Important note: Please refer to page 4 for information on accounting changes. Relevant 2003 financial data have been adjusted to reflect these accounting changes for the purpose of comparability. A full reconciliation from 'as reported' to 'as adjusted' is provided from page 19 (see full version press release).
Aegon reports strong increases in net income and net income per share for the first quarter of 2004 on a comparable basis with the first quarter of the prior year. The increases in both measures primarily reflect the variance of realized gains and losses on shares and real estate between reporting periods. We expect that recognition of realized gains and losses on shares and real estate will increase the volatility of net income, in total and per share.
Net income before realized gains and losses on shares and real estate for the first quarter amounted to EUR 284 million, slightly lower than EUR 286 million reported for the same period the prior year on a comparable basis. Included in the net results in both years is the contribution by Transamerica Finance Corporation (TFC). In the first quarter of 2004, TFC reported a net loss of EUR 16 million, compared to a net profit of EUR 73 million in the first quarter of 2003.
Income before realized gains and losses on shares and real estate was EUR 417 million in the first quarter of 2004, an increase of 35% on a comparable basis to the same period in 2003. The increase reflects the continued focus on profitability and the improvements in the equity and credit markets. All major country units contributed to the considerable increase in income before realized gains and losses on shares and real estate. On a comparable basis, the Americas showed an increase of 42% to USD 483 million (21% to EUR 386 million), the Netherlands an increase of 81% to EUR 87 million and the United Kingdom reported an increase of 10% to GBP 32 million (9% to EUR 47 million). Other countries rose 21% to EUR 23 million.
Income before tax, which includes realized gains and losses on shares and real estate, amounted to EUR 506 million for the first quarter of 2004, an increase from EUR 185 million on a comparable basis in the first quarter of 2003. Income before tax in the first quarter of 2004 was positively influenced by realized net gains on shares and real estate of EUR 89 million compared to realized net losses of EUR 124 million on a comparable basis in the first quarter of 2003. Income before tax as reported in the first quarter of 2003 amounted to EUR 444 million.
Net income per share, which includes realized gains and losses on shares and real estate, amounted to EUR 0.22 in the first quarter of 2004, an increase from EUR 0.10 on a comparable basis in the first quarter of 2003. Net income per share as reported in the first quarter of 2003 amounted to EUR 0.25.
Donald J. Shepard, Chairman of the Executive Board, said: The profitability of our core business continues to improve. Income before realized gains and losses on shares and real estate increased 35% over the comparable 2003 first quarter results. Higher contribution to net income of our business units has compensated the lower contribution to net income from the remaining TFC businesses. While new business production showed mixed results in the first quarter 2004 compared to first quarter 2003, we are particularly pleased with the continued strong production in traditional life products sold through the Agency channel in the Americas as well as increased production in the United Kingdom. And, though lower than the first quarter of last year, variable annuity production is higher than in any of the last three quarters of 2003".
Included in this report are financial measures, pre-tax as well as after-tax, that exclude realized gains and losses on shares and real estate. Net income before realized gains and losses on shares and real estate is a non-GAAP measure. Management uses this non-GAAP measure, in addition to GAAP measures, as an indicator of Aegon's financial performance and believes that the presentation of this measure provides useful and important information to analysts and investors. This non-GAAP measure should be seen as part of a range of supplementary measures, that assist in achieving greater transparency and understanding of insurance reporting and can help investors and analysts in comparing Aegon with its peers. Reconciliation of this measure to the most comparable GAAP measure is provided on page 30 (see full press release).
Key points for the first quarter 2004
Standardized new life production, when compared to the first quarter of 2003, was down 2% to USD 244 million (down 16% to EUR 195 million) in the Americas, declined 8% to EUR 67 million in the Netherlands, was 9% higher at GBP 176 million (8% higher at EUR 259 million) in the United Kingdom and decreased 29% to EUR 67 million in Other countries primarily due to lower production in Taiwan.
New variable annuity deposits in the Americas, while higher than in the previous three quarters, declined 38% to USD 1,597 million (declined 47% to EUR 1,277 million) compared to the first quarter last year, reflecting the strong sales in the first quarter of 2003 prior to the discontinuation of certain product features.
New fixed annuity deposits in the Americas were significantly lower compared to the first quarter of last year as a result of reductions in policyholder crediting rates and adjustments to compensation structures made last year. However, production of USD 830 million (EUR 664 million) was fairly stable compared to the fourth quarter of 2003.
Additions to the default provision in the United States were USD 50 million (EUR 40 million) compared to USD 149 million (EUR 139 million) in the first quarter of 2003. Actual default losses charged against the provision were USD 50 million (EUR 40 million), compared to USD 150 million (EUR 140 million) in the first quarter of 2003.
TFC completed the sale of most of its commercial lending activities in January 2004. This resulted in an after-tax book gain of EUR 163 million (USD 204 million) credited directly to shareholders' equity. On an operating basis, TFC reported an income before tax of EUR 5 million (USD 7 million) in the first quarter of 2004, however interest expense of EUR 31 million (USD 39 million) resulted in a pre-tax loss for TFC of EUR 26 million (USD 32 million). TFC contributed EUR 73 million (USD 78 million) to net income in the first quarter of 2003. TFC's results are consolidated and included in Interest charges and other as from 1 January 2004. Interest charges and other now also includes high yielding debt related to TFC activities, which proved uneconomical to prepay at the time parts of TFC were sold.
Aegon's capital leverage ratio improved in the first quarter of 2004. Shareholders' equity increased by EUR 1,078 million to EUR 15,045 million and represents 73% of the total capital base compared to 71% at year-end 2003.
Implementation of Statement of Position 03-1 in Aegon USA resulted in a decline of EUR 165 million (USD 208 million) in Aegon N.V.'s opening balance of shareholders' equity and decreased income before tax by EUR 13 million (USD 16 million) in the first quarter of 2004 and EUR 14 million (USD 15 million) in the same period of the prior year.
Exchange rate translation negatively impacted the results reported in euro, which is the currency of our primary financial statements. The table below provides the percentage increases and decreases of a selected number of relevant measures:
First quarter 2003 as adjusted
At const. currency exchange rates
Income before realized gains and losses on shares and real estate
Net income before realized gains and losses on shares and real estate