On consolidation, the financial statements of group entities with a foreign functional currency are translated to euro, the currency in which the consolidated financial statements are presented. Assets and liabilities are translated at the closing rates on the balance sheet date. Income, expenses and capital transactions (such as dividends) are translated at average exchange rates or at the prevailing rates on the transaction date, if more appropriate. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are translated at the closing rates on the balance sheet date.
AEGON’s operating segments are based on the businesses as presented in internal reports that are regularly reviewed by the Executive Board which is regarded as the “chief operating decision maker”. The operating segments are: �� AEGON Americas: Covers business units in the United States, Canada, Mexico and Brazil, including any of the units’
�� Holding and other activities: Includes financing, employee and other administrative expenses of Holding companies.
Life Insurance (BOLI/COLI) business and life reinsurance business in AEGON Americas. AEGON believes that excluding the earnings of these blocks of business enhances the comparability from period to period of AEGON’s key earnings measure, underlying earnings. Bank-Owned and Corporate-Owned Life Insurance (BOLI/COLI) business and life reinsurance business in AEGON Americas were put in run-off in 2011. Comparative figures have been revised as disclosed in this paragraph.
�� Earnings from the Company’s associates in insurance companies in Spain, India, Brazil and Mexico are reported on an underlying earnings basis.
This non-IFRS measure is calculated by consolidating on a proportionate basis the revenues and expenses of AEGON’s associated companies in Spain, India, Brazil and Mexico. AEGON believes that its non-IFRS measure provides meaningful information about the underlying operating results of AEGON’s business including insight into the financial measures that senior management uses in managing the business.
AEGON’s senior management is compensated based in part on AEGON’s results against targets using the non-IFRS
measures, the non-IFRS measure presented in this document may nevertheless differ from the non-IFRS measures presented by other insurers. There is no standardized meaning to these measures under IFRS or any other recognized set of accounting standards and readers are cautioned to consider carefully the different ways in which AEGON and its peers present similar information before comparing them.
AEGON believes the non-IFRS measure shown herein, when read together with AEGON’s reported IFRS financial statements, provides meaningful supplemental information for the investing public to evaluate AEGON’s business after eliminating the impact of current IFRS accounting policies for financial instruments and insurance contracts, which embed a number of accounting policy alternatives that companies may select in presenting their results (i.e. companies can use different local GAAPs) and that can make the comparability from period to period difficult.
The interest rate risk on these bonds is hedged using swaps. The fair value movement resulting from changes in
150 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 2.6 - 2.7
Includes underlying results of business units where management has decided to exit the market and to run off the existing block of business. Currently, this line includes the run-off of the institutional spread-based business, structured settlements blocks of business, Bank-Owned and Corporate-Owned Life Insurance (BOLI/COLI) business and life reinsurance business in the United States. AEGON has other blocks of business for which sales have been discontinued and of which the earnings are included in underlying earnings.
As of January 1, 2011 both BOLI/COLI and life reinsurance earnings are no longer reported in underlying earnings but reflected in the run-off businesses line in the segment reporting (both in 2011 and 2010). The comparative figures, affecting the Americas segment, regarding the underlying earnings and the run-off businesses have been revised as follows: CONTENTS
152 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 2.8 not to be recoverable is charged to the income statement. VOBA is considered in the liability adequacy test for each reporting period.
On the acquisition of a portfolio of investment contracts without discretionary participation features under which
Software and other intangible assets are recognized to the extent that the assets can be identified, are controlled by the Group, are expected to provide future economic benefits and can be measured reliably. The Group does not recognize internally generated intangible assets arising from research or internally generated goodwill, brands, customer lists and similar items.
Depreciation of the asset is over its useful life as the future economic benefits emerge and is recognized in the income statement as an expense. The depreciation period and pattern are reviewed at each reporting date, with any changes recognized in the income statement.
The following financial assets are measured at fair value through profit or loss: financial assets held for trading, financial assets managed on a fair value basis in accordance with the Group’s risk management and investment strategy and financial assets containing an embedded derivative that is not closely related and that cannot be reliably bifurcated.
154 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 2.9 - 2.10
A receivable is recognized for any related cash collateral paid by AEGON. The difference between sale and repurchase price is treated as investment income. If the Group subsequently sells that security, a liability to repurchase the asset is recognized and initially measured at fair value.
Investments in real estate include property held to earn rentals or for capital appreciation, or both. Investments in real estate are presented as investments. Property that is occupied by the Group and that is not intended to be sold in the near future is classified as real estate held for own use and is presented in “Other assets and receivables”.
All property is initially recognized at cost. Such cost includes the cost of replacing part of the real estate and borrowing cost for long-term construction projects if recognition criteria are met. Subsequently, investments in real estate are measured at fair value with the changes in fair value recognized in the income statement. Real estate held for own use is carried at its revalued amount, which is the fair value at the date of revaluation less subsequent accumulated depreciation and impairment losses. Depreciation is calculated on a straight line basis over the useful life of a building.
The valuation techniques incorporate all factors that market participants would consider and are based on observable market data, when available.
For hedge accounting purposes, a distinction is made between fair value hedges, cash flow hedges and hedges of a net investment in a foreign operation.
Fair value hedges are hedges of a change in the fair value of an unrecognized firm commitment or an asset or liability
156 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 2.11 - 2.13
Net investment hedges are hedges of currency exposures on a net investment in a foreign operation. To the extent that the hedge is effective, the change in the fair value of the hedging instrument is recognized in shareholders’ equity. Any ineffectiveness is recognized in the income statement. The amount in shareholders’ equity is released to the income statement when the foreign operation is disposed of.
Hedge accounting is discontinued prospectively for hedges that are no longer considered effective. When hedge accounting is discontinued for a fair value hedge, the derivative continues to be carried on the statement of financial position with changes in its fair value recognized in the income statement. When hedge accounting is discontinued for a cash flow hedge because the cash flow is no longer expected to occur, the accumulated gain or loss in shareholders’
Own equity instruments of AEGON N.V. that are held by the associate are not eliminated.
AEGON is not relieved of its legal liabilities when entering into reinsurance transactions, therefore the reserves relating to the underlying reinsured contracts will continue to be reported on the consolidated statement of financial position during the run-off period of the underlying business.
DPAC balances also include deferred cost of reinsurance. A deferred cost of reinsurance is established when AEGON
enters into a reinsurance transaction to cede an existing block of business.
AEGON will render investment management services. Incremental costs that are directly attributable to securing these investment management contracts are recognized as an asset if they can be identified separately and measured reliably and if it is probable that they will be recovered.
The deferred transaction costs are amortized in line with fee income, unless there is evidence that another method better represents the provision of services under the contract. The amortization is recognized in the income statement.
Interest rebates that are expected to be recovered in future periods are deferred and amortized as the surplus interest is realized. The amortization is recognized in AEGON’s income statement. They are considered in the liability adequacy test for insurance liabilities.
Deferred interest rebates are derecognized when the related contracts are settled or disposed of.
Cash comprises cash at banks and in-hand. Cash equivalents are short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known cash amounts, are subject to insignificant risks of changes in value and are held for the purpose of meeting short-term cash requirements. Money market investments that are held for investment purposes (backing insurance liabilities, investment liabilities or equity based on asset liability management considerations) are not included in cash and cash equivalents but are presented as investment or investment for account of policyholders.
With the exception of goodwill, impairment losses are reversed when there is evidence that there has been a change in the estimates used to determine the asset’s recoverable amount since the recognition of the last impairment loss.
160 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 2.17 - 2.19
Reinsurance assets are impaired if there is objective evidence, as a result of an event that occurred after initial recognition of the reinsurance asset, that not all amounts due under the terms of the contract will be received and the impact of the event on the amount to be received from the reinsurer can be reliably measured. Impairment losses are recognized in the income statement.
Financial instruments that are issued by the Group are classified as equity if they represent a residual interest in the assets of the Group after deducting all of its liabilities and the Group has an unconditional right to avoid delivering cash or another financial asset to settle its contractual obligation. In addition to common shares and preferred shares, the
Insurance contracts are accounted for under IFRS 4 – Insurance Contracts. In accordance with this standard, AEGON
continues to apply the existing accounting policies that were applied prior to the adoption of IFRS, with certain modifications allowed by IFRS 4 for standards effective subsequent to adoption. AEGON applies non-uniform accounting policies for insurance liabilities and related deferred acquisition costs and intangible assets, to the extent that it was allowed under Dutch Accounting Principles. As a result, specific methodologies applied may differ between AEGON’s operations as they may reflect local regulatory requirements and local practices for specific product features in these local markets. In the United States AEGON applies US GAAP and in the Netherlands and the United Kingdom AEGON
applies Dutch Accounting Principles, both with consideration of standards effective subsequent to the date of transition to IFRS.
Insurance contracts are contracts under which the Group accepts a significant risk – other than a financial risk – from a policyholder by agreeing to compensate the beneficiary on the occurrence of an uncertain future event by which he
The Group reviews homogeneous books of contracts to assess whether the underlying contracts transfer significant insurance risk on an individual basis. This is considered the case when at least one scenario with commercial substance can be identified in which the Group has to pay significant additional benefits to the policyholder. Contracts that have been classified as insurance are not reclassified subsequently.
Insurance assets and liabilities are valued in accordance with the accounting principles that were applied by the Group prior to the transition to IFRS and with consideration of standards effective subsequent to the date of transition to
IFRS, as further described in the following paragraphs. In order to reflect the specific nature of the products written, subsidiaries are allowed to apply local accounting principles to the measurement of insurance contracts. All valuation methods used by the subsidiaries are based on the general principle that the carrying amount of the net liability must be sufficient to meet any reasonably foreseeable obligation resulting from the insurance contracts.
Life insurance contracts are insurance contracts with guaranteed life-contingent benefits. The measurement of the liability for life insurance contracts varies depending on the nature of the product.
Shadow accounting ensures that all gains and losses on investments affect the measurement of the insurance assets and liabilities in the same way, regardless of whether they are realized or unrealized and regardless of whether the unrealized gains and losses are recognized in the income statement or directly in equity in the revaluation reserve.
Group. The liability is calculated at the reporting date using statistical methods based on empirical data and current assumptions that may include a margin for adverse deviation. Liabilities for claims subject to periodic payment are calculated using actuarial methods consistent with those applied to life insurance contracts. Discounting is applied if allowed by the local accounting principles used to measure the insurance liabilities. Discounting of liabilities is generally applied when there is a high level of certainty concerning the amount and settlement term of the cash outflows.
All tests performed within the Group are based on current estimates of all contractual future cash flows, including related cash flows from policyholder options and guarantees. A number of valuation methods are applied, including discounted cash flow methods, option pricing models and stochastic modeling. Aggregation levels are set either on geographical jurisdiction or at the level of portfolio of contracts that are subject to broadly similar risks and managed together as a single portfolio. To the extent that the tests involve discounting of future cash flows, the interest rate applied is based on market rates or is based on management’s expectation of the future return on investments.
Some investment contracts have participation features whereby the policyholder has the right to receive potentially significant additional benefits which are based on the performance of a specified pool of investment contracts, specific investments held by the Group or on the issuer’s net income. If the Group has discretion over the amount or timing of the distribution of the returns to policyholders, the investment contract liability is measured based on the accounting principles that apply to insurance contracts with similar features.
At inception, investment contracts without discretionary features are designated as at fair value through profit or loss if by doing so a potential accounting mismatch is eliminated or significantly reduced or if the contract is managed on a fair value basis. Some investment contracts with embedded derivatives that have not been bifurcated are also carried at fair value through profit or loss. All other contracts are carried at amortized cost.
The contracts are initially recognized at transaction price less, in the case of investment contracts not carried at fair value through profit or loss, any transaction costs directly attributable to the issue of the contract. Fees and commissions incurred with the recognition of a contract held at fair value through profit or loss and that are not related to investment management services provided under the contract are recognized immediately in the income statement.
The consolidated financial statements provide information on the fair value of all financial liabilities, including those carried at amortized cost. As these contracts are not quoted in active markets, their value is determined by using valuation techniques, such as discounted cash flow methods and stochastic modeling. For investment contracts that can be cancelled by the policyholder, the fair value cannot be less than the surrender value.
It is subsequently amortized over the life of the contract or a shorter period, if appropriate.
The unwinding of the effect of discounting is recorded in the income statement as an interest expense.
The Group has issued defined contribution plans and defined benefit plans. A plan is classified as a defined contribution plan when the Group has no further obligation than the payment of a fixed contribution. All other plans are classified as defined benefit plans.
The defined benefit obligation is based on the terms and conditions of the plan applicable on the balance sheet date.
AEGON recognizes gains or losses on the curtailment or settlement of a defined benefit plan when the curtailment or settlement occurs. The gain or loss on a curtailment or settlement comprise: �� Any resulting change in the present value of the defined benefit obligation.
Where only part of an obligation is settled and in respect of closure to future accrual, the gain or loss includes a proportionate share of the previously unrecognized past service cost and actuarial gains and losses. The proportionate share is determined on the basis of the present value of the obligations before and after the curtailment or settlement.
Deferred tax assets and liabilities are recognized for the estimated future tax effects of temporary differences between the carrying value of an item and its tax value, with the exception of differences arising from the initial recognition of goodwill and of assets and liabilities that do not impact taxable or accounting profits. A tax asset is recognized for
Deferred tax liabilities relating to investments in subsidiaries, associates and joint ventures are not recognized if the
Group is able to control the timing of the reversal of the temporary difference and it is probable that the difference will not be reversed in the foreseeable future.
When the inflow of economic benefits becomes virtually certain, the asset is no longer contingent and its recognition is appropriate.
Gross premiums, including recurring and single premiums, from life and non-life insurance and investment contracts with discretionary participation features are recognized as revenue when they become receivable. Not reflected as premium income are deposits from certain products that are sold only in the United States and Canada, such as deferred annuities. For these products the surrender charges and charges assessed have been included in gross premiums.
168 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 2.30 - 3 insurance and investment contracts. It includes internal and external claims handling costs that are directly related to the processing and settlement of claims. Amounts receivable in respect of salvage and subrogation are also considered.
Results from financial transactions include: Net fair value change of general account financial investments at fair value through profit or loss, other than derivatives
Net fair value change on for account of policyholder financial assets at fair value through profit or loss include fair value movements of investments held for account of policyholders (refer to note 2.9). The net fair value change does not include interest or dividend income.
In addition, results from financial transactions include gains/losses on real estate (general account and account of policyholders), net foreign currency gains / (losses) and net fair value change on borrowings and other financial liabilities and realized gains on repurchased debt.
Interest expense on trust pass-through securities and other borrowings carried at amortized cost is recognized in profit or loss using the effective interest method.
Arrangements that do not take the form of a lease but convey a right to use an asset in return for a payment are assessed at inception to determine whether they are, or contain, a lease. This involves an assessment of whether fulfillment of the arrangement is dependent on the use of a specific asset and whether the purchaser (lessee) has the right to control the use of the underlying asset.
Mortality tables applied are generally developed based on a blend of company experience and industry wide studies, taking into consideration product characteristics, own risk selection criteria, target market and past experience.
Mortality experience is monitored through regular studies, the results of which are fed into the pricing cycle for new products and reflected in the liability calculation when appropriate. For contracts insuring survivorship, allowance may be made for further longevity improvements. Morbidity assumptions are based on own claims severity and frequency experience, adjusted where appropriate for industry information.
DPAC or VOBA amortization schedule, referred to as DPAC or VOBA unlocking. The difference between the original
In the third quarter of 2011, to reflect the low interest rate environment, AEGON has lowered its long-term assumption for 10-year US Treasury yields by 50 basis points to 4.75% (graded uniformly from 2011 yields over the next five years)
and lowered the 90-day treasury yield to 0.2% for the next two years followed by a three year grade to 3% (2010: 3,5%).
United States and Canada amounted to EUR 2 billion at December 31, 2011.
For the fixed annuities and fixed universal life insurance products, the estimated gross profits (“EGP”) calculations include a net interest rate margin, which AEGON assumes will remain practically stable under any reasonably likely interest-rate scenario.
lower levels of surrenders may indicate future claims will be higher or lower than anticipated. Such correlations are accounted for in the mortality and morbidity assumptions based on the emerging analysis of experience.
The following is a description of AEGON’s methods of determining fair value, and a quantification of its exposure to financial instruments measured at fair value.
In accordance with IFRS 7, AEGON uses the following hierarchy for determining and disclosing the fair value of financial instruments: �� Level I: quoted prices (unadjusted) in active markets for identical assets or liabilities that AEGON can access at the measurement date; �� Level II: inputs other than quoted prices included within Level I that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices of identical or similar assets and liabilities) using valuation techniques for which all significant inputs are based on observable market data; and
�� Level III: inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs)
using valuation techniques for which any significant input is not based on observable market data.
To operationalize AEGON’s fair value hierarchy, individual securities are assigned a fair value level based primarily on the type of security and the source of the prices (e.g. index, third-party pricing service, broker, internally modeled).
The estimated fair values of AEGON’s financial assets and liabilities are presented in the respective notes to the statement of financial position together with their carrying values. The estimated fair values correspond with the amounts at which the financial instruments at AEGON’s best estimate could have been traded at the balance sheet date between
172 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 3 knowledgeable, willing parties in arm’s length transactions. When available, AEGON uses quoted market prices in active markets to determine the fair value of investments and derivatives. In the absence of an active market, the fair value of investments in financial assets is estimated by using other market observable data, such as corroborated external quotes and present value or other valuation techniques. An active market is one in which transactions are taking place regularly on an arm’s length basis. A fair value measurement assumes that an asset or liability is exchanged in an orderly transaction between market participants, and accordingly, fair value is not determined based upon a forced liquidation or distressed sale.
AEGON employs an oversight structure over valuation of financial instruments that includes appropriate segregation of duties. Senior management, independent of the investing functions, is responsible for the oversight of control and valuation policies and for reporting the results of these policies. For fair values determined by reference to external quotation or evidenced pricing parameters, independent price determination or validation is utilized to corroborate those inputs. Further details of the validation processes are set out below.
Valuation of financial instruments is based on a pricing hierarchy, in order to maintain a controlled process that will systematically promote the use of prices from sources in which AEGON has the most confidence, where the least amount of manual intervention exists and to embed consistency in the selection of price sources. Depending on asset type the pricing hierarchy consists of a waterfall that starts with making use of market prices from indices and follows with making use of third-party pricing services or brokers.
Fair values for unquoted shares are estimated using observations of the price/earnings or price/cash flow ratios of quoted companies considered comparable to the companies being valued. Valuations are adjusted to account for company-specific issues and the lack of liquidity inherent in an unquoted investment. Illiquidity adjustments are generally based on available market evidence. In addition, a variety of other factors are reviewed by management, including, but not limited to, current operating performance, changes in market outlook and the third-party financing environment.
Lastly, securities are priced using internal cash flow modeling techniques. These valuation methodologies commonly use the following inputs: reported trades, bids, offers, issuer spreads, benchmark yields, estimated prepayment speeds, and/or estimated cash flows.
To understand the valuation methodologies used by third-party pricing services AEGON reviews and monitors the applicable methodology documents of the third-party pricing services. Any changes to their methodologies are noted and reviewed for reasonableness. In addition, AEGON performs in-depth reviews of prices received from third-party pricing services on a sample basis. The objective for such reviews is to demonstrate that AEGON can corroborate detailed information such as assumptions, inputs and methodologies used in pricing individual securities against documented pricing methodologies. Only third-party pricing services and brokers with a substantial presence in the market and with appropriate experience and expertise are used.
(adjusted for current markets) as well as the structural characteristics of each security.
Significant variances between the price used for financial reporting and the transaction price are investigated to explain the cause of the difference.
AEGON’s portfolio of private placement securities (held at fair value under the classification of available-for-sale or fair value through profit or loss) is valued using a matrix pricing methodology. The pricing matrix is obtained from a third-party service provider and indicates current spreads for securities based on weighted average life, credit rating, and industry sector. Each month, AEGON’s asset specialists review the matrix to ensure the spreads are reasonable by comparing them to observed spreads for similar bonds traded in the market. Other inputs to the valuation include coupon rate, the current interest rate curve used for discounting and an illiquidity premium to account for the illiquid nature of these securities. The illiquidity premiums are determined based upon the pricing of recent transactions in the private placements market; comparing the value of the privately offered security to a similar public security. The impact of the illiquidity premium for private placement securities to the overall valuation is insignificant.
The fair value of floating interest rate mortgages, policy loans and private placements used for disclosure purposes is assumed to be approximated by their carrying amount, adjusted for changes in credit risk. Credit risk adjustments are based on market observable credit spreads if available, or management’s estimate if not market observable.
For long-dated illiquid contracts, extrapolation methods are applied to observed market data in order to estimate inputs and assumptions that are not directly observable. To value OTC derivatives, management uses observed market information, other trades in the market and dealer prices. Controls and procedures regarding the fair values of free standing derivatives are similar to the controls as described for the debt securities.
AEGON normally mitigates counterparty credit risk in derivative contracts by entering into collateral agreements where practical and in ISDA master netting agreements for each of the Group’s legal entities to facilitate AEGON’s right to offset credit risk exposure. In the event no collateral is held by AEGON or the counterparty, the fair value of derivatives is adjusted for credit risk based on market observable spreads. Changes in the fair value of derivatives attributable to changes in counterparty credit risk were not significant.
Certain guarantees for minimum benefits in insurance and investment contracts are carried at fair value. These guarantees include guaranteed minimum withdrawal benefits (GMWB) in the United States and United Kingdom which are offered on some AEGON variable annuity products and are also assumed from a ceding company; minimum interest rate guarantees on insurance products offered in The Netherlands, including group pension and traditional products; Variable annuities sold in Europe; and guaranteed minimum accumulation benefits on segregated funds sold in Canada.
(who have priority in payments to other creditors). Because CDS spreads for US life insurers differ significantly from that for European life insurers, AEGON’s assumptions are set by region to reflect these differences in the valuation of the guarantee embedded in the insurance contracts.
Since many of the assumptions are unobservable and are considered to be significant inputs to the liability valuation, the liability included in future policy benefits has been reflected within Level III of the fair value hierarchy. Refer to note 46 for more details about AEGON’s guarantees.
Similar to embedded derivatives in insurance contracts, certain investment products are not quoted in active markets and their fair values are determined by using valuation techniques. Because of the dynamic and complex nature of these cash flows, stochastic or similar techniques under a variety of market return scenarios are often used. A variety of factors are considered, including expected market rates of return, market volatility, correlations of market returns, discount rates and actuarial assumptions.
The table below shows an analysis of financial instruments recorded at fair value by level of the fair value hierarchy: Financial assets carried at fair value Level I Level II Level III
Investment contracts for account of policyholders 5,020 20,405 178 25,603 5,550 25,783 2,884 34,217 1 The investments for account of policyholders included in the table above represents those investments carried at fair value through profit or loss. 2 Borrowings included in the table above contain those borrowings that are carried at fair value through profit or loss. In measuring the fair value of derivatives credit spread is considered. Total borrowings on the statement of financial position also contain borrowings carried at amortized cost that are not included in the above schedule.
During 2011, the amount of assets transferred from Level I to Level II classification was EUR 4 million
178 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 3
Investments for account of policyholders 2,352 (40) – 301 (342) – 22 129 (197) 2,225 22
Other investments at fair value 1,080 66 – 159 (149) – 84 77 (112) 1,205 62
The amount of the total assets transferred was EUR 794 million (2010: EUR 722 million). The reason for the change in level was that the market for these securities had become inactive, which led to a change in market observability of prices. Prior to transfer, the fair value for the Level I and II securities was determined using observable market transactions or corroborated broker quotes for the same or similar instruments. Since the transfer, all such assets have been valued using valuation models incorporating significant non market-observable inputs.
The change in level was mainly the result of a return of activity in the market for these securities.
The total net amount of loss recognized in the income statement on Level III financial instruments amount to
Investments for account of policyholders are excluded from the reasonably possible alternative assumptions disclosure.
The effect on total assets is offset by the effect on total liabilities.
In order to determine reasonably possible alternative assumptions, AEGON adjusted key unobservable models inputs are as follows: a. Available-for-sale shares include shares in the Federal Home Loan Bank for an amount of EUR 143 million
For investments in structured debt securities (ABS, RMBS and CMBS), the most significant unobservable input for valuation of these securities is the credit spread / illiquidity premium. AEGON adjusted the discount rate by 100 basis points up or down for this input.
and private equity investments (EUR 731 million; 2010: EUR 692 million). AEGON adjusted the assumption pertaining to real estate values up or down by 10%. This change is reflective of the range presented to senior management when analyzing investment opportunities for approval. For private equity investments the underlying investments are of a very diversified nature in terms of type of investments, investment strategy and sector. There is no one significant unobservable assumption or combination of assumptions that could be identified and used to compute a reasonably possible alternative assumption analysis for this portfolio.
deteriorating financial condition of the issuer, 4) covenant violations, 5) high probability of bankruptcy of the issuer or 6) recognized credit rating agency downgrades. Additionally, for ABS, cash flow trends and underlying levels of collateral are monitored.
will impair its particular tranche to fair value where it would not be able to receive all contractual cash flows.
Commercial mortgage-backed securities (CMBS) are monitored and reviewed on a monthly basis. Detailed cash flow models using the current collateral pool and capital structure on the portfolio are performed quarterly. Model output is generated under base and several stress-case scenarios by AEGON’s CMBS asset specialists. For conduit securities, a widely recognized industry modeling software is used to perform a loan-by-loan, bottom-up approach to modeling.
For non-conduit securities, a CMBS asset specialist works closely with AEGON’s real estate valuation group to determine underlying asset valuation and risk. Both methodologies incorporate external estimates on the property market, capital markets, property cash flows, and loan structure. Results are then closely analyzed by the asset specialist to determine whether or not a principal or interest loss is expected to occur. AEGON will impair a particular tranche to fair value where it would not be able to receive all contractual cash flows.
Other ABS securities are monitored and reviewed on a monthly basis. Where ratings have declined to below investment grade, the individual debt securities have been modeled. Results are then closely analyzed by the asset specialist to determine whether or not a principal or interest loss is expected to occur. AEGON will impair its particular tranche to fair value where it would not be able to receive all contractual cash flows.
Goodwill is reviewed and tested for impairment under a fair value approach. Goodwill must be tested for impairment at least annually or more frequently as a result of an event or change in circumstances that would indicate an impairment charge may be necessary. The recoverable amount is the higher of the value in use and fair value less costs to sell for a cash-generating unit. Impairment testing requires the determination of the value in use or fair value less costs for each of AEGON’s identified cash generating units.
The valuation utilized the best available information, including assumptions and projections considered reasonable and supportable by management. The assumptions used in the valuation involve significant judgments and estimates.
AEGON manages risk at local level where business is transacted, based on principles and policies established at the
AEGON operates a Derivative Use Policy and a Reinsurance Use Policy to govern its usage of derivatives and reinsurance. These policies establish the control, authorization, execution and monitoring requirements of the usage of such instruments. In addition, these policies stipulate necessary mitigation of credit risk created through these derivatives and reinsurance risk management tools. For derivatives, credit risk is normally mitigated by requirements to post collateral via credit support annex agreements. For reinsurance, credit risk is normally mitigated by downgrade triggers allowing AEGON’s recapture of business, funds withheld by treaties (when AEGON owns the assets) and assets held in trust for the benefit of AEGON (in the event of reinsurer insolvency).
Americas where there is clear evidence of dynamic lapse behavior. Management action is taken into account to the extent that it is part of AEGON’s regular policies and procedures, such as established hedging programs. However, incidental management actions that would require a change in policies and procedures are not considered.
Each sensitivity analysis reflects the extent to which the shock tested would affect management’s critical accounting estimates and judgment in applying AEGON’s accounting policies 1. Market-consistent assumptions underlying the measurement of non-listed assets and liabilities are adjusted to reflect the shock tested. The shock may also affect the measurement of assets and liabilities based on assumptions that are not observable in the market. For example, a shock in interest rates may lead to changes in the amortization schedule of DPAC or to increased impairment losses on equity investments. Although management’s short-term assumptions may change if there is a reasonably possible change in a risk factor, long-term assumptions will generally not be revised unless there is evidence that the movement is permanent. This fact is reflected in the sensitivity analyses provided below.
The accounting mismatch inherent in IFRS is also apparent in the reported sensitivities. A change in interest rates has an immediate impact on the carrying amount of assets measured at fair value. However, the shock will not have a similar effect on the carrying amount of the related insurance liabilities that are measured based on prudent assumptions or on management’s long-term expectations. Consequently, the different measurement bases for assets and liabilities lead to increased volatility in IFRS net income and shareholders’ equity. AEGON has classified a significant part of its investment portfolio as “available-for-sale”, which is one of the main reasons why the economic shocks tested have a different impact on net income than on shareholders’ equity. Unrealized gains and losses on these assets are not recognized in the income statement but are booked directly to the revaluation reserves in shareholders’ equity, unless impaired. As a result, economic sensitivities predominantly impact shareholders’ equity but leave net income unaffected. The effect of movements of the revaluation reserve on capitalization ratios and capital adequacy are minimal. AEGON’s target ratio for the composition of its capital base is based on shareholders' equity excluding the revaluation reserve.
The sensitivities do not reflect what the net income for the period would have been if risk variables had been different because the analysis is based on the exposures in existence at the reporting date rather than on those that actually occurred during the year. Nor are the results of the sensitivities intended to be an accurate prediction of AEGON’s future shareholders’ equity or earnings. The analysis does not take into account the impact of future new business, which is an important component of AEGON’s future earnings. It also does not consider all methods available to management to respond to changes in the financial environment, such as changing investment portfolio allocations or adjusting premiums and crediting rates. Furthermore, the results of the analyses cannot be extrapolated for wider variations since effects do not tend to be linear. No risk management process can clearly predict future results.
As an international group, AEGON is subject to foreign currency translation risk. Foreign currency exposure exists when policies are denominated in currencies other than the issuer’s functional currency. Currency risk in the investment portfolios backing insurance and investment liabilities is managed using asset liability matching principles. Assets allocated to equity are kept in local currencies to the extent shareholders’ equity is required to satisfy regulatory and self-imposed capital requirements. Therefore, currency exchange rate fluctuations will affect the level of shareholders’
AEGON operates a Currency Risk Policy which applies currency risk exposure limits both at Group and regional levels, and under which direct currency speculation or program trading by country units is not allowed unless explicit approval has been granted by the Group Risk and Capital Committee. Assets should be held in the functional currency of the business written or hedged back to that currency. Where this is not possible or practical, remaining currency exposure should be sufficiently documented and limits are placed on the total exposure at both group level and for individual country units.
The estimated approximate effects on net income and shareholders’ equity of movements in the exchange rates of AEGON’s non-euro currencies relative to the euro as included in the table below are due to the translation of subsidiaries and joint-ventures in the consolidated financial statements.
SENSITIVITY ANALYSIS OF NET INCOME AND SHAREHOLDERS’ EQUITY TO TRANSLATION RISK
1 The effect of currency exchange movements is reflected as a one-time shift up or down in the value of the non-euro currencies relative to the euro on December 31.
AEGON bears interest rate risk with many of its products. In cases where cash flows are highly predictable, investing in assets that closely match the cash flow profile of the liabilities can offset this risk. For some AEGON country units, local capital markets are not well developed, which prevents the complete matching of assets and liabilities for those businesses. For some products, cash flows are less predictable as a result of policyholder actions that can be affected by the level of interest rates.
This activity may result in cash payments by AEGON requiring the sale of invested assets at a time when the prices of those assets are adversely affected by the increase in market interest rates; this may result in realized investment losses. These cash payments to policyholders result in a decrease in total invested assets and a decrease in net income.
Among other things, early withdrawals may also require accelerated amortization of DPAC, which in turn reduces net income.
AEGON manages interest rate risk closely taking into account all of the complexity regarding policyholder behavior and management action. AEGON employs sophisticated interest rate measurement techniques and actively uses derivatives and other risk mitigation tools to closely manage its interest rate risk exposure. AEGON operates an Interest Rate Risk policy that limits the amount of interest rate risk to which the Group is exposed. All derivative use is governed by
The sensitivity analysis in the table below shows an estimate of the effect of a parallel shift in the yield curves on net income and shareholders’ equity. In general, increases in interest rates have a negative effect on shareholders’ equity and a positive impact on net income in the current year because it results in unrealized losses on investments that are carried at fair value. The rising interest rates would also cause the fair value of the available-for-sale bond portfolio to decline and the level of unrealized gains would become too low to support recoverability of the full deferred tax asset triggering an allowance charge to income. The offsetting economic gain on the insurance and investment contracts is however not fully reflected in the sensitivities because many of these liabilities are not measured at fair value. Over time, the short-term reduction in net income due to rising interest rates would be offset by higher net income in later years, all else being equal. Therefore, rising interest rates are not considered a long-term risk to the Group. In 2010, despite the shift up in interest rates, the estimated approximate effect on net income was negative because of the adverse effect of certain derivatives positions.
As premiums and deposits are received, these funds are invested to pay for future policyholder obligations. For general account products, AEGON typically bears the risk for investment performance equaling the return of principal and interest. AEGON is exposed to credit risk on its general account fixed-income portfolio (debt securities, mortgages and private placements), OTC derivatives and reinsurance contracts. Some issuers have defaulted on their financial obligations for various reasons, including bankruptcy, lack of liquidity, downturns in the economy, downturns in real estate values, operational failure and fraud. During the financial crisis, AEGON incurred significant investment impairments on AEGON’s investment assets due to defaults and overall declines in the capital markets. While impairments remained elevated in the current weak economic environment, AEGON’s 2011 impairment charges on investments improved significantly compared to 2010. Further excessive defaults or other reductions in the value of these securities and loans could have a materially adverse effect on AEGON’s business, results of operations and financial condition.
Money market and other short-term investments - carried at fair value 10,472 – 1,345 – – – – 1,345 28 9,155
Other loans - carried at amortized cost 2,797 – – – – – 2,160 2,160 972 1,609
Other financial assets - carried at fair value 2,831 – 1 – – – – 1 – 2,830
Debt securities - carried at fair value 96,725 – – 1,183 – – – 1,183 – 95,542
Debt securities - carried at amortized cost 139 – – – – – – – – 139
Private loans - carried at amortized cost 829 – – – – – – – – 829
Further information on equity risk is provided in section “equity market and other investment risk”.
Several bonds in AEGON USA’s portfolio are insured by monoline insurers. Further information on the monoline insurers is provided in section “ additional information on credit risk, unrealized losses and impairments”.
(repo’s). Within tri-party repo’s AEGON invests under short term reverse repurchase agreements and the counterparty posts collateral to a third party custodian. The collateral posted is typically high-quality short term securities and is only accessible to AEGON in the event the counterparty defaults.
Guarantees that have been received regarding mortgage loans that fulfill certain criteria of the Dutch Mortgage loan
The master netting agreements column in the table relates to derivative liability positions which are used in AEGON’s credit risk management. The offset in the master netting agreements column includes balances where there is a legally enforceable right of offset, but no intention to settle these balances on a net basis under normal circumstances.
As a result, there is a net exposure for credit risk management purposes. However, as there is no intention to settle these balances on a net basis, they do not qualify for net presentation for accounting purposes.
Credit Default Swaps - CDSs). The positions outstanding at the end of the year were: CDOs and CDSs
In August 2007, the Canadian asset backed commercial paper markets froze, which ultimately resulted in a restructuring of the Asset Backed Commercial Paper (ABCP) into long-term asset backed notes. The restructuring required AEGON
to restructure its EUR 113 million notional liquidity facility agreement backing the original ABCP. To restructure the liquidity facility, AEGON entered into swaps (the “Swaps”) that are linked to three collateralized debt obligations comprising the assets within the liquidity facility backed ABCP (the “CDO”). The three CDOs are as follows: �� 15%-30% tranche of a bespoke CDO (EUR 957 million notional) maturing 6/20/2013
�� 30%-60% tranche of the CDX.IG.7 index (EUR 287 million notional) maturing 12/20/2016
The Swaps exposure to the CDO will be reduced by a proportionate share of the assets that supported the original
ABCP and from additional funding sources negotiated as part of the ABCP restructuring (the “Margin”). The market value of the Margin allocated to the Swaps is EUR 409 million (2010: EUR 403 million). If losses attached to any of the CDO that exceeds the fair value of the Margin, then AEGON will recognize a loss on its Swaps. AEGON considers it remote that a loss will be incurred due to the attachment point on the tranches and the amount of Margin.
The Swaps also incorporate the unwind triggers that were built into the restructured long-term notes. The triggers are defined by a matrix based on credit losses and credit spreads related to the underlying CDX.IG.7. If a trigger event occurs,
AEGON will have the option to continue with the existing Swaps, settle the market value of the Swaps, or terminate the
Swaps and enter directly into the reference CDO while taking ownership of a proportionate share of the Margin.
AEGON manages credit risk exposure by individual counterparty, sector and asset class, including cash positions.
Normally, AEGON mitigates credit risk in derivative contracts by entering into collateral agreements, where practical, and in ISDA master netting agreements for each of AEGON’s legal entities to facilitate AEGON’s right to offset credit risk exposure. Main counterparties to these transactions are investment banks which are typically rated A or higher.
or its counterparty. Transactions requiring AEGON or its counterparty to post collateral are typically the result of OTC
may also mitigate credit risk in reinsurance contracts by including down-grade clauses that allow the recapture of business, retaining ownership of assets required to support liabilities ceded or by requiring the reinsurer to hold assets in trust. For the resulting net credit risk exposure, AEGON employs deterministic and stochastic credit risk modeling in order to assess the Group’s credit risk profile, associated earnings and capital implications due to various credit loss scenarios.
US and France. AAA-rated sovereign assets are generally excluded from the Credit Name Limit Policy.
AEGON Group level long-term counterparty exposure limits at the end of 2011 (unchanged compared to 2010) are as follows: Amounts in EUR million Group Limit
The ratings distribution of general account portfolios of AEGON’s major country units, excluding reinsurance assets, are presented in the table that follows, organized by rating category and split by assets that are valued at fair value and assets that are valued at amortized cost. Disclosure of ratings follows a hierarchy of S&P, Moody’s, Fitch, Internal and National Association of Insurance Commissioners (NAIC).
AT DECEMBER 31 10,277 82,202 18,826 30,445 8 9,946 794 2,562 29,905 126,181 1 Includes investments of Holding and other activities.
Credit risk concentrations – debt securities and money market investments 2011 Americas
Residential mortgage backed securities (RMBSs) 5,080 1,300 527 253 7,160 1,127
Commercial mortgage backed securities (CMBSs) 6,098 2 384 3 6,487 4
Credit risk concentrations – debt securities and money market investments 2010 Americas
Commercial mortgage backed securities (CMBSs) 6,725 3 371 2 7,101 6
(2010: EUR 14,668 million). The LTV amounts to about 94% (2010: 93%). A significant part of the portfolio (54%; 2010: 52%) is government guaranteed. Of the portfolio, 1.0% (2010: 0.8%) is in delinquency (defined as 60 days in arrears).
Included in the debt securities and money market investments are EUR 168 million of assets that have been classified as held-to-maturity and are therefore carried at amortized cost (2010: EUR 139 million), of which EUR 31 million government bonds (2010: EUR 29 million) and EUR 137 million corporate exposure (2010: EUR 110 million).
Of the EUR 1,166 million (2010: EUR 1,382 million) indirect exposure on the monoline insurers, 34% relates to MBIA, 24%
to AMBAC, 10% to FGIC and 26% to FSA (2009: 35% related to MBIA, 24% to AMBAC, 10% to FGIC and 15% to FSA).
In addition to its indirect exposure via wrapped bonds, AEGON USA also has direct exposure of EUR 8 million
The amortized cost and fair value of debt securities, money market investments and other, included in AEGON’s available-for-sale (AFS) and held to maturity (HTM) portfolios, are as follows as of December 31: In EUR million
AEGON’s available-for-sale and held to maturity portfolios in an unrealized loss position held by AEGON at December 31 is presented in the following table: In EUR million
Asset Backed Securities (ABSs) - CDOs backed by ABS, Corp. Bonds, Bank loans 1,277 (197) 1,164 (206)
As of December 31, 2011, there are EUR 8,372 million of gross unrealized gains and EUR 3,138 million of gross unrealized losses in the AFS debt securities portfolio of AEGON Americas, AEGON The Netherlands and AEGON UK. No one issuer represents more than 3% of the total unrealized loss position. The largest single issuer unrealized loss is EUR 57 million and relates to Dexia Bank Belgium, a bank owned by the Belgian government.
Financial and credit market conditions were mixed in the first half of 2011 and deteriorated in the second half of 2011 despite positive economic growth in most of the world. Developed-world growth remains below potential, frustrating attempts to generate a strong recovery after the financial crisis. The credit crisis that began as a result of the subprime mortgage crisis continues to evolve into concerns about governmental borrowing and debt levels across much of the world. European sovereign debt has been under significant pressure as concerns for default risk in the peripheral
European countries have begun to expand to the larger nations. High governmental debt levels are also a concern in the US, including those of state and local governments, evidenced by the downgrade of the US from AAA to AA+ by
AEGON regularly monitors industry sectors and individual debt securities for indicators of impairment. These indicators may include one or more of the following: 1) deteriorating market to book ratio, 2) increasing industry risk factors, 3)
deteriorating financial condition of the issuer, 4) covenant violations, 5) high probability of bankruptcy of the issuer or 6) nationally recognized credit rating agency downgrades. Additionally, for asset-backed securities, cash flow trends and underlying levels of collateral are monitored. A security is impaired if there is objective evidence that a loss event has occurred after the initial recognition of the asset that has a negative impact on the estimated future cash flows.
A specific security is considered to be impaired when it is determined that not all amounts due (both principal and interest) will be collected as scheduled. Factors considered include industry risk factors, financial condition, liquidity position and near-term prospects of the issuer, nationally recognized credit rating declines and a breach of contract.
(2010: EUR 190 million), which are classified as fair value through profit or loss.
* Ratings based on a hierarchy of S&P, Moody’s, Fitch, Internal, NAIC.
200 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 4
Loss severity assumptions were determined by obtaining historical rates from broader market data and by adjusting those rates for vintage, specific pool performance, collateral type, mortgage insurance and estimated loan modifications. Prepayments were estimated by examining historical averages of prepayment activity on the underlying collateral. Quantitative ranges of significant assumptions within AEGON’s modeling process for Prime Jumbo, Alt-A
has experienced since 2007. Even with the stabilization over the past two years, fundamentals in RMBS continue to be weak, which impacts the magnitude of the unrealized loss. Delinquencies and severities in property liquidations remain at an elevated level, while prepayments remain at historically low levels. Due to the weak fundamental situation, reduced liquidity, and the requirement for higher yields due to market uncertainty, credit spreads remain elevated across the asset class.
The fair values AEGON USA’s RMBS instruments were determined as follows: Level II Level III Total 2011 Level II Level III
This AFS portfolio totals EUR 580 million at December 31, 2011, with net unrealized losses on this portfolio of EUR 2 million.
Alt-A loans are made to borrowers whose qualifying mortgage characteristics do not meet the standard underwriting criteria established by the GSEs. The typical Alt-A borrower has a credit score high enough to obtain an “A” standing, which is especially important since the score must compensate for the lack of other necessary documentation related to borrower income and/or assets.
mortgage securities of AEGON USA. Additionally, AEGON USA has investments in RMBS Alt-A mortgages of EUR 31 million
(2010: EUR 43 million), which are classified as fair value through profit or loss.
AEGON USA’s portfolio of securitized exposure to negative amortization mortgages is primarily invested in super-senior securities. The tables below summarize the credit quality * and the vintage year of the available-for-sale negative amortization (Option ARMs) securities OF AEGON USA. Additionally, AEGON USA has investments in RMBS Negative
Total Amortized cost Fair value * Ratings based on a hierarchy of S&P, Moody’s, Fitch, Internal, NAIC.
As part of AEGON’s AFS RMBS portfolio, AEGON holds EUR 1,127 million of securitized RMBS - Subprime mortgages, with net unrealized losses of EUR 274 million at December 31, 2011, fully owned by AEGON USA. RMBS - Subprime mortgages are secured by pools of residential mortgage loans primarily those which are categorized as subprime.
Total subprime mortgages - floating rate 20 4 – 27 202 253 58 139
204 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 4
Vintage year AAA AA A BBB < BBB Amortized cost Of which insured Fair value
There is one individual issuer rated below investment grade in the RMBS sector which has an unrealized loss position greater than EUR 25 million.
Soundview Hm Eq Ln 2006-OPT1 RMBS – Subprime Mortgage 8 (38) CC > 24 months * Ratings based on a hierarchy of S&P, Moody’s, Fitch, Internal, NAIC.
AEGON Americas, AEGON The Netherlands and AEGON UK hold EUR 6,398 million of AFS commercial mortgage-backed securities (CMBS), of which EUR 5,987 million is held by AEGON USA, EUR 385 million by AEGON UK and EUR 2 million by AEGON The Netherlands. CMBS are securitizations of underlying pools of mortgages on commercial real estate. The underlying mortgages have varying risk characteristics and are pooled together and sold in different rated tranches.
The Company’s CMBS includes conduit, large loan, single borrower, commercial real estate collateral debt obligations
The total gross unrealized loss on AFS CMBS of AEGON Americas, AEGON The Netherlands and AEGON UK amounts to
EUR 138 million, of which EUR 71 million (2010: EUR 59 million loss) relates to positions of AEGON USA. The commercial real estate market previously experienced a deterioration in property level fundamentals over 2008-2010, which led to an increase in CMBS loan-level delinquencies. The introduction of 30% credit enhanced tranches within the 2005-2008 vintage deals provide some offset to these negative fundamentals. During 2011, CMBS market experienced several positive factors as commercial real estate fundamentals have begun to display some signs of stabilization. The pace of credit deterioration appears to be moderating as property transactions have increased and there is greater availability of financing for commercial real estate. Liquidity has improved within the CMBS market, but a broad re-pricing of risk has kept credit spreads on legacy subordinate CMBS tranches at wide levels.
206 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 4
There are no individual issues rated below investment grade in this sector which have unrealized loss positions greater than EUR 25 million.
Securities are impaired to fair value when AEGON expects that it will not receive all contractual cash flows on its tranches. As the remaining unrealized losses in the CMBS portfolio relate to holdings where AEGON expects to receive full principal and interest, AEGON does not consider the underlying investments to be impaired as of December 31, 2011.
The fair values of AEGON USA’s CMBS instruments were determined as follows: Level II Level III Total 2011 Level II Level III
AEGON Americas, AEGON The Netherlands and AEGON UK hold EUR 5,471 million of ABS instruments of which
EUR 3,727 million is held by AEGON USA. The total gross unrealized loss on ABSs is EUR 434 million, of which
EUR 252 million relates to positions of AEGON USA, and the total net unrealized losses on ABSs is EUR 195 million, of which EUR 169 million relates to positions of AEGON USA. These are securitizations of underlying pools of credit card receivables, auto financing loans, small business loans, bank loans, and other receivables. The underlying assets of the asset backed securities have been pooled together and sold in tranches with varying credit ratings. The breakdown of quality * of the available-for-sale ABS portfolio of AEGON USA is as follows: AAA AA A BBB < BBB
The fair values of AEGON USA’s ABS instruments were determined as follows: Level II Level III Total 2011 Level II Level III
The net unrealized loss on the ABS – small business loans is EUR 74 million. The unrealized loss in the ABS – small business loan portfolio is a function of increased credit spreads for existing positions and a lengthening of expected cash flows as refinancing activities within this sector have come to a halt. Additionally, delinquencies and losses in
AEGON’s ABS – small business loan portfolio is concentrated in senior note classes. Thus in addition to credit enhancement provided by the excess spread, reserve account, and over-collateralization, AEGON’s positions are also supported by subordinated note classes. AEGON’s ABS – small business loan portfolio is also primarily secured by commercial real estate, with the original loan to value (LTV) of the underlying loans typically ranging between 60-70%.
portfolio positions are not considered impaired as of December 31, 2011.
ABS - other includes debt issued by securitization trusts collateralized by various other assets including student loans, timeshare loans, franchise loans and other asset categories. The unrealized losses are a function of decreased liquidity and increased credit spreads in the market. Where ratings have declined to below investment grade, the individual debt securities have been modeled. Assumed defaults on delinquent loans are dependent on the specific security’s collateral attributes and historical experience. Results are then closely analyzed by the asset specialist to determine whether or not a principal or interest loss is expected to occur. AEGON impaired its particular tranche to fair value where it would not be able to receive all contractual cash flows. As the unrealized losses in the ABS – other portfolio relate to holdings where AEGON expects to receive full principal and interest, AEGON does not consider the underlying investments to be impaired as December 31, 2011.
Spirit Master Fndg LLC 1 Franchise loan 1st Lien Commercial RE 112 (41) BB+ > 24 months *
Ratings based on a hierarchy of S&P, Moody’s, Fitch, Internal, NAIC. 1 AMBAC Insured.
(2010: EUR 11,244 million) of bonds issued by banks. The net unrealized loss on these bonds amount to EUR 680 million
European banks hold a significant amount of Sovereign debt on their balance sheets. Subordinated securities, specifically, have become a target for liability management exercises by some European banks as they attempt to raise core Tier 1 ratios to 9% by June, 2012 as required by the European Banking Authority. Deeply subordinated securities became more volatile following successful attempts by the European Commission to impose “burden sharing” on the subordinated securities of those banks receiving significant state-aid. Furthermore, credit spreads reflect the risk that the US and Europe could impose new “burden sharing” on both senior and subordinated bondholders in order to quickly stabilize or wind-up troubled banks. While these measures have made existing subordinated securities more volatile in the near-term, new, more stringent global legislation on bank capital and liquidity requirements is intended to reduce overall risk in the sector going forward. Furthermore, central banks appear committed to providing liquidity to the market and, as a result, asset write-downs and credit losses have diminished substantially in all but the most troubled countries.
Banks are broadly referred to as capital securities which can be categorized as Tier 1 or Upper Tier 2. Capital securities categorized as ”Tier 1” are typically perpetual with a non-cumulative coupon that can be deferred under certain
The following table highlights AEGON’s credit risk to capital securities within the banking sector: Americas The
Royal Bank of Scotland Group PLC 59 (34) BB+/BB > 24 months * Ratings based on a hierarchy of S&P, Moody’s, Fitch, Internal, NAIC.
December 31, 2011, of which EUR 49 million relates to holdings rated below investment grade. The below investment grade securities are Upper Tier 2 and had unrealized losses of EUR 57 million as of December 31, 2011. Dexia SA was impacted by the global economic crisis in 2008 and is one of the most exposed European banking groups to problem peripheral countries in Europe. Its reliance on short-term wholesale funding caused a near-collapse as funding markets froze in 2008 and 2009. Capital injections from Belgium, France and Luxembourg along with guarantees on Dexia’s funding provided sufficient access to funding markets until the Sovereign debt crisis in 2011 put too much strain on
Dexia’s large funding needs. In November 2011, a new restructuring plan was put in place for Dexia SA and 100% of
Dexia Bank Belgium was sold to the Belgian state. AEGON’s bonds now form part of the capital structure of that entity.
AEGON’s available-for-sale debt securities for Bank of America Corp (BAC) have a fair value of EUR 321 million as
December 31, 2011, of which EUR 113 million relates to holdings rated below investment grade. As of December 31, 2011
unrealized losses were EUR 67 million, of which EUR 39 million relates to holdings below investment grade. BAC is one of the largest banking organizations in the US. Given the difficult credit market, concerns about capital adequacy and heightened risk for possible coupon deferral or exchange offers, BAC’s deeply subordinated capital securities were rated as low as B at one time; however, they are now mostly rated BB+ or higher, with some ratings returning to investment grade. While challenges remain for BAC, particularly in the mortgage business, the process of stabilization in the credit profile appears to be ongoing, including an emphasis on actions to build capital, reduce non-core assets and restore confidence. Payments continue to be made on AEGON’s holdings in accordance with the original bond agreements. AEGON evaluated the near-term prospects of the issuer and it is believed that the contractual terms of these investments will be met and these investments are not impaired as of December 31, 2011.
AEGON’s available-for-sale debt securities for Lloyds Banking Group PLC have a fair value of EUR 160 million as of December 31, 2011, of which EUR 52 million relates to holdings rated below investment grade. These Tier 1 and
Tier 2 securities are rated BB to CC, depending on the individual features of the debt securities. As of December 31, 2011 unrealized losses were EUR 37 million, of which EUR 34 million related to holdings rated below investment grade.
RBS is one of the world’s largest universal banks with historically prominent positions in both global wholesale banking and in UK financial services. The bank was impacted by the global financial market crisis in 2008 and, ultimately, the UK government was forced to take a majority equity stake in the bank to stabilize it. In addition, a large portion of RBS’ riskiest assets have been placed under the UK’s Asset Protection Plan (APS), limiting the potential loss to RBS.
European Commission outlining the steps it planned to take to restore profitability and long-term viability. As one of the conditions of approving the restructuring plan, and to ensure “burden sharing” among subordinated bondholders, the European Commission required RBS to defer dividends and coupons on certain of its existing hybrid securities
(including certain Tier 1, Upper Tier 2, preference and B shares) and to refrain from exercising any call options for a two year period from April 30, 2010. As such, in 2010, AEGON impaired its RBS securities with optional deferral language and non-cumulative coupons. The remaining RBS securities are deemed “must pay” securities or have optional deferral language with cumulative coupons. RBS continues to make progress on its restructuring plan, showing improvement in the profitability levels of its core businesses, lowering balance sheet leverage, improving capital ratios, reducing reliance on wholesale funding, and significantly increasing liquidity reserves. AEGON evaluated the near-term prospects of the issuer and it is believed that the contractual terms of these investments will be met and these remaining investments are not impaired as of December 31, 2011.
The unrealized loss in the brokerage, insurance and other finance sub-sector primarily reflect general spread widening on financial services companies (due to broad housing, mortgage market, equity market and economic issues plus increased liquidity and capital markets concerns).
There are no individual issuers rated below investment grade in the capital goods sub-sector which have unrealized loss positions greater than EUR 25 million.
The more significant of these industries from an unrealized loss perspective are retailers and automotive. Fundamentals in the retail industry have been challenged by higher raw material costs, consumer confidence, unemployment and weak discretionary spending. Price increases, tight cost controls, and increased private label offerings have been rolled out to help mitigate margin pressure, but the lag and renewed focus on promotional activity and discounts (to drive traffic and market share) has had limited success. The underlying fundamentals driving sales and earnings performance of the automotive industry continue to be pressured as a result of a secular shift away from more profitable SUVs and pickups towards more fuel-efficient cars and crossovers. Though, lower fixed cost structures have improved the profitability of smaller vehicles. Global economic weakness and high unemployment have restrained auto sales.
However, positive trends have begun to emerge in consumer confidence and credit availability standards. AEGON
The Communications sub-sector can be further divided into the media cable, media non-cable, wireless and wirelines sub-sectors. Overall, the media cable, wireless and wirelines industries continue to be stable. In the wirelines industry, the economic uncertainty in Europe weighed on the investment grade telecom providers. Within the media non-cable industry, the strength from 2010 continued, albeit at a slightly lower rate. AEGON evaluated the near-term prospects of the issuers and it is believed that the contractual terms of these investments will be met and these investments are not impaired as of December 31, 2011.
There are no individual issuers rated below investment grade in the communications sub-sector which have unrealized loss positions greater than EUR 25 million.
The Utility sector is further subdivided into electrical, natural gas and other sub-sectors.
There are no individual issuers rated below investment grade in this sub-sector which have unrealized loss positions greater than EUR 25 million.
AEGON Americas, AEGON The Netherlands and AEGON UK’s government issued available-for-sale debt securities include emerging market Sovereign bonds, Dutch government bonds and US Treasury, agency and state bonds.
There are no individual issuers rated below investment grade in this sector which have an unrealized loss position greater than EUR 25 million.
Greece and Spain) are increasingly relevant and have therefore been presented below. As part of AEGON’s de-risking activities, peripheral sovereign exposure has been reduced over the year. The highest concentration remain in Spain, which is a reflection of AEGON’s operations in that country. In order to present the most conservative view the figures included in the table below are shown on a gross basis and do not reflect the effect of any hedging activities.
AEGON did not have credit protection against exposure in the countries included in the table.
214 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 4
216 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 4
In 2011, EUR 27 million, EUR 54 million and EUR 55 million losses were realized on GSR Mtge Ln Tr 2007-OA1 2A3A,
American Home Mtge 2007-5 A1 and Countrywide Alt Ln 2006-OA10, respectively. The debts represent beneficial interests in portfolios of pooled US Negative Amortization mortgage loans. The pools contain a large concentration of mortgages in states experiencing a significant decline in home values. While the deals continued paying full principal and interest payments during 2011, deterioration in the housing markets triggered adverse changes in cash flows on
AEGON’s tranches. The securities were impaired to fair value for the year ended 2011 due to adverse changes in projected cash flows.
In 2011, a EUR 29 million loss was realized on Bank of Ireland. The Bank of Ireland holding was impaired as a result of the announcement of a coercive tender/equity conversion offer during the second quarter of 2011. After the announcement of the tender/equity conversion offer, we sold AEGON’s investment at slightly above the tender price and recognized the loss.
The tables that follow provide information on past due and individually impaired financial assets for the whole AEGON
Group. An asset is past due when a counterparty has failed to make a payment when contractually due. Assets are impaired when an impairment loss has been charged to the income statement relating to this asset. After the impairment loss is reversed in subsequent periods, the asset is no longer considered to be impaired. When the terms
and conditions of financial assets have been renegotiated, the terms and conditions of the new agreement apply in determining whether the financial assets are past due.
generally does not use the non-cash collateral for its own operations.
EUR 10 million of impairment charges for year ended December 31, 2011 (2010: EUR 7 million) for AEGON Americas,
218 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 4
As of December 31, 2011, there are EUR 183 million of gross unrealized gains and EUR 23 million of gross unrealized losses in the equity portfolio of AEGON (2010: EUR 340 million of gross unrealized gains and EUR 11 million of gross unrealized losses). There are no securities held by AEGON with an unrealized loss above EUR 5 million. The table below represents the unrealized gains and losses on share positions held by AEGON Americas, AEGON The Netherlands and AEGON UK.
The Netherlands and AEGON UK at December 31, 2011 and December 31, 2010 is presented in the table below.
The table below provides the length of time the shares held by AEGON Americas, AEGON The Netherlands and AEGON
Fluctuations in the equity, real estate and capital markets have affected AEGON’s profitability, capital position and sales of equity related products in the past and may continue to do so. Exposure to equity, real estate and capital markets exists in both assets and liabilities. Asset exposure exists through direct equity investment, where AEGON bears all or most of the volatility in returns and investment performance risk. Equity market exposure is also present in insurance
The general account equity, real estate and other non-fixed-income portfolio of AEGON is as follows: Equity, real estate and non-fixed income exposure Americas
Other alternative investments 1,499 – – – – 1,499 1 Common shares in Holdings and Other activities includes the elimination of treasury shares in the general account for an amount of EUR 2 million.
220 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 4
Liquidity risk is inherent in much of AEGON’s business. Each asset purchased and liability sold has its own liquidity characteristics. Some liabilities are surrenderable while some assets, such as privately placed loans, mortgage loans, real estate and limited partnership interests, have low liquidity. If AEGON requires significant amounts of cash on short notice in excess of normal cash requirements and existing credit facilities, it may have difficulty selling these investments at attractive prices or in a timely manner.
AEGON holds EUR 32,773 million of general account investments in cash, money market products and sovereign bonds that are readily saleable or redeemable on demand (2010: EUR 29,922 million). The Group expects to meet its obligations, even in a stressed liquidity event, from operating cash flows and the proceeds of maturing assets as well as these highly liquid assets. Further, the Group has access to back up credit facilities, as described in note 39, amounting to EUR 3,623 million which were unused at the end of the reporting period (2010: EUR 2,563 million).
222 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 4
AEGON’s liquidity management is based on expected claims and benefit payments rather than on the contractual maturities. The projected cash benefit payments in the table below are based on management’s best estimates of the expected gross benefits and expenses, partially offset by the expected gross premiums, fees and charges relating to the existing business in force. Estimated cash benefit payments are based on mortality, morbidity and lapse assumptions comparable with AEGON’s historical experience, modified for recently observed trends. Actual payment obligations may differ if experience varies from these assumptions. The cash benefit payments are presented on an undiscounted basis and are before deduction of tax and before reinsurance.
Insurance contracts for account of policyholders – 5,989 21,909 19,499 65,464 112,861
Investment contracts for account of policyholders 95 6,023 20,712 19,853 68,182 114,865
Investment contracts for account of policyholders 90 5,778 20,447 19,837 83,020 129,172 1 The liability amount in the consolidated financial statements reflects the discounting for interest as well as adjustments for the timing of other factors as described above. As a result, the sum of the cash benefit payments shown for all years in the table exceeds the corresponding liability amounts included in notes 35, 36, 37 and 38.
AEGON is at risk if policy lapses increase as sometimes AEGON is unable to fully recover up front expenses in selling a product despite the presence of commission recoveries or surrender charges and fees. For mortality and morbidity risk, AEGON sells certain types of policies that are at risk if mortality or morbidity increases, such as term life insurance and accident insurance, and sells certain types of policies that are at risk if mortality decreases (longevity risk) such as annuity products. AEGON is also at risk if expenses are higher than assumed by management.
AEGON monitors and manages its underwriting risk by underwriting risk type. Attribution analysis is performed on earnings and reserve movements in order to understand the source of any material variation in actual results from what was expected. AEGON’s units also perform experience studies for underwriting risk assumptions, comparing
224 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 4 in products, AEGON uses these analyses as the basis for modifying these charges, with a view to maintain a balance between policyholder and shareholder interests. AEGON also has the ability to reduce expense levels over time, thus mitigating unfavorable expense variation.
Realized gains / (losses) on investments 124 269 51 2 – – 446 – 446
226 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 5
Realized gains / (losses) on investments 380 155 14 13 96 – 658 (2) 656
Run-off businesses (26) – – – – – (26) – (26)
Realized gains / (losses) on investments 63 351 79 5 20 – 518 (1) 517
The Group uses underlying earnings before tax in its segment reporting as an important indicator of its financial performance. The reconciliation of this measure to the income before tax is shown below. AEGON believes that underlying earnings before tax, together with the other information included in this report, provides a meaningful measure for the investing public to evaluate AEGON’s business relative to the businesses of its peers.
Realized gains and (losses) on financial investments 10 803 564 475
Realized gains and (losses) on repurchased debt 10 4 18 11
Impairment charges / (reversals) on financial assets, excluding receivables 273 15 63 55 – 406
Amortization of deferred expenses, VOBA and future servicing rights 1,118 125 232 94 – 1,569
Impairment charges / (reversals) on financial assets, excluding receivables 1,005 111 183 23 5 1,327
Impairment charges / (reversals) on non-financial assets and receivables 22 15 1 – – 38
VOBA and future servicing rights 1,805 73 401 204 – – 2,483
Investments for account of policyholders 61,729 23,223 51,166 6,415 – (4) 142,529
Insurance contracts for account of policyholders 42,792 23,413 8,594 2,851 – – 77,650
Investment contracts for account of policyholders 16,573 – 49,642 3,312 – – 69,527
Investments in real estate 775 2,009 – – – – 2,784
Off balance sheet investments third parties 91,951 – – 44,959 – – 136,910
232 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 6 - 7
Off balance sheet investments third parties 86,287 12,353 – 25,126 – – 123,766
Financial assets at fair value through profit or loss 63,928 23,286 56,642 6,278 289 (8) 150,415
234 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 8 - 10
Gains and (losses) on investments in real estate (49) 135 (179)
Realized gains and losses on financial investments relate to: 2011 2010 2009
Net fair value change on free standing derivatives 2,334 747 (1,795)
Ineffective portion of hedge transactions to which hedge accounting is applied 13 (1) (41)
Fair value changes on economic hedges for which no hedge accounting is applied (117) (119) 152
The ineffective portion of hedge transactions to which hedge accounting is applied comprises: 2011 2010 2009
Investments for account of policyholders comprise of financial assets and investments in real estate. Refer to note 23 for further information. Financial assets for account of policyholders are classified as at fair value through profit or loss. Investment income on investments for account of policyholders is included in investment income. Refer to note 7 for further information.
236 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 11 - 14 11 OTHER INCOME
Other income in 2011 mainly includes a benefit related to the settlement of legal claims of EUR 37 million.
Change in valuation of liabilities for insurance and investment contracts 3,975 13,159 12,548
The change in valuation of liabilities for insurance and investment contracts include losses of EUR 388 million
(2010 and 2009: gains of EUR 60 million) related to policyholder tax and other charges that are classified for segment reporting purposes as non underlying earnings.
Profit appropriated to policyholders 48 27 61 14 COMMISSIONS AND ExPENSES
Included in administration expenses above is depreciation amounting to EUR 77 million (2010: EUR 88 million; 2009: EUR 90 million) that relates to equipment, software and real estate held for own use. The direct operating expenses relating to investments in real estate that generated rental income was EUR 92 million (2010: EUR 83 million; 2009: EUR 72 million). Minimum lease payments recognized as expense amounted to EUR 7 million (2010: EUR 7 million; 2009: EUR 6 million). Included in employee expenses is EUR 27 million (2010: EUR 29 million; 2009: EUR 27 million)
Transamerica Reinsurance (TARe), to SCOR. A charge of EUR 263 million (2010: EUR 24 million, 2009: EUR (74) million), included in amortization of deferred expenses of EUR 823 million, is classified as non underlying earnings for segment reporting purposes and is offset against realized gains and losses and impairments on financial investments.
Senior executives of AEGON companies, as well as other AEGON employees, have been offered both share appreciation rights and share options. These share appreciation rights and share options have been granted at an exercise price equal to the market price of the shares at the date of the grant. The rights and options granted in 2004 - 2008 vest after three years and can only be exercised during the four years after the vesting date. The rights and options granted in 2003 vest after two years and can only be exercised during the five years after the vesting date. Vesting and exercisability depend on continuing employment of the individual employee to whom the rights and options have been granted. Option plans are settled in equity, whilst stock appreciation rights are settled in cash or provide the employee with the choice of settlement.
The performance indicators apply over a vesting period of three years (2010 – 2012) and consist of financial and nonfinancial targets set by the Supervisory Board or the local remuneration committees. After the vesting period, the shares are transferred to the individual employees. Members of the Executive Board and the Management Board are not entitled to execute any transactions regarding the shares for a period of two years following vesting.
AEGON shares if certain performance indicators are met and depending on continued employment of the individual employee to whom the rights have been granted. The shares were granted at the beginning of the year at the average share price on the NYSE Euronext stock exchange in Amsterdam during the period between December 15 preceding a plan year and January 15 of a plan year. The performance indicators apply over a performance period of one year and consist of financial and non-financial targets set by the Supervisory Board or the local remuneration committees.
Following the performance year a vesting period of two years applies after which the shares are transferred to the individual employees. Ex post assessment is not applicable to this group of employees.
Members of the Executive Board and the Management Board as well as other selected Senior Managers have been defined as “Identified Staff” in accordance with new rules, guidelines and interpretations. Of these, the Capital
Requirements Directive III (CRD III) remuneration principles, the 2010 Guidelines on Remuneration Policies and
Practices by the Committee of European Banking Supervisors (CEBS) and the 2011 Decree on Sound Remuneration
Policy by De Nederlandsche Bank (Regeling beheerst beloningsbeleid WFt 2011 – Rbb) are prominent examples.
The rules have been adopted in AEGON’s Global Remuneration Framework for Identified Staff. After the performance period, and based on the framework, variable compensation is partly made available and partly deferred. Variable compensation is paid in cash and in AEGON NV shares. The shares were conditionally granted at the beginning of the year at the average share price on the NYSE Euronext stock exchange in Amsterdam during the period between
Members of the Executive Board and the members of the Management Board who are based in the Netherlands are not entitled to execute any transactions regarding the shares for a period of three years following vesting (with the exception of shares sold to meet income tax obligations).
In compliance with regulations under Dutch law, no transactions regarding the shares can be exercised in blackout periods.
In 2009, 2010 and 2011 no share appreciation rights were granted.
The liability related to share appreciation rights is valued at fair value at each balance sheet date. Refer to note 44 for details. There were no costs related to the share appreciation rights in 2011 (2010: EUR 4 million; 2009: EUR (5) million).
The costs related to the share options amount to EUR (1) million (2010: EUR (7) million and 2009: EUR 10 million)
At December 31, 2011, the total compensation cost related to non-vested awards not yet recognized is estimated at
Impairment charges on non-financial assets and receivables 2 77 176 38 1 Impairment charges/(reversals) on financial assets, excluding receivables, are excluded from underlying earnings before tax for segment reporting (refer to note 5).
2 Of impairment charges on non-financial assets and receivables EUR 75 million is excluded from underlying earnings before tax for segment reporting (refer to note 5) (2010 EUR 169 million and 2009: nil)
Impairment charges on financial assets, excluding receivables, from: 2011 2010 2009
The interest charges accrued on financial assets and liabilities that are not carried at fair value through profit or loss amounted to EUR 284 million (2010: EUR 303 million; 2009: EUR 288 million).
In 2011, other charges include EUR 37 million related to increased reserves in connection with the company’s use of the Social Security Administration’s death master file in the United States. Additionally, other charges include a net bank tax charge by the Hungarian Government of EUR 17 million (2010: EUR 19 million), as well as a loss related to the sale of the Guardian life and pension business in the United Kingdom of EUR 7 million.
In 2010, other charges included a one-time provision of EUR 95 million for the settlement of a dispute related to a Bank-Owned Life Insurance (BOLI) policy in the United States.
242 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 18 - 19 18 INCOME TAx
Income tax calculated using weighted average applicable statutory rates 279 566 (200)
Changes in deferred tax assets as a result of recognition/write off of previously not recognized/recognized tax losses, tax credits and deductible temporary differences (31) (218) (47)
Tax effect of (profit) / losses from associates – 1 –
The weighted average applicable tax rate is 30.5% (2010: 29.6%; 2009: 43.1%). The marginal increase of the weighted average applicable tax rate from 2011 compared to 2010 is mainly caused by the increased share in the overall profit of the higher taxed countries. The decrease of the weighted average applicable tax rate compared to 2009 is mainly caused by a positive result by the higher taxed countries compared to a negative result in 2009 in combination with an increased share in the overall profit of the lower taxed countries.
In Canada, the federal corporate income tax rate decreased from 18% in 2010 to 16.5% in 2011. The rate will further decrease to 15% in 2012. In the United Kingdom, the corporate income tax rate decreased from 28% in 2010 to 26% as from April 1, 2011. The rate will further decrease to 25% as from April 1, 2012. In Japan, the corporate income tax rate will decrease from 36.21% in 2011 to 33.33% in 2012 and will further decrease to 30.78% in 2015.
Different tax rates on overseas earnings in the reconciliation between standard and effective income tax consists of results on intercompany reinsurance transactions between Ireland and the United States. Losses in the United States are deductible at 35% and gains in Ireland are taxed at 12.5%.
Diluted earnings per share is calculated by adjusting the average number of shares outstanding for share options.
The difference between the number of dilutive options issued and the number of common shares that would have been issued at the average market price has been treated as an issue of common shares for no consideration.
The number of share options that has not been included in the weighted average number of common shares used in the calculation of diluted earnings per share amounted to 18,778,361 (2010: 21,844,693; 2009: 27,090,867). In 2011, 2010 and 2009 the average share price did not exceed the exercise price. At December 31, 2011, the exercise prices of these share options range from EUR 8.93 to EUR 14.98.
244 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 20 - 21
The dividend per common share paid in 2011 (final 2010 and interim 2011) and 2010 (final 2009 and interim 2010) was nil in both years. As part of the European Commission’s approval granted in August 2010 regarding the state support received in December 2008, AEGON committed itself not to pay any dividend to the common shareholder until the convertible core capital securities had been fully repurchased. The repurchase of the convertible core capital securities was completed in 2011, refer to note 31 for additional information on this repurchase.
246 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 20 - 21
Amortization and depreciation through the income statement is included in “Commissions and expenses”. None of the intangible assets have titles that are restricted or have been pledged as security for liabilities.
Accumulated amortization includes disposal of a business for the sale of the Guardian life and pensions business in the United Kingdom (EUR 125 million), offset by the impact of the divested life reinsurance business in the Americas
Impairments of goodwill and future servicing rights in 2010 related to the wind-down of Bank Owned Life Insurance /
The addition of goodwill is attributable to the extension of AEGON's life and health insurance and pension partnership with Unnim, effective July 1, 2011, which includes the acquisition of Caixa Sabadell Vida. Refer to note 51 for further information on business combinations.
Other movements primarily relate to the write-down of US intangibles following the dissolution of Transamerica
The goodwill balance has been allocated across the cash-generating units which are expected to benefit from the synergies inherent in the goodwill. Goodwill is tested for impairment annually when there are specific indicators of a potential impairment. The recoverable amount is the higher of the value in use and fair value less costs to sell for a cash-generating unit. The operating assumptions used in all the calculations are best estimate assumptions and based on historical data where available.
Goodwill in AEGON USA is allocated to its divisions. Value in use calculations of AEGON USA have been actuarially determined based on business plans covering a period of typically five years and pre-tax risk adjusted discount rates.
The movement in VOBA over 2011 can be summarized and compared to 2010 as follows: Disposal of a business (857) –
248 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 22 - 22.1 22 INVESTMENTS
Financial assets at fair value through profit or loss (FVTPL) 1 5,531 5,312
TOTAL INVESTMENTS FOR GENERAL ACCOUNT 144,079 143,188 1 Refer to note 48 for a summary of all financial assets and financial liabilities at fair value through profit or loss.
have been derecognized with a total value of EUR 1.8 billion (2010: EUR 3.1 billion relating to SAECURE 3, SAECURE 4,
In the first quarter of 2011, in relation to the publicly placed securitization SAECURE 3, the special purpose entity decided to use its right to redeem all notes to the note holders and sold EUR 468 million of mortgage loans back to
In the third quarter of 2011, in relation to the publicly placed securitization SAECURE 4, the special purpose entity decided to use its right to redeem all notes to the note holders and sold EUR 329 million of mortgage loans back to
These transactions did not generate a profit or loss for AEGON.
With respect to the transactions SAECURE 5 and SAECURE 6 NHG, the related mortgage loans have been sold and derecognized and the special purpose entities are not consolidated in the financial statements of AEGON. The structure of these transactions is as follows: the economic ownership of a certain amount of aggregate mortgage receivables was conveyed to a special purpose entity. This special purpose entity funded the purchase of mortgages from AEGON
Levensverzekering N.V. with the issuance of mortgage-backed securities. The transfer of ownership title will take place only if the borrowers are duly notified by the special purpose entity upon the occurrence of certain pre-defined
AEGON owns EUR 143 million (2010: EUR 178 million) of shares in the Federal Home Loan Bank that are measured at par, which equals the amortized cost value. The bank has implicit financial support from the United States government.
250 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 22.2 - 23.1 22.2 INVESTMENTS IN REAL ESTATE
In 2011, 85% of the value of AEGON’s properties, both for general account and for account of policyholders, were appraised (2010: 88%), of which 94% was performed by independent external appraisers (2010: 91%).
AEGON The Netherlands has entered into long-term residential property leases that can be terminated subject to a short-term notice. Under Dutch law, the maximum annual rent increase on residential property rented in the affordable housing segment is specified by the Dutch national government and equals the annual inflation rate plus a small margin.
Transfers from other headings include properties that were foreclosed during the year. Mortgage loans balances have been transferred to the investments in real estate heading.
Refer to note 49 for a summary of contractual obligations to purchase investment property or for repairs, maintenance or enhancements.
252 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 24 24 DERIVATIVES
Of these derivatives EUR 1,033 million net asset is current (2010: EUR 141 million net liability).
Embedded derivatives that are not closely related to the host contracts have been bifurcated and recorded at fair value in the statement of financial position. These bifurcated embedded derivatives are embedded in various institutional products, modified coinsurance and unit-linked insurance contracts in the form of guarantees for minimum benefits.
Certain derivatives are used to add risk by selling protection in the form of single name credit default swaps and tranches of synthetic collateralized debt and commodity obligations. Another strategy used is to synthetically replicate corporate credit exposures with credit derivatives. This involves the purchase of high quality low risk assets and the sale of credit derivatives. The program is designed to purchase asset positions that are already subject to review by management, but may not be available under the same terms and conditions in the cash bond market. AEGON holds financial derivatives for trading purposes.
AEGON has entered primarily into interest rate swap agreements that effectively convert certain variable-rate assets and liabilities to a fixed-rate basis in order to match the cash flows of the assets and liabilities within AEGON’s portfolio more closely. These agreements involve the payment or receipt of variable-rate interest amounts in exchange for fixedrate interest amounts over the life of the agreement without the exchange of the underlying principal amounts. AEGON
is hedging its exposure to the variability of future cash flows from the interest rate movements for terms up to 30 years for hedges converting existing floating-rate assets and liabilities to fixed-rate assets.
AEGON uses forward starting interest rate swap agreements to hedge the variability in future cash flows associated with the forecasted purchase of fixed-income assets. These agreements reduce the impact of future interest rate changes on the forecasted transaction. Fair value adjustments for these interest rate swaps are deferred and recorded in equity until the occurrence of the forecasted transaction at which time the interest rate swaps will be terminated.
The accumulated gain or loss in equity will be amortized into investment income as the acquired asset affects income.
For the same year, none of AEGON’s cash flow hedges were discontinued, as it was probable that the original forecasted transactions would occur by the end of the originally specified time period documented at the inception of the hedging relationship.
In addition, AEGON also makes use of cross currency swaps to convert variable or fixed foreign currency cash flows into fixed cash flows in local currencies. The cash flows from these hedging instruments are expected to occur over the next 15 years. These agreements involve the exchange of the underlying principal amounts.
For the year ended December 31, 2011, AEGON recognized a gain of EUR 1 million of hedge ineffectiveness on cash flow hedges. In 2010 and 2009, gains of EUR 6 million and losses of EUR 10 million respectively of hedge ineffectiveness were recorded in the income statement. In 2011, EUR (18) million was released from equity into investment income
(2010: EUR (8) million, 2009: EUR (117) million). The amount of deferred gains or losses to be reclassified from equity into net income during the next 12 months is expected to be EUR 11 million.
AEGON funds its investments in insurance subsidiaries with a mixture of debt and equity. AEGON aims to denominate debt funding in the same currency as the functional currency of the investment. Investments outside the eurozone, the United States, the United Kingdom and Canada are funded in euros. When the debt funding of investments is not in the functional currency of the investment, AEGON uses derivatives to swap the currency exposure of the debt instrument to the appropriate functional currency. This policy will ensure that total capital will reflect currency movements without distorting debt to shareholders’ equity ratios. AEGON utilizes various financial instruments as designated hedging instruments of its foreign investments. These instruments include long-term and short-term borrowings, short-term debts to credit institutions, cross currency swap contracts and forward foreign exchange contracts.
AEGON is of the opinion that, in 2010, a change of control occurred in Caja de Ahorros de Mediterráneo (CAM), AEGON’s partner in Caja Mediterráneo Vida (MedVida). Subsequently, AEGON decided to exercise its put option pursuant to the shareholder’s agreement between CAM and AEGON, to exit the partnership. Currently, CAM and AEGON are in an arbitration process to determine the occurrence of a change in control and the corresponding date, which determines the exit price. At December 31, 2011, MedVida is recorded for an amount of EUR 301 million in the statement of financial
256 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 27
Gross premium and deposits – existing and new business 2,279 63 2,342
On August 9, 2011, AEGON completed the divestment of its life reinsurance business, Transamerica Reinsurance (TARe), to SCOR. The divestment of TARe consists of a series of reinsurance agreements between various statutory insurance entities and SCOR for the US domestic business.
The transaction has been accounted for primarily as a reinsurance transaction between AEGON and SCOR. Certain fixed assets and certain investment assets have been transferred with any related gain (loss) being recognized. As a result, the divestment did not have significant impact on shareholders’ equity. Earnings on the business retained as well as amortization of the deferred cost of reinsurance asset have been reflected in the run-off businesses line in AEGON’s segment reporting. A deferred cost of reinsurance was established and has a 2011 ending balance of EUR 502 million.
(USD 40 million) before tax per annum initially. These costs are expected to trend down as the contracts mature.
Company and in the fourth quarter EUR 1.8 billion was ceded to Liberty Life Insurance Company.
The reinsured policies consist of fixed annuity contracts issued by Transamerica Life Insurance Company in the U.S.
Also, in the fourth quarter of 2011 EUR 431 million of medium term notes (MTN) backing funding agreements issued by Monumental Life insurance company in 2006 and 2007 were reinsured to Liberty Life Insurance Company.
Movements during the year in reinsurance assets relating to non-life insurance: 2011 2010
Gross premium and deposits – existing and new business 227 224
DPAC for insurance contracts and investment contracts with discretionary participation features 11,027 11,340
Costs deferred / rebates granted during the year 1,398 60 12
Real estate held for own use and equipment 28.1 561 574 28.1 REAL ESTATE HELD FOR OWN USE AND EQUIPMENT
General account real estate held for own use has not been pledged as security for liabilities, nor are there any restrictions on title. Depreciation expenses are charged in “Commissions and expenses” in the income statement.
The movements in the provision for doubtful debts during the year were as follows: Additions charged to earnings (4) (8)
EUR 2,489 million of the accrued income is current (2010: EUR 1,932 million).
EUR 13.2 billion (2010: EUR 12.7 billion) cash collateral is received of which EUR 408 million (2010: EUR 891 million)
The weighted effective interest rate on short-term deposits was 0.40% (2010: 0.44%) and these deposits have an average maturity of 4.18 days (2010: 4.75 days).
For the purposes of the cash flow statement, cash and cash equivalents comprise the following: Cash and cash equivalents 8,104 5,231
The majority of cash is not subject to any restrictions. However, the Dutch Central Bank requires AEGON
This amount on deposit is reassessed on a monthly basis and carries interest at approximately 1.0% (2010: 1.0%).
The balance at the end of the year was EUR 103 million (2010: EUR 111 million).
Net cash and cash equivalents at December 31, 2011 are positively impacted by effects of changes in exchange rates at EUR 107 million (2010: EUR 57 million; 2009: EUR 81 million).
Net cash flows from investing activities improved by EUR 931 million to a EUR 653 million inflow (2010: EUR 278 million outflow). The improvement is a result of cash received from the divestment of Transamerica Reinsurance and the sale of Guardian life in the United Kingdom.
EUR 1,500 million related to the repurchase of 375 million convertible core capital securities and EUR 750 million related to the premium attached to this repurchase. A share issuance in early 2011 provided EUR 913 million of cash and additional borrowings provided EUR 1,259 million, partly offset by coupon payments on perpetual capital securities and dividends on the preferred shares.
Total net cash flows from operating activities increased by EUR 8,268 million to EUR 1,263 million inflow
(2009: EUR 7,005 million outflow). This increase is predominantly driven by cash collateral, mainly related to securities lending activities, which resulted in an improvement of the cash inflow by EUR 7,982 million year-on-year (inflow of
264 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 30.2 - 30.3
All issued common and preferred shares are fully paid. Repayment of capital can only be initiated by the Executive
Moreover, repayment on preferred shares needs approval of the related shareholders. Refer to Other information for further information on dividend rights.
Vereniging AEGON, in case of an issuance of shares by AEGON N.V., may purchase as many class B preferred shares as would enable Vereniging AEGON to prevent or correct dilution to below its actual percentage of voting shares, unless
Vereniging AEGON as a result of exercising these option rights would increase its voting power to more than 33 percent.
Class B preferred shares will then be issued at par value (EUR 0.25), unless a higher issue price is agreed. In the years 2003 through 2008, 35,170,000 class B preferred shares were issued under these option rights. In 2009, Vereniging
AEGON exercised its option rights to purchase in aggregate 33,860,000 class B preferred shares at par value to correct dilution caused by AEGON’s EUR 1 billion equity issue as completed in August 2009. In 2010, no option rights were exercised.
Vereniging AEGON has agreed to exercise one vote only per preferred share, except in the event of a “special cause”, such as the acquisition of a 15% interest in AEGON N.V., a tender offer for AEGON N.V. shares or a proposed business combination by any person or group of persons, whether individually or as a group, other than in a transaction approved by the Executive Board and Supervisory Board. If, in its sole discretion, Vereniging AEGON determines that a “special cause” has occurred, Vereniging AEGON will notify the General Meeting of Shareholders and retain its right to exercise the full voting power of 25/12 vote per preferred share for a limited period of six months.
Transactions in 2011: Sale: 1 transaction, price EUR 5.39 (17) – –
Net (gains) / losses transferred to income statement (203) – (8) (211)
The revaluation accounts for both available-for-sale investments and for real estate held for own use include unrealized gains and losses on these investments, net of tax. Upon sale, the amounts realized are recognized in the income statement or transferred to retained earnings. Upon impairment, unrealized losses are recognized in the income statement.
The closing balances of the revaluation reserve for available-for-sale investments relate to the following instruments: REVALUATION RESERVE FOR AVAILABLE-FOR-SALE INVESTMENTS 2,299 493 (1,928)
Movement in foreign currency translation and net foreign investment hedging reserves 364 45 – 409
Movement in foreign currency translation and net foreign investment hedging reserves (115) (94) – (209)
On August 30, 2010, AEGON repurchased 125 million of convertible core capital securities. The total payment to the
shares of EUR 4.8315 during the five trading days from November 23 until November 27. The amount repurchased includes accrued interest from May 22, 2009 of EUR 44 million.
2 The coupon of the EUR 950 million junior perpetual capital securities is reset each quarter based on the then prevailing ten-year Dutch government bond yield plus a spread of ten basis points, with a maximum of 8%.
3 The coupon of the USD 500 million junior perpetual capital securities is reset each quarter based on the then prevailing ten-year US dollar interest rate swap yield plus a spread of ten basis points, with a maximum of 8.5%.
The bonds have the same subordination provisions as dated subordinated debt. In addition, the conditions of the bonds contain provisions for interest deferral and for the availability of principal amounts to meet losses.
Although the bonds have no stated maturity, AEGON has the right to call the bonds for redemption at par for the first time on the coupon date in the year of next call.
USD 190 million 2 7.625% Semi–annually, November 15 1997 2037 n.a. 38 38 1 Issued by a subsidiary of AEGON N.V. 2 Issued by a subsidiary of, and guaranteed by AEGON N.V.
Trust pass-through securities are securities through which the holders participate in a trust. The assets of these trusts consist of junior subordinated deferrable interest debentures issued by Transamerica Corporation and Clark Consulting
Inc. The trust pass-through securities carry provisions with regard to deferral of distributions for extension periods up to a maximum of ten consecutive semi-annual periods. The trust pass-through securities are subordinated to all other unsubordinated borrowings and liabilities. There were no defaults or breaches of conditions during the period.
The fair value of these loans amounts to EUR 114 million (2010: EUR 117 million).
Non-life insurance - Unearned premiums and unexpired risks 3,687 3,209 - Incurred but not reported claims 718 702
Losses recognized as a result of liability adequacy testing 2 7
Net exchange differences 125 238 36 INSURANCE CONTRACTS FOR ACCOUNT OF POLICYHOLDERS
Gross premium and deposits – existing and new business 6,882 6,475
1 Refer to note 48 for a summary of all financial assets and financial liabilities at fair value through profit or loss.
Investment contracts for account of policyholders 1 71,433 69,527 1 Refer to note 48 for a summary of all financial assets and financial liabilities at fair value through profit or loss.
274 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 40 -41
EUR 500 million Medium-Term Notes 9 4.125% December 8 2004 / 14 516 521
USD 500 million Senior Unsecured Notes 4.625% Semi–annually 2009 / 15 384 372
EUR 1,018 million “SAECURE 7” RMBS Note 2, 4 Floating Quarterly 2010 / 15 951 996
GBP 35 million Note issue agreement 2, 5, 6 Floating Quarterly 2010 / 15 33 39
EUR 80 million Mortgage loan 3 Floating Quarterly 2010 / 15 80 80
EUR 1,500 million “SAECURE 10” RMBS Note 2, 7 Floating Quarterly 2011 / 16 1,448 –
EUR 842 million “SAECURE 9” RMBS Note 2, 8 Floating Quarterly 2010 / 16 778 826
GBP 92 million Note issue agreement 2, 5, 6, 9 Floating April 21 2007 / 21 – 19
USD 305 million Note issue agreement 2 5.54%/8.88% Quarterly 2002 / 22 94 106
USD 1.54 billion Variable Funding Surplus Note 1, 5 Floating Quarterly 2006 / 36 1,034 957
USD 1.5 billion Variable Funding Surplus Note 1, 5 Floating Quarterly 2007 / 37 126 190
GBP 400 million Senior Unsecured Notes 6.625% Semi–annually 2009 / 39 471 457 1 Issued by subsidiaries of, and guaranteed by AEGON N.V. 2 Issued by a subsidiary of AEGON N.V. 3 Issued by a joint venture of AEGON Nederland N.V. 4 The first optional redemption date is August 2015; the legal maturity date is August 2093. Notes are fully collateralized by mortgage loans which are part of AEGON’s general account investment.
The cumulative positive impact of AEGON’s credit spread, based on observable market data, on income before tax amounted to EUR 72 million (2010: EUR 42 million).
The provisions include litigation provisions, restructuring provisions and provisions for contingent consideration relating to business combinations.
276 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 41
Present value of wholly unfunded obligations 1 2,272 1,952 1,831 1,644 1,622
Present value of wholly unfunded obligations 271 256 224 231 224
The fair value of AEGON’s own financial instruments included in plan assets and the fair value of other assets used by AEGON included in planned assets was nil in both 2011 and 2010.
Actual return on plan assets and reimbursement rights 50 – 50 337 – 337
278 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 41
SENSITIVITY OF ASSUMED MEDICAL COST TREND RATES: Assumed medical cost trend rates have an effect on the amounts reported for the health care plans. A one-percentage change in assumed medical cost trend rates would have the following effects: Aggregate of current service cost and interest cost components of net periodic post-employment medical costs 2 (1) 2 (1)
Revenue Service Code. The benefits are based on years of service and the employee’s eligible annual compensation.
The unfunded amount related to these plans, for which a liability has been recorded, is EUR 208 million
Assumptions used to determine benefit obligations at year­end: Discount rate 4.50% 5.25%
Assumptions used to determine net periodic benefit cost for the year ended December 31: Discount rate 5.25% 6.00%
AEGON USA provides health care benefits to retired employees, which are predominantly unfunded. The postretirement health benefit liability amounts to EUR 197 million (2010: EUR 185 million).
Year that the rate reaches the rate that it is assumed to remain at 2020 2020
From time to time the actual asset allocation may deviate from the desired asset allocation ranges due to different
280 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 42-43 market performance among the various asset categories. If it is determined that rebalancing is required, future additions and withdrawals will be used to bring the allocation to the desired level.
Pension plan contributions were not required for AEGON USA in 2011 or 2010.
Assets held by AEGON The Netherlands for retirement benefits do not meet the definition of plan assets and as such were not deducted in calculating this amount. Instead, these assets are recognized as general account assets.
AEGON The Netherlands also has a post-retirement medical plan that contributes to the health care coverage of employees and beneficiaries after retirement. The liability related to this plan amounted to EUR 46 million at December 31, 2011 (2010: EUR 46 million).
Year that the rate reaches the rate it is assumed to remain at N.A. N.A.
Assumptions used to determine benefit obligations at year-end: Discount rate 4.70% 5.40%
Target allocation of plan assets for retirement benefit plans for the next annual period is: Equity instruments 40% 50%
282 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 43
The increase of deferred tax liabilities primarily relates to unrealized profits in 2011 in respect of financial assets due to a decrease in market interest rates.
Deferred corporate income tax assets are recognized for tax losses carried forward to the extent that the realization of the related tax benefit through future taxable profits is probable. For an amount of gross EUR 128 million; tax
Deferred corporate income tax asset dependent on the realization of capital profits 1,201 914 420 320
284 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 44 -46 44 OTHER LIABILITIES
For financial reporting purposes AEGON distinguishes between the following types of minimum guarantees: �� Financial guarantees: these guarantees are treated as bifurcated embedded derivatives, valued at fair value and presented as derivatives (refer to note 2.10 and note 3); �� Total return annuities: these guarantees are not bifurcated from their host contracts because they are valued at fair value and presented as part of insurance contracts (refer to note 2.19); �� Life contingent guarantees in the United States: these guarantees are not bifurcated from their host contracts, valued in accordance with insurance accounting (ASC 944, Financial Services - Insurance) and presented together with insurance liabilities (refer to note 2.19 and note 3); and
�� Life contingent guarantees in the Netherlands: these guarantees are not bifurcated from their host contracts, valued at fair value and presented together with the underlying insurance contracts (refer to note 2.19 and note 3).
Variable annuities allow a customer to select payout options designed to help meet the customer’s need for income
The management expense ratio charged to the funds is not guaranteed and can be increased by management decision.
In addition, AEGON Canada sells a contract with a minimum guaranteed withdrawal benefit. The contract provides capital protection for longevity risk in the form of a guaranteed minimum annuity payment.
(in the range of 3% to 4%) if the premium has been paid for a consecutive period of at least ten years and is invested in a mixed fund and/or fixed-income funds. No guarantees are given for equity investments only. The management expense ratio charged to the funds is not guaranteed and can be increased at management’s discretion, with a maximum cost ratio of 3.5% due to the product improvements (‘Generieke Verbetermaatregelen’).
2 Fund plan and unit-linked guarantees. 3 Balances are included in the derivatives liabilities on the face of the statement of financial position; refer to note 24. 4 The net amount at risk represents the difference between the maximum amount payable under the guarantees and the account value.
In addition, AEGON reinsures the elective guaranteed minimum withdrawal benefit rider issued with a ceding company’s variable annuity contracts. The rider is essentially a return of premium guarantee, which is payable over a period of at least fourteen years from the date that the policyholder elects to start withdrawals. At contract inception, the guaranteed remaining balance is equal to the premium payment. The periodic withdrawal is paid by the ceding company until the account value is insufficient to cover additional withdrawals. Once the account value is exhausted,
AEGON pays the periodic withdrawals until the guaranteed remaining balance is exhausted. At December 31, 2011, the reinsured account value was EUR 3.3 billion (2010: EUR 4.2 billion) and the guaranteed remaining balance was
Total Return Annuity (TRA) is an annuity product in the United States which provides customers with a pass-through of the total return on an underlying portfolio of investment securities (typically a mix of corporate and convertible bonds) subject to a cumulative minimum guarantee. Both the assets and liabilities are carried at fair value, however, due to the minimum guarantee not all of the changes in the market value of the asset will be offset in the valuation of the liability. This product exists in both the fixed annuity and life reinsurance lines of business and in both cases represents closed blocks. The reinsurance contract is in the form of modified coinsurance, so only the liability for the minimum guarantee is recorded on AEGON’s books.
Certain variable insurance contracts in the United States also provide guaranteed minimum death benefits (GMDB)
and guaranteed minimum income benefits (GMIB). Under a GMDB, the beneficiaries receive the greater of the account balance or the guaranteed amount upon the death of the insured. The net amount at risk for GMDB contracts is defined as the current GMBD in excess of the capital account balance at the balance sheet date.
The additional liability for guaranteed minimum benefits that are not bifurcated are determined (based on ASC 944)
each period by estimating the expected value of benefits in excess of the projected account balance and recognizing the excess over the accumulation period based on total expected assessments. The estimates are reviewed regularly and any resulting adjustment to the additional liability is recognized in the income statement. The benefits used in calculating the liabilities are based on the average benefits payable over a range of stochastic scenarios. Where applicable, the calculation of the liability incorporates a percentage of the potential annuitizations that may be elected by the contract holder.
Average attained age of contractholders 67 66 66 66 1 Guaranteed minimum death benefit in the United States.
4 Balances are included in the insurance liabilities on the face of the statement of financial position; refer to note 35. 5 The net amount at risk is defined as the present value of the minimum guaranteed annuity payments available to the contract holder determined in accordance with the terms of the contract in excess of the current account balance.
The group pension contracts offered by AEGON in the Netherlands include large group contracts that have an individually determined asset investment strategy underlying the pension contract. The guarantee given is that the profit sharing is the minimum of 0% or the realized return (on an amortized cost basis), both adjusted for technical interest rates ranging from 3% to 4%. If there is a negative profit sharing, the 0% minimum is effective, but the loss in any given year is carried forward to be offset against any future surpluses. In general, a guarantee is given for the life of the underlying employees so that their pension benefit is guaranteed. Large group contracts also share technical results (mortality risk and disability risk). The contract period is typically five years and the premiums are fixed over this period. Separate account guaranteed group contracts provide a guarantee on the benefits paid.
The accumulation products pay benefits on the policy maturity date, subject to survival of the insured. In addition, most policies also pay death benefits if the insured dies during the term of the contract. The death benefits may be stipulated in the policy or depend on the gross premiums paid to date. Premiums and amounts insured are established at inception of the contract. The amount insured can be increased as a result of profit sharing, if provided for under the terms and conditions of the product. Minimum interest guarantees exist for all generations of accumulation products written, except for universal life type products for which premiums are invested solely in equity funds. Older generations contain a 4% guarantee; in recent years the guarantee has decreased to 3%.
The following table provides information on the liabilities for guarantees that are included in the valuation of the host contracts.
are calculated as the present value of future expected payments to policyholders less the present value of assessed rider fees attributable to the guarantees. Given the long-term nature of these guarantees, their fair values are determined by using valuation techniques. Because of the dynamic and complex nature of these cash flows, AEGON
The credit spread is set by using the credit default swap (CDS) spreads of a reference portfolio of life insurance companies (including AEGON), adjusted to reflect the subordination of senior debt holders at the holding company level to the position of policyholders at the operating company level (who have priority in payments to other creditors).
Because CDS spreads for United States life insurers differed significantly from that for European life insurers,
EUR 2,838 million in 2011 (2010: decrease of EUR 109 million). The main drivers of this increase are EUR (3,081) million related to decreases in risk free rates (2010: EUR 1,328 million loss), EUR (160) million related to a decrease in equity markets (2010: EUR 360 million gain), EUR (75) million related to increases in equity volatilities (2010: EUR 80 million gain) offset by EUR 592 million related to movements in the spread of credit risk (2010: EUR 227 million gain). Hedges related to these guarantee reserves contributed fair value gains of EUR 2,805 million to income before tax (2010: gains of EUR 894 million) and DAC offset and other contributed a gain of EUR 71 million (2010: EUR 123 million gain).
Additionally, AEGON manages capital adequacy at the level of its country units and their operating companies. The goal is to ensure that AEGON companies maintain their financial strength. AEGON maintains its companies’ capital adequacy levels at whichever is the higher of local regulatory requirements and the relevant local Standard & Poor’s requirements for very strong capitalization, and any additionally self-imposed economic requirements.
Shareholders’ equity increased by EUR 3,672 million due to the change in the revaluation reserve of EUR 2,506 million, the EUR 913 mln proceeds from a 10% equity issuance and net income attributable to equity holders of AEGON N.V.
Group equity consists of core capital plus Other equity instruments (see note 32) such as the junior perpetual capital securities and the perpetual cumulative subordinated bonds as well as other equity reserves. Group equity (including the revaluation reserve) was EUR 25,734 million at December 31, 2011, compared to EUR 23,543 million at December 31, 2010.
290 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 48
TOTAL CAPITAL BASE EXCLUDING REVALUATION RESERVE 23,842 23,755 1 Capital securities that are denominated in foreign currencies are, for purpose of calculating the capital base, revalued to the period-end exchange rate.
Borrowings not related to capital funding of insurance activities consists of operational funding including US regulation
The Total Capital Base is a non-IFRS measure, as IFRS does not permit separate presentation of borrowings based on the deployment of the proceeds.
AEGON N.V. is subject to certain financial covenants in some of its financial agreements (such as issued debentures, credit facilities and ISDA agreements). Under these financial covenants, an event of default may occur if and when any financial indebtedness of any member of the Group is not paid when due, or not paid within any applicable grace period.
Action Level range (200%) as applied by the National Association of Insurance Commissioners in the US. The calculation of the IGD ratio excludes the available and required capital of the UK With-Profit funds. In the UK solvency surplus calculation the local regulator only allows the available capital number of the With-Profit funds included in overall local available capital to be equal to the amount of With-Profit funds' required capital.
For the insurance and reinsurance undertakings of AEGON in the EU, the European Solvency I directives are applicable, as implemented in the relevant member states. Solvency I allows member states to require solvency standards, exceeding the minimum requirements set by the Solvency I directives. For life insurance companies the Solvency I
of insurance and investment liabilities for account policyholders if no guaranteed investment returns are given.
The Financial Services Authority (FSA) regulates insurance companies in the United Kingdom under the Financial
related to OPTAS N.V. which represents the increase in statutory reserves since the acquisition of OPTAS N.V. by AEGON.
292 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 49
Total financial assets at fair value through profit or loss 14,197 146,188 5,533 150,113
Derivatives with negative values not designated as hedges 11,697 – 4,789 –
In addition, the investment for account of policyholders include with profit assets, where an insurer manages these assets together with related liabilities on a fair value basis in accordance with a documented policy of asset and liability management. In accordance with Group’s accounting policies, these assets have been designated as at fair value through profit or loss.
Changes in the fair value of investment contracts for account of policyholders designated at fair value through profit or loss were not attributable to changes in AEGON’s credit spread. There are also no differences between the carrying amounts of these financial liabilities and the contractual amounts payable at maturity (net of surrender penalties).
Share of contingent liabilities incurred in relation to interests in joint ventures 51 75
294 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 49
(Bermuda) Ltd ensuring the company is adequately capitalized and has sufficient cash for its operations.
AEGON N.V. has guaranteed and is severally liable for the following: �� Due and punctual payment of payables due under letter of credit agreements applied for by AEGON N.V. as coapplicant with its subsidiary companies Transamerica Corporation, AEGON USA, LLC and Commonwealth General
Funding Company LLC, Commonwealth General Corporation and Transamerica Finance Corp. with respect to bonds, capital trust pass-through securities and notes issued under commercial paper programs (EUR 656 million; 2010: EUR 620 million), as well as payables with respect to certain derivative transactions of Transamerica Corporation
Derivatives N.V. in connection with derivative transactions. AEGON Derivatives N.V. only enters into derivative transactions with counterparties with which ISDA master netting agreements including collateral support annex agreements have been agreed; net (credit) exposure on derivative transactions with these counterparties was therefore limited as at December 31, 2011.
AEGON is involved in litigation in the ordinary course of business, including litigation where compensatory or punitive damages and mass or class relief are sought. In particular, certain current and former customers, and groups representing customers, have initiated litigation and certain groups are encouraging others to bring lawsuits in respect of certain products. AEGON has established litigation policies to deal with the claims defending when the claim is without merit and seeking to settle in certain circumstances. There can be no assurances that AEGON will be able to resolve existing litigation in the manner it expects or that existing or future litigation will not result in unexpected liability.
As other insurers in the United States have recently done, AEGON Americas identified certain additional internal processes that it has implemented or is in the process of implementing. AEGON Americas increased certain reserves related to this matter by approximately EUR 37 million during the fourth quarter of 2011. While AEGON believes that
AEGON’s processes to manage unclaimed property are generally adequate, with industry practices changing and regulatory interpretations evolving, it is uncertain what the further impact of any such inquiry could be for us and other market participants.
AEGON subsidiaries have received inquiries from local authorities and policyholder advocate groups in various jurisdictions including the United States, the United Kingdom and the Netherlands. In the normal course of business, reviews of processes and procedures are undertaken to ensure that customers have been treated fairly, and to respond to matters raised by policyholders and their representatives. In 2010, AEGON UK received a fine of GBP 2.8 million from the FSA due to systems and control failings, some of which have led to customer detriment. AEGON UK also set up reserves to compensate certain policyholders after self-reporting failures in its administrative procedures to the UK
provided for up to EUR 250 million in potential policy modifications which did not have a significant impact on
AEGON’s income statement as the actual reserves for insurance and investments policies are sufficient to cover the estimated future liabilities. Any amounts due for past periods have been recorded in insurance contract reserves.
Woekerpolis. However, recently a public debate emerged on the adequacy generally of the arrangements reached between the various insurance companies and customer interest groups like Stichting Verliespolis and Stichting
EUR 95 million for settlement of a dispute with a bank related to an employer owned life insurance policy.
had already taken steps to improve its communications with customers as well as adjusting the amounts charged to
In its decision, the Court ruled that customers are required to pay a reasonable premium. However, the Court went on to define what it considers to be a reasonable premium at a level below that charged by AEGON. The Court based its decision on a single industry example, which AEGON believes is not representative. AEGON believes that, based on the≈arguments presented, the Court's ruling was wrongly decided and, in October 2011, appealed the decision taken by the Amsterdam Court of Appeal to the Supreme Court in the Netherlands. However, if the Supreme Court were to confirm the decision taken by the Amsterdam Court of Appeal and the principles underlying such decision were applied to AEGON’s entire KoersPlan-portfolio (instead of solely to the holders of KoersPlan-products who are plaintiffs in the pending litigation), AEGON currently estimates the financial effect to be approximately EUR 150 million, after tax.
The actual amount may vary based on uncertainties related to the application of any decision to individual customers, equity market fluctuations as well as interest rates movements. AEGON expects the Supreme Court to issue a decision during the second half of 2012.
296 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 50
The operating lease obligations relate mainly to office space leased from third parties. The total of future minimum sublease payments expected to be received on non-cancellable subleases is EUR 9 million (2010: EUR 11 million).
50 SECURITIES LENDING AND REPURCHASE ACTIVITIES AND ASSETS ACCEPTED AND PLEDGED
Cash collateral is usually invested in pre-designated high quality investments. The sum of cash and non-cash collateral is typically greater than the market value of the related securities loaned.
Transactions requiring AEGON or its counterparty to post collateral are typically the result of over-the-counter derivative trades, comprised mostly of interest rate swaps, currency swaps and credit swaps.
298 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 51 - 52 51 BUSINESS COMBINATIONS
Effective July 1, 2011, AEGON entered into a Joint Venture contract with Unnim, the entity which was created by the merger of Caixa Terrassa, Caixa Sabadell and Caixa Manlleu. AEGON Spain is the sole insurance partner of Unnim to provide life and pension insurance products. Since the acquisition date, the company has attributed EUR 5 million to net income in 2011. If the acquisition had been as of January 1, 2011, contribution to net income and total revenues would amount to EUR 9 million and EUR 134 million respectively.
Spanish institutional protection system (similar to a merger) of Caja Navarra, Cajasol, Caja Burgos and Caja Canarias.
EUR 0 million to net income in 2011. If the acquisition had been as of January 1, 2011, contribution to net income and total revenues would amount to EUR 0 million and EUR 8 million respectively.
In June 2009, AEGON acquired a 50% stake in BT-AEGON (Romania), a pension fund management company earlier run as a 50%-50% joint venture with Banca Transilvania. The total purchase price amounted to EUR 11 million. Acquired assets included EUR 1 million cash positions. Goodwill of EUR 3 million was recognized. Since the acquisition date, the company has attributed EUR 0 million to net income. If the acquisition had been as of January 1, 2009, contribution to net income and total revenues would amount to EUR 0.3 million and EUR 0.6 million respectively. Goodwill of
300 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 53
The legally required list of participations as set forth in articles 379 and 414 of Book 2 of the Dutch Civil Code has been registered with the Trade Register in The Hague. AEGON N.V. has issued a statement of liability as meant in article 403 of Book 2 of the Dutch Civil Code for its subsidiary company AEGON Derivatives N.V.
Pensiones, (50%) and Caixa Sabadell Vida, SA (50%) both life insurance and pension companies
Dutch government on June 15, 2011 amounted to EUR 1.125 billion and included a premium of EUR 375 million. Including this repurchase AEGON had repurchased the full EUR 3 billion convertable core capital securities from the Dutch State.
On March 15, 2011 Vereniging AEGON exercised its option rights to purchase in aggregate 41,042,000 class B preferred shares at par value to correct dilution caused by AEGON’s issuance of shares conducted under AEGON’s US Shelf
Registration through the sale of 173,604,912 common shares of AEGON N.V. at a price of EUR 5.20 per share in March 2011.
On March 15, 2011, AEGON repurchased 187.5 million of the convertible core capital securities. The total payment to the
Dutch government on March 15, 2011 amounted to EUR 1.125 billion and included a premium of EUR 375 million.
302 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 53
Dutch government on August 30, 2010 amounted to EUR 563 million and included a premium for repurchase amounting to EUR 52 million and accrued interest from May 25, 2010 of EUR 11 million. This repurchase was in line with AEGON’s agreement with Vereniging AEGON and Vereniging AEGON’s agreement with the Dutch government as amended in
In August 2010, the European Commission approved the capital support provided to AEGON by the Dutch State through
shares of EUR 4.8315 during the five trading days from November 23 until November 27. The amount repurchased includes accrued interest from May 22, 2009 of EUR 44 million. Refer to note 31 for disclosure about the convertible core capital securities.
preferred shares at par value to correct dilution caused by AEGON’s EUR 1 billion equity issue as completed in
EUR 7.3 million (2010: EUR 9.9 million), consisting of EUR 4.3 million (2010: EUR 5.7 million) salary and other short term benefits, EUR 1.1 million (2010: EUR 1.7 million) cash performance payments, EUR 1.2 million (2010: EUR 1.2 million)
pension premiums, EUR 0.7 million (2010: EUR 1.3 million) other long-term benefits. No share-based incentives were paid in 2011 (2010: nil).
Additional information on the remuneration and share-based compensation of members of the Executive Board and the remuneration of the Supervisory Board is disclosed in the sections below.
Salary Other 1 Cash 2 Shares 2, 3 Pension premiums 4 Total 1 Other periodic benefits are additional remuneration elements, including non-monetary benefits, social security contributions and tax expenses related to the company car, borne by the Group. For Mr. Shepard, the Group had also borne expenses and non-monetary benefits which were provided in his employment agreement with AEGON. These benefits included compensation to the extent that the total actual annual taxation on his total income exceeded the taxation if he were only subject to U.S. taxes, personal life insurance and tax planning.
2 No performance related remuneration was paid to the Executive Board Members in 2011. 3 The LTI Plan 2006 matured in 2009 and the shares and option rights vested for 75%. In accordance with the terms of the 2006 LTI plan, the Executive
Board received shares in April 2009. The number of shares for each member was: Mr. Wynaendts 8,827; Mr. Streppel 10,432 and, Mr. Shepard 19,660. These have been converted using the share price of EUR 3.18 at April 27, 2009.
5 Base salary was adjusted in 2011 and 2010 in line with the general increase for all AEGON employees in the Netherlands. 6 Mr. Nooitgedagt was appointed as CFO and Member of AEGON’s Executive Board in April 2009.
7 Mr. Streppel retired as CFO and Member of AEGON’s Executive Board in April 2009. 8 The pension premiums for the years 2009 and 2010 are adapted as taxes were not taken into account (tax adjustment 2010: EUR 76,340, 2009: EUR 72,153). This reflects the terms of Mr. Wynaendts’ appointment as Chairman of the Executive Board on April 23, 2008.
304 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 53
The table below shows the number of conditional shares, cash and options based on LTI plans.
SHARE OPTIONS AND INTERESTS IN AEGON N. V. HELD BY ACTIVE MEMBERS OF THE EXECUTIVE BOARD
�� An attendance fee of EUR 3,000 for each Supervisory Board meeting, attended in person or by video- or telephone conference, other than one of the six regular Supervisory Board meetings.
�� A committee fee for members on each of the Supervisory Board’s Committees.
Shares held by Supervisory Board members are only disclosed for the period they have been part of the
On January 27, 2012, AEGON completed a EUR 2 billion syndicated credit facility agreement with a syndicate of international banks led by Bank of America Merrill Lynch and Citigroup Global Markets. The revolving standby facility has a term of five years with two one-year extension options. AEGON maintains back-up credit facilities with international banks to support outstanding amounts under AEGON's commercial paper programs and to serve as additional liquidity sources. The facility also allows AEGON to issue letters of credit for an amount up to EUR 1 billion.
We have audited the accompanying consolidated financial statements 2011 of AEGON N.V., The Hague (as set out on pages 132 to 306), and comprise the consolidated statement of financial position as at December 31, 2011, the consolidated income statement, statement of comprehensive income, statement of changes in equity and cash flows statement for the year then ended and notes, comprising a summary of the significant accounting policies and other explanatory information.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error.
An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
In our opinion, the consolidated financial statements give a true and fair view of the statement of financial position of AEGON N.V. as at December 31, 2011 its result and its cash flows for the year then ended in accordance with
International Financial Reporting Standards as issued by the IASB , as adopted by the European Union and with Part 9 of Book 2 of the Dutch Civil Code.
308 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. OTHER INFORMATION
Pursuant to the legal requirement under Section 2:393 sub 5 at e and f of the Dutch Civil Code, we have no deficiencies to report as a result of our examination whether the Report of the Executive Board, to the extent we can assess, has been prepared in accordance with Part 9 of Book 2 of this Code, and whether the information as required under
FINANCIAL STATEMENTS OF AEGON N.V. 2011 Financial statements of AEGON N.V. Financial statements of AEGON N.V.
Statement of financial position of AEGON N.V. Statement of financial position of AEGON N.V. Statement of financial position of AEGON N.V.
AEGON N.V., incorporated and domiciled in the Netherlands, is a public limited liability share company organized under
Group”) have life insurance and pensions operations in over twenty countries in Europe, the Americas and Asia and are also active in savings and investment operations, accident and health insurance, general insurance and limited banking operations. Headquarters are located in The Hague, the Netherlands. The Group employs approximately 25,000 people worldwide.
(increasing Shareholders’ equity by EUR 110 million) in the current financial statements in accordance with IAS 8
The net effect of the correcting adjustments, including the foreign exchange impact, on the opening and closing balance of the individual financial statement line items for the period are as follows: Statement of financial position
Exchange differences on monetary items are recognized in the income statement when they arise, except when they are deferred in equity as a result of a qualifying cash flow or net investment hedge. Exchange differences on nonmonetary items carried at fair value are recognized in equity or the income statement, consistently with other gains and losses on these items.
314 FINANCIAL STATEMENTS OF AEGON N.V. 2011 NOTE 2.6 - 2.13
All derivatives are recognized on the statement of financial position at fair value. All changes in fair value are recognized in the income statement, unless the derivative has been designated as a hedging instrument in a cash flow hedge or a hedge of a net foreign investment. Derivatives with positive fair values are reported as other assets and derivatives with negative values are reported as other liabilities.
preferred shares, the Company has issued perpetual securities. Perpetual securities have no final maturity date, repayment is at the discretion of AEGON and for junior perpetual capital securities AEGON has the option to defer coupon payments at its discretion. The perpetual capital securities are classified as equity rather than debt, are measured at par and those that are denominated in US dollars are translated into euro using historical exchange rates.
Revaluation account includes unrealized gains and losses on available-for-sales assets and the positive changes in value that have been recognized in net income / (loss) relating to investments (including real estate) and which do not have a frequent market listing.
316 FINANCIAL STATEMENTS OF AEGON N.V. 2011 NOTE 3 - 8
Foreign currency translation differences – – 17 17 1 Fair value through profit or loss.
Receivables from group companies and other receivables have a maturity of less than one year.
The following table shows the movement during the year in the number of common shares: Number of common shares 2011 2010
Detailed information on remuneration of active and retired members of the Executive Board including their share option rights, remuneration of active and retired members of the Supervisory Board along with information about shares held in AEGON by the members of the Boards is included in note 53 to the consolidated financial statements of the Group.
Dividend preferred shares – – – – – (59) – – (59)
Coupons and premium on convertible core capital securities and coupon on perpetual securities, net of tax – – – – – (927) – – (927)
Changes in equity from relation with shareholders 32 881 – – – (999) – – (86)
Coupons and premium on convertible core capital securities and coupon on perpetual securities, net of tax – – – – – (250) – – (250)
Changes in equity from relation with shareholders – – – – – (339) (1) – (340)
Transactions in 2011: Sale: 1 transaction, price EUR 5.39 (16,771) –
On August 30, 2010, AEGON repurchased 125 million of convertible core capital securities. The total payment to the Dutch government amounted to EUR 563 million and included a premium for repurchase amounting to EUR 52 million and accrued interest from May 25, 2010 of EUR 11 million.
The interest rate exposure on some of these securities has been swapped to a three-month LIBOR and/or EURIBOR
The securities have been issued at par. The securities have subordination provisions and rank junior to all other liabilities. The conditions of the securities contain certain provisions for optional and required coupon payment deferral and mandatory coupon payment events. Although the securities have no stated maturity, AEGON has the right to call the securities for redemption at par for the first time on the coupon date in the years as specified, or on any coupon payment date thereafter.
Year of 1 The coupon of the EUR 114 million bonds was originally set at 8% until June 8, 2005. Subsequently, the coupon has been reset at 4.156% until 2015. 2 The coupon of the EUR 136 million bonds was originally set at 7.25% until October 14, 2008. Subsequently, the coupon has been reset at 5.185%
until October 14, 2018. 3 The coupon of the EUR 203 million bonds was originally set at 7.125% until March 4, 2011. Subsequently, the coupon has been reset at 4.26% until
March 4, 2021. 4 If the bonds are not called on the respective call dates and after consecutive period of ten years, the coupons will be reset at the then prevailing effective yield of ten-year Dutch government securities plus a spread of 85 basis points.
The bonds have the same subordination provisions as dated subordinated debt. In addition, the conditions of the bonds provide for interest deferral and for the availability of principal amounts to meet losses. Although the bonds have no stated maturity, AEGON has the right to call the bonds for redemption at par for the first time on the coupon date in the years as specified.
324 FINANCIAL STATEMENTS OF AEGON N.V. 2011 NOTE 15 - 17
AEGON N.V. has entered into a contingent capital agreement in order to enable its subsidiary Scottish Equitable Plc. to maintain capital in excess of the minimum capital requirements. The agreement is secured by GBP 200 million in assets, which have been allocated to Scottish Equitable. In the event Scottish Equitable’s solvency capital would fall below the minimum capital requirement, AEGON N.V. has agreed to replenish solvency capital up to the amount of assets remaining in the secured account. The agreement expires when certain conditions have been triggered. These conditions are: 1)
(partial) disposal of Scottish Equitable or 2) the implementation of solvency II in the UK.
Limited (AFA), pursuant to which AEGON N.V. will cause AFA to have a tangible net worth of at least 3% of its total liabilities under financial guaranty policies which it issues up to a maximum of EUR 3 billion.
AEGON Funding Company LLC, Commonwealth General Corporation and Transamerica Finance Corp. with respect to bonds, capital trust pass-through securities and notes issued under commercial paper programs (EUR 656 million; 2010: EUR 620 million), as well as payables with respect to certain derivative transactions of Transamerica
Other than the Executive Board members, there were no employees employed by AEGON N.V. in either 2011 or 2010.
On February 7, 2012, AEGON completed the issuance of USD 525 million aggregate principal amount of 8.00% noncumulative subordinated notes due 2042 in an underwritten public offering in the United States registered with the U.S.
Securities and Exchange Commission. The subordinated notes will bear interest at a fixed rate of 8.00% and will not be cumulative and are priced at 100% of their principal amount. The coupon may be cancelled under certain circumstances.
The proceeds from the issuance of the subordinated notes will be used for general corporate purposes.
On January 27, 2012, AEGON completed a EUR 2 billion syndicated credit facility agreement with a syndicate of international banks led by Bank of America Merrill Lynch and Citigroup Global Markets. The revolving standby facility has a term of five years with two one-year extension options. AEGON maintains back-up credit facilities with international banks to support outstanding amounts under AEGON’s commercial paper programs and to serve as additional liquidity sources. The facility also allows AEGON to issue letters of credit for an amount up to EUR 1 billion. The new facility replaces AEGON’s current USD 3 billion syndicated letter of credit and revolving credit facilities, which would have expired in September 2012.
To: The Supervisory Board and the Executive Board of AEGON N.V.
We have audited the accompanying company financial statements 2011 of AEGON N.V., The Hague (as set out on pages 310 to 325), which comprise the statement of financial position as at December 31, 2011, the income statement for the year then ended and the notes, comprising a summary of the significant accounting policies and other explanatory information.
Management is responsible for the preparation and fair presentation of these company financial statements and for the preparation of the Report of the Executive Board, both in accordance with Part 9 of Book 2 of the Dutch Civil Code.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the company financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the company financial statements, whether due to fraud or error.
In our opinion, the company financial statements give a true and fair view of the statement of financial position of
AEGON N.V. as at December 31, 2011 and of its result and for the year then ended in accordance with Part 9 of Book 2 of the Dutch Civil Code.
OTHER INFORMATION Other information Other information Independent auditor’s report Other information Independent auditor’s report
Central Bank’s fixed interest percentage for basic refinancing transactions, to be increased by 1.75 percentage points, all applicable to the first trading day on Euronext Amsterdam in the financial year to which the dividend relates. Apart from this, no other dividend is to be paid on the preferred shares. The authority to charge the payment of preferred dividends to the reserves of the Company rests with the Executive Board subject to approval by the Supervisory Board.
A cash dividend of 2.75% on the amount paid-in on the class A and class B preferred shares shall be paid to the holder of the preferred shares.
At the Annual General Meeting of shareholders on May 16, 2012, the Executive Board will, absent unforeseen circumstances, propose a final dividend for 2011 of EUR 0.10 per common share related to the second half of 2011. The final dividend will be paid in cash or stocks at the election of the shareholder. The value of the stock dividend will be approximately equal to the cash dividend.
NET INCOME ATTRIBUTABLE TO EQUITY HOLDERS OF AEGON N.V. 869 1,759
December 31, 2011, there were approximately 23,700 record holders resident in the United States, of AEGON’s New York
Vereniging AEGON is the continuation of the former mutual insurer AGO. In 1978, AGO demutualized and Vereniging
AGO became the only shareholder of AGO Holding N.V., which was the holding company for its insurance operations.
In accordance with the 1983 Merger Agreement, Vereniging AEGON had certain option rights on preferred shares to prevent dilution of voting power as a result of share issuances by AEGON N.V. This enabled Vereniging AEGON to maintain voting control at the General Meeting of Shareholders of AEGON N.V. In September 2002, AEGON N.V. effected a non-dilutive capital restructuring whereby Vereniging AEGON sold 350,000,000 of its common shares, of which 143,600,000 common shares were sold directly by Vereniging AEGON in a secondary offering outside the United States and 206,400,000 common shares were purchased by AEGON N.V. from Vereniging AEGON. AEGON N.V. subsequently sold these common shares in a global offering. The purchase price for the 206,400,000 common shares sold by
Vereniging AEGON to AEGON N.V. was EUR 2,064,000,000, which amount (less EUR 12,000,000 related costs)
Vereniging AEGON contributed as additional paid-in capital on the existing AEGON N.V. preferred shares, all held by
Vereniging AEGON. As a result of these transactions, Vereniging AEGON’s beneficial ownership interest in AEGON N.V.’s common shares decreased from approximately 37% to approximately 12% and its beneficial ownership interest in
Articles of Association were subsequently amended on May 26, 2003. The relationship between Vereniging AEGON
shares was increased by EUR 120,000 to EUR 52,920,000. The voting rights pertaining to the new preferred shares
AEGON N.V. and Vereniging AEGON have amended the option arrangements under the 1983 Merger Agreement. Under the amended option arrangements Vereniging AEGON, in case of an issuance of shares by AEGON N.V., may purchase as many class B preferred shares as would enable Vereniging AEGON to prevent or correct dilution to below its actual percentage of voting shares, unless Vereniging AEGON as a result of exercising these option rights would increase its voting power to more than 33%. Class B preferred shares will then be issued at par value (EUR 0.25), unless a higher issue price is agreed. In the years 2003 through 2008 35,170,000 class B preferred shares were issued under these option rights. In 2009, Vereniging AEGON exercised its option rights to purchase an additional 33,860,000 class B
preferred shares to prevent dilution caused by AEGON’s share issuance in August 2009. In 2010, no option rights were excercised. In March 2011 Vereniging AEGON exercised its option rights to purchase in aggregate 41,042,000 class B
preferred shares at par value to correct dilution caused by AEGON’s issuance of shares conducted under AEGON’s
At December 31, 2011, the General Meeting of Members of Vereniging AEGON consisted of seventeen members.
The majority of the voting rights is with the fifteen members who are not employees or former employees of AEGON N.V. or one of the AEGON Group companies, nor current or former members of the Supervisory Board or the Executive Board of AEGON N.V. The two other members are both elected by the General Meeting of Members of Vereniging AEGON from among the members of the Executive Board of AEGON N.V.
AEGON has fully and unconditionally guaranteed all of the outstanding public indebtedness of Transamerica
Finance Corporation (TFC), a wholly owned subsidiary of AEGON. The guarantees were issued on January 14, 2004.
The following condensed consolidated financial information presents the condensed statement of financial position, condensed income statements and cash flow statements of (i) AEGON NV (parent company only), (ii) TFC, (iii) other subsidiaries (iv), the eliminations necessary to arrive at the information for AEGON on a consolidated basis and (v)
The condensed consolidated income statements for the years ended December 31, 2011, 2010 and 2009: Year ended December 31, 2011 Amounts in EUR million AEGON N.V. TFC
The condensed consolidated statements of financial position as at December 31, 2011 and 2010 are shown below: As at December 31, 2011 Amounts in EUR million AEGON N.V. TFC
Investment contracts for account of policyholders – – 71,433 – 71,433
As at December 31, 2010 Amounts in EUR million AEGON N.V. TFC
Insurance contracts for account of policyholders – – 77,650 – 77,650
Investment contracts for account of policyholders – – 69,527 – 69,527
The condensed consolidated cash flow statements for the years ended December 31, 2011, 2010 and 2009 are presented below: Year ended December 31, 2011 Amounts in EUR million AEGON N.V. TFC
Purchase and disposal of intangible assets – – (17) – (17)
Purchase, disposal and dividend of subsidiaries and associates – – 725 (1) 724
Issuance, repurchase and coupons of convertible core capital securities (2,250) – – – (2,250)
NET INCREASE / (DECREASE) IN CASH AND CASH EQUIVALENTS (214) (2) 2,761 – 2,545
Purchase, disposal and dividend of subsidiaries and associates – – (170) (7) (177)
Issuance, repurchase and coupons of perpetual securities (251) – – – (251)
Year ended December 31, 2009 Amounts in EUR million AEGON N.V. TFC
Issuance, repurchase and coupons of convertible core capital securities (1,273) – – – (1,273)
NET INCREASE / (DECREASE) IN CASH AND CASH EQUIVALENTS (2,021) – (3,553) – (5,574)
CONDENSED CASH FLOW STATEMENT OF AEGON N.V. FOR THE YEAR ENDED DECEMBER 31
Purchase, disposal and dividend of subsidiaries and associates – – –
Our audits also include the other financial information included on page 332 to 342. These financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of AEGON N.V. at December 31, 2011 and 2010, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2011, in conformity with International Financial
11 Quantitative and Qualitative Disclosures About Market Risk 85–88; 183–224 12 Description of Securities Other than Equity Securities n/a 13 Defaults, Dividend Arrearages and Delinquencies n/a
1 Articles of Association incorporated by reference to Exhibit 99.1 to form 6-K filed with the SEC on May 18, 2011. (1)
4.1 Amendment of the 1983 Merger Agreement among AEGON and Vereniging AEGON. (2)
4.9 Senior Loan Agreement between Vereniging AEGON, The State of the Netherlands and AEGON N.V. dated 4.10 Subscription Agreement between Vereniging AEGON, The State of the Netherlands and AEGON N.V. dated 4.11 Agreement on Governance and Certain Other Matters between Vereniging AEGON, The State of the Netherlands and AEGON N.V. dated December 1, 2008. (12)
4.12 Amendment agreement Terms and Conditions of AEGON Securities between Vereniging AEGON, The State of the
8 List of Subsidiaries of AEGON N.V. – Incorporation by reference to Note 52 of this Annual Report.
12.1 Certification of the Chief Executive Officer pursuant to Rule 13A-14 or 15D-14 of the Securities Exchange Act of 1934.
13 Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 15 Consent of independent registered public accounting firm.
(1) Incorporated by reference to Form 6-K (file no. 1193125-07-126500) filed with the SEC on May 31, 2007.
(3) Incorporated by reference to Exhibit 4.3 to Form F-3 (file no. 333-106497) filed with the SEC on June 25, 2003.
(4) Incorporated by reference to Exhibit 4.3 to Form 20-F 2009 filed with the SEC on March 29, 2010.
(5) Incorporated by reference to Exhibit 4.11 to Form 20-F 2004 filed with the SEC on March 29, 2005.
(6) Incorporated by reference to Exhibit 4.12 to Form 20-F 2004 filed with the SEC on March 29, 2005.
(7) Incorporated by reference to Exhibit 4.13 to Form 20-F 2004 filed with the SEC on March 29, 2005.
(9) Incorporated by reference to Exhibit 4.15 to Form 20-F 2005 filed with the SEC on March 30, 2006.
(11) Incorporated by reference to Exhibit 4.11 to Form 20-F 2008 filed with the SEC on March 31, 2009.
(12) Incorporated by reference to Exhibit 4.12 to Form 20-F 2008 filed with the SEC on March 31, 2009.
The Company agrees to furnish to the Securities and Exchange Commission upon request copies of instruments with respect to long-term debt of the Company and its consolidated subsidiaries.
PURSUANT TO RULE 13A-14 OR 15D-14 OF THE SECURITIES EXCHANGE ACT OF 1934
I, Jan J. Nooitgedagt, certify that 1. I have reviewed this Annual Report of AEGON N.V.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report; 4. The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and 5. The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors
In connection with this Annual Report of AEGON N.V. (the “Company”) for the period ended December 31, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Alexander R. Wynaendts, the Chief
Plan – 2005, 7. Registration Statement (Form S-8 No. 333-132839) pertaining to AEGON USA Companies Employee Stock Option
Plan – 2005, 8. Registration Statement (Form S-8 No. 333-132841) pertaining to AEGON USA Companies Employee Stock Option
Plan – 2006, 10. Registration Statement (Form S-8 No. 333-144174) pertaining to AEGON USA Companies Employee Stock Option 11. Registration Statement (Form S-8 No. 333-144175) pertaining to AEGON USA Companies Management Stock Option
Plan – 2008, 14. Registration Statement (Form S-8 No. 333-150774) pertaining to AEGON USA, Inc. Profit Sharing Plan, and 15. Registration Statement (Form S-8 No. 333-157843) pertaining to AEGON USA, LLC Profit Sharing Plan.
of our reports dated March 21, 2012 with respect to the consolidated financial statements and schedules of AEGON N.V.
and the effectiveness of internal control over financial reporting of AEGON N.V. included in this Annual Report for the year ended December 31, 2011.
Individual companies in the AEGON Group are each subject to solvency supervision in their respective home countries. Based on European Union legislation (Directive 98/79/EC) adopted in 1998, the supervisory authority in the Netherlands (De Nederlandsche Bank (DNB or Dutch Central Bank) is required, as a lead supervisor, to carry out
In the United States, AEGON owns many of the buildings that the company uses in the normal course of its business, primarily as offices. AEGON owns 18 offices located throughout the United States with a total square footage of 2.2 million. AEGON also leases space for various offices located throughout the United States under long-term leases with a total square footage of 2.0 million. AEGON’s principal offices are located in Baltimore, Maryland; Cedar Rapids,
Iowa; Louisville, Kentucky; Los Angeles, California; St. Petersburg, Florida; Plano & Dallas, Texas; Harrison, New York; Little Rock, Arkansas; and Atlanta, Georgia; Exton, PA.
Other principal offices owned by AEGON are located in The Hague, The Netherlands; Budapest, Hungary; and Madrid,
are employed in the Americas, 20% in the Netherlands, 13% in the United Kingdom and 19% in New Markets.
has participated in collective negotiations in the insurance industry and has based its employment agreements with its employees on the relevant collective agreement. The collective agreements are generally for a duration of one year.
Dutch subsidiary company AEGON Nederland N.V., including the right to make non-binding recommendations for appointments to its Supervisory Board and the right to enter objections against proposals for appointments to that
The average number of employees per geographical area was: Of which agent-employees 2,991 3,095 3,767
Under Dutch law and AEGON’s Articles of Association, holders of AEGON’s common shares are entitled to dividends paid out of the profits remaining, if any, after the creation of a reserve account. First of all, a fixed dividend is paid on the preferred shares, as described below. AEGON’s Executive Board may determine the dividend payment date and the dividend record date for the common shares, which may vary for the various kinds of registered shares. AEGON’s
Executive Board, with the approval of AEGON’s Supervisory Board, may also determine the currency or currencies in which the dividends will be paid.
If and when we have paid any dividends in the past, we have traditionally paid interim dividends (usually in September)
after the release of AEGON’s six-month results and final dividends (usually in May) upon adoption of the annual accounts at the annual General Meeting of Shareholders.
On December 1, 2008, AEGON secured EUR 3 billion of convertible core capital securities from the Vereniging AEGON.
As part of the approval granted by the European Commission in August 2010, AEGON committed itself not to pay any dividend to the common shareholder until the Dutch State is fully repaid. A cash dividend of 2.75% on the amount paid-in on the class A and class B preferred shares was paid to the holder of the preferred shares. Consequently, no final dividend to common shares for 2010 and no interim dividend for 2011 to common shares was declared.
At the Annual General Meeting of shareholders on May 16, 2012, the Executive Board will, absent unforeseen circumstances, propose a final dividend for 2011 of EUR 0.10 per common share related to the second half of 2011. AEGON
The remaining cash flow is available to execute AEGON’s strategy and to fund dividends on AEGON’s shares, subject to maintaining the holding company targeted excess capital. Depending on circumstances, future prospects and other considerations, AEGON’s Executive Board may elect to deviate from this target. AEGON’s Executive Board will also take capital position, financial flexibility, leverage ratios and strategic considerations into account when declaring or proposing dividends on common shares.
Under normal circumstances, AEGON would expect to declare an interim dividend when announcing AEGON’s second quarter results and to propose a final dividend at the annual General Meeting of Shareholders for approval. Dividends would normally be paid in cash or stock at the election of the shareholder. The relative value of cash and stock dividends may vary. Stock dividends paid may, subject to capital management and other considerations, be repurchased in order to limit dilution.
Holders of common shares historically have been permitted to elect to receive dividends, if any, in cash or in common shares, except for the final dividend for 2002, as distributed in May 2003, which was made in common shares only.
For dividends, which holders may elect to receive in either cash or common shares, the value of the stock alternative may differ slightly from the value of the cash option. We pay cash dividends on shares of New York registry in US
dollars through Citibank, N.A., AEGON’s NYSE paying agent, based on the foreign exchange reference rate (as published each working day at 14:15 hours by the European Central Bank) on the business day following the announcement of the interim dividend or on the second business day following the shareholder meeting approving the relevant final dividend.
The principal market for AEGON’s common shares is NYSE Euronext Amsterdam. AEGON’s common shares are also listed on the NYSE Euronext New York and the London stock exchanges.
The table below sets forth, for the calendar periods indicated, the high and low sales prices of AEGON’s common shares on NYSE Euronext Amsterdam and the NYSE Euronext New York as reported by Bloomberg and is based on closing prices. Share prices have been adjusted for all stock splits and stock dividends through December 31, 2010.
1. The objects of AEGON are to incorporate, acquire and alienate shares and interests in, to finance and grant security for commitments of, to enter into general business relationships with, and to manage and grant services to legal entities and other entities, in particular those involved in the insurance business, and to do all that is connected therewith or which may be conducive thereto, all to be interpreted in the broadest sense.
Common Characteristics of the Common and Preferred Shares 1. All shares are in registered form.
3. Each currently outstanding share is entitled to one vote except for shares held by AEGON as treasury stock.
AEGON, may cast 25/12 votes for each preferred share. Vereniging AEGON and AEGON have entered into a preferred shares voting rights agreement, pursuant to which Vereniging AEGON has voluntarily waived its right to cast 25/12 votes per class A or class B preferred share. Instead, Vereniging AEGON has agreed to exercise one vote only per preferred share, except in the event of a “special cause”, such as the acquisition of a 15% interest in
AEGON N.V., a tender offer for AEGON N.V. shares or a proposed business combination by any person or group of persons, whether individually or as a group, other than in a transaction approved by the Executive Board and
Supervisory Board. If Vereniging AEGON, acting at its sole discretion, determines that a “special cause” has arisen,
4. All shares have the right to participate in AEGON’s net profits. Net profits is the amount of profits after contributions, if any, to a reserve account.
5. In the event of liquidation, all shares have the right to participate in any remaining balance after settlement of all debts.
Differences between common and preferred shares 1. The common shares are listed; the preferred shares are not listed.
2. Preferred shares under certain circumstances are entitled to cast 25/12 votes per share in line with their higher par value.
3. Preferred shares are entitled to a preferred dividend on the paid-in amount, restricted to the fixed rate set by the
European Central Bank for basic refinancing transactions plus 1.75%. No additional dividend is paid on the preferred shares and the remaining profit is available for distribution to the holders of common shares.
Meeting of Shareholders (annual General Meeting or extraordinary General Meeting) may only pass a resolution to amend the Articles of Association pursuant to a proposal of the Executive Board with the approval of the Supervisory
Board. The resolution requires a majority of the votes cast at the meeting in order to pass. The actual changes to the text of the Articles of Association will be executed by a civil law notary.
Shareholders must notify AEGON of their intention to attend the meeting.
PROVISIONS THAT WOULD HAVE THE EFFECT OF DELAYING A CHANGE OF CONTROL
There are no such provisions in the Articles of Association. Dutch law requires public disclosure to a supervising government agency with respect to the ownership of listed shares when the following thresholds are met: 5%, 10%,
Reference is made to the paragraph “Differences in company law practices for domestic companies” included in the Corporate Governance section.
On December 1, 2008, AEGON secured EUR 3 billion of additional core capital from Vereniging AEGON, funded by the
Dutch State. The capital contribution was part of the Dutch government’s EUR 20 billion support program for banks and insurance companies in connection with the worldwide financial crisis.
In 2011, AEGON repurchased EUR 1.5 billion in principal amount of the original 3 billion in convertible core capital securities from the Dutch State. The total payment to the Dutch State amounted to EUR 2,250 million of which EUR
1,500 million related to the repurchase of 375 million convertible core capital securities and EUR 750 million related to the premium attached to this repurchase. This repurchase was completed in two equal tranches on March 15 and June 15 respectively. With these transactions AEGON has repurchased all of the EUR 3 billion core capital securities issued to the Dutch State at the height of the financial crisis in 2008. With the completion of this buy back, the agreement with the Dutch state ceased to exist. Refer to note 31 of the consolidated financial statements for additional information regarding the convertible core capital securities.
The support transaction was structured in such a way that it does not affect AEGON’s ownership. The new core capital was made available through a loan to the company’s major shareholder, Vereniging AEGON, which enabled the
(cash or stock) on the AEGON common shares. For the first year the coupon was fixed at 8.5% (EUR 0.34 per security).
With regards to repurchase of the securities and subsequent repayment of the loan the following was agreed in 2008.
Until December 1, 2009, AEGON could repurchase up to 250 million of the securities at nominal value plus accrued interest and a repurchase compensation dependent on the repurchase date and AEGON’s actual share price but maximized at EUR 130 million. After the first year the securities could be repurchased at any time at 150% (= EUR 6.00 per security) plus accrued interest. Alternatively, as from December 1, 2011, AEGON could choose to convert all or some of the securities into common shares on a one-for-one basis, subject to adjustment of the conversion price under certain circumstances. In the event of AEGON exercising its conversion right however, Vereniging AEGON and the Dutch
In August 2010, the agreement between AEGON and the Dutch State on repurchase of the securities and the subsequent repayment of the loan was adjusted. As of December 1, 2010 and on a date no later than June 30, 2011,
The additional core capital could be used for general corporate purposes in the ordinary course of business; investments chargeable to the additional capital in excess of EUR 300 million outside the European Union required prior approval from the Dutch Central Bank. The transaction did not affect AEGON’s ownership structure. Vereniging
State to the General Meeting of Shareholders for appointment on AEGON’s Supervisory Board and its Committees as long as less than three quarters of the loan facility has been redeemed. To this end, Karla Peijs, who already was a member of the Supervisory Board, and Arthur Docters van Leeuwen were proposed by the Dutch State as State representatives and appointed by the General Meeting of Shareholders on April 22, 2009. Ms. Peijs is a member of the
Compensation and Nominating Committees and Mr. Docters van Leeuwen, formerly head of the Dutch financial markets regulator AFM, was a member of AEGON’s Audit Committee. Following completion of the full repayment of the loan to the Dutch State, Mr Docters van Leeuwen resigned as member of the Supervisory Board with effect of 31st July 2011.
Copies of the transaction agreements with the Dutch State are available on www.aegon.com.
The behavioral constraints expired with the full repurchase of the core capital securities and repayment of the Dutch
State on June 15, 2011. The structural measures that remain in force include a reduction of the total US general account assets, full delta hedging of the US variable annuity guaranteed minimum income benefit back book, improvement of the ratio of consolidated shareholders’ equity to total equity base to at least 75% by December 2012, and acceleration of the run-off of certain portfolios, and selling or putting into run-off AEGON’s UK bulk purchase annuity business.
This section describes the material tax consequences that will generally apply to holders of AEGON’s common shares under Dutch tax law, Dutch tax treaties, published case law, regulations and judicial interpretations thereof, in each case as in force and in effect as of the date hereof. This description is subject to changes in Dutch law including changes that could have retroactive effect. No assurance can be given that authorities or courts in the Netherlands, the European
Court of Justice (“ECJ”) or the European Free Trade Association Court (“EFTA Court”) will agree with the description below. Not every potential tax consequence of such investment under the laws of the Netherlands will be addressed and
The description of certain Dutch taxes set out in this section “Dutch Taxation of Resident Shareholders” is only intended for the following investors: a. individuals who are resident or deemed to be resident in the Netherlands and, with respect to personal income taxation, individuals who opt to be taxed as a resident of the Netherlands for purposes of Dutch taxation and who invest in AEGON’s common shares (“Dutch Individuals”), excluding individuals: i. who derive benefits from AEGON’s common shares that are taxable as “benefits from miscellaneous activities”, which includes activities that exceed normal active portfolio management; ii. for whom AEGON’s common shares or any payment connected therewith may constitute employment income; or iii. who have a substantial interest, or a deemed substantial interest, in us; and b. corporate entities (including associations which are taxed as corporate entities) that are resident or deemed to be resident in the Netherlands for purposes of Dutch taxation and who invest in AEGON’s common shares (“Dutch
Dutch corporate income tax upon request; iii. corporate entities that hold common shares, the benefits derived from which are exempt under the participation exemption (as laid down in the Dutch Corporate Income Tax Act 1969); and iv. investment institutions as defined in section 28 of the Dutch Corporate Income Tax Act 1969.
With respect to (a)(iii) above, generally, an individual who holds common shares will have a substantial interest if he or she holds or is deemed to hold, alone or together with his or her partner, whether directly or indirectly, the ownership of, or certain other rights relating to, shares representing 5% or more of AEGON’s total issued and outstanding capital
(or the issued and outstanding capital of any class of shares), or rights to acquire shares, whether or not already issued, that represent at any time 5% or more of AEGON’s total existing issued and outstanding capital or the existing issued and outstanding capital of any class of AEGON’s shares (without taking into account the potential increase in the issued and outstanding capital in case of exercising rights to acquire newly issued shares), or the ownership of certain profit participating certificates that relate to 5% or more of AEGON’s annual profit and/or to 5% or more of AEGON’s liquidation proceeds. A holder of common shares will also have a substantial interest in us if, he or she on their own account does not have a substantial interest, but certain relatives (including foster children) of that holder or of his or her partner have a substantial interest in us. If a holder of common shares does not have a substantial interest, a deemed substantial interest will be present if (part of) a substantial interest has been disposed of, by this holder, or is deemed to have been disposed of, on a non-recognition basis.
With respect to (b)(iii) above, generally, the participation exemption will apply if the shareholding interest represents at least 5% of the nominal paid up capital (or, under certain conditions, 5% of the voting rights)
Where this summary refers to a holder of shares, such reference is restricted to a holder holding legal title to, as well as an economic interest in, such shares.
Dutch Individuals not engaged or deemed to be engaged in an enterprise.
Generally, a Dutch Individual who holds common shares that are not attributable to an enterprise from which it derives profits as an entrepreneur or pursuant to a co-entitlement to the net worth of such enterprise other than as an entrepreneur or a shareholder, will be subject to a fictitious yield tax. Irrespective of the actual income and/or capital gains, the annual taxable benefit of all the assets and liabilities of a Dutch Individual that are taxed under such regime including, as the case may be, AEGON’s common shares, is set at a fixed percentage. This percentage is 4% of the fair market value of these assets and liabilities at the beginning of every calendar year (minus a tax-free amount). The tax rate applicable under the fictitious yield tax is 30%.
Any benefits derived or deemed to be derived from AEGON’s common shares (including any capital gains realized on the disposal thereof) that are attributable to an enterprise from which a Dutch Individual derives profits, whether as an entrepreneur or pursuant to a co-entitlement to the net worth of such enterprise (other than as an entrepreneur or a shareholder), are generally subject to personal income tax in its hands. Any benefits derived or deemed to be derived from AEGON’s common shares (including any capital gains realized on the disposal thereof) that are held by a Dutch
Dividend distributions are subject to a withholding tax imposed by the Netherlands at a rate of 15%. The concept
�� Liquidation proceeds in excess of the qualifying average paid-in capital for Dutch dividend withholding tax purposes.
�� Consideration for the redemption of AEGON’s common shares, or, as a rule, consideration for the repurchase of common shares by us (including a purchase by one of AEGON’s direct or indirect subsidiaries) in excess of the qualifying average paid-in capital of these specific class of shares for Dutch dividend withholding tax purposes, unless such repurchase is made for temporary investment purposes or is exempt by law.
Dutch Individuals and Dutch Corporate Entities can generally credit the withholding tax against their personal income tax or corporate income tax liability and are generally entitled to a refund of dividend withholding taxes exceeding their aggregate personal income tax or corporate income tax liability, unless such individual or such entity is not the beneficial owner of the dividend.
Based on a legal provision, a recipient of dividends will not be considered the beneficial owner thereof if as a consequence of a combination of transactions: �� A person other than the recipient wholly or partly benefits from the dividends.
�� Such person retains, whether directly or indirectly, an interest in the shares on which the dividends were paid comparable with his position in similar shares before such combination of transactions.
The term combination of transactions includes the sole acquisition of one or more dividend coupons and the establishment of short-term rights of enjoyment on common shares, while the transferor retains the ownership of
AEGON’s common shares. The provisions apply to the transfer of AEGON’s common shares and dividend coupons and also to transactions that have been entered into in the anonymity of a regulated stock market.
�� 3% of the gross amount of certain qualifying dividends received by us.
This section describes certain Dutch tax consequences for a holder of common shares who is neither resident nor deemed to be resident in the Netherlands (a “Non-Resident Shareholder”). This section does not describe the tax consequences for Non-Resident Shareholders that hold AEGON’s common shares as a participation under the participation exemption as laid down in the Dutch Corporate Income Tax Act 1969.
A Non-Resident Shareholder will not be subject to any Dutch taxes on income in respect of dividends we distribute
�� Such Non-Resident Shareholder is not entitled to a share in the profits of an enterprise effectively managed in the
See the section “Dutch Taxation of Resident Shareholders” for a description of the circumstances under which your common shares form part of a substantial interest or may be deemed to form part of a substantial interest in us. It is noted that both non-resident individuals and non-resident corporate entities can hold a substantial interest.
Dividends we distribute are subject to a withholding tax imposed by the Netherlands at a rate of 15%, unless reduced under a relevant tax treaty. Reference is made to the section “Dutch Taxation of Resident Shareholders—Withholding tax” for a description of the concept “dividends we distribute”.
In the section “Dutch Taxation of Resident Shareholders—Withholding tax”, certain legislation is discussed regarding the beneficial ownership of dividends. This legislation may also be applied to deny reduction or a refund of Dutch dividend withholding tax under double taxation conventions or the EU Parent Subsidiary Directive.
Currently we may, with respect to certain dividends received from qualifying non-Netherlands subsidiaries, credit taxes withheld from those dividends against the Netherlands withholding tax imposed on certain qualifying dividends that are redistributed by us, up to a maximum of the lesser of: �� 3% of the amount of the qualifying dividends redistributed by us; and
(stand still) provisions in the Treaty on the functioning of the European Union (i.e. the restriction of the freedom of capital movements is allowed if these stand still provisions apply). However, based on case law of the ECJ and the
Especially the following non-EU resident, non-Iceland and non-Norway shareholders may be affected and may as a result be entitled to a refund of Netherlands dividend withholding tax: �� Legal entities that could have invoked the participation exemption with respect to the dividends received in case they would have been a resident of the Netherlands for tax purposes. In general, the participation exemption applies in case of shareholdings of 5% or more. In case of legal entities resident in the Netherlands, in effect no Dutch dividend withholding tax is due with respect to dividends on shareholdings that apply for the participation exemption.
�� Legal entities that, if they had been based in the Netherlands, would not have been subject to corporate income tax and that would, because of this, be eligible for a refund of dividend withholding tax withheld at their expense.
In case such an individual would have been a resident of the Netherlands, the dividend as such would not be subject to individual income tax. Instead, the individual would be taxed on a deemed income, calculated at 4% of his average net equity, whereas the dividend tax withheld would have been credited in full against the individual income tax due.
AEGON’s common shares pertains; and is an individual, an exempt pension trust or exempt organization as defined in the US/NL Income Tax Treaty, an estate or trust whose income is subject to US taxation as the income of a resident, either in its hands or in the hands of its beneficiaries, or a corporation that is not excluded from treaty benefits under the limitation on benefits provision of the US/NL Income Tax Treaty.
For purposes of Dutch gift and inheritance tax, an individual who holds Dutch nationality will, inter alia, be deemed to be resident in the Netherlands if he has been resident in the Netherlands at any time during the ten years preceding the date of the gift or his death. For purposes of Dutch gift tax, an individual not holding Dutch nationality will be deemed to be resident in the Netherlands if he has been resident in the Netherlands at any time during the 12 months preceding the date of the gift.
Furthermore, in exceptional circumstances the deceased or the donor will be deemed to be a resident in the Netherlands for purposes of Dutch gift and inheritance taxes if the heirs jointly, or the recipient of the gift, as the case may be, elect the deceased or the donor, as the case may be, to be treated as a resident of the Netherlands for purposes of Dutch gift and inheritance taxes.
“straddle” or as part of a “synthetic security” or other integrated transaction for US Federal income tax purposes.
�� Holders that own (or are deemed to own for US Federal income tax purposes) 10% or more of the voting shares of AEGON.
(including the District of Columbia); �� An estate, the income of which is subject to US Federal income taxation regardless of its source; or
�� A trust, if a court within the United States is able to exercise primary supervision over its administration and one or more US persons have the authority to control all of the substantial decisions of such trust.
The gross amount of any distribution (including any amounts withheld in respect of Dutch withholding tax) actually or constructively received by a US holder with respect to common shares will be taxable to the US holder as a dividend to the extent of AEGON’s current and accumulated earnings and profits as determined under US Federal income tax principles. Such dividends will not qualify for the dividends received deduction otherwise allowable to corporations.
Distributions in excess of current and accumulated earnings and profits are treated under US tax law as non-taxable return of capital to the extent of the US holder’s adjusted tax basis in the common shares. Distributions in excess of earnings and profits and such adjusted tax basis will generally be taxable to the US holder as capital gain from the sale or exchange of property. However, AEGON does not maintain calculations of its earnings and profits under US Federal income tax principles. Therefore, US holders of AEGON shares will generally be taxed on all distributions as dividends, even if some portion of the distributions might otherwise be treated as a non-taxable return of capital or as capital gain if the amount of US earnings and profits was known. The amount of any distribution of property other than cash will be the fair market value of that property on the date of distribution.
Certain “qualified dividend income” received by individual US holders is taxed at a maximum income tax rate of 15%.