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AEGON USA showed its staying power and solid foundation in the face of the most serious market correction in several decades. 2002 was a year when asset related issues adversely affected earnings for AEGON USA as well as the entire US insurance industry. Higher credit losses, low interest rates, combined with lower fee income, seriously influenced financial performance. In the context of these developments, adhering to a disciplined long-term strategy that emphasizes diversification, excellent client and customer support, expense management and prudent risk management are of great importance.
FINANCIAL RESULTS
Net income totaled USD 916 million compared to USD 1,428 million for 2001. Depressed equity and credit markets led to additions to asset default provisions (USD 774 million), higher DPAC amortization (USD 407 million in the USA and CAD 31 million in Canada) and an increase in guaranteed minimum benefits provisions (USD 203 million in the USA and CAD 88 million in Canada). The acquired J.C. Penney direct marketing insurance operations had a positive impact of USD 89 million on pre-tax earnings while 2001 results included the gain of USD 307 million on the sale of divested operations in Mexico as well as USD 73 million of earnings from these operations.
Total revenues were 1% higher. Although new business production contributed to the significant increase in general account assets, investment income was 1% lower as a result of lower yields. Commissions and expenses increased 16% due to higher production levels, the higher DPAC amortization and acquired businesses. When adjusted for acquired businesses, operating expenses for the US operations decreased by 4% from the prior year through the ongoing realization of administrative and marketing efficiencies. The organizational restructuring within the Agency Group and the creation of AEGON Financial Partners as an internal service provider have contributed to the cost reduction.
ABOUT OUR BUSINESS
Despite the difficulties, 2002 was a year of achievements. The diversity of products and expanded multiple distribution channels helped AEGON USA attain solid sales results in 2002. Revenues increased 1% to USD 16.4 billion, while annuity and institutional spread-based deposits reached USD 26.9 billion. Operating efficiency and client support was improved through internal partnering. AEGON USA’s accomplishments also include the development of offerings that kept pace with evolving customer preferences, outstanding customer service, increased cross-selling initiatives and the strengthening of key distribution channel relationships.
AEGON USA attracted new distribution relationships while expanding its business with existing distributors. This was particularly true with banks, wirehouses and independent producers, which generated double-digit sales growth for annuities and traditional life products. While distributors look to AEGON USA for high-quality products, it is the responsiveness and service that AEGON USA provides to sales partners that offer a clear competitive advantage. Tailored product design, on-line producer support, combined with highly-trained wholesale and service teams and consistent and expedient underwriting and policy issue, are clearly valued by AEGON USA’s partners.
During the year, the Agency Group offered key distributors the benefit of expanded scale and resources. The administration, technology and service functions of four distribution groups were combined to form a new internal service operation known as AEGON Financial Partners (AFP). However, sales and marketing support for each of the distribution groups supported by AFP – Transamerica Insurance & Investment Group, InterSecurities, World Financial Group and Life Investors Agency Group – remained separate and entrepreneurial under the current decentralized structure.
By leveraging economies of scale across the larger organization, primarily with the AFP realignment, AEGON USA improved capacity and lowered expenses.
The company’s commitment to advancing service and improving efficiency is also evidenced by its investment in technology. During 2002, AEGON USA moved closer to becoming a one-stop customer service center through the ongoing development of the Enterprise Client System. This is part of AEGON USA’s evolving strategy to give customers convenient access to their accounts by calling a single service center or logging on to a single website.
Investment Management’s objective of maximizing long-term earnings while managing to appropriate levels of risk proved challenging in 2002, as market-wide corporate bond defaults escalated to unprecedented levels. Proactive efforts to reduce credit limits and tighten controls were put in place early in the year in anticipation of a difficult credit environment. Despite these efforts, elevated losses were experienced and USD 774 million was added to the default provision. At year-end less than 1.0% of total assets were non-performing assets, while bonds in default constituted less than 1.0% of the total bond portfolio. Invested asset balances general account increased USD 12.1 billion to USD 109.0 billion. Bonds comprise the majority of invested assets at USD 90.1 billion and AEGON USA slightly improved their average credit quality during the year. Commercial mortgage loans, alternative investments and equities contributed the balance of the portfolio. The total return of the portfolio over one and three year horizons has been 6.1% and 6.9% per annum, respectively.
ANNUITIES
Fixed annuity earnings experienced the largest impacts from the weakened and volatile financial markets. Spread compression and bond defaults were the primary drivers for the decrease with 49%. Deposits increased to USD 7.2 billion in 2002, outpacing the previous year’s performance by 6%. In 2002, Transamerica Financial Institutions, Inc. (TFI) maintained its leadership role in the bank channel by strengthening the relationships with its major partners. Due in large part to TFI’s contributions, fixed annuity balances grew to USD 42.0 billion for the year.
Variable annuity deposits were USD 9.9 billion, an increase of 67% over 2001. Over two-thirds of this was driven by Transamerica Capital, Inc., which worked successfully to develop preferred relationships with major wirehouses and regional broker-dealer firms and secure prime shelf space for AEGON USA’s variable annuity products. Outstanding wholesale efforts, quality products and leveraging the Transamerica brand spurred much of this growth. The weak equity markets reduced fee income and contributed to increased guaranteed minimum benefit provisions, resulting in a decline in variable annuity earnings.
LIFE INSURANCE
Traditional life insurance income before tax increased 3% to USD 813 million for 2002, more than offsetting slower growth in variable life products. Transamerica Insurance & Investment Group had an especially strong year, benefiting from a well-positioned product portfolio and solid production from an agency distribution system that includes more than 400 general agencies and 40,000 independent producers. Monumental Life produced relatively stable earnings in a volatile market and further improvements in its service and efficiency were realized through technology enhancements. Life Investors Agency Group focused on expanding its presence in the independent producer market while Transamerica Worksite Marketing positioned itself operationally for an expected increase in sales volume. At Transamerica Reinsurance, partners with the greatest value potential were targeted through establishing new relationships and increasing share in key existing accounts.
GUARANTEED INVESTMENT CONTRACTS AND FUNDING AGREEMENTS
AEGON Institutional Markets Division (IMD) achieved good results in 2002. Earnings on the institutional spread business totaled USD 257 million for 2002, a 33% gain over 2001. Sales of stable value products, primarily to retirement plans, were robust as investors continued to diversify away from volatile equity markets. In the funding agreement markets, medium term note programs grew substantially to USD 7.8 billion, with growth coming primarily from US fixed-income investors. Consistent with AEGON USA’s plan, the municipal reinvestment business remained steady. Funding agreement sales to money market funds slowed due to continued discipline in marketing conservatively designed products.
MUTUAL FUNDS, COLLECTIVE TRUSTS & SYNTHETIC GICS
Our off balance sheet production had positive results for the year despite the weak market conditions. Deposits in synthetic GICs, in which IMD is the market leader, approached USD 12.2 billion. In 2002, IMD continued to expand this market platform. Our two principal pension providers, Diversified Investment Advisors, which focuses on the mid-to-large plan market, and Transamerica Retirement Services, which specializes in the smaller employer market, built on their solid foundations during a difficult year and increased assets.
At the same time, Transamerica Retirement Services asserted its leadership in the small business retirement plan market through a revitalized product line and by expanding relationships with strategic alliances, third-party administrators and broker-dealers.
2002 was also a positive year for Transamerica Investment Management, which increased assets under management to USD 2.8 billion despite the further deterioration of the equity markets. Increased emphasis on marketing existing products and diversifying into other sources of money management such as managed separate accounts paved the way for this growth.
SUPPLEMENTAL HEALTH
Health revenues, primarily supplemental and accidental death and dismemberment, increased 18% in USD in 2002, due largely to the full year inclusion of J.C. Penney’s direct marketing insurance services. AEGON Direct Marketing Services (ADMS) focused on driving growth in its two key channels – Direct (to consumer) and Sponsored (through affinity partners) – capitalizing on the successful integration of the J.C. Penney direct marketing services acquisition. ADMS achieved growth in its membership products, the affinity market, and international markets, which now includes the United Kingdom, Australia, Japan and South Korea. ADMS generated over USD 2.4 billion in revenues in 2002 from its worldwide operations.
AEGON CANADA
Similarly in Canada the decline in equity markets negatively impacted earnings. Unit-linked sales slowed sharply as consumers sought more traditional products. Segregrated fund redemptions increased in the last half of the year, mitigated somewhat by encouraging client transfers to the newer Transamerica investment portfolio for segregated funds. 2002 heralded a stronger expense reduction focus, starting with minimizing operational costs and prioritizing resources on distribution critical functions. The new organizational structure, consisting of five operating subsidiaries created a wider framework for the fulfillment of AEGON Canada’s vision to provide multiple financial services offering to customers.
TRANSAMERICA FINANCE CORPORATION
Transamerica Finance Corporation, with its focus on commercial finance, container leasing, equipment leasing and real estate information services, remains a non-core operation for AEGON USA. Nonetheless, it was a solid contributor in 2002, driven primarily by lower operating expenses across all business segments and improved credit quality within the Commercial Lending and Technology Finance units. Yet, earnings decreased in 2002 to USD 48 million. However, the Real Estate Information Services segment showed strong revenue growth resulting from increased refinancing activity.
BUSINESS OBJECTIVES
For 2003, AEGON Americas will pursue growth in our core business at an acceptable risk profile. In addition, the various cost saving initiatives will be vigorously pursued. Broadening and growing distribution relationships will accelerate as enhanced technology capabilities and management emphasis will bring more of AEGON USA’s product offerings to each distribution channel.
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