As an international life insurance, pension and investment company, AEGON has businesses in over twenty markets in the Americas, Europe and Asia. AEGON companies employ approximately 31,500 people and serve over 40 million customers across the globe.
In 2008, AEGON’s earnings were severely affected by the global financial crisis. Underlying earnings before tax declined 40% to EUR 1.57 billion.
During the year, AEGON remained committed to its short-term strategic objectives to lower risk, reduce cost and release additional capital from the company’s existing businesses.
AEGON had an excess capital of EUR 2.9 billion over and above AA-capital adequacy requirements.
Consolidated financial statements of AeGOn Group 2008 82 Contents 84 Consolidated balance sheet 85 Consolidated income statement 86 Consolidated cash flow statement 88 Consolidated statement of changes in equity 91 Exchange rates 92 Notes to the consolidated financial statements 215 Remuneration 219 Auditor’s report
Financial statements of AeGOn n.V. 2008 221 Balance sheet 222 Income statement 223 Notes to the financial statements
designed to increase earnings, improve returns and make better use of the company’s international resources.
announces it will reduce costs of unit-linked insurance policies sold in the Netherlands.
financial crisis, promising measures to reduce risk, free up more capital and keep a tight lid on operating costs (the three C’s: Capital,
Clearly, the effects of the financial crisis were significant for AEGON during 2008. However, they confirmed our belief that the strategy we introduced last June is the right one: to improve the capital efficiency of
Despite the difficult economic environment during 2008, we were encouraged by the continued confidence of
This resulted in a release of EUR 1.7 billion for the full year. We expect to release an additional EUR 1.5 billion in 2009 by continuing to reduce AEGON’s risk to equity and credit markets; reducing interest rate risks and lowering product guarantees; reducing spread-based balances within our institutional business in the
United States; further increasing our hedging program; and improving the matching of assets and liabilities.
EUR 150 million to be achieved mainly by AEGON’s operations in the United States, the Netherlands and the United Kingdom during 2009. We will reduce costs without sacrificing the quality and service our customers and business partners have come to expect.
Furthermore, we regard it as essential to put in place clear contingencies that will enable AEGON
to withstand further market distress. AEGON’s participation in the capital facility program extended by the Dutch government for the benefit of healthy and viable financial services companies operating in the Netherlands was an additional measure to strengthen AEGON’s capital position by EUR 3 billion and secure a solid capital buffer to withstand future market turmoil.
During 2008, we continued to make progress in expanding AEGON’s presence in new growth markets and in strengthening our position in the international retirement market. In Central & Eastern Europe, we enhanced AEGON’s position in the pension markets of
Hungary and Poland. We also initiated our first steps in the fast-developing Turkish market with the acquisition of an established life insurance and pension provider.
Spain, AEGON’s presence through the important bank channel was extended through a fifth joint venture agreement. In China, AEGON’s continued roll-out across the highly developed coastal provinces resulted in record sales, and we also entered into a promising new asset management joint venture. In July, AEGON launched its business in India to provide life insurance and pensions for the rapidly expanding middle class.
Early in 2009, AEGON announced that Jos Streppel will fulfill his long-stated intention to retire after over 35 years with AEGON and its predecessor companies.
We are also grateful to our many shareholders, business partners and other stakeholders for their confidence in
Amsterdam and London in the Dutch bank’s capital markets, asset management, corporate finance and private banking operations. In 1997,
Jos Streppel started his career in 1973 occupying treasury and investment positions at one of AEGON’s predecessor companies in the Netherlands.
Executive Vice-President and Chief Operating Officer, Chief Financial Officer and Director of Tax and was appointed to his current position in March 2002.
Member of the Management board, responsible for the United Kingdom, india and Variable Annuities in europe
Otto Thoresen joined Scottish Equitable in 1978, where he qualified as an actuary and worked in a number of roles including marketing manager.
Gábor Kepecs began his career with the Hungarian government before joining former state-owned insurance company Állami Biztosító. In 1990, he was appointed CEO, two years before Állami Biztosító was privatized and acquired by AEGON. Since 1992, Mr. Kepecs has been CEO of AEGON Hungary.
In 2008, AEGON broadened the roles of the members of the company’s Management Board. With this new structure, members of the Board have a mix of local and global responsibilities. This change has helped bring AEGON’s corporate governance into line with its objective of running the company more as one international business. The Management
Today, AEGON is an international life insurance, pension and investment company, with major operations in the United States, the Netherlands and the United Kingdom, and a growing presence in the new, emerging markets of Asia, the Americas and Central & Eastern Europe.
combining local knowledge and local decision-making with the resources of an expanding international company; AEGON pursues sustainable, profitable growth, by ��
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
on areas that have strong growth prospects; To improve growth and returns from AEGON’s ��
The second half of 2008, however, saw a dramatic decline in world financial markets. This led to a shift in priorities both for AEGON and the global insurance industry.
In particular, uncertain economic and market conditions have resulted in an increased demand for capital to support existing businesses, which means fewer resources are now available for international expansion or acquisitions. AEGON believes these conditions will last well into 2009.
During the year, we’ll continue with the same measures – we’ll carry on lowering risk and releasing capital to support our businesses. It’s the right strategy to deal with what are still very challenging market conditions.”
company’s existing businesses; Measures to reduce operating expenses in 2009 and ensure ��
a sufficient capital buffer as a safeguard against further declines in world financial markets.
As part of this approach, AEGON accelerated measures already set out in June in the company’s five-year growth plan. These measures are designed to free up a total of EUR 4 billion to EUR 5 billion of capital by 2012 from AEGON’s existing businesses.
In addition, AEGON also took a number of steps aimed at reducing risk and protecting the company’s position during the financial crisis: AEGON reduced its exposure to equity markets; ��
assets and liabilities, and substantially increased the resources committed to risk management.
EUR 1.5 billion in capital in 2009. In October 2008, AEGON took the further step of securing EUR 3 billion in additional core capital from
A crucial part of ‘Unlocking the Global Potential’ is ensuring that
AeGOn has taken steps toward managing AeGOn more as an international company
AEGON wants to make the most of its expanding international resources. The company is setting up a global asset management organization, bringing together existing businesses in the
In addition, AEGON will use its existing strength and expertise in the
United States to develop new markets for its variable annuities and life reinsurance businesses in Europe and Asia.
‘global’, rather than just ‘local’. That’s a big shift in mentality. But it’s one we have to make.
This change means we’ll be able to offer a broader range of products and investment ideas to our clients. And we’ll be able to start developing and selling cross-border products as well.”
United Nations’ World Population estimates, just one in ten Europeans was over the age of 65. By 2020, it will be one in five.
In other parts of the world, new markets are emerging –
Europe as well as China, India and Taiwan in Asia, and
Mexico in Latin America. In China alone, AEGON has businesses in provinces that cover a population of more than 300 million people.
AEGON unveiled a long-term growth plan, ‘Unlocking the Global Potential’, in June 2008. The plan is designed to increase earnings, improve return on equity from AEGON’s existing businesses over the next few years and make better use of the company’s international resources.
Central & eastern europe Achieve top five position in all existing markets ��
Because of the financial crisis, AEGON shifted its shortterm focus in the second half of 2008 to measures designed to improve capital efficiency, lower risk and reduce operating expenses. ‘Unlocking the Global
Turmoil in world financial markets, particularly during the second half of 2008, underscored the importance of maintaining communication with investors and the broader financial community.
During 2008, AEGON organized a number of conferences, road shows and other events designed to communicate the company’s strategy and performance directly to investors and financial markets.
Asia, with one-on-one and group meetings with shareholders and other potential investors; In total there were meetings with about 700 investors ��
November. In total, these events – both held in London –
In June, presentations were also given on AEGON’s strategy, ‘Unlocking the Global Potential’. In November,
CEO Alex Wynaendts set out AEGON’s approach to dealing with the global financial crisis by focusing on
Code, this policy sets out clear rules and guidelines for interaction between AEGON and its investors. A copy of the policy is available at www.aegon.com.
AEGON’s common shares are listed on four stock exchanges. The primary listing is in Amsterdam. The company’s shares are also listed in London, New York and Tokyo. These listings give AEGON access to global capital markets, a vital part of the company’s overall corporate and financial management strategies. In addition, AEGON is also active on world debt markets, using its strong credit rating to issue debt instruments in various currencies.
AEGON’s policy is that the total dividend for the year should be composed of two parts: An interim dividend, announced at the same time as ��
August; A final dividend, proposed in March and voted on at ��
In 2008, AEGON paid an interim dividend of EUR 0.30 a share. Shareholders who elected to receive their interim dividend in AEGON shares were entitled to one new common share for every 27 they already held. The value of the stock dividend was approximately equal to the cash dividend. AEGON decided to forego the final dividend for 2008 as part of broader measures to preserve capital in light of the global financial crisis.
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec share price information
August 13 Second quarter 2009 results november 12 Third quarter 2009 results
August 12 Second quarter 2010 results november 11 Third quarter 2010 results
“I’m confident we are taking the right steps to deal with the financial crisis.”
“There’s no doubt that 2008 was a difficult year, not only for AEGON, but for the entire financial services industry.
Last June, when we announced our new strategic priorities, we said we wanted to use our capital more efficiently to free up resources in order to make use of them in markets that offer stronger growth and higher returns. Because of the global financial crisis, we had to rethink our priorities. We needed that extra capital not for growth, but to protect ourselves from the effect of falling bond and equity prices. In October, as a precautionary step, we also secured additional core capital from our main shareholder Vereniging AEGON, funded by the Dutch State. Taken together, these measures ensured AEGON’s ability to enter 2009 with a strong buffer – a safeguard against further turmoil in the world financial markets.
Despite what we’ve achieved, 2009 will inevitably be a difficult year as well. All signs suggest we’re already in a deep economic recession. These uncertainties mean that liquidity and capital management will continue to be a high priority in the next year or two.
Already we’ve seen that widening credit spreads are hurting the fair value of our credit portfolio. And naturally, over the coming period, we’ll see an increase in impairments for the financial services industry as a whole. That’s no surprise; you see that in every economic downturn. However, given AEGON’s long-term business model, we are also able to hold on to these investments until they either reach maturity or recover their value. Given our very solid liquidity management, we are unlikely to be forced to sell assets simply to generate cash. Unlike banks, we also run less withdrawal risk because of the long-term contracts we have with our clients. In the current climate, one big advantage of our business model is this absence of possible liquidity shocks.
Moreover, AEGON’s earnings capacity – its underlying insurance, pension and investment businesses, with
“Despite what we’ve achieved, 2009 will inevitably be a difficult year. All signs suggest we’re already in a deep economic recession. These uncertainties mean that liquidity and capital management will continue to be a high priority in the next year or two.”
+38% Total net deposits rose 38% in 2008 to more than EUR 3.4 billion.
EUR 6.1 billon in shareholders’ equity and an additional EUR 3 billion from
Unprecedented turmoil in world financial markets during the year resulted in: Significantly lower equity markets;��
half of the year; An unprecedented widening in credit spreads and ��
Despite the financial crisis, AEGON made significant progress toward its short-term objectives: In the second half of 2008, AEGON released ��
EUR 1.7 billion in additional capital from its existing businesses, primarily by reducing investment risk, optimizing asset and liability management and transferring risk through reinsurance; AEGON also secured EUR 3 billion in additional core ��
Dutch State, part of a broader program to help healthy and viable banks and insurance companies in the
In addition, AEGON has also announced that it will scale back its institutional markets business in the United States.
As a result of these measures, AEGON’s capital position remains strong, despite the significant deterioration in global financial and economic conditions in the second half of the year. At the end of December 2008, AEGON
had a capital surplus of EUR 2.9 billion over and above
EUR 1.1 billion. Underlying earnings before tax declined 40% to EUR 1.6 billion – the result primarily of reserve strengthening and accelerated amortization in the
Net income for the year was affected by an increase in impairments and the impact of lower markets on financial guarantees and fair value investments in the
1 NAIC RBC: National Association of Insurance Commissioners Risk Based Capital.
AEGON reported a net loss for 2008 of EUR 1.1 billion, the result of a steep decline in financial markets during the second half of the year. The underperformance of fair value investments and fair value losses related to guarantees led to a charge of almost EUR 1.6 billion.
This charge reflected a sharp decline in equity markets, increases in equity volatility and a decrease in government bond rates. These factors were partly offset by the impact of the increase in the spread of credit risk on the valuation of the guarantees. Alternative investment classes in the Americas and the Netherlands, such as hedge funds, private equity and credit derivatives, also significantly underperformed their expected long-term returns. AEGON has taken steps to reduce its exposure to alternative assets, as well as to credit and equity markets. Impairments also rose sharply during the year to EUR 1.0 billion. This was the result of a significant deterioration in business and economic conditions. Impairments stemmed primarily from investments in US financial institutions (particularly
Mutual), housing-related structured assets, high-yield corporate bonds and equity investments. As expected, the credit crisis has resulted in impairments rising above their long-term expectations. Gains on investments, meanwhile, declined sharply to EUR 35 million from
EUR 2.6 billion. Worsening financial market conditions clearly affected sales in the Americas, Central & Eastern
Europe and Asia. In the Americas, there was also a decline in sales of both bank-owned and corporate-owned life insurance and life reinsurance. In the Netherlands sales also decreased, mainly due to a slow down in the Dutch group pension market. In the United Kingdom, sales held up well, mainly due to continued growth in individual annuities and the corporate pension markets. Sales in
EUR 40.8 billion. Overall sales of variable annuities, savings products, pensions and asset management all declined, mainly because of unprecedented volatility in the global financial markets. Sales of savings products were also affected by increased competition as interest rates declined. Fixed annuity deposits in the
EUR 4.1 billion in 2008 from EUR 1.1 billion the year before, as customers sought additional financial security amid significant equity market volatility.
EUR 9.1 billion. This consisted of EUR 6.1 billion in shareholders’ equity and an additional EUR 3 billion from Vereniging AEGON, funded by the Dutch State.
Core capital includes unrealized losses on available-forsale assets of EUR 7.2 billion. Excluding these unrealized losses, AEGON’s core capital totaled EUR 16.2 billion, 78% of the capital base and well above AEGON’s minimum target of 70%.
Unrealized losses – held in the company’s revaluation reserve – were due primarily to an unprecedented widening in credit spreads on corporate bonds during the year. This widening more than offset the effect of declines in government bond yields. It should be noted that unrealized losses will only affect earnings if AEGON: Is forced to sell investments at a loss; or��
At the end of December 2008, AEGON’s revenuegenerating investments amounted to EUR 331.8 billion, down from EUR 370.5 billion the year before. The decline was due to lower financial markets during the year.
Underlying earnings before tax by line of business (in EUR million)
Eastern Europe. AEGON companies include some of the best-known brands in the insurance sector, among them Transamerica in the United States,
The company’s variable annuities, savings and mutual fund business is growing rapidly in other countries, too. A combination of economic growth and rising levels of personal wealth in recent years has supported an expansion of AEGON’s businesses in Asia, Mexico and Central & Eastern Europe.
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
AEGON provides a range of life and annuity reinsurance products. The company’s core product – mortality risk transfer – is offered primarily through coinsurance, but is also available under yearly renewable term arrangements. AEGON offers life reinsurance services not only in the United States, but also in Asia
and bank-owned and corporate-owned life insurance. AEGON USA markets a range of institutional products to pension and retirement funds, money market funds and US municipalities as well as investors outside the United States.
“Clearly, the global financial crisis had a serious effect on our earnings in 2008 as it did on the entire US life industry. However, AEGON Americas’ underlying businesses remained resilient. For a long time, our focus has been on cost control, risk, capital and liquidity management, as well as profitability. It’s this focus that is helping us withstand the current crisis.”
During the second half of the year, business conditions in the Americas – particularly in the United States –
worsened significantly. Equity markets fell sharply, default risk increased, leading to spreads on corporate bonds widening to unprecedented levels. Meanwhile, yields on government bonds dropped and the broader economy began to show signs of considerable contraction. Earnings from AEGON Americas were significantly affected by the crisis. The company reported a net loss for 2008 of USD 2.0 billion –
a reflection of sharply lower financial markets and an increase in impairments. Underlying earnings before tax, meanwhile, declined 42% to USD 1.6 billion. Worsening economic conditions also had a negative impact on new life sales, though gross deposits for the year decreased by just 3%, due mainly to growing demand for fixed annuities. The value of new business rose 4% to
EUR 2.0 billion. This was the result primarily of: A significant underperformance in fair value items, ��
Brothers and Washington Mutual), housing-related structured assets, including subprime, and high-yield corporate bonds. AEGON Americas booked an income tax benefit of USD 74 million in 2008. Much of the tax benefit arising from impairments and financial losses during the year, however, was offset by charges of
AEGON The Netherlands operates through three sales organizations, each focusing on a separate segment of the Dutch market. Corporate and Institutional Clients serves large corporations and financial institutions such
as company and industry pension funds. AEGON Bank, meanwhile, sells mainly to individuals both directly and through tied agents. Lastly, AEGON Intermediary focuses on independent agents and retail sales organizations in the Netherlands.
During 2008, AEGON The Netherlands was also affected by the distressed market conditions. This led to a decline in both net income and underlying earnings before tax.
The Netherlands, set out a new strategy for the company’s Dutch businesses. The strategy is based on three priorities: To improve profitability through a series of measures, ��
As part of the plan, AEGON The Netherlands aims to improve its return on capital by at least 100 basis points
AEGON The Netherlands’ underlying earnings before tax declined 10% to EUR 378 million. An exceptional dividend of EUR 75 million from an investment fund and improved technical results from AEGON The Netherlands’ pension business were offset by a decrease in investment income, higher claims in the company’s Accident and Health business and a series of one-off charges that included higher system and project expenses and restructuring charges. Earnings from Individual savings and Retirement products also declined because of lower margins and volumes. The company’s General insurance business, meanwhile, was adversely affected by a slowdown in the Dutch real estate market, though it remained level net income
at EUR 94 million. This was essentially due to declining financial markets, the underperformance of private equity investments and investments held at fair value through profit or loss, and a rise in impairments. These factors were partly offset by the positive net impact of fair value movements in guarantees and related hedges
(EUR 214 million). The valuation of the fair value of liability guarantees includes sharply increased interest rates and equity volatilities, as well as discount rates, including a credit spread, a reflection of extremely dislocated and very illiquid markets. Impairments rose to
EUR 138 million, primarily linked to investments in equities and high-yield bonds.
higher at EUR 934 million. This increase was due to a number of one-off factors, including a rise in project expenses, systems-related spending and a restructuring of AEGON The Netherlands’ Distribution business.
AEGON’s new life sales in the Netherlands declined by 16% in 2008 to EUR 219 million. Retail life insurance sales held up well, despite a worsening economic climate. The Dutch group pensions market, however, declined significantly, due mainly to increased uncertainty among clients. Sales of Accident and Health policies declined from EUR 18 million to EUR 15 million
lower at EUR 2.70 billion. Savings deposits, meanwhile, decreased by 7% during the year to EUR 2.5 billion, a result of worsening economic conditions.
AEGON UK’s principal means of distribution is through the intermediated financial advice channel, which is the main sales route for long-term savings and retirement products in the United Kingdom. In all, there are an
United Kingdom. AEGON UK also explores new distribution opportunities, including agreements with banks and affinity partnerships with other potential distributors.
“AEGON UK’s businesses stood up well to what was a very difficult economic and financial environment in 2008. Naturally, the decline in bond and equity markets had an impact on our earnings. But strong sales, particularly of group pensions, annuities and protection plans, demonstrate the underlying strength and diversity of our businesses.”
United Kingdom’s value of new business, which was up 18% to GBP 186 million.
GBP 8 million to GBP 46 million as strong underlying growth was masked by a one-off benefit in 2007.
variable annuity products resulted, net of hedging, in an underperformance in fair value items of GBP 15 million.
Net income in 2008 also included impairment charges on bond holdings of GBP 18 million.
GBP 414 million. The increase in operating expenses was due mainly to continued investments in AEGON UK’s businesses and restructuring costs.
increased new life sales in 2008 by 3% to GBP 1.22 billion.
GBP 251 million due to continued strong sales of annuities and protection products, reflecting AEGON UK’s continued focus on its diversification strategy. Sales of pensions were flat at GBP 971 million. Group pensions continued to be strong, though this was offset by lower individual pension sales. Total gross deposits, however, were sharply lower – down 40% at GBP 542 million – a reflection of unprecedented turmoil in world financial markets, which resulted in lower sales of mutual funds and third party managed assets.
earnings overview AeGOn United Kingdom Amounts in GBP million 2008 2007
It offers both life insurance and accident and health cover. Through the network of joint venture partners,
AEGON Spain also offers pensions as well as both traditional life and unit-linked variable life products, a market traditionally dominated by the country’s retail banks. In France, AEGON works together with its partner
AEGON operates through a number of different sales channels in Asia. In Taiwan, the company works through a network of professional agents, independent brokers and banks, as well as through worksite and direct marketing. Similarly, in China, AEGON sells its products through agents, independent brokers, banks and direct marketing. In China, agents and brokers distribute mainly life insurance. In recent years, AEGON has taken steps to extend its bank distribution network in the region. In India, AEGON is working closely with its partner Religare to expand its distribution network.
Earnings from Other countries declined in 2008 – largely the result of a significant decrease in earnings from
Underlying earnings before tax from AEGON’s Other countries declined 35% to EUR 93 million in 2008.
EUR 9 million, compared with a profit the previous year of EUR 73 million. Net income was affected by losses on investments totaling EUR 10 million, a tax charge of
EUR 25 million and EUR 68 million in impairments related primarily to equity investments. These factors offset a positive contribution from AEGON’s businesses in Spain and Central & Eastern Europe.
Central & Eastern Europe and further investment in the company’s bank distribution network in Spain.
In Central & Eastern Europe, sales of unit-linked products were adversely affected by the persistent weakness of equity markets. Spain posted a steep increase in sales, helped by recent changes to national pension legislation, as well as the expansion of AEGON’s bank distribution network in the country.
Sales in Taiwan, on the other hand, declined significantly, offset only in part by continued growth in China. Total gross deposits for AEGON’s Other countries rose sharply in 2008 to EUR 1.64 billion, due mainly to the company’s strong asset management business in China and further growth in its pension operations in Central & Eastern Europe.
Value of new business decreased to EUR 148 million in 2008 – primarily the result of a decline in sales in Taiwan, though France and Spain also reported a lower value of new business. Value of new business in Central & Eastern
Europe, the internal rate of return declined to 44.8%, due to a relatively low return from AEGON’s new operations in Romania. In Spain, AEGON’s bank distribution partnerships continued to deliver high rates of return, but France declined to 8.9%.
At the end of 2008, revenue-generating investments in Other countries stood at EUR 13.6 billion, up from EUR 10.9 billion a year earlier. The increase was due mainly to further growth in AEGON’s asset management business in
China and its pension operations in Central & Eastern Europe, as well as to expansion in Spain.
For AEGON, risk management involves: Understanding which risks the company is able to ��
By operating within 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 full knowledge of potential returns and losses both for the company and for its shareholders.
AEGON faces a number of risks, both 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.
rates or equity and credit markets. Clearly, these risks, whether internal or external, may affect the company’s operations, its earnings, its share price, the value of its investments or the sale of certain products and services.
Credit risk 2008 saw an unprecedented widening in credit spreads, particularly in AEGON’s US corporate bonds. This had significant implications for the value of AEGON’s fixed income investments. 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 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.
During the year, AEGON took a series of measures designed to counter the effects of the marketcrisis and, where required, limit the company’s exposure to major financial risks.
AEGON’s risk management governance structure has four basic layers: The Supervisory Board (and the Supervisory Board ��
The goals of this framework are as follows: To minimize ambiguity by clearly defining ��
responsibilities and escalation procedures for decision makers; To institute a proper system of checks and balances by ��
ensuring that senior management are aware at all times of material risk exposure; To manage concentration by avoiding the threat of ��
In line with AEGON’s integrated approach to risk management, the company’s Chief Financial Officer sits as both a member of the Executive Board and as Chairman of the GRCC. AEGON’s Chief Risk Officer (CRO), its Group
The GRCC also provides oversight for individual country unit Risk and Capital Committees (RCCs). As such, the
GRCC receives regular reports from RCCs, reviews major decisions and oversees compliance with Group-level risk policies.
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.
In the second half of 2008, there was a significant deterioration in the risk environment both for AEGON
and the insurance industry as a whole. The global financial crisis led to a period of extreme volatility in world financial markets.
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 exposure to equity markets;��
primarily by moving toward higher quality investments; Extending its hedging programs on interest rates;��
During the second half of 2008, AEGON made considerable progress toward these aims: A total of EUR 1.7 billion in additional capital was ��
released from the company’s existing businesses, primarily by lowering investment risk and optimizing asset and liability management, as well as through reinsurance and securitization transactions.
EUR 3 billion in core capital from Vereniging AEGON, funded by the Dutch State – part of a broader program to support healthy and viable banks and insurance companies in the Netherlands during the financial crisis.
AEGON expects difficult market conditions to continue in 2009. As a result, measures designed to reduce risk, free up additional capital and lower operating expenses will remain a significant priority for the company.
capital adequacy levels at whichever is the higher of local regulatory requirements, the relevant local
Standard & Poor’s requirements for very strong capitalization, and any additionally self-imposed economic requirements. During 2008, the capital adequacy of
Specifically, 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
At December 31, 2008, AEGON’s capital base consisted of 77.5% core capital, and 21.2% perpetual capital securities. Senior and dated subordinated debt accounted for the remaining 1.3%.
AEGON defines financial flexibility as the sum of excess capital in its companies and leverage capacity.
Core capital, which consists of shareholders’ equity and the convertible core capital securities which were issued in 2008 (see below), was EUR 9,055 million at
Group equity consists of the aforementioned core capital plus other equity securities, such as the Junior perpetual
(including currency revaluations on other equity securities), compared with EUR 19,962 million at
State - part of a broader program to support healthy and viable banks and insurance companies in the
Netherlands during the financial crisis. For more details on this transaction, please refer to page 77-78.
AEGON’s liquidity management strategy is aimed at maintaining sufficient liquidity to ensure that the company can meet its payment obligations as they fall due at a reasonable cost. This is achieved by dispersing day-to-day funding requirements, maintaining a broad base of funding sources and maintaining a welldiversified portfolio of highly liquid assets.
AEGON has a short-term debt rating of P2/A1/F1 by, respectively, Moody’s, S&P and Fitch. The fact that
AEGON has a lower prime rating from one of these rating agencies could reduce access to short-term Euro and US Commercial Paper markets. AEGON has access to the US Federal Reserve Commercial Paper Funding
Facility (CPFF), which is restricted to a minimum of two prime short-term ratings.
AEGON maintains back-up credit facilities to support outstanding amounts under its commercial paper programs. The principal arrangement is a USD 5 billion syndicated facility including a USD 3 billion back-up facility maturing in 2012. This arrangement also includes a USD 2 billion multicurrency revolving letter of credit facility maturing in 2015, extendable until 2017. In addition, AEGON maintains USD 525 million of shorter dated bilateral back-up facilities. AEGON N.V. has not drawn any amounts under any liquidity back-up facilities.
considers its working capital, backed by the external funding programs and facilities, to be amply sufficient for the Group’s present requirements.
1 Reference is made to the Financial statements of the Annual Report, note 17.
Operational debt primarily relates to mortgage warehousing and the funding of US regulation xxx and
AEGON completed a Value in-Force (VIF) securitization, which enabled the Group to monetize the value of a portion of future profits from a book of unit-linked business within its UK operations. The transaction added around EUR 315 million (GBP 250 million) of core capital, enhancing the financial flexibility of the Group.
In addition, a rating downgrade may adversely affect relationships with broker-dealers, banks, agents, wholesalers and other distributors of AEGON’s products and services. This may negatively impact new sales and adversely affect the Group’s ability to compete.
This would have a materially adverse effect on AEGON’s business, results of operations and financial condition.
In addition to the financial risks detailed on pages 45 - 46,
While systems and processes are designed to support complex transactions and to avoid systems failure, fraud, information security failures, processing errors and breaches of regulation, any failure could affect
In addition, AEGON must commit significant resources to maintaining and enhancing the Group’s existing systems in order to keep pace with industry standards and customer preferences.
AEGON is subject to comprehensive regulation and supervision in all countries in which the Group operates.
The primary purpose of such regulation is to protect policyholders. Changes in existing insurance laws and regulations may affect the way in which AEGON
AEGON’s ability to sell new policies or claims exposure on existing policies.
US courts, including those predicated on the civil liability provisions of the federal securities laws of the United
Therefore, AEGON’s shareholders who obtain a judgement against AEGON in the United States may not be able to require the company to pay the amount of the judgement unless a competent court in the Netherlands gives binding effect to the judgement. It may, however, be possible for a US investor to bring an original action in a Dutch court to enforce liabilities against AEGON, its affiliates, directors, officers or any expert named therein who reside outside the United States, based upon the US
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 risk management function develops and executes risk policies and risk frameworks. This also involves the facilitation of risk identification (especially for operational and emerging risks) and reviewing risk assessments performed by operating units. The risk management function is responsible for identifying best risk management practices and working with management to ensure that AEGON adheres to these practices.
Finally, the compliance function plays a key role in monitoring the company’s adherence to external rules and regulations and internal policies.
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 ��
management and control systems will not continue to function properly in 2009.
The risk management and control systems provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of its published financial statements.
The Remuneration Policy and report may be found on pages 67 to 71. For detailed information about AEGON’s corporate governance and compliance with the Dutch
(further details on the composition of AEGON’s Supervisory Board may be found on pages 62-64). From December 1, 2008,
Arthur Docters van Leeuwen has been acting as an observer to the
Meeting of Shareholders (AGM) 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
This past year has been an extraordinary one for AEGON. In April 2008,
Don Shepard retired. In June, he announced a new set of strategic priorities for the company, designed to increase earnings, improve returns from the company’s businesses and make better use of its international resources.
However, the global financial crisis prompted AEGON to concentrate on measures aimed at preserving and releasing capital, lowering risk and reducing operating costs. As a further precaution, AEGON secured an additional
In 2008, the Supervisory Board held a total of six regular meetings and several additional conference call meetings. No member of the Supervisory Board was frequently absent from these meetings.
Meetings of the Supervisory Board’s Comittees were usually held before the meetings of the full Supervisory
In 2008, discussions within AEGON’s Supervisory Board focused on the following issues: Strategy (particularly in view of the developing crisis ��
figures. The Board also reviewed and approved the company’s annual accounts for 2007 and a proposal to the General Meeting of Shareholders for a final dividend to shareholders.
Supervisory Board reviewed AEGON’s first, second and third quarter results as well as disclosures on VNB.
At several meetings held in the second half of 2008, the Supervisory Board as well as the Audit and
Risk Committees were informed of the impact of fair value movements on the valuation of guarantees.
The development of AEGON’s investment portfolio, in view of the deterioration in world financial markets was also addressed.
AEGON’s capital position. At several meetings in October 2008, the Board discussed the company’s capital position and the proposed transaction with the Dutch
State. The Board approved the terms and conditions of the transaction on October 24, 2008, including changes to the company’s corporate governance arrangements
Committee reviewed and discussed AEGON’s Group Plan 2009, including the 2009 budget and the 2009 Capital
Plan. The full Board also received a separate report on these issues from AEGON’s Audit Committee. Following a recommendation from the Audit Committee, the Board approved the 2009 budget and the 2009 Capital Plan and authorized the Executive Board to provide for
During its meetings in 2008, the Supervisory Board discussed a number of proposed new partnerships and acquisitions. Those announced during the year include the following: The life insurance, pension and health joint venture ��
In March, the Supervisory Board agreed that shareholders should be asked to approve the following: A new four-year term for Irving W. Bailey, II, as a ��
Dirk P.M. Verbeek and Ben van der Veer (the latter from October 1, 2008) for appointment to the
All proposals above were accepted by shareholders at their General Meeting in April 2008.
In March, the Supervisory Board decided to propose that shareholders, at the 2009 General Meeting of
Meeting of Shareholders in April 2008. At its meeting on December 17, 2008, the Supervisory Board decided to nominate Jan J. Nooitgedagt to the Executive Board as successor to Joseph B.M. Streppel, the company’s Chief
During 2008, the Supervisory Board again discussed issues of compliance, particularly with regard to equitylinked insurance policies in the Netherlands as well as to other regulatory and legal issues in Europe, the
In December, the Supervisory Board reviewed and discussed its own composition and performance, as well as that of the Executive Board (without Executive Board members being present). The Board was assisted by an external consultant. This consultant conducted an extensive assessment, including questionnaires and interviews with members of both the Supervisory and
Supervisory Board was held in December. During this session, the Board received an update on the US variable annuities market, as well as the various types of annuity products sold by AEGON in the United States. The
Each of these Committees is made up of members drawn from the Supervisory Board itself. In accordance with its
The Audit Committee held seven meetings in 2008, which also were attended by AEGON’s Chief Financial
Officer as well as other members of the Executive Board, the Director of Group Finance & Information and representatives from Ernst & Young, AEGON’s independent auditor. AEGON’s Group Internal Auditor, the Group Risk Officer and the Group Actuarial Officer also periodically attended Audit Committee meetings.
Discussions focused on the following topics: Quarterly results, annual accounts and the audit ��
AEGON’s 2007 Embedded Value Report and the Group’s annual VNB figures.
The Audit Committee recommended that Ernst & Young be reappointed for the 2008 financial year. In addition, the Committee confirmed that Shemaya Levy qualifies as a financial expert within the terms and conditions of both the Dutch Corporate Governance Code and the
Committee recommended that the Supervisory Board amend the pre-approval policy for the company’s external auditor.
Auditor, AEGON’s compliance with US SOx 404 legislation and an overview of fraud and general compliance issues. During these meetings, the Audit
Results for the first six months of 2008 (Form 6-K). ��
During its meeting in December, the Audit Committee conducted a review of the AEGON’s 2009 budget, as well as the company’s Capital Plan. The Committee conveyed its findings and recommendations to the Supervisory
Committee was dissolved. The Risk Committee held five meetings in 2008, which were also attended by the members of AEGON’s Executive Board, the company’s
AEGON’s Nominating Committee held four meetings in 2008. The Chairman of the Executive Board attended all meetings. During the year, the Nominating Committee discussed the composition of the Supervisory Board and its Committees, as well as existing and forthcoming vacancies. It also advised the Supervisory Board on nominations for four appointments and one reappointment. In addition, the Nominating Committee reviewed the composition of the Executive Board and discussed Mr. Streppel’s succession. After a lengthy and thorough selection process, the Nominating Committee recommended the Supervisory Board, on December 17, 2008, nominate Jan J. Nooitgedagt as Mr. Streppel’s successor on the Executive Board and as AEGON’s Chief
The Compensation Committee held four meetings in 2008, also attended at times by either the Chief
Governance Code and decided that, if the final version of that Report necessitates amendments to AEGON’s
All members of the Supervisory Board are considered independent according to the terms of the Dutch
Willem F.C. Stevens will expire. Mr. Stevens is not eligible for reappointment. Mr. Eustace will be nominated for an additional one-year term at the annual General Meeting of Shareholders, scheduled for April 22, 2009. He will be succeeded as Chairman of the Supervisory Board by
Also in 2009, Shemaya Levy’s four-year term as a member of the Supervisory Board will expire. The Board will propose that shareholders reappoint Mr. Levy for another term of four years at the 2009 General Meeting of Shareholders.
Board, on advice from the company’s Nominating Committee, has decided to nominate Mr. Docters van Leeuwen to the Board for a term of four years. His biography will be provided together with the agenda for the 2009 General Meeting of Shareholders. Taking into account the changes detailed above, the number of Supervisory
In compliance with the Dutch Corporate Governance Code, members of the Executive Board are appointed by shareholders for a term of four years, with the possibility of reappointment for subsequent, additional four-year terms. A schedule for all members of the
Committee and the Supervisory Board, and submitted to shareholders for adoption. The Supervisory Board recommends that shareholders adopt these annual accounts.
The Supervisory Board would like to thank the Executive Board and employees of the company for the measures they have taken over the past year to help strengthen AEGON’s financial position.
AEGON through periods both of growth and economic difficulty. In recent months, he has been instrumental in helping frame the company’s response to the global financial crisis. The Supervisory
Board would like to express its gratitude to Mr. Streppel for his years of outstanding service to the company and his undoubted contribution to the development of AEGON’s businesess around the world.
Mr. Streppel’s successor. Mr. Nooitgedagt will bring considerable experience to the position, having spent his entire professional life in international finance.
The Supervisory Board is delighted to have a person of Mr. Nooitgedagt’s integrity and professional caliber at the company. The Board would like to wish
Chairman of the nominating Committee and member of the Compensation Committee
Royal Philips Electronics N.V. Mr. Eustace was appointed to AEGON’s Supervisory Board in 1997. His current term will end in 2009. He is also a member of the European Advisory Council for Rothschilds, Chairman of the Supervisory Board of the unlisted company The Nielsen Company and sits on the Council of the University of Surrey in the United Kingdom.
Chairman of the Risk Committee and member of the Audit Committee
Irving W. Bailey II is a senior advisor to Chrysalis Ventures. He is a retired Chairman and CEO of Providian Corp., a former managing director of Chrysalis Ventures, and a former Chairman of the Board of Directors of AEGON USA Inc.
He was appointed to AEGON’s Supervisory Board in 2004 and his current term will end in 2012. He is also a member of the Board of Directors of Computer Sciences Corp. and Hospira Inc.
AEGON N.V.’s Supervisory Board in 2008. His current term will end in 2012. He sits on the Board of Directors of
ASA (Association of Reinsurance and Insurance Arbritration Society, ARIAS U.S.) and the International Association of Insurance Receivers. Ms. Kempler is certified by IMSA (Insurance Market Standard Association).
Chairman of the Audit Committee and member of the Risk Committee
Shemaya Levy is a retired Executive Vice-President and CFO of the Renault Group. He was appointed to AEGON’s
Renault Finance, Renault Spain and the Safran Group, and a member of the Supervisory Boards of the Segula
Karla M.H. Peijs is Queen’s Commissioner for the Province of Zeeland in the Netherlands. 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
Willem F.C. Stevens is a retired partner/senior counsel of Baker & McKenzie and was a senator in the Dutch Parliament until June 2003. He was appointed to AEGON’s Supervisory Board in 1997 and his current term will end in 2009. He is also a member of the Supervisory Boards of N.V. Luchthaven Schiphol, TBI Holdings B.V., AZL N.V., Goedland N.V., and
Board of KLM Royal Dutch Airlines N.V., Vice-Chairman of the Supervisory Board of Pon Holdings B.V. and a nonexecutive director of Unilever N.V. and Unilever plc. Mr. Storm also serves as a member of the Board of Directors of
Executive Board of AON Group Inc. Mr. Verbeek was appointed to AEGON N.V.’s Supervisory Board in 2008.
His current term will end in 2012. He is also a Chairman of the Supervisory Board of Robeco Group N.V. and a member of the Supervisory Board of some of its subsidiaries, as well as a member of the Supervisory Board of Aon Jauch &
TUI Nederland N.V. and of the Board of Directors of Northwest Airlines (USA).
AEGON’s Compensation Committee is responsible for designing, developing, implementing and reviewing the company’s Remuneration Policy.
AEGON’s Remuneration Policy outlines: Terms and conditions for employment of Executive ��
The Remuneration Policy will be reviewed annually to ensure it remains fully in line with international standards.
Members of AEGON’s Supervisory Board are entitled to: A base fee for membership of the Supervisory Board ��
itself; A fee for membership on each of the Supervisory ��
AEGON’s Supervisory Board do not receive any performance or equity-related compensation and do not accrue pension rights with the company. These measures are designed to guarantee the independence of Supervisory Board members and strengthen the overall effectiveness of AEGON’s corporate governance 1.
AEGON has four committees in total: Audit, Compensation, * Nominating and Risk.
Attendance fee For committee meetings attended in person Amounts in EUR per annum
In the case of intercontinental travel, this fee is EUR 2,500.*
1 Please note that Arthur Docters van Leeuwen has been attending meetings as an observer since his nomination to the Supervisory Board last December, and has been paid accordingly. Mr. Docters van Leeuwen’s appointment to the Board is subject to approval by the General Meeting of Shareholders, scheduled for April 22, 2009. Mr. Docters van Leeuwen is one of two representatives nominated by the Dutch government as part of its capital support agreement with AEGON. The second representative, Karla M.H. Peijs, was already a serving member of the company’s Supervisory Board before her nomination by the government.
AEGON’s Remuneration Policy has four main objectives: To ensure AEGON is able to attract and retain highly ��
remuneration, consisting of both fixed and variable components; To ensure the interests of Executive Board members ��
are closely aligned with those of shareholders by linking remuneration directly to company performance; To enhance the simplicity, transparency and credibility ��
January 1, 2007. It was adopted by the General Meeting of Shareholders on April 25, 2007.
Compensation Committee. If necessary, the Committee will recommend amendments to AEGON’s Supervisory
Board. Material changes, if any, will then be submitted by the Supervisory Board to the General Meeting of
AEGON regularly compares the Group’s levels of executive remuneration with those at other comparable companies. For this purpose, two separate peer groups have been established, one for US-based Executive Board members and a second for European-based members.
Companies included in these two peer groups were chosen according to the following criteria: Industry, preferably life insurance; ��
The Supervisory Board will again review the composition of the peer groups in 2009.
Board, however, have employment contracts that predate AEGON’s existing Remuneration Policy. As a result, the compensation breakdown for current members of the Executive Board may differ from the numbers below: Target % of fixed compensation
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 an interestbearing escrow account on behalf of the Executive Board members. These amounts are transferred to individual
reasons other than death or disability; A participant in the plan has acted in a way that the ��
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% ��
Executive Board members may receive up to a maximum of 150% of their entitlement.
1 For this calculation, the ‘additive method’ is used, i.e. targets are set and performance assessed for each separate indicator, independently of the targets and performances of other indicators.
1 The absolute maximum for the adjusted variable compensation as a percentage of the target is therefore 187.5% (in other words, 150% multiplied by 125%). It is theoretically possible to arrive at a variable compensation of zero, AEGON’s Supervisory Board has the authority, if justified 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 fixed compensation.
Governance Code. Existing rights of current Executive members will be respected. For further information, please refer to the agreements published on AEGON’s corporate website.
Policy for members of its Executive Board and senior management aligned to new international standards.
Chairman of the Executive Board; Joseph B. M. Streppel, Chief Financial Officer, member ��
Mr. Streppel will step down as Chief Financial Officer and member of the Executive Board at the annual General
Variable compensation is based on the company’s financial performance. Amounts paid vary from year to year. Variable compensation comprises two different elements: Short-term incentive (STI) compensation, paid in cash; ��
AEGON’s Remuneration Policy, the Executive Board members were not entitled to short-term incentive payments under this Plan. This is also in line with the provisions of AEGON’s agreement with the Dutch State.
2 For details of AEGON’s Remuneration Policy with regard to members of the Executive Board, please refer to pages 67–69. 3 Mr. Shepard retired as Chief Executive Officer and Chairman of AEGON’s Executive Board in April 2008. The salary shown here therefore covers the first four months of the year.
Donald J. Shepard 3 Former Chief Executive Officer 243,992 730,834 –
The LTI Plan 2006 was also formulated under the previous Remuneration Policy 1 and was based on a three-year period. This Plan matured in 2009 and the shares and option rights vested for 75%. See table 3 for the grants due in 2009 as part of the LTI Plan 2006.
The LTI Plan 2008 matured in 2009. Under the terms of the Remuneration Policy, members of the Executive
Board were not entitled to long-term incentive payments under this Plan. This is also in line with the provisions of
Mr. Shepard’s pension is based on 55% of his ‘final average earnings’ – equivalent to his five highest complete and consecutive calendar years of pensionable earnings.
Dudley G. Eustace Chairman of the Supervisory Board 1 AEGON’s current Remuneration Policy for Executive Board members was approved by shareholders in April 2007 and it amended AEGON’s previous policy in three important aspects: all long-term incentive payments now take the form of AEGON shares, rather than shares and stock options as had been the case previously; for variable compensation, the performance period is now one year, rather than three and 50% of shares granted under the company’s long-term incentive plans now vest four years after the grant date. The remaining 50% vest after eight years.
Table 3 - Long-term incentive Plan 2006, matured in 2009 executive board member
Table 4 - Long-term incentive Plan 2007, matured in 2008 executive board member Number of shares granted conditionally
Meetings are convened by public notice. When deemed necessary, the Supervisory or Executive Board has the authority to convene an extraordinary General Meeting of Shareholders.
Only 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. In accordance with AEGON’s Articles of Incorporation, 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.
Meeting, to speak and vote, either in person or by proxy granted in writing (this includes electronically submitted proxies). Any shareholder wishing to take part must, however, provide proof of his or her identity and shareholding, and must notify the company ahead of time of his or her intention to attend the meeting.
When convening a meeting, the Executive Board may set a date (‘the record date’), which is then used to determine shareholders’ entitlements with regard to their participation and voting rights.
1 For further details on how AEGON’s corporate governance practices differ from those required of US companies under New York Stock Exchange standards, please refer to the Corporate Governance section of AEGON’s website (www.aegon.com).
AEGON is a member of the Stichting Communicatiekanaal Aandeelhouders, a Dutch foundation dedicated to improving communications between listed companies in the Netherlands and their shareholders and to encouraging greater shareholder participation at general meetings. Participating shareholders may vote by proxy using the services of this foundation.
Resolutions are adopted by an absolute majority of valid votes cast, unless the law or AEGON’s Articles of
Pension arrangements for Executive Board members are based on a retirement age of 62. Dutch members of the
AEGON’s Supervisory Board oversees the management of the Executive Board, as well as the overall course of the company’s business and corporate strategy. In its deliberations, the Supervisory Board must take into account the interests of all AEGON stakeholders. The
The Supervisory Board also oversees the activities of several committees. These committees are composed exclusively of Supervisory Board members and deal with specific issues linked to AEGON’s financial accounts, risk management strategy, executive remuneration and appointments.
Supervisory Board is well balanced. A profile has been drawn up outlining the required qualifications of its members. Supervisory Board members are no longer eligible for appointment after the age of 70, unless the
As a company based in the Netherlands, AEGON adheres to the Dutch Corporate Governance Code. AEGON
endorses this Code and strongly supports its principles for sound and responsible corporate governance.
Recently, the Dutch Corporate Governance Code was amended to take into account changes put forward by the Monitoring Committee, which oversees the Code.
Board and the Executive Board. Any significant change to this structure is submitted for debate to the
AEGON is committed to applying this best practice provision to all future Executive Board appointments.
AEGON, 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 1 Please see page 77-78 for further details.
AEGON. For this reason, a protocol has been drawn up authorizing the CEO and CFO to continue their existing practice with respect to their dealings with the
AEGON’s Articles of Incorporation provide for a two thirds majority and a higher quorum than those advocated by the Code. Taking into account that the company has no specific anti-takeover measures, the current system is deemed appropriate within the context of the 1983 Merger Agreement, under which AEGON was formed. However, to mitigate any possible negative effects from this, the Supervisory Board has decided that, in the absence of any unfriendly actions, it will only make nominations to the Executive and Supervisory
AEGON has authorized capital of EUR 610 million, divided into three billion common shares, each with a par value of EUR 0.12, and one billion class A and class B
The capital contribution made by class A preferred shares is a reflection of the market value of AEGON’s common shares at the time this contribution was made.
Each share carries one vote. However, in line with the higher par value of the preferred shares, the holder of preferred shares, Vereniging AEGON, may, in certain circumstances, cast 25/12 (approximately 2.08) votes per share (see below for further explanation).
There are no restrictions on the transfer of common shares. As regards the transferability of preferred shares, please refer to clause 10.5 of the Amendment to the 1983 Merger Agreement, available on AEGON’s corporate website.
Vereniging AEGON would increase its voting power to more than 33%.
AEGON N.V. amounting to 15% or more; A tender offer for AEGON N.V. shares; ��
Incorporation, Vereniging AEGON may effectively be in a position to block unfriendly actions by either a hostile bidder or others for a period of six months.
For more information on Vereniging AEGON, please refer to the Financial Statements of the Annual Report, page 226, or the website of Vereniging AEGON.
There are no restrictions whatsoever on the exercise of voting rights by holders of common shares, either with regard to the number of votes or to the time period in which they may be exercised. The voting rights attached to preferred shares held by Vereniging AEGON are limited (see above). Depository receipts for AEGON
The General Meeting of Shareholders appoints members of both the Supervisory and Executive Boards, following nominations by the Supervisory Board. If at least two candidates are nominated, these nominations are binding. However, the General Meeting of Shareholders may cancel the binding character of such nominations with a majority of two-thirds of the votes cast, representing at least one-half of AEGON’s issued capital.
Members of AEGON’s Executive and Supervisory Boards may only be suspended or dismissed by the General
Board may also be suspended by the Supervisory Board, though the General Meeting of Shareholders has the power to discontinue that suspension.
Board, if and to the extent that the Board is empowered to do so by the General Meeting of Shareholders.
An authorization to this end is usually presented to the General Meeting of Shareholders.
AEGON is entitled to acquire its own fully paid-up shares with due regard to the applicable legal requirements.
AEGON has secured EUR 3 billion of core capital from Vereniging AEGON, funded by the Dutch State, in view of the ongoing uncertainty on the financial markets.
EUR 4.00 per security to Vereniging AEGON. These securities rank equal to common shares (pari passu), but carry no voting rights.
Payment of interest on the securities as well as on the state loan provided to Vereniging AEGON is conditional on the payment of dividends (cash or stock) on AEGON’s common shares. For the first year the coupon is fixed at 8.5% (EUR 0.34 per security). For consecutive years the coupon will be the higher of either 8.5% or an amount linked to the cash dividend paid on the common shares in the preceding year: in the second year 110% of the dividend paid per share, rising to 120% in the third year, and to 125% in the fourth and subsequent years. The coupon is not deductible for corporate income tax.
The additional core capital may be used for general corporate purposes in the ordinary course of business; investments chargeable to the additional capital in excess of EUR 300 million outside the European Union require prior approval from the Dutch Central Bank.
The transaction does not affect AEGON’s ownership structure. Vereniging AEGON continues to be AEGON’s major shareholder with the same voting rights as prior to the transaction (for further details on Vereniging
Annual Report, page 226). The Dutch State has no voting rights at the General Meeting of Shareholders as a result of the transaction. AEGON has retained full discretion over its dividend payment policy. Interest on the securities will only be payable if a dividend is paid to the holders of common shares.
State representative and Arthur Docters van Leeuwen has been nominated as State representative for appointment by the General Meeting of Shareholders on
Remuneration Policy for the Executive Board and senior management to ensure that it is aligned to new international standards. AEGON’s Executive Board members shall not be entitled to any performance related remuneration for the year 2008 and exitarrangements have been limited to a maximum of one year’s fixed salary. Copies of the transaction agreement are available on www.aegon.com.
Corporate Responsibility (CR) executive, responsible for: Implementing all local corporate responsibility policies ��
The Corporate Responsibility team reports to Marco Keim, the member of AEGON’s Management Board directly responsible for corporate responsibility and sustainability issues. All issues of CR strategy and policy are subject to approval by the company’s Executive Board.
‘Group’ policies which apply to all its operations around the world. These include: A Group-wide environmental policy, which stresses the ��
asset management companies around the world; A company-wide Human Rights policy, which sets out ��
AEGON also adheres to a number of international agreements, which establish guidelines or minimum standards for pollution, human rights or labor conditions.
AEGON made important progress with its objectives for 2008. Projects during the year included: Updating the company’s Code of Conduct to bring it ��
financial literacy, particularly in AEGON’s main markets, the United States, the Netherlands and the
partner Seguros Argos; Introduction of a new ‘e-learning’ course for ��
employees on insider dealing; Launch of a ‘Stakeholder Panel’ to assess the ��
For more information about AEGON’s corporate responsibility strategy and initiatives, please refer to the company’s annual Corporate Responsibility Report, available online at www.aegon.com.
Note 49 Summary of total financial assets and financial liabilities at fair value through profit or loss 206
In 2008, AEGON reclassified its real estate held for own use. Reference is made to note 2.2.1.1
Amounts in EUR million (except per share data) note 2008 2007 2006 income
neT inCOMe / (LOss) ATTRibUTAbLe TO eqUiTy HOLDeRs OF AeGOn n.V. (1,082) 2,551 3,169 earnings and dividends per share
Dividend per common share (EUR per share) 46 0.30 0.62 0.55
Insurance and investment liabilities for account of policyholders (24,556) 7,809 12,086
Disposal of investments (other than money market investments) 51,055 67,148 64,043
Consolidated cash flow statement of AEGON Group for the year ended December 31
Purchase of individual intangible assets (other than VOBA and future servicing rights) (12) (10) (10)
Acquisition of subsidiaries and associates, net of cash (461) (2,625) (143)
neT inCReAse / (DeCReAse) in CAsH AnD CAsH eqUiVALenTs 2 2,386 (4,718) 6,781
Included in net increase / (decrease) in cash and cash equivalents are interest received (2008: EUR 8,614 million; 2007: EUR 8,715 million and 2 2006: EUR 9,458 million) dividends received (2008: EUR 925 million; 2007: EUR 886 million and 2006: EUR 1,192 million) and interest paid (2008: EUR 356 million; 2007: EUR 422 million and 2006: EUR 411 million).
Consolidated cash flow statement of AEGON Group for the year ended December 31 > CONTINUATION
(Gains) / losses transferred to income statement on disposal and impairment – – 1,024 – – – 1,024 – 1,024
Foreign currency translation differences – – (98) – – – (98) – (98)
TOTAL COMPReHensiVe inCOMe / (LOss) FOR 2008 – (1,072) (6,651) (177) – – (7,900) (10) (7,910)
Treasury shares – withdrawn (12) 12 – – – – – – –
Coupons on perpetuals – (189) – – – – (189) – (189)
Consolidated statement of changes in equity of AEGON Group for the year ended December 31, 2008
Dividends paid on common shares – (583) – – – (583) – (583)
Consolidated statement of changes in equity of AEGON Group for the year ended December 31, 2007
Reclassification treasury shares 3 545 (545) – – – – – –
(Gains) / losses transferred to income statement on disposal and impairment – – (130) – – (130) – (130)
Aggregate tax effect of items recognized directly in equity – – 281 – 2 283 – 283 net income recognized directly in equity – (15) (996) (1,391) 2 (2,400) 1 (2,399)
Dividends paid on common shares – (391) – – – (391) – (391)
Coupons on perpetuals – (143) – – – (143) – (143)
EUR USD GBP CAD PLN CNY RON HUF NTD CZK SKK 1 EUR – 1.3683 0.6838 1.4681 3.7900 10.4610 3.3340 251.2310 45.4200 27.5710 33.6890 1 USD 0.731 – 0.500 1.073 2.770 7.645 2.437 183.608 33.194 20.150 24.621 1 GBP 1.462 2.001 – 2.147 5.543 15.298 4.876 367.404 66.423 40.320 49.267 1 CAD 0.681 0.932 0.466 – 2.582 7.126 2.271 171.127 30.938 18.780 22.947 1 PLN 0.264 0.361 0.180 0.387 – 2.760 0.880 66.288 11.984 7.275 8.889 1 CNY 0.096 0.131 0.065 0.140 0.362 – 0.319 24.016 4.342 2.636 3.220 1 RON 0.300 0.410 0.205 0.440 1.137 3.138 – 75.354 13.623 8.270 10.105 100 HUF 0.398 0.545 0.272 0.584 1.509 4.164 1.327 – 18.079 10.974 13.410 100 NTD 2.202 3.013 1.506 3.232 8.344 23.032 7.340 553.129 – 60.702 74.172 100 CZK 3.627 4.963 2.480 5.325 13.746 37.942 12.092 911.215 164.738 – 122.190 100 SKK 2.968 4.062 2.030 4.358 11.250 31.052 9.896 745.736 134.821 81.840 –
AEGON N.V., its subsidiaries and its proportionally consolidated joint ventures (AEGON or ‘the Group’) have life insurance and pensions operations in over twenty countries in Europe, the Americas and Asia and are also active in savings and investment operations, accident and health insurance, general insurance and limited banking operations in a number of these countries. Headquarters are located in The Hague, the Netherlands. The Group employs approximately 31,500 people worldwide.
and with Part 9 of Book 2 of the Netherlands Civil Code. The consolidated financial statements have been prepared in accordance with the historical cost convention as modified by the revaluation of investment properties and those financial instruments (including derivatives) and financial liabilities that have been measured at fair value. Information on the standards and interpretations that were adopted in 2008 is provided below in paragraph 2.1.1B. Certain amounts in prior years have been reclassified to conform to the current year presentation.
Those estimates are inherently subject to change and actual results could differ from those estimates. Included among the material (or potentially material) reported amounts and disclosures that require extensive use of estimates are: fair value of certain invested assets and derivatives, deferred acquisition costs, value of business acquired and other purchased intangible assets, goodwill, policyholder claims and benefits, insurance guarantees, pension plans, income taxes and the potential effects of resolving litigated matters.
The financial statements are put to the Annual General Meeting of Shareholders on April 22, 2009 for adoption. The shareholders’ meeting can reject the financial statements but cannot amend them.
The amendments to IAS 39 and IFRS 7 Reclassification of financial instruments permit entities to reclassify non-derivative financial assets out of the fair value through profit or loss category in particular circumstances. The amendment also permits an entity to transfer from the available-for-sale category to the loans and receivables category where certain requirements are met. The effect of the reclassification would be to value the asset following the reclassification at amortized cost instead of at fair value. The amendments to IFRS 7 required detailed disclosures of any reclassifications made and the potential impact on the financial statements. AEGON has not applied these amendments in 2008.
The following standards, amendments to existing standards and interpretations, published prior to January 1, 2009, were not early adopted by the Group and will be applied in future years: IAS 1 Presentation of financial statements; ��
IFRIC 16 Hedges of a net investment in a foreign operation�� 1; Amendments to IAS 39 Eligible hedged items�� 1; Improvements to IFRS (2008)�� 1.
The amendments to IFRS 2 define the term vesting condition and give guidance on the accounting for non-vesting conditions.
For example, all payments to purchase a business are to be recorded at fair value at the acquisition date, with some contingent payments subsequently re-measured at fair value through profit or loss. All transaction costs will be expensed.
The requirements of this standard will be considered for future business combinations.
instruments and obligations arising on liquidation; Amendments to IFRS 1 and IAS 27 Cost of an investment ��
As of January 1, 2008, AEGON reclassified, on the face of its balance sheet, real estate for own use from Investments general account and Investments for account of policyholders to
Other assets and receivables. In addition AEGON reclassified cash flows from real estate held for own use from cash flows from operating activities to investing activities, to the extent that such cash flows relate to real estate that is occupied by
AEGON’s own employees. The comparative 2007 and 2006 information has been reclassified accordingly. This change reduced Investments general account by EUR 329 million and
Investments for account of policyholders by EUR 141 million with an offsetting increase in Other assets and receivables of
EUR 471 million in 2007. In the cash flow statement, net cash flows from operating activities increased by EUR 16 million in 2007 and EUR 29 million in 2006. The net cash flows from investing activities decreased by the same amounts.
As of January 1, 2008, AEGON’s treasury shares are included in
Retained earnings instead of Share capital. The comparative 2007 and 2006 information has been reclassified accordingly.
IFRS (January 1, 2004) have not been restated. No operations have been identified as assets held for sale or disposal groups.
The subsidiary’s assets, liabilities and contingent liabilities are measured at fair value on the acquisition date and are subsequently accounted for in accordance with the Group’s accounting principles. Intra-group transactions, including
AEGON N.V. shares held by subsidiaries, which are recognized as treasury shares in equity, are eliminated. Intra-group losses are eliminated, except to the extent that the underlying asset is impaired. Minority interests are initially stated at their share in the fair value of the net assets on the acquisition date and subsequently adjusted for the minority’s share in changes in the subsidiary’s equity.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON GROUP | NOTE 2.2 - 2.5
financial assets, other than those classified as at fair value through profit or loss 1; Gains and losses on investments in real estate �� 1; Fair value changes in derivatives held for economic hedges ��
for which no hedge accounting is applied and the economically hedged underlying assets or liabilities are not valued at fair value through profit or loss 1/2; The ineffective portion of hedge transactions for which ��
Transfer prices between segments are on normal commercial terms and determined in a manner similar to transactions with third parties.
VOBA when it acquires a portfolio of investment contracts with discretionary participation features.
Loans and financial assets held-to-maturity are subsequently carried at amortized cost using the effective interest rate method. Financial assets at fair value through profit or loss are measured at fair value with all changes in fair value recognized in the income statement as incurred. Available-for-sale assets are recorded at fair value with unrealized changes in fair value recognized directly in shareholders’ equity. Financial assets that are designated as hedged items are measured in accordance with the requirements for hedge accounting.
equity and are released to retained earnings over the remaining useful life of the property.
To qualify for hedge accounting, the hedge relationship is designated and formally documented at inception, detailing the particular risk management objective and strategy for the hedge (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. Qualitative methods may include comparison of critical terms of the derivative to the hedged item. Quantitative methods include a comparison of the changes in the fair value or discounted cash flow of the hedging instrument to the hedged item. A hedging relationship is considered effective if the results of the hedging instrument are within a ratio of 80%
Net investment hedges are hedges of currency exposures on a net investment in a foreign operation. To the extent that the hedge is effective, the change in the fair value of the hedging instrument is recognized in shareholders’ equity.
Hedge accounting is discontinued prospectively for hedges that are no longer considered effective. When hedge accounting is discontinued for a fair value hedge, the derivative continues to be carried on the balance sheet with changes in its fair value recognized in the income statement. When hedge accounting is discontinued for a cash flow hedge because the cash flow is no longer expected to occur, the accumulated gain or loss in shareholders’ equity is recognized immediately in the income statement. In other situations where hedge accounting is discontinued for a cash flow hedge, including those where the derivative is sold, terminated or exercised, accumulated gains or losses in shareholders’ equity are amortized into the income statement when the income statement is impacted by the variability of the cash flow from the hedged item.
Entities over which the Group has significant influence through power to participate in financial and operating policy decisions, but which do not meet the definition of a subsidiary or joint venture, are accounted for using the equity method. Interests held by venture capital entities, mutual funds and investment funds that qualify as an associate are accounted for as an investment held at fair value through profit or loss.
The carrying amount is subsequently adjusted to reflect the change in the Group’s share in the net assets of the associate and is subject to impairment testing. The net assets are determined based on the Group’s accounting policies. Any gains and losses recorded directly in shareholders’ equity by the associate are reflected in other reserves in shareholders’ equity, while the share in the associate’s net income is recognized as a separate line item in the consolidated income statement.
When unrealized gains or losses arise on available-for-sale assets, DPAC is adjusted to equal the effect that the realization of the gains or losses would have had on its measurement. This is recognized directly in the related revaluation reserve in shareholders’ equity.
Deferred transaction costs relate to investment contracts without discretionary participation features under which
With the exception of goodwill, impairment losses are reversed when there is objective evidence that there has been a change in the estimates used to determine the asset’s recoverable amount since the recognition of the last impairment loss.
The reversal is recognized in the income statement to the extent that it reverses impairment losses previously recognized in the income statement. The carrying amount after reversal cannot exceed the amount that would have been recognized had no impairment taken place.
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’ recoverable amounts.
Financial instruments that are issued by the Group are classified as equity if they represent a residual interest in the assets of the
AEGON has the option to defer coupon payments at its discretion. Convertible core capital securities can be converted into ordinary shares of AEGON or repaid at the discretion of
A financial instrument issued by the Group is classified as a liability if the contractual obligation must be settled in cash or another financial asset or through the exchange of financial assets and liabilities at potentially unfavorable conditions for the Group.
One insurance product in the United States is carried at fair value through profit or loss as it contains an embedded derivative that could not be reliably bifurcated. The fair value of the contract is measured using market consistent valuation techniques.
In the Netherlands, an additional liability is established for guaranteed minimum benefits that are not bifurcated on group pension plans and on traditional insurance contracts with profit sharing based on an external interest index. These guarantees are measured at fair value.
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
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON GROUP | NOTE 2.20
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
For similar changes in unrealized gains and losses, shadow accounting is applied. If an unrealized gain or loss triggers a shadow accounting adjustment to VOBA, DPAC or the insurance liabilities, the corresponding adjustment is recognized in shareholders’ equity in the revaluation reserve, together with the unrealized gain or loss.
Aggregation levels are set either on geographical jurisdiction or at the level of portfolio of contracts that are subject to broadly similar risks and managed together as a singe portfolio. To the extent that the tests involve discounting of future cash flows, the interest rate applied is based on market rates or is based on management’s expectation of the future return on investments.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON GROUP | NOTE 2.21 - 2.22
Initial fees and front-end loadings paid by policyholders and other clients for future investment management services related to investment contracts without discretionary participation features are deferred and recognized as revenue when the related services are rendered.
Tax assets and liabilities for current and prior periods are measured at the amount that is expected to be received from or paid to the taxation authorities, using the tax rates that have been enacted or substantively enacted by the reporting date.
Deferred tax assets and liabilities are reviewed at the balance sheet date and are measured at tax rates that are expected to apply when the asset is realized or the liability is settled.
Premium loadings for installment payments and additional payments by the policyholder towards costs borne by the insurer are included in the gross premiums. Rebates that form part of the premium rate, such as no-claim rebates, are deducted from the gross premium, others are recognized as an expense.
For interest-bearing assets, interest is recognized as it accrues and is calculated using the effective interest rate method.
Results from financial transactions include: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON GROUP | NOTE 2.23 - 3
(refer note 2.9). The net fair value change does not include interest or dividend income.
In addition Results from financial transactions include gains / losses on real estate (general account and account of policyholder), net foreign currency gains / (losses) and net fair value change on borrowings and other financial liabilities and realized gains on repurchased debt.
Interest charges and related fees includes interest expense on trust pass-through securities, subordinated borrowings and other borrowings. Interest expense on trust pass-through securities, subordinated borrowings and other borrowings carried at amortized cost is recognized in profit or loss using the effective interest method.
This involves an assessment of whether fulfillment of the arrangement is dependent on the use of a specific asset and whether the purchaser (lessee) has the right to control the use of the underlying asset.
presentation and that require complex estimates or significant judgment are described in the following sections.
IAS 39 Financial Instruments: Recognition and Measurement was amended late in 2008 permitting companies with a choice to reclassify certain financial assets between categories, the effect of which would be to hold assets at ‘deemed cost’ (cost determined during the third or fourth quarter of 2008) and discontinue mark-to-market valuation. Moreover, the IASB
published clarifications in the fourth quarter 2008 of valuation techniques in illiquid or distressed markets including describing additional situations when mark-to-model valuations would be appropriate. AEGON has not reclassified assets held as available-for-sale (AFS) to loans or held-to-maturity assets.
Also, AEGON transferred a very limited amount of assets valued based on market prices to mark-to-model valuations, driven by current market developments.
To the extent that the failure relates to unrealized gains and losses on available-for-sale investments, the additional liability is recognized in the revaluation reserve in equity.
Mortality tables applied are generally developed based on a blend of company experience and industry wide studies, taking into consideration product characteristics, own risk selection criteria, target market and past experience. Mortality experience is monitored through regular studies, the results of which are fed into the pricing cycle for new products and reflected in the liability calculation when appropriate. For contracts insuring survivorship, allowance may be made for further longevity improvements. Morbidity assumptions are based on own claims severity and frequency experience, adjusted where appropriate for industry information.
Investment assumptions are either prescribed by the local regulator or based on management’s future expectations. In the latter case, the anticipated future investment returns are set by management on a countrywide basis, considering available market information and economic indicators. A significant assumption related to estimated gross profits on variable annuities and variable life insurance products in the United
VOBA amortization schedule and the revised schedule, which is based on estimates of actual and future gross profits, is recognized in the income statement as an expense or a benefit in the period of determination. At December 31, 2008, the reversion to the mean assumptions for variable products, primarily variable annuities, were as follows in the United States: gross long-term equity growth rate of 9% (2007: 9%); gross short-term growth rate of 15% (2007: 6%); gross short- and long-term fixed security growth rate of 6% (2007: 6%); and the gross short- and long-term growth rate for money market funds of 3.5% (2007: 3.5%). The significant decreases in equity
markets in 2008 would have resulted in a 25% gross short-term growth rate at year end 2008. The short-term equity growth rate was capped at 15%, which caused an additional DPAC
Surrender rates depend on product features, policy duration and external circumstances such as the interest rate environment and competitor and policyholder behavior.
These contracts are not quoted in active markets and their fair values are determined by using valuation techniques, such as discounted cash flow methods and stochastic modeling or in relation to the unit price of the underlying assets. All models are validated and calibrated. A variety of factors are considered, including time value, volatility, policyholder behavior, servicing costs and fair values of similar instruments. Credit spread is considered in measuring the fair value of derivatives (including derivatives embedded in insurance contracts), borrowings and other liabilities.
When available, AEGON uses quoted market prices in active markets to determine the fair value of its debt securities.
RMBS, CMBS and CDO securities) are determined by management after taking into consideration several sources of data. AEGON’s valuation policy dictates that publicly available prices are initially sought from several third party pricing services. In the event that pricing is not available from these services, those securities are submitted to brokers to obtain quotes. The majority of brokers’ quotes are non-binding. As part of the pricing process AEGON assesses the appropriateness of each quote (i.e., as to whether the quote is based on observable market transactions or not) to determine the most appropriate estimate of fair value. Lastly, securities are priced using internal cash flow modeling techniques. These valuation methodologies commonly use the following inputs: reported trades, bids, offers, issuer spreads, benchmark yields, estimated prepayment speeds, and/or estimated cash flows. Only pricing services and brokers with a substantial presence in the market and with appropriate experience and expertise are used.
Housing, RMBS, CMBS and CDO securities are estimates of the speed at which principal will be repaid over their remaining lives. These estimates are determined based on historical repayment speeds (adjusted for current markets) as well as the structural characteristics of each security.
The fair value of assets maturing within a year is assumed to be approximated by their carrying amount adjusted for credit risk, where appropriate, based on market observable credit spreads.
trades, or external pricing services. Most valuations are derived from swap and volatility matrices, which are constructed for applicable indices and currencies using current market data from many industry standard sources. Option pricing is based on industry standard valuation models and current market levels, where applicable. The pricing of complex or illiquid instruments is based on internal models. For long-dated illiquid contracts, extrapolation methods are applied to observed market data in order to estimate inputs and assumptions that are not directly observable. To value OTC derivatives management uses observed market information, other trades in the market and dealer prices.
AEGON normally mitigates 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; and guaranteed minimum accumulation benefits on segregated funds sold in Canada.
Certain AEGON subsidiaries previously used a single parameter approach for equity volatilities and moved to a term structure in 2008. 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.
Since many of the assumptions are unobservable and are considered to be significant inputs to the liability valuation, the liability included in future policy benefits has been reflected within the category ‘Valuation techniques not based on observable market data’ of the fair value hierarchy. Refer to note 47 for more details about AEGON’s guarantees
Included in this category are financial assets and liabilities that are measured by reference to quoted prices in an active market. A financial instrument is 1 regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency and those prices represent actual and regularly occurring market transactions on an arm’s length basis. Main assets included in this category are financial assets for which the fair value is determined by management using various inputs, including pricing vendors or binding broker quotes and assets for which the fair value is determined by reference to indices. Included in this category are financial assets and liabilities that are measured using a valuation technique based on assumptions that are supported by 2 prices from observable current market transactions in the same or a similar instrument or based on available market data. Main assets included in this category are financial assets for which pricing is determined by management based on various market observable inputs but may include insignificant assumptions which are not observable, such as the illiquidity premium assumption used in the valuation of private placements. Not based upon market observable input means that fair values are determined by management in whole or in part using a using a valuation technique 3
(model) for which a significant input is not based on observable market data. A significant input is an input that is significant to the fair value measurement in its entirely. Main assets in this category are hedge funds, private equity funds and limited partnerships. In addition bifurcated embedded derivatives related to guarantees in insurance contracts are included.
The total net amount of changes in fair value recognized in net income (loss) of the financial instruments of which the valuation technique includes non market observable inputs amount to a pre-tax loss of EUR 1,301 million (2007: EUR 57 million).
The fair values of the general account financial instruments carried at fair value were determined as follows: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON GROUP | NOTE 3
ABS - Housing securities, CMBS and RMBS are monitored and reviewed on a monthly basis with detailed modeling completed on each portfolio quarterly. Model output is generated under a base and several stress-case scenarios. ABS - Housing, CMBS and
More detailed cash flow modeling was performed on issuances identified as being most at risk, such as issuances with a disproportionate number of borrowers from states experiencing significant declines in home values. Cash flows were modeled using the current collateral pool and capital structure to determine whether there has been an adverse change in cash flows (i.e. an event has occurred that would impact estimated future cash flows). Defaults were estimated by identifying the loans that are in various delinquency buckets and defaulting a certain percentage of them over the near-term and long-term.
Objective evidence of impairment of an investment in an equity instrument classified as available for sale includes information about significant changes with an adverse effect that have taken place in the technological, market, economic or legal environment in which the issuer operates, and indicates that the cost of the investment in the equity instrument may not be recovered. A significant or prolonged decline in the fair value of an investment in an equity instrument below its cost is also objective evidence of impairment. Significant or prolonged decline is generally defined as an unrealized loss position for more than 6 months or a fair value of less than 80% of the cost price of the investment.
The liabilities or assets recognized in the balance sheet in respect of defined benefit plans is the difference between the present value of the projected defined benefit obligation at the balance sheet date and the fair value of plan assets, together with adjustments for unrecognized actuarial gains or losses and past service costs. The present value of the defined benefit obligation is determined by discounting the estimated future cash flows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity that approximate the terms of the related pension liability. Actuarial assumptions used in the measurement of the liability include the discount rate, the expected return on plan assets, estimated future salary increases and estimated future pension increases. To the extent that actual experience deviates from these assumptions, the valuation of defined benefit plans and the level of pension expenses recognized in the future may be affected.
and as a result is exposed to a variety of risks. A description of
AEGON’s risk management and control systems is given below on the basis of significant identified risks for us. Some risks, such as currency translation risk, are related to the international nature of AEGON’s business. Other risks include insurance related risks, such as changes in mortality and morbidity. However, AEGON’s largest exposures are to changes in financial markets (e.g. interest rate, credit and equity market risks) that affect the value of the investments, liabilities from products that AEGON sells, deferred expenses and value of business acquired.
Operating within this policy framework, AEGON employs risk management programs including asset liability management
As part of these risk management programs, AEGON takes inventory of its current risk position across risk categories.
(convertible core capital securities, perpetual capital securities, subordinated and senior debt) in various currencies in amounts that are targeted to correspond to the book value of the country units. This balancing mitigates currency translation impacts on equity and leverage ratios. AEGON does not hedge the income streams from the main non-euro units and, as a result, earnings may fluctuate due to currency translation. As
Information on AEGON’s 3-year historical net income and equity in functional currency are shown in the table below: net income
Other countries (in EUR) (9) 73 36 equity in functional currency
AEGON group companies’ foreign currency exposure from monetary assets and liabilities denominated in foreign currencies is not material. The estimated approximate effects on net income and shareholders’ equity of movements in the
AEGON manages interest rate risk closely taking into account all of the complexity regarding policyholder behavior and management action. AEGON employs sophisticated interest rate measurement techniques and actively uses derivatives and other risk mitigation tools to closely manage its interest rate risk exposure. All derivative use is governed by AEGON
Therefore, rising interest rates are not considered a long-term risk to the company.
The table that follows shows the Group’s maximum gross credit exposure from investments (credit protection not taken into account) in general account financial assets, as well as general account derivatives and reinsurance assets. Please refer to note 50 and note 51 for further information on capital commitments and contingencies and on collateral given, which may expose the Group to credit risk.
Money market and other short-term investments - carried at fair value 8,464 5,387
Further information on equity risk is provided in section ‘equity market and other investment risk’.1
That means that losses to AEGON would only occur if cumulative net losses on the CDx index exceeded 30%, where cumulative net loss is defined as bond defaults net of recoveries. AEGON considers the probability of losses at these levels to be remote and hence does not expect any cash losses to occur from these synthetic CDO positions. The average duration of the outstanding transactions is 4.2 years. As these derivatives are marked to market through earnings, they may however cause substantial operating earnings volatility prior to maturity due to credit spread volatility. Assuming there are no cash losses from the positions, any mark to market effect on operating earnings will be reversed by maturity.
In addition AEGON entered into standby liquidity asset purchase agreements for which the Company received a fee for providing liquidity on asset-backed commercial paper with a notional of
(fair value of collateral is EUR 316 million at December 31, 2008).
did not take possession of collateral or called on other credit enhancements. 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.
For the resulting net credit risk exposure, AEGON employs deterministic and stochastic credit risk modeling in order to assess the Group’s credit risk profile, associated earnings and capital implications due to various credit loss scenarios.
AEGON operates a Credit Name Limit Policy under which limits are placed on the aggregate exposure that it has to any one counterparty. Limits are placed on the exposure at both group level and for individual country units. The limits also vary by a rating system, which is a composite of the main rating agencies
The limits were not changed for 2008. At December 31, 2008 there were two violations of the Credit Name Limit Policy. One was caused by the acquisition of a distressed American bank by another bank where AEGON had investments in both entities.
As a result the combined investments under the new Credit Name were above the policy limit. The second breach was caused by the downgrading of one reinsurer. AEGON’s Group Risk and
AEGON’s major country units, excluding reinsurance assets, are presented in the table that follows, organized by rating category and split by assets that are valued at fair value and assets that are valued at amortized cost.
Past due and / or impaired assets 3 235 250 90 – 2 33 – 286 327
Asset backed securities (ABSs) – Aircraft 51 – – – 51
Past due and / or impaired 266 9 2 16 293
ABSs – Collateralized Bond Obligations (CBOs) 780 – – 5 785
Included in the debt securities and money market investments are EUR 2,255 million of assets that have been classified as held-to-maturity and are therefore carried at amortized cost
(2007: EUR 8 million) and EUR 367 million is corporate exposure (2007: EUR 259 million).
AeGOn Americas housing exposure1 2008 2007 ABSs – Housing related 1,819 2,840
The fair values of these instruments were determined as follows: In EUR million
AEGON USA Holds EUR 1,752 million of ABS - Housing securities
AEGON USA does not currently invest in or originate whole loan residential mortgages. AEGON USA categorizes asset backed securities issued by a securitization trust as having subprime mortgage exposure when the average credit score of the underlying mortgage borrowers in a securitization trust is below 660. AEGON USA also categorizes asset backed securities issued by a securitization trust with second lien mortgages as subprime mortgage exposure, even though a significant percentage of second lien mortgage borrowers may not necessarily have credit scores below 660. As of
The following table provides the market values of the subprime mortgage exposure by vintage.
with an amortized cost balance of EUR 165 million (2007: EUR 193 million). All but one position have vintages of 2003 or prior (2007: one position). These amounts are not included in
EUR 743 million at December 31, 2008 (2007: EUR 844 million).
Unrealized losses amount to EUR 524 million at December 31, 2008 (2007: EUR 18 million). Alt-A loans are made to borrowers whose qualifying mortgage characteristics do not meet the standard underwriting criteria established by the GSEs
borrower has a credit score high enough to obtain an “A”
Alt-A portfolio is invested in super-senior tranches. Mortgagebacked securities classified as super-senior are those that substantially exceed the subordination requirements of AAArated securities. The tables below summarize the credit quality of the underlying loans backing the securities and the vintage year.
(2007: EUR 73 million). Negative amortization mortgages (also known as option ARMs) are loans whereby the payment made by the borrower is less than the accrued interest due and the difference is added to the loan balance. When the accrued balance of the loan reaches the negative amortization limit
Current delinquencies in the CMBS universe remain relatively low in spite of the recent upward trend caused by the deterioration in the fundamentals of the commercial real estate market. The introduction of the 20% and 30% credit enhanced, super senior AAA classes provide an offset to these negative fundamentals. The lending market has become virtually frozen as lenders have become more conservative with underwriting standards, property transactions have diminished greatly, and higher mortgage spreads have curtailed lending. A lack of liquidity in the market combined with a broad re-pricing of risk has led to increased credit spreads across the credit classes.
The unrealized loss on ABS – credit cards is EUR 958 million.
Over 96% of the ABS auto bonds held by AEGON are rated investment grade.
See the table below for the breakdown of the non housing
AEGON’s small business loan ABS portfolio is concentrated in senior note classes (99% of par value). Thus 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 - Collateralized Debt Obligations 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.
bonds wrapped by monoline insurers Cost price Market price Cost price Market price
Fluctuations in the equity, real estate and capital markets have affected AEGON’s profitability, capital position and sales of equity related products in the past and may continue to do so.
Property with a value of EUR 21 million collateralizing mortgage loans was taken possession of in December 2008. As at
in equities, such as variable annuities, unit-linked products and mutual funds. Although most of the risk remains with the policyholder, lower investment returns can reduce the asset management fee earned by AEGON on the asset balance in these products. In addition, some of this business has minimum return or accumulation guarantees.
The general account equity, real estate and other non-fixedincome portfolio of AEGON is as follows: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON GROUP | NOTE 4
sensitivity analysis of net income and shareholders’ equity to equity markets Immediate change of
Liquidity risk is inherent in much of AEGON’s business. Each asset purchased and liability sold has liquidity characteristics that are unique. 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, AEGON may have difficulty selling these investments at attractive prices, in a timely manner, or both.
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 Company’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 without relying on surplus assets or bank lines in order to meet all cash needs under this extreme scenario.
The maturity analysis on page 138 shows the remaining contractual maturities of each category of financial liabilities
(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 the country unit can be required to pay. Financial liabilities that the country unit can be required to repay on demand without any delay are reported in the category “On demand”. If there is a notice period, the country unit should assume that notice is given immediately and present the repayment 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. For example, when the amount payable varies with changes in an index, the amount disclosed may be based on the level of the index at the reporting date.
Investment contracts for account of policyholders 2 9,685 7,078 – – – 16,763
Investment contracts for account of policyholders 2 11,219 10,329 – – – 21,548
Borrowings include debentures and other loans, short term deposits, bank overdrafts and commercial paper; refer to note 24 for more details.1
Financial derivatives include all derivatives regardless whether they have a positive or a negative value. It does not include bifurcated embedded 3 derivatives. These are presented together with the host contract. For interest rate derivatives only cash flows related to the pay leg are taken into account for determining the gross undiscounted cash flows.
Estimated cash benefit payments are based on mortality, morbidity and lapse assumptions comparable with AEGON’s historical experience, modified for recently observed trends.
Actual payment obligations may differ if experience varies from these assumptions. The cash benefit payments are presented on an undiscounted basis and are before deduction of tax and before reinsurance.
The projected cash benefit payments are based on management’s best estimates of the expected gross benefits and expenses partially offset by the 1 expected gross premiums, fees and charges relating to the existing business in force. Estimated cash benefit payments are based on mortality, morbidity and lapse assumptions comparable with AEGON’s historical experience, modified for recent observed trends. Actual payment obligations may differ if experience varies from these assumptions. The cash benefit payments are presented on an undiscounted basis and are before deduction of tax and before reinsurance. The liability amount in the consolidated financial statement reflects the discounting for interest as well as adjustments for the timing of other factors as described above. As a result, the sum of the cash benefit payments shown for all years in the table exceeds the corresponding liability amounts included in notes 20, 21 and 23.
Sources of underwriting risk include policy lapses and policy claims such as mortality, morbidity and expenses. In general,
AEGON is at risk if policy lapses increase as sometimes AEGON
sensitivity analysis of net income and shareholders’ equity to changes in various underwriting risks Estimated approximate effect (in EUR million)
note 5 seGMenT inFORMATiOn income statement – Operating earnings - 2008 Americas
Individual savings and retirement products (920) (14) – 12 – – (922)
Share in net results of associates 1 7 – 16 – – 24
Other non-operating income / (charges) 4 – (17) 1 (1) 1 (12)
Interest charges and other – – – – (195) 10 (185)
Share in net results of associates – 3 1 32 – – 36
Other non-operating income / (charges) – 30 8 – 1 1 40
neT inCOMe / (LOss) ATTRibUTAbLe TO eqUiTy HOLDeRs OF AeGOn n.V. 1,596 606 267 73 (2) 11 2,551
Interest charges and other – – – – (238) (4) (242)
neT inCOMe / (LOss) ATTRibUTAbLe TO eqUiTy HOLDeRs OF AeGOn n.V. 1,553 1,420 232 36 (64) (8) 3,169
Gains and losses on investments in real estate 36 (48) 137 134
Impairment (charges) / reversals of financial assets, excluding receivables 41 (1,072) (88) (24)
Charges to policyholders in respect of income tax in AEGON UK for an amount of EUR 17 million are excluded from segment expenses and included in 2 other non-operating income / (charges).
Charges to policyholders in respect of income tax in AEGON UK for an amount of EUR 8 million are excluded from segment expenses and included in 2 other non-operating income / (charges). The difference between fair value movement on certain guarantees and the fair value changes of derivatives that hedge certain risks of these 3 guarantees, amounting to EUR 325 million, are as of financial year 2008 reclassified from Gains and losses on investments to Operating earnings.
Charges to policyholders in respect of income tax in AEGON UK to the amount of EUR 75 million are excluded from segment expenses and included 2 in other non-operating income / (charges).
Amortization of deferred expenses, VOBA and future servicing rights 999 133 246 179 – 1,557
Impairment charges / (reversals) on financial assets, excluding receivables 815 138 22 70 34 1,079
Impairment charges / (reversals) on non-financial assets and receivables 38 – – 3 – 41
Impairment charges / (reversals) on financial assets, excluding receivables 44 24 3 – – 71
Impairment charges / (reversals) on non-financial assets and receivables 28 – – 2 – 30
Impairment charges / (reversals) on financial assets, excluding receivables 12 12 1 – – 25
Impairment charges / (reversals) on non-financial assets and receivables 9 – – – – 9
Analysis of operating earnings before tax from non-life business Accident & Health
Investments for account of policyholders 55,474 21,354 62,850 2,730 – (24) 142,384
Investment contracts for account of policyholders 11,427 3 52,286 40 – – 63,756
Share in results of associates 21 – – 498 – – 519
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON GROUP | NOTE 6
In the preparation of the Opening Balance Sheet under IFRS as at January 1, 2004, business combinations prior to that date have not been restated and goodwill previously written off through equity has not been reinstated.
Amortization and depreciation through the income statement is included in ‘Commissions and expenses’.
Company of New York by AEGON USA during 2007, of which
Value in use calculations have been actuarially determined based on business plans covering a period of typically 5 years and pre-tax risk adjusted discount rates ranging between 9%
All the cash-generating units tested showed that the recoverable amounts were significantly higher than their carrying values, including goodwill. A reasonably possible change in any key assumption is not expected to cause the carrying value of the cash-generating units to exceed its recoverable amount.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON GROUP | NOTE 7
December 31, 2008 (2007: 10 years). Software is generally depreciated over a period of three to five years.
Real estate held for own use, previously reported as part of general account investments has been reclassified to other assets and receivables - note 13.
Money market and other short-term investments 5,280 107 – – 5,387 5,387
Of the debt securities, money market and other short-term investments, mortgages and private loans EUR 17,833 million is current (2007: EUR 11,082 million).
AEGON entered into a fixed-to-floating swap agreement with the contract parties under which AEGON agreed to pay the floating rate (EURIBOR based) and receive the fixed rate (yield from the mortgage receivables). After a period of seven years, the interest of the notes issued by the special purpose companies in respect of this transaction will step-up, together with a similar step-up in the fixed-to-floating swap agreement.
SAECURE 4 amounting to EUR 13 million (2007: EUR 18 million)
The bank has implicit financial support from the United States government. The redemption value of the shares is fixed at par and can only be redeemed by the bank.
Movement on the loan allowance account during the year were as follows: Addition charged to income statement (49) (6)
Transfers from real estate held for own use and mortgage loans 102 49
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 19 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.
AEGON the Netherlands has entered into long-term residential property leases that can be terminated subject to a short-term notice. Under Dutch law, the maximum annual rent increase on residential property rented in the affordable housing segment is specified by the Dutch national government and equals the annual inflation rate plus a small margin.
Real estate in use by AEGON, previously reported as part of investments for account of policyholders has been reclassified to other assets and receivables - note 13.
AEGON has elected not to apply hedge accounting. The economic hedges of certain exposures relate to an existing asset or liability or the future reinvestment risk. In all cases, these are in accordance with internal risk guidelines and are closely monitored for continuing compliance.
In addition, AEGON entered into standby liquidity asset purchase agreements for which the Company received a fee for providing liquidity on asset-backed commercial paper with a notional of
(GICs), liquidity agreements and principal protection agreements have been sold by AEGON to earn a fee.
AEGON has entered into interest rate swap agreements that effectively convert certain fixed-rate assets and liabilities to a floating-rate basis (generally to six months or less LIBOR) in order to more closely match the performance of the assets and liabilities within AEGON’s portfolio. These agreements involve the payment or receipt of fixed-rate interest amounts in exchange for floating-rate interest amounts over the life of the agreement without the exchange of the underlying principal amounts.
AEGON recognized gains and losses related to the ineffective portion of designated fair value hedges of EUR 38 million,
AEGON uses forward starting interest rate swap agreements to hedge the variability in future cash flows associated with the forecasted purchase of fixed-income assets. These agreements reduce the impact of future interest rate changes on the forecasted transaction. Fair value adjustments for these interest rate swaps are deferred and recorded in equity until the occurrence of the forecasted transaction at which time the interest rate swaps will be terminated. The accumulated gain or loss in equity will be amortized into investment income as the acquired asset affects income. AEGON is hedging its exposure to the variability of future cash flows from interest rate movements for terms up to 25 years. The cash flows from these hedging instruments are expected to affect the profit and loss for approximately the next 44 years. For the year ended
United Kingdom and Canada are funded in Euros. When the debt funding of investments is not in the functional currency of the investment, AEGON uses derivatives to swap the currency exposure of the debt instrument to the appropriate functional currency. This policy will ensure that total capital will reflect currency movements without distorting debt to shareholders’
equity ratios. AEGON utilizes various financial instruments as designated hedging instruments of its foreign investments.
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
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON GROUP | NOTE 11 - 12
DPAC for insurance contracts and investment contracts with discretionary participation features 12,224 10,957
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON GROUP | NOTE 13 - 13.1
47% of the value of the general account real estate held for own use was last revalued in 2008, based on market value appraisals by qualified internal and external appraisers. 76% of the appraisals in 2008 were performed by independent external appraisers.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON GROUP | NOTE 13.2 - 14
For the purposes of the cash flow statement, cash and cash equivalents comprise the following: Cash and cash equivalents 10,223 8,431 neT CAsH AnD CAsH eqUiVALenTs 9,506 7,385
The majority of cash is not subject to any restrictions. However, the Dutch Central Bank requires AEGON The Netherlands to hold 2% of its assets relating to banking activities in an account with the Dutch Central Bank. This amount on deposit is reassessed on a monthly basis and carries interest at approximately 2.5%. The balance at the end of the year was
AEGON N.V., may purchase as many class B preferred shares as would enable Vereniging AEGON to prevent or correct dilution to below its actual percentage of voting shares, unless Vereniging AEGON as a result of exercising these option rights would increase its voting power to more than 33 percent. Class B preferred shares will then be issued at par value (EUR 0.25), unless a higher issue price is agreed.
Vereniging AEGON has voluntarily waived its right to cast 25/12 vote per class A or class B preferred share. Instead, Vereniging
On the balance sheet date AEGON N.V. and its subsidiaries held 62,778,194 of its own common shares with a face value of
Transactions in 2008: Purchase: 10 transactions, average price EUR 8.32 26,300 – –
Share repurchase program: various transactions, average price EUR 13.41 – 74,570 –
Transactions in 2006: Purchase: 30 transactions, average price EUR 14.78 – – 19,076
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON GROUP | NOTE 15.2 - 15.4
Net (gains) / losses transferred to income statement (527) – (130) (657)
The amounts are released to the income statement upon the sale of the subsidiary.
USD 500 million Floating CMS rate 3 Quarterly, July 15 2014 402 402 402
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 1 a 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 conditions of the securities contain certain provisions for optional and required coupon payment deferral and mandatory payments 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.
The coupon of the EUR 114 million bonds was originally set at 8% until June 8, 2005. As of this date, the coupon is reset at 4.156% until 2015. 2
The coupon of the EUR 136 million 7.25% bonds was originally set at 7.25% until October 14, 2008. As of this date, the coupon is reset at 5.185% until 3
USD 225 million 2 7.65% Semi-annually, December 1 1996 2026 n.a. 105 77
The trust pass-through securities carry provisions with regard to deferral of distributions for extension periods up to a maximum of ten consecutive semi-annual periods.
Non-life insurance - Unearned premiums and unexpired risks 2,860 2,605 - Incurred but not reported claims 790 704
Gross premium and deposits – existing and new business 12,027 9,771
Gross premium and deposits – existing and new business 1,093 1,539
Gross premium and deposits – existing and new business 5,931 7,873
ACCOUnT OF POLiCyHOLDeRs investment contracts for account of policyholders 1 45,614 63,756
Bank overdrafts are largely part of cash pool agreements with banks and matched by cash balances. IFRS does not permit net presentation of these cash balances and bank overdrafts under the current agreements with these banks.
EUR 500 million Medium-Term Notes 4.125% December 8 2004/14 421 474
EUR 75 million Medium-Term Notes 4.625% December 9 2004/19 57 70
GBP 92 million Note issue agreement 2, 3, 4 April 21 2007/21 34 83
GBP 250 million Note issue agreement 2, 3, 4 April 21 2008/23 262 –
USD 1.54 billion Variable Funding Surplus Note 1, 3 Floating Quarterly 2006/36 705 569
USD 1.5 billion Variable Funding Surplus Note 1, 3 Floating Quarterly 2007/37 295 204
USD 550 million Floating Rate Guaranteed Note 2, 3 Floating Quarterly 2007/37 395 374
Private Value-in-Force (ViF) securitization by AEGON UK to monetize a portion of future profits associated with an existing book of unit-linked business. 4
(2007: EUR 980 million) relating to borrowings measured at fair value. Proceeds have been swapped to US Dollar floating-rate.
Undrawn committed borrowing facilities: 2008 2007 Floating-rate - Expiring within one year 269 255 - Expiring beyond one year 2,263 2,140
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON GROUP | NOTE 25 - 26
The amounts recognized in the balance sheet are determined as follows: Present value of wholly or partly funded obligations 2,144 2,357 2,487 2,542 2,091
Present value of wholly unfunded obligations 1,644 1,622 1,768 1,817 1,543
Present value of wholly unfunded obligations 231 224 247 254 246
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 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 defined benefit expenses.
included in planned assets was nil in both 2008 and 2007.
Expected return on plan assets (193) – (193) (193) – (193)
Actual return on plan assets and reimbursement rights (689) – (689) 257 – 257
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 171 million at December 31, 2008
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 191 million (2007: EUR 171 million).
Assumptions used to determine benefit obligations at year end: Discount rate 6.50% 6.25%
Assumptions used to determine net periodic benefit cost for the year ended December 31: Discount rate 6.25% 5.90%
believes that the asset allocation is an important factor in determining the long-term performance of the plans. From time to time the actual asset allocation may deviate from the desired asset allocation ranges due to different market performance among the various asset categories. If it is determined that rebalancing is required, future additions and withdrawals will be used to bring the allocation to the desired level.
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
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 48 million at December 31, 2008
The principal actuarial assumptions that apply for the year ended December 31, 2008 are as follows: Discount rate 5.75% 5.50%
Year that the rate reaches the rate it is assumed to remain at n.a. n.a.
The assets of the scheme are held under trust separately from those of the Group. The assets of the scheme are held in policies effected with Scottish Equitable plc. The scheme is closed to new entrants. Under IAS 19, the defined benefit plan has a deficit of EUR 186 million at December 31, 2008
The principal actuarial assumptions that apply for the year ended December 31, 2008 are as follows: Discount rate 5.90% 5.20%
The other countries mostly operate defined contribution plans, with the exception of smaller defined benefit plans in
For an amount of EUR 280 million (2007: nil, 2006: nil) the utilization of tax losses is dependent on retaining bonds and similar investments until the earlier of market recovery or maturity. For an amount of EUR 233 million (2007: EUR 1 million, 2006: EUR 49 million) the utilization of tax losses is dependent on the projection of future taxable income from existing business.
(2007: nil, 2006: nil) is dependent on future taxable profits in excess of the profits arising from the reversal of existing taxable temporary differences. For the whole amount the realization of the deferred tax asset is dependent on retaining bonds and similar investments until the earlier of market recovery or maturity.
AEGON did not recognize deferred corporate income tax assets in respect of tax losses amounting to EUR 1,512 million (2007: EUR 1,199 million, 2006: EUR 642 million) that can be carried forward to future taxable income. Tax losses amounting to
EUR 391 million (2007: EUR 40 million, 2006: EUR 42 million)
EUR 67 million (2007: nil, 2006: nil) will expire in ten to fifteen years; tax losses amounting to EUR 27 million (2007: nil, 2006: nil) will expire in fifteen to twenty years.
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 totaled EUR 1,808 million (2007: EUR 1,856 million; 2006: EUR 1,810 million). All deferred taxes are non-current by nature.
Results from financial transactions comprise: 2008 2007 2006 Net fair value change of general account financial investments at fair value through profit or loss, other than derivatives (1,261) 573 775
Gains and (losses) on investments in real estate (48) 137 134
net fair value change of general account financial investments at fair value through profit or loss, other than derivatives comprise: 2008 2007 2006
Realized gains and losses on financial investments comprise: 2008 2007 2006
Realized gains and losses on financial investments relate to: 2008 2007 2006 Available-for-sale investments 90 923 536
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON GROUP | NOTE 35 - 37
Ineffective portion of hedge transactions to which hedge accounting is applied 50 16 12
Fair value changes on economic hedges for which no hedge accounting is applied (46) (340) (193)
The ineffective portion of hedge transactions to which hedge accounting is applied comprises: 2008 2007 2006 Fair value change on hedging instruments in a fair value hedge (164) (242) (22)
EUR 1.7 billion, EUR 212 million higher than the acquisition price of EUR 1.5 billion resulting in a one-time gain at acquisition that is reported as part of Other income.
Gains / losses on separate accounts and investment funds (14,020) 3,244 4,962
(2007: gains of EUR 7 million, 2006: gains of EUR 75 million)
of other charges that for segment reporting are excluded from Operating earnings before tax.
Profit appropriated to policyholders 38 15 69 note 40 COMMissiOns AnD exPenses
Included in administration expenses above is depreciation amounting to EUR 84 million (2007: EUR 86 million and 2006: EUR 112 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 59 million (2007: EUR 62 million and 2006: EUR 32 million). Minimum lease payments recognized as expense amounted to EUR 6 million (2007: EUR 10 million and 2006: EUR 6 million). Included in employee expenses is
employees, have been offered both share appreciation rights and share options. These share appreciation rights and share options have been granted at an exercise price equal to the market price of the shares at the date of the grant. The rights and options granted in 2004-2008 vest after three years and can only be exercised during the four years after the vesting date. The rights and options granted in 2003 and 2002 vest after two years and can only be exercised during the five years after the vesting date. Vesting and exercisability depend on continuing employment of the individual employee to whom the rights and options have been granted. Option plans are settled in equity, whilst stock appreciation rights are settled in cash or provide the employee with the choice of settlement.
Executive Board decides to implement such plans, that decision has to be approved by the Supervisory Board. Options granted pursuant to the purchase agreement with Providian have various expiration dates. The options granted in 1997 to senior executives of former Providian business units fully vest in three years and the exercise period is up to ten years, with the latest period ended in August 2008.
The weighted average share price at which the share appreciation rights were exercised in 2008 is EUR 10.46
The following assumptions are used in estimating the fair value of share appreciation rights at December 31: Expected dividend yield 7.77% 7.18% 3.99%
The liability related to share appreciation rights is valued at fair value at each balance sheet date. Refer to note 29 for details. The costs related to the share appreciation rights amount to EUR (34) million (2007: EUR (16) million and 2006: EUR 26 million) and are recognized in the income statement as part of ‘Commissions and expenses’.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON GROUP | NOTE 40
The weighted average share price at which the share options were exercised in 2008 is EUR 5.99 (2007: EUR 14.00).
The following assumptions are used in estimating the fair value of share options at the grant date: Expected dividend yield 9.84% 4.53% 4.23%
The costs related to the share options amount to EUR 19 million
At December 31, 2008, the total compensation cost related to non-vested awards not yet recognized is estimated at
The breakdown of the share appreciation rights and share options granted in 2008 is as follows: senior executives
Refer to note 54 for detailed information about the SARs / share options and the shares and options conditionally granted to the
Impairment reversals on financial assets, excluding receivables 1 (36) (64) (118)
Impact of the above impairments on the valuation of insurance assets and liabilities 1 (7) 16 –
impairment charges on financial assets, excluding receivables, from: 2008 2007 2006
In 2007, AEGON refined its method of calculating the fair value of the guarantees included in its unit-linked products in order to align these calculations with the calculations currently used for the group pension contracts and traditional products. This change in accounting estimate has been applied prospectively.
Other charges is for segment reporting purposes fully excluded from Operating earnings (refer to note 2.5).
Write off / (reversal of write off) of deferred tax assets 134 37 25
Reconciliation between standard and effective income tax: 2008 2007 2006 Income before tax (1,061) 3,077 3,971
Income tax calculated using weighted average applicable statutory rates (423) 973 1,272
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON GROUP | NOTE 45 - 46
net income / (loss) attributable to common shareholders for basic earnings per share calculation (1,383) 2,291 2,946
AEGON assumed that all dilutive share options have been exercised at the exercise price, or adjusted exercise price if necessary. The proceeds are regarded as having been received from the issue of common shares at the average market price of the AEGON N.V. share during the year. The difference between the number of dilutive options issued and the number of common shares that would have been issued at the average market price has been treated as an issue of common shares for no consideration.
EUR 0.62 and EUR 0.61 respectively. It was decided to forego the final dividend for 2008. Consequently, the dividend for 2008 will total EUR 0.30 per common share, an amount already paid out to shareholders as interim dividend in September 2008.
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).
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.
(in the range of 3% to 4%) if the premium has been paid for a consecutive period of at least ten years and is invested in a mixed fund and/or fixed-income funds. No guarantees are given for equity investments only.
The Netherlands 2 Total 3 United States 1 Canada 1 UK
Balances are included in the derivatives liabilities on the face of the balance sheet; refer to note 9.3
Once the account value is exhausted, AEGON pays the periodic withdrawals until the guaranteed remaining balance is exhausted. At December 31, 2008, the reinsured account value was EUR 4.2 billion (2007: EUR 6.9 billion) and the guaranteed remaining balance was EUR 4.6 billion (2007: EUR 4.5 billion).
The reinsurance contract is accounted for as a derivative and is carried in AEGON’s balance sheet at fair value. At December 31, 2008, the contract had a value of EUR 442 million (2007: EUR 1 million). AEGON entered into a derivative program to mitigate the overall exposure to equity market and interest rate risks associated with the reinsurance contract. This program involves selling S&P 500 futures contracts to mitigate the effect of equity market movement on the reinsurance contract and the purchase of over-the-counter interest rate swaps to mitigate the effect of movements in interest rates on the reinsurance contracts.
EUR 790 million in fixed annuities (2007: EUR 1,000 million) and
Certain variable insurance contracts in the United States also provide guaranteed minimum death benefits (GMDB) and guaranteed minimum income benefits (GMIB). Under a guaranteed minimum death benefit, the beneficiaries receive the greater of the account balance or the guaranteed amount upon the death of the insured. The net amount at risk for GMDB
The additional liability for guaranteed minimum benefits that are not bifurcated are determined (based on SOP 03-1) each period by estimating the expected value of benefits in excess of
The net amount at risk is defined as the present value of the minimum guaranteed annuity payments available to the contract holder determined in 5 accordance with the terms of the contract in excess of the current account balance.
Netherlands include large group contracts that have an individually determined asset investment strategy underlying the pension contract. The guarantee given is that the profit sharing is the minimum of 0% or the realized return (on an amortized cost basis), both adjusted for technical interest rates ranging from 3% to 4%. If there is a negative profit sharing, the 0% minimum is effective, but the loss in any given year is carried forward to be offset against any future surpluses. In general, a guarantee is given for the life of the underlying employees so that their pension benefit is guaranteed. Large group contracts also share technical results (mortality risk and disability risk). The contract period is typically five years and the premiums are fixed over this period. Separate account guaranteed group contracts provide a guarantee on the benefits paid.
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% guarantee; in recent years the guarantee has decreased to 3%.
The table on the following page provides information on the liabilities for guarantees that are included in the valuation of the host contracts.
Balances are included in the insurance liabilities on the face of the balance sheet; refer to note 20.2
Since the price of these guarantees is not quoted in any market, the fair value of these guarantees is computed using valuation models which use observable market data supplemented with the Group’s assumptions on developments in future interest rates, volatility in equity prices and other risks inherent in financial markets. All the assumptions used as part of this valuation model are calibrated against actual historical developments observed in the markets. Since many of the assumptions are unobservable and are considered to be significant inputs to the liability valuation, the liability has been reflected within the category ‘Valuation techniques not based on observable market data’ of the fair value hierarchy. Refer to note 3 for more details on AEGON’s fair value hierarchy.
The expected returns are based on risk-free rates, such as the current London Inter-Bank Offered Rate (LIBOR) forward curve.
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%. Certain AEGON subsidiaries previously used a single parameter approach for equity volatilities and moved to a term structure in 2008. 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 used a long term equity implied volatility assumption that was 5 volatility points higher or lower, the impact on income before tax would have been a decrease or increase of EUR 100 million, respectively, in 2008 income before tax.
AEGON utilizes different risk management strategies to mitigate the financial impact of the valuation of these guarantees on the results including asset and liability management and derivative hedging strategies to hedge certain aspects of the market risks embedded in these guarantees.
Guarantees valued at fair value contributed a net loss before tax of EUR 0.7 billion to operating earnings. This net loss is attributable to an increase in the total guarantee reserves of
(see below), was EUR 9,055 million at December 31, 2008, compared to EUR 15,151 million at December 31, 2007.
The table that follows reconciles total shareholders’ equity to the total capital base: Total shareholders’ equity 6,055 15,151
Borrowings not related to capital funding of insurance activities (5,271) (4,766)
In the context of the unprecedented market conditions that materialized in 2008, AEGON felt it was prudent to reinforce the capital buffer to a level substantially in excess of
EUR 3 billion of additional core capital from Vereniging AEGON, funded by the Dutch State. AEGON issued 750 million non-voting convertible core capital securities at EUR 4.00 per security to
Vereniging AEGON. In turn Vereniging AEGON was funded on back-to-back terms and conditions by the Dutch State. The securities rank equal to common shares (pari passu), but carry no voting rights. Before December 1, 2009, AEGON has the right to repurchase 250 million of the securities at a price between
EUR 4.00 and EUR 4.52 per security, depending on AEGON’s share price at the date of the repurchase, and after that date at
EUR 6.00 per security. AEGON may at any time repurchase the remaining 500 million securities at EUR 6.00 per security
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON GROUP | NOTE 48
In this situation, the Dutch State may opt for repayment either in cash (at the original issue price of EUR 4) or in shares.
AEGON retains full discretion over its policy regarding dividends paid on common shares. The coupon on the non-voting securities will be paid only if a dividend is also paid to holders of common shares. As the holder of the non-voting securities,
Borrowings not related to capital funding of insurance activities mainly include operational funding of US regulation xxx and guideline Axxx redundant reserves. In the ordinary course of business, AEGON N.V. may at times have borrowings, which are offset by cash and cash equivalents available for future capital management activities, such as funding capital contributions in its subsidiaries, redemption of borrowings or payment of dividends to its shareholders. The Total Capital Base is a non-
IFRS measure, as IFRS does not permit separate presentation of borrowings based on the deployment of the proceeds.
National Association of Insurance Commissioners have adopted risk-based capital (RBC) requirements for insurance companies.
formula. The RBC formula measures exposures to investment risk, insurance risk, market risk, and general business risk.
RBC measure is the company action level (CAL) RBC. This is the highest regulatory intervention level and is the level at which a company has to submit a plan to its state regulators. The CAL is 200% of the authorized control level (ACL), the level at which regulators are permitted to seize control of the company. At the end of 2008, the combined risk based capital ratio of AEGON’s life insurance subsidiaries in the United States was approximately 350% of the CAL RBC and approximately 700% of the ACL RBC.
directives. The Netherlands and the United Kingdom have set higher solvency standards, as explained below. For life insurance companies the Solvency I 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 2008, AEGON The Netherlands solvency capital ratio for the whole group based on IFRS was approximately 158%.
Act 2000 and sets minimum solvency standards. Companies must manage their solvency positions according to the most stringent of the published Solvency I measure (Pillar 1) and a privately submitted economic capital measure (Pillar 2). For
OPTAS N.V., an indirect subsidiary of AEGON N.V., holds statutory reserves of EUR 821 million (2007: EUR 770 million)
Derivatives with positive values not designated as hedges 5,435 – 1,008 –
The Group manages certain portfolios on a total return basis which have been designated as at fair value through profit or loss. This includes portfolios of investments in limited partnerships and limited liability companies (primarily hedge funds) for which the performance is assessed internally on a total return basis. In addition, some investments that include an embedded derivative that would otherwise have required bifurcation, such as convertible instruments, preferred shares and credit linked notes, have been designated at fair value through profit or loss. Investments for general account backing insurance and investment liabilities that are carried at fair value with changes in the fair value recognized in the income statement are designated at fair value through profit or loss.
No loans and receivables were designated as at fair value through profit or loss.
Other commitments include future purchases of interests in investment funds and limited partnerships.
Share of contingent liabilities incurred in relation to interests in joint ventures 480 675
Guarantees include those given on account of asset management commitments and guarantees associated with the sale of investments in low-income housing tax credit partnerships in the
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 minimal as at December 31, 2008.
AEGON is involved in litigation in the ordinary course of business, including litigation where compensatory or punitive damages and mass or class relief are sought. In particular, certain current and former customers, and groups representing customers, have initiated litigation and certain groups are encouraging others to bring lawsuits in respect of certain products in the Netherlands. The products involved, include securities leasing products and unit-linked products (so called
In addition, in recent years, the insurance industry has increasingly been the subject of litigation, investigations and regulatory activity by various governmental and enforcement authorities concerning certain practices. AEGON subsidiaries have received inquiries from local authorities in various jurisdictions including the United States, the United Kingdom and the Netherlands. In certain instances, AEGON subsidiaries modified business practices in response to such inquiries or the findings thereof. Certain AEGON subsidiaries have been informed that the regulators may seek fines or other monetary penalties or changes in the way AEGON conducts its business.
Parties expect the judgment in near future after which they may appeal from it with the supreme court of the Netherlands.
Future lease payments Not later than 1 year years Later than 5 years Not later than 1 year years Later than
AEGON retains substantially all risks and rewards of the transferred assets, this includes credit risk, settlement risk, country risk and market risk. The assets are transferred in return for cash collateral or other financial assets.
AEGON pledges assets that are on its balance sheet in securities borrowing transactions, in repurchase transactions, and against long-term borrowings. In addition, in order to trade derivatives on the various exchanges, AEGON posts margin as collateral.
stake as of December 31, 2008. The total purchase price amounted to EUR 27 million for the 40% stake. Acquired assets included EUR 2 million cash positions. Goodwill of
On October 1, 2008, AEGON signed an agreement to acquire a 50% interest in Mongeral SA Seguros e Previdência (Brazil).
Acquired assets included EUR 11 million cash positions. Goodwill of EUR 167 million was recognized. Since the acquisition date, the company has attributed EUR 0 million to net income. If the acquisition had been as of January 1, 2008, contribution to net income and total revenues would amount to EUR 4 million and
Ankara Emeklilik Anonim Şirketi. The total purchase price amounted to EUR 34 million. Since the acquisition date, the company has attributed EUR (3) million (loss) to net income.
EUR (7) million (loss) and EUR 11 million. As a result of the acquisition, assets and liabilities were recognized for
As a result of the acquisition, assets and liabilities were recognized for EUR 156 million and EUR 17 million respectively, including a cash position of EUR 4 million. Goodwill of
If the acquisition had been as of January 1, 2008, contribution to net income and total revenues would amount to respectively
In June 2007, AEGON acquired OPTAS N.V., a Dutch life insurance company specializing in employee benefit products and services within the Dutch group pension market for
Pensioenfonds voor de 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
A portion of the shareholders’ equity of OPTAS is subject to restrictions as set out in the articles of association of the company. These restrictions assure continued fulfillment of existing policy obligations and will remain in force after the acquisition. OPTAS has contributed EUR 11 million to AEGON’s income before tax in 2007. Had the acquisition taken place on
January 1, 2007, OPTAS’ contribution to the Group’s net income is estimated at EUR 22 million, contribution to revenues would have been approximately EUR 251 million.
Clark should have contributed an amount of EUR 90 million to total revenues and EUR 4.7 million to net income of AEGON
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.
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. Since the acquisition date, the company has contributed
January 1, 2007, contribution to net income and total revenues would amount to respectively EUR 3 million and EUR 12 million.
In September 2006, AEGON The Netherlands acquired the remaining 55% of the Unirobe shares. The distribution activities of the Dutch operations are placed under the Unirobe Meeùs
Groep. No operations have been disposed off as a result of the combination. The cost of acquiring the remaining 55% of the shares was EUR 59 million, which was paid in cash. In total an amount of EUR 96 million was paid to acquire the 100% interest.
EUR 186 million and EUR 134 million respectively which included a cash position of EUR 0 million. Since the acquisition date,
March by Scottish Equitable International S.A. prior to the sale was EUR 20 million. The acquiring company, La Mondiale
Participations S.A., is a 35% associate of AEGON. 35% of the gain on the sale was eliminated on consolidation.
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%
exercised its option rights to purchase 2,690,000, respectively 3,190,000 class B preferred shares at par value to correct dilution caused by AEGON’s stock dividend issuances and treasury stock sales during the year.
AEGON Central and Eastern Europe. The total remuneration for the members of the Management Board over 2008 was
EUR 5.3 million (2007: EUR 5.7 million) salary and other short term benefits, EUR 4.8 million (2007: EUR 7.1 million) cash performance payments, EUR 1.2 million (2007: EUR 1.3 million)
Mr. Shepard earned an annual base salary of USD 1 million. He retired as CEO and Chairman of AEGON’s Executive Board in April 2008. His 2008 salary 1 covers only the first four months of the year. 2006 and 2007 salaries for Messrs. Wynaendts, Streppel and Van der Werf included customary Dutch employee benefits for profit sharing and tax 2 deferred savings scheme.
Other periodic payments are additional remuneration elements, including social security contributions borne by the Group. For Mr. Shepard, the Group 3 had also borne expenses and non-monetary benefits which were provided in his employment agreement with AEGON. These benefits 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. For Mr. Wynaendts, the amount in 2006 also includes compensation for relocation and cost of living related to his temporary secondment to AEGON USA. 2008 performance related cash benefits are in respect of the 2007 STI plans under the Remuneration Policy for Executive Board members, approved by 4 the shareholders in April 2007. In accordance with the provisions of the Short-term Incentive (STI) Plan for the years 2005 and 2006, it was established that the value of new business of the Group and of the relevant country units for those years was positive. Accordingly, operating earnings were calculated and established per area of responsibility. After adoption of the 2005 and 2006 annual accounts by the shareholders, the disclosed STI cash bonuses for the years 2005 and 2006 were paid in 2006 and 2007 respectively. In addition to the STI plan, Mr. Shepard was entitled to a short-term incentive bonus equal to 0.1% of the net income of AEGON N.V. according to the adopted accounts. The amount included in the table for 2008 is based on net income over 2007 as reported in the 2007 IFRS financial statements. Similarly the amounts included in the table for the years 2006 and 2007 are based on the net income of 2005 and 2006 respectively. 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 5 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 inflation 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.
The share appreciation rights were granted before becoming a member of the Executive Board. 1
Board had loans with AEGON or any AEGON related company: Mr. Streppel continued a 5% mortgage loan of EUR 608,934 at unchanged terms; and Mr. Wynaendts had four mortgage loans totaling to EUR 1,485,292, with interest rates of 4.1%, 4.3%, 4.4% and 5.4%, of which two commenced in 2008.
Karla M.H. Peijs (as of April 25, 2007) 50,417 30,718 –
Ben van der Veer (as of October 1, 2008) 18,000 – –
Dirk P.M. Verbeek (as of April 23, 2008) 33,481 – –
Peter R. Voser (up to April 25, 2006) – – 15,138
Starting January 1, 2005, a three-components structure has been introduced for the remuneration of the Supervisory Board: A base fee for membership of the Supervisory Board;��
Ben van der Veer (as of October 1, 2008) 1,407 n.a. n.a.
As part of the transaction, the two companies will sign a distribution agreement covering both life insurance and pension products. The transaction is expected to close in the second quarter of 2009, subject to prior regulatory approval.
Joseph B.M. Streppel as Chief Financial Officer and a member of the Executive Board, effective April 22, 2009 at AEGON’s annual General Meeting of Shareholders. Mr. Streppel, who has served as CFO since 1998 and a member of the
In 2008, an amount of EUR 7,000 has been paid to Mr. Docters van Leeuwen, the proposed member of the Supervisory Board, whose appointment will be submitted for approval at the General Meeting of shareholders on April 22, 2009.
Ernst & Young, the international organization for assurance, tax, transaction and advisory services.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON GROUP | NOTE 55
Management of the company 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, with International Financial
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.
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 Report of the Executive Board is consistent with the consolidated financial statements as required by 2:391 sub 4 of the Netherlands Civil Code.
The Hague, March 11, 2009 for Ernst & Young Accountants LLP
Income statement of AEGON N.V. for the year ended December 31
Amounts in EUR million 2008 2007 2006 Net income / (loss) group companies (1,337) 2,313 2,935 neT inCOMe / (LOss) (1,082) 2,551 3,169
AEGON N.V., incorporated and domiciled in the Netherlands, is a limited liability share company organized under Dutch law and recorded in the Commercial Register of The Hague under its registered address at AEGONplein 50, 2591 TV The Hague.
The Hague, the Netherlands. The Group employs approximately 31,500 people worldwide.
At the balance sheet date, monetary assets, monetary liabilities and own equity instruments denominated in foreign currencies are translated at the prevailing exchange rate. Non-monetary items carried at cost are translated using the exchange rate at the date of the transaction, whilst assets carried at fair value are translated at the exchange rate when the fair value was determined.
Exchange differences on monetary items are recognized in the income statement when they arise, except when they are deferred in equity as a result of a qualifying cash flow or net investment hedge. Exchange differences on non-monetary items are recognized in equity or the income statement accordingly, consistently with other gains and losses on these items.
Other assets include fixed assets, derivatives with positive fair values, other receivables and prepaid expenses. Other receivables are recognized at fair value when due and are subsequently measured at amortized cost.
Financial instruments that are issued by the company are classified as equity if they represent a residual interest in the assets of the company after deducting all of its liabilities and the company has an unconditional right to avoid delivering cash or another financial asset to settle its contractual obligation.
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 AEGON or repaid at the discretion of AEGON, and coupon payments are payable only if AEGON pays dividend on ordinary shares. Both the perpetual and convertible core capital securities are classified as equity rather than debt, are measured at par. Those that are denominated in US dollars are translated using historical exchange rates.
Revaluation account includes unrealized gains and losses on available-for-sale assets and the positive changes in value that have been recognized in net income / (loss) relating to investments (including real estate) and which do not have a frequent market listing.
(Retained earnings) regardless of the objective of the transaction. No gain or loss is recognized on the purchase, sale, issue or cancellation of the instruments. The consideration paid or received is recognized directly in equity. All treasury shares are eliminated in the calculation of earnings per common share and dividend per common share.
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. The liability is derecognized when the company’s obligation under the contract expires or is discharged or cancelled.
Vereniging AEGON as a result of exercising these option rights would increase its voting power to more than 33%. Class B
AEGON N.V. shares or a proposed business combination by any person or group of persons, whether individually or as a group, other than in a transaction approved by the Executive Board and the Supervisory Board. If, in its sole discretion, Vereniging
The following table shows the movement during the year in the number of common shares: number of common shares 2008 2007
The weighted average number of EUR 0.12 common shares for repurchased by AEGON, although included in the issued and outstanding number of shares, are excluded from the calculation of the weighted average number of shares. The number has been adjusted for share dividend.
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, page 192.
Detailed information on remuneration of active and retired members of the Executive Board including their share option rights, remuneration of active and retired members of the Supervisory Board along with information about shares held in AEGON by the members of the Boards is included on page 215-218 of the consolidated financial statements of the Group.
Total net income – – – – – 3,169 – (618) 2,551
Changes in foreign currency translation reserve – – – (1,445) – – – – (1,445)
Transfer to legal reserve – – (15) – (58) 15 – – (58)
Dividend common shares – – – – – (583) – – (583)
Dividend preferred shares – – – – – (85) – – (85)
Withdrawal of treasury shares (2) – – – – (170) 172 – –
Coupons on perpetuals, net of tax – – – – – (175) – – (175)
Transfer to legal reserve – – (148) – 446 (305) – – (7)
(2007: EUR 1,810 million) of items with positive revaluation and for EUR (9,646) million of items with negative revaluation
The revaluation account and legal reserves, foreign currency translation reserve and other, cannot be freely distributed. In case of negative balances for individual reserves legally to be retained, no distributions can be made out of retained earnings to the level of these negative amounts.
Certain AEGON subsidiaries, principally insurance companies, are subject to restrictions on the amounts of funds they may transfer in the form of cash dividends or otherwise to their parent companies. There can be no assurance that these restrictions will not limit or restrict AEGON in its ability to pay dividends in the future.
which are restricted. Included in AEGON N.V.’s legal reserves is an amount of EUR 69 million related to OPTAS N.V. which represents the increase in statutory reserves since the acquisition of OPTAS N.V. by AEGON.
On the balance sheet date, AEGON N.V. and its subsidiaries held 62,778,194 of its own common shares with a face value of
EUR 0.12 each. Most of the shares have been purchased to neutralize the dilution effect of issued share dividend, and to hedge share appreciation rights and stock options granted to executives and employees. Movements in the number of repurchased own shares held by AEGON N.V. were as follows: Transactions in 2008
The consideration for the related shares is deducted from or added to the retained earnings.
On December 1, 2008, AEGON’s core capital was increased through a special transaction with the State of the Netherlands in view of the ongoing uncertainty regarding the financial and economic environment during the year. Via Vereniging AEGON
a senior loan of EUR 3 billion was provided against issuance of 750 million non-voting convertible core capital securities at
AEGON retains full discretion over its policy regarding dividends paid on common shares. The coupon on the non-voting securities will be paid only if a dividend is also paid to holders of common shares.
EUR 950 million floating DSL rate 2 Quarterly, July 15 2014 950 950
NOTES TO THE FINANCIAL STATEMENTS OF AEGON N.V. | NOTE 9 - 11
The interest rate exposure on some of these securities has been swapped to a three-month LIBOR yield.
October 14, 2018. If the bonds are not called on the respective call dates and after consecutive period of ten years, the coupons will be reset at the then prevailing 4 effective yield of ten-year Dutch government securities plus a spread of 85 basis points.
AEGON N.V. has entered into a net worth maintenance agreement with its indirect subsidiary AEGON Financial
At December 31, 2008, the letter of credit arrangements amounted to EUR 3,544 million; as at that date no amounts had been drawn or were due under these facilities; Due and punctual payment of payables by the consolidated ��
AEGON’s financial statements over 2007 further to the allegation of the plaintiff (a foundation representing the employers and insured employees in the harbors) that the equity of OPTAS should not have been consolidated as AEGON’s equity and that as a result, the profit of OPTAS should not have been reported as being part of AEGON’s consolidated profit.
NOTES TO THE FINANCIAL STATEMENTS OF AEGON N.V. | NOTE 12 - 16
On January 7, 2009, AEGON announced that it has agreed to acquire Banca Transilvania’s 50% shareholding in BT AEGON, the two companies’ jointly-owned Romanian pension business.
December 31, 2008, the income statement for the year then ended and the notes.
Management of the company is responsible for the preparation and fair presentation of the company financial statements and for the preparation of the Report of the Executive Board, both in accordance with Part 9 of Book 2 of the Netherlands Civil
Code. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of the company 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.
Our responsibility is to express an opinion on the company financial statements based on our audit. We conducted our audit in accordance with Dutch law. This law requires that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the company financial statements are free from material misstatement.
In our opinion, the company financial statements give a true and fair view of the financial position of AEGON N.V. as at
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 Report of the Executive Board is consistent with the company financial statements as required by 2:391 sub 4 of the Netherlands Civil Code.
2. If the adopted profit and loss account shows a profit, the
Executive Board, to set aside part of the profit to augment and/or form reserves.
Supervisory Board, decide that a distribution on common shares shall not take place as a cash payment but as a payment in common shares, or decide that holders of common shares shall have the option to receive a distribution as a cash payment and/or as a payment in common shares, in all cases out of the profit and/or at the expense of reserves. Subject to the approval of the Supervisory Board, the Executive Board shall also determine the conditions applicable to the aforementioned choices.
7. The company’s policy on reserves and dividends shall be determined and can be amended by the Supervisory Board, upon the proposal of the Executive Board. The adoption and thereafter each amendment of the policy on reserves and dividends shall be discussed and accounted for at the General
Company have caused AEGON to decide to forego the 2008 final dividend. This was announced on October 28, 2008. Thus no final dividend payment will be made on the common shares.
The interim dividend of EUR 0.30, as paid in September 2008, has been charged to the retained earnings reserve. Similarly a cash dividend of 5.75% on the amount paid-in on the class A
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.
AEGON had certain option rights on preferred shares to prevent dilution of voting power as a result of share issuances by
EUR 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. As a result of these transactions,
AEGON N.V.’s voting shares (excluding issued common shares held in treasury by AEGON N.V.) decreased from approximately 52% to approximately 33%.
AEGON’s relationship with Vereniging AEGON in an extraordinary General Meeting of Shareholders. AEGON’s
was changed as follows: The 440,000,000 preferred shares with nominal value of
AEGON has agreed to exercise one vote only per preferred share, except in the event of a ‘special cause’, such as the acquisition of a 15% interest in AEGON N.V., a tender offer for AEGON N.V.
shares or a proposed business combination by any person or group of persons whether individually or as a group, other than in a transaction approved by the Executive Board and the
B preferred shares as would enable Vereniging AEGON to prevent or correct dilution to below its actual percentage of voting shares, unless Vereniging AEGON as a result of exercising these option rights would increase its voting power to more than 33 percent. Class B 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
Vereniging AEGON, based on the number of outstanding and voting shares (excluding issued common shares held in treasury by AEGON N.V.) at December 31, 2008, amounts to approximately 23.73%. In the event of a ‘special cause’, Vereniging AEGON’s voting rights will increase, currently to 33.77%, for up to six months per ‘special cause’.
AEGON group companies, nor current or former members of the Supervisory Board or the Executive Board of AEGON N.V.
The other two members are also members of the Executive Board of AEGON N.V. Resolutions of the Executive Committee, other than with regard to the amendment of the Articles of Association, are made with an absolute majority of the votes. When a vote in the Executive Committee results in a tie, the General Meeting of
Underlying earnings before tax by line of business 125 155 126 90 496 Individual savings and retirement products 116 115 56 (433) (146)
7 10 8 11 36 Share in net results of associates 9 11 (1) 5 24 602 679 691 667 2,639 UnDeRLyinG eARninGs beFORe TAx 658 596 500 (181) 1,573 132 (146) (113) (145) (272) Over / (under) performance of fair value items (441) 48 (456) (770) (1,619)
454 532 531 516 2,033 net underlying earnings 503 437 363 (69) 1,234 553 415 438 399 1,805 net operating earnings 175 479 38 (623) 69
Actuarial gains and losses relate to the accounting for postemployment benefit plans. They comprise the effects of experience adjustments and changes in assumptions used to determine the cost of a plan.
Assets held by long-term employee benefit funds are part of plan assets. These are assets (other than non-transferable financial instruments issued by the reporting entity) that: Are held by an entity that is legally separate from the reporting entity and exists solely to pay or fund employee benefits; and
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.
Derivatives are financial instruments whose value changes in response to an underlying variable, that require little or no net initial investment and are settled at a future date.
Discretionary participation feature is a contractual right to receive, as a supplement to guaranteed benefits, additional benefits: That are likely to be a significant portion of the total ��
contractual benefits; Whose amount or timing is contractually at the discretion of ��
The profit or loss of the company, fund or other entity •
equity method is a method of accounting whereby the investment is initially recognized at cost and adjusted thereafter for the post-acquisition change in the investor’s share of net assets of the investee. The profit or loss of the investor includes the investor’s share of the profit or loss of the investee.
equity volatility is the relative rate at which the price of equity changes.
exchange differences are differences resulting from translating a given number of units of one currency into another currency at different exchange rates.
from another entity or to exchange financial instruments with another party under conditions that are potentially favorable; or
A contract that will or may be settled in the entity’s own ��
insurance asset is an insurer’s contractual right under an insurance contract.
(or the carrying amount of related deferred acquisition costs or related intangible assets decreased) based on a review of future cash flows.
Liquidity risk is the risk that an entity will encounter difficulty in raising funds to meet commitments associated with financial instruments.
Minority interests are that portion of the profit or loss and net assets of a subsidiary attributable to equity interests that are not owned, directly or indirectly through subsidiaries, by the parent.
Operating expenses are all expenses associated with selling and administrative activities (excluding commissions) after reallocation of claim handling expenses to benefits paid.
Private loan is a non-derivative financial asset with a fixed interest rate and a maturity date, which is not bought in an active market but negotiated between the two parties involved.
These are insurance policies issued by an insurer that is not a related party of the reporting entity, if the proceeds of the policies: Can be used only to pay or fund employee benefits under a ��
Real estate investments foreclosed are real estate investments purchased through foreclosure on the mortgage.
Such purchases are not accounted for as mortgages, but as real estate investments until they can be sold at a better price than at the foreclosure. Meanwhile they yield a rental income.
Recognition is the process of incorporating in the balance sheet or income statement an item that meets the definition of an element and satisfies the following criteria for recognition: It is probable that any future economic benefit associated ��
with the item will flow to or from the entity; and
The item has a cost or value that can be measured with ��
Return on plan assets is the investment income derived from plan assets, together with realized and unrealized gains and losses on the plan assets less any costs of administering the plan and less any tax payable by the plan itself.
settlement date is the date that a financial asset is delivered to the entity that purchased it.
spread is the difference between the current bid and the current ask or offered price of a given security.
Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset or liability.
restatements on the financial markets and the resulting decline in the value of equity and debt securities held; The frequency and severity of insured loss events;��
rapidly changing interest rate levels; Changes affecting currency exchange rates, in particular the ��
EUR/USD and EUR/GBP exchange rates; Increasing levels of competition in the United States, the ��
AEGON’s operations, the products the company sells, and the attractiveness of certain products to AEGON’s consumers; Regulatory changes relating to the insurance industry in the ��
distribution cost of or demand for AEGON’s products; AEGON’s failure to achieve anticipated levels of earnings or ��
Reporting Standards may have on AEGON’s reported financial results and financial condition.