Aegon Ltd (AEG) 2005 Q3 法說會逐字稿

Ladies and gentlemen and thank you for standing by. Welcome to the Aegon nine months 2005 results conference call on November 10, 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. Hulters, please go ahead sir.

Good afternoon, my name is Michel Hulters. I would like to welcome you to Aegon’s conference call to discuss the nine 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 the statement after the presentation.

During today’s conference call our CFO, Joe Streppel, will provide an overview of developments in the nine months of 2005. Afterwards there will be ample opportunity for questions, but now let me hand it over to Joe Streppel, CFO of Aegon NV.

Thank you Michel. Good afternoon here in Europe and good morning for those of you listening from the U.S.

Thank you for joining us to discuss our nine months results. Also, with us today are Darryl Button from Aegon U.S.A. and Michiel van Katwijk, our Group Treasurer. We try to conclude this call no later than 4.00 p.m. so that you can enjoy my friend, Kate [indiscernible].

Slide three, before I discuss the details of our nine months and third quarter results, I would like you to know that we are satisfied with the overall results of Aegon’s third quarter and the developments of the Company during the nine months of this year.

Let me give you a brief overview of Aegon’s key developments. Sales have continued to develop favorably. For the nine month period compared to last year, new life sales increased in the Americas and in the Netherlands. In the United Kingdom they were pretty much flat, and in other countries sales rose significantly, largely due a sharp increase in sales in Taiwan in the second quarter. Sales of our U.S. deposit businesses were also higher overall.

Operating earnings continued their positive trend during the nine months of the year and we have maintained our focus on growing Aegon’s core businesses profitably.

As we have reported in previous quarters, certain volatile items have an impact on operating earnings, and they have had a particularly strong positive impact on our third quarter result. I’ll discuss these in some detail later in the presentation.

Another key development is the recent completion of our acquisition of Nationwide Poland. This is an important development in the roll out of Aegon’s expansion throughout Central and Eastern Europe.

Finally, we have accelerated our acquisition of the remaining 40% of Positive Solutions, which is an important step for Aegon’s position in the United Kingdom’s markets.

Slide four, turning to an overview of our results for the nine months of 2005, operating earnings before tax increased by 13% to €1.596m. All major country units contributed to the increase with the Americas accounting for 74% of operating earnings.

In the third quarter operating earnings before tax increased 45% to €652m. Operating earnings in the third quarter of this year benefited from a positive contribution of volatile items in the amount of €108m compared to a negative of €6m in the third quarter of last year. The majority of this impact is reflected in the operating earnings of the U.S.

For the nine month period, the effect of volatile items was a positive of €78m relative to prior year.

Net income which increased 30% for the nine months period to €2.069b reflects the higher operating earnings, as well as the net gain on investments and a positive contribution from impairment charges as asset recoveries exceeded impairments.

The non recurring income items listed here refer to the sale of our general insurance activities in Spain at the beginning of this year and the sale of our non core Trans America Finance Corporation businesses last year.

And as you can see on this slide, our results have increased a couple of percentage points more at constant currency exchange rates. The increase in operating earnings would have been 16% and net income 32%.

Slide five, taking a look at sales for the Group. New life sales were up 11% in the nine months driven by strong increases in the Americas, the Netherlands and other countries. Also in the third quarter our major country units recorded higher sales, which were mostly offset by lower sales in Taiwan. You may remember that sales in Taiwan were exceptionally strong in the second quarter before product terms were changed.

In the Americas we have continued to see improvements in our retail variable annuity business, which were especially strong in the third quarter and institutional guaranteed products. Sales of our pension business in the U.S. was particularly strong in the third quarter in both fixed and variable annuity lines of business.

And finally, off balance sheet production increased in all our country units. The largest portion coming from new institutional and retail asset management mandates in the United Kingdom.

Slide six. Let me now discuss some of the highlights of the nine months and the third quarter in the Americas. Operating earnings for the nine months increased by 8% to $1.698b driven by increases in traditional life, fixed annuities, fee, off balance sheet products and reinsurance. These increases were partly offset by lower earnings from variable annuities and institutional guaranteed products.

When taking a look at results by line of business, 11% increase in traditional life primarily reflects growth of the in force business, as well as the favorable contribution of a lot of items. These were partly offset by higher mortality claims during the first six months of the year.

The significant increase in earnings from fixed annuities in the nine months is also mainly due to volatile items, and more specifically the valuation of total return annuity and a fair valuation of assets with no direct offset in liabilities.

In this line of business we also experienced more favorable mortality on payout annuities, which was partly offset by modest spread compression in the second and third quarters of the year.

Coverage spreads on the largest segment of our fixed annuity book amounted to 233 basis points for the third quarter compared to 216 in the second quarter of this year.

The decline in earnings for variable annuities was primarily due to the impact of the evaluation of Canadian segregated funds, which was explained in the second quarter. The €2.2b increase in assets under management resulted in higher fields -- fees.

The flattening of the youth curve in the United States had an adverse impact on earnings from guaranteed institutional products as liabilities reset more frequently than assets.

Finally, in our life reinsurance business you have seen the improvements in the operating environment. The increase of 72% is an indication of the strong growth of the in force business and a relatively favorable mortality experience.

Slide seven, turning now to new life sales in the Americas. Single premium sales were up by 24% in the nine months of this year, the result of strong sales of bank owned and Company owned life insurance which, as you know, tend to be irregular. Strong BOLI COLI sales in the third quarter offset the lower single premium sales to individuals.

Our bank sales were affected by the loss of a major distribution partnership. But you have to keep in mind that we maintained our first position in selling these products.

Slide eight, recurring new life sales rose by 11% during the nine months, mainly driven by a 30% increase in sales to institutions. Most notable here is the 51% increase in life reinsurance. Our recurring premium life sales to individuals showed a good increase, particularly in the third quarter where they grew by 8%.

Slide nine, in our variable annuity line of business we have experienced continued sales momentum with a 21% increase during the nine months and an increase of 25% in the third quarter compared to the second quarter.

The 5 for Life variable annuity product introduced last year is demonstrating good growth. The 5 for Life feature accounted for 21% of variable annuity sales to individuals during the third quarter and the guaranteed principle solution feature accounted for another 19%. We have seen a particularly strong increase in variable annuities being sold through brokerage firms, 78% in the third quarter.

Our pension business has continued to do well. This is demonstrated by the exceptional 89% increase in variable annuity sales during the third quarter, and a 28% increase for the nine months period. This increase in the third quarter is due to a particularly large contract within diversified investment advisers.

Slide 10, new fixed annuity deposits, overall, were lower compared to the prior year, reflecting our continued focus on business with an acceptable risk return profile and the flattening of the yield curve. However, we have experienced consecutive quarterly growth during the nine months of this year at a time when the fixed annuity market has experienced a steady decrease in sales. The improvement during the third quarter is primarily the result of enhanced distribution through the bank channel as well as higher sales of our pension businesses. Third quarter new fixed annuity deposits were 9% higher than in the second in this year.

Turning over to the Netherlands, slide 11. Sales in the Netherlands improved as we have been able to win several large group pension contracts during the first and the third quarters of this year. Sales of our off balance sheet products increased by 17% during the nine months, as we have seen good growth in asset only group pension contracts, as well as higher sales through TKP pension. It’s always difficult to spell in a language.

Slide 12, the 87% increase in operating earnings in the Netherlands during the nine months primarily reflects the increase in traditional life, which was partly offset by lower earnings from life for account of policy of all the lines of business.

Operating earnings from traditional life increased to €192m, and reflects higher investment income and the positive effects of volatile items. The decline in operating earnings in life for account of policy holders is largely due to provisions taken in the first half of the year. But as you can see, operating earnings in this line of business were up considerably in the third quarter.

Turning over to the U.K. on slide 13. In the United Kingdom new life sales were pretty much stable for the nine months, but picked up in the second and the third quarters of this year. We continue to see a considerable proportion of new sales coming from our non pension products. Off balance sheet production in the U.K. increased as a result of new institutional and retail asset management mandates in the United Kingdom.

Slide 14, let me discuss the declining earnings in the fee off balance sheet products. This is mainly the result of the charge for the recruitment incentive related to Positive Solutions. It has always been our intention to purchase 100% of Positive Solutions by mid 2007. However, we have decided to accelerate the acquisition of the remaining 40%, which will now take effect in early 2006 in order to allow the business to maximize its potential.

Anticipating this transaction, Aegon U.K. has also concluded an incentive plan for individuals and start of Positive Solutions.

This IFA platform has been developing successfully with approximately 1,300 registered individuals now part of the network. We expect this number to continue to grow. There will be further charges related to this incentive plan. It is expected that a total remaining charge will amount to £19m, of which £8m will taken in the fourth quarter of this year and in the first quarter of next year.

And finally, the increase in operating earnings in our life for account policy holders business reflects higher average equity and bond markets compared to last year.

To the other countries on slide 15. Let’s turn our attention for a minute to the results of our other countries. We have already explained that the level of sales in Taiwan in the second and third quarter was the main driver of the sales reported for other countries. I want to highlight the strong increase in off balance sheet production. This increase is on the back of our successful expansion of the pension funds business in Hungary and a very good start in Slovakia.

The partnership with CAM in Spain is well on track and new life sales in the first nine months of this year amounted to €177m. This number is on a 100% basis and, as you may know, the partnership with CAM is not consolidated in Aegon’s accounts. Aegon includes its almost 50% share in the results under the lines share in profit or loss of associates.

Slide 16, operating earnings from other countries declined largely due to the divesture of our general insurance activities in Spain at the beginning of this year. Included in operating earnings are also higher start up losses due to the new venture in the Czech Republic and the start of the pension fund in Slovakia.

Slide 17, let’s turn briefly to capital management. Shareholders’ equity at September 30, 2005 amounted to €18.5b, an increase of €3.6b or 24% compared to the year end 2004. The main items positively impacting shareholders’ equity were net income of €2.069m, currency exchange rate effects of €1.271m, and an increase in the fair value reserve of €607m. Please note that the fair value reserve and the unrealized part of non operating earnings changed with the fluctuation in equity and bond markets.

Our capital base was strengthened during the nine months of 2005. At September 30, 2005 shareholders’ equity represented 75% of our total capital base comfortably within target levels. Group equity, which includes perpetual capital securities and minority interest, represented 90% of the total capital base at September 30, 2005.

Slide 18, let me conclude by saying that we are pleased with the nine months and the third quarter results. We have made good progress during the nine months of the year in sales, enhanced distribution agreements and strategic expansion in Asia and Central and Eastern Europe.

We believe that Aegon continues to be well positioned to serve the developing needs of our customers in the major and emerging markets.

Slide 19, before we give you an opportunity to ask questions, let me remind you of our Analyst and Investor conference in New York on December 8 and 9. We hope to speak to you again on that event, but for now we are happy to be taking questions.

Thank you sir. Ladies and gentlemen at this time we will begin the question and answer session. [OPERATOR INSTRUCTIONS]. The first question comes from Mr. Michael van Wegen. Please state your company name, followed by your question.

Yes, hello, good afternoon, Mike Wegen from Fortis Bank.

Hello Mike.

I have a couple of questions primarily on the U.S. business. First of all, could you give any comments on the mortality developments in traditional life for the third quarter?

Second, I saw that the sales for variable annuities in your wirehouse segment were down Q on Q. Could you give any explanation for that?

Third question is on the general impact of AIG on your business. What do you see now a couple of months after the events?

And then I understand on the fixed annuities, largest segment of the book, the lapse rate is actually down compared with Q2. Could you give any comments on that? How you see that developing?

And finally, on the Netherlands the profitability actually is quite good in Q3. Is this a sustainable level or should we be more cautious? That’s it, thank you.

Well, listen, that’s a lot. So, we start with the mortality on traditional life. I remember that in the last quarter we had a lot of discussions on severity or frequency of mortality. It’s a little bit clearer now, because we are a quarter further. But Darryl, could you give the comments?

Yes, this is Darryl Button in the U.S. Mortality in the third quarter was basically benign in the U.S. There was -- I would say it was very close to expected levels. The higher mortality that we’d experienced in the first half of the year on our older age high net worth business did not persist to any material degree into the third quarter. So, all in all, the third quarter was a good quarter.

On the VA -- did you want me to go ahead VA sales as well?

No, that’s okay.

[Yes].

Take it.

On the VA sales a couple of things going on there. We did see a rash of new competitor products that were launched in May that added a lot of new features -- growth features particularly. And we’re really just -- given the lag in getting those rolled out to the wirehouse channel, we really just seeing the effect of that increased competition coming through now. We will be countering with our own product design changes in January.

In addition, we’ll be adding some wholesalers to the field force as well. So, unfortunately that’s just a period where the competition has stepped it up a bit here.

I would say on the -- I know you didn’t mention it, but on the bank side there’s an example where we actually rolled our riders out to -- some additional products in our bank channel in May as well. And, in fact, we’re seeing the pick up in that channel in this quarter. That’s offsetting some of that decline in the wirehouse.

On the fixed annuity lapse rate, I might as well go ahead and take that one. It’s materially flat. It’s -- I think it’s down maybe 10 basis points quarter over quarter. Interest rates fairly low most of the quarter and the lapse rate itself was basically flat quarter over quarter.

And still amply within pricing?

Yes, well within pricing, yes.

[Well] –

And I think the U.S. question was on the AIG. The -- I wouldn’t say there has been any material noticeable effects from the AIG situation. I think they’re working through that and handling that very well. I think around the edges there has been some pick up on our distribution, but nothing material and nothing that I could quantify for you.

Okay, on the Netherlands the third quarter in terms of operating revenues was -- it was a very good quarter. You should not extrapolate a quarter over quarter for profitability in the Netherlands.

We are happy with the developments in the Netherlands. But, as you see, there are some volatile items, especially in the second quarter. Less so in the third quarter, but volatile items can go anywhere. So, I would not take this number and multiply it by four and then have a normalized operational result for the Netherlands. So, some caution is okay.

Okay, thank you.

The next question comes from Mr. Nick [Dunn]. Please state your company name followed by the question.

Hello, it’s Nick Dunn at JP Morgan. Actually, just following on from the last question on the Dutch life business, looking at the volatile items there didn’t seem to be any in the third quarter in the Dutch life business. So, can you actually be very specific about what caused the €70m profit in traditional life and what run rate we might expect from that business on a quarterly basis?

And then my second question is on the U.S. In the traditional life business I just wonder if you can talk more broadly about competitive pressures you face as a consequence of other competitors offering universal life policies often with the secondary guarantees. Has there been any change in that competitive environment and to what extent does that have an impact on your traditional life business?

Well, Nick, on your question on the Netherlands, you have to realize that under IFRS dividends are where they appear now at the moment you get them in. So, that’s in the second and the third quarter. So, there will not be much dividend income in the fourth quarter and there will not be much dividend income in the first quarter. In the past from the volatile items that we explained to you then you have probably the full analysis [per round].

On the universal life, Darryl?

Yes, Nick, on the universal life the high net worth universal life market in the U.S. is still extremely competitive and it’s an area where we’re not getting our percent on leverage returns.

There’s a lot of talk, I think, within the industry and within the landscape around needing to deal with the recent AG38 revised reserved guidelines and the like. We’ve seen a little bit of price changes in the market. That’s eased a little bit of the pressure, but there’s still more to go and I think the industry’s still playing a little bit of a waiting game there.

And so what are you doing in that environment? Are you stepping back from the market with the secondary guaranteed business and waiting to see how the reg changes? Or, are you just basically offering a product to compete in the same shelf space?

No, we’re -- we have our solutions in place. And we have -- fortunately we have the scale to deal with the issue through off shore reinsurance programs and external financing of those capital markets -- financing of those redundancies. We’re getting -- we’re not getting our full 11%, but we’re -- we expect double digit by the end of the year on our returns.

Okay, thank you.

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

Yes, hello, it’s Nick Holmes at Lehman.

Hello.

I wondered if I could go back to the variable annuities and just check where are you with the roll out in the bank channel is that fully rolled out now? And where are you with the roll out in the agency channel?

And then you mentioned new products in January and I just wondered whether you could elaborate a bit and give us some feel for what type of product it would be.

And then final question, in Taiwan I wondered if you could tell us a bit more about your outlook for sales in Q4 and into next year? Thank you.

Okay, Darryl on the variable annuities and I do Taiwan.

Yes, on the VAs we’re fully rolled out in the bank channel on our current product. But we’re still selling, as far as VA riders go, we’re still selling the GPS rider and we’re fully rolled out now with our 5 for Life rider. The -- as far as the changes in January, I think you’re going to I won’t give too much away here, but I think you’ll see us out with a competing growth feature. That seems to be the feature that’s taking off and hot right now.

In addition, we’ll be adding some distribution around that as well. So, I think I look forward to a growth in 2006.

And, sorry, could I just -- I'm sorry, what features could you elaborate a little bit more about those features you mentioned for the January [launch] product?

I think for the some of the issues with the current products and particularly with the 5 for Life is that if you don’t utilize the option, it’s an income later type of approach, the issue is that as you get older obviously the annuity -- the life annuity gets cheaper. And so, rewarding the policy holder for not exercising the annuity earlier, in other words basically deferred income. So, recognizing that that’s available and offering enhancements to deferred amortization.

That’s not a totally new product, Nick. It’s just in the next stage in the 5 for Life looking at the competitive market.

What would you say has been the biggest competitive challenge with 5 for Life, because 5 for Life’s done quite well, but it hasn’t competed perhaps as well as you might have expected?

Well, I think it goes back to what I said before. It’s been copied. It was copied back in May by several competitors and then it was won out and it was when it went up was in the growth features that I was talking about.

Right.

Ours is 5 for Life after the age 60 and where we’re seeing it getting one out is products that are offering a step up or a growth feature in the underlying account values for every year that you don’t exercise the life annuity option.

Yes.

Okay. On Taiwan, well, you have to understand what happens in Taiwan first and that is that the regulator announced somewhere in the second quarter that we have requirements for certain products in Taiwan would be more severe from July 1 on.

Our reaction to that was that commission should be cut. People knew that. And that meant for the third quarter that production was much -- and much lower than in the first, and certainly in the second, quarter.

We expect the competition to follow. So, that everybody is giving lower competition. That will help us. But there’s also a very good chance that the regulator will relieve the stricter solvency and reserve requirements in Taiwan in the fourth quarter. And then you come back to a normalized situation. And that gives us good hope that somewhere in the fourth quarter production is picking up. And we certainly expect that for 2006.

Okay, thanks very much.

The next question comes from Mr. Trevor [Kelsich]. Please state your company name followed by your question.

Yes, good afternoon. It’s Trevor Kelsich at ABN Amro. A couple of hopefully quick questions. First of all returning to the fixed annuity business yet again. I was wondering if you can talk a little bit around the decline ongoing in terms of the net new sales.

So, you’ve already indicated that the pricing assumptions -- it’s within pricing assumptions, but still the net new sales continue to be negative. I’m specifically interested in what kind of business are you losing there. So, presumably it’s some of the more profitable business with low guarantees. Can you talk a little bit around that? So, that’s the first point.

The second point staying with the annuity business. Fixed annuities you had a decline from 204 basis points to 200 basis points in the spread once I take out the IFRS issues there. That’s pretty surprising given the fact that interest rates were either flat or up in the third quarter. So, I was wondering if you can talk a little bit around that.

Then the third element is on the fixed annuities, could you just confirm for me on the balance sheet you show some fixed annuity account balances. Are those marked to market? Those are my three questions please.

Okay, Trevor, this is Darryl in the U.S. I’ll take a cut at those.

On the fixed annuity net flows you asked what business are we losing, it’s -- no it’s not the newer lower minimum guarantee business, because that business is still locked up under some pretty heavy surrender charges. It’s going to be the older mature business that’s out of surrender charge penalty. So, it’s going to be business with the 3% guarantees.

On the spread declines, yes, you’re real close. I actually had it at six basis point decline quarter over quarter. I think you said four when you strip out all the volatile items. And that is a function of what interest rates did here in the U.S. over the quarter. They ended the quarter real strong. They dipped down pretty low for a large part of the third quarter and really didn’t come back until the end of the quarter and then they’ve since come back even further. So, the six basis point is spread compression that incurred over the quarter due to the low interest rate here in the U.S. as relates it A it’s a non issue going -- in fact I actually think we might even see a little bit of spread widening going forward with I think 10 years Treasury in U.S. now up over $460.

And the last question I think you asked about balances, those are amortized costs balances. Those are not market value.

Okay. Could I follow up on one or two issues please?

Yes, go ahead.

Thank you. First of all, if you’re losing older material business, so higher guaranteed business on fixed annuities that means that the overall profitability of the bank book should be increasing. Am I correct in that?

Yes.

Okay. The second point is on the spread decline. I know it’s probably quite difficult, but could you give some sensitivity as in generally speaking interest rates go up by X basis points, therefore we could expect spread on the fixed annuity business to expand by X basis points. Is that possible?

Well, Darryl you made that calculation so go ahead.

I’m not sure I can do that on this Trevor, so we might have to get back to you on that one.

Just on the profitability question, I think what I would comment is that we do try to match the assets and liabilities fairly closely. So, we tend to be much shorter duration assets supporting the more liquid money that’s assets out of the surrender charge and will leave the stuff that we expect to be leaving. So, when you get -- just because the older stuff is lasting up I don’t think there’s necessarily an immediate improvement to the profitability.

Okay.

That’s great, thanks a lot.

May we go to the next question please?

The next question comes from Mr. Pierre-Marie Gerez. Please state your company name, followed by your question.

Yes, hello, Pierre-Marie Gerez from Exane BNP Paribas. Could you give us some details about the traditional life business because you told us in the past very good outlook on this type of business, especially for mid term revenues clients. And I’ve got to admit that I’m a bit disappointed by the growth figure of only 4% on this type of business reported on nine months.

Darryl? I think you mean the U.S. isn’t it?

Yes, yes, of course, I mean the U.S.

I hope I heard the question right, but I think that it was around sales in general for traditional life, particularly the middle market?

Yes.

Yes, okay. Well, the sales have been running pretty well for our traditional life business all year long and have been for a while.

We did see a little bit of declines quarter over quarter, Q3 over Q2. That was primarily coming from three areas. The first was our home service business was off slightly quarter over quarter. The second was our direct marketing was off slightly. And the third element was that our variable life production in the second quarter was extraordinarily high. So, those are primarily explaining the quarter over quarter decrease that we saw. But materially it’s been -- still been running fairly flat. And I think at pretty good levels all year long.

[Indiscernible].

And as far as our -- if you like, I could just expand on the middle market. We have initiatives under way to continue to expand into that market and we’ve talked to you in the past about those. And one of the key one initiatives that we have is our work site marketing initiative. And we’ve always talked about that being a 18 month to two year type project and we’re making some good inroads there. But it’ll be the end of ’06 before I think we really start to see the impact of that.

And that’s mostly the case again for the strategy execution. It’s not coming in two or three months. But we do our utmost and we think it’s a good market for the future.

Next question please?

[OPERATOR INSTRUCTIONS]. The next question comes from Mr. David Nesbitt. Please state your company name followed by your question.

Yes, it’s Merrill Lynch. Good afternoon gentlemen. I wondered whether I could ask a question on the institutional business in the States. There were one or two references to some pressure on spread. But you’re still writing fairly substantial volumes of business. I wondered if you could provide some comfort that you are still hitting the targeted returns and also give some indication of whether you’d expect to maintain volumes at around this level going forward? Thanks.

Well, in general we are not ready to produce and certainly not on a transactional basis business that is not meeting our criteria. If you see some pressure in the institutional market, it’s because the reset of our liabilities is different from the assets and that’s on the existing portfolio. New business is written and according to meet our standards.

And the preview is not bad. You have seen that our people in the U.S. open office in Ireland and we have started to do institutional business in Europe as well. So, expect that this business will be good to us in the near future.

Is that okay?

Yes, thanks.

Okay, thank you. Are there any next questions?

[OPERATOR INSTRUCTIONS].

So, if not ladies and gentlemen, thank you very much for staying with us and we see you hopefully in New

So, if not ladies and gentlemen, thank you very much for staying with us and we see you hopefully in New York and if not, we will see you on the conference call for the yearly result.

Thank you very much, and have fun with AIG.

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