Notes to the consolidated financial statements 1 General information 141 2 Summary of significant accounting policies 141 3 Critical accounting estimates and judgment in applying accounting policies 164 4 Financial and insurance risks 176 5 Segment information 212 6 Premium income and premiums to reinsurers 217 7 Investment income 218 8 Fee and commission income 218 9 Income from reinsurance ceded 219 10 Results from financial transactions 219 11 Other income 220 12 Policyholder claims and benefits 220 13 Profit sharing and rebates 221 14 Commissions and expenses 221 15 Impairment charges / (reversals) 224 16 Interest charges and related fees 225 17 Other charges 225 18 Income tax 226 19 Earnings per share 227 20 Dividend per common share 228 21 Intangible assets 229 23 Investments for account of policyholders 234 25 Investments in associates 237 26 Reinsurance assets 238 27 Deferred expenses 239 28 Other assets and receivables 240 29 Cash and cash equivalents 242 30 Shareholders’ equity 244 31 Convertible core capital securities 249 32 Other equity instruments 250 33 Trust pass-through securities 251 34 Subordinated borrowings 252 35 Insurance contracts 252 36 Insurance contracts for account of policyholders 253 37 Investment contracts 254 38 Investment contracts for account of policyholders 255 41 Defined benefit plans 257 42 Deferred revenue liabilities 263 43 Deferred tax 263 44 Other liabilities 265 46 Guarantees in insurance contracts 265 47 Capital and solvency 269 48 Summary of total financial assets and financial liabilities at fair value through profit or loss 271 49 Commitments and contingencies 272 50 Transfers of financial assets 275 51 Business combinations 278 52 Group companies 279 53 Related party transactions 281 54 Events after the balance sheet date 286
Notes to the financial statements 1 General information 292 2 Summary of significant accounting policies 292 3 Shares in group companies 295 4 Loans to group companies 295 5 Other investments 296 7 Other assets 296 8 Share capital 296 9 Shareholders’ equity 298 10 Other equity instruments 300 11 Subordinated borrowings 302 12 Long-term borrowings 302 13 Short-term borrowings 302 14 Other liabilities 303 15 Number of employees 303 16 Accountants remuneration 303 17 Events after the balance sheet date 304
Income before share in profit / (loss) of associates and tax 1,878 887 1,873
Net income / (loss) attributable to: Equity holders of Aegon N.V. 1,570 869 1,759
Other comprehensive income: Gains / (losses) on revaluation of available-for-sale investments 4,221 3,113 3,873
Changes in revaluation reserve real estate held for own use (5) 3 4
Movement in foreign currency translation and net foreign investment hedging reserve (116) 409 1,054
Aggregate tax effect of items recognized in other comprehensive income / (loss) (1,063) (1,167) (1,409)
Issued capital and reserves attributable to equity holders of Aegon N.V. 29,687 25,720
Net income / (loss) recognized in the income statement - 1,570 - - - 1,570 1 1,571
Movements in foreign currency translation and net foreign investment hedging reserves - - - (116) - (116) - (116)
Aggregate tax effect of items recognized in other comprehensive income / (loss) - (6) (1,060) 3 - (1,063) - (1,063)
Total other comprehensive income / (Loss) - (24) 2,618 (91) - 2,503 (2) 2,501
Total comprehensive income / (loss) for 2012 - 1,546 2,618 (91) - 4,073 (1) 4,072
Cost of issuance of noncumulative subordinated notes (net of tax) - (10) - - - (10) - (10)
Movements in foreign currency translation and net foreign investment hedging reserves - - - 409 - - 409 - 409
Aggregate tax effect of items recognized in other comprehensive income / (loss) - - (1,155) (12) - - (1,167) - (1,167)
Repurchase of convertible core capital securities - - - - (1,500) - (1,500) - (1,500)
Share options and share-based incentive plans - - - - - 16 16 - 16 1 Issued capital and reserves attributable to equity holders of Aegon N.V.
Consolidated statement of changes in equity of Aegon N.V. For the year ended December 31, 2010
Net income / (loss) recognized in the income statement - 1,759 - - - - 1,759 1 1,760
Other comprehensive income: Gains / (losses) on revaluation of available-for-sale investments - - 3,873 - - - 3,873 - 3,873
Aggregate tax effect of items recognized in other comprehensive income / (loss) - - (1,358) (51) - - (1,409) - (1,409)
Repurchase of convertible core capital securities - - - - (500) - (500) - (500)
Coupons and premium on convertible core capital securities - (63) - - - - (63) - (63)
Share options and share-based incentive plans - - - - - (5) (5) - (5)
Purchase of investments (other than money market investments) (32,464) (29,612) (42,691)
Disposal of investments (other than money market investments) 34,050 34,924 45,446
Cash flow movements on operating items not reflected in income 1,898 6,609 4,787
dividends received (2012: EUR 1,005 million, 2011: EUR 760 million and 2010: EUR 635 million) and interest paid (2012: EUR 432 million, 2011: EUR 273 million and 2010: EUR 380 million)
2.1.1 Adoption of new IFRS accounting standards New standards become effective on the date specified by IFRS, but may allow companies to opt for an earlier adoption date. In 2012, the following new standard issued by the IASB became mandatory: �� IFRS 7 Financial Instruments: Disclosures - Transfers of Financial Assets
2.1.2 Future adoption of new IFRS accounting standards The following standards, amendments to existing standards and interpretations, published prior to January 1, 2013, were not early adopted by the Group, but will be applied in future years: �� IFRS 7 Financial Instruments: Disclosures - Offsetting Financial Assets and Financial Liabilities; �� IFRS 9 Financial Instruments*; �� IFRS 10 Consolidated Financial Statements; �� IFRS 11 Joint Arrangements; �� IFRS 12 Disclosure of Interests in Other Entities; �� IFRS 13 Fair Value Measurement; �� IAS 1 Financial Statement Presentation - Presentation of Items of Other Comprehensive Income; �� IAS 19 Employee Benefits; �� IAS 27 Separate Financial Statements; �� IAS 28 Investments in Associates and Joint Ventures; �� IAS 32 Financial Instruments: Presentation - Offsetting Financial Assets and Financial Liabilities; �� Annual improvements 2009-2011 Cycle*.
IFRS 7 Financial Instruments: Disclosures - Offsetting Financial Assets and Financial Liabilities
IFRS 9 Financial Instruments: Classification and Measurement is part of the project to replace IAS 39 with a new standard. The project is divided into multiple components, classification and measurement of financial instruments, impairment and hedge accounting.
IFRS 9 is available for early adoption immediately but mandatory for accounting periods beginning on or after January 1, 2015. The
within the Group are joint ventures. As of January 1, 2013 the accounting treatment for joint ventures will therefore change from proportionate consolidation to equity accounting. This change does not have impact on Aegon’s financial position or performance.
The amendments apply to financial years beginning on or after July 1, 2012. The amendments require the grouping together of items within other comprehensive income that may be reclassified to the profit or loss section of the income statement. The amendments also reaffirm existing requirements that items in other comprehensive income and profit or loss should be presented as either a single statement or two consecutive statements. The amendment affects presentation only and has therefore no impact on Aegon’s financial position or performance.
The impact on other comprehensive income and net income is expected to have an adverse impact on Aegon’s Insurance Group Directive
As a consequence of the new IFRS 10 and IFRS 12, what remains of IAS 27 is limited to accounting for subsidiaries, jointly controlled entities, and associates in separate financial statements. The amendment becomes effective for annual periods beginning on or after
IAS 28 Investments in Associates and Joint Ventures (as revised in 2011)
2.2 Changes in presentation Segment reporting As of 2012, Aegon has revised its segment reporting to reflect changes in its organization. Businesses in Asia, which were previously managed by Aegon Americas, are included in the Asia line of business within the “New Markets” segment. The change in operating segments had no impact on equity or net income. The comparative segment information presented in note 5 has been adjusted to make the information consistent with the current period figures. Refer to note 2.5 Segment reporting for details about this change.
Aegon N.V. shares held by subsidiaries, which are recognized as treasury shares in equity, are eliminated. Intra-group losses are eliminated, except to the extent that the underlying asset is impaired. Non-controlling interests are initially stated at their share in the fair value of the net assets on the acquisition date and subsequently adjusted for the non-controlling share in changes in the subsidiary’s equity.
Transactions with non-controlling interests are accounted for as transactions with equity holders. Therefore disposals to non-controlling interests and acquisitions from non-controlling interests, not resulting in gaining or losing control of the subsidiary
Investment funds managed by the Group in which the Group holds an interest are consolidated in the financial statements if the
Group can govern the financial and operating policies of the fund. In assessing control all interests held by the Group in the fund are considered, regardless of whether the financial risk related to the investment is borne by the Group or by the policyholders.
At the balance sheet date, monetary assets and monetary liabilities in foreign currencies and own equity instruments in foreign currencies are translated to the functional currency at the closing rate of exchange prevailing on that date. Non-monetary items carried at cost are translated using the exchange rate at the date of the transaction, whilst assets carried at fair value are translated at the exchange rate when the fair value was determined.
b. Translation of foreign currency operations On consolidation, the financial statements of group entities with a foreign functional currency are translated to euro, the currency in which the consolidated financial statements are presented. Assets and liabilities are translated at the closing rates on the balance sheet date. Income, expenses and capital transactions (such as dividends) are translated at average exchange rates or at the prevailing rates on the transaction date, if more appropriate. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are translated at the closing rates on the balance sheet date.
�� Aegon United Kingdom: Covers businesses operating in the United Kingdom.
The line item “Run-off businesses”, which includes earnings of certain business units where management has decided to exit the market and to run-off the existing block of business. This line item includes the earnings of the institutional spread-based business, structured settlements blocks of business, Bank-Owned and Corporate-Owned Life Insurance (BOLI/COLI) business and life reinsurance business in Aegon Americas. Aegon believes that excluding the earnings of these blocks of business enhances the comparability from period to period of Aegon’s key earnings measure, underlying earnings.
Earnings from the company’s associates in insurance companies in Spain, India, Brazil and Mexico are reported on an underlying earnings basis.
As of 2012, Aegon has revised its financial reporting to reflect changes in its organization. Businesses in Asia, which were previously managed by Aegon Americas, are included in the Asia line of business within the “New Markets” segment. In previous years, the underlying earnings before tax generated by these Asian operations were previously reported under the “Americas” segment.
Non-IFRS measures This report includes the non-IFRS financial measures: underlying earnings before tax, income tax (including associated companies)
and income before tax (including associated companies). The reconciliation of these measures to the most comparable IFRS measures is presented in the tables in note 5. These non-IFRS measures are calculated by consolidating on a proportionate basis the revenues and expenses of Aegon’s associated companies in Spain, India, Brazil and Mexico. Aegon believes that its non-IFRS measures provide meaningful information about the underlying operating results of Aegon’s business including insight into the financial measures that senior management uses in managing the business.
Aegon believes the non-IFRS measures shown herein, when read together with Aegon’s reported IFRS financial statements, provides meaningful supplemental information for the investing public to evaluate Aegon’s business after eliminating the impact of current
Underlying earnings Certain assets held by Aegon Americas, Aegon The Netherlands and Aegon UK are carried at fair value and managed on a total return basis, with no offsetting changes in the valuation of related liabilities. These include assets such as investments in hedge funds, private equities, real estate limited partnerships, convertible bonds and structured products. Underlying earnings exclude any over- or underperformance compared to management’s long-term expected return on assets.
Based on current holdings and asset returns, the long-term expected return on an annual basis is 8-10%, depending on asset class, including cash income and market value changes. The expected earnings from these asset classes are net of deferred policy acquisition costs (DPAC) where applicable.
Impairment charges / reversals Includes impairments and reversals on available-for-sale debt securities and impairments on shares including the effect of deferred policyholder acquisition costs, mortgage loans and loan portfolios on amortized cost and associates respectively.
Run-off businesses Includes underlying results of business units where management has decided to exit the market and to run off the existing block of business. Currently, this line includes the run-off of the institutional spread-based business, structured settlements blocks of business,
Share in earnings of associates Earnings from Aegon’s associates in insurance companies in Spain, India, Brazil and Mexico are reported on an underlying earnings basis. Other associates are included on a net income basis.
2.6 Offsetting of assets and liabilities Financial assets and liabilities are offset in the statement of financial position when the Group has a legally enforceable right to offset and has the intention to settle the asset and liability on a net basis or simultaneously.
2.7 Intangible assets a. Goodwill Goodwill is recognized as an intangible asset for interests in subsidiaries and joint ventures acquired after January 1, 2004 and is measured as the positive difference between the acquisition cost and the Group’s interest in the net fair value of the entity’s identifiable assets, liabilities and contingent liabilities. Subsequently, goodwill is carried at cost less accumulated impairment charges.
The Group develops property itself with the intention to hold it as investments in real estate. During the construction phase both the land and the building are presented as investments in real estate and carried at fair value unless this cannot be determined reliably in which case the real estate is valued at directly attributable costs, including borrowing costs. All fair value gains or losses are recognized in the income statement.
2.10 Derivatives a. Definition Derivatives are financial instruments, classified as held for trading financial assets, of which the value changes in response to an underlying variable, that require little or no net initial investment and are settled at a future date.
Derivatives with positive values are reported as assets and derivatives with negative values are reported as liabilities. Derivatives for which the contractual obligation can only be settled by exchanging a fixed amount of cash for a fixed amount of Aegon N.V. equity instruments are accounted for in shareholders’ equity .
Notes to the consolidated financial statements of Aegon N.V. Note 2 b. Measurement All derivatives recognized on the statement of financial position are carried at fair value.
2.11 Investments in associates Entities over which the Group has significant influence through power to participate in financial and operating policy decisions, but which do not meet the definition of a subsidiary or joint venture, are accounted for using the equity method. Interests held by venture capital entities, mutual funds and investment funds that qualify as an associate are accounted for as an investment held at fair value through profit or loss. Interests held by the Group in venture capital entities, mutual funds and investment funds that are managed on a fair value basis, are also accounted for as investments held at fair value through profit or loss.
Aegon is not relieved of its legal liabilities when entering into reinsurance transactions, therefore the reserves relating to the underlying reinsured contracts will continue to be reported on the consolidated statement of financial position during the run-off period of the underlying business.
Notes to the consolidated financial statements of Aegon N.V. Note 2 expected gross profit margins, the amortization period and pattern are reviewed at each reporting date and any change in estimates is recognized in the income statement. Estimates include, but are not limited to: an economic perspective in terms of future returns on bond and equity instruments, mortality, disability and lapse assumptions, maintenance expenses and expected inflation rates.
Gains or losses on buying reinsurance are amortized based on the assumptions of the underlying reinsured contracts. The amortization is recognized in the income statement.
c. Deferred transaction costs Deferred transaction costs relate to investment contracts without discretionary participation features under which Aegon will render investment management services. Incremental costs that are directly attributable to securing these investment management contracts are recognized as an asset if they can be identified separately and measured reliably and if it is probable that they will be recovered.
Deferred transaction costs are derecognized when the related contracts are settled or disposed of.
a. Impairment of non-financial assets Assets are tested individually for impairment when there are indications that the asset may be impaired. For goodwill and intangible assets with an undefined life, an impairment test is performed at least once a year. The impairment loss is calculated as the difference between the carrying and the recoverable amount of the asset, which is the higher of an asset’s value in use and its net selling price.
Non-financial assets that only generate cash flows in combination with other assets and liabilities are tested for impairment at the level of the cash-generating unit. The goodwill acquired in a business combination, for the purpose of impairment testing, is allocated to cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination.
c. Impairment of equity instruments For equity instruments, a significant or prolonged decline in fair value below initial cost is considered objective evidence of impairment and always results in a loss being recognized in the income statement. Significant or prolonged decline is defined as an unrealized loss position for generally more than six months or a fair value of less than 80% of the cost price of the investment. Equity investments are impaired to the asset’s fair value and any unrealized gain or loss previously recognized in shareholders’ equity is taken to the income statement as an impairment loss. The amount exceeding the balance of previously recognized unrealized gains or losses is recognized in the income statement.
Notes to the consolidated financial statements of Aegon N.V. Note 2 d. Impairment of reinsurance assets Reinsurance assets are impaired if there is objective evidence, as a result of an event that occurred after initial recognition of the reinsurance asset, that not all amounts due under the terms of the contract may be received. In such a case, the value of the reinsurance asset recoverable is determined based on the best estimate of future cash flows, taking into consideration the reinsurer’s current and expected future financial conditions plus any collateral held in trust for Aegon’s benefit. The carrying value is reduced to this calculated recoverable value, and the impairment loss recognized in the income statement.
Perpetual securities have no final maturity date, repayment is at the discretion of Aegon and for junior perpetual capital securities
Non-cumulative subordinated notes are identified as a compound instrument due to the nature of this financial instrument. For these non-cumulative subordinated notes Aegon has an unconditional right to avoid delivering cash or another financial asset to settle the coupon payments. The redemption of the principal is however not at the discretion of Aegon and therefore Aegon has a contractual obligation to settle the redemption in cash or another financial asset or through the exchange of financial assets and liabilities at potentially unfavorable conditions for Aegon. Compound instruments are separated into liability components and equity components.
The liability component for the non-cumulative subordinated notes is equal to the present value of the redemption amount and carried at amortized cost using the effective interest rate method. The liability component is derecognized when the Group’s obligation under the contract expires, is discharged or is cancelled. The equity component is assigned the residual amount after deducting the liability component from the fair value of the instrument as a whole. The equity component in US dollars is translated into euro using historical exchange rates.
Incremental external costs that are directly attributable to the issuing or buying back of own equity instruments are recognized in equity, net of tax. For compound instruments incremental external costs that are directly attributable to the issuing or buying back of the compound instruments are recognized proportionate to the equity component and liability component, net of tax.
Treasury shares are deducted from Group equity, regardless of the objective of the transaction. No gain or loss is recognized in the income statement on the purchase, sale, issue or cancellation of the instruments. If sold, the difference between the carrying amount and the proceeds is reflected in retained earnings. The consideration paid or received is recognized directly in shareholders’ equity.
For further information on accounting policy of the non-cumulative subordinated notes refer to note 2.17.
2.19 Insurance contracts Insurance contracts are accounted for under IFRS 4 - Insurance Contracts. In accordance with this standard, Aegon continues to apply the existing accounting policies that were applied prior to the adoption of IFRS, with certain modifications allowed by IFRS 4 for standards effective subsequent to adoption. Aegon applies non-uniform accounting policies for insurance liabilities and related deferred acquisition costs and intangible assets, to the extent that it was allowed under Dutch Accounting Principles. As a result, specific methodologies applied may differ between Aegon’s operations as they may reflect local regulatory requirements and local practices for specific product features in these local markets. In the United States Aegon applies US GAAP and in the Netherlands and the United Kingdom Aegon applies Dutch Accounting Principles, both with consideration of standards effective subsequent to the date of transition to IFRS.
Insurance assets and liabilities are valued in accordance with the accounting principles that were applied by the Group prior to the transition to IFRS and with consideration of standards effective subsequent to the date of transition to IFRS, as further described in the following paragraphs. In order to reflect the specific nature of the products written, subsidiaries are allowed to apply local accounting principles to the measurement of insurance contracts. All valuation methods used by the subsidiaries are based on the general principle that the carrying amount of the net liability must be sufficient to meet any reasonably foreseeable obligation resulting from the insurance contracts.
Notes to the consolidated financial statements of Aegon N.V. Note 2 b. Life insurance contracts for account of policyholders Life insurance contracts under which the policyholder bears the risks associated with the underlying investments are classified as insurance contracts for account of policyholders.
it is performed at the level of the portfolio of contracts. To the extent that the tests involve discounting of future cash flows, the interest rate applied is based on market rates or is based on management’s expectation of the future return on investments. These future returns on investments take into account management’s best estimate related to the actual investments and, where applicable, reinvestments of these investments at maturity. In the event expected investment returns on actual assets held are not considered in the discounting of future cash flows, the fair value of the assets carried at amortized cost is considered in determining any liability adequacy surplus or deficit.
b. Investment contracts without discretionary participation features At inception, investment contracts without discretionary features are designated as at fair value through profit or loss if by doing so a potential accounting mismatch is eliminated or significantly reduced or if the contract is managed on a fair value basis. Some investment contracts with embedded derivatives that have not been bifurcated are also carried at fair value through profit or loss. All other contracts are carried at amortized cost.
2.22 Assets and liabilities relating to employee benefits a. Short-term employee benefits A liability is recognized for the undiscounted amount of short-term employee absences benefits expected to be paid within one year after the end of the period in which the service was rendered. Accumulating short-term absences are recognized over the period in which the service is provided. Benefits that are not service-related are recognized when the event that gives rise to the obligation occurs.
The defined benefit obligation is based on the terms and conditions of the plan applicable on the balance sheet date. Plan improvements are charged directly to the income statement, unless they are conditional on the continuation of employment. In this case the related cost is deducted from the liability as past service cost and amortized over the vesting period. In measuring the defined benefit obligation the Group uses the projected unit credit method and actuarial assumptions that represent the best estimate of future variables. The benefits are discounted using an interest rate based on the market yields for high-quality corporate bonds on the balance sheet date.
The gain or loss on a curtailment or settlement comprise: �� Any resulting change in the present value of the defined benefit obligation; �� Any resulting change in the fair value of the plan assets; �� Any related actuarial gains and losses and past service cost that had not previously been recognized.
For share option plans that are equity-settled, the expense recognized is based on the fair value on the grant date of the share options, which does not reflect any performance conditions other than conditions linked to the price of the Group’s shares. The cost 161Annual Report 2012
2.23 Deferred revenue liability Initial fees and front-end loadings paid by policyholders and other clients for future investment management services related to investment contracts without discretionary participation features are deferred and recognized as revenue when the related services are rendered.
included in the gross premiums. Rebates that form part of the premium rate, such as no-claim rebates, are deducted from the gross premium, others are recognized as an expense. Depending on the applicable local accounting principles, bonuses that are used to increase the insured benefits may be recognized as gross premiums.
2.31 Impairment charges / (Reversals) Impairment charges and reversals include impairments and reversals on investments in financial assets, impairments and reversals on the valuation of insurance assets and liabilities and other non-financial assets and receivables. Refer to note 15.
DPAC and VOBA assets respectively and are amortized to the income statement over time. If the assumptions relating to the future profitability of these policies are not realized, the amortization of these costs could be accelerated and may even require write offs due to unrecoverability.
The reconsideration of this assumption may affect the original DPAC or VOBA amortization schedule, referred to as DPAC or VOBA
In 2011, to reflect the low interest rate environment, Aegon lowered its long-term assumption for 10-year US Treasury yields by 50 basis points to 4.75% (graded uniformly over the next five years) and lowered the 90-day treasury yield to 0.2% for the next two years followed by a three year grade to 3%. In addition, Aegon lowered its assumed return for US separate account bond fund returns by 200 basis points to 4% over the next five years, followed by a return of 6% thereafter. These assumptions, as well as Aegon’s assumptions on the long term credit spread or default assumptions, remained unchanged in 2012.
A 1% decrease in the expected long-term equity growth rate with regards to Aegon’s variable annuities and variable life insurance products in the United States and Canada would result in a decrease in DPAC and VOBA balances and reserve strengthening of approximately EUR 150 million (2011: EUR 159 million). The DPAC and VOBA balances for these products in the United States and
To operationalize Aegon’s fair value hierarchy, individual securities are assigned a fair value level based primarily on the type of security and the source of the prices (e.g. index, third-party pricing service, broker, internally modeled). Periodically, this logic for assigning fair value levels is reviewed to determine if any modifications are necessary in the context of the current market environment.
Fair value of financial assets and liabilities The estimated fair values of Aegon’s financial assets and liabilities are presented in the respective notes to the statement of financial position together with their carrying values. The estimated fair values correspond with the amounts at which the financial instruments at Aegon’s best estimate could have been traded at the balance sheet date between knowledgeable, willing parties in arm’s length transactions. When available, Aegon uses quoted market prices in active markets to determine the fair value of investments and derivatives. In the absence of an active market, the fair value of investments in financial assets is estimated by using other market observable data, such as corroborated external quotes and present value or other valuation techniques. An active market is one in which transactions are taking place regularly on an arm’s length basis. A fair value measurement assumes that an asset or liability is exchanged in an orderly transaction between market participants, and accordingly, fair value is not determined based upon a forced liquidation or distressed sale.
Valuation techniques are used when Aegon determines the market is inactive or quoted market prices are not available for the asset or liability at the measurement date. However, the fair value measurement objective remains the same, that is, to arrive at the price at which an orderly transaction would occur between market participants at the measurement date. Therefore, unobservable inputs
assumptions about risk). These inputs are developed based on the best information available.
Valuation of financial instruments is based on a pricing hierarchy, in order to maintain a controlled process that will systematically promote the use of prices from sources in which Aegon has the most confidence, where the least amount of manual intervention exists and to embed consistency in the selection of price sources. Depending on asset type the pricing hierarchy consists of a waterfall that starts with making use of market prices from indices and follows with making use of third-party pricing services or brokers.
Aegon’s valuation policy utilizes a pricing hierarchy which dictates that publicly available prices are initially sought from indices and third party pricing services. In the event that pricing is not available from these sources, those securities are submitted to brokers to obtain quotes. The majority of brokers’ quotes are non-binding. As part of the pricing process, Aegon assesses the appropriateness of each quote (i.e., as to whether the quote is based on observable market transactions or not) to determine the most appropriate estimate of fair value. Lastly, securities are priced using internal cash flow modeling techniques. These valuation methodologies commonly use the following inputs: reported trades, bids, offers, issuer spreads, benchmark yields, estimated prepayment speeds, and/or estimated cash flows.
Aegon performs back testing on a sample basis. Back testing involves selecting a sample of securities trades and comparing the prices in those transactions to prices used for financial reporting. Significant variances between the price used for financial reporting and the transaction price are investigated to explain the cause of the difference.
Free standing financial derivatives Where quoted market prices are not available, other valuation techniques, such as option pricing or stochastic modeling, are applied.
and dealer prices. Controls and procedures regarding the fair values of free standing derivatives are similar to the controls as described for the debt securities.
The expected returns are based on risk-free rates. The credit spread is set by using the credit default swap (CDS) spreads of a reference portfolio of life insurance companies (including Aegon), adjusted to reflect the subordination of senior debt holders at the holding company level to the position of policyholders at the operating company level (who have priority in payments to other creditors).
Aegon’s assumptions are set by region to reflect differences in the valuation of the guarantee embedded in the insurance contracts.
Investment contracts Investment contracts issued by Aegon are either carried at fair value (if they are designated as financial liabilities at fair value through profit or loss) or amortized cost (with fair value being disclosed in the notes to the consolidated financial statements). These contracts are not quoted in active markets and their fair values are determined by using valuation techniques, such as discounted cash flow methods and stochastic modeling or in relation to the unit price of the underlying assets. All models are validated and calibrated.
Financial liabilities carried at fair value Investment contracts for account of policyholders 10,028 19,050 109 29,187 1 The investments for account of policyholders included in the table above represents those investments carried at fair value through profit or loss. 2 Borrowings included in the table above contain those borrowings that are carried at fair value through profit or loss. Total borrowings on the statement of financial position also contain borrowings carried at amortized cost that are not included in the above schedule.
Other investments at fair value 1,428 231 - 96 (315) - (22) 174 (176) 1,416 221
Other investments at fair value 1,205 116 - 107 (170) - 48 203 (81) 1,428 128
Investments for account of policyholders 2,352 (40) - 301 (342) - 22 129 (197) 2,225 22
Investment contracts for account of policyholders (178) 9 - - 7 - (4) - - (166) 1 Includes impairments and movements related to fair value hedges. 2 Total gains / (losses) for the period during which the financial instrument was in Level III.
During 2012, Aegon transferred certain financial instruments from Levels I and II to Level III of the fair value hierarchy. The amount of the total assets transferred was EUR 1,496 million (2011: EUR 794 million). The reason for the change in level was that the market for these securities had become inactive, which led to a change in market observability of prices. Prior to transfer, the fair value for the Level I and II securities was determined using observable market transactions or corroborated broker quotes for the same or similar instruments. Since the transfer, all such assets have been valued using valuation models incorporating significant non marketobservable inputs or not corroborated broker quotes.
Similarly, during 2012, Aegon transferred certain financial instruments from Level III to other levels of the fair value hierarchy. The recorded amount of the total assets transferred was EUR 1,247 million (2011: EUR 1,425 million). The change in level was mainly the result of a return of activity in the market for these securities.
The total net amount of loss recognized in the income statement on Level III financial instruments amounted to EUR 125 million
Investments for account of policyholders are excluded from the reasonably possible alternative assumptions disclosure. Policyholder assets, and their returns, belong to policyholders and do not impact Aegon’s net income or equity. The effect on total assets is offset by the effect on total liabilities.
In order to determine reasonably possible alternative assumptions, Aegon adjusted key unobservable models inputs are as follows: a. Available-for-sale shares include shares in the Federal Home Loan Bank for an amount of EUR 126 million (2011: EUR 143 million)
b. Debt securities mainly consist of corporate bonds (EUR 580 million; 2011: EUR 742 million) and other structured debt securities
e. Included in derivatives is EUR 167 million (2011: EUR 0 million) relating to a longevity index derivative of Aegon The Netherlands.
Recognition of deferred tax assets Deferred tax assets are established for the tax benefit related to deductible temporary differences, carry forwards of unused tax losses and carry forwards of unused tax credits when in the judgment of management it is more likely than not that Aegon will receive the tax benefits. Since there is no absolute assurance that these assets will ultimately be realized, management reviews Aegon’s deferred tax positions periodically to determine if it is more likely than not that the assets will be realized. Periodic reviews include, among other things, the nature and amount of the taxable income and deductible expenses, the expected timing when certain assets will be used or liabilities will be required to be reported and the reliability of historical profitability of businesses expected to provide future earnings.
Furthermore, management considers tax-planning strategies it can utilize to increase the likelihood that the tax assets will be realized.
Recognition of provisions Provisions are established for contingent liabilities when it is probable that a past event has given rise to a present obligation or loss, the settlement of the obligation will probably lead to an outflow of resources embodying economic benefits and the amount can be reasonably estimated. Management exercises judgment in evaluating the probability that a loss will be incurred. The estimate of the amount of a loss requires management judgment in the selection of a proper calculation model and the specific assumptions related to the particular exposure.
General As an insurance company, Aegon is in the “business of risk” and as a result is exposed to a variety of risks. A description of Aegon’s risk management and control systems is given below on the basis of significant identified risks for the company. Some risks, such as currency translation risk, are related to the international nature of Aegon’s business. Other risks include insurance related risks, such as changes in mortality and morbidity. However, Aegon’s largest exposures are to changes in financial markets (e.g. interest rate, credit and equity market risks) that affect the value of the investments, liabilities from products that Aegon sells, deferred expenses and value of business acquired.
To manage its risk exposure, Aegon has risk policies in place. Many of these policies are group-wide while others are specific to the unique situation of local businesses. The Group level policies limit the Group’s exposure to major risks such as equity, interest rates,
As part of its risk management programs, Aegon takes inventory of its current risk position across risk categories. Aegon also measures the sensitivity of net income and shareholders’ equity under both deterministic and stochastic scenarios. Management uses the insight gained through these “what if?” scenarios to manage the Group’s risk exposure and capital position. The models, scenarios and assumptions used are reviewed regularly and updated as necessary.
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. For each type of market risk, the analysis shows how net income and shareholders’ equity would have been affected by changes in the relevant risk variable that were reasonably possible at the reporting date. For each sensitivity test the impact of a reasonably possible change in a single factor is shown. The analysis considers the interdependency between interest rates and lapse behavior for products sold in the Americas where there is clear evidence of dynamic lapse behavior.
The effect of movements of the revaluation reserve on capitalization ratios and capital adequacy are minimal. Aegon’s target ratio for the composition of its capital base is based on shareholders’ equity excluding the revaluation reserve.
Currency exchange rate risk As an international group, Aegon is subject to foreign currency translation risk. Foreign currency exposure exists when policies are denominated in currencies other than the issuer’s functional currency. Currency risk in the investment portfolios backing insurance and investment liabilities is managed using asset liability matching principles. Assets allocated to equity are kept in local currencies to the extent shareholders’ equity is required to satisfy regulatory and self-imposed capital requirements. Therefore, currency exchange rate fluctuations will affect the level of shareholders’ equity as a result of translation of subsidiaries into euro, the Group’s presentation currency. Aegon holds the remainder of its capital base (perpetual capital securities, subordinated and senior debt) in various currencies in amounts that are targeted to correspond to the book value of the country units. This balancing mitigates currency translation impacts on shareholders’ equity and leverage ratios. 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
The estimated approximate effects on net income and shareholders’ equity of movements in the exchange rates of Aegon’s non-euro currencies relative to the euro as included in the table below are due to the translation of subsidiaries and joint-ventures in the consolidated financial statements.
Increase by 15% of non-euro currencies relative to the euro 193 2,621
Decrease by 15% of non-euro currencies relative to the euro (193) (2,621)
Increase by 15% of non-euro currencies relative to the euro 77 3,079
Decrease by 15% of non-euro currencies relative to the euro (77) (3,079)
Aegon manages interest rate risk closely taking into account all of the complexity regarding policyholder behavior and management action. Aegon employs sophisticated interest rate measurement techniques and actively uses derivatives and other risk mitigation tools to closely manage its interest rate risk exposure. Aegon operates an Interest Rate Risk policy that limits the amount of interest rate risk to which the Group is exposed. All derivative use is governed by Aegon’s Derivative Use Policy.
The sensitivity analysis in the table below shows an estimate of the effect of a parallel shift in the yield curves on net income and shareholders’ equity. In general, increases in interest rates have a negative effect on shareholders’ equity and a positive impact on net income in the current year because it results in unrealized losses on investments that are carried at fair value. The rising interest rates would also cause the fair value of the available-for-sale bond portfolio to decline and the level of unrealized gains would become too low to support recoverability of the full deferred tax asset triggering an allowance charge to income. The offsetting economic gain on the insurance and investment contracts is however not fully reflected in the sensitivities because many of these liabilities are not 179Annual Report 2012
Further excessive defaults or other reductions in the value of these securities and loans could have a materially adverse effect on
Private loans - carried at amortized cost 1,013 - - - - - - - - 1,013
Other financial assets - carried at fair value 3,219 - 1 - - - - 1 - 3,218
Debt securities - carried at amortized cost 168 - - - - - - - - 168
Private loans - carried at amortized cost 927 - - - - - - - - 927
Other financial assets - carried at fair value 2,831 - 1 - - - - 1 - 2,830
Collateral for structured securities such as ABS, RMBS and CMBS is not included in the table above. Whilst collateral for structured securities is present, the collateral is however related to the cash flows for paying the principal and interest on the securities and not to mitigate credit risk. The credit risk management relating to structured securities is disclosed in the credit risk concentrations section of this note.
The collateral reported for the money market and short term investments are related to tri-party repurchase agreements (repo’s).
The total collateral includes both under- and over-collateralized positions. To present a net exposure of credit risk, the over collateralization, which is shown in the surplus collateral column, is extracted from the total collateral.
CDOs and CDSs Aegon has entered into free-standing credit derivative transactions (Single Tranche Synthetic CDOs and Single Name Credit Default
Swaps - CDSs). The positions outstanding at the end of the year were: CDOs and CDSs Notional Fair value Notional Fair value
In 2012, the swaps linked to collateralized debt obligations (Canadian credit derivatives), with a notional amount of EUR 2.0 billion at
The extent to which the exposure to credit risk is reduced through a master netting agreement may change substantially within a short period of time because the exposure is affected by each transaction subject to the arrangement. Aegon may also mitigate credit risk in reinsurance contracts by including down-grade clauses that allow the recapture of business, retaining ownership of assets required to support liabilities ceded or by requiring the reinsurer to hold assets in trust. For the resulting net credit risk exposure, Aegon employs deterministic and stochastic credit risk modeling in order to assess the Group’s credit risk profile, associated earnings and capital implications due to various credit loss scenarios.
At December 31, 2012, there were four violations of the Credit Name Limit Policy at Group level, three received exemptions from
At December 31, 2011, there were two violations of the Credit Name Limit Policy at Group level. One was granted an exemption from
Past due and / or impaired assets 291 1,426 367 227 - 24 169 (9) 827 1,686 2,513
At December 31 10,260 1 Includes investments of Holding and other activities.
Commercial mortgage backed securities (CMBSs) 5,964 2 384 137 6,487 4
Asset Backed Securities (ABSs) - CDOs backed by ABS, Corp. Bonds, Bank loans 633 732 - - 1,365 23 1 Includes investments of Holding and other activities.
EUR 7,317 million (2011: EUR 8,563 million). The loan to value (LTV) amounts to about 61% (2011: 64%). Of the portfolio 1.43%
(net of recoveries) on this portfolio. In 2012, Aegon Americas foreclosed upon, or recovered EUR 83 million of real state. The 2012 additional recoveries associated with these loans at the time of foreclosure amounted to EUR 2 million (2011: impairment of
Monoline insurers About EUR 0.9 billion of the bonds in Aegon USA’s portfolio are insured by monoline insurers (2011: EUR 1.1 billion), of which
EUR 419 million of bonds (2011: EUR 516 million) in the EUR 1.2 billion subprime portfolio (2011: EUR 1.4 billion). Expected claims against the monolines amount to EUR 108 million (2011: EUR 120 million), although an insolvency by one of the monolines could create significant market price volatility for the affected holdings.
At the end of 2012, Aegon USA had no indirect exposure via wrapped bonds via holdings in monoline insurers and derivative counterparty exposure where monoline insurers are Aegon’s counterparty (2011: EUR 8 million which was entirely related to MBIA).
Financial and credit market conditions were generally strong in the second half of 2012 after being mixed in the first half. Developedworld growth remains below potential, frustrating attempts to generate a strong recovery. The credit crisis that began as a result of the subprime mortgage loan crisis continues to evolve into concerns about governmental borrowing and debt levels across much of the world. European sovereign debt rallied significantly over the second half of the year as policy efforts to stabilize sovereign and banking credit have begun to get traction. High governmental debt levels remain a concern in the US, as well, including those of state and local governments. Most world equity markets performed well during the second half of 2012 and now show strong gains for the year. In the
Individual issuers rated below investment grade in any sector, which have unrealized loss positions greater than EUR 25 million, will be disclosed separately. Furthermore, quality ratings of investment portfolios are based on a hierarchy of S&P, Moody’s, Fitch, Internal and NAIC.
Residential mortgage-backed securities are securitizations of underlying pools of non-commercial mortgages on real estate.
of EUR 97 million (2011: EUR 133 million), which are classified as fair value through profit or loss.
Total fair value 1 Reported as part of asset backed securities in the table on page 188.
RMBS of Aegon USA are monitored and reviewed on a monthly basis. Detailed cash flow models using the current collateral pool and capital structure on the portfolio are updated and reviewed quarterly. Model output is generated under base and stress-case scenarios. Aegon’s RMBS asset specialists utilize widely recognized industry modeling software to perform a loan-by-loan, bottom-up approach to modeling. Key assumptions used in the models are projected defaults, loss severities, and prepayments. Each of these key assumptions varies greatly based on the significantly diverse characteristics of the current collateral pool for each security. Loanto -value, loan size, and borrower credit history are some of the key characteristics used to determine the level of assumption that is utilized. Defaults were estimated by identifying the loans that are in various delinquency buckets and defaulting a certain percentage
of them over the near-term and long-term. Assumed defaults on delinquent loans are dependent on the specific security’s collateral attributes and historical performance.
Once the entire pool is modeled, the results are closely analyzed by Aegon’s asset specialists to determine whether or not Aegon’s particular tranche or holding is at risk for not collecting all contractual cash flows taking into account the seniority and other terms of the tranches held. Aegon impaired its particular tranche to fair value where it would not be able to receive all contractual cash flows.
The total gross unrealized loss on AFS RMBS of Aegon Americas, Aegon The Netherlands and Aegon UK amount to EUR 397 million, of which EUR 351 million relates to positions of Aegon USA, and the total net unrealized gain on available-for-sale RMBS is
EUR 157 million, including a EUR 31 million net unrealized gain relating to positions of Aegon USA. The unrealized loss in the sector is primarily a result of the housing downturn the United States has experienced since 2007. Even with the stabilization over the past two years, fundamentals in RMBS continue to be weak, which impacts the magnitude of the unrealized loss. Delinquencies and severities in property liquidations remain at an elevated level, while prepayments remain at historically low levels. Due to the weak fundamental situation, reduced liquidity, and the requirement for higher yields due to market uncertainty, credit spreads remain elevated across the asset class.
Aegon’s RMBS portfolio includes exposure to securitized home loans classified as Alt-A, fully owned by Aegon USA. This AFS portfolio totals EUR 735 million at December 31, 2012, with net unrealized gains of EUR 93 million, compared to a net unrealized loss position at December 31, 2011. Alt-A loans are made to borrowers whose qualifying mortgage characteristics do not meet the standard underwriting criteria established by the GSEs. The typical Alt-A borrower has a credit score high enough to obtain an “A” standing, which is especially important since the score must compensate for the lack of other necessary documentation related to borrower income and/or assets.
As part of Aegon’s AFS RMBS portfolio, Aegon holds EUR 213 million of securitized reverse mortgages, with net unrealized losses of
As part of Aegon’s AFS RMBS portfolio, Aegon holds EUR 1,124 million of securitized RMBS - Subprime mortgages, with net unrealized losses of EUR 112 million at December 31, 2012, fully owned by Aegon USA. RMBS - Subprime mortgages are secured by pools of residential mortgage loans primarily those which are categorized as subprime.
Total Sub-prime Mortgages- fixed rate 148 277 46 30 258 759 164 762
Total Sub-prime Mortgages- fixed rate 364 282 6 14 178 844 193 744
Total Sub-prime Mortgages- floating rate 19 4 - 27 202 252 58 138 1 Second lien collateral primarily composed of loans to prime and Alt-A borrowers.
There is one individual issuer rated below investment grade in this RMBS sector which have unrealized loss position greater than
Securities are impaired to fair value when Aegon expects that it will not receive all contractual cash flows on Aegon’s tranches. As the remaining unrealized losses in the RMBS portfolio relate to holdings where Aegon expects to receive full principal and interest, Aegon does not consider the underlying investments to be impaired as of December 31, 2012.
The total gross unrealized loss on AFS CMBS of Aegon Americas, Aegon The Netherlands and Aegon UK amounts to EUR 102 million, of which EUR 102 million relates to positions of Aegon USA. The total net unrealized gain on CMBS is EUR 344 million, of which
EUR 247 million (2011: EUR 64 million) relates to positions of Aegon USA. The commercial real estate market previously experienced a deterioration in property level fundamentals over 2008-2010, which led to an increase in CMBS loan-level delinquencies.
of EUR 62 million (2011: EUR 81 million), which are classified as fair value through profit or loss.
Securities are impaired to fair value when Aegon expects that it will not receive all contractual cash flows on its tranches. As the remaining unrealized losses in the CMBS portfolio relate to holdings where Aegon expects to receive full principal and interest, Aegon does not consider the underlying investments to be impaired as of December 31, 2012.
Asset-backed securities Aegon Americas, Aegon The Netherlands and Aegon UK hold EUR 5,124 million of AFS ABS instruments of which EUR 2,907 million is held by Aegon USA. The total gross unrealized loss on ABSs is EUR 248 million, of which EUR 139 million relates to positions of Aegon
CDOs backed by ABS, Corp. Bonds, Bank loans 260 207 15 - 30 512 501
There is one individual issuer rated below investment grade in this ABS sector wich has unrealized loss position greater than
For the ABS - Small Business Loan holding, the underlying collateral pool has experienced higher than expected delinquencies and losses, which is further exacerbated by the impact of declining commercial real estate values. This has led to the underlying collateral pool having reduced cash flows in comparison to expectations at origination. Increased collateral losses have reduced the subordination available as credit enhancement to this security, which in turn has led to a decline in the level of protection to Aegon’s tranche within the collateral pool. Despite the decline in the level of protection provided by the subordination for this security, cash flow modeling 197Annual Report 2012
Notes to the consolidated financial statements of Aegon N.V. Note 4 continues to indicate full recovery of principal and interest, Aegon does not consider the underlying investments to be impaired as of
The net unrealized loss on the CDOs backed by ABS, Corporate Bonds, and Bank Loans is EUR 11 million. CDO’s are primarily secured by pools of corporate bonds and leveraged bank loans. The unrealized loss is a function of decreased liquidity and increased credit spreads in the market for structured finance. All of the individual debt securities have been modeled using the current collateral pool and capital structure. Assumed defaults on delinquent loans are dependent on the specific security’s collateral attributes and historical experience. Results are then closely analyzed by the asset specialist to determine whether or not a principal or interest loss is expected to occur. Securities are impaired to fair value when Aegon expects that it will not receive all contractual cash flows on its tranches. The remaining CDO portfolio positions are not considered impaired as of December 31, 2012.
SVG Diamond Holdings II Limited ABS - CDO 90 (28) BBB, CCC > 24 months
For the ABS - CDO holding, the underlying collateral pool contains exposure to roughly 40 private equity funds containing approximately 500 distinct investments in the underlying portfolio of companies. Due to the worsened economic climate the valuation of the underlying private equity investments has declined in comparison to expectations at origination. Increased collateral losses have reduced the subordination available as credit enhancement to this security, which in turn has led to a decline in the level of protection to Aegon’s tranche within the collateral pool. Despite the decline in the level of protection provided by the subordination for this security, cash flow modeling continues to indicate full recovery of principal and interest, Aegon does not consider the underlying investments to be impaired as of December 31, 2012.
The net unrealized loss on Other ABSs is EUR 24 million. ABS - other includes debt issued by securitization trusts collateralized by various other assets including student loans, timeshare loans, franchise loans and other asset categories. The unrealized losses are a function of decreased liquidity and increased credit spreads in the market. Where ratings have declined to below investment grade, the individual debt securities have been modeled. Assumed defaults on delinquent loans are dependent on the specific security’s collateral attributes and historical experience. Results are then closely analyzed by the asset specialist to determine whether or not a principal or interest loss is expected to occur. Securities are impaired to fair value when Aegon expects that it will not receive all contractual cash flows on its tranches. As the remaining unrealized losses in the ABS - other portfolio relate to holdings where Aegon expects to receive full principal and interest, Aegon does not consider the underlying investments to be impaired as December 31, 2012.
Financial The Financial Industry sector is further subdivided into banking, brokerage, insurance, REIT’s and financial other. Companies within
The banking sub-sector in Aegon’s portfolio is relatively large, diverse, and of high quality. Aegon holds EUR 8,319 million
(2011: EUR 10,209 million) of AFS bonds issued by banks. The net unrealized gain on these bonds amounts to EUR 326 million
The following table highlights Aegon’s credit risk to capital securities within the banking sector: Americas The
Belfius Bank & Insurance Banking 53 (51) B > 24 months
Bank of America Corp Banking 89 (28) BB+ > 24 months
Aegon’s available-for-sale debt securities for Belfius Bank SA have a fair value of EUR 53 million as of December 31, 2012. These below investment grade securities are Upper Tier 2 and had gross unrealized losses of EUR 51 million as of December 31, 2012. Belfius
Aegon’s available-for-sale debt securities for Lloyds Banking Group PLC have a fair value of EUR 59 million as of December 31, 2012, of which EUR 49 million relates to holdings rated below investment grade. The Upper Tier 2 securities are rated from BB+ to BB
Aegon’s available-for-sale debt securities for Royal Bank of Scotland Group plc (RBS) have a fair value of EUR 49 million as of
December 31, 2012, which are all rated below investment grade. The Tier 1 and Upper Tier 2 securities are rated BB+ to BB-, depending on the individual features of the debt securities. As of December 31, 2012 gross unrealized losses were EUR 30 million, of which
European Commission, among other things, required RBS to defer dividends and coupons on certain of its existing hybrid securities
There are no individual issuers rated below investment grade in the financial industry other sub-sector which have unrealized losses greater than EUR 25 million.
Industrial The Industrial sector is further subdivided into various sub sectors Aegon evaluated the near-term prospects of the issuers and it is believed that the contractual terms of these investments will be met and these investments are not impaired as of December 31, 2012.
Utility The Utility sector is further subdivided into electrical, natural gas and other sub-sectors. Aegon evaluated the near-term prospects of the issuers and it is believed that the contractual terms of these investments will be met and these investments are not impaired as of
Sovereign Aegon Americas, Aegon The Netherlands and Aegon UK’s government issued available-for-sale debt securities include emerging market sovereign bonds, US Treasury bonds, agency and state bonds. All of the issuers in the sovereign sector continue to make payments in accordance with the original bond agreements. Aegon evaluated the near-term prospects of the issuers and it is believed that the contractual terms of these investments will be met and these investments are not impaired as of December 31, 2012.
has been reduced over the past year. The highest concentration remains in Spain, which is a reflection of Aegon’s operations in that country. The figures included in the table below are shown on a gross basis and do not reflect the effect of any hedging activities and include Aegon’s proportionate share in the investments of its associates, of which CAM Aegon Holding Financiero (Spain) is the most significant.
In 2012, Aegon did not record any impairments on its exposure to central governments of the European peripheral countries (2011: nil).
Net (impairments) and recoveries Net impairments during 2012 totaled EUR 103 million (2011 full year: EUR 294 million), including EUR 120 million
(2011: EUR 251 million) of gross impairments related to residential mortgage backed securities in the Americas.
As of December 31, 2012, there are EUR 262 million of gross unrealized gains and EUR 18 million of gross unrealized losses in the equity portfolio of Aegon (2011: EUR 183 million of gross unrealized gains and EUR 23 million of gross unrealized losses). There are no securities held by Aegon with an unrealized loss above EUR 5 million. The table below represents the unrealized gains and losses on share positions held by Aegon Americas, Aegon The Netherlands and Aegon UK.
The sensitivity analysis of net income and shareholders’ equity to changes in equity prices is presented in the table below. The sensitivity of shareholders’ equity and net income to changes in equity markets reflects changes in the market value of Aegon’s portfolio, changes in DPAC amortization, contributions to pension plans for Aegon’s employees and the strengthening of the guaranteed minimum benefits, when applicable. The results of equity sensitivity tests are non-linear. The main reason for this is due to equity options sold to clients that are embedded in some of these products and that more severe scenarios could cause accelerated
Investment contracts for account of policyholders2 20,342 5,192 - - 2 25,536
Insurance contracts for account of policyholders - 5,042 21,071 19,905 70,971 116,989
Investment contracts for account of policyholders 95 6,417 23,191 20,653 57,291 107,647
Insurance contracts for account of policyholders - 5,989 21,909 19,499 65,464 112,861
Underwriting risk Aegon’s earnings depend significantly upon the extent to which actual claims experience differs from the assumptions used in setting the prices for products and establishing the technical liabilities and liabilities for claims. To the extent that actual claims experience is less favorable than the underlying assumptions used in establishing such liabilities, income would be reduced. Furthermore, if these higher claims were part of a permanent trend, Aegon may be required to increase liabilities, which could reduce income. In addition, certain acquisition costs related to the sale of new policies and the purchase of policies already in force have been recorded as assets on the statement of financial position and are being amortized into income over time. If the assumptions relating to the future
In 2012, Aegon has revised its financial reporting to reflect changes in its organization. Businesses in Asia, which were previously managed by Aegon Americas, are included in the Asia line of business within the “New Markets” segment. For the full year 2011, the underlying earnings before tax generated by the Asian operations totaling EUR 37 million were previously reported under the
Realized gains / (losses) on investments 119 269 51 7 - - 446 - 446
Fair value changes on economic hedges for which no hedge accounting is applied 10 (37) (117) (119)
Realized gains and (losses) on repurchased debt 10 7 4 18
Impairment charges / (reversals) on financial assets, excluding receivables 122 28 - 26 4 180
Amortization of deferred expenses, VOBA and future servicing rights 1,043 99 250 118 - 1,510
Impairment charges / (reversals) on non-financial assets and receivables 161 (2) 1 16 - 176
Insurance contracts for account of policyholders 45,589 26,158 2,011 3,113 - - 76,871
Investment contracts for account of policyholders 20,381 2 54,422 3,613 - - 78,418 215Annual Report 2012
Separate accounts and investment funds 65,970 - 10,099 1,259 - - 77,328
Total investments on balance sheet 152,429 67,984 67,224 11,516 759 (8) 299,904
Financial assets at fair value through profit or loss 66,207 23,392 50,082 6,525 728 (6) 146,928
Investment income from financial assets held for general account 2012 2011 2010
Financial assets designated at fair value through profit or loss 139 125 155
The increase in Income from reinsurance ceded in 2012 compared to 2011 is mainly the result of the increased income from external reinsurance following the divestment of the life reinsurance business, Transamerica Reinsurance, to SCOR, completed on 10 Results from financial transactions
Net fair value change of general account financial investments at fair value through profit or loss, other than derivatives 419 44 257
Included in the results from financial transactions is an amount of EUR 93 million of cash received from total return swaps.
Net fair value change of general account financial investments at fair value through profit or loss, other than derivatives comprise: 2012 2011 2010
Realized gains and losses on financial investments comprise: 2012 2011 2010
Ineffective portion of hedge transactions to which hedge accounting is applied 6 13 (1)
Fair value changes on economic hedges for which no hedge accounting is applied (37) (117) (119)
The ineffective portion of hedge transactions to which hedge accounting is applied comprises: 2012 2011 2010
Fair value change on hedging instruments in a fair value hedge (64) (99) 146
EUR 100 million and the gain following the ending of the life, health and pension partnership with Banca Cívica of EUR 35 million. For more details on these two transactions refer to note 25 and 51 respectively. In 2011 other income primarily included a benefit related to the settlement of legal claims of EUR 37 million. In 2010 other income primarily included a gain of EUR 33 million related to the sale of the funeral insurance business in the Netherlands.
EUR 31 million (2011: EUR 27 million; 2010: EUR 29 million) regarding defined contribution expenses.
A charge of EUR 126 million (2011: EUR 263 million, 2010: EUR 24 million), included in amortization of deferred expenses, is classified as non underlying earnings for segment reporting purposes and is offset against realized gains and losses and impairments on financial investments.
Shares, share appreciation rights, share options and LTIP 32 18 1 221Annual Report 2012
Long Term Incentive Plans In 2010, Aegon implemented a Long Term Incentive Plan which replaced the option plan, share appreciation plans, share plans or similar plans relating to Aegon shares. Members of the Executive Board and the Management Board, as well as other senior managers within Aegon, were granted the right to receive Aegon shares if certain performance indicators are met and depending on continued employment of the individual employee to whom the rights have been granted. The shares were granted in May 2010 at the average share price on the NYSE Euronext stock exchange in Amsterdam during the period between December 15 preceding a plan year and
As per 2011 the structure of Long Term Incentives scheme changed. Senior managers within Aegon, not classified as ‘Identified Staff’, have been granted the conditional right to receive Aegon shares if certain performance indicators are met and depending on continued employment of the individual employee to whom the rights have been granted. The shares were granted at the beginning of the year at the average share price on the NYSE Euronext stock exchange in Amsterdam during the period between December 15 preceding a plan year and January 15 of a plan year. The performance indicators apply over a performance period of one year and consist of financial and non-financial targets set by the Supervisory Board or the local remuneration committees. Following the performance year shares are allocated based on actual performance. A vesting period of two years applies after which the shares are transferred to the individual employees. Ex post assessment is not applicable to this group of employees.
“Identified Staff” in accordance with new rules, guidelines and interpretations. Of these, the Capital Requirements Directive III (CRD
WFt 2011 - Rbb) are prominent examples. The rules have been adopted in Aegon’s Global Remuneration Framework for Identified
Variable compensation is paid in cash and in Aegon N.V. shares. The shares were conditionally granted at the beginning of the year at the average share price on the NYSE Euronext stock exchange in Amsterdam during the period between December 15 preceding a plan year and January 15 of the plan year. The performance indicators apply over a performance period of one year and consist of financial and non-financial targets set by the Supervisory Board or the local remuneration committees. For Members of the Executive Board and the Management Board all variable compensation has vested after three years following the performance period. After the vesting period, the variable compensation is transferred to the individual employees. Additional holding periods may apply for vested shares.
Share appreciation rights and share options Senior executives of Aegon companies, as well as other Aegon employees, have been offered both share appreciation rights and share options. These share appreciation rights and share options have been granted at an exercise price equal to the market price of the shares at the date of the grant. The rights and options granted in 2004 - 2008 vest after three years and can only be exercised during the four years after the vesting date. The rights and options granted vest after two years and can only be exercised during the five years after the vesting date. Vesting and exercisability depend on continuing employment of the individual employee to whom the rights and options have been granted. Option plans are settled in equity, whilst stock appreciation rights are settled in cash or provide the employee with the choice of settlement.
The exposure from the issued SARs and share options is economically hedged by part of the position in treasury shares. There have been no modifications to the plans during the financial year.
Impairment reversals on financial assets, excluding receivables, from: 2012 2011 2010
EUR 339 million (2011: EUR 284 million; 2010: EUR 303 million).
There are no interest charges and related fees that are classified for segment reporting purposes as non underlying earnings (2011: nil; 2010: EUR 27 million).
Other charges in 2012 mainly include a charge of EUR 26 million related to a settlement in Q4 following the termination of a Bank-
In 2010, other charges included a provision of EUR 95 million for the settlement of a dispute related to a Bank-Owned Life Insurance
Notes to the consolidated financial statements of Aegon N.V. Note 18 18 Income tax
The prior year adjustments include shifts between current and deferred tax.
Difference due to the effects of: Non-taxable income (93) (66) (71)
The weighted average applicable tax rate for 2012 is 31.0% (2011: 30.5%; 2010: 29.6%). The marginal increase of the weighted average applicable tax rate compared to prior years is caused by the increased contribution to the overall profit of the higher taxed countries (mainly the US).
The beneficial impact in respect of the changes in tax rate/base is primarily the result of the decreased corporate income tax rate in the
In 2012, Other consists of a benefit related to the run-off of the company’s institutional spread-based activities in Ireland.
Basic earnings per share Basic earnings per share is calculated by dividing the net income attributable to equity holders, after deduction of preferred dividends declared, coupons on perpetual securities, coupons and premium on convertible core capital securities and potential coupon on convertible core capital securities by the weighted average number of common shares, excluding common shares purchased by the company and held as treasury shares (refer to note 30.1 and 30.3 respectively).
Net income / (loss) attributable to equity holders 1,570 869 1,759
Net income / (loss) attributable to common shareholders for basic earnings per share calculation 1,316 (117) 1,292
Weighted average number of common shares, excluding treasury shares (millions) 1,907 1,852 1,707
Weighted average number of common shares for diluted earnings per share calculation (millions) 1,907 1,852 2,165
Diluted earnings per share (EUR per share) 0.69 (0.06) 0.68 227Annual Report 2012
Notes to the consolidated financial statements of Aegon N.V. Note 20 20 Dividend per common share It will be proposed to the annual General Meeting of Shareholders on May 15, 2013, absent unforeseen circumstances, to pay a dividend for the year 2012 of EUR 0.21 per common share after taking into account the interim dividend 2012 of EUR 0.10 per common share, resulting in a final dividend of EUR 0.11 per common share. The interim dividend 2012 was paid in cash or stock at the election of the shareholder. The interim dividend was payable as of September 14, 2012.
Amortization / depreciation through income statement - 148 20 13 4 185
The decrease in goodwill reflects the disposal of a business following the ending of a partnership with Banca Civica and a decrease of an earn out provision resulting in a write off of goodwill relating to Caja Cantabria reported in Other movements. This is partly offset by an increase following an acquisition of Liberbank Vida. According to Aegon’s accounting policies, any changes in the estimated value of an earn out provision related to a business combination that dates prior to July 1, 2008, are recognized in goodwill.
Acquisitions through business combinations in value of business acquired (VOBA) mainly consists of the VOBA related to the Liberbank acquisition.Whereas disposal of business relates to the ending of the partnership with Banca Civica.
Accumulated amortization of VOBA in 2011 included the impact of the disposal of the Guardian life and pensions business in the
United Kingdom (EUR 125 million), offset by the impact of the divested life reinsurance business in the Americas (EUR 538 million).
With the exception of goodwill, all intangible assets have a finite useful life and are amortized accordingly. VOBA and future servicing rights are amortized over the term of the related insurance contracts, which can vary significantly depending on the maturity of the acquired portfolio. VOBA currently recognized is amortized over an average period of 24 years, with an average remaining amortization period of 12 years (2011: 12 years). Future servicing rights are amortized over an average period up to 30 years, of which 14 remains at
December 31, 2012 (2011: 14 years). Software is generally depreciated over an average period of 5 years. At December 31, 2012, the remaining depreciation period was 3 years (2011: 3 years).
All the cash-generating units tested showed that the recoverable amounts were higher than their carrying values, including goodwill.
(2011: 5%) and pre-tax risk adjusted discount rate of 17% (2011: 17%).
Where Aegon Spain has agreed to exit businesses at balance sheet date, the recoverable amount is based on the exit price. The exit price includes estimations based on the appraisal value of the cash-generating unit using embedded value principles. Appraisal value represents available net asset value plus a multiple of the value of new business plus the value of in force business. Key assumptions used for the calculation were pre-tax risk adjusted discount rates of 11%-13.5%, future premiums, commissions, inflation, persistency, mortality, morbidity and future investment returns.
To determine the recoverable amounts of the cash generating units of Aegon CEE, value in use was calculated, and compared to the carrying amounts. Value in use has been determined based on a business plan covering a period of typically three years further extrapolated to twenty years where the new business levels for years 4-20 assumed a growth rate based on the business plan of the third year, prudentially decreased by 10%-20%. Other key assumptions used for the calculation were pre-tax risk adjusted discount rate of 10.9%-16.4% (2011: 9.8%-15.8%), new business contribution, renewals, asset fees, investment return, persistency and expenses.
Financial assets at fair value through profit or loss (FVTPL) 1 5,632 5,531
Receivables out of share lease agreements - - - 9 9 9
Receivables out of share lease agreements - - - 19 19 19
Measurement Aegon owns EUR 126 million (2011: EUR 143 million) of shares in the Federal Home Loan Bank that are measured at par, which equals the amortized cost value. The bank has implicit financial support from the United States government. The redemption value of the shares is fixed at par and can only be redeemed by the bank.
Other Movement on the loan allowance account during the year were as follows: Addition charged to income statement (79) (99)
(2011: 85%), of which 95% was performed by independent external appraisers (2011: 94%).
Aegon The Netherlands has entered into long-term residential property leases that can be terminated subject to a short-term notice.
Rental income of EUR 86 million (2011: EUR 93 million; 2010: EUR 100 million) is reported as part of investment income in the income statement. EUR 10 million (2011: EUR 8 million; 2010: EUR 3 million) is attributable to rent on foreclosed real estate. Direct operating expenses (including repairs and maintenance) arising from investment property that generated rental income during the period amounted to EUR 86 million (2011: EUR 78 million; 2010: EUR 72 million). EUR 6 million (2011: EUR 7 million; 2010: EUR 9 million)
Derivatives for account of policyholders Derivatives not designated in a hedge 310 713 65 59 1 Refer to note 48 for a summary of all financial assets and financial liabilities at fair value through profit or loss.
The fair value of derivatives on both the asset and liability side of the consolidated statement of financial position increased during 2012. This increase is mainly caused by decreases in market interest rates in combination with the practice of Aegon The Netherlands to buy swaps and swaptions to offset certain derivative positions rather than unwinding the positions as a whole. Although these new swaps create a full economic offset with existing swaps, the derivatives with a positive or negative fair value do not meet the IFRS
criteria to be netted in the statement of financial position and hence increased both the asset and liability side.
Derivative asset Derivative liability Derivatives not designated in a hedge - general account 2012 2011 2012 2011
Embedded derivatives that are not closely related to the host contracts have been bifurcated and recorded at fair value in the statement of financial position. These bifurcated embedded derivatives are embedded in various institutional products, modified coinsurance and unit-linked insurance contracts in the form of guarantees for minimum benefits. Please refer to note 46 for more disclosures about these guarantees.
Derivatives designated as fair value hedges Aegon’s fair value hedges consist of interest rate swaps that are used to protect against changes in the fair value of fixed-rate instruments due to movements in market interest rates. Gains and losses on derivatives designated under fair value hedge accounting are recognized in the income statement. The effective portion of the fair value change on the hedged item is also recognized in the income statement. As a result, only the net accounting ineffectiveness has an impact on the net result.
For the years ended December 31, 2012, 2011 and 2010, Aegon recognized gains and (losses) related to the ineffective portion of designated fair value hedges of EUR 16 million, EUR 12 million and EUR (6) million respectively. No portion of derivatives was excluded when assessing hedge effectiveness.
Fair value adjustments for these interest rate swaps are deferred and recorded in equity until the occurrence of the forecasted transaction at which time the interest rate swaps will be terminated. The accumulated gain or loss in equity will be amortized into investment income as the acquired asset affects income. Aegon is hedging its exposure to the variability of future cash flows from interest rate movements for terms up to 20 years. The cash flows from these hedging instruments are expected to affect the profit and loss for approximately the next 39 years. For the year ended December 31, 2012, the contracts for which cash flow hedge accounting was terminated resulted in deferred gains of EUR 225 million (2011: EUR 131 million) that are recognized directly in equity to be reclassified into net income during the period when the cash flows occur of the underlying hedged items. For the same year, none of
Aegon’s cash flow hedges were discontinued, as it was probable that the original forecasted transactions would occur by the end of the originally specified time period documented at the inception of the hedging relationship.
For the year ended December 31, 2012, Aegon recognized a loss of EUR (10) million of hedge ineffectiveness on cash flow hedges.
Net foreign investment hedges Aegon funds its investments in insurance subsidiaries with a mixture of debt and equity. Aegon aims to denominate debt funding in the same currency as the functional currency of the investment. Investments outside the eurozone, the United States, the United Kingdom and Canada are funded in euros. When the debt funding of investments is not in the functional currency of the investment, Aegon uses derivatives to swap the currency exposure of the debt instrument to the appropriate functional currency. This policy will ensure that total capital will reflect currency movements without distorting debt to shareholders’ equity ratios. Aegon utilizes various financial instruments as designated hedging instruments of its foreign investments. These instruments include long-term and short-term borrowings, short-term debts to credit institutions, cross currency swap contracts and forward foreign exchange contracts.
All associates are unlisted and are accounted for using the equity method and are considered to be non-current. The investments in associates include interest in insurance companies that are required to maintain a minimum solvency margin based on local directives.
Such restrictions can affect the ability of these associates to transfer funds in the form of cash dividends, or repayment of loans or advances, and therefore, there can be no assurance that these restrictions will not become a limitation in the future. There are no unrecognized shares of losses in associates.
As at December 31, 2012, Aegon and Caja de Ahorros de Mediterráneo (CAM), Aegon’s partner in Caja Mediterráneo Vida (MedVida) are still in an arbitration process to determine the occurrence of a change in control and the corresponding date, which determines the exit price. During the fourth quarter of 2012, the arbitration went into its final stages. A final verdict from the arbitrators is expected to be released in the first half of 2013.
Aegon is of the opinion that, in 2010, a change of control occurred in CAM. Subsequently, Aegon decided to exercise its put option pursuant to the shareholder’s agreement between CAM and Aegon, to exit the partnership. At December 31, 2012, MedVida is recorded for an amount of EUR 327 million in the statement of financial position, including a negative revaluation reserve of EUR 44 million.
On October 1, 2012, Aegon closed the sale of its interest in Prisma Capital Partners LP (“Prisma”). Prisma, which is accounted for as an associate, served as an investment manager for certain of Aegon’s hedge fund investments as well as for other third parties. The final proceeds are subject to certain contingent arrangements which may lead to further payments in 2014 and 2017. The book gain amounted to EUR 100 million. The carrying value of Prisma at the transaction date was EUR 2 million. Aegon’s share in Prisma earnings from January 1, 2012 till October 1, 2012 amounted to EUR 10 million (full year 2011: EUR 13 million).
On August 9, 2011, Aegon completed the divestment of its life reinsurance business, Transamerica Reinsurance (TARe), to SCOR. The divestment of TARe consists of a series of reinsurance agreements between various statutory insurance entities and SCOR for the US
Structuring the transaction as a reinsurance arrangement leaves Aegon exposed to a counter-party risk of SCOR not performing on the reinsurance contracts as the business matures. For such an event, certain levels of collateral related to the reinsured contracts have been placed in trust for Aegon’s benefit. SCOR is rated A1/A+ by Moody’s and Standard & Poor’s, both with stable outlooks.
The transaction has been accounted for primarily as a reinsurance transaction between Aegon and SCOR. Certain fixed assets and certain investment assets have been transferred with any related gain (loss) being recognized. As a result, the divestment did not have significant impact on shareholders’ equity. Earnings on the business retained as well as amortization of the deferred cost of reinsurance asset have been reflected in the run-off businesses line in Aegon’s segment reporting. A deferred cost of reinsurance was established and is disclosed in note 27.
Aegon USA reinsured approximately EUR 4.1 billion of fixed annuities on a quota share basis in three separate transactions during 2011 and 2012. A total of EUR 2.3 billion was ceded to Commonwealth Annuity and Life Insurance Company which includes
Also, in 2011 EUR 431 million of medium term notes (MTN) backing funding agreements issued by Monumental Life insurance company in 2006 and 2007 were reinsured to Liberty Life Insurance Company. This transaction is treated as a financing arrangement since the MTN contracts do not qualify as insurance contracts. The financing cost of approximately EUR 6 million will be amortized over the expected life of the contracts.
DPAC balances at December 31, 2012 include deferred cost of reinsurance for an amount of EUR 558 million (2011: EUR 579 million).
Below a breakdown is provided of DPAC balances, including deferred cost of reinsurance by line of business and reporting segment: Americas The
None of the equipment is held for lease (2011: EUR 0 million). Equipment has not been pledged as security for liabilities, nor are there any restrictions on title. Depreciation expenses have been charged in “Commissions and expenses” in the income statement. Equipment is generally depreciated over a period of three to five years.
For the purposes of the cash flow statement, cash and cash equivalents comprise the following: Cash and cash equivalents 9,653 8,104
Net cash and cash equivalents at December 31, 2012 are positively impacted by effects of changes in exchange rates of EUR 27 million
Net cash flows from investing activities reduced by EUR 582 million to a EUR 71 million inflow (2011: EUR 653 million inflow).
The inflow in 2012 is mainly a result of the proceeds of EUR 102 million on the sale of Aegon’s interest in Prisma and the proceeds of EUR 190 mln received from the exit from the partnership with Banca Civica, partly ofset by the aquisition of Liberbank and purchases of software. In 2011, the inflow was a result of cash received from the divestment of Transamerica Reinsurance and the sale of
Net cash flows from financing activities improved by EUR 2,976 million to EUR 2,602 million inflow (2011: EUR 374 million outflow).
Notes to the consolidated financial statements of Aegon N.V. Note 30 2011 compared to 2010 Net cash flows from operating activities
Total net cash flows from operating activities increased by EUR 1,003 million to EUR 2,266 million inflow (2010: EUR 1,263 million inflow). This increase is predominantly driven by higher net disposals of investments, partly offset by a lower net change in cash collateral. The net change in cash collateral in 2011 is mainly due to derivatives transactions while the net change in cash collateral in 2010 was mainly related to securities lending transactions.
The improvement is a result of cash received from the divestment of Transamerica Reinsurance and the sale of Guardian life in the
30 Shareholders’ equity Issued share capital and reserves attributable to shareholders of Aegon N.V.
The shares were issued at a price of EUR 5.20 per share. The proceeds of EUR 903 million were used to fund part of the repurchase of the convertible core capital securities described in note 31.
On March 15, 2011, Vereniging Aegon exercised its option rights to purchase 41,042,000 class B preferred shares at par value of
All issued common and preferred shares are fully paid. Repayment of capital can only be initiated by the Executive Board, is subject to approval of the Supervisory Board and must be resolved by the General Meeting of Shareholders. Moreover, repayment on preferred shares needs approval of the related shareholders. Refer to Other information for further information on dividend rights.
There are restrictions on the amount of funds that companies within the Group may transfer in the form of cash dividends or otherwise to the parent company. These restrictions stem from solvency and legal requirements. Refer to note 47 for a description of these requirements.
Vereniging Aegon, based in The Hague, holds all of the issued preferred shares.
Vereniging Aegon, in case of an issuance of shares by Aegon N.V., may purchase as many class B preferred shares as would enable
Vereniging Aegon to prevent or correct dilution to below its actual percentage of voting shares, unless Vereniging Aegon as a result of exercising these option rights would increase its voting power to more than 33 percent. Class B preferred shares will then be issued at par value (EUR 0.25), unless a higher issue price is agreed. In the years 2003 through 2009, 69,030,000 class B preferred shares were issued under these option rights. In 2010, no option rights were exercised. In March 2011 Vereniging Aegon exercised its option rights to purchase in aggregate 41,042,000 class B preferred shares at par value to correct dilution caused by Aegon’s issuance of shares conducted under Aegon’s US Shelf Registration through the sale of 173,604,912 common shares of Aegon N.V. at a price of EUR 5.20 per share in March 2011. In 2012 Vereniging Aegon exercised its option rights to purchase in aggregate 8,021,000 class B preferred shares at par value to correct the dilution caused by the issuance of shares as a result of distribution of dividend in the form of stock.
Net (gains) / losses transferred to income statement (513) - (18) (531)
Net (gains) / losses transferred to income statement (203) - (8) (211)
The closing balances of the revaluation reserve for available-for-sale investments relate to the following instruments: Revaluation reserve for available-for-sale investments 4,985 2,299 493
Movement in foreign currency translation and net foreign investment hedging reserves (74) (41) (1) (116)
Movement in foreign currency translation and net foreign investment hedging reserves 364 45 - 409
The equity movements of associates reflect Aegon’s share of changes recognized directly in the associate’s equity.
Aegon repurchased, 375 million convertible core capital securities, in two equal tranches on March 15, 2011 and June 15, 2011 respectively. The total payment to the Dutch State amounted to EUR 2,250 million of which EUR 1,500 million related to the repurchase of the convertible core capital securities and EUR 750 million related to the premium attached to this repurchase. With these transactions Aegon completed the repurchase of all EUR 3 billion convertible core capital securities issued to the Dutch State in
Issuance of non-cumulative subordinated notes - - - 271 271 1 Share options and incentive plans include the shares and options granted to personnel which are not yet vested
USD 250 million floating LIBOR rate 1) Quarterly, December 15 2013 212 212 212
EUR 950 million floating DSL rate 2) Quarterly, July 15 2014 950 950 950
Year of next call 2012 2011 2010 1 The coupon of the EUR 114 million bonds was originally set at 8% until June 8, 2005. Subsequently, the coupon has been reset at 4.156% until 2015. 2 The coupon of the EUR 136 million bonds was originally set at 7.25% until October 14, 2008. Subsequently, the coupon has been reset at 5.185% until
These notes are recognized as a compound instrument due to the nature of this financial instrument. Compound instruments are separated into an equity component and a liability component. At December 31, 2012 the equity component amount to
Refer to note 34 for details of the component classified as subordinated borrowings.
USD 18 million1 Floating Quarterly, July 23 2004 2034 2013 15 15
USD 190 million2 7.625% Semi-annually, 1 Issued by a subsidiary of Aegon N.V. 2 Issued by a subsidiary of, and guaranteed by Aegon N.V.
34 Subordinated borrowings Subordinated borrowings are subordinated to all other unsubordinated borrowings and liabilities. There have been no defaults or breaches of conditions during the period. The fair value of these loans amounts to EUR 94 million at December 31, 2012
Non-life insurance - Unearned premiums and unexpired risks 4,095 3,687 - Incurred but not reported claims 678 718
Loss recognized as a result of liability adequacy testing 1 2
Gross premium and deposits - existing and new business 6,901 6,882
Notes to the consolidated financial statements of Aegon N.V. Note 37 37 Investment contracts
Gross premium and deposits - existing and new business 5,541 5,307 10,848
Gross premium and deposits - existing and new business 7,076 5,750 12,826
EUR 2,050 million. Also, EUR 1,500 million was borrowed from the European Central Bank (ECB), under its Long Term Refinancing
Operation (LTRO) program. The net proceeds of these borrowings were used to finance a part of the Dutch mortgage portfolio of
USD 200 million Zero Coupon Bonds1 - - 1982 / 12 - 142
USD 750 million Senior Notes 4.75% Semi-annually 2003 / 13 569 578
USD 500 million Senior Unsecured Notes 4.625% Semi-annually 2009 / 15 378 384
EUR 1,018 million “SAECURE 7” RMBS Note2, 4 Floating Quarterly 2010 / 15 914 951
GBP 35 million Note issue agreement2, 5, 6 Floating Quarterly 2010 / 15 25 33
EUR 80 million Mortgage loan3 Floating Quarterly 2010 / 15 80 80
EUR 212 / USD 600 “SAECURE 11” RMBS Note2, 8 Floating Quarterly 2012 / 15 649 -
EUR 1,500 million “SAECURE 10” RMBS Note2, 7 Floating Quarterly 2011 / 16 1,378 1,448
EUR 500 million Unsecured Notes 3% July 18 2012 / 17 498 -
GBP 250 million Note issue agreement2, 5, 6 Floating April 21 2008 / 23 92 156
USD 292 million Senior Secured Note2 Floating Quarterly 2012 / 23 216 -
GBP 250 million Medium-Term Notes 6.125% December 15 1999 / 31 305 296
USD 1.54 billion Variable Funding Surplus Note 1, 5 Floating Quarterly 2006 / 36 1,091 1,034
USD 550 million Floating Rate Guaranteed Note2, 5 Floating Quarterly 2007 / 37 360 366
GBP 400 million Senior Unsecured Notes 6.625% Semi-annually 2009 / 39 486 471 1 Issued by subsidiaries of, and guaranteed by Aegon N.V. 2 Issued by a subsidiary of Aegon N.V. 3 Issued by a joint venture of Aegon Nederland N.V. 4 The first optional redemption date is August 2015; the legal maturity date is August 2093. Notes are fully collateralized by mortgage loans which are part of
Aegon’s general account investment. 5 Outstanding amounts can vary up to the maximum stated nominal amount. 6 Private Value-in-Force (ViF) securitization by Aegon UK to monetize a portion of future profits associated with an existing book of unit-linked business. 7 The first optional redemption date is February 2016; the legal maturity date is February 2094. Notes are fully collateralized by mortgage loans which are part of
Aegon’s general account investment. 8 The first optional redemption date is July 2015; the legal maturity date is July 2092. Notes are fully collateralized by mortgage loans which are part of Aegon’s general account investment. 9 The first optional redemption date is March 2016; the legal maturity date is September 2092. Notes are fully collateralized by mortgage loans which are part of
Aegon’s general account investment. 10 The first optional redemption date is October 2017; the legal maturity date is July 2092. Notes are fully collateralized by mortgage loans which are part of
Included in debentures and other loans is EUR 1,050 million (2011: EUR 1,010 million) relating to borrowings measured at fair value. For the year 2012, Aegon’s credit spread had a negative impact of EUR 48 million on income before tax (2011: positive impact of EUR 30 million) and a negative impact of EUR 34 million on shareholders’ equity (2011: positive impact of EUR 21 million).
The cumulative positive impact of Aegon’s credit spread, based on observable market data, on income before tax amounted to
Floating-rate - Expiring within one year 1,248 2,638 - Expiring beyond one year 2,020 985
Main uncertainties relate to the contingent consideration relating to business combinations. These earn out payments will be payable if specific targets, as set out in the purchase agreements, are met in the future. The expected timing of resulting outflows vary between 41 Defined benefit plans
The amounts recognized in the statement of financial position are determined as follows: Present value of wholly or partly funded obligations 3,617 3,309 2,925 2,545 2,144
Present value of wholly unfunded obligations1 2,660 2,543 2,208 2,055 1,875 1 Assets held by Aegon The Netherlands backing retirement benefits of EUR 2,280 million (2011: EUR 2,039 million) do not meet the definition of plan assets and as such were not deducted in calculating this amount. Instead, these assets are recognized as general account assets. Consequently, the return on these assets also does not form part of the calculation of defined benefit expenses.
Actual return on plan assets and reimbursement rights 305 - 305 50 - 50
Movements during the year of the present value of the defined benefit obligations 2012 2011
Movements during the year in plan assets for retirement benefit plans 2012 2011
Sensitivity of assumed medical cost trend rates Assumed medical cost trend rates have an effect on the amounts reported for the health care plans. A one-percentage change in assumed medical cost trend rates would have the following effects: Aggregate of current service cost and interest cost components of net periodic post-employment medical costs 2 (1) 2 (1)
Code. The benefits are based on years of service and the employee’s eligible annual compensation. The defined benefit plans were unfunded by EUR 611million at December 31, 2012 (2011: EUR 524 million unfunded).
The overall goal of the plans is to maximize total investment returns to provide sufficient funding for the present and anticipated future benefit obligations within the constraints of a prudent level of portfolio risk and diversification. Aegon believes that the asset allocation is an important factor in determining the long-term performance of the plans. From time to time the actual asset allocation may deviate from the desired asset allocation ranges due to different market performance among the various asset categories. If it is determined that rebalancing is required, future additions and withdrawals will be used to bring the allocation to the desired level.
Pension plan contributions were not required for Aegon USA in 2012 or 2011.
Aegon The Netherlands Aegon The Netherlands has a number of defined benefit plans and a small defined contribution plan. The contributions to the retirement benefit plan of Aegon The Netherlands are paid by both the employees and the employer, with the employer contribution being variable. The benefits covered are retirement benefits, disability, death and survivor pension and are based on an average salary system. Employees earning more than EUR 45,978 per year (as at January 1, 2012) have an option to contribute to a defined contribution plan for the excess salary. However, the cost for the company remains the same. The defined benefit plans were unfunded by EUR 2,191 million at December 31, 2012 (2011: EUR 2,050 million). Assets held by Aegon The Netherlands for retirement 261Annual Report 2012
Notes to the consolidated financial statements of Aegon N.V. Note 41 benefits do not meet the definition of plan assets and as such were not deducted in calculating this amount. Instead, these assets are recognized as general account assets. Consequently, the return on these assets do not form part of the calculation of defined benefit expenses.
Rate that the cost trend rate gradually declines to 2.00% 2.00%
Aegon UK Aegon UK operates a defined benefit pension scheme providing benefits for staff based on final pensionable salary. The assets of the scheme are held under trust separately from those of the Group. The assets of the scheme are held in policies affected with Scottish
Deferred corporate income tax assets are recognized for tax losses carried forward to the extent that the realization of the related tax benefit through future taxable profits is probable. For an amount of gross EUR 71 million; tax EUR 11 million
Deferred corporate income tax asset dependent on retaining bonds and similar investments until the earlier of market recovery or maturity 890 1,900 311 656
Deferred corporate income tax asset dependent on the realization of capital profits 683 1,201 239 420
Deferred corporate income tax liabilities have not been recognized for withholding tax and other taxes that would be payable on the unremitted earnings of certain subsidiaries, branches, associates and joint ventures. The unremitted earnings totaled gross
Refer to note 14 for a description of share appreciation rights and related expenses.
In The Netherlands, individual variable unit-linked products have a minimum benefit guarantee if premiums are invested in certain funds. The sum insured at maturity or upon the death of the beneficiary has a minimum guaranteed return (in the range of 3% to 4%) if the premium has been paid for a consecutive period of at least ten years and is invested in a mixed fund and/or fixed-income funds. No guarantees are given for equity investments only. The management expense ratio charged to the funds is not guaranteed and can be increased at management’s discretion, with a maximum cost ratio of 1.25% for normal unit-linked policies and 1.90% for policies with a guaranteed return due to the product improvements (’Generieke Verbetermaatregelen’).
In addition, Aegon Americas reinsures the elective guaranteed minimum withdrawal benefit rider issued with a ceding company’s variable annuity contracts. The rider is essentially a return of premium guarantee, which is payable over a period of at least fourteen years from the date that the policyholder elects to start withdrawals. At contract inception, the guaranteed remaining balance is equal to the premium payment. The periodic withdrawal is paid by the ceding company until the account value is insufficient to cover additional withdrawals. Once the account value is exhausted, Aegon pays the periodic withdrawals until the guaranteed remaining balance is exhausted. At December 31, 2012, the reinsured account value was EUR 3.0 billion (2011: EUR 3.3 billion) and the guaranteed remaining balance was EUR 2.4 billion (2011: EUR 2.9 billion).
The reinsurance contract is accounted for as a derivative and is carried in Aegon’s statement of financial position at fair value. At
selling equity futures contracts (S&P 500, Nasdaq, FTSE100 and NKY225 in accordance with Aegon’s exposure) to mitigate the effect of equity market movement on the reinsurance contract and the purchase of over-the-counter interest rate swaps to mitigate the effect of movements in interest rates on the reinsurance contracts.
Product balances as of December 31, 2012 were EUR 432 million in fixed annuities (2011: EUR 495 million) and EUR 112 million in life reinsurance (2011: EUR 122 million).
c. Life contingent guarantees in the United States Certain variable insurance contracts in the United States also provide guaranteed minimum death benefits (GMDB) and guaranteed minimum income benefits (GMIB). Under a GMDB, the beneficiaries receive the greater of the account balance or the guaranteed amount upon the death of the insured. The net amount at risk for GMDB contracts is defined as the current GMBD in excess of the capital account balance at the balance sheet date.
The GMIB feature provides for minimum payments if the contractholder elects to convert to an immediate pay-out annuity. The guaranteed amount is calculated using the total deposits made by the contractholder, less any withdrawals and sometimes includes a roll-up or step-up feature that increases the value of the guarantee with interest or with increases in the account value.
Notes to the consolidated financial statements of Aegon N.V. Note 46 d. Life contingent guarantees in the Netherlands The group pension contracts offered by Aegon in the Netherlands include large group contracts that have an individually determined asset investment strategy underlying the pension contract. The guarantee given is that the profit sharing is the minimum of 0% or the realized return (on an amortized cost basis), both adjusted for technical interest rates ranging from 3% to 4%. If there is a negative profit sharing, the 0% minimum is effective, but the loss in any given year is carried forward to be offset against any future surpluses within the contract period. In general, a guarantee is given for the life of the underlying employees so that their pension benefit is guaranteed. Large group contracts also share technical results (mortality risk and disability risk). The contract period is typically five years and the premiums are fixed over this period. Separate account guaranteed group contracts provide a guarantee on the benefits paid.
The traditional life and pension products offered by Aegon in the Netherlands include various products that accumulate a cash value.
The expected returns are based on risk-free rates. Aegon added a premium to reflect the credit spread as required. The credit spread is set by using the credit default swap (CDS) spreads of a reference portfolio of life insurance companies (including Aegon), adjusted to reflect the subordination of senior debt holders at the holding company level to the position of policyholders at the operating company level (who have priority in payments to other creditors). Aegon’s assumptions are set by region to reflect differences in the valuation of the guarantee embedded in the insurance contracts. If the credit spreads were 20 basis points higher or lower respectively, and holding
Aegon utilizes different risk management strategies to mitigate the financial impact of the valuation of these guarantees on the results including asset and liability management and derivative hedging strategies to hedge certain aspects of the market risks embedded in these guarantees. Guarantees valued at fair value contributed a net gain before tax of EUR 289 million (2011: gain of
Guarantee reserves increased EUR 381 million in 2012 (2011: increase of EUR 2,838 million).
47 Capital and solvency Aegon’s capital base reflects the capital employed in insurance activities and consists of shareholders’ equity, perpetual capital securities and dated subordinated debt and senior debt. Aegon targets its capital base to comprise at least 70% core capital (excluding the revaluation reserve), and targets 25% perpetual capital securities (consisting of junior perpetual capital securities and perpetual cumulative subordinated bonds) and 5% dated subordinated and senior debt related to insurance activities.
Additionally, Aegon manages capital adequacy at the level of its country units and their operating companies. The goal is to ensure that Aegon companies maintain their financial strength. Aegon maintains its companies’ capital adequacy levels at whichever is the higher of local regulatory requirements and the relevant local Standard & Poor’s requirements for very strong capitalization, and any additionally self-imposed economic requirements.
Shareholders’ equity increased by EUR 3,669 million due to the change in the revaluation reserve of EUR 2,618 million and net income for the year of EUR 1,571 million. There were a number of other effects, including dividends of EUR 148 million paid to common shareholders and preferred dividend paid of EUR 59 million.
Group equity consists of core capital plus Other equity instruments (see note 32) such as the junior perpetual capital securities, the perpetual cumulative subordinated bonds, the non-cumulative subordinated notes as well as other equity reserves. Group equity was
Borrowings not related to capital funding of insurance activities (12,237) (8,670)
Borrowings not related to capital funding of insurance activities consists of operational funding including funding for the Dutch mortgage business and US regulation XXX and guideline AXXX redundant reserves. In the ordinary course of business, Aegon N.V. may at times have borrowings, which are offset by cash and cash equivalents available for future capital management activities, such as funding capital contributions in its subsidiaries, redemption of borrowings or payment of dividends to its shareholders.
All financial agreements are closely monitored periodically to assess the likelihood of a breach of any financial covenant and the likelihood thereof in the near future. On the basis of this assessment, a breach of any such covenant has not occurred.
Commissioners in the US. The calculation of the IGD ratio excludes the available and required capital of the UK With-Profit funds. In the
Association of Insurance Commissioners have adopted risk-based capital (RBC) requirements for insurance companies. RBC calculations measure the ratio of a company’s statutory capital, which is measured on a prudent regulatory accounting basis, to a minimum capital amount determined by the RBC formula. The RBC formula measures exposures to investment risk, insurance risk, market risk, and general business risk. Life reinsurance is treated as life insurance. The most pertinent RBC measure is the company action level (CAL)
RBC. This is the highest regulatory intervention level and is the level at which a company has to submit a plan to its state regulators.
For the insurance and reinsurance undertakings of Aegon in the EU, the European Solvency I directives are applicable, as implemented in the relevant member states. Solvency I allows member states to require solvency standards, exceeding the minimum requirements set by the Solvency I directives. For life insurance companies the Solvency I capital requirement is by and large the sum of 4% of insurance and investment liabilities for general account and 1% of insurance and investment liabilities for account policyholders if no guaranteed investment returns are given. At the end of 2012, Aegon The Netherlands consolidated solvency capital ratio based on IFRS
Act 2000 and sets minimum solvency standards. Companies must manage their solvency positions according to the most stringent of the published Solvency I measure (Pillar 1) and a privately submitted economic capital measure (Pillar 2). For Aegon UK, the published measure continues to be the most stringent requirement. At the end of 2012 Aegon UK’s aggregate Pillar 1 capital ratio was approximately 126% (excluding With-Profit funds). In the local solvency surplus calculation for regulatory filings the local regulator
(FSA) only allows the available capital number of the With-Profits Funds included in overall available capital to be equal to the amount of With-Profits funds’ required capital.
In addition Aegon’s subsidiaries, principally insurance companies, are subject to restrictions on the amounts of funds they may transfer in the form of cash dividends or otherwise to their parent companies. There can be no assurance that these restrictions will not limit or restrict Aegon in its ability to pay dividends in the future.
OPTAS N.V., an indirect subsidiary of Aegon N.V., holds statutory reserves of EUR 981 million (2011: EUR 936 million) which are restricted. Included in Aegon N.V.’s legal reserves is an amount of EUR 441 million (2011: EUR 396 million) related to OPTAS N.V.
Notes to the consolidated financial statements of Aegon N.V. Note 49 would otherwise have required bifurcation, such as convertible instruments, preferred shares and credit linked notes, have been designated at fair value through profit or loss.
Investments contracted In the normal course of business, the Group has committed itself through purchase and sale transactions of investments, mostly to be executed in the course of 2013. The amounts represent the future outflow and inflow, respectively, of cash related to these investment transactions that are not reflected in the consolidated statement of financial position.
Share of contingent liabilities incurred in relation to interests in joint ventures 102 51
Contractual obligations An Aegon N.V. indirect US life subsidiary has a net worth maintenance agreement with its subsidiary Transamerica Life (Bermuda) Ltd, pursuant to which Transamerica Life Insurance Company, a US life insurance subsidiary, will provide capital sufficient to maintain a S&P
Legal and arbitration proceedings, regulatory investigations and actions Aegon is involved in litigation in the ordinary course of business, including litigation where compensatory or punitive damages and mass or class relief are sought. Current and former customers, both institutional as well as individual, and groups representing customers, initiate litigation. Also, certain groups encourage others to bring lawsuits in respect of products. Aegon has established litigation policies to deal with the claims, defending when the claim is without merit and seeking to settle in certain circumstances. There can be no assurances that Aegon will be able to resolve existing litigation in the manner it expects or that existing or future litigation will not result in unexpected liability.
In addition, the insurance industry has increasingly and routinely been the subject of litigation, investigations, regulatory activity and challenges by various governmental and enforcement authorities and policyholder advocate groups concerning certain practices. For example, unclaimed property administrators and state insurance regulators are performing unclaimed property examinations of the life insurance industry in the U.S., including certain of its subsidiaries. These are in some cases multi-state examinations that include the collective action of many of the states. Additionally, some states are conducting separate examinations or instituting separate enforcement actions in regard to unclaimed property laws and related claims settlement practices. As other insurers in the United
States have recently done, Aegon Americas identified certain additional internal processes that it has implemented or is in the process of implementing. Aegon Americas increased certain reserves related to this matter by approximately EUR 37 million during the fourth quarter of 2011. No additional reserve increase was recorded in 2012. As the methodology to identify deceased policyholders becomes more refined, it is possible Aegon will add to this reserve. Also, various major insurers in the U.S. have entered into settlements with insurance regulators recently regarding claims settlement practices. Aegon expects that regulators will be trying to reach settlements with other US insurers. While Aegon believes that Aegon’s processes to manage unclaimed property are generally adequate, with industry practices changing and regulatory interpretations evolving, it is uncertain what the further impact of any such inquiry could be for Aegon. Aegon estimates that the adverse financial impact may range from EUR 0 to EUR 150 million before tax.
Aegon subsidiaries have received inquiries from local authorities and policyholder advocate groups in various jurisdictions including the United States, the United Kingdom and the Netherlands. In the normal course of business, reviews of processes and procedures are undertaken to ensure that customers have been treated fairly, and to respond to matters raised by policyholders and their representatives. There is a risk that the Group is not able to resolve some or all such matters in the manner that it expects. In certain instances, Aegon subsidiaries modified business practices in response to such inquiries or the findings thereof. Aegon has also sought and intend to continue to seek to settle certain claims, including via policy modifications, in appropriate circumstances, such as the settlement Aegon reached in July 2009 with Stichting Verliespolis and Stichting Woekerpolis in The Netherlands, two major customer interest groups. In May 2012, Aegon announced that it would accelerate certain product improvements that reduce future costs and that increase policy value for its customers with unit-linked insurance policies consistent with the agreements Aegon announced in
Dienstverlening (the Netherlands financial services industry ombudsman) support the arrangement, it is uncertain whether the public debate on the adequacy generally of the arrangements reached with customer interest groups, as well as the discussions in the
Dutch Parliament, will not be continued in the future and lead to re-examination and adjustment of the settlements made. It is not yet possible to determine the direction or outcome of any further debate, including what actions, if any, Aegon may take in response thereto, or the impact that any such actions may have on Aegon’s business, results of operations and financial position. In addition to the above, certain Aegon subsidiaries have been informed that the regulators may seek fines or other monetary penalties or changes in the way Aegon conducts its business.
Proceedings in which Aegon is involved Aegon and other US industry participants have been named in lawsuits alleging, among other things, that asset-based fees charged for investment products offered on 401(k) platforms were higher than those generally available in the market. Matters like these are being defended vigorously; however, at this time, due to its nature and the type of claims, it is not practicable for Aegon to quantify a range or maximum liability or the timing of the financial impact, if any.
On July 26, 2011, the Amsterdam Court of Appeal, an intermediate appeals court, ruled with respect to a specific Aegon unit-linked product, the “Koersplan”-product. The Amsterdam Court of Appeal accepted Aegon’s position that Koersplan-products sold during the
Supreme Court in March 2013. The Attorney General advised the Supreme Court to annul the decision of the Amsterdam Court of
Appeal and refer the case back to another Court of Appeal for reassessment. However, for reasons that are limited to this specific case, the Attorney General’s advice to annul did not include the Amsterdam Court’s decision to apply a single industry example to define a reasonable premium.
The actual amount may vary based on uncertainties related to the application of any decision to individual customers, equity market fluctuations as well as interest rates movements. Aegon expects the Supreme Court to issue a decision in 2013.
The operating lease obligations relate mainly to office space leased from third parties. The total of future minimum sublease payments expected to be received on non-cancellable subleases is EUR 9 million (2011: EUR 9 million).
50 Transfers of financial assets Transfers of financial assets occur when Aegon transfers contractual rights to receive cash flows of financial assets or when Aegon retains the contractual rights to receive the cash flows of the transferred financial asset, but assumes a contractual obligation to pay the cash flows to one or more recipients in that arrangement.
�� Collateral accepted in the case of securities lending, reverse repurchase agreement and derivative transactions.
Carrying amount of transferred assets 272 8,038 - 26 795 -
Carrying amount of associated liabilities 297 8,075 - 27 814 -
The related mortgage loan portfolio were sold and derecognized to SAECURE 6 BV in 2006. SAECURE 6 BV is not consolidated in the financial statements of Aegon. At the date of the transfer of the mortgage loan portfolio, Aegon recognized a gain of EUR 49 million, which equaled the difference between fair value and carrying amount of the mortgage loan portfolio transferred. The continuing involvement in SAECURE 6 and the maximum exposure to loss is represented by the interest rate swap, reported as a derivative. The fair value of the swap is EUR 202 million at December 31, 2012 (2011: EUR 155 million).
In 2013, the interest of the notes issued by the special purpose entity in respect of this transaction will step-up, together with a similar step-up in the fixed-to-floating swap agreement. At that same time, the special purpose entity has the right to call the notes and to sell the mortgage loan portfolio first back to Aegon. Aegon has a choice to either call back the mortgage loan portfolio, or not. The undiscounted cash outflows required to repurchase mortgage loans transferred to SAECURE 6 BV in 2006, will equal the fair value of the mortgage loan portfolio at repurchase date. The fair value of the mortgage loan portfolio is EUR 1.2 billion as at December 31, 2012 (2011: EUR 1.5 billion). The first opportunity for Aegon to buy the mortgage loan portfolio back is in the third quarter of 2013.
The following table analyses the fair value of the assets received in relation to securities lending and reverse repurchase activities: Securities lending 2012 2011
Non-cash collateral that can be sold or repledged in the absence of default 1,802 2,708
Aegon or its counterparty to post collateral are typically the result of over-the-counter derivative trades, comprised mostly of interest rate swaps, currency swaps and credit swaps. Refer to the credit risk section in note 4 for details on collateral received for derivative transactions.
50.4 Assets pledged Aegon pledges assets that are on its statement of financial position in securities borrowing transactions, in repurchase transactions, and against long-term borrowings. In addition, in order to trade derivatives on the various exchanges, Aegon posts margin as collateral.
As part of Aegon’s mortgage loan funding program in the Netherlands, EUR 2.9 billion (2011: EUR 3.2 billion) have been pledged as security for notes issued (refer to note 39). In addition, in order to trade derivatives on the various exchanges, Aegon posts margin as collateral. The amount of collateral pledged for derivative transactions is EUR 1,643 million (2011: EUR 1,743 million).
On December 5, 2012 Aegon announced the acquisition of 100% of Fidem Life, a life insurance company in Ukraine. The transaction was closed on February 8, 2013. Fidem Life will be rebranded ‘Aegon Ukraine’ and will be integrated into the governance and management structure of Aegon CEE. Information related to the acquired assets and acquired liabilities will be disclosed in future periods, as the initial accounting is not yet finalized due to the fact that Aegon is currently performing the purchase price allocation.
Effective July 1, 2011, Aegon entered into a Joint Venture contract with Unnim, the entity which was created by the merger of Caixa
CaixaBank to end the life, health and pension partnership with Banca Cívica and sell its 50% interest in the joint ventures to CaixaBank for a total consideration of EUR 190 million. The transaction was closed on October 11, 2012 after obtaining regulatory approval. The sale resulted in a book gain of EUR 35 million before tax and was recorded in the fourth quarter of 2012. Aegon’s share in underlying earnings before tax of the joint venture totaled EUR 13 million for 2012 (full year 2011: EUR 16 million).
GBP 275 million to Cinven, a European private equity group. The sale of the Guardian life and pension business in the United Kingdom resulted in a loss of EUR 7 million, mainly originated from the disentaglement costs associated with the sale.
Underlying earnings before tax for Guardian life and pension totaled GBP 23 million in 2010. Gross written premiums for 2010 was
The divestment resulted in a total after-tax consideration of USD 1.4 billion, consisting of cash proceeds of USD 0.9 billion and capital release of USD 0.5 billion. Aegon has retained certain blocks of business consisting primarily of variable annuity guarantee products with a book value of USD 0.4 billion. The divestment of TARe consists of a series of reinsurance agreements between various statutory insurance entities and SCOR for the US domestic business. In addition, SCOR has acquired Transamerica International Reinsurance
Ireland (TIRI), a company that includes reinsurance contracts that are assumed by Aegon US domestic companies which have been retroceded to TIRI, and has taken over the operational assets and systems of TARe.
On April 1, 2010, Aegon completed the sale of its funeral insurance business in the Netherlands to Dutch investment firm Egeria for
Subsidiaries The principal subsidiaries of the parent company Aegon N.V. are listed by geographical segment. All are wholly owned, directly or indirectly, unless stated otherwise, and are involved in insurance or reinsurance business, asset management or services related to these activities. The voting power in these subsidiaries held by Aegon is equal to the shareholdings.
�� Aegon Sony Life Insurance Cy, Tokyo (Japan), life insurance company (50%)
�� Liberbank Vida y Pensiones, Seguros y Reaseguros, S.A., Oviedo (Spain) life insurance and pension company (50%)
Summarized financial information of joint ventures for 2012 accounted for using proportionate consolidation: Current assets
Summarized financial information of joint ventures for 2011 accounted for using proportionate consolidation: Current assets
�� Mongeral, S.A. Seguros e Previdencia, Rio de Janeiro (Brazil) (50%)
Meeting of Shareholders on May 15, 2013, all of Aegon’s preferred shares for cash and common shares (see also the section “Major
On August 15, 2012 Vereniging Aegon exercised its option rights to purchase in aggregate 4,114,000 class B preferred shares at par value to correct dilution caused by Aegon’s issuance of shares on June 15, 2012, being the final dividend 2011 in the form of stock-dividend.
Aegon. The Commission gave its approval for the state support, but imposed a number of behavioral constraints on the company.
EUR 1.15 billion and an amount of EUR 1 billion of the senior loan provided by the Dutch State through Vereniging Aegon was repaid.
On December 1, 2008, Aegon secured EUR 3 billion of convertible core capital securities from the Vereniging Aegon.
Aegon provides reinsurance, asset management and administrative services for employee benefit plans relating to pension and other post-employment benefits of Aegon employees. Certain post-employment insurance benefits are provided to employees in the form of insurance policies issued by affiliated insurance subsidiaries.
Board, and the CEO’s of Aegon USA, Aegon The Netherlands, Aegon UK and Aegon Central & Eastern Europe. The total remuneration for the members of the Management Board over 2012 was EUR 13.8 million (2011: EUR 9.7 million), consisting of EUR 4.1 million
Remuneration of active members of the Executive Board This presentation-format differs from that of previous years. The information below reflects the compensation and various related expenses, as incurred in 2012. Under the new remuneration structure introduced in 2011 rewards are awarded (paid out, or ‘vesting’
in the case of shares) over a number of years after a performance year. The changes in the remuneration-structure have made it more relevant to present rewards earned in a certain performance year instead of what was received in a certain year. Additional factors have been introduced as well, i.e. the ‘crisis tax levy’ introduced by the Dutch Government in 2012 that is required to be included in this section.
The Supervisory Board has adjusted the 2012 fixed compensation of the Executive Board members in order to reflect cost of living increases in line with that has been awarded to all staff in the Netherlands in previous years.
1 The performance related cash remuneration granted over 2011, payable in 2012, was waived by Mr. Wynaendts and Mr. Nooitgedagt (respectively EUR 164 and EUR 106).
To the vested shares a retention (holding) period is applicable for a further three years, before they are at the disposal of the Executive
The remaining part of variable compensation for the performance year 2012 (60%), for Mr. Wynaendts EUR 305 and 97,665 shares and for Mr. Nooitgedagt EUR 210 and 67,110 shares, is to be paid out in future years, subject to ex-post assessments, that may result in downward adjustments and may be subject to additional conditions being met. In each of the years 2014, 2015 and 2016, 20% of the total variable compensation over 2012 may be made available. Any payout will be split 50/50 in a cash payment and an allocation of shares vesting (with the exception of shares sold to meet income tax obligations). To the vested shares a retention (holding) period is applicable for a further three years, before they are at the disposal of the Executive Board members.
3 During the vesting period, dividend payments on these shares are deposited in blocked savings accounts on behalf of the executive members. For active members of the Executive Board 50% of the shares will vest in 2012 and 50% will vest in 2016.
Shares held in Aegon at December 31, 2012 by Alexander R. Wynaendts and Jan J. Nooitgedagt amount to respectively 56,582 and 135,175. For each of the members of the Executive Board, the shares held in Aegon mentioned above do not exceed 1% of total outstanding share capital at the balance sheet date.
Aegon’s Supervisory Board members are entitled to the following: �� A base fee for membership of the Supervisory Board itself. No attendance fees are paid to members for the attendance of the regular Supervisory Board meetings (2012: 7 meetings, 2011: 6 meetings, 2010: 7 meetings); �� An attendance fee of EUR 3,000 for each Supervisory Board meeting, attended in person or by video- or telephone conference, other than one of the regular Supervisory Board meetings; �� A committee fee for members on each of the Supervisory Board’s Committees; �� An attendance fee for each Committee meeting attended in person or through video- and telephone conferencing facilities.
Notes to the consolidated financial statements of Aegon N.V. Note 54
On March 8, 2013 the Attorney General (Procureur Generaal) issued advice to the Supreme Court regarding the KoersPlan case.
For more details on this advice refer to Note 49 Commitments and contingencies.
Meeting of Shareholders on May 15, 2013, all of Aegon’s preferred shares for cash and common shares (see also the section
Other information To: The Supervisory Board, the Executive Board and Shareholders of Aegon N.V.
International Financial Reporting Standards as adopted by the European Union and with Part 9 of Book 2 of the Dutch Civil Code, and for the preparation of the Report of the Executive Board in accordance with Part 9 of Book 2 of the Dutch Civil Code. Furthermore management is responsible for such internal control as it determines is necessary to enable the preparation of the consolidated financial statements that are free from material misstatement, whether due to fraud or error.
December 31, 2012 its result and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union and with Part 9 of Book 2 of the Dutch Civil Code.
Income statement of Aegon N.V. Income statement of Aegon N.V. Financial statements of Aegon N.V.
2.6 Cash and cash equivalents Cash comprises cash at banks and in-hand. Cash equivalents are short-term highly liquid investments with original maturities of three months or less that are readily convertible to known cash amounts, are subject to insignificant risks of changes in value and are held for the purpose of meeting short-term cash requirements. Money market investments that are held for investment purposes (backing insurance liabilities, investment liabilities or equity based on asset liability management considerations) are not included in cash and cash equivalents but are presented as investment or investment for account of policyholders.
2.9 Equity Financial instruments that are issued by the company are classified as equity if they represent a residual interest in the assets of the company after deducting all of its liabilities and the company has an unconditional right to avoid delivering cash or another financial asset to settle its contractual obligation. In addition to common shares and preferred shares, the company has issued perpetual securities. Perpetual securities have no final maturity date, repayment is at the discretion of Aegon and for junior perpetual capital securities Aegon has the option to defer coupon payments at its discretion. The perpetual capital securities are classified as equity rather than debt, are measured at par and those that are denominated in US dollars are translated into euro using historical exchange rates.
The liability component for the non-cumulative subordinated notes is equal to the present value of the redemption amount and subsequently carried at amortized cost using the effective interest rate method. The liability component is derecognized when the
Group’s obligation under the contract expires, is discharged or is cancelled. The equity component is assigned the residual amount after deducting the liability component from the fair value of the instrument as a whole. The equity component in US dollars is translated into euro using historical exchange rates.
For a list of names and locations of the most important group companies, refer to note 52 of the consolidated financial statements of the Group. The legally required list of participations as set forth in article 379 of Book 2 of the Netherlands Civil Code has been registered with the Commercial Register of The Hague.
Money market and other short-term investments FVTPL1) Total 1 Fair value through profit or loss.
6 Receivables Receivables from group companies and other receivables have a maturity of less than one year. Other receivables include an income tax receivable of EUR 59 million (2011: payable of EUR 206 million).
Aegon N.V., together with certain of its subsidiaries, is part of a tax grouping for Dutch corporate income tax purposes. The members of the fiscal entity are jointly and severally liable for any taxes receivable or payable by the Dutch tax grouping.
7 Other assets Other assets include derivatives with positive fair values of EUR 330 million (2011: EUR 158 million).
All issued common and preferred shares are fully paid. Repayment of capital can only be initiated by the Executive Board, is subject to approval of the Supervisory Board and must be resolved by the General Meeting of Shareholders. Moreover, repayment on preferred shares needs approval of the related shareholders. There are restrictions on the amount of funds that companies within the Group may transfer in the form of cash dividends or otherwise to the parent company. These restrictions stem from solvency and legal requirements. Refer to note 47 to the consolidated financial statements of the Group for a description of these requirements.
Aegon N.V. and Vereniging Aegon have entered into a preferred shares voting rights agreement, pursuant to which Vereniging Aegon has voluntarily waived its right to cast 25/12 vote per class A or class B preferred share. Instead, Vereniging Aegon has agreed to exercise one vote only per preferred share, except in the event of a “special cause”, such as the acquisition of a 15% interest in
In 2012, Vereniging Aegon exercised its option rights to purchase in aggregate 8,021,000 class B preferred shares at par value to correct the dilution caused by the issuance of shares as a result of distribution of dividend in the form of stock.
Foreign currency translation differences and movement in foreign investment hedging reserves - - - (113) - - - - (113)
Foreign currency translation differences and movement in foreign investment hedging reserves - - - 397 - - - - 397
On the balance sheet date Aegon N.V. and its subsidiaries held 28,713,730 of its own common shares with a face value of EUR 0.12 each. Most of the shares have been purchased to neutralize the dilution effect of issued share dividend and to hedge share based payment plans for executives and employees. Movements in the number of repurchased own shares held by Aegon N.V. were as follows: Transactions in 2012: Sale: 1 transaction, price EUR 3.52 (9,533) -
Junior perpetual capital securities Coupon rate Coupon date, as of Year of next call 2012 2011 2010
EUR 950 million floating DSL rate 2 Quarterly, July 15 2014 950 950 950
USD 500 million floating CMS rate 3 Quarterly, July 15 2014 402 402 402 1 The coupon of the USD 250 million junior perpetual capital securities is reset each quarter based on the then prevailing three-month LIBOR yield plus a spread of 87.5 basis points, with a minimum of 4%.
Perpetual cumulative subordinated bonds Coupon rate Coupon date, as of Year of next call 2012 2011 2010 1 The coupon of the EUR 114 million bonds was originally set at 8% until June 8, 2005. Subsequently, the coupon has been reset at 4.156% until 2015. 2 The coupon of the EUR 136 million bonds was originally set at 7.25% until October 14, 2008. Subsequently, the coupon has been reset at 5.185% until
October 14, 2018. 3 The coupon of the EUR 203 million bonds was originally set at 7.125% until March 4, 2011. Subsequently, the coupon has been reset at 4.26% until 4 If the bonds are not called on the respective call dates and after consecutive period of ten years, the coupons will be reset at the then prevailing effective yield of ten-year Dutch government securities plus a spread of 85 basis points.
These notes are recognized as a compound instrument due to the nature of this financial instrument. Compound instruments are separated into an equity component and liability component. At December 31, 2012 the equity component amounts to
The proceeds from the issuance of the subordinated notes are used for general corporate purposes.
The repayment periods of borrowings vary from within one year up to a maximum of 28 years. The interest rates vary from 3.000% to 6.625% per annum. The market value of the long-term borrowings amounts to EUR 3,126 million (2011: EUR 3,414 million).
Commitments and contingencies Aegon N.V. has entered into a contingent capital agreement in order to enable its subsidiary Scottish Equitable Plc. to maintain capital in excess of the minimum capital requirements. The agreement is secured by GBP 200 million in assets, which have been allocated to
Scottish Equitable. In the event Scottish Equitable’s solvency capital would fall below the minimum capital requirement, Aegon N.V. has agreed to replenish solvency capital up to the amount of assets remaining in the secured account. The agreement expires when certain conditions have been triggered. These conditions are: 1) (partial) disposal of Scottish Equitable or 2) the implementation of solvency II
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 indirect subsidiary companies of Transamerica Corporation, Aegon USA, LLC and Commonwealth General Corporation. At December 31, 2012, the letter of credit arrangements amounted to EUR 3,606 million (2011: EUR 3,773 million); as at that date no amounts had been drawn, or were due under these facilities; �� Due and punctual payment of payables by the consolidated group companies Transamerica Corporation, Aegon Funding Company
15 Number of employees Other than the Executive Board members, there were no employees employed by Aegon N.V. in either 2012 or 2011.
Financial statements of Aegon N.V. Note 17 17 Events after the balance sheet date On March 8, 2013 the Attorney General (Procureur Generaal) issued advice to the Supreme Court regarding the KoersPlan case.
Management's responsibility Management is responsible for the preparation and fair presentation of these company financial statements and for the preparation of the Report of the Executive Board, both in accordance with Part 9 of Book 2 of the Dutch Civil Code. Furthermore management is responsible for such internal control as it determines is necessary to enable the preparation of the company financial statements that are free from material misstatement, whether due to fraud or error.
In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the company financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the company financial statements.
Opinion with respect to the company financial statements In our opinion, the company financial statements give a true and fair view of the financial position of Aegon N.V. as at
Proposal for profit appropriation Appropriation of profit will be determined in accordance with the articles 31 and 32 of the Articles of Association of Aegon N.V. The relevant provisions read as follows: 1. The General Meeting of Shareholders shall adopt the annual accounts.
At the Annual General Meeting of shareholders on May 15, 2013, the Executive Board will, absent unforeseen circumstances, propose a final dividend for 2012 of EUR 0.11 per common share. The final dividend will be paid in cash or stocks at the election of the shareholder. The value of the stock dividend will be approximately equal to the cash dividend.
In order to reflect the prevailing market price of Aegon N.V. common shares fully within the indication provided, the number of dividend coupons that give entitlement to a new common share of EUR 0.12 will be determined on June 7, 2013 after 5.30 pm, based on the average share price on NYSE Euronext Amsterdam in the five trading days from June 3, 2013 up to and including June 7, 2013.
EUR 0.12 per share and 1,000,000,000 preferred shares (divided into 500,000,000 class A and 500,000,000 class B preferred shares), each with a par value of EUR 0.25 per share. At the same date, there were 1,972,029,595 common shares, 211,680,000 class A
Aegon’s common shares are registered shares. Holders of shares of New York registry hold their common shares in registered form issued by Aegon’s New York transfer agent on Aegon’s behalf. Shares of New York registry and shares of Netherlands registry are exchangeable on a one-to-one basis and are entitled to the same rights, except that cash dividends are paid in US dollars on shares of
Ennia N.V. merged into Aegon N.V. Vereniging AGO initially received approximately 49% of the common shares (which was reduced gradually to less than 40%) and all of the preferred shares in Aegon N.V., giving it voting majority in Aegon N.V. At that time Vereniging
In accordance with the 1983 Merger Agreement, Vereniging Aegon had certain option rights on preferred shares to prevent dilution of voting power as a result of share issuances by Aegon N.V. This enabled Vereniging Aegon to maintain voting control at the General
Aegon N.V. subsequently sold these common shares in a global offering. The purchase price for the 206,400,000 common shares sold by Vereniging Aegon to Aegon N.V. was EUR 2,064,000,000, which amount (less EUR 12,000,000 related costs) Vereniging Aegon contributed as additional paid-in capital on the existing Aegon N.V. preferred shares, all held by Vereniging Aegon. As a result of these transactions, Vereniging Aegon’s beneficial ownership interest in Aegon N.V.’s common shares decreased from approximately 37%
Aegon has voluntarily waived its right to cast 25/12 vote per class A or class B preferred share. Instead, Vereniging Aegon has agreed to exercise one vote only per preferred share, except in the event of a “special cause”, such as the acquisition of a 15%
interest in Aegon N.V., a tender offer for Aegon N.V. shares or a proposed business combination by any person or group of persons whether individually or as a group, other than in a transaction approved by the Executive Board and the Supervisory Board. If, in its sole discretion, Vereniging Aegon determines that a “special cause” has occurred, Vereniging Aegon will notify the General Meeting of Shareholders and retain its right to exercise the full voting power of 25/12 vote per preferred share for a limited period of six months.
B preferred shares as would enable Vereniging Aegon to prevent or correct dilution to below its actual percentage of voting shares, unless Vereniging Aegon as a result of exercising these option rights would increase its voting power to more than 33%. Class B
September 2012, being the interim-dividend 2012 in the form of stock-dividend.
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, 2012, amounts to approximately 22.06%. In the event of a “special cause”, Vereniging Aegon’s voting rights will increase, currently to 32.64%, for up to six months per “special cause”.
Vereniging Aegon has an Executive Committee consisting of six members, four 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.
Resolutions of the Executive Committee, other than with regard to amendment of the Articles of Association of Vereniging Aegon, are made with an absolute majority of the votes. When a vote in the Executive Committee results in a tie, the General Meeting of Members has the deciding vote. With regards to the amendment of the Articles of Association of Vereniging Aegon, a special procedure is in place to provide for the need of a unanimous proposal from the Executive Committee, thereby including the consent of the representatives of Aegon N.V. at the Executive Committee. Following the amendment of the Articles of Association as effected on September 13, 2005, this requirement does not apply in the event of a hostile change of control at the General Meeting of Shareholders of Aegon N.V., in which event Vereniging Aegon may amend its Articles of Association without the cooperation of
Proposed capital restructuring In February 2013 Aegon and Vereniging Aegon have reached an agreement which enables Aegon to simplify the company’s capital structure and maintain a high-quality capital base.
Under the agreement, all of Aegon’s preferred shares will be exchanged for cash and common shares. The value of all preferred shares, which have a book value of EUR 2.1 billion, has been determined at EUR 1.1 billion. Vereniging Aegon will receive EUR 400 million from
Vereniging Aegon will relinquish its preferential rights with regard to dividends and liquidation proceeds. In addition, the voting rights of Vereniging Aegon in ordinary course will be reduced from the current 22.1% to 14.8% which will align its voting rights and economic ownership in Aegon. Vereniging Aegon will maintain its current 32.6% voting rights in case of a “special cause”.
�� Amendment of the Preferred Shares Voting Rights Agreement (Voting Rights Agreement) between Aegon N.V. and Vereniging
Aegon to ensure that under normal circumstances the Association will only exercise 1 vote per 40 common shares B (voting rights in normal circumstances will be equal to the financial rights of a common share B) and that it will only exercise its full voting rights in case of a “special cause”.
Other investments at fair value through profit or loss 2,333 3,089 3,089
Real estate: Investments in real estate 2,679 2,679 1 Cost is defined as original cost for available-for-sale shares and amortized cost for available-for-sale and held-to-maturity bonds.
Issuance, repurchase and coupons of convertible core capital securities - (2,250) (563)
Net increase / (decrease) in cash and cash equivalents 505 (214) (25)
The provisions can be analyzed as follows: Schedule V Schedule V
�� Purchases of equity securities by the issuer and affiliated purchasers
Additional information Supervision Property, plants and equipment Employees and labor relations
Bank (DNB or Dutch Central Bank) is required, as a lead supervisor, to carry out “supplementary supervision”. The supplementary supervision of insurance companies in an insurance group enables EU supervisors to make a detailed assessment of the financial position of the EU insurance companies that are part of that group. The Directive requires 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 its supervisors twice a year setting out supplemental capital adequacy calculations of the insurance companies, risk concentrations and significant transactions and positions between insurance and non-insurance companies in the Aegon Group.
Aegon owns 16 offices located throughout the United States with a total square footage of 2.0 million. Aegon also leases space for various offices located throughout the United States under long-term leases with a total square footage of 1.1 million. Aegon’s principal offices are located in Baltimore, Maryland; Cedar Rapids, Iowa; Los Angeles, California; St. Petersburg, Florida; Plano & Dallas,
The Netherlands’ employees. The Central Works Council has certain defined powers at the level of the Dutch subsidiary company
The average number of employees per geographical area was: Of which agent-employees 2,929 2,991 3,095
Dividend policy Under Dutch law and Aegon’s Articles of Association, holders of Aegon’s common shares are entitled to dividends paid out of the profits remaining, if any, after the creation of a reserve account. First of all, a fixed dividend is paid on the preferred shares, as described below. Aegon’s Executive Board may determine the dividend payment date and the dividend record date for the common shares, which may vary for the various kinds of registered shares. Aegon’s Executive Board, with the approval of Aegon’s Supervisory
Aegon may 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 below.
If and when Aegon has paid any dividends in the past, Aegon has traditionally paid interim dividends (usually in September) after the release of Aegon’s six-month results and final dividends (usually in May) upon adoption of the annual accounts at the annual General
As part of the approval granted by the European Commission in August 2010, Aegon committed itself not to pay any dividend to the common shareholder until the Dutch State is fully repaid. A cash dividend of 2.75% on the amount paid-in on the class A and class B
Aegon’s NYSE paying agent, based on the foreign exchange reference rate (as published each working day at 14:15 hours by the
European Central Bank) on the business day following the announcement of the interim dividend or on the second business day following the shareholder meeting approving the relevant final dividend.
The offer and listing The principal market for Aegon’s common shares is NYSE Euronext Amsterdam. Aegon’s common shares are also listed on the NYSE
The table below sets forth, for the calendar periods indicated, the high and low sales prices of Aegon’s common shares on NYSE
Euronext Amsterdam and the NYSE Euronext New York as reported by Bloomberg and is based on closing prices. Share prices have been adjusted for all stock splits and stock dividends through December 31, 2010.
On NYSE Euronext Amsterdam only Euronext registered shares may be traded and on the NYSE Euronext New York only New York
Objects and purposes �� The objects of Aegon are to incorporate, acquire and alienate shares and interests in, to finance and grant security for commitments of, to enter into general business relationships with, and to manage and grant services to legal entities and other entities, in particular those involved in the insurance business, and to do all that is connected therewith or which may be conducive thereto, all to be interpreted in the broadest sense.
Description of Aegon’s capital stock Aegon has two types of shares: Common shares (par value EUR 0.12) and (class A and class B) Preferred shares (par value EUR 0.25).
�� All shares have dividend rights except for those shares (if any) held by Aegon as treasury stock. Dividends which have not been claimed within five years lapse to Aegon.
�� Each currently outstanding share is entitled to one vote except for shares held by Aegon as treasury stock. There are no upward restrictions.
�� However, in line with the higher par value of the preferred shares, the holder of the preferred shares, Vereniging Aegon, may cast 25/12 votes for each preferred share. Vereniging Aegon and Aegon have entered into a preferred shares voting rights agreement, pursuant to which Vereniging Aegon has voluntarily waived its right to cast 25/12 votes per class A or class B preferred share.
Instead, Vereniging Aegon has agreed to exercise one vote only per preferred share, except in the event of a “special cause”, such as the acquisition of a 15% interest in Aegon N.V., a tender offer for Aegon N.V. shares or a proposed business combination by any person or group of persons, whether individually or as a group, other than in a transaction approved by the Executive Board and
�� All shares have the right to participate in Aegon’s net profits. Net profits is the amount of profits after contributions, if any, to a reserve account.
�� The General Meeting of Shareholders may, at the proposal of the Executive Board, as approved by the Supervisory Board, resolve to reduce the outstanding capital either by (i) repurchasing shares and subsequently canceling them, or (ii) by reducing their nominal share value.
�� All issued shares are fully paid-up; so there is no liability for further capital calls.
�� There are no provisions discriminating against any existing or prospective holder of shares as a result of such shareholder owning a substantial number of shares.
3. Preferred shares are entitled to a preferred dividend on the paid-in amount, restricted to the fixed rate set by the European Central
Bank for basic refinancing transactions plus 1.75%. No additional dividend is paid on the preferred shares and the remaining profit is available for distribution to the holders of common shares.
The behavioral constraints expired with the full repurchase of the core capital securities and repayment of the Dutch State on June 15, 2011. The structural measures that remained in force throughout 2012 include a reduction of the total U.S. general account assets, full delta hedging of the U.S. variable annuity guaranteed minimum income benefit back book, improvement of the ratio of consolidated shareholders’ equity to total equity base to at least 75% by December 2012 and acceleration of the run-off of certain portfolios, and selling or putting into run-off Aegon’s U.K. bulk purchase annuity business.
Taxation i Certain Netherlands tax consequences for holders of shares The following section outlines certain material Netherlands tax consequences of the acquisition, holding, redemption and disposal of Aegon common shares, but does not purport to be a comprehensive description of all Netherlands tax considerations that may be relevant. This section is intended as general information only and each prospective investor should consult a professional tax adviser with respect to the tax consequences of an investment in Aegon common shares.
This section does not address the Netherlands tax consequences for: i. Investment institutions (fiscale beleggingsinstellingen); ii. Pension funds, exempt investment institutions (vrijgestelde beleggingsinstellingen) or other entities that are exempt from
Beneficial Owner A recipient of proceeds from Aegon common shares will not be entitled to any exemption, reduction, refund or credit of Netherlands dividend tax if such recipient is not considered to be the beneficial owner of such proceeds. The recipient will not be considered the beneficial owner of these proceeds, if, in connection with such proceeds, the recipient has paid a consideration as part of a series of transactions in respect of which it is likely: a. that the proceeds have in whole or in part accumulated, directly or indirectly, to a person or legal entity that would: - as opposed to the recipient paying the consideration, not be entitled to an exemption from dividend tax; or - in comparison to the recipient paying the consideration, to a lesser extent be entitled to a reduction or refund of dividend tax; and b. that such person or legal entity has, directly or indirectly, retained or acquired an interest in Aegon common shares or in profit-sharing certificates or loans, comparable to the interest it had in similar instruments prior to the series of transactions being initiated.
Netherlands Withholding Tax upon Redistribution of Foreign Dividends Aegon must transfer to the Dutch tax authorities all Netherlands dividend withholding tax it withholds on dividends it distributed with respect to the Aegon common shares. Provided certain conditions are met, Aegon may apply a reduction with respect to the withholding tax that it has to pay over to the Dutch tax authorities. This reduction can be applied if Aegon distributes dividends that stem from dividends Aegon itself has received from certain qualifying non-Netherlands subsidiaries, provided these dividends received by Aegon are exempt from Dutch corporate income tax and were subject to withholding tax of at least 5% upon distribution to Aegon.
Non-residents of the Netherlands If a person is neither a resident nor is deemed to be a resident of the Netherlands for Netherlands corporate or individual income tax purposes (nor has opted to be taxed as a resident of the Netherlands for individual income tax purposes), such person is not subject to
and to which enterprise Aegon common shares are attributable. Income and gains derived from Aegon common shares as specified under (1) and (2) by an individual are subject to individual income tax at up to a maximum rate of 52%. Income derived from a share in the profits of an enterprise as specified under (3) that is not already included under (1) or (2) will be taxed on the basis of a deemed return on income from savings and investments (as described above under “Residents of the Netherlands”). The fair market value of the share in the profits of the enterprise (which includes Aegon common shares) will be part of the individual’s Netherlands yield basis.
Gift and Inheritance Tax Residents of the Netherlands Generally, gift tax (schenkbelasting) or inheritance tax (erfbelasting) will be due in the Netherlands in respect of the acquisition of
Netherlands. A holder of any other nationality is deemed to be a resident of the Netherlands for the purposes of the Netherlands Gift and Inheritance Tax Act 1956 if he or she has been resident in the Netherlands and makes a gift within a twelve months period after leaving the Netherlands. The same twelve-month rule may apply to entities that have transferred their seat of residence out of the
Other Taxes and Duties No registration tax, customs duty, transfer tax, stamp duty, capital tax or any other similar documentary tax or duty will be payable in the Netherlands by a holder of Aegon common shares in respect of or in connection with the subscription, issue, placement, allotment, delivery or transfer of the Aegon common shares.
ii Taxation in the United States This section describes certain US Federal income tax consequences to beneficial holders of common shares that are held as capital assets. This section does not address all US Federal income tax matters that may be relevant to a particular holder. Each investor should consult their tax advisor with respect to the tax consequences of an investment in the common shares. This section does not address tax considerations for holders of common shares subject to special tax rules including, without limitation, the following: �� Financial institutions; �� Insurance companies; �� Dealers or traders in securities or currencies; �� Tax-exempt entities; �� Regulated investment companies; �� Persons that will hold the common shares as part of a “hedging” or “conversion” transaction or as a position in a “straddle” or as part of a “synthetic security” or other integrated transaction for US Federal income tax purposes; 323Annual Report 2012
�� Holders that own (or are deemed to own for US Federal income tax purposes) 10% or more of the voting shares of Aegon; �� Partnerships or pass-through entities or persons who hold common shares through partnerships or other pass-through entities; and
�� Holders that have a “functional currency” other than the US dollar.
This section is based on the US Internal Revenue Code of 1986, as amended, US Treasury regulations and judicial and administrative interpretations, in each case as in effect and available on the date of this Annual Report. All of the foregoing is subject to change, which change could apply retroactively and could affect the tax consequences described below.
For the purposes of this section, a “US holder” is a beneficial owner of common shares that is, for US Federal income tax purposes: �� A citizen or individual resident of the United States; �� A corporation created or organized in or under the laws of the United States or any state of the United States (including the District of Columbia); �� An estate, the income of which is subject to US Federal income taxation regardless of its source; or
US earnings and profits was known. The amount of any distribution of property other than cash will be the fair market value of that property on the date of distribution.
Certain “qualified dividend income” received by individual US holders is taxed at a maximum income tax rate of 15% in 2012 and 20% in 2013 and subsequent years. Only dividends received from US corporations or from a “qualified foreign corporation” and on shares held by an individual US holder for a minimum holding period (generally, 61 days during the 121-day period beginning 60 days before the ex-dividend date) can qualify for this reduced rate. Aegon is eligible for benefits under the comprehensive income tax treaty between the Netherlands and the US; therefore, Aegon should be considered a “qualified foreign corporation” for this purpose.
Distributions paid in currency other than US dollars (a “foreign currency”), including the amount of any withholding tax thereon, must be included in the gross income of a US holder in an amount equal to the US dollar value of the foreign currency calculated by reference to the exchange rate in effect on the date of receipt. This is the case regardless of whether the foreign currency is converted into
US dollars. If the foreign currency is converted into US dollars on the date of receipt, a US holder generally should not be required to recognize foreign currency gain or loss in respect of the dividend. If the foreign currency received in the distribution is not converted into US dollars on the date of receipt, a US holder will have a basis in the foreign currency equal to its US dollar value on the date of receipt. Any gain or loss on a subsequent conversion or other disposition of the foreign currency will be treated as ordinary income or loss.
Passive Foreign Investment Company Considerations Based on the nature of Aegon’s gross income, the average value of Aegon’s gross assets, and the active conduct of Aegon’s insurance business, Aegon does not believe that it could be classified as a Passive Foreign Investment Company (“PFIC”). If Aegon were treated as a PFIC in any year during which a US holder owns common shares, certain adverse tax consequences could apply. Investors should consult their tax advisors with respect to any PFIC considerations.
Tax Consequences to Non-US Holders A non-US holder generally will not be subject to US Federal income tax on dividends received on common shares or on any gain realized on the sale or exchange of common shares unless the gain is connected with a trade or business that the non-US holder conducts in the United States or unless the non-US holder is an individual, such holder was present in the United States for at least 183 days during the year in which such holder disposes of the common shares, and certain other conditions are satisfied. Non-US holders should consult their tax advisors with respect to the US Federal income tax consequences of dividends received on, and any gain realized from the sale or exchange of, the common shares.
fails to otherwise comply with the applicable requirements of the backup withholding rules. Certain US holders are not subject to the backup withholding and information reporting requirements.
All other fees include fees billed for permissible non-audit services that Aegon believes are routine and recurring services, would not impair the independence of the auditor and are consistent with the SEC’s rules on auditor independence.
Audit Committee Pre-approval Policies and Procedures Aegon’s Audit Committee is responsible, among other matters, for the oversight of the external auditor. The Audit Committee has adopted a policy regarding pre-approval of audit and permissible non-audit services provided by Aegon’s independent auditors (the
Alt-A mortgages relates to a type of US residential mortgage which are securitized home equity loans. Typical Alt-A borrower has a credit score high enough to obtain an: “A” standing. Alt- A
Assets held by long-term employee benefit funds are part of plan assets. These are assets (other than non-transferable financial instruments issued by the reporting entity) that: �� Are held by an entity that is legally separate from the reporting entity and exists solely to pay or fund employee benefits; and
Discretionary participation feature is a contractual right to receive, as a supplement to guaranteed benefits, additional benefits: �� That are likely to be a significant portion of the total contractual benefits; �� Whose amount or timing is contractually at the discretion of the issuer; and
�� The profit or loss of the company, fund or other entity that issues the contract.
�� A non-derivative for which the entity is or may be obliged to deliver a variable number of the entity’s own equity instruments; or
�� A derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity’s own equity instruments.
Individual savings and retirement products 122 116 101 142 481 139 115 84 136 474
Realized gains / (losses) on investments 45 85 128 149 407 91 204 102 49 446
New premium production accident & health insurance 195 187 190 196 768 159 145 153 188 645
Securities Litigation Reform Act of 1995. The following are words that identify such forward-looking statements: aim, believe, estimate, target, intend, may, expect, anticipate, predict, project, counting on, plan, continue, want, forecast, goal, should, would, is confident, will, and similar expressions as they relate to Aegon. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Aegon undertakes no obligation to publicly update or revise any forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which merely reflect company expectations at the time of writing. Actual results may differ materially from expectations conveyed in forwardlooking statements due to changes caused by various risks and uncertainties. Such risks and uncertainties include but are not limited to the following: �� Changes in general economic conditions, particularly in the United States, the Netherlands and the United Kingdom.
�� The effects of declining creditworthiness of certain private sector securities and the resulting decline in the value of sovereign exposure that Aegon holds.
�� Changes in the performance of Aegon’s investment portfolio and decline in ratings of Aegon’s counterparties.
�� Changes affecting mortality, morbidity, persistence and other factors that may impact the profitability of Aegon’s insurance products.
�� Reinsurers to whom Aegon has ceded significant underwriting risks may fail to meet their obligations.
�� Changes affecting currency exchange rates, in particular the EUR/USD and EUR/GBP exchange rates.
�� Changes in the availability of, and costs associated with, liquidity sources such as bank and capital markets funding, as well as conditions in the credit markets in general such as changes in borrower and counterparty creditworthiness.
�� Increasing levels of competition in the United States, the Netherlands, the United Kingdom and emerging markets.
�� Changes in laws and regulations, particularly those affecting Aegon’s operations, ability to hire and retain key personnel, the products Aegon sells, and the attractiveness of certain products to its consumers.
�� Regulatory changes relating to the insurance industry in the jurisdictions in which Aegon operates.
�� Acts of God, acts of terrorism, acts of war and pandemics.
�� Lowering of one or more of Aegon’s debt ratings issued by recognized rating organizations and the adverse impact such action may have on Aegon’s ability to raise capital and on its liquidity and financial condition.
�� Litigation or regulatory action that could require Aegon to pay significant damages or change the way Aegon does business.
�� Competitive, legal, regulatory, or tax changes that affect profitability, the distribution cost of or demand for Aegon’s products.
�� Catastrophic events, either manmade or by nature, could result in material losses and significantly interrupt Aegon’s business.
�� Aegon’s failure to achieve anticipated levels of earnings or operational efficiencies as well as other cost saving initiatives.
Investor Relations: Telephone: +31-70-344-8305 or toll free (US only): 877 548 96 68