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Aegon First-Quarter Profit Slumps 61% After Hedging Losses

May 8 (Bloomberg) -- Aegon NV, the Dutch owner of U.S. insurer Transamerica Corp., said first-quarter profit fell 61 percent after an accounting loss on hedging programs designed to protect capital.

Net income dropped to 204 million euros ($267 million) from 525 million euros a year earlier, The Hague-based company said in a statement today. That missed the average 319 million-euro estimate of six analysts surveyed by Bloomberg. The shares tumbled 3.9 percent in Amsterdam today.

Aegon increased the use of hedging in the fourth quarter to protect capital and reduce risks of equity-market losses on variable annuity savings products in the U.S. A 10 percent increase in the Standard & Poor’s 500 Index in the first quarter led to a loss on equity hedges in the U.S., contributing to a 286 million-euro loss in so-called fair-value items, the insurer said today.

The loss will be offset over time by an increase in fees, which are calculated on the basis of asset values, Chief Executive Officer Alex Wynaendts said in an interview today. A rise in line with markets will show in underlying earnings, a measure of profit that excludes investment swings.

“Underlying earnings are strong, sales and production are strong, capital position is strong and on top of that we are putting in place a protection of our capital,” he said. “Let’s not forget that we live in a very uncertain world. When equity markets go up for one quarter, people tend to forget that there is a lot of risk out there.”

Shares Fall

Aegon, whose Pyramid building is a landmark in San Francisco’s financial district, declined 20 cents to 4.99 euros in Amsterdam trading. That pared this year’s gain to 3.9 percent compared with the 13 percent advance in the 28-company Bloomberg Europe 500 Insurance Index.

Equity-linked variable annuities can provide minimum guarantees to clients, and insurance companies’ costs climb when bond yields fall and stocks decline. The hedges put in place to safeguard capital have to be accounted through the profit-and-loss account.

Aegon said underlying pretax profit rose 1 percent to 445 million euros in the first quarter, beating a 437 million-euro average estimate of five analysts surveyed by Bloomberg. Business growth and equity market gains in parts of the business where no hedges are in place, were offset by higher employee costs and Aegon’s exit from partnerships in Spain.

New life sales rose 12 percent to 499 million euros, helped by sales of pension products in the Netherlands and the U.K., the company said.

Record Loss

Aegon is countering low interest rates and market turmoil by cutting costs and boosting the share of profit from fee-based businesses, including unit-linked pensions and variable annuities, to as much as 35 percent by 2015.

Impairments fell to 17 million euros, the lowest since the financial crisis in 2008, Wynaendts said in today’s statement.

The insurer’s Insurance Group Directive ratio, a measure of solvency, dropped to 224 percent from 228 percent at the end of last year. Excess capital at the holding declined to 1.8 billion euros from 2 billion euros at year-end.

Aegon last week completed a restructuring of its operations in Spain, agreeing to sell its stake in a life-insurance joint venture with Caja de Ahorros del Mediterraneo to Banco Sabadell SA. The Dutch firm has raised 1 billion euros as it revisited its joint ventures in the country after Spain’s banking bailout last year led to mergers of savings banks, or cajas.

It remains in the Spanish market through joint ventures with Banco Santander SA, the nation’s largest lender, and will continue to sell its products through Liberbank SA, Caja Badajoz and agents.

To contact the reporters on this story: Maud van Gaal in Amsterdam at mvangaal@bloomberg.net; Fred Pals in Amsterdam at fpals@bloomberg.net

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

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