Net income down 9%; operating earnings up 67%
- Decrease in net income reflects lower gains on investments and the gain on the sale of the Spanish general insurance business in the first half of 2005
- Operating earnings performance driven by increases in all major country units
- New life sales1 up 6% helped by record sales in the UK
Value of new business totals EUR 346 million
- Increase of 26% compared to pro forma first half 2005 value of new business 2)
- Internal rate of return improved to 14.8% from 12.4%, exceeding internal return targets
Expansion strategy on track
- Agreement to acquire 49% of Seguros Argos in Mexico
- Memorandum of understanding signed with Religare in India
- New bank distribution partnerships in Spain began writing business
Interim dividend increased 9% to EUR 0.24 per share
- Value of stock dividend to be set approximately 5% lower than the cash dividend
- Aegon intends to purchase an equivalent amount of stock on the open market to neutralize the effect of stock dividend, subject to certain tax considerations
1) New life sales refers to standardized new premium production and is defined as new recurring premium + 1/10 of single premium
2) Pro forma first half 2005 value of new business is equal to half of the full year 2005 value of new business
View the table Earnings summary Q2 2006.
Note: This press release includes non-GAAP financial measures: operating earnings before tax and value of new business. The reconciliation of operating earnings before tax to the most comparable GAAP measure and an explanation for its use is provided on page 29 of the full press release. (see related documents). Value of new business is not based on IFRS, which are used to report Aegon's quarterly statements and should not be viewed as a substitute for IFRS financial measures. On pages 24 and 25 of the full press release (see related documents), a further breakdown is given and reference is made to the assumptions included in the Embedded Value disclosure document See related documents). Aegon believes the value of new business, together with the GAAP information, provides a meaningful measure for the investment community to evaluate Aegon's business relative to the businesses of our peers.
Chairman's overview
Commenting on Aegon's results for the first half of the year, Donald J. Shepard, Chairman of the Executive Board, stated:
"Aegon's half-year results for 2006 demonstrate our continuing focus on profitability, both in terms of operating earnings and in the value of new business. We have also made good progress in expanding our presence internationally.
"Operating earnings for the Group improved by 67%, reflecting increases within all of Aegon's major country units. The 26% increase in the value of new business for the Group during the first half of the year was driven by the Americas, the United Kingdom and Central and Eastern Europe. New life sales for the Group increased by 6% during the first half of the year, led by a record performance in the UK. The 14.8% internal rate of return for the first half of 2006 compared to 12.4% for the full year in 2005 reflects our ongoing commitment to writing profitable business.
"Pensions continue to offer strong growth opportunities for Aegon. In the US, our pension business experienced a 17% increase in sales. In the UK, life sales increased 55%, driven primarily by sales of individual and group pensions as well as exceptional activity that occurred as a result of Pension A-Day. In Slovakia, membership in Aegon's pension fund has grown to over 150,000 members.
"Aegon's broad distribution capability remains strong. In the US, our agent force serving the middle market grew further during the first part of the year, particularly in our World Financial Group division. In the UK, our IFA distribution platform, Positive Solutions, produced another record earnings quarter. Also, our new bank distribution partnerships in Spain with Caja Badajoz and Caja Navarra have recently begun writing business and are off to a promising start.
"We recently announced new agreements in Mexico and India, regions that we have identified as growth markets. Our 49% acquisition of Seguros Argos will enable us to re-establish our presence in Mexico. Additionally, our announced intention to partner with Ranbaxy Promoter Group in India to provide life insurance and asset management products through its financial services company Religare will provide Aegon a strong platform in this fast-developing market.
"As a result of our solid capital position and strong cash flows, we have raised the interim dividend by 9% to EUR 0.24 per common share. To encourage the election of cash dividend, the value of the stock dividend will be approximately 5% lower than the cash dividend. Aegon intends to purchase shares on the open market to neutralize the effect of stock dividend.
"In summary, increases in operating earnings and value of new business, enhanced distribution capability and continued international expansion indicate that we are on track in implementing Aegon's growth strategy."
First six months 2006 Group highlights
View the table Earnigns overview Q2 2006.
Value of new business
The value of new business for the first six months of 2006 amounted to EUR 346 million. This is an increase of 26% compared to EUR 275 million for one-half of the full year 2005 value of new business. The internal rate of return (IRR) on new business amounted to 14.8% compared to 12.4% for the full year 2005. The Other countries, outside the three major country units, accounted for 20% of the total first six months value of new business.
Sales
During the first six months of 2006, new life sales increased 6% to EUR 1,423 million, primarily due to record sales in the United Kingdom. In the UK, new life sales increased 55% for the period, as a result of strong pension sales, partly attributable to Pension A-Day, and growth in bonds and annuities. New life sales in the Americas decreased 8%. The majority of the decline reflects a decrease in production within the Transamerica agency channel and lower sales of BOLI/COLI business. The prospect of new legislative and regulatory changes to investor owned life insurance has created considerable uncertainty within the older age life market. This uncertainty is likely to continue for the remainder of the year. Aegon continues to focus on profitability and strict underwriting disciplines which has resulted in improved value of new business and profits but somewhat lower production. While BOLI/COLI sales were lower in the first half of the year the US operations have already secured a significant BOLI/COLI case early in the third quarter of this year. New life sales in the Netherlands increased 2%, reflecting strong growth in individual life and pension sales through intermediaries, while group pension sales were lower because of the absence of large group pension contracts. New life sales in Other countries in the first six months of 2006 decreased 58% due to lower sales in Taiwan, partly offset by the inclusion of Aegon Poland.
Sales of annuity and institutional guaranteed products in the Americas increased 15% to USD 11.1 billion. Variable annuity sales increased 14% as a result of the introduction of enhanced withdrawal benefit riders and increased wholesaling capacity. As anticipated, sales of fixed annuities were lower and reflect Aegon's pricing discipline and the challenging interest rate environment. Total pension sales in the US increased 17% to USD 4,997 million. Deposits in institutional guaranteed products increased 19% in part due to strong medium term note funding agreements issued by the Ireland platform.
Off balance sheet production for the Group decreased 2%, reflecting lower sales of managed assets, partly offset by strong sales in both synthetic GICs and retail mutual funds in the US.
Operating earnings before tax
Operating earnings before tax in the first six months of 2006 increased 67% to EUR 1,507 million (and increased 62% at constant currency exchange rates), with increases in all three major country units. Operating earnings in the Americas were positively affected by strong business growth in the variable annuity and reinsurance lines of business and improved mortality in the traditional life and reinsurance lines. In addition, the positive impact of items that receive fair value treatment has contributed to the significant earnings growth.
The increase in operating earnings in the Netherlands is mainly a result of the positive effect of a release of guarantee provisions for unit-linked business following rising interest rates. In the United Kingdom, the increase in operating earnings before tax mainly reflects business growth and the positive effect of higher equity and bond markets. The decrease of operating earnings before tax in Other countries primarily reflects lower results in Taiwan and higher start-up costs due to investments in growth in China and Slovakia, partly offset by higher earnings in Hungary and Spain.
Net income
Net income decreased 9% to EUR 1,294 million (11% at constant currency exchange rates) in the first six months of 2006. Higher operating earnings were more than offset by lower net gains/losses on investments and lower other non-operating income. Lower other non-operating income primarily reflects the gain on the sale of the Spanish general insurance business last year. The effective tax rate decreased to 20% from 28% in the first six months of 2005, as a result of higher tax exempt gains. Net income per share decreased 13% to EUR 0.73, reflecting lower net income and a slightly higher average number of ordinary shares outstanding.
Non-operating income
Net gains/losses on investments (before tax) and impairment charges together amounted to a gain of EUR 93 million compared to a gain of EUR 826 million in the first six months of 2005. The decline primarily reflects a negative fair value change in derivatives used for asset and liability management in the Netherlands and normal trading activity in the US in a higher interest rate environment, offset by net gains on the sale of shares in the Netherlands.
Other non-operating income/(charges) and share in profit/(loss) of associates together amounted to EUR 22 million, mainly attributed to the book gain on the sale of Scottish Equitable International Luxembourg and the charges made to Aegon UK policyholders with respect to income tax. The comparable period in 2005 contained the book gain on the sale of the general insurance activities in Spain.
Commissions and expenses
Commissions and expenses increased 9% to EUR 2,983 million (6% at constant currency exchange rates). This is mostly the result of a change in business mix and growth in the business.
Revenue generating investments
Total revenue generating investments amounted to EUR 346 billion at June 30, 2006, compared to EUR 358 billion at December 31, 2005.
Shareholders' equity
Shareholders' equity at June 30, 2006 amounted to EUR 17.3 billion, a decrease of 10% compared to December 31, 2005. The increase from net income was more than offset by foreign currency translation effects and a decrease in revaluation reserves, reflecting higher interest rates.
Dividend
An interim dividend of EUR 0.24 per common share has been declared, a 9% increase compared to the interim dividend of 2005. The interim dividend will be paid in cash or shares, at the election of the shareholder. The value of the stock dividend will be approximately 5% lower than the cash dividend. Aegon intends to purchase an equivalent amount of stock on the open market to neutralize the effect of stock dividend, subject to certain tax considerations.
