Strategy

Strategy

AEGON is one of the world’s leading providers of life insurance, pensions and investment products. The company has activities in more than twenty countries in the Americas, Europe and Asia, employing some 28,000 people and serving more than 40 million customers. AEGON’s ambition is to be a global leader in helping its customers secure their financial futures and, in doing so, to grow its businesses profitably and sustainably.

AEGON: an international provider of life insurance, pensions and investments

AEGON was formed in 1983, the result of a merger between two Dutch insurance companies, AGO and Ennia. But AEGON’s roots in the Netherlands can be traced back much further, to the first half of the nineteenth century. AEGON companies in the United States and the United Kingdom also have long histories. Monumental Life, one of AEGON’s US subsidiaries, has been insuring people since 1858, while AEGON’s history in the United Kingdom stretches back almost 180 years to the foundation of Scottish Equitable in 1831.

AEGON’s main operations are located in the United States, the Netherlands and the United Kingdom. Traditionally, these markets have generated most of the company’s earnings. In recent years however, AEGON has also expanded its presence elsewhere, establishing new businesses in growth markets in the Americas, Central & Eastern Europe and Asia.

AEGON’s role in the world economy

AEGON believes that its main businesses – life insurance, pensions and investments – have significant potential for growth in the years ahead. AEGON also believes that the insurance industry as a whole has a vital economic and social role to play protecting living standards and ensuring the long-term viability of pension systems around the world.

In many countries – particularly in Western Europe, the United States and Japan – people are living longer, healthier lives. At the same time, workforces available to finance pension systems are shrinking and governments are increasingly shifting the burden of retirement funding to the individual and private sector providers like AEGON.

By 2050, according to the latest estimates from the United Nations 1 , more than one in five Americans will be over the age of 65. In Western Europe, that figure is higher – more than one in four – while in Japan, by the middle of the current century, those over 65 will account for nearly 40% of the country’s total population.

At the same time, new markets are opening up, particularly in Asia, Central & Eastern Europe and Latin America. In many of these areas, economic growth and rising levels of personal wealth have resulted in an increase in long-term demand for pensions, life insurance and investment products. In Central & Eastern Europe, reforms have led to the widespread introduction of mandatory private pensions, while in both China and India economic growth in recent years has brought greater prosperity and a rapid expansion of the urban middle class in these countries. In 2010, India’s middle class is expected to exceed 500 million people 2 – more than the combined populations of the United States, the Netherlands and the United Kingdom.

Over the past several years, AEGON has expanded its international presence to capitalize on opportunities for growth in these new markets. Currently, the company has operations in six countries in Central & Eastern Europe – Hungary, the Czech Republic, Slovakia, Poland, Romania and Turkey. In addition, AEGON has businesses in both France and Spain, as well as China, India and Japan in Asia, and Mexico and Brazil in Latin America. In China, AEGON has operations in provinces across the country, giving it access to a potential market of some 450 million people.

A changing industry

The insurance industry is experiencing a period of considerable change. This is partly because of the effects of the global financial crisis, but also because of changing attitudes among customers and regulators.

In the short term, the global financial crisis presented significant challenges for the insurance industry, increased market volatility, and resulted in lower corporate bond and equity prices and a sharp downturn in the world’s leading economies. Since the end of the first quarter of 2009, market conditions have begun to improve. Even so, the crisis has had a long-term effect on the business environment in which AEGON operates, particularly as customers have become more aware of financial risk.

As a result, many customers are demanding greater financial guarantees because of the increase in market volatility. At the same time, distribution patterns in many leading markets are changing, and products are being redesigned, becoming simpler and more transparent.

“We are working to reorganize our businesses to be more responsive to the needs of our customers. The result has been that our customers have stayed with us. At the same time, we have attracted new customers who in today’s environment are even more discerning about the companies they rely on to provide them financial security. The financial crisis has led us to think differently about our obligation to provide customers with simple, need-specific products, delivered through cost-efficient and value-added channels.”

Alex Wynaendts
Chief Executive Officer AEGON N.V.

Insurance companies, meanwhile, are placing greater emphasis on the importance of capital. This is partly a consequence of the global financial crisis, and partly in anticipation of the European Union’s Solvency II capital adequacy rules. In the years ahead, Solvency II will have a significant effect on the insurance industry, particularly in the way insurers manage both risk and capital. AEGON believes these changes, which are still under discussion, should help improve regulation of the insurance industry, and ultimately enhance the protection of policyholders and other beneficiaries.

Market conditions

Economic and financial market conditions continued to be extremely difficult during the first quarter of 2009. The remainder of the year, however, saw a significant improvement, particularly in higher equity markets and narrower corporate credit spreads. This had a positive effect on AEGON’s earnings and capital position. Naturally, AEGON’s underlying businesses were affected by the crisis, particularly as customer behavior changed. Sales volumes declined, but this decline was common to the entire insurance sector. Consequently, throughout the crisis, AEGON maintained a strong franchise and its share of leading markets.

In some areas, the impact was more significant than others. Sales of unit-linked products, for example, decreased because of concerns over equity market volatility. Many customers switched to products offering greater financial guarantees, such as fixed annuities, or else chose to reduce their exposure to equity markets within existing products. During this process, AEGON benefited from its broad range of products. In certain cases, the company also took steps to modify existing products to take account of the change in customer behavior.

Despite the improvement after the first quarter of 2009, financial conditions remain uncertain, with unemployment continuing to rise and growth still hampered by higher corporate and household debt levels. AEGON expects market conditions to remain uncertain throughout 2010.

AEGON’s long-term strategy and the company’s response to the financial crisis

In June 2008, AEGON set out an ambitious five-year plan, designed to increase returns and grow the company’s businesses. This plan – ‘Unlocking the Global Potential’ – is based on three strategic objectives:

1. To reallocate capital toward businesses with higher growth and return prospects.

2. To improve growth and returns from AEGON’s existing businesses.

3. To manage AEGON as an international company.

As part of these objectives, AEGON’s aim has been to further reduce risk and lessen the company’s overall exposure to fluctuations in world financial markets.

In the second half of 2008, the global financial crisis led to a dramatic deterioration in market conditions. To counter the effects of this crisis, AEGON introduced a number of short-term measures, aimed at reducing financial risk, lowering operating costs and freeing up capital from the company’s existing businesses. These short-term measures – known as ‘The Three Cs’ – Capital, Cost and Contingency – significantly strengthened AEGON’s financial position, improved efficiency and ensured the company would be well placed to take advantage of future opportunities.

Capital

As part of its long-term strategy, AEGON set out measures to release between EUR 4 billion and EUR 5 billion in capital from the company’s existing businesses by 2012. Given the global financial crisis, AEGON decided to bring forward these measures. Since the introduction of ‘Unlocking the Global Potential’ in June 2008, AEGON has freed up a total of EUR 4.9 billion.

This capital has been released through a combination of different measures, including risk reduction and a more active approach to capital management. AEGON’s aim is to maintain a sufficient capital buffer to protect the company’s long-term business and its credit and financial strength ratings. At the end of 2009, AEGON’s excess capital – over and above what would be required to maintain AA capital adequacy requirements – totaled EUR 3.7 billion, a significant improvement from EUR 2.9 billion at the end of the previous year. For the time being, given the current uncertain environment, AEGON believes it necessary and prudent to maintain a substantial capital buffer.

Risk reduction

Even before the start of the crisis, AEGON had started taking steps to reduce financial risk and thereby free up additional capital. With the onset of the crisis, these steps were accelerated, helping protect the company from any further deterioration in market conditions. Over the longer term, reduced levels of financial market risk should also result in more stable earnings. The steps AEGON took included:

Reducing the company’s overall exposure to world equity markets.
Structuring the company’s investment portfolio more defensively, taking measures to reduce credit and interest rate risk and lowering financial guarantees on some products.
Expanding AEGON’s hedging programs, particularly in the United States and the Netherlands.
Taking a more integrated, international approach to risk management and significantly increasing the resources committed to this area.

In addition, AEGON also took a number of strategic decisions during the year which had the effect of significantly reducing the company’s overall financial risk position:

Running off AEGON’s institutional spread-based business in the United States.
Sale of the company’s life insurance activities in Taiwan.

More active approach to capital management

During 2009, AEGON also carried out a number of transactions designed to raise capital, further strengthen the company’s overall capital position and enhance financial flexibility. These included:

Strengthening AEGON’s cash position by raising EUR 1 billion through the issue of a new three-year bond in April.
Raising EUR 1 billion in August through the sale of a combination of new and existing shares. Proceeds from this sale were used to repay one third of the EUR 3 billion in additional core capital that AEGON secured from the Dutch State at the end of 2008.
Raising USD 500 million in November in the United States and a further GBP 400 million in the United Kingdom in December with the issue of senior unsecured notes.

Cost

As part of its response to the financial crisis, AEGON announced that it would initiate cost reduction measures in 2009 of EUR 150 million – equivalent to 5% of the company’s 2008 adjusted cost base. This target was achieved by the end of September 2009, three months ahead of schedule – largely through efficiency improvements, restructuring programs and expense reductions at AEGON’s main operations in the United States, the Netherlands and the United Kingdom. In November, AEGON also announced a reorganization of its sales activities in the Netherlands, resulting in annual cost savings of an additional EUR 15 million.

In 2009, AEGON’s cost reduction measures totaled EUR 250 million, EUR 100 million above the company’s original target.

“We have worked diligently over the past year to strengthen AEGON’s balance sheet, reduce our risk to financial markets and achieve a broad range of cost and operational efficiencies that will serve to better align our businesses with today’s market realities. Consequently, AEGON is in a better position to respond to the significant opportunities for the life, pensions and asset management sectors internationally.”

Jan Nooitgedagt
Chief Financial Officer AEGON N.V.

Contingency

Since the start of the financial crisis, AEGON has developed a number of ‘contingency measures’ aimed at protecting the company from further sharp declines in world financial markets. Despite the recovery in financial markets, some of these measures were put into place during 2009 as part of the company’s broader efforts to reduce risk and release capital.

In February, AEGON announced a decision to run off its institutional spread-based business in the United States. This will lead to a significant reduction in credit risk, as well as releasing approximately EUR 600 million in capital by 2010.
The sale of AEGON’s life insurance activities in Taiwan in April contributed to a decrease in the company’s long-term interest rate exposure which, in turn, further lowered AEGON’s capital requirements.
AEGON also withdrew from the group risk market in the United Kingdom, a decision that is expected to release approximately EUR 55 million in additional capital by 2012.

Dutch government support

As part of its response to the financial crisis, AEGON secured EUR 3 billion in additional core capital in December 2008 from the Dutch State as a necessary precaution against a further possible deterioration in market conditions.

Thanks to the measures AEGON has taken to strengthen its overall financial position, the company in 2009 was in a position to begin repaying the Dutch State. AEGON’s objective is to repay the Dutch State the full amount at the earliest opportunity. At the end of November 2009, AEGON repaid an initial installment of EUR 1 billion, in line with the terms of the company’s agreement with the Dutch State. AEGON’s priority is to repay the remaining EUR 2 billion as soon as it is feasible and responsible to do so.

In November 2009, AEGON also submitted a plan to the European Commission, via the Dutch Ministry of Finance, designed to demonstrate that the company’s businesses are fundamentally sound and viable. This plan was a requirement for all those EU companies, including AEGON, which received state support during the financial crisis. The European Commission is currently in the process of assessing the contents of this plan before deciding whether to approve a continuation of the Dutch State’s support for AEGON.

Refining AEGON’s long-term strategy

Since the second half of 2008, the short-term measures taken by AEGON to counter the effects of the global financial crisis have significantly strengthened the company’s overall capital position and left the company well-placed to take advantage of future opportunities for growth. In addition, AEGON’s long-term strategy – ‘Unlocking the Global Potential’ – has been refined to take into account the change in market conditions since the global financial crisis.

As part of this approach, AEGON intends to:

Maintain efforts to direct capital to areas that offer higher returns and strong growth prospects. For the time being, AEGON will not enter new countries, but instead will concentrate efforts on strengthening its position in markets where the company already has developing operations.
Focus on improving growth and returns from existing businesses, with an added emphasis on continuing measures to reduce risk and lower operating costs.
Maintain the objective of managing AEGON as a single, international company.

Investment in existing businesses

AEGON continued to invest in its existing businesses, honoring commitments made before the onset of the financial crisis.

In May, AEGON completed the acquisition of a 50% stake in Mongeral SA Seguros e Previdência, one of Brazil’s largest independent life insurers.
In June, AEGON completed the acquisition of Banca Transilvania’s 50% stake in BT AEGON, the Romanian pension joint venture set up by the two companies in 2008.
In December, AEGON’s joint venture with Sony Life in Japan began operations. The joint venture, which was agreed in 2007, will initially focus on variable annuities.

As part of its long-term strategy, AEGON intends to direct more of its financial resources to growth markets in Central & Eastern Europe, Asia and Latin America. This will provide greater balance to AEGON’s businesses and reduce the company’s reliance on the US market.

Managing AEGON as a single international company

Considerable progress has been made toward the objective of managing AEGON as a single, international company:

Members of AEGON’s Management Board have been assigned global as well as national responsibilities. A more global approach both to risk and capital management has also been adopted 3 .
In October 2009, AEGON launched a new global organization for its asset management operations, designed to strengthen the company’s market position and further improve products and services to customers in Europe, North America and Asia. AEGON Asset Management brings together businesses in the United States, the Netherlands, the United Kingdom and Central & Eastern Europe as well as the company’s joint ventures in Asia.
AEGON is currently using its expertise in the United States to expand its variable annuities business to markets in both Europe and Japan.
A new European data center has been opened at the company’s offices in Edinburgh, aimed at improving efficiency by bringing together systems in both the Netherlands and the United Kingdom. Operations in Central & Eastern Europe will be added at the earliest opportunity.