Aegon Ltd (AEG) 2003 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the AEGON First half-year Results 2003 Conference Call on the 7th of August, 2003. Throughout today's recorded presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. If any participant has difficulty hearing the conference, please press the star key followed by the zero on your push button phone for operator assistance.

I would now like to turn the conference over to Mr. Michiel van Katwijk. Please go ahead sir.

Thank you and welcome to AEGON's conference call on our first half-year results. My name is Michiel van Katwijk. I am the Group Treasurer for AEGON and before we begin, I need to need to make you aware of our cautionary note regarding any forward-looking statements, which is on the next slide. We would appreciate if you would take a minute or two to review this statement because the statements made in this presentation that are not historical facts are forward-looking statements as defined in the US Private Securities Litigation Reform Act of 1995. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates.

All forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from expectations. I also need to make you aware that we will defer questions on our 2002 embedded value until tomorrow at our conference in London at Savoy Hotel. This conference will be webcast and if you are unable to attend, you will be able to e-mail us your questions during the question and answer session, which follows the presentation.

Now, let me turn the call over to Don Shepard.

Thank you Michiel. Good afternoon here in Europe and good morning in the US. Thank you for joining us today. With me are my Executive Board colleagues Jos Streppel, Johan Van der Werf, Paul Van de Geijn, and Alex Wynaendts. Also joining us today are Pat Baird, CEO of AEGON USA, David Henderson, CEO in the UK and of course, Michiel van Katwijk is on the line. After a few remarks by myself and Jos, we will be happy to take your questions.

We've had a modest improvement in our business during the first half of this year with net income in Euros increasing 13% and net income per share increasing 4%. It is also worth noting that these increases on a constant exchange rate basis would be 28% and 19% respectively. The principle reasons for the difference in the net income and net income per share growth figures is the higher preferred share dividend due to the increase in our preferred share capital and the increased number of shares from last year's stock dividend. Along with higher results from Transamerica Finance Corporation and the underwriting, product pricing, and product design actions we have taken, the increase in net income is influenced by continued improvement in the level of corporate bond defaults and by relative recovery in the equity markets, thereby resulting in lower DPAC amortization and charges for product guarantees.

Like the earnings figures shareholders’ equity and assets have also been heavily influenced by currency exchange rates. However, because our debt is proportionately allocated to our country units, there is no currency influence on our capital leverage or capital adequacy positions. Accordingly, we have declared an interim dividend of EUR0.20.

Slide 4. After reaching historical low points during the first half of this year, interest rates have moved up in recent weeks. At the same time, default rates on corporate bonds continue to go down. Continuation of these trends and the lower interest return guarantees on new business now required by most of the state regulators in the US will help our future results. The lower required interest return guarantees now down to 1.5% in many states is a good example of one of the successes we are having in pursuing product changes, which will improve the profitability of our business.

Slide 5. You are already well aware of the recent trends of equity market performance. Except for the AEX, all indices were up the first six months of this year and except for the NASDAQ, all indices at June 30th were still lower than a year ago. As I mentioned a few minutes ago, the improvement thus far this year has had a significant positive effect on our second quarter results, particularly relative to the DPAC unlocking and guarantee provisions, which were included in the second quarter results for last year.

Slide 6. The dollar Euro exchange rate is now close to what it was when the Euro was introduced in 1999. It has been quite volatile in the intervening period. Because of its recent significance, you've probably noticed the column we added in this quarter's press release, which allows you to quickly see the percentage change in the key figures on a constant currency exchange rate basis. Even though the recent trend has had an adverse influence on Euro earnings, we will continue with our policy of not hedging earnings. We believe that over time hedging currency results in additional costs for all shareholders.

Slide 7. Generally speaking, new business production for the first half of this year has been good. Excluding currency influence, Life Production increased 11% with the largest increase in the Americas and Taiwan. Deposits were 8% lower but in line with expectations following the actions we've taken on product features, interest crediting rates, and distribution costs particularly commissions. In our operational activities, we are continuing our commitment to cost management in each of the country units. We are also directing our attention to those products within the various product lines which we expect to provide the best growth and return prospects going forward.

And of course, earlier this week in line with our strategy to focus on our core business, we announced the sale of most of TFC's commercial lending activities. We are pleased with the purchase price and the $250m gain, which will be credited to shareholders equity. Jos will discuss this in more detail in a few minutes. Finally, before Jos discusses the financial results, you have also seen in our press release that we are not providing an earnings forecast. Although the financial market environment seems to have improved somewhat, it's still a very uncertain market environment.

Jos, over to you.

Thank you Don. As Don has already summarized all the headline results, I will give you a quick summary of our product segments results and also discuss our investment portfolio, our capital position, the sale of TFC, and our plans for reviewing our embedded value results with you tomorrow.

Slide 9. In the Americas, income before tax increased by 27%. Traditional Life, Accident and Health, and GIC & Funding Agreements results were lower, while Fixed Annuities, Variable Annuities, and Fee Business results were higher with no change of Variable Life results. Lower investment yields and indirect return adversely influenced the Traditional Life, Fixed Annuity, GIC, and Accident & Health segments, while lower credit losses in the Fixed Annuity and the GIC product segments had a positive influence. Variable Annuity results recovered from a loss position, as there were no charges for DPAC unlocking or guaranteed reserve provisioning.

Slide 10. In the Netherlands income before tax increased by 4%. Traditional life, Life for Account of Policyholders and Fee Business results improved, while Accident & Health and banking results were lower. There was no change in the General Insurance results. Traditional Life results reflect higher investment income primarily indirect return. Life for the Account of policyholders results reflect lower provisions for guarantees, while Fee Business results reflect higher assets under management. Accident & Health's results are lower due to rebalancing of investment portfolios, while lower banking results reflect lower account balances and also lower fees and additions to our credit provision.

Slide 11. In the UK, income before tax was 36% lower. Each line of business had lower results. Traditional Life earnings were lower due to lower investment income as well as lower levels of experience profit. Life for Account Policyholder results reflects lower fees on equity-linked products and higher expenses, particularly DPAC amortization and pension costs.

Slide 12. In other countries, income before tax increased by EUR15m, a 60% increase. Traditional Life, General Insurance, and Fee Business results all increased while Life for Account of Policyholders and Accident & Health results were slightly lower. Results improved significantly in Hungary, Spain, and Taiwan. In general, the higher results in Life Business reflect higher business volumes, while the improvement in General Insurance reflects improved claim experience.

Slide 13. Standardized Life Production increased 11% excluding currency influence with a 14% increase in the Americas, a 5% increase in the UK, and a three fold increase in other countries primarily Taiwan. The Netherlands was 29% lower, primarily in Group Pensions, while new individual life business in the Netherlands was equal to the prior year.

Slide 14. Excluding currency influence, total deposits were 10% lower which as Don indicated previously, lower annuity deposits reflecting the actions taken on product features, interest crediting rates and distribution costs - primarily commissions. Although lower, GIC and funding agreements production was good, as account balances grew by 5%. Saving deposits in Netherlands were lower reflecting the competitive rate environment. Off balance sheet production was higher in all markets, with the largest increase in the Netherlands.

Slide 15. While asset growth was good on a local currency basis, the currency translation effect is shown here. In dollars, total investments were up 11% in the Americas, in Pounds Sterling, total investments were up by 6% in UK, and in Euros total investments were up 22% in the Netherlands. The loss increase in the Netherlands reflects higher off balance sheet investments, which now includes EUR6.5b of managed assets by TPK Insurance, which was acquired earlier this year.

Slide 16. Our US bond portfolio increased by nearly $7b during the first six months of the year, accounting for most of the increase in the general account assets. Credit quality has not changed significantly as the corporate bond default rate has declined. The addition to our default provision in the first half of the year was $293m compared to $417m in the first six months of last year. Charges to the provisions were $283m compared to $460m last year.

Slide 17. There are no material developments in our capital base during the first six months of the year. While shareholders equity and debt have been both influenced by currency exchange rates, our equity to total capital ratio has remained at 71%, and meets our target of 70%. We continue to have good financial flexibility in our operating companies in our core markets of the US, the Netherlands, and UK continues to have strong financial ratings.

Slide 18. Earlier this week, we announced the sale of the majority of TFC's commercial lending business to GE Capital. The total payment is $5.4b of which $700m is for a direct asset sale on which there is no gain or loss. $1b is for a net asset value of the subsidiary company with an approximate net asset value of $700m.

Total debt of TFC to be repaid is $4.4b with $3.8b coming from GE and $600m coming from the previously mentioned direct asset sale of $700m. In book gain, there will be approximately $250m, which will be credited to shareholders' equity and this will be used to reduce capital leverage. This transaction will have a mildly positive influence on our capital position and a minimal dilutive effect on earnings in the shorter term.

Slide 19. Today, we also published our embedded value results for 2002. It's our first public disclosure of embedded value. As you are all aware, we have scheduled the presentation and meeting on our 2002 embedded value results for 10 o'clock tomorrow morning in London. For those of you that cannot attend both the presentations and the question and answer session will be webcast. You will also be able to e-mail your questions to us during the webcast.

Accordingly, we would ask that you defer your questions on the embedded value results until tomorrow and focus your questions today on our earnings release of today or other issues that you may want us to address.

We're happy to take your questions.

Thank you. Ladies and gentlemen, at this time we will begin the question and answer session. If you have a question, please press star followed by one on your push button phone. If you wish to cancel your request, please press star followed by two. Your questions will be answered in the order that they are received. If you are using speaker equipment today, please lift the handset before making your selections. One moment please for the first question.

The first question comes from Mr. Bart Horsten. Please state your name and company name followed by your question.

Yes, good afternoon. It's Bart Horsten from Lanschot Bankers in the Netherlands. I have three questions. First, on your indirect investment income you stated in the first half, you added EUR310m to the results, but if I recall correctly you stated at the full-year presentation that for the full year, you expect EUR450m in indirect investment income. So, does that mean that for the second half, we have to expect a lower investment income or can we increase our full-year estimate for indirect investment income? And could you possibly give a breakdown of that EUR310m by country?

And the second question is on the contribution of your employee pension plan income, which you stated was $42m lower than last year. Could you just tell us how much is still included in the results and is this also going to be the case going forward? And my final question concerns the interest rate development, recently we've seen a sharp rise in the long-term interest rates and how does that affect your profitability? Because in your Annual Report, you stated a one percentage point increase in interest rates would have a negative impact on your earnings. Thank you.

Jos?

The indirect return is indeed EUR310m before tax for the first half year. At the end of last year, we assumed that we would not have any indirect return from the US because there was no positive revaluation reserve in the US. The first half of 2002 showed recovery in the equity market. So, we ended up the end of the first half year with a positive revaluation reserve. So, we had to take some indirect return in the USA as well. So, that makes the difference.

The calculation of EUR450m that we made at the end of the year, –well -- we have to change that a little bit on the assumption that the markets hold or improve further. So, per a country, the figures are, in the Netherlands, we released EUR250m before tax. In the US, EUR58m before tax and the difference with EUR310m is Spain and Taiwan for very minor amounts of money.

Okay.

Thanks.

This is Pat Baird. The question on the pension plan, I assume references the $42m that is in the press release. You refer to as a contribution, I'll answer it my way and I will say a little bit differently, we are over funded in the US in our defined benefit pension plan, but we are less over funded than we used to be. Under GAAP and DAP, you report to the extent you’re over funded under some formula earnings from the over funding and the $42m is less earnings from the lower levels of over funding.

Okay and how much is still included from the over funding?

Well, we are over; we are approximately $250m over funded in our defined benefit plan as of June 30. But the annual expense, or the annual income is based on the level of over funding and that is what the change was from last year to this year.

Okay, the interest rates?

The question on the interest rates affects mostly the US market.

But you could say in general that in our modeling of our sensitivity, if you would have a sudden interest rate spike up the whole yield curve with 1%, we would have a negative influence on earnings. And that is under the assumption that for certain products you have disintermediation and more lapses. What you see at the moment is that interest rates are rising, not a whole yield curve suddenly somewhat slower, and it's too early to come to any conclusion because we have no sign of disintermediation yet.

Okay. So far, no negative impact seen on the results?

So far not included in figures and so far not seen.

Okay and one final remark on your first answer. The EUR310m in the first half, can we double that for the full-year?

No you can't because that is on the assumption that the revaluation reserve in other countries than the Netherlands are sufficient to release and that is not certain.

Okay, thank you.

Next question comes from Ms. Margot van der Velden. Please state your company name followed by your question.

Hi good afternoon. It's Margot van der Velden from ING Financial Markets. I have a question on the US business. Could you give a little bit of insight on how and if there is a mismatch between the investments on the business compared with the policies, that those investments are matched with? Do you understand my question?

I think you were asking about possible either interest rate or duration mismatch?

Yes

No, we have always, I will just say it this way. There has been no material change in our matching of assets with our liabilities from both an interest rate and a duration standpoint. We have always had a very strict discipline and not withstanding all of the volatility over the last couple of years, we have not moved away from that discipline.

And then can you give a little bit of an indication of how the mismatch is then? It has not deteriorated or has not changed, but how is it?

Well, the duration of the mismatch is less than, approximately a half a year or less than half a year and the assets are a little longer than liabilities all end.

Okay, thank you.

Next question comes from Mr. Nick Holmes. Please state your company name followed by your question.

Thank you. It’s Nick Holmes, Lehman. I have two questions please. The first one is, can we clarify again, how you regard the AEGON Association preference shares and whether you do definitely regard them as debt rather than equity? That's my first question.

The second question is, I wondered if you could tell us a little bit more about how vulnerable you feel the DAC on the US general accounts book could be to any acceleration due to low bond yields? One of the reasons I raise this is that in your embedded value disclosure, which of course we are not here to discuss today, but I can't help noticing that the value of the in-force business is actually lower than the gross DAC in America or the net DAC and this just makes me wonder whether you have some concern about the DAC of the general account books?

Well, let me answer the first question on the Association. We issued in September of last year of preferred shares to the Association and the deal was that they were unredeemable, perpetual, and we talked also with the rating agencies and it was acknowledged as equity and it will stay as equity. They are not transferable and not redeemable, it is pure equity and it is treated that way in our accounts in our embedded value disclosure, and also accepted with the rating agencies. We do not expect any change for that.

Can I just follow up on that? I mean, presumably, you do not regard it though as common equity and therefore, you do not regard it as eligible for inclusion in calculations of common equity, net assets, or indeed embedded value.

I understand what you mean Nick. It is part of our embedded value. If you would like to calculate the embedded value per share, you have a point there and then, it is your job to make an evaluation of the value of the preferred shares and we have not done that for you.

But even with your Dutch GAAP equity, you do agree, do you that it should be excluded from a calculation of the common equity net asset value?

Oh yes, for common yes, but not for equity.

But the common equity is what we are looking at.

That's right, you are looking at it and that's why I say, if you want to calculate an embedded value or an equity per share, per common share, then you are right because those values that are with the Association are not free for distribution for common shareholders. So, that's a right analysis and again you have to value the market value of the preferred shares to come to a conclusion.

Okay, I think it might be helpful for you in your presentation, just to clarify that a little bit more, but thank you for your answer.

I will say it again tomorrow, Nick.

Okay.

And Nick this is Pat, I will try to answer your question on whether there will be an acceleration of DAC due to low bond yields. Let me take interest rate levels where they were as of June 30th rather than where they are now. For example on fixed annuities, you've got two major components to DAC unlocking, one is lapsation and the other, of course, are interest rates.

And if the rates at June 30th were to stay where they were for a prolonged period of time it's our view that given that there would be some profit margin squeeze because of lower interest rates, but it seems like lapse rates are also reduced and that the net of the two would not suggest that there would not be any material DAC unlocking.

So, if I can explore what you've said just a little bit more, I mean, can you quantify the level of spread that you need to obtain on your book of let's say, fixed annuities in order to avoid any DAC unlocking.

Well, that would then ignore the fact that you also have lapsation risk that also drives that. Our pricing of fixed annuities is between 200 and 250 basis points. To get our returns, we also have certain lapse assumptions and right now, we are getting lower spreads than what we priced for, but we were also having higher persistency and lower lapsation rates and the two are offsetting each other and therefore there is no material unlocking.

So, there is a perfect offset at the moment or approximately perfect?

Approximately, a perfect offset at the moment.

Okay, right. So, you don't view any DAC unlocking as a possibility then?

Well you just made that absolute definitive and if I left you that impression, I didn't mean to. As of now, given the way those two assumptions are interacting, we don't expect anything material between now and the end of the year. But certainly it is possible if rates were to drop back down again, if we change our last assumption, it is possible there could be some unlocking, but right now, we don't see anything material.

Okay. Thank you very much.

The next question comes from Mr. Duncan Russell. Please state your company name followed by your question.

Good afternoon. It's Duncan Russell from Fox-Pitt, Kelton. And the first question is on the dividend of 0.20 per share. As an option to take either cash or stock, and the question is if it is taken as cash, will that be funded by issuing stock later in the year?

No.

Okay. The second question is on bond defaults, the provision for bond defaults. Can you please split that down by product in the US as you did in the first quarter? And then the third question is on the Transamerica results. Can you please give us an estimate of clean earnings. I know you said there is $35m from the first quarter. Is there any other issue there or an estimate of what the sustainable earnings power is of Transamerica?

While Pat is looking that up Duncan, let me follow up on your default question. We will have to follow up separately because we don't have -- I don't have the numbers here by product line, but we will certainly follow up on that.

Okay, thank you.

Just one more question that I was just looking up. Approximately Duncan, on clean earnings excluding the one-time adjustments approximately $120m, about two-thirds of what was reported would be clean.

You tell us some of the deductions from that?

The termination of a major tax service contract accelerates the deferred income and also, which is approximately $35m and then we have another approximate $25m to $30m in foreign tax credits -that’s timing difference from when the taxes are paid in the foreign entities and offset in the US.

Right, thank you.

Duncan, I got your answer on the bond default. Traditional life (and these are all for the first half and in dollars): Traditional life $94m, Fixed Annuities: $111m, GIC: $66m, and Accident & Health: $21m.

Right, thank you very much.

Welcome.

The next question comes from Mr. Tom Headmond (ph) . Please state your company name followed by your question.

Hello, Tom Headmond [Inaudible] from Amsterdam. Few questions, did you give the breakdown -- the regional breakdown of the indirect results in the first half, but I think that was already in the press release, but could you also provide these numbers on a 2002 full year base, because that's something I'm still missing, so I don't know how the second half last year looked like?

And second question is, you mentioned that in a large number of states the crediting rates have come down to 1.5%, could you tell us what the average crediting rate is now and how interest rates are moving up again, do you think that any time soon there will be a reversal of this downward trend? And thirdly, a question on variable annuities, where do you expect your business to go from here in the rest of the year? Or let's phrase it differently, where do you want your loss in market share to stop before taking action?

Pat, I think those are –

Two of the three are mine.

Yeah. The first one is on the indirect return for 2002. For comparison reasons I have given first six months of 2002; as for comparison for the full year I have not, but we are prepared to fill in your model, so we'll come back to that.

Okay, thank you.

On the minimum crediting rate, are you asking about our new business, what is the average crediting rate?

Yeah.

I don't know, on a weighted average basis, I don't think we've looked at it, but it would be -- let's say slightly under 2% on new business. With respect to variable annuity production going forward, we did make the decision to withdraw a major benefit earlier in the year and that has had the effect of reducing our variable annuity production. We are looking at introducing another product that is competitive with today's features; a lot of the features earlier in the year have been withdrawn. So, we are looking at another competing product. It will be one that we can manage the equity risk on that product through hedging or through asset allocation or otherwise. We would expect to attempt to reenter that market in November. We don't think in the wirehouse market that there has been a loss in franchise value. The wirehouse is treated a little bit more like a closed-end mutual fund. You are in sometimes, you are out sometimes, and they’re waiting for us to get back in. But I would say that variable annuity production because we would not be reentering that market until late in this year, will be off significantly the last six months.

Okay, thank you. And there were no with regard to the fixed annuities, the second part of the question was that you have been negotiating down these crediting rates, but interest rates have moved up of course in the past weeks or past months. Do you expect that these crediting rates are going to move up again in or that there will be negotiations the other way around in the coming months?

We are regulated by each of the 50 states. About 12 states have a floating minimum guarantee at the time that you issue the contracts. So, those by formula will be moving up somewhat if rates stay up. Some of the other states have moved to 2% and 1.5% sunset that lower rate. I think the answer to your question is probably yes that the minimum guarantee will be moving up, somehow in concert with how treasury rates move.

Okay, thank you.

The next question comes from Mr. Tom Bennett. Please state your company name followed by your question.

Hi, this is Tom Bennett, BNP Paribas. Couple of questions. The US bond default numbers do seem relatively high. Have you any idea how you compare with the industry and what are the losses relative to your portfolio in basis points?

Tom, it's hard to compared in the US because under US GAAP there is no such thing as a “bond default reserve.” But I will tell you that based on the size of our portfolio, we are running about this year 50 to 60 basis points on our portfolio this year. And from what I understand from our survey that we looked at (I think this one was Oliver Wyman) is that we are better than average in terms of our level of default losses.

And what is the size of your bond portfolio?

Around $55b. Just a moment I will get it exactly. That is the corporate bond portfolio. I assume that's what you meant the corporate bond portfolio, Tom?

Well, I just want to calculate the default rate. I have got a figure of two…

Pat Baird Corporate bonds is approximately $60b, asset-backed securities, approximately $12b, mortgage and commercial backs are another $10b, emerging market is $2.5b and I am excluding treasuries and government agencies from that.

Thank you. And the second question is on this pension credit of $42m dollars or Euros. I can't remember. You said that reflected an over funding of $250m, is that correct?

Tom, the answer is, that when you over funding under GAAP, which we have carried over to DAP under FAS 87, you report income or in our case a reduced expense, pension expense -- a negative pension expense depending upon your level of over funding. And $42m is a reduced amount of pension income or an increased pension expense, however, you want to say. It's goofy the way it's reported. In other words, we are getting $42m less credit for our level of over funding.

Than you had last year.

Yes.

But you're still paying money into the pension funds?

No, because we are over funded. We actually don't make any contributions.

All right. So, the over funding limit is $250m, still?

Approximately at June 30, yes.

Fine. So, this will run out sometime next year at the current rate?

I didn't say that, no.

All right. Thank you very much.

The next question comes from Mr. Marijn Smit. Please state your company name followed by your question.

Yes. Hi, it's Marijn Smit from ABN Audio. Just had a question on your US Life results. I assume the indirect income that you've included is largely attributed to the Traditional Life or at least to a large extent? And on that basis, it seems like the results there have actually come under pressure in second quarter compared to the first quarter? I was just wondering if you are seeing margin deterioration in Traditional Life and can you just sort of talk about the business circumstances there?

Well, we are seeing some margin deterioration on the Life Business as interest rates come down. Yes. I think if I understood your question, however, was how much of that the indirect yield is allocated to the Life results.

Yes, how much of the indirect yield was going to the Life results? I mean, if you sort of exclude that out of the results, it seems like results have come down quite sharply compared to the first quarter. So, I was just wondering what the drivers behind that were?

I think most of the drivers of our Life results were an allocation of the pension expense item that we just talked about and reduced indirect yield amortization were most of the drivers of the decrease.

Yes, I’m talking compared to the first quarter?

I didn't look at it from the first quarter to the second quarter. So, I will have get that for you.

Do you have any basic --?

No, there are no outliers; there is nothing in the basis other than it would be some of the non-cash items like we just talked about.

You should not be confused Marijn when he said that our indirect return would be 450m approximately per year for all of AEGON. We calculated that Euro for the US and now the US has a little release to the result, but still first year to first year 89m lower than last year.

I appreciate that. It’s just that you're excluding your indirect return, so your second quarter Life result in the US is quite a bit lower than your first quarter Life result in the US?

And there was some Universal Life unlocking in the second quarter, approximately $11m and then again we had the pension expense, and other than the indirect yield, those would be the drivers for the reduction.

Okay. Thanks.

The next question comes from Mr. Fred Nieto. Please state your company name followed by your question.

Hi, this is Fred Nieto at Execution. I have a couple of questions. The first question just on the unrealized gains on your bond portfolio. I know sometimes in the past, you gave that number out and I was curious to know, I guess the way interest rates swung in the first half, what that would have looked like at June 30th and then, maybe what would have happened to that since then, given the swing back up in interest rates?

Then, my second question relates to following back on the fixed annuities. There was a discussion about persistency and crediting rates and we are seeing that your P&L. The ROA's or the earnings, so to speak are not ticking up too much in spite of your comments about trying to cut crediting rates. And it looks as though it surrenders in the second quarter in my calculations picked up to about 11% versus 9% in the first quarter and that's just taking your net deposits versus gross. I'd like to know a bit more about your fixed annuity block as far as what percent of it has market value adjusters or deferred sales charge type of penalties that can protect the persistency if we have more interest rate increases.

The unrealized gain on the portfolio at the end of the first half year to end of June, the net of unrealized gains and unrealized losses is $5.7b.

And what would that look like do you think since then?

It's probably lower, but you have to bear in mind that's not too important because the bonds are accounted for under DAP accounting principles at cost and if you sell and you make a gain that gain will be released over the life time of the original bond's duration. So, it is not so in AEGON's case and Dutch accounting principles, if you realize the gain on your bond portfolio, that would do anything to your P&L.

That's a picture we are happy to give you but it does nothing for you in trying to determine what our results for 2003 would look like.

And then, in that case do you have any idea of how much it has come down or I mean, I know, you don't consider it important but just to get a feel for just how much the market has taken on or off the portfolio?

What you see and I'm not going to make an estimate because that's far too dangerous but you are talking about $5.7b on a portfolio of $100b. So, its interest rates with the duration that is between four and seven years depending on which product line you are talking about. Movements are going to be very quickly, so it's not a small amount with interest rates rise, you will see it in unrealized gains as a negative.

All right and then on the fixed annuities, maybe could you give us some more on how the book is protected from any rate rises and any possible up ticks in surrenders?

I have got a lot of information here about the fixed annuity, but I don't think I've ever been asked about market value adjustments. We do have some products out there with market value adjustments. I do not have that information now. And you are concerned about --

I guess, if you can see where I am coming from, you had a discussion earlier about the DAC asset as being in sort of the perfect situation between persistency and the impacts of lower spreads and the fear we have is -- it is a pretty competitive business and everyone seems to be going after one another's books of business and so getting an understanding how well protected the DAC asset is in these types of environments is what the gist of the question is?

Certainly, the majority of our business, not the vast majority, but the majority of our fixed annuity business is still in a surrender penalty period but a lot of that does start to roll off, you know, the next few years. You know, as interest rates, if they continue to spike, or if they continue to go up, they would have to go up quickly and they would have to go up at least more than 100 basis points before I think it makes sense for a policyholder to consider rolling the business. And if they go up, over a period of 12 to 18 months, then of course, we have a reset period during that period of time where we can lower the gap between new money crediting rates and where we are.

So, I'm sorry, I don't have the market value adjustment number, the majority of our business is still under surrender period penalty that will be coming off in the next five years and as you know, you amortize your DAC over that -- some of your DAC over that period of time as well to reduce the risk of that. And lapse rates have been down.

Okay, so when we circle back to what you reported in the press release about spreads being up three basis points on the quarter, how should we think of the progress that you are making in bringing down your crediting rates on the book and getting you back to your target as far as what was your average credited rate and how much more do you think you can get it down in the next half year or year?

I think between now and the end of the year, we would hope to widen those spreads another 20 basis points approximately if all else stays the same.

Okay. And so we can expect to see that between here and the rest of the year?

All else being the same, yes.

Great, thanks.

The next question comes from Mr. Hunt. Please state your company name followed by your question.

Yes, hello. This is from Amsterdam. Two questions, first of all, on Transamerica Finance, if you could breakdown what the result was of the operation that you will keep after the sale of the commercial lending business. Secondly, looking at the bond defaults during the quarter, second quarter there was some statements regarding additional provisions for the airline business. Could you a little bit elaborate on what kind of amount we have to calculate with and what would you think more is the more normal level for bond defaults in the second quarter or really were there no additions for the airlines? Could you a little bit elaborate on that?

On the question about the Transamerica Finance company that we are keeping. Were you asking about receivable size or receivables for example --.

No, on the business you are keeping, what kind of profitability level do we have to calculate this for the first half?

Okay. Let me start with the bond default question. We think long-term and appropriate long-term default rate is about 35 to 36 basis points. As far as what it's going to be for the next six months, I mean there is a lot of volatility out there; I don't think we are trying to hazard a guess as to what it is going to be. Clearly it has improved from last year, but it is not going to be down, we do not expect it to be down to our long-term default assumption of 35 basis points yet over the next six months.

With respect to the business that we are keeping, materially it is the real estate tax service business and there have been one-time adjustments coming through the first half of the year material for us. One-time adjustments, I think for the first six months, the earnings on the real estate tax service has been approximately $70m, which includes a one-time $35m fee for acceleration of accounting income. And that's materially the assets that we are going to be keeping, the other portions of the finance business that we are keeping are not material to income.

Following on the bond defaults, were there in the second quarter any industries you had to really, because I am referring to the airline business mainly, you have to really some additional provisions made for on the bond defaults or are there any industries, which really was a problem for you in the second quarter?

No. There is no one industry that was problematic for us in the second quarter.

Okay, thank you.

We have a follow-up question from Mr. Duncan Russell. Please go ahead sir.

Yeah, this is actually Bob Yates with Duncan Russell at Fox-Pitt, Kelton. Just on the fixed annuities in the states, you talked a lot about crediting rates and yields. What have you done structurally in order to improve the economics of that business long-term? I am thinking of how much have you moved commission rates during the last two or three months? Have those gone back down, will they go back up again? How much have you re-engineered the product other than minimum guarantees and have you done anything to reduce your general in-house expenses?

Well, there are two ways of going at this. One is reducing the minimum guarantees on your new sales and cutting your crediting rates down to a sustainable level. That we have done. And as you suggested also reducing commissions. We have not tried to protect the amount of volume by chasing business. We have tried to protect the returns we are getting on the business and for example, the products that had a 3% minimum guarantee, we basically could not get a sustainable spread and pay any commission at all. So, we've pulled the commission altogether where we could, where we did not otherwise have a contractual obligation to and as you can imagine, when you pay no commissions then you get no sales in that. In the 2% and 1.5% guaranteed products, the commissions were also reduced so that we could get a supportable spread and get our returns and to the extent that the competition did not follow then of course, that would have the effect of reducing our amount of production as well.

Now, I think what you’re suggesting is that interest rates have come back to 100 basis points and that at 1.5% and 2% minimum guarantees. It's true we could again almost pay on the 1.5% guarantee. We could pay full commission and on the 2% contract, we could almost pay a full commission to be back in the market. I will just tell you that we are being cautious because, lets face it, the rates came up awfully quick, they came up faster than they dropped and I think it is worst to be in and out of the market on a monthly basis than being confident that you can be in for the long term.

So, we‘re being -- let's just say cautious before we take commissions back up to where they were until we are confident that rates are going to be stable, going forward. Does that answer your question?

Pat. You might mention paying up-front commissions going forward.

And in addition, another product design change that we made with a couple of our bank partners is rather than paying a larger upfront commission we're paying a trail fee, which allows us to more easily get a supportable rate over a long-term basis. We are trying to move some of other bank partners to that method as well.

Thank you. I just wondered if you could really quantify the cutting of commissions. If I remember just the other question about your general expenses, whether you've taken action to cut those?

On the expense question, we continue to try to take out expenses through attrition and through some planned reductions as we can. And that's an ongoing process. But to date the fixed annuity production, while it is off somewhat from a year ago, and we are likely to be somewhat off year-over-year we've not taken major steps because we still think there is going to be some production coming in. Our expenses are at about pricing right now in that division. I am sorry, your other question was on --

Well, I was just really asking if you could quantify cutting commissions...

I think most of it is by the 2% level now.

Yeah, I think we have basically reduced commissions across the board on the 1.5% and 2% minimum guarantee from about 5% or 6% down to 2%, 2.5%, 3% and that allows us to still get our supportable rate. But at this point, where rates have rebounded we can come back. We could probably pay a full commission, but we haven't taken that action yet until we have more certainty that rates are going to be stable.

Okay, thank you very much.

The next question comes from Carlota Millan. Please state your company name followed by your question.

Hello, this is Carlota Millan from BBVA . I would like to ask you two questions. First of all, if you could explain why the costs are up 4% in the United States and then I would like to know if -- or what is the level of interest rates where you could suffer losses in the bond portfolio if the lapse rates are up to quickly due to these higher interest rates? Thank you.

Okay, the costs are up 4% primarily to accommodate -- I mean we have a number of initiatives going on and investments we are making in systems and so forth, but specifically costs are up 3% to 4% in the US over the first six months. However, it is in line with the additional allowable expenses from the new business and the growth in the business that we have written. With respect to your question, how much more would interest rates have to go up before we would start seeing policyholders leave for higher interest rates, is that your question?

Yes.

I will give you our best guess right now, but it has been more difficult given the volatile markets for us to predict policyholder behavior. The trend has been for policyholders to stick with you more than we thought. But from a mathematical perspective, we think that unless rates go up from now another 100 to 150 basis points, there is no reason for a policyholder to consider moving. Beyond that, there may be an economic reason for them to move, but again it's been more difficult to predict policyholder behavior given the volatility recently.

Okay, thank you very much.

The next question comes from Mr. Hani Sabbagh. Please state your company name followed by your question.

Hi, thanks. Hani Sabbagh from Citigroup Asset Management. Just have a few question. I wonder, could you just tell us what the gross unrealized losses are on the bond portfolio at the half year? Also what's the achieved rate on new investments is in terms of -- in the US and also I don't know if you already answered this but achieved spread on new business, whether that is meeting your profitability targets?

Thirdly, what cash injections or withdrawals have you made to or from the US operations in the first half of the year? And finally, just wanted to understand, you've turned the tap off on production in the US both on the fixed and variable annuities. Is that because you don't have the capital to write the business or is that because you don't think it's profitable?

The unrealized -- unrealized up to a total bond portfolio in the US, unrealized losses of 1.4b. So in the earlier part of the conference call I gave you the net number of 5.7. So that means that 7.1 is unrealized gains, I added it up for you.

Okay.

Then, you've asked, I think me a number of questions and I guess I would ask someone to look for an achieved rate on -- are you talking about new money being invested?

Yeah.

I will ask someone to look for that. If we don’t have it, then I will have to get back to you. The achieved rate on new business, I believe we are getting approximately 11% all in on new business, 11% un-leveraged internal rate of return. That is our goal, that's what we believe we achieved in 2002 and that's what we are attempting to achieve this year It's been made more difficult this year because we had a quarter where interest rates were very, very low, and some of our Life products were not right to get 11% at that lower level of interest rates. So it’s possible this year it may slip below 11% but materially we are trying to get 11% un-leveraged in the US.

Hani, on the new money rates, obviously those are a little bit different right now than they were during the second quarter. But my guess would be that would be just north of four during the second quarter 4.2% or so, which is consistent with the fact that we would like to make about 225 basis points spread and our crediting is just below 2.

Okay.

And did you ask one another question, I am sorry as --

On the cash to or from the US operations in the first half?

Nothing. Nothing to and nothing from.

And finally, maybe you can just answer the question as to why you switched off the production so severely?

It was not a matter of capital, it was a matter of not wanting to take unreasonable risks given the returns that were available during the low interest rate period, variable annuities in the first half of the year in order to be in the ball game, we had to take what we thought were unreasonable, equity risks on the product.

So, we chose not to chase volume on either variable or fixed annuity, but to maintain our risk and profit disciplines. And then in addition at the same time of course life production is where we are getting our returns and we are comfortable with all the risks.

Of course, the turns we get on required capital that we have to put up with that new business doesn't make a lot of sense in low interest rate environments.

Of course, the returns we got on required capital that we have to put up with that new business doesn't make a lot of sense in low interest rate environments. On a risk-adjusted basis on fixed and variable annuities, we just didn't think, we could write the business profitably in the first six months.

Okay, thanks.

Excuse me gentlemen. This concludes the Q&A session. Please continue with any other points you wish to raise.

Thank you all very much for attending and we hope to see you tomorrow. Thank you.

Ladies and gentlemen, this concludes the AEGON half-year results 2003 conference call. Thank you for participating. You may now disconnect.