Aegon Ltd (AEG) 2006 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the First Quarter 2006 Results and Embedded Value 2005 Conference Call on the 10th of May 2006.

[OPERATOR INSTRUCTIONS]

I would now like to hand over the conference to Mr. Joseph Streppel. Please go ahead, sir.

Thank you very much. Good afternoon here, in Europe, and good morning to those of you that have joined us from the U.S. I'm Joseph Streppel; I'm AEGON's CFO. And I am joined today with Michiel van Katwijk, EVP and Group Treasurer; Ruurd van den Berg, EVP and Group Finance Director; and we have here Bill Robertson, who is Group Actuary; and Darryl Button, the CFO of AEGON USA is on the line.

Don Shepard had planned to present AEGON's first quarter results for this year along with the Embedded Value results for 2005, because that's an important event. But unfortunately, he has a death in his family, and he is spending time with family members, as you may expect. He has asked me to extend his regards, and he, of course, is looking forward to catching up with you very soon probably in London.

Although we have two subjects to be covered, I will try to limit my comments to the essentials so that we have ample time for your questions. Let's go to slide one. It's the most interesting one, as usual. I would ask that you review this cautionary note regarding any forward-looking statements at your convenience.

So then to slide three. Slide three marks the first quarter. And it's the first quarter that we released Value of New Business on a quarterly basis, and we will do so in the coming quarters also. Our first-quarter Value of New Business looks promising. It increased 18% compared to one-fourth of the 2005 Value of New Business.

Also, if you take operating earnings for the group, it looks good. It increased by 92% over the first quarter of 2005, reflecting higher -- the effect of higher interest rates and evaluation of certain financial assets.

On new life sales, we did good. So there was an increase of 12%, and that was very strongly supported by our business in the UK, which rose in terms of new life sales with more than 50%.

We continued to make good progress on our growth strategy in the Americas and Europe and Asia, and I will elaborate on this later. So many measurements are possible, but whatever measurements you take, be it IFRS, value of new business or new life sales, the quarter for AEGON was good.

Let's go to slide four and the Value of New Business, as mentioned. The Value of New Business increased by 18% to 163 million. The largest Value of New Business increase was in the Americas, and that is reflecting higher sales in more profitable lines of business. So it's not that new sales, in general, were up, but what we have sold is very profitable.

And also the UK's VNB showed a strong increase, and that's because of higher sales and also because of a more profitable mix of business. As you may remember, we have been seeking to diversify our business in the UK, at the same time, but our pension business -- and I should mention this -- also performed better in the first quarter.

In the Netherlands, we saw a slightly lower VNB due to lower margins in the mortgage-related business as well as a change in interest rates. We are pleased with the continued strong contributions of our developing activities in Central & Eastern Europe, Asia and what we call "other countries" in Europe. Together, these accounted for 24% of AEGON's total first quarter Value of New Business, and that looks promising.

Going to slide five, on internal rate of returns. You know that a key aspect of our strategy has always been and will be that we will try to grow our business in a profitable way. Well, AEGON's internal rate of return on new business showed a strong increase in the first quarter from 12.4% in 2005 to 14.7% in the first quarter of 2006. And you know that we have an 11% hurdle rate, so we're meeting that hurdle rate well pretty easily, with the exception, though, of the Netherlands, and so each of our country units exceeded their hurdle rate.

Only in the Netherlands do you see that we did not meet the hurdle rate. We are continuing to work on improving our business in the Netherlands, what continues to be a very competitive market. If you look to production, mortgage production went up, individual sales went up, but the margin part is really stiff in the Netherlands.

On slide six, the operating earnings. There is a very sharp increase of 92%. And of course, that reflects some very good underlying developments in our business. But as I mentioned at the start, it was also helped by the impact of favorable financial markets on the valuation of certain assets and liabilities.

And this includes the favorable returns on certain assets carried at fair value in the America and the Netherlands, but the largest single item is the EUR205 million release of guarantee provisions for unit-linked business in the Netherlands.

You have seen in 2004 but more so in 2005 that we have taken reserves, when interest rates went down to the 3% level in the Netherlands. It's now above 4. So it's natural that you can release a part of those reserves when interest rates go up again, and that is the situation in the Netherlands.

To profit development, on slide seven. Operating income increased strongly, but AEGON's net income decreased by 7%, and that's largely due to the result of lower other non-operating income and lower gains on investments.

I might add the investment performance of our asset management organization is good. They are all meeting their benchmarks. So it's not a token for the performance of our asset management. It's more what kind of decision our asset managers have taken during the quarter and they realized not many gains.

You have also in comparison to 2004 to take into account that in the beginning of 2004 we sold our general business in Spain, and that booking is non-operational as well, and that's not going to repeat in 2006.

And the last point that needs some elaboration is that you are aware that in 2003 and 2004, we did some duration swaps, especially for lengthening the duration of our assets in the Netherlands. When the interest rates go down, the value of that derivative is positively influenced. We have seen that last year. Now, interest rates are going up. The value change of that derivative is negative, as also shown on the non-operating earnings.

To slide eight, sales. We had new life sales for the group up 12% and an especially strong quarter in the UK across all the business lines. And let me add that this performance was another record quarter for the UK. We had a record quarter at the end of 2005 in the fourth quarter.

The first quarter in 2005 was a little bit weak in the UK. But even if you compare it to the sales performance in the last quarter, the record quarter of 2005, in this first quarter in 2006 we did better. So that's a very good result.

And we are equally pleased with our acquisition in Poland. We acquired our Polish business in the last quarter of 2005, and they immediately surprised us with a record sales quarter, while, in the first quarter of 2006, they did even better.

Going to slide nine, the Americas, the sales overview. In the Americas, I just mentioned, sales of institutional guaranteed products increased by 45%, driven mainly by our new sales platform in Ireland. So that performed well.

We are very satisfied with an increase of our variable annuities with 16% overall, led by robust sales in the retail and pension segments and our 5 for Life with Growth feature was received very well. And we increased -- as we promised you in our last call on the year that we were to increase our wholesaling capacity, and that seems to be a driver behind the good results in 2006.

We have introduced a new variable annuity product in the U.S. We call it the Income Select for Life product, introduced in May. No results known yet. We only know that it has been received well in our distribution channel. This variable annuity product is probably the most flexible product that is on sale in the U.S.

So we tried to keep our promise that we will be innovative, and in the U.S. we will look at our products every half year. And as a result of that promise, there is now a new product.

Let's go to slide 10. There is much talk about pensions all over the world and also in the U.S. and I am happy to report today to you that our U.S. retirement division has continued to perform well and 60% increase in our U.S. pension sales and it was supported in all the products we sell in this product segment. Our total assets under management in the retirement service is over 60 billion. There is more information, but it's in the back in the appendix.

To the Netherlands. In the Netherlands, we saw a modest increase overall in new Life sales up 1%, but the good news there is that we have suffered for many years to increase our individual Life sales, the individual Life sales are up by 15%. We did not do big case group pension business in the Netherlands, we have a lot of smaller case, but not one big case as we had in 2005, but the pipeline looks promising. So we consider the sales results of the Netherlands as a good early sign of recovery.

For those who are interested in all the products in the Netherlands, I might mention that on Levensloop, the life cycle product that has been introduced in the Netherlands, we have now 12 million of recurring deposits. So it is not accounted for under new Life sales because it is a deposit, but we have 12 million of recurring deposits in the first quarter of 2006.

To the UK. In the UK, new Life sales, as I said, were particularly strong in all major lines of business, and the increase was 51%, as I said, the comparative to the first quarter of 2005 -- it was a relatively slow quarter, but it's also, as I said, better than the last quarter of 2005, so that's a good result. Our business mix is getting broader in that the margins on those businesses like risk products, annuities and bonds are higher than in the pension business, so profitability is on the increase in the UK as well.

In slide 13, we talk about other countries. In other countries, we saw a downturn in sales, mostly due to Taiwan. You remember that in the first quarter but also in the second quarter, we had a kind of fire sale in Taiwan, and that production slowed down in the third and the fourth quarter. So there is a strong recovery in Taiwan. It's up 64% against the fourth quarter of 2004 and we are changing the composition of the business in Taiwan with good result because if we analyze the value of the business numbers, you see that the profitability of Taiwan is okay.

We are happy to report that we have managed to get other strong bank partnerships in China for AEGON-CNOOC and that resulted in more than tripling premium income in the first quarter. You have to wait a little bit before you see results under IFRS because you know that in Life offers that takes us six, seven, or eight years before you see results under IFRS, but it's promising.

Also promising is our pension business in Central & Eastern Europe, we achieved good growth there with solid increases in the number of new entrants and assets under management and I already bragged a little bit about Poland so, I will not repeat that. In Spain, we announced that we will continue to seek more joint ventures to sell AEGON products in Spain. We announced in 2005 that we were planning to do two new joint ventures; one at Caja Navarra and one at Caja de Badajoz. I am happy to say that we got all the licenses and that means that soon our products will be available in approximately 1,500 bank branches across the country.

So in conclusion, we are pleased with the increase in the value of new business. We are satisfied about the internal rate of return and I think those underline our focus on growing our business profitably. And I think the diversification of our business with an ever growing and stronger distribution network is AEGON helping very much. You cannot expect that every business line in the world is always outperforming, but diversification helps us here. So, in summary, wherever you look at IFRS, VNB, new sales, IRR, AEGON is in good shape.

To the embedded value of 2005, the value in the business of 2005, let me start with a clarification we just disclosed by means of a press release. In our press release this morning, we have said that the total embedded value per common share amounts to EUR12.61. This is based on the average number of outstanding shares in 2005. Taking the number of shares outstanding at the end of the year, the total embedded value per common share is 12.39. The increase compared to 2004 does not change, it's not affected because you have to adjust the numbers for 2004 as well. And there is no other number in our report that changes because of this.

Slide 16. AEGON's total embedded value for 2005 increased by 27% to EUR21 billion, and adjusted for the estimated theoretical value of the AEGON preferred shares, the total embedded value per common share amounts to EUR0.1239 per share, also representing an increase of 27% against 2004.

We are very happy with the development at AEGON's developing markets in Asia and the Central & Eastern Europe and other countries in Europe such as Spain and France makes up a strong contribution. We see that 25% is coming from what we call the other companies.

Asia is taking in a fair share of that at 60%, predominantly Taiwan, and the rest is evenly split between Spain, France and what we call the Central & Eastern European units. And we are pretty satisfied here there's -- a couple of years ago, we said that in 2008 we would arrive at 25% of value of new business from developing countries, that's now beginning of 2006 and the end of 2005 we were there. So we're pretty happy with it.

The value of new business in 2005 on slide 17 increased by 13%, and that reflects the growth in most geographies and increasing volumes and a more profitable mix of business in general were underlying factors for that. And also contributing to the growth was the contribution of the new countries Czech Republic, Slovakia and Poland, and our share in La Mondiale and our joint venture in Spain with CAM.

The value of new business though in the Americas denominated in U.S. dollars decreased by 12%. And the decreases were in traditional life, accidents and health and institutional products. But on the other hand, free insurance and fee business increased. Value of new business decreased in traditional life due to reinsurance rate increases and a large volume of sales at less profitable issue ages.

To slide 18, the internal rate of return in 2005. The AEGON internal rate of return remained stable for the most part from 12.4 in 2005 and it was 12.6 in 2004. And also here, the same as in the analysis in the value of new business in the first quarter of 2006, the Netherlands is lagging and is not reaching the hurdle rate. We are meeting, therefore, our profitability promise. The exception is the Netherlands. There are a couple of technical aspects to it apart from a very competitive market. And if you want some explanation for that, Bill Robertson is here to do that later.

To the margins, embedded value of margin on slide 19. There are, as you know, many different ways in the life industry to measure the embedded value operating margins. For instance, we at AEGON, we do not include investment return variants in operating margins. So if you compare us to some others, you have to make an adjustment for that. So to help you a little bit out, we therefore provide both operating margins and total margins.

The embedded value total margin, which reflects a total change in the embedded value life, excluding capital movements, increased to 25% from 12.7% in 2004. The embedded value operating margin, representing the embedded value operating return divided by beginning of the year embedded value life, decreased to 7.8% in 2005. The decline in operating margin primarily reflects adverse operating variances and assumption changes in the Netherlands and, of course, the measures we took to improve our [spot cost] product in Netherlands is part of the cause of the hit. All other country units performed in line with expectations.

To the movement analysis on slide 20, here you see what drove the increase in our embedded value life insurance. Besides in-force performance and improved value of new business, better investment returns and positive currency movements were the big factors in the 22% increase in 2005.

You might wonder what the 424 means. That change is -- that negative variance is due to a change in economic assumptions. And it is reflecting the reduction of equity returns assumptions and risk free rates in the Netherlands in 2005. And you know that we had a very low interest rate in 2005 in the Netherlands.

You can also see what we include in our operating margin, and as I just mentioned the 1.7 billion of positive investment return variance is part of our overall increase in embedded value but it's not a part of our operating return as we have defined it.

So in conclusion, our business has performed well with solid improvements in embedded value and value of new business for 2005. Our developing markets continue to validate our investment in the long-term growth potential of these regions. We continue to stick to the strategy of writing profitable business as evidenced by the growth in value of new business and the level of internal rate of return achieved by all of our country units, but the Netherlands.

Upcoming events. Let me quickly remind you of our upcoming Analyst and Investors Conference scheduled for May 22 and 23 in London. If you are late, registrations are still being accepted. But we hope that you will register very soon. That would be very helpful. Our focus of the conference will be primarily on our business in the UK, in the Netherlands and Central & Eastern Europe, but of course there will be plenty of opportunity to discuss key developments across our businesses elsewhere in several breakout sessions with senior management and that includes embedded value.

So thank you very much for listening. And we are open for questions now.

[OPERATOR INSTRUCTIONS]

The first question comes from Mr. Kimon Kalamboussis. Please go ahead with your question sir.

Hi. This is Kimon Kalamboussis from HSBC. Two question if I may. First on fixed annuities, you mentioned in the press release that sales were lower because of the challenging interest rate environment. I wonder now that the environment has improved how easy it is for AEGON to reverse the sales trend here? And also would you comment on surrender ratios, please, since Q4?

The second question is on, if you could update us on AEGON's excess capital position, and also if you find any areas you -- that appear more attractive to you to reallocate this capital, please? Thanks.

Well, that's right Kimon. The fixed annuity market is still a very difficult market; there is still a lot of competition by other financial products such as CDs. The yield curve has improved a little bit in the U.S., but it's still almost flat and so that competition will stay there. So I think it's too early to predict that production levels will go up in the fixed annuities. We compared to last year, we lost a little bit, but I think that relatively we did a nice job, but the market in general is still going down, it's not going up.

Surrender, surrender rates -- at the end of the fourth quarter, we told you we were at 16%. That's total decrements, and we are now at 17, that in terms of profitability, it's not a problem, because in our pricing models, we calculated with surrender rates over 20%. So that's still okay.

Turning to excess capital. If you look to our embedded value numbers, you arrive at a free surplus of a little bit more than 3 billion. Let me first make a couple of remarks. It's nice to have surplus of 3 billion, but you have to realize that a part of that surplus you need as a buffer. If you look to the first quarter numbers, you see that the development of the capital markets, which were not rough at all, it's a little bit of interest rates hike in the U.S. and in Europe.

And in terms of capital under IFRS, that took 500 million. So that you need a little buffer to compensate for those movements in capital markets, that's for me, that's a given. But even then you have say 2 billion left and my first remark on that is, you should not confuse yourself by saying that is free cash flow, because those surpluses are in our insurance companies. And if you want to take it out, we first -- in most countries have to go the regulators to take it out, so that needs some time.

What we are going to do with it? We will try to grow the business in the countries we are in and some of our country units are growing pretty fastly -- look to Central & Eastern Europe and Spain, and Spain for instance, so we need capital for that. But apart from that, we are constantly on the lookout to do acquisitions that are good for us. So we would like to have the freedom to do smaller acquisitions without going immediately to the capital markets. If we see larger acquisitions that would be good for our shareholders and to build up on the expansion for AEGON, we would go to the market, and you are the first to know.

Thank you so much. I appreciate it.

The next question comes from Mr. Mark Cathcart. Please state your name, company, followed by your question sir.

Yes, Mark Cathcart from Deutsche Bank. In the UK, your volumes went up 50 odd percent. Your new business profits went up 20 odd percent. I just wondered what you could say was happening to margins, bearing in mind you are saying the growth is really in the wide margin areas, are you really aggressive in individual annuities?

Second question in the Dutch market, your internal rate of return, you keep telling us is good overall, but in the Dutch market it looks pretty atrocious. It's almost half the level of ING. I just wondered if you could tell us what's gone wrong and what you are hoping to get right on a going forward basis?

And in relation to that I have noted that the new business profits that you are generating in the Dutch market are about 4% of total, so I wondered if that really justifies you being a Dutch company owning a huge U.S. company whether there is a corporate governance issue here going forward.

And then finally, in the U.S., I think about 25% of your new premium is exposed to these old-age universal life. I just wondered if you could tell us what's going to happen to volumes in Q2, Q3, and Q4 and if we are likely to see nice rising margins as a consequence. Thank you.

That's quite a list.

No, it's only three questions.

So on the UK, there is an -- we have improved the mix of our business, so a 51% growth in new sales. You can't compare with the rise in value of new business, but since you see that the value of new business is rising in the UK, you are assured that we do that in a profitable way.

Surely, that suggests that margins are falling, though, doesn't it? It has to be margin fall?

We just explained the way that we have done the comparison against the VNB is against the quarter of the full-year results. We haven't shown a VNB figure for the first quarter. It's a quarter [in the full year]. And I think Joseph had explained earlier that 2004 Q4 was --

Okay. Can you tell us then for sure that your margins aren't under pressure in the UK in each of your three main lines of business?

Well, what you can see is that the IRR has moved from 11 to 10.8. And the great majority of that, in fact more than all of that, is as a result of the economic assumptions moving forward, because in 2006 we are using slightly different economic assumptions. There has been no change to margins at all. Most of the changes will be slightly positive in the UK. In the pensions area, the margin has risen slightly. I think the protection area may be marginally affected by reinsurance. But the overall margins are not reduced in the UK at all.

And you are not really aggressive on your individual annuity margins in the UK?

Individual annuity margins, Mark, it's a little bit more -- we priced that a little bit more aggressively in the past. But it's still been priced to produce very attractive margins, it's not -- the factor you're seeing there is purely as a result of the new business comparing Q1 against - the VNB prepared against the average of the full year divided -- that divided by 4.

Okay. So UK margins flattened? Great.

Yes. So on IRRs, I can understand that you are not very satisfied with the outcome of the IRR in the Dutch operation. There are some technical effects. Bill might explain that in a minute. But apart from that, you see that the Dutch market is a very competitive market and that the only way to increase VNBs more than 4% of total VNB for AEGON is to produce more.

And we have said that many times. We think that that organization should produce more. There are early signs of recovery, so 50% increase in new life sales. We expect group pensions to do well in the remainder of the year. It has nothing to do with being a Dutch company. AEGON NV is an older company holding many insurance companies in the world. So the connection you made between having Dutch operations and having a holding company in Holland has little to do with each other.

Bill, you have...

Surely, I mean we've been hearing this for a long time. You said we've heard it many times. When you say early recovery, it's really a very late recovery. It's being -- we've been waiting for it for four years. Is there some stage, if you keeping getting these sub cost of capital IRRs, you will pull out of this business or take more drastic action?

You can never exclude that, because we want return on capital invested. And I have said probably and it's published in some papers, but I think in more Dutch papers. You haven't read -- you haven't read it. But it will be a moment here if you take a few measures. If the plans that the Dutch organization now have for recovery would not work, but if we look to the plans and we see what the Dutch organization is doing to recover, we think we're on track. So we are not jumping to any conclusions.

And I add to that that the returns are -- they are below the hurdle rate, but they are not below the cost of capital like you suggested in your question.

No but they're probably not good enough to keep the guys in the UK and America happy, though.

But since it's in your words such a little operation, why do you care?

Carry on, the third question.

Okay. Yes, --

It's a serious question, though -- why aren't you an American company?

No, we are not an American company, because we fund our international operation from Holland. That's why we are not an American company. But you realize that we have a big American business and we even have an American CEO, so what is the problem?

Yes. It might just be more efficient from the valuation that can be appended to your assets.

I think if you study tax that you would come to another conclusion.

But because you aren't making anything in Holland it doesn't matter. No, no. Anyway, so the third question?

Well, let's first elaborate a little bit because that might help you a little bit to get a better view on the Netherlands. My part of the story was that IRR was suppressed, because we have some problems in the Netherlands in terms of production and competitive dividends. But there are also some technical factors that affected the IRR. Bill is going to explain that to you.

What actually happened if you look through our economic assumptions from two years ago, the Netherlands was, on an equity return and a risk free return, 8% and 4.5% respectively. If you move forward to 2006, that dropped by around 1.3%, as a result of just risk free rates dropping in the whole of the [Euroland].

Now what that means is, when your are pricing product, you tend to just reduce your discount rate accordingly. Well, that works fine and you price your products accordingly, but then what you see is your IRR automatically suppressed by 1.3%. Now in time you may be able to, if that continues, price against it but the short term impact is you'd see a lower IRR. Against that, if you looked across at say the United States, you would find out that their risk free rate was 100 basis points higher that the risk free rate in the Netherlands. So I think you have to allow for some factor there in the short-term in terms of its impact on IRRs.

All right, thank you. About the U.S. question, please.

Yes, on the new -- on 25% of new premium in the life is in the old age and your question is on our volume. Darryl, you have projections?

Yes. Hi Mark. It's Darryl Button from the U.S.

Hello.

Maybe what I can do is just help walk you through some of the decline here in the first quarter before I talk about the rest of the year. We've had to make some pricing changes here in the U.S. to reflect really two factors, the changing reinsurance cost that we noted towards the end of 2005, as well as we've had to tighten down some of our age band pricing in the older age market. And I think that gets directly to one of the questions that you are asking about.

And, unfortunately that has led to the decline here in the first quarter. As I look forward into the rest of the year, I am certainly not going to make any predictions because it's very hard to tell. There has been a dislocation in the market in the older age market here in the U.S. and others in the industry are facing it as well, and we are seeing a number of changes hit the marketplace right now. So honestly, I think, we just have to see it shake out over the next two quarters before we will really see what the go forward impact is going to be.

But it is 25% of your annualized premium in the States and I guess we should see some improvement in margin going forward, because my understanding is, you have managed to re-price 75% of your book already, most of the re-pricing action has taken place.

Yes, we will definitely see margin improvement going forward. In fact, we have already seen in the first quarter, particularly in that market the volumes are down but our values in new business and our margins are up.

But do you think there is going to be a volume recovery in the third and fourth quarter?

That's where it's very difficult to say and I am just not going to put a prediction out there. As I mentioned, there has been a distribution dislocation focusing on the older age market over the last 1 to 2 years. And it's an issue facing the entire industry right now and there is a lot of changes going on. I honestly I think it's going to have to be the second or third quarter before we see where sales shake out.

Part of your real strategy was growing the middle income market business that was launched about a year and a half ago. So surely that's really kicking through and helping support your volumes. I mean I just wondered if you could give us some sort of feel of how successful the push into the middle income market has actually been?

Well, it's certainly a growing initiative and we go after the middle market in a number of different channels -- our world financial group distribution channel, our home service business as well as our direct marketing and our worksite marketing operations.

We continue to make advancements on the worksite channel in particular and a lot of the technology platforms that we have been working on over the last year, year and a half are just coming to fruition now. So towards the end of the year I expect that to start to pick up contribution as well.

A year and a half in, can you give some numbers or quantification or percentage as to how you are growing in the middle income market from a base, I mean is there anything you can show us in terms of success?

There is nothing I have available for this call but certainly some numbers that we have thrown up on analyst days in the past, that's probably something we can follow back up with you on.

Thank you. Thank you very much.

Okay. Thanks.

Welcome.

Next question please.

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

Yes, hello. It is Nick Holmes at Lehman. Couple of questions, more questions on the U.S. please. The first one is, in Q1 the IRR on new business improved in the States versus 2005. Wondered if you could tell us a bit more about which products were driving this improvement?

And then second question on variable annuities, wanted to ask when do you think your two new VA products, the 5 for Life with Growth and the Income Select will be fully rolled out in your distribution channels and will start to have maximum effect on your sales? Thank you.

Well, Darryl, could you give an indication where we made the most profits in IRR without going to speak about every business line because we are not giving numbers by business line, but some things are clear, so. And on the VA, I think our 5 for Life product and Growth product is doing very well. You can read that in the numbers in the first quarter and also in 2005. So we have momentum there.

As I said, our Income Select product is well received in distribution channels but actually we have launched it by May 1, we cannot show you any results. But on the basis of the information we have got from our distribution channels, we are pretty positive about it.

Would you -- could I just ask, would you say that the 5 for Life with Growth is now fully rolled out in all of your distribution channels?

Darryl, is it totally ready or almost?

Yes. I think it's probably most of the way out there now as we released it at the just January 1st and we had it available for most of the channels right at the beginning in the quarter. So I think second quarter 5 for Life with Growth will be a good run rate quarter for that product.

As Joseph already mentioned the Income Select rider is just rolling out here early in the second quarter, so it will probably be third quarter before we get a good run rate of the two products combined.

Great. Thanks.

On the IRR question, are you asking about the IRR increase in the U.S., really I'll just give you the two biggest drivers of it. We had an increase a very strong quarter on institutional sales in the first quarter, which tend to be a higher internal rate of return, so it's a bit of a mix issue. And the second one is the issue I already mentioned to Mark, we have improved the value of the business in IRRs on our older age high network business on the life side.

Great. Thank you very much.

Okay. I would say some extra information on the 5 for Life with Growth that's still not launched in the banking channel. So it's not fully introduced yet.

Okay. And that's coming out –- what, it's still not --

I think they are working on it.

Right. Okay. Thank you.

Next question, please.

The next question comes from Mr. Duncan Russell. Please state your name, company's name, followed by your question sir.

Hello. It's Duncan Russell from Fox-Pitt, Kelton. The first question is on the embedded value disclosure. I was wondering if it would be possible for you to give me the assumed spread between the blended investment return and the risk free rate by market. So for example, in the U.S., what's the basis point difference between the overall blended investment return and the risk free rate? And then, the same for the Netherlands and the UK et cetera.

And then, the second question, I am not sure if this question is going to make much sense, but essentially, I was wondering if you hit your budgets for '06 and how do you see the free surplus developing in -- for the overall group. Do you -- would you anticipate the free surplus still going up or being stable assuming normal movement in equity markets et cetera? Thank you.

Well, the second question is a pretty easy one because budgets, as you know, Duncan, are targets, and targets for management internally within AEGON are high. So if everybody meets this target, the free surplus will go up. And of course, there's influences of markets, but in budgets you normalize that so if you talk about the budget with normalized assumptions for capital markets and managers meeting their targets, free surplus is going up. On the embedded value disclosure, there is an additional question.

Duncan, can I understand what are you looking for, you are looking for the credit rate addition across all the different country lines.

No I am looking for -- so if I look at the sensitivity table, you give one sensitivity, which is a 100 basis point reduction in the risk free rate, the discount rate in all asset class returns. And so I want to know the difference between what the overall blended asset class return is by market and the risk free rate please?

Okay.

We can follow up on that one.

We can follow up on that one. Yes, we can follow up on it.

It's possible to derive it from the numbers that we gave you, but it needs some calculations so Bill will call you.

Okay. Thank you.

Okay. Next please.

The next question comes from Mr. Marc Thiele. Please state your name, company name followed by your question sir.

Hi, it's Marc Thiele here from UBS. My first question is, could you give us the new business profit for life reinsurance for the first quarter, I think, we have the full year number, but it would be great to have the first quarter as well.

Then the second question also regarding embedded value, could you provide us with a sensitivity number, if I were to assume an unchanged interest rate instead of an increase over the next five years? And could you do the same for the spreads, which are also going up over a period of two years.

And then, finally, am I right to assume that the U.S. dollar sensitivity for the embedded value numbers is similar to the balance sheet?

Well under new business life reinsurance we have not published numbers line by line, but if you see what the life reinsurance market in the U.S. is doing and you see that production in life reinsurance is growing, you should not worry about margins. It is very safe to say it's up.

If I back out the sensitivities I am afraid we don't have these and there is a link here as well to Duncan's previous question, the CFO Forum set a consistent set of sensitivities across though market and we've actually cut back in a couple from last year which we would have done in the fixed interest. I think I can help Duncan, but it's not easy to give you the particular one you want. I will go away and think about it, and I will maybe give you a call but it is quite a difficult sensitivity.

Well, U.S. dollar sensitivity is that close to the IRFS sensitivity? I think so, we have not tested it, but the difference cannot be much.

Okay. Thank you.

Okay.

The next question comes from Mr. Christopher Hitchings. Please state your name and company followed by your question sir.

Yes. Hello, it's Chris Hitchings from KBW. I think most of the U.S. things have been done to death, but can you tell me, get me though this provision release in Holland on the equity guarantees. What assumptions do you make going forward on the basis of this moment as this provision has been released? And so what metrics should we look at to see whether further provision will release going forward, first question?

Second question again, reading your sensitivities in the embedded value announcement. You've changed the wording of some of them, i.e., 100 basis points decrease in risk free rate, all asset returns in RDR. Does this mean that the actual methodology's changed or have you just explained what you were doing before more accurately?

Let me take first one and Bill the second. In Holland, if you follow IFRS according to IFRS 4, you have to follow local regulatory prescriptions for valuation. In Holland the Dutch central branches are regulator and they are pretty cautious because they use risk neutral rates to come to reserves for guarantees. In 2004 and 2005 interest rates in the Netherlands fell to a critical level because many of the products outstanding have either guarantee of 3% or 4%.

So that means that the 4% guarantees are in the money and the 3% have an increasing value. That's the reason that you saw us make reserves, especially in 2005. Today, interest rates are above 4% and that means that almost every one of those guarantees are out of the money but not without value. But if you ask me then, what is going to happen if interest rates go up further, will you see the same kind of releases, the answer is no because the higher the interest rates go, the more out of the money our other guarantees that we have issued to our policy holders. So that will be at a much slower rate.

Yes. But, so you haven't released all the provision?

No.

No. But the same change in interest rates going forward will release much less provision than is in the first quarter.

You need to -- you need much more than 100 basis points rise to have a release of 200 million. Yes.

Thanks. Thanks much on that.

Your question on the wording, some of these wordings have changed to be consistent with discussion through the CFO Forum and for example, the one you talked about, decrease in really all asset returns. The reason we've dropped next in proxy was just to cut down on the wording there.

But I think that's a different sensitivity than before because the risk discount rates have been combined with the movements in the markets and the discussions the CFO Forum had with analysts [thought] that that was the number to be used and that's why we've actually made a slight adjustment this year. If there's [the impact] that some different numbers would be required I think that's something we could bear in mind for the future.

Yes. Bear in mind for the future but the CFO Forum decided not to change how we approach embedded value before the end of 2007.

Okay. Now but, in that case, I might have misunderstood this, I mean my reading was previously you were the only one who really did do what the CFO Forum said and others haven't.

No. No, I wouldn't say that. The only thing I can say is that the CFO Forum amendment last October issued amendments of publication disclosures for 2006 embedded value. We implemented them a year earlier.

Right. So these are next year --

Next year, it's compulsory for all our members.

Okay. Fine. Thanks, thanks very much indeed.

The next question comes from Mr. Max Broden. Please state you name, company, followed by your question, sir.

Hi. It's Max Broden with DnB. I've got two questions and the first one is if you can elaborate a little bit more on the 41 million of a Canadian segregated funds revaluation within the VA business? And the second one is on the net sales in the first quarter, which dropped 27% on variable annuities versus the first quarter of 2005.

And I am just wondering, is this due to the old block of business now coming off surrender charges that is triggering withdrawals -- is that why we see net sales not increasing as much as gross sales?

[Inaudible] we look it up the other one.

Yes. Max, what are you referred -- we're looking at the book on variable annuities and that's been growing every quarter over the past 5 quarters.

Yes. I'm looking at the net number on page 26 of the release, where it was net number last year 199 million and this year it's 146.

It's a net increase.

So it's a net inflow, but a net inflow is lower than last year. I would have expected that to also grow in line with the gross deposit.

Yes, but I think that compared to the first quarter, that surrenders are up a little bit.

But is that due to old business from sort of pre-2002 business that is increasing because they are now coming off surrender charges?

I think we will have to look into that and follow up unless Darryl has a more specific answer right away.

Okay.

Max, I mean I think that's generally true. We have seen the lapse rates on the VA's kick up a little bit and it is from older business coming out of surrender period. You also asked about the segregated funds, if you like me to, I can --

No, no, that's okay Darryl.

On the seg funds?

Yes.

Darryl?

Yes, oh sorry.

Are you taking the one on the seg funds?

Yes, I mean it's part of the fair valuation that we do, the seg funds are carried at market value. The valuation is very volatile and very exposed to what risk free rates do. And in the quarter the risk free rates in Canada jumped 24 basis points I think. So that's the primary driver of it. It's a very volatile calculation quarter-to-quarter.

Okay.

Okay.

Thanks.

Next please.

The next question comes from Mr. Albert Ploegh. Please state your name, company, followed by your question sir.

Yes, good afternoon. This is Albert Ploegh from Kepler Equities. I had a question on table 14 in the embedded value booklet. In 2005 you're now separating reinsurance, new business value from the traditional life. Can you give the comparable numbers for 2004 and maybe say something about the IRR on the reinsurance book, which is one of your growth drivers.

Well, we did not separate the business in 2004.

We did not -- Darryl.

I have that split. The value of new business on reinsurance in 2004 was 61 million.

61, okay. Is it possible to get some feeling of IRR on that business?

Yes. I have that too if you just give me one second.

While Darryl is looking that up, we can --

We will come back to that question. We are looking it up, should we take the next one first.

Next question please.

While we are waiting for the next question, I have the answer. It's 14.9% for '05.

Okay. Thank you.

Okay. Next please.

The next question comes from Mr. Ton Gietman. Please state your name, company, followed by your question sir.

Good afternoon. Ton Gietman, Petercam. I am somewhat puzzled by two tables in the press release on page 25 and page 28. On page 25 you have the consolidated profit and loss account. And their fair value and foreign exchange gains are tenfold the level from a year ago. I wondered if you could explain what exactly is included in these numbers and to what extent –- you mentioned before in the presentation that your swaps because interest rates moved up became less in value, I would have imagined a negative figure here. Perhaps you could explain how that's, how can I reconcile that. On page 28, you gave the gains on investments, which were negative, I assume that there the negative effect from the swap is included. Is it possible to break down this gain on investment and what has happened to equities, bonds and what other instruments there are?

The last question is first confirmative, the swaps or the valuation of the duration swap is included in there and that's a negative number. We gave a split once a year; we did not do that in the quarterly report and as you know, in the Netherlands you are not doing any separate disclosure after you did a press release. So I keep my mouth shut.

Okay. So we can close the call now?

No, because -- there is a lot explanatory remarks I can make and I am fully prepared to do that but I am not going to do a disclosure. The fair value and foreign exchange gains went up because the valuation of the life for that kind of policy holders is running through that line. So and that goes up and down; sometimes you see even negative numbers if you go a couple of years back and this year, you see a positive number because of the movement in the capital markets.

I thought that was the next line, not total gains on investments.

No, total.

The next line is showing an even bigger jump, at least, in absolute terms. I thought there you would show up the value changes related to life of policy holders?

Let me see -- let me look to the spilt. Total gains on investments. We'll come back to that, Ton.

Okay. Thank you.

Next question please. Room for one more.

The last question comes from Mr. [James Garner]. Please state your name, company, followed by your question, sir.

Hi. It's James Garner from ING. Two short questions. Firstly, about 18 months ago, you talked about chopping headcount in the Netherlands by about 15%. I haven't heard anything on this recently. I just wondered if you could give me an update with what progress you've made, and also, please could you give us some planned cost savings on it?

And secondly, a broader question. Are you going to announce any restructuring or profit improvement programs? I mean, especially given, one, your relatively high IRR -- low IRR in the Netherlands, secondly, the raft of efficiency gain announcements we've seen by some of your European competitors over the last six months.

And also, finally, the fact that your life administration expense ratio, which I firmly believe should be comparable at the group level, is considerably higher than your European peers –- it's about 2.4 times higher than the best -- than the top quartile performers and it's twice as high as Prudential?

Okay. Well, 18 months ago we made an announcement that AEGON in the Netherlands would restructure its business and would end up approximately with 15% lower number of employees. In that restructuring process we added to that -- also at that time, we needed some time to do the restructuring because we restructured all the organization, the big decentralization that we had in the Netherlands was taken back. We have concentrated on distribution. We have to change our IT systems.

And in terms of cost savings, you do not see much. Although with all those efforts, it's not really rising over the last 18 months. In terms of employee and employee cost, you see that it's not getting any lower at this moment of time. And the reason is that employees that we have for an unlimited term is already much lower than it was two years ago, but that we have a lot of temp aid, qualified temp aid to help us to implement the restructuring. So I ask for a little bit patience, but the restructuring is going on and will end in savings.

And that's necessary, because if you look to the IRR, you are totally right, that should go up. To compare life administration to numbers you see in Prudential is not totally honest because the types of production of products in the UK and in the Netherlands, they are not comparable at all. So to say that if you are in the UK business you are in the first quartile and if you are in the Dutch business you are in the third quartile is not a totally honest comparison.

There will be substantially more detail on expenses at the Analyst and Investor Conference in two weeks, James.

Okay. And just to come back, I mean the Prudential figure is one isolated example. If I look at about 40 European insurance companies and their life operations, you're still considerably higher than the rest of them.

Well, let me --

And I have heard no explanation.

One remark on the Netherlands. So we accept criticism on the low IRR, and everybody can see that. And the Dutch organization has to work on that and has improvement plans. But what we did is we benchmarked across levels of the Netherlands to the other Dutch insurance industry, and we belong to the best -- first quartile.

To be fair, there's a small peer group, and also one of the biggest is having a restructuring program. And secondly, I think we should be benchmarking at a group level, especially in a world where you can outsource on to lower cost operations within the group. We're talking about admin here.

Yes, that's a fair statement. But then you have to benchmark product line by product line in a country where you are busy and not -- you cannot compare the one company with the other. Some people have more business in Asia and some are more in America. What we do is we benchmark our expenses country by country and product line by product line. And if you look to the Netherlands, we belong to the most cost efficient [serving] according to that benchmarking. And it's clear that if you have people behind us that they are restructuring as well.

But why aren't you outsourcing the Netherlands onto lower cost territories within the group? I mean Zurich Financial outsourcing the administration of their Swiss Group life policies onto their more efficient lower-cost German operation?

You missed probably that we were the first to outsource our IT in the Netherlands, and we did that four years ago.

What were the cost savings?

There were cost savings at that moment. And costs are rising to a lesser extent because of that. But we were one of the first that outsourced the part of our admin business in the Netherlands.

I mean, the high expense ratio would certainly indicate that at a group level that's more to come?

Well, we go into that. We are ready to discuss it with you in London, and I hope you will be there.

Certainly will.

Okay. Thank you.

Bye.

Well, ladies and --

Keep on. We'll get back to Ton Gietman separately.

Okay. Ton, you will get a call. We'll come back to you separately. Having said that, thank you very much for your interest in AEGON's first quarter results and embedded value numbers of 2005. We all hope to see you in London, and I wish you a good day.