Business context and reporting period
Aegon N.V. filed this annual report on Form 20-F for the fiscal year ended December 31, 2020; it is not a standalone fourth-quarter report. Aegon is a Netherlands-based international insurance, retirement, banking and asset-management group reporting under IFRS as issued by the IASB. Unless indicated otherwise, figures below are in euros. “Underlying earnings” is a non-IFRS measure and is not directly comparable across companies.
The year was shaped by COVID-19, sharply lower interest rates and market volatility. Aegon introduced a new strategy focused on the United States, the Netherlands and the United Kingdom as core markets; Spain and Portugal, Brazil and China as growth markets; and one global asset manager.
Financial performance and capital
| Metric | 2020 | 2019 | Change or context |
|---|---|---|---|
| Total revenue | EUR 25.657bn | EUR 28.197bn | Down 9% |
| Premium income | EUR 16.099bn | EUR 18.138bn | Down 11% |
| Investment income | EUR 7.149bn | EUR 7.531bn | Down 5% |
| Fee and commission income | EUR 2.405bn | EUR 2.523bn | Down 5% |
| Underlying earnings before tax | EUR 1.729bn | EUR 1.969bn | Down 12% |
| Income (loss) before tax | EUR (364)m | EUR 1.453bn | Fair-value losses, impairments and other charges weighed on results |
| Net income (loss) | EUR (135)m | EUR 1.236bn | Basic and diluted common-share EPS: EUR (0.09), versus EUR 0.56 |
| Operating expenses | EUR 3.852bn | EUR 3.929bn | Down 2% |
| Return on equity | 8.5% | 9.5% | Lower, principally reflecting Americas performance |
| Free cash flow | EUR 530m | EUR 923m | Down; used toward debt reduction and dividends |
| Gross financial leverage | EUR 6.0bn | EUR 6.7bn | Includes repayment of USD 500m senior debt |
| Cash Capital at Holding | EUR 1.1bn | EUR 1.2bn | Within the stated EUR 0.5bn–1.5bn operating range |
| Group Solvency II ratio | 196% | 201% | 2019 was 198% on a comparable basis including Aegon Bank; 2020 included the bank |
Consolidated cash and cash equivalents were EUR 8.372bn at year-end, down from EUR 12.263bn. Net cash flow from operating activities was an outflow of EUR 2.854bn, versus an inflow of EUR 7.302bn in 2019; insurer cash-flow movements include substantial investment and policyholder flows. Reported borrowings, including subordinated and trust pass-through securities, were EUR 10.735bn, compared with EUR 11.650bn.
The capital ratios of the main units were above their stated operating levels at year-end: US RBC 432% (470% in 2019), Dutch Life Solvency II 159% (164%), and UK Solvency II 156% (148%). These are estimates pending regulatory filing and review.
Material changes versus prior year
- Net income moved from EUR 1.236bn profit to a EUR 135m loss, while underlying earnings before tax declined 12%.
- Americas underlying earnings before tax fell 27% to EUR 820m, reflecting lower rates and adverse life mortality; other major units reported improved underlying earnings.
- New life sales declined 15% to EUR 731m. Total gross deposits rose 37% to EUR 198.5bn, largely reflecting asset-management inflows; net outflows improved to EUR 13.8bn from EUR 25.1bn.
- Aegon’s share price fell 20.5% and total shareholder return was a loss of 18.4%, according to the report.
- Comparative financial statements were retrospectively restated for a voluntary change in deferred reinsurance cost accounting. Management said the change increased 2020 net income by EUR 42m compared with the former policy; it did not affect cash flows.
Outlook, management commentary, risks and unusual items
Management’s 2021–2023 targets include gross financial leverage of EUR 5.0bn–5.5bn; EUR 400m lower addressable expenses by 2023 versus 2019, with EUR 150m of savings to be reinvested; cumulative free cash flow of EUR 1.4bn–1.6bn over the three years; and a dividend of around EUR 0.25 per share over 2023. Aegon also expects revenue-growth initiatives to contribute EUR 150m to earnings by 2023. These are targets, not guarantees. The company withdrew its 2019–2021 financial targets in August 2020 amid pandemic and market uncertainty.
The proposed 2020 final dividend was EUR 0.06 per common share, which would bring the year’s total to EUR 0.12, versus EUR 0.15 for 2019. The final 2019 dividend was withheld. Management cited the need for sustainable dividends, balance-sheet strength and resilience to stress.
Significant unusual items included EUR 1.239bn of other charges, primarily in the Americas, and EUR 237m of net impairments. Assumption and model updates had a net EUR 580m adverse effect on income before tax: a negative EUR 805m in the Americas, partly offset by a positive EUR 225m in the Netherlands. The Americas lowered its long-term interest-rate assumption from 4.25% to 2.75% and reduced the assumed annual improvement in long-term-care morbidity from 1.5% to 0.75%. Aegon also recorded fair-value losses of EUR 750m. The report says higher US mortality hurt earnings, while lower long-term-care claims produced favorable morbidity experience; Aegon cautioned that deferred claims could rise as the pandemic evolves.
Portfolio actions included the completed sale of Aegon’s Japanese variable-annuity joint-venture stake for EUR 153m and the sale of the Transamerica Pyramid property for USD 650m. The EUR 830m sale agreement for the Hungary, Poland, Romania and Turkey businesses remained subject to approvals and was expected to close in 2021. Stonebridge’s sale for approximately GBP 60m completed on February 28, 2021, after year-end, with up to GBP 10m contingent consideration.
Key risks include persistent low or negative interest rates, market and credit volatility, mortality and longevity experience, policyholder behavior, illiquid assets, derivative collateral demands, reinsurer recoverability, cyber and data risks, outsourcing and transformation execution, regulatory change and litigation. Notable matters include ongoing US universal-life monthly-deduction litigation and opt-out proceedings, Dutch unit-linked product litigation, and a Vliegwiel/Sprintplan settlement subject to conditions and further details. The report records a EUR 45m Netherlands litigation provision and describes other case-specific provisions; ultimate exposure in certain disputes cannot be reliably estimated. PwC issued unqualified opinions on the financial statements and internal control over financial reporting, and identified insurance-contract valuation, Level 3 investment valuation and asset impairments as critical audit matters.
Important facts for investors to verify
- Check the audited IFRS statements and notes for the drivers of the EUR 135m net loss, the EUR 1.239bn other charges and the EUR 237m net impairments, including the distinction between assumption updates and other items.
- Review the cash-flow statement and holding-company liquidity disclosures together; consolidated cash, operating cash flow, free cash flow and Cash Capital at Holding measure different things.
- Assess the comparability of the 196% Solvency II ratio with 2019, including the inclusion of Aegon Bank in 2020 and in the recalculated 2019 comparison.
- Track delivery of the 2021–2023 cost, free-cash-flow, deleveraging and dividend targets, and whether cost savings are achieved without impairing sales, service or growth.
- Verify completion, proceeds and capital effects of the CEE divestiture and other portfolio exits, plus the final status and possible cost of material litigation and reinsurance exposures.