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Aegon Profit Falls on Reorganization Costs; Shares Jump on Longevity Swap

Aegon NV (AGN), the Dutch owner of U.S. insurer Transamerica Corp., reported a 75 percent decline in fourth-quarter profit on reorganization costs and lower investment returns from equity markets and interest rates.

Net income fell to 79 million euros ($106 million) from 318 million euros a year earlier, the Hague-based insurer said today. The firm had 194 million euros in charges, including 48 million euros related to U.K. insurance policies.

The shares rose as the insurer said it completed a swap with Deutsche Bank AG to protect the firm against the risk of pensioners living longer than expected. Aegon, which makes most of its profit in the U.S., repeated that it aims to increase underlying pretax profit by 7 percent to 10 percent a year on average until 2015 and to post a return on equity of 10 percent to 12 percent.

“It’s positive that longevity risk has been reduced in the Dutch book,” Albert Ploegh, an Amsterdam-based analyst at ING Groep NV, wrote in a note today. “After several insurers had to take charges on the back of increased longevity, Aegon now appears to have tackled this issue.”

Shares of Aegon, whose Pyramid building is a landmark in San Francisco’s financial district, jumped as much as 7 percent in Amsterdam today. They were up 6.3 percent to 3.97 euros at 11:50 a.m. local time, giving the company a market value of 7.6 billion euros. That outpaced the 1.1 percent advance in the 28- company Bloomberg Europe 500 Insurance Index.

No Acquisitions

Aegon doesn’t plan a share buyback or acquisitions at this point, Chief Executive Officer Alex Wynaendts told analysts on a conference call today. He plans to continue a strategy of maintaining a strong capital position as market volatility will likely persist in coming years, even as the “bottom of the euro crisis is probably behind us.”

Profit missed the average estimate of 209 million euros in a Bloomberg survey of 10 analysts. Aegon said today it proposed a 2011 dividend of 10 cents per share, as the company had previously indicated. It would be the company’s first payout since 2008, when it took state aid during the financial crisis.

“The fourth-quarter result was mainly affected by one-off charges which we do not expect to occur in 2012,” Lemer Salah, an Amsterdam-based analyst at SNS Securities, said in a note. “We believe that the company is well positioned to achieve its objectives in the U.S. and Netherlands.”

Longevity Swap

Wynaendts said Aegon may do more transactions like today’s longevity swap, which will see Deutsche Bank (DBK) protect 12 billion euros, or one-third of the reserves in the Dutch business. “The transaction reduces required capital at an attractive cost,” Aegon said.

The risk of pensioners living longer will be borne by investors rather than Deutsche Bank, the German bank said in a separate statement. It is the first transaction to place such risk wholly in the capital markets, it said.

In 2011, Aegon set aside 82 million euros to cover life- expectancy risks in the Netherlands, Wynaendts said in an interview today. The transaction today helps the insurer increase its capacity on the Dutch pension market.

Aegon’s value of new business, a measure of projected future profitability of new policies, fell 59 percent to 53 million euros in the fourth quarter. That is unsurprising given “the historic low interest rates” in the insurer’s key markets, Wynaendts told reporters on the call.

U.K., Dutch Charges

Underlying pretax profit, which excludes investment swings, fell 23 percent to 346 million euros, almost matching the average estimate of 347 million euros in a Bloomberg survey of 12 analysts. Earnings on this basis fell 17 percent in 2011.

In the Netherlands, Aegon wrote down 75 million euros on its distribution business in anticipation of a ban on commissions in life and pension products starting in 2013, Wynaendts said. The U.K. charges, which were related to fixing administrative errors, exceeded the estimate of Cor Kluis, an analyst at Rabobank International.

“With all these charges for the U.K. taken, the year 2012 should be a normal profit level,” Kluis, based in Utrecht, the Netherlands, said in a note.

Aegon’s profit goals rely on assumptions including a 4.75 percent U.S. 10-year bond yield for 2016, which is more than double the current 2 percent rate.

The U.S. Federal Reserve said last month that it sees “exceptionally low” interest rates through 2014, having previously pledged to refrain from raising borrowing costs until at least the middle of 2013. Insurers suffer from lower long- term interest rates as they hold back returns from bond investments and increase future liabilities.

To contact the reporter on this story: Maud van Gaal in Amsterdam at mvangaal@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net

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