Aegon Ltd (AEG) 2006 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the AEGON full year 2006 results analyst and investor conference call on 08 March, 2007. [OPERATOR INSTRUCTIONS]. I will now hand the conference over to Mr. Don Shepard. Please go ahead, sir.

Thank you and thank all of you for joining us today. Jos Streppel, our Chief Financial Officer, is here, Michiel van Katwijk, our Treasurer, Alex Wynaendts, my colleague that's been doing a lot of our work internationally, and Darryl Button's in by phone, CFO of the U.S.A.

I'm going to give you a brief overview of some key developments and then we can talk about the results in greater detail and end up with some questions.

We continue to have a priority of growing our business, but profitably. I think 2006 was a very strong year, capped by a particularly strong quarter in terms of financial performance. Our operating earnings up 32%. New life sales up 20%. And we got a strong increase in the value of new business, which is up about 41%. And, of course, our internal rate of return for the Group improved to 14.5%.

We announced new targets for the Group last November. And the increase in VNB for 2006 does put us ahead of the business plan, underlying our target to double the VNB to EUR1.1b by 2010. We will keep you updated on our progress on a regular basis.

Let me spend a moment on some key developments achieved over the past year. It was a really busy year for AEGON in terms of our international expansion objectives and efforts to strengthen our leading position in pensions internationally.

We fulfilled our plans to begin operations in India, with our joint venture with Ranbaxy Promoter Group. Now, I guess it will probably be operational late in 2007. But we'll provide both life insurance and asset management products and services through Religare, the Ranbaxy Financial Services company. Of course, India is a target market for us, given its big population and the developing economy and, of course, the relatively low penetration level of insurance in the country. We see continued strong growth rates for the insurance sector in coming years.

We reentered Mexico with our 49% acquisition of Seguros Argos, a company that specializes in work-side marketing and is showing good growth, and started our pension fund management company in Mexico, Afore Argos. It's up and running.

We've continued to focus on the developing markets in Central and Eastern Europe. In November we acquired a top-10 pension fund in Poland, Ergo Hestia, which will go very well with the life company that we acquired in 2005 in Warsaw.

Early in 2007, we announced our plans to develop a mandatory pension company in Romania, the Bank of Transylvania, in anticipation of their mandatory pension system which we expect to be introduced next year. We'll also co-brand some life products through the Bank's network of 340 branches.

We also made you aware of our plans to establish a life insurance company in Japan with Sony Life that will initially focus on variable annuity products. We will be distributing through Sony Life's life planner agent network as well as through banks and other financial institutions. It'll be into 2008 before we're up and running.

We're playing the piano here?

Yes. We've also made some very good progress in the past year in strengthening distribution. I see we had a press release in the last day or two that we have shareholder approval to acquire Clark Inc., a leading provider of bank-owned and corporate-owned life insurance in the U.S.

Of course, in the Netherlands we picked up the last 55% of Unirobe, a company of independent financial advisors here in the Netherlands.

In Spain, the two recent joint ventures of Caja Badajoz and Caja Navarra started actually selling in mid-year '06 and had a good, successful last half of the year.

And we continue to roll out in the highly developed coastal province of China, with a new office in Jinan, located in the Shandong Province.

I might also add that our APN, AEGON Pension Network, is gaining momentum. During the year we invited Germany's third largest pension provider, HDI Pension Management, to joint our network and they have. And our local business continued to report new business, given this focus on developing cross-border pension solutions.

Let me now turn to our full-year results, beginning with our growth in VNB for 2006. 41% increase. So the Group reflects solid increases in virtually all of our country units with the -- I'm not sure where that is.

It's not here. It's not here.

It's not here. Okay. I'm sorry. I thought maybe Jos had his phone on, but I see it's off. Excuse me.

So the 41% increase in VNB for the Group reflects solid increases in almost all of our country units. Asia is the only one that -- (technical difficulty) -- there's a -- guys, there's some kind of a machine on behind us, so hang on just a minute. Have you got it off, guys? Sorry about that.

So I said we had good increase with the exception of Asia, particularly strong growth in the U.K., other European countries and Central and Eastern Europe. The U.S. had a 44% increase, helped by $48m worth of one-off-type effects in the fourth quarter. But even if you take these one-off items, we're still ahead of our plan to double the value of new business by 2010. Of course, we don't expect our progress to reach our target to be linear, but we feel pretty good about the increases that we've been able to achieve so far.

The lower VNB in Asia reflects lower sales in Taiwan. And if you all remember, in '05 we had the fire sale in the first half of '05 because of cutting commissions on products that required reserve changes. But at the same time we've increased our margins in Taiwan and made progress on our strategy to sell more unit-linked business, in line with our profitability requirements.

Next slide. The 14.5% internal rate of return on new business compares to 12.4% for the full year of 2005. I might add that we don't expect that kind of an IRR for the long term because it's well above our internal 11% hurdle rate.

The internal rate of return on new business in the Netherlands improved from 9.2% in 2005 to 9.8% for 2006. This was supported by enhanced capital and risk management initiatives and the success of our new disability products in the Netherlands.

Our internal rate of return in Asia improved strongly due to the re-pricing in Taiwan I mentioned. Although this did result in lower sales, our returns were considerably higher. Today almost 50% of our sales in Taiwan are now coming from unit-linked products.

Returns in other areas remain above our target levels. Central and Eastern Europe particularly, where returns are very good and even surpassed our 2005 level. A lot of this is actually driven by our Polish life business, which had a record fourth quarter. The improved return in other European countries was due mostly to the returns on new business sold through our partnership with the Cajas in Spain.

Next slide. Let me now talk about operating earnings. The 32% increase was a result of increases in the Americas, the Netherlands and the U.K., and we can talk in a moment about the components when we talk about the country units in greater detail. Let me mention, though, that the increase was a combination of good, solid business growth in several areas, as well as improved mortality in the U.S.

We've also enjoyed a pretty positive market environment. Interest rates increased at the beginning of the year and we've continued to have a very benign credit environment. Equity markets were generally higher and returns on some of our asset portfolios significantly outperformed long-term expectations. That's mainly in the U.S.

Next slide. At our Annual General Meeting on April 25, the Executive Board will propose a total dividend for 2006 of EUR0.55 per common share, which is a 22% increase compared to our 2005 dividend. The dividend increase is driven by a strong capital base and healthy cash flows.

The final dividend will be paid in cash or shares at the election of the shareholder. The value of the stock dividend will be approximately 5% lower than the cash dividend. As was the case with the interim dividend, we will buy back an equivalent amount of stock on the open market to neutralize the effect of stock dividend.

We do understand the importance of paying dividends to our shareholders and will continue to increase the annual dividend as long as we continue to have good cash flows and a strong balance sheet.

Next slide. If you look at the 20% increase in life sales for the Group, the U.K. was the primary driver behind the increase, with new life sales up 54% for the year, nearly double the industry level in the U.K. Variable annuity sales in the U.S. and institutional products were the main drivers between our overall 10% increase in deposits.

And our off-balance-sheet production for the Group was up 14%, reflecting very strong sales of synthetic guaranteed investment contracts and strong sales in retail mutual funds in the U.S. and the U.K. and, of course, growth of our pension fund business in Central and Eastern Europe, partially offset by a little lower sales of managed assets.

Next slide. Let me spend a little time on the country units. In the Americas, our operating earnings before tax increased 16%. We had very strong returns on hedge funds, limited partnerships and convertible bond assets, and we experienced business growth in most lines of business. As I mentioned earlier, we also experienced improved mortality.

New life sales in the U.S. were up 7%, with higher bank-owned and corporate-owned life insurance which, as we've said when it was down, tends to be a bit lumpy. And also our reinsurance sales were quite strong. We also did have some growth in the middle market, particularly with our World Financial Group.

This was partially offset by lower retail sales in France/America Agency Channel earlier in the year, although those sales came back pretty strong in the fourth quarter. Our variable annuity sales increased 6% overall, with retail variable annuity sales up 15%, and pension-related VA sales were actually down 3%. This was against some very, very strong sales in 2005, particularly in the third quarter. And those sales were driven by a couple of large cases in 2005.

In the Netherlands, we continued to enhance our risk management strategy over the past year. We implemented a hedging strategy to mitigate a good share of the interest rate risk related to the guarantees in traditional life, unit-linked and certain group pension products. These efforts resulted in lower capital requirements on some of the business, and also had a positive impact on the internal rate of return.

Our VNB in the Netherlands increased by 23%, while the internal rate of return improved to 9.8% compared to 9.2% for 2005. The successful introduction of the new disability product, WIA, in the Netherlands also played a part.

We still have some work to do in the Netherlands to get the IRR up to our 11% hurdle rate, but we're clearly headed in the right direction.

Operating earnings were EUR634m in 2006 compared to EUR322m the prior year, largely influenced by the guaranteed provisions as well as related hedging results. We had a positive EUR167m in 2006 where in '05 we actually added EUR165m to the guarantee provisions.

New life sales in the Netherlands increased 7% and we believe our market share grew in 2006, although the absolute numbers aren't out yet. If we look at the drivers behind the increase, we had growth in individual life sales through the intermediary channel and increased activity in the group pensions business.

Non-life sales were up 65% due to the successful sales from the new disability products I mentioned. And pension sales were overall [around] 6% for the year, and 13% in the fourth quarter.

Next slide. Turning to the U.K., the higher operating earnings there has been with good growth across most business lines, our annuity business in particular and a lower charge for an incentive plan related to our accelerated acquisition of positive solutions in the IFA platform in the U.K.

Results were also helped by the positive effect of higher equity and bond markets. These positive effects were partly offset by the impact of higher surrenders due to Pension A Day, which occurred last April in the U.K.

We continue to show very strong sales growth, with a 54% increase over last year. Pension business particularly had strong growth, part of it being attributable to Pension A Day, the pension single premium sales more than doubling.

Our non-pension business, however, also performed well, with non-pension sales growing 25% compared to '05, to GBP263m in annualized premium equivalent.

Naturally, the flipside of higher A-Day-related sales in the U.K. is that the lapse rates also increased through the A-Day activity, particularly on older books of business.

Overall, we believe we are a clear net winner of A Day with strong net cash flow and strong growth in new business value. VNB increased 85%, reflecting the higher sales levels and a more profitable mix of business, with the IRR increasing to 12.2% from 11% in 2005.

In other countries, we had higher earnings in Hungary and Spain, offset by investments in growth in Slovakia and China. You might remember that in greenfields, as Slovakia was, we don't defer any acquisition costs and probably had about almost EUR30m in acquisition costs in Slovakia last year, none of which was deferred.

New life sales were down 30% as sales in Taiwan decreased 61%. We already talked about the high level of sales through broker and the bank channel in 2005 before we re-priced and reduced commissions. Business mix, though, has improved, with almost half the life sales being unit-linked.

Our overall new life sales in Central and Eastern Europe were EUR82m, compared to EUR32m in 2005. In Hungary the life sales increased 5% and we're pleased with the EUR60m new life sales from our Polish operations, which had an absolute record fourth quarter.

We continue to make good progress in our pension business in Central and Eastern Europe. In Hungary, the number of new members added in 2006 increased by 60,000. Total membership of our pension funds is now well over 600,000 members and growing. Off-balance-sheet investments grew by 32% compared to the year-end 2005 level.

In Slovakia, our pension fund business, launched in 2005, was also successful. We had approximately 154,000 members registered in the mandatory pension fund. So we're now up over 200,000 in Slovakia. And I think when we're able to close the pension fund we bought in Poland we'll be somewhere in the area of 1,200,000 participants.

Our business in Spain more than doubled in new life sales, mainly as a result of our inclusion of our proportion of bancassurance sales through Caja Badajoz and Caja Navarra. And, again, I mentioned these really didn't get rolling till mid year.

CAM sales which are not consolidated were down after a very strong sales period in 2005, but returns improved as the product mix continues to shift from single premium savings products to reoccurring premium risk and protection products.

Next slide. Let me just conclude by saying this past year was a good, solid financial performance for AEGON, with operating earnings, VNB, higher internal rates of return on new business. I think we were pretty successful in delivering on our expansion strategy, entering into Mexico, the continued rollout in China, expansion in Romania and Japan. And we've strengthened our pension position internationally with our initiatives in Poland and Mexico, and along with strong growth in the U.K. and other countries.

Our announced acquisition of Clark Inc. and Unirobe in the Netherlands further strengthens our multi-channel distribution. And let me finish by saying our capital position and cash flows are strong and will enable us to increase our dividend.

Let me finish by mentioning just a few dates. We're going to change our line of business reporting, beginning in the first quarter of 2007. And we will be providing a statistical supplement, which is an important and asked-for step in enhancing our financial disclosure. In order to help you prepare for this wave of new information, we'll also be providing you with the historical information in April.

With that, let's take questions. Thank you very much. First question?

[OPERATOR INSTRUCTIONS]. The first question comes from Mr. Nick Holmes. Please state your company name followed by your question.

Yes. Hello. It's Nick Holmes at Lehman. I had three questions, really all on the U.S. The first one is, looking at your VA distribution, it seems to be growing very well in the broker, dealer and fee planner channels, but less well in banks and agency. And I wondered if you could talk us through how you see all these channels developing and where you think you're best positioned to get the most growth.

Second is on life reinsurance and institutional guaranteed products, which was strong in '06. I wondered if you could elaborate a bit more on why that was the case and what you think the outlook is for this year.

And lastly, just looking at U.S. retail life sales in Q4 which you mentioned rebounded quite strongly, I wondered if you could update us again on the outlook for this year. Thank you.

Thank you, Nick. First of all, on VA sales, I would start by saying that I'm a bit disappointed that we're not ramping that up quicker. We are adding some more wholesalers. I think we added 33 in 2006, bringing us to 97. And we're planning on adding another 17 in 2007, which should get us to about 114 or 115. Of course, it takes them a bit of a while to get rolling.

We still feel pretty comfortable about our product line. I think we just have to get out there and work a little harder to sell it. We're doing okay in the wirehouse market. Our shortfall is really in the agency channel. And the agency channel that we sell in has opportunities to sell for others as well. So sometimes there's a commission issue and sometimes it's a product design issue. But we have to do better there.

The institutional product sales are really driven -- the increase is driven by the reinsurance business, which had a strong year, and our guaranteed investment contracts, particularly synthetic GICs.

And then U.S. retail life sale, the rebound in the last quarter, a lot of it came actually from the Transamerica Group where there was a period of time there where the IOLI, the industrial life sales and our stance on that slowed things down a bit. But we think that, as a whole, we're back to work there and doing better.

As well as our World Financial Group in the middle market has had good, strong sales the last quarter. It's a bit early to say this but we feel pretty good. It looks like things are continuing into this year with the increase in life sales from those two markets.

Thank you very much. That's very clear. I just wondered if I could press you again on the variable annuities, just really where you see the most upside potential, which distribution channel might provide the most growth.

Well, in terms of numbers, it's going to be the wirehouse. So I would say that I know that we've picked up a couple more distribution agreements. And with good wholesaling I would expect to get a little better share than we're getting now of the wirehouse channel. That'll be the larger place for increases for us.

Okay. Thank you very much.

Thank you, Nick.

The next question comes from Mr. David Nisbet. Please state your company name followed by your question.

Yes. Good afternoon. It's David Nisbet from Merrill Lynch. The first question just partly follows on from one Nick asked. The level of synthetic GICs were extremely high towards the end of 2006. I wondered whether you could give some indication of whether the levels for the full year, you think, can be maintained going forward.

The second point on the GIC sales, you mentioned in the statement the spread has been coming down. I wondered whether you could quantify that and perhaps indicate whether you think the trend will continue or we should see some stabilization from here. Thanks.

Thanks, David. In terms of the level of GIC sales, a lot of that was driven in the synthetic GIC by one very large case. And, of course, that business kind of comes and goes. And I think, looking at that production in the last quarter with that very large sale, to have that kind of a level going forward would not be expected.

So, again, one very large sale. But we'll get some other large sales in the future, I expect, it's just I don't know when they come. But I wouldn't suggest that that kind of a level should be expected throughout the year.

In terms of spreads coming down, that's -- you know what, I think I'll let Darryl Button jump in on that one, if you don't mind. Darryl?

Yes, sure, David. It's Darryl Button in the U.S. The spreads coming down relates to our in-force earnings. It doesn't relate to new business. The new business profitability and returns still remain very strong in that business.

As for the earnings, it relates to a small mismatch that we had between the duration of the assets and liabilities at the front end of the yield curve. And so we were affected when the short end of the yield curve rose rapidly, going back over the last 18 months or so. Now that the front end of the curve has stabilized for a couple of quarters, that spread compression has now stabilized going forward.

Okay. Thanks. That's very clear.

Thanks, David.

And the next question comes from Mr. Marc Thiele. Please state your company name followed by your question.

Hi there. It's Marc Thiele from UBS. A few number questions, if I may. Firstly, you mentioned in the press release that you had a favorable development in terms of mortality gains. Maybe you could give us some indication of how much better it is compared with the normal levels you would be expecting going forward.

Then, secondly, could you give us some guidance on the impact of assumption changes on the value of new business? Was it more in the order of, say, 10m or was it more in the area of 100m? I've seen the one-off that you mentioned regarding the Americas division, but maybe you could give us some indication ahead of the full year embedded value release in May.

And finally, if I may, on the new business value in the Netherlands, does that include the lower tax rate already, or should we expect another positive impact from the lower tax rate as well?

Would you repeat the last question, Marc?

Yes. Sorry. My last question was regarding the Netherlands and the new business profit. Is this based on the lower tax rate already?

Okay. I got it. I got it. I'm sorry. First of all on mortality, I think the impact of favorable mortality in 2006 was about $40m. Well, in '05 we probably had unfavorable mortality of about the same amount. So the actual swing from '04 -- or '05 to '06 is almost $80m in mortality.

The impact of the assumptions I'll save for last and I'll let Darryl take that question.

The tax issue in the Netherlands, that was a special situation. We would expect a run rate on taxes more in the 25% range.

And that's included in the value of new business.

Yes, it's already been included.

So there's no zero rate in the value of new business.

Right. Darryl, do you want to pick up on the impact of assumptions?

Yes, Marc. I can certainly speak to the 48m of extraordinary fourth quarter items that (multiple speakers).

Darryl, he understood the 48m. I think he was asking about more general assumptions in the (multiple speakers).

I guess the most material assumption was part of that 48m where we have been executing -- we announced at the end of the year we executed a long-term collateral financing deal for redundant regulatory reserves on our, what's called AXXX, our universal life business here in the U.S. We had -- until we executed that transaction, we had been using fairly conservative actuarial assumptions assuming the execution of that. Now that we've worked through that, that led to about 18m of the 48m.

Going forward, now that we've worked through those transactions, we know what those costs are, we'll be building those directly into our assumptions going forward. So that's probably the largest assumption change that we have on our value of new business.

Okay. That's helpful. Thank you.

Thank you, Marc.

The next question comes from Mr. Mark Cathcart. Please state your company name followed by your question.

Yes. Mark Cathcart from Deutsche. I've got a couple of questions. The first one is I wondered if you could indicate the relevance of reinsurance new business profit in your U.S. results, and also if you could give an outlook for growth in that line. I think at the November conference we were told that the growth was going to be considerably more subdued in '07, '08 and '09.

And the second question, you've got 470m of capital gains in your earnings for '06. I just wondered if you could say what the pool is for capital gains on a going-forward basis, and any strategy you may have on the speed of unwinding that level of capital gains.

Okay. In terms of capital gains, and I'll give you my answer and then look to Jos, as you know, we were changing our Netherlands operation where we had quite a few equities, and we've sold a good bit of those off. So I wouldn't expect any constant gains -- capital gains coming out of -- for us going forward to any big extent.

And in terms of the pension business, I don't think we'll see the kind of growth rate we saw.

The reinsurance business, Don.

Pardon me?

Reinsurance.

Yes. What did I say?

Pension. It was the piano music that confused you, I think.

Yes. Reinsurance. I don't think that we expect the same growth rate that we've had this past year, but we continue to believe that we can get double-digit growth in the pension business, including some of the rollout of the international --

Reinsurance.

It's reinsurance, not pensions.

But you can't indicate what level of new business profits relates to reinsurance for this year -- for last year? Just an indication, for reinsurance.

Yes, we typically don't give that kind -- we don't give -- but in May you'll get a statistical supplement that will show that for you.

Sure. But no sort of ballpark number that you could give us?

I tell you what, why don't I have Louise or Michiel call you and give some numbers for you?

That would be great. Thanks. Thank you. Thank you. So it was about the capital gains, the pool of capital gains and your desire to realize those capital gains.

The reason I was confused, Mark, is I thought you were talking to [Grover]. Jos?

Well, Mark, you saw in our condensed balance sheet there is still a revaluation reserve of 1.6b.

Yes.

But we have no instructions for our asset managers to manage IFRS. That would be stupid. We do it on an economical basis. If our asset management wants to realize some profits, if they see that there is an investment available with a better effective return after tax effect, they should do that because that's in the interest of the shareholders and also in the interest of our policyholders.

So there's no instruction of a CFO in this Company saying to the asset management 'push the button and give me a billion'. We are not doing that. So making a calculation for next year is undoable.

Sure. Just as an afterthought, I remember you saying that you wanted to get a 20% market share in the Netherlands in terms of outsourcing of group pensions. I wondered if you could comment on the margins attached to that sort of business because my understanding is that there's a lot of competition in the market for group pensions.

Yes. It's a bitter fight, Mark, so we all have to fight for our returns there. But at least 50% of the business is not only decided upon pricing, but also on service and other things. We are not giving in sharply to our returns. We want to make -- the Netherlands to make their hurdle rate in the near future. So there's not much room to do that. And we stress the Netherlands organization to improve on services. That's what they are doing and that's how they win contracts.

On that front, have you been behind the curve, say, for the past 10 years in terms of IT investment and now you're catching up, or would you say you're ahead of the curve in terms of IT investment?

No, I said more often that the service level, partly caused by IT, in the Netherlands in the pension fund industry is not great. But between all the bad, AEGON is a good one.

Right. So you're ahead of the curve or in line with the curve?

Absolutely. Yes.

Okay. Thanks. Thank you.

Thanks, Mark.

The next question comes from Mr. William Elderkin. Please state your company name followed by your question.

Good afternoon, everyone. It's William Elderkin from Citigroup. I have three questions, please. First of all, could you give us a bit more of an outlook in terms of new sales, new business production in the U.K. for your business, just given the strength of the 2006 performance?

Secondly, can you give us some figures in respect of VA net flows over this quarter and perhaps '06 as a whole compared to 2005?

And finally, in terms of your IFRS accident and health earnings in the Americas business, that's quite volatile quarter on quarter, I think, particularly with reserving movements. Does the full year '06 profit that you report, is that a sensible base from which to forecast going into 2007 and 2008?

Okay. Outlook in the U.K., getting the kind of growth rates that we've got won't be there. We think that we've -- we're in a -- we've mentioned that we think A Day probably contributed 20, 25%, something like that, of additional pension sales and the -- which at some point aren't going to be there. But, of course, we remain with a very strong pension franchise and believe that we can continue to get our share of the business.

In terms of we are growing our non-pension business, so bonds, annuities and risk-type premiums, I mentioned they were up pretty good this past year and I do think we'll continue to get some growth there. And, of course, with A Day activity, there's probably been less focus by the IFA market on those risk products and we would expect to be after the A-Day-type thing slows down a little bit.

I'm going to let Darryl pick up the VA net flows and the IFRS question. Darryl?

Yes. On the VA net flows, we are -- actually positive net flows, just over 400m for the year in 2006. But admittedly that is about 800m from the pension with a small offset from the retail side. So we are slightly negative on retail VA net flows and positive on the pension side.

On the IFRS question, I think, if I got it right, it was on A&H line of business. And you're right, it does tend to be a little volatile period to period. I think the short answer is actually 2006 is not a bad year to peg going forward. We had some reserve strengthening in 2005 which contributed to some of the growth we saw here in '06 but that was an '05 issue. So I think, if you look at '06, that's not a bad starting point to look forward.

Great. Thanks very much.

Thanks, William.

And the next question comes from Mr. Bruno Paulson. Please state your company name followed by your question.

Hi. It's Bruno Paulson from Sanford Bernstein. A few questions. Firstly, in the U.K. you had -- looking at the life account policyholder profit, you had a favorable market. You also claim to have had net inflows from A Day. But the profits on the -- here on the life account policyholders were only flat and I was wondering how you could explain that. Is that some change to do with that?

Secondly, on U.S. new business profits, can you confirm whether the redundant reserve move, that incremental 18m, was just on 2006 sales or was that on previous year sales?

And are the U.S. mutual funds included in new business profit yet because they weren't in '05 and they are in the '08 to say 2010 targets? So I was wondering where that comes in.

And finally, on costs, in the U.S. both the commission and the operating costs went up a great deal in a year when sales didn't go up that much. And I was wondering if you could provide some clarity around that.

Let me take the easy one first. Mutual funds weren't included. I think they're going to be included after the first quarter going forward.

The U.S. -- so for life account policyholders in the U.K., I think that that's -- Alex is here and he's worked with that, that's the true-up for lapses, the A Day lapses, Alex?

Including everything.

Including everything, A Day and regular lapse rates. Okay.

And the U.S. operating expenses, let me see if I can work through a few different pieces. First of all, at the end of the year we did an indemnity reinsurance agreement with AIG and took over a relatively large block of credit insurance. So we picked up the cost and we did the transaction on December 31. So we picked up the cost for it but had no revenue and the revenues and the earnings will come in in '07. So costs were booked in '06 and we'll pick up revenues going forward. That's a big part of that.

Secondly, we've, of course, invested in new wholesalers. And in our investment operations we've added investment professionals dealing with areas where we needed to beef up a little bit more in terms like -- in areas like emerging markets and that type of thing.

In addition, we acquired a small asset manager that we picked up the expenses on, I believe it was in the third quarter. And about 40m of the increased costs was just normal payroll costs in the U.S. So I think if I could -- I tell you what, if you would like, I'll have Louise or somebody call you and actually go through the detail on that and show you the absolute expense increases.

That would be great. And coming back to the first one, sorry, I missed your answer on the mutual funds. When do they cancel?

That's first quarter.

Yes, so it's not included in [multiple speakers].

First quarter of next year?

Of '07.

Yes. Great. Thank you.

Okay. And, let's see, what was the question on 2006 sales?

I don't know -- the other question was, and I think I missed it, if you answered it, on the redundant reserves, yes, was that -- the 18m, was that just on the 2006 sales or --?

Yes, it was. Just on 2006 sales.

So it's not really a one-off in terms of new business profits, it's just a one-off in Q4 new business profits?

That's correct.

Yes. Thank you.

Thank you.

And the next question comes from Mr. Ton Gietman. Please state your company name followed by your question.

Good afternoon. Ton Gietman, Petercam. I'd like to ask two questions. First one coming back on the capital gains referred to by Mark, he said 470m. Actually it's roughly 917m gains and 500m losses. I wondered if you could, ahead of the annual report, because I know it's in there, give us an idea of how much of that was on equities and probably losses on bonds. That's my first question.

Second, in order to have any feel of what is coming out of the Netherlands in 2007, could you give us some sensitivities as to what 10 basis points in change in interest could do to your derivatives program because that leads to quite significant changes in the operating and, indeed, pre-tax result?

Well, that's a pretty difficult one because that supposes that the programs are not going to be changed in the meantime and that [if it spikes] our risk managers will interfere immediately, so it's a constant process.

But we look at it more in an economical sense and say, well, what is non-operational and operational is not too important if you have an economic view. If you're fully hedged, economically the effect should be zero. But, as you know, you're not fully hedged. There's all this inefficiency in hedges and you will see that appear through operating earnings. And the rest of the valuation -- the fair valuation of derivatives is going through non-operating earnings.

And you see backswings. You achieve backswings there. They have to be and to stay in non-operating earnings. We saw a swing in 80 basis points between the end of 2005 and 2006, and you saw that that had an effect of more than 300m under the line in non-op. So that's what I could give you. It's not an analysis we are very fond of because our risk managers, they make their analysis on an economic basis.

But coming back, you said 80 basis points change, indeed, 330m change in the underlying result of the hedges, but you extended or expanded the hedge. So could I take it [that would immediately change] --?

That would dampen the volatility.

Sorry?

That would dampen the volatility because what you saw over 2006, that the duration hedges were in place almost all year and that non-linear hedging, so the guarantee hedging, took place in the third and in the fourth quarter. So the volatility of operational earnings will be dampened in 2007.

Okay. Thank you.

And the next question comes from Mr. Michael van Wegen. Please state your company name followed by your question.

Yes. Good afternoon. Michael van Wegen, Soc Gen. Three questions, please. First of all, in the U.S. on your traditional life business, Q4 showed a quite good improvement in the agency channel. We've heard your comments on IOLI, STOLI. Could you indicate whether we've seen basically the bottom in Q3 and that from here it's basically only going up?

Then the second question is on Taiwan. Q4 showed in Taiwan dollar very strong sales, 1.4b versus only 800m in Q3. I know your comment from the past that you're working on distribution, working on products. If there's deferred signs of, yes, that's finally paying off, what is you outlook going forward?

And then the third question on the U.K. In May, at the Investor Day last year, you indicated that there was basically a target of 10% market share and 20% margin, if I'm correct. And the assumption was 4% market growth over 2005/2010 period. Basically you were well ahead of that. You're gaining significant market share and the market is doing better. So what is your outlook now? Are you willing to raise that target already, or what should happen to raise that target?

Okay. Thank you for the questions. I think, first of all, on the U.K., we're not prepared to raise targets yet because we're just coming off a very, very strong year and we'd like to see how things develop. But we're appreciative of the fact that we had a very strong year this past year.

In terms of Taiwan sales, the Taiwan sales always get a bit confused because we have that early '05 big production from the fire sale, when we cut commissions and changed pricing in Taiwan. And I think we've just had pretty good, steady, we've added more bank relationships to sell products. We're increasing our brokerage capacity in Taiwan and continue to develop our own sales force.

But I might let Alex comment on that in a minute -- here in a minute in terms of Taiwan. Go ahead, Alex.

Michael, the fourth quarter showed a good improvement over the third quarter. But you've got to take into account that the fourth quarter is traditionally a strong quarter in Taiwan. And so it's a combination of increase in distribution, improving our products and seasonality for the fourth quarter.

Okay. Your question on the U.S., my expectations are that the third quarter was kind of a bottoming out. And we were, again, very pleased by the performance in the fourth quarter. I can tell you that recruiting in WFG and two of the other smaller units has been very strong and that usually suggests you'll see increasing production. We actually saw this increasing production in these units coming from the increased recruiting that happened last year.

And the TIG sales, the Transamerica Group sales, I really believe it's a concentration issue. They're back looking at other products and selling in the top end of the market in business-type life cases and that type of thing. And I would expect to see continued reasonable growth in Transamerica as agency sales operations.

Okay. Thank you. May I follow up on the U.K. one, then? You say you're not willing yet to raise the target but, given comments from Aviva [Legals], are you in line with their view on market growth of, let's say, a high single digit for '07 and perhaps for '08 or are you more pessimistic or optimistic?

I think that's reasonable, high-single-digit growth. And we would hope to do a little better than that in the risk products and those areas.

Okay. Thank you.

Thank you.

And the next question comes from Mr. Nick Byrne. Please state your company name followed by your questions.

Hello. It's Nick Byrne at JP Morgan. Can you hear me okay?

Yes.

Okay. It's a quick question on the balance sheet data. I'm really trying to reconcile your very strong new business growth with some thoughts I had on the balance sheet. Really what I was trying to understand is in the liability side of the balance sheet, you still see fixed annuities, quite significant outflows in terms of both dollar and in euros. Annuities on the variable side were up but only, I guess, due to the market. And then overall, if you look at the liabilities for the general accounts, they're down around 8% year on year in euros. And I wonder whether this reflects a continued increase in the lapse rates that you're seeing on the fixed book and how this will flow through to the embedded value data when we get that in May.

So really the question is can you reconcile that with the very strong growth you're seeing in new business and how, perhaps, the earnings profile will lag the growth in new business? And then some comments, perhaps, on the embedded value side as well.

I guess I'd want to spend a little time looking at it, thinking about it. If you don't mind, I'll have somebody follow up with you. But maybe, Jos, do you want --?

One way market could [immediately make] that. If liabilities went down by 8% a year for the U.S., that means an increase because it's a balance sheet item. And the euro/dollar rate at December 31, 2005 -- 31 of 2006 is a big difference. You won't see that in the P&L because the average rates are the same. So you have to analyze the liabilities movement for the U.S. in dollars.

No, sorry, perhaps I didn't make my point clear. On the fixed annuity side, in dollars, your total reserve base for liabilities is down 9%.

Yes.

Perhaps, rephrasing the question, can you give some comments as to whether you're seeing an increase in the decrement rate or the [multiple speakers] flow into that?

Actually, the decrement rate for the year, of course, was up, but it slowed down a little bit in the fourth quarter. And it's always a little bit more difficult to look at the total decrement rate because it depends on how much new business is coming in. And, of course, new deposits and fixed annuities are somewhat slow.

The present decrement rate is about what -- it's within our expectations and our assumptions. And looking out for the next year we'll probably see a decrement rate in the 27 to 30% range. If it gets much over 30, we would probably have some effect on DAC, but not significant. So, and Darryl, you can jump in if you dislike my answer.

No, I think that was fine, Don.

So, just to clarify, so you're not expecting any DAC write downs to come as a consequence of the decrement rate being outside your assumptions, and we shouldn't expect any write downs or assumption variance in the embedded value when we see those numbers in May?

Not until 30.

Okay. Thank you. That's very clear.

Thank you.

And the last question comes from Mr. Ton Gietman. Please state your company name followed by your question.

Yes. Ton Gietman again. I wondered if I could still get an answer on the breakdown of the capital gains.

Jos, you go ahead.

I tried to escape, Ton.

Yes, I guess so. We shouldn't have to wait for the annual report, I guess. You're giving other people some detailed information for Q4, so why not this figure?

Well, let me give you an easy one and the rest you could calculate for yourself. If you have the net gains and losses on investments, the only thing that's going through that number is the fair valuing of the hedges, and that was EUR352m for the year. And the rest is pluses and minuses in shares, where the biggest part in realization of shares, positive one, was on the sale of our 5% interest in the Dutch organization. That's about EUR550m.

Okay.

But the rest of the calculation is for you.

Right. Thank you.

Thanks, Ton.

Thank you, sir. There appear to be no further questions. I will hand over to you.

Thank you very much for attending our conference call. And if you have any follow-up questions, you can call Louise Costikyan or somebody in our Investors Relations department.

Thank you very much.

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