• Derivative instruments designated as cash flow hedges 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 performance 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 fixed-rate 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 five and a half years for hedges converting existing floating-rate assets and liabilities to fixed.
AEGON uses forward starting interest rate swap agreements to hedge the variability in future cash flows associated with the forecasted purchase of fixed-income assets. These agreements reduce the impact of future interest rate changes on the forecasted transaction. Fair value adjustments for these interest rate swaps are deferred and recorded in equity until the occurrence of the forecasted transaction at which time the interest rate swaps will be terminated. The accumulated gain or loss in equity will be amortized into investment income as the acquired asset affects income. AEGON is hedging its exposure to the variability of future cash flows from interest rate movements for terms up to seventeen and a half years. For the year ended December 31, 2005, none of AEGON’s cash flow hedges has been discontinued, as it was probable that the original forecasted transactions would occur by the end of the originally specified time period documented at inception of the hedging relationship.
In addition, AEGON also makes use of cross currency swaps to convert variable 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 30 years.
Immaterial amounts of hedge ineffectiveness were recorded in the income statement during 2005 and 2004. The amount of deferred gains or losses to be reclassified from equity into net income during the next twelve months is expected to be immaterial.
Synthetic GICs — — 36,076 — — — 29,818 — Other contracts — — — 6 — — — 13
OTC: — Forwards — — — — 2 — — —
Share in net income 20 25 Share in changes in associate’s equity (note 15.5) 20 59 Dividend (3) —
All associates are unlisted and are accounted for using the equity method. There are no restrictions on the ability of associates to transfer funds in the form of cash dividends, or repayment of loans or advances. There are also no unrecognized shares of losses of associates.
The summarized financial information is based on the Group’s relative holding. Refer to note 53 for a listing of the principal investments in associates and the Group’s percentage holding.
Life insurance general account 3,001 2,409 Life insurance for account of policyholders 320 270 Non-life insurance 799 609 Investment contracts 5 10
MOVEMENTS DURING THE YEAR IN REINSURANCE ASSETS RELATING TO NON-LIFE INSURANCE Non-life
Gross premium and deposits — existing and new business 346 Unwind of discount / interest credited 23 Technical reserves released (179) Changes to valuation of expected future benefits 1 Changes in unearned premiums (80) Changes in unexpired risks (3) Incurred related to current year 75 Incurred related to prior years 5 Release for claims settled current year (11) Release for claims settled prior years (50) Change in IBNR (9) Disposals (21) Net exchange differences 93 12 DEFERRED EXPENSES AND REBATES
Costs deferred/rebates granted during the year 1,919 60 3 Amortization through income statement (936) (28) (56) Shadow accounting adjustments 413 — — Disposals (44) — — Net exchange differences 930 21 — Other 8 — —
Loans to associates 8 27 Finance lease assets 108 86 Receivables from policyholders 2,170 1,469 Receivables from brokers and agents 161 146 Receivables from reinsurers 578 621 Investment income receivable 1 — Cash outstanding from assets sold 15 10 Trade receivables 29 20 Reverse repurchase agreements 23 2 Income tax receivable 275 198
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON GROUP Amounts in EUR millions, unless otherwise stated 14 CASH AND CASH EQUIVALENTS
Cash at bank and in hand 1,032 1,346 Short-term deposits 2,209 2,787 Money market investments 4,066 3,670
The carrying amounts disclosed reasonably approximate the fair values as at the year end. Included in the balances for short-term deposits and money market investments is cash collateral received of EUR 4,616 million
(2004: EUR 4,910 million), of which EUR 3,917 million (2004: EUR 4,372 million) relates to security lending and repurchase agreements. A corresponding liability to repay the cash is recognized in other liabilities (note 28). Refer to note 51 for a discussion of collateral received and paid. Investment of cash collateral received is restricted through limitations on credit worthiness, duration, approved investment categories and borrower limits. A maximum weighted average maturity of the investment portfolio of no greater than 90 days is specified. AEGON earns a share of the spread between the collateral earnings and the rebate paid to the borrower of the securities. Income from security lending programs were approximately EUR 21 million (2004: EUR 13 million).
For the purposes of the cash flow statement, cash and cash equivalents comprise the following: Cash and cash equivalents 7,307 7,803 Bank overdrafts (note 23) 1,239 999
Furthermore, AEGON The Netherlands holds required funds related to post-retirement benefits for former employees in a bank deposit, amounting to EUR 102 million at year end (2004: EUR 35 million).
Preferred shares A Preferred shares B Number Number of shares Total of shares Total (thousands) amount (thousands) amount
Vereniging AEGON, based in The Hague, holds all of the issued preferred shares. Vereniging AEGON, in case of an issuance of shares by AEGON N.V., has the right to have issued to it as many class B preferred shares as shall enable Vereniging AEGON to prevent or correct dilution to below its actual percentage of total voting shares. Class B preferred shares will then be issued at par value (EUR 0.25), unless a higher issue price is agreed. In 2003/2004 16,900,000 class B preferred shares were issued under these option rights. In 2005, Vereniging AEGON exercised its option rights to purchase in aggregate 6,950,000 class B preferred shares at par value to correct dilution caused by AEGON’s share dividend issuances and treasury share sales during the year.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON GROUP Amounts in EUR millions, unless otherwise stated 15.2 SHARE PREMIUM
Share premium relating to: — Common shares 5,054 5,060 — Preferred shares 2,052 2,052
On the balance sheet date AEGON N.V. and its subsidiaries held 23,314,930 of its own common shares with a face value of EUR 0.12 each. Movements in the number of repurchased own shares held by AEGON N.V. were as follows: Number Number of shares of shares (thousands) (thousands)
Number Number of shares Total of shares Total (thousands) amount (thousands) amount 144 AEGON ANNUAL REPORT 2005
Gains/(losses) transferred to income statement (9) — 63 54 Foreign currency translation differences 139 3 — 142
The closing balances of the revaluation reserve for available-for-sale investments relate to the following instruments: The cash flow hedging reserve is made up of unrealized gains and losses on the effective portions of hedging instruments, net of tax. The amounts are recognized in the income statement at the moment of realization of the hedged position to offset the gain or loss from the hedged cash flow.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON GROUP Amounts in EUR millions, unless otherwise stated 15.5 OTHER RESERVES Foreign Net foreign Equity currency investment movements translation hedging of reserve reserve associates Total
The net foreign investment hedging reserve is made up of unrealized gains and losses on the effective portions of hedging instruments, net of tax. The amounts are recognized in the income statement at the moment of realization of the hedged position to offset the gain or loss from the net foreign investment.
16 OTHER EQUITY INSTRUMENTS Junior Perpetual Share perpetual cumulative options capital subordinated not yet securities bonds exercised Total
Instruments issued 1,457 — — 1,457 Instruments redeemed — (950) — (950) Share options granted — — 3 3 146 AEGON ANNUAL REPORT 2005
The coupon of the USD 250 million junior perpetual capital securities, callable in 2010, is based on the yield of three-month Libor plus an additional spread of 87.5 basis points. The coupon will be reset each quarter based on the then prevailing three-month Libor yield, with a minimum of 4%. The coupon of the euro junior perpetual capital securities is based on the yield of ten-year Dutch government bonds plus an additional spread of ten basis points. The coupon will be reset each quarter based on the then prevailing ten-year Dutch government bond yield, with a maximum of 8%. The coupon of the USD 500 million junior perpetual capital securities, callable in 2014, is based on the yield of ten-year US dollar interest rate swaps, with an additional spread of ten basis points. The coupon is reset each quarter based on the then prevailing ten-year US dollar interest rate swap yield, with a maximum of 8.5%. The interest rate exposure on some of these securities has been swapped, using derivatives, to three-month Libor yield.
The coupon for the EUR 1 14 million 8% bonds was set at 8% until June 8, 2005. As of this date, the coupon is set at 4.156% until 2015. The coupon for the EUR 136 million 7.25% bonds is set at 7.25% until October 14, 2008, while the coupon for the EUR 203 million 7.125% bonds is set at 7.125% until March 4, 201 1. On these dates, and after every consecutive period of ten years, the coupons will be reset at the then prevailing effective yield of nine- to ten-year Dutch government securities and a spread of 85 basis points. The coupon of the EUR 1 14 million with an interest rate of 7.625% is fixed.
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 years as specified.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON GROUP Amounts in EUR millions, unless otherwise stated 148 AEGON ANNUAL REPORT 2005 17 TRUST PASS-THROUGH SECURITIES Coupon Year of Year of rate Coupon date issue maturity 2005 2004
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. 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. There were no defaults or breaches of conditions during the period. Earlier redemption is possible for the USD 100 million 7.8% trust pass-through securities on or after December 1, 2006, either in whole or in part, at any time after December 1, 2006. The call price ranges from 103.5% if called in 2006 to par if called in 2016 or thereafter. The trust pass-through securities are subordinated to all other unsubordinated borrowings and liabilities.
The fair value of these loans amounts to EUR 574 million (2004: EUR 468 million).
Non-life insurance — Accident and health insurance 4,160 3,406 — General insurance 733 969
Acquisitions through business combinations 49 Portfolio transfers and acquisitions 864 Gross premium and deposits — existing and new business 7,806 Unwind of discount/interest credited 3,627 Technical reserves released (9,791) Changes in valuation of expected future benefits (76) Fund charges released (168) Losses recognized as a result of liability adequacy testing 151 Shadow accounting adjustments 503 Net exchange differences 8,960 Other (39)
Prior year run-off results, compared to opening balances of the non-life reserve, are immaterial.
Gross premium and deposits — existing and new business 1,244 Unwind of discount/interest credited 168 Technical reserves released (1,309) Changes in valuation of expected future benefits 32 Net exchange differences 350 Other (15)
Acquisitions through business combinations 416 Portfolio transfers and acquisitions (1,826) Gross premium and deposits — existing and new business 6,202 Unwind of discount/interest credited 6,937 Technical reserves released (5,630) Fund charges released (798) Changes in valuation of expected future benefits (67) Net exchange differences 5,129 Other 13 21 INVESTMENT CONTRACTS
Technical reserves released — (132) (132) Interest credited 1,318 — 1,318 Fund charges released (4) — (4) Movements related to fair value hedges (178) — (178) Net exchange differences 4,295 24 4,319 1Refer to note 48 for a summary of all financial assets and financial liabilities at fair value through profit or loss.
Investment contracts consist of the following: Institutional guaranteed products 26,348 21,567 Fixed annuities 6,212 5,164 Savings accounts 5,047 5,519 Investment contracts with discretionary participation features 702 810
Included in the total balance for fixed annuities is EUR 4,351 million (2004: EUR 3,483 million) that relates to products without contractual maturity terms. For the remainder of the balance, contractual repricing or maturity information can be analyzed as follows: <1 yr 1<5 yrs 5<10 yrs >10 yrs Amount Yield Amount Yield Amount Yield Amount Yield
Debentures and other loans 4,293 4,599 Bank overdrafts 1,239 999 Bank borrowings — 64
Additional provisions charged to the income statement 161 57 Unused amounts reversed through the income statement (13) (26) Used during the year (196) (40) Net exchange differences 15 (5)
Retirement benefit plans in deficit 1,778 1,721 Other post-employment benefit plans in deficit 237 237
Other post- Other postRetirement employment Retirement employment benefit plans benefit plans Total benefit plans benefit plans Total
Present value of wholly or partly funded obligations 2,569 4 2,573 2,091 — 2,091 Fair value of plan assets (2,570) — (2,570) (2,125) — (2,125)
Retirement employment Retirement employment benefit plans benefit plans Total benefit plans benefit plans Total
Expected return on plan assets (184) — (184) (169) — (169) Actuarial gains/(losses) recognized on present value of defined benefit obligation 2 (28) (26) — 26 26 Actuarial gains/(losses) recognized on plan assets 1 — 1 — — —
Defined benefit expenses are included in ‘Commissions and expenses’ in the income statement.
MOVEMENTS DURING THE YEAR IN PLAN ASSETS FOR RETIREMENT BENEFIT PLANS
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 1 (1) 1 (1)
Accumulated post-employment benefit obligation for medical cost (15) 13 (11) 9
AEGON USA has defined benefit plans covering substantially all its employees that are qualified under the Internal Revenue Service Code. The benefits are based on years of service and the employee’s compensation during the highest five, complete, consecutive years of employment. These defined benefit plans were overfunded by EUR 386 million at December 31, 2005.
AEGON USA also sponsors supplemental retirement plans to provide senior management with benefits in excess of normal pension benefits. These plans are unfunded and non-qualified under the Internal Revenue Service Code. The unfunded amount related to these plans, for which a liability has been recorded, is EUR 126 million.
Discount rate 5.65% 5.75% Rate of increase in compensation levels 4.5% 4.5%
Discount rate 5.75% 6.25% Rates of increase in compensation levels 4.5% 4.5% Expected long-term rate of return on assets 8.25% 8.25%
AEGON USA provides health care benefits to retired employees, which are predominantly unfunded. The post-retirement health benefit liability amounts to EUR 158 million.
The principal actuarial assumptions that apply for the year ended December 31, 2005 (that is at January 1, 2005) are as follows: ASSUMPTIONS USED TO DETERMINE BENEFIT OBLIGATIONS AT YEAR END
ASSUMPTIONS USED TO DETERMINE NET PERIODIC BENEFIT COST AT YEAR END
Health care cost trend rate assumed for next year 9% 6.25% Rate that the cost trend rate gradually declines to 5% 5.25% Year that the rate reaches the rate that it is assumed to remain at 2009 2006
The overall goal of the plans is to maximize total investment returns to provide sufficient funding for the present and anticipated future benefit obligations within the constraints of a prudent level of portfolio risk and diversification. AEGON believes that the asset allocation is an important factor, determining the long-term performance of the plans. From time to time the actual asset allocation may deviate from the desired asset allocation ranges due to different market performance among the various asset categories. If it is determined that rebalancing is required, future additions and withdrawals will be used to bring the allocation to the desired level.
AEGON The Netherlands has a defined benefit plan. The contributions to the retirement benefit plan of AEGON The Netherlands are paid by both the employees and employer, with the employer contribution being variable. The benefits covered are retirement benefits, disability, death and survivor pension and are based on an average salary system. Employees earning more than EUR 40,039 per year (as at January 1, 2005) have an option to contribute to a defined contribution plan for the excess salary. However, the cost for the company remains the same. The defined benefit plan was unfunded by EUR 1,612 million at December 31, 2005. 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. Consequently, the return on these assets also do not form part of the calculation of defined benefit expenses.
Salary increase rate 2.5% 2.5% Social security increase rate 2.5% 2.5% Pension increase rate 2% 2%
The principal actuarial assumptions that apply for the year ended December 31, 2005 are as follows: Discount rate 5.3% 5.4%
The other countries mostly operate defined contribution plans, with the exception of smaller defined benefit plans in AEGON Canada, AEGON Spain and AEGON Taiwan, with total liabilities of EUR 21 million.
Income deferred 19 5 Amortization through income statement (13) (12) Net exchange differences 2 —
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes relate to the same fiscal authority.
Deferred income tax assets are recognized for tax losses carried forward to the extent that the realization of the related tax benefit through the future taxable profits is probable. The aggregate amount of these deferred income tax assets is EUR 10 million (2004: nil).
AEGON did not recognize deferred income tax assets in respect of losses amounting to EUR 474 million (2004: EUR 507 million) that can be carried forward to future taxable income. Losses amounting to EUR 322 million (2004: EUR 401 million) can be carried forward indefinitely; losses amounting to EUR 137 million (2004: EUR 95 million) will expire within the next five years; losses amounting to EUR 1 1 million (2004: EUR 7 million) will expire in five to ten years; and losses amounting to EUR 4 million (2004: EUR 4 million) will expire in ten to fifteen years.
Payables due to policyholders 324 853 Payables due to brokers and agents 1,127 2,255 Payables out of reinsurance 1,460 1,273 Social security and taxes payable 54 97 Income tax payable 458 23 Investment creditors 255 439 Cash collateral 4,616 4,910 Share appreciation rights 66 40 Other creditors 2,373 3,049
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON GROUP Amounts in EUR millions, unless otherwise stated 30 PREMIUM INCOME AND PREMIUMS TO REINSURERS General account For account of policyholders Total
Interest income 8,967 8,426 Dividend income 868 796 Rental income 102 115
Fee income from asset management 611 522 Sales commissions 386 268 Commissions from intermediary activities 197 218 160 AEGON ANNUAL REPORT 2005
Negative fair value changes of general account financial assets and liabilities at fair value through profit or loss, other than derivatives 27 4 Negative fair value changes of derivatives 257 12 Negative foreign currency results 89 87 Impairment charges on non-financial assets and receivables 12 96 35 GAINS AND LOSSES ON INVESTMENTS FOR ACCOUNT OF POLICYHOLDERS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON GROUP Amounts in EUR millions, unless otherwise stated 36 GAINS AND LOSSES ON INVESTMENTS 2005 2004
Gross gains on investments 1,002 973 Impact of gains on investments on the valuation of insurance assets and liabilities (75) (104) Positive ineffective portion of hedge transactions 31 39 Fair value gains on economic hedges for which no hedge accounting is applied 311 372 Realized gains on repurchased debt — 10
TOTAL GROSS GAINS AND LOSSES ON INVESTMENTS 1,002 887 37 OTHER INCOME
Amortization of interest rate rebates 56 59 Surplus interest bonuses 21 24 Profit appropriated to policyholders 94 73 162 AEGON ANNUAL REPORT 2005
Employee expenses 1,662 1,784 Administration expenses 1,281 1,208 Deferred expenses (1,980) (1,735) Amortization of deferred expenses 955 1,103 Amortization of VOBA and future servicing rights 287 373
Share appreciation rights and share options exercisable as at December 31, 2005, amount to 21,834,648 (2004: 28,371,898) and their weighted average exercise price amounts to EUR 24.52 (2004: EUR 31.90).
Fair value of the share appreciation rights and share options granted during the year amounts to EUR 24 million at the grant date (2004: EUR 32 million).
The following assumptions are used in estimating the fair value of share appreciation rights and share options at the measurement date: Expected dividend yield 3.12% 4.19% Expected term (in years) 5.22 5.6 Risk-free rate 3.36% 3.54% AEGON share price 13.75 10.03
The liability related to share appreciation rights is valued at fair value at each balance sheet date. Refer to note 28 for details. The change in value of the liability amounts to EUR 26 million (2004: EUR 12 million) and is recognized in the income statement as part of ‘Commissions and expenses’.
There have been no modifications to the plans during the financial year. The breakdown of the share appreciation rights and share options granted in 2005 is as follows: Executive Board nil, other senior executives 4,71 1,960 and other employees 5,449,800 (2004: 200,000, 4,498,250 and 6,876,600). Refer to note 54 for detailed information about the share options granted to the Executive Board.
Impairment charges on financial assets, excluding receivables 147 275 Impairment reversals on financial assets, excluding receivables (160) (79) Impact of impairments on the valuation of insurance assets and liabilities (1) (13)
In February 2005, AEGON settled legal proceedings brought by Banque Internationale à Luxembourg S.A. (BIL) and Dexia Bank Belgium S.A. (Dexia) in connection with AEGON’s sale in 2000 of Labouchere, at that time a subsidiary company of AEGON. Dexia had alleged that AEGON had made certain misrepresentations and breached certain warranties contained in the purchase agreement. The alleged misrepresentations and breaches of warranties related to securities leasing products sold by Labouchere. Without admitting the claims brought by BIL and Dexia, AEGON agreed to pay EUR 218 million in cash to BIL and Dexia in full and final settlement of all and any claims in this regard. The settlement amount was paid on February 14, 2005.
The weighted average applicable tax rate is 33.7% (2004: 34.2%). The change from 2004 to 2005 is due to a change in the profitability of the countries and a change in applicable statutory tax rates. The Dutch statutory tax rate has changed from 34.5% in 2004 to 31.5% in 2005.
Net income attributable to ordinary shareholders for basic earnings per share calculation 2,521 2,077
Basic earnings per share (EUR per share) 1.63 1.38 166 AEGON ANNUAL REPORT 2005
The number of share options that has not been included in the weighted average number of ordinary shares used in the calculation of diluted earnings per share, because these share options were anti-dilutive for the periods presented, amounted to 10,256,000 (2004: 8,392,000). The exercise prices of these share options range from EUR 34.84 to EUR 10.56.
Net income attributable to equity holders 2,732 2,256 Dividends on preferred shares (79) (95) Coupons on perpetuals (132) (84)
Net income attributable to ordinary shareholders for diluted earnings per share calculation 2,521 2,077
Weighted average number of ordinary shares for diluted earnings per share calculation (thousands) 1,548,547 1,503,127
Diluted earnings per share (EUR per share) 1.63 1.38 46 DIVIDEND PER SHARE
The dividend per share paid in 2005 and 2004 were EUR 0.43 and EUR 0.41 respectively. A final dividend in respect of 2005 of EUR 0.23 per share, amounting to a total dividend of EUR 0.45 per share for 2005 is to be proposed at the annual General Meeting of Shareholders on April 25, 2006. These financial statements do not reflect the final dividend payable.
AEGON’s capital base reflects the capital employed in insurance activities and consists of shareholders’ equity, capital securities and dated subordinated and senior debt. AEGON manages its capital base to comprise at least 70% shareholders equity, at least 5% capital securities (consisting of junior perpetual capital securities, perpetual cumulative subordinated bonds and trust pass-through securities) and a maximum of 25% other subordinated and senior debt related to insurance activities.
TOTAL CAPITAL BASE 25,450 20,661 1Borrowings not related to capital funding of insurance activities mainly include operational funding of TFC businesses, operational funding of collateral reserve relief for the AEGON USA reinsurance business and short-term funding of cash and collateral management activities.
The required solvency margin shown in the table that follows is the sum of the individual margins of all AEGON’s insurance and banking companies based on European directives implemented in Dutch legislation. Liability capital available includes shareholders’ equity, capital securities and subordinated loans of the Group. The solvency position of the Group has been outlined in the following table: Liability capital of the Group 23,391 18,391 Required solvency margin 8,613 7,461 Solvency surplus 14,778 10,930 Solvency as a percentage of required solvency margin 272 246
The table that follows summarizes the carrying amounts of financial assets and financial liabilities that are classified as at fair value through profit or loss, with appropriate distinction between those financial assets and financial liabilities held for trading and those that, upon initial recognition, were designated as at fair value through profit or loss.
TOTAL FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS 2,272 136,106 1,498 115,980
TOTAL FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS 1,368 23,506 1,041 18,074
Change in insurance contracts 7,574 6,949 Change in investment contracts 6,677 6,538 Change in reinsurance assets (411) (340) Depreciation and amortization 1,475 1,889 Impairment losses and reversals (13) 291 Investments for account of policyholders (9,184) (9,140) Investments in financial assets (170) (2,138)
Other assets and receivables 64 523 Other liabilities (3,421) 1,754 Accrued interest (12) (160)
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 law suits in respect of certain products in the Netherlands. The products involved include securities leasing products and the Koersplan product. We believe we have established adequate litigation policies to deal with the claims defending ourselves when the claim is without merit and seeking to settle in certain circumstances. This and any other litigation we have been involved in over the last twelve months have not had any significant effects on the financial position or profitability of AEGON N.V. or the Group. However, there can be no assurances that we will be able to resolve existing litigation in the manner we expect or that existing or future litigation will not result in unexpected liability.
Share of contingent liabilities incurred in relation to interests in joint ventures 676 625 Capital commitments for the acquisition of intangible assets — 3 Other capital commitments and contingencies 81 62
AEGON does not account for the receipt of the securities, as the Group does not have economic ownership. When collateral takes the form of non-cash, AEGON does not account for the delivery of instruments as collateral, or for the securities received, as there is no change in economic ownership.
Under security lending and repurchase agreements, AEGON accounts for a liability to repay cash collateral received. The balance of these payables, included in other liabilities in note 28, are as follows: Cash collateral repayable on security lending 3,917 4,372
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON GROUP Amounts in EUR millions, unless otherwise stated 53 GROUP COMPANIES
The principal subsidiaries of the parent company AEGON N.V. are listed by geographical segment. All are wholly owned, directly or indirectly, unless stated otherwise, and are involved in insurance or reinsurance business, asset management or services related to these activities. The voting power in these subsidiaries held by AEGON is equal to the shareholdings.
Americas AEGON USA, Inc., Cedar Rapids, Iowa (United States) Commonwealth General Corporation, Wilmington, Delaware (United States) Life Investors Insurance Company of America, Cedar Rapids, Iowa (United States) Monumental Life Insurance Company, Baltimore, Maryland (United States) Peoples Benefit Life Insurance Company, Cedar Rapids, Iowa (United States) Stonebridge Casualty Insurance Company, Columbus, Ohio (United States) Stonebridge Life Insurance Company, Rutland, Vermont (United States) Transamerica Corporation, Wilmington, Delaware (United States) Transamerica Financial Life Insurance Company, Inc., Purchase, New York (United States) Transamerica Life Canada, Toronto, Ontario (Canada) Transamerica Life Insurance and Annuity Company, Charlotte, North Carolina (United States) Transamerica Life Insurance Company, Cedar Rapids, Iowa (United States) Transamerica Occidental Life Insurance Company, Cedar Rapids, Iowa (United States) Veterans Life Insurance Company, Springfield, Illinois (United States) Western Reserve Life Assurance Co. of Ohio, Columbus, Ohio (United States)
On May 17, 2005, AEGON N.V. purchased 3,821,645 of its common shares from Vereniging AEGON at a purchase price of EUR 9.847. On December 5, 2005, Vereniging AEGON exercised its option rights to purchase in aggregate 6,950,000 class B preferred shares at par value to correct dilution caused by AEGON’s stock dividend issuances and treasury stock sales during the year.
AEGON has a 60% limited partnership interest in Prisma Capital Partners LP, a company that performs investment management services and creates fund of funds investments in the hedge fund industry. Two outside entities, Prisma Capital Partners I, LP (31%) and Prisma Capital Partners EH LLC (8%) also have a limited partnership interest. Prisma GP LLC is the general partner with a 1% interest and is responsible for day-to-day activities. A management board with seven voting members (three appointed by AEGON, three appointed by Prisma GP LLC and one independent member) has to approve certain policies and activities. The limited partnership currently serves as investment manager for certain of AEGON's hedge fund investments, in exchange for management fees. It has also created several hedge fund of funds to be marketed to institutional investors. The limited partnership will manage these funds and receive a management fee and an incentive fee. AEGON concluded that it does not control Prisma Capital Partners LP, but that it does have significant influence. As a result, the investment is accounted for using the equity method.
P. van de Geijn (pro rata for the year 2003) — — 241 — — 241 1Other periodic payments are additional remuneration elements, including social security contributions borne by the Group. For Mr. Shepard, the Group has also borne expenses and non-monetary benefits mainly related to personal life insurance and tax planning. For Mr. Wynaendts, the amount also includes compensation for relocation and cost of living related to his temporary secondment to AEGON USA.
4 In 2004, all the members of the Executive Board opted for payment of half of the cash value of their 2003 STI bonus in AEGON N.V. common shares. These shares are restricted (non-transferable) for a period of three years. The number of shares for each member was: Mr. Shepard 16,143; Mr. Streppel 12,409; Mr. Van der Werf 12,409; and Mr. Wynaendts 8,771. After the three-year holding period, the Executive Board members will be entitled to bonus shares, provided that they are still employed by AEGON. The number of bonus shares will be calculated through performance based matching, on the basis of earnings per share growth over inflation in the preceding three years, i.e. 2004, 2005 and 2006. The number of bonus shares varies from 0 to 100% of the number of shares mentioned above.
6Base salary including adoption in accordance with the general salary rounds applicable to AEGON employees in the Netherlands, the customary employee profit sharing bonus, as well as a tax deferred employee savings scheme.
For further details about the LTI Plan, refer to the Remuneration Policy and Report on pages 33-36.
Balance at Exercise Exercise Market Balance at Exercise AEGON at January 1 price Granted price Lapsed Date price December 31 price December 31
J.G. van der Werf 48,000 34.50 48,000 — — — —
Starting January 1, 2005, a three-components structure has been introduced for the remuneration of the Supervisory Board: (1) a base fee (for membership of the Supervisory Board); (2) an additional fee for membership of a Committee; and (3) an attendance fee for face-to-face Committee meetings.
Exercise Market Exercise Balance at price price Balance at price January 1 EUR Lapsed Date EUR December 31 EUR
On February 13, 2006, AEGON N.V. and HDI Pensionsmanagement AG announced that HDI Pensionsmanagement has joined the AEGON Pension Network. The AEGON Pension Network was created jointly by AEGON and La Mondiale in 2005 as the first international network dedicated to providing specialized cross border group pensions solutions for multi-national corporate clients and their employees.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON GROUP Amounts in EUR millions, unless otherwise stated 56 FIRST-TIME ADOPTION OF IFRS Amounts in EUR millions
DPAC, VOBA and liability valuation (2,693) (2,704) Defined benefit plans (1,490) (1,642)
Under DAP, interest related gains and losses on debt securities were deferred and released into the income statement over the estimated average remaining term to maturity. Under IFRS, gains and losses are recognized in the income statement when realized. The net deferred gains that existed in the DAP balance sheet have been released to shareholders’ equity for IFRS.
The deferred transaction costs for products classified as investment contracts without discretionary participation features have been reduced in the Opening Balance Sheet and the amount of transaction costs that can be deferred in the future under IFRS will be lower. Under IFRS, only certain costs directly related to the rendering of investment management services can be deferred.
For certain products, DPAC and VOBA balances are amortized based on expected gross profits under both DAP and IFRS. Due to the removal of the deferred interest-related gains and other changes to the underlying basis of the assets under IFRS, expected gross profits under IFRS will change when compared to DAP and consequently the DPAC and VOBA balances were reduced.
Liability valuation changes are mainly caused by the application of shadow accounting, the valuation of embedded derivatives, the recognition of losses from liability adequacy testing and the valuation of a specific liability at fair value.
For some products, primarily the life contingent block of payout annuities, losses were recognized from liability adequacy testing. For DAP, no such adjustment was necessary, because there were excess margins primarily from the amortization of deferred interestrelated gains on the DAP balance sheet.
Further changes in liability valuation are caused by a specific product that provides customers with a pass-through of total investment returns, subject to a cumulative minimum guarantee. This product contains an embedded derivative that cannot be separated from the host contract and valued on a stand alone basis at fair value and as a result, the entire contract is valued at fair value. The investments backing this product have also been classified as financial assets at fair value through profit or loss. The changes in the fair value of the liabilities and the assets backing the product should generally offset each other. However, changes in the asset values are not always offset with changes in the liabilities during a rising interest rate environment, due to the contractual minimum guarantees.
Under IFRS, AEGON will show a liability in the Opening Balance Sheet for defined benefit plans that are underfunded and an asset for defined benefit plans that are overfunded.
Under DAP, goodwill was not capitalized, but charged directly to equity at the time of acquisition. Under IFRS, goodwill is capitalized as an asset. IFRS allows the prospective application of the standard applicable to business combinations to acquisitions after January 1, 2004. As a result, goodwill written off to equity before this date will not be reinstated on transition to IFRS. The adjustment from DAP equity relates to goodwill from acquisitions during 2004.
Tax differences relate to the tax effects of reconciling items as well as tax differences due to discounting. DAP required that the deferred tax balance be presented on a discounted basis. Under IFRS this is no longer allowed and as a result the deferred tax liability is increased in the Opening Balance Sheet with a corresponding charge to shareholders’ equity. Furthermore, deferred tax related to the liability for accrued policyholder surplus taxes is reduced as a result of a change in tax legislation.
Perpetual capital securities are classified as equity under IFRS, rather than as debt, as these securities have no final maturity date, repayment is at the discretion of the issuer and AEGON has the option to defer coupon payments at its discretion.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON GROUP Amounts in EUR millions, unless otherwise stated
FAIR VALUE MOVEMENTS ON FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS
The amount of transaction costs that can be deferred under IFRS is less than what can be deferred for DAP for investment contracts without discretionary participation features. This in itself results in a decrease of IFRS net income compared to DAP. This decrease is somewhat offset by the fact that amortization charges are lower under IFRS, as deferred transaction cost balances are lower. However, for flexible premium products, such as universal life and some fixed and variable annuity products, the amortization of DPAC is based on profit emergence. The inclusion of the net realized gains on debt securities causes the total investment return on assets backing this business to be higher than the investment return under DAP. This increase in total investment return was slightly offset by the reversal of the amortization of deferred investment gains. The net increase in profits caused increases in DPAC and VOBA amortization.
An adjustment to the VOBA of AEGON USA caused a further decrease in net income compared to DAP. This adjustment was necessary primarily due to changes in estimates regarding future gross profits on certain assumed reinsurance contracts. For DAP no such adjustment was necessary, because there were excess future margins primarily due to the amortization of deferred interestrelated gains.
Perpetual capital securities are classified as equity under IFRS, rather than as debt. As a result, coupons and transaction costs on these instruments are recognized as a direct deduction from equity, instead of an expense in the income statement for DAP and therefore cause an increase in IFRS net income.
Also included in net gains on investments are fair value changes for derivatives that are used for economic hedge purposes, as part of asset liability management, for which no hedge accounting is applied. These derivatives are considered economic hedges of certain exposures related to an existing asset or liability. The fair value movements of these derivatives are not offset by fair value movements as the underlying asset or liability is not valued at fair value through profit or loss. In addition, this line also includes the ineffective portions of transactions for which hedge accounting is applied.
The gain on the sale of Transamerica Finance Corporation businesses in 2004, which was credited to shareholders’ equity under DAP, is reflected in the income statement in 2004 under IFRS and caused an increase in net income.
DESIGNATION OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES AS FINANCIAL ASSETS OR FINANCIAL LIABILITIES AT FAIR VALUE
General account investments Other financial investments 9,489 9,803 Investments for account of policyholders 99,868 99,868
FINANCIAL LIABILITIES DESIGNATED AS AT FAIR VALUE THROUGH PROFIT OR LOSS AT JANUARY 1, 2004 Carrying value Fair value under January 1, DAP 2004
General account liabilities Technical provisions 638 638 Technical provisions with investments for account of policyholders 42,506 42,539
We have audited the consolidated financial statements for the year 2005 (as set out on pages 82 to 182 that are part of the financial statements of AEGON N.V., The Hague. These consolidated financial statements are the responsibility of the company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the Netherlands. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements give a true and fair view of the financial position of the company as at December 31, 2005 and of the result and the cash flows for the year then ended in accordance with the International Financial Reporting Standards as adopted by the EU and comply with the financial reporting requirements included in Part 9 of Book 2 of the Netherlands Civil Code as far as applicable.
Furthermore, we have to the extent of our competence, established that the Report of the Executive Board is consistent with the consolidated financial statements.
BALANCE SHEET OF AEGON N.V. AS AT DECEMBER 31, 2005 Amounts in EUR millions
Group companies Shares in group companies 3 17,525 13,502 Loans to group companies 4 7,259 5,984
Cash and cash equivalents 1,886 1,018 Deferred tax assets 548 —
AEGON N.V., incorporated and domiciled in the Netherlands, is a limited liability share company organized under Dutch law and recorded in the Commercial Register of The Hague under its registered address at AEGONplein 50, 2591 TV The Hague. AEGON N.V. serves as the holding company for the AEGON Group and has listings of its common shares in Amsterdam, New York, Frankfurt, London, Tokyo and Zurich.
Companies are allowed to apply IFRS valuation principles in their financial statements prepared under Part 9 as of January 1, 2004 following a change in legislation in the course of 2005. The transition to IFRS valuation principles by AEGON N.V. had a negative effect on shareholders’ equity as at January 1, 2004 of EUR 617 million and a positive effect on the reported net income for 2004 of EUR 596 million. Both effects are disclosed in the table in note 7 on page 188 of the financial statements. For comparative purposes, the balance sheet and income statement for 2004 have been adjusted accordingly.
At the balance sheet date monetary assets, monetary liabilities and own equity instruments denominated in foreign currencies are translated at the prevailing exchange rate. Non-monetary items carried at cost are translated using the exchange rate at the date of the transaction, whilst assets carried at fair value are translated at the exchange rate when the fair value was determined.
Exchange differences on non-monetary items are recognized in equity or the income statement accordingly consistently with other gains and losses on these items.
The group companies are stated at their net asset value, determined on the basis of IFRS as applied in the consolidated financial statements of the Group. For details on the accounting policies applied for the group companies refer to the notes to the consolidated financial statements on page 87 and following.
Cash comprises cash at banks and in-hand. Cash equivalents are short-term highly liquid investments 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 commitments.
NOTES TO THE FINANCIAL STATEMENTS OF AEGON N.V. Amounts in EUR millions, unless otherwise stated 2.9 EQUITY
A financial instrument issued by the company is classified as a liability if the contractual obligation must be settled in cash or another financial asset or through the exchange of financial assets and liabilities at potentially unfavorable conditions for the company.
For a list of names and locations of the most important group companies, refer to note 53 to the consolidated financial statements of the Group, page 172. The legally required list of participations as set forth in article 379 of Book 2 of the Netherlands Civil Code has been registered with the Trade Register in The Hague.
Additions / repayments 852 252 Other changes 94 1,059 5 OTHER LOANS
Common shares 192 186 Preferred shares A 53 53 Preferred shares B 6 4
Vereniging AEGON, based in The Hague, holds all of the issued preferred shares. Vereniging AEGON, in case of an issuance of shares by AEGON N.V., has the right to have issued to it as many class B preferred shares as shall enable Vereniging AEGON to prevent or correct dilution to below its actual percentage of total voting shares. Class B preferred shares will then be issued at par value (EUR 0.25), unless a higher issue price is agreed. In 2003/2004, 16,900,000 class B preferred shares were issued under these option rights. In 2005, Vereniging AEGON exercised its option rights to purchase in aggregate 6,950,000 class B preferred shares at par value to correct dilution caused by AEGON’s share dividend issuances and treasury share sales during the year.
Net income 2003 retained — — 1,033 (1,033) — — —
Changes in foreign currency translation reserve — — — — — (755) (755) Changes in revaluation subsidiaries — — — — 481 — 481 Transfer to legal reserve — — (167) — 167 — —
Dividend common shares — — (256) — — — (256) Dividend preferred shares — — (95) — — — (95) Share dividend 4 (4) — — — — — Issuance of shares 1 — — — — — 1 Repurchased and sold own shares — 236 (214) — — — 22 Coupons on perpetuals, net of tax — — (84) — — — (84)
Paid- RevaShare in- Retained Net luation Other capital surplus earnings income account reserves Total
Net income 2004 retained — — 2,256 (2,256) — — —
Dividend common shares — — (193) — — — (193) Dividend preferred shares — — (79) — — — (79) Share dividend 6 (6) — — — — — Issuance of shares 2 — — — — — 2 Repurchased and sold own shares — 220 (146) — — — 74 Coupons on perpetuals, net of tax — — (132) — — — (132)
The revaluation account reflects the legal reserve for investments in group companies. The foreign currency translation reserve is the legal reserve for currency differences on non-euro subsidiaries and refers to accumulated translation differences amounting to EUR 760 million (2004: EUR (755) million). The amounts are released to the income statement upon the sale of the subsidiary. In case of a negative balance, no distributions can be made out of the retained earnings to the level of this negative amount.
On the balance sheet date AEGON N.V. and its subsidiaries held 23,314,930 of its own common shares with a face value of EUR 0.12 each. Movements in the number of repurchased own shares held by AEGON N.V. were as follows: Transactions in 2005: Purchase: one transaction on May 17, price EUR 9.85 3,821,645 — Sale: 31 transactions, average price EUR 10.28 (10,403,274) — Transactions in 2004: Purchase: two transactions on May 18 and September 24, average price EUR 9.88 — 7,466,660 Sale: three transactions April 1, April 22 and July 19, average price EUR 10.29 — (9,663,508)
The consideration for the related shares is deducted from or added to the paid-in-surplus.
8 OTHER EQUITY INSTRUMENTS Junior Perpetual Share perpetual cumulative options capital subordinated not yet securities bonds exercised Total
The coupon of the USD 250 million junior perpetual capital securities, callable in 2010, is based on the yield of three-month Libor plus an additional spread of 87.5 basis points. The coupon will be reset each quarter based on the then prevailing three-month Libor yield, with a minimum of 4%. The coupon of the euro junior perpetual capital securities is based on the yield of ten-year Dutch government bonds (‘CMT’) plus an additional spread of ten basis points. The coupon will be reset each quarter based on the then prevailing ten-year Dutch government bond yield, with a maximum of 8%. The coupon of the USD 500 million junior perpetual capital securities, callable in 2014, is based on the yield of ten-year US dollar interest rate swaps (‘CMS’), with an additional spread of ten basis points. The coupon is reset each quarter based on the then prevailing ten-year US dollar interest rate swap yield, with a maximum of 8.5%. The interest rate exposure on some of these securities has been swapped, using derivatives, to three-month Libor yield.
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 co-applicant with its subsidiary companies AEGON USA, Inc., Commonwealth General Corporation and Transamerica Corporation (EUR 3,680 million). At December 31, 2005, there were no amounts due and payable.
Appropriation of profit will be determined in accordance with the articles 31 and 32 of the Articles of Incorporation of AEGON N.V. The relevant provisions read as follows: 1. The General Meeting of Shareholders shall adopt the annual accounts.
2. If the adopted profit and loss account shows a profit, the Supervisory Board may decide, upon the proposal of the Executive Board, to set aside part of the profit to augment and/or form reserves.
3. From the net profit as reflected in the profit and loss account, if it is sufficient to this end after a part of the profit has been set aside for augmenting and/or forming reserves in accordance with 2, first of all the holders of preferred shares shall receive, on the amount paid on their preferred shares, a dividend the percentage of which, on an annual basis, shall be equal to the European 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.
4. The profits remaining after application of the above shall be put at the disposal of the General Meeting of Shareholders. The Executive Board, subject to the approval of the Supervisory Board, shall make a proposal for that purpose. A proposal to pay a dividend shall be dealt with as a separate agenda item at the General Meeting of Shareholders.
It is proposed to the annual General Meeting of Shareholders on April 25, 2006, to pay a dividend for the year 2005 of EUR 0.45 per common share of EUR 0.12 par value which, after taking into account the EUR 0.22 interim dividend, leads to a final dividend of EUR 0.23 per common share. It is also proposed that the final dividend will be made available entirely in cash or entirely in shares, at the election of the shareholder. The value of the stock dividend will be approximately the same as the value of the cash dividend and will be paid out of the paid-in surplus fund. Shareholders can elect to receive a dividend in cash or in shares up to and including May 5, 2006.
In order to reflect the prevailing market price of AEGON N.V. common shares fully within the indication provided, the number of dividend coupons that gives entitlement to a new common share of EUR 0.12 will be determined on May 9, 2006, after 5:30 p.m., based on the average share price quoted by Euronext Amsterdam in the five trading days from May 3, 2006 up to and including May 9, 2006.
Upon approval of this proposal, profit will be appropriated as follows: Dividend on preferred shares 79 Interim dividend on common shares (cash portion) 102 Final dividend on common shares (cash portion) 362 Earnings to be retained 2,189
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 1983, AGO Holding N.V. and Ennia N.V. merged into AEGON N.V. Vereniging AGO initially received approximately 49% of the common shares (which was reduced gradually to less than 40%) and all of the preferred shares in AEGON N.V., giving it voting majority in AEGON N.V. and changed its name into Vereniging AEGON.
On May 9, 2003, AEGON’s shareholders approved certain changes to AEGON’s corporate governance structure and AEGON’s relationship with Vereniging AEGON in an extraordinary General Meeting of Shareholders. AEGON’s Articles of Incorporation were subsequently amended on May 26, 2003. The relationship between Vereniging AEGON and AEGON N.V. was changed as follows: • The 440,000,000 preferred shares with nominal value of EUR 0.12 held by Vereniging AEGON were converted into 21 1,680,000 new class A preferred shares with nominal value of EUR 0.25 and the paid-in capital on the preferred shares was increased by EUR 120,000 to EUR 52,920,000. The voting rights pertaining to the new preferred shares (the class A preferred shares as well as the class B preferred shares which may be issued to Vereniging AEGON under the option agreement as described in the following sections) were adjusted accordingly to 25/12 vote per preferred share.
• 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., has the right to have issued to it as many class B preferred shares as shall enable Vereniging AEGON to prevent or correct dilution to below its actual percentage of total voting shares. Class B preferred shares will then be issued at par value (EUR 0.25), unless a higher issue price is agreed. In 2003/2004 16,900,000 class B preferred shares were issued under these option rights. In 2005, Vereniging AEGON exercised its option rights to purchase in aggregate 6,950,000 class B preferred shares at par value to correct dilution caused by AEGON’s share dividend issuances and treasury share sales during the year.
Share dividend 2004 received 3,821,645 — — Sale of shares, offering price of EUR 9.847 per share (3,821,645) — — Interim share dividend 2005 received 3,439,481 — — Exercise option right preferred B shares — — 6,950,000 Sale of shares, offering price of EUR 1 1.45 per share (3,439,481) — —
Accordingly, under normal circumstances the voting power of Vereniging AEGON, based on the number of outstanding and voting shares (excluding issued common shares held in treasury by AEGON N.V.) at December 31, 2005, amounts to approximately 22.44%. In the event of a ‘special cause’, Vereniging AEGON’s voting rights will increase, currently to 32%, for up to six months per ‘special cause’.
Based on publicly available information there are no major shareholders exceeding 5% participation.
We have audited the company financial statements for the year 2005 (as set out on pages 183 to 195) that are part of the financial statements of AEGON N.V., The Hague. These company financial statements are the responsibility of the company’s management. Our responsibility is to express an opinion on these company financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the Netherlands. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the company financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the company financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the company financial statements. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the company financial statements give a true and fair view of the financial position of the company as at December 31, 2005 and of the result for the year then ended in accordance with the accounting principles generally accepted in the Netherlands and comply with the financial reporting requirements included in Part 9 of Book 2 of the Netherlands Civil Code.
Furthermore, we have to the extent of our compentence, established that the Report of the Executive Board is consistent with the company financial statements.
ADJUSTMENTS FOR: f) Insurance and investment contracts 669 290 (422) (17) g) Pensions and other post-employment benefits 1,268 1,432 (278) 15 i) Balance of other items (112) (89) 57 (58)
Cumulative effect of adopting SOP 03-01, net of tax — (207) Cumulative effect of adopting DIG B36, net of tax — (77) Cumulative effect of adopting FAS 123, net of tax (5) —
SUMMARY OF DIFFERENCES BETWEEN IFRS AND US GAAP, WHICH HAVE AN IMPACT ON REPORTED SHAREHOLDERS’ EQUITY
b) Deferred expenses and VOBA IFRS Deferred expenses comprise DPAC and deferred transaction costs.
The adjustment in the shareholders’ equity column of the reconciliation and the adjustment in the net income column of the reconciliation include the effect of unlocking for DPAC on flexible premium products in the United Kingdom and the Netherlands and the difference in accounting for acquisition costs related to non-insurance investment type products and service contracts in the United States and the United Kingdom.
Property is initially recognized at cost. Subsequently, investments in real estate are measured at fair value with the changes in fair value recognized in the income statement. Property held for own use is carried at its revalued amount, which is the fair value at the date of revaluation less any subsequent accumulated depreciation and impairment losses. On revaluation the accumulated depreciation is eliminated against the gross carrying amount of the asset and the net amount is restated to the revalued amount. Increases in the net carrying amount are recognized in the related revaluation reserve in equity and are released to retained earnings over the remaining useful life of the property.
The adjustment shown in the shareholders’ equity column of the reconciliation represents the reduction from fair value to the depreciated historical cost basis.
e) Derivatives Derivatives are measured at fair value under both IFRS and US GAAP.
The adjustment shown in the net income column of the reconciliation represents the effect of different starting dates for certain hedge transactions. Under IFRS these transactions were designated retrospectively and under US GAAP these transactions were designated at the time the formal FAS 133 documentation requirements were established.
In 2004, a change in estimate with regards to the assumptions used in the valuation of embedded derivatives included in the Canadian segregated funds business resulted for US GAAP in a net loss, after DPAC offset and tax, of EUR 1 14 million.
US GAAP For AEGON Americas all life insurance liabilities on an IFRS basis are determined following US GAAP as these local accounting principles were followed previously for DAP. Therefore no reconciling item exists for AEGON Americas.
The adjustment in the shareholders’ equity column of the reconciliation represents the effect of different models used in calculating insurance liabilities under US GAAP for the Netherlands and the United Kingdom.
For AEGON The Netherlands, traditional life and universal life type contracts, the insurance liabilities under IFRS are based on current assumptions for longevity and future administration expenses. Furthermore, DPAC is amortized on a straight line basis over the duration of the contracts. Under US GAAP traditional life contract liabilities are adjusted using historical assumptions and a deferred revenue liability is established. For universal life type contracts the liabilities for US GAAP are adjusted to the policyholder account balance and an unearned revenue liability is established. For traditional limited pay products a deferred profit liability is established.
SOP 03-01 changed the reserving for mortality on universal life contracts and for guaranteed living and death benefits on variable annuity and variable life contracts. The implementation mainly changed the timing of the recognition of mortality profits in earnings. The liability for guaranteed living and death benefits on variable annuity and variable life contracts in the United States is the same as described for IFRS. For US GAAP, the impact from the adoption of SOP 03-01 was recorded as a cumulative effect of a change in accounting principles as at January 1, 2004.
The amount in reconciliation in the net income column represents the difference between the pension expenses on SFAS 87 basis including the amortization of the cumulative actuarial gains and losses outside the corridor and the pension expenses based on IAS 19 Employee benefits (IAS 19) taking into account the amortization of the cumulative actuarial gains and losses outside the corridor since January 1, 2004. Furthermore, it includes the different treatment related to assets held by country units that do not qualify as plan assets but are classified as investments. As a result the direct income on these investments is included in net income and the expected return on plan assets is not taken into account for the determination of the pension expenses.
US GAAP Under US GAAP the junior perpetual capital securities, as well as perpetual cumulative subordinated bonds, are treated as debt instruments. Interest charges, based on the effective interest rate, are included in net income.
i) Balance of other items Certain items are recorded differently or in different periods on the two bases of accounting.
QUARTERLY RESULTS amounts in millions 2004 EUR 2005 EUR First Second Third Fourth Total First Second Third Fourth Total quarter quarter quarter quarter year quarter quarter quarter quarter year
66 70 72 96 304 Life for account of policyholders 60 14 90 79 243 18 11 14 (7) 36 Fee — off balance sheet products 20 32 (9) (10) 33 210 10 31 (273) (22) Other non-operating income/(charges) 204 27 22 24 277 1 12 5 7 25 Share in profit/(loss) of associates 3 11 (2) 8 20
Assets held by long-term employee benefit funds are part of plan assets. These are assets (other than non-transferable financial instruments issued by the reporting entity) that: • Are held by an entity that is legally separate from the reporting entity and exists solely to pay or fund employee benefits; and
• Are available to be used only to pay or fund employee benefits and are not available to the reporting entity’s own creditors.
Discretionary participation feature is a contractual right to receive, as a supplement to guaranteed benefits, additional benefits: • That are likely to be a significant portion of the total contractual benefits; • Whose amount or timing is contractually at the discretion of the issuer; and
Equity method is a method of accounting whereby the investment is initially recognized at cost and adjusted thereafter for the postacquisition change in the investor’s share of net assets of the investee. The profit or loss of the investor includes the investor’s share of the profit or loss of the investee.
• A contract that will or may be settled in the entity’s own equity instruments and is: — A non-derivative for which the entity is or may be obliged to receive a variable number of the entity’s own equity instruments; or
— A derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity’s own equity instruments.
Financial liability is any liability that is: • A contractual obligation to deliver cash or another financial asset to another entity or to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavorable to the entity; or
Policy acquisition costs are the expenses incurred in soliciting and placing new business as well as renewal of existing business. It includes agent’s commissions, underwriting expenses, medical and credit report fees, marketing expenses and all other direct and indirect expenses of the departments involved in such activities.
Qualifying insurance policies are a component of plan assets. These are insurance policies issued by an insurer that is not a related party of the reporting entity, if the proceeds of the policies: • Can be used only to pay or fund employee benefits under a defined benefit plan; and
• The item has a cost or value that can be measured with reliability.
Sovereign exposures are AAA rated government bonds, or lower rated government bonds if purchased in local currency by a reporting unit.
With headquarters in The Hague, the Netherlands, AEGON companies employ approximately 27,000 people. AEGON’s three major markets are the United States, the Netherlands and the United Kingdom. In addition, the group is present in a number of other countries including Canada, China, Czech Republic, Hungary, Poland, Slovakia, Spain and Taiwan.