Aegon Ltd (AEG) 2002 Q3 法說會逐字稿

Welcome to the AEGON third quarter results conference call on the 8th November 2002. Through out today’s presentation all participants will be on a listen only mode. After the presentation there will be an opportunity to ask questions. If any participants have difficult hearing the presentation, please press the * followed the 0 on your telephone for operator assistance. I will now hand the conference over to Mr. Don Shepard, please go ahead sir.

Good afternoon here from London and good morning in the US. With me today are my executive board colleagues, Joe Streppel; Paul van de Geijn and Johan van der Werf. In addition Bob McGraw is here and Michiel van Katwiji I expect to show up any time. The slides accompanying this presentation are available on our corporate website, should you want to view them during this call. As you know, as you may know, we hosted a meeting today in London where Pat Baird, CEO of AEGON USA, David Henderson, CEO of AEGON UK, and Johan van der Werf, our Executive Board member with responsibility for The Netherlands, gave presentations on their respective country units. In addition [Guy Clancy], Executive VP of AEGON USA, and Gerald Button, Vice President of AEGON, gave presentations on the deferred policy acquisition costs and guaranteed minimum death benefits specific to our US operations. For those of you who cannot be here, all those presentations are available on our corporate website. I will give slide numbers so you can follow along.

Since our last earnings announcement, we continue to have some disappointing financial markets, causing some difficulties, but we continue to add new distribution and to strengthen existing distribution and, of course, distribution is what drives our growth in the long run. Since our last earnings announcement, we announced our new venture with La Mondiale in Paris, giving us a foothold in the important French pension market, and we continue to acquire positions in successful independent financial advisors in the UK.

In The Netherlands, we just announced a joint venture agreement with ICA Ahold, extending the successful joint venture they hold in The Netherlands beyond the Dutch quarter and the Scandinavian countries. And in the US, we’ve just announced a joint venture with GE, selling pension and 403B business to the hospital community. We completed the transaction with the Heranagon(ph.) the association AEGON, strengthening our balance sheet and bringing AEGON more in line with accepted corporate governance standards. And we continue to make progress in growth of distribution and our expense issues in each of our core markets. I’ll make a few more remarks and Joe Streppel will be glad to take, and he will take you through the rest of the program, and we’ll be glad to take your questions. Pat Baird is actually sitting in too, so he can answer specific questions on the US.

So, I’ll go to slide 2. As we discussed three months ago, the economy, questionable accounting and audit practices, distressed credit markets and political developments have all contributed to volatile and weak financial markets. During the third quarter, the world didn’t change much. This slide shows the decline in the equity markets over the last four years, the increase in corporate bond defaults by number of issuers and the drop in interest rates. These influences, combined with the weaker US dollar relative to the euro, are the principle reasons for our lower earnings results this year. Conditions have improved somewhat since the end of the third quarter, but we’re still cautious about developments for the rest of the year.

Fortunately, investors remain confident in our future, as our capital alignment resulted in a successful secondary placement of 350m AEGON shares in September this year. And with the resulting EUR2.1b capital infusion, S&P confirmed our ratings.

Slide 3, now for the results. Net income for the first nine months of this year is EUR1,192m, down 32%. Earnings for the third quarter EUR429m were in line with our expectations. New business production increased in the US, the weak financial market contributed to lower production levels in The Netherlands and the UK during the third quarter. Our expense management initiatives continue to be on target, principally in the US and the UK.

Average currency exchange rates had just a 1% influence on the first nine months' results. Shareholders' equity was 5% lower than the prior year end. Prior end currency exchange rates, principally the US dollar, had a negative influence of EUR1.3b on shareholders' equity, while unrealized investment losses had an influence of EUR1.7b on shareholders equity. The additional paid in capital on the association's preferred shares increased shareholders' equity by EUR2.1b. Total assets of EUR247.8b were lower, due to weak equity market and the lower dollar exchange rates.

Slide 4. In the first nine months of this year, the total additional pre-tax charges to earnings were nearly EUR1.2b higher than our original forecast. And, of course, we need to remember that 2001 figures included EUR294m of non-recurring gains and the unwanted sale of our Mexican operations. We now expect, within the scope of the prior outlook, our full year 2002 earnings to be approximately 35% lower than 2001 earnings. This is based on the results for the first nine months and barring unforeseen financial market circumstances.

Slide 5. Growing distribution networks, improving customer service and maintaining strong relationships have kept overall production moving in the right direction. These are the drivers of our future earnings growth, excluding currency influence, insurance premiums and deposits combined, increased 9% in the first nine months of this year. This doesn’t include bank savings deposits. Starting at the top of this slide, you see total deposits of EUR24.6b for the first nine months of 2002. Included in this total are fixed annuities, which have increased 22% for 2001, and variable annuities, up 48% over 2001. Fixed annuity production slowed in the third quarter, as some competitors are offering higher interest crediting ratings. Variable annuity sales accelerated as the brokerage distribution channel continued to expand. Guaranteed investment contracts, funding agreements and savings deposits are at lower levels than 2001. Our off balance sheet production, primarily synthetic guaranteed investment contractors, mutual funds and other managed assets, increased 13% over 2001.

Standardized life sales were 9% lower than 2001. This figure is not directly comparable with last year due to inclusion of life production in Mexico. Without this influence, overall standardized life production would have been just 5% lower. Commissions and expenses, as reported in 2002, include additional costs associated with J C Penny and the accelerated amortization of deffered acquisition costs that was reported in the second quarter. Removing these affects for a fair comparison with 2001 shows a reduction in overall commissions and expenses of 6%. Focusing on expense management and operational efficiencies remains one of our top priorities.

Now Joe Streppel will discuss some of the key influences on the first nine months' results.

Thank you Don. Slide 6. I have talked to many of you over the last three months. I'll focus on the items which see to dominate our discussions. I will briefly review the makeup of our total investment portfolio and provide some [greater quality] and check the detail on the US bond portfolio. I will also touch on our tax developments, discuss minimum benefit currencies and give an overview of our capital position.

Slide 7. Total investments declined 7% compared to year end 2001, influenced by a weaker dollar and by the depressed equity markets. Equities and real estate, held in our general accounts, now comprise 6% of the total general account investment portfolio and are down 23% year to date, reflecting conditions in the market. Equities alone were EUR5.9b at the end of the third quarter.

Our fixed income portfolio is primarily bonds and mortgages held in the US. I will go into more detail on the US bond portfolio in a minute. As can be seen in the middle of the slide, the influence of the weak equity markets on assets held for the account of policy holders has been very significant, with equities down 32% from the end of last year, and fixed income assets up by 12%. Overall, account values have declined 15%, which has reduced revenue, increased deferred acquisition cost amortization and increased provisions for guaranteed minimum benefits.

Slide 8. Our US bond portfolio credit quality has changed incrementally since the end of last year, with higher quality new investments, partially offset by falling income. I should mention here that we have upgraded the ratings standards and are now principally using the S&P and Moody's ratings, rather than the NAIC ratings. At the end of last year, our default provision was $298m. At September 30 this year, it is $268m, after adding $555m to the provision and charging $585m against the provision. While we anticipate some additions to the provision in the fourth quarter of this year, we are not specifying a figure. We cannot know what the prices there may be, either positive or negative. It’s worthwhile noting that, even with the increase in bond defaults, that our fixed income portfolio's total return compares favorably with many of the relevant indices. It’s also worth noting that we have gross unrealized gains of $6.1b and net unrealized gains of $2.5b in the fixed income portfolio, including our mortgage position. Approximately half of that are unrealized gains in the bond portfolio, unlike on the US GAAP and the Dutch accounting principles, reallocation of those gains would not lead to offsetting credit defaults.

Slide 9. One thing that we can help you with is another update on the sector analysis of our US corporate bond portfolio, which represents 50% of our total bond portfolio. In sector terms, the financials, communications, transportation and utility sectors have continued to decrease somewhat, while the [consuming] non-cyclical energy technology and foreign sectors have increased slightly. Each sector is broadly diversified. The largest positions are in American international groups: General Electric, Philip Morris, Goldman Sach and Wells Fargo. One of the largest default charges in the first half of the year were in WorldCom, CBO Impairments, Global Crossing and Qwest Communications. Approximately 50% of the financial sector is in banking, with the balance broadly diversified across brokerage, insurance, finance, [briefs] and others.

Slide 10. With the additional deffered acquisition costs unlocking of EUR317m in the second quarter, the total amortization of deffered acquisition costs for the first nine months of the year was nearly EUR1.4b. Excluding the additional EUR317m for the unlocking this year, differed acquisition costs amortization for the first nine months was about the same as the third quarter in the prior year, partially reflecting good consistency in the fixed annuities and traditional life lines of business.

Slide 11. With the further decline in the equity markets in the third quarter, asset values have been depressed, thereby increasing our exposure. During the third quarter, we increased our reserves relative to this higher exposure by $59m in the USA, by EUR69m in The Netherlands and by CAN$21m in Canada.

Slide 12. As you know, we executed a successful capital transaction in the third quarter, increasing shareholders' equity by EUR2.1b of paid-in capital on the preferred stock helped by the [inaudible]. Unfortunately, losses in the investment portfolio and a weaker dollar exchange rate have absorbed much of this since the beginning of the year. Nevertheless, we continue to have a strong, high-quality capital base with shareholders' equity being 76% of total capital, thereby giving us the breathing room above our 70% target that we were looking for in the current volatile financial environment.

We are glad to take your questions now.

First question. Any questions? Operator?

Thank you, sir. If any participant would like to ask a question, please press the * followed by the 1 on your telephone. If you wish to cancel this request, please press the * followed by the 2. Your questions will be polled in the order they are received and there will be a short pause while participants register for a question.

The first question comes from Mr. Mark Wickfeld. Please state your company name followed by your question.

Hi, good afternoon. Tt’s Mark Wickfield here from Warburg. I thought I'd better chip in with one. You mentioned earlier on about costs being in line with your expectations, particularly in the US and the UK. Can you talk about your experiences in terms of operating cost in the Netherlands?

Johan van der Werf’s here. Johan would you answer that?

Johan G. van der Werf: What’s the exact question please?

Costs of ...

Johan G. van der Werf: I think cost in The Netherlands are developing very well. We’ve shown in the last 10 years a terrific track record on premium income cost ratios, and we’ll continue that in the coming year. In the first nine months of 2002, you see commissions and expenses going up a little bit, and that’s mainly because of selling more life insurance. A part of the increase is because we changed the way we books a little compared to 2001. That’s IT costs, where we had the millennium impact and the euro impact, but we see that we continue to have ICT expenses on, for instance, changing ICT because the tax system in The Netherlands changes, and that’s why we have to make expenses for.

Johan G. van der Werf: Thanks.

The next question comes from Mr. Mike Winget. Please state your company name followed by your question. We have a question from Mr. Tom Purcell, please go ahead sir.

Hello Tom? Operator, what’s the problem?

Mr. Purcell, please go ahead with your question.

There’s something not working.

Operator, are we having a problem with the connection?

No, the participant seems to have depolled, sir. If anyone would like to ask a question please press the * followed by the 1 on your telephone. To cancel this request please press * followed by the 2.

I guess our presentations were complete. Let’s give it another minute. If there are no questions, we will let everybody go back to work.

We have a question from Mr. Jason Suka. Please state your company name, followed by your question, sir.

Hi can you hear me.

Yes.

Oh good, because part of the reason you may not be getting question is that we were told it was a listen-only call. Let me ask about annuities in the US if I could. Don, I was hoping you could talk in a bit more detail as to how you’re getting all this new business, where the market share gains are coming from? And maybe if you could just touch on some of the expansion of the distribution? But in addition, I would be curious to know if you have any commission specials that are bringing in new business. And then on the fixed slide, I was hoping you could talk about spreads. Some companies here in the US are talking about seeing some spread compression this past quarter and anticipation of some spread that’s compression next year. I was hoping you could tell us a little bit about what you are seeing and how you can, how you plan to handle that.

Thank you, Jason. Pat Baird’s here with us, so I think I’ll let him answer it. If he’s wrong, I’ll let you know.

Hi Jason

Hi there.

Going back to variable annuity sales, Jason, as you may remember, we decided about three years ago that a company of our size, with the Trans-America brand, should be further into the variable annuity market than we were, and we started making an investment into wholesale and distribution about three years ago. With Trans-America, with what we already had started in the US, we brought all that together and, while it looks like there is a lot of new -- and there are a lot of new sales coming in for AEGON USA -- we’re really just getting to where we should be. We’re just now ramping up that part of that business. You ask about where is it coming from. We’re getting new preferred relationships with the major wire houses. Some of the variable annuities is coming out of the banks, but we’re just really now getting the preferred relationships, the shelf space, that I think is going to drive some additional sales into the next couple of years. So, it looks like impressive growth, but remember where we are starting from. We’re starting from ... We weren’t really into business, and we’re just getting up to where we should be. There really isn’t any commissions or benefits that are out in front of the market on the variable annuity business. We’re all pretty much look alike out there, in our view. Occasionally, someone will step out in front, but it’s really just getting to where we should be. Our brand, the guys who are out there developing the relationships, will tell you that the Trans-America brand has had a big on their ability to get shelf space.

On variable annuities, you asked about commission specials, there is no commission specials coming out of AEGON. Occasionally you’ll here of a commission special, but for the most part, the wire houses requirs that the commissions paid on the different competitors be the same. They don’t want commissions driving sales to one vendor or another.

On fixed annuities, you asked I think about spread compression. Clearly, with the rates dropping as fast as they have, and given that we are ... Most of our business we can reset on our an anniversary, the drop in the asset rates has probably outpaced our ability to credit lower interest rates. Our spread has compressed about 20 basis points in the third quarter. We have been able to get out in front of the market a little bit and get 40 out of the 50 states to except a 2% minimum guarantee, which are going live with as speak and will probably be live in those 40 states by early January. And we expect to be able to maintain pricing spreads on new business once we are fully out with that new product. But, yes, there has been some spread compression, and if rates state down for a prolonged period of time, then spread compression will become a bigger issue, three or four years out.

Can I also ask about guaranteed minimum death benefits? Two questions, one is: Are you considering perhaps altogether stopping the sale of a product with this feature? Or perhaps there's a new product redesign that you’re thinking about that would limit some of the liability that you have with this product? And also, if the market goes up, let’s say it stays where it is this quarter, do we ever see you reverse the GMBD reserves that you’ve taken?

Jason, there are no plans to stop selling a product, a VA product, currently with guaranteed minimum debt benefit writers. As always, we are tinkering with the products, and we’ll continue to tinker with the products. But at this point, we are planning to continue to offer the benefit at substantially the same form. As far as ... You asked about reversing the reserves. You know, there is a fairly wide corridor, given our methodologies and what we understand death is going to be required in the future. And it is possible that, if the market really makes a run, that it is possible at some point you can see us reversing some of the GMBD reserves, but I would not look for us ... I mean, that would be substantial correction in the marketplace. As of now, if the market goes up a while, we just would not increase the GMDB reserves, but would not look to release any of that.

And, Jason, you asked something about GMIBs? I'm sorry.

I didn’t, but has that been a feature that’s been selling well for you in the VA?

It has been, you know, all of our benefits, if you look at them all-in, we’re about the middle of the pack. And so it has been a ... You know, it has been a feature that has kept us in the game, but not out in front of the market.

And I guess, are there any reserves taken up for that future as well?

Not material, but there are some... some reserves we're setting up, but not material, not worth talking about.

Great.

But reasonable, given the amount of production that we’ve had.

Alright. Great. Thank you. You just might want to check with the operator and see if there's a problem with the line too.

Thank you.

Thank you the next question comes from Mr. Tom Cristiline. Please state your company name, followed by your question.

Hi. Fidelity Investments. Just trying to understand, you mentioned the $6.1b of gross unrealized gains, $2.5b of net. I guess I’d be interested in that. again, what’s in mortgages, what’s in bonds and the gross an unrealized gains, And then what are the gross unrealized losses on the bond portfolio? And also, if you could help, what’s flowing through your equity account at least is $1,7b of negative changes to the revaluation account. So, kind of help me out with the positive impacts that you’re talking about and the negatives on your capital and funding. And also if you could talk about the charge from the total return slot that you mentioned in your press release, and what’s going on there, and what the expectations are for and what would cause that to be a drag again on the fourth quarter?

Okay. First on the bond portfolio, we have on the bond portfolio of 1.3b unrealized gains; What I said in my presentation is, if you do realize it, according to Dutch accounting principles, that will not go to the P&L, but that gain will be amortized over the duration of the bond portfolio. That’s unlike US GAAP, where you recognize those realized gains immediately in the P&L. Many American insurance companies can so offset their default charges, which we cannot do. So, we take a default charges immediately to the P&L, and we are not taking realized gains on the bond portfolio in the P&L. So, it makes no sense for us to realize the EUR1.3b unrealized gains. We gave you this picture in order that you’re able to compare US life industries with AGEON. AGEON is, as you, know holding more than 60% of its business in the US.

As far as the revaluation reserve is concerned, we had realized losses during the third quarter, and we impairments in the equity portfolio in the June third quarter. That has been charged against the revaluation account.

He actually asked about the gain in the mortgage portfolio too.

Okay. The gain in the, the unrealized gain in the mortgage portfolio is the difference between EUR2.5b I mentioned in my presentation and the EUR1.3b on the bond, so that’s EUR1.2b.

Okay, you mentioned the EUR6.1b gross number. What else is in that gross number? Did you mention EUR6.1b gross unrealized gains?

Yes, that’s gross. Gross US dollar unrealized gains is EUR6.1b.

So, am I to ...

And losses are EUR3.6b and net is EUR2.5b unrealized gains.

And the losses are primarily on the bond portfolio?

Yes, it’s included.

Okay, I’m just saying that the loss of ERU3.6b is, that chunk is primarily the bond losses? Or does that ... A part of that would be your equity unrealized losses as well?

You have to separate what we do with equities and with bonds. So, all equities go through the revaluation account and the bond portfolio does not.

The difference is all primarily bonds then?

Yes.

Okay. And then on the total returns slot.

Total returns slot, as you know, we have staff option schemes and management option schemes outstanding. We had them against the stock position of the [inaudible] of the AEGON association,so we did the total returns [swap with them]. And at a preference of 10 at the time of the transaction took place, on the secondary offering, they asked for a cash collateral call, and so we paid them because they were in-the-money, and they gave us the money back by paying off the preference shares. That’s what happened. You understand what I mean?

So, your net capital coming in is really ERU1.65b. Is that kind of how I should look at it?

In terms of the paid up capital, we got EUR2.1b. And if you look to the equity movement and the share capital, you will find the cash collateral call [at the year end and it should be] 300 and something million. So, if you deduct that, you come to EUR1.7 m. That’s correct.

Okay, thank you, okay.

Thank you the next question comes from Mr. Hanz Blicar. Please state your company name, followed by your question.

Yes, good afternoon this Hanz Blicar. I’ve got question regarding the fine tuning of your forecast. Will you be able to elaborate on how you come to the fine tuning, and especially what the low end of the previous year’s forecast, if you’ll be able to deliberate on that?

Okay, as you know since June 30th, although we’ve had a nice run the last few weeks in the equity market, they are still down about 10% or so from June 30th levels. In addition the, although actual bond default from the third quarter was less than the second quarter, the prognosis in the near term for continuing bond default isn’t great. So, we’re being cautious and we just haven’t seen the improvement that we’d like to have.

But it’s correct, it was understood in some former press statements that you don’t expect any additional cost provisions for deferred [...].

Well, we’re comfortable generally where we’re at, assuming there isn’t any more serious deterioration in equity market.

Against 930 level.

Against 930 levels

Okay.

The next question comes from Mr. Tom Purcell please state your company name followed by your question.

Hi can you hear me this time?

Yes, Tom I can hear you.

Sorry about that earlier. The question on the unrealized gains, the 2.1 would that be under US gap just as I think 144 so that would be included in your book value under US gap, 2.1b unrealized gain?

Can you help me what you mean 2.1?

I’m sorry 2.5b unrealized gains on the bonds, that would be the [...] either 144 or 115 adjustment under the US gap. That would be included in the book value, correct?

Let me think, also under US gap it’s recognized as equity.

Okay and there was, on the GMDB, just so I understand, what I had been under the impression was, was that for US statutory purposes, people are forced to put up reserves and you guys and everyone else have put the reserves up for statutory. I had thought and I think you’re the only person who runs it actually through there P&L, I had thought that if the market did go up that just by virtue of kind of the mechanics of those rules that the charges would be reversed and if there is not a lot of room in terms of you guys being conservative. Am I incorrect in thinking that?

Well [...] there are different methodologies out there and our methodology and is under a fantastic modeling basis. It is too under gap and under Dutch accounting, is to compute a corridor, if you will, a range and as the marketing improves as long as that corridor is out there then we’re going to keep the guaranteed minimum debt benefits reserves where they are. Now on a statutory basis it is more [...] and I think it does reverse as the market increases.

Okay.

Tom it’s our understanding that although everybody is doing it on statutory basis, gap doesn’t require reserves yet but will next year but we feel that it was prudent to put them up this year. We believe we’ve seen what’s coming and we believe that we’re at least meeting the floor that’s going to be required under the pronouncement coming next year.

And by the way it’s compulsory under Dutch accounting principles.

Okay, and is the, the 326m of increase debt benefit guarantees that you’ve charged to income this year, what is the reserve under Dutch gap and the reserve under the statutory regimes, both in the Netherlands and in the US? Are they equivalent right now, or is there actually a higher reserve per stat than there is what you’ve recognized through your income statement?

I don’t know the answer to stats in the US.

For the rest of the world it’s equal and it’s certainly not less so I have to look it up but if it’s compulsory for statutory accounting [...] and we use our prudence to make the right calculations under Dutch accounting principle. So it can be less, it might be more but [...].

Okay, thanks

Thanks Tom.

Thank you the next question comes from Lucas Balder please state your company name followed by your question. Mr. Balder your line is open would you like to go ahead with your question?

Moving on we have a question from Mr. Michael Cowler please state your company name followed by your question.

We seem to have a problem.

Once again if you would like to ask a question, please press the * followed by the 1 on your telephone. To cancel this request please press the * followed by the 2.

Okay.

Sir there are no further questions now, please continue.

Alright thank you very much for everybody for listening.

Thank you this concludes today’s conference call, thank you for participating.