AEGON's CEO Discusses Q4 2012 Results - Earnings Call Transcript

| About: AEGON NV (AEG)

AEGON N.V. (NYSE:AEG)

Q4 2012 Earnings Call

February 15, 2013 3:00 AM ET

Executives

Alexander Wynaendts – Chairman and CEO

Darryl Button – EVP and CFO

Analysts

Farooq Hanif – Citigroup

Ashik Musaddi – JPMorgan

Farquhar Murray – Autonomous

Jan Willem Weidema – ABN AMRO

Hans Pluijgers – Cheuvreux

Paul De’Ath – RBC

Robin Buckley – Deutsche Bank

William Elderkin – Goldman Sachs

David Andrich – Morgan Stanley

François Boissin – BNP Paribas

Gordon Aitken – RBC

Operator

Ladies and gentlemen, thank you for holding. Welcome to the AEGON’s Fourth Quarter 2012 Results Conference Call for Analysts and Investors. Throughout today’s presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. (Operator Instructions)

I will now hand the conference over to Mr. Alexander Wynaendts. Please go ahead, sir.

Alexander Wynaendts

Good morning, and thank you for joining us today for this review of AEGON fourth quarter and full year 2012 results. And today also with me are, Jan Nooitgedagt, the CFO; Darryl Button, the Head of our Corporate Financial Center; and of course, Willem van den Berg, Head of Investor Relations.

Before turning to the presentation, let me remind you to take a moment to review our disclaimer on forward-looking statements which is at the end of this presentation. We look forward to your questions after the presentation.

As you have seen, we have issued two announcements today. The first of course is our fourth quarter results. Again, our businesses generated strong growth in sales and earnings. At the same time, we have maintained a strong capital position and our businesses continued to generate healthy cash flows. This has allowed us to propose an increased final 2012 dividend of €0.11 per share.

The second announcement is the agreement we have reached with the Vereniging Aegon, also known as the association to cancel all of AEGON’s preferred shares of which the association is a sole owner. I would like to first highlight the details of this agreement before turning to our fourth quarter results.

I’m now turning to slide 3. We believe that we have reached a balanced agreement with the association to cancel all of our AEGON’s preferred shares and in the manner that minimizes the impact on existing common shareholders. This transaction will result in a simplified capital structure for AEGON while enabling the company to maintain a high-quality capital base on the new European solvency requirements. And at the same time, it will allow the association to substantially reduce its debt.

All of the preferred shares will be changed for cash and common shares. The value of all preferred shares, which have a book value of €2.1 billion has been determined at €1.1 billion. The association has also agreed to give up its preferential status. The result of the transaction, the number of common shares outstanding will increase by approximately 7%. However, the diluted effect on earnings per share is limited to 3% as there will be no preferred dividend payments following the transaction.

We recognize the importance of minimizing dilution for existing shareholders and we will take that into account in management actions going forward.

Turning to slide 4, and this agreement has clear benefits for AEGON and its stakeholders as highlighted on this slide. Just to name a few, over the years, voting right of the association and economic ownership in AEGON have grown apart and these are being brought back in line again. Also, no single shareholder will have an economic preferential status and the ending of the payment of preferred dividend will improve the interest coverage ratio of AEGON.

The new capital structure will enable the company to maintain a high-quality capital base under the new European solvency rules by allowing our hybrid capital to be classified as Tier 1. From the perspective of the association, the agreement allows for substantial reduction of its debt. And although the association will relinquish its preferred economic status, it maintains a sizeable holding of common shareholders in the company. To maintain its special course in vote rights, a new class of common shares will be created, common shares B. Effectively, these shares will replace existing preferred shares B which we cancelled too. And all in all, we therefore believe that this is balanced outcome for all stakeholders.

Now turning to slide 5, here I’d like to give you a bit more detail on the transaction. The preferred shares had a book value of €2.1 billion which is the amount that the association paid back to AEGON in 2002. We’ve agreed on a fair value of the preferred shares of €1.1 billion which is based on the discounted value of future cash flows. This fair value will be paid in €400 million of cash, €83 million of preferred dividends, and the remaining €655 million is converted into common shares and the new class of shares, common shares B.

The transaction is slightly EPS dilutive and declared low level of the ECB financing rate which determines the level of the preferred dividends. However, the ECB financing rate would only be 2% to 3% higher effect of the transaction will become EPS neutral as a preferred dividend within approximately double from its current level.

Currently, our shareholders’ equity consists of two elements; common shareholders’ equity and equity related to the preferred shares. As shown on the slide, equity related to the preferred shares is effectively transferred to common shareholders’ equity. The resulting increase in common shareholders’ equity is partly offset by the cash payment by AEGON to the association of €400 million.

It’s important to note as common shareholders’ equity is the basis of the calculation of our return on common shareholders’ equity.

Here on slide 6, we can clearly see the impact of the transaction on our capital position. As I’ve mentioned earlier, the agreement will result in a simplified capital structure for AEGON while enabling the company to maintain the high-quality capital base on the new European solvency requirements and on Solvency II. Before the exchange and under the new Solvency II legislation, the preferred shares would not qualify as Core Tier 1 capital. In addition, the existence of these preferred shares effectively pushes our junior perpetual capital securities down to Tier 2.

After the exchange, preferred shares no longer exist. Consequently, our junior perpetual capital securities in this situation remained classified as Tier 1 securities, which improved overall quality of our capital position and the proposed Solvency II legislation.

And here on slide 7, we provide you with an overview of the impact of the transaction on various financial metrics. The key factors, which caused the change in our ratios after the transaction are of course the use of €400 million of excess capital, the fact that there will be no longer the preferred shares on which we are required to pay preferred dividends and the higher level of common shareholders’ equity.

The transaction is done in such a way that we’re able to maintain sufficient buffers in the holding company while maintaining a capital base ratio above 75%. As you can see, the impact on most metrics is limited. Moreover, I would like to reiterate that management is evaluating options to further mitigate the effective dilution.

Turning to slide 8, and as I shared in my introduction, the substantial debt reduction is a key benefit of this transaction for the association.

AEGON will pay €400 million in cash to the association and €83 million in preferred dividends, which will enable the association to reduce its debt by approximately €500 million from its current level of approximately €1 billion. The remaining debt has been refinanced with a new three-year refinancing facility, with a one-year extension option.

We should emphasize that there are no covenants in this facility linked to the AEGON share price. The association was, is, and will continue to remain a long-term shareholder committed to acting in the interest of all of AEGON’s stakeholders.

As part of the agreement, the association has agreed to give up its preferential status. I’m now on slide 9. And this means that they will relinquish its preferential rights with regard to dividends and liquidation proceeds. In addition, the voting rights of the association in ordinary course will be reduced from the current 22.1% to approximately 14.9% in line with economic ownership as shown in the table.

However, we have agreed with the association that they will always maintain their current 32.6% voting rights in case of special cause through recreation of a new class of common shares, common shares B.

So what is the process from here and we can see that on slide 10. So today, a 10-day period of determining the average price on which the preferred shares will be converted into common shares will commence. The precise increase in the number of common shares will depend on the volume, weighted average price of AEGON common shares on Euronext Amsterdam from February 15 up to and including February 28, 2013 and at our annual general meeting of shareholders on May 15, AEGON Supervisory Board will propose to approve the new capital structure.

So, let me now turn to our fourth quarter results and I’m turning in to slide 12. The fourth quarter closes the year during which we have made considerable progress. And as you can see on the slide 12, during 2012 all metrics showed clear improvement compared to 2011. After a year of rebasing and taking a number of steps to realign our businesses, we entered a new phase in 2012. One focused on generating strong business performance and growth. We achieved a high level of sales demonstrating the strength of our franchise. The higher underlying earnings are the result of business growth, a strong delivery in cost reduction programs, and favorable equity market and currency movements.

Our fee-based earnings for the full year now represent 33% of underlying earnings. And at the same time, our return on equity increased to 7.1% and 8.0% when excluding the one-off businesses.

Rather than going to further detail on our strategic highlights for this year, I would like to focus on our fourth quarter results in the remainder of this call.

I’m now on slide 13. The 29% increase in underlying earnings was a result of solid growth of our business, the turnaround in our UK business, successful delivery on cost reduction programs, as well as favorable currency and equity market movements.

In the Americas, higher earnings were driven by growth of the business, partly offset the higher flow of incentive and benefit plan expenses. In The Netherlands, higher earnings and license savings more than offset lower earnings and pensions in non-life. During the quarter, we adjusted reserve to reflect observed mortality and this resulted in a one-time benefit offset by the exceptional charge related to administrative backlogs in non-life. The strong improvement of our UK earnings was mainly driven by a focus to achieve further cost savings in addition to the non-recurrence of exceptional charges taken in the previous year. The negative effect of adverse persistency in our pension business following the implementation of the retail distribution review provisions is likely to continue in the first half of 2013.

Earnings from new markets were lower. The continued strong results from AEGON asset management were offset by divestment of our joint ventures in Spain and one-offs in each. And holding results improved as a result of the fact that part of the holding expenses are now charged to the operating units and cost savings in the holding.

Turning on slide 14, you can see that in the fourth quarter, net income was positively impacted by gains on investments. These are mostly the results of asset liability management driven trading in our portfolio as well as the book gains on sale of a minority stake in Prisma and the divestment of our joint venture with Banca Civica in Spain. We were pleased to see that impairments remained at the low level amounting to only €58 million, which translate into just 4 basis points for the quarter.

One-off businesses were impacted by the accelerate amortization of intangibles in the life reinsurance line and this following increased transfers of clients directly to score. And we do expect to see this acceleration the first half of 2013 as well.

As you are well aware, and I’m on slide 15, in recent years, we’ve been pursuing a broad restructuring program in order to sharpen our focus on our core lines of business, significantly reduce our cost base, and to create greater efficiency across the organization. Reducing expenses will continue to be a primary focus going forward and during 2012, we’ve made good progress to capture costs and operational efficiencies.

As you can see on slide 15, we have achieved €188 million in cost reductions. These cost reductions, along with the non-recurrence of restructuring charges, led the 6% lower year-on-year cost base. And I want to make clear here that overall reducing costs and pursuing operational efficiencies are an integral part of how we manage our day-to-day business. We’re also committed to making the necessary investments to drive business growth going forward as shown by investments in the platform that we have launched in the UK and the Netherlands.

Let me now give you some details, and this is on slide 16, on sales and value of new business generated during the fourth quarter. We are very pleased with the strong level of total sales which amounted to €1.8 billion. We achieved strong growth of new life sales in many of our markets, most notably in the Netherlands and the UK as a result of strong pension sales.

In the Americas, the main drivers of our 29% increase in sales were higher amounts for indexed universal life products as well as higher sales volumes related to the anticipated return of certain unprofitable universal life secondary guarantee products. Gross deposits were 30% higher than last year at €9.2 billion. The main contributors were U.S. retail mutual funds and pension, as well as asset management.

And in general, we continued to experience strong customer demand for our core products and services in each of our markets, a clear reflection of the strength of our franchise.

Moreover, our disciplined approach to pricing demonstrates our commitment to selling the right product to the right customers and at the right price, ensuring that it provides value for both our customers in AEGON in the current challenging economic environment and low level of interest rates.

The success of this approach is seen in a significant improvement to our valued new business to €204 million for the quarter. The strong sales momentum that we’ve been to achieve is in large part due to our broad distribution network.

And I’m now on slide 17. Expanding into new channels while strengthening existing relationship continues to be priority and is clearly showing results. In the Americas for example, we’ve added partners for the distribution of our variable annuity products broadening the scale and diversity of our distribution network. And as we previously highlighted, over 20% of our new life shares in the U.S. is the result of distribution added since 2008.

As you know, during 2012 we launched our Workplace Savings and At Retirement platform in Germany and UK. These platforms have been well received by the market and now, we have strategic agreements in place with most of the leading advisor networks. And we are convinced that this will be beneficial in developing our platform business and expect further ad distribution in the coming months.

In our new markets, we’ve been able to complete two acquisitions which will increase our footprint in Central and Eastern Europe. In Romania, we’ve taken over sizeable life insurance portfolio and pension fund business, and also we’ve entered Ukraine with our acquisition of the country’s fifth largest life insurance company.

Another area where we’re successfully leveraging our skills and capability is in Spain. You can see them on slide 18. Despite the currency difficulties, we continue to see strong long-term growth prospect for our core business. And as such, we are very pleased to have entered into a long-term exclusive partnership with Banco Santander last December. We will visit with life and general insurance products to Banco Santander’s extensive nationwide network of over 4,600 bank branches and providing us access to potential client base of 20 million individuals across the country.

And in terms of the agreement, AEGON will acquire a 51% stake in both life insurance company as well as a non-life insurance company for a consideration of €220 million. Furthermore, AEGON Spain will provide the back-office services to the joint venture companies.

In the context of the consolidation on the El Monte Cajas, we had also successfully divested our share in the partnerships with Banca Cívica and Unnim while making good returns on these investments. And as you know, we are in the process of exiting our joint venture with CAM as well. We are confident that with these transactions, AEGON is repositioned to make the most of the longer-term opportunities in Spain, a country where the needs of professional savings products will increase in the coming years.

And now turning to slide 19, where you can see AEGON’s capital position at the end of the fourth quarter. As you’re aware, we’ve been working toward achieving a capital base ratio of at least 75% by the end of 2012. And we are pleased to report a capital ratio of 76.7% in the fourth quarter, which allows us to conclude our commitments to the European Commission.

Our group IGD ratio increased to 230% from the level of 222% the end of the previous quarter with the main drivers being the strong earnings generated during the quarter. So RBC ratio in U.S. increased approximately 495% and this is a result of strong statutory earnings and a one-time releases that were partly offset by dividend upstreamed to the holding. Not surprisingly, we continue to believe that maintaining a strong capital position is not only prudent but a necessity in the current environment.

During the fourth quarter, operational cash flows excluding the impact of markets total €619 million, and I’m now on slide 20. Operational free cash flows excluding market impacts particularly strong during the quarter, primarily the effect of reserve leases and proceeds from divestments.

One-time items amounted to approximately €300 million, which puts our normalized free cash flow number at around €320 million for the quarter, in line with our expectations. The high and new business strength, reflects the strong new life sales, most notably in the Netherlands.

So let me now summarize on slide 21. We have made clear progress positioning our businesses to compete successfully in the new environment. 2012 was a year in which we entered a new phase, focused on generating strong business performance and growth as evidenced by our results.

We have taken the necessary steps to sharpen our focus, to improve the efficiency of our operations, and to reposition our businesses for the growth prospects we continue to see going forward. The cancellation of all preferred shares is also part of this transformation as it simplifies the capital structure and further improves the quality of our capital base in the new European regulatory environment.

Our decision to propose an increase in our final dividend is not only a reflection of the strength of our financial position but also of our confidence that we are well positioned for the future.

As always, we appreciate your continued interest in AEGON and we’ll be happy to take your questions. Thank you.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) The first question is from Farooq Hanif from Citigroup. Please go ahead.

Farooq Hanif – Citigroup

Good morning. Thanks for taking my question. First question, could you just quickly run us through the movement in the holding excess capital from Q3 to Q4? Just the main items. Is it mainly just the cash flow that’s paid out – that’s been generated? And how much of that cash have you actually been able to pay out to the holding? That’s question one.

And question two is I know that VAs are obviously very volatile and the markets are very strong at Q4 for you. But could you talk us through the high VA margin that was achieved in the fourth quarter and kind of the driver behind that? Thank you.

Alexander Wynaendts

So, good morning. Thanks for your questions. So in terms of excess capital in the holding, what we said is that the excess capital in the holding increased to €2 billion at the end of the fourth quarter and is up from €1.6 billion. And this is a result of dividends paid by the operating companies and the largest part of this is from the U.S. And now we have to deduct the cost of the holdings. So that’s how you get to the €2 billion.

In terms of the VA, yes, we have a high margin and there is a one-off, which is related to product change and a DAC unlocking is not a recurring element. But what’s important here is that we are continuing to run our business on achieving a target, this – the 80 basis points of our assets. And that’s what you see coming through the numbers here.

On the specific item, Darryl, maybe you would like to give Farooq a little color to explain the one-off €20 million, which obviously brings our margin for this quarter above our target of 80 basis points.

Darryl Button

Yes. Hi, Farooq, it’s Darryl. We did have a one-off in VA this quarter. We had been introducing volatility controlled funds across our whole VA platform and we’ve got approval in the fourth quarter to push those funds in to a large part of the mandates of the – of the assets mandates behind the – part of our VA business. That’s going to lead to lower hedge costs going forward and we run those lower hedge costs through the Q3 – gross profits, we end up with a DAC unlocking. And that was about €20 million to above favorable this quarter in the VA line.

Farooq Hanif – Citigroup

Sorry. Just on fund facts a new fund for existing customers?

Darryl Button

Yes, it’s really – we have to go through – we do, as you know, we do a lot of our DAC unlocking work in the third quarter. This was a case where we had a little bit delayed on that. We had to actually get the fund boards to approve the new fund mandates and the new bulk controlled funds and that approval didn’t happen until the fourth quarter so we couldn’t take the benefit until the fourth quarter.

Farooq Hanif – Citigroup

Okay. I’ll probably come back on that later. But just on the cash flow, you were at €1.6 billion and you go to €2 billion. Does the €2 billion holding also allow for the dividend that you’ve declared?

Alexander Wynaendts

Yes. Clearly, we have declared a dividend increase which will be paid in May, after the AGM. So we’ve taken into current strength of our capital position. We’ve taken the current also, the fact that we’re slowly able to upstream that cash flows to the holding and that was the basis for us to increase our final dividend from €0.10 to €0.11 a share.

Farooq Hanif – Citigroup

Okay. I’ll probably come back later on that with IR, but thank you very much.

Alexander Wynaendts

Thank you, Farooq.

Operator

Thank you. The next question is from Ashik Musaddi from JPMorgan. Please go ahead.

Ashik Musaddi – JPMorgan

Yes, hi. Thanks a lot and good morning, everyone. A couple of questions. Firstly, on dividend, I know we have discussed this a lot earlier as well but can you give us some clarity about how should we think about the dividend going forward? Now the reason being now your earnings are looking very stable if you look upon quarter-on-quarter basis for the last five, six quarters. Your capital has improved a lot. Your cash generation has improved a lot. So how should we think about dividend because right now the payout ratio on earnings basis is just like 30%, 35%? So is that a kind of a number reasonable to think about or if you can give some color on that?

And second is, can you give us exact number as in how much of your perpetual securities will be counted as Tier 1 capital under the Solvency II, which was earlier not allowed to be calculated because of the preference share structure. So, yes, okay, some color on this would be good. Thank you.

Alexander Wynaendts

Yes, on the dividends, I think we’ve been very consistent with sharing with you what our policy is. And you know our policy is to have an attractive dividend, a dividend that grows with the business. And that is based on the capital position of the company, so that’s the first check. We need to have a strong capital position if you want to pay dividend.

But secondly, on the cash flows which are being generated by the business. And as you know, we’ve given you an indication of what we expect from our cash flows. We said they should be growing. And as such, you can expect a dividend that goes in line and synch with the cash outflow. I want to make the point here is that the – there shouldn’t be – there is no relationship between the dividends and the earnings. We are putting a link between the dividends and the cash flows, and checking if indeed the capital position is strong enough. So we should not relate it to earnings. As you know, they can be more volatile.

In terms of the perpetual securities, these junior perpetual securities, they will now be – remain as qualifying since day 1 on the Solvency II. And the exact amounts is – yes, as you can see, it’s a little hard to answer the exact amounts. The Solvency II rules are still moving as you know. The real issue here is that perhaps would push the – and the amount that junior perpetual is down into a Tier 2 class security.

Our working assumption is that with the process they’re on that they would be qualified under Tier 1. There are limitations under the Solvency II rules in terms of whether you’re looking at the SCR, the MCR in terms of the total amount that would be accounted as Tier 1. Our working assumption is that the majority, the vast majority of the perpetuals would in fact be Tier 1. Be grandfathered.

Ashik Musaddi – JPMorgan

And I think just a follow up on that. So if I look at your financial statement, it states that €5 billion is something of a hybrid. So is it reasonable to say that a vast majority of this number would be allowed as Tier 1 capital?

Alexander Wynaendts

Yes, I think we’re taking at this point at least 80% of them would be grandfathered and that’s roughly in line with our working assumption.

Ashik Musaddi – JPMorgan

Okay. Fantastic. Thank you.

Operator

Thank you. The next question is from Farquhar Murray from Autonomous. Please go ahead.

Farquhar Murray – Autonomous

Good morning, gentlemen. Just one very quick question. And apologies if it got covered earlier. But does the capital restructuring at all affect the way that the SEC will look at you and I don’t know whether you’ve had any preliminary discussions around that at all. That’s just my first question.

Alexander Wynaendts

Farquhar, thanks for your question then. I’ll pass it on to Darryl who has had – were recently discussions with the rating agencies and particularly also covering this item.

Darryl Button

Yes. Thanks, Farquhar. They’re looking at it very favorably. They like the simplification of the capital structure. Certainly, from their perspective, actually our fixed-charge cover does go up with the elimination of the plus dividend. From their perspective, it’s a mild credit positive.

Farquhar Murray – Autonomous

Right. Great. Thanks much.

Operator

Thank you. The next question is from Jan Willem Weidema from ABN AMRO. Please go ahead.

Jan Willem Weidema – ABN AMRO

Good morning. A few questions. If I look at your core capital ratios now at 75%, but shouldn’t we – it will drop to around 74% if IAS 19 is imposed? Can you elaborate on where you want the ratio to be now that A, that you see requirement has gone. And B, your Solvency II ratios have been improved. And how will this impact your targets for – in line earnings growth. In other words, what we should really expect the short-term capital redeployment?

And secondly, looking at the covenants of the foundation, is there any covenants there which relates to your dividends?

And final question, can you comment on whether you had a benefit for your innovative life bond that you issued one or two years ago? Thank you.

Alexander Wynaendts

So Willem, maybe Jan will answer the first question on the impact of IAS 19 on the CBR ratio.

Jan Willem Weidema – ABN AMRO

Yes, it was a – that’s a clear answer. It has no impact on our capital base ratio. Also, our re-evaluation issues have no impact. And at the same way, we treat the IAS 19, so no impact on capital base ratio?

Alexander Wynaendts

In terms of – I think you’re asking about the European Commission. As I said in my introduction, with the ends of 2012 at a CBR rate, so as defined with the European Commission above 75%, we have met all our targets and as such, we have now concluded our agreements.

Jan Willem Weidema – ABN AMRO

Maybe I should explain it a bit better. What I meant to say is that in the past, you said you also yourself would like to be around that 75% in the long run. So you’re also – you’re at 75%. That might restrict your capital redeployment and how does that impact the targets for earnings growth that you’ve set two years ago?

Alexander Wynaendts

There are many different sectors affecting that 75%. That is one measure. What you also have to look at is the amount of excess capital freely deployable at the holding, which I think is giving you a better indication as to how much capacity we have to redeploy our capital in one form or another.

And I think I’ve been very clear, is that in our plan going forward, we do expect to generate additional excess and they will be looking at ways of redeploying it and it’s not really linked to your – that CBR ratio. And by the way, we have had a hard target of above 75%. What we have said about that ratio is that we feel comfortable with the level but it means that we clearly have a bit more flexibility right now.

In terms of the question in relation to the dividends, if there’s any covenants with the association, I can assure that it is a zero covenant with the banks providing the facility in relation to dividend or share price. And I think that’s an important point to mention because that clearly very much improves the situation for the association in relation to its bank.

I believe that the life – the last question on the life bond is you’re referring to the longevity swap we did in The Netherlands, whereby we were able to take some of our longevity risks off our balance sheet. At that point in time, we had said that there’s very marginal impact on earnings.

Jan Willem Weidema – ABN AMRO

All right. Thank you.

Operator

Thank you. The next question is from Hans Pluijgers from Cheuvreux. Please go ahead.

Hans Pluijgers – Cheuvreux

Yes. Good morning. Going back on the ROE target to go on forward. Because in principle, you could argue that a big part of your other targets like the PBS part of the business, you closed upward last year in line was strong. But how you look at your ROE targets going forward that the ROE has not really grown over the last few years. Yes, how do you see that, let’s say, going forward, are you going to, let’s say, much more – be somewhat more aggressive on that or can you give some feeling on how do you see really that – reaching that target in 2015?

With respect to the sales, second question, in UK, The Netherlands, can you maybe elaborate on the telemed in Netherlands. What do you currently have in the pipelines, back of the pension contracts? Have you become somewhat more active in that market over recent months that explains the good development in Q4? And also in the UK, you argued that a marketing spend has helped – a marketing action has helped Q4. Any plans with it going forward in 2013? So how should we look at sales there and development in the UK?

Alexander Wynaendts

Hans, on the ROE targets, we remain committed on delivering on our targets. Please, also keep in mind that we have given the targets in conjunction with a set of financial market assumptions. And in particular as you know, the level of interest rate is relevant. We provided you the sensitivities. We are committed to delivering on these targets. We do obviously recognize that this transaction at this point in time has a dilutive effect but I also would like to remind you that we are not paying anymore a preferred dividend.

And as I said in my introduction, the preferred dividend is now at a – I would say a historic low level because it’s based on ECB refinancing rates, which I think is 0.75%. And as such, if the ECB financing rate would be a bit higher as I said, 2%, 3% higher effectively, that would take away the biggest part of the dilution effect from doing this transaction. And I think it’s reasonable to assume that over the number of years, that number – that percent of your ECB refinancing rate would go up.

What we are seeing is a business that is growing. We’re seeing that we are growing ourselves. But clearly also, it’s increasing our equity for common shareholders. Our equity for common shareholders has also been increased by the fact that we’ve done this transaction.

We effectively, as I shared in my presentation transferred – so the €2.1 billion minus the €400 million, which we bought back effectively to common equities, so you have a higher common equity – book value as we commonly call that for shareholders. So there’s a number of various elements in here, which I think you have to take into account when you look at it. But we remain committed on delivering on what we have promised to.

In terms of sales, yes, we’re clearly happy with the development where we see sales in all of our markets growing. You asked me specifically about the Netherlands. It is true that the fourth quarter in the Netherlands for pension business is traditionally a strong quarter. And I think we are benefiting also from the fact that there seems to be rapid movement now from pension schemes to move towards insured solution and I think AEGON is extremely well positioned there to take advantage of that.

And you see that movement is driven by the fact that interest rates have gone up a little bit and that means that the coverage ratio again close to 100%, which means that therefore economically possible to move these contracts to internal solutions.

We have a strong balance sheet. We have capacity as to the previous question of Jan Willem Weidema we have laid off longevity in the market at an attractive price. So we have capacity to be an important player in this market.

On the UK, I think it’s a little bit too early for me to be very clear on how we see sales in this year because we have to take into account the whole aspect and impact of RDR. So in the run up of RDR, we’ve seen a lot of activity and we clearly benefited from that too. So it’s not so much us specifically doing marketing campaign or these kind of things but it’s more of the fact that a lot of activity takes place before they took place before the 31st of December because at that point in time, we’re entering into a new world.

What we will see is the pipeline of their activity still flowing over in the first quarter and potentially in the second quarter. And really we will only have a clear picture of how the market will develop in the third and the fourth quarter not before that. But what’s important is that I’m positive about our positioning and we have invested heavily in these platform propositions.

I’m pleased to see that we seem to be recognized now as a leader in the market. We have platform propositions which cover B2C which cover also direct to employees, employers and we have now developed a platform proposition that supports the intermediaries. So we have a very broad now capability and that should really, I think, bode well for the future. But I will be able to be more clear with you on that in the third quarter.

Hans Pluijgers – Cheuvreux

Good. Thank you.

Operator

Thank you. The next question is from Paul De’Ath from RBC. Please go ahead.

Paul De’Ath – RBC

Yes. Hi there. Good morning. A couple of questions, please, and just kind of building on the question there on the UK business. And I’m just wondering if you could give me more detail around the persistency charge in the UK? And exactly what acceleration to and how you see that developing over the first half of 2013? And then the second point was just on the cash generation and the release of required surplus seems to be much larger proportion of cash generation in this quarter. And how sustainable is that or should we be treating some of that as a one-off? Thanks.

Alexander Wynaendts

Yes. We said we had this discharge in the UK on persistency. I mean, it’s not a big number but still on the quarterly earnings, it does have an impact. And this obviously is related to what we just discussed the whole RDR activity. What’s important here for me to say is that this is a one-off. Effectively, it’s a debt unlocking so you have the persistency issue and you have to write-off the corresponding debt. There’s not an ongoing effect.

But as I said also in the previous question is we expect that the effect of the activity in the fourth quarter will actually flow over in first and second quarter. So we therefore do expect to see some of this repeating and continuing in the first two quarters of the year. And we said there was an amount of €6 million, €7 million so it’s not a big amount. But obviously, it has an impact and I would expect this to continue in the first, second quarter as a result of business, which was agreed on in the fourth quarter.

You’re asking about our cash flows. Yes, we had in this quarter a number of one-off items, they’re related to the AG38, and they’re also related to our disposals and the proceeds of Prisma and Banca Civica. So these are clearly not recurring.

But on AG38, maybe – Darryl, do you want to add something?

Darryl Button

Yes. On the operational cash flow side, there were some one-timers in there. So the operational cash flow was stronger than what we would normally expect, really related to because at the end of the year and did our cash flow testing in AG38, testing in the U.S., and it did not turn out to be as severe as we were previously projecting. And so we had some release there. We also released some of the discretionary default reserve in the UK as well. Thirdly, we put some additional hedging on in the U.S., which also freed up some required surplus. So, those three really contributed to the operational free cash flows.

In terms of the holding company cash flows and this does go back to Farooq’s question a little bit earlier. Yes, there were some extraordinaries there as Alex just mentioned in terms of Civica and the Prisma sales, contributed some additional holding company cash flow.

Paul De’Ath – RBC

Okay. Thanks.

Operator

Thank you. The next question is from Robin Buckley from Deutsche Bank. Please go ahead.

Robin Buckley – Deutsche Bank

Yes, good morning, just a couple of questions, please. Firstly, just sort of following on I guess from the operational cash flow question. Could you just give us an indication I guess of what the underlying run rate is that we could expect from a quarterly basis? Just sort of stripping up I guess the various one-offs that you mentioned.

And then the second question is just picking up on a few comments that you made earlier, Alex, where you were talking about some further management actions to try and minimize the impact of dilution. I’m just wondering if you expound on that topic, please. Thank you.

Alexander Wynaendts

On the operational cash flows, I indicated in my introduction that if you would take off the one-time items which were just discussed, I won’t repeat them. If you also will correct for market impacts, the change in the shape of the euro curve, then the number would be – the outcome would be around €320 million.

Keep in mind that we have a very strong quarter in sales, so our new business strength has been higher than usually. I think it gives you a reasonable good indication as to what we believe the run rate going forward is.

And second question on management actions, the point I was trying to make Robin is that we are clearly aware of the fact that this has – is leading to some form of dilution. The dilution is minimized I think to excel is very acceptable in light of the entire transaction, it is attractive transaction for all stakeholders.

It is dependent on the level as you see of the preferred dividends. The preferred dividends based on each of the financing rates are extremely, and if they are great would’ve been some higher, effectively dilution would be more limited. And I think the point I was trying to make is that we’re aware that we will take this into account in actions we’ll be taking, going forward to minimize or even neutralize entirely the effect.

Robin Buckley – Deutsche Bank

Okay. Thank you.

Operator

Thank you. The next question is from William Elderkin from Goldman Sachs. Please go ahead.

William Elderkin – Goldman Sachs

Hi. Good morning, everybody. William Elderkin from Goldman Sachs. A couple of questions, please. Following on from your last comment, a – you think you are taking some measures to eliminate accretion from your stock dividend.

Secondly, given the timing of this transaction and ends today, the level of your excess capital at the holding company, I guess, €1.6 billion, €1.5 billion after the completion. Does that level provide a good indication of your real world level of target buffer you want in place before you would consider major capital actions? And then just a final numbers question, but within the asset management’s earnings, can you give us a guide to how much of those revenues are coming from performance fees?

Alexander Wynaendts

Bill, as I said, I don’t think there’s much we can make in there to what I just said there to Hans and Robin saying that obviously we want to minimize the dilution. We want to make sure that we do this in a balanced way, taking into account all this interest of all the stakeholders. But I think have been changed a lot here in terms of buffer on our capital, which is your related question. We’ve now – well, significant amount of €2 billion.

We’ve always been saying that we are focusing on being capital-efficient. That means that we need to have a capital that is not necessary in the business unit. We need to be upstream to the holdings so that we can do something with it. Today, I still feel and I said it earlier that we are still in an uncertain environment, an environment where we see a lot of things happening. Just need to remind you, just 10 days ago, we had a significant event here in the Netherlands with the maximization of our fourth largest bank.

So all of that means that this environment is an environment we’re holding a strong capital position. Again, it’s not a luxury. We’ve been clear that we have, as a minimum buffer, at least 1.5 times the expenses of the holding, and that is – that’s around 1.5 times, €500 million to €750 million, and that hasn’t really changed. So going forward, we will be seeing in what environment we are working. But I think it’s important that you can see here that you can see here that we are deploying that excess capital in a way. We are taking €400 million of it and taking that into account in the transaction, which is minimizing as you can imagine the effect on the dilution of shareholders.

In terms of asset management, I think it’s very difficult but looking here around the table to my colleagues, yes, we have, there is some performance fees. But I can tell you one thing that in many cases, at least a part of these performance fees get offset by an increase in incentives.

So the biggest impact of performance in the portfolio is in the investment returns of the operating companies because that’s where the performance of the investments goes to. So there’s a little impact of performance fees in asset management but it’s not a very big one.

Well, Darryl, is – do you want to add something?

Darryl Button

Yes, I think – it’s about €6 million in the quarter.

William Elderkin – Goldman Sachs

This quarter?

Darryl Button

Yes.

Alexander Wynaendts

But it’s an offset also in the incentives. So...

William Elderkin – Goldman Sachs

Okay. Thank you.

Alexander Wynaendts

Does that answer your questions?

William Elderkin – Goldman Sachs

Yes. Thank you very much.

Operator

Thank you. The next question is from David Andrich from Morgan Stanley. Please go ahead.

David Andrich – Morgan Stanley

Hi, good morning, just a couple of questions. First of all in the Americas, you mentioned that you’ve added some alternative channels in terms of the VA distribution. I just wondered if you could maybe give a little bit more detail on that.

Second of all, I was just wondering, over the past year, equity markets in U.S. have been at least positive or reasonably stable. And I was just wondering, have you seen any trends emerging in terms of impact on behavior because of market performance, just wondering if kind of anything has started to emerge there.

And then finally, in terms of debt nationalization, just wondering if you could comment and maybe – is there kind of – is there having any regulatory impact in terms of the regulators’ attitude towards insurers and if they are kind of looking at setting things up more or what impacts do you see coming from that? Thanks.

Alexander Wynaendts

Yes. Our distribution, we actually have been working very much in expanding our distribution and I know we’ve had a number of new distribution channels. Some of them have been announced. Others not. I’m looking at Darryl who is just as you know coming from the U.S. So which one can you mention is basically Darryl? Yes. I’ve found exciting ones actually.

Darryl Button

Well, there are and I’m probably more comfortable answering the trend than I am the names. I don’t feel very comfortable of putting actual names out. So I’m going to withhold from that.

We have been on both the VA and the life side lining up some very good names in terms of adding new distribution. There’s some IMOs on the life side. And on the VA side as well, we’re also doing some white labeling on the VA side for some new distribution channels. And there’s more in the pipeline as well. We’re in the process of signing up two very interesting names right now and I’ll just fill up with those in the – out there right now for obvious reasons. But I would say that there’s still momentum coming and more to come.

I think the other question was on equity markets and the impact on policy order behavior. Really, impossible the behavior, it is dynamic and as our assumption. So we’re really not seeing anything deviating any different than what our underlying assumptions are which are when a policy guarantees are in the money, the last rates are quite low.

And when they’re out of the money, they follow a more normal lapsation function if you will which itself is also a function of interest rates. So as long as interest rates remain low and those products that are in the money, there – lots’ rates are extremely low as interest rates go up, where the policy is going out of the money, you get into more normalization at that stage. We’re not taking any different that basic function.

David Andrich – Morgan Stanley

Okay.

Alexander Wynaendts

Again, and on SNS, maybe I should be answering. Yes, on SNS, obviously, this has been I think quite a shock actually for the people here in the Netherlands. Nationalization has never happened before, so there’s a lot of questions around about the legal environment to what extent this all regulation and legislation in place to do a nationalization. And I personally think that clearly the positive of this whole thing is that is clarity and that now we know that this institution is in safe hands in the state.

It’s obviously never a good thing that you have now a number of financial situations in the hand of the state, and that’ll also be that the state will be looking for options to bring it back into the private sector. But it probably helps us in a sense that it reiterates in the Dutch market that AEGON is really in a very strong position.

The fact that we are showing consecutive improvement in our results, the fact that we’re increasing our dividends is clearly in sharp contrast to what you see on SNS. And that should, from that point of view, be beneficial to AEGON going forward.

David Andrich – Morgan Stanley

Great. Thank you.

Operator

Thank you. The next question is from François Boissin from BNP Paribas. Please go ahead.

François Boissin – BNP Paribas

Good morning, gentlemen. Just a few questions, please, on my side. The first one on the core capital ratio, can you give the number basically at the end of the year after dividend payment? And am I right in understanding that you could consider actually talking below 75% you previously announced? That’s the first question.

The second question is can you give us a sense of sensitivity for the underlying earnings before tax in the Americas that we can see 2013 versus 2012 increasing that rate and FX rates remain stable?

And lastly, just more a question on SNS. Did you have – I mean, are you going to have to pay a tax in 2014 following the nationalization? Thank you.

Alexander Wynaendts

Yes, on the core capital ratio, IR will come back to you to give you an exact number. There’s always different moving parts and we need to do that very thoroughly. So I want to make sure we get the right number and IR will come back. What I said, yes, we have a target of at least 75%. I have said that we are comfortable where they started for the time being certainly but at least we have more flexibility. And so that I can say to you right now.

I’m not sure I understood your question on the U.S. but, Darryl, you would like to?

Darryl Button

I think it was a basic earning sensitivity question to interest rate I assume was the question?

François Boissin – BNP Paribas

Yes, that’s right. I mean what’s I mean, again, taking the full year 2012 reported base, what happened to that base if rates come in at the current level in FX rates, are you a dollar at this level?

Darryl Button

Yes, I think if you use 2012 as the base, I think we’re looking at about $10 million quarter headwind from low interest rates if they remain low in the 2013.

Alexander Wynaendts

If they remain at the same level that they have been in 2012.

François Boissin – BNP Paribas

Overall and average I would say, is that your point?

Alexander Wynaendts

Yes.

Darryl Button

Yes. Well, that’s in line with our assumptions. It gets a little bigger as we go out because we do have an assumption that rates will rise over time. So it’s kind of quarter in 2013, that probably grows to closer to 30 a quarter and 40 and 15 range. So it depends on how long rates stay out there.

When you get out there or you get past our assumption of where our assumption where we are assuming that rates will rise further.

François Boissin – BNP Paribas

Yes, and assume that year in dollars or in euros in terms of 10 and 30 a quarter.

Darryl Button

Well, in dollars.

François Boissin – BNP Paribas

In dollars. Okay. So in euros basically would have a – that the assumed, the average expense rate in 2012 was?

Darryl Button

Well, we’re sitting at a $1.33, $1.34 the other day. Obviously, it was lower than that, much lower than that three months ago. And where it’s going to be three months from now, I guess I have no idea.

Alexander Wynaendts

And if he knew, if they all knew, I’m sure he wouldn’t be sitting next to me. He’d be sitting somewhere else.

François Boissin – BNP Paribas

That’s for sure. It would be a turnoff. And on SNS?

Alexander Wynaendts

Yes. On SNS we believe that we will probably have between €10 million and €15 million contribution to the €1 billion, which as you know the natural – the financial markets but it’s – the biggest part obviously is with the banks and we have a small bank. And therefore, it’s a very small amount.

François Boissin – BNP Paribas

Sure. Depending on 2014 I guess?

Alexander Wynaendts

Yes. I’m not sure. It’s not clear.

François Boissin – BNP Paribas

But it’s at least expected there.

Alexander Wynaendts

That’s expected in 2000, yes, yes.

François Boissin – BNP Paribas

Okay. Thank you very much.

Alexander Wynaendts

You’re welcome.

François Boissin – BNP Paribas

Yes. Thank you.

Operator

Thank you. The last question is from Gordon Aitken from RBC. Please go ahead.

Gordon Aitken – RBC

Yes, good morning. Just on this pickup in the Dutch pension funds, which are looking for an insured solution, do you think – I mean to what extent will the Dutch pension funds cut benefits such as future pension increases? And what do you think the DNBs attitude will be to that? And will it result from an acceleration of buyouts?

And the second question is really a comment on competition, and there seems to be a real lack of supply in this sort of pension buyout market and do you think you will be able to take some more margin as a result of that?

Alexander Wynaendts

Yes. On your first question, it’s obviously, politically, very sensitive question. So will pension plans be required to make cuts? Yes, they do that and they are making announcements on an ongoing basis of reducing pension payments going forward. So that is taking place.

Now, if your question is if that is going to allow more transfers, I would say that’s up to the pension funds and their boards to decide on this, clearly I believe that there is a trend towards consolidation that’s still around 500 individual pensions. That means 500 boards, 500 institutions that need to be regulated. So I think it’s clear to see that the regulator here would effectively – positively have a consolidation because it would make the environment more easy to regulate but also more secure for the pensioners.

And I’m talking about – when I talk about 500, I’m talking about company schemes and sector schemes. And as you know, we have a lot of them here in The Netherlands. But it’s also clear that boards of companies really are looking for the solutions because there’s an impact on their balance sheet and therefore, I can see the strength continue. But we’ve seen it for some time.

So in terms of capacity and supply, the one thing which is clear is that we have a very strong balance sheet. In our Dutch business, we are seen as being not only a player with a strong balance sheet or another one with capacity, but also a player that’s able to deliver the right products.

And we have with around 25% market share, we already have a very strong position. We’ve been frontrunners in bringing new concept, new solutions to PTI as they call themselves. There’s a lot changes taking place in this market. And we are frontrunner with a strong balance sheet and that should, rightly as you said, ensure that slowly margins should be improving. And as you look at our fourth quarter, you see that we have been able to sell a couple of attractive contracts, and these contracts all were attractive in the sense that they are contributing positively to our MCVNB.

Gordon Aitken – RBC

Thank you.

Alexander Wynaendts

Yes. Well, this was the last question. Thank you all very much for listening in. And I look forward to seeing you individually over the coming months. Thank you all very much. Bye-bye.

Operator

Thank you. Thank you, sir. Thank you, ladies and gentlemen. This does conclude today’s presentation. Thank you for participating. You may now disconnect.

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