Highlights-Q1-2005.pdfStandardized new life production rose 4% to Eur 610 million (6% at constant exchange rates)
Operating earnings before tax decreased 14% to Eur 437 million reflecting volatility of results under IFRS (11% at constant exchange rates)
Net income increased 5% to Eur 666 million
“During the first quarter, Aegon’s overall life production showed a healthy increase due to the growth of our US, Dutch and Taiwanese businesses. Moreover, Aegon’s net income increased by five percent,” said Aegon Chairman Donald J. Shepard. “Our conversion to International Financial Reporting Standards, along with 7000 other European companies, has entailed anticipated accounting volatility in our operating earnings. Today we also released Aegon’s 2004 embedded value report, which is an important additional measure of our performance. The solid improvement in Aegon’s total embedded value, as well as the significant increase in the value of new business, is a direct result of our consistent pursuit of profitable growth.”
Operating earnings before tax decreased 14% to EUR 437 million (11% on a constant currency basis). The positive developments, such as sound business growth and higher product spreads in the Americas and increased operating earnings in the United Kingdom, are offset primarily by the impact of International Financial Reporting Standards (IFRS) in the Americas and the Netherlands that induced volatility in the reported operating earnings. Net income, which includes net gains/losses on investments and impairment charges and nonrecurring items, increased 5% to EUR 666 million (7% on a constant currency basis). Net gains/losses on investments and impairment charges together amounted to a gain of EUR 292 million compared to a gain of EUR 190 million in the first quarter of 2004. Non-recurring income amounted to EUR 192 million before tax, reflecting the book gain on the sale of the Spanish general insurance activities. The comparable period in 2004 included EUR 193 million in non-recurring income, related to the sale of the non-core TFC commercial lending business.
This press release includes a non-GAAP financial measure: Operating earnings before tax. The reconciliation of this measure to the most comparable GAAP measure is shown on page 23 of the full press release. This non-GAAP measure should not be viewed as a substitute for the related figures presented in accordance with IFRS. However, management believes it presents meaningful supplemental information about the elements of our business characterized under IFRS as our operating income and operating charges.
New life production in the Americas increased sharply during the first quarter, primarily reflecting strong BOLI/COLI production. The Netherlands saw a solid improvement in group pension business, driving an increase in life production. Life production in the United Kingdom decreased compared to the very strong first quarter of last year and also reflects certain pricing and other changes made throughout 2004 and 2005 in the core pensions markets. Taiwan experienced significant growth in new life production, due to increased demand for traditional life products over alternative products.
Commission and expenses decreased 7% to EUR 1,351 million. Total operating expenses decreased 8% to EUR 713 million (8% at constant currency exchange rates). The decrease is primarily explained by the lower expenses due to the divestiture of the non-core TFC operations partly offset by higher expenses in The Netherlands due to the addition to the provision for disputes related to life products.
Revenue generating investments increased 4% to EUR 315 billion compared to year-end 2004. In the Americas, operating earnings before tax totaled USD 522 million, a 15% decrease compared to the same period in 2004. Items that are included in operating earnings are volatile under IFRS. In the first quarter of 2004 these items contributed USD 146 million to operating earnings, while these items amounted to a negative USD 11 million in the first quarter of 2005. These volatile items include a discontinued total return pass-through annuity product, Canadian segregated funds maturity guarantees and financial assets carried at fair value, such as hedge funds, convertible bonds and certain limited partnerships, for which no offset in liabilities is present. Excluding these volatile items in both 2005 and 2004, operating earnings increased 13%. This reflects primarily increased spreads and continued favorable persistency in fixed annuities, and higher assets under management on mutual funds and variable annuities due to favorable persistency and equity market growth in 2004. The Americas accounted for 80% of operating earnings before tax generated by the country units. Standardized new life production increased 25% to USD 306 million.
In the Netherlands, operating earnings before tax decreased 31% to EUR 29 million. The decrease in earnings in the Netherlands primarily reflects an addition of EUR 35 million to the provision for disputes related to life products. This was partly offset by higher interest income on ALM swaps in the life business and improved results in non-life on the back of business growth in accident and health and a favorable claims experience in general insurance. The Netherlands represented 6% of operating earnings before tax generated by the country units. Standardized new life production increased 13% to EUR 76 million.
In the United Kingdom, operating earnings before tax increased 31% to GBP 42 million. Included in operating earnings are charges made to policyholders with respect to corporation tax, which are offset by an equal and directly related tax amount not included in operating earnings. Excluding these charges operating earnings rose 62%. The increase in operating earnings primarily reflects the positive effect of the higher equity and bond markets on policy fee income. Other positive factors include cost savings and improved mortality/morbidity results in annuity and term business. The United Kingdom accounted for 12% of operating earnings before tax generated by the country units. Standardized new life production decreased 18% to GBP 144 million. Operating earnings before tax in Other countries amounted to EUR 11 million compared to EUR 23 million in the first quarter of 2004. The decrease reflects primarily the lower contribution to operating earnings from Spain due to the sale of the general insurance activities as well as higher start-up losses for new ventures. This was partially offset by higher operating earnings in Hungary.
Other countries accounted for 2% of operating earnings before tax generated by the country units. Standardized new life production in Other countries increased by 37% to EUR 92 million, particularly in Taiwan where standardized new life production rose 51%. Shareholders’ equity at March 31, 2005 amounted to EUR 15,767 million, an increase of EUR 829 million compared to December 31, 2004.