Aegon Ltd (AEG) 2004 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the AEGON first 9 months' results 2004 conference call on Thursday, the 11th of November, 2004. Throughout today's presentation, all participants will be in a listen-only mode. After the presentation there will be an opportunity to ask questions. If any participants have difficulty hearing the conference, please press the star key, followed by 0 on your pushbutton phone for operator assistance. I would now like to turn the conference over to Mr. Fred Romijnsen. Please go ahead, sir.

Good afternoon. Welcome to AEGON's 9-month 2004 results conference call. My name is Fred Romijnsen. I'm Senior Vice President responsible for corporate affairs and investor relations. Before we begin, I need to make you aware of our cautionary note regarding any forward-looking statements, which is on this slide. We would appreciate it if you would take a minute or 2 to review this statement after the presentation. Also, as we discussed in the previous 2 quarters, please note that the 2003 financial amounts have been adjusted for the change in accounting principles related to the discontinuance of the indirect income method for recognizing gains and losses on shares, and real estate and the adoption of SOP 03-1. For a detailed reconciliation of reported to adjusted full-year 2003 amounts, please refer to the supplemental disclosure in our first-quarter press release. During today's conference call our CFO, Jos Streppel, will provide you with an overview of the developments in our business and results over the first 9 months of 2004. Afterwards, there will be ample opportunity for questions. But now, let me hand it over to Jos.

Thanks, Fred. Good afternoon here in Europe, and good morning in the United States. Thank you for joining us. In addition to Fred, also with us today are senior management of our main country units, Darryl Button from the U.S., Edgar Koning from The Netherlands, and Otto Thoresen from the U.K. Michiel van Katwijk, our group treasurer, is on the call as well.

Slide 4. Let me start by briefly highlighting the most important developments of the first 9 months. We continue to see improvement in the profitability of our core operations, with all the country units contributing to the growth in income. We have taken some important strategic steps to enhance our distribution capabilities. In the U.K., as you know, we formed Origen , a combination of leading IFAs that is set to play a leading role in the advisory market in the U.K. Our distribution agreement with CAM has given us access to important banking distribution channels in Spain. We are pleased with the early performance of this partnership. Our newly announced agreement with Agricultural Bank of China will further strengthen our multichannel distribution in China. The quality of our capital base further improved during the first 9 months of the year, and was also add -- aided by the issuance of junior perpetual capital securities. Finally, as an illustration of our commitment to focusing on our core business, we recently sold the maritime container leasing activities of TFC, and expect to sell the trailer leasing business before the end of the year. This marks the sale of most of the remaining non-core TFC activities.

Slide 5. We are pleased to report that results from our core operations continued to show strong progress across all major country units. Income before realized gains and losses on shares and real estate, which is the primary profit measure on which we assess our country units, increased by 36%. At constant currency exchange rates, this represents an increase of 46%. Net income before realized gains and losses increased 4%, or 13% at a constant currency exchange rate. Finally, net income including realized gains and losses rose 62% in the first 9 months of the year, compared to the same period last year. Higher earnings from our core -- core operations more than compensated for the reduced contribution from Transamerica Finance Corporation, the majority of which was sold in late 2003 and early 2004. The main factors driving the improvement in earnings were improved equity and credit markets and increased product spreads.

Slide 6. Looking at the country units in their local currencies, income before realized gains and losses increased by 37% in the Americas, 35% in the Netherlands and 20% in the U.K., and increased 39% in euros in other countries. These positive results were largely influenced by the improvements in the equity and credit markets, higher product spreads and an increasing in-force block of business.

Slide 7. Reported new life production increased by 1% in the Americas, but as I will show you in a minute, increased by 5% on a comparable basis. We are particularly pleased with the continued strengths of the traditional life production through the agency channel. In the United Kingdom new life production increased by 5%, reflecting further growth in our core individual and group pension businesses. With regard to the Netherlands, production continues to be challenged by a difficult market environment and the absence of large-case pension contracts. New life production decreased 42% in other countries, largely due to lower production in Taiwan, where we had very strong sales in the comparable period. On balance, total new life production for the group decreased 9% in euros and 6% at constant currency exchange rate during the first 9 months.

Slide 8. Looking at the Americas, life -- looking at the Americas' life production, we see continued positive developments in the agency segments, which is one of our key core franchises. Recurring premium production in the agency segment was up by 7%, compared to the first 9 months of 2003. We have introduced recurring life products for high-net-worth individuals in the banking channel and are encouraged by their early success. Direct marketing had a respectable increase of 3% of recurring life production, despite the challenges posed by changes in privacy regulation. Institutional recurring premium production was down by 8% as a result of lower bank-owned and company-owned life insurance sales, where production tends to occur more unevenly. Reinsurance, on the other hand, showed strong growth on the back of increasing volumes and prices.

Slide 9. Total retail single premium production increased by 12% compared to the first 9 months of 2003, an increase that was driven by a 24% gain in the bank channel. Institutional single premium sales which, as said, occur unevenly, showed strong production results for the first 9 months of 2004, with an 8-fold increase to $137 million. We discontinued the sale of structured settlements last year and, as such, institutional premium production for 2004 reflects only BOLI/COLI sales. Total standardized life production increased by 5%, to $784 million, during the first 9 months on a comparable basis to the same period in 2003.

Slide 10. It's no secret that our annuity production in the Americas has slowed as a result of our focus on profitability and our relative discomfort with the risk/return profile of certain product features. Lower sales of fixed annuities in the retail segments reflects a challenging environment, due to low interest rates which reduce the attractiveness of many products to our clients. Furthermore, some competitors have been slower in reducing guaranteed rates to policyholders. Fixed annuity pension production, which is mostly health and stable funds, showed a 27% increase compared to the first 9 months of 2003, driven in particular by strong production in the second quarter.

Slide 11. Retail variable annuity production was 40% lower than compared to the relatively strong sales last year. Keep in mind, please, that during part of that period, we still carried a GMIB product which was later discontinued. A new product with a guaranteed 5% for life withdrawal feature has been launched in the fourth quarter of 2004 and will supplement the current guaranteed principal solution rider. The 5% for life rider is priced at 60 basis points off the guaranteed amount, and will require allocation strategies. Direct sales, which consist of private-label production of several funds, showed a strong increase, largely reflecting higher sales by our direct partners of funds, for which we provide variable annuity wrappers.

Slide 12. In the first months -- first 9 months of 2004, total operating expenses, which exclude commissions and net deferred policy acquisition costs, were 12% higher than in the same period of last year. This picture, however, is distorted by the fact that we consolidated the remaining TFC activities this year. Then, adjusting for this, operating expenses were slightly lower in euros and 4% higher on a constant currency exchange basis. In the Americas, operating expenses increased by 6%, due to high employee pension plan expenses and increased regulatory and compliance costs. Operating expenses in the Netherlands, including the additional contribution to a provision for post-retirement benefits, were up 9%. On a like-for-like basis, expenses were actually down by 2%. And in the United Kingdom, we achieved a 17 million pounds sterling expense savings, and a program targeting 40 million pounds sterling in expense savings is on track.

Slide 13. Expense management remains critical to the successful implementation of our strategy. We are increasing productivity in our back offices and aligning the size of our sales forces with production levels. Personnel costs made up over 50% of our operating expenses in the first 9 months of 2004, and managing our headcount is an important part of our ongoing expense management efforts. Slide 13 illustrates some of these efforts that we have gone through to continue to run our business efficiently. As you know, we announced that we would reduce the workforce in the Netherlands by 10 to 15% over a 3-year period. Given the 5% reduction achieved to date, we are clearly on schedule to reach this target. In the United Kingdom, the decrease in our headcount levels -- in -- in our headcount levels illustrate our continued commitment to bringing our costs down. Contrary -- contrary to our major country units, we have added personnel in other countries in order to build scale and invest in major growth opportunities that exist in these markets.

Slide 14. I now want to briefly discuss the developments in our asset base. Growth in our asset base is one of the prime drivers for revenue development. In U.S. dollars, total investments in the Americas were up by 9%, compared to 1 year ago. In the United Kingdom, total investments were up by 6% in pounds sterling, and in euros total investments were up 9% in the Netherlands. For the group as a whole, total revenue-generating investments were up by 5% in euros and 8% using constant exchange rates. Benefiting from high equity-market levels, the general and separate account equities in our real estate portfolio increased by 9% and 8%, respectively. The total general account equity portfolio is now EUR 7 billion, which includes almost EUR 700 million in preferred shares. Nearly 85% of our general account fixed-income portfolio of EUR 114 billion is invested in bonds and markets in the United States.

Slide 15. So looking at the results for the Americas, we saw a broad-based increase in our earnings. Each individual business line contributed to the 7 -- 37% rise in income before realized gains and loss on shares and real estate. Lower bond defaults and our successful efforts to increase spreads are the primary reasons for the improved results of our traditional life and spread-based deposit businesses. High fund balances, better proficiency, lower guaranteed-debt benefit costs and reduced operating expenses led to the -- an increase in variable annuity results. Accident and health results benefited from lower defaults and improved claims experience, more effective cost containment and premium rate -- rate increases in certain products. Increased earnings from our fee business reflect higher assets under management, due to deposits and equity market appreciation.

Slide 16. Our U.S. bond portfolio increased by nearly 5 billion U.S. dollars, compared to the end of 2003. There was no meaningful change in the average credit rating of our U.S. bond portfolio during the period. Asset defaults have improved significantly over the last year, and are currently below long-term expected rates. Additions to the default provision were $225 million below the level of the first 9 months of 2003. The outlook for credit quality for the remainder of 2004 and early 2005 continues to be positive, and credit fundamentals continue to improve, albeit at a slower pace.

Slide 17. Now over to the Netherlands. Income before realized gains and losses on shares and real estate increased by 35%. All business lines reported an increase in earnings. The 8% increase in traditional life results reflect continued positive development of the result on disability riders, as well an increase in the results on interest as we invested more in longer-date assets. Life for account of policyholder results improved strongly, due to lower provisions for guarantees and positive results on disability riders, although lower production and higher [inaudible] somewhat mitigated these positive effects. Furthermore, additional provisions for post-retirement benefits also impacted the results. Results from fee business showed a substantial improvement. The Meeus group is benefiting from the reorganization that was started in 2003. Results at TKP Pensioen increased and asset management profits showed a stable development. Accident and health results were mainly driven by a strengthened position in the sick-leave segment. General insurance results improved strongly, reflecting the continued improvement in claims experience in fire.

Slide 18. Now to the U.K., where income before realized gains and loss on shares and real estate was 20% higher. The increase is largely due to the favorable life account policyholder results. Tradition-- traditional life earnings were lower, due to a 5 million pound charge recorded in the first quarter of 2004 related to the cost reduction program. Life for account of policyholders results primarily reflect a higher average value of the equity markets. Lower expenses in our asset management business contributed significantly to the overall increase in results in the fee business segment.

Slide 19. In other countries, income before realized gains and losses on shares and real estate increased by 39%. The largest part of the increase is due to the higher results in Spain. The partnership with CAM has made an encouraging start, with over 81 million in new premium -- premium sales through CAM's extensive branch network. At the same time, the distribution franchise has continued to grow, reaching 900 branches this October. CAM expects to attain 1 -- 1,000 branches towards the end of 2005. The partnership with CAM is not consolidated in the AEGON accounts.

Now, let me briefly update you on our capital position and ratings. Slide 20. During the first 9 months of 2004, the quality of our capital base was further strengthened by the issuance of junior subordinated perpetual capital securities. Following the success of the initial offering in July, the amount issued was increased in October. We are using the proceeds to repay debt, and we have experienced an important reduction in the relative weight of senior and subordinated debt in our capital base as a result. We managed our leverage ratio on the basis of shareholder equity as a percentage of the total capital base. The shareholders' equity to total capital base of 72% is higher than our minimum target of 70%. Equity, junior subordinated perpetuals and other capital securities together accounted for 84% of our capital base.

Slide 21. We continued to improve our financial flexibility. Also, our operating companies in our core markets of the United States, the Netherlands and the U.K. continue to have very strong financial ratings. During the third quarter, Moody's raised the outlook for AEGON N.V. to stable, reflecting the improvements in the underlying core operations, and Standard & Poor's removed the negative outlook on our financial-strength rating in the U.K.

Slide 24. So, in conclusion, ladies and gentlemen, our key messages for these 9 months are first, we have continued to focus on our core business, second, we have maintained strong emphasis on profitable growth, and third, we continue to grow our business in existing and developing markets through an enhanced multichannel distribution network. We are happy to take your questions now.

Ladies and gentlemen, at this time we will begin the question-and-answer session. If you have a question, please press star, followed by 1 on your pushbutton phone at any time. If you wish to cancel your request, please press star, followed by 2. Your questions will be answered in the order they are received. If you're using speaker equipment today, please lift the handset before making your selections. One moment, please, for the first question. The first question comes from Mr. Kimon Kalamboussis. Please state your name, company name, followed by your question.

Hi. This is Kimon Kalamboussis from HSBC. Two questions, if I may, on the dividend first. In light of your positive comments on the capital position of the -- of the groups, should we assume an increase in the dividend, please, for next year? And second question, I would like to know how core are the -- the Spanish nonlife operations, the U.S. life reinsurance and the aircraft leasing activities, please? Thanks.

The dividends, I'll -- you can't expect much -- much in -- in term -- in terms of response to that. The -- we will decide on -- on the -- on the -- dividend when we have our annual accounts ready, and it's up to the -- up to the supervisory board then to make a proposal to the -- to the shareholders, so you have to live with improved earnings of AEGON for the moment.

Is there any policy on the -- on the matter or -- ?

There -- there's -- there is a -- there's is a policy on the matter and we have announced -- they have announced that 1 and a half years ago and that we -- we -- we say -- we -- we don't -- we do not have and pay out as a percentage of net income because net income isn't -- is volatile and the definition of net income will -- will change also under IFRS. Instead of that, we have set a -- the dividend policy depending on the capital situation of the Company and the cash flow from the operating units to the -- to the holding. So indeed we'll analyze that for you in due course.

Thanks.

The second question on -- on core -- on core business, well, we have a strong -- we have a strong focus -- we have a strong focus on -- on -- on our core business and our core business in -- in -- in -- our life business, pension business and related asset management products. So that's -- that's -- that's the core -- that's the core. So talking -- talking about -- talking about Spain, we would -- we would not like to comment because the P&C operation in Spain so -- so far has contributed to the setting up of our life operations in Spain and we will -- we will consider any action in -- in the future if necessary and profitable for shareholders. As far as reinsurance is -- is concerned -- is concerned, I know that there were rumors in the market that a -- a colleague company of -- of ours here in the Netherlands took the decision to sell their reinsurance operation. Let me assure you that we did not hire any investment banker or were preparing any book on the sale of our reinsurance operations. And, third, it was the -- the -- the leftover in TFC, the air -- the aircraft -- the aircraft portfolio, though the aircraft portfolio is certainly -- certainly not core, so if -- if you -- if you know a very good buyer, you're welcome -- you're welcome to call me, but on the other hand it's not -- it's not a problem. It's in -- it's a small portfolio in terms of the assets of -- of -- of AEGON and we took provisions for it because that portfolio is not in the AA-rated company -- the AA-rated portfolio, as you -- as you understand. So we are -- we are even -- even -- even there. If -- if somebody makes us a -- a -- a good offer, we are welcome to -- we are welcome to listen, and otherwise our -- our asset managers in the U.S. will manage the portfolio.

Thanks.

You're welcome.

Thank you. The next question comes from Mr. Duncan Russell. Please state your name, company name, followed by your question.

Hi. It's Duncan Russell from Fox-Pitt Kelton. The first question I have is could you provide an update on the sales outlook for the Dutch market, Dutch life insurance market, and on any ongoing regulatory or pension changes there? The second question, then, is could you give us an indication of the reaction to your new variable annuity product by the distributors? And then finally, could you just provide a bit of an update on the U.K. operations and the strategic positioning of those operations and how the outlook is there? Thanks.

Well, it is no -- it is no secret and -- and perhaps you listened in on the -- in the press conference this -- this morning and -- and -- and -- and heard remarks that Don Shepard was making on the -- on the Netherlands. We are certainly disappointed on the -- on the production level in -- in -- in the Netherlands. We -- we go through a phase that -- that -- that we have seen for the last 1 and 1/2 year, production -- production to go down. It has -- it has several -- it has several -- several reasons. One of the -- one of the reasons is that we are pretty strong in the group -- group pension business, but it's a lumpy business so we did not do -- we did not do big -- big cases. The second -- the second reason I would give is uncertainty in the -- in the Dutch market. You -- you probably know that just last week, after a year discussion, the -- the Dutch cabinet made a deal with -- with -- with the unions and the -- and the employers how to go forward, so uncertainty is now disappearing out -- out -- out of the market and that is in -- that's a good -- that is a good thing. And the third thing I would like to mention is that my colleague, Johan van der Werf, who is the CEO of AEGON in the Netherlands, apart from being my colleague in the executive board, has taken strong measures to reorganize the Dutch organization and will direct the Company to -- to clients instead -- instead of products. And all those things together and the disappearance of the -- of the uncertainty and the good preparation for the Dutch organization for the market of the future makes us positive for the future, starting in the fourth quarter.

Thank you.

Variable -- variable annuities, we launched a new product -- 5 -- 5 -- 5 for Life. It's pretty early to say something about that. We felt -- we felt the temperature of the water in our distribution channels and the first reactions were pretty positive, but that's all I can -- can say. In the U -- in the U.K., you see that -- that through -- through our IFA network, we did a pretty good job there. Production -- production is up -- is up by -- by 5% in the -- in the -- in the pension -- in the pension business, and we don't think that the new regulatory environment in the U.K. will hurt us, and apart from that, we made very good preparations. You saw us building up our own -- our own distribution channels in the -- in the last half year. We put -- we put all the acquisitions, the smaller acquisitions with this to -- together, and I think the -- we are ready for the new market environment in the U.K.

Just -- just quickly to follow up on the U.K. Obviously, a few of your competitors have raised quite a bit of capital, and do you feel you have the necessary results as to compete in the markets you're looking at there?

Well, we -- we saw some of our colleagues in the -- in the U.K. raise -- raise -- raise new capital. The -- the solvency directive of the E.U. is -- is -- is -- well, that's first of January, 2005. That's not the case for Holland, it's 2006, but apart from that, our position in the U.K. is -- is much different from -- from our -- from our colleagues in -- in -- in the -- in the U.K., and our estimates are that there will be no significant impacts on our capital position because of these changes in the U.K.

Great. Thank you.

Thank you. The next question comes from Mr. Nick Byrne. Please state your name, company name, followed by your question.

Hello, it's Nick Byrne.

Hi, Nick.

I'm from J.P. Morgan. I had 2 questions relating to your balance sheet, if I may. First, you've been going through a process over the last few months of refinancing a lot of debt on the balance sheet. I wonder if you could just go into a bit more detail on how you think this fits in with the group's solvency directive, i.e., how confident are you that it will be allowable as Tier 1? And secondly, on -- on that point, is there more to come? Can we expect more refinancing of -- of this nature? And then the second question, just thinking about the earnings in 2005, can you give us some feeling for how the change in your debt structure will reflect in the interest charges line, which seems to have gone up a little bit in Q3? Perhaps you could give some guidance on what the interest charge level would be for 2005, please.

Well, the first question is the -- is the -- is the most -- is the most easy one. You saw -- you saw us issue approximately -- just -- just under 1.5 billion -- billion junior perpetual capital -- capital securities, and with the proceeds we redeemed debt. And as a -- as a result, 80 -- 84% of our capital position is -- consists now of -- shareholder -- shareholders' equity, junior perpetuals and capital securities, and under the solvency to direct -- solvency to directive -- any new directive, all these instruments will count -- will be counted as capital. Does that answer your question, Nick?

Yes, [inaudible].

Okay. So the -- the earnings of 2005, the -- the -- the interest charges, that's your territory, Michiel.

Nick, I think when you look at first quarter interest charges, you should take into account that TFC is also in there, and TFC reported a -- a loss of $8 million in the -- in the third quarter. So if you take that out, interest charges haven't moved a whole lot during -- during the third quarter compared to the second. And on average, if you compare where our issuing spreads would be for senior debts, compared to what we've paid on these perpetuals that we recently issued, the difference is going to be relatively small. It's maybe something like 30 basis points higher cost on average.

Okay. That's very helpful. Thank you.

Next, please?

Thank you. The next question comes from Mr. -- one moment, please. The next question comes from Mr. Mark Cathcart. Please state your name, company name, followed by your question.

Mark Cathcart from Deutsche. AEGON seems to be suffering from a lack of lumps, in -- in other words, group life in both the Dutch market and also the U.S. market. I wondered if that's because you'd outpriced yourself from those markets. In other words, this lack of lumps might actually continue through next year. Second question, I understand that you've had trouble convincing your sales force in Taiwan to sell unit-linked business, because you have a delay with the government in approving that. I wondered if that was the case. Third, could you update us on your cost overruns, allowable over actual expenses in the States? I think they were at about 103% at the first-half stage. And then finally, could you indicate what you'd anticipate your EV margins to be doing in '05, now that we're at the third-quarter stage '04, given your expense improvement program and pricing strategy? Thank you.

You're -- you're right in the analysis that -- that we did not see big cases in the U.S. in -- in -- in group life. I don't think it has much to do with pricing, but just a lumpy -- lumpy business. In the -- in the Netherlands, if you -- if you follow the Netherlands closely you saw that a couple of big group cases have been -- have been sold by our -- by our competitors, and there my comment would be that those cases would not have met our hurdle rate. Life -- life -- life is going better in the -- in the Netherlands, and I -- I expect that group life will recover in the -- in the Netherlands in -- in duest course -- in due course. On Taiwan, we had a delay, as you say, in -- in the allowance of our variable annuity products in -- in -- in -- in Taiwan, so it's not unit-linked business but in the variable annuity. And that -- that -- that cost -- that cost us a little bit of slowing down in the production, but we're pretty satisfied with the situation in Taiwan. We had an excellent year in production terms in 2003, but if you compare the progress that we have made from 2003 -- from 2002 to 2004, you see that there is excellent -- excellent progress and we are fully confident that Taiwan will be a growing operation.

We deliberately not participated in the structured notes markets. I'm not sure whether your referring to that, Mark. But we did not participate in the structured note markets, which is commonly referred to as unit-linked business because we think it doesn't make any sense from a customer or from a company point of view to participate in that.

I really meant the variable annuity products. I understand that there was a delay in approval from the government. Was that the case?

Yes. That's the case.

As a -- as a result, your sales force don't like selling it. I wondered if that was also the case?

That's partly also the case.

That's a new product. It takes -- takes a while. There are not really products like that in the market before we launched ours.

On cost overruns -- on cost -- our cost overruns, you -- you -- you mentioned -- you mentioned costs to allow -- it's 1 -- 103 -- it's a little bit lower in -- in effect. It's -- it's close -- it's close to 1 -- 1 -- 102. The main reason for that if you split it up by product line is that we have decided as -- as the executive board of AEGON to keep franchises intact, of which we think that they will be very profitable for us, and also in terms of production will be good to us in the near future. So if you -- if you -- if you do that and you keep all the other product lines on -- around -- around 1 -- 100, you go over the 100 if -- if -- if you do that, and that was -- that was a decision by the executive board. An example for 1 of the product lines where we did that is fixed annuities, because we -- we decided to keep our franchise intact there. On 2000 -- on 2005 you -- you're raising a very -- a very difficult question, because you know, as I know, that EV -- EV margins are depending on many things. You may be assured that this Company will watch its expenses very, very, very closely. So if it's -- if it's only -- if it's only the expenses you might -- you might -- you may conclude that EV margins go up, but as you know, there are many other things that you have to take into account for the EV margins, so it's a little bit too early to comment on 2005 margins.

And then, finally, in the U.K., could you clarify what your actual investment has been in distribution over, say, the past 18 months?

In -- in terms of numbers?

Yeah.

About 100 million.

How much? Sorry.

About 100 million pounds sterling.

Yeah. And your growth rate is still way below those of your core competitors within the U.K. market. Don't -- don't you feel you're in a bit of a hole?

No, I don't think that's a -- that's a right analysis, because you've -- what you -- what you have to analyze is the markets we are in. So we are in the group pension business market through the IFA channel, and there we are leading.

I just wondered if you -- you -- you've wished that you'd diversified some time ago. You're -- you're in a hole inasmuch as you're in a low-growth segment of the market.

Well, we had some complaints last year about -- about U.K., because the U.K. -- U.K. had problems in making their hurdle rates in 2003. If you look to the production today, which is up, then also the conclusion is after analyzing the 9 months figures in The Hague here, is that they are almost meeting -- making their hurdle rates

And Mark, if you -- if you look at what's happening in the market, you see that sales of -- with-profit products have -- have increased. As you know, we are a smaller player in -- in that part of the business. There are competitors out there that, compared to a -- a dismal last year, now show big increases in -- in with-profit sales which, you know, on a comparable basis shows that we would grow a little bit less, but that's because we have been focused on -- on the pension business.

All right. Thank you very much.

Okay. Next, please.

Thank you. The next question comes from Mr. Nick Holmes. Please state your name, company name, followed by your question.

Yes, hi. It's Nick Holmes at Lehman. I have just a couple of questions, please. First one is on the GIC sales, which were very strong in Q3. I wondered if you could tell us what the IRRs are on these products and whether you expect to continue growing GIC sales at this rate? Then secondly, I wanted to ask about capital and growth. You say that you've strengthened your capital base over the last couple of years, and I wanted to ask, do you think you have enough capital to support material growth, especially since you're now targeting more capital-intensive products, like GICs and traditional life rather than the less capital-intensive products like variable annuities, which most of your competitors are targeting? Thank you.

Okay. Darryl, you want to take the one on the GIC sales?

Yeah, sure. You know, we -- we price our -- our spread business with a minimum return requirement of 11% unlevered. I actually expect that GIC sales would have come in probably closer to 12. The sales were originating in actually traditional GIC sales, some sales activity we haven't seen in a while. There's been a -- a -- a movement back into -- in the stable value funds back into the traditional GIC product. As far as persisting GIC sales into the future, obviously this tight spread environment that we're in right now, it makes it -- pricing a challenge in that market and our medium-term note programs, where we get a lot of our funding agreement production, have -- have been off because of those tight spreads, but the -- the production is driven by the movement back to the -- the traditional GICs, so we -- we are optimistic there.

Okay. On -- on -- on capital. Sorry?

Just to return to the IRR. Can you say again, the IRR for GICs that you're targeting is 11%?

That's our minimum. We -- we -- we target -- obviously we target to maximize returns wherever we can. In the institutional marketplace often there are opportunities that we can get north of 11. And it's not uncommon for traditional GIC sales to come in around the 12% range.

How would you describe the IRR on GICs relative to your product portfolio? Would you say it's a lower than average?

I would say probably a little bit higher, for the reasons I talked about. Again, it's -- we have minimum IRR requirements, but we target to maximize returns across the board and -- and there are opportunities come throughout the year where we can get a little more, but 11% is our -- our minimum pricing discipline.

Okay. Thank you.

On capital -- on capital, Nick, though there are many -- many ways to view -- to view a capital -- to look at -- to look at -- to look at capital, one -- one way -- one way is the capital adequacy rules we have internally. I have good news for you here. We have -- we are running -- we are running on a surplus, so new -- new production -- new production is welcome even if the -- even if the -- the charges for -- for capital are higher, if the price -- if the pricing is good, then that's -- that's -- that's something we have managed all along and yet we have -- we have -- we have proven that. For your information, the charge on variable annuities, by the -- by the way, are -- are going up as well, but you should not -- you should not be worried that in terms of capital AEGON cannot finance its growth in the next years.

My -- my question was -- we really just focused on a very different strategy that you have from some of your competitors at the moment, being focused on these more capital-intensive products. I mean, does that, do you think, make you different in terms of capital consumption and restrict your growth ability?

No, I don't -- I don't think so. I think we have capital enough to finance -- to finance that growth and the decision to allocate capital to the growth of our product line is depending on the returns we can make on that allocated capital. So if the capital charges increase, then the profit -- the profit streams that are coming from those profits -- products should be higher, and we watch that.

Okay. Thank you very much.

You're welcome.

Thank you. The next question comes from Mr. Rob Procter. Please state your name, company name, followed by your question.

Hello. Good afternoon. It's Rob Procter from Morgan Stanley. I've got a few questions. One, you -- you mention improved mortality results at least a couple of times in the context of the U.S. business. I -- I wonder if you can just elaborate on whether these results in the third quarter, for example, were exceptionally good, whether the experience against which you're comparing was bad, any -- any sort of view as to where those mortality results are -- are going looking forwards? Second question, on the fixed annuity book, I think you mentioned a new release and some changes to the commission structure that you're paying. Again, I wonder if you could elaborate at all in terms of what's going on there? And I guess you've already been asked about how much you've spent to date on distribution in -- in the U.K. market. Any sort of feel as to how much more you might like to spend on -- on distribution acquiring IFAs going forwards.

Darryl, why -- why don't you take the mortality results? It's a complicated story and many -- many -- many bricks frying out -- fly -- flying around there, isn't it?

Yeah. Sure. We -- we did have a -- a bit of a mortally blip back in the second quarter in our reinsurance operations. We saw what I'd say would be abnormally high claims in that quarter as well. We saw some claims extending back in time as the ceding companies had -- had cleaned up some files and distributed some backdated claims, so we actually increased our IBNR reserve as well as incurred some higher cash claims back in the second quarter, so on a quarter-over-quarter, on a sequential-quarter basis, there was significant mortality improvement here in the third quarter over the fourth -- or over the second quarter. We continue to experience very strong favorable mortality experience on our direct business, and we've been incurring that all year. So on a year-to-date over year-to-date basis, there's a strength in our direct business and some relative weakness on the reinsurance business, which all stem back in the second quarter. Hopefully that helps clear up some of the comparison.

Can -- can -- can you quantify it at all? Because some companies would give a -- an experience as a percentage of -- of mortality assumed, something like that. Is -- does that make any sense to go into it that way?

I -- I don't have any of those statistics. I think we talked back in the second quarter, the mortally blip that we talked about at reinsurance was in the order of magnitude of around $30 million and that -- that is not recurring here in the -- in the -- in the -- in the third quarter, and again that 30 was a combination of higher claims experience and a strengthening of the IBNR reserve. The favorable mortality that we've been experiencing on a year-to-date business on the direct business is at least that big, probably actually a little bigger on the favorable side year-over-year.

Okay. Thanks.

You're welcome.

On the commissions, Darryl, could you -- could you continue on the commissions?

Yeah. On the fixed annuity commission I'm -- I'm maybe a little lost on -- on the comment you're talking about, unless it refers to some of the commission action that we took earlier, a while ago, when rates dropped as low as they did and we just made the move to reduce commission on 3% guarantee business and renewal deposits.

The -- the press release talks about adjustments made to -- to commission structures, but it's not clear whether it was.

Yeah, that's -- that's what it's referring to. When we -- when we hit the -- the very low interest rate environment back in 2003, we -- we made the move that we needed to focus on -- on profitability and contain the risk profile and we -- of course, we were leading the effort to reduce minimum guarantees on new business, but at the same time we made the moves to reduce commission -- cut commission on 3% business.

Okay. So there's been no further -- there's been no changes essentially in the -- in the third quarter of this year?

No, not at all. Since -- you know, since then we've gotten new products refiled with the lower guarantees and, you know, we're selling new business coming back gradually, but it's very much a function of where interest rates are, and we like to maintain that spread over our minimum guarantees and so we're still very disciplined on our fixed annuity pricing. But I -- I think those commission comments relate back to the original actions we took.

Okay. All right. Thanks.

Rob, finally, we have no intention to -- to -- to do investments by the way of acquisition and distribution in the U.K. in the -- in the short term, but, Otto, why don't -- don't you give some flavor on the distribution in the U.K.?

Thanks, Jos. I think I -- I -- I agree with what you just said. I mean, we feel we've got sufficient scale in Origen and in Positive Solutions from which we can achieve significant organic growth in what we see as -- as our consolidating market. Of course, you can never say never, and there may be opportunities in the next 12 months or so to take minority positions in large distributors, but we're certainly -- at the moment we're very happy with the -- the base that we've built.

Okay.

Thank you very much.

Okay. Next, please.

Thank you. The next question comes from Mr. Carsten Zielke. Please state your name, company name, followed by your question.

Yes, hello. Carsten Zielke, WestLB. I'm referring to slide 12, where you said that the operating expenses of the TFC activities were 249 million. Could you tell us what the corresponding turnover would be? This is the first question. Then second one, you mentioned that your results haven't improved due to lower lapses. Could you specify the -- the lapse rate, especially in the United States? And then I also wonder what the current margins are you're making on fixed annuity products, what -- what the crediting rates are right now? Thank you.

Well, the question on TFC I have -- I have to look up, to be -- to be honest. So we -- we -- we'll get back to that. That rate in -- in the U.S., Darryl, on the fixed and variable annuities is just over 10. How is it in traditional life?

Actually, on the variable annuities lapse rates are -- are just under 8. They are just over 10 on -- on fixed annuities. I'm not sure I have -- I actually don't have any statistics on the life business. I -- what I can say is we've seen a -- quite a significant improvement on the variable life business in particular, and that's where we saw an increase in -- in lapses as just more market-driven than anything. That -- that has all rebounded here in 2004, and that's probably the biggest driver of some of the earnings comments that are in there.

Because variable annuity lapses were how much last year?

Variable annuity lapses last year were running a little over 8%, and this year they're running a little under 8%. So they've actually come down a little bit.

Okay.

Annuity lapses last year were quite low, running 8 to 9%, and now they're running about 11%. All those numbers are well within our -- our pricing expectations.

While Darryl was talking, we found -- we found -- we found the answer to the TFC question for revenues -- revenues -- revenues for that period in 2003 were 345 million U.S. dollars.

Okay.

On the margin of the fixed annuities, margin -- the -- the margin, the spread -- the spread on fixed annuity on the book came down a little bit in the -- in the -- in the third -- in the third quarter by 12 -- by 12 basis points. And if you -- if you split it up, there are 3 -- 3 reasons. The -- the first -- the first one -- the first one is that you've got a little bit less return from equity-related investments that -- that we have in the fixed -- fixed annuities. The second reason is that the amortization of prior deferred gains on the -- on the bond portfolio was a little lower. And the third reason is that the book yield on the portfolio was a little lower, but that was compensated for the greater -- for the greater part by lowering crediting rates. So, all -- all in -- all in all, it was 12 basis points down for the -- for the -- for the quarter on the book. On new production it's higher.

And could -- could you specify the -- the rates then? Is it -- where was it last year? I don't know.

It's now 200 --

213 basis points in the third quarter, and that's down from 225 in the second quarter.

Okay. Thank you.

Okay. And, what there was -- no -- we are finished with yours, Carsten, thank you.

Thank you. The next question comes from Mr. Andrew Ritchie. Please state your name, company name, followed by your question.

Hi, good afternoon. It's Andrew Ritchie from Citigroup I just wanted to ask on -- on 3 broad areas. First of all, on fixed annuities, just a bit more color as to why those lapse rates picked up would be of interest. Also, I understood you had launched an EIA product. That's been doing well for your competitors. I was wondering if you could comment if those reasons have affected your sales much in the third quarter, could you just comment a bit on -- on that? Second question, on life -- traditional life in the U.S. or universal life in particular, just comment on your capacity to keep growing that business in respect of providing or having collateral to back the AXXX reserve situation. Just an update on -- on that would be useful. And thirdly, in light of stubbornly low interest rates, a number of your peers, one in particular in the U.S. has been doing a sort of annual review of its DAC assets and -- and various other reserves. Could I just get a bit more color on how you see the resilience of those, both in -- on the annuity and the life side, in light of where we are with interest rates, both and 10 and 30-year yields kind of not really moving much? That's everything. Thanks.

Okay. Thank you. Darryl, you can go again -- and more color on the lapse -- and lapse rates. It's now just -- just -- just over -- just over 10, coming up a little bit, but it was higher before, wasn't it?

Yeah. The -- I'll just hit them in order here, I -- I hope I got them all written down. Fixed annuities lapse rates, they -- they have trended up a little bit. I think a lot of it was actually due to -- we started to see a rise up in the interest rates and then they've now since backed off. So, you know, I'm not sure that there's anything really systemic or material in those numbers. They're well within our -- our pricing expectations, probably still a little inside, actually. So we're not terribly worried about those. The equity-indexed annuity product, you're correct, we have launched one. I -- I actually don't have any statistics for you. We can gather that and -- and -- and I -- I'll filter that information back through our investor relations group. What I do know is the word is that it's been favorably received, but I actually don't have any numbers that I can -- I can put on it for you.

So could you -- ?

It's still not a material driver of the production numbers that you're seeing, though. On the traditional life, your UL question on XXX, AXXX reserves, our capacity. I would -- our capacity is -- is quite good there. I think, like the rest of the industry, we've been looking at various collateral financing substitution programs for letters of credit, and actually we've been getting some very good success there, and I expect us to be out to the market in the next couple of quarters with a couple of different funding solutions. So I think our -- our capacity is -- is strong there. The last one I think was a generic comment on -- or question on low interest rate risk and particularly how it relates to the traditional life business. We -- we look at our -- our unlocking in DAC recoverability analysis, you know, we look at it quarterly and we're -- we're up to date, so there's no surprises pending or anything like that. I think it's -- it's probably no surprise that on traditional life business if rates were to remain low for a sustained long period of time, there would be pressure back on the spreads. We do a lot of activity to reduce UL crediting rates over the last year and a half and get our spreads widened back out there, and I think we've been successful, but if -- if rates lingered too low for too long, there would be some compression, but it would be a very sustained -- it would take a sustained low rate environment to cause that.

That -- thank -- thank you. Thanks.

Next, please.

Thank you. The next question comes from Mr. [inaudible]. Please state your name, company name, followed by your question.

Yes, hello, sir. Elwood [ph] Plouf [ph] from [inaudible] in Amsterdam. I've got 2 questions, the first one a follow-up on DAC unlocking Can you give some quantification on possible DAC unlocking on your variable annuity book if, for example, the S&P 500 stays at the current level until year-end? And the second question is on the investigation of Eliot Spitzer. You did not receive a request for information. Did you also did not receive any requests from -- from the separate federal states? Thank you.

Okay, if the interest rates stay where it is, we will not have any DAC unlocking for variable annuities. So that -- that's the first one. On Eliot Spitzer, you are right. We did not get a subpoena from Eliot -- Eliot Spitzer. You know that recently a -- a great deal of attention has been given to investigations by various regulatory bodies in -- in the United States, mostly on -- on bid -- bid -- bid ridding. These investigations are mainly directed at property and casualty business and, as you well know, AEGON's U.S. operations do not include P&C business at all. Lately, group insurance has been mentioned as an additional area of review, and in the -- in our U.S. operations group business accounts for a small percentage of AEGON's operations, although most of those group businesses is sold directly and not through -- through intermediary. So we -- maybe use our direct marketing operation. As -- as a large organization, AEGON will from time to time be requested to provide information in the context of these -- these investigations that are going on, both formally and -- and informally, by various regulatory bodies, and you have to understand that in the United States you have 50 -- 50 -- 50 regulators, 50 -- 50 attorney -- attorneys general, and we -- we have -- we have had requests for -- for information from -- from several sites. And we've got one in the form of a subpoena, and that was from the attorney general in -- in Connecticut, where we -- where we have very -- very little business and no operations. And that subpoena was done to 30 companies.

Okay. Thank you.

Okay.

Thank you. The next question comes from Mr. Nick Hoskins [ph]. Please state your name, company name, followed by your question.

Hello. I just wanted to follow up on a question that someone else answered early on, which was just on the Taiwan capital, and I think there was a part of the question that you didn't answer, which was whether you -- you'd come to the end of the -- the Taiwan issue and thought whether you -- you believed there was more that you needed to do?

Well, as -- as -- as you see from I think slides 50 -- 15 or something like that, 84% of our capital base is already capital under the solvency requirements of the -- of the E.U. in the -- in the future, and also under Solvency II. And if -- if I -- if I tell you that the capital base as a whole is more than sufficient to grow -- to grow the business, then it is not very likely that we would go to the markets in the immediate future. Is that okay?

Okay. Thank you.

Okay.

Thank you. There is another -- there is a follow-up question from Mr. Nick Byrne. Please go ahead, sir.

Hello again. It's Nick Byrne at J.P. Morgan. I just wanted to follow up on the U.K. business. Firstly, I wonder if you could just comment on the fact that, given the U.K. is becoming more competitive with depolarization, and secondly, if you look at the contribution to the group cash flow for AEGON, it looks as if the U.K. business does not dividend up very much to the holding company at all. Is there a potential to sell either part or all of Scottish Equitable now?

Well, Otto, if you take the one on competition, I -- I'll take the one on cash flow and -- on -- on -- on dividends before you get defensive. Because what we -- what we -- what we decided at AEGON is to do investments in the -- in the -- in the U.K. which will throw off valuable new business that will meet our hurdle rates. But if you invest in a country, it takes time in the life insurance industry before that is translated into cash flow to the holding company. The -- the situation from the mid -- the mid -- the mid of the '90s to last -- last -- last year was that the growth of the business in the U.K., not -- not -- not every -- every, but over -- over the years, was such that it needed more capital, and if you allocate capital -- allocate the capital at a good return, that's the right -- that's the right thing to do. To date, U.K. -- the U.K. operations are in the situation that they do not have to be funded by the holding anymore, so the next step is that we are going to pay cash flow out to the holding. That having been said, how -- how's the competition in -- in the U.K., Otto?

Okay. Well, I think this -- the depolarization point is best looked at by -- by looking at the market in different segments. I think for the pensions market, which is our core activity, our expectation is that most advisors who operate in that sector will continue as independent advisors or whole market advisors, and in the short to medium-term won't really be affected very much by the changes that are coming in. But if you look at the areas that will be affected, well, on the one hand, the part of the market which is currently single tied, which is mainly the banks and -- and the tied sales forces, will have the opportunity to open up to broader provided organizations in terms of their -- the products they distribute. And, of course, that creates opportunity for us, and we're -- we're feeling optimistic about the potential that brings us. The other sector that is affected is the protection market, where distributors which have a large level of activity in the mortgage sector are looking at multi-tied models as being more economical for them. But that's a relatively small part of the market in -- in terms of the markets that we focus on.

Should I conclude from those 2 comments, then, that the U.K. is still very much a core part of the business?

Absolutely. Absolutely. That question was raised before a year -- a year ago, and Don Shepard was very clear -- clear on it. The situation in the U.K. in terms -- in terms of returns has -- has improved, so I repeat it, it's core business. And there's time for 1 next question, because some of us have to catch -- to catch planes, and since we had a nice -- nice quarter, I would like to have a nice question.

The next follow-up question comes from Mr. Andrew Ritchie. Please go ahead, sir.

Hi. I just had 2 very -- very simple follow-up questions. First of all, just clarify -- presumably, I mean the actual total debt has actually gone up on the balance sheet. Could you just clarify that the refinancing of the senior debt still has to take place in the fourth quarter? Second question, how do you see yourself -- just a quick comment on the Dutch market, in light of the WFD financial services act, which says it will increase the regulatory scrutiny of the intermediary channel next year? Could you just describe how -- how you see yourselves coping with that, how you think that might impact your business?

Okay, talking about the junior perpetuals, I told you that we used our -- the proceeds to redeem debt. As you know, the first tranche of junior perpetuals was done in July, so that's included in the third quarter, and the second tranche you will see in the fourth -- in the fourth quarter, and also the proceeds of the second tranche will be used to redeem debt further. On the regulatory environment in the -- in the -- in the Netherlands, I think it's nice to close with Edgar Koning

Thank you. There -- there will be major changes in the Dutch market, because of the WFD. It's a new regulation that, as a sector, we've been working on for quite some time, so that gave us the opportunity to prepare well. We are very confident that it will improve the quality of the broker channels, so where they could be any issues in the past, we think the situation will be a -- a lot better. We are preparing for quite some time, we are in the middle of it, also as an owner of the Meeus group. We're on top of it, and we expect that with Meeus and with all our relationships in the market, we will be prepared for the future, where advice will even be more important than it has been in the past. We are big player in the pension area, pensions are getting complex and even more complex in the future with all the new regulations from the government. And we think our broker channel will play a key role in that, and we will support them.

In general, Andrew, if regulations get stricter, it is a -- it is a hassle for the companies to implement, but larger companies have more advantage, relatively in the competition, than smaller companies, and you should take that into your mind as well. So with that, ladies -- ladies and gentlemen, I'd like to close. I -- I thank you very much for your attention and for your attendance, and I hope to hear and see you at -- in New York or in the conference call on the fourth quarter and the year results. Thank you very much. Have a nice weekend.

Thank you, sir. Ladies and gentlemen, this concludes the AEGON first 9 months' results 2004 conference call. Thank you for participating. You may now disconnect.