First six months 2003 earnings of EUR 859 million increase 13% over first half 2002; net income per share EUR 0.55
Interim dividend of EUR 0.20 declared
Second quarter 2003 net income EUR 466 million; net income per share EUR 0.30
Chairman’s statement Donald J. Shepard, Chief Executive Officer and Chairman of the Executive Board, said: "Our second quarter results reflect a modest improvement in our businesses. The relative recovery in the equity markets, the continued improvement in the level of corporate bond defaults and the actions we’ve taken to improve profitability have had a positive impact on our results. However, the low interest rate environment continues to compress margins and the euro / dollar exchange rate has also affected our earnings. In line with our strategy to concentrate on our core lines of business, we have successfully completed the divestiture of most of Transamerica’s commercial finance business. An interim dividend of euro 0.20 has been declared.”
Aegon reports net income of EUR 466 million for the second quarter of 2003, compared to EUR 146 million for the same period of 2002. For the first six months of 2003 net income totaled EUR 859 million versus EUR 763 million for the same period of the prior year, an improvement of 13% resulting from improved insurance activities and higher results at Transamerica Finance Corporation.
Excluding currency influence, net income increased 28% while total new life production increased 11%, with a 14% increase in the Americas, 5% increase in the UK and 29% decrease in the Netherlands. Gross annuity and GIC deposits, excluding currency influence, were 8% lower, which is in line with lowered expectations due mainly to changes in product features, benefits and distribution costs.
Outlook 2003 Aegon is not providing an earnings forecast. While the company believes the long term outlook is positive, market conditions remain uncertain.
Key points for the second quarter 2003
Standardized new life production increased 18% in the Americas and 6% in the UK and was down 10% in the Netherlands compared to the second quarter of 2002.
Total deposits decreased 18% in the Americas compared to the second quarter of 2002. Lower variable annuity sales (39%) were due mainly to product feature changes. Lower fixed annuity sales (12%) reflect lower interest rates, product feature changes and lower distribution costs.
Bond default provisions in the USA were increased by USD 144 million compared to USD 335 million during the second quarter of 2002. Actual defaults for the second quarter were slightly less than the first quarter of 2003 (USD 134 million compared to USD 149 million). There were no charges for DPAC unlocking or additions to guarantee provisions related to the equity markets. During the second quarter of 2002, EUR 318 million in DPAC unlocking was taken and EUR 171 million was added to the guarantee provisions.
Net income for Transamerica Finance Corporation for the second quarter was USD 109 million compared to USD 26 million in the second quarter of 2002. Increased earnings were primarily driven by higher gross margins due to lower funding costs, lower expenses and lower credit losses. In addition, deferred income of USD 35 million (after tax) was realized as a contract with a major client was terminated.
Key points for the first six months 2003
Lower charges related to DPAC amortization of EUR 153 million, lower additions to guarantee provisions of EUR 114 million and lower additions to the bond default reserve of EUR 112 million positively affected earnings compared with the first six months of 2002
Currency exchange rates negatively impacted net earnings by 15% compared to the first six months of 2002, driven mainly by the lower US dollar exchange rate. EUR 310 million was released as indirect investment income from the revaluation account to income before tax compared with EUR 416 million for the first six months of 2002. The revaluation account balance at June 30, 2003 was EUR 2,529 million. Realized gains of EUR 1,550 million and unrealized gains of EUR 979 million account for the total.
Net income for the first six months of 2003 for Transamerica Finance Corporation was USD 187 million (USD 50 million for the first half of 2002). Compared to the first six months of 2002, business conditions in all segments were more favorable. In addition to lower funding costs, lower expenses and lower credit losses, and the recognition of deferred income from the termination of a major client contract, several one-time tax benefits totaling USD 31 million were realized.
Earnings per share of EUR 0.55 for the first half year 2003 are 4% higher than the first half of 2002 after the preferred share dividend and the adjustment for the 2002 stock dividend.
REPORT OF THE COUNTRY UNITS
The Americas Net income totaled USD 282 million compared to USD 35 million in the second quarter of 2002. Income before tax for the six months of 2003 totaled USD 752 million compared to USD 591 million during the same period last year. The largest influences on the increase in earnings before tax are due to the lower additions to the asset default provision (USD 124 million) and lower DPAC amortization and GMB provisioning (USD 238 million), offset by lower employee pension plan income (USD 42 million) and lower indirect income and investment yields (USD 179 million).
Commissions and expenses show a 4% increase compared to the first six months of 2002. Excluding commissions and net DPAC amortization, actual operating expenses increased USD 107 million. Reflected in the year-to-date 2003 expenses is USD 42 million less in employee pension plan income and USD 27 million related to a coinsurance agreement that was cancelled and USD 12 million higher expenses related to acquired businesses. Excluding these items, expenses were up 3% from first half 2002 and in line with pricing allowables.
Traditional life production (standardized new premium) increased 13% over the first six months of 2002 to USD 404 million. Strong traditional universal and term life sales in our Agency group continue to drive the production. Earnings of USD 344 million were 15% lower than the same period last year and reflect lower investment yields. Indirect yield was USD 25 million lower compared to the first six months of 2002.
Fixed annuity deposits were down 17% compared to the first half of 2002 as a result of reductions in crediting rates and adjustments to commission structures. Surrenders are at historically low levels reflecting the overall decline in interest rates and the continued uncertainty in the financial markets. Earnings of USD 127 million were 12% above comparable prior year. The favorable impact of USD 97 million lower credit losses in 2003 was somewhat offset by the decline in indirect income and lower investment yields. The pricing spread on the total annuity book increased 3 basis points during the second quarter to 163 basis points, despite the drop in yields.
Variable annuity deposits decreased 1% over the first half of 2002 but declined 46% when compared to first quarter 2003. The decrease from first quarter 2003 is due to the discontinuance of the guaranteed minimum income benefit (GMIB) feature. Earnings of USD 8 million were USD 235 million higher than the first six months of 2002. Results through June 30, 2002 included DPAC unlocking and guarantee reserve strengthening that occurred as a result of the severe decline in the stock market during the second quarter of 2002.
GICs and funding agreement account balances rose 5% to USD 29.3 billion reflecting strong international funding agreement sales. Earnings declined 15% to USD 106 million due to lower indirect yield income (USD 21 million).
Life for account of policyholders sales remain challenging due to the continued uncertainty in the equity markets. Earnings of USD 50 million for the first six months of 2003 were equal to the same period last year.
Off-balance sheet production was USD 10.9 billion, a 15% increase compared to the first half 2002. Mutual fund sales of USD 3.8 billion and synthetic GIC sales of USD 7.1 billion were 11% and 18% higher, respectively, compared to the same period last year. Fee income increased USD 9 million due to higher assets under management and lower expenses.
Accident and health premiums were equal to the first six months of 2002. Earnings of USD 107 million were 12% lower than first half 2002 due to reduced indirect investment income, and a one-time foreign currency gain that was included in the first quarter of 2002.
Income before tax totaled EUR 361 million, a 4% increase compared to the first six months of 2002. Earnings reflect a reduction in additions to guarantee provisions, which was offset by additions to credit provisions, increased employee pension related costs and higher DPAC amortization. Net income for the second quarter 2003 of EUR 149 million was 10% above the first quarter and brought the six months after tax results to EUR 285 million. Provisions for guarantees were increased by EUR 22 million and credit provisions were increased by EUR 15 million. Employee pension premiums increased EUR 32 million compared to the same period last year while lower production resulted in lower loadings of EUR 8 million.
Commissions and expenses increased 72% to EUR 505 million partly due to the consolidation of Meeùs. Additional employee pension costs of EUR 32 million, 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 six months of 2002. Also included in expenses are EUR 26 million of investment costs that are now recognized on a gross instead of net basis. This amount in expenses is offset by an equal amount in revenues. Excluding these items, expenses were up 4% from first half 2002.
Traditional life results of EUR 278 million were in line with the first six months of 2002, influenced by investment income, which was up 10%.
Life for account of policyholders results were EUR 46 million, 142% higher than in the same period last year. The substantial increase in earnings is due to lower additions to the provision for guarantees.
Overall life production lagged 29% behind the first six months of 2002 as a result of continued volatility in placing group pension business and uncertainty surrounding both the equity markets and the fiscal status of company savings plans. New individual life production equals the first six months of 2002.
Off-balance sheet production increased 143% to EUR 1,109 million due to the addition of significant new clients and accounts from the group pensions target group.
Savings account balances, compared to year-end 2002, slightly decreased (-4%) to a total of EUR 6.1 billion at the end of the second quarter 2003.
United Kingdom Net income was GBP 41 million compared to GBP 66 million for the first half of 2002. The reduction in net income is primarily due to lower levels of management and fund related fees as a direct result of the lower equity markets, lower levels of experience profits, lower indirect yield and investment income.
Commissions and expenses increased to GBP 188 million up GBP 52 million due to inclusion of the operating costs of the acquired distribution companies, growth in our protection businesses, the resumption of contributions to the pension scheme of GBP 8 million and accelerating depreciation charges on IT costs.
Traditional life production (standardized new premium) increased 19% over the first six months in 2002 with strong growth in our protection business and increasing volumes of annuity business from our own maturing pension book. Earnings were GBP 8 million lower due to reduced levels of investment income as well as lower levels of experience profits.
Life for account of policyholders production (standardized new premiums) increased 3% over the same period in 2002. Earnings on this business line have been adversely affected by the fall in equity markets.
Off-balance sheet production was GBP 169 million, a 21% increase from the same period in 2002 representing our continued success to securing fixed interest mandates.
While the current economics of the UK market are challenging, it is one of the largest long-term savings markets in the world and offers solid growth prospects. Aegon is committed to building upon the Aegon UK group’s strong and growing market presence in the UK market as evidenced by the recent significant investment in distribution.
Other countries Net income from other countries was EUR 29 million, a 53% increase compared to the first six months of 2002. Traditional life and general insurance results contributed to the increase. Hungary had one of its most successful quarters in terms of earnings and moved forward with the preparations for the start-up of our operations in Slovakia. Standardized new life production in other countries increased from EUR 55 million to EUR 163 million in the first half, largely driven by continued strong production growth in Taiwan. In Spain income before tax increased considerably compared to prior year to EUR 18 million.
REPORT OF THE HOLDING COMPANY
Capital and funding Shareholders’ equity was EUR 13,607 million compared to EUR 14,231 million at December 31, 2002. The decrease of EUR 624 million is largely due to negative currency exchange rate differences of EUR 1,045 million offset by net income of EUR 812 million (excluding the preferred dividend). A reduction in the revaluation account of EUR 69 million and a goodwill charge of EUR 273 million, mainly as a result of the consolidation of Meeùs in the Netherlands, contributed to the remaining decrease in shareholders’ equity.
There were no material developments in the capital base during the second quarter of 2003. At June 30, 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 it was at year-end 2002 and at March 31, 2003. Currency exchange rate translations do not affect the solvency at the operating units. Aegon is committed to maintaining a strategy that ensures financial strength and flexibility.
Dividends An interim dividend of EUR 0.20 per common share has been declared. The interim dividend will be paid in cash or stock at the election of the shareholder. The interim dividend in shares, if elected, will be 5% higher than the value of the interim cash dividend, or EUR 0.21 per common share of EUR 0.12 par value. Aegon shares will be quoted ex-dividend on August 11, 2003. The dividend will be payable as of September 19, 2003.
Aegon recognizes the importance of offering its shareholders a stable and adequate dividend, which is supported by the company’s cash flow and capital position. Aegon is considering proposing a full year dividend of EUR 0.40 per common share.