Optimizing our portfolio is one of our four strategic objectives1. The idea is simple: we want to put more of our resources into businesses that will bring us future earnings and growth.
Over the past few years, we've been shifting more toward businesses that pay fees or earn us money from our insurance margins, rather than those dependent on investment spreads. There are several reasons for this: it reduces our financial risk, which, in turn, reduces the amount of capital we have to set aside to cover those risks. It also makes us less reliant on the performance of financial markets – important in a time of market uncertainty. Fee businesses now account for 45% of our earnings, compared with just 15% in 2010.
earnings accounted for by fee businesses
capital now invested in core businesses
aim of average annual sales growth between 2016 and 2018
We've been selling some businesses, and expanding others, so we can build up sources of growth for the future. Last year, we sold UMG, our advisory business in the Netherlands. We also sold our Irish operations and our UK annuities book. In the US, we sold several businesses already placed in run-off; these included our pay-out annuity and BOLI-COLI businesses, as well as another tranche of our US life reinsurance business. These sales reduced risk and freed up capital. Ninety percent of our capital is now invested in our core businesses; in 2010, it was just two-thirds. Elsewhere, we're looking to expand. We want to increase earnings from our asset management activities, for example. In the UK, we've made acquisitions in pensions and investments. By expanding our asset management operations and investing more in fee businesses, we're aiming for average annual sales growth of 10% between 2016 and 2018.
Nobody quite knows yet what the impact of blockchain will be. But it's clear it has the potential to transform the finance and insurance industry. In 2016, Aegon set up the Blockchain Insurance Industry Initiative (B3i) with four other insurers. B3i's aim is to develop uses for blockchain technology in insurance. The initiative's first project – a common platform for reinsurance – launched a prototype in December 2017. Blockchain works by creating a digital ledger, each transaction in the ledger representing a separate block of data, with its own code and time-stamp. Using blockchain has several advantages: it's quicker, easier and more efficient than the current pen-and-paper approach, so it should lower costs. More importantly, it's secure. Once data is verified and stored in its block, it can't be changed, which should help further strengthen trust in financial services. Reinsurance is an ideal starting point for our work on blockchain; it's a business-to-business industry, involving a relatively small number of players. But there's no reason why blockchain, once tried and tested, shouldn't also revolutionize other parts of the insurance industry.
How we repositioned our US and UK businesses
Over the past year, we've repositioned our businesses in the US and the UK. These changes have been disruptive at times, particularly for our employees. But, as a result, we're in a much stronger position; we can commit more resources to what's important: growing our businesses, and helping our customers save, plan and invest for the future.
Outsourcing in the US
In the US, we're outsourcing administration of our life, health, annuities and workplace businesses to Tata Consultancy Services (TCS)1; the agreement with TCS covers around 10 million policies. Outsourcing should save some $70 million a year (eventually rising to $100 million). The alternative – to update our own administration systems – would have proved too costly. TCS' know-how and use of technology should mean better, faster, more responsive customer service. As part of the agreement, TCS will offer jobs to 2,100 Transamerica employees, minimizing disruption. In some places, we'll be sharing office space. TCS will also site its North American headquarters in Cedar Rapids (Iowa), Transamerica's home city.
Acquisitions in the UK
In the UK, we sold off our annuities book, and made two important acquisitions: Cofunds and Blackrock's UK worksite pensions business. Together, these acquisitions brought £90 billion onto our UK investment platform, making it the biggest in the country. Through the platform, we're able to offer funds, savings products and pensions to customers, their employers and financial advisors. We're now working to upgrade our UK back-book – by converting pre-existing customers to newer, better products. With these changes, we've shifted Aegon UK from being an insurer to a long-term savings business; as a result, we're much better placed to benefit from forecast UK market growth2.
1 These four strategic objectives are: loyal customers, operational excellence, empowered employees and optimized portfolio. These objectives have been in place since 2012.