Aegon Ltd (AEG) 2007 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the AEGON third quarter 2007 results conference call on the 8th of November, 2007. (OPERATOR INSTRUCTIONS) I would now like to hand the conference over to Mr. Don Shepard. Please go ahead, sir.

Thank you very much and thank you for joining us this afternoon and this morning in the U.S. Joining me are Jos Sreppel, our Chief Financial Officer; Darryl Button, CFO of our AEGON Americas; and Eric Goodman, Chief Investment Officer; and also joining us is my colleague Alex Wynaendt, and in light of the other news we issued today, namely my retirement next April and his selection by the Supervisory Board to be AEGON's next Chairman of the Executive Board.

Before we get into the results, let me remind you to please review our disclaimer regarding forward-looking statements. Excuse me, I've got a cold.

Let me get started. During the quarter, we continued to invest in AEGON's growth initiatives. As you know, we're focused on the pension business and are established in emerging markets.

In the Czech Republic, Slovakia, we are now offering voluntary pension funds in addition to pension funds under the mandatory systems. In Romania, the mandatory system will open January 1 and in anticipation of this, we've already begun our campaign with our partner, Banca Transilvania.

In the U.S., you're aware of our acquisition of Merrill Lynch Life's business last August. This will give us a good opportunity to enhance distribution, build some additional scale in variable annuity and Merrill Lynch has a very attractive and effective network of brokers of, I think, 16,000, so it gives us a platform to develop, with them, additional retirement-related products.

In other developments, we received our newest license to operate in the Guangdong Province in China. In Taiwan, we've joined up with Taishin Bank to set up a joint venture to sell life insurance and pensions through their network of 200 branches and in Spain, we've started our new joint venture with Caja Cantabria, which will bring our number of branches that we distribute product through in Spain to 1,800.

Let me quickly run through our results. Underlying performance continues to be strong. Net operating earnings up 2% in euros and on a constant currency basis, it was 7%. On an underlying basis, up 10%, and 15% on a constant currency basis.

The increase in net operating earnings lags the increase in underlying earnings following the exceptional outperformance of our alternative investment strategies in 2006. Having said that, the returns on our alternative investment strategies for the first nine months are still above our long-term expected returns. Net income was up 47% against the comparable period last year, but keep in mind we had a somewhat weak third quarter in '06.

Sales -- they were good in the third quarter. We had a 12% increase across all regions and deposits for our Group increased by 53%. A lot of this was driven by extraordinarily high sales in our institutional business. Because of the financial turmoil, they had some special opportunities to grow their business.

We continue to grow our business profitably, as demonstrated by the increase in VNB, which was up 51%, and by the increase in our internal rate of return, which was 17.8%. A lot of that, of course, was good margins in other countries. It continues to be well above our 11% hurdle rate.

We experienced continued strong growth of our revenue-generating investments. You can see that since the end of 2004 investments have grown 10% annually on a constant-currency basis, but even in euros, it's 9%.

At the end of the third quarter, total revenue generating investments amounted to EUR 374 billion compared to EUR 360 billion at the same time last year. This reflects net growth of our in-force portfolio in both our deposits and premium business, as well as market performance.

Let me talk a little bit about our growth in VNB during the quarter. A great deal of this was driven by good growth in the Americas and the U.K., but also our developing markets continued to perform well and they accounted for 24% of the total VNB for the quarter.

As you're aware, we continue to make better-than-expected progress towards our EUR 1.1 billion 2010 target, which we announced last year, and, as we said, we're in the process of reviewing the target and will update you at our analyst and investor conference in New York later this month.

As I mentioned earlier, our businesses achieved strong sales during the period. New life sales for the Group increased 12% and deposits were up 53. In the Americas, without-- if you exclude the one-time single premium sale that we had in the third quarter last year -- it was a $1 billion BOLI/COlI case -- sales were up considerably on a comparative basis.

In the Netherlands, new life sales were up 36%, driven by exceptional group pension sales. I think this can be seen as-- that improving our service levels and our customer satisfaction.

The U.K. had another strong quarter with good sales of annuities and individual protection, up 56% in the quarter.

Sales in our other countries more than doubled, I think sales in Taiwan being particularly strong. In Central and Eastern Europe, sales growth was supported by rising equity markets, successful distribution initiatives in the broker channel, particularly in Poland.

Taking a look at our deposit business in the Americas, I'll say a word about net deposits from our various business, which is variable and fixed annuities, mutual funds. Compared to the third quarter of 2006, product balances increased 11 (technical difficulty) mainly driven by market (technical difficulty) $6 billion U.S.

I'm not sure what that background noise is. It's not coming from in here, but cut it out, please.

Let's talk a minute about the subprime market in the U.S. During the third quarter, we did not have any impairments in our subprime portfolio. The quality of our investments have resulted in only a couple of downgrades since we did our last press release and those that were downgraded still have a strong rating of at least A-plus. Downgraded securities represent less than 2% of the value of our subprime portfolio, so I think the number was something like 70-80 million.

Looking ahead, we do not expect our cash flows to be impacted in a material way.

Remember last quarter that we announced our intention to purchase EUR 1 billion of AEGON's common shares (technical difficulty) managing our capital more efficiently. To date we've repurchased EUR (technical difficulty) million, representing over 50 million shares. We expect to repurchase the remainder before year end.

I guess if you add up the amounts we paid in terms of cash dividend and repurchased shares, (technical difficulty) returning about EUR 1.9 billion to shareholders in 2007.

So let me conclude by saying this was a solid quarter for AEGON. Increases in sales, deposits and earnings, combined with increases in the value of new business, in turn, demonstrate our continued focus on profitability. We've continued to strengthen (technical difficulty)

Okay. I'm not sure what's that all about.

But we continued to strength our distribution network in the U.S., Asia and in Spain and we're making good progress in expanding our presence in areas that we believe will deliver growth in our core business over the long term, particularly in Central and Eastern Europe.

Finally, before we get to your questions, I'd like to point out that you can still register for our analysts and investor conference in New York, which will give you a good opportunity to meet with management and discuss further our progress.

So let's take questions. Thank you very much.

Thank you, sir. (OPERATOR INSTRUCTIONS) The first question comes from Mr. Michael van Wegen. Please state your company name, followed by your question.

Good afternoon. Mike with Soc Gen. A couple of questions, please.

First of all, on your fixed annuity sales, very strong sales in Q3. I understand there were a couple of specials. Can you indicate what the impact of those specials were? And, linked to the fixed annuity as well, your lapses have come down a bit in Q3 compared with the very high level of Q2. To what extent do you see lapses moving down going forward now that the yield curve is steepening in recent months?

Then the other question I have is on the variable annuity business. In your broker dealer wirehouse channel, you had very good sales in Q2. In the conference call back then I asked is there something special in that and you said no. Now, they're down, which is weaker than the market. So I'm wondering why they're down?

And the last question that I have is, again, on that steepening of the yield curve, you had very good synthetic GICs. Probably even without the specials you had probably also still good fixed annuity sales. What's the outlook for these kind of products going forward now that the yield curve is steepening?

Thank you.

First of all, on the yield curve-- the yield curve steepening very definitely helps our fixed annuity production and probably also impacts the lapse rate. Keep in mind, the rate that we give is a total decrement rate and includes withdrawals and deaths. It's not just lapses. Lapses would be about 7 points lower.

We did have a special with Wachovia. If you'd like the absolute detail on that, I'll have to ask that you call investor relations, because it was a Wachovia we did with a major bank and it was where we both agreed to come up with a product that makes a lot of sense for the time.

So, in terms of variable annuity sales, our traditional-- the main distribution system, so through the wirehouses, with our wholesalers, production was up significantly. It was-- our agent production fell off significantly. We lost two agent-type distributors during the quarter, which negatively impacted variable annuity sales.

If I can get back to that one directly before you answer the rest, if I look at your financial supplement, then I see fee planner, wirehouse, broker/dealer going down from 455 in Q2 to 416. Do you mean-- when you talk about agents, do you talk about the specific line mentioned agency or do you talk about agent in the fee planner business?

Agency.

Okay, because I'm specifically asking about wirehouse and broker/dealer, which is down.

Okay. Can I ask you to come back on that? The-- on that specific number?

I think, Don, what happened is that there has been a--

Yes?

Darryl can talk to this, as well. I think it was discovered that there were some sales were recorded in wirehouse that should have been recorded in banks and that this is the first quarter that you see that reallocated between those two lines. That's why you see that.

It's because of the banks that have a broker/dealer network.

Exactly. That's why you see at the same time, the banks are up a lot and so I think it's just a reallocation of one or two wholesalers. Is that correct, Darryl?

Yes, it is. Michael, this is Darryl in the U.S. I apologize for this. If you look in the stats supplement, you'll see a shift from-- in 2006 from the fee planner channel and wire channel into the banks. That correction that was made was 41 million in the third quarter. The comparable number in the second quarter would have been 35 million.

So if you make that adjustment, I think you'll find that the trend is much flatter in both channels on a quarter-over-quarter basis, sequential. And that is some seasonal trend that we normally see in the third quarter.

Very helpful. Thank you. Okay and the specials is with IR. Okay, thank you very much.

Thank you.

Thank you, sir. The next question comes from Mark Thiele. Please state your company name, followed by your question.

Good afternoon. It's Marc Thiele here from UBS. One question, if I may, on page 10. If I-- if I look at the numbers correctly, on the subprime portfolio we've seen a 230 million devaluation in shareholder stock since the revaluation reserve in the third quarter. Would you expect a similar mark on the back of what happened in the markets, say, over October? Is that a good guidance, or do you think it will be a bigger or smaller number? What do you think might be the impact?

Well, obviously, it's deteriorated further in October.

Especially the floating-- the floating side, where pricing is influenced by the ABX Index. It's predicated to the recent-- came into turmoil. We do not expect that prices for the fixed part are going down that rapidly, but all in all it's safe to say that if we would have to do the revaluation today it would be lower than at September 30th.

And do you have a sort of number for that?

No, we-- no we don't, Marc. We update-- we update internally on a regular basis, but we publish only once a quarter. But your suggestion is probably right.

Can you actually provide us with a split of what is fixed and what's floating?

Sure.

It's in a slide.

In the appendix-- there's an appendix to the slides and it's only slide 15.

Yes. Basically, it's--

Oh, it's all there. Thank you.

--about 1.8 billion floating and 2.5 billion fixed, at book value.

Excellent. Thank you.

Thanks, Marc.

Thank you, sir. The next question comes from Mr. Zenon Voyiatzis. Please state your company name, followed by your question.

Hi. It's Zenon from Merrill Lynch. Good afternoon, everyone.

Good afternoon.

Hi. Three questions, if I may. I'll start with the first one. In the U.S. you've taken a $49 million impairment charge below the line, which, presumably, reflects the performance of your corporate bond portfolio.

Could you give us some more color on that? Can you, perhaps, break it down between what is-- what reflects, perhaps, a pickup in corporate bond defaults and what else is in there?

I guess what I'm trying to do is you've talked in the past that there is a normalized annual run rate of about $250 million that comes there in terms of bond defaults. I just wanted to get a handle as to what we should be looking at in the near term, especially with what's happening in the markets and what you've taken in the third quarter.

Maybe you can answer that before I go to the other questions?

Eric, I'll let you pick up that. I don't even recall the name of that, but I'll let you pick it up.

Yes, we had net impairment for the quarter of $56 million in the U.S. So maybe there were some things going on outside the U.S. I've forgotten the final number, but there was a $27 million impairment on res cap bonds, because we had the intent to sell. We have already sold those and most of the rest of the impairments were some variety of impairments. Actually, there's some equity positions that we had an intent to sell, as opposed to a credit experience. So the main credit impairment was the res cap impairment.

Right. So it's fair to say that bond defaults remain at fairly benign levels and in what you've seen, as well, so far.

Yes, I think that's true.

Okay. The second question, just moving on, there's some speculation that you're looking at the Dutch business of Swiss Life in Holland. And I wouldn't expect you to comment on that, but in looking at your markets and the IRRs you earn on new business per market, that's your lowest-yielding market, 9.8%. You are committed to do bolt-on deals, but wouldn't it be more rational to expect you to be looking at investments in faster-growing higher-yielding assets? What would be the rationale to increase exposure within one of your lowest return markets?

Yes, I-- again, you're right. I won't comment on the specifics, but I will say that we continue to want to grow our pension business overall and that when we have opportunities to grow it at the right price, we would like to do that. I remember that a few years ago you would-- we would all think the same thing about the U.K. market. The U.K. markets turned around. I don't know how soon the Dutch market will turn around and get better, but if we can get a-- to the extent we can grow our Dutch pension business, we should be able to get some costs out and get our IRRs up.

But we will keep our pricing discipline.

Absolutely.

And it'd also be fair to say that any deal you do will have to justify your 11% IRR target?

You're right.

And just the final question, for Alex, I guess congratulations for the selection. Perhaps you can spend a little bit, a few minutes maybe talking through what would be the first areas that you'll be focusing on upon taking over in April and, perhaps, why?

Well, thank you for your congratulations. I've just been appointed. I heard it yesterday evening; I heard it officially today. So, what I actually would like to do is do that a bit more, what you're asking, answering your question a bit more when we see each other, hopefully, we'd see each other in New York at the end of the month.

Okay, fair enough. Thanks.

Thank you, sir. The next question comes from Mark Cathcart. Please state your company name, followed by your question.

Yes, it's Mark Cathcart, Deutsche Bank. I've got a couple of questions. The first one, is have you got potential exposure to bond insurers in the States? My understanding is you've got something like a $200 million direct exposure, but you've also got some billion exposure by a wrap of products. I just wondered if you could say how relaxed you were about that?

And the second question is, if we were to go into a nasty phase of equity markets, where volatility goes up, say, to 30% for a six-month period, then what impact would that have on your VA business in terms of hedging cost or your new business profit? I'm just trying to get a feel of how that might impact your new business profits or even the profits that you're showing through your IFRS?

Right. Good question. Obviously, if volatility goes up, the cost of hedging goes up and it does impact profitability on variable annuities.

Yes, our pricing. But keep in mind that the most part of the variable annuities that are outstanding are hedged already. So that will not be influenced. It's on new production.

Yes, so have you got any idea how much your new business margin would suffer?

It depends on the hedge prices and it depends whether you can charge it to customers or not and that's open, but certainly you need more basis points for hedging points and that means that either the volume of business of that business is going to fall or that-- or that variable annuity gets less momentum in the market because everybody has the same problem.

Right, okay, thanks.

On the wrap bonds in the subprime area, we're at about 1.2 billion, but when-- if we look through into the underlying assets, we would be pretty comfortable with the assets that we have without the insurance.

Yes.

Your number, I think, is pretty close on our direct exposure to the model lines. Eric, do you want to make a comment on that?

Yes. We have 180 million of direct exposure. There are several different insurers, so no significant exposure to any one, as far as we're concerned. And we also own bonds that are insured by monolines. Don referenced specifically the subprime ones, but the first thing to say is that we underwrite each of those bonds as those the monoline insurance didn't exist when we buy them.

Moreover, we've reviewed all those within the last quarter and still believe that the vast majority of those remain investment grade. So even if the monoline insurers weren't there, well, let's say the monoline insurers are there, we expect to make less than $25 million of claims against the monolines in these deals. So insolvency by any one of the monolines wouldn't create-- would create only minor impairments for us.

Yes. Okay and then, just finally, could you make an acquisition for about 1 billion euros and keep your buyback intact?

Yes.

Okay, great. Thanks, Don.

Thanks, Mark.

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

Yes. Yes, hi. It's Nick Holmes at Lehman. I had three questions. The first one is, going back to subprime. I wondered if you could tell us if any of it is marked to model? And, if possible, if you can give us the split by levels one to three? Perhaps you might want to answer that before I move on to the next question.

Nick, we don't mark anything to model. We start with the Lehman Brother Index and then we use other vendors for the rest and if we don't get a price there, we go to the brokers and that's where the majority of it gets done. So it's all third-party priced.

Okay, that's great. That's very clear. The second question is, just coming back to the decrement rate for fixed annuities, I wondered is this still within your assumptions and maybe you could share with us what your assumptions are?

Yes. I think that they are within our assumptions and I-- Darryl, you can jump in and correct me, but I think our assumption for the quarter was like 27 total decrement rate?

Yes, that's right, Don. And it was-- it came in under that, actually, a little better at 24.5. So we're a little ahead of our-- a little ahead of our assumption.

Right. That's very clear. Then final question is, as you said, you had a very good quarter in synthetic GIC. I wondered how much of a one-off do you think this is, or do you think market conditions will continue to favor this type of product?

Nick, I wouldn't expect as strong a quarter in the fourth quarter in our institutional business as we had in the third quarter.

Okay. That's great. Thank you very much, indeed.

Thank you.

Thank you, sir. The next question comes from Mr. Jeffrey Talbert. Please state your company name, followed by your question.

Hi, good afternoon. Wesley Capital, here in the United States.

I just want to follow up on the last gentleman's question. Am I correct that with reference to subprime securities, mostly U.S., I suppose, that you're making those based on broker bids. Was that correct?

Well, that's the-- that's the last place we would go. Again, we start with the Lehman index and then we use, what is it, Data-- what's the name of the--

Vendors.

Different vendors for pricing and then our last would be on the broker bids.

Got it. And when you say the Lehman index, could you just tell me what index you're referring to, please?

That'd be the Lehman Asset-Backed Index.

Okay. The reason I'm asking is, it looks like in reference, again, back to page ten, am I correct that in general that portfolio is being held at about 95, dollar price, give or take.

Yes.

Yes. That's correct.

What I'm just trying to do is I'm trying to reconcile that and if you can help, this would really be much appreciated. If you look at the ABX indices for, let's say, the 2006 AAAs, 2006-2s, the AAAs are trading right now at about 86, the AAs at about 62. Similar sorts of numbers if you look at the '07s and I'm just trying to reconcile the 95s back to those indices.

Let me start by saying that we don't own any of the securities in the ABX Index, but, Eric, will you pick up on that, please?

And the other part of the question-- the other part of the question, while you answering it, is that the indices are first liens and if you could try and give me a breakdown on the mortgages that are backing your securities as between first and second?

Okay, Eric.

When you say the indices are first lien--

In other words, they're backed by subprime, first lien subprime paper. And I may be wrong, my understand was that of the subprimes that you have, you've got about $4.2 billion, at least as of the last report, of subprime HELOC, second mortgages.

No, no. I don't know that at all. We don't have that much. But let me take your first question about the breakdown--

Sure. Sure.

--and reconciliation with the ABX.

Sure.

The ABX -- first of all, I think you quoted prices from recent ABX movements. Insofar as these third-party pricing services are incorporating some reference to the ABX Index, that would have been as of September 30th, which weren't the prices you just quoted, I don't think.

That is exactly correct.

And so, at any rate, the indices-- we're matching CUSIP to CUSIP. I don't know if implied in your question was that somehow these indices are inappropriate for the bonds we hold. We're referencing CUSIPs within either the index or provided by these third-party vendors and using their market quotes.

Now, whether-- whether you believe the ABX movements suggest that they're mispricing is not something I can really comment on, but we're depending on these third-party pricers to give us more or less accurate quotes. That being said, the market is very disrupted. There aren't a lot of trades going on, so it is difficult to identify good market values in this kind of market.

So, moving on to your second lien question, we have-- we have about $227 million of second-lien subprime-- second-lien mortgages that are not insured by a financial guarantor. And these are high quality and we expect no impairments. Another $671 million also benefits from an insurance wrap from one of the financial guarantors. And, as I said before, we've reviewed the underlying deals using updated assumptions and don't believe that we'll need to make any claims against any of the guarantors for those deals.

Got it. Okay and so those are actually both extremely helpful answers. The 227 and the 671, then, are both, I guess, subsets of what was on page 18 of the presentation that the company made back in May of '07 where on that page you had about $4.217 billion of home equity loans? Those mortgages--

Those are contained within our home equity numbers. I know-- because a lot of those loans are technically prime. Other people may not include them in their subprime exposure, but we do, because we think they're-- they have some similar dynamics.

Got you. Thank you very, very much. Those are both helpful answers and good luck in the coming quarter.

Thank you.

Thank you.

Thank you, sir. The next question comes from Mr. Damien Regent. Please state your company name, followed by your question. Mr. Regent, your line is in talk.

Yes, hello?

Hi.

Yes, hi. Can you hear me?

Yes.

Yes, hi, sorry. Yes, Damien Regent at UBS (inaudible). I think your annual report shows that you have commercial paper outstanding and that you used it in the U.S. in the context of the spread investment business. And I'd be curious to get a bit more color exactly on what sort of-- or what amount of commercial paper you may have at the moment, to what extent the disruption we've seen since August may have impacted this part of your business.

Eric or Darryl?

No, I'll take that. We have-- the parts of the commercial paper market that have been disrupted, I guess, are the ones associated with SIVs and I'm looking for my data right now. The-- we have pretty limited exposure to commercial paper issued by SIV. We don't own any capital or mezzanine notes.

We do own about $229 million of asset-backed commercial paper issued by SIVs. Of this amount, $130 is rated A1P1 and we fully expect to recover it all. About $90 million is A2-not prime, but our analysis says full recovery is a very likely scenario. We are likely-- there's a small position we're likely to take a $3 million hit on. So we think we're in pretty good shape.

And in your position as issuer of commercial paper, can I assume that there's no-- there's no problem on that side? I mean, you don't seem to see that--

Oh, we're talking about-- we're talking about the program at IMD?

Exactly, the CP you issue yourself.

Darryl, maybe you have some commentary on that. I think they've wound that down quite a bit. I'm not sure they have a lot outstanding at this point.

Yes, that's true, Damien. We did have a little trouble rolling some of the CP behind the funding agreement back to CP conduits through our institutional group, so we let those balances wind down. It was in the context of the overall liquidity management that we had going on in the third quarter, and really no issues, but we have lower balances there and will probably have lower balances going forward for a while.

Okay, fantastic. Thank you.

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

Hi. It's Andy Hughes from JPMorgan. Sorry, I thought I was going to jump the queue there a minute. A quick question, really, on the VNB numbers. Obviously, the credit environment is pretty tough at the moment and I was just wondering if you at all had reviewed the default assumption backing your VNB assumptions at all? And-- or whether that's something you're planning to do at the year end?

We use-- we use our pricing default rate, which is, on average, 25 basis points for the whole portfolio for VNB. In the U.S., anyway, that's 25 basis points and if it gets worse than that, we'll take the hit to VNB at the time. But right now, the expected defaults that are in our VNB numbers are higher than we're achieving, than we're seeing.

Yes. And the other question I had was in relation to the market value movement in terms of the revaluation reserve. I noticed that the movement in the revaluation reserve in the quarter was only EUR 200 million negative in total. Can you just give us some idea about what's going on underneath that?

That's-- the value underneath that? I'm not sure what you're asking.

Is it partly-- a sort of-- a movement with interest rates and default rates at the same time or something?

It's interest rates and widening spreads.

And it's 120 million in equities, is all.

Right.

So the movement is explained also by a movement in the equity reserves. In the bond reserves, we saw 200 million. It's-- primarily it's subprime. And you see, if you go back year-over-year you see it's up 1.4 billion and it's mostly interest rates.

Okay, thank you.

Thank you. (OPERATOR INSTRUCTIONS) The next question is from Mr. Bruno Paulson. Please state your company name, followed by your question.

Hi, this is Bruno Paulson from Sanford Bernstein. A few questions.

Firstly, on the Dutch business, looking at the underlying-- underlying IFRS operating earnings, they seem to bounce around quite a lot. Clearly, in Q3 last year, there was the 29 million, I presume in the pension and asset million line securitization. But, for instance, the life line was only 28 million in the first quarter and it's been roughly twice that since then and the pension and asset management line was strong in Q1-- in Q4 last year and Q1.

I was wondering, are the current sort of profits in Q3 normal or is there funnies going on now or have there been those last few quarters?

Well, if you-- if you go to the underlying earnings, you get rid of the swing that you have in the fair value items.

Yes, the numbers I'm quoting, I think, were the ones-- those were the underlying ones.

Your 29 million in quarter three was in the one off in securitization. And if you then compare the numbers, I would say that the Dutch organization is at the low side and the reason is that their investment income was a little bit of a disappointment.

Right. Thank you very much. Moving on to the other countries, that showed a sharp rise and it's the life element. One thought is whether you could contemplate in the future, now it's getting to significant numbers, a split by country and which countries. And the life line trebled to EUR 30 million. How much of this is one-off or is this getting towards a new sort of higher level as the investments over the last few years pay off?

I think, Bruno, two things. One, that's a real number. And there's two things happening. Taiwan's unit link business continues to grow strong and in Slovakia, where, during the first three years we took all of the commissions directly to-- as an expense, after we have an operation for three years, we start setting up a DAC asset. So there's a change in the numbers in Slovakia, as well. Alex, do you want to add--?

But you do that mainly in the pension line right?

Right. Investment income, Alex, go ahead.

Yes, no just, I think, one item is we had a very strong quarter in investment income in Q3 this year in Taiwan. And it had to do with some seasonal effect in the sense that certain dividends happened to be paid in the third quarter and we don't expect the same level of investment income in the fourth quarter.

On that and going back-- thank you very much. And on that, going back to the Netherlands, do you, like ING, see in the Netherlands a seasonal Q2 dividend effect?

Yes, to some extent, although we have lowered our exposure to equities over the past year, so the effect of that was-- will be probably more limited.

And one final question, in the U.K. the annuity sales, I think, rose by a pretty large 50% in one quarter. I was wondering how you did that?

A combination of individual annuities, which we have been expanding our business on the basis of strong first and second quarters, combined with a couple of larger deals which are more of a one-off character.

But they go through the individual line rather than the bulk line?

Yes, bulk is in bulk and individual is in individual and I think that it's what Alex said, that it's a reflection of the fact that we've been going from up until the end of '05 we started, really, to market outside of our own book. We're seeing some success in doing that and sequentially you will see, if you look back in the financial supplement, quarter by quarter you'll see annuity sales rising and that is a result of the fact that we are marketing outside of our existing book.

Yes, I've noticed that and I note just it was quite a sharp rise from 30 million to 47 million in a quarter. That was all. That looked quite striking.

We have been able to increase the ratio of all customers--

That you hang on to.

--in all pension funds to sell our own annuities, so that has been-- has had a compounded effect.

Okay, thanks very much.

Thanks, Bruno.

Thank you. The last question comes from Mr. Chris Hitchings. Please state your company name, followed by your question.

Hi. It's Chris Hitchings from KBW. A couple of questions. In the Netherlands, I think from this quarter you're consolidating Optas. You've also, again this quarter, had a strong sales in group pensions and weaker sales in individual and your IRR has gone down third quarter on second quarter. Can-- are these facts, in any way, related and can you, perhaps, take us through how they're related?

And the second question relates to, if I can find it, yes, the synthetic GICs that you sold in the third quarter, you seemed quite definitive that this was exceptional and won't be repeated in the fourth quarter, almost whatever happens. Can you-- it sounds a little bit like you don't want it to be repeated. What are the nature of these contracts? What are the issues and what are the margins that you're earning on them? Can you take us through a little bit of that? Or, perhaps, I'm being just a bit too suspicious. Thanks.

Chris, on the Netherlands, yes, there's a correlation between the one and the other. Optas has no correlation, because we did the Optas deal and we calculated the Optas above the 11%, so it has nothing to do with the VNB or IRR for the third quarter. And the contribution of Optas was there, but is limited in the quarter.

On the IRR for the Netherlands, we have more than once said that it is a struggle in the Netherlands in group pensions, if you do new deals, to arrive at the 11%.

And in the second quarter you saw that they passed the 11% hurdle rate and that was because we did more business in our TKP business than in the AEGON pension business. And traditionally, TKP business is a kind of fee business, so the capital allocation to that business is pretty low and mostly, if you negotiate well, you get a high IRR. That's what you saw in the second quarter.

In the third quarter, the product mix was different. There was more impact on normal group pension and less on those TKP business. In the group pension, IRRs are lower, so the IRR for the third quarter is around 10.

For the total nine months or year to date, we are at 11 and we hope to stay there for the remainder of the year.

Darryl, would you pick up the IMD question?

Yes, sure can. Chris, it's Darryl in the U.S. First off, we had about-- we had $6 billion of institutional fee-based production in the third quarter. Only $2.1 billion of that was synthetic GICs. The other $3.9 billion was from our structured products group.

Specifically, on the synthetic GIC, it's institutional business. It's lumpy, period to period, but I think more the comment around not expecting to recur going forward was probably more geared to the structured products side where we took advantage of some of the spreads widening in the third quarter and some of the market dislocation.

On the synthetic GICs themselves, fees range anywhere from 6 to 10 basis points. It's basically book-value wrap on underlying high-grade corporate credit.

Yes. Hello? Just can I come back on that? Firstly, just on the U.S. business, again, spreads have widened further in the fourth quarter. Are there not opportunities to make-- to do more in the fourth quarter or have you decided that you've done enough of that? That was really the point I was trying to make.

And back on the Dutch business, my understanding was that having sorted out the financing of the capital of the Dutch business, then the problem of low IRRs on new business was, to some extent, going away. Is that not the case?

No, that's not the case. It's a highly competitive market and it's a struggle in group pensions to make the 11% on a pre-calculated basis and we know that. The mix of the business in the Netherlands would hopefully take care of the hurdle rate for the Netherlands at 11%, but group pension business will always be at the low side, unless the competition (inaudible).

And just on the-- just on Optas, Optas, of course, doesn't itself comprise new business, but presumably it won't itself produce new business now that it's part of the Group. Will it?

Optas is not producing much new-- much new business. It's a pension fund that we took over and, of course, some of the participants will do business with us and they have-- they have some people in the distribution that may bring us some business. But Optas is predominantly a nice deal at a more-than-satisfactory return.

And, Chris, on your comment or your question on the structured products. The dislocation has moved on into the fourth quarter and there are some opportunities there. So we're probably a little cautious with our statements there. But I guess what I would offer is that Jackie Griffin will be in New York at the end of the month at our analysts day and you can catch her there.

Okay. And thanks much.

Thank you.

Thank you, sir. We have a question from Mr. Farooq Hanif. Please state your company name, followed by your question.

Hello, there. This is Farooq Hanif from Morgan Stanley. Sorry just to slip in with a last question. Just actually three very brief questions.

Firstly, you mentioned these funding agreements, which are backed by commercial paper and said that you wound them down. I'm just trying to understand what you mean by that, exactly. So were the assets that you were investing in them of the same duration as the commercial paper?

Question number two is, what is happening in the medium-term note market? So you're obviously borrowing money in the medium-term note market and backing these funding agreements. My understanding was that was also being affected by the current turmoil.

And the last question is, what-- can you give us a brief indication of the vintages that you have in your subprime portfolio?

Darryl, do you want to take the first two?

Yes. On the institutional business-- actually, I'll start with the second one first, the medium-term note program. That really has not been that impacted by the market turmoil and, actually, we were able to tap the markets for some longer-term funding there.

What has been affected is the CP-backed programs and those are conduits where CP is issued and then we issue funding agreements into those conduits. And those are the ones where with the CP turmoil that happened in the third quarter, we let those funding balances roll down and we replaced some of that funding with MTN issuance, as well as some municipal GIC issuance.

Am I right in thinking that's about EUR 3 billion or so?

I don't have the actual split in front of me. We'll have to get back to you on that one.

Okay. And the vintages, please? Do you have a split of what's 2006 and 2007, in particular?

Right. About-- of our total at book value, about 27% is '07, 24% '06, 18% '05, 7% '04, about 17% '03 and then the balance is earlier years.

That's really helpful. Thank you.

Thank you. I think we have time for one more question. If not, thank you all very much. Appreciate it.

Thank you very much, sir. This concludes the AEGON third quarter 2007 results conference call. Thank you for your participation. You may now disconnect your lines.