Aegon Ltd. · EURONEXT:AGN
Aegon — Q3 2008 Earnings Presentation
74 slides from Aegon's earnings presentation, Nov 6, 2008
Slide 1: Third quarter 2008 results
Local knowledge. Global power. Third quarter 2008 results Jos Streppel, CFO Eric Goodman, CIO AEGON USA Analyst & Investor presentation November 6, 2008
Slide 2: Index
Index Presentation Slide Q3 Results 2008 4 Appendix Slide I US investment portfolio detail 43 II UK investment portfolio detail 63 III Netherlands investment portfolio detail 69 IV Other countries investment portfolio detail 72 Local knowledge. Global power. 2
Slide 3: Cautionary note regarding forward-looking statements
Cautionary note regarding forward-looking statements Cautionary note regarding forward-looking statements The statements contained in this presentation that are not historical facts are forward-looking statements as defined in the US Private Securities Litigation Reform Act of 1995. The following ar
Slide 4: Key messages
Key messages o Financial markets impacted earnings, but fundamentals remain intact o Significant capital buffer to weather the storm o Committed to maintain capital level equivalent to AA rating requirements o Unrealized losses are not a proxy for impairments o AEGON has ample liquidity Local knowle
Slide 5: Execution of strategy
Execution of strategy o Securitization of unit linked business in the UK released EUR 315 million, adding to core capital o Agreement signed to acquire 50% stake of Brazil’s sixth largest independent life insurer o Joint venture with Spanish savings bank Caixa Terrassa ranks AEGON 6th life insurer i
Slide 6: Underlying earnings impacted by world financial markets turmoil
Underlying earnings impacted by world financial markets turmoil o Underlying earnings before tax in Q3 impacted by – lower fees in US and UK – reserve strengthening, mainly related to VA’s sold pre-2004 in US – higher mortality charges in US life reinsurance – provisioning in NL for unit linked poli
Slide 7: Americas – net deposits of USD 3 billion
Americas – net deposits of USD 3 billion o Fundamentals of business remain Underlying earnings before tax (USD million) intact but results impacted by financial 699 markets turmoil 578 o Economic downturn impacted sales of high net worth and middle market products Q3 07 Q3 08 o Very strong FA deposi
Slide 8: The Netherlands – individual life sales up 10%
The Netherlands – individual life sales up 10% o Underlying earnings declined to Underlying earnings before tax (EUR million) EUR 74 million, mainly due to costs of modifying unit-linked insurance 107 products and charges related to a 74 group of pension products o Life sales down 46%, due to slowdo
Slide 9: United Kingdom – continued strong sales
United Kingdom – continued strong sales o Sales growth across most lines of Underlying earnings before tax (GBP million) businesses o Underlying earnings decline due to 46 lower financial markets and 28 investments for growth Q3 07 Q3 08 o VNB up 13% on higher margins and volumes New life sales over
Slide 10: Other countries – strong growth of deposits
Other countries – strong growth of deposits o Strong increase in deposits driven by Underlying earnings before tax (EUR million) retail mutual funds and variable annuity sales in Asia 55 o Weakness in financial markets 42 resulted in decline in life sales o Underlying earnings in Central & Eastern E
Slide 11: Financial markets and impairments had a negative impact
Financial markets and impairments had a negative impact o Net income mainly impacted by underperformance of fair value items and impairment charges – Impairment charges in Q3 mainly related to Lehman Brothers, Washington Mutual (EUR 336 million) and US housing related asset-backed securities (EUR 46
Slide 12: Fair value items performance
Fair value items performance Total underperformance of fair value items (EUR million) Americas Netherlands Holding Total Canadian segregated funds (41) Alternative investments** (224) (384) Total return annuities* (61) VA GMWB* (60) Credit derivatives (67) 123 (54) Private equity Debt held at FV * R
Slide 13: Capital position
Capital position AEGON to reinforce capital buffer significantly above AA level requirements Expected June 30, 2008 September 30, 2008 changes in Q4 + Underlying Capital Base Ratio earnings 74% 71.5% (debt / equity ratio) - Market S&P risk-based insurance movements capital model excess EUR 842 milli
Slide 14: Capital position after drawdown of additional capital
Capital position after drawdown of additional capital Pro-forma September 30, 2008 post draw down Insurance Group Directive EUR 5.0 billion EUR 8.0 billion (IGD) surplus capital (160%) (195%) S&P risk-based insurance capital model excess EUR 312 million EUR 312 million capital in operating units abo
Slide 15: Excess capital roll-forward
Excess capital roll-forward Excess capital in operating units development Q3 2008 (EUR million) 729 (315) 842 (662) (313) (29) 312 59 Q2 08 Excess Estimated Investments in Capital Dividend paid Change in Other Q3 08 Excess Capital Statutory country units preservation to holding target capital (inclu
Slide 16: Ongoing acceleration of de-risking and capital release
Ongoing acceleration of de-risking and capital release Capital preservation and risk mitigation actions important to enhance capital buffer Complete execution on identified capital preservation and risk mitigation actions of EUR 600 - 800 million in Q4, including: o Lowering investment risk – New mo
Slide 17: Shareholders' equity development
Shareholders’ equity development o Shareholders’ equity excluding revaluation reserve is 71.5% of total capital base – above target o Decline in revaluation reserves driven by wider credit spreads o Revaluation reserve stands at negative EUR 5.5 billion Shareholders’ equity (EUR million) 11,621 (329
Slide 18: Calculation of financial flexibility
Calculation of financial flexibility Financial flexibility (EUR billion) (EUR million) 1.8 Shareholders’ equity 9,412 Revaluation reserve 5,458 Shareholders’ equity 14,870 excl. revaluation reserve Group equity 19,232 Capital leverage 1,568 0.8 Total capital base 20,800 Target is minimum 70% of tota
Slide 19: Equity market sensitivity increased due to market deterioration
Equity market sensitivity increased due to market deterioration Based on equity markets as of September 30, 2008 Estimated impact on earnings Estimated impact on capital (12 month period, EUR million) (EUR million) Assumed Assumed equity market equity market decline of 20% 40% decline of 20% 40% -70
Slide 20: Limited direct equity exposure
Limited direct equity exposure Total investments General account Shares EUR 351 billion EUR 132 billion EUR 3.3 billion Off balance Loans Indexed sheet 18% Universal 28% Life Other 21% 8% Other Real estate 39% 2% General Shares account 2% 37% Private Bonds equity& Equities Policyholder 70% hedge fun
Slide 21: US living benefit variable annuity guarantees hedged since 2003
US living benefit variable annuity guarantees hedged since 2003 o Around 60% of living benefits is hedged – Intention to hedge more over time o GMIB exposure represents predominantly pre-2004 sales Per September 30, 2008 Total Hedged Unhedged (USD billion) FV FV FV Direct - GMIB 9.3 1.2 8.1 Direct -
Slide 22: Interest rate sensitivity
Interest rate sensitivity Based on interest rates as of September 30, 2008 Impact on earnings Impact on capital (12 month period, EUR million) (EUR million) Assumed* Assumed* interest rate interest rate decline of 1% 2% decline of 1% 2% 270 175 -250 -450 o Lower funding costs o Reserve strengthening
Slide 23: Limited DAC at risk, only 11% of DAC related to US annuities
Limited DAC at risk, only 11% of DAC related to US annuities DAC per line of business Other Americas Netherlands UK Total countries Life & 41% 5% 2% 4% 53% protection Ind. savings 11% 11% & retirement Pensions & 1% 27% 27% asset man. Institutional 2% 2% products Life 7% 7% reinsurance Total 61% 6% 2
Slide 24: Strong liquidity position
Strong liquidity position Liquidity management Stress scenario Assumptions: o Extreme possibility of ‘frozen’ markets for (EUR billion) years anticipated 80 o Impaired capital markets liquidity test 60 assumes an extended period and normal liquidity only resuming in 2 years 40 20 Results: 0 o Our li
Slide 25: General account mainly in Americas
General account mainly in Americas Total investments General account EUR 351 billion EUR 132 billion Other Holding United countries Off balance 0% Kingdom 4% sheet 4% 28% The Netherlands 24% General account 37% Americas Policyholder 68% account 35% As of September 30, 2008 Local knowledge. Global po
Slide 26: Q3: an extraordinary quarter
Q3: an extraordinary quarter o The Q3 environment - Acceleration of Debt Crisis - Failures of major financial institutions - Deleveraging of the financial sector - Darkening economic outlook - Gapping credit spreads and declining non-government bond prices - Increasingly aggressive global policy res
Slide 27: Credit losses in the Americas remain manageable
Credit losses in the Americas remain manageable Credit losses in bps of assets (includes only bonds and mortgages) 82 64 54 48 44 44 37 average of 25 bps 27 25 since 1990 17 17 9 8 1 2 4 2 -6 -2 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 YTD 2008 o Duri
Slide 28: US fair value items: credit derivatives
US fair value items: credit derivatives o Our credit derivatives are corporate credit exposures, not mortgage or subprime credit o Risk of permanent loss on our tranched credit protection is very low due to seniority Q3 Q3 YTD Notional value fair value change fair value change Tranched Credit Protec
Slide 29: Unrealized losses
Unrealized losses The revaluation account increased by EUR 2.5 billion in Q3, due to the increase in unrealized losses in AFS bonds o Why such a large change? o Is it consistent with generic market changes or is it idiosyncratic? o Does it portend large future impairments? Local knowledge. Global po
Slide 30: Why such a large change in unrealized losses?
Why such a large change in unrealized losses? o As a life insurer, AEGON invests in long-term, investment grade bonds to match long-term liabilities o Long-term bond prices are very sensitive to changes in discount rates, and market yields have been rising sharply for all non-government bonds o Spik
Slide 31: Bond prices declined in all sectors
Bond prices declined in all sectors Percentage of Q3 08 Q2 08 portfolio US AFS bond portfolio Market value / Market value / amortized cost amortized cost amortized cost 9% Commercial MBS 90% 95% 2% Agency MBS 97% 100% 9% Non-agency RMBS and subprime 72% 79% 9% Non-housing related asset-backed securi
Slide 32: Generic or idiosyncratic?
Generic or idiosyncratic? o Generic investment grade interest rates rose by 140 to 190 basis points – AEGON USA’s portfolio market yield rose from 7.01 to 8.51% during Q3, or 150 basis points o Generic investment grade bond prices fell by 5 to 8% – AEGON USA’s AFS bond portfolio prices declined from
Slide 33: Future impairments?
Future impairments? o Since 1970, the relationship between investment grade credit spreads and subsequent impairments has been weak BBB spreads sorted lowest to highest with corresponding 1, 3, 5 year default losses for the period 1970-2007 1,2 4% 3% 2% 1% 0% 1997 1994 1996 1995 1992 1993 1998 1989
Slide 34: Future impairments?
Future impairments? o During the Depression, some correlation was seen, but milder than one might have guessed BBB spreads sorted lowest to highest with corresponding 1 year BBB default losses for the corresponding period 1920-2007 1,2 6% 5% 4% 3% 2% 1% 0% 1965 1955 1956 1982 1946 1950 1959 1988 196
Slide 35: Significant shift into higher rated assets
Significant shift into higher rated assets Subprime in US investment portfolio o As stated in previous EUR 2.7 billion as per September 30, 2008 presentations, AEGON USA has restructured its asset portfolio defensively in numerous ways: – Reducing and upgrading corporate exposures 25% 40% 65% 73% 74
Slide 36: Reduced exposure to financials
Reduced exposure to financials Financials as % of general account o Actively reduced financial assets in US investment portfolio sector exposure, esp. in 2007 EUR 11.2 billion as per September 30, 2008 and 2008 16.4% 15.7% 14.6% 12.3% 2005 2006 2007 Q3 YTD 2008 Corporate high yield as % of general a
Slide 37: Sector-specific risk mitigants
Sector-specific risk mitigants o Subprime: The portion of the subprime portfolio from which most impairments will come is the hybrid mezzanine sector, which is USD 731 million book value, and has a remaining unrealized loss of USD 449 million. Other portions are expected to avoid significant princip
Slide 38: Investments summary
Investments summary o The large market price change in the AEGON AFS portfolio was consistent with generic interest rate increases in Q3 o The macroeconomic environment is highly stressed. Credit spreads presage a period of elevated impairments but AEGON expects them to remain at manageable levels d
Slide 39: Conclusions
Conclusions o Financial markets impacted earnings, but fundamentals remain intact o Significant capital buffer to weather the storm o Committed to maintain capital level equivalent to AA rating requirements o Unrealized losses are not a proxy for impairments o AEGON has ample liquidity Local knowled
Slide 40: Q&A
Q&A For questions please contact Investor Relations +31 70 344 8305 ir@aegon.com P.O. Box 85 2501 CB The Hague The Netherlands Local knowledge. Global power. 40
Slide 41: Upcoming events
Upcoming events November 13, 2008 Cheuvreux Conference, New York CFO November 24, 2008 AEGON Analyst and Investor Day, London CEO December 4, 2008 Société Générale Conference, Paris CEO March 12, 2009 AEGON Full year 2008 results CEO April 22, 2009 AEGON Annual General Meeting SB May 14, 2009 AEGON
Slide 42: Appendix Slide
Appendix Slide I US investment portfolio detail 43 II UK investment portfolio detail 63 III Netherlands investment portfolio detail 69 IV Other countries investment portfolio detail 72 Local knowledge. Global power. 42
Slide 43: Appendix I: US investment portfolio detail
Appendix I US investment portfolio detail September 30, 2008 Local knowledge. Global power. 43
Slide 44: US general account well diversified
US general account well diversified Total investments General account EUR 206 billion EUR 85.2 billion Loans 16% Off balance sheet Other 37% 11% Real estate General <1% account Shares 41% 1% Bonds Policyholder 72% account 22% Note: data as per September 30, 2008 Local knowledge. Global power. 44
Slide 45: Active management of US investment portfolio
Active management of US investment portfolio Shifts in US investment portfolio EUR 83.3 billion(*) as per September 30, 2008 o Increased Cash position Cash/Treasuries/Agency o IG Corporate bond actions: High Yield Corporate – Reduced total exposure Emerging Markets Debt – Increased diversification A
Slide 46: Asset allocation is typical for the US life industry
Asset allocation is typical for the US life industry Total invested assets of EUR 83.3 billion* Asset allocation of USD 119.2 billion – September 30, 2008 45.1% 46.0% � AEGON � Industry 18.3% 14.9% 13.6%13.3% 11.4% 6.7% 7.1% 5.6% 5.4% 6.1% 2.0% 1.9% 0.9% 1.7% Cash & Govt Corp. Bonds EM Bonds MBS/ABS
Slide 47: 94% of US bond portfolio is investment grade
94% of US bond portfolio is investment grade AEGON US bond portfolio quality profile EUR 61 billion (USD 87 billion)* – September 30, 2008 B Below B BB 2.0% 0.4% 3.7% BBB 31.3% A & above 62.6% * Based on market value of bonds – IFRS basis; Ratings based on hierarchy of S&P, Moody’s, Fitch, Internal,
Slide 48: Credit quality is typical for the US industry
Credit quality is typical for the US industry AEGON US bond portfolio quality profile EUR 61 billion (USD 87 billion)* – September 30, 2008 67.2% 62.6% � AEGON � Industry 31.3% 26.0% 3.7% 3.9% 2.4% 2.9% A & above BBB BB B & below Industry data source: Lehman Brothers 2007 annual survey of top 20 Ins
Slide 49: US corporate bonds by quality and sector
US corporate bonds by quality and sector AEGON US corporate bond portfolio EUR 38 billion (USD 54 billion)* – September 30, 2008 BIG AAA AA Utility 7.5% 1.8% 10.0% 14.3% Financial 24.8% Sovereign 0.5% BBB A 43.9% 36.8% Industrial 60.4% Ratings are based on a hierarchy of S&P, Moody’s, Fitch, Interna
Slide 50: US corporate bonds by quality and sector
US corporate bonds by quality and sector (in EUR million) AAA AA A BBB <BBB Total Financial 393 2,406 4,576 1,812 153 9,340 Industrial 241 1,279 7,606 11,343 2,237 22,708 Sovereign 9 52 119 0 0 180 Utility 31 33 1,526 3,345 450 5,385 Total 675 3,771 13,828 16,500 2,839 37,612 AAA AA A BBB <BBB Total
Slide 51: Structured assets of US
Structured assets of US AEGON US structured assets portfolio quality profile EUR 21.5 billion (USD 30.7 billion)* – September 30, 2008 BB & Lower BBB Housing 2.4% CDO 4.9% 7.5% related ABS A 13.3% CMBS 4.7% 27.6% AA 11.7% Non- Housing- related ABS AAA 27.9% 73.7% Residential MBS 26.3% High quality
Slide 52: US structured assets detail
US structured assets detail Mortgage-backed and Asset-backed Securities Amortized costs as of September 30, 2008 (EUR million) Unrealized Unrealized Ratings hierarchy of S&P, Moody’s, Fitch, Internal, NAIC AAA <AAA Total gains / change from (losses) June 30, 2008 Total CMBS 5,103 831 5,934 (528) (28
Slide 53: US commercial mortgage backed securities
US commercial mortgage backed securities o The CMBS portfolio has been structured defensively, with over 80% AAA-rated securities o Below-AAA exposures have been positioned conservatively, particularly for 2006 and 2007 vintage deals, when standards were most aggressive o CMBS and Commercial Real Es
Slide 54: US prime and near-prime residential MBS
US prime and near-prime residential MBS o Almost all of AEGON’s Prime and Near-prime Residential MBS are rated AAA o The Near-prime portfolio is composed of primarily Fixed-rate Alt-A and Negative Amortization Floating-rate mortgage securitizations o A majority of the “near prime” portfolio is super
Slide 55: US subprime summary
US subprime summary o Negligible subprime CDOs: EUR 17 million held at fair value o Senior subprime tranches hold up well under stress tests, and are unlikely to be permanently impaired o EUR 511 million are mezzanine tranches of securitizations collateralized by subprime hybrid-ARM loans, and these
Slide 56: US subprime unrealized losses
US subprime unrealized losses Amortized costs / (unrealized loss) September 30, 2008 (EUR million) Collateral Insured Senior Subordinated Sub/residual Total Amortized Unrealized Amortized Unrealized Amortized Unrealized Amortized Unrealized Amortized Unrealized costs loss costs loss costs loss costs
Slide 57: US sub-prime and second lien exposure
US sub-prime and second lien exposure Amortized costs as of September 30, 2008 (EUR million) Ratings hierarchy of S&P, AAA AA AA A BBB+ BBB BBB <BBB Moody’s, Fitch, Internal, NAIC AAA wrapped AA+ AA wrapped wrapped A+ A wrapped wrapped BBB wrapped BBB- wrapped <BBB wrapped Total Subprime 1st lien
Slide 58: US sub-prime by vintage
US sub-prime by vintage Amortized costs - fixed as of September 30, 2008 (EUR million) Ratings hierarchy of S&P, Moody’s, AAA AA Below Fitch, Internal, NAIC AAA AA+ AA A BBB Total wrapped wrapped BBB 2004 & prior 326 152 14 33 59 1 - - 584 2005 150 - 5 6 - - - - 160 2006 105 - 1 - 17 - - 22 145 2007
Slide 59: US second lien by vintage
US second lien by vintage Amortized costs as of September 30, 2008 (EUR million) Ratings hierarchy of S&P, Moody’s, Fitch, Internal, AAA AA AA- A BBB BB- Below <BBB Total NAIC AAA wrapped AA wrapped wrapped A wrapped BBB wrapped wrapped BBB wrapped 2004 & prior 66 8 6 28 6 4 - 3 9 14 - - 144 2005 5
Slide 60: US CDO summary
US CDO summary o No purchases of ABS CDOs since 2001 o Therefore, negligible subprime exposure o Primarily corporate credit collateral Collateral by type EUR million Tranches by rating EUR million Leveraged bank loans 704 AAA 756 Corporate bonds 145 AA 226 Commercial real estate and CMBS 192 A 37 As
Slide 61: No synthetic subprime CDO's
No synthetic subprime CDO’s US investment portfolio detail o No synthetic subprime or mortgage-related CDOs o Sold protection primarily on very senior tranches of the CDX (index of 125 investment grade corporate bonds) o Accounting for all credit derivatives is mark to market through earnings o Mark
Slide 62: Market movement Q3
Market movement Q3 US investment portfolio detail o During Q3, non-government investment grade bonds’ - Yields rose by 140 to 190 basis points - Prices fell by 5% to 8% - Credit spreads widened by 170 to 250 basis points Credit Spreads Yield to Maturity Price (% of Par) Lehman Index Jun 30 Sep 30 Δ
Slide 63: Appendix II: UK investment portfolio detail
Appendix II UK investment portfolio detail September 30, 2008 Local knowledge. Global power. 63
Slide 64: UK general account mainly bonds
UK general account mainly bonds Total investments General account EUR 60 billion EUR 6 billion Shares Loans 1% <1% Off balance sheet 5% General account Policyholder 10% account Bonds 85% 99% Note: data as per September 30, 2008 Local knowledge. Global power. 64
Slide 65: UK general account portfolio
UK general account portfolio Percentage of Market value / UK general account* book value amortized cost 5% Asset backed securities 89% 1% Basic industries 90% 7% Communications 88% 7% Consumer, cyclical 92% 2% Consumer, non-cyclical 92% 3% Energy 95% 48% Financial 84% 11% Government 98% 7% Industria
Slide 66: Rating split of UK general account
Rating split of UK general account o The rating split of the UK general account demonstrates the conservative positioning of our portfolio o A downgrade below investment grade is a trigger for considering a sale o Other main trigger being concerns about the credit Market value / Index Fund Differenc
Slide 67: UK investments conservatively positioned
UK investments conservatively positioned The UK general account is conservatively positioned versus the iBoxx corporate bond index for all investment grade corporates rated AA to BBB Index Fund Difference Sector split* % % % Non-financials 31% 35% 4% Asset/mortgage-backed 10% 8% -2% Sub-sovereigns 3
Slide 68: Comfortable with our exposure to UK financials
Comfortable with our exposure to UK financials o We have been cautious on banks and are therefore underweight in our portfolio Market value / Index Fund Difference Financials break down* amortized cost % % % Banks 83% 37% 25% -13% Insurance 85% 10% 12% 2% Other financial 87% 9% 8% 0% Total 84% 56% 4
Slide 69: Appendix III: Netherlands investment portfolio detail
Appendix III Netherlands investment portfolio detail September 30, 2008 Local knowledge. Global power. 69
Slide 70: Dutch general account well diversified
Dutch general account well diversified Total investments General account EUR 63 billion EUR 31 billion Off balance Loans sheet 32% 19% Other <1% Real estate 7% General account Shares 50% 5% Policyholder account Bonds 31% 55% Note: data as per September 30, 2008 Local knowledge. Global power. 70
Slide 71: All collateralized assets investment grade
All collateralized assets investment grade Netherlands investment portfolio detail External ratings hierarchy of S&P, Market Total Unrealized Moody’s, Fitch AAA AA A BBB <BBB value / book (all figures in EUR million) exposure loss value (%) ABS 147 11 15 0 0 173 -13 92% RMBS 970 14 3 0 0 987 -12 99%
Slide 72: Appendix IV: Other countries investment portfolio detail
Appendix IV Other countries investment portfolio detail September 30, 2008 Local knowledge. Global power. 72
Slide 73: Other countries general account mainly bonds
Other countries general account mainly bonds Total investments General account EUR 14 billion EUR 5 billion Off balance Loans sheet 13% 44% Other 2% General account Shares 38% 3% Bonds 82% Policyholder account 18% 18% Note: data as per September 30, 2008 Local knowledge. Global power. 73
Slide 74: For questions please contact Investor Relations
For questions please contact Investor Relations +31 70 344 8305 ir@aegon.com P.O. Box 85 2501 CB The Hague The Netherlands Local knowledge. Global power. 74