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News and Information Article
THE HAGUE, Netherlands, March 9 /-FirstCall/ --
* STRONG FINANCIAL PERFORMANCE
-- Net income increased 21% in 2005 to EUR 2,732 million and 2% in the
fourth quarter.
-- Operating earnings before tax increased 21% in 2005 to EUR 2,147
million and 64% in the fourth quarter.
-- New life sales(1) remained stable in the fourth quarter and increased
9% to EUR 2,539 million in 2005.
-- Strong capital base and cash flow generation: 10% increase in proposed
2005 final dividend to EUR 0.23 per share, bringing the total dividend
for 2005 to EUR 0.45, a 7% increase over 2004. The value for cash and
stock will be approximately the same for the final dividend.
* IMPROVED POSITION IN AEGONS THREE MAJOR MARKETS
-- All major markets contributed to increased operating earnings.
-- In the Americas, strong sales in the pension business, substantial
growth in life reinsurance and a new product introduction in variable
annuities led to enhanced performance.
-- The improved organization in the Netherlands concluded several large
pension contracts in 2005 and is uniquely positioned to capture
further growth in the group pension business.
-- AEGON UK recorded highest sales ever in the fourth quarter. The UK
organization introduced a broader range of non-pension products and is
in a good position to benefit from developments in the distribution
market.
* EXPANSION STRATEGY ON TRACK
-- AEGON Poland achieved record sales in the fourth quarter, its first as
an AEGON company.
-- Two new bancassurance joint ventures were established in Spain to
strengthen life distribution.
-- Further expansion was achieved in China with new licenses to operate
in Beijing and Nanjing. Brokers were added to strengthen multi-channel
distribution advantage.
-- Expansion continues in 2006, with a life insurance license for the
Shandong province in China. In addition, HDI Pensionsmanagement AG has
joined the AEGON Pension Network as a new partner, adding Germany to
the network.
(1) New life sales refers to standardized new premium production and is
defined as new recurring premium + 1/10 of single premium
EARNINGS SUMMARY
Constant
Amounts in EUR Fourth Fourth Full Full currency
millions, except quarter quarter year year exchange
per share data 2005 2004 % 2005 2004 % rates %
Operating
earnings before
tax 643 393 64 2,147 1,772 21 21
Net gains/losses 136 493 (72) 1,171 1,020 15 15
on investments
and impairment
charges before tax
Other 32 (266) - 297 3 - -
income/(charges)
and share in
profit/(loss) of
associates
Income before tax 811 620 31 3,615 2,795 29 29
Net income 687 672 2 2,732 2,256 21 21
- per share 0.41 0.42 (2) 1.63 1.38 18 18
Note: This press release includes a non-GAAP financial measure: operating
earnings before tax. The reconciliation of this measure to the most comparable
GAAP measure and an explanation for its use is provided on page 28. In
addition, 2004 financial data have been adjusted to reflect further
refinements to the adoption of IFRS. A reconciliation of the data as
reported to as adjusted is provided on pages 29 to 33.
Chairmans Overview
"During 2005, we made good progress in strengthening AEGONs position in
our three major markets. In addition, we continued to invest in Central and
Eastern Europe, Spain and Asia, where we see good growth prospects. We have
taken a number of steps to improve the operations of our businesses as well as
enhance AEGONs strategic position in the life insurance and pension sectors.
We are pleased to report increased earnings from all major country units for
the year, enhanced distribution and a stronger balance sheet. We believe that
AEGON is well-positioned to deliver the products and services that will lead
to the continued growth of our business," said Don Shepard, Chairman of the
Executive Board.
"In the Americas we achieved a 7% increase in new life sales over last
year, as well as a 17% increase in operating earnings for 2005. Sales through
our reinsurance division were particularly strong.
"Our variable annuity business in the Americas showed 19% sales growth for
the year, led by a 41% increase through the wirehouse and fee planner channel
and a 24% increase in our pension business. Although fourth quarter retail
sales were lower than previous quarters of the year, we anticipate sales
growth going forward driven by accelerated new product development and
additional wholesaling capability. Despite the challenging interest rate
environment in the US, and against the backdrop of declining industry sales,
we have seen consecutive quarterly growth in our fixed annuity sales in 2005,
due largely to new bank distribution agreements as well as growth in our
pension business.
"In the Netherlands, the improved organization reported a 64% increase in
operating earnings for the year. Leveraging its leading position in the group
pension market, AEGON The Netherlands was successful in capturing several
large pension contracts. The Dutch organization is focused on maximizing its
opportunities. For instance, to date, we signed 775 "Levensloop" contracts
with employers and 2,250 group disability contracts. Looking ahead, we expect
continued momentum of sales in our group business, as well as improved sales
to individuals driven by new product initiatives in the intermediary channel.
"AEGON UK had a good year with a 32% increase in operating earnings before
costs associated with the accelerated acquisition of Positive Solutions, our
Independent Financial Advisor network, in 2005. In the fourth quarter of 2005
we recorded our highest sales performance ever. We have successfully
introduced a broader range of non-pension products in the UK market, which
resulted in over 30 percent of new business coming from annuities, bonds and
protection products in 2005. Moreover, AEGON UK is in a good position to both
drive and benefit from developments in the distribution market. The number of
registered individuals affiliated with Positive Solutions has more than
doubled since making our initial investment in the company in late 2002. We
regard this as key to ensuring AEGONs leading position in the UK market as
further reforms are implemented and the distribution environment becomes more
competitive.
"Elsewhere in Europe, we divested our general insurance business in Spain
and focused our efforts on establishing life insurance partnerships with
savings banks. Our partnership with Caja de Ahorros del Mediterraneo achieved
a 27% increase in recurring premiums during the year. We also established two
new bancassurance joint ventures in 2005 with Caja de Badajoz and Caja
Navarra. Our life products will soon be sold in over 1500 branches across the
country. We will be looking at opportunities to expand this network given the
dominant role of banks in the Spanish life and pensions market.
"Relying on our strong management in Hungary, we have been pleased with
the progress of our strategy for Central and Eastern Europe. The countries
where AEGON is now active, with a total population of over 65 million, offer
strong growth potential for life and pension products. AEGON Hungary achieved
a notable increase of 26% in net earnings for the year. AEGON Poland, which we
acquired in October, had record sales in the fourth quarter, its first as a
member of the AEGON group. Membership in AEGONs pension fund in Slovakia
continues to grow with over 70,000 currently enrolled, and life sales have
begun in the Czech Republic where we launched operations in April.
"We continue to see pensions as a key growth driver for our business.
Leveraging AEGONs pension expertise, we formally launched the AEGON Pension
Network, which has been developed with our French partners at La Mondiale to
provide multi-national corporate clients cross-border solutions. The recent
addition of HDI Pensionsmanagement, a leading provider of group pensions in
Germany, has added further momentum to this initiative which now covers ten
European countries as well as the United States.
"Finally, we have been pleased by the progress of our operations in Asia
during 2005. In Taiwan, new life sales increased 58% following especially
strong sales in the first half of the year. Although recurring traditional
life business continued to be the main driver of growth, increased efforts to
sell unit-linked products led to encouraging results in the fourth quarter.
"In China, we have expanded from our base in Shanghai, having received
licenses to begin operations in Beijing, Nanjing and most recently, the
Shandong province, where we are among the first foreign insurers to gain
access to the region. During the fourth quarter, AEGON-CNOOCs multi-channel
distribution advantage was strengthened with the addition of brokers. We have
made clear our long-term commitment to China and we will continue to identify
additional opportunities to expand AEGONs geographic presence.
"AEGON continues to benefit from strong capitalization in all our country
units. The year 2005 was especially good in terms of capital formation and
cash flows. Shareholders equity at December 31, 2005 was EUR 19.3 billion, an
increase of 30% compared to year-end 2004. In 2005, AEGON further strengthened
the quality of its capital base by replacing senior debt and perpetual
subordinated bonds with perpetual capital securities. Group equity, which
includes shareholders equity and other equity instruments, represented 89% of
the total capital base at the end of December. Due to our strengthened capital
position and good cash flows, we propose to raise the final dividend by 10% to
EUR 0.23 per common share, bringing the total 2005 dividend to EUR 0.45 per
common share. The value of the final stock dividend will be approximately the
same as the cash dividend.
"In summary, 2005 was a good year. We expect the momentum to continue in
2006 and are confident about our prospects for capturing further growth in
AEGONs core lines of business. The increased sales and earnings for the year,
combined with enhanced distribution and improved operational efficiency,
indicate that we have made good progress within AEGONs three major markets
while investing in new markets that offer long-term profitable growth."
Earnings overview
amounts in millions
EUR EUR
Fourth quarter Full year
2005 2004 % 2005 2004 %
By product segment
Traditional life 224 157 43 823 566 45
Life for account of policyholders 79 96 (18) 243 304 (20)
Fixed annuities 138 95 45 425 284 50
Variable annuities 99 66 50 130 177 (27)
Institutional guaranteed products 69 81 (15) 280 367 (24)
Fee - off balance sheet products (10) (7) (43) 33 36 (8)
Reinsurance 25 (137) N.M. 105 (88) N.M.
Accident and health insurance 67 82 (18) 324 325 (0)
General insurance 10 28 (64) 55 104 (47)
Banking activities 11 10 10 15 24 (38)
Other (6) 0 N.M. (6) 0 N.M.
Interest charges and other (63) (78) (19) (280) (327) (14)
Operating earnings before tax 643 393 64 2,147 1,772 21
Gains/(losses) on investments 141 559 (75) 1,157 1,203 (4)
Impairment charges (5) (66) 92 14 (183) N.M.
Other non operating income/(charges) 24 (273) N.M. 277 (22) N.M.
Share in profit/(loss) of associates 8 7 14 20 25 (20)
Income before tax 811 620 31 3,615 2,795 29
Income tax (123) 49 N.M. (885) (537) 65
Minority interest (1) 3 N.M. 2 (2) N.M.
Net income (1) 687 672 2 2,732 2,256 21
Net income in USD 819 865 (5) 3,403 2,806 21
Income before tax geographically
Americas 606 390 55 2,181 1,698 28
The Netherlands 229 472 (51) 1,286 1,097 17
United Kingdom 73 70 4 272 220 24
Other countries 11 39 (72) 248 135 84
Holding and other activities (102) (341) (70) (352) (356) (1)
Eliminations (6) (10) 40 (20) 1 N.M.
Income before tax 811 620 31 3,615 2,795 29
Commissions and expenses 1,448 1,370 6 5,522 5,784 (5)
Amounts per common share of EUR 0.12
Net income in EUR (2) 0.41 0.42 (2) 1.63 1.38 18
Net income fully diluted in EUR (2) 0.41 0.42 (2) 1.63 1.38 18
Net income in USD 0.49 0.54 (9) 2.03 1.72 18
Net income fully diluted in USD 0.49 0.54 (9) 2.03 1.72 18
Dividend in EUR (3) 0.45 0.42 7
At At
Dec. 31 Dec. 31
2005 2004
Shareholders equity in EUR (4) 10.89 8.38 30
Shareholders equity in USD (4) 12.85 11.41 13
Number of employees 27,159 27,446 (1)
Outstanding common shares:
- Number of common shares (millions) 1,599 1,553 3
- Weighted average number (millions) 1,548 1,503 3
(1) Net income refers to net income attributable to equity holders of
AEGON N.V.
(2) After deduction of preferred dividend and coupons on perpetuals.
(3) Amount for 2005 is the proposed dividend for 2005.
(4) Shareholders equity per share is calculated after deduction of the
preferred share capital of EUR 2.1 billion (2004: EUR 2.1 billion)
and considering the number of outstanding treasury shares.
2005 GROUP HIGHLIGHTS
Sales
During 2005, new life sales increased 9% to EUR 2,539 million. New life
sales in the Americas increased 7% to USD 1,166 million, primarily reflecting
higher reinsurance sales. The combination of higher group pension sales and
lower individual life sales led to a 2% increase in new life sales in the
Netherlands. New life sales in the United Kingdom increased 4% for the year,
despite lower sales in the first quarter as a result of certain pricing and
commission changes in the core pensions markets. In Taiwan, new life sales
increased 58%, due to a particularly strong increase in sales of traditional
life products in the second quarter.
Sales of annuity and institutional guaranteed products in the Americas
increased 8% compared to 2004. Variable annuity sales benefited from higher
sales to individuals and through the pension businesses. Sales of fixed
annuities were lower and reflect AEGONs pricing discipline and the
challenging interest rate environment. New fixed annuity sales of EUR 521
million in the fourth quarter were 12% higher than in the third quarter due to
higher pension sales and marginally higher retail sales. Off balance sheet
production increased 9%, reflecting strong performance from the asset
management operations in the Netherlands and the UK, increased pension sales
in Central and Eastern Europe and higher synthetic GIC sales in the US.
Operating earnings before tax
Operating earnings before tax in 2005 increased 21% to EUR 2,147 million.
In the fourth quarter of 2005, total operating earnings before tax increased
64% to EUR 643 million as compared to 2004. The three major country units -
the Americas, the Netherlands and the United Kingdom - each reported increases
in operating earnings before tax for the year. The increase in the Americas
reflects business growth, favorable mortality experience and the impact of
volatile items, partly offset by decreased spreads. The increase in operating
earnings before tax in the Netherlands is largely due to improved interest
results and released provisions for profit-sharing and employee benefits,
increased technical life and non life results, partially offset by additional
provisions for guarantees and improvements to "Spaarkas" life products in the
first quarter of 2005. In the United Kingdom, the increase mainly reflects the
positive impact from higher equity and bond markets. The increase is largely
offset by a charge for an incentive payout to registered individuals and
relates to the accelerated acquisition of the remaining 40 percent of Positive
Solutions. The divestiture of the general insurance activities in Spain at the
beginning of this year is the primary reason for the decline in operating
earnings in Other Countries.
Net income
Net income increased 21% to EUR 2,732 million in 2005 reflecting higher
operating earnings, increased net gains on investments and impairment charges,
and higher non-operating income. The effective tax rate increased to 24% from
19% in 2004, reflecting higher taxable earnings, higher policyholder taxes in
the United Kingdom and one-time tax benefits in 2004. Net income per share
increased 18% to EUR 1.63. Net income in the fourth quarter of 2005 amounted
to EUR 687 million and increased 2% compared to the previous year, while net
income per share decreased 2% to EUR 0.41. This reflects higher operating
earnings before tax, the settlement with Dexia in 2004, lower net gains on
investments and a higher tax charge due to a one-time tax benefit in the
fourth quarter of 2004 in the Americas.
Net gains/losses on investments (before tax) and impairment charges
Net gains/losses on investments (before tax) and impairment charges
together amounted to a gain of EUR 1,171 million compared to a gain of EUR
1,020 million in 2004. Other non-operating income/(charges) and share in
profit/(loss) of associates together amounted to EUR 297 million, reflecting
the book gain on the sale of the Spanish general insurance activities and the
charges to AEGON UK policyholders related to taxes payable for the account of
policyholders.
Commission and expenses
Commission and expenses decreased 5% to EUR 5,522 million. The sale of
most of Transamerica Finance Corporations businesses in 2004, the sale of the
general insurance business in Spain, and expense savings in AEGON UK, all
contributed to lower operating expenses.
Revenue generating investments
Total revenue generating investments amounted to EUR 358 billion at
December 31, 2005, an increase of 17% compared to year-end 2004.
Shareholders equity
Shareholders equity at December 31, 2005 amounted to EUR 19.3 billion, an
increase of 30% compared to December 31, 2004.
Dividend
The Executive Board will propose a total dividend for 2005 of EUR 0.45 per
common share, a 7% increase compared to the 2004 dividend. Taking into account
the interim dividend of EUR 0.22 paid in September 2005, the proposed final
dividend will amount to EUR 0.23 per common share. The final dividend will be
paid in cash or shares, at the election of the shareholder. The value of the
stock dividend will be approximately the same as the value of the cash
dividend.
REPORT OF THE COUNTRY UNITS
Americas
amounts in millions
USD USD EUR
Fourth quarter Full year Full year
2005 2004 % 2005 2004 % 2005 2004 %
Income by product
segment
170 174 (2) Traditional life 674 639 5 541 514 5
22 27 (19) Life for account 108 107 1 87 86 1
of policyholders
166 121 37 Fixed annuities 529 353 50 425 284 50
123 84 46 Variable 162 220 (26) 130 177 (27)
annuities
82 106 (23) Institutional 349 456 (23) 280 367 (24)
guaranteed
products
9 (7) N.M. Fee - off balance 67 (1) N.M. 54 (1) N.M.
sheet products
30 (169) N.M. Reinsurance 131 (109) N.M. 105 (88) N.M.
65 91 (29) Accident and 345 361 (4) 277 290 (4)
health insurance
667 427 56 Operating 2,365 2,026 17 1,899 1,629 17
earnings before
tax
77 143 (46) Gains/(losses) 299 280 7 240 225 7
on investments
(17) (62) 73 Impairment 53 (197) N.M. 42 (159) N.M.
charges
0 2 N.M. Share in 0 3 N.M. 0 3 N.M.
profit/(loss)
727 510 43 Income before 2,717 2,112 29 2,181 1,698 28
tax of associates
(128) (7) N.M. Income tax (705) (439) 61 (566) (353) 60
0 3 N.M. Minority 2 (3) N.M. 2 (2) N.M.
interest
599 506 18 Net income 2,014 1,670 21 1,617 1,343 20
Revenues
299 302 (1) Life general 922 1,217 (24) 740 979 (24)
account single
premiums
1,474 1,335 10 Life general 5,568 5,104 9 4,470 4,104 9
account recurring
premiums
107 564 (81) Life policyholders 611 652 (6) 491 524 (6)
account single
premiums
282 282 0 Life 1,156 1,178 (2) 928 947 (2)
policyholders
account recurring
premiums
2,162 2,483 (13) Total life 8,257 8,151 1 6,629 6,554 1
insurance gross
premiums
589 603 (2) Accident and 2,456 2,444 0 1,972 1,965 0
health insurance
2,751 3,086 (11) Total gross 10,713 10,595 1 8,601 8,519 1
premiums
1,731 1,592 9 Investment 6,705 6,254 7 5,383 5,029 7
income
286 257 11 Fee and 1,085 1,012 7 871 814 7
commission income
4,768 4,935 (3) Total revenues 18,503 17,861 4 14,855 14,362 3
453 691 (34) Income from 1,753 1,741 1 1,407 1,400 0
reinsurance ceded
134 164 (18) Fair value and 336 235 43 270 189 43
foreign exchange
gains
1,355 3,514 (61) Total gains on 4,137 4,630 (11) 3,321 3,723 (11)
investments
6,710 9,304 (28) Total income 24,729 24,467 1 19,853 19,674 1
1,049 1,126 (7) Commissions and 4,063 4,325 (6) 3,262 3,478 (6)
expenses
Standardized new premium production
insurance
289 781 (63) Life single 1,298 1,592 (18) 1,042 1,279 (19)
premiums
258 225 15 Life recurring 1,036 928 12 832 746 12
premiums annualized
287 303 (5) Life total 1,166 1,087 7 936 874 7
recurring plus
1/10 single
Gross deposits
626 605 3 Fixed annuities 2,221 3,017 (26) 1,783 2,426 (27)
2,121 1,649 29 Institutional 10,712 9,487 13 8,600 7,630 13
guaranteed products
1,529 1,354 13 Variable 6,260 5,278 19 5,026 4,244 18
annuities
4,276 3,608 19 Total
production 19,193 17,782 8 15,409 14,300 8
on balance
sheet
Off balance sheet production
2,598 2,482 5 Synthetic GICs 8,239 7,260 13 6,614 5,838 13
2,314 2,793 (17) Mutual funds/ 10,114 11,175 (9) 8,120 8,986 (10)
Collective Trusts
and other managed
assets
4,912 5,275 (7) Total 18,353 18,435 (0) 14,734 14,824 (1)
production off
balance sheet
The Americas (the AEGON USA companies and AEGON Canada)
- New life sales increased 7% to USD 1,166 million during 2005.
- Operating earnings before tax increased 17% to USD 2,365 million in
2005.
- Operating expenses were level with last year at USD 1,768 million.
- Total revenue generating investments amounted to USD 265 billion at
December 31, 2005 and increased 3% compared to year-end 2004.
Results
Operating earnings before tax increased 17% to USD 2,365 million in 2005.
Favorable earnings growth was notable in the fixed annuity, fee - off balance
sheet, and reinsurance lines of business in the Americas. Certain volatile
items increased pre-tax operating earnings by USD 316 million in 2005,
compared to an increase of USD 255 million in 2004. A significant portion of
this is due to returns on hedge funds and limited partnership investments,
which exceeded long-term pricing expectations in both 2004 and 2005. These
items are described in more detail on page 10. Results from 2004 reflect a
fourth quarter one-time charge of USD 80 million in the reinsurance business
and a charge of USD 172 million related to certain payout annuities and
reinsurance contracts.
Fourth quarter operating earnings before tax of USD 667 million increased
by USD 240 million as compared to the fourth quarter of 2004. This change was
primarily attributable to the charges in the fourth quarter of 2004 discussed
above.
Net income, which includes net gains/losses on investments and impairment
charges, increased 21% to USD 2,014 million. Net gains on investments (before
tax) amounted to USD 299 million compared to USD 280 million in 2004.
Impairment charges amounted to a net recovery of USD 53 million in 2005
compared to a net charge of USD 197 million in 2004. The effective tax rate of
25.9% in 2005 compares to an effective tax rate of 20.8% in 2004. The increase
primarily reflects the effect of the repatriation of accumulated earnings from
Canada in 2004 and higher taxable earnings in 2005.
Traditional life / Life for account of policyholders
New life sales of USD 907 million were level compared to 2004. This
excludes reinsurance sales, which are reported in a separate line of business.
Production in the agency channel increased by 5%, but this was offset by lower
sales in the Bank-Owned/Company-Owned Life (BOLI/COLI) and bank channels.
Operating earnings before tax for traditional life increased 5% to USD 674
million during 2005. Continued growth of the in-force business contributed to
the earnings increase during 2005 in addition to the increase in earnings from
the valuation of certain financial asset at fair value. Operating earnings
before tax from life for account of policyholders were level with 2004 at USD
108 million.
Fixed annuities
Fixed annuity new deposits of USD 2.2 billion decreased 26% in 2005,
although during 2005 AEGON Americas recorded consecutive quarterly growth
driven primarily by new distribution arrangements and increased pension sales.
Fourth quarter deposits of USD 626 million were 10% higher than in the third
quarter. The current low interest rate environment, a flat yield curve and
AEGONs continued commitment to write profitable business with acceptable risk
profiles resulted in lower fixed annuity production in 2005 relative to 2004.
Fixed annuity account balances of USD 52.9 billion decreased 4% from year-end
2004 due to net withdrawals. Lapse rates increased in the fourth quarter due
to the continued flattening of the yield curve and increased competition from
shorter term banking products.
Fixed annuity operating earnings before tax increased 50% to USD 529
million in 2005. This increase reflects a strong positive impact from the
total return annuity, fair value movements of certain financial assets, lower
amortization of deferred policy acquisition cost on the retail annuity block
and favorable mortality on payout annuities. This has been partially offset by
minor spread compression in the second and third quarters of this year and
lower account balances. In addition, the fourth quarter of 2004 included a
charge of USD 54 million related to reserve strengthening on a block of payout
annuities.
Product spreads on the largest segment of the fixed annuity book were 244
basis points for the fourth quarter on an IFRS pre-tax operating basis
compared to 233 basis points in the third quarter this year. Product spreads
in both the third and fourth quarters include 33 basis points from the impact
of valuation of certain financial assets carried at fair value.
Institutional guaranteed products
Institutional guaranteed product sales amounted to USD 10.7 billion in
2005, an increase of 13% compared to 2004. Higher sales were primarily in
traditional and municipal GIC products, in addition to the fourth quarter sale
of USD 588 million in medium term notes in conjunction with the launch of a
new sales platform in Ireland. The account balances of institutional
guaranteed spread products were USD 32.9 billion at December 31, 2005, up 6%
from year-end 2004.
Institutional guaranteed products operating earnings before tax of USD 349
million in 2005 decreased 23%. The decline was primarily due to the impact of
decreased product spreads resulting from the rise in short-term interest rates
in 2005.
Variable annuities
Variable annuity new deposits of USD 6.3 billion in 2005 increased 19%
compared to 2004. The strong year over year growth is notable in both the
retail and pension markets. The growth in the retail segment during the year
was 13%, much of which was attributable to the "5 for Life" product that was
introduced in the fourth quarter of 2004. Retail sales in the fourth quarter
of 2005 were lower than previous quarters of the year in anticipation of a new
product launch - "5 for Life with Growth" - in January of 2006. Sales in the
pension segment grew at 24%, largely due to strong production in the third and
fourth quarters. Variable annuity account balances increased 8% to USD 48.0
billion compared to the end of 2004.
Variable annuities operating earnings before tax of USD 162 million in
2005 decreased USD 58 million from 2004. This decline was primarily due to the
impact of the valuation of Canadian segregated funds with maturity guarantees,
as shown in the volatile items table on page 27. Partly offsetting the decline
were higher fees from growth in assets under management.
Fee - off balance sheet products
Off balance sheet products include managed assets such as mutual funds,
collective investment trusts and synthetic GICs. Off balance sheet production
of USD 18.4 billion was level with 2004. Synthetic GIC sales of USD 8.2
billion in 2005 increased 13% while mutual fund sales of USD 10.1 billion in
2005 decreased 9% from 2004. Off balance sheet assets increased 6% from year-
end 2004 and totaled USD 80.8 billion at the end of 2005.
Operating earnings before tax from fee - off balance sheet products of USD
67 million increased USD 68 million from 2004 due to higher fees from growth
in assets under management, lower expenses and a one-time positive item of USD
20 million during the second quarter.
Reinsurance
Reinsurance new life production of USD 259 million increased USD 82
million or 46% compared to 2004, reflecting continued strong sales in both the
domestic and international life markets.
Reinsurance operating earnings before tax were USD 131 million in 2005
compared to a loss of USD 109 million in 2004. Earnings in 2004 include the
effect of a change in methodology for computing incurred but not reported
claims and a new reserve system as well as an accelerated amortization of
Value of Business Acquired (VOBA). Excluding these items, operating earnings
increased USD 42 million primarily due to strong growth of the in force
business and more favorable mortality experience relative to adverse
experience in the second quarter of 2004.
Accident and health business
Accident and health premium revenue of USD 2,456 million was slightly
higher in 2005 due to increased sales through sponsored programs along with
premium rate increases on certain health products. The discontinuance of new
sales of long-term care policies announced in mid 2004 has reduced the growth
in premiums.
Accident and health operating earnings before tax of USD 345 million
decreased USD 16 million over 2004. The decrease is primarily related to lower
earnings in the fourth quarter of 2005 reflecting slightly higher claims on
certain closed blocks of business and increased expenses related to
international development and expansion.
Commissions and expenses
Commissions and operating expenses of USD 4,063 million decreased 6% in
2005. Operating expenses of USD 1,768 million were almost the same as 2004.
Expense increases due to higher compliance and regulatory costs, along with
higher costs due to international expansion and development, were offset by
expense reductions from operating efficiencies and certain one time favorable
items.
Impact of volatile items in the Americas
Operating earnings before tax on an IFRS basis are generally expected to
be more volatile than income before realized gains and losses on shares and
real estate as reported on the previous Dutch accounting principles (DAP)
basis for the Americas. In particular, there are three items that are expected
to create significant volatility due to the fair value nature of the
underlying valuation. In aggregate, these items contributed pre-tax operating
earnings of USD 316 million during 2005 compared to USD 255 million in 2004.
These items are as follows:
Asset valuation - Certain financial assets that are managed on a total
return basis, such as hedge funds, convertible bonds, and certain limited
partnerships, are carried at fair value with no offsetting changes in the fair
value of liabilities. As of December 31, 2005, these assets totaled USD 3.2
billion or just over 2% of the general account portfolio in the Americas. The
market valuation of these assets contributed net USD 269 million to operating
earnings before tax in 2005, compared to USD 241 million last year. The impact
of this is notable in the traditional life, fixed annuity and institutional
guaranteed products lines of business.
Total return annuity - This annuity product provides customers with a
pass-through of the total return on an underlying portfolio of investment
securities (typically a mix of corporate and convertible bonds) subject to a
cumulative minimum guarantee. Both the assets and liabilities are carried at
fair value. However, due to the minimum guarantee, not all of the asset market
value changes will be offset in the liability valuation. This product exists
in both the fixed annuity and reinsurance lines of business and in both cases
represents closed blocks. Product balances as of December 31, 2005 were USD
2.2 billion in fixed annuities and USD 0.6 billion in reinsurance. This item
contributed a positive USD 35 million in 2005 compared to a negative USD 46
million in 2004.
Segregated funds maturity guarantees - Segregated funds sold in Canada and
reported in the variable annuity line of business contain ten-year maturity
guarantees that are carried at fair value using market-based risk neutral
scenario techniques. The operating earnings impact from these guarantees is
generally positive for higher equity market returns and higher interest rates,
and conversely negative for lower equity market returns and lower interest
rates. As of December 31, 2005 segregated fund balances with maturity
guarantees totaled USD 4.3 billion (CAD 5.0 billion). This product contributed
USD 12 million to operating earnings before tax in 2005, compared to USD 60
million in 2004. The lower earnings in 2005 are due to the decrease in the
risk free interest rate during the year, in addition to changes made in best
estimate assumptions for these products during the second and third quarters.
Please refer to page 27 for an overview of the effects of the above-
mentioned volatile items on operating earnings by product line.
The Netherlands
amounts in millions
EUR EUR
Fourth quarter Full year
2005 2004 % 2005 2004 %
Income by product segment
80 26 N.M. Traditional life 270 40 N.M.
(3) 19 N.M. Life for account of policyholders (53) 45 N.M.
(4) 0 N.M. Fee - off balance sheet products 15 26 (42)
12 10 20 Accident and health insurance 45 27 67
6 4 50 General insurance 30 34 (12)
11 10 10 Banking activities 15 24 (38)
102 69 48 Operating earnings before tax 322 196 64
114 416 (73) Gains/(losses) on investments 985 907 9
10 (14) N.M. Impairment charges (25) (19)(32)
3 1 N.M. Share in profit/(loss) of associates 4 13 (69)
229 472 (51) Income before tax 1,286 1,097 17
(22) (28) (21) Income tax (272) (177) 54
207 444 (53) Net income 1,014 920 10
Revenues
115 293 (61) Life general account single premiums 419 678 (38)
64 61 5 Life general account recurring premiums 474 488 (3)
97 48 102 Life policyholders account single 634 325 95
premiums
299 287 4 Life policyholders account recurring 1,494 1,491 0
premiums
575 689 (17) Total life insurance gross premiums 3,021 2,982 1
26 29 (10) Accident and health insurance 191 188 2
90 92 (2) General insurance 443 445 (0)
691 810 (15) Total gross premiums 3,655 3,615 1
614 559 10 Investment income 2,184 2,021 8
81 46 76 Fee and commission income 325 297 9
1,386 1,415 (2) Total revenues 6,164 5,933 4
6 (80) N.M. Income from reinsurance ceded 0 (62) N.M.
145 14 N.M. Fair value and foreign exchange gains 303 6 N.M.
327 388 (16) Total gains on investments 2,736 956 186
1,864 1,737 7 Total income 9,203 6,833 35
225 202 11 Commissions and expenses 1,091 1,021 7
Standardized new premium production
insurance
280 395 (29) Life single premiums 1,079 1,037 4
34 32 6 Life recurring premiums annualized 123 122 1
62 72 (14) Life total recurring plus 1/10 single 231 226 2
10 16 (38) Non-life premiums 48 64 (25)
Gross deposits
939 568 65 Saving deposits 3,478 2,881 21
939 568 65 Total production on balance sheet 3,478 2,881 21
Off balance sheet production
149 178 (16) Mutual funds and other managed assets 864 789 10
149 178 (16) Total production off balance sheet 864 789 10
AEGON The Netherlands
- New life sales increased 2% to EUR 231 million in 2005.
- Operating earnings before tax increased 64% to EUR 322 million.
- Operating expenses, including provisions, increased 27% compared to
2004 to EUR 752 million, and increased 4% on an underlying basis.
- Total revenue generating investments amounted to EUR 62.7 billion at
December 31, 2005, an increase of 8% compared to year-end 2004 levels.
Results
Operating earnings before tax totaled EUR 322 million in 2005, an increase
of 64%. The increase in operating earnings in the Netherlands is largely due
to improved interest results and released provisions for profit-sharing and
employee benefits, as well as increased technical life and non life results,
lower amortization of deferred policy acquisition cost (DPAC), partially
offset by additional provisions for guarantees and improvements to "Spaarkas"
life products.
In 2005, EUR 71 million of profit-sharing and employee benefits provisions
were released, while 2004 included a charge of EUR 50 million for profit-
sharing. Total additional provisions for account of policyholder guarantees
amounted to EUR 163 million in 2005, of which EUR 84 million was recorded in
the fourth quarter. Improvements to "Spaarkas" products resulted in a charge
of EUR 42 million, primarily incurred in the first quarter. In 2004,
accelerated DPAC amortization amounted to EUR 42 million. Interest results in
2005 included EUR 33 million related to a mortgage securitization program and
EUR 26 million higher interest on derivatives.
Operating earnings include volatile items, which are explained in more
detail on page 14. These items contributed EUR 62 million to operating
earnings in 2005 compared to EUR 12 million in 2004. Operating earnings before
tax in the fourth quarter of 2005 amounted to EUR 102 million compared to EUR
69 million in the same period last year.
Net income, which includes net gains/losses on investments and impairment
charges, increased 10% to EUR 1,014 million. Net gains/losses on investments
(before tax) amounted to EUR 985 million compared to EUR 907 million in 2004.
The gains on investments (before tax) include an amount of EUR 307 million
from the increase in market value of derivatives. Net income for the fourth
quarter decreased 53% to EUR 207 million as lower net gains/losses on
investments more than offset higher operating earnings.
Traditional life / Life for account of policyholders
New life sales increased 2% to EUR 231 million. This mainly reflects an
increase in the group pensions business, with the closing of a number of large
single premium institutional pension contracts. The growth in pension business
was partly offset by lower sales in individual life.
Operating earnings before tax for traditional life amounted to EUR 270
million, compared to EUR 40 million in the same period in 2004. The increase
mainly reflects higher investment income and provision releases.
Operating earnings before tax from life for account of policyholders
amounted to a loss of EUR 53 million, compared to a profit of EUR 45 million
in 2004. This was largely due to the additional provisions for guarantees and
"Spaarkas" life products.
Fee - off balance sheet products
Off balance sheet product sales increased 10% to EUR 864 million,
reflecting growth in asset-only group pension contracts and good performance
at TKP Pensions.
Operating earnings before tax from fee business amounted to EUR 15
million, compared to EUR 26 million in 2004. Performance of TKP Pensions and
AEGON Asset Management improved. Operating earnings from Meeus were lower as
significant investments were made in improving the quality of the organization
and generating growth.
Non-life insurance
Accident and health premiums increased 2% to EUR 191 million, reflecting
growth of the portfolio following the privatization in 2004 of the sick leave
and disability-for-self-employed markets. In 2005, AEGON successfully
developed new disability products for the group employee benefits market to
address the changing needs as a result of the new disability system in the
Netherlands as outlined in the WIA law. To date, AEGON has signed WIA
contracts with 2,250 employers. Accident and health operating earnings before
tax were EUR 45 million compared to EUR 27 million in 2004. The results
benefited from substantially better-than-expected claims experience on
disability and sick leave coverage products.
General insurance premiums remained stable at EUR 443 million. General
insurance operating earnings before tax decreased 12% to EUR 30 million,
mainly due to additional provisioning for personal liability insurance.
Banking activities
In 2005, AEGON successfully developed an offering in the new "Levensloop"
(or "Lifecycle") market. Building on AEGONs strong position in the group
market, the Lifecycle arrangement has proved successful as a worksite
marketing opportunity. The initial number of accounts is encouraging and the
average savings amounts of participating employees are above expectations. To
date, AEGON has signed "Levensloop" agreements with 775 employers and industry
organizations. These represent some 500,000 employees.
Operating earnings before tax from banking activities amounted to EUR 15
million, compared to EUR 24 million in 2004. The decrease reflects lower
interest spreads, a decline in the lease portfolio due to expiration and a
decline in savings account balances following the release of company savings
accounts.
Commissions and expenses
Commissions and expenses increased 7% to EUR 1,091 million in 2005.
Operating expenses amounted to EUR 752 million, 27% higher than in 2004. This
is primarily due to additions to provisions taken in the first half of this
year for "Spaarkas" life products and other one-time effects. Excluding these
effects, operating expenses were up by approximately 4%, as a result of the
implementation of programs to enhance service levels of the organization.
Impact of volatile items in the Netherlands
Operating earnings before tax on an IFRS basis are generally expected to
be more volatile than income before realized gains and losses on shares and
real estate as reported on the previous DAP basis for the Netherlands. In
particular, there are two items that are expected to create significant short-
term volatility due to the fair value nature of the underlying valuation. In
aggregate, these items contributed EUR 62 million to operating earnings in
2005, compared to EUR 12 million in 2004. These items are as follows:
Asset valuation - Certain financial assets, such as an investment in a
private equity fund, are carried at fair value with no offsetting changes in
the value of liabilities. As of December 31, 2005, these assets totaled EUR
225 million. This item contributed EUR 67 million to operating earnings before
tax in 2005, compared to EUR 28 million in 2004.
Derivatives used in portfolio allocation - AEGON The Netherlands uses
derivatives to manage the asset allocation of its investment portfolio. These
derivatives are carried at fair value with no offsetting changes in the value
of liabilities. The valuation of these derivatives contributed a negative EUR
5 million to operating earnings before tax in 2005, compared to a negative
contribution of EUR 16 million in 2004.
Please refer to page 27 for an overview of the effects of the above-
mentioned volatile items on operating earnings by product line.
United Kingdom
amounts in millions
GBP GBP EUR
Fourth quarter Full year Full year
2005 2004 % 2005 2004 % 2005 2004 %
Income by product segment
(1) (5) 80 Traditional life (1) (8) 88 (1) (12) 92
42 38 11 Life for account of 139 114 22 203 168 21
policyholders
(11) 0 N.M. Fee - off balance (27) 3 N.M. (40) 5 N.M.
sheet products (1)
30 33 (9) Operating earnings 111 109 2 162 161 1
before tax
3 5 (40) Gains/(losses) on 6 3 100 9 4 125
(1) (2) 50 Impairment charges (2) (2) 0 (3) (3) 0
investments
18 13 38 Other non-operating 71 40 78 104 58 79
income/(charges) (2)
50 49 2 Income before tax 186 150 24 272 220 24
(18) (13) 38 Income tax (71) (40) 78 (104) (58) 79
attributable to
policyholder return
32 36 (11) Income before income 115 110 5 168 162 4
tax on shareholders
return
2 (12)N.M. Income tax on (17) (28) (39) (24) (41) (41)
shareholders return
34 24 42 Net income 98 82 20 144 121 19
Revenues
146 45 N.M. Life general account 388 177 119 567 260 118
single premiums
36 38 (5) Life general account 172 146 18 252 215 17
recurring premiums
533 485 10 Life policyholders 1,756 1,852 (5) 2,569 2,727 (6)
account single premiums
293 286 2 Life policyholders 1,206 1,128 7 1,764 1,662 6
account recurring
premiums
1,008 854 18 Total gross premiums 3,522 3,303 7 5,152 4,864 6
336 349 (4) Investment income 1,480 1,465 1 2,165 2,157 0
42 34 24 Fee and commission 153 120 28 223 177 26
income
1,386 1,237 12 Total revenues 5,155 4,888 5 7,540 7,198 5
34 (7)N.M. Income from 190 131 45 278 193 44
reinsurance ceded
4 0 N.M. Fair value and 9 1 N.M. 13 2 N.M.
foreign exchange gains
1,476 1,322 12 Total gains on 4,434 1,604 176 6,485 2,363 174
investments
2,900 2,552 14 Total income 9,788 6,624 48 14,316 9,756 47
156 120 30 Commissions and 518 433 20 757 638 19
expenses
Standardized new premium production
insurance (3)
1,010 822 23 Life single premiums 3,185 2,844 12 4,658 4,188 11
95 87 9 Life recurring 368 378 (3) 538 557 (3)
premiums annualized
196 169 16 Life total recurring 687 662 4 1,004 976 3
plus 1/10 single
Off balance sheet production
85 60 42 Mutual funds and 1,032 143 N.M. 1,509 210 N.M.
other managed assets
85 60 42 Total production off 1,032 143 N.M. 1,509 210 N.M.
balance sheet
(1) Includes a GBP 33 million charge in 2005 for incentive pay related to
Positive Solutions (GBP 10 million in 2005 fourth quarter).
(2) Other non-operating income/(charges) is currently used to report
charges made to policyholders in respect of income tax. There is an
equal and opposite tax charge which is reported in the line Income tax
attributable to policyholder return.
(3) Includes production on investment contracts without a discretionary
participation feature of which the proceeds are not recognized as
revenues but are directly added to our investment contract
liabilities.
AEGON UK
- New life sales increased 4% to GBP 687 million, as AEGON UK records its
highest sales performance ever in the fourth quarter of 2005 at GBP 196
million, an increase of 16% compared to the fourth quarter in 2004.
- Operating earnings before tax increased 2% to GBP 111 million or 32%
when excluding the effect of an incentive plan charge related to the
accelerated acquisition of the remaining 40% of Positive Solutions.
- Operating expenses increased by less than 1% to GBP 346 million.
- Total revenue generating investments increased 18% to GBP 45.0 billion
compared to year-end 2004 levels.
Results
Operating earnings before tax amounted to GBP 111 million compared to GBP
109 million in 2004. The increase mainly reflects the positive effect of
higher equity and bond markets, largely offset by a GBP 33 million charge for
the incentive plan for registered individuals and staff related to the
accelerated acquisition of the remaining 40% of Positive Solutions. Excluding
the effect of the incentive plan charge, operating earnings before tax
increased 32%. Net income, which includes net gains/losses on investments and
impairment charges, increased 20% to GBP 98 million. The effective tax rate
decreased from 25% in 2004 to 15% in 2005, largely due to non-recurring tax
charges in 2004 and the mix of profits in 2005 by line of business.
Operating earnings before tax in the fourth quarter amounted to GBP 30
million, a decline of 9% compared to the fourth quarter of 2004. The decline
reflects the part of the charge related to the Positive Solutions incentive
plan that was booked in the fourth quarter (GBP 10 million). A further charge
of GBP 7 million is expected in the first quarter of 2006. Excluding the
effect of the incentive plan charge, operating earnings before tax increased
21% in the fourth quarter. Net income for the fourth quarter period amounted
to GBP 34 million, an increase of 42% compared to the same period in 2004.
Taxes amounted to a credit of GBP 2 million in the fourth quarter, reflecting
a release of tax provisions built up in the first nine months of the year.
Traditional life/Life for account of policyholders
New life sales in 2005 increased 4%, despite lower sales in the first
quarter, as a result of certain pricing and commission changes in the core
pensions markets. New life sales in the fourth quarter amounted to GBP 196
million, an increase of 16% over the same quarter last year, marking AEGON
UKs best ever sales performance. Throughout the year, AEGON UK was successful
in further diversifying its business. Higher margin non-pension products, such
as annuities, bonds and protection products accounted for nearly one third of
new business sales in 2005.
Operating earnings before tax for traditional life amounted to a loss of
GBP 1 million compared to a loss of GBP 8 million in 2004. The improvement
primarily reflects a restructuring charge of GBP 10 million taken in 2004.
Operating earnings before tax from life for account of policyholders was GBP
139 million, a 22% increase compared to 2004. This increase mainly reflects
the impact of the higher equity and bond markets on fund related charges.
Fee - off balance sheet products
In asset management, both the institutional and retail business performed
well, largely attributable to the continued equity market improvement which
encouraged investors into the market as well as to the continued strong
performance of AEGON UK Asset Managements fixed income team. Total off
balance sheet production amounted to GBP 1,032 million compared to GBP 143
million in 2004.
In the owned distribution businesses, Positive Solutions continued to
perform well. The number of registered individuals (RIs) reached over 1,300 at
the end of 2005, an increase of over 300 RIs, while average productivity
increased markedly over the year.
Operating earnings before tax from the fee business segment amounted to a
negative GBP 27 million, compared to a positive contribution of GBP 3 million
in 2004. The lower result was due to the charge of GBP 33 million for the
incentive plan related to Positive Solutions.
Commissions and expenses
Commissions and expenses rose 20% to GBP 518 million including the GBP 33
million incentive cost related to Positive Solutions and growth in the
distribution businesses, leading to an increase of GBP 38 million in paid-out
commissions. Operating expenses increased by less than 1% to GBP 346 million.
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