259 Pensions and asset management 1,052 Life and protection 118 Institutional products 36 General insurance 21 Life reinsurance
AEGON has businesses in more than twenty markets in the Americas, Europe and Asia, providing life insurance, pensions, savings and investment products for some 40 million customers around the world.
States can trace their roots back to the mid-nineteenth century. Today, AEGON has businesses across the
UK is a leading provider of life insurance and pensions, and also has a strong presence in both the asset management and financial advice market.
Other Countries In the past few years, AEGON has significantly expanded its international presence outside its three established markets.
AEGON had an excess capital of EUR 3.7 billion over and above AA-capital adequacy requirements.
78 Contents 80 Consolidated balance sheet 81 Consolidated income statement 84 Consolidated statement of changes in equity 86 Consolidated cash fl ow statement 88 Exchange rates 89 Notes to the consolidated fi nancial statements 216 Remuneration 220 Auditor’s report
Other information 238 Proposal for profi t appropriation 239 Major shareholders
Executive Board 24 AEGON worldwide 32 Americas 34 The Netherlands 36 United Kingdom 38 Other Countries 40 Risk management 46 Liquidity and capital management 51 In control statement 54 Report of the
AEGON raises EUR 1 billion through launch of new three-year bond, further strengthening the company’s financial position.
AEGON reaches final agreement with customer organizations to reduce charges on unit-linked insurance policies in the Netherlands.
AEGON completes EUR 1 billion equity issue; proceeds used to repay part of the EUR 3 billion in capital secured in 2008 from the Dutch State.
AEGON releases USD 650 million in additional capital for the company’s US operations through capital management transaction.
AEGON’s operations in the Americas to succeed Pat Baird, who retires at the beginning of January 2010.
Please be assured of our commitment to putting AEGON’s considerable resources and expertise to work on your behalf as we further pursue our ambition of being a global leader in helping our customers secure their financial futures.
Shortly after taking over as CEO, I introduced a set of strategic priorities aimed at enhancing how we make use of AEGON’s substantial resources. These priorities have served us well during these many months of unprecedented challenges to our business. During the year we worked diligently across our businesses to achieve greater efficiency and balance in how and where we put our capital to work. We are determined to make the most of those regions and market segments that offer higher growth and returns over the long-term.
Brazil’s leading life insurers; and in December, we began serving the world’s second largest retirement market through our newly-formed company, AEGON Sony Life
Insurance Company in Japan. A particular success has been our strategy to broaden our customer reach in
United Kingdom and the Netherlands, we are working to reorganize our businesses to be more responsive to the needs of our customers. The clear result has been that our customers have stayed with us, while at the same time we have attracted new customers who, in today’s
environment, are even more discerning about the companies they rely on to provide them financial security.
Employer solutions & Pensions. In the United Kingdom, we are positioning our business to make the most of new industry changes that will reduce the cost of delivering products to customers, while also introducing new valueadded products designed to serve their financial needs into a longer retirement. Finally, in the Netherlands, we are working to improve customer service, reduce complexity of administrative processes, and ensure that we get right the first time what customers need and expect from a company which has as its mission to provide long-term financial security.
AEGON turned a decisive corner in the second half of 2009, when we were again in a position to report a net profit after four successive quarterly losses. This was a clear result of our determination to deliver on our strategic objectives to strengthen our balance sheet, reduce costs, and make the difficult decisions necessary to lessen AEGON’s exposure to market risk. The actions we took during the year to better align AEGON’s business portfolio with these objectives included the sale of AEGON’s life insurance business in Taiwan; the run-off of our institutional spread-based business in the
During the year, reinforcing AEGON’s capital position remained a central focus. This led to a strong excess capital position of EUR 3.7 billion at year-end, bringing the total of capital released from our businesses in 2009 to EUR 3.3 billion. We are convinced that our decision to maintain a larger capital buffer in the persistent economic uncertainty is not only necessary but prudent and in the interests of all our stakeholders.
At the end of November, we achieved an important milestone with the early repayment of EUR 1 billion of the capital AEGON obtained from the Dutch government at the height of the financial crisis. We were able to do so given AEGON’s strong financial position and as a result of our successful equity offering in August, which raised
EUR 1 billion from the capital markets. It continues to be our objective to complete full repayment of the remaining EUR 2 billion at the earliest opportunity, in line with the provisions of our agreement with the government and when it is most feasible to do so. Late last year, we also submitted a viability plan to the
In 2009, we exceeded the EUR 150 million target we set for cost reduction measures by an additional
Our customers, shareholders, business partners and employees can take confidence in knowing that the strategy we implemented to counter the worst financial crisis in nearly a century has delivered – enhancing
AEGON’s position to capture the clear opportunities before us. Thank you for your continued trust as we devote ourselves to further unlocking AEGON’s global potential in the months and years ahead.
Alex Wynaendts began his career in 1985 with ABN Amro, working in Amsterdam and London in the Dutch bank’s capital markets, asset management, corporate finance and private banking operations.
Executive Board. Mr. Wynaendts also has responsibility for asset management and
Jan Nooitgedagt has worked in Europe’s financial services sector for almost 30 years. Formerly with PriceWaterhouseCoopers, he joined Ernst & Young in 1980, becoming a partner in the firm in 1989. Mr. Nooitgedagt headed Ernst &
Young’s financial services business in the Netherlands for five years until his appointment in 2005 to the firm’s
subsidiary Diversified Investment Advisors and has also served as head of AEGON’s annuity and mutual fund businesses.
Marco B.A. Keim (1962, Dutch) Gábor Kepecs (1954, Hungarian) Otto Thoresen (1956, British)
Otto Thoresen joined Scottish Equitable in 1978, where he qualified as an actuary and worked in a number of roles, including marketing manager. He left Scottish
Chief Operating Officer, Chief Financial Officer and Director of Tax, before being appointed CEO of
AEGON Americas in March 2002. Mr. Baird is also a member of the board of directors at Cedar Rapids
Bank & Trust in Iowa in the United States. Mr. Baird retired from his position at AEGON at the beginning of January 2010 and was succeeded by Mark Mullin.
Monumental Life, one of AEGON’s US subsidiaries, has been insuring people since 1858, while AEGON’s history in the United Kingdom stretches back almost 180 years to the foundation of Scottish Equitable in 1831.
AEGON believes that its main businesses – life insurance, pensions and investments – have significant potential for growth in the years ahead. AEGON also believes that the insurance industry as a whole has a vital economic and social role to play protecting living standards and ensuring the long-term viability of pension systems around the world.
United Nations 1, more than one in five Americans will be over the age of 65. In Western Europe, that figure is higher – more than one in four – while in Japan, by the middle of the current century, those over 65 will account for nearly 40% of the country’s total population.
At the same time, new markets are opening up, particularly in Asia, Central & Eastern Europe and Latin
Europe, reforms have led to the widespread introduction of mandatory private pensions, while in both China and
India economic growth in recent years has brought greater prosperity and a rapid expansion of the urban middle class in these countries. In 2010, India’s middle class is expected to exceed 500 million people 2 – more than the combined populations of the United States, the Netherlands and the United Kingdom.
Over the past several years, AEGON has expanded its international presence to capitalize on opportunities for growth in these new markets. Currently, the company has operations in six countries in Central & Eastern
This is partly because of the effects of the global financial crisis, but also because of changing attitudes among customers and regulators.
In the short term, the global financial crisis presented significant challenges for the insurance industry, increased market volatility, and resulted in lower corporate bond and equity prices and a sharp downturn in the world’s leading economies. Since the end of the first quarter of 2009, market conditions have begun to improve. Even so, the crisis has had a long-term effect on the business environment in which AEGON operates, particularly as customers have become more aware of financial risk.
As a result, many customers are demanding greater financial guarantees because of the increase in market volatility. At the same time, distribution patterns in many leading markets are changing, and products are being redesigned, becoming simpler and more transparent.
AEGON benefited from its broad range of products. In certain cases, the company also took steps to modify existing products to take account of the change in customer behavior.
Despite the improvement after the first quarter of 2009, financial conditions remain uncertain, with unemployment continuing to rise and growth still hampered by higher corporate and household debt levels.
In June 2008, AEGON set out an ambitious five-year plan, designed to increase returns and grow the company’s businesses. This plan – ‘Unlocking the Global
Potential’ – is based on three strategic objectives: 1. To reallocate capital toward businesses with higher growth and return prospects.
In the second half of 2008, the global financial crisis led to a dramatic deterioration in market conditions. To counter the effects of this crisis, AEGON introduced a number of short-term measures, aimed at reducing financial risk, lowering operating costs and freeing up capital from the company’s existing businesses. These short-term measures – known as ‘The Three Cs’ –
As part of its long-term strategy, AEGON set out measures to release between EUR 4 billion and
This capital has been released through a combination of different measures, including risk reduction and a more active approach to capital management. AEGON’s aim is to maintain a sufficient capital buffer to protect the company’s long-term business and its credit and financial strength ratings. At the end of 2009, AEGON’s excess capital – over and above what would be required to maintain AA capital adequacy requirements – totaled
Even before the start of the crisis, AEGON had started taking steps to reduce financial risk and thereby free up additional capital. With the onset of the crisis, these steps were accelerated, helping protect the company from any further deterioration in market conditions.
Over the longer term, reduced levels of financial market risk should also result in more stable earnings. The steps
defensively, taking measures to reduce credit and interest rate risk and lowering fi nancial guarantees on some products.
During 2009, AEGON also carried out a number of transactions designed to raise capital, further strengthen the company’s overall capital position and enhance financial flexibility. These included: Strengthening AEGON’s cash position by raising �
EUR 1 billion through the issue of a new three-year bond in April.
combination of new and existing shares. Proceeds from this sale were used to repay one third of the
As part of its response to the financial crisis, AEGON announced that it would initiate cost reduction measures in 2009 of EUR 150 million –
Since the start of the financial crisis, AEGON has developed a number of
In February, AEGON announced a decision to run off its institutional �
The sale of AEGON’s life insurance activities in Taiwan in April contributed �
a decision that is expected to release approximately EUR 55 million in additional capital by 2012.
Thanks to the measures AEGON has taken to strengthen its overall financial position, the company in 2009 was in a position to begin repaying the
higher returns and strong growth prospects. For the time being, AEGON will not enter new countries, but instead will concentrate efforts on strengthening its position in markets where the company already has developing operations.
businesses, with an added emphasis on continuing measures to reduce risk and lower operating costs.
As part of its long-term strategy, AEGON intends to direct more of its financial resources to growth markets in Central & Eastern Europe, Asia and Latin America.
This will provide greater balance to AEGON’s businesses and reduce the company’s reliance on the US market.
Considerable progress has been made toward the objective of managing AEGON as a single, international company: Members of AEGON’s Management Board have been �
A new European data center has been opened at the �
company’s offi ces in Edinburgh, aimed at improving effi ciency by bringing together systems in both the
Central & Eastern Europe will be added at the earliest opportunity.
During 2009, in addition to quarterly earnings updates, AEGON organized a number of conferences, road shows and other events designed to communicate the company’s strategy and performance directly to investors and the financial markets.
Dutch Corporate Governance Code. A copy of this policy is available on www.aegon.com.
AEGON hosted an Analyst & Investor Conference in London in June 2009, as well as a separate Investor Day in New York in December. In total, these two events attracted around 100 participants. Presentations by senior management addressed AEGON’s strategy and the financial performance of both the company and its operating units.
At the June meeting, presentations were given on: AEGON’s strategy and approach to dealing with the �
United States, the Netherlands, the United Kingdom and Central & Eastern Europe.
AEGON held its annual General Meeting of Shareholders in The Hague on April 23, 2009. At the meeting 180 holders of common or preferred shares were present or represented. Together they accounted for 52.03% of
AEGON’s CEO Alex Wynaendts set out details of the company’s long-term strategy as well as steps being taken to counter the effects of the global financial crisis.
AEGON’s common shares are listed on three stock exchanges. The primary listing is in Amsterdam, but the company’s shares are also listed in London and
New York 2. These listings give AEGON access to global capital markets, and are a vital part of the company’s overall corporate and financial management strategy.
Share price information 1 For further details of Vereniging AEGON’s shareholding in AEGON, please refer to page 74 of this report. 2 Please note that AEGON’s common shares are scheduled to be delisted from the Tokyo Stock Exchange on March 27, 2010.
The company’s shares will continue to be traded in Amsterdam, New York and London.
did not declare either an interim or a final dividend for 2009.
AEGON’s share price, like that of other international insurance groups, was adversely affected by the global financial crisis, particularly during the first quarter of the year. An improvement in business and financial conditions, however, led to a strengthening in the share price after the second quarter. Overall, AEGON’s share on the Amsterdam stock exchange gained 0.3% in value during 2009. AEGON shares on the New York Stock
shares on the Amsterdam and New York stock exchanges during 2009.
Marco Keim, the Management Board member responsible for Sustainability, gives his view on the growing importance of environmental, social and governance issues to AEGON and the vital role customers are playing in helping shape the company’s long-term strategy.
For a fi nancial services company like AEGON, how important is sustainability?
I think they’re critical. What we’ve seen over the past several years is a very significant shift in behavior.
effective, transparent and easy to understand, but also ensuring people have the information they need to make the right decisions for themselves and their families – particularly important during times of uncertainty, as we saw with the global financial crisis. We already help fund financial literacy and education programs in the Netherlands, the United Kingdom, the United States and elsewhere. This is an area directly related to our expertise, and we’d like to do a lot more.
We already have a number of successful funds – especially in the United
Netherlands in recent months, or child labor, or human rights, or pollution, or simply good governance.
What about the environment? This is one of the major issues of our time…
It is. And – though we are not a significant polluter – we recognize that we have a role to play, and that we must do what we can to lessen the impact of our operations on the environment. In many of our offices, we already have initiatives in place aimed at reducing our consumption of electricity, water and paper and, just as importantly, our business travel. In 2010, we’ll be stepping up some of these efforts. Cutting back on unnecessary consumption not only helps the planet, it also reduces costs, which in turn benefits the company, its shareholders, its business partners – and, ultimately of course, its customers.
We’ve also pressed ahead with measures to reduce risk, particularly related to equity and credit markets, and to free up more capital from our businesses. These measures have significantly strengthened our overall financial position, and we were able last November to repay a first installment of the EUR 3 billion the Dutch
“This is a period of change for the insurance industry. If we manage this period well, there are opportunities not only to improve the way we run our companies, which will benefit our shareholders, but also to strengthen what we can do for our customers.”
Solvency II will lead to greater transparency and enable customers, shareholders and other stakeholders to compare insurers more easily.
Of course, Solvency II won’t come into effect for a while – not until October 2012 at the earliest. At the moment, there is broad agreement on the basic principles behind the system, but a lot still has to be ironed out. In particular, how you treat businesses in countries outside the European
This is a crucial moment for the insurance industry. We’re only just emerging from the financial crisis, and still digesting some of the lessons that have to be learned from the past two years. Here we have an opportunity in Europe to increase public trust, and put in place a modern, effective system of regulation, which will help improve the way we run our companies, benefit our shareholders, and strengthen what we can do for our customers.”
In the wake of the global financial crisis, AEGON companies around the world saw a substantial improvement in market conditions in 2009.
Part of the increase in earnings during the year was due to a substantial improvement in market conditions after the end of the first quarter. Measures designed to reduce costs, lower financial risk and free up capital from existing businesses, meanwhile, further strengthened
AEGON’s decision during the year to run off its institutional spread-based business in the United States.
Products also declined, the result of AEGON’s decision to run off its spread-based institutional business in the
AEGON’s net income for 2009 totaled EUR 204 million, compared with a loss for the previous year of nearly
Losses on fair value items amounted to EUR 460 million in 2009, a significant improvement from losses in 2008 of EUR 1.6 billion.
Net impairments in 2009 totaled EUR 1.3 billion. Of this amount, EUR 678 million were associated with
United States and the United Kingdom. Impairments showed a steady improvement during the year, but remained above AEGON’s long-term expectations.
Most of these savings were achieved through efficiency improvements, restructuring programs and expense reductions at AEGON’s main operations in the
During 2009, AEGON’s total workforce, excluding agents, declined by 7% to just over 25,000 employees. Most of the decline was due to restructuring in the United States and the United Kingdom, as well as the sale of AEGON’s realtor activities in the Netherlands and the company’s life insurance operations in Taiwan.
Sales across the company showed a gradual improvement after the first quarter. During the year as a whole, significant growth in the Netherlands and Spain was offset by lower sales in the Americas and Central &
Excluding institutional guaranteed products, AEGON’s gross deposits rose 6% in 2009 to EUR 23.6 billion.
Most of the increase was due to growth in pension deposits and the company’s variable annuities business in both the Americas and Europe. Savings deposits in the
Netherlands also showed an increase, as did retail mutual fund deposits in China. Gross deposits of fixed annuities decreased 17% however, as AEGON decided to lower crediting rates to preserve margins on these products.
Including institutional products, gross deposits declined 31% in 2009 to EUR 28.0 billion, following the decision to run off AEGON’s institutional spread-based business in the United States.
AEGON’s focus on profitability. AEGON’s operations in the Netherlands and Spain both reported strong VNB
figures for the year, offset by declines in the United States and the United Kingdom.
Measures to reduce costs, lower risk and free up capital further strengthened AEGON’s fi nancial position in 2009.
1 The calculation of the IGD capital surplus and ratio are based on Solvency I capital requirements on IFRS for entities within the European Union (Pillar I for AEGON UK), and local regulatory solvency measurements for non-EU entities. Specifi cally, required capital for the life insurance companies in the United States is calculated as two times the upper end of the Company Action Level range (200%) as applied by the National Association of Insurance Commissioners in the United States. The calculation of the IGD ratio excludes the available and required capital of the UK With-Profi t funds. In the UK solvency surplus calculation the local regulator only allows the available capital number of the With-Profi ts funds included in overall local available capital to be equal to the amount of With-Profi ts funds’ required capital.
Earnings overview AEGON worldwide Amounts in EUR million 2009 2008 year-on-year comparison
Throughout the financial crisis and beyond, AEGON companies around the world have helped their customers adapt to changing economic circumstances.
realizes more than ever that earning and building the trust of its customers is vital to the long-term success of the company.
Services developed a ‘Recover Plan’, designed to help existing customers manage their investments during the downturn.
that helps life insurance professionals make it easier for their clients to pass on wealth to future generations.
offers a broad range of traditional, term, universal, permanent life insurance, as well as individual and group financial protection, including accident and health cover.
AEGON helps individuals and families around the world save for their retirements, increasingly important as people in many countries live longer, healthier lives.
AEGON’s businesses cater to the needs not only of individuals, but also of institutional customers, such as banks, pension funds, municipalities and private companies. AEGON announced in February 2009 it is running off its institutional spread-based business in the United States.
AEGON is one of the largest providers of life insurance, pensions and investments in the United States.
The company employs over 14,000 people in locations across the country.
Canada and in Mexico, and in 2009 signed a joint venture agreement with Mongeral Seguros e
Market share AEGON The Netherlands 1 2nd in group pensions �
Market share AEGON Americas 1 1st in synthetic guaranteed investment �
Share of global revenuegenerating investments 1.1 307billion US dollars billion US dollars
In recent years, AEGON has built up significant operations in both Central & Eastern Europe and Asia.
Since then, the company has expanded across the region. Today, AEGON has operations in both China and
AEGON also offers life insurance and pension products to millions of customers in six countries across Central &
AEGON has had a partnership with pension and life insurance company La Mondiale for the past seven years.
Share of global workforce13% Share of global underlying earnings before tax
Market share AEGON in Asia 1 6th of foreign-owned life insurers in China �
Underlying earnings before tax declined 26% during the year to USD 1.3 billion. Earnings from Life & Protection decreased by 15%, mainly because of a rise in employee benefit expenses, reserve strengthening in the US life business and restructuring charges. Earnings from
Pensions & Asset management also declined as a result of lower fee income during the year. AEGON’s Life reinsurance business in the Americas returned to profit, while the company’s Individual savings & Retirement operations also reported a sharp turnaround in earnings as capital markets improved.
AEGON’s decision to run off its automotive credit business in the United States also led to a 13% decline in accident and health sales.
Variable annuity deposits continued to grow, but this growth was offset by a managed decline in fixed annuity deposits. Net pension deposits showed a strong improvement to USD 4.6 billion during the year.
Despite strong competition in the Dutch market, AEGON The Netherlands reported a significant rise in net income, helped by stronger earnings from the company’s Life & Protection business.
AEGON The Netherlands reported a sharp increase in net income for 2009 as a result of improved market conditions and stronger earnings from the company’s
EUR 398 million due mainly to higher earnings from the company’s Life & Protection business. Earnings from
Life & Protection rose sharply to EUR 262 million in 2009 as higher investment income, lower costs and an increase in earnings from mortgages offset charges related to a reorganization of the company’s sales operations. Earnings from AEGON’s Distribution business in the Netherlands also improved as 2008 had included a substantial restructuring charge. Earnings from
Savings business reported an underlying loss for the year of EUR 54 million as a result of low interest margins, charges related to sales restructuring and the failure of banks Icesave and DSB.
EUR 94 million the year before. This improvement was due mainly to higher underlying earnings, lower impairment charges and an increase in gains on investments, offset partly by an underperformance in fair value items. Gains on investments during the year totaled EUR 224 million, mainly from adjustments in the bond portfolio as part of the company’s asset and liability management.
EUR 873 million. The decline was due to the impact of cost saving measures, as well as a reduction in staff and project-related expenses.
Despite difficult market conditions, total new life sales in the Netherlands rose 9% in 2009 to EUR 239 million, due mainly to a strong increase in demand for pensions and improved customer service and satisfaction. Life sales, however, declined 15% to EUR 82 million. Sales of both individual life single and recurring premium products were down compared with 2008, because of increased pricing competition in the immediate annuity market, as well as lower demand for regular premium products.
Earnings from AEGON’s Life & Protection business in the Netherlands rose sharply in 2009.
Earnings overview AEGON The Netherlands Amounts in EUR million 2009 2008 year-on-year comparison
Difficult conditions in the equity and corporate bond markets led to lower earnings from the United Kingdom in 2009.
Kingdom. Earnings were also affected by an exceptional charge of GBP 38 million relating to a program to improve the consistency of AEGON’s customer records in the United Kingdom. Life & Protection reported a decline in its underlying earnings as the impact of charges associated with the company’s withdrawal from the group employee benefit business offset further growth in annuities and protection. Earnings from Pensions &
GBP 687 million in 2009 as a result of a lower deferral of expenses and higher operating expenses. Operating expenses were 3% higher at GBP 428 million, due to additional restructuring costs and a one-off release of reserves related to an employee incentive scheme.
United Kingdom showed a decline. Sales of annuities were lower as planned following repricing, while difficult economic conditions continued to affect sales of group pensions. Sales of investment bonds, meanwhile, were impacted by changes to tax rules and the economic environment.
Diffi cult conditions in equity and corporate bond markets had an adverse effect on AEGON’s 2009 earnings in the United Kingdom.
Earnings from AEGON’s ‘Other Countries’ rose significantly on further growth in Central & Eastern Europe and an improved performance from the company’s joint ventures in Spain.
AEGON’s sale of its life insurance business in Taiwan resulted in a net loss for the year, despite lower impairments and an increase in investment gains.
EUR 161 million in 2009, up 73% from EUR 93 million the year before. This increase was due to a significant rise in earnings from AEGON’s Life & Protection business as a result of further growth in Central & Eastern Europe and an improved performance in Spain. In addition, earnings in 2008 had been adversely affected by an acceleration in deferred policy amortization costs in Taiwan, amounting to EUR 43 million. Earnings from Individual savings & Retirement products also increased, a reflection primarily of the recovery in the Chinese equity market. Pensions & Asset management earnings rose, while General insurance earnings remained stable.
Total commissions and expenses decreased 31% in 2009 to EUR 340 million. Operating costs were down 8% at
Europe. Sales in Central & Eastern Europe were mixed as strong performances in Slovakia and the Czech Republic were offset by declines in sales of recurring premium life insurance in Hungary and Poland. Poland also experienced a steep decline in single premium sales, because of continued market turmoil. In Spain, new life sales rose because of the inclusion of new joint ventures, while China also showed an increase, the result of stronger demand for recurring premium life insurance.
EUR 2.7 billion, due primarily to higher retail mutual funds and the introduction of new funds in China.
Deposits were also helped by the continued growth in 2009 of AEGON’s pension business in Central & Eastern
Value of new business declined 19% to EUR 120 million, due mainly to a narrowing in margins for some products and the sale of AEGON’s life insurance operations in
Revenue-generating investments in Other Countries decreased 11% in 2009 to EUR 12.3 billion, due to the sale of AEGON’s Taiwanese life insurance operations.
Earnings overview AEGON Other Countries Amounts in EUR million 2009 2008 year-on-year comparison
For AEGON, risk management involves: Understanding which risks the company is able to �
By setting certain pre-defined tolerances and adhering to policies that limit the overall risk the company is exposed to, AEGON is able to accept risk with the knowledge of potential returns and losses both for the company and for its shareholders.
scenarios: AEGON must remain solvent in the case of plausible extreme events.
AEGON faces a number of risks, including underwriting, operational and financial. Some of these risks may arise from internal factors, such as inadequate compliance systems. Others, such as movements in interest rates or unexpected changes in longevity trends, are external in nature.
regularly carries out sensitivity analyses to determine the impact of different scenarios (including extreme event scenarios) – particularly on the company’s earnings and capital position 1.
Credit risk AEGON’s fixed income assets recovered a significant part of their value during 2009, though credit spreads, on an historical basis, remained relatively high. Meanwhile, defaults and downgrades both reached historical highs during 2009. AEGON’s strong liquidity management, however, ensured that the company would not be a forced seller of such assets. Because AEGON invests for the long term, the company is able to retain investments until they mature or recover their value. AEGON announced in February 2009 that the company would run off its institutional spread-based business in the United States, significantly reducing credit risk.
Equity markets remained depressed during the first part of 2009, though they rallied later in the year. AEGON had already sold most of its direct equity market exposure in the Netherlands and the United States before financial markets began to decline. During 2009, AEGON further extended its program of hedging equity risk at its US, Dutch and Canadian operations to protect itself against a possible deterioration in equity markets.
Liquidity risk AEGON has a strong liquidity management strategy in place. Since the early 1990s, AEGON has been constantly refining and developing its approach to liquidity management. As part of this approach, AEGON regularly considers the most extreme liquidity stress scenarios, including the possibility of prolonged ‘frozen’ capital markets, an immediate and permanent rise in interest rates, and policyholders withdrawing liabilities at the earliest conceivable date. In addition, the company has highly developed liquidity stress planning in place. In 2009, AEGON built up its holdings of cash and highly liquid assets as a further precaution against liquidity risk. AEGON’s liquidity management strategy ensures the company is not a forced seller of assets even in a severe stress scenario. Current tests show that available liquidity would more than match the company’s requirements for at least the next two years, even if already poor market conditions were to deteriorate further or capital markets were to close completely.
The goals of this framework are as follows: To minimize ambiguity by clearly defi ning �
AEGON’s Executive Board has overall responsibility for risk management. The Board adopts the risk governance framework and determines the company’s overall risk tolerance and risk appetite.
Board, which is responsible for overseeing AEGON’s enterprise risk management framework, including governance and measures taken to ensure risk management is integrated properly into the company’s broader strategy. In addition, the Risk Committee also reviews overall risk exposure in light of management’s risk appetite, the company’s own risk exposure limits and
AEGON’s overall solvency position. The Committee reports to the full Supervisory Board on a quarterly basis or more frequently, if required. Details of members of the Supervisory Board’s Risk Committee may be found on pages 61 to 63 of this Annual Report.
It is the responsibility of the Executive Board to inform the Supervisory Board should any risks directly threaten the solvency or operations of the company.
The role of Group Risk is to act, effectively, as the working arm of the GRCC. As such, Group Risk is responsible for developing and executing risk policies and frameworks. This involves identifying risk, particularly operating and emerging risk, as well as reviewing risk assessments carried out by operating units. Group Risk also identifies best risk management practices and helps ensure there is consistency in methodology and application of these practices across the company. In addition, Group Risk performs risk analyses, either at its own initiative or at the request of management, including the analysis of extreme events and related management capabilities.
CROs of individual operating units report to their respective regional CROs.
and the insurance industry as a whole. The global financial crisis led to a period of extreme volatility in world financial markets, and presented the global insurance industry with extremely challenging conditions, including: Signifi cantly lower equity markets �
These conditions persisted into 2009, though by the second half of the year there were signs that equity markets and the global economy were recovering and that, significantly, credit spreads were narrowing.
AEGON had, however, taken a number of steps designed to position itself for a possible downturn in the global economy. These steps included: Reducing the company’s overall exposure to world �
These steps helped strengthen AEGON’s capital and risk position in the years immediately preceding the financial crisis. The crisis itself, however, proved more severe than anticipated, and AEGON was obliged to introduce a series of short-term measures to counter its effects.
AEGON intends to further strengthen these lines of defense by: Clarifying the role and accountability of senior �
of AEGON’s risk management processes and controls (third line of defense).
The Executive Board will retain its overall responsibility for risk management, including AEGON’s risk governance framework, its risk tolerance and policies, and the risk culture within the organization.
Taiwan, meanwhile, contributed to a decrease in the company’s long-term interest rate exposure, which, in turn, lowered AEGON’s capital requirements.
Dutch State an initial amount of EUR 1 billion thanks to a significant improvement in the company’s capital position and the issuance of EUR 1 billion in equity.
entered 2010 with a significant capital buffer as a safeguard against any further deterioration in world financial markets. At the end of December 2009, AEGON’s excess capital – over and above what would be required to maintain AA capital adequacy requirements – totaled
AEGON has a number of basic principles, which determine its approach to capital and liquidity management: To ensure strong capital adequacy across the company. �
In June 2008, AEGON set out a number of measures designed to release capital from the company’s existing businesses over the next several years. These measures, however, were brought forward as part of the company’s response to the global financial crisis, aimed at preserving capital and stengthening the company’s overall position. The measures included a risk reduction program, steps to further improve capital efficiency, and the adoption of a more active approach to capital management.
During 2009, AEGON carried out a number of transactions designed to further strengthen the company’s capital and liquidity position and enhance overall financial flexibility: In April, AEGON raised EUR 1 billion through the issue �
EUR 3 billion in capital provided by the Dutch State in
AEGON’s strategy is aimed at securing stable and strong capital adequacy for its businesses, strengthening its ability to withstand adverse market conditions and ensuring the company is able to meet long-term obligations toward its stakeholders.
At AEGON N.V., liquidity is sourced from internal payments by operating companies. Additional liquidity comes from capital raising, debt funding in the form of medium term note and commercial paper issuance, backed by credit facilities. AEGON N.V. uses its liquidity primarily to fund operating expenses, interest payments on its debt, investments in country units, and distributions to shareholders.
AEGON N.V. and at country unit levels. AEGON’s liquidity position remained strong throughout 2009.
AEGON N.V. has regular access to international capital markets under its USD 6 billion debt issuance program.
This arrangement includes a USD 3 billion back-up credit facility. In addition, AEGON maintains USD 475 million of shorter-dated bilateral back-up facilities. AEGON N.V.
AEGON N.V.’s excess liquidity is invested in highly liquid, short-term assets in accordance with internal risk management policies. The duration profile of AEGON’s capital leverage is managed in line with the duration of surplus assets related to investments in its subsidiaries, subject to liquidity needs, capital and other requirements. AEGON considers its working capital, backed by external funding programs and facilities, to be ample for the company’s present requirements.
1 Where cash is defi ned as cash, cash equivalents plus highly liquid securities issued by governments or entities fully and explicitly guaranteed by governments in domestic denominations.
Though operational leverage is not considered part of the capital base, it is an important source of liquidity and funding. Operational debt relates primarily to mortgage warehousing and the funding of US regulation XXX
AEGON’s overall capital management depends on the following considerations: Capital requirements � – AEGON’s defi nes capital adequacy as whichever is the most stringent of its relevant capital requirements (see below).
Action Level range of the Risk Based Capital requirement set by the US
AEGON’s goal is to ensure that all operating companies maintain a strong financial position, now and into the future, even after sustaining losses from adverse business and market conditions.
Relevant local Standard & Poor’s requirements for AA capital adequacy �
AEGON applies leverage tolerances to its capital base that are consistent with its financial strength objectives.
AEGON’s target is for its capital base to comprise at least 70% core capital, no more than 25% perpetual capital securities and up to 5% dated subordinated debt and senior debt. At the end of 2009, AEGON’s capital base consisted of 74.5% core capital and 20.4%
perpetual capital securities. Senior and dated subordinated debt accounted for the remaining 5.1%.
EUR 13.8 billion twelve months previously. AEGON’s other equity securities amounted to EUR 4.7 billion.
AEGON, funded by the Dutch State. AEGON obtained this additional capital at the height of the crisis as a necessary precaution against further sharp declines in world financial markets. The capital was provided by the
At the end of November 2009, following a successful equity issue, AEGON repaid EUR 1 billion of the EUR 3 billion received. The equity issue was conducted in
August 2009 under AEGON’s US dollar shelf registration through the sale of just over 157.8 million new common shares and 32.7 million existing treasury shares. The shares were sold at EUR 5.25 per Dutch-registered share and USD 7.50 per New York-registered share. AEGON’s priority is to repay the remaining EUR 2 billion as soon as it is feasible and responsible to do so.
1 Please note that excess capital is the capital over and above the most stringent capital adequacy requirements adhered to by AEGON’s operating companies plus any excess capital held by AEGON N.V. Additional leverage capacity, meanwhile, is a managementimposed limitation for assuming debt, and is defi ned as the maximum capacity to issue additional debt under the company’s leverage tolerances.
In 2009, AEGON retained strong financial strength ratings from Standard & Poor’s (S&P), Moody’s and Fitch.
Consistent with the credit rating agencies’ overall outlook for the industry, AEGON’s financial strength ratings continue to carry a negative outlook.
During 2009, Standard & Poor’s lowered its senior debt rating for AEGON N.V. to A-, Moody’s lowered its senior debt rating to A3, while Fitch also lowered its senior debt rating to A. The outlook for all three credit ratings remained negative. At the same time, Standard & Poors,
Moody’s and Fitch lowered the insurance financial strength ratings of AEGON USA by one notch, to AA-,
AEGON’s risk management function monitors and controls AEGON’s solvency position and ensures that risk taking is within AEGON’s risk tolerance levels. The
On the basis of the above, AEGON’s Executive Board makes the following statement regarding the group’s financial reporting risks: AEGON’s risk management and control systems �
Financial Reporting Standards (IFRS) as adopted by the European Union (EU).
Board are guided by the interests of AEGON and its businesses, and take into account the interests of the company’s stakeholders. The Supervisory Board is a separate corporate body, independent of the Executive
General Meeting of Shareholders concerning all appointments and reappointments, and dismissals from both the Executive Board and the Supervisory Board itself. In addition, the Supervisory Board determines the remuneration of individual members of the Executive
Dutch Corporate Governance Code may be found on pages 71 to 76 of this Annual Report. In 2008, the capital agreement with the Dutch State prompted certain changes to AEGON’s corporate governance structure.
Approval from these representatives is required for certain decisions, including: The issuance and repurchase of shares and �
In 2009, discussions within AEGON’s Supervisory Board focused on the following issues: Strategy, Group Plan 2010-2014 �
AEGON’s strategy and businesses of the financial crisis and of the support received from the Dutch State. Both short and long-term trends and the challenges facing AEGON were reviewed. These challenges ranged from the economic downturn and developments in the capital markets, to changing regulations and customer behavior. During the course of the meeting, various macro-economic scenarios were examined. AEGON’s Supervisory
In addition, the Board also received presentations from the three main business lines of AEGON Americas: Life & Protection, Individual savings
AEGON’s Supervisory Board has been very much on how the company should react to the financial crisis that began in 2008. Management continued with measures aimed at preserving and releasing capital, lowering risk and reducing operating costs. The Board and management reviewed options to repay a first
should aim to repay this first tranche, the company’s capital position and market circumstances permitting. In
August, EUR 1 billion was raised through the sale of equity with the intention of repaying the initial tranche to the Dutch State. With the consent of the Dutch Central Bank,
EUR 1 billion was repaid on November 30. This was a first step toward a total repayment of the core capital securities held by the Dutch State.
AEGON’s capital position and its investment portfolio. As stated elsewhere in this report, AEGON’s capital position improved significantly during the year.
The Supervisory Board also discussed with the Executive Board the impact of the financial crisis on AEGON’s businesses over the longer term and the company’s response to it. These discussions are ongoing, and the
At the meeting in December, the Board discussed and approved AEGON’s Group Plan for 2010-2014, including the 2010 budget. As part of its discussion on the plan, the Board reviewed actions taken by management during 2009 to counter the effects of the global financial crisis. These actions included measures to release and preserve capital, lower risk and reduce costs.
Even with these measures, AEGON succeeded in maintaining its strong franchises, and management made progress on its three long-term strategic priorities.
March 2009, the Supervisory Board discussed AEGON’s fourth quarter and audited annual results for 2008, including the company’s embedded value and VNB
At several meetings held in the second half of 2009, the
Risk Committee. In 2009, the company’s capital position improved significantly compared with 2008. The Board regularly reviewed AEGON’s capital position and the internal and external factors affecting it. In August, the
Capital Plan and authorized the Executive Board to provide for AEGON’s funding needs as budgeted.
During its meetings in 2009, the Supervisory Board discussed a number of proposed new partnerships, acquisitions and divestments. Those announced during the year included the following: At meetings in February, the divestment of AEGON �
The licensing process had been delayed by the global fi nancial crisis.
Since the beginning of October 2009, AEGON has been subject to supplemental group supervision by the Dutch
Board, Dudley Eustace, and the Chairman of the company’s Audit Committee, Shemaya Levy, held two separate meetings with officials from the Dutch Central
In March, the Supervisory Board agreed that shareholders should be asked to approve the following: The appointment of Arthur W.H. Docters van Leeuwen �
The appointment of Shemaya Levy for a new term of �
Compliance also presented to the Board the company’s compliance governance model, the compliance strategy and its compliance reporting model. At the March meeting, management presented AEGON’s updated
In December, the Supervisory Board reviewed and discussed its own composition and performance, as well as that of the Executive Board. This year’s assessment did not involve any external consultant. The Board usually involves an external consultant in this process only once every two years. The Board assessed the performance of both individual members and its committees, on the basis of an internal questionnaire and a discussion of the results. Among the results of the review were recommendations on how to increase the effectiveness of both preparations for meetings and of meetings themselves. The Board also discussed the performance of the Executive Board and its individual members. Members of the Executive Board were not present during these discussions.
Officer, Director of Group Finance, Chief Risk Officer and other senior managers provided members of the Board with an update on the key issues surrounding Solvency II
Each of these committees is made up of members drawn from the Supervisory Board itself. In accordance with its
Committee recommended that the Supervisory Board amend its pre-approval policy for the company’s external auditor.
US Securities & Exchange Commission. These comprised of the company’s: 2008 Annual Report (Form 20-F) �
Chief Risk Officer and occasionally the Group Treasurer and AEGON USA’s Chief Investment Officer attended the meetings. The Risk Committee helps the Supervisory
Consequently, the Committee regularly reviews the company’s Enterprise Risk Management framework, its risk exposure and compliance with company risk policies.
AEGON’s quarterly risk overviews and the major risks faced by the company. Other important and recurring subjects were developments in AEGON’s US investment portfolio and capital and liquidity updates.
on April 22, 2009. In addition, the Nominating Committee reviewed the composition and the functioning of the Executive Board, and discussed succession planning. In addition, the Nominating Committee was consulted on the appointment of Mark Mullin to the Management Board.
AEGON agreed with the Dutch State to develop a new Remuneration Policy in line with international standards. In addition, the Dutch financial services industry also committed itself to more sustainable remuneration structures.
As planned, the Committee again reviewed the Supervisory Board’s remuneration in 2009. Based on a comparison of peer companies in Europe with a similar, two-tier system of corporate governance, AEGON’s
A minor adjustment in attendance fees will, however, be proposed to
All members of the Supervisory Board are considered independent according to the terms of the Dutch Corporate Governance Code, with the exception of Kornelis J. Storm. Mr. Storm is not regarded as independent within the definition of the Code since he served as Chairman of AEGON’s
Supervisory Board after five years in this position. His retirement will take effect at the annual General
Mr. Eustace brought great distinction to his role as Chairman of both the Supervisory Board and AEGON’s Audit and
Supervisory Board will consist of eleven members after the annual General Meeting of Shareholders on
Jan J. Nooitgedagt to the Executive Board for a fouryear term. Mr. Nooitgedagt succeeded Mr. Streppel as the company’s Chief Financial Officer.
Code, members of the Executive Board are appointed by shareholders for a term of four years, with the possibility of reappointment for subsequent four-year terms.
This Annual Report includes the annual accounts for 2009, prepared by the Executive Board, discussed by both the Audit Committee and the Supervisory Board, and submitted to shareholders for adoption. The
Supervisory Board would also like to express their appreciation for the dedication and commitment they have shown during the current uncertain business environment.
Dudley G. Eustace Chairman of the Supervisory Board of AEGON N.V.
AEGON’s Supervisory Board in 1997. He was due to retire in April 2009, but his term of office was extended for a further year, following approval from the General Meeting of Shareholders in 2009. Mr. Eustace is also a member of the European Advisory Council for Rothschild’s and sits on the Council of the University of Surrey in the United Kingdom.
Mr. Routs was appointed to AEGON’s Supervisory Board in 2008. His current term ends in 2012. He will take over from Mr. Eustace as Chairman of the Supervisory Board in April 2010.
Antony Burgmans is a retired Chairman of Unilever NV and Unilever PLC. He was appointed to AEGON’s Supervisory Board in 2007. His current term will end in 2011. Mr. Burgmans is also a member of the Supervisory Boards of Akzo Nobel N.V., SHV Holdings N.V. and Jumbo
Supermarkten B.V. as well as a member of the Board of Directors of BP p.l.c.
Board in 2009. His current term will end in 2013. Mr. Docters van Leeuwen is also Chairman of the Advisory Boards of Meesman Index Investments BV and Independent Risk Solutions, as well as Chairman of the Supervisory Board of foundation E-court.
Cecelia Kempler is director and instructor at Florida Atlantic University - College of Business,
Risk Management and Insurance Program. She was a partner at the law firm LeBoeuf Lamb
Foundation. She is a member of the Association of Life Insurance Counsel, the American
She was appointed to AEGON’s Supervisory Board in 2007 and her current term will end in 2011. She was formerly a member of the Provinciale Staten of the Province of Utrecht and a member of the European Parliament. She also served as Minister for Transport, Public Works and Water Management in the Dutch government.
Mr. Storm is also Chairman of the Supervisory Board of KLM Royal Dutch Airlines N.V.,
Vice Chairman of the Supervisory Board of Pon Holdings B.V. and a non-executive director of
NV and non-executive Director at Reed Elsevier PLC. He is also a member of the Supervisory
Supervisory Board of Robeco Group N.V., as well as a member of the Supervisory Boards of
Remuneration Policies, to make sure they remain fully in line with prevailing international standards. This review is based partly on information provided by
AEGON’s remuneration policy with regard to members of its Supervisory Board is aimed at ensuring fair and competitive compensation, and protecting the independence of the Board’s members. Terms and conditions for members of the Supervisory Board are part of AEGON’s broader Remuneration Policy and are the responsibility of the company’s Compensation Committee.
Remuneration Policy Members of AEGON’s Supervisory Board are entitled to the following: A base fee for membership of the Supervisory Board �
A fee for members on each of the Supervisory Board’s �
Member 40,000 1 Please note that Mr. Baily joined the Compensation Committee in April 2009, succeeding Dirk P.M. Verbeek.
Supervisory Board in 2008. This review concluded that fees for Supervisory Board members were generally below those paid at European peer companies. However, given the market environment, Supervisory Board members agreed to forego any increases in 2009. A
Remuneration report Members of AEGON’s Supervisory Board received the following payments in 2009.
Please note that, in 2009, Willem Stevens stepped down from 1 his position on the Supervisory Board.
company’s Executive Board has four main objectives: To ensure AEGON is able to attract and retain highly �
are closely aligned with those of shareholders by linking remuneration directly to company performance.
Committee. If necessary, the Committee recommends amendments to the Supervisory Board. Material changes, if any, are then submitted by the Supervisory Board to the General Meeting of Shareholders for adoption.
AEGON regularly compares its levels of executive remuneration with those at other, comparable companies.
AEGON’s current Remuneration Policy for members of the Executive Board has been in force since the beginning of 2007.
Under AEGON’s current policy, the two peer groups are as follows: North America: American International Group, or AIG (United States) �
Total Target Compensation levels to ensure they remain competitive and continue to provide proper incentives to members of AEGON’s Executive Board.
Total Target Compensation for Executive Board members comprises a fixed component, as well as both short and long-term variable compensation. This structure ensures a balance between fixed and performance-related pay.
Over the long term, AEGON’s aim is to ensure that compensation for new members of the company’s
It is the responsibility of AEGON’s Supervisory Board to determine fixed compensation for each member of the company’s Executive Board, based on his qualifications, experience and expertise.
AEGON believes that variable compensation is an effective way of strengthening the commitment of individual Executive Board members to the company’s short and long-term objectives.
Variable compensation is granted only once AEGON’s annual accounts have been formally adopted by the
Fifty percent of shares granted under AEGON’s longterm incentive compensation plan vest four years after the grant date. The remaining 50% vest after a period of eight years. During this vesting period, dividend payments on these shares are deposited in blocked savings accounts on behalf of the Executive Board members. These amounts are then transferred to individual Board members once their shares are fully vested. If the shares do not vest, then the amounts revert to AEGON.
Vesting occurs unless the Supervisory Board makes use of its discretionary right to annul the grants. Grants may be annulled if: Employment is terminated before the vesting date for �
At the beginning of the financial year, a target is set for each of the three indicators. A comparison is then made at the end of the year between these targets and actual company performance. Entitlements to variable compensation are calculated accordingly 1: Members of the Executive Board are entitled to 100% �
AEGON’s Supervisory Board may also make discretionary adjustments to Executive Board members’ variable compensation, but must adhere to the following procedure: If the Supervisory Board considers that AEGON’s short �
and document its fi ndings. The committee may then put forward a proposal to the Supervisory Board, assuming, of course, that the committee’s conclusions coincide in principle with those of the Supervisory
Code, Executive Board members are appointed for an initial term of four years and may be reappointed for successive mandates, also of four years. New members of the Executive Board must give three months’ notice if they wish to leave the company. For its part, AEGON
must give six months’ notice if it wishes to terminate the employment of any Executive Board member.
Executive Board members will be respected. For further information, please refer to the contracts of employment published on AEGON’s corporate website.
2 The absolute maximum for the adjusted variable compensation as a percentage of the original target is therefore 187.5% (in other words, 150% multiplied by 125%). While it is theoretically possible to arrive at a variable compensation of zero, AEGON’s Supervisory Board has the authority, if justifi ed by the circumstances, to grant a discretionary payment. It should also be noted that these discretionary adjustments concern variable compensation only, and do not apply to fi xed compensation.
3 As part of the capital support transaction agreed with the Dutch State in December 2008, the more favorable severance payment arrangements then available to AEGON’s CEO, Alex Wynaendts, were waived and his exit arrangements limited to a maximum of one year’s fi xed salary. The severance arrangement in Mr. Nooitgedagt’s employment agreement is compliant with the Code. For further information, please refer to the Corporate Governance section of this report, page 76.
Executive Board Given the severity of the financial crisis, AEGON took a number of measures in 2009 with regard to executive remuneration. These measures followed the capital support agreement finalized with the Dutch State in
December 2008, as well as other separate discussions with the Dutch Ministry of Finance. As part of these measures, it was agreed that: Members of AEGON’s Executive Board would not �
would be limited to a maximum of one year’s fi xed salary.
Policy for members of its Executive Board aligned with new international standards. In this regard,
AEGON will propose a new Remuneration Policy to the company’s next annual General Meeting of
At the end of December 2009, AEGON’s Executive Board had two members: Alexander R. Wynaendts, Chief Executive Offi cer and �
Alexander R. Wynaendts 1 Chief Executive Offi cer 950,000 864,583 9.9%
Jan J. Nooitgedagt 2 Chief Financial Offi cer 525,000 n/a –
Joseph B.M. Streppel 3 former Chief Financial Offi cer 254,400 763,200 –
Donald J. Shepard 4 former Chief Executive Offi cer n/a 243,992 –
Variable compensation is based on the company’s financial performance. Amounts paid therefore vary from year to year.
Mr. Wynaendts’ pension benefits consist of a pension plan based on 70% of his final base salary, providing he completes 37 years of service, and an additional pension contribution equal to 28% of his base salary. This reflects the terms of Mr. Wynaendts’ appointment as
Under the terms of AEGON’s Remuneration Policy, Executive Board members were not entitled to payments under this plan, in line with discussions that took place last year with the Dutch government.
AEGON’s largest shareholder is Vereniging AEGON, an association established to protect the broader interests of the company’s stakeholders.
Those shareholders who alone, or jointly, represent at least 0.1% of AEGON’s issued capital or a block of shares worth at least EUR 50 million may request items be added to the agenda of these meetings.
AEGON is an international company, based in the Netherlands, with shares listed in Amsterdam, New York and London 1 and thousands of retail and institutional shareholders around the world. Overseeing AEGON’s overall corporate governance structure is the responsibility of both the Supervisory and Executive Boards.
In accordance with AEGON’s Articles of Incorporation 3, such requests will be granted, providing they are received in writing at least 60 days before the meeting and unless important interests of the company dictate otherwise.
When convening a meeting, the Executive Board may set a date, known as the ‘record date’. This is used to determine shareholders’ entitlements with regard to their participation and voting rights.
Aandeelhouders (www.communicatiekanaal.nl), a Dutch foundation dedicated to improving communication between listed companies in the Netherlands and their shareholders and to encouraging greater shareholder participation at general meetings.
Shareholders may use the services of this foundation to vote by proxy. AEGON also solicits proxies from New York registry shareholders in line with common practice in the United States.
1 Please note that AEGON’s common shares are scheduled to be delisted from the Tokyo Stock Exchange on March 27, 2010. The company’s shares will continue to be traded in Amsterdam, New York and London.
However, under certain circumstances 1, AEGON’s largest shareholder, Vereniging AEGON, may cast 25/12 votes for each preferred share. All resolutions are adopted by an absolute majority of votes cast, unless Dutch law or
AEGON’s Executive Board is charged with the overall management of the company and, as such, is responsible for achieving the company’s aims, strategy and associated risk profile, as well as overseeing any relevant corporate sustainability issues and the development of the company’s earnings.
Board members and their terms of employment are determined by the company’s Supervisory Board.
Incorporation – the Executive Board must seek prior approval from the Supervisory Board. In addition, the
AEGON’s Executive Board is assisted in its work by the company’s Management Board, which comprises six members, including the members of the Executive Board
endorses the Code and strongly supports its principles for sound and responsible corporate governance. AEGON
The new, amended Code came into force on January 1, 2009. This review deals with the Dutch Corporate
Overseeing AEGON’s overall corporate governance structure is the responsibility of both the Supervisory and Executive Boards. Any substantial change to this structure is submitted to the General Meeting of
Dutch Corporate Governance Code recommends that the maximum compensation in the event of dismissal should be one year’s salary, or two years’ salary for cases when one year’s salary would be manifestly unreasonable for a member who is dismissed in his or her first term of office.
AEGON is committed to applying this best practice provision to all new Executive Board appointments. In accordance with the capital transaction concluded with the Dutch State on December 1, 2008, the more favorable severance payment arrangements in CEO
Code II.3.3: The Code recommends that a member of the Executive Board should not take part in discussions or decision-making related to a subject or a transaction in which he or she has a conflict of interest.
Vereniging AEGON. This may be construed as a conflict of interest. However, under Vereniging AEGON’s Articles of Association, AEGON’s CEO and CFO are specifically excluded from voting on issues directly related to AEGON
or their position within it. AEGON’s Supervisory Board holds the view that, given the historic relationship between AEGON and Vereniging AEGON, it would not be in the company’s best interests to prevent their participating in discussions and decision-making related to Vereniging AEGON.
Supervisory Board may be appointed for a maximum of three four-year terms.
Code IV.1.1: The Dutch Corporate Governance Code states that the General Meeting of Shareholders may cancel the binding nature of nominations for the appointment of members to the Executive and
Supervisory Boards with an absolute majority of votes and a limited quorum.
1 billion class A and class B preferred shares, with a �
– the company’s main markets. All preferred shares are held by Vereniging AEGON, the company’s largest shareholder.
(please see below for further explanation). All prefered shares are held by Vereniging AEGON, the company’s leading shareholder.
Vereniging AEGON, AEGON’s leading shareholder, holds a total of: 171,974,055 common shares �
preferred shares to prevent a dilution of its voting rights, unless, by exercising this option, the association increases its share of voting rights to more than 33%.
To AEGON’s knowledge, only one other party holds a capital and voting interest in AEGON N.V. in excess of 5%. According to its filing with the Dutch Financial
1 As a publicly listed company, AEGON is required to provide information in this section regarding any structures or measures that may hinder or prevent a third party from acquiring the company or exercising effective control over it.
If Vereniging AEGON, acting at its sole discretion, determines that a ‘special cause’ has arisen, it must notify the General Meeting of Shareholders. In this event, Vereniging AEGON retains full voting rights on the preferred shares for a period limited to six months.
may effectively be in a position to block unfriendly actions by either a hostile bidder or others for a period of six months. In the absence of a ‘special cause’,
Senior executives at AEGON companies and other employees have been granted share appreciation rights and share options. For further details, please see page 194. Under the terms of existing share option plans,
The General Meeting of Shareholders appoints members of both the Supervisory and Executive Boards, following nominations by the Supervisory Board. Providing at least two candidates are nominated, these nominations are binding. However, the General Meeting of
Provisions on appointing Board members were included as part of a broader review of AEGON’s corporate governance framework.
Meeting of Shareholders with a two-thirds majority of votes cast, representing at least one half of AEGON
New shares may be issued up to the maximum of the company’s authorized capital, following a resolution adopted by the General Meeting of Shareholders. Shares may also be issued following a resolution of the
the Board has been authorized to do so by the General
AEGON is entitled to acquire its own fully paid-up shares, providing of course it acts within existing legal requirements. Shareholders usually authorize the
Dutch State in December 2008, severance payments for members of the Executive Board members are limited to a maximum of one year’s fixed salary.
NOTE 3 Critical accounting estimates and judgment in applying accounting policies 107
AEGON strives to provide clear, accurate, timely and transparent information to investors and its other stakeholders around the world.
NOTE 49 Summary of total financial assets and financial liabilities at fair value through profit or loss 206
NOTE 51 Securities lending and repurchase activities and assets accepted and pledged as collateral 209
CONSOLIDATED BALANCE SHEET OF AEGON N.V. � AS AT DECEMBER 31
Issued capital and reserves attributable to equity holders of AEGON N.V. 18,873 13,754
TOTAL EQUITY AND LIABILITIES 298,634 289,041 2008 balances have been reclassifi ed for comparative purposes.1
Income before share in profi t / (loss) of associates and tax (487) (1,085) 3,041
Dividend per common share (EUR per share) 46 – 0.30 0.62
After deduction of preferred dividends, interest and premium on convertible core capital securities and coupons on perpetual securities.1
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME OF AEGON N.V. � FOR THE YEAR ENDED DECEMBER 31
Gains / (losses) on revaluation of available-for-sale investments 7,860 (11,139) (2,147)
Movement in foreign currency translation and net foreign investment hedging reserve (204) (82) (1,537)
Total comprehensive income attributed to: Equity holders of AEGON N.V. 5,564 (7,900) (1,147)
Other comprehensive income: Gains / (losses) on revaluation of availablefor -sale investments – – 7,860 – – – 7,860 – 7,860
Changes in revaluation reserve real estate held for own use – – (1) – – – (1) – (1)
Disposal of group assets – 59 35 – – 94 – 94
Repayment convertible core capital securities – – – – (1,000) – (1,000) – (1,000)
Other comprehensive income: Gains / (losses) on revaluation of availablefor -sale investments – – (11,139) – – – (11,139) – (11,139)
Changes in revaluation reserve real estate held for own use – – 8 – – – 8 – 8
Coupons on convertible core capital securities – (121) – – – – (121) – (121)
Issued capital and reserves attributable to equity holders of AEGON N.V.1
Net income recognized in the income statement – 2,551 – – – 2,551 – 2,551
(Gains) / losses transferred to income statement on disposal and impairment of available for-sale-investments – – (891) – – (891) – (891)
Changes in revaluation reserve real estate held for own use – – 7 – – 7 – 7
Changes in cash fl ow hedging reserve – – 81 – – 81 – 81
Movements in foreign currency translation and net foreign investment hedging reserves – – – (1,537) – (1,537) – (1,537)
Equity movements of associates – – – (58) – (58) – (58)
Transfers between revaluation reserves and retained earnings – 1 (1) – – – – –
Aggregate tax effect of items recognized directly in equity – – 787 92 – 879 – 879
Treasury shares – withdrawn (2) 2 – – – – – –
Coupons on perpetual securities – (175) – – – (175) – (175)
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY OF AEGON N.V. � FOR THE YEAR ENDED DECEMBER 31, 2007
Insurance and investment liabilities for account of policyholders 18,925 (24,556) 7,809
Purchase of investments (other than money market investments) (49,022) (56,394) (70,156)
Disposal of investments (other than money market investments) 50,875 51,055 67,148
Net purchase of investments for account of policyholders (3,837) (2,563) (4,866)
Purchase of equipment and real estate for own use (202) (85) (81)
Acquisition of subsidiaries and associates, net of cash (202) (461) (2,625)
Coupons and premium on convertible core capital securities (273) – –
Net cash and cash equivalents at the beginning of the year 9,506 7,385 12,391
NET CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR 14 4,013 9,506 7,385
EUR USD GBP CAD PLN CNY RON HUF NTD CZK SKK
Derivative assets and liabilities at year end 2008 were increased by EUR 1,782 million reflecting a gross-up of previously netted derivative positions in prior years financial statements. These reclassifications had no effect on net income, shareholders’ equity or earnings per share.
reporting segments of the Group. Adoption of this Standard did not have any effect on the financial position or performance of the Group. The Group determined that the operating segments were the same as the business segments previously identified under IAS 14 Segment Reporting. Additional disclosures about each of these segments are shown in Note 5, including revised comparative information.
The Standard has been amended to and restricts the definition of vesting condition to a condition that includes an explicit and implicit requirement to provide services. Any other conditions are non-vesting conditions, which have to be taken into account to determine the fair value of the equity instruments granted.
In addition, the amendment clarifies and enhances the existing requirements for the disclosure of liquidity risk primarily requiring a separate liquidity risk analysis for derivative and non-derivative financial liabilities. It also requires a maturity analysis for financial assets where the information is needed to understand the nature and context of liquidity risk. AEGON has made these additional relevant disclosures in note 3 and note 4 to the consolidated financial statements.
The standard has been revised to require capitalization of borrowing costs on qualifying assets. This amendment is not relevant to AEGON as the Group already had a policy to capitalize borrowing costs.
Following changes to IAS 40, investment property under construction, which was formerly classified as ‘Real Estate held for own use’ (note 13.1) has been reclassified and presented under ‘Investments in Real Estate’ (note 7.2) with effect from
Other than the above, the Improvements project did not result in any changes to the classification, measurement or presentation of any items in the financial statements.
In addition, the following new standards, amendments to existing standards and interpretations are mandatory for the first time for the financial year beginning January 1, 2009 but are not currently relevant for the Group: IFRIC 16 � Hedges of a net investment in a foreign operation; Amendments to IAS 32 and IAS 1 � Puttable fi nancial instruments and obligations arising on liquidation; Amendments to IFRS 1 and IAS 27 � Cost of an investment in a subsidiary; Embedded Derivatives (amendments to IFRIC 9 and IAS 39); �
The revised IFRS 3 continues to apply the acquisition method to business combinations, with some significant changes. For example, all payments to purchase a business are to be recorded at fair value at the acquisition date, with some 1 Not yet endorsed by the European Union.
The revised IAS 27 requires the effects of all transactions with non-controlling interests to be recorded in equity if there is no change in control. The standard also specifies the accounting when control is lost. The amendment is applicable to transactions which take place in accounting periods beginning on or after July 1, 2009. The requirements of this amendment will be applied by AEGON to all transactions with noncontrolling interests starting from January 1, 2010.
January 1, 2010 or later periods but are not relevant for the
IFRIC 14 (Amendment ) � Prepayment of a minimum funding requirement; 1
IFRIC 19 � Extinguishing fi nancial liabilities with equity instruments. 1
The excess of the cost of acquisition, comprising the consideration paid to acquire the interest and the directly related costs, over the Group’s share in the net fair value of assets, liabilities and contingent liabilities acquired is recognized as goodwill. Negative goodwill is recognized directly in the income statement. If the fair value of the assets, liabilities and contingent liabilities acquired in the business combination has been determined provisionally, adjustments to these values resulting from the emergence of new evidence within twelve months after the acquisition date are made against goodwill.
Group. Disposals to minority interests result in gains and losses for the Group that are recorded in the income statement.
The Group’s consolidated financial statements are prepared in euros which is also the Company’s functional currency. That is the currency of the primary economic environment in which the
Under IFRS 8, AEGON’s operating segments are based on the businesses as presented in internal reports that are regularly reviewed by the executive board which is regarded as the “chief executive decision maker”. The operating segments are: AEGON Americas. Main business lines include life and �
protection, individual savings and retirement, pensions and asset management, distribution and general insurance.
These financial statements include a non-IFRS financial measure: Underlying earnings before tax. AEGON believes this non-IFRS measure, together with the IFRS measure (Net income), provides a meaningful measure for investors to evaluate AEGON’s business relative to the businesses of peers.
Any over- or underperformance compared to management’s expected return is excluded from underlying earnings. The fair value movements of certain guarantees and the fair value change of derivatives that hedge certain risks on these guarantees of AEGON The Netherlands and Variable Annuities
Holding and other activities includes certain issued bonds that are held at fair value through profit or loss. The interest rate risk on these bonds is hedged using swaps. The fair value movements on issued bonds resulting from changes in AEGON’s credit spread are excluded from underlying earnings.
When a portfolio of insurance contracts is acquired, whether directly from another insurance company or as part of a business combination, the difference between the fair value and the carrying amount of the insurance liabilities is recognized as value of business acquired (VOBA). The Group also recognizes
AEGON will render investment management services, the present value of future servicing rights is recognized as an intangible asset. Future servicing rights can also be recognized on the sale of a loan portfolio or the acquisition of insurance agency activities.
Group becomes a party to the contractual provisions of the instrument and are classified for accounting purposes depending on the characteristics of the instruments and the purpose for which they were purchased.
Financial assets with fixed or determinable payments that are not quoted in an active market and that the Group does not intend to sell in the near future or for which the holder may not recover substantially all of its initial investment, other than because of credit deterioration, are accounted for as loans. To the extent that the Group has the intention and ability to hold a quoted financial asset with fixed payments to the maturity date, it is classified as held-to-maturity.
Derivatives are financial instruments, classified as held for trading financial assets, of which the value changes in response
All derivatives recognized on the balance sheet are carried at fair value.
(which includes the item and risk that is being hedged), the derivative that is being used and how hedge effectiveness is being assessed. A derivative has to be effective in accomplishing the objective of offsetting either changes in fair value or cash flows for the risk being hedged. The effectiveness of the hedging relationship is evaluated on a prospective and retrospective basis using qualitative and quantitative measures of correlation.
Cash flow hedges are hedges of the exposure to variability in cash flows that is attributable to a particular risk of a forecasted transaction or a recognized asset or liability and could affect profit 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’
DPAC is derecognized when the related contracts are settled or disposed of.
Deferred transaction costs are subject to impairment testing at least annually.
Cash comprises cash at banks and in-hand. Cash equivalents are short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known cash amounts, are subject to insignificant risks of changes in value and are held for the purpose of meeting shortterm cash requirements. Money market investments that are held for investment purposes (backing insurance liabilities, investment liabilities or equity based on asset liability management considerations) are not included in cash and cash equivalents but are presented as investment or investment for account of policyholders.
Impairment losses are charged to shareholders’ equity to the extent that they offset a previously recorded revaluation reserve relating to the same item. Any further losses are recognized directly in the income statement.
Non-financial assets that only generate cash flows in combination with other assets and liabilities are tested for impairment at the level of the cash-generating unit. The goodwill acquired in a business combination, for the purpose of impairment testing, is allocated to cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination. The allocation is based on the level at which goodwill is monitored internally and cannot be larger than an operating segment. When impairing a cash-generating unit, any goodwill allocated to the unit is first written-off and recognized in the income statement. The remaining impairment loss is allocated on a pro rata basis among the other assets, on condition that the resulting carrying amounts do not fall below the individual assets’
Debt instruments are impaired when it is considered probable that not all amounts due will be collected as scheduled.
Financial instruments that are issued by the Group are classified as equity if they represent a residual interest in the assets of the Group after deducting all of its liabilities and the Group has an unconditional right to avoid delivering cash or another financial asset to settle its contractual obligation. In addition to common shares and preferred shares, the Group has issued perpetual securities and convertible core capital securities.
Insurance contracts are contracts under which the Group accepts a significant risk – other than a financial risk – from a policyholder by agreeing to compensate the beneficiary on the occurrence of an uncertain future event by which he or she will be adversely affected. Contracts that do not meet this definition are accounted for as investment contracts. The Group reviews homogeneous books of contracts to assess whether the underlying contracts transfer significant insurance risk on an individual basis. This is considered the case when at least one scenario with commercial substance can be identified in which the Group has to pay significant additional benefits to the policyholder. Contracts that have been classified as insurance are not reclassified subsequently.
Some products, such as traditional life insurance products in continental Europe and products in the United States, for which account terms are fixed and guaranteed, are measured using the net premium method. The liability is determined as the sum of the discounted value of the expected benefits and future administration expenses directly related to the contract, less the discounted value of the expected theoretical premiums that would be required to meet the future cash outflows based on the valuation assumptions used. The liability is either based on current assumptions or calculated using the assumptions established at the time the contract was issued, in which case a margin for risk and adverse deviation is generally included. A
separate reserve for longevity may be established and included in the measurement of the liability. Furthermore, the liability for life insurance comprises reserves for unearned premiums and unexpired risks as well as for claims outstanding, which includes an estimate of the incurred claims that have not yet been reported to the Group.
Life insurance contracts under which the policyholder bears the risks associated with the underlying investments are classified as insurance contracts for account of policyholders.
The estimates are reviewed regularly and any resulting adjustment to the additional liability is recognized in the income statement. The benefits used in calculating the liabilities are based on the average benefits payable over a range of stochastic scenarios. Where applicable, the calculation of the liability incorporates a percentage of the potential annuitizations that may be elected by the contract holder.
Shadow accounting ensures that all gains and losses on investments affect the measurement of the insurance assets and liabilities in the same way, regardless of whether they are realized or unrealized and regardless of whether the unrealized gains and losses are recognized in the income statement or directly in equity in the revaluation reserve. In some instances, realized gains or losses on investments have a direct effect on the measurement of the insurance assets and liabilities. For example, some insurance contracts include benefits that are contractually based on the investment returns realized by the insurer. In addition, realization of gains or losses on availablefor -sale investments can lead to unlocking of VOBA or DPAC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 2.20
The liability for outstanding claims and benefits is established for claims that have not been settled and any related cash flows, such as claims handling costs. It includes claims that have been incurred but have not been reported to the Group. The liability is calculated at the reporting date using statistical methods based on empirical data and current assumptions that may include a margin for adverse deviation. Liabilities for claims subject to periodic payment are calculated using actuarial methods consistent with those applied to life insurance contracts. Discounting is applied if allowed by the local accounting principles used to measure the insurance liabilities. Discounting of liabilities is generally applied when there is a high level of certainty concerning the amount and settlement term of the cash outflows.
All tests performed within the Group are based on current estimates of all contractual future cash flows, including related cash flows from policyholder options and guarantees. A number of valuation methods are applied, including discounted cash flow methods, option pricing models and stochastic modelling.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 2.21 - 2.24
Some plans provide employees of the Group with the choice of settlement.
Investment income includes the interest income and dividend on financial assets carried at fair value through profit or loss.
Results from financial transactions include: Net fair value change of general account fi nancial investments at fair value through profi t or loss, other than derivatives
Net fair value change of general account financial investments at fair value through profit or loss, other than derivatives include fair value changes of financial assets carried at fair value through profit or loss. The net gains and losses do not include interest or dividend income.
All changes in fair value are recognized in the income statement, unless the derivative has been designated as a hedging instrument in a cash flow hedge or a hedge of a net investment in a foreign operation. Fair value movements of fair value hedge instruments are offset by the fair value movements of the hedged item, the resulting hedge ineffectiveness, if any, is included in this line. In addition the fair value movements of bifurcated embedded derivatives are included in this line.
(refer to note 2.9). The net fair value change does not include interest or dividend income.
Impairment charges include impairments on investments in financial assets, impairments on the valuation of insurance assets and liabilities and other non-financial assets and receivables. Refer to note 41.
are amortized to the income statement over time. If the assumptions relating to the future profitability of these policies are not realized, the amortization of these costs could be accelerated and may even require write offs due to unrecoverability.
Netherlands. The agreement is part of industry-wide efforts in the Netherlands to address concerns over charges related to unit-linked insurance products. The total costs of the improvements to the policies under this agreement are estimated at EUR 250 million. The improvements do not have a significant impact on AEGON’s 2009 income statement as the actual reserves for insurance and investment policies are sufficient to cover the estimated future liabilities. Any amounts due for past periods have been recorded in insurance contract reserves.
States and some of the smaller country units, is the annual long-term growth rate of the underlying assets. As equity markets do not move in a systematic manner, assumptions as to the long-term growth rate are made after considering the effects of short-term variances from the long-term assumptions
Investment contracts issued by AEGON are either carried at fair value (if they are designated as financial liabilities at fair value through profit or loss) or amortized cost (with fair value being disclosed in the notes to the consolidated financial statements).
When available, AEGON uses quoted market prices in active markets to determine the fair value of its debt securities. These market quotes are obtained through index prices or pricing services.
AEGON’s portfolio of private placement securities (held at fair value under the classification of available-for-sale) is valued using a matrix pricing methodology. The pricing matrix is obtained from a third party service provider and indicates current spreads for securities based on weighted average life, credit rating, and industry sector. Each month, AEGON’s asset specialists review the matrix to ensure the spreads are reasonable by comparing them to observed spreads for similar bonds traded in the market. Other inputs to the valuation include coupon rate, the current interest rate curve used for discounting and an illiquidity premium to account for the illiquid nature of these securities. The illiquidity premiums are determined based upon the pricing of recent transactions in the private placements market; comparing the value of the privately offered security to a similar public security. The impact of the illiquidity premium for private placement securities to the overall valuation is insignificant.
The fair value of floating interest rate mortgages, policy loans and private placements used for disclosure purposes is assumed to be approximated by their carrying amount adjusted for changes in credit risk. Credit risk adjustments are based on market observable credit spreads if available, or managements estimate if not market observable.
Money market and other short term investments and deposits with fi nancial institutions
The fair value of assets maturing within a year is assumed to be approximated by their carrying amount adjusted for credit risk where appropriate. Credit risk adjustments are based on market observable credit spreads if available, or managements estimate if not market observable.
derivative financial instruments represent amounts estimated to be received from or paid to a third party in settlement of these instruments. These derivatives are valued using pricing models based on the net present value of estimated future cash flows, directly observed prices from exchange-traded derivatives, other OTC trades, or external pricing services.
AEGON normally mitigates counterparty credit risk in derivative contracts by entering into collateral agreements where practical and in ISDA master netting agreements for each of the Group’s legal entities to facilitate AEGON’s right to offset credit risk exposure. Where appropriate collateral is not held by AEGON or the counterparty, the fair value of derivatives is adjusted for credit risk based on market observable spreads. Changes in the fair value of derivatives attributable to changes in counterparty credit risk were not significant.
Certain guarantees for minimum benefits in insurance and investment contracts are carried at fair value. These guarantees include guaranteed minimum withdrawal benefits (‘GMWB’) in the United States which are offered on some AEGON variable annuity products and are also assumed from a ceding company; minimum interest rate guarantees on insurance products offered in The Netherlands, including group pension and traditional products; Variable annuities sold in Europe; and guaranteed minimum accumulation benefits on segregated funds sold in Canada.
A variety of factors are considered, including expected market rates of return, equity and interest rate volatility, credit spread, correlations of market returns, discount rates and actuarial assumptions.
For equity volatility, AEGON uses a term structure with market based implied volatility inputs for the first five years.
December 31, 2009 volatility assumption for the S&P 500 index in year 30 is approximately 25.3% (spot rate). 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.
identical assets or liabilities that AEGON can access at the measurement date; Level II: inputs other than quoted prices included within Level �
I that are observable for the asset or liability, either directly
The majority of valuation techniques employ only observable market data, and so the reliability of the fair value measurement is high. However, certain financial instruments are valued on the basis of valuation techniques that feature one or more significant market inputs that are unobservable and, for such financial instruments, the derivation of fair value is more judgmental. An instrument in its entirety is classified as valued using significant unobservable inputs if, in the opinion of management, a significant proportion of the instrument’s carrying amount and / or inception profit (‘day 1 gain or loss’) is driven by unobservable inputs. ‘Unobservable’ in this context means that there is little or no current market data available from which to determine the price at which an arm’s length transaction would be likely to occur. It generally does not mean that there is no market data available at all upon which to base a determination of fair value. Additional information is provided in the section headed ‘Effect of changes in significant unobservable assumptions to reasonably possible alternatives’ below.
Borrowings included in the table above contain those borrowings that are carried at fair value through profi t or loss. Total borrowings on the balance 2 sheet also contain borrowings carried at amortized cost that are not included in the above schedule.
Money market and other short-term instruments 59 – – – (49) – – – 10 –
Other investments at fair value 1,333 (211) – 123 (157) – 93 (101) 1,080 (232)
Investment contracts for account of policyholders (291) 30 – (280) 20 – – – (521) –
Total gains / (losses) for the period during which the fi nancial instrument was in Level III.2
EUR 434 million. The reason for the change in level was that the market for these securities had become inactive, which led to a change in market observability of prices. Prior to transfer, the fair value for the Level I and II securities was determined using observable market transactions or corroborated broker quotes for the same or similar instruments.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 3
unobservable input for valuation of these securities is the credit spread / illiquidity premium. AEGON adjusted the discount rate by 100 basis points up or down for this input.
c. Other investments at fair value include investments exposed to real estate (EUR 444 million) and private equity investments (EUR 575 million). AEGON adjusted the assumption pertaining to real estate values up or down by 10%. This change is refl ective of the range presented to senior management when analyzing investment opportunities for approval. For private equity investments the underlying investments are of a very diversifi ed nature in terms of type of investments, investment strategy and sector.
Level III instruments to changes in key assumptions, by class of instrument: Financial assets carried at fair value Note
Investments for account of policyholders are excluded from the reasonably possible alternative assumptions disclosure. Policyholder assets, and their 1 returns, belong to policyholders and do not impact AEGON’s net income or equity. The effect on total assets is offset by the effect on total liabilities.
In order to determine reasonably possible alternative assumptions, AEGON adjusted key unobservable models inputs as follows: a. Available for sale shares include shares in the Federal Home
Loan Bank for an amount of EUR 194 million that are measured at par. The bank has implicit fi nancial support from the United States government. The redemption value of the shares is fi xed at par and can only be redeemed by the bank.
b. Debt securities and money market and other short-term investments mainly consist of corporate bonds
e. Investment contracts refl ect the fair value of guarantees issued for which the most signifi cant unobservable input is the credit spread. The credit spread was increased or decreased by 20 basis points.
There are a number of significant risks and uncertainties inherent in the process of monitoring investments and determining if impairment exists. These risks and uncertainties include the risk that the Group’s assessment of an issuer’s ability to meet all of its contractual obligations will change based on changes in the credit characteristics of that issuer and the risk that the economic outlook will be worse than expected or have more of an impact on the issuer than anticipated. Also, there is a risk that new information obtained by the Group or changes in other facts and circumstances will lead the Group to change its investment decision. Any of these situations could result in a charge against the income statement in a future period to the extent of the impairment charge recorded.
AEGON regularly monitors industry sectors and individual debt securities for evidence of impairment. This evidence may include one or more of the following: 1) deteriorating market to book ratio, 2) increasing industry risk factors, 3) deteriorating financial condition of the issuer, 4) covenant violations, 5) high probability of bankruptcy of the issuer or 6) recognized credit rating agency downgrades. Additionally, for asset-backed securities, cash flow trends and underlying levels of collateral are monitored. A security is impaired if there is objective evidence that a loss event has occurred after the initial recognition of the asset that has a negative impact on the estimated future cash flows. A specific security is considered to be impaired when it is determined that it is probable that not all amounts due (both principal and interest) will be collected as scheduled.
The RMBS models incorporate external loan-level analytics to identify the riskiest securities. The results from the models are then closely analyzed by the asset specialist to determine whether or not a principal or interest loss is expected to occur.
Housing securities, CMBS and RMBS noted on exception reports are specifically addressed by research and credit analysts who evaluate the unrealized losses based upon current market conditions, changes in credit spreads specific to the asset class, fundamentals related to the issuer and, if applicable, the available protection of the monoline wrapper. Impairments are recorded in instances where loss events have taken place that would affect future cash flows. The impairment analysis is therefore based on a combination of models and analysts review of market events on individual securities.
Goodwill is reviewed and tested for impairment under a fair value approach. Goodwill must be tested for impairment at least annually or more frequently as a result of an event or change in circumstances that would indicate an impairment charge may be necessary. The recoverable amount is the higher of the value in use and fair value less costs to sell for a cash-generating unit.
As an insurance company, AEGON is in the “business of risk”
To manage its risk exposure, AEGON has risk policies in place.
Therefore, currency exchange rate fluctuations will affect the level of shareholders’ equity as a result of translation of subsidiaries into euro, the Group’s presentation currency.
Risk and Capital Committee. 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 3-year historical net income (loss) and equity in functional currency are shown in the table below: Net income / (loss)
The exchange rates for US dollar and UK pound per Euro for each of the last five year-ends are set forth in the table below: AEGON group companies’ foreign currency exposure from monetary assets and liabilities denominated in foreign currencies is not material.
AEGON’s non-euro currencies relative to the euro as included in the table below, are due to the translation of subsidiaries and joint-ventures in the consolidated financial statements.
Movement of markets 1 Estimated approximate effects on net income Estimated approximate effects on equity
Increase by 15% of non-euro currencies relative to the euro 78 2,009
Decrease by 15% of non-euro currencies relative to the euro (78) (2,009)
Increase by 15% of non-euro currencies relative to the euro (204) 1,180
AEGON bears interest rate risk with many of its products. In cases where cash flows are highly predictable, investing in assets that closely match the cashflow profile of the liabilities can offset this risk. For some AEGON country units, local capital markets are not well developed, which prevents the complete matching of assets and liabilities for those businesses.
The table that follows shows interest rates at the end of each of the last five years.
The sensitivity analysis in the table below shows an estimate of the effect of a parallel shift in the risk free yield curves on net income and equity. Increases in interest rates have a negative effect on IFRS equity and net income in the current year because it results in unrealized losses on investments that are carried at fair value. The rising interest rate also would cause the fair value of the available-for-sale bond portfolio to decline and the level of unrealized gains would become too low to support recoverability of the full deferred tax asset triggering an allowance charge to income and an additional allowance charge directly to equity. The offsetting economic gain on the insurance and investment contracts is however not fully
AEGON is exposed to credit risk on its general account fixedincome portfolio (debt securities, mortgages and private placements), OTC derivatives and reinsurance contracts. Some issuers have defaulted on their financial obligations for various reasons, including bankruptcy, lack of liquidity, downturns in the economy, downturns in real estate values, operational failure and fraud. In the current weak economic environment AEGON
incurred significant investment impairments on AEGON’s investment assets due to defaults and overall declines in the capital markets. Further excessive defaults or other reductions in the value of these securities and loans could have a materially adverse effect on AEGON’s business, results of operations and financial condition.
Further information on equity risk is provided in “section equity market and other investment risk”.1
CDX index, via a synthetic collateralized debt obligation program (synthetic CDO).
(EUR 5 million liability). When the contingent options are exercised, AEGON is exposed to the underlying tranches of the synthetic CDOs. The maturity dates of the underlying synthetic
AEGON’s right to offset credit risk exposure. Main counterparties to these transactions are investment banks and are typically rated A or higher. The credit support agreement will normally dictate the threshold over which collateral needs to be pledged by AEGON or its counterparty. Transactions requiring AEGON or its counterparty to post collateral are typically the result of over-the-counter derivative trades, comprised mostly of interest rate swaps, currency swaps, and credit swaps. Collateral received is mainly cash (USD and EUR). The Credit Support
AEGON did not take possession of collateral or call on other credit enhancements. In 2008, AEGON obtained securities with a value of EUR 1.1 billion by taking possession of collateral on reverse repurchase agreements and EUR 1.9 billion on securities lending transactions with Lehman Brothers. The loss incurred on these transactions amounted to EUR 10 million. The credit risk associated with financial assets subject to a master netting arrangement is eliminated only to the extent that financial liabilities due to the same counterparty will be settled after the assets are realized.
The extent to which the exposure to credit risk is reduced through a master netting agreement may change substantially within a short period of time because the exposure is affected by each transaction subject to the arrangement. AEGON may also mitigate credit risk in reinsurance contracts by including down-grade clauses that allow the recapture of business, retaining ownership of assets required to support liabilities ceded or by requiring the reinsurer to hold assets in trust.
AEGON also operates an investment and counterparty policy that limits the overall amount of counterparty risk that the
The following table shows the credit quality of the gross balance sheet positions for general account reinsurance assets specifically: Carrying value 2009
Past due and / or impaired 592 27 65 5 689
Past due and / or impaired assets 413 236 – 135 784
The fair value of AEGON Americas commercial mortgage portfolio as per December 31, 2009 amounts to EUR 9,338 million.
The loan to value (LTV) amounts to about 65%. 2.48% of the portfolio is in delinquency (defined as 60 days in arrear). In 2009 we recognized impairments of EUR 101 million on this portfolio. We foreclosed upon, or received back EUR 68 million of real estate. The impairments associated with these loans amounted to EUR 5 million.
There were no significant impairments during 2009. Historical defaults in basis points of the portfolio have been between 2 and 9 basis points per year.
ABSs – Collateralized Bond Obligations (CBOs) 573 197 – – 770
(2008: EUR 2,255 million). Of the EUR 70 million assets held-to-maturity, EUR 11 million are government bonds
At December 31, 2009 there were no significant unrealized losses on exposures to these specific governments.
subprime mortgage exposure by rating. Disclosure of ratings follows a hierarchy of S&P, Moody’s Fitch, Internal, NAIC.
Total Subprime Mortgages - Fixed Rate 469 26 22 7 128 652 2009 – – – – – –
Total Subprime Mortgages - Floating Rate 104 87 2 19 93 305 2008 – – – – – –
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 4
Comparative information on subprime ABS mortgage exposure by quality and vintage - 2008 figures: Market value by Quality and Vintage
AAA AA A BBB < BBB Total 2008 – – – – – –
Total Subprime Mortgages – Fixed Rate 724 55 50 13 20 862
Additionally, AEGON USA has exposure to asset backed securities collateralized by manufactured housing loans.
EUR 135 million (2008: EUR 165 million). All but one deal have vintages of 2003 or prior. These amounts are not included in
of RMBS. RMBS are securitizations of underlying pools of noncommercial mortgages on real estate. The underlying residential mortgages have varying credit ratings and are pooled together and sold in tranches.
Positions are impaired to fair value where loss events have taken place (or are projected to take place on structured securities) that would affect future cash flows. The next tables summarize the credit quality of these securities based on a hierarchy of S&P, Moody's, Fitch, Internal, National Association of Insurance Companies (NAIC) of the RMBS portfolio.
The unrealized loss on RMBS is EUR 982 million which relates to positions of AEGON USA. The pace of deterioration continued in early 2009, but began to stabilize in late 2009. Even with the stabilization, fundamentals in RMBS securities continue to be weak. Delinquencies and severities in property liquidations remain at an elevated level. Prepayments remain at historically low levels. Due to the weak fundamental situation, reduced liquidity, and the requirement for higher yields due to uncertainty, credit spreads remain elevated across the asset class.
Reverse mortgage fl oaters 289 – – – – 289 381
Alt-A borrower has a credit score high enough to obtain an
“A” standing, which is especially important since the score must compensate for the lack of other necessary documentation related to borrower income and / or assets.
credit enhanced classes within the 2005-2008 vintage deals provide some offset to these negative fundamentals. Despite beginning to show signs of improvement, the lending market remains limited as lenders have become more conservative with underwriting standards, property transactions have diminished greatly, and higher mortgage spreads have curtailed borrowing.
A lack of liquidity in the market combined with a broad repricing of risk has led to increased credit spreads across the credit classes.
of non housing related ABS, net unrealized losses on this portfolio amount to EUR 496 million at December 31, 2009
CDOs backed by ABS, Corp Bonds, Bank Loans 469 74 3 27 17 590 881
AEGON’s small business loan ABS portfolio is concentrated in senior note classes (99% of par value). In addition to credit enhancement provided by the excess spread, reserve account, and over-collateralization, AEGON’s positions are also supported by subordinated note classes. AEGON’s small business loan ABS portfolio is also primarily secured by commercial real estate (99% of par value), with the original LTV
ABS-CDO are primarily secured by pools of corporate bonds and leveraged bank loans. The unrealized loss is a function of decreased liquidity and increased credit spreads in the market for structured finance and monoline guaranteed securities.
Where there have been rating downgrades to below investment grade, the individual bonds have been modeled using the current collateral pool and capital structure.
AEGON holds EUR 11,871 million (2008: EUR 8,367 million) of bonds issued by banks. The net unrealized loss on these bonds amount to EUR 799 million (2008: EUR 2,355 million).
(callable after 10 years) and generally have common structural features, including a cumulative coupon in the event of deferral.
The ‘Hybrid’ category is comprised of capital securities issued by financial services entities which typically have an original maturity of more than 30 years and may be perpetual. In addition, Hybrids have other features that may not be consistent across issues such as a cumulative or noncumulative coupon, capital replacement and an alternative payment mechanism, and could also be subordinate to the traditional Trust Preferred in the Group’s capital structure.
Of the EUR 1,661 million (2008: EUR 2,604 million) indirect exposure on the monoline insurers 35% relates to MBIA, 29%
to AMBAC, 9% to FGIC and 14% to FSA (2008: 29% related to
AEGON USA also has direct exposure of EUR 38 million (2008: EUR 37 million) via holdings in monoline insurers and derivative counterparty exposure where monoline insurers are AEGON’s counterparty.
Of AEGON’s direct exposure 36% relates to XL, 25% to MBIA
and 39% to AMBAC (2008: 34% related to Syncora, 14% to
MBIA, 29% to AMBAC). There are no other individual monoline insurers that represent more than 10% (2008: 10%) of the total direct exposure.
Other fi nancial assets – carried at fair value 41 3
The general account equity, real estate and other non-fixedincome portfolio of AEGON is as follows: Equity, real estate and non-fi xed income exposure Americas
Common shares in Holdings and Other activities refl ect the elimination of treasury shares.1
The sensitivity analysis of net income and equity to changes in equity prices is presented in the table on the next page. The sensitivity of shareholders’ equity and net income to changes in equity markets reflects changes in the market value of AEGON’s portfolio, changes in DPAC amortization, contributions to pension plans for AEGON’s employees and the strengthening of the guaranteed minimum benefits, when applicable. The results of equity sensitivity tests are non-linear. The main reason for this is due to equity options sold to clients that are embedded in some of these products and that more severe scenarios could cause accelerated DPAC amortization and guaranteed minimum benefits provisioning, while moderate scenarios may not.
Liquidity risk is inherent in much of AEGON’s business. Each asset purchased and liability sold has its own liquidity characteristics. Some liabilities are surrenderable while some assets, such as privately placed loans, mortgage loans, real estate and limited partnership interests, have low liquidity. If
AEGON requires significant amounts of cash on short notice in excess of normal cash requirements and existing credit facilities, it may have difficulty selling these investments at attractive prices or in a timely manner.
AEGON operates a Liquidity Risk Policy under which country units are obliged to maintain sufficient levels of highly liquid assets to meet cash demands by policyholders and accountholders over the next two years. Potential cash demands are assessed under a stress scenario including spikes in disintermediation risk due to rising interest rates and concerns over AEGON’s financial strength due to multiple downgrades of the Group’s credit rating. At the same time, the liquidity of assets other than cash and government issues is assumed to be severely impaired for an extended period of time. All units and AEGON Group must maintain enough liquidity in order to meet all cash needs under this extreme scenario.
The Group expects to meet its obligations, even in a stressed liquidity event, from operating cash flows and the proceeds of maturing assets as well as these highly liquid assets. Further, the Group has access to back up credit facilities, as described in note 24, amounting to EUR 2,412 million which were unused at the end of the reporting period (2008: EUR 2,532 million).
(including coupon interest). When the counterparty has a choice of when an amount is paid, the liability is included on the basis of the earliest date on which it can be required to be paid.
Financial liabilities that can be required to be paid on demand without any delay are reported in the category “On demand”.
If there is a notice period, it has been assumed that notice is given immediately and the repayment has been presented at the earliest date after the end of the notice period. When the amount payable is not fixed, the amount reported is determined by reference to the conditions existing at the reporting date.
AEGON’s liquidity management is based on expected claims and benefit payments rather than on the contractual maturities. The projected cash benefit payments in the table below are based on management’s best estimates of the expected gross benefits and expenses, partially offset by the expected gross premiums, fees and charges relating to the existing business in force.
< 1 yr Amount 1 < 5 yrs Amount 5 < 10 yrs Amount > 10 yrs Amount Total
Investment contracts for account of policyholders 77 3,698 16,464 19,853 79,368 119,460
The liability amount in the consolidated fi nancial statement refl ects the discounting for interest as well as adjustments for the timing of other factors as 1 described above. As a result, the sum of the cash benefi t payments shown for all years in the table exceeds the corresponding liability amounts included in notes 20, 21 and 23.
Financial derivatives include all derivatives regardless whether they have a positive or a negative value. It does not include bifurcated embedded 1 derivatives. These are presented together with the host contract. For interest rate derivatives only cash fl ows related to the pay leg are taken into account for determining the gross undiscounted cash fl ows.
In accordance with first time adoption requirements of the amendment to IFRS 7, this information is required only for the current year and comparative information is not required.
AEGON’s earnings depend significantly upon the extent to which actual claims experience is consistent with the assumptions used in setting the prices for products and establishing the technical liabilities and liabilities for claims. To the extent that actual claims experience is less favorable than the underlying assumptions used in establishing such liabilities, income would be reduced. Furthermore, if these higher claims were part of a permanent trend, AEGON may be required to increase liabilities, which could reduce income. In addition, certain acquisition costs related to the sale of new policies and the purchase of policies already in force have been recorded as assets on the balance sheet and are being amortized into income over time. If the assumptions relating to the future profitability of these policies (such as future claims, investment income and expenses) are not realized, the amortization of these costs could be accelerated and may even require write offs due to unrecoverability. This could have a materially adverse effect on AEGON’s business, results of operations and financial condition.
Sources of underwriting risk include policy lapses and policy claims (such as mortality and morbidity). In general, AEGON is at risk if policy lapses increase as sometimes AEGON is unable to fully recover up front expenses in selling a product despite the presence of commission recoveries or surrender charges and fees.
(longevity risk) such as annuity products. AEGON is also at risk if expenses are higher than assumed by management.
Sensitivity analysis of net income and shareholders’ equity to changes in various underwriting risks Estimated approximate effect 0n Equity On Net income On Equity
Should the European Commission conclude that we do not qualify as a fundamentally sound institution, the European
Commission might ultimately oblige the Dutch State to unwind the December 2008 transaction, which would require the EUR 2 billion remaining outstanding to be repaid to the Dutch State.
AEGON to the European Commission, which is evaluating the plan. Due to a lack of sufficient certainty about the application of state aid provided to financial institutions in the context of the current global financial crisis, it is not possible to provide additional specificity on either the timing or likelihood of outcome of the European Commission’s evaluation. A failure by the European Commission to reach a final decision on the acceptability of this viability plan within a reasonable timeframe could have a material adverse effect on our business, results of operations and financial condition, primarily due to uncertainty regarding the possible consequences of such a decision.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 5
Over / (under) performance of fair value items (30) (247) 6 – (189) – (460)
Gains and losses on investments 6 224 101 7 94 – 432
Underlying earnings before tax geographically 1,073 378 141 93 (130) 18 1,573
Over / (under) performance of fair value items (1,660) (165) (19) – 225 – (1,619)
Total operating earnings before tax (587) 213 122 93 95 18 (46)
Gains and losses on investments (71) 20 (21) (10) 117 – 35
Underlying earnings before tax geographically 1,993 418 271 142 (195) 10 2,639
Over / (under) performance of fair value items 109 (381) – – – – (272)
Over / (under) performance of fair value items 2.5 (460) (1,619) (272)
Realized gains and (losses) on fi nancial investments 36 475 99 957
Impairment (charges) / reversals of fi nancial assets, excluding receivables 41 (1,331) (1,072) (88)
Amortization of deferred expenses, VOBA and future servicing rights 1,118 125 237 89 – 1,569
Insurance contracts for account of policyholders 37,092 22,318 7,924 2,426 – – 69,760
Investment contracts for account of policyholders 12,882 2 44,533 4 – – 57,421
VOBA and future servicing rights 3,530 174 732 205 – – 4,641
Investment contracts for account of policyholders 9,621 4 35,861 128 – – 45,614 2008 balance has been reclassifi ed for comparative purposes.1
Separate accounts and investment funds 49,920 – 4,772 1,117 – – 55,809
Investments in real estate – – 1,048 – – – 1,048
Investments for account of policyholders 49,920 21,749 51,768 2,413 – (5) 125,845
Financial assets at fair value through profi t or loss 54,005 21,890 50,807 2,557 622 (8) 129,873
TOTAL INVESTMENTS ON BALANCE SHEET 135,690 57,893 59,685 5,119 1,671 (8) 260,050
Separate accounts and investment funds 42,353 – 2,500 1,420 – – 46,273
Investments in real estate – – 1,131 – – – 1,131
Investments for account of policyholders 42,353 19,133 41,856 2,067 – (9) 105,400
Off balance sheet investments third parties 76,478 11,783 2,403 5,299 – – 95,963
Financial assets at fair value through profi t or loss 47,004 19,730 40,826 2,323 – (11) 109,872
TOTAL INVESTMENTS ON BALANCE SHEET 129,146 51,296 47,068 8,310 72 (11) 235,881 2008 balance has been reclassifi ed for comparative purposes.1
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 6
Of additions to goodwill in 2008 of EUR 297 million, an amount of EUR 229 million relates to acquisitions of joint ventures by
and 17% (2008: between 9% and 17%). Projections beyond that date have been extrapolated using a declining growth rate up to a maximum of 5% (2008: 5%). Key assumptions used for the calculation include new business, renewals, value of new business, asset fees, investment return, persistency, expense inflation and mortality.
Fair value less costs to sell calculations were estimated based on the appraisal value for the cash-generating units using embedded value principles. Appraisal value represents available net asset value and the shareholders’ interest in the long-term business plus a multiple of the value of new business. Key assumptions used for the calculation were pre-tax risk adjusted discount rates of 11% (2008: 11%), future premiums, commissions, inflation, persistency, mortality, morbidity and future investment returns.
The operating assumptions used in all the calculations are best estimate assumptions and based on historical data where available. The economic assumptions used in all the calculations are based on observable market data and projections of future trends.
The value in use test in the USA includes two cash generating units for which the following key assumptions were used: Employer solutions & pensions (EUR 81 million): business �
With the exception of goodwill, all intangible assets have a finite useful life and are amortized accordingly. VOBA and Future servicing rights are amortized over the term of the related insurance contracts, which can vary significantly depending on the maturity of the acquired portfolio.
Money market and other short-term investments 9,189 875 – – 10,064 10,064
Receivables out of share lease agreements – – – 39 39 39
Receivables out of share lease agreements – – – 54 54 54
In the last quarter of 2007 the first of the publicly placed securitizations (SAECURE 1) was called by the special purpose vehicle. In 2006, AEGON Levensverzekering N.V. terminated one of the two privately placed securitization transactions reported in prior years. Also, it completed one publicly placed securitization transaction in 2006, whereby the economic ownership of EUR 2.1 billion of aggregate mortgage receivables was conveyed to a special purpose company. The special purpose company funded the purchase of mortgages from
Levensverzekering N.V. to any specified residual positive value of the special purpose entity at maturity.
In 2005, AEGON Levensverzekering N.V. completed one mortgage-related publicly placed securitization contract for
securitization described above. A 3.3% portion of securitized mortgage loans forming part of SAECURE 4 and amounting to
Refer to note 3 for information on the fair value measurement.
AEGON USA has entered into commercial property leases on its investment property portfolio, consisting of office, retail and industrial buildings. These non-cancellable leases have remaining lease terms up to 20 years. Most leases include a clause to enable upward revision of the rental charge on an annual basis according to either a fixed schedule or prevailing market conditions.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 7.2 - 8.1
(2008: EUR 1 million; 2007: EUR 1 million) of direct operating expenses is related to investment property that did not generate rental income during the period.
Total investments for account of policyholders at fair value through profi t or loss, excluding derivatives 1 124,797 104,269
Rental income of EUR 76 million (2008: EUR 115 million) is reported as part of investment income in the income statement.
Derivatives not designated in a hedge 1 3,614 5,889 4,375 5,504
Derivatives designated as cash fl ow hedges 315 1,584 354 507
Derivatives not designated in a hedge 489 1,328 243 296 2008 balance has been reclassifi ed for comparative purposes.1
the market value of the guarantees embedded in the written insurance contracts decreased significantly. Please refer to note 47 for more disclosures about these guarantees.
Certain derivatives are used to add risk by selling protection in the form of single name credit default swaps and tranches of synthetic collateralized debt and commodity obligations.
In August 2007, the Canadian asset backed commercial paper market experienced a disruption, which included Canadian
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 9
AEGON recognized gains and (losses) related to the ineffective portion of designated fair value hedges of EUR (31) million,
EUR 38 million and EUR 11 million respectively. No portion of derivatives was excluded when assessing hedge effectiveness.
December 31, 2009, the contracts for which cash flow hedge accounting was terminated resulted in deferred gains of
For the year ended December 31, 2009, AEGON recognized a loss of EUR 10 million of hedge ineffectiveness on cash flow hedges. In 2008 and 2007 gains of EUR 12 million and
EUR 5 million respectively of hedge ineffectiveness were recorded in the income statement. In 2009 EUR (117) million was reclassed from equity into interest income (2008: EUR 306 million, 2007 EUR 25 million). The amount of deferred gains or losses to be reclassified from equity into net income during the next twelve months is expected to be EUR 6 million.
The periods when the cash flows are expected to occur are as follows: < 1 year years 2009 Total
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 10 - 11
The summarized financial information is based on the Group’s relative holding and excludes any goodwill included in the measurement of the investment in associates.
Refer to note 53 for a listing of the principal investments in associates and the Group’s percentage holding.
Gross premium and deposits – existing and new business 1,169 60 1,229
DPAC for insurance contracts and investment contracts with discretionary participation features 10,900 12,224
Costs deferred / rebates granted during the year 1,720 72 77
None of the equipment is held for lease (2008: EUR 0 million).
EUR 8.9 billion (2008: EUR 13.0 billion) cash collateral is received of which EUR 992 million (2008: EUR 4.7 billion) is included in cash and cash equivalents. This collateral relates to security lending and repurchase agreements and margins on derivatives transactions. A corresponding liability to repay the cash is recognized in other liabilities (note 29). Refer to note 51 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 16 million (2008: EUR 47 million; 2007: EUR 23 million).
(2008: EUR 105 million) of deposits which have a charge over them relating to loans made by banks to unit linked funds.
For the purposes of the cash flow statement, cash and cash equivalents comprise the following: Cash and cash equivalents 4,314 10,223
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 13.3 - 15.1
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, unless Vereniging
AEGON N.V. and Vereniging AEGON have entered into a preferred shares voting rights agreement, pursuant to which
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 15.2 - 15.3
Share premium relating to: The share premium account reflects the balance of paid-in amounts above par value at issuance of new shares less the amounts charged for share dividends.
Transactions in 2008: Purchase: 10 transactions, average price EUR 8.32 – 26,300 –
Transactions in 2007: Purchase: 3 transactions, average price EUR 13.71 – – 33,200 Share repurchase program: various transactions, average price EUR 13.41 – – 74,570
On the balance sheet date AEGON N.V. and its subsidiaries held 29,271,309 of its own common shares with a face value of
AEGON N.V. were as follows: policyholders. These shares have been treated as treasury shares and are (de)recognized at the consideration paid or received.
Net (gains) / losses transferred to income statement 640 – (117) 523
Net (gains) / losses transferred to income statement 718 – 306 1,024
Net (gains) / losses transferred to income statement (891) – 25 (866)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 15.4 - 15.5
The closing balances of the revaluation reserve for availablefor -sale investments relate to the following instruments: REVALUATION RESERVE FOR AVAILABLE-FOR-SALE INVESTMENTS (1,928) (7,864) (679)
Movement in foreign currency translation and net foreign investment hedging reserves (1,594) 57 – (1,537)
On December 1, 2008, AEGON’s core capital was increased through a transaction with the State of the Netherlands in view of the ongoing uncertainty regarding the financial and economic environment during the year. Vereniging AEGON received a senior loan of EUR 3 billion which was invested in AEGON
November 27. The amount repaid includes accrued interest from May 22, 2009 of EUR 44 million. AEGON may at any time repurchase the remaining 500 million securities at EUR 6 per security. Alternatively, after two years from now, AEGON may choose to convert these securities into common shares on a one-for-one basis. In this situation, the Dutch government may opt for repayment in cash (at the original issue price of EUR 4).
USD 250 million fl oating LIBOR rate 1 Quarterly, December 15 2010 212 212 212
The coupon of the USD 250 million junior perpetual capital securities is reset each quarter based on the then prevailing three-month LIBOR yield plus a 1 spread of 87.5 basis points, with a minimum of 4%. The coupon of the EUR 950 million junior perpetual capital securities is reset each quarter based on the then prevailing ten-year Dutch government 2 bond yield plus a spread of ten basis points, with a maximum of 8%. The coupon of the USD 500 million junior perpetual capital securities is reset each quarter based on the then prevailing ten-year US dollar interest rate 3 swap yield plus a spread of ten basis points, with a maximum of 8.5%.
The interest rate exposure on some of these securities has been swapped to a three-month LIBOR and / or EURIBOR related yield.
The coupon of the EUR 203 million bonds is set at 7.125% until March 4, 2011.1
Although the bonds have no stated maturity, 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.
USD 12 million 1 Floating Quarterly, January 8 2003 2034 – – 9
USD 18 million 1 Floating Quarterly, July 23 2004 2034 2010 13 11
USD 190 million 2 7.625% Semi-annually, November 15 1997 2037 n.a. 35 36
The fair value of these loans amounts to EUR 88 million
In 2008, these loans were subordinated to all other unsubordinated borrowings and liabilities. There were no defaults or breaches of conditions during the period.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 18 - 20
Non-life insurance - Unearned premiums and unexpired risks 2,890 2,860 - Incurred but not reported claims 721 790
Gross premium and deposits – existing and new business 10,298 12,027
Prior year run-off results, compared to opening balances of the non-life reserve, are not material.
Fair value of investment contracts without discretionary participation features 27,297 35,077
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 23 - 24
Gross premium and deposits – existing and new business 3,805 5,219 9,024
EUR 500 million Medium-Term Notes 4.125% December 8 2004 / 14 507 421
USD 500 million Senior Unsecured Notes 4.625% Semi-annually 2009 / 15 345 –
EUR 75 million Medium-Term Notes 4.625% December 9 2004 / 19 73 57
GBP 92 million Note issue agreement 2,3,4 April 21 2007 / 21 22 34
GBP 250 million Medium-Term Notes 6.125% December 15 1999 / 31 277 258
USD 1.5 billion Variable Funding Surplus Note 1,3 Floating Quarterly 2007 / 37 241 295
USD 550 million Floating Rate Guaranteed Note 2,3 Floating Quarterly 2007 / 37 382 395
Outstanding amounts can vary up to the maximum stated nominal amount.3
Private Value-in-Force (ViF) securitization by AEGON UK to monetize a portion of future profi ts associated with an existing book of unit-linked business.4
Floating-rate - Expiring within one year 330 269 - Expiring beyond one year 2,082 2,263
The amounts recognized in the balance sheet are determined as follows: Present value of wholly or partly funded obligations 2,545 2,144 2,357 2,487 2,542
Present value of wholly unfunded obligations 224 231 224 247 254
Assets held by AEGON The Netherlands for retirement benefi ts do not meet the defi nition of plan assets and as such were not deducted in calculating 1 this amount. Instead, these assets are recognized as general account assets. Consequently, the return on these assets also does not form part of the calculation of defi ned benefi t expenses.
Actuarial (gains) / losses recognized 59 – 59 2 – 2
Actual return on plan assets and reimbursement rights 374 – 374 (689) – (689)
Assumed medical cost trend rates have an effect on the amounts reported for the health care plans. A one-percentage change in assumed medical cost trend rates would have the following effects: Aggregate of current service cost and interest cost components of net periodic post-employment medical costs 2 (1) 2 (1)
Accumulated post-employment benefi t obligation for medical cost 14 (13) 17 (16)
Best estimate of contributions expected for the next annual period 192
Service Code. The benefits are based on years of service and the employee’s compensation during the highest five, complete, consecutive years of employment. The defined benefit plans were unfunded by EUR 113 million at December 31, 2009
AEGON USA also sponsors supplemental retirement plans to provide senior management with benefits in excess of normal pension benefits. These plans are unfunded and non-qualified under the Internal Revenue Service Code. The unfunded amount related to these plans, for which a liability has been recorded, is EUR 192 million (2008: EUR 191 million).
Assumptions used to determine benefi t obligations at year end: Discount rate 6.00% 6.50%
Assumptions used to determine net periodic benefi t cost for the year ended December 31: Discount rate 6.50% 6.25%
AEGON USA provides health care benefits to retired employees, which are predominantly unfunded. The post-retirement health benefit liability amounts to EUR 165 million (2008: EUR 164 million).
AEGON The Netherlands has a number of defined benefit plans and a small defined contribution plan. The contributions to the retirement benefit plan of AEGON The Netherlands are paid by both the employees and the employer, with the employer contribution being variable.
The benefits covered are retirement benefits, disability, death and survivor pension and are based on an average salary system. Employees earning more than EUR 43,764 per year (as at January 1, 2009) have an option to contribute to a defined contribution plan for the excess salary. However, the cost for the company remains the same. The defined benefit plans were unfunded by EUR 1,631 million at December 31, 2009 (2008: EUR 1,438 million). Assets held by AEGON The Netherlands for retirement benefits do not meet the definition of plan assets and as such were not deducted in calculating this amount.
AEGON The Netherlands also has a post-retirement medical plan that contributes to the health care coverage of employees and beneficiaries after retirement. The liability related to this plan amounted to EUR 45 million at December 31, 2009 (2008: EUR 48 million).
Assumptions used to determine net periodic benefits costs for the year ended December 31, 2009: Discount rate 5.75% 5.50%
Rate that the cost trend rate gradually declines to 1.50-2.00% 1.50-2.00%
AEGON UK operates a defined benefit pension scheme providing benefits for staff based on final pensionable salary.
The other countries mostly operate defined contribution plans, with the exception of smaller defined benefit plans in AEGON
For an amount of EUR 60 million (2008: EUR 513 million; 2007: EUR 1 million) the realization of the deferred tax asset is dependent on future taxable profits in excess of the profits arising from the reversal of existing taxable temporary differences.
For the amount of EUR 60 million (2008: EUR 233 million; 2007: EUR 1 million) the utilization of tax losses is dependent on the projection of future taxable income from existing business.
EUR 1,571 million (2008: EUR 3,761 million; 2007: nil) the recognition of the deferred tax asset is dependent on retaining bonds and similar investments until the earlier of market recovery or maturity. For an amount of EUR 284 million the recognition of the deferred tax asset is dependent on the realization of capital gains.
EUR 32 million (2008: EUR 424 million; 2007: EUR 7 million).
Deferred corporate income tax liabilities have not been recognized for withholding tax and other taxes that would be payable on the unremitted earnings of certain subsidiaries, branches, associates and joint ventures. The unremitted earnings totalled EUR 1,803 million (2008: EUR 1,808 million; 2007: EUR 1,856 million). All deferred taxes are non-current by nature.
Investment income from fi nancial assets held for general account: 2009 2008 2007
Income from reinsurance ceded represents mainly claims made under reinsured insurance policies.
The interest income on financial assets that are not carried at fair value through profit or loss amounted to EUR 5,750 million
Net fair value change of general account fi nancial investments at fair value through profi t or loss, other than derivatives 193 (1,261) 573
Realized gains and losses on fi nancial investments 475 99 957
Net fair value change of general account fi nancial investments at fair value through profi t or loss, other than derivatives comprise: 2009 2008 2007
Realized gains and losses on fi nancial investments relate to: 2009 2008 2007
Net fair value change on free standing derivatives (1,795) 2,713 (12)
Ineffective portion of hedge transactions to which hedge accounting is applied (41) 50 16
Net fair value change on for account of policyholder fi nancial assets at fair value through profi t or loss comprise: 2009 2008 2007
Gains / losses on separate accounts and investment funds 8,043 (14,020) 3,244
Change in valuation of liabilities for insurance and investment contracts 12,548 (4,036) 13,002
The change in valuation of liabilities for insurance and investment contracts include EUR 66 million of gains
(2008: losses of EUR 17 million; 2007; gains of EUR 7 million)
or other charges that for segment reporting are excluded from underlying earnings before tax.
loss. Investment income on investments for account of policyholders is included in investment income. Refer to note 32 for further information.
Included in administration expenses above is depreciation amounting to EUR 90 million (2008: EUR 84 million; 2007: EUR 86 million) that relates to equipment, software and real estate held for own use. The direct operating expenses relating to investments in real estate that generated rental income was EUR 72 million (2008: EUR 59 million; 2007: EUR 62 million). Minimum lease payments recognized as expense amounted to EUR 6 million (2008: EUR 6 million; 2007: EUR 10 million). Included in employee expenses is
Decisions by the Executive Board to implement Share appreciation rights and share option plans are subject to approval by the Supervisory Board. If, subsequently, the
During 2009, no share appreciation rights were exercised. The weighted average share price at which the share appreciation rights were exercised in 2008 was EUR 10.46.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 40
The weighted average share price at which the share options were exercised in 2008 was EUR 5.99. In 2009 no share options were exercised.
In 2009 no share options were granted. The following assumptions were used in estimating the fair value of share options at the grant date: Expected dividend yield 9.84% 4.53%
No share options were exercised and no SARs were paid during 2009. The total intrinsic value of share options exercised and
The exposure from the issued share appreciation rights and share options is economically hedged by part of the position in treasury shares.
There have been no modifications to the plans during the financial year.
Impact of the above impairments on the valuation of insurance assets and liabilities 1 4 (7) 16
Impairment charges on non-fi nancial assets and receivables 38 41 30
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 41 - 43
Included in the EUR 385 million were unrealized losses for an amount of EUR 94 million, reflecting revaluation reserves, foreign currency translation reserves and net investment hedges which were recycled through the income statement.
Other charges is for segment reporting purposes fully excluded from underlying earnings (refer to note 2.5).
Recognition of previously unrecognized tax loss / tax credit (47) (3) 27
Write off / (reversal of write off) of deferred tax assets 51 134 37
Tax effect of (profi t) / losses from associates – (2) (1)
INCOME TAX FOR THE PERIOD (INCOME) / CHARGE (668) 21 526
The increase of the weighted average applicable tax rate compared to 2008 and 2007 is caused by losses that are taxed at a higher rate than the compensating profits. In the Czech
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 44 - 45
Basic earnings per share is calculated by dividing the net income attributable to equity holders, after deduction of preferred dividends declared, accrued coupons on perpetual securities and coupons and premium on convertible core capital securities, by the weighted average number of common shares, excluding common shares purchased by the company and held as treasury shares (refer to note 15).
Net income / (loss) attributable to common shareholders for basic earnings per share calculation (248) (1,383) 2,291
The proceeds are regarded as having been received from the issue of common shares at the average market price of the
Net income / (loss) attributable to equity holders 204 (1,082) 2,551
Coupons and premium on convertible core capital securities (148) – –
Net income / (loss) attributable to common shareholders for diluted earnings per share calculation (248) (1,383) 2,291
The dividend per common share paid in 2009 (final 2008 and interim 2009) and 2008 (final 2007 and interim 2008) was nil and EUR 0.62 respectively. It was decided not to declare the final dividend for 2008 and the interim 2009.
For financial reporting purposes AEGON distinguishes between the following types of minimum guarantees: Financial guarantees: these guarantees are treated as �
from their host contracts because they are valued at fair value and presented as part of insurance contracts (refer to note 2.19).
guarantees are not bifurcated from their host contracts, valued in accordance with insurance accounting (ASC 944,
guarantees are not bifurcated from their host contracts, valued at fair value and presented together with the underlying insurance contracts (refer to note 2.19 and note 3).
In addition to the guarantees mentioned above AEGON has traditional life insurance contracts that include minimum guarantees that are not valued explicitly; however, the adequacy of all insurance liabilities, net of VOBA and DPAC, are assessed periodically (refer to note 2.19).
In the United States and United Kingdom, a guaranteed minimum withdrawal benefit (GMWB) is offered directly on some variable annuity products AEGON issues and is also assumed from a ceding company. Variable annuities allow a customer to provide for the future on a tax-deferred basis and to participate in equity or bond market performance. Variable annuities allow a customer to select payout options designed to help meet the customer’s need for income upon maturity, including lump sum payment or income for life or for a period of time. This benefit guarantees that a policyholder can withdraw a certain percentage of the account value, starting at a certain age or duration, for either a fixed period or during the life of the policyholder.
In The Netherlands, individual variable unit linked products have a minimum benefit guarantee if premiums are invested in certain funds. The initial guarantee period is 10 years and may be reset at the policyholder’s option to lock in market gains.
Balances are included in the derivatives liabilities on the face of the balance sheet; refer note 9.3
Once the account value is exhausted, AEGON pays the periodic withdrawals until the guaranteed remaining balance is exhausted. At December 31, 2009, the reinsured account value was EUR 4.5 billion (2008: EUR 4.2 billion) and the guaranteed remaining balance was EUR 4.0 billion (2008: EUR 4.6 billion).
(2008: EUR 442 million). AEGON entered into a derivative program to mitigate the overall exposure to equity market and interest rate risks associated with the reinsurance contract.
Product balances as of December 31, 2009 were EUR 657 million in fixed annuities (2008: EUR 790 million) and EUR 149 million in life reinsurance (2008: EUR 176 million).
GMBD in excess of the capital account balance at the balance sheet date.
Note that the variable annuity contracts with guarantees may offer more than one type of guarantee in each contract; therefore, the amounts listed 3 are not mutually exclusive. Balances are included in the insurance liabilities on the face of the balance sheet; refer to note 20.4
The traditional life and pension products offered by AEGON in the Netherlands include various products that accumulate a cash value. Premiums are paid by customers at inception or over the term of the contract. The accumulation products pay benefits on the policy maturity date, subject to survival of the insured. In addition, most policies also pay death benefits if the insured dies during the term of the contract. The death benefits may be stipulated in the policy or depend on the gross premiums paid to date. Premiums and amounts insured are established at inception of the contract. The amount insured can be increased as a result of profit sharing, if provided for under the terms and conditions of the product. Minimum interest guarantees exist for all generations of accumulation products written, except for universal life type products for which premiums are invested solely in equity funds. Older generations contain a 4%
These guarantees are valued at fair value and are included as part of insurance liabilities with the underlying host insurance contracts in note 20.
The fair values of guarantees mentioned above (with the exception of life contingent guarantees in the United States) are calculated as the present value of future expected payments to policyholders less the present value of assessed rider fees attributable to the guarantees. Given the long-term nature of these guarantees, their fair values are determined by using complex valuation techniques. Because of the dynamic and complex nature of these cash flows, AEGON uses stochastic techniques under a variety of market return scenarios. A variety of factors are considered, including expected market rates of return, equity and interest rate volatility, credit risk, correlations of market returns, discount rates and actuarial assumptions.
Correlations of market returns across underlying indices are based on actual observed market returns and their interrelationships over a number of years preceding the valuation date. The volume of observable option trading from which volatilities are implied diminishes markedly after five years, and therefore, AEGON uses a volatility curve which grades from actual implied volatilities for five years to a long-term forward rate of 25%. 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. Had AEGON
The main drivers of this decrease are EUR 911 million related to an increase in equity markets (2008: EUR (1,098) million),
EUR 187 million related to the increase in the spread of credit risk (2008: EUR 1,174 million). Hedges related to these guarantee reserves contributed fair value losses of EUR 2,581 million to income before tax (2008: gains of EUR 3,617 million).
AEGON’s capital base reflects the capital employed in insurance activities and consists of shareholders’ equity, convertible core capital securities, perpetual capital securities and dated subordinated debt and senior debt. AEGON targets its capital base to comprise at least 70% core capital (excluding the revaluation reserve), and targets 25% perpetual capital securities (consisting of junior perpetual capital securities and perpetual cumulative subordinated bonds) and 5% dated subordinated and senior debt related to insurance activities.
Borrowings not related to capital funding of insurance activities (6,527) (5,271)
Capital securities that are denominated in foreign currencies are, for purpose of calculating the capital base, revalued to the period-end exchange rate.1
RBC calculations measure the ratio of a company’s statutory capital, which is measured on a prudent regulatory accounting basis, to a minimum capital amount determined by the RBC
capital requirement is by and large the sum of 4% of insurance and investment liabilities for general account and 1% of insurance and investment liabilities for account policyholders if no guaranteed investment returns are given. At the end of 2009, AEGON The Netherlands consolidated solvency capital ratio based on IFRS was approximately 265%.
Companies must manage their solvency positions according to the most stringent of the published Solvency I measure (Pillar 1)
which are restricted. Included in AEGON N.V.’s legal reserves is an amount of EUR 321 million (2008: EUR 69 million) related to
Derivatives with positive values not designated as hedges 4,103 – 7,217 –
Total fi nancial assets at fair value through profi t or loss 4,727 129,249 7,233 109,856
Total fi nancial liabilities at fair value through profi t or loss 4,618 21,436 5,800 17,674
In addition the investment for account of policyholders include with profit 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 profit or loss.
In the normal course of business, the Group has committed itself through purchase and sale transactions of investments, mostly to be executed in the course of 2009. The amounts represent the future outflow and inflow, respectively, of cash related to these investment transactions that are not reflected in the consolidated balance sheet.
Share of contingent liabilities incurred in relation to interests in joint ventures 717 480
United Kingdom and the Netherlands. In the normal course of business, reviews of processes and procedures are undertaken to ensure that customers have been treated fairly, and to respond to matters raised by policyholders and their representatives.
On August 5, 2009, the Enterprise Chamber of the Amsterdam court of appeals in the Netherlands ruled in favor of AEGON in
Cash collateral is recorded on the balance sheet as an asset and an offsetting liability is established for the same amount as
AEGON is obligated to return this amount upon termination of the lending arrangement or repurchase agreement. Cash collateral is usually invested in pre-designated high quality investments.
Non-cash collateral that can be sold or repledged in the absence of default 1,797 259
The above items are conducted under terms that are usual and customary to standard derivative, and securities lending activities, as well as requirements determined by exchanges where the bank acts as intermediary.
EUR 235 million of the financial assets and other assets were pledged as collateral for liabilities and contingent liabilities for account of policyholders in 2009 (2008: EUR 56 million).
Non-cash financial assets that are borrowed or purchased under agreement to resell are not recognized in the balance sheet.
EUR 44 million. An additional earn-out payment of EUR 11 million will be payable if certain targets are met in the future.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 52
In December 2008, AEGON acquired an additional 40% stake in the Spanish Caja Cantabria Vida y Pensiones, of which already 10% was acquired in 2007. As a result, AEGON holds a 50%
In October 2008, AEGON acquired a 50% stake in Caixa Terrassa
Vida y Pensiones, a Spanish life insurance, pension and health company. The total purchase price amounted to EUR 186 million.
In June 2008, AEGON completed the acquisition of 100% of the shares of Heller-Saldo 2000 Pension Fund Management Co.,
EUR 849 million cash consideration. The opening balance sheet of the acquired business was recorded provisionally at
December 31, 2007, as the acquisition occurred within a few days of year end. The provisionally determined opening balance sheet includes total assets of EUR 10.8 billion, including
EUR 111 million reflecting the expected profitability of new business. The carrying amount of the assets and liabilities of the acquired companies amounted to EUR 10.8 billion and
EUR 9.9 billion respectively, the estimated fair values are subject to adjustment at the initial allocation for a one year period as more information relative to the fair values as of the acquisition date become available. As the acquisition was completed at the end of December, the net income of the acquired operations was not material to the AEGON’s consolidated net income. Had the acquisition taken place on 1 January 2007, the contribution of these companies to the
Vervoer- en Havenbedrijven (a pension fund for companies active in the transport and port industries) was converted into a public company in 1997. At the end of 2006, OPTAS had 60,000 policyholders and reported total gross written premiums of
EUR 86 million, with total assets of EUR 4.5 billion. Assets held as investment amounted to EUR 3.4 billion, the insurance liabilities were EUR 2.9 billion. A portion of the shareholders’
Clark should have contributed an amount of EUR 90 million to total revenues and EUR 4.7 million to net income of AEGON USA.
AEGON has disposed operations for an amount of EUR 42 million regarding Clark business, not considered to be core to AEGON, to Clark’s former management after the acquisition. As a result of the acquisition, assets and liabilities were recognized for
EUR 549 million and EUR 325 million respectively, which included a cash position of EUR 14 million. Goodwill was recognized for an amount of EUR 84 million, reflecting the future commission revenue from inforce contracts. In addition an intangible asset was established for the present value of future commission receivables in the amount of EUR 365 million.
In March 2007, AEGON completed the acquisition of the Polish pension fund management company PTE Ergo Hestia S.A. The company was renamed to PTE AEGON Poland. The cost of the acquisition amounted to EUR 72 million, which was paid in cash.
EUR 2 million to net income in 2007. If the acquisition had been as of January 1, 2007, contribution to net income and total revenues would amount to respectively EUR 3 million and
ML Life Insurance Company of New York, New York, New York �
Book 2 of the Dutch Civil Code for its subsidiary company
Seguros, Badajoz (Spain), life and accident insurance and pension company (50%)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 54
The remaining 42% limited partnership interest is owned by unrelated entities made up of various employees and individuals.
Prisma GP LLC is the general partner with a 1% interest and is responsible for day-to-day activities. A management board with seven voting members (three appointed by AEGON, three appointed by Prisma GP LLC and one independent member appointed collectively by the other six voting members) must approve certain actions, including restructuring transactions, hiring senior management and the annual operating budget.
On November 30, 2009, AEGON redeemed EUR 1 billion in principal amount of those convertible core capital securities for
EUR 1.15 billion and an amount of EUR 1 billion of the senior loan provided by the Dutch State through Vereniging AEGON was repaid. The total payment to the Dutch government amounted to EUR 1.15 billion. Under the terms of AEGON’s agreement with
Board over 2009 was EUR 9.3 million (2008: EUR 16.8 million), consisting of EUR 4.3 million (2008: EUR 5.3 million) salary and other short term benefits, EUR 0.6 million
EUR 0.3 million (2008: EUR 0.6 million) other long-term benefits, and no termination benefits (2008: EUR 3.7 million).
Officer and member of the Executive Board. In line with existing pension arrangements for Executive Board members,
Salary Other 1 Cash 2 Shares 3 Pension premiums 4 Total
Other periodic benefi ts are additional remuneration elements, including non-monetary benefi ts, social security contributions and tax expenses related to 1 the company car, for which 2007 and 2008 have been amended accordingly, borne by the Group. For Mr. Shepard, the Group had also borne expenses and non-monetary benefi ts which were provided in his employment agreement with AEGON. These benefi ts included compensation to the extent that the total actual annual taxation on his total income exceeded the taxation if he were only subject to U.S. taxes, personal life insurance and tax planning. The STI Plan 2008 matured in 2009. Under the terms of AEGON’s Remuneration Policy, the Executive Board members were not entitled to short-term 2 incentives. This was also in line with the provisions of AEGON’s agreement with the Dutch government. 2008 Performance related cash benefi ts are in respect of 2007 STI plans under the Remuneration Policy for Executive Board members, approved by the shareholders in April 2007. In accordance with the provisions of the Short-Term Incentive (STI) Plan for the year 2006, it was established that the value of new business of the Group and of the relevant country units for that year was positive. Accordingly, operating earnings were calculated and established per area of responsibility. After adoption of the 2006 annual accounts by the shareholders, the disclosed STI cash bonuses for the year 2006 were paid in 2007. In addition to the STI plan, Mr. Shepard was entitled to individual 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 table for 2008 is based on net income over 2007 as reported in the 2007 IFRS fi nancial statements. Similarly the amount included in the table for the year 2007 is based on the net income of 2006. The LTI Plan 2006 matured in 2009 and the shares and option rights vested for 75%. In accordance with the terms of the 2006 LTI plan, the Executive 3
Board received bonus shares in April 2009. The number of shares for each member was: Mr. Wynaendts 8,827; Mr. Streppel 10,432 and, Mr. Shepard 19,660. These have been converted using the share price of EUR 3.18 at April 27, 2009. In accordance with the terms of the 2005 LTI plan, the Executive Board received bonus shares in April 2008. The number of shares for each member was: Mr. Shepard 38,542; Mr. Streppel 20,169; and Mr. Wynaendts 17,066. These have been converted using the share price of EUR 10.275 at April 22, 2008. In accordance with the elections made by the Executive Board members under the terms of the 2003 STI plan, the Executive Board received bonus shares in April 2007. The number of bonus shares varied from 0 to 100% of the number of shares paid in 2003, calculated through performance based matching, on the basis of earnings per share growth over infl ation over the years 2004, 2005 and 2006. The number of shares for each member was: Mr. Shepard 16,143; Mr. Streppel 12,409; and Mr. Wynaendts 8,771. These have been converted using the share price of EUR 15.61 at April 25, 2007. Mr. Wynaendts’ pension benefi ts consists of a pension plan based on 70% of his fi nal base salary, providing he completes 37 years of service, and an 4 additional pension contribution equal to 28% of his base salary. This refl ects the terms of Mr. Wynaendts’ appointment as Chairman of the Executive Board on April 23, 2008; the amount for the year 2008 has been amended accordingly. For Mr. Nooitgedagt, the defi ned benefi t contribution equals 25% of his base salary. Pension premiums include a provision for post employment health care, 0.5% of base salary. Mr. Nooitgedagt was appointed as CFO and Member of AEGON’s Executive Board in April 2009.5
In line with the March 2009 gentlemen’s agreement in the Dutch financial sector, no variable compensation will be granted to members of the Executive Board for the year 2009. AEGON does have a long-term 2009-2011 plan, under which variable compensation, in the form of shares, will be granted in 2012, subject to pre-determined performance objectives being met.
During the vesting period, dividend payments on these shares are deposited in blocked savings accounts on behalf of the executive members.1
Share options and share appreciation rights and interests in AEGON N.V. held by active members of the Executive Board
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.
Remuneration of active and retired members of the Supervisory Board In EUR 2009 2008 2007
Arthur W.H. Docters van Leeuwen (as of April 22, 2009) 72,000 7,000 –
Ben van der Veer (as of October 1, 2008) 63,000 18,000 –
Dirk P.M. Verbeek (as of April 23, 2008) 66,258 33,481 –
Starting January 1, 2005, a three-components structure has been introduced for the remuneration of the Supervisory Board: (1) a base fee for membership of the Supervisory Board; (2) an additional fee for membership of a Committee; and (3) an attendance fee for face-to-face Committee meetings. Members of the Supervisory Board do not have any share options or share appreciation rights in AEGON N.V. at December 31, 2009.
Leeuwen, prior to his formal appointment as a member of the
Not included in the table above is a premium for state health insurance paid on behalf of Dutch Supervisory Board members.
Ben van der Veer (as of October 1, 2008) 1,407 1,407 n.a.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 55
Egeria for an amount of EUR 212 million. Under the agreement, the nineteen employees affected by the sale will retain their jobs, as well as maintain similar employment conditions. In 2009,
Management is responsible for the preparation and fair presentation of the consolidated financial 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
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 consolidated financial 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.
Reporting Standards as adopted by the European Union and with Part 9 of Book 2 of the Netherlands Civil Code.
INCOME STATEMENT OF AEGON N.V. � FOR THE YEAR ENDED DECEMBER 31
NOTES TO THE FINANCIAL STATEMENTS OF AEGON N.V. � AMOUNTS IN EUR MILLION, UNLESS OTHERWISE STATED
Financial assets and liabilities are offset in the balance sheet when 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.
A security that has been received under a borrowing or reverse repurchase agreement is not recognized as an asset. A
AEGON. The difference between sale and repurchase price is treated as investment income. If the Group subsequently sells that security, a liability to repurchase the asset is recognized and initially measured at fair value.
and for junior perpetual capital securities AEGON has the option to defer coupon payments at its discretion. Convertible core capital securities can be converted into ordinary shares of
Subordinated loans and other borrowings are initially recognized at their fair value including directly attributable transaction costs and are subsequently carried at amortized cost using the effective interest rate method, with the exception of specific borrowings that are designated as at fair value through profit or loss to eliminate, or significantly reduce, an accounting mismatch, or specific borrowings which are carried as at fair value through the profit and loss as part of a fair value hedge relationship. The liability is derecognized when the company’s obligation under the contract expires or is discharged or cancelled.
NOTES TO THE FINANCIAL STATEMENTS OF AEGON N.V. NOTE 2.11 - 7
preferred shares will then be issued at par value (EUR 0.25), unless a higher issue price is agreed. In the years 2003 through 2007 35,170,000 class B preferred shares were issued under these option rights. In 2008 no option rights were exercised.
In 2009, Vereniging AEGON exercised its option rights to purchase in aggregate 33,860,000 class B preferred shares at par value to correct dilution caused by AEGON’s 1 billion equity issue as completed in August 2009.
EUR 8.5 million representing 33.9 million shares. After the transaction Vereniging AEGON holds 22.8% of the voting rights in AEGON N.V.
For detailed information on share appreciation rights and share options granted to senior executives and other AEGON
employees, refer to note 40 to the consolidated financial statements of the Group.
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
Changes in equity from relation with shareholders 27 810 – – – (765) 474 – 546
Foreign currency translation differences and movement in foreign investment hedging reserves – – (98) (170) – – – – (268)
Dividend preferred shares – – – – – (112) – – (112)
Transactions in 2008: Purchase: 10 transactions, average price EUR 8.32 – 26,300,000
As part of their insurance and investment operations, subsidiaries within the Group also hold AEGON N.V. common shares, both for their own account and for account of policyholders. These shares have been treated as treasury shares and are included at their consideration paid or received.
November 27. The amount repaid includes accrued interest from May 22, 2009 of EUR 44 million. AEGON may at any time repurchase the remaining 500 million securities at EUR 6 per security. Alternatively, after two years from now, AEGON may choose to convert these securities into common shares on a
AEGON retains full discretion over its policy regarding dividends paid on common shares. The coupon on the non-voting securities will be payable only if a dividend is also paid to holders of common shares. As the holder of the non-voting securities, Vereniging AEGON will receive either an annual coupon of EUR 0.34 per security or, if higher, an amount linked to the value of the dividend paid on AEGON common shares.
Coupon rate Coupon date: as of Year of fi rst call 2009 2008Junior perpetual capital securities
EUR 950 million fl oating DSL rate 2 Quarterly, July 15 2014 950 950
USD 500 million fl oating CMS rate 3 Quarterly, July 15 2014 402 402
The conditions of the securities contain certain provisions for optional and required coupon payment deferral and mandatory payment events. Although the securities have no stated maturity, AEGON has the right to call the securities for redemption at par for the first time on the coupon date in the years as specified, or on any coupon payment date thereafter.
GBP 400 million in senior unsecured notes, due December 16, 2039. These notes were issued under the company’s
AEGON N.V., together with certain of its subsidiaries, is part of a tax grouping for Dutch corporate income tax purposes. The members of the fiscal entity are jointly and severally liable for any taxes payable by the Dutch tax grouping.
At December 31, 2009, the letter of credit arrangements amounted to EUR 3,492 million (2008: EUR 3,544 million); as at that date no amounts had been drawn or were due under these facilities.
Transamerica Finance Corp. with respect to bonds, capital trust pass-through securities and notes issued under commercial paper programs (EUR 668 million; 2008: EUR 694 million), as well as payables with respect to certain derivative transactions of Transamerica Corporation (nominal amount EUR 1,870 million; 2008: EUR 1,003 million).
AEGON Derivatives N.V. 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 limited as at December 31, 2009.
On August 5, 2009, the Enterprise Chamber of the Amsterdam court of appeals in the Netherlands ruled in favor of AEGON in connection with a dispute with unions and employers in the harbors of Rotterdam regarding the consolidation of equity of
On February 2, 2010 AEGON announced the sale of its funeral insurance business in the Netherlands to Dutch investment firm
Central Works Council, in addition to the approvals of the relevant regulatory authorities.
NOTES TO THE FINANCIAL STATEMENTS OF AEGON N.V. NOTE 15 - 17
December 31, 2009, the income statement for the year then ended and the notes.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the company financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the company financial 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 financial 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 financial statements.
Pursuant to the legal requirement under 2:393 sub 5 part f of the Netherlands Civil Code, we report, to the extent of our competence, that the management board report is consistent with the company financial statements as required by 2:391 sub 4 of the Netherlands Civil Code.
Appropriation of profit will be determined in accordance with the articles 31 and 32 of the Articles of Incorporation of AEGON
Executive Board, to set aside part of the profi t to augment and / or form reserves.
4. The profi ts remaining after application of the above shall be put at the disposal of the General Meeting of Shareholders.
5. The Executive Board may, subject to the approval of the
Supervisory Board, make one or more interim distributions to the holders of common shares and / or to the holders of preferred shares, the latter subject to the maximum dividend amount set forth under 3.
became the only shareholder of AGO Holding N.V., which was the holding company for its insurance operations. In 1983, AGO
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 N.V., giving it voting majority in AEGON N.V. At that time Vereniging AGO changed its name into Vereniging AEGON. The objective of Vereniging AEGON is the balanced representation of the interests of AEGON N.V. and all of its stakeholders, including shareholders, AEGON Group companies, insured parties, employees and other relations of the companies.
2,064,000,000, which amount (less EUR 12,000,000 related costs) Vereniging AEGON contributed as additional paid-in capital on the existing AEGON N.V. preferred shares, all held by
Vereniging AEGON consisted of nineteen members. The majority of the voting rights is with the seventeen members who are not employees or former employees of AEGON N.V. or one of the AEGON group companies, nor current or former members of the Supervisory Board or the Executive Board of
When a vote in the Executive Committee results in a tie, the
General Meeting of Members has the deciding vote. With regards to the amendment of the Articles of Association of
To AEGON’s knowledge, only one other party holds a capital and voting interest in AEGON N.V. in excess of 5%. According to its filing with the Dutch Financial Markets Authority on March 16, 2010, US-based investment management firm Dodge & Cox owns a total of 113 million common shares, representing 5% of the issued share capital and voting rights in the company.
9 11 (1) 5 24 Share in net results of associates 2 10 6 5 23
(441) 48 (456) (770) (1,619) Over / (under) performance of fair value items (197) (31) (58) (174) (460)
Underlying earnings geographically 8,636 9,131 11,051 11,933 40,751 Gross deposits (on and off balance sheet) 8,111 6,570 6,742 6,530 27,953
Actuarial funding enables a life insurance company to reduce the size of the unit reserves it holds for unit linked business to reflect some or all of the unit-linked charges it expects to receive in the future from the units nominally allocated.
reporting entity and exists solely to pay or fund employee benefi ts; and
benefi ts and are not available to the reporting entity’s own creditors.
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 final node and then works backwards through the lattice to the first node, which is the valuation date, where the calculated result is the value of the option.
Business combination is the bringing together of separate entities or operations of entities into one reporting entity.
Discretionary participation feature is a contractual right to receive, as a supplement to guaranteed benefits, additional benefits: That are likely to be a signifi cant portion of the total �
contractual benefi ts; Whose amount or timing is contractually at the discretion of �
Effective interest rate method is a method of calculating the amortized cost of a financial asset or liability and of allocating the interest income or expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or liability.
from another entity or to exchange fi nancial instruments with another party under conditions that are potentially favorable; or
A non-derivative for which the entity is or may be obliged •
asset to another entity or to exchange fi nancial assets or fi nancial liabilities with another entity under conditions that are potentially unfavorable to the entity; or
exchange of a fi xed amount of cash or another fi nancial asset for a fi xed number of the entity’s own equity instruments.
Insurance liability is an insurer’s contractual obligation under an insurance contract.
Presentation currency is the currency in which the financial statements are presented.
Reinsurance assets are a cedant’s net contractual rights under a reinsurance contract.
Temporary differences are differences between the carrying amount of an asset or liability in the balance sheet and its tax base that will reverse over time.
FORWARD-LOOKING STATEMENTS � The statements contained in this Annual Report that are not historical facts are forward-looking statements as defined in the
Actual results may differ materially from expectations conveyed in forward-looking statements due to changes caused by various risks and uncertainties. Such risks and uncertainties include but are not limited to the following: Changes in general economic conditions, particularly in the �
emerging markets, such as with regard to: The frequency and severity of defaults by issuers in our �
restatements on the fi nancial markets and the resulting decline in the value of equity and debt securities we hold.
Acts of God, acts of terrorism, acts of war and pandemics �
Consultancy and design Dart | Brand guidance & Design, Amsterdam (NL)
Lowering of one or more of insurer fi nancial strength ratings �
Reporting Standards may have on our reported fi nancial results and fi nancial condition and
and other regulations in other jurisdictions affecting the capital we are required to maintain.