Aegon Ltd (AEG) 2008 Q3 法說會逐字稿

I will now hand the conference to Mr. Jos Streppel. Please go ahead, sir.

Thank you very much. Good afternoon and good morning to those that are joining us in the US. Thank you for joining us for AEGON's third quarter results. Joining me today is Eric Goodman, Chief Investment Officer of AEGON USA, as well as Darryl Button, CFO of our operations in the USA, and Michiel van Katwijk, the Group Treasurer. Eric has joined us to provide you a more extensive overview of AEGON's investments, given the ongoing turmoil underway in financial markets.

Of course, we have already given you a preliminary overview of our third quarter results on October 28th, when we announced AEGON's participation in the capital facility program offered by the Dutch State. Given the extraordinary markets we have seen in the third quarter, this presentation is a bit longer than you are used from us. However, we are trying to preempt your questions.

Please take a moment to read our disclaimer.

Next slide, I don't need to tell you that financial markets have had an impact on AEGON. This is something we discussed rather extensively last week, but what we do want to make clear is that the fundamentals of our business remain strong with a total net deposits of EUR1.7 billion.

The additional capital that we have accessed from the Dutch State and through AEGON's largest shareholder Vereniging AEGON has reinforced our capital buffer to weather the further downturn in market conditions.

As we made clear last week, we are committed to maintaining a capital level consistent with our AA ratings. Our bond portfolio has been impacted by significant spread widening, resulting in increasing unrealized losses. But as we will make clear, we do not believe that the unrealized losses are a good proxy for future impairments. Furthermore, AEGON has ample liquidity.

Slide 5, we continue to execute our strategy which places capital efficiency front and center. As you know, during the quarter, we completed the EUR350 million securitization of a block of our UK business, and completed a number of other capital efficiency and risk-reduction initiatives, which I will cover in more detail in a minute.

We took a 50% stake in Brazil, and setup yet another joint venture with a savings bank in Spain. And we have made progress in refocusing our Canadian business as part of our ongoing portfolio review.

Slide 6, AEGON's underlying earnings in the third quarter amounted to EUR500 million before tax, and that is a decline of 22% on a constant currency basis. The turmoil of financial markets played the biggest part in the decline. We had lower account balances related to our equity-based products which resulted in lower fee income both in the US and the UK.

Lower equity markets also necessitated that we strengthen our reserves related to variable annuities. The guarantees thereof, written before 2004 in the US. We had a spike in mortality in our reinsurance line of business in the US, and then in the Netherlands, we had a charge on a group of pension contracts, in addition to the cost of modifying unit-linked insurance products which we previously announced.

On the positive side, I would like to mention that underlying earnings from our US life business is up 9%, and our institutional business is up 41%.

Slide 7, turning to the Americas; underlying earnings were down 17% due to lower equity markets, and the unfavorable mortality experience I just referenced. The financial crisis negatively impacted sales, particularly to high net worth, and middle market customers. Sales of individual saving and retirement products rose sharply due to the strong demand for fixed annuities. We will call and close deposits of $1.8 billion in the quarter, our best quarter since 2003.

New life sales were down in all lines of business, particularly in BOLI/COLI and life reinsurance. AEGON's value of new business in the Americas was up by 9% with an IRR of 12.3%.

Slide 8, in the Netherlands; underlying earnings before tax declined 31%, driven mostly by a EUR35 million charge to meet guaranteed returns on certain group pension contracts, as well as the cost to modify unit-linked insurance products which had the affect of offsetting the high investment income during the quarter.

Sales were down significantly due to a sharp slowdown in our group pension business. Effectively, the market for group pensions in the Netherlands is basically closed because of the market turmoil. However, individual life sales were up by 10% despite the ongoing economic turbulence. Value of new business in the Netherlands declined to EUR8 million as a result of the decline in group pension business I mentioned.

Other lines of business, our efforts showed increases in value of new business during the third quarter. And we were pleased with the increase in IRR to 11.5%.

Taking on slide 9, a brief look at our business in the UK; lower equity and bond markets resulted in lower fee income which had a negative impact on our underlying earnings. Sales of annuities and group pensions were strong during the quarter as AEGON continued its focus on the rapidly growing at retirement market.

Value of new business in the UK increased by 13% as margins continued to improve in the third quarter. We're continuing to pursue our strategy of transitioning our business to higher margin businesses such as annuities. Consequently, our IRR improved from 12.8% to 13.6%.

Slide 10, in other countries, earnings from our two core businesses, that is, life protection and pension, and asset management held up relatively well in this environment. We now have more than 2 million members in our pension funds in Central and Eastern Europe. We saw a strong increase in deposits due to the retail mutual funds, and variable annuities sales in Asia. Underlying earnings before tax declined by 24% as a result of impairment charges related to Lehman Brothers in our joint venture with CAM, our largest bank partner in Spain. We also experienced a lower contribution from our partner in France, La Mondiale.

The market turmoil impacted new life sales, particularly in Poland and Asia. However, in Spain sales of life insurance were strong due to a sharp increase in activity following government changes to pension arrangements in the country. I should mention here that CAM experienced a particularly strong quarter, with sales up by 57% compared to last year.

In Central and Eastern Europe, sales of recurring life premiums increased by 53% driven by strong performances in Poland, the Czech Republic, and Slovakia. Underlying earnings in Central Eastern Europe remains robust. Value of new business in other countries decreased to EUR32 million due to lower production and a change in product mix in Taiwan.

Slide 11, as we noted previously, AEGON's net income during the third quarter was impacted by an underperformance of fair value items in the amount of EUR384 million, as well as a substantial increase in impairment charges totaling EUR407 million pre tax. I'll come to the fair value items in a moment.

Let me just mention a word or two on our impairment charges. The vast majority of impairments were related to our exposure to Lehman Brothers and Washington Mutual, which totaled EUR336 million, which we disclosed during the quarter. In addition, we had EUR46 million in impairments of housing related asset-backed securities in the United States. I would like to point out here that, although a minor detail, by mistake the press release states, on page 5, in the paragraph on mortgage-backed securities that we have EUR1.7 billion of material tranches of securitization, collateralized by sub-prime hybrid ARM. As we have disclosed in other disclosures, this is only EUR511 million, as you can see on slides 55, and 56 of this presentation.

Slide 12, taking a look in a little more detail to the underperformance of fair value items in the third quarter. Clearly, the largest impact occurred in the Americas. Lower equity markets had a negative impact on private equity and hedge funds. The spike in credit spreads had an impact in the fair value of our credit derivatives. The holding includes issued bonds held at fair value. The interest rate risk on these bonds in hedged using swaps, as credit spreads widened during the quarter, we realized a book gain of EUR123 million.

Total return annuities and variable annuity products that guaranteed minimum withdrawal benefits represent a closed book of business. The negative impact of capital markets on these products were about EUR120 million. The Canadian segregated funds contributed to a loss of EUR41 million driven by lower interest rates in Canada. And lower equity markets also came into play in our private equity investments in the Netherlands.

Slide 13, by the end of the third quarter, the excess capital in our operating unit was EUR312 million and the surplus capital over our regulatory minimum was EUR5 billion. The EUR3 billion additional capital buffer is not included in the third quarter number. As you probably remember, our operating units are capitalized at a higher regulatory requirements, rating requirements consistent with AA level and additional economic requirements which we impose on ourselves.

In the fourth quarter, we expect to see a continuation of negative market impacts. However, as we continue to execute our strategy, we expect to see benefits from the de-risking of our business and capital releases. The quarter end, our regulatory IGD ratio which includes the unrealized losses on our bond portfolio was 160%. Financial flexibility at the end of quarter three was EUR756 million including excess capital in the operating units of EUR312 million.

Capital base is at 71.5% and that is above our target of 70. And again, those numbers are all excluding the secured EUR3 billion additional capital buffer.

AEGON has ample liquidity and strong asset/liability management and is therefore not likely to be a fore seller of assets.

Slide 14, including that EUR3 billion of core capital our IGD ratio would be 195% at quarter end. As mentioned earlier, our IGD ratio does include the negative impact from unrealized losses on our bond portfolio. As some of our peers exclude these losses from their IGD ratio we thought it would be worthwhile to share with you our IGD ratio excluding unrealized losses which would be closer to 260% taking into account the EUR3 billion of capital. Capital buffer of EUR3 billion will be initially held as holding level and therefore is not included in excess capital in operating units.

Slide 15, looking at our excess capital, it is clear to say that statutory earnings had a negative impact which has been partly offset by capital preservation actions. These actions include amongst others, our UK securitization of 350 million announced in July and hedging. The capital released by the securitization in the UK has been up-streamed to the holding as dividend. The change in our target capital is mainly driven by the growth of fixed annuities and increased related to lower equity and interest rates market.

Slide 16, as we have made clear, we continue to pursue the actions we are taking to de-risk our balance sheet and further release capital from our operating units. In fact, we are accelerating these actions. We expect that the actions underway will result in a release of between EUR600 million and EUR800 million in the fourth quarter. In addition to securitizations we will continue to transfer risks through re-insurance of risk as well as lower investment risk in our existing portfolio and by further improving the credit quality of our portfolio. All of these actions are aimed at enhancing our capital buffer further.

Slide 17, shareholders equity declined to EUR9.4 billion and has been mainly impacted by the EUR2.5 billion euro to euro change in the revaluation reserve. We will come back to revaluation reserve later in the presentation, but what I would like to say is that life insurance met long-term liabilities with long-term assets. When private sector interest rise sharply, the fair value of both assets and liabilities declined sharply, but in the absence of cash flow interruptions the ability to meet claims is unaffected. However, under IFRS accounting a majority of assets are marked to fair value on the balance sheet while liabilities are held at cost.

The strength of the US dollar against the euro had a positive impact. Movement in foreign currency translation reserves increased by over EUR1 billion.

Slide 18, turning to financial flexibility. Our financial flexibility has decreased during the quarter as the capital base ratio came down to 71.5%. I would like to note that the financial flexibility of EUR756 million does not include the EUR3 billion of core capital that we secured from the Dutch State.

Slide 19, when we published our preliminary results on October the 28th, we already shared this slide with you. This slide shows the sensitivity of our earnings and capital to a 20% and a 40% drop in equity markets from the September 30 level. I would like to point out that we are showing here our total equity exposure and not just the sensitivity of our direct equity exposure.

The estimated impact on earnings is driven by direct exposure for 5%, lower fees 20%, debt charges 25%, and guarantees by 50%. The estimated impact on capital is for 50% costs by our direct equity exposure for 20% by lower fees, and for 65% by reserve strengthening for guarantees.

It's also important to remember that the impact of the first 20% decline on equity markets will largely be absorbed by our internal capital preservation measures of EUR600 million to EUR800 million in quarter four as mentioned earlier.

Slide 20, as you noted from the previous slide, our direct equity exposure is limited as we have sold a significant part of our equity exposure before markets fell during 2007. Of our general account of EUR132 billion, only 2% under this EUR3.3 billion is invested in shares. As you can see on this slide, the 3.3 billion in shares consist of our investments in private equity and hedge funds and investments for our indexed universal life business.

This other contains amongst others investments in equities related to a collection of group pension contracts. But only one-fifth of our investments is directly in shares for risk of shareholders.

Slide 21, the largest portion of our equity sensitivity is generated by equity exposure related to products with guarantees. The larger portion of this exposure is related to our US variable annuity back-book sold before 2004. So the majority of our un-hedged exposure to guarantees is related to GMIB and GMDB contracts. All new production of variable annuities is hedged. As a result all of our GMWB guarantees are hedged.

All in all, about 60% of our total variable annuity exposure with living benefits has been hedged and we have been exploring ways to hedge a portion of the remaining exposure. As a note, on our Canadian business, approximately 65% of our delta risks has been hedged.

Slide 22, our interest rate sensitivity is oddly shaped. Lower interest rates have a positive affect on earnings as a result of lower funding costs and higher capital gains. The impact on capital, however, is negative, which is a better representation of our economic exposure. I would like to point out that in this sensitivity analysis, we assume that interest rates declined by 1% and 2% and then remain at those lower levels into eternity, which probably is a very unlikely scenario.

At lower interest rates, we are close to guaranteed levels on un-hedged business. As you know, our exposure to interest rates -- to interest rate guarantees in the Dutch business is substantially hedged. Most of this capital sensitivity is related to guarantees on products in Taiwan and the US.

Slide 23, over the past years, our deferred acquisition costs largely consisting of commissions paid on new business have enjoyed ample coverage by future profits. It's worthwhile to note that more than half of our deferred acquisition costs relate to our life business containing substantial mortality profits. Only 11% of our deferred acquisition costs are related to our annuity, both variable and fixed business in the US.

Slide 24, this graph shows AEGON's liquidity position in an extreme stressed environment. Even in such an environment our cash flows remain healthy and the availability of cash clearly outweighs our cash requirements whether you look short term, over seven days or a month, or you look longer term over 18 months or two years.

On a very conservative basis, the estimates that even in this extreme scenario, we have positive inflows for at least two years. On top of that, we have significant contingent sources of liquidity at our disposal. This is very important. It means that we are not likely to be forced to sell investments at a loss to generate cash.

And with this I would like to handover to Eric Goodman, our Chief Investment Officer in the US who will discuss our US general account investment portfolio which constitutes the largest portion of our general account assets. Eric?

Thanks Jos.

On slide 26, we note that in the third quarter we saw an acceleration of the US debt market crisis, with the failures or rescues of several major financial institutions. In particular the failure of Lehman in mid-September brought the crisis to an entirely new degree of intensity and precipitated a series of unprecedented and aggressive policy responses from governments in the US and in Europe.

The impact on AEGON USA's investment results included high levels of impairments, primarily due to our Lehman and Washington Mutual exposures. Fair value items, particularly credit derivatives and hedge funds had large negative marks during the quarter. And finally, our IFRS revaluation account was negatively impacted by declining bond prices.

Slide 27. Under IFRS accounting, we impaired securities if we don't have the intent and ability to hold them to maturity or if we expect to receive less than full principal and interest. Obviously, any securities would actually miss the principal or interest payment are immediately impaired if they haven't been already. During the third quarter, US credit impairments totaled $540 million or about EUR380 million, about 80% of those were due to impairments in Lehman and Washington Mutual holdings.

We've priced products assuming 25 to 30 basis points in credit losses on average, our long-term results are consistent with that assumption. Though, in any individual year we can be well above or below that amount.

Slide 28, our credit derivatives referenced corporate credits and tend to decline in price during the periods of corporate credit spread widening. And although you may have begun to doubt that credit spreads will ever tighten again, it will also gain in price when credit spreads contract.

Among other fair value investments, our hedge fund portfolio experienced a significant loss during the third quarter and so underperformed our expectations by EUR200 million more or less. Our hedge fund portfolio had exceptional long-term results, both absolute and risk-adjusted and is expected to produce them in the future. But we are reducing the pit size as part of our corporate wide risk reduction initiatives.

Slide 29, AEGON's AFS revaluation account increased by EUR2.5 billion in the third quarter, most of which was due to the growth in the unrealized loss in the US portfolio which grew by EUR3.6 billion to EUR7.6 billion pre-tax. I have listed here some questions that we will address on the next few slides. Why was there such a large change? Is that change consistent with broad market changes or is it idiosyncratic? And does it portend large future impairments?

First, "Why such a large change?" on slide 30. As you know, AEGON buys long-term investment grade bonds as a match for its long-term liabilities and long-term bond prices are very sensitive to changes in yields and spreads. As the example on this slide illustrates, relatively small changes in credit spreads or yields can produce relatively large dollar changes in the AFS portfolio. And the yield changes during the third quarter were anything but small. Moreover, those yield changes were large for almost every non-government sector in the credit markets, as you can review in the appendix, slide 52.

And it affected all rating categories from AAA to BBB. The only bonds really immune to this yield shift were government bonds or bonds like Fannie Mae mortgage-backed, are guaranteed by the government. Most of AEGON's "Available for Sale" portfolio is invested in non-government bonds.

Slide 31. So, first let's look at the distribution of that loss across various sectors of the portfolio. As you can see, virtually every sector experienced a price decline, whether a corporate or structured. The average price decline was about 5 points.

But two sectors stand out as having had above average losses and those would be non-agency residential mortgage-backs and financial corporate bonds. Within the residential MBS sector Alt-A and Option ARM bond crisis had significant declines. And the details are available in the appendix, page 52.

Most of the decline occurred early in the quarter and was due to combination of -- most of the decline, I should say for the Alt-A and Option ARMs was early in the quarter and was due to a combination of technical selling pressure from the forced liquidations of market participants such as [CMBS] and CDOs as well as continued fundamental concerns regarding delinquency and loss expectation for the RMBS sector as a whole.

The financial sector also stands out, as the quarter end came shortly after the Lehman, AIG and Washington Mutual failures, but before the TAF program had begun to inject capital into the banking system. Pricing in this sector has begun to normalize versus other sectors, subsequent to quarter end, as systemic fears have declined.

Slide 32. Overall, we believe that the price and yield changes within AEGON's portfolio were largely reflective of generic non-government bond price changes during the quarter. Yields, prices and credit spreads within AEGON's portfolio changed by an amount similar to changes reported in widely used generic bond market industry as is shown in appendix on 52.

In particular, we'd reference our internal attribution analysis to confirm that our credit instruments are performing inline with market variables. And as we note here, our AFS bond portfolio experienced spread widening of about 138 basis points in the third quarter.

Slide 33. There's a widespread concern that permanent credit impairments are destined to rise, market-wide, as a result of the ongoing credit crisis. And that furthermore, these impairments maybe equal to, or at least, a substantial share of the market discount currently embedded in non-government credit instruments.

AEGON's share is the first concern. The outlook for economic growth has been severely damaged and a recession, perhaps a severe one is probably imminent. Such conditions have often given rise to elevated levels of impairments in credit instruments in the past. And although AEGON does not publicly forecast impairment levels, it's reasonable to expect above average impairments in the next year or so.

The second concern that permanent impairments might be equal to or a substantial share of the market discount embedded in investment grade credit instruments is unlikely to be validated in AEGON's view. We're not aware of empirical support for this expectation. The prevailing wide credit spread and low prices have been caused, in part, by the shock to bank capitals, due initially to the massive write-off of subprime derivatives and CDOs. This precipitated a system-wide de-leveraging causing a self-reinforcing cascade of forced asset sales and further de-leveraging.

This is part of the logic of government recapitalization of the financial system, to halt the forced selling and de-leveraging. The rising yields and falling bond prices are at least, partially reflective of this dynamic; in addition to the normal increase in default expectations that are part of the anticipated recessionary environment.

So, here we'll show the relationship between BBB bond spreads and subsequent default experience since 1970. We've sorted the years from tighter spread to wider spreads. So on the far left of the graph you can see that during 1997 BBB credit spreads averaged about 120 basis points over Treasury.

And during the subsequent five years BBB has experienced losses estimated at 40 basis points annualized. On the far right, you see that credit spreads in 1982 averaged close to 400 basis points. And during the subsequent five years BBB has experienced losses estimated at about 40 basis points.

Slide 34. Although the '70s and '80s had their share of nasty recessions, we should perhaps look backward to the depression years, in so far as our as our current debt crisis maybe reminiscent of that period. For this longer study only one year default data is available in the Moody's database. And here you can see that default loss levels did rise, but perhaps less than you might have imagined.

Again, AEGON is not disputing the widespread impression that impairments are likely to be elevated in the coming year or so. But we're disputing the impression that for investment grade instruments, those impairments are destined to be proportionate to the spread widening we've seen, or the associated bond price declines.

Slide 35. We've spoken in previous presentations about the defensive repositioning of various sectors of our portfolio in recent years. That should allow us to avoid substantial principal losses in the current environment. We've spoken about how we steadily migrated the structured portfolio into primarily, senior and super senior structures and how we've been building liquidity balances and liquidating public common equities.

Slide 36. We've also spoken about risk mitigation in the corporate bond portfolio which has been repositioned defensively. For example, by reducing corporate high yields from 5% to 3.5% of general account assets. More recently, as the debt crisis began to unfold, we reduced our financial credit exposure significantly.

We did so in 2007 and early 2008. And since we moved early, before the financial bond crisis reached their lows in the third quarter, we didn't have to take significant losses in order to execute the reduction.

Slide 37. Within our subprime ABS portfolio, we've consistently identified the Mezzanine Hybrid sector as the primary source of risk and we continue to think that this is the case. The other parts of the subprime portfolio, the senior hybrid and the fixed rate securitizations have levels of credit support, but they're high in relation to delinquencies. And we expect few permanent impairments outside of the Mezzanine Hybrid sector.

That being said, further ratings downgrades are probable in all the subprime sectors, as they are for most of the structured sectors generally. Our Alt-A and Option ARM securitizations are mostly super senior and have significant credit enhancement. They could endure high levels of losses in the underlying collateral without suffering impairment.

For example, our Option ARM and Alt A holdings, on average, can withstand cumulative losses around 28% and 18% respectively before experiencing principal loss. Over 85% of our CMBS are in senior most AAA tranches. Below AAA, exposures have been positioned conservatively particularly, for the 2006 and 2007 vintage deals when standards were most aggressive.

About 10% of our portfolio is invested in single-borrower deals where we were able to leverage the expertise of our commercial mortgage lending group. The weighted average LTV on those single borrower holdings is only 32%. The remaining 90% of our CMBS portfolio is invested in multi-borrower deals. Few of our lower rated multi-borrower deals are late vintage. And the weighted average credit enhancement on the entire multi-borrower pool is around 27%.

We fully expect commercial real estate prices to decline significantly and for losses on commercial mortgage loans generally to rise. Nevertheless, we expect few principal losses on our CMBS holdings.

Our corporate bond portfolio's rating profile is more conservative than it was during -- going into the last recession. And it's been repositioned in anticipation of a downturn. Even in the event of a severe recession, we expect the impairments to remain manageable. And one of our chief concerns, a systemic financial sector meltdown, has been mitigated by the aggressive recapitalization programs, initiated in both the US and Europe.

Slide 38. The third quarter was extraordinary and featured the largest corporate failures in US history. As a result of the accelerating debt crisis and the shock to financial sector capital, credit spread gapped and non-government bonds re-priced rapidly. As a result, not only were AEGON's permanent credit impairment higher than normal, but our unrealized losses grew at a rapid rate, with obvious implications for our revaluation account.

But we've offered evidence that the repricing of the portfolio was broadly consistent with generic credit spread changes and that such credit spread changes have not historically been followed by proportion spikes in defaults for investment grade credits. As a result, we expect elevated, but manageable levels of permanent credit losses in the near term, tending the long-delayed, but inevitable normalization of credit market conditions and prices.

Turn it back to you, Jos.

Thank you Eric. Just to conclude before we take your questions, the highly stressed market environment has indeed impacted AEGON during the quarter. However, the strong fundamentals of our business are intact. We've taken steps to strengthen AEGON's capital buffer in what continues to be a period of extreme economic uncertainty.

AEGON's participation in the capital facility program, through our largest shareholder, we believe, gives us the added buffer we might need and in a manner that's in the best interest of our shareholders.

We're determined to maintain a strong capital position consistent with our AA rating requirements. The unrealized losses are not in our view a good proxy for impairments, since AEGON can hold the investments until maturity and does not expect to be a forced seller in distressed markets as AEGON has strong asset and liability management and has ample liquidity.

Finally, we believe we're well positioned to withstand the current turmoil and benefit from an eventual upturn when conditions improve.

Thank you very much. With that I'll be happy to take your questions.

Thank you sir. (Operator Instructions). The first question comes from Michael van Wegen. Please go ahead, sir.

Yes, good afternoon. Mike van from Soc Gen. A couple of questions.

First one, you mentioned indeed, corporate credit as let's say, the next potential risk. And you showed that 38% of your portfolio is industrial related. Could you give some further segmentation in that area to give us a better feel of where the risks are for you in that area?

The second question, on the fixed annuity business. Incredible sales in this quarter, but at the same time we've seen AIG not being in the market and a lot of consolidation in the banking sector. Could you give a sense of where your distribution is, after all these events?

And final question, and a somewhat broader question, on the releasing of capital, 440 million in Q3 excluding the Barclays deal. Could you indicate what elements were done there and on the 600 million to 800 million, how much of that is securitizations?

And finally, related to that, you show in your slides that basically a research strengthening on your VA book is one of your big risks. You indicated before that you wanted to reduce that in the future. Obviously, hedging is very expensive at the moment. But what is your stance on that currently and the capital you released, I assume you're not going to pay that tomorrow to the -- back to the Dutch government. But you want to keep that for a buffer. Thanks.

Thank you very much. For the first question is on corporate credits for the segmentation. Eric, could you do that?

Sure. Michael, as you may have seen in the appendix, we don't break the industrial sector down by subsector, on Slide 50, where we show our broader categories. Obviously, since we do think we're -- we may be going into a nasty recession, the more cyclical sectors of the portfolio, consumer cyclicals, retailing, auto, airlines are all vulnerable in this sort of environment.

We think we have repositioned our portfolio defensively. We've been anticipating a slowdown. It may be a more severe slowdown than we were anticipating, but nevertheless, we did reposition out of some of these cyclical sectors. Our auto exposure, for example, we think is very manageable. We've reduced exposures in many of these sub categories.

I don't have the detailed break-out with me. So I can't quote exposures specifically. But we feel pretty good about our exposures there. We think the corporate sector, maybe because it went through a pretty tough time in the last recession, have balance sheets that are in pretty good shape. We don't see excessive leverage in the industrial sector. And so, we're not particularly fearful of balance sheet-induced problems within the investment grade portfolio. So I think that -- that's about all I have to say there, Jos.

Okay thank you. On fixed annuities share, it's true that AIG has much less a position than we have in this business. But that's to remind you here, Michael, that in the last conference call and also in London, Alex said that we want a distribution channel in the US, in the banking sector. That's partly the cause that we have a better position and I think we have [selling] good products as well.

But further conservation is going on. I wouldn't know but the banking channel is still selling fixed annuities to -- great volume to us.

Any comment, Darryl?

I know, I think you covered it Jos. Our primary channel is the bank channel. There's really four major factors driving the production. We've got a steeper yield curve which is good for the fixed annuity market. There has been broadly a consumer shift away from equity product and into guaranteed product.

We were a benefactor we added new bank channel distribution earlier in the year, which has turned out very successful for us. And the fourth factor, I will admit is AIG was pulled away from the market in the third quarter so, really four things all positive tailwinds towards fixed annuity production.

On the capital action plans, Michael, apart from the securitization we did in the third quarter of 350 million, we had other measures. We increased our effectiveness of available annuity hedging, lower requirement -- lower capital requirements for credit risks and we took the decision to sell our impaired assets, and that's the only way to get credit in the deferred tax assets, so that -- those are the main parts.

As for the plans we have for quarter four, we build -- we have planned some securitizations. And we will continue to transfer our risks to reinsurance of risk and we will lower our investment risk in our existing portfolio and further improving the credit quality of our portfolio, and that together would give us EUR600 million to EUR800 million.

On variable annuity hedging, well, we did a lot de-risking our equity exposure in the last, say, one year. For instance, we took the decision to sell almost all of our direct investments in equity and then came towards the conclusion that the equity exposure we still have is manageable, taking into account that for all new production after 2003 we were hedging our variable annuities.

Having said that, we still are in the lookout for delta hedging for variable annuities that's -- for that part that's still unhedged. We will probably not do vega hedging in such a volatile market as we have today. And with all the capital preservation, if the market stays where it is today, as we have said, we are not planning to use the 3 billion as a capitalization for our subsidiaries in the world. If need to, we will certainly take that decision; it's not planned for now.

Thank you.

The next question comes from Marc Thiele. Please go ahead sir.

Hi, thank you and good afternoon.

First question is regarding Slide 19. And thank you, Jos, for providing us with the components. Could you repeat what you said regarding the first 25% being absorbed, and do you think this is still a good reflection on the current balance sheet sensitivities, because there was this press release in October somewhere which was talking about stepping up the hedging program and I wonder if this is still up-to-date?

The second question is regarding rating agencies. Moody's lowered the rating outlook after this 3 billion recapitalization announcement. And let's ignore the timing of this downgrade for a moment. Would you reassume regarding balance sheet and earnings impact in case they were actually to downgrade AEGON in to the single A category?

And then my third question is just to follow-up on the variable annuity hedges that you mentioned. Do you have a sense in terms of (inaudible) that you'd expect from variable annuities going forward, given that the hedges are likely to remain expensive for some time.

Yes, thank you Mark. What we meant at first absorption, if you follow the sensitivity, the equity sensitivity that we have shown on page 19, and the other scenarios that we have in place. If the first 20% would happen and you look toward capital plans that we just explained between 600 and 800 and the capital plans that we have executed during the third quarter, giving us a surplus over AA level of EUR300 million, then the conclusion is that we could weather such an environment without using the 3 billion facility.

So this is essentially what we mean with the absorption. Stepping up hedging; as I just said, we are looking business line for business line, including variable annuity, whether it makes sense to do delta hedging, vega hedging, we would probably leave alone for the moment due to volatility being as high as it is today.

On the ratings, the question was what would be the effect if we would be downgraded to single A. Well, I think first that that chance is pretty little after we got the facility with the Dutch Government giving us a buffer, over AA of more than 3 billion because we still have an excess.

But if we would be downgraded and the effect is not very predictable, because it depends also what the rest of the industry would be at that moment, and -- well, I've not an opinion on that, if you look to the ratings of our competitors, all the life industry is probably on the negative outlook today and we are not the only ones there.

So I could not make a perfect guess what the effect would be. If we would be the only ones, that would certainly affect all business to business primarily. So group pensions, BOLI/COLI, life reinsurance and those kinds of things.

On your variable annuity question what are (inaudible) the IRS today, well, they are around 8%. And around 8% means that what we have in pricing as the cost of hedges is probably at the low side today. So that means that the cost of hedging is more than we have provided to ourselves for in the pricing and that should be temporary. So either hedging costs should go down or pricing should go up.

Thank you very much.

The next question comes from Farooq Hanif. Please go ahead.

Hi there. I've got a couple of questions on variable annuities, and also a question on the alternative investments.

If we go to Slide 21 where you talk about the hedged and unhedged portfolio, could you just talk about firstly if you do increase hedging of living benefits, what is the cost approximately, let's say, for on average for 1 billion or 2 billion of living benefits to hedge. I know it depends on the how much you are close to being in the money, I'm not surprised, but if you could give a guide on that?

Secondly, the reinsurance that you have on your living benefit, could you remind us who that's with, how often -- when it will be renewed and what the impact of volatility is going to be on the cost of that?

And my third question is, could you please break down the fair value movements on alternative investments between the different factors such as hedge funds and private equity and what's going on in Q4 there. Sorry, lots of questions I have -- but, thank you.

Okay, and difficult ones too, Farooq. And therefore I hand over to Darryl because he is my conscience.

Hi Farooq, it's Darryl.

First of all, actually I want to make a correction in the table on Slide 21. Actually, those exposures on Slide 21 are in US dollar, not euro. And there is one more small correction in there; the hedge fair value for the GMIB is 1.2 billion, not 0.8. So, the other 400 million comes out of the unhedged, so it moves to 8.1, so my apologies for that.

Secondly, your question on cost of variable annuity hedging, we're looking at it right now is the short answer. We have -- actually have some RFPs out. We've had some interest from some third party reinsurers. We actually get a little better accounting and a little better hedge effectiveness treatment if we go third party as opposed to do it ourselves.

And some of this relates to the older [IBDB] benefit that's carried on the book for the amortized costs. So we have some RFPs out there and we're expecting to get some costs back in, in the next week or two. As far as the reinsurance, who is the reinsurance with. I just don't think I can give you that information just for confidentiality reasons, so I'm not going to disclose that here.

Again I think your last question was on break down --

Of the fair value movement.

Fair value movement.

We will give you that later, Farooq. It's the 124 you're referring to. It's 124?

Is it 222 --

224. So the rest of the breakdown you know because it's in the slides. I don't know it by the -- at the top of my head, but we'll come back to you.

Okay, that really helps. Well, thank you.

The next question comes from Duncan Russell. Please go ahead, sir.

Hello, good afternoon. Duncan Russell from JPMorgan. First question is, is there -- do you anticipate any issue with the Dutch Government's involvement in AEGON now for your US subsidiary, do you think there will be any negative backlash either from customers or competitors or the regulator? I know you've structured it via the AEGON association, but still there is an explicit link; so that's the first question.

Second question is can you tell us what the impact of the US elections is on some of your major product lines and pension business, et cetera?

And then the third question is, the derivatives in the Netherlands which are used for hedging purposes it is my understanding that the normal derivative results through the P&L would be zero, but if I look over the last three years, I think you only had one positive quarter from those derivatives and every other quarter has been significantly negative. So what should I plug in for '09 and 2010 for that derivative line and drives it please? Thank you.

Okay. Well, the first question, we do not anticipate any problems for our AEGON USA business with the facility that we secured in Holland. Probably to the contrary, you know what the structure is. They are a non-voting securities they are not even held by the Dutch Government but by the association.

And of course before we closed that deal with the Dutch Government, we have checked everything not only in AEGON USA, but also in the other countries we are operating that will not have a negative influence.

On the USA -- on the US elections, it's a little bit early because you can read programs as long as you want, but one thing is sure; in such an environment as we are living in today, no one of those programs will be executed immediately be it Republican or Democratic.

So of course we have studied the Democratic program and if there is talk about raising taxes in certain elements, it's certainly not bad for the insurance industry but for the rest it's pretty early to say what the influence on our business would be.

On the derivatives in the Netherlands, well, you saw a couple of negatives and one positive and so the conclusion is that the hedge was not totally effective because theoretically, you had to -- should end at zero. That is not the case but we are closer and closer over time. Over time it's getting better, and moreover as you should fill out zero knowing that there will be always some ineffectiveness.

Okay. Thank you.

The next question comes from Frank Stoffel. Please go ahead.

If I -- this is Frank Stoffel from Merrill Lynch. Everything is -- two questions left. First, could you please give us your US risk-based capital ratio as per end of September? And the second question relates to your life reinsurance operations in the Americas; I think you had a mortality charge in the third quarter. So I was just wondering what is going on there, is this somehow related to the data cleaning processes I think you did in the second quarter or is this something completely independent and what is your view, obviously, on the overall situation in your life reinsurance business? Thank you.

Let me take the last one first. We had a problem in tuning up our systems and we mentioned that in the last quarter Alex Wynaendts said that is -- was unacceptable. We have sorted out that problem, it did not need any further provision, so that's behind us. And this is totally something different.

This is just business. You've got a couple of claims. It's mortality claim nothing to do with cleaning up systems, nothing to do with the system. It's just business and we really think that's a one-off. Darryl?

Yes, Frank, on your US RBC ratio, we don't actually manage to an RBC ratio on a quarterly basis. I'm a little more comfortable giving you our year-end projection. It's true, it's obvious that impairments and equity markets have impacted our capital position in the US in the third quarter.

That being said the combination of the capital raise initiatives that Jos went over earlier which is -- a fair share of those exist in the US, combined with we will be foregoing our planned fourth quarter dividend to our parent. The combination of those two we expect to be back above 325% by the end of the year.

So can you say how much of new capital of 3 billion does this protection include?

Subsequently, none. No, we expect to repair the capital deterioration from the third quarter with the capital raising initiatives that we have going on. In combination with we are foregoing our scheduled fourth quarter dividend to the parent. We usually pay semiannual dividends to the parent. So we'll be foregoing the second half.

Frank, what we're essentially trying is that every business unit is capitalized at the double level at the end of the year without use of the 3 billion. If markets further deteriorate that might not be possible even after completing all the actions we have taken internally. That's what the 3 billion is for. The 3 billion is not for repairing balance sheets where we are today.

And I should also comment that my statement stands with an assumed equity market deterioration in the fourth quarter of 20%.

Okay. Well, thank you very much.

Well, just a quick follow-up. On the EUR600 million to EUR800 million that you expect to free up in the fourth quarter, you've already given us some indications how you expect to free this capital up; can you elaborate a bit on where do you believe you are on your way to freeing up EUR600 million to EUR800 million? Do you feel you are halfway through already or you're just starting to taking these actions?

I'm an cautious man, Frank, you know me, I would not -- I never say EUR600 million to EUR800 million if I was not sure to meet the EUR600 million.

Okay, looking forward to EUR1 billion then. Okay. Thank you.

The next question comes from Christopher Hitchings. Please go ahead.

Hi, good afternoon gentlemen. Thanks. A couple of questions. You signaled I think at the capital raising time that you might take advantage of the TARP in the US. Have you got any further in whether you kind of will do that? It seems to depend of -- what I read last night -- of whether you own a thrift and/or could be classified as one?

Secondly, you've got fairly good inflows on your GICs business in the US. Can you give some comment on the margins on what you're writing that business?

Thirdly, just these are fixed annuity sales. I think you had some special commission arrangements in the second quarter. Did they -- were they benefiting in the third?

And just, fourth question, you've given a lot of sensitivity as to what's happen -- what the impact of credit spreads widening on equity markets have been on your balance sheet in the third quarter. Is there any reason why we shouldn't just use those sensitivities to project what the balance sheet might look like today, i.e. the sort of the -- or I think it's 10 basis points equals X amount on the credit spreads and the sensitivities you've given.

And finally, just a clarification; did you actually charge any DAC unlocking in the third quarter? Thanks.

Okay. First on the top. You're totally right. You need to be a thrift or a bank to be eligible for top. As far as we are now, AEGON is not a thrift and not a bank. So unless we change our structure, we are not eligible for top at the moment.

That having said, there are all kinds of negotiations in the US, it might become open to us under certain conditions and then we have to investigate whether that would be a good proposition for AEGON and AEGON USA. You are aware that out of the 3 billion we have the ability to pay 1 billion back to the Dutch Government at better terms than the whole facility.

So we will take everything into account and if it's advantageous to the shareholders we will certainly act. Today, we have not a clear view of whether that would happen or not.

Okay.

On the GIC business we did a couple of deals. I - -we did a couple of deals before -- so in the beginning of the third quarter there were short deals -- any explanation for that, Darryl.

No, I would just say it was concentrated towards the front end of the curve. The majority -- front end of the quarter, the majority of the production was shorter term municipal GIC and some shorter term funding deals.

What I would say, Chris, that towards the back half of the quarter a lot of the market would close on the institutional and in fact remained closed. We do continue to -- if you look at the net flows on our institutional on a year-to-date basis, we're down almost 2 billion negative relative to a positive 3 billion last year.

So the institutional fund balances are running down and that is a conscious effort on our part as we manage or it's part of our capital management towards the end of the year and also just managing our overall profile.

On our fixed annuities, you have the data -- we did announce last quarter that we had a distribution arrangement with one of the largest banks in the US, and that's still standing. It was not a one-off action but it was a distribution arrangement of which we hoped that it will last a long time.

Using sensitivities, yes, well, we are giving you sensitivity so that you get a good look at -- that you can take a good look at the balance sheet. Of course there is management action in between so you cannot calculate a euro for euro, a dollar for dollar, but I think you have a good look on the development in the balance sheet if you used those sensitivities. On DAC, Darryl, any unlocking not much but -- ?

I'm going to apologize I missed that last question.

Was there any charge on DAC in the US, in the third quarter; that was the question, Chris?

Yes.

There was about 20 million in variable annuities.

Is that dollars or euros?

That was dollars.

$20 million. Okay. Just as a follow-up to that; what risk is it to DAC in the UK?

For DAC clearly risk for us is pretty low, because -- and the levels of [deutsche] should go down severely so that's far away.

Okay.

But it's probably unthinkable. I don't think the market has enough time to reach that level in the remainder of the quarter.

Okay. Thank you.

The next question comes from Farquhar Murray. Please go ahead, sir.

Good afternoon gentlemen. It's Farquhar, Fox-Pitt. Two short questions from me. Firstly, just on capital. Of the -- you're confident of gaining the EUR600 million to EUR800 million, but I just wondered if you could give us any color on how much of that might already been done or whether actually it's still zero so far?

And secondly, looking at contingencies, and just in terms of you obviously mentioned 2 billion to 3 billion of capital relief actions originally in June, I just wonder how much of the actions you've done so far? How do you get into that, and whether some of them obviously might be additional to that figure so far?

And then just on S&P, I just wonder where your -- you might have thought that thinking is with regards to unrealized bundles at this stage.

And then the second set of questions; just on variable annuities, can you break down the capital -- excess capital movement between intrinsic value and actually capital requirements in the sensitivity, so showing that please?

Okay. On the EUR600 million to EUR800 million, what I just said on another question, we would not -- probably EUR600 million to EUR800 million if I was not sure that we would get the EUR600 million. So that's almost the same as that at least for EUR500 million to EUR600 million, actions have been completed.

Alex announced that he would install programs for 2 billion in the framework of his strategy and the answer is on the question that if those capital efficiency actions are part of that 2 billion; the answer is yes. It's an acceleration of a program. So you could not do the double account to [have] all these measures that we have taken.

Okay.

The 2 billion was de-risking and there was another 2 billion of release of capital. So if you compare what we did so far, so 1.5 billion if we complete our programs for the year 2008 that goes out of the 4 billion to 5 billion, and not out of the 2 billion.

Okay, great.

Then on the S&P, rating agency S&P realizes that if you look at the business model that actually only impairments are important to value the capital situation of an insurance company.

And I can put it in another way; if you have your assets on fair value and your liabilities are not on fair value, this means that the discount rate for assets and liabilities are not the same. You get an enormous accounting mismatch. And part of that accounting mismatch you see in the negative revaluation reserve and S&P realizes that.

The last question on excess capital and variable annuities, Darryl?

Yes, I think ultimately I'm going to have to [point] on the question, Farquhar. On slide 19, we did disclose our total equity sensitivity, as you all said earlier we did go to a lot of effort to make sure that we pulled in all the components that's our direct exposure, our fees, and our guarantees. I don't have a split on the guarantees what would be reserved strengthening versus capital model. That's something we can take away and think about at a later time.

Okay. Thanks.

Okay. I have time for one other question.

The next question comes from Johnny Vo. Please go ahead, sir.

Yes, hi, it's Johnny Vo from Goldman Sachs. Just a quick question in regards to the -- what is the average duration of the outstanding GMIBs? When can the policyholders elect to take the benefit and I think, Farguhar asked the question, but you're not willing to answer about the what's the split between the reserve strengthening and the increase in capital required?

And just the last question; in terms of the bulk of the equity market sensitivity, you're showing there is that resulting from the living benefits or is that from the [JMD] base?

Well, I'll jump in on both of those. The average duration of the GMIB, I don't have an exact number, but I can maybe guide you there. A lot of the production of the IB product happened in the 2000 to 2002 era and same thing would be for a lot of the DB exposure. Actually, probably going back into probably in the late '90s through to 2000 and till 2003. 2003 is when we pulled that product and came back with the new living benefit and started hedging from there going forward.

So that at least will zone it as far as when the business was put on. Clearly there's a dynamic last behavior in behind the product itself as the guarantees go further and the money, we do expect and reserve and hold the capital for the fact that we expect policyholders to remain longer so that the duration is moving real fine.

The second question?

Split of reserves. The reserve strengthening and capital amount --

Which we -- we just don't have. Third question I didn't get it jotted down. Johnny --

Just -- the third question is just the impact of the equity market sensitivity on Slide 19; is that resulting predominantly from the GMIB or GMD base?

Right. I'm sorry about that. Actually you asked me, it's a mixture of both. A lot of the equity risk is obviously coming from the unhedged business.

Yes.

So it's the older business. It's coming from a combination of the IB product which has some death benefit in concert with the IB writer. But also pre the IB era, so back into the late '90s there was a lot of death benefit only business and just given the timing of when that business was written and the market correction that happened shortly thereafter the death benefit is contributing some of the risks certainly.

Okay. Okay. Thanks very much.

Pick another one. Darryl was quick.

The next question comes from William Elderkin. Please go ahead, sir.

Hello everybody, it's William Elderkin from Citi calling. Two questions. First of all, could you give us a sense of what the earnings impact of your de-risking plans are? I'll assume that those additional risk was contributing to earnings.

And then secondly within the Dutch business, you've got a provision for, I think, some unit-linked restitution selling type things; is that a one of or can we expect to see further charges coming through?

Okay. So that's for me. Start with the deaths and in the meantime we can probably formulate an answer on the first question. The total cost of the repair action for the unit-linked business in Netherlands is 140 million, so 140 million would be the cost to embed its value.

We took 28 million in the third quarter and that's the immediate cost of improvements of the conditions where customers are entitled to as from today. And the rest of the 140 million you will see over time over the duration of those policies and that's between 5 and 10 years depending on the policy. The earnings impact --

I'll jump on that one. At least from the US perspective, I would point to a couple of large initiatives, we are unwinding some of our hedge fund exposures on the investment portfolio. Clearly, the cost there will be, whatever foregone return happens in the future that would probably be the rest or the best way to quantify that. I mentioned earlier we will be in house -- had negative flows on the institutional business throughout the year. Expect those to continue so from a declining balance perspective there will be potentially a spread loss there.

And then the third one is the de-risking of the variable annuity portfolio. As I mentioned earlier in the call, we actually have some RFPs out for some hedging and I don't know the cost there yet.

Right. Thank you.

Okay. One last.

The next question comes from Bruno Paulson. Please go ahead.

Thank you for letting me squeeze under the wall there. Just on page 19, where we look at the income effects or the earnings effects of the fallen equity market, first question I'm presuming is that post-tax or pretax? And secondly, my assumption is that the direct effect is just the one-off that the fee effect is a permanent one.

And the -- sorry it is direct and guarantees are one-off, the fees is a permanent quarterly effect. Is the DAC effect a one-off?

Yes, the DAC effect is a one-off and the numbers are net numbers.

Yes. And these DAC effects do they do both --- this is a removing effect or not a permanent federation? [Devising] off the DAC?

Writing down DAC.

Yes. So it's an acceleration.

Right.

It's an acceleration. It's a onetime, it's an acceleration. If things go well you can invest in later earnings.

Okay. That's one.

And the fees number is based on a full year effect on earnings.

Right. Thanks. And very finally what was the -- in '03, '04 when you revised everything. Why did you decide -- why did you not then introduce a retrospect hedging programs of the IB and DB stuff?

That's a good question. If I would have known what the situation would be at the end of 2008, we would certainly have taken that decision at that time we said we are stopping -- what we thought dangerous production of variable annuities because hedging was not an option at that time because it was just not available.

So we reentered the market when those hedging structures were available. We have de-risked the organization from equity risk by selling almost all of our direct exposure. But in hindsight, you're totally right, we should have done more.

Okay. Thanks very much.

Thank you. Thank you all for listening to us and we are happy to entertain your questions through our IR department.

Thank you.

This concludes the AEGON third quarter 2008 results, analysts and investor conference call. Thank you for participating.