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AEGON N.V. (NYSE:AEG)

Q4 2013 Earnings Call

February 20, 2014 3:00 am ET

Executives

Willem van den Berg

Alexander Rijn Wynaendts - Chairman of The Executive Board, Chairman of The Management Board and Chief Executive Officer

Darryl D. Button - Chief Financial Officer, Member of The Executive Board and Member of The Management Board

Analysts

Farquhar Murray - Autonomous Research LLP

Michael van Wegen - BofA Merrill Lynch, Research Division

Benoit Petrarque - Kepler Cheuvreux, Research Division

David T. Andrich - Morgan Stanley, Research Division

Nick Holmes - Societe Generale Cross Asset Research

Ashik Musaddi - JP Morgan Chase & Co, Research Division

William Elderkin - Goldman Sachs Group Inc., Research Division

Maarten Altena

William Hawkins - Keefe, Bruyette, & Woods, Inc., Research Division

Francois Boissin - Exane BNP Paribas, Research Division

Peter Testa

Gordon Aitken - RBC Capital Markets, LLC, Research Division

Operator

Ladies and gentlemen, welcome to the Aegon Fourth Quarter 2013 Results Conference Call for the 20th of February 2014. [Operator Instructions] I would now hand the conference over to Willem van den Berg. Please go ahead, sir.

Willem van den Berg

Good morning, everyone. We appreciate that you've joined us for this call on Aegon's fourth quarter 2013 results. Today's presenters are CEO Alex Wynaendts; and CFO Darryl Button. As always, we welcome your questions after the presentation in our usual Q&A session. We have again combined the analyst and media earnings calls, but we will still keep the Q&A sessions separate and we will start with the analysts. Before we begin, I would like to remind you to review our disclaimer on forward-looking statements, which is at the back of this presentation.

I would now like to turn over the call to Alex Wynaendts. Please go ahead, Alex.

Alexander Rijn Wynaendts

Thank you, Willem, and good morning to everybody. I am pleased to report this morning a solid set of results for the Q4. This quarter completes a good year for Aegon and provides for evidence that we're delivering on our objective of growing our business profitably. We achieved again a strong set of underlying earnings, sales and value of new business. Capital levels and cash flows also remain strong. And we will be proposing a final dividend of EUR 0.11 per share in line with our stated objective of sustainable dividend growth.

I'm now turning to Slide 3, which provides you with a good summary of how we are performing against our key performance indicators. As you can see, 2013 was a year during which we've made considerable progress. Underlying earnings rose 5% or 8% at constant currencies. 1/3 of our earnings came from fee business, normalized cash flows were strong and we increased our returns. Writing profitable new business and addressing our low return businesses will contribute to higher returns going forward.

Let's now turn to Slide 4 to the highlights of the strategic action we've taken in 2013. During the last year, we've made solid progress on the 4 strategic objectives we are pursuing throughout our organization to achieve our ambition to become a leader in all of our chosen markets. We began the year by simplifying our capital structure with the successful transaction that eliminated the preferred shares owned by the Aegon Association. And throughout the year, we made add-on acquisitions, including in Central and Eastern Europe, and successfully completed the transformation of our business in Spain, which enabled us to upstream a net amount of EUR 800 million to the holding. And we are now offering products through Santander's extensive branch network in Spain and early results of this new joint venture are positive.

At the same time, all our businesses stepped up their efforts to strengthen customer engagement by improving service levels and by simplifying products and by enhancing their online presence through the use of technology. 2013 saw us launch major new digital platforms and propositions in most of our markets worldwide. These new propositions have been received very positively and many of them have been recognized for their innovation and customer-centricity. I'm therefore confident that our focus on creating a positive customer experience will continue to support the growth we are achieving in our business.

Turning to Slide 5. In 2013, we continued to see strong sales as highlighted on this slide. Total sales for the year increased 6% to EUR 7.2 billion driven primarily by variable annuity, pensions and asset management businesses. Gross deposits increased 15% to EUR 11 billion during the fourth quarter while net deposits more than doubled to EUR 2 billion. I will address our deposits in more detail on the next slide.

New life sales were strong but somewhat below the level we experienced in an exceptionally strong quarter last year. In the U.K., we successfully launched our platform with now more than GBP 1.3 billion of assets under management. Accident and Health and general insurance sales were slightly lower compared to the fourth quarter of last year, mainly due to adverse currency effects and lower production levels as a result of our focus on improving profitability. And as you can see, we continue to experience strong customer demand for our core products and services, a clear reflection of strength of our franchise, the depth of our distribution and our focus on offering the right products to our customers.

Here on Slide 6, we provide an overview of our deposits. Let me start with the Americas. Increase in deposits was mainly driven by variable annuities and pensions. This was an exceptional year for our variable annuity business with sales of USD 8.5 billion. And although we do see competitive pressure slowly increasing in the variable annuity market, the addition of new partners, such as Edward Jones and Voya Financial, during the year has further strengthened our position and we continue to expect healthy flows going forward.

Our U.S. pension business also had another very successful year, adding deposits of more than USD 21 billion. The rise was driven by plan takeovers, within this particularly in the education and health segments, as well as a successful focus of retirement readiness to grow participation and contribution rates. Our sole proposition is supported by fully scalable platform that enables us to continue to grow and write profitable business. Our New Markets deposits of EUR 3.2 billion for the quarter mainly reflect the significant growth of our third-party asset management business. But also our joint venture in Japan is experiencing a strong increase in variable annuity production, driven by expansion of a distribution network of regional banks.

Turning to Slide 7. We are committed to offering products and services that provide value to both our customers and to the company. This commitment is clearly reflected in the significant increase in the market consistent value of new business achieved this quarter and over the year. In the Americas, variable annuities were a key driver of this increase as a result of higher volumes and higher margins supported by increasing interest rates. The improvement in the U.S. life business is the result of active repricing and the withdrawal of products that did not meet our profitability standards.

In the Netherlands, the market consistent value of new business was lower compared to the fourth quarter last year due mainly to low margins of mortgage production. Contribution from our pension business was stable as strong margin improvement fully offset lower sales. As the slide indicates, market consistent value of new business in the U.K. was impacted by lower margins and volumes of annuities and lower pension volumes. And the MCVNB in New Markets benefited from the strong sales in Asia. This, however, was offset by the impact of divestments in Spain and lower sales in Poland. In addition to increasing sales, our profitability is supported by cost efficiencies across all our businesses and we continue to seek ways to further improve these efficiencies.

Here on Slide 8, I want to highlight the successful shift we've made towards rebalancing our business. Today, 1/3 of our earnings are generated by fee businesses. This has been achieved by growing our revenue-generating investments by over 7% per year since 2008 to EUR 475 billion. And as you can see on the slide, this has been driven by growth in investments for the account of policyholders and off-balance sheet investments with third parties. Now on the other hand, our spread-based business has been significantly reduced over the same period. Institutional spread-based balances are down USD 28 billion and fixed annuity balances are down almost USD 20 billion. This reduction in balances over the last 5 years has reduced market risk and freed up substantial capital.

I'm now turning to Slide 9. 2013, we executed on significant cost reduction programs across the company. And you are aware of the extensive business transformation program in the U.K. and a significant cost reductions in the Netherlands. We're also improving efficiently in the Americas with the creation of a shared service center. This is a new group within the U.S., which will provide services to the whole of our U.S. organization and it will result in significant cost savings going forward. The savings realized allowed us to invest in growth and to make strategic investments in technology to better connect and engage with our customers. We have already online direct sales channels in all of our markets. And in the U.K., we are preparing to launch a new direct-to-consumer proposition during the quarter that gives individuals without a financial advisor access to our platform, providing them a full service capability. This is a significant and fast-growing segment of the market. The investments we are making are needed to ensure that our proposition remains strong, compelling and differentiated.

And I will now turn it over to Darryl for more insight on our earnings and financial position. Darryl?

Darryl D. Button

Thank you, Alex. Here on Slide 10, I would like to take a closer look at underlying earnings, which despite negative currencies' impact, rose by 7% in the fourth quarter to EUR 491 million. In the Americas, earnings declined to EUR 327 million, which was mainly due to adverse persistency in the life and protection and a weaker U.S. dollar, partly offset by higher pension earnings. Underlying earnings in the Netherlands increased to EUR 110 million as observed mortality was better than expected. As we have announced, beginning January 1, 2014, we have moved to prospective tables, bringing our IFRS reporting in line with our statutory and economic frameworks.

In the U.K., underlying earnings decreased to EUR 21 million as we invested in the development of our new direct-to-consumer proposition, as Alex mentioned earlier. Earnings from New Markets amounted to EUR 49 million. Higher earnings in Asia were more than offset by the negative impact of divestment in Spain and the recently introduced insurance tax in Hungary. Holding results improved by EUR 40 million, mainly the result of lower interest expenses following debt redemptions, reduced operating expenses and a one-time gain of EUR 18 million related to interest on taxes.

Net income was down for the quarter and for the year. Here on Slide 11, you can see that our strong underlying earnings for the quarter were mitigated by fair value results. Higher equity markets and interest rates impacted our hedges, which I will address in the next slide. Realized gains were mainly driven by further adjustments to our general account investment portfolio in the Netherlands to bring it better in line with the new regulatory yield curve. Impairments were very low this quarter as a result of the current benign credit environment. The little impairments we had were offset mostly by recoveries on investments in subprime RMBS in the U.S. Other charges were mainly related to restructuring in the Americas and the U.K. In addition, the new pension legislation approved by the Polish Parliament was more adverse than anticipated. And as a result, we have impaired the remaining EUR 10 million of intangibles related to this business.

By now, you will be familiar with the way we address the results of fair value items, as shown on Slide 12. The results from fair value investments were again positive for the quarter, mainly driven by returns on alternative investments and credit derivatives. Fair value hedging programs, where we largely have an accounting match, were effective. However, there was a negative impact from the movement in our own credit spread in addition to model refinements in the Netherlands. Fair value hedging without an accounting match resulted in a loss of EUR 123 million following strong equity market performance in the fourth quarter. As a result, we saw losses again on both the equity collar hedge, as well as on the macro hedge in the U.S. These hedges have now been restructured, as outlined on the next slide.

Slide 13. We have replaced the U.S. macro hedge and the collar hedge with one single new hedge program. The goal of the hedge program remains to protect the capital position and dividend-paying ability of our U.S. business. Given the strong equity market performance in 2013, higher interest rates and lower market volatility, we were able to put in place a new hedging program that will achieve the same level of capital protection but at a reduced expected cost and lower market sensitivities. Assuming a total equity market return of 2% per quarter, the new hedge will have an expected cost of USD 60 million per quarter and will vary by plus or minus a further USD 60 million if the actual market returns vary by plus or minus 10%. The source of the volatility from this program continues to be the accounting mismatch that exists between the insurance treatment of the liabilities versus the fair value treatment of the hedging instruments.

Turning now to Aegon's capital position at the end of the fourth quarter here on Slide 14. Our group IGD ratio of 212% reflects the continued strong regulatory capital positions of our business units. This slide illustrates our capital management framework and practice. In the U.S. and the Netherlands, the improvement in the capitalization as a result of operational free cash flows allowed for dividend payment to the holding during the year. In the U.K., we have reset our target and buffer capital levels based on Pillar 1 at 145% and 165%, now including the with-profit fund. In the fourth quarter, we contributed another GBP 150 million of capital and we are now comfortable with the level of capital in the U.K. Each of our major business units is now capitalized within the target range. The next slide covers the consolidated operational free cash flows and excess capital at the holding.

Slide 15. Operational free cash flows were EUR 228 million in the fourth quarter. Excluding market impacts and one-time items, operational free cash flows amounted to EUR 304 million for the quarter and EUR 1.3 billion for the year. We ended the year with EUR 2.2 billion of excess capital in the holding, reflecting EUR 1.5 billion of dividend claimed by our business units. As previously communicated, EUR 900 million of this capital will be used during 2014 to further reduce leverage. At the end of 2013, our gross leverage ratio was 30.1% and our fixed charge coverage was 5.1x. With the further deleveraging later this year, we expect to be within our target ranges.

Slide 16. Given our strong capital position and solid cash flows, as Alex mentioned in the introduction, we will be proposing at the Annual General Meeting of Shareholders in May a dividend of EUR 0.11 per share covering the second half of 2013. This results in a full year dividend over 2013 of EUR 0.22 per share. As shown on the slide, the cash allocated to common dividends has increased substantially over the past few years. Our aim is to grow the dividend in a sustainable way, taking into account our capital position and our cash flows.

Alex, back to you to wrap it up.

Alexander Rijn Wynaendts

Thank you, Darryl. And before taking your questions, allow me to summarize here. We are pleased with our financial results over 2013 and the fourth quarter was again a strong quarter. And looking ahead, we are confident that our strong financial position, combined with the continued execution of our strategy, will enable us to take advantage of the many opportunities we see in all of our markets and to create value for both our customers and our shareholders. We're happy to take now your questions. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Farquhar Murray from Autonomous.

Farquhar Murray - Autonomous Research LLP

Just a couple of questions actually around the cash flows on Slide 15, if I may. If we look at the EUR 1,335 million kind of normalized figure for the full year, I just wondered if you could outline the contributions coming from the U.S. and the run-off book and perhaps coming from the U.K. securitization. And then specifically with regards to U.S. components, I just wondered if you could help us in terms of how much that figure might be perhaps by the absence of financing solutions this year and presumably at what stage we might see some of that come back.

Darryl D. Button

Yes. Farquhar, it's Darryl. Let me just give you a feel for the cash flows. They're actually pretty close in line with where we had highlighted in my June presentation on the expected cash flows for the year. So obviously, the bulk of that is coming from the U.S., about EUR 900 million. The Netherlands, about EUR 250 million. The U.K. is actually contributing about 0 right now from an operational free cash flow perspective. And as we've signaled in the past, we expect that to come up as we go into 2015 as we complete the transformation in that part of the business. And the rest of it is really coming from the rest of the organization.

Farquhar Murray - Autonomous Research LLP

Okay. And the run-off book and the U.K. securitization component?

Darryl D. Button

Yes, the securitization components in the U.K., it was about -- a little less than EUR 50 million in 2013. And that's going to drop down to about EUR 25 million in '14 and largely be gone in '15. And that's down from over EUR 100 million in '12. So that's been a trajectory on the way down. In terms of -- from the run-off books in the U.S., the incremental impact from a year-over-year basis is pretty small, less than EUR 100 million change on the delta. And I think that's the number that you're after there. And that would include the fixed annuity portfolio in that as well.

Operator

Our next question comes from Michael van Wegen from Bank of America.

Michael van Wegen - BofA Merrill Lynch, Research Division

Mike van Wegen from Bank of America Merrill Lynch. One question actually. I think looking at these results, it becomes increasingly clear that some of the operations that you restructured are doing well and some, I guess, are not doing so well. I think things in the U.S. look nowadays quite good on the core business and the Netherlands is not doing too bad either. I guess, 2 areas where things still remain tough is the U.K. and Canada. Darryl, in January, talked about the portfolio review. Can you talk a little bit more about that? And can you talk us through your idea behind idea behind Canada and the U.K., why you are confident that you can turn them around? And when are you willing to take steps, given that you've worked on this now for the past 5 years?

Alexander Rijn Wynaendts

I'm pleased that you recognized that while we have taken a lot of actions, we're seeing really good results. The U.S. is a good example in terms of making choices in what businesses we want to stay and what businesses we don't want to stay. And you still have there a run-off portfolio. It's clearly a portfolio of businesses where we said they are not core to our business. And we said, and Darryl has repeated that in January, that obviously we are looking at all the options we have in order to deal with them, but in a way that we do not destroy unnecessarily shareholders' value. So we will continue to put emphasis on it, the run-off portfolio, probably taking into account somewhat more favorable market conditions. You talked about the U.K. and Canada, clearly challenged market environments. And let me start with the U.K. 3 years ago, we said we have done a strategic review of all the options we have in the U.K. And when I meant all the options, I really mean all the options, effectively putting in a runoff, running it or selling it. We've come to the conclusion at that point in time that the best way for us to protect shareholder value was for us to take actions which we needed to take. And that means starting by taking our cost down very significantly. You see that 25% we promised in terms of cost reduction, we executed on it. We have been very clear that we will have further cost reductions needed in the U.K. while at the same time, we are also positioning ourselves for the future in the new platform world. That will take time, but I'm confident that we are on the right track and that we will see the results in margin. Canada is a different situation, where we have had the business for a long time in a market that clearly is not an easy market. And Canada clearly is one of those operations, where we still see that we need to take more actions. And we will be doing that, and hopefully we're able to share more with you later this year.

Michael van Wegen - BofA Merrill Lynch, Research Division

Okay. Can I follow up on what you said on the U.K., please? I appreciate that, indeed, a couple of years ago, you've done this strategic review and you decided to go the fix-it route, let's call it that way. Do you agree with me that since then, the situation has deteriorated in the sense that you've cut the cost that you targeted and profitability is still not anywhere near where it's supposed to be, cash flows are still not anywhere near where they're supposed to be with the 0 for 2013 and you had to inject capital in the past year significantly ahead of what you expected? So isn't it the situation now that despite your decision that you made a couple of years ago, things have deteriorated only further and perhaps conclusions might need to be drawn again?

Alexander Rijn Wynaendts

Well, Michael, when you take a decision, you have to be consistent with your decision. That doesn't mean that you don't change the way you look at things. But once you take a decision, you have the management that's committed to execute on the plan and we are executing on the plan. We are taking our expenses down. We will continue to take further expenses down. We have developed, I think, a great capability, well-recognized by the market in terms of platforms. And we should see the benefits of it emerging margin. Now on the cash flow, you're making a valid point. The cash flow was 0, but that was as planned because it has the impact of securitizations, as Darryl just mentioned. And Darryl also gave you the trajectory going forward. So we will continue to take actions in the U.K. that are needed to fix this business, and we will do that ourselves.

Operator

Our next question comes from Benoit Petrarque from Kepler.

Benoit Petrarque - Kepler Cheuvreux, Research Division

It's Benoit Petrarque from Kepler Cheuvreux. The first question is on the dividend. I would like to come back on the decision to put the full year at EUR 0.22. What has been your thinking process beyond--behind that? I just know that you have a strong excess capital at the holding. Excluding deleveraging, it's still EUR 1.3 billion right over the EUR 600 million floor. And how do you see your kind of dividend yield currently? I think it's about 3.2% on the EUR 0.22. So how do you kind of view dividend yield versus the sector? Second question will be on the fixed annuity. I mean, I know it's on the runoff, but I mean, residing apparently in the U.S. So do you see this business going into the next 2 years? Do you see opportunities? And I've seen the crediting rate actually on the new business going up by 20 bps quarter-on-quarter. So is that a kind of sign that you are a bit more aggressive commercially on the fixed annuity? Or are you still out there? And then just finally, on the variable annuity business, you just mentioned during the presentation some more kind of -- a little bit more competition on that. So I mean, how do you see that moving in '14? Do you expect still healthy margins and good volumes in '14?

Alexander Rijn Wynaendts

Just on the dividends, I think we've been very consistent. We have a dividend policy. The dividend policy is based on the strength of our balance sheet and based on cash flow generation. And what is really important here is that we want to have a dividend that is growing sustainably in the future. So looking back at this year's full year dividend, it's a 5% increase over the previous year. But in terms of yields, we are positioned somewhere between the U.S. sector. We are higher in terms of yields in the U.S. sector and a bit lower than the European sector. It's probably not surprising if you view the profile we have, where we have nearly 60% of our businesses in the U.S. I'll take your last question so that Darryl can give you more insight on your question on fixed annuities. On variable annuity competition, you see what we're seeing now is the result of a lot of hard work, which has taken place in previous years to develop distribution. You see the sales coming from new distribution channels. I just mentioned the 2, Edward Jones and Voya Financial. And I think that, that is what is now emerging and that is also the reason that we feel pretty comfortable that the positive trend will continue. Now we've had good margins, very good margins. And you could say these margins have been in the low -- what you call the low 20s or margins which we do not believe will be sustainable going forward. But they don't need to be sustainable going forward, so we probably expect a little bit more competition and pressure on the margins. But still very healthy margins and a great momentum in the distribution. Darryl, do you want to [indiscernible] respond on the fixed annuities?

Darryl D. Button

Yes. I can be very short on fixed annuities. I would not signal that I see the fixed annuity for us picking up anytime soon. We've said in the past that interest rates need to be significantly higher than where they are now. Obviously, they started to get -- started to jump up at the end of the fourth quarter and have come back down here again as we sit here today. But we're really not ready to run the credit risk that would be required to make the spreads work in today's rate environment. So we need rates to be a lot higher than they are and a steeper curve. I just don't see that in the near-term forecast, so I would take expectations down on that for us.

Operator

Our next question comes from David Andrich from Morgan Stanley.

David T. Andrich - Morgan Stanley, Research Division

I just wanted to follow up on an earlier question regarding captives in the U.S. and kind of what the drag has been creating on U.S. free cash flow. I'm just wondering if you could just give a bit more comments on that in terms of the 4Q results, and then also going forward what you expect to happen.

Alexander Rijn Wynaendts

Darryl?

Darryl D. Button

David, I'll take that one. The drag has been running about EUR 40 million per quarter. That's what it was in the third quarter. We've had several quarters where we have not financed the redundant reserves, the XXX, AXXX issue in the U.S. We're actually looking at that for '14. And I actually expect us to execute some financing of that in '14, which will bring back some of that strain in the operational free cash flow somewhere in the next couple of quarters.

David T. Andrich - Morgan Stanley, Research Division

Okay. And that will impact the operational free cash flow, so we should -- well, we would hope to expect about EUR 40 million or so increase in that going forward in 2014?

Darryl D. Button

Yes. We've had a EUR 30 million to EUR 40 million kind of strain in our numbers each quarter for the last 4 or 5 quarters as we've held off on financings. So we'll be able to get some of that back when we catch back up, yes.

Operator

Our next question comes from Nick Holmes from SocGen.

Nick Holmes - Societe Generale Cross Asset Research

Just a couple of quick questions. First one is coming back on the portfolio optimization review, wondered if you can tell us whether the rising U.S. rates last year is going to help you to accelerate finding solutions for the run-off book. And then second question is again coming back on the dividend. If you measure this over a payout of net underlying earnings and I think it comes to something like 30%, and that seems a little bit low. And I just wondered whether you would agree with that and whether you think that there is scope for it to rise on that basis.

Alexander Rijn Wynaendts

Nick, on your question of portfolio review, yes, I did say that the rising interest rate environment, the improvement in general of market conditions, investors looking for yield, clearly all of that is hopefully going to make it now easier and more executable, if that's a better word than here, to deal with business of the run-off portfolio. And I think we've been very clear all along that it is our objective. And that's why we put them separately in a run-off record, it is our objective to address these, but again in a way that we do not destroy unnecessarily shareholder value. So it has clearly our attention and the market conditions are improving, will make things easier.

Nick Holmes - Societe Generale Cross Asset Research

Can you give us a little bit more color on the sort of solutions that you think might be possible?

Alexander Rijn Wynaendts

So not right now. All I'm saying to you, Nick, is that we are looking at all options available there to effectively accelerate the runoff in what we now see improved market conditions. In terms of your dividends, what I said just in response to the previous question, what's important for us is that we have a dividend that is growing sustainably over time. And that's part of our strategy, where we said we wanted to take our risk down, improve our risk profile, be more predictable, and that also applies here to the dividend. And we believe that the EUR 0.22, which represent a 5% growth over the previous year, is a good basis for growth going forward.

Nick Holmes - Societe Generale Cross Asset Research

Okay. I mean, you don't think that there is a structural issue with the dividend, that it's structurally low perhaps because of the legacy situation that you still have to some extent?

Alexander Rijn Wynaendts

Again, Nick, I can only repeat what I said. For us, the objective is clearly a steadily growing dividend. And we've grown it now 5% over the previous year. That brings us with a dividend yield, by the way, in excess of our U.S. peers and I would admit a bit lower than our European peers, not surprising if you look at the portfolio composition of Aegon being, for a big part, U.S.-based.

Operator

Our next question comes from Ashik Musaddi from JPMorgan.

Ashik Musaddi - JP Morgan Chase & Co, Research Division

Sorry to come back again on the same point on your run-off business. I know you have been trying to give some answer, but some thoughts on that. Assuming interest rates starts picking up, now what would you think your book will look like? I mean, would you start looking for some potential disposals, or would you still be thinking from a run-off perspective of that book, assuming interest rate pick up significantly from here on? I know you have mentioned that you definitely look for shareholder value creation thing, but at least if you can give a bit more color, would be great. Secondly, on the impairments. It looks like the impairments went down significantly in this quarter. Is it a real improvement in the RMBS market that is just driving that? Or is it across the book which is going forward? I mean, how should we think about it going forward, would be great.

Alexander Rijn Wynaendts

Ashik, what I' said on the run-off is that we obviously are looking at ways to accelerate run-off. And of course, if we are able to find a buyer for these books of business in the run-off business, we would certainly do that, because it would accelerate the run-off. It's difficult for me to give you more color right now. But I can say to you, what I can say, we are engaged in conversations. We are looking at options and I hope that over the course of the year, I can give you more. Darryl, you want to respond on impairments?

Darryl D. Button

Yes. Ashik, it's Darryl. If we had to look across the whole portfolio, credit is pretty benign everywhere right now. So we're just really not seeing much in the way of gross impairments in any of our portfolios right now. And then it's further enhanced by we're actually getting some recoveries back in the U.S. RMBS portfolio. So that's really those 2 things are -- together are both fixed.

Ashik Musaddi - JP Morgan Chase & Co, Research Division

Should we expect that going forward as well, or is it just a one-off kind of an event?

Darryl D. Button

No. I think the near term, I don't see anything -- we're not hearing anything on our side from a credit perspective and in the near term that anything should change this trend. Obviously -- and comes in cycles, but in the near term, I think this is to be expected.

Operator

Our next question comes from William Elderkin from Goldman Sachs.

William Elderkin - Goldman Sachs Group Inc., Research Division

A couple of questions. Firstly, just following up on Farooq's question. Within the U.S. cash generation for 2013, was that EUR 100 million of that EUR 900 million you mentioned coming from the run-off business? Just not sure I understood the answer correctly? And the secondly, within the U.S. business, I'm just wondering, do you have any meaningful exposure to long-term care products, I understand there'd been some reserving issues there and then just where you stand on that? And then finally, I was wondering if you'd help with the U.K. business, really trying to understand what the potential earnings powers the pensions business is going into 2014 and 2015. And the way I was thinking about it was looking at the fourth quarter, pensions earnings was a GBP 9 million loss, adding back all the negatives that you've mentioned, which takes me to plus GBP 4 million. And really, if you can give me a sense of how much of the IT expenses in persistency may or may not recur as negative charges plus any other dynamics that I should be bearing in mind when I'm thinking about my forecast?

Alexander Rijn Wynaendts

Darryl, would you like to take the question on the run-off business?

Darryl D. Button

Yes, I will. Sorry, there's a lot of questions, we were trying to get those all jotted down there. No, the EUR 100 million was not the actual capital release from the run-off business, as it was more of the delta effect, if you will, that we're seeing coming from those on a period-over-period basis. I actually don't have the actual capital that was released from those run-off businesses and I'm going to have to ask IR to follow back up with you on that. On the second question, I think was long-term care-related.

Alexander Rijn Wynaendts

Yes, the long-term care-related, Darryl. I think you know, William, we have some exposure to long-term care. It's limited exposure and we're comfortable with the reserves and the propositions we have. In terms of the U.K. business, clearly, this has been a quarter where we had a number of exceptionals. The exceptionals are related to persistency as we highlighted but also to a number of investments, which we are making to make our business more ready for today's environments. You know we're making significant investments in our platform capability. We're also, as we announced -- as I announced, making investments in a proposition, which is a proposition which is going to be focused on the end consumer directly, which is a very different model and a new model in our business. So a lot of these investments effectively are impacted -- are impacting this quarter.

William Elderkin - Goldman Sachs Group Inc., Research Division

I'll just come back on that. So on the U.K. side, are those investments likely to continue into 2014, or is that base will be down for the time being?

Alexander Rijn Wynaendts

I think it's fair to say, William, that you can expect that these investments will continue in a similar range in terms of run rate going forward.

William Elderkin - Goldman Sachs Group Inc., Research Division

And then just sort of finally again on the U.K., I was under the impression that you have been paying cash commissions, which had sort of tracked into 2013. Will that now stop going into 2014? And what's the order of magnitude in terms of potential earnings uplift if indeed that perhaps assumption was correct?

Alexander Rijn Wynaendts

We are certainly benefiting from the new environments from RDR. So for new business, which has been written after 2013, that is indeed done on a commission-fee basis. But we still have a lot of effectively trail commissions on previous contracts, which we continue to pay commission on. So the commission level has come down, which by the way is a very good thing for our business going forward, but we do still have trail commissions, in particular in our workplace in the group pensions space.

William Elderkin - Goldman Sachs Group Inc., Research Division

I don't know if you can sort of comment on this to give us a sense of things. I mean, it's difficult for that pensions business to be delivering much for you on sorts of low-double digit earnings for some time. Is that fair?

Alexander Rijn Wynaendts

That is clear that we need to increase scale. And that's why we invest in the capabilities we have, which you know we have, I think, a platform capability now for pension business, which is very much recognized. So we're now really focusing on scale, and indeed in order to get our cost levels on a more efficient basis which should be driving earnings going forward.

Operator

Our next question comes Maarten Altena from Mediobanca.

Maarten Altena

Three questions from my side. The first is a follow-up on the U.K., the capital position in particular, as you mentioned now to be more satisfied with the capital position. Does this mean that we should expect upstreaming of dividends through the holding as of the first quarter 2014 already, or is that still too early? The second thing is on holding expenses, because what should we expect here for a run rate -- a quarterly run rate given that the fourth quarter was impacted by a one-off and take into account the earlier announced deleveraging measures for 2014? And maybe on the Netherlands, would you be able to update us on what you have seen in group pensions in the fourth quarter of 2013 and how you see the pipeline of competitions and maybe also the outlook for 2014?

Alexander Rijn Wynaendts

Darryl?

Darryl D. Button

Yes, I'll take the first 2. On the U.K. capital, no, I wouldn't expect a dividend here in the first quarter of 2014, not after just putting a contribution in the fourth quarter of '13. The reality is we expect a step change in the cash flow generation in the U.K. starting in '15. I think '14 is really a transformation year, where we complete the investment that Alex was mentioning in terms of the cost and the transformation costs that we're investing in the U.K. That will also complete the run rate expense reduction by the end of '14. So not only will we stop investing, the expenses will come down. In addition to that, the securitization will run out in the U.K. as well in 2015. And then as Alex said, we're really -- the new business stream has come down substantially in the post-RDR world, where we don't have the high commission environment or the commission environment. Those 4 things will all interact by the end of '14 and really create '15 being a positive cash flow year for the U.K., and I think a step change to the cash flow. So you can assume that '15 will be that transition year and we should be ready to pay dividends in 2016 based on calendar year 2015 performance. On the -- you also asked about holdings, yes, there was an extraordinary interest on taxes in the holding that was EUR 18 million this quarter. There was about EUR 5 million of noise that went the other way, so I think you would look at the holding run rate results to be about EUR 13 million high for this quarter.

Alexander Rijn Wynaendts

I think the last question was on pensions in the Netherlands, which I'm happy to answer. And I think what's important for you to see is that coverage ratios are improving, as you know, high equity markets, slightly higher interest rates, so that means that it's easy now to consider transfers. As such, we have a good pipeline. It's important for us to be very consistent that we price these products in line with our pricing policy. But I believe that not only our strong capital position, which is clearly recognized in the Netherlands, but also the improved back office capabilities, we invest a lot in improving our back office capabilities, will all be the basis forward to see that the pipeline, which is coming, will also convert into actual basis. The second element I'd like to bring maybe to your attention, because I think it's an important change going forward, you're well aware of that tax changes in the Netherlands. So the contribution rate effectively, which is tax-free, has been reduced. But probably more important also is that the -- there's a cap now on the amount that is pensionable and that's EUR 100,000 now and that means that we see a lot of opportunities effectively to offer our customers that have a pension which is in a tax-efficient place, to be complimented with more capabilities in terms of saving for the future. So we'll be focusing not only on our group pension customers and the contributors, but also to them individually, in particular for all of those that now see a cap and need to find different ways of replacing their retirement savings for the future. So that is an additional capability, where we are very much focusing on, and with all the efforts we're putting in place, connecting better with our customers, those who contribute to the pension plans, with all the digital and technology investments we are making, we believe we're well positioned to take advantage of that new opportunity emerging as a result of the legislative changes here in the Netherlands.

Operator

Our next question comes from William Hawkins from KBW.

William Hawkins - Keefe, Bruyette, & Woods, Inc., Research Division

Two questions, please. First one, can you update your guidance, please, of what would be the impact on underlying earnings if yields stayed unchanged where they are today? And then secondly, can you remind me your dividend policy now with regards to interim dividends? Are we back to the former time's policy of interim dividends being sort of fixed at the final dividend or do you retain flexibility for interim dividend movements?

Darryl D. Button

On the interest rate sensitivities, we really haven't updated those from what we've previously put out in the market. So what we're seeing, I think it's -- I think the biggest thing to keep in mind is that the book yields, particularly in the U.S., and this is where most of the interest rate sensitivity comes from, the book yields are down around 5% now, maybe just a little bit below that, and we're getting new money investments in the low 4s now. So that differential versus what we had 2 or 3 years ago when the book yields were 6% and we were getting new money investment yields of 3%, so that differential has shrunk significantly. We've also lowered our long-term interest rate assumptions back in the third quarter when we took the DAC write-off and the assumption changed back in the third quarter. So our expectations for rising interest rates have been pushed out significantly. So that lowers the overall sensitivity, but we haven't put any new guidance in the market and I'm not prepared to give any here today. On the interim dividend policy?

Alexander Rijn Wynaendts

On the interim dividend policy, William, we will obviously maintain flexibility in terms of what we do with between interim and the final dividend. All I can say here again is we are looking for a dividend that is growing sustainably over in the future.

Operator

Our next question comes from Francois Boissin from BNP Paribas.

Francois Boissin - Exane BNP Paribas, Research Division

This is Francois Boissin from Exane BNP Paribas, 2 questions, please. The first one is on your cash flows. Basically you've reported a stronger market value of new business over the past years. I was wondering if this could translate into higher cash flows going forward? Basically, is there room to improve your midterm guidance on that? And the second point is on dividends. So just to come back on the interim dividend and what you put in Slide 16 in your presentation, is the EUR 460 million a fixed amount or are you ready to go beyond this for 2014? And basically, should we assume that EUR 0.11 is what you aim to pay as an interim dividend or could you go higher than that?

Darryl D. Button

Francois, it's Darryl. I'll take those. The short answer is, yes, the MCVNB will translate into higher operational free cash flow, higher earnings, higher ROEs going forward, that's an important part of our story. We've been able to get all of the products reset to be very attractive, very profitable margins in this low-rate environment, and I think that's the most important part of the MCVNB's, is that we have the profitable new business, which is going to take our ROE, earnings and operational free cash flows and propel them going forward. So I think the answer is a definitive yes. In terms of the interim dividend, on Slide 16, I wouldn't read too much into this. We've tried that caveat with the footnotes that are there. We're not going to forecast or give guidance on our dividend. So the footnote is simply saying we're assuming that it's flat, although Alex has stated very clearly that our ambition and our goal is to provide a sustainably growing dividend going forward.

Alexander Rijn Wynaendts

And a sustainable growing dividend, as well as buying back any scrip dividend that we paid to those of our shareholders that elects specifically to have scrip dividend. So we want to pay it fully in cash.

Darryl D. Button

Full cash dividend, correct.

Alexander Rijn Wynaendts

So full cash dividend.

Francois Boissin - Exane BNP Paribas, Research Division

Okay, it's very clear. Just coming back on the potential improvement in free cash flow. Basically, what time frame should we be thinking of in terms of significant improvement, in your opinion?

Darryl D. Button

Well in the short term, you really -- obviously, the new business is an accretion over time and so, it has a horizon where long-term business in it has a long-term horizon associated with it. It's incremental and over a long period of time. In the short term, the operational free cash flows will probably most be impacted by the step change that I mentioned earlier in the U.K., where really when we clear 2014 and head into '15, we expect the U.K. consistent with the guidance that I showed back in the summer, we expect the U.K. to come out of 0 to a small loss territory that they're in now, up into the GBP 150 million to GBP 200 million range by 2015.

Francois Boissin - Exane BNP Paribas, Research Division

Okay, and then for the, basically, the higher-margin business being sourced in the U.S., this is something you see beyond 2016, basically?

Darryl D. Button

Yes, the U.S., the other phenomenon we talk about the in the U.S., obviously, these MCVNBs and the profit on the new business and the transition to the fee business is all accelerating free cash flow generation from that part of the growth business, but we have to offset the other issue that was raised earlier, which is the incremental impact and the decline that's coming from the rundown of the run-off businesses and the spread businesses as those get smaller.

Operator

Our next question comes from Edward Donohue [ph] from One Investments.

Peter Testa

Actually, it's Peter Testa. I had a couple of questions, please. Firstly, just on the discussion about sort of capital. I mean, you've been quite clear on what you expect in the U.K. but just looking on it at a wider prospective, you have clear 2015 to return on equity goals. The largest -- the obstacles, it seems, to getting those are realizing the run-off and getting the returns up in the U.K. on those large blocks of capital employed. Can you maybe just give a sense on how you perceive the opportunity to make those goals in 2015 to reduce businesses as part of Aegon, or think about what -- give some sense if that is not the case, whether there are opportunities to review these situations again. And then on the variable annuity business, you talked about a potentially more competitive market. Can you give a sense as whether this is something you're really seeing in new business working on now or was that just a long-term view expressed that returns are very good and expecting it to stay that way but you haven't seen any change at this moment?

Alexander Rijn Wynaendts

Thank you, for your question. Yes, I think we have been, I guess, very clear that we want to address those run-off businesses. These businesses are not part of our core businesses and obviously, if we can accelerate that through a sale, we would certainly entertain that. But again, I said we want to do that in a way that we're not destroying shareholder value. On the other side, we're now seeing that there is more appetite for this type of transactions and we're putting all our efforts in trying to get this executed. On the U.K., I can only repeat what I repeated earlier, is we've looked at the various options we have. We do recognize that the returns are far from where they need to be. We have had a number of options explored. As I said, there was putting it in a run-off, which we felt was not an attractive option, we would have lost enormous amount of value. Dealing with it ourselves, taking ourselves the measures that need to be taken, taking our costs down very significantly, 25% cost reduction we've had, we will have further cost reductions. We've had also a lot of significant reduction of employees from over 4,500 to something above 2,000 right now and more will have to take place. So we've taken these actions. And the final one is obviously, we've also considered would there be possibility to transact, and we've come to the conclusion, us taking the measures we need to take was really the best option at that point in time and we are really executing on that option. And I think we're also delivering on what we're promising, which is important, taking cost down, restructuring our business in the U.K., at the same time, positioning it that we're able to maintain these assets, which we have on the books, in our system, from an old platform environment to a new modern platform, which I'm very pleased also to say, has been receiving quite a number of rewards. So that is promising. We will continue to execute on the plans in the U.K. Now in terms of the margins of the variable annuity business, yes, these margins are high margins, in the low 20s. And it's more a reflection of the fact that these margins are high, that I made a comment, that we do expect and have to expect that these margins will come down. But what is important is that we continue to be committed in maintaining at all times our pricing discipline for new business, and I believe there's more than enough room in this environment to be able to maintain that.

Peter Testa

Right. Okay. If I can add just one follow-up question on capital. You make the very clear statement that you look to grow your dividend over time, which is a good -- a very strong goal. To what extent do you think there's an opportunity to go beyond delevering with the excess capital streamed up? Maybe not in early 2014, but over the medium term of the business, because you've been delevering now for some time, you've repaid a lot of high-yield debt, you have a strong balance sheet structure, [indiscernible] prospectively given the cash flow comments earlier. To what extent should we just expect continued delevering or other capital steps in the medium term?

Alexander Rijn Wynaendts

I said-- pleased to hear that you recognize that we have a sound policy on dividends, stable but growing dividends. Clearly, we are also looking at -- we have signaled in the past and I'd like to reiterate it right now, that it is our intention to neutralize the effect of the dilution which came with the transaction to cancel our preferred shares with the Aegon Association. We've given that intention over a longer period of time and that could be one of the ways of redeploying our capital.

Operator

Our next question comes from Gordon Aitken from RBS [ph].

Gordon Aitken - RBC Capital Markets, LLC, Research Division

Gordon Aitken from RBC. A couple of questions, please. First on your Dutch pensions buyout business. You mentioned you've got a good pipeline, that compares to this morning reporting, an acceleration of that business in the fourth quarter with improved margins. I was wondering if you can say what the IRR on that pensions business is for you in the Dutch market? And the second question on the U.K., I mean, you've pulled away from annuities in recent years, but you built a very decent drawdown capability. Now drawdown sales for the market were down 40% in 2013, and probably they have more -- they, I think, have more to do with demographics than anything else, but drawdown has to improve presumably as pension fund sizes increase in the U.K. Can you talk about what your growth prospects are in drawdown, and how much competition there is in that market?

Alexander Rijn Wynaendts

Yes, in terms of the buyout business in the Netherlands, which are effectively address some assets to us and us taking over the liabilities. Again, here we are committed to maintaining strict pricing discipline. We've done that all along. And that means that you see also some -- the lumpiness in the sales quarter-over-quarter. So our pricing discipline means we have to achieve at least returns of 10% and you can be sure that we are delivering on that target ourselves. In terms of drawdown, Darryl?

Darryl D. Button

Yes, the only thing I can say is that I agree with you. We agree with you that the drawdown in the U.K. is going to be an increasingly important product going forward. And so we're actually very bullish about the prospects for enhanced drawdown products and that's going to be something -- in fact, that's something we're undertaking and enhancing that on our platform. And that's in effect in -- over the next 18 months, to enhance the product there. So I would say we're bullish there.

Gordon Aitken - RBC Capital Markets, LLC, Research Division

Can I just come back on the first one, on the Dutch pensions business. I mean, you talk -- I mean there's a really lack of supply. I mean there's -- as I understand there's only a couple of players in this market. So you talk about needing to maintain IRRs and sort of -- I mean, who is keeping the pricing high, is it the consultants, because presumably the pension funds have got nowhere else to go apart from this -- the only 2 people writing this business?

Alexander Rijn Wynaendts

Gordon, you're right to say that the number of suppliers in this business has been reduced and I would say that we at Aegon, particularly, I think are an attractive provider because we have a strong capital position. And I think it's easy to understand that when a company, a corporate -- CFO of a corporate takes a decision to transfer liabilities, and these liabilities are liabilities over a very long period of time, it is important that they look at a provider such as Aegon that has a strong capital position and is committed to maintain a strong capital position. We, at the same time, also want to maintain our pricing discipline, and that's where we find -- we're looking for the right balance. You're absolutely right, there is a flow coming, we want to maintain our pricing discipline. We're not in a hurry to take off all the schemes at once. But taking over scheme, setting up a new scheme, it requires a lot of work. We want to make sure we do that right. And that's why we invest also in our back office capabilities, because it's important that we provide excellent quality of service to not only the corporate that transfers the pension, but to each and every single contributor employee in the pension scheme, because we believe that not only the opportunity is with the overall corporate scheme, but all the add-on business we can do, in a particular now in the context of the changing tax legislation, which means we'll get more access and there will be more need to save outside of the corporate pension plan. So it is a business which we are clearly very much focused on, but we look at it beyond purely a corporate pension transaction. It is about all the millions of employees, which effectively we have as part of this corporate pension plan, we think the big opportunities go long and forward.

Operator

[Operator Instructions] The first question comes from Maud van Gaal from Bloomberg.

Maud van Gaal

I had 2 questions, both on the Netherlands, actually. I was wondering, so many competitors are in the Dutch market are preparing to be sold or for sale. And I was wondering if you see that as an advantage or a disadvantage, competitively, for you this year? My second question was, and I'm sorry if missed it, if you can give an update on how your talks are going with [indiscernible] and other unit-linked clients? And also if you've seen new proceedings coming your way? And you seem to be sort of warning for that and I was wondering if you can comment on that?

Alexander Rijn Wynaendts

Maud, in general, on the Dutch markets, I think there is an absolute and broad recognition that result in capacity. So any form of consolidation on the longer run will be positive for our market. Let me repeat our position here, and we said that clearly this morning, our focus is on growing our business organically. Now your second question is about the [indiscernible]? We have come to an agreement with [indiscernible] as you know, and that means we've agreed to implement certain agreements and that is an agreement with 35,000 policyholders. And our priority now is to get this done and implemented. And we've already dealt with certain groups of the 35,000. And I hope and expect that before the summer, we can have that process entirely completed. You ask me if we had more proceedings, as you call it, for the time being? We have not seen more proceedings coming to us.

Operator

Our next question comes from Archie van Weiss [ph] from Dow Jones.

Unknown Attendee

This is Archie of Dow Jones. I was wondering on the run-off businesses that you might want to try to sell and you see increased appetite. Can you give some -- well, can you describe them a little bit? And, yes, to which kind of parties would be interested in buying them?

Alexander Rijn Wynaendts

Archie, you know the run-off businesses we have, they're clearly stated in all our reporting. I think it's too early now to speculate on what business, what parts could potentially be sold to what. What I did say and happy to repeat that is, clearly, it has our attention, and we would like to be able to accelerate that run-off. And obviously, if we're able to transfer it to another party, that would help the run-off and accelerate the run-off.

Unknown Attendee

Okay. And you don't have a target or expectation that you can sell at least one of them or something like that?

Alexander Rijn Wynaendts

No, I've been very clear that we're working on it and that's all I can say right now.

Operator

Our next question comes from Chris van Allum [ph] from [indiscernible].

Unknown Attendee

Chris van Allum with [indiscernible]. I would like to come back on the [indiscernible] discussions. I would like to know what the average compensation is you will be paying to these 35,000 customers you mentioned earlier? And the second question is about the [indiscernible] components process. I understood that they're having talks with Aegon about compensation as well. Do you recognize them as a party? Are you making progress in the talks? And have you made provisions for an extra number of clients that need to be compensated?

Alexander Rijn Wynaendts

Yes, in terms of average compensation, the best way I can guide you is that we have announced a provision of 25 million and we have around 35 million -- 35,000, excuse me, customers. But again, these are all very different customers, so I'm not sure if that average tells you a lot. What is important is that we have come to an agreement with [indiscernible] on how to implement the measures and what we want to do is to make sure that every single of those customers that were part of that [indiscernible], gets what we have agreed, then should receive before the summer, and that's really what we're focusing on. And the second question, I said to you that our priority today is, let's focus on dealing with the 35,000 members of [indiscernible], and we want to get this done before we start anything else.

Unknown Attendee

Okay, but at least the question about [indiscernible] process, could you elaborate on that?

Alexander Rijn Wynaendts

Yes, we are and continue to be in discussions with them. And obviously, it is way too early to share anything with you. I'll certainly share something with you when it's time. But we are discussing consistent with what we've always said, we would like to have this whole issue around mis-selling behind us. It's not a good thing for the industry, as I said, it's not a good thing for Aegon. What we would like is that the customers feel the trust in the sector, the trust in Aegon. And what we are doing is therefore executing very diligently on the [indiscernible] and the 35,000 customers there, to assure that they get what we have promised and to get it in a timely way.

Unknown Attendee

But could you tell me how many people [ph] is representing?

Alexander Rijn Wynaendts

35,000, roughly. That’s the number of...

Unknown Attendee

I mean, [indiscernible]?

Alexander Rijn Wynaendts

I am not aware of the number, I'm not aware of that number. And I'd be happy to look into it and ask, Reuben Vaughn [ph], who is the Head of our Communication, to come back to you if that number is available.

Operator

Thank you. There appears to be no further questions. Please continue with any other points you wish to raise.

Alexander Rijn Wynaendts

Yes, I would like to thank you for joining our call. It's always a pleasure for us. And of course, we appreciate your interest in Aegon. Thanks a lot and have a great day. Bye-bye.

Operator

This concludes the Aegon Fourth Quarter 2013 Results Conference Call. Thank you for participating. You may now disconnect.

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