Aegon Ltd (AEG) 2003 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing side. Welcome to the AEGON first four months results 2003 conference call on the 6th of November, 2003. Throughout today's presentation all participants will be in a listen-only mode. After the presentation there will be an opportunity to ask questions. (CALLER INSTRUCTIONS) I would now like to turn the conference over to Mr. Romijnsen.

Welcome to AEGON's conference call on our first nine-month results. I am Fred Romijnsen, Senior Vice President Group Corporate Affairs and Investor Relations. I hope to have the opportunity to meet many of you in the coming months, especially at our analysts and investor conference next Monday and Tuesday in Orlando, Florida.

This conference will be webcast on our website. Before we begin, I need to make you aware of our cautionary note regarding any forward-looking statements, which is on the next slide. We would appreciate it if you would take a minute or two to review this statement. But now, let me turn the call over to Don Shepherd.

Thank you, Fred. Good afternoon in Europe and good morning in the US. Thank you for being with us today. Along with Fred, who by the way, is a 12 year AEGON veteran and most recently was responsible for one of our very profitable operations in group pensions in the Netherlands. In addition to Fred, joining me here today are my executive board colleagues Joe Streppel, Johan von der Werf, and Alex Wynaendts; and also on the phone are Pat Baird, CEO of the AEGON USA, and Otto Thoresen, our CFO in the UK, and of course Michiel van Katwijk, our Treasurer, is here as well. After a few remarks by myself and Jos Streppel, we'll be happy to take your questions.

In total, we have had a good growth -- slide three, I'm sorry. I'll enumerate the slides as we go. In total we've had a good growth in our business during the first three quarters of this year with net income in euros increasing 11 percent and net income per share increasing 4 percent. On a constant exchange rate basis, these increases would be 24 percent and 16 percent respectively. Principal reasons for the difference in the net income and net income per share growth figures is the higher preferred share dividend due to the increase in our preferred share capital and the increased number of shares from last year's stock dividends.

Along with underwriting, product pricing, and product design actions we have taken, such as lowering interest crediting rates, the increase in net income is influenced by continued improvement in the level of corporate bond defaults and by higher equity markets, thereby resulting in lower DPAC amortization and lower charges for product guarantees. Prior results from Transamerica Finance Corporation also had a significant impact on net income. Like the earnings figures, shareholders equity and assets have also been heavily influenced by our currency exchange rates. However, because our debt is proportionally allocated by currency based on our country unit capital levels, there is no currency influence on our capital leverage or capital adequacy positions.

Slide 4. Interest rates remain at low levels and default rates on corporate bonds have also continued to go down. While we have adapted many of our products and compensation models to this lower interest rate environment, much of our in force fixed-income business continues to be affected by spread compression.

Slide 5. In the equity markets, except for the AEX, all of our key indices were up in the first nine months of this year. The improvement has had a positive effect on our results, particularly relative to the DPAC unlocking and guarantee provisions which were included in the second-quarter results last year.

Slide 6. Although the dollar/Euro exchange rate is close to what it was when the euro is introduced, it's been quite volatile over the last two years. Even though the recent trend has had an adverse influence on our Euro earnings, we will continue with our policy of not hedging earnings. We believe that over time hedging currencies results in additional cost for all shareholders. The effect for the first nine months this year was that our net income growth was 13 percent lower than it would've been without this translation influence.

Slide 7. Generally speaking new business production for the first nine months of this year has been good, but somewhat mixed. Excluding currency influence, life production increased 15 percent. The increased life production in the Americas and the UK continued the trends of recent quarters, while life production in the Netherlands continued to be influenced by the fiscal changes introduced in 2001 in the Netherlands, as well as lower production in the large case group pension market. The significant increase in life production in Taiwan reflects our multichannel distribution strategy with 50 percent coming from the bank channel, 30 percent from brokerage, and 20 percent from the Asian channel.

Deposits for the first nine months of the year were lower, but are in line with the actions we've taken on product features, interest crediting rates, and distribution costs, particularly commissions. In our operational activities, we are continuing our commitment to cost management in each of the country units. In fact, our administered head count is down about 1,000 positions in the first nine months of the year, or 5 percent of our non-Asian employee headcount.

Excluding the acquired and newly consolidated activities, total operating expenses, which don't include commissions or deferred policy acquisition costs, were down 2 percent despite the notable increase in employee pension costs. We continue to direct our attention to those products within the various product lines which we expect to provide the best growth and return prospects going forward.

In line with our strategy to focus on our core business, we have announced the sale of most of Transamerica Finance Corporation's activities. A gain of approximately $600 million will be credited to shareholders equity during the fourth quarter. Joseph Streppel will discuss this in more detail in a few minutes. Just last week we had the official launch of our operations in Slovakia, a rapidly growing life insurance market in a country which will likely be admitted to the European Union in the near future. Leveraging our strength in Hungary, this is a natural expansion of our capabilities in Central Europe. Slide 8. Jos.

Thanks, Donald. (indiscernible) we're going to summarize our headline results. I will give you a quick summary of our product segment and new business results. I will also discuss our investment portfolio, our capital position, the two Transamerica Finance Corporation transactions, and provide you with a picture of the soundness of our currency hedging policy.

Slide 9. In the Americas income before tax increased 24 percent. Traditional lines (indiscernible) for the account for shareholders and health results for lower while fixed annuity, variable annuity, and key business results were higher with no change in GICs (indiscernible) agreement results. Lower attachment deals and indirect return has readily influenced the traditional line, fixed annuity, GIC (indiscernible) and health segments, while lower (indiscernible) losses in the fixed annuity and (indiscernible) product segments has had a notably positive influence. Variable annuity results recovered from a loss position as there were no charges for DPAC or (indiscernible) or guarantee reserve provisioning. (indiscernible) policyholders’ results reflect higher policy lessons (ph).

Slide 10. In the Netherlands, income before tax increased 5 percent, nine for (indiscernible) shoulders and fee business results improved, while traditional life, non life, and banking results were lower. Traditional life results reflect higher (indiscernible) costs. Higher line for the account of policyholder results are due to lower provisions for guarantees, while fee business primarily reflects the results of the consolidated (indiscernible) activities. Low live (ph) results are lower due to lower investment income, while lower data results reflect lower account balances and lower margins.

Slide 11. In the UK, income before tax was 23 percent lower. Both the traditional life and (indiscernible) linked live lines of business had lower results. Traditional life earnings were lower due to the lower investment return as well as lower levels of mortality experienced profit. (indiscernible) policyholders’ results reflect lower fees on account balances and higher expenses, particularly DPAC amortization and pension (indiscernible).

Slide 12. In other countries income before tax increased by EUR16 million, a 34 percent increase. Life, nonlife, and fee business results all improved. Results improved significantly in Hungary, Spain, and Taiwan. In general the higher results in life business reflects higher business volume, while the improvement in nonlife insurance reflects group (indiscernible) experience.

Slide 13. While asset growth was very good on a local currency basis, the currency translation effect limits the increased 5 percent in euros. In dollars, total investments were up 14 percent in the Americas. In pounds (ph), total investments were up 8 percent in the UK. And in euros, total investments were up 26 percent in the Netherlands. The large increase in the Netherlands reflects higher off-balance sheet investments, which now include EUR6.5 billion of (indiscernible) assets like TPK (ph) pensions, which was acquired earlier this year.

Slide 14. Our U.S. bond portfolio increased by over $7 billion during the first nine months of the year, accounting for most of the increase in their general account assets. Credit quality has not changed significantly as corporate (indiscernible) growth rates, though lower than a year ago, are still at high levels relative to our long-term experience. In addition to our default provision in the first nine months of the year was $400 million compared to $555 million in the first nine months of the year. Charges to the provision were at $390 million compared to $585 million last year.

Slide 15, there were no material developments in our capital base during the first nine months of the year. While shareholders equity and Debt (technical difficulty) by currency change rates, the ratio equity to total capital base is not affected by the translation. The equity to total capital base ratio, which now stands at 68 percent, is slightly below our stated mark of 70 percent. The ratio is affected by the timing of transactions and cash flows and we expect to be at or above our targeted ratio in subsequent quarters. We continue to have good financial flexibility and our operating companies in our core markets of the US, the Netherlands, and UK continue to have strong financial ratings.

Slide 16, here is a summary on the sale on our noncore PSC (ph) businesses. We have announced two transactions. Completion of both transactions will result in a book gain of approximately $600 million US. This will be credited directly to shareholders equity. These transactions are in line with our strategy to focus on our core activities. The first transaction is still pending settlement, while the second transaction was completed last month. Upon completion of both transactions approximately $1 billion of assets and $150 million of net asset value remain.

Slide 17. Don indicated earlier in his remarks AEGON doesn't hedge, and this chart shows why. Since the Euro was introduced for reporting in January of 1999, hedging would have added nothing other than hundreds of millions of cost at the expense of shareholders. So while such hedging activity may have tempered the volatility of earnings in recent years, the economics of not hedging our dollar earnings are exceptionally compelling. Accordingly, rather than hedging, we will continue our practice of advising investors of the approximate influence of currency movements on our reported earnings as far as our annual sensitivity analysis.

Slide 18. (indiscernible), as a reminder, we are hosting an analyst conference in Orlando this coming Monday and Tuesday. If you need additional information, please contact our investor relations firm. We will be happy to take your questions now.

(CALLER INSTRUCTIONS) Bart Horsen (ph) from (indiscernible).

I have a few questions on your production figures. I was a bit surprised by the relatively strong decline in your on balance sheet production in, in fact, all three major product lines. And I was wondering, to what extent is this decline influenced by your new commission structure in the US? And another question related to that is on your off-balance sheet production, which shows a relatively strong rise, especially in mutual funds. I was wondering to what extent do the recent investigations into the mutual fund industry affect your business, also related to your variable annuity business? And the third question regards your Dutch business and the production there. I think the new premium production has reached the lowest level since 2000 and was wondering what the reasons are behind that and whether that should be structural?

Bart, I think we'll have Pat Baird answer the questions about the US, and we'll ask Johan van der Werf to answer the questions about the Netherlands. So let's go with Pat first.

Bart, with respect to your question on life insurance production, included in that line is a business line that we have discontinued, which is the structured annuity payout business. The life insurance business continues to show increases quarter-over-quarter as well as nine months over nine months.

With respect to the annuities -- fixed annuities and variable annuities business, our deposits are down. We exited a major product feature, if you will, on the variable annuity business early this year, and that has had a significant decline in our variable annuity production. We felt that was appropriate and the right decision. We are about to re-enter the market with a new what we think is a more sustainable variable annuity next month and we look forward to some increase in that business next year.

Fixed annuities, we decided not to chase topline growth. When interest rates declined, we're not able to get our internal rate of return at that level of interest rates and commission rates. So we took two actions. We cut commissions as well as reduced the minimum guaranteed interest rate, and actually we're leaders in that market because had we not done that then our returns were going to drop lower and we just didn't want to chase a commodity business.

You see some -- or in some cases high-growth at a few of your US peers. Do you think you are structurally losing market share there, or is it deliberately chosen this way?

I think in the life insurance business we are either holding or slightly gaining market share. On the annuity business I believe we have lost market share, but that is in line with our desire to hold our pricing disciplines.

Okay.

On the question you had about mutual funds, and I think what you're really asking about is the market timing, what I will call a witch hunt that seems to be taking place in the US. For over a year, we have had I think very effective procedures and policies in place to discourage or even I guess preclude market timing from our investors. Now, having said that, us, like everyone else, those practices and procedures are not perfect. But we haven't seen anything in our own funds, in our own mutual funds or series trust that would suggest that there's anything significant that has happened to any of our funds. Nor has happened to any of our policyholders.

But I think the growth in the mutual funds is consistent with -- we are trying to increase our production in mutual funds as well as grow our proprietary Asset Management businesses. And you're just seeing us getting our act together and we look forward to continuing growth in that area.

Bart, I might ask Alex Wynaendts to make a quick comment on growth in Taiwan. That was pretty significant for the nine months, and then we'll give it to Johan for the Dutch questions. Alex.

Thank you, Don. In Taiwan we have experienced quite significant growth. The main result is that we have now a multichannel distribution where we have agents, our own agencies, brokers in which we have gained a significant market share, and in particular also bank assurance, which has been contributed for 50 percent of the production. We have been able to establish a number of relationships with banks, with 10 to 12 of the larger banks, and that has been driving the growth in Taiwan.

About the Dutch market, although the Dutch market has been quite difficult in the last 18 months because of fiscal restructuring and also the depressed financial markets, we think that the low single premium production is not structural. We have to realize that at the end of 2001 and in the first quarter of 2002 we closed some very big single premium group pension deals. In total, EUR640 million that you find back in our premium income right away.

If you look at the third quarter of this year, at the single premium production, it's slightly up compared to last year, 4 percent. And I think that we have to take into account that these large, and very large single premium conflicts simply don't occur every quarter or every year. If you go to the level of 2000, we think that we can meet that level by the end of this year, and in the individual life markets we are sure that our market share has gone up in spite of the difficult market circumstances.

Okay, thank you.

Trevor Kalchek (ph) from Julius Baer:

I had one question on your Dutch business, specifically the expenses there. They have increased quite substantially. Some of that is related obviously to one off costs. What I would like to know is what would you see as a realistic level of expenses for the Dutch unit going forward? Is it a 3 percent growth internal that you've seen corrected for the one offs, or is it higher than that? What figure would you put on that?

As we see it now, it'll be about flat this year compared to 2001. We are at this moment restructuring the Dutch organization from 12 business units to service centers and marketing and sales organizations, and we are convinced that our expenses will go down in the years to come.

Good. Would you feel comfortable to put an absolute number on that?

No, no. I wouldn't feel comfortable to do that, sorry. We have to dig into it further.

Right. I have a second question, and that concerns the follow-up on the Taiwan business. A lot of your increase in IP (ph) or in new life production is as a result of Taiwan. I wondered if you can tell us a bit more about the profitability of that business, because it seems to have a certain dynamic of its own as far as Taiwan is concerned?

Alex. In terms of profitability, the products which are being sold meet our early rate (ph) requirements, which, as you know, are at 11 percent. And the production, which you have seen here coming out of Taiwan, is meaning that (indiscernible) way and it gives us the profitability we are comfortable with.

Would you feel comfortable giving us just an idea of what you are on your total book in paying (ph) in terms of interest crediting to accounts?

You're talking about in Taiwan?

Yes, correct.

We are trending (ph) somewhere between 3.5 and 4 percent. The bulk of the business, as you can see from a production level, is a recent business and the buildup of business therefore is at the lower part of that range.

Excellent, thank you. Those are all my questions.

Yav Mayor (ph) from Cheuvreux (ph).

I have still some questions regarding the Americas, the exceptionals over there. (technical difficulty)

(technical difficulty) the general account. The tax refund is spend on the business lines, so the general account 9 million, account policyholders 1 million, spread base (ph) 12 million, (indiscernible) 6 million, fee based 1 million, (indiscernible) and health business 2 million. So those interests on tax refunds, we call them exceptional items, but in many years we catch up to tax refunds. It's not a continuing thing, so therefore we call them exceptional, but you are -- reasonably recurring, so somewhere in a gray area. The 40 million is an insurance gain we had damaging a building the insurance company paid us just 40 million. And that's an exceptional item.

Don, do you want me to take the question on expenses in the Americas?

Yes, go ahead, Pat.

There's really three components of it, two of which I think are exceptional items. We have $64 million of reduced pension plan earnings, which shows up as additional operating expenses. And we have another $27 million of a coinsurance agreement that was discontinued, and that piece shows up in it -- yes, $27 million shows up as an additional expense. If you exclude those two items, the gross operating expenses in the US are 2 percent higher than last year.

Are these amounts you just mentioned in your expenses and interest charges I just asked for?

No, no. These are operating expenses.

What is explaining the jump in interest charge and other expenses then quarter-on-quarter?

Do you mean all the amount?

You mean the holding amount in the US?

Yes, yes, the holding.

It's Michiel here. I think the big swings that you see compared to quarters but also compared to last year, compared to last year most of the change there is because of nonrecurring earnings, nonrecurring effects last year. This year in the third quarter it's a little bit higher than in the second quarter, but as we -- and that's because of some miscellaneous items, nothing in particular, nothing recurring. As we said before, the interest charges should be running at around -- at a normalized level, should be running at around EUR100 million, and that's where we expect it to be going forward.

So just some miscellaneous expenses of 21 million, that's what you're saying?

Yes.

That's fine, thanks.

Rob Procter from Morgan Stanley.

I apologize if I'm going over old ground a little bit, but first off in the US, in the annuities business, I'm just surprised at the scale of the decline, 31 percent down. And in the variable annuity business in particular, I'm just wondering what are competitors doing that you're not to be able to increase their sales volumes? Do they have features in their products that you think are unprofitable, or is there something else going on there? And just as an aside to that, I know you've got the situation where you've exited the major product feature on the GMIB at the end of last year I think, but I just wonder why it takes so long to redesign that product to get back into the marketplace there. That's the first question.

The second question, just going back to Taiwan, obviously incredible sales figures in the third quarter particularly. Can you give us any idea of these sustainable, what sort of grades do you expect going forward, and what sort of capital is this business consuming? I assume you're putting capital into it. And third questions is a very brief question. In the U.S. traditional life business, you mentioned earnings of $509 million, 15 percent lower in part due to reserve increases. I just wondered if there is anything -- if you can elaborate exactly on what those reserve increases are?

Pat, why don't you take the U.S. questions and then we will have Alex tell about Taiwan?

Let me start with variable annuities. As you know, we had a product feature out there guaranteed minimum income benefit writer that had actually been out there for three or four years and had not sold. And it was not intended to be the reason for a sale. It was intended to be for a very small part of the market, and because of the market correction in the last couple of years, it became the reason for a sale. And it was not intended to -- we did not expect in any way that it would become an all-encompassing sale in the marketplace, and it did. So we had to make an immediate move we felt to avoid a firesale, and we wanted to avoid a firesale because we are at the level of embedded equity risk in our products and in our enterprise that we felt was appropriate, so we made an immediate move to exit that business.

Now, I think your question was, why did it take you so long to get back in? We exited that business really in the first quarter of this year, and three quarters later we are entering with a replacement product. So it was a surprise ending to us for that product for the reasons that I just said. I think to go through all of the SEC approvals and state requirements to get a product approved and up and running along with the administrative capability, I think 6 to 9 months is about standard fare. I think ideally, you would like to have the replacement product coming out about the time you were discontinuing another product. We were not able to in this case, as you know.

On fixed annuities, the fixed annuity production being down 31 percent, that would be third quarter over third-quarter last year. We really did lead the market. The fixed annuity business got to a point for the entire industry, not just us, where the supportable rates were just not there, given how low interest rates got during the summer. And you had to take corrective action. Companies either made the decision to stay in the market and accept much lower internal rates of return or made the decision not to chase the topline but try to hold the profitability, and that's a decision that we made and the choice we made.

You have a situation now where spreads are increasing, bond deals have risen. Do you feel more comfortable being more aggressive in that business? Would you restore commissions back to where they were?

At this point, we have restored commissions back to where they were for most of the states that we do business in. Those are the states that have allowed us to reduce the minimum guaranteed interest rate to either 1.5 or 2 percent. So, for the most part, we are back to a full commission and I do think fixed annuities will start to recover somewhat, but I will also tell you that the fixed annuity business, it is very difficult to get your internal rate of return, to get our internal rate of return, which in the U.S. is 11 percent unleveraged. It is very difficult to get that return. We're looking at our fixed annuity business more in the line of selling that along with our other products in our bank channel.

So I would say that the idea of having an annuity only relationship out there with the bank or really any other marketing organization, we're probably not going to chase as much going forward. And then with respect to life insurance, I heard your question. I am not sure I agreed with what you said. For the nine months, we have lower earnings due to lower indirect yield income, also lower pension. We allocate the pension expense by our product lines, and we have lower pension expense -- excuse me, higher pension expense, lower pension income, and we did have $20 million of unlocking in the reserve increases that I would call fine tuning. And for the most part, that is due to compressed spreads.

Right, okay. That was 20 million, okay.

That's it for me, Don.

Okay, Alex on Taiwan?

To put it in perspective, the production for 2002 was around 70 million, and for the first nine months of this year we have more than 250 million. So you see that's quite a big increase. Actually, all the different channels have shown increases, but in particular the brokerage channel and the (indiscernible) sales have shown very strong increases. In terms of sustainability, what I can say here is that those increases have been based on building a relationship with brokers. We've even helped brokers to establish themselves, so it is always difficult to say how sustainable it is, but we believe we have a strong basis there for continued production.

In terms of the banks, we have now established a relationship with 10 to 12 banks, larger banks, but some also smaller regional banks, so we have a broad range of banks. And again, the relationship aspect is very important. Of course, this year has been showing such a tremendous growth that it's difficult to say to what extent these kind of levels are sustainable. But what we are actually confident of is that we have brought the overall production level to a much higher level.

I would like to remind you that also most of the sales we do, and it is up to 95 percent, is regular premium. So we're going to see those premiums coming back in the coming years. In terms of the capital, the majority of the products are traditional products. They do, therefore, require capital, but as I mentioned earlier, they all meet our (indiscernible) rate of 11 percent.

Okay, thank you very much.

Duncan Russell of Fox-Pitt Kelton.

Could you provide a brief description of the new VA product you plan to produce?

He asked about the new variable annuity product Pat is introducing. Pat?

Okay, give me just a moment. I have got a description here. We call it -- it is a variable annuity. Well, we have several variable annuities out there, but the one that I was referencing has a rider that we call the guaranteed principal solution, and it is a combination of three living benefit guarantees, and this package would only be on those products that also have certain death benefit options. And I can describe the features somewhat for you or I have some help here, but I think what you would like -- what is important to us about this product is that it is a much more sustainable product in that the equity risks embedded in this product are much more manageable.

We have capital markets hedging pricing assumed in the product, so we feel like we can issue this product in greater amounts. We feel like it's going to be receptive in the marketplace, but it is more important to us I think at this point, it is a way of containing the equity risk embedded in the product.

A little bit more on the features, it essentially provides certain guaranteed withdrawal benefit guarantees, and if the market drops, there is a portfolio allocation method required within this contract where we, the company, are able to reallocate some of the underlying investments out of equities and into a safer fixed income component. That allows us to basically soften the performance in the down markets and allows us to limit the equity risk embedded in the product.

How much are you charging for the feature, and secondly, are you reclaiming all the risk or are you hedging or laying some of the risk off externally?

The charge for this feature is 75 basis points and the decision as to how much or what to hedge we'll be making going forward.

Okay, thank you.

(indiscernible) Securities.

Four questions. First question is about the outlook for the addition to the provisions for bond defaults for the next quarter. What is your expectation for that? Second question is about third quarter. Was there any extra DAC amortization in the third quarter? Third question is about capital gains outlook for Q4, because you had given some guidance at the time of the half-year figures that I think the outlook is already realized, and you see some difference between much lower capital gains in the US and higher in the Netherlands. What's the reason behind that? And last question is about your dividend policy. Is it cash or stock dividends?

The present market in the U.S. is improving and we see that in our figures and we see that in our portfolio. So the outlook is positive, so we expect that we get less and less defaults in the near future. But as you know, the market trend is not exactly to be followed by a portfolio because the spread is different. And what we faced a couple of years ago, that combination that had a (indiscernible) going down suddenly, such a thing could pop up in the fourth quarter and even in the last week of a year. So you're never sure, but the trend is positive. We see that in our provisions and we see that also in the trends that we have analyzed in our reinvestment departments in the US. So we're very positive but still cautious and a little bit afraid for an exemption here. It's inevitable.

The DAC amortization in the third quarter, no, we did no acceleration of DAC amortization because the financial markets were turning against us, but it also maxed out (ph) DAC amortization in the Netherlands because of lapses of the saving plans for instance. And also in the UK, because in the UK we are now that low in the business that you have some mature schemes and then you need to take the rest of the debt and that's still on your balance sheet. So those two items led to some extra DAC amortization, but no bit numbers this time.

And also in the US -- excuse me, but also in the US we had some additional DAC unlocking due to some lapsed rate adjustments in one of our blocks of variable annuities.

What was the size of the DAC unlocking in the third-quarter?

For the US or --?

Yes, in all the three countries you mentioned.

In the Netherlands it was 18 million for the third quarter. Full year is 30, Johan is whispering to me. Pat, do you know what it was in the US on the variable block?

In total the variable block and then a couple other miscellaneous things, in total it was $63 million US.

And for the nine months?

For the nine months it's $87 million accelerated DAC amortization.

And for the UK it's 9 million pounds. On capital gains, we gave guidance at the beginning of the year that the indirect return for the last year would proximately be 450 million, and that was a calculation we made on the Dutch organization because at the end of 2002 there was no positive realized revaluation reserve anymore in the US. But you know that the market picked up during the first nine months and that revaluation reserve also in the US went positive. So although the release was less than the year before, 70 million less than the year before, we had a positive release to P&L (indiscernible) and that's the main reason for the higher indirect return that you see. In Netherlands it's a little bit higher, but that's caused by refining the level against the estimates -- the (indiscernible) estimate that we did at the end of the year.

As far as dividends -- dividends are concerned, you will take it that we are not going to say what the dividends will be at the end of the year. We announced that the plan to (indiscernible) 40 cents to the shareholders meeting next year of over 2003. We have no reason to change those plans. We did not say that it would be cash or stock. We take that decision later. Let me say that the cash flow position of the Company meanwhile improved.

What was the total amount of DAC unlocking in the third-quarter -- for the group?

Let me make some calculations and come back to you.

And one additional question on the bond default. You have a reserve of around 300 million US dollars. Can that be used also under a new accounting in the next few years?

No, that's still unsure. The best chance is that we have to specify the account to certain credits. You know that it's not until today on the Dutch accounting it's unspecified. It's just a reserve for future losses, there's a good chance that under the new (indiscernible) we have to specify it. Under other (indiscernible) so it's unsure.

And Yost, if I could, I need to make a correction on something I said. For the nine months the accelerated DAC acceleration -- I was just handed a note -- is a total of US$109 million, not 87.

Yes, and what was the total amount in the third quarter of DAC unlocking?

We are (indiscernible) that calculation for you because we have to roll it forward here. But we'll get back to you.

Okay, thanks.

(indiscernible) Oppenheim (ph).

Two questions. One about Netherlands, one about UK. The first one, could you give us some details about the group pension business in the Netherlands, because you have some negative comments here in your text on the group pension business but positive on your smaller mid cap business. And you have zero value for your investment contracts in the Netherlands. Could you explains all these items a little bit? Secondly, what I do not understand in the UK, you made some acquisitions which are much easier to do since there are no more legal constraints, but you have here expenses of over 30 million pounds, and this is very high firstly compared with your new production in the UK, and secondly my question is, is this figure sustainable? That is, does it contribute to a higher cost base in the UK in the quarters to come?

I think let's see -- Johan, go ahead and take the Dutch one first.

The group pension? If you look at the total pension business in 2000, we had a total of 123 million standardized production, and that's what we'll be able to meet about this year at the end. I told you about the large contracts at the end of 2001 and the first quarter of 2002 totaling 640 million single premium. If you look at the underlying group pension business, the small and medium-sized enterprise business has grown very well, and even more important to tell you is that if you look at the mix between standardized products and products made for the end consumer, tailor made, and at this moment over 50 percent is standardized where it use to be less than 25. So profits underlying profit of group pension business going up as well.

And Otto Thoresen, are you on with us to that you can answer the UK question?

I'm here, Don. I think the -- I'll attempt to cover that. The first thing is to make the point that there isn't any link between the expenses associated with IFA businesses, which were required under our new business production, because actually the way the regulation works in the UK still, those IFAs who we own can't advise or sell our own products. The revenues that we generate from the IFA businesses comes through a separate line in the press release. It's actually -- how is it described? Investment income for (indiscernible) activities. That's where the revenue line appears. The other factor, one has to be reminded, is that one of those IFA companies actually operates effectively by providing services to smaller RFE groups, and some part of that 37 million relates to expenses which will be passed on to those organizations.

And is it sustainable or not?

Could you explain to me, in sustainable, exactly what you mean by that?

Is it to be seen in the next quarter in your P&L in UK?

Yes, it is effectively. I think the point I made earlier is that you see the expense (indiscernible) in one line, you see the revenues are included in another line.

Okay, thanks. Maybe the investment contracts -- zero now?

I'm not sure what the question is?

Can you repeat the question, please?

Yes, what is the reason or what is behind this sharp contraction of the investment contract?

That's a product we were very successful in in the Netherlands. (indiscernible) leasing products and that was stopped completely in half last year because of equity prices being so uncertain.

Okay, thanks.

(indiscernible) Smith from ABN Amro.

I just had one very simple question. If I understood you correctly, I think at VA DAC unlocking of 63 million in the third-quarter in the US. I was just wondering how you could still have made a 15 million profit in that line then in the third-quarter? I don't think that makes sense. And the other thing is, you mentioned that there's a bit of sort of timing difference in terms of the capital composition that you have at the moment. I was just wondering, are all the major business lines self funding at the moment, or do you think that the growth opportunities that are out there can be matched with the current capital that you have?

I'm going to -- Pat, do you want to answer the one on the DAC unlocking? It wasn't variable annuities.

Variable annuity in the third-quarter was $39 million, and again that was not -- or that was specific to a single block and it was related to expected additional lapses on a specific block.

So it had nothing to do with the equity markets and the variable annuities?

It did not.

So how much was that again?

39 million.

So are you saying excluding that your profit would've been 54 million in the third-quarter in variable annuities?

If that's how the math works, yes. Yes, that's right.

Just to get a sense of sort of normalized level there.

If you look at (indiscernible) at the end of September, we said that capital adequacy in every one of our units is okay and on our internal target. If you look to the capital ratio it's at 68 percent at the end of September instead of the target of 20. That has to do with when cash flow will rise. For your information, the Transamerica transactions are not included in those figures, so we are well over 70 percent once those transactions are closed. So that's not of any worry. The question whether we had to infuse new capital in our units to keep the capital adequacy in a good shape, the answer is no, we didn't have to do that. No new capital (indiscernible).

Thank you. And do you expect any of your units to be eligible for upstream dividends?

That depends and we have to look at that for the next year (indiscernible) and that's depending also on targeted production levels and on the value of new business we think we get out of new production next year. So that's another discussion at this moment. You're a little bit too early.

Tom Bennett from BNP Paribas. Tom Bennett just withdrew his question. Andrew Goodwin from Commerzbank.

Three questions. First, just on the US, would it be possible to give a breakdown of default the charges and the indirect investment income by product? Secondly, also in the US, why don't you have a -- US life companies have commented that they've had prepayment penalty income coming in benefiting their fixed annuity results, particularly in the third-quarter. I just wonder whether that was a feature at all of your results?

And finally, going back to the position on the DAC, just (indiscernible) although you give us a figure for the increase in debt in Euros, obviously that's benefited partly from the weakness of the dollar, and I guess overall debt would've risen by close to a billion since the beginning of the year. And you say that you've got some transactions coming out that are going to sort of change that. Can you give some further guidance as to what these transactions are, because it does seem to have been quite a significant increase in debt in the first nine months in a period when you haven't been growing that rapidly.

Why don't we answer the first -- the last one first, Jos, and then Pat can pick up the other two questions.

Apart from internal cash flows and timing differences of internal cash flows, the big items are the closing of the two transactions of Transamerica. Transamerica finance transactions that all leads to -- and far better capital.

I thought you said it was going up over 70 percent without Transamerica?

No, no, no. I said if you measure it at the end of September it's at 68. If you would have included the Transamerica transactions it's (indiscernible) closed on the 1st of October and the other one is to close probably the end of November, beginning of December. Then it would be far over 70 percent.

Yes, but you're seeing a deterioration. You're not going to have a Transamerica benefit each year. I just wonder why you seem -- your ongoing business seems to have seen such a significant deterioration in the first nine months?

It's not related to the business, Andrew. It's just the timing of cash flows. And even without the Transamerica gains, the ratio is going to go up anyway again over the fourth quarter. It's just a timing difference in cash flows. It's nothing material that is related to the business.

I'll trust you.

I'll do my best here. On the 400 million gross bond defaults for the first nine months by product line, we have $142 million allocated to the life product line, 153 million to annuity, 79 million to GICs, 23 million to the A&H business line, and then there's $3 million I think to fill it out that we have to fee-based businesses. With respect to indirect yield, $36 million to the lifeline, 35 million annuity, 35 million GIC, and then let's just say 9 million spread between health, fee-based, and off balance sheet.

Okay, fine.

To your question on one of the other companies in the US, I had heard that Nationwide had said something about prepayment penalties adding as much as 25 basis points I think. We can only surmise what that is. It could either be from perhaps prepayments on residential mortgages or other mortgages that they had, or perhaps they had maybe some surrender penalties coming in from lapsation (ph). We did not see any increase in lapses in our fixed annuity business, so there would be nothing there from us, and we are a commercial mortgage portfolio, and we saw nothing unusual there either.

Right, thanks.

Tom Bennett from BNP Paribas.

I don't know what happened earlier on. Can you hear me this time?

Yes, Tom.

Good, thanks. Preference dividends, you've got these preference shares (indiscernible). Where does the dividend cost show up?

We're having a discussion here, Tom.

Well, while you're thinking about that, can I ask this question? I listened to the press conferences this morning, and you were asked about why you're unwilling to make any forecasts for the year. And you mentioned Enron. I was just wondering what sort of Enron might -- second Enron might be lurking in your bond portfolio, and I remember a talk about a large exposure to Ford, which has hit the headlines recently. What is your present exposure to Ford and have you taken any provisions against it?

Tom, we typically don't talk about individual exposure.

I'm obviously asking about the motor industry then.

Yes. Jos, can you get me the -- you got the motor industry there? That comment only meant that the Enron issue is a fraud issue that popped up at the end, and that's more in the context. I'm not aware of anything that we're specifically worried about. We have an airline exposure and the airlines appear to be getting a little better now, but it's still not a real healthy industry. But I think Jos may have the exposure to the auto industry.

You take provisions for bonds defaults before the bonds actually default don't you? What sort of provisions are you carrying for bonds that are still undefaulted which could be written back?

Well, you can't write them back once you impair them, so -- not under US GAAP.

But under IAS this could happen?

Yes.

Do you know what the number is?

No. (multiple speakers)

(multiple speakers) The other question on the preferred -- let's go to that question? If you go to the attachment -- the figure attachment to the press release, (indiscernible) consolidated balance sheet, you will find the figure net income excluding preferred dividends.

So which page are we on?

It's unnumbered, so it's in the middle. It's under comments -- consolidated balance sheet. There you find shareholders equity, and after shareholders equity you will find net income excluding preferred dividends. So technically you have a net income, and then the income distribution -- a net income of 1,323,000,000 and net income excluding preferred dividends is 1,252,000,000.

I see, all right.

Technically you have a net income and the preferred dividend is distributed firstly, and then it is retained in earnings or given to common shareholders.

So which earnings number do you use to calculate the earnings-per-share?

The 1252.

I see. And lastly, excuse me for asking this, but I'm used to my insurers having big, bold head offices on their presentation materials. Why have you chosen to have a doormat on yours?

Because we expect many analysts to visit us.

Well done. Thank you very much.

(CALLER INSTRUCTIONS) Andrew McNulty from UBS.

I've just got a question, not on necessarily new business and production, but on your existing book, and if we look at the fixed annuity portfolio, you mentioned that over the course of the third quarter the overall spread increased by 13 percent, 176 basis points. And some of that appears to be partly because you have (indiscernible) experience or withdrawal experience was more favorable. Can you just confirm, has there been any rebalancing or rematching of your portfolio that's created the increase in your profitability from the second quarter to the third quarter? And can we actually use that based on your -- or as a suggestion, can we use your surrender withdrawal experience to get an indication of the amount of gearing we could expect going forward from a widening margin on that in force value of that book? That's my first question.

The second one, what I'd like to ask is can you just clarify again all your -- the DAC unlocking for the third quarter in all territories, because it just seems to be a bit clear (ph). And I'm also interested to know why did not disclose that as an item in your comments? And then finally, can you give us some details on the lower mortality profits experienced in the UK?

Pat, do you want to the fixed annuity question?

I would characterize our improving spreads, our widening spreads in the fixed annuity business not as a result of restructuring the investment portfolio, but because we have been decreasing or dropping the crediting rates that we're paying to our customers. And typically the crediting rates are reset on an anniversary date which occurs each month and will typically lag the drop in investment interest rates. So rather than it being a restructuring of the investment portfolio, it's just catching up of the dropping of the crediting rates to the customer.

Are you able to disclose what the average crediting rate has changed to since let's say the beginning of the year through the quarters so that we can get a feel for how much (indiscernible) you've got there and how you're managing the profitability?

The weighted average crediting rates as of the end of the third quarter is now 3.7 percent.

That's on your existing book?

On the existing book. And as of the end of 2002, it was 4.72 percent.

Okay, fantastic.

Pat, why don't you --?

Can you tell us about the same thing on the GIC portfolio, because I understand you manage that related to sort of yields and spreads as well? And even if it applies to the bulk of the traditional build (ph)?

I don't have the same information at hand on the GIC business as I do the fixed annuity business. I'll just say that it is much more tightly managed and the lags, because they are single premium type deposits, or maybe I can -- let's see. Let me finish what I was going to say. Because they are single premium deposits that are matched exactly, you do not see a variability. But what I have here is -- net margins for institutional spread business is generally priced at 60 to 75 bps (ph) and we are currently at 78 basis points on average year-to-date for new business.

Fantastic. And then in the case of the traditional book, if it's relevant now?

I'm sorry, traditional book?

Yes. You also have an impact on your profitability from the investment yields on that part of the business. I'm really looking for some sort of investment return experience change over the period as well, just similar to what you've just been detailing.

When you say traditional book, do you mean --?

Traditional life, yes.

I think that is one Jos will have to try to find. Typically on our pricing of our life insurance policies on the profitability, about 25 percent of the profitability comes from the investment spreads. The rest comes from mortality and other fees, but if you want that information, we'll have to dig that out and find it for you.

It's a totally different question because you have -- under the more traditional line you have many products that -- different liability features -- they're different durations. And what we do in our (indiscernible) is product-by-product balance the portfolios according to the expected liability duration. So you have a mix of portfolios in order to match it. The development of the interest rates has an effect on new production and on pricing, but it has hardly any direct effect on the outlook (ph). And we did not rebalance the portfolios because we saw a big change in durations.

Pat, do you want to -- since you've got the DAC expert sitting there next to you, do you want to take the DAC question?

As of the third quarter in the US, for variable annuities, $39 million. For fixed annuities, $24 million. It's 39 million for variable annuities (multiple speakers).

Sorry, I missed that. The 24 million is what?

Fixed annuities. And that's a total of 63 million. And that's the total for the US for the third quarter.

Thank you. And the other territories, there's nothing there?

18 million for the Netherlands, and it was 9 million for the UK.

9 million pounds for the UK. And what was the reason why you didn't actually comment on that?

There's really a difference between unlocking and deferring and amortizing in the normal course of business where you adjust your amortization when you have for instance your loss rates go up. And what we really have in disclosing separately, and so that's why you saw the big number last year, has been unlocking of assumptions, where this is really normal course of business when your loss rates on a block of business go up and business is coming up like it was happening in the Netherlands you have to write down part of your debt in an accelerated way.

Just coming back to the fixed annuity, the $24 million, was that just on some small block as you've said that your withdrawal experience was getting better?

It was specific to a block in our reinsurance subsidiary, so it was not our retail business. So yes, it was unique (multiple speakers) fine-tuning.

Thank you. And then just the final question just on some details on the UK mortality experience?

I'll take that one up. We made some assumption changes actually last year on our (indiscernible) book, that led to a one off release last year of 106 million and the numbers for that accounts for the difference.

Okay, so you're not experiencing any ongoing mortality or unfavorable mortality experiences? Just a purer base change from the year before?

No, there's no significant experiences there.

Okay, thank you very much.

Thank you, everybody.

I will now read the cautionary note for forward-looking statements. Statements contained in this press release that are not historical facts are forward-looking statements as defined in the US Private Securities Litigation Reform Act of 1995. Words such as believe, estimates, intends, may, expect, anticipate, predict, project, coming on, plan, continue, want, forecast, should, would, confident, and will, and similar expressions as they relate to us are intended to identify such forward-looking statements. These statement and not guarantees of future performance and so include risks, uncertainties, and assumptions that are difficult to predict.

We undertake no obligation to publicly update or revise any forward-looking statements. We use our caution not the place undue reliance on these forward-looking statements, which speak only as of that day. All forward-looking statements are subject to various risks and uncertainties could cause actual results to differ materially from expectations, including, but not limited to, the following -- changes in general economic conditions, particularly in the United States, the Netherlands, and the United Kingdom; changes in performance of financial markets including emerging markets, including the frequency and severity of the forced by issuers in our fixed-income investment portfolios and the effects of corporate bankruptcies and/or accounting restatements in the financial markets and the resulting decline in value of equity and debt securities we hold; frequency and severity of insured loss events, changes affecting mortality, morbidity, and other factors that may effect the profitability of our insurance products, statements affecting interest rate levels and continuing low industry rate levels; changes affecting currency exchange rates including Euro/dollar and Euro/British pound exchange rate; increasing levels of competition in the United States, the Netherlands, the United Kingdom and emerging markets; changes in the laws and regulations, particularly those affecting our operations, the products we sell, and attractiveness of (indiscernible) products to our consumers; regulatory changes relating to the insurance industry and the jurisdictions in which we operate; acts of God, acts of terrorism, and acts of war; changes in the policies of central banks and of foreign governments; litigation or regulatory action that could require us to pay significant damages or change the way we do business; and customer responsiveness to both new products and distribution channels. Thank you very much.

Ladies and gentlemen, this concludes the AEGON third quarter results 2003 conference call. Thank you for participating. You may now disconnect.