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As a leading provider of group and individual pensions and life products through independent financial advisors (IFAs) and a major asset manager, AEGON UK showed resilience in the face of uncertain equity markets and ongoing regulatory changes by focusing on its cost base and taking steps to capture greater benefits along the distribution chain.
FINANCIAL RESULTS
Net income was GBP 112 million compared to GBP 165 million for 2001. Net income is lower as a direct result of weak equity markets leading to lower management and fund related fees as well as the setting up of provisions to meet costs associated with the expense reduction program.
Standardized new life production was GBP 588 million, 8% lower than 2001 (GBP 638 million). Off balance sheet production increased to GBP 437 million, a 59% gain over 2001.
Total revenues increased 3%. Investment income increased GBP 30 million reflecting higher general account assets and capital. Commissions and expenses increased to GBP 314 million, up GBP 93 million due to setting up provisions for restructuring costs, inclusion of operating costs of the acquired distribution companies, additional costs associated with the completion of a major ICT systems project and the growth in our protection businesses.
ABOUT OUR BUSINESS
Although AEGON UK’s new premium income fell in 2002, three business sectors delivered significant growth with institutional asset management mandates up 66%, individual protection up 57% and UK offshore investment sales up 44%. However, stock market weakness led to some corporate and private clients deferring decisions to set up pension or investment arrangements helping to decrease the core pension business (down by 10%).
Regulatory change contributed to the ongoing development of the UK market. The Financial Services Authority provided greater freedom to intermediaries by allowing ownership of important distributors by life insurance companies. The Sandler review added impetus to the concept of simple, low risk products and a transparent approach to the ‘With Profits’ concept.
AEGON UK is implementing strategies to take full advantage of the opportunities created to strengthen relationships with intermediaries – including ownership of distributors – to offer ‘second tier’ selling in the workplace and to improve the profitability of its core life and pensions business by greater integration of technology and simpler administration models. Greater focus on distribution and manufacturing capability is expected to generate profitable growth in the UK business.
AEGON UK made important strides with its policy of building and buying distribution capability in the intermediary sector where IFAs are the primary channel. During the year AEGON UK made four IFA acquisitions, giving access to over 700 registered financial sales consultants: Advisory & Brokerage Services, Momentum Financial Services, Positive Solutions (Financial Services) and Wentworth Rose Ltd.
In addition, AEGON UK made minority investments in a number of other distributors with access to over 3,500 sales consultants, giving AEGON UK a strong presence in the UK financial services distribution.
Other acquisitions and investments are being considered in order to capture greater distribution margins and ultimately establish a strong position with the leading IFA organizations covering the UK market.
By extending the number of investment management partnerships external to the group, AEGON UK’s core pensions business achieved a leading position in this important area of the markets for corporate pensions and high net worth individuals.
In addition, AEGON UK launched a replacement for the traditional ‘With Profits’ product that levels investment returns without including guarantees – a product that will permit more efficient management of AEGON UK’s capital base. This investment offering is consistent with the direction recommended by the Sandler review of the UK retail savings industry. The launch of critical illness cover and income protection products in the individual protection market further strengthened AEGON UK’s product offerings.
In the asset management sector, new products were created for the increasingly important fixed income market, where AEGON Asset Management UK retained in 2002 the title of ‘Fixed Income Manager of the Year’ for institutional pension business.
Cost management continued to be a key priority with the identification of considerable annual savings. AEGON UK is on track to cut costs by 15% at year-end 2003. A significant proportion of these cost savings result from investment in information technology made over the last three years, which are expected to improve profitability. Another part will come from the planned reduction of 600 jobs in the work force across the UK operations.
A significant development was the extension of AEGON UK’s offshore business to Dublin’s International Financial Services Centre, a move that is expected to permit increased product flexibility and which contributed to the sales in 2002.
BUSINESS OBJECTIVES
AEGON UK remains confident that the market for savings, pensions and insurance has significant growth potential and is strongly positioned to benefit from expected consolidation as weaker life companies withdraw from active market participation. AEGON UK will focus on delivery of cost savings in 2003, while continuing to invest in delivering excellence to its target markets of corporate pensions, employee benefit packages, pre- and post-retirement investment and insurance business.
Finally, management and process improvements in AEGON UK’s investment management are expected to deliver strong future performance in the equity and managed fund arena and to sustain growth in the institutional marketplace.
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