Aegon Ltd (AEG) 2005 Q4 法說會逐字稿

Throughout today’s presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. [OPERATOR INSTRUCTIONS] I would now like to hand the conference over to Mr. Don Shepard. Please go ahead sir.

Thank you very much and good afternoon to everybody and good morning to those of you from the U.S. Thank you for joining us today to discuss our 2005 results. During today’s conference call, I’ll provide an overview of the major developments in 2005 and Jos Streppel will give some greater detail of the financial results. Afterwards, we’ll have time for questions.

We intend to conclude this call by 4:00 p.m., so those of you who plan to attend the Fortis conference can do so.

Also with us today are Pat Baird, the Chief Executive Officer of the U.S. and Darryl Button from AEGON USA, George Peebles from AEGON U.K. and Michiel van Katwijk our Group Treasurer.

Before we begin I need to make you aware of our cautionary note regarding forward-looking statements, which is on the next slide. Please take a minute or two to review this statement before or after the presentation. That’s on slide 2.

We’ll start with Slide 3. Let me begin by highlighting some of the key developments of 2005. During the year, each of our major country units, the Netherlands, the U.K. and the U.S. contributed to the 21% increase in operating earnings that we’re reporting. We’ve strengthened AEGON’s position in the U.S., the Netherlands, and the U.K. And at the same time, we’ve made good progress in developing our presence in new markets that we believe offer good profitable growth prospects for life insurance, pensions, and savings and investment products.

New life sales for the full year increased 9% driven a great deal by life reinsurance sales in the U.S. and sales in Taiwan particularly in the first half of the year. During the year we further improved AEGON’s solid capital base and cash flows to the holding company and we have finally, we’ve proposed a final dividend of EUR 0.23, a 10% increase and a 7% increase for the year. We’ve also decided to make the value of the cash and stock dividends approximately the same, bringing the total 2005 dividend to EUR 0.45 per common share.

We’ve made good progress in our strategy for Central and Eastern Europe. We expanded our distribution in Spain with two new joint ventures that are awaiting regulatory approval, which we expect to receive soon. And finally, our rollout in China is on track with two new licenses in 2005, Beijing and Nanjing. I might add that in January we were among the first foreign insurers to obtain a license in the coastal province of Shandong.

Slide 4, turning back to AEGON’s profit development, operating earnings before tax and net income were both up by 21%. Our three major country units each reported increases in operating earnings before tax for the year. We also experienced higher gains on investments as well as increases to other non-operating income mainly the sale of our general insurance activities in Spain. Income before tax increased 29% for the year and net income per share was up 18% year over year.

Slide 5, taking a look at sales for the group, which was up 9% for the year, all of AEGON’s country units achieved increases in new life sales. The Americas reported a 7% increase in new life sales including a 46% increase in sales in its reinsurance business, the U.K a 4% increase, and in the Netherlands life sales increased 2%. I might mention that in the U.K. the first quarter sales were pretty low because we reduced commissions on our pension products but made up for it the rest of the year. In our other countries, there was a 50% increase mainly driven by higher sales in Taiwan, again particularly in the first half of the year. And I might mention that in Spain our partnership with CAM recorded a 24% increase in new life sales and that was their first full year with us. And our partnership with CAM also recorded, also had-- although these numbers are not consolidated in AEGON’s accounts, they represent EUR 219 million in new life sales and or course half of that’s ours. But it doesn’t show up in our sales numbers.

In our annuity and institutional guaranteed products, we experienced an 8% increase in deposits overall with particularly strong sales of variable annuities. Off-balance sheet production was up 9% in 2005, reflecting strong performance from the asset management operations in the Netherlands and the U.K, increased pension sales in Central and Eastern Europe and higher synthetic GIC sales in the U.S.

Slide 6, let me spend some time on reviewing some key developments. In the Americas with our 7% increase in life sales, our retail sales were up 2% for the year whereas Transamerica reinsurance sales were strong with a 46% increase. The biggest decrease for our business of significance in the U.S. were the sales of BOLI/COLI business, which were down 17%. But as we’ve talked about before that business tends to be quite irregular.

Going forward, we believe that market circumstances will continue to be challenging for the older age, large case business. More traditional life sales however are expected to show moderate growth although some lines of business will do better than that. We’ll continue to focus on improving our returns while sticking with our risk management discipline. In addition, I want to mention that we’ve made good progress in the recruitment of new independent agents in our World Financial Group division in the U.S. The number of licensed agents grew 21% during the year and we see this as a key to strengthening our efforts to better serve the middle income market, in addition to our direct and work side marketing initiatives.

Slide 7, we believe the retirement business in the U.S. is a key driver of our growth. Our pension group, which includes diversified investment advisors and Transamerica Retirement Services, make up a big part of this business. These divisions managed Defined Contribution and Defined Benefit Plans for corporate and non-profit organizations. 2005 was a good year for pension sales overall, which increased by 12% to over $9 billion. We have a top five position in institutional pension sales, but that’s among the life insurance companies in the U.S. And we’re a top ten provider of 401k plans based on the number of plans.

Slide 8, our U.S. pension group has experienced accelerated growth in pension assets under management and the average case size has almost doubled since 2002. In the pension group, both Defined Contribution and Defined Benefit Assets grew faster than the market over the past few years. Investments in our technology and infrastructure have allowed us to significantly increase the number of planned participants we serve without having to add additional staff.

Slide 9, our pension group doesn’t represent all of our retirement business in the U.S. We also have traditional GIC business, which is primarily sold to qualified pension plans as well as other qualified annuities. Together, these represent an additional $18 billion in pension-related assets under management, bringing the total retirement assets under management to almost $62 billion.

Slide 10, our guaranteed minimum withdrawal variable annuity feature “5 for Life” which we continue to roll out during 2005 has been well received. It was the biggest driver behind the 13% increase in retail variable annuity sales for the full year. There was a drop off in the fourth quarter sales compared to the third quarter probably due to, although we don’t know for sure, flat variable annuity sales for the market and the anticipation of the launch of our new product “5 for Life with Growth” this January.

Slide 11, the main feature of this new variable annuity product is the incentive to postpone withdrawals. The withdrawal base increases by a guaranteed 5% per year until either the first withdrawal or until the 10th writer anniversary, whichever comes first. This product gives us the advantage of expanding our presence in the market, not only those serving, serving those who elect to receive income now, but also those who wish to defer income to a later stage. Product development cycle occurs twice a year now in order to keep pace with new developments in the market. During the second half of last year, we also expanded our distribution force by adding 23 new wholesalers in the wire house and financial planner channels. And the effects of this should become visible in 2006.

We continue to believe that competition and new product features will remain strong. However, the market seems to be rationalizing in terms of the level of risk embedded in the features offered. Overall we expect steady incremental growth in our variable annuity sales going forward.

Slide 12, in our fixed annuity line of business, we experienced lower sales for the year compared to 2004. However, against the market trend, we achieved sequential quarter-on-quarter sales growth in 2005, helped by new distribution relationships and maintained profitable spreads.

Slide 13, of course you are aware that the current interest rate environment continues to pose challenges for fixed annuities. We’ve seen increases in lapses and the sales momentum that we experienced in 2005 will be difficult to maintain. That being said, our experience in the fourth quarter demonstrated that our focus on profitability is paying off. Even with the increase in the lapse rates, we remained within our pricing expectations, which are currently developed around the assumption of a moderately increasing yield curve over the next few years. Finally, let me also just point out that we have a well-diversified business, offering many products that are less dependent on spread income and generate fee, expense, mortality, and morbidity profits.

Slide 14, in the Netherlands our capabilities in the group pension market led to some good success with a number of large pension cases captured during the year. The Dutch organization responding to changes in the local market has also had early success with the new Lifecycle Levensloop product and disability products. In addition, the consistent performance of the asset management operation has helped win several group pension contracts and asset management mandates. This business has also received various industry awards.

Slide 15, in the U.K., AEGON has continued to broaden its mix of business during the year with an increased percentage coming from higher margin, non-pension products such as bonds, annuities, risk and protection products. Margins in these lines of business are significantly higher than margins in our pension business. But of course certain areas of our pension business generate attractive returns as well and we continue to work on improving returns of our group pension business.

Slide 16, we made the strategic decision a few years ago to invest in owned distribution. Positive Solutions is profitable and has been growing at a good pace. That’s our IF8 platform. Our other main distribution company, Origin, however will take a bit longer to live up to its potential. The number of registered individuals joining Positive Solutions has continued to grow and productivity has been on the increase. As we reported last quarter, we decided to accelerate our acquisition of the remaining 40% of Positive Solutions to take fuller advantage of market opportunities.

Slide 17, turning to our progress on Central and Eastern Europe, our new business in Poland achieved a record quarter, its first as a member of the AEGON group. Our business in the Czech Republic is up and running but of course it is a Greenfield and off to a relatively slow start. In Slovakia, our operations are doing well and we’re quickly building scale in the pension business that we launched in 2004. AEGON Hungary achieved record profits during the year, a 26% increase and has also seen continued success in its pension fund management business. We previously announced that our operations in Central and Eastern Europe have been organized under the capable leadership of AEGON Hungary’s CEO Gabor Kepecs who has been with AEGON since we acquired the Hungarian operation back in 1992.

Slide 18, at the beginning of 2005 as you may remember, we sold the general activities in Spain to Reale Mutual Group. At the same time, we acquired their life business. In the transaction, we also agreed that the non-life agents would continue to sell our life products. In Spain, nonetheless, the bank channel continues to be the dominant means for selling life and pensions. It’s for this reason that we focused our attention on establishing strong bank partnerships.

You’ll remember that we initiated our partnership with CAM in 2004. During the past year, this partnership achieved a 12% increase in total life premiums and a 24% increase in new life sales. We’ve also entered into two new joint ventures with savings banks and soon our life products will be sold in over 1,500 branches across the country. We’ll continue looking for opportunities to further expand our presence in Spain and our position in the life and pension market.

Slide 19, turning finally to Asia, we made considerable progress in our expansion strategy in China during the year. We entered into agreements with two major national banks and also added distribution through brokers. AEGON CNOOC received additional licenses to begin operations in Beijing and Nanjing and as I mentioned earlier we were also awarded a license in Shandong province. Sales in Taiwan were very strong during the first part of 2005 and then we adjusted commissions on certain whole life products and we adjusted them down. This adjustment was due to a new reserving requirement on new business set by the regulator.

The extremely high level of sales in the second quarter, which was kind of a fire sale, was followed by an expected sharp drop off in the third quarter. To give you an idea, sales in quarter three were less than 10% of sales in the second quarter. Then during the fourth quarter, sales recovered well and increased 54% over the third quarter. Our efforts to sell more unit linked products paid off and will continue to play an important role as we further develop our operations in Taiwan.

Now I’ll turn the program over to my colleague Jos Streppel. Jos?

Thank you Don. Slide 20, since Don has already discussed our sales development in the Americas in considerable detail, let me move on to review of operating earnings for the Americas. I may refer you to the appendix where we give the more detailed insight on the developments on certain product lines.

Slide 21, operating earnings before tax in the Americas increased by 17% to $2.365 billion. Certain volatile items increased our pre-tax operating earnings by $360 million in 2005 compared to an increase of $255 million in the year prior. The last portion of this is due to the returns on hedge funds and limited partnership investments, which have exceeded long-term pricing expectations in both 2004 and 2005. Results from 2004 include a one-time charge of $80 million in the reinsurance business and a charge of $172 million related to, related to certain payout annuities and reinsurance contracts.

Let me briefly explain some of the largest movements by line of business. Fixed annuity operating before tax increased 50% to $529 million USD in 2005. This increase reflects the strong positive impact from the total return annuity, fair value movements of certain financial assets, lower amortization of deferred policy acquisition costs under retail annuity block, and favorable mortality on payout annuities. This has been partly offset by minor spread compression in the second and the third quarters of this year and lower account balances.

In addition, the fourth quarter of 2004 included a charge of $54 million USD related to the reserve strengthening on our block of payout annuities. The decline in operating earnings from institutional guaranteed products was primarily due to decreased product spreads resulting from the rising short-term interest in 2005.

Variable annuities showed a decrease of $58 million compared to 2004. This decline reflects primarily the impact of lower interest rates on the valuation of Canadian segregated funds with maturity guarantees, partly offsetting the decline for higher fees from growth and assets under management.

The $68 million USD increase in operating earnings from fee off balance sheet products is due to higher fees from growth in assets under management, lower expenses, and a one-time positive item of $20 million USD during the second quarter of 2005. Compared to 2004, operating earnings before tax from our life reinsurance business were significantly higher at $131 million USD.

Earnings in 2004 include the effects of a change in the methodology for computing incurred but not reported claims and a new research system as well as an accelerated amortization of value of business clients. Excluding these items, operating earnings increased $42 million USD primarily due to strong growth of the [enforce] business and more favorable mortality experience relative to adverse experience in the second quarter of 2004.

Fourth quarter operating earnings before tax of $667 million USD increased by $240 million USD over the fourth quarter of 2004. This was primarily due to the one-time charges in the fourth quarter of 2004 that I just mentioned.

Slide 22, moving to the Netherlands. We saw there an increase of 2% in new life sales in 2005. This mainly reflects an increase in accrued pension business with a number of launching to premium institutional pension contracts signed during the year. The close in pension business however was partly offset by lower sales in the individual lines. Our balance sheet product sales increased by 10% to EUR 864 million, reflecting growth in asset only group pension contract and good performance at TKP pension.

Slide 23, operating earnings before tax totaled EUR 332 million in 2005, an increase of 64%. The increase in operating earnings in the Netherlands is largely due to improved interest results and released provisions for profit sharing and employee benefits. Also impacting operating earnings were increased technical lives and loan life results and lower amortization of [DPAC]. These positives were partially offset by additional provisions for guarantees and for improvements to [inaudible-accented language] life products, or [inaudible-accented language] products for those who are adept. These aren’t explaining all of this in detail. Let me spend a minute explaining the additional provisions for guarantees.

In 2005, total additional provisions for account, portion of all the guarantees amounted to EUR 163 million, of which EUR 84 million was recorded in the fourth quarter. [Account, a portion of the] business included both unit linked and group separate account business. In 2005, we decided to use a market failure approach for the valuation of the guarantees for unit linked products. For the group separate account business, we used a stochastic extracted return approach for the valuation of guarantees. The additional provision for guarantees in 2005 reflect the effect of lower interest rates on the risk neutral market value of the unit link guarantees as well as normal refinements and change in the portfolio and the movement to a uniform interest curve.

Slide 24, let’s move on to the U.K. The business there experienced its highest sales effort in the fourth quarter. They did 68% increase over the fourth quarter of 2004. New life sales for the year amounted to GBP 687 million, a 4% increase. This was described to decline in the first quarter following certain pricing information changes in the pension business. Throughout the year, AEGON U.K. was successful in further diversifying its business as Don already pointed out. Higher margin, non-pension products such as annuities, bonds, and protection products accounted for nearly one-third of the new business sales in 2005.

In asset management, most institutional and retail business performed well due to the continued performance of AEGON U.S. asset management’s fixed income team. Total balance sheet production amounts to GBP 1.032 billion compared to GBP143 million in 2004.

Slide 25, operating earnings before tax amounted to GBP 111 million compared to GBP 109 million in 2004. The increase mainly reflects the positive effects from higher equity and bond markets. This increase however was largely offset by a GBP 33 million charge for an incentive plan for registered individuals and staff relating to the accelerated acquisition of the remaining 40% of Positive Solutions. This item also explains the negative results for fee off balance sheet products. Excluding the effect of the incentive plan charge, operating earnings in the U.K. before tax increased by 32%.

Slide 26, finally in other countries, we show a strong increase of 50% in new life sales. As we have explained, this was particularly driven by Taiwan where sales increased 58% to $12.3 billion New Taiwanese dollars. The strong increase in off balance sheet production in other countries reflects the success of our offensive fund management business in Hungary, while the business in Slovakia has also been expanding rapidly.

Slide 27, operating earnings before tax in other countries were EUR 44 million compared to EUR 113 million in 2004. The decrease primarily reflects the lower contribution to operating earnings from Spain due to the sale of our general insurance activities as of January 1st, 2005. These activities contributed EUR 56 million to operating earnings before tax in 2004. Higher operating earnings in Hungary however partly, partially offset the decrease. Startup costs were higher than the prior year due to the new country in the Czech Republic and the start of the pension fund business in Slovakia.

Slide 28, now a word about our capital base. Shareholders’ equity at December 31st, 2005, amounted to EUR 19.3 million, an increase of EUR 4.4 billion or 30% compared to the end of 2004. The main items positively impacting shareholders’ equity were of course net income of EUR 2.7 million and currency exchange rate effects of EUR 1.5 million offset slightly by dividends and coupons paid. The biggest item included under the heading “Other” is a EUR 275 million effect of the agreement between AEGON and fee and the Dutch tax authorities on a number of items related to AEGON’s property income tax findings for the years 1996 to 2005.

At December 31st, 2005, shareholders’ equity represented 76 of the total capital base, which is comfortably within target levels. Group equity, which includes other equity instruments such as perpetual capital securities and minority interest, represented 89% of the total capital. The capital leverage to total capital ratio decreased from 14% at year end 2004 to 11% at the end of 2005. During the year, AEGON further strengthened the quality of the capital base in a non-diluted and cost effective manner with the issuance of perpetual capital securities.

Slide 29, cash flows from the operating units to the holding company improved further during 2005. Total net repatriation from the country units to the holding amounted to over EUR 1.4 billion in 2005 and increased by EUR 350 million compared to 2004. This reflects a dividend from both the Netherlands and the United Kingdom in 2005, whereas they did not contribute in 2004. In addition, the repatriation from other countries increased due to the sale of the Spanish general insurance activities.

It’s important to note that these amounts do not represent the maximum amount that we could take out of the country units. We still have substantial redundancy over our internal capital requirements in several country units. The capital invested in acquisitions and new ventures reflects the investment made to grow our business in Asia and Central and Eastern Europe during 2005.

And now for a quick wrap-up let me turn it over to Don.

Thank you Jos. Before we take your questions, let me just finish by reiterating that we’re satisfied with our 2005 results. The increases in operating earnings and net income indicate that our strategy of profitably growing our business remains on track. We’ve made good progress in enhancing our position in AEGON’s major markets while at the same time investing in new markets that offer profitable growth.

AEGON’s capital position is strong and cash flows are improved further during 2005. Finally, we believe that we’re in a good position to capture a continued growth resulting from the developing needs of our customers.

We hope, Slide 31, we hope you will join us on May 10th when we’ll be releasing our 2005 embedded value report and we’ll also release our first quarter 2006 value of new business and first quarter 2006 results. And of course, we hope to see you at our Analyst and Investor Conference in London, May 22nd and May 23rd of 2006.

We’ll be happy to take your questions.

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

Yes, good afternoon, Mike van Wegen from Fortis Bank. A couple of questions actually. Starting with the institutional business in the U.S, operating profit was quite heavily hurt, I presume due to the flattening of the yield curve. What are your expectations going forward and how quickly could earnings recover if the yield curve starts to steepen again? That’s question one.

Second question, on fixed annuities, your lapse rate went up to 15.9% from 13.4% in Q3 and 13.6% in Q2. Actually we see in the market a different development, actually a slowdown of the increase in lapses while it is accelerating with AEGON. Why is that?

Third question is, are you adjusting your pricing assumptions concerning lapses within fixed annuities?

And last question, on the Levensloop product in the Netherlands, you report a quite substantial number of contracts, but what is your take up expectations for this products in terms of number of clients and in terms of Euros. Thank you.

Okay, Michael let me start with the Levensloop question and Jos can jump in if he wants to add something to it, but people don’t have to make their decision until June or July on which product they go into, whether it’s deposits or mutual funds. And the take up rate will be very much dependent on, in some cases on the job that we do selling them, but also in how much the company participates. So the companies that are going to add something for their employees, we think the take up rate will be pretty good. But nobody’s going to know for a period of time.

We have a lot in the, in the pipeline. We’ve signed up some very good large cases and a lot of potential there. But nobody’s going to know till later in the year.

On the other questions on fixed annuities, I’ve got Pat Baird sitting next to me. So I’m going to turn it over to him.

You asked three questions about the U.S. The first one is concerning the institutional business and the flattening of the yield curve. Darryl Button, are you on and do you want to take that?

Sure Pat. Generally the spread compression that we’ve seen on the institutional spread business, it is related to the flattening of the curve, predominantly the rising of the short rates. Really I’m looking for spreads to stabilize in ’06 but to be honest it’s a function of where the curve goes. It really relates to the short-end of the LIBOR rates and once those stabilize, the spreads will stabilize.

On the two questions you asked about the annuity business, our, what we call total decrements, which is a combination of 10-35 exchanges and just lapses, ours has gone up. I think our 10-35 exchanges actually has dropped. So it really relates to alternative investments and the money leaving fixed annuities going to probably bank CDs and that’s a direct result of the flattening of the yield curve. As to why ours is different than competitors, I would say we have some of our blocks coming out of surrender penalty period. And that may answer your question, but I’d like to link that to your third question, which was are you adjusting your pricing? The answer is no. The decrements that we were seeing is still consistent with our long-term pricing assumption.

Okay, thank you.

Thank you Michael.

The next question comes from Mr. Trevor Moss. Please state your company name, followed by your question.

Everyone, it’s Trevor Moss at Man Securities. Just a couple of questions actually. You mentioned towards the end of that presentation some redundancies over economic capital requirements in several country units. I wondered if you might quantify that. I think obviously you’ve talked about the possibility of making acquisitions at some point. And I think if I remember rightly from your May Analyst Day there was a number banded around of perhaps being able to handle acquisitions of up to EUR 1 billion out of internal resources. I wonder if you could sort of talk around that and quantify the numbers?

And the second question I have is well I think you have a target for your other country units of representing 10% of operating earnings by 2008, I wondered if that is still your target? It’s quite difficult I think to see clarity on where those earnings are going, given the recent acquisitions you’ve made and inability really to see how those earnings are going to move over time. But I wonder if you might talk about that for me. Thank you.

Yes, thank you. First of all we are not completed with our economic capital project yet. So but I think I can move on and talk about the redundancy in our, not redundancy but under IFRS we feel like it’s important to continue to keep a buffer. But we probably have in the area of 1.5 billion or a little better that we could utilize for acquisitions.

Your last question, we continue to expect our other countries to contribute in the 10% range of our earnings by 2008 and expect that the VNB on our new country units of course will even have, play a greater percentage, be a greater percentage.

Okay, thank you very much. I wondered if it might just, as a point of reference, it might be helpful to see some sort of breakdown of those other country earnings, perhaps by country so we can map their progression. Anyway, that’s a subject for another day. Thank you very much Don.

Thank you.

We have a follow-up question from Mark Tiller. Please state your company name, followed by your question.

Hi it’s Mark [Tiller] here from UBS. Can I come back to the fixed annuity business in the U.S.? Can you remind us what the assumptions are in terms of the surrender rates in the embedded value calculations? In other words, how high can it go actually to have an impact on those numbers?

The second question is regarding your cost base. Most of your competitors come up with impressive plans in terms of reducing the cost base. I was wondering if that puts AEGON under pressure to come up with a similar plan?

And then thirdly, could you give some guidance on the tax rate going forward?

Okay, I’ll start with the cost savings. AEGON throughout its operations have always been pretty good at costs. In the Netherlands and the U.S. and in the U.K. a few years ago we announced cost reductions and did deal quickly with headcounts and that type of thing. But at the same time, we spent or invested a great deal in infrastructure and in our information systems, which was the right thing to do because today our U.K. operation is much more cost efficient operation.

In the U.S., we have an ongoing project of consolidating back offices and putting together five or six different IT systems that we accumulated through acquisitions and that type of thing. But that’s a two or three-year project, but will be a very positive cost reduction method. If you look in the U.S., they increased their business, held their costs pretty level and that includes much higher costs for Sarbanes-Oxley and the different regulatory type things.

So I think that in the Netherlands, we did have a little cost increase this year but I think perhaps we cut costs a little too much in the past and having an effect on customer service. So we’ve invested in the quality of people and again in infrastructure in the Netherlands.

Even then it’s only 4%.

Yes, it’s only a 4% increase in the-- and there’s also been a lot of change in the Netherlands as well with the whipped vane changes in the pension laws and so there, and the new regulatory environment here. So I don’t think an announcement about big cost savings measures would make any sense. And we’re going to work at it continually.

In terms of the annuity portfolio, I think just from a logics standpoint and then I’ll let Pat or Darryl answer the rest, AEGON has been in the fixed annuity business for a long time and has a very large portfolio, a lot of which was put on in years past. So I think you would expect more of our business relative to more recent players to be rolling out of their penalty periods. And so that clearly has an effect on it. And in terms of the pricing, pricing is adjusted on lapses as they’re, as we look at our block of business and to see how much is coming out of the penalty period and how much new is coming on with new penalties. Pat?

Well and Darryl let me throw it to you because it was a question specific to embedded value.

Yes, Mark this is Darryl in the U.S. We currently have our embedded value assumptions set on the expectation of a gentling rising interest rate curve, yield curve over the next couple of years and a [steepening] of that curve. As you know fixed annuity lapse rates are very sensitive to the interest rate environment. Under that scenario, we actually do have lapses trending up into the low 20’s. So that’s what our base expectation is. I’d say what we’re experiencing now is not so much the steepening of the curve and the rising of long rates, but rather the flattening of the curve and the rising of short rates. And that’s brought in increased competition from short-term banking products. But our embedded value assumptions trend up into the low 20’s.

Next.

Tax, Jos.

Well the tax rate in the U.S. went up and that was because we had, we had a special situation in the U.S. in 2004 where we could repatriate money from Canada in a special tax treatment. And if you look to 2005, we did not have that advantage. And since our profits grew in 2005 in the U.S. more and bigger part of total income is charged at the 35% rate. The, in the Netherlands you see that a tax, a tax rate is going up and there, the, there the reason is that in prior year we did a lot of sales in our equity portfolio, the so-called 5% participation portfolio. And those things are tax exempt. And we had a lot of that advantage in 2005. And also in the U.K., we have this year a special situation because the payment for the incentive plans are taxed at a different rate than the normal rate in the U.K.

Going forward, I would say that tax rate that you see in the U.S. is a pretty normal rate. The tax rate that you see in the Netherlands is pretty normal, but may tend to rise a little bit because there’s not much tax exempt gains to be delivered by the Dutch organization. And if you correct for the Positive Solutions, then I think that U.K. is at a pretty normal rate as well.

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

Yes, hi it’s Nick Holmes at Lehman. I had a couple of questions on sales please. The first one is, it sounds as if you’re becoming more comfortable with the pricing of guarantee risk in the variable annuity market. And would you say that because of this, you’re becoming more ambitious about regaining your position as one of the leading players as you used to be?

Secondly, with Taiwan the sales recovered in Q4 and I wondered if you could give us a little bit more color about how you see the sales outlook for this year? Thank you.

That was Taiwan with the last question?

Yes.

On Taiwan, okay. First of all in the variable annuity area and the area of embedded options, we weren’t comfortable with our own embedded options in 2003 or 2002, which is why we backed off from embedded options. And there was a period of time when in our view that there was a lot of risk being taken in those options and we re-priced our product and were quite comfortable with the two main products we have out there and the new “5 for Life” growth product. So, saying that we’re going to regain a position, I’m not sure that we look at it that way. Variable annuities, because we’re relatively well diversified, I think was about 7% of our income last year and about the same the year before. And it’s never been a really huge part of AEGON’s earnings picture.

But I think the indication that we’ve added 23 wholesalers, a good share of them added in the past six months, is an indication that we are going to be a bit more sales aggressive in variable annuities this next year and the next couple of years. But we’ll still maintain our discipline on risk and profitability.

And I didn’t, I’ll take Taiwan for a moment. We, that first half of the year there was a reserve increase put in on new business by the regulator. And we adjusted commissions down because of that reserve increase. And then of course there was a fire sale. And then the regulator reduced that reserve requirement back a bit, now not back to where it was before but it did reduce it back somewhat. So we were able to go forward and get sales moving a little bit. And we’ve also been introducing equity linked type products which we think is more the future in Taiwan over the next few years. So we’ll be going there. There was a third question and I didn’t get it down guys.

No, actually there wasn’t. It was just those two.

Okay.

Thanks very much for your answers.

Thank you Nick.

The next question comes from Pierre-Marie Gerez. Please state your company name, followed by your question.

Good afternoon, Pierre-Marie Gerez, Exane BNP Paribas. First of all, a follow-up question on Taiwan. Could you please give us the consequence of this reserve strengthening on, well maybe allocated capital or even on the value metrics? And second question is about the level of capital gains you have realized this year. What can we assume as a sustainable level? And is the level reported this year, let’s say not too big compared to the unrealized capital gain you still have in your book? Thank you.

Okay, let me take the Taiwan question and I’ll let Jos take the capital gains question. The answer on the reserves strengthening in Taiwan is that there was a relatively small amount when you look at the whole book of business sold with that higher reserve requirement. And of course the higher reserve requirement before you adjust the commissions down means that you’re, that would have a small effect or some effect on embedded value just because the earnings stream would be less. So, but I don’t think that’s a hugely significant thing because it was only on that one period of time when the fire sale was going on.

Jos, do you want to pick up the capital gains question?

Yes, well the general statement and I said that before is that we do not share or require our asset management organizations to run, to run the business on IFRS accounting system. We want them to the benefit of our shareholders and our policy holders to build for that for net returns. And that means that the one year you can have much higher capital gains than the other year, than other years. So if you want to make an estimation yourself, you should take those portfolios that are taken up in the realized gains and losses and take for instance a 5 and 7 or a 9 and 10-year period and say, well what should the average return on those asset classes be? And then have a 10-year, a 10-year period. If you take the last two years, if you do that, capital gains on average were higher than in the long-term perspective. And you saw the same thing in the four, the items that we have published, they also had of normal expectations. Okay?

Next question. Hello?

The next question comes from Tom Guidman. Please state your company name, followed by your question.

Good afternoon. Tom Guidman, Petercam. I’d like to ask two questions. First of all, you raised the full year dividend by 7%, which is a bit poor when you compare it with EPS growth. And it, in fact, means that your payout comes to, what is it, 27 or 28%, which is a much lower rate than you used to have until a few years ago, which I think was 44%. And given the strong cash flow generation, I wondered why you didn’t increase your dividend by a bit more than 7%? That’s my first question.

Second question regards the volatile items and than more in particular the return on your participation in hedge funds. As you mentioned, it was significant contribute to the positive volatile items in 2004 and 2005. Could you give us a clue as what your expectations of long term in terms of total returns for this, for these investments are?

Okay, your first question on the dividends, you’re right. It was 47% of earnings that AEGON used to pay out.

Yes, yes.

And it was our view that that wasn’t a realistic approach because it had nothing to do with cash flow, particularly under the old [DAP] methodology where you used the what did we call it?

Indirect return.

Indirect return, okay, thank you. And so our position since 2002 has been very simply that annually we, with our supervisory board, look at the, our cash flow and we look at our capital position and come up with a sustainable dividend and we expect it to be sustainable. And we recognize the need for investors to have a fair dividend. We also looked at other companies both in the U.S. and the Netherlands to make sure that we were at least on a fair, on a fair basis, and so we were quite, we feel pretty good about where our dividend is today.

In addition, for institutional investors by taking away the discount for accepting stock, that of course, you would imagine that it might take some extra cash because less people will take stock and more will take cash.

In terms of volatile items on the hedge funds, we’ve had a couple of good years on hedge funds of out performance. It would be on our wish list for that to continue but we sure wouldn’t want to forecast that or speculate.

That didn’t answer the question really. What is the total return actually that you expect? And about what return then does it become a volatile item?

Well it is a volatile item mostly because those according to the IFRS [senders] hedge funds and convertible bonds are taken on fair value by our liabilities are at cost. That means that increases the volatility. The remark we have made is that we should not adjust the income of volatile items to zero because they have a normal average return.

That’s my question. What’s the average return?

Hedge funds depends what kind of hedge fund it is, but it’s somewhere between 8 and 15 depending on what kind of hedge fund it is. So, my former remarks to the question of Pierre, was just saying you have to take into account that the returns we have received in 2004 and 2005 are over an expectation level that we have set for those investments.

Okay.

Okay.

Thank you.

[OPERATOR INSTRUCTIONS] The next question comes from Bruno Paulson. Please state your company name, followed by your question.

Hi this is Bruno Paulson calling from Sanford Bernstein. You mentioned that the U.K. pension, two questions. First you mentioned the U.K. pension sales declined in the first half due to commission cuts. I was wondering if and if the success in pension sales in the second half was done to any reversal of those commission cuts?

And secondly on the movement, removal of the 5% premium for stock and the dividend, do you have any view of the likely impact on the cash versus stock up take?

I’ll take the one on the pension business first. We were one of the first companies to cut commissions on pensions. Other companies then joined on. Some of them reversed their decision and increased pension commissions again. We did not. We’ve not reversed our, we’ve stayed with the lower commissions. And the fourth quarter of, we, the fourth quarter of ’05 for AEGON U.K. was the best quarter we’ve ever had. So with the commission cuts and with the addition and more activity in the other lines of business, the higher margin business, we had the best quarter we’ve ever had. I think on the dividend question, I’ll turn that to Jos.

Yes, no the answer you will, you will only know it when you see, when you see it. But in general, if there is no discount for taking stock anymore, you’re not getting rid of all the albatross for people that take stock and sell it, and sell the stock afterwards. Dilution problem has been solved. So we expect that cash return to shareholders will increase. But whether it’s $100 million or $200 million, we don’t know.

Thank you very much.

Excuse me, Mr. Don Shepard, there are no further questions at this time. Please continue with any other points you wish to raise.

We’re done, okay. Thank you all for joining us and I look forward to seeing you, I hope at our Analyst Meeting in London in May. Thank you.