With headquarters in The Hague, the Netherlands, AEGON companies employ approximately 29,000 people. AEGON’s businesses serve millions of customers in over twenty markets throughout the Americas, Europe, and Asia, with major operations in the United States, the Netherlands and the United Kingdom.
Respect, quality, transparency and trust constitute AEGON’s core values as the company continually strives to meet the expectations of customers, shareholders, employees and business partners.
Consolidated fi nancial statements of AEGON Group 2006 98 Consolidated balance sheet 99 Consolidated income statement 100 Consolidated cash fl ow statement 102 Consolidated statement of changes in equity 105 Notes to the consolidated fi nancial statements 219 Remuneration Executive Board 222 Remuneration Supervisory Board 224 Auditors’ report
Additional information 241 Quarterly results 242 Corporate and shareholder information 243 Glossary ibc Forward-looking statements
18 AEGON Group 22 Americas 32 The Netherlands 40 United Kingdom 46 Other countries 55 Product line overview 56 Risk and capital management
AND COMPLIANCE 70 Report of the Supervisory Board 74 Members and committees Supervisory Board 76 Remuneration policy and report 82 Corporate governance 85 Dutch corporate governance code 93 Corporate responsibility
Independent agents and agent-employees, marketing companies, fi nancial institutions, broker-dealers, wirehouses, affi nity groups, direct response, worksite marketing, institutional intermediaries www.aegonins.com www.transamerica.com
MAIN DISTRIBUTION CHANNELS Brokers, tied agents, direct marketing, franchise sales force, worksite marketing www.aegon.nl
MAIN DISTRIBUTION CHANNELS Financial advisors www.aegon.co.uk 1 AEGON Direct Marketing Services (ADMS) is one of the operating groups of AEGON USA. Please refer to page 28 for more information.
MAIN PRODUCT AREAS Universal life, unit-linked, pensions, accident and health insurance
MAIN PRODUCT AREAS Traditional life, life for account of policyholders, pensions, accident and health insurance
MAIN DISTRIBUTION CHANNELS Financial institutions, independent and tied agents, brokers, direct marketing, worksite marketing www.aegon.es * Joint ventures/associates: Caja de Badajoz Vida (50 percent), Seguros Navarra (50 percent), CAM AEGON Holding Financiero (49.99 percent).
MAIN PRODUCT AREAS Variable universal life, traditional life, structured notes, accident and health insurance
MAIN DISTRIBUTION CHANNELS Tied agents, brokers, banks, worksite marketing, direct marketing www.aegon.com.tw
MAIN DISTRIBUTION CHANNELS Brokers, fi nancial institutions www.lamondiale.com * Joint ventures/associates: La Mondiale Participations (35 percent).
MAIN PRODUCT AREAS Traditional life, life for account of policyholders, pensions, fee business (incl. mutual funds), accident and health insurance, general insurance, mortgage loans
AEGON is committed to ensuring that equity and fi xed income investors have an accurate understanding of the company’s performance and prospects. To this end, AEGON’s investor relations program focuses on providing the international investment community with the information required to make sound investment decisions. This includes information on key factors that drive
AEGON will more closely align its line of business reporting with the way the businesses are organized.
supports the European Embedded Value Principles, which are aimed at improving the consistency and transparency of the life insurance industry’s embedded value reporting.
Additionally, AEGON will provide information on its various business activities in a statistical supplement to be included in its quarterly earnings releases starting with the fi rst quarter of 2007.
With the aim of ensuring equal access to all relevant information,
AEGON recognizes the importance of offering its shareholders a stable and adequate dividend, which is supported by the company’s cash fl ow and capital position.
“AEGON is committed to the highest standards of both integrity and fair disclosure.”
AEGON’s total dividend for the full year is composed of an interim dividend, declared at the time of the publication of the six months’
Meeting of Shareholders. Payment of the interim and fi nal dividend is either in cash or in stock to be paid out of the paid-in surplus fund
(free of tax in the Netherlands) or, if so requested, out of the net income. The management has the ability to alter the relative attractiveness of cash versus stock dividend if deemed appropriate.
The stock fraction, used to determine the dividend in shares, will be based upon the average share price calculated over a period of fi ve trading days. There will be no trading in dividend rights on Euronext
amounts to EUR 0.31 per common share bringing the total 2006 dividend to EUR 0.55, an increase of 22 percent compared to the prior year. The fi nal dividend in shares will be approximately 5 percent lower than the value of the cash dividend. AEGON started to repurchase shares to neutralize the effect of stock dividends. It remains AEGON’s objective to increase dividend subject to the development of capital position and cash fl ows.
AEGON’s international business activities are refl ected in the geographical diversity of its investor base.
The investor base consists of approximately 86 percent of institutional shareholders (including Vereniging AEGON) and 14 percent individual shareholders.
Based on publicly available information, Vereniging AEGON is the only major shareholder (exceeding 5 percent participation in AEGON
EUR 13.75 on December 30, 2005 to EUR 14.44 on December 29, 2006. In May 2006, AEGON paid a fi nal dividend for 2005 of
Index (DJ Stoxx 600 Insurance Index) of 20.7 percent (2005: 34.6 percent) and the S&P 500 Insurance Index (in EUR) of minus 0.5 percent (2005: 30.7 percent).
March 26 Record date for attending/voting at the April 25 AGM
TRENDS INDICATE THAT OURS IS THE RIGHT BUSINESS AT THE RIGHT TIME
During 2006, HDI Pensionsmanagement – Germany’s third largest pension provider – joined the AEGON Pension Network, adding further momentum to our efforts to provide innovative cross-border pension solutions for AEGON’s multi-national clients and their employees. Multi-national companies are taking a more international view of their pensions and AEGON Pension Network is providing solutions that will enable them to better negotiate the complexities involved.
Profi tability continues to be a cornerstone of AEGON’s growth strategy. This was evident in 2006 with the 32 percent increase in operating earnings before tax, as well as the 41 percent increase in the value of new business for the AEGON Group, which represents a compound annual growth rate of 33 percent since 2003. Similarly, the internal rate of return on AEGON’s new business improved to 14.5 percent during 2006, compared to 12.4 percent for 2005. These positive developments represent better-than-expected progress toward our goal of doubling AEGON’s value of new business to
Americas, the Netherlands, and the United Kingdom will continue to perform well and together comprise the majority of AEGON’s earnings growth in the coming years. However, we believe that our operations in Central and Eastern Europe, as well as in other
Another key component in AEGON’s growth strategy is the retirement opportunity globally. Demographics and trends in nearly every market indicate that ours is the right business at the right time. There is a clear and increasing need for a broader range of protection and pre- and post-retirement solutions given people’s needs to successfully manage their accumulated assets during a
Mediterráneo in Spain, two new joint ventures with Spanish mutual savings banks – Caja de Badajoz and Caja Navarra – became operational during 2006, extending AEGON’s products and services through nearly 1,500 bank branches across the country. As banks internationally expand their product offering to include protection and retirement products, we intend to advance AEGON’s reputation as a preferred partner in this essential distribution channel.
Board, as a way to further maximize the opportunities we see for
President and CEO of AEGON USA, Otto Thoresen, CEO of AEGON UK, and Johan van der Werf, CEO of AEGON The Netherlands. The
AEGON’S STRONG RELATIONSHIP WITH BANKS PROVIDES ACCESS TO A GROWING CUSTOMER SEGMENT
International expansion is another essential pillar in AEGON’s growth strategy and the past year was an especially productive one in this regard. In October, we completed our 49 percent acquisition of Seguros
Argos in Mexico, and at the same time announced our plans to establish a pension management joint venture, known as Afore Argos.
Romania with the formation of a new pension fund company with
Also in January 2007, AEGON announced its intention to form a new life insurance company in Japan with Sony Life. The 50/50 joint venture will initially focus on developing variable annuity products that will be distributed through Sony Life’s Lifeplanner® channel as well as through banks and other fi nancial institutions. AEGON regards this new partnership with one of Japan’s most respected companies as an excellent platform for ongoing collaboration in the world’s second largest market for life insurance products and services.
“A key component in our growth strategy is the retirement opportunity.”
It is our intention to increase dividends annually, naturally subject to the development of AEGON’s capital position and cash fl ows.
Our ability to ensure AEGON’s continued growth and fi nancial strength depends on the talent and dedication of management, employees and trusted business partners. Their many contributions to AEGON’s business objectives enabled us to achieve the progress we are pleased to report for 2006. As we look to the opportunities ahead, AEGON remains committed to leveraging the resources of an expanding global operation with the knowledge and expertise of local business managers and partners. At the same time, we will continue to identify and implement operational and cost effi ciencies in order to maintain AEGON’s reputation as a competitive and reliable provider of life insurance, pensions and related savings products and services.
We are grateful for your ongoing support and continued interest in AEGON.
and in April 2002 he was appointed chairman. He currently serves as a member of the Boards of Directors of the Mercantile Bankshares
In 1986, he became CFO of FGH BANK and in 1987 he joined the
Executive Board of FGH BANK. In 1991, he became chairman and CEO
of Labouchère and, in 1995, also chairman of FGH BANK. In 1998 he became CFO of AEGON N.V. In May 2000 he was appointed a member of the Executive Board of AEGON N.V. Mr. Streppel is also a member of the Supervisory Boards of Royal KPN N.V. and
(1954, American nationality) began his career at AEGON USA in 1976.
He served as executive vice-president and chief operating offi cer, chief fi nancial offi cer and director of tax and was appointed in
March 2002 to his current position as president and CEO of AEGON
AEGON N.V., effective January 1, 2007. He is also a member of the
Merchant Marine. In 1982 he joined one of the predecessors of
AEGON’s objective is to create long-term value for its many stakeholders. With this in mind, AEGON focuses on its core businesses of life insurance, pensions and related investment products. The company’s strategy is to achieve long-term profi tability, encourage entrepreneurship in its local markets, attain suffi cient scale in each operating country and pursue opportunities for international expansion.
Netherlands and the United Kingdom, as well as in new and emerging markets.
In Central and Eastern Europe, AEGON’s pension business is growing at a rapid pace. AEGON Hungary is experiencing particularly strong growth, while in Slovakia the number of customers registered with
AEGON pension funds grew to more than 200,000 in 2006. The proposed acquisition of PTE Ergo Hestia, one of Poland’s leading pension fund management companies, will further strengthen
AEGON has always relied on talented local managers to identify the changing needs of their customers and the opportunities emerging in their particular markets. In this way, AEGON seeks to combine the resources of an expanding global operation with the more specifi c knowledge and expertise of its local businesses.
Through the AEGON Pension Network, AEGON is helping its multinational corporate customers negotiate the growing complexities of diverse national pension systems by providing local solutions within a broader, more international framework. Established with AEGON’s
French partner La Mondiale, the AEGON Pension Network is the fi rst coordinated cross-border network to cater to the needs of multinational companies, addressing issues such as asset pooling, regulatory reporting, varying tax regimes and supplying pension solutions for expatriate workers. Since its inception, the AEGON
Taiwan and AEGON-CNOOC has secured cooperation agreements with three of China’s leading banks as a way of supporting AEGON’s expansion in the country.
Writing profi table new business is an essential pre-condition for growth in both AEGON’s established and developing markets. It ensures a good return for shareholders as well as a fi nancially sound company.
In 2006, AEGON posted an increase of 32 percent in its operating earnings and 41 percent in its value of new business. AEGON’s internal rate of return (IRR), a measure of the profi tability of the business AEGON is writing, rose to 14.5 percent in 2006, up from 12.4 percent in 2005. In November 2006, AEGON also announced a new growth target to double the value of new business for the Group by 2010 to EUR 1.1 billion.
AEGON’s fi nancial results, over the past two years, demonstrate the company’s commitment to profi tability, with signifi cant increases in the value of new business and a consistent improvement in the IRR.
AEGON aims to achieve a leading position in each of its chosen markets. This allows extensive economies of scale and helps attract strong local business partners as well as talented managers and staff. Currently, AEGON is one of the largest providers of life insurance and pensions in the United States, the Netherlands and the United Kingdom. In addition, the company occupies a leading position in the Hungarian, Slovakian and Polish markets. In Asia,
In the medium term, AEGON aims to double its value of new business during the period 2005-2010. AEGON sets its return objectives relative to the risks of its markets and well in excess of the cost of capital. Disciplined expense management, together with the divestiture of non-core and structurally underperforming activities, are key to achieving these objectives.
AEGON strives for a leading position in its chosen markets in order to realize the benefi ts of scale, while attracting and retaining quality management as well as strong local partners.
The worldwide pension market is changing rapidly – and AEGON is convinced that these changes will result in significant opportunities for the company in the years ahead. Throughout the developed world, people are living longer, while the size of the workforce available to fund pensions is shrinking. It is estimated that by the middle of this century, the working-age population in Europe will have declined by 20 percent. The population of over-65s, meanwhile, will have risen by 80 percent. This phenomenon is putting strain on many countries’ pension systems. Increasingly, governments around the world are shifting responsibility for pension funding from the public to the private sector. More companies, conscious of their growing liabilities, are switching their pension plans from defined benefit to defined contribution, effectively transferring responsibility for retirement planning to the individual.
United States is now on helping individuals manage their pension assets. In emerging countries, however, market penetration of pensions and life insurance is still relatively low and recent reform –
particularly in Central and Eastern Europe – is opening up previouslyclosed markets to private pension providers like AEGON.
AEGON already has relationships with banks that span decades. In some countries, banks have long been the primary means of distribution. In Spain, for example, where AEGON has distribution agreements in place with three of the country’s largest regional savings banks, an estimated 70 percent of life insurance policies are sold through banks.
Reform is already spurring economic growth and wealth creation, while sales of life insurance and pension products are still very low, relative to AEGON’s established markets. In many places, pension reform is underway, creating additional opportunities. In Hungary,
AEGON will buy back shares in the market to neutralize the dilution effect of stock dividends, affirming the solid cash flows of the company. Contingent on sustained strong capital position and cash flows, it is AEGON’s objective to increase dividends.
Solvency II regulations for the insurance industry. A proposed directive is expected to be published in 2007, although implementation is unlikely to take place before 2010. AEGON is pleased with the progress made in the development of Solvency II as it is expected to be an economic capital based system, which will increase transparency and comparability among insurers all over Europe.
Solvency II is implemented on the same basis as the next round of
IFRS accounting to prevent an additional administrative burden for the insurance industry. Given the importance of various regulatory developments for AEGON and the industry, AEGON established a public affairs office in Brussels in 2006 to support decision makers in this process.
In 2007, AEGON will be running its economic capital model internally for calibration purposes, with full implementation of the model expected to be phased in during 2008. Large, diversified companies such as AEGON will be in the best position to capture the diversification benefits that exist under economic capital. For instance, while AEGON is exposed to mortality risk in some products, such as traditional life insurance, it is also exposed to longevity risk in its large pension business. These risks work in opposite directions and mitigate the overall risk in a diversified company such as AEGON.
AEGON’s results demonstrate that 2006 has been a successful year for the company. Taking into consideration various measures of financial performance, each of these showed a positive development, with significant increases in operating earnings (32%), net income (2%) and value of new business (41%).
1 Net income refers to net income attributable to equity holders of AEGON N.V.
(MCEV) definition that is applicable to all members, so MCEV will also be comparable between participating companies. As an active member of the CFO forum, AEGON is an avid supporter of developments that can lead to increased transparency and comparability in the insurance industry. In May 2007, AEGON will publish its full 2006
AEGON’s strategy to increase profitability, enhance distribution and expand geographically into regions that offer long-term growth potential for our core products and services.
The 32 percent increase in operating earnings reflects growth across most lines of business especially in the Americas and the United
Kingdom. The 2 percent increase in AEGON’s net income for the year reflects higher operating earnings, as well as lower gains on the company’s investment portfolio and lower book gains.
EUR 2,828 million (and increased 33 percent at constant currency exchange rates), with increases from AEGON Americas, AEGON
AEGON Americas were USD 2,732 million for 2006, an increase of
USD 367 million or 16 percent compared to 2005. The return on hedge funds, limited partnership and convertible bond assets contributed significantly to the earnings growth. In addition, the earnings improvement at AEGON Americas is due to growth in most lines of business and improved mortality experience. The increase in operating earnings at AEGON The Netherlands reflects primarily the net positive impact of changes in interest rates on guarantee provisions and related hedges. At AEGON UK, the increase in operating earnings before tax mainly reflects the positive effect of higher equity and bond markets and growth of the businesses, partly offset by the impact of higher surrenders due to ‘Pension A-Day’.
Slovakia and China. This decrease was partly offset by higher earnings in Hungary and Spain.
Net gains on investments (before tax) and impairment charges together amounted to EUR 444 million compared to a gain of
EUR 1,171 million in 2005. The decline, partly offset by net gains on the sale of shares in the Netherlands, primarily reflects a negative fair value change in derivatives used for asset and liability management in the Netherlands and normal trading activity in the
(loss) of associates together amounted to EUR 118 million. The comparable figure in 2005 contained the book gain before tax on the sale of the general insurance activities in Spain of EUR 176 million.
In 2006, new life sales increased 20 percent to EUR 3,051 million, primarily due to record sales in the United Kingdom. In the UK, new life sales increased 54 percent for the period as a result of strong pension sales, partly attributable to ‘Pension A-Day’, and growth in the sales of bonds, annuities and individual protection products. New life sales in the Americas increased 7 percent in 2006. Higher bankowned and corporate-owned (BOLI/COLI) sales, reinsurance sales, as well as growth in the middle market were partly offset by lower retail sales within the Transamerica agency channel earlier in the year.
New life sales in the Netherlands increased 7 percent to EUR 248 million, driven by growth of individual life sales through the intermediary channel and increased activity in the group pensions business. New life sales in Other countries in 2006 decreased 30 percent due to lower sales in Taiwan, but were partly offset by higher sales in Spain and Poland. The increase in new life sales in Spain mainly refl ects the joint ventures with Caja de Badajoz and Caja
Off balance sheet production for AEGON increased 14 percent, refl ecting strong sales of synthetic Guaranteed Investment Contracts
Eastern Europe. The increase was partly offset by lower sales of managed assets.
Regulation G, regarding conditions for use of non-GAAP fi nancial measures. AEGON believes the non-GAAP measure shown herein, together with the GAAP information, provides a meaningful measure for the investing public to evaluate AEGON’s business relative to the businesses of our peers.
Organic growth initiatives included increasing our penetration of the middle market through the development of new products and accelerated agent recruitment. Targeting the worksite, we launched a new initiative through Transamerica Worksite Marketing that offers employers a state-of-the-art system designed to enroll employees and make premium payments through direct payroll deduction.
Early in 2006, we created a new business unit called Transamerica
Retirement Management. While our industry has done well to encourage retirement savings during employment, we believe that more can be done at the point of retirement.
Our companies continue to export their expertise and proven capabilities internationally. AEGON Direct Marketing Services and
Transamerica Reinsurance are examples of businesses that have successfully transferred their capabilities into markets outside the Americas. Increasingly, this approach of sharing knowledge and
AEGON Americas is well-positioned, profi table, and growing. We continue to be disciplined with regard to profi tability and risk management, and this discipline has been instrumental in driving our solid fi nancial results and meeting the long-term expectations of our stakeholders – even during changing market conditions.
“AEGON Americas is tailoring existing products to address a broader range of retirement needs.”
GROSS DEPOSITS / OFF BALANCE SHEET PRODUCTION Amounts in USD million
Life for account of policyholders 109 108 1 87 87 0
experience and leveraging skills is proving a distinct competitive advantage as AEGON pursues its growth opportunities.
Acquisitions in 2006 included the purchase of a 49 percent interest in Seguros Argos S.A. de C.V., a Mexican life insurance company that distributes term life products through the worksite. The Mexican insurance and savings market offers signifi cant opportunities for growth. We also announced our agreement to acquire Clark Inc., a
The earnings from the fair value assets held at fair value through profi t and loss (hedge funds and limited partnerships) contributed
USD 79 million in 2006 compared to USD 58 million in 2005.
Operating earnings before tax from life for account of policyholders of USD 109 million increased USD 1 million compared to 2005.
USD 545 million compared to 2005. This refl ects an increase in earnings from the impact of fair value movements of certain fi nancial assets, as well as otherwise stable spreads on lower balances. Assets carried at fair value contributed USD 148 million compared to USD 92 million in 2005. The earnings impact from the valuation of total return annuities declined to USD 14 million compared to USD 42 million in the prior year.
USD 327 million in 2006, an increase of USD 165 million compared to 2005. The valuation of Canadian segregated funds contributed earnings of USD 54 million in 2006 compared to USD 12 million in 2005. The remainder of the increase refl ects favorable equity markets and growth in assets under management in addition to favorable deferred policy acquisition costs (DPAC) amortization compared to 2005.
Operating earnings before tax of institutional guaranteed products decreased 1 percent to USD 346 million compared to 2005. Higher earnings on certain assets carried at fair value, which amounted to
Reinsurance operating earnings before tax of USD 205 million increased 56 percent compared to 2005. The increase in earnings primarily refl ects continued growth in the inforce business due to strong sales and favorable mortality compared to 2005. In addition, earnings from the total return annuity product amounted to USD 24 million in 2006 compared to a loss of USD 7 million in 2005.
Accident and health operating earnings before tax increased 21 percent to USD 416 million in 2006. The increase in earnings is primarily due to favorable claims experience compared to 2005 and continued growth of the business.
These assets include certain hedge funds, real estate limited partnerships and convertible bonds, with assets totaling approximately USD 3.8 billion as of December 31, 2006. Operating earnings for 2006 include USD 499 million (USD 598 million before
Based on current holdings and asset class returns consistent with long-term historical experience, the long-term expected return on an annual basis is 8 to 10 percent, including fair valuation and cash income, before tax and DPAC offsets. The impact of the fair valuation of assets is most notable in the traditional life, fi xed annuity and institutional guaranteed products lines of business.
Accident and health premiums of USD 2.5 billion remained stable compared to 2005.
Commissions and expenses of USD 4,614 million increased 14 percent compared to 2005. Operating expenses of USD 1,957 million in 2006 were up 11 percent compared to 2005. This increase includes the impact of a one-time release of USD 20 million during 2005 from a long-term deferred compensation plan included in the fee – off balance sheet line of business.
Transamerica announced that it will consolidate its Kansas Citybased life insurance administrative operations in Cedar Rapids, Iowa by year-end 2007. Once consolidation is complete annual savings are expected to be USD 15 million to USD 20 million.
New life sales for retail and BOLI/COLI products increased 3 percent to USD 934 million, including USD 50 million from the assumption of a signifi cant block of credit life insurance through a reinsurance transaction. Retail sales declined 9 percent over 2005 due to the discontinuance of sales of investor-owned life insurance offset partially by a rebound in the fourth quarter of 2006. Standardized sales of BOLI/COLI increased USD 95 million to USD 202 million in 2006. Reinsurance new life sales of USD 315 million increased
Off balance sheet sales for 2006 of USD 22.3 billion increased 22 percent over 2005. Retail mutual fund deposits of USD 3.1 billion increased 51 percent in 2006 due to increased sales in the wirehouse and fee planner channels. Sales of pension mutual funds increased 2 percent over a strong 2005 to USD 5.3 billion. Synthetic GIC sales of USD 12.6 billion in 2006 increased 53 percent with the increase largely attributable to fourth quarter 2006 sales of USD 7.1 billion.
United States are collectively referred to as AEGON USA. Reference to AEGON USA in this report refers individually or collectively to the corresponding operating companies. The companies operating in
S.A. de C.V., a Mexican life insurance company specializing in the sale of life insurance to individuals through their employers (worksite marketing) and the 49 percent of Afore Argos, a start-up pension fund management joint venture. Ranked by market share for individual life insurance, Seguros Argos is Mexico’s eight largest insurance company as of December 31, 2006 (Source: AMIS - the
AEGON USA’s primary insurance subsidiaries in the United States, all of which are wholly owned, are: Life Investors Insurance Company of America
Markets, Institutional Products and Services, and Pension. The group structure enables AEGON USA to manage the organization effi ciently, to identify business synergies, to pursue cross-selling opportunities, and to improve operating effi ciencies. Coordinated support services complement operations by providing expertise in systems technology, investment management, regulatory compliance, and various corporate functions. Products are offered and distributed through one or more of the AEGON USA licensed insurance or brokerage subsidiary companies. The divisions referenced below are part of those subsidiary companies.
The Long Term Care division (LTC) administers an existing block of insurance products designed to meet clients’ long-term healthcare needs during retirement. LTC insurance products provide coverage primarily for care services provided at home, in an assisted living facility, or in a nursing home. Sales of long-term care insurance in this division were temporarily discontinued in 2005. The LTC division is currently re-evaluating the long-term care marketplace and intends to begin selling new long-term care products in 2007.
Transamerica Insurance & Investment Group (TIIG), the marketing unit for Transamerica Occidental Life Insurance Company (TOLIC) and its affi liates, distributes term, fi xed, and variable universal life insurance and fi xed annuity products. In the United States, TIIG
TIIG’s primary distribution channel is a network of independent general agencies and agents. Sales of TIIG’s variable products are supported by its broker-dealer affi liate, Transamerica Financial
Transamerica Worksite Marketing (TWM) offers a wide range of voluntary payroll deduction life and supplemental health insurance products for groups ranging in size from as few as fi ve employees to more than 100,000 employees. Products marketed to employees at their workplace are designed to supplement benefi t plans that they may already have, both through their employers and on their own.
World Financial Group (WFG) targets the middle-income market, selling variable universal life insurance, variable annuities, mutual funds, equity indexed universal life insurance, universal life insurance, and term life insurance. WFG offers its associates the opportunity to build fi nancial services and insurance businesses on their own terms. Associates can offer securities-related products and services by becoming registered representatives of WFG’s affi liated broker-dealer, World Group Securities, Inc.
AEGON Direct Marketing Services (ADMS) is focused on customers who may not be reached by AEGON USA’s other distribution channels. ADMS aims to attract clients that might prefer to buy insurance products directly and not through an agent or intermediary. For this purpose, ADMS has developed a highly targeted approach using sophisticated database technology to increase its ability to develop niche markets and design products positioned to meet specifi c customer needs. Customers can purchase an extensive portfolio of products through direct mail, point-ofservice, internet, and telemarketing. Products are also marketed using the endorsement of sponsoring organizations such as fi nancial institutions, auto dealers, and various membership associations.
Transamerica Capital Inc. (TCI) works in partnership with many of the largest banks, national and regional broker-dealers, and fi nancial planners in the United States to market fi xed and variable annuities, mutual funds, 401(k) plans, and life insurance products. The bank distribution channel is particularly important to FMG. Working closely with its partners, FMG develops products and provides support to help banks expand their relationship with their customers.
Extraordinary Markets offers fi xed and variable life insurance products through independent brokers to the bank- and corporateowned life insurance market. Extraordinary Markets’ specialized
For more than 30 years, Transamerica Reinsurance has worked closely with life insurance and fi nancial services companies to provide mortality risk and capital management solutions for individual life insurance and annuity products. These direct relationships result in a more complete understanding of the risks being assumed and provide valuable insights into the needs of clients and trends within the marketplace.
Transamerica Reinsurance brings value internationally through customized solutions including coinsurance fi nancing, product development and related quota share programs, as well as traditional life reinsurance.
companies in the United States, as well as through offshore affi liates in Bermuda and Ireland: Transamerica International Re Bermuda
Diversifi ed Investment Advisors (Diversifi ed) is a registered investment advisory fi rm dedicated to retirement plan management.
Transamerica Retirement Services (TRS) serves the markets of defi ned contribution retirement plans and group fi xed annuity contracts to qualifi ed retirement plan sponsors terminating their defi ned benefi t pension plans. In the defi ned contribution retirement plan market, TRS provides customized retirement plan solutions for more than 14,500 small and mid-sized businesses, including multiple employer plans. TRS offers a full line of 401(k), profi t sharing, ageweighted, and new comparability retirement plans. TRS distributes these products and services through intermediaries, including life agents, brokers, registered representatives, and fi nancial planners, as well as through a series of strategic alliance relationships, including wirehouses, regional broker-dealers, and banks. TRS
TRS is also a leading provider in the market for terminal funding, a single premium non-participating group annuity product for terminating defi ned benefi t plans. This market is primarily driven by certain market forces such as mergers and acquisitions, business closures, and the need for plan-related cost savings. The fi nancial strength and stability of AEGON USA’s insurance subsidiaries are key competitive factors as this market requires the effective management of long-term pension liabilities. The terminal-funding product is distributed primarily through large benefi t consulting fi rms or selected specialty brokers.
Transamerica Retirement Management (TRM) was created in 2006 and is expected to be fully operational in the second quarter of 2007.
This new division provides the baby-boomer generation with access to simple yet comprehensive life planning products, services and retirement solutions. Through its Transition and Retirement Advice
enters into these arrangements to assist in diversifying its risks and to limit the maximum loss on risks that exceed policy retention limits.
Transamerica Life Canada (TLC) offers term and tax-sheltered universal life insurance, segregated funds, guaranteed interest accounts, and annuities. Money Concepts (Canada) Limited (MCC) is an independent Canadian fi nancial planning company with an association of franchised planning centers that offers a diverse spectrum of planning products and services to investors. With 54 franchises across Canada, MCC is the only franchised fi nancial planning company in Canada. MCC franchises and representatives benefi t from AEGON Dealer Services Inc. (ADSCI), which provides advisors and distributors with mutual fund and segregated fund dealership capability. These services are also provided to TLC’s and
AEGON Capital Management Inc. (ACM) was created in November 2001 from the spin-off of the investment management division of
TLC’s life products business unit provides life insurance products for individuals and corporates across Canada. The portfolio includes universal life and traditional life insurance, predominantly term life and permanent life insurance, as well as accidental death and out-ofthe -country medical insurance.
As part of its policy of reducing state benefits, the Dutch government ended an official pre-retirement savings plan, known as VUT, at the end of 2005 and replaced it with ‘Levensloop’. Levensloop allows savers to put aside a certain amount each year, free of tax, either to fund their retirement, take early retirement or, in some cases, finance a break in their careers. Many companies in the Netherlands decided to support Levensloop as a way of enhancing their overall employee benefits packages. Over the past year, AEGON The Netherlands has succeeded in establishing itself as the largest insurer providing
Pensions and individual life insurance continue to be our core products. In 2006, AEGON The Netherlands’ corporate and institutional sales force, and its TKP Pensioen unit, posted improved sales. AEGON is now the second largest pensions provider in the
Dutch market with 24 percent of the market in 2005, and continues to make progress in its ambition to become the market leader.
As the post-war ‘baby boomer’ generation heads into retirement, an increasingly large pool of assets is entering the life insurance market in the Netherlands and elsewhere. In such circumstances, it is incumbent on companies like AEGON to help individuals identify the most suitable products and services for their long-term retirement needs. Over the years, AEGON The Netherlands has established a successful track record in doing this. In particular, the company saw a 40 percent increase in 2006 in its sales of immediate annuity products and is well positioned for further growth in the years ahead.
Past efforts to create a new, more responsive organization for the business began to yield positive results. While strong competition in the Dutch market showed no signs of abating, production and value of new business improved markedly, compared with 2005.
With its tax and legal advice unit, Adfis, AEGON The Netherlands is a noted center of knowledge and expertise for the pensions industry. In
April 2006 a group of Dutch parliamentarians visited AEGON’s head office in The Hague to discuss the impact of recent legislation on the pensions market in the Netherlands.
The Dutch pensions and insurance market is a mature one. It is becoming ever more competitive. Despite that, AEGON
The Netherlands believes it is well positioned to become the leading, recognizable, quality brand in the market. For that reason, the company invested heavily in 2006 to expand its general staff and its sales teams, as well as improve its administration systems. At the same time, AEGON The Netherlands took action to lower its operating costs, enhancing the company’s ability to provide high quality, competitive pensions and insurance products.
AEGON The Netherlands believes the Dutch market will continue to grow in the coming years. However, only companies that are able to offer the highest quality and tailored, integrated solutions and services will be able to maximize the opportunities. We believe AEGON The
Netherlands is well positioned for further growth in 2007 and beyond.
Fair value movements of the derivatives hedging the unit-linked guarantees are part of operating earnings, while fair value movements of derivatives related to guarantees in traditional life and certain group pension contracts are part of net gains/losses on investments.
EUR 43 million to operating earnings before tax, compared to a positive EUR 67 million in 2005. Operating earnings in 2005 included
EUR 189 million in 2006, compared to EUR 270 million in 2005.
Operating earnings before tax from life for account of policyholders amounted to EUR 315 million, compared to a loss of EUR 53 million in 2005. This mainly refl ects the net positive effect of changes in interest rates on provisions for guarantees and related hedges, and the absence of additions to provisions for ‘Spaarkas’ products.
Operating earnings before tax from fee - off balance sheet products amounted to EUR 35 million in 2006, compared to EUR 15 million in the previous year. The asset management business continued the positive trend in profi tability, Meeùs improved its performance. For
The effective tax rate was 0 percent compared to 21 percent in the prior year. The decrease mainly refl ects higher tax-exempt gains from the sale of shares and the impact of the reduction of the corporate tax rate in the Netherlands from 29.6 to 25.5 percent, ratifi ed by the Dutch parliament in the fourth quarter of 2006, resulting in a release of deferred tax liabilities.
Revenues of EUR 6,034 million decreased by 2 percent in 2006 compared to 2005. Life insurance gross premiums of EUR 3,028 million and accident and health insurance premiums of EUR 191 million remained stable, general insurance premiums of EUR 434 million decreased 2 percent, investment income of EUR 2,006 million decreased by 8 percent and fees and commissions of EUR 375 million increased by 15 percent.
Life for account of policyholders premiums decreased by 10 percent compared to 2005. Single premiums in 2006 were 5 percent lower than in 2005 when a particularly large single premium contract was closed. Recurring premiums were 12 percent lower than in 2005 when a catch-up effect for a large co-insurance pension contract in the recurring segment was recognized.
Non-life premiums were 1 percent lower than in 2005. Accident and health insurance premiums were at the same level as in 2005 as decreased premium levels following legislative changes effective in 2006 have been fully compensated for by successful new income products (WIA). General insurance premiums decreased by 2 percent compared to 2005 as price pressure began to be felt, particularly in the motor market.
The consolidation of Unirobe in the fourth quarter of 2006, securities lending activities, performance fees earned by TKP
Non-life sales increased 65 percent to EUR 79 million, due to successful sales of new disability products. Accident and health premiums amounted to EUR 191 million, equal to 2005, as premiums from new products offset the decline in income, resulting from lapses in the sickness benefi ts market following new legislation. Sales of the new WIA disability product developed favorably and represented 49 percent of all new non-life production in 2006. General insurance premiums decreased 2 percent to EUR 434 million.
Off balance sheet product sales amounted to EUR 408 million compared to EUR 864 million in 2005. The comparable period in 2005 included a number of large asset management contracts.
The head offi ce of AEGON The Netherlands is located in The Hague, with additional offi ces in Leeuwarden, Groningen and Nieuwegein.
The business organization of AEGON The Netherlands is based on fi ve service centers (SC’s) and three sales organizations (SO’s). The service centers are responsible for all ‘back offi ce’ activities. The three sales organizations have been structured to serve different sales channels. Corporate & Institutional Clients (C&IC) focuses on large companies and institutional clients such as company pension funds and industry pension funds. AEGON Intermediary focuses on independent agents and AEGON Spaarbeleg works with tied agents as well as making direct sales.
Nedasco form a separate cluster of activities, as do the pension administration activities of TKP Pensioen. The Unirobe Meeùs Groep was formed in 2006 subsequent to the purchase of the remaining 55 percent of the shares of Unirobe in September 2006.
For most large companies and some small and medium-sized enterprises, AEGON The Netherlands provides defi ned benefi t products for which profi t sharing is based upon a pre-defi ned benchmark. Benefi ts are guaranteed. Premium tariffs are fi xed over the contract period and the longevity risk lies with AEGON The
AEGON The Netherlands provides a broad selection of separate life insurance policies and has a signifi cant position in funeral insurance.
insurance). Over the past few years, the Dutch government has gradually withdrawn from the sick leave and workers disability market. In 2006, AEGON The Netherlands developed new disability products for the group employee benefi ts market to address changing needs as a result of the new disability system in the
& Institutional Clients sales organization. In the property and casualty segment, AEGON The Netherlands provides products for the corporate and retail market.
providing fi duciairy management using multi-manager investment pools. AEAM is also the main asset manager for AEGON The
Netherlands’ insurance activities. Both AEAM and TKPI are able to tailor products to customers’ needs, including hedging of liability risks.
Unirobe in September 2006. Within the fi nancial advice segment, the Unirobe Meeùs Groep has developed a broad range of activities such as insurance, pensions, mortgages, fi nancing, savings, and investments. In the real estate business, Meeùs acts as a broker of both residential and corporate property. Meeùs is also active in the real estate management business.
AEGON The Netherlands remains contingently liable with respect to the amounts ceded if the reinsurer fails to meet the obligations it assumed. To minimize its exposure to reinsurer insolvencies, AEGON
The Netherlands annually monitors the creditworthiness of its primary reinsurers. It has experienced no material reinsurance recoverability problems in recent years. Where deemed appropriate, additional protection is arranged through letters of credit or trust arrangements, and, for certain arrangements, funds are withheld for investment by the ceding company.
In the fi re insurance business, an excess of loss reinsurance strategy is in place with retention of EUR 5.0 million (2007: EUR 3.0 million)
per risk and EUR 21.0 million (2007: EUR 20.0 million) per event. The motor liability business is also reinsured on an excess-of-loss basis with retention of EUR 2.5 million per event.
New business volumes in our corporate and individual life and pensions businesses reached higher levels than ever before, while our value of new business increased significantly, highlighting the profitable nature of our growth. New legislation simplifying rules on pensions came into effect in April 2006. These changes, collectively referred to as ‘Pension A-Day’, prompted many people and businesses to restructure their existing pension arrangements, leading to a high level of activity across the market. AEGON UK benefited from the impact of ‘Pension A-Day’ as a net winner in terms of new business.
Our advisory units, Origen and Positive Solutions, also saw increased business as a result. Both continued to make good progress, with
Management also saw impressive increased new business in the retail funds market, driven by our fixed income team’s continued high level of performance.
Scottish Equitable. This has been well received by our target markets of intermediary distributors and corporate customers.
We have also put in place a number of strategic initiatives, which will further strengthen the company’s position as we look to the future.
Last year was a highly successful one for AEGON in the United Kingdom.
Our business performance was stronger than ever. At the same time, we put in place strategic initiatives that will help us deliver our future growth objectives.
Income tax on shareholders return (16) (17) (6) (24) (24) 0 1 Included in other non-operating income/(charges) are charges made to policyholders with respect to income tax. There is an equal and opposite tax charge which is reported in the line Income tax attributable to policyholder return.
market, AEGON UK is using its fi nancial strength and global position to offer new solutions to its UK customers. Our recent move into the individual annuity market gathered momentum over the year and we have already attained a strong position in that market well ahead of our original schedule. In September, the launch of the ‘5 for Life’
product in the United Kingdom, based on what is an already successful product in the United States, made AEGON UK the fi rst operator to bring the variable annuity, living benefi t concept to the
We believe AEGON UK is well positioned to build on the considerable advances made in 2006 and achieve further success in 2007.
Excluding the effect of these charges, operating earnings before tax increased 15 percent.
GBP 14 million, compared to a loss of GBP 1 million in 2005. Earnings increased due to higher annuity earnings, positive experience in the protection businesses and higher underlying assets.
Operating earnings before tax from life for account of policyholders were GBP 139 million, equal to 2005 earnings. This mainly refl ects business growth and the impact of the higher equity and bond markets on fund-related charges offset by higher surrenders due to
Participations. In the consolidated earnings for the AEGON Group, 35 percent of this gain has been eliminated to refl ect AEGON’s 35 percent share in La Mondiale Participations. The effective tax rate in 2006 decreased from 15 percent to 9 percent. This primarily refl ects the tax-exempt disposal of the Luxembourg subsidiary and the mix of earnings.
Commissions and expenses increased 17 percent to GBP 607 million, refl ecting growth in the protection and distribution businesses, and the impact of higher surrenders related to ‘Pension A-Day’. Operating expenses increased by 8 percent to GBP 375 million, due to investments, growth of the businesses and strong new business in 2006.
New life sales in 2006 increased 54 percent, following record sales in the fourth quarter of 2006. The increase was due to increased activity in almost all business lines and the pension business in particular.
AEGON UK is a leading manufacturer, fund manager, and distributor of pension, protection and investment products.
AEGON UK is a major fi nancial services organization specializing in the long-term savings and protection markets. AEGON UK sells a range of products through fi nancial advisor channels in the United
Kingdom. The business is centered on two core markets: individual and corporate customers. This segmentation is driven by a desire to place the customer at the heart of the strategy.
Changes to many aspects of UK pension legislation and taxation continue to impact the industry. The most signifi cant change relates to the introduction of a simpler and unifi ed tax regime, which now applies to all types of pension arrangements. This was implemented in April 2006 and has impacted all UK pension providers. AEGON UK
has supported its distribution channels by seeking to ensure they have an appropriate product range and by helping them to focus on the opportunities presented by these changes.
AEGON UK believes that its high standards of service are a key market differentiator for AEGON UK, with technology increasingly being used to improve effi ciency for providers and advisors.
AEGON UK is building on its success with SmartScheme, AEGON UK’s technology solution to pension administration. The company is involving fi nancial advisors and clients in developing technology solutions to ensure that all parties derive benefi t.
AEGON Individual Pensions offers a comprehensive range of pension products, including stakeholder pensions, personal pensions, pensions for executives, transfers from other plans, phased retirement, unsecured pensions (USP), alternatively secured pensions (ASP) and self invested personal pensions (SIPP).
All manufacturing and scheme administration operations relating to the corporate pension and employee benefi ts markets in the
This SIPP includes facilities for investing for retirement and the full range of post-retirement facilities (USP, ASP, phased retirement). It is also supported by a good range of technological support, including a risk profi ling tool and on-line viewing facilities.
Group pensions is a key business area for AEGON Corporate. These are pension arrangements for the employees of corporate customers that cover a range of benefi t options and which are predominantly defi ned contribution. At retirement, cash up to the maximum allowed can be taken, with the remainder of the pension fund used to purchase an annuity or to invest in a drawdown policy until the age of 75. AEGON Corporate also sells and administers defi ned benefi t pension schemes. The market for new defi ned benefi t plans has decreased in recent years, but opportunities remain to take over the administration and investment of existing plans. A group SIPP
AEGON UK has seen an increase in new business this year because of the change in rules on tax-free lump sums, with more people wanting to combine several pensions together into one higher annuity. AEGON UK is currently developing a capital protection option for launch during 2007.
AEGON UK is continuing to invest in improving its systems and servicing processes, to improve our ability to gain market share from our main competitors. This will provide AEGON UK with the platform to develop into a top player in this market and develop additional products to complement the Compulsory Purchase Annuity and
The offshore contracts are, historically, aimed at the high net worth market giving valuable tax advantages and a wide investment choice.
The number of estates falling within the UK Inheritance Tax market continues to drive demand for trust-based solutions to mitigate potential tax liabilities. AEGON Scottish Equitable International offers a range of trusts to support inheritance tax planning.
AEGON Corporate offers a range of group risk products exclusively through fi nancial advisors. These products are provided to employers who use them as part of their wider employee benefi ts and remuneration strategy.
Products in general are sold on a standard employer paid basis, however there is increasing interest in placing these products as part of the fl exible benefi t offering, allowing an element of employee choice over product selection as well as benefi t levels.
Distribution is heavily concentrated with the top 12 intermediaries accounting for 80 percent of total market revenue (Source: Association of British Insurers, 2006). The main intermediaries involved in this market are specialist Employee Benefi t Consultancies.
AEGON UK’s principal means of distribution is through the intermediated fi nancial advice channel in the United Kingdom. These advisors provide their customers with access to varying numbers and types of products depending on their regulatory status.
For longevity risk prior to 2002, AEGON UK perceived reinsurance terms to be attractive for the risk of improving mortality under immediate annuities relative to the typical prices for these products.
Reinsurer quality is sought by targeting a credit rating of AA. Any decision to use a reinsurer with a lower credit rating requires approval of the local Risk and Capital Committee and discussion with
Group Risk, where both the credit quality of the reinsurer and the type of risk being covered will be considered. As a refl ection of the insurance industry in general there has been a reduction in the credit rating of reinsurers and this has resulted in a greater need to refer decisions to the reinsurance committee. However the policy remains to seek reinsurers with AA rating where this can be achieved on economic terms.
AEGON’s position in Other countries, entering new markets that offer long-term growth opportunity for our core products and services. In nearly every market, the need for a broader range of protection and retirement products and services is significant. The progress achieved during 2006 strengthened AEGON’s position as we claim a sizable share of new business that will emerge in the coming years.
Slovakia, more than 200,000 individuals have now joined AEGON’s pension fund, begun in 2005. AEGON’s acquisition of PTE Ergo Hestia in Poland in November 2006 and the partnership with Banca
Transilvania in January 2007 to form a mandatory pension fund company in Romania further strengthened our pension position in the region.
In recent years, AEGON has made significant progress in expanding its global footprint beyond its traditional markets, to include developing countries throughout Asia, Central and Eastern Europe, as well as other European countries such as Spain and France.
Central and Eastern Europe region, our plans to establish more joint ventures in Spain, and AEGON’s pipeline for new business in other parts of Europe and Asia, it is our view that the Other country VNB
EUR 37 million, compared to EUR 44 million in 2005. Higher earnings in Hungary and Spain were more than offset by investments in growth in Slovakia and China. The increase in Spain is mainly driven by non-recurring expenses in 2005, related to the sale of the general insurance business, and by the proportional inclusion of the joint ventures with Caja de Badajoz and Caja Navarra since the second quarter of 2006. In Taiwan, higher life for account of policyholders earnings compensated lower traditional life earnings.
Operating earnings from life for account of policyholders increased from EUR 6 million in 2005 to EUR 8 million in 2006, primarily due to higher earnings in Taiwan.
Total fee - off balance sheet operating earnings before tax from
Other countries amounted to EUR 4 million in 2006 compared to
AEGON’s share in the profi t of associates amounted to EUR 24 million, compared to EUR 16 million in 2005. This line represents the income from the partnership with CAM (49.99 percent interest) as well as the income from the 35 percent stake in La Mondiale
Net income amounted to EUR 36 million, compared to EUR 211 million in 2005. The 2005 fi gure included a book gain on the sale of the Spanish general insurance activities of EUR 176 million before tax. AEGON’s share in the profi t (and loss) of associates (after tax)
The effective tax rate in 2006 was 56 percent as a result of a reduction in the deferred tax asset in Taiwan in 2006.
Total revenues increased by 36 percent to EUR 2.2 billion and primarily refl ects the full year of revenues from AEGON Poland, the inclusion of the joint ventures with Caja de Badajoz and Caja Navarra and growth in the other markets. AEGON Poland’s revenues increased from EUR 88 million in 2005 (only fourth quarter) to
Operating expenses increased 4 percent to EUR 148 million due to higher expenses in China, Hungary and new operations in Poland, offset by lower expenses in Spain.
New life sales in Taiwan in 2006 decreased 61 percent to NTD 4.8 billion (EUR 117 million), refl ecting the high levels of sales through the broker and bank channel in the fi rst six months of 2005. Unitlinked sales accounted for 47 percent of total new life sales in 2006.
The decline in traditional life sales is due to re-pricing of the products following the revised reserving requirements introduced in 2005. Total gross premiums increased 12 percent to NTD 39.8 billion
(EUR 965 million) in 2006, mainly due to growth in premiums of the life for account of policyholders business.
New life sales in Central and Eastern Europe amounted to EUR 82 million. In Hungary, new life sales increased 5 percent to HUF 4.6 billion (EUR 17 million), due to the introduction of a new tax regulation, higher sales in the agency channel and the development of the broker channel. In Poland, new life sales amounted to PLN 232 million (EUR 60 million) in 2006, after record sales in the fourth quarter of 2006. Sales of single premium life insurance through the bank channel showed very strong momentum, due to a recovery in equity markets in the fourth quarter in 2006. In addition, recurring premium sales accelerated in the fourth quarter of 2006 as a result of the successful development of the broker channel and the tied agent network.
AEGON’s joint ventures Caja de Badajoz and Caja Navarra. In addition, a large group life policy sold in the fourth quarter of 2006, after the approval of tax changes, contributed to the sales growth.
Spain has developed several new products in anticipation of the new tax rules and will launch these in 2007.
amounted to EUR 492 million (on a 100 percent basis). The partnership with CAM is not consolidated in AEGON’s accounts.
HUF 93 billion (EUR 353 million). Sales in the pension fund business continued to grow, with the number of new members added in 2006 increasing by 32 percent to more than 60,000. Total pension fund membership amounted to more than 628,000 members at the end of 2006 compared to 583,000 at the year-end of 2005. Off balance sheet investments grew by 32 percent to HUF 373 billion (EUR 1.5 billion) compared to the year-end 2005 level.
In Hungary, AEGON Credit Finance Company was offi cially registered on July 13, 2006, and started operations in November 2006. Its principal business is to provide mortgage fi nancing to the retail market in Hungary.
On July 1, 2006, AEGON converted the branch offi ce of its Slovakian life insurance operations into a separate stand-alone legal entity.
AEGON CEE offers life insurance and, in case of AEGON Hungary, non-life insurance products as well. The region’s core business products are life, pension, mortgage, and household insurance. The life insurance product portfolio consists of traditional general account products and unit-linked products, although in recent years unit-linked sales have been signifi cantly higher than general account product sales. Margins for household insurance in Hungary are attractive, and they present considerable opportunities for crossselling life insurance products. Property and car insurance are also represented in the portfolio, but are not considered core products.
Pension insurance is a core business product of AEGON Hungary and
AEGON Slovakia. Pension fund administration services are also offered. The mandatory pension funds in Hungary and Slovakia, and the voluntary pension fund of AEGON Hungary, are among the largest in their countries in terms of the number of members and the assets they had under management (Source: www.pszaf.hu; Association of Pension Fund Management Companies Slovakia).
AEGON CEE is aiming to grow its pension fund business by adding new members to its existing funds and by taking over other pension funds or starting greenfi eld activities in new countries.
Traditional general account products are marginal in all countries apart from Hungary. These products include individual life policies that were issued before AEGON Hungary was privatized and became part of AEGON. Traditional general account products also include indexed life products that are not unit-linked but have guaranteed interest. AEGON Hungary no longer offers these products. In addition, traditional general account products include group life products and the preferred life product.
Group life products are yearly renewable term products with optional accident and health coverage. Savings products for employee benefi t programs are mainly traditional products with interest guarantee.
Company (AEGON Credit), provides Swiss franc-denominated mortgage loans to the retail market. AEGON Credit also sells various endowment life, term life and household insurance product-riders to these loans.
Hungary Investment Fund Management Co. It offers mutual funds to the public and manages the assets of the general account portfolio of AEGON Hungary Composite Insurance Co., as well as the unitlinked portfolios, the guaranteed fund of AEGON Poland and AEGON
Hungary pension funds. It also supplies asset management services to third parties and AEGON Slovakia. AEGON Hungary Investment
Risk Excess of Loss Treaty. The majority of AEGON CEE’s programs are non-proportional Excess of Loss programs. Additionally, AEGON CEE
Excess of Loss Treaty, EUR 0.4 million in the case of the Motor Third
In 2006, AEGON operated in Spain through two insurance companies: AEGON Seguros Salud and AEGON Seguros de Vida, subsidiaries of a holding company, AEGON España S.A. Administrative and operational services to all companies in Spain, including joint ventures with third parties, are provided by a separate legal entity: AEGON Administración y Servicios A.I.E.
AEGON fi rst entered the Spanish market in 1980 by acquiring
Covadonga at the end of 1999. In 2004, AEGON Spain set up a strategic partnership with Caja de Ahorros del Mediterráneo (CAM).
This partnership combines CAM’s signifi cant customer reach through its banking network with AEGON’s expertise in life insurance and pensions. In July 2005, AEGON Spain entered into a strategic partnership agreement with Caja de Badajoz (CB) aimed at setting up a new insurance company to sell AEGON Spain’s life insurance, accident and pension products through the CB network. AEGON
Spain provides back offi ce services for this joint venture company. In
May 2006, the new company, Caja de Badajoz Vida y Pensiones, started operations, having obtained regulatory approval. In
November 2005, AEGON Spain signed a strategic partnership agreement with the Spanish savings bank Caja de Ahorros de
Navarra (CN), under which AEGON acquired a 50 percent stake in
The maximum retention limit on any one life varies by product and risk classifi cation, and is generally between EUR 45,000 and
EUR 60,000. AEGON Spain remains contingently liable with respect to the amounts ceded if the reinsurer fails to meet the obligations it assumed.
AEGON Spain annually monitors the creditworthiness of its primary reinsurers. It has experienced no material reinsurance recoverability problems in recent years. Where deemed appropriate, additional protection is arranged through funds that are withheld for investment by the ceding company.
AEGON Life Insurance (Taiwan) Inc. (AEGON Taiwan) is a life insurance company formed in 2001 to conduct life insurance business in the Republic of China. AEGON Taiwan’s operations began in 1994 as a branch offi ce of Life Investors Insurance Company of
AEGON Taiwan acquired a block of business comprised of 57,000 policies of National Mutual Life Association of Australia, AXA’s
AEGON-CNOOC Life Insurance Co., Ltd. (AEGON-CNOOC) is a 50/50 joint venture established in Shanghai, People’s Republic of China, by
The agency channel portfolio consists primarily of universal life and traditional life products, including level whole life, coupon whole life, endowment life, term life as well as short-term accident and longterm health products. The most important product for the bank channel is a single premium whole-life universal life product.
According to the CIRC regulations, AEGON-CNOOC cedes a quota share of accident and health business to the China Reinsurance
In addition, AEGON-CNOOC entered into several commercial reinsurance arrangements to achieve a diversifi cation of risk and to limit the maximum loss on risks that exceeded policy retention limits.
Banking • Accident and health insurance • • • • • • • General insurance • • * Also distributed internationally from the United States
AEGON COMPANIES AROUND THE WORLD OFFER PRODUCTS TAILORED TO THE SPECIFIC NEEDS OF LOCAL CUSTOMERS
AEGON manages risk at the local level where business is transacted, based on principles and policies established at group level. AEGON’s integrated approach to risk management involves common measurement of risk and scope of risk coverage to allow for aggregation of AEGON’s risk position. In addition, this integrated framework facilitates the sharing of best practices and the latest research on methodologies. The risk management functions are applied locally and are tied to the speed of business, while corporate oversight remains independent from the business activity to provide oversight and peer review.
AEGON ACTIVELY MANAGES ITS CREDIT RISK EXPOSURE BY INDIVIDUAL COUNTERPARTY, SECTOR AND ASSET CLASS
For reinsurance, credit risk is often mitigated through funds withheld by treaties (when AEGON owns the assets) or through assets held in trust for the benefi t of AEGON (in the event of reinsurer insolvency).
holds the remainder of its capital base (capital securities, subordinated and senior debt) in various currencies in amounts that are targeted to correspond to the book value of AEGON’s country units. This balancing mitigates currency translation impacts on equity and leverage ratios. Currency risk in the investment portfolios is managed using asset liability matching principles.
The exchange rates for US dollar and UK pound per euro for each of the last fi ve year-ends are set out in table 2.
The sensitivity analysis in table 3 shows the estimated approximate effects on net income and shareholders’ equity of movements in the exchange rates of AEGON’s non-euro currencies relative to the euro.
Among other things, early withdrawals may also require AEGON to accelerate amortization of deferred policy acquisition costs (DPAC), which in turn reduces net income.
Decrease by 15% of non-euro currencies relative to the euro decreases between 11% and 12% decreases between 12% and 13%
2 The effect of currency exchange rate movements is refl ected as a one-time shift up or down in the value of the non-euro currencies relative to the euro on December 31, 2006.
The general account fi xed income portfolios of AEGON Americas and
Table 4 shows the year-end interest rates for the period from 2002
Parallel movement of yield curve Estimated effects on net income Estimated effects on shareholders’ equity
Under IFRS, income and shareholders’ equity are adversely affected when interest rates rise and favorably affected when interest rates fall. When interest rates shift up, there would be unrealized losses on certain assets that adversely affect net income and shareholders’
As premiums and deposits are received, these funds are invested to pay for future policyholder obligations. For general account products,
AEGON typically bears the risk for investment performance equaling the return of principal and interest. AEGON is exposed to credit risk on its general account fi xed income portfolio (bonds, mortgages and private placements), over-the-counter derivatives and reinsurance contracts. Some issuers have defaulted on their fi nancial obligations for various reasons, including bankruptcy, lack of liquidity, downturns in the economy or downturns in real estate values, operational failure and fraud. In the past, poor economic and investment climates in AEGON’s major markets resulted in signifi cant investment impairments on AEGON’s investment assets due to defaults and overall declines in the securities markets. Although credit default rates were benign in 2006, a reversion to excessive defaults, or other reductions in the value of these securities and loans, could have a material adverse effect on AEGON’s business, results of operations and fi nancial condition.
For the resulting net credit risk exposure, AEGON employs deterministic and stochastic credit risk modeling in order to assess its credit risk profi le, associated earnings and capital implications due to various credit loss scenarios. The ratings distribution of general account portfolios of AEGON’s major country units are presented in table 6 on page 59 and are organized by rating category.
CCC or lower 50 1 The fi xed income issuer rating is used when applying the credit counterparty limit exposure policy.
Equity market exposure is present in equity-linked products whereby policyholder funds are invested in equities at the discretion of the policyholder; here most of the risk remains with the policyholder.
Equity, real estate and non-fi xed income exposure in general account assets
AEGON is also at risk if returns are not suffi cient to allow amortization of DPAC and VOBA. It is possible under certain circumstances that AEGON would need to accelerate amortization of
DPAC and VOBA and to establish additional provisions for minimum guaranteed benefi ts, which would reduce net income and shareholders’ equity. Volatile or poor market conditions may also signifi cantly reduce the popularity of some of AEGON’s savings and investment products, which could lead to lower sales and lower net income. AEGON’s general account equity and certain other investment holdings are shown in table 8 on page 60.
The general account equity, real estate and other non-fi xed income portfolio of AEGON USA and AEGON The Netherlands accounted for 92 percent of the total general account equity, real estate and other non-fi xed income portfolio of AEGON. Of AEGON’s country units,
AEGON The Netherlands consists of a diversifi ed portfolio of global equities and 5 percent equity holdings in Dutch companies, which include non-redeemable preferred shares.
AEGON’s shareholders’ equity is directly exposed to, among other things, movements in the equity and real estate markets and to movements in interest rates. With the implementation of IFRS, income and shareholders’ equity are expected to be more volatile and subject to increased sensitivity to movements in equity and real estate markets and to movements in interest rates. In addition, net income is sensitive to the fees earned on equity investments held for the account of policyholders as well as the amortization of DPAC and provisioning for minimum product guarantees.
The sensitivity analysis of net income and shareholders’ equity to equity and real estate markets is presented in table 10.
AEGON is exposed to currency fl uctuations, changes in the fair value of its investments, the impact of interest rate, equity markets and credit spread changes and changes in mortality and longevity.
AEGON uses common fi nancial derivative instruments such as swaps, options, futures and forward contracts to hedge some of the exposures related to both investments backing insurance products and company borrowings.
1 Basic assumptions: no correlation between markets and risks, unchanged conditions for all other assets and liabilities and limited management actions taken. All changes are relative to net income and shareholders’ equity. Effects do not tend to be linear and there fore cannot be extrapolated for larger increases or decreases.
2 The effect of movements in equity and real estate markets is refl ected as a one-time increase or decrease of worldwide equity and real estate markets on December 31, 2006.
AEGON’s earnings depend signifi cantly upon the extent to which actual claims experience is consistent with the assumptions used in setting the prices for products and establishing the technical provisions and liabilities for claims. To the extent that actual claims experience is less favorable than the underlying assumptions used in establishing such liabilities, income would be reduced. Furthermore, if these higher claims were part of a trend, AEGON may be required to increase liabilities, which could reduce income. In addition, certain acquisition costs related to the sale of new policies and the purchase of policies already in force have been recorded as assets on the balance sheet and are being amortized into income over time. If the assumptions relating to the future profi tability of these policies (such as future claims, investment income and expenses) are not realized, the amortization of these costs could be accelerated and may require write-offs due to unrecoverability. This could have a material adverse effect on AEGON’s business, results of operations and fi nancial condition.
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 is unable to fully recover up front expenses in selling a product despite the presence of commission recoveries or surrender charges and fees. For mortality and morbidity risk, AEGON sells certain types of policies that are at risk if mortality or morbidity increases, such as term life insurance and accident insurance, and sells certain types of policies that are at risk if mortality decreases, such as annuity products.
AEGON is also at risk if expenses are higher than assumed by management.
units also perform studies for underwriting risk assumptions, comparing AEGON’s experience to industry experience. As well as combining AEGON’s experience and industry experience based on the depth of the history of each source to AEGON’s underwriting assumptions. Where policy charges are fl exible in products, AEGON
uses these analyses as the basis for modifying these charges, with a view to maintain a balance between policyholder and shareholder interests. AEGON also has the ability to reduce expense levels over time, thus mitigating unfavorable expense variation.
AEGON may face claims from customers and adverse negative publicity if its products result in losses or fail to result in expected gains, regardless of the suitability of products for customers or the adequacy of the disclosure provided to customers by AEGON and by the intermediaries who distribute AEGON’s products. New products that are less understood and that have less of a historical performance track record may be more likely to be the subject of such claims. Any such claims could have a material adverse effect on AEGON’s results of operation, corporate reputation and fi nancial condition.
Levensloop (Life cycle). Any changes in United States or Dutch tax law affecting similar products could have a material adverse effect on AEGON’s business, results of operations and fi nancial condition.
AEGON’s result of operations and fi nancial condition may be materially affected from time to time by general economic conditions, such as levels of employment, consumer lending or infl ation in the countries in which AEGON operates.
Claims paying ability and fi nancial strength ratings are factors in establishing the competitive position of insurers. A rating downgrade
The current S&P, Moody’s and Fitch insurance fi nancial strength ratings and ratings outlook of AEGON’s primary life insurance companies in AEGON’s major country units are shown in table 12.
(double A minus) ratings to AEGON N.V.’s senior debt and A+ ratings to subordinated debt and perpetual securities.
AEGON’s operating results and fi nancial position can be adversely affected by volatile natural and man-made disasters such as hurricanes, windstorms, earthquakes, terrorism, riots, fi res and explosions. Over the past several years, changing weather patterns and climatic conditions have added to the unpredictability and frequency of natural disasters in certain parts of the world and created additional uncertainty as to future trends and exposure.
AEGON is subject to comprehensive regulation and supervision in all countries in which AEGON operates. The primary purpose of such regulation is to protect policyholders, not holders of securities.
AEGON’s ability to sell new policies or claims exposure on existing policies. Additionally, the insurance laws or regulations adopted or amended from time to time may be more restrictive or may result in higher costs than current requirements.
The US Sarbanes Oxley Act of 2002 (SOX) and rules subsequently implemented by the SEC and the New York Stock Exchange, require changes to some of AEGON’s reporting and corporate governance practices, including the requirement that AEGON issues a report on its internal controls over fi nancial reporting, beginning for the year ending December 31, 2006 onwards. If AEGON is unable to maintain or achieve compliance with SOX, it may have a material adverse impact on AEGON’s business.
In recent years, the insurance industry has increasingly been the subject of litiga tion, investigation and regulatory activity by various govern mental and enforcement authorities concerning common industry practices such as the disclosure of contingent commissions and the accounting treatment of fi nite reinsurance or other nontraditional insurance products. AEGON cannot predict at this time the effect this current trend towards litigation and investigation will have on the insurance industry or its business. Lawsuits, including class actions and regulatory actions, may be diffi cult to assess or quantify, may seek recovery of very large and/or indeterminate amounts, including punitive and treble damages, and their existence and magnitude may remain unknown for substantial periods of time.
A substantial legal liability or a signifi cant regulatory action could have a material adverse effect on AEGON’s business, results of operations and fi nancial condition.
The failure of a major market participant could disrupt securities markets or clearance and settlement systems in AEGON’s markets, which could cause market declines or volatility. Such a failure could lead to a chain of defaults that could adversely affect us. In addition, such a failure could impact future product sales as a potential result of reduced confi dence in the insurance industry.
States, may not be enforceable in Dutch courts. Therefore, AEGON’s share holders that obtain a judgment against AEGON in the United
AEGON’s internal audit departments are responsible for performing an annual risk assessment and conducting audits as necessary to evaluate the effectiveness of the design and operation of its internal controls. AEGON has also established a Group Risk and Capital
Committee at the Group level. The objectives of the Group Risk and
Capital Committee include monitoring AEGON’s overall exposure as well as making recommendations and overseeing remedial action where these exposures are deemed excessive. Moreover this Committee is responsible for ensuring that risks are well managed and measured within the country units. The Group Risk and Capital Committee regularly reports to the Executive Board and Supervisory Board.
The Executive Board has established a group wide framework to document, evaluate, and report on the effectiveness of the internal controls over the fi nancial reporting process. Within this context the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
The risk management and control systems have worked properly in 2006.
AEGON’s funding strategy continues to be based on assuring excellent access to international capital markets at low costs. As part of this strategy, AEGON aims to offer institutionally targeted debt securities and to maintain excellent access to retail investors, as witnessed by the successful issuance of junior perpetual capital securities during recent years.
AEGON manages capital adequacy at the level of its country units and their operating companies. AEGON seeks to support its internal capital adequacy levels at the higher of local regulatory requirements, 165 percent of the relevant local Standard & Poor’s capital adequacy models or internally imposed requirements. During 2006, the capital adequacy of AEGON’s operating units continued to be strong. All of AEGON’s units were capitalized within these tolerances. In the United States, at December 31, 2006, AEGON held approximately 365 percent of the minimum capital required by the
(excluding revaluation reserve), 25 percent capital securities and a maximum of 5 percent dated subordinated and senior debt.
AEGON’S FUNDING STRATEGY CONTINUES TO BE BASED ON ASSURING EXCELLENT ACCESS TO INTERNATIONAL CAPITAL MARKETS AT LOW COSTS
Operating debt activities primarily relate to mortgage warehousing and the funding of US regulation XXX and Guideline AXXX redundant reserves.
EUR 0.6 billion matures within three years and EUR 5.0 billion is perpetual or matures after fi ve years. AEGON considers its working capital, backed by the external funding programs and facilities, to be amply suffi cient for the group’s present requirements.
was examined along with the process initiated by AEGON to ensure compliance with IFRS beginning with the 2005 fi nancial year. The director Group Finance & Information attended the meetings during which the Supervisory Board discussed the annual results for 2005, the quarterly results and value of new business fi gures in 2006; the dividend policy and the interim and fi nal dividends; and the press releases. Representatives from Ernst & Young, AEGON’s independent auditor, attended the discussion regarding the annual results for 2005.
The Supervisory Board approved the Executive Board’s proposal to discontinue the secondary listings of the AEGON N.V. shares in
Frankfurt and Zurich as well as the abolition of bearer shares (K and
The June 2006 Supervisory Board meeting was devoted to AEGON’s corporate strategy and the risks of the business activities, and to the
Group Management Overview and management development. This meeting was preceded and prepared by the Strategy Committee. It was hosted by AEGON Hungary and took place in Budapest. The occasion provided a good opportunity for AEGON’s management in
Board will pursue further oppor tunities to engage with AEGON’s international senior management.
Together with the Executive Board, the Supervisory Board also regularly reviews AEGON’s business strategy. The Supervisory Board held a total of six meetings in 2006, with an attendance average of approximately 90 percent. Meetings were typically preceded or followed by meetings of its various committees or by exclusive meetings that did not include
Please refer to pages 82 to 92 for AEGON’s full report on corporate governance and its compliance with the Dutch Corporate Governance
its meeting in December. The Supervisory Board subsequently discussed the results of the Executive Board’s assessment of the structure and operation of the internal risk management and control systems. During this December meeting, the budget for 2007, the budgeted Capital Plan for 2007 and the targets for the value of new business (VNB) until 2010 were also discussed. The Supervisory
May 2006. The Supervisory Board also discussed and supported the decision of the Executive Board to disclose AEGON’s VNB on a quarterly basis, beginning in 2006. The Supervisory Board subsequently discussed and supported each quarterly disclosure of
in India and with Banca Transilvania in Romania; the acquisitions of the pension fund management company PTE Ergo Hestia S.A. in
Poland and Clark, Inc. in the USA, as well as the acquisition of the remaining 55 percent stake in Unirobe in the Netherlands.
The Supervisory Board also revised its internal control procedure for acquisitions, divestitures and joint ventures, which will be refl ected in the Executive Board Charter.
The Supervisory Board paid special attention to compliance in general, which included equity-linked insurance policies in the
Board further followed the advice of the Audit Committee, in accordance with the Sarbanes-Oxley Act (SOX) to adopt the Preapproval Policy for 2006 that relates to the services of AEGON’s independent auditor, Ernst & Young.
Supervisory Board held an educational meeting in December. During this meeting AEGON’s Group Treasurer, Chief Risk Offi cer and Group
Plan, reports on currency exposure, internal control systems, as well as risk management and Ernst & Young’s engagement letter for 2006 and its report on independence, the fi rm’s fee structure and the integrated Audit Plan for 2006. The Audit Committee advised the Supervisory Board to recommend to shareholders that
Ernst & Young be reappointed as the independent auditor for the fi nancial year 2006. The Committee also discussed the consequences of SOX and the Dutch Corporate Governance Code, as well as the role of the independent auditors. The Committee confi rmed that
Mr. Levy qualifi es as fi nancial expert within the meaning of the relevant provisions of SOX and the Dutch Corporate Governance
The Audit Committee was updated each quarter on the activities of the Group Internal Auditor and on AEGON’s worldwide compliance with SOX 404, as well as on fraud and general compliance issues.
During these meetings, the Audit Committee held separate sessions with the internal auditor as well as with the external auditors, in order to discuss their fi ndings outside the presence of the Executive
Supervisory Board accordingly. The Audit Committee also advised the Supervisory Board to authorize the Executive Board to fi ll
As required by the Audit Committee Charter, the proceedings of the meetings of the Audit Committee were reported to the Supervisory
THE PURPOSE OF THE STRATEGY COMMITTEE IS TO REVIEW THE MAJOR FEATURES OF AEGON’S STRATEGY
The Strategy Committee held two meetings in 2006, which were also attended by the Executive Board members. The purpose of the
Strategy Committee discussed AEGON’s business strategy and prepared a framework for the agenda for the Supervisory Board meeting held in Budapest, in May 2006. As required by the Strategy
Board and its committees as well as existing and forthcoming vacancies and it advised the Supervisory Board on nominations for two appointments and one reappointment in 2007. In addition, the
The Compensation Committee held four meetings in 2006, which were from time to time also attended by the chairman or the CFO
AEGON share price as expressly stated in the rules of the Option
Plans. The proceedings of the Compensation Committee meetings were reported during subsequent Supervisory Board meetings.
Please refer to pages 76 to 81 for the full text of the Compensation
Code. Mr. Storm is not considered to be independent within the meaning of the Code due to the fact that he served as chairman of AEGON’s Executive Board prior to his retirement in April 2002.
Mr. Storm’s four-year term of offi ce expired in 2006. The Supervisory
Board nominated him for reappointment for another term, and he was subsequently reappointed by shareholders during the AGM in 2006.
Mr. Sobel, as nominated by the Supervisory Board, was appointed by shareholders during the AGM in April 2006 as a member of the
Board has decided to nominate Mrs. Peijs and Mr. Burgmans for appointment by shareholders during the AGM on April 25, 2007.
In compliance with the Dutch Corporate Governance Code, the members of the Executive Board are appointed by shareholders for a term of four years, with the possibility of being reappointed for additional four-year terms. According to the schedule (which is included in the Executive Board Rules and has been posted on AEGON’s corporate website), the term of offi ce for Mr. van der Werf expired in 2006. Although he was reappointed by shareholders during the 2006 AGM, Mr. Van der Werf submitted his resignation as an
Board. Following the recommendation of the Nominating Committee, the Supervisory Board has decided to nominate Mr. Wynaendts for reappointment to the Executive Board for another four-year term. This nomination will be proposed to shareholders during the AGM in 2007.
Baird, Van der Werf and Thoresen. The chairman of the Executive
This annual report includes the annual accounts for 2006, which were deliberated and proposed by the Audit Committee and the
Board. The Supervisory Board recommends that shareholders adopt these annual accounts and approve the proposal to pay a total dividend for the fi nancial year 2006 of EUR 0.55 per common share.
community for their ongoing commitment to growing AEGON’s business profi tably. The Supervisory Board members further wish to express their appreciation for the dedication and professionalism demonstrated in responding to the ever-changing regulatory environment, market conditions and opportunities for AEGON’s businesses.
(1936, dual citizenship British and Canadian) is a retired chairman of
Supervisory Board in 1997 and his current term will end in 2009.
FFTW Funds in Dublin (Ireland). He is currently a member of the
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
Sciences Corp. and Hospira, Inc. He is currently a member of the
Board in 2005 and his current term will end in 2009. He is also a non-executive director of Nissan Motor Cy, Renault Spain and the
AEGON’s Supervisory Board in 2000 and her current term will end in 2008. She is also a member of the Board of Directors of AT&T, Inc.
(USA). She is currently a member of the Supervisory Board Audit
(1938, Dutch nationality) is a retired partner 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
Goedland N.V., and Ermenegildo Zegna International N.V. He is currently a member of the Supervisory Board Audit and
Base fee per annum, for membership of the Supervisory Board, in EUR
Attendance fee per meeting, in EUR, for face-to-face meetings of the committees (i.e. committee members have attended the meeting in person)
Other Committees 1,250 1 1 In case of intercontinental travel this fee will be EUR 2,500 per face-to-face meeting.
This policy aims at enhancing simplicity, transparency and credibility of Executive Board remuneration. The objectives of this Remuneration
Remuneration Policy until the AGM in 2007. A proposal for a new policy will be submitted to shareholders for adoption at the 2007 AGM and will, upon adoption, take effect retrospectively as from January 1, 2007.
and variable compensation in the form of (2) a short-term incentive and (3) a long-term incentive compensation; (4) pension arrangements; (5) perquisites and (6) termination arrangements.
Compensation Committee ensures that these levels are realistic and competitive, taking into account individual roles and responsibilities of Executive Board members and benchmark information provided by independent external advisors.
Under the STI Plan, a bonus is paid only if a positive value of new business (VNB), as publicly disclosed, is realized. Each member of the Executive Board has been assigned a specifi c area of responsibility of which the related VNB will be taken into account when determining individual bonus levels.
The amount of the STI Plan bonus will then be determined by the level of achieved operating earnings (OE) relative to the OE target.
Provided the VNB of the AEGON Group in the plan year is positive, the members of the Executive Board are eligible for an
If the VNB of the AEGON Group is positive, Messrs. Shepard and
Messrs. Van der Werf and Wynaendts are eligible for 40 percent of their STI Plan bonus. In the event that the VNB in the areas of their respective responsibilities is also positive, Messrs. Van der Werf and
Each year, the Compensation Committee reviews the agreed parameters to ensure that they continue to provide the best reference. Independent external advisors, Tillinghast and Ernst & Young, review and confirm relevant data.
Additionally, Mr. Shepard is entitled to a cash bonus equal to 0.1 percent of AEGON’s net income for the corresponding year.
The Long-term Incentive (LTI) Plan is designed to focus members of the Executive Board on achieving long-term growth of sustainable value for the company’s shareholders. For this purpose, the Plan aims to reward Executive Board members for AEGON’s relative total shareholders return (TSR) performance over a three-year period.
TSR is defined as the return, in terms of share price appreciation and dividends, to shareholders.
Each year, an LTI grant is determined to serve as a basis for the calculation of the achievable bonus under the LTI Plan. The LTI grant is calculated as a percentage of the compensation of the Executive
During the three-year grant period, the TSR data are compiled by the Compensation Committee based on independent external advice.
The Remuneration Policy aims to offer Executive Board members pension arrangements that are in line with local practices in their countries of residence and retirement benefits that are consistent with those provided to executive directors of other multinational companies in those countries. Pension arrangements are based on a retirement age of 62, with optional early retirement for the Dutch members at reaching the age of 60.
Mr. Shepard’s benefits would be based on 55 percent of his ‘final average earnings’ calculation (his five highest complete and consecutive calendar years of pensionable earnings). For Messrs.
Streppel, Van der Werf and Wynaendts, their benefits would be 70 percent of their final salary, provided they have completed 37 years of service. In addition, the arrangements include entitlements to a pension in the event of disability and a pension for spouse or
Members of the Executive Board receive other benefi ts, based on their contractual agreements, local practices, and customary arrangements for executives of multinational companies. Moreover, it is the company’s policy not to grant Executive Board members any personal loans, guarantees or the like, unless in the normal course of business and on terms applicable to the personnel as a whole, and only after Supervisory Board approval. No remission of loans shall be granted.
Under his employment agreement, Mr. Shepard will be entitled to a specifi ed amount of severance upon termination of his employment for reasons specifi ed in the employment agreement. Under his employment agreement, Mr. Shepard shall be entitled to severance in the amount of three years’ base salary and the aggregate short-term incentive compensation he received during the three years prior to the termination in the event that Mr. Shepard’s employment is terminated (a) by AEGON other than for urgent cause, death, disability, voluntary resignation or retirement, (b) by AEGON in connection with a merger, take-over or fundamental changes of policy and related organizational amendments, or (c) by Mr. Shepard in the event that his responsibilities or position are diminished by such circumstances. Any such severance payments received by Mr. Shepard shall be taken into account in determining the amounts payable to him under his AEGON
‘Zwartkruis formula’, which means that the severance payment would be calculated on the basis of and depending on age, years of service, functional level, and the probability of fi nding an equivalent position.
Executive Board member, six months for the company, and termination arrangements would be in line with the Dutch Corporate
As explained in the plans which are posted on AEGON’s website, when performance is at target level, for Mr. Shepard approximately 75 percent of his total compensation is based on variable reward components, while for the other members the variable portion is approximately 50 percent.
Van der Werf 174 122 697,392 1 OE per area of responsibility was established as set out in the Remuneration Policy and described in the STI Plan Rules.
Mr. Shepard also received EUR 2,732,000 in 2006 as an additional bonus related to AEGON’s net income over the fi nancial year 2005.
STI bonus related to AEGON’s net income over the fi nancial year 2006, will be calculated and paid in 2007, after adoption of the 2006 annual accounts by shareholders, and be reported in the 2007 Annual Report.
AEGON common shares and options have been granted to each of the Executive Board members. Vesting of these rights is conditional upon AEGON’s TSR performance relative to that of the peer group over a three-year period. The date of grant for the 2006 LTI Plan was April 26, 2006 and the closing share price of that day was
EUR 14.55. The grant is a 50/50 combination of the value of the performance shares and performance options. Vesting of these rights will take place after three years, in accordance with the aforementioned LTI vesting schedule.
Mr. Shepard’s benefi ts are based on 55 percent of his ‘fi nal average earnings’ calculation (his fi ve highest complete and consecutive calendar years of pensionable earnings). For Messrs. Streppel, Van der Werf and Wynaendts, their benefi ts are 70 percent of their fi nal salary, provided they have completed 37 years of service.
Mr. Wynaendts was seconded to AEGON USA for the period from
entitled to cast 25/12 votes per preferred share in the event that
‘special cause’ (as defi ned in the Preferred Shares Voting Rights
Each ‘special cause’ is then limited to a period of six months. Please refer to page 238 of this annual report’s fi nancial statements for more information on Vereniging AEGON.
The Executive Board, as a body, is charged with the management of the company. Each Executive Board member has an allocation of duties relating to his or her specifi c areas of interest. The number of
Executive Board members and their terms of employment are determined by the Supervisory Board. The members of the Executive
Board are appointed by the General Meeting of Shareholders upon nomination by the Supervisory Board.
Pension arrangements of the Members of the Executive Board are based on a retirement age of 62 with optional early retirement for the Dutch members at reaching the age of 60. The Articles of
Incorporation require the Executive Board to obtain the prior approval of the Supervisory Board for a number of defi ned resolutions. Additionally, the Supervisory Board may subject other resolutions of the Executive Board to its prior approval.
AEGON N.V. is a public company under Dutch law, and it is governed by three corporate bodies: the General Meeting of Shareholders, the
Extraordinary General Meetings of Shareholders may be convened by the Supervisory Board or the Executive Board whenever they are deemed necessary. In accordance with the Articles of Incorporation, requests will generally be honored to add items to the agenda of a
General Meeting of Shareholders when supported by shareholders representing at least 0.1 percent of the issued common shares.
Dutch foundation dedicated to enhancing the communication with and the participation of shareholders at General Meetings of Shareholders, AEGON welcomes the possibility of voting by proxy.
AEGON HAS LONG BEEN COMMITTED TO THE PRINCIPLES OF SOUND AND EFFECTIVE CORPORATE RESPONSIBILITY AND GOVERNANCE
members, one of whom is a former member of the Executive Board.
Specifi c issues are prepared and dealt with in committees comprising members of the Supervisory Board. In view of a balanced composition of the Supervisory Board a profi le has been drawn up outlining the required qualifi cations of its members. Upon reaching the age of 70, a member of the Supervisory Board is no longer eligible for reappointment, except with the approval of the Supervisory Board.
The remuneration of the members of the Supervisory Board is determined by the General Meeting of Shareholders.
Vereniging AEGON holds 171,974,055 common shares and all 240,970,000 issued preferred shares, together representing 32.3 percent of the voting capital, however, in the absence of a
AEGON N.V. and Vereniging AEGON have entered into a preferred shares voting rights agreement, pursuant to which Vereniging
‘special cause’, such as the acquisition of a 15 percent interest in AEGON
Board and the Supervisory Board. If, in its sole discretion, Vereniging
Governance and compliance Corporate governance share options. In this regard reference is made to page 204 of the fi nancial statements. Under the outstanding option plans it is up to the executive/employee to exercise its option rights under the conditions of the plan. The company cannot infl uence the exercise of granted option rights.
There are no restrictions on the exercise of voting rights, neither in number of votes nor in terms of time limitations (apart from the limitation in time mentioned under (d) above as to the exercise of full voting rights on preferred shares). Depositary receipts for shares are not issued with the company’s cooperation.
The company has no knowledge of any agreement between shareholders with regard to the restriction of share transfers or of voting rights pertaining to shares.
Supervisory Board. This nomination will be binding if at least two candidates are nominated. However, the General Meeting of
The provisions on appointing board members were included at the time of the overall review of AEGON’s corporate governance and were adopted at the extraordinary General Meeting of Shareholders on May 9, 2003. The qualifi ed majority requirement was included in order to give AEGON a temporary protection against unfriendly actions by a hostile bidder, for example. Effectively, Vereniging AEGON
may for a period of six months block unfriendly attempts to replace the Supervisory Board and the Executive Board.
New shares may be issued pursuant to a resolution of the General
Executive Board, if and to the extent that the Board is authorized to do so by the General Meeting of Shareholders. An authorization to that end is usually proposed to the annual General Meeting of
The company is not a party to signifi cant agreements, which take effect, alter or terminate conditional upon a change of control of the company following a public offer on the outstanding shares of the company, other than customary in the market (e.g. fi nancial arrangements, loan agreements, joint venture agreements).
A summary of these plans will continue to form part of AEGON’s annual reports.
Conduct is implemented and monitored by a taskforce that reports directly to the Executive Board. This is in addition to the Codes of
The Code of Conduct includes whistleblower provisions that give employees the ability to report on suspected irregularities without jeopardizing their employment. Within the framework of the
This chapter is intended to outline AEGON’s compliance with the code as of the end of 2006. The circumstances in which AEGON does not fully comply with the code are explained. The information set forth below closely follows the structure of the Dutch Corporate
The Executive Board and the Supervisory Board accept full responsibility of AEGON’s corporate governance structure. Whenever a substantial change in the company’s corporate governance structure is proposed, AEGON will submit the proposal for debate as a separate agenda item at the General Meeting of Shareholders.
The Supervisory Board has agreed with the Executive Board and its individual members on a reappointment and retirement schedule for
Executive Board members, which is available on the company’s website www.aegon.com.
Executive Board for a four-year term. The principle of appointments to the Executive Board for a four-year term with possible reappointment is duly refl ected in the Articles of Incorporation.
AEGON CLOSELY PAYS ATTENTION TO RISK MANAGEMENT AND RISK FACTORS IN EACH OF ITS COUNTRY AND GROUP UNITS
None of the members of AEGON’s Executive Board is a member of the Supervisory Board of more than two listed companies nor is a chairman of the Supervisory Board of a listed company. The
Executive Board Rules, as posted on AEGON’s website, provide that any prospective appointment of an AEGON Executive Board member to a supervisory or non-executive director role in another Dutchlisted company is subject to prior approval from AEGON’s
AEGON’s Remuneration Policy was adopted by the General Meeting of Shareholders on April 22, 2004 for a period of three years
April 25, 2006, resolved to extend the duration of this Remuneration
Remuneration Policy also sets out a plan for Executive Board members to be remunerated partly in share options (performance options) and performance shares. If Executive Board members are entitled to share options, the strike price of these options corresponds to the AEGON share price on Euronext Amsterdam at the close of trading on the date the options are granted. The terms under which share options and performance shares are issued shall not be altered during the reference period, except for technical alterations in accordance with market practice in events such as share splits, mergers and acquisitions, share issuances, and (super)
Executive Board members are subject to the prior approval of the
Executive Board concerning the ownership of and transactions in securities, other than AEGON shares. These regulations are in line with the regulations prescribed by the Dutch regulators and have been further refi ned in light of the more detailed best practice provisions of the Dutch Corporate Governance Code. Compliance with these regulations is supervised by the Group Compliance
Offi cer, who acts alongside compliance offi cers appointed by country units and the business units. The regulations applicable to members of the Executive Board are posted on AEGON’s website.
website, explains the manner in which the Remuneration Policy pertaining to the members of the Executive Board has been applied in the year under review. The principal points of the Remuneration
Report are also dealt with in the Report of the Supervisory Board
(page 72). In addition, the annual report presents an overview of the current Remuneration Policy (pages 76 to 81), as adopted previously by the annual General Meeting of Shareholders and in force until the annual General Meeting of Shareholders of April 25, 2007. At that meeting a new Remuneration Policy will be proposed.
The remuneration of the individual members of the Executive Board is determined by the Supervisory Board within the scope of the prevailing Remuneration Policy. Upon conclusion of a contract with a new member of the Executive Board, the main elements of the member’s employment contract shall be made public forthwith. Any particular payment to a (former) member of the Executive Board is recorded and explained in the Remuneration Report.
The supervision of the management of the Executive Board and of the company’s business and general course of affairs is entrusted to the Supervisory Board, acting as a body with collective responsibility and accountability. The Supervisory Board also assists the Executive
Board by giving advice. In performing their duties, the members of the Supervisory Board are required to act in accordance with the interests of the company and its business. The Supervisory Board is responsible for decisions relating to the resolution of confl icts of interest between members of the Executive Board, members of the
Supervisory Board, major shareholders, and the independent auditor on the one hand, and AEGON on the other.
Board Rules, the Supervisory Board members are empowered to obtain all information they deem necessary for the performance of their duties, including the right to acquire information from company offi cers and external experts. The Supervisory Board Rules contain provisions regarding the division of duties within the Supervisory
Supervisory Board consistently provides a detailed report of its activities during the fi nancial year in each annual report. The activity report includes the information prescribed in the Dutch Corporate
This profi le also refl ects the detailed composition requirements of the Dutch Corporate Governance Code.
AEGON PLACES A HIGH LEVEL OF IMPORTANCE ON DIALOGUE WITH ITS SHAREHOLDERS
Several members of the Supervisory Board also serve as members of Supervisory Boards of other Dutch-listed companies. The
Supervisory Board has concluded that none of these memberships unduly or negatively impacts the respective individual’s performance of his or her duties as a member of AEGON’s Supervisory Board.
According to the Supervisory Board Rules, the chairman is responsible for overseeing the day-to-day functions of the
Board. The chairman is also responsible for initiating the performance evaluation of the individual members of the Supervisory and
Supervisory Board. In particular, the company secretary is responsible for the correct application of the statutory obligations under the
Articles of Incorporation and the Supervisory Board Rules. The appointment of the company secretary is subject to the approval of the Supervisory Board.
Each Committee reports its fi ndings to the Supervisory Board and these fi ndings are discussed in the plenary meetings of the
The Supervisory Board’s yearly report, which is included in this annual report, provides information on the activities of each its
The Audit Committee is appointed by the Supervisory Board to assist the Supervisory Board in monitoring (1) the integrity of AEGON’s fi nancial statements, (2) the independent auditor’s qualifi cations and independence, (3) the performance of AEGON’s internal audit performance and that of the independent auditor, (4) AEGON’s compliance with legal and regulatory requirements, and (5) AEGON’s fi nances and the company’s fi nance related strategies. The Audit
Board members, the director of Group Finance, the Internal Auditor and the independent auditor periodically attend the meetings of the
The purpose of the Compensation Committee is to design, develop, implement, and review the Executive Board members’ compensation and terms of employment and the Supervisory Board members’
Board vacancies and member reappointments after each four-year term. The advice of the Nominating Committee shall be based on the profi le for the Supervisory Board. In addition, the Nominating
Committee advises on and proposes to the Supervisory Board candidates to be nominated for appointments as members or as chairman of the Executive Board. The Nominating Committee on a regular basis reviews the individual performance of Executive Board and Supervisory Board members, as well as the selection criteria for senior management within the AEGON Group. The Nominating
Rules regarding confl icts of interest applicable to members of the
The remuneration of Supervisory Board members is determined by the General Meeting of Shareholders and is not dependent on
Supervisory Board concerning the ownership of and transactions in securities, other than AEGON shares. These regulations are in compliance with the regulations prescribed by the Dutch regulators and have been further refi ned in light of the more detailed best practice provisions of the Dutch Corporate Governance Code.
Compliance Offi cer, who acts alongside compliance offi cers appointed by country units and the business units. The regulations applicable to members of the Supervisory Board are posted on
Articles of Incorporation, in the event of a special cause (as referred to above), for a period of six months Vereniging AEGON may effectively be in a position to temporarily block unfriendly actions by a hostile bidder or others. The Supervisory and Executive Board take the view that this arrangement is appropriate in the context of the 1983 Merger Agreement.
Board can only be dismissed by the General Meeting of Shareholders with the same qualifi ed majority, except if proposed by the
The Supervisory Board and the Executive Board have evaluated the provisions in AEGON’s Articles of Incorporation containing the qualifi ed majority requirements in light of the provisions of the
Taken together, the qualifi ed majority requirements and the voting rights of Vereniging AEGON constitute the only protection AEGON
For the purpose of further mitigating the possible negative effects of the qualifi ed majority requirements in the ordinary course of business, the Supervisory Board has decided that, absent unfriendly actions, it shall make nominations to the Executive Board and the
Changes to AEGON’s policy on profi t appropriation (additions to reserves and on dividends) shall be discussed and accounted for as a separate item on the agenda of the annual General Meeting of
Release from liability of the members of the Executive Board for their management and of the members of the Supervisory Board for their supervision is separately voted upon in the annual General
States’ Sarbanes-Oxley legislation. These communications and fi lings are made available on AEGON’s website. AEGON refrains from any actions that may jeopardize the indepen dence of analysts in relation to the company. Other than factually, analysts’ reports and valuations (including earnings estimates) are not assessed, commented upon or corrected by AEGON in advance of their publication and AEGON pays no remuneration of any kind to analysts in the context of preparing such reports or their publication.
In addition to AEGON’s responsibility to its shareholders and other stakeholders, the company also is an institutional investor. As such, in deciding whether to exercise its rights as a shareholder of other listed companies, AEGON acts primarily in the interest of its policyholders and other ultimate benefi ciaries of its products while also honoring the responsibility to the ultimate benefi ciaries and investors in the companies in which it has invested. In compliance with local Codes of Conduct applicable to institutional investors,
A record of whether, and if so, how AEGON Nederland N.V. has voted as shareholder in General Meetings of Shareholders of Dutch listed companies is also published on its website. At a minimum, this record is updated on a quarterly basis.
Audit Committee, supervises the compliance with these internal procedures and the external information. Specifi c regulations dealing with the internal control function have been documented in the
Based on its Charter, the Audit Committee of the Supervisory Board has determined the extent of the involvement of the independent auditor in the preparation and publication of fi nancial reports (other than the annual accounts) in addition to setting up a Pre-approval
AEGON has an internal auditor on Group level who reports directly to the Executive Board. This is in addition to the internal auditors that have been appointed on the level of AEGON’s country units.
The Supervisory Board meets with the independent auditor at least once a year on the occasion of the discussion of the annual accounts that are to be submitted for adoption to the General Meeting of
Supervisory Board and the Executive Board simultaneously. The independent auditor may request the chairman of the Audit
Committee to call a meeting of the Audit Committee. The independent auditor customarily attends the meetings of the Audit
Committee. In accordance with applicable laws, the independent auditor reports on his activities to the Executive Board and the
Supervisory Board, raising issues in relation to his audit that require the attention of management. Pursuant to the Audit Committee
Charter such issues include signifi cant fi nancial reporting issues and judgments made in connection with the preparation of the fi nancial statements, including the quality of earnings, signifi cant deviations between planned and actual performance, the selection or application of accounting principles (including any signifi cant changes with respect thereto), any major issues as to the adequacy of its internal controls, and any special steps adopted in light of material control defi ciencies.
This best practice provision provides that the maximum remuneration in the event of dismissal is one-year’s salary. AEGON
Vereniging AEGON, it is not in the best interests of AEGON to preclude the CEO and CFO from participating in discussions and decision-making relating to Vereniging AEGON. For this reason a protocol was drafted authorizing the CEO and CFO to continue the existing practice in dealing with Vereniging AEGON.
Shareholders may pass a resolution canceling the binding nature of a nomination for appointment of a member of the Executive Board or the Supervisory Board by an absolute majority and a limited quorum.
Articles of Incorporation is appropriate in the context of the 1983
As a company that provides long-term fi nancial protection and services to individuals, families and institutions in diverse international markets,
both committed and knowledgeable, and managing the company’s businesses to the highest possible standards of integrity and in the best interests of all stakeholders.
AEGON’S CODE OF CONDUCT PROVIDES BOTH MANAGEMENT AND EMPLOYEES WITH CLEAR AND CONSISTENT GUIDELINES TO RESPONSIBLE BUSINESS PRACTICES
All of AEGON’s country units are committed to supporting initiatives to improve consumer awareness on savings, retirement, and protection products.
AEGON UK is heavily involved in the National Strategy for Financial
AEGON’s 2006 Corporate Responsibility Report, which can be found on www.aegon.com, details the specifi c steps AEGON has been taking to ensure that these principles become an integral part of the way AEGON conducts its business around the world.
AEGON’s Code of Conduct provides both management and employees with clear and consistent guidelines to responsible business practices.
It defi nes the company’s core values and underlying principles and sets out how AEGON expects its managers, employees and business partners to carry out their work with respect to local laws, customs and industry standards. AEGON believes it is critical the Code of
AEGON provides the guiding principles for this approach and sets out a Code of Conduct applicable to all company employees, each country and local business unit is empowered to identify and focus on issues specifi c to their local situations with respect to corporate responsibility.
AEGON and its employees are active members of the communities in which they work and live. AEGON companies make a range of charitable donations and its employees often volunteer time and expertise to a wide variety of local causes. AEGON also donates funds to larger causes. In particular, AEGON is supporting the international fi ght against cancer, helping fund a program of research into prostate, breast and colon cancer. As part of these programs, money has been donated to the VU Medical Center in
will pursue new, globally coordinated initiatives to reduce energy consumption, set out guidelines for responsible investment and establish minimum corporate responsibility standards for suppliers in all its major procurement centers.
AEGON continues to receive external recognition for its performance in matters of Corporate Responsibility. The company is included in both the Dow Jones Sustainability and FTSE4Good indices, which rank companies according to their ability to manage a variety of economic, social and environmental risks. AEGON’s continued inclusion in these indices is tangible evidence of the company’s commitment to its core principles of corporate responsibility and a further indication that AEGON may legitimately take its place among the world’s leading insurance companies, not only in terms of its size and fi nancial performance but also in terms of sound and responsible management of its businesses.
RESPECT We treat all our stakeholders as we would want to be treated with consideration for individual and cultural diversity.
QUALITY We offer products and services that are designed to improve the futures and fi nancial security of our customers.
TRANSPARENCY We provide open, accurate and timely information about our products, performance and fi nancial results.
Consolidated fi nancial statements of AEGON Group 2006 97 Exchange rates
CONSOLIDATED BALANCE SHEET OF AEGON GROUP AS AT DECEMBER 31, 2006
Net fair value and foreign exchange losses 34 127 385 199
Net losses on investments for account of policyholders 35 1,174 2 13
CONSOLIDATED INCOME STATEMENT OF AEGON GROUP FOR THE YEAR ENDED DECEMBER 31, 2006
Insurance and investment liabilities for account of policyholders 12,028 13,964 9,447
Net purchase of investments for account of policyholders (5,361) (1,628) (751)
Cash fl ow movements on operating items not refl ected in income (1,307) (4,915) (7,757)
Purchase of individual intangible assets (other than VOBA and future servicing rights) (10) (17) (16)
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 2 6,781 (1,444) 3,686
Net cash and cash equivalents at the beginning of the year 6,068 6,804 3,563
2 Included in net increase in cash and cash equivalents are interest received (EUR 9,458 million; 2005: EUR 9,099 million and 2004: EUR 8,180 million), dividends received (EUR 1,192 million; 2005: EUR 870 million and 2004: EUR 796 million) and interest paid (EUR 123 million; 2005: EUR 50 million and 2004: EUR 189 million).
CONSOLIDATED CASH FLOW STATEMENT OF AEGON GROUP FOR THE YEAR ENDED DECEMBER 31, 2006 > Continuation
Transfers between revaluation reserves and retained earnings – – – – – – – –
NET INCOME RECOGNIZED DIRECTLY IN EQUITY – (15) (645) (1,391) 2 (2,049) 1 (2,048)
TOTAL RECOGNIZED NET INCOME FOR 2006 – 2,774 (645) (1,391) 2 740 1 741
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY OF AEGON GROUP FOR THE YEAR ENDED DECEMBER 31, 2006
Transfers between revaluation reserves and retained earnings – 4 (4) – – – – –
NET INCOME RECOGNIZED DIRECTLY IN EQUITY – (51) 152 1,534 – 1,635 2 1,637
(Gains)/losses transferred to income statement on disposal and impairment – – (23) – – (23) – (23)
Equity movements of associates – – – 59 – 59 – 59
Movements in foreign currency translation and net foreign investment hedging reserves – – – (755) – (755) – (755)
TOTAL RECOGNIZED NET INCOME FOR 2004 – 2,232 481 (696) – 2,017 (14) 2,003
Other equity instruments issued – – – – 1,352 1,352 – 1,352
Dividends paid on ordinary shares – (256) – – – (256) – (256)
N.V. serves as the holding company for the AEGON Group and has listings of its common shares in Amsterdam, New York, London and
Headquarters are located in The Hague, the Netherlands. The Group employs approximately 29,000 people worldwide.
The consolidated fi nancial statements have been prepared in accordance with International Financial Reporting Standards (IFRS), as adopted by the European Union (EU), which for AEGON is equal to IFRS as published by the International Accounting Standard
January 1, 2006; IFRIC 4 Determining whether an arrangement contains a lease –
The amendments to IAS 21 broadens the defi nition of net investment so that monetary items no longer need to be denominated in either the functional currency of the parent company or the functional currency of the foreign operation. Also, the new standard clarifi es that monetary items resulting from transactions between subsidiaries may also qualify.
Insurance Contracts – required adoption date January 1, 2007; IFRS 8 Operating segments – required adoption date January 1, 2009; IFRIC 8 Scope IFRS 2 Share-based payment – required adoption date January 1, 2007; IFRIC 9 Reassessment of embedded derivatives – required adoption date January 1, 2007; IFRIC 10 Interim fi nancial reporting and impairment – required adoption date January 1, 2007; IFRIC 11 IFRS 2 – Group and Treasury Share Transactions –
The IASB issued IFRS 8 as part of the convergence project with the
US Financial Accounting Standards Board. This new standard replaces IAS 14 Segment Reporting and adopts a management approach to segment reporting as required in SFAS 131 Disclosures about Segments of an Enterprise and Related Information. AEGON
The interpretation is not expected to have an impact on equity or net income.
As allowed by IFRS 4 Insurance Contracts, the Group values its insurance contracts in accordance with the accounting principles that were applied prior to the transition to IFRS. The assets and liabilities relating to insurance contracts issued in the United States and Canada are accounted for in accordance with United Stated
Generally Accepted Accounting Principles (US GAAP). On September 19, 2005, the American Institute of Certifi ed Public Accountants
Exchanges of Insurance Contracts. This SOP provides guidance on the accounting for replacements of one contract by another.
Depending on whether certain conditions are met, the replacement is accounted for as either an extinguishment or as a continuation of the replaced contract. The classifi cation will affect the accounting for unamortized deferred policy acquisition costs (DPAC), unearned revenue liabilities and deferred sales inducement assets from the replaced contract.
United States and Canada effective January 1, 2007. As a result of adopting SOP 05-1, AEGON expects to report a cumulative effect of a change in accounting principle resulting in a noncash decrease to retained earnings of an immaterial amount. The adoption of SOP 051 is also expected to result in an immaterial increase in DAC
amortization in 2007 and future years. The actual impact will depend on policy modifi cation activity as well as any possible exchange programs implemented in the future.
In 2006 AEGON changed its presentation of cash fl ows from purchases and sales of fi nancial assets (excluding derivatives and fi nancial assets at fair value through profi t and loss), investments in real estate and real estate held for own use. These cash fl ows were previously reported as cash fl ows from investing activities and are now reported as cash fl ows from operating activities.
IFRS (1 January 2004) have not been restated. No operations have been identifi ed as assets held for sale or disposal unit.
Group has the decision-power to obtain control of the entity or has delegated these powers through an autopilot, the Group can obtain the majority of the entity’s benefi ts or the Group retains the majority of the residual risks related to the entity or its assets.
Notes to the consolidated fi nancial statements of AEGON Group Note 2.1 – 2.4
accounted for in accordance with the Group’s accounting principles and reporting year. Intra-group transactions, including AEGON N.V.
Group’s share in the net fair value of assets, liabilities and contingent liabilities acquired is recognized as goodwill. Negative goodwill is recognized directly in the income statement. If the fair value of the assets, liabilities and contingent liabilities acquired in the business combination has been determined provisionally, adjustments to these values resulting from the emergence of new evidence within twelve months after the acquisition date are made against goodwill.
Also, goodwill is adjusted for changes in the estimated value of contingent considerations given in the business combination when they arise. Contingent consideration is discounted and the unwinding is recognized in the income statement as an interest expense.
On consolidation, the fi nancial statements of group entities with a foreign functional currency are translated to euro, the currency in which the consolidated fi nancial statements are presented. Assets and liabilities are translated at the closing rates on the balance sheet date. Income, expenses and capital transactions (such as dividends)
As the Group’s risks and rates of return are predominantly affected by the fact that it operates in different countries, the primary basis for segment reporting is geographical segments. Geographical segments are defi ned based on the location of assets. Secondary segment information is reported for groups of related products.
Included in operating earnings are segment revenues and segment expenses. Segment revenues consists of premium income, investment income, fee and commission income, income from banking activities and other revenues. Segment expenses consist of premiums to reinsurers, policyholder claims and benefi ts (excluding the effect of charges to policyholders in respect of income tax), profi t sharing and rebates and commissions and expenses. In addition to segment revenues, the following income items are also included in the calculation of operating earnings: reinsurance claims and benefi ts, fair value and foreign exchange gains and gains on investments for account of policyholders. Similarly, in addition to segment expenses, the following expense items are also included in the calculation of operating earnings: fair value and foreign exchange losses, losses on investments for account of policyholders and interest and related charges.
Goodwill is recognized as an intangible asset for interests in subsidiaries and joint ventures acquired after January 1, 2004 and is measured as the positive difference between the acquisition cost and the Group’s interest in the net fair value of the entity’s identifi able assets, liabilities and contingent liabilities. Subsequently, goodwill is carried at cost less accumulated impairment charges. It is derecognized when the interest in the subsidiary or joint venture is disposed of.
Notes to the consolidated fi nancial statements of AEGON Group Note 2.4 – 2.8
Other intangible assets are recognized to the extent that the assets can be identifi ed, are controlled by the Group, are expected to provide future economic benefi ts and can be measured reliably. The
Loans and assets held-to-maturity are subsequently carried at amortized cost using the effective interest rate method. Financial assets at fair value through profi t 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’
The fair value of an asset is the amount for which it could be exchanged between knowledgeable, willing parties in an arm’s length transaction. For quoted fi nancial assets for which there is an active market, the fair value is the bid price at the balance sheet date. In the absence of an active market, fair value is estimated by using
A fi nancial asset is derecognized when the contractual rights to the asset’s cash fl ows expire, when the Group has transferred the asset and substantially all the risks and rewards of ownership, or when the
Financial assets that are lent to a third party or that are transferred subject to a repurchase agreement at a fi xed price are not derecognized as the Group retains substantially all the risks and rewards of the asset. A liability is recognized for cash collateral received, on which interest is accrued.
A security that has been received under a borrowing or reverse repurchase agreement is not recognized as an asset. A receivable is recognized for any related cash collateral paid by AEGON. If the
With the exception of cash collateral, assets received as collateral are not separately recognized as an asset until the fi nancial asset they secure is foreclosed. When cash collateral is recognized, a liability is recorded for the same amount.
Property that is occupied by the Group and that is not intended to be sold in the near future is classifi ed as real estate held for own use.
All property is initially recognized at cost. Subsequently, investments in real estate are measured at fair value with the changes in fair value recognized in the income statement. Real estate held for own use is carried at its revalued amount, which is the fair value at the date of revaluation less subsequent accumulated depreciation and impairment losses. Depreciation is calculated on a straight line basis over the useful life of a building. Land is not depreciated. On revaluation the accumulated depreciation is eliminated against the gross carrying amount of the asset and the net amount is restated to the revalued amount. Increases in the net carrying amount are recognized in the related revaluation reserve in shareholders’ equity and are released to retained earnings over the remaining useful life of the property.
Expenditure incurred after initial recognition of the asset is capitalized to the extent that the level of future economic benefi ts of the asset is increased. Costs that restore or maintain the level of future economic benefi ts are recognized in the income statement as incurred.
Derivatives are fi nancial instruments of which the value changes in response to an underlying variable, that require little or no net initial investment and are settled at a future date.
Derivatives for which the contractual obligation can only be settled by exchanging a fi xed amount of cash for a fi xed amount of AEGON
For hedge accounting purposes, a distinction is made between fair value hedges, cash fl ow hedges and hedges of a net investment in a foreign operation.
Fair value hedges are hedges of a change in the fair value of an unrecognized fi rm commitment or an asset or liability that is not held at fair value through profi t or loss. The hedged item is remeasured to fair value in respect of the hedged risk and the resulting adjustment is recorded in the income statement.
Entities over which the Group has signifi cant infl uence through power to participate in fi nancial and operating policy decisions, but which do not meet the defi nition 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 profi t or loss. Interests held by the Group in venture capital entities, mutual funds and investment funds that are managed on a fair value basis, are also accounted for as investments held at fair value through profi t or loss.
The carrying amount is subsequently adjusted to refl ect 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 refl ected 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. The Group’s share in losses is recognized until the investment in the associate’s equity and any other long-term interest that are part of the net investment are reduced to nil, unless guarantees exist.
DPAC relates to insurance contracts and investment contracts with discretionary participation features and represents the variable costs that are related to the acquisition or renewal of these contracts.
For all products, DPAC is assessed for recoverability at least annually on a country-by-country basis and is considered in the liability adequacy test for each reporting period. If appropriate, the assumptions included in the determination of estimated gross profi ts are adjusted. The portion of DPAC that is determined not to be recoverable is charged to the income statement.
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 AEGON will render
Notes to the consolidated fi nancial statements of AEGON Group Note 2.10 – 2.16
For contracts involving both the origination of a fi nancial liability and the provision of investment management services, only the transaction costs allocated to the servicing component are deferred.
The deferred transaction costs are amortized in line with fee income, unless there is evidence that another method better represents the provision of services under the contract. Deferred transaction costs are subject to impairment testing at least annually.
Other assets include trade and other receivables, prepaid expenses and fi xed assets other than property. Trade and other receivables are initially recognized at fair value and are subsequently measured at amortized cost. Fixed assets are initially carried at cost, depreciated on a straight line basis over their useful life to their residual value and are subject to impairment testing.
Assets are tested individually for impairment when there are indications that the asset may be impaired. The impairment loss is calculated as the difference between the carrying and the recoverable amount of the asset, which is the higher of an asset’s value in use and its net selling price. The value in use represents the discounted future net cash fl ows from the continuing use and ultimate disposal of the asset and refl ects all its known inherent risks and uncertainties.
recoverable amounts. With the exception of goodwill, impairment losses on non-fi nancial assets can be reversed.
For equity instruments, a signifi cant or prolonged decline in fair value below initial cost is considered objective evidence of impairment and always results in a loss being recognized in the income statement. Equity investments are impaired to the asset’s fair value and any unrealized gain or loss previously recognized in shareholders’ equity is taken to the in the income statement in the impairment loss. The amount exceeding the balance of previously recognized unrealized gains or loss is recognized in the income statement.
Reinsurance assets are impaired if there is objective evidence, as a result of an event that occurred after initial recognition of the reinsurance asset, that not all amounts due under the terms of the contract will be received and the impact of the event on the amount to be received from the reinsurer can be reliably measured.
These securities are measured at par and those that are denominated in US dollars are translated using historical exchange rates.
Group. They are deducted from shareholders’ equity, regardless of the objective of the transaction. No gain or loss is recognized in the income statement on the purchase, sale, issue or cancellation of the instruments. If sold, the difference between the carrying amount and the proceeds is refl ected in retained earnings. The consideration paid or received is recognized directly in shareholders’ equity. All treasury shares are eliminated in the calculation of earnings per share and dividend per share.
Contracts that do not meet this defi nition are accounted for as investment contracts. The Group reviews homogeneous books of contracts to assess whether the underlying contracts transfer signifi cant insurance risk on an individual basis. This is considered the case when at least one scenario with commercial substance can be identifi ed in which the Group has to pay signifi cant additional
benefi ts to the policyholder. Contracts that have been classifi ed as insurance are not reclassifi ed subsequently.
Insurance liabilities are recognized when the contract is entered into and the premiums are charged. The liability is derecognized when the contract expires, is discharged or is cancelled.
Insurance assets and liabilities are valued in accordance with the accounting principles that were applied by the Group prior to the transition to IFRS, as further described in the following paragraphs.
Other products with account terms that are not fi xed or guaranteed are generally measured at the policyholder’s account balance.
Life insurance contracts under which the policyholder bears the risks associated with the underlying investments are classifi ed as insurance contracts for account of policyholders.
Life insurance contracts typically include derivative-like terms and conditions. With the exception of policyholder options to surrender the contract at a fi xed amount, contractual features that are not closely related to the insurance contract and that do not themselves meet the defi nition of insurance contracts are accounted for as derivatives. If the embedded derivative cannot be reliably bifurcated, the entire insurance contract is carried at fair value through profi t or loss.
The benefi ts used in calculating the liabilities are based on the average benefi ts payable over a range of stochastic scenarios. Where applicable, the calculation of the liability incorporates a percentage of the potential annuitizations that may be elected by the contract holder.
In the Netherlands, an additional liability is established for guaranteed minimum benefi ts that are not bifurcated on group pension plans, based on stochastic modeling. The liability is measured by applying the accrual method based on market assumptions less actual claims incurred. A corridor for the provision is determined regularly based on stochastic modeling methods. If the provision develops outside the corridor, a charge or credit is recognized in the income statement.
Shadow accounting ensures that all gains and losses on investments affect the measurement of the insurance assets and liabilities in the same way, regardless of whether they are realized or unrealized and regardless of whether the unrealized gains and losses are recognized in the income statement or directly in equity in the revaluation reserve. In some instances, realized gains or losses on investments have a direct effect on the measurement of the insurance assets and liabilities. For example, some insurance contracts include benefi ts that are contractually based on the investment returns realized by the insurer. In addition, realization of gains or losses on available-forsale investments can lead to unlocking of VOBA or DPAC and can also affect the outcome of the liability adequacy test to the extent that it considers actual future investment returns. 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.
At each reporting date the adequacy of the life insurance liabilities, net of VOBA and DPAC, is assessed using the existing liability adequacy test that is acceptable under local accounting principles.
VOBA and DPAC are considered in the liability adequacy test performed on insurance contracts. To the extent that the account balances are insuffi cient to meet future benefi ts and expenses, additional liabilities are established and included in the liability for life insurance.
All tests performed within the Group are based on current estimates of all contractual future cash fl ows, including related cash fl ows and policyholder options and guarantees. A number of valuation methods are applied, including discounted cash fl ow methods, option pricing models and stochastic modeling. Aggregation levels and the level of prudence applied in the test are consistent with local requirements.
Any resulting defi ciency is recognized in the income statement, initially by impairing the DPAC and VOBA and subsequently by establishing a technical reserve for the remaining loss. In subsequent periods, the liability for a block of business that has failed the adequacy test is based on the assumptions that are established at the time of loss recognition. The assumptions do not include a margin for adverse deviation, unless required under local accounting policies. Impairment losses resulting from liability adequacy testing can only be reversed if allowed by local accounting principles.
life insurance contracts. Discounting is applied if allowed by the local accounting principles used to measure the insurance liabilities.
Contracts issued by the Group that do not transfer signifi cant insurance risk, but do transfer fi nancial risk from the policyholder to the Group are accounted for as investment contracts. Depending on whether the Group or the policyholder runs the risks associated with the investments allocated to the contract, the liabilities are classifi ed as investment contracts or as investment contracts for account of policyholders. Investment contract liabilities are recognized when the contract is entered into and are derecognized when the contract expires, is discharged or is cancelled.
Some investment contracts have participation features whereby the policyholder has the right to receive potentially signifi cant additional benefi ts which are based on the performance of a specifi ed pool of investment contracts, specifi c investments held by the Group or on the issuer’s net income. If the Group has discretion over the amount or timing of the distribution of the returns to policyholders, the investment contract liability is measured based on the accounting principles that apply to insurance contracts with similar features.
At inception investment contracts without discretionary features are designated as at fair value through profi t or loss if by doing so a potential accounting mismatch is eliminated or signifi cantly reduced or if the contract is managed on a fair value basis. Some investment contracts with embedded derivatives that have not been bifurcated are also carried at fair value through profi t or loss. All other contracts are carried at amortized cost.
The contracts are initially recognized at transaction price less, in the case of investment contracts not carried at fair value through profi t or loss, any transaction costs directly attributable to the issue of the contract. Fees and commissions incurred with the recognition of a contract held at fair value through profi t or loss and that are not related to investment management services provided under the contract are recognized immediately in the income statement.
The consolidated fi nancial statements provide information on the fair value of all fi nancial liabilities, including those carried at amortized cost. As these contracts are not quoted in active markets, their value is determined by using valuation techniques, such as discounted cash fl ow methods and stochastic modeling. For investment contracts that can be cancelled by the policyholder, the fair value cannot be less than the surrender value.
A provision is recognized for present legal or constructive obligations arising from past events, when it is probable that it will result in an outfl ow of economic benefi ts and the amount can be reliably estimated.
The Group has issued defi ned contribution plans and defi ned benefi t plans. A plan is classifi ed as a defi ned contribution plan when the
Group has no further obligation than the payment of a fi xed contribution. All other plans are classifi ed as defi ned benefi t plans.
Share appreciation right plans are initially recognized at fair value at the grant date, taking into account the terms and conditions on which the instruments were granted. The fair value is expensed over the period until vesting, with recognition of a corresponding liability.
The liability is remeasured at each reporting date and at the date of
Notes to the consolidated fi nancial statements of AEGON Group Note 2.21 – 2.29
Share option plans that can be settled in either shares or cash at the discretion of the employee are accounted for as a compound fi nancial instrument, which includes a debt component and an equity component.
A provision is recognized for present legal or constructive obligations arising from past events, when it is probable that it will result in an outfl ow of economic benefi ts and the amount can be reliably estimated. If the outfl ow of economic benefi ts is not probable, a contingent liability is disclosed, unless the possibility of an outfl ow of economic benefi ts is remote.
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. Depending on the applicable local accounting principles, bonuses that are used to increase the insured benefi ts may be recognized as gross premiums.
Investment income also includes dividends accrued and rental income due, as well as fees received for security lending.
Gains and losses on investments include realized gains and losses on general account fi nancial assets, other than those classifi ed as at fair value through profi t or loss, and gains and losses on investments in real estate. It also includes fair value changes for hedging derivatives for which no hedge accounting is applied and the economically hedged underlying assets or liabilities are not valued at fair value through profi t or loss. Derivatives included in gains and losses on investments are considered economic hedges of certain exposures related to an existing asset or liability and are part of the
The gains and losses on investments are aggregated to net gains or net losses by country, per category of fi nancial assets and, in the case of available-for-sale fi nancial assets, per type of instrument included in the category as reported in note 7 of the consolidated fi nancial statements.
Arrangements that do not take the form of a lease but convey a right to use an asset in return for a payment are assessed at inception to determine whether they are, or contain, a lease. This involves an assessment of whether fulfi lment of the arrangement is dependent on the use of a specifi c asset and whether the purchaser (lessee) has the right to control the use of the underlying asset.
Leases that do not transfer substantially all the risks and rewards of ownership are classifi ed as operating leases.
Payments made under operating leases, where the Group is the lessee, are charged to the income statement on a straight line basis over the period of the lease.
Application of the accounting policies in the preparation of the fi nancial statements requires management to apply judgment involving assumptions and estimates concerning future results or other developments, including the likelihood, timing or amount of future transactions or events. There can be no assurance that actual results will not differ materially from those estimates. Accounting policies that are critical to the fi nancial statement presentation and that require complex estimates or signifi cant judgment are described in the following sections.
The liability for life insurance contracts with guaranteed or fi xed account terms is either based on current assumptions or on the assumptions established at inception of the contract, refl ecting the best estimates at the time increased with a margin for adverse deviation. All contracts are subject to liability adequacy testing which refl ects management’s current estimates of future cash fl ows.
To the extent that the liability is based on current assumptions, a change in assumptions will have an immediate impact on the income statement. Also, if a change in assumption results in the failure of the liability adequacy test, the entire defi ciency is recognized in the income statement. In the event 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.
in accordance with local accounting principles. Given the dynamic and complex nature of these guarantees, stochastic techniques under a variety of market return scenarios are often used for measurement purposes. Such models require management to make numerous estimates based on historical experience and market expectations. Changes in these estimates will immediately affect the income statement.
DPAC and VOBA assets respectively and are amortized to the income statement over time. If the assumptions relating to the future profi tability of these policies are not realized, the amortization of these costs could be accelerated and may even require write offs due to unrecoverability.
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 signifi cant assumption related to estimated gross profi ts on variable annuities and variable life insurance products in the United States, Canada and some of the smaller country units, is the annual long-term growth rate of the underlying assets. As equity markets do not move in a systematic manner, assumptions as to the long-term growth rate are made after considering the effects of short-term variances from the long-term assumptions (a reversion to the mean assumption). The reconsideration of this assumption may affect the original DPAC or
amortization schedule and the revised schedule, which is based on estimates of actual and future gross profi ts, is recognized in the income statement as an expense or a benefi t in the period of determination.
Investment contracts issued by AEGON are either carried at fair value (if they are designated as fi nancial liabilities at fair value through profi t or loss) or amortized cost (with fair value being disclosed in the notes to the consolidated fi nancial statements).
These contracts are not quoted in active markets and their fair values are determined by using valuation techniques, such as discounted cash fl ow methods and stochastic modeling. 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. Changes in own credit risk are not considered when determining the fair value of insurance and investment liabilities as these contractholders have precedent over other creditors in case of default. Own credit risk is considered in measuring the fair value of borrowings and other liabilities.
In the absence of an active market, the fair value of non-quoted investments in fi nancial assets is estimated by using present value or other valuation techniques. For example, the measurement of interests held in non-quoted investments funds is based on the fair value of the underlying assets. The fair value of non-quoted fi xed interest debt instruments is estimated by discounting expected future cash fl ows using a current market rate applicable to fi nancial instruments with similar yield, credit quality and maturity characteristics. For mortgage and other loans originated by the
Group interest rates currently being offered for similar loans to borrowers with similar credit ratings are applied. The fair value of fl oating interest rate debt instruments and assets maturing within a year is assumed to be approximated by their carrying amount.
Fair values for exchange-traded derivatives, principally futures and certain options, are based on quoted market prices. Fair values for over-the-counter (OTC) derivative fi nancial instruments represent amounts estimated to be received from or paid to a third party in settlement of these instruments. These derivatives are valued using pricing models based on the net present value of estimated future cash fl ows, directly observed prices from exchange-traded derivatives, other OTC 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. The values for OTC derivatives are verifi ed using observed market information, other trades in the market and dealer prices, along with management judgment.
Certain bifurcated embedded derivatives in insurance and investment products are not quoted in active markets and their fair values are determined by using valuation techniques. Because of the dynamic and complex nature of these cash fl ows, stochastic techniques under a variety of market return scenarios are often used. A variety of factors are considered, including expected market rates of return, market volatility, correlations of market returns, discount rates and actuarial assumptions.
The expected returns are based on risk-free rates, such as the current London Inter-Bank Offered Rate (LIBOR) forward curve or the current rates on local government bonds. Market volatility assumptions for each underlying index are based on observed market implied volatility data or observed market performance.
Notes to the consolidated fi nancial statements of AEGON Group Note 3 – 4.1.1
Deferred tax assets are established for the tax benefi t related to deductible temporary differences, carryforwards of unused tax losses and carryforwards of unused tax credits when in the judgment of management it is more likely than not that AEGON will receive the tax benefi ts. Since there is no absolute assurance that these assets will ultimately be realized, management reviews AEGON’s deferred tax positions periodically to determine if it is more likely than not that the assets will be realized. Periodic reviews include, among other things, the nature and amount of the tax income and expense items, the expected timing when certain assets will be used or liabilities will be required to be reported and the reliability of historical profi tability of businesses expected to provide future earnings. Furthermore, management considers tax-planning strategies it can utilize to increase the likelihood that the tax assets will be realized. These strategies are also considered in the periodic reviews.
Provisions are established for contingent liabilities when it is probable that a past event has given rise to a present obligation or loss and the amount can be reasonably estimated. Management exercises judgment in evaluating the probability that a loss will be incurred. The estimate of the amount of a loss requires management judgment in the selection of a proper calculation model and the specifi c assumptions related to the particular exposure.
This section contains a summary of the terms and conditions of the products sold and provides further background for an understanding of the business and its related risks. This is followed by an overview of the approach to risk management and highlights of specifi c risks to which the Group is exposed.
Products for the account of policyholders are those where the policyholder carries the investment risk. AEGON earns management, administration and guaranteed minimum benefi t fees, as well as mortality results on products.
In addition to the mortality risk as described above, the pension and annuity business of specifi cally AEGON The Netherlands and
AEGON UK that are reported as part of traditional life also carry signifi cant longevity risk. Longevity risk arises from enhanced medical treatment and improved life circumstances, although this is not easy to predict.
AEGON’s underwriting strategy is intended to ensure that the risks underwritten are well diversifi ed in terms of type of risk and level of benefi ts. AEGON also uses third party reinsurers to spread mortality risk. Furthermore, AEGON’s risk policy dictates a maximum insured benefi t on a country basis it will retain on any one life, reinsuring the excess.
Permanent life insurance provides life-long fi nancial protection. Most permanent policies have a cash value feature with implicit minimum interest rate guarantees prescribed by statutory requirements of between 4% and 5%. A customer may either withdraw the cash value, subject to withdrawal charges, or receive the benefi t upon a predetermined event, such as the death of the insured.
Minimum interest rate guarantees exist in all generations of fi xed universal life products, as they are required by non-forfeiture regulations. These are mostly at 4%, with newer products at 3%. No lapse guarantees were introduced in recent universal life products.
The no lapse guarantee feature provides a policyholder the guarantee that the universal life policy will stay in force, even if the cash value becomes zero or less than zero, provided that a specifi ed minimum premium payment is made when due or a shadow account remains positive. The guarantee period can vary from fi ve years to the entire contract term.
Equity indexed universal life products have both interest rate guarantees of between 1 and 2% and equity index return guarantees, with a cap currently around 12%.
Term life insurance provides protection for a certain period of time and allows the customer to select the duration of coverage and the amount of protection. The policy pays death benefi ts only if the customer dies during the specifi ed term. Most term life policies do not accumulate a cash value. The policies can usually be renewed upon expiration and premiums normally increase upon renewal.
Certain term life insurance products sold in the United States, such as mortgage insurance and credit life insurance, provide a death benefi t that decreases over the term period, based on a stated method. The rate of decrease usually corresponds with the decrease in the principal balance of the loan. Some term life insurance products include a cash value feature designed to return premiums after a specifi ed number of years.
Traditional life products also include life insurance sold as part of defi ned benefi t pension plans, endowment policies, post-retirement annuity products and group risk products. Bank- or corporate-owned life insurance (BOLI/COLI) is sold to corporations as a method of funding employee benefi t liabilities. The corporation insures key employees and is the owner and benefi ciary of the policies.
Term to 100 is a permanent life insurance product with level premiums, level coverage amounts, minimal or no cash values and no expiry age. These policies are priced as lapse supported business and approximately 90% of the lapse and mortality exposures have been reinsured with third party reinsurers.
This product is a life contingent payout annuity with guaranteed regular payments for the life of the annuitant. Some of these contracts have a minimum guaranteed payment period.
Minimum interest guarantees exist for all generations of accumulation products written. Older generations contain a 4%
There are different kinds of profi t sharing arrangements. Bonuses are either paid in cash (mainly in pension business, as discussed in the following section) or used to increase the sum assured. For one common form of profi t sharing, the bonus levels are set by reference to external indices that are based on predefi ned portfolios of Dutch government bonds. The bonds included in the portfolio have different remaining durations and interest rates and together are considered an approximation of the long-term rate of return on
Dutch high quality fi nancial investments. Another common form of profi t sharing are the interest rebates, whereby policyholders receive a discount on single premium business which refl ects the expectation that the actual rate of return on the contract will exceed the minimum interest guarantee used to determine the premiums and sums assured. Here too, the expected actual rate of return is based on a portfolio of Dutch government bonds.
This category includes products in accumulation phase and in payout phase. Payout commences at a date determined in the policy and usually continues until death of the insured or the benefi ciary.
Interest rebates are given on both single and regular premium pension and annuity insurance and may be based on a portfolio of
The AEGON UK traditional life business primarily comprises immediate annuity, individual protection and group protection business. The protection business provides insurance of major life events such as death, critical illness and total or permanent disability on individual or groups of lives. A menu approach offers fl exibility on the level and combination of benefi ts that can be chosen. Premium levels for individual business are typically fi xed over the term of the contract, while those for group arrangements are normally reviewed every two years.
applies for traditional life products with fi xed premiums. Current new business provides interest guarantees mostly between 2% and 3.4%.
In Slovakia the current minimum interest rate on universal life products is 3%.
Universal life products in the Czech Republic have a guaranteed interest rate of 2.4%.
AEGON earns a return from investment management fees, mortalitybased cost of insurance charges, other guarantee charges and expense charges. The contract account balance varies with the performance of the investments chosen by the policyholder
This product also contains a no lapse guarantee, which is an equity option. Under the no lapse guarantee, the contract is guaranteed to remain in force regardless of the level of underlying account value, provided the policyholder continues to meet minimum premium requirements. The value of this guarantee increases with higher cost of insurance charges and with lower minimum required premiums.
Notes to the consolidated fi nancial statements of AEGON Group Note 4.1.1 – 4.1.2
In the Netherlands, variable unit linked products are sold. These products have a minimum benefi t guarantee if premiums are invested in certain funds. The initial guarantee period is 10 years.
The 10-year period may be reset at the policyholder’s option to lock in market gains. The reset feature cannot be exercised in the fi nal decade of the contract and for many products can only be exercised a limited number of times per year. The management expense ratio
The operation of with profi t funds is complex. What is set out below is a brief summary of AEGON’s overall approach.
Guaranteed rates of return on with profi ts policies are typically in the range of 0% to 5.5% per year, with the highest rates closed to new premiums in 1999 and all funds closed to new business with investment guarantees from October 2002, except for a low level of increments.
The AEGON UK interest in Guardian Assurance plc’s with profi t fund is 10% of profi ts in the fund, with the remaining 90% going to with profi ts policyholders. In 1998, prior to acquisition by AEGON UK, the with profi t fund was restructured and became closed to new business, except for a low level of increments.
Guaranteed returns on policies without guaranteed cash options or annuity payments are typically 0% to 3.5% per year. Those on policies with guaranteed cash options or annuity payments depend on the value of the options at retirement. Currently, the guaranteed annuities are in the money.
Each with profi ts fund has a target range for the percentage of its assets that are invested in a combination of equities and property; the ranges may be varied. Within the target ranges, there is a policy of holding an appropriate mix of asset classes to reduce risk.
The investment performance of the with profi ts funds is distributed to policyholders through a system of bonuses which depend on: The guarantees under the policy, including previous annual bonus additions.
As all of AEGON UK’s with profi t funds are closed to new business with investment guarantees, the process has begun of gradually distributing free assets to with profi ts policyholders through the bonus system outlined earlier. Part of the management of this process involves trying to ensure that any surpluses in the with profi t fund from other (historic) business lines can be distributed to existing with profi t policyholders at a suitable rate. In particular,
Guardian Assurance plc has reinsured blocks of immediate annuity business to another part of AEGON UK on terms refl ective of prevailing market rates; this helps avoid a tontine effect building up in the fund, as the number of with profi t policyholders decline.
In the United States, AEGON sells group and individual fi xed annuities and retirement plan contracts to small and medium-sized institutions. Group fi xed annuities are purchased with a single premium that funds the annuities for a group of employees. The single premium includes a fee for the administrative services which are provided by AEGON after the annuities are sold.
Fixed deferred annuity contracts may be purchased on either a fl exible or single premium basis. Deferred annuities are offered on a fi xed interest crediting method or indexed basis. The customer can surrender the annuity prior to maturity and receive the cash value less surrender charges. Fixed deferred annuities have a specifi ed crediting rate that can be reset periodically by AEGON. Fixed deferred annuity contracts in the United States also offer discretionary crediting rates, as well as guaranteed minimum surrender values and payout options. Upon maturity of the annuity, the customer can select payout options, including a lump sum payment or income for life, as well as payment for a specifi ed period of time. Should the customer die prior to receiving the benefi ts of
the policy, the benefi ciary receives either an accumulated cash value death benefi t or an enhanced death benefi t in the event there are benefi t riders attached to the base contract. A discontinued multistrategy annuity allows a customer a choice of investment strategies to allocate funds and provides a cumulative minimum guaranteed interest rate. Early withdrawal by the customer of the cash value of the annuity is subject to surrender charges.
Terminal funding is a single premium non-participating group annuity product. This product is usually used for an insurance company takeover of a terminating defi ned benefi t pension plan. The company receives a single deposit from the contractholder and in return guarantees the payment of benefi ts to participants. Usually these annuity payments are paid monthly for the life of the participant or participant and spouse, commencing immediately for retired participants or at some date in the future for deferred participants.
Fixed annuity contracts in Canada have fi xed rates for specifi ed terms and contracts are sold as redeemable or non-redeemable.
Variable annuities are sold to individuals and pension funds in the
In the United States, a guaranteed minimum withdrawal benefi t is offered on some variable annuity products AEGON USA either issued or assumed from a ceding company. This benefi t guarantees a policyholder can withdraw a certain percentage of the account value, starting at a certain age or duration, for either a fi xed period or the life of the policyholder.
Certain variable insurance contracts also provide guaranteed minimum death benefi ts and guaranteed minimum income benefi ts.
The guaranteed amount is calculated using the total deposits made by the contractholder, less any withdrawals and sometimes includes a roll-up or step-up feature that increases the value of the guarantee with interest or with increases in the account value. These benefi ts subject the company to equity market risk, since poor market performance can cause the guaranteed benefi ts to exceed the policyholder account value.
Segregated funds are similar to variable annuities, except that they include a capital protection guarantee for mortality and maturity benefi ts (guaranteed minimum accumulation benefi ts). The initial guarantee period is ten years. The ten-year period may be reset at the contractholder’s option to lock in market gains. Certain limits and conditions for the timing and frequency of resets exist. The reset feature cannot be exercised in the fi nal decade of the contract and for many products can only be exercised a limited number of times per year. The management expense ratio charged to the funds is not guaranteed and can be increased at management’s discretion.
AEGON utilizes consolidated special purpose entities to issue medium-term notes that are backed by funding agreements. The proceeds of each note series are used to purchase a FA from an
AEGON insurance company, which is used to secure that particular series of notes. The payment terms of any particular series substantially match the payment terms of the FA that secures that series. AEGON also sells fi xed-rate AAA-wrapped municipal debt securities to consolidated special purpose entities, which issue fl oating-rate notes. AEGON receives residual income from these entities and provides certain guarantees to the noteholders in the event of early termination. These are refl ected in ‘FAs and notes issued to institutional investors’ in the table that follows.
In addition, AEGON utilizes consolidated special purpose entities to issue commercial paper, that is backed by the issuance of certain
FAs. These are refl ected in ‘Other FAs’ in the table that follows.
AEGON Global Institutional Markets plc (AGIM) is domiciled in Ireland for the purpose of issuing medium term notes to non-US investors and investing in a diversifi ed portfolio of eligible assets with the proceeds of the issued notes. AEGON Financial Assurance Ireland limited (AFA), another AEGON Ireland entity, provides a fi nancial guarantee for the medium term notes issued by AGIM.
Notes to the consolidated fi nancial statements of AEGON Group Note 4.1.4 – 4.1.5
The following table presents Institutional guaranteed product liabilities by withdrawal regulation: Book value out 1
The municipal/governmental funding agreements generally include downgrade language pursuant to which, should various downgrade events be triggered, one of the following four decisions must be followed at AEGON’s option: Transfer contract to a higher-rated party; Purchase a credit enhancement; Collateralize the underlying position; or
As at December 31, 2006, the contractual maturities (based on nominal amounts) for all contracts with defi ned maturities were: 2007 – EUR 5,506 million; 2008 – EUR 2,892 million; 2009 – EUR 4,103 million; Thereafter – EUR 3,961 million.
structure, in which the core is similar to a mutual fund and the feeder provides an institutional customer with a choice of products that are directly linked to the performance of the mutual fund, such as a registered or non-registered variable annuity, a collective investment trust (off balance sheet) or mutual funds (off balance sheet). Clients also have the fl exibility to supplement institutionally managed funds with funds from retail fund families.
Funds, and Diversifi ed Investors Funds Group family of mutual funds.
‘wrapper’ around fi xed-income invested assets, which are owned by the plan and managed by the plan or a third party money manager.
A synthetic GIC is typically issued with an evergreen maturity and is cancelable by the plan sponsor under certain conditions. Such a contract helps to reduce fl uctuations in the value of the wrapped assets for plan participants and provides book value benefi tresponsiveness in the event that qualifi ed plan benefi t requests exceed plan cash fl ows. In certain contracts, AEGON agrees to make advances to meet benefi t payment needs and earns a market interest rate on these advances. The periodically adjusted contract crediting rate is the means by which investment and benefi t responsive experience is passed through to participants.
In Canada, fees are earned through several special service and fund management companies, by providing administrative back offi ce services that facilitate the sale of mutual funds and segregated fund products. In addition, a national network of fi nancial planning franchises and representatives earn fees when products of nonaffi liated companies are sold. Investment management fees are also earned by providing portfolio management and investment advisory services.
AEGON The Netherlands offers fi nancial advice, provides asset management and administrative services and is involved in intercession activities in real estate. The fi nancial advice activities include selling insurance, pensions, mortgages, fi nancing, savings and investment products. The intercession activities in real estate comprise brokerage activities of residential as well as commercial real estate and real estate management business.
AEGON USA provides an array of life and annuity reinsurance solutions in the United States, Asia, and Latin America.
The core life reinsurance offering, mortality risk transfer, is sold primarily through coinsurance, as well as yearly renewable term arrangements. Under a coinsurance arrangement, reinsurance is ceded and assumed in the same form as the direct policy and the reinsurer shares proportionately in the product risks, including mortality, morbidity, persistency, investment, and capital requirements.
Yearly renewable term reinsurance has premium rates that are not related to the original plan of insurance and the ceding company only reinsures the mortality or morbidity risk.
Notes to the consolidated fi nancial statements of AEGON Group Note 4.1.6 – 4.2
AEGON offers limited forms of health insurance, including disability insurance in the Netherlands, Spain and Hungary and accidental death and dismemberment insurance in the United States, but does not offer major medical coverage.
AEGON USA offers accident, critical illness, cancer treatment, hospital indemnity and short-term disability policies. Some of these plans provide lump sum or specifi ed income payments when hospitalized, disabled or diagnosed with a critical illness. Others pay scheduled benefi ts for specifi c hospital or surgical expenses and cancer treatments, hospice care and cover deductible, as well as copayment amounts not covered by other health insurance.
AEGON sold its general insurance business in Spain with effect from
AEGON offers limited forms of general insurance, such as automobile insurance, liability insurance, household insurance and fi re protection.
Banking products are only sold by AEGON The Netherlands and include savings accounts and investment contracts. Both products generate investment-spread income for AEGON. Savings accounts retain fl exibility to withdraw cash with limited restrictions. AEGON
exposure from currency fl uctuations are from the differences between the US dollar and the euro and between the UK pound and the euro. AEGON may experience signifi cant changes in net income and shareholders’ equity because of these fl uctuations.
AEGON bears interest rate risk with many of its products. In cases where cash fl ows are highly predictable, investing in assets that closely match the liabilities can mitigate this risk. For some of the businesses capital markets are not well developed which prevents the complete matching of assets and liabilities for those businesses.
To manage its risk exposure, AEGON employs risk management programs, including asset liability management processes and models, hedging programs (which are largely conducted via the use of derivatives) and insurance programs (which are largely conducted through the use of reinsurance). These risk management programs are in place in each country unit and are not only used to manage risk in each unit, but also for AEGON. Derivative and reinsurance usage by the company is governed by derivative and reinsurance usage policies. These policies establish the control, authorization, execution and monitoring requirements of the usage of such instruments. In addition, these policies stipulate necessary mitigation of credit risk created through these risk management tools of derivatives and reinsurance. For derivatives, credit risk is often mitigated by requirements to post collateral via credit support annex agreements. For reinsurance, credit risk is often mitigated through funds withheld treaties (when AEGON owns the assets) or through assets held in trust for the benefi t of AEGON (in the event of reinsurer insolvency).
Netherlands, the majority of AEGON’s equity holdings are invested in an internationally diversifi ed portfolio rather than solely in euro denominated equities.
United States and in the United Kingdom, the principal sources of
by higher income in later years all else equal. Therefore, rising interest rates are not considered a long-term risk to the company.
AEGON USA and AEGON The Netherlands manage their duration mismatch on the basis of their expectations for the future level of interest rates within limits. Presently, other AEGON country units target the duration of their assets to equal approximately the duration of their liabilities where possible. In addition to point in time duration measurement, deterministic and stochastic scenarios are used to measure and manage interest rate risk. In these models, policyholder behavior changes are anticipated. These models are used by all country units and aggregated at group level. The table that follows shows each of the last fi ve year-end interest rates for the period from 2002 through 2006.
The tables that follow show the effective interest rates and the earliest of contractual repricing or maturity dates for general account fi nancial assets and borrowings.
General account bonds, money market investments, mortgage loans and private loans
Trust pass–through securities – – – – – – 123 7.64%
The tables that follow show the expected cash fl ows for insurance and investment contracts.
2 The cash fl ows included in the table are consistent with those included in the fair value measurement of the liabilities. More details on the products, and terms and conditions are included in notes 4.1 and 22.
AEGON typically bears the risk for investment performance equaling the return of principal and interest. AEGON is exposed to credit risk on its general account fi xed-income portfolio (bonds, mortgages and private placements), OTC derivatives and reinsurance contracts.
Derivatives Association (ISDA) master netting agreements for each of AEGON’s legal entities to facilitate AEGON’s right to offset credit risk exposure. The credit risk associated with fi nancial assets subject to a master netting arrangement, is eliminated only to the extent that fi nancial liabilities due to the same counterparty will be settled after the assets are realized. The extent to which the exposure to credit risk is reduced through a master netting agreement may change substantially within a short period of time, because the exposure is affected by each transaction subject to the arrangement.
For the resulting net credit risk exposure, AEGON employs deterministic and stochastic credit risk modeling in order to assess the Group’s credit risk profi le, associated earnings and capital implications due to various credit loss scenarios.
The following table shows the credit quality of general account reinsurance assets specifi cally.
The table that follows shows the Group’s maximum credit exposure from investments in general account fi nancial assets, as well as general account derivatives and reinsurance assets and off balance sheet exposures.
The tables that follow present specifi c credit risk concentration information for general account fi nancial assets.
Asset backed securities (ABSs) - Aircraft 195 – – – 195 303
Exposure to equity, real estate and capital markets exists in both assets and liabilities. Asset exposure exists through direct equity investment, where AEGON bears all or most of the volatility in returns and investment performance risk. Signifi cant terrorist actions, as well as general economic conditions, have led to and may again result in signifi cant decreases in the value of AEGON’s equity investments.
AEGON’s country units, AEGON The Netherlands holds the largest amount of equities, both in absolute terms and expressed as a percentage of total general account investments. The largest part of the equity portfolio of AEGON The Netherlands consists of a diversifi ed portfolio of global equities and 5% equity holdings in
The table that follows sets forth the year end closing levels of certain major indices.
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 is unable to fully recover up front expenses in selling a product despite the presence of commission recoveries or surrender charges and fees. For mortality and morbidity risk, AEGON sells certain types of policies that are at risk if mortality or morbidity increases, such as term life insurance and accident insurance, and sells certain types of policies that are at risk if mortality decreases such as annuity products.
2 The mortality sensitivities assume that mortality increases or decreases for all products regardless of whether one product produces a gain or loss on the directional change.
Income statement – Operating earnings 2006 Amounts in EUR million Americas
Fee – off balance sheet products 54 35 – (14) – – 75
Share in profi t/(loss) of associates – 7 1 24 – – 32
Income statement – Operating earnings 2005 Amounts in EUR million Americas
Life for account of policyholders 87 (53) 203 6 – – 243
Income before share in profi t/loss of associates and tax 2,181 1,282 272 232 (352) (20) 3,595
Income statement – Operating earnings 2004 Amounts in EUR million Americas
Life for account of policyholders 86 45 168 5 – – 304
Share in profi t/(loss) of associates 3 13 – 9 – – 25
Attributable to minority interest (2) – – – – – (2)
NET INCOME ATTRIBUTABLE TO EQUITY HOLDERS OF AEGON N.V. 1,343 920 121 101 (230) 1 2,256
Life for account of policyholders 1,923 2,123 9,865 759 – – 14,670
Fee – off balance sheet products 538 316 216 27 – – 1,097
1 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 in other non-operating income/(charges).
Income statement – Segment revenues 2005 Amounts in EUR million Americas
Life for account of policyholders 1,077 3,181 6,412 257 – – 10,927
Holding and other activities – – – – 741 (620) 121
Net gains on investments for account of policyholders 3,061 1,751 6,477 62 – (11) 11,340
Net fair value and foreign exchange losses (58) (202) – (12) (113) – (385)
1 Charges to policyholders in respect of income tax in AEGON UK to the amount of EUR 104 million are excluded from segment expenses and included in other non-operating income/(charges).
Income statement – Segment revenues 2004 Amounts in EUR million Americas
Net fair value and foreign exchange gains 189 6 2 1 7 1 206
Amortization of deferred expenses, VOBA and future servicing rights 999 199 276 83 – 1,557
Impairment charges/(reversals) on non-fi nancial assets and receivables 9 – – – – 9
Amortization of deferred expenses, VOBA and future servicing rights 832 157 187 66 – 1,242
Impairment charges/(reversals) on fi nancial assets, excluding receivables (42) 25 3 – – (14)
Impairment charges/(reversals) on non–fi nancial assets and receivables 3 – – 2 7 12
All intercompany loans transactions are done on at arms’ length basis, based on readily available information.
Insurance contracts for account of policyholders 36,986 20,383 13,201 1,624 – – 72,194
VOBA and future servicing rights 3,359 12 1,135 41 – – 4,547
Insurance contracts for account of policyholders 36,331 19,536 13,456 957 – – 70,280
Life for account of policyholders 7,547 25,712 70,010 1,994 – – 105,263
Life for account of policyholders 6,084 23,634 64,204 1,136 – – 95,058
Cost to acquire investments in real estate, software and equipment were not material during the fi nancial period.
Amortization / depreciation through income statement – 308 22 41 1 372
Notes to the consolidated fi nancial statements of AEGON Group Note 6 – 7
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’, except when it is related to the gains and losses on investments, in which case it is included in
None of the intangible assets have titles that are restricted or have been pledged as security for liabilities.
Poland, completed in the last quarter of 2005. The initial allocation of goodwill has not been completed for all business combinations included in the fi nancial statements of 2006.
Investments for general account comprise fi nancial assets, excluding derivatives, as well as investments in real estate and real estate held for own use. Refer to note 8 for investments for which the investment risk is borne by the policyholders and to note 9 for details on general account derivatives.
Financial assets, excluding derivatives AFS Loans HTM FVTPL Total AFS Loans HTM FVTPL Total
Money market and other short-term investments 4,387 – – 38 4,425 3,151 – – 50 3,201
Refer to the analysis of credit risk concentrations for bonds and money market investments in note 4.2, for an overview of asset backed securities and collateralized mortgage backed securities.
Changes in estimates of prepayments will impact the calculation of the effective yield and therefore the carrying value and interest income related to these securities. Collateralized mortgage backed securities are a combination of commercial and residential mortgage backed securities. Commercial mortgage backed securities are secured by a pool of mortgages on income producing properties and are subject to credit risk, but unlike other structured products, are generally not subject to prepayment risk due to protections within the underlying commercial mortgages, whereby borrowers are effectively restricted from prepaying their mortgages due to changes in interest rates. Residential mortgage backed securities are subject to credit risk and interest rate risk. The credit risk associated with residential mortgage backed securities is mitigated due to the fact that the portfolio consists of securities that were issued by, or have underlying collateral that is guaranteed by, US government agencies or US government sponsored entities.
EUR 2.1 billion of aggregate mortgage receivables was conveyed to a special purpose company. The special purpose company funded this purchase with the issuance of mortgage-backed securities. The transfer of ownership title will take place upon notifi cation of the borrowers by the special purpose company. The special purpose company has the right to notify the borrowers upon the occurrence of certain pre-defi ned ‘notifi cation events’. At the same time AEGON
Levensverzekering N.V. completed one mortgage-related publicly placed securitization contract for EUR 1.2 billion that was structured similarly to the 2006 securitization described above. A portion of securitized mortgage loans amounting to EUR 24 million (2005: EUR 28 million) continues to be recognized as a fi nancial asset on balance, representing the interest rate risk retained by AEGON in respect of the fourth publicly placed securitization contract.
For the year ending December 31, 2006, AEGON USA sold approximately EUR 105 million (2005: EUR 21 million) of AAAwrapped municipal debt securities to qualifying SPEs (QSPEs). Due to AEGON’s continuing involvement with the assets in these QSPEs, it consolidates these entities. The fair value of all such debt securities refl ected in investments and also measured at fair value through profi t or loss is EUR 678 million as of December 31, 2006
of the excess of the fair value of the securities over the notes value may be shared with the noteholders, with residual fl owing to AEGON.
In the event that the fair value of the securities is less than the notes value at early termination and the securities have maintained their investment grade rating, AEGON will reimburse the QSPE liquidity provider for this shortfall. AEGON must pledge collateral to support these shortfall agreements. At December 31, 2006, the fair value of the bonds was in excess of the par value of the fl oating rate notes and no collateral was pledged. The maximum exposure to loss resulting from AEGON’s involvement is the December 31, 2006 unpaid principal and accrued interest on the notes of EUR 649 million
(2005: EUR 840 million) refl ected in fi nancial liabilities-investment contracts. Management does not anticipate any future funding requirements with respect to these guarantees that would have a material effect on reported fi nancial results.
No fi nancial assets were reclassifi ed during the fi nancial year.
Realized gains and losses are determined as the difference between proceeds and cost prices, before taking tax effects into account.
Notes to the consolidated fi nancial statements of AEGON Group Note 7.1
Deposits with fi nancial institutions 1,995 9 – 2,004 2,004 –
Bonds 7.4 FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS
Listed and unlisted shares and bonds 2006 2005 7.5 INVESTMENTS IN REAL ESTATE
Transfers from real estate held for own use and mortgage loans 140 134
AEGON USA has entered into commercial property leases on its investment property portfolio, consisting of offi ce, retail and industrial buildings. These non-cancellable leases have remaining lease terms up to 12 years. Most leases include a clause to enable upward revision of the rental charge on an annual basis according to either a fi xed schedule or prevailing market conditions.
arising from investment property that generated rental income during the period amounted to EUR 28 million (2005: EUR 33 million; 2004: EUR 25 million). No amounts (2005: EUR 2 million; 2004: EUR 0 million) of direct operating expenses related to investment property that did not generate rental income during the period.
Investments for account of policyholders comprise fi nancial assets at fair value through profi t or loss, excluding derivatives, as well as investments in real estate and real estate held for own use. Refer to note 9 for details on derivatives for account of policyholders.
Derivatives for general account - Derivatives not designated in a hedge 860 1,058 558 690 - Derivatives designated as fair value hedges 256 335 480 516 - Derivatives designated as cash fl ow hedges 197 326 133 227
Derivatives for account of policyholders - Derivatives not designated in a hedge 373 440 579 678
TOTAL DERIVATIVES 1 1,883 2,295 1,788 2,202 1 Refer to note 48 for a summary of all fi nancial assets and fi nancial liabilities at fair value through profi t or loss.
Interest rate contracts are used to manage AEGON’s exposure to interest rate risks. These contracts are designated as economic hedges to AEGON’s risk exposures. The main types of derivative fi nancial instruments used are interest rate swaps, swaptions, caps/
Caps/fl oors are contracts to settle the difference between a market interest rate and a certain strike rate for a certain period of time on a specifi ed notional amount.