Aegon Ltd (AEG) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the AEGON First Quarter 2004 Results Conference Call 12th of May 2004. For today's presentation participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. If any participant is [inaudible] hearing the conference please press the "*" key followed by "0" on your pushbutton phone for operator assistance. I would now like to turn the conference over to Mr. Fred Romijnsen. Please go ahead sir.

Good afternoon. Welcome to AEGON's first quarter 2004 results conference call. My name is Fred Romijnsen. I am the Senior Vice President 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. During today's conference call, our CFO, Jos Streppel will provide you with a brief overview of our Q1, 2004 results. After this we will [end] the room for questions. Now, let me hand over to Jos.

Thank you, Fred. Good afternoon here in Europe and good morning in the U.S. Thank you for joining us. Along with Fred with me today are Michiel van Katwijk, our Treasurer; and the CFOs of our main country units Brenda Clancy, Edgar Koning and also Otto Thoresen. I hope you have all received our press release which as you will have noticed includes a number of additional tables. Each table contains financial data which has been adjusted for the purpose of comparability to reflect certain account changes. After summarizing the main aspects of these accounting changes that affect the way they report our earnings, I will run you through some highlights of our Q1, 2004 results. After that we will be happy to take your questions.

Slide three, as I just mentioned a number of accounting changes, which I will discuss in more detail in a minute, now effects the way we report our results. On a comparable basis, AEGON has reported strong increases in net income and net income per share for the first quarter of 2004. However, this primarily reflects the variance of realized gains and losses on shares and real estates between reporting periods. Net income before realized gains and losses on shares in real estates for the first quarter amounted to 284 million euros. This is stable compared to the 286 million euros reported for the same period last year on a comparable basis and represents 13% increase on a constant currency exchange rate basis. During the first quarter of last year Transamerica Finance had a strong positive contribution of 73 million euros to net profit. We sold the majority of these activities and in the first quarter of 2004 the remaining TFC activities generated a net loss of 16 million euros. This net income before realized gains and losses on shares and real estates has remained stable, the decline in the TFC contribution was compensated for by higher earnings from our core operations.

Slide four, as you know, we discontinued the indirect income method for recognizing realized gains and losses on shares and real estate. Instead as per 1 January 2004, they are recognized when realized. We expect this will increase the volatility of net income and net income per share. Implementation of SOP 03-1 resulted in a decline in the opening balance of shareholders equity and decreased income before tax. The change in the opening balance of shareholders equity primarily relates to the establishments of additional mortality base reserves on universal life contracts. While the overall profitability, we expect on this business is still in tact what has changed is the timing of the recognition of this profitability into earnings. The implementation of SOP O3-1 resulted in a decline of 165 million euros in the 2004 opening balance of shareholders equity and decreased income before tax by 13 million euros in the first quarter.

In addition, there is a small effect on the comparison base for the Meeus consolidation. Consolidation of this business as of the 30th of June, 2003 was applied retrospectively to the 1st of January, 2003. Also, we will report on income [methods] before realized gains and losses on shares and real estate, as we believe these provide useful and important information to analysts and investors.

Slide 5, net income before realized gains and losses on shares and real estate came in at 284 million euros, essentially the same as the 286 million euros in a comparable period last year and up 13% on a constant currency exchange rate basis. On per share basis, net income before realized gains and losses on shares and real estate was stable at 18 euro cents but up 15% on a constant currency exchange rate basis. As explained, this reflects the decrease in the contribution from Transamerica Finance offset by higher earnings in our core operations.

Pre-tax income before realized gains and losses on shares and real estate increased 35% and 53% on a constant currency basis reflecting our continued focus on profitability and the improvements in equity and credit markets. All major country units contributed to this increase. Realized gains on shares and real estate amounted to 89 million euros in quarter one 2004 against a negative 124 million in the same period last year. To compare this against the result as reported last year notice that indirect income on shares and real estates amounted to 126 million euros in the first quarter of 2003. Our total income before tax came to 506 million euros, an increase of 174% on the comparable basis to the same period last year. This reflects the impact of realized gains and losses on shares and real estate, which makes income more volatile. Income before taxes reported last year was 444 million euros.

Slide 6, production results have been mixed. Overall new life production decreased 8% in euros and 2% on a constant exchange rate basis. Gross deposits declined 45% in euros and 37% on a constant exchange rate basis. I will discuss production in more detail by country unit in a minute. Like the earnings and production figures, shareholders' equity and assets has also been influenced by currency exchange rates. The strengthening of U.S. dollar versus the euro during the quarter had a positive effect on equity. Compared to the beginning of the year, exchange rate translation had a positive effect on our equity base of 463 million euros. The other major effects on our shareholders' equity include net income of 354 million euros, an increase in the revaluation reserve of 208 million euros and the 163 million euro booking on the disposal of the majority of TFC's commercial finance business.

Implementation of SOP 03-1 in AEGON USA resulted in a decline of 165 million euros in the opening balance of shareholders' equity 1st of January 2004. Overall our shareholders' equity increased 8% in euros during the quarter.

Slide seven. Standardized new life production decreased by 8% in euros and by 2% on constant currency exchange rates. In the Americas, we saw continued strong production in traditional life, universal, and term life sold through the agency channel, which was up 18%. This was more then offset by lower sales of company-owned life insurance, which is more volatile in nature. Overall, standardized new life production in the Americas was down 2% as a result. Production in the Netherlands was down 8% primarily due to lower individual life production. Development of production in the U.K. was positive with a 9% increase primarily driven by higher premiums in group pension business. A 29% decrease of standardized life production in other countries is primarily driven by lower production in Taiwan. Lower production mainly reflects current market developments.

Slide 8. Total deposits in the Americas decreased 31% to $4.8 billion. Fixed annuity deposits decreased 51% as we lowered policyholder's crediting rates and adjusted compensation structures. Compared to the fourth quarter of last year, fixed annuity deposits were fairly stable. Variable annuity deposits decreased 38% in the Americas reflecting actions taken last year to change or eliminate certain product features. Compared to the fourth quarter of 2003, however variable annuity production increased by 42% and was higher than the previous three quarters. Fixed and funding agreement deposits were 10% lower than last year while saving deposits were 82% lower reflecting our policy to focus on profitability rather than volumes. Our balance sheet production showed a 27% decrease largely reflecting a decline in synthetic GIC sales in the Americas.

Slide 9, In the Americas income before realized gains and losses on shares and real estate increased 42% on comparable basis. Life for account of policyholders results were flat, while all other business lines contributed to the strong increase. Lower additions to the asset default provision and increased spreads are the primary reasons for the increase in the results of our traditional life and spread based deposit businesses. Variable annuity results recovered from a loss position, reflecting higher fees related to the higher fund balances and improved persistency. There were no material charges to DPAC unlocking or guaranteed reserve provisioning. Accidental and health results benefit from lower default losses and improved claim ratios and several one-time items. Improved results from fee based business reflect higher assets under management.

Slide 10, in the fixed annuity business, lower crediting rates and adjustments to compensation structures resulted in a significantly lower production. Compared to fourth quarter of last year production more or less stabilized. The spread on the largest segment of the book increased from 192 basis points at the end of fourth quarter of 2003 to 209 basis points at the end of the first quarter of 2004. At the end of the first quarter, crediting rates on the majority of the existing book have been reset to contractual minimum crediting rates. Fixed annuity account balances of $44.7 billion at the end of the first quarter of 2004 were slightly lower than at yearend 2003. Withdrawals, while higher than the previous quarter, continued to be at low levels. Recent interest rate developments allow us to credit higher rates to our customers on new production while retaining pricing discipline.

Slide 11. Variable annuity production decreased 38%, as a result of the discontinuance 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 small scale in December, 2003. At just over $100 million. The first quarter production level for this product has been in line with expectations Variable annuity account balances grew 3% to $43.7 billion since yearend 2003 reflecting new sales and market performance.

Slide 12. In the Netherlands, income before realized gains and losses on shares and real estate increased by 81%. Accident and health results were flat, while all other business lines contributed to the strong increase. This largely reflects low addition to provisions for credit risk and minimum guarantees as well as higher investment income. Traditional life results were positively influenced by higher investment income and improved mortality experience. Life for the account of policyholder results improved strongly in the absence of further provisions for guarantees, partly offset by higher DPAC amortization due to higher than expected lapse rates. Fee business improved on the back of better asset management results and TPK pension. Accidents and health results are in line with last year. General insurance results improved strongly reflecting improved claims experience, high investment income, and cost containment. Banking results improved despite lower balances illustrating that our policy of putting profitability over volume is paying off.

Slide 13. In the United Kingdom income before realized gains and losses from shares and real estate was 10% higher. Higher results from life for account of policyholders and fee business offset lower traditional life results. Traditional life earnings were lower due to 5 million pound charge related to the cost reduction program. Life for account of policyholder results were higher primarily due to the high average value of the equity markets. Fee business improved due to the increase profits in our distribution businesses and increased asset management fee income due to higher equity markets.

Slide 14. In other countries income before realized gains and losses on shares and real estate increased by 21%. The largest part of the increase is due to higher results in Spain reflecting improved claims experience.

Now let me turn to the U.S. bond portfolio and developments in the credit markets.

Slide 15. Our U.S. bond portfolio increased by around $1.7 billion compared to yearend 2003, accounting for most of the increase in the general account assets. There is no meaningful change in the average credit rating of our U.S. bond portfolio. Losses to the default provision have come down sharply and were $15 million compared to 150 million in the same period last year.

Slide 16. Corporate default as measured by Moody's have come down sharply. It's also reflected in our experience. This slide illustrates the strong decline that we have seen in our charges to the default provision, at the same time it shows that big single cases can notably affect the level of default losses in a single quarter as we experienced with our $54 million loss on Parmalat in the fourth quarter of last year. On balance, however, we should benefit from the generally positive developments in the credit markets.

Slide 17. Our capital base improved during the quarter. The equity to capital base ratio, which now stands at close to 73% is higher than our stated target of a minimum of 70% and improved from the yearend 2003 level of 71%. We continue to have good financial flexibility and our operating companies, and our core markets of the U.S., the Netherlands and the UK continue to have very strong financial ratings.

Slide 18. In conclusion, our first quarter results can be summarized by the following developments. All major country units reported earnings growth on a comparable basis compensating for a lower contribution to net income from the remaining TFC businesses. Net income before realized gains and losses on shares and real estate increased 13% on a constant currency basis. New business production had been mixed, but we are very pleased with developments in the UK and the agency channel in the U.S. The fixed annuity spread has continued to improve, while bond defaults have come down sharply. Final remarks before we open it up for questions. Tonight we start our analyst and investors conference in London, here many of our international business managers will be available to share their thoughts on how they will further develop their businesses and continue to build on our platform for growth. And thank you for your attention and we'll be happy to take your questions now.

Thank you sir. Ladies and gentlemen, at this time we will begin the question-and-answer session. Please press "*" [inaudible], if you wish to cancel your request please press "*" followed by "2". Your questions will be answered in the order they are received. If you are using a speaker equipment today [inaudible]. One moment please for the first question. Thank you. The first question comes from Lukas Daalder. Please state your name, company name followed by your question.

Yes, good afternoon this is Lukas Daalder from Bank Oyens & van Eeghen. And I have a question concerning the realized gains on equity and real estate. I know that you aren't giving any guidance for the year as a whole, but I was looking at the development last year and if my calculations are right, I see that in the U.S. a loss of 65 million was booked even though the S&P 500 was up by roughly 25%. Is there -- given that you don't give any guidance is there a chance that we are going to see negative equity bookings into quarters ahead? Is there some sort of a possibility for that as well because so far I have been expecting average or lower earnings but with no negative quarters, and looking at the developments last year, it seems to be quite common, is there some sort of a guidance given on that?

Lukas you may remember that the first quarter of 2003 also in terms of S&P, was a very bad quarter.

Yeah.

And that recovery came late -- came later. Their mode of realization on gains and losses on real estate and shares is not the same as following the performance of the market because there are choices in mind. Asset managers may decide to take some profits while the market is going down or to realize some losses from all the time when markets go up. So, that continuity is not all always there. There are choices and we have made those choices. We can try because we have still, a big revaluation reserve so there is something to realizing if you would like to do that. You could plan that you could manage that. We think that for the interest the policyholders and shareholders, it is better that the investment people do their jobs and not the bookkeepers. And that means that principally we are not going to manage that result and that means that net income and net income per share is volatile. So I understand that you are seeking guidance for your models but we are not going to give it.

Okay and if I may, one follow up or slightly different question, we have seen quite a strong move in the U.S. bond markets in the end of Q1 and the beginning of Q2, can you give me some sort of color on what the impact could be or will be in Q2 for life business, in general?

You mean the bond portfolio itself?

Yes.

You realize that the bond portfolio is going to Dutch accounting principles and assets are on amortized cost as the liabilities are. That will change in the year from now probably that's so far that's the case. So that means that the movement in the bond market, interest left movements are not too important in our accounting. What is important is the movement of the credit market. The credit market is doing pretty well. You will see that the default ratio as published with Moody's are coming down which you see the same in our portfolio. We only give you in one of our slides the warning that one incident can pollute that beautiful picture but having said that we are optimistic about performance of credit markets.

Thanks very much.

You are welcome.

The next question comes from Nick Byrne. Please state your name, company name followed by your question.

Hi there, it's Nick Byrne. I have a small number of questions on the fixed annuity business. Firstly can you clarify for us what the 8 basis points of equity like investment gains is related to and if it has to do with asset-backed and mortgage-backed securities. Can you give us a feel for whether there will be mark-to-market losses on that portfolio with the recent rise in yields of mortgage-backed in the U.S.? And then as a second point on fixed annuities, if we x out the 8 basis points is it comparable to look at the 201 basis points versus the 192 you reported in the fourth quarter? Are both of those based on the basis of 35 basis points of pricing? And then following on from that in term of the earnings from the fixed annuity business Q4'03 versus Q1 of this year could you just explain what the one-off items were in the fourth quarter last year? I understand that there was 11 million relating to gain of RCC real estate and also I think that that DAC unlocking. So could you perhaps explain what the impact of the spreads or spread expansion has been on the underlying earnings?

Brenda, you are going to trying this?

Yes.

Start with the easy one. I think the comparison between quarter four and quarter one with the one-offs this year with a run off is the question and is the 35 basis points still in our calculation? And the 8 basis points that comes from equity related instruments.

Okay let's start with the fixed annuity earnings for the fourth quarter of last year because Nick, actually you were right there were a couple of one-time items that then basically you cant really extrapolate from the fourth quarter and so your first item was correct. Of the RCC gains which we did mention last year that we had RCC gains of 54 million in total 11 million of that was allocated to the fixed annuity block. That's the first item. The second item was a $31 million positive DAC unlocking in our reinsurance block and while this did not get referenced in our prior calls probably because of the fact that this was actually offsetting some negative unlocking that was booked in the second and third quarter of '03. We refined our models and basically determined that the negative unlocking was not required and so we reversed that in the fourth quarter. So in essence in the fourth quarter of '03, we had $42 million of positive on a pre-tax basis, based on positive one-time items. and so you need to take those into consideration. If you look at it then on a quarter-to-quarter basis the impact of the additional spreads we estimate that's probably 6 million to 7 million of additional pre-tax earnings in the quarter.

Could you repeat that, 6-7?

Yes, in the first quarter of this year.

Okay.

And as far as the 35 basis points in our pricing as far as for, you know, credit losses that is consistent we are continuing to fight for that. And the first item as far as the equity gains that are in the spread, I 'm going to defer that to Darryl. I don't know specifically, which assets that was … Darryl Button?

Yeah, I believe that was on a payout that we received on our CMS partnerships.

Shall that be considered as the recurring item or no?

No.

No? Okay, thank you very much.

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

Nick has disappeared? Next.

The next question comes from Mr. Kalamboussis state your name, company name followed by your question.

Hi this is Kimon Kalamboussis from HSBC. Two questions, if I may, I would like to know if you expect the minimum guaranteed crediting rates in the U.S. to move up again in line with the interest rates. The second is on your Guaranteed Principal Solution product, I would like to know what is the commission rate and how does that compare to the rest of the market?

Operator, we have no -- we lost the line.

[inaudible].

Hello? Yeah, can you hear me?

Yes. Please restart because we lost you.

Yeah hi, this is Kimon Kalamboussis from HSBC. Two questions if I may. First one is that I would like to know if you expect minimum guaranteed crediting rates to move up again in line with interest rates in the U.S. And the second question is on your guaranteed principal solution product, I would like to know what is the commission rate and then how that has compared to the rest of the market, please? Thanks.

Okay, on the minimum guarantees in our fixed annuity back book, minimum guarantees actually will trend downwards, because the new products that we are selling right now have minimums that range from 1.5-2%. So what you may have been asking is actual crediting rates and crediting rates right now are continuing to trend down, you know, as they have been over the past year. Now, you know, we will if interest rates rise we will monitor that and make the appropriate adjustments, but minimum guarantees as new businesses added, will actually trend downwards. Now as far as the Guaranteed Principal Solution, the commission on that product is 7% which would be in line with the market.

Right a last question if I may, the sensitivity of the P&L to rising bond yields, do you expect sort of higher surrenders going forward, given current long bond yields in the U.S. please?

That depends a little bit on what is happening. We've always said and understand that surely now analysis and also the sensitivity analysis that you will find in the M, D&A and in our annual report as long as the interest rates go up slowly and gradually then we have no problem because then we will not face the fact that there is disintermediation happening. So, 100 basis points up from now to the end of the year, we can have that and improve our margins, it's more and if the line is steeper, that will be advantageous to the business but not in the first year.

Thanks.

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

Yes, hello. Nick Holmes from Lehman. Can you hear me?

Hi, Nick.

Hi, my apologies for earlier. I had two questions. One on fixed annuities, which is -- now that the spread is 209 basis points, how much further benefits could there really be from rising interest rates. For example, if yield were to rise by 50 basis points, would you will be able to raise your spread., you think above your target of 225 basis points or are you effectively capped by competition at that source of level of target spread? That's my first question. Second question is with the variable annuity sales, what are you really targeting for this year? If you maintain your Q1 run rate then your sales look as though they will be flat with a '03 in dollar terms. And the question is do you really want to better that and would you consider doing things like reducing your GMWB charge down to say 50 basis points which is the market sort of norm in order to boost your sales?

Okay. On the fixed annuity side if we saw an increase of 50 basis points since we are a new money rate chart we would probably raise our crediting rates on new deposits which would then be a positive from a standpoint of you know, -- I feel like we've got some positive momentum on the sale side, so it would actually help us in terms of attracting new business because we would be able to support a little higher crediting rate. Our new money rates right now are at 2.5% so you know if we could afford to raise those to 3% that would be a positive from that standpoint. On the VA annuity sales in the first quarter we did have -- you know, our deposits were -- we benefited from some sales on the pension side some large cases that actually helped our deposit number. Would we actually reduced surcharge for GMWB?. No we would not. We're comfortable with the pricing and the profile of that business it allows us to hedge some of the equity risk and so we would not reduce that charge

And on sales do we get some momentum or is 100 million a quarter is that the target?

Oh, for the GPS.

I think we have some momentum

I would expect some momentum. That part of the product got introduced you know, throughout the first quarter when we really got it out there strong and you know, so getting our distributors acquainted with the product features and the asset allocation mode. I would expect more sales of that particular product.

So variable annuities overall, do you feel that you will achieve sales that are flat with 2003 or growing?

That's hard to say.

Do you hope?

Yeah hope for growth and we will fight for it.

Yeah.

Okay. Thank you and very quick follow-up also just on the fixed annuity spread, do I understand what you are saying that there isn't a scenario you would envision, which the spread could exceed 225 basis points, your target?

No.

No, absolutely?

Yeah, no. We would --

I would expect you to say that, but I just wanted to clarify.

[inaudible] but as we could as the market would bear with the competition.

Yeah, and if you remember some old days and they look far away today, we had spreads of 250 -- 2.5 years ago and we would like to go back there.

Yes.

Okay, thank you very much indeed.

Thank you Nick.

Thank you. The next question comes from Mr. Sow Kidman (ph.). Please state your name, company name followed by your question.

Hi, good afternoon. I have two questions. First one, with regard to revaluation reserve -- you have adjusted to revaluation reserve is that now because in the past there used to be also say, the result of realized gains held back in revaluation account. That has been stripped out to the 2 billion that we see now and revaluated account is actually the excess over the cost price of the shares held?

Yeah, you are right.

And is that 2 billion in equity only or is that also included in property?

That's included property.

And could you say how much?

We are looking it up for you.

Okay.

I don't know it by heart.

Alright. My second question is regarding the GPS, that's the right name for the new variable product.

Yeah. Okay.

Even if it were to increase substantially going forward in Q2 and later on, do I understand that why that is still a relatively small portion of the business because there was 1.2 billion sales of variable in the first quarter, so if you lose, let's say, would you mention some of the large cases in Q2 than it may be very well be that the deposits will decline again in Q2?

Could you re-phrase a little bit because I think I missed the clue as to what you are exactly asking. I won't want to give the wrong answer.

Okay, I will. In variables some 100 million was done on the new product, the total deposits in Q1 were 1.2 billion because as I understand and now in addition to these new product there were also other variable sales, like Brenda mentioned, large case and large pension fund cases, if these -- suppose these decline or is fall back in the second quarter, then even if you have a strong momentum in the GPS sales than the overall variable annuity sales could be down in the second quarter again?

Yeah, I think that's true. If we have not managed to get some big cases in the second quarter and the third quarter then that analysis is correct.

And could you say something about margins between these two types of business?

They are priced against the same formula and we require the same returns.

Okay. Thank you.

You are welcome.

Thank you. Next question comes from Mr. Rampar Viyoga (ph.). Please state your name, company name followed by your question.

First one concerns the DPAC amortization in the U.S. This went up and apparently this is being linked to higher profits you get out of the life business there. I am somewhat puzzled because while new deposits are down and you already have higher DPAC amortization which actually leads us to an increase in cost which is higher to the increase in revenues in dollar terms. So could you give us some guidance here where we should see these amortizations going forward and what the actual amount was for the first quarter? This would be the first question. The second one is concerning strategy given that the crediting rates of fixed annuities is really low. I have the feeling that you've lost some of your traditional distribution channels, especially in the banking field. Could you comment on that if there has been a major impact of partners which switch over providers? And the third one would be on Taiwan. could you develop a little bit why the new business is down so dramatically?

Can you state your first question again?

I think, let me try to rephrase if I am wrong, correct me. I understood that the question was will we have a normalized amortization pattern for DPAC in the remainder of the year. That's correctly rephrasing?

Yes. And the question is if profits go up further should we see this effect being eaten up by even higher DPAC amortization?

Yes.

Well the DPAC on the universal life and annuity products is going to vary relative to the gross profit. So the relationship of the DPAC amortization and the gross profit that will be a consistent relationships. So if gross profits go up, an easy example would be if defaults stay low or go lower it will drive gross profits up on those products and then you will get some additional DPAC amortization. There will be a constant relationship.

Okay, what puzzles me is that revenues up only 7% but the cost was up 18%, so?

And you're looking at overall costs, the commissions expense and DPAC amortization lines?

Yeah that's correct and from the press release the major effect comes from this DPAC amortization increase?

That, and in addition to that the fact that our renewal commissions are up on the larger in-force blocks of business and none of that expense is deferrable so that's all going to flow through. Operating expenses that we've seen in the Americas are relatively flat.

Okay.

Okay. On Taiwan in the first quarter we reported total production in Taiwan of [NT] dollars of 2.15 billion and that's better than on the APE basis. Our position in Taiwan is pretty good. We rank eighth among the life insurance companies. The production of the whole life industry in traditional life policy is subject to decrease due to re-pricing that's a market given and effective January 1 of this year [deployed] the no prior product -- replace the old compulsory dividend policies as mandated by the Ministry of Finance in Taiwan, and therefore, you got -- you saw in reshuffling and if you require your margins then production will be affected. You did not see that only with us, you saw that with many companies. We did not lose market share and you should remember that in the first quarter of 2003 the production in Taiwan was extremely high, better than the other quarters. So that together explains I think the situation in Japan.

Okay. Your other question related to our distribution partners, firstly on fixed annuity and I would say that the relationships with our bank partners have remained very strong. They understood, we've been very clear and as far as our return requirements and they understood our business need to make the changes that we made as far as minimum rate guarantees on our products and the commission changes. So, you know it's true that while they understood our need to make those changes, they had you know, they had revenue goals and so, on a narrow basis they probably shifted some of their business to our competitors. But those relationships have stayed strong as we offered additional products in the banks and you know as new money rates are coming out and we are adjusting our crediting rates accordingly, we really feel like they still trust that long-term relationship and will continue to do business with us.

Okay, thank you. Coming back to Tom Kitmark's (ph.) questions to split up the revaluation reserve between the recent real estate and the shares. The bond and the revaluation reserve that got another line in equity as of the 1 of January 2004 was 500 million euros and the total was 1.6 by the way, not 2 billion, a little bit less. Next question please.

Thank you. Your next question comes from Mr. Chris Watson (ph.). Please state your company name followed by your question.

Hi. I'm Bob Yates with [Chris Watson] at Fox-Pitt Kelton. Two questions please on the subject of VAs. The first one is just to clarify the impact of the mark-to-market of the hedge in Q1, which I think was 16 million, was I correct to understand that cost will flown back at some point in the future, I was wondering whether you could perhaps clarify whether it will and in what conditions it will? Secondly, just getting at the underlying profitability, it looks like you made 30 million in Q1, prior to the adjustments that annualizes at about a 120 billion or about 27 basis points on VA balances, I just wondered what sort of operating pre-tax return on the VA balances you would regard as normal or what you actually target, please?

Darryl, do you want to take the mark-to-market on the GMWB?

Sure Brenda. Short answer to your question -- is yes, that $16 million mark-to-market for the first quarter.] The issue there was we've put in equity hedge around VA guarantee that we had in our reinsurance division and we had put the equity hedge in place at the end of the year but we had not yet put the interest rate hedge around the cost of that hedge. We did that now and the dip in interest rates in the first quarter caused a loss. The roaring back of interest rates in the second quarter reversed the loss and now we are hedged going forward, so I don't expect near that volatility going forward.

Okay. And the second question was what's the normal level?

On our variable annuities we're continuing to price around a 13% after-tax return?

If I could just follow that up, Brenda then that would imply that you need substantially higher profitability than you reported in Q2, I think -- sorry Q1, if you are going to get 13% post-tax return. I don't know what capital you're allocating, but if you allocate about say 2% capital support, I think you need quite a lot more than 120 million of annual rate of profits to give a 13% return.

That is true.

What's the prospects of getting to the 13% return, please?

It depends little bit on the movement of the markets?

Markets.

So, your calculation, you have an assumption of the markets behavior longer-term and those -- and that market has to behave in those 7- or 8-year terms according to your formula and as long as it does not have under-performance and if it does a little bit better, then you have over-performance. So, it's a modeled return of which in normal market circumstances on the longer term you should be confident to get it.

Okay. Thank you very much.

You are welcome.

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

Hi this is Fred Nieto (ph.) with Execution. I have a couple of questions. Now the first question relates to the fixed annuity earnings, and should we simply understand that what you've reported this quarter excluding the bond losses and excluding the one-time 8 basis point contribution from that special investment. Is that really how we should see the run rate earnings or is there any earnings accretion from further margin expansion left on the table? And then the follow-on to that is simply if this is really the run rate earnings then how concerned should we be about the fact that the book has now been in a net negative deposit strength for two quarters in a row, is that something that we can see turning around in the quarters to come? And sorry the third question would be, in the past on your traditional life earnings in the U.S. you're mentioning that there was an impact from the pension plan and I am just curious to know what impact that has had on the comparisons for this quarter versus preceding?

[inaudible]

Okay. On our fixed annuity block I'd say generally your comments are correct in terms of this is a fairly good representation of the earnings this quarter and yet we should see some additional margin from increasing spreads on a going forward basis. And as far as you know deposit activity, I would say we are cautiously optimistic that with rates moving up and our ability to increase crediting rates on new business and possibly restore all of our commission levels that you would see more of an upward movement in deposit activity.

So then just to follow-up on this point. If we look at a little bit of margin increase left would that equate to say, 5 basis points of pre-tax earnings relative to the account balances or potentially 10 basis points?

Somewhere between 5 and 10, it's probably a good proxy.

Great, thanks. And then on the -- Traditional Life, I am just curious if there was anything we can get on the impact of the pension plan? I know that the U.S. GAAP accounting treatment last year was something that kept getting mentioned in the press releases?

Yeah. On an overall basis, you know, the pension plan resulted in about a 12 million decrease to earnings quarter-over-quarter. Now that's total Americas and the piece that was allocated to Life, --- Darryl, do you have?

It's 3 million of that 12 in Life.

3 million, okay.

So essentially what we saw last year is going to be a lot smaller this year, if not, almost significant.

Right. Thanks.

Great, thank you.

Welcome.

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

Hi, it's Andrew Goodwin here with CommerzBank. Just three questions. First, could you give me a breakdown for your bond defaults by product in the U.S.? Secondly, on the Transamerica contribution in the relatively high interest charge, I gather there has been some repayments of that which led to some exceptional costs in the first quarter, could you sort of quantify that and give us any indication of what sort of interest charges likely to be going forward? And finally on your unit-linked business in the Netherlands, you commented on sort of relatively high lapse rates leading to a higher DPAC charge, can you quantify that and also give some explanation of what the reason was for the increase in lapses?

I don't know if I have the total charge of bond defaults by product. Darryl do you have that?

Yeah Brenda I have got it.

Okay.

The $50m of first quarter deposits taken in the U.S. breaks down, 5 in Traditional Life, 17 in fixed annuities, 25 in GICs and Funding Agreements, 2 in VAs and 1 in Accident & Health.

Okay. And on TFC, I think this is worth talking about a little bit, because we had some extraordinary items running through in the first quarter and I am going to start Andrew with the operating income, you saw in the press release, on a pre-tax basis we've reported operating income of 7 million, this is before interest charges, included in that were two one-time items that totaled 26 million that should not be reoccurring and of the 26 million that breaks down to about 17 million or 16 million that was a pre-payment charge on some debt that was paid down and the remainder amount was severance cost associated with the sales. So those items should not be reoccurring. The interest expense of 39 million and that should come down a little bit because we did have interest costs on the total block before the sale about mid January, otherwise that's a fairly good representation of ongoing interest costs. So, I guess the way you want to think about that is on a net income basis we reported a loss of around 20 million and on an after-tax basis 17 million of that loss is non-recurring. So, if you look at TFC, I would not expect that we will have -- that that loss would increase significantly at the remainder of the year. In other words, as we move forward, we should be close to a breakeven in the last three quarters on a dollar basis.

Your unit-linked lapses in Netherlands?

Yes. The unit-linked business in the Netherlands lapses are taking place in the area of the Company's saving plan. That's what we have shown for a number of quarters and it was still the case in the first quarter. So that's in the individual business and you talk about may be three or four million.

Okay, thanks a lot.

Ladies and gentlemen, if you would like to ask a question, please press "*" followed by "1" on your pushbutton phone at anytime. As a reminder, if you're using speaker equipment please lift the handset before making your selection. There is a follow-up question from Mr. Nick Byrne . Please go ahead sir.

Excuse me Mr. Byrne , please go ahead with your questions.

My question has been answered. Thank you very much.

Is there any other questions?

No, at this moment there are no further questions.

If not than we thank you all and we hope to see many of you tonight for [drinks] and tomorrow for a great investment day. Thank you for listening in and we hope to see you in London tonight. Thank you.

Thank you gentlemen. Ladies and gentlemen, this concludes the AEGON first quarter results 2004 conference call.