Delta Lloyd in 2012
In 2012, Delta Lloyd Group defied adverse market conditions to move closer to realising its long-term goals.
We strengthened our distribution, consolidated our market leadership position in Life Insurance, exited loss-making activities, beat our cost target, benefited from excellent access to capital markets and gained independence from Aviva to become a fully autonomous publicly-traded company, now also listed in Belgium.
Although we posted a net IFRS loss of € 1,495 million for 2012, compared with a € 184 million loss in 2011, this reflects the impact of low interest rates and our marked-to-market IFRS balance sheet. Our conservative approach is reflected in the marked-to-market IFRS accounting principles. We value our life provisions in a way that differs from regular industry practice, at a market yield of 1.99% at the 10-year point. Consequently, shareholders’ funds decreased to € 2.3 billion compared to € 3.9 billion at the end of 2011. This was mostly attributable to the effect of the decline of the Collateralised AAA curve on the value of our liabilities, which was only partly compensated by an increase in the value of our assets.
At the 10-year point, the Collateralised AAA curve decreased 200 basis points, while the ECB AAA curve dropped 94 basis points. The lower Collateralised AAA curve led to higher provisions for insurance liabilities and investment contracts (€ 4.7 billion) and hence to lower shareholders’ funds. Based on more traditional accounting principles, as generally used in the industry, shareholders’ funds after non-controlling interests would have been substantially higher at € 3.7 billion. For more details on this we refer to the annual results 2012 analyst presentation on www.deltalloydgroep.com.
On an operational level, our result after tax was € 404 million, in line with third-quarter guidance, but down from € 480 million in 2011.
In millions of euros
Operational result after tax and non-controlling interests
Operational result before tax and non-controlling interests
With operating expenses at € 782 million, we beat our ambitious 2012 cost-cutting target to lower our operating expenses to € 820 million. This includes the costs of the acquired ABN AMRO intermediary activities, which were fully absorbed in 2012. The savings are largely from the ongoing simplification of our organisation, leading to increased efficiency. For 2013 and 2014, our targets are € 790 million and € 760 million respectively (excluding the costs of the acquired ABN AMRO intermediary activities).
Total gross premiums declined by 13% to € 4.7 billion in tough markets, but Delta Lloyd remained the leader in the Life new business with new annual premium income (NAPI) of € 401 million.
Our proposed total dividend for 2012 remained stable at € 1.03 per ordinary share.
The business environment for financial services providers remained complex in 2012. Financial markets were volatile as uncertainty about the future of the euro zone, government austerity measures, worries about the US economy and fears of a slowdown in China all cast dark shadows over the global economy.
Towards the end of the year, investor confidence picked up and markets rallied on both sides of the Atlantic. However, interest rates remained at historic lows, which had a direct impact on our shareholders’ funds and our results.
In August 2012, Delta Lloyd Levensverzekering NV placed a € 500 million subordinated loan with a wide group of investors. The success of the issue illustrates our excellent access to capital markets. The subordinated notes have a 9% coupon and are compliant with the latest draft requirements for Solvency II, qualifying as Tier 2 capital for Delta Lloyd. We have no additional financing requirements in the short or medium term.
In December, Amstelhuys securitised a portfolio of Dutch residential mortgage loans valued at € 700 million under the name Arena 2012-1, again attracting strong investor interest.
We reduced our exposure to sovereign and sub-sovereign bonds from Greece, Italy, Portugal, Spain and Ireland to € 59 million from € 178 million in 2011. We now have no sovereign exposure to Greece, Ireland or Portugal.
In July 2012, majority shareholder Aviva announced an accelerated book-build offering of 25 million shares – 14.4% of all ordinary shares – to institutional investors. Due to huge demand, this was increased to 37.2 million shares (21.4%), leaving Aviva with a less than 20% stake in Delta Lloyd.
In January 2013, Aviva placed its outstanding 34.3 million shares with institutional investors in another oversubscribed accelerated book-building process. Delta Lloyd’s capital is now more than 99% free float.
Since January 2013, we have also been listed on NYSE Euronext Brussels. We have been included in Belgium’s leading BEL20 index since 18 March 2013.
Consumer behaviour is changing, which in turn is altering the distribution landscape. Rather than going through third-party financial advisers, shrewd consumers are taking a direct approach and using the internet to research, compare and buy insurance products. On one hand, products are becoming increasingly commoditised as price becomes a prime consideration in buying decisions. On the other, there is growing demand for customised financial services that are best suited to individual consumer needs.
With insurance markets in the Netherlands and Belgium already highly saturated, there is limited room to grow, which puts pressure on margins. This demands a new approach from insurance providers. Solid players that are proactive and agile can take advantage of these developments to capture market share from competitors.
Delta Lloyd Group and Deutsche Bank entered into a 30-year agreement for the exclusive distribution of pension products to customers of Deutsche Bank through the Delta Lloyd Group labels. Our BeFrank joint venture will be the exclusive partner for Deutsche Bank commercial customers interested in taking out a group pension plan at a premium pension institution (PPI).
Delta Lloyd is well positioned to respond to the opportunities arising from changing consumer trends. We have strong brands and our multi-channel distribution approach allows us to sell both directly to consumers, as well as through intermediaries.
In Belgium, where we expect solvency issues to lead to greater consolidation in the insurance market, we announced the proposed sale of our general insurance portfolio to insurance broker Fidea in December. For Life Insurance, we signed a distribution agreement with CRELAN. This fits our strategy to expand life insurance businesses in Belgium, primarily through distribution by local banks and direct online sales.
The Dutch economy grew marginally in the first half of the year, only to contract again in the third quarter. Consumers were reluctant to spend amid concerns about the future of their pensions, which will be affected by restrictions on how much they can save for their retirement, and plans by the government to scrap tax benefits on mortgages, depressing the weak housing market even further.
Dutch mortgage debt (excluding associated savings) is among the highest in Europe, and falling property prices have left around 25% (800,000) of homeowners in negative equity. In our view, government proposals to stimulate the Dutch housing market could be counter-productive, resulting in higher mortgage repayments that could scare buyers from the market and leave households with even less money to spend. This would in turn lower house prices further, reduce activity in the construction industry and affect Dutch banks whose balance sheets are filled with mortgages.
The new Dutch pro-austerity coalition government formed in October 2012 also proposed a myriad of other measures to cut state spending and reduce the budget deficit. Some of these will affect our business. They include the introduction of higher taxes on insurance property and casualty (P&C) insurance products, which rose from 9.7% to 21% on 1 January 2013, and a proposal to tax all financial transactions, which if implemented will affect the entire Dutch financial services industry.
In both the Netherlands and Belgium, the pension market remains a catalyst for potential growth. The growth of the over-65 population relative to the working age population is placing increasing demands on the pension system. There is more onus on consumers to provide for their own retirement. As such, more people are investing in pension and endowment products.
In addition, challenging investment conditions and higher solvency requirements are making it harder for pension funds to meet their obligations and remain independent. According to Dutch Central Bank data (end of November 2012), more than half of all Dutch pension funds (55%), representing 84% of all participants in Dutch pension schemes, fell short of the compulsory 105% coverage ratio in 2012. We therefore expect a substantial transfer of insurance liabilities and assets under management from pension funds to commercial insurers such as Delta Lloyd, if coverage ratios are sufficiently high.
Reforms to the Dutch pension system have yet to be finalised, and there is still uncertainty around what the changes will entail. Proposals to lower the annual build-up of pension reserves by 0.4 percentage points to 1.75% – almost 20% a year in the long term – and to cap tax-free pension savings by 0.35pp per person at € 100,000 could affect people’s financial security upon retirement. This also raises the question of who will benefit from the money saved: will it go to the pension funds to improve their coverage ratios, or will it put more cash in the hands of the people contributing to the funds, to boost consumer spending? Government plans to raise the age of retirement to 66 in 2018 and 67 in 2021 will also have implications for the Dutch pension market.
In Belgium, too, a low-yield environment and changes to legislation and tax laws could put pressure on the life insurance market in the short to medium term. However, in the long term, unit-linked and pension products are expected to provide a modest return once the policies mature and people retire.
Delta Lloyd recognises that consumers want simple, easy to understand and transparent products at competitive prices. We have simplified our organisation, processes, systems and communication to make it easier for customers to find, buy and use our products. At the same time, simplification optimises our margins and reduces costs.
Our Customer Centric programme emphasised accessibility, providing easy-to-understand information and communication, as well as listening to customers and making improvements based upon their feedback. As a result of better service delivery, customer satisfaction improved in 2012.
The Customer Centric programme has made many improvements in the interests of customers. In 2011 and 2012, all existing and new products were checked against our product approval process standards. As part of this review, we verify regulatory compliance, as well as whether the product is cost-efficient, useful, safe and understandable. All employees must strive for customer centricity: to stimulate this all staff are judged by their customer centric performance, which is laid down in specific key performance indicators (KPIs). For a more detailed report see section 4.2.
Delta Lloyd’s number one priority is to put our customers first. As part of this, we introduced the ‘Vreemde Talen’ (‘foreign languages’) campaign in 2012 to create more transparent and comprehensible financial products.
We paid particular attention to simplifying our pension and individual pension products. This helped position Delta Lloyd as the number one pensions insurer in the Netherlands, according to customer satisfaction research by consultancy firm IG&H.
In 2012, Delta Lloyd qualified for inclusion in the Dow Jones Sustainability Indices for Europe and the World. We scored a strong 75 points in the DJSI self-assessment, up from 69 in 2011. Although not yet been formally admitted to the DJSI, we are recognized as a ‘top-scoring company’ in the insurance sector (2013 RobecoSAM Bronze Class).
In June, we were a founding signatory of the UN Principles for Sustainable Insurance (PSI), which commits us to doing business responsibly and ethically as part of our daily practice, to create sustainable long-term value for our shareholders and protect our good name. In 2012, more than half (55%) of our total assets under management classified as responsible investment (2011: 54%).
The Delta Lloyd Foundation works to improve financial self-reliance and awareness among vulnerable groups. In 2012, more than 600 employees volunteered for the Foundation, an increase of almost 20%. An e-learning platform launched in October helps employees prepare for their role as a volunteer.
To deliver excellent service and meet the needs of our customers, we rely on the commitment and professionalism of our employees. In return, we strive to offer them an enjoyable work environment in which they feel engaged, responsible and valued. We offer flexible working, preventative healthcare and appealing assignments.
At the end of 2012, we employed 5,276 permanent employees (FTEs), of which 3,966 were in the Netherlands, 1,110 in Belgium and 200 in Germany. This was 2% fewer than at the end of 2011, and includes employees from the intermediary activities we acquired from ABN AMRO Bank.
Delta Lloyd is committed to diversity in the workplace. Our efforts at increasing diversity are outlined in section 4.5.4. of this report. In management positions, Delta Lloyd aims to have a gender balance by having at least 30% female executives (overall percentage of the Executive Board and the two management layers immediately below: directors and managers). In 2012, Delta Lloyd did not meet this criterion, although the percentage of female managers and directors increased compared to 2011 and it is expected to continue to do so in 2013.
For 2015, Delta Lloyd has set specific targets of having at least 35% female managers, at least 25% female directors and at least one female Executive Board member. To meet these targets a diversity council has been set up, managers and directors have targets for increasing diversity in their staff, and additional efforts are taken to stimulate female talents to join the management development programme and become team leader, which is the basis for a healthy future gender balance. Moreover, Delta Lloyd is a signatory partner of the Talent to the Top Charter.
In 2012, we entered into a new collective labour agreement for our staff in the Netherlands. It included a 3% wage increase and an option to purchase an iPad at a favourable rate. 79% of employees took up the offer. This reflects the modernisation of our workplace and the introduction of a new way of working called ‘Sterk Werk’ (‘strong work’), which allows staff to choose when and where they work. All business divisions in Amsterdam and Arnhem have adopted this concept. We announced changes to staff packages and will develop measures to reduce some so-called ‘gold-plated’ perks to reduce costs.
Delta Lloyd was ranked among the top 10 most attractive employers in the Netherlands in 2012 in surveys by influential daily newspaper NRC Handelsblad and Intermediair career magazine.