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Results third quarter and first nine months 2003

The Hague, November 6, 2003

Our earnings for the first nine months showed growth of 11% and using constant currency exchange rates growth was up 24%. Life production for the first nine months was up 3% and up 15% using constant currency exchange rates.

  • Third quarter 2003 net income EUR 464 million; net income per share EUR 0.30
  • First nine months 2003 net income EUR 1,323 million; net income per share EUR 0.85
     

Aegon reports net income of EUR 464 million for the third quarter of 2003 compared to EUR 429 million in the third quarter of 2002. Additions to the provision for defaults on fixed income securities and the provision for guarantees were lower than in the same period of 2002. Net income for Transamerica Finance Corporation was EUR 31 million higher for the quarter. Earnings per share for the third quarter of 2003 were EUR 0.30, compared to EUR 0.29 in the same period last year.  

Net income of EUR 1,323 million increased 11% compared to EUR 1,192 million in the first nine months of 2002 and includes an EUR 144 million increase in net income from Transamerica Finance Corporation. At constant currency exchange rates, net income would have increased by 24% for the first nine months of 2003. Income before tax for the first nine months of 2003 was 3% lower than the first nine months of 2002. Reflecting the adjustment for the 2002 stock dividend and the increased preferred share dividend, earnings per share over the first nine months amounted to EUR 0.85 compared to EUR 0.82 for the same period last year.

View the Highlights Q3 2003.

Chairman’s statement
Donald J. Shepard, Chief Executive Officer and Chairman of the Executive Board, said: 
"Our earnings for the first nine months showed growth of 11% and using constant currency exchange rates growth was up 24%. Life production for the first nine months was up 3% and up 15% using constant currency exchange rates. The agreement to divest most of Transamerica Finance Corporation’s business reinforces our focus on core activities. We continue to look for efficiency improvements to enhance our profitability.” 

Outlook
With sustained market improvements, the company believes the outlook is positive. Aegon is not providing earnings forecasts.

 Key points for the third quarter 2003

  • Net income in local currencies for the third quarter in the US and the UK were up by 25%, while net income in the Netherlands was 1% lower and net income in euro in the Other Countries was comparable to last year.
  • Standardized new life production was level in the Americas, declined 20% in the Netherlands, was 7% higher in the UK and increased more than fivefold in Other Countries when compared to the third quarter of 2002. The increase in Other Countries is largely driven by the strong production in Taiwan. 
  • Deposits decreased 31% in the Americas compared to the third quarter 2002. Variable annuity sales declined 51% reflecting actions taken to curtail certain product features. Fixed annuity deposits were 34% lower as a result of actions taken to reduce policyholder crediting rates and adjustments to commission structures.
  • Off balance sheet production increased by 63% in the Americas and 49% in The Netherlands and was significantly lower in the UK.
  • Bond default additions were USD 107 million (EUR 95 million) compared to USD 138 million (EUR 149 million) in the third quarter 2002. Actual default losses charged against the provision were USD 108 million (EUR 96 million) compared to USD 169 million (EUR 167 million) in the third quarter of 2002.
  • Net income for Transamerica Finance Corporation for the third quarter was USD 49 million (EUR 43 million) compared to USD 13 million (EUR 12 million) in the third quarter of 2002 primarily as a result of lower credit losses and higher gross margin.  

Key points for the first nine months 2003

  • Net income in local currencies for the first nine months of this year was up 30% in the Americas, was up 2% in the Netherlands and was 23% lower in the UK. Net income in euro in the Other Countries was 27% higher than in the first nine months of the prior year.
  • Currency exchange rates negatively impacted net earnings by 13% compared to the first nine months of 2002, driven mainly by the lower US dollar against the euro.
  • Standardized new life production increased 10% in the Americas and 6% in the UK, but declined 27% in the Netherlands compared to the first nine months of 2002. Standardized new life production increased by nearly fourfold in Other Countries, mainly driven by strong sales in Taiwan.
  • While new deposits decreased 15% in the Americas compared to the first nine months of 2002, account balances rose in the Americas for fixed annuities, variable annuities and GICs by 7%, 20% and 8% respectively during the first nine months this year. Savings account balances in the Netherlands decreased 6% during the first nine months this year.
  • Off balance sheet production, excluding currency effect, rose 32% driven by new business in the Americas and the Netherlands.
  • Earnings, compared to the first nine months of 2002 were positively affected by:
    - Lower charges related to DPAC amortization (EUR 183 million);
    - Lower additions to provision for guarantees (EUR 279 million);
    - Lower additions to the default provision for fixed income securities (EUR 238 million)
  • and were negatively affected by:
    - Higher pension expenses (EUR 111 million);
    - Lower indirect income (EUR 125 million);
    - Lower investment yields in the US (EUR 106 million) and
    - Lower management fees in the UK (EUR 39 million)
  • Net income for the first nine months of 2003 for Transamerica Finance Corporation was USD 236 million (EUR 212 million) compared to USD 63 million (EUR 68 million) for the nine months of 2002. Compared to the prior year, business conditions in all segments were more favorable. In addition to lower funding costs, lower expenses and credit losses, and the recognition of deferred income of USD 35 million (EUR 32 million) from the termination of a major client contract, several one-time tax benefits totaling USD 31 million (EUR 28 million) were realized.
  • As part of the company’s cost reduction initiatives, during the first nine months of 2003, administrative employee headcount was reduced by almost 1,000 positions. Agent employee headcount rose by approximately 3,200 positions, primarily reflecting the fiancial consolidation of the distribution units in The Netherlands.  

REPORT OF THE COUNTRY UNITS

The Americas
Net income in the third quarter rose 25% to USD 342 million compared to USD 273 million in the third quarter of 2002. Net income for the first nine months increased 30% to USD 869 million compared to USD 666 million during the same period last year. The largest influences on earnings over the first nine months were the lower additions to the asset default provision (USD 155 million), lower DPAC amortization (USD 190 million) and lower additions to the provision for guarantees (USD 115 million), a non-recurring property insurance gain (USD 40 million) and interest on a tax refund (USD 31 million). Offsetting these influences were lower employee pension plan income (USD 64 million) lower indirect income (USD 134 million) and lower investment yield (USD 118 million). 

Traditional life production (standardized new premium) increased 8% over the first nine months of 2003 to USD 594 million. In line with second quarter 2003, strong traditional, universal and term life sales in the Agency group continue to drive sales, but were slightly offset by lower production in structured settlements as a result of the discontinuance of this product. Earnings of USD 509 million were 15% lower than the first nine months of 2002 and primarily reflect lower investment yields, reserve increases and a reduction in employee pension plan income. Indirect income was USD 33 million lower compared to the same period last year. 

Life for the account of policyholders sales have increased from the same period last year, largely due to recurring BOLI/COLI sales. Earnings of USD 73 million were 9% lower when compared to the first nine months of 2002. Increased policy lapses continue to have an adverse impact on the level of earnings. 

Fixed annuity deposits were down 22% compared to the first nine months of 2002 as a result of reductions in crediting rates and adjustments to commission structures. Withdrawals from in-force policies continue to be at their lowest levels in years reflecting the lower new money interest rates available on new policies. Earnings of USD 239 million were 27% above the first nine months of 2002. The favorable impact of lower credit losses in 2003 has been somewhat offset by the decline in indirect income and lower investment spreads relative to prior year. For the largest segment of the fixed annuity book, the overall spread increased 13 basis points during the third quarter to 176 basis points. Spread on new fixed annuity deposits is within the target range of 225-250 basis points. This reflects lower crediting rates on both existing and new business. Fixed annuity account balances increased 7% to USD 44.9 billion since year-end 2002, largely due to low lapse rates as well as new sales.

Variable annuity deposits decreased 20% compared to the same period in 2002 largely reflecting the discontinuance of the guaranteed minimum income benefit (GMIB) feature. Variable annuity earnings showed a USD 23 million profit. Compared with the same period in 2002, earnings have increased USD 287 million largely reflecting the improvement in the equity markets. Variable annuity account balances increased 20% to USD 38.8 billion since year-end 2002. 

GICs and funding agreement production was down 7% compared to the first nine months of 2002 primarily due to disciplined pricing to achieve returns. Results of USD 189 million are comparable to the same period last year. Improvements in credit losses were offset by a decrease of indirect investment income and lower investment spreads. GICs and funding agreement account balances increased 8% to USD 27.9 billion since year-end 2002. 

Off balance sheet production was USD 17.3 billion a 29% increase compared to the same period in 2002. Mutual fund sales of USD 6.1 billion are 27% higher than the same period last and reflect an increased marketing emphasis on these products. Synthetic GIC sales of USD 11.2 billion were 31% higher compared to the same period last year as pension plan sponsors continue to seek more stable value benefits. Earnings on fee business increased by USD 13 million due to higher assets under management and lower expenses.
 
Accident and health premiums are slightly ahead of the first nine months of 2002. Earnings of USD 181 million were 5% lower than the first nine months of 2002 primarily due to lower indirect investment income and a non-recurring foreign currency gain that was included in the first quarter of 2002. 

Commissions and expenses show a 7% increase compared to the first nine months of 2002. Excluding commissions and net DPAC amortization, actual operating expenses increased USD 133 million. Reflected in the year-to-date 2003 expenses is USD 64 million less in employee pension plan income and USD 27 million related to a coinsurance agreement that was cancelled and USD 22 million in higher expenses related to acquired businesses. Excluding these items, expenses were up 2% from the same period last year.  

The Netherlands
Net income totaled EUR 148 million in the third quarter, a 1% decrease compared to 2002. Net income of EUR 433 million for the first nine months of 2003 was 2% higher than for the same period last year. 

Traditional life results of EUR 398 million were 3% lower than the first nine months of 2002, while life for account of policyholders results were EUR 92 million, 114% higher than in the same period last year. The substantial increase in earnings is due to lower additions to the provision for guarantees. 

Overall standardized life production lagged 27% behind the first nine months of 2002, mainly due to lower single premium contracts in the group pension business from the larger employers. Small and medium-size enterprises pension production grew significantly. New individual life production was also lower than in the first nine months of 2002 and reflective of the conditions of the individual markets. 

Non-life performance was lower due to lower investment income. 

Savings account balances, compared to year-end 2002, decreased by 6% to a total of EUR 6.0 billion at the end of the third quarter 2003. 

Off balance sheet production increased 96% to EUR 1,774 million due to the addition of new clients and accounts from the group pensions target group. 

Commissions and expenses increased 66% to EUR 728 million. The increase is largely explained by the financial consolidation of distribution units (EUR 149 million), additional employee pension costs (EUR 46 million), investment costs related to Aegon Asset Management that are now recognized on a gross instead of net basis (EUR 41 million), higher DPAC amortization (EUR 30 million) and the acquisition of TKP Pensioen (EUR 11 million). The amount in expenses from Aegon Asset Management is offset by an equal amount in revenues. Excluding these items, operating expenses were up 3% from nine months of 2002. Provisions for guarantees and credit risks were increased by respectively EUR 31 million and EUR 21 million.  

United Kingdom
Net income increased 25% to GBP 25 million in the third quarter this year compared to GBP 20 million in the third quarter in 2002. Net income for the first nine months of 2003 was GBP 66 million compared to GBP 86 million for the same period in 2002. The reduction in net income was primarily due to lower levels of management and fund related fees as a direct result of lower average account balances reflecting lower equity markets, lower mortality profits and higher pension scheme contributions. 

Life for account of policyholders production for the first nine months of 2003 (standardized new premiums) increased 4% over the same period in 2002. Earnings on this line of business have been adversely affected by the fall in the equity markets.

Traditional life production (standardized new premium) increased 17% to GBP 54 million for the first nine months of 2003, compared to GBP 46 million for the same period last year, as a result of growth in our individual protection business and increasing volume of annuities from maturing pension business. Earnings were GBP 10 million lower due to lower levels of mortality profits and a small number of non-recurring provision releases in 2002.

Off balance sheet production was GBP 202 million for the first nine months of 2003, a reduction of 42% from the same period in 2002. 

Commission and expenses increased to GBP 289 million up GBP 81 million due to the inclusion of operating costs of the acquired distribution companies (GBP 37 million), growth in our protection businesses (GBP 13 million), the recommencement of contributions to our staff pension scheme (GBP 6 million) and increased depreciation charges on IT project costs (GBP 24 million). Excluding these items commissions and expenses were at the same level of the prior year.  

Other countries
Third quarter net income from other countries was EUR 18 million, the same result as in 2002. Net income during the first nine months amounted to EUR 47 million, an increase of 27% compared to the prior year. Both life and general insurance contributed to the increase in results. 

Standardized new life production in other countries increased from EUR 80 million to EUR 301 million in the nine months of this year, largely driven by continued strong production growth in Taiwan. New life production in Taiwan rose to NTD 9,731 million (EUR 254 million) during the first nine months this year, representing a more than eleven-fold increase compared to the first nine months of 2002. 

Transamerica Finance Corporation
Net income for the first nine months of 2003 for Transamerica Finance Corporation (TFC) was USD 236 million (EUR 212 million) compared to USD 63 million (EUR 68 million) for the nine months of 2002. Compared to the prior year, business conditions in all segments were more favorable. In addition to lower funding costs, lower expenses and credit losses, and the recognition of deferred income of USD 35 million (EUR 32 million) from the termination of a major client contract, several one-time tax benefits totaling USD 31 million (EUR 28 million) were realized. 

On 5 August 2003 Aegon announced the agreement to sell most of TFC’s commercial lending activities to GE. It is expected that the transaction will be successfully completed before year-end 2003. 

On 2 October 2003 Aegon announced the completion of the sale of Transamerica’s real estate information services and flood hazard certification business. 

The sale of these two businesses combined will have an expected capital gain of approximately USD 600 million which will be credited to shareholders’ equity directly.  

REPORT OF THE HOLDING COMPANY

Capital and funding
Shareholders’ equity decreased by EUR 625 million from 31 December 2002 to EUR 13,606 million at 30 September 2003. The main factors contributing to the change were negative exchange rate translations of EUR 1,289 million, a cash interim dividend on common shares of EUR 147 million, preferred dividend of EUR 71 million, a reduction in the revaluation reserve of EUR 85 million and net income of EUR 1,323 million. In addition, a goodwill charge of EUR 340 million was incurred mainly as a result of the consolidation of distribution companies. 
 
At 30 September 2003, equity capital represented 68% of our total capital base, while senior and dated subordinated debt comprised 22% of our total capital base. Not included in these numbers is the positive effect on equity capital of the sale of most of TFC’s commercial lending activities as well as the sale of TFC’s real estate information services and the flood hazard certification business. Inclusion of these divestitures would have taken the ratio equity to total capital to over 70%. Capital securities accounted for the remaining 10%. Fluctuations in the capital base may occur throughout the year due to the timing of transactions and cash flows. Aegon targets its equity to be 70% of the total capital base and expects to be at this level in subsequent quarters.

The revaluation account balance at 30 September 2003 was EUR 2,513 million, comprised of realized gains of EUR 1,530 million and unrealized gains of EUR 983 million account for the total. EUR 467 million was released as indirect investment income from the revaluation account to income before tax compared with EUR 592 million for the first nine months of 2002.