Aegon Ltd (AEG) 2004 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Aegon First Six Months 2004 Results Conference Call on Thursday, August 12, 2004. Throughout today's presentation, all participants will be in a listen-only mode. After the presentation, there will be opportunity to ask questions. If any participant has difficulty 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 second quarter 2004 results conference call. My name is Fred Romijnsen. I am the Senior Vice President responsible for Group Corporate Affairs and Investor Relations.

Slide two; before we begin I need to make you aware of our cautionary note regarding any forward looking statements, which is on this slide. We would appreciate it if you would take a minute or two to review this statement after the presentation. Also as we discussed in the first quarter, please note that the 2003 financial amounts have been adjusted for a change in accounting principles related to the discontinuance of the indirect income method for recognizing gains and losses on shares and real estate and the adoption of SOP 03-1. For a detailed reconciliation on the reported to adjusted full year 2003 amounts, please refer to the supplemental disclosure in our first quarter press release.

Next slide, during today's conference call, our Chairman Don Shepard will provide you with a brief overview of our first half 2004 highlights, and then Michiel van Katwijk, our Group Treasurer will discuss in greater detail the results of the country units. Afterwards, there will be ample opportunity for questions. But now let me handover to Don.

Thank you, Fred. Good afternoon here in Europe and good morning in the U.S. Thank you for joining us. In addition to Fred and Michiel van Katwijk, also with us are Brenda Clancy and Darryl Button from the U.S.; Edgar Koning from the Netherlands, and Otto Thoresen from the U.K.; Alex Wynaendts, our Group Executive Board member and Johan Van der Werf for the Netherlands and of course Michel is here also. Unfortunately, Joe Streppel, our CFO was unable to join us today because of a previously scheduled surgical procedure. However, I am happy to report he is doing well and will be back in a couple of weeks.

Next slide, we are pleased to report that results from our core operations continue to show strong progress across all major country units. Net income including realized gains and losses rose a 140% in the first 6 months of this year compared to the same period last year. Net income before realized gains and losses increased 5%. At constant currency exchange rates, this represents an increase of 15%. Higher earnings from our core operations more than compensate for the reduced contribution from Transamerica Finance Corporation, the majority of which was sold in late 2003 and early 2004. The main factors driving the improvements in earnings were improved product spreads, higher interest results and increased fee income as well as improved equity and credit markets. The results have been aided by strict cost management measures, and yet we see further opportunities for improvement.

Next slide. While each of the country units have shown solid earnings improvement, our overall results in euros have been heavy influenced by the euro-dollar exchange rate. The dollar has weakened against the euro on average 11% compared to the first half of 2003. Setting aside the negative influence of currency translation, mostly a weaker U.S. dollar, income before realized gains and losses on shares and real estate increased 15%.

Next slide, slide 6. Looking at the country units in their local currencies, income before realized gains and losses increased 40% in the Americas, 58% in Netherlands, 19% in U.K. and increased 28% in euros in other countries. The positive results from our three major country units were largely affected by improved equity and credit markets while results for other countries were affected by improved non-life claims experience in Spain and higher life results in Hungary.

Next slide, except for the modestly higher production in the U.K. and certain production lines in the U.S., which I will discuss in more detail in a few moments, overall group production was lower. With some exceptions, the actions we have taken to focus on profitability have proved a persistent challenge to increase overall production levels today. Recognizing that higher production is the key component of future revenue growth, we have initiatives in progress at each of our major country units that will further our production objectives.

As an example in the U.S., we are expanding product offerings in the high net worth client area and looking to introduce some additional variable annuity products with which would be comfortable with the risks through the wirehouse channel further down the road. In the Netherlands, we have been restructuring and streamlining our internal organization and are working to increase the flexibility of our products to better adapt to the clients changing needs. We are also focusing more of our attention towards the middle market distributors, and in the U.K. we are focusing on expanding our product range, in particular our individual protection business. Looking at the Americas life production we see continued positive developments in the agency segment which is one of our key core franchises. Recurring premium production in the agency segment was up 11% over the first 6 months of 2003. Institutional recurring premium production was down 19% resulting from lower bank-owned life and company-owned life insurance sales where production occurs more unevenly.

Slide 9 total retail single premium production increased 10% compared to the first 6 months of 2003, an increase that was driven by a 32% gain in the bank channel. As shown at the bottom of the slides certain reoccurring premiums on Variable Universal Life contracts in 2003 that were recorded as single premium production have been excluded here for comparability. Institutional single premium sales, which occur unevenly showed strong production results for the first 6 months of 2004 with a five-fold increase to $74 million. As a result of the discontinuance of structured settlement production, premium production results for 2004 are driven solely by the bank-owned life and corporate-owned life business. While overall standardized life production shows a 3% decrease, when accounting for the adjustment for certain reoccurring premiums, total standardized life production actually increased 2%.

Slide 10, our annuity production in the Americas, as you know, has slowed due to the actions we have taken to focus on profitability. In the retail fixed annuity line, production for AEGON and the industry has been affected as the low interest rate environment reduced the attractiveness of many products to clients. In addition, some competition has been slower in reducing crediting rates. With slowly rising interest rates and improving spreads, and new product offerings we would expect to see improvement in future production levels. Fixed annuity pension production, which is mostly held in stable funds, continues to show strong growth, increasing nearly 50% compared to the first 6 months of 2003.

Slide 11, retail variable annuity production is lower, largely due to the discontinuance of the GMIB rider in early 2003. Private label production which consist of several funds and included here as direct showed a strong increased largely reflecting higher volumes for our direct partners. While variable annuity products complete our broad product offering, they are not a major production focus for us in the current environment. We will however continue to develop new products that afford us an acceptable level of risk and profitability.

Slide 12, we continue to focus on managing expenses to our current production levels. In the first half of 2004, total operating expenses which exclude commissions and net deferred policy acquisition cost and excluding the TFC, the Transamerica Finance consolidation, were down just 2% in euros and 4% higher on a constant currency exchange basis compared to the first six months of 2003. In the Americas, operating expenses increased 4% reflecting increased regulatory compliance in IT cost with actual to allowable expenses continuing to be within an acceptable range. Operating expenses in the Netherlands increased 9%, results from expense loadings were positive, while there was an increase in expenses due to a contribution to the provision for post-employment benefits. And in the U.K. we achieved a 15 million pound sterling expense savings.

Slide 13, more favorable capital markets and our increased earnings have resulted in an improvement in our equity-to-total-capital ratio. In addition, our continued emphasis on profitability has resulted in higher cash flows from our operating units. The quality of our capital base has also improved with a recent successful Perpetual Bond Issue in July 2004. We have raised the interim dividend to 21 euro cents per share representing an increase of 5%, which is an action supported by our increased cash flow and sound financial position.

Let me now turn it over to Michiel van Katwijk, who will discuss in greater detail the results of the country units.

Thanks, Don. On the Slide 14, "Revenue generating investments"; growth in our asset base is one of the prime drivers not just for revenue development but also for future earnings. In U.S. dollars, total investments in the Americas were up 10% compared to a year ago. In pound Sterling total investments were up 6% in the United Kingdom and in euro total investments were up 9% in the Netherlands. Total revenue generating investments were up 6% in euros and 9% using constant exchange rates. A good asset growth for each of the country units has had a substantial influence on the favorable results reported in the first six months of this year.

Slide 15; looking at investments by type, the equity, and real estate portfolios had the largest percentage changes. The general and separate account equities and real estate portfolios increased 13% and 16%. The total general account equity portfolio is now 7.2 billion euros which includes almost 700 million euros in preferred shares. Nearly 90% of our general account fixed income portfolio of 113 billion euros is invested in bonds and mortgages in the Americas. In the U.S. fixed income portfolio, we had gross unrealized gains of just over $4 billion, and net unrealized gains of approximately $2.4 billion at the end of the second quarter.

Slide 16. Looking at the results for the Americas, income before realized gains and losses on shares and real estate increased 46% on a comparable basis. All lines contributed to this strong increase. Lower additions to the asset default provision and increased spreads are the primary reason for the increase in the results of our traditional life and spread-based deposit businesses. Variable annuity results increased due to higher fees related to higher fund balances and improved persistency. In addition, 2003 results included the reserve strengthening for certain reinsured guaranteed minimum benefits. Accident and health results benefited from lower default losses and improved claims ratio and premium rate increases. Improved results from fee business reflect higher assets under management.

Slide 17, our U.S. bond portfolio increased by $3 billion compared to year end 2003, with the majority of the increase coming from general account assets. There was no meaningful change in the average credit rating of our U.S. bond portfolio during the second quarter. We continued to see an overall declining bond default rate as reflected by the $147 million decrease in charges to the default provision for the first six month of 2004 compared to the same period last year. While bond defaults in the second quarter were higher than in the first quarter of this year, we believe the credit markets are generally benign.

Slide 18, in the Netherlands income before realized gains and losses on shares and real estate increased 58%. Traditional life results were slightly down, all other product lines contributed to the increase. Reflected in the results are lower additions to provisions for credit risks and minimum guarantees as well as higher investment income. The modest downturn in traditional life results was mostly influenced by lower loadings from decreased production and additional provisions for medical costs for retired personnel. Life for Account Policyholder results improved strongly due to lower provisions from guarantees and positive morbidity results partly offset up by higher lapses and an additional provision for medical costs for retired personnel.

Fee business improved due to higher assets, asset management profits and higher results at TKP pension. Accidents and Health results were mainly driven by a strengthened position in the sick leave segment. General Insurance results improved strongly reflecting the continued improvement in claims experience.

Slide 19, in the U.K. income before realized gains and losses on shares and real estate was 19% higher, the increase is largely due to the favorable Life Account Policyholder results. Traditional Life earnings were lower due to a 5 million pound charge, reported in the first quarter of 2004 related to the cost reduction program. Life for Account Policyholders results primarily reflect the higher average value of the equity markets.

Slide 20. In other countries, income before realized gains and losses on shares and real estate increased 28%. The largest part of the increase is due to higher results in Spain and Hungary. Now, let me briefly update you on our capital position and ratings.

Slide 21. Our capital base was strengthened during the first six months of 2004. Equity-to-total capital ratio of 72% is higher than our targeted minimum of 70% and with the successful completion of our recent perpetual capital securities issue in July, the quality of the capital base will improve as well. The proceeds from the perpetual capital securities will be used to refinance maturing senior insurance debt. New capital securities are junior to other subordinated debt.

Slide 22. We continue to have good financial flexibility. Further our operating companies in our core markets of the U.S., the Netherlands and U.K. continued to have very strong financial ratings. Recently in July, Moody's has changed the outlook for AEGON N.V. to stable reflecting the improvements in the underlying core operations. And S&P removed the negative outlook on our financial strength ratings in the U.K.

Slide 23. To wrap it up, earnings from our core operations have developed strongly and more than compensated for the lower contribution from TFC to the bottom line. We remain committed to the profitability of our business.

We will be happy to take your questions now. So first question.

Thank you, sir. Ladies and gentlemen, at this time, we will begin the question-and-answer session. If you have a question, please press the "*" followed by "1" on your pushbutton phone. If you wish to cancel your request please press "*" followed by "2". Your question will be answered in the order they are received. If you are using speaker equipment today, please lift the handset before making your selections. One moment please for the first question. The first question comes from Mr. Nick Byrne. Please state your company name before asking the question, sir.

Hi. It's Nick Byrne from JP Morgan. I just wondered -- I had one question just to see if you could get into a bit more detail on the level of bond defaults. If I look at the numbers, in the first quarter you were roughly at around 21 basis points of the total U.S. portfolio in terms of defaults. That increases back up to about 36 on my numbers in Q2, which seems to be around the level that you price in, so what we might consider to be an across the cycle rate. If we just compare it -- comparison with ING, in the first quarter they had one basis point of losses and in the second quarter 6 basis points of losses and that's pretty consistent with other players you have reported in what's regarded as a benign period for losses on credit. So, can you give us a bit more color as to what's really driving the high level of losses compared to a close peer group? And secondly, could you perhaps give us some feel for what caused that number to pick up in Q2 and what perhaps you might extrapolate for full year and into '05?

Nick, this is Don Shepard. In the second quarter, we impaired about $35 million of our aircraft portfolio and our expectations for the balance of the year are to continue to have an improved benign credit aspects in our bond portfolio. I can't comment on the other companies, but -- and I have not thought about in terms of basis points, but our first -- I think in the first quarter we had about 50 million and again we had the additional 35 in the airline sector second quarter.

Okay, thanks so much.

Thanks, Nick.

Thank you sir. The next question come from Mr. Rob Procter. Mr. Procter, please state your company name before asking your question.

Yeah, good afternoon, this is Rob Procter from Morgan Stanley. I've got a few questions. The first question, I guess, is a fairly broad question, it's like observation. I mean, it's seems to me that much of the theme of these results is quite mixed sales levels depending on which product grouping we look at, I think that's certainly true in the US. And at the same time you are commenting that you are stepping back from unprofitable new business, you keep mentioning where peers have aggressive policies with regard to how they are pricing that new business and I just wonder -- I know you, obviously, don't publish embedded value of new business information at first half stage, some of your peers do, but I am just wondering, you know, is there any more granularity you can give us on the profitability of new business in aggregate across the group? I think in the press release you commented on hitting the hurdle rate in the fixed annuity business. I guess, put it another way, you may be -- are there any businesses where you are not meeting the hurdle rate, you know, any real feel for how in a quantifiable way that the profitability of new business is moving? Second question -- sorry for the long-winded first question. The second question is, I wonder if you could just give us your feel for where sales are going, where the top line is going in the rest of the year, I know you can't be specific, but any sort of more detail on that specific point? And the third point or the third question just a simple numerical question, I think you say that with regards to expenses, the actual versus allowable, is within an acceptable range? You have given that number in previous periods and I just wonder if you can tell us exactly what that percentage is, I seem to recall it was 99% in a prior period when we talked about this. Thanks.

I will answer the first one last. In the actual to number, I think last year it was around 100 in the US, and I think it's just over 103 for the first six months of this year. In terms of the -- I don't remember 99, but I think it was just over a 100 last year. In terms of production, it is very mixed, let me make a comment -- our comment on the variable annuity isn't that somebody else is doing something, it's that our view on use of capital for the variable annuity market, we are not comfortable with the risk reward of the variable annuity business with the options that are -- the embedded options that are required to be a big player in writing a lot of new business. If you notice, we continue to do pretty well on the variable annuity business in our pension lines and that type of things where that isn't a factor. We just, you know, we came out with a variable annuity where we were allowed to reallocate the assets if we had a discomfort with where the markets were going and that hasn't been highly successful. We are looking at some other things and -- but we've just made the decision not to get into the -- trying to better other companies in terms of those embedded options.

Sorry, can I just --

Sure.

If you are so uncomfortable with these options or with the return profile that you have after allowing for the cost of those options, and you don't understand how competitors are pricing that business for an acceptable return on equity, let's say, would you not consider just effectively withdrawing from that business? I mean, it seems to me that you do have reasonable sales growth in part of the business, particularly the traditional life business where you have reasonable sales growth, I suspect you are hitting the hurdle rates. Why would you not commit more fully into that business and have a more profitable mix overall if this is true?

Yeah. First of all, I don't know that the profitability -- it's more of the risk profile of a -- from tail risk on the embedded options that's our concern. Clearly, there is a lot of smart guys out there pricing product and it's just in our instance, we are not comfortable with the tail risk on some of the embedded options given the fact that that's not a major business for us in terms of selling to the wirehouse today, but we continue to stay in the market, we see cycles happening in different products; in the fixed annuity business over the past 20 years, we've seen people get more aggressive at times and we lose some market share and then things change and we get some market share back. So, we are continuing in that market, we sell other products through those distributors including mutual funds, 401(k) plans and other type products. So we think it makes sense to continue and when we have -- when the pricing makes sense or we feel like we can get our share. And again, if you look at the -- I think what you are suggesting is why being it in the wirehouse at all because as you notice in the pension market and other areas, we are doing pretty well in the variable annuity business.

Well, I am just questioning whether there is a better use of your capital, whether you could put it to use in the segments where you have better return prospects and frankly better top line growth prospects because it seems to me actually my two questions are linked that it's very well saying that if you step back from -- you know, if others are pricing, actually you have to step back from the market that may make sense, but ultimately you have a pretty weak top line and you have expense overrun issues which with a, you know, 3% deterioration in the actual versus allowable is not great, I guess?

Rob, when that happens, of course, we will continue to adjust the ongoing expenses to deal with cost overruns as we have in the past, but because we are pretty decentralized in terms of our distribution, it isn't a matter -- you are right, we are putting our capital with the growth in our life insurance business and there is some where spreads are today, we think there are some -- we are going to get a little bit of benefit in the fixed annuity business, but perhaps I think we have Brenda on the phone who has been working with this. Brenda would you like to make any comments on that.

Yes, I guess just a couple of comments, Rob. Part of the deterioration that you see in our expense ratio, that's not all related to sales volumes. We are making some investments in the business in terms of system capabilities and that, so some of the expense increase is actually focused on positioning ourselves for more efficiency in the future or increase capabilities, so some of that is what I would say is more of an investment in the business along with some increase in terms of all of the additional compliance that we're faced with here in the U.S. As far as new business and I can guarantee you we would take all of the life insurance business that we can get, we are very focused on continuing to improve our franchise in the high net worth market with our Transamerica field force, also in terms of middle market life insurance. And I can tell you after attending several sales meetings and conventions in the last several months, I am really pleased in terms of the increase we have seen and recruiting activity, some of the momentum especially in our VUL business, it's all very positive. As you've heard us say in the past, I think, we're very proud of the fact that we're a good partner and clearly understand in terms of agency business the importance of service and responsiveness, so that focus on growing the life insurance we have not backed off on that at all, in fact, we're putting tremendous effort in that, and I think we are starting to see the results.

So you would be quite upbeat on sales momentum in the second half of the year, Brenda?

On life insurance I think we have got a lot of the right players. And as you say we have consistently been a good partner in the agency and brokerage BGA business.

Brenda, do you want to comment on the variable annuity?

I guess -- I am with you Don, I mean, the risk reward, in the U.S. it's less than 10% of our earnings, its not -- the margins on that business, they are not going to generate the real growth in earnings to take the risk. As far as being there and having that complete portfolio, I do think that that's important and it's a key part of our pension business. So -- and there the product that you go out with in the pension business must have all of the guarantees and the tail risk in that, so the profile of that product in that particular market is much better. I just want to -- the other question Rob had, which I will let Daryl comment on in terms of looking at the value of new business for '04, Darryl, I am pretty upbeat as far as getting the returns on that.

Yeah, we don't have any actual figures and we are not producing value of new business quarterly, but some of the actions that we have taken, and the steps we have taken has been to maintain profitability, and so I am positive with value of new business as we go throughout the year, we are not allowing -- we are quick to move on products that don't meet our hurdles there will be no destruction in value for sure, and I would say growth in value of new business in '04.

Especially in the fixed annuities.

Definitely.

Okay. Thank you very much.

Thanks, Rob.

Thank you Mr. Procter. Next question comes from Mr. Ton Gietman. Mr. Gietman, please state your company name followed by your question, sir.

Good afternoon. Ton Gietman, Petercam. I have one request and three questions if I may. In your report you mentioned what the developments is regarding the spreads in the fixed annuity business, so I wondered if you could also show what the average yield on your portfolio is like a number of your competitors are doing, and preferably your if that is possible in lets say statistical annex, that's my request. My first question is the class action has been dismissed and I wondered if that perhaps has tempted you to come back on something, which you did a number of years ago, that is giving guidance for the full year? My second question is regarding the Netherlands, you mentioned that you tried to change distribution channels or to change the sales through different distribution channels you've mentioned that a number of large distributors offer one-sided products and you are not keen to do business with them. Could you elaborate on that, who are these distributors and what kind of products are they offering? And my final question in regards the accident and health business in the U.S., you mentioned that you ceased the long-term care there in 2005, could you give an indication as to what profit contribution that business is giving today?

Let me give you on the first issue. I think we are happy to put in our statistical information our portfolio yield, so we will do that.

Thank you very much.

Okay, in terms of guidance, no, we will talk about how we feel like the business is going but what we are not going to do any forecasting or guidance on earnings. I noticed a few more companies are not doing at any longer as well.

Yeah, you are right.

And so I think the question on the distribution in the Netherlands would be best answered by Johan Van der Werf. Johan?

Yes, Mr. Gietman, first the large distributors, the late 90s and early 2001, and 2002 we had distribution from a number of large single product distributors that sold mainly equity based product. Equity prices came down but also tax legislation changed in the Netherlands, and for that reason, these channels sort of dried up and these large distributors are not there any more or shifted their business somewhere else. And we have to reinstall our intermediary distribution channel and that's what we are doing.

Are the distributors that sold, let us say, the lease products?

No, no, no I don't mean lease, I mean life products where the saving component was invested in equity. On distribution channels, we have now four separate distribution channels. What you see in the first half is that the intermediary channel lags behind about 35% but the direct channel where our own sales forces sell AEGON products are equal to last year, and we are expanding those direct channels, and I expect that sales will go up there. Also as there is more clarity on the plans of the Government on pension I expect that the market will pick up and after the restructuring we did in the half -- first half of this year, we will pay much more attention to sales in the second half and I am positive about that too.

Mr. Gietman on terms of the long-term care business, I think that the earnings -- I better not think, Brenda the earnings for the first 6 months.

I guess one point we want to make, Don, is while we're discontinuing the sales; that business is going to be around for a long time.

But what were the earnings for the first 6 months?

The earnings for the first 6 months including earnings on the capital that is allocated to that -- pre tax were around $16 million.

Okay. Thank you.

Yes, and I would not anticipate that dropping off.

Okay.

Does that answer your question Mr. Gietman.

yes.

Thank you. The next question comes from Mr. Andrew Ritchie. Mr. Ritchie, please state your Company name followed by your question sir.

Yes this is Andrew Ritchie from Citigroup. I wonder if you could give us a bit more clarity on the comment you made about mortality experience in the reinsurance line, you mentioned that impacted earnings in the quarter; secondly, could you just give us some flavor if let's say interest rates remain or yields remain fairly unchanged from here, what do you expect the outlook for spread income and spreads over the rest of the year? The final question, a number of rating agencies have made comments recently on AXXX regulation in respect of the tail risk in universal life sales. You have obviously been selling quite a lot in that market, can you comment on the risk of that going forward or your views on that issue.

Okay, in terms of the first question, the Life Reinsurance business had about 35 million higher than expected life claims in the second quarter. We don't see -- read anything special into that, generally mortality is improving in the life reinsurance business. And I did notice that there was a couple of others that had a little spike in mortality in the second quarter, but at this point we don't see anything there. We think its going to continue to improve. In terms of if the interest rates stay about where they are, I think we will continue to make our spreads, about where they are at. I don't think there is a -- we would not be cutting credited rates much any more so, I think they would stay about where they are. Darryl I am going to let you answer the XXX question.

Sure, we have actually done a lot of modeling around the secondary guarantees and around the XXX business I guess I am not sure what to say other than saying we are very comfortable with the risk. The other I am sure what you've heard a lot about is the letter of credit issue and financing those reserves and so we've had to do a lot of modeling to support various programs that we have underway right now, collateral funding type programs to validate and support the redundancies in those reserves and through that modeling I can say we are very comfortable with the risk.

Andrew any other --?

Yeah, I guess just to clarify on the spread issue can you just quantify what your new money yields are versus your portfolio yield currently?

In the U.S. on the major block of business, has somebody got that quick, Brenda?

New money?

Yeah.

New money right now is at 2.8%.

So that's the --?

Crediting rate.

That's the crediting rate.

I was looking for the yield, sorry

Oh! The yield. I am sorry.

Well the five year treasury is at yesterday it was around 3.5, so new money yields would probably be about 4.5% in that range.

And the current portfolio yield?

Current portfolio yield on the -- on the largest segment of our fixed annuity book is running around 6.25.

That it's great. Thanks.

Thank you sir. The next question comes from Mr. Duncan Russell. Please state your company name followed by question, Mr. Russell?

It's Duncan Russell from Fox-Pitt Kelton. I have just got one question on Dutch business, and two questions actually. The first one was can you just update us on pension legislation and to what extent we are seeing sales being delayed until 2005? And then the second question was referring to the distribution in the IFA markets and to what extent are you seeing some channel conflict because you have been buying up lot of IFAs and therefore maybe some other IFAs you're taking off a list?

Are you talking about, you are talking about the Netherlands on both questions?

Yeah.

Okay, Johan?

Yeah the first the pension legislation question. It's for over a year now it's unclear what legislation or pension will be. There is discussion on whether permitted ages would shift from 60 to 65 or somewhere in between. And what we see in sales especially in the individual markets it's difficult to give an advice to consumers. It's not sure what the future is going to be, and we think and the market thinks that that delays sales, when it's going to pickup and how -- to what level it is going to pickup is uncertain, but I am positive about picking up again.

Just what proportion of your sales are individual pension?

Excuse me I didn't understand.

What proportion of your sales are individual pension in the Dutch market?

The main part of the recurring premium production is individual and a smaller part is single premium but I can't give you the exact division right now.

Okay.

I will have to do that later. On the IFAs you mentioned the channel conflict because of the fact that we have buying IFAs.

Yeah.

We have not seen a channel conflict at all. When we announced in January 2000 that we had financed the Meeus group and the Meeus group is the largest distributor and retailer in small and medium size enterprise markets, about 7% market share intermediary distribution. When we announced that there was not one single intermediary that stopped doing business with us.

Okay. Thank you.

Thank you Mr. Russell. The next question comes from Mr. Rinere Offeild (phonetic) Mr. [Rinere] please state your company name followed by your question sir.

Yes hello Oppenheimer research. I have the following questions, first of all the interest rate was flat and the debt, the net debt has even increased a little bit, I had the understanding, that you used the Transamerica, or the proceeds from its sales Transamerica Finance Corporation to redeem that, can you keep me updated on that issuing, the second question is could you give us the industry-wide experience regarding fixed annuities in order to compare your figures with the industry average and the third question is I saw that the investment income rose by 15% in the first six month, but the benefits provided and paid to the clients declined by some 9%, so is it too much in redistributing wealth from the customer to the shareholder is this an explanation for some I would say weak points in your top line and also do you alter, do you change this strategy in the calls of 2004?

Okay, our strategy for 2004 is going to be to continue to promote our individual life sales and our fixed annuity sales through the banks and the other product lines through the bank distribution in the US which we're now selling life insurance, pension plans, 401(k) plans, mutual funds, and other products, so we're adding new products to our distribution channels, but we are going to focus on the areas where we feel that we can get -- use our capital the best. In the Netherlands, Johan's group's going to focus on increasing his pension sale and his protection business and of course in the U.K. in the pension business and the protection business. I think on the interest rate question, I would like to turn that over to Michiel.

Just one additional question. Do you want to change your pricing and to make it more favorable to the client in order to gaining back market share.

Well I think that's a very product specific type think, but we -- one of the reasons that we kind of cut back a little bit on trying to promote fixed annuities in those very low interest rates is that it just wasn't a particularly exciting product, if we were going to make our returns, we couldn't do very well for our client with that, so it's just a very product specific question and you don't expect to look at it product by product. In the large life insurance market, we are seeing some increases in the cost of reinsurance which I think have to be looked at in terms of how that's going to fit in our pricing going forward, but each product is priced individually and looked at on an individual basis, and it's just very product specific. I don't know how else to answer that.

Okay.

But if the answer that we are not planning on reducing our return objectives to get higher growth rates.

On the interest charges, the line item you are looking at is actually interest charges and other and what's causing the difference between the first and the second quarter is in other because in the first quarter we had negative results on TFC. In the second quarter actually, I think, operating results on TFC were marginally positive and so that's why you see interest charge and other come down from 126 to around 93. Interest charges have remained relatively stable over that period of time.

But you didn't redeem that after the Transamerica transaction, isn't it?

I am sorry. I didn't understand that part of your question.

Didn't you redeem debt after the Transamerica transaction? You used -- or you planned to use some of the proceeds from Transamerica to reduce the debt? If I understood it correctly, I don't know.

Yeah, that is right, but the only effect you'll see turn up in interest charges and other is the effect on the capital gain, which is a minor part and has a positive effect on interest charges, but I think the total capital gain we realized last year was about $400 million. So, based on that and maybe between 2 and 3% interest charge, that leaves us with around 10 million on an annual basis that we were able to lower interest charge. So, on a quarterly basis, not much more than 2 or 3 million. So that effect is there, but it is small.

So, that does have an effect the other way.

It was there and is still there.

Investment income being up, your question. I think -- if you at the Netherlands, I think there is -- just a follow-on on the earlier answer -- there is a specific reason why investment income is up and that's because we got payments in on preferred shares, so it's investment related specific explanation for investment income being up.

Okay.

Thank you Mr. [Offeild]. Next question comes from Mr. Nick Holmes. Mr. Holmes please state your company name followed by your question sir.

Yes, hi. It's Nick Holmes at Lehman. I have just a few follow-up questions please. Firstly, wondered if you could tell us more about the new variable annuity product that is under development and in particular what your thinking is on dropping pricing on GMWB from the current 75 basis points and even reintroducing GMIB. Secondly, on Dutch life, just wanted to ask you what you see as driving the new business sales trail this year versus last and you referred to an absence of lumpy business like group contract. Just wanted to check whether you think it is lumpy business or whether you think that there is a significant increase in competition in Holland at the moment? And then, thirdly, finally just wanted to check what the spread on the new fixed annuity business is again? Sorry, I didn't quit get that in your previous answer. Thank you.

Okay. Nick, I think that on the variable annuity and the features in the new variable annuity and the pricing on the existing one, we will let -- Darryl Button will take that question and he can deal with the interest spreads while he does that and then on the pension business in Netherlands, we will ask Edgar Koning to do it, so, Edgar why don't you take the Dutch business question first?

Okay. Your question is what drives new business sales in the pension business. I think we already addressed a couple of issues there. There is a lot of legislation and there is a lot of things going on in that market. So it's the tax situation and there is also a lot of new legislation. So what you see is that we as an insurance company, but also for agents, are working with that to implement all these new rules.

That's the minimum age paying rules.

That's minimum age rules and there are a couple more coming. So, this sort of keeps them busy and makes it very difficult to increase sales. On your question of the lumpy business, it's not that we don't like it, but it's the way it comes. So, we think that especially that part of the market also has large pension contracts and the market is a little slower right now. Now, of course, there is a lot of competition, but we don't think that they take the substantial part of our business right now.

Would your -- sorry, the follow-up, would your prognosis then going forward be that you might expect to see things improve in Holland?

It will come back sooner or later because the pension cap is still very huge. What -- this is Johan Van der Werf -- what we see in Dutch large pension contract market right now is that there is more activity than there was in last 12 months. So, companies -- pension companies look at their schemes better now more active and we are in discussions with a lot of them.

Thank you.

Darryl.

Yeah, a couple of questions there. I think on the VA, are we looking at dropping our GMWB pricing? And the short answer to that is no. Actually the pricing on that product hasn't really been the problem, it's been the allocation strategy that Don talked about before that just hasn't taken off the way we had hoped. So if anything we are looking at on our new design about what we can do to get away from that active allocation strategy, but looking back we just --

Just a follow-up -- so, you don't see sort of competitors pricing at a 50 basis points as a material problem?

No. And part of the issue too is -- I mean, our riders are not exactly comparable, we do have more features in our rider. We do have the 5% for life option that's not in the standard GMWB as well as the maturity guarantee. So there is differentiation in the product itself. The feedback we received is that the pricing is not the issue so much as the allocation strategy. On your question on the GMIB, no, we are not looking at specifically bringing back a GMIB rider. I think the withdrawal benefits are probably the stronger, I would say, from a need perspective out there right now.

I think your other question was on spread on fixed annuities and I am not sure if I caught the question right, but I think you are wondering what our spread on new business is, right now and it's around 225 basis points plus or minus depending on what channel, commission structure, product design etc. are.

So, it's the same as what you are getting on your whole book at the moment?

Yes. Pretty close.

All right. Thank you very much.

Thank you Mr. Holmes. Next question comes from Mr. Carsten Zielke . Mr. Zielke, please state your company name followed by a question.

Yes, Carsten Zielke of WestLB. I wondered may be you can explain a little bit the details of the profit development in traditional life, you've seen 22% lower earnings compared to Q1 and I just wondered whether there was some mortality, or experience which had affected this downside and also I would like to know the profits from Transamerica Re, could you give the details there and perhaps the capital which is allocated to this company and how serious are you really about selling this company? Thank you.

I'll take that question. I mentioned that earlier, the mortality for -- in the life line was higher in the second quarter but that was all at Transamerica Re. So that was the reinsurance company that had higher mortality. The trend is then that mortality has been improving at Transamerica Re and so we are not particularly concerned about the -- I mean, I would have rathered it had not been 35 million higher, but the trend continues to be that mortality is improving. We don't disclose the capital on our particular lines of business. So, I will not give you a good answer on that one. The question on the sale of Transamerica Re, there was -- I was asked a question in an interview today and the question was posed as ING was looking to do something, does that mean you are going to and my answer was that we actually see some -- because of firming up in life reinsurance rates that we think perhaps that business is actually getting better, but that there is still a long-term discussion going on of how core it is, so we have no immediate plans to put Transamerica Reinsurance for sale, and at this point we are operating it just like we always would.

Okay. So we should see a traditional life profits coming back to normal starting next quarter?

That's correct.

Okay. Thank you.

Thank you sir. Next question comes from Mr. Lukas Daalder. Mr. Daalder, please state your company name followed by your question.

Yes, good afternoon this is Lukas Daalder, Bank Oyens & van Eeghen. I have three questions, the first one is on the variable annuities. I saw that you had quite solid results there of 58 euros in the second quarter, the highest on record. There is one mention in the press release that there was a $16 million lower lapse rate that had positive impact on earnings. Is that of recurring nature or is it going to be just one of that? And also on the bond defaults, the question was already raised before that if you look at the bond defaults in basis points Aegon does appear to be on the high side of the industry. Do you have any statements to make on that or is that observation incorrect, also a possiblity. And third, I understand that the variable product that you introduced in December last year, sales of that is currently not running as you would like it to be and you're therefore now introducing the new product. Any specification and what time can we expect this new product to hit the markets?

Let's see. The better performance in the variable product reflects higher fees and profits that resulted because the equity markets improved from a year ago -- I mean that is the principal reason. And the $16 million higher earnings were just due to lower lapse rates, and I wouldn't expect to see that as an ongoing thing but it depends on what lapse rates do and what persistency does. The new product, I am going to punt on that and let Darryl answer that but on the bond losses, again we expect to have a good performance in our bond portfolio this year. The quarter issue was we impaired some aircraft paper, and but over the full year, we expect it to be pretty good performance. I admit that I have not looked at it relative to others at this point, so I can't answer that question, but Darryl would you pick up and talk about the new product and when you expect it.

Yes, and I will say that's -- I mean it's a fair statement that sales haven't been what we had -- we hoped for and that's why we are going back and we are looking at, as I mentioned before, our product without the asset allocation strategy. The sales thus far in '04 for the new product are $255 million. The other thing I wanted to also just clarify a little bit on the VA earnings, if you are looking sequential quarter-over-quarter we did have some our GMWB hedge program that we have in place at our reinsurance operations, there was a large quarter-to-quarter variance there. If you recall, we had a $16 million market value loss in the first quarter and that reversed and then some and we had a $28 million positive in the second quarter. We've now completed the interest rate hedging on that program, we have put the equity hedging in place as of the year end, we now have the interest rate hedging in place, so, a lot of that volatility will disappear going forward. But if you are looking on sequential quarters, that's fair.

And on the final construction for new product.

The new product?

Yes.

I am not sure I am ready to commit yet. We are obviously trying to get something out in the fourth quarter of this year but we will have to see.

Okay, thanks.

Thank you.

Thank you Mr. Daalder. Our next question comes from Mr. David Nisbet. Mr. Nisbet, please state your company name followed by your question.

Yes. Good afternoon, it's David Nisbet at Merrill Lynch. I was wondering whether you might say a little more on the decision to increase the dividend, specifically I am interested in where the improvement in cash flow has come from within the group, which operations will be able to perhaps pass higher dividends back to the center, where you are requiring less capital financing than in the past. I guess, I am really just after some comfort of the improvement in cash flow isn't just a consequence of lower new business stream? Second part of the question, you also referred to the stronger capital position. If one looks just at the debt-to-equity ratio that seems to be hovering in the 27-29% region, I was just wondering whether you feel more comfortable with it at that level? Thanks.

Go ahead, Michiel.

David I think the improvement is pretty much across the board for our larger country units in the U.S., in Canada, and the U.K. we either have higher dividends or have no more injections, like for instance in the U.K. Netherlands capital also has been improving. So, on a broad basis it's been an improvement in really underlying business performance. Think about bond defaults in U.S., bond defaults coming down has a profound effect on cash flow, and from that perspective it is largely driven by the underlying business that we see this improvement in cash flow, and that's why we are comfortable increasing the dividend to 21 euro cents a share. But the debt level, it has been hovering around those levels, that's right. If you look back 5 years, it's been hovering around those levels, hasn't been changing much, here and there, a point more or point less. We are comfortable with the levels where we are at and we are particularly happy with the fact that we in July were able to refinance part of the senior debt with junior subordinated perpetual securities.

Okay thanks.

Thank you Mr. Nisbet. Ladies and gentlemen, if you would like to ask a question, please press the "*" and the "1" on your telephone. Next question comes from Mr. Trevor Moss. Mr. Moss, please state your company name followed by a question.

Good afternoon, gentlemen. This is Trevor Moss from Man Securities, here. I just have a couple of questions. Firstly, your tax rate, I think looks to me to be a bit on the low side for the half year. Is there anything special that we should aware of in the tax charge? Second question would be -- I wondered if you might be able to give us your solvency ratios coming out of each of your main territories, I know you've obviously got AA rating from the rating agencies to each one. I wondered what the solvency ratios might be. So that's it, really? Thanks.

It's Michiel. On the solvency, we are in the AA range. On a capital adequacy as we regard it, where we look at regulatory requirements S&P -- the relevant S&P model at a 165% and any other requirements that we may have ourselves, and we are comfortable that we are at those levels in all of our country units. So we currently believe that we are consistently capitalized in line with the ratings that we have.

The tax question?

Don, the tax rate in the U.S. dropped in the second quarter primarily due to the resolution of the several tax audit items that cleared in the U.S. and the total of those was about $20 million lower tax.

Right. The tax rate in the Netherlands is lower because we had higher untaxed income from investments.

Especially because of the dividends of the preferred shares?

Okay. Do you think that the level of untaxed dividend there and some of the realized gains you had is sustainable throughout the year, or is that going to normalize and therefore the tax rates normalize?

The tax rate probably will go up more towards the levels we saw in the first quarter.

Okay thanks.

Thank you Mr. Moss. And Mr. Shepard there seems to be no further questions right now. Please continue with any other points you had.

We just thank everybody for participating and for your time, thank you very much.

Thank you.

Ladies and gentleman, this concludes the Aegon First 6 Months 2004 Result Conference Call. Thank you for participating and you may now disconnect.