Aegon Ltd (AEG) 2011 Q1 法說會逐字稿

Welcome to the Aegon first quarter 2011 and embedded value 2010 results conference call for analysts and investors on May 12, 2011. (Operator Instructions). I will now hand the conference over to Mr. Jan Nooitgedagt. Please go ahead sir.

Good morning. Thank you for joining this call to review Aegon's first quarter 2011 results as well as our 2010 embedded value. Joining me here are Michiel van Katwijk, Executive Vice President, Darryl Button, our CFO Americas, and our new Head of Investor Relations, Willem van den Berg. Before getting started, let me just remind you to take a moment to review our disclaimer on forward-looking statements which is at the end of this presentation. As usual, after the presentation, there will be ample time for your questions.

Let me provide you the key headlines. We achieved solid progress on a number of key, of our key strategic objectives during the quarter. Aegon's underlying earnings were impacted by exceptional charges in United Kingdom and increased longevity provisioning in the Netherlands, something I will come back to in more detail. In line with our strategy to increase fee-generating business and reduce spread business, we saw strong sales and earnings of pensions and variable annuities in the United States.

Aegon's excess capital position above AA capital requirements remains strong at EUR3.7b, including the repayment of a further EUR1.125b to the Dutch state. As you are well aware, we aim to fully repurchase the remaining core capital securities from the Dutch state by the end of June. And finally, Aegon's total embedded value increased 6% to almost EUR19b as a result of the positive performance of our in-force business.

Let me turn to our continued focus on executing our strategy. As you know, reallocating our capital to those businesses that offer higher returns and growth in our core lines of business has been a consistent priority. During the quarter we made further progress in doing so. Just two weeks ago we announced the successful conclusion of our negotiations with Scor to divest Aegon's life reinsurance business, Transamerica Reinsurance for a total after-tax consideration of $1.4b.

During the first quarter we also further increased our fee-generating business. The strong earnings and sales of pensions and variable annuities are evidence of our progress in this regard. In addition, we are refocusing on the growth of our life business in the Central and Eastern European region, as evidenced by a 42% increase in new life sales.

In our aim to further increase returns of our businesses, our continued focus on reducing operating expenses resulted in a modest decrease during the quarter. Also we have fully hedged the equity exposure of our GMIB back book, something we have previously indicated as an objective. In the Dutch market we are reorganizing Aegon Bank, which has meant the reduction of 80 staff positions and consolidating these activities into our offices in The Hague. This will result in an annual cost saving of EUR20m. And finally, in the United Kingdom, our restructuring program to reduce our total cost base by 25% is on track. Adrian Grace, our new CEO of Aegon UK, is committed to delivering on our objectives for our UK business.

Slide four. Let me touch on the key benefits of our divestment of Transamerica Reinsurance. First of all, this transaction supports our ongoing efforts to sharpen our focus on our core life, pension and asset management activities while improving further our risk return profile. The total consideration of the divestment amounts to $1.4b, of which $900m is in the form of cash while the other $500m is in the form of capital release. The divestment enables us to upstream to the holding $1.1b to support the repurchase of all remaining core capital securities from the Dutch state. Since the divestment is primarily in the form of reinsurance agreements, it will have no meaningful impact on shareholders' equity.

Earnings on the business retained as well as amortization on prepaid cost of reinsurance, will be reflected in the run-off businesses line. The expected amortization period is 15 years, which means an amortization of prepaid cost of reinsurance of approximately $40m before tax per year. And, as we have communicated, we expect to close the deal this summer.

Last February we announced new medium-term targets for underlying earnings, return on equity, cash flows and the increased earnings from fee businesses to 30% to 35% of underlying earnings by 2015.

Slide six. Turning now to underlying earnings, there were a couple of key factors which came into play, specifically increased life expectancy in the Netherlands, which I will come back to on the next slide, and our program to redress customers for errors on policy records in the United Kingdom. The main priority of the program has been to deal with issues that resulted in financial detriment and to return effective customers to the financial position they would have enjoyed had the issue not occurred. Efforts to determine the full scope of customer redress is expected to continue and could potentially lead to additional charges.

In the Americas, earnings increased by 2% driven by strong results from both pensions and variable annuities, as I mentioned. In Central and Eastern Europe, earnings were stable despite the negative impact of the new pension legislation in Hungary and Poland.

Slide seven. Let me discuss briefly the issue of increased longevity in the Netherlands. The new projected mortality tables showed a strong increase in life expectancy in the Dutch population, as we noted in our third-quarter results presentation. At the time I indicated a one-time impact of EUR225m on excess capital in the fourth quarter of 2010.

IFRS provisioning is based on yearly observed mortality tables and has taken us through underlying earnings in line with our accounting methodology. This means that actual mortality experience is used to update Aegon's annual levels of provisioning. The observed mortality for 2010 is not yet available. However, to be prudent, we have assumed that the strong improvement in life expectancy seen in 2009 will be continued in 2010. And as a result we will add to our reserves on average EUR20m per quarter during 2011 in addition to the 2010 level of provisioning.

On slide eight, identifying and pursuing cost efficiencies continues to be a priority. During the quarter operating expenses excluding restructuring charges came down by a modest 1% at constant currency. The cost reductions realized in the Americas were offset by investments in new distribution capabilities in the Netherlands and further investments in our growth markets in Asia. Restructuring charges in the United Kingdom amounted to GBP7m at the end of the first quarter. We achieved GBP37m of our targeted GBP80m to [GBP80m] cost reduction program. And then in the Netherlands I have already mentioned the restructuring of Aegon Bank and the cost benefits of this.

Turning now to net income on slide nine, the EUR327m in net income for the quarter was positively impacted by a run off of business and lower impairments. The combined result of our run-off businesses increased to EUR22m, mainly as a result of a lower amortization yield paid on internally transferred assets related to the institutional spread-based business. The other influence was favorable mortality results in the paid-out annuities block of business. I will come back to the run-off business in a moment.

As I mentioned, impairments were at particular low levels in the first quarter, totaling EUR62m, the lowest amount in almost three years. This number includes recoveries of EUR26m and refer mainly to US real estate-related securities.

On slide 11, as of the first quarter of 2011 Aegon's run-off line of business in the Americas comprises the institutional spread-based business, the structured settlement payout annuities, BOLI/COLI and life reinsurance. And the latter two have been included for the first time in this first quarter. When the divestment of Transamerica Reinsurance is complete we expect the contribution of life reinsurance to turn negative. The capital allocated to the run-off business amounted to EUR2.7b and negatively impacts the return on equity. And if we exclude this capital from the return-on-equity ratio, the ratio for our ongoing businesses would actually increase.

On slide 12, turning now to the sales development for the quarter. In order to provide a clearer view of Aegon's sales across our businesses we have introduced a single sales indicator consisting of new life sales, new premium production of both accident and health insurance and general insurance as well as one-tenth of gross deposits. We support -- this supports our aim to improve our disclosures.

New life sales increased in all units except United Kingdom and amounted to EUR501m. I've mentioned the 42% increase in new life sales in Central and Eastern Europe. You are well aware of the new pension legislation in Hungary and Poland, which has given us reason to shift our business focus to life insurance. Gross deposits for the Group were somewhat lower, mainly as a result of lower inflows in asset management and less savings deposits in the Netherlands. Gross deposits in the United States, however, showed solid growth, totaling $7.7b as a result of higher pension and variable annuity deposits.

Our US pension business was a particular standout in the first quarter. Gross and net deposits continued to be strong, while account balances and earnings showed a further increase compared to the previous quarters. The noticeable improvement was particularly driven by our third-party administration business in addition to our plan administration services and support product. And finally we attribute the continued low withdrawal rates to our focus on delivering high-quality service.

Slide 14, in the United States we are keenly focused on the at-retirement market, where we see a clear and growing need for longer term guaranteed income products. Consequently Aegon's variable annuity deposits increased 46% year over year. At the same time, competitors rationalizing their pricing and a number of competitors exiting the market also benefited our VA sales results. And of course the progress of this business is consistent with our strategic focus to shift from spread-based to fee business.

Turning now, on slide 15, to Aegon's capital position at the end of the first quarter, excess capital remained strong at EUR3.7b. The payment to the Dutch state was partly offset by the raising of equity in the amount of EUR903m in February this year. Again, we did so to support our targeted core capital ratio to maintain a sufficient buffer at the holding, as well as support our aim to repurchase the remaining core capital from the Dutch state.

On slide 16, we have decided to publish our operational cash flows on a quarterly basis going forward to keep you informed of our progress of increasing our operational cash flows by 30% by 2015 from the normalized 2010 level of EUR1b to EUR1.2b. During the first quarter earnings on the in-force remained strong. Earnings were impacted by additional longevity charges and negative fair-value items in the Netherlands in addition to UK restructuring charges. This was offset, however, by lower impairments, favorable market developments and growth of our fee business.

Investments in new business are driven by sales volumes and our strategic shift from spread to fee-based business. In total, our operational free cash flows for the first quarter amounted to EUR265m (sic - see presentation).

As you can see on slide 17, the core capital ratio remains stable at 75% and the movements are indicated on this slide. As we have announced, it's our aim to have a core capital ratio of at least 75% of total capital by the end of 2012.

Slide 18. The shareholders' equity during the quarter decreased to EUR16.9b or EUR7.84 per share. The equity issue and retained earnings contributed positively to shareholders' equity, and negative impact came from the lower revaluation reserve of EUR665m as the risk-free interest rates rose during the quarter. And of course the weakening of the US dollar against the euro during the quarter clearly had a negative effect on shareholders' equity. Our return on equity amounted to 7.8% as the average shareholders' equity excluding the revaluation reserve increased. Furthermore, lower underlying earnings also had their impact. I have already referred to the impact of our run-off business on our overall return on equity.

Turning now, on slide 19, to our embedded value results for 2010, total embedded value rose 6% to almost EUR19b. This increase was due to positive performance of our in-force business as a result of cost savings, improved financial markets and strengthening of currencies. It's our strategy to increase the relative capital allocated to operations in our new market segment. And this is demonstrated by the fact that new markets, which only represent 7% of embedded value, already generate 21% of the value of new business.

The 11% increase in embedded value for Aegon's life insurance business benefited from new business of EUR555m, a positive performance of our in-force book and a stronger US dollar. Changes in operating assumptions impacting our in-force performance were mainly driven by strengthening of persistency in the variable annuity and life businesses of the Americas and assumed increasing longevity in the Netherlands. Lower interest rates in the Netherlands led to negative economic assumption changes and were offset by results on interest rate related hedges in the Netherlands, reflected in long-term investment return variance.

Let me briefly summarize. We are pleased with our progress on a number of strategic objectives. Aegon's solid underlying earnings were impacted by exceptional charges in the United Kingdom and increased longevity provisioning in the Netherlands. In line with our strategy to increase fee business and reduce spread business in the United States, we achieved strong sales and earnings growth of pensions and variable annuities. As a result, on the positive performance of our in-force business, total embedded value increased 6% to nearly EUR19b. Aegon's excess capital position above AA capital requirements remained strong at EUR3.7b and we are on track with our aim to fully repurchase the remaining core capital securities by the end of next month.

As always, we appreciate your interest in the steps we are taking to position Aegon for sustainable earnings growth, consistent with our risk/return objectives. And before we take your questions, let me remind you that we will host an analyst and investor conference on June 21 and 22 in London. Both Alex Wynaendts and I along with senior management hope to see you there.

Thank you for your continued interest in Aegon. And, with that, we welcome your questions.

(Operator Instructions). The first question comes from Farooq Hanif. Please state your company name followed by your question.

Hi there. Farooq Hanif from Morgan Stanley. Just a few questions. Firstly, just on the exceptional items that you've talked about, could you just talk through again how long it's likely that each will last? So, for example, if I look at the longevity impact, if you take the total capital impact that would suggest two years' worth of provisioning, but of course your actual experience might be less than the projected experience. So could you talk about that?

And also the UK customer redress, how many quarters will that continue for?

Second question is on the cost savings in the UK and the Netherlands and elsewhere, now that you're getting closer to actually achieving them, could you update us on what the bottom-line impact would be? You suggested in the past, for example, in the UK that roughly an GBP80m to GBP85m cost saving would not all come to the bottom line because there would be other pressures on the P&L. Could you just talk about that?

And lastly, in the fee-based business growth in the US, particularly the pensions business, as you move towards more fee-based and administration type of business, isn't that going to pressure the actual earnings margin earned on assets in that business? Could you talk about that? Or are you still happy with your guidance of 20 to 25 basis points? Thank you.

Thank you Farooq. Your first question about the exceptionals in this quarter, the UK and the Netherlands, let me explain very short the provisioning for longevity in the Netherlands. The IFRS provisioning is based on observed actual mortality tables. What we have done in last year for our capital, was based on projected mortality tables and these projected mortality tables go through 2060. And based on these tables we have taken EUR225m as a reserve in our capital.

What we have done in our IFRS results, we looked at the actual experience last couple of years. The actual experience for 2010 is not yet available. But we have assumed that the trend, the negative trend if you will, or the positive improvement in mortality, will, the trends will continue. That means that on top of 2009/2008 we will see a positive longevity trend.

If that will happen, we don't know yet, but we have assumed that that will happen. We have to take for the whole year, the end of the year, we expect EUR80m provision. What we have done now, we said we want to prudent. We take EUR20m in this quarter, expecting that the trends will continue, which we don't know yet. And that's the answer I would like to give. And, of course, every year, you are depending on the newest mortality table. For capital we look at projected tables. And for the provisioning IFRS we look at actual experience.

Second question about the cost savings and especially you asked about the UK and the Netherlands. The UK, very clearly we have set a target and we are on track on that target. We will achieve 25% cost reduction off our cost in the United Kingdom at the end of this year. On top of that we are also finalizing our whole exercise on improving our [funds] for our customers.

In the Netherlands we have, in this quarter we have achieved a restructuring of Aegon Bank, which will deliver savings of EUR20m on a yearly basis. We also have said that we are looking at a cost reduction in our pension and life business of 20%. And that 20%, we are not fully sure if that will also go directly to the bottom line. But clearly what -- talking about cost reductions in the United States, in the UK and Netherlands, we are continually looking for cost reductions in our established markets.

Talking about the fee business, I must say I'm very pleased with the development of our fee business in the United States. But we have Darryl here available and he can give much more color on the positive development in United States.

Yes. Farooq, it's Darryl. I think your question's specifically to the margins in the US. I think the short answer is yes, over time. Inside the 25-basis-point guidance we've given, it's a fairly eclectic group of products in there and there is some general account terminal funding business that has higher margin. And we're not -- and as part of our shift from spread to fee, we're really not selling more of that product. So the core pension business will have slightly smaller margins. I think the pensions are running right around 20. The stable value products right around 20 as well. So modest compression, but I don't see it to be significant.

I would also say I don't really see that compression standing in the way of seeing double-digit earnings growth coming out of this line going forward. And that's speaking to the positive top line and net retention that we've had in the business. So modest decompression but not standing in the way of good earnings growth.

Okay. Thank you. Can I just come back on the first two questions? So what you're saying on longevity is that basically you don't know, but it could continue for more than a year. That's my read of it, depending on actual experience.

And on the cost saving you haven't really been that clear on the bottom-line impact. You seem to be saying that actually a lot of it might not come to the bottom line. So I'm a bit confused.

I will -- the question about longevity, as I said, we are depending on the actual experience tables and we'll look at that point year to year. And depending on the fact if the trend, the positive trend will continue being positive, then yes, it will continue. But we are depending on the actual experience from year to year.

About the cost, I'd like to be more clear there on the question you raised. We will achieve in the UK the bottom-line cost reduction. We have said that we will have an GBP80m to GBP85m improvement of our cost levels in the United Kingdom and that will have a direct impact on the bottom line. The other item is the legacy in the United Kingdom. We have taken already and now this is the third quarter that they have taken a restructuring charge for the legacies. We feel that now we have the majority behind us and this whole program will also be finalized at the end of this year. But obviously there can always be smaller amount, but we feel that we have now the majority behind us.

Okay. That's clear. Thanks very much.

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

Thank you. Good morning. JP Morgan. Just coming back on the longevity charge or longevity provisioning, just to be clear, on the IFRS reserves, I remember in the third quarter you published a new mortality table which you took from CBS I think, which showed life expectancy for a male 2010 85.5 years at zero and I see now 87.3. So are your IFRS reserves based on that table you published in the third quarter and now you are taking additional provisions because that table is below your actual experience, in fact? Is that what's going on? Can you just clarify that for me, please?

Secondly, and then secondly, do you not think this should have been disclosed a bit earlier, particularly given the capital raising you did in this quarter?

Then thirdly on the fixed annuities, could you just comment a bit on why the surrenders and withdrawals jumped quite significantly in the first quarter and the maturities, the blocks, which is coming off the books, the change of the block which is coming off the books. Thanks.

Yes, Duncan. To make clear, what we have said based on our third quarter results is the impact on excess capital. We are talking now about the provisioning under IFRS. And the impact on excess capital, as I said earlier, was based on the new projected mortality tables. We are now talking about, according to our own accounting methodology, we are talking about the observed, the actual experience.

And, as I said, we don't know yet what the actual experience for 2010 will be. We have run through our numbers in this quarter based on this quarter and we have made an assumption that the improvement of actual experience in 2010 will be on the level of 2009 so an even increased [improval] again. And that could have meant that we'd taken provision for EUR80m at the end of the year and we have said we want to be prudent and take EUR20m in this quarter.

Maybe I'll have to take this offline because I don't want to get into too many, too much detail. But just, could you just clarify for me, the reserves, your IFRS reserves at the end of 2010, they're based on the experience you had in 2009 or 2008 or the tables which are set up in 2005, or the CBS tables of 2010? What were the reserves set up of, on the basis of, in 2010 please?

For 2010 the annual accounts, the reserves are based on the latest available tables, which including, that means 2009, actual experience. That is the way we reserve in our IFRS.

2009 actual experience form the reserves of 2010?

Correct.

Okay. Thanks.

I would love to come back to you for more questions. The next, the other question you asked I think about margin on fixed annuities, Darryl, maybe you can give --

Yes, I think you're asking about the surrender and withdrawal rates. And correct, we've been experiencing about EUR600m a quarter in net outflows really over the last several quarters, which is a total loss rate in the 9% to 10% range. That did up-tick to 12.3% in the first quarter, which is an EUR800m outflow. It's tied to interest rates. There's the up-tick in interest rates is going to increase withdrawal activity out of fixed annuities and if interest rates were to go up further from here I would expect that number to continue to accelerate.

Okay, but interest rates didn't move in the quarter, Darryl, not much anyway.

They did towards the end of the year, absolutely. And what it is, this comes down to competing product. And so you have to look over a -- you really have to look over the last four or five months, what's been going on in the marketplace and rates came up in the US fairly significantly towards the end of the fourth quarter. That works its way into pricing and product and competing product. And you can see it move over into the variable annuity product. You can see it in competing spread product. It's also a function of what's going on in the competitive landscape as well. But the movement in interest rates up towards the end of the year was noticeable.

Okay. And is it stuff, is it stuff coming off, stuff with no surrender penalty? Or is it -- 60% of the book's got a surrender penalty, I think, hasn't it?

Certainly it's a closed, effectively a closed run-off book. We're really not selling a lot of new fixed annuities, as you know. So business continues to mature and come out of surrender period, and it becomes more sensitive to competing product and where the general flows in the industry are.

Okay. Alright. Thank you very much.

The next question comes from Michael van Wegen. Please state your company name followed by your question.

Yes, morning guys. Michael van Wegen, Bank of America - Merrill Lynch. A couple of things I wanted to check. First of all getting back on to the UK customer redress issue, I think you've stated in the past as well that you had largest part of the provisioning behind you. What has happened since the end of the year that made you decide that further provisioning was required? And why are you confident it's not going to happen again going forward?

Secondly, probably a question for Darryl, your variable annuity profitability improved quite a bit in the quarter. At the same time, I see the hedging item in the fair value being a bigger negative than I expected. Have you changed anything in your DAC accounting or what's really the driver behind that variable annuity profitability improvement in Q1?

And then finally, your Central/Eastern European profits so far haven't really been affected yet by the pension transfer that should take place I think in this quarter. Can you guide us a little bit on what the profitability impact will be for Poland and Hungary when this transfer actually takes place? Thank you.

Yes Michael. Thank you for your question. Talking about the UK, as I said, we started in May 2009 investigating these administrative errors and we took a provision in I think the third quarter in 2009. At that time we also believed that this was an adequate provision based on the samples we have made. During 2010, and we have gone through the whole process, I can tell you takes, it has taken a lot of time and money from people. Spent a lot of time in fixing these administrative errors and fixing the files. We have took a provision at the end of 2010, which clearly was not sufficient because the remaining part we have taken in the first quarter this year.

You have certain IFRS rules so you have to be quite clear about do we really have to pay back and redress the files and detriment to our customers. Gone through this whole process. We came to the conclusion that we have now the majority behind us. There might be some more depending on -- we have an internal program and it goes through phases. Clearance has to be made that we really have to pay back this to our policyholders, but my feeling is that we are now finalizing this whole program. The plan is to finish it at the end of the year. There might be some additional but the majority we have behind us.

I think the other question is, Darryl, for you?

Variable annuities, yes. Hi Michael. Your two questions I think, one on profitability of new business and the other one on the fair value results. On the profitability, it's a similar story to what I was mentioning to Duncan earlier. You have to trace back into the up-tick in interest rates that happened late in the fourth quarter. We had actually increased prices on our product and positioned ourselves for higher hedge costs in the lower rate environment and with interest rates coming up that actually improved the hedge cost relative to what was in our pricing and so expanded our margins.

I would also say that there's some innovation in here as well. We've introduced a new product, retirement income max, and it's got some innovative features underneath it as it relates to the fund management and some of the fund options, which also reduce risk and bring our hedge cost down, and that's had an effect of increasing margin as well. So we'll get a very good new business profitability story going on the VA side right now combined with our growth in sales.

On the earnings side, on the fair value side, really not outside of our expectation for the quarter. A strong quarter means hedging losses on all the delta hedging that we have in place now. And as Jan mentioned earlier, we are up to 100% coverage on our old product now, so the additional macro hedge losses from the additional delta hedging that's in place. Also I explained when we were together in New York as well, there is an expectation there's a differential between the hedge results and the product because of the long-term assumptions are they involved in behind the product relative to the market assumptions that are in behind the hedges that are at fair value. So not out of the line of expectation, I would say, on the fair value side.

Darryl, maybe to follow up on that, I'm sorry for the confusion. I was actually talking about the profitability of the in-force that saw a very big improvement in the quarter.

On the profitability of the in-force, really that gets to the growth and the profitability of the new business that we've been putting on. There was -- we did have an intent -- a write-off last quarter, an extraordinary write-off last quarter, about $9m or $10m I think it was for a write-off of an intangible related to the Merrill Lynch acquisition, which probably held back the fourth quarter earnings slightly. But outside of that it's growth in the business and year over year boosted by top line growth and overall market growth. And I see nothing extraordinary in the first quarter. I see it sustainable going forward.

Michael, just in addition to the question about the UK customer redress, to make more clear, the program, our program to redress these customers is ending before the year end. And we also believe that charging will stop well before that time and that we have going now through the last stages of the whole process. There's also more reason to feel more comfortable.

Your question about CEE is simple. The transfer has taken place in Q2 of our mandatory pension to the Hungarian state so that has some favorable impact on the earnings.

Favorable impact? How would --

That 25 is now 20 for the full year.

Okay. Thank you.

The next question comes from Johnny Vo. Please state your company name followed by your question.

Yes, hi. It's Johnny Vo from Goldman Sachs. Just a couple of quick questions. Just in regards to the 7% and 10% growth in underlying earnings from a rebased level in 2011, so with the 2011 numbers are we expected to believe that the exceptionals are part of the rebased level or not? That's the first question.

The second question is just questioning on your positioning in regards to interest rates and interest rate risk. Is you book now positioned for rising rates or actually are you protecting against declining rates, if you can just give us a feel for where that is? Thanks.

John, yes. The -- your first question about the --- be a bit more clear, the 7% to 10% that are financial targets for the mid-term, the exceptional charges are not included in these targets and also not in the base.

The second question.

On interest rates. You want to talk about US?

Yes. I can certainly speak on behalf of the US. We've said consistently that higher interest rates is good for our business and nothing we've done recently changes that. So I would say I would just reiterate what we've said in the past, higher interest rates are good for our business.

And the other large book where we have interest rate exposure, Johnny, is in, obviously in the Netherlands. And that's where we have all of our guarantees hedged. And so we're not really positioned to [hide] away in the Netherlands. We have little interest rate exposure in that book of business.

Okay. Thanks.

The next question comes from Tony Silverman. Please state your company name followed by your question.

Good morning. It's Tony Silverman, Standard & Poor's Equity Research. I'd just like to come back if I may on longevity and then I've got one other question. If you could perhaps clarify if the -- what -- how long the charge would persist if the projections in the EEV report were actually borne out, those central projections? You've mentioned the capital that's in the EV report. The charge is EUR600m net of tax, which would imply the charge persisting for many years.

The second question is perhaps more positive. I'd be interested to hear if you could talk a bit about what sales channels are producing the VA growth. Thank you.

Yes Tony. Thank you. The question about longevity, I think again to make it clear that the projections we use for our capital embedded value are really the projected mortality tables 2060. And what for IFRS is important that we base ourselves on the actual experience. And this is where of course you have --- you are depending here on every five year we get new tables, but every year we get in the Netherlands the so-called CBS actual mortality tables.

Sorry, if I can just come back. So if the projections in the -- the question really is, if the projections in the EV report were realized in the successive sets of tables that are used to produce the IFRS numbers, would we then have this provisioning arising for many years?

Yes. If the actual -- the answer is yes. If the actual experience is in accordance with the projected 2060 materials then you will see this happen over the years and it is depending on when, how, based on actuals every year.

Yes. Thank you. I suppose that's the answer. Thank you very much. And the second question's on the sales channels to the VAs?

Maybe Darryl, you can elaborate on that?

Yes. Most of the growth is coming from the independent channel actually and that's not inconsistent with a lot of the industry right now. We're still seeing growth in our other channels, but by far the majority of the growth has been coming from the independent BD channel.

Thank you very much.

The next question comes from Jan Willem Weidema. Please go ahead, sir, state your company name followed by your question.

Good morning, Jan Willem Weidema, ABN AMRO. A few questions. You have a perpetual which you can redeem in July, EUR200m. Are you planning to redeem that and are you planning to issue any new high risk for the remainder of the year?

Secondly, on upstreaming of capital to the holding, could you give us a more recent number than the EUR1.3b that you've given in the press release?

And thirdly, on the US life and protection business, I recognize there are a few one-offs like mortality, but can you give us a feeling about the run rates that you see for 2011 because the number is quite a bit lower than the average of the last three quarters in 2010.

Jan Willem, I think the question about the capital and upstreaming, and maybe Michiel, you can give an answer to --

Sure. Hi Jan Willem. We currently are still working under some commitments that we've made to the European Commission. One of those commitments is that we will not call or repurchase hybrids that are outstanding and those will be listed at the time we repay. So technically you could argue that we repay before the end of June, you could call hybrid in July, but we also have to take care of notice periods etc. And certainly all the hybrids who have come up for a call, economically it's not been that attractive to call them. So we have no plans at this point to call those.

We are following what's going on in the hybrid markets, particularly within high and also with how Solvency II is shaping up. So certainly from that perspective we are keeping a close eye on things that are going on.

On excess capital, a more recent number than the EUR1.3b, I can tell you that during the second quarter we're expecting more dividends from actually our major operations, enabling us to effect the repayment in part of the government securities. And so an actual point in time number I do not have for you, but I can tell you that there will be more dividends that are upstreamed during the second quarter.

Maybe a follow-up question on that one. Have the dividend streams that you foresee been improved already by the local regulators?

Yes. Most of those actually have approved by local regulators.

Darryl, life and protection?

Yes. On your life and protection question, when you look on a year-over-year basis earnings are flat. There's about EUR10m of growth, which is about a 5% growth rate and that's offset by about 10m of worse mortality first quarter of 2011 relative to a year ago.

There is, I would say overall there is two dynamics going on in our life earnings. We are taking some aggressive expenses out of this line of business through our consolidations. But that's offset by a trend in the industry that we're seeing in terms of higher lapsation on some of the level term products. So those are two offsetting components that are competing against each other.

I'd say we're probably pretty close to expectation here in the first quarter. When you go back over the last couple of quarters, you have to get into some, more some one-time positives. We had a conversion of the defined benefit employee pension plan to a cash balance plan in the fourth quarter. That contributed extraordinary positive earnings in the fourth quarter. There was some positive DAC related to good mortality and expense experience back in the second and third quarters. So I would say we're probably close to run rate, certainly within my level of expectation here in the first quarter of '11.

Okay. Thank you very much.

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

Good morning. It's Nick Holmes at Nomura. A couple of questions. First, on looking at your strategy in the US to move from spread to sea-based business, wondered if you could tell us whether you think this is going to release capital, which intuitively it should do. And if so, could you give us some sort of guide as to the amount of capital that you think could be released?

And then another question on the US which is on the VA growth. Could you tell us a little bit more about what you're doing with new products? I think you mentioned distribution, but I wondered if you could tell us about the new products. Thank you very much.

I think that this is a good question for Darryl to answer this.

Yes. Hi Nick. It's Darryl. On the strategy from spread to fee, absolutely it's releasing capital. You can see it in our excess capital and capital that's been building on the US balance sheet. Our RBC ratio we're estimating to be around 430% so that's been some significant growth in that since we began executing this strategy. So the rebuild of capital is certainly noticeable and ongoing as we continue to run down the institutional spread business and the fixed annuity run out that's happening as well.

In terms of VA, in terms of product, I think your general question was around innovation and product, and as I mentioned earlier on one of the earlier questions, we've had a couple of changes in innovations to our product. We have a recurrent retirement income max right about now which is designed to compete in the higher withdrawal rate segment of the market. And we pay for that with basically having a much more conservative underlying investment portfolio. That combined with we have some fund options now where we actually reduce the equity allocation whenever the VIX index increases, as an example.

Those are examples of where innovation and reducing the hedge costs allow us to compete on other features of the products that play well, for instance, in the income-now space. So that's just one of many examples.

As I mentioned before, we're also being very opportunistic in looking at our pricing. We've been trying to follow a fast-to-market in terms of repricing when the markets are changing and the hedge costs are changing. That competes a little bit against some of the competitors in the market place that take a little bit more of a slow-to-market strategy. So you see a little give and take every quarter on market share, but I like our position right now.

And where do you think you are versus the competition? Do you see -- your equity guarantees are relatively risk-averse, aren't they? Do you see your sales becoming more -- having a greater risk appetite for the secondary guarantees?

No, not really. We're sitting in a number-10 market position right now. The top five is not something we aspire to. You can get there with product in the market if you choose to. We choose not to. I like how we're positioned from a risk aversion, if you will, and profitability perspective, and the growth in sales that we've been able to achieve, and you can see it coming through on our earnings now. So I like that we have the balanced position. You can move up the league tables if you choose to look the other way on risk, but we choose not to do that.

Okay. Thank you very much.

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

Hi. It's William Hawkins from KBW. On slide 16, your operational free cash flow if I annualize it is remaining comfortably in your target for 2015. So presumably it's inflated by some things that you think are going to come down. I made a list of all the contributing factors that you mentioned during the presentation. But could you just clarify what, if you like, was one-off in the first quarter and therefore what the underlying number should be? I'm assuming it's relating to the 523 in-force, but if you could clarify that would be helpful.

And then secondly, on slide 19, in your life embedded value, could you just confirm how much of the EUR25.8b related to Transamerica Re and therefore what the impact of the sale would be on a pro forma basis? Thank you.

William, I think if you look at one-offs in the operational free cash flow, maybe Michiel, do you have the one-offs available, what has now impacted in this quarter in our operational free cash flow?

Right. Hi William. It's Michiel van Katwijk. I think that what you observed is that with a EUR264m of operational cash flow we are within our normalized range. Our normalized range is EUR1b to EUR1.2b. And actually there aren't that many specific one-offs in the first quarter. And so for us to actually grow the 30% we need to grow it from the level that we're currently at. For instance, I would expect at the time that the Transamerica Re transaction closes that that will actually release capital. We've said that part of the transaction comes in cash and part of it comes in the release of capital and you will see that come through in the cash flow statement in the quarter when we're actually closing the transaction.

With regard to your question about the life, value of the life reinsurance business, the value of the part that we're selling is $1.8b. And the value of the part ---

Dollars.

Yes, that's dollars. Sorry. Yes, thank you Darryl. And the part that we're retaining is roughly $0.3b, $0.4b, I think $0.4b, as well.

I'm sorry, just trying to clarify. Does that mean the embedded value is staying the same following the sale simply because you're replacing the EV with some cash or is it actually going down?

No, I think that's, at that time that's exactly right. EV will not be affected by the transaction itself. However, how we apply the cash will have an impact and so the overall impact is probably going to be a slight positive, if you will, because we are redeeming the most expensive part of our capital base with it. And so -- and of course the government securities, which will impact our WACC. And, as you know, we're not getting the full value for embedded value. So it's not -- the $1.8b of embedded value at the end of the year we're selling basically for $1.4b.

Okay. Thanks.

The last question comes from Farquhar Murray. Please state your company name followed by your question.

Hi there. It's Farquhar Murray from Autonomous Research. Just one question if I may just to finalize things. On the -- in terms of the persistency charge that you took on the EV metrics, I think you took about EUR544m in the US, how much of that relates specifically to the Reinsurance business. And particularly I think some of it was on the term. Is that a particular distribution channel or an issue within that book that maybe you could give some color around? Thanks.

Darryl, can you give some color here?

Yes, the persistency charge in the reinsurance business was $340m and it relates to the term lapsation issue at the end of the --- the shock lapse at the end of the level term period. I don't know if there was a part two to that question.

Reinsurance, the remainder.

The remainder of, in the US the remainder of the lapse issues, there was some in our direct business as well, but that was actually offset by other positive assumptions on expenses and mortality. So you don't really see it coming through on our life EV numbers.

The other persistency issue we had was on the variable annuity business in the US. And that was basically updating our policy or our behavior assumptions on the older IV product which is very sensitive to policyholder behavior assumptions, the very reason we stopped selling it in 2003. And with the low interest rate environment, basically the lapses are much lower than what we have built into our embedded value and so we brought those and trued those up to current experience.

Okay. Many thanks. Cheers.

Thank you for your questions and let me also remind you again that we will host an analyst/investor conference on 21 and 22 in London. See you all there. Thank you.

This concludes the Aegon conference call. Thank you for participating. You may now disconnect.