Aegon Ltd (AEG) 2006 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the AEGON first half year results 2006 conference call on the August 10, 2006. At this 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 turn the conference over to Mr. Shepard. Please go ahead, sir.

Thank you very much. And thank all of your for joining us today. With me is Joseph Streppel, our Chief Financial Officer; Michiel van Katwijk, our Treasurer; and Darryl Button, our AEGON USA CFO who is calling in, but he is on the call. We've invited Alex Wynaendts, my colleague on the executive board today. This is his first day back in the Netherlands after spending a year in the United States.

I am going to start and give you a brief overview of some of the things that happened. Then we'll get into the results in a little greater detail and we will take your questions. It's our intention to finish by 4:00 so that you can make the ING call. Slide one, of course, is our normal disclosure/disclaimer statement. I would appreciate it if you would take a look at that.

We'll get started by looking at the slide, Key Developments - First Six-Months. Basically we've stuck with our strategy and the execution of it focusing on profitability. As you can see by the results, I think it's working. Overall our core business continues to perform well and pensions remain a strong driver of our overall performance. Our international expansion -- Mexico, India -- working with new partners. We've got the couple of joint ventures that we did in Spain -- actually started doing some business in June. We'll talk about all that in a little bit more detail later.

Let's go to the Value of New Business slide and the results. During the six-months, our value of new business increased 26%. Keep in mind that that's -- we didn't do quarterly VNB on '05, so that is against half a year's results last year. You can see that the Americas, the UK, and Central and Eastern Europe led the increase in value of new business.

To the Internal Rate of Return slide, our IRR improved to 14.8 from 12.4 for the full year of 2005. I think this reflects our commitment to writing profitable business. Obviously, as you can tell by the slide, we still have some work to do in the Netherlands where our returns are below our hurdle rate. However, IRR in the Netherlands did show some improvement during the second quarter against the first quarter. I think it was 7.9 and came up to 8.5. But that is still below the end of '05. So we've still got some work to do. You can also see that the IRR in Asia improved dramatically, mostly due to Taiwan where we did some re-pricing that we mentioned to you last year, led to lower sales, but higher returns.

The next slide, is the Increase in Operating Earnings. Of course, they increased by 67%. I'll get into the detail in a minute on the country units. But I'd like to point out that this increase was a combination of both good execution and solid business growth in several areas. And of course, they were helped by a relatively benign credit market. Rising interest rates helped a bit and improved equity markets. All of our major country units, the three major country units contributed to the increase in operating earnings.

Let's take a look at the net income development. The 9% decline in net income is basically driven by lower non-operating earnings, lower gains on investments. And in the comparable period for last year -- for '05, the first six-months -- recall that we sold our Spanish general insurance business, which amounted to 176 million gain before tax. Some reasons for the lower gains on investment -- even though we had high gains on the sale of shares in the Netherlands, there were two offsetting factors. There was normal trading activity and a higher interest rate environment in the US, which led to some realized bond losses. They amounted to about 150 million in the first half of '06 versus gains of 160 million in the first half of '05. Italy had negative fair value change on derivatives used for lengthening our assets in the US -- I'm sorry, in the Netherlands.

Next slide, Group Sales overview. The 6% increase in life sales for the Group -- the real winner in our country units was the UK, which had a record quarter. Sales were up 55% for the six-months. The fire sale that occurred in Taiwan during the second quarter of '05 -- as you recall, we reduced commissions because [of local] reserving changes. So we had kind of a fire sale. Then we also re-priced Taiwan a little bit later in '05 as well. So sales relative to that very strong first six-months decreased about 75%. I think the reality of the market is that with the traditional life having these long-term commitments -- and there aren't a lot of long assets to match them -- so we are putting more and more concentration on unit-linked business, which was over 40% of our new life sales in the first half of '06. In the US our variable annuity and institutional products were the main drivers between the 20% increase in deposits. Off balance sheet production for the Group decreased 2% really reflecting lower sales in managed assets. This decline was partly offset by strong sales of synthetic GICs and mutual funds in the US.

Let's go to the country units. First the Americas. We had strong business growth in variable annuities and reinsurance. In the variable annuity area, our retail sales were up about 19% and pension sales for variable annuities were up 10%. So the average was 14%. Reinsurance premiums or sales were up about 20%, a lot of that coming from international sales as opposed to US domestic. We had improved mortality and traditional life and reinsurance. And we had the positive impact of the fair value items in the US. New life sales decreased by 8%, a result of lower BOLI/COLI business in the US and a decrease in production within the Transamerica agency channel. Although life reinsurance sales were up just 20%, the situation with investor-owned life in the US has changed quite a bit with new legislative and regulatory proposals being considered. This led to some uncertainty in the older-age market.

In general, our focus on profitability and strict underwriting disciplines has led to higher value of new business and profits, even though this has led to lower sales in some areas. While BOLI/COLI sales were lower in the first half of the year, the US operations have already secured a significant BOLI/COLI case early in quarter three. Keep in mind, we've always said that that is a lumpy business. You get some big ones and then you go for a dry spell. So we were happy to see it was lumpy on the upside so far this quarter.

The overall increase -- I've already mentioned the variable annuity increase. We've added about -- I think it's around 40 wholesalers in the last six to eight months. We're getting them out and rolling. I would expect to see a little increase in variable annuity sales going forward. Fixed annuity deposits were down 4%. Retail was down 15%. It's basically the flat yield curve with short rates being high, it makes some other products for -- particularly in the bank market, the bank CDs are competitive. Our total decrement rate for the first half of 2006 is at an annualized 20%. That is still within expectations. I might mention, keep in mind that decrement rate includes partial withdrawals at deaths. So that isn't just a pure lapse rate.

Pension-related sales were up 33% in the fixed annuity area. That included a fairly large terminal funding case in quarter two. Our institutional guaranteed products were up about 19%. That was due to medium-term note-funding agreements, GICs, through our new Ireland platform.

Let's look at the Netherlands slide. The main driver for the increased operating earnings -- we released an amount of EUR236 million in guarantee provisions because interest rates came up. A year ago we added 83 million to these provisions in the same time period. Keep in mind that that whole amount that was in there, came through earnings in previous times when interest rates were lower. New life sales were up 2%. I think you've got to dig into that a little bit. There was very strong growth, actually, in individual life and pension business and pensions for small and medium size companies, particularly through the intermediary market. I think sales on average in those markets were probably up about 25%. We were pleased with that. But in the first half of '05, we had one large pension case. We didn't have any large pension cases in the first half of this year, again a bit of lumpy business. Looking forward, we feel like we've got a strong pipeline. But you never know if you get them until you get them. We continue to have good activity in the small and medium size business.

New non-life premiums were up 70%. That is basically the new disability products here in the Netherlands. It was 57% of all new non-life production in the first six months.

Looking at the United Kingdom, the main things that pushed the operating earnings. One, overall growth of the business -- good strong growth. Higher equity and bond markets in the UK. Positive mortality and traditional life. And of course, we had a record sales quarter in quarter two, leading to this 55% increase for the first six months. Part of that is A-Day activity. A-Day -- this pension simplification act came about in April. We think something like 20 or 25% of that activity came as a direct result of A-Day. Of course, A-Day on the other side means that we've also seen some increase in lapses in the UK in our pension market.

We had strong sales in the UK in bonds and annuities. Onshore bonds were up about 38% and annuities were up very significantly.

Positive Solutions, which is the IFA platform that we purchased had another very strong quarter and had its highest-ever quarterly income. In addition, we've got that network up to 1,420+ IFAs at the end of June.

Next slide, Other Countries. We had a decline in other countries. The principle reason is lower results in Taiwan and higher start-up costs due to our investment expanding in China and the pension business in Slovakia. I might mention that our Slovakian pension business has grown very fast. You don't set up [DAC] on the pension business in Slovakia. In the first six months, we had about 100,000 new pension fund members registered, bringing our total now to well over 150,000.

New life sales, of course, were down 58%. A great deal of that was the decline in Taiwan. Hungary is up slightly. We had our third consecutive record sales quarter for AEGON Poland, the company we purchased in October of last year. Spain continues to do well. I think the inclusion going forward of the production from Badajoz and Navarra will both be positives to the Spanish story. Keep in mind that [COM] continues to be not consolidated, so their sales are not consolidated in our sale slides?

Let's go on to the Interim Dividend. We continue to have a solid capital position and excellent cash flows, so we've raised the interim dividend by 9% to 24 euro cents per common share. We are going to use an incentive to choose cash over stock. The value of the stock dividend will be approximately 5% lower than the cash dividend. We do think we should continue to offer our shareholders the choice between stock and cash, but of course, we would like to encourage people to take cash rather than stock. It's our intention -- assuming that we can deal with some tax hurdles, it will be our intention to purchase a sufficient amount of stock in the open market to neutralize dilution.

Conclusion. We had a good quarter. We had a good first half a year. I am particularly pleased by our increase in the value of new business and our improving internal rate of return. And the fundamentals of the business remain good. I think the 9% dividend is a positive with the 9% increase the result of a strong capital position and cash flows. And of course, we continue to execute in our international expansion in India, the acquisition in Mexico, in addition to distribution in other countries.

With that, let's open it to questions.

Thank you, sir. (OPERATOR INSTRUCTIONS) Mark Cathcart. Please state your name and company followed by your question.

Deutsche Bank. The IRR in the Dutch business continues to decline. What corrective measures are being taken? Is it feasible that you could sell your Dutch business and still be a Dutch holding company owning a US business? Is that feasible?

The second question is on the US side, when do we expect to see some sort of recovery in retail sales? My understanding in Q1 was that 75% of the pricing had taken place. So hopefully that is now 100%. So is it likely, therefore, that in Q3, we see a nice boost, because repricing has taken place, to retail life sales in the States? Thank you.

First of all, let me restate your suggestion on the Dutch deal. Actually, we think our performance is improving. It is not improving to the extent we'd like it to. When you dig under the numbers, our small and medium size pension business and life business is improving. Sales were up 25, 26% for the first six months. We do need to land a few big cases once in a while in terms to really get it rolling. But I think we have a little bit more confidence going forward on the Dutch market. This disability product that was initiated by the Dutch government has been a strong performer for us. We're getting a good share of that business.

In terms of the IRRs, we still need to improve the IRRs. But because of the -- I always get a little confused on this -- but because of the low interest rates in the European market, it's harder to get a higher IRR in Netherlands. So that is a factor there. We still expect to increase that.

We have not considered selling the Dutch business. I don't know technically whether you could remain a Dutch holding company and sell it. Probably you could, but we haven't considered -- we are not considering selling our Dutch business.

The answer technically is yes. Look to the [unit levels of indiscernible], the answer is yes.

On the US retail sales, again you have to dig under the numbers a little bit. The big decline is in the -- I think you're familiar with the term, investor-owned life business. It was the older-age large case businesses where investors would actually pay the premium and benefit from the death benefit, which is a method of getting around our long-term tradition of adding insurable interest. There is legislative action being looked at and the industry generally is trying to stop the use of -- I don't want to call it illegitimate -- but the investor-owned life-type thing. There are some companies, I guess, that continue to write it. We're a little bit concerned, actually, about the pricing on it because the assumptions that we used on pricing business always has some lapse rate in it. If it's an investor-owned policy, you aren't going to have any lapses. In addition, on those older-age life cases, if underwriting becomes a real factor -- and I'm not certain that that's an area where we want to really continue growing -- so we put some restrictions on investor-owned life. That is the big case market.

World Financial Group, which is one of our key operations in the middle market, had a very successful first quarter -- or first half. First of all, their recruiting was up in excess of 30%. And generally sales follow increased recruiting. I think their production was up 20% over the previous year. This is the unit that we're selling the indexed universal life product in.

Our home service business in the US, Monumental Life, was basically flat. Recruiting has not been a positive story. We need to increase recruiting. Productivity by agents is up, but we had a lot of open agencies, more than we need, that we should have in terms of our Monumental operation.

In the direct marketing area, life sales were off, but were offset by the increase in health sales. So sales in direct marketing were flat. Our expectations are that we'll get that growing again. Reinsurance was up. I talked about the BOLI/COLI. I hope that----

Am I right, though, that you've re-priced your business at the beginning of the year so therefore for high net worth that led to a decline in volume. But that should be out of the equation by the second half?

It was more than just repricing in the older-age market. We have actually put restrictions out there. We'd just rather not have the investor-owned life.

So therefore the decline will likely continue on Q3 and Q4 versus Q3 and Q4 last year?

In that absolute segment, yes. I think that there is still some of that in the pipeline in that absolute segment left. But as all good agents will do, I'm sure we'll have other products that will take up some of the slack in the Transamerica Group.

Would you be able to quantify how much of the decline in the second or first quarter has been driven by restrictions on investor-owned life?

I couldn't. Darryl, have you got any detail on that? Darryl Button.

Yes. Not right at my fingertips. I agree with everything you've said so far, Mark. We have completed the repricing. That is why you've seen the increase in IRRs in value of new business. It is probably attributable to this area. Unfortunately, I don't have how much the [IOLI] decline has caused.

Mark, do you want me to have somebody follow-up with you with some----?

Yes, maybe Louise. That would be good.

Okay, we'll do that.

Thank you.

[Trevor Betch].

Insight Investment. It's a follow-up question to Mark's. Could you say if the situation you refer to with third-party owned life is affected at all by the legislation that has recently been passed by the Senate? And also talk a little bit about the new pension protection law and any opportunities that might arise from that. Thanks.

In a very general sense, we're quite pleased with the new pension law. On an overall basis, it's very positive news for us and for many of our industry. I didn't catch your first comment, Trevor.

I was just asking whether there is any clarity given to the issues about third-party-owned life and policies by the legislation that has just passed through the Senate and what the legislative outlook is. A little more detail on that.

Not at all. That didn't address it. I think, if anything, between the industry and legislative views on it, it is probably more complicated today than it was a few months ago. We've still got to sort that out.

So what might be happening with regard to the pension protection law? What opportunities does that open?

Again, BOLI/COLI looks much more solid going forward. We're glad to have that clarified. BOLI/COLI remains a big business. Our Transamerica investment management -- it should increase the assets available for management under the plans. Stable value products like we sell into 401(K) plans and 529 plans in the US should get a boost from that. The combination annuity and long-term care product that we're working on will probably benefit, primarily long-term care products. The COLI and BOLI reform just means that we've got continued availability of the product because some of the legislation that was proposed could have killed it going forward. That is big business for us, so we're very happy to see that clarified

I guess it's too early to put any kind of numbers on any of that?

Yes.

Thank you.

Nick Holmes.

Lehman. I have three questions please. The first one is on variable annuities. Could you update us on the progress with variable annuity product launches like [five] for life with growth and income select. Would you say that your aim is to return to the top ten of variable annuity producers?

I would like to be in the top five. But it is dependent on pricing and whether or not we can continue to get our risk-adjusted returns. We're working hard to increase our business in the variable annuity business. That is why the addition of the wholesalers and the better attention to product development. In terms of the actual performance on those individual product launches, I'd have to defer to Darryl Button for that. Darryl, can you comment please.

We're continuing to see good momentum on our VA business. The latest product, income-select for life, was rolled out in some of our channels in May and June. We will have some more rollout to go in the third quarter. I think you are going to see us continue VA sales momentum growth into the third and fourth quarters. As for market share aspirations, we're continuing to add distribution and getting our returns. We're doing it in a disciplined way. Very competitive marketplace out there. I think we're keeping track of our business and growing it profitably.

Okay, thank you. Could I ask two more questions. Could you update us on the UK launch of the US-style variable annuity product that you mentioned before. Is that still on course? And then, last question is, could you give us a bit more color on the life reinsurance new sales growth, which was very strong at 20%. I'd be particularly interested in your comments about the international sales because those, you commented, are quite significant.

We are going to rollout the five for life in the UK on September 18. We're looking forward to a good rollout on that in the UK. In terms of the pension business, a lot of the growth has come from going into other markets and selling more supplemental health products, and indemnity products, simple products in new markets where we go in and take a share with them. Darryl can you add a little color to that with the protein business. Reinsurance. I am sorry, I said pension. Reinsurance.

Thank you, yes. On the reinsurance, international sales have been a big driver of our growth. Just to give you some numbers, Nick, I think in 2005, the international business contributed 27% of our reinsurance sales. In '06 it's up to 38%. I can let you do the math behind that. It has definitely been a big driver of the growth that we are seeing there. The margins and returns are very attractive.

That's great. Thank you very much.

Trevor [Kelci].

ABN AMRO in Amsterdam. Just three quick questions, if I may. First of all, returning to the IRR and margin story. Just looking at the second quarter in isolation, as far as I can see generally speaking, there has been a gradual or very slight up-tick in your new business margins. Then your half year, generally speaking, IRRs are also higher compared to the first quarter. The only question I have about this is, could you perhaps just briefly explain what the short to medium term levers are that you have to manage that -- to get them to go up -- the levers?

Then, second question is, you mentioned that you are trying to do some product mix changes towards mutual funds, towards unit-linked type businesses. Is that across-the-board, number one? And number two, could you detail a little bit more about some specific initiatives in this regard?

The third question is, just to put it straight-forward on your dividend, that certainly is a very nice increase half year. I realize that it is limited in what you can say. Could you perhaps indicate just what the potential implication of that is vis-à-vis either full year dividend or in terms of where you see your profit developing. Is 9% growth, is that going to go -- is that going to be level for dividend going forward? Or is it just one-off growth? Those are the three questions. Thanks.

Let me take the easiest one first. We are not going to make any forward comments on the dividend. We've said that dividends are going to be dependent on cash flow and our capital position. They are both good enough to do this today. I think you can see by the fact that we're encouraging cash rather than stock to be a positive sign. I think that other than saying that up to this point, I probably wouldn't care to say much else.

In terms of unit-linked business, the big move in Taiwan is to unit-linked business. We've got the issue there, where in the traditional business, we've got long liabilities and not assets that are long enough. You know what the interest rate history has been there. Thankfully, we weren't great top-line guys prior to 2002, so our problem isn't there. But going forward, there continues to be an interest rate and an [ALM] problem in Taiwan. So we are more interested in building the unit-linked business. I might add one other piece of color. I think about 35% of the assets in Taiwan are invested in the US. We have been hedging the dollar and that has been wiping out our profit to a great extent in Taiwan. It's expensive.

Unit-linked. In the US I mentioned that our World Financial Group -- it isn't truly unit-linked, but we are selling the equity indexed like the UL policy. That is off to a good start.

Short-term levers on IRR, Jos you can jump in here. The key is pricing the product right and getting good execution and the fundamentals and mortality and expense levels and that type of thing is the key item. Of course, sales, volume.

Technical comment. If interest rates in the Netherlands would rise to US levels, that would improve the IRR for the Dutch [indiscernible] operations significantly. So it's also a technical matter because if interest rates are low, you know the discount rates are low. That affects IRRs as well. So if the interest rates rise a little, that would help.

Could I make two follow-up questions please related to the answer that you've given. First of all, let's say on the short-term levers. Are there particular issues related to, for example, changing your asset mix that could be done fairly rapidly in order to improve matters for you, specifically in your Dutch business?

Again on the unit-linked question, are there specific initiatives in the Netherlands as well that you are initiating in order to move toward capitalized solutions?

We do not change our asset mix much. I think in the US, we've been a little bit more conservative because [indiscernible] in the first half of the year were a little bit on the low side, taking into account what kind of risk we were taking. The only real change in the asset mix is in the Netherlands. It was at the end of the second quarter we saw the big part of our 5% participation. That means that the share of equities in the Netherlands is lower. That will, at the end of the day, attract investment yields and your analysis a little bit. But it is not a material effect.

Product in the Netherlands. We improved a couple of traditional life products. We introduced -- and that is really important -- a new disability product. That is a very profitable product line, I must say. But no specific interesting changes, no. We were very strong in unit-linked at the end of [the 1900s] and beginning of 2000. We sell now more traditional products and fewer unit-linked products.

Trevor Moss,

Man Securities. I think it must be a first having three Trevors ask a question. That's unique, but anyway good stuff. A couple of questions if I may. The first one relates to your comments on the IRR significantly exceeding your internal requirements. I wonder whether the trade-off is right on the IRR versus volume and whether you think that to maximize [over] returns, there could be some argument for reducing your IRR requirements for the big sales. That is the first question.

Secondly, given the IRRs you're getting and given the returns you're getting, I wonder if you're tempted given the high returns that you make as a Company -- whether you are tempted to buy a little more stock back in the market given you valuation out there than just to offset the potential dilution from the stock dividend. Is that something you are considering or thinking about?

Actually, I have a third question. It's just a small detail. On the pensions business in the UK, obviously with A-Day there has been quite a lot of churning going on and lapses, as you mentioned, in your portfolio. Are you a net beneficiary or net loser in terms of net flows as a result of that A-Day movement. That's it. Thank you.

Yes, in the UK A-Day has been a net benefit for us and net flows even with the higher lapse rates. We have, with our stock dividend -- you may have missed it. We have said that we are going to encourage cash dividends, but we will still make stock available subject to a 5% discount. It is our intention, assuming that we get the right kind of revenue ruling, which we hope happens -- it will be our intention to buyback enough stock to cover the stock dividend.

The first question, we have that conversation on a regular basis. There is a point where you would consider that in certain product lines. That always is driven a little bit like overall product mix. There are some products where, because of volatility or because of the risk you take in a product, you'd like to have a little higher IRR than normal. There are some that are more stable that you can accept a lesser one. I think that if, over time, we saw that and if we believed that was really making us uncompetitive, we would consider that.

Many of our products are price inelastic. For instance, if you drop your return on fixed annuities, you would sell much more.

Thank you.

James Garner.

ING. I am following up on Nick's question on VA sales. I think Darryl mentioned that VA sales are meant to continue in Q3 and Q4. I am a little bit surprised at that. I am looking at your Q2 VA sales. They are actually down 10% quarter-on-quarter. Compared to your competitors that have posted double-digit increases, why were the sales in Q2 so weak?

Secondly, I think at the beginning of 2005, you took your US bond default pricing assumption from around 40 basis points to, I think 25. Given what has happened to corporate spreads recently ticking up, are you going to revisit that assumption?

Let me take your variable annuity first. One of the things I think in the second quarter, that is when we rolled out one of the new product lines. Sometimes when you've announced a rollout, they come off a little bit. I am not sure that is a good answer. It looks like retail actually has gone up quarter-on-quarter. So retail variable annuities through '06 were -- they are up 19%. Quarter-on-quarter they went from 874 to 891.

I am looking at the aggregate variable annuity.

Part of that is driven by pension sales. So pension variable annuities. Almost half the variable annuities in that timeframe were in the pension market. They didn't grow as fast. Why don't I have Louise follow-up with you. She can give you some of the detail and color on that. Would that be alright?

That would be great. It's just that, as I said, competitors are posting double-digit increases. And yours are down 10%.

I think we have a double-digit increase in our retail variable annuities.

But the aggregate VAs are down.

Yes, and part of it is in the pension business. That comes and goes with the business. We'll have Louise follow-up with you. It's a good question. What did I miss there?

Bond default pricing.

That is an easy one because we are still in a very benign climate. We are pricing our products for bond defaults about 25 basis points. As we speak, we don't need it. So all-in-all we had [steady fall] in impairments in the US on bond defaults. That is far less than we had priced for. Last year was an even more excellent year because then we had the same volume of impairments. But then we had recoveries as well, so the number is a little bit higher. But all-in-all, this climate is very benign. On the pessimistic side, you should not think over the years that it stays that way.

In fact we would expect -- Moody's expects a little bit of an increase in credit defaults going into next year -- still good, but a little bit of an increase going into this next year.

[that 30% or so of soft] assets is not -- 25 basis points is the average over time.

That's an average over time and that is an average over asset classes as well.

Thanks a lot.

Albert [Flune].

[Capital Rexies]. Three questions. First one on your variable annuities, more on growth trends in the industry. [Hartford] mentioned that they didn't seem too optimistic about industry growth trends, suggesting that the growth in deposits is coming more from churning. Do you agree on this view?

The second question is, in the US you have posted some losses on investments of $126 in the second quarter. Is this purely driven by investment decisions in your portfolio or are there also realized bond losses due to outflows of fixed annuities?

The final question is on the dividend policy on the neutralization. Should I see this as a change in policy going forward? Or is this a one-time event?

What was the last one?

On the neutralization. Is that a one-time event or a change in policy going forward?

Again, our policy on dividends is to look at our cash flow and our capital situation and make those decisions as we go along. We recognize the need to treat the shareholder fairly. We recognize their interest in dividends. I wouldn't suggest it's a change in policy. It's something we'll look at each time.

The US losses on investment. There was a little more outflow in the fixed annuity business. But basically that was normal trading in the bond portfolio with the higher interest rates that caused the losses.

The other question was on variable annuity sales. Is it churning? I assume that we get a fair amount of 1035 exchange coming to us and some going out. We do not have, internally, a lot of internal 1035 exchanges. In fact, it's a relatively low number. Darryl, can you help me with that number?

I guess what I would say is that our net VA flows are still positive. I don't have as far as any internal exchanges or churning that is going on. It is relatively low compared to what I've seen in the industry.

We have not had a lot of internal 1035 exchanges.

But more in general in your industry is it still a growing business or -- can you shed some light on that?

It is for us. We are still having net inflows. We are still getting some good increases. It's a very competitive market. From time-to-time somebody is going to take extra market share. It is something we have to manage quarter-to-quarter and keep our eye on the ball.

Peter Colson.

Sanford Bernstein. Looking at the annuity new business profit numbers, we saw some strong improvements in annuity profits in the US and the UK. But in the rest of the world, the new business profit was down quite sharply Q2 on Q1. That seems to be to lower sales Q2 to Q1 in Taiwan and Central and Eastern Europe. Could you help explain this.

The big driver there, of course, is Taiwan. As I mentioned we had very high sales the year before because of the repricing.

I am talking about Q2 versus Q1. I am fully aware [multiple speakers]

Q2 versus Q1. Same. It was timing. I think rather than me trying to bumble around on that, Alex Wynaendts, my colleague has worked very closely with that recently so I am going to give you to Alex on that one to finish it up.

On the VNB in Taiwan, Q2 is a bit lower than Q1. One of the reasons is that the production in Q2 is a bit lower than Q1. In Q1 we still had some overflow from the previous year. You usually have that at the end of the year. That does not generate an exceptionally market. What is important for us is to look at the development of unit-linked sales. What we see is that unit-linked sales have increased over that from Q2 to Q1. So, that is a positive sign.

And I would mention that Central and Eastern Europe is up as well in the second quarter.

Thank you.

[Yapp Maier].

Cheuvreux. I noted that the third largest life reinsurance company is running into problems. What would it means for your competitive position in the life reinsurance business? Is it an area you would like to expand in if the right opportunity arises?

I think that the large life insurer that had a little problem probably gives us some opportunities to get some new business. In terms of our interest in expanding in life reinsurance through an acquisition, I would say we're not interested.

Alright, thanks.

William [Alderking].

Citigroup. I have a couple questions. With respect to the Americas' [indiscernible] results, there is quite a big up-tick in profits Q2 on Q1 in the traditional life and accident and health lines, I think due to better mortality, better claims experience. How sustainable is that? Or are those just one-time effects coming through?

Secondly on the fixed annuity line, there is a reference in your press statement to a lower DCA amortization. How much was that?

On the mortality and the claims experience in the health business, you might recall that we had a little worse than expected in '05. I would suggest that our mortality and health claims is more normalized. It doesn't mean it can't go up and down. I wouldn't suggest it is better than expected. It is getting back to more normal levels.

Generally it depends on which period you are comparing to. Generally on a year-over-year basis, we are incurring a little less fixed annuity DAC amortizations than we incurred last year. Part of this is related to -- as we've looked at our models and the interest rate environment, we've realized that we've had -- last year we had some conservative lapse rate assumptions built into the models. We've cleaned that up at the end of last year. We are going forward this year. As far as the sequential quarter-over-quarter impact, it is virtually none. I think you are seeing much more of a run rate as far as the DAC amortization goes going forward.

Marc Thiele.

UBS. Two technical questions. One is, as I look through the press release, I think there was a 135 million loss on the hedge in the Netherlands in the second quarter, which was clearly lower than the 211 that you had in the first quarter. Can you give us an update on what the position is at the moment. Should we plan to have similar movements in the third quarter?

Secondly, did the low tax rate, is that only explained by the equities you've sold in the Netherlands? Or is there something else I need to be aware of?

You are right on the lower tax. It's principally a tax-favored sale of the 5% positions.

We did a big duration swap in 2004. So we are getting in 30-year interest at 5%. We pay a short-term rates. That is the swap. So if you should see short-term rates going down as we have seen in 2004 and 2005, you see when you fair value the derivative that you get a positive evaluation. Now we see the reverse. Short-term interest rates in Europe have gone up. That means that we are paying more for getting into 5% on a 30-year basis. Economically nothing has happened. We do it to stabilize the ALM and fix the market in the portfolio so economically there is no change. If you go back to 2004 and you look at the level we did this deal, we have still more than 240 in the plus.

So the size of the hedge is not [multiple speakers].

[multiple speakers] go up, you won't see a negative performance in non-operating earnings [abate] in the next quarters. If we go down, we reverse it and you see a positive.

There are no further questions. Please continue.

No more questions? Thank you all very much. Have a good evening.

Ladies and gentlemen, this concludes today's presentation. Thank you for participating. You may now disconnect.