Income before tax increased significantly in comparison to the fourth quarter of 2002, but was 47% lower compared to the first three months of 2002.
View the Highlights Q1 2003 (amounts in millions, except per share data).
Chairman’s statement
"Income before tax increased significantly in comparison to the fourth quarter of 2002, but was 47% lower compared to the first three months of 2002. The first quarter of 2003 proved to be challenging, with continued low interest rates, lower equity markets, continued bond defaults and the weaker US dollar versus the euro. However, it is encouraging to see that the first quarter of 2003 showed some signs of improvement in the credit markets, even though default rates remain far above a level considered average for Aegon and the industry", said Don Shepard, CEO and Chairman of the Executive Board. "Excluding currency influence, we continue to increase total life production as we maintain our focus on cost control".
Outlook 2003
Aegon’s Executive Board remains cautious in its outlook for 2003 in view of continuing uncertainties in the financial markets and is not providing an earnings forecast.
Key points for the first quarter 2003
Standardized life production increased 10% in the Americas and 4% in the UK but was down 42% in the Netherlands, reflecting volatility in the placement of new business in the pension fund markets compared to first quarter of 2002. Total annuity and GIC deposits increased 2% in the Americas. Off-balance sheet production in the Americas increased 32% over the first quarter of 2002. Off-balance sheet production decreased 48% in the Netherlands but increased fourfold in the United Kingdom, compared to first quarter 2002.
Default provisions in the USA were strengthened by USD 149 million compared to USD 82 million in the first three months of 2002 but showed improvement in comparison to the fourth quarter of 2002 (USD 219 million). The balance of the USA default provisions at 31 March 2003 was USD 280 million.
EUR 126 million was released as indirect investment income from the revaluation account to income before tax compared with EUR 215 million for the first quarter of 2002.
Earnings are negatively affected by lower employee pension plan benefits in the USA (USD 22 million) and higher pension costs in the Netherlands (EUR 15 million) and the UK (GBP 4 million) totaling EUR 42 million.
Variable annuity results continue to assume annual equity returns of 12% for five years and 9% thereafter in the determination of deferred policy acquisition costs (DPAC) amortization and provisions for guaranteed benefits.
There was no accelerated amortization of deferred policy acquisition costs (DPAC unlocking). Additions to the provisions for guaranteed minimum benefits taken during the first quarter 2003 in the USA were USD 9 million, in Canada CAD 12 million and in the Netherlands EUR 13 million. In the first quarter 2002 the additions were nil in all countries.
Net income for Transamerica Finance Corporation was USD 78 million compared to USD 24 million in the first quarter of 2002. The increase was driven by lower credit losses, increased revenue due to mortgage refinancing activity, lower funding costs, and one-time tax benefits of USD 31 million.
Currency exchange rates negatively impacted net earnings by 10% compared to first quarter 2002, driven mainly by the lower US dollar exchange rate.
The ratio of shareholders’ equity to total capital remains stable at approximately the same level as year-end 2002. Currency exchange rate translations do not affect the solvency at the operating units.
Report of the Executive Board
Income before tax for the first quarter of 2003 totaled EUR 444 million, 56% higher than the previous quarter but 47% lower than the same period last year. Earnings per share of EUR 0.26 were 41% lower than first quarter 2002. The decline from first quarter 2002 resulted from the lower average exchange rates of the main currencies (EUR 112 million), lower gross margin due to lower direct and indirect investment income, increased default charges (EUR 62 million), increased provisions for products with guaranteed minimum benefits (EUR 28 million) and lower fees on variable and unit-linked accounts.
Total revenues were 9% lower (3% higher, excluding currency influence) and gross margin was 20% lower (excluding currency influence 7% lower). Commissions and expenses were 1% lower than the first quarter of 2002 (16% higher excluding currency influence) and negatively affected by higher employee pension cost; on balance higher DPAC amortization; EUR 13 million of investment costs in the Netherlands that are now recognized on a gross instead of a net basis, but which are offset by an equal amount in revenues; and EUR 27 million related to a USA coinsurance agreement.
The Americas
Net income totaled USD 245 million compared to USD 358 million in the first quarter of 2002. Pre-tax income for the quarter totaled USD 356 million compared to USD 536 million during the same period last year. Additions to asset default provisions of USD 149 million (USD 67 million higher than first quarter 2002), no indirect income compared to USD 81 million in the first quarter of 2002 and lower investment yields and squeezed spreads with an impact of approximately USD 44 million contributed to the decline.
Variable annuity results continue to assume annual equity returns of 12% for five years and 9% thereafter in the determination of deferred policy acquisition costs (DPAC) amortization and provisions for guaranteed benefits.
There was no accelerated DAC amortization (unlocking). Additions to the provisions for guaranteed minimum benefits in the U.S. were USD 9 million. In Canada provisions for guaranteed minimum benefits increased CAD 12 million.
Excluding commissions and DPAC amortization, operating expenses increased USD 63 million. Reflected in the expenses of the first quarter 2003 is USD 22 million less in employee pension overfunding benefit, USD 27 million related to a coinsurance agreement that was cancelled and USD 7 million higher expenses related to acquisitions since the first quarter 2002. Excluding these items, expenses were up 2% from first quarter 2002 primarily as a result of increased sales production and growth of the in-force block of business.
Standardized new premium life production in the Americas increased 10% over first quarter 2002 to USD 250 million. The majority of the increase was driven by the strong traditional universal life sales in our Agency operations. Total annuity and guaranteed investment contract (GIC) deposits increased 2% to USD 7 billion in the first quarter. Fixed annuity sales were down 20% compared to the first quarter of 2002. The strong growth (49% increase over the first quarter 2002) in variable annuity sales was influenced by consumer demand to capture the guaranteed minimum income benefit (GMIB) feature before its discontinuance in January 2003. Variable annuity production decreased significantly in the latter part of the quarter after the GMIB withdrawal. Off-balance sheet production was USD 5.6 billion, a 32% increase compared to the first quarter of 2002.
Traditional life results of USD 174 million, down 24% compared to the first quarter of 2002, include USD 49 million of bond defaults compared to USD 13 million in the first quarter of 2002. Fixed annuity results of USD 64 million, down 44%, include USD 61 million of bond defaults compared to USD 19 million for the first quarter of 2002. The loss of the indirect investment income negatively impacted both the traditional life and fixed annuity earnings by USD 21 million and USD 31 million, respectively.
GICs and funding agreement results of USD 44 million decreased 29% compared to the first three months of 2002. The loss of indirect investment income impacted GICs and funding agreement earnings by USD 22 million. Life for the account of policyholders results were USD 24 million compared to USD 28 million for the same period in 2002.
Variable annuities experienced a loss of USD 4 million compared to a profit of USD 29 million in the first quarter of 2002. The majority of the decline over first quarter 2002 is due to higher guarantee death claims, higher DPAC amortization and an increase in provisions for guaranteed minimum benefits in Canada. Accident and health earnings were 29% lower due to increased bond defaults, loss of indirect investment income, and a one-time foreign currency gain in the first quarter of 2002.
The Netherlands
Net income was EUR 136 million compared to EUR 182 million for the first quarter 2002. Continued bearish equity markets were the primary driver of the decline. This resulted in lower investment income and in additions to the provisions for guaranteed minimum benefits, which were EUR 13 million and were nil in the first quarter 2002. The balance of DPAC amortization was EUR 7 million higher.
New life production of EUR 73 million was down 42% compared to first quarter 2002 while off-balance sheet production decreased 48% to EUR 161 million for the quarter. With 6% production growth individual life performed well, while production in pensions decreased 62% compared to the first quarter 2002 reflecting the volatility in the placement of new business in the pension fund markets. Compared to year-end 2002 savings account balances slightly decreased (-1%) to a total of EUR 6 billion at the end of the first quarter 2003.
Total revenues of EUR 2 billion were lower than the same period last year. The individual life business showed satisfying growth in premium income of 11%. Commissions and expenses increased 25% to EUR 189 million. Additional employee pension costs, lower deferral of policy acquisition costs and higher DPAC amortization are the primary drivers of the increase in commissions and expenses compared to the first quarter of 2002. Also included in expenses are EUR 13 million of investment costs that are now recognized on a gross instead of net basis, accounting for approximately 10% out of the 25% increase. This latter amount in expenses is offset by an equal amount in revenues.
Traditional life results of EUR 133 million were 8% lower than the first quarter 2002, influenced by lower investment income. Life for the account of policyholder results were EUR 25 million, down from EUR 65 million in the prior year first quarter. Life results were affected by the higher provisions of EUR 31 million (e.g. guaranteed minimum benefits) and lower investment income due to the decline in the equity markets.
Technical results from non-life were EUR 10 million, an increase of 9%. Mainly due to lower investment income total results were EUR 8 million lower compared with the first quarter 2002. Results from banking activities were zero, compared to EUR 9 million in the first quarter 2002. Lower interest spreads and further increases in provisions for credit risk contributed to the decline.
United Kingdom
Net income was GBP 21 million compared to GBP 42 million in the first quarter of 2002. The reduction in net income is primarily due to lower management and fund related fees as a direct result of the lower equity markets and higher DPAC amortization. Commissions and expenses increased to GBP 91 million, up GBP 36 million, due to inclusion of the operating costs of the acquired distribution companies, growth in the protection businesses, higher contributions of GBP 4 million to the employee pension plan and higher DPAC amortization.
Standardized new life production of GBP 161 million was 4% higher than the first quarter 2002. Off-balance sheet production increased to GBP 127 million, a fourfold increase from the same quarter in 2002.
Total revenues were up 21% as a result of increased single premium business and income from the acquired distribution companies.
Other Countries
Net income from other countries was EUR 14 million, a 17% increase from first quarter 2002. Higher investment income in Hungary, strict cost control and strong life sales at Aegon Taiwan as well as higher general insurance business results at Aegon Spain contributed to the increase.
Capital gains
EUR 126 million was released as indirect investment income from the revaluation account to income before tax compared with EUR 215 million for the first quarter of 2002. The revaluation account balance at 31 March 31 was EUR 2,170 million. Realized gains of EUR 1,840 million and unrealized gains of EUR 330 million account for the total.
Capital and funding
Shareholders’ equity was EUR 13,522 million compared to EUR 14,231 million at 31 December 2002. The decrease of EUR 709 million is largely comprised of negative currency exchange rate differences of EUR 539 million, a reduction in the revaluation account of EUR 428 million, a EUR 105 million decrease in the fair value of the total return swaps with Vereniging Aegon, and net income of EUR 393 million.
Aegon is committed to a strategy of continued financial strength. At the end of the first quarter 2003, equity capital represented 71% of our total capital base, while senior and dated subordinated debt comprised 19% of our total capital base. Capital securities accounted for the remaining 10%. The ratio of shareholders’ equity to total capital remains stable at approximately the same level as year-end 2002. Currency exchange rate translations do not affect the solvency at the operating units.
Extraordinary General Meeting of Shareholders
Aegon will hold an Extraordinary General Meeting of Shareholders on 9 May 2003, to adopt proposed changes to Aegon’s corporate governance and to end its voluntary application of the Dutch large company regime. For further information please refer to the press release of 20 March 2003.
