Aegon Ltd (AEG) 2009 Q2 法說會逐字稿

I will now hand the conference over to Mr. Alex Wynaendts. Thank you sir. Please go ahead.

Thank you and good morning to all of you. Thank you for joining us to discuss Aegon's second quarter results. This is not the usual time when we host this call, but given our decision to launch an equity issue, we thought it would be helpful to do this call at this earlier hour.

Joining me today are Eric Goodman, Chief Investment Officer of the Aegon USA, Darryl Button the CFO of our US operations, and Michiel van Katwijk the Group Treasurer. And, of course, our new CFO Jan Nooitgedagt is also with us this morning. And Jan will be hosting the conference call on our third quarter results in November.

As usual, I need to ask you to take a moment to read our disclaimer carefully.

And I'll move on now to slide three.

We were pleased by the further improvement to Aegon's earnings this quarter. As you will note we have returned positive underlying earnings driven by what are clear improvements in the markets. We strengthened our capital position exceeding our full year capital release target. We will continue our capital efficiency program. While, at the same time, we have started investing cash in higher quality, better yielding assets. And this will have a positive effect on earnings going forward.

It continues to be our aim to repay EUR1b to the Dutch state by December. There are clear financial incentives to do so, but as we said earlier, we will take a final decision by December 1.

During the quarter we have seen a strong improvement in our revaluation reserves, the result of credit spreads narrowing during the quarter. In what continues to be a difficult environment, we have maintained the confidence of our customers, while continuing to write profitable business.

And finally we've committed to the strategic priorities we've discussed with you on several occasions. Known as the three Cs they focus on capital, cost, developing contingent actions to safeguards the customers' confidence and trust. You are by now, I hope and I trust, familiar with our strategic priorities. However let me run through the progress we've made during the quarter.

As I mentioned, we've exceeded our capital release target for the year as we released EUR1.6b in the first half of this year. We will however continue to pursue opportunities to release capital from our businesses and be as efficient as possible. At the end of June, Aegon had EUR3.5b of excess capital, above AA capital adequacy requirements.

We did not declare an interim dividend. Our dividend policy which is based on cash flows and our capital position remains unchanged. And we will take a decision regarding the payment of a final dividend early next year.

On cost, we are well on track to achieving the EUR150m in cost savings that we target for 2009. Same time we are working to identify additional areas where we can save cost. However we are working equally hard to make sure we maintain the high level of service our customers expect.

Finally, as you know, our portfolio review is ongoing. And has resulted in our decision to sell our Taiwanese Life business, as well as withdraw from the Group Risk market in the UK. We also completed acquisition in Brazil and Romania, markets where we believe we will achieve high growth and returns long-term.

Turning to slide five. And let me spend a moment now taking you through the earnings development of the second quarter.

Here you see that the fair value items have been split into three parts. The EUR202m gain is a result of the improved equity markets in line with the sensitivities we provided you in the past. However we experienced a EUR282m loss due to valuation differences between guarantees at fair value and related interest rate hedges in our Dutch business. This is the result of significant volatility and the movements in the yield curve during the second quarter. The remaining EUR49m includes the impact of low credit spreads on Aegon's own debt, and this has resulted in a loss of EUR163m.

Impairments, which I'll discuss in a bit more detail in a moment, remained at elevated levels as we anticipate in the current environment. And income tax this quarter includes a benefit related to an inter-company reinsurance transaction. This is a partial reversal of the charge of EUR409m we incurred during the year 2008.

And finally, as announced earlier, the sale of our Life businesses in Taiwan resulted in a one-time book loss of EUR385m. Excluding this item, net income would have amounted to EUR224m. I should mention that the sale of Taiwan has an immediate positive effect as it decreases our long-term interest rate exposure, and reduces substantially our required economic capital.

Slide six you see our much improved underlying earnings for the quarter were impacted by a few exceptional items. We did experience an accounting mismatch in our US employee benefit defined contribution plan. We also had an extraordinary DPAC unlocking in our Canadian business as we're reviewing our underlying asset assumptions, a process we shall complete in third quarter. We also had some one-time restructuring charges related to cost reduction efforts. And obviously we do expect to see the benefits of these cost reduction efforts in the future. These three negative items were partly offset by the positive effects of one-time reserve adjustments.

So excluding these exceptional items, and when you take into account the EUR45m attributed to the de-risking measures in the first half this year, underlying earnings are well within the range I indicated you in June.

Turning to slide seven, and in our efforts to manage our balance sheet and reduce our risk profile, we stepped up our hedging program, particularly in relation to our equity exposure in the US. The second quarter we put in place a macro hedge related to our unhedged retail variable annuity guarantees. And this is aimed at reducing the impact of equity markets on our capital position.

And you can see here clearly on this slide the benefits of these actions. Compared to the first quarter, our capital is now much less exposed to equity market changes. Let me give you an example. If equity markets were to drop by 20% from the June 30 levels, then the impact on capital would be a negative EUR475m, versus a EUR700m negative impact before putting the hedge in place. And the sensitivity to net income is shown on slide 26 in the Appendix. And we've done that in the same format as we've presented to you before.

On slide eight, as I've already mentioned, impairments during the quarter were at elevated levels. However these were not unexpected considering the current economic environment. But half of the impairments were related to US housing related assets such as sub-prime securities. Just point out however, that if you look at our second quarter impairments under US GAAP, the total amount is clearly lower.

Slide nine. We continue to be on track with our cost savings measures. And expect to achieve our EUR150m target which we set for 2009.

Operating expenses on a comparable basis decreased by 5%. This takes into account currency effects, restructuring charges and the accounting mismatch in our US defined contribution plan for employees I mentioned earlier. We will continue to identify areas for additional cost savings across our businesses, keeping in mind however the need to maintain high customer service levels.

With regard to headcount, the total decreased, and this includes agents by, 2% on a comparable basis.

Turning to our excess capital position on slide 10, capital efficiency and de-risking measures contributed EUR700m, bringing Aegon's excess capital at the end of June to EUR3.5b, an increase from the EUR2.7b last quarter. The negative effects of credit impairments and rating migration in the US, were offset by the positive effect of rising financial markets, primarily the equity markets.

Slide 11. In the last 12 months we succeeded in releasing EUR3.3b of capital from our businesses. Of this amount about EUR2b accounts for capital efficiency initiatives and EUR1.3b is related to de-risking measures. The capital efficiency initiatives generally have no substantial negative impact on earnings. However the de-risking measures do have a negative impact on earnings, as we've seen during the first and second quarters.

We expect to release additional capital during the remainder of the year. And at the same time, we started to reverse the negative impact of our de-risking measures on earnings by investing cash in high quality better yielding assets, as I mentioned earlier.

Slide 12. Since the end of March, credit markets have improved significantly, reversing the negative revaluation reserves by EUR3.4b. The positive trend we've seen in credit markets continued in early July, resulting in an improvement of another EUR1.6b. This brings the total improvement since the end of March to EUR5b. As a result our negative revaluation account at the end of July totaled EUR3.5b. These developments clearly had a positive impact on shareholders' equity. Here I would like to remind you that we have not and will not in the future consider our unrealized loss position a good indicator of future credit losses.

Turning to slide 13, to how our businesses performed, let me touch some of the highlights of the quarter. In Americas, Retail Life sales improved by a solid 7% over the first quarter, the first increase in five quarters, a result of our continuous efforts to expand our agency distribution network.

Pension sales and Retail Mutual Funds deposits were also strong. We experienced a slowdown in Group Pension sales in the Netherlands where we had a very strong first quarter which can be explained by seasonality. However, we're pleased that the first half 2009 did show a strong recovery over the second half of 2008.

And in the UK the lower sales reflected the challenging market environment. Customers demand for guaranteed products however led to higher variable annuity sales in Europe, with the majority coming from the UK. And sales in other countries increased over the first quarter, driven by encouraging growth in Central and Eastern Europe and particularly strong sales through our bank partnerships in Spain.

The decline in the value of new business reflects the generally lower volume sales in the Americas and the UK. Though we were pleased by the improved margins in the Netherlands and a strong contribution from Spain.

As we've made clear this morning and on previous occasions, we intend to repay EUR1b to the Dutch state by December 1, provided our capital position remains strong and market conditions and economic outlook do not deteriorate materially. There are clear financial benefits in doing so, not least of which is the fact that we'll save at least EUR370m. We regard this as a first step to Aegon's full withdrawal from government support. And again, a final decision to repay the EUR1b will be taken just before December 1.

So before taking your questions, let me briefly summarize the highlights of Aegon results.

We've seen a strong improvement in our underlying earnings. We continue our capital efficiency program, and have begun reversing the impact of the de-risking measures on our earnings by starting to invest cash again in high quality, better-yielding assets.

We did not declare an interim dividend. Our dividend policy remains unchanged. And we will inform you of our decision to pay a final dividend when we publish our fourth quarter results.

We've further reduced costs, and are confident in our ability to achieve our cost saving target for the year. At the same time, we are identifying other areas where we can realize additional cost efficiencies.

Our franchise is strong. And we are very pleased to have maintained the confidence of our customers while attracting new customers in both our established and developing markets, while continuing to write profitable business.

And, in short, we've weathered the turmoil of these many months. And we've committed to being in a strong position to maximize the opportunities ahead. I would like to thank you for your continued interest in Aegon. And I will be happy now to take your questions.

Thank you sir. (Operator Instructions). The first question comes from Farquhar Murray. Please go ahead sir.

Hi morning gentlemen. It's Farquhar from Fox-Pitt here. Two questions if I may. Just starting with the capital rate. I just wondered if you could outline the rationale for going down the capital rate route to repay that rather than using internal resources. And, I think, you know you'd always said that it was attractive and that you'd repay the capital if it was feasible and responsible. I just wondered if it would have been feasible and responsible to have repaid the EUR1b out of the EUR3.5b excess capital. And if not, why not?

And then the second question is, just turning to the de-risking or the reversing of de-risking strategy, I was just wondering if you could give us some color around how much earnings potential you think you could put back into the business by pursuing that strategy going forward. And those are my questions. Thanks.

Thank you Farquhar. On the capital rating, we've always said that it has been our intention to pay back as soon as possible the full EUR3b to the government. And, as you know, there is specific financial advantage on the first EUR1b to repay the first EUR1b before December 1. And therefore we've decided to go to the market and raise EUR1b equity. And the main reason here is we want to maintain our strong excess capital position.

We believe it is very important that we have this strong excess capital position because the market conditions are still uncertain. Well, we've seen a significant improvement but they're still uncertain. But we also believe that this will make it easier for us to -- and put us in a stronger position to remain -- to repay the remaining EUR2b, because it will allow us also to strengthen our earnings generation power. We'll do this at very limited increase of risk.

Okay.

In terms of de-risking, your second question. What we gave you here in this slide is what we attribute the impact of the de-risking measures we've taken in Q1 and Q2. So we've given you an indication that that impact was around EUR45m.

What we are saying here is that we have been building over the last quarters significant amounts of cash. And that we now feel that we have sufficient cash and we can start -- put some of the cash to work in a very careful way. So it's going to be very gradual. And it's all about putting some of the cash we have at work in a careful way by investing in high-quality investments. But in a very careful way, I would like to reiterate.

And in terms -- just to give us some color on that re-risking. I mean which kind of assets -- are we just looking at the top end of the investment grade spectrum or what?

Yes. We're looking at high quality investments. We have clearly seen that, of course, that the markets, the credit markets of the higher quality have performed very well. So that's the reason why we will be very careful and tip-toeing in the market. But we just want to give you a signal that we are starting to do so. And in fact in the month of July we've been able to reinvest a $1b of cash, in dollars I'm talking here, into high quality assets.

Okay. Thanks a lot.

Thank you. The next question comes from Michael van Wegen. Please go ahead sir.

Yes, morning. Mike van Wegen, SocGen. I'm afraid I'm going to ask about the same topic. Indeed, quite surprised you raise the capital. And therefore EUR2.5b excess capital after -- yes if you would have paid it out of your own pocket, why is that still a buffer that you effectively don't feel comfortable with? How big does that buffer need to be?

And secondly at the June Investor Day I think you indicated that you wanted to delay the decision to pay back the government as long as possible, effectively close to December. Why are you then announcing today already that you, effectively, want to issue shares. And why aren't you waiting?

Secondly on the re-risking could you indicate how much capital you think, additional capital requirements you would get from re-risking the Company back again?

And last question on, risk migration seems to be indeed very limited. Is that something you expect to continue? In other words, will it remain limited? Or do you expect for some reason risk migration to go up in Q3 or Q4? That's it thank you.

Michael let me start with your first question. Your question was, if you pay back a EUR1b at a level EUR3.5b, and you still have EUR2.5b, is that not enough? I would say that under normal market conditions we would be comfortable with a level of EUR2.5b. But I reiterate here again, we are still not in normal market conditions. It is clear that with the uncertainty there, although we have seen an improvement, we feel that we need to have more excess capital than what we would have normally in the normal market conditions.

And the second element, which is I think is equally important, is I need to keep reminding us that we still have another EUR2b which we have to repay. So by keeping significant excess capital, not only are we in a strong position in these uncertain conditions, but it puts us clearly in a much better position to strengthen our earnings generation power. So that it puts us in a much better position to repay back the remaining EUR2b, which we still have to pay back at a certain point in time.

So in June I did say that we would delay our decision as late as possible. I still say the same thing, because I say that it is our intention to pay the EUR1b. And that will depend obviously on our capital position. And also, as I said, the market and the economy should not deteriorate materially from the levels we hear and we will take the decision again as last as possible -- as late as possible.

Why are we raising equity now? It's seen -- we've seen that the markets and also the market financials has been supportive and we wanted to really take advantage of that opportunity.

Re-risking, you asked me about the amount of capital which we would be needing for that. As I said, we are looking at really very carefully putting cash to work into high quality assets. And that means that the amount of capital which will be needed for the cycle, yes, is going to be limited.

In terms of risking migration, you will remember at the Q1, we did say that we expected that a lot of the risking migration impact would be in the first quarter. So it's not surprising to see that the level in the second quarter is much lower. We expect also the level to remain lower. But it's going to be very difficult to give you an exact number.

Perhaps Eric, Eric, you might want to add something on what you believe the rating migration will be for the remaining quarters.

I think that's right. It's hard to predict. But it will look more like the second quarter than the first quarter. But we're still obviously in an environment that we need to plan for a certain about of -- that sort of migration each quarter.

Okay. Thank you.

Thank you. The next question comes from Marc Thiele. Please go ahead.

Hi. Morning. My first question is regarding the shareholding of the foundation. It's not in the slides here, but I think I've read somewhere that the foundation wants to keep its voting rights, or the share of its voting rights unchanged. Should we assume a proportion of similar increase in the preferred shares to make sure that the foundation remains with the same level of voting rights? And will that boost the 2.1b of preferred shares that's included in book value?

And my second question is coming back to the de-risking, the EUR45m, and I got the impression from the Investor Day on 9 June that already reinvesting cash into corporate bonds, but maybe I misunderstood at the time. Shouldn't we assume higher normalized earnings level going forward, with the capital coming in? Should we be probably looking at north of EUR500m quarterly underlying run rate? But maybe you can make a few remarks on that?

Okay. On the foundation, the way this works is that we do not expect them to participate in this rights issue. They have the right to maintain their voting levels at the same level they had before and they can do that by subscribing some preference shares, but they do subscribe to these shares on a nominal value, so the amount here we're talking about is very limited.

Re-investing in the corporate bonds, in June, I did make the remark that we were very carefully starting to -- putting some of our cash to work in high-quality paper, which is true. And that's what I mentioned just now, earlier too, in response to one of the previous questions, that in July we have started to put $1b switching debt from cash to some very high-quality assets. So what I said in June was the beginning of what we have been doing in July.

In terms of earnings impact, what we have shown you here this morning is what the impact has been from the de-risking in Q1 and Q2 on the numbers of Q2. So with that number, we have come up with a total which remains well within the range I have indicated in June. And I would expect that that range is still the correct range.

So the EUR1b that you get, is not -- well, is that being redeployed in your operating business? Is that being invested? I would have thought that the --.

The EUR1b is set aside to pay back the EUR1b of the government. It's very simple.

But that EUR1b probably hasn't been really redeployed in the business, but anyway. Okay. Cool. Thank you.

Thank you. The next question is from Farooq Hanif. Please go ahead, sir.

Hi there. This is Farooq Hanif from Morgan Stanley. I just want to come back on the various questions that you've had on the capital position. It sounds like you're still going to do the de-risking actions -- sorry, not de-risking, but the capital efficiency actions, but then you're also taking more risk. Net-net, are you still looking for more net capital releases from your business? So I refer to you talking in the past about having EUR4b to EUR5b capital release potential from your business in total. So could you just give a guidance on where, net, you see your capital release going and also the earnings impact of that?

Second question is on this interest rate hedging impact that you had in the second quarter, could you just talk us through what the impact actually was in monetary terms and how that would affect the earnings going forward because that was probably something that, well, certainly I didn't pick up?

And I guess the third question is when you look at this macro equity hedging that you've done in the US, is this a -- just a normal VA kind of delta hedge product-by-product approach, or is there something that will actually also make your fair value items a little bit more volatile? That's it.

Farooq, in terms of your first question, we have given ourselves a target for the full year of EUR1.5b after we've done a similar amount in the second half last year. As you can see, within the first six months we've actually exceeded our target and I said we will continue to put in place measures to enhance capital efficiency. That is really very important. What we're now doing is putting some cash, and as explained earlier, we've been building up cash quite significantly, a significant amount, we're now putting cash carefully at work -- to work. But the net-net position will be that the amount of capital release will be significantly more than what we will need to put some of the cash to work.

I don't want to give numbers at this point in time. It depends also, of course, on how the market situation is in the remaining of the year. But, as I said, it's about continuing our efforts in enhancing our capital efficiency and that will lead to further capital savings and this is what is the target.

If I may just interrupt there, because you use the word capital efficiency rather than de-risking, and does that imply that you're looking at actions that are not necessarily a major earnings impact?

It will have an earnings impact, but it's not going to be major earnings impact. As I said, what is important here is that we continue our capital efficiency measures. At the same time, we start putting the cash to work. All of this is also important in the context of enhancing our position in being able to repay the remaining EUR2b because that's really what we want to achieve at the end is be able to repay the full EUR3b. So we do EUR1b right now through this equity issue. We announce our position. We increase our earnings generation power so that we are in a significantly strengthened position for the remaining EUR2b.

Okay. And, I'm sorry, I know I'm asking lots of questions here, but what discussions are you likely to have? I know you're not talking right now, or you say you're not talking right now about the remaining EUR2b, but given that you're possibly going to release a significant amount of further capital, you're raising EUR1b, you would technically, I guess, if markets improved, be in a position to repay the future EUR2b quite quickly. But obviously it's not ideal to do so if you're going to have to get a penalty on that. Can you talk about that?

Absolutely right, Farooq. The penalty is significant. Our objective here, as you know, is let's make sure we have a plan in place for the full EUR3b, but in the short term we're focusing on the EUR1b. And we'll be deciding and taking that decision as of December 1. We're not having any conversation with the Ministry of Finance about the remaining EUR2b. Let's first get the EUR1b paid back.

Your second question about interest rate hedging in the Netherlands, to give you a little bit of a background there, as you know, we have significant guarantees in our pension business. We're talking about liabilities of around EUR30b, with durations of around 30 years. I think it's important to realize the size of the liability but also the duration. And what we have put in place is a number of hedges to take off our interest rate risk. And we're actually very pleased we have done so because it's served us extremely well, at the end of '08, as you can imagine, when interest rates also for technical reasons came down to very low level.

And what we've seen subsequently is that these changes in the interest rate, in particular on the longer part of the yield curve, have been quite volatile in the second quarter and not only has the yield curve moved up and down but also the shape of the yield curve has changed quite a lot in the second quarter.

We see now a stabilization of that yield curve. But the impact of these changes within the quarter, and these are changes which, I would say, are clearly not the normal changes in market conditions, has led to this difference in valuation between the value of the guarantees and the value of the hedges. And that difference is the one we've been showing. It's around EUR280m.

Obviously it's difficult to tell you what the impact will be on Q3. But the impact will depend to a significant extent to, I would say, the stability and the shape of the yield curve. And I think what we're seeing right now is a more stable and less volatile yield curve.

So I guess what you're saying is that if you have steepening of the yield curve and long yields going up, and volatility, that's bad. But if --?

It's the speed. What you do is we have liabilities. We obviously put in -- we have a model which calculates liabilities of these guarantees along the yield curve. And if you then get sudden and quick changes because of illiquidity in the market on the longer end of the yield curve, you can understand that the impact on the differences in valuation is bigger. So it's not so much about the shape of the yield curve, it is the changes of the shape and the changes of the exact levels, in particular at the longer end of the yield curve.

So interest rate volatility that's hurt basically?

Yes, call it that way. It's the changes, but not only volatility, but also the shape of the yield curve. But all about the sudden changes which have taken place in second quarter.

Okay. Thank you very much.

Okay. In terms of the macro equity hedge, this is a macro hedge, so we've wanted here to reduce the positive, I would say, the impact from equity markets on capital. But I'll pass it on to Daryl to give you a little bit more color as to what it means in terms of earnings impact on the different items.

Yes. Hi, Farooq. It's Darryl.

Hi there.

Yes. We already had delta row hedge programs in all of our GMWB products, which are the variable annuities in the US that are carried at fair value already. So this is a macro hedge to go after all the un-hedged variable annuity equity exposure. It's about 50% of the un-hedged exposure in the US. It's focused on the older style products, the DBIB benefits which are actually carried at not at fair value accounting, carried at more of an amortized cost book value accounting.

And, however, the hedges will be -- there will be a bit of an inherent accounting mismatch between the hedges and those liabilities since they're not carried at fair value. And so we'll be reporting the fair value of these hedges in the fair value items. So that will create a little bit of quarter-to-quarter volatility.

To give you an example, we had $26m of income booked in the second quarter related to these hedges. We got it on early June at about a 940 S&P strike. Obviously the quarter closed below that and we made some income here. I expect that to reverse and we're now in a small loss position as we sit here year to date, or quarter to date, in Q3. So I hope that gives you some feel for what the style of hedge is.

I guess it would be useful to have the earnings impact of equities rather than just the capital impact. But I think you've shown that before. It's just useful so that -- clearly it's an accounting issue, not an economic issue, but it just helps us not get a surprise.

Yes. And actually we continue to put out the sensitivities. I think on slide 26 you'll find the earning sensitivities, and Alex already covered the capital sensitivity as he walked through his presentation.

Okay. Okay, thank you very much.

Okay.

Thank you. The next question is from Nick Holmes. Please go ahead, sir.

Yes. Hi. My first question is on the dividend. You've raised the prospect of paying a dividend at the end of this year. And I wondered if you could take us through the economic rationale for paying a dividend at all. Isn't it better basically not to pay a dividend until you've repaid the government?

Then the second question is for Eric. Corporate bond defaults haven't really increased that much so far. And I wondered what your view of the outlook is. Are we nearing the peak of corporate defaults, or is it too early to say that? Thanks.

Morning, Nick. On the dividend, what I did say is that we did not declare an interim dividend. As said, we did not declare an interim dividend, while we also did not change our dividend policy. As you know, the dividend policy is paying a dividend which is based on the strength of our balance sheet, but also on the cash flows. And I'd like to remind you here that our cash flows clearly have been impacted by impairments. And it's on that basis that we decided not to declare a dividend.

What you are referring to is the link between paying a dividend and paying the coupon on the securities at that stage. But that decision about the dividend for the full year will not be taken now, will be taken after the results are known and after we know our capital position, but also after we know what the cash flow has been from our businesses. And I again repeat the cash flow on our businesses has been hampered, has been hurt by impairments in the first half of this year.

So you're basically saying that you will defer the decision about the linkage with the Dutch government debt?

No. I'm saying that we will take a decision on dividends after we have the full '09 year behind us, taking -- and again, I'm repeating myself, based on capital position and cash flows.

Okay. Thank you.

Eric, would you like to answer the second question?

Hi, Nick. I think it is fair to say that we are cautiously optimistic about future corporate bond defaults, just judging that by the number of new credits coming onto our watch list or problem loan list. That has clearly slowed down in the second quarter. We still have a lot of financial credits, for example, that we're watching closely. So if I'm wrong, it may be because some large financial credits have issues. But as a general comment, I think the trend is probably going to be in a positive direction over the next three or four quarters.

So is your feeling that the corporate bond default experience this time round is going to be very different from 2001, 2002, when it really spiked to very high levels?

I guess that's what I'm saying. But obviously the dynamic in '01 and '02 were very different. And so yes, again, except for the possibility still, the financial sector seems much better now than it did six months ago, there's still a chance for some surprises there. But, barring that, I think we're going to be on an improving trend.

Great. Thank you very much.

Thank you. The next question is from Chris Hitchings. Please go ahead, sir.

Hi. Thanks very much indeed. A couple of issues. When we talked -- sorry, you were saying that one of the problems is you have lots of cash now which can be redeployed into corporate bonds to improve the yield, and that all sounds perfectly reasonable. When I talked to you guys at the June Investor Day, it was very much emphasized that high cash balances were there because of the expected outflows from the institutional business. Have you changed your view of what the outflows from the institutional business will be and if -- and give us some background there?

Secondly, the -- I think we also asked questions at June Investor Day about whereabouts the capital that came from the government was, i.e. was it a certain holding company that had been deployed into operating companies? And could you just update us, has any -- given your intention to de -- to re-risk part of the business, is there an intention to put capital to work in the subsidiaries?

Thirdly, yes, could you tell me what your US RBC ratio is now and what your solvency capital ratio is? I don't think I found that in the slides. Also -- yes, thanks.

Chris, just to help you, it's in the press release. Solvency ITG ratio is 202% and the US RBC ratio is above 300%.

How much above 300%?

305%, around there.

Yes, around 305%.

Thanks very much.

So that's the easy answer. What we did say in our June investment day is that we wanted to build up a significant amount of cash and we knew that part of that cash would have been used to effectively account for the run-off of the institutional market division. I think we've been building up very significant balances and that's why we've now come to the point where we feel that it makes sense to put carefully some of the cash to work in high quality bonds. And again I want to make the point that is really about being very careful.

I'll pass you on to Darryl in a second so he can give you a bit more color also about this. But it is not our intention to take a risk and re-risk our balance sheet significantly here. We're really talking about putting some, again of that cash, into high quality, I repeat high quality assets. And clearly assets which are yielding more than what you're getting on cash right now. And that's really what we're trying to do. So there's no intention to re-risk our businesses.

I'll pass on to Darryl here. Would you give a little bit more color about the balances and what is needed for the institutional business run-off and what we have remaining?

Yes, sure, I'd be happy to. Hi Chris.

Hi.

You asked if we'd changed our view on the institutional outflows. The answer is no, not at all. In fact that business is in contractual run-off right now so we know absolutely what the cash flows are and the timing of those outflows.

We've been building a lot of cash in preparation for that outflow and a lot of the cash that we're holding right now is earmarked for that outflow and that starts to ramp up in the second half of '09 and carries on into 2010. I think we've talked about EUR20m of outflows over the two-year run-off period between '09 and '10.

But we've also been -- we're still very cash flow positive in all of our retail businesses and as we've been executing our de-risking strategy we've been getting out of hedge funds, high yield, some of the lower quality triple B securities and we've been maintaining a lot of that in cash build-up, really to the point where we have -- and it's not a material amount but we have probably 3b or 4b of excess cash that is sitting around yielding very low cash yields right now and it's time to put that to work in some very high quality, low capital intensive credit instruments. And that's really what we're talking about here. And there's some yield pick-up that we expect to be able to do from that.

Thanks Darryl. That's Chris, just also another question in relation to where the capital sits. We have no intention right now to put any more capital from the holding into the operating companies, with the exception obviously of our new emerging markets but that is very minimum. But not to our main markets.

Okay.

Thanks Chris.

Thank you. The next question is from Albert Ploegh. Please go ahead.

Yes, morning all. It's Albert Ploegh from ING. Three questions. One is coming back to the decision to repay the government capital with an equity issue. You need basically proof from the Dutch Central Bank to repay so has there been any pressure from the Dutch Central Bank to repay with equity instead of internal sources? That will be the first question.

The second one is on the dividend really and from one of your Benelux peers that said that it was possible to skip the coupon payments on the government securities two out of the three years but if you do it longer than you'll probably face pressure or scrutiny from the European Commission. Can you also confirm this?

And then one operational question on the UK. You mentioned that your free-priced the annuity business, that basically we sold it in lower sales. So are you again ahead of the competition and what do you see in the market and should we expect a few more weak quarters there in terms of annuities? Thank you.

Thank you for your questions. No. We have always had the intention on one side to repay back the government and repay back the EUR1b early. And at the same time we've always said and we're consistent that we maintain a very strong level of excess capital. And that's why we decided to take advantage of the market conditions right now to raise EUR1b of equity and that will replace then the equity which we received from the Dutch state.

By the way I'd also like to point out that we're talking here about better quality equity. There's been no pressure on the DNB. We have obviously discussions with the DNB, it is our main regulator. And so we have discussed these issues and we have also discussed the press release with them and agreed that a final and formal decision will be taken at the end of -- just before December 1.

Okay.

In terms of dividend skipping and two to three years, you mentioned about (inaudible), I'll tell you this is new for me. I'm focusing on --

But it's more than -- of course if you skip dividends then you don't pay the coupon of course. So for how many years you can do that without (multiple speakers)?

Dividend policy Albert, we have dividend policy. The Executive Board of Aegon is the one who enforces the dividend policy and there is no pressure from outside to alter our dividend policy. And our dividend policy I repeat is based on balance sheet position, cash flow generation.

Okay, that's very good.

In terms of the UK, yes we did reprice annuities. That's part of an ongoing process. It looks like that repricing has affected sales. I think we should look really at the sales more in terms of the very weak environment. We have seen sales in the UK actually being very resilient and very strong Q3, Q4 and Q1 of this year. And it looks like the crisis is kind of finally catching up also on the sales of our UK business and I think that has impacted our annuities and has also impacted other parts of our business in the UK. It's taken a bit more time clearly to have an impact on our sales.

But in terms of repricing you're in line with the competition then basically or --?

Well we obviously look very carefully at where the competition is. As you know we never intend to be the most aggressive player. We stick to our conservative pricing policies. But you have many different sales, different age people, different regions. So therefore it's always very difficult to compare that as a whole because you have to compare them category by category and we are not the most aggressive.

Okay. Okay, thank you very much.

Thank you.

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

Yes, hi guys. It's Johnny from Goldman Sachs. Just a couple of quick questions. Just in relation to your excess capital, you say that you manage it to an S&P style model. Does this really translate to a statutory surplus in each of your jurisdictions? That's the first question.

Second question is all the de-risking actions that you've undertaken, are they designed to relieve S&P capital requirements or are they designed to relieve statutory regulatory requirements?

Third question is just in terms of your RBC ratio, the 305% looks very low relative to your peers. What do you target and have you completed an impact study in relation to VA (inaudible) at the end of the year for US business?

And the final question is just in terms of your cash flow generation. Clearly if your normalized cash flow is about EUR1b a year and your impairments so far have been nearly EUR800m, it seems that your impairments are overtaking your cash flows. How long do you expect this to last for? If you can answer those questions that would be great, thanks.

Good morning Johnny. Our excess capital by the way, the way we deal with excess capital is it has to be a requirement of the higher of S&P AA or statutory requirements. So in every case -- in any case we will make sure that it's the higher of the two. As far as I know in all the cases where we operate the S&P AA levels are higher than the statutory requirements. I think there was only one place where this was not the case but this is history. That was in Taiwan where at a certain point in time local requirements did catch up with S&P. But for the remaining business that's the case.

You're right, our capital release targets is really to focus on the S&P capital, although we do take into account our RBC ratio in the US which we think is important. It is now 305%, you were asking why this was low compared to our peers. If you compare us with peers who have their head office and excess capital in the US I don't think it's the right comparison because obviously the excess capital which we're holding is held outside of the US and it's not added. I'd also like to repeat our target. Our target is to achieve around 325% RBC ratio.

On this VACARVM, we believe the impact is limited. I'll pass you on to Darryl so he can add something on that. And in terms of cash flow generation, your observation is right, EUR800m is a high level. We've been saying that these are elevated levels in terms of extraordinary market conditions and obviously we do not expect that level to stay there for the long term. But I can't tell you for how long this will be there. And this is exactly the reason why we have always said we want to maintain a very strong capital position.

Darryl, anything on the VA CARVM?

Yes. Johnny, it's Darryl. I guess what I would just add a little bit on the capital for the VA CARVM, we look to a dual constraint and we look to both our S&P capital levels and the RBC ratios. We're currently a little above on the S&P basis so our RBC ratio is what we're considering our constraint and that's we're continuing to target our capital efficiency to increase that ratio to 325% by the end of the year.

On the VA CARVM we've done some initial analysis, we're still working through all of that detail, but our initial analysis is indicating that we're going to have a very minimal impact from VA CARVM. And I think that has a lot to do with where we've set the statutory reserves in the past. We're not seeing a big impact from this.

Okay. Thanks.

Johnny, just to your point about cash flow generation. Obviously I think it's important that this is also seen in the context of our aim to repay the remaining EUR2b. So that is going to be very important for us and obviously we do hope that the level of impairments which are now clearly at a higher level, that that level is going to come down. You've heard Eric earlier saying what he thinks about the developments in the market. So that is important for us because we want to be able to repay back the EUR2b and obviously do that with as little dilution as we can.

Okay. That's great, thank you.

Thank you. The next question is from William Elderkin. Please go ahead sir.

Thanks. Morning everybody. Three questions. First one, can I just come back on the free capital generation that Johnny raised. Is this underlying EUR1b free capital generation a year guidance, does that still hold good given all the de-risking measures you've put in place? And I guess there's both positives and negatives there in terms of the capital consumption on new business.

And also, if you could comment, obviously there's EUR200m of statutory earnings I think in the second quarter. I guess that's net of accrued defaults but before the capital investment in new business and capital release. If you can say anything about that that would be helpful?

Second question is, of the expense savings achieved so far this year how much are inside that underlying operating earnings in the second quarter? So how much is inside the EUR404m?

And then finally, could you just give us an update in terms of where the negative revaluation reserve has got to on the corporate bonds and structured credit? I think the first quarter positions were something like EUR6.3b negative and EUR6.4b negative on structured credit. It would be just interesting to know where those had got to.

Thank you William. Free capital, yes. The EUR1b is clearly I would say an estimate which is based on current market conditions. So that also reflects the overall lower level of fees as a result of not only equity markets but also bond markets coming down.

In terms of expense savings, I think the impact on our second quarter is limited. As you know you implement these measures and it always takes some time before you really see the effects and the impact reflected in the numbers. So clearly there is some. We see -- in particular in the Netherlands we see some of it, in the UK not so much and we do see some of it in the US. But I expect that we see much bigger impact of it in terms of run rate later this year. Also keep in mind that there are a number of offsets. As you know -- as you can imagine, contributions to pension plans have gone up. So inflation has to be absorbed. So there's a number of offsets there taking place too.

In terms of the statutory earnings in the US, I would like Darryl to take that question and Eric Goodman the different parts of the negative revaluation account please?

Yes, I think you were mentioning the EUR200m. I think you're getting that from slide 10 of the presentation which is a Group number, the bulk of that is the US and when you strip out the impairments that is in line with where our quarterly statutory earnings would have been. So I think that's fairly accurate.

Thank you Darryl and Eric, would you comment on the --

I'm not sure I have the exact data that you've requested. The revaluation account is of course tax and back-adjusted. But in terms of what the net unrealized loss was, you asked for the corporate and structured portfolios separately, net unrealized loss for the corporate portfolio in the US was about a negative $3.8b at the end of June and the same number for the structured portfolio was $6.8m unrealized loss at the end of June. Both of those would have been smaller at the end of July as we've already indicated. But I think our IR department will have to come back with an attribution of the revaluation account itself, I'm not sure I have that with me.

So basically those numbers you gave for $3.8b and $6.8m are in dollars rather than euros.

Those are all dollars, yes.

Thanks.

We'll ask our IR department to come back to you and confirm these numbers so you make sure that the right numbers in.

Thank you. The final question is from Ryan Palacek. Please go ahead sir.

Hi, just a couple of short questions. Good morning. First of all on repayment to the government. Everyone seems to be talking now -- everyone at IG, sorry a peer of yours as well, is also talking about repayment to the government and no one's talking about conversion any more. And I know there's obviously some technical factors about where the share price is etc. But I'm wondering has conversion become scrutinized by the EU and the more favorable conversion conditions?

Secondly I'm wondering if the more favorable conditions on the one third prepayment if that's also found scrutiny -- increased scrutiny in Brussels?

Thirdly Eric, I'm wondering -- you've given us a watch list in the past of potential issues, I'm wondering what yours might be for the next quarter or two?

And finally, the fourth question maybe to Darryl. I'm wondering what would be the impact of VA CARVM on the IRRs of the variable annuity product that you're writing today? Thanks. That would be it.

No, we're talking about repayment here. The reason is we would like to repay the EUR1b and not have to repay EUR1.5b. So I think that's very obvious, if we're able to do that before December 1 that is clearly more attractive than conversion at EUR4 a share in our case. There's been no scrutiny as far as I'm aware of from European Commission.

On a watch list, I understand you were asking me the watch list for investments. I think Eric commented on it. Perhaps Eric, is there anything else you would like to comment on?

Yes, I guess I commented already about the corporate sector having the potential for improvement. We still remain concerned about the residential sector. While there's been some signs of stabilization, not enough and so that remains a sector of concern. We don't expect to see problems over the next six to 12 months, a significant amount of problems at any rate from our BNBS portfolio. Commercial mortgage loans are a potential area of some growing impairments although not rapidly in our view. We don't see a rapid increase in problem loans but there are some growing signs of stress. And so we're keeping an eye out for that. I don't have forecasts of course for any of those but that gives you the general sense of the direction of the different sectors.

Darryl, would you like to add on the impact of the VA CARVM?

Yes, hi Ryan. The VA CARVM is statutory reserving for variable annuities. What's ultimately going to impact the internal rate of returns is the total capital that we're allocating to the product and we've always held capital based on a stochastic modeling approach at the CT98 level. Really not anticipating to see the VA CARVM revisions to change that overall total capital allocation to the product. So I'm anticipating a fairly small impact from the IRR although I will caveat that we're still working through all of the analysis and will do so over the next two quarters.

Okay. Thank you very much, I appreciate it.

Thank you Darryl and I'd like to thank you all for your interest and continued interest in Aegon and wish you a good day. Thank you very much. Bye bye.

Thank you ladies and gentlemen. This does conclude today's presentation. Thank you for participating. You may now disconnect.