Aegon reports improved operating performance first nine months of 2006
November 09, 2006, 1:00 CET
"Aegon’s commitment to writing profitable business was further demonstrated by the 22% increase in value of new business for the Group", Aegon Chairman of the Executive Board Donald J. Shepard, stated.
Decrease in net income mainly reflects lower gains on investments
Operating earnings reflect increases in the Americas, the Netherlands and the UK
New life sales1 up 15% driven by strong performance in the UK
Value of new business totals eur 503 million
Increase of 22% compared to pro forma first nine months 2005 value of new business2
Internal rate of return on new business of 14.8% compares to 12.4% for the full year 2005
Solid progress in pension business
UK pensions strong driver of overall sales growth
Pension funds in Hungary and Slovakia experienced significant growth
Production of individual and small- and medium-sized enterprise pensions up in the Netherlands
Overall pension production in the US slightly up, fundamentals remain strong
Set up pension fund management joint venture in Mexico, adding to Aegon’s global pension capabilities
Agreement to acquire pension fund management company in Poland
Distribution strengthened, international expansion continued
Signed an agreement to acquire Clark, Inc., a US company specializing in the distribution and servicing of bank-owned and corporate-owned life insurance, in the fourth quarter
Completed the acquisition of 49% of Seguros Argos, a Mexican life insurance company, in the fourth quarter
Acquired the remaining 55% stake in Unirobe, a Dutch distribution company, in the fourth quarter
Opened Jinan branch in the Shandong province, expanding Aegon’s geographical reach in China
1 New life sales refers to standardized new premium production and is defined as new recurring premium + 1/10 of single premium 2 Pro forma first nine months 2005 value of new business is equal to three-fourths of the full year 2005 value of new business
Highlighting key developments during the first nine months of 2006, Aegon Chairman of the Executive Board Donald J. Shepard, stated:
“Aegon’s commitment to writing profitable business was further demonstrated by the 22% increase in value of new business for the Group. Although the first nine months of this year showed significant growth, the third quarter declined from an especially strong second quarter. Aegon’s internal rate of return on new business increased to 14.8%, well above our minimum internal requirements.
“While net income was off slightly during the period, operating earnings increased by 39% for the Group. Our businesses in the United States, the Netherlands and the United Kingdom all contributed to the increase in operating earnings.
“The record sales in the UK, which increased 56% during the period, were the most important contributor to the 15% increase in new sales for the Group. Pension A-Day in the UK, of course, played a role in the increase as well as in the larger number of lapses. However, on balance, Aegon is a net winner both in terms of cash flow and the value of new business generated. We expect growth to continue in the UK given the response to new products launched in the third quarter. As in Aegon’s other markets, product innovation will continue to be an important driver of future sales. In the Americas, sales for the nine months were up a modest 1%, while new life sales in the Netherlands improved by 7%. The internal rate of return on new business in the Netherlands improved from 8.5% at the half-year stage to 9.4% for the full nine months, supported by enhanced risk management initiatives.
“Pensions continue to be a key initiative in Aegon’s growth strategy. In the UK, sales of individual and group pensions was a principal driver of our overall sales performance, and in the Netherlands, sales of individual as well as small- and medium-sized enterprise pensions experienced significant growth. Our businesses in the US and Central and Eastern Europe also improved their positions in the pensions market. Our recently announced pension fund management joint venture in Mexico, to be known as Afore Argos, and our just announced plan to acquire the pension fund management company Ergo Hestia in Poland, further add to our global pension capabilities.
“Aegon’s geographical footprint expanded further with the completion of our 49% acquisition of the Mexican life insurance company, Seguros Argos, and with the opening of our Jinan branch in the Shandong province in China in September. We continued to strengthen distribution with Aegon’s acquisition of the remaining 55% of Unirobe, a prominent independent distribution business in the Netherlands, as well as with our recently announced plans to acquire Clark Incorporated, a leading distributor of bank-owned and corporate-owned life insurance in the US.
“Overall, we continued our strategy of enhancing profitability, expanding Aegon’s reach and strengthening our broad, multi-channel distribution network.”
Value of new business for the first nine months of 2006 amounted to EUR 503 million. This is an increase of 22% compared to EUR 413 million for three-fourths of the full year 2005 value of new business. The internal rate of return (IRR) on new business remains high reflecting Aegon’s focus on growing profitability and amounted to 14.8% compared to 12.4% for the full year 2005. Sales
During the first nine months of 2006, new life sales increased 15% to EUR 2,179 million, primarily due to record sales in the United Kingdom. In the UK, new life sales increased 56% for the period, as a result of strong pension sales, partly attributable to Pension A-Day, and growth in the sales of bonds, annuities and individual protection products. New life sales in the Americas increased 1% in the first nine months. Lower retail sales within the Transamerica agency channel were due in part to the discontinuance of most sales of investor-owned life insurance. This decline was offset by higher BOLI/COLI and reinsurance sales, and growth in the middle market. New life sales in the Netherlands increased 7% to EUR 181 million. Strong sales growth of individual life and pensions, and small- and medium-sized enterprise (SME) pensions, particularly in the third quarter, more than compensated for fewer large group pension contracts in the first nine months of 2006. New life sales in Other countries in the first nine months of 2006 decreased 47% due to lower sales in Taiwan, partly offset by higher sales in Spain, Hungary and Poland. The increase in new life sales in Spain mainly reflects the proportional inclusion of bancassurance sales, resulting from Aegon’s joint ventures Caja Badajoz Vida and Seguros Navarra.
Sales of annuity and institutional guaranteed products in the Americas increased 10% to USD 16.4 billion compared to the first nine months of 2005. Variable annuity new deposits of USD 5.0 billion increased 6%, driven by 16% growth in the retail segment. Although growth in retail variable annuity sales slowed in the third quarter, due to a decline in industry sales in general, the roll-out of the new “Income Select for Life” variable annuity continued throughout the third quarter and the product has been favorably received. Sales of fixed annuities were lower, reflecting the challenging interest rate environment and competition from other bank products. Deposits in institutional guaranteed products increased 15%, primarily due to higher medium term note issuance from Aegon’s two programs, including the new Irish platform.
Off balance sheet production for the Group decreased 8%, reflecting lower sales of managed assets and synthetic GIC’s, partly offset by strong sales in retail mutual funds in the US and the UK, and strong off balance sheet production in Central and Eastern Europe.
Operating earnings before tax
Operating earnings before tax in the first nine months of 2006 increased 39% to EUR 2,093 million (and increased 38% at constant currency exchange rates), with increases in the Americas, the Netherlands and the UK. The increase in operating earnings in the Americas was led by strong growth in most lines of business, and improved mortality experience in the traditional life and reinsurance lines. In addition, the positive impact of items that receive fair value treatment has contributed to earnings growth. The increase in operating earnings in the Netherlands reflects the net positive impact of changes in interest rates on guarantee provisions and related hedges. In the United Kingdom, the increase in operating earnings before tax mainly reflects business growth, and the positive effect of higher equity and bond markets. The decrease of operating earnings before tax in Other countries primarily reflects investments to grow Aegon’s businesses in Slovakia and China, as well as lower results in Taiwan. This decrease was partly offset by higher earnings in Hungary and Spain.
Net income decreased 4% to EUR 1,973 million (4% at constant currency exchange rates) in the first nine months of 2006. Higher operating earnings were more than offset by lower net gains on investments and lower other non-operating income. Lower other non-operating income primarily reflects the gain on the sale of the Spanish general insurance business last year. The effective tax rate decreased to 23% from 27% in the first nine months of 2005, mainly as a result of higher tax-exempt gains. Net income per share decreased 7% to EUR 1.13, reflecting lower net income and a slightly higher average number of ordinary shares outstanding.
Net gains on investments (before tax) and impairment charges together amounted to EUR 418 million compared to a gain of EUR 1,035 million in the first nine months of 2005. The decline primarily reflects a negative fair value change in derivatives used for asset and liability management in the Netherlands and normal trading activity in the US in a higher interest rate environment, offset by net gains on the sale of shares in the Netherlands.
Other non-operating income/(charges) and share in profit/(loss) of associates together amounted to EUR 67 million. The comparable period in 2005 contained the book gain on the sale of the general insurance activities in Spain of EUR 176 million before tax.
Commissions and expenses
Commissions and expenses increased 8% to EUR 4,416 million (7% at constant currency exchange rates).
Revenue generating investments
Total revenue generating investments amounted to EUR 360 billion at September 30, 2006, compared to EUR 358 billion at December 31, 2005.
Over the past quarter, cash flows have remained strong and financial markets were benign for capital formation. As a result, shareholders’ equity amounted to EUR 19.1 billion at the end of the quarter, up 10% compared to June 30, 2006.
During the first nine months, the positive impact of EUR 2.0 billion from net income was offset by negative foreign currency translation effects of EUR 0.8 billion, a decrease in revaluation reserves of EUR 0.6 billion and distributions (dividends, coupons on perpetuals and repurchases of outstanding shares) of EUR 0.7 billion.
Repurchases of common shares
In the press release dated September 15, 2006, Aegon N.V. announced the repurchase of 11.6 million Aegon N.V. shares. The purpose of the repurchase is to neutralize the dilutive effect on earnings per share of the new shares issued as part of the payment of the 2006 interim dividend. Aegon N.V. completed the repurchase of shares in October 2006.