Aegon Ltd (AEG) 2007 Q4 法說會逐字稿

Ladies and gentlemen welcome to the Aegon fourth quarter 2007 results analyst and investor conference call on March 6, 2008. (OPERATOR INSTRUCTIONS). I will now the conference over to Mr. Don Shepard. Please go ahead sir.

Thank you and thank all of you for joining us today. In the room with me is Jo Streppel, our chief financial officer and Eric Goodman, our chief investment officer of Aegon USA who will provide an overview of our US investment portfolio, given the interest in financial markets and investments right now. Also Michiel van Katwijk our group treasurer and Darryl Button, CFO of Aegon USA are on the phone. So I'll get started and then turn it over to Eric.

As usual, would you please take a moment to review our cautionary note regarding forward-looking statements.

During the past year we continued to make good progress on our strategy, strengthening our multi-channel distribution network. We announced a joint venture with Taishin, one of Taiwan's leading banks. We formed a partnership with Barclays in the UK and we acquired Merrill Lynch's life companies in the US. And in addition formed a strategic business alliance with Merrill Lynch, which we believe will enhance our position as a provider of life and variable annuity products.

In 2007 we also formed an asset management joint venture with China's industrial securities. And we secured a fourth regional bank partnership in Spain with Caja Cantabria, bringing us up to 1,800 branches that we're selling through. As we've announced, we received a new license in China and will soon be operating in the Guangdong province, making that our fifth coastal province where we'll be selling product.

Continuing our focus on the growth markets of Central and Eastern Europe, we recently acquired the Uniqa pension funds making us second in mandatory pensions and third in voluntary pensions in Hungary. Our new mandatory pension fund that we formed with Romania's Bank of Transylvania is now up and running. And as you know, just last week we announced our entry into Turkey through the acquisition of a small life and pension company.

Turning now to our results, let me start off by emphasizing that Aegon experienced no material impairments to its investment portfolio in 2007. Eric will go into this in a lot greater detail but just let me say that there were no impairments towards subprime portfolio, it continues to be high quality with 99% either AA or AAA.

Net underlying earnings decreased 15% during the quarter but were up 4% for the full year. Again tax played a big role in the decline. Underlying earnings before tax were up 9% on the fourth quarter; that would have been 16% at constant currency which demonstrates the solid growth trends of our businesses.

Net operating earnings declined 32% during the fourth quarter but were level for the full year at constant currency. The overall drivers of the decline in quarter four were the weak dollar and the one-time tax benefits that we received in 2006. The decline in net income for 2007 is due mostly to lower non-operating earnings in the Netherlands.

Okay, slide five. New life sales in the fourth quarter were down 8% or flat at constant currency. This was due mostly to lower sales in the UK, as you all recall that we still were gaining a bit from heyday last year and in Spain. Also a weaker US dollar and British pound affected this. For the full year, new life sales were up 7% and at a constant currency rate, 11%.

We experienced a decline and deposits in the quarter due to lower sales of our institutional guaranteed products relative to last year because the fourth quarter of 2006 was very strong.

I do want to mention however that our pension deposits were up 43% in the fourth quarter to $3.4 billion. The increase was due to higher sales of both single premium defined contribution and terminal funding products.

The fourth consecutive year of value of new business growth resulted in a record EUR927 million in 2007. We're pleased to report that our businesses are on track to achieve the increased value of new business target for 2010, which we set at EUR1.25 billion.

Slide six. Aegon's revenue generating investments at year end increased 2% in euros 11% at constant currency. The increase reflects net growth in our in force portfolio and in addition to some improved market performance, but also included the $15 billion from the life insurance companies which we acquired from Merrill Lynch. This fourth consecutive yearly increase represents a GBP10 -- a 10% compound annual growth rate since 2004.

Slide seven. We proposed a full year dividend of EUR0.62 per common share; that's a 13% increase over last year's full year dividend. It's a reflection of our continued good cash flows and solid capital position. We propose to increase the final dividend by 3% to EUR0.32.

Slide eight. Shareholders equity at year end accounted for 72% of our overall capital base, above our target of 70%. We did complete $1 billion -- or EUR1 billion share repurchase program last November and if you combine this with the stock dividend we repurchased and the cash dividend we paid out, the return of -- that made a return of EUR1.9 billion to common shareholders in 2007.

I want to make it clear that we do continue to maintain excess capital of well over EUR1 billion, which will support our organic growth and at the same time, allow us to continue pursuing acquisition opportunities if they fit our pricing disciplines.

Slide nine. Before I turn it over to Eric Goodman to talk about our investment portfolio in the US, I want to make a point about auditing of the valuation of our investments. Due to the recent environment in the credit markets, our staff has focused a lot more time and energy on identifying and valuing subprime exposures and related indirect investment issues.

In addition, we requested that our auditors expand the scope of their audit, I think they call it a deep dive, and had them perform a deeper analysis than normal. The additional internal analysis and the feedback of our auditors confirmed our confidence in the identification of our existing exposures and comfort in our valuation methods and procedures, as well as our conclusions around the overall investment valuations. In addition, the deeper analysis performed by the audit team resulted in no adjustments to our financial statements.

With that, let me turn things over to Eric. Eric Goodman please.

Okay. I'm going to describe fourth quarter developments for Aegon USA's portfolios specifically. Because most of Aegon is credit risk and all of Aegon's US mortgage exposure resides in Aegon USA, it'll be a fair reflection of Aegon's investment risks globally.

Slide ten. The main themes for the fourth quarter investment results are first, in spite of very high credit market volatility, our credit impairments were very low. Second, no impairments were taken on our subprime exposure or other mortgage backed securities, in spite of market value declines, for reasons I'll describe in a moment.

Most of our mortgage-backed exposure has enough credit enhancement to make them low risk or moderate risk, even in today's stretched real estate market. But we do have a manageable amount of subprime exposure that is at heightened risk of future impairment in today's environment.

Finally, in addition to our bond portfolio, we have a variety of alternative investments and derivatives whose changes in market value are recorded in operating earnings each quarter. The results for these fair value investments were strong overall. Alternative investment programs generated above expected returns, offset partially by some losses on credit derivatives as a result of the general spread widening in the market.

Slide 11. The majority of our invested assets are bonds that are accounted for as available for sale items under IFRS. As such, we only impair them in earnings if we intend to sell them for less than their amortized cost or if we expect to receive less than full principal and interest in the future. If either of these are true, the securities are deemed to be other than temporarily impaired and are written down to market value through earnings. That's what we refer to as a credit impairment.

During the fourth quarter, our credit impairments were very low, only EUR10 million pre tax. Indeed over the last few years, our credit impairments net of recoveries have been close to zero. That being said, we expect in price for credit losses in the neighborhood of 25 basis points of our assets per year. And that's reasonably consistent with our long-term results. But as this graph illustrates, we rarely experience exactly 25 basis points of credit impairment.

Slide 12. Our total subprime and second lien asset portfolio is EUR2.9 billion in size. It's important to note that we have negligible exposure to subprime CDOs; only EUR20 million purchased prior to 2002 and held at fair value.

Although the markets for all mortgage related securities are under pressure, market anxieties are especially acute for the kind of securities referenced by the ABX derivative contracts; that is hybrid arm or floating rate loan structures. These are the affordability products with so-called teaser rates during the first couple of years. It's these late vintage hybrid arms which are referenced by the ABX indices and for which delinquencies are spiking and where most of the ratings downgrades are occurring. Delinquencies are arising in fixed rate subprime as well but not enough to trigger downgrades.

Within our floating rate portfolio of EUR1.2 billion, about EUR560 million are mezzanine or subordinated tranches. Although Aegon bought the senior most M1 mezzanine tranches with original ratings at issuance of either AA or AA plus, the expected losses in the underlying collateral pools have risen. They've not risen yet to the point at which these M1 tranches would lose principal or interest, however, we believe these are the subprime securities in our portfolio most at risk for impairment at some future date.

Clearly, the margin of safety between expected losses and the impairment level of losses has diminished in recent months, as the housing crisis has deepened. That's why S&P recently put about EUR408 million of our holdings on the watch list for downgrade.

While the risk of future impairments for these securities is material, we believe that this exposure is of manageable size at EUR560 million, and showing -- and currently shows at 12/31 showed an unrealized loss of EUR171 million.

Slide 13. Our prime and near prime portfolio is very highly rated. There are virtually no mezzanine or subordinated bonds in it. The main categories of near prime in our portfolio are the EUR862 million of Alt-A securities and EUR1.6 billion of negative amortization floaters, also known as option arms.

The Alt-A bonds are securitizations of fixed rate loans, not hybrid arms. Fixed rate all day loans like fixed rate subprime loans are showing better performance than arms. Moreover, these are all senior tranches and about one third of them are super senior, with several times more credit enhancement that is normally required for AAA.

Negative amortization floaters are an affordability loan structure, allowing for flexible monthly payments. But all of that portfolio is super senior AAA and has four or five times the credit enhancement that's required by rating agencies for AAA.

Impairments of this portfolio are unlikely in our view, even in an environment of depressed real estate prices and rising delinquencies.

Slide 14. Beginning in 2003, we began to be concerned about lending standards in the commercial MBS market and also about the weakening structural support required by rating agencies. So we upgraded our portfolio. In 2002, less than half of our CMBS portfolio was rated AAA; now more than 80% is AAA.

Just as importantly in recent years, we've involved our commercial mortgage whole loan staff with its deep resources and experience, in the analysis of credit risk in our CMBS portfolio. They've focused especially on any below AAA purchases. So while we share concerns about rising delinquencies in the CMBS collateral pool, we believe we have structured the portfolio to weather even stress scenarios very well.

Our only mortgage related CDOs are our CMBS and commercial real estate CDOs, totaling EUR188 million, which are collateralized by real estate loans, CMBS bonds and REIT debt. The majority of these are AAA rated and almost all of the below AAA rated deals were originated prior to 2005, that is prior to the years during which lending standards were the most lax and real estate values were peaking. We've actually experienced several upgrades in this portfolio.

Slide 15. So far we've focused attention on the Aegon USA bond portfolio which is accounted for under available for sale accounting. A much smaller yet important part of the portfolio is accounted for using a mark-to-market or fair value standard. This includes most of our alternative investments as well as our credit derivatives portfolio.

During the fourth quarter we saw a continuation of the multi-year trend of strong results in our alternative investments portfolio, particularly within our hedge fund portfolio. Total earnings from these programs exceeded our expectations by over EUR90 million during the quarter.

Our fair value items also included a moderate amount of credit derivatives as value tends to decline as credit spreads widen. Our fair value loss for all of these programs totaled EUR50 million in the fourth quarter.

Next slide. As we discussed at our analyst conference last November, our credit derivatives portfolio includes no derivatives of mortgage related risk, only of corporate credit risk. In the same three programs still exist as still existed then, a tranche credit protection program, sometimes called synthetic CDO. A single name credit default swap program and some CLO credit swaps on bank loan portfolios. All of these programs tend to add to earnings when credit spreads are stable or tightening or detract from earnings when credit spreads are widening as they did in Q4.

Slide 17. In particular our largest program, the tranche credit protection or synthetic CDO program is one in which the institutional markets divisions, structured products group, sells protection on very senior tranches of the CDX, which is an index of the 125 investment grade corporate credits.

During the fourth quarter we added to the exposure and are comfortable with the current positions. As you can see, most of these contracts are on the senior most 30% to 100% tranche meaning that only if losses exceed 30% of the referenced 125 credits would any payment be owed by Aegon. Default losses net of recoveries of 30% imply default rates before recoveries approaching 40% to 50% of the referenced credit.

Such an apocalyptic scenario for investment grade bonds has a vanishingly small risk of occurring in our view. Nevertheless, as derivatives these are mark-to-markets and we reported operating earnings and can cause substantial earnings volatility prior to maturity, particularly during extremely volatile markets like this one. But cash losses are a very remote risk.

Now, let me turn it back over to Don to conclude the presentation.

Thank you Eric. As you are aware, this marks my final earnings call as I'll retire next month at our annual general meeting of shareholders. They have been extraordinary years for me personally and also an interesting time for Aegon.

I recall that when I took over was the year that we did our first earnings warning and since that time myself, along with my executive board and management board colleagues, have worked on increasing the balance sheet and making the balance sheet of Aegon more stable and more solid. We've improved profitability and we've strengthened our distribution network. And it maintained consecutive annual dividend increases since 2003.

If you look at the value of new business in the internal rate of return you'll see that our focus on profitable growth rather than top line only has resulted in strong V and B growth. And consistently higher IRRs for the Group, well above our self imposed 11% hurdle rate.

Slide 20. During the same time, we've expanded Aegon's presence steadily into areas that we believe will achieve above average long term growth in the coming years.

Taking a quick look at some of our expansion activity in recent years, we've gone well beyond our traditional markets of the US, the UK and The Netherlands. We did have an operation in Asia back in 1993 with a Greenfield in Taiwan, but in 2000 of this -- in 2003, we entered mainland China and have since continued our rollout in the highly developed coastal provinces. We've also entered Japan with Sony Life and expect to be operational in India soon.

We've expanded in the high growth fast developing region of Central and Eastern Europe using our base in Hungary. Focusing on the opportunities created with the introduction of mandatory pensions, and this -- in these markets, we are now serving customers in Slovakia, the Czech Republic, Poland and most recently Romania and soon in Turkey. We've successfully built our presence through the Cajas in Spain, operating now through four regional savings banks and their combined 1,800 branches.

We re-entered Mexico forming a joint venture with Seguros Argos and also established in a foray to provide pension advice to customers in the region. This is of course a broad overview of our investments over the past few years. The growth that is already coming from these new ventures we believe will contribute to earnings growth in increasing proportion. You can already see this in the contribution of these markets to our value of new business.

So let me just conclude by saying our investment strategy where we started increasing the stability of our portfolio and upgrading the quality has successfully, so far, weathered the current market turmoil. Having said that, we have no material impairments.

The fundamentals of our business remains strong, and during the year sales were strong; up 11% at constant currency and total deposits up 22% at constant currency. The 13% increase in Aegon's full year dividend reflects our continued strong capital position and healthy cash flows.

And finally our businesses are on track to deliver on our increased value of new business target of EUR1.25 billion for 2010.

My colleague, Alex Wynaendts is going to my successor. I know he's looking forward to these calls with you in the future. I think most of you know him. Let me just say that I believe he'll do a terrific job in leading Aegon into its next phase of growth which will continue to be an exciting time for the life and pensions sector.

Thank you for your continued interest in Aegon and now we're happy to take your questions.

Thank you sir. (OPERATOR INSTRUCTIONS). The first question comes from Mr. [Mark Teeler]. Please state your company name, followed by your question.

Good afternoon it's Mark Teeler here from UBS.

Hi Mark.

Hi. My first question is, I was wondering if you could provide us with an update on the mark-to-market or the subprime and related securities, year to date? What do you think could be the impact on the book value in the first quarter?

My second question is maybe you could give us a bit of an update regarding how the sales numbers are developing by line of business, year to date? Have you seen any significant impact from a decline in demand as a result of the capital market turmoil? Have you seen an improvement or continued improvement in net deposits for fixed annuities? Those issues I would be interested in.

And then thirdly and finally, I can probably assume that you are unlikely to provide an earnings guidance in the current situation?

Thank you Mark. No we would not give an earnings guidance, of course. But, let me turn you back to Eric for your questions about the mark-to-market.

Well, obviously the market prices for all credit instruments have declined in the first quarter, in particular for mortgage securities. And the markets are very fast moving so we don't -- aren't going to provide an updated mark-to-market for the portfolio but suffice it to say that the marks will be -- are likely to be lower at the end of the first quarter than at the end of 2007.

Okay. And in terms of sales, generally sales have not had any significant -- haven't been impacted by market turmoil. I was trying to think across the board, sales are pretty much -- pretty strong, across the board. At least so far this quarter.

Excellent, many thanks.

Thanks Mark.

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

Good afternoon gentlemen. A couple of questions. Sorry Chris Hitchings, KBW here. A couple of questions. The outflow of deposits, the net outflow in the fourth quarter seemed to increase significantly relative to what you'd seen in quarters one to three. Are there any particular issues behind that geographically etc., and product?

I also noticed you had a strong fourth quarter in sales on fixed annuities. Again, can you give us some background as to where that's from? Thank you.

Mark I'm not sure about the out -- I don't think there is a strong outflow. Relative deposits in the fourth quarter were down because we had a real strong fourth quarter in '06 in institutional sales. But I don't think there's a significant increase in outflows.

Just on the institutional business?

Yes except the institutional business. Darryl, do you want to pick up on that?

Yes sure. Hi Chris, it's Darryl in the US. Yes the only place where net flows did pick up in the fourth quarter was in our institutional spread business and it's really a case of the production. We did a lot lower production in the fourth quarter primarily because we did a lot higher production throughout the year. Fourth quarter production dropped off a lot but year-to-date over year-to-date, we're still up 28% on year-to-date deposits. So it's more of a timing issue, I would say, than anything Chris.

Thanks very much yes. And the fixed annuities?

The fixed annuity sales were high in the third and fourth quarter. We had a favorable -- I'd say some favorable tailwinds from a yield curve. We had some steepening in the curve and yields were still attractive, and we ran a couple of specials. Unfortunately the yield curve has dropped down. It still remains somewhat steeper than it's been in the past but the absolute levels are low enough now that I just wouldn't trend those higher sales into '08 unless we get some increases in the yield curve.

Yes. And can I come back with one third question? What is the current level of the unrealized gains in the balance sheet? I can't find that disclosed. I may be being stupid.

You mean the total revaluation account?

Yes the total revaluation account.

It's minus EUR1.2 billion.

Okay thank you.

Thank you. And the next question comes from Mr. Farooq Hanif. Please state your company name followed by your question.

Hi there. Thank you very much. This is Farooq Hanif from Morgan Stanley. I have some questions on your alternative investments. What proportion of these investments are valued using a level sea own model approach? That's question one on the alternatives.

Question two is, I know that the -- that a lot of this profit on alternatives goes through some of your lines and maybe the institutional business is one of them. Could you just give us an idea of what amount of profit is going through the institutional profit line in the US from these investments?

And a similar question on the CDX, the -- sorry synthetic CDOs, they have -- continue to decline as you've mentioned. I think the marks have gone from about 98 to about 95 in Q1. Which line should we expect to see this in?

Eric I think those are all for you.

Well I can handle some of them. I'm not sure I can split some of these results between institutional markets and other business lines because they're not all concentrated in the institutional markets division.

And I think on those -- that detail, I think it might be best if we get back to IR and let them work with you on that, Farooq, if that's okay?

But what proportion is your own model in the valuation?

We don't model these -- the prices for the hedge funds come from the hedge funds themselves. That's through the private equity mezzanine in real estate. So these are not model driven valuations, these are audited results that we get from the external alternative investment managers themselves. And that's true of the synthetic CDO that you referenced. These are contracts on the CDX so these are fairly -- relatively liquid contracts where quoted markets are available. So we're not doing our internal modeling. And that's true of the vast majority of our portfolio, we're using independent pricing.

Okay. And if I may just ask one more question then, in that case. You had some pressure on your fixed annuity profits in Q4 and the commentary reads that there was a lower return on total return annuities. Can you just explain that, because you had really good inflows obviously in Q4?

Darryl?

Farooq yes, let me jump in here a little bit. On the fixed annuities, the fair value assets that Eric's referring to, particularly hedge fund investments, did have a strong quarter. However we have some total return annuity products that also have embedded derivative in the products that we carry at fair value as well. And that is where the softness in the operating earnings came from. We had a total valuation on those total return annuities of pre-tax negative $26 million in the quarter.

What's the nature of these derivatives? How can we think about that going forward? Is it really a one-off?

Well they're total return past year annuities which means the crediting rate, unlike a normal traditional fixed annuity where there's a general account, a fixed crediting rate, these have a pass through total return of the underlying pool of assets which is what creates the embedded derivative inside of it. And that's what causes us, under the accounting rules, to have to carry that market value. And it's very swingy period to period.

So widening spreads would be more negative?

Yes. And it's really affected as much as anything by lowering interest rates, I think is what caused the fair valuation this quarter.

Okay that's --

I can also give you a little bit of color on your institutional question as well. The net impact in the institutional was a negative $7 million pre-tax.

From the --?

From the fair value asset items which would be a combination of the positive hedge fund performance that Eric talked about in his presentation offset by the -- on the synthetic CDOs.

That's really useful. Thank you.

You're welcome.

Can I come back for a moment on the revaluation reserve because I --

(multiple speakers)

Chris' question, yes.

Chris' question, the line is open. The balance at December 31, 2007 is minus $560 million. The quarter before that, at the end of September, it was a plus of $78 million. So the movement is about $600 million in the quarter.

Okay next question.

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

Yes hi it's Nick Holmes at Lehman. First question is, can we come back to the outlook for '08? I know you're not willing to say too much but I just wondered, can you give us any color at all on the way you think things are going? For example, if equity markets were to stabilize at current levels, would you expect net underlying earnings to maybe possibly increase because they're not very equity geared, are they? That's my first question. Maybe you might like to ask that -- answer that first.

I think that you stated that very well. I think that's a pretty accurate statement.

Okay. Very good. Second question is your equity book -- coming back to equity exposure, your equity book has fallen by about half in '07. Could you tell us are you looking to reduce it further? And can you take us through what your asset allocation strategy now is?

Well we've sold off a lot of equities both in the Netherlands and the US to improve our capital efficiency. And I think that's just about completed. Jos, do you want to add anything to that?

Yes I think that that's completed. That does not mean that we do not have any equity risk left because we have guarantees outstanding based on equity portfolios to customers. That's partly hedged and it's partly unhedged as well. So the conclusion is right that our equity exposure in direct investments is pretty low but we still have exposure through our guarantees and those are partly hedged.

So you're saying it's fallen further since the year-end, the direct equity exposure, which fell by about 50%?

That's about the same because in the Netherlands, they completed their program before year-end.

So should we therefore not expect much change since year-end in your direct equity exposure?

That is a correct assumption.

And -- right and you don't really intend to reduce it further going forward?

Nick, most of what is left is not common equity. Particularly in the Dutch market we have lowered substantially our exposure to common equities, we have some funds left but -- and some preferred shares that are still left there. But for all intents and purposes we believe that we have lowered it to the level where we're comfortable.

Okay that's very clear. Can I ask another question which is with the Dutch ombudsman report on unit linked mis-selling. I wondered if you could give us your thinking about what sort of charge you might have to take?

Nick as we've mentioned before, in 2000 and then in 2005 we made improvements to that portfolio and we actually went retroactively somewhere in the area of EUR100 million and then improved the future around EUR100 million as well. So Aegon has already taken a lot of the improvements on that before the report. We'll watch it closely going forward but at this point we've not made any reservation because we think we've taken care of a lot of it already.

What we are doing at the moment is studying the letter issued by the ombudsman because he gave a lot of guidance. Most of the things he is recommending are already covered in our 2000 and 2005 improvements. There may be elements in this letter, it's still under study, because we are talking about 100 different products in our portfolio alone. That may lead to some corrections and if necessary we will take a provision in the first quarter.

But you feel pretty comfortable?

Yes, we are certainly much more comfortable than the general market is because we did a lot in 2000 and 2005.

Great. And then last question is for Eric. Do you intend to add more to your synthetic CDOs? They've grown since your last report date and I just wondered what your expectations are, what your plans are?

Well right now we're comfortable with the position, we wouldn't rule it out, but it would -- we would give it a hard look. Remembering that we think there's very little permanent risk of loss here. There is mostly mark-to-market volatility. But nevertheless we do need to pay attention to both those sources of volatility. And at the moment we don't have a plan currently to add.

Okay, thank you very much.

Thanks Nick.

Thank you. The next question comes from Mr. Farquhar Murray. Please state your company name followed by your question.

Hi, good afternoon. Farquhar Murray, Fox-Pitt Kelton here. Four questions if I may, and unfortunately three are credit related, so I'll apologize in advance. Starting with subprime.

I'll let Eric pick up and take those right away.

Okay. Starting with subprime I just wondered if Eric could give us a feel in terms of his expectation for the cumulative net loss on the 2006 subprime vintage and how that would equate to an industry scenario?

And secondly, on the negative amortization portfolio. I'm just wondering if you could give us a feel for the average attachment points on that portfolio and also a sense of the LTVs and their distribution within that?

And then finally, just on the CDX position. If I took a 3.5% haircut on the EUR4.5 billion and got about EUR160 million, would that be roughly about the right approach?

Okay, repeat the first question again for me please?

In November you gave us a feel for where you thought net cumulative losses would go on the subprime portfolio for the 2006 vintage, which if I recall was 13%. And I'm just wondering whether that has increased significantly since and where it now stands?

Our internal estimates have increased, not to the break even level, but we're revising them all the time. I'll tell you this, since S&P has come out with their estimates of cumulative net losses on the underlying pools, for the 2006 vintage it's -- if you average those all together they'd be around 17%. So still shy of the break even but obviously getting closer which is why we're describing our position as still not to the point where they need to be impaired but getting closer. And obviously the trend has not been friendly so that's why we identify that sub-set of the portfolio as somewhat more at risk.

Regarding the neg-am portfolio, I don't have all the relevant statistics but that is, as I said a super-senior portfolio where the underlying - the credit support, the subordination below our tranche is in the range of 45% to 50%. So there's a lot of credit support in those instruments. I don't have the average LTVs for those. Those particular kind of loans tended not to be made at high LTVs because they were allowed to go higher from there. But we're going to have to follow up with you on the average LTV.

The -- regarding your back of the envelope CDX, it's somewhere in the ball park but they change a lot period to period, so I wouldn't try to take a stab at it today. But you're right, the volatility in the first quarter has been very high and so the volatility on these instruments, market value volatility has been high as well. That being said, because the risk of permanent loss is extremely low in our view, that just means that over time we think it'll reverse out prior to maturity.

Thanks, that's appreciated.

Thank you. The next question comes from Mr. Zenon Voyiatzis. Please state your company name followed by your question.

Hi it's Zenon from Merrill Lynch. Two quick questions if I may. The first one on the variable annuities. You stated that you'd taken charge of $70 million in respect of the Canadian business. I presume that refers to the higher hedging costs from the increased market volatility and I also presume that that's recurring given the current market conditions. What about the US business, are the hedging costs going up there?

And perhaps you can give us a feel on whether at any point you'd be planning to re-price those products? Thanks.

Good question. Darryl?

Yes Zenon I'll take that, in the US. I can't quite get to your $70 million. We did have some softness in our Canadian seg fund valuations. It is a product -- a variable annuity product with maturity guarantees that because of the embedded derivative, again we carry it at market value.

There was a total hit or I would say a market value hit in the fourth quarter of $35 million negative. There was $15 million positive on the same product in the fourth quarter of last year, so that doubles up to be about $50 million negative. So I'm getting close to your $70 million. So there's a little bit of a doubling up effect because of the volatility there. The primary driver was, in that particular product, we have about 65% of the equity exposure hedged, but we do not have the interest rate exposure hedged and the primary driver of the valuation was the lowering of interest rates up in Canada in the fourth quarter.

As far as US hedging costs, we see a little bit of noise every quarter in our hedging costs, typically low single digit millions, that hasn't really changed. From a new business perspective the returns have dropped a little bit, primarily due to the lower interest rates that drives the hedge costs a little higher. We're still hitting our returns in the fourth quarter, but we're continuing to look at our pricing and product as we look into '08 and watching the markets develop.

Thanks Darryl. In pricing and in accounting do you use long-term volatility assumption or current volatility?

Well on the variable annuity products we use a short-term volatility assumption which is a market implied volatility assumption grading to a longer term assumption over time.

Okay thanks. And the second question, the slide 11, if I may. In 2002 your impairments peaked at 82 basis points. I accept that you have increased the conservatism of your corporate bond portfolio. Can you please remind us any other measures that you have taken to ensure that if markets become more difficult we won't have a return to those levels?

And I wonder if you run any scenarios, if 2002 were to repeat again, what could have been - what could be the equivalent on the current corporate bond portfolio that you have now?

I might just start that, and Eric you can jump in. The two really big hits that we had in '02 were WorldCom and Enron so they were, I guess, to a certain extent if you accept that Sarbanes-Oxley has changed things, I think that's part of it. But Eric, do you want to add anything to that?

Yes, the main thing we've done is we have assumed a more defensive position in our corporate bond portfolio. For example, going into the last recession, something like 8% of our overall assets were in high yield assets. Right now, less than 5% of our assets are in high yield assets, so we're more defensively positioned, generally, on the corporate side. But as I said, we price for 25 basis points on average, and we expect that there will be volatility around that number. I don't have a modeled number for you to say if we had exactly the kind of environment we had in 2002, what would be our number today? We actually don't think it's likely to be exactly like 2002, there's a lot more stress in the financial and mortgage sectors this time, and a lot less stress in the corporate sector. But I don't really have a modeled version of 2002 for you.

Great, thanks.

Thank you. And the next question comes from Mr. Ton Gietman. Please state your company name, followed by your question.

Good morning, good afternoon, Ton Gietman, Petercam Amsterdam. Coming back to what Nick asked on the investment products you sold in the Netherlands, the mediator proposed a cashing out of the industry of EUR2 billion. We read however, that many claimants are not happy with that and possibly want to go for the full losses they claim which is EUR5 billion. Am I right to conclude that suppose they are right, that the EUR200 million you have more or less set aside for these claims in recent years, then would have to be increased to EUR500 million, so another EUR300 million?

In addition to that. Going forward, these products are certainly less profitable for you than they were at initiation. Have you also made DAC adjustments for these products?

Talking about DAC I wondered also whether the negative equity market developments, particularly in the US, even though you have much less -- the negative equity development in the United States and also in the Netherlands. Does that mean that you have to make new adjustments for DAC going forward, and does that mean that we could see a charge in the first quarter?

Then third and final question if I may, is that I noticed that in the Netherlands, you realized more than EUR140 million of gains on selling equities. Quite nice timing I would say. Given the fact that you have more or less reduced the equity portfolio to the level you wish it to be, one couldn't expect further equity gains I guess in 2008.

In 2004 -- sorry in 2007, the final quarter, the EUR140 million gains were more or less offset by EUR140 million of losses which referred to, I quote, movement of derivatives for economic hedging. Could you help me out again what exactly these were? And these kind of loss, are we expecting them again in 2008?

Okay, Tom. Quite a lot of questions.

Three I think.

I will try to do my best on the Dutch part, including the DAC, and perhaps Darryl will comment on the DAC in the US.

There is a letter off the ombudsman. He's not a mediator, he's an independent institution called [KIPIT] in the Netherlands, so he is independent from the insurance industry. He studied the unit linked policies problem in the Netherlands and he came with recommendations. And the recommendations that he issued are pretty balanced. He said that the cost levels should not be higher than 2.5% for the future, but that for the past he could think that 3.5% was acceptable, because it was not only the insurance industry but also the consumers, the government and the distribution channels that were used, that made mistakes between 1985 and around 2000.

What we have done, because we saw this problem coming, we have done two things. First in 2000, in close contact with the consumer panels, we have improved our products and we did it again in 2005. And together with future margin that we have given up, and retroactive improvements to the products, we have a loss in embedded value, call it that way, of about EUR250 million to date.

The number that you mention of -- and damage to the insurance industry, of EUR2 billion in total, is not a number mentioned by the ombudsman, but that's a number mentioned by some analysts in the Netherlands. While the consumer panels wanted to be -- want to be reimbursed for the movements in the equity markets as well, and they come to EUR5 billion. Well, let me tell you, you are never going to reimburse -- what markets that? If we have made mistakes in transparency or those kind of things, we will take care of the customers, and we have done so in 2000 and 2005.

What we are doing today is studying the recommendations of the ombudsman, of which we think it's a balanced view, and if there are elements in our products that we have not improved, and of which the ombudsman is saying that we should improve them, we will do that. We do not think that is very major, and as I have said before, if that is the conclusion we will take a provision in the first quarter of 2008.

The consumer panels may try to get more than the ombudsman is recommending today. We will see. I don't think that Aegon will be the leader in those kind of negotiations, since our position since [2007] and 2005.

On the equity part. If you look to those products, 50% of those products have a guarantee, one way or the other, to customers, for the performance in markets. The DAC that we have set up in -- while selling these products was not very high, and we do not have to unlock -- to negatively unlock DAC for these products.

As far as the equity position in the Netherlands is concerned, thank you for your compliment in timing of the markets. We made a gain of EUR140 million. We do not expect big gains in the first quarter because our direct equity exposure in the Netherlands is pretty low now. And you are right that there is an offset of those gains because of the fair valuing of derivatives.

We have announced after the accounting change in the beginning of the year, that our interest guarantees are on fair value in the pension business in the Netherlands. We have hedged those interest risks, but a hedge is never totally effective. If you have to have EUR30 billion or EUR40 billion, then it's impossible to have a hedge that is -- that comes to zero. So from time to time you will see plusses and minus -- minuses, and in the last quarter there was a minus.

Thank you very much.

Darryl, do you want to pick up the DAC question in the US?

Tom, I think the only thing that I would add to what Jos has said, is just remind you of the way we set our equity assumptions in our DAC, in our mean reversion process, and that's all laid out in our 20-F and you can see that there. But the short answer is, because the equity markets have returned very strong returns over the last three years, we've been lowering our future expectation for equity returns, so a lot of that has already been built into our DAC.

Okay, thank you.

You're welcome.

Thank you. The next question comes from Mr. William Elderkin. Please state your company name, followed by your question.

Hello everyone, it's William Elderkin from Citi. Three questions please. First of all, you mentioned earlier, that you had EUR1 billion or thereabouts, as spare capital. Does that still hold good given what's happened to equity markets, and fixed income markets year to date?

Secondly, can you just reiterate guidance in terms of the tax rate we should expect at a Group level, and also for Aegon Americas?

And then finally, I see within the Americas Reinsurance Division, you've had some reserve strengthening on a variable annuity, off closed block. I think you had a similar charge in the second quarter. Could you just explain what's driving that, and is this reserve strengthening now done?

Okay, the first question (technical difficulty) --

The EUR1 billion surplus is --

Yes, the EUR1 billion surplus, we still have an excess of EUR1 billion in excess capital.

The second question --

Tax rates.

The tax rates. You could -- on average the Netherlands will be about 22% and the US closer to 30%.

And what will the Group level be? Roughly?

In the reserve strength or in reinsurance?

No, the Group level tax rate on a normalized level? 25%?

Around 25%. It's very difficult because one law change in a larger country could influence that but on the assumption that there were no big law changes in countries we are operating, 25% is a right assumption.

And the reserve strengthening in the reinsurance business was on a closed block of guaranteed minimum income benefit. A closed block reinsurance where consumer behavior -- after looking at consumer behavior we just strengthened reserves there.

Is that now done?

Pardon me?

I think it's the second charge you've had this year en masse, is that -- ?

No, no. That's the first time and it was -- we believe it's a one-time charge that -- this is a relatively older block of business, going back, and it's closed book and we just looked at the consumer behavior and felt like we should take a little reserve strengthening.

Okay, thank you very much.

Thank you. And the last question comes from Mr. Trevor Moss. Please state your company name followed by your question.

Good afternoon gentlemen. It's Trevor Moss at MF Global. I have a few --

Hi Trevor.

Morning -- afternoon, sorry. I'm in Ton's time zone.

A couple of quick questions on points of detail. There was quite a lot happening in terms of the numbers in Taiwan with deferred tax, asset write-downs, DAC write-offs, economic assumption changes etc. I was wondering if you might perhaps put some flesh around what's happened there in Taiwan?

Secondly, there was a number of negative provisioning items I think they were, in the Netherlands and the UK on your distribution -- on the assets you owned in distribution. I was a little confused by the write-up you gave in your press release. I wonder if you might add a bit to that?

And thirdly, I think, a question for Don. In response to Nick's earlier question on underlying earnings, growth of equity market stabilized and you said, yes, that's a correct description at this level. Were you thinking in terms of the underlying earnings in constant currency? Because obviously the currency has had a pretty major effect year-to-date and I wondered if you were also assuming a stabilization of the currency to get to that figure? Or whether that's a constant currency underlying earnings growth?

Yes I apologize for that. Yes, it does assume a constant currency.

Okay. Thanks, Don.

Okay. Jos?

On Taiwan the -- if you look at earnings before tax they're pretty good, and after tax they're negative. And the reason is that we have a deferred tax asset in Taiwan and we know that the Taiwanese government has a bill hanging in parliament to extend the recovery period from five to ten years. We need that, we need the ten years. Since it's not sure that the bill will be accepted in parliament we have calculated with five years and therefore we impaired EUR27 million of our deferred tax assets. That's the reason.

Distribution. Are you going to -- ?

Go ahead.

And in distribution in the Netherlands we have set up a reserve for claw-backs in these intermediary companies. You may remember that we have bought [Unirope] and that we had already [Mayus] and we have aligned both systems and that led to a charge of EUR12 million. It's a one-off, you will not see that again because it's just cleaning up the branches after we merged them.

And in the UK we had almost the same problems there. We went through the balance sheet as well and we saw there, by having done the Netherlands, almost the same problem in the UK. And we have aligned the methodology in the UK to a more conservative one that we are now using in Holland as well, to the same system and led to a charge.

Okay. If I may take the opportunity to just use Eric, while he's in the room, since it's unusual to have an investment expert to talk to in the credit markets. The credit spreads appear to be implying Armageddon or Doomsday scenarios and I think you mentioned that in your earlier discussion; certainly in certain types of corporate bond. In addition both the equity markets and the bond market seem to flit on a daily basis on the basis of the expectations of health or lack of health amongst the municipal bond insurers.

I was wondering if you might perhaps put a little bit of flesh on the bones of what you think, sitting there as an investment expert, about the underlying health of the bond insurers and more particularly the impact you think it has on the market? The impact you think it may or may not have on your own portfolio. The issue with credit spreads, how is that shaping your investment strategy going forward into 2008? How do you think it may play out? Do you think credit spreads really are discounting Armageddon or are they being realistic? Could you possibly put a little bit of thinking behind all that?

I should have dinner.

Well it would be nice actually. There's nothing I like more than to talk about that.

Okay well there were two pieces that I heard there, one was just generally what do I think the markets are saying about credit spreads. I think there's certainly a lot of fundamental concern that's being reflected in credit spreads but on top of that there's a massive amount of deleveraging that is occurring in the capital markets as various parties realize that they have to reduce their risk dramatically. Whether those are banks who've found out that a lot of the CDOs they were holding are almost worthless and have destroyed a lot of capital and therefore have to reduce the amount of risk they hold on the balance sheets. Or SIVs who have hit triggers that are forcing them to sell, or hedge funds that took on mortgage bets and are having to spew out mortgage securities that they may not believe are fundamentally at risk, but simply they're having a margin call.

So there's a mixture of fundamental stress and a forced deleveraging that's going on in the market and I think a lot of the action we've seen, for example over the last few weeks has been a lot of the latter. And -- but it's hard to distinguish, there's no scientific way to tell how much of this is fundamental and how much is just a deleveraging event. But we think a significant amount is that deleveraging event. So we do see a lot of assets that we think are priced much more severely than the fundamentals would justify and we attribute that to a financial sector stress.

Regarding the monolines, that's a big involved question. We do think that the monolines have basic fundamental problems. Regarding how that impacts our own portfolio, we do have some direct exposure, but not very much. I think we've disclosed that in the past. In the US it's less than $200 million of direct corporate counterparty sorts of exposure. We do have bonds that are wrapped but all those bonds that are wrapped by monolines were analyzed at purchase and that analysis is refreshed on a periodic basis to make sure that we're comfortable with the underlying bond structures.

So even if one or more of the monolines go away we don't think we have a significant amount of real economic damage to incur, in the sense that we don't think we have a lot of claims that we're going to have to submit to these monolines, because most of these securities are investment grade on their own. That being said with the monoline insurers going down, we very well could see more market value volatility. We've already seen a significant amount of market value volatility, and that can show up in our equity balances. But we don't think we're going to see much in the way of earnings impact from the monoline problems, even if some of the monolines go down.

So -- and the reason that it has a big impact though is that there's a lot of counterparty risk at banks or other holders of monoline exposure who are forced sellers if monolines get downgraded below AAA. We are not forced sellers if monolines get downgraded below AAA. We have a very stable funding and we are able to hold securities that get downgraded below AAA. So it's a different kind of issue for us than for those parties who become forced sellers when monolines lose the AAA. So we're concerned about the impact it has on the overall financial markets, we're not particularly concerned about the earnings impact for Aegon.

Thanks Eric, and thank all of you for participating today.

Ladies and gentlemen, this concludes the Aegon fourth quarter 2007 results analyst and investor conference call. Thank you for participating, you may now disconnect.