Foreign exchange contracts are used to manage AEGON’s exposure on its net investment in subsidiaries denominated in foreign currencies and other investments. The main types of derivative fi nancial instruments used are cross currency swaps and forward foreign exchange contracts: Cross currency swap agreements are contracts to exchange two principal amounts of two currencies at the prevailing exchange rate at inception of the contract. During the life of the swap the counterparties exchange fi xed- or fl oating-rate interest payments in the swapped currencies and at maturity the principal amounts are again swapped at a predetermined rate of exchange.
A forward foreign exchange contract is an agreement that obligates its parties to purchase / sell a predetermined amount of foreign currency at a specifi ed exchange rate at a specifi ed future date.
Synthetic GICs sold by AEGON are fee-based products that are further described in note 4 under Fee – off balance sheet products.
Liquidity agreements issued by AEGON are fee-based products that could require AEGON to provide liquidity in certain predetermined events.
AEGON has elected to not apply hedge accounting. These derivatives are either classifi ed as economic or non-economic hedges. The economic hedges of certain exposures relate to an existing asset or liability. In all cases, these are in accordance with internal risk guidelines and are closely monitored for continuing compliance.
Furthermore synthetic GICs and liquidity agreements and principal protection agreements are sold by AEGON to earn a fee.
AEGON USA reinsures some business on a modifi ed coinsurance basis or coinsurance with funds withheld basis. These reinsurance arrangements contain embedded derivatives in that the credit risk of the underlying investment is not closely related to the host contracts. These embedded derivatives are bifurcated and carried at fair value. The change in fair value of the embedded derivative, as well as the gains or losses on trading investments supporting these arrangements, fl ows through the income statement. This embedded derivative is not eligible for hedge accounting treatment.
The following table provides information on the liabilities for guarantees for minimum benefi ts that are included in the bifurcated embedded derivatives.
AEGON has entered into interest rate swap agreements that effectively convert certain fi xed-rate assets and liabilities to a fl oating-rate basis (generally to six months or less LIBOR), in order to more closely match the performance of the assets and liabilities within AEGON’s portfolio. These agreements involve the payment or receipt of fi xed-rate interest amounts in exchange for fl oating-rate interest amounts over the life of the agreement without the exchange of the underlying principal amounts.
For the years ended December 31, 2006, 2005 and 2004, AEGON
AEGON has entered primarily into interest rate swap agreements that effectively convert certain variable-rate assets and liabilities to a fi xed-rate basis in order to match the performance of the assets and liabilities within AEGON’s portfolio more closely. These agreements involve the payment or receipt of variable rate interest amounts in exchange for fi xed-rate interest amounts over the life of the agreement without the exchange of the underlying principal amounts. AEGON is hedging its exposure to the variability of future cash fl ows from the interest rate movements for terms up to fi ve and a half years for hedges converting existing fl oating-rate assets and liabilities to fi xed-rate assets.
These transactions will affect the profi t and loss for approximately 40 years. For the year ended December 31, 2006, none of AEGON’s cash fl ow hedges has been discontinued, as it was probable that the original forecasted transactions would occur by the end of the originally specifi ed time period documented at inception of the hedging relationship.
Kingdom and Canada are funded in euro. When the debt funding of
Notes to the consolidated fi nancial statements of AEGON Group Note 9
AEGON uses derivatives to swap the currency exposure of the debt instrument to the appropriate functional currency. This policy will ensure that total capital will refl ect currency movements without distorting debt to shareholders’ equity ratios. AEGON utilizes various fi nancial instruments as designated hedging instruments of its foreign investments. These instruments include subordinated borrowings, long-term and short-term borrowings, short-term debts to credit institutions, cross currency swap contracts and forward foreign exchange contracts.
AEGON would receive or pay to terminate the contracts on reporting date. Market quotes are available for many derivatives; for those products without readily available market quotes generally accepted valuation models are used to estimate fair value. The cross currency interest rate swaps are presented as foreign exchange contracts.
Consolidation following acquisition of remaining shares in an associate (41) –
Notes to the consolidated fi nancial statements of AEGON Group Note 10 – 11
Gross premium and deposits – existing and new business 1,083 125 1,208
Changes to valuation of expected future benefi ts 4 14 18
Gross premium and deposits – existing and new business 313 346
DPAC for insurance contracts and investment contracts with discretionary participation features 10,938 10,789
United States: gross long-term equity growth rate of 9% (2005: 9%); gross short-term growth rate of 4.75% (2005: 6 %); gross short- and long-term fi xed security growth rate of 6% (2005: 6%); and the gross short- and long-term growth rate for money market funds of 3.5% (2005: 3.5%). For Canada these assumptions, at December 31, 2006, were as follows: gross long-term equity growth rate of 9%
Depreciation expenses have been charged in ‘Commissions and expenses’ in the income statement. Equipment is generally depreciated over a period of three to fi ve years.
Notes to the consolidated fi nancial statements of AEGON Group Note 13.1 – 14
(2005: EUR 3.9 billion) relates to security lending and repurchase agreements. A corresponding liability to repay the cash is recognized in other liabilities (note 28). Refer to note 50 for a discussion of collateral received and paid. Investment of cash collateral received is restricted through limitations on credit worthiness, duration, approved investment categories and borrower limits. AEGON earns a share of the spread between the collateral earnings and the rebate paid to the borrower of the securities. Income from security lending programs was approximately EUR 26 million (2005: EUR 21 million; 2004: EUR 13 million).
Vereniging AEGON, in case of an issuance of shares by AEGON N.V., may purchase as many class B preferred shares as would enable
Vereniging AEGON to prevent or correct dilution to below its actual percentage of voting shares. Class B preferred shares will then be issued at par value (EUR 0.25), unless a higher issue price is agreed.
has voluntarily waived its right to cast 25/12 vote per class A or class
Transactions in 2005: Purchase: one transaction on May 17, price EUR 9.85 – 3,821 –
Transactions in 2004: Purchase: two transactions on May 18 and September 24, average price EUR 9.88 – – 7,467
The share premium account refl ects the balance of paid-in amounts above par value at issuance of new shares less the amounts charged for share dividends.
AEGON N.V. were as follows: Notes to the consolidated fi nancial statements of AEGON Group Note 15.2 – 15.4
Movement in foreign currency translation and net foreign investment hedging reserves (827) 72 – (755)
Movement in foreign currency translation and net foreign investment hedging reserves (1,478) 153 – (1,325)
Notes to the consolidated fi nancial statements of AEGON Group Note 15.5 – 16
Junior perpetual capital securities Coupon rate Coupon date: quarterly, as of Year of fi rst call 2006 2005 2004
USD 500 million fl oating CMS rate 3 January 15 2014 402 402 402
TOTAL JUNIOR PERPETUAL CAPITAL SECURITIES 3,447 2,809 1,352 1 The coupon of the USD 250 million junior perpetual capital securities, callable in 2010, is based on the yield of three-month LIBOR plus an additional spread of 87.5 basis points. The coupon will be reset each quarter based on the then prevailing three-month LIBOR yield, with a minimum of 4%.
The interest rate exposure on some of these securities has been swapped, using derivatives, to three-month LIBOR yield.
Perpetual cumulative subordinated bonds Coupon rate Coupon date Year of fi rst call 2006 2005 2004
The bonds have the same subordination provisions as dated subordinated debt. In addition, the conditions of the bonds contain provisions for interest deferral and for the availability of principal amounts to meet losses. Although the bonds have no stated maturity, AEGON has the right to call the bonds for redemption at par for the fi rst time on the coupon date in the years as specifi ed.
The USD 100 million 7.8% trust pass-through securities were called in 2006 at a call price of 103.5%. The USD 225 million 7.65% and the
AEGON has no unconditional right to defer settlement of these liabilities for at least twelve months after balance sheet date. This feature results in the classifi cation of these insurance contract liabilities as current.
Gross premium and deposits – existing and new business 8,764 7,806
Average attained age of contractholders 65 64 – – 64 63 – –
Notes to the consolidated fi nancial statements of AEGON Group Note 19
Gross premium and deposits – existing and new business 7,387 6,202
Notes to the consolidated fi nancial statements of AEGON Group Note 20 – 21
Fair value of investment contracts without discretionary participation features 34,611 37,658
Refer to note 4.1.5 for a description of institutional guaranteed products and an analysis of the contractual maturities for all institutional guaranteed products with defi ned maturities, based on nominal amounts. On the next page a maturity analysis follows of those contracts with defi ned maturities, based on carrying amounts.
EUR 4,058 million (2005: EUR 5,361 million) of the total balance of institutional guaranteed products have no contractual maturities.
(2005: EUR 4,351 million) that relates to products without contractual maturity terms. For the remainder of the balance, contractual repricing or maturity information can be analyzed as follows: Amount Yield Amount Yield Amount Yield Amount Yield
Savings accounts are part of the banking activities of the Group, as described in note 4.1.10. Due to the nature of these products, policyholders have fl exibility to withdraw cash from these savings accounts, with limited restrictions.
Gross premium and deposits – existing and new business 4,148 4,119 8,267
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.
Bankoverdrafts are largely part of cash pool agreements with banks and matched by cash balances. IFRS do not permit net presentation of these cash balances and bankoverdrafts under the current agreements with these banks.
USD 200 million Domestic Debentures 1 6.75% 1996 / 06 Semi-annually – 170
USD 133 million Zero Coupon Bonds 1 1982 / 10 67 65
USD 200 million Zero Coupon Bonds 1 1982 / 12 72 70
USD 750 million Senior Notes 4.75% 2003 / 13 Semi-annually 569 636
EUR 500 million Medium-Term Notes 4.125% 2004 / 14 December 8 485 512
USD 980 million Variable Funding Surplus Note2 Floating 2006 / 36 Quarterly 744 –
Floating-rate - Expiring within one year 247 254 - Expiring beyond one year 2,316 2,607
The amounts recognized in the balance sheet are determined as follows: Retirement benefi t plans 2006 2005
Actuarial (gains)/losses recognized on present value of defi ned benefi t obligation 6 – 6
Defi ned benefi t expenses are included in ‘Commissions and expenses’
Movements during the year in plan assets for retirement benefi t plans 2006 2005
Accumulated post-employment benefi t obligation for medical cost 19 (19) 15 (13)
Best estimate of contributions expected for the next annual period 99
Defi ned benefi t plans are mainly operated by AEGON USA, AEGON
The benefi ts are based on years of service and the employee’s compensation during the highest fi ve, complete, consecutive years of employment. These defi ned benefi t plans were overfunded by
Internal Revenue Service Code. The unfunded amount related to these plans, for which a liability has been recorded, is EUR 146 million.
AEGON USA provides health care benefi ts to retired employees, which are predominantly unfunded. The post-retirement health benefi t liability amounts to EUR 144 million.
Target allocation of plan assets for retirement benefi t plans for the next annual period is
The overall goal of the plans is to maximize total investment returns to provide suffi cient funding for the present and anticipated future benefi t obligations within the constraints of a prudent level of portfolio risk and diversifi cation. AEGON believes that the asset allocation is an important factor, determining the long-term performance of the plans. From time to time the actual asset allocation may deviate from the desired asset allocation ranges due to different market performance among the various asset categories.
(as at January 1, 2005) have an option to contribute to a defi ned contribution plan for the excess salary. However, the cost for the company remains the same. The defi ned benefi t plan was unfunded by EUR 1,436 million at December 31, 2006. Assets held by AEGON
Health care cost trend rate assumed for next year 2.00% 5.00%
AEGON UK operates a defi ned benefi t pension scheme providing benefi ts for staff based on fi nal pensionable salary. The assets of the scheme are held under trust separately from those of the Group.
The assets of the scheme are held in policies effected with Scottish
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes relate to the same fi scal authority. The netting is refl ected in the tables above. Deferred tax liabilities included in a net deferred tax asset position are presented as negative components of the deferred tax asset breakdown. Similarly, deferred tax assets included in a net deferred tax liability position are presented as negative components in the breakdown of the deferred tax liability.
that can be carried forward to future taxable income. Losses amounting to EUR 83 million (2005: EUR 322 million) can be carried forward indefi nitely; losses amounting to EUR 517 million (2005: EUR 137 million) will expire within the next fi ve years; losses amounting to EUR 42 million (2005: EUR 11 million) will expire in fi ve to ten years; and no losses (2005: EUR 4 million) will expire in ten to fi fteen years. Deferred income tax liabilities have not been recognized for withholding taxes and other taxes that would be payable on the unremitted earnings of certain subsidiaries, branches, associates and joint ventures, since such amounts are permanently reinvested. Unremitted earnings totaled EUR 1,810 million (2005: EUR 1,741 million). All deferred taxes are non-current by nature.
Notes to the consolidated fi nancial statements of AEGON Group Note 28 – 30
Included in interest income is EUR 28 million (2005: EUR 37 million and 2004: EUR 39 million) in respect of interest income accrued on impaired fi nancial assets.
Notes to the consolidated fi nancial statements of AEGON Group Note 31 – 35
Net fair value and foreign exchange gains comprise: Positive fair value changes of general account fi nancial assets and liabilities at fair value through profi t or loss, other than derivatives 817 472 172
Net losses on investments for account of policyholders comprise 2006 2005 2004
Net gains and losses on investments from - Bonds and money market instruments (10) 332 352
The total amount of the change in fair value estimated using a valuation technique that was recognized in profi t or loss during 2006 is immaterial.
Notes to the consolidated fi nancial statements of AEGON Group Note 36 – 40
Profi t appropriated to policyholders 69 94 73 40 COMMISSIONS AND EXPENSES
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 units fully vest in three years and the exercise period is up to ten years, with the latest period ending in August 2008.
The following tables present the movements in number of share appreciation rights outstanding (SARs), as well as the breakdown by year in which they were granted.
Weighted average remaining contractual term in years Aggregate intrinsic value in EUR million
January 1, 2006 December 31, 2006 Exercise price in EUR Exercise period
Notes to the consolidated fi nancial statements of AEGON Group Note 40
The following assumptions are used in estimating the fair value of share appreciation rights at December 31: Expected dividend yield 3.99% 3.12% 4.19%
Refer to note 3 for a description of the method used to estimate the fair value and a description of the signifi cant assumptions.
(2005: EUR 40 million and 2004: EUR 14 million) and are recognized in the income statement as part of ‘Commissions and expenses’.
The following tables present the movements in number of share options, as well as the breakdown by year in which they were granted.
The following assumptions are used in estimating the fair value of share options at the grant date:
(2005: EUR 3 million and 2004: nil) and are recognized in the income statement as part of ‘Commissions and expenses’.
At December 31, 2006 AEGON N.V. held 26,123,865 of its own common shares with a face value of EUR 0.12 each by virtue of acquisitions for this purpose.
The breakdown of the share appreciation rights and share options granted in 2006 is as follows: Executive Board nil, other senior executives 4,009,800 and other employees 5,384,000 (2005: nil; 6,876,600).
Impairment charges on fi nancial assets, excluding receivables 142 147 275
Impairment reversals on fi nancial assets, excluding receivables (118) (160) (79)
Impairment reversals from - Bonds and money market instruments 103 139 80
TOTAL IMPAIRMENT REVERSALS 118 160 79 42 INTEREST CHARGES AND RELATED FEES
- Changes in deferred tax assets as a result of recognition/write off of previously not recognized/ recognized tax losses, tax credits and deductible temporary differences (12) (66) 1 - Non-recognition of deferred tax assets 47 2 3 - Tax effect of profi t/losses from associates (2) 1 –
The number of share options that has not been included in the weighted average number of ordinary shares used in the calculation of diluted earnings per share, because these share options were antidilutive for the periods presented, amounted to 9,151,195 (2005: 853,048 and 2004: 1,013,198). The exercise prices of these share options range from EUR 23.33 to EUR 14.00.
WEIGHTED AVERAGE NUMBER OF ORDINARY SHARES FOR DILUTED EARNINGS PER SHARE CALCULATION (THOUSANDS) 1,579,703 1,548,547 1,503,127
The dividend per share paid in 2006 (interim 2006 and fi nal 2005)
April 25, 2007. These fi nancial statements do not refl ect the proposed fi nal dividend payable.
Borrowings not related to capital funding of insurance activities 1 (3,518) (3,473)
Borrowings not related to capital funding of insurance activities mainly include operational funding of US regulation XXX and guideline AXXX redundant reserves, funding of mortgage warehousing activities, short-term funding of cash and collateral management activities, and the proportional amount of other borrowings not immediately deployed for capital management activities. In the ordinary course of business, AEGON N.V. may at times have borrowings, which are offset by cash and cash equivalents available for future capital management activities, such as funding capital contributions in its subsidiaries, redemption of borrowings or payment of dividends to its shareholders. The Total Capital Base is a non-IFRS measure, as IFRS does not permit separate presentation of borrowings based on the deployment of the proceeds.
Both insurance and banking companies are required to maintain a minimum solvency margin based on local directives. AEGON’s insurance subsidiaries in the United States are subject to risk-based standards established by the National Association of Insurance
States was 365%. Under the Insurance Industry Supervision Act 1993 in the Netherlands, life insurance companies are required to maintain equity of among others 4% of general account technical reserves and, in case of no interest guarantee, 1% of technical reserves with investments for account of policyholders plus 0.3% of the amount at risk under the insurance policies for life insurers.
AEGON’s capital base refl ects the capital employed in insurance activities and consists of shareholders’ equity, capital securities and dated subordinated and senior debt. AEGON targets its capital base to comprise at least 70% shareholders equity (excluding the revaluation reserve), 25% perpetual capital securities (consisting of junior perpetual capital securities and perpetual cumulative subordinated bonds) and a maximum of 5% dated subordinated and senior debt related to insurance activities.
The solvency position of the Group has been outlined in the following table: Liability capital of the Group 23,342 23,391
EUR 1,521 million and EUR 16,796 million is available for dividends.
TOTAL FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS 1,137 23,869 1,368 23,506
Therefore the Group elected to designate these investments for account of policyholders as at fair value through profi t or loss.
Investments held for account of policyholders comprise assets that are linked to various insurance and investment contracts for which the fi nancial risks are borne by the customer.
Under the Group’s accounting policies these insurance and investment liabilities are measured at the fair value of the linked assets with changes in the fair value recognized in the income statement. To avoid an accounting mismatch the linked assets have been designated as at fair value through profi t or loss.
In addition the investment for account of policyholders include with profi t assets, where an insurer manages these assets together with related liabilities on a fair value basis in accordance with a documented policy of asset and liability management. In accordance with Group’s accounting policies, these assets have been designated as at fair value through profi t or loss.
Investment contracts that have been designated as at fair value through profi t or loss include contracts that are considered to contain an embedded derivative that requires measurement at fair value through profi t or loss, such as equity-linked or pass-through investment performance features and total return swaps. For consistency, the underlying portfolio has been designated as at fair value through profi t or loss. Also contracts that contain embedded derivatives that can not be reliably bifurcated are carried at fair value, such as a fi xed annuity issued by AEGON USA containing an investment performance pass-through feature subject to a cumulative minimum guarantee.
With the exception of derivatives designated as a hedging instrument, all derivatives held for general account and held for account of policyholders are included in the table on page 211.
Borrowings designated as at fair value through profi t or loss include fi nancial instruments that are managed on a fair value basis together with related fi nancial assets and fi nancial derivatives.
No loans and receivables were designated as at fair value through profi t or loss.
Changes in the fair value of fi nancial liabilities designated as at fair value through profi t or loss were not attributable to changes in credit risk. There are also no differences between the carrying amounts of these fi nancial liabilities and the contractual amounts payable at maturity (net of surrender penalties).
In addition to the guarantees shown in the table, guarantees have been given for fulfi llment of contractual obligations such as investment mandates related to investment funds.
AEGON N.V. has entered into a net worth maintenance agreement with its indirect subsidiary AEGON Financial Assurance Ireland Limited
(AFA), pursuant to which AEGON N.V. will cause AFA to have a tangible net worth of at least 3% of its total liabilities under fi nancial guaranty policies which it issues up to a maximum of EUR 3 billion.
Clark debt assumed by AEGON, the EUR 21 million cost basis of Clark common stock already owned by AEGON and transaction costs. In addition, a Clark management group will acquire some of Clark’s other business segments, not considered core to AEGON, for EUR 41 million. Currently AEGON holds a 13% interest in Clark.
In December 2006, AEGON and Ranbaxy Promoter Group agreed to jointly establish a life insurance and an asset management undertaking in India. The ventures will be incorporated by AEGON
AEGON N.V. has guaranteed and is severally liable for the following: Due and punctual payment of payables due under letter of credit agreements applied for by AEGON N.V. as co-applicant with its subsidiary companies AEGON USA, Inc., Commonwealth General
Corp. with respect to bonds, capital trust pass-through securities and notes issued under commercial paper programs
(EUR 1,025 million), as well as payables with respect to a derivative transaction of Transamerica Corporation (EUR 744 million).
Due and punctual payment of any amounts owned to third parties by the consolidated group company AEGON Derivatives N.V. in connection with derivative transactions. AEGON Derivatives N.V.
AEGON is involved in litigation in the ordinary course of business, including litigation where compensatory or punitive damages and mass or class relief are sought. In particular, certain current and former customers, and groups representing customers, have initiated litigation and certain groups are encouraging others to bring lawsuits in respect of certain products in the Netherlands. The products involved include securities leasing products and unit linked products
AEGON has established adequate litigation policies to deal with the claims defending when the claim is without merit and seeking to settle in certain circumstances. This and any other litigation AEGON
has been involved in over the last twelve months have not had any signifi cant effects on the fi nancial position or profi tability of
The operating lease obligations relate mainly to offi ce space leased from third parties. The total of future minimum sublease payments expected to be received on non-cancellable subleases is EUR 13 million.
Notes to the consolidated fi nancial statements of AEGON Group Note 49 – 50
The collateral received is typically in the form of cash and is invested in pre-designated high quality investment strategies. The collateral is typically greater than the market value of the related securities loaned and is recorded on the balance sheet as an asset and an offsetting liability is established for the same amount. AEGON is obligated to return the collateral upon termination of the lending arrangement.
AEGON can receive or pledge collateral relative to derivative transactions that it enters into. The credit support agreement will normally dictate the threshold over which collateral needs to be pledged by AEGON or its counterparty. In addition, in order to trade derivatives on the various exchanges, AEGON posts margin as collateral. The amount of collateral will vary with the market value changes of the derivative contracts. Cash is normally received as collateral and a portion of this cash collateral has been rehypothecated to other parties to serve as collateral. Securities that may be received, other than cash that has been rehypothecated, are reported on the consolidated balance sheet at fair value. Cash that is pledged to counterparties is removed from the balance sheet. AEGON is obligated to return the collateral to the original counterparty upon termination of the derivative contract. AEGON has entered into asset lending transactions for which the collateral is held by a third party and will only be released to AEGON on default by the counterparty. This collateral is not recognized in the balance sheet.
The following table summarizes the carrying amounts on the balance sheet of fi nancial assets pledged as collateral. Collateral paid as part of share borrowing or reverse repurchase transactions are included in this information.
Group does not have economic ownership. When collateral takes the form of non-cash, AEGON does not account for the delivery of instruments as collateral, or for the securities received, as there is no change in economic ownership.
Details of collateral accepted that the Group is permitted to sell or repledge in the absence of default by the owner of the collateral are as follows: Fair value of fi nancial assets accepted as collateral 9,960 4,616
In September 2006 AEGON The Netherlands acquired the remaining 55% of the Unirobe shares. The distribution activities of the Dutch operations are placed under the Unirobe Meeùs Group. No operations have been disposed off as a result of the combination. The cost of acquiring the remaining 55% of the shares was EUR 59 million, which was paid in cash. In total an amount of EUR 96 million was paid to acquire the 100% interest. At the acquisition date assets and liabilities were recognized for EUR 186 million and EUR 134 million respectively which included a cash position of EUR 0 million. Since the acquisition date, Unirobe has contributed EUR 5 million to the net income of AEGON. The acquisition resulted in the recognition of
EUR 49 million goodwill, of which EUR 18 million had previously been included in the measurement of the interest held in Unirobe as an associate. Goodwill refl ects the commission income that is expected to be generated by Unirobe in future years.
Seguros Navarra S.A. took place in two tranches. In the fourth quarter of 2005, 15% was acquired, followed by another 35% in 2006. The acquisition date was April 30, 2006 when approval was obtained from the Spanish and European regulatory authorities. The fi nal price of the acquisition was EUR 61 million, fully paid in cash.
CN is entitled to an contingent earn-out payment, the amount of which is dependent on the business’ performance over the coming fi ve years. AEGON has provided for the expected future payment on a discounted basis (EUR 60 million at December 31, 2006).
As a consequence of the acquisition goodwill of EUR 91 million was reported.
In October 2005, AEGON and the Spanish savings bank Caja de Badajoz
Pensiones, Sociedad Anónima de Seguros, has been set up with a capital amounting to EUR 11 million of which 50% has been paid in.
The remaining 50% shall be paid in within the next 2 years. At the end of the fi fth year of the joint venture, CB is entitled to a contingent earn-out payment. AEGON has provided for the expected future payment on a discounted basis (EUR 21 million at December 31, 2006).
Fixed Income Fund (PREFF), a newly created hedge fund formed as a limited partnership. As of 31 December 2006 AEGON is the only limited partner in this fund. As a limited partner, AEGON does not have any direct voting power. However, in addition to its limited partnership interest, AEGON has an equity interest in the general partner of the fund and also has derivative trading responsibilities through a sub-advisory agreement. Based on these facts, AEGON
On November 24, 2006, Vereniging AEGON exercised its option rights to purchase in aggregate 5,440,000 class B preferred shares at par value to correct dilution caused by AEGON’s stock dividend issuances during the year.
On December 21, 2006, Vereniging AEGON sold at intrinsic value and transferred to AEGON International N.V. all shares of its subsidiary company Albidus B.V. for an immaterial amount.
In both 2001 and 2002, AEGON N.V. entered into total return swaps with Vereniging AEGON in order to hedge the share option plan for each respective year. On April 15, 2005, these total return swaps were terminated, resulting in a positive impact on shareholders’ equity of EUR 115 million. The amount has been added to retained earnings.
On May 17, 2005, AEGON N.V. purchased 3,821,645 of its common shares from Vereniging AEGON at a purchase price of EUR 9.847. On
December 5, 2005, Vereniging AEGON exercised its option rights to purchase in aggregate 6,950,000 class B preferred shares at par value to correct dilution caused by AEGON’s stock dividend issuances and treasury stock sales during the year.
AEGON provide reinsurance, asset management and administrative services for employee benefi t plans relating to pension and other post-employment benefi ts of AEGON employees. Certain postemployment insurance benefi ts are provided to employees in the form of insurance policies issued by affi liated insurance subsidiaries.
In addition to these transactions, the remuneration and share-based compensation of members of the Executive Board and the
Amounts in EUR thousands Salary Other 3 Cash 4 Shares 5
P. van de Geijn (pro rata for the year 2003) – – 241 – – 241 1 Mr. Shepard earns a salary of USD 1 million. 2 Base salary, including adoption in accordance with the general salary rounds applicable to AEGON employees in the Netherlands, the customary employee profi t sharing bonus, as well as a tax deferred employee savings scheme.
4 In line with the regulations of the Short-Term Incentive (STI) Plan for the years 2005 and 2004, it was established that in 2005 and 2004 the value of new business of the Group and of the relevant country units was positive. Subsequently, operating earnings were calculated and established per area of responsibility. After adoption of the 2004 and 2005 annual accounts by the shareholders, the disclosed STI cash bonuses for the years 2004 and 2005 were paid in 2005 and 2006 respectively. Under the 2003 STI plan, paid in 2004, Mr. Shepard was entitled to receive USD 50,000 per percentage point increase in the preceding year’s earnings per share. The other members of the Executive Board were entitled to receive EUR 32,432 per percentage point increase in the preceding year’s earnings per share in excess of the rate of European infl ation as indicated by the European Central Bank. The relevant percentage was 8.9%. All 2003 bonuses were maximized at 150% of the year’s salary. Under the STI plan 2003, Executive Board members could opt for payment in cash or in shares.
5 In 2004, all members of the Executive Board opted for payment of half of the cash value of their 2003 STI bonus in AEGON N.V. common shares. These shares are restricted (non-transferable) for a period of three years. The number of shares for each member was: Mr. Shepard 16,143; Mr. Streppel 12,409; Mr. Van der Werf 12,409; and Mr. Wynaendts 8,771. After the three-year holding period, the Executive Board members will be entitled to bonus shares, provided that they are still employed by AEGON. The number of bonus shares will be calculated through performance based matching, on the basis of earnings per share growth over infl ation in the preceding three years, i.e. 2004, 2005 and 2006. The number of bonus shares varies from 0 to 100% of the number of shares mentioned above.
6 In addition to the STI plan, Mr. Shepard is entitled to a short-term incentive bonus equal to 0.1% of the net income of AEGON N.V. according to the adopted accounts. The amount included in the 2006 table is based on net income over 2005 as reported in accordance with IFRS. The amounts included in the 2005 and 2004 tables are based on 2004 and 2003 net income respectively as reported in accordance with Dutch accounting principles.
Notes to the consolidated fi nancial statements of AEGON Group Note 53
The above rights have been granted under the LTI plan in force until December 31, 2003. Details of the exercise period is provided in note 40. For each of the members of the Executive Board, the shares held in AEGON as shown in the above table do not exceed 1% of total outstanding share capital at the balance sheet date.
Board had loans with AEGON or any AEGON related company: Mr. Streppel had a 5% mortgage loan of EUR 608,934; Mr. Van der Werf had a mortgage loan of EUR 1,240,000, with half of the amount at 3.4% fixed rate and half of the amount at 3.4%
respectively. In accordance with the terms of the contracts, no principal repayments were received on the loans in 2006. The terms of the board members’ loans have not been amended.
Under his employment agreement, Mr. Shepard shall be entitled to a specified amount of severance upon termination of his employment for reasons specified in the employment agreement. Under his employment agreement, Mr. Shepard shall be entitled to severance in the amount of three year’s base salary and the aggregate shortterm incentive compensation he received during the three years prior to the termination in the event that Mr. Shepard’s employment is terminated (a) by AEGON other than for urgent cause, death, disability, voluntary resignation or retirement, (b) by AEGON in connection with a merger, take-over or fundamental changes of policy and related organizational amendments, or (c) by Mr. Shepard in the event that his responsibilities or position are diminished by such circumstances. Any such severance payments received by
Retirement Plan (SERP). In addition, three additional years of service will be credited for the purpose of calculating his benefits under the SERP.
I.W. Bailey, II (as of April 22, 2004) 56,669 48,750 23,562
F.J. de Wit (up to April 22, 2004) – – 10,603
Share options and share appreciation rights of active members of the Supervisory Board
The options have been granted by reason of membership of the
Notes to the consolidated fi nancial statements of AEGON Group Note 53 – 54
Sony Life is expected to be operational in early 2008, subject to fi nal agreement and regulatory licensing and approval.
common stock at USD 17.21 per share. Based on preliminary information, the shares tendered, together with the shares already owned by AEGON, represent approximately 94% of the outstanding shares of Clark. AEGON intends to complete this transaction as soon as practical. Reference is made to note 49.
Management of the company is responsible for the preparation and fair presentation of the consolidated fi nancial statements in accordance with International Financial Reporting Standards as adopted by the European Union and with Part 9 of Book 2 of the
Netherlands Civil Code, and for the preparation of the Report of the
Before profi t appropriation, amounts in EUR million Note 2006 2005
N.V. serves as the holding company for the AEGON Group and has listings of its common shares in Amsterdam, New York, London, and Tokyo.
Book 2 of the Netherlands Civil Code. Based on article 2:362.8 of the
Exchange differences on monetary items are recognized in the income statement when they arise, except when they are deferred in equity as a result of a qualifying cash fl ow or net investment hedge.
Cash comprises cash at banks and in-hand. Cash equivalents are short-term highly liquid investments that are readily convertible to known cash amounts, are subject to insignifi cant risks of changes in value and are held for the purpose of meeting short-term cash commitments.
reacquired by the Group and are deducted from equity regardless of the objective of the transaction. No gain or loss is recognized on the purchase, sale, issue or cancellation of the instruments. The consideration paid or received is recognized directly in equity. All treasury shares are eliminated in the calculation of earnings per share and dividend per share.
A fi nancial instrument issued by the company is classifi ed as a liability if the contractual obligation must be settled in cash or another fi nancial asset or through the exchange of fi nancial assets and liabilities at potentially unfavorable conditions for the company.
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.
Notes to the fi nancial statements of AEGON N.V. Note 2.9 – 6
AEGON will notify the General Meeting of Shareholders and retain its right to exercise the full voting power of 25/12 vote per preferred share for a limited period of six months.
equity of EUR 115 million. The amount has been added to retained earnings.
The weighted average number of EUR 0.12 common shares for 2006
Detailed information on remuneration of active and retired members of the Executive Board including their share option rights, remuneration of active and retired members of the Supervisory
Changes in foreign currency translation reserve – – – – – 1,515 1,515
Changes in revaluation subsidiaries – – 4 – 152 – 156
Transfer to legal reserve – – (60) – 60 – –
Repurchased and sold own shares – 220 (146) – – – 74
CHANGES IN EQUITY FROM RELATION WITH SHAREHOLDERS 4 (244) (637) – – – (877)
Notes to the fi nancial statements of AEGON N.V. Note 8
The revaluation account refl ects the legal reserve for investments in group companies.
The foreign currency translation reserve is the legal reserve for currency differences on non-euro subsidiaries and refers to accumulated translation differences amounting to EUR (565) million
On the balance sheet date AEGON N.V. and its subsidiaries held 40,809,710 of its own common shares with a face value of EUR 0.12 each. Most of the shares have been purchased to hedge stock appreciation rights and stock options granted to executives and employees and to neutralize the dilution effect of issued stock dividend. Movements in the number of repurchased own shares held by AEGON N.V. were as follows: Transactions in 2006: Purchase: 30 transactions, average price EUR 14.78 19,076,000 –
Transactions in 2005: Purchase: one transaction on May 17, price EUR 9.85 – 3,821,645
Junior perpetual capital securities Coupon rate Coupon date: quarterly, as of Year of fi rst call 2006 2005
EUR 950 million fl oating CMT rate January 15 2014 950 950
The coupon is reset each quarter based on the then prevailing tenyear US dollar interest rate swap yield, with a maximum of 8.5%. The interest rate exposure on some of these securities has been swapped, using derivatives, to three-month LIBOR yield.
Notes to the fi nancial statements of AEGON N.V. Note 9 – 11
TOTAL PERPETUAL CUMULATIVE SUBORDINATED BONDS 567 567 1 Issued at an interest rate of 8%, which was reset in June 2005.
The repayment periods of borrowings vary from in excess of one year up to a maximum of 25 years. The interest rates vary from 2.745 to 9.375% per annum.
EUR 186 million (2005: EUR 70 million) and income tax payable for
At December 31, 2006, there were no amounts due and payable.
Due and punctual payment of payables by the consolidated group companies AEGON Funding Corp., Commonwealth General
only enters into derivative transactions with counterparties with which ISDA master netting agreements including collateral support annex agreements have been agreed; net (credit)
exposure on derivative transactions with these counterparties was therefore minimal as at December 31, 2006.
common stock at USD 17.21 per share. Based on preliminary information, the shares tendered, together with the shares already owned by AEGON, represent approximately 94% of the outstanding shares of Clark. AEGON intends to complete this transaction as soon as practical. Reference is made to note 49 of the consolidated fi nancial statements of the Group.
Appropriation of profi t will be determined in accordance with the articles 31 and 32 of the Articles of Incorporation of AEGON N.V. The relevant provisions read as follows: 1. The General Meeting of Shareholders shall adopt the annual accounts.
2. If the adopted profi t and loss account shows a profi t, the
Executive Board, to set aside part of the profi t to augment and/
Apart from this, no other dividend is to be paid on the preferred shares.
Board, shall make a proposal for that purpose. A proposal to pay a dividend shall be dealt with as a separate agenda item at the
Supervisory Board, decide that a distribution on common shares shall not take place as a cash payment but as a payment in common shares, or decide that holders of common shares shall
have the option to receive a distribution as a cash payment and/
Supervisory Board, the Executive Board shall also determine the conditions applicable to the aforementioned choices.
7. The company’s policy on reserves and dividends shall be determined and can be amended by the Supervisory Board, upon the proposal of the Executive Board. The adoption and thereafter each amendment of the policy on reserves and dividends shall be discussed and accounted for at the General Meeting of
April 25, 2007, to pay a dividend for the year 2006 of EUR 0.55 per common share of EUR 0.12 par value which, after taking into account the EUR 0.24 interim dividend, leads to a fi nal dividend of EUR 0.31 per common share. It is also proposed that the fi nal dividend will be made available entirely in cash or entirely in shares, at the election of the shareholder. The value of the stock dividend will be approximately 5% lower than the value of the cash dividend and will be paid out of the paid-in surplus fund. Shareholders can elect to receive a dividend in cash or in shares up to and including
In order to refl ect the prevailing market price of AEGON N.V. common shares fully within the indication provided, the number of dividend coupons that gives entitlement to a new common share of EUR 0.12 will be determined on May 16, 2007, after 5:30 p.m., based on the average share price quoted by Euronext Amsterdam in the fi ve trading days from May 10, 2007 up to and including May 16, 2007.
AGO. In 1978, AGO demutualized and Vereniging AGO became the only shareholder of AGO Holding N.V., which was the holding company for its insurance operations. In 1983, AGO Holding N.V. and
Ennia N.V. merged into AEGON N.V. Vereniging AGO initially received approximately 49% of the common shares (which was reduced gradually to less than 40%) and all of the preferred shares in AEGON
had certain option rights on preferred shares to prevent dilution of voting power as a result of share issuances by AEGON N.V. This enabled Vereniging AEGON to maintain voting control at the General
AEGON sold 350,000,000 of its common shares, of which 143,600,000 common shares were sold directly by Vereniging
AEGON in a secondary offering outside the United States and 206,400,000 common shares were purchased by AEGON N.V. from
EUR 2,064,000,000, which amount Vereniging AEGON contributed as additional paid-in capital on the existing AEGON N.V. preferred shares, all held by Vereniging AEGON. As a result of these transactions, Vereniging AEGON’s benefi cial ownership interest in
The relationship between Vereniging AEGON and AEGON N.V. was changed as follows: The 440,000,000 preferred shares with nominal value of
AEGON has voluntarily waived its right to cast 25/12 vote per class A or class B preferred share. Instead, Vereniging AEGON
has agreed to exercise one vote only per preferred share, except in the event of a ‘special cause’, such as the acquisition of a 15%
interest in AEGON N.V., a tender offer for AEGON N.V. shares or a proposed business combination by any person or group of persons whether individually or as a group, other than in a transaction approved by the Executive Board and the
AEGON N.V. and Vereniging AEGON have amended the option arrangements under the 1983 Merger Agreement. Under the amended option arrangements Vereniging AEGON, in case of an issuance of shares by AEGON N.V., may purchase as many class
B preferred shares as would enable Vereniging AEGON to prevent or correct dilution to below its actual percentage of voting shares. Class B preferred shares will then be issued at par value (EUR 0.25), unless a higher issue price is agreed.
Vereniging AEGON exercised its option rights to purchase in aggregate 5,440,000 class B preferred shares at par value to correct dilution caused by AEGON’s stock dividend issuances during the year.
Vereniging AEGON, based on the number of outstanding and voting shares (excluding issued common shares held in treasury by AEGON N.V.)
Vereniging AEGON has an Executive Committee consisting of seven members, fi ve of whom, including the chairman and the vicechairman, are not nor have ever been, related to AEGON. The other two members are also members of the Executive Board of AEGON
Based on publicly available information there are no other major shareholders exceeding 5% participation.
Management of the company is responsible for the preparation and fair presentation of the company fi nancial statements and for the preparation of the Report of the Executive Board, both in accordance with Part 9 of Book 2 of the Netherlands Civil Code. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of the company fi nancial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.
Our responsibility is to express an opinion on the company fi nancial statements based on our audit. We conducted our audit in accordance with Dutch law. This law requires that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the company fi nancial statements are free from material misstatement.
judgment, including the assessment of the risks of material misstatement of the company fi nancial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the company fi nancial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the company fi nancial statements.
Pursuant to the legal requirement under 2:393 sub 5 part e of the
Netherlands Civil Code, we report, to the extent of our competence, that the Report of the Executive Board is consistent with the company fi nancial statements as required by 2:391 sub 4 of the
AUDITOR’S REPORT To: The Supervisory Board and the Executive Board of AEGON N.V.
At Dec. 31 1 Net income refers to net income attributable to equity holders of AEGON N.V. 2 After deduction of preferred dividend and coupons on perpetuals. 3 Shareholders’ equity per share is calculated after deduction of the preferred share capital and considering the number of outstanding treasury shares.
Amortized cost is the amount at which the fi nancial asset or liability is measured at initial recognition minus principal repayments, plus or minus the cumulative amortization using the effective interest rate method of any difference between that initial amount and the maturity amount and minus any reduction (directly or through the use of an allowance account) for impairment or uncollectability.
Bifurcation is the measurement and presentation of embedded derivatives separate from the host contracts, as if they were standalone derivative fi nancial instruments.
Binomial option pricing model uses a binomial lattice that represents possible paths that might be followed by the underlying asset’s price over the life of the option, for a given number of time steps between valuation date and option expiration. Each node in the lattice represents a possible price of the underlying asset, at a particular point in time. The valuation process is iterative; it starts at each fi nal node and then works backwards through the lattice to the fi rst node, which is the valuation date, where the calculated result is the value of the option.
Constructive obligation is an obligation that derives from an entity’s actions whereby an established pattern of past practice, published policies or a suffi ciently specifi c current statement, the entity has indicated to other parties that it will accept certain responsibilities, and as a result, the entity has created a valid expectation on the part of those other parties that it will discharge those responsibilities.
Credit risk is the risk that one party to a fi nancial instrument will fail to discharge an obligation and cause the other party to incur a fi nancial loss.
Currency risk is a market risk, namely the risk that the value of a fi nancial instrument will fl uctuate due to changes in foreign exchange rates.
Deferred tax assets are amounts of income taxes recoverable in future periods in respect of deductible temporary differences; the carryforward of unused tax losses; and the carryforward of unused tax credits.
(a fund) and will have no legal or constructive obligation to pay further contributions if the fund does not hold suffi cient assets to pay all employee benefi ts relating to employee service in the current and prior periods.
Deposit accounting method includes amounts charged and paid to customers directly into the fi nancial liability and not through the income statement as premium income and claims.
Derecognition is the removal of a previously recognized asset or fi nancial liability from an entity’s balance sheet.
Derivatives are fi nancial instruments whose value changes in response to an underlying variable, that require little or no net initial investment and are settled at a future date.
Equity instruments are fi nancial instruments issued by the Group that are classifi ed as equity if they evidence a residual interest in the assets of the Group after deducting all of its liabilities.
Financial instrument is any contract that gives rise to both a fi nancial asset of one entity and a fi nancial liability or equity instrument of another entity.
A contract that will or may be settled in the entity’s own equity instruments and is
Guaranteed benefi ts are payments or other benefi ts to which a particular policyholder or investor has an unconditional right that is not subject to the contractual discretion of the issuer.
Hedge effectiveness is the degree to which changes in the fair value or cash fl ows of the hedged item that are attributable to a hedged risk are offset by changes in the fair value or cash fl ows of the hedging instrument.
accepts signifi cant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specifi ed uncertain future event (the insured event) adversely affects the policyholder.
Onerous contracts are contracts in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefi ts expected to be received under it.
Operating expenses are all expenses associated with selling and administrative activities (excluding commissions) after reallocation of claim handling expenses to benefi ts paid.
Plan assets are assets held by a long-term employee benefi t fund and qualifying insurance policies.
Price risk is a market risk, namely the risk that the value of a fi nancial instrument will fl uctuate as a result of changes in market prices.
Projected unit credit method is an actuarial valuation method that sees each period of service as giving rise to an additional unit of benefi t entitlement and measures each unit separately to build up the fi nal obligation.
Repurchase agreement is a sale of securities with an agreement to buy back the securities at a specifi ed time and price.
EUR/USD and EUR/GBP exchange rates; Increasing levels of competition in the United States, the
Standards may have on our reported fi nancial results and fi nancial condition.