AEGON values its many trusted relationships within the global investment community and is committed to the highest standards of both integrity and fair disclosure.
In addition to its IFRS results, AEGON believes value of new business and embedded value information should be considered in arriving at a balanced assessment of its underlying performance. AEGON
AEGON’s businesses and management decisions aimed at achieving its strategy of long-term profi table growth in AEGON’s major and developing markets.
The secondary listing of AEGON N.V. common shares on the Frankfurt Stock
Europe and in Asia provides critical access to a growing customer segment in both our established and developing markets. It is for this reason that we have also identifi ed broadening AEGON’s presence through the bank channel as another of our global growth initiatives. In addition to our successful partnership with Caja de Ahorros del
Total life insurance gross premiums 7,709 3,028 9,214 1,817 0 21,768
In 2006, new life sales1 increased 20 percent for the full year, reflecting record sales at AEGON UK which increased 54 percent, as well as a rebound in retail life sales at AEGON US and improved life sales at AEGON The Netherlands. AEGON Spain’s new life sales more than doubled to EUR 52 million as a result of our recent partnerships with major savings banks. AEGON Central and Eastern Europe’s new life sales were particularly strong in Poland during the year, with record sales in the fourth quarter of 2006. AEGON Taiwan made the transition to a more balanced product portfolio during 2006. Nearly half of its new business came from higher margin unit-linked products.
Report of the Executive Board AEGON Group 1 New life sales refers to standardized new premium production and is defined as new recurring premium + 1/10 of single premium.
the corporate tax rate in the Netherlands from 29.6 percent to 25.5 percent ratifi ed by the Dutch parliament in the fourth quarter of 2006 and resulting in a release of deferred tax liabilities. Net income per share of EUR 1.63 was equal to net income per share in 2005.
December 31, 2006, compared to EUR 358 billion at December 31, 2005.
Variable annuity deposits of USD 6.6 billion increased 6 percent compared to 2005. The retail segment increased 15 percent over last year due to increased demand for variable annuity products and increased wholesaler distribution. Fixed annuity deposits declined 2 percent while deposits in the pension channel increased 48 percent. Retail fi xed annuity deposits declined 19 percent as sales continue to be challenged by the inverted yield curve and competition from other bank-sold products. Deposits in institutional guaranteed products increased 17 percent, primarily due to higher medium-term note issuance.
This report includes a non-GAAP fi nancial measure: operating earnings before tax. The reconciliation of this measure to the most comparable GAAP measure is shown below in accordance with SEC
In 2006, we announced for the fi rst time a value of new business growth target. Over the next fi ve years, we are projecting a 13 percent growth in the value of new business. We expect our business mix during this period to move toward more individual savings and pensions.
USD 42 million, or 6 percent, to USD 716 million in 2006. The growth over last year is primarily attributable to improved mortality experience, continued favorable performance in the hedge fund and limited partnership portfolios, and continued growth of the inforce.
Operating earnings before tax from fee – off balance sheet products were USD 68 million in 2006, an increase of USD 1 million over 2005.
The 2005 results include a one-time release of USD 20 million from a long-term deferred compensation plan. This was more than offset by higher fees from the growth in assets under management due to strong production and favorable equity markets.
DPAC offsets) related to these asset classes, including fair valuation of assets of USD 452 million and cash income of USD 47 million.
Issuance Survey, IMD Market Research). IMD has been able to enhance its leadership position through product customization, strong service capabilities, and profi table underwriting. IMD’s skills in product development, distribution, investment, and risk management have resulted in a diversifi ed customer and market base and multichannel distribution. Building on these skills, IMD is also responsible for AEGON Structured Products that is generally involved in various capital market transactions such as writing credit default swaps, undertaking synthetic collateralized debt obligations, and providing guarantees of affordable housing tax credits and hedge fund principal protection. IMD also administers AEGON USA’s block of structured settlement annuity business. New sales for this product were discontinued in 2003.
distinguishes itself from its competitors by focusing on innovative plan design and Employee Retirement Income Security Act (ERISA)
Income tax attributable to policyholder return (51) (71) (28) (75) (104) (28)
Operating earnings before tax amounted to GBP 153 million, compared to GBP 111 million in 2005. The increase mainly refl ects the positive effect of higher equity and bond markets and growth of the businesses, partly offset by a charge related to higher surrenders due to ‘Pension A-Day’. Earnings in 2006 were impacted by a GBP 14 million charge for an incentive plan related to the accelerated acquisition of the remaining 40 percent of Positive Solutions. In 2005, earnings included a GBP 33 million charge related to this item.
Solutions’ income increased in 2006, driven by higher adviser productivity. Operating earnings before tax from the fee – off balance sheet products amounted to nil, compared to a negative contribution of GBP 27 million in 2005. Excluding the charges of GBP 14 million for the incentive plan related to Positive Solutions in 2006 and GBP 34 million in 2005, earnings of the fee businesses increased from GBP 7 million in 2005 to GBP 14 million in 2006.
The pension legislation changes of April 2006 has resulted in new opportunities for annuity contracts. In the UK, pension plans have to be converted into income when they come to retirement. One option for retirees is an annuity contract to provide their retirement income.
Approximately 50 percent of new sales in 2006 came from unitlinked products and we expect this to increase in the coming years.
In Spain, new life sales increased 112 percent to EUR 52 million, reflecting the proportional inclusion of bancassurance sales through
Party Liability Excess of Loss Treaty, and EUR 1.2 million in the case of the Property per Risk Excess of Loss Treaty.
AEGON Taiwan’s variable universal life product was enhanced in 2005, and is now the company’s top selling product line. The product includes a wide range of investment options, including AEGON’s unique stable value fund.
BBB+ to A- in October 2006. The reinsurance covers both excess surplus risks and catastrophic concentration risks.
AEGON bears interest rate risk with many of its products. In cases where cash fl ows are highly predictable, investing in assets that closely match the liabilities can mitigate this risk. For some AEGON
During periods of sustained low interest rates, life insurance and annuity products may be relatively more attractive to consumers, resulting in increased premium payments on products with fl exible premium features, and a higher percentage of insurance policies remaining in force from year to year. During such a period, investment earnings may be lower because the interest earnings on new fi xed income investments likely will have declined with the market interest rates. In addition, mortgages and redeemable bonds in the investment portfolio are more likely to be repaid as borrowers seek to borrow at lower interest rates and AEGON may be required to reinvest the proceeds in securities bearing lower interest rates.
IFRS also does not recognize the unrealized losses in corresponding liabilities in net income and shareholders’ equity. As a result under
A downgrade in AEGON’s ratings may increase policy surrenders and withdrawals, adversely affect relationships with distributors and negatively affect its results.
In addition, a downgrade may adversely affect relationships with broker-dealers, banks, agents, wholesalers and other distributors of
AEGON may not be able to rely on accurate information for product pricing, risk management and underwriting decisions.
Changes in pension and employee benefi t regulation, social security regulation, fi nancial services regulation, taxation and the regulation of securities products and transactions may adversely affect
Shareholders’ equity was EUR 19,137 million at December 31, 2006, compared to EUR 19,276 million at December 31, 2005. Net income of EUR 2,789 million was offset mainly by a decrease in the foreign currency translation reserve of EUR 1,325 million (largely due to a lower US dollar), a decrease in the revaluation reserve of EUR 645 million, dividend payments, and coupon payments on perpetual capital securities.
USD 6 billion Euro Medium Term Notes Program. AEGON N.V. also has access to US markets through a separate US shelf registration.
AEGON’s 2005 embedded value and value of new business report, in
Netherlands, as well as regulatory and other legal issues in Europe, the USA and Asia. The Supervisory Board was also kept up to date with developments regarding E-learning and the Code of Conduct. In accordance with the Sarbanes-Oxley Act (SOX), the Supervisory
Executive Board. This new Remuneration Policy will be put to shareholders for adoption during the 2007 Annual General Meeting of Shareholders (AGM) and, if adopted, will be retroactively effective as from January 1, 2007. The Committee also discussed the worldwide stock option plans within AEGON and reconfi rmed that exercise prices will not be changed once they have been set at the date of grant of stock options, except in case of dilution of the
Supervisory Board. However, he was required to submit his resignation as a Supervisory Board member in July 2006, following his appoint ment as the United States ambassador to Brazil. His resignation also left a vacancy in the Audit Committee. The
Smith & Nephew PLC (London, UK) and a retired vice-chairman of
Supervisory Board in 2004 and his current term will end in 2008.
He is also chairman of the Supervisory Board of Royal Ahold N.V., a member of the Supervisory Board of TNT N.V. and a member of the International Advisory Board of the Guggenheim Group. He is currently chairman of the Supervisory Board Compensation
CFO of the Renault Group. He was appointed to AEGON’s Supervisory
Levels for fi xed compensation (base salary) refl ect the requirements and responsibilities of an Executive Board position. The
Incentive (STI) Plan, which provides for an annual cash bonus for the achievement of previously determined performance targets. The achievable STI bonus levels relate to the fi xed compensation and vary among the members of the Executive Board, refl ecting the differences in responsibilities.
Board members. The grant is a 50/50 combination of the value of performance shares and performance options. For each year, the value (amount) of the grant is determined, as is the related number of shares and options granted. After three financial years, starting with the grant year, vesting of the granted shares and options is subject to AEGON’s TSR performance relative to that of a select peer group. This peer group comprises companies that are comparable in type of business, size, geographical presence, and that are generally recognized as the most appropriate reference group. The reference group consists of Allianz, Aviva, AXA, Fortis, Generali, ING, Financial
Base salaries of the Executive Board members in 2006 are as follows: BASE SALARY 2006 1
AEGON may effectively be in a position to temporarily block unfriendly actions by a hostile bidder or others.
AEGON has adopted a Code of Conduct at group level. The Code of
Governance Code. Where appropriate, the headings of the Code’s chapters and paragraphs have been included for easy reference.
Executive Board. More detailed regulations regarding confl icts of interest between members of the Executive Board and AEGON are included in the Executive Board Rules. Both documents are available on AEGON’s website. Any transactions in which there are confl icts of interest shall be agreed on terms customary in the industry and are published in the annual report.
Supervisory Board and its committees, for keeping close track of the fl ow of information to the Supervisory Board, and for overseeing the consultation and decision-making processes within the Supervisory
Board has a charter in which the composition, duties, and internal procedures are defi ned. The Committee Charters are available on
Audit Committee. In addition, at least once a year, or more often if necessary, the Audit Committee meets with the independent auditor without the presence of the Executive Board members.
Group level: Group Corporate Affairs & Investor Relations. One of the key opportunities for dialogue with its shareholders is the General
AEGON’s Articles of Incorporation provide that the General Meeting of Shareholders may cancel the binding character of nominations for the appointment of new members to the Supervisory Board and the Executive Board with a majority of two-thirds of the votes cast representing at least one-half of the issued capital. In addition, members of the Executive Board and members of the Supervisory
In the event of a serious private bid for a business unit or a participating interest in excess of the threshold as referred to in article 2:107a.1 under c of the Netherlands Civil Code, the Executive
Executive Board may not take part in discussions and decision making that involves a subject or transaction in relation to which he or she has a confl ict of interest. Given the position of AEGON’s
Central to AEGON’s growth objectives and its efforts to improve its record on corporate responsibility is the fi rm commitment to transparent products and services. As the comany’s business evolves in response to changing needs, AEGON welcomes suggestions from its many stakeholders as to how the company can continue to maintain the highest ethical standards in all its activities. For AEGON, the only target that truly matters is the continued confi dence and trust of its customers, business partners, employees and shareholders.
AEGON builds lasting relationships with business partners who share its basic core values. Together, AEGON and its partners work to provide quality products and services. At all times,
In 2006, the Group has adopted the following relevant standards and interpretations of the International Financial Reporting
Group subsequently sells that security, a liability to repurchase the asset is recognized and measured at fair value.
Cash fl ow hedges are hedges of the exposure to variability in cash fl ows that is attributable to a particular risk of a forecasted transaction or a recognized asset or liability and could affect profi t or loss. To the extent that the hedge is effective, the change in the fair value of the derivative is recognized in the related revaluation reserve in shareholders’ equity. Any ineffectiveness is recognized directly in the income statement. The amount recorded in shareholders’ equity is released to the income statement to coincide with the hedged transaction, except when the hedged transaction is an acquisition of a non-fi nancial asset or liability. In this case, the amount in shareholders’ equity is included in the initial cost of the asset or liability.
The carrying amount after reversal cannot exceed the amount that would have been recognized had no impairment taken place.
One insurance product in the United States is carried at fair value through profi t or loss as it contains an embedded derivative that could not be reliably bifurcated. The fair value of the contract is measured using market consistent valuation techniques.
Some insurance contracts without a guaranteed or fi xed account term contain guaranteed minimum benefi ts. Depending on the nature of the guarantee, it may either be bifurcated and presented as a derivative or be refl ected in the value of the insurance liability
Assumptions on customer behavior, such as lapses, included in the models are derived in the same way as the assumptions used to measure insurance liabilities.
Universal life insurance has either a fl exible or single premium. The contract has a feature that allows the customer greater fl exibility as to when to pay premiums and with regard to the amount of the premiums, subject to a minimum and a maximum. The interest rate at which the cash value accumulates is adjusted periodically.
These products provide policyholders with a wide range of choices in determining the credited interest rate that will be applicable to the account values of their policies. Policyholder investment options include a fi xed rate investment for a guaranteed interest rate for a guarantee period running between fi ve and 25 years, a fl oating daily rate, a rate that is tied to the movement of various share and bond market indices, or a rate that is tied to the movement of various mutual funds. Similar to the operations in the United States, there are minimum interest rate guarantees on fi xed rate investments, which vary from 0% to 4% depending on when the policy was issued, and what term of investment was chosen. There is no minimum interest rate guarantee on returns tied to market indices or to mutual funds. Policyholders can allocate their account values such that the credited interest rate for various portions is tied to different investment options. Policyholders can switch among these various options as they desire.
Life for account of policyholder products include several forms of life insurance and pension products whereby death benefi ts and cash values vary with the performance of a portfolio of investments.
Included in for account of policyholder assets and liabilities are the invested assets and the insurance and investment contract liabilities of AEGON UK’s with profi t funds. The assets and liabilities are equal as any excess of assets over liabilities in respect of guaranteed benefi ts and constructive obligations are classifi ed as an insurance or investment contract liability. The Scottish Equitable with profi t fund is a 100:0 fund, where all benefi ts are held for participating policyholders. The Guardian Assurance plc with profi t fund is a 90:10 fund where there is a 10% profi t participation by AEGON UK in surpluses distributed to policyholders. For the Guardian fund, profi t for AEGON UK emerges based on bonuses declared.
Immediate annuities contain interest rate risk and also longevity risk if annuity payments are life contingent.
Long-term care (LTC) products offered by AEGON USA provide benefi ts to customers who, because of their advanced age or a serious illness, require continuous care. These products protect the insured’s income and retirement savings from the costs of long-term care. Sales of long-term care insurance by AEGON USA were temporarily discontinued in 2005. The LTC division is currently reevaluating the LTC marketplace and intends to begin selling new LTC
AEGON The Netherlands accounted for 93% of the total general account fi xed-income portfolio of the Group on December 31, 2006.
If an exposure exceeds the stated limit as a result of a downgrade, the exposure must be readjusted to the limit for that rating category as soon as possible. The limits vary with the asset quality of the security as can be seen in the above table. Exceptions to these limits can only be made after explicit approval from AEGON’s Group Risk and Capital Committee.
ABSs – Collateralized Bond Obligations (CBOs) 926 – – 31 957 1,197 78,982 14,811 4,335 3,828 101,979 111,148 1 Includes investments of Holding and other activities.
Interest charges and other – – – – (328) 1 (327)
Investment contracts for account of policyholders 11,118 1,217 46,372 17 – – 58,724
Receivables out of share lease agreements – 373 – – 373 – 772 – – 772
Included in debt securities at fair value through profi t or loss are convertible bonds and preferred shares of EUR 881 million (2005: EUR 505 million). At the end of 2006 approximately 99% of these convertible options are exercisable within the next year and the remaining 1% are exercisable after fi ve years, all at various exchange ratios. In addition, AEGON also holds EUR 623 million (2005: EUR 818 million) of convertible bonds and preferred shares backing a fi xed annuity product considered to contain an embedded derivative. This entire liability is also measured at fair value, with changes reported through the income statement.
In 2006, AEGON Levensverzekering N.V. has terminated one of the two privately placed securitization transactions reported in prior years. Also, it completed one publically placed securitization transaction in 2006, whereby the economic ownership of
Depreciation expenses are charged in ‘Commissions and expenses’ in the income statement. The useful lives of buildings range between 40 and 50 years.
TOTAL INVESTMENTS FOR ACCOUNT OF POLICYHOLDERS 135,537 127,547 1 Refer to note 48 for a summary of all fi nancial assets and fi nancial liabilities at fair value through profi t or loss.
recognized gains and losses related to the ineffective portion of designated fair value hedges of EUR 5 million, EUR 32 million and
The weighted effective interest rate on short-term deposits was 4.21% (2005: 2.71%) and these deposits have an average maturity of
For the purposes of the cash fl ow statement, cash and cash equivalents comprise the following: Cash and cash equivalents 13,144 7,307
Transactions in 2006: Purchase: 30 transactions, average price EUR 14.78 19,076 – –
The securities have been issued at par. The securities have subordination provisions and rank junior to all other liabilities. The conditions of the securities contain certain provisions for optional and required coupon payment deferral. Although the securities have no stated maturity, AEGON has the right to call the securities for redemption at par for the fi rst time on the coupon date in the years as specifi ed, or on any coupon payment date thereafter.
TOTAL PERPETUAL CUMULATIVE SUBORDINATED BONDS 567 567 1,517 1 The coupon of the EUR 114 million bonds with an interest rate of 7.625% is fi xed. 2 The coupon for the EUR 136 million 7.25% bonds is set at 7.25% until October 14, 2008, while the coupon for the EUR 203 million 7.125% bonds is set at 7.125% until March 4, 2011. On these dates, and after every consecutive period of ten years, the coupons will be reset at the then prevailing effective yield of nine- to ten-year Dutch government securities and a spread of 85 basis points.
Non-life insurance - Unearned premiums and unexpired risks 2,632 2,610 - Incurred but not reported claims 680 391
EUR 1,000 million Medium-Term Notes 4.625% 2003 / 08 April 16 1,000 1,000
Included in debentures and other loans are EUR 938 million (2005: EUR 1,025 million) relating to borrowings measured at fair value.
Actuarial (gains)/losses recognized on present value of defi ned benefi t obligation 2 (28) (26)
If it is determined that rebalancing is required, future additions and withdrawals will be used to bring the allocation to the desired level.
The weighted average share price at which the share appreciation rights were exercised in 2006 is EUR 14.51 (2005: EUR 11.06).
There have been no modifi cations to the plans during the fi nancial year.
- Recognition of previously unrecognized tax loss/tax credit (65) (66) 1 - Write off / (reversal of write off) of deferred tax assets 25 8 1
Notes to the consolidated fi nancial statements of AEGON Group Note 44 – 45
AEGON is subject to legal restrictions on the amount of dividends it can pay to its shareholders. Under Dutch law the amount that is available to pay dividends consists of total shareholders’ equity less the issued and outstanding capital and less the reserves required by law. At December 31, 2006, the issued and outstanding capital is EUR 255 million, the reserves required by law amount to
Notes to the consolidated fi nancial statements of AEGON Group Note 48 – 49
AEGON pledges investment securities that are on its balance sheet related to certain other transactions that it enters into that create liabilities, such as reverse repurchase agreements and other transactions involving funding agreements. The amount of collateral pledged may vary as the fair value of the securities changes since these agreements require certain minimum maintenance levels.
The total assets of the joint venture at the acquisition date amounted to EUR 476 million, of which EUR 2 was cash and cash equivalents.
The date of grant for the 2006 LTI Plan was April 26, 2006 and the closing price of that day was EUR 14.55. The grant is a 50/50 combination of the value of the performance shares and performance options. Regarding the granted shares and options of the reference period 2004-2006 the Executive Board members are entitled to 0% vesting of the target award.
AEGON N.V. has a legally enforceable right to offset and has the intention to settle the asset and liability on a net basis or simultaneously.
For a list of names and locations of the most important group companies, refer to note 52 to the consolidated fi nancial statements of the Group, page 216. The legally required list of participations as set forth in article 379 of Book 2 of the Netherlands Civil Code has been registered with the Trade Register in The Hague.
Changes in foreign currency translation reserve – – – – – (1,325) (1,325)
Coupons on perpetuals, net of tax – – (143) – – – (143)
LIBOR plus an additional spread of 87.5 basis points. The coupon will be reset each quarter based on the then prevailing three-month
Perpetual cumulative subordinated bonds Coupon rate Coupon date: quarterly, as of Year of fi rst call 2006 2005
N.V. Resolutions of the Executive Committee, other than with regard to amendment of the Articles of Association, are made with an absolute majority of the votes. When a vote in the Executive
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the company fi nancial statements. The procedures selected depend on the auditors’
Assets held by long-term employee benefi t funds are part of plan assets. These are assets (other than non-transferable fi nancial instruments issued by the reporting entity) that: Are held by an entity that is legally separate from the reporting entity and exists solely to pay or fund employee benefi ts; and
Are available to be used only to pay or fund employee benefi ts and are not available to the reporting entity’s own creditors.
Financial asset is any asset that is: Cash; An equity instrument of another entity; A contractual right to receive cash or another fi nancial asset from another entity or to exchange fi nancial instruments with another party under conditions that are potentially favorable; or
Incremental cost is one that would not have been incurred if the entity had not acquired, issued or disposed of a fi nancial instrument.