On behalf of the Executive Board, I am pleased to present this, my final Annual Report, which summarizes the progress we made during 2007 to strengthen AEGON’s position as a leading international provider of life insurance, pensions and related investment products.
One of AEGON’s ambitions in the United States is to maintain its position as a leading provider of life insurance and variable annuity products to the brokerage channel. In line with this goal, AEGON formed a strategic partnership in 2007 with Merrill Lynch, the world’s leading brokerage house with over 16,000 advisors. As part of the new partnership - announced in August and completed at the end of 2007 - AEGON also acquired Merrill Lynch’s two life insurance companies. Meanwhile, the acquisition of Clark in March was an important step in enhancing AEGON’s position in the bank-owned and corporate-owned life insurance market.
He held various management and executive positions before becoming Life Investors’ Executive Vice-President and Chief
AXXX fi nancing transaction with HSBC Bank USA; Also in January, AEGON UK completed a private value-inforce securitization, adding approximately
AEGON a presence in the world’s second largest life insurance market. Together, AEGON and Sony Life will focus initially on the rapidly growing variable annuities market, but the new joint venture will also provide a platform in the future for closer cooperation in other areas.
“ Expansion is the culmination of months, sometimes years of hard work and preparation.”
India with the Ranbaxy Promoter Group. Together, the two companies are setting up joint ventures in life insurance and asset management. For AEGON, the Indian market offers exciting prospects: a young, growing population and a new economic vibrancy that is driving demand for life insurance and other long-term savings and investment products. John Mungall, head of AEGON
EUR 2,551 million as a result primarily of lower gains from investments and hedging operations. The Group’s effective tax rate declined to 17% in 2007, down from 20% the previous year. Net income per share is EUR 1.47, down from EUR 1.87.
In USD million adjusted to adjusted In EUR million adjusted to adjusted
Production of synthetic GICs and other off-balance sheet items grew 44%, due to the inclusion of synthetic CDOs.
and Commonwealth General. AEGON has operating licenses in every US state, the District of Columbia, Puerto
EUR 260 million, driven by a growth in pensions sales through the corporate and institutional sales channels.
UK offers a range of investment products, including offshore bonds and trusts. The company’s asset management business offers institutional and retail funds as well as managing a series of life and pension funds on behalf of AEGON UK.
This increase was driven largely by growth in the underlying business, resulting in higher commissions and expenses.
Please note that AEGON’s ‘Other countries’ segment is accounted for in the fi nancial statements in euros, but that the operating results for individual country units are accounted for, and discussed, in local currency terms.
EUR 9 million to EUR 32 million in 2007, mainly the result of successful sales campaigns for motor and household insurance in Hungary.
AEGON opened its first business in Asia in 1993 in Taiwan.
AEGON Mortgage Finance Company. AEGON is targeting a share of between 5% and 10% of the Hungarian mortgage market in terms of new sales.
AEGON’s pension business in Central and Eastern Europe has experienced considerable growth in recent years. This is due mainly to the region’s strong economic growth and widespread reform of the pension system in many countries. In four of the five countries in which AEGON
AEGON now has partnerships in place with four of Spain’s regional savings banks, giving access to nearly 1,800 branches across the country: Caja de Ahorros del Mediterráneo
The sensitivities do not reflect what the net income for the period would have been had risk variables been different because the analysis is based on the exposures in existence at the reporting date rather than on those actually occurring during the year. Nor are the results of the sensitivities intended to be an accurate prediction of
Furthermore, the results of the analyses cannot be extrapolated for wider variations since effects tend not to be linear. No risk management process can clearly predict future results.
Assets should be held in the functional currency of the business written or hedged back to that currency. Where this is not possible or practical, remaining currency exposure is subject to documentation requirements and limits are placed on the total exposure at both group level and for individual country units. Information on AEGON’s three-year historical net income and equity in functional currency on an IFRS basis are shown in table 1.
Money market and other short-term investments- carried at fair value 5,387 4,425
TOTAL ON BALANCE CREDIT EXPOSURE 13,462 78,059 8,516 20,761 7 5,696 2,447 2,359 24,432 107,168 1 Includes investments of Holding and other activities.
CCC or lower – 206 – 17 – – – – – 223
Where credit events may be impacting the unrealized losses, cash flows are modeled using effective interest rates.
CMBS are attributable to credit spread widening and not fundamental credit problems with the issuer or collateral,
AEGON also has the ability to reduce expense levels over time, thus mitigating unfavorable expense variation.
AEGON N.V. successfully issued USD 1,050 million of junior perpetual capital securities to further improve the quality of its capital base and reduce refinancing risk.
AEGON’s liquidity management strategy is aimed at maintaining sufficient liquidity to ensure that the company can meet its payment obligations as they fall due. This is achieved by dispersing day-to-day funding requirements, maintaining a broad base of funding sources and maintaining a well-diversified portfolio of highly liquid assets. Liquidity is managed at both Group and business and country unit level.
At the August meeting, the Group’s interim dividend was approved, while in November the Board discussed a 2008 budget for VNB as well as a separate forecast covering the period 2009-2012. This forecast included the new VNB
In August, the Board discussed and approved proposals for a EUR 1 billion share repurchase program in 2007. This program was completed as planned in November.
The Strategy Committee held two meetings in 2007, which were also attended by the members of AEGON’s Executive
Board remuneration, comparing AEGON’s arrangements with other leading Amsterdam-listed companies. The
Streppel and Wynaendts); The CEOs of AEGON USA, AEGON The Netherlands and
The structure of Supervisory Board fees is as follows: Base fee For membership of the Supervisory Board
Committee. If necessary, this Committee will recommend amendments to AEGON’s Supervisory Board. Any material changes are then submitted by the Supervisory Board to the General Meeting of Shareholders for approval.
Companies included in these two peer groups were chosen according to the following criteria: Industry: preferably life insurance; Size: companies with similar levels of assets, revenue and market capitalization; Geographic scope: preferably companies operating globally; Location: companies based in the United States and Europe.
Please note that the 2006 plan was part of AEGON’s former Remuneration Policy. The 2007 Plan, on the other hand, was formulated under the Group’s new
AEGON’s Executive Board can set a date (‘the record date’), which is used to determine the entitlement of shareholders to take part and vote at the meeting.
Executive Board members and the terms of their employment are determined by AEGON’s Supervisory
Pension arrangements for Executive Board members are based on a retirement age of 62. Dutch members have the option of retiring earlier, at 60.
Overseeing AEGON’s overall corporate governance structure is the responsibility of both the Supervisory and
AEGON. For this reason, a protocol has been drafted specifically authorizing the CEO and CFO to continue their existing practice in dealings with Vereniging AEGON.
AEGON’s voting capital, taking into account that the preferred shares are entitled to 25/12 votes per share. The 1983 Merger Agreement (as amended) provides that
Members of AEGON’s Executive and Supervisory Boards may only be dismissed by the General Meeting of
1 AEGON’s 2007 Corporate Responsibility Report contains further information on the Group’s corporate responsibility strategy and initiatives, as well as more detailed data on customer and employee satisfaction and AEGON’s environmental and investment records.
AEGON has a corporate group-wide environmental policy, which stresses the importance of respecting the environment, conserving energy and eliminating waste. In recent years, AEGON has endeavored to reduce its energy consumption and to make as much use as possible of renewable or recyclable sources. Two of AEGON’s country units – AEGON UK and AEGON The Netherlands – have been certified ISO14001 compliant. Many AEGON country units also have their own environmental policies, which operate alongside the Group’s overall corporate policy.
CONSOLIDATED CASH FLOW STATEMENT OF AEGON GROUP FOR THE YEAR ENDED DECEMBER 31
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY OF AEGON GROUP FOR THE YEAR ENDED DECEMBER 31, 2007
(Gains)/losses transferred to income statement on disposal and impairment – – (130) – – (130) – (130)
Until January 1, 2007, AEGON’s secondary format for segment reporting was based on product characteristics, such as traditional life and fixed annuities. As of 2007, AEGON introduced a new line of business format (LOB) as secondary segment format. The new LOB
As the Group’s risks and rates of return are predominantly affected by the fact that it operates in different countries, the primary basis for segment reporting is geographical segments. Geographical segments are defined based on the location of where the activities are managed.
Financial assets and liabilities are offset in the balance sheet when the
Interests in associates are initially recognized at cost, which includes positive goodwill arising on acquisition. Negative goodwill is recognized in the income statement on the acquisition date. If associates are obtained in successive share purchases, each significant transaction is accounted for separately.
VOBA and DPAC are considered in the liability adequacy test performed on insurance contracts. To the extent that the account balances are insufficient to meet future benefits and expenses, additional liabilities are established and included in the liability for life insurance.
The unrecognized actuarial gains and losses are amortized in a straight line over the average remaining working life of the employees covered by the plan, to the extent that the gains or losses exceed the corridor limits. The corridor is defined as ten percent of the greater of the defined benefit obligation or the plan assets. The amortization charge is reassessed at the beginning of each year. The corridor approach described above was not applied retrospectively to periods prior to the transition to IFRS (January 1, 2004).
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON GROUP NOTE 2.24 - 2.32
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON GROUP NOTE 2.33 - 3
Realized gains and losses on repurchased debt 33 – (12) –
Of the additions to goodwill in 2007, an amount of EUR 187 million relates to the acquisitions of Clark and Merrill Lynch by AEGON USA
December 31, 2007 unpaid principal and accrued interest on the notes of EUR 578 million (2006: EUR 649 million) reflected in financial liabilities-investment contracts. Management does not anticipate any future funding requirements with respect to these guarantees that would have a material effect on reported financial results.
Furthermore, synthetic GICs, liquidity agreements and principal protection agreements are sold by AEGON to earn a fee.
Vereniging AEGON to prevent or correct dilution to below its actual percentage of voting shares, unless Vereniging AEGON as a result of exercising these option rights would increase its voting power to more than 33%. Class B preferred shares will then be issued at par value
The closing balances of the revaluation reserve for available-for-sale investments relate to the following instruments: REVALUATION RESERVE FOR AVAILABLE-FOR-SALE INVESTMENTS (679) 1,536 2,450
USD 250 million fl oating LIBOR rate 1 March 15 2010 212 212 212
2 The coupon of the EUR 950 million junior perpetual capital securities, callable in 2014, is based on the yield of ten-year Dutch government bonds plus an additional spread of ten basis points. The coupon will be reset each quarter based on the then prevailing ten-year Dutch government bond yield, with a maximum of 8%.
USD 225 million 7.65% and the USD 190 million 7.625% trust pass-through securities were partially redeemed in 2006 through a cash tender offer.
The other countries mostly operate defined contribution plans, with the exception of smaller defined benefit plans in AEGON Canada,
1 Included in this line are the fair value movements of bifurcated embedded derivatives of AEGON the Netherlands (minimum guarantees on unit linked policies) and the fair value movement of related derivatives that hedge certain risks of these guarantees and of the guarantees included in both group pension contracts and traditional products (refer to note 35).
Net fair value change on for account of policyholder fi nancial assets at fair value through profi t or loss comprise: 2007 2006 2005 - Bonds and money market investments (884) (1,124) 1,628 - Deposits with fi nancial institutions (1) – –
EUR 75 million, 2005: gains of EUR 104 million) of other charges that for segment reporting are excluded from Operating earnings before tax.
The direct operating expenses relating to investments in real estate that generated rental income was EUR 62 million (2006: EUR 32 million and 2005: EUR 33 million). Minimum lease payments recognized as expense amounted to EUR 10 million (2006: EUR 6
Supervisory Board. Options granted pursuant to the purchase agreement with Providian have various expiration dates. The options granted in 1997 to senior executives of former Providian business
Impairment charges on fi nancial assets, excluding receivables, from: 2007 2006 2005
In 2007 AEGON refined its method of calculating the fair value of the guarantees included in its unit-linked products in order to align these calculations with the calculations currently used for the group pension contracts and traditional products. This change in accounting estimate has been applied prospectively. The pre–tax cumulative charges amounts to EUR 181 million and is reported as part of Other charges.
Other charges is for segment reporting purposes fully excluded from operating earnings (refer to note 2.6).
Weighted average number of ordinary shares for diluted earnings per share calculation (thousands) 1,562,587 1,579,703 1,548,547
will be able to resolve existing litigation in the manner it expects or that existing or future litigation will not result in unexpected liability.
In addition, in recent years, the insurance industry has increasingly been the subject of litigation, investigations and regulatory activity by various governmental and enforcement authorities concerning certain practices. AEGON subsidiaries have received inquiries from local authorities in various jurisdictions including the United States, the United Kingdom and the Netherlands. In certain instances, AEGON
Financial assets at fair value through profi t or loss 113 129
AEGON pledges non-cash financial assets that are on its balance sheet in securities borrowing and lending transactions, in repurchase and reverse repurchase transactions, and against long-term borrowings. In addition, in order to trade derivatives on the various exchanges, AEGON posts margin as collateral.
In the Netherlands, AEGON employees may make use of financing and insurance facilities for prices which are equivalent to the price available for agents. The benefit for AEGON employees is equivalent to the margin made by agents.
Termination of the employment contracts requires a three months notice period for the current members of the Executive Board. In the event of contract termination by AEGON, the company must adhere to a notice period of six months and, unless terminated for urgent cause, the member of the Executive Board would be entitled to a severance arrangement.
International Financial Reporting Standards (IFRS), as used for the preparation of the consolidated financial statements of the Group.
A provision is recognized for present legal or constructive obligations arising from past events, when it is probable that it will result in an outflow of economic benefits and the amount can be reliably estimated. The amount recognized as a provision is the best estimate of the expenditure required to settle the present obligation at the balance sheet date considering all its inherent risks and uncertainties, as well as the time value of money. The unwinding of the effect of discounting is booked to the income statement as an interest expense.
General Meeting of Shareholders. Moreover, repayment on preferred shares needs approval of the related shareholders. There are restrictions on the amount of funds that companies within the Group may transfer in the form of cash dividends or otherwise to the parent company.
3 The coupon of the USD 500 million junior perpetual capital securities, callable in 2014, is based on the yield of ten-year US dollar interest rate swaps (‘CMS’), with an additional spread of ten basis points. The coupon is reset each quarter based on the then prevailing ten-year US dollar interest rate swap yield, with a maximum of 8.5%.
AEGON has the right to call the bonds for redemption at par for the first time on the coupon date in the years as specified.
The profit or loss of the investor includes the investor’s share of the profit or loss of the investee.
It includes agent’s commissions, underwriting expenses, medical and credit report fees, marketing expenses and all other direct and indirect expenses of the departments involved in such activities.
AEGON launches Romania Fund AEGON’s joint venture in Romania gets green light to launch Vital, its new pension fund, just ahead of a planned reform of the country’s retirement services system. September 2007