Underlying earnings before tax Aegon's underlying earnings before tax increased 29% to EUR 447 million in the fourth quarter of 2012. This is the result of business growth, a strong delivery on cost reduction programs, the non-recurrence of exceptional charges in the United Kingdom and favorable equity markets and currency movements.
Underlying earnings from the Americas rose to EUR 342 million. The 8% increase compared to the fourth quarter of 2011 is mainly due to growth of the business and favorable currency exchange rates.
In the Netherlands, underlying earnings increased 11% to EUR 83 million as higher earnings in Life & Savings more than offset lower earnings in Pensions and Non-life.
In the United Kingdom, underlying earnings increased to EUR 25 million. This strong improvement in earnings compared to the same period last year was driven by the non-recurrence of exceptional charges and the successful implementation of the cost reduction program. Earnings were negatively impacted by adverse persistency following the implementation of the Retail Distribution Review and investments in new propositions in the pension business. It is expected that the effects of adverse persistency will continue in the first half of 2013.Underlying earnings from New Markets decreased 20% to EUR 52 million. Higher earnings of Aegon Asset Management as a result of strong growth were more than offset by lower underlying earnings from Asia and Spain. Results in Spain were impacted by the divestment of the joint venture with Banca Cívica and results from Aegon's partnership with CAM are no longer included pending the exit from this joint venture. Total holding costs decreased 35% to EUR 55 million. This is mainly the result of Aegon's Corporate Center expenses being charged, in part, to operating units as of the first quarter of 2012. These charges reflect the services and support provided to operating units by the Corporate Center and amounted to amounted to EUR 16 million in the fourth quarter of 2012. In addition, lower operating expenses also contributed to the decrease. Net income Net income increased to EUR 422 million driven by higher underlying earnings, realized gains on investments and book gains on divestments, and lower impairments. These were only partly offset by lower results on fair value items and higher tax charges. Fair value items The results from fair value items amounted to a loss of EUR 79 million. The loss was mainly driven by the holding company, which included the impact of lower credit spreads on the valuation of Aegon bonds and the negative effect on the fair value of swaps, as a result of unfavorable interest rates movements. Realized gains on investments In the fourth quarter, realized gains on investments amounted to EUR 149 million and were the combined effect of trading as a result of asset liability management and normal activity in the investment portfolio in a low interest rate environment. Impairment charges Impairments improved significantly compared to last year and amounted to EUR 58 million. In the Americas, impairments were primarily linked to one large mortgage loan in the United States, while in New Markets impairments were largely related to mortgage loans in Hungary. Other income Other income amounted to EUR 106 million. Book gains on both the sale of Aegon's minority stake in Prisma Capital Partners ( EUR 100 million) and the divestment of its 50% stake in a joint venture with Banca Cívica ( EUR 35 million) were partly offset by a BOLI wrap charge in the United States ( EUR 26 million). Run-off businesses The results of run-off businesses amounted to a loss of EUR 14 million, which was primarily due to the reinsurance business. Aegon divested its life reinsurance business during 2011 through a reinsurance transaction and carries an intangible asset as a result. Increased transfers of clients from Aegon to Scor resulted in an acceleration of the amortization of the intangible asset during the quarter ( EUR 18 million). Income tax Income tax amounted to EUR 129 million in the fourth quarter, translating into an effective tax rate of 23%. The main drivers of the lower than nominal tax rate were tax exempt income in the Americas and the Netherlands, tax credits in the Americas and Central & Eastern Europe and the benefit of a future tax rate decrease in the United Kingdom. Return on equity The increase in return on equity to 7.2% for the fourth quarter of 2012, was driven by the positive effect of growth in net underlying earnings partly offset by higher shareholders' equity excluding revaluation reserves. Return on equity for Aegon's ongoing businesses, excluding the run-off businesses, amounted to 8.0% over the same period. Operating expenses In the fourth quarter, operating expenses decreased 3% to EUR 848 million mainly as a result of significant cost savings in the United Kingdom. On a comparable basis, total operating expenses also decreased 3% compared with the fourth quarter of 2011. Sales Aegon's total sales increased substantially to EUR 1.8 billion. New life sales grew strongly in many markets, most notably in the Netherlands and the United Kingdom where higher pension production was driven by a strong market proposition and the introduction of the Retail Distribution Review respectively. In the Americas, the main drivers behind the increase were continued successful sales of indexed universal life products and the discontinuance of certain unprofitable universal life products which resulted in higher activity. Gross deposits remained strong for the variable annuity, retail mutual fund, retirement plan and asset management businesses. Market consistent value of new business The market consistent value of new business increased to EUR 204 million as a result of a combination of higher volumes, product repricing in the United States, a higher contribution from mortgage and pension production in the Netherlands and improved margins in Central & Eastern Europe and Asia. Revenue-generating investments Revenue-generating investments declined 1% compared to the third quarter-end of 2012 to EUR 458 billion at December 31, 2012 as net inflows were more than offset by the effect of adverse currency movements. Capital management Aegon's core capital excluding revaluation reserves amounted to EUR 18.6 billion, equivalent to 76.7% 6 of the company's total capital base at December 31, 2012. This is well-above the company's capital base ratio target of at least 75% by the end of 2012 as agreed with the European Commission. Shareholders' equity increased to EUR 24.7 billion, mainly as a result of fourth quarters' net income. The revaluation reserves increased slightly during the fourth quarter to EUR 6.1 billion, mainly a reflection of lower credit spreads partly offset by slightly higher interest rates. Shareholders' equity per common share, excluding preference capital and revaluation reserves, amounted to EUR 8.47 at December 31, 2012. In the fourth quarter, excess capital in the holding increased to EUR 2.0 billion as dividends received from business units were partly offset by interest payments and operational expenses. During 2012, Aegon aimed to maintain excess capital at the holding of at least EUR 750 million. At December 31, 2012, Aegon's Insurance Group Directive (IGD) ratio amounted to 230%, an increase from the level of 222% at the end of the third quarter. Measured on a local solvency basis, the Risk Based Capital (RBC) ratio in the United States increased to ~495%. This was mainly the result of strong net income in the quarter partly offset by dividends paid to the holding company. The IGD ratio in the Netherlands remained stable at ~250%, while the Pillar I ratio in the United Kingdom increased to ~140% at the end of the fourth quarter of 2012. Cash flows Operational free cash flows amounted to EUR 530 million. Excluding negative market impacts of EUR 89 million, the operational free cash flows amounted to EUR 619 million. Market impacts related mainly to interest rate movements. Operational free cash flows excluding market impacts were particularly strong during the quarter, primarily the effect of reserve releases and proceeds from divestments. Operational free cash flows represent the distributable earnings generated by the business units. Final dividend 2012