Aegon Ltd (AEG) 2006 Q3 法說會逐字稿

Welcome to the nine-month results conference call on the 9th of November, 2006. Throughout today's presentation all participants will be in a listen-only mode. After the presentation, there will be a opportunity to ask questions. If any participant has difficulty hearing the presentation, please press the star followed by the zero on your telephone for operator assistance. I will now hand the conference over to Mr. Donald Shepard. Please go ahead, sir.

Thank you very much, and thank you for joining us this afternoon. Joe Streppel, our CFO, and Darryl Button, our Aegon USA CFO is on the phone with us, I believe.

Let me give you a brief overview of some of our key developments, and then we'll talk about the results in a little detail. We're going to finish by 4:00 -- I think you've got an ING call at 4, so we'll try to get done by then. Let me make a reminder to look at the disclaimer statements, and what I'll do is go through this slide-by-slide.

The first slide, I think, goes without saying that it continues to be our priority to write profitable business, and I think this continues to show up with a higher value of new business as well as the broad-based improvement of our internal rate of returns in virtually all country units.

Operating earnings showed an increase of 39% for the group during the nine months, and sales in the UK were the principal driver of our 15% increase in new life sales. Our pension capability across the group continues to be one of our core strengths. During this period we continue to grow in the U.S., the UK, the Netherlands, and Central and Eastern Europe, and with our acquisition of Seguros Argos in Mexico, we've also set up an Afore with them.

Slide 2 -- yesterday we announced -- or today we announced, actually, that in Poland we reached an agreement to acquire a top 10 pension fund called PTE Ergo Hestia, which will become part of Aegon Poland. Furthermore, we agreed with our friends at [Munich RE], the parent company of Ergo that we will enter into a distribution agreement to encourage our agents to sell Ergo Hestia non-life products and, in turn, they will encourage their agents to sell our pension products.

This, combined with our pension funds in Hungary and Slovakia, will bring the total number of members in our pension funds in Central and Eastern Europe to well over a million.

Slide 3 -- we continue to strengthen distribution by the full acquisition of Unirobe, a leading independent distribution company here in the Netherlands and, as you heard last week, we announced our intended acquisition of a major distributor of bank-bound and corporate-owned life insurance in the U.S., Clark Incorporated.

Finally, with our acquisition in Mexico and in China, we have furthered our footprint by opening in the Shandong Province in China.

Slide 4 -- let me talk about our value of new business during the nine months of this year. The 22% increase in VNB for the group was driven primarily by increases in the U.S. and the UK and also by Central and Eastern Europe. In the Netherlands, we achieved a 13% increase.

The lower value of new business in Asia reflects lower sales in Taiwan. You might remember that in '05, we had a commission cut because of a reserve change in the traditional business there, and we had a fire sale that ran through the second quarter of '05, and then sales dropped off quite a bit. But the repricing that we did, and the commission cut, have increased the returns, as you'll see on the next slide, and I might mention that we're working hard to -- let's see here -- somebody just stuck a piece of paper in front of me, so let me -- okay -- but, at the same time, the returns have increased.

The 14.8% internal rate of return for the nine months improved over the 12.25 for the full 12.4 for the full year of '05. That's the same as it was six -- at the six months numbers. The internal rate of return on new business in the Netherlands actually showed some improvement from 8.5 at the half-year stage to 9.4 for the full nine months. This was supported by better capital and risk management initiatives, particularly hedging of unit link guarantees.

As I mentioned on the slides before, our IRR in Asia improved strongly where we did some repricing in Taiwan that resulted in the lower sales but higher returns. We've also been broadening our product offering in Taiwan such that about half of our sales now are coming from unit link products, and we hope to increase that percentage as we go forward.

Returns in other areas remain above our target levels. Of course, Central and Eastern Europe stand out in this regard, where returns are exceptionally high, keeping in mind that a lot of our business, there is pension business, which has relatively low capital requirements, but we do expect these returns to come down gradually, over time, as the markets change.

Let me turn your attention to our operating earnings for the group. The 39% increase was the result of increases in the Netherlands, the Americas, and the UK. In a moment, I'll talk about the components of that increase when we talk about each country unit.

Let me just point out that the increase in operating earnings was a combination of business growth in several areas, and a relatively positive market environment with interest rates increasing since the beginning of the year and a benign credit environment continues, and equity markets were higher.

Taking a look at net income for the nine months, the slight decline in net income was primarily driven by lower gain on investments. We had a negative fair value change in derivatives used for asset liability management. We've mentioned before that's the derivative that we use the lengthen the duration of our assets in the Netherlands to do better asset liability management. That was a negative of 133 million in the nine months compared to a positive 327 last year.

Also, normal trading activity in a higher interest-rate environment in the U.S. led to some realized bond losses, partly offset by higher gains on the sale of shares in the Netherlands. And remember in the comparable period, in '05 we sold the Spanish General insurance business for EUR176 million book gain.

If you look at the 15% increase in life sales for the group, the UK was, by far, the driver of that increase with new life sales up 56%. Variable annuity sales in the U.S. and institutional products were the main drivers between an 11% increase in deposits. Our off balance sheet production for the group was down by about 8% reflecting lower sales of managed assets and lower sales of synthetic guaranteed investment income contracts.

The decrease was partly offset by strong sales in retail mutual funds in the U.S. and the UK and some strong off balance sheet production in Central and Eastern Europe.

Let me give you a little more context for what happened in the country units. In the Americas, operating earnings before tax increased 16%. Good business growth in most lines, improved mortality and traditional life and reinsurance, and a positive impact on the fair value items. New life sales in the U.S. were basically flat due to the discontinuance of most sales of investor-owned life. This was offset by a large bank-owned life insurance case in the third quarter, somewhat higher reinsurance sales, and some growth in the middle markets.

Let me just a minute and put that in perspective a little bit. The TransAmerica life sales, the investor-owned life business, contributed, I think, about 140 million in sales last year, and probably contributed about 56 million, so far, this year. But it's basically been shut off. There might be a little bit in the pipeline yet but, basically, that business has stopped. And that's the big negative in terms of production. Our equity index life production and production in our world financial group in the middle market was up about 12% year-to-date over last year but, of course, those numbers relative to the TransAmerica group are somewhat smaller.

Variable annuity sales increased 6% overall. Retail variable annuity sales were up about 16%, and like the rest of the industry -- or -- most of the rest of the industry, anyway, we experienced a little slower growth in the third quarter. We feel like we've picked up a little market share, however, with our sales in the quarter. Pension-related VA sales decreased 3% during that period, particularly as a result of a very strong third quarter last year.

Fixed annuity deposits declined 6% but our retail sales were down about 12%. I don't need to re-mention the fact that the yield curve and the low interest rate environment makes selling retail fixed annuities a little tougher. Our total decrement rate was 22% on an annualized basis for the first nine months of 2006. It's still within our expectations.

New fixed annuity deposits on the pension channel did increase 15%. Institutional guaranteed product sales were up 15% primarily due to our new Ireland platform.

Our overall VNB in the Americas increased 23% primarily due to higher sales of variable annuities, higher sales of institutional guaranteed products and reinsurance. In addition to higher returns in most lines of business, our internal rate of return on new business improved from 11.3 for '05 to 12.4 for the nine months.

We've continued to see improvement in our business in the Netherlands. We've worked to enhance our active risk management strategy, particularly to mitigate the risks related to guarantees in traditional life and unit link products. Hedging the exposures to guarantees of the unit link business led to lower capital requirements on that business and, of course, this resulted in improved VNB and IRR for the first nine months.

Operating earnings amounted to EUR533 million on the nine months compared to 220 last year. The increase was largely influenced by guarantee provisions as well as related hedging results. The impact was a positive EUR188 million in the first nine months, whereas EUR81 million was added to the guaranteed provisions last year in the comparable period.

New life sales in the Netherlands increased 7%, but we had pretty good growth in individual life and pensions as well as pensions in the small and medium-sized companies, and that more than compensated for fewer large-group pension contracts during the period. In '05 we had two pretty significant pension cases. We haven't had any really large ones yet this year, so we made up for that with sales in the small and medium-sized market.

New non-life premiums were up 66% due to very strong sales of the new [WEA] disability product, most of which actually happened in the first half of the year because that's when companies -- it's a seasonal business event, and that's when they buy them.

Our pension sales in the Netherlands, overall, were up 3% for the nine-month period and 11% for the third quarter.

Turning to the UK, the main drivers for higher operating earnings had to do with good growth across all business lines, our annuity business, in particular. And, of course, results there were also helped by the positive effect of higher equity and bond markets. The UK continued to show very strong sales growth during the nine months with sales increasing 56% over last year.

Our pension business in the U.S. and the UK continues to make good progress. Of course, part of that is the effect of the Pension A-Day. We estimate that somewhere in the 20% to 25% of that increase is a direct result of Pension A-Day.

I might point out that we're also experiencing higher lapses but, on balance, we believe we're a net winner both in terms of cash flow and value and putting the cash flow in perspective. This year we've got about 900 million pounds in net cash flow. Last year, that number would have been out 400 million.

Non-pension sales also continue to go strongly and were up 32% to 193 million pounds in annualized premium equivalent. The value of new business increased 68% reflecting the higher sales level and a more profitable mix of business. IRR increased to 11.9, 7% in '05.

In other countries, we had higher earnings in Hungary and Spain but this was more than offset by lower results in Taiwan and higher investments in growth in Slovakia and China. You might remember that it's our policy to expense acquisition costs in our greenfields for the first three years they are operation. And so the earnings that we are seeing from Slovakia and China are having to shoulder those acquisition costs for the time being. Just as an example, in Slovakia where we had a strong push in the pension business this year, operating earnings would have been up by another 32 -- well, approximately EUR32 million if we would have deferred costs -- so -- a little less than that but around that area. We think it still makes sense that during the first three years of greenfield to expense those costs.

New life sales were down 47% in other countries. I already mentioned Taiwan. In Hungary, new life sales increased 18%, and we were pleased with the contribution of our new Polish company, which amounted to EUR38 million in new life sales. While Slovakia and Czech Republic have yet to report profits, keep in mind that we expensed those acquisition costs in the greenfields.

Our business in Spain achieved 57% growth, mainly as a result of the inclusion -- proportional inclusion of Badajoz Vida and Seguros Navarra. Those really didn't get started -- I think Badajoz really got started producing in June or July and Navarra about the same period of time.

[CAM] sales, which are not consolidated, they don't show up here anyplace, declined after a very strong sales period in '05' returns in the nine months improved.

Our pension operations in Central and Eastern Europe are, I think, a great success story. The number of new members in our Hungarian pension fund increased by 49% getting us to over 600,000 in Hungary and then Slovakia 145,000 new fund members were registered, bringing the total to nearly 200,000. And, of course, our plans to acquire the pension fund business of Ergo Hestia will be a great addition to our overall pension presence in this important growth region.

So to conclude -- Aegon has increased VNB and internal rate of return growth demonstrate that our ongoing focus on profitability is paying off. The 39% increase in operating earnings for the group is a result of good underlying performance in our business in the U.S. and the UK, and we're also beginning to see some benefit to our efforts to improve operations in the Netherlands.

Aegon has reinforced its position on the pension market internationally, particularly in Central and Eastern Europe, the UK, the Netherlands and the U.S. and, finally, we strengthened Aegon's broad distribution network and extended our operations in China and with our recently announced reentry into Mexico.

Before we open up to questions, let me remind you of our upcoming analyst and investors conference in New York later this month on November 28th and 29th. You can still register at the conference website or by contacting our IR team. I think we're going to concentrate on the U.S. again at that conference, so I look forward to seeing you there, and now we'll be happy to take any questions. Thank you.

Thank you, sir. [Operator Instructions] Nick Holmes.

It's Nick Holmes at Lehman. I have three questions. The first one is you've launched -- the first two are really on U.S. life, and they are -- you've launched a number of new VA products, but you haven't taken that much market share. Do you think Income Select, your new product, has the right ingredients to be more successful? And the second one on the U.S. is how concerned are you that the elapsation rate on your fixed annuity book might rise above your assumption? And then, third and final question is really a group question, which is after your acquisition of Clark, can you update us on your appetite for more acquisitions and, in particular, I wondered about Italy? Is that a priority area for you? Thanks very much.

Thank you, Nick. First of all, the Income Select -- anecdotally, talking to the members of the wirehouse, people that operate in the wirehouse market and in the financial planner market, the word that we hear is they like our product portfolio, and that we've got the right kind of business, and they think they're innovative, and we're getting them out. We still have to do a better job at wholesaling, and we've been investing in new wholesalers, and it just takes a little time to get that going.

I guess I would have to say I'm a little disappointed it's not coming on faster, but we are spending the time and the money to get the wholesalers out there, and I would expect it will start showing some increase.

In terms of the last rate, fixed annuities, as you know, we model it. So far, we've come in a little bit under what we modeled for decrement rate and let me again make the point that our decrement rate, if we took out and did it on a pure lapse rate, you'd take about 7 points off that. So decrement rate includes the partial withdrawals, deaths, and any reason the money goes out is part of the decrement.

When you look at the amount of business -- right now, we've got about 45% of the total book has some kind of a penalty on it. Next year I think about -- and I'm going to look at [Yost] -- I think about 3 billion comes out -- of the total portfolio comes out, and then it seems to me it's a little less than that the following year. And a little bit depends on the mix of what's coming out, because a lot -- a fair amount of the in-force book was from one producer that had no upfront commission. So no DAC, so that affects the modeling a little bit on the whole situation. But, right now, we feel like our modeling is pretty well up to date, and we think that we can stay within the model decrement rates, which we do have going up for '07.

Clark -- we think that's kind of an exciting acquisition and adds good strength to distribution. We've had a long relationship with them. They're very creative, and the combination of their people in the field and their headquarters people plus ours have done some pretty creative things in terms of product design. So we consider it to be a good addition for us. They do business for about 18 different companies, and, of course, would continue to do business with other companies. But they have a very strong position both in COLI and particularly strong in bank-owned life business. So we feel good about it, and it will add, I think, quite a bit to our distribution capabilities.

Italy is one of the markets we're very interested in being in, and we continue to look at different opportunities there. I hope one of these quarters we'll be to tell you we got one done, but I can't do that yet, and there's nothing that's imminent.

We're continuing to look at lots of opportunities. Most of them are small to mid-sized, add-on type things and, in fact, I think our list of projects is as large as it's ever been, but now we've just got to execute and get some done.

Great. Can I just quickly come back the decrement rate -- you said that will rise probably in '07. I think -- I mean, at the moment, for '06, it's certainly 25% if not higher. Can you give us any sort of indication of what it might rise to in '07?

Darryl, you're on the phone. Why don't you take a crack at that? I'm not sure I could give you an estimate.

Yeah, hi, Nick. It's Darryl in the U.S. We're projecting '07 to be in around the 26% range and rising to about 28% in '08.

[Bruno Paulson].

Hi, this is Bruno Paulson from Sanford Bernstein. I'd like to start with a request. It would be helpful if, rather than talking about them presenting on the nine months, if a lot more of the presentation and data was on Q3, because that would make our life rather easier on the day of the results.

Let me say, Bruno, that, of course, we look at our business and the trends on a longer-term basis, but we recognize that that hasn't been helpful to the analyst community, and I think that we've made the commitment that beginning with 2007 and the first quarter, that we will start putting everything on a quarter-to-quarter.

That's fantastic, because, you know --

We understand that, and I apologize.

That's absolutely fine. The traction is a challenge at an ungodly hour of the morning.

Well, as you might imagine, since we're looking at nine months, and the questions come on the quarters, and some of them come from second quarter '06 to third quarter '06 and some are third quarter '05. It gets a little complicated for us as well.

My question is actually comparing Q306 to Q206 --

[laughter]

Thanks.

In particular looking at the new business profits in the U.S., which seem to fall from about EUR94 million to EUR70 million of new business profit, and why is this, is the first question. And I think part of the answer may be a fall in the sales of reinsurance, which fell quite sharply quarter on quarter. Is the -- what's the normal run rate in both cases, first, is the new business profits. Was Q2 aberrant or is there a particular issue in Q3, and was the boom in reinsurance in the first half of the year a temporary thing or was it Q3 that fell away?

I'll give kind of a general and then let Darryl jump in. First of all, Quarter 2 is a particularly strong quarter, particularly in the life reinsurance business. I think that, to a certain extent, domestic life reinsurance sales are slowing down a little bit, and even international sales, looking out, aren't as robust as we would have expected, but we have to keep doing value-added things out there, and I think I mentioned before that we're looking for more opportunities when we can go out and partner with seeding companies helping finance the front end of the business and develop the product and share on the backside. So we'll be pushing that a lot harder. Darryl, do you want to pick up on a few things there?

Yeah. Bruno, it's Darryl in the U.S. I would say that a number of things that Don mentioned in Q2 wasn't a very strong quarter for us. We're having a very good year. We're up 23% on a year-over-year basis. Some of our businesses are lumpy, period to period, particularly our institutional businesses, such as our institutional spread business and our reinsurance. You're correct, some of the numbers are down on reinsurance following the volume there.

On the institutional side, we did -- value in new business doesn't necessarily always follow the production straight up. We did some shorter duration deals in the third quarter than we did earlier in the year. We did some longer-term, longer-duration MTM programs back earlier in the year, and that drives up higher value of new business per dollar of production.

Also, there was a little bit of softening on the traditional life side -- as the sales came down our acquisition expense overruns kicked up. So we have an issue there that we need to continue to work through. Going the other way, we got some lift in the quarter from the large COLI/BOLI deal that we put on this quarter. So a number of things going on, primarily driven from the institutional lumpiness of our business period to period.

And the cost overrun at [TIG] on acquisition costs was pretty significant with the falloff in business, and our preference, of course, is to increase the volume and get back to increasing premium to solve that first.

And that's the recourse business.

Do you have a number for that overrun?

Darryl -- I think that the overall overrun is -- I'm not going to say. Darryl, I'll let you do it so I don't --

I don't think I have a specific number that I'm going to give you here now. What I would say is it's very important to keep in mind that our value of new business is calculated on a fully loaded cost basis, so we include all our expenses including all acquisition costs as full maintenance. We don't build in any cost or scale improvement.

So when you're looking at a 12.4% IRR unlevered in the U.S., that includes all our acquisition costs, all our current maintenance unit cost levels, going forward. As far as to the extent we have the overruns that I talked about, they represent -- particularly on the acquisition side -- they do represent the lower volumes of new business placed in the period, but you should know that they're fully loaded -- the IRRs are fully loaded on an actual expense basis.

Trevor Kalcic

Yes, good afternoon, it's Trevor Kalcic from ABN Amro. Just a couple of quick questions -- first of all, you launched a new product in the UK market quite recently, so I was wondering if you could provide us with a little bit of feedback on how that launch is developing. And then, secondly, you know, I'm getting a little bit confused on the reinsurance comments you made. If I'm understanding correctly, volumes are down in the reinsurance field? But I was wondering if you could perhaps talk a little bit around pricing, because you had previously indicated that it remains a fairly robust pricing environment for life reinsurance, certainly, in the U.S. And then a third question, perhaps, more generally, have you considered moving any of your triple X reserves from offshore situations to onshore situations? Maybe you have already done so. And, if so, what is the expected impact from that, or what has the expected impact from that already been? Those are my questions, thanks.

Okay. I didn't get the first question.

UK product.

Oh, yeah, UK product, Five for Life. Yes, the introduction of the Five for Life in the UK has gone very well. We're getting a tremendous amount of calls. I think it's, like, 6,000 a day or something. It has not translated into huge premium yet, but I think there's about a billion and a half pounds in actual premium, so far, since the -- but an awful lot of quote activity and a lot of interest in the product, so I hope that when we talk after the end of the year, I'll be able to give you a pretty significant production number, because there's just a hell of a lot of interest in it.

And we're looking at similar products for some other country units, too, so I think we'll be rolling -- you'll see some more rollouts of that type of product.

The life reinsurance business -- I think that there's two pieces of it, and I'll talk as a direct writer first. We've seen 20 and 25% increases in some parts of the business. That translates into better margin for our reinsuror in the U.S. as well. Having said that, a lot of the big companies are increasing their retention levels and looking at some recapture. So I think that growing domestically is going to be a little tougher than we expected, although it's still okay.

Let's see, there was one other one.

Triple X reserve.

Triple X reserve. I'm going to let Darryl handle that one, only to say that we looked at it pretty hard. So -- Darryl?

Yes, Don, I'll take one. Trevor, on the -- just before I answer that one, the one thing I would add on the reinsurance is the returns are still very robust. We're getting mid-teen returns there, and we are up 13% in production year-over-year. I think it's more of a Q2 was an extraordinarily strong quarter in the year, but production is good, returns still remain good on the reinsurance.

On the triple X side, we have executed an onshore solution already. In fact, the last deal we executed at the end of 2005 was an onshore transaction. I don't know if you want more detail on that, but we've already executed that.

Has that answered your question, sir?

Thank you.

Duncan Russell.

Just a quick question on the fixed annuity decrement rate. So if I add in all the outflows you've had since the first quarter 2004 it's about $20 billion, and then I compared that to the start of 2004, fixed annuity balances, it showed about 44 billion. So you basically lost about 45% of the book of that period of time.

Duncan, I think there's something -- that doesn't sound right. Darryl, do you want to pick that up? That does not sound right. I think where we can follow-up directly with you, but I think that net outflows in the fixed annuity business for the nine months are less than 3 billion.

No, I mean cumulative since the first quarter of 2004, so it's 3 billion.

Oh, since first quarter -- I don't think it's -- we'll look it up for you, Duncan, and call you, okay?

William [Eltercan].

Hello, it's William Eltercan calling from Citigroup. I just had a couple of questions. I was wondering how much excess capital you will have left after the completion of all the deals you've financed recently? I think the position that was started here was about EUR2 billion. Secondly, you mentioned that the charge to your income statement to the expensing the buildout in Slovakia, I think, was EUR32 million year-to-date. I just wondered what the effect for China was as well? And, thirdly, two quick questions on the U.S. cap results. How sustainable is the accident and health profit you are sharing at the moment -- I think 120 million for the quarter. You referred to some favorable claims experience there and, secondly, on the [GIC] profit -- what sort of interest rate environment do you need to see to see that profit returning to the level we saw over most of 2004-2005?

Okay. The China number is very small. It's negligible -- 1 or 2 million. The excess capital -- billion and a half to 2 billion. The GIC interest rate situation -- lower front rates or stable rates -- even stable rates will slow the compression down, or take away the compression, actually, in the GIC business.

I think that most of the 20 million health is basically in the supplemental type health. It's done through our direct marketing thing, and you can get some ups and downs, but we think it's priced well and relatively sustainable. Would you add anything to that, Darryl?

I guess on the two U.S. questions, I would add, on the GIC -- back to 2004-2005 spread type levels, we probably need the short end of the yield curve to come back down to where we think is a longer-term land spot for that, if you will.

Just having the short end of the curve steady out and stable out for a while will stabilize the spreads and probably have them come up just a little bit. But to get back to those prior levels, we probably need the short end of the curve to come down to where it was back in that time era.

The other one, on the ANH side, I would say, generally, there's a little bit of favorable claims experience relative to our long-term expectations going on both, as you said, Don, on the direct marketing side but also on our long-term care operations. Other than that, returning to expected levels, it's probably fairly close to run rate.

Albert Ploegh.

This is Albert Ploegh from Kepler Equities. A few questions -- one on the Netherlands. I saw you have done a securitization deal in mortgages. Can you give some background on that? The second one is on the U.S. Pension Act 2006. That seems positive for your [indiscernible] business. Do you agree on that? And, finally, maybe can you give some color on the pipeline in terms of the U.S. on the COLI/BOLI business and in the Netherlands on potential large pension contracts. Thank you.

The pipeline for pension contracts, the large ones in the Netherlands, looks good. We probably have as good a pipeline for COLI/BOLI business as we've ever had. It's very strong, and I think a little bit of that just may be the fact that the pension protection act gives some certainty to COLI/BOLI and people that were on the fence are taking a look at it. So all that's very positive for us.

I'm going to let Joe Streppel discuss the Netherlands securitization.

It's probably [indiscernible] securitization deal what we -- sixth, corrected by [indiscernible]. What we do is when we place some mortgages in the retail market and we fund it through securitization. It's -- there what we do in such a way that for us it is off balance, and it's not counting as operational finance for the rating agencies. So in terms of capital management and assuring that the market that we have on that vision is locked in. Those are the prime reasons for doing those business, and we probably are going to continue that if the markets are right.

Trevor [Moss].

here from Mound Securities. I have a number of questions. The first, relating to other countries, I supposed, primarily Asia, Central and Eastern Europe, and other Europe. You've obviously got some good things happening there in terms of investment on the new businesses you've set up in the pension funds, and so forth. The thing that strikes me is the earnings that you have coming out of those businesses, clearly, are very low, partly as a result of those investments but very considerably away from the value though I think is attributable to that particular area, certainly in my numbers on an embedded value strike appraisal value.

I wonder if there's -- maybe it's not a question, it's a plea -- more transparency for the numbers in these different areas would be very helpful. I think that's a big area in terms of value that you're missing out on by not giving good disclosure.

And I guess previously you had said that you thought that these areas would represent maybe 10% of earnings by 2008. Now, clearly, with the investments you've made that, to me, is not going to happen. But I think there's a lot more that can be done in terms of highlighting the value there just with more transparency. It isn't really a question, I suppose.

Question two, Transamerica Re, I understand are starting up operations in Europe, which sounds quite interesting, given the success that's been had in the U.S. recently. I wondered if you had any preliminary reviews on when the volumes may start to play through that operation.

And I think, thirdly, with the focus on profitability that you've had during the quarter for the last two to three years, and obviously we've seen significant improvements in IRRs on new business and value of new business. I'm just looking at the IRRs now. I mean, they look in line in almost every territory or above your hurdle rates, and I was thinking whether really now is the time to put the growth back on the agenda. There's obviously some reasonable growth coming through some parts of these operations but it looks to me like with the IRRs now above hurdle rates, it's time to start turning on the volumes again. I wondered if you had any views on that.

Trevor, we will try to get more transparency and more information on other countries. I think, just from an earnings standpoint, going back to the fact that we write off all the commissions and all these during the first three years of greenfield, of course, has a significantly depressing effect on any output.

But, yes, we do think there is good value there, and we will try to do more target to get to 10% of earnings from other countries, of course, includes all countries except our three major markets, and I think that target date was 2009.

On Transamerica, the entry into Europe got a little slower than we'd hoped getting started, but we would expect it to start showing up in '07.

The IRR -- that's a discussion we are having. Let me give an example -- in the UK where we're at about 11.9 IRR, we think that, in total, for the country, that's very good, but we still need to work on improving the IRR in our pension business. We're getting that because of the risk business and the annuities, the changing mix of business. So there we'll be trying to push up the IRR, actually, on the pension business.

But, clearly, in some other markets, we've got to start looking at the tradeoff between pricing and growth and the returns, and we're doing that.

It's not as simple as --

Yeah, it's not quite that simple.

-- because the price sensitivities of products are totally different, line by line.

Oh, of course, yeah, I understand that but, obviously, there's a sort of price volume tradeoff with all of these types of products, and we -- IRR is never a very useful measure in terms of looking over weak economic value creation, I think, sometimes.

Fixed annuities, I think, is a good example. We could -- as things roll out of the penalty period, you know, if we took them up 50 basis points, or 60 basis points, as they rolled out, they would still roll off the books, more than likely. But your question is fair, and it's something that all of our product people are having a discussion about, and there are some areas where we're going to have to look at trading off the IRR, to some extent, to get some additional [inaudible].

Thank you, Don. Can I just come back very quickly on the first part of that question relating to other countries. I understand, obviously, that you're expensing the commissions in the first three years of your greenfields and obviously making some serious investments in the growth of those businesses. Are you actually saying that you still have 10% of operating earnings being your target for 2009? I thought it was 2008 but, anyway, 2009. I'm miles short of that I my model, and I'm just wondering if that really still is a genuine target even with your plans for investment and with your modeling of commission write-offs, et cetera.

Let me help you a little bit. The 30 million or something in Slovakia is probably nonrecurring, because the window for new pension entrants is closed. So that means that for next year you do not have to take into account commission levels of 30 million, but much, much, much, more or less.

And yet you'll have the earnings coming off that block.

Absolutely.

Almostlike statutory -- like statutory accounting. But, Trevor, we still think we can be at the 10%, and I think that's our target and our goal, and we're going to work hard to get there.

Pierre [indiscernible].

What is the impact on earnings for the outflows, because I think that three is still some lapses penalty on your fixed annuity business and a second question is about the UK business. Could you quantify a little bit the impact of lapses regarding the pension book? Thank you.

I'm not sure I quite understood, but I think you said there are still more outflows to come in the fixed annuity business? Is that --

Penalties [inaudible].

Oh, penalties. Yeah, we're collecting on penalties. That was [Mikhail] talking. We are collecting penalties, and, as I mentioned, about 45% of the book of business still has penalties on it. So we are collecting penalties. Mikhail?

[inaudible]

Oh, I'm sorry. We'll get back to you on the earnings impact on the penalties, if that's all right.

Thank you.

And, the UK, yes, lapses are up. Let me see if I can --

Our expectation is, I mean, it's fourth quarter for that to be sure that 20% to 25% of the value of new business is higher than our loss in our [VNSLU] because of lapses so it's value creating.

[Operator Instructions] There are no further questions at this time. Would you like to continue, sir?

Thank you very much. We appreciate everybody's attendance. Thank you.

And this concludes the nine months results conference call. Thank you for participating.