Willem van den Berg - Alexander Rijn Wynaendts - Chairman of the Management Board and Chief Executive Officer Darryl D. Button - Chief Financial Officer and Member of the Management Board.

David T.

Andrich - Morgan Stanley, Research Division Ashik Musaddi - JP Morgan Chase & Co, Research Division William Elderkin - Goldman Sachs Group Inc., Research Division Albert Ploegh - ING Groep N.V., Research Division Nick Holmes - Societe Generale Cross Asset Research Farooq Hanif - Citigroup Inc, Research Division Gordon Aitken - RBC Capital Markets, LLC, Research Division Francois Boissin - Exane BNP Paribas, Research Division Jan Willem Knoll - ABN AMRO Bank N.V., Research Division Steven Haywood - HSBC, Research Division.

Good day, and welcome to the Aegon Q3 Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Willem van den Berg. Please go ahead, sir..

Thank you, operator. Good morning, and thank you for joining us for this conference call on Aegon's third quarter 2014 results. As always, we will keep today's presentation short, leaving plenty of time to address your questions.

We would appreciate it if you take a moment to review our disclaimer on forward-looking statements, which is at the back of this presentation. Our CEO, Alex Wynaendts, will provide an overview of this quarter's performance and will then be joined by our CFO, Darryl Button, to answer your questions. I'll now hand it over to Alex..

Good morning, everyone. Let me begin by saying that this was clearly a quarter of mixed results. Earnings this quarter have been impacted significantly by the changes we have made to our assumptions and the enhancements to our models, something I will address in more detail very shortly.

Excluding these onetime items, underlying earnings were EUR 512 million, which is in line with what we would normally expect. And at the same time, we are pleased with strong profitable sales performance over the quarter and the continued execution of our strategy, including the recently announced sale of our business in Canada.

Cash flows were robust, taking into account the higher new business strain related to the exceptionally large pension contract win in The Netherlands. There was also a onetime impact on our capital position in The Netherlands following a valuation methodology change for our Dutch mortgage portfolio. I will also return to this in a moment.

Let's turn to Slide 3, where we have provided you with a comprehensive overview of the outcome of our assumption review and model updates. I am clearly disappointed by the outcome of our annual assumption review. But on that note, let me say that this is a core part of what we do. We make assumptions.

We validate them through our experience and adjust them when necessary. And that is exactly what we have done this quarter. As we flagged earlier, we have updated our mortality assumptions and strengthened the reserves in the U.S.

This was a result of emerging experience, supplemented by industry studies and relates mostly to the older-age segment, ages of 85 and above. And this is a group for which the industry has limited experience.

On the contrary, our assumptions related to policy behavior for our variable annuity book have been too conservative, and these were also updated to better reflect actual experience. The combined impact of assumption changes on underlying earnings was EUR 138 million, as you can see in the table.

Also included this quarter is the result of several model enhancements. Over the past year, we have intensified our efforts to review and enhance our models. We've made many different products and, therefore, models, so this is a very significant undertaking. More than 60 high-priority models have now been validated and, where necessary, adjusted.

The impact here was EUR 82 million on underlying earnings and EUR 151 million on income before tax. We have also improved our processes and governance related to the ongoing maintenance of our models.

In addition to the onetime impact shown in the table, the assumption changes and model updates will have a recurring negative impact on underlying earnings before tax in our U.S. Life and Protection business of approximately EUR 20 million per quarter.

This is significant, but I can assure you that we will be looking at all options available to mitigate the impact as much as possible. Let me now turn to capital on Slide 4. We have adjusted the Level 3 fair valuation methodology for our mortgage portfolio in The Netherlands to use more market-observable data.

As a result, our IGD ratio in The Netherlands stands at 220% and the group IGD ratio now stands at 202%. This is a valuation methodology change only and does not change our view of this asset class or of our Dutch mortgage business.

Therefore, we expect the immediate capital impact to be recovered through cash flows over the lifetime of the mortgage portfolio. The U.K. Pillar 1 ratio was stable and remains at the target level.

Here, though, I would like to point out that uncertainties will remain until the recently announced DWP regulatory changes are fully implemented in the coming years. And finally, in the U.S., our capital position is healthy at $1.1 billion over the S&P AA level.

Total sales were up 38% this quarter, which is a reflection of the continued strength of our franchise across our markets. Slide 5 shows the strong growth of our life and accident and health sales. Life sales were higher across all markets, and the highlight this quarter was securing the largest-ever pension buyout deal in The Netherlands.

In the U.S., we continue to see higher demand for our universal life products, in particular, indexed universal life. Growth in accident and health sales has been driven by the addition of new distribution partners, successful worksite marketing and additional demand for our products created by the introduction of the Affordable Care Act in the U.S.

Now turning to Slide 6. Strong momentum in deposits growth continued this quarter with record gross deposits of over EUR 15 billion. Aegon Asset Management had a very strong quarter with new mandate wins in each of its markets.

Third-party inflows more than tripled to EUR 7 billion, driven, in part, by growing demand for Dutch mortgage funds, which has now assets of over EUR 2 billion. U.S. variable annuities had record deposits both on a gross and a net basis. Deposits remained strong in our U.S.

pensions business despite fewer takeovers as we continue to see higher recurring deposits. Other parts of our business are also contributing to deposit growth. Assets on our U.K. platform increased 20% to GBP 2.4 billion, and the platform continues to be one of the fastest-growing in the market.

In The Netherlands, our online bank, Knab, is also growing. This is a great example of how we are using technology to get closer to our customers and provide the products and services they look for. It took some time to generate momentum.

However, since we have repositioned the business earlier this year, the number of customers has more than doubled with assets now stand at over EUR 800 million. So in summary, while I'm not pleased with the negative impacts on this quarter's earnings, I'm proud of the many ways in which we are successfully executing on our strategy.

Sales are higher across almost every part of our business, underlining the successful expansion of our franchise. We announced the sale of our business in Canada, and we continue to work hard towards repositioning our company successfully in the digital world.

And therefore, I am confident that Aegon is well positioned to not only manage future challenges, but also to take advantage of the many opportunities we see across our businesses. Darryl and I are now happy to take your questions, and I'm sure you will have a few. Thank you..

[Operator Instructions] Questions will be taken from analysts and investors first, followed by media. [Operator Instructions] And we will take our first question from David Andrich from Morgan Stanley..

My first question is just around the model assumption changes. And I was just wondering, going forward now, what kind of, I guess, stricter controls have you put in place? And how much more consistent are the assumptions across your different business units? And then second of all, I was just wondering, in terms of the U.K.

business, you cite that the cash flow generation is challenged due to ongoing regulatory changes.

I was just wondering, has something changed since Q2? Or is this more just along the lines of the continued transition of the business in the U.K.?.

Hi, David. It's Darryl. I'm going to take your first question just on the model updates and assumption changes. First of all, on the assumption changes, the biggest change we did have is the one we flagged back in the second quarter on the mortality.

This is really an area where industry data has been limited in this ultra-older-age category, our own data as well. But we've seen enough combination of our data and industry data that suggested that we needed to make this change. And so we've done that.

I don't think that we're going to be needing to change the mortality assumptions again anytime soon, so I think we've dealt with that. Not all the assumption changes were negative. We had a significant positive on the variable annuity on the lapsation as well. So that's part of our annual update.

On the model updates, I would say that we have had an intensified effort over the last year to really go through and scrub all of our high-priority models, and Alex mentioned that earlier. So I certainly hope that this lends itself to fewer adjustments going forward.

As part of that process, I can also say that we've also strengthened our own internal governance for ongoing review and maintenance of these models going forward. So I hope that also contributes to a much lower likelihood of these assumption updates in the future..

David, on the U.K., this is a continuation of the transition in which we are in. It's a transition, as you know, from a business model, but it's also the changes -- the regulatory changes, which are affecting our business and which still have to be implemented. I can just name a few of them.

The implementation of DWP, as you know, it's not only a price cap which has been included, but probably a more important impact could be the elimination of the difference between what we charge active members, members we -- that contribute to a pension plan, and members that don't. So all of that has to be worked out.

That also requires we engage with each of our customers individually because these are large customers for which we have a contract with their participants. You're well aware of the annuity changes. There's been recently another change in taxes for individuals.

So all these changes all create uncertainty, and I just wanted to make sure we understand that we are working hard towards repositioning our business, that we are executing on what we committed to execute on, but we are in an environment that has a lot of changes, which also means that it requires a lot of attention of our people to address those change and implement all these regulatory changes, of which some are still not even clear how they need to be implemented.

So it's a continuation of this transition phase..

Okay. So no change in terms of the expected cash flow from the U.K.

business going forward then?.

Well, we have given you a range, which we see as a target for the U.K. I've been very clear that we are looking at the lower end of the range, and I believe that these changes will make it probably even more challenging than it was before these regulatory changes were in place to achieve that target..

And we will now take our next question from Ashik Musaddi from JPMorgan..

So 3 questions.

First of all, can you give a bit more color on what this EUR 20 million per quarter is? And how do you arrive at this number? Secondly, I mean, it looks like this -- all this assumption changes and model updates have no impact on your cash flows, i.e., is it fair to say that this is purely an IFRS accounting thing and has no impact on the capital position on a local basis, i.e., you don't have any concerns from the upstreaming dividend from U.S.

or Netherlands because of all these accounting assumption changes and model updates? And thirdly, basically, can you give us a bit more color about this model changes? How much of that is driven by low interest rate? How much of that is driven by underwriting? So a bit more thought on that would be really appreciated..

Hi, Ashik. It's Darryl. I'm going to try and hit those questions, all 3 of them. On the EUR 20 million per quarter, how is that arrived at? Basically, when you're strengthening the assumptions, it's really strengthening the assumptions that goes to both the reserves and the DAC in combination.

Effectively, in this particular case, it was strengthening reserves. What it does is it changes the trajectory of the reserve build over time. So there's a onetime catch-up on the reserves, and that's what you've seen through the P&L period going forward.

There's also a additional premium that has to now be set aside to increase the reserves further, so the trajectory of the reserve build is increased, and that's what drives the EUR 20 million a quarter going into the future. It's actually -- it is not an IFRS only. There will also be a regulatory cash flow impact out of the U.S. as well.

Expect that to be in the neighborhood of maybe even slightly larger than this EUR 20 million on regulatory earnings in the U.S. So that will impact their operational free cash flow going forward. The third question, I must admit, I didn't....

Can we give some color on the model changes?.

Oh, the model -- yes, the model changes themselves..

Interest rate plus....

Yes. So you can see that there were a collection of different model changes, and you can see that on the slide presentation. Generally, it falls in the category of using -- really upgrading and making our models more sophisticated on the life side, increasing the model points that we now model.

So a lot of the life assumption changes was getting better premium persistency assumptions down to lower cohorts, which means basically getting more granular data points down into the models, which would've been difficult in the past due to technology restrictions.

But as we continue to upgrade technology, and -- we're able to basically get that finer granularity down into the model points. Same thing goes on the variable annuity side as well, an update to the withdrawal assumptions and able to take that down into a finer cohort of individuals and data points. Those are really the nature of the changes.

The one on the fair value side related to getting a better projected -- projection of our future hedging costs down into the model. So they all fall in that generic camp of more sophisticated, newer-technology model enhancements..

Yes. But that's really very clear, but like, just 1 follow-up on that.

The EUR 300 million of the total impact you flagged in third quarter itself, how much of that is actually going to cash, i.e., how much of that will weaken your cash position? And just a follow-up one from that simple question again is, how should we think about the trajectory of cash flows? Because if I remember correctly, you mentioned that from U.S., you should get roughly, give or take, EUR 900 million dividend to holding company.

From Netherlands, I think it's around EUR 300 million.

So what changes today from these -- on these 2 numbers specifically?.

Yes, Ashik. There's actually very limited impact to the capital position in the U.S. from this change today. I'd caveat that slightly, in that at the end of the year, we'll do our annual cash flow testing work at the end of the year, and there may be some impact on that.

But for the most part, there's really no cash or regulatory impact from these IFRS changes today.

However, the lower mortality and the adverse part of the assumptions will obviously bear through regulatory earnings as that experience emerges into the future, which is why the regulatory earnings impact will be slightly higher than the IFRS earnings impact going forward..

And we will now take our next question from William Elderkin from Goldman Sachs..

I just got 2 questions left, one following up from the previous one. The effects then [ph], and if we're looking at U.S. underlying capital generation, we should be lowering that by -- my expectations, by around $100 million a year, if I understood the answer to the previous question correctly.

And then secondly, just on long-term care, a number of your competitors had a few problems there. I was just wondering if you could give us an update as to your position and then whether there's anything there we need to be worrying about from your side..

Yes. William, this is Darryl. I'm going to take those questions. Yes, your math is right on the U.S. adjustment to the operating free cash flows. That's a pretty good estimate. Long-term care, we had a small -- so as part of our assumption changes, there was a small hit.

It was about EUR 16 million, 1-6 million, so that's pretty small number in the grand scheme of things in terms of updating the assumptions. I will say, as part of the actual quarter performance, we did flag that it was not a strong quarter from a mortality and morbidity perspective, and that was around EUR 60 million total.

About half of that was the morbidity experience, EUR 30 million. That was related to long-term care. And we have seen some higher claims this quarter, and we strengthened the -- we -- effectively, we strengthened the IBNR reserve, which is setting aside what we think we need to set aside for future claims.

So that is impacting the Q3 results by the EUR 30 million, plus the additional EUR 16 million on the assumption change this quarter. Otherwise, we're comfortable with our reserves, and I don't foresee anything different than that..

We will now take our next question from Albert Ploegh from ING Bank..

The first one is on the Dutch mortgage impact, so the change in -- basically in the fair value accounting thereof. What are the implications for that also on the cash flows going forward? It seems actually they probably will move up a little as a result.

And will it also impact maybe your strategy to invest in Dutch mortgages going forward, and whether there's potentially any impact -- or any difference on the impact between Solvency I and Solvency II, a word on that? Then the second question is on the business review of the lower-performance -- performing assets on any specific fronts.

Is there anything to mention on the progress on that specific file? [indiscernible] pointing towards REAAL.

Is there anything you can say on that?.

Albert, I must admit, the phone cut out after your second question.

Could you repeat your third question?.

Oh, sorry. The third question is on interest in the Dutch consolidation to participate, and your local competitor made clear statements last week. So any color from your end would be welcomed as well..

Okay. I'll jump in with the first ones. On the Dutch mortgages, yes, so we have updated our valuation. You're correct, actually, it will have a higher cash flow going forward, so it's really a point-in-time valuation change. We really feel very strongly about the ultimate performance of this asset class and the underlying asset cash flows.

So any valuation change that we make today will come back into capital and cash flows into the future. So you're correct on that.

In terms of impacting our investment strategy into Dutch mortgages, we actually have gotten to the point where we are really, from a concentration risk perspective, filling up on our capacity on our own balance sheet for Dutch mortgages.

So starting this quarter, in fact, we've started diverting more of our Dutch mortgage production into our fund, our fee business, so the Asset Management fund that we've opened up to sell third party. So that's where I predict more of our Dutch mortgage production to go into the future.

Obviously, that's a little more lower margin for us going forward, but it comes back to the concentration that we have to manage on our own balance sheet..

Yes. Darryl, I'll take the 2 other questions. In terms of the business reviews, I was -- obviously, we were very pleased to announce the sale of Transamerica in Canada.

As you have probably guessed, this has been quite a long process, a process where we have really looked at all the different options and tried to ensure that we would get the best possible outcome for shareholders. And the same applies to France. Again, here, we are reviewing options. We've committed to give you clarity by the end of the year.

We're looking at the various options we have, all of it with the same objective of optimizing the returns for our shareholders. And as you can imagine, once you -- if you're in a hurry, that's usually not the best way of optimizing returns. So we will do what is right here. Your last question was about the consolidation.

I will repeat what I said all along, Aegon is focused on organic growth. In The Netherlands, we have a strong position, and we've made that very clear. We've not participated in the process around REAAL, and we are not intending to do anything different there.

If -- when you look at our organic growth in The Netherlands, you can see we're well positioned. We're particularly well positioned in the pension business, where we were able to secure the largest-ever deal.

It was not only won on the fact that we have a good proposition, but also because we were able to provide the participants of the plan the kinds of products and service they were looking for. And that has made a difference. So that is really at the heart of our strategy, growing organically. And that applies to our businesses across the world..

And we will now take our next question from Nick Holmes from Societe Generale..

Two more questions on the mortality review, please.

The first one is, can you give us more color on the level of confidence that you have in your new assumptions? And I'm thinking things like, how do you compare with the industry? And how much scope have you built into the assumptions for further deterioration in mortality? And then secondly, you mentioned options to mitigate the EUR 20 million recurring impact.

I wondered what those might be, and, in particular, I wondered is longevity something which might be a natural hedge to what you've got on the mortality..

Hey, Nick. It's Darryl. Yes. So on the mortality assumptions, I think now we're -- we compare very well and very conservatively, I think, on the older-age mortality issue. This is something I've mentioned in the past. The industry data has been sparse but is now starting to emerge.

I've seen enough benchmarking data to show me that this is not just a Transamerica issue, that this is an industry issue. So I think you're going to hear more on that as we go forward, but I feel very comfortable now that we made the change. We've made a significant change and to a point where we're very comfortable with our assumptions.

On your second part related to longevity, the only thing I would maybe mention there is that we have been, I think, very upfront that we have, with our hedging programs here in The Netherlands, the risk that really we're left with that dominates the balance sheet becomes longevity risk.

And so we're very actively looking to pursue longevity hedge transactions and move those into the capital markets, and we've executed on a couple of those deals already. And we continue to work on that, and you'll see more from us on that front..

Great. I just wanted to come back to the options to mitigate the EUR 20 million. I think, Alex, you mentioned that. I just wondered what you were thinking of..

Yes. Nick, obviously, we always look at our business, the ways of optimizing. And what we're saying here is we're going to have to look again as to where are there options to further improve efficiency and looking at our big back book, in terms of expenses and margins. So it's not something specific that I can share with you at this point in time.

This is at the end of the year. It's a process around the budget, and you can -- I just want to make sure you understand that both Darryl and I are going to make sure that we do everything here to mitigate as much as possible that impact..

So sorry to labor this point, but just very finally, does that mean there might be scope to off-load some of this business, that kind of thing, that you're looking at?.

Again, Nick, at this point in time, I can say we will be looking at all options to optimize our position here. And clearly -- and I've said that I am disappointed by the outcome. I'm disappointed by the onetime hit, but obviously, equally disappointed by the fact that it has an impact going forward.

So we'll be looking at all ways optimizing our position here..

And we will now take our next question from Farooq Hanif from Citi..

I want to just go over some topics again, if you don't mind. Firstly, on the RMBS assumption change, I would have thought that the reserve -- I mean, the additional sort of the valuation hit that you've taken for that could come back quite quickly into capital, given the duration of the book.

So could you give an -- us an idea quantitatively of how much of the -- I think, the EUR 500 million or so is going to come back into cash every year as a result of that? That's question one. Question two is on the upstream. I know it's early to comment on Q4 and next year, but it seems to me that you've got a very good surplus generation in the U.S.

and obviously a hit to IGD in The Netherlands. So I'm just kind of wondering what -- whether this is going to really change your policy on the payout or the level of upstream from these 2 businesses. Could it have an impact? And lastly, you talked about there being no capital impact from the assumption changes.

But theoretically speaking, if we had a Solvency II number, which I know we don't have, but if we had one, would there be any impact on Solvency II from any of the changes you've made?.

Hi, Farooq. It's Darryl. Let me try and address those questions. On the first one -- on your first one, yes, just basically divide by 7 and gives you a rough feel for how much that cash flow will come back in, so that gets you to about EUR 70 million a year going forward on a EUR 500 million adjustment. So I think that's a reasonable number there.

In terms of upstreaming, yes, so we've talked about the U.S. And obviously, the excess capital position in the U.S. remains very robust. And the U.S. is -- we are in the fortunate position that the U.S. cash flow is not impacted in any way by new regulatory standards, i.e., à la Solvency II. So I expect the U.S.

cash flow will -- as we've suggested throughout the year, will come in the second half of the year -- sorry, in the fourth quarter. And The Netherlands, I think it's very much a fourth quarter decision. And we're having conversations, obviously, and we'll be having conversations with the regulator in the fourth quarter.

Obviously, the Solvency I IGD ratios are very strong, but we continue to prepare ourselves and implement -- and get ready for implementation on Solvency II. So that's very much going to be a fourth quarter discussion and conversation in The Netherlands.

On the third question?.

It was Solvency II impact of the assumption changes, yes..

Oh, yes. Yes, a very hypothetical question, I guess.

So -- but I think it's fair to say, if you look at the upfront impact that we've had on the assumption changes this quarter, and you combine it with the quarterly impact that we've talked about going forward, I think that gets maybe a little bit of a feel of what might be on more of an upfront basis within a Solvency II context.

That's probably about the best I can do. We're obviously not running Solvency II numbers on our U.S. business so....

Oh, yes, of course, yes, so it basically has no impact. Of course. I wasn't thinking..

No, it has no mechanical [indiscernible]....

Mechanical impact, yes..

Impact. Again, our working assumptions for Solvency II on our U.S. business remains that we will get equivalency and use the deduction in aggregation..

And just one, just to go back very quickly. So on the U.S. business, you very carefully didn't use any adjective when you were describing the fourth quarter cash flow. You just said it was going to come, but you weren't saying if it's going to be better or worse because of the higher surplus..

Yes, just because we'd been running above our capital targets in the U.S., and we have -- obviously, the difference in the U.S. is we have much better clarity on the regulatory framework. And so I think the excess capital we have in the U.S., combined with the clarity that we have on the U.S.

statutory and regulatory framework, gives us a lot more sight lines and visibility on the U.S. upstreaming. We continue to prepare ourselves for Solvency II here in Holland..

And we will now take our next question from Gordon Aitken from RBC..

Just on -- back on to this U.S. mortality assumption change. No, understand it's sort of 85- to 95-year-old male smokers are not living as long as you expected. I know you flagged this in Q2, but it is a surprising development, given the general increases in life expectancy, and especially we've seen those at older ages.

So firstly, why do you think you're seeing this in the U.S. and not see it in your U.K.

business or your Dutch business? Second, I mean, to what extent is this a new development over the last 12 months? Or for several years, have you seen more people dying versus your expectations? And finally, in Q2, you mentioned that you were seeing lower-than-expected reinsurance recoveries on this.

Why aren't the reinsurers paying out?.

Yes. So, I mean, generally, what I would say on the U.S. mortality, it's -- there is a general trend to increasing longevity. That's still there. But what we've had to adjust back is that, that increase in longevity is not as much as what we had predicted it would be.

You have to go back into -- if I go back a little bit into why the data is just really starting to emerge, you really get back into older-age estate planning, second-to-die spouse products and things like that.

These are the products that really extend out into these older ages, and they were popular in the '80s and 90s, is when -- are when those products started being sold to people in their 50s and 60s. So that's the cohort of people that are now in the 85 to 95 area that are coming online now that's giving us the data points that we're seeing.

So we've had to pull back our assumption. And again, I will repeat what I said before, I've seen pricing benchmark data from the U.S. that suggest this is not ours alone. But we see a trend, and it's important. We still sell these products, and we're still very much committed to this part of the market.

So it's important that we acknowledge and address the trends when we see them, so we can get our pricing assumptions updated and make sure that we don't grow into this problem into the future. So that's, I think, the importance for us to deal with this now. I think you're going to see a good continued emerging experience as the data comes online.

There was a recent -- going back here, so an old-age mortality study performed in the industry that really did start to correlate with our own data, which is giving us the confidence to make this assumption change. I'm not sure I can add a whole lot more.

I really don't want to comment on competitors' or other experience or how you've been hearing that from others. I don't think that's my place to do here..

Reinsurance?.

Yes. So reinsurance, they are in a position -- they do have a -- they are in a position to see more accumulated data than any one of the individual companies.

I think, actually, the experience there has been mixed, and that's a question you're going to have to ask them in terms of what they've seen in this part of the market in terms of this data trend..

Just Q2, you seemed to imply that they weren't -- the reinsurance recoveries were down..

Oh, sorry, sorry. Yes, you had asked specifically. Yes, well, that's part of -- to be honest with you, that's actually part of our assumption updates as well in terms of -- so the largest number that I've been talking about is the older-age mortality adjustment.

We also had an impact for adjusting our own reinsurance recovery assumptions in the model, and that's also impacting the Life and Protection numbers in the U.S. this quarter. We've strengthened those, yes..

And we will now take our next question from Francois Boissin from Exane BNP Paribas..

I have 2 questions remaining, please. The first one, on Dutch mortgages, can you give a bit more detail on what drove the depreciation in value? And does this have an impact on your nominal value of mortgages? Or does this lead to a lower market value of mortgages only? That's my first question.

Second question is on the market value -- sorry, market-consistent value of new business. You had quite a decline in Q3, mainly in the U.S. and in The Netherlands. I wondered whether you could provide a bit more details on why that was and how you saw the outlook for that..

Sure. I'll take the first one. On -- it's Darryl. On the Dutch mortgages, what drove the change? It was a change in our discounting methodology to come up with the fair value of mortgages as we report under IFRS 13.

It's a Level 3 valuation, which means we can't go into the market and get an actual fair value on mortgages from transactions directly, so we are obliged to come up with a fair value calculation. We basically have gone back into the market, and we've adjusted our methodology to incorporate more market-observable information.

We've taken a look at some of the RMBS transactions that have been done over the last year as well as us updated our methodology to include more of the junior tranches on the securitizations in the calculation. Effectively, what that means is we increased the discount rate, which lowered the fair value of the mortgages.

And that's -- fair value of those mortgages are included in the IGD calculations and will be included in the Solvency II calculations as well. So it's strictly a market value adjustment. It does not impact the nominal value. It also does not impact the IFRS earnings, only the fair values, which do not come through the IFRS P&L statement..

In terms of the -- your question of the value of new business, what we're seeing in this quarter is very strong sales. We see sales up 38% compared to last quarter. Sales are up in our key markets, and that has had a clearly positive impact on MCVNB. However, the positive impact was more than offset by 2 items.

First of all, we've had lower interest rates, which means that the value of new business with lower interest rate is lower. And what we see also is, Darryl mentioned it earlier, we are generating a significant amount of mortgages now for our third-party Asset Management business. There's a lot of demand for it.

And that part of the mortgage obviously does not come into the market-consistent value of new business if it doesn't come -- does not come to our general account. And that explains why you have despite very strong sales, and you would've expected a higher MCVNB, slightly lower MCVNB this quarter compared to last year..

Okay. That's quite clear.

And in terms of outlook, I mean, should I understand that basically now your ability to write new mortgages for your own account has been limited? So should we expect lower margins? Or, let's say, should we not expect margins to recover in The Netherlands going forward on the back of that?.

Well, these mortgages have been put on our -- on the books, so these margins are there. These margins will be there for the maturity of the mortgages. And what we're doing right now effectively is using our franchise in the market.

We have now 13% market share in mortgages, 1-3 percent, based on very strong origination capabilities, to leverage that on behalf of third-party business. This is attractive business. It needs no capital. It's business where we get a fee.

Fees are attractive, between 40 and 50 basis points, and they stay -- they're very sticky because once you buy a mortgage, an institutional investor buys a mortgage, it will stay. It will have to hold on that mortgage until the customer, the one that issued the mortgage, will redeem it or repay it..

Yes, I understand this, but this is more kind of -- this is more a fee business for third-party.

But how should I think of your general account business in The Netherlands?.

As I was saying, these mortgages are -- that are on the book, they will hold on, on these margins. The margins will stay there..

And we will now take our next question from Jan Willem Knoll from ABN..

Back on the model assumption review, you mentioned you reviewed 60 high-priority models.

What percentage of your reserves has been covered by this review? And what is the euro amount of reserves that will be covered by the ongoing review going forward? And then on Dutch nonlife, you mentioned a negative impact of a number of large claims in general insurance. Maybe you can give a bit more color on the size and the nature of these claims.

And then lastly, on the Dutch pension buyout market, maybe you can comment a bit on the time line you're seeing there.

Any impact, let's say, of the low interest rate environment of -- on the appetite of pension funds to move to a structural solution? And also, the fact that your Dutch IGD ratio has been declining in the quarter quite significantly, will it have any impact on the short term -- or the short to medium term on your appetite to grow in the Dutch pension buyout market?.

Yes. I'll try and cover the first one. I can't give you an exact reserve coverage number, but what I can tell you is we've -- as I mentioned before, we really intensified our efforts over the last -- really over the last year in terms of a comprehensive model review and update across the organization.

We focused our efforts and segmented them into the high-priority models, which were a function basically of the bigger reserve coverage and the bigger numbers. And we've really gotten through all of those high-priority models.

And I mentioned earlier on the call that we strengthened our governance program in terms of ongoing model validations and governance and control reviews. That now carries on, well, going forward, obviously, on these high-priority models, but also extending to all of the lower models.

So while I can't give you an actual reserve number, what I can tell you is that we've covered all of the material and larger-ticket models with this update..

In terms of general insurance in The Netherlands, as you know, they have 2 parts. One is, I would call it property and casualty. That's where we've seen a number of exceptionally large claims. They're related to a number of fires, which we have had. You don't need many, actually, to kind of move the number from a profit to a loss here in this quarter.

However, what we see is a further improvement in our disability segment, and this is the result of actions we have been taking in the last year to improve the quality of our portfolio, improve underwriting, but also to increase prices. So we are, here, on the good trend, but have had a couple of exceptional items.

Your question on the Dutch pension market, just to put it in perspective, the large buyout of the minority pension had an impact of EUR 70 million on our new business strain in Netherlands. And that obviously is exceptionally high, and it was the largest-ever contract.

In general, we have seen in the past quarters, the new business strain has been closer to the level of EUR 15 million to EUR 20 million, and that is what we expect also to be going forward. This business is lumpy. So you'll have big contracts, and then you might have a couple of, of course, much lower one. We are still very interested in this market.

We believe we're well positioned. We want to make sure that any deal we do is a deal that also meets our requirements in terms of pricing. This deal, the mijnwerkers deal, the pensions for the mineworkers, clearly is within our pricing discipline.

What's important is that it fits very much in our strategy because we're not only looking at the pension plan in itself, but we're looking at the participants. And I've talked about that more often. These are customers -- the participants in the pension plan, they need more products and more services.

Governments are retiring here in The Netherlands as they do in many other parts of the world. The responsibility shift goes to the individual. And this is at the heart of our strategy, but we will do that only if we're able to achieve our pricing requirements. Thank you..

And we will now take our next question from Steven Haywood from HSBC..

I just wanted to clarify something. The model update for hedging costs on your GMWB VA book in the fair value items, this EUR 46 million, what exactly does this relate to on this -- on the change in the model update for the hedging costs? Because I thought Aegon had implemented its dynamic hedging structure here fairly recently.

And second question, I see there's an adjustment for lower yields of about minus EUR 8 million in the Americas line.

Can you just clarify whether this is in addition to the EUR 10 million per quarter dollar charge that you disclosed? Or is it -- is this related to that?.

Yes. Hi, Steven. It's Darryl. On the -- I'll take both those. On the first question, specifically, what we've done is, you're right, we made no change to our dynamic hedge program on the GMWB. That's fully intact. What this involves is projecting that program into the future, and where that's important is actually on the DAC calculation.

So it is a fair value product and a fair value hedge program, but we have to project those hedge costs forward and into the end of the life of the product and then adjust our DAC models. So this change that we made was actually a more enhanced way of projecting those future Greeks-and-hedge program through the life of the product.

And that had a onetime impact on DAC, and that's what you see on the fair value line. On the drop in yields, it actually is just a onetime adjustment as we reflected and us updated the curve that we use at the Q3. So it's sort of -- I would say it's unrelated to the standing guidance, if you will.

This is very much a onetime impact, and I wouldn't expect this to recur next quarter. The standing guidance on the impact in rates is just the ongoing investment yield drag that comes from persisting in the low interest rate environment..

Can I just follow up on the last one? That standing guidance, that's not changed either?.

No, it has not..

If any members of the media would like to ask a question at this time. [Operator Instructions] And we will now take our next question from Archie van Riemsdijk from Dow Jones..

Maybe a reiteration of an earlier question, but could you maybe once more give some color on the change in valuation of the Dutch mortgages? And to what extent can this be described as accepting that the losses on your -- on the mortgages are higher than the model previously expected?.

Yes. Archie, it's Darryl. First, let me deal with the last part of your question first. It actually has nothing to do with expected higher losses on the mortgage. Let me be perfectly clear on that. We still feel as good today as we did yesterday on the quality of the Dutch mortgage cash flow. So that -- it had nothing to do with that.

It really is about a Level 3 valuation under IFRS, which means we have to do a fair valuation.

We -- it requires expert judgment to do that, and there's some subjectivity in that because we cannot point directly into the market and find the fair value of the Dutch mortgage, which means we have to come up with a discount rate to discount the cash flows.

In there, we've used more recent market-observable information to adjust our calculation, and that leads to a valuation change, day 1.

Obviously, whatever -- because we still feel about -- strongly about the cash flow development on the future, whatever we strengthen day 1 will come back to us over the next coming 7 or so years as the mortgages mature..

Okay. And as an additional question, could you give the number of how much capital -- well, it has increased, the capital requirement for these mortgages, by EUR 0.5 billion.

But what was the previous requirement? And how much has it increased?.

Well, that goes into our actual overall IGD ratio, so what you have to understand is that the fair value of the mortgage book is inside of the IGD calculation. So we reduced the fair value of the mortgages by EUR 500 million, and that's EUR 500 million on a EUR 26 billion, EUR 27 billion mortgage base, so to put that into some context, if you will..

Okay. So you have no number for the total capital requirements of this mortgage book..

I don't -- I think that's something you can follow up with Investor Relations, or Robin, actually, would probably be your best contact on that..

And we will now take our next question from Maud van Gaal from Bloomberg..

I was also looking for 1 further clarification. I'm sorry if it's already been discussed. But it's regarding the assumption review on Slide 3. It says that a review of the lower impact models will continue throughout 2015.

Will that then lead to further adjustments to quarterly earnings? Would that -- will that have another impact?.

Maud, it's Darryl. I can't promise that it won't, but I don't expect it to, is probably the best thing that I can say. And we've taken into this quarter everything that we can see or would expect.

The other thing I would mention is that we've really dealt with the more material ones up through this quarter, so it's part of our ongoing -- and I really tried to describe that we really have strengthened the governance in terms of our ongoing model reviews going forward, and this will be part of that.

So I'm not expecting -- I think if there was something, it would have, at this point, an equal chance of being positive than negative..

As there are no further questions in the queue, I would like to turn the call back to our host for any additional or closing remarks..

Yes. I just would like to thank you for participating in this call, and thank you for your continued interest in Aegon, and have a good day. Bye-bye..

Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect..