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DON SHEPARD
CHAIRMAN OF THE
EXECUTIVE BOARD
Making money in a low interest rate environment
Low interest rates affect our earnings and are a factor for everyone
in our
industry. Declining interest rates have an effect on our general account
fixed
income investments, which includes the assets supporting traditional
life
products. It is important to point out however, that portions of AEGON's
business are in fact not dependent on interest rates. For example,
earnings on
traditional life products, the largest part of our business are, to
a certain
extent, derived from mortality experience. In addition, our product
offering is
very broad and includes a wide range of products that is less sensitive
to
interest rates. We are also well-positioned to meet customer preferences
for
equity-related products in this low interest rate environment.
There are, of course, management actions that can be taken to reduce
the
effects of lower interest rates. In the United States,we have taken
a number of steps to mitigate the effects of the current low interest
environment on our fixed annuity products. Examples include lowering
crediting rates to existing policyholders, adjusting commission structures,
re-filing with most states to
lower the interest guarantee on new products, and eliminating commissions
on fixed annuities in states where re-filing was not possible.
Expense management is also important. I believe AEGON is one of the
most cost efficient insurance companies in the world, which is even
more beneficial in this climate. The current reorganizations in the
United Kingdom and the Netherlands, as well as cost reduction initiatives
in the United States, are all part of this drive to increase efficiency. We
are concentrating our efforts on directing resources to areas that
will provide maximum return.
The potential for growth in AEGON's
mature markets
The key to achieving growth is distribution. For this reason we have
continued the development of our distribution channels through banks
in the United States and Spain, as well as brokers in the Netherlands
and independent financial advisors in the United Kingdom. Distribution
is, and will continue to be, a fundamental aspect of AEGON’s
strategy.
Another important aspect is scale, which AEGON has achieved. We have
leadership positions in each of our chosen markets and we plan to
strengthen our presence in these markets over the coming years. However,
increasing market share does not come through distribution and scale
alone. Fulfilling our customers’ needs in terms of the quality
and range of products is essential. Our customers increasingly have
multiple insurance needs and we have to ensure that we are able to
meet their demands. The ability to deliver this is what distinguishes
AEGON from the competition.
What do the recent corporate governance
developments mean for AEGON's shareholders?
AEGON's Articles of Incorporation were amended in May of 2003,
following approval by our shareholders. The change increased the authority
of AEGON's common shareholders and aligned the voting rights
of Vereniging AEGON (Association AEGON) with its economic interest.
The amendments replace a structure that dates back to a time when
AEGON was mainly operating in the Netherlands.We are committed to
meeting emerging global best practices in corporate governance and
this decision is consistent with that goal.
As I mentioned in my letter to shareholders, the Dutch Corporate Governance
Code is also an important development that will raise corporate governance
standards for Dutch companies. AEGON already complies with most of
the code and we are currently assessing all of its recommendations.
Why is corporate responsibility such an important issue for AEGON?
We recognize that a company's performance and profitability go
hand in hand with good business practices. Companies should devote
proper consideration of their wider responsibilities to the communities
in which they operate. AEGON does so. For any corporate responsibility
strategy to succeed, it must start from the top. AEGON's senior
management at both the Executive Board and country unit level are
committed to living in accordance with a corporate responsibility
code.
Increasingly, companies are judged not only on the quality of their products, services and financial performance, but also on many intangible criteria that fall within the category of corporate responsibility. It is important to us that we continue to meet international expectations and we are proud of our many contributions to the local communities where we operate. Examples of these activities are included in this year's annual report.
The divestiture of Transamerica Finance Corporation
It has been a long-standing strategy of AEGON to focus on core activities,
the business we know best – life insurance, pensions, savings
and investment products. As part of this strategy, we announced in
August 2003 the agreement to sell most of Transamerica Finance Corporation's
(TFC) commercial lending activities to General Electric. This transaction
was successfully completed in January 2004. We also sold Transamerica's real estate tax services and flood hazard certification businesses
in October 2003. The TFC companies had a successful year and we wish
them well under their new owners.
TFC’s businesses owned by AEGON now consist largely of maritime
container and European trailer leasing. We will continue to seek the
divestiture of the remaining TFC businesses in order to align AEGON’s
resources with its focused strategy.
JOS STREPPEL
CFO AND MEMBER OF THE
EXECUTIVE BOARD
AEGON's policy towards currency hedging
As it is for any international business with exposure to foreign currencies,
currency translation affects AEGON. The majority of AEGON’s earnings
are
generated in non-euro currencies, while the company’s reporting
currency
is the euro. Our policy is quite simple - we do not hedge translation
risk.
While some form of hedging activity may have tempered the volatility
of
earnings in recent years, hedging our translated dollar earnings would
have
cost hundreds of millions of euro and would not have been a prudent
use of
shareholders’ funds. Rather than hedging against translation,
we will continue
our practice of advising investors about the approximate influence
of currency
movements on our reported earnings through the sensitivity analysis
we
perform and report on each year.
For our balance sheet, liabilities in a particular currency are balanced
against assets in that same currency. At the same time,all capital
leverage debt is pro-rated in the local currencies relative to the
invested capital, so changes in currency rates do not affect debt-to-capital
ratios.
Discontinuation of the indirect income
method
As announced in the 2002 annual report, starting January 1, 2004,
we will no longer use the indirect income method for recognizing gains
and losses on our investments in shares and real estate. Since 1995,
we have used this method to reflect the long-term nature of our business, by
recognizing gains and losses on shares and real estate using a thirty-year
average return against the seven-year average portfolio balance. In
the international environment that AEGON operates, comparability is
critical. For this reason, a new method will be used,which will be in
line with what will be required by IFRS and is similar to US GAAP.
This new method recognizes gains and losses on equity and real estate
investments when realized. While the effect on net income is not determinable,
future results are expected to become more volatile.
However, we believe the increase in transparency and comparability
is important.
Looking at AEGON's approach to capital
leverage
We are committed to a strategy that will ensure the continued financial
strength of the AEGON Group. This is demonstrated by the AA ratings
from Standards & Poor's for our operating companies in our
core markets of the United States, the Netherlands,and the United
Kingdom. We manage the capital adequacy of our operating units according
to regulatory requirements, self-imposed standards, and taking into
account local capital adequacy models from Standards & Poor’s. Capital
adequacy consistent with an AA rating on the local Standard &
Poor’s models exceed those of the regulatory bodies and other
self-imposed requirements in most of the countries in which we operate.
For the AEGON Group, we manage leverage within certain tolerance levels:
targeting shareholders’ equity to exceed a minimum of 70% of
total capital,
while limiting dated subordinated and senior debt to 25%. Capital
securities are managed within a minimum of 5% and a maximum 15% of
total capital. In 2003, shareholders’ equity and debt were influenced
by currency exchange rates, but the equity to total capital base ratio
was not materially affected as we manage the debt to be in proportion
to the local currency of invested capital in our subsidiaries.
Current status on IFRS implementation
In June 2002, the European Union (EU) endorsed proposals that all
exchange-listed companies in the EU should report under International
Financial Reporting Standards (IFRS) by 2005. This is a further step
forward in increasing transparency and harmonization in financial
reporting, which AEGON fully supports. The overall objective of AEGON’s
conversion from Dutch accounting principles to IFRS is to enable AEGON
to prepare a full set of consolidated IFRS financial statements for
the 2005 financial year. Conversion
teams in each of the business units have project plans in place to
ensure that AEGON meets this deadline. This conversion process is
controlled and monitored centrally and takes into account the effect
of on-going developments in accounting for financial instruments and
insurance liabilities.
The opportunity seems obvious and can be summed up in one word: comparability.
As we approach IFRS, our main interest is to ensure a level playing
field, allowing fair comparison of all companies competing for capital.
For the life insurance industry in particular, it is our interest
to have a system, which takes into account the long-term nature of
life insurance and pension products.
AEGON's approach to risk management
Over the past several years, AEGON has been strengthening its global
risk management framework. Capital management has been a central function
within AEGON for many years. AEGON has been and will continue to closely
align its capital management with the risk management performed by
the country units. These efforts continued in 2003, and now allow
for a more proactive and coordinated approach to risk and capital
management within AEGON, which is demonstrated by the activities of
the Group Risk and Capital Committee. Among other things, the committee monitors the risks of
the AEGON Group, makes recommendations and oversees remedial action
where exposures are deemed excessive.
The move to reporting embedded value
In August 2003, we reported our embedded value for the first time,
which also included a comprehensive sensitivity analysis and valuation
of our product guarantees, which provided more detail than most of
the disclosure that was already in the market. The response from the
investment community has been very encouraging. With international
financial reporting standards and regulations constantly evolving
to higher levels, the move to reporting embedded value is part of
our overall commitment to providing high quality
disclosure and to increase the transparency of AEGON. AEGON will report
on its 2003 embedded value on June 7, 2004.
PAT BAIRD
PRESIDENT AND
CEO AEGON AMERICAS
Strategy for achieving top-line growth
Multi-channel distribution is the catalyst that drives revenue growth.
In the
United States, as part of our strategy, we use a multi-channel distribution
network to generate profitable growth within an acceptable risk profile.
Strengthening and expanding AEGON’s relationships with these
distributors is
key to this strategy. We look to help our partners grow their businesses
through our broad product range and quality service to customers.
We also
support our revenue drivers through an organizational structure that
separates product distribution and manufacturing. This lets sales
professionals focus on what they do best – recruiting new distributor
relationships, broadening existing relationships and generating sales.
At the same time, our manufacturing centers have maintained high levels
of service and reduced operating expenses. Multi-branding is another
component of our strategy. In many instances, we offer comparable
products to varying distribution channels, using different brand names.
With this strategy, we can penetrate certain markets and geographical
regions better than we could with a
single brand.
AEGON Direct Marketing Services –
looking at the business and opportunity for growth
AEGON Direct Marketing Services (ADMS) is an important part of AEGON’s
business – both in the United States and internationally. With
more than 20 million customers, ADMS is one of the largest providers
of life insurance, supplemental health and fee-based products through
sponsored relationships and other direct-to-consumer initiatives.
Most of the customers reached through ADMS are not served by any of
our other distribution channels. Our goal is to develop lifetime customers
by actively managing customer relationships and working internally
to build cross-marketing opportunities.
Less than five years ago, ADMS began exporting its proven business
model to a growing overseas market. Using direct mail and telemarketing,
ADMS leverages its overseas business partners' brands when selling
to its customers. Telemarketing and other business services are typically
outsourced locally to maintain a low cost of entry into a new market.
ADMS now operates in seven countries in Europe and Asia.
Along with international expansion, ADMS is also responding proactively
to regulatory barriers in the United States by opening new market
segments in the United States, cross-selling additional products utilizing
customer service centers, and expanding their product mix. We believe
there will be opportunities to gain market share from competitors
who lack the scale and resources to compete successfully in a more
regulated US environment.
The importance of bank distribution to AEGON USA
The bank distribution channel is very important to AEGON USA. Our
investment here goes back 20 years, where we have been one of the
leading fixed annuity providers utilizing relationships with 15 of
the largest banks and the majority of the top 50 financial institutions.
In 2003, life sales through banks more than doubled. Working closely
with our partners, AEGON USA can customize products and support to
help banks expand their relationship with their customers.
Today, as banks expand their non-traditional product lines, many prefer
to work with a company that can offer a complete range of insurance
and investment products. We are one of the few organizations with
the experience, wholesaling strength and product depth to accomplish
this. Each one of our business units can add value to the banking
relationship by providing their own unique financial product solutions.
As a single-source solution, we offer banks the benefits of local
relationship management,backed by the full resources of the AEGON
organization.
Agency-sold life sales momentum
Transamerica Insurance & Investment Group’s (TIIG) agency
force has been a key contributor to the sales momentum of our agency-sold
life business. With more than 100,000 independent agents, TIIG is
an established, respected and geographically dispersed marketing organization.
Our product depth and commitment to service have been instrumental in the growth of the
business. Over the past few years, we have doubled the number of producers
in our independent producer channel.
Pension Group deposits continue their growth,driven primarily by sales
in the mid-to-large plan market. The Pension Group has gained considerable
advantage by investing in its technological infrastructure to meet
the growing complexity of the business and increased sponsor demands.
As a result, plan processing and administrative functions are handled
more efficiently, while participants benefit from improved capabilities
to assess their account information and retirement planning via the
web.
Sales have also been encouraging in the fast-growing small-plan
market where products are distributed through independent producers
and professional organizations as well as leading banks and brokerage
firms. The Pension Group has been successful in company-wide cross-marketing
initiatives.
JOHAN VAN DER WERF
MEMBER OF THE
EXECUTIVE BOARD AND
CEO AEGON THE NETHERLANDS
Restructuring AEGON The Netherlands
In an environment of increasing competition, regulation and cost of distribution, there has become a stronger need for greater quality and efficiency throughout our business in the Netherlands. Going forward, it is vital that we structure ourselves in a way that enables the business to grow profitably and to fulfill the ever changing and increasing needs of our customers, in all the markets in which we operate. Subsequently, a number of necessary steps have been taken to restructure the business. The new AEGON The Netherlands will be a business that can deal with dynamics and developments in the market more efficiently than under the previous structure. The thirteen business units, which had been operating as independent businesses from various sites throughout the country, are making way for five service centers and four marketing and sales organizations, at only three locations. This new structure not only provides for benefits of scale and a higher level of quality due to centralization and standardization of processes in the production environment, it also gives focus to the marketing and sales organizations and allows them to develop products tailored to customer needs more efficiently. The new structure helps to build close and strong relationships with the distributors, enabling us to better and more quickly understand the changing needs of our current and potential customers. AEGON The Netherlands is on the move, towards an organization where the customer, again, is the motive power of our business.
While the restructuring will result in staff reductions, it is important
to emphasize that this will be achieved through attrition rather than
through compulsory redundancies.
Product strategy for the Netherlands life market
AEGON is the second largest life insurer in the Netherlands, with
a strong position in individual, group life and pension businesses.
Our product offering also includes accident and health, general insurance
and savings accounts. AEGON The Netherlands targets many customer
segments through a sophisticated multi-channel distribution network. We
recognize that in today’s world, customers – whether individual,
corporate or institutional – demand high quality tailor-made
products delivered with excellent service. The steady gain in market
share in the group pension business, the largest part of our activities
in the Netherlands, demonstrates this.
We have improved the transparency of our products and services, anticipating
forthcoming legal and regulatory changes in the financial services
industry in the Netherlands. That is what customers expect from AEGON.
Looking forward, there are significant long-term growth opportunities
in our existing core markets. For example, in the group pension market
where we offer products and services in asset management, liability
risk management and pension administration, bundled or unbundled,
and also in the individual
pension and income markets.
Strategy for achieving top-line growth
In a challenging market for life insurance and pension products, AEGON
The Netherlands is confident of its ability to grow its business in
the long term, and expects to gain market share in some areas. High
quality value-added products and services, supported by a low level
of operating costs provide us with a healthy competitive position.
While our existing customers already form a good basis from which
to grow, we are extending our customer reach by adding distribution
and database capabilities and building stronger relationships with
intermediaries. As we have done in the past, we continue to focus
on market or product segments we believe will provide opportunities
for profitable growth in the future.
DAVID HENDERSON
GROUP CHIEF EXECUTIVE
AEGON UK
AEGON UK's strategy for long-term growth
When AEGON acquired Scottish Equitable in 1994, we came in believing
that the United Kingdom offered substantial long-term growth potential.
Today, our opinion has not changed and AEGON UK is wholly committed to the
development of its business. The United Kingdom is one of the largest
savings markets in which AEGON operates. However, recent regulatory changes,
including price capping of certain products, coupled with the presence
of a high exposure to equities in many product areas, has presented
significant challenges to the life industry. Our strategy is to create
a core of quality financial products and services and to strengthen
further our position as one of the leading companies in the industry.
A key aspect of our strategy is to expand our product range, while
building strong relationships with our distribution partners.
Internal reorganization of AEGON UK
In October 2003, we announced a new structure for AEGON UK, which is
an important development in the continued enhancement of our services
and of the lowering of our cost levels. The new structure included
the creation of AEGON UK Life and Pensions, and this new unit has
brought together Scottish Equitable, Scottish Equitable International,
AEGON Individual Protection and AEGON UK Services into one organization.
AEGON UK has made significant investments in the development of new
technology platforms. This has made our processing more cost effective and reduced significantly
our 'time to market' for product and service enhancements.
In addition, it has allowed us to step up our delivery in the important
area of e-commerce, particularly in the corporate pensions market.
For example, corporate customers are now able to benefit from SmartScheme,
an online solution, which makes managing a group pension scheme less
time consuming and more cost effective for employers than ever before.
Asset management in AEGON UK
With over GBP 30 billion of assets under management, our in-house
investment manager, AEGON Asset Management UK, is one of the UK's
leading providers of institutional and retail fund services.
We have
developed a market-leading 'open architecture' approach
for our life and pension products, which include access at a competitive
cost to ten carefully selected external fund managers, our investment
partners. Market developments mean we are more committed than ever
to advancing the development of this approach.
Providing a genuine choice of internal and external asset management
capabilities means that we can offer investment solutions tailored
to suit anyone from the most cautious investor to the most ambitious.
AEGON's expansion into the IFA market
Independent financial advisors (IFAs) have long been the primary channel
through which we have provided our pension and life products. We remain
committed to the advice-based sales channel and we are confident that
depolarization will reaffirm the position of that channel. One of our
key aims is to establish strong partnerships with IFAs, ensuring that
both parties’ ability to deliver value-adding financial planning
solutions is continually developed. The regulatory changes have provided
an opportunity to build our own distribution capability in a highly
fragmented market. AEGON UK has invested in the ownership of distributors
and as a result of these transactions we are now one of the largest
distribution organizations in the United Kingdom. Further consolidation
in the market will continue and we believe that AEGON UK
Distribution is well placed to benefit from such developments.
ALEX WYNAENDTS
MEMBER OF THE
EXECUTIVE BOARD
Business development: leveraging existing knowledge and skills
AEGON's strategy is to focus on profitable growth. We are confident
that there are many ways in which AEGON can successfully leverage its broad knowledge
and skills in markets where we already have major operations, such
as in the United States and in Europe, and also in developing and
emerging countries in Asia as well as in Central and Eastern Europe.
AEGON opened operations in Taiwan in 1994 as a start-up and it has
formed the blueprint for AEGON's approach to start-ups. It started
from a small base but AEGON Taiwan is now experiencing significant growth.
Under the direction of an experienced local management team, the successful
execution of a multi-channel distribution strategy has been the key
driver of our growth in Taiwan. This includes traditional agents, bancassurance
and brokers through which we have gained a significant market share. Bancassurance,
which currently contributes about 50% of production, is a relatively
new and fast-moving distribution channel in Taiwan. We have been able
to establish partnerships with sixteen banks operating in the country.
AEGON entered the Hungarian market in 1992 and we now have a top two
position with a significant share of the country's life market. Hungary
is a key market in Central Europe and provides AEGON with a strong
platform for expanding into other selected countries in the region, acting
as a regional support for new greenfield operations. In September
2003, we established a greenfield in Slovakia and initial sales results
are encouraging. With a number of Central and Eastern European countries
set to join the European Union in May 2004, we expect to see further
favorable developments.
In April 2003 we started life operations in the fast-growing life
insurance market of mainland China through the joint venture with
the Chinese National Offshore Oil Corporation (CNOOC). Our strategy
is to leverage the group's skills by developing a multi-channel
distribution capability to achieve accelerated growth.
Also, our expertise and high professional standards in pensions, especially
group pensions, make us well positioned to benefit from developments
in the pension market in Europe. Most of the larger continental European
countries still have a pay-as-you-go pension system, which is becoming
an increasingly
unsustainable burden on the finances of these countries. The governments
of these countries are recognizing the magnitude of the emerging pension
burden and are demonstrating the courage to implement fundamental
reforms, which will lead to a much larger participation of the private
sector in
developing pension activities. We remain committed to taking advantage
of the opportunities that these major European markets represent.
Expansion of our distribution partnerships: the
example of Spain
We see attractive opportunities in developing new distribution channels
in existing markets. A good example of this is the joint venture with
Caja de Ahorros del Mediterráneo (CAM), as announced in November
2003.
The partnership with CAM creates a joint venture, which we expect
to become one of the key players in the Spanish life insurance and
pensions market. It provides AEGON with exclusive use of CAM's banking
network of over 850 branches to sell life insurance and is a major
step in strengthening our distribution in Spain. The Spanish life
insurance market is the fifth largest market in Europe. Banks have
proven to be the preferred intermediary by Spanish customers and have
been a major contributor to the recent growth of
the market. The partnership with CAM will prove to be a considerable
driver for the profitable growth in Spain and complements our existing
Spanish franchise.
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