Aegon Ltd (AEG) 2009 Q1 法說會逐字稿

Welcome to the Aegon first quarter 2009 results and embedded value 2008 conference call for analysts and investors on the 14th of May, 2009. (OPERATOR INSTRUCTIONS.) I will now hand the conference over to Mr. Alex Wynaendts. Please go ahead, sir.

Thank you and good afternoon. And good morning to those that are joining us in the US. Thank you for joining us for Aegon's first quarter results. And joining me today are Eric Goodman, our Chief Investment Officer in the US; Darryl Button, the CFO of our operations in the US [who is with us here today]; Michiel van Katwijk, Group Treasurer; and Bill Robertson, our Chief Actuary.

As you know, since our last call Jos Streppel has officially retired as Aegon CFO and Jan Nooitgedagt has succeeded him. And Jan is also here with us and you'll have the opportunity to meet him in London during our analyst and investor conference, if you have not already done so.

As usual, I have to ask you to take a moment to read our disclaimer. I'm turning now to slide three.

We continue to implement a strategy, which by now you're all aware is focused on enhancing our capital position, reducing costs, putting in place contingencies and reviewing our business across the board, something that I'll come back to in a few moments.

And let me make clear that, while we certainly are not pleased to report a net loss for the quarter, we are encouraged by the significant improvement over the second half of 2008. The sharp downward trends impacting earnings in the third and the fourth quarters of last year was reversed in the early part of 2009.

Sales and deposits during the quarter were stable compared to the fourth quarter, as well as profitable as shown by solid value of new business. This is a clear evidence of the strength of Aegon's franchise and the continued confidence of our customers. Our excess capital at March 31st totaled EUR 2.7 billion above AA capital adequacy requirements. And finally, embedded value for 2008, which we're also reporting today, came in at EUR 11.35 per common share.

Slide four. Now, returning to our strategic priorities, which are focused on capital, cost, contingencies and our portfolio review. We have committed to a target of releasing EUR 1.5 billion of capital for 2009. And I'm pleased to say that we're well on our way to reaching this target, having released already EUR 900 million in the first quarter.

We're also on track with our cost savings efforts, having realized about a third of our 2009 target of EUR 150 million.

As part of our ongoing portfolio review, we've taken the decision to downsize significantly our Institutional Markets Division. This will reduce the institution spread base balances by US $20 billion in two years' time and will free up approximately EUR 600 million of capital.

In addition, last month we announced the sale of our life insurance operations in Taiwan as part of our strategy to optimize capital allocation and returns. The sale will significantly reduce Aegon's long-term interest rate risk and release us from future capital contributions to Taiwan. And of course, we'll keep you updated as our portfolio review progresses.

Slide five. Let me now turn to Aegon's earnings development during the quarter. The net loss of EUR 173 million in Q1 was largely the result of lower equity markets, the underperformance of fair value assets, as well as impairment charges. Although underlying earnings show a loss of EUR 22 million, this represents a substantial improvement over Q4.

If you exclude the impact of capital markets, Aegon's underlying earnings for the first quarter would have been approximately EUR 450 million. This lower level of underlying earnings compared to the previous year's is a result of lower fees on equity-based products, spread compression and increase in employee pension plan expenses, particularly in the US.

The underperformance of fair value items was driven by certain investment classes, which underperformed their long-term expected returns and accounted for a loss of EUR 197 million. Let me remind you, however, that this is an improvement of EUR 573 million over Q4.

The other major factor impacting net income was impairments. The EUR 386 million of impairments we took in the first quarter were largely in housing related structured assets and corporate bonds in the Americas, as well as equity investments in the Netherlands. EUR 173 million of gains in investments was primarily the result of profits on shares and bonds in the Netherlands.

And finally, the EUR 282 million tax benefit related to the underlying loss, the impairments and losses on fair value items. The high effective tax rate is mainly a result of fixed rates and other fixed exempt income.

As you can see on slide six, the S&P index was down severely most of the first quarter and eventually ended up the quarter at minus 12%. The total impact on earnings in the US from low equity markets amounted to approximately US $600 million, which also included low fee income due to reduced asset balances.

And here on slide seven, we want to update you on our sensitivity to equity markets. And as you can see, the numbers have not really changed substantially since year-end.

It's important to remember that we started our equity risk reduction program already in 2003. We stopped selling certain VA riders in 2003, including also our GMIB. Secondly, we hedged all new production with living benefits and currently we've hedged 68% of our total in-force living benefits. And we reduced our direct equity holdings, both in the US and in the Netherlands.

I'm turning now to slide eight. As I've already indicated, sales were relatively stable during the quarter when compared to the fourth quarter; evidence, we believe, of the ongoing strength of our franchise and continued confidence of our customers.

New life sales were down in the Americas due to lower universal life sales in the high net worth market, and lower variable life sales in the middle market, as well as lower sales of bank-owned and corporate-owned life insurance contracts.

In the Netherlands we won a couple of large group pension contracts, though we've seen it's declined in individual life sales. In the UK sales were down across most lines of business, which offset the growth we experienced in our annuity business. And in other countries Spain experienced a particularly strong increase in new life sales, reflecting the incorporation of our new joint ventures, as well as higher sales within our existing bank partnerships.

On slide nine you can see that net deposits were strong in the first quarter, totaling EUR 1.1 billion. This excludes the business generated from our institutional market division. As I mentioned earlier, we took the decision to downsize our institutional market division, which will reduce our spread-based balances by US $20 billion in the next two years.

Fixed annuity deposits were again strong in the first quarter, but we anticipate lower levels going forward given that we continue to lower our trading rates.

And in our pension business in the Americas sales of retirement plans were lower, mainly due to the impact of financial markets. Reduced asset values have decreased the amount of takeover assets associated with new sales.

Our European variable annuity business is included for the first time in deposits of other countries. And total variable annuity deposits amounted to EUR 115 million, mainly from the UK. Other countries deposits also include our new asset management joint venture in China.

Turning to slide 10. We were encouraged by the 8% increase in value of new business during this quarter compared to last year. GMB in the Americas was flat after the exclusion of institutional guarantee products. But overall, sales across the board remained profitable, reflecting the shift to higher-margin products, particularly in the Netherlands and in the UK.

Turning to slide 11. Reducing costs continues to be an important element of our current focus. And as I mentioned at the start, we're well on our way to achieving the EUR 150 million in cost reduction measures for 2009. I won't detail again the specific actions we're taking; however, they include a broad range of measures underway in the Americas, the Netherlands and the UK.

On slide 12 you can see that, at the end of the first quarter, Aegon's excess capital was EUR 2.7 billion and the surplus capital of our regulatory minimum was approximately EUR 4.6 billion. The decline in surplus capital was mainly due to the negative revaluation of our government bond portfolio in the Netherlands and the rating migration in our bond portfolio in the US. And also impairments and reserve strengthening in the US had a negative impact. That said, Aegon's IGD ratio stands at around 170% as of March 31st.

So, let me now turn briefly to the development of our core capital in the first quarter, as shown on slide 13. The core capital declined to EUR 7.9 billion in the first quarter as a result of an increase in our unrealized loss position. Our revaluation account was down primarily due to the impact of higher risk-free long-term interest rates of loan values both in the US and in Europe. However, you have to keep in mind that, while our assets are valued at market value, our liabilities remain at book value. And as we have made clear to you in the past, we do not consider our unrealized loss position as a good indication of future credit losses.

We are pleased to see that, since the beginning of April, credit spreads have improved considerably, offset somewhat by an increase in risk-free rates, resulting in an improvement in our revaluation reserves of approximately EUR 900 million in April. And in the first part of May the positive developments of the credit spread have continued.

And here on slide 14, it is clear the financial markets again were the dominant sector impacting our excess capital. The three main drivers in the decline were credit impairments of EUR 200 million, the rating migration totaling EUR 600 million in the US, as well as the negative impact of capital markets of EUR 600 million. And as we've been discussing with your previously, we have implemented a number of de-risking measures, which include the reduction of investment risk and increased allocation to cash, treasury and agency bonds.

The EUR 900 million in capital preservation and the de-risking measures that we achieved in the first quarter, which include reducing our exposure to hedge funds and other alternative investments, is expected to reduce earnings by approximately EUR 85 million on an annual basis going forward. It's important to keep in mind, however, that these de-risking measures are not permanent and, consequently, their impact on earnings can likewise be reversed over time.

Let me turn for a moment to Aegon's investment portfolio in the US. This is on slide 15. As you see, Q1 impairments totaled EUR 328 million under IFRS rules, the majority of which were impairments of subprime and residential mortgage-backed securities. However, if we would impair these same securities under the US GAAP rules, the total impairment charge would amount to approximately EUR 170 million rather than the EUR 328 million we are reporting under IFRS. And the difference is that, under IFRS, we have to impair to market value while, under the new US GAAP rules, the impairment reflects expected economic loss, which is generally less than the drop in market value.

On slide 16, I'm turning to the US portfolio, where you can see that NAIC-based rating distribution shifted significantly during Q1. The low investment grade NAIC rating category three through six grew from 8.4% to 11.5% of US fixed income securities. And this was primarily due to rate transactions by Moody's to downgrade non-agency residential MBS during the quarter, often directly from AAA levels to below investment grade.

And our expectation was for most of these securities to migrate to below investment grade in the course of 2009 and, therefore, we have built these expectations into portfolio and capital management activities. Although the economic environment will continue to cause the general trend in credit ratings to be negative, we expect ratings migration during the remainder of the year to be significantly lower.

We perform quarterly stress tests on our mortgage-backed investments, which are done bond by bond using loan-level models. Moreover, the parameters in our models are updated quarterly to reflect market conditions. And as stated before, our hybrid method in subprime securities are most at risk for future impairments, although Alt-A securities are increasingly at risk as well as the housing crisis deepens. However, we do expect principal losses to be manageable.

And here on slide 18 we're providing you a snapshot of our general account investment portfolio. As you know, historically our allocation to government paper has been relatively high in our Dutch portfolio. In the US we have been increasing our exposure to treasuries, agency and cash for the past quarters.

This investment strategy has served a number of purposes. Firstly, we have been investing conservatively in a period of widening credit spreads across fixed income markets. Secondly, we've put our institutional spread business in run-off and, over the past year, our liabilities in this business have been getting shorter as puts have been exercised. And at the same time, some asset classes have been extending, such as structured assets, which no longer benefit from repayment cash flows. And in order to properly match our assets and liabilities, we have been investing in shorter-term assets.

As a result of these actions, we have not been forced sellers of assets at depressed prices. This strategy maximizes long-term value, even tough we are currently incurring a lower return on our short-dated and government paper. We will continue to manage our credit portfolio actively. At the same time, with current improvement in market conditions and the maturity of assets and liabilities of our institutional book much closer aligned now, we will start to invest new money flows into highly rated credit investments.

Let me now turn briefly to Aegon's embedded value for 2008. And this is on slide 18. I won't spend too much time on the [VND] since we update you on our progress quarterly. But I do want to emphasize that, under difficult market circumstances, VND decreased by only 2% in constant currency; that the value of life insurance is down 10% in constant currency, which I'll explain further on the next slide. This is slide 19.

As you can see, embedded value of life insurance decreased to EUR 22.9 billion for the year. It is clear that the positive contribution from VNB and the in-force performance has been more than offset by the negative impact of capital markets. The large negative long-term investment variance reflects the decline in equity markets and the impact of widening credit spread. The net change in economic assumptions was largely driven by lower fixed interest rate returns and higher default losses.

And so to conclude, slide 20. Despite the persistent challenges of the financial crisis, we continue to implement our strategy of enhancing our capital position, reducing costs and reviewing our businesses. At the same time, our capital position remains strong as a result of the capital preservation and de-risking measures we have been taking.

And finally, the fundamentals of our business are sound. Customers continue to show confidence in Aegon, evidenced by relatively stable sales and deposits during the quarter. Our products and services can never be more needed than now. We continue to offer solutions for long-term perfection, asset (inaudible) and financial guarantees that are of value to our customers.

And before we open the line for questions, I would like to take the opportunity to remind you of our upcoming analyst and investor conference on June 9th and 10th in London and we hope to see you all there.

With that, we'll be happy to take your questions.

Thank you. (OPERATOR INSTRUCTIONS.) The first question comes from Chris Hitchings from KBW. Please go ahead.

Thanks so much indeed. I need a bit of -- two questions on the embedded value assumptions. What is the relationship between the credit spreads you've assumed and the default assumptions you've assumed, and what are the sensitivities to that?

And secondly, I'm quite intrigued that you've used a high bond credit assumption but, in fact, your ultimate assumption, particularly in the US of credit spreads seems to have gone down. That's the famous table 23. I'm not entirely sure why that is. Perhaps I'm just being very stupid.

The other -- sorry, that's the main question. Thank you.

Thank you, Chris. I don't think you're being stupid, but I'll pass you to Bill Robertson, who'll give you answers to your questions.

Thanks, Chris. The -- if our book is in the US, because that's the biggest issue in terms of the credit assumption, what we've done is we've moved our default assumption up from 25 basis points to around 45 in 2009. It slides down slightly to around 38 by 2013. The net impact of that, to let you have an idea of the impact, is the original assumption would have hit US numbers by US 328 million in 2009. Under the new assumption, it's around US 440 million.

Taking up on your point on table 23, what we've done there is we've actually ran the higher default assumption in the Americas also through internal ultimate assumptions and that's why you see that drop there in the ultimate assumptions. The higher defaults have flowed through to ultimate as well.

So, you can see that roughly we're looking at a default assumption of just under US 450 million in 2009, and reducing to around US 400 million by 2013 and projecting on slightly down from there.

Our approach to that default assumption is to try and set something that runs about right through different sectors of the credit cycle. And it's a little bit more when you're at the bad end of the cycle, and it's well above what you need in the good part of the cycle.

I'm probably following on from that. Sorry, thanks very much. Is this -- the positive new business is surprisingly good. And I really can't believe that changes in margins or whatever it is the Netherlands has bumped your new business margin up from sort of 14% to 40%. What's the background to that?

Which number is that?

This is the value of new business in the first quarter.

Okay.

In the Netherlands. Or just overall generally, but particularly it's the Netherlands figure that stands out.

the new business impact there has just grown significantly, increased margin coming through from our mortgage business that we're able to generate a significantly higher margin than we were able to generate in the previous year. I think the market's less competitive and that allows you to generate a significantly higher margin.

But what's the proportion of mortgage business to your total in the Netherlands? Because it looked like the business mix, if anything in the Netherlands, is less life and more pensions. And I thought the pensions was the lower margin stuff.

Pensions is lower margin and that's why what you're seeing is the VNB in the pension side hasn't moved substantially. The movement that you're seeing in the VNB in the first quarter is almost entirely due to the higher margin coming through from mortgages.

That's fantastic. What is the margin you earn on the mortgage business then?

I don't know the exact answer to that.

Thank you.

We'll follow up, Chris.

Thanks.

Thank you, Chris.

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

Good afternoon, everybody. Three questions, please. The first one, I would just like to go over your comment on ratings migration again, about it being front-end loaded. I mean, I remember in Q4 you had something like a EUR 300 million impact. I mean, could you talk about what you -- what kind of level you think you could be facing going forward and what the kind of rating agencies are doing? That's question number one.

Question number two is you talk about going back into corporate credit, which is a lot more positive than your previous statements. Could you talk about where you're going to invest and how much you have to invest? I mean, if you have net flows of EUR 1 billion in fixed annuities and VAs, for example, but you're expecting fixed annuities to go down. I mean, how much -- how significant do you think that will be?

And the third question -- sorry to ask so many. You've made EUR 900 million of capital release in one quarter. You haven't got very much left to get to your target. Is your target going to go up?

Farooq, thank you. I will respond to the questions -- second and third questions and then pass it on to you, Eric Goodman. If you could then provide a little bit more color to the rating migration.

In terms of corporate credits, I think what we've said here is that we are starting carefully to look at opportunities to invest new money inflows in highly-rated credit investments. This, we'll do that very carefully. It's part of our total portfolio review. And as you know, we actively manage our portfolio.

In terms of capital release, yes, we did release EUR 900 million. We did give you a target of EUR 1.5 billion. The target's for the full year. As you know, I mean, a lot of these actions on capital release, they have to be implemented either directly by sales. In certain cases you need a counterparty. So, it's too early now after the first quarter to talk about increasing the target.

In terms of rating migrations, I think I'd rather pass the question to you, Eric. If you can give a little bit more color of where we see the remaining of our rating migrations in the context of what we've said, that we see that rating migrations' impact on capital will be significantly lower in the following quarters. Eric, would you like to add something to it, please?

Yes, I will. The reason there was a spike in ratings migration in the first quarter had to do with a wholesale reevaluation by Moody's of the Alt-A [neg-am] and subprime sectors, RMBS sectors. It was not a surprise to us that they made that reevaluation. In fact, in our beginning of year planning we identified those sectors as likely to be where migration would be concentrated, in addition to high-yield, of course.

The -- and S&P has taken some actions. Moody's decided to do a lot in the first quarter. And just by definition, that can't be repeated quarter after quarter. In other words, when most of the neg-am securities are already downgraded to high-yield, they can't do that four times in a row. So, almost by definition, some of the things that have occurred in the first quarter won't be repeated.

We do anticipate elevated levels of downgrades in each of the remaining quarters. And we have identified the securities and sectors where we think that's going to come from. I don't have the number at my fingertips to give an indication, but we do think they're going to be well above average. We just don't think they'll be at the kinds of levels you saw in the first quarter.

And if I may just come back -- I mean, just on the question of how significant it's going to be, your investment in corporate credit and taking advantage of spreads. I mean, how much money net do you think you're going to be able to go in? Is it quite small initially and a bigger impact later on, or could it be quite significant?

Farooq, I think this is the question I just answered. It relates also to our European part of the business, so not only in the Netherlands in particular. Also in the US, as I said, it's going to be a step-by-step approach. We're going to see opportunities in the market. And what we see is there's pockets of good value and we just want to make sure that, where we have the amount of cash available, that we are able to deploy that in a sensible way.

Okay. Thank you very much.

Thank you. The next question, please.

The next question comes from Hans Pluijgers from Cheuvreux. Please go ahead.

Yes. Good afternoon, gentlemen. One sort of question on the rate migration and your capital preservation. Do you still want to keep the target at EUR 1.5 billion? Of course, investing in credits more, it's still high rate but, of course, capital used for that will be somewhat higher. Is it not more logical to reduce your capital preservation program instead of investing more in high-rated? Could you elaborate on why you choose for the one and not for the other?

And second, on your tax, could you elaborate and give a breakdown on which part -- because you mentioned it in your press release that the part was permanent. Could you little bit elaborate on the size of that impact?

And thirdly, for some operation -- discussing restructuring charges, we cannot get any number. Could you give some more indication with respect to restructuring charge taken in Q1?

Well, please keep in mind, in response to your first question, that we have actually been de-risking our portfolio quite significantly. As you know, we have now a significant amount of our portfolio in cash. So, what we're really doing now is investing it in highly-rated credits. But this is very careful. This is step by step, by the way. Not talking about moving big amounts. I'd like to repeat that here. But it's a first step into that direction.

And at the same time, we have a target of EUR 1.5 billion. We've achieved EUR 900 million in the first quarter and we have the rest of the year to execute other capital preservation plans.

In terms of tax, I'm not sure I exactly understand your question. The only (inaudible) is that we have in terms of tax no one-offs. These are just the usual tax exempt results. And as you know, when you have results which are close to zero, calculating percentages when there are some fixed items is not very relevant anymore. So therefore, the tax rate which, if you calculate it back, should be in the rage of 60%, clearly is not an indication for the rest of the year.

No, I understand that. But you are saying a part comes from impairment and fair value -- impact from fair value changes and some other impacts are more permanent. That's what -- the three explanations given. Is it possible to give then the impact from -- on a tax rate from the impairment and the fair value charges?

No. I don't have the split up. I'm happy to have somebody to follow up with you.

Okay.

But what you have to see is that when you have losses, then you have a tax offset and that's basically what we are saying.

Yes, I understand that. I understand what you mean, but --.

Yes. We'll come back to that separately in the breakout.

In terms of restructuring costs, yes, we had some restructuring costs which are related to the actions we've taken, particular in IMD, the Institutional Market Division. It was taken in the amount of US $22 billion of restructuring costs in the first quarter.

Okay.

22.

Thank you.

Thank you.

Thank you. The next question comes from Farquhar Murray. Please go ahead.

Hi, there. Afternoon, gentlemen. It's Farquhar from Fox-Pitt here. Three questions, if I may. Just starting actually with rate immigration, unfortunately. Just wondering if you could decompose the EUR 600 million of pressure you had from that in the first quarter, perhaps between pressurized RMBS, etc., and maybe corporate bonds.

And then, I just wondered if you could just talk us through what kind of planning or thinking you have on that, i.e. through the cycle, what levels you're perhaps anticipating and what incentives there are around that.

Secondly, I just wondered if you could -- on the EUR 900 million recovery on re-val losses in April, etc., I wonder if you could just give us some color on which part of assets are actually doing the most about fact.

And then finally, just a detail question. On RBC, I appreciate it's obviously -- it's very complex in the year end, but I just wondered if you could give us a sense of where that number stands now. Thanks.

I will -- Eric, could you please elaborate a little bit more on the rating migration question? The first question.

I have some -- kind of a rough breakout for you. The vast majority of the migration impact came from the residential mortgage-backed downgrades that I referenced earlier. There was an impact from downgrades in -- of high-yield bonds and other bonds, but those were mostly offset by some of the de-risking activity, where we were selling some high-yield bonds as well. So, the cap loss after those sales pretty much, in rough numbers, offset the downgrades there. So really, most of the impact came from the downgrades of Alt-A securities and subprime.

With -- regarding the recovery in April, I can address what we saw in the US. And maybe I'd reference the slide in the appendix where we show -- I think it's slide 34 -- no, 33, where you can take a look at the various sectors. I don't have an attribution for that EUR 900 million, but it's sort of preliminary anyway.

But within the -- with just these generic sectors in the US market where most of that probably came from, you can see that there were big recoveries in high-yield and -- well, housing-loaded ABS was maybe overstated by this index move. But almost all the sectors have had triple-digit kinds of spread tightening.

So, it was a pretty broad-based rally in the spread markets and it well overwhelmed the relatively modest increase in risk-free rates that we've seen. I'm afraid that's all I can do for you right now.

Just --.

We'll have a better attribution when we release our quarterly numbers next time.

No, that's fine. Just as a follow-up on the ratings migration. I mean, there's ultimately presumably some cap on how much you can actually (inaudible) the risk rating on things once they've hit high yield anyway. What kind of through the cycle increase are you expecting from the corporate side, which presumably is a bit more predictable, or kind of -- there is some history to play with?

Well, that's exactly right. We go back and use some of the statistics you're referencing from the Moody's database, etc. We also do a bottoms-up look at bond by bond for bonds that are trading at steeper discounts or have low ratings and make an assessment of the probability of downgrading. We try to blend both that top-down perspective, more the actuarial analysis based on historical ratings migrations during recession years with the bottom-up approach.

And is there any kind of rule of thumb we can apply in terms of how much we should anticipate of that going forward?

I don't think so. As far as I know, we're not releasing the -- our quarter by quarter forecast for that. But if we change on that, that can come through IR.

Okay. And on the RBC?

Farquhar, I'll respond to that. And just to add to what Eric said in the US, we see actually the same type of movement in April in the Northlands and in the UK.

In terms of RBC, as you know, we do not do any of -- we do an annual calculation. We don't do quarterly calculations. We see our RBC ratio in the US at this point approximately around 300%, while our target remains 325%, between now and the end of the year we'll get to 325%. And I'll pass it on to Darryl. Can you add something?

Yes, sure. Hi, Farquhar. It's Darryl. I guess all I'd say is we are doing quarterly estimates of the ratio. And Alex is correct, we estimate to be around 300%. The short answer is the migrations and the decline in equity markets in the quarter got a little ahead of our capital initiative plans that we have for the rest of the year. And when we look at our plans and forecast it out to the end of the year, we're expecting to in and around the 325% range.

Okay. Thanks much, indeed.

Thanks, Farquhar.

The next question comes from Nick Holmes from Nomura. Please go ahead.

Yes. Hi, there. I had three questions on US life. The first one is could you tell us how much DPAC you've accelerated and for what reasons? And can you give us some sort of guide as to how much could be reversed in Q2 if markets remain stable?

The second question is just the same with the VA reserve strengthening.

And the third question is, what effect do you think the introduction of VA [CRVM] will have on your unhedged VA book? Thanks very much.

Nick, Darryl will answer these questions. Darryl?

Yes. I'll give it a shot. You said US life. You mean the US life business or the US business (inaudible)?

Yes. It was a generic term covering everything.

Okay. We had -- on the life business specifically, we did have about 25 million on the life business related to persistency, driven mainly off of our variable life products, our variable universal life and our index universal life. That's not uncommon to see elevated lapses in times of volatile equity markets, which is what we've seen.

When you move over to the annuity business, that is clearly where we had the largest impact in the quarter. We had a combination of DAC and locking in reserves of about 450 million in the quarter on the VA business. You really can't separate DAC and reserves the way the SOP reserve mechanism works and the [DAC-ter] intertwine so you have to look at them together. And we had 40 million on the reinsurance business. And that would be the -- I would say the bulk of the one-timers or the DAC and reserve effects related to the equity markets in the quarter.

We also had some policyholder reserve -- or sorry, some policyholder assumption changes on the VA business related to lapsation assumptions that hit for another 75 million that I think we touched on in the press release.

Right. Yes. I was sort of trying to get at -- I mean, you say it's all equity related, all those numbers. Does that mean that in Q2 it would be reversed out?

I think we're saying about 600 million in the quarter was -- in our underlying earnings was equity market related. And yes, I would expect most of that to be -- I would expect all of that to be gone at this point in Q2. I can't predict where we go between now and the end of June, but that's a combination of equity market related, a combination impact on DAC and reserves together.

Okay. One thing I wasn't quite clear on is I thought you were using mean reversion for equity assumptions.

We are, Nick. But we've hit the top end of the corridor of our methodology, so we --.

Okay. So, you're on 15% for five years.

That's right, as of the first quarter end close. And then, as the markets recover from that, that assumption will come down and that will dampen the volatility significantly going forward.

Okay.

But I think the key there is that we're fully DACed and reserved through to the end of Q1's market levels. So, as long as we don't breach below that, we should be much more stable going forward.

Right. And sorry, Darryl, you can't provide any sort of indication of the split between the secondary guarantee reserve strengthening and the normal DPAC unlocking?

Well, I probably could, Nick. I don't have the numbers with me. To be honest with you, I stopped looking at the two separated because they are intertwined, the way you do the actual accounting you end up taking the reserve strengthening first and then you take a DAC offset to that. So, you get some non-intuitive answers if you look at the two separately. I really do think you need to look at the two combined.

Okay.

If the split is important to you, we can follow back up with you.

Okay, yes. That would be interesting.

I think the third question you asked was the VA CRVM work and I don't have any numbers for you, Nick. The short answer is we're working through all that analysis right now.

Can you give us any sort of fell for what it might do?

I mean, at this point I actually think it won't be that material. And like I said, we're working through the mechanics of the calculation right now. We're already holding -- our total capital base is already on a CT-98 economic-type level, the capital. I don't expect that to change because of the VA CRVM rules. So, I'm not anticipating a big hit, or a big change.

Okay. That's very useful. Thanks very much.

Thank you. The next question comes from William Elderkin from Citi. Please go ahead.

Hello, everybody. I've got a couple questions, please. First of all, two more sort of general strategic ones. Can you give us a sense of how important your AA rating is to Aegon as a whole? The reason I ask is I see that, if you were say to target a single-A rating, your level of surplus capital would appear substantially higher than it is. And when you come close to sort of the point at which you may or may not begin to start returning Dutch government capital, there is presumably quite a significant tradeoff between the cost of that AA capital and the ability to start redeeming it. So, I'd be interested in your thoughts on that.

Secondly, in terms of your variable annuity strategy, I see one of your close neighbors in Holland has taken what I understand to be a very significant reversal of their VA strategy, moving towards I think more VA-light product, if you like. If I understand, you're pretty much sticking with what you've been doing. If that's indeed the case, why is your view of the -- so the product, what is the right product right -- and how you see things developing?

And then the final question relates to the 450 million I think of underlying earnings that you gave on slide five. Within that, is that net of -- there's a number of one-offs you mentioned particularly in the US business in terms of pension reserves strengthening and so on. Is that a clean number? And secondly, how would you expect that to change over the coming quarters as the rest of your expense initiatives feed through? And also, given markets have come up, how earnings from the fee business would help that develop as well.

Okay. Thank you for the questions. Somebody's having a laugh here. Hello?

I'm sorry.

Your first question on rating. We'll continue to price our business target, capital levels on the AA ratio -- the AA rating level. So, we'd like to maintain our AA rating. However, at a certain point in time it becomes something above our relative position compared to our peers. And at this point in time, we are key to maintain our AA rating because we think it's where we should be.

In terms of our VA strategy, I think I should remind you first that we've had a distinctive strategy in being quite selective in which areas of the VA markets we wanted to develop ourselves. AS you know, we have stopped selling the GIMB products, the old GIMB products as long as in 2003. And we switched to products which we feel offer a much better risk/reward profile for us as a provider.

So, the strategy which we are following in Europe and the UK, as we said, we want to enter into in selective ways in other markets in Europe, is also to provide a product which as a risk/reward profile which we are more comfortable with. We've seen actually in the UK the first quarter sales have run [EUR 115 million]. That means it's after quite a lot of marketing effort. And bringing the product to the knowledge of our distributors, we see that finally some interest is actually been picking up. But we want to do that within the parameters which we have set ourselves.

In terms of the EUR 450 million, what I'd like to say that, yes, there are a couple of one-offs in there. Let me give you some examples. There is a restructuring cost, the change in DAC assumptions that Darryl just mentioned, but also effects of expense reductions. And I think that if you kind of net all these one-offs, the EUR 450 million would probably be closer to EUR 500 million. That's the rate, the kind of number I would use clean of the different one-offs.

I just have one follow-up on that. From what I could see looking across your asset-based earnings in the US, in the UK and so on, pensions, they were very much down from where we were say a year ago. Given the pickup in equity markets we've had this quarter, do you have any feel of how much more earnings we might see coming through as those account balance climb up again?

Well, William, as you know, these markets go up and down in a short period of time. The numbers we gave you, the indication I gave you of a EUR 500 million kind of netted off all the different one-offs is probably a reasonable indication. Yes, if markets move substantially up and stay up, because I think it's important that they need to stay up for a longer level, then you will see an improvement. Just keep in mind that the markets effectively now are just back at where they were at the end of last year.

Okay. Thank you.

Thank you. The next question comes from Johnny Vo from Goldman Sachs. Please go ahead.

Yes, hi. Just a couple of quick questions. Just in regards to your RBC ratio of 300, can you just tell us if you have actually down-streamed any capital from the holding company to boost that RBC ratio?

The second question just relates to the run rate in terms of impairments. I mean, the impairments obviously for this quarter were 328. At Q4 it was 360. Is this a reasonable run rate going forward? Because obviously, arrears has got worse it the US and also house prices are still falling. So, can you give us some feel of that?

And the last question is can you give us an update with regards to paying back the billion pounds -- the first billion pounds back to the Dutch government, which would incur less costs then than the 2 billion remaining? Thanks.

Johnny, I'll respond to your first and third questions. The answer to your first question is no, we have not up-streamed anything to the US -- downstreamed, sorry -- anything to the US. I'm used to upstreaming, so --. We haven't used anything -- we haven't downstreamed anything to the US to get it to the 300% level.

In terms of the 1 billion, you asked me the question. I'd like to remind you that we have until the end of the year to decide what we do and how, if we pay back the 1 billion. You're absolutely right to observe that the 1 billion can be paid back at favorable commissions so we'll do our best. But we need to take into account how markets develop between now and then to do our best to pay back this 1 billion.

In terms of impairments, I think it's very difficult to say something about impairments in the future. But I'll pass it on to Eric, if you have anything you wanted to add to this. Any color you can give?

Well, obviously we are in the middle of a very sharp recession. And we've said in the past that we don't forecast impairments, although we have said that, given the economic environment, we expect elevated levels of impairments and I think we reiterate that.

I think that the improvement we've seen in the markets, though, gives us some feeling of comfort that maybe the tail events that might have been looming when the financial sector seemed to be on the brink of being nationalized sometime in February may - some of those tail scenarios may be off the table. But we do expect elevated levels of impairments going forward. I don't have anything to say in particular about any run rate, however.

Okay. Thank you.

Thank you.

Thank you. The next question comes from Trevor Moss from MF Global. Please go ahead.

Good afternoon. I just had a couple of questions. Actually, I wanted to follow up on the impairments, really. I'm certainly surprised by the fact that there were so many residential mortgage-backed securities that were downgraded to below investment grade by the rating agencies. And that's evidenced in your tables as well. There's significant unrealized losses obviously in those areas. I'm a little surprised there weren't more impairments coming through the RMBS line.

And I suppose, following on from that, Eric, I wonder where you see -- I think you've indicated before where you see the greater sensitivity to future impairments. Is it still in those residential mortgage-backed securities, or do you see sensitivity in any other areas there? So, that was really sort of one question.

And the second question was really just a simple one, I think. I would like to know where your crediting rates on the fixed annuities were in the first quarter and whether that was substantially above where the market was at. You implied that you were going to reduce the amount of fixed annuities you were writing going forward as you brought your crediting rates down. So, I'd just be interested -- a little bit of a flavor of where you were and what you're doing there. Thanks.

Eric, anything else you can say on -- and answer the question of Trevor?

Well, you're right. There was a lot of -- there were a lot of downgrades in the RMBS to high-yield status. And the housing market does continue to deteriorate. So, yes, I would say that we remain somewhat vulnerable to further impairments in subprime and potentially some more Alt-A securities. But given where we are, we felt as though we impaired securities appropriately with the information we have.

And I think you also asked about future impairments, are they likely to come from that area or other areas. I would say yes to both. We probably will see some more impairment in residential mortgage-backeds. And certainly corporate bonds in this environment and high-yield bonds have historically shown elevated levels of impairments in recessionary environment. And we don't think this recession will be any different in that regard. So, both sectors are likely to show -- be sources for the elevated level of impairments that I have indicated we expect over the coming year.

Could I just have a quick follow-up on that one, Eric? On the RMBS, are you, broadly speaking, making similar assumptions to the rating agencies in your modeling of where you expect to see cash losses coming through in terms of potential house price movements and default rates and so on and so forth?

I'm not sure whether we're using -- I can't say for sure that we're using identical assumptions. We'd like to think we're a bit ahead of the rating agencies. But since I don't have that data in front me, I can't confirm it.

Okay. Thanks.

Trevor, on the crediting rates, as I mentioned in my introduction, we are lowering the crediting rates. On average for the first quarter it was 3.8% (inaudible) basis points crediting rate. And at the end of the quarter, actually, the rate was around 3.25%.

But Darryl, maybe you want to give a little bit more color?

Sure. Trevor, hi. It's Darryl. No, that's right. We ended the quarter around 3.25%. We've actually trended down since then. We're actually on the high twos on several accounts there as well. And the short answer is that we're getting more flows than what we have the current appetite for right now and so we're starting to bring those rates down.

And you asked where we were from a competitive standpoint. For those that are in -- it's still a very competitive field, to be honest with you. But we are seeing that, as we've been bringing it down, others have been following us as well. So, there's -- as far as the lead competitors, they're all in a similar space.

Okay. One of your competitors this morning said they were down at 2.75. So, is that sort of where you're at?

Yes.

Yes. Okay.

We're down in that range as well.

Alright. Very good. Thanks.

Thank you.

Thanks, Trevor.

Sorry, sir. Are you ready for the next question?

Yes.

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

Hi. Thank you very much. Looking at the evolution of the excess capital, just some questions on that. With the rating migration, is the way of thinking about that that the RBC denominator went up by EUR 200 million and that, therefore, took three times that off the AA surplus, given 300-odd percent assumption? And the EUR 600 million hit to interest rates in equities, can we assume that that's mainly equities rather than interest rates?

And a more general question is the -- there was only an overall drop of EUR 200 million in the AA excess, but the overall IGD surplus dropped by a whole billion. Where's the differences between them and can we have a rough bridging for what happened to the IGD like we had with the S&P AA bit?

Michiel, can you give the details --?

Sure.

The two questions.

Bruno, on your first question you're absolutely right. That is largely related to equities. On your second question, the big -- one of the big differences between the two ratio is the fact that on IGD we include the Dutch operations at -- or the revaluation on account of the Dutch operation gets included into the IGD ratio. Whereas, on the S&P basis, that is excluded as far as related to liabilities. And that in itself I think makes a difference of around EUR 500 million, EUR 600 million. And that explains the largest portion of the difference between the two ratios.

And the Dutch regulator. So, when the risk for your rates rise, obviously your assets drop in value and there's no credit given on the liability side for that then.

I'm afraid that's right, yes.

Isn't that -- what have you done to protect yourself? Because if we see a sharp rise in risk-free Dutch rates, which is not unthinkable given people are talking about inflation again, is that -- isn't that quite a serious problem for the IGD surplus?

As you know, we've -- particularly on the Dutch business, we have hedged all of our guarantees. And in that respect, our assets and liabilities move -- on the guarantees, move in step. So, we like to think that we have taken quite a few steps, particularly related to our Dutch portfolio, to limit our interest rate exposure.

Yes. I've always been worried about interest rates going down in the Netherlands and exposing the guarantees. And now it seems interest rates go up. And it's obviously not an economic problem in one sense, but it goes hit the IGD surplus quite badly. Is that a reasonable --?

Bruno, it's a reasonable -- a very reasonable question. Moreover, it's a question we have been discussing also with the Dutch Central Bank. They understand not yet what the consequence could be of interest rate rise -- which as you know, in general it's good for our business.

Yes.

So, this is a discussion we're having. We don't think that rates are going to rise in a very short period of time to the levels that would be an issue. But we are taking it through with them because, as you know, the IGD ratio is calculated in every single country in Europe in a different way.

Yes.

And we've brought this to their attention.

And the other sub-question I had, the interest rates and equity market impacts on the excess capital development, is that mainly the equity sensitivities you've talked about, or --?

Yes, that's right.

Okay. Thank you.

Thank you. The next question comes from Ryan Palecek from Kempen & Co. Please go ahead.

Hi. Good afternoon, everybody. I just have two questions. First of all, on the excess capital question, I'm wondering how much excess to the AA S&P requirement do you want to hold and how much do you think you actually need to hold on a structural basis to achieve what you want to in terms of your rating?

The second question is more of a bank-ish analyst kind of question. I'm wondering is it possible, or is it even desirable, for you to deconsolidate ABS assets from Aegon's balance sheet due to rating migration concerns, and maybe possibly even losses? I know some of the banks have found ways to deconsolidate them at very, very punchy prices. I have the impression they're still looking to do so. From an insurance point of view, is that possible or even desirable? Those are my two questions. Thanks.

Let me answer your first question, excess capital. I think that the amount of excess above AA we want to hold is also a bit of function, as you understand, of the market environment. We've made it very clear right now that we are focusing on preserving capital and effectively have -- and to have as big as a buffer we can in these uncertain times.

Once we settle down to a more normalized environment, we will probably be looking at levels which are lower than what we have right now. But I think it's too early to talk or mention here the kind of excess above AA which we'd be targeting.

In terms of the second question, ABS deconsolidation, Darryl?

Yes. Hi, Ryan. It's Darryl. If I understand your question right, I think you're looking at the -- some of the non-economic nature of the migration on -- that we had in the first quarter. (Inaudible) the migration occurred on some structured residential assets where we own a lot of -- we own the senior part of the tranche at a capital structure. And the ratings methodology is a first dollar ratings methodology. So, we end up taking literally securities from that were high investment grade, AA, AAA quality to CCC overnight. That is what happened in January and February.

The capital charges that we then have to hold related to those migrations are really not reflective of the more senior parts of the tranche of those structures. So, the short answer to your question is yes, it is something we're looking at. It's part of our capital initiatives that we've opened up for the end of the year to take a look at that deconsolidation and figure out a way to get a more efficient, or I would say a more rational, capital charge to the securities that we're holding.

Okay. Thank you very much.

Thank you. The next question comes from Mitchell Todd from T. Rowe Price. Please go ahead.

Hi. Just a couple of questions. The first one, I guess a broad view. Unemployment in the US has really rocketed up in the last few months. They're now 14%, 15% ahead of the peak in the early '90s. I'm just wondering how's that shaping your expectation for losses, surrenders, etc.? And have you started to look at changing assumptions through the remainder of 2009? That's the first thing.

And the second question was, the mortgage loan portfolio, how's that performing compared to the year-end? And can you maybe just talk about the capital consumption on that portfolio relative to the CMBS' one? Thanks.

Darryl?

Yes. Mitchell, on your first question, I think you're getting into a policyholder behavior question, do we anticipate anything or are we seeing anything related to the unemployment increase in the US. And the short answer is, outside of some hardship withdrawals in some of our pension business, we're really not seeing a lot of activity. We have the -- what we are seeing is on the annuity business actually persistency getting higher and not lower. So, lapses are going down on both variable and fixed annuities.

Outside of that -- and then the other issues, I guess, on the variable life business that I mentioned earlier on the call, where we are seeing an elevation of lapses there. But outside of that, the only other thing we're seeing is some increased hardship withdrawals out of the pension business.

And if you look back to the early '90s, is that what you would expect to continue as a pattern?

I think that that's -- yes, I think that's a trend that -- I'd say there's nothing out of what's happening right now is unexpected to us. That's what we've seen in other -- we saw a similar trend back in the 2002 era. I think it would hold back into the '90s as well.

On the second one, I--.

On the mortgage loans, Darryl?

I missed that question, so I need somebody to --?

The question is, what can you say about the development in mortgage investments we have.

I think I'll turn that one over to Eric.

Right. Delinquencies are still at a very low level. They haven't risen nearly as much as you see the delinquencies rising in CMBS. And that's because we think we have a more conservative underwriting in our whole loan book than is typical in a CMBS structure.

So, we're -- whereas we're not as zero the way we were for 2006 and 2007 in terms of defaults, we're still just a few tenths of a percent of the portfolio in default. That being said, the trend is probably up from zero and we're behaving accordingly in the management of the portfolio.

I think your question also had to do with capital related -- or capital ratings migration or whatever. The capital that gets held against the mortgage loans is different in nature than what we see for maturities. And it's not so much ratings-based. But there haven't been -- as far as I know, and maybe Darryl you can help me out on this -- there hasn't been a significant increase in the amount of capital we've -- we're holding there, as far as I know.

That's correct, Eric.

Just one other question. Sorry, just to follow up. The EUR 4 billion securitization you've got, the off balance sheet stuff, is that still there through 2008 and how do you see that program developing?

Yes, this is Darryl. I think you're referring to the synthetic CDOs that are off balance sheet. Yes, those are still there. And there's really not a lot of activity. The spreads haven't moved a whole lot and there hasn't been a whole lot of earnings noise. It's all mark-to-market through the P&L so you see that every quarter.

Okay. Sorry, just one follow up just occurs to me as well when you talk about the lower lapses on the Vas. Does that kind of invalidate the hedging program then?

No, not really. The policyholder behavior is one of those things that's difficult to hedge. On the GMWB product, where most of our delts and row hedges are, we did see actually some hedging gains in the quarter, net all-in. It's a combination of a number of factors.

So, the lower lapses did hurt a little bit, but it was offset by a number of positives. We've seen some other policyholder behavior where people have been shifting out of equity accounts and into fixed income accounts. That causes a basis issue in our hedge where we actually incurred a gain in the first quarter related to that.

So, there's a lot of various pieces that go into the overall hedging program. I would say nothing material one way or the other coming from behavior.

Okay. Thank you. This is the last question. Thank you for listening to our conference and we all look forward to seeing you in London the 9th and the 10th of June at our investor conference. Thank you. Bye-bye.