Aegon Ltd (AEG) 2007 Q1 法說會逐字稿

Welcome to the first quarter of 2007 results and embedded value 2006 Analyst and Investor Conference Call on the 9th of May 2007. (Operator Instructions) I will now hand the call over to Mr. Jos Streppel. Please go ahead, sir.

Welcome. Good morning. Good afternoon. Thanks for joining us for this discussion of AEGON's first quarter 2007 results and our embedded value for year-end 2006. I am Jos Streppel, AEGON's CFO and joining me today are Michiel van Katwijk, Executive Vice President, Bill Robertson, Group Actuary and Darryl Button, CFO for AEGON USA.

Let me start by giving you a brief overview of some key developments. We will then discuss the results in greater detail along with our embedded value results for 2006. We will, of course, conclude with your questions.

Let me remind you to please review our disclaimer regarding forward-looking statements and I'll go over to the next slide. Let me just say at the start that we had unreasonable first quarter. Profitability continues to be a top priority and this was demonstrated by the particularly strong increase in value of new business, which was up by 42%. As you remember we announced a target to double AEGON's value in new business to 1.1 billion euro by 2010. Clearly our businesses are making good progress towards that call.

Also DE, internal rate of return for the Group increased to 17.9% during the period and we are especially pleased with the progress at AEGON the Netherlands where the IRR exceeded our hurdle rate. New Life sales were also strong with a 20% increase for the Group due to a record sales quarter in the U.K. and Poland. In the Americas sales were solid during the quarter. The development in net operating earnings was matched by a couple of key factors which I'll come back to in a moment. As we discussed with you during the last call, we have continued to make good progress on our strategic objectives involving further international expansion, strengthen distribution and the growth of our pension business. Next slide please.

I would like to say a word or two about the decline in net income during the quarter. Net income includes the impact of our pretax revaluation of derivatives used for our business in the Netherlands. These derivatives are used for asset and liability management purposes. We began hedging guarantees for our traditional life products in the second half of 2006. Under IFRS these hedges are qualified as economic hedges. This means that in essence that we cannot apply hedge accounting and that fair value changes of the derivatives are not offset by fair value changes in the liabilities in the P&L and so in the first quarter of 2007 you're only seeing one side of the coin and it appears to be negative. But we are doing the right thing from an economic perspective. In short, the 258 million euros changed our fair value of the derivatives as a negative impact on results but it is a non-cash item. And from an economic perspective it is offset by changes in liabilities, which you do not see in our P&L under present IFRS.

Let me now turn to net operating earnings for the Group. It's important to keep in mind that in the same period last year we had a significant release of provisions for guarantees for unit linked products in our [death] business as a result of rising interest rates, EUR205 million to be exact. We also experienced the effect of lower returns on all fair value items. We also experienced the effect of lower returns on all fair value items in the Americas during the first quarter. I'll come back to individual country units in a few minutes. Next slide.

As this slide makes clear, the underlying development of operating earnings was essentially strong with an increase of 25% excluding currency effects of EUR32 million. In the year ago period you see the benefit of the release of guarantee provisions as well as the earnings impact of fair value items. The first quarter of last year saw a EUR205 million release of [currently] provisions for unit linked products in the Netherlands whereas in the first quarter of this year we recorded a charge of EUR19 million. Also in the first quarter of 2006 the earnings impact of our value assets were EUR166 million, significantly above long term normalized expectations. In the same period of this year these assets contributed EUR93 million. Excluding these factors, operating earnings actually increased by 25% quarter-over-quarter with favorable mortality and morbility in our life and protection business in the Americas, improved technical results in the Netherlands and the positive effects of business growth across most regions.

We now turn to AEGON's value of new business results for the first quarter. The 42% increase in value new business for the Group reflects strong results across our businesses, particularly in the U.K. where value in the business increased by 87% due to both higher production and a more profitable mix of business. The 67% increase in the value of new business for AEGON the Netherlands reflects a change in the sales mix while the 36% increase in the Americas is primarily the result of higher sales to institutions. 20% of the Group's value new business came from other countries. We were especially pleased with the results in Europe where we experienced strong increases in new business from our bank partnerships in Spain as well as very strong sales in Poland. The lower value new business in Taiwan was the result of a decline in sales volumes, mostly due to reduced sales of traditional products and also lower margins from a decrease of a assumed investment returns.

The currently internal rate of return for the Group, which is an important measure, the 17.9 internal rate of return on new business compares to 14.7% in the first quarter of 2006. As we have said in previous quarters, we do not expect our IRR to stay at the current level given that it's well above our 11% minimum hurdle rate. As I mentioned already in the beginning, the improvement in the Netherlands was in particular highlight. The Dutch organization achieved 13.4 IRR, which reflects a change in the mix of business during the quarter. However, this level is not sustainable as we expect a change of sales mix but we do expect to be above our internal hurdles rate of 11% for the full year. Returns in other areas remain above targeted levels. The improved return in other European countries reflects a particularly high return for Spain resulting from new business sold through our two new bank partnerships. The IRR for Asia declined to 13.2% versus 20.5% in the year ago quarter, a result of the impact of lower assumed investment returns.

On April 27, as you know, we introduced a new method of reporting. AEGON will report its operating earnings using a new line of business formats. Let me emphasize that we are not restating our audited results. Prior to January 1st of this year our segment reporting was based on product characteristics, also within geographical areas. Going forward our geographical reporting will remain the same. However, instead of product lines, such as traditional life, fixed annuities, comparable annuities, AEGON will report its result based on the way we manage our business and we think that that's might enhance transparency into our operating progress. I should note that on April 26th we also published our first financial supplement. This document includes all of the previously issued 2005 and 2006 quarterly results, so that makes 8 quarters, using the new line of business reporting formats. And now with today's results you will have 9 quarters available and we do hope that this will be useful for you in developing trend analysis.

Turning to sales for the Group, during the first quarter we experienced a significant growth in both new life sales as well as for deposits. The 20% increase in new life sales was driven by record sales in the United Kingdom and in Poland, which has been another record quarter as well. Our BOLI/COLI sales in the U.S. also boosted our results. Deposits were up by 21% for the Group as a result of a 6% increase of pension deposits in the Americas as well as solid results from our pension businesses internationally. Institutional guaranteed production was up by 66%.

Let me give you a little bit more context for what is happening in our country units. In the Americas net operating earnings in U.S. dollars were up 3% against the year ago quarter. As I have mentioned at the start, returns of all fair value items were lower compared with a very strong performance in 2006. Despite that decline, returns on these alternative assets remain above our long-term expectations. Excluding these fair value items, which as you know tend to be volatile period to period, operating earnings before tax increased by 12%. Earnings derived from our pension business in Americas continued to be strong with an increase of 24%. Assets under management increased driven by both positive net cash flows and favorable equity markets. Life and protection earnings improved due to positive mortality experience and continued growth in the [in-force] business. Total new life sales which include retail life, BOLI/COLI and reinsurance, were up by 15%. Excluding approximately $30 million of investor owned life insurance sales in the year ago quarter, new life sales increased by 29%. As you know, we discontinued selling investor owned life insurance in the second half of last year.

Moving to the Netherlands as I mentioned earlier the decrease in earnings reflects the effect of a EUR205 million release of guaranteed provisions for unit linked business in the first quarter of last year due to higher interest rates. New life sales were disappointing given the decline of 21%. The change is mainly due to lower sales of unit linked products where there has been some controversy in the marketplace regarding these products. Accident and health sales declined compared to the first quarter of 2006 when the introduction of a new visibility product contributed to very robust sales. I have already mentioned the 67% increase in value new business in the Netherlands and, of course, we were very pleased by the improvement of the IRR of our death business, which met the Group hurdle rate. I should note that all lines of business in the Netherlands reported an IRR above our 11% hurdle rate. The current IRR is probably not sustainable for 2007 as a whole as we expect the sales mix to change over the quarters.

Next slide to the U.K.. In the U.K. net operating earnings increased by 25% in local currency. The increase reflects both growth in our pension and non-pension businesses. Those non-pension businesses include annuities, investment bonds and individual protection products. Sales of new life products were particularly strong, up by 37%, resulting in another record quarter. the increase reflects strong growth across most product lines. Pension production post [A day] showed a decrease in our Group business but the decline was offset by increases in individual pension business. I should point out that sales of individual pension products in the U.K. have achieved eight consecutive quarters of growth. The internal rate of return in the U.K. continued its upward trend improving to 12.5%. The increase was a result of higher pension sales, cost control and a change in business mix towards more profitable products. This, of course, contributed to the 77% increase in value new business in local currency for the quarter.

AEGON's businesses in other countries, which include Central and Eastern Europe, other parts of Europe and Asia, achieved a record quarter reflecting the progress of our businesses in these important growth markets. During the quarter our pension business in Slovakia achieved profits for the first time. The number of registered individuals in our pension fund there is now over 200,000 members. New life sales in other countries increased by 24% and this was a result of high single premium production in Poland and also from significant growth within our [bank assurance] joint ventures in Spain. Value new business for other countries increased to EUR47 million or 20% of the total value new business for the Group.

So to conclude, AEGON's first quarter earnings and value new business results are what we think very reasonable. Our business achieved strong increases in value of new business and for other improvement in the internal rate of return. On an underlying business operating earnings were strong with a 25% increase excluding the effect of guaranteed provisions and earnings from fair value items as well as currency translation effects. Both standardized life sales and deposits for the Group were strong with a 20% and 21% increase respectively. Therefore, in short the fundamentals of our business remain strong.

Let me now briefly turn to AEGON's embedded value for 2006. There go to the first slide of the embedded value segment, highlight embedded value 2006. Total embedded value for 2006 increased by 8% to EUR22.6 billion. The increase was hampered by the impact of the weakening U.S. dollar. On a constant currency basis the increase in total embedded value would have been 13%. Adjusted for the estimated value of AEGON's preferred shares the total embedded value per common share amounted to EUR13.29, an increase of 7% from EUR12.39 per share a year ago. Excluding the currency movements the increase is 13%. The embedded value life insurance was nearly unchanged at EUR27.5 billion. Key factors were a solid performance of the in-force book and successful new business growth offset by currency effects.

There are, as you know, different ways in the life insurance industry to measure the embedded value operating margin. For instance, we do not include investment return variance in the operating margin. Consequently we provide both operating margin and total margin. The embedded value operating margin, which is calculated on a constant currency basis, increased to 11.2% primarily reflecting improvement in the Netherlands. The embedded value total margin, which reflects a total change in embedded value life insurance excluding capital movements, fell to 7.4% and that decrease primarily reflects the currency movements.

This slide shows what impacted the changes in our embedded value life insurance. In addition to a solid in-force performance and higher value new business, better than expected investment returns also benefited the embedded value life insurance. On the negative side, the weakening of the U.S. dollar against the euro decreased embedded value life insurance by EUR1.7 billion and net capital movements out of the life operations reduced embedded value life insurance by a further 2.2 million. Net net embedded value life insurance was stable over the year.

To conclude, our businesses are performing well on an operating basis with increase in embedded value reflecting growth across most country units. We continue to benefit from our strategy of writing profitable business. This was evidenced by the growth in value new business in both AEGON's established and developing markets as well as the internal rate of return level achieved by all country units.

Before we take your questions let me remind you of our Analyst and Investor's conference that is scheduled for May 22 and 23 in Amsterdam. If you have not yet registered, please take the opportunity to do so on our conference website. Thank you very much.

We are now open for your questions.

(Operator Instructions) The first question comes from Mr. Nick Holmes. Please state your company name followed by your question.

Yes, it's Nick Holmes at Lehman. Jos, I guess the question everybody is burning is burning to ask is how would you guide us to forecast the sensitivity of this Dutch hedging program? Is it linear or asymmetric and why aren't you more concerned about the effects that this has on IFRS earnings?

The question, Nick, thank you very much. Nothing in the world is totally linear but it's fair to say that if interest rates go up that fair value of that derivative would be negative. I understand your concern. We are looking into that whether we can find solution under the present IFRS to do what is economically right without causing that volatility in the IFRS numbers. I feel with you. It needs a lot of explanation but keep in mind that it's the right thing to do economically.

But when you put this in place last year what was your thinking in terms of IFRS? I mean you did not seem to care too much about the impact on IFRS. I'm just curious as to your thought process there.

Well, it's in sequence of decision taking. The decision to take that derivatives was taken by the Executive Board on the advise of the Group Risk Committee. We did some analysis on accounting effect and we underestimated them.

Right, right. I mean it would be very useful if you could give us an indication of sensitivity. I mean from Q1 it appears that for every basis point movement there's about 20 million impact. I mean--

No it's lower, Nick, because in the-- I think that in your analysis you are adding up to 205 and the 258. It's lower. If you cannot find the solution for this volatility under the present IFRS, it's more like 10 million and 20 million.

So it's-- so for every basis point move it's about 10 to 20 million you say?

No at the low end of that rate, of that range. It's closer to 10 than to 20.

And so what happens if interest rates continue to rise this year? I mean how should investors view this?

Then you will see major effects on the IFRS while knowing if you do the analysis that there is a set off in the liabilities that is not going to run through the P&L so that economically there's nothing happening and our IFRS numbers will be distorted but that we will find to seek a solution.

So but you will find a solution?

We'll try to find a solution. We are busy with that.

Okay just related to this I wondered if you might be able to provide any more sensitivity analysis on the other IFRS volatile items? You provide very, very helpfully I may say an appendix on guarantees and related hedges but it would be tremendously useful for investors if there was more guidance on the sensitivity of these items. Is that something you might also be addressing in the future?

It will be a pleasure to look into it if we can give good guidance to all of the market we will certainly do so so I promise you to look into it.

[Duncan Russell].

It's [Fox at Kelton]. The first question is on the variable annuities in the U.S., which were still pretty stagnant and not showing much growth quarter-on-quarter and I know you've invested heavily in distribution. I'm just wondering what's going wrong there and how long-- how much longer will we have to wait until we get some real momentum in that product? And the second question is on the institutional business, which had very strong sales in the first and second-- in the first quarter, and I was just wondering how sustainable that is and what-- I know it's lumpy business but I'm just trying to figure out has there been a change which has caused the level of sales to jump up and rebase? And then the same question really for pension products? Thank you.

Okay, Darryl? You are on the line?

Yes I am on the line. Hi, Duncan. It's Darryl Button in the U.S. First, I guess on your VA side as you're well aware we've had a VA wholesaler build out strategy going on for a while now and that's been focused in the broker dealer and warehouse channel. I would say in that channel we are up 20% on a year-over-year basis so clearly I think that that execution is there and working. I would say though it is a little lumpy as you go sequentially and to give you an example in the last quarter we brought in a new national sales manager and we reworked some territories and we had a little bit of turnover and so we were left part of the quarter with some open territories and we've moved quickly to fill those. So I am actually fairly optimistic as we go forward so I think that that helps explain some of the flat sequential quarter.

I would also say that we're moving that strategy. We moved about a year and a half ago to go to a multi-product wholesaling strategy and split our wholesalers apart from the VA and the mutual fund and we're moving that strategy into the bank channel now going forward so we're going to look to see to get some growth there going forward. So I think the strategy is there and working and building but we will run into periods where we do some internal reorganization or shuffling of territories that causes short-term disruption. I think that's what we saw in the first quarter.

It's been flat since the second quarter of 2006 so it jumped in the second quarter of 2006 to about a 320, 330 run rate per quarter and then it's just been flat since the second quarter so the comparatives is 20, 10 up first quarter, first quarter but second quarter if you continue this flat run rate it's not going to be 20, 10 up. It's going to be flat.

Yes and I think a lot of that does speak to some of the territory reshuffling that we've been doing and we had an initial jump, as you mentioned, early on back towards the middle of last year. Since then we've been reshuffling some of the territories and we brought in a new national sales manager and as we went into the fourth quarter and into the first quarter we did pull some of the wholesalers back into some national I would say sales strategy meetings and so that took a little bit of focus off. But I think we're optimistic in that channel as we look forward into the rest of the year but we'll have to see how the year unfolds.

And what's the issue? Why-- I mean it sounds like the way you describe it it sounds like it's mostly you guys just reorganizing your strategy etcetera and it's nothing to be fundamentally concerned about but I mean is there something in which the issue if you were to say is a big issue for them with your products?

No I don't think so. I mean I think that the tone and messaging we're hearing from that channel is pretty positive right now. I think at any time when you expand quickly-- you know, we hired a lot of new wholesalers in a short amount of time. The reality of those, several of them work out well and some not so well and we have to re-strategize. Not a word, we have to go back to the table as far as strategy and reshuffle territories and refill those openings and, as I mentioned, the new national sales manager that we brought on board towards the end of last year we think is going to make a difference. So I think we're optimistic for the rest of '07.

I think I'm also optimistic as we move that strategy into the bank channel as well that we'll get some lift there so we'll have to see. It's a very competitive market place with a lot of good competitors and a lot of tight competitive products. We think our product plays well. We're optimistic but if anybody is grabbing a lot of market share quickly in that market place they're probably doing something they shouldn't be doing.

The institutional sales we had an above run rate quarter. I think in the first quarter I would not look for that to be sustainable going forward. We hit on a number of fronts in our institutional spread business. I think we'll return to more historic norms as we go forward so I would not look for that to be sustainable.

The pension probably is a little more sustainable although seasonally we do tend to see some high production typically in the first half of the year. Following on there's typically a one to two quarter lag from when a case is written until the deposits fund and we tend to see a push towards written sales in the back half of the year with the follow-on deposits coming in the first half of the year.

[Zenon Voyagis].

It's Zenon Voyagis from Merrill Lynch. I've had similar questions with Duncan but I do have two follow-ups if I may. Firstly, on the institutional business you had very strong sales but I am very surprised. There hasn't been much of an effect on profits. If I look at your PVT for the first quarter, it's been exactly flat on the first quarter of last year. I just wondered if you can give us a bit of color here and how we should look at the profit progression? And on the variable annuities I noticed a small uptick in your lapse rate from 8% in the third quarter moving up to 10% in the first quarter of this year. I just wonder if you can give us a little bit of more color on this and whether you see that stabilizing or possibly moving further on from here?

Darryl, you can do the follow-up as well?

Yes I think I got them written down in two questions. One was on things--

Yes when are the strong sales in the institutional business reflected in earnings is one and the second one is about the [detriment] rate in variable annuities. It has gone up a little bit. It has to do with the competition of the Group but if you follow it up?

Yes institutional earnings, I mean it does take time for the earnings to emerge spread based business so that the earnings will follow the growth in assets under management. There were some-- part of the high production that we saw was replacing some of shorter term liabilities that were rolling as well, so not all of that production goes to net asset under management growth so that's part of it

The other part of it is that there were some higher things in a prior period from some of the assets that we carry at fair value volatility. [It's in] on a year-over-year basis. They, generally, the underlying earnings will grow with asset under management growth or spread business.

Any lapses, I think we're just seeing the natural maturing of the business. I don't think there's anything for us to be worried about it in particular. It has caused us to have a small net negative flow, our VA business, but a lot of that is just book of business five to seven years ago, which is just coming out of surrender charge.

Hello, sir, does that answer your question?

Yes, that's fine, thanks.

Thank you. The next question comes from Mr. Mark Cathcart.

It's Mark Cathcart from Deutsche. Wondered if I could turn to page 5 of your presentation. I just, just think that you guys are working backwards because on this slide you actually give a number, which is meaningful, the 614. So I'm wondering why you don't do what [AXA] does which is release the numbers pre all of the IFRS funnies and hedges and give those to us as well as the IFRS numbers so you don't have to waste your conference call explaining how it works and we don't have to waste our time trying to work through the numbers, and then the risk premium attached to the share should actually decrease because we don't panic when we see these numbers? Just wondered why you don't do that?

Well, the reason that we don't do it, Mark, is a very, very simple one there. In our legal department there is some doubt whether you can start a press release with non-U.S. currency, non-GAAP items.

What you can do is you can start the press release with your IFRS but encourage the analyst and investor community to look at numbers which have got economic validation, which maybe you have on page 2, page 3, even on the last page, you know numbers that we can actually use without guys like Nick having to work out what 1 basis point of interest rate moves, which makes no difference to the economic value of the stock. It's just stupid. So that would be my first point.

Second point is the presentation seems to focus on the new business profits and generation and so forth. If I take your new business figures and adjust for discount rate closer to a typical cost of capital for an insurance stock-- maybe, say 9.5, 10%, then I get to a figure which is about-- not the 775 that you show but closer to about 450, 470 in other words for the full year. So, in other words the value of new business is basically representing about 20 to 25% of your total profit base. And so, I just wondered if you could focus more of your presentation and information that you give us on the other 75% of your profits, and by the same token whether we could actually get some sort of earnings target based on that 614, which I guess annualizes say 2.4 billion, some sort of earnings feelings for what you believe you can achieve outside of new business profitability?

Well, whether you discount the value of new business with 7.8% to 8% or 9 is certainly at your discretion.

No, not really. It's the choice of the market, and the market clearly chooses a higher rate. Otherwise your share price would be much higher. But the point is the cost of capital for the insurance sector seems to be about 10%, so that should be the starting point.

If the cost of capital would be 10%, you may be right, but I think that the common feeling is that it's a little bit lower, and if you take a cost of capital that is higher than we do now, you should change your investment returns as well.

No, because the investment returns and interest rate is at 4.6. You can't make the interest rate go up.

No, no but, but there's a return for credit; there's a return for equity, and those things change down as well if you change the discount rate. So it's not that easy that calculation. But whether you using a higher discount rate or not, is to your discretion. Targets on IFRS are pretty difficult.

I said on that 614.

If you go to the underlying development, then it gets easier, and we have all the set up fee that we intend to grow on the longer term. Operating earnings undone from all those fluctuations were 10% a year.

Yes but we don't know what the base is. We never know what the base is if that's on net income. It's just so unclear what that base is and what the duration is, if it's like a ten year cycle, a five year cycle.

I agree to that and that's pretty difficult because our mix of business is between products that have a duration of 1 year till 50 years, so, that's a pretty difficult calculation.

And then finally, I've just got a quick question on the Foundation. I think the Foundation is designed to protect the interests not only of shareholders but also of policyholders and employees of the Company.

Correct.

Bearing in mind that the bulk of policyholders and employees are now outside of the Netherlands in comparison to when the Foundation was first set up, I notice that almost all of the members of the Foundation are Dutch, Dutch industrialists, economists, intellectuals, people in financials. I just wondered if there was a case for the actual membership, that the 20 membership of the Foundation to now become more Scottish, American or European or Asian to reflect more fully the actual employee and policyholder base of the Netherlands?

You could, you could address the Association for that. There is no block on any nationality, but you have to keep in mind that the members of the Association are not representing policyholders or staff.

No, but the Foundation does, and you have got a Board of the Foundation and, again, the Board six of the seven or if you count Donna's half-- six and a half of the seven are again Dutch nationality.

Which is true and there is no block on any nationality so you should address the Association and ask in the future with appointments for more internationalization of the Association. I am pretty sure--

Okay, so--

The Company as such would not have any objection to that.

So if we go to the other issue of the Foundation, that they own 11% of the ordinary shares, but somehow it goes up to 33% and therefore blocking bid if somebody tries to make a bid for the Company, which I guess is a bit unfortunate for the other 89% shareholders, how would the shareholder base or how would an individual address the Foundation? Is it that they have an AGM? Can they have an EGM? What is the process to actually address the Foundation? You said we can address the Foundation. How do we do that?

They have a website and they have a postal address but they have no AGM because it is not a public company. It's a Foundation.

And you're one of the seven?

I am one of the seven with a very restrictive vote. If there is a conflict of interest between my shareholders and the Association, I have no vote, and you can read that on the website. And the 11% you compare with the 89, you have to bear in mind that the Association is holding preferred shares, but that they paid the full economic value for those shares. They paid in 2002, EUR10, exactly the same amount for a preferred, for one preferred share, as for an ordinary share at that time

And that gives you 22%, but I still don't understand the logic, why it shoots up to 33%?

That's the only protection measure that AEGON has.

But it's a significant one.

And that it is for a limited period of six months. And it's the only thing we have and whether you go to the U.K. or the U.S. or other companies on the continent of Europe, there is very little protection.

Okay, thank you.

Andrew Hughes. .

Sorry, hello, hello. What's going on?

Hello, Mr. Hughes.

Hi.

Your line is now open.

Sorry, hello. It's my fault. Just a quick question really about the increase in the institutional business, and so it's Andrew Hughes from J. P. Morgan. I'll ask a question on the institutional business and its growth. It seems to me that you're growing the institutional business to replace the falling and lapsing fixed annuity sales and I was just wondering how the rating agencies view this, principally Moody's, who has a AA, sorry AA3 rating on you? And I'm aware that obviously the rating agency view institutional business as potentially more risky than the fixed annuity business that's leaving. So, I was wondering whether we could see if growth in this line continues and what the limits on capacity is?

Okay. We have our Treasurer here, and he does that kind of conversation with the rating AG on a constant basis, so he's very proper to answer.

Hi, Andrew, it's Michiel van Katwijk here. I think the limits that rating agencies like Moody's are, are tracking is based on the assets of the business or liabilities of the business, not so much the sales of the business. And if you look at, for instance, what happened last year during the year or in the first quarter, you see actually that withdrawals on the institutional spread business are relatively close to the deposits so that, in fact, if you look on a dollar basis the business has grown but with much less than the sales figures would suggest. The limit is based on assets and I think generally what the Moody's has communicated publicly in the past is that that limit would be around 30% of general account assets. We are substantially below that number.

Okay, well thank you very much.

You're welcome. Next please.

Operator. [Trevor Kalcic]..

It's Trevor from ABN AMRO. A couple of quick questions if you don't mind. First of all, on your value of new business growth targets, the 2005 to 2010, 15% number, could you-- you're kind of well on the way to meeting the target, so I was wondering if you could share with us what you are thinking is about that target at this point of time? Is it up for upgrade, for example?

Then my second question relates to the U.S. value of new business where apparently you've been including in the first quarter some mutual fund production value of new business. I was wondering if you could remind us a little bit around what that is exactly and what the size of that, of that uplift from that is?

Then the next one would be on your embedded value, specifically the movement analysis, and then specifically the line on persistency where you've had across the U.S., across the Netherlands and across the U.K. business some fairly negative adjustments on the persistency. So, I was wondering if you could just, in addition to the comments that are already in the release on this, perhaps just give us a little bit more of an indication on that? So those are my three questions.

Thank you. You're pretty right, Trevor, that we have given targets for 2010 and we are well away. We are pleased to report that we are well ahead, and we will look into those targets. It's not as simple as some people, not you of course, would think because the value in a business is a product of volumes and margins, but we will dig into all our businesses and we will report to you probably at the end of the year whether we are going to revise our targets or not. And we get those questions often now that we approach the targets somewhat earlier than we anticipated a year ago. So, yes, we will comment on that but not today.

Darryl, are you, are you going to comment on the mutual funds value in business in the U.S., and then probably for persistency, I go to Bill Robertson, our Chief Actuary.

Trevor, it's Darryl in the U.S. The mutual funds is our retail mutual fund business, our IDEX retail mutual funds, that we had not until the end of '06 computed embedded value calculations on. We had held that business at book value beginning with the first quarter '07. That mutual fund is now-- business is now being computed under the VNB calculations, and in the first quarter it was $7 million. Thanks.

Okay. On the persistency, if I pick it up individually looking across the country, in the Americas you saw in the in-force significant 133 adverse persistency and a very large part of that was the loss of a single contract in the reinsurance phase. That was a very significant part of the persistency issue there. What you can see though is there is a small worsening in the persistency assumption in the operating changes. That's against the background of the last two years where we've seen positive feelings variances from persistency in the U.S., and I think you can just see that as from year to year there will be small positives and small negatives.

In the Netherlands we had adverse persistency in-force variance related to a couple of factors. During the first months of the year, we had a policy of encouraging business to move across to our new [Labinslope] product which I think [Johann] and the team talked about the last analyst conference and that led to an increase in lapses from particularly our LAP type business. As far as the traditional business is concerned, we actually didn't see an adverse lapse variance. In fact, we saw good lapse experience. We also saw the LAP business hit a little bit by banks where they were more easily able to compete with that style of business. So, you see what looks a slightly strange situation where there's an adverse in-force persistency variance in the Netherlands, but we actually get a good change of the operating assumption and that's because the traditional experience comes through into the operating assumptions to a greater extent.

As far as the U.K. is concerned, I think it's something we've talked about on a number of occasions. A large part of the, the in-force variance will be related to the AD changes in the U.K., and I think that's being seen right across the U.K. across any of the big pension players. There was a lot of movement through AD and business moving around, and as a result of that we've slightly worsened their persistency assumption going forward.

Thanks very much. Could I add one question please?

Yes, please.

Okay, just last one, if you're looking at the life production in the U.S, right, I understand the issues until the first half of '06 of the [IOLI], but what struck me was the quarter-on-quarter, so 1Q '07 versus 4Q '06 showed a 14% decline which kind of doesn't really [jol] with the fact that we now have [XIOLI] comp base. Could you perhaps just talk a little bit around that quarter-on-quarter development?

Darryl?

Yes. Hi, Trevor, it's Darryl. I'm not sure if I am looking at the same numbers as you. On our retail life, which is I think probably where your question is focused, you know that our BOLI/COLI business is very lumpy. Our retail life is flat, I think down very modestly, 2% on a sequential quarter-over-quarter basis. As you know, we talked about this where we had a sizable increase in the 4th quarter and part of that is seasonality. There's always a fourth quarter push to retail life sales, but also that was the first quarter where we had completely eliminated all the [IOLI/STOLI] production, so we feel pretty good about that. Oh, I know what the other piece of it is. We did an in-force transaction that we disclosed, the in-force reinsurance transaction where we acquired the AIG business and that included 50 million of production in the fourth quarter. So when you normalize that out, I think you will get back to the case where we're basically holding our higher life sales on a sequential quarter-over-quarter basis.

Okay, Trevor?

Super. Thank you very much.

Okay, thank you.

[William Elderkin].

Hello everyone, it's William Elderkin from Citigroup. I've got three questions please. First of all, I see with your new financial supplements you've introduced this after tax after holding items operating earnings metric. I assume there is a reason for doing that, and particularly I was wondering are you comfortable using-- for us to use that as benchmark against which to compare you with the U.S. life companies reporting an after tax operating earnings measure as well?

And then I've got two questions related to the embedded value, particularly to the free surplus row 4 on table 7, page 9. First of all, you've very helpfully given the split of the investment in new business between new business straight and required surplus. I was wondering if you had those same figures for 2005 to hand and if you didn't, could you provide them to us?

And secondly, (inaudible) 2006 was pretty kind in terms of equity market performance. No real bond defaults and so on. If all of those actuary markets, bond defaults and so on have performed in line with your underlying embedded value assumptions, can you give us a sense of where that earnings on the fourth line actually would have been and similarly what the capital movements out of the business would have been, if you like, on a sustainable basis?

Financial supplement, Jos.

Why did we change to net operating earnings? Has that the objective to make us comparable to U.S. operating companies? That was the question wasn't it?

Are you comfortable for us to use that metric you are now reporting as a comparison?

No, not totally because there are still differences between U.S. GAAP treatment and IRFS treatment so you have to make some adjustments to that to get a totally comparative basis, and you have to bear in mind that a part of our business or 65% of our business is U.S. business that would be comparable if you made those corrections. But the other businesses in continental Europe and in Asia are not totally comparable in terms of products with the U.S. business and most of the U.S, business except for companies like AIG, do not have a lot of foreign business outside the U.S. So, you will always keep a couple of complications, but it's meant to help you to make another analysis as well.

So you can have nice confidence when we are comparing the Americas business but should be careful, more careful elsewhere?

If you compare our U.S. business to U.S. other businesses, you have to make some corrections between U.S. GAAP and IFRS and then it's probably a useful analysis.

William, the main objective here is, is to include in our earnings development, our operating earnings development, also tax because we also manage for tax in investments that we invest in. So we think it's important to include that in your operating earnings definition rather than go to operating earnings before taxes. That is the main objective. You always have to remember that we report on IFRS. U.S. companies report on U.S. GAAP, and apart from what Jos already mentioned that there are different terms of accounting, it's also different in the way this Company is run. We are a Company-- we are not a Company run because on the U.S. GAAP. That's an important difference as well.

You will see that everywhere in Europe if you see that we try to run our Company on an economical basis so that's why we publish embedded value. That's why we're preparing for the roll out of economic capital. There is a difference between Europe and the U.S. so we tend to manage the Company on that basis, on an embedded value and the risk adjusted basis. And most of our peers in the U.S. are to a lesser extent, let's say that, doing that, so the difference in behavior in management is there as well.

Okay, thanks and on the embedded value questions?

Bill, on the embedded value questions.

I don't think that I have every one of the figures for last year, but I think what I might be able to do is go away and think about it and talk with Michiel and perhaps give you for maybe either the main countries or certainly a total level that can provide the figures for the split for 2005. But I think if you see it--

If you can do that Bill, we should put it on the web site.

Yes.

But the only bit that is probably a little bit difficult is some of the newer countries. And your other question was what would the earnings of the in-force have been in terms of if we've achieved more normal returns rather than reflecting the actual experience in things like spread. I'm guessing but I'm looking at the 3.1 billion. It's a bit up from last year in terms of looking at where we were last year so I suspect that at least a couple of hundred million lower if we'd achieved normal returns, between 2 and 3 hundred million lower looking at that number is a rough approximation. But that number is always going to be volatile from year on year.

And finally on the level of capital movement tied to the business.

And the other thing is in terms of going forward though if you're trying to estimate what a going forward number is, that's are base starting point though in terms of a lot of things like if the equity markets are up, that's where are base is now so you don't want to reduce it down; you're actually trying to use that number going forward, which I guess what you are trying to do. Is it?

Yes, I mean I was just trying to build a full cost.

Yes so you don't want to necessarily to be puling the number away although there has been a benefit coming in this year because it's arrived. Right, sorry what was the last part?

The final question was just in terms of the capital movements coming out. I think it has been an exceptional movement in Holland but again, what is a sustainable level of repatriation?

Well, at the moment we are sitting there looking at 3.3 billion free surplus, and I don't know the exact figure that what would be sustainable in terms of what--

Bill, on an ongoing basis to correct indeed, William, the main item to correct for is the extraordinary [div note] in the Netherlands. So, to get to a more normalized level, you should probably take off around 0.5 billion.

Yes 1.6, 1.7 is a normalized number.

That's very helpful, thank you very much.

[Christopher Hitchings].

Hi, its Christopher Hitchings from KBW. Can I just go back way and little past to look at the Netherlands result again? I know we've forgotten about all this having been told by (inaudible) how to run your business, but if I back all the funnies out of the result, I take the guaranties and take out accident and health and etcetera and look at life profits, I got a figure that is certainly well ahead of the 1st quarter of last year, as you say. But, it's significantly down on what you achieved in the second, third and fourth quarters of last year in the Netherlands, and I'm wondering is that a seasonal factor? It didn't seem to be last year in '05. And what is the basis of it? Does it have anything to do with the business mix because you've quoted about the very high IRR reflects business mix in the 1st quarter, and you talked about unit lengths but the major business mix difference seems to be pension business. That makes some sense to IRR, but is there an impact there on profits? That's the first question. Do you want to have a go at that?

Well, if you make production in the 1st quarter, hardly any of that will appear in the P&L under IFRS in the same quarter. So the business mix, that was changed in the first quarter in 2007 by accident I have to say more fee business than we were used to and no big group pension contract that changed the mix of sales and that resulted in a higher IRR. So under IFRS you will see that later. There is some seasonality in the Dutch operation but if you undo the results from all the special things with the derivatives, you end up at the 79 million plus something because we had a charge for guaranteed provisions in the Netherlands in the first quarter, and I would call that a normalized figure. So, 880 with a little plus is a normalized figure.

That's per quarter so for the year it would be-- our best guess would be four times that figure or is there going to be a similar level of seasonality?

If there is no growth you could say 880, 80 plus times, times four would be a normalized number, but you know that things happen in the--

No, no, no, I fully appreciate that and all the other things too, but it's just that if you look at '06, there was very little profit or much less profit in the first quarter than in the subsequent quarters.

Jos, our conclusion was undone from all the derivatives then. The quarter for the Netherlands was a pretty reasonable quarter.

Yes, I hear it. Good. If I move on to the U.S. just briefly, again, if I look at U.S. profits. If I look seasonally last year-- again, I take out all the funnies and the accident, health and the reinsurance which bounced about a bit, again, you had a fantastic second quarter last year and then all went back, and since then it's been trading around about the 300 million, 400 million per quarter. Again, are there any funnies in there? Was the second quarter last year an unusual one for any reason?

Well, what I am remembering off the top of, top of my head of 2006 that we were exceptionally fortunate with what we call the whole (inaudible) full of our items and that was a big plus in 2006 and in 2007 so far we are still doing better than expectations. We give that in the press release what we--

.Yes, sorry. I backed out all of those items, and I still get sort of the U.S. as being very good in the second quarter of last year and not since then. So, that--

That's probably true.

Yea, yea.

Yes, but you excluded reinsurance as well?

Yes, yes I've excluded reinsurance, which had a rather poor second quarter and accident and health, which had a fantastic second and third quarter.

Let me look. Forgive me but we look a little bit different to the business in the U.S. We (inaudible) reinsurance and the accident and health business which is our ADMS business which is a big, big (inaudible).

Yes. Fine. I'm just trying, trying to look at seasonality and what we should expect going forward, all the things I'm sure that we're all trying to do. That's fine. So is there any impact in these figures of Clark on sales or profits?

No that's very little. We included Clark in our numbers in the beginning of the year so that's not something that's very noticeable.

Okay. Thank you much indeed.

[Albert Ploegh].

Yes, good afternoon. It's Albert Ploegh from [Kepler Equities]. I have two questions on the embedded value, one on the economic assumption changes. It's on page 4 of the booklet. There has been a small change in the risk margin coming down from 3.2 to 3%. I wondered what your reason was. Is it a little bit more in line with [Pierce] or are you more comfortable with the risk profile of the Group?

And the second question is probably a bit more difficult to answer as most insurance companies are now publishing a more consistent embedded value. Could you maybe give some kind of indication what the embedded value numbers would have looked like under such a framework, at least some kind of direction? Thank you.

Economic assumptions to Bill.

Yes, the economic assumptions that dropped from 3.2 to 3%, that reflected a couple of things. We go through a methodology and we derive the risk premium but underlying that methodology, it's not all math. There is a certain element of judgment. Looking at how things have gone over the year, there's definitely been a drop in our EBIDTA and it was pretty easy to justify that small drop. Also, Jos and I sat with quite a lot of you and me in London where a number of you commented that our risk premium was a little bit high relative to our competitors', so our base analysis supported a reduction and the feedback we've had was against competitors that we were tending to be a little bit conservative in the level of margin, so against that we've brought in a small reduction of 0.2%

Okay.

The background to that one.

Well, market consistency is in a difficult subject as you say, Albert. There are many differences on market consistency in development. We know that the CFO Forum is trying to get its act together and try to have standardized definition of market-to-market consistency. If that would happen in the market, AEGON would certainly follow and introduce market consistency. If they do not get their act together and come with a common definition, and we continue to have all kinds of definitions flying around to market, we probably wait until we announce our economic capital model. That may take until the end 2008 and then automatically you get market consistent information. It's pretty difficult because now in an embedded value model, you have all kind of analysis of what the value of the embedded option is in a sarcastic way and partly some times in a discount rate, so the total effect is difficult to estimate. What we do know in our first roll outs of economic capital is that they come with certainty not need more capital to run its business on an economic capital model than we do now while keeping our ratings. But that is as far as I can go now today.

Okay. Thank you.

We have time now for one more question.

Thank you. The last question comes from Mr. Peter Monaco. Please state your company name followed by your question.

Good afternoon. Thank you for your time. Peter Monaco, Tudor Investment Corporation. I had to step off the call briefly, so I apologize if you've addressed any of this. Could you please remind me what, if any, estimate you folks have made in terms of what you believe to be your excess, existing excess capital, over and above that required to retain your desired rating? And secondly and similarly, could you remind what you believe to be projected free capital generation; in other words, after retention of capital for new business growth and after the payment of the common share dividend? Thank you.

Okay, Peter. Good question. Well, you have seen our embedded value analysis. You have seen our IFRS numbers and those are important while looking to rating agency. I would estimate surplus capital that we can use to do sensible acquisitions or raise dividends or something like that is now 2 billion, around 2 billion, and if we do not spend capital on this train for new business more than we do today, we probably produce around 300 million a year in pre-surplus extra.

After dividends?

After dividends. We are producing surpluses unless we expand by organic growth or acquisition.

I understand. A brief follow up if I may, and understanding that the new business initiatives seem to be going well. Would the stock trading at such a low multiple of EV, why wouldn't it make sense to be buying back your stock?

It's one of the considerations. I just told you that we have 2 billion in surplus. If we can do from our pipeline of acquisitions that we see. If we can do sensible business, we will certainly do it. If that would be impossible then we would seek solution to give it back to shareholders, and the option of share buy backs would then be one of them.

Thank you.

Thank you. Thank you for listening to us. Thank you for your questions. I hope to see you all in May, and then we will have a prolonged discussion. Thank you very much and have a good afternoon.

Thank you. This now concludes the 1st Quarter 2007 Results, and Embedded Value 2006 Analyst and Investor Conference Call. Thank you for your participation. You may now disconnect.