Group Performance H1 2009

•  Net profit shows strong recovery from second half 2008; slightly below first half 2008
• Announced efficiency programmes are being implemented:
  • Operating expenses down 9%
  • FTE reduction 4%
• De-risking investment portfolio completed
• Total contributions insurance and investment contracts at € 10.6 billion
• Value of  new business at € 11 million
• Total equity up 14% to € 8.5 billion

Introduction

For Eureko, the first half of 2009 has been a period of taking action on many fronts. After the economic declines of the previous year, we have made it our priority to reduce our risk profile while at the same time streamlining our organisation into a more efficient company with more focus on customer satisfaction.

Measures to improve efficiency, which were announced in March, are being implemented in virtually all of our businesses. These require far-reaching changes in the way we structure our activities.
We have taken important steps to improve our capital position, reduce our exposure to equity instruments and strategic investments, reduce costs, lower our risk profile, enhance customer satisfaction and bring down the number of FTEs. Going forward, we believe that these measures will have a positive effect on our cost level, efficiency and our profitability.

Net profit

In the first half of 2009, Eureko realised a net profit of € 115 million; a strong recovery compared to the significant loss at the end of 2008. The decisive action taken in the first half of 2009 is paying off.

However, the current market environment is still impacting our results. Total impact of the financial markets in the first half of 2009 was € 340 million (H1 2008: 253 million).
This loss is mainly due to losses on our investment portfolio and strategic investments of € 277 million and € 29 million, respectively. Furthermore, an additional provision of € 14 million was made to cover interest-rate guarantees in segregated investment funds. Part of Eureko’s annuity portfolio is valued at fair value through profit and loss. After significant losses on this portfolio in 2008 (A 462 million), we incurred additional losses of € 20 million in the first half of 2009.

Profit before tax corrected for impact financial markets was € 434 million (H1 2008: € 347 million). From an operational perspective, our Health and Non-life businesses performed well. This mainly was driven by more efficient operations.
Non-life managed to increase its gross written premiums combined with a lower cost ratio compared to last year. The Life business was impacted by lower sales. The Net interest margin of banking activities increased strongly, resulting in an improved efficiency ratio. Net result was, however, impacted by additions to loan loss provisions of € 43 million, mainly Friends First Finance in Ireland.

Gross written premiums

Gross written premiums decreased by 3% to € 10.5 billion (H1 2008: € 10.8 billion). The decrease is mainly related to lower government contributions in the Dutch Health business. Gross written premiums for our Life business were down 8% compared to the first half of 2008 mainly due to lower sales through the banking channel as a result of increasing popularity of a relatively new bancassurance product, known as “banksparen”.

Expenses

Total operating expenses were down by 9% to € 1,599 million (H1 2008: € 1,755 million). Of this decrease, € 40 million is attributable to the cost-cutting programme (announced in March). The target for 2009 for this programme is to reduce costs by € 100 million. Focus includes procurement, IT and external employees. Based on the results of the first half year, we are confident this target will be achieved this year.
Programmes to improve performance for our customers and to reduce expense ratios were implemented in several Dutch divisions in 2008. In 2009, these programmes will also be rolled out to other divisions and the holding company.

FTEs

As a result of cost reduction programmes at Eureko, the total number of FTEs (internal and external) for Eureko decreased 4% by 964 FTEs (1,054 head count), compared to year-end 2008.
This reduction has been spread across all business lines. In 2009, the number of external employees decreased by 1,022 to 2,605 while the number of internal employees increased by 58 FTEs to 21,365.

CAPITAL AND SOLVENCY POSITION

In 2009, Eureko B.V. strengthened its capital base with € 1,028 million through the issue of new shares to our main shareholders, Achmea Association, the Rabobank Group and MillenniumBCP. Total equity improved 14%, from € 7.5 billion at year-end 2008 to € 8.5 billion at 30 June 2009.

Our Group solvency position improved by 26% to 176% of minimum regulatory requirements compared to year-end 2008. At 200% for Life, 217% for Non-life and 178% for Health, segment solvency ratios are in line with stringent internal requirements.* At the end of June 2009, the Tier 1 ratio of Achmea Hypotheekbank and Staalbankiers, was 10.6% and 14.6%, respectively.

Dividend was paid on preference shares and coupons were paid on perpetual capital securities.

Although the total investment portfolio of € 36 billion (year-end 2008: € 36 billion) remained stable, the composition changed considerably. The investment portfolio excludes the strategic investments in MillenniumBCP, F&C and PZU. The position in fixed income (predominantly government bonds) increased from 76% of the total portfolio to 84% and equity was reduced by 4%-points to 3% of the total portfolio.

The total losses in the investment portfolio amounted to € 277 million. These losses consist of realised losses of € 118 million, negative result on the collar of € 31 million and impairment losses of € 128 million. The realised losses were due mainly to the change in composition of the investment portfolio as a consequence of our de-risking strategy. The majority of the impairments concern unlisted indirect real estate (€ 87 million). Based on the current market environment, further impairments during the remainder of the year cannot be ruled out.

Equity portfolio

At the end of June 2009, the equity portfolio amounted to € 1.1 billion, € 1.4 billion lower than at the end of 2008. Since 2008, Eureko has hedged part of the equity portfolio. In early 2009, we decided to permanently lower the equity portfolio by selling approximately € 1 billion of equity and unwinding one of the two equity collars. At the end of June, the other equity collar expired and it was decided to further decrease the exposure on listed equity and another € 400 million of listed equity was sold. The loss in value of the collar amounted to € 31 million. The remaining equity portfolio is not hedged apart from currency hedges. Realised losses amounted to € 82 million (H1 2008: € 36 million) due mainly to the reduction in equity investments.

Due to the de-risking strategy (sale of equity), the downside risk has been reduced considerably. Nevertheless, in the first half of 2009, impairments of € 26 million (H1 2008: € 173 million) were made. However, due to the increase of equity prices in the second quarter of 2009, € 8 million was recognised in the revaluation reserve as part of total equity.

Due to the sale of a large part of the equity position the impact of a large decline in equity prices on the total equity and solvency is limited. If equity investments decline by 10%, total equity will be 0.9% lower and solvency 2.0%-points lower.

Fixed-income portfolio

The fixed income portfolio increased in the first six months by 8% to € 30 billion (year-end 2008: € 28 billion). The exposure to government bonds was increased to 65% (mainly triple A-rated EU countries) of the total fixed income portfolio while the position in high yield was sold (last part sold early July) and the position in credits was reduced considerably. Less than one-third of the credits are financial hybrids, 85% of the loans are savings deposits on mortgage and pension products with Rabobank that back financial liabilities for policyholders.

RELATIVE POSITION OF FIXED INCOME BY NATURE (TOTAL €30 BILLION)

A shift to higher quality is also visible. Exposure to triple A-rated counterparties increased to 76% compared to 68% at year-end 2008. At the end of June 2009, 94% of the fixed income portfolio had an investment rating.

In the first half of 2009, realised losses on the fixed income portfolio amounted to € 35 million and impairments of € 15 million were made. Due to the narrowing of the credit spread a positive revaluation of fixed income of € 105 million was realised. Eureko manages its interest rate risk on an economic basis using matching duration. On an economic basis there is a close to 100% match. On an accounting basis the impact of a decrease in interest rates of 100 bp on Group solvency is +8%-points and an increase in interest rates of 100bp is -8%-points.

Real estate portfolio

The position in listed real estate was sold in the first half of 2009*. Total real estate amounted to € 1.7 billion (year-end 2008: € 1.7 billion). Impairments amounted to € 87 million. Eureko has not hedged its real estate exposure. The impact of a 10% decrease in real estate would result in a 1.6% decrease in equity and a 3.3%-point decrease in the solvency ratio.

Strategic investments

Eureko’s main strategic investments are PZU, MillenniumBCP and F&C Asset Management. In the first half of 2009 we reduced the shareholding in MilleniumBCP resulting in a loss of € 31 million. On the remaining part impairments of € 11 million were taken. As a result of an increase in the share price of F&C Asset Management a reverse impairment charge of € 13 million was made, bringing total impairments on the strategic investments to a profit of € 2 million.

* For calculating its solvency Eureko applies the conservative DNB swap curve.
* Listed real estate was stated under equity.