AEGON N.V. Q2 2003 Earnings Conference Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Bart Horsten - F. van Lanschot Bankers - Analyst : Yes, good afternoon. It's Bart Horsten from Lanschot Bankers in the Netherlands. I have three questions. First, on your indirect investment income you stated in the first half, you added EUR310m to the results, but if I recall correctly you stated at the full-year presentation that for the full year, you expect EUR450m in indirect investment income. So, does that mean that for the second half, we have to expect a lower investment income or can we increase our full-year estimate for indirect investment income? And could you possibly give a breakdown of that EUR310m by country? And the second question is on the contribution of your employee pension plan income, which you stated was $42m lower than last year. Could you just tell us how much is still included in the results and is this also going to be the case going forward? And my final question concerns the interest rate development, recently we've seen a sharp rise in the long-term interest rates and how does that affect your profitability? Because in your Annual Report, you stated a one percentage point increase in interest rates would have a negative impact on your earnings. Thank you. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Bart Horsten - F. van Lanschot Bankers - Analyst : Okay.

Question: Bart Horsten - F. van Lanschot Bankers - Analyst : Okay and how much is still included from the over funding?

Question: Bart Horsten - F. van Lanschot Bankers - Analyst : Okay, the interest rates?

Question: Bart Horsten - F. van Lanschot Bankers - Analyst : Okay. So far, no negative impact seen on the results?

Question: Bart Horsten - F. van Lanschot Bankers - Analyst : Okay and one final remark on your first answer. The EUR310m in the first half, can we double that for the full-year?

Question: Bart Horsten - F. van Lanschot Bankers - Analyst : Okay, thank you.

Question: Margot van der Velden - ING Barings Research - Analyst : Hi good afternoon. It's Margot van der Velden from ING Financial Markets. I have a question on the US business. Could you give a little bit of insight on how and if there is a mismatch between the investments on the business compared with the policies, that those investments are matched with? Do you understand my question?

Question: Margot van der Velden - ING Barings Research - Analyst : Yes REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Margot van der Velden - ING Barings Research - Analyst : And then can you give a little bit of an indication of how the mismatch is then? It has not deteriorated or has not changed, but how is it?

Question: Margot van der Velden - ING Barings Research - Analyst : Okay, thank you.

Question: Nick Holmes - Lehman Brothers - Analyst : Thank you. It's Nick Holmes, Lehman. I have two questions please. The first one is, can we clarify again, how you regard the AEGON Association preference shares and whether you do definitely regard them as debt rather than equity? That's my first question. The second question is, I wondered if you could tell us a little bit more about how vulnerable you feel the DAC on the US general accounts book could be to any acceleration due to low bond yields? One of the reasons I raise this is that in your embedded value disclosure, which of course we are not here to discuss today, but I can't help noticing that the value of the in-force business is actually lower than the gross DAC in America or the net DAC and this just makes me wonder whether you have some concern about the DAC of the general account books?

Question: Nick Holmes - Lehman Brothers - Analyst : Can I just follow up on that? I mean, presumably, you do not regard it though as common equity and therefore, you do not regard it as eligible for inclusion in calculations of common equity, net assets, or indeed embedded value. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Nick Holmes - Lehman Brothers - Analyst : But even with your Dutch GAAP equity, you do agree, do you that it should be excluded from a calculation of the common equity net asset value?

Question: Nick Holmes - Lehman Brothers - Analyst : But the common equity is what we are looking at.

Question: Nick Holmes - Lehman Brothers - Analyst : Okay, I think it might be helpful for you in your presentation, just to clarify that a little bit more, but thank you for your answer.

Question: Nick Holmes - Lehman Brothers - Analyst : Okay.

Question: Nick Holmes - Lehman Brothers - Analyst : So, if I can explore what you've said just a little bit more, I mean, can you quantify the level of spread that you need to obtain on your book of let's say, fixed annuities in order to avoid any DAC unlocking.

Question: Nick Holmes - Lehman Brothers - Analyst : So, there is a perfect offset at the moment or approximately perfect?

Question: Nick Holmes - Lehman Brothers - Analyst : Okay, right. So, you don't view any DAC unlocking as a possibility then?

Question: Nick Holmes - Lehman Brothers - Analyst : Okay. Thank you very much.

Question: Duncan Russell - Fox-Pitt, Kelton - Analyst : Good afternoon. It's Duncan Russell from Fox-Pitt, Kelton. And the first question is on the dividend of 0.20 per share. As an option to take either cash or stock, and the question is if it is taken as cash, will that be funded by issuing stock later in the year?

Question: Duncan Russell - Fox-Pitt, Kelton - Analyst : Okay. The second question is on bond defaults, the provision for bond defaults. Can you please split that down by product in the US as you did in the first quarter? And then the third question is on the Transamerica results. Can you please give us an estimate of clean earnings. I know you said there is $35m from the first quarter. Is there any other issue there or an estimate of what the sustainable earnings power is of Transamerica?

Question: Duncan Russell - Fox-Pitt, Kelton - Analyst : Okay, thank you.

Question: Duncan Russell - Fox-Pitt, Kelton - Analyst : You tell us some of the deductions from that?

Question: Duncan Russell - Fox-Pitt, Kelton - Analyst : Right, thank you.

Question: Duncan Russell - Fox-Pitt, Kelton - Analyst : Right, thank you very much.

Question: Tom Headmond - - Analyst : Hello, Tom Headmond [Inaudible] from Amsterdam. Few questions, did you give the breakdown -- the regional breakdown of the indirect results in the first half, but I think that was already in the press release, but could you also provide these numbers on a 2002 full year base, because that's something I'm still missing, so I don't know how the second half last year looked like? And second question is, you mentioned that in a large number of states the crediting rates have come down to 1.5%, could you tell us what the average crediting rate is now and how interest rates are moving up again, do you think that any time soon there will be a reversal of this downward trend? And thirdly, a question on variable annuities, where do you expect your business to go from here in the rest of the year? Or let's phrase it differently, where do you want your loss in market share to stop before taking action?

Question: Tom Headmond - - Analyst : Okay, thank you.

Question: Tom Headmond - - Analyst : Yeah.

Question: Tom Headmond - - Analyst : Okay, thank you. And there were no with regard to the fixed annuities, the second part of the question was that you have been negotiating down these crediting rates, but interest rates have moved up of course in the past weeks or past months. Do you expect that these crediting rates are going to move up again in or that there will be negotiations the other way around in the coming months?

Question: Tom Headmond - - Analyst : Okay, thank you.

Question: Tom Bennett - BNP Paribas - Analyst : Hi, this is Tom Bennett, BNP Paribas. Couple of questions. The US bond default numbers do seem relatively high. Have you any idea how you compare with the industry and what are the losses relative to your portfolio in basis points?

Question: Tom Bennett - BNP Paribas - Analyst : And what is the size of your bond portfolio?

Question: Tom Bennett - BNP Paribas - Analyst : Thank you. And the second question is on this pension credit of $42m dollars or Euros. I can't remember. You said that reflected an over funding of $250m, is that correct?

Question: Tom Bennett - BNP Paribas - Analyst : Than you had last year.

Question: Tom Bennett - BNP Paribas - Analyst : But you're still paying money into the pension funds?

Question: Tom Bennett - BNP Paribas - Analyst : All right. So, the over funding limit is $250m, still?

Question: Tom Bennett - BNP Paribas - Analyst : Fine. So, this will run out sometime next year at the current rate?

Question: Tom Bennett - BNP Paribas - Analyst : All right. Thank you very much.

Question: Marijn Smit - - Analyst : Yes. Hi, it's Marijn Smit from ABN Audio. Just had a question on your US Life results. I assume the indirect income that you've included is largely attributed to the Traditional Life or at least to a large extent? And on that basis, it seems like the results there have actually come under pressure in second quarter compared to the first quarter? I was just wondering if you are seeing margin deterioration in Traditional Life and can you just sort of talk about the business circumstances there?

Question: Marijn Smit - - Analyst : Yes, how much of the indirect yield was going to the Life results? I mean, if you sort of exclude that out of the results, it seems like results have come down quite sharply compared to the first quarter. So, I was just wondering what the drivers behind that were?

Question: Marijn Smit - - Analyst : Yes, I'm talking compared to the first quarter?

Question: Marijn Smit - - Analyst : Do you have any basic --?

Question: Marijn Smit - - Analyst : I appreciate that. It's just that you're excluding your indirect return, so your second quarter Life result in the US is quite a bit lower than your first quarter Life result in the US?

Question: Marijn Smit - - Analyst : Okay. Thanks.

Question: Fred Nieto - Execution Limited - Analyst : Hi, this is Fred Nieto at Execution. I have a couple of questions. The first question just on the unrealized gains on your bond portfolio. I know sometimes in the past, you gave that number out and I was curious to know, I guess the way interest rates swung in the first half, what that would have looked like at June 30th and then, maybe what would have happened to that since then, given the swing back up in interest rates? Then, my second question relates to following back on the fixed annuities. There was a discussion about persistency and crediting rates and we are seeing that your P&L. The ROA's or the earnings, so to speak are not ticking up too much in spite of your comments about trying to cut crediting rates. And it looks as though it surrenders in the second quarter in my calculations picked up to about 11% versus 9% in the first quarter and that's just taking your net deposits versus gross. I'd like to know a bit more about your fixed annuity block as far as what percent of it has market value adjusters or deferred sales charge type of penalties that can protect the persistency if we have more interest rate increases. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Fred Nieto - Execution Limited - Analyst : And what would that look like do you think since then?

Question: Fred Nieto - Execution Limited - Analyst : And then, in that case do you have any idea of how much it has come down or I mean, I know, you don't consider it important but just to get a feel for just how much the market has taken on or off the portfolio?

Question: Fred Nieto - Execution Limited - Analyst : All right and then on the fixed annuities, maybe could you give us some more on how the book is protected from any rate rises and any possible up ticks in surrenders?

Question: Fred Nieto - Execution Limited - Analyst : I guess, if you can see where I am coming from, you had a discussion earlier about the DAC asset as being in sort of the perfect situation between persistency and the impacts of lower spreads and the fear we have is -- it is a pretty competitive business and everyone seems to be going after one another's books of business and so getting an understanding how well protected the DAC asset is in these types of environments is what the gist of the question is? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Fred Nieto - Execution Limited - Analyst : Okay, so when we circle back to what you reported in the press release about spreads being up three basis points on the quarter, how should we think of the progress that you are making in bringing down your crediting rates on the book and getting you back to your target as far as what was your average credited rate and how much more do you think you can get it down in the next half year or year?

Question: Fred Nieto - Execution Limited - Analyst : Okay. And so we can expect to see that between here and the rest of the year?

Question: Fred Nieto - Execution Limited - Analyst : Great, thanks.

Question: Mr. Hunt - - Analyst : Yes, hello. This is from Amsterdam. Two questions, first of all, on Transamerica Finance, if you could breakdown what the result was of the operation that you will keep after the sale of the commercial lending business. Secondly, looking at the bond defaults during the quarter, second quarter there was some statements regarding additional provisions for the airline business. Could you a little bit elaborate on what kind of amount we REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. have to calculate with and what would you think more is the more normal level for bond defaults in the second quarter or really were there no additions for the airlines? Could you a little bit elaborate on that?

Question: Mr. Hunt - - Analyst : No, on the business you are keeping, what kind of profitability level do we have to calculate this for the first half?

Question: Mr. Hunt - - Analyst : Following on the bond defaults, were there in the second quarter any industries you had to really, because I am referring to the airline business mainly, you have to really some additional provisions made for on the bond defaults or are there any industries, which really was a problem for you in the second quarter?

Question: Mr. Hunt - - Analyst : Okay, thank you.

Question: Bob Yates - Fox-Pitt, Kelton - Analyst : Yeah, this is actually Bob Yates with Duncan Russell at Fox-Pitt, Kelton. Just on the fixed annuities in the states, you talked a lot about crediting rates and yields. What have you done structurally in order to improve the economics of that business long-term? I am thinking of how much have you moved commission rates during the last two or three months? Have those gone back down, will they go back up again? How much have you re-engineered the product other than minimum guarantees and have you done anything to reduce your general in-house expenses?

Question: Bob Yates - Fox-Pitt, Kelton - Analyst : Thank you. I just wondered if you could really quantify the cutting of commissions. If I remember just the other question about your general expenses, whether you've taken action to cut those?

Question: Bob Yates - Fox-Pitt, Kelton - Analyst : Well, I was just really asking if you could quantify cutting commissions...

Question: Bob Yates - Fox-Pitt, Kelton - Analyst : Okay, thank you very much.

Question: Carlota Millan - BBVA BOLSA - Analyst : Hello, this is Carlota Millan from BBVA . I would like to ask you two questions. First of all, if you could explain why the costs are up 4% in the United States and then I would like to know if -- or what is the level of interest rates where you could suffer losses in the bond portfolio if the lapse rates are up to quickly due to these higher interest rates? Thank you.

Question: Carlota Millan - BBVA BOLSA - Analyst : Yes.

Question: Carlota Millan - BBVA BOLSA - Analyst : Okay, thank you very much.

Question: Hani Sabbagh - Citigroup Asset Management - Analyst : Hi, thanks. Hani Sabbagh from Citigroup Asset Management. Just have a few question. I wonder, could you just tell us what the gross unrealized losses are on the bond portfolio at the half year? Also what's the achieved rate on new investments is in terms of -- in the US and also I don't know if you already answered this but achieved spread on new business, whether that is meeting your profitability targets? Thirdly, what cash injections or withdrawals have you made to or from the US operations in the first half of the year? And finally, just wanted to understand, you've turned the tap off on production in the US both on the fixed and variable annuities. Is that because you don't have the capital to write the business or is that because you don't think it's profitable?

Question: Hani Sabbagh - Citigroup Asset Management - Analyst : Okay.

Question: Hani Sabbagh - Citigroup Asset Management - Analyst : Yeah.

Question: Hani Sabbagh - Citigroup Asset Management - Analyst : Okay.

Question: Hani Sabbagh - Citigroup Asset Management - Analyst : On the cash to or from the US operations in the first half?

Question: Hani Sabbagh - Citigroup Asset Management - Analyst : And finally, maybe you can just answer the question as to why you switched off the production so severely?

Question: Hani Sabbagh - Citigroup Asset Management - Analyst : Okay, thanks.