AEGON N.V. is the holding company of one of the world’s largest listed insurance groups. The Group’s businesses offer a diverse portfolio of products: principally in life insurance, pensions and related savings and investment products, but also in accident, health and general insurance.
50 Summarized consolidated income statements 51 Consolidated income statements 53 Consolidated cash flow statements 54 Notes to the consolidated financial statements 57 Notes to the consolidated balance sheets 74 Notes to the consolidated income statements 81 Remuneration Executive Board and
Donald J. Shepard, Chairman (American), 56, started his career with Life Investors in 1970. Serving in various management and executive functions with Life Investors, he became Executive Vice-President and Chief Operating Officer in 1985, a position he held until AEGON consolidated its other US operations with Life Investors to form AEGON USA in 1989. He became a member of the Executive Board in 1992. As per April 18, 2002 he became Chairman of the Executive Board of AEGON N.V.
Johan G. van der Werf (Dutch), 50, started his career in 1973 as a First Officer in the Merchant Marine. In 1981 he joined one of the predecessors of AEGON as a district sales manager. From 1987 till 1992 he was chairman of the management board of Spaarbeleg and in 1992 he became a member of the management board of AEGON The Netherlands. As from 2002 he is a member of the Executive Board of AEGON N.V. and CEO of AEGON The Netherlands.
The AEGON Group Staff Departments have specific areas of attention, defined by the Executive Board. They work for the whole Executive Board and, if so requested, for individual members. Each head of a Group Staff Department formally reports to an individual member of the Executive Board. AEGON’s Group Staff consists of some 110 people of different nationalities and is based in The Hague, the Netherlands.
Corporate Actuarial Ad A.M. Kok (until March 1, 2003) Group Business Development Alexander R. Wynaendts Group Communications Gerard van Dongen Group Finance & Information Ruurd A. van den Berg Group Legal Erik Lagendijk Group Tax Adri D.J. Verzijl Group Treasury C. Michiel van Katwijk
The historic correction experienced by financial markets made 2002 an unprecedented year for the insurance industry. Credit defaults, record low interest rates and a third consecutive year of falling stock prices worldwide contributed to a 35% decline in net income in 2002, which is in line with the guidance we issued in July and November of 2002. Earnings per share were 39%
However, earnings excluding all exceptional items in 2002 and 2001 were up marginally, with the US
Coupled with our leading role as a pension provider in the Netherlands and the United Kingdom, the alliance reinforces AEGON’s position as one of the EU’s premier pension specialists.
THE AEGON EXECUTIVE BOARD FROM LEFT TO RIGHT: DONALD J. SHEPARD, CHAIRMAN, 56, PAUL VAN DE GEIJN, 56,
Broadening the commitment to its key distribution channel, AEGON UK has begun to invest directly in selected independent financial advisory firms, taking a controlling interest in several such agencies during 2002. The UK Stakeholder Pension initiatives and other regulatory developments are creating new business opportunities but are also putting pressure on margins; by extending its distribution expertise AEGON UK is preparing itself to respond effectively to these changes. Similarly, AEGON
These moves illustrate the high importance we place on supporting our traditional distribution partners.
Multi-domestic and multi-branded approach, giving a high degree of autonomy to the management of the individual country and business units, encouraging entrepreneurial spirit and action. AEGON requires local management to run local businesses.
AEGON supplements its autonomous growth with selective acquisitions and partnerships, which are preferred in countries where AEGON already has a presence in order to build scale and enhance distribution.
For the many trusted AEGON partners, it means generating new ideas and services that provide mutual benefit and creating partnerships based on clarity, honesty and integrity.
For all the many other stakeholders in our business too, we want to work hard to recognize and accept our wider responsibilities to the communities and environments in which we do business. We believe that a constructive approach to sustainability issues is essential in creating better futures for us all.
‘pension gap’, or shortfall between present savings and future needs, has only been intensified by the economic downturn. Though partly masked by market turmoil, we believe the underlying dynamism of our business remains.
During the long bull market of the 1990s, the appreciation of financial assets helped AEGON to deliver high growth rates. The reversion to lower asset growth rates has had a profound impact. Nevertheless, we believe that by focusing on our core business, AEGON is strongly positioned to serve our growing markets. The theme of this year’s report – staying power – reflects that confidence.
in euro in dollar in pound last 5 years last 10 years
TOTAL RETURN AEGON SHARES* % compound growth rate, average per year * Price appreciation and dividends
The AEGON Supervisory Board consists of ten business and social leaders of three nationalities.
G.A. POSTHUMUS T. REMBE W.F.C. STEVENS K.J. STORM F.J. DE WIT
M. TABAKSBLAT H. DE RUITER D.G. EUSTACE O.J. OLCAY K.M.H. PEIJS
The duties of the Supervisory Board, which consists of ten non-executive members, are to supervise the Executive Board’s management and advise the Executive Board. With the active assistance of its four specialized committees, the Supervisory
We spent significant time reviewing corporate governance issues, in particular AEGON N.V.'s status as a company governed by the so called ‘Structure Regime’ under Dutch corporate law. For the outcome of these discussions we refer to the proposals to be made to the Annual General Meeting of shareholders on April 17, 2003, as explained in more detail in our ‘Letter to shareholders’ dated March 20, 2003.
Vereniging AEGON that resulted in a capital realignment and a reduction of Vereniging AEGON’s shareholding.
We also devoted attention to acquisitions, joint ventures and alliances. We reviewed and supported the acquisition of several independent financial advisory firms in the UK and TKP
Posthumus as members, held four meetings in 2002. In accordance with the Audit Committee Charter, the members are experienced and competent in financial and accounting matters. The Executive Board members and representatives from Ernst & Young also attended the Audit Committee meetings. Special items on the agenda in 2002 were discussions with internal and external auditors of several country units, who gave an insight into their audit work at these units.
Discussions in 2002 were dominated by the Committee’s permanent agenda: the quarterly results, annual accounts and the auditing of these by Ernst & Young, accounting principles, internal control systems, the group-wide risk report as well as
Ernst & Young’s independence and fees. The Audit Committee subsequently reported to the Supervisory Board on its findings. It also considered the consequences of the USA’s
Committee discussed the composition of the Executive Board following Mr. Storm’s retirement and the composition of the
Mr. Tabaksblat as Chairman and Messrs. De Ruiter, Olcay and De Wit as members, held two meetings, also attended by the Executive Board members. The purpose of the Strategy
Mr. Storm was appointed a member of the Supervisory Board as of July 1, 2002, after his retirement as Chairman of the
Mr. L.M. van Wijk as of that date. Shareholders have not recommended another candidate, but they have the right to object to this appointment at the AGM in 2003. The Dutch
In 2004, Mr. De Ruiter will reach the retirement age of 70 and will step down at the end of the AGM in that year. We intend to fill this vacancy. Shareholders have the right to recommend candidates during the AGM in 2003.
We will remember 2002 as a difficult year marked by continuing depressed equity markets, poor credit markets and low interest rates. These unusually persistent factors – not only affecting AEGON but the whole of the life insurance industry – were the unfortunate cause of the decrease in net income in 2002, the first in AEGON’s history.
AEGON CEO DON SHEPARD DISCUSSES BUSINESS ISSUES AND PROVIDES SOME CLARITY AND INSIGHT INTO OUR ACTIVITIES.
Q: During 2002 major European insurers used rights issues to reinforce their capital. How did the transaction with Vereniging AEGON (the Association) differ?
A: The charter of the Association – which dates back to the merger creating AEGON in 1983 – requires it to support AEGON while balancing the interests of all stakeholders. In the past the Association provided material support for our acquisition strategy, by selling part of its AEGON shares to AEGON N.V. for exchange purposes. The buying back of shares in the open market resulted in some debt and as the price of the shares fell, the Association’s leverage rose substantially, resulting in the need to stabilize the Association’s financial base. The capital realignment achieved this, allowing the Association to more than halve its debt burden, and invest EUR 2.1 billion in preferred AEGON shares, which are a stable asset class, while at the same time bringing the Association’s voting interest more closely in line with its ownership interest.
related to variable annuities sold in the United States. Your unlocking appears large.
A: We entered the variable business in the early 1990s with the acquisition of Western Reserve, but our variable annuity business has grown significantly in recent years as a result of our decision to increase our presence in this market. Well over half of our variable annuity balances result from business added since 1999. So we have a relatively young book of business which was written when markets where high.
A: We believe long-term pricing spreads will be achieved over the life of the business. However, it is clear that with the current low level of interest rates and the high level of corporate bond defaults we are not achieving our return targets for fixed annuities at the moment. Pricing of general account products anticipates some level of defaults. For many years, defaults were less than the pricing allowance.
In addition, excess product spreads were achieved on in-force annuities for several years as new money rates on competing products fell. Over the lifetime of the business we price for a 225–250 basis point spread.
A. New money crediting rates have declined throughout the year in line with the decline of investment yields and were as low as 2.7% during the fourth quarter. In response, we refiled products with the US
state regulators effectively allowing us to lower the crediting rate on fixed annuities to 2%. Many US
A: The complex payment flows and long time scales associated with insurance products make it hard to create an accurate snapshot of how much value is accumulating inside the company. Embedded value is a management tool showing the present value of future distributable earnings from an existing book of business, and is important for corporate planning, since capital and other resources are allocated so as to generate the greatest value.
European Union, by 2005. There are important differences between IAS, the Dutch GAAP currently followed by AEGON, and US GAAP reporting. We have long disclosed the significant differences between these last two methods in our Dutch GAAP to US GAAP reconciliation. Given our long-term business perspective, we have used an earnings matching system, which has reflected the long-term nature of our business, but at the same time has made it difficult to compare AEGON with its US and European peers. Now, as we approach a new harmonization with the IAS, our main interest is to ensure a level playing field allowing fair comparison of all companies competing for capital, while for the life insurance industry in particular, to have a system which takes into account the long timeframes involved in life insurance and pensions. Also we have decided to change our accounting for capital gains on equities and real estate beginning January 1, 2004. We will stop using our indirect return system and instead recognize capital gains and losses as income when realized.
Notwithstanding the financial market turmoil of 2002, the market for life insurance and pensions is broadening perceptibly with the aging of developed-country populations, (fiscal) stimulation programs, European integration and increased wealth. There is reduced public faith in the ability of government-sponsored social security programs to provide desired levels of living standards for retirees. At the same time, consolidation is reducing the number of private sector providers able to offer both protection and prudent investment on a sustainable basis. Together, these changes present opportunities for long-term growth. Both the expansion of distribution and cost management are critical for achieving the scale and expertise required to take advantage of these opportunities and form a part of AEGON's long-term strategy for profitable growth.
“Partnering covers a broad spectrum of alliances with other players in the world of financial services. This approach focuses on building efficient collaborative networks to reinforce AEGON's existing strengths and extending its reach to customers.”
Expanding distribution is key to AEGON's growth strategy, which relies on strengthening existing sales channels while simultaneously building new capabilities. Across the decentralized AEGON Group, business and marketing units pursue multiple initiatives to reach customers more effectively. Yet a common thread is always to reinforce and expand distribution relationships. Reflecting this importance,
Because of the country-specific nature of insurance and pension products, AEGON partners must exhibit a high level of local market knowledge and specialization in order to contribute to AEGON's goal of expanding distribution and increasing cost effectiveness.
Partnering takes many shapes, including partial (or outright) acquisition, joint ventures, alliances and outsourcing. But whatever form it takes, AEGON seeks out certain core characteristics whenever and wherever partnering begins. More than ever, AEGON is working hard to build sales through all available channels, leading AEGON companies to cooperate closely with other specialized entities through partnering. In the United States, distribution through financial institutions is increasingly important. For example, Transamerica Capital, drawing together a wide range of products, serves as a highly effective partner to wirehouses and intermediaries serving retail customers. And a partnering strategy, jointly executed by Transamerica Capital and Transamerica
As a result of an enhanced logistical partnership among AEGON Particulieren, Spaarbeleg and agents, clients were informed within a very short time about the effects of changes in the fiscal treatment of employee savings plans and about possible solutions.
In 2002, AEGON UK expanded distribution in its core business through a number of acquisitions, bringing access to over 700 independent financial advisors. The expansion in distribution will allow
AEGON UK to accelerate its own ambitious product development plans in response to the ongoing regulatory changes aimed at simplifying the UK's complex rules on distribution. These investments clearly signal our commitment to our distribution strategy and our belief in the quality of the independent sector in the United Kingdom. In addition to building significant in-house sales capability, AEGON UK is also working to build closer links between insurer and intermediaries using
web-based technology. An additional benefit of distribution ownership is that AEGON UK can develop better, more integrated servicing solutions through its improved understanding of customer and intermediary needs.
AEGON announced in 2002 an agreement with China National Offshore Oil Corporation to launch a life insurance joint venture in which AEGON will provide insurance-industry expertise. The new company is expected to commence operations in the second quarter of 2003 to pursue the rapidly growing demand for asset accumulation and protection products among the Chinese population.
AEGON also puts technology - e.g. via internet - to work supporting distribution and more traditional forms of customer service. Web-based technology is used to help provide customers and agents with convenient on-line account information, and to support the sales process. Outsourcing with specialists in such areas as ICT, claims handling, telemarketing and administration also produced important results in 2002.
AEGON has always maintained a strong focus on cost management and efficiency, a key component to maintain long-term profitable growth. Our decentralized business model has long demonstrated its advantages in reaching customers. However, more than any other time, the current and future operating environment demands that the operating units manage and control expenses.
The goal for AEGON has always been to realize efficiency and cost benefits through outsourcing, sharing services across operating units or consolidating back-office administrative functions, while maintaining the entrepreneurial drive of sales and sales support teams in the front-office.
Increasingly, the solution to these challenges has been found in internal shared service initiatives, in which business units share administrative and logistical support while the sales and marketing organizations retain the benefits of decentralization. The distinct management of the shared services strengthens operational support, encourages and allows for the utilization of best practices within the organization and permits sales and marketing managers to pursue targeted branding, product design and distribution strategies. In addition, it allows for better economies of scale across the organization.
“Our cost management activities are part of our long-term strategy, because we believe it is a continuing exercise that should be part of a growing profitable business. These goals present difficult decisions for management, but they have never been more important for the underlying growth of the business.”
In 2002, AEGON again achieved improved efficiencies by streamlining and rationalizing administrative functions in almost all business units. Cost control again proved to be an important contributor to
AEGON The Netherlands has extended its relationship with outsourcing partners, which has improved the quality and cost-effectiveness of processing policies and claims. AEGON The Netherlands also expanded the range of administrative and technical support for independent advisors and smaller
AEGON UK expects to achieve important cost savings in part as a result of the reduction in staffing and significant investments in technology, incurred over the last three years, coupled with administrative efficiencies.
Efficiency improvements are also being realized through information sharing within the AEGON Group.
In terms of risk assessment, there is an expanded group-level review to assess and facilitate appropriate enterprise-wide exposure. Exchanges of information on technology, reinsurance, investment and other specialized aspects of insurance are carried forward by various Internal Working Groups, bringing together experts from across the AEGON Group to create more value.
Cost management and efficiency improvements do not always result from concentration. In the asset management field, a policy review has concluded that the major units should be left to pursue their distinctive models for asset liability management, reflecting regional needs, with no plans for full integration. However, the US, Dutch and UK investment units are working together to optimize the use of resources, improve coordination and reduce overlaps in research and execution of investment mandates. The goal is clear: but more than a common approach to achieve cost reduction, it also provides the added benefit of binding different parts of the AEGON Group together, creating common energy and purpose.
AEGON USA showed its staying power and solid foundation in the face of the most serious market correction in several decades. 2002 was a year when asset related issues adversely affected earnings for
Net income totaled USD 916 million compared to USD 1,428 million for 2001. Depressed equity and credit markets led to additions to asset default provisions (USD 774 million), higher
USD 307 million on the sale of divested operations in Mexico as well as USD 73 million of earnings from these operations.
Total revenues were 1% higher. Although new business production contributed to the significant increase in general account assets, investment income was 1% lower as a result of lower yields. Commissions and expenses increased 16% due to higher production levels, the higher DPAC amortization and acquired businesses. When adjusted for acquired businesses, operating expenses for the US operations decreased by 4%
from the prior year through the ongoing realization of administrative and marketing efficiencies. The organizational restructuring within the Agency Group and the creation of
AEGON Financial Partners as an internal service provider have contributed to the cost reduction.
AEGON USA attracted new distribution relationships while expanding its business with existing distributors. This was particularly true with banks, wirehouses and independent producers, which generated double-digit sales growth for annuities and traditional life products. While distributors look to AEGON USA for high-quality products, it is the responsiveness and service that AEGON USA provides to sales partners that offer a clear competitive advantage. Tailored product design, on-line producer support, combined with highly-trained wholesale and service teams and consistent and expedient underwriting and policy issue, are clearly valued by
Investors Agency Group – remained separate and entrepreneurial under the current decentralized structure.
The company’s commitment to advancing service and improving efficiency is also evidenced by its investment in technology. During 2002, AEGON USA moved closer to becoming a one-stop customer service center through the ongoing development of the Enterprise Client System. This is part of AEGON USA’s evolving strategy to give customers convenient access to their accounts by calling a single service center or logging on to a single website.
USD 774 million was added to the default provision. At yearend less than 1.0% of total assets were non-performing assets, while bonds in default constituted less than 1.0% of the total bond portfolio. Invested asset balances general account increased USD 12.1 billion to USD 109.0 billion. Bonds comprise the majority of invested assets at USD 90.1 billion and AEGON
USA slightly improved their average credit quality during the year. Commercial mortgage loans, alternative investments and equities contributed the balance of the portfolio. The total return of the portfolio over one and three year horizons has been 6.1% and 6.9% per annum, respectively.
Variable annuity deposits were USD 9.9 billion, an increase of 67% over 2001. Over two-thirds of this was driven by
Transamerica Capital, Inc., which worked successfully to develop preferred relationships with major wirehouses and regional broker-dealer firms and secure prime shelf space for
Group had an especially strong year, benefiting from a wellpositioned product portfolio and solid production from an agency distribution system that includes more than 400 general agencies and 40,000 independent producers.
Transamerica Worksite Marketing positioned itself operationally for an expected increase in sales volume.
At Transamerica Reinsurance, partners with the greatest value potential were targeted through establishing new relationships and increasing share in key existing accounts.
Our off balance sheet production had positive results for the year despite the weak market conditions. Deposits in synthetic GICs, in which IMD is the market leader, approached
USD 1 2.2 billion. In 2002, IMD continued to expand this market platform. Our two principal pension providers, Diversified
Health revenues, primarily supplemental and accidental death and dismemberment, increased 18% in USD in 2002, due largely to the full year inclusion of J.C. Penney’s direct marketing insurance services. AEGON Direct Marketing
Services (ADMS) focused on driving growth in its two key channels – Direct (to consumer) and Sponsored (through affinity partners) – capitalizing on the successful integration of the J.C. Penney direct marketing services acquisition. ADMS
achieved growth in its membership products, the affinity market, and international markets, which now includes the
generated over USD 2.4 billion in revenues in 2002 from its worldwide operations.
Similarly in Canada the decline in equity markets negatively impacted earnings. Unit-linked sales slowed sharply as consumers sought more traditional products. Segregrated fund redemptions increased in the last half of the year, mitigated somewhat by encouraging client transfers to the newer
Finance units. Yet, earnings decreased in 2002 to USD 48 million. However, the Real Estate Information Services segment showed strong revenue growth resulting from increased refinancing activity.
For 2003, AEGON Americas will pursue growth in our core business at an acceptable risk profile. In addition, the various cost saving initiatives will be vigorously pursued. Broadening and growing distribution relationships will accelerate as enhanced technology capabilities and management emphasis will bring more of AEGON USA’s product offerings to each distribution channel.
Overall, AEGON The Netherlands demonstrated both resilience and flexibility as the units adapted to the changing needs of a market with continued long-term growth potential.
This flagship unit continued to build on improvements implemented in 2001. Worksite marketing, the concept pioneered by Pensioen en Advies, was extended to other distribution channels. AEGON The Netherlands bought TPG
KPN Pensioen B.V. (TKP Pensioen), an administrator of pension funds, which included approximately 150,000 participants at the end of 2002. Our other group pension unit, Bedrijfspensioenen, which distributes through agents, had lower sales compared to the good year 2001. Group life sales held up well, in spite of changes to Dutch laws that negatively affected the tax treatment of certain life insurance products.
In the individual life sector, stock market weakness and fiscal uncertainties caused something like a buyer’s strike among consumers. This led to a drop in sales and higher lapse rates among some plan holders. AEGON The Netherlands was able in part to compensate for this by marketing new products such as mortgage-related products (Beleggingshypotheek) and rejuvenating the more traditional life policies. To help minimize distribution bottlenecks and reduce costs, the organization of
AEGON Van Nierop’s distribution was streamlined and we believe the unit is positioned to benefit from future opportunities for further growth.
Management focused on reaching to customers by enhancing administration services and by extending distribution and the partnering principle. A disciplined focus on profitability helped underpin AEGON The
Netherlands’ low-cost producer status in each of its key product sectors.
New life production was EUR 345 million, down 2% for the year. Off balance sheet production increased 41% to EUR 1,223 million for the year while savings deposits and investment contracts were 21% and 52% lower, respectively. Sales in retail markets were lower due to fiscal changes and weak equity markets, while production in the group pension business was higher.
This includes EUR 60 million in investment costs that are recognized on a gross instead of a net basis and which are offset by an equal amount in revenues. The change in presentation is the result of the establishment of AEGON Asset
In 2002, AEGON The Netherlands revitalized its product lines, while consolidation and standardization helped raise the visibility of the AEGON brand name across all channels.
Customers for individual life and pension products are traditionally served by independent agents, who AEGON The
AEGON Bank has chosen to emphasize profitability over volume. As part of distribution improvements and new lines,
With respect to the Moneymaxx activities – a concept for unit linked life insurance products – in the various AEGON countries it was decided to incorporate these activities in the existing local AEGON units, unless the activities were large enough to operate independently. Consequently, in Hungary and Spain the Moneymaxx activities were incorporated in 2002, whereas
And there was a sound growth to 260,000 savers using the
Despite a volatile and adverse year for the securities markets, and thanks to the high quality of its asset portfolio, investments by AEGON Asset Management outperformed those of its peers in 2002. While fixed investments were not affected by any major bond default, the value of the equity and real estate portfolio in the Netherlands declined by EUR 1,347 million in 2002. Overall, off balance sheet production enjoyed a 41% increase over 2001 to EUR 1,223 million.
Without losing sight of the strategic commitment to local responsibility or to proven business principles, such as reliability, teamwork and responsiveness, AEGON
The Netherlands will continue during 2003 to modernize and enhance links with distribution channels and consolidate brand perception and back-offices, while focusing on partnering both inside and outside the organization is the key to strengthening and speeding business flow.
Although AEGON UK’s new premium income fell in 2002, three business sectors delivered significant growth with institutional asset management mandates up 66%, individual protection up 57% and UK offshore investment sales up 44%. However, stock market weakness led to some corporate and private clients deferring decisions to set up pension or investment arrangements helping to decrease the core pension business
Regulatory change contributed to the ongoing development of the UK market. The Financial Services Authority provided greater freedom to intermediaries by allowing ownership of important distributors by life insurance companies. The
Sandler review added impetus to the concept of simple, low risk products and a transparent approach to the ‘With Profits’
‘second tier’ selling in the workplace and to improve the profitability of its core life and pensions business by greater integration of technology and simpler administration models.
Greater focus on distribution and manufacturing capability is expected to generate profitable growth in the UK business.
UK made four IFA acquisitions, giving access to over 700 registered financial sales consultants: Advisory & Brokerage
As a leading provider of group and individual pensions and life products through independent financial advisors
(IFAs) and a major asset manager, AEGON UK showed resilience in the face of uncertain equity markets and ongoing regulatory changes by focusing on its cost base and taking steps to capture greater benefits along the distribution chain.
Net income was GBP 1 12 million compared to GBP 165 million for 2001. Net income is lower as a direct result of weak equity markets leading to lower management and fund related fees as well as the setting up of provisions to meet costs associated with the expense reduction program.
Other acquisitions and investments are being considered in order to capture greater distribution margins and ultimately establish a strong position with the leading IFA organizations covering the UK market.
By extending the number of investment management partnerships external to the group, AEGON UK’s core pensions business achieved a leading position in this important area of the markets for corporate pensions and high net worth individuals.
In the asset management sector, new products were created for the increasingly important fixed income market, where
Pre-tax earnings totaled EUR 59 million, compared to EUR 60 million in 2001. Profit after tax was EUR 48 million, which is 4% lower than the profit for 2001.
The non-life segment performed well: despite greater competition and Hungary’s extensive summer flooding, household insurance made a meaningful contribution to the company’s profit, while the motor sector also maintained profitability. Overall, AEGON Hungary maintained its position in the market due to the high quality of its underwriting and a narrowing of risks covered.
In preparation for the commencement of operations in neighboring Slovakia, AEGON Hungary began adapting local products for the Slovak market, building a linked ICT
infrastructure. In the beginning of 2003 a license application was submitted to the Slovak regulatory authorities.
AEGON Hungary’s objectives for 2003 are to further build its life and investment distribution channels providing the best quality products in the Hungarian market and implementing its new life portfolio ICT systems.
This situation has had a negative impact on AEGON Spain’s revenues. Conversely however, there was significant growth in the area of pensions, resulting from a new law mandating third party administration of corporate pension commitments. The
AEGON Spain is also exploiting recent changes in tax regulations to adapt its products to appeal to particular market segments.
AEGON Spain’s objectives for 2003 are to boost production of recurring premium insurance while improving the quality of the portfolio by intensifying training of the career agents.
AEGON Spain will also continue to explore strategic alliance opportunities with financial institutions.
The good returns from the non-life sector helped to offset lower earnings from the life business due to weakened stock markets. Overall, pre-tax earnings totaled EUR 12 million, compared to EUR 16 million in 2001, profit after tax was EUR 9 million, which is substantial lower than the profit for 2001.
The Taiwan insurance market can be characterized as a market where the growth rate of life insurance, pensions and savings is faster than GDP growth and where AEGON
Taiwan has the potential to become a profitable top five player.
AXA’s local portfolio, AEGON Taiwan has completed its transformation from a start-up to a fully-fledged member of the AEGON Group, with significant revenue generation.
The company was strengthened by the establishment of a broker and a bank channel in addition to its existing agency channel. Further ties with the bank channel are being explored.
2,047 3,259 –37 Income before tax business units 2,162 3,640 –41 -296 –355 –17 Interest charges and other –313 –397 –21
AMOUNTS PER COMMON SHARE OF EUR 0.12 1.02 1.57 –35 Net income fully diluted1 1.08 1.75 –38
Outstanding common shares: — Number of common shares (millions) 1,445 1,422 2 — Weighted average number (millions) 1,402 1,357 3 1 Based on the weighted average number of common shares, adjusted for repurchased own shares. 2 Based on the number of common shares outstanding at the end of the period, adjusted for repurchased own shares.
AEGON’s international business activity is matched with a geographically diverse investor base. AEGON’s common shares are listed on the stock exchanges in Amsterdam,
New York, London, Frankfurt, Zurich and Tokyo. Its common shares are also included in many major indices.
Much attention is given to ensuring that the information provided is consistent, coherent and comprehensive, and disclosed on a non-selective basis and in a timely fashion. Current and evolving industry disclosure practices as well as feedback from the financial community are closely monitored to keep AEGON attuned to changes in the markets. Clear communications on the complexities and dynamics of our business activities and the related financial issues are important.
lower taxable income relative to tax preferred investments and tax-exempt income in the Netherlands and the US, and a tax loss in the UK.
160 million of bond defaults compared to USD 157 million for 2001. Fixed annuity results of USD 165 million , down 49%, include USD 401 million of bond defaults compared to USD 229 million for 2001. Fixed annuity results also include a net reduction of DPAC amortization of USD 34 million compared to a positive unlocking of USD 20 million for 2001. GICs and funding agreement results of USD 257 million, up 33%, include bond defaults of USD 174 million compared to USD 159 million for 2001. Life for the account of policyholders results were USD
CAD 88 million were charged against results. Fee business results were USD 5 million, USD 69 million lower than 2001.
Traditional life results of EUR 552 million were 10% lower than 2001 results, due to lower interest results and higher lapse rates. Life for the account of policyholders results were EUR
49 million, down from EUR 192 million the prior year. This is primarily due to the provisions for guaranteed minimum benefits of EUR 209 million. Accident and health results of
Life for the account of policyholders results were GBP 75 million lower, mainly as a result of lower management and fundrelated fees.
Net income from other countries was EUR 52 million, a 15%
EUR 758 million was released as indirect return to income before tax compared with EUR 723 million for 2001. The revaluation account balance at December 31, 2002 was EUR
2,598 million, of which realized gains of EUR 2,056 million and unrealized gains of EUR 542 million.
With International Accounting Standards becoming AEGON’s reporting standard in 2005, it is AEGON’s intention to discontinue the indirect return system of accounting for capital gains after 2003. Beginning with the first quarter 2004 capital gains and losses will be reported as earnings in the income statement when realized. Based on current stock market levels,
AEGON expects to recognize indirect income in 2003 of approximately EUR 450 million. The remaining realized portion of the revaluation reserve not recognized in 2003 will be transferred directly to the surplus fund at year-end 2003.
share on the Euronext Amsterdam Stock Exchange for the five trading days from February 27 up to and including March 5.
AEGON manages its currency risk using established currency risk policies. For investments, these policies are based on asset liability matching principles. Equity held in subsidiaries is kept in local currencies to the extent shareholders’ equity is required to satisfy (local) regulatory and self-imposed capital requirements. As a result, currency fluctuations may affect the level of AEGON’s shareholders’ equity as a result of translation into euro. The remainder of AEGON’s capital base (capital securities and subordinated and senior debt) is held in or swapped into various currencies proportionally to the value of AEGON’s activities in those currencies such that AEGON’s debt-to-total-capital ratio is not materially affected by currency volatility. We also run a translation risk on earnings generated by the various country units. AEGON does not hedge these income streams. As a result, earnings may also fluctuate due to currency translation risk.
The sensitivity analysis table on this page shows the effect on net income and shareholders’ equity of movements in the exchange rates of AEGON’s most important currencies relative to the euro. The table shows that a decrease of 10% of the
US dollar, Canadian dollar and UK pound exchange rates would result in a negative impact on net income of approximately 6% and on shareholders’ equity of approximately 10.5%.
Conversely, an increase of 10% in these exchange rates would result in a positive impact on net income of the same magnitude.
SENSITIVITY ANALYSIS OF NET INCOME AND SHAREHOLDERS’ EQUITY1 TO CURRENCY MARKETS2
Increase versus the euro of USD, GBP and CAD of 10% between 5.5% and 6.5% between 10.0% and 1 1.0% Decrease versus the euro of USD, GBP and CAD of 10% between –5.5% and –6.5% between –10.0% and –1 1.0%
Over the past several years, we have been strengthening our global risk management framework. Capital management is a central function in the AEGON Group and we have been and will continue to closely align the AEGON Group’s capital management with the risk management performed by the country units. During 2003, we will further expand the AEGON
Actuarial assumptions and their sensitivities underlie the calculation of technical provisions, which are based on generally accepted reserve valuation standards. In the ordinary course of business, AEGON makes assumptions such as estimates of premiums, mortality, morbidity, investment returns, lapses, surrenders and expenses. These assumptions are initially based on best estimates of future experience at the policy inception date, in some instances taking into account a margin for the risk of adverse deviation from these assumptions. The assumptions used are regularly reviewed, compared to actual experience and, if necessary, depending on the type of products, updated.
The AEGON Group is exposed to both mortality and longevity risk in its products. In the United States, we are on balance exposed to mortality risk as a result of AEGON USA’s large life insurance business, while in the Netherlands we are on balance exposed to longevity risk as a result of AEGON
AEGON Group maintains a well-balanced portfolio of businesses in terms of mortality and longevity risks. Therefore, we believe that changes to mortality and longevity factors are not a current concern relative to our reserving basis and our mix of business.
Assumptions are made regarding future investment yields for both the pricing and for the assessment of profitability of many general account and for account of policyholders products.
Periodically, AEGON assesses the impact of fluctuations of future investment yields on pricing and profitability.
These policy acquisition costs are costs that are related to the sale of life insurance contracts. Policy acquisition costs are deferred to the extent that they are recoverable from future expense loadings in the premiums or from estimated gross profits, depending on the type of product. Deferred policy acquisition costs (DPAC) are deducted from the technical provision for life insurance.
these accounts, estimated future profits can increase or decrease with movements in the equity markets. AEGON USA currently assumes long-term equity returns of 9.0%, fixed income returns of 6% and money market returns of 3.5%. As equity markets do not move in a systematic manner, AEGON uses its best estimates giving consideration to the effect of short-term swings in the equity markets. As a result, a 12% equity growth rate has been assumed for the next five years reverting to 9% thereafter.
Included in AEGON’s DPAC is a substantial amount of value of business acquired (VOBA) resulting from acquisitions, which in its nature is similar to DPAC and is subject to the same testing and amortization requirements. At year-end 2002, this amounted to approximately EUR 5.3 billion, 2001: EUR 7.2 billion.
In 2002, AEGON’s general account investment assets decreased 5.8% from 2001 to EUR 123.1 billion. These assets represent 44.4% of AEGON’s total managed assets. On general account assets, AEGON carries the investment risk and earns a spread.
AEGON’s total managed assets in 2002) decreased by 16.4% in 2002 to EUR 94.7 billion, driven by currency exchange rate changes and declines in equity markets. Strong new production in variable annuities in the Americas of USD 9.9 billion partially offset the impact of equity market declines. On investments for the account of policyholders, the investment risk is generally borne by the policyholders, in certain cases subject to minimum benefit guarantees provided by AEGON, and AEGON earns fee income through policy expense charges. For these investments, the shift toward fixed income allocations already apparent in the past two years continued in 2002, as the allocation in fixed income securities (49%) was brought almost equal to the allocation in equities (51%). Assets related to banking activities increased 1.7% in 2002 to EUR 7.2 billion.
exchange rate, more than offsetting increased new production in third-party asset management and synthetic GICs.
AEGON conducts both interest rate sensitive and interest rate insensitive business. A simultaneous decrease of worldwide interest rates of 1% from the current levels would have a positive effect on AEGON’s net income of approximately
During 2002, interest rates decreased substantially, lowering the new money spreads on our traditional life insurance and causing initial crediting rates on fixed annuities to be as low as 2.7%. We have refiled products with the US state regulators allowing us to lower the crediting rate to 2% (subject to a 3% minimum guarantee on 90% of the original premium, consistent with current US non-forfeiture law). Many US states have approved this change to lower crediting rates on new sales to levels, which are more consistent with our profitability objectives. At the same time, we are leading an industry effort in the United States to tie the level of guarantees to actual interest rates. This effort is still in progress.
aggregates exposures from its country units to assess overall credit risk. Most of the AEGON Group’s credit risk lies with
Immediate parallel yield curve shift up of 100 basis points approx. EUR –110 million Immediate parallel yield curve shift down of 100 basis points approx. EUR 25 million 1 Basic assumptions: no correlation between markets and risks; unchanged conditions for all other assets and liabilities; limited management actions taken; all changes are relative to net income. Effects do not tend to be linear and therefore cannot be extrapolated for larger increases or decreases.
2 The effect of interest rate movements is reflected as the effect of an immediate parallel shift up or down of all relevant yield curves on January 1.
portion of AEGON The Netherlands’ fixed income portfolio composed of residential mortgages, the actual default experience is very low, corresponding to an annual effect of approximately 0.02% on the total return of the fixed income portfolio. AEGON establishes provisions for credit risk in the ordinary course of business. AEGON USA added USD 774 million to its default provisions during 2002 while USD 791 million was released, leaving a balance at year-end of USD 281 million.
AEGON uses derivative financial instruments, such as interest rate swaps, options, credit derivatives, futures and foreign exchange contracts, to manage its exposures related to investments and borrowings. AEGON does not hold or issue derivative instruments for speculative trading purposes.
We plan to use AEGON Derivatives N.V., a wholly owned subsidiary, as the counterparty for all over-the-counter derivatives transactions executed by AEGON Group units and guaranteed by AEGON N.V. enabling centralized monitoring and netting of exposures with derivatives counterparties. This subsidiary will also facilitate collateral management of derivative transactions.
AS PER DECEMBER 31, 2002 reduced since sales in USD price*
AEGON USA assigns internal ratings to assess counterparty creditworthiness, based on both published ratings by rating agencies and in–house analyses. In general, the internal ratings tend to be in line with the ratings issued by the rating agencies.
If an exposure exceeds the stated limits as a result of a downgrade, the exposure must be readjusted as soon as is practical to the limit for the rating category, which varies with the asset quality of the security. In all cases, exceptions to these limits can only be made after explicit approval in advance from AEGON senior management. Almost all of the AEGON
As markets deteriorated, AEGON USA expanded its credit risk modelling to reflect more closely current market circumstances.
Under certain circumstances, AEGON uses credit derivatives, mainly in specific cases where synthetic corporate bonds are being created. The total underlying amount of these credit derivatives is small relative to the entire fixed income portfolio and amounted for the AEGON Group to approximately
In 2002, AEGON USA reinvested at a slightly higher average credit quality, increasing the average credit quality of its portfolio. In addition, it actively reduced exposures in certain sectors, reallocating credit risk to the consumer non-cyclical and energy sectors. For more detail on our exposure reductions, please refer to the table on this page, which includes the average prices at which we sold these securities.
(excluding mortgages) around 5% is BBB-rated and less than 1% is below investment grade or not rated. With respect to the
contracts if the rating of the counterparty is at least double A.
AEGON Derivatives N.V. will employ collateralization to limit counterparty exposure, which will allow transactions with single A rated counterparties.
The sensitivity of shareholders’ equity and earnings to changes in equity and real estate markets reflects changes in market value of our portfolios, indirect return, changes in DPAC
amortization and guaranteed minimum benefits provisioning while an increase of 10% will not. AEGON is not directly exposed to commodity markets.
In September 2002, AEGON effected a non-dilutive capital realignment whereby Vereniging AEGON sold 350 million of the common shares, of which 143.6 million common shares were sold directly by Vereniging AEGON in a secondary offering outside the United States and 206.4 million common shares were purchased by AEGON from Vereniging AEGON. AEGON
Note Program, all through private placements. Funding needs were largely driven by operational financing, which almost entirely consisted of refinancing of maturing funding of the
AEGON maintains access to the debt capital markets through its Medium Term Note Program and its existing shelf registration in the United States, while its EUR 2 billion
TFC has secured USD 3.25 billion (EUR 3.1 billion) of back-up facilities for its own Commercial Paper Program.
AEGON is committed to a strategy of continued financial strength as reflected by the development of AEGON’s capital base, which has kept leverage within our prescribed tolerances.
The capital adequacy of our operating units continues to be strong. AEGON manages its capital adequacy to a higher standard than required by the regulators, and as of December 31, 2002, solvency for AEGON N.V. was more than double the minimum EU capital requirement. Relative to the National
Recognizing that good business performance and long-term profitability go hand in hand with good business practices, and that corporate ethics are complex but increasingly important to today's multinational organization, Corporate Responsibility in AEGON is being led by the Executive Board, supported by a newly appointed Group Staff specialist and by an International Working Group, formed from among the main country units. Initial tasks are to identify and define policy requirements, manage the information gathering and reporting process, formulate a group environmental policy and identify alignment with international standards during 2003. One objective is the eventual disclosure of externally verified data and information.
“AEGON has made a promising start by putting in place the governance process, defining priorities, identifying areas for improvement and setting parameters for reporting”
Our Corporate Responsibility policy will evolve over time, but AEGON has made a promising start by putting in place the governance process, defining priorities, identifying areas for improvement and setting parameters for reporting. Dialogue with stakeholders and the monitoring of local activities will become an important feature. Understanding and definitions of Corporate Responsibility are evolving rapidly and where cultural and geographic differences emphasize the need for local solutions, AEGON
Finally, AEGON continues to work to fulfill its responsibilities to the general communities of which it is a part. AEGON's corporate citizenship program aims to build recognition and goodwill by supporting projects in the arts, athletics, education, medical research and international understanding. The Group's country and local operating units work on a grassroots level to support the quality of life of their employees and the communities in which they operate and live. For more information please visit the
Independent and employee agents, marketing companies, financial institutions, broker-dealers, wirehouses, affinity groups, direct response, worksite marketing, institutional intermediaries
• Broad product offerings; balanced mix of businesses • Efficient, targeted product development, coupled with advanced actuarial and administrative systems
Traditional life, universal and term life, segregated funds, mutual funds, annuities, mutual fund dealer services, financial planning services and professional portfolio management
Individual and group life and pension products, savings and investment products, asset management, accident and health insurance, general insurance
• Consolidate activities on production platforms to maintain cost leadership and improved customer service
• Standardize and utilize ICT and on-line services to extend and develop the distribution network and to support professional agents
• Delivery of rapid market response to regulatory changes • Focus on low costs of manufacture • Market leader in institutional fixed interest investment arena • Ownership of quality distribution capability
• Emphasis on profitability while taking full advantage of growth opportunities
• Consolidate investments in distribution companies to deliver synergies across the group
• Further strengthen relationships with distribution partners • Take advantage of full integration of ICT systems to improve efficiency and customer service and lower costs further
• Emphasis on profitability, while retaining sales leadership • Introduction of new sales channels • Update and renew ICT and internet access • Investigate growth opportunities elsewhere in the region
• Exploitation of agent portfolio and boost cross-selling * Servimed is a software tool
Traditional life, variable universal life, term life, group life, accident and health
• Professional image and brand name • Strong relations with tied agents and other distribution partners
• Continued development of professional agency force • Strengthen distribution partnership with brokers and banks • Emphasis on innovative product development • Preparations for the entrance into the pension market • Enhancement of the efficiency of administrative support, business processes and ICT systems
Term life insurance covers the insured for a specific period of time. The policy pays death benefits only if the insured dies during the term.
These are usually perpetual with no stated final maturity and liquidity option. The contract is terminated at the notification of the client; notice provisions range from six months to thirteen months in advance of the payout date. CUSTOMERS individuals pension funds companies banks
ACCOUNT OF POLICYHOLDERS On account of policyholder products the policyholders carry the investment risk. AEGON earns management and administration fees and mortality results.
Represents several forms of life insurance and pension products whereby death benefits and cash values vary with the performance of a portfolio of investments. Premiums can be allocated among a variety of investments that offer different degrees of risk and reward including stocks, bonds, combinations of both, or investment products that guarantee interest and principal.
Variable universal life products are similar to universal life products, but have the added feature of investment options and investment assets are maintained in a separate account.
Security lease products provide a combination of monthly interest payments on a loan and a final payout based on the performance of the investments. This category also includes investment products, which offer index-linked returns and generate fee income on the performance of the investments.
Limited forms of health insurance, including disability insurance (Netherlands) and accidental death and dismemberment (USA), are offered. AEGON offers no major medical coverage.
Traditional life 1,457 Fixed annuities 174 GICs and funding agreements 272
AEGON IS COMMITTED TO PROVIDING TRANSPARENT INFORMATION AND QUALITY SERVICES TO EXISTING AND POTENTIAL SHAREHOLDERS.
IN ADDITION TO THE ANNUAL REPORT, WE PUBLISH THE HISTORICAL DATA BOOKLET 1992-2002, WHICH PROVIDES FURTHER INFORMATION AND TREND DATA OVER AN 11-YEAR PERIOD. BOTH THESE PUBLICATIONS ARE AVAILABLE ON OUR CORPORATE WEB SITE, WHICH CONTAINS INVESTOR INFORMATION AND PRESS RELEASES IN BROWSABLE AND DOWNLOADABLE FORMATS.
99,341 99,827 INVESTMENTS FOR THE ACCOUNT OF POLICYHOLDERS 5 94,728 113,272
2,218 1,511 Receivables out of direct insurance 6 2,115 1,714 586 407 Receivables out of reinsurance 559 462
FOR THE ACCOUNT OF POLICYHOLDERS 15 -1,233 –323 Reinsurers’ share -1,176 –367 24 26 DEPOSITS WITHHELD FROM REINSURERS 23 29
2,771 2,741 Payables out of direct insurance 2,642 3,110 380 155 Payables out of reinsurance 362 176 4,469 2,851 Amounts owed to credit institutions 4,262 3,235 6,674 5,690 Entrusted savings accounts and deposits 6,364 6,456 249,807 232,717 TOTAL EQUITY AND LIABILITIES 238,206 264,061 1Amounts adjusted by EUR 631 million (USD 556 million) due to the change in presentation of dividend.
CONSOLIDATED INCOME STATEMENTS In accordance with Dutch Accounting Principles Amounts in EUR millions 52 AEGON GROUP
ALLOCATED INVESTMENT INCOME TRANSFERRED FROM TECHNICAL ACCOUNTS 10 1,056 1,038 967
OPERATING EXPENSES BANKING ACTIVITIES AND OTHER EXPENSES 7 -125 –96 –85
4,024 8,793 Increase technical provisions net of reinsurance 4,250 9,820 6,572 26,907 23,622 Annuity, GIC and funding agreement deposits 28,419 26,381 25,506 -17,297 -17,066 Annuity, GIC and funding agreement repayments -18,269 -19,059 -21,593 -736 –437 Change in provisions -777 –488 348 1,749 1,273 Amortization of policy acquisition costs 1,848 1,422 1,284 80 91 Amortization of interest rate rebates 84 102 118 2,176 657 Change in current liabilities 2,299 734 –763 -87 1,125 Change in entrusted funds -92 1,257 –95 -2,733 –2,290 Deferred policy acquisition costs -2,887 –2,558 –2,393 -47 –84 Interest rate rebates granted -50 –94 –61 -43 –809 Change in receivables -45 –904 –796
Disposed and redeemed 299 1,044 Shares of group companies and subsidiaries 316 1,166 1,374 -718 –647 Indirect return real estate and shares -758 –723 –595 -3,980 -6,233 Change in investments for account of policyholders -4,204 -6,961 -6,076
These financial statements have been drawn up in accordance with the rules for financial statements of insurance companies in the Netherlands, embodied in Title 9, Book 2 of the Dutch Civil Code. A summarized consolidated income statement has been added to the required formats for balance sheet and profit and loss account in order to present a comprehensible view of the results of the AEGON Group. For some of the required information refer to the separate publication of AEGON’s Historical Data 1992-2002, which is an integral part of the financial statements.
AEGON is exposed to a variety of risks. Some risks are related to the international nature of the group, such as currency translation risk. Other risks include insurance related risks, such as changes in mortality and morbidity. However, the largest part of the risk lies in the exposure to financial markets: changes in financial markets affect the value of the investments and provisions (including deferred policy acquisition costs) through the exposure to interest rate, credit and equity market risks. For an extensive description and detailed information about risks and sensitivity of the group for movements in the interest rate markets, the currency markets and the equity and real estate markets, and their effects on net income and shareholders’ equity, refer to the financial review on page 30.
In 1993 AEGON acquired Diversified Investment Advisors Inc., the former group pension operation of Mutual Life Insurance Company of New York. The original transaction involved the transfer of general account assets and liabilities which were classified and aggregated as assets and liabilities for the account of policyholders as the risks remained at the seller. Therefore the transaction was structured in such a way that AEGON did not participate in the earnings of the existing business for the subsequent nine years, whereas renewals from the existing business and new business would be fully for the benefit of AEGON from 1994 onwards. In 2002, according to the agreement AEGON purchased the remainder of the existing business pursuant to a formula described in the agreement. As AEGON is now the full owner, the assets and liabilities have been classified as general account assets and liabilities. This includes a shift from policyholders account assets and liabilities to general account assets and liabilities for an amount of EUR 1.3 billion for the related assets and liabilities.
On December 2, 2002, AEGON announced that an agreement had been reached with Paramount Life & General Insurance Corporation in the Philippines for the transfer of AEGON’s activities in the Philippines with immediate effect. The agreement includes the transfer of the existing book of business. Approval of the relevant regulatory authorities has been received for this transaction.
Consolidated entities also include special purpose entities set up in connection with the sale of investment products in the United States.
Participations in joint ventures have been consolidated proportionally. Due to their insignificance the minority interests are included under other current liabilities. A list of names and locations of the most important group companies is given on page 96. With regard to the income statements of AEGON N.V., article 402, Book 2 of the Dutch Civil Code has been applied, allowing a simplified format.
Income statement items in foreign currencies are converted at the weighted average currency exchange rates for the reporting period. Calculation differences resulting from using year-end exchange rates in the balance sheet and weighted average exchange rates in the income statement are charged or credited directly to shareholders’ equity under the caption currency exchange rate differences.
The most important closing rates are: US Dollar (USD) 1.04870 0.88130 Swiss Franc (CHF) 1.45240 1.48290 Pound Sterling (GBP) 0.65050 0.60850 Canadian Dollar (CAD) 1.65500 1.40770 Japanese Yen (JPY) 124.39000 115.33000 Hungarian Forint (HUF) 235.90000 246.33000 Taiwan Dollar (NTD) 36.11000 30.47000
Where not otherwise stated, balance sheet items are carried at face value. If necessary a provision for bad and doubtful debts is deducted.
In the United States a reduction in the carrying value is made and charged against any default provision when impairment of a specific fixed income investment is determined. This can be the case when such investments have experienced a significant downgrade in their credit rating or a significant decline in their market value. The determination of the amount of the write down is based upon best estimation of the future recoverable value of the fixed income investment and takes into account underlying collateral or estimations of liquidation values of issuing companies.
In the other countries the provision is accrued until the receivable has legally ceased to exist.
Assets and liabilities from banking activities and gains and losses on these activities are accounted for in accordance with the regulations for banks. The impact on group equity and net income from the differences in accounting principles compared to the rules applied at insurance companies is not material.
Real estate for own use 345 375 Other real estate 1,866 1,951
Interests in companies in which AEGON is able to influence operating policy, as well as group companies which are not consolidated because of their relative financial insignificance, are accounted for by inclusion of AEGON’s proportion of the equity and the net income of the companies, based on AEGON accounting principles. Loans to group companies and other participations are valued at face value.
Interests in short-term holdings are valued at cost less provisions where necessary. Dividends declared are included in the consolidated income statements.
MOVEMENTS IN GROUP COMPANIES AND PARTICIPATIONS Shares in group companies Loans to group companies and participations and participations
Capital contribution and acquisitions 169 89 903 1,216 Divestitures and redemptions –316 –454 0 0 Net income for the financial year 77 109 – – Dividend distributed –11 –17 – –
Bonds and other fixed rate securities 75,697 72,861 Loans guaranteed by mortgages 18,568 20,537 Other loans 21,632 26,831 Deposits with credit institutions 1,577 1,553 Other financial investments 4,566 4,892
Shares, non-redeemable preferred shares and convertible debentures reported under this caption are valued at their quoted price or, if unquoted, at estimated market value. Unrealized and realized gains and losses on shares as well as results, expenses and currency exchange rate differences from hedging transactions are recognized in the revaluation account, taking into account the related (deferred) taxes.
For shares of which the market value is considered to be impaired on an ‘other than temporary’ basis (durable), a realized loss is recorded. Shares are generally considered to be other than temporarily impaired if the market value is below cost for a period of at least six months. However, independent third-party documentation about the financial condition and near-term prospects of the issuer and the intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery are also important factors taken into account. These factors typically require significant management judgement. The impairment for the financial year amounted to EUR 1,057 million (2001: EUR 36 million). Within the application of the indirect return method this loss has been recognized in the realized part of the revaluation account with an offset in the unrealized part of the revaluation account. When optional dividend is taken up in shares, an amount equal to the cash dividend is credited to income. The participation in AEGON Aandelenfonds N.V. is also accounted for under this caption. Shares and convertible debentures lent out are included and amount to EUR 651 million (2001: EUR 785 million). No shares and convertible debentures were borrowed.
Realized gains and losses from transactions within the bonds and private placements portfolios, unless a loss is considered a default loss, are deferred and released to the income statements in annual installments over the estimated average remaining maturity term of the investments sold. In the United States a reduction in the carrying value is made for bonds which have experienced a significant downgrade in their credit rating or a significant decline in their market value. Such reductions are charged against the bond default provision. In the other countries the provision is accrued until the receivable has legally ceased to exist.
The carrying value and fair value of the bonds and other fixed rate securities are as follows: Carrying Unrealized Unrealized Fair value gains losses value
The carrying value and fair value of bonds and other fixed rate securities by contractual maturity at December 31, 2002 are as follows: Carrying Fair value value
Due in one year or less 5,805 5,862 Due after one year through five years 24,575 25,501 Due after five years through ten years 22,526 23,678 Due after ten years 22,791 23,519
For a proper understanding it should be noted that the market value is not part of the matching of these investments with the related insurance liabilities, which are not stated at market value either.
The doubtful debts provision for bonds and other fixed rate securities not yet written down amounts to EUR 249 million (2001: EUR 238 million). Bonds and other fixed rate securities lent out are included and amount to a market value of EUR 5,469 million (2001: EUR 5,819 million). No bonds and other fixed rate securities were borrowed.
Private placements are shown at amortized cost less write-downs for uncollectable amounts. Amortized cost represents the cash value at the balance sheet date of future interest and principal repayment components based on the effective interest rate on the date of acquisition.
Realized gains and losses from transactions within the private placements and bond portfolios valued at amortized cost, unless the loss is considered a default loss, are deferred and released to the income statements in annual installments over the estimated average remaining maturity term of the investments sold.
In the United States realized losses on loans which have experienced a significant downgrade in their credit rating are charged against the loans default provision. In the other countries the provision is accrued until the receivable has legally ceased to exist.
The carrying value and fair value of the private placements by contractual maturity at December 31, 2002 are as follows: Carrying Fair value value
As no market exists for these investments, market value is calculated based on current interest rates, term to maturity and risk assumptions. For a proper understanding it should be noted that the market value is not part of the matching of these investments with the related insurance liabilities, which are not stated at market value either. The provision for doubtful debts for not yet written-down private placements amounts to EUR 32 million (2001: EUR 75 million).
This item relates to amounts that can be called up after a minimum period of one year. Market value of the deposits is equated with book value.
Policy loans 1,636 1,838 Receivables out of share lease agreements and others 2,930 3,054
Bonds and other fixed rate securities 72,861 86,369 –74,523 – –9,010 75,697 Loans guaranteed by mortgages 20,537 4,355 –4,0732 – –2,251 18,568
Deposits with credit institutions 1,553 143 –121 – 2 1,577 Other financial investments 4,892 1,379 –1,157 – –548 4,566 1 Including reallocation from investments for account of policyholders for an amount of EUR 1,278 million due to the final settlement of the Diversified Investment Advisors acquisition.
Bonds and other fixed rate securities 238 818 –744 –63 249 Loans guaranteed by mortgages 53 2 –11 –6 38
Bonds and other fixed rate securities 110 728 –492 –108 238 Loans guaranteed by mortgages 184 0 –127 –4 53
The increase of investments in data processing systems results from major long-term information technology projects in several country units.
The market value of these loans amounts to EUR 1,327 million (2001: EUR 1,584 million).
Capital Trust Pass-through Securities (TRUPS) are securities through which the holders participate in a trust. The assets of these trusts consist of junior subordinated deferrable interest debentures of Transamerica Corp. The trusts have been included in the consolidated financial statements. The TRUPS carry certain provisions with regard to deferral of distributions. Earlier redemption is possible for the USD 100 million 74⁄5% Capital Trust Pass-through Securities on or after December 1, 2006. The market value of these loans amounts to EUR 686 million (2001: EUR 634 million).
These loans are subordinated to all other liabilities and borrowings. The interest rates vary from 6.42% to 8.25%. The market value of these loans amounts to EUR 647 million (2001: EUR 739 million).
Balance at charged to tions and Balance at January 1, the income other December
Deferred policy acquisition costs –15,264 –14,089 Unamortized interest rate rebates –424 –389
NON-LIFE INSURANCE: Unearned premiums and unexpired risks 1,760 284 –262 1,782 Deferred policy acquisition costs –1,202 –1,109
2 Of which the balance of deposits and withdrawals is EUR 3,237 million. 3 Of which the balance of deposits and withdrawals is EUR 685 million.
The provision for life insurance represents the present value of future benefits and related expenses less the present value of future net premiums to be paid to, or on behalf of policyholders. The provision is calculated using actuarial methods that include assumptions such as estimates of premiums, mortality, investment performance, lapses, surrenders and expenses. These assumptions are initially based on best estimates of future experience at policy inception date, in some instances taking into account a margin for the risk of adverse deviation. The assumptions used are regularly reviewed, compared to actual experience and, if necessary, depending on the type of products, updated.
Included in premiums is a loading for expenses. When the premiums are actually received or become receivable, the loadings emerge and are available to offset actual expenses, including maintenance expenses, non-deferrable acquisition expenses and amortization of the deferred policy acquisition costs (DPAC).
For products that have guaranteed benefits over the lifetime of the policy or at maturity, the premiums also include loadings for the expected cost of the guarantee. The pricing of the guarantee is based on assumptions for future investment performance, including reinvestment assumptions.
Part of the risk is covered by reinsurance contracts. The provision for life insurance also comprises the provision for unexpired risks as well as the provision for claims outstanding. In case the premium-paying period is shorter than the lifetime of the policy, a provision for future expenses is set up to cover any estimated future expenses after the premium-paying period. Future costs in connection with benefit payments are also provided for.
In various countries products are sold that contain minimum guarantees. For these products the regular technical provision is recognized under technical provisions with investments for account of policyholders. The technical provision life insurance includes provisions for guaranteed minimum benefits related to contracts where the policyholder otherwise bears the investment risk. The main products are summarized below: PROVISIONS
Guaranteed minimum benefits on variable products in the United States USD 269 80 Guaranteed minimum accumulation benefits on segregated funds in Canada CAD 126 38 Guaranteed return on certain unit-linked products in The Netherlands EUR 236 27
In the Netherlands Fundplan policies have a guaranteed return of 3% or 4% at maturity or upon the death of the insured if premium paid for a consecutive period of ten years is invested in Mix Fund and/or Fixed Income Fund. For this guaranteed return a provision is established based on stochastic modelling. The provision is developed applying the accrual method based on pricing assumptions less actual claims incurred. A corridor for the provision is determined regularly based on stochastic modelling methods. If the provision develops outside the corridor, a charge or credit to the income statement is recorded. Minimum interest guarantees on group pension contracts in the Netherlands are given for nominal benefits, based on the 3% or 4% actuarial interest, after retirement of the employees. Due to the nature of the product, these guarantees have a long-term horizon of about 30 to 60 years. The provision is developed applying the accrual method based on pricing assumptions less actual deductions.
Provisions for fixed annuities are for annuity contracts sold in the United States. Fixed annuities are typically single premium insurance products where the paid-in amounts accumulate with interest credits less applicable loads or fees. The interest crediting rate is fixed during a period, at the end of which it can be reset by the company. The funds grow on a tax deferred basis and have significant long-term savings characteristics. The benefit provisions are equal to the full accumulated contract values.
For flexible products, including fixed and variable annuities, variable universal life and unit linked contracts, deferral and amortization of policy acquisition costs is based on prudent assumptions underlying the calculation of expected gross profits determined based on management’s best estimates, supported by historical experience and management judgement as to future experience. These estimates include but are not limited to: an economic perspective in terms of long-term bonds and equity returns, mortality, disability and lapse assumptions, maintenance expenses, and future expected inflation rates. Deferred policy acquisition costs for flexible insurance contracts and investment type contracts are amortized generally in proportion to emerging gross profits over the life of the contracts. The amortization pattern can be disturbed by mortality, lapses and movements in the equity markets. In case of mortality the unamortized DPAC write-off is covered by the mortality risk loadings included in the regular expense loadings. In case of lapses the unamortized DPAC can in some cases be recovered in whole or in part from surrender penalties; if not then an extra write-off will occur.
Included in the deferred policy acquisition costs is an amount of value of business acquired (VOBA) resulting from acquisitions, which is equal to the present value of estimated future profits of insurance policies in force related to business acquired at the time of the acquisition and is in its nature the same as deferred policy acquisition costs and also subject to the same recoverability testing. The VOBA is amortized against expense loadings included in the premiums of the acquired portfolios or for acquired unit-linked business against charges arising from the related acquired business.
These policy acquisition costs are costs that are directly or indirectly related to the conclusion or renewal of non-life insurance contracts.
The deferred policy acquisition costs are deducted from the technical provision for unearned premiums and include both renewal commission paid related to unearned premiums, amortized over the related premium period, and first year commission on health insurance policies, amortized over the contract period.
NOTES TO THE CONSOLIDATED BALANCE SHEETS Amounts in EUR millions 68 AEGON GROUP
Balance at January 1 2,398 2,407 Less reinsurance recoverables –486 –593
Net balance 1,912 1,814 Incurred related to: — current year 1,506 1,422 — prior years 18 120
Paid related to: — current year –738 –902 — prior years –700 –599
This provision consists of the amounts earmarked for insured or beneficiaries, as far as their accounts have not yet been credited.
This consists mainly of insurance deposits under Dutch group life contracts, which are designated for improvement of retirement benefits under such contracts. Maturity is undetermined. Interest credited to such deposits is linked with the average yield on longterm Dutch government bonds.
The following amounts on account of reinsurance ceded have been deducted from the technical provisions: Life insurance 2,193 2,391 Unearned premiums and unexpired risks 322 217 Claims outstanding 475 486
AEGON insurance subsidiaries cede premiums to other insurers under various agreements that cover individual risks, group risks or defined blocks of business, on a coinsurance, yearly renewable term, excess or catastrophe excess basis. These reinsurance agreements spread the risk and minimize the effect of losses. The amount of each risk retained depends on its evaluation of the specific risk, subject, in certain circumstances, to maximum limits based on characteristics of coverages. Under the terms of the reinsurance agreements, the reinsurer agrees to reimburse for the ceded amount in the event the claim is paid. However, AEGON insurance subsidiaries remain liable to their policyholders with respect to ceded insurance if any reinsurer fails to meet the obligations assumed by it. To limit this risk reinsurance treaties are entered into with only well-capitalized, highly rated reinsurers. Where deemed appropriate additional protection is arranged through letters of credit or trust arrangements.
Decrease rate Balance at credited to fluctuations Balance at January 1, the income and other December
PROVISIONS FOR INSURANCE OF WHICH THE POLICYHOLDER BEARS THE INVESTMENT RISK AND FOR INSURANCE-LINKED SAVINGS DEPOSITS 113,272 -9,279 -9,265 94,728 1 Including reallocation of EUR 1,278 million to the technical provisions general account relating to the liabilities of the pension business of Diversified Investment Advisors due to the final settlement of the acquisition.
This provision includes variable annuities, variable universal life, unit-linked insurance contracts, separate investment funds group life, insurance-linked savings deposits and the liabilities of AEGON UK with profit funds (EUR 24,000 million). The amount of EUR 9,279 million credited to the income statement is the total of premium receipt and benefits of EUR 2,245 million and the investment income for the account of policyholders amounting to EUR –11,524 million.
As some products have a minimum guaranteed benefit amount, a provision for this benefit is accumulated during the term of the related portfolio and has been included in the technical provisions life insurance.
As at December 31, the provisions for taxation consist of: Deferred tax liabilities relating to: Deferred policy acquisition costs 3,169 3,447
Deferred tax assets relating to: Technical provisions 1,147 1,880 Operating losses carried forward 564 296
NOTES TO THE CONSOLIDATED BALANCE SHEETS Amounts in EUR millions 70 AEGON GROUP
The following table provides the detail of long-term liabilities: Period Coupon date 2002 2001
USD 100 million 93⁄8% Domestic Debentures (Transamerica Corp.) 1996/08 March/Sept 1 95 114 USD 200 million 63⁄4% Domestic Debentures (Transamerica Corp.) 1996/06 May/Nov 15 191 227 CHF 150 million 31⁄4% Bonds 1997/04 June 24 103 101 DEM 150 million 21⁄2% Eurobonds 1998/03 February 24 77 77 USD 500 million 7% Eurobonds (AEGON Funding Corp.) 1999/04 September 10 477 567 USD 450 million 63⁄4% Eurobonds (AEGON Funding Corp.) 1999/02 November 15 — 511 CHF 300 million 31⁄8% Eurobonds 1999/04 September 27 206 202 GBP 250 million 61⁄8% Eurobonds 1999/31 December 15 384 411 USD 250 million 73⁄8% Eurobonds (AEGON Funding Corp.) 2000/05 July 25 238 284 EUR 350 million 43⁄4% Eurobonds (AEGON Funding Corp. II) 2001/05 February 28 350 350 CHF 150 million MTN floating 2001/04 Semi-annual 103 101 EUR 100 million MTN floating 2001/03 Semi-annual 100 100 USD 367 million MTN floating 2001/02 Semi-annual — 416 USD 90 million MTN floating 2001/03 Semi-annual 86 102 USD 200 million MTN floating 2002/04 Quarterly 191 — USD 90 million MTN fixed 2002/03 April 10 86 — USD 60 million MTN floating 2002/03 Quarterly 57 — USD 100 million MTN floating 2002/03 Monthly 95 — USD 50 million MTN fixed 2002/03 March 28 48 —
Investment payables 111 137 Taxes and social security 165 63 Preferred dividend 30 3
Interest rate contracts, which include swaps, swaptions, caps, floors and forward rate agreements, are used to manage AEGON’s exposure to interest rate risks. These contracts are designated individually or in groups to specific assets, liabilities or borrowings at inception of the contracts.
A swaption is an option to enter into an interest rate swap at a specific future date. A call or receiver swaption is the right but not the obligation to receive the fixed rate payments and a put or payer swaption is the right but not the obligation to pay the fixed rate payments on a certain interest rate swap. By entering into swaption contracts, AEGON is able to lock-in future interest rates and thus limiting reinvestment risk. Premiums paid for swaptions are deferred and amortized to interest expense on a straight-line basis over the term of the contract.
An interest rate cap is an agreement under which the seller, in return for an upfront payment, agrees to pay the buyer the difference between the market interest rate and certain strike rate or cap for a certain period of time on a specified notional amount. Under an interest rate floor agreement, the seller pays the buyer if the interest rates are below the specified strike rate or floor. Interest rate caps are used to limit the impact of rising rates, whereas interest rate floors are used to ensure minimum interest income when rates decline. Premiums paid for purchased interest rate cap or floor agreements are capitalized and amortized to interest expense over the term of the contract.
Forward rate agreements are commitments to purchase or sell a financial instrument at a future date for a specific price and are used to hedge short-term interest movements, in particular, for future investments or short-term borrowings. Forward rate agreements settle in cash at a specific future date based on the differential between agreed interest rates applied to a notional amount. Payments or receipts are recognized as interest income or interest charge at the moment of cash settlement.
Cross currency swap agreements are contracts to exchange two principal amounts of two currencies at the prevailing exchange rate at inception of the contract. During the life of the swap the counterparties exchange fixed or floating-rate interest payments in the swapped currencies and at maturity the principal amounts are again swapped at a predetermined rate of exchange. Cross currency swaps are used to manage the company’s exposure to foreign exchange rate fluctuations of both assets and liabilities. AEGON uses cross currency swaps to allow investments, product offerings and borrowings to be made in foreign currencies, gaining access to additional markets and sources of funding while eliminating foreign exchange risk. Cross currency swaps are recognized in the balance sheet as an adjustment to long-term liabilities and in the income statement in investment income, benefits to policyholders or miscellaneous income and expenditure – currency exchange rate differences. The amount recognized represents the currency exchange difference on the notional amount at period-end rates.
NOTES TO THE CONSOLIDATED BALANCE SHEETS Amounts in EUR millions 72 AEGON GROUP
Options are contracts that give the option purchaser the right, but not the obligation, to buy or sell, at or before a specified future date, a financial instrument at a specified price. Purchased options are carried at market value, while options sold are carried at the premium received. Unrealized gains (losses) on options are recognized in equity or current liabilities.
Credit derivatives are contracts between two parties that allow for transfer of credit risk from one party to another. The party transferring risk away has to pay a fee to the party that takes the risk. A commonly used credit derivative instrument is a credit default swap. A credit default swap allows the transfer of third-party credit risk from one party to another. In essence, the buyer of a credit default swap is insured against third-party credit losses. If the third-party defaults, the party providing insurance will have to purchase the defaulted asset from the insured party. In turn, the insurer pays the insured the remaining interest on the debt and the principal. Credit derivatives are used to hedge credit exposures or to create synthetic credit exposure.
Under non-cancellable operating lease contracts for office buildings, future minimum lease payments amount to: Less than one year 64 63 Between one and five years 218 223 Later than five years 342 349
Bonds and registered debentures 2,435 855 Private placements 1 1 Ceded and securitized mortgage loans 3,792 2,173 Letters of credit 1,022 1,513
GRAND TOTAL 17,741 –1,977 15,764 2001 Life insurance Investments for the account of policyholders
Accident liability Other and General Other & health motor motor aviation Fire liability branches Total
Gross claims incurred –1,571 –151 –112 –29 –177 –30 –11 –2,081 Gross operating expenses –1,208 –48 –39 –10 –108 –21 –9 –1,443 Balance of reinsurance ceded 136 –3 –1 –1 –23 –3 –2 103
RESULT TECHNICAL ACCOUNT NON-LIFE 264 3 13 2 12 10 10 314
Gross claims incurred –1,200 –149 –117 –25 –179 –33 –4 –1,707 Gross operating expenses –988 –45 –41 –9 –98 –22 –7 –1,210 Balance of reinsurance ceded –4 1 2 –1 –11 0 –4 –17
Balance of other items –31 –1 –2 0 –2 0 0 –36 Investment income allocated to the non-technical account –15 –4 –1 –2 –5 0 0 –27
Gross claims incurred –1,512 –167 –110 –32 –168 –33 –2 –2,024 Gross operating expenses –636 –52 –44 –10 –96 –23 –5 –866
Bonds and other fixed rate securities 5,399 292 0 5,691 Loans guaranteed by mortgage 1,201 5 0 1,206
Bonds and other fixed rate securities 4,242 216 0 4,458 Loans guaranteed by mortgage 1,301 4 0 1,305
Indirect income real estate and shares 577 18 0 595 1Of which allocated internal rent for real estate in own use an amount of EUR 14 million (2001: EUR 17 million and 2000: EUR 17 million), based on market conditions.
Bonds and other fixed rate securities 54 49 63 Loans guaranteed by mortgage 51 36 33
CHANGE IN TECHNICAL PROVISIONS 7,424 8,815 7,513 6 PROFIT SHARING AND REBATES
Amortization of interest rate rebates 84 102 118 Surplus interest bonuses 38 40 48 Profit appropriated to policyholders 67 106 204
Granted interest rate rebates amount to EUR 50 million (2001: EUR 94 million and 2000: EUR 61 million), almost entirely relating to the Dutch companies.
Deferred policy acquisition costs —2,486 —401 — —2,887 Amortization of deferred policy acquisition costs 1,520 328 — 1,848
Commissions and profit sharing from reinsurers —253 —138 — —391 Banking and other activities — — 125 125
Deferred policy acquisition costs —2,256 —302 — —2,558 Amortization of deferred policy acquisition costs 1,203 219 — 1,422
Deferred policy acquisition costs —2,232 —161 — —2,393 Amortization of deferred policy acquisition costs 1,143 141 — 1,284
Deferred policy acquisition costs —2,887 —2,558 —2,393 Amortization of deferred policy acquisition costs 1,848 1,422 1,284 Commissions and profit sharing from reinsurers —391 —462 —463
NOTES TO THE CONSOLIDATED INCOME STATEMENTS Amounts in EUR millions 80 AEGON GROUP
The amount in note 10 (page 63) for Prepaid pension costs on employee pension plans relates entirely to AEGON in the United States. The amount is a combination of unrecognized net losses, unrecognized prior service costs and the positive difference between the fair value of the pension plan assets at the reporting date and the projected benefit obligation. No amortization of deferred losses has taken place in 2002 and no contributions were made by the US in 2002.
In the United Kingdom benefits are based on past and future service, taking into account future salary and benefit levels as well as estimated inflation in future years. Regular improvements of benefits are allocated to future service years. No contributions have been made to the scheme in the UK in 2002. In the other countries pension costs are fully charged to the income statements in the years in which they are earned by the employees.
The average number of employees was 25,974 of which 4,039 agent-employees (2001: 25,790 of which 4,298 agent-employees and 2000: 24,377 of which 4,112 agent-employees). The specification per geographical area is as follows:
REMUNERATION OF ACTIVE AND RETIRED MEMBERS OF THE EXECUTIVE BOARD Performance Amounts in EUR thousands related
Stock Stock Shares options Exercise Exercise Market options Exercise held in the
Balance at price price price Balance at price company January 1 EUR Granted1 EUR Lapsed Date EUR December 31 EUR December 31
J.G. van der Werf 60,000 17.36 60,000 — — — —
ABN Amro, Fortis, ING). The comparison is based on a moving average over the last three years. 2. If the AEGON share price finishes in the top three each person receives the maximum of 200,000 options, in the bottom three 50,000 per person and in the middle four 100,000 per person. 3. If there is no increase in earnings per share, no options will be offered.
At the balance sheet date, J.B.M. Streppel had a 5% mortgage loan of EUR 680,700. In accordance with the terms of the contract no redemptions were received on this loan in 2002.
Addition to provision for doubtful debts 766 32 6 804 Currency exchange rate differences 1 0 –18 –17 Book gain on sale of partnership interests in Mexico –343 — — –343 Other income and expenditure –9 4 –61 –66
Addition to provision for doubtful debts 132 3 7 142 Currency exchange rate differences 1 –1 10 10 Other income and expenditure –4 1 –14 –17 10 INVESTMENT INCOME ALLOCATED TO THE NON-TECHNICAL ACCOUNT
The tax burden for AEGON as a group is made up of the direct and future taxes payable on profits of the units operating in the various countries. The effective tax rates of these units reflect tax benefits available in the local environment and could therefore be below nominal rates. The lower effective tax rate is largely due to a reduction of the deferred tax liability, favorable adjustments resulting from the filing of the 2001 corporate tax returns in the United States, lower taxable income relative to tax preferred investments and tax-exempt income in the Netherlands and the United States, and the use of tax losses in the United Kingdom. The tax burden in the Netherlands further reflects the benefit of special tax rules for which the company and its subsidiaries qualify, including additions to the equalization reserve for insurers and tax exempt investment in subsidized housing and certain participations.
The following is a reconciliation of the nominal tax charge to the actual tax expense: Statutory tax rate 621 1,109 969 Increases (decreases) in taxes resulting from: Dividend income exclusions and credits –181 –286 –109 Depreciation of equipment and real estate –2 –3 –3 Valuation of technical provisions 0 2 0 Other, net –85 96 –24
Because of the sale on March 31, 2000, this subsidiary was deconsolidated in the presented 2000 figures for comparability reasons. The net profit for the first quarter 2000 amounting to EUR 31 million has been recognized under unconsolidated Group companies.
The commercial lending operation makes commercial loans through four businesses: distribution finance, business capital, equipment financial services and specialty finance. It has offices in the United States, Mexico, Canada, Europe and India. The intermodal leasing operation provides service, rentals and term operating leases through a worldwide network of offices, third-party depots and other facilities. The intermodal leasing operation offers a wide variety of equipment used in international and domestic commerce around the world. Its fleet consists of over 674,000 marine containers (consisting of units that are owned along with managed for and leased from others) and over 19,000 European trailers. Real estate information services provides property tax payment and reporting, flood certification and other real estate information services to its customers.
Interest and debt expense 252 470 660 Salaries and other employee expenses 332 365 384 Depreciation on equipment held for lease 222 246 307 Addition to the provision for doubtful accounts 169 155 149 Miscellaneous income and expenditure 414 590 589
Income before tax 122 126 223 Corporation tax –34 –1 –70
Net cash provided by operating activities 547 465 578 Net cash provided by (used in) investing activities 914 2,285 –377 Net cash used in financing activities –1,463 –2,737 –175
NOTES TO THE CONSOLIDATED INCOME STATEMENTS Amounts in EUR millions 86 AEGON GROUP
The contractual maturity is: Less than three months 1,230 2,063 Between three months and one year 1,453 1,743 Between one and five years 2,416 3,144 Over five years 629 915
Transamerica Finance Corporation has entered into securitization arrangements under which it sells designated pools of net finance receivables to qualified special purpose entities (QSPEs). Under the terms of the securitization arrangements, Transamerica noninsurance retains the servicing of the securitized assets and generally receives a servicing fee on the outstanding balance of the securitized assets along with rights to future residual cash flows.
Transamerica Finance Corporation maintains an allowance for losses on net finance receivables at an amount that it believes is sufficient to provide adequate protection against losses in its loan portfolios. The allowance is provided through charges against current income and is adjusted for specific accounts as well as losses inherent in the portfolio.
Equipment held for lease is shown at cost less depreciation over the estimated useful life. Assets held for sale consists primarily of retail finance receivables, certain off-lease equipment and repossessed assets.
The contractual maturity is: Less than three months 218 505 Between three months and one year 318 1,804 Between one and five years 2,478 2,254 Over five years 537 363
Long-term borrowings include intercompany loans for an amount of EUR 2,342 million (2001: EUR 1,735 million). The weighted average interest rate on long-term borrowings at December 31, 2002 and 2001 was 6.32% and 6.25% respectively.
NOTES TO THE CONSOLIDATED INCOME STATEMENTS Amounts in EUR millions 88 AEGON GROUP
Leasing revenues are earned on service, rental and term operating leases. Rental revenues are recognized in the period billed. Revenues from service contract minimum and term leases are recognized on a straight-line basis over the lease term. Initial direct costs are amortized on a straight-line basis over the lease term.
Real estate service revenues are primarily fees for life of loan property tax payment and reporting services and flood certifications. Life of loan service fees are deferred and recognized in income over the expected service period. The company periodically reviews its revenue recognition method to determine if the contract lives and/or prepayment speeds used have changed. Accordingly, the company may adjust the deferral period to reflect current trends.
–10,911 –8,520 –28 INVESTMENT INCOME FOR THE ACCOUNT OF POLICYHOLDERS –11,524 -9,515 –21
8,639 7,629 13 Mutual funds/Collective Trusts and other managed assets 9,125 8,520 7 20,835 19,338 8 TOTAL PRODUCTION OFF BALANCE SHEET 22,006 21,597 2 718 647 11 1 Of which indirect income on shares and real estate. 758 723 5
Life general account single premiums 942 1,047 –10 995 1,170 –15 Life general account recurring premiums 4,470 4,179 7 4,721 4,667 1 Life policyholders account single premiums 791 1,001 –21 835 1,118 –25 Life policyholders account recurring premiums 631 712 –11 667 795 –16
TOTAL PRODUCTION ON BALANCE SHEET 26,907 23,622 14 28,419 26,381 8
TOTAL PRODUCTION OFF BALANCE SHEET 18,842 18,109 4 19,901 20,225 –2 1 Includes also variable annuities and fees.
Total life insurance gross premiums 3,573 3,637 –2 Accident and health insurance premiums 162 146 11 General insurance premiums 447 422 6
Total gross premiums 4,182 4,205 –1 Investment income insurance activities 1,454 1,484 –2 Income from banking activities 416 384 8
Gross margin 1,325 1,479 –10 Commissions and expenses2 666 555 20
TOTAL PRODUCTION OFF BALANCE SHEET 1,223 868 41 1 Includes income on off balance sheet type products. 2 Includes the effect of a change in presentation of investments costs from a net basis to a gross basis and from various provisions formed in 2002.
Total life insurance gross premiums 139 123 13 98 178 –45 280 205 37
TOTAL PRODUCTION OFF BALANCE SHEET 186 62 — — — —
INVESTMENTS, ASSETS AND CAPITAL GEOGRAPHICALLY Amounts in EUR millions (unless otherwise stated)
USD GBP AS AT DECEMBER 31, 2002 Americas Netherlands Kingdom countries Total USD
FACE VALUE AND TOTAL SUMS INSURED Amounts in EUR millions (unless otherwise stated)
High yield (BB+ or less) 5,511 173 0 6 6,431 5 1 Adjusted for comparison purposes to reflect the accounting change of the preferred shares and the change in rating structure whereby NAIC was no longer used as a source.
AEGON USA, Inc., Cedar Rapids (Iowa USA) AUSA Life Insurance Company, Inc., Purchase (New York USA) Commonwealth General Corporation, Wilmington (Delaware USA) First AUSA Life Insurance Company, Baltimore (Maryland USA) Stonebridge Life Insurance Company, Rutland (Vermont USA) Stonebridge Casualty Insurance Company, Columbus (Ohio USA) Life Investors Insurance Company of America, Cedar Rapids (Iowa USA) Monumental Life Insurance Company, Baltimore (Maryland USA) Peoples Benefit Life Insurance Company, Cedar Rapids (Iowa USA) Transamerica Corporation, Wilmington (Delaware USA) Transamerica Life Canada, Scarborough (Ontario Canada) Transamerica Life Insurance and Annuity Company, Charlotte (North Carolina USA) Transamerica Life Insurance Company, Cedar Rapids (Iowa USA) Transamerica Occidental Life Insurance Company, Cedar Rapids (Iowa USA) Veterans Life Insurance Company, Springfield (Illinois USA) Western Reserve Life Assurance Co. of Ohio, Columbus (Ohio USA)
AEGON Bank N.V., Utrecht AEGON Financiële Diensten B.V., The Hague AEGON International N.V., The Hague AEGON Levensverzekering N.V., The Hague AEGON NabestaandenZorg N.V., Groningen AEGON Nederland N.V., The Hague AEGON Schadeverzekering N.V., The Hague AEGON Spaarkas N.V., The Hague AEGON Vastgoed Holding B.V., The Hague AMVEST Vastgoed B.V., Utrecht (50%) Spaarbeleg Kas N.V., Utrecht
TOTAL EQUITY AND LIABILITIES 20,739 21,864 1 Excluding dividend on preferred shares of EUR 30 million (2001: EUR 3 million) 2 Amounts adjusted by EUR 631 million due to the change in presentation of dividend.
Balance at January 1 11,850 11,251 Capital contribution and acquisitions 3,756 0 Divestitures –1,149 0 Net income for the financial year 1,511 2,337 Dividend distributed — –360 Goodwill — –277 Revaluations –3,504 –1,101
Balance at January 1 435 524 Repayments or payments received –83 –89
On September 17, 2002 Vereniging AEGON and AEGON N.V. agreed to mark to market the existing TRS agreements that hedge the 2001 and 2002 share option and stock appreciation rights plans based on the EUR 10.04 closing price of AEGON N.V. share on Euronext Amsterdam. This resulted in a payment to Vereniging AEGON of EUR 378.3 million.
Senior executives of AEGON companies as well as other AEGON employees have been offered AEGON stock appreciation rights in 2002 which do not entitle to buy AEGON shares but provide the same financial benefits. In previous years also stock options were offered. Rights and options have been granted at an exercise price equal to the market price of the shares at the date of the grant. The rights granted in 2002 are vested after two years and can only be exercised during five years after the vesting date. The plans for 1997 up to and including 2001 can be exercised three years after being granted and then during a period of two years. Plans for stock appreciation rights and in the past stock option plans can only be established after the prior consent of the Annual General Meeting. If, subsequently, the Executive Board decides to implement such plans, that decision has to be approved by the Supervisory Board. Rights and options granted in earlier years can generally be exercised during a period of five years. Options granted pursuant to the purchase agreement with Providian have various expiration dates. The options granted in 1997 to senior executives of former Providian business units fully vest in three years and the exercise period is up to ten years, ending at the latest in August 2008. In compliance with regulations, stock options and appreciation rights cannot be exercised in black-out periods.
The following tables set forth the changes in the years 2000, 2001 and 2002 as well as the breakdown of options and stock appreciation rights (SARs) outstanding.
Options/SARs number1 20021 20021 in EUR1 Exercise period3 1 Adjusted for the stock splits in 1998 and 2000 as appropriate.
2 Weighted average exercise price of the outstanding options in USD calculated at the closing rate. 3 Up to and including the 1999 series the exercise period for a small part of the options is 74 months. 4 Including stock appreciation rights, which do not entitle to buy AEGON shares but provide the same financial benefits. 5 Stock appreciation rights, which do not entitle to buy AEGON shares but provide the same financial benefits; only employees in Canada were granted 263,100 stock options.
Stock options exercisable as of December 31, 2002 amount to 20,395,702 (2001: 18,445,778 and 2000: 10,760,566) and their weighted average exercise price amounts to EUR 35.24 (2001: EUR 24.75 and 2000: EUR 13.45).
The fair value of the stock options and stock appreciation rights granted during the year amounts to EUR 76 million at the grant date (2001: EUR 83 million and 2000: EUR 74 million). This value was estimated using the binomial option pricing model, taking into account that the SARs and options granted in 2002 vest after two years and the options granted in 2001 and 2000 cannot be exercised within the first three years.
The breakdown of the stock options and stock appreciation rights granted in 2002 is as follows: Executive Board 150,000, other senior executives 4,041,000, other employees 7,364,700 (2001: 400,000, 3,824,700 and 7,064,100 and 2000: 640,000, 4,125,300 and 5,844,400 respectively recalculated for the split in May 2000). For detailed information about the Executive Board’s options refer to page 82.
Balance at January 1 after change in presentation 5,074 4,640 3,591 13,305 13,209 Net income 2001 excluding preferred dividend 2,394 2,394 — Final dividend and interim dividend –731 –731 –541 Issuance of new shares — 1,677 Paid in on preferred shares 2,053 2,053 — Repurchased and sold own shares 0 –21 Valuation equity swap –318 –318 –19 Exercised options 0 3 Stock dividend –2 –2 –2 Revaluation group companies: — Goodwill –70 –70 –286 — Sale Mexico — 602 — Currency exchange rate differences –90 –1,397 –1,487 430 — Other revaluations –1,952 5 –1,947 –1,531 Currency exchange rate differences –703 –703 –50 Cash settlement subordinated convertible loan — –68 Settlement stock option plans –6 –6 –71 Other movements 0 0 –27
Unrealized gains and losses on investments are due to changes in stock exchange quotations and reappraisal of real estate of all activities.
The indirect income is released from these revaluations if and as far as the balance for real estate and shares separately is positive. Impairments of shares are charged to the realised part of the revaluation account. Moreover, the minimum reserves as required by law are to be maintained. These minimum reserves consist of the unrealized difference between the bookvalue and the cost prices of real estate and shares, respectively. In relation to this, as at December 31, 2002, an amount of EUR 2,056 million after tax is presently available for release from the revaluations whereas the remainder is only available after realization.
Remaining terms up to 3 years 1,215 1,458 Remaining terms 4-5 years 7 — Remaining terms over 5 years 396 430
FGH BANK N.V., for the sake of a. all unsubordinated and non-privileged creditors, to whom FGH BANK owes from deeds prior to February 27, 1987, and from all loans contracted by FGH BANK after February 27, 1987, up to March 30, 1998; b. those whom FGH BANK guaranteed or assumed several liability prior to February 27, 1987. The sales agreement with Hypo-Vereinsbank includes recourse against that bank for liabilities emerging from above guarantees.
3. The remaining profit shall be put at the disposal of the general meeting of shareholders. 4. The Executive Board may, subject to the approval of the Supervisory Board even before the approval of the balance sheets and the income statements of any financial year distribute one or more interim dividends on account of the dividend to the holders of shares.
In order to fully reflect the prevailing market price of AEGON N.V. common shares within the indication provided, the number of dividend coupons that gives entitlement to a new common share of EUR 0.12 will be determined on March 5, 2003, after 5.30 p.m., based upon the average share price (quotation Euronext Amsterdam) in the five trading days from February 27 up to and including
In January and February 2003, AEGON and certain (former) members of the Executive Board were named in a series of similar class action complaints filed in US federal court alleging various violations of US securities laws involving the issuance of false and misleading statements during the period between August 9, 2001 and July 22, 2002, when AEGON issued an update to its earnings guidance for 2002. AEGON believes these allegations are without merit and intends to defend vigorously against these actions. AEGON does not believe that these claims, either individually or in the aggregate, will result in a material adverse effect on its financial condition or results of operations.
On February 24, 2003 a proposal of law has been submitted to Dutch Parliament regarding changes in the rules for financial reporting of insurance companies. One of the elements of this proposal might necessitate, if and when adopted, AEGON to discontinue the indirect return method for capital gains prior to the reporting year 2004.
Vereniging AEGON is the continuation of the former mutual insurer AGO. In 1978 AGO was demutualized and Vereniging AGO became the only shareholder of AGO Holding N.V., which was the holding company of its insurance operations. In 1983 AGO Holding N.V. and Ennia N.V. merged into AEGON N.V. Vereniging AGO initially received approximately 49% of the common shares (which shareholding was reduced gradually to 40%) and all of the preferred shares in AEGON N.V., giving it voting majority in AEGON N.V. and it changed its name into Vereniging AEGON.
As of December 31, 2002, the General Meeting of Members of Vereniging AEGON consisted of 23 members. Nineteen of these are not an employee or former employee of AEGON N.V. or one of its group companies, nor a (former) member of the Supervisory Board or the Executive Board of AEGON N.V. They hold the majority of the voting rights. Of the four other members, two are elected by the General Meeting of Members from among the members of the Supervisory Board and two from among the members of the Executive Board of AEGON N.V.
The Executive Board is accountable to investors for a clear and transparent justification of its management. Every shareholder has the right to speak and to vote without limitation in any of AEGON’s meetings of shareholders. Each outstanding share entitles the holder to one vote. AEGON was one of those actively involved in the establishment of the Dutch ‘Stichting Communicatiekanaal Aandeelhouders’ (Shareholders’ Communication Channel Foundation), established in April 1998 for better and direct communication with shareholders. Shareholders with a securities account in the Netherlands and participating in this Communication Channel can use the possibility offered by the Foundation to receive the annual report and the agenda for the AGM. Also a system is introduced which will offer shareholders the possibility of voting without attending a meeting in person. Furthermore, for both management and (groups of) shareholders the Communication Channel may serve to solicit proxies.
According to Dutch corporate law and AEGON N.V.’s Articles of Incorporation, shareholders in a meeting are authorized as follows: ● To approve the annual accounts, including profit appropriation and dividend. Furthermore, to release the Executive Board from liability with respect to its management and the Supervisory Board with respect to the supervision thereof, insofar as such management appears from the annual accounts.
● To appoint the external auditor. ● To decide on share issues or on the granting of rights to take shares (stock options) or to designate the Executive Board to resolve on such issues or grants, up to a certain maximum percentage and for a period not exceeding five years, and, possibly, to exclude shareholders’ pre-emptive rights.
The Netherlands: charged to shareholders’ equity United States: capitalized and tested for impairment. Before 2002 capitalized and amortized over various periods not exceeding 20 years
Technical provisions (including deferred policy acquisition costs) –999 689 –155 -96 –34 The Netherlands: calculated on recent assumptions United States: calculated on assumptions when the policy was issued or on recent assumptions
Realized gains and losses on bonds and private placements 245 189 8 276 –348 The Netherlands: deferred and released to income over the estimated average remaining maturity term United States: recognized as income when realized
Deferred taxation (including taxation on US GAAP adjustments) –1,140 –934 123 418 155 The Netherlands: calculated using discounted tax rates United States: calculated using nominal tax rates
Balance of other items –12 –825 329 –410 242 Certain expenses are recorded in different periods on the two bases of accounting
Realized and unrealized gains and losses by their nature can show large fluctuations. Included in realized gains and losses on shares and real estate are EUR 1,057 million (2001: EUR 36 million and 2000: nil) impairment losses due to an other than temporary decline in market value and the reversal of the indirect return of EUR 758 million (2001: EUR 723 million and 2000: EUR 595 million). An EUR 318 million loss on the total return swaps has been included in 2002 net income on the line derivatives. The balance of other items includes the effect of the sale of Mexico which under DAP has been reported in 2001. In 2000 the result of the sale of Labouchere and of other divestitures has been included in the balance of other items.
2002 USD 2002 EUR I II III IV Total I II III IV Total
–224 –30 –154 74 –334 Corporation tax –255 –28 –157 87 –353
2001 USD 2001 EUR I II III IV Total I II III IV Total
–108 –103 –89 –55 –355 Interest charges and Other –117 –118 –100 –62 –397
G.A. Posthumus (1933), Dutch nationality, is a member of the Council of State in the Netherlands. He was appointed in 1997 and will retire in 2003, then having reached the retirement age of 70. He is also a former member of the Executive Board of the IMF. He is a member of the Audit Committee.
T. Rembe (1936), American nationality, is a partner of Pillsbury Winthrop LLP (San Francisco, USA). She was appointed in 2000; her current term will end in 2004. She is a member of the Board of Directors of Potlach Corporation (USA) and SBC Communications (USA). She is a member of the Audit Committee.
H. de Ruiter (1934), Vice-Chairman and Dutch nationality, is a retired Managing Director of Royal Dutch Petroleum Company and Group managing director of Royal Dutch/Shell group of companies. He was appointed in 1993; he will retire in 2004, then having reached the retirement age of 70. He is a member of the Supervisory Boards of a number of Dutch companies, among which Royal Dutch Petroleum Company, Royal Ahold, Wolters Kluwer and Univar N.V. He is also a member of the Executive Committee of Vereniging AEGON and of Trust offices on behalf of some Dutch companies. He is a member of the Audit, Compensation, Nominating and Strategy Committees.
M. Tabaksblat (1937), Chairman and Dutch nationality, is Chairman of Reed Elsevier plc and a retired Chairman and CEO of Unilever. He was appointed in 1990; his current term will end in 2005. He is also Chairman of the Supervisory Board of TNT Post Group and a member of the International Advisory Boards of Salomon Smith Barney (USA) and Renault Nissan (France). He is also a member of the Executive Committee of Vereniging AEGON. He is the Chairman of the Compensation, Nominating and the Strategy Committees.
F.J. de Wit (1939), Dutch nationality, is a former Chairman of the Executive Board of Koninklijke KNP BT. He was appointed in 1990; his current term will end in 2004. He is also a member of the Supervisory Boards of Océ and PontEecen. He is a member of the Compensation and Strategy Committees.
WRL Janus Growth 1,110 1,058 –29.9 –29.0 –1.3 WRL VKAM Emerging Growth 652 622 –33.1 26.7 2.1
Equity Growth 1,147 1,094 –23.1 –19.6 –0.1 Special Equity 1,006 959 –23.7 –10.3 –0.9
Pension Funds Mixed Fund 4,218 6,484 –19.6 –12.8 –2.4 UK Equity Fund 2,520 3,874 –23.2 –14.4 –3.8 European Fund 715 1,099 –29.4 –19.9 –4.6 Global Fund 651 1,001 –27.8 –17.6 –6.0 North America 516 793 –33.6 –16.9 –2.1
FT World Index (in EUR) –31.0 –16.7 –0.9 AEX (in EUR) –36.3 –21.7 –4.9 FTSE100 (in GBP) –24.5 –17.2 –5.2 S&P 500 (in USD) –23.4 –15.7 –1.9 Nasdaq Composite (in USD) –31.5 –31.0 –3.2 EuroStoxx50 (in EUR) –37.3 –21.3 –1.2 TOPIX (in JPY) –18.3 –21.2 –6.4 Merrill Lynch Euro AAA (in EUR) 9.6 7.4 6.2
Participation in most of our funds can only be completed by buying an insurance product that is linked to these funds.
March 7 Intended appointments at Supervisory Board and Executive Board AEGON N.V. April 18 AEGON N.V. announces final dividend 2001 April 18 Appointments at Supervisory Board and Executive Board AEGON N.V. April 26 CNOOC and AEGON expected to agree on joint venture May 6 Stock fraction final dividend AEGON determined at 1/55 May 7 First quarter net income increases 15% to EUR 617 million
Transaction size fixed at 350 million common shares, resulting in total gross proceeds of EUR 3.5 billion September 23 Placement of 350 million AEGON common shares by Vereniging AEGON closed
October 1 1 AEGON N.V. appoints manager for Corporate Responsibility November 7 Net income EUR 429 million for third quarter 2002; per share EUR 0.30
First nine months net income EUR 1,192 million; per share EUR 0.85 December 2 AEGON signed an agreement to transfer its Philippine activities to Paramount Life & General December 26 AEGON has acquired a 20% stake in LA MONDIALE PARTICIPATIONS
● the effects of corporate bankruptcies and/or accounting restatements (such as Enron and WorldCom) on the financial markets and the resulting decline in value of securities we hold; ● the frequency and severity of insured loss events; ● changes affecting mortality, morbidity and other factors that may affect the profitability of our insurance products; ● changes affecting interest rate levels; ● changes affecting currency exchange rates, including the euro/US dollar and euro/UK pound exchange rates; ● increasing levels of competition in the United States, the
About our business 40 Corporate responsibility 41 AEGON around the world 44 Product line overview
Financial section 47 Financial statements AEGON N.V. 48 Consolidated balance sheets
Supervisory Board 82 Stock options and stock appreciation rights 89 Segment information 96 Group companies 97 Balance sheets of AEGON N.V. 98 Income statements of AEGON N.V. 99 Notes to the balance sheets of
AEGON N.V. 104 Other information 106 Auditor’s report 107 Corporate governance 108 Information based on US accounting principles 110 Quarterly results 112 Data on the members of the Supervisory
THE EXECUTIVE BOARD FROM LEFT TO RIGHT: JOHAN G. VAN DER WERF,