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The historic correction experienced by financial markets made 2002 an unprecedented year for the insurance industry. Credit defaults, record low interest rates and a third consecutive year of falling stock prices worldwide contributed to a 35% decline in net income in 2002, which is in line with the guidance we issued in July and November of 2002. Earnings per share were 39% lower, the first decline in almost two decades.
However, earnings excluding all exceptional items in 2002 and 2001 were up marginally, with the US operations leading the way. We had a relatively good year for new production, with production up in many of our key product lines driven by our strong distribution capabilities. At the same time, we are addressing the issues financial markets are posing to us. We maintained the capital adequacy of the company at a high level and have approximately double the EU minimum required solvency. We are managing our balance sheet in a responsible way, for instance by increasing the average credit quality of our bond portfolio. And our operating units are committed to lowering their costs. Despite good new production in the US, operating costs were lower, and in the UK we are on track to cut operating costs 15% by year-end 2003.
Achievements in 2002
In the course of the year, AEGON successfully completed a number of strategic transactions, including the capital realignment with Vereniging AEGON in September. As a result AEGON raised EUR 2.1 billion of additional equity capital and Vereniging AEGON gave up its majority voting power and now holds about 33% of the voting rights in AEGON. AEGON also established an alliance with La Mondiale, a leading French provider of life insurance and pensions sold through banks and financial institutions.
By taking a 20% interest in La Mondiale’s non-mutual activities, AEGON further signaled its commitment to the European private pension sector, a market we believe is set for rapid growth. Coupled with our leading role as a pension provider in the Netherlands and the United Kingdom, the alliance reinforces AEGON’s position as one of the EU’s premier pension specialists.
In the United States, AEGON’s largest market, our new life production grew 6% in 2002 from a broader distribution base, while we reduced operating costs by 4%. A major contributor to this structural improvement is the increased use of partnering as a means of expanding distribution and controlling costs. Our units are increasingly working together to improve efficiency through common processes, shared services, standardization or centralized ICT.
Broadening the commitment to its key distribution channel, AEGON UK has begun to invest directly in selected independent financial advisory firms, taking a controlling interest in several such agencies during 2002. The UK Stakeholder Pension initiatives and other regulatory developments are creating new business opportunities but are also putting pressure on margins; by extending its distribution expertise AEGON UK is preparing itself to respond effectively to these changes. Similarly, AEGON The Netherlands and AEGON Canada took a number of steps to strengthen relations with brokers and agents in their respective markets, through either expanded support services, financing or ownership. These moves illustrate the high importance we place on supporting our traditional distribution partners.
In Asia, our Taiwan company posted revenues of over EUR 168 million (USD 159 million) and achieved just over break-even. In China we took an important step forward with the signing of a joint venture agreement with China National Offshore Oil Corporation and the appointment of a CEO and a management team.
Group-wide approach to risk
In the light of the recent highly volatile market environment, we have extensively re-examined our product portfolio and pricing strategies in terms of risk and reward. Today, financial turmoil underscores the need for products that give constant good value. Accordingly, we are modifying or eliminating the features of some products and scaling back exposures where required returns are not currently feasible at acceptable levels of risk. Similarly, following the corporate defaults of 2001 and 2002 we have reviewed and where appropriate redeployed our investment portfolio to reduce exposure to certain issuers and sectors. While we cannot immunize ourselves against defaults in the market, we are satisfied that the structure and performance of our bond portfolio compare well with our industry peers.
Once more, in 2002 the value of communication and transparency was confirmed. We recognized this and understand the need for straight talk and clear actions. Particular areas of communication force include providing more information on variable annuity policy acquisition costs, enhanced disclosure and coming changes in accounting rules. These issues are discussed in a special section. In addition, a corporate responsibility program was launched under the direct supervision of the Executive Board and we are taking steps to codify and communicate what has always been our commitment to good corporate citizenship.
Demographic developments in our markets continue to bode well for AEGON; we expect the growth in pensions, savings and life insurance to exceed nominal GDP growth for many years to come, while the ‘pension gap’, or shortfall between present savings and future needs, has only been intensified by the economic downturn. Though partly masked by market turmoil, we believe the underlying dynamism of our business remains.
During the long bull market of the 1990s, the appreciation of financial assets helped AEGON to deliver high growth rates. The reversion to lower asset growth rates has had a profound impact. Nevertheless, we believe that by focusing on our core business, AEGON is strongly positioned to serve our growing markets. The theme of this year’s report – staying power – reflects that confidence.
On behalf of the Executive Board,
Donald J. Shepard, Chairman
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