Aegon Ltd (AEG) 2003 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the AEGON Yearly Results 2003 Conference Call on the 12th of March, 2004. Throughout today's presentation, all participants will be in a listen-only mode. After, the presentation there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Mr. Don Shepard. Please go ahead, sir.

Additionally, I'll turn it over to Fred first.

Good afternoon. Welcome to AEGON's conference call on our 2003 full-year results. My name is Fred Romijnsen, and I'm the SVP responsible for Group Corporate Affairs and Investor Relations.

Before we begin, I need to make you aware of our cautionary note regarding any forward-looking statements, which is on the next slide. We would appreciate it if you would take a minute or two to review this statement. But now, let me turn the call over to Don Shepard.

Thank you, Fred. Good afternoon here in Europe and good morning in the U.S. Thank you for being with us today. Along with Fred, joining me here today are my Executive Board colleagues Jos Streppel, Johan van der Werf, and Alex Wynaendts. Also joining us today on the phone are Brenda Clancy and Darryl Button from AEGON USA and David Henderson, our CEO in the UK. Michiel van Katwijk, our Treasurer, is here as well.

We feel better about our business now than we did a year ago. 2003 was a year for improving the profitability of our business. This is due in part to the actions we've taken to improve margins, and further focus on our core business. It's also due to the improvements we've seen in the equity and credit markets. In some cases, the actions taken to focus on profitability have come at the expense of new production. We'll talk about that more in a few minutes, as well as some of the opportunities we see to grow our revenues profitably in the coming years. But first, I'll turn the microphone over to Jos Streppel, who will discuss our 2003 performance and financial results, as well as an important change in our reporting for 2004. Jos?

Thank you, Don. Slide three. Net income in Euros for 2003 increased 16%, and net income per share increased 11%. On a constant exchange rate basis, these increases would be 30% and 24%, respectively. The principle reasons for the difference in the increase in net income and net income per share gross figures are the higher preferred share dividend, due to the increase in our preferred share capital and the increased number of our shares from last year's stock dividends.

The increase in net income was influenced by lower corporate bond defaults and by higher equity markets. Higher results from Transamerica Finance Corporation also had a significant influence on net income. Production results have been mixed, partly influenced by the markets and partly influenced by actions we have taken. Still, new line production increased 3% in Euros and 15% on a constant exchange rate basis.

Like the earnings figures, shareholder's equity and assets have also been heavily influenced by currency exchange rates. However, because our debt is proportionally allocated by currency, based on our country unit capital levels, there is no currency influence on our capital leverage or capital adequacy positions. Shareholder's equity would have increased 14% on a constant exchange rate basis.

Slide four -- as you may be aware, we do not hedge currency translation risk. It continues to be our belief that over time, hedging adds cost at the expense of shareholders. So, while such hedging activity could have tempered the short-term volatility of earnings, the economics of not hedging our dollar earnings are very compelling. Accordingly, rather than hedging, we will continue our practice of advising investors of the approximate influence of currency movements on our imported earnings, as part of our annual sensitivity analysis. In the upcoming annual report, we will provide you with update sensitivity of our net income to financial markets, including exchange rate movements.

Slide five -- measured in Euros, standardized new life production increased by 3% and by 15% at constant currency exchange rates. Standardized new life production in the Americas and the UK was up by 9% and 8%, respectively. Production in the U.S. was up primarily because of strong sales of traditional universal life products in the agency channel. Production in the UK was higher, due partly to the [15%] increase in traditional life business. In the Netherlands, standardized new life production decreased by 21%, due mainly to lower large case group pension sales. The increase of standardized life production in other countries is primarily driven by a four-fold increase in Taiwan, due to the expansion of distribution networks there.

Slide six -- total deposits in the Americas decreased 22%, to approximately $21b in 2003. Fixed annuity deposits decreased 27%, as we lowered crediting rate on new and existing business and adjusted compensation structures. Variable annuity deposits decreased 36% in the Americas, due largely to the discontinuance of the guaranteed minimum income benefit in January, 2003. GICs and funding agreement deposits were 4% lower than last year, due in part to maintaining our pricing discipline in a very competitive market. Saving deposits were 14% lower for the same reason.

Our balance sheet production, which is mostly in the Americas, showed a 14% increase in U.S. dollars, for a 25% increase in mutual fund and managed asset sales, and a 9% increase in synthetic GIC sales.

Slide seven -- in the Americas, income before tax increased 52%. Traditional life, life for the account of policyholders, and GIC and funding agreement results were lower, while fixed annuity, variable annuity, accident and health and fee business results were higher. Lower investment deals and lower indirect income adversely influenced the traditional life, fixed annuity, GIC, and accident and health segments, while lower credit losses in the fixed annuity and GIC product segments had a notable positive influence. Variable annuity results recovered from a loss position, as they were no changes for [depack] unlocking or guarantee of reserve provisioning. Life for the account of policyholder results reflect higher policy lapses. Because they are so significant, I'll also show you why and how the profitability the of the fixed and variable annuity books has improved.

Slide eight -- in the fixed annuity business, lower crediting rates and adjustment to compensation structures resulted in lower production. The spread on the largest segment of the book increased from 163 basis points at the end of 2002 to 192 basis points at the end of 2003. And, during that same period, account balances grew from 7%, from $42b to $45b, mainly due to new deposits and low lapse rates. Higher spreads, higher account balances, and low lapse rates all served to improve future results.

Slide nine -- variable annuity production decreased 36%, as a result of the withdrawal of the Guaranteed Minimum Income benefit feature in the first quarter of 2003. The new feature, the Guaranteed Minimum Withdrawal benefit, was introduced on a smaller scale in December, 2003. The production level for this product, and product feature, has not been significant yet, but it's building momentum. Variable annuity account balances grew 30%, from $32b to $42b, largely as a result of market performance, leading to increased fee income, which will also be reflected in future results.

Slide ten -- in the Netherlands, income before tax increased 17%. Life for r account policyholders, health, banking, and fee business results improved, while the traditional life results was modestly lower. General insurance income was half of the prior year. The small decrease in traditional life results reflect higher employee pension costs, higher life for account of policyholder results were due to lower provisions for guarantees, while the fee business results primarily reflect the results of the consolidated distribution companies. General insurance results were lower, due primarily to lower investment income and at-risk claim experience, while the increase in banking results reflects lower additions to provisions.

Slide 11 -- in the United Kingdom, income before tax was 11% lower. Both the traditional life and the [unit-linked life] lines of business had lower results. Traditional life earnings were lower, due to the lower levels of mortality experience profits and non-recurring provisional releases, included the prior year's result. Life for account of policyholder results were lower, as a direct result of lower management fees on equity-linked funds, reflecting lower average daily equity market values. Also affecting results were higher expenses, particularly [depack] amortization and pension costs.

In other countries -- slide 12 -- in other countries, income before tax increased 23%. Life and fee business results have all improved. Results improved significantly in Hungary, Spain, and Taiwan. In general, modestly higher results in life business reflect higher business volume, while the improvement in loan life insurance reflects improved claim experience.

Slide 13 -- while asset growth was very good on a local currency basis, the currency translation effect limits the increase to 2% in Euros. In U.S. dollars, total investment in the Americas were up 17%. In pounds sterling, total investments were up 13% in the United Kingdom and in Europe, total investments were up 27% in the Netherlands. The large increase in the Netherlands reflect higher off-balance sheet investments, which now include 6.5b Euros of manage asset by date [BT pensions], which was acquired in the beginning of 2003.

Slide 14 -- our U.S. bond portfolio increased by over $6b during the year, accounting for most of the increase in the general account assets. Credit quality has not changed significantly, as corporate bond default rates, though lower than a year ago, are still at high levels, relative to our long-term experience. The addition to our default provision was $516m, compared to $774m last year. [inaudible] provision were $520m, compared to $791m last year.

Slide 15 -- there were no material developments in our capital base during the year. While shareholder's equity and debt have been affected by currency exchange rates, the ratio of equity to total capital base is not materially affected by the translation. The equity to total capital base ratio, which now stands at 71%, is higher than our stated targeted minimum of 70. We continue to have good financial flexibility, and our operating companies in our core markets of the United States, the Netherlands, and the UK continue to have very strong financial ratings.

Slide 16 -- in line with the income strategy, to concentrate on life insurance, pensions, and related saving products, AEGON divested most of its non-core TFC businesses. AEGON sold most of TFC's commercial lending activities to General Electric. This transaction was successfully completed in January, 2004, and the after-tax book gain of approximately $200m will be credited directly to shareholders equity in 2004.

AEGON also sold Transamerica's Real Estate Information Services and Flood Hazard Certification business. This transaction resulted in an after-tax book gain of $347m U.S. dollar, which has been credited directly to shareholders equity in 2003. The remaining non-core TFC business, which managed assets of $2.2b and a book value of approximately $0.2b, consists of maritime container and European train leasing, which will be consolidated in AEGON's financial account, as of the first quarter of 2004.

This brings me to two accounting issues, which we also addressed in our press release. Slide 17 -- the first of these issues is the change we announced in the assumptions used in our mean reversing methodology. As this slide shows, because of strong 2003 equity market performance, in both the NASDAQ and the S&P 500, the change in return assumption from 12% to 7.5% was necessary in order to bring us in line with our 9% long-term return assumption for the market as a whole. As you see here, using the major indices as surrogates for some positions, this results in the S&P 500 Index being slightly below the 9% long-term return assumption, while the NASDAQ Index is slightly above the 9% long-term return assumption.

Slide 18 -- additionally, as we have announced earlier, as of January 1st, 2004, AEGON no longer uses the indirect income method for recognizing gains and losses on our investments in shares and real estate. We have used this method since 1995 to reflect the long-term nature of our business. Beginning this year, we apply Generally Accepted and Recognized Methods, which is in accordance with international financial reporting standards requirements and is similar to U.S. GAAP. This method recognizes gains and losses on shares and real estate investments when realized. While the affect on future net income is not determinable, the expected change will result in increased volatility of future net income.

I would like to turn it back to Don, who will discuss what we see as our growth opportunities going forward. Don?

Thank you, Jos. While 2003 was the year - this is slide 19 -- while 2003 was the year for focusing on the profitability of our business, our top priority for 2004 is revenue growth, but not at any cost. It must be profitable and accompanied by continual improvement in operating efficiency. Positive financial markets certainly aide our revenue growth. Reasonably stable equity markets, improving credit markets, and slowly rising interest rates would be favorable for our business.

Slide 20 -- revenue development for AEGON is happening on multiple fronts. In our existing markets, it is through the autonomous entrepreneurial activities of our various business units, or through acquisitions, such as we've done with distribution in the UK and the Netherlands, or through joint ventures, such as we've done with Com in Spain. In France, we are confident that we will be able to further develop our potential with La Mondial, which continues to operate successfully in the growing marketplace of bank assurance and pensions. We believe it will also come from new markets, such as China and Slovakia, where the initial results are very encouraging. In parallel, new opportunities in large markets like Mexico, Japan, and Germany would be considered.

We expect -- slide 21 -- we expect that the greatest part of our revenue growth in the coming couple of years will be from existing markets. Our objective is to have a leading position in each of our markets, aided or hindered by government programs, revenue growth is and will be coming from new product initiatives, increased productivity of our existing distribution resources, as well as the addition of new distribution resources. The opportunities differ greatly by country, depending upon the size of the market and the breadth of distribution and product offerings.

For example, our insurance companies in the United States have a broad product line, wide distribution, and combined, they have about a 4% market share. In the UK, on the other hand, AEGON has a more narrow distribution and product line focus, and our market share of 14% in its major line of business, where we have a very broad product portfolio. While new product initiatives and greater distribution capacity are important in both markets, the emphasis on each is different. Our distribution channels continue to be the agency channel, financial institutions, direct marketing, and brokerage. Our revenue growth in Taiwan is an excellent example of increasing the breadth of distribution resources. Initially established as an agency operation, financial institutions and brokerage now account for the majority of sales, which are up Euro 335m in 2003, a more than four-fold increase.

Slide 22 -- looking ahead, we can see how, for example, AEGON USA is positioned. You still have strong franchise value in the annuity business, where we see signs that market rationalization is occurring and where we expect to see increased sales levels in the coming months, helped along by our new variable annuity product features. We've also enhanced our product menu in the bank, wire house, and broker dealer channel, and we still remain committed to our risk and profitability standards in this line of business. Our position in the life market is very solid. Transamerica has a strong franchise, and we're seeing accelerated growth in the middle market brokerage channel. With good penetration in the banks and broker/dealers, we're also seeing promising developments in the pension market, as the growth of those business units and pensions is outpacing the market.

Slide 23 -- in the Netherlands, our new, client-focused organizational structure better enables us to provide high-quality, value-added products and services, supported by lower operating costs. This allows us to capture the significant long-term growth opportunities that exist in different segments of the market. We are well-positioned in the group pension market, where our small and medium-sized enterprise segment is growing strongly. Unbundled pension business is becoming more important, and our market share and asset-only management products and administrative services is increasing. In individual pensions, the huge pension gap that still exists offers a substantial opportunity for growth. In the life insurance market, we will further develop life cycle products and services to address the constantly changing needs of our customers. We also see opportunities in the non-life sector, particularly in the disability market, which is growing as a result of changes in government programs. These different segments are targeted through a sophisticated, multi-channel distribution network, which we continuously develop and strengthen, with particular emphasis on direct marketing techniques.

Slide 24 -- AEGON UK is well-positioned in its core pension markets to capitalize on the government's agenda to encourage the population to make greater retirement provision for themselves. There's a gap of at least 30b British pound per annum in the amount of savings required. The growth in pensions is expected to be through more defined contribution business, as more employers close their final salary and pension schemes. We are now seeing new business being concentrated on a number of scale players. AEGON UK, with its core positioning in the pension market, will continue to be one of these key players in a historically fragmented market. Because the UK has an aging but increasingly wealthy population requiring sophisticated solutions, we have a strong portfolio of retirement planning products, offshore investment products, and protection products, which address the needs of our clients. The growth in protection products will also continue to be fueled by buoyant property market in the UK. And as you know, we have invested in IFA distribution in anticipation of the consolidation of the sector.

Slide 25 -- in addition to focusing on revenue growth, we are continually pursuing cost efficiencies. In all of our country units, we work aggressively to control costs, but the greatest potential for improvement remains in our largest country units. For example, in AEGON USA, the consolidation of back office functions within AEGON Financial Partners has resulted in $40m of expense reduction over the last two years. Actual operating expenses were $25m less in 2003 compared to 2002. We also expect that the simplification of our system environment will generate additional expense savings in future years. AEGON the Netherlands has for many years been a low-cost operator and anticipates a reduction in headcount of 10% to 15% over the next three years, as a result of the recently announced reorganization. And during 2003, AEGON UK completed the first phase of a cost control program, generating costs savings of approximately 40m British pounds per annum, and recently entered the second phase of this program, targeting another 40m British pounds in cost savings.

Looking ahead, not only to the strength of our existing businesses, but also with new opportunities, AEGON is positioned to grow its chosen markets. We have a platform upon which we will be able to sustain growth and increase profitability. Thank you for your attention. We will be happy to take your questions now.

[Operator Instructions] The first question comes from Mr. Rob Procter. Please state your name, company name, followed by your question.

Yeah, good afternoon, it's Rob Procter from Morgan Stanley. Can you hear me?

Yes.

Hello. Good afternoon. I wanted to draw you out a little bit on the sales picture, looking forward, not so much on the life side, but more on the annuity side, in the States. Clearly you've launched the new GMWB contract in December, you've said that so far, sales are not yet significant. But I just wondered if you could give us any indication of what sort of quantum of sales that you're looking for from this new product? For example, is it set to replace much of the lost market share that you've suffered in VA over the past year? Is it considerably smaller than that? How should we think about that picture, on that side? And then also on the fixed annuity side, also you've seen a material reduction there, you've indicated that at least part of this is due to, let's say, stepping back from unprofitable business. Looking forward, how do you see the new business profitability within fixed annuity? I think at the nine-month stage, you gave an indication of spreads on new business. I wonder if you could just update as to where we are on the spreads on the new book of business you're writing? You also mentioned in your comments from there that perhaps there's been some changes in the compensation structure. I wondered if you could just elaborate on that side, too? Thanks.

Thanks, Rob. I'll kind of give some information and then I might ask Brenda Clancy to jump in a little bit on spreads and how things are developing right now. But let me take fixed annuities first, and in 2001, we had about-- and this is sales through our bank, wire house, planner, and regional broker/dealer channels, we had about $3.9b in fixed annuity production in 2001. It shot up in 2002 to $5.1b, and if you think about it, a lot of that had to do with issues in equity markets, so things went to the fixed, so we had a big shoot-up in production. In 2003, it was back to $3.7b, but of course, we cut crediting rates, we cut guarantees on products and changed compensation. So that's expected.

The-- I guess our view is, on fixed annuities, that as long as we can get fixed annuities being sold without-- where we can get a reasonable return on it, we'll continue. If not, it's OK with us if somebody else gets the sales. We think that we can stay in our franchise value in the channel, and just to give you some indication, in these channels that we're talking about, from 2001 to 2003, we had mutual fund sales of $1.2b, in 2001. We're up to $2.1b in 2003. We have single-premium life production in 2001 of $60m, up to $216m in the banks. Reoccurring life premium banks, zero in 2001, $5.6m in the banks in 2003. Small plan 401ks, about $450m in 2001 -- these are through these channels again -- $990m in 2003. Large plan 401k, $480m in 2001, $900m in 2003. So, what I'm suggesting here is that we've been able to take other product lines, where we're more comfortable with the profitability, into these channels that we have great relationships with. And we will, as things rationalize more in the fixed annuity business, I think we'll get our fair share back again. Even with this big reduction in 2003, I think in the [Carra] report we were still number eight, or had about an 8% market share, and I think we were number two or number three in terms of production. It's just that one company is way out ahead of everybody else.

I hope that kind of gives you an indication that we've continued the franchise value, we introduced new products, and we'll continue to be able to grow in those distribution systems. Brenda, do you want jump in here on both production and profitability issues and spreads?

I guess, Rob, on new business right now, on fixed annuities, we are getting our spreads, you know, but our policyholder crediting rate on new business right now is at 2%, so from a profitability standpoint, on business we're writing today, not a problem.

With regard to your question on variable annuities, as you mentioned, we launched our new GMWB product and quite frankly, got out of the gates a little slower than we had originally expected, and this is somewhat due to all the requirements, you know, with our filing with the SEC, and then quite frankly, even our distribution partners now are doing much more scrutiny and review on their side, in terms of, you know, whether or not they're going to accept the product. We're very pleased so far with the acceptance, that the new guaranteed principal solution product has received. And recent sales have been strong. Do we expect to, you know, reach levels on the variable side, even level with last year? Given the slow start, probably not. It'll probably be a little less than that.

OK. Sorry, can I just ask a quick follow-up? Again, it goes back to the fixed side and a comment you made in the press release, I think, that with withdrawal rates continue to be very low. It's interesting, the balance on the fixed bucket increased, I think, 7% in the U.S. during the year. Can you quantify what that lapse or withdrawal rate actually is on that product?

Can you give me a minute? I think it's down to 7%, 8%, if I recall right. Brenda?

Ahh-

8.8.

8.8 in the last quarter.

OK.

But that's down. That's withdrawals, surrenders, everything all in, Rob.

OK, good. Thank you very much.

Thank you.

Thank you. The next question comes from Mr. [Jah Mayer]. Please state your name, company name, followed by your question.

Hi, this is [Jah Mayer] for just a couple of questions. Perhaps you could split out the one-offs of the 50 million in the fourth quarter to the different business lines, and another one, and related -- is-- it's pretty easy to calculate what's the impact of the deconsolidation of Transamerica Finance Corporation, but I'm just wondering what's going to be happening with the redemption on the loans and what's the impact on interest costs in '04? Thanks.

Jos, you want to take that. I'm not sure I understood the question.

I did not understand, Jah, the first question. Could you--

Yeah, the one-off of $50m, maybe you could split the allocation towards the business lines, like I heard that traditional life was helped by the one-offs of the $50m in the final question.

I couldn't help you out, because I still cannot see where the $50m is. Somebody understand what's the $50m?

Well, your press release talks about the one-offs for the full year, and of that amount, $50m is new, so just wondering how you allocated that to your business, different business lines?

Jah, I can't really [inaudible] -- I can't really reconcile the $50m at this point. I'll get back to you on that, but whatever came in, in the last quarter, I think it's less than $50m that came in largely in the traditional life line.

OK, that's fine. Then on the Transamerica Finance Corporation, the impact on interest costs, because of the redemption of loans -- give some color on that.

We-- we have always had the interest of the acquisition debt separate, so in our interest charges and other, you never saw any interest-- interest costs related to TFC. What will happen after consolidation is on the book value debt that is left, that's a relatively low amount, maybe like $200m or so. That will end up in interest charges and other. The rest will be compensated by the assets, so you won't see that in interest charges and other. So the effect will be interest on the $200m on debt, so that will be a [log] number.

OK. Do I understand correctly, that your redemption of the core debt is $1.4b? That's going to be the lower run rate [inaudible] for the interest charges in?

Yeah, we redeemed mostly operational debt. What now comes into our core debt is just the $200m on the book value of the remaining businesses.

OK, that's fine, then. OK.

OK.

Thank you. The next question comes from Mr. Nick Burns. Please state your name, company name, followed by your question.

Hi, it's Nick Burns from JP Morgan. I have two questions. Just following on from the last question, on interest charges, I wonder if you could just provide a little bit of clarity or guidance, going forward, on how we should look at line for the group, because there does seem to be quite marked volatility from quarter to quarter. For example, in the final quarter, it was only $90m and it was approximately 470 for the year. Then my second question is on the Dutch traditional life operations, which, including the indirect income, looks flat year on year. However, when you strip it out, the traditional life profit fell from 142 in '02 to only 18 million. And just given Michiel's comments just a few minutes ago, on the fact that potentially there's a one-off included in the fourth quarter included in traditional life, can you give me a feeling for what's happening in that business, please?

The one-off is in the traditional life line in the U.S. On the interest charges, I think on average, by quarter, interest charges for-- have been and will be, not to be too different-- around 90 million a quarter, so the total may be 360 a year. The noise around that is the ``other,'' and that includes expenses, currency results, and you should keep in mind that certainly, not so much in '03, but in '02, there was also some release provisions there on runoff businesses.

And what also happened in the fourth quarter is we started including in the ``other'' the expensing of stock appreciation rights.

Does that answer your question, Nick?

Yes, it does, but just on the 20 million stock appreciation rights, are we to-- is that a one-off, effectively, then?

No, it will be a revaluation every year of the outstanding appreciation rights.

So the obligation will be march-- will be mark to market, so-- and the difference in fair value at the end of the year will show up in the P&L. It can be a positive or negative against [inaudible] at the end of 2003.

OK. And then on the Dutch life operations?

What was the question again, Nick?

Well, if you present the traditional life business in two ways, with the indirect income included and excluded. And if we look at it excluded, which is, presumably, how we should focus going forward, there was a 44% drop in pre-tax income from Dutch traditional life, excluding indirect income. And given your comments about the strength of that business, it looks to me quite disturbing.

Well, you're right. If you realize that-- if you realize that in the Dutch portfolio, the relative weight of equities is pretty high, that should count something back for that. But apart from that-- and a term we do not use, but so-called operational income for traditional life the Netherlands went down. We had a considerable amount of lapses in the saving plans, so a big part of that acceleration of the impact caused the lapses. That comes to an end, because that is winding down. It was government regulation- government regulation that changed that, that caused a lot of lapses, and Johan, you could perhaps go into that. I think that's coming to an end, gradually.

Yes, we were very successful in the 90s, the end of the 90s, and 2000, 2001, in company saving schemes, where companies can support their employees to save with a fiscal help, and one and a half years ago, government took away that advantage and as a result of that, in these company savings schemes, policies that were paid up were partly ended or premium gone down, and that's the reason for the lapses the [de-amortization] of [Depak].

And the last rate was pretty significant.

Yes, it's very significant. It's going to end, I think, in the first and the second quarter of this year, we'll still feel it, and then it might end.

OK, just for clarity, presumably there's also a consequence, going forward, of not having those savings plans on the books, from an ongoing earnings perspective. Can you just give us some feel for what a normalized run rate should be for the traditional life business, X-ing out the [Depak] amortization, and then also the lack of revenue that you'll get from those company schemes?

We have to dig in that question and come back to you.

Nick, to give you an idea, the lapses in 2003, in life insurance, were up at 45% because of the reasons just explained, so that's a lot, and we do not expect that to be recurring. To give you a normalized ratio, these circumstances are quite difficult, you must understand.

Another reason-- another reason is that the--

Well, what Nick is saying is, is that with the lapses over, what do you expect out of the traditional book, going forward, so I think we can do a little, and Michiel, or somebody--

Yeah, we will do some research on that and come back to you. Another-- another factor for the low result in traditional life, excluding the indirect return, was we strengthened for the pension part, for the traditional life, the longevity provisions, so there was some strengthening there.

Could you quantify that?

Yeah, we'll get back to you, Nick, with an answer to your original question, so what-- acceptable run rate for this line of business.

That's very kind, thank you.

And strengthening for longevity was 21 million.

Thank you.

Thank you. The next question comes from Mr. [Lukas Dalder]. Please state your name, company name, followed by your question.

Yes, good afternoon, this is Lukas Dalder from [inaudible]. A couple of questions. One, about the fee business in the U.S., which showed a sharp drop. There's some line on it in the press release as well. Could you give some more details on that, because I don't really see what's going on there. TFC, also a strong drop in results, related to another- the other results, which showed a sharp decline. Can you quantify something on that? And if you could give me some indication on the earned rates in Q4, that would also be most welcome.

I'll take the first one. On the fee income, a lot of that, there was a $35m hit for what's called deferred comp, and basically that's on our Transamerica Investment Management Services, because we have a-- we own 80% and the management owns 20%, it's kind of a deferred comp calculation. Frankly, we didn't agree with that way of accounting for it, but we lost, so it's- Jos, if you want to jump in?

Well, the situation is this -- we have an asset management company called Transamerica Investment Management. It's owned for 80% by AEGON, 20% is owned by the management. We have an agreement with the managing that they sell back to AEGON the 20% when they leave, if and when they leave the company, at a predefined formula, approaching market value. According to our outside-- to our external auditors, although we think that it is-- it is a stock arrangement, they and the U.S. GAAP think that it's a deferred compensation arrangement, so we accounted for it as a deferred compensation, and that's meant that the fair value of the 20% in that company was charged to the P&L in 2003, so that's the reason.

Lukas, again, what was your second question, on TFC?

TFC, well, the results, Q4 results, seemed to be on the low side, and that's related to the charge ``other,'' or at least what I can see from it, and I was wondering, ``other,'' what's in it? There's 65 million negative--

Yeah, OK. Brenda?

Well, the primary reason for the lower earnings in TFC was the fact that we sold the Real Estate Information Services segment. That closed on October 1st, and so there were no earnings reported for that segment in the fourth quarter.

Yeah, that's what I've gathered as well, but if you look at the income, the drop in Q4 seems to be mostly related to the-- not the sale, but the charge-- somewhere are hidden in the ``other'' department.

I guess we don't see that.

Maybe I'm mixed up there, but I'll look at it as well. And the third question, on the earned rates?

What do you mean, Lukas?

Well, the earned-- the rates that you make on your fixed annuity book in the U.S.?

Oh, OK, we are now on the book -- Brenda, correct me if I'm wrong -- at 193 basis points and we have one quarter to go at specialty credit rates for a quarter of our book, so it's now 193 and it should be, a quarter from now, approaching, or just going over 200 basis points.

OK, thanks very much.

And Lukas, the ``other'' thing in the ``other'' line was, in the fourth quarter, we also had to include higher corporate expenses as a result of accruals for incentive compensation.

OK. OK, thanks very much.

Thanks.

Thank you. The next question comes from Ms. Chantelle Weight. Please state your name, company name, followed by your question.

Hello there, this is Chantelle Weight from Deutsche Bank. First, I'd just like to have a follow-up question on the Dutch business, if possible, especially to get a feel for whether the life policy account run rate is a reasonable one to forecast from, going forward. And also, just in terms of the cosmetics, with your new investment in term policy, will you be showing realized gains by line of business or separately, so basically, at an [optical] level, are we likely to see a very steep fall in state Dutch life profits? And secondly, a follow-up question on your withdrawal benefit, the A product, in the States. Firstly, how comparable is this product to the peer group, and what distribution channels are you targeting? And we note that you seem to have higher pricing on the rider than some of your peers. Does this reflect inherent caution on your part or different features on those products? Thanks.

We'll let Brenda take the variable question, but Jos, do you want to--

I go first on the realized -- yes, we will show it separately, by product line.

[inaudible]

Yeah

I guess you won't take that question.

No! The most important- the most important part, I think, of your question is, will we see a fall? Will we see a fall, or not, in income, because of the discontinuance of the indirect return, and the honest answer is, ``I don't know,'' because we take realized gains on the investments on real estate and equities, as they come. We have no plans to really manage it. We have good reasons for that, because really-- realizations have an effect on our tax position, have an effect on our asset and liability management, and we really think that asset managers should decide when to realize, and not bookkeepers. So I cannot guarantee that we will realize all of our 1.4 billion unrealized reserves that we had at the end of 2003, for us to look better. Take it as it comes; so no guarantees there.

Thank you.

OK, on the new variable annuity product, I'm going to let Darryl Button describe some of the features for you, Chantelle.

Yeah, there's actually-- we talked about it as a withdrawal benefit. There's actual three living benefits on our new living benefit rider. There's a ten-year return of premium maturity benefit, a 7% per annum withdrawal benefit feature, and a 5% per life withdrawal feature, which is an life annuity feature, starting at age 60, so it's actually the combination of three living benefits, and the living benefit rider comes with a portfolio allocation strategy as well, and it's that portfolio, active portfolio allocation strategy, that we use to keep the risk levels down within the product. We charge 75 basis points for it. Some of the additional cost will be used to put a delta hedge program on, again, to control the equity risk in the product to ourselves.

As far as target distribution, we target primarily the wire houses, the broker/dealer channel, small financial planner channel. As Brenda alluded to earlier, we're probably a full quarter behind where we liked to have been as far as rolling this product out, simply because of the delay in-- I'd say the queue is a little longer right now, getting marketing materials and approvals and the like.

Can you comment on the primary competitors and how it stacks up, Darryl? That was part of the question.

Yeah. I mean, the withdrawal part of the benefit is very similar to the withdrawal benefit in the Hartford-- Hartford's product. The 7% per annum withdrawal. In addition to that, we have the other two riders, which makes our more unique, the 5% per life and the ten-year return of premium benefit. I'd say that that's the primary comparison that I have.

OK, thanks.

Chantelle, maybe you had-- your first question was life for account of policyholder in the Netherlands. That line does not really carry any indirect return. So, the earnings on the slides, excluding indirect return, are the same as in the normal slide, so the indirect return will not really affect the line-- that line of--

So, I appreciate that, but there's been a sort of very healthy swing in that line as well. To what extent is the 2003 number representative of--

Right, OK--

--forecast, going forward.

Well, that's related to the fact that we took charges last year.

Could you just sort of remind us of the charges last year, the magnitude of that?

I'll look it up. I'll get back to you on that.

Thanks.

Perhaps to clarify on the realized gains and losses, going forward, what I meant was separate by country-- no, no, and I think that was the question, because the question was related, do we see a fall in Dutch income?

Yes.

Sorry, Jos.

The next question comes from Mr. [Bart Boston]. Please state your name, company name, followed by your question.

Yes, good afternoon. It's [inaudible]. I have a few questions. First of all, I would like some clarification on your spread development. Am I understanding it correctly, that at the current interest rate, you are still able to get spreads of 225 to 250 basis points on new business? And also, on your existing book of business, is the current interest rate environment still allowing you to have spreads of more than 200 basis points? That's the first question. The second one is, on your bond default provisions. It declined, well, rather significantly in 2003, but it's still relatively high, if you look to your history. Is it fair to assume that in 2004, we can expect another relatively sharp drop in these provisions?

Taking the last one first, actually, there was very little decrease in the provision; 15 million or something. It's--

Over the--

No, I mean the full year.

Oh, you're talking about the actual? OK. The provision is about the same.

Charges are lower this year.

But you're right, it went sharply down over 2003. We expect continuing improvement of the credit markets in the U.S. for 2004, unless-- unless you have the defaults caused by irregularities. You never know that. If you look to the economic cycle, yes, it's reasonable to expect it will be lower in 2004.

OK.

On fixed annuity spreads, you know, in terms of new business, there has been, you know, just recently, over the past several weeks, there's been a, you know, an additional drop in interest rates, so our supportable new money crediting rate would be somewhat less than 2%. You know, as a reminder, many of our products -- in fact, most of the products we're selling today are filed with a 1.5% minimum guarantee, so you know on sales today, we're probably somewhat short, getting our spread on new business. As far as in-force business, Jos quoted for you earlier that our spreads on our in-force were at 192, and with, you know, continued drop in policyholder crediting rates, we're continuing to try to expand on that. We're looking at 2004. Our expectation is to get that up to around, you know, 200, 210 basis points, so that is still slightly below the required spread on the block.

And could you tell me what the average crediting rate is on the existing book, right now, and what it was in the same period last year?

The average crediting rate today, on the entire block, is at 357, and a year ago-- it would have been- yeah, at year-end- hang on for just a minute.

Sure.

On the-- this is Darryl. On the largest block in the fourth quarter, the average crediting rate was 357.

And a year ago, it would have been around 440.

OK.

And Brenda, those spreads include pricing defaults and also the new risk charges? What are they called, CIC or--

The 192 and 200 to 210 that Brenda quoted, those are pricing level of defaults.

Right.

Yes.

That's how we disclose our spreads.

OK, thank you.

On the [inaudible] on the change of provisions in the Netherlands, there was a question that we still had -- no additions to provisions for guarantees was 170-- 80 million, so the difference-- so we added 31 million in 2003 against 209 million in 2002.

That was Chantelle's question.

That was Chantelle's question.

I hope she heard it. Next?

Thank you. The next question comes from Mr. Nick Holmes. Please state your name, company name, followed by your question.

Yes, hi, it's Nick Holmes from Lehman. I had three questions, if I may. The first one is, can I check again your view of the association's preference shares? You include them in shareholders equity, but I think you agreed last year that they are definitely not common equity, and I just wanted to check that you still have this view, and to ask whether you envisage a time when they could, indeed, become common equity and would that involve something like winding up of the association?

Second question was on traditional life in the U.S., just wanted to ask, are mortality margins coming under pressure this year, due to reinsurers raising their pricing? And do mortality profits still make up 60% of the profits from U.S. traditional life, and what are your expectations for demand for traditional life this year, and are you invested in writing more variable life? Do you see that as a growing product?

Then third, quick question is, on the dividend policy, just wanted to ask whether you're thinking of linking it to any measurement, such as net income or other measure?

First, on the preferred. The preferred shares are held by the Vereniging Association in [inaudible] are considered to be equity. They are non-redeemable. The preferred shares is not commutative. Also, the rating agencies accept that as equity, and according to Dutch law, they are equity, so there's no discussion-- there's no discussion about it. There's no conversion--

If I may, I think you did agree that they do not count as common equity, because they, in a liquidation, clearly they would be paid out ahead of common shareholders. They also have a coupon, not a dividend, paid.

They have a dividend.

But they're clearly dead.

No, they have a dividend, and we passed a dividend, if you have no earnings. So they have a dividend. It's not a coupon. It's only-- [proto] dividend, as a definition for that dividend, and that's with the common shares.

But you do agree that they are a debt instrument. They may be equity-like and rating agencies--

No, I do not-- I do not agree. I do not agree. According to Dutch law and according to the rating agencies, it is equity. There's no conversion into common equity, and your question to why-- to why adopt the de-association, well, I'm not empowered to wind up any shareholder.

But just to clarify this point, you did last year say that share-- in a calculation of shareholder's net asset value, the preference shares not be included, because they're not common equity.

What I-- what I-- somebody else said, at the meeting-- at the meeting in London, is that if you calculate the earnings per share, you have to deduct the preferred dividend before you arrive at an earnings per share. So that's why you see a large difference between our net-- our net income and the net income per share, also in the growth rate. So there's a difference, but there is-- it is equity, according to Dutch law, according to the rating agency, and that's it. And this question, we also had in London, with you, Nick, at the time, that we disclosed the embedded value, is, what is the value- what is the value, what is the market value, of those preferred shares? And there, you can have a discussion, how you arrive at that. But using these shares for calculations or-- and I've said at that moment, and I still believe that, that's totally up to you, because you have to make that calculation, I'm not going to do it for you.

But by saying that, that means that they're not common equity.

No, it means that you can discuss it outside market valuation for those preferred shares.

The dividend policy-- we're not going to link-- we are not going to link it to earnings, because as you know very well, the earnings definition will change. It's going to change this year because we discontinued the indirect to indirect return. But the influences of the IRS will be major, so it makes no sense to develop a dividend policy in 2004, linked-- linked to earnings per share. What we have said for a year now, that we would like our dividend policy to our capital situation and to the cash flow-- cash flow situation of the folding. We-- what is the cash flow that-- that the units can send to the holding, and that's the way we do it, and that's how we announced it, and that's how we are going forward.

OK, Nick, as far as pressure on mortality margins, you know, while broadly, they're-- you know, there are hints from the reinsurers that they will be raising their prices, to date, we have not had any increases, rate increases, from our reinsurers. They are-- obviously with the volume of life business that we write, you know, they watch our business closely. We're always under review, in terms of audits on our underwriting and that, and to date, we have not had any problems, so we're going to watch this very closely.

In terms of looking at the sources of profits, from, you know, the majority of our traditional business, and while it will vary some, based on product design, your 60% is a pretty good estimate as far as, you know, that portion of the profits coming from the mortality margins.

I think your third point was with regard to variable life business, would we like to see a pick-up in that, and definitely yes. We came out with a new product late last year, quite frankly, our VUL product was getting a little bit stale, so we came out with a new product that thus far has been received well, you know, with our sales force and that, so we're hoping to increase the level of the VUL sales in 2004.

Would the profit margins be higher on variable life than traditional?

You know, somewhat. You know, we're still pricing, in terms of our returns, we're still going to price between 11 and 13% returns, on the VUL.

Great. Thank you very much.

Thanks, Nick. We can take one more question.

Thank you. The next question comes from Mr. Andrew McNulty. Please state your name, company name, followed by your question.

Thank you. Andrew McNulty, UBS. I've got two quick questions. The first one, on the fixed annuity spreads, I've seen you've been indicating you've been managing that on your in-force book, up quite nicely. I just wanted to get a feel for, if you can let us know, on the asset side of the-- of the assets that back that portfolio, is there any experience in terms of assets rolling over, over the next-- well, the first quarter of this year and maybe going into the next number of quarters, for 2004, that you might have any lumpy experience with some of the assets roll over and actually have to be reinvested in lower-yielding assets?

And then the second question is just also on the Dutch life business, I know there's been a lot of comment on the profitability might be contracting, but in fact, it looks like the profitability in successive quarters actually did rebound upwards, and even on your sales, the fourth quarter was actually pretty strong, and that seems to be consistent with what we've seen from Delta, Lloyd, ING, and Fortis yesterday. Can you just give us an idea on what's actually caused the rebound in the Dutch life volume sales in the last quarter this year, and is that a sustainable them that we can expect going into 2004?

Brenda, will and Darryl handle the first question?

I'll let Darryl take it. I mean, we don't have data available, Andrew, but I don't think there's any reason we would expect, you know, the lumpiness, and Darryl, maybe that-- you can speak to the, you know, the durations and the fact that we have recently had some fairly [inaudible].

Right. As Brenda said, we don't have the [inaudible] I mean, I think what you're getting to a [inaudible] assets and our liabilities. We have lengthened the duration of the in-force book a little bit over the last couple of years, in anticipation of lower surrenders on the fixed annuity book. We'll have, first half, normal recoup on investment, and normal [inaudible] on--

Can you give us an idea in terms of that normal coupon reinvestment and what sort of experience we can expect in active accounts that are balanced to the spread widening that you're managing to achieve, from your active management of, you know, the yields you're getting, relative to the actual crediting rate?

I can't give you any specific numbers. I don't have any in front of me. I will say that we've looked at, as we've looked forward into 2004, to try and estimate where our spreads are going on our largest book. We have looked at the reinvestment and where the yields are going, as well as in combination with lower crediting rates, and it's a combination of those two things that led to the-- we hope to be in the low 200--

Yes, just going into this year, then, even with yields coming down from late last year, are you saying that you think you can maintain that low 200s, you know, from here on in? Even despite, you know, the low levels that we've seen this year so far?

We've looked out into '04, and I tell you, that's a true statement for '04, and when we get beyond that, we're really at a function of where interest rates are going to go.

OK, OK, fantastic.

They're down 50 points-- since year-end, so it gets very hard to predict.

As far as you're concerned, the 200 is quite a reasonable number that you expect, you experience for asset reinvestment and what you're managing your crediting rates and other issues that affect the spread widening?

Yeah, I think that's fair for our largest block in '04, and beyond that, it's a function of where are rates going to go between now and the end of this year and the end of next year.

OK, wonderful. Thank you.

OK, to the Dutch life sales and improvements in the fourth quarter, if you look at the profitability in the life, it's mainly in the fourth quarter, caused by lower provisions, but [inaudible] health insurance. It's been the claim handling really improving--

I'm not talking quarter--

[crosstalk]

Hi, can you hear me?

If you look at sales, we think that the market is improving, and the first half, especially, last year, there was so fierce competition on profitability that we also let go a number of cases, single premium cases, for instance, because profitability is too low. And in the fourth quarter, we both saw our organization sell more but also at higher profitability rates. And we'll see in the new year what it's leading to.

OK, but what's the reason for-- all the Dutch life companies seem to be showing quite a strong rebound?

It could be that they're becoming more sensitive to the market.

Again, just to comment, I wasn't comparing fourth quarter 2003 with 2002, I was looking at successive progression.

Yes, that's right.

It has been improving.

Yep.

OK.

OK.

Thank you.

Thank you.

Thank you.

Ladies and gentlemen, this concludes the AEGON Yearly Results 2003 Conference Call. Thank you for participating. You may now disconnect.