Aegon Ltd (AEG) 2008 Q1 法說會逐字稿

This is, of course, my first presentation of AEGON's quarterly results as CEO, and I look forward to our discussion.

Joining me today is Jos Streppel, our CFO, as well as Eric Goodman, our Chief Investment Officer of AEGON USA. Michiel van Katwijk, our Group Treasurer, is also with us, along with Darryl Button, CFO of AEGON USA.

And given that we will also discuss AEGON's embedded value for 2007, Bill Robertson, our Group Actuary, is also here.

For my part, I'll provide you a brief overview of financial results. Then Eric will provide an overview of our investment portfolio in the U.S., given the ongoing impact of world financial markets. Then Jos will take you through our country units and embedded value results. After that, I'll conclude, and then we'll take your questions.

And as usual, please take a moment to review our cautionary note regarding forward-looking statements.

I'm turning to slide 3. In this call, I'll be discussing our first quarter results, as I will present our strategic plan at our upcoming analysts and investor conference in London in early June.

During this quarter, our business showed strong underlying performance, as underlying earnings increased by 9%, and by 22% on constant currency basis. The market environment, which was characterized by significant increasing credit spreads, high equity volatility, and a weakening of the U.S. dollar and the British pound, had a very negative impact on our first quarter operating earnings and net income.

For the first quarter, we are reporting net impairments of just EUR 32 million, which reflects the continuing high quality of our investment portfolio. AEGON's value of new business for the first quarter declined, due to lower contributions from life reinsurance and our institutional business in the U.S. The weakening of the dollar and the pound is, again, a factor here.

Despite a decrease in VNB, however, we do remain confident in meeting our 2010 VNB target of EUR 1.25 billion.

Slide 4. Taking a closer look at underlying earnings, we can see that our business demonstrated a strong performance in the first quarter. The Americas experienced healthy growth of 14% in dollars, reflecting growth in all lines of business with the exception of fixed annuities, and also reflecting higher investment income in the institutional business due to higher spreads.

The increase in the Netherlands is a result of high investment income and better claim experience from general insurance, while a decrease in earnings in the U.K. is a result of lower fees related to the decline in equity markets.

A positive development in Other Countries reflects the growing inforce of our businesses. And finally, the Holding accounts for an improvement of EUR 41 million, mainly due to low interest rate charges compared to last year.

Let me now turn to operating earnings on slide 5. The 47% decrease for the first quarter is due, to a large extent, to the underperformance of fair value assets, principally in the U.S. In the Americas, credit derivatives were negatively impacted by widening credit spreads, accounting for the decline of EUR 150 million. But in April, a significant portion of the decline was reversed. As we have indicated before, we do not expect cash losses on these positions.

Alternative investments in the Americas and the Netherlands, such as hedge funds and private equity, underperformed the expected returns considerably during the quarter. And another major factor was lower risk-free interest rates, which impacted guaranty products such as total return annuities in the U.S., and Seg funds in Canada.

The EUR 87 million positive contribution from the Holding was a result of widening credit spreads during the quarter, which led to fair value adjustments of our outstanding medium term-note program.

Slide 6. Turning now to net income for the quarter, we are reporting a significant decline of 78%. We experienced realized losses of EUR 39 million on investments, and we recorded net impairments of EUR 32 million. Again, I wish to point out that we consider these lower impairments a reflection of the quality of our investment portfolio, and also, the strength of our risk management capabilities.

EUR 118 million, as indicated, accounts for tax, reflecting higher taxes in the Americas, as a result of the unfavorable impact from an internal reinsurance treaty between the U.S. and Ireland.

Let me now turn to sales and deposits for the group--this is slide 7. Although total new life sales are down 70%, or 8% at constant currency, mainly as a result of lower quality BOLI / COLI and life insurance sales in the U.S., I would like to highlight that Retail Sales showed solid growth, with a 9% increase in the U.S., and 15% in the Netherlands. In the U.S., sales in variable, and in particular, fixed annuities, were strong, as were sales within our pension businesses, which increased 27%.

Market conditions have proven particularly challenging for institutional business in the U.S., as we maintained our approach to writing profitable business. And as a result, institutional sales declined 52%. And the 20% decline in Value of New Business, I have already mentioned.

Slide 8, turning to shareholders' equity. Shareholders' equity was impacted by the decline in the revaluation reserve and currency movements. Our revaluation reserved decreased EUR 1.5 billion, from a negative balance of around EUR 500 million at year-end 2007, to a negative balance of EUR 2 billion as of March 31, 2008.

The widening of credit spreads had a significant impact on the revaluation of bonds in the Americas and the U.K. For the Americas, significant losses on credit spreads were only partly offset by the decrease in the risk-free rates. Unrealized losses in the U.K. were predominantly due to credit spreads.

The impact on AEGON on the Netherlands, however, is limited, because in the Netherlands, we have less exposure to credit investments, and we also benefited from a decrease in the risk-free rates.

Let me just emphasize that AEGON is a long-term investor, and generally intends to hold large parts of its portfolio until maturity. Moreover, as a result of the group's effective asset and liability management, and illiquid nature of our liabilities, AEGON has ample liquidity in its investment portfolio.

At the end of March, shareholders' equity represented 72% of AEGON's total capital base.

I'm now turning the presentation to Eric. Eric Goodman will update you on our U.S. investment portfolio. Eric?

Thanks, Alex. The next few slides apply only to AEGON USA's portfolio, but since the USA represents a preponderance of AEGON's credit risk globally, and all of its U.S. mortgage-backed exposure, it will give a fair summary of our overall investment risk.

As you've already heard, we had relatively few impairments in the first quarter, even though market prices were highly volatile during the quarter, with volatility peaking in March along with the Bear Stearns collapse. The decline in value was consistent with the broad market movements during the quarter.

That being said, the crisis in the credit markets did cause an unusual amount of volatility in our fair value items, as we'll discuss. Our credit derivatives did decline in value by a significant amount, but we still expect these declines to be temporary.

And we will update you on the USA's subprime mortgage-backed exposures. Although we didn't impair any of these securities in the first quarter, there is increased risk of future impairments if the U.S. housing crisis intensifies. Nevertheless, we continue to identify the Mezzanine Subprime sector of this portfolio as the main source of that earnings risk, as we have in previous presentations to you. This part of the portfolio has an unrealized loss of EUR 250 million.

The graph at the bottom of slide 9 is just a reminder that the credit spread widening that was experienced in the first quarter was a very exceptional event. Normally, we are used to seeing 10 or 20 basis points of movement in investment grade spreads each quarter, but we saw 90 basis points in the first quarter. And moreover, the corporate bond sector was actually one of the better performing sectors. The mortgage-backed and asset-backed sectors saw an even more dramatic tail event.

It's worth noting that we've seen a reversal of some of this widening so far in the second quarter. Just in April, 45 basis points for corporates, or half of the first quarter's widening, was reversed.

On slide 10, we remind you about the rules for impairment through earnings under IFRS, and we note that our impairments during the first quarter were only EUR 10 million, net of recoveries.

We've priced our insurance products assuming that we will see 25 to 30 basis points of impairment on our fixed income portfolio each year, on average, and should earn our expected ROE if that assumption holds over time. Some years, of course, will be lower, as the last few have been. Some will be higher, as the graph illustrates.

And although precise forecasts aren't possible, our best guess is that 2008 may turn out to be roughly consistent with an average expectation.

On slide 11, we summarize the impact of credit derivatives on first quarter earnings. Normally these items, which are mark to market directly through earnings, don't warrant special mention. But because of the exceptional volatility we referenced earlier, they did have a significant impact.

All of these derivatives reference corporate credit instruments. None of them are mortgage-backed or asset-backed derivatives. The largest program, listed at the top here, is the so-called Synthetic CDO, or Tranched Credit Protection program. And it's a program in which IMD's Structured Products Group sells protection on very senior, or super-senior tranches of the CDX index.

These contracts are very unlikely to require any cash payment by AEGON. And yet, during an extreme market movement and credit spreads, as during the first quarter, their market value movement can be very significant.

As mentioned, there has been a reversal of over half of the first quarter's corporate spread widening during the second quarter, with obvious implied benefits for this position.

In our subprime summary on slide 12, we reiterate some of the points we've made in previous presentations. Our senior tranches of subprime securitizations, most of which are AAA, hold up well under stress tests, and are not expected to experience significant impairments.

From an earnings perspective, we continue to believe that the EUR 520 million Mezzanine Hybrid ARM securitizations remain our primary earnings risk, and though these holdings may see impairments through earnings if problems in the housing sector intensifies, but with EUR 250 million unrealized loss at quarter end, these represent a manageable exposure for AEGON.

Slide 13--we note that our Available for Sale portfolio declined in value by 3.6%, or if you exclude interest rate swaps, 3.1%. Credit spread widening of an estimated 135 basis points more than offset the benefits of declining risk-free rates. This credit spread widening was consistent with what we observed in general credit market indices.

The spread widening impact was highest in the MBS sectors, as you would have guessed. And there are some tables on this page, and in the appendix, with the specific market value changes associated with each of the structured finance sectors.

Additionally, floating rate securities, by their nature, saw significant value declines, although not necessarily riskier. Their prices don't benefit much from the decline in risk-free rates. Unlike our peers, much of AEGON USA's portfolio is invested in floating rate instruments, as a match for floating rate liabilities. And that contributed to the larger than average market value change.

AEGON believes that most of the first quarter's market volatility, outside of the residential MBS sectors, was driven by an unprecedented array of financial sector stresses, liquidity disruptions, and de-leveraging events that triggered market moves in excess of the increase in default risk. We expect most of these market movements to be temporary. Indeed, credit spreads in many sectors have tightened significantly so far in the second quarter, as we have mentioned.

Furthermore, because AEGON funds most of its investments with stable, long term insurance liabilities or other long term funding, we don't need to realize losses in disruptive credit markets. We can wait for market normalization during periods like Q1. It's one of the strengths of our business model.

Jos?

Thank you, Eric. We're now on slide 14.

With all the attention given to the impact of financial markets on operating earnings, it's easy to overlook the underlying performance of our business. Let me expand a bit on what Alex said in this regard, taking a look at the individual country units.

In the Americas, there was a solid increase in sales of variable annuities, largely as a result of the distribution partnership with Merrill Lynch, as well as the introduction of our Retirement Income for Choice rider.

The integration of Merrill Lynch Life Insurance companies continues to go well. Roughly 12% of the first quarter sales came through the Merrill channel.

Total deposits slipped during the quarter, due again to market conditions, and mainly as a result of a significant decline in institutional sales. However, deposits in pensions and asset management increased strongly.

Slide 15. In the Netherlands, overall, the quarter was pretty positive, both from an underlying earnings as well as from a sales perspective. Although the Dutch market remains competitive, pension sales increased 5% due to higher sales through the broker channel to institutional clients. The 15% increase in new life sales was driven by a very strong growth of immediate annuities.

As you aware, we announced the appointment of Marco Keim as our new CEO as AEGON the Netherlands, effective June 1. Marco has a strong expertise in the Dutch insurance industry, and we look forward to introducing him to you.

Slide 16. In the United Kingdom, operating earnings declined by 23%, mostly due to the impact of lower bonds and equity markets on fund related charges in the pension business. Despite the modest decline in new life sales, the Value of New Business still showed an increase as a result of higher margins.

During the quarter, we launched an onshore bond with a principal guarantee. This, with the variable annuity style pension contract to be introduced soon, we think the U.K. is responding well to customer demands for guarantee products in this uncertain market environment. The decline in the revaluation reserve of EUR 300 million is mainly due to rising of credit spreads.

Slide 17. Our businesses in the central and eastern Europe region continued to perform well, and were the primary reason for the increase in operating earnings for Other Countries. Sales in Other Countries declined by 32%. Lower equity markets played a big part here, which affected single premium unit link sales in both Poland and Taiwan.

In Taiwan, our rather strong variable annuity deposits partly compensated for the decline in life sales.

During the first quarter, in line with our growth strategy, we expanded further in the central and eastern European region, with our acquisition of a pension fund management company in Hungary, and a life and pensions company in Turkey. I should also mention that the number of pension fund members in the region increased to 1.4 million during this quarter. This, however, doesn't account for the inclusion of our recent acquisitions, which would push this number closer to 1 million.

Slide 18, turning to embedded value. I won't spend too much on Value of New Business, since we update you on our progress quarterly, but I do want to emphasize the growth we have achieved of the last couple of years, as well as the diversification of Value of New Business growth by region.

Value of New Business increased by 20% year-over-year to EUR 927 million in 2007. Of this total, 30% of Value of New Business came from new markets, including the international activities from the Americas.

Of course, embedded value is impacted by currency movements as well. Total embedded value per share grew by 2%, and 10% at constant currency. The increase in total embedded value per share is a result of our share buyback, which we completed in 2007.

Slide 19. Embedded value life insurance decreased to EUR 25.9 billion for the year. At constant currency, however, the increase was 2%. The weakened dollar and pound sterling were, again, factors to reckon on with. The net effect of the currency movements was EUR 2 billion less. This was further compounded by EUR 1.2 billion of lower than expected investment returns.

The capital movements out of the life operations reduced embedded value by EUR 32 billion. The operating return, consisting of the positive contributions of Value of New Business and the performance of the inforce life book, amounted to EUR 2.3 billion. Adding to that, changes in economic assumptions contributed EUR 935 million.

Let me now turn it back to Alex. Alex?

Thank you, Jos. So in summary, the first quarter showed a strong underlying performance of AEGON's businesses, but the turbulent financial markets clearly had a negative impact on our operating earnings and net income. However, in this environment, we were again able to demonstrate the quality of our investment portfolio, but also, of our risk management processes.

At the same time, we have continued to invest in our businesses while expanding internationally, and most recently into Turkey. Furthermore, we remain confident in our ability to reach our 2010 VNB target, EUR 1.25 billion.

And in terms of long-term value creation, we've been able to grow the embedded value per share by 2%, and 10% at constant currency.

Before we take your questions, I'd like to remind you of our upcoming analysts and investor conference in London on June 2 and 3, during which I will be discussing in much greater detail our strategic plans for AEGON, and obviously, we look forward to seeing you there.

Thank you. Now we turn to your questions.

Thank you, sir. (Operator instructions).

Where is the first question?

One moment, please. The first question comes from Mark Teeler from UBS. Please state your company name, followed by your question.

Hi, there. Mark Teeler from UBS--good afternoon. Let me start with a question for Eric, in terms of the credit market recovery that we've seen since the end of the first quarter. You indicated that half of the impact that we've seen in the first quarter could be reversed. So do I just take the [150 million] in the P&L and to see a [75 million] positive for the second quarter? And similar, [750 million] in terms of the balance sheet impact?

Also, if I look at the Alt-A investments, have you been buying into Alt-A? For compare the table on page 27, there seems to be an increase compared with the fourth quarter last year.

My second question is related to the embedded value report, and I'm looking at page 10 of the embedded value report. There seems to be a pretty high level of persistency charges, despite previous comments that I've--on questions regarding those persistency charges, comments such as the worst will be over. And I'm a bit puzzled to see close to [500 million] of these charges appearing in the changes in operating assumptions as well as the variances. And I'm just wondering, can we expect at some stage negative impact in the IFRS earnings? Will that impact the earnings outlook?

And can you also provide more detail on the other operating variances? There's sizable numbers in the U.S. and Netherlands, with [307 million] and [139 million].

Okay, I'll go ahead and take the investment questions. Regarding the spread tightening, and its impact on the income statement and the balance sheet, for the income statement, since the big impact was the credit derivatives, you will see a substantial recovery. You can't extrapolate that a 50% recovery in spreads will lead to a 50% recovery in credit derivatives. Actually, it could be more. It's not a linear relationship.

We think, as of right now, the majority of the derivatives loss has been reversed, but of course, that's very volatile and could change by quarter end.

Regarding the balance sheet impact, that's trickier to figure out. We haven't even compiled all of our pricing for April quite yet. And it will have to do not just with spread recovery, but also with the movement Treasury rates. As you know, Treasury rates has also risen fairly sharply.

So it will be a combination of the benefit from credit spread tightening and the offset from the Treasury rate rising, if the current trends continue. All I will say is that just as the floating rate component of our portfolio might have held us back a little bit in the kind of environment we saw in Q1, it may actually benefit us relative to fixed rate peers in an environment like Q2. But I don't have any forecast for how it will turn out on the balance--on the revaluation account, at this point.

And you asked a question about Alt-A--oh, did we add Alt-As? We did add--if I remember correctly, a couple hundred million of Alt-A securities early in the quarter. They were--unlike most of our portfolio, which is fixed rate, these were some very short floaters for a particular niche need we had for floaters. They were very, very high quality, and super senior, and we think low-risk. But yes, you are right, we did add a little bit of Alt-A.

Bill is going to answer the question--Bill Robertson, the Group Actuary, is going to answer your questions on the embedded value, page 10, on persistency and the other operating variances. Bill?

Okay, on the persistency, if we pick out, first, going through the countries--on the Americas, our look at the persistency is just noise. There was a number of small positives and a number of small negatives across different business areas. And in relation to the size of the business in the Americas, I think it's just the kind of noise you can expect to see year on year.

If I pick up the two big ones, in relation to the Netherlands, we had a difficult 2007. It was related to difficult market conditions, and environment within the Netherlands, and competition from banking products. As a result, you can see that we also did a small adjustment to the persistency, operating variance change, and that's because we saw that a decline in the persistency over the period. So we did expect a slight worsening next year, which is why we upped our assumption. But we don't expect it to be at the level of 2007.

In the U.K., it was all to do with the ED impact, which was pretty severe, and we saw that across the industry. And you can see that we made a significant change in our operating assumptions going forward, recognizing that that ED impact might not just be a 2007 factor, and it may continue onwards. But you can see that it's around three times the level of the variance, so it's really quite a significant adjustment, which we think covers it off.

To count on Other--there's a number of small things that are in Other, in the U.S., but the largest part was spread in relation to Other, and for the Netherlands, the largest part of the Other was--actually, it's closely linked to mortality. It was the release of a longevity reserve within the Netherlands business, which gave up pretty well, I think, around two thirds to three quarters of that 139 number, and we debated about whether to include it under mortality or under Other.

Is there a risk that these persistency numbers have an impact on the IFRS earnings outlook?

So yes, they have some impact, to the extent that business came off. But then it was being--if you look at the U.K., what you saw was business coming off and business coming on. We had a very successful period for new business. So the two things will be, to a degree, offsetting there.

Okay, thank you.

Thank you, Mark.

The next question comes from Farooq Hanif. Please state your company name, followed by your question.

Hi, there. This is Farooq Hanif from Morgan Stanley. Looking at your embedded value, the value of holding company debt fell quite a lot. And I was wondering how much of this is related to spreads widening, and how much the dollar--if you could explain that, because obviously, that will probably--yes, some of those effects reverse if spreads have cut back in, so I just want to understand that.

The second question is, we know that the [150 billion] of (inaudible)--it sounds like you had a loss on that, is reversed. But could you talk a little bit more about the other negatives, so in terms of investments, what's going on there, total return on (inaudible) in the U.S., and Seg funds in Canada? Just going--swap rates, and what's going. Can you just explain the sensitivities?

And I guess the third question--I'm sorry for asking so many. But in fixed annuities, your spreads have compressed. So there was 180 basis points but approximately--and I think the average last year was about 250 basis points. Now, I know that Treasury risk-free yields have gone back up. You've had spreads coming back in. But the actual--absolute level of yields does still remain lower than your average in the book.

So could you just explain what's happening to fixed annuities spreads so far this year, and what you think is going to happen going--panning out?

Thank you, Farooq. I'll take any questions, and if we need more detail, then you might ask Darryl.

On the embedded value holding company, that's--it's a EUR 1 billion impact, of which roughly half is currency and the other half is spreads--spread widening.

(inaudible)?

So I mean, similarly--yes, some of that will have, also, come back in Q1, or you'll see them measured on a quarterly basis?

We don't measure on the quarterly basis. But obviously, spread change--that could change. That's clear.

On other alternatives, I think we spoke about the Synthetic CDOs. We have hedge funds, private equity. Actually, our hedge funds in the U.S. have done pretty well. They had a very slight negative performance in the first quarter, which compared to what happened in the market, it was a good performance. So we feel comfortable there.

In terms of private equity, the major change was in the Netherlands, where we have a position in a listed private equity company, and that showed a decline in mark to market.

In terms of changes for the Treasury rates which impact total annuity products, we've seen risk-free rates come up since the end of March in the U.S., so that will clearly have a positive impact. While in Canada, we have seen only a very small increase in the risk-free rates, so at this point in time, they would not have a significant impact on the Canadian Seg funds, negative impact on alternative investments.

In terms of spreads, I think the main reason it's affected our alternative investments performance last year strongly, compared to this year, and that is a major reason of the spread comparison to fixed annuities.

Darryl, is there anything else you would like to add on the fixed annuity spreads?

No, I think you covered it well, Alex. Farooq, if you just look at our underlying spreads, you'll see that they are very stable over the last several quarters, and as Alex mentioned, the operating spreads were down because of the alternative asset performance.

If we think that the volatility is going to continue in that area, then your spreads--I mean, it's not just like a one-off effect, is it? And the earnings, there would presumably be a continuation if the environment continued to be under pressure there.

I would just say that we have the--if you look to the underlying spreads, that removes the volatility from the alternative asset portfolio that's carried at fair value.

Yes.

And what you saw in the first quarter was--as Alex mentioned, and particularly the hedge fund portfolio, while it still performed well relative to other asset classes, it was down about a percent in the first quarter, relative to a positive 2%, 2.5% quarterly expectation.

Okay. Thank you very much.

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

Yes, hi, it's Nick Holmes at Lehman. Three questions, please. The first one is, have you looked at ways of reducing the effect of the volatile items on your earnings? I remember last year, you solved the Dutch hedge problem rather neatly, and I just wondered whether you could do something similar with this nasty Synthetic CDO book. That's my first question. Perhaps you'd like to answer that one first, before I move on?

Nick, no. This product which we have on our books, I don't think that there is any ways. We obviously have looked at it, as you said rightly--we looked at it for the Dutch business, because there we saw significant volatility between the valuation of assets and liabilities. This is a product which is on our books, and I don't think there's anything at this point in time we can do in reducing the volatility. We'll have to live with it.

But is right that you're not adding to that book? You have stopped investing in that book?

Yes. We have stopped--we have not increased our position, and that's why we provide you with this underlying earnings, effectively to try to help you, and to see the longer term trend of our business.

Yes, yes, of course. Second question is on New Business Value. Wondered if you could give us a little bit more color on the slowdown in Asia, and also the slowdown in the BOLI / COLI products, and institutional products, and life reinsurance in the states.

Okay, let me answer it first on Asia, which as you know, it's a part of the world I know well. We've seen actually an improvement in our Chinese business. Volumes have gone up, margins have stayed steady. In Taiwan, which is the other major component, what has happened, as you know, we have since one or two years embarked on reshuffling our portfolio away from traditional and traditional savings products to where it is unit-linked.

So it was not a surprise to us, that when the markets, as you know, in Asia particularly, were very negative, that sales of unit linked products were affected. And that's what you then see in the terms of the VNB.

Some of the products shifted to unit-linked. We also had, on the positive side, a nice increase in our variable annuity products deposits. But obviously, the production was not enough to compensate for the VNB.

And finally, you were asking about other markets? BOLI / COLI, as you know, it's what we call a lumpy business. You get a big deal in a certain quarter, and we did not have one this quarter, in the first quarter. I don't think that it's very strange, because obviously, this was a quarter with so much turbulence in the markets that I can imagine that some of the decision makers were holding back.

In terms of reinsurance, we are comparing a weak--if I compare a lower first quarter '08 with a strong '07 quarter, first quarter, and in terms of institutional--which, by the way, is the biggest impact of the decrease in Value of New Business--I think it's pretty obvious that with the dislocation of the markets, institutional business suffered, and again here, as you know, we focus on profitable production. And with these changes to the market, these daily changes--or changes within a day, I should say--we felt that we had to hold back in order to make sure that we would sell, and sell the right production. It was a very clear choice which was made.

With the BOLI / COLI, do you see signs of recovery in that market?

Yes, I think that--as I said, it's a lumpy business, so I can't predict how Q2, Q3 will be looking. But we have a good franchise, and I believe that once the markets stabilize a little bit, then the decisions will hopefully--decision makers will hopefully take the right decisions and do the deals. But there is no reason to believe that there is a fundamental--neither a structural slowdown in that market.

Great, thank you.

You had a third question?

Last question was on embedded value. You've raised your credit spread assumptions, which is very reasonable. I just wondered whether you've done anything with your default assumptions, or whether you've left those at the normalized rate that you had before.

I'll turn this question to Bill. Bill?

The credit assumptions, as you say, have been raised in the short-term, but the long-term assumption in the U.S., for example, is exactly, at the end of two years, where it was last year. So it's just a short-term adjustment we've made. And I think we've not made any significant adjustment to the default assumption.

Right. So is it correct that some change in economic assumptions, which was about [950 million], is that all to do basically with the credit spreads just being widened for a year or two?

No. The economic assumption impact is almost entirely the fixed interest movement, and almost entirely in the Netherlands. There's a very limited impact in the Americas from the economic factors, particularly if you link in between the variance and the economic assumptions.

But if you go into the--back to the appendices, Nick, so that you look at the individual countries, you'll discover that the big jumps in the economics are in the Netherlands.

Okay, thank you very much.

Thank you, Nick.

The next question comes from [Frank Stossell]. Please state your company name, followed by your question.

Hi, it's Frank Stossell from Merrill Lynch, and I have three questions. First, on the Americas, on all lines of business that have spread based earnings also have shown a strong out-performance over a normal performance on the underlying basis. The life insurance division, however, despite generating about one third of its profits from investment spread has shown a strong underperformance. This suggests quite material mortality issues, which follow on from similar comments in Q4. Could we elaborate what is going on in this portfolio?

And second question. Although spreads will probably continue to tighten again, could we comment on how current spreads compare to the assumptions that are underlying the normal performance assumptions that you gave in your New York presentation last year, and whether we shouldn't expect at least the spread based lines of business to outperform the normal performance going forward?

And my last question is on S&P. The outlook was revised downwards. Could you please comment on this decision, and why do you think S&P has singled you out in a very proactive move? Thank you.

I think, Darryl, would you please take the first question?

Sure, Alex, I'd be happy to. Hi, Frank. It's Darryl in the U.S. I'm not sure if I got the full grasp of your question, but you're asking about the life line of business in particular, and some of the performance there.

If you're talking specifically the difference between underlying earnings and operating earnings, there was some underperformance between the two, and it's related to fair value asset strategies, really, the hedge fund alternative asset portfolio that we were already discussing.

This is something--I wasn't referring to the difference between operating and underlying. In your New York presentation at the end of last year, you gave some indications as to how your different business lines should perform in a normal scenario. You gave some indications on spreads, and reserves, and things like that.

Right.

And about 30% of the earnings of the life insurance division is coming from spreads, so with the spreads widening, it should have had a positive impact on earnings, as it has in the other lines of business that have spread-based earnings.

Oh, okay.

The performance was--it actually underperformed what should have been a normal performance in the quarter, so I assume there must be something going on the mortality side of things, as you commented in the fourth quarter already. Could we comment whether you have any mortality issues in this portfolio?

Okay, two issues--let me try and answer both of them here.

First, on the mortality--yes, it was a relatively weak quarter for mortality, and the life line of business. That's not unusual for what we see in the first quarter of each year. We've actually seen that trend for the last several years, where the first quarter, for whatever reason, does tend to trend negative on mortality results, and we're seeing that again in the first quarter.

Secondly, on your spread question, I guess what I would say is that wider credit spreads will, long term, benefit the life line of business through higher reinvestment income and yields, but that's a very--I guess I would say, a long term outlook, and it's going to take their reinvestment over several years of positive cash flow for that to come in. There is no market value accounting, or anything that would allow that wider spreads to be recognized up front into P&L. So that's something that will come in over time.

Good. All the lines of business in the Americas division in Q1 that have a significant part of their earnings sources being investment spreads have shown good performance, very strong performance in Q1, actually, on an underlying basis. So we shouldn't extrapolate this for the rest of the year?

Yes, well, part of the strongest spread performance actually comes from our institutional business, where actually the spread issue there is a little bit different. It's related to the short end of the curve, and because their liabilities reset faster than their assets, the precipitous drop in LIBOR rates over the last quarter has widened out the product spreads wider than what I would have presented to you in my last presentation. That's where most of the short-term spread gains from an underlying basis come from.

Okay, so just commenting on the mortality question, is it--you (inaudible) quarter, but you had similar comments in the fourth quarter last year already, where you commented on mortality problems in the U.S. portfolio. So there's nothing--it's not a bigger problem in there, in your view?

Well, I think if you look to our embedded value results, you'll see that mortality was pretty strong in the U.S. overall in 2007. As a general trend, we do tend to see it weaker in the first quarter, and then come back over the next three quarters. We've seen that three or four years in a row now.

I would say overall, our mortality generally--if you look over the last three year trend period, it's been on the strong side.

Okay, thank you.

Frank, let me just add that in general, higher spreads is good for our business, for a lot of reasons. Obviously, for the reasons you mentioned yourself, but also, because it means that we can invest our assets on the basis that we have a much better risk/return reward for us. So actually, we see that on the longer run, the higher spreads, which we would see going to a more normal level, are going to be positive, while on the very short term, we've seen, obviously, the impacts, because it changes the asset values.

So actually, we are pretty positive about the environment for us, because of the higher spreads going forward.

You asked about the S&P negative outlook. What is important for us, really, is that the AA was reaffirmed, and I think that's important. You know how important AA rating is for our business. It's important in all our businesses, but in particular in the U.S. And I think that we have not been singled out here, as you were suggesting, but I think it's part of an industry issue, where obviously the whole industry has been impacted by what we see in terms of widening spreads, and I believe also that for European companies with a large exposure in the U.S., that effect is somewhat larger.

But Jos, is there anything that you would like to add to this?

No, but if you read the note that S&P has issued, they confirmed a strong capital position and a strong cash flow position, and a strong liquidity position. And they have set us on a negative outlook, but under certain conditions. And one of the conditions is that future impairment would be far higher than we anticipate in our (inaudible), gave you a preview of what we anticipate in this environment.

Well, if that would not--coming through, that would not be one of the indicators to revise a rating, but so far, obviously, we have a strong confirmation of the AA rating.

Okay, great. Thank you.

The next question comes from Chris Hitchings. Please state your company name, followed by your question.

Hi, good afternoon. It's Chris Hitchings from KBW. A couple of questions.

Just picking up on the capital issue, could you give us some update on what you think your excess capital is, and what you think it might be if you had to impair what your--sorry, if present market values of assets had turned into impairments?

Well, on the capital issue, we really--Chris, we look at capital is our financial flexibility, which is a combination of excess capital which we have in our statutory companies, and the financial flexibility which we have as a holding. And the two together is the way we look at excess capital, and that's [1.5 billion] right now.

In our models, the way we look at the capital we have, we do, obviously, take into account a certain level of impairments, because that would be part of our pricing. And we do that out of prudence. And so, we have not made the calculations like you're suggesting, that all the negative mark to market should turn into impairments, because I think it's a completely unrealistic scenario.

In spreads, come in, but we also have movements of interest rates, and when interest rates go up, we've seen also, obviously, that that impact was negative, while the spreads decreased, tightening we've seen since the end of April was very positive.

Perhaps I can come at it another way. What do you estimate--well, I presume actually you know--what's the gap between your end capital as assessed by S&P, and its 150% cutoff? Can you give us some feel of what freedom of movement you have on that?

I'll let Michiel answer this question.

Chris, the number that Alex was talking about, the [1.5 billion] of financial flexibility consists of [1 billion] of excess capital in statutory entities, and what we call excess capital is the excess over 165% of S&P's model.

So we're measuring against 165%. If you would measure against 150%, which indeed is the lower end of AA, that would add a substantial amount of additional capital.

So [1 billion] is the level over 165%, and the other [.5 billion] you were talking about, that's additional debt capacity.

Debt capacity, or cash that we have on hand, we're holding. Yes.

That's useful. Can I go on to a couple of other issues? The--slide 5 has a rather interesting analysis of the fair value adjustments between different types. Have you ever given these figures before?

I think we have not given these figures before in this level of detail. We've given indications.

Numbers. (inaudible) supplement.

Yes. In the financial supplement, you can find a lot. But we felt that because of the extraordinary nature of this first quarter, it made sense here to provide you these figures in quite some detail.

It's jolly useful, and if you could get some history of what these numbers looked like, that would be great. I'm particularly interested in the holding, the credit from holding. Have you always done that--the adjustment of your medium-term notes to given credit spreads? Has that always been in the fair value adjustments?

Principally, yes, with the introduction of IFRS, but it was never meaningful. And this is the first quarter that it is meaningful, that fair value in the--you have to issue it, MTNs gives us a positive, because it's part of liabilities of [87 million]. We will be very open to that. It's a little compensation of the credit derivatives that are standing out that gives us business--makes losses.

Okay, fine, yes. Just on the same subject of this--sort of, market value of debt, if you're an old fogey like me and think this is a bit funny, could you give us for--in the embedded value statement, the actual face value of that item? What you do is market value, as debt and other assets and holding company? Is that available?

Looking at Bill--if we have the exact number?

The market value of the debt, Chris, is on page two. It was about [4.1 billion].

Yes.

That's the number--

And that's the market value. What's the face value?

If you give me a second, I'll have it down. I'm not sure, but I'll--

We'll come back to you with the exact numbers.

Thank you very much. And just one other question. The fixed annuity is--the sales are very--considerably up from first quarter last year. But not, obviously, on the fourth quarter, where I think you had a very significant--special offers, and a special promotion. How much of the first quarter sales have come from a follow on of that special promotion? Do you have other special promotions going on, on fixed annuities, and what impact has--and I--what is the ongoing sales likely to look like?

Well, Chris, obviously, fixed annuities are in a much better shape right now from the point of view of our customer attraction. I think it's a combination of a couple of things. First of all, the shape of the yield curve, you're well aware of that.

Yes.

These products are now more--clearly more competitive compared to bank CDs, and within banks that we sell a lot of these products.

The second thing, I also believe that the general turmoil in the market also has reminded some--has reminded many customers of the attraction of having a fixed annuity with a guarantee.

The two things combined make that actually we are pretty positive on the outlook of fixed annuities for the rest of the year, as we've seen--as you noted yourself, a very strong first quarter. And we add in bank distribution with a couple of very large banks, which I think is a very good sign, a very positive sign of the fact that our products are liked. And the addition of bank distribution, the continuation of the positive yield curve shape, actually makes us feel that the momentum which we see building in Q1 can be continued.

So did you not have a special promotion in the fourth quarter? I'm--

A lot of--we have special promotions on a regular basis, and sometimes it does show compared to a previous quarter. But I think it's part of our ongoing business. What we're doing is, developing more bank distribution. Actually, as I just mentioned, we signed on one of the largest banks in the U.S., with--for this specific product.

And what is important is that we are able to sell this product now, meeting (inaudible) rates, and I think that's important. So we're actually pretty pleased with the development of this product line now, because it shows you, sort of, our franchise has actually remained strong.

No, I appreciate that. It was just--I was sure my notes--that Don talked about a special promotion in the fourth quarter, and I obviously must have written it down wrong.

On the VAs, the growth--how much--did you say 12% of VA sales came from Merrill Lynch? Or was that total retail sales?

Correct. That's correct.

12% of the VA sales came from Merrill Lynch, and overall sales of our VA product was up 9%. I'd like to make the point here that we have a distribution with Merrill's, which is obviously started with the VA, but has expanded way beyond variable annuities. We talk about pensions, mutual funds.

So our distribution agreement is not limited only to the VA, but it's been much broader, and it's actually working very well.

No, I know that, which is why I was asking the question. So your like for like VA sales are down about 3%?

Yes. Yes, correct.

Thank you very much indeed. And have you got the answer to that earlier question?

We'll follow up later, Chris.

Okay, thank you.

Thank you, Chris.

Your next question comes from Duncan Russell. Please state your company name, followed by your question.

Good afternoon. Duncan Russell from JPMorgan. I had two questions. The first one is, on the fixed annuity deposits--just following up on the last question--where do you think fixed annuity sales could get to, if the yield curve continues to steepen? Is there the same appetite in the market for the product as there was, say, in 2001, 2002? And is there the same appetite at AEGON for that? And you used to sell about [7 billion] of fixed annuities--now you're doing about [2 billion], run rate.

So could you just comment on the potential for fixed annuity sales if the yield curve continues to steepen, please? And then I'll follow up.

Duncan, obviously what is important for us, in terms of how we look at sales, is that we sell products which are profitable. These are products which do use capital, so we have to make sure we meet our revenue range. And the second part, which for us is important, we have to maintain a scale so that we have the benefits of scale. So that is important.

So these two--taking these two into accounts may make it difficult, obviously, for me to give you a number of what we would like our sales of fixed annuities to be. But I actually would be satisfied, and I would be pleased, if we at least would make sure that we get net deposits instead of having net outflows, because with a continuation of net outflows, we end up at a point in time where you're not competitive any more in terms of cost.

So that's the way we'd be looking at it.

Okay, so that's about--in '07, you had net outflows--I think I'm using the right numbers--of about [6 billion]. So that means you would expect the sales--you would like the sales to go back to the '01, '02 levels. Are those the right numbers?

'07 is a--is one of the years where outflows are high. As you know, outflows usually follow sales by a 7-year lag, because when you get out of the surrender penalty. So our outflows in the coming years are going to be clearly lower than this amount.

Okay, I've got it. Okay.

Therefore--if that helps you, I think--

Yes, I've got it. Okay, good. And second question, and you can answer this another time. But I just--no one's really explained the CDS portfolio, the rationale for using that product in the first place. So what sort of--I guess what I'm trying to figure out, what sort of--when you bought that product, or did what you did, what sort of return do you expect--did you expect to get off it? So you've made a mark to market loss of about [140 million]. What would have been net gain you would have expected to made? I mean, you've said you've made no cash losses, but what sort of profit would you make on that trade?

I'll tell you the first part. Clearly, when we sold this product, we were pricing it on the assumptions that we're making a significant and good return on investment, otherwise we would not have done it. But when you do these kind of calculations, you've got to make assumptions. And I think we've made assumptions in terms of standard deviations as to what could normally happen--that's what you price in.

And obviously, what happened in Q1 was a multiple of that standard deviation, and that led obviously to this situation.

And but--why do you do this? I mean, what is it--is it backing some product for a client, or is it just part of a trading book, or why would you do this?

We get paid a fee for this, and we felt that the risk/reward was worthwhile, and that the amount of capital which we needed to hold to do this trade made a lot of sense. Eric, is there anything else you'd want to add on this, I missed?

No, it's indicative of some of the kinds of trades that the Structured Products Group at IMD has entered into over time, where they see reasonable returns for the volatility. I think in hindsight, given the realized volatility, it's fair to say we--they wouldn't have entered into the trade. It was far higher volatility than expected.

And it's quite a lot of the profit in the institutional business, is it, coming from doing this sort of thing?

No. Actually--well, someone else can answer that. I don't think a big percentage of the institutional group's profit comes from the Structured Products Group within that group. Darryl, you may have that number.

I probably could get that number for you, Duncan, but Eric's correct. The number is pretty small, from the Structured Products activity. Most of the profits from the institutional business comes from traditional spread and lending business, where we're basically raising institutional funds at fixed term, fixed interest rates, and investing in the investment portfolio to earn a spread.

Okay, and I just had one final point, on the embedded value. So in the assumptions, you have the spreads, the credit spreads, and you give it for the one-year and the five-year, and they come down over time. And then in the last year, they went up over time.

I don't know--I just wanted to check, does that affect the embedded value totals right there? The credit spreads are coming down, so the market value of your bonds, I presume, goes up. And do you assume that therefore you sell some bonds in your better value and get a gain? Or does it have another effect, assuming you hold the bonds to maturity?

We assume that we hold the bonds to the period in which we released them. Then maybe after we sold, before maturity, because it's part of the cash flow match of the [stop]. But we don't do any kind of clever trading up and down, to increase value. We don't.

No? So basically, there will be an element of profit of the embedded value in the inforce? Which will be a benefit now that you've gone from having credit spreads being high and coming down, to the market value of the bonds goes up? Whereas in the past, it was low and going up--some market value bonds goes down.

There's an element of these two things, offset each other, and you see it in the offset between the variance and the assumptions, so you can find the market value goes down, but your income goes up and vice versa. So by offsetting, they're not--there's no significant impact.

Okay, okay--that's good. Thank you.

Thank you, Duncan.

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

Oh, hi, good afternoon, everybody. It's William Elderkin from the insurance team at Citi. I had two questions, please.

First of all, on the embedded value, in table 7 where you showed the free surplus roll forward, the earnings on inforce from the Netherlands, [minus 1.4 million], that's very different from last year. I'm just wondering what was going on there.

And then the second question was, what proportion of the U.K. embedded value pertains to the Guardian closed book stock of reserves?

I will ask Bill to answer the question, but clearly, in this number recorded, there is also changes in movement of revaluation reserve the Netherlands. But Bill, can you--

I mean, the figure last year was excessively high, and I think Jos and I were doing the presentation in London. We talked about the fact the [5/3 figure] was unnaturally high last year, and if you looked it against [VBFP], you could see that was the case. The Netherlands is the only country where we use IFRS as our basis underlying embedded value, and so you get an exceedingly high level of volatility there, and that negative reflects significant unrealized gains.

So it's not a reflection of what we expect an ongoing position to be.

The second question, on the percentage of the Guardian book out of the total embedded value in the U.K., I don't know the percentage, but I'm guessing somewhere around the 30%? But I think probably we could maybe come back a bit lower than that. But may I come back on that?

It's just only in the Dutch expected earnings on the invoice. What would be a sort of normal level of expected emerging earnings?

We talked last year somewhere around the [400 million] is a reasonable number in the IFRS site, and therefore is probably a pretty reasonable number. Do you have--

Yes, and if you make a correction for the change in our revaluation account in the Dutch organization, you'll come to that number.

Excellent. Thank you very much.

Even higher with (inaudible)?

Yes, [400, 460] with (inaudible), and a change of investment portfolio from equities into fixed income, which leads to higher income.

The value.

Yes, thank you, William.

Your last question comes from Bruno Paulson. Please state your company name, followed by your question.

Hi, it's Bruno Paulson, Sanford Bernstein. Coming back to the mortality stuff that Frank talked about earlier, the--I was wondering what the mortality variances were in the life protection, savings and retirement, and life reinsurance lines in the U.S., so we can sort of get normalized underlying earnings? That's the first question.

Secondly, going back to the underlying earnings again, the center improves a great deal. It was only [minus 17]--that's against [minus 58] last year and [minus 46] in Q4. The interest payments probably went down a bit as you did more debt below the line, below the operating line. But I was wondering what other factors were there.

And finally, the U.K., you mentioned you get a lower tax rate on the life and protection element. What is a reasonable underlying tax rate for the two halves of the U.K. earnings?

Darryl, would you like to please take the first question on the mortality--on the variances?

Yes. Bruno, it's Darryl. In the first quarter, in the life and protection line, mortality was off about US $30 million, pretax dollars. We had a small gain in the annuity book on the payout side of about US $7 million, and everything else was pretty small after that.

And those numbers against last year, or against the normal expectation?

Relative to last year. Actually, that's pretty close to--no, I apologize. The US $30 million is against normal expectation.

And so, reinsurance, there wasn't anything at stake there?

Reinsurance was US $4 million favorable, relative to expectation in the quarter.

Okay, right.

Bruno, on your question on the center, the interest charges came down. It's a combination of a decline in interest rates, and the U.S., in particular, and also a bigger proportion of perpetuals, which obviously was what you were suggesting yourself.

So the [minus 17] is a reasonable number, going forward.

A little higher, but--

Slightly higher, Michiel--our Treasurer--tells me.

Yes.

The final one, the tax rates in the U.K. They're ranging--

There's always some pollution in the numbers of the U.K., because there's some policy--there's a policyholder tax, which is reversed in a tax line--

Yes, yes, I'm ignoring that bit. But you mentioned in the tax, the tax rate was falling, because of the change in the profit mix to the life and protection element rather than the pensions element? The company's effective tax rate fell 13.5% following the U.K.--oh, no, it's not the--or is it? Sorry. High portions of earnings was generated by life and protection, which is taxed at a lower rate.

Yes, and please, that is not every product, product line is taxed at the same rate in the U.K. And if you have a mix of products, you have changes in the average tax rate.

Okay, thanks.

Okay, thank you very much.

Thank you.

Thank you.

This concludes the AEGON first quarter 2008 results and embedded value 2007 analyst and investor conference call. Thank you for participating. You may now disconnect.