Aegon reports on full year 2003 results

We feel better about our business than a year ago. The profitability of our business has been strengthened by our actions to improve margins and has benefited from the improvements in the equity and credit markets.

• Fourth quarter 2003 net income increased 32% to EUR 470 million; net income per share EUR 0.30, an increase of 36%
• Full year 2003 net income increased 16% to EUR 1,793 million; net income per share EUR 1.15, an increase of 11%
• 2003 dividend of EUR 0.40 is proposed; final dividend of EUR 0.20

Aegon reports net income of EUR 470 million for the fourth quarter of 2003, an increase of 32% compared to EUR 355 million in the fourth quarter of 2002. Full year net income of EUR 1,793 million increased 16% compared to EUR 1,547 million in 2002. The largest influences on the increased results for both fourth quarter and full year were improved equity and credit markets as well as improved administrative operating efficiencies. 

Transamerica Finance Corporation (TFC), most of which has been sold in line with Aegon’s strategy to concentrate on life insurance, pensions and related savings products, contributed EUR 218 million to net income during 2003 compared to EUR 51 million in 2002. Corporation tax was EUR 219 million higher in 2003 as the effective tax rate increased. 

Exchange rate translation negatively impacted the earnings reported in euro, which is the currency of the financial statements. At constant currency exchange rates net income and income before tax increased by 30% and 29% respectively in 2003.

Earnings per share for the full year amounted to EUR 1.15, an increase of 11% compared to EUR 1.04 for last year (adjusted for the 2002 stock dividend). 

Standardized new life production was up 1% to EUR 672 million in the fourth quarter of 2003 compared to EUR 666 million in the same period in 2002. For the full year, standardized new life production increased by 3% to EUR 2,545 million, which at constant currency exchange rates would have increased by 15%. The increase in standardized life production is driven by higher production in the Americas, the United Kingdom and Other countries, in particular in Taiwan, partly offset by lower production in the Netherlands.

During 2003, indirect income of EUR 631 million pretax was included in earnings, compared to EUR 758 million pretax in 2002. As announced earlier, effective January 1, 2004, Aegon discontinued the indirect income method for recognizing gains and losses on investments in shares and real estate. A generally accepted and recognized method has been adopted, which is in accordance with International Financial Reporting Standards (IFRS) and is similar to US GAAP. This method recognizes gains and losses on shares and real estate investments when realized.
 

Chairman’s statement

Donald J. Shepard, Chairman of the Executive Board, said: "We feel better about our business than a year ago. The profitability of our business has been strengthened by our actions to improve margins and has benefited from the improvements in the equity and credit markets. In some cases, the actions we have taken to focus on profitability have come at the expense of new production. Production has been particularly good in our traditional life business in the United States and pension business in the United Kingdom, and life production in Taiwan has been very strong. Through the joint venture with Caja de Ahorros del Mediterráneo in Spain as well as greenfield operations in China and Slovakia we are well-positioned to expand and strengthen our core activities in markets that offer opportunities for both growth and scale. Distribution remains key in our strategy as evidenced by the successful implementation of a multi-channel distribution strategy in Taiwan, the successful integration of the recent IFA acquisitions in the United Kingdom as well as the participation in Unirobe, a major broker in the Netherlands."
 

Outlook

The company believes the outlook remains positive. We expect increased volatility of net income as a result of the discontinuance of the indirect income method, effective 1 January 2004. Aegon is not providing earnings forecasts.
 

Key points for the full year 2003

• Net income in the Americas increased 35% to USD 1,239 million (13% to EUR 1,095 million), was up 13% to EUR 592 million in the Netherlands and was 17% lower at GBP 93 million (decreased 24% to EUR 135 million) in the United Kingdom. Net income in euro in the Other countries amounted to EUR 58 million, 12% higher than in the prior year. Net income per share increased 11% to EUR 1.15.
• Currency exchange rates negatively impacted net income reported in euro by 14% compared to 2002, driven mainly by the lower US dollar and pound sterling against the euro.
• Standardized new life production increased 9% to USD 1,076 million (decreased 8% to EUR 951 million) in the Americas, declined 21% to EUR 272 million in the Netherlands and was up 8% (down 2% in euro) in the United Kingdom compared to the full year of 2002. Standardized new life production increased 150% to EUR 403 million in Other countries, mainly driven by strong production in Taiwan.
• Account balances rose in the Americas for fixed annuities, variable annuities and GICs by 7%, 30% and 5% respectively during the full year, while new deposits decreased 22% to USD 21,002 million (decreased 35% to EUR 18,568 million) in the Americas compared to 2002. Savings account balances in the Netherlands decreased 11% in 2003.
• Off balance sheet production rose 14% to USD 21,547 million (decreased 4% to EUR 19,050 million) in the Americas, rose 188% to EUR 3,522 million in the Netherlands and declined 24% to GBP 332 million (declined 31% to EUR 481 million) in the United Kingdom.
• Additions to the bond default provision in the United States were USD 516 million (EUR 456 million) compared to USD 774 million (EUR 817 million) in 2002. Actual default losses charged against the provision were USD 520 million (EUR 460 million), compared to USD 791 million (EUR 835 million) in 2002. At December 31, 2003, the provision for defaults amounted to USD 277 million (EUR 219 million) in the United States, compared to USD 281 million (EUR 268 million) at the end of 2002.
• Net income for 2003 for Transamerica Finance Corporation was USD 247 million (EUR 218 million) compared to USD 48 million (EUR 51 million) for 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, the recognition of deferred income of USD 35 million (EUR 31 million) from the termination of a major client contract and several one-time tax benefits totaling USD 31 million (EUR 27 million) were realized.
• The effective tax rate for 2003 was 27% compared to 19% for 2002. The low effective tax rate in 2002 was largely due to a reduction of the deferred tax liability, favorable adjustments resulting from the filing of the 2001 corporate tax returns in the United States, lower taxable income relative to tax preferred investments and tax-exempt income in the Netherlands and the United States, and the use of tax losses in the United Kingdom.
• Beginning 2003, the market value of stock appreciation rights is recognized as a liability on the balance sheet. The change in the market value is recognized in the income statement under expenses. This accounting method is in accordance with International Financial Reporting Standards. For 2003, this resulted in a charge to earnings of EUR 20 million taken entirely in the fourth quarter.
• Dividends on preferred shares in 2003 amounted to EUR 95 million compared to EUR 30 million in 2002, reflecting the increased paid-in capital on the preferred shares as per September 2002.
• The total number of employees increased from 26,097 to 27,708 at year-end 2003. The increase primarily reflects the addition of 2,935 employees from distribution units in the Netherlands, consolidated as from 1 January 2003, partly offset by the reduction of employees in the group as result of cost control measures.
   

Key points for the fourth quarter 2003

• Net income in the Americas increased 48% to USD 370 million (26% to EUR 313 million), in the Netherlands net income increased 59% to EUR 159 million and net income rose 4% to GBP 27 million (-5% to EUR 39 million) in the United Kingdom. Net income in Other countries decreased 27% to EUR 11 million. Gross margin increased 26% while commissions and expenses increased just 7%. Net income per share increased 36% to EUR 0.30.
• Standardized new life production, when compared to the fourth quarter of 2002, was up 9% to USD 299 million (down 9% to EUR 251 million) in the Americas, declined 2% to EUR 81 million in the Netherlands, was 15% higher to GBP 166 million (5% higher to EUR 238 million) in the United Kingdom and increased 26% to EUR 102 million in Other countries primarily driven by strong production in Taiwan.
• Variable annuity account balances rose 9% in the quarter, although new variable annuity deposits declined 66% to USD 1,127 million (declined 73% to EUR 913 million) reflecting actions taken during the year to change or eliminate certain product features. Fixed annuity account balances were slightly higher even though new fixed annuity deposits were 47% lower to USD 846 million (57% lower to EUR 678 million) as a result of reductions in policyholder crediting rates and adjustments to compensation structures made throughout the year. Deposits on GICs and funding agreements were up 9% to USD 1,814 million (down 6% to EUR 1,482 million) compared to the fourth quarter of 2002. Total new deposits decreased 43% to USD 3,787 million (decreased 53% to EUR 3,073 million) compared to the fourth quarter of 2002.
• Off balance sheet production in the Americas decreased by 22% to USD 4,255 million (decreased by 37% to EUR 3,486 million), increased more than fivefold to EUR 1,748 million in the Netherlands and increased 44% to GBP 130 million (increased 32% to EUR 188 million) in the United Kingdom.
• Additions to the default provision in the United States were USD 116 million (EUR 96 million) compared to USD 219 million (EUR 219 million) in the fourth quarter of 2002. Actual default losses charged against the provision were USD 129 million (EUR 108 million), compared to USD 206 million (EUR 206 million) in the fourth quarter of 2002.
• Transamerica Finance Corporation completed the sale of its real estate information services and flood hazard certification business on 2 October 2003. This resulted in an after-tax book gain of USD 347 million (EUR 307 million) credited directly to shareholders’ equity. No earnings were reported in Aegon’s income statement from these TFC business units in the fourth quarter of 2003.
• Net income for Transamerica Finance Corporation in the fourth quarter of 2003 was USD 11 million (EUR 6 million) compared to a loss of USD 15 million (EUR 17 million) in the fourth quarter of 2002.
• Due to the strong performance of the equity markets during 2003, the gross short-term (5 year) equity market return assumption used primarily on variable annuity business has been lowered from 12.0% to 7.5% in the United States. Aegon maintains its gross long-term equity market return assumption of 9% per annum in the United States. The lowering of the short-term gross equity market return assumptions did not change the amortization of deferred policy acquisition cost (DPAC) nor did it affect the provisions for guaranteed minimum benefits.