Results third quarter 1998

Outlook 1998

Better results of operations than previously projected have to some extent offset the effect of the strengthening of the guilder against the dollar. Barring additional adverse currency movements or other, exceptional circumstances we expect an increase in 1998 earnings and earnings per share in guilders approximating 25% and 20% respectively.

Summary

• Total net income increased by 33% (17% autonomously) to NLG 1,990 million in the first nine months of 1998, despite recent unfavorable financial market developments. Earnings per share increased by 26% (17% autonomously) to NLG 3.43. The effect of the recent drop in interest rates, the depreciation of the US dollar and the British pound to the Dutch guilder and the volatile equity markets on AEGON's 1998 earnings will be limited. This has led AEGON's Executive Board to maintain the positive earnings forecast for the full year.
• Income before tax in the Americas increased by 74% (68% in USD) to NLG 1,478 million, mainly due to the acquisition of the insurance operations of the former Providian Corporation (included in our figures as from the third quarter of last year). Income before tax in the Netherlands rose by 8% to NLG 1,159 million in the first nine months, including the earnings of Bank Labouchere. An 18% (13% in GBP) higher contribution to the Group's income before tax was reported by Scottish Equitable, totaling NLG 226 million (GBP 68 million). AEGON's stake in the profits of this UK-based provider of pension and investment products increased from 90% to 95% as of the end of last year. The positive earnings contribution from the activities in other countries totaled NLG 30 million before tax in the first nine months of this year.
• Premium income growth amounted to 26% (autonomous 17%), totaling NLG 19,359 million in the first nine months, mainly as result of the continued growth in life insurance, pensions and related savings and investment products. Under less favorable financial market conditions, investment income rose to NLG 8,323 million. Total revenues increased by 26% to NLG 28,772 million.
• The decrease in shareholders' equity is mainly due to currency exchange rate movements, recognized goodwill and the repurchasing of AEGON shares to hedge the company's stock option plans.

Chairman's statement

Commenting on the results for the first nine months of 1998, AEGON's Executive Board Chairman Kees Storm said: "The volatility in the financial markets increased quite dramatically during the third quarter. Nevertheless, we are confident our business is well-balanced and the autonomous long-term growth trend continues to be positive."

Report of the Executive Board

Managing risks in a volatile financial market environment

Net income in the first nine months of this year totaled close to NLG 2 billion, marking an increase of 33% in comparison to the same period last year. Autonomous earnings growth (i.e. excluding the effect of currency exchange rate movements, acquisitions and divestitures) in this reporting period amounted to 17%. Autonomous earnings growth per share amounted to 17%, while the total increase amounted to 26%, lifting net income per share for the first nine months to NLG 3.43.
The overall financial climate has changed quite significantly in the past few months as a result of the recent currency exchange rate movements, the volatility in the equity markets and the lowering of interest rates. Nevertheless, we believe that the interests of AEGON's clients, shareholders and other stakeholders are well-protected.

The higher weighted average exchange rate of the US dollar and the pound sterling in the first nine months of this year, as compared to the same period last year, had a positive effect on consolidated earnings reported in Dutch guilders of 2%. However, the drop in the US dollar and pound sterling at the end of the reporting period had a negative influence on shareholders' equity and will have a limited effect on the earnings development in the remainder of the year. There is, of course, a corresponding reduction in the company's non-guilder liabilities, assuring that AEGON's solvency position remains strong.

The recent turn of the tide in most equity markets has put returns on equity investments under pressure. As a consequence of AEGON's accounting practice of amortizing gains on equities into income, the effect of short-term market volatility on investment income is dampened. About 55% of AEGON's total investments are held in our general account, while 45% are being held for the account of policyholders. The majority of investments consists of fixed income instruments, on which investment returns have been more stable than equities. Accordingly, investment income has increased in line with the increase in assets, adjusted for the exchange rates at the end of the reporting period.

For AEGON the current low interest rate is not a major concern relative to our capital position, earnings, or the security of policyholders. The portfolio yields in all our country units continue to be substantially higher than the minimum guarantees. The assets supporting most insurance products which guarantee the payment of a principal amount generally have a relatively long contract term and were acquired when rates were higher. As a consequence the investment yields for existing guaranteed contracts continue to back the guaranteed rates of return. Our assets are managed to be aligned with our technical provisions for that part of our portfolio for which we do guarantee a minimum return. In addition, AEGON has a high solvency ratio. Therefore no additional provisions are needed at this time.

View the breakdown of net income first nine months 1998.

Life insurance and pensions' income now represents 86% of the Group's total profits. Approximately 51% of earnings before tax and interest charges in guilders now come from our operations in the Americas, 40% from the Netherlands, 8% from the UK and the balance from the operations in other countries.

The major portion of life insurance income in the first nine months of this year came from the Americas, increasing 82% on a year-on-year comparison basis to NLG 1,337 million, primarily due to the acquisition of the insurance operations of the former Providian Corporation. The increase in life insurance earnings in the Netherlands was 10%, totaling NLG 921 million. Scottish Equitable's contribution to the life insurance results of the Group rose 18% to NLG 226 million. From a NLG 1 million loss in the first nine months of 1997, life insurance results from the other countries increased to NLG 6 million for the same reporting period this year.

Accident and health insurance results rose 23% in the US to NLG 136 million and 4% in the Netherlands to NLG 29 million, while the contribution from other countries was NLG 4 million in the first nine months of this year compared to NLG 8 million last year.

General insurance profit is NLG 7 million below last year's nine months' results, now totaling NLG 73 million. The increase in general insurance results in the Netherlands was offset by a lower profit contribution in this segment from other countries, primarily Spain.

The results of the banking activities totaled NLG 161 million, which is NLG 13 million less than last year, reflecting the sale of FGH Bank earlier this year and the strong earnings growth of the continuing operations.

The Netherlands

Income before tax in the Netherlands increased to NLG 1,159 million. Higher results were reported with regard to both life and non-life insurance activities, as well as the remaining banking activities.

Life insurance profit rose 10%, to NLG 921 million, supported by new premium production, stable investment results and effective cost management. Life insurance premium income increased by 15% to NLG 4,459 million, reflecting the strong growth of those business units marketing individual life and pension insurance. New production of recurring premium rose 17%, while new single premium production advanced 16% compared to last year's nine months results.

The non-life insurance results increased by 15% in the first nine months of this year, totaling NLG 77 million, despite an increase in claims due to the storms in June and slower growth in the accident and health results.

The planned divestiture of Bank Labouchere was delayed last month, after the Securities Body of the Netherlands expressed objections to the proposed merger of the bank with AOT Stock Specialists. As a consequence, the results of Labouchere continue to be included in the consolidated earnings from the banking activities, which also include the results of AEGON Bank (formerly Spaarbeleg Bank). Both banking operations reported continued growth in results.

The Americas

Income before tax firmly increased in the Americas, totaling USD 731 million. The USD 295 million rise in pre-tax profits is largely influenced by last year's acquisition of the insurance activities of the former Providian Corporation and their integration with AEGON USA.

The integration efforts are progressing well and ahead of schedule. Premium income in the first nine months rose 32%, to USD 3,159 million.

Life insurance profit (comprising 91% of the total pre-tax income from the Americas) rose 75% compared to the first nine months of last year, now totaling USD 662 million.

Last year's acquisition, coupled with new sales and continued good investment spreads, contributed to the performance of AEGON USA's major divisions.

Life insurance premium income from the Americas (not including annuity deposits) totaled USD 2,149 million. Both recurring and single life insurance premium production in the US increased significantly. Annuity deposits, including Guaranteed Investment Contracts, totaled USD 5,833 million in the first nine months of this year.

Accident and health insurance results increased 18% to USD 67 million, despite the unfavorable claims experience from a run-off portfolio in the first half of this year.

The two Mexican joint ventures, Seguros Banamex AEGON and Afore Banamex AEGON, both contributed positive results.

The sale of Providian Auto & Home and its subsidiaries is still being pursued. These activities are not included in the consolidated accounts for AEGON.

United Kingdom

Scottish Equitable, the UK-based member of the AEGON Group, contributed GBP 68 million to the Group's earnings before tax in the first nine months: a 13% rise in sterling terms and 18% more than last year measured in Dutch guilders. Whereas AEGON's profit share was 90% at the time of the publication of the nine months' results last year, it is now 95%.

Premium income was up 26% compared to the first nine months of last year and totaled GBP 1,961 million. Premium income growth was supported by group pension schemes restructuring following the 1995 Pensions Act, as well as a significant rise in sales of pension trustee investment contracts. Total new premium production, as measured on the industry standard basis (new annual premiums plus 1/10 of the single premiums), advanced 13% compared to the first nine months of last year.

Other countries

The combined pre-tax earnings contribution from other countries totaled NLG 30 million in the first nine months of this year. Accident and health insurance results and general insurance results from other countries were positive, but lower than in the first nine months of last year. This was mainly due to increased claims in Hungary and Spain, as well as intense competition and run-off losses from previous years in Spain. However, the life insurance results from other countries, although still modest, were substantially higher. All countries realized further growth in premium income. The introduction of the unit-linked savings product "Moneymaxx" in Spain, has shown positive response.

The total start-up costs of operations in Germany, Belgium, Taiwan, and the Philippines amounted to NLG 14 million in the first nine months of this year, as compared to NLG 36 million in the same period of last year.

Capital gains

Realized and unrealized gains on the equities and real estate portfolio general account credited to the revaluation account during the first nine months of 1998 totaled NLG 125 million.

NLG 459 million was released from the revaluation account as indirect return to the Group's earnings before tax (NLG 74 million more than the first nine months of 1997).

The revaluation account balance at September 30, 1998 was NLG 6,853 million.

Capital and funding

During the first nine months of this year, shareholders' equity decreased 10% to NLG 16,309 million. Contributing factors to the NLG 1,822 million decrease since December 31, 1997 were: currency changes, recognized goodwill and share purchases to hedge the company's stock option plans.

Outlook

 Better results of operations than previously projected have to some extent offset the effect of the strengthening of the guilder against the dollar. Barring additional adverse currency movements or other, exceptional circumstances we expect an increase in 1998 earnings and earnings per share in guilders approximating 25% and 20% respectively.