Strategic update

At AEGON’s recent analyst & investor conference in June, the company presented plans to strengthen AEGON’s position in the At-Retirement market in North America, the Netherlands and the United Kingdom, while seeking to leverage its strong capabilities in providing protection and asset accumulation products and services in its developing markets throughout Central & Eastern Europe, Asia and Latin America.

Continued demographic and economic uncertainties have increased the opportunities for AEGON in pursuing its core mission of assisting customers achieve their long-term financial security. To capture these opportunities, AEGON will accelerate the development of new business models by investing in innovative technology driven distribution channels, with the aim of connecting better and more frequently with customers, improving service levels and increasing retention rates. AEGON will also extend its investments in technology to support intermediaries as they adapt to the changing environment for distribution.

In recent years, AEGON has implemented a broad restructuring program to sharpen its focus on its core lines of business, reduce significantly its overall cost base, and create greater efficiencies across the organization. This has resulted in a better balance between spread-based and fee-generating business and a substantially improved risk-return profile, the divestment of non-core businesses, a lower cost base and an improved capital base ratio.

AEGON’s ambition

AEGON’s aim to be a leader in all of its chosen markets by 2015 is supported by four strategic objectives: Optimize Portfolio, Enhance Customer Loyalty, Deliver Operational Excellence and Empower Employees. These key objectives have been embedded in all AEGON businesses. They provide the strategic framework for the company’s ambition to become the most-recommended life insurance and pension provider by customers and distributors, as well as the most-preferred employer in the sector.

Optimize portfolio

AEGON has indicated previously that the consolidation of Spanish savings banks might lead to exiting one or more of its joint ventures in Spain. Following the announced merger between Banca Cívica and CaixaBank, AEGON reached an agreement with CaixaBank to end the life, health and pension partnership with Banca Cívica and sell its 50% interest in the joint ventures to CaixaBank for a total consideration of EUR 190 million. The sale is expected to result in a book gain of approximately EUR 35 million before tax. In 2011, AEGON’s share in underlying earnings before tax of the joint venture totaled EUR 16 million. The transaction is expected to close in the second half of 2012 and is subject to regulatory approvals.

In Spain, AEGON is also involved in an arbitration process to exit the joint venture with Caja Ahorros del Mediterráneo (CAM). This process is expected to be concluded in the first half of 2013. As of the second quarter of 2012, AEGON no longer includes results from this partnership. The second quarter of 2011 included underlying earnings of EUR 9 million from CAM.

AEGON Asset Management has reached an agreement with KKR to sell its minority stake in Prisma Capital Partners, a provider of hedge fund solutions, while continuing to be invested in Prisma’s funds. The transaction is expected to close in the fourth quarter of 2012. Prisma’s contribution to underlying earnings totaled EUR 5 million in the first half of 2012.

In November, AEGON launched its new platform proposition in the United Kingdom, AEGON Retirement Choices, to capture opportunities in the At-Retirement market. Recently, the company added its Workplace Savings proposition to the platform. Pension reform and the Retail Distribution Review will transform pension products and services and how they are distributed. AEGON’s platform offers a compelling solution to advisers, employers, and their employees.

AEGON is also focused on securing strategic distribution agreements in the United Kingdom and reached an agreement to supply corporate protection solutions to Barclays Corporate & Employer Solutions, confirming AEGON’s position as one of the market leaders in business protection.

In India, AEGON Religare launched its online health plan, iHealth. The plan is targeted at customers who prefer a direct and convenient process while buying a financial product. Additionally, AEGON Religare is planning to expand its suit of online products with protection and traditional plans.

Deliver operational excellence

In the Netherlands, AEGON is on track with reorganizing its business to be more agile and better positioned to respond to changing conditions and opportunities in the Dutch market. The reorganization program and other initiatives will result in reducing the cost base for AEGON The Netherlands by EUR 100 million, compared to the cost base for 2010. The cost savings aim to offset pressure on underlying earnings from increased longevity provisioning and a declining life insurance back-book. The majority of the cost savings is expected to be achieved in 2012. To date, AEGON has implemented costs savings of EUR 62 million.

In June, AEGON joined approximately 30 leading insurance companies as a signatory and founding member of the Principles of Sustainable Insurance (PSI). The PSI is a framework that helps companies incorporate environmental, social and governance (ESG) factors into their decision-making. The principles – a United Nations initiative – are aimed at positioning the world insurance industry as a lever for green industry and sustainable development. AEGON believes the PSI will help the company identify and manage both risks and opportunities associated with ESG issues.

Enhance customer loyalty

Recently, AEGON Asset Management published its first annual responsible investment report. The report details AEGON’s approach to responsible investment and its engagement with companies in which it invests on issues such as corporate governance, the environment, health & safety, remuneration and human rights. Last year, AEGON introduced a new Responsible Investment Policy, aimed at integrating ESG criteria into the company’s investment decisions and asset ownership. AEGON believes a responsible approach to investment may help to reduce risk and improve returns for customers.

OPERATIONAL HIGHLIGHTS

Underlying earnings before tax

AEGON’s underlying earnings before tax increased 10% to EUR 443 million in the second quarter of 2012. This is the result of business growth, a strong delivery on cost reduction programs and favorable currency movements.

Underlying earnings from the Americas rose to EUR 339 million. The 8% increase compared to the second quarter of 2011 is due to underlying growth in the business and a strengthening of the US dollar against the euro partly offset by lower fixed annuity earnings, recurring charges for Corporate Center expenses and an increase in employee benefit expenses.

In the Netherlands, underlying earnings decreased 4% to EUR 71 million. The decline was mainly the result of adverse claim experience on disability products in the non-life business, partly offset by higher contributions from pensions and distribution.

In the United Kingdom, underlying earnings before tax increased to EUR 25 million. The strong improvement in earnings compared to the same period last year was driven by the non-recurrence of extraordinary charges and successful implementation of the cost reduction program in AEGON’s businesses in the United Kingdom.

Underlying earnings from New Markets decreased 9% to EUR 64 million. Improved results at AEGON Asset Management and in Asia were offset by lower underlying earnings from Central & Eastern Europe, Variable Annuities Europe and Spain. AEGON no longer includes results from its partnership with Caja Ahorros del Mediterráneo (CAM). The comparable quarter of 2011 included underlying earnings of EUR 9 million from CAM.

Total holding costs decreased 16% to EUR 56 million as part of AEGON’s Corporate Center expenses are now charged to operating units. This change reflects the various services and support provided by the Corporate Center to operating units. The second quarter 2012 charge to operating units amounted to EUR 16 million.

Net income

Net income declined to EUR 254 million as higher underlying earnings, more favorable results on fair value items and lower impairments were more than offset by lower realized gains and a one-time charge in the Netherlands of EUR 265 million before tax included in Other charges.

Fair value items

The results from fair value items amounted to EUR 101 million. Positive results in the Netherlands and the holding were partly offset by negative fair value results in the Americas and New Markets.

Realized gains on investments

In the second quarter, realized gains on investments amounted to EUR 85 million and were mainly the result of normal trading in the investment portfolio.

Impairment charges

Impairments amounted to EUR 42 million which were primarily linked to residential mortgage-backed securities in the United States.

Other charges

Other charges amounted to a loss of EUR 254 million. On May 31, 2012 AEGON announced the acceleration of product improvements for unit-linked insurance policies in the Netherlands and the related one-time charge of EUR 265 million.

Run-off businesses

The results of run-off businesses amounted to EUR 6 million. The amortization of the prepaid cost of reinsurance asset related to the divestment of the life reinsurance activities was offset by improved results from the institutional spread-based business.

Income tax

Net income contained a tax charge of EUR 85 million in the second quarter, translating into an effective tax rate of 25%.

Return on equity

Higher average shareholders’ equity excluding revaluation reserves, compared with the second quarter of 2011, resulted in a return on equity of 6.8% for the second quarter 2012. Return on equity for AEGON’s ongoing businesses, excluding the run-off businesses, amounted to 7.7% over the same period.

Operating expenses

In the second quarter, operating expenses decreased 4% to EUR 814 million as a result of cost savings and lower restructuring charges. Excluding restructuring charges and at constant currencies, operating expenses also decreased 4% compared with the second quarter of 2011.

Sales and deposits

AEGON’s total sales increased 27% to EUR 1.6 billion. New life sales were stable as increased sales in the Americas were offset by lower sales in the Netherlands and the United Kingdom. Gross deposits in the pension business and AEGON Asset Management, however, were strong. New premium production for accident and health insurance also increased, mainly driven by strong travel insurance sales in the United States. At constant currencies, total sales increased 16%.

Market consistent value of new business

The market consistent value of new business amounted to EUR 117 million. The increase in the Netherlands resulting from a higher contribution from mortgage production was more than offset by the impact of lower interest rates on the value of new business in the Americas, Asia and Variable Annuities Europe.

Revenue-generating investments

Revenue-generating investments rose 3% compared to first quarter-end 2012 to EUR 452 billion at June 30, 2012, mainly the result of favorable currency movements in addition to net inflows.

Capital management

AEGON’s core capital excluding revaluation reserves amounted to EUR 18.5 billion, equivalent to 74.6%⁶ of the company’s total capital base at June 30, 2012. AEGON is on track to reach a capital base ratio of at least 75% by the end of 2012.

Shareholders’ equity increased to EUR 23 billion. The increase was a result of second quarters’ net income, an increase in the revaluation reserves and strengthening of the US dollar against the euro.

The revaluation reserves increased to EUR 4.5 billion during the second quarter, mainly a reflection of lower interest rates. Shareholders’ equity per common share, excluding preference capital, amounted to EUR 10.91 at June 30, 2012.

During the second quarter, excess capital in the holding increased to EUR 1.6 billion, mainly the result of dividends received from operating units partly offset by operational expenses and dividends on preferred and common shares. Excess capital in the holding serves as a buffer. During 2012, AEGON aims to maintain a buffer at the holding of at least EUR 750 million.

At June 30, 2012, AEGON’s Insurance Group Directive (IGD) ratio amounted to 216%, a strong increase from the level of 201% at the end of the first quarter. Measured on a local solvency basis, the Risk Based Capital (RBC) ratio in the United States increased to ~460%, while the Pillar I ratio in the United Kingdom remained level at ~135% at the end of the second quarter 2012. The IGD ratio in the Netherlands increased substantially to ~265% partly as a result of a change in the yield curve to discount liabilities as prescribed by the Dutch Central Bank. This measure has added ~35 percentage points to the IGD ratio of the Dutch entity, equivalent to ~8 percentage points to the group IGD ratio.

Cash flows

Operational free cash flow amounted to EUR 761 million. Excluding positive market impacts of EUR 622 million and negative one-time items of EUR 157 million, the operational free cash flows amounted to EUR 296 million. Market impacts included the impact of the Ultimate Forward Rate change and favorable yield curve movements in the Netherlands partly offset by adverse interest rate and equity market movements which affected AEGON’s businesses in the United States.

The one-time items included the effects of measures in the Netherlands related to unit-linked insurance policies and adverse tax items in the Americas. Operational free cash flows represent distributable earnings generation of the business units. The impact of capital preservation initiatives is not included in the reported operational free cash flows. AEGON is on track to improve operational free cash flow from its 2010 normalized level of EUR 1.0-1.2 billion per annum by 30% by 2015.

In July, AEGON issued EUR 500 million in senior unsecured notes due in 2017. The notes were issued under AEGON’s USD 6 billion debt issuance program at a price of 99.712%, and carry a coupon of 3%. Net proceeds from this issuance will be used for general corporate purposes and the replacement of short-term debt.

Interim dividend

The 2012 interim dividend amounts to EUR 0.10 per common share. The interim dividend will be paid in cash or stock at the election of the shareholder. The value of the stock dividend will be approximately equal to the cash dividend.

AEGON shares will be quoted ex-dividend on August 16, 2012. The record date is August 20, 2012. The election period for shareholders will run from August 22 up to and including September 7, 2012. The stock fraction will be based on the average share price on Euronext Amsterdam from September 3 through September 7, 2012. The stock dividend ratio will be announced on September 7, 2012 after closing of Euronext Amsterdam. The dividend will be payable as of September 14, 2012.

Underlying earnings before tax

Underlying earnings from the Americas in the second quarter 2012 amounted to USD 435 million. The 4% decrease compared to the second quarter of 2011 is primarily due to lower fixed annuity earnings. Underlying growth in the business was offset by recurring charges for Corporate Center expenses of USD 9 million and an increase of USD 14 million in employee benefit expenses.

Net income

Net income from AEGON’s businesses in the Americas decreased to USD 275 million in the second quarter. Lower impairments were offset by a decrease in underlying earnings, a decline in results from fair value items and higher tax charges.

The loss of USD 103 million from fair value items for the quarter was mainly driven by the loss on the macro equity hedge, and unfavorable alternative investment performance.

Gains on investments of USD 70 million were realized as a result of normal trading activity. Net impairments amounted to USD 50 million and continued to be primarily linked to residential mortgage-backed securities. On an annualized basis, impairments in the second quarter amounted to 22 basis points of AEGON’s US fixed income general account portfolio, below long-term expectations of 30-35 basis points.

The results of run-off businesses amounted to USD 8 million. The amortization of the prepaid cost of reinsurance asset related to the divestment of the life reinsurance activities was offset by improved results from the institutional spread-based business.

Net income included a net tax expense of USD 83 million in the second quarter, translating into an effective tax rate of 23%.

Return on capital

In the second quarter of 2012, the return on average capital, excluding revaluation reserves, invested in AEGON’s business in the Americas amounted to 6.6%. Excluding the capital allocated to the run-off businesses, the return on capital in the Americas amounted to 7.8%. Return on capital of AEGON’s businesses excludes the benefit of leverage at the holding.

Operating expenses

Operating expenses decreased 3% to USD 477 million, primarily due to cost savings in the main business units. Excluding restructuring charges, employee benefit plan expenses and the Corporate Center cost allocation, operating expenses decreased 8%. This was mainly as a result of the wind down of the BOLI/COLI activities and the divestiture of Transamerica Reinsurance last year.

Sales and deposits

New life sales increased 11% to USD 162 million, primarily driven by strong indexed universal life sales. New premium production for accident & health insurance increased 17% to USD 225 million, mainly the result of increased travel insurance sales driven by expanded existing relationships and the addition of a new partner in the third quarter of 2011.

Gross deposits increased 18% to USD 8.5 billion as a result of higher takeover deposits in the retirement plan space and increased stable value deposits. Variable annuity sales continued to be strong, despite a repricing of the company’s variable annuity offerings earlier in the year reflecting the current low interest rate environment and subsequent higher hedging costs in its riders.

Net deposits increased to USD 1 billion in the second quarter – excluding run-off businesses. AEGON’s core growth areas of variable annuities and retirement plans recorded net inflows of USD 0.4 billion and USD 1.6 billion respectively, which were partly offset by stable value outflows of USD 0.5 billion and fixed annuity outflows of USD 0.6 billion. AEGON is de-emphasizing sales of fixed annuities as part of a strategic repositioning and therefore incurs net outflows.

Market consistent value of new business

The decline in interest rates impacted the level of market consistent value of new business in the second quarter of 2012, which amounted to USD 58 million. A continued strong contribution from the pensions business was more than offset by lower value of new business on certain life insurance and variable annuity products, compared to the second quarter of 2011. AEGON will continue to reprice products and slow down sales of unprofitable business in order to meet its return targets. During the second quarter of 2012, AEGON has discontinued sales of universal life joint survivorship policies and repriced its long term care offering.

Revenue-generating investments

Revenue-generating investments were stable at USD 325 billion at June 30, 2012, as compared to the first quarter of 2012. Net inflows and the positive effect of lower interest rates on the value of fixed income assets were offset by outflows related to run-off businesses, a fixed annuity coinsurance transaction of USD 1.6 billion and the effect of unfavorable equity market performance.