Aegon Ltd (AEG) 2005 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the AEGON first six months 2005 results conference call for analysts and investors on 11 August 2005. Throughout today's presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. (Operator Instructions). I would now like to turn the conference over to Mr. Michel Hulters. Please go ahead, sir.

Good afternoon. My name is Michel Hulters, Head of Investor Relations. Welcome to AEGON's conference call to discuss the first six months 2005 results.

Before we begin, I need to make you aware of our cautionary note regarding forward-looking statements, which is on the next slide. Please take a minute or two to review this statement after the presentation.

During today's conference call, our CEO, Don Shepard, and our CFO, Jos Streppel, will provide an overview of developments in the first six months of 2005. Afterwards, there will be ample opportunity for questions. But now, let me hand it over to Don Shepard, CEO of AEGON NV.

Thank you, Michel. Good afternoon to those of you in Europe and good morning, those of you that are listening in the U.S. Thank you for joining us to discuss our first-half results. Joining me today in addition to Jos are Darryl Button from the U.S. and Mark Laidlaw from AEGON UK, and of course, Michiel van Katwijk are also on the line.

Since ING released its second-quarter results today, we will conclude this call at 4 PM sharp so that you have adequate time to participate in their conference call.

Slide 3. Standardized new life production increased considerably in the first six months of 2005, particularly in the Americas and Taiwan, while showing good pickup during the second quarter in the UK. Life production also showed a fairly good increase in the Netherlands, where we saw strong group pension sales in the first quarter. Jos will go into detail for the country units in a few minutes.

During the first half of the year, we continued our focus on growing our core businesses on a profitable basis, and in the second quarter, all major country units reported higher operating earnings compared to the same period a year ago. At the same time, we further improved AEGON's strong capital position and have maintained strong cash flows for the group. This has led us to increase our interim dividend to EUR22 cents per share.

In line with our strategy of achieving a leading position in our chosen markets, we completed the sale of MoneyMaxx in Germany and our general insurance activities in Spain, since it was clear that these businesses were not going to meet our expectations for sufficient scale. Several new distribution agreements were developed in Spain and China during the first half of 2005, in addition to our further rollout in Beijing and Nanjing.

We've also taken some important steps in our growth strategy for Central and Eastern Europe with our announced acquisition in Poland. We've organized our Central and Eastern Europe operations such that Gabor Kepecs, who has been our very successful executive in leading AEGON Hungary, will head that region.

Slide 4. Getting back to distribution, you heard us discuss the benefits of our partnership with one of Spain's largest savings banks, CAM. This has been key in providing us access to the important bank channel in that country. During the first half of this year, several more branches have been added to this distribution network, and now AEGON's products are available in over 1000 branches.

CAM generated EUR128 million in premium and EUR305 million in premium income in the first six months of the year. Keep in mind that since these numbers are not consolidated, so they don't show up on our financials, but the benefit of half of that premium and production is for AEGON's account.

Just last month, we entered into a 50-50 partnership with another of Spain's prominent savings banks, Caja de Badajoz, which will enable us to sell life and pension products through its 200 branch offices. This strengthens our position in Spain's fast-growing life insurance and pension markets and is a good geographic complement to COM. We will continue to look at additional distribution opportunities in Spain.

Slide 5. Building on our successful operations in Hungary, where we have a leading position in the market, we've made some good progress on our expansion strategy for Central and Eastern Europe. You may remember that we began selling life insurance in Slovakia in 2003 and then started pensions this past year. We've achieved strong brand recognition, and our Slovakian business continued to grow during the first half of 2005, particularly in pensions.

We are pleased that in the first six months of this year, we've passed the 50,000 pension enrollment mark, which is the number regulators require companies to achieve by July of 2006. So, now we have another 12 months to continue to add scale.

Still slide 5 -- in April, we began operations in the Czech Republic and in June announced our acquisition of Nationwide Poland. I would like to mention that this company has achieve the number one position in single premium unit-linked individual life insurance and the number five position in the life insurance market based on gross premiums, and is a leading company in the upper income segment. We expect this transaction to be completed during the second half of the year.

Going forward, we will be looking at rolling out additional product lines that include regular premium products, group pensions, individual pensions, as well as credit and mortgage-related life. While our operations in Central and Eastern Europe are currently small from an earnings standpoint, we feel very good about their long-term potential, particularly as these economies develop further and their populations build wealth that they want to protect and grow.

Slide 6. You will remember that we started in China in May 2003 with our joint venture with the China National Offshore Oil Company. Our initial focus has been building on a strong base in Shanghai, with agency, bank assurance and telemarketing channels. In addition to a key distribution agreement with the Agricultural Bank of China, we recently announced new national agreements with two other leading banks, the Industrial and Commercial Bank of China and the Bank of Communications.

As we continue our rollout across China, these partnerships give us the opportunity to provide our products to the customer bases of these major banking institutions. We also sell through several other banks and we feel that these are a great addition to our bank insurance segment and our multichannel distribution network in China.

Slide 6, take a quick look at some other developments in our Chinese operations. We were pleased to receive additional licenses to set up branches in Beijing and Nanjing during the first half of the year. We are already selling in Beijing and are looking to be up and running in Nanjing soon. Nanjing is particularly attractive since it's in one of the fastest-growing and most developed provinces of China.

At the moment, we have about 37,000 policies in force in China -- a little lower than we expected, but our premium -- our average premiums are higher than we anticipated. We continue to see long-term opportunity in the developing pension market, as well as asset management business in China. All in all, we feel that we're off to a good start and are looking forward to capturing the growth potential of the Chinese market over time.

Slide 7. Turning to our results for the first half, which Jos will discuss in more detail in a few minutes, we had some pretty good increases in our bottom line. Of course, we are continuing to learn how to deal with IFRS, which is one of the reasons why we focus on operating earnings as an important measure of our performance. But even in operating earnings, some volatile items remain.

Operating earnings before tax for the six months decreased 2% in euros and would have increased 2% on a constant currency exchange basis. Net income, including the nonoperating earnings such as gains on investments and non-recurring items, increased 32% to EUR1.426 billion. On a constant currency basis, the increase was about 35%.

Slide 8. Taking a look at production in the first half of the year, standardized new life production increased 16%. This was driven largely by a strong performance in the Americas and Taiwan. Although we are pleased by this, the very strong sales in Taiwan, particularly in the second quarter, are unlikely to be repeated in the second half.

New life production in the Americas increased 13% as a result of strong sales of bank-owned and corporate-owned life insurance during the first quarter and good performance in the agency channel and increased reinsurance sales. In the past, you've heard us discuss our focus on the middle income opportunity. Although our captive field force didn't do quite as well as expected in the first half, our world financial group division, which is also focused on the middle income segment, recurring life production was up 14% over the prior year, and recruitment, a good early indicator of growth, was up 12% compared to the previous year.

Let's go on to slide 8 -- we'll continue with slide 8. Sales of our annuity and institutional guaranteed products in the Americas held pretty steady in euros during the first six months and were actually up 4% in U.S. dollars. Although fixed annuities were down for reasons we've mentioned repeatedly in the past, we have seen an increase in sales from quarter one to quarter two and believe that new distribution agreements will have a positive effect on retail sales in the second half of this year. We also saw some good momentum in retail variable annuity sales and an increase in institutional guaranteed sales. Off-balance sheet production increased in all country units, with the largest portion coming from the UK.

So, before I turn it over to Jos, let me conclude by saying that we feel pretty good about where we are halfway through the year. Improvements in life production and the progress made across our businesses, combined with our strong capital position and cash flows, indicate our strategy for profitable growth is on track. I will leave it now to Jos to give you the detail behind our results, and then we will be happy to take you questions. Jos?

Thanks, Don. Slide 9. Now, let me start by discussing the results of the Americas in more detail. Operating earnings before tax decreased by 6% to US$1.024 billion. Volatile items, which we have identified and explained in detail in our press release, reduced operating earnings by US$24 million in the first six months of 2005, while they contributed a positive US$65 million in the same period of last year. This mainly reflects lower earnings from our Canadian segregated fund business, which are reported under variable annuities.

As you may know, under IFRS, the guarantees embedded in segregated funds have to be valued using a risk-neutral market valuation. This does not allow us to include reasonable expectation for equity market appreciation. Instead, this calculation assumes that balances will only grow at the risk-free rates.

In the second quarter, interest rates in Canada declined by 60 basis points, which had an immediate impact on the valuation. Please note that since quarter end, interest rates in Canada have moved up again.

Looking at other lines of business, we have seen solid earnings growth in life for account policyholders, fixed annuities, fee off balance sheet and reinsurance. This was partially offset by lower product spreads in the institutional and guaranteed products lines and lower earnings from variable annuities due to a non-recurring DPAC reduction. The Americas remained the most important contributor to operating earnings before tax and accounts for 73% of operating earnings before tax generated by the country units.

Slide 10. In moving from operating earnings before tax to net income for the Americas, two things stand out. First, we have a strongly increase in net realized gains on our investments, and second, impairment charges amounted to a positive of US$59 million in the first six months of 2005. Gross asset impairments were more than offset by asset recoveries of $128 million.

Slide 11. Taking a look at production in the Americas, as Don noted, new life premium production was up by 13% in the first half of the year. Don gave you a feel for the drivers behind this increase. Let me just point out that while fixed annuity sales declined in the first six months, in the second quarter, they increased 5% compared to the first quarter of this year. We are also seeing some good momentum in our variable annuity business.

Slide 12. Breaking down life production in its components, total single premium production increased 39% compared to the first six months of last year. This increase reflects strong BOLI/COLI production in the first quarter of 2005. As the second quarter shows, production in this business line is very irregular.

Slide 13. The 10% growth in annualized life recurring premiums in the Americas in the first six months of this year is mainly driven by reinsurance sales. The reinsurance market continues to look attractive.

Slide 14. Variable annuity new deposits of US$2.951 billion increased by 6% compared to the first six months of 2004, which includes a 7% increase for retail variable annuities.

Slide 15. The new retail product 5 for Life, introduced in the fourth quarter of 2004, continues to gain momentum, and sales of this product increased during the second quarter to US$126 million, a 54% increase over the first quarter.

Slide 16. On the fixed annuity side, the lower production relative to 2004 reflects AEGON's continued commitment to drive profitable business with acceptable risk profiles. In addition, the prevailing low interest rate environment has affected the production levels. New deposits in the second quarter were 5% higher than in the first quarter driven by higher sales through our bank channel and an increase in our pension business.

Slide 17. Turning briefly to the Netherlands, the increase in life production was due to strong first-quarter group pension sales. The individual market continues to be challenging, but overall, the prospects are reasonably positive since our position in the group pension business is strong.

Slide 18. Operating earnings in the Netherlands increased by 27%, reflecting strong underwriting results in both life and long life, as well as increased investment income. These positive effects were partially offset by higher provisions. Additional provisions for guarantees were taken as we adjusted assumptions for fixed income returns for separate accounts and unit-linked business. This amounted to EUR71 million. In the first quarter of 2005, additional provisions for improvement to certain life products, spark-offs (ph), amounted to EUR35 million and we decided to add an additional EUR6 million in the second quarter.

Slide 19. Here, you can see the net gains and losses on investments, which increased strongly due to the higher market value of derivatives and higher realized gains on investments. All in all, net income in the Netherlands more than doubled in the first half of the year.

Moving over slide 20 to the UK, the decline in life production in the first half of the year is a result of pricing and commission changes in the core pension markets. This particularly affected first-quarter production. The good news is, as you can see, that second-quarter production actually increased by 13% as AEGON UK continues to experience a favorable diversification of its product mix. You will also note that off-balance sheet production has increased substantially with strong performance in the retail and institutional sales.

Slide 21. As you can see here, in the past three years, the proportion of sales coming from higher market products has increased substantially, allowing for creative diversification of the business.

Slide 22. Operating earnings before tax in the UK increased by 94%. When excluding the Corporation tax attributable to policyholders, which is captured here in the line other, operating earnings before tax increased by 40%. This is a more meaningful indicator of business performance. The increase in earnings in the UK reflects the positive effect of the equity and bond markets and higher mortality and morbidity results in the annuity and term business.

Slide 23. Net income in the United Kingdom increased 39% to 53 million pounds. Note that the corporation tax attributable to policyholder return does not impact the bottom line.

Slide 24. Let's now turn our attention for a minute to the results of our other countries. We already covered the drops (ph) behind a substantial increase in life sales, but I want to also highlight the solid increase in off-balance sheet production. This increase is on the back of our successful expansion of the pension fund business in Hungary. Don has already highlighted the successful progress of our partnership with CAM in Spain.

Slide 25. Operating earnings from other countries declined, largely due to the divestiture of our general insurance activities in Spain in the beginning of this year. Included in operating earnings are also higher startup losses due to the new venture in the Czech Republic and the startup of pension funds in Slovakia.

Slide 26. The non-recurring item of EUR176 million in other countries refers to the booking on the sale of the Spanish general insurance activities.

Slide 27. Turning to capital management, our capital base was strengthened during the first six months of 2005, as you can see. The equity to total capital ratio of 75% is comfortably within AEGON's target levels. As this slide shows, the quality of the capital base has improved substantially. We have used part of the proceeds of the junior perpetual capital securities issuance in May to redeem senior debt. The group equity to total capital ratio increased to 91% from 86% at the year-end 2004. The stronger capital base and cash flow from our operating units allowed us to raise interim dividends to EUR0.22 per common share.

Slide 28. Shareholders' equity at June 30, 2005, amounted to EUR18.4 billion, an increase of EUR3.5 million or 23%, compared to January 1, 2005. The main items positively impacting shareholders' equity were net income of EUR1.4 billion, currency exchange rate effects of EUR1.2 billion and an EUR875 million change in the FAS-LU (ph) reserve. Please note that the FAS-LU reserve and the unrealized part of nonoperating earnings changed with the fluctuation in equity and bond markets.

Slide 29. To conclude, we are pleased with the progress made across our businesses during the first half of the year. We saw a solid increase in new life production and continued to expand our distribution capability in our major as well as our developing markets. In short, we continue to make progress in growing our core lines of business profitably and we are well-positioned to maximize the opportunities that we see in our various markets. Before slide 30, we give you an opportunity to ask questions.

Let me remind you of some key upcoming events in 2005. On November 10, we will disclose our first nine months 2005 results. On December 8 and 9, we will host our analyst and investor conference in New York. We hope to speak to you again around these events, but for now, we're happy to take your questions.

(Operator Instructions). Lucas Dahlbert.

Lucas Dalbert, Banco (indiscernible). I have a question/request on the IFRS items that you specify in your press release. If I run through the U.S. operations, I see that the specific units -- an 11 million positive, call that fixed annuities and a 65 negative of variable annuities, which brings the total to minus 45, but if you then go to the end of the American pages, then you see that IFRS had a negative impact of minus 24. I'm sort of interested, curious to know where the other 30 came down. That's one. And a second one is the DPAC invariables. What's that related to?

Lucas, I will take the DPAC and variables while Jos gets back to your first part of your question. The DPAC and variables -- doing our embedded value, we found that we were not properly calculating trails on our variable annuity block, and so we refined the modeling that we do for DPAC and took a $25 million hit on the DPAC. That number was already in the embedded value numbers that we produced. It was just an error, the way we handled the DPAC. Jos is --

I'm not certain, Lucas, that I understood your question very well. I have the press release in front of me -- it's page 24 you were referring to, isn't it?

Yes, that's the total, the sum, that's the 20 -- the total impact was negative 24 million in the first half, but if you read through the various different components, like fixed annuities, variable annuities, sometimes it mentioned how much negative or positive the impact has been. But if you take those, that's plus 11 at 6 that I can find and minus 65 at variable, but I can't find any other amounts that bring me to the 24 million that should be the total for the whole American operations.

Thank you. The next question (multiple speakers)

No, no, no. We still find it. We're trying to find the reconciliation. The total breakdown is here, page 24 under the first six months 2005, and there you come to the 24. So what are you missing?

Well, if I read through the U.S., I see at, for example, page, what is it -- page 6, fixed annuities, that says that there's 11 million positive in the first -- the full -- items contributed a negative 40 million in the first six months of 2004 compared to a positive 11 million for six months this year. So that's 11 million positive. Then if I move over to variable annuities, I see a same sort of statement, only then it's a 65 negative related to the Canadian second CAD bonds (ph). And those are the only two specific mentions at the different categories. And if I add those two, I don't come up with the 24 mentioned in the total.

So you should concentrate on the table on page 24 because in the write-up we didn't mention -- not mention everything.

Okay, that I probably missed. There is a table on 24 -- on page 24 (multiple speakers). Okay.

There's a the table you should use (multiple speakers). Left out smaller things.

Thanks very much.

Albert Ploegh.

It's Albert Ploegh from Kepler Equities. I've got to questions. First on your fixed annuity business, there was again an outflow of roughly EUR1 billion in Q2. Can you give an update about lapse rates in Q2 versus Q1? Second question is on your 5 for Life product, in June of Q1 conference call, you mentioned that there was a rollout going on in the banking and agencies in general. Has it now been completely finished in the second quarter, and what are your expectations for that, sir, for those sales channels in Q3? Thank you.

On the fixed annuities, there was a slight increase of lapse rates in the fixed annuities -- very slight. It's still well within our pricing parameters for lapse rates in fixed annuities. On the variable annuities, the 5 for Life, we had about a 6% increase, actually a little better than a 6% increase, in the 5 for Life in the first half of -- well, that's all variable annuities. I'm sorry. I actually have the rollout numbers on 5 for Life.

It's 54% increase (multiple speakers) in Q1.

So it's coming off pretty well, and the key rollout for that will be as we build back our wholesaler staff a little bit to work with the wire houses.

But it is now also being rolled out already in the bank and agency channel, that product line, or--?

It's not a big item in the bank and agency channels.

Mark Cathcart.

It's Mark Cathcart from Deutsche Bank. I've got a couple of questions. The first one is you seemed very relaxed about your capital position at the beginning of the year when your shareholders' funds has gone up by about 3.5 billion. So does that mean that you've got 3.5 billion of excess capital, or if you could tell us what your excess capital is?

Second, in relation to that, you've got some fair value reserve. I wondered if you could split the fair value reserve between bonds and equities?

And the third, I think when we first looked at the press release this morning, it seemed a little bit disappointing because there was this nasty hit from volatility factors from IFRS. It looked as if you had undershot, if you stripped IFRS out, but in fact, it's the opposite, because when you look at other factors like exceptional items, which I believe they are about 100 million in the second quarter, then actually on balance it turns out to be quite positive. So I just wondered on a going-forward basis if you could have on the front page not only the IFRS impact, but also all of these exceptional items so that we can see what the underlying result is rather than having to draw through when we've got ING to deal with as well on a sunny day in London.

On page 24, you see everything.

I mean, just going back to that, in the Netherlands, for instance, you have got this item which I think can be classified as IFRS or just accounting-related -- it was about EUR71 million -- adjustments to assumption for interest rates. Then, I mean, you would see that as exceptional -- it's not going to happen again? Or does it happen as interest rates move up and down, in which case it's really an IFRS volatility factor, isn't it, which you don't include?

Let me try -- let me take that one immediately. We did a provision in the Netherlands for separated accounts and life for policyholders. And we did renovations (ph), like in Canada, on a neutral rate, and that's prescribed by IFRS. Well, that's pretty conservative, but it's compensated for by a derivative that we have outstanding in the Netherlands that brought us a lot of money, but under the operating line. So, under non-operating -- so in non-operating, you see a lot of income in the Netherlands, and if you take a provision, according to IFRS, you take it in the operating line. And therefore, we specify it.

It just seems a bit misleading, because if people look at the operating, then it would suggest that the operating is 71 million lower.

I can't help this, but this is prescribed by IFRS, and it's ill logic that income you get from protection against lower interest rates are current to non-operating, and that the provisions you have to take for low interest rates are current to operating. I cannot help, but -- please, do me a pleasure, call Twiti (ph).

But in terms of when you present your results, can't you just give a clean number -- a clean operating number, so we don't have to scramble through several pages of text?

Well, we tried to do it on page 24.

I know you do, but it doesn't include the 71 million.

No, but the 71 million -- I don't want to get into a discussion with you where is operating or non-operating, because this is a fact, interest rates went up, went down, and if you take a very conservative stance prescribed by IFRS, it isn't charged to operating income. And that there are compensating factors that are booked on another place. I cannot help it. I try to explain it to you, I do it with pleasure, and I stay on doing it, but I cannot change the system.

Mark, this is Michiel van Katwijk. We get your point.

I'm only trying to help, because it looked like (multiple speakers)

I know.

We like you asking it, because we need to hear explanations.

The split between the -- of the fair value reserve between bonds and equities, we don't have it readily available here, but we will get back to you separately on that one.

But is it roughly 50-50? You must have an idea. I mean, you must know (multiple speakers)

If you put me on the spot, it's going to be more in bonds than in equities. But we will get you the numbers. And of course, it doesn't mean when our equity goes up by 3.5 billion, that we have 3.5 billion of excess capital.

No, I was being flippant. But I was just trying to make you (multiple speakers)

I know.

You better concentrate on the embedded value publication. There you have a better view on surplus. And I have to warn every listener on capital position, while it is in a very good position and also the composition of capital is fine and the cash flows are fine, if interest rates, for instance, arise, then you will see the reversion of that on solid derivatives, and that is going through net income, not operational income and non-operational income, and that will have an effect of the equity position as well. So there are volatile items as of the first of January 2005 under IFRS also sneaking into the equity position. So, while our position is strong, I have to warn you, there is some volatility there as well.

At year-end, we had approximately 1.5 billion of excess capital. Most of that was in the country units. It's gone up since then. We will update the total excess capital position by the end of the year, but it's gone up from the 1.5 billion, but certainly not as much as that.

That's a perfect answer. Thank you very much. Fantastic.

Nick Holmes.

It's Nick Holmes, Lehman Brothers. I just had a few questions. I wondered firstly, could I come back on the 5 for Life question? I just wondered if you could tell us more about what your growth expectations are. I did think, as the first questioner mentioned, that you were targeting rolling it out through bank and agency channels, and I wondered if we could just have a little bit more detail on that. Also, with variable annuities, I wondered what is the reason for the fall in sales through the direct channel?

Second question is on Taiwan. I wondered if you could give us a bit more detail about why you expect a slowdown in sales in the second half and what you think the impact of pension reform will be, which I think is taking effect or has already taken effect from the first of July.

Then final question is looking at shareholders' equity, coming back to this fair value reserve. Would you say that the bond element is economically neutral in the sense that embedded value would encompass the gain that you are showing, so that looking at embedded value, we shouldn't factor any increase in what you show for IFRS?

That's the easiest one, Nick. The answer is yes.

That's great.

In terms of sales growth for the 5 for Life, we had sales growth in all channels except banking and direct, and you are right, we are rolling it out, but we don't expect great sales, actually, from those two markets. We expect the wire houses and some of the banks to do a good job with 5 for Life, and I'm going to let Darryl give you a little more color on that, but before I do, let me answer the question on Taiwan.

During the first half, there was an expectation of a reduction in commissions on our life products in Taiwan, and so there was more activity in selling new business, and so we just wouldn't expect that kind of sales activity during the last half in Taiwan. In terms of pension reform, it's not going to have a big impact on Taiwan. Pensions are not for insurance companies, but it will be good for overall awareness for savings and for being interested in retirement.

Darryl, would you like to comment a little more on the 5 for Life?

Sure, Don. First of all, on the direct side, the direct channel is really a partnership relationship we have with a distributor that has a direct model themselves, and that production does tend to be a little bit lumpy quarter to quarter based on their model. On the 5 for Life, it's probably got the greatest traction in the planner channel here in the U.S., but we are continuing to get incremental growth in both the 5 for Life and the GPS product that was the predecessor to 5 for Life. Both are experiencing monthly incremental growth, and I think, actually, in June was the first month that we had the 5 for Life overtake the GPS as far as production. But both are continuing to grow month over month, so we're hoping for continued production growth for the third quarter.

And could I just ask, I mean, with the agency channel, do you see good prospects there it with party agents -- not your own agents, but the party agents?

And it is rolled out in the agency channel, but I think that the greatest prospects are probably from a combination of the wire houses and the planner channel.

Did we pick up all of Nick's questions?

Yes, we did.

David Nisbet.

David Nisbet, Merrill Lynch. Just a quick question. There was a reference to some new distribution agreements in the States. I wondered whether you could give some details and perhaps try to give some indication of how important these might be to production. Thanks.

Basically, we were talking about the fixed annuity business and we've had arrangements and operations with most of the big banks in the U.S. I wouldn't -- I'm not sure I should characterize them as new, because we've had arrangements. It's just that we weren't competitive for a period of time, which we gave you the reasons for that.

Interest rates are up a little bit now and we're able to be a little bit more competitive with our current rate of interest, and we've worked out some arrangements with some of our friends in the banks, and I won't specifically mention names, but we are already seeing good increases coming in the fixed annuity production. We've stayed with our 1.5% guarantee, but in some accounts, we're going to a bailout rate, so that there isn't a feeling that people are going to get locked in and then have their rates slashed. So, Darryl, do you want to add any commentary to that?

Well, I think I mentioned last quarter that we expect our fixed annuity production to be back-end-loaded this year. It's -- as Don just mentioned, we're going to be featured -- it's not two new relationships, but we are going to be featured in two new accounts in existing relationships that are coming online in the third quarter -- one came on early in the quarter and one coming towards the end of the quarter. So I expect Q3 production to be up and I expect Q4 to be up over Q3. Those are my high-level expectations.

Lance Burbridge.

Lance Burbridge from Bear Stearns. A couple of questions. The first is on mortality. I think you mentioned there was adverse mortality in both Transamerica RE and traditional life in the U.S. Can you just confirm whether that's severity rather than frequency or the other way around? I think it has been severity in most cases where people have had that.

And the second one is on Taiwan again. I think most people seem to have grown, like yourselves, in regular premium business in the second quarter quite dramatically. And I assume one of the reasons why you've cut commission was perhaps to stem some of that new business flow. Is that really because you were worried about selling business that didn't meet your hurdle rates or anything? Perhaps you can just give a bit more color on that.

On Taiwan, Lance, it really had more to do with an expected reserve increase coming from the Taiwanese authorities, and with that reserve increase, it would require a commission cut to continue to make our hurdle rate. So I don't think that the reserve increase has actually gone into effect -- it has gone into effect, so it has gone into effect now, and that was the reason for the commission cuts.

So everyone has fallen into line in the same way as yourselves, perceivably?

I can't be specific about that, but I would think that that will be the case, that people will all gravitate towards a lower commission situation. In terms of mortality, the higher age, higher amount is where we have the higher mortality. Mortality in our other lines of business has been pretty reasonable, in fact, favorable. But the big case overage market is where there's been some mortality difficulties, and it is primarily severity.

Okay, so you think it is a blip rather than a trend?

Well, who knows? I think we have to watch that a little longer. In the reinsurance -- in our reinsurance mortality, although the first quarter was pretty good and the second quarter was a bit higher, but much lower than the first and second quarters of last year in the reinsurance business, so we actually look at our reinsurance mortality as being favorable for the first half of this year.

William Attican (ph).

William Attican from Citigroup. Just one question. What was the average crediting rates on the U.S. fixed annuity book in the second quarter, and how did that move over the first quarter?

Supportable rates are about 3.27, looking at the end of the -- yes, for new business, and average crediting rate on the overall book is 3.41.

And what scope has that got to move around over the next couple quarters?

Pardon me?

What scope is there to move that over the next couple of quarters?

The rates are up slightly already here in the third quarter, which means that our supportable rate for new business could be higher coming on. But it just depends on what rates do. And you know that we reset rates on the old block annually.

Mark Cathcart.

You talked about the worldwide marketing organization where you've got some really nice growth coming through there. In the past, management has told us that they've really worked hard on the agency channels to generate growth. Just wondered if you could give us an idea of when we're likely to see some nice growth coming through from the agency channel. You mentioned about selling to the lower mid-net worth market, but when are we starting to see a real turnaround coming through, do you think?

I think that the agency channel, particularly through the Transamerica group, has been continued to show good increases in production quarter on quarter over the last few years. The NWFG, when the equity marks got hit, since they were selling a variable universal policy, their sales dropped off for a period of time, but that's where it's coming back now, and recruiting is good. So I think that we are getting good growth in our, quote, agency channels.

And do you think that the interest rate or the shape of the yield curve in the States and also spreads versus corporate bonds -- I mean, they've been under pressure since the beginning of the year. On an EV basis, and that's how you measure your profitability, can you tell us what's going on with your margins on your universal life or the spread of products within the States?

Darryl, that sounds like a good question for you.

Sure. I mean, we're still getting our -- we're still pricing to our discipline and getting our minimum return. I will say in the high net worth marketplace, it's an extremely competitive marketplace and we're probably getting a little under our 11% minimum in that market. It's a function of a number of things. It's the competitive landscape, the low interest rate environment. I will say that recently, there's been passed legislation on AG 38, revising the reserve standards, and I know there's been some press on that, and that really doesn't have an impact on our returns, so that's not the issue. But we're hopeful that that will impact some of the industry and possibly relieve some of the pressure that's out there.

But Darryl, aren't you already seeing the effects of higher reinsurance rates on those big cases?

Yes. I think that's affecting the industry as a whole, and so I think there is a transition period that's going through right now in that marketplace, and that's what's making it very tough for us to get our 11% unlevered return right now.

What proportion of your business is being impacted like this? In other words, what proportion would you classify as high net worth?

In terms of standardized premium, I probably would need to get back to you on that. I don't think I have those numbers handy.

But just roughly, I mean, is its 20-80, 30-70?

Less than half. I really don't want to speculate.

We'll just find the number and come back to you.

Andreas Theisen.

Andreas Theisen from WestLB in Dusseldorf. Just one question regarding Taiwan. Can you confirm that your reserves are sufficient to meet the liabilities now, and what is your exposure to guarantees in Taiwan currently?

We weren't as successful as some other companies in the early years, when interest rates were real high in Taiwan. Most of our production started coming out in 2003, 2004 and now 2005, and guarantee rates were 2.5% in 2003 and 2% in 2004 and 2005. So we don't have a problem today in Taiwan.

(Operator Instructions). Franklin Rosely. Mr. Rosely?

Next.

(Operator Instructions). Charles Graham.

Could you talk a little bit more about the development of business in the UK, particularly, what were the pricing issues that affected the new business development in the quarter?

I think in the first quarter, when we reduced commissions in the pension market, other companies hadn't reduced them yet, so we didn't have a great production quarter. Second quarter over first quarter, I think we were up about 14%, and so that would be second-quarter '05 over first-quarter '05. As that became more normal, we understand that some companies, because of loss of market share, are increasing commissions again. I don't know that that's started to impact us yet, but it's a concern, and I think that at this point, I never say never, but I don't think we're going to try to match that.

And as a broader view, how do you see the competitive environment and degree of success that you are having in competing for pension business particularly?

I think we're getting our fair share of the pension business, but we're also pushing more other products, the bonds and risk products. And although it's not going as quickly as we'd like, it is coming on, and the UK remains a competitive market with good strong competition there, but we're pretty comfortable with where our growth is coming.

(Operator Instructions).

Don, I can come back to that question on the high net worth premiums, if you would like.

Okay, go ahead. We can take one more question after that.

On slide 13, you'll see the recurring premium production for the Americas, and of the total retail recurring premium of 358 in the first half, 170 million of that was from our Transamerica insurance and investment group, and so it's just around the half mark and that's primarily the high net worth business for the U.S. business.

Good first estimate, Darryl.

We can take one more question, if there is one. Okay, thank you very much for participating.

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