Aegon Ltd (AEG) 2005 Q1 法說會逐字稿

Welcome to the AEGON Q1 2005 results conference call on the 11th of May 2005. Throughout today's recorded presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. (OPERATOR INSTRUCTIONS).

I will now hand the conference over to Mr. Hulters. Thank you, sir. Please go ahead.

Good afternoon. My name is Michel Hulters, Head of Investor Relations. Welcome to AEGON's conference call to discuss the first-quarter 2005 results and the 2004 embedded value. Before we begin, I need to make you aware of our cautionary notes regarding any forward-looking statements, which is on the next slide. Please take a minute or two to review the statement after the presentation.

During today's conference call, our CFO, Joe Streppel, will provide an overview of the developments in the first quarter and the highlights of our 2004 embedded value. Afterwards, there will be ample opportunity for questions. But now, let me hand it over to Joe Streppel, CFO of AEGON N.V.

Thank you Michel. We're glad that you could join us to discuss the first-quarter results of AEGON's businesses throughout the Americas, Europe and Asia and the development in our 2004 embedded value. With us today are the CFOs of our major country units -- Darryl Button from the U.S., Mark Laidlaw from the U.K. and Edgar Konig (ph) from the Netherlands. Our Group Treasurer, Michiel van Katwijk, as well as our Group Finance Director, Ruurd van den Berg, are with us. And also our Group Actuary, Bill Robertson, is going to join us to answer your questions, especially on embedded value.

Slide 3. The first-quarter 2005 results are the first time we are officially reporting on an IFRS basis. Of course, we have tried to prepare you for this by providing an extensive set of comparative results at an early stage. Still, the new reporting base will probably take some time getting used to -- also for us. One of the unfortunate effects of IFRS is that it causes increased volatility in the numbers. By identifying an operating earnings line, we have separated the most volatile items. However, even in the operating earnings, there are a number of volatile items that will require some additional explanation in order to better understand underlying performance. I will come back to this in more detail when discussing the Americas and The Netherlands. But for the objected body underlying analysis shows that the first quarter has been a reasonably good start of 2005.

With the volatility of our IFRS in mind, it is probably fortunate that we also report on our 2004 embedded value today. Management believes that embedded value remains an important additional performance measure. Hopefully, the combination of more details on our first-quarter IFRS results and the 2004 embedded value gives you a good chance of where AEGON's stands and how our businesses are performing.

Slide 4. To paint the background of our operating environment, let's take a brief look at what capital markets have done in the first quarter. This is not only relevant as one of the profit drivers of our business, but it also helps in explaining some of the movements in the volatile items. As slide 4 illustrates, equity markets had a mixed performance in the first quarter with European markets generally rising and outperforming the U.S. markets, which was down slightly. On average, the major markets were higher than in the first quarter of last year.

Slide 5. The bond market shows a similar development with European government bonds increasing in value and pushing yields down slightly. U.S. yields, on the other hand, rose. The U.S. dollar strengthened against the euro, however on average remains weaker than the first quarter of last year.

Slide 6. Slide 6 shows that our operating earnings before tax were down 14% compared to the first quarter of 2004. This is caused by the impact of certain volatile items, which I will explain in greater detail in a minute. Net gains and losses on investments and impairment charges together increased strongly, resulting in an increase in income before tax of 3%. Finally, net income increased by 5% to EUR666 million.

Slide 7. Looking at operating earnings before tax by country units in their respective currencies, we see a strong increase in the U.K. but a decline in the other countries. In the Americas, this reflects the impact of certain volatile items. In The Netherlands, this also caused by some additional provision for disputes related to life products, while in other countries, the sale of the Spanish general insurance activities has had an impact.

Slide 8. Overall, standardized new life production was up by 4%, which mainly reflects strong BOLI/COLI sales in the U.S., increased group pension business in The Netherlands, and a strong contradictional (sic) life sales in Taiwan.

Slide 9. Growth in our asset base is one of the prime drivers for our revenue development. In our three major country units, investments were up by 7% in local currencies compared to 1 year ago. Total investments for the group were up 3% to over EUR315 billion.

Slide 10. AEGON's revenue generating investments are made up of three major building blocks -- the general account, the account for policyholders and our balance sheet investments. These accounted for 43%, 34% and 23% of the total raspatility (ph). Under IFRS, investments on the balance sheet had to be classified under a number of headings. The two most important ones are available for sale, financial assets and financial assets, at fair value through profit and loss. Together, these account for some 90% of our investments.

Slide 11. Looking at our general account investments of 130 billion in more detail, it is clear that bonds are by far the largest asset class, accounting for 75% of the total. Including loans, fixed income investments make up 19% of total general account investments, while shares and real estate together account for less than 7% of the total. More than three-quarters of general account investments have been classified as available for sale financial assets. Unrealized gains and losses on these assets are recognized in equity and only show up in the P&L when gains or losses are realized. Even though financial assets at fair value through profit and loss only make up 7% of our general account investments, they can cause considerable volatility in our quarterly results, as I will discuss in a minute.

Slide 12. Now, let me move over to discussing the country units' results in more detail. And rather than going through every single line, I will highlight some of the items that stand out. The earnings from the Americas have been impacted by three volatile items. I will discuss these in turn.

Firstly, certain financial assets that are managed on a total return basis, such as hedge funds, convertible bonds and certain limited partnerships -- are carried at fair value with no offsetting changes in the fair value of liabilities. As of March 31, 2005, these assets totaled $2.7 billion or just over 2% of the general account portfolio in the Americas. The evaluation of these assets reduced operating earnings before tax by $68 million US compared to the first quarter in 2004. The impact of this is notable in the traditional life, fixed annuities, institutional guaranteed products and in the reinsurance lines of business.

Secondly, there is an impact from an annuity product that provides customers with a pass-through of the total return on an underlying portfolio of investment securities, typically a mix of corporate and convertible bonds -- subject to a cumulative minimum guarantee. Both, the assets and liabilities, are carried at fair value. However, due to the minimum guarantee, not all of the assets, markets or value changes will be offset in the liability valuation. This product exist in both the fixed annuity and in the reinsurance lines of businesses and in both cases are closed blocks.

Product balances at the end of the quarter, first quarter of 2005, were $2.4 billion US in fixed annuities and $600 million US in reinsurance. This item reduced operating earnings before tax by $67 million relative to the same period of last year. And finally, there is an impact from second-rated funds sold in Canada and reported in the variable annuity line of business that contained 10-year maturity guarantees. These are carried at fair value, using market-based rich neutral scenario techniques. The operating earnings impact from these guarantees is generally posit for higher equity markets returns and higher interest rates and conversely negative for lower equity market returns and lower interest rates.

As of the end of the first quarter, segregated fund balances with maturity guarantees totaled $4 billion US. This product reduced operating earnings before tax by $22 million compared to the first quarter last year. All together, these volatile items decreased operating earnings before tax by $157 million relative to the prior year.

Slide 13. Moving from operating earnings before tax to net income for the Americas, the thing that stands out is the positive entry for impairment charges. Impairment charges amounts to a positive of $20 million in the first quarter of this year, as asset impairments of $29 million US were more than offset by impairment recoveries. This compares to a net charge of $1 million US in the same period of 2004.

Slide 14. Turning to production, recur new life production in Americas was up by 62% on the back of strong reinsurance sales, reflecting the completion of several enforced transactions and strong international sales.

Slide 15. Total Cincom premium production more than doubled compared to the first quarter of last year. This reflects the increased BOLI/COLI production, where sales tend to occur in large amounts but not on a regular or predictable basis. Overall standards new life production in Americas increased by 25%.

Slide 16. On the deposit side, we saw lower fixed annuity sales. This reflects AEGON's continued commitments to write profitable businesses with acceptable risk profiles in the current low-interest rate environment. The draws from existing contracts have increased from prior year however remain near historically low levels.

Slide 17. Variable annuity new deposits of $1,528,000,000 declined by 2% compared to the first quarter of 2004 but increased by 13% compared to $1,354,000,000 US during the fourth quarter of the prior year. The increase in sales through financial institutions and financial planners as well as agency and I (ph) of distribution were offset by lower pension production due to in particularly strong first quarter of 2004.

The new retail products, "5 for Life," that was introduced in the fourth quarter 2004 has been favorably received. And sales of the GPS product that was introduced earlier also continued to expand. Total retail variable annuity sales increased by 4% to 739 million compared to the same period the prior year.

Slide 18. Turning to asset quality, slide 18 shows that there was no meaningful shift in the average credit quality of our U.S. portfolio.

Slide 19. Turning to The Netherlands, the decrease in operating earnings primarily reflects the addition of EUR35 million to the provision for disputes related to the live products and the impact of volatile items, partly offset by higher interest income on ALM swaps in the life businesses and improved results in no life on the back of business growth in accident and health and a favorable claims experience. The volatile items in The Netherlands include valuation of derivatives used for the portfolio allocation and shows the financial assets carried at fair value, such as private equity investments, for which no offset in the movement of liabilities is present. These items contributed 60 million to operating earnings in the first quarter of 2004 compared to a negative contribution of 15 million in the first quarter of this year.

Net gains and losses on investment doubled compared to the first quarter of 2004 level to EUR234 million. The increase is mainly due to the gain on the sale of a product to shares in real estate fund and increasing market value for derivatives. The impairment charges of 25 million primarily relates to AEGON Germany -- of which the sale was announced in April 2005.

Slide 21. The increase in operating earnings in the U.K. primarily reflects the positive effect of the higher equity and bond markets on policy fee income. Other positive factors include cost-savings and higher mortality morbidity results in annuities and term businesses. The comparable period included a 5 million British pounds in restructuring charge.

The line "Other" relates to charges made to policyholders in respect of corporation tax. There is an equal and opposite tax charge included on the corporation tax. But these items have to be presented gross under IFRS.

Slide 22 gives you the corporation tax attributable to policyholder return. Then we go directly to slide 23.

The decrease in operating earnings from other countries primarily reflects the lower contribution to operating earnings from Spain due to the sale of the general insurance activities, which was effective from the 1st of January, 2005. In the first quarter of 2004, operating earnings from these activities amounted to EUR11 million. Start-up losses related to new ventures were higher than the prior year. Partially offsetting the decrease were higher first-quarter operating earnings in Hungary.

Slide 24. The book gain on the sale of the Spanish general insurance activities amounted to 192 million on a pretax basis and has been included in non-recurring income.

Slide 25. Turning to our capital position, this remains on comfortable levels. Shareholders' equity represented 71% of our total capital base, above our minimum requirement of 70%. Besides shareholders' equity, our group equity includes minority interest and perpetual capital securities. Group equity, as a percentage of the total capital basis, amounted to 84%.

Slide 26. Shareholders' equity at March 31, 2005 amounted to 15.8 billion, an increase of 829 million compared to December 31, 2004. The main items positively impacting shareholder's equity were net income of 666 million and currency exchange-related effects of 487 million. It was partially offset by a change in the fair value reserve, primarily reflecting realizations of gain.

Let's now move on to the highlights of the 2004 embedded value disclosure. And I go to slide 28. On many occasions, I have explained AEGON's strategic decision to focus on profitability, even if in some cases, this is at the expense of short-term sales growth. The embedded value and value of new business information, as disclosed today, shows that we have made the right decision. AEGON achieved a solid improvement in the embedded value life insurance and saw a strong increase in the value of new business in 2004. Importantly, this development was visible in each of our country units. This shows that some of the tough decisions that AEGON had to make and the measures taken to improve product margins and emphasize profitability have paid off.

Since the discussions first started, AEGON has been an active participant in developing the European-embedded value framework. AEGON has adopted the European-embedded value framework and endorses the efforts to increase comparability between companies. To be honest, the move to European-embedded value principles was very simple for AEGON, as the embedded value life insurance under European-embedded value principles is consistent with the principles we already used in 2003.

Slide 29. One of the changes we made in the presentation of our embedded value information this year is that we have used the internal surplus basis. That is 165 of S&P as the base case, rather than a regulatory required capital. This is aligned with how we manage the business. And we believe it to be consistent with European-embedded value principles. We expect the introduction of IFRS to only lead to small adjustments in our embedded value life insurance due to modest timing differences. The only material adjustment we would expect is the adjustment from that to IFRS equity of the U.S. pension plan, which would reduce the carrying value of other activities by approximately EUR700 million after tax.

In the 2004 embedded value report, you will find that we have provided the usual detail on various items but have also included Sunday information. For instance, we provide additional information on the value new business of partnerships and new operations that fall outside the scope of the embedded value analysis but are an increasingly important part of our activities.

Slide 30. Slide 30 gives you a quick reminder of the elements that make up our embedded value life insurance and total embedded value. This has not changed from last year. Please note that the items that are carried at book value are still on a net debt basis, as this was the basis on which our 2004 financial accounts were prepared.

Slide 31. The scope of the type of businesses included in the embedded value analysis has essentially remains the same. The only change compared to 2003 relates to some business in The Netherlands, where we have now included pension service contracts in permanent health business. This increased the embedded value life insurance by EUR144 million and decreased other activities by 56 million.

Slide 32. The next few slides show the economic assumptions used in the embedded value and the value new business calculations. Compared to those of the previous year, the main changes have been a decrease in risk-free fixed returns and corresponding discount rates in The Netherlands, Canada, the U.K. and Spain -- secondly, an increase in the risk-free fixed interest returns for Taiwan -- and third, a reduction in the credit spread for corporate bonds for The Netherlands and Spain.

On the next slide, you will get a better insight of all the assumptions that we have used so that takes slide 33, 34, and 35. Then, I go over to slide 36.

Turning to the outcome of the embedded value analysis, slide 36 shows that both our embedded value life insurance and total embedded value increased by a solid 12%. Value of new business increased by 48% to EUR489 million. This is despite lower sales in a number of product areas and illustrates the positive results from focusing on profitability. Not surprising, the Americas is the largest contributor to EVLI and the end value new business, accounting for 57% and 64% respectively.

The country units outside our three major markets are still a small part of the embedded value life insurance, accounting for less than 4%. However, their importance is clear when looking at value new business, where they contribute almost 15% of the total, similar to the level of the U.K.

Slide 37. Slide 37 shows additional information on the new business contribution from partnerships and new operations. These activities are included at debt book value under other activities and total embedded value and are not included in the embedded value life insurance or VNB. The indicative value of new businesses from these activities amounts to over EUR40 million, of which AEGON shares in 2004 amounts to EUR18 million. Please note that AEGON share only includes the interest in the partnership with CAM for 6 months.

Slide 38. The 12% increase in total embedded value is mainly due to the 10% rise in our embedded value life insurance, which I will discuss in more detail on the next slide. The value of other activities decreased by 24%, while the value of the holding activities increased in value. That is, became less negative by 3%.

Slide 39. The 10% increase in embedded value life insurance mainly reflects increases in free surplus and the present value of future profits. Free surplus in the life operations at the end of 2004 amounted to almost EUR1.6 billion compared to EUR829 million at the end of 2003.

Slide 40. This slide shows the breakdown of the embedded value life insurance by country and by product line. Two-thirds of the embedded value life insurance consists of traditional life and life for account of policyholders. Fixed annuities account for 11% of the total, and the other lines account for around 10% or less. The three major country units accounted for 97% of the embedded value life insurance.

Slide 41. For the first time, we have shown the embedded value operating margin in our disclosure documents. This number defines the embedded value operating return over the beginning of the year in embedded value life insurance. For the group as a whole, the embedded value operating margin accounted to 12% with the country units ranging from 7% to over 30%.

Slide 42. Moving from embedded value to value of new business. Slide 42 shows that the 48% increase in value new business is carried by strong increases in all major product groups -- premium business, deposit business and accident and health.

Slide 43. The improvement in value new business was driven by strong increases in all the country units with no exception. Again, this is where the focus on profitability is showing its results.

Slide 44. Another way to illustrate this is by the chart on slide 44. On the horizontal axis, we show the internal rate of return on new business. On a vertical access, we show the value of new business in millions of euros. We have plotted the three major country units along these axis. The size of the bubble denotes the relative size of the sales in 2003 and 2004, which for comparison sake, we have defined as APE plus one-tenths of deposits. In the case of the Americas and The Netherlands, the lowest sales level has been more than offset by the increase in internal rate of return, pushing value new business higher. In the U.K., a combination of higher sales and higher margins left to the desired improvement. Although not shown in this slide, the general return in Taiwan is around 12% and is even higher in Hungary.

Slide 45. The majority of the value new business came from the traditional life activities, accounting for nearly half of the total. Accident and health and GICs, both account for around 13%; life for our account policyholders for 11%; variable annuities and fee, both for around 5%; and fixed annuities for around 3%. The three major country units accounted for 86% of the value of new business.

Slide 46. And let's move over to the movement analysis of the embedded value life insurance. I will discuss the drivers behind the biggest movements in turn.

Slide 47. The nearly EUR2.1 billion of enforced performance is made up of 1.6 billion for the unwinding of the discount rates, 230 million for positive variances and EUR269 million for operating assumption changes.

Slide 48. The more favorable capital market environment led to the positive long-term investment return variance of EUR750 million.

Slide 49. Currency affects negatively impacted the embedded value life insurance by over EUR900 million, primarily reflecting the weaker US dollar against the euro. On a constant currency exchange rate basis, embedded value life insurance would have increased by 14% rather than 10%.

Slide 50. Capital movements reduced embedded value life insurance by 770 million. This mainly reflects dividends paid to the holding.

Slide 51. In our embedded value report this year, we have extended the sensitivity analysis to include some more parameters, including changes in mortality/morbidity and a separate sensitivity for changes in fixed income returns on the one hand and equity and property returns on the other hand. The numbers shown on the slide are fairly self-explanatory. One point that perhaps needs some more explanation is the SN matrix sensitivity of movements to fixed income returns. This can be attributed to the minimum parities in many products. As a result of these guarantees, future lower fixed income returns will not be fully offset by equally lower crediting rates.

On the next slide, 52, you see the sensitivity analysis continued.

Slide 53 shows the sensitivity of the value of new business to changes in various parameters. The analysis have been expanded to include the same parameters as the embedded value life insurance sensitivity. In general, the value of new business is more sensitive to these changes than the enforced value. And the relatively small chance in -- change in the future profits can have a relatively large impact on the small value of new business compared to the value of in force. The size and sign of the sensitivities depend on the profitability of the invenerable (ph) products, as well as the composition of the new business portfolio within the country units. And more sensitivities, you'll see on slide 54.

And finally, joint -- Tillinghast, slide 55, undertook an extensive review of the embedded value life insurance, the value of new business and the movement of analysis. These have been reviewed with regard to the reasonableness of the methodology, assumptions, models and results. The opinion is shown on this slide.

Slide 56. To conclude my comments on the quarter and the embedded value, I think it's fair to say that we all need to get used to IFRS and in particular some of the volatility that it inevitably entails. We feel that there were some solid underlying developments in our business, as evidenced by the growth in our revenue generating investment base and increased new life production. Our capital base remains strong, and AEGON is in a good position to capture the opportunities for profitable growth that exists in our markets.

We are pleased with the solid improvement in embedded value and the strong increase in value new business in 2004. All country units contributed to the positive development. The decision to focus on profitability has paid off, and AEGON will continue with this strategy. We have adopted the European-embedded value principles and believe our embedded value results are in line with both the letter and the spirit of these principles.

Before moving over to your questions, let me remind you of some upcoming events. On May 23rd and 24th, we will host our analysts and investors conference in Amsterdam. This conference will primarily focus on our Dutch and U.K. business. As usual, this conference will provide great access to our senior management via the small group meetings. And I hope to meet you there. And as a reminder, we will cover our first 6 months results on August 11. And after having said this, we will be happy to take your questions now.

(OPERATOR INSTRUCTIONS). Kimon Kalamboussis.

Kimon Kalamboussis from HSBC. 2 questions, if I may. Could you please elaborate on the $1.2 billion US fixed annuities net outflows, please? And also give an indication of lapse rates there, please.

Second question, could you give us an indication of your exposure to the automotive sector in light of the General Motors and Ford downgrades, please?

Joe, you take the first question?

Yes, fall off the fixed annuities and the lapse rates?

Yes, this is Darryl Button from the U.S. Fixed annuity lapse rates moved up a little bit to around 12% on an annualized basis in the first quarter. That is still well within our icing (ph) and towards the low end of a historical range.

And this was around 10% last year, wasn't it?

Yes, it was running around 10%, 10.5%. I think it is 12.2, I think, annualized on the first quarter.

And the exposure to the automotive industry -- well, what I can say is that in the top 25 of our investments, we have no GM or Ford outstanding. And you have to take into account that most of our investments in both those companies are in their financing companies, where the risk is much lower than in the mother.

Duncan Russell.

It is Duncan Russell from Fox-Pitt Kelton. I have got two questions on the embedded value and two on the IFRS. On the embedded value, could you give some detail on the movement and the free surplus, so we can get an idea of the cash flow in 2004? For example, can you tell us what that investment in new business was? And what the transfer from the PVFP to the net worth was?

Secondly, can you just confirm on the treatment of the pension deficit or plan? If I take your embedded value and deduct whatever I think is the fair value of the liability of the preference stock, what additional deduction do I have to make on the pension asset or deficit? Because on page 6, it says that you treat this as an expense in the PVFP, which basically covers the pension deficit. And so can you just confirm what I have to do to really get the pension deficit down to 0?

And then on IFRS, there's a comment on page 7, which talks in the reinsurance result about an improved result from the hedged from guaranteed minimal withdrawal benefits. Could you just expand on that and exactly what that means? And why you have that exposure in the reinsurance division?

And then also, on the volatile assets, the figures you are giving in terms of reconciling year-on-year movement from volatile assets, that takes into account everything I presume, including movements in DAC, etcetera? Thanks.

Noel (ph), you are ready for the first one?

The first question on the free surplus movement, you should pick up looks of the movement in free surplus through just about Section 4.2 in the report on page 11.

Okay that scufund (ph). Does that give the investment in new business on the transfer from the PVFP to the --?

It doesn't include there the investment in new business, though the investment in new business roughly is around the Americas -- cost around 2 billion is the investment in new business.

That is commissions and capital?

Yes.

And that is in euros?

I am just wondering -- it's not. 1 of the U.S. 1 is in dollars, but it's going to be pretty close because I was rounding. It will be pretty close to that number.

So that's investment in new business. And then what's the transfer out of the PVFP?

The transfer out the PVFP, the net earnings that you're talking about moving up there, the 1.9?

Yes, the 1.9.

Do you like -- that is the -- on top page 11, the 1.9 (multiple speakers).

Oh, I see. Yes, yes, yes.

The second question on the pension, I cannot really --

It is 700 million.

The 700 million figure, I think.

700 million.

Okay, so what does it mean on page 10 actually where it says, expense assumptions and the embedded value include the cost of providing employee pension benefits where appropriate? The allowance for these costs fully reflects long term cost of providing pensions?

Well, what actually happened last year was, we got some questions as to whether there was any double counting, and this is meant to reassure there is no double counting. So because there is an asset for the U.S. in there in respect of the surplus in the pension scheme, we don't then allow for the fact that no contributions could be paid into the pension scheme. We take into account pension contributions as a normal, ongoing cost. And things like maintenance and acquisition expense looked --

Okay, on the IFRS to reinsurance, that's on the Debedall (ph) benefits product, Darryl? It is about 20 million?

Yes, it was 16 million -- was the first quarter of '04 loss. And that was because we had not yet put on a row hedge to hedge the interest rate risk exposure. And if you recall from the first quarter of last year, interest rates declined fairly sharply over the quarter. That all came back to us and then some in the second quarter of last year. So that's really more of a comparison of Q1 over Q1.

Your last question, I will go ahead and take that one as well. On the fair value of assets in the Americas, your question was -- is that DAC-adjusted or not? The answer is, yes, it is.

And the reinsurance, why is that at the end of double we see in the reinsurance division? Do you reinsure? Do you double the exposure of other players or something?

Yes, correct.

And then just coming back to the investment and new business of 2 billion, can you give that by country, please?

It is roughly about 1.6 in the Americas.

Dollars.

$1.6 billion. And it's around pretty close to around the 200's though in euros in the Netherlands and a little bit more than that in the U.K.

And you meant dollars, that is why euros in the U.K.?

Yes. (Multiple speakers)

The U.S. number is $1.650 U.S.

$1650.

Dollars.

So if you add everything up, Duncan, you arrive at approximately the EUR2 billion that Bill had mentioned. Let me add to the volatility of the assets. You may have suggested with your question, did we pick and choose? No, we did not. If you take the 3 assets that we dealt with in the presentation and in the press release, you have 95% of the volatility that we have in operating earnings.

I know you broadly cash flow neutral in every country -- so, you said it was 1.9 billion transferred from the PVFP to the net worth for the group. And that is covering about 2 billion of acquisition expenses, is that true in every country? Do you give especially in interest?

(multiple speakers) Taiwan is the area, which is -- because it is a much newer business that will still be consuming.

So only Taiwan is cash deficit really? Okay, thank you very much.

Sygup Maya (ph).

This is Maya, Cheuvreux. I noticed quite a strong investment income of 302 million. Would it be possible to split it up in asset categories like shares, real estate and fixed income? And maybe you know what was the effect on the Dutch accounting centers of the amortization of deferred gains?

A second question is about --

Let me take this one first. Because I can understand your question, but to answer your question, we have yet to make up debt accountive (sic) figures. And we're not doing that. So try to make a calculation what would be the release of the interest reserves on the bonds under DAP and then compare that with accidental realization of profits off the bonds is I think is senseless. And we don't have the numbers because we are not preparing DAP numbers anymore.

But I just want to know what was the average number before, not in '05 but over the last few years or so.

That is all in the publication we have provided that ecofparty (ph).

Yes, we issued a comparison.

So you are not willing to split up any way the income from asset categories?

The investment income, you mean?

Yes.

That is the realizations? That is no secret. I do not know it by heart.

We have not done that yet. It will be certainly done in our Annual Report, and we're considering to do it earlier, but we haven't given that information at this stage yet.

Okay. That is fine. And another one is -- can you remind me how you take impairments for deteriorating credit quality? What is the systematic there? Is it very similar to U.S. GAAP under IFRS?

Yes, it is.

Yes, it is. There's one big exemption, and that is under IFRS, you can recover. And an impairment under U.S. GAAP is not recoverable, but an interment under IFRS is recoverable if the situation changes -- only for bonds, not for equity. But that's the only difference. The system, how to impair, is the same.

Trevor Calkick (ph).

This is Trevor Celntrend (ph), Calsitrate Pabian Number (ph). 2 questions related to the IFRS results and two questions related to the embedded value results. First, on fixed annuity crediting rates, you have provided us with the spread on an IFRS basis for the first quarter. I was wondering if you would be prepared to give us some historical figures to compare that against.

The second IFRS question is -- could you indicate to us what your capital strength on a regulatory basis was in the first quarter -- so in other words, your coverage on a regulatory basis?

Going to embedded value. You had a very strong value of new business number. What I would like to understand is, what would drive the client and the cost of capital for the value of new business? So if you would just say for example, look at slide 42, the cost of capital of 2004 versus 2003 was 30% lower. I would like to understand what would drive that so significantly lower.

And then a final question -- you had some efficiencies -- investments in your efficiencies for most of your country units. I wondered how you treat those efficiencies, expected efficiency gains, in your value of new business calculation. Those are the questions, yes.

Now, I want to describe the rates. Do you have any historical information based on IFRS because it's a big change. Because on the DAP, you included the release of the end results on the bonds. And you included also a provision for credit. The provision for credit on our IFRS is out. And the release of the in terrific (ph) reserve is out because it is not existing anymore. So it's now the yield on the book minus the credit rates. So it's a very simple calculation. But Darryl, is there any historical information?

Yes, I have a little bit of information historically. I've taken a look at them, Trevor. They're basically flat on an IFRS basis. And again, that's for the largest fixed annuity book that we do quote the spreads on.

And yes, you are correct on comparing to DAP. The two major differences are the fact that defaults are now out, as we do it on an IFRS operating basis. And we have also do not have the amortization of prior deferred gains. And those roughly offset each other, which is why we get back to around the same level as the old DAP spreads.

Okay. Capitalization, well, we have our treasurer (technical difficulty) here, he knows.

I am Michiel van Katwijk. At the end of last year, our NAIC ratio in the U.S. was around 370%. In our Annual Report, we also published the ratio for the total group, which we do in managing our capital, do not pay that much attention to. But that was around 240%. And there has not been a meaningful change to both of them during the first quarter.

Okay, then over to the questions on the value of new business, the decline in cost of capital -- I think in nominal amounts, not in percentage.

That calculation there is fairly easy. If you look into table 9, what you will see is where the sales labels have gone, and that was what Joseph was talking about right at the beginning of the presentation. That what we've done is we sold less business, but we have made significantly more money on that business. The cost of capital is driven by our acquired surplus, and that will be driven by the business you sell predominately. And so even though your value of new business can go up significantly because of higher margins, your required surplus is lower because you've had lower sales. And therefore, your cost of capital is lower. There are a number of secondary factors like the mix of business through the sale and through the Netherlands, a slight reduction in the discount rate that helped. But it is firmly driven by the new business number.

I think the second question you asked was about expenses. We have been really clear on page 10 of the report. We take no efficiency gains whatsoever into account. We make that absolutely clear. That's our interpretation of the EV principles.

Albert Ploegh.

This is Al Ploegh from Kepler Equities. I have got two questions. First one is on the embedded value disclosure on page 14, you showed your internal rates of returns. And the U.S., it was 11.8% -- what actually was quite strong. Can you give me the comparable number for last year? And given all re-pricing efforts you've done in 2004 and given the interest rate levels today, is there much more room to improve that further?

And the second question is on your "5 for Life" product. Is it already completely being rolled out in the sales channel? And for what kind of run rates are you looking on a global basis for this product?

The first question Albert is that you just want the number for 2003 -- was 10.5 -- so well, in the satisfactory uplift. The second question was, please remind me?

Maybe also on the -- come back on the internal rates of return in the U.S. Is there much more room to improve that further? Or is it quite acceptable levels in today's interest rate environment?

Well, we have always said that 12% in this environment would be an excellent return. So if they keep it at around 12, I would be pretty satisfied. But if they can do better, they are very welcome.

And the second question was on the "5 for Life" products.

The "5 for Life" -- Darryl, it's going reasonably well, isn't?

Yes, it is going reasonably well. The short answer is it is still not completely rolled out in all of our channels yet. And we are seeing month-over-month increases and have since the day we rolled it out. And March was up over February. February was up over and January. And I believe April was up over March. We are getting slow and steady growth. We are also continuing to sell, get growth on the GPS product, which is the one that we introduced the year before the "5 for Life". So both products are getting slow but steady incremental growth.

And can you then share some run rates or what you're looking for?

Actual production between the two products in the month of March, I have that data -- was just under 100 million.

Andrea Schafer (ph).

It is actually Carson Saykovichsavi (ph). 1 question concerning the IFF on this statement. Why actually have you opted for the fair value option taking 7% of your assets under held not available for sales for profit and loss? Because well, obviously, we see all this volatility then coming through to the operating earnings.

Darryl? It is the American decision after a lot of deliberations. Could you tell something?

Yes, I think the question was, why did we choose the fair value treatment for so many or such a large portion of our assets. And I apologize if that wasn't quite the question.

No, that was the question.

There is about 9 billion of the U.S. general account that we have chosen the fair value treatment for. Really all but 2.7 of it is because we have similar treatment on the liability side. So there really is a matching there. And that relates to both the total return annuity products as well as some modco, modco treaties, that also have to be fair-valued.

The volatility really all comes from about 2.7 billion of assets. And I think, as we outlined in the press release, these would be hedge fund convertible bonds, limited partnership-typed securities. And there, the choice was made on an IFRS basis to go to a fair value treatment to try and bring through the economics of those through the -- the way that wasn't allotted choice to do anything otherwise, as far as bringing through the economics through the P&L.

Sorry, did you say proud equity too?

Limited partnerships.

How do you value that fair value?

Based on the underlying financial statements. We get marks where we can or unit values.

And who is giving a price to that, the auditors or--?

In some cases and in some cases in internal. Probably the largest component of that is convertible bonds and hedge fund investments. The limited partnerships is probably relatively small.

And if you have to do our own evaluations, Andrea, than we have a check to auditors who look to it. But the evaluation is reasonable. We're not aggressive.

Sir Tom Guidman (ph).

Sir Tom Guidman, Petercam. I've two questions. First, could you tell us what is the sizes of the number 25 investment on the general account? And second, you referred to a legal dispute in the Netherlands. Could you elaborate a bit on that? And could you also indicate if there are some more disputes running at this point in time -- legal actions taken against the Company, and what you're feeling is what the outcome will be for those?

Well, we are looking up your question what the sizes of 25, top 10 (multiple speakers). Correct me if I am wrong, Tom. You asked what the size is of the top 25 investment in the U.S.?

No, the number 25. So your exposure to GM and Ford is less than that amount that you give me now. That's the idea of the question.

Okay. So you try to fool me indirectly.

It is probably going to be a very high number, and then you're going to tell me that the expose to GM and Ford is much lower than that.

My remark was made to satisfy you that you don't have to think that we are in the 700 million area or something like that --

But even 200 million would worry me of course.

200 million would worry you. You think that's not recoverable, then?

At least, I would take all 50% or not.

Let me see, the income. I have not in here. Tom, we don't have that number here. We will get back to you.

Your second question was on the 35 billion provision that we took in the Netherlands for dispute with like products. While you are living here Tom and you read the papers, there is a lot of discussion on a couple of life products in the Netherlands that were sold in the '80s and the '90s. We have said even before the publications in the papers, that we were talking with for instance the insurance ombudsman whether it would be necessary to do some repairs in those products if you look with the eyes of today to products sold in the '80s and the '90s. We have not concluded those conversations.

But from the information I got from AEGON The Netherlands, we took the cautious stand and we took a provision of 35 million. And that 35 million will probably be used for improving the product for customers.

The next question is, are there other products? Well of course, in these times of compliance, we look through the whole of the organization, whether we might face a problem, a legal problem or a fairness problem to our customers. So from time to time, you will see that. But if I talk now about The Netherlands, I'm not aware of it.

Just to remind me, I thought many of these products we were talking about that they were offered by Aegon Bank. So I would have expected anything like that to be reported in the banking line. (Multiple speakers).

Spaarbeleg is a so-called spar cost in Tongteed (ph). So it's life business. It is not banking business. So Spaarbeleg had two divisions, the banking business and the life business.

Nick Holmes.

It is Nick Holmes with Lehman. I had possibly actually 4 questions. I hope you don't mind that. First one is -- just very quickly coming back to "5 for Life". I think you said 100 million of sales in March. I wonder if you could just clarify that. And is that in the wirehouse broker dealer the planner channel exclusively?

And have you started to roll out into the agency and bank channels. And what would your sort of expectations be there? That is the first question.

Second is -- looking at the new business profits, in the U.S., you cite re-pricing of traditional life as one of the main drivers for the higher margins. And I wondered how you can be doing this when I thought the cost of life for insurance is getting more expensive. The other product that you cite, where margins are improving is accidents and health. And I wondered if you could just explain more what is happening here.

A third quick question is -- U.K. sales fell significantly, you say due to pricing changes, commissions, reductions -- wondered if you could just elaborate on this what you are doing and how optimistic you are about the U.K. returning to growth?

Then, finally, fourth question, Dutch life -- you benefited from strong sales of large pension contracts. And I wondered if you could update us on what the pipeline is looking like for the rest of this year. Thank you very much.

Okay Darryl, I think the "5 for Life" question is almost answered in question we already had. But could you repeat please?

Yes, I said, maybe I need to clarify -- it is under 100 million. It's about 90 million between the two products. The GPS is still outselling "5 for Life" because we have rolled GPS out in more of the channels. "5 for Life" is 35 million in March. And the rest was coming from GPS. It is both the wirehouse and the planner channels. And it's just on these products because they are so complicated. They really do require a second and third visit from the wholesalers to really get this distribution channels up and running and get the shelf space that we need to get them rolling in all the channels. So that's a little more color on the "5 for Life".

I will go ahead and talk about the VNBIRR questions too. I think they related mostly to the U.S. as well. On traditional life, the short answer there is, we did re-price a couple of products and our home service business, where reinsurance has really not been a factor in that business. We brought through premium rate increases and pushed those out and got our IRRs back in line with our targets. So that is one of the improvements.

The other one was -- another significant one was the return-to-premium term product that you have heard us talk about on a production front from 2004, where we re-price that one as well. And that did cost us some topline through 2004. Of course, we re-price all of our products on a regular recurring basis, but those are two of the notable items that I would say in traditional life.

On the ANH (ph) side, a lot of this stems to our direct marketing unit. And direct marketing kind of the nature of the beast there is -- a lot of investment is made in the marketing programs upfront. And then the sales come along behind. And the IRR is heavily dependent on whether we have successful marketing programs or less successful marketing programs. In 2004, we had some very successful sales programs, and that helped drive the IRR up in that line of business.

Right, can I just very quickly--?

Question on the U.K., I think the (multiple speakers)

"5 for Life."

Go ahead, Nick.

Sorry, just to follow-up. Which is the timing of the roll out since the agency and bank channels for that product, please?

The timing of the roll out? Well, it was released at the end of I think November of '04. So it was towards the end of '04. And it's really been rolling out and ramping up all through the first quarter of '05. I'm not sure what else to say other than we are getting a lot of positive feedback and early feedback. But on these types of products on VAs with extensive guarantees anymore, it just takes that second and third trip from wholesalers to producers to really get things what I would call completely rolled out into the system.

So you would expect it to be completely rolled out in Q2, basically?

Yes, I think by the end of second quarter. And we will really start to see -- I think third quarter is when we will start to see more typical run rates I think for that product. Obviously, it's a very competitive channel, and there is new products come in to market all the time. So I probably need to caveat those statements. But yes, I think by the third quarter.

On the sales in the U.K., the explanation for the drop -- apart from mentioning the first quarter of 2004, which was particularly strong in new production in the U.K., I think you mentioned the main reasons, pricing and commission. But Mark, would you give some flavor?

Of what happened during 2004? Yes, we basically in 2004, we have increased charges on our pension business and removed paying commission on one lane of group pensions business. Additionally, in November 2004, we reduced commission on our individual pensions business and in January, followed up by reduced commission on our group business.

I think we were one of the first of the U.K. companies to make these changes. And our competitors have followed that and made similar actions during quarter 1 and early quarter 2. And we are confident that we will be more competitive in quarter 2 onwards in this market.

Then on the Netherlands, we had a successful quarter in the pension business in the Netherlands and the question was -- is there an outlook. We have Edgar here. Edgar?

This is Edgar Konig. We indeed had a good quarter for our group pension business. We can say that the market improved since the second half of 2004. The pipeline is better than 1 or 1.5 years ago, and we see opportunities. But we have to be aware that it is a volatile business. It sometimes can take very long before you really sign a contract, essentially the big ones. So it will remain volatile.

So there is a pipeline, but you are never sure. That is your answer, Nick.

Michael van Wegen.

Mike van from Fortis Bank. I had 3 questions on the U.S. business. First of all, the strong improvement in GIC sales. Are there any exceptionally large contracts in there?

Second question -- now that new business is improving, could you give me the actual to allowable costs number for Q1? And my third question -- given the problems AIG has, what do you see on the market growth in general and what are the distributors telling you about -- are they more willing to do business with you due to the difficulties at AIG? Or what is happening there? Thank you.

Well, Michael, all GIC yields that we do are large amounts actually. There is almost no exception. But if you mean have we done business with a 5 billion or a 7 billion number, the answer is no. But all those transactions are business to business, professional transactions and are always large. There's no one transaction that is exceptionally large.

On the VNB actuals to allowables, Darryl?

I am looking at beos (ph), I think it is 103% -- actual to liable.

I thought it a little bit better than last year. And the main reason is that we are keeping up a part of our franchise that is not producing enormous amounts at the moment in the trust that we will see better times. If they will not come, we will cut it.

And on the general markets, AIG problems, is that positive for us or is it negative for us? Darryl, what is your feel?

I guess I am mixed feelings. In general, I would say it's probably fairly neutral. I do not like to see news like that affect the industry as a whole. So clearly it's not something I wish for. As far as the types of issues that are in the paper that AIG is dealing with, I do not believe that we have any of those issues and a --

But does it help you as in distribution -- distribute our products instead of AIG products because that --

(multiple speakers) question is politics.

And we have asked that question. I think it's probably just a little early. I don't think anyone is jumping out and suggesting yes. But clearly, their financial strength ratings have come back in line with more of the industry. What impact that will have with them or not, I am not sure. Certainly, they have been a big player in the fixed annuity market as well in the past. And whether people will be looking at concentrations there or not, I don't know. I am not going to speculate.

I think Darryl and Michael, I would say that any bad news on a major pier is bad news for the industry.

Andrew Kreeme (ph).

Andrew Kreeme, Citigroup Smith Barney. A few questions on your embedded value methodology. Firstly, when setting the risk discount rates, were you using a top down whack approach? Or were you using a bottom-up approach assessing the risks of the individual businesses? And if you were using top down, does it equate to a bottom-up approach? That was my first question.

Do you want to finish with the others?

The other questions are a couple of questions on the sensitivity analysis. Could you give us a sense as to the impact on the embedded value of a 10% foreign equities. And also, on the fixed income sensitivity, I just wanted to find out -- I assume if bond yields fall 100 basis points, you book the appreciation in the bonds and then take the lower investment yield going forward. You don't look at general discount rate or the equity return assumption -- around that. And I think your sensitivity is relatively low to that parameter. I was wondering whether at what point guarantees really begin to bite? How much lower bond yields have to go before it really begins to hurt?

My final was just going back to Duncan Russell's point. When you are looking at cash flows, I really I suppose look at 4 elements -- the actual cash burned on new business, offset by the positive cash flow on the in force. And then the capital consumed in writing new business offset by the release of capital, as business matures. Is it possible to give us that sense within those numbers? Because I wasn't quite sure when you talked about the investment in new business of 2 billion, whether that was just a cash burn or whether it had the capital tied up as well?

Including the capital, Andrew, that is probably the simplest one. The risk discount factor --

You'll find in the back of the report, once you eventually get into the 30 that we talk about the risk discount rate. And it was a top-down approach based on weighted average cost of capital, as you described. And we haven't crosschecked it in detail against the bottom-up approach, but we are comfortable where we have got in that.

And a couple of other things you asked about, the movement in the fixed interest rate -- yes, you're right, for your existing portfolio and if you are achieving a return of 5% in the portfolio today, if you move up 1%, you just get the market value dropping and the yield going up. But your income doesn't actually change. So for your existing cash assets, there is no impact at all. But where the sensitivity picks up is on the reinvestment and on the new premiums coming in.

And that is just --

Flat seasons. So, you tend to see a greater sensitivity in the new business than you see in the existing business.

I was just wondering, as interest rates drop or bond yields drop, there is sort of a cliff guarantee point, isn't there when it gets really painful. It's clearly not --

It depends on how much it is you've actually got going forward and how many future premiums you are coming in. Then, you can do some extrapolation out from where the numbers are. But it obviously, it's dangerous the further out you go.

It's not linear though, is it?

No, it is not linear. Absolutely no. That is why I'm saying, you can go from 1% to 1.5 and feel not too uncomfortable. But when you go much beyond that, it gets harder.

The last thing was the 10% fall on it. We don't show the impact of just a straightforward 10% coming in right out of the equity market. We don't show that number. And we would like to --

Just going back to the cash flow question then, just so I can get that absolutely straight. What you are saying essentially is that your net earnings are 1.9 billion. The transfer from the -- what you say, the increase in required service were greater in the business -- was net impact of 0.2 billion resulting from -- was it basically 0.7 billion negative? Is that not all new business? That is a net figure presumably looking at the new business burn or capital committed to new business offset by release on in force is it?

Yes, that's right.

And do you have that split?

No, I do not have that, the split.

But it is contained within the 2 billion of strain on in force?

Yes.

Last question please because many of us have to go.

Charles Graham (ph).

Charles Graham, William Sparrow. Just a quick question, I hope. On the volatile items in the Americas, you know, you should just break out what the movements where by quarter during 2004 to give a feel for what the swing was.

Where are those numbers? We can, but I have to look them up.

I have them here, Joseph.

So in quarter 1 2004, there was a positive one of 146. In quarter 2, there was a negative of 81. In quarter 3, there was a positive of 7. In quarter 4, there was a positive of 174. And in quarter 1 2005, there was a -11.

And this is all dollars for the Americas.

Yes.

All dollars.

We will take one more because that was a quick question.

David Nesbitt.

It is David Nesbitt from Merrill Lynch. And another quick question, just on the value (technical difficulty) of new business, is it possible to split out the impact of the changes in the operating assumptions? What I'm trying to do is find out how much of the 48% growth is underlying and how much is due to the assumption changes. Thanks.

I don't think that would be -- the 12 figure, we certainly have to (technical difficulty) -- and I know you can see the impact of operating assumption changes, how big they were in relation to the in force. And that gives you a sense of the impact of operating assumptions under the old portfolio. But we don't have a separate for that at the new business level.

If you take, David, said just over 10% business.

It will be slightly different for new business. (Multiple speakers)

I am sorry 1%.

It will be higher in the new business. But I would not like to speculate how much though.

But it's not 10 or 15 or 20. On the in force, it is just over 1. On the value new business, it is probably a little bit higher but not much.

But certainly under 10%?

(multiple speakers) yes.

I am sorry for the confusion because I made a wrong calculation. I divided 269 by the embedded value. Since I am CFO, I cannot calculate. Okay?

Well, thank you very much. We hope to see you all in Amsterdam. The one thing you can be sure of that we will make sure that we will have nice weather at a nice hotel, a nice conference room and nice people. So the rest is up to you. I hope that we will see you all. Bye-bye.

Ladies and gentlemen, this concludes the AEGON Q1 2005 results conference call. Thank you for participating. You may now disconnect.