December 31, 2017. It presents the consolidated financial statements of Aegon pages 147-308 and the stand-alone financial statements of Aegon N.V. pages 310-322, both prepared in accordance with the International Financial Reporting
Aegon N.V. is referred to in this document as 'Aegon', or 'the
Company', and is together with its member companies referred to as 'Aegon Group' or 'the Group'. For such purposes, 'member companies' means, in relation to Aegon N.V., those companies required to be consolidated in accordance with the Netherlands legislative requirements relating to consolidated accounts.
Presentation of certain information References to the 'NYSE' are to the New York Stock Exchange and references to the ‘SEC’ are to the US Securities and
'UK pound' and 'pound sterling' when referring to the lawful currency of the United Kingdom; and 'PLN' when referring to the lawful currency of Poland.
2017 was a year to be proud of as we continued to grow our business profitably, strengthened our capital position, executed our strategy and helped millions of people achieve a lifetime of financial security.
Our environment Last year saw a welcome improvement in the world economy, with the 3% pickup in global growth the highest rate recorded since 2011. For Aegon, the macroeconomic backdrop was in general positive. Economic growth improved across the majority of our markets, and this was reflected in business and consumer confidence. Inflation remained relatively low and central bank policies moved slowly onto a path of normalization globally. The rise in interest rates, be it from a very low base, was a beneficial development not only for customers wishing to save for the future, but also for Aegon and the industry as a whole.
Political events were once again followed very closely by the financial community. Indeed, political developments in Aegon’s three largest markets continued to make headlines, with a new President taking office in the US, the formation of a new coalition in the Netherlands, and the triggering of article 50 by the UK government to leave the EU. The regulatory world also continued to change rapidly. In the US, for instance, the
Department of Labor implemented a new fiduciary rule to ensure customers’ best interests are served, whereas in the UK, changes to corporate tax rate policy required us to hold more capital.
Our financial performance 2017 was a very positive year for Aegon from a financial perspective, and I am pleased that we are, as a result, well positioned to achieve our 2018 financial targets. In terms of our key financial metrics, our earnings were strong, we continued to generate solid sales – particularly in fee businesses, pension businesses, mutual funds and third-party asset management
Furthermore, recapitalizing our Dutch business and strengthening our group solvency ratio means that we are able to fully focus on continuing to implement our strategy, such as executing our expense savings program, which will lead to annual
Our company’s transformation Customers’ needs and expectations are continuously evolving and we are therefore changing the way we serve them. In 2017, we made significant progress across our company in becoming a more innovative and digital company, positioning us well for future growth.
In our largest market, the US, we continued our work to reduce expenses in order to boost earnings and modernize our business by investing in new technology. In early January of 2018, we announced that we would outsource the administration of our life, health, annuities and benefits businesses. This decision represents a major strategic step forward, as our customers will benefit from both enhanced digital capabilities and higher service levels. In addition, the divestment of the majority of our run-off businesses marked a major milestone in the strategic transformation of our US business.
The most important development in the Netherlands over the last year was the recapitalization of our Dutch business by injecting capital from the Group and divesting Unirobe
Meeùs Groep. As a result, the unit is now strongly capitalized, is expected to generate healthy cash flows, and is positioned to pay a dividend to the group in 2018, which represents a very significant turnaround from only a year ago.
During 2017, we took the decision to implement a new structure in our European asset management business to enhance synergies, become more agile and improve earnings. Furthermore, our asset management joint ventures in China and France have proven very successful in contributing to underlying earnings and the growth of our business.
The significant progress achieved in our largest markets was also replicated in our developing markets. In Asia, for instance, our Chinese joint venture has become profit-making due to the continued success of our critical illness product. Our Asian highnet -worth business has made a meaningful contribution to the group, upstreaming a special dividend of USD 200 million for the first time. Elsewhere, our business in India is a leader in the digital insurance market, and continues to set the standard for offering life insurance online. Perhaps most pleasing of all, we have made significant progress in terms of how we share ideas, information
Our communities Being a responsible corporate citizen is a role we take very seriously. We manage over EUR 800 billion of investments and have a duty to invest responsibly. We also support our communities in other ways: raising global awareness about retirement issues; fulfilling our tax obligations; and helping to implement the UN’s 2030 Sustainable Development Goals and Paris Agreement on Climate Change. Further information about all these issues, together with an overview of our strategy, can be found in our 2017 Review, which is published online.
Our employees and shareholders I am very proud of how our team of over 28,000 colleagues continued to deliver at a time of change. I would therefore like to pay tribute to their hard work and dedication over the last 12 months, and express my gratitude for all that they do to serve our customers. Our thanks also go to our investors, without whom we would not be able to meet our purpose.
Board, Dirk Verbeek, both of whom are stepping down at the
Annual General meeting in May 2018. I would like to sincerely thank Rob and Dirk for the commitment, challenge and support they have provided over the last 10 years, and wish them well for the future.
Looking ahead Our company has every reason to look forward with confidence.
We are well on track to achieve our 2018 financial targets, and we have a compelling strategy. Moreover, the need for the financial security we help provide to millions of customers has never been so great. By continuing to transform and grow our business we will therefore be even better placed to help people around the world secure their financial future.
He was appointed as a member of Aegon’s Executive Board in 2003, overseeing the Company’s international growth strategy. In April 2007, Mr. Wynaendts was named Aegon’s Chief
Operating Officer. A year later, he became CEO and Chairman of Aegon’s Executive Board and Management Board. His current term of office ends in 2019. Mr. Wynaendts has been an Independent Director of the Board of Air France-KLM S.A.
since May 2016 and a member of the Supervisory Board of Puissance B.V. (not listed) since May 2017.
Matthew J. Rider (1963, American) CFO and member of the Executive and Management Boards of Aegon N.V. Matt Rider began his career at Banner Life Insurance Company and held various management positions at Transamerica,
Mark Bloom (1964, American) Global Chief Technology Officer and member of the Management Board of Aegon N.V. Mark Bloom has over 30 years' experience in information technology. He joined Aegon from Citi in February 2016, where he served as Global Head of Consumer Digital and Operations
Technology, responsible for digital, data and operations technology solutions and innovations. Prior to that, he held a number of technology leadership positions in financial services and the aerospace industry. As Global Chief Technology
Allegra van Hövell-Patrizi (1974, Italian) Chief Risk Officer of Aegon N.V. and member of the Management Board of Aegon N.V. Allegra van Hövell-Patrizi began her career in 1996 at McKinsey
& Company, specializing in financial institutions. After several years as a partner there, she joined F&C Asset Management in 2007 as a member of the Management Committee. In 2009, she joined Prudential plc where she became Group Risk Director, and a member of the Group Executive Risk Committee, as well as the PUSL Board (within the Prudential plc group).
Board in June 2008, and Head of Aegon Continental Europe in January 2017. Mr. Keim was a Board member at the Verbond van Verzekeraars until December 2016. Mr. Keim is a member of the Supervisory Board of Eneco Holding N.V., and holds a Management Board position at VNO-NCW.
Onno van Klinken (1969, Dutch) General Counsel and member of the Management Board of Aegon N.V. Onno van Klinken has over 25 years' experience providing legal advice to a range of companies and leading Executive Board offices. Mr. Van Klinken started his career at Allen & Overy, and previously worked for Aegon between 2002 and 2006. He then served as Corporate Secretary for Royal Numico, before it was acquired by Groupe Danone. His next position was as General
Group Legal, Regulatory Compliance, the Executive Board Office, and Government and Policy Affairs. Mr. Van Klinken has been a member of Aegon’s Management Board since August 2016.
Resources, Communications and Corporate Strategy. Following several years as a consultant – during which time she worked for Spencer Stuart, among other companies – Ms. Mahieu was appointed Senior Vice President Corporate Human Resource
Management at Royal Philips Electronics in 2003. Ms. Mahieu joined Aegon in 2010 as Global Head Human Resources, and has been a member of Aegon’s Management Board since
in 1994. She moved to the Netherlands in 2000, where she held a number of various roles, leading to her appointment as CEO of
Aegon’s strategy Long-term value creation To prosper, companies must create long-term value for society and their stakeholders. Aegon creates value in several ways, for instance as a provider of insurance and other financial services, and a responsible employer and business partner. Aegon also makes significant social and economic contributions through its returns to shareholders, its tax payments, its support for local communities and, most importantly, through the money the Company invests both for its own account and on behalf of its customers. Aegon’s aim is to be a responsible corporate citizen, fully aware of the impact the Company’s businesses have on its stakeholders and on society as a whole.
Most Aegon businesses operate in a highly-regulated environment. This environment may be affected by a number of factors: economic, financial, regulatory, social, environmental and employee-related. More information on the aspects relevant to Aegon can be found in the non-financial statement on page 14.
Aegon’s ambition Aegon’s purpose – to help people achieve a lifetime of financial security – forms the basis of the Company's strategy. The central focus of the strategy is to further change the Company from a product-based to a customer need-driven company. This means serving diverse and evolving needs across the customer life cycle; aligning Aegon’s brand promise with being a trusted partner for financial solutions that are relevant, simple, rewarding, and convenient; and developing long-term customer relationships by providing guidance and advice, and identifying additional financial security needs at every stage of customers lives.
The aim of Aegon’s strategy is that the Company be a truly international enterprise with a common culture across its businesses of working together; that Aegon’s respective businesses learn from one another and replicate best practices to benefit customers; that it recognizes and addresses opportunities in rapidly changing markets in a timely and agile way; and that it attracts, develops, and retains the best people who share its values and are committed to its purpose.
(‘Loyal Customers’); �� Delivering excellent service to customers at competitive cost levels by increasing scale and improving the quality, efficiency and accuracy of processes with technology (‘Operational
Aegon invests money received from customers, and works to increase its value over time. Aegon invests both for its own account and on behalf of its customers.
Acquisitions & divestments Acquisitions can accelerate the implementation of Aegon’s strategy, provide it with access to new technologies and provide the scale needed in markets in which it is already active. Aegon is selective when determining which businesses it would like to acquire, generally targeting acquisitions that fit the Company's mission of securing the financial future of its customers, and that are aligned with its four strategic objectives.
The Company uses several financial criteria for determining the attractiveness of acquisitions, including: return on capital, internal rate of return, capital generation, and capital fungibility.
Risks and opportunities for Aegon Aegon has identified several risks to successfully executing its strategy, which are both financial and non-financial in nature.
Opportunities with regards to the most significant topics and issues affecting Aegon’s business are also described in the non-financial statement on page 14-15.
Operational and financial goals Aegon has a number key financial targets, including: �� Realize annual operating expense savings of €350 million; �� Achieve a return on equity of 10% by 2018; �� Return €2.1 billion of capital to shareholders over 2016-2018 through share buyback and dividends; �� Achieve an annual sales growth of 10% by growing fee-based businesses and expanding in Asset Management; and �� Maintain a solid capital position with a Solvency II ratio within a range of 150-200% at Group level.
Non-financial information is further described in the non-financial statement on page 17 (Performance indicators).
Aegon exists to help people achieve a lifetime of financial security. It uses a multi-brand, multichannel distribution approach to meet its customers' needs, and fosters an entrepreneurial spirit within its businesses, encouraging the development of innovative products and services.
Portugal may be referred together as 'Europe', although Europe is not an operating segment.
A summary of historical financial data is provided in the table below. It is important to read this summary in conjunction with the consolidated financial statements and related notes (see pages 147-308) of this Annual Report.
Meeting of Shareholders on May 18, 2018, the Supervisory Board will, absent unforeseen circumstances, propose a final dividend of EUR 0.14 per common share (at each shareholders option in cash or in stock), which will bring the total dividend for 2017 to EUR 0.27. With respect to the Common Shares B, each which has financial rights attached to it of 1/40th of a Common Share, the proposed final dividend will be EUR 0.0035. After taking the interim-dividend 2017 of EUR per Common Share B into account, this will result in a total 2017 dividend of EUR 0.00675 per
Exchange rates Fluctuations in the exchange rate between the euro and the US dollar will affect the dollar equivalent of the euro price of Aegon’s common shares traded on Euronext
1 The US dollar exchange rates are the noon buying rates in New York City for cable transfers in euros as certified for customs purposes by the Federal Reserve
The Company also has operations elsewhere in Europe, as well as in Asia and Latin America.
US, Europe and parts of Asia. Interest rates remain low, however.
Insurance sector regulation, meanwhile, has become increasingly complex. There has also been a rise in political uncertainty, and rapid social change, driven by aging and the introduction of new digital technologies.
Low interest rates Influence and control Aegon has no direct control over interest rates. Benchmark rates are primarily the responsibility of central banks and governments. Longer-term rates, meanwhile, are determined by financial markets. Despite recent increases in the US and UK, rates overall remain at historically low levels.
Opportunities As a result of low rates, demand may increase for alternative savings products (which are less dependent on interest rate returns). At the same time, there are opportunities to refinance corporate debt at a lower rate.
Opportunities Aging has brought increased demand for pensions and other long-term savings and investments. At the same time, many governments are opening up markets for at- or after-retirement products, offering new opportunities for financial services providers like Aegon.
Action taken Aegon has taken steps to reduce its longevity risk, partly through financial products such as longevity swaps. The Company has also launched new at-retirement products, and is making targeted investments in healthcare and new care homes for the elderly.
Increased economic and financial uncertainty Influence and control Like other companies, Aegon cannot control political or economic events, but it must respond, where possible, to protect its business and the interests of its stakeholders.
Increased regulation in financial services (including capital requirements) Influence and control Aegon has no control over laws and regulations in its industry, but does work closely with governments and regulators in the US, Europe and Asia.
Opportunities Effective regulation helps strengthen trust in financial services, and may open up new opportunities by allowing innovative products or creating new areas for investment.
Action taken Aegon has a Global Governmental and Policy Affairs department and invests extensively in research into attitudes to aging and retirement, which may influence long-term policy. Where there are opportunities, Aegon is also developing new products and services, and using changes in regulation to redefine relationships with both its customers and distributors.
1 In 2016, Aegon set up the Blockchain Insurance Industry Initiative (B3i) with four other insurers. B3i’s aim is to develop uses for blockchain technology in insurance. The initiative’s first project – a common platform for reinsurance – launched an initial prototype in December 2017.
Value creation Aegon creates both short and long-term value for its stakeholders. This value is often financial – through the payment of claims and benefits to customers, for example. But it may also be economic, social or environmental: Nature of value created Customers Through its products and services, Aegon offers protection and peace of mind. The Company pays out claims and benefits, and provides returns on customers’ long-term savings and investments.
Business partners Aegon invests in its joint ventures, pays suppliers for goods and services, and commissions to brokers, financial advisors and other intermediaries.
To create this value, Aegon makes use of different resources or capitals4. These inputs include: �� Financial capital (from the Company’s investors through investment in Aegon shares, bonds and other securities). �� Human & intellectual capital (through the skills and expertise of the Company’s employees in product development, pricing, marketing, investment and risk management).
Strategy and objectives Over the past year, Aegon has reorganized many of its businesses, reducing costs and selling operations no longer considered core. At the same time, the Company has strengthened its capital position, set out responsible business objectives, and invested in new areas that will transform customer service and bring future growth. With this strategy, the aim is to ensure Aegon remains profitable, relevant to its customers, and able to continue creating long-term financial, social and environmental value for all its stakeholders. For more details of our strategy, measures taken and performance, please see pages 9-10 and Aegon’s Review, available online.
(claims processing, underwriting, customer service, pricing etc.). Recent restructuring at the Company's operations in the
Most financial value can be measured, but often social and environmental value is more difficult to quantify. Aegon also recognizes that, in creating value for one stakeholder group, it may deplete value for another group (for example, reducing headcount may result in lower costs and improved profit margins, creating value for shareholders and other investors, while overall value for employees is reduced).
Impact investments with specific environmental benefit €0.8 billion €0.4 billion €0.6 billion + Environmental
Impact investments with specific social or health benefits €7.2 billion €6.8 billion €7.0 billion + Social
Corporate income tax paid3) €173 million €116 million €405 million Social
Community investment (donations and value of employee volunteering) €8.9 million €8.8 million €8.6 million + Social 1 Value created may be financial, social or environmental (or a combination of these values). Charts shows main value created for each stakeholder group only. 2 Does not include impact of share buy-backs. 3 Negative figures denote amounts received from the tax authorities. Please note that there is often no direct correlation between tax on earnings for any given year and amounts paid or received in tax.
Culture change To execute its strategy successfully, Aegon realizes that it needs to adapt its corporate culture to new circumstances. In 2016, the Company introduced Future Fit. With this program,
Aegon’s goal is to create a more flexible organization, able to adapt quickly to new ways of working and doing business.
With Future Fit, Aegon’s aim is to ensure employees also have the skills they will need in their future careers, whether within the
Policies, procedures and outcome7 Aegon’s system of governance is based on checks and balances.
All employees must abide by Aegon’s Code of Conduct. This covers a number of topics, including data protection, environmental responsibility, human rights, and money laundering. The Code of Conduct also contains provisions for reporting suspected illegal and unethical behavior. Aegon has separate global policies to address prevention of financial crime (including fraud, money laundering, economic sanctions, and bribery and corruption).
• Policy attestation for bribery and corruption risk (Conflict of Interest and Gift & Entertainment Policies).
Aegon’s Global Information Security Policy sets out the Company’s approach to cyber threats and data protection. The policy applies to all Aegon businesses, and is supported by mandatory training in data and cyber security.
Customer complaints relating to data privacy 198 (down from 275 in 2016). An internal assessment showed 73% compliance with the Company's Global Information Security Policy. This is in line with expectations; most examples of non-compliance were in smaller operating units and were minor in nature.
Aegon’s Statement on Diversity & NonDiscrimination applies to all its businesses worldwide. Diversity is also included in Aegon’s Code of Conduct for employees, and there are diversity targets in place for the Company’s Supervisory, Executive and Management Boards.
• Percentage of women in senior management and at Supervisory, Executive or Management Board level.
Environment Aegon’s Environmental Policy emphasizes the importance of minimizing damage to the environment through the Company’s use of energy, water and other utilities. The policy also commits Aegon, where possible, to identifying renewable or sustainable sources of energy.
from previous year’s 69,213 metric tons); business travel 80.7 million km (-26%); gas consumption 1.8 million m3 (-20%); electricity consumption 85.7 GwH (-12%); water use 208,531 m3 (-20%). Renewable energy represented 26% of overall energy consumption in 2017 (up from 24%).
• Business travel by air, consumption of gas, electricity and water.
Work-related injuries and illnesses 167 (-18% from 204 the previous year); absentee rate 2.4%, up from 2.0%.• Absentee rate (by country of operation).
Investment Aegon has a Responsible Investment Policy, covering all major asset classes. This policy sets out minimum social and environmental standards for the Company’s investments. Aegon also excludes investment in certain areas, including controversial weapons, tobacco, and certain coal mining companies. Aegon’s approach to responsible investment is overseen by a Responsible Investment Strategy Committee, supported by a technical committee, which manages all operational aspects. The Company also has an extensive program of shareholder engagement, focused mainly on social, environmental and governance issues.
Procurement Aegon’s Sustainable Procurement policy sets out business conduct, social and environmental standards for suppliers of goods and other services. Aegon businesses regularly assess suppliers against these standards, and require leading suppliers to sign a ’sustainability declaration’.
• Percentage of Aegon businesses regularly assessing suppliers for social, environmental and governance risk.
• Percentage compliance with terms of the Pricing & Product Development Policy.
An internal assessment of Aegon’s business and operating units showed 95% compliance with the requirements of the policy.
• Percentage of workforce with non-financial metrics in performance appraisals and variable compensation.
Aegon’s Operational Risk Management Framework covers social and environmental risk. Under this framework, businesses are required to set minimum tolerance levels. Risks covered include tax, processing risk, financial crime and business disruption.
Tax Aegon has a Global Tax Policy. This policy is based on the principle of ‘fair taxes’ which means paying the right amount of taxes in the right places. Aegon tax follows business, which means that decisions are taken for business reasons and not for tax advantages.
In 2017, Aegon paid a total of €444 million in taxes (this covers corporate income tax, wage tax, irrecoverable VAT or GST, insurance premium tax and other taxes). The Company also collected €2.2 billion in taxes on behalf of governments (including withholding tax, wage tax, insurance premium tax, and other taxes).
Business lines Americas Life Products offering protection against mortality, morbidity and longevity risks, including traditional and universal life, in addition to endowment, term, and whole life insurance products.
United States offered primarily to tax-qualified institutional entities such as 401(k) plans and other retirement plans.
Europe The Netherlands �� Life: Products offering protection against mortality, morbidity, and longevity risks, including traditional and universal life, in addition to employer, endowment, term, whole life insurance products; mortgages; annuity products; and banking products, including saving deposits.
United Kingdom �� Life: Individual protection products, such as term insurance, critical illness, income protection and international/
Slovakia, and Turkey. Includes life insurance, individual and group pension products, savings and investments, in addition to general insurance.
Spain & Portugal Distribution partnerships with Santander in Spain & Portugal and with Liberbank in Spain. Includes life insurance, accident and health insurance, general insurance and investment products.
Results of operations This Annual Report includes the non-IFRS-EU financial measure: underlying earnings before tax. The reconciliation of this measure to the most comparable IFRS-EU measure is presented in the table below in addition to note 5 'Segment information'
Aegon’s results against targets using the non-IFRS-EU measures presented in this report. While many other insurers in Aegon’s peer group present substantially similar non-IFRS-EU measures, the non-IFRS-EU measures presented in this document may nevertheless differ from the non-IFRS-EU measures presented by other insurers. There is no standardized meaning to these measures under IFRS-EU 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 making a comparison. Aegon believes the non-IFRS-EU measures present within this report, when read together with Aegon’s reported IFRS-EU financial statements, provide meaningful supplemental information for the investing public. This enables them to evaluate Aegon’s businesses after eliminating the impact of current IFRS-EU accounting policies for financial instruments and insurance contracts, which embed a number of accounting policy alternatives that companies may select in presenting their results (as companies may use different local generally accepted accounting principles (GAAPs)), and this may make the comparability difficult between time periods.
Run-off businesses 30 54 (45) Income before tax (excluding income tax from certain proportionately consolidated joint ventures and associates) 2,437 836 192 Income tax from certain proportionately consolidated joint ventures and associates included in income before tax 44 31 45
, o th er ac ti vi ti es a nd el im in at io ns
Results 2017 worldwide Aegon’s net income in 2017 improved compared with 2016 to EUR 2,361 million. Underlying earnings before tax increased by 10% compared with 2016 to EUR 2,103 million in 2017, as higher underlying earnings before tax from the Americas, Europe and Asia were only partly offset by lower Asset Management underlying earnings before tax and Holding and other activities. The net result in 2017 benefited from realized gains of EUR 413 million mainly related to normal trading in the investment portfolio, as well as a EUR 554 million benefit related to the US tax reform. Other charges amounted to EUR 68 million in 2017, as the net gain from divestments was more than offset by other items, including charges related to assumption changes and model updates.
Net income Net income amounted to EUR 2,361 million in 2017 driven by underlying earnings before tax of EUR 2,103 million, realized gains and an effective tax rate of only 3% as a result of a benefit related to US tax reform.
�� Underlying earnings before tax from the Americas increased compared with 2016 to EUR 1,381 million in 2017. Expense reductions, an improvement in claims experience, and higher fee revenue resulting from favorable equity market performance more than offset net outflows.
�� Total holding costs amounted to EUR 170 million in 2017 compared with EUR 162 million in 2016 impacted by regulatory projects.
Fair value items The results from fair value items amounted to nil in 2017.
Netherlands, as well as negative fair value changes on equity hedges in the United Kingdom, and interest rate hedges in the
Netherlands to protect Aegon’s capital position. Gains on interest rate swaps were the main driver of the EUR 24 million fair value gains in 2017 at the holding.
During the year, the revaluation reserves net of deferred tax liabilities decreased by EUR 0.5 billion to EUR 4.9 billion.
The methodology is subject to annual review. The RBC ratio in the
Netherlands, the estimated Solvency II ratio at the end of 2017 amounted to 199%, up from 134% at the end of 2016. The ratio benefited from the aforementioned capital injection, model changes, derisking and the divestment of UMG. The estimated
Solvency II ratio at the end of 2017 of Aegon United Kingdom amounted to 176%, up from 156% at the end of 2016.
The capital generation, the completion of the Part VII transfers related to the divestment of the majority of the UK annuity book and model changes more than offset remittances to the Group.
Americas, EUR 176 million from Asia and EUR 167 million from the United Kingdom. Aegon spent EUR 1.1 billion on capital injections, including EUR 1 billion into the Netherlands.
Income tax (250) 78 n.m. Of which Income tax from certain proportionately consolidated joint ventures and associates included in income before tax (31) (33) 6
Net deposits (on and off balance) Amounts in EUR millions 2016 2015 %
Net income The net income amounted to EUR 586 million in 2016 driven by underlying earnings before tax of EUR 1,913 million, and was impacted by the book loss on the divestment of the UK annuity portfolio and fair value losses, partly offset by gains on investments.
in the United Kingdom following the write down of DPAC in the fourth quarter of 2015.
Worth business. This was partly offset by lower underlying earnings before tax from Strategic Partnerships compared with 2015 mainly a result of the increase in ownership from 26% to 49% in India, which is currently loss-making. �� Underlying earnings before tax from asset management decreased by 12% in 2016 compared with 2015 to EUR 149 million. This decline was mainly driven by lower underlying earnings before tax from Aegon’s Chinese asset management joint venture AIFMC due to the normalization of performance fees.
Fair value items The results from fair value items amounted to a loss of EUR 645 million in 2016, and were mainly driven by fair value losses in the United States. EUR 521 million fair value losses in the United States in 2016 were driven by the loss on hedging programs and the underperformance of alternative investments.
Run-off businesses The results of run-off businesses declined to EUR 54 million in 2016 mainly as a result of an adjustment to the intangible balances for BOLI/COLI business.
Kingdom. The effective tax rate on underlying earnings before tax and total income for 2016 was 22% and 30%, respectively.
Operating expenses increased by 1% in 2016 compared with 2015 to EUR 3.8 billion. Increased variable personnel expenses compared with 2015 and the acquisition of the defined contribution business from Mercer more than offset expense savings.
Net deposits, excluding run-off businesses, declined to EUR 3.5 billion in 2016 compared with 2015, mostly due to lower gross deposits in variable annuities, anticipated contract discontinuances from the business acquired from
Capital management During 2016, shareholders' equity decreased by EUR 1.8 billion to EUR 20.9 billion, as a result of a EUR 400 million share buyback and the impact from higher interest rates on revaluation reserves. During the year, the revaluation reserves decreased by EUR 1.1 billion to EUR 5.4 billion. Aegon’s shareholders'
equity, excluding revaluation reserves and defined benefit plan remeasurements, amounted to EUR 17.4 billion on December 31, 2016, or 8.51 per common share. The gross leverage ratio increased to 29.8% on December 31, 2016, compared with 28.4% at the end of 2015, which was mostly the result of the issuance of EUR 500 million senior unsecured notes. Excess cash in the holding increased from EUR 1.4 billion at the end of 2015 to EUR 1.5 billion on December 31, 2016, as net remittances from business units and the aforementioned issuance of senior unsecured notes more than offset the EUR 400 million share buyback, dividends to shareholders, interest payments and operating expenses.
Solvency II ratio have been updated since the earlier public communications on February 17, 2017 as a result of a change in the calculation of the risk margin in the Netherlands.
Net income The net income amounted to USD 1.8 billion in 2017, as underlying earnings before tax, gains from fair value items, realized gains, a net gain on divestments, and a benefit from
US tax reform were partly offset by other charges which mainly relate to model updates and assumption changes. Underlying earnings before tax in 2017 strongly increased compared with 2016 to USD 1.6 billion. Results on fair value items amounted to a gain of USD 192 million in 2017, which was primarily related to changes to hedging programs to a 100% option based program and real estate investments. Income before tax from run-off businesses in 2017 almost halved compared with 2016 to USD 33 million following the divestment of the majority of run-off businesses in 2017, while realized gains on investments in 2017 amounted to USD 177 million. Net impairments amounted USD 19 million in 2017, primarily related to a single commercial mortgage loan. Other charges of USD 409 million in 2017 mainly related to the impact of model updates and assumption changes related to conversion of the largest block of universal life business to a new model and a provision in anticipation of a possible settlement in connection with an investigation by the US SEC (USD 51 million), which more than offset a net gain on divestments due to the sale of BOLI/
COLI and Payout annuities (USD 250 million) and life reinsurance block (USD 119 million). The benefit from US tax reform amounted to USD 626 million driven by a reduction in deferred tax liabilities.
compared with 2016 to USD 1.6 billion. Expense reductions, an improvement in claims experience, and higher fee revenue resulting from favorable equity market performance more than offset net outflows.
�� Underlying earnings before tax from Life increased to USD 251 million in 2017 compared with USD 174 million in 2016. This increase was mainly driven by an improvement in mortality experience.
USD 218 million in 2016, as an improvement in claims experience and expense savings more than offset the negative impact on underlying earnings before tax of product exits. �� Underlying earnings before tax from Mutual Funds increased by USD 4 million in 2017 compared with 2016 to USD 54 million. Increased fee income from higher average account balances driven by equity market performance and inflows more than offset increased expenses.
�� Fixed Annuity underlying earnings before tax decreased by 15% in 2017 compared with 2016 to USD 145 million, reflecting the continued balance reduction and unfavorable adjustments of deferred acquisition costs.
USD 96 million in 2016 mainly due to lower hedging costs. �� Latin America remained stable at USD 1 million of underlying earnings before tax in 2017.
Income tax from certain proportionately consolidated joint ventures and associates included in income before tax 3 5 (32) 3 5 (32)
New premium production accident and health insurance 895 1,003 (11) 808 904 (11)
Total net deposits excluding run-off businesses (1,123) 8,607 n.m. (1,015) 7,754 n.m.
Commissions and expenses Commissions and expenses increased by 1% compared with 2015 in 2016 to USD 4.5 billion. Operating expenses decreased by 1% compared with 2015 in 2016 to USD 1.8 billion. Expense savings and lower restructuring charges compared with 2015 were partly offset by increased variable personnel expense and the acquisition of the defined contribution business acquired from Mercer.
Overview of Americas Aegon Americas operates under the Transamerica brand in the United States, and has joint venture operations in Brazil and Mexico and a small operation in Canada.
Aegon in the US Transamerica is one of the leading life insurance organizations in the United States, and the largest of Aegon’s operating units worldwide. Its businesses in the US serve customers in all fifty states and the District of Columbia, and employ approximately 10,000 people. Most Aegon companies in the United States operate under the Transamerica brand. Its companies have existed since the mid-19th century, and its primary offices are in Cedar Rapids, Iowa, Denver, Colorado and Baltimore, Maryland
Aegon employs a variety of distribution channels to help customers access its products and services as suits their needs.
These include brokerage, partner (including career/captive), institutional/workplace and wholesale distribution channels.
Aegon in Brazil Aegon has a 50% interest in Mongeral Aegon Seguros e
established Sicoob Seguradora de Vida e Previdência, a new life insurance and pensions company dedicated to providing life insurance and pension products to the Sicoob system.
Transamerica, this Mexico City-based organization launched a series of mutual funds in October 2017, targeting family offices, high net worth individuals, and institutions. As of
World Financial Group Insurance Agency of Canada Inc. (WFGIA), in addition to an affiliated securities dealer under the name
& health insurance, mutual funds, variable annuities, fixed annuities, retirement plans, stable value solutions, and Latin
America. The business lines, described in greater detail below, represent groups of products and services that Aegon USA
offers through a number of distribution methods and sales channels. Products are also offered and distributed through
Brokerage Aegon USA offers protection products (life insurance and accident & health insurance) through third-party distribution outlets known as 'Brokerage General Agents' or 'Independent
(World Financial Group), approximately 3,000 of which are registered broker-dealer and investment advisers (with
(Transamerica Agency Network), Transamerica Financial Network offers insurance, annuities, mutual funds, retirement plans and managed accounts to individuals. This channel provides the same life and health products as the brokerage channel, with a focus on the middle and emerging affluent markets.
Universal life insurance Universal life insurance is flexible permanent life insurance that offers death benefit protection together with the potential for cash value accumulation. After the first few years, there is usually no set premium. The policyholder can adjust the frequency and amount of premium payments, as long as sufficient premiums are paid to cover charges in the month that follows, which are called "monthly deductions". In determining the monthly deduction rate to apply to a specific policy plan,
Variable universal life insurance Variable universal life insurance is cash-value life insurance that offers both a death benefit and cash value accumulation potential. The premium amount for variable universal life insurance is flexible and within contract limits may be changed by the consumer. Coverage amount may change as well.
Long-term care riders that provide benefits if policyholders are unable to perform two or more specific activities of daily living or develop a severe cognitive impairment, and living benefit riders that provide accelerated benefits for critical illnesses or chronic conditions, are both available on IUL.
Whole life insurance Whole life insurance provides permanent death benefit protection, provided that the required premiums are paid, while accumulating cash values based on statutory requirements.
A number of these products provide policyholders with lump sum or specified payments if such policyholders are hospitalized, injured, or diagnosed with a critical illness. Others pay benefits for specific medical expenses and treatments, or cover deductibles, co-payments and co-insurance amounts not covered by other health insurance. Medical stop-loss insurance offered to employers to protect against catastrophic losses under self-funded health plans will be discontinued after a wind-down period.
Long-term care insurance Long-term care (LTC) insurance products provide benefits to policyholders that require qualified LTC services as they are unable to perform two or more specific activities of daily living or develop a severe cognitive impairment. LTC insurance helps protect a policyholder's assets from the high cost of LTC services, and it may also help families better manage the financial, health and safety issues associated with LTC. The LTC product is offered as a standalone product or as a rider to certain life insurance products.
Mutual funds Mutual funds are professionally managed investment vehicles made up of a pool of money collected from many investors for the purpose of investing in different security types such as stocks, bonds, money market instruments and other securities.
Exchange Traded Funds (ETFs) are a pooled investment vehicle with shares that investors can buy and sell throughout the day on an exchange. On August 2, 2017, Transamerica launched a suite of managed risk exchange-traded funds DeltaShares.
Fixed annuities Fixed annuities allow investors to make a lump-sum payment or a series of payments and receive income in the form of periodic payments that can begin immediately or after a period of time. Aegon USA has de-emphasized traditional fixed deferred annuities, and is not actively marketing new sales. The traditional fixed deferred annuity book is, according to plan, continuing to reduce over time. Aegon USA actively offers a fixed-index annuity
Tools are provided to help plan participants monitor their retirement accounts and engage in behavior to stay on track towards a funded retirement. Managed Advice® is an option that plan sponsors can make available to participants that provides investment advice to participants using the plan's line-up.
For individual plan participants in transition due to a job loss or change or planned retirement, services are offered through the Transamerica Advice Center, a team of experienced registered representatives and investment advisor representatives. Services and products include IRAs, advisory services, annuities and access to other financial products and resources.
is offered around fixed-income invested assets, which are owned by the plan and managed by the plan or a third-party money manager hired by the plan. A synthetic GIC is typically issued with an evergreen maturity and may be terminated under certain conditions. Such a contract helps to reduce fluctuations in the value of the wrapped assets and provides book value withdrawals for plan participants, while ensuring that investment fund conditions are met.
interest in Mongeral Aegon Seguros e Previdência S.A., a Brazilian independent life insurer, and a 99.99%
Sicoob, the largest cooperative financial system in the country, with over 3.2 million associates and 2,340 points of service.
Run-off businesses On June 28, 2017, Aegon completed the divestment of its two largest US run-off businesses, the payout annuity business and the Bank Owned / Corporate Owned Life Insurance business
GICs and funding agreements are spread-based products issued on a fixed-rate or floating-rate basis. They provide customers with a guarantee of principal and a specified rate of return.
Before 2009, Aegon USA utilized consolidated special purpose entities to issue MTNs that are backed by funding agreements.
Life, Voya Financial, and John Hancock. LifeSecure and Mutual of Omaha are primary competitors for sales of individual longterm care insurance through the brokerage channel. Competitors for supplemental health include a wide range of companies and company types based on the nature of the coverage including
Aegon USA's primary competitors in the variable annuity market are AIG, AXA Equitable, Jackson National, Lincoln National,
In the emerging market segment and the multiple employer plan segment, Aegon USA's main competitors are Fidelity, Empower,
Regulation and supervision Aegon USA's insurance companies and the business they conduct in the US are regulated primarily at the state level, as carried out by various state insurance regulators. Some activities, products and services are also subject to federal regulation.
State of Iowa, and the Iowa Insurance Division exercises principal regulatory jurisdiction over those companies. This regulation includes implementation and enforcement of standards of solvency, adequacy of reserves and capital, and reinsurance.
investment limitations, and required approval of significant transactions. State regulators, by law, conduct extensive financial examinations every three to five years.
Other current initiatives include a project to update capital charges for asset default risk, longevity risk and operational risk. A project to develop a group capital calculation is underway in the NAIC that could impact how captives are treated from a capital perspective. Long-term care is currently regulated by states as health insurance, although both state regulators and federal agencies are examining the current environment for the long-term care industry, which may lead to a more predictable regulatory regime for premium adjustments, and facilitate the development of new and innovative products In 2017, the
Federal Regulation of Financial Services and Health Insurance Although the insurance business is primarily regulated at the state level, many federal laws and initiatives impact the insurance sector in such areas as the regulation of financial services, derivatives, retirement plans, securities products, health care, taxes, data security and privacy. Regulation of financial services has increased as a result of the Dodd Frank Act, which also created the Federal Insurance Office (FIO) and the Office of
Congress, and the OFR conducts research in financial services, including insurance, in support of such oversight. In addition, the
In addition to financial services products, many supplemental health insurance products offered by Aegon USA, such as
Medicare Supplement products, are subject to both federal and state regulation as health insurance. The Patient Protection and Affordable Care Act (ACA), enacted in 2011, significantly changed the regulation of health insurance and the delivery of health care in the United States, including in certain respects, the regulation and delivery of supplemental health insurance products. The President and Congress have signaled their intent to repeal all or part of the ACA in order to, among other things, eliminate the employer mandate and remove barriers to provider and product offerings. While removal of barriers to provider and product offerings would be generally favorable to Aegon USA's supplemental health business, the likelihood that these efforts will be successful and actual impact of any such efforts on
guidance on how to calculate group solvency in the context of equivalence. It includes lowering the conversion factor from 250% to 150% of the local RBC Company Action Level
The non-regulated US entities and the US holding companies are included in Aegon’s group Solvency II results through application of the Accounting Consolidation method under Solvency II, using
Solvency II valuation and capital requirement calculations for these local balance sheets under the standard formula.
The distribution and sale of these and other securities by affiliate and non-affiliate broker-dealers are regulated by the SEC and the Financial Industry Regulatory Authority (FINRA). A number of Aegon USA companies are also registered as investment advisors and subject to SEC regulation.
In accordance with Dodd-Frank Act requirements, in January 2011 the SEC studied and recommended a harmonized standard of care for broker-dealers, investment advisors and persons associated with firms that provide personalized investment advice. Broker-dealers are currently subject to requirements to make suitable recommendations, while investment advisors are regulated as fiduciaries, required to put customer interests above their own. On June 1, 2017, the SEC requested public comments from retail investors and other interested parties on standards of conduct for investment advisers and brokerdealers. The current SEC Chair has signaled a desire to regulate a harmonized standard of care, and to coordinate with the
Department of Labor (DOL) in a harmonized standard of care for financial professional providers of both retirement and retail savings, and for investment products and services. Legislation has also been introduced in Congress that, if enacted, will provide for a best interest standard of care for financial professionals that offer retirement and retail savings and investment products across jurisdictional lines. In addition, Nevada has enacted, and other states have proposed, an enhanced standard of care for insurance agents and securities brokers registered in their states.
Finally, the NAIC is considering the addition of best interest standard of care for the sale of variable annuities in its model law. The likelihood of any such regulation or enactment of such legislation cannot be determined at this time.
Aegon USA modified business practices in response to those inquiries or findings. Certain Aegon USA companies have paid, or have been informed that the regulators may seek, restitution, disgorgement, fines or other monetary penalties or changes in the way that business is conducted. The impact of any such fines or other monetary penalties is not expected to have a material impact on Aegon USA's financial position.
Regulation of Retirement Plans and IRAs Aegon USA administers and provides recordkeeping, investment and insurance services and products used to fund defined contribution plans, such as 401(k), 403(b) and 457 plans, in addition to defined benefit plans, IRAs, 529 plans and other savings vehicles. Aegon USA also administers benefits distributed on termination of defined benefit plans. These products and services are generally subject to the Employee Retirement
Code of 1986, as amended (the 'Code') for which the US
In June 2017, the DOL conflicts of interest rule (the 'DOL Rule')
Tax Treatment of Insurance Companies and their Products and Plans Although the insurance business is regulated at state level, the US federal tax treatment of life insurers, life insurance, pension and annuity products is governed by the US federal tax code. The 'Tax Cuts and Jobs Act,' signed into law on December 22, 2017, made significant changes to the federal tax code, generally effective as of January 1, 2018. Along with other changes, the new law lowered the corporate tax rate to 21 percent, eliminated the corporate alternative minimum tax, changed interest deductibility limitations (including by adding a new limitation on the deductibility of business interest expense)
and moved the US to a partial territorial system of international business taxation. In addition, the new law introduces a 'base erosion anti-abuse tax,' which may be imposed on companies that make significant deductible payments to their non-US affiliates.
Introduction Europe The Results 2017 Europe cover the following operating segments: The Netherlands, United Kingdom (including
Underlying earnings before tax by product segment 520 116 67 4 707
Income / (loss) before tax (excluding income tax from certain proportionately consolidated joint ventures and associates) 872 137 66 4 1,078
Other income / (charges) 336 (658) n.m. Income before tax (excluding income tax from certain proportionately consolidated joint ventures and associates) 1,078 288 n.m.
Income tax from certain proportionately consolidated joint ventures and associates included in income before tax 6 7 (16)
Commissions and expenses 2,141 2,058 4 of which operating expenses 1,610 1,445 11
Results 2017 Europe Net income improved to EUR 846 million in 2017 compared with 2016 driven by Other income and higher underlying earnings before tax. The gain on the sale of the insurance broker UMG in the Netherlands was the main driver behind Other income of EUR 336 million. Underlying earnings before tax in 2017 increased compared with 2016 to EUR 707 million. This was mainly the result of higher results in the United Kingdom, reflecting higher fee income.
Net income for the Netherlands Net income from Aegon’s businesses in the Netherlands amounted to EUR 710 million in 2017, largely driven by underlying earnings before tax of EUR 520 million.
Results on fair value items declined compared with 2016 to a loss of EUR 112 million in 2017, as positive real estate revaluations were offset by losses on credit spread and interest rate hedges due to a mismatch on an IFRS basis between the valuation of hedges and liabilities. Realized gains of EUR 184 million in 2017 were the result of asset-liability management adjustments and normal trading activity in the investment portfolio. Impairments amounted to EUR 17 million in 2017 and were mostly driven by a loan loss provision related to growing consumer loan origination. Other income amounted to EUR 296 million in 2017. This reflects the EUR 208 million gain on the sale of UMG and EUR 101 million positive assumption changes and model updates mainly related to the guarantee provision in the Netherlands.
Cofunds and BlackRock's defined contribution business and the impairment of intangible assets related to the announced sales of Aegon Ireland.
(CEE) amounted to EUR 57 million in 2017 and reflect underlying earnings before tax of EUR 67 million.
compared with 2016 to EUR 707 million. This was driven by higher fee income in the United Kingdom and growth in CEE.
Underlying earnings before tax for the Netherlands Underlying earnings before tax for the Netherlands in 2017 decreased by 2% compared with 2016 to EUR 520 million. �� Underlying earnings before tax from Life & Savings declined by 2% compared with 2016 to EUR 301 million, reflecting lower investment income in Life, partly offset by a higher interest margin in Savings.
�� Underlying earnings before tax from Life increased in 2017 compared with 2016 to EUR 65 million, reflecting higher results on inflation-linked bonds and growth in the protection business.
Commissions and expenses for the Netherlands Commissions and expenses decreased compared with 2016 to EUR 930 million in 2017. Operating expenses were down compared with 2016 to EUR 818 million in 2017, reflecting the sale of UMG. Expense savings in the insurance businesses were more than offset by investments in growth.
Commissions and expenses for Central & Eastern Europe Commissions and expenses increased compared with 2016 to EUR 262 million in 2017. Operating expenses increased compared with 2016 to EUR 152 million in 2017, reflecting the growth of the business and higher variable personnel expenses.
Commissions and expenses for Spain & Portugal Commissions and expenses increased compared with 2016 to EUR 192 million in 2017. Operating expenses increased compared with 2016 to EUR 94 million in 2017, mainly resulting from the growth of Aegon’s joint ventures with Santander and project-related expenses, severance costs and the write-down of an IT system.
Production Gross deposits increased from EUR 12.8 billion in 2016 to EUR 44.3 billion in 2017. The increase compared with 2016 was primarily driven by the higher platform sales in the United Kingdom.
Aegon’s online bank. New life sales declined compared with 2016 to EUR 99 million in 2017, caused by lower DB pension sales and individual life sales. Premium production for accident & health increased compared with 2016 to EUR 16 million in 2017, while general insurance production decreased compared with 2016 to EUR 15 million in 2017.
Production for the United Kingdom Gross deposits increased from EUR 5.8 billion in 2016 to EUR 35.9 billion in 2017 as a result of higher platform sales, reflecting the inclusion of Cofunds. New life sales decreased compared with 2016 to EUR 37 million in 2017, mainly due to the sale of the majority of the annuity business in the second half of 2016.
Santander. General insurance and accident & health insurance sales increased compared with 2016 to EUR 53 million in 2017, also as a result of higher sales from the joint ventures with Santander.
Other income / (charges) (658) (1,205) 45 Income before tax (excluding income tax from certain proportionately consolidated joint ventures and associates) 288 (275) n.m.
Income tax (161) 54 n.m. Of which Income tax from certain proportionately consolidated joint ventures and associates included in income before tax (7) (6) (19)
Net income for the United Kingdom Net income from Aegon’s businesses in the United Kingdom amounted to a loss of EUR 456 million in 2016. The sale of the annuity portfolio which resulted in a loss of EUR 678 million recorded in other charges, was the main driver behind this loss. Losses from fair value items of EUR 7 million were driven by losses on equity hedging programs which were only partly offset by fair value gains related to Aegon’s European variable annuities business. Positive components were realized gains which amounted to EUR 153 million in 2016 and were driven by rebalancing of the investment portfolio following the sale of the annuity portfolio, and underlying earnings before tax which amounted to EUR 59 million.
Underlying earnings before tax Underlying earnings before tax in 2016 increased 17% compared with 2015 to EUR 655 million. This was mainly driven by lower amortization of deferred policy acquisition costs in the United
�� The results from the Non-life business increased compared with 2015 to EUR 1 million in 2016. Lower investment income and weather related losses were more than offset by favorable claims experience driven by management actions implemented in 2015 and 2016 as well as the benefit from the divestment of the loss-making commercial line nonlife business.
Underlying earnings before tax for Central & Eastern Europe Underlying earnings before tax from Central & Eastern Europe increased to EUR 55 million in 2016, up from EUR 37 million in 2015. This increase was primarily driven by a normalization of surrender levels in Poland which led to a negative impact following product changes in 2015.
Underlying earnings before tax for Spain & Portugal Underlying earnings before tax from Spain & Portugal decreased compared with 2015 to EUR 8 million in 2016. Higher results from the joint ventures with Banco Santander were offset by adverse claims experience and increased investments in the direct channel and new business initiatives.
Commissions and expenses Commissions and expenses decreased by 13% compared with 2015 to EUR 2.1 billion in 2016. Operating expenses were stable compared with 2015 and amounted to EUR 1,445 million in 2016.
Commissions and expenses for the United Kingdom Commissions and expenses decreased by 27% in 2016 to EUR 667 million compared with 2015. Operating expenses decreased by 1% in 2016 to EUR 394 million compared with 2015, mainly due to favorable currency movements, partly offset by expenses related to the acquisitions of Cofunds and
Commissions and expenses for Central & Eastern Europe Commissions and expenses decreased compared with 2015 to EUR 244 million in 2016. Operating expenses remained stable compared with 2015 at EUR 143 million in 2016.
Aegon’s online bank. New life sales declined compared with 2015 to EUR 111 million in 2016, which was a result of the absence of large pension buyouts. Premium production for accident & health increased compared with 2015 to EUR 14 million in 2016, while general insurance production decreased compared with 2015 to EUR 21 million in 2016.
Production for Spain & Portugal New life sales in Spain & Portugal in 2016 remained stable compared with 2015 and amounted to EUR 39 million as increasing sales through the joint venture with Banco Santander were offset by declines in other channels.
General insurance and accident & health insurance sales increased compared with 2015 to EUR 50 million in 2016, also as a result of higher sales from the joint ventures with Santander.
Aegon the Netherlands' primary subsidiaries are: �� Aegon Bank N.V.; �� Aegon Hypotheken B.V.; �� Aegon Levensverzekering N.V.; �� Aegon PPI B.V.; �� Aegon Schadeverzekering N.V.; �� Aegon Spaarkas N.V.; �� CAPPITAL Premiepensioeninstelling B.V.; �� Optas Pensioenen N.V.; and �� TKP Pensioen B.V.
On November 1, 2017, Aegon successfully completed the sale of Unirobe Meeùs Groep (UMG) to Aon Groep Nederland for
EUR 295 million. The transaction is consistent with Aegon’s strategic objective to optimize its portfolio across its businessess.
In general, the guarantee is dependent on the life of the insured in order that their pension benefit is guaranteed. Some large group contracts also receive part of the technical results for mortality risk and disability risk. The contract period for these types of contracts is typically five years and the tariffs, cost loadings and risk premiums are generally fixed over this period.
they wish to continue with their subscription. Larger group of customers are currently becoming more interested in these low cost and flexible solutions which results in a significant flow from separate account and other 5-year contracts to 1-year subscription products.
These subscription products include an all-in defined benefit product with guaranteed benefits. The expected profit for the customer and anticipated investment returns are taken into account in the pricing of the product. Customers may contribute funds for future pension increases to a separate account.
Most of Aegon the Netherlands' pensions are sold through sales and account management and Aegon’s intermediary channel.
Pension Fund). On June 20, 2016, Aegon received approval from the Dutch Central Bank (DNB) to launch the first such fund called ‘Stap’ (a separate legal entity), together with TKP.
Stap is a pension pooling vehicle that enables separate financial administration for multiple pension plans from multiple employers. This vehicle enables smaller pension schemes to benefit from economies of scale and to comply with complex pension regulations, meaning that a greater percentage of the employees' pension premium is invested, and that employers and participants receive the same high quality of service as a traditional pension plan. The fiduciary investments for Stap are carried out by TKP Investments, a subsidiary of
Non-life accident and income protection insurance Aegon the Netherlands offers disability and sick leave products to employers that cover sick leave payments for employees not covered by social security, and for which the employer bears the risk.
Accumulation products pay benefits on the policy maturity date, subject to survival of the insured. Most policies also pay death benefits should the insured die during the term of the contract.
Term and whole life insurance Term life insurance pays out death benefits should the insured die during the term of the contract. Whole life insurance pays out death benefits in the event of death, regardless of when this occurs. Premiums and amounts insured are established at inception of the contract and are guaranteed. The amount insured may be adjusted at the request of the policyholder.
or 4%, and prior to 1999, of 4%. Interest rebates are given on both single and regular premium annuity insurance, and may be based on a portfolio of Dutch government bonds – although other calculation benchmarks may also be applied. There are also profit-sharing schemes set by reference to external indexes based on pre-defined portfolios of Dutch government bonds.
Mortgage loans At present, Aegon the Netherlands mostly offers 'annuity mortgages'. Before 2013, Aegon the Netherlands also offered interest-only, unit-linked and savings mortgage loans, and is continuing to do so for existing mortgage loans that are being renegotiated. Mortgage loans are partly funded externally.
Aegon’s Dutch residential mortgage-backed securities program and private placements, the Aegon Mortgage fund is the main source of external funding. For this business, Aegon originates the mortgage loans fully for account of third parties and remains the service provider for these mortgage loans.
Non-life general insurance Aegon the Netherlands’ commercial portfolio was sold to Allianz
Netherlands has focused exclusively on private lines in general insurance, with products offered providing cover for property, motor, travel, legal aid and casualty.
Aegon Bank focuses on the 'income' and 'housing' market, together with seeking to reinforce the Aegon Netherlands-wide pensions offering. Customers are increasingly having to make provision for their current and future income and wealth since the government changed the rules for pension provisions.
Aegon Bank's focus is on customers whose income and wealth is in the middle-market, in line with Aegon the Netherlands's target group. Products are distributed directly to Aegon’s customers. For more complex 'advice' products, independent financial advisers continue to be a very important distribution channel for Aegon Bank. Aegon Bank's activities mainly focus on 'Banksparen' products'. 'Banksparen' is a tax-deferred savings product in which amounts are deposited in a 'locked'
Competition Aegon the Netherlands has strong competition in all markets from insurers, banks, investment companies and pension funds.
The top five companies in the Netherlands by gross premium income accounted for almost 85% (Ind. Life and Pension) of total premium income in 2017 in the insurance market. Following the merger of NN group and Delta Lloyd, Aegon the Netherlands is the second largest insurance company in the pensions market.
(and 7% in 2016), making it the fourth largest mortgage loan provider in the market. Rabobank, ING Bank and ABN AMRO
are the largest mortgage loan providers in the market, and competition is increasing from foreign competitors and capital from pension funds.
Dutch household savings. In 2017, its market share was approximately 3%, which is relatively small in comparison to banks such as Rabobank, ING and ABN AMRO.
This is especially true in the life insurance market, where the tax deductibility of certain products has been reduced, leading to a shift to bank-saving products. Moreover, volatility in economic and financial markets has meant that customers are more reluctant to commit themselves to long-term contracts. These changes have resulted in more competition, greater focus on competitive prices, improved customer service and retention, and product innovation.
Regulation and supervision General Regulation of the financial sector in the Netherlands is included in the Financial Supervision Act (Wet op het financieel toezicht or Wft). The Wft embeds the cross-sectorial functional approach within the Dutch supervisory system. The supervision of financial institutions pursuant to the Wft rests with the DNB and the
DNB's prudential supervision is to ensure the solidity of financial institutions and contribute to the stability of the financial sector.
EU legislation, which, up until December 31, 2015, was set out in the Solvency I framework. Effective as of January 1, 2016,
Prudential Rules for Financial Undertakings (Besluit prudentiële regels Wft or Bpr Wft).
Aegon Spaarkas N.V. and Optas Pensioenen N.V. conduct life insurance activities. Aegon Schadeverzekering N.V. conducts non-life insurance activities. Prudential supervision is exercised by the home state supervisory authority (DNB in the
Netherlands). Insurance companies in the Netherlands may conduct their activities on a cross-border basis or through a branch office based on the mutual recognition of (prudential)
Solvency II Aegon the Netherlands uses a Partial Internal Model (PIM)
to calculate the solvency position of its insurance activities under Solvency II. The calculation includes the use of the volatility adjustment, but does not include the use of any transitional measures. The internal model was approved on
(SSM), which comprises the European Central Bank and the relevant national authorities of participating EU Member
The ECB may give instructions to the DNB in respect of Aegon Bank N.V. or even assume direct supervision over the prudential aspects of the Aegon Bank N.V.'s business.
Pursuant to the banking supervision by the DNB, Aegon Bank N.V.
is (among others) required to file monthly regulatory reports and an audited Annual Report.
These include (among others) capital and liquidity requirements, the requirement to maintain a certain leverage ratio, governance and reporting requirements in line with the requirements of EU Directive 2013/36/EU (CRD IV) and
CRD IV and the CRR are the European Union's translation of the Basel III accord for prudential supervision of credit institutions and investment firms. The CRR is binding for all
(Wet op het financieel toezicht, the 'Wft') on August 1, 2014.
Aegon Bank N.V.. The ultimate aim of Basel III/CRD IV is to reduce leverage in order to bring institutions' unweighted assets more in line with their Tier-1 capital. The capital requirements include qualitative in addition to quantitative requirements.
Tier 1 capital forms the rest of the Tier 1 capital. In addition, the capital of a credit institution may be composed of Tier 2 capital, which is of a lesser quality than Tier 1 capital.
Wft (the BRRD Implementation Act). The SRM Regulation was adopted on July 15, 2014. Those parts of the SRM Regulation that deal with recovery and resolution entered into force on January 1, 2016.
Common Equity Tier 1, Additional Tier 1 and Tier 2 instruments, in a specific order.
Were Aegon Bank N.V. to fail or be likely to fail and the other resolution conditions were also met, the national resolution authority would be able to place Aegon Bank N.V. under resolution. As part of the resolution scheme to be adopted by the national resolution authority it may decide to apply certain resolution tools and exercise its powers pursuant to the implemented BRRD in order to give effect to such resolution tools. In addition, the SRM Regulation and the BRRD
Implementation Act introduce the bail-in tool which gives the national resolution authority the power to write down or convert into equity certain debt and other liabilities of the institution.
Overview of United Kingdom Following the completed sale of its own annuity portfolio and announced sale of Aegon Ireland8, together with the acquisition of Cofunds and the BlackRock's Defined Contribution business, Aegon UK is primarily a long-term savings and protection business, supporting customers who are retired or saving for their retirement. Products are sold through its online platform, which enables advisors, employers and individuals to buy and manage investments online, and also have a single view of investments. Aegon Ireland is a specialist provider and reinsurer of variable annuity (guarantee) products in the United Kingdom and Germany. It also offers offshore investment bonds in the United Kingdom.
Acquisitions and disposals Aegon UK's business strategy is focused on developing the business as the leading platform savings, investments and pensions provider in the market. For this reason, during 2016 it made a number of strategic changes in order to align its business model with its strategy.
BlackRock's UK defined contribution (DC) platform and administration business, strengthening its position as a leading player in the UK workplace market, adding Master Trust and
On January 1, 2017, Aegon UK completed the acquisition of Cofunds, funding for which came from the divestment of the annuity portfolio. The transaction demonstrates
European operations of Athene Holding Ltd. Aegon Ireland provided both unit linked guarantees and offshore bond product in the UK. The transaction is expected to be completed in 2018.
Aegon Retirement Choices (ARC) helps advisors and their customers save for the long term and manage the transition from work to retirement. ARC uses leading-edge digital technology to deliver an intuitive method of saving for the long term, including retirement, taking income in retirement, such as
The process of migrating customers to Aegon’s technology platform began in December 2017, with the upgrading of 79,000 customers. The remaining 700,000 customers will be migrated during the course of 2018.
Since inception, approximately 370,000 customers, with assets of around GBP 6.6 billion, have been upgraded to Aegon UK’s new proposition.
Aegon Ireland Aegon Ireland reinsures Aegon UK's Secure Retirement Income product, a guaranteed SIPP/drawdown product on the ARC
(SMEs). 'Pensions' comprises a broad range of workplace and personal pensions in addition to investment products and variable annuities.
The Existing Business is responsible for older products that are no longer actively marketed to new customers. However, new assets are accumulated as customers pay into existing policies, or as new employees join older workplace schemes.
Savings, Investments & Pensions Aegon UK provides a full range of personal and corporate pensions and saving-related products. These include: �� Individual Saving Accounts; �� General Investment Account; �� Flexible personal pensions; �� Self-invested personal pensions; �� Group personal pensions; �� Group Self-invested personal pensions; �� Mastertrust; �� Investment Only capability for workplace pension schemes; and �� Institutional Trading Platform
& General). These products are not actively marketed but have a large number of existing customers.
In addition, in April 2015, the government removed all restrictions on individuals being able to access their pension pots, thereby significantly increasing the flexibility with which individuals can use their pension savings. Individuals are now no longer restricted to buying an annuity or entering drawdown, and can choose to withdraw some of their money and take flexible income through drawdown, or secure income via an annuity or guaranteed product. This development has had a substantial impact on the at-retirement market, with a large reduction in annuity sales and an increase in the purchase of income drawdown products, in addition to supporting a shift from traditional products to platforms better able to support the delivery of flexible solutions to customers.
Aegon’s competitors include traditional insurance companies, investment platforms and asset managers, with a key competitive dimension being the degree to which companies are vertically integrating either to own distribution or to create in-house investment solutions.
Regulations 1994 (the 1994 Regulations), which implement the Consolidated Life Directive in Ireland. Aegon Ireland is regulated by the Central Bank of Ireland. As an Irish-authorized life insurance company, Aegon Ireland may undertake life insurance business in any member state of the European
Requirements, extensive actuarial information, and detailed information regarding the investments of the insurance company.
The PRA's regulatory reporting is based on a single entity focus, and is designed to highlight risk assessment and risk management.
Since the introduction of Solvency II on January 1, 2016, Aegon has been using a Partial Internal Model (PIM) to calculate the solvency position of its insurance activities in the United Kingdom.
In addition, Aegon uses the matching adjustment in the calculation of the technical provisions for its annuities, and uses the volatility adjustment in the calculation of the technical provisions for the With Profits business with investment guarantees.
Following the reinsurance of the majority of its annuity business in 2016, Aegon no longer uses the transitional measures on technical provisions.
Aegon Ireland uses the Standard Formula to calculate the solvency position of its insurance activities.
Overview of Central & Eastern Europe Aegon has operations in the Central & Eastern European (CEE) countries of the Czech Republic, Hungary, Poland, Romania, Slovakia, and Turkey. It first entered the Central & Eastern European market in 1992 with the purchase of a majority stake in Hungary's former state-owned insurance company, Állami Biztosító. Aegon Hungary is Aegon’s leading business in Central & Eastern Europe.
Organizational structure Aegon’s main subsidiaries in Central & Eastern Europe are: �� Aegon Magyarország Általános Biztosító Zártkörűen Működő
(Aegon Poland Pension Fund Management Co.); �� Aegon Emeklilik ve Hayat A.Ş. (Aegon Turkey); �� Aegon Pensii Societate de Administrare a Fondurilor de Pensii
Overview of sales and distribution channels Aegon operates through a number of different sales channels in Central & Eastern Europe. In the Czech Republic and in Slovakia, Aegon distributes mostly unit-linked and term life insurance policies with the help of broker sales partners.
Overview of business lines Life & Savings Aegon companies in Central & Eastern Europe offer a range of life insurance and personal protection products. These include traditional life and unit-linked products. Unit-linked products cover all types of life insurance, including pension, endowment and savings.
In Poland, Aegon focuses on unit-linked as well as traditional life products. In line with the local regulatory and market developments, the products marketed have been modified in recent years.
These riders provide customers – in addition to the main coverage
Aegon is a significant market player in Hungary in the unitlinked segment9.
The Romanian branch sells unit-linked, term life and endowment insurance policies.
Mortgage loans Aegon Hungary first offered mortgage loans to retail customers in 2006 via Aegon Hungary Mortgage Finance Co., a subsidiary of Aegon Hungary Composite Insurance Company. After its launch, the mortgage loan business was affected by several legislative changes. On March 17, 2014, Aegon Hungary
Pensions Aegon’s pension business in Central & Eastern Europe was impacted by reforms to the pension system in several countries in the region during recent years. Aegon is currently active in the (formerly mandatory) private pension market in Slovakia,
In Turkey, Aegon was ranked tenth in the life insurance market based on written premium at the end of Jul 201713. Aegon is a less significant market participant in Poland, Slovakia, the Czech
The foundation and operations of voluntary pension funds are regulated in Hungary by the country's Voluntary Mutual
Pension Funds Act (XCVI. 1993). Activity in this area is also
(NBS). In Romania, the private and voluntary pension system is regulated and supervised by the Authority for Financial
Supervision (ASF). The mandatory pension system is subject to the Privately Administered Pension Funds Act (411/2004) and the voluntary pension system is subject to the Voluntary Pension
(as secondary legislation). In Poland, this activity is supervised by the KNF and governed by the Organization and Operation of Pension Funds Act. In Turkey, the voluntary pension funds are under the supervision of the Undersecretariat of Treasury and the companies are subject to Individual Retirement Saving and Investment System Law No. 4632.
In addition, Aegon Hungary Mortgage Finance Company is under the supervision of the MNB, in exactly the same way as Aegon Hungary Home Savings and Loan Association.
Overview of Spain & Portugal Aegon entered in the Spanish insurance market in 1980. In recent years, Aegon’s activities in Spain have developed through distribution partnerships with Spanish banks.
operates in Spain through Aegon España S.A.U. de Seguros y Reaseguros. In addition, Aegon Spain operates in Spain through long-term partnerships with Banco Santander S.A. (offering both life and general insurance products)and Liberbank, S.A. (offering life products).
S.A. (51%); and �� Liberbank Vida y Pensiones, Seguros y Reaseguros, S.A. (50%).
of the total respectively. Overall, the bancassurance channel accounts for 42.5% of the Spanish household market.
of pure life risk premiums and 43% (2016: 43%) of household insurance premiums are written through bancassurance channels, where credit-related policies mostly related to mortgages play a significant role.
Banco Santander S.A. is the largest financial institution in Spain, with over 2,800 branches nationwide.
Aegon Spain's agreement with Banco Santander S.A. initially concerned pure life risk and general insurance products (accident, home and commercial multi-risk insurance, and critical illness).
Furthermore, Santander Generales began offering funeral insurance on July 7, 2017.
Totta, S.A., a Portuguese insurance company that is part of the Santander International group, have partnered to distribute a number of insurance products. The partnership concerns the distribution of pure life risk and general insurance products
through over 500 branches nationwide – the largest network of its kind in the country. These products are developed through two insurance entities: Aegon Santander Portugal Vida, for pure life risk products; and Aegon Santander Portugal Não Vida, for general insurance products. Aegon Spain and Banco Santander
Totta, S.A. are both shareholders of these entities: Aegon Spain has a 51% share in each entity and Banco Santander Totta,
On December 21, 2015, Banco Santander Totta, S.A. announced that it had acquired Banco Internacional de Funchal (Banif).
On December 5, 2016, Aegon Spain and Santander Totta reached an agreement in order to add Banif´s retail and corporate network
– consisting of 174 branches and 370,000 clients – to the current distribution network for Aegon Santander Portugal Vida and
Cantabria, Castilla La Mancha and Extremadura). Liberbank Vida y Pensiones, Seguros y Reaseguros, S.A. currently distributes its products through nearly 575 Liberbank, S.A. branches.
Aegon’s share in this entity is 50%, and Liberbank, S.A. owns the remaining 50%.
Overview of business lines Aegon Spain focuses primarily on retail customers. It offers individual life, pensions, general insurance, accident and health products through different distribution channels, including its own channels (agents, brokers and direct),together with bancassurance products through its joint venture partnerships with Liberbank, S.A. and Banco Santander Group, the latter of which in both Spain & Portugal.
The offering focuses mainly on household protection and funeral insurance products.
Health Health insurance is offered by Aegon Spain in Spain through its own network of brokers and agents, direct channels, and
Santander’s network of branches. Medical expense coverage for doctor visits, diagnoses, hospitalization, dental and other health covers are offered through a broad network of medical partners across the country.
Mapfre leads the non-life insurance market with a 14% market share, followed by Grupo Mutua Madrileña with a 14% market share, and Allianz with a 7% market share. The non-life market is more fragmented than the life one. Aegon Spain's multi-risk business line is responsible for non-life and has a market share of less than 1%.
Regulation and supervision Insurance companies in Spain are required to report on a quarterly basis to the Dirección General de Seguros y Fondos de Pensiones (DGSFP), the regulatory authority for the
Government of Catalonia, the application of article 155 of the Spanish Constitution by the Spanish Government, and the call for Regional Elections in December. Despite these events, markets were relatively calm. The spread of Spanish 10-year
Income tax from certain proportionately consolidated joint ventures and associates included in income before tax 19 2 n.m. 16 2 n.m.
New premium production accident and health insurance 14 19 (27) 12 17 (28)
Aegon Insights and China. Fair value losses improved compared with 2016 to USD 1 million due to lower losses on hedging of the variable annuity business in Japan. Realized gains decreased to USD 5 million in 2017 due to lower gains from normal trading activity compared with 2016. Other charges increased compared with 2016 to USD 21 million as a result of the net impact of assumption changes and model updates in 2017. Income tax increased to USD 32 million in 2017 compared with USD 30 million in 2016 as higher taxes on higher underlying earnings before tax were partially offset by a one-time tax benefit of USD 10 million from the write-down of deferred tax liabilities in Aegon Insights as a result of US tax reform.
The increase in operating expenses was mainly driven by strong sales in China and India throughout the year and investments made to support future growth, partially offset by lower operating expenses in Aegon Insights as a result of discontinuing the outbound telemarketing business.
�� In the high net worth businesses in Hong Kong and Singapore, new life sales were down 4% to USD 84 million in 2017, compared with USD 88 million in 2016. This decrease was mainly the result of lower sales of universal life products due to increased competitive environment.
USD 86 million in 2017 compared with 2016 due to a strong increase from sales in China that was mainly driven by the critical illness product and the new direct sales strategy implemented in India during the first half of 2017.
Gross deposits in Asia declined to USD 250 million in 2017 compared with USD 337 million in 2016. Increased inflows from foreign currency variable annuities were more than offset by lower Japanese Yen-denominated variable annuity sales.
The latter was the result of a pricing change in order to maintain profitability by strictly adhering to Aegon’s pricing policy.
Income before tax (excluding income tax from certain proportionately consolidated joint ventures and associates) 16 (31) n.m. 14 (27) n.m.
Accident and health insurance premiums 115 117 (2) 104 105 (1)
Underlying earnings before tax In Asia, underlying earnings before tax remained stable at USD 23 million in 2016 compared with 2015. �� Underlying earnings before tax from the high net worth businesses in Hong Kong and Singapore increased to USD 61 million in 2016, compared with USD 45 million in 2015. This increase was mainly the result of favorable mortality experience compared with 2015.
�� Underlying earnings before tax in Aegon Insights decreased to USD 1 million in 2016 compared with USD 5 million in 2015 due to lower production in Indonesia as a result of rationalizing sales campaigns and unfavorable currency movements.
Aegon’s ownership percentages) are: �� Aegon THTF Life Insurance Co. Ltd. (50%); �� Aegon Life Insurance Co. Ltd. (49%); �� Aegon Sony Life Insurance Co. Ltd. (50%); �� SA Reinsurance Ltd. (50%); and �� Transamerica Life (Bermuda) Ltd. (TLB).
Tongfang Co. Ltd (THTF). The name of the joint venture is Aegon THTF Life Insurance Co. Ltd. (Aegon THTF). Aegon
Coleman & Co. Ltd. (BCCL). The joint venture follows a digitally focused direct-to-consumer strategy.
(Aegon Sony Life). The primary focus of Aegon Sony Life is annuity sales in Japan. Aegon and Sony Life also jointly established a reinsurance company, SA Reinsurance Ltd.
(SARe), to provide Aegon Sony Life with greater flexibility in the pricing and design of its annuity products. Launched in 2010 and based in Bermuda, SARe manages the guaranteed benefit risks of Aegon Sony Life's products.
Aegon Insights is a marketing and distribution services business in the Asia-Pacific region. The Aegon Insights business first established operations in Australia in 1998, and currently maintains operations in Australia, China, Hong Kong, Indonesia,
Japan and Thailand. Given changes in consumer preferences in some countries, changes were also made during 2017 to close active partner distribution relationships, while continuing to serve existing customers.
Aegon made the strategic decision to discontinue the outbound telemarketing businesses.
In India, Aegon Life offers term life plans, traditional individual participating products, traditional non-participating savings products, and unit-linked life insurance plans through the direct sales force and e-sales channels.
Competition China: Aegon THTF As of November 30, 2017 there were 85 life insurance companies in the market, including 57 domestic life companies and 28 foreign life insurers. Based on total premium income,
Corporation of India continues to maintain a dominant share of new business premiums (April 2017 to November 2017), private sector companies have shown double-digit growth to obtain more than 30% of the individual recurring new business premiums written. Aegon Life India ranked twentythird in the individual recurring premium market (April 2017 to November 2017).
Japan: Aegon Sony Life There are seven active companies in Japan's variable annuities market. In 2017, Aegon Sony Life ranked third in terms of market share behind Dai-ichi Frontier and Nippon.
Hong Kong and Singapore: TLB TLB's main competitors in Hong Kong and Singapore have traditionally been the global providers for the high-net-worth market, such as HSBC Life, Manulife Bermuda, and Sun Life
The IRDAI is active in introducing new regulations that focus on protecting policyholders' interests and exploring avenues to support growth in the industry. Steps initiated by the
Hong Kong, Singapore and Bermuda: TLB TLB is incorporated in Bermuda and regulated by the Bermuda
Authority of Singapore (MAS). The MAS is an integrated regulator that oversees all banks, insurers, capital market intermediaries and financial advisors in Singapore.
Aegon Insights keeps abreast of all changes or proposed changes to regulations in all of its markets. Where appropriate, it also implements industry standard compliance programs, such as Payment Card Industry Compliance in Australia and Privacy
& Aggregation. For TLB and Japan, Deduction & Aggregation is applied using available and required capital as per the local capital regime. The regulatory regime of Bermuda and Japan were granted full provisional equivalence on December 7, 2015.
Results 2017 Aegon Asset Management Amounts in EUR millions 2017 2016 %
Income tax from certain proportionately consolidated joint ventures and associates included in income before tax 17 19 (7)
Total net flows other third-party 6,913 2,964 133 1 Rest of world include intragroup eliminations from internal sub-advised agreements
(SEC). The investigation relates to the operation or existence of errors in the quantitative models in question and disclosures regarding these matters. Aegon had discovered these errors in its asset management operations in the United States.
As a result of recent discussions, Aegon has taken a provision through Other charges in the fourth quarter of 2017 for a potential settlement. This amount is partly recorded in the Americas and partly in Asset Management
�� Americas underlying earnings before tax increased to EUR 59 million in 2017, compared with EUR 55 million in 2016, as lower expenses more than offset lower management fee income in 2017 compared with 2016. �� Underlying earnings before tax from the Netherlands in 2017 increased by EUR 1 million to EUR 15 million compared with 2016, mainly driven by higher management fee income, which was partly offset by higher expenses in 2017 compared with 2016.
�� Underlying earnings before tax from the United Kingdom amounted to EUR 16 million in 2017, a decrease from the
�� Underlying earnings before tax from Strategic partnerships decreased by EUR 1 million compared with 2016 to
Commissions and expenses Commissions and expenses declined in 2017 compared with 2016 to EUR 481 million. Operating expenses decreased by 2% in 2017 compared with 2016 to EUR 444 million.
Assets under management Assets under management decreased by EUR 14 billion in 2017 to EUR 318 billion compared with the start of 2017. Favorable market movements and net inflows in other third-party were more than offset by outflows in the general account, primarily resulting from the divestment of the majority of the run-off businesses in the US, outflows in affiliates, and unfavorable currency movements.
Income tax from certain proportionately consolidated joint ventures and associates included in income before tax 19 19 (3)
AIFMC due to the normalization of performance fees. �� Americas underlying earnings before tax decreased to EUR 55 million in 2016, compared with EUR 66 million in 2015, as higher transactional fee income was more than offset by lower management fee income in 2016 compared with 2015, and increased employee and projectrelated expenses.
compared with 2015. Annualized operating expenses as a percentage of average assets under management remained in 2016 stable compared with 2015 at 13 basis points.
Production Gross inflows in other third-party increased by 37% in 2016 to EUR 46.4 billion compared with 2015. This was mainly the result of higher gross flows in AIFMC in 2016 compared with 2015, which were mainly driven by higher recognized gross inflows, the acquisition of La Banque Postale Asset Management, and higher gross flows in the US and the Netherlands.
Management to establish experienced investment teams, a solid asset base and proven long-term records; �� Kames Capital is a UK-based asset management company that provides fixed income, equities, real estate and multiasset solutions to both UK and international clients; and �� TKP Investments is a Netherlands-based fiduciary manager that is recognized for its manager selection and tailored advice on balance sheet solutions for the pension market.
Management offers a comprehensive range of investment strategies to French institutional clients, and to private investors through La Banque Postale group’s retail banking network.
Asset Management Company Zrt. Depending on regulatory requirements and the local business environment, boards of local operating entities may include oversight through independent non-executive directors.
Committee and the Human Resources Committee, together with a Global Strategic Change Committee. Members of the Global
Management B.V. and Kames Capital plc remain ultimately responsible for the entities, and have the duty to oversee the delegated authorities. As part of this integration in Europe,
B.V.. To ensure the continued independence of the fiduciary services offered by TKP Investments, the respective teams have, since January 1, 2018, reported to the global CEO of Aegon
Overview of sales and distribution channels Aegon Asset Management uses a variety of sales and distribution channels in the Americas, Europe and Asia. These include among others: affiliated companies, direct to institutional clients, independent investment advisors, investment consultants, joint ventures and third-party investment platforms.
Management manages Aegon’s general account derivatives book of Aegon the Netherlands.
In the United Kingdom, Aegon Asset Management focuses on offering investors fixed income, equities, real estate, multi-asset, absolute return and ethical investments. It serves institutional clients and their advisors, and is active in the wholesale market. Primary competitors in the UK include
Aegon Asset Management businesses in order to compete with large local asset managers and specialized international competitors. In France, primary competitors include Amundi
From a regulatory perspective, the asset management activities of the US-based entities of Aegon Asset Management in the
Asset-Liability Management Aegon specializes in writing long-term life insurance business with key markets in the US, Europe and Asia. Its product suite includes savings and annuity products that feature a guaranteed level of benefit. Aegon also writes mortgages in The Netherlands that are initiated using long-term insurance funds. Products are priced using a market-consistent framework, and comprehensive asset-liability management (ALM) programs are implemented to ensure that the assets backing policyholder benefits are invested prudently over the long term.
Regular liquidity stress testing is used to monitor required liquidity and ensure that sufficient funding is available.
Americas The investment choices of Aegon USA’s companies are subject to regulation dependent upon the laws of the applicable state in which each such company is domiciled. Each state prescribes the nature, quality and percentage of various types of investments that may be made by the companies. Such laws generally permit investments in government bonds, corporate debt, preferred and common stock, real estate and mortgage loans, while limiting investment in other classes of investments.
Transamerica also writes a significant volume of variable annuity business, which is managed using sophisticated dynamic hedging techniques. Clearly-defined hedge strategies cover first order
Derivatives are central to Aegon’s hedging strategy, and the derivatives market has been subject to a large number of changes in recent years. These include the introduction of the EMIR in Europe. Furthermore, counterparty risks associated with derivative contracts are mitigated by collateral, and the introduction of central clearing has increased collateral requirements and reduced counterparty risk over recent years.
United Kingdom Having disposed of the majority of its annuity portfolio, the primary role of ALM at Aegon UK is to protect Solvency II
own funds. This is achieved by using options and equity and interest rate swaps to guard against fluctuations in best estimate liabilities. Programs are also in place to match assets with the liabilities of the remaining annuity book and the staff pension scheme.
The UK with-profits business is written in the policyholder-owned fund (otherwise called the ‘with-profits fund’). The funds with the highest guaranteed rates have been closed to premiums since 1999, and all funds have been closed to new business with investment guarantees since October 2002 (except for a small increase in regular payments). The fund contains free assets that have not yet been fully distributed to individual policyholders.
Central & Eastern Europe Aegon has a range of ALM programs in place across life and non-life businesses in the Central & Eastern Europe region.
Spain & Portugal Aegon has a range of ALM programs in place in Spain & Portugal across life and non-life businesses. In Spain & Portugal, insurance liabilities are predominately long-term life benefits, and the focus of ALM is to minimize interest rate risk by duration matching.
Asia SARe uses a sophisticated dynamic hedge program to manage guarantee risk included in variable annuity products associated with equity markets and interest rates.
In order to minimize its exposure to reinsurer defaults, Aegon regularly monitors the creditworthiness of its reinsurers, and where appropriate, arranges additional protection through letters of credit, trust agreements and overcollateralization.
For certain agreements, funds are withheld for investment rather than relying on the reinsurer to meet investment expectations.
Default exposure is further reduced by the use of multiple reinsurers within certain reinsurance agreements. Aegon has experienced no material reinsurance recoverability problems in recent years.
The Global Reinsurance Use Committee (GRUC) is a global body that shares and discusses updates and matters of interest among local and global reinsurance managers. The GRUC
Reports are shared with the Global Risk and Capital Committee and Group Management Board as appropriate.
Americas’ overall risk and limit the maximum loss on risks that exceed policy retention levels. Maximum retention levels vary by product, method of underwriting, and the nature of the risk being reinsured.
Europe The Netherlands Aegon the Netherlands reinsures part of its insurance exposure with third-party reinsurers under traditional indemnity and ‘excess of loss’ contracts. Reinsurance helps Aegon manage, mitigate and diversify its insurance risks, and thereby limit the maximum loss it may incur. Since January 1, 2014, Aegon the Netherlands has reinsured its term life assurance through a quota-sharing contract. For non-life, Aegon the Netherlands only reinsures its property, general and motor third-party liability business.
Spain & Portugal Aegon Spain has a ‘one Aegon’ reinsurance management policy.
Asia: Aegon Insights Aegon Insights’ traditional business model primarily creates value by reinsurance of the third-party carrier partner through an Aegon risk carrier, whereby risk-based premium is acquired for the Group. Aegon Insights acts as an independent marketing services provider. This enables it to form partnerships with local insurers, particularly in locations in which Aegon does not have a local presence.
For Aegon, risk management involves: �� Understanding risks that the Company faces; �� Maintaining a company-wide framework through which the risk-return trade-off associated with these risks can be assessed; �� Maintaining risk tolerances and supporting policies to limit exposure to a particular risk or combination of risks; and �� Monitoring risk exposures and actively maintaining oversight of the Company’s overall risk and solvency positions.
By setting certain predefined tolerances and adhering to policies that limit the overall risk to which the Company is exposed,
Enterprise Risk Management (ERM) framework Aegon’s ERM framework is designed and applied to identify and manage potential risks that may affect Aegon. This means identifying and managing individual and aggregate risks within
Aegon’s risk tolerance in order to provide reasonable assurance regarding the achievement of Aegon’s objectives. The ERM
The ERM framework applies to all of Aegon’s businesses for which it has operational control. Aegon’s businesses are required to either adopt the Group level ERM framework directly, or tailor it to local needs while meeting the requirements of the Group level ERM framework.
Risk response Aegon distinguishes the following risk responses: �� When the risk exposure is within the set risk tolerance, management can accept the risk; and �� When an exposure exceeds the risk tolerance of management or if cost-benefit analysis supports further actions, management can decide to control, transfer or avoid the risk.
The identified risk categories are financial risk, underwriting risk and operational risk. Specific risk types are identified within these risk categories. The risk universe captures all known material risks to which Aegon is exposed. These risks, internal or external, may affect the Company's operations, earnings, share price, value of its investments, or the sale of certain products and services. In the context of Aegon’s risk strategy, a risk appetite is set for the three identified risk categories (see table below).
Financial The risk of incurring financial losses due to movements in financial markets and the market value of balance sheet items. Elements of financial risk are credit risk, investment risk, interest rate risk and currency risk.
Low to medium – Accepted where it meets customer needs and the risk return profile is acceptable.
Description of risk types Credit risk Credit risk is the risk of economic loss due to the deterioration in the financial condition of counterparties, either through fair value losses on traded securities or through defaults on traded securities, loans and mortgages. Having a well-diversified investment portfolio means that Aegon can accept credit spread risk to earn a liquidity premium on assets that match liabilities.
Interest rate risk Aegon is exposed to interest rates as both its assets and liabilities are sensitive to movements in long- and short-term interest rates, as well as to changes in the volatility of interest rates. Aegon accepts interest rate risk in order to meet customer needs. However, as no spread is earned on this interest rate risk,
Currency exchange rate fluctuations therefore affect the level of shareholders’ equity as a result of converting local currencies into euro, the Group’s reporting currency. The Company holds its capital base in various currencies in amounts that correspond to the book value of individual business units.
Liquidity risk Aegon needs to maintain sufficient liquidity to meet short term cash demands not only under normal conditions, but also in the event of a crisis. To that end, Aegon has put a strong liquidity management strategy in place. The Company considers extreme liquidity stress scenarios, including the possibility of prolonged
Underwriting risk Underwriting risk relates to the products sold by Aegon’s insurance entities, and represents the risk of incurring losses when actual experience deviates from Aegon’s best
estimate assumptions on mortality, morbidity, policyholder behavior, P&C claims and expenses. Aegon has a preference to selectively grow underwriting risk, but this must work handin -hand with a strong underwriting process. Aegon’s earnings depend, to a significant degree, on the extent to which claims experience is consistent with assumptions used to price products and establish technical liabilities. Changes in, among other things, morbidity, mortality, longevity trends and policyholder behavior may have a considerable impact on the Company's income.
Assumptions used to price products and establish technical liabilities are reviewed on a regular basis. Please refer to note 3 'Critical accounting estimates and judgment in applying accounting policies' to the consolidated financial statement for further information.
Operational risk Like other companies, Aegon faces operational risk resulting from operational failures or external events, such as processing errors, inaccuracies in used models, acts from personnel, non-compliance to laws and regulations, and natural or manmade disasters. In addition, major programs or organizational transformations may also increase potential for operational risks.
Aegon’s systems and processes are designed to support complex products and transactions, and to avoid such issues as system failures, business disruption, financial crime and breaches of information security. Aegon monitors and analyses these risks on a regular basis, and where necessary revises contingency plans to deal with them.
Officer, who is a member of the Management Board. Moreover, regular updates are provided to Aegon’s Supervisory Board.
Conduct Risk Both industry-wide and within Aegon, cultural and behavioral elements of risks increasingly play a role within overall risk frameworks. Relevant in this context are, among others, the European Insurance Distribution Directive (IDD) and the
The SBRC reports to the Supervisory Board on topics related to the ERM framework and the internal control system. The formal responsibility regarding the effectiveness and design, operation and appropriateness of the ERM and internal control system rests, however, with the Audit Committee of the Supervisory
Furthermore, the SBRC regularly reviews risk exposures relating to capital, earnings and compliance with Group Risk policies.
Aegon’s Executive Board has overall responsibility for risk management. The Executive Board adopts the risk strategy, risk governance, risk tolerance and material changes in risk methodology and risk policies. The Group's CRO has a standing invitation to attend Executive Board meetings and a direct reporting line to the Supervisory Board to discuss ERM and related matters, and is a member of the Management Board.
The Management Board oversees a broad range of strategic and operational issues. While the Executive Board remains
Aegon’s strategic goals. The Management Board discusses and sponsors ERM, in particular the risk strategy, risk governance, risk tolerance and the introduction of new risk policies.
It is responsible for managing Aegon’s balance sheet at the global level, and is in charge of risk oversight, risk monitoring and risk management related decisions on behalf of the Executive
The ERMAAC can seek advice on significant framework development from temporary working groups comprised of subject-matter experts from across the Company's businesses.
The MVC is responsible for approving all model validation reports across Aegon. This is an independent committee that reports into the GRCC and Executive Board to provide information on model integrity and recommendations for further strengthening of models.
In addition to the four basic layers described above, Aegon has an established group-wide risk function. It is the mission of the Risk Management function to ensure the continuity of the
In general, the objective of the Risk Management function is to support the Executive Board, Management Board, Supervisory
Aegon’s risk tolerances, and stakeholder expectations are managed under both normal business conditions and adverse conditions caused by unforeseen negative events.
The following roles are important in order to realize the objective of the Risk Management function: �� Advising on risk-related matters including risk tolerance, risk governance, risk methodology and risk policies; CONTENTS
In the context of these roles, the following responsibilities can be distinguished: Advising on risk-related matters �� Bringing businesses together to facilitate information exchange, sharing best practices and working together on relevant case studies and external standards in order to develop, adopt and maintain relevant standards of practice throughout Aegon; and �� Optimizing the use of capital and growth within risk/return and consumer conduct criteria.
Supporting and facilitating �� Developing and maintaining the global ERM framework for identifying, measuring and managing all material risks the Company is exposed to as defined in Aegon’s risk universe and protecting Aegon’s reputation; �� Developing and maintaining Aegon’s risk methodology as described in the Aegon Market Consistent Reporting
Model validation ensures independent review of methodology, assumptions, data, testing, production, reporting and use of the Solvency II PIM; �� Analyzing Solvency II PIM outputs and performance and reporting results to the Boards and relevant (Supervisory)
Committees; �� Providing subject matter expertise from the Centers of Excellence of the global Risk Management function to business areas through review of key initiatives, transactions, programs, projects, assumptions, methodologies and results across all important paradigms; �� Providing assurance on the integrity of models and cash flows through model validations and maintenance of model validation policies and standards; and �� Promoting a strong risk management culture across Aegon, including review of performance targets and remuneration in line with the Aegon Group Global Remuneration Framework.
Aegon’s Group and business unit’s risk management staff structure is fully integrated. Business unit CROs have either a direct reporting line to the Group CRO or one of the regional
Internal control system Aegon has developed an internal control system that serves to facilitate its compliance with applicable laws, regulations and administrative processes, and the effectiveness and efficiency of operations with regard to its objectives, in addition to the availability and reliability of financial and non-financial information. The overall internal control system ensures appropriate control activities for key processes and the documentation and reporting of administrative and accounting information. The internal control system is embedded through policies and frameworks such as the ERM framework, the
Commission’ (COSO, 2013), on which criteria for the internal control system is based.
Act and Solvency II). Aegon’s control activities should assure an adequate level of internal control over Aegon’s objectives and in particular compliance, operational and financial reporting objectives including the production of Solvency
– the audit function – provides independent assurance opinions on the effectiveness of the internal control, risk management and governance systems.
Solvency II metrics are embedded in Aegon’s key reports and used for risk management purposes. In 2017, Aegon published its first Solvency and Financial Condition Reports (SFCRs).
Aegon’s business and performance, system of governance, risk profile, valuation for solvency purposes, and capital management.
SFCRs were published within the Aegon Group by Aegon N.V. and by various life, non-life and reinsurance companies established within the EU.
In 2017, a number of management actions were taken, particularly with regard to strengthening the solvency position of the Dutch insurance entities. These actions included Group support through a capital injection, portfolio optimization and risk profile improvements. The latter included de-risking the General Account and hedging. Furthermore, the Capital
II capital ratios of the Group and Aegon the Netherlands do not include any contingent liability potentially arising from unit-linked products sold, issued or advised on by Aegon in the Netherlands in the past, as the potential liability cannot be reliably quantified at this point.
Adequate capitalization To calculate its Group Solvency Ratio, Aegon applies a combination of the Group consolidation methods available under Solvency II which are the Accounting Consolidation (AC)
capital requirements are mainly used for the EEA-based insurance and reinsurance entities, applying the Accounting
(D&A), affecting Aegon’s tiering of capital, retrospectively as of the second quarter of 2017. It includes lowering the conversion factor from 250% to 150% Risk-Based Capital Company
The methodology is subject to annual review. Under the new methodology, a 100% RBC CAL haircut is applied to own funds by decreasing Americas regulated entities deferred tax assets and subsequently reducing Tier 1 unrestricted capital. The allocation of restricted Tier 1 and Tier 2 capital instruments is based on the share of AC and D&A entities in the total available own funds
Group Solvency II ratio 201% 170% 157% 1 The Group Own Funds information is based on the revised method which was confirmed by the DNB on August 8, 2017. Based on the old method, the
5 Aegon Bank is not included in the Group Solvency II ratio. 6 Group Solvency II ratio at December 31, 2017 does not reflect impact of NAIC tax factor changes following the US tax reform. At this point it is unclear when the NAIC will update the tax factors used in the RBC calculation. 7 The 2016 comparative numbers are the final numbers as disclosed in Aegon’s 2016 Solvency and Financial Condition Report.
Aegon Group Partial Internal Model (PIM) SCR amounted to EUR 7,774 million on December 31, 2017 (2016: EUR 11,563 million). The SCR decreased by EUR 2,162 million as a result of a change in the treatment of US insurance entities within Solvency II. Aside from this, the SCR was reduced by EUR 1,627 million driven by a weakening of the US dollar against the euro, the implementation of approved major model changes to Aegon’s PIM, positive market movements and management actions, including the divestment of the majority of the US run-off business, the divestment of the vast majority of UK annuity book and the divestment of UMG and separate account derisking in Aegon the Netherlands.
The Group Solvency II ratio improved by 44% to 201% in 2017.
The increase in solvency ratio was partly offset by the impact of the external dividend and the US tax reform.
measure is the CAL risk-based capital requirement. This is the regulatory intervention level at which a company has to submit a plan to its state regulators. The domiciliary state regulator has the authority to require additional capital depending on the type, volume and nature of the business being conducted. The domiciliary state regulator also has the ability to require
Action Level as the SCR equivalent for including the US life insurance and reinsurance entities into the Group solvency calculation. The non-regulated US entities and the US holding companies are included in the Aegon Group Solvency II results through application of the Accounting Consolidation method under Solvency II, using Solvency II valuation and capital requirement calculations for these entities. The contribution of the Aegon Americas entities to the Group Solvency II position on December 31, 2017, is estimated to be 199% (2016: 163%).
The Americas ratio does not include a diversification benefit between the US life companies and there is no diversification benefit between US and other group entities.
The calculation includes the use of the volatility adjustment, but does not include the use of any transitional measures.
The initial internal model of Aegon the Netherlands was approved on November 26, 2015, by the supervisor, the DNB, as part of the Internal Model Application Process. The combined
Solvency II position of the activities of Aegon the Netherlands, including Aegon Bank18, on December 31, 2017, is estimated to be 199% (2016: 134%). This increase mainly reflects a capital injection from Aegon Group of EUR 1 billion, the sale of UMG, positive market impacts, and model adjustments approved by the
DNB, which mainly related to adjusting the calculation of spread risk. These benefits were partly offset by higher capital requirements from an ongoing program of increasing the share of illiquid investments on the balance sheet of Aegon the
Netherlands. The solvency position of the banking activities are calculated using the CRR/CRD IV framework. As at December 31, 2017, the factor of LAC DT is set at 75%, unchanged from 2016.
Aegon UK Aegon UK uses a PIM to calculate the solvency position of its insurance activities under Solvency II. The calculation includes the use of both the matching adjustment and volatility adjustment
Solvency II position of the activities of Aegon in the UK on
This increase mainly reflects positive market impacts, the divestment of the vast majority of the annuity book, and model adjustments approved by the PRA, which related to operational and currency risk being included in the internal model,
Sensitivities Aegon calculates sensitivities of its Solvency II ratios as part of its risk management framework. The following table provides an overview of the shocks to parameters used to assess the sensitivities, and their estimated impact on the
Solvency II ratio as at December 31, 2017: Scenario Group US NL UK
Interest rates +100 bps +12% +2% +12% (6%) +8% +11% +12% +16%
NL loss absorbency of taxes factor -25%pts (6%) (3%) - - (11%) (8%) - 1 Non-government bonds credit spreads. 2 Additional defaults for 1 year including rating migration of structured products.
Aegon is mainly exposed to movements in equity, interest rates, credit spreads and defaults/migrations, and longevity. The Group is exposed to losses in the downward equity scenario, which is driven by Aegon Americas and Aegon the Netherlands. This is partially offset by hedging gains in Aegon UK. In the US, the sensitivity to equities rising changed due an updated hedging strategy. The Group and its main operating units entities are exposed to a decrease in interest rates. The sensitivity towards lower interest rates is mainly caused by higher SCRs in NL and
Lower mortality rates (longevity) increase the longevity exposed liabilities. The higher liability values decrease OF in US and NL, as longevity is only partially hedged, and increase the SCR.
Internal capital management framework In managing the capital adequacy of the Group and its operating units, Aegon’s capital management framework is built on, among other things, managing capitalizations towards target capital management zones. Under Aegon’s capital management framework, the most relevant target capitalization zones are as follows: Capitalization target range1
The frequent monitoring of actual and forecast capitalization levels of both the Aegon Group and of its underlying businesses is an important element in Aegon’s capital framework in order to actively steer and manage towards maintaining adequate capitalization levels. Aegon’s capital framework is based on several capital management zones in which escalating management actions are called for in a timely manner to ensure that there is always adequate capitalization of both the Aegon Group and its operating units.
100% - 120% SCR Recovery 100% - 300% RBC 100% - 130% SCR 100% - 130% SCR Re-assess capital plan and risk positions. Reduce or suspend remittances.
Aegon USA (Life entities) 1), 3) 100% Company Action Level (NAIC RBC CAL) 472% of combined CAL ~EUR 7.8 bln
Aegon the Netherlands 2), 3) 100% Solvency II SCR 199% Solvency II SCR ~EUR 3.2 bln
Aegon United Kingdom 3) 100% Solvency II SCR 176% Solvency II SCR ~EUR 1.1 bln 1 Capitalization for the United States represents the internally defined combined Risk-Based Capital (“RBC”) ratio of Aegon’s life insurance subsidiaries in the
Improving risk-return profile Aegon continues to take measures to improve its risk-return profile. These measures include de-emphasizing the selling of various spread based products and the strategic growth in fee-based businesses. In 2016, Aegon divested its annuity business in the UK, and reinvested part of the proceeds for the acquisition of Cofunds and BlackRock's DC business in the
UK. In 2017, Aegon continued its commitment to optimize its portfolio by divesting UMG in the Netherlands and completing the sale of the majority of its US run-off businesses. Aegon
Aegon UK, and hedging the capital position in the Americas against adverse equity and interest rate movements. In addition, Aegon is actively involved in hedging longevity risk in the Netherlands and has an active global reinsurance program in order to optimize the risk-return profile of other insurance risks. Aegon strictly monitors the risk-return profile of new business written, withdrawing products that do not meet the required hurdle rates for all stakeholders including the policyholders and shareholders.
Solvency II distinguishes between basic own funds and ancillary own funds. Aegon’s total own funds are comprised of Tier 1,
Dated or perpetual Subordinated capital instruments. With an original maturity of at least 5 years.
Available own funds Unrestricted Tier 1 capital consists of Aegon’s share capital, share premium and the reconciliation reserve. The reconciliation reserve includes deductions to account for foreseeable dividends that have been approved by the Board but that have yet to be distributed to Aegon’s shareholders, and restrictions related to Aegon’s with-profits fund in the UK for which the excess of own funds over its capital requirement is ringfenced for the policyholder, and therefore unavailable to Aegon’s shareholders.
Restricted Tier 1 capital consists of Aegon’s junior perpetual capital securities and perpetual cumulative subordinated bonds, both of which are grandfathered. Tier 1 restricted capital is subject to tiering restrictions.
Aegon’s Tier 2 capital consists of its grandfathered dated subordinated notes, and deferred tax asset balances related to the inclusion of (provisional) equivalent regimes in
The grandfathered restricted Tier 1 and Tier 2 capital instruments are grandfathered to count as capital under Solvency II for up to 10 years as of January 1, 2016. All call dates are listed in note 33
When applying the eligibility restrictions, Aegon determines its tiering limits based on: �� EEA entities – representing the part of the Group covered by the Accounting Consolidation based method, for which tiering limits are based on the SCR of the consolidated part of the Group, i.e. the consolidated group SCR; and
States, Aegon does not initially categorize these own funds into tiers or define tiers that are significantly different from those established under the Solvency II Directive. The own funds brought in by the Deduction & Aggregation method are then allocated to tiers according to the principles laid out in
Aegon’s gross financial leverage ratio is calculated by dividing total financial leverage by total capitalization. Aegon defines total financial leverage as debt or debt-like funding issued for general corporate purposes and for capitalizing Aegon’s business units. Total financial leverage includes hybrid instruments, subordinated and senior debt. Aegon’s total capitalization consists of the following components: �� Shareholders’ equity, excluding revaluation reserves, cash flow hedge reserves, and the remeasurement of defined benefit plans, based on IFRS as adopted by the EU; �� Non-controlling interests and share options not yet exercised; and �� Total financial leverage.
management purposes with several affiliated captive insurance companies (captives). All captives are fully consolidated for
All external financing provided to captives to support statutory reserves is disclosed in note 39 'Borrowings' to the consolidated financial statements to the extent to which it has been funded.
Aegon also has access to domestic and international money markets through its EUR 2.5 billion commercial paper programs.
As at December 31, 2017, Aegon had EUR 72 million outstanding under these programs (2016: EUR 128 million).
Liquidity management Liquidity management is a fundamental building block of Aegon’s overall financial planning and capital allocation processes. The Company's liquidity risk policy sets guidelines for its operating companies and the holding in order to achieve a prudent liquidity profile and to meet cash demands under extreme conditions.
Aegon’s liquidity is invested in accordance with the Company's internal risk management policies. Aegon believes that its working capital, backed by its external funding programs and facilities, is ample for the Company's present requirements.
Aegon’s internal audit function assists the Executive Board in maintaining effective controls by independently and objectively evaluating the adequacy and effectiveness of the organization's internal control and risk management systems. Criteria established under 'Internal Control – Integrated Framework', the Treadway
Commission's Committee of Sponsoring Organizations (COSO, 2013 framework), are used by Aegon’s internal audit function to analyze and make recommendations to the Executive Board concerning the effectiveness of the Company's internal control framework. Based on risk assessments performed, the
Supervisory Board and its Risk Committee. Through oversight and framework setting, Aegon’s risk management function ensures the group-wide risk profile is managed in line with Aegon’s risk tolerances, and stakeholder expectations are managed both under normal business conditions and adverse conditions caused by unforeseen events. The Executive Board is timely informed of risks to the Company's economic/statutory solvency, reputation, reliability of financial reporting or operations.
In preparing the consolidated financial statements, Aegon’s directors and management have adopted a going concern basis on the reasonable assumption that the Company is and will be able to continue its normal course of business in the foreseeable future.
The main areas assessed were financial performance, capital adequacy, financial flexibility, liquidity, and access to capital markets, together with the factors and risks likely to affect Aegon’s future development, performance and financial position. Commentary on these areas is set out in the ‘Business
Company, its continued ability to access capital markets, the fact that solvency and leverage ratios are well within target range, and the level of excess cash in the holding,
Aegon’s risk management and control systems provide reasonable assurance for the reliability of financial reporting and the preparation and fair presentation of Aegon’s published financial statements. They cannot, however, provide absolute assurance that a misstatement of Aegon’s financial statements can be prevented or detected.
The statements in this section are not statements in accordance with the requirements of Section 404 of the
Act (Wet op het financieel toezicht (Wft)), the Executive Board confirms that, to the best of its knowledge, the financial statements prepared in accordance with applicable accounting standards and give a true and fair view of the assets, liabilities, financial condition and profit or loss of the Company and the undertakings included in the consolidation as a whole; and that the Report of the Executive Board gives a fair view of the position at the reporting date of the Company, the development and performance of the business during the financial year, and the undertakings included in the consolidation as a whole, together with a description of the principal risks and uncertainties that the Company faces.
SCR (the rules for which are set out in detail in the Solvency II
rules and guidelines); (b) use an internal model (for which the approval of the supervisory authorities is required); or
(c) use a partial internal model (PIM) (which is a combination of the standard formula and an internal model, and requires approval of the supervisory authorities). An internal model is developed by the insurance or reinsurance company in question, and should better reflect the actual risk profile of the insurance or reinsurance company than the standard formula.
In addition to the SCR, insurance and reinsurance companies should also calculate a Minimum Capital Requirement (MCR).
This represents a lower level of financial security than the SCR, below which the level of eligible own funds held by the insurance or reinsurance company is not allowed to drop. An irreparable breach of the MCR would lead to the withdrawal of an insurance or reinsurance company’s license.
The lower tiers of own funds (tiers 2 and 3) represent a limited part of the eligible own funds, as excess lower tier capital
In general, Solvency II requires insurance and reinsurance companies to maintain an effective system of governance that is proportionate to the nature, scale and complexity of the insurance or reinsurance company. A number of risks that insurance or reinsurance companies face can only be addressed through proper governance structures, rather than quantitative requirements. Management of the insurance or reinsurance company is ultimately responsible for the maintenance of an effective governance system.
(such as risk management, internal control, internal audit and outsourcing (where appropriate)). A number of key functions are required to be part of the system of governance (compliance, risk management, the actuarial function and internal audit).
The Pillar 2 requirements include specific requirements relating to the risk management system. This should cover at least the following areas: underwriting and reserving, asset-liability matching, investments (in particular derivatives and similar commitments), liquidity and concentration risk management, operational risk management, reinsurance and other risk mitigating techniques. Risk management relating to Solvency II is discussed in further detail in the section Risk management on page 94. As part of the risk management system, insurance and reinsurance undertakings are required to undertake an ORSA, which includes the overall solvency needs of the undertaking, taking into account the risk profile, risk tolerance limits and business strategy, the ongoing compliance with Solvency II capital requirements and rules regarding technical provisions, and the extent to which the risk profile of the undertaking deviates from the assumptions underlying the calculation of the SCR. Solvency II Pillar 2 requirements also include detailed requirements with respect to outsourcing, including intra group outsourcing.
The Supervisory Review Process (SRP), which is part of Pillar 2, allows supervisory authorities to supervise the ongoing compliance of insurance and reinsurance undertakings with
Solvency II requirements. Possible enforcement measures include: the imposition of capital add-ons (for instance in the event that the risk profile of the undertaking deviates from the SCR calculation or if there are weaknesses in the system of governance); the requirement to submit and execute a recovery plan (in the event of a (potential) breach of the
SCR or a short-term financing plan (in the event of a (threatening)
II does however require groups to maintain eligible own funds, at least equal to a floor, as further defined in the Solvency
requirements for banks and certain investment firms) and using the Deduction and Aggregation method for inclusion of these entities in the group calculation (as opposed to the Accounting
on a solo-basis and on consolidated basis, whereby consolidation takes place at the level of Aegon Bank N.V.. The prudential requirements (including CRD IV and CRR) are described in more detailed on page 62.
Group Solvency position. US insurance and reinsurance entities are included in Aegon’s group solvency calculation in accordance with local US (RBC) requirements. US insurance and reinsurance entities are included in Aegon’s group solvency calculation in accordance with local U.S. Risk-Based Capital (RBC) requirements.
Until June 30, 2017, Aegon used 250% of the local Company
July 1, 2017, that includes lowering the conversion factor from 250% to 150% RBC, and reducing the contribution to own funds by 100% of the local Company Action Level RBC requirement to reflect transferability restrictions. This methodology is subject to annual review, and the change enhances comparability with
European peers. The RBC and CAL, as well as the allocation of restricted Tier 1 and Tier 2 capital instruments between the accounting consolidation and deduction and aggregation part of the Group are described in more detail in the ‘Capital and
The FSB reviews the G-SII designation annually. However, the FSB, in consultation with the IAIS and national authorities, has decided not to publish a new list of G-SIIs for 2017 and that the measures will continue to apply to the G-SIIs that were on the 2016 list. Consequently, Aegon continues to be designated at the time of publication of this annual report.
International Capital Standards (ICS) In 2017, for financial year 2016, G-SIIs have calculated and reported a Basic Capital Requirement (BCR) and Higher Loss
reference ICS, followed by an implementation phase where the ICS is envisaged to become a required capital standard.
US Department of the Treasury announced the signing of the US-EU Covered Agreement on insurance and reinsurance measures. The Covered Agreement covers three areas of prudential insurance oversight: reinsurance, group supervision and exchange of information between supervisors. The impact of this agreement (or any changes made to the regulatory frameworks in the US or the EU as a result of this agreement)
Oversight and advice The Supervisory Board is a separate independent corporate body, consisting of nine members on December 31, 2017.
In addition, the Supervisory Board determines the remuneration of individual members of the Executive Board in line with the Remuneration Policy adopted at the Company's General
Corporate governance Details of Aegon’s corporate governance structure and a summary of how the Company complies with the Dutch Corporate
Board in 2017 can be found on pages 123-125. All members of the Supervisory Board are considered independent under the terms of best practice provisions 2.1.7, 2.1.8 and 2.1.9 of the Dutch Corporate Governance Code.
There were a number of changes to the Supervisory Board in 2017. Shemaya Levy stepped down as a member of the Board on May 19, 2017, after he reached the end of his third and final term. The Board benefitted greatly from Mr. Levy’s knowledge and contributions. On May 19, 2017, shareholders approved the reappointment of Dona Young to the Board for another term of four years. She has also taken over the role of Shemaya Levy as Chairman of the Risk Committee. In addition, the proposed
Board members William Connelly and Mark Ellman were appointed as new members of the Supervisory Board at the
Chairman of the Supervisory Board, decided to step down, after 10 years of service, at the Annual General Meeting of Shareholders on May 18, 2018. The Supervisory Board elected
In compliance with the Dutch Corporate Governance Code, members of the Supervisory Board are appointed by shareholders for a term of four years. From 2018 on, the option will exist to reappoint members for one additional four-year term.
Rider joined Aegon in January 2017 and was formally appointed as member of the Executive Board during the Annual General
for a term of four years, with the option of reappointment for additional four-year terms. The appointment schedule and other information about members of the Executive Board are available on aegon.com.
Ben van der Veer was unable to attend. All committee meetings were attended by all committee members, except for one
Members of the Executive Board and Management Board attended the Supervisory Board meetings held in 2017 when relevant with regard to the meeting agenda. At the request of the Supervisory Board, other Company executives also attended the meetings to provide reports and updates on specific topics.
Representatives from Aegon’s external auditor PwC attended the March 2017 Supervisory Board meeting on Aegon’s Annual
Report. PwC also attended all 2017 Audit Committee meetings except for the October deep dive meeting in the Netherlands focused on Aegon the Netherlands. Regular Board meetings were preceded or followed by meetings attended only by the members of the Supervisory Board and the CEO. Furthermore, the Supervisory Board held meetings without the presence of
Highlights and activities Key topics discussed during the 2017 Supervisory Board meetings were Aegon’s quarterly results and (annual) reporting,
Quarterly results were discussed on the basis of feedback from the Audit Committee. The full-year results reported in the Annual Report were discussed in the March 2018 meeting in the presence of the external auditor PwC. At the
After approving the corporate strategy in December 2015, the Supervisory Board regularly discussed the long-term value creation strategy with the Executive Board and the Management
Board, and closely monitored its execution, the risks involved in its execution, and any opportunities to further enhance the strategy where necessary. Plans and projects were discussed during executive sessions and in regular meetings, together with the strategic focus for all operating segments. Furthermore, digitization and the cultural transformation of the business were additional important strategic priorities that were discussed during the Supervisory Board meetings.
During the year, the Board discussed various M&A transactions, including but not limited to the divestment of Aegon Ireland, the sale of the Unirobe Meeùs Groep in the Netherlands and the divestment of the two largest US run-off businesses, the payout annuity business, and the Bank Owned / Corporate
Governance Code 2016 and how the Code is implemented within the Company; �� Composition of the Supervisory Board, including the
Company’s Medium Term Plan, including the 2018 budget, capital and funding plan; �� Capital generation and Solvency II capital position, including regulatory capital reports and the capital position of Aegon the Netherlands; �� Enterprise risk management, cybersecurity and information security risks, and the risks related to the execution of the strategy within the Company; �� Investor relations, including shareholder listing, market analysis and roadshow feedback; �� Legal, regulatory and compliance issues, including
Governance Code 2016 and the analysis on how the Company was impacted by the new Code and what was needed to comply with the new Code. The Supervisory Board approved an amended
Supervisory Board Committee Charters to reflect the clauses of the new Dutch Corporate Code 2016.
with other Board members within and outside Aegon. The Board visited local offices and employees in the UK and the US and was furthermore in particular informed on the strategic direction of
Committee furthermore held a meeting dedicated to a detailed discussion program on Aegon the Netherlands.
Board and the Executive Board and Management Board. With regard to this mutual interaction, the 2017 Supervisory Board review also included input from the Management Board.
The performance of the members of the Executive Board was discussed regularly during 2017. The Supervisory Board reviewed the performance of individual members of the Executive and Management Board over the preceding calendar year in January 2017. In addition, the Supervisory Board discussed the cooperation and communication between the Supervisory
Board makes decisions. The Committees report verbally about their discussions, and they are discussed in full at Supervisory
Board meetings. Supervisory Board members receive all minutes of the Committee meetings. These meetings are open to all members of the Board, regardless of membership of the Committees. All Committee reports were prepared by the respective Committees and approved by the Supervisory Board.
Ben van der Veer, qualified as a financial expert according to the
Sarbanes Oxley Act in the United States and his competence in accounting and auditing according to the Audit Committee
to assist and advise the Supervisory Board in fulfilling its oversight responsibilities regarding: �� The integrity of the consolidated interim and full-year financial statements and financial reporting processes; �� Internal control systems and the effectiveness of the internal audit process; and �� The performance of the external auditors and the effectiveness of the external audit process, including monitoring the independence and objectivity of PwC.
Netherlands. Topics for discussion included the Dutch market developments, the capital generation, operational management and digital solutions within Aegon the Netherlands. Audit
Management Board; �� Discussed PwC's quarterly reports (included in local filings)
The Audit Committee was satisfied with the explanations provided by PwC, Internal Audit and Executive and Management
The Audit Committee Charter was furthermore discussed and revised as a result of the new Dutch Corporate Governance Code in November 2017.
The Risk Committee Composition On December 31, 2017, the composition of the Risk Committee was as follows: �� Dona D. Young (chair); �� Robert W. Dineen; �� Mark A. Ellman; �� Ben J. Noteboom; and �� Dirk P.M. Verbeek.
Management (ERM) framework and the internal control systems of the Company and the subsidiaries and affiliates that comprise the Aegon Group. This includes: �� Risk strategy, risk tolerance and risk governance; �� Product development and pricing; �� Risk assessment; �� Risk response and internal control effectiveness; �� Risk monitoring; �� Risk reporting; �� Operational Risk; and �� Transformation Risks.
The Nomination and Governance Committee Composition On December 31, 2017, the composition of the Nomination and
of the Supervisory Board and the Executive Board; �� Discussing the annual global employee survey; �� Overseeing the corporate governance structure of the Company, compliance with the Dutch Corporate
Governance Code and any other applicable corporate governance legislation and regulations; and �� Assessing and advising on the responsible business strategy as part of the corporate strategy, and overseeing the execution of the responsible business strategy.
Committee meetings Aegon’s Nomination and Governance Committee held six meetings in 2017. In addition to the committee members, these meetings were attended in whole or in part by the CEO, the Global Head Human Resources and the General Counsel.
Committees. The Nomination and Governance Committee furthermore advised the Supervisory Board to approve the updated Charters of the Executive Board, the Supervisory Board and the Supervisory Board Committees, including the Charter of the Nomination and Governance Committee.
Aegon’s Global Head Human Resources the extent to which sufficient internal candidates are available to fill positions at Executive Board, Management Board and senior management level both in the event of emergency and when positions open up in the future. The CEO also discussed changes in the global senior management team with the Nomination and Governance
The Supervisory Board is aware that the current composition of the Executive and Supervisory Board does not meet the 'balanced composition' requirement under Dutch law with regard to gender diversity (at least 30% of the positions should be filled by women and at least 30% by men). Following the appointment of Corien Wortmann-Kool to the Supervisory Board in 2014, the gap in terms of the 'balanced composition' was reduced, and the Supervisory Board currently has two female
Board members. When identifying candidates for open positions in the Executive, Management and Supervisory Board, the
Committee was as follows: �� Ben J. Noteboom (chair); �� William L. Connelly; and �� Robert J. Routs.
remuneration governance processes, procedures and methodologies adopted. Furthermore, the Committee ensures that the overall remuneration policy is consistent with the longer-term strategy of the Company and the longer-term interest of its shareholders, investors and other stakeholders.
This includes: �� Reviewing the Aegon Group Global Remuneration Framework and making recommendations on the outcomes; �� Preparing recommendations regarding variable compensation both at the beginning and after the end of the performance year; �� Overseeing the remuneration of the Executive Board,
Global Remuneration Framework and the various policies and procedures related to it, including the Remuneration Policy fo Identified Staff. This included: �� Setting the 2017 performance indicators and targets for remuneration purposes; �� Preparing the 2018 performance indicators for remuneration purposes; �� Allocating variable compensation for 2016; �� Overseeing the scenario analysis of payout levels under the Executive Board Remuneration Policy; and �� Reviewing and/or approving the ex-ante assessments and ex-post assessments, any exemption requests under the remuneration policies, and changes to the list of
Remuneration Committee. The Remuneration Committee approved an updated Remuneration Committee Charter that reflects the requirements of the new Dutch Corporate
Annual Accounts This Annual Report includes the Annual Accounts for 2017, which were prepared by the Executive Board and discussed by both the Audit Committee and the Supervisory Board.
DSM N.V. and sits on the Board of Directors of ATCO Ltd.,
He is a former non-executive director at UPM and former Vice
Board of ING Bank, where he was responsible for ING's corporate, financial institutions and financial markets activities.
He started his career at Chase Manhattan Bank, fulfilling senior roles in commercial and investment banking in France, the Netherlands, Spain, the United Kingdom and the United
Mr. Connelly is also an independent director at the Board of Directors of Société Générale.
He was appointed to Aegon’s Supervisory Board in May 2014, and his current term ends in 2018. He is a member of the
Mr. Dineen is also the non-executive Chairman of the Board of Aretec Inc (not listed, US-based) and was a member of Lincoln
Mark A. Ellman (1957, American) Member of the Audit Committee Member of the Risk Committee Mark A. Ellman is a former Vice Chairman Global Origination of Bank of America/Merrill Lynch. Before joining Bank of America/
Financial Officer of the Renault Group. He was appointed to Aegon’s Supervisory Board in 2005, and his final term ended in May 2017. He was Chairman of the Supervisory Board Risk
Ben J. Noteboom (1958, Dutch) Chairman of the Remuneration Committee Member of the Risk Committee Ben J. Noteboom worked for Randstad Holding N.V. from 1993 until 2014, where he was appointed member of the Executive
He was appointed to Aegon’s Supervisory Board in May 2015, and his current term ends in 2019. He is Chairman of the
Supervisory Board Remuneration Committee and a member of the Supervisory Board Risk Committee.
In addition, Mr. Noteboom is a member of the Board of Directors of VUmc Cancer Center Amsterdam.
Ben van der Veer (1951, Dutch) Chairman of the Audit Committee Member of the Nomination and Governance Committee Ben van der Veer is former Chairman of the Board of
Management of KPMG N.V. Mr. Van der Veer retired from KPMG
Supervisory Board in October 2008. Mr. Van der Veer was re-appointed as a member of the Supervisory Board during the 2016 Annual General Meeting of Shareholders, and his third and final term ends in 2020. He is Chairman of the
FrieslandCampina N.V. (not listed), and a former member of the Supervisory Board of Royal Imtech N.V., TomTom N.V., and Siemens Nederland N.V. (not listed).
Corien M. Wortmann-Kool (1959, Dutch) Vice Chairman of the Supervisory Board Member of the Audit Committee Member of the Nomination and Governance Committee Corien M. Wortmann-Kool is Chairman of the Board of Stichting
May 2014, and her current term ends in 2018. She is Vice
Ms. Wortmann-Kool is also a member of the Supervisory Board of Het Kadaster (not listed), member of the Advisory Council of the Centraal Bureau voor de Statistiek, Chairman of the
Dona D. Young (1954, American) Member of the Audit Committee Chairman of the Risk Committee Dona D. Young is an executive/board consultant and retired
Audit Committee of the Board of Trustees of Save the Children
US (not listed), and member of the Board of Save the Children
Remuneration Framework (GRF). The GRF covers all Aegon staff. It contains the guiding principles for remuneration and therefore supports the consistent setting of sound and effective remuneration policies throughout the Aegon Group. The GRF
Remuneration Policy for the Executive Board. These policies define specific terms and conditions for the employment of various groups of staff. All steps in the remuneration process are governed by the GRF and its underlying policies. Staff from
of the performance indicators used for determining variable compensation to be of a non-financial nature. In addition, the regulations limit the use of financial retention and severance arrangements.
Aegon met the applicable criteria. Although the regular maximum levels of variable compensation apply in the Netherlands,
of base salary as variable compensation for performance delivered by selected senior staff in positions that, based on local market practice, could exceed the 100% of base salary variable compensation set out in the legislation. The Company's capital is not adversely impacted by the maximum variable compensation that could be paid out.
Role of risk management and compliance Variable compensation may have an impact on risk-taking behaviors and, as such, may undermine effective risk management. The opportunity to receive high variable compensation can lead to excessive risk taking, which can have a material impact on the Company's financial soundness.
In addition, the Risk Management and Compliance functions, together with the Human Resources and Finance functions, are responsible for the execution of the various measures that ensure the GRF and associated practices are aligned with the defined risk tolerances and behaviors. The risk mitigating measures are taken prior to the payout of compensation to individual employees (regardless of whether the compensation is deferred)
(before vesting of these payments) to ensure sustainability of performance, are considered ex-post measures.
General compensation practices Aegon has a pay philosophy based on total compensation.
Supervisory Board Remuneration Policy 2017 Aegon’s Remuneration Policy for members of its Supervisory
Board is aimed at ensuring fair compensation, and protecting the independence of the Board's members. Terms and conditions for members of the Supervisory Board are part of Aegon’s broader Remuneration Policy, and are the responsibility of the Company's Remuneration Committee.
Fee for membership of a Supervisory Board committee EUR / year
Executive Board Remuneration in 2017 The following section describes how the Company applies the principles of good governance relating to Directors remuneration.
Executive Board remuneration Aegon’s Executive Board is remunerated on the basis of the principles described in Aegon’s GRF. Aegon’s remuneration policy for members of the Executive Board is derived from this framework and sets out terms and conditions for members of the Company's Executive Board.
General Meeting of Shareholders on May 12, 2011. The Policy will remain in force until such time as the Supervisory Board proposes changes or amendments. Any material changes in the Executive
Meeting of Shareholders for adoption. The implementation of the current policy during 2017 is described in the Executive Board
In addition to the pay-out scenario, the committee has considered the ratio of the average employee pay expense (excluding
Company’s employee population, which may impact the outcome of the ratio. The composition of the Company and the way this is affected by restructuring and other organisational changes
Remuneration Principles, as described earlier. In particular, the variable compensation element in the remuneration ensures a clear link between individual pay and (both short- and longterm ) company performance. The objectives set for each
Instead, the performance on the 2017 mix of financial- and non-financial targets is disclosed. For Mr. Wynaendts this was 28.7% (of 32.5% possible) for the financial objectives and 61.7%
(of 67.5% possible) for the non-financial objectives. For Mr. Rider this was 28.7% (of 32.5% possible) for the financial objectives and 60.4% (of 67.5% possible) for the non-financial objectives.
This is comprised of the 12 leading companies listed on Euronext Amsterdam, excluding financial services providers.
Performance is determined by using a mix of financial and nonfinancial indicators. For the CEO and CFO the mix of individual and company performance measures is 37.5% to 62.5% and 27.5% to 72.5% respectively. The type of performance indicators are selected in accordance with the long-term goals of the Company. The level of the indicators should be challenging but achievable. The targets and levels are agreed by the
Performance is assessed by Aegon’s Remuneration Committee and validated by the full Supervisory Board. Each year, a oneyear target is set for each performance indicator. By paying half of the variable compensation in cash and the other half in shares, together with adding deferral and additional holding periods to the variable compensation that is allocated, Aegon believes that the long-term interests of Executive Board members are aligned with the interests of Aegon and its stakeholders.
Variable compensation over 2017 At an aggregated level, payments are made as follows21. �� 50% of base salary if the threshold target is reached.
This results in the allocation of EUR 634,739 and 120,994 shares for Mr. Wynaendts and EUR 450,000 and 85,779 shares for Mr. Rider; �� If at an aggregated level the threshold target is not reached, no variable compensation related to the performance period will be made available.
Group financial IFRS based Group underlying earnings after tax, return on equity 15.0% 15.0%
Group financial risk adjusted based Group market consistent value of new business 17.5% 17.5%
The Supervisory Board asks the Remuneration Committee to review these criteria in detail prior to each vesting and to document its findings. Based on this analysis, the Committee may then put forward a proposal to the Supervisory Board to adjust unvested variable compensation. Deferred variable compensation may only be adjusted downwards. Ex-post, riskbased assessments concern deferred variable compensation, not fixed compensation.
Pension arrangements Members of Aegon’s Executive Board are offered pension arrangements and retirement benefits. Benefits offered are consistent with Executive Board members' agreements. Details on the pension contributions to the Executive Board over the course of 2017 can be found in the Remuneration of members of the Executive Board on page 306.
Currently, it is expected that the terms of the engagement agreements will remain largely unchanged during 2018.
Conditional variable compensation awards 2017 Subject to the adoption of the annual accounts at the General
Targets for the performance indicators have been set in line with the agreed variable compensation targets and 2017 company budgets.
Forty percent of variable compensation related to performance year 2017 is payable in 2018. This is split 50/50 in a cash payment and in an allocation of shares.
The number of shares to be made available in 2018 is 43,732 for Mr. Wynaendts and 19,017 for Mr. Rider. With regard to vested shares (with the exception of shares withheld to cover for the payment of any applicable taxes, social security premiums and possible other deductions by the government due for which the Company holds a withholding obligation in connection with the vesting of the shares), a retention (holding) period of a further three years is applicable before they are at the disposal of the Executive Board members.
The remaining part of variable compensation for the performance year 2017 (60% of the total, which for Mr. Wynaendts equates to EUR 344,130 and 65,598 shares, and for Mr. Rider equates to EUR 149,633 and 28,522 shares) is to be paid out in future years, subject to ex-post assessments, which may result in downward adjustments and be subject to meeting additional conditions. In each of the years 2019, 2020 and 2021, 20% of the total variable compensation may be made available. Any payout is split 50/50 in a cash payment and an allocation of shares (vesting). After vesting (with the exception of shares withheld to cover for the payment of any applicable taxes, social security premiums and possible other deductions by the government due for which the Company holds a withholding obligation in connection with the vesting of the shares), a retention (holding) period is applicable for a further three years, before shares are at the disposal of the Executive
Aegon is governed by three corporate bodies: �� General Meeting of Shareholders �� Supervisory Board �� Executive Board
(re) appointments to the Supervisory Board and Executive Board of Aegon.
Aegon’s Articles of Association, such a request will be granted if it is received in writing at least 60 days before the meeting, and if there are no important interests of the Company that dictate otherwise.
Executive Board, in addition to the Company's business and corporate strategy. The Supervisory Board must take into account the interests of all Aegon stakeholders. The Supervisory Board operates according to the principles of collective responsibility and accountability.
Committees The Supervisory Board also oversees the activities of its committees. These committees are composed exclusively of
Executive Board Aegon’s Executive Board is charged with the overall management of the Company and is therefore responsible for achieving
Supervisory Board and/or the approval of the General Meeting of Shareholders. In addition, the Supervisory Board may also subject other Executive Board decisions to its prior approval.
The number of Executive Board members and their terms of employment are determined by the Company's Supervisory
Board limits exit arrangements to a maximum of one year of the fixed component of the salary.
In 2017, no transactions were concluded between the Company and either member of the Executive Board. Furthermore, the
Executive Board, and helps oversee operational issues and the implementation of Aegon’s strategy. Members are drawn from Aegon’s business units and from Aegon’s global functions.
Supervisory Board and the Management Board committee have been given shape, the members of the Management Board will act in accordance with the provisions provided therefore in the Management Board Charter, the Executive Board Charter and the Supervisory Board Charter.
The capital of the Company Aegon has an authorized capital of EUR 1,080 million, divided into 6 billion common shares and 3 billion common shares B, each with a nominal value of EUR 0.12. As of December, 31 2017, a total of 2,095,648,244 common shares and 585,022,160 common shares B had been issued.
Depository receipts for Aegon shares are not issued with the Company's cooperation.
Rights Agreement, under which Vereniging Aegon may cast one vote for every 40 common shares B it holds in the absence of a Special Cause.
Aegon N.V. and Vereniging Aegon under or in connection with the 1983 Merger Agreement. All requirements determined by Best Practice 2.7.5 of the Dutch Corporate Governance Code were complied with in the execution of these transactions.
On June 23, 2017, Vereniging Aegon exercised its options rights to purchase in aggregate 13,042,612 common shares B at fair value (1/40th of the market value of a common share in the capital of the Company at the time of issuance) to mitigate dilution caused by Aegon’s issuance of shares on June 23, 2017, in connection with the distribution of dividend in stock.
repurchased 51,864,626 common shares to neutralize the dilutive effect of the 2016 final and 2017 interim dividends in stock. Following the completion of this Share Buy Back
on December 15, 2017. The repurchase of common shares B was executed to align the aggregate shareholding of Vereniging
Aegon in Aegon N.V. with its special cause voting rights of 32.6%.
Dutch Autoriteit Financiële Markten, the US based investment management firm Dodge & Cox International Stock Fund holds a capital and voting interest in Aegon of over 5%.
Stock Fund stated to hold 134,654,439 common shares, which represent 5.2% of the issued and outstanding capital and of the votes as at December 31, 2017.
BlackRock holds 119,424,291 common shares, representing 4.6% of the issued and outstanding capital as at December 31, 2017, and has voting rights for 107,367,731 shares, representing 4.1% of the votes as at December 31, 2017.
On February 20, 2018, the filing of Franklin Resources, Inc. (FRI), a US based investment management firm, with the SEC shows that FRI holds 156,591,360 common shares and voting rights, representing 6.0% of the issued and outstanding capital, as at
by its shares. This means that in the absence of a Special Cause,
General Meeting of Shareholders. Shares may also be issued following a resolution of the Executive Board, subject to approval by the Supervisory Board, providing, and to the extent that, the Board has been authorized to do so by the General Meeting of Shareholders. A resolution authorizing the Executive Board to issue new shares is usually presented at Aegon’s Annual
Shareholders usually authorize the Executive Board to purchase the Company's shares under terms and conditions determined by the General Meeting.
Share plan Senior executives at Aegon companies and some other employees are entitled to variable compensation of which part is granted in the form of shares. For further details, please see the remuneration-report on page 126 and note 53 of the notes to Aegon’s consolidated financial statements of this Annual
Board. A member of the Executive Board may also be suspended by the Supervisory Board, although the General Meeting of
Board and the Executive Board to oversee Aegon’s overall corporate governance structure.
General Meeting of Shareholders may cancel the binding nature of nominations for appointments of members of the Executive
Board and Supervisory Board with an absolute majority of votes and a limited quorum.
General Meeting of Shareholders, as inside directors are in the United States. The Remuneration Policy as regards the members of the Executive Board is adopted by the General
The Supervisory Board performs supervisory and advisory functions only, and its members are outsiders that are not employed by the Company. The Supervisory Board has the duty to supervise the performance of the Executive Board, the Company's general course of affairs and the business connected with it. The Supervisory Board also assists the
Board include the prior approval of certain important resolutions of the Executive Board. Members of the Supervisory Board are appointed for a four-year term and may be dismissed by the General Meeting of Shareholders. The remuneration of Supervisory Board members is fixed by the General Meeting of Shareholders. Resolutions entailing a significant change in the identity or character of the Company or its business require the approval of the General Meeting of Shareholders.
Differences between Dutch and US company laws Differences between Dutch and US company laws
Aegon’s Code of Conduct is available on aegon.com. The Code outlines Aegon’s clear commitment to a customer centric approach, and reflects Aegon’s core values: Working Together; Bringing Clarity and Exceeding Expectations. The Code of Conduct was updated in 2017. All Aegon employees sign the Code of Conduct to declare their compliance with the Code. Moreover, the rolling out of a new Code of Conduct e-learning for all Aegon companies began in 2017 and will continue in 2018.
In order to support the Code, Aegon has engaged a vendor to supply a tool that enables employees and third parties to report actual or potential violations of the Code on an anonymous and confidential basis. Employees are encouraged to raise concerns. All reports are investigated and results are reported to the Audit Committee of the Supervisory Board.
Suspected or actual frauds that exceed certain thresholds must also be reported to Group Regulatory Compliance.
Based on the assessment, management concluded that, in all material aspects, the internal control over financial reporting was effective as of December 31, 2017. They have reviewed the results of its work with the Audit Committee of the
Accountants N.V., an independent registered public accounting firm, as stated in their report included on the following page.
Relevant facts and circumstances relating to the consolidated financial position on December 31, 2017, were assessed in order to reach the going concern assumption. The main areas assessed are financial performance, capital adequacy, financial flexibility, liquidity and access to capital markets, together with the factors likely to affect Aegon’s future development, performance and financial position. Commentary on these is set out in the ‘Business Overview’ sections ‘Results of operations’,
Report of Independent Registered Public Accounting Firm To: The Annual General Meeting of Shareholders’ and
Opinion on Internal Control over Financial Reporting We have audited the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provide a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Purchases of equity securities by the issuer and affiliated purchasers 379
Net income / (loss) attributable to: Owners of Aegon N.V. 2,361 586 (524)
Earnings per share (EUR per share) 19 Basic earnings per common share 1.08 0.22 (0.31)
Total comprehensive income/ (loss) attributable to: Owners of Aegon N.V. 327 (729) (903)
Remeasurements of defined benefit plans - - - 224 - - 224 - 224
Items that may be reclassified subsequently to profit or loss: Gains / (losses) on revaluation of available-for-sale investments - - 1,283 - - - 1,283 - 1,283
Movements in foreign currency translation and net foreign investment hedging reserves - - (452) 102 (1,800) - (2,149) - (2,149)
Equity movements of joint ventures - - - - (15) - (15) - (15)
Total comprehensive income / (loss) for 2017 - 2,374 (461) 151 (1,737) - 327 (3) 323
Net income / (loss) recognized in the income statement - 586 - - - - 586 - 586
Remeasurements of defined benefit plans - - - (392) - - (392) - (392)
Equity movements of joint ventures - - - - 9 - 9 - 9
Income tax relating to items that may be reclassified - - 264 - (39) - 225 - 225
Dividends paid on common shares (186) (304) - - - - (490) - (490)
Equity movements of joint ventures - - - - (8) - (8) - (8)
Income tax relating to items that may be reclassified - - 836 - (52) - 783 - 783
Dividends paid on common shares (211) (292) - - - - (503) - (503)
Insurance and investment liabilities for account of policyholders 12,988 10,716 (3,343)
Purchase of investments (other than money market investments) (32,057) (34,873) (38,290)
Repayment of TRUPS 1), Subordinated borrowings and borrowings (7,918) (3,070) (3,916)
2 Summary of significant accounting policies 2.1 Basis of presentation The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRS-EU) and with Part 9 of Book 2 of the Netherlands Civil Code.
2.1.1 Adoption of new IFRS-EU accounting standards New standards and amendments to standards become effective at the date specified by IFRS-EU, but may allow companies to opt for an earlier adoption date. In 2017, the following amendments to existing standards issued by the IASB became mandatory, but are not currently relevant or do not significantly impact the financial position or financial statements: Accounting standard/ amendment/ interpretation IASB effective date Endorsed by EU Impact for Aegon
IAS 12 Recognition of Deferred Tax Assets for Unrealised Losses January 1, 2017 Yes Low
Annual improvements 2014-2016 IFRS 12 Disclosure of interests in other entities January 1, 2017 Yes Low
2.1.2 Future adoption of new IFRS-EU accounting standards The following standards and amendments to existing standards, published prior to January 1, 2018, were not early adopted by the
January 1, 2018 (Aegon intends to make use of the amendment)
IFRS 16 leases January 1, 2019 Yes No See below for comments
The standard will replace IAS 39 and all previous versions of IFRS 9. Under IFRS 9 Classification and Measurement, financial assets are measured at amortized cost, fair value through profit or loss or fair value through other comprehensive income, based on both the entity’s business model for managing the financial assets and the financial asset’s contractual cash flow characteristics. The classification and measurement of financial liabilities is unchanged from existing requirements apart from own credit risk. For financial liabilities that are designated at fair value through profit or loss, the changes which are attributable to the change in an entity’s own credit risk are presented in other comprehensive income, unless doing so would enlarge or create an accounting mismatch. For the impairment component, the IASB included requirements for a credit loss allowance or provision which should be based on expected losses rather than incurred losses.
4 Insurance Contracts (the predecessor standard to IFRS 17) that provides for a qualifying insurer a temporary exemption that permits, but does not require, the insurer to apply IAS 39 Financial Instruments: Recognition and Measurement rather than IFRS 9 for annual periods beginning before January 1, 2021 (i.e., a temporary exemption of IFRS 9). The objective of the amendment is to address the temporary accounting consequences of the different effective dates of IFRS 9 and IFRS 17. This amendment was endorsed by the
As Aegon defers the application of IFRS 9 until 2021, the full impact of the standard is not yet clear, however an initial impact assessment resulted in the expectation that it will have a significant impact on shareholders’ equity, income and/or other comprehensive income and disclosures. An implementation project has started in 2017 and will be combined with the implementation of IFRS17 Insurance Contracts.
IFRS 4, which was intended as an interim solution and allowed insurers to continue to use accounting principles that they had applied prior to the initial adoption of IFRS. IFRS 17 establishes principles for the recognition, measurement, presentation and disclosure of insurance contracts issued, reinsurance contracts held and investment contracts with discretionary participating features issued.
The objective of the Standard is to ensure that entities provide relevant information in a way that faithfully represents those contracts.
This information should provide users of financial statements with a basis to assess the effects that the contracts have on the financial position, financial performance and cash flows of the insurer. The Standard also specifies presentation and disclosure requirements to enhance comparability between insurance companies.
IFRS 17 is effective for annual periods beginning on or after January 1, 2021. The Standard represents a fundamental change to current financial reporting and the implementation effort is expected to be significant. Early adoption of the standard is therefore not expected. An implementation project was started soon after the publication of the new Standard. Currently no choices have been made as to the accounting policy options provided in IFRS 17, however, it is expected that the impact of the initial application on Aegon’s financial statements is significant.
The subsidiary’s assets, liabilities and contingent liabilities are measured at fair value on the acquisition date and are subsequently accounted for in accordance with the Group’s accounting policies, which is consistent with IFRS-EU. Intra-group transactions, including
Upon consolidation of an investment fund, a liability is recognized to the extent that the Group is legally obliged to buy back participations held by third parties. The liability is presented in the consolidated financial statements as investment contracts for account of policyholders. Where no repurchase obligation exists, the participations held by third parties are presented as noncontrolling interests in equity. The assets allocated to participations held by third parties or by the Group on behalf of policyholders are presented in the consolidated financial statements as investments for account of policyholders.
10 have more focus on the purpose and design of the investee (with relation to the relevant activities that most significantly affect the structured entity) and the exposure to variable returns, which for structured entities lies in interests through e.g. derivatives, and will not be focused on entities that are controlled by voting rights.
2.3 Foreign exchange translation a. Translation of foreign currency transactions The Group’s consolidated financial statements are presented in euros. Items included in the financial statements of individual group companies are recorded in their respective functional currency which is the currency of the primary economic environment in which each entity operates. Transactions in foreign currencies are initially recorded at the exchange rate prevailing at the date of the transaction.
2.4 Segment reporting Reporting segments and segment measures are explained and disclosed in note 5 Segment information.
When unrealized gains or losses arise on available-for-sale assets backing the insurance liabilities, VOBA is adjusted to equal the effect that the realization of the gains or losses (through a sale or impairment) would have had on VOBA. The adjustment is recognized directly in shareholders’ equity. VOBA is derecognized when the related contracts are settled or disposed.
value of future cash flows are recognized and amortized in the period when future economic benefits arise from these intangibles.
Expenditure incurred after initial recognition of the asset is capitalized to the extent that the level of future economic benefits of the asset is increased. Costs that restore or maintain the level of future economic benefits are recognized in the income statement as incurred.
of IFRS-EU. The EU ‘carve out’ macro hedging enables a group of derivatives (or proportions thereof) to be viewed in combination and jointly designated as the hedging instrument and removes some of the limitations in fair value hedge accounting. Under the
EU ‘carve out’, ineffectiveness in fair value hedge accounting only arises when the revised projection of the amount of cash flows in scheduled time buckets falls below the designated amount of that bucket. Aegon applies fair value hedge accounting for portfolio hedges of interest rate risk (macro hedging) under the EU ‘carve out’ to mortgage loans. Changes in the fair value of the derivatives are recognized in the profit and loss account, together with the fair value adjustment on the mortgages (hedged items) insofar as attributable to interest rate risk (the hedged risk).
Gains and losses on transactions between the Group and the associate are eliminated to the extent of the Group’s interest in the entity, with the exception of losses that are evidence of impairment which are recognized immediately. Own equity instruments of Aegon N.V.
2.12 Reinsurance assets Reinsurance contracts are contracts entered into by the Group in order to receive compensation for claims/benefits incurred on contracts written by the Group (outgoing reinsurance). Reinsurance assets are also held as part of exiting the business. For contracts transferring sufficient insurance risk, a reinsurance asset is recognized for the expected future benefits, less expected future reinsurance premiums. Reinsurance contracts with insufficient insurance risk transfer are accounted for as investment or service contracts, depending on the nature of the agreement.
Reinsurance premiums, commissions and claim settlements are accounted for in the same way as the original contracts for which the reinsurance was concluded. The insurance premiums for the original contracts are presented gross of reinsurance premiums paid.
For all products, DPAC, in conjunction with VOBA where appropriate, is assessed for recoverability at least annually on a countryby -country basis as part of the liability adequacy test for each reporting period. If appropriate, the assumptions included in the determination of estimated gross profits or revenues are adjusted. The portion of DPAC that is determined not to be recoverable is charged to the income statement.
a. Impairment of non-financial assets Assets are tested individually for impairment when there are indications that the asset may be impaired. For goodwill and intangible assets with an undefined life, an impairment test is performed at least once a year or more frequently as a result of an event or change in circumstances that would indicate an impairment charge may be necessary. The impairment loss is calculated as the difference between the carrying and the recoverable amount of the asset, which is the higher of an asset’s value in use and its fair value less cost of disposal. The value in use represents the discounted future net cash flows from the continuing use and ultimate disposal of the asset and reflects its known inherent risks and uncertainties. The valuation utilizes 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. Refer to note 31 Intangible assets for more details.
Treasury shares are deducted from Group equity, regardless of the objective of the transaction. No gain or loss is recognized in the income statement on the purchase, sale, issue or cancellation of the instruments. If sold, the difference between the carrying amount and the proceeds is reflected in retained earnings. The consideration paid or received is recognized directly in shareholders’ equity. All treasury shares are eliminated in the calculation of earnings per share and dividend per common share.
d. Shadow accounting Shadow accounting allows 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 shareholders' equity in the revaluation reserve. In some instances, realized gains or losses on investments have a direct effect on the measurement of the insurance assets and liabilities. For example, some insurance contracts include benefits that are contractually based on the investment returns realized by the insurer. In addition, realization of gains or losses on available-for-sale investments can lead to unlocking of VOBA or DPAC and can also affect the outcome of the liability adequacy test to the extent that it considers actual future investment returns. For similar changes in unrealized gains and losses, shadow accounting is applied. If an unrealized gain or loss triggers a shadow accounting adjustment to VOBA, DPAC or the insurance
e. Non-life insurance contracts Non-life insurance contracts are insurance contracts where the insured event is not life-contingent. For non-life products the insurance liability generally includes reserves for unearned premiums, unexpired risk, inadequate premium levels and outstanding claims and benefits. No catastrophe or equalization reserves are included in the measurement of the liability.
To the extent that the account balances are insufficient to meet future benefits and expenses, any resulting deficiency is recognized in the income statement, initially by impairing the DPAC and VOBA and subsequently by establishing an insurance liability for the remaining loss, unless shadow loss recognition has taken place. In the Netherlands, in situations where market interest rates for the valuation of debt securities leads to a change in the revaluation reserve, and where the result of using the same assumptions for the liabilities could lead to a deficiency in the liability adequacy test that should be recognized in the income statement, shadow loss recognition is applied. Shadow loss recognition is applied to the extent that the deficiency of the insurance liabilities relates to the revaluation of debt securities as a result of movements in interest rates, the addition to the insurance liabilities is then offset against the revaluation reserve. If in subsequent periods such a deficiency of the insurance liability is no longer applicable, shadow loss recognition is reversed via the revaluation reserve.
Group are accounted for as investment contracts. Depending on whether the Group or the policyholder runs the risks associated with the investments allocated to the contract, the liabilities are classified as investment contracts or as investment contracts for account of policyholders. Investment contract liabilities are recognized when the contract is entered into and are derecognized when the contract expires, is discharged, cancelled or substantially modified.
These segments are based on the business as presented in internal reports that are regularly reviewed by the Executive Board which is regarded as the chief operating decision maker.
date, considering all its inherent risks and uncertainties, as well as the time value of money. The estimate of the amount of a loss requires management judgment in the selection of a proper calculation model and the specific assumptions related to the particular exposure. The unwinding of the effect of discounting is recorded in the income statement as an interest expense.
Remeasurements of the net defined benefit liability (asset) which is recognized in other comprehensive income are revisited quarterly and shall not be reclassified to profit or loss in a subsequent period.
Past service cost is the change in the present value of the defined benefit obligation for employee service, resulting from a plan amendment or curtailment.
The cost for long term incentive plans are recognized in the income statement, together with a corresponding increase in shareholders’
2.30 Results from financial transactions 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 of general account financial investments at fair value through profit or loss, other than derivatives include fair value changes of financial assets carried at fair value through profit or loss. The net gains and losses do not include interest or dividend income.
In addition, certain acquisition costs related to the sale of new policies and the purchase of policies already in force are recorded as DPAC and VOBA assets respectively, and are amortized to the income statement over time. If the assumptions relating to the future profitability of these policies are not realized, the amortization of these costs could be accelerated and may require write-offs due to unrecoverability.
In the latter case, the anticipated future investment returns are set by management on a countrywide basis, considering available market information and economic indicators. A significant assumption related to estimated gross profits on variable annuities and variable life insurance products in the United States and some of the smaller countries, is the annual long-term growth rate of the underlying assets. The reconsideration of this assumption may affect the original DPAC or VOBA amortization schedule, referred to as
During 2017, Aegon implemented actuarial assumption and model updates resulting in a net EUR 276 million charge to income before tax (2016: EUR 118 million charge). Refer to note 5 Segment information for further details.
EUR 130 million (2016: EUR 158 million). The DPAC and VOBA balances for these products in the United States amounted to EUR 2.7 billion at December 31, 2017 (2016: EUR 3.0 billion).
A relative increase of 10% to the mortality assumption was used, dependent on product and characteristics of the block of business, would reduce net income by approximately EUR 265 million (2016: EUR 223 million). A relative 20% increase in the lapse rate assumption would increase net income by approximately EUR 78 million (2016: EUR 60 million).
Fair value is defined as the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions (i.e. an exit price at the measurement date from the perspective of a market participant that holds the asset or owes the liability). A fair value measurement assumes that the transaction to sell the asset or transfer the liability takes place either: �� In the principal market for the asset or liability; or �� In the absence of a principal market, in the most advantageous market for the asset or liability.
Aegon uses the following hierarchy for measuring and disclosing of the fair value of assets and liabilities: �� 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.
An active market is one in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. The judgment as to whether a market is active may include, although not necessarily determinative, lower transaction volumes, reduced transaction sizes and, in some cases, no observable trading activity for short periods. In inactive markets, assurance is obtained that the transaction price provides evidence of fair value or it is determined that adjustments to transaction prices are necessary to measure the fair value of the instrument.
Aegon sells, deferred expenses and value of business acquired. Other risks include insurance related risks, such as changes in mortality and morbidity, which are discussed in note 36 Insurance contracts. Aegon manages risk at local level where business is transacted, based on principles and policies established at the Group level. Aegon’s integrated approach to risk management involves similar measurement of risk and scope of risk coverage to allow for aggregation of the Group's risk position.
To manage its risk exposure, Aegon has risk policies in place. Many of these policies are group-wide while others are specific to the unique situation of local businesses. The Group level policies limit the Group's exposure to major risks such as equity, interest
rates, credit, and currency. The limits in these policies in aggregate remain within the Group's overall tolerance for risk and the
Aegon operates a Derivative Use Policy to govern its usage of derivatives. This policy establishes the control, authorization, execution and monitoring requirements of the usage of such instruments. In addition, the policy stipulates necessary mitigation of credit risk created through derivatives management tools. For derivatives, counterparty credit risk is normally mitigated by requirements to post collateral via credit support annex agreements or through a central clearinghouse.
Currency exchange rate risk As an international group, Aegon is subject to foreign currency translation risk. Foreign currency exposure exists mainly 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' equity as a result of translation of subsidiaries into euro, the
Americas and in the United Kingdom, the principal sources of exposure from currency fluctuations are from the differences between the US dollar and the euro and between the UK pound and the euro. Aegon may experience significant changes in net income and shareholders' equity because of these fluctuations.
Risk and Capital Committee and the Management Board. 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 exchange rates for US dollar and UK pound per euro for each of the last five year ends are set forth in the table below: Annual Report 2017
Increase by 15% of USD currencies relative to the euro 260 2,159
Increase by 15% of non-euro currencies relative to the euro 265 2,598
Decrease by 15% of USD currencies relative to the euro (189) (1,566)
Decrease by 15% of non-euro currencies relative to the euro (184) (1,868)
Decrease by 15% of non-euro currencies relative to the euro (110) (1,794) 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. 2 For the sensitivity analysis the book loss of the UK annuity portfolio in 2016 has been excluded.
In periods of rapidly increasing interest rates, policy loans, surrenders and withdrawals may increase. Premiums in flexible premium policies may decrease as policyholders seek investments with higher perceived returns. 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.
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 arising from the impact on general account investments and offset due to liabilities from insurance and investment contracts. In general, increases in interest rates are beneficial to Aegon. However, timing and valuation differences between assets and liabilities may cause short-term reductions in net income as rates rise. 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 could 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. The short to medium term reduction in net income due to rising interest rates would be offset by higher net income in later years, all else being equal.
Credit risk 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 which is equal to 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), over-thecounter 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 financial downturns, Aegon can incur defaults or other reductions in the value of these securities and loans, which could have a materially adverse effect on Aegon’s business, results of operations and financial condition. Investments for account of policyholders are excluded as the policyholder bears the credit risk associated with the investments.
Surplus collateral (or overcollater alization ) Net exposure Debt securities - carried
Money market and other short-term investments - carried at fair value 6,809 - 719 - - - - 719 25 6,115