Independent and tied agents, direct marketing, franchise sales force, worksite marketing, internet www.aegon.nl
Traditional, universal and variable universal life insurance, bank- and corporate-owned life insurance, fixed and variable annuities, life reinsurance, supplemental health insurance, traditional and synthetic GICs, funding agreements, pensions and 401(k) plans, mutual funds
Specialist life agents, independent and tied agents, brokers, internet, direct marketing, worksite marketing, financial institutions www.aegon.es
Traditional and variable life insurance, annuities, term and group life insurance, accident and health insurance
Tied agents, banks, direct marketing/telemarketing, brokers www.aegon-cnooc.com 1 December 30, 2004, AEGON N.V. announced the sale of its general insurance activities in Spain 250/50 joint venture by China National Offshore Oil Corporation and AEGON N.V.
AEGON N.V. IS ONE OF THE WORLD’S LEADING LISTED LIFE INSURANCE COMPANIES RANKED BY MARKET CAPITALIZATION AND ASSETS. AEGON’S HEAD OFFICE IS IN THE HAGUE, THE NETHERLANDS. AT THE END OF 2004, AEGON COMPANIES EMPLOYED ABOUT 27,000 PEOPLE WORLDWIDE.
AEGON’S BUSINESSES FOCUS ON LIFE INSURANCE AND PENSIONS, SAVINGS AND INVESTMENT PRODUCTS. THE GROUP IS ALSO ACTIVE IN ACCIDENT AND SUPPLEMENTAL HEALTH INSURANCE AND GENERAL INSURANCE, AND HAS LIMITED BANKING ACTIVITIES.
AEGON values its many relationships with the global investment community and is committed to the highest standards of integrity and fair disclosure. The international business activities of the company are reflected in the geographical diversity of AEGON’s investor base.
AEGON’s Investor Relations program is aimed at ensuring efficient and effective access to the global capital markets. For this reason, AEGON’s common shares are listed on the stock exchanges in Amsterdam, Frankfurt, London, New York, Tokyo and Zurich. The company’s stock is included in several major equity indices. In addition, AEGON has a variety of debt instruments outstanding in various major currencies.
have an accurate understanding of the company’s performance and prospects. To achieve this, AEGON’s Investor Relations program focuses on providing investors around the world with the information required to make sound investment decisions. This includes information on key factors that drive AEGON’s businesses and influence its results, financial condition and value. AEGON is focused on ensuring that both financial and nonfinancial information is disclosed accurately, completely, timely and in a consistent fashion.
A major change in the financial reporting of companies will take place in 2005 with the introduction of International Financial Reporting Standards (IFRS). AEGON is fully prepared for this transition and has held a number of presentations to educate the financial community on the relevant changes in the accounting standards. The first publication of IFRS results will
INCOME BEFORE REALIZED GAINS AND LOSSES ON SHARES AND REAL ESTATE BY ACTIVITY in EUR million1
Banking activities Other activities 1The graphs have been adjusted for the changes in accounting principles implemented as of January 1, 2004
AEGON actively maintains contact with the financial community in many ways, including investor roadshows throughout the USA, Europe and Asia, webcasts, press releases and investor days, while ensuring equal access to information.
AEGON invites shareholders, bondholders and potential investors to learn more about AEGON. Dedicated Investor Relations staff is available to answer questions and is determined to maintain an open dialogue with the financial community.
The Hague, The Netherlands: +31 (0)70 344 83 05 E-mail: gca-ir@aegon.com
AEGON has a multi-domestic and multi-brand approach, giving a high degree of autonomy to the management of the individual country and business units, encouraging entrepreneurial spirit and action.
AEGON aims to achieve a long-term average growth of net income of 10% per annum. The minimum return on investment is set to earn adequate returns well in excess of the cost of capital on the pricing of new business and acquisitions. Divestment of non-core and structurally underperforming activities as well as disciplined expense management are key to achieving these objectives.
We offer products and services that are designed to improve the futures and financial security of our stakeholders.
We provide open, accurate and timely information about our products, performance and financial results.
On behalf of the Executive Board, it is my pleasure to present
I am especially happy to report that all of AEGON’s major country units contributed to the favorable results for 2004. The full-year proposed dividend further demonstrates our improved cash flows, AEGON’s strong capital position and our confidence in our business.
Without question, our industry has undergone some dramatic changes during the past several years. Since we last reported to you, market and economic conditions have continued to improve the prospects for AEGON. Although challenges remain, we have been pleased by less volatile equity markets, indications of a gradual rise in interest rates in the US, and lower defaults in the bond market. These conditions have all contributed to a more favorable climate for our business. The increased regulatory environment facing the industry, however, will continue to pose significant challenges. At the same time, these circumstances provide AEGON an opportunity to reaffirm its commitment to sound and transparent business practices for the benefit of all of its stakeholders — our shareholders, bondholders, customers, business partners, and employees alike. In the end, it is trust, reliability and quality in the execution of our business that will help to ensure AEGON’s continued competitiveness and growth as one of the world’s leading life insurance providers.
It is our view that we can best claim a portion of this significant potential by continually focusing on what we know and do best, by staying close to our customers and through disciplined financial management.
AEGON’s broad-based multi-channel distribution network continues to be one of its most notable strengths. This network was further enhanced during 2004 with the implementation of
In AEGON’s largest country unit, the United States, the important agency channel grew during 2004 and we continued to broaden our relationships with key financial institutions and distribution partners. In the Netherlands, our focus during 2004 has been devoted to restructuring operations to better serve the needs of our customers while realizing a broad range of efficiencies in our service and marketing operations. And in the
United Kingdom, we believe that our partnerships in the important Independent Financial Advisory (IFA) sector are ensuring that AEGON is well positioned to maximize the opportunities of the changing distribution landscape currently underway.
companies and our distribution partners worldwide who daily help us to carry out our mission to provide better futures for individuals, families, businesses and communities. Thank you for your continued interest in AEGON, its businesses around the world and in our decisions, which are aimed at maximizing every opportunity for continued growth and profitability.
American nationality, started his career with Life Investors in 1970. Serving in various management and executive functions with Life Investors, he became executive vicepresident and chief operating officer in 1985, a position he held until AEGON consolidated its other United States operations with Life Investors to form AEGON USA in 1989.
AEGON’s predecessors in several treasury and investment positions. In 1986 he became CFO of FGH BANK
In 1991 he became chairman and CEO of Labouchere and in 1995 also of FGH BANK. In 1998 he became CFO of
Spaarbeleg and in 1992 he became a member of the management board of AEGON
Dutch nationality, started his career with ABN AMRO in 1984 and had several assignments in asset management
(Amsterdam) and corporate finance (London). In 1997 he joined AEGON’s Group
Business Development department and was promoted executive vice-president and head of Group Business
Executive Board’s management and providing consultation and advice to the Executive Board. With the assistance of its four specialized committees, the Supervisory Board makes nominations to the Executive Board, deliberates and decides on compensation levels of Executive Board members and recommends terminations of the Executive Board when appropriate. The Supervisory Board also proposes to shareholders candidates for membership to its own body.
Governance Code, which became effective on January 1, 2004, and the implications for AEGON’s corporate governance were discussed.
December 2004. In December 2004, the Supervisory Board discussed the Executive Board’s and its own composition and performance, in the absence of the Executive Board members.
The meetings, during which the Supervisory Board discussed the quarterly and annual results and the press releases, were also attended by the director of the Group Finance department.
Representatives from Ernst & Young, AEGON’s independent auditor, attended the discussion regarding the results for 2003.
As usual, special meetings of the Supervisory Board were dedicated to AEGON’s budget for 2005 and to the Group
In June, a meeting of the Board was devoted to AEGON’s business strategy. This meeting was preceded and prepared by the Strategy Committee. The meeting was hosted by AEGON
UK’s management and board to exchange a broad range of information about AEGON in general and AEGON UK in particular.
The Supervisory Board intends to pursue further opportunities to engage AEGON’s international senior management and the board members of the various country units.
Value Report was disclosed on June 7, 2004. Recognizing the increasing importance of effective risk management, the
Audit Committee discussed this issue and reviewed the measures that AEGON has implemented. The conversion to International
Financial Reporting Standards (IFRS) was also discussed as well as the process initiated by AEGON to ensure compliance beginning with the 2005 financial year.
The Supervisory Board approved an increase in AEGON’s participation in La Mondiale Participations from 20% to 35%; the establishment of a pension fund management company in
Control Complaints Procedure, which establishes a whistleblower arrangement according to SOX, in addition to the whistleblower procedure in the Code of Conduct, as well as the Executive
The Audit Committee held six meetings during 2004, which were also attended by members of the Executive Board as well as the Group Finance Director, the Group Internal Auditor and representatives of Ernst & Young. The discussions in the Audit
The Committee also discussed the consequences of SOX and the Dutch Corporate Governance Code, as well as the role of the independent auditor. The Committee confirmed that Mr. Eustace and Mr. Voser qualify as financial experts within the meaning of the relevant provisions of SOX and the Dutch Corporate
Committee is to review the major features of AEGON’s business strategy, in addition to considering alternative strategies and the consideration of material aspects relating to the implementation of the strategy. The Committee discussed AEGON’s business strategy and prepared the agenda for the meeting of the
These meetings were also attended by the Executive Board’s chairman. The Committee discussed the composition of the
Supervisory Board and its Committees and existing and forthcoming vacancies. In addition, introduction programs for new members were planned and a retirement schedule for members of the Executive Board was prepared.
Policy that outlines the terms and conditions of employment of the members of the Executive Board and of the remuneration of the members of the Supervisory Board. The Committee makes its recommendations to the Supervisory Board. The Committee held one meeting in 2004, attended also by the Executive Board’s chairman, during which the implementation of the Remuneration
Policy 2004-2006 for the Executive Board as adopted by the shareholders during the AGM on April 22, 2004, was discussed.
In 2004, Mr. de Ruiter reached the retirement age of 70 years and stepped down at the end of the AGM on April 22, 2004.
Mr. De Wit, whose four-year term of office ended in 2004, served as a member of the Board for a total of 14 years. In accordance with the Dutch Corporate Governance Code, Mr. De Wit stepped down as a member of the Supervisory Board at the end of that same AGM. The members of the Supervisory Board extended their gratitude to Messrs. De Ruiter and De Wit for their long and distinguished service to the company.
Mrs. Rembe and Mr. Olcay for reappointment and they were subsequently reappointed during the AGM in 2004. In the same meeting shareholders appointed Messrs. Dahan, Bailey and Voser as members of the Board.
Mr. Tabaksblat is not eligible for reappointment and as such will step down at the end of the AGM to be held on April 21, 2005.
Mr. Tabaksblat as chairman, subject to his reappointment by shareholders during the AGM on that same date. Mr. Olcay will have served the Board for 12 years in 2005 (the maximum term according to the Dutch Corporate Governance Code).
The Supervisory Board, however, has asked Mr. Olcay to remain on the Board given his extensive experience and due to the relatively large number of recent changes in the composition
Mr. Levy will be provided together with the agenda for the AGM
In compliance with the Dutch Corporate Governance Code, the members of the Executive Board will henceforth be appointed for a term of four years, subject to possible reappointments by the AGM. According to the retirement schedule (which has been posted on AEGON’s corporate website)
the term for Messrs. Shepard and Streppel will end in 2005.
This annual report includes the annual accounts for 2004, as deliberated and proposed by the Audit Committee, and subsequently submitted by the Executive Board.
The Hague, March 2, 2005 On behalf of the Supervisory Board, Morris Tabaksblat, chairman
M. Tabaksblat chairman (1937, Dutch nationality) is chairman of Reed Elsevier and a retired chairman and CEO of Unilever.
International (USA) and Renault Nissan (France/Japan). He is currently the chairman of both the Nominating Committee and the Strategy Committee.
D.G. Eustace vice-chairman (1936, British nationality) is chairman of Smith & Nephew plc (London, UK) and a retired vice-chairman of Royal Philips Electronics. He was appointed in 1997 and his current term will end in 2005. He is eligible for reappointment and is willing to remain on the Supervisory Board. Upon his reappointment in 2005, he will succeed Mr. Tabaksblat as chairman of the Supervisory Board. He is also a member of the
Supervisory Boards of Royal KPN N.V. and Hagemeyer N.V. He is currently chairman of the Audit Committee. Upon becoming chairman of the Supervisory Board he will step down from the
I.W. Bailey, II (1941, American nationality) is a senior advisor to Chrysalis Ventures. He is a retired chairman and CEO of
Corporation. He was appointed in 2004 and his current term will end in 2008. He is also chairman of the Supervisory Board of
He is currently chairman of the Compensation Committee and a member of the Nominating Committee.
(USA), FFTW Funds Selection in Luxembourg and FFTW Funds in Dublin (Ireland). He is currently a member of both the
International N.V. He is currently a member of both the Audit
K.J. Storm (1942, Dutch nationality) is a former chairman of the
Boards of N.V. Royal Wessanen, Laurus N.V. and KLM Royal Dutch
Boveri) Ltd. He was appointed in 2004 and his current term will end in 2008. He is currently a member of the Audit Committee.
KLM S.A. He was appointed in 2003 and his current term will end in 2007. He is also a member of the Supervisory Boards of
14 AEGON ANNUAL REPORT 2004 will be four years. Every appointment would be for the full term; however, members may leave before the end of their term due to reaching the age of retirement. On expiry, the Executive
Base salary levels are based on the requirements and responsibilities of an Executive Board position. The Compensation
Board members for achieving previously determined objectives that reflect their respective responsibilities. Those targets will be set annually to ensure that business priorities are followed and the targets remain dynamic.
The plan determines that a STI bonus will be paid only if value is created for shareholders, i.e. only after a positive value of new business (VNB), as defined in AEGON’s Embedded Value Report, is realized. For Messrs. Shepard and Streppel corporate VNB will apply; for Messrs. Van der Werf and Wynaendts, the VNB for their specific business area will be taken into account.
Provided the relevant VNB is positive, then the actual level of income before realized gains and losses on shares and real estate will determine the level of the bonus payout. The income before realized gains and losses on shares and real estate target will be calculated based on a rolling, three-year average, increased by 2.5% to reflect inflation. Bonus payout for Messrs. Shepard and
The Supervisory Board relies on four committees to prepare specific issues for decision making by the Board. One of these committees is the Compensation Committee, responsible for the design, development, implementation and review of the
Remuneration Policy that outlines the terms and conditions of employment of the members of the Executive Board and of the remuneration of the members of the Supervisory
The Remuneration Policy for the Executive Board is aimed at creating a reward structure that will allow the company to attract and retain qualified and expert executives, as well as at providing those executives with a well balanced and incentive based compensation.
Policy took effect on January 1, 2004, for a three-year term.
Any material changes in this Remuneration Policy will be submitted to the AGM for adoption.
Ernst & Young, will provide and sign off all relevant STI data.
April 18, 2002, Mr. Shepard is entitled to a STI equal to 0.1% of the net income of AEGON in the plan year.
In that regard, the attainment will be determined by measuring AEGON’s Total Shareholders Return (TSR)
Should AEGON rank at positions twelve through nine, the grant will not vest. Once AEGON achieves position eight in this zone, 50% of the grant will vest. At position six, 100% will vest. Should
The Compensation Committee will monitor the peer group composition and the performance incentive zone to ensure that they continue to provide an appropriate reference. The first review will take place in 2006; would those parameters no longer provide the appropriate reference, the Committee may decide to amend them. The independent external advisor, Towers Perrin, will provide and sign off all relevant LTI data.
Termination of employment of Mr. Shepard by AEGON other than for urgent cause, death, disability, voluntary resignation or retirement, shall entitle Mr. Shepard to three years’ base salary.
In such a case, the other Executive Board members have no specific financial arrangement.
Messrs. Van der Werf and Wynaendts would be entitled to three years’ fixed salary, only in case of termination in connection with a merger or takeover.
Board would contain a termination arrangement in compliance with the Dutch Corporate Governance Code.
For an overview of the remuneration received by the members of the Supervisory Board in 2004, please refer to page 1 19.
During the year 2004 no material changes to the policy, as referred to in the Dutch Corporate Governance Code, were implemented.
The Supervisory Board will propose to the AGM on April 21, 2005 to (re)appoint Messrs. Shepard and Streppel for a four-year period starting in 2005.
All the members of the Executive Board have opted for payment of half of the cash value of their STI bonus into
growth over inflation in the preceding three years, i.e. 2004, 2005 and 2006, according to the following table.
The STI 2004 bonuses will be paid in 2005, after adoption of the annual accounts for 2004 by shareholders during the AGM on
ING, Prudential PLC and Zurich). The comparison is based on the share price performance over the preceding three years.
• Should the AEGON share price performance achieve a top three position, each Executive Board member would receive 200,000 SARs. Should this share price performance finish in the middle group (of four companies), each Executive
• In case earnings per share did not increase, no SARs would be granted.
At the end of the plan term it was determined that the AEGON
Please refer to page 120 for the exercise price and the duration of these SARs.
AEGON common shares and options were granted to each of the
Executive Board members. Vesting of those rights is conditional upon the attainment of the agreed performance.
Edinburgh, Madrid, Budapest or Taipei, AEGON is committed to being responsive to the evolving needs of our customers and adaptable to the economic and market circumstances where we operate. A key to AEGON’s success is its broad-based, multidistribution channel. In many cases, the distribution partnerships that we rely on have been in place for twenty years or more.
It’s impossible to overstate the importance of these relationships as we face new challenges, develop new products and look for the most efficient, cost-effective way to get them into the market.
At AEGON, we believe that the insurance industry should be completely transparent in its business practices. The regulatory environment for our business is intense and the related costs to ensure compliance are high — both monetarily and in terms of management’s time and resources. Inasmuch as management is diligent in pursuing the highest standards of good corporate governance and sound business practices, there will hopefully be less cause for extreme measures on the part of authorities.
What do you see as the opportunities for AEGON in today's market? The business of life insurance and providing asset accumulation products continues to be a great business given the increasing trend of governments to shift responsibility for financial protection to the private sector.
The opportunity is great when considering the needs of the post-
World War II (‘baby boomers’) generation. As I indicated in my Chairman’s Letter, this segment represents the greatest asset accumulation population in history. Together with the opportunities in the middle-income market, where there remains a largely unaddressed need for more adequate retirement and life insurance provisions, the long-term growth prospects are very favorable. In order for AEGON to claim a portion of this significant potential, we must remain focused on our core lines of business. At the same time, our business units need to be agile in identifying and developing products that are responsive to the need and also adaptable to changing circumstances, and I might add, clear and easy to understand by our customers.
However, both the regulators and industry managers share the common goal of protecting the assets and trust of our customers and shareholders. Simply put, we are in the business of making promises — for ten, 20, 30 years or more. Ultimately, we have to do everything we can to ensure that we are there to fulfill those promises whenever the time comes.
What is AEGON’s approach to ensuring professional growth of its employees and cultivating the next generation of leaders? One of AEGON’s consistent strengths has been and continues to be its ability to attract quality individuals who bring a wide range of talents, interests and abilities to their work. It is particularly beneficial that so many who have come to AEGON stay for such a considerable length of time. This is extremely valuable in building trusted relationships with our many partners, and ensuring consistency in how we run our businesses and build on the experiences that have brought us to where we are today. As for cultivating leaders and leadership qualities at all levels, it’s important to keep in mind that whether an individual has been with the company one year, five years, ten years or more, the key to personal and professional advancement is the desire and willingness to learn and engage with others. Ultimately, it is incumbent on managers to recognize that desire and to foster the right opportunities for ongoing professional growth.
University was established in 1993 and brings together 30 to 40 junior managers from across the AEGON network who demonstrate potential and strong commitment to the future of the company. My colleague on the Executive Board, Johan van der Werf, is principally responsible for overseeing AEGON
University and developing the curriculum. This is a three-week intensive program that spans two years and includes team building and relationship building in a wide variety of learning and development forums. Two of the weeks are spent in the
U.S. and one week is spent in the Netherlands. In the US, we have the AEGON Leadership Academy — a weeklong intensive program — which likewise brings together a diverse group of professionals from a variety of business and country units to share ideas, best practices and to form relationships to benefit their specific area of work. Inevitably it is the company as a whole that ultimately benefits from this type of candid and quality exchange. We’re very proud of those who have graduated from AEGON University and AEGON Leadership Academy and it’s particularly gratifying to see how so many of them have emerged as leaders and maintained the strong relationships that were forged in these programs.
Governance Code. AEGON Board members have been actively involved in all phases of development of corporate governance in the Netherlands. As an active participant in the extensive discussions surrounding the preparation and publication of the code, AEGON welcomes this very important improvement in corporate governance that will benefit the entire
Dutch business community. With the code in place, Dutch corporate governance has improved to a level that is comparable to international best practices. The goals of the code, however, can only be achieved if shareholders actively use the enhanced power allowed for by the new code and increase their participation in General Meetings. AEGON, as an institutional investor, will play a more active role and we further expect our own shareholders to do the same. AEGON is a member of the
Will reporting under International Financial Reporting Standards have a big impact on AEGON? The 2004 financial year was the last period in which AEGON
Reporting Standards (IFRS). Thanks to all the hard work from our people across the company, the organization is fully up to speed and prepared for the transition to IFRS reporting. I believe the transition to IFRS is an important step towards enhancing international comparability and transparency of accounts, a trend that AEGON strongly supports. At least in the initial phase, the transition to these new accounting standards will result in some complications; for instance, we can expect to see a level of volatility in AEGON’s financial statements that is purely accounting-driven. This is caused primarily by an inconsistency between the way assets are valued on the one hand and liabilities considered on the other. We expect this issue to be addressed under phase two of IFRS. It is our intention to disclose comparative IFRS 2004 figures on April 14, 2005 for both the full year and on a quarterly basis. Reconciliations from DAP to IFRS
will also be disclosed. This will be well ahead of the publication of our first quarter 2005 results, which will be reported according to IFRS and are due on May 1 1, 2005.
strives to have a good mix between captive channels and third party distribution, such as brokers and financial institutions.
China, strengthening AEGON-CNOOC’s multi-channel distribution strategy, which includes bank distribution, agent distribution and direct marketing. Furthermore, AEGON has developed into one of the premier international direct insurance marketing organizations, transferring the expertise developed by AEGON
Direct Marketing Services in the United States to many other countries such as Korea, Taiwan, and Australia, to name a few.
We made the decision in the UK to bring together five leading
Independent Financial Advisor (IFA) businesses to form one company, called Origen. This move enables us to have a balanced distribution mix between captive and independent channels in the rapidly changing distribution landscape.
This trend creates an opportunity for the private sector in most
AEGON’s capital position should not look materially different under IFRS and we expect rating agencies to look through the reported financial statements in order to focus on the underlying reality and economic substance of companies. At the same time,
IFRS has no direct bearing on the cash flow generated from the business and will not change our dividend paying ability or dividend policy.
During this period of transition, AEGON’s value must be demonstrated by other indicators, such as operating earnings, the value of new business and embedded value. With regards to the latter, I have been an active participant in the Chief Financial
Embedded Value Principles, aimed at achieving greater performance comparability between companies.
Can the company afford to pay an attractive dividend and at the same time support further growth of the business? AEGON aims to pay its shareholders a stable and adequate dividend that is supported by the company’s cash flow and capital position. In 2004, we saw an ongoing improvement of
AEGON’s cash flows and capital position. The 5% increase in the dividend for 2004 that the board has proposed is a further indication of AEGON’s capital strength, as well as of our continued confidence in the business. AEGON’s strong capital position and cash flow allow the company to fund ample opportunities for organic growth.
Have there been any major changes in the strength of the AEGON’s capital base? AEGON continues to enjoy very strong capital adequacy ratings in all the local country units, while the group capital position remains solid. In view of the weakness of the US dollar versus the euro over the past year, it is important to note that currency movements do not impact the solvency positions of the various country units, as they hold both their assets and liabilities in their respective local currencies. Translation effects do impact the absolute amount of total shareholders’ equity in euros on a group level, but changes in currency rates do not affect leverage ratios as capital leverage debt is held in various currencies on a pro rata basis relative to the invested capital. In 2004, AEGON
Europe. The joint-venture for European pensions with the French mutual company, La Mondiale, is a prime example of our ability to enter new markets and add value with the right business partners. Given AEGON’s global expertise in providing a wide range of life, pensions and associated asset accumulation products through a multi-channel distribution network, the company is well positioned to capture the long-term opportunity in Europe.
How is AEGON leveraging the successful platform in Hungary into other CEE countries? In May of 2004, the European Union’s most significant enlargement ever — in terms of scope and diversity — became a reality with the incorporation of ten new countries into the
Over the years, AEGON Hungary has been successfully transformed into an efficient, market focused business. The good position of AEGON Hungary with its strong local management serves as a platform for cost efficient expansion into other countries in the region. An example of this is the experience in
AEGON Slovakia became operational in September 2003, using the systems and support of the Hungarian business to pursue a multi-channel distribution strategy. In November 2004, a
CNOOC, in China with fully fledged insurance operations. India and Japan have been identified as other potential target markets. In line with AEGON’s decentralized operating model, it continues to be our belief that to be successful, it is crucial to have strong local management in place with the ability to transfer and adapt the group’s expertise to local circumstances.
One of the reasons for our success is that we have been able to not only attract the right senior executives, that fit into the
How would you characterize the opportunities for AEGON The Netherlands? AEGON The Netherlands operates in a very competitive but also very dynamic market. This market is far from saturated, however, due to such prevailing factors as a government that is retreating from long-term protection schemes and an aging population.
AEGON The Netherlands is maximizing the opportunities created by these new developments with new, innovative products, concepts and propositions to address the various needs of increasingly discerning clients, with a wider array of needs.
How has AEGON The Netherlands changed its focus to respond to changes in the market? By proactively working with our clients and offering them suitable solutions and information in each stage of their lives, we are investing in long-term loyalty and are offering (financial)
Transitioning from a product-based organization to a relationship and customer-focused organization, AEGON The
Largely completed in 2004, the new structure signifies a fundamental change in the way AEGON The Netherlands reaches and serves its customers. The process has involved replacing
We are also focused on helping clients retain more assets at the point of retirement. By 2010, it is estimated that ‘baby boomers’ and others will begin rolling over more than USD 400 billion annually in pension assets. We have hundreds of thousands of retirement plan participants and see an opportunity here to provide our high quality products and services through our well diversified distribution channels.
We are also looking at leveraging and growing our existing forms of distribution as well as carefully expanding our businesses into new countries when and where it makes sense.
Finally, we will continue to look at selective acquisition opportunities that meet our pricing and risk tolerance disciplines and will complement the growth of our core businesses.
How are you expanding your distribution franchise? Our franchises are strong and growing. A broad, well diversified distribution network remains a core advantage, and we continue to introduce more products and services through these channels.
AEGON The Netherlands has been transformed to one compact, innovative and accessible organization, in which the selling power of the marketing and sales units can be better utilized. Furthermore, by enhancing the technology of our service centers, AEGON The Netherlands can be even more responsive to the needs of its customers and the changes in the market.
Responsibility annual report, which served to identify the activities undertaken to ensure sound corporate responsibility principles, as well as the particular strengths and weaknesses of
encompassing a number of product lines. The solid growth of traditional life sales and small 401(k) retirement plans sold through our bank partners is an example and reflects our commitment to expanding these relationships
How do you view your businesses and markets? We view most of our businesses as growth opportunities.
Essentially, if the business is growth-oriented, we focus on adding distribution, developing innovative products, expanding overseas where possible, and pursuing new initiatives. If a business is more mature, we have to manage it somewhat differently. We need to find growth areas within the mature market, such as a specific geographic niche or a new distribution arrangement. Regardless, all our businesses must always be vigilant with expenses.
If a particular business is truly part of a mature market, and you are one of the large players within that market, there are likely to be consolidation opportunities as those unable to achieve scale exit. Our management team has the tools, experience and commitment to grow earnings at sustainable risk profiles, whether their respective businesses are in growth or mature markets.
We’re working together to take advantage of our diverse organizational structure, which, I feel, positions us well to deliver growth and expected returns.
Equitable in 1994, it did so with the belief that the market in the
What are the challenges and opportunities in the current environment for the insurance industry in the United Kingdom? The industry’s reputation has suffered as a result of several high profile issues, which have adversely impacted consumers’
confidence. As a result, it is the industry’s priority to win back consumer confidence. Toward this end, AEGON UK, along with its peers, has worked to develop and implement a broad range of initiatives to restore public trust and confidence in the insurance industry. The creation of the Financial Services Authority’s
How is AEGON UK responding to changes brought about through depolarization? These positive developments are all occurring in the context of the end of the polarization regime in the UK. This longstanding system effectively required financial advisor firms to either be tied to a single provider or be independent, offering advice on every available product across the whole market.
AEGON UK anticipated many of the opportunities that would result under depolarization and in many cases was the first to take advantage of the new system. For example, Scottish
Equitable became the first provider to secure a multi-tie deal, an arrangement in which it will be the sole pensions provider to
We believe that a number of factors, including reduction in commissions and significantly higher regulatory and professional indemnity costs, will further drive consolidation in the very fragmented distribution market. This will allow scale distributors to benefit from increased efficiency and deliver stronger customer propositions. The investments made by AEGON UK are in distribution businesses, which can be at the forefront of this consolidation. We believe that this area of our business will be a significant source of future income for AEGON UK.
New leadership Finally, I would like to introduce AEGON UK’s next Chief
Board. When Otto takes up the role on April 1, Mark Laidlaw will become Chief Financial Officer. I have every confidence that
Otto will build AEGON UK into an even more formidable force in the UK market and wish him and Mark great success in their new roles.
RESULTS OF OPERATIONS 2004 20031 in million in million EUR EUR %
Realized gains and losses on shares and real estate 600 (270)
ON SHARES AND REAL ESTATE AND BEFORE EXCEPTIONAL ITEMS 1,386 1,277 9
Non-consolidated ventures 9 218 1 The 2003 numbers have been adjusted to reflect the changes in accounting principles implemented as of January 1, 2004. See also page 90 for a reconciliation from 2003 reported numbers to adjusted numbers.
REVENUES GEOGRAPHICALLY 2004 The United Other in million EUR Americas Netherlands Kingdom countries Total
Total life insurance gross premiums 6,517 3,079 5,898 875 16,369 Accident and health insurance premiums 2,043 187 — 88 2,318 General insurance premiums — 445 — 368 813
AEGON’s country units, which more than offset the lower income from Transamerica Finance Corporation (a net loss of EUR 20 million compared to a net profit of EUR 218 million in 2003). Net income, which includes realized gains and losses on shares and real estate and an EUR 218 million exceptional charge, increased to EUR 1,663 million compared to EUR 1,033 million in 2003. The exceptional charge relates to the agreement with Dexia to resolve the dispute over the sale of Labouchere to Dexia in 2000.
The effective tax rate declined to 24% in 2004 from 32% in 2003 primarily reflecting higher realized gains on tax preferred investments in the Netherlands and a one-time reduction in taxes in the United States.
Commission and expenses increased 8% to EUR 5,756 million in 2004. Total operating expenses were 10% higher than in 2003 at EUR 3,1 1 1 million. However, EUR 291 million of the increase was caused by the consolidation of the remaining TFC activities in 2004. Excluding this effect operating expenses were level with 2003. Main factors impacting expenses include additional employee pension expense, post-retirement benefits costs and increased regulatory and compliance costs, offset by expense savings in operating units.
Corporation tax on realized gains and losses on shares and real estate (105) 26
INCOME BEFORE REALIZED GAINS AND LOSSES ON SHARES AND REAL ESTATE LIFE INSURANCE in USD million1
INCOME BEFORE REALIZED GAINS AND LOSSES ON SHARES AND REAL ESTATE in USD million1
AEGON Americas income before realized gains and losses on shares and real estate increased 29% to USD 1,931 million for 2004. The 2004 results benefited significantly from lower additions to the asset default provision of USD 312 million
Certain product spreads increased in 2004 due to actions taken to lower crediting rates beginning in 2003. These positive items were partially offset by lower employee pension plan income of
USD 80 million, consisting primarily of a change in the methodology for computing incurred but not reported claims and for the conversion to a new reserve system. The model and system changes reflect the ability to compute reserves on more specific information from ceding companies. Mortality experience continues to be favorable relative to pricing expectations when measured over a longer horizon. Other items impacting the 2004 results included USD 13 million of higher mortality costs, USD 16 million of higher additions to the technical provisions related to the adoption of SOP 03-01 and USD 14 million of lower employee pension plan income. Included in 2003 results was a one-time
USD 70 million property insurance recovery and provision release and USD 10 million of interest on an IRS tax refund.
Improved product spreads and growth in assets were the other primary factors contributing to the increase.
Income before realized gains and losses on shares and real estate in the variable annuity line of business increased from
USD 68 million in 2003 to USD 200 million in 2004. Improved equity market performance resulting in higher fees, more favorable persistency, lower guaranteed death benefit costs and reduced operating expenses contributed to the significant earnings growth. For DPAC amortization in the variable annuity business, equity return assumptions have been based on year end account balances and assume the equity markets will grow at 6.25% for five years and 9% thereafter. The gross short and longterm fixed security growth rate remains at 6% and the gross short and long-term rate for money market funds remains at 3.5%.
Accident and health income before realized gains and losses on shares and real estate of USD 321 million increased 26% in 2004 compared to 2003, primarily as a result of USD 26 million of lower additions to the default provision. The health results benefited in 2004 from effective expense containment and premium rate increases in certain health products contributing to improved overall profitability. Positive one-time recoveries of commissions and profit sharing in 2004 provided about
The effective tax rate was 29% for 2004 compared to 27% for 2003. The tax provision includes a one-time reduction in taxes of
Life insurance gross premiums of USD 8,104 million increased 16%, accident and health insurance premiums of USD 2,541 million increased 1%. Investment income of USD 6,687 million
Life general account single premiums of USD 1,199 million increased 31% in 2004, while life general account recurring premiums of USD 5,002 million increased 5%. The significant increase in general account single premiums was due to simplified issue sales in the Transamerica Capital Inc. bank channel and terminal funding premiums generated by Retirement Services.
Investment income, excluding realized gains and losses on shares and real estate, was 4% higher in 2004 compared to 2003. Interest rate related net trading gains of USD 402 million have been deferred for 2004. Asset defaults improved significantly over last year and were below long-term expected rates. Actual net credit losses for 2004 were USD 204 million, including USD 193 million related to bonds and USD 1 1 related to mortages. This compares to credit losses of USD 516 million in 2003. Significant impairment losses in 2004 include USD 80 million of aircraft and carrier related investments and USD 93 million for various structured investments. The default provision of USD 277 million remains unchanged from the 2003 year-end.
The increase in fees and commission revenues is primarily attributable to increased investment management fees earned as a result of higher asset balances. Fees were lower on certain membership products sold on a direct basis due to the Federal
Commissions and expenses include commissions, operating expenses and the net change in policy acquisition costs.
Higher regulatory and compliance costs were offset by expense savings in the operating units.
Life for account of policyholder sales increased significantly in the fourth quarter of 2004 as a large BOLI case closed. These sales tend to be large and less predictable in nature.
(GMIB) feature in the first quarter of 2003, as part of AEGON’s disciplined approach to write profitable business at acceptable risk profiles. AEGON introduced the ‘5 for life’ guaranteed minimum withdrawal benefit during the fourth quarter of 2004 to complement the existing ‘Guaranteed Principal Solution’ rider introduced at the beginning of the year. The balances of variable annuities increased 10% to USD 44.5 billion primarily reflecting strong equity market performance in 2004.
decrease compared to 2003. Mutual fund sales of USD 1 1.2 billion for 2004 increased 35% over 2003, reflecting the expanded marketing relationships with wirehouse networks. Synthetic GIC
USD 76 billion at year-end 2004. AEGON does not manage the assets underlying a synthetic GIC and is not subject to the investment risk, but receives a fee for providing liquidity to benefit plan sponsors in the event that qualified plan benefit requests exceed plan cash flows.
Realized gains and losses on shares and real estate 368 (191)
AEGON The Netherlands implemented a new organizational structure and a revised strategy in 2004 in order to provide better services to its clients with higher value-added products sold through multiple and more broad-based distribution channels. As of January 1, 2004, thirteen different front and back offices were integrated into one company with five service centers and four marketing and sales organizations. The number of geographical locations was reduced from six to four. The number of employees at December 31, 2004, excluding agentemployees, was 7% lower than at the last year-end.
Income before realized gains and losses on shares and real estate increased 16% to EUR 352 million compared to 2003. The 2004 results were positively influenced by lower additions to the guarantee provisions, partly offset by additions to the profit sharing provisions and higher pension and other post-retirement charges.
Traditional life income before realized gains and losses on shares and real estate amounted to EUR 196 million in 2004, which is almost level with 2003. The 2004 results are negatively influenced by additional profit sharing expenses in 2004 whereas the 2003 results benefited from the release of profit sharing provisions. Investment income over 2004 benefited from the release of provisions on preferred dividends and from the interest rate spread on interest rate swaps.
Life for account of policyholders income before realized gains and losses on shares and real estate increased by EUR 24 million to EUR 42 million in 2004, primarily reflecting EUR 31 million lower additions to the provision for guarantees.
General insurance income before realized gains and losses on shares and real estate increased in 2004 by EUR 25 million to
Income before realized gains and losses on shares and real estate from banking activities increased by 10% to EUR 22 million in 2004. The increase is largely attributable to lower additions to the provisions for credit risks and cost savings, offsetting the margins compression.
Total revenues increased by 9% to EUR 5,771 million in 2004.
For non-life, accident and health premium income increased by 15% in comparison to 2003 mainly due to new production.
Commissions and expenses of EUR 1,098 million were 15% higher than in 2003. Commissions were 10% lower than in 2003, mainly caused by lower production. Operating expenses amounted to
Standardized new life production declined 17% to EUR 227 million in 2004 due to a lack of large case pension contract activity and due to efforts to improve margins in the various channels and products. Through the implementation of a new organization and renewed focus on intermediaries, AEGON is committed to improve intermediary distribution.
Life for account of policyholders 154 128 20 227 184 23
INCOME BEFORE REALIZED GAINS AND LOSSES ON SHARES AND REAL ESTATE 151 130 16 222 188 18
Income before realized gains and losses on shares and real estate of GBP 151 million in 2004 increased 16% compared to 2003.
The main reason for the increase was higher policy fee income reflecting an average 12% higher FTSE level in 2004 compared to 2003.
Income before realized gains and losses on shares and real estate in the life for account of policyholder product segment was GBP 154 million for 2004, an increase of 20% compared to 2003. This growth is primarily due to increased levels of equity markets.
Since December 31, 2003, AEGON UK has acquired further stakes in distribution companies. These acquisitions did not materially impact fee business net income in 2004.
compared to 2003. The effective tax rate of 28% is in line with 2003.
Commissions and expenses decreased 4% to GBP 426 million in 2004. This is largely due to lower amortization of deferred policy acquisition cost, partially offset by expansion in the distribution companies (including the effect from acquisitions).
Both in 2003 and 2004, GBP 10 million of restructuring charges were taken related to expense reduction programs.
These restructuring costs resulted from a broad review of all of
The increase in production of 4% reflects growth in AEGON UK’s core individual and group pensions businesses, partly offset by a fall in asset management institutional sales to pension fund trustees.
Weighted average exchange rates for the currencies of the countries included in the Other countries segment, and which do not report in euro, are summarized in the table below.
Income before realized gains and losses on shares and real estate amounted to HUF 13.5 billion, a decrease of 19% compared
Traditional life results were 33% lower than in 2003, reflecting losses on bonds and a smaller size of the portfolio.
Results of the general insurance business were 26% lower than in 2003 mainly from losses on investments and reserves strengthening.
HUF 66.5 billion in 2004. The 6% increase in recurring life premiums to HUF 37 billion reflects a lower level of surrenders compared to 2003, partly offset by accelerated maturities in the traditional life portfolio and a lower level of policy surrenders.
Single life premium amounted to HUF 500 million, HUF 1.1 billion lower than in 2003. Non-life premium income amounted to HUF
29 billion, an 18% increase compared to 2003. AEGON Hungary achieved growth in car insurance while at the same time taking on acceptable levels of risk in the portfolio. Premiums in the car insurance segment increased by 66% and amounted to HUF 6.7 billion over 2004.
Fees and commissions increased by 27% to HUF 3.6 billion in 2004, reflecting growth in the number of participants in the
Commissions and expenses increased by 8% to HUF 21 billion compared to 2003. The increase reflects strong growth in commission on car insurance, inflation and increased expenses from projects.
Standardized new life production decreased by 12% to HUF 4.6 billion, while off balance sheet production increased by 27% to
Income before realized gains and losses on shares and real estate amounted to a loss of SKK 325 million in 2004, compared to a loss of SKK 200 million in 2003.
INCOME BEFORE REALIZED GAINS AND LOSSES ON SHARES AND REAL ESTATE Hungary in EUR million1
STANDARDIZED NEW PREMIUM PRODUCTION Spain in EUR million by 5%. Traditional life premium income increased by 34%, while unit-linked premium income decreased, mainly due to the change of the Spanish fiscal regulation that neutralized the tax advantages of these products compared to the investment funds tax treatment.
The focus on reduction of expenses continued in 2004, resulting in 1% lower expenses compared to 2003. Expenses in the life business decreased by 13%, whereas expenses in the non-life business increased by 5%.
EUR 36 million compared to 2003, primarily by involving the intermediaries network of non-life in the sale of life products.
EUR 53 million in 2004. As part of the agreement, AEGON
Seguros Generales’ distribution network in Spain, which in the transaction will be transferred to Reale Mutua Group, will continue to sell AEGON’s life and health insurance products.
Income before realized gains and losses of the traditional life segment amounted to NTD 90 million for 2004, compared to a
NTD 131 million loss in 2003. The increase is mainly due to higher recurring premiums as a result of higher persistency.
Net income decreased from NTD 57 million in 2003 to NTD 33 million in 2004. For 2004, realized losses on shares and real estate were NTD 90 million, while for 2003 realized gains were
NTD 24,261 million increased by 38% compared to NTD 17,517 million for 2003. Variable universal life premiums increased by 83% over 2003 to NTD 710 million driven by the efforts of
Investment income rose 47% to NTD 918 million in 2004 compared to NTD 623 million in 2003, mainly due to an increase in the asset base. Investment assets increased from
NTD 24.6 billion at the end of 2003 to NTD 45 billion at the end of 2004, but the investment yield of 2.7% in 2004 declined from 3.5% in 2003 due mainly to unsatisfactory equity investment performance and a write-down of a defaulted bond.
NTD 940 million in 2003, resulting from growth in employees, occupancy and policy related costs in connection with the growth of renewal business volumes. However, the expenses to premium ratio was 3.7% compared to 4.2% in 2003.
AEGON’s share in income before realized gains and losses on shares and real estate amounted to a loss of CNY 41 million in 2004 compared to a loss of CNY 29 million in 2003.
Dexia to resolve a dispute over the sale of Labouchere to Dexia in 2000.
AEGON’s share in net results since the date of acquisition amounted to EUR 4 million and is reported under results from nonconsolidated ventures. CAM is not consolidated in AEGON’s results.
AEGON’s 20% stake in La Mondiale Participations resulted in an EUR 5 million contribution to the net results in 2004. AEGON
The EUR 218 million net income included in non-consolidated ventures in 2003 relates to TFC, which was consolidated as from
From January 1, 2005 onwards, all exchange-listed companies in the European Union are required to prepare their financial statements in conformity with International Financial Reporting
Dutch Accounting Principles (DAP) as its primary accounting framework to IFRS as of that date.
AEGON’s first full set of financial statements under IFRS will be the annual financial statements for the year ending December 31, 2005. The annual financial statements for 2005, as well as the quarterly reporting that will be presented during 2005, will include comparative numbers for 2004 on an IFRS basis.
The balance sheet at January 1, 2004, the IFRS ‘Opening Balance
DAP basis and assets and liabilities valued on an IFRS basis is reflected as an adjustment in shareholders’ equity in the Opening
The key impacts for AEGON are summarized below. It is important to understand that the impact on external reporting does not change the fundamental economic realities of AEGON’s business or the way AEGON manages the business.
The conversion from DAP to IFRS will especially affect the following items.
Under IFRS, most debt securities, including bonds and certain loan portfolios, will be valued at fair value. Since the fair value of these debt securities exceeds the amortized costs, AEGON will reflect a credit in shareholders’ equity in the Opening Balance
To mitigate this anomaly, which is purely accounting driven, if there is a direct link between the measurement of the invested assets and the measurement of the insurance liabilities or related deferred policy acquisition costs (DPAC) and value of business acquired (VOBA) asset, AEGON will adjust shareholders’
equity in such a way as if these unrealized movements in fair value had actually been realized. This adjustment is generally referred to as ‘shadow accounting’. The default provision that existed under DAP for debt securities will be credited to shareholders’ equity in the Opening Balance Sheet. Under DAP
interest related gains and losses on debt securities were deferred and released into earnings over the estimated average remaining term to maturity. Under IFRS, gains and losses will be recognized in the income statement when realized. The deferred gains that existed in the DAP balance sheet will be released to shareholders’ equity in the Opening Balance Sheet.
40 AEGON GROUP ANNUAL REPORT 2004 participation features’. For all products classified as ‘insurance contracts’ or ‘investment contracts with discretionary participation features’, AEGON continues to apply current accounting principles. IFRS allows products classified as
Balance Sheet for defined benefit plans that are underfunded and an asset for defined benefit plans that are overfunded.
DAP allowed the deferred tax balance to be presented on a discounted basis. Under IFRS this is no longer allowed.
For AEGON this means that the deferred tax balance will be increased in the Opening Balance Sheet with a corresponding charge to shareholders’ equity.
Under IFRS all derivatives have to be valued at fair value, with changes in fair value recognized in earnings, unless strict hedge accounting criteria are met and hedge accounting is applied.
AEGON’s perpetual capital securities are classified as equity instruments under IFRS, as opposed to debt instruments under
DAP. As a consequence, the coupon paid on these perpetuals will be reflected as a direct charge to equity under IFRS whereas for
The gain on the sale of TFC businesses in 2004, which was credited to shareholders’ equity under DAP, will be reflected in the income statement in 2004 under IFRS.
AEGON continues to stay abreast of regulatory developments, in particular Solvency II, which allows advanced internal risk management models as a basis for capital requirements.
AEGON’s financial risk management, part of the global risk management framework, is based on asset liability management
Results of AEGON’s sensitivity analyses are presented throughout this section to show the estimated sensitivity of net income and shareholders’ equity to various scenarios. These sensitivity analyses are presented on Dutch Accounting Principles (DAP) in order to permit a consistent comparison with historical financial data. AEGON ceased to apply DAP on January 1, 2005 when it changed its basis of accounting to International Financial
These scenario results do not consider the actions that might be taken to mitigate losses inherent in AEGON’s risk management processes. As financial markets fluctuate, these actions may involve selling investments, changing investment portfolio allocation and adjusting interest rates or bonuses credited to policyholders. Also, the results do not take into account correlation between factors and assume unchanged conditions for all other assets and liabilities. Results of the analyses also cannot be extrapolated for wider variations since effects do not tend to be linear.
Netherlands, AEGON invests the majority of its equity holdings in an internationally diversified portfolio, rather than solely in Dutch equities. Equity held in subsidiaries is kept in local currencies to the extent shareholders’ equity is required to satisfy regulatory and self-imposed capital requirements.
Because of this, currency exchange rate fluctuations may affect the level of shareholders’ equity as a result of translation into euro. AEGON holds the remainder of its capital base (capital securities, subordinated and senior debt) in various currencies in amounts that are targeted to correspond to the book value of its country units. This balancing mitigates currency translation impacts to equity and leverage ratios. Currency risk in the investment portfolios is managed using asset liability matching principles. AEGON does not hedge the income streams from the
main non-euro units and, as a result, earnings may fluctuate due to currency translation. As AEGON has significant business segments in the Americas and in the United Kingdom, the principal sources of exposure from currency fluctuations are from the differences between the US dollar and euro and between the UK pound and euro. AEGON may experience significant changes in net income and shareholders’ equity because of these fluctuations.
SENSITIVITY ANALYSIS OF NET INCOME AND SHAREHOLDERS’ EQUITY TO CURRENCY EXCHANGE RATE MARKETS1,2,3
1 The accounting basis used for this table is DAP. The effects should not be used as a guide in providing directional and approximate magnitude impact on net income and shareholders’ equity in 2005 since starting January 1, 2005 AEGON adopted IFRS, which differs in significant respects from DAP in its treatment of the consequences of certain events, including interest rate changes, equity market changes and relative currency rate movements.
proceeds in securities bearing lower interest rates. Also, in a period of low interest rates, AEGON may not be able to reduce crediting rates on policies and still preserve margins as a result of minimum guaranteed crediting rates provided on policies.
These models are used by all country units and aggregated at the group level.
For AEGON USA’s business, the average duration of assets is approximately 4.3 years. This relatively low duration, as compared to the long-term nature of most of AEGON USA’s businesses, is driven by the asset and liability management process applied to the institutional markets business in the
United States (GICs and funding agreements). Both the assets and the liabilities for this business are managed on a floating rate basis, with extensive use of interest rate swaps. As a result, these assets and liabilities, which represent a little over a quarter of the total general account assets and liabilities of AEGON USA, have an effective duration of close to two months. For AEGON
The Netherlands, the average duration of assets is approximately 6.9 years. The combined market value weighted duration mismatch of AEGON USA and AEGON The Netherlands was approximately minus 1.0 year at December 31, 2004 (duration of assets is shorter than duration of liabilities).
Table 4 shows each of the last five year-end interest rates for the period from 2000 through 2004.
The sensitivity analysis in table 5 shows an estimate of the effect on net income and shareholders’ equity of movements in interest rates.
Estimated approximate Estimated approximate Parallel movement of yield curve effects on net income effects on shareholders’ equity
2Basic assumptions: no correlation between markets and risks; unchanged conditions for all other assets and liabilities; limited management actions taken; changes are relative to net income. Effects do not tend to be linear and therefore cannot be extrapolated for larger increases or decreases.
3The effect of interest rate movements is reflected as the effect of a one-time parallel shift up or down of all relevant yield curves on December 31, 2004.
(bonds, mortgages and private placements), over-the-counter derivatives and reinsurance contracts. Some issuers have defaulted on their financial obligations for various reasons, including bankruptcy, lack of liquidity, downturns in the economy or downturns in real estate values, operational failure and fraud.
AEGON actively manages its credit risk exposure by individual counterparty, sector and asset class. AEGON also employs deterministic and stochastic credit risk modeling in order to assess AEGON’s credit risk profile and associated earnings and capital implications due to various credit loss scenarios. The ratings distribution of general account portfolios of AEGON’s major country units are presented in table 6 on page 44 by rating category.
AEGON establishes provisions for credit risk in the ordinary course of business. AEGON added EUR 195 million to its default provisions during 2004, while EUR 167 million was charged for defaults. Other movements had a positive impact of EUR 53 million on the provision, leaving a balance at year-end of
Fluctuations in the equity, real estate and capital markets have adversely affected AEGON’s profitability, capital position and sales of equity related products in the past and may continue to do so.
Liability exposure is present in equity-linked products whereby policyholder funds are invested in equities at the discretion of the policyholder, where most of the risk remains with the policyholder.
typically earns a fee on the asset balance in these products and therefore has a risk related to the investment performance. In addition, some of this business has minimum return or accumulation guarantees, which are often life contingent or contingent upon policyholder persistency. AEGON is at risk if equity market returns do not exceed these guarantee levels and may need to set up additional reserves to fund these future guaranteed benefits. AEGON is also at risk if returns are not
The general account equity, real estate and other non-fixed income portfolio of AEGON Americas and AEGON The Netherlands accounted for 98% of the total general account equity, real estate and other non-fixed income portfolio of the AEGON Group.
Table 9 sets forth the year-end closing levels of certain major indices.
discontinued the indirect income method and instead recognizes realized gains and losses on equities and real estate in income, which may lead to increased sensitivity of net income to movements in equity and real estate markets. In addition, net income is sensitive to the fees earned on equity investments held for the account of policyholders as well as the amortization of deferred policy acquisition costs and provisioning for minimum product guarantees.
AEGON’s inability to manage risks successfully through derivatives or counterparty’s failure to honor its obligations could have a material adverse effect on AEGON’s business, results of operations and financial condition.
Liquidity risk is inherent in much of AEGON’s business. Each asset purchased and liability sold has liquidity characteristics that are unique. Some liabilities are surrenderable while some assets have low liquidity such as privately placed loans, mortgage loans, real estate and limited partnership interests. If AEGON
AEGON ANNUAL REPORT 2004 47 decreases such as annuity products. AEGON is also at risk if expenses are higher than assumed by management.
Sensitivity analysis of net income and shareholders’ equity to various underwriting risks is shown in table 11 on page 48.
AEGON and by the intermediaries who distribute AEGON’s products, AEGON may face claims from customers and adverse negative publicity if these products result in losses or fail to result in expected gains. New products that are less well understood and that have less of a historical performance track record may be more likely to be the subject of such claims.
Any such claims could have material adverse affect on AEGON’s results of operation, corporate reputation and financial condition.
2Basic assumptions: no correlation between markets and risks; unchanged conditions for all other assets and liabilities; limited management actions taken. All changes are relative to net income and shareholders’ equity. Effects do not tend to be linear and therefore cannot be extrapolated for larger increases or decreases. The approximate effects on shareholders’ equity exclude the effects on net income, which is presented above separately.
paid. The US Congress has, from time to time, considered possible legislation that would eliminate the deferral of taxation on the accretion of value within certain annuities and life insurance products. In addition, the United States Congress passed legislation in 2001 that provided for reductions in the estate tax and the possibility of permanent repeal of the estate tax continues to be discussed, which could have an impact on insurance products and sales in the United States. Recent changes in tax laws in the Netherlands have reduced the attractiveness of certain of AEGON’s individual life products.
This may result in cash payments requiring the sale of invested assets, including illiquid assets, at a price that 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 cause
During 2004, Standard and Poor’s maintained the credit ratings of AEGON N.V. at A+ with a stable outlook. Moody’s
Natural disasters, terrorism and fires could disrupt AEGON’s operations and result in significant loss of property, key personnel and information about AEGON and its clients.
SENSITIVITY ANALYSIS OF NET INCOME AND SHAREHOLDERS’ EQUITY TO VARIOUS UNDERWRITING RISKS1,2,3
2Basic assumptions: no correlation between markets and risks; unchanged conditions for all other assets and liabilities; limited management actions taken. All changes are relative to net income and shareholders’ equity. Effects do not tend to be linear and therefore cannot be extrapolated for larger increases or decreases.
3The mortality sensitivities assume that mortality increases or decreases for all products regardless of whether one product produces a gain or loss on the directional change.
operates. The primary purpose of such regulation is to protect policyholders, not holders of securities. Changes in existing insurance laws and regulations may affect the way in which
AEGON faces significant risks of litigation and regulatory investigations and actions in connection with activities as an insurer, securities issuer, employer, investment advisor, investor and taxpayer. Lawsuits, including class actions and regulatory actions, may be difficult to assess or quantify, may seek recovery of very large and/or indeterminate amounts, including punitive and treble damages, and their existence and magnitude may remain unknown for substantial periods of time. A substantial legal liability or a significant regulatory action could have a material adverse effect on AEGON’s business, results of operations and financial condition.
equity, including the level and volatility of reported results and shareholders’ equity.
The AEGON Group conducts its capital management processes at various levels in the organization. The main goal of AEGON’s capital management is to manage the capital adequacy of its operating companies to high standards within leverage tolerances consistent with strong capitalization.
AEGON N.V. issued Junior Perpetual Capital Securities in separate tranches of EUR 950 million and USD 500 million to refinance maturing debt and strengthen its capital base. The ratio of shareholders’ equity to total capital remains stable at approximately the same level as it was over the year.
Shareholders’ equity was EUR 14,413 million at December 3 1, 2004, compared to EUR 13,947 million at December 3 1, 2003.
The increase of EUR 466 million is largely due to the net income of EUR 1,663 million, offset by amongst others, currency translation losses of EUR 775 million and cash dividends of
Junior Perpetual Capital Securities. AEGON’s focus on the fixed income investor base will continue to be supported by an active investor relations program to keep investors well informed on
Most of AEGON’s external debt is issued by the parent company, AEGON N.V., as well as two companies whose securities are guaranteed by AEGON N.V.
AEGON N.V. has employed its regular access to the capital markets through private placements issued under its USD 6 billion Euro Medium Term Notes Program and under a separate
EUR 2.0 billion outstanding under its Medium Term Notes Program and EUR 95 million under its Commercial Paper Programs.
(2003: EUR 2.9 billion). Operating debt was reduced during 2004 due to cash proceeds from the sale of the TFC commercial finance and container leasing businesses. This was partially offset by the issuance of EUR 500 million of ten-year fixed-rate notes and EUR 75 million of 15-year fixed-rate notes to finance collateral reserve relief for the AEGON USA reinsurance business, as alternatives to current letter of credit requirements.
The remaining operating debt activities primarily relate to the financing of TFC and its subsidiaries.
Internal sources of liquidity include distributions from operating subsidiaries on the basis of excess capital or cash and cash equivalents. Internal distributions may be subject to (local)
regulatory requirements. Each business unit further manages its liquidity through closely managing the liquidity of its investment portfolio.
individuals (independent) agents pension funds brokers companies direct response banks worksite marketing financial institutions
These products are marketed to individuals, pension funds, companies and banks, through (independent) agents, brokers, direct response, worksite marketing and financial institutions in the United States, the Netherlands, the United Kingdom, Canada,
Permanent life insurance provides life-long financial protection. Most permanent policies have a cash value feature with a minimum rate guarantee that accumulates tax-deferred over the life of the policy and can be used to help fund financial goals, particularly in retirement. A customer can either withdraw the cash value subject to withdrawal charges or receive the benefit upon a predetermined event, such as the death of the insured. Whole life insurance is a common form of permanent life insurance where premiums generally remain constant over the life of the policy. Universal life insurance is another form of permanent life insurance that has either a flexible or single premium. The contract has an adjustable benefit feature that allows the customer greater flexibility on when to pay premiums and the amount of the premiums, subject to a minimum and a maximum. For universal life products, the more the customer pays in premium, the greater the cash value will be. The interest rate at which the cash value accumulates is adjusted periodically.
Term life insurance provides protection for a certain period of time and allows the customer to select the duration of coverage and the amount of protection. The policy pays death benefits only if the customer dies during the specified term. Term policies do not accumulate a cash value. The policies can usually be renewed upon expiration and premiums normally increase upon renewal. Certain term life insurance products sold in the
United States and in the United Kingdom (such as mortgage insurance and credit life insurance) provide a death benefit that decreases over the term period, based on a stated method. The rate of decrease usually corresponds with the decrease in the principal balance of the loan.
Traditional life products also include life insurance sold as part of defined benefit pension plans, endowment policies, post-retirement annuity products and group risk products.
Bank- or company-owned life insurance (BOLI/COLI) funds the costs of employee benefits, usually with key employees of the company as the insured persons.
Fixed annuities contributed 14% of AEGON’s line of business result1 in 2004 (15% in 2003 and 3% in 2002). Fixed annuities are marketed to individuals and pension funds through financial institutions, (independent) agents and brokers in the United States and Canada and through direct response in the United States.
AEGON USA offers include deferred or immediate annuities, which may be purchased on either a flexible or single premium basis. An immediate annuity is purchased with a single lump sum premium payment and the benefit payments generally begin within a year after the purchase. Deferred annuities are offered on a fixed or indexed basis with the option of liquidating the contract at any time after the purchase. Upon maturity of the annuity, the customer can select payout options, including a lump sum payment or income for life or for a period of time.
AEGON utilizes consolidated special purpose entities linked to medium term notes or asset backed commercial paper for the issuance of certain funding agreements. Under these programs, the proceeds of each note series or commercial paper issuance are used to purchase a funding agreement from an AEGON
Products for the account of policyholders are those where the policyholders carry the investment risk. AEGON earns management, administration and guaranteed minimum benefit fees and mortality results on these products.
individuals (independent) agents marketing organizations financial institutions worksite marketing franchise organizations brokers
AEGON’s line of business result1 in 2004 (13% in 2003 and 26%
Life products for the account of policyholders include several forms of life insurance and pension products whereby death benefits and cash values vary with the performance of a portfolio of investments and are in some cases protected by guarantees if certain requirements are met. Premiums can be allocated among a variety of investments that offer different degrees of risk and reward, including stocks, bonds, combinations of both, or investment products that guarantee interest and principal. The customer retains the investment risk and AEGON earns a return from investment management fees, mortality-based cost of insurance charges and expense charges. The contract account balance varies with the performance of the investments chosen by the policyholder. These products also include variable universal life (United States), tontine plans (the Netherlands), unit-linked, pensions and unitized with-profits life insurance (UK,
Variable universal life products are similar to universal life products, but include investment options and maintenance of investments for the account of policyholders.
Tontine plans (the Netherlands) are linked pure endowment savings contracts, with a tontine bonus structure. Policyholders can choose from several funds in which to invest premiums paid.
When death occurs before maturity, the tontine plans pay a death benefit equal to the premiums accumulated at 4%
deceased policyholder belonged. On survival to the maturity date, a benefit equal to the fund value, inclusive of tontine bonuses, is paid out. This amount is at least equal to the premiums paid, providing the Mix Fund was chosen for investing premiums.
Unit-linked products are contracts whereby the policyholder is able to choose initially, and change subsequently, the proportion of the premium that is invested in certain funds. The benefits on death or maturity are equal to the value of the units, in certain cases subject to a minimum of the guaranteed benefits. Unitlinked products generally have variable maturities and variable premiums.
Variable annuities contributed 7% to AEGON’s line of business result1 in 2004 (3% in 2003 and minus 35% in 2002). Variable annuities are sold to individuals and pension funds through
AEGON and third party providers, including bond and equity funds, and selected by a client based on the client’s preferred level of risk. The assets and liabilities related to this product are legally segregated for the benefit of particular policyholders in separate accounts of the insurance company (classified as investments for the account of policyholders). Various riders are available on variable annuity contracts, providing guaranteed minimum death and/or maturity withdrawal or income benefits.
The account value of the variable annuities reflects the performance of the funds. AEGON earns mortality and expense charges as well as various types of rider fees for providing various forms of guarantees and benefits, including guaranteed death and income benefits. This category includes the segregated fund products offered by AEGON Canada.
AEGON’s fee business comprises products that generate fee income by providing management, administrative or risk services related to off balance sheet assets (i.e. equity or bond funds, third-party managed assets and collective investment trusts).
AEGON serves the following retirement plan markets: • corporate defined benefit plans
Bundled retirement plans are sold to mid-sized and large employers. A ‘manager of managers’ investment approach is used specifically for the retirement plans market, which allows clients access to institutional investment managers across the major asset classes. These funds are available in a ‘core-andfeeder ’ structure, in which the core is similar to a mutual fund and the feeder provides an institutional customer with a choice of products that are directly linked to the performance of the mutual fund, such as a registered or non-registered variable annuity, a collective investment trust (off balance sheet) or mutual funds (off balance sheet).
A synthetic GIC is generally characterized as an off balance sheet fee-based product sold primarily to tax-qualified institutional entities such as 401(k) plans and other retirement plans, as well as college savings plans. AEGON’s US insurance companies provide a synthetic GIC ‘wrapper’ around fixed-income invested assets, which are owned by the plan and managed by the plan or a third-party money manager. A synthetic GIC helps to reduce fluctuations in the value of the wrapped assets for plan participants and provides book value benefit-responsiveness in the event that qualified plan benefit requests exceed plan cash flows. In certain contracts, AEGON agrees to make advances to meet benefit payment needs and earns a market interest rate on these advances. The periodically adjusted contract crediting rate
experience is passed through to participants. AEGON enters into agreements to provide liquidity for multi-seller asset backed commercial paper conduits and municipal variable rate demand note facilities if there are certain disruptions in the commercial paper or municipal bond markets. These liquidity agreements generally provide for AEGON to purchase non-defaulted assets or provide loans secured by assets from the conduit or facility at market interest rates or better.
AEGON UK has expanded its interest in a number of independent financial advisors in the United Kingdom. The independent advisors deliver advice relating to financial needs to a range of customers (both individuals and companies). AEGON
Long-term care products offered by AEGON USA provide benefits to customers who, because of their advanced age or a serious illness, require continuous care. Long-term care policies offered include nursing home coverage, home health care, assisted living and adult day-care services and protect the insured’s income and retirement savings from the costs of long-term nursing home or home health care. Sales of long-term care insurance by the Long Term Care Division within AEGON USA will be discontinued in 2005, as announced in 2004.
General insurance contributed 5% to AEGON’s line of business result1 in 2004 (3% in 2003 and 4% in 2002). General insurance is sold to individuals and companies through (independent)
announced in December 2004, that it sold its general insurance business in Spain with effect from January 1, 2005.
Life for account of policyholders ■ ■ ■ ■ ■ ■ ■
Accident and health insurance ■ ■ ■ ■ ■ ■ ■
Individual companies in the AEGON Group are each subject to solvency supervision in their respective home countries. Based on European Commission legislation (Directive 98/79/EC)
(De Nederlandsche Bank, or DNB) are, as lead supervisors, also required to carry out ‘supplementary supervision’. The supplementary supervision of insurance companies in an insurance group enables the lead supervisors to make a detailed assessment of the financial position of the insurance companies that are part of that group. The Directive requires the DNB to take into account the relevant financial affiliations between the insurance companies and other entities in the group. In this respect, AEGON is required to submit reports to the DNB twice a year setting out all the significant transactions and positions between the insurance and non-insurance companies in the
Group are also required to maintain a minimum solvency margin based on local requirements. The required solvency margin is the sum of the margins of each of AEGON’s insurance and banking subsidiaries, based on the requirements of European directives.
Commonwealth General and Transamerica Corporation, with licenses in every state of the United States, the District of
Pennsylvania; Little Rock, Arkansas: Los Angeles, California; Louisville, Kentucky; Kansas City, Missouri; Plano, Texas; Purchase, New York and St Petersburg, Florida. AEGON Canada’s principal office is located in Toronto, Canada.
AEGON’s operations in the United States are derived from traditional life products.
Services, Financial Markets, Institutional Products and Services, and Pension. The group structure enables AEGON USA to manage the organization more efficiently and to identify business synergies, pursue cross-selling opportunities and improve operating efficiencies. Coordinated support services provide expertise in systems technology, investment management, regulatory compliance and various corporate functions to complement operations. Products are offered and distributed through one or more of the AEGON USA licensed insurance or brokerage subsidiary companies. The following divisions are part of AEGON’s subsidiary companies in the US.
The Agency Group divisions offer a wide range of insurance products through agents dedicated to selling AEGON products, as well as independent agents, registered representatives, financial advisors and specialized marketing organizations. The Agency
Group targets distinct market segments ranging from lowerincome clients to the advanced market that serves clients with higher net worth by providing various tax and estate planning products.
Life Investors Career Agents/Independent Producers Group targets middle to upper-income markets, selling primarily interest-sensitive and ordinary life insurance. Life Investors provides support to establish new agencies and has provided its more than 2,000 agents with quality products, technology tools, and a high level of home office training and support. During the past few years, the Independent Producers Group has seen growth in both recruiting and sales. This unit, which is focused on developing relationships with independent marketing organizations and managing general agents throughout the
Transamerica Insurance & Investment Group (TIIG) distributes term, fixed and variable life insurance and equity products to its targeted niche market of older, affluent individual customers and small to mid-sized businesses. TIIG’s primary distribution channels are 465 general agencies and over 70,000 agents.
Sales of TIIG’s variable products are supported by a network of broker-dealers, including the broker-dealer channel, which includes Transamerica Financial Advisors, Inc., an affiliated broker-dealer with over 1,000 representatives. TIIG has a
Transamerica Worksite Marketing offers a wide range of voluntary, payroll deduction life and supplemental health insurance products for groups ranging in size from as few as five employees to more than 150,000 employees. Products marketed to employees at their workplace are designed to supplement benefit plans that they may already have, both through their employers and on their own.
Additionally, ADMS has applied its direct marketing expertise to markets abroad and is doing business in the United Kingdom,
Taiwan. ADMS has developed strategic relationships with major business partners in these areas and uses their endorsement to market AEGON USA’s products via telemarketing and direct mail.
Transamerica Investment Management is a registered investment advisor and provides investment management services to mutual funds, institutional accounts, pension funds, variable annuity and variable life insurance separate accounts.
Association, Stable Value and Funding Agreement Products, 2003 Fourth Quarter Sales, IMD Market Research). IMD has been able to enhance its leadership position through product customization, strong service capabilities and profitable underwriting. IMD’s skills in product development, distribution and investment and risk management have resulted in a diversified customer and market base and multi-channel distribution. Building on these skills, IMD is also responsible for a new Structured Products (SP) group. SP is generally involved in capital markets transactions such as writing credit default swaps, undertaking synthetic collateralized debt obligations, and providing guarantees of affordable housing tax credits. IMD also administers AEGON’s block of structured settlement pay-out annuities business. New sales for this product were discontinued in 2003.
Group distinguishes itself through its knowledge and experience in assessing and pricing mortality risk, underwriting, and private label term services. Transamerica Reinsurance continues to advance its international efforts, with a focus on select markets in Latin America and the Asia Pacific region. Foreign offices have been established in Taipei (Taiwan), Seoul (South Korea), Hong
industry. AEGON USA enters into these arrangements to assist in diversifying its risks and to limit the maximum loss on risks that exceed policy retention limits. The maximum retention limit on any one life is generally USD 500,000 with certain companies retaining up to USD 2,000,000. AEGON USA remains contingently liable with respect to the amounts ceded if the reinsurer fails to meet the obligations it assumed. To minimize its exposure to reinsurer insolvencies, AEGON USA annually monitors the creditworthiness of its primary reinsurers, and has experienced no material reinsurance recoverability problems in recent years. Where deemed appropriate, additional protection is arranged through letters of credit or trust arrangements and for certain arrangements funds are withheld for investment by the ceding company. AEGON USA insurance subsidiaries also enter into reinsurance contracts with affiliated domestic and offshore companies. These have been eliminated in the consolidated statements, except for certain arrangements that involve producer profit sharing arrangements.
Transamerica Retirement Services (TRS) offers customized retirement plan services in the small business retirement plan market and the multiple employer plan market. TRS services a full line of 401(k), profit sharing, age-weighted, and comparability retirement plans. TRS distributes its products through intermediaries, including life agents, brokers, registered representatives, financial planners and certified public accountants as well as through a series of strategic alliance relationships. TRS seeks to distinguish itself from its competitors by focusing on innovative plan design and ERISA expertise, offering a broad range of investment choices and employee educational services.
operates multiple insurance, financial services, investment portfolio management and fund management businesses and provides wealth management solutions.
The primary operating companies that comprise ACI are: • Transamerica Life Canada
Transamerica Life Canada (TLC) offers term and tax-sheltered universal life insurance, segregated funds, guaranteed interest accounts and annuities.
Canadian financial planning company with an association of franchised planning centers, offering a diverse spectrum of planning, products and services to investors. With 77 offices across Canada, MCC is the only franchised financial planning company in Canada.
The portfolio includes universal life and traditional life insurance, predominantly term life and permanent life insurance, as well as accidental death and out-of-the-country medical insurance.
Group’s Dutch insurance and banking activities. AEGON’s operations in the Netherlands are collectively referred to as
AEGON The Netherlands is involved in both life and non-life insurance business and provides financial services and asset management.
As of January 1, 2004, AEGON The Netherlands implemented a new organization structure with five service centers and four marketing and sales organizations. Prior to this reorganization initiative a business unit structure was in place. The five service centers that focus on customer service and the administration of the five main product lines are as follows: • Service center pensions
The marketing and sales organizations (MSO) have been structured to serve the different sales channels, such as independent agents, AEGON affiliated organizations and AEGON
• Intermediary, which focuses on retail and institutional clients through independent agents
The main products are: • Products for account of policyholders with guarantees
AEGON The Netherlands has the option not to renew a contract at the end of the contract period, so that the longevity risk lies with the pension fund. Separate investment guaranteed contracts provide a guarantee on the benefits paid. The longevity risk therefore lies with AEGON The Netherlands.
AEGON Garantie Pensioen and medium and small-sized enterprises growth pensions are also defined benefit products with single and recurring premiums. The initial contract period is ten years, with renewals for five-year periods. Profit sharing is based on excess interest earned on the general account investment portfolio. Premium tariffs are fixed over the contract period and the longevity risk lies with AEGON The Netherlands.
Minimum interest guarantees are given for nominal benefits, based on 3% actuarial interest (4% on policies sold before the end of 1999), after retirement of the employee.
AEGON Persoonlijk Pensioen Plan, an individual pension product based on defined contribution, which targets employees that fall outside a collective pension plan and directors who own a company. Clients can choose from several investment options as well as two options with limited guarantees. The insurance cover is client-specific: the client can select the retirement date and the type of pension.
The life insurance products are mainly sold by the marketing and sales organization Intermediary and by AEGON Spaarbeleg.
Mortgage savings products. AEGON The Netherlands provides mortgage loans to customers for a period of twenty or thirty years. The loan is repaid at the redemption date with, fully or partly, the proceeds from a savings policy. Upon the death of the insured within the policy contract period, the benefit payment is used to repay the mortgage loan. The interest paid on the loan is normally tax deductible and the customer retains the full income tax benefit over the contract period so long as there is no early redemption. The interest paid on the mortgage loan usually equals the interest accumulated on the account balance under the savings policy. In case of surrender the policyholder loses the tax benefit.
Spaarbeleg Kas N.V. and AEGON Spaarkas N.V. sell life products with both single and recurring premiums and profit sharing based on a specific bonus system (tontine system). The main characteristic of a tontine system is that when the policyholder dies, the balance is not paid out to the policyholder’s estate, but is distributed at the end of the year to the surviving policyholders of the specific series (a new series starts at the beginning of each calendar year) to which the deceased policyholder belonged. In addition to the tontine products, Spaarbeleg Kas N.V. sells a number of tax-driven products and has provided better access to products and services in order to meet consumers’ requests with respect to pension issues.
AEGON Bank N.V. supplies savings accounts with simple conditions. The products are sold through various marketing and sales organizations.
AEGON Asset Management’s (AAM) approach is to further develop the institutional market by winning asset management customers in cooperation with the marketing and sales organization C&IC. AAM is also the asset manager for AEGON
The distribution units consist primarily of the Meeùs Groep, which is an intermediary company with its core activities in insurance and real estate. Within the financial advice segment, the Meeùs Groep has developed a broad range of activities such as insurance, pensions, mortgages, financing, savings and investments. In the real estate business the Meeùs Groep acts as a broker in both residential and commercial real estate.
In addition to this, the Meeùs Groep is active in the real estate management business.
Reinsurance takes place through a profit sharing contract between AEGON Levensverzekering N.V. and Swiss Re, with a retention of EUR 900,000 per policy with respect to death risk and a retention of EUR 25,000 annually with respect to disability risk.
AEGON UK is a leading manufacturer, fund manager and distributor of pension, protection and investment products.
The primary operating subsidiaries of AEGON UK are: • Scottish Equitable plc
In June 2004, the UK government announced an increase in the price cap from April 2005 for new stakeholder business to 1.5%
Implementation will occur in April 2006 and the changes will impact all UK pension providers. Reviews of product ranges and supporting infrastructure are underway to ensure that
Sales of more specialized pensions have grown significantly over the last few years, particularly in the area of income draw down and phased retirement products. These allow individuals up to the age of 75 to access part of their pension income without having to fully purchase an annuity until a later date.
Equitable plc (SE). These are pension funds for the employees of corporate customers and cover a range of benefit options, which are predominantly defined contribution. At retirement, cash up to the maximum allowed can be taken, with the remainder of the accumulated pension fund used to purchase an annuity or invest in a draw down policy until age 75. SE also sells and administers defined benefit pensions. Although the market for new schemes of this type of product has decreased in recent years, opportunities remain to take over the administration of existing schemes.
High standards of service are a key differentiator in the pensions market, with technology increasingly being utilized to improve efficiency for providers and advisors. An example is
UK bonds. The bond market in the UK is one of considerable size and is still seen by most financial advisors and product providers as a core part of their business. Onshore bonds offer a taxefficient method of investing for a wide range of investors.
Scottish Equitable currently offers a range of internally managed funds as well as a comprehensive range of managed funds provided by a range of market-leading fund managers.
and general tax planning. They are also recommended for investing corporate money.
AEGON Individual Protection (AIP) operates in the individual protection market under the brand name of Scottish Equitable
Protect. Launched in 2001, Scottish Equitable Protect offers three menu-based products targeted at the personal, mortgage and business protection markets.
The Employee Benefits business offers a range of corporate risk products to suit the needs of all sizes and types of employers
AEGON UK’s core product lines consists of: group life, group income protection and group critical illness. Each can be bought on a stand-alone basis, or together in the form of a tailored employee benefits package, either on a core or flexible benefits basis. Employee Benefits also has a product aimed specifically at small to medium enterprises called the Employee Protection
Kingdom market. These advisors provide their customers access to all available products and must demonstrate that the best advice is given to their client.
There are approximately 30,000 active registered independent financial advisors in the United Kingdom, many of whom are grouped into networks of advisors, who act as large national distributors. The 30 largest of the 5,300 IFA firms operating in AEGON UK’s key markets employ 80% of the registered independent financial advisors. AEGON UK has strong relationships with independent financial advisors across the market, but is particularly involved with the networks and with large local firms.
To support this activity, there are over 250 broker-consultants based in the UK, operating out of local branch offices. SE
provides support to local IFAs through this branch network in areas such as business development and training.
Origen delivers advice relating to the financial needs of a range of customers (both individuals and corporates), using a range of distribution methods (primarily face to face but also using media and worksite marketing).
number of members (source: www.pszaf.hu). The pension fund business concentrates its growth strategy on adding new members and taking over other pension funds.
AEGON Hungary and the largest part of AEGON Hungary’s new sales is derived from unit-linked products. Unit-linked premiums are invested in various asset funds. AEGON Hungary charges asset management fees, policy fees, front-end-loadings and risk charges to the fund. The unit-linked products cover all types of life insurance (including pension, endowment and savings).
AEGON Hungary also provides asset management services through its subsidiary, AEGON Hungary Investment Fund
Investment Fund Management Rt manages the assets in the general account portfolio of AEGON Hungary, the unit-linked portfolios and AEGON Hungary Pension Funds and provides assets management services to third parties. AEGON Hungary
The legal predecessor of the company was the state-owned ÁB, which was incorporated in the 1940s. AEGON Hungary is a limited liability company. It operates in Hungary and has its head office in Budapest. AEGON Hungary’s main operations are life insurance, general insurance and asset management.
AEGON Hungary’s operations are organized by sales channels and functional areas. In the second half of 2004 asset management areas and the sales channels were reorganized.
The renewed, integrated direct sales and direct marketing operation focuses on core portfolio protection and sale of simple products.
AEGON Hungary’s reinsurance partners are all significant reinsurers in the European and London markets. Only reinsurers with a minimum rating of A (Standard & Poor’s) are allowed.
Excess of Loss Treaty. AEGON Hungary’s catastrophe cover, which protects private homeowners, is significant in the Hungarian market. In addition, AEGON Hungary has smaller treaties for other business lines, such as General Third Party Liability,
The majority of AEGON Hungary’s programs are nonproportional Excess of Loss programs, which is in line with
AEGON Hungary’s strategy to cede only the higher risks or involve the reinsurers in high losses.
On September 2, 2003, AEGON Slovakia was established as a branch office of AEGON Levensverzekering N.V. At the end of October 2004, AEGON Slovakia started its operations.
AEGON Slovakia offered five basic products (endowment, term fixed, whole life insurance, group life and child) and four riders
(accidental death, accidental disability, critical illness and waiver of premium) in 2004. There are four new riders added as of
January 1, 2005: a hospitalization rider, an operational surgery rider, a basic accidental rider and an extended accidental rider.
Czech Ministry of Finance. It is expected that the license will be received in the first half of 2005.
La Sanitaria and Caja de Previsión y Socorro in 1996 and
Generales to Reale Mutua Group (Reale). As part of the agreement, AEGON Seguros Generales’ distribution network in
AEGON Spain will continue to expand its life insurance business strengthening its own agent distribution capability, by enhancing its existing bancassurance partnership with CAM and by pursuing new distribution opportunities.
The focus of AEGON Spain is on the individual consumer segment. In life insurance, AEGON Spain’s principal lines of business are traditional life and unit-linked insurance products.
The main general insurance products are motor and fire insurance. These products are distributed exclusively through the agency channel, using a network of agents and brokers.
AEGON Taiwan provides protection through yearly renewable life, accident or medical insurance to employees of its corporate clients.
Over the past two years, distribution through brokerage and bancassurance has resulted in substantial growth in new business volumes and accounts for the majority of AEGON Taiwan’s total new business premiums.
Reinsurance Company. All of them carry a rating of ‘A–’ or higher.
Assurance Company Taiwan. In 1999, the Transamerica Taiwan branch was added to AEGON’s business as a result of AEGON’s acquisition of Transamerica. The integration with the existing operations was completed in 2001. At the end of 2001, AEGON
In October 2004, AEGON-CNOOC signed a national cooperation agreement with the Agricultural Bank of China
(ABC). ABC is one of the ‘Big Four’ banks in China. Through this agreement, AEGON-CNOOC will provide a broad range of life and accident and health insurance services to ABC’s customer base.
AEGON N.V. is a public company under Dutch law and it is governed by three corporate bodies: the General Meeting of
A General Meeting of Shareholders is held at least once a year to discuss and resolve on subjects, which include the adoption of the annual accounts, the approval of dividends and any appointments to the Executive Board and the Supervisory Board.
The Executive Board, as a body, is charged with the management of the company, each member having specific areas of interest within an allocation of duties. The number of the Executive Board members and the terms of employment of these members are determined by the Supervisory Board. The members of the
Members of the Executive Board are eligible for retirement upon reaching the age of 60. Retirement is mandatory at the age of 62. The Articles of Incorporation require the Executive Board to obtain the prior approval of the Supervisory Board for a number of resolutions. The Supervisory Board may subject further resolutions of the Executive Board to its prior approval.
Supervisory Board also assists the Executive Board by giving advice. In performing their duties the Supervisory Board members shall act in accordance with the interests of the company and its business.
Supervisory Board. The Supervisory Board currently consists of ten non-executive members, one of whom is a former member of the Executive Board. Specific issues are dealt with and prepared in committees from among the members of the Supervisory
Board. With a view to a balanced composition of the Supervisory
Board a profile has been drawn up, outlining the required qualifications of its members. Upon reaching the age of 70, a member of the Supervisory Board is no longer eligible for reappointment, except with the approval of the Supervisory
In December 2003, the final version of a new Dutch Corporate
AEGON endorses the code and the principles of good corporate governance included therein. AEGON intends to use the code and the principles contained therein to continue and intensify its ongoing discussions with its stakeholders on corporate governance with the view to bringing its corporate governance standards in compliance with the code.
In the 2003 annual report AEGON provided an overview specifically indicating where its corporate governance was already compliant with the code. To the extent that AEGON did not fully comply with best practice provisions of the Dutch
This chapter is intended to provide a comprehensive description of AEGON’s compliance with the code as at the end of 2004. Those instances in which AEGON does not fully comply with the code are explained. This chapter will be discussed as a separate item on the agenda of the General Meeting of
Meeting of Shareholders at that time that are aimed at implementing changes to AEGON’s Articles of Incorporation in line with the code.
The discussion set forth below closely follows the structure of the Dutch Corporate Governance Code. Where appropriate, the headings of the chapters and paragraphs of the Dutch Corporate
Recommendations as to how AEGON has proposed implementing the code are further specified. This report contains an update of this overview. Starting with the 2005 annual report, and in line with the recommendations of the code as well as the government regulations based thereon, the annual reports will include a separate chapter outlining in general terms AEGON’s corporate governance structure and describing AEGON’s application of the principles and best practice provisions of the corporate governance code. This chapter will also detail those areas in which AEGON does not follow the code and the reasons therefore.
Each time a substantial change in the corporate governance structure of the company is contemplated, the compliance of
Executive Board and its individual members on a reappointment and retirement schedule for members of the Executive Board.
Pursuant to this retirement schedule, (available at www.aegon.com), the Supervisory Board intends to propose to the annual General Meeting of Shareholders in 2005 that the chairman of the Executive Board, Don Shepard, and the CFO,
Jos Streppel, be appointed for a four-year term. Moreover, the other members of the Executive Board, Johan van der Werf and
Alex Wynaendts, are eligible for reappointment in 2006 and 2007 respectively. It is proposed that the Articles of
In each of its country units, and at group level, AEGON has established an Internal Audit Department responsible for performing an annual risk assessment and conducting audits as necessary to evaluate the effectiveness of the design and operation of the internal controls. AEGON established the Group
Act 2002 (SOX 404), the Executive Board has established a group wide framework to document, evaluate and report on the effectiveness of the internal controls over the financial reporting process. The scope of the Sarbanes-Oxley Act compliance work
The Code of Conduct is monitored and implemented by a taskforce that reports directly to the Executive Board. This is in addition to the Codes of Conduct adopted earlier by the majority of AEGON’s country units. The Code of Conduct includes whistleblower provisions, that give employees the ability to report on suspected irregularities without jeopardizing their positions. More detailed rules and regulations regarding the reporting of financial complaints have been implemented in the form of the financial complaints procedure that provides for reports to the Audit Committee. Serious violations of the Code of
The Executive Board Rules, as posted on AEGON’s website, provide that any appointment of members of the Executive Board as a supervisory or non-executive director of another listed company is subject to the prior approval of the Supervisory
Board. Moreover, the Executive Board Rules provide that members of the Executive Board intending to accept any other important position will notify the Supervisory Board prior to acceptance of such position.
Board has proposed amendments to the Remuneration Policy in 2003. This Remuneration Policy has been adopted by the General
Meeting of Shareholders on April 22, 2004 and will be in place for a period of three years (2004-2006). AEGON places a high importance on attracting and retaining qualified directors and personnel, while at the same time safeguarding and promoting
Policy for members of the Executive Board is reflective of these objectives. It is designed to support AEGON’s strategy for value creation and shareholder alignment, as well as establishing standards for evaluating performance and business results.
Executive Board as a whole. The Remuneration Policy also takes into consideration compensation levels in relevant reference markets and segments and corporate governance guidelines.
Board includes fixed and variable components. For the variable components, the Supervisory Board has set clear and measurable criteria including criteria relating to the value of new business and total shareholder return. For more details on the remuneration of the members of the Executive Board, please refer to the chapter on Remuneration on page 14 and following of this annual report.
The Remuneration Policy also includes a plan for members of the Executive Board to be remunerated partly in stock options
(performance options) and performance shares. If members of the Executive Board are entitled to stock options, these options are granted solely in reference to the AEGON share price on
The Supervisory Board has decided that it will implement further changes to the Remuneration Policy with regard to severance payments payable to new members of the Executive
Board. These changes will include a maximum severance payment in the event of termination and be limited to the fixed component of the relevant member’s salary of one year, or two years in cases where a maximum of one year’s salary would be manifestly unreasonable for a member of the Executive Board who is dismissed in his first term of office. In order to respect the existing employment agreements with the current members of the Executive Board and given the fact that employment conditions in the United States vary with those in the
Netherlands, the Supervisory Board has agreed with the members of the Executive Board not to amend the existing arrangements with regard to severance payments with current members of the Executive Board. The employment agreements of the members of the Executive Board can be found on AEGON’s website, www.aegon.com.
As consistently disclosed in AEGON’s annual reports, members of the Executive Board of AEGON are entitled to mortgage loans provided by AEGON in the normal course of its business and under the terms applicable to personnel as a whole, subject to the prior approval of the Supervisory Board.
Meeting of Shareholders on April 22, 2004. Any future material changes to the Remuneration Policy will also be submitted to the
Policy for the years 2004-2006 is included in this annual report.
Board is determined by the Supervisory Board within the scope of the adopted Remuneration Policy. Upon conclusion of a contract with a new member of the Executive Board, the main elements of the employment contract with the member shall be made public.
In AEGON’s annual accounts the value of options and stock appreciation rights, if any, granted to the Executive Board and personnel shall be recognized with an indication as to how this value is determined.
AEGON’s Code of Conduct is a code of ethics that addresses conflicts of interest that may occur between AEGON and its employees including the members of the Executive Board.
Code, the membership of Messrs. Shepard and Streppel of the executive committee of Vereniging AEGON may give rise to deemed conflicts of interest. The Supervisory Board and the
AEGON and Vereniging AEGON will be agreed upon according to terms customary in the industry and are published in the annual report.
Executive Board and the Supervisory Board concerning the ownership of and transactions in securities, other than AEGON
The Supervisory Board is responsible for decisions relating to the resolution of conflicts of interest between members of the
Supervisory Board are required to act in accordance with the interests of AEGON and its affiliated enterprises. Pursuant to
supervisory directors. The sole member that does not qualify as ‘independent’ within the meaning of these provisions is
General Meeting of Shareholders. For the purpose of making nominations to the Supervisory Board, including any nominations for reappointment, the Supervisory Board has drawn up a profile that specifies the desired composition and competences of the Supervisory Board as a whole as well as what is required of individual members. This profile also reflects the detailed composition requirements of the Dutch Corporate
The composition profile is available on AEGON’s website where shareholders and investors can also find the prescribed information about each member of the Supervisory Board as well as the retirement schedule.
Several members of the Supervisory Board also serve as a member of Supervisory Boards of other Dutch listed companies.
In accordance with the Code the Supervisory Board Rules provide that no member can serve on AEGON’s Supervisory
Supervisory Board has decided to request Mr. Olcay to complete his current term in office despite the fact that he will in 2005 have served more than the maximum term allowed by the Dutch
Moreover, the Supervisory Board Rules provide that a member of the Supervisory Board shall resign if the Supervisory Board has resolved that such a member is no longer fit to function due to inadequate performance, fundamental differences of opinion or other impeding circumstances.
Committee and the Strategy Committee. Each committee reports its findings to the Supervisory Board and these findings are discussed in the plenary meetings of the Supervisory Board.
(which is part of the annual report) includes information on the activities of each of the committees. This report also lists the members of each committee.
financial statements of AEGON, (2) the independent auditor’s qualifications and independence, (3) the performance of AEGON’s internal audit function and the independent auditor, and (4) the compliance by AEGON with legal and regulatory requirements, and (5) advising on and monitoring the financing of AEGON and its finance related strategies. The Audit Committee is chaired by
(and more often as necessary) the Audit Committee meets with the independent auditor without members of the Executive Board being present.
The purpose of the Compensation Committee is to design, develop, implement and review the compensation and terms of employment of members of the Executive Board and of the fees of the members of the Supervisory Board to be adopted by the
General Meeting of Shareholders. The Compensation Committee makes its recommendations to the Supervisory Board. The
Compensation Committee is chaired by Mr. Dahan. Mr. Van Wijk is the sole member of the Compensation Committee who is also a member of the management board of another Dutch listed company.
Supervisory Board on candidates for the Supervisory Board for a first appointment to fill a vacancy as well as on the reappointment of members of the Supervisory Board after each four-year term. The advice of the Nominating Committee shall be based on the profile for the Supervisory Board as it shall be in place from time to time. In addition, the Nominating Committee advises on and proposes to the Supervisory Board candidates to be nominated for appointment to the Executive Board as a member or as the chairman. On a regular basis the Nominating
Committee reviews the functioning of the individual members of the Executive Board and the Supervisory Board as well as the selection criteria for senior management within the AEGON
Board. The Strategy Committee also considers options and alternative avenues with regard to the strategy as well as considering the material aspects relating to the implementation of the agreed strategy. Finally, the Supervisory Board acts as a consultative body to the Executive Board with regard to its strategy. The Strategy Committee is chaired by Mr. Tabaksblat.
Strategy Committee effective after the annual General Meeting of Shareholders on April 21, 2005, and subject to Mr. Eustace being reappointed by the General Meeting of Shareholders.
The remuneration of the members of the Supervisory Board is determined by the General Meeting of Shareholders and is not dependent on the profit of AEGON. The members of the
AEGON places a high level of importance on dialogue with its shareholders. For this purpose, AEGON has an active department on group level called Group Corporate Affairs & Investor
AEGON has traditionally made an effort to maximize shareholder participation by allowing proxy voting, both in the
AEGON has preferred shares class A and preferred shares class B, all of which are held by Vereniging AEGON. The capital contribution made on the preferred shares class A is reflective of the market value of AEGON’s common shares at the time the capital contribution was made.
Vereniging AEGON in order to prevent Vereniging AEGON’s voting power from being diluted as a result of issuances of common shares. In addition, AEGON and Vereniging AEGON have entered into a preferred shares voting rights agreement. Pursuant to this agreement, voting power attached to the preferred shares classes A and B is under normal circumstances limited to one vote per share. The preferred shares voting rights agreement allows Vereniging AEGON to exercise the full voting power on its preferred shares (approximately 2.08 votes per preferred share)
Vereniging AEGON can effectively be in a position to temporarily block any unfriendly actions by a hostile bidder or others.
General Meeting of Shareholders may cancel the binding character of binding nominations for the appointment of new members to the Supervisory Board and the Executive Board with a majority of two-thirds of the votes cast representing at least one-half of the issued capital. In addition, members of the
Executive Board and members of the Supervisory Board can only be dismissed by the General Meeting of Shareholders with the same qualified majority (except if proposed by the Supervisory
May 9, 2003. This qualified majority requirement was included in order to give AEGON a temporary protection against unfriendly actions by a hostile bidder for example. Effectively, these provisions provide Vereniging AEGON a period of six months during which time it can block any unfriendly attempts to replace the Supervisory Board and the Executive Board.
The Supervisory Board and the Executive Board have evaluated the provisions in AEGON’s Articles of Incorporation containing the qualified majority requirements in light of the provisions of the Dutch Corporate Governance Code. They have evaluated these requirements in the context of the absence of anti-takeover protection and concluded that the qualified majority requirements (in light of the voting rights of Vereniging
The protection thus accorded is in line with accepted market practice.
In the event of a serious private bid for a business unit or a participating interest in excess of the threshold expected to be set in the Dutch Civil Code the Executive Board will make public its position on the bid and its reasons for its position.
Release from liability of the members of the Executive Board for their management and of the members of the Supervisory
AEGON intends to continue its practice of providing for the determination of a registration date for the exercise of the voting rights and the rights relating to General Meetings of
General Meeting of Shareholders. Shareholders’ circulars are in any event published in those instances where shareholders’
As such, in deciding whether to exercise its rights as a shareholder of other listed companies AEGON acts primarily in the interest of its policyholders and other ultimate beneficiaries of its products while also honoring the responsibility to the ultimate beneficiaries and investors in the companies in which it has invested.
States and the United Kingdom have detailed policies in place in relation to their exercise of the voting rights attaching to the shares held by them. AEGON Nederland N.V. has published on its
States Congress, AEGON undertook in 2002 through 2004 a thorough review of its internal procedures relating to the composition, preparation and publication of its financial reporting. The Executive Board has instituted procedures aimed at ensuring that major financial information is delivered to the
Audit Committee, supervises the compliance with these internal procedures and the external information. Specific regulations dealing with the internal control function have been documented in the Audit Committee Charter and accompanying attachments.
Board has determined the extent of the involvement of the independent auditor in the preparation and publication of financial reports (other than the annual accounts) in addition to setting up a pre-approval procedure for any additional (non-audit)
The Executive Board and the Audit Committee report annually to the Supervisory Board on their dealings with the independent auditor, particularly with regard to assessing its independence.
Board and the Supervisory Board, raising issues in relation to his audit that require the attention of management. Pursuant to the
In summary: • II.2.7: this best practice provision provides that the maximum remuneration in the event of dismissal is one-year’s salary.
• II.3.3. this best practice provision provides that a member of the Executive Board may not take part in discussions and decision making that involves a subject or transaction in relation to which he or she has a conflict of interest.
AEGON. For this reason a protocol was drafted authorizing the CEO and CFO to continue the existing practice in dealing with Vereniging AEGON.
Mr. Olcay to complete his current term, thus exceeding the maximum stated in the code; • IV.1.1: this best practice provision provides that the General
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31 In accordance with Dutch Accounting Principles Amounts in millions 84 AEGON ANNUAL REPORT 2004
2,304 1,878 Accrued interest and rent 1,691 1,487 1,987 2,123 Other prepayments and accrued income 10 1,459 1,681 1The 2003 numbers have been adjusted to reflect the changes in accounting principles implemented as of January 1, 2004, as explained on page 90.
1The 2002 and 2003 numbers have been adjusted to reflect the changes in accounting principles implemented as of January 1, 2004. 2Adjusted for stock dividend.
1The 2002 and 2003 numbers have been adjusted to reflect the changes in accounting principles implemented as of January 1, 2004.
NET INCOME NON-CONSOLIDATED VENTURES 9 218 51 1The 2002 and 2003 numbers have been adjusted to reflect the changes in accounting principles implemented as of January 1, 2004.
7,391 8,268 Increase technical provisions net of reinsurance 5,943 7,310 4,250 18,144 21,002 Annuity, GIC and funding agreement deposits 14,590 18,568 28,419
Invested and acquired 1,096 (580) Shares of group companies and subsidiaries 881 (513) (1,142)
(123) 718 Shares of group companies and subsidiaries (99) 635 316
(1,801) (4,875) Change in investments for account of policyholders (1,448) (4,310) (4,204)
The cash flow statement is prepared according to the indirect method. Only those changes affecting liquid assets have been taken into account. The effects of revaluation and currency exchange rate differences are therefore not included. Currency exchange rate differences had a significant negative impact on liquid assets denominated in foreign currencies.
Less: indirect income (631) (758) Effect of SOP 03-01 (53) (63)
Income before tax and before realized gains and losses on shares and real estate 1,463 1,028
The effect on shareholders’ equity of the changes in accounting principles can be summarized as follows: January 1, January 1,
As of January 1, 2005, all public listed companies in the European Union are required to prepare their financial statements in conformity with International Financial Reporting Standards (IFRS). AEGON N.V. will be converting from Dutch Accounting Principles (DAP) as its primary accounting framework to IFRS as of January 1, 2005. The first full set of financial statements prepared under IFRS will be the annual financial statements for the year ending December 31, 2005. The annual financial statements for 2005, as well as the quarterly reporting that will be presented during 2005, will include comparative numbers for 2004 on an IFRS basis. As a result, AEGON has effectively already made the transition to IFRS on January 1, 2004. The effect of the conversion from DAP to IFRS will be reflected as a direct entry in the other surplus fund of shareholders’ equity in the ‘opening balance sheet’ at January 1, 2004. AEGON will publish its condensed ‘opening balance sheet’ and results for 2004 on an IFRS basis on April 14, 2005. The information that will be published
will include a balance sheet at January 1, 2004 and at December 31, 2004, both presented on an IFRS basis, quarterly results per line of business by reporting segment on an IFRS basis, as well as reconciliations from DAP to IFRS for shareholders’ equity and net income.
Certain amounts in prior years have been reclassified to conform to the current year presentation. AEGON N.V. announced on January 14, 2004, that its subsidiary Transamerica Finance Corporation (TFC) closed on the sale of most of TFC’s commercial lending business to GE Commercial Finance, the business-to-business financial services unit of the General Electric Company. The agreement and its details were announced on August 5, 2003. The total payment of USD 5.4 billion resulted in an after tax gain of USD 204 million under Dutch Accounting Principles, which was added to shareholders’ equity in 2004.
On October 20, 2004, AEGON announced that AEGON-CNOOC Life Insurance Company Ltd., the 50/50 joint venture of AEGON with the Chinese National Offshore Oil Corporation (CNOOC), signed a national cooperation agreement with the Agricultural Bank of China. The Agricultural Bank of China (ABC) is one of the 'Big Four' banks in the People’s Republic of China. Through this agreement, AEGONCNOOC will provide a broad range of life and accident and health insurance services to ABC's extensive customer base. ABC will provide AEGON-CNOOC with payment and cash management services.
On October 28, 2004, AEGON announced the expected sale of the maritime container leasing business and the sale of the European trailer leasing business by its subsidiary TFC. On November 4, 2004, AEGON announced that TFC had sold its maritime container leasing business to TAL International Group, Inc. for a purchase price of USD 1.2 billion. AEGON has provided interim financing of USD 275 million, which will be repaid within one year of the closing. AEGON used the net proceeds to redeem debt. The maritime container leasing activities represent approximately USD 1.1 billion in assets. On February 16, 2005, AEGON announced the sale of the European trailer leasing business of TFC to Goldman Sachs and Cerberus Capital Management. The financial effect of these divestitures, which under DAP was booked in shareholders’ equity in 2004, was not material.
On December 30, 2004, AEGON announced that it had entered into an agreement to sell AEGON Seguros Generales, its general insurance subsidiary in Spain, to Italian mutual insurance company Reale Mutua Group, effective January 1, 2005. The price of the sale is approximately EUR 250 million and will be fixed at completion. The transaction will result in a book profit of approximately EUR 130 million after tax. The sale is subject to regulatory approval and is expected to be completed in the second quarter of 2005.
On February 1 1, 2005, AEGON announced that it had reached agreement with Dexia and Banque Internationale à Luxembourg S.A. resolving a dispute over the sale of Labouchere to Dexia in 2000. AEGON agreed to pay EUR 218 million in cash in full and final settlement of all and any claims in this regard. The settlement amount was recognized as an exceptional item in the 2004 results.
All group companies have been included in the consolidated financial statements of AEGON N.V., except for some group companies whose aggregate financial effect is relatively insignificant. Consolidated entities also include special purpose entities set up in connection with the sale of investment products in the United States. Participations in joint ventures have been consolidated proportionally.
Minority interests are included under Other current liabilities as the amounts involved are insignificant. A list of names and locations of the most important group companies is provided on page 137. With regard to the income statements of AEGON N.V., article 402, Book 2 of the Dutch Civil Code has been applied, allowing a simplified format.
Unless otherwise stated, balance sheet items are carried at face value. If necessary, provisions for expected future losses on investments and for bad and doubtful debts are deducted.
Provisions for future losses on fixed income investments (bonds, mortgage loans and private placements) are established for expected defaults or other credit-related issues. The provisions reflect management’s judgment on possible defaults and are based upon a variety of factors, including expectations for long-term default rates and pricing assumptions.
For bonds and private placements, industry sectors and individual debt investments are monitored regularly for signs of impairment, including the length of time and extent to which the market value has been less than cost, industry risk factors, financial condition and near-term prospects of the issuer, and rating changes of locally recognized credit rating agencies. Additionally, cash flow trends and underlying levels of collateral are monitored for asset-backed securities and loans. A specific security or loan is considered to be impaired when it is determined that it is probable that not all amounts due (both principal and interest) will be collected as scheduled. Consideration is also given to management’s intent and ability to hold a security or loan until maturity or until market value will recover.
Credit risk on mortgages is monitored by assessing delay of payment classification combined with a related level of provision. Other asset provisions are formed when credit risk emerges. Assets identified as potential credit risks are monitored and placed on a watch list. Discussions about the assets on the watch list are held on a regular basis to determine necessary updates.
Real estate is shown at market value, which is the selling value under normal market circumstances. Each property is valued at least once in every five-year period. Valuation is largely based on external appraisal. In 2004 80% of the portfolio was valued. New property is valued at construction cost including interest during the construction period, or at purchase price.
The purchase price of the portfolio amounts to EUR 1,654 million (2003: EUR 1,591 million).
Shares, non-redeemable preferred shares and convertible debentures reported under this caption are valued at their quoted price or, if unquoted, at estimated market value. Unrealized gains and losses on shares are recognized in the revaluation account, taking into account (deferred) taxes. Realized gains and losses are recognized in the income statement when realized.
Unless a loss is considered a default loss, realized gains and losses from transactions within the bond and private placement portfolios are deferred and released to the income statements in annual installments over the estimated average remaining maturity term of the investments sold. In the United States a reduction in the carrying value is made for bonds which are in default or have experienced a significant downgrade in their credit rating or a significant decline in their market value. Such reductions are charged against the bond default provision. In the other countries the provision is accrued until the receivable has legally ceased to exist.
The carrying value and market value of bonds and other fixed rate securities by contractual maturity at December 31, 2004, are as follows: Carrying Market value value
For a proper understanding it should be noted that the market value is not part of the matching of these investments with the related insurance liabilities, which are not stated at market value either. The doubtful debts provision for bonds and other fixed rate securities not yet written down amounts to EUR 81 million (2003: EUR 194 million).
Bonds and other fixed rate securities lent out are included and amount to a carrying value of EUR 8,905 million (2003: EUR 3,784 million).
The market value of the portfolio amounts to EUR 16,401 million (2003: EUR 18,01 1 million). As no market exists for these investments, market value is calculated based on current interest rate, maturity and risk assumptions. For a proper understanding it should be noted that this market value is not part of the matching of these investments with the related insurance liabilities, which are not stated at market value either.
The carrying value and market value of the private placements by contractual maturity at December 31, 2004, are as follows: Carrying Market value value
This item relates to amounts that can be called up after a minimum period of one year. Market value of the deposits is equal to book value.
This item represents debentures related to reinsurance contracts that are not at free disposal. Market value of deposits with ceding undertakings is equal to book value.
Carrying value of bonds, fixed rate securities and private placements with gross unrealized losses Gross unrealized losses
Bonds and other fixed rate securities 194 146 (146) (113) 81
Investments for account of policyholders and insurance-linked savings deposits are investments of which the investment risk is borne by the policyholders. They are valued at market value. Separated investments for group life contracts with full profit sharing are valued according to the terms of the related contracts. For more information refer to note 15 on page 107. The total return of these investments is accounted for in the technical account life insurance on a separate line.
BALANCE AT DECEMBER 31 104,873 100,089 6 RECEIVABLES OUT OF DIRECT INSURANCE
The provision for doubtful debts for these receivables amounts to EUR 106 million (2003: EUR 135 million).
Other receivables mature within one year. The provision for doubtful debts for other receivables amounts to EUR 1 1 1 million (2003: EUR 43 million).
For an explanation of the prepaid pension costs on employee plans, refer to page 1 18.
For the notes to the share capital, reserves, stock appreciation rights and stock options, refer to page 140 and following.
EUR 950 million, coupon date October 15, January 15, April 15, July 15 2014 950 —
The coupon of the Euro tranches of the perpetual capital securities is based on the yield of 10-year Dutch government bonds plus an additional spread of 10 basis points. The coupon will be reset each quarter based on the then prevailing 10-year Dutch government bond yield, with a maximum of 8.0%. The coupon of the US dollar tranches of the perpetual capital securities is based on the yield of 10-year USD interest rate swaps plus an additional spread of 10 basis points. The coupon is reset each quarter based on the then prevailing 10-year USD interest rate swap yield, with a maximum of 8.5%.
The securities have been issued at par. The securities have subordination provisions and rank junior to all other liabilities. The conditions of the securities contain certain provisions for optional and required coupon payment deferral. Any deferred coupon payment (with accrued interest on the deferred coupon payment, if applicable) will be satisfied from the proceeds of such amount of ordinary shares as required to make the payment in full. Although the securities have no stated maturity, AEGON has the right to call the securities for redemption at par for the first time on July 15, 2014 or on any coupon payment date thereafter.
TOTAL PERPETUAL CUMULATIVE SUBORDINATED BONDS 1,517 1,517 1Year of first call.
Although the bonds have no stated maturity, AEGON has the right to call the bonds for redemption at par for the first time on the coupon date in the years as specified above. AEGON has the right to call the bonds for redemption at par on every tenth year thereafter on the coupon date, with the exception of the EUR 700 million 67⁄8% bond. This bond is callable every year on the coupon date after the initial call date in 2005.
USD 225 million 713⁄20% Capital Trust Pass-through Securities 1996/2026 165 178
Capital Trust Pass-through Securities (TRUPS) are securities through which the holders participate in a trust. The assets of these trusts consist of junior subordinated deferrable interest debentures of Transamerica Corporation. The trusts have been included in the consolidated financial statements. The TRUPS carry certain provisions with regard to deferral of distributions. Earlier redemption is possible for the USD 100 million 74⁄5% TRUPS on or after December 1, 2006.
These loans are subordinated to all other liabilities and borrowings. The interest rates vary from 6.51% to 8.18%. The market value of these loans amounts to EUR 279 million (2003: EUR 495 million).
NOTES TO THE CONSOLIDATED BALANCE SHEETS Amounts in EUR millions 14 TECHNICAL PROVISIONS Exchange
NON-LIFE INSURANCE: Unearned premiums and unexpired risks 1,681 205 (121) 1,765
PROFIT SHARING AND REBATES 306 324 1Of which the balance of deposits and withdrawals is EUR (2,161) million. 2Of which the balance of deposits and withdrawals is EUR 1,037 million.
The provision for life insurance represents the present value of future benefits to be paid to or on behalf of policyholders and related expenses less the present value of future net premiums. The provision is calculated using actuarial methods that include assumptions such as estimates of premiums, mortality, investment performance, lapses, surrenders and expenses. These assumptions are initially based on best estimates of future experience at the policy inception date, in some instances taking into account a margin for the risk of adverse deviation. The assumptions used are regularly reviewed, compared to actual experience and, if necessary depending on the type of products, updated.
The technical provision for life reinsurance assumed is included in this provision as well and amounts to EUR 2,409 million (2003: EUR 2,404 million).
The average interest rate used is 4.96% (2003: 5.18%). Taking into account the capitalized interest rate rebates, the average interest rate used is 5.12% (2003: 5.38%).
In various countries products are sold that contain minimum guarantees. For these products the regular technical provision is recognized under technical provisions with investments for account of policyholders. The technical provision life insurance includes provisions for guaranteed minimum benefits related to contracts where the policyholder otherwise bears the investment risk. The main guarantees are summarized below: Amounts in millions 2004 2003
Guaranteed minimum benefits on variable products in the United States USD 217 203
The GMDB liability is determined each period end by estimating the expected value of death benefits in excess of the projected account balance and recognizing the excess ratably over the accumulation period based on total expected assessments. AEGON regularly evaluates estimates used and adjusts the additional liability balance, with a related charge or credit to benefit expense, if actual experience or other evidence suggests that earlier assumptions should be revised. The assumptions used in estimating the liability as of December 31, 2004, are consistent with those used for amortizing DPAC, including the mean reversion assumption. The assumptions of investment performance and volatility are consistent with historical experience. The benefits used in calculating the liabilities are based on the average benefits payable over a range of scenarios.
The GMIB liability is determined each period end by estimating the expected value of the annuitization benefits in excess of the projected account balance at the date of annuitization and recognizing the excess ratably over the accumulation period based on total expected assessments. AEGON regularly evaluates estimates used and adjusts the additional liability balance, with a related charge or credit to benefit expense, if actual experience or other evidence suggests that earlier assumptions should be revised. The assumptions used for calculating the GMIB liability as of of December 31, 2004, are consistent with those used for calculating the GMDB liability. In addition, the calculation of the GMIB liability incorporates a percentage of the potential annuitizations that may be elected by the contract holder.
The account balances at December 31, 2004, consist of fixed rate, fixed maturity contracts (45%), floating rate, indeterminate maturity contracts (30%), floating rate, fixed maturity contracts (22%), and market indexed, fixed maturity contracts (3%). Most of the fixed rate contracts are swapped to floating rate via swap agreements. Credited interest on floating rate contracts is reset mostly on a monthly basis based on various indices. Indeterminate maturity contracts allow the customer to withdraw funds with advance notice periods ranging from three to 13 months without a withdrawal penalty. Market indexed contracts provide a return based on the market performance of a designated index, such as the S&P 500. Futures or swap contracts are used to hedge the market risk and effectively convert the contracts to a floating rate.
Major components of GICs and funding agreements are summarized as follows: Liabilities for GICs and funding agreements: Guaranteed investment contracts issued to defined contribution/benefit plans 3,039 3,386
The municipal/governmental funding agreements generally include clauses pursuant to which, should various downgrade events be triggered, one of the following four options must be followed: — transfer contract to a higher rated party — purchase a credit enhancement — collateralize the underlying position — pay the contract out at book value
These options are negotiated with the customer at contract issuance but AEGON unilaterally retains the ultimate decision-making capability in the event of a downgrade. Available collateral is monitored to ensure the company would be able to utilize this option at its discretion.
For fixed premium products, DPAC are amortized to the income statement in proportion to the premium revenue recognized. The amortization of DPAC is based on management’s best estimate assumptions established at policy issue, including assumptions for mortality, lapses, expenses and investment returns. A margin for adverse deviation is included in the assumptions. DPAC are tested by country unit and product line to assess recoverability at least annually. The portion of DPAC that is determined to be not recoverable will be recognized as an expense in the income statement in the period of determination.
In the United States (and Canada), DPAC are amortized at a constant rate based on the present value of the estimated gross profit amounts expected to be realized over the life of the policies. If appropriate, the assumptions included in the determination of estimated gross profits are adjusted. A significant assumption related to estimated gross profits on variable annuities and life insurance products is the annual net long-term growth rate of the underlying assets. As equity markets do not move in a systematic manner, assumptions are made as to the net long-term growth rate after considering the net effects of short-term variances from the long-term assumptions (a ‘reversion to the mean’ assumption). At December 31, 2004, the reversion to the mean assumptions for variable products, primarily annuities in the United States, were as follows: gross long-term equity growth rate of 9% (2003: 9%), gross short-term growth rate of 6.25% (2003: 7.5%), the reversion period for the short-term rate is five years, the gross short and long-term fixed security growth rate was 6% and the gross short and long-term growth rate for money market funds was 3.5%. For Canada these assumptions, at December 31, 2004, were as follows: gross long-term equity growth rate of 9% (2003: 9.5%), gross short-term growth rate was 10.75% (2003: 10.75%). The reconsideration of assumptions may affect the original DPAC amortization schedule, referred to as DPAC unlocking. The difference between the original DPAC amortization schedule and the revised schedule, which is based upon estimates of actual and future gross profits, is recognized in the income statement as an expense or a benefit in the period of determination.
BALANCE AT DECEMBER 31 3,617 4,110 1Mainly caused by currency exchange rate differences.
Unearned premiums represent the unearned part of premiums received for both property and casualty insurance and for accident and health insurance. The provision for unexpired risks includes a provision to compensate for the increasing age of persons insured under health and personal accident policies.
These policy acquisition costs are costs that are directly or indirectly related to the conclusion or renewal of non-life insurance contracts. The DPAC are deducted from the technical provision for unearned premiums and include both renewal commission paid related to unearned premiums, amortized over the related premium period, and first year commission on health insurance policies, amortized over the contract period.
The provision for claims outstanding relates to claims incurred in the current and previous years, still unsettled at year-end. Calculation takes place either on an item by item basis or on the basis of statistical information, taking into account claims incurred but not yet reported. In calculating the provision, the future costs of processing claims are considered.
INVESTMENT RISK AND FOR INSURANCE-LINKED SAVINGS DEPOSITS 100,089 8,532 (3,748) 104,873
This provision includes variable annuities, variable universal life, unit-linked insurance contracts, separate investment funds group life, insurance-linked savings deposits and the liabilities of AEGON UK with-profit funds (EUR 22,648 million). The amount of EUR 8,532 million debited to the income statement is the total of premium receipt and benefits of EUR 48 million and the investment income for account of policyholders amounting to EUR 8,484 million.
The provisions are generally shown at book value of the related investments. The provisions include an amount of EUR 1,503 million (2003: EUR 1,465 million) for pension provisions regarding own employees, primarily in the Netherlands and the United Kingdom.
NOTES TO THE CONSOLIDATED BALANCE SHEETS Amounts in EUR millions 16 PROVISIONS
Tax losses carried forward not recognized within deferred tax assets (252) (201)
Tax losses carried forward as at December 31, by terms of expiration: Up to five years 185 76
17 LONG-TERM LIABILITIES Remaining terms less than between between over Total Total 1 year 1-3 years 4-5 years 5 years 2004 2003
CAPITAL MARKET: OTHER: The repayment periods of borrowings vary from in excess of one year up to a maximum of 50 years. The coupons vary from 1.49% to 10% per annum. Borrowings include debenture loans for EUR 2,733 million. The market value of total long-term liabilities amounts to EUR 4,488 million (2003: EUR 5,053 million).
USD 250 mln 73⁄8% Eurobonds (AEGON Funding Corp.) 2000/05 July 25 172 198
USD 250 mln floating rate senior notes 2003/05 Quarterly 184 198
Other (including swaps)1 799 745 1Of which EUR 37 million relate to AEGON N.V. (2003: EUR (58) million).
Gross premiums, including recurring and single premiums, from all types of life insurance, both general account and with investments for account of policyholders, incoming life reinsurance and non-life insurance are recognized as revenues when they become receivable. Premiums to reinsurers have not been deducted. Not reflected as premium revenues are deposits from certain products that are sold in the United States and Canada such as deferred annuities, immediate annuities without life contingency and GICs and funding agreements. For these products the surrender charges and charges assessed have been included in gross premium life insurance.
Leasing revenues are earned on service, rental and term operating leases. Rental revenues are recognized in the period billed. Revenues from service contract minimum and term leases are recognized on a straight-line basis over the lease term, initial direct costs are amortized on a straight-line basis over the lease term.
AEGON is involved in both ceded and assumed reinsurance. This includes separate life reinsurance operations as well as within the life and non-life operations ceded and assumed reinsurance agreements to spread risk and to limit exposure on large risks. Premiums for reinsurance assumed are included in premium revenues, premiums for reinsurance ceded are shown separately as a charge on the face of the income statement.
The effects of reinsurance on premiums are: Life Non-life Total Life Non-life Total Life Non-life Total 110 AEGON ANNUAL REPORT 2004
NOTES TO THE CONSOLIDATED INCOME STATEMENTS Amounts in EUR millions 21 ANALYSIS OF PREMIUMS LIFE INSURANCE (CONTINUED)
NON-LIFE INSURANCE Legal transport Accident liability Other and General Other & health motor motor aviation Fire liability branches Total
RESULT TECHNICAL ACCOUNT NON-LIFE 293 4 26 1 58 8 7 397
Investment income allocated to the non-technical account (12) (4) (1) (1) (2) (1) (2) (23)
The combined ratio is the sum of the ratio of net incurred claims to net premiums earned and the ratio of net commissions and expenses to premiums own account. Although a ratio over 100% suggests a loss, the ratio does not include investment income. With the inclusion of investment income in the calculation, all of AEGON’s major product lines were profitable during the periods presented.
Interest on liquid assets and other 13 3 0 16 1Of which allocated internal rent for real estate for AEGON’s own use is EUR 8 million (2003: EUR 1 1 million and 2002: EUR 14 million), based on current market conditions.
NOTES TO THE CONSOLIDATED INCOME STATEMENTS Amounts in EUR millions 24 FEES AND COMMISSIONS NonLife Non-life technical Total
Other fee and commission income 8 301 — 309 25 INCOME FROM BANKING ACTIVITIES
Commissions and profit sharing from reinsurers (247) (134) — (381) Banking and other activities — — 140 140
Technical and non-technical accounts include the following: Other social security charges 196 208 205
The liabilities related to the various stock appreciation right plans are valued at market value and are included in other payables. The value was estimated using the binomial option pricing model, taking into account the period of time until the vesting date, the remaining period of time until maturity and the expected decreasing number of entitled employees. At the balance sheet date, market value of the 2004, 2003, and 2002 plans amounted to EUR 35 million (2003: EUR 20 million). The change in market value is recognized in other expenses and amounted to EUR 15 million for 2004 (2003: EUR 20 million and 2002: nil).
In the other countries pension costs are fully charged to the income statements in the years in which they are earned by the employees.
REMUNERATION OF ACTIVE AND RETIRED MEMBERS OF THE EXECUTIVE BOARD Amounts in EUR thousands Performance related
J.G. van der Werf (as of April 18, 2002) 3645 — — — 36 400 1Mr. Shepard earns a salary of USD 1 million.
3All the members of the Executive Board have opted for payment of half of the cash value of their 2003 STI bonus in AEGON N.V. common shares, which shares are restricted (non-transferable) for a period of three years. The number of shares for each member was: Mr. Shepard 16,143, Mr. Streppel 12,409, Mr. Van der Werf 12,409 and Mr. Wynaendts 8,771. After the three-year holding period, the Executive Board members will be entitled to bonus shares, provided that they are still employed by AEGON. The number of bonus shares will be calculated through performance based matching, on the basis of earnings per share growth over inflation in the preceding three years, i.e. 2004, 2005, and 2006. The number of bonus shares can vary from 0% to 100% of the number of shares shown in front of this.
4In addition to the Short Term Incentive plan, Mr. Shepard earned a short-term incentive for the period until April 18, 2002, related to the earnings increase of AEGON USA in 2002, which was paid in 2003. As of April 18, 2002, Mr. Shepard is entitled to an annual incentive equal to 0.1% of the net income of AEGON N.V., for the first time for the financial year 2002 (paid in 2003). The relevant amounts have been paid in US dollars and are recognized above in euro against the weighted average exchange rate.
In accordance with the 2004-2006 Long Term Incentive plan, AEGON common shares and options were conditionally granted in December 2004 over the year 2004 to each of the Executive Board members, which following the plan criteria will not vest until 2006 and are conditional upon the attainment of the agreed performance. The numbers of these performance shares and performance options are: Shares Options
STOCK OPTIONS INCLUDING STOCK APPRECIATION RIGHTS AND INTERESTS IN AEGON N.V.
Stock options Exercise Exercise Market options Exercise held in Balance at price price price Balance at price AEGON at January 1 EUR Granted EUR Lapsed Date EUR December 31 EUR December 31
2. Should the AEGON share price performance achieve a top three position, each Executive Board member would receive 200,000 rights. Should this share price performance finish in the middle group (of four companies), each Executive Board member would earn 100,000 rights. Should the share price performance rank in the bottom group (three companies), 50,000 rights would be granted.
3. If there is no increase in earnings per share, no rights will be granted.
At the balance sheet date, the following members of the Executive Board had loans with AEGON or any AEGON related company: Mr. Streppel had a 5% mortgage loan of EUR 680,700, Mr. Van der Werf had a mortgage loan of EUR 1,240,000 at a 2.85% floating rate at year-end and Mr. Wynaendts had two mortgage loans totaling EUR 635,292, with interest rates of 3.9% and 4.1% respectively. In accordance with the terms of these contracts, no principal repayments were received on these loans in 2004. The terms of these loans have not been amended.
In the employment contracts with the current Executive Board members, the following specific severance payment arrangements regulate their entitlements in the event AEGON terminates their membership on the Executive Board.
Termination of employment of Mr. Shepard by AEGON other than for urgent cause, death, disability, voluntary resignation or retirement, shall entitle Mr. Shepard to three years’ base salary. In addition, he shall be entitled to receive an amount equal to the aggregate shortterm incentive compensation he received during the three years prior to the termination. In such a case, the other Executive Board members have no specific financial arrangement.
In the event of termination of employment by AEGON in connection with a merger, takeover or fundamental changes of policy and related organizational amendments or by Mr. Shepard in the event his responsibilities or position are diminished by such circumstances, AEGON will pay Mr. Shepard compensation in the amount of three years’ base salary. Furthermore, he shall be entitled to receive an amount equal to the aggregate STI compensation he received during the three years prior to the termination and such severance payments shall be taken into account in determining the amounts payable to Mr. Shepard under his AEGON USA Supplemental Executive Retirement Plan and three additional years of service will be credited for the purpose of calculating his benefit thereunder. Mr. Streppel would be entitled to compensation according to the ‘Zwartkruis formula’, which means that the severance payment would be calculated on the basis of and depending on age, years of service, functional level and the probability of finding an equivalent position. Messrs. Van der Werf and Wynaendts would be entitled to three years’ fixed salary, only in case of termination in connection with a merger or takeover.
H. de Ruiter (up to April 22, 2004) 14,137 — —
The effective tax rate for 2004 was 24% compared to 32% for 2003. The decline primarily reflects higher realized gains on tax preferred investments in the Netherlands and a one-time reduction in taxes related to the repatriation of accumulated earnings from Canada to the United States pursuant to the America Jobs Creation Act. The low effective tax rate of 11% in 2002 was largely due to a reduction of the deferred tax liability, favorable adjustments resulting from the filing of the 2001 corporate tax returns in the United States, lower taxable income relative to tax preferred investments and tax-exempt income in the Netherlands and the United States, and the use of tax losses in the United Kingdom.
The statutory tax rates on profits are as follows: In the Netherlands the statutory tax rate reduced to 31.5% as of January 1, 2005. The tax rate will further reduce in 2006 to 30.5% and to 30% in 2007.
Based on profits earned for the year, a nominal tax charge at 34.0% on profits (2003: 33.6%) would be expected. The following is a reconciliation of the tax charge based on nominal rates to the tax charge based on effective rates: Statutory tax rate 735 398 (142)
Amounts paid in cash in 2004 for income taxes totaled EUR 187 million (2003: EUR 365 million and 2002: EUR 31 1 million).
NOTES TO THE CONSOLIDATED INCOME STATEMENTS Amounts in EUR millions 34 NET INCOME PER SHARE
AEGON’s capital base reflects the capital employed in insurance activities and consists of shareholders’ equity, capital securities and dated subordinated and senior debt. AEGON manages its capital base to comprise at least 70% shareholders’ equity, at least 5% capital securities, and a maximum of 25% subordinated and senior debt.
The required solvency margin shown below is the sum of the individual margins of all AEGON’s insurance and banking companies based on European directives implemented in Dutch legislation. Liability capital available includes shareholders’ equity, capital securities and subordinated loans of the group. The solvency position of the group has been outlined in the following table: Liability capital of the group 17,879 16,324
AEGON is subject to legal restrictions on the amount of dividends it can pay to its shareholders. Under Dutch law the amount that is available to pay dividends consists of total shareholders’ equity less the issued and outstanding capital and less the reserves required by law. At December 3 1, 2004, the issued and outstanding capital is EUR 243 million, the reserves required by law amount to EUR 1,448 million and EUR 12,722 million is available for dividends. However, certain of AEGON’s subsidiaries, principally insurance companies, are subject to restrictions on the amount of funds they may transfer in the form of cash dividends or otherwise to their parent companies. While management does not believe such restrictions on AEGON’s subsidiaries will affect its ability to pay dividends in the future, there can be no assurance that these restrictions will not limit or prevent AEGON from doing so.
• Forward rate agreements/futures are commitments to purchase or sell a financial instrument at a future date for a specific price.
• A forward foreign exchange contract is an agreement that obligates its parties to purchase/sell a predetermined amount of foreign currency at a specified exchange rate at a specified future date.
• Credit derivatives are contracts between two parties that allow for transfer of credit risk from one party to another. The party transferring the risk has to pay a fee to the party that assumes the risk.
• Credit derivatives are also used to add credit risk by selling credit protection in the form of single name credit default swaps and AAA rated tranches of synthetic collateralized debt obligations. Another strategy is to synthetically replicate corporate credit exposures with credit derivatives. This involves the purchase of high quality low risk assets and the sale of credit derivatives. The program is designed to purchase credits that are already subject to review by the bond credit desk but may not be available under the same terms and conditions in the cash bond market.
AEGON engages in both exchange-traded derivatives contracts as well as over-the-counter (OTC) derivatives transactions. Because of its OTC derivatives positions, AEGON is exposed to counterparty credit risk. Counterparty credit risk is the risk of loss from a counterparty failing to meet its obligations according to the terms of the contract. AEGON continually monitors its position and the credit ratings of the counterparties to these derivative instruments. AEGON believes the risk of loss due to nonperformance by its counterparties is low due to its counterparties’ high credit quality. All OTC transactions are governed by ISDA Master Agreements, which allow for netting of positions with one specific counterparty.
The following table represents aggregate notional amounts of derivatives, held in the general account portfolio. The amounts listed for interest rate contracts will not be exchanged by parties and, thus, do not reflect an exposure of the company to market movements. The amounts listed for cross currency swaps will be exchanged at amounts calculated on the basis of the notional amounts and the terms of the derivatives, which are related to interest rates, exchange rates and/or certain indices.
Notional Market Book Notional Market Book amounts value value amounts value value
Under non-cancelable operating lease contracts for office buildings, future minimum lease payments amount to: Less than one year 100 77
A significant portion of operating leases is for agency and administration offices.
Standby letters of credit amounts reflected above are the liquidity commitment notional amounts. Guarantees further include guarantees given on account of asset management commitments. In this regard, besides the guarantees shown in the table, guarantees have been given for fulfillment of contractual obligations.
As part of its core operations, AEGON concludes transactions and has relationships with institutional and retail customers for a variety of financial services. The return for these services is a fee related to the asset value, to the investment performance or to the risk exposure of the contract. The services include: • management of investments for institutional investors; and
AEGON Levensverzekering N.V. has four publicly placed and two privately placed securitization programs outstanding with a total size of EUR 4.7 billion.
In 2004, AEGON Levensverzekering N.V. completed one publicly placed securitization transaction whereby the economic ownership of EUR 1.1 billion of aggregate mortgage receivables was conveyed to a special purpose company. This company funded this purchase with the issuance of mortgage-backed securities. The transfer of the ownership title will take place upon notification of the borrowers by either AEGON or the special purpose company. The special purpose company has the right to notify the borrowers upon the occurrence of certain predefined ‘notification events’. A first ‘undisclosed’ right of pledge on the mortgage receivables was given to the special purpose company. At the same time AEGON entered into a fixed-floating swap agreement with the contract parties under which AEGON agreed to pay the floating rate (EURIBOR based) and receive the fixed rate (scheduled yield from the mortgage receivables). For the transaction, after a period of seven years, the interest of the notes issued by the special purpose company will step-up, together with a similar step-up in the fixed-floating swap agreement. At this time, the special purpose company has the right to call the notes.
AEGON and some of its subsidiaries and affiliates are involved in litigation in the ordinary course of business, including litigation where compensatory or punitive damages and mass or class relief are sought. The outcome of litigation is, at times, unpredictable. It is management’s opinion, after consultation with legal counsel, that damages arising from such litigation will not have a material adverse effect on either the financial position or the results of operations.
770 (305) Realized gains and losses on shares and real estate 619 (270)
19,931 26,262 (24) TOTAL PRODUCTION OFF BALANCE SHEET 16,027 23,218 (31)
Realized gains and losses on shares and real estate 276 (74) 222 (65)
Life general account recurring premiums 5,002 4,747 5 4,022 4,197 (4)
Life policyholders account single premiums2 651 522 25 524 461 14
Total life insurance gross premiums 8,104 6,964 16 6,517 6,157 6
Accident and health insurance premiums 2,541 2,508 1 2,043 2,217 (8)
TOTAL PRODUCTION ON BALANCE SHEET 18,129 21,002 (14) 14,578 18,568 (21)
1 Includes also variable annuities and fee business. 2Effective January 1, 2004, for reasons of consistency, additional variable universal life premiums, in the past recognized as single premiums, have been reclassified to renewal premiums.
of which general account 260 252 3 of which policyholders account1 70 31 126
1 Includes also fee business. 2 Includes income on off balance sheet type products. 3Reflected in the column total year 2004 is a reclassification of EUR 62 million from general account recurring premiums to policyholders account recurring premiums relating to Q1 2004.
ON SHARES AND REAL ESTATE 151 130 16 222 188 18
Investment income for account of policyholders 2,799 3,383 (17) 4,122 4,897 (16)
TOTAL PRODUCTION OFF BALANCE SHEET 143 332 (57) 210 481 (56)
Life for account of policyholders 8 5 60 0 (4) (3) (15) 80
LOSSES ON SHARES AND REAL ESTATE 53 66 (20) 65 35 86 (9) (25) 64
Realized gains and losses on shares and real estate 15 1 1 (2) (2) 2
Life general account recurring premiums 72 75 (4) 79 60 32 584 447 31
Life policyholders account single premiums 1 5 (80) 7 11 (36) 0 4
Life policyholders account recurring premiums 75 63 19 20 22 (9) 18 131 (86)
Total life insurance gross premiums 149 144 3 122 104 17 604 583 4
Investment income for account of policyholders 25 6 10 17 (41) 0 31
TOTAL PRODUCTION ON BALANCE SHEET 0 0 0 0 12 0
Mutual funds and other managed assets 204 160 28 0 5 0 0
TOTAL PRODUCTION OFF BALANCE SHEET 204 160 28 0 5 0 0 1 Includes also fee business.
AT DECEMBER 31, 2004 in USD in EUR in GBP in EUR in EUR total
High yield (BB+ or less) 7,088 97 0 6 5,307 5
AEGON’s most important group companies (100% owned unless indicated otherwise) are as follows.
AEGON Bank N.V., Utrecht AEGON Financiële Diensten B.V., The Hague AEGON International N.V., The Hague AEGON Levensverzekering N.V., The Hague AEGON NabestaandenZorg N.V., Groningen AEGON Nederland N.V., The Hague AEGON Schadeverzekering N.V., The Hague AEGON Spaarkas N.V., The Hague AEGON Vastgoed Holding B.V., The Hague Meeùs Groep B.V., Amersfoort Spaarbeleg Kas N.V., Utrecht TKP Pensioen B.V., Groningen
AEGON Asset Management UK plc, London AEGON UK Distribution Holdings Ltd., London AEGON UK plc, London Guardian Assurance plc, Lytham St Annes Guardian Linked Life Assurance Limited, Lytham St Annes Guardian Pensions Management Limited, Lytham St Annes HS Administrative Services Limited, Chester Scottish Equitable International Holdings plc, London Scottish Equitable plc, Edinburgh
AEGON Hungary Composite Insurance Company Rt., Budapest (Hungary) AEGON España S.A., Madrid (Spain) (99.98%) AEGON Lebensversicherungs-AG, Düsseldorf (Germany) AEGON Life Insurance (Taiwan) Inc., Taipei (Taiwan)
BALANCE SHEETS OF AEGON N.V. AT DECEMBER 31 Amounts in EUR millions
NOTES TO THE BALANCE SHEETS OF AEGON N.V. Amounts in EUR millions
Vereniging AEGON, based in The Hague, holds all of the issued preferred shares. AEGON N.V. and Vereniging AEGON have amended the option arrangements under the 1983 Merger Agreement. Under the amended option arrangements Vereniging AEGON, in case of an issuance of shares by AEGON N.V., has the right to have issued to it as many class B preferred shares as shall enable Vereniging AEGON to prevent or correct dilution to below its actual percentage of total voting shares. Class B preferred shares will then be issued at par value (EUR 0.25), unless a higher issue price is agreed. In 2003, Vereniging AEGON exercised its option rights to purchase in aggregate 1 1,100,000 class B preferred shares at par value to correct dilution caused by AEGON‘s stock dividend issuances and treasury stock sales during the year. In 2004, Vereniging AEGON exercised its option rights to purchase in aggregate 5,800,000 class B preferred shares at par value to correct dilution caused by AEGON’s stock dividend issuances and treasury stock sales during this year.
In both 2001 and 2002, AEGON N.V. entered into Total Return Swaps (TRSs) with Vereniging AEGON in order to hedge the stock option plan for the respective years. The TRSs give AEGON N.V. the right to the capital gains on AEGON N.V. shares (1 1.3 million for the 140 AEGON ANNUAL REPORT 2004
2001 TRS and 7.8 million for the 2002 TRS) at the termination date and to the dividends on these shares during the contract period. The capital gains are calculated based on an exercise price of EUR 32.04 for the 2001 TRS and EUR 26.70 for the 2002 TRS. Any losses compared to the exercise price will be paid by AEGON N.V. to Vereniging AEGON upon termination. AEGON N.V. in return will pay interest to Vereniging AEGON on a quarterly basis over the (remaining) amount outstanding under the TRSs. The interest rate is equal to the 3-month EURIBOR plus a spread. The 2001 TRS ends on March 12, 2006, and the 2002 TRS matures on March 1 1, 2009, but both swaps may be terminated earlier, either partly or entirely, at the option of AEGON N.V. The TRSs are carried at market value with changes in market value reported in equity.
In 2002, Vereniging AEGON and AEGON N.V. agreed to mark to market the existing TRS agreements that hedge the 2001 and 2002 share option and stock appreciation rights plans based on the EUR 10.04 closing price of AEGON N.V. shares on Euronext Amsterdam at September 17, 2002. This resulted in a payment to Vereniging AEGON of EUR 378.3 million.
The weighted average number of EUR 0.12 common shares over 2004 was 1,507,323,772 (2003: 1,476,499,310). The shares repurchased by AEGON, although included in the issued and outstanding number of shares, are excluded from the calculation of the weighted average number of shares. The number has been adjusted for stock dividend.
2 Weighted average exercise price of the outstanding options in USD calculated at the closing rate. 3 Including stock appreciation rights which do not entitle the holder to buy AEGON shares but provide the same financial benefits. 4 Stock appreciation rights which do not entitle the holder to buy AEGON shares but provide the same financial benefits; only employees in Canada were granted 364,400 stock options (2003: 438,200 and 2002: 263,100).
The market value of the stock appreciation rights and stock options granted during the year amounts to EUR 32 million at the grant date (2003: EUR 20 million and 2002: EUR 76 million). This value was estimated using the binomial option pricing model, taking into account the respective vesting and exercise periods of the stock appreciation rights and options. The liabilities related to stock appreciation rights are valued at market value at the balance sheet date. The change in value of the liabilities is recognized in the income statement under expenses.
The breakdown of the stock appreciation rights and stock options granted in 2004 is as follows: Executive Board 200,000, other senior executives 4,498,250 and other employees 6,876,600 (2003: nil, 4,350,500 and 7,096,800 and 2002: 150,000, 4,041,000 and 7,364,700 respectively). For detailed information about the Executive Board’s stock appreciation rights and options, refer to page 120.
SHAREHOLDERS’ EQUITY AS AT JANUARY 1 238 7,116 1,393 4,167 1,033 13,947 14,231
Unrealized gains and losses on shares and real estate 720 720 679
Reclass adjustment for gains and losses included in net income (619) (619) 270
The minimum amount of the revaluation account for the consolidated investments as required by law amounts to EUR 1,448 million (2003: EUR 1,393 million). The legal reserve for currency differences on foreign subsidiaries refers to accumulated translation differences amounting to EUR (1,477) million (2003: EUR (1,710) million) and is included in the other surplus fund.
Revaluation account at January 1 — as reported 2,093 2,040 581 558 2,674 2,598
Transferred to other surplus fund at January 1, 2004 (1,217) (1,860) (64) (196) (1,281) (2,056)
By virtue of acquisitions in accordance with article 98, paragraph 5 of Book 2 of the Dutch Civil Code, on the balance sheet date AEGON kept 25,232,494 of its own common shares with a face value of EUR 0.12 each. The shares have been purchased to hedge stock appreciation rights and option rights granted to executives and employees.
Purchase: 2 transactions on May 18 and September 24, average price EUR 9.88 7,466,660
Sale: 3 transactions April 1, April 22 and July 19, average price EUR 10.29 (9,663,508)
AEGON N.V. has guaranteed and is severally liable for the following: Due and punctual payment of payables due under Letter of Credit Agreements applied for by AEGON N.V. as co-applicant with its subsidiary companies AEGON USA, Inc., Commonwealth General Corporation and Transamerica Corporation (EUR 2,220 million). At December 31, 2004, there were no amounts due and payable.
M. Tabaksblat D.J. Shepard D.G. Eustace J.B.M. Streppel I.W. Bailey, II J.G. van der Werf R. Dahan A.R. Wynaendts O.J. Olcay T. Rembe W.F.C. Stevens K.J. Storm P. Voser L.M. van Wijk 144 AEGON ANNUAL REPORT 2004
Appropriation of profit will be determined in accordance with the articles 31 and 32 of the Articles of Incorporation of AEGON N.V. The provisions can be summarized as follows: 1. The General Meeting of Shareholders shall adopt the annual accounts.
4. The remaining profit shall be put at the disposal of the General Meeting of Shareholders. 5. The Executive Board may, subject to the approval of the Supervisory Board make one or more interim distributions to the holders of common shares and/or to the holders of preferred shares, the latter subject to the maximum dividend amount set forth under 3. 6. A distribution on common shares may take place as a cash payment or as a payment in common shares. In addition, the Executive
Board may, subject to the approval of the Supervisory Board, decide to give shareholders the option to elect to receive a distribution as a cash payment or as a payment in common shares. In all cases distribution will be made out of the profit and/or at the expense of reserves.
It is proposed to the annual General Meeting of Shareholders on April 21, 2005, to pay a dividend for the year 2004 of EUR 0.42 per common share of EUR 0.12 par value, which after taking into account the EUR 0.21 interim dividend, leads to a final dividend of EUR 0.21 per common share. It is also proposed that the final dividend will be made available entirely in cash or entirely in stock, at the option of the shareholder. The value of the stock dividend will be approximately 5% higher than the value of the cash dividend and will be paid out of the paid-in surplus fund. The period during which shareholders can elect is from April 25, 2005, up to and including May 2, 2005.
In accordance with article 32, paragraph 3 of the Articles of Incorporation, a dividend equal to 3.75% of the paid up amount of the preferred stock will be distributed in cash.
The objective of Vereniging AEGON is the balanced representation of the interests of AEGON N.V. and all of its stakeholders, including shareholders, AEGON group companies, insured parties, employees and other relations of the companies.
Sale of stock, offering price of EUR 10.6980 per share (3,372,040) — —
Accordingly, under normal circumstances the voting power of Vereniging AEGON, based on the number of outstanding and voting shares (excluding issued common shares held in treasury by AEGON N.V.) at December 31, 2004, amounts to approximately 22.8%. In the event of a ‘special cause’, Vereniging AEGON’s voting rights will increase to currently 32.35% for up to six months per ‘special cause’.
Vereniging AEGON has an Executive Committee consisting of seven members, five of whom, including the chairman and the vice-chairman, are not nor have ever been, related to AEGON. The other two members are also members of the Executive Board of AEGON N.V. When a vote in the Executive Committee results in a tie, the General Meeting of Members has the deciding vote.
Based on filings made with the SEC the following major shareholdings in AEGON N.V. are known as at December 31, 2004: • Capital International Group, Inc., parent company of several investment management companies, holds 96,440,510 common shares for account of third parties (6.2%); • Brandes Investment Partners, L.P., investment advisors, holds 90,203,735 common shares for account of third parties (5.8%).
We conducted our audit in accordance with auditing standards generally accepted in the Netherlands. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements give a true and fair view of the financial position of the company as at December 31, 2004, and of the result for the year then ended in accordance with accounting principles generally accepted in the Netherlands and comply with the financial reporting requirements included in Part 9, Book 2 of the Netherlands Civil Code.
The consolidated financial statements of AEGON N.V. have been prepared in accordance with Dutch accounting principles which differ in certain respects from those generally accepted in the United States (US GAAP). The following information is a summary of the effect on AEGON’s shareholders’ equity and net income of the application of US GAAP, which is included in further detail in the Form 20-F report filed with the Securities and Exchange Commission. The Form 20-F report is available on request, free of charge, and can also be retrieved from the EDGAR database of the SEC at www.sec.gov and via www.aegon.com
Adjustments for: Bonds and private placements — valuation 3,959 3,824 — — —
Realized gains and (losses) on shares and real estate — — 13 145 (150)
Reclassification adjustment for (gains) and losses included in net income (526) 7 1,193
Goodwill impairment charges are recorded on a US GAAP basis while goodwill is charged to equity on a Dutch accounting basis at the time of acquisition. The required annual goodwill impairment test under SFAS 142 was performed in the fourth quarter of 2004 and resulted in no goodwill impairment charge (2003: EUR 219 million). This impairment charge was reported as a 2003 US GAAP operating expense.
The following is a summary of differences between Dutch accounting principles and US GAAP which have an impact on reported shareholders’ equity or net income.
Under US GAAP real estate is carried at historical cost less accumulated depreciation and is adjusted for any impairment in value. Depreciation is provided over the estimated economic life of the property. Realized gains or losses and all other operating income and expense are reported in the income statement.
The adjustment shown in the reconciliation in the net income column represents the annual depreciation charge and the differences in results on disposals arising from the reversal of cumulative depreciation charges on the disposals under US GAAP.
Under US GAAP debt securities are classified in three categories and accounted for as follows: • debt securities that the company has the intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost; • debt securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at market value, with unrealized gains and losses included in earnings; • debt securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale securities and reported at market value, with unrealized gains and losses reported in shareholders’ equity.
The adjustment shown in the reconciliation in the shareholders’ equity column represents the difference between the amortized cost basis less write-downs for uncollectable amounts and the market value.
Under US GAAP realized gains and losses on sales of debt securities are recorded in the earnings of the period in which the sales occurred. Gains and losses, both realized and unrealized, on debt securities classified as trading are included in net income.
The adjustment shown in the reconciliation in the shareholders’ equity column represents the reclassification of the deferred results on the sale of bonds from liabilities to shareholders’ equity.
The adjustment in the reconciliation in the shareholders’ equity column and the adjustment in the reconciliation in the net income column include the effect of unlocking for DPAC on flexible premium products in the United Kingdom and the Netherlands and the difference in accounting for acquisition costs related to non-insurance investment type products related to 401(k) plans in the United States. Also included, in accordance with practice subsequent to the issuance of SFAS 115, is the adjustment of DPAC to reflect the change in amortization that would have been necessary if unrealized investment gains or losses related to debt securities had been realized. The effect on US GAAP equity related to SFAS 115 is EUR (1,371) million (2003: EUR (1,421) million).
Under Dutch accounting principles goodwill is charged to shareholders’ equity in the year of acquisition. Under US GAAP goodwill is capitalized and prior to January 1, 2002, goodwill was amortized over the expected periods to be benefited with adjustments for impairment, if necessary. For US GAAP accounting purposes goodwill was amortized over various periods, not exceeding 20 years for years prior to 2002. Goodwill was tested for impairment based on undiscounted cash flows.
The provision for life insurance comprises also the provision for unexpired risks as well as the provision for claims outstanding. In case the premium-paying period is shorter than the lifetime of the policy, a provision for future expenses is set up to cover any estimated future expenses after the premium-paying period. Future costs in connection with benefit payments are also provided for.
The Statement of Position 03-01 (SOP 03-01), issued by AcSEC, changed the provisioning for mortality on universal life contracts and for guaranteed living and death benefits on variable annuity and variable life contracts in the United States. AEGON USA has adopted this standard for both DAP and US GAAP as of January 1, 2004. The implementation mainly changed the timing of the recognition of mortality profits in earnings. For the purposes of comparison and as required under Dutch Law, the reported 2003 DAP net income and shareholders’ equity have been adjusted in the reconciliation to reflect the accounting adjustments to the 2003 reported results.
In the Netherlands Fundplan policies have a guaranteed return of 3% or 4% at maturity or upon the death of the insured if the premium paid for a consecutive period of ten years is invested in Mix Fund and/or Fixed Income Fund. For this guaranteed return, a provision is established based on stochastic modeling. The provision is developed applying the accrual method based on pricing assumptions less actual claims incurred. A corridor for the provision is determined regularly based on stochastic modeling methods. If the provisions develop outside the corridor, a charge or credit to the income statement is recorded. Minimum interest guarantees on group pension contracts in The Netherlands are given for nominal benefits, based on the 3% or 4% actuarial interest, after retirement of the employees. Due to the nature of the product, these guarantees have a long term horizon of about 30 to 60 years. The provision is developed applying the accrual method based on pricing assumptions less actual deductions.
As of January 1, 2004, AEGON no longer applies the indirect return method to its capital gains and losses on investments in shares and real estate. Under the new accounting principle the unrealized capital gains and losses are recognized in a revaluation reserve (a component of shareholders’ equity). The realized gains and losses are recognized in the income statement at the time of realization. Direct income (interest and dividend) is recognized in the income statement. The comparative figures have, in accordance with DAP, been adjusted to reflect the new accounting policy.
US GAAP accounting for shares is consistent with DAP, except for shares designated in a trading portfolio where changes in fair value from period to period are reported in net income. Real estate is carried at historical cost less accumulated depreciation and gains and losses are only recognized upon sale.
US GAAP requires that all derivatives, including embedded derivatives, be recognized as either assets or liabilities in the balance sheet and be measured at fair value. Derivatives that do not qualify for hedge accounting treatment under US GAAP must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through income or recognized in other comprehensive income and amortized to income when the hedged transaction impacts income. Any portion of a derivative’s change in fair value determined to be ineffective at offsetting the hedged risk will be immediately recognized in income.
US GAAP requires an asset and liability approach for financial accounting and reporting for income taxes. Deferred tax assets and liabilities are measured using those enacted tax rates expected to apply to taxable income in the periods in which the deferred tax asset or liability is expected to be realized or settled and such tax rates are not discounted. Deferred tax assets are reduced, if necessary, by a valuation allowance to reflect the fact that (part of) the assets are not expected to be realized.
Comprehensive income is the change in shareholders’ equity during the year from transactions and other events and circumstances from non-shareholders’ sources. It includes all changes in shareholders’ equity during the year except those resulting from investments by owners and distributions to owners.
Income before tax and 633 696 762 872 2,963 exceptional items 506 577 624 676 2,383
2003 USD 2003 EUR I II III IV Total I II III IV Total
January 14 Sale of most of TFC’s commercial lending business successfully closed January 28 CAM and AEGON have reached final agreement on strategic partnership
October 8 AEGON N.V. increases Junior Perpetual Capital Securities to EUR 950 million and USD 500 million October 20 AEGON’s subsidiary in China enters into national cooperation agreement with Agricultural Bank of China
November 4 AEGON sells Transamerica Finance Corporation’s maritime container leasing business November 1 1 AEGON reports on first nine months 2004 results November 26 AEGON N.V. offers EUR 500 million 4.125% Eurobonds December 6 AEGON-CNOOC receives license for life insurance activities in Beijing December 10 Changes in the Supervisory Board of AEGON N.V.
April 14 Publication 2004 IFRS figures April 21 Annual General Meeting of Shareholders April 22 Final dividend record date April 25 Ex-dividend date (Due Bill trading of New York Registry Shares from April 20 up to and including April 24)
August 1 1 Release results first six months 2005, interim dividend announcement August 12 Interim dividend record date August 15 Ex-dividend date
• the impact on our reported financial results and financial condition as a result of our adoption of International Financial Reporting Standards.
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