THERE IS A PERSONAL STORY BEHIND EVERY PRODUCT THAT AEGON SELLS
Understanding customers and their financial needs throughout their lives is the foundation of AEGON’s business. Millions of people around the world rely on AEGON to help them secure their long-term financial futures. That’s why, last year, AEGON invited its employees to take part in a photography competition on the theme of “Lifecycle”. After all, AEGON’s business is all about being there for customers, for life.
The level of work sent in was high, and making a selection of the best pictures was challenging. In the end, though, there had to be some winners. Prizes went to Cindy Ferguson (USA), David Stein (USA), Jan Zegers
(the Netherlands) and Rhona Bradbury (UK). Their pictures are featured throughout this annual report, along with other outstanding images from the photo competition.
AEGON has businesses across the United States, as well as in Canada, Brazil and Mexico.
Transamerica is one of the best known names in the US
AEGON The Netherlands is one of the country’s largest providers of life insurance, pensions and long-term investment products.
uses its strength and expertise to create added value for customers, shareholders, employees, and the wider community.
AEGON has businesses in more than twenty markets in the Americas, Europe and Asia, providing life insurance, pension and asset management products for some 40 million customers around the world.
Underlying earnings before tax by geographical area 2010 In EUR million 1,598 Americas 385 The Netherlands 72 United Kingdom 200 New Markets
Consolidated fi nancial statements 80 Consolidated balance sheet 81 Consolidated income statement statement of comprehensive income statement of changes in equity 86 Consolidated cash fl ow statement 88 Exchange rates 89 Notes to the consolidated fi nancial statements 221 Remuneration
Financial statements 227 Balance sheet 228 Income statement 229 Notes to the fi nancial statements
Equally important has been our focus on capturing the operational and cost efficiencies necessary to create a more streamlined organization, better positioned to deliver added value to customers, business partners and of course, our shareholders.
At the same, we have continued to invest in our businesses, both within AEGON’s established markets and in those regions that offer higher growth and returns over the longer-term – Central & Eastern Europe,
Asia will be managed as one regional division, allowing us to leverage product and distribution expertise, capture efficiencies, and pursue organic growth across the Asian continent.
Serving the growing need AEGON is committed to assisting our many current and future customers around the world secure their financial futures. This is both our mission and our promise. More than at any time in recent history, individuals and families understand their need to take responsibility for their financial security and make the decisions that will provide them the peace of mind hoped for throughout a longer retirement. This requires that wherever AEGON
Alex Wynaendts began his career in 1984 with ABN Amro Bank, working in
Mr. Nooitgedagt headed Ernst & Young’s financial services business in the
Netherlands for five years until his appointment in 2005 to the firm’s
Mr. Nooitgedagt was appointed Chairman of Ernst & Young in the Netherlands and became Managing Partner for the
Mark Mullin has spent more than twenty years with AEGON in various management positions in both the
United States and Europe. Mr. Mullin has served as President and CEO of one of
NS Reizigers, part of the Dutch railway company, NS Group. In 1999, he joined
Member of the Management Board responsible for Central & Eastern Europe
Állami Biztosító was privatized and acquired by AEGON. Between 1992 and 2009, Mr. Kepecs was the CEO of
AEGON Hungary. In that time, he has headed the expansion of AEGON’s businesses not only in Hungary but also across the Central & Eastern
He left Scottish Equitable in 1988 and worked as a manager and executive at
Director. In 2002, Mr. Thoresen was appointed Finance Director of AEGON UK
AEGON’s strategy AEGON’s ambition is to become a leader in all its chosen markets by 2015. This means becoming the most recommended life and pensions provider among customers, the preferred partner among distributors and the employer of choice among both current and prospective employees.
Achieving this ambition is based on three strategic priorities: � To reallocate capital to areas that offer strong growth prospects and higher returns.
� And to optimize ONE AEGON by increasing effi ciency and making better use of the company’s global resources.
� More coordinated approach to underwriting and risk and capital management.
Implementing the strategy Reallocate capital AEGON’s objective is to allocate more capital towards those markets that offer higher returns and strong prospects for growth.
� AEGON intends to allocate more capital to highergrowth markets in Central & Eastern Europe, Asia,
� Within the company’s main markets – the United States, the Netherlands and the United Kingdom – AEGON will sharpen its focus on opportunities for growth within specifi c market segments.
Steps AEGON is taking � Shifting focus from spread to fee-based products, particularly in the company’s US businesses. As part of this, AEGON’s institutional spread-based business was placed in run-off in 2009. AEGON is also taking steps to de-emphasize fi xed annuities and expand its
AEGON’s life reinsurance unit, including a possible divestment. AEGON believes Transamerica Re offers only a limited long-term strategic fi t with AEGON’s core life insurance, pension and asset management businesses.
Netherlands, and in the Americas for variable annuities. Approximately 80% of AEGON’s guaranteed minimum income benefi t variable annuities back-book in the United States is delta equity hedged. AEGON’s aim is 100% by the end of 2012.
New Markets (AEGON Asset Management, Asia, Central & Eastern Europe, France, Latin America, Spain, Variable Annuities Europe)
Steps AEGON is taking � Restructuring of UK businesses to improve returns, lower costs and refocus on opportunities for growth in key At Retirement and Workplace Savings markets.
� Restructuring of businesses and introduction of a more streamlined organization in the United States.
� Improving and strengthening customer service – and continuing to compete on customer service.
United Kingdom � AEGON expects restructuring in the United Kingdom to reduce costs, improve returns and refocus the company on opportunities for growth in the
At Retirement and Workplace Savings markets, where AEGON already has leading positions.
� At the same time, AEGON will retain its life insurance and protection business in the United Kingdom to support new opportunities in the At Retirement market.
a step that will lead to the loss of a number of positions over the course of 2011.
� Business partners. Business ambition: to become the most preferred partner. Measure: extend principles of market conduct to partnerships globally.
AEGON believes these initiatives will further strengthen confidence in the company, and help create long-term value for all shareholders and investors.
International commitments As part of its approach to sustainability, AEGON has a number of international commitments: � AEGON is a signatory to the Carbon Disclosure
� AEGON Asset Management is also a signatory to the United Nations’ Principles for Responsible
Global Reporting Initiative, which develops accepted and comparable standards for sustainability reporting.
Declaration of Human Rights and subscribes to the core standards of the International Labor
Organization and the principles on human rights and labor standards contained in the UN Global
was ranked among the twenty highest performing companies in the Netherlands in the Dutch government’s 2010 Transparency Benchmark.
Supervisory Board also plays a key role in helping monitor and developing overall strategy.
For more details on AEGON’s approach to sustainability, please see the Sustainability 2010 – Report to Stakeholders, available online.
� AEGON’s operations in Louisville, Kentucky will be consolidated with locations elsewhere in the
Organizational changes will result in annual cost savings of approximately USD 70 million.
� AEGON Asset Management fully operational as one global business since beginning of 2010, bringing together asset management businesses in the United
European Data Center covering both the Netherlands and the United Kingdom.
� Appointment of new senior management in the past two years, with new CEOs appointed in the Netherlands, the United States, the United Kingdom and Asia, and the appointment of a new CEO of AEGON Asset
� More integrated approach with the appointments of AEGON’s global heads of Human Resources,
� Introduction of consistent performance management across the organization and greater alignment of management compensation with strategic objectives.
AEGON’s business. Over the past decade, the company has built up operations in new, emerging markets.
Europe, as well as China, India and Japan in Asia, and
During 2010, market and financial conditions continued to improve, following the upward trend that started in 2009. Equity markets continued to rise but remained volatile, while corporate credit spreads remained fairly stable. This had a positive impact on AEGON’s earnings and capital position. Sales of equity-linked products benefited from positive sentiment on equities. AEGON
However, AEGON’s exposure to the sovereign debt of these countries was, and remains limited. During the remainder of 2010, interest rates began to recover but did not reach the levels of the beginning of the year, but generally have a negative impact on AEGON’s businesses.
In Poland, the Government plans to amend pension fund legislation as well. The main changes would be a lower contribution fee, special requirements on minimum mandatory capital and solvency margin, and the creation of three pension funds with distinct risk profiles
AEGON expects these government measures in Hungary and Poland to have a combined negative effect on underlying earnings of approximately EUR 25 million for the full year of 2011.
However, the insurance and pensions industry is continuing to go through a period of significant change.
AEGON’s challenge is to understand the nature of this change, and to adapt to it. There are several factors: � In many countries, people are living longer, healthier lives. People are spending longer in retirement than they used to, and there is a growing demand for life insurance, private pensions and long-term investment products.
This means that there are fewer economically active people to fund traditional pay-as-you-go state pensions. As a result, governments, particularly in
� Distribution patterns are changing due to new technology. Customers are increasingly using the internet and social media to locate and purchase fi nancial services. In some countries this has led to the emergence of new competitors using online distribution models, or non-traditional suppliers such as supermarkets and retailers. Established providers are under increasing pressure to reduce costs and adapt their systems of distribution.
EUR 1 billion of convertible core capital securities followed by another repurchase of EUR 500 million in
� Terms on the remaining EUR 1.5 billion remain unchanged, though the Ministry agreed to waive rights to any accrued coupons.
December 2009 EUR 1 billion AEGON repaid one third of the convertible core capital, taking advantage of a lower premium for repayment. Including this premium and interest, the repayment amounted to EUR 1.15 billion.
March 2011 EUR 750 million EUR 750 million was repaid in March 2011. There was a 50% premium and no coupon. In total an amount of EUR 1.25 billion was paid by AEGON.
Commission gave its approval, on condition that the company adopted a limited number of behavioral constraints.
AEGON will 1: � Continue to run off its institutional spread-based business in the United States and lower production of fi xed annuities. These measures will result in a reduction of USD 25 billion in AEGON’s US general account by the end of 2012.
before the European Commission ruling as part of broader measures to improve AEGON’s risk-return profile and operational efficiency and to lower costs.
In addition, AEGON is also subject to a number of other temporary behavioral constraints, which will remain in force until the convertible core capital securities are fully repurchased: � AEGON will not pursue acquisitions, though investment in the company’s partnerships in Spain is permitted, providing AEGON’s overall share of the Spanish market does not increase.
� AEGON will make no further dividend payments to common shareholders until all core capital securities issued to the Dutch State are fully repurchased.
Communications AEGON’s aim is to provide information that is clear, transparent, accurate and timely. This is particularly important during times of economic uncertainty. During 2010, AEGON organized a number of conferences, road shows, press briefings and other events to communicate the company’s strategy and performance to investors and the financial markets. AEGON’s investor relations team works closely with the company’s media and communications team. AEGON has a clear and well-defined policy with regard to communications between the company and its investors. This policy, adopted in 2008, sets out rules and guidelines in line with the Dutch
America, Europe and Asia. In total, there were approximately 460 meetings with shareholders and other potential investors in 42 different locations.
presented to the meeting were adopted. During the meeting, CEO Alex Wynaendts set out details of the company’s strategy and efforts to focus AEGON on longterm opportunities for growth in its main markets.
AEGON reports underlying earnings and other results primarily by the following segments: � Americas (which includes AEGON’s businesses in the
In addition, AEGON has continued to provide details of underlying earnings by line of business. The new format is designed to enhance transparency and reflect recent organizational changes in the company’s businesses.
There were also a number of other modifications made to AEGON’s reporting format. Full details are available on
These shareholders include Vereniging AEGON, the company’s largest shareholder. Vereniging AEGON owns 9.9% of AEGON’s common shares. Please see page 244 to 245 for further details.
To AEGON’s knowledge, only one other party holds a capital and voting interest in AEGON N.V. in excess of 5%. According to its filing with the United States
Shareholder base 2010 AEGON has shareholders all over the world, but around 80% are located in the company’s main markets in North
Another 15% of AEGON’s shareholders are based elsewhere in Europe, mainly Germany, France, Norway and Switzerland.
Payment of the interim and final dividends is made in either stock or cash.
AEGON is not allowed to pay a dividend on its common shares until the core capital obtained from the Dutch
Consequently, AEGON did not declare an interim or propose a final dividend for 2010.
shares on the New York Stock Exchange, meanwhile, declined 5% as a result of strengthening of the dollar against the euro. AEGON’s share price performed in line with European peers, however, they underperformed compared with peers in the United States. For further information, please refer to the charts on this page.
Publication of AEGON’s Annual Report, AEGON’s Sustainability 2010 - Report to Stakeholders and information relating to the company’s 2011 annual General Meeting of Shareholders
Underlying earnings and net profit for the year were strong, at EUR 2 billion and EUR 1.8 billion respectively.
These actions make AEGON a more balanced company with an improved risk-return profile.
You have a substantial capital buffer. Could you tell us why it is so important, and outline the steps you have taken to achieve this?
As the recent financial crisis underlined, we need to maintain a substantial capital buffer to ensure that
On this subject, AEGON received EUR 3 billion of capital from the Dutch State at the height of the financial crisis.
Solvency II is expected to come into effect in January 2013. The European Commission’s intention with the new framework is to ensure that the amount of capital an insurance company has to hold at any one time is linked directly to its risks, and to the nature of those risks. This should mean a better system for insurers, because it will reward strong risk management. Customers will benefit because the new framework will lead to a healthier industry, which holds capital for the actual risk it runs.
European insurers, both in the European Union and internationally. We are involved in the discussions to ensure that in the end this new framework is supportive of AEGON’s business ambitions.
At the same time, we have continued to free up capital to invest in markets where we believe we can achieve higher growth and greater returns and implemented measures to capture a broad range of operational efficiencies. We are a much better integrated company, globally and locally, and we will continue to look for more synergies.
Our longer-term aim is to deliver sustainable earnings growth with an improved risk-return profile. We have set targets covering various metrics leading up to 2015.
EUR 1.97 billion, mainly as a result of a strong recovery in the Americas. The improvement was the result of growth of the business, cost savings, higher fee income as a result of higher account balances driven by net inflows and a recovery in financial markets and the absence of reserve strengthening in the Americas.
Earnings in the Netherlands remained strong. AEGON’s operations in the United Kingdom reported higher underlying earnings, while earnings from New Markets increased mainly as a result of the inclusion of AEGON
Asset Management, only partly offset by higher claim experience in the non-life business in Hungary.
Net income AEGON’s net income for 2010 amounted to EUR 1.8 billion, a significant increase compared with net income of
AEGON operates in more than 20 countries around the world, serving about 40 million customers. AEGON sharpened its focus on its core businesses – life insurance, pensions and asset management – and turned in a strong performance.
Japan, Korea, Mexico, Singapore, Spain, Taiwan, Thailand and the United Kingdom.
compared with a loss for the previous year of EUR 544 million. Most of the turnaround was attributable to an improvement in the fair value of guarantees net of related hedges in the Netherlands.
Other charges amounted to EUR 309 million and included a one-time payment for settlement of a dispute related to a bank-owned life insurance policy in the United States and restructuring charges in the United States, the
Income tax amounted to EUR 165 million for 2010, while 2009 had included a tax credit of EUR 658 million.
Solvency II) and investments in growth markets. At constant currency, excluding restructuring charges, operating expenses declined 2% in 2010 compared with the previous year.
AEGON’s core capital position improved considerably during the year to EUR 18.7 billion, as a result of a further increase in the value of the company’s investments and the inclusion of 2010 net income. These positive effects were partly offset by the repayment of
EUR 500 million to the Dutch State, as well as coupon, premium and dividend payments on AEGON securities.
Gross deposits (excluding run-off business) In EUR billion 1 Please refer to note 46 of the consolidated fi nancial statements.
Share in underlying earnings before tax of associates 50 35 43
Includes both individual and group pensions, as well as 401 (k) plans and similar products usually sponsored by, or obtained via, an employer.
Includes all business and operating units in Central & Eastern Europe, Asia,
Spain and France as well as AEGON’s variable annuity activities in Europe and
Includes life insurance, individual and group pension products, savings and investments, as well as general insurance.
Underlying earnings by lines of business In USD million 897 Life and protection 664 Individual savings and retirement products 385 Employer solutions and pensions 105 Life reinsurance 60 Other
increase in underlying earnings and net income mainly as a result of improved market conditions in 2010.
United States and to pursue further operational and cost efficiencies by consolidating operations currently based in Louisville, Kentucky with other existing locations.
Underlying earnings before tax Underlying earnings before tax increased 84% during the year to USD 2.1 billion. Earnings from life and protection remained stable as cost savings were offset by lower margins. Individual savings and retirement products returned to profit, mainly as a result of higher account balances driven by a recovery in financial markets and the absence of reserve strengthening. Earnings from employer solutions and pensions increased as a result of continued strong growth of the business as well as an improvement in the financial markets.
Net income Net income from the Americas more than doubled compared with 2009 to USD 1.5 billion. This was mainly the result of higher underlying earnings and realized gains on investments, a better performance from fair value items and fewer impairments. The result was only partly offset by higher charges that were mainly related to restructuring, the settlement of a dispute related to a bank-owned life insurance policy in the United States and losses from the run-off businesses.
Operating expenses Operating expenses declined 15% compared with 2009 to USD 2 billion, mainly as a result of significant cost reductions, lower restructuring charges, a decrease in employee benefit plan expenses and the transfer of asset management activities to AEGON Asset
Value of new business Value of new business in the Americas declined 26% to
USD 320 billion. This increase was the result of significant improvements in bond, credit and equity markets, partly offset by a decline in run-off assets.
USA # 3 Term life # 4 Universal life # 10 Variable annuities # 13 Pensions
Canada # 5 Universal life # 6 Term life # 6 Segregated funds
In 2010, AEGON decided to discontinue the small bank BOLI and COLI businesses and to pursue further operational and cost efficiencies.
As a result of AEGON’s focus on core businesses, the funeral insurance business in the Netherlands was sold. A further reduction in expenses and investments in new capabilities will position the company for sustainable growth.
underlying earnings for 2010. Net income increased considerably as a result of lower impairments and improved results from fair value items. At the beginning of the year, AEGON sold its funeral insurance activities.
Underlying earnings before tax Underlying earnings before tax declined 3% during the year to EUR 385 million as increased earnings from life and savings and non-life were more than offset by lower pensions earnings. Life and savings increased to
Earnings from pensions declined to EUR 153 million, mainly as a result of lower investment income. Non-life earnings increased to EUR 33 million as a result of more favorable motor and fire insurance claim levels. Earnings from distribution remained level at EUR 16 million.
EUR 748 million. The decline was due mainly to cost savings measures and the transfer of asset management activities to AEGON Asset Management.
Sales and deposits Total new life sales in the Netherlands increased 4%.
Dutch pension market to secure a number of sizeable group pension contracts during the year. Individual life sales were level at EUR 83 million as a result of continued demand for mortgage-related products and immediate annuities. This was a strong result, given that the market as a whole is declining.
Following changes in government regulations, the disability insurance market in the Netherlands is now more open to private sector insurers. As a result, AEGON
Value of new business The value of new business in 2010 declined to
EUR 144 million. The positive effects of increased sales were more than offset by lower spreads in AEGON’s mortgage and annuity businesses. The internal rate of return on new business amounted to 14%.
The Netherlands # 3 Group pensions # 5 Accident and health # 6 Individual life # 7 Property and casualty
AEGON is taking significant steps to improve its return on capital in the United Kingdom. The company is on track to reduce costs by 25% in its life and pensions operation by the end of 2011, and is directing more resources to the key growth At Retirement and
Underlying earnings before tax Underlying earnings from AEGON’s businesses in the
Net income Net income amounted to GBP 72 million for 2010, a significant improvement compared with GBP 8 million the previous year. Higher underlying earnings and significantly lower impairments during the year more than offset a decline in fair value item results and lower realized gains on investments. Net income in 2010 also benefitted from tax credits, in particular a GBP 25 million positive impact from the reduction of the corporate tax rate from 28% to 27% effective April, 1, 2011, with consequential impact on deferred taxes.
GBP 390 million. The decline was mainly due to cost saving measures and the transfer of the asset management activities to AEGON Asset Management, partly offset by project-related costs and charges relating to the restructuring of AEGON’s operations in the United Kingdom, announced in June 2010. The restructuring aims to reduce costs by 25% in the life and pensions operations by the end of 2011. Further restructuring charges are expected. As already noted, a significant proportion of the targeted reduction was enacted 2010.
Sales and deposits Compared with the previous year, new life sales increased 1% to GBP 907 million. Higher sales of pensions and retirement products were offset by a planned decrease in sales of immediate annuities
AEGON group personal pension business which was transferred internally to new group pension contracts.
Value of new business (VNB) In GBP million repricing immediate annuities and the decision to adopt a more conservative investment strategy by investing in new assets in gilts, rather than corporate bonds. The internal rate of return on new business amounted to 11%
Underlying earnings by lines of business In EUR million 76 Life
Underlying earnings before tax Underlying earnings before tax from New Markets increased 18% compared with 2009 to EUR 200 million.
AEGON’s operations in Asia recorded a loss of EUR 39 million as a result of continued investments in the company’s joint ventures in China, India and Japan.
In 2010, asset management and administration fees were reduced, due to new pension legislation in Hungary.
Sales and deposits New life sales during 2010 declined 4% compared with the previous year to EUR 275 million. Growth in Central
& Eastern Europe - and to a lesser extent Asia - was more than offset by a decline in Spain. Strong singlepremium production in the bank channel in Poland, continued growth in Hungary and a successful shift from pensions to life insurance in Turkey contributed to the 26% growth in new life sales in Central & Eastern Europe.
Sales in Asia increased 6% as a result of growth in both
China and India, while the decrease in Spain was mainly due to lower sales from AEGON’s partnership with CAM.
Eastern Europe was largely offset by the decline in Spain, which was driven mainly by lower sales. The internal rate of return on new business remained high at 34%.
during the year to EUR 34 billion at December 31, 2010, mainly as a result of the inclusion of AEGON Asset
Underlying earnings geographically New Markets In EUR million 2010 2009 %
Transamerica Insurance & Investment Group announces the launch of TransSecurity, a concept specifically designed to help financial advisors address the concerns of clients with current financial needs, while ensuring that future generations also benefit.
AEGON-CNOOC launches its single premium universal life (UL) plan. The product is designed for people who focus on both protection and asset accumulation with minimum guaranteed return and provides additional accidental medical protection.
LIVESTRONG SurvivorPlan policies offering vital insurance protection for cancer patients with access to exceptional resources from the Lance
AEGON Spain launches its savings product family CuenTAEgon, including a version for children called CuenTAEgon Junior. The product offers convenience, flexibility, security and tax benefits.
CEO Alex Wynaendts provides a strategic update to the market, which includes steps to sharpen
Consistent with this strategy, he announces that the company is taking further steps to allocate capital to businesses and markets that offer higher growth and returns over the long term.
Asset Management into a new period of development and growth, in line with the company’s ambitions.
AEGON appoints Executive Vice President Marc van Weede as global Head of Sustainability, effective October 1, 2010. The appointment of Mr. Van Weede extends AEGON’s more integrated approach to managing its operations around the world.
Mongeral AEGON is the first insurance company in Brazil to introduce products for high net worth clients when it launches its family of Private Solutions products.
AEGON announces a new organizational structure for its operations in Asia. Under the new structure all Asian based insurance businesses will be managed as one regional division headquartered in Hong Kong and led by new CEO, Douglas Henck. The integration will be carried out during 2011.
AEGON announces a new product, AEGON Settlement Package Saving in the Netherlands. The product is a savings account in which the settlement amount can later be used to complement income or pension payments.
Defi nition and tolerances For AEGON, risk management involves: � Understanding which risks the company is able to underwrite.
By setting certain pre-defined tolerances and adhering to policies that limit the overall risk the company is exposed to, AEGON is able to accept risk with the knowledge of potential returns and losses.
� Continuity: Ensure a high likelihood that AEGON will meet policyholder obligations, even under plausible extreme events.
� Culture: Encourage a strong risk culture by stressing the company’s low tolerance for operational risk. This will help improve operational excellence and ensure the company treats its customers and other stakeholders fairly.
During the year, AEGON carried out regular sensitivity analyses to determine the impact of different economic and business scenarios, particularly on the company’s
Credit risk After initially narrowing during the first part of the year, credit spreads later widened, reverting to levels seen at the start of 2010. Defaults and downgrades improved. During the year, AEGON took a number of specific steps to reduce its exposure to credit risk: � Restructuring of AEGON US’s investment portfolio and a reduction in high yield bonds.
� Reduction in exposure in the Netherlands through the sale of high yield investments, Dutch residential mortgage-backed and other asset backed securities, as well as a further reduction in exposure to lower-rated European countries.
Equity markets were volatile throughout the year. During 2010, AEGON further extended its program of hedging equity risk at its US and Dutch operations to protect the company against a possible deterioration in equity markets.
During 2010, AEGON took a series of measures to limit the company’s exposure to major financial risks (see page 45).
AEGON’s risk governance framework AEGON has a strong culture of risk management, based on a clear, well-defined governance framework.
� To manage concentration of risk by avoiding the threat of insolvency from an over-concentration of risk in particular areas.
� To facilitate diversifi cation by enabling management to identify diversifi cation benefi ts from apparent risk-return trade-offs.
� To reassure external constituencies that AEGON has appropriate risk management structures and controls in place.
� Risk and Capital Committees (RCCs) present at group level, regional level and in AEGON’s operating units.
Committee with responsibility for ensuring proper execution of the risk governance framework, as well as monitoring compliance with the risk tolerance and company-wide risk policies. The Executive Board Risk
Officer. This Committee reports regularly significant risks to and discusses risk strategy with the Risk Committee of the Supervisory Board, which is responsible for overseeing AEGON’s enterprise risk management, including risk governance and measures taken to ensure risk management is integrated properly into the company’s broader strategy. The Risk Committee of the
Supervisory Board also supervises overall risk exposure in light of management’s risk tolerance, the companywide risk policies and AEGON’s overall solvency position.
Center, the Chief Investment Officer for AEGON’s general account, CFOs from the Americas, the Netherlands and the United Kingdom and the Chief Risk Officer. The Chief
Risk Officer has the additional authority to defer decisions that can have a significant impact on the company’s solvency, liquidity or operations to the
Chief Risk Officers (CROs) have the additional authority to defer decisions that can have a significant impact on the region’s or operating unit’s solvency, liquidity or operations to the Board of the region or operating unit and AEGON’s Chief Risk Officer.
Group Risk Group Risk is responsible for developing and keeping oversight of compliance with the risk governance framework, risk methodology, risk tolerances and risk policies. This involves identifying risk, particularly operational and emerging risk, as well as reviewing risk assessments carried out by operating units.
Group Risk also identifies best risk management practices, facilitates implementation thereof and helps ensure there is consistency in the application of these practices across the company. In addition, Group Risk performs risk analyses, either at its own initiative or at the request of management, including the analysis of extreme events and related management capabilities.
Lines of defense AEGON’s risk management structure includes the establishment of three “lines of defense” to ensure conscious risk-return decisions and limit the magnitude of potential losses within defined levels of certainty.
The objective of this structure is to avoid surprises, either due to unidentified risks materializing or losses that exceed pre-defined risk tolerance levels and related limit structures.
business and support functions. The second line of defense facilitates and oversees the effectiveness and integrity of enterprise risk management across the company, i.e. risk functions and committees. Finally, the third line of defense provides independent assurance and challenge regarding the effectiveness and integrity of enterprise risk management across the company, i.e.
Guiding principles AEGON has a number of guiding principles, which determine its approach to capital and liquidity management: � Ensure AEGON’s business and operating units have strong capital adequacy.
� Manage and allocate capital as effi ciently as possible, maximizing returns and supporting the company’s overall objective of sustainable, profi table growth.
� Maintain overall capital strength and an effi cient capital structure through management of the company’s capital base and leverage.
Taken together, AEGON believes these guiding principles strengthen the company’s ability to withstand adverse market conditions, enhance its financial flexibility and serve the long-term interests of both the company and its stakeholders.
Committee (for further details on this Committee, please see pages 46 to 47).
Capital management Strategic importance AEGON’s approach to capital management plays a vital role in the company’s broader strategy, which is based in part on ensuring more capital is directed toward those markets that offer strong growth prospects and higher returns. In recent years, AEGON has released a significant amount of capital from its existing businesses through a combination of risk reduction, greater capital efficiency and a more active capital management strategy.
AEGON intends to retain an adequate capital buffer for the foreseeable future. For an overview of AEGON’s strategy, please see pages 9 to 15.
Improving risk-return profi le AEGON has taken measures to improve its risk-return profile and lessen its exposure to world financial markets. These measures, in turn, have had the effect of lowering the company’s overall capital requirements.
In addition, AEGON has taken decisions in recent years that have led to an improved risk-return profile, including the sale of the company’s life insurance activities in
Taiwan and the run-off of AEGON’s spread-based institutional business in the United States. Since mid2008, risk reduction measures have accounted for approximately 40% of AEGON’s efforts at preserving and releasing capital.
AEGON aims to secure stable and strong capital adequacy for its businesses, strengthening its ability to withstand adverse market conditions and ensuring the company is able to meet long-term obligations toward its stakeholders.
company’s exposure to equity markets by increased hedging of variable annuity back books in the
Reallocating capital AEGON’s aim over the next few years is to reallocate capital toward markets offering strong growth and higher returns. This includes markets in Latin America,
� AEGON has, in the meantime, continued to invest in growth markets in Asia, Latin America and Central &
Capital requirements and leverage AEGON’s goal is to ensure that all units maintain a strong financial position, now and into the future, and are able to sustain losses from adverse business and market conditions. The company’s overall capital management depends on the following factors: � Capital adequacy
In 2010, AEGON’s capital position remained strong. At the end of the year, AEGON had an excess over and above its capital adequacy requirements of EUR 3.8 billion, an improvement from EUR 3.7 billion twelve months earlier.
was 198%, down from 204% at the end of 2009. This was mainly due to an increase in capital requirements in the Americas. AEGON’s capital position in 2010 was strengthened by increased earnings from the company’s operating units. Over the past year, these units have generated a total of EUR 1.4 billion in cash flow to the group. Excess capital increased despite a revision to
Capital quality and leverage AEGON’s capital base consists of the following components: � Core capital, which comprises shareholders’ equity
(excluding the revaluation reserve), and convertible core capital securities issued in December 2008.
AEGON places limits on the amount of non-core capital in its overall capital base. Currently, the company’s aim is to ensure that core capital comprises at least 70% of the capital base, and that perpetual capital securities and dated subordinated and senior debt account for no more than 25% and 5% respectively. At the end of 2010,
Solvency II In Europe, new rules covering the insurance industry have been proposed and are currently being debated.
The Solvency II frameworks will replace and enhance the Solvency I framework, the currently applicable EU
European insurance and/or reinsurance businesses and will redefine the rules under which insurers calculate their capital. The amount of capital an insurance company will be required to hold under the rules of the Solvency II framework will be determined in a more risk-sensitive way, and more by the type of business it writes and the way it manages its risks than under the current rules.
� A uniform and enhanced level of policyholder protection; the Solvency II framework should, reduce the chance of any particular insurer failing.
AEGON is coordinating its efforts with key European decision makers across the industry to ensure the best outcome for its businesses.
The project team includes a range of disciplines, including Finance, Risk Management and Actuarial.
The team is presently setting the direction, methodology and strategy for the company’s implementation of Solvency II. It also supports teams in each of the strategic business units that are working on the company’s implementation of
AEGON’s overall financial planning and capital allocation processes. AEGON’s aim is to ensure that liquidity is sufficient to meet cash demands even under extreme conditions. The amount of liquidity held is determined by the company’s liquidity risk policy, which ensures that
AEGON’s liquidity policy requires that all operating units measure the period they can maintain a projected positive cash balance without needing to sell any noncash assets, while meeting all cash demands for a period of two years 1.
In addition, AEGON also maintains USD 425 million of shorter-dated bilateral back-up facilities. AEGON N.V.
Operational leverage Though operational leverage is not considered part of AEGON’s capital base, it is an important source of liquidity and funding. Operational debt relates primarily to mortgage warehousing and the funding of
AEGON completed the sale of EUR 1.02 billion in residential mortgage backed securities to institutional investors.
Internal risk management and control systems The Executive Board is responsible for designing, implementing and maintaining internal controls, including proper accounting records and other management information suitable for running the business.
Finally, the compliance function plays a key role in monitoring the company’s adherence to external rules and regulations and internal policies. On the basis of the above, AEGON’s Executive Board makes the following statement regarding the company’s financial reporting risks: � IN CONTROL STATEMENT
� AEGON’s risk management and control systems functioned properly in 2010.
The risk management and control systems provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of AEGON’s published financial statements.
However, they cannot provide absolute assurance that a misstatement of AEGON’s financial statements would be prevented or detected.
Responsibilities in respect of the fi nancial statements and the Annual Report The Executive Board is responsible for preparing the financial statements and the Annual Report in accordance with Dutch law and those International
Executive Board confirms that, to the best of its knowledge, the financial statements prepared in accordance with applicable accounting standards give a true and fair view of the assets, liabilities, financial condition and profit or loss of the company and the undertakings included in the consolidation as a whole and that the Report of the Executive Board includes a fair view of the development and performance of the business during the financial year and the position at balance sheet date of the company and the undertakings included in the consolidation as a whole, together with a description of the principal risks and uncertainties the company faces.
We make it our business to provide the financial security for whatever life’s many choices bring.
Oversight and advice In performing their duties, members of the Supervisory
Corporate governance Details of AEGON’s corporate governance structure and a summary of the company’s compliance with the
Dutch Corporate Governance Code may be found on pages 74 to 75 of this Annual Report. In 2008, the capital agreement with the Dutch State prompted certain changes to AEGON’s corporate governance structure.
As part of the agreement, the Dutch State now has two representatives on the company’s Supervisory Board.
In accordance with AEGON’s Supervisory Board Rules, all regular meetings in 2010 were preceded by preparatory meetings, attended by the Chairman, the Vice Chairman of the Supervisory Board and, from time to time, the
Chairman of the Audit Committee, as well as by the Chief
In 2010, discussions within AEGON’s Supervisory Board focused on the following issues, among others: � Strategy and Group Plan, including the strategic priorities
AEGON’s strategy, among other matters, at the annual two-day strategy retreat in Edinburgh, Scotland. During the two-day meeting the Board considered the changing environment for insurance companies, as well as changing customer needs and distribution methods.
Solvency II (discussed in the Capital and Liquidity section of this Annual Report on page 50) was a regular item on the agenda of meetings of the Board. AEGON’s CFO
presented updates on relevant regulatory and political developments and on AEGON’s preparations for
Solvency II. The Board scheduled extra meetings with management, including the senior manager charged with
AEGON’s Solvency II project, to discuss the implications for the company’s business and products.
Members of the Management Board provided a business update of their country or unit at each quarterly
and Global Sustainability also presented their plans to the Supervisory Board during the course of the year.
The Board discussed various restructurings and cost saving initiatives in the light of the strategic priority to optimize AEGON’s portfolio. The Board supported management’s decision to explore strategic options for, among others, the company’s life reinsurance activities.
Commission not to pay a dividend until the core capital securities obtained from the Dutch State are fully repurchased. Developments concerning AEGON’s investment portfolio and impairment levels were also regularly addressed.
AEGON has been subject to supplemental group supervision by the Dutch Central Bank since the beginning of October 2009, in accordance with the requirements of the European Union’s Financial Conglomerate Directive.
Board. This proposal was accepted by shareholders at their annual General Meeting in April 2010.
took the initiative to notify its regulatory authority and implement a program to deal with the issues.
As part of the program, AEGON UK identified impacted customers and took steps to return those customers to the financial position they would have been in had the issue not occured. It also noted that AEGON UK has since put in place more stringent controls to prevent similar issues occurring in the future.
Supervisory Board Committees The Supervisory Board requires its four Committees to prepare specific issues for decision-making by the Board.
Each of these Committees is made up of members exclusively drawn from the Supervisory Board itself. In accordance with its Charter, each Committee reports its findings to the Supervisory Board during a subsequent
Representatives from Ernst & Young, AEGON’s external auditor, also attended most of these meetings. Officials from AEGON’s Group Risk and the Actuarial departments were present at some meetings of the Audit Committee.
During the year, management and the Audit Committee carried out an in-depth assessment of Ernst & Young’s performance, quality, cost levels and independence, as required pursuant to the Dutch Corporate Governance
The Audit Committee also discussed AEGON’s compliance with the Sarbanes Oxley Act of the United States, regular reports from the Group Compliance Officer on fraud and general compliance issues.
The members of AEGON’s Executive Board and the company’s Chief Risk Officer attended these meetings, while the head of the Corporate Financial Center and
AEGON USA’s Chief Investment Officer attended the meetings occasionally. The Risk Committee assists the Supervisory Board and Audit Committee to oversee the activities of AEGON’s Enterprise Risk Management framework. The Committee also advises the Executive
Board with respect to the company’s risk management strategy and policies. Consequently, the Committee regularly reviews the company’s Enterprise Risk
Nominating Committee reviewed the composition and functioning of the Executive Board and discussed succession planning with the CEO and AEGON’s Global
The Compensation Committee AEGON’s Compensation Committee held five meetings in 2010. The Chief Executive Officer and the Chief Financial
Officer attended these meetings from time to time, either together or separately. In the first half of the year the Committee’s main focus was on the new Executive
Board Remuneration Policy, which was submitted to shareholders for approval at the annual General Meeting on April 29, 2010. When reviewing the then current
Policy, the Committee took into account international developments regarding remuneration in general and in the financial industry in particular. The Committee reviewed the compensation mix – short-term versus long-term – as well as the details of both the short-term and long-term incentive compensation plans.
Supervisory Board. As in 2009, it was decided not to propose an increase of the base fee to shareholders, but instead to submit two amendments for the existing fee structure as from January 1, 2010. At their meeting on
April 29, 2010 the shareholders approved the introduction of an attendance fee of EUR 3,000 for additional
Remuneration Policy adopted earlier in the year. These discussions were continued in the beginning of 2011 and will lead to a proposal to amend the Executive Board
Cecelia Kempler beginning 2011, the Supervisory Board will likely consist of ten members after the annual
The current term of Mr. Alex Wynaendts will expire in 2011. On advice of the Nominating Committee, the Supervisory Board has decided to nominate
The members of the Supervisory Board would like to thank both the Executive and Management Boards and the company’s employees for their dedication and commitment in facing up to the challenges of the year and staying focused on AEGON’s customers. They are also grateful to AEGON’s customers for trusting the company with their business. The Supervisory Board is confident that management and employees are on the right track to execute AEGON’s strategic priorities and to guide the company towards renewed prosperity.
Supervisory Board in 2008. Her term was due to expire in 2012. Ms. Kempler has been an outstanding member of AEGON’s Supervisory
Board and AEGON has benefitted significantly from her in-depth knowledge of the insurance business in general and AEGON in particular. She has had a career-long involvement with leading industry organizations dedicated to the promotion of high ethical standards in the insurance sector. The
Royal Dutch Shell. He was appointed to AEGON’s Supervisory Board in 2008 and took over as
Royal KPN N.V. and Royal DSM N.V. He also sits on the Board of Directors at Canadian Utilities
Ventures and Chairman of the Board of Directors at AEGON USA Inc. He was first appointed to AEGON’s Supervisory Board in 2004. His current term will end in 2012. Mr. Bailey is also a member of the Board of Directors of Computer Sciences Corp. and Hospira Inc.
Arthur W.H. Docters van Leeuwen is Senior Research Fellow at the Netherlands School for
Board in 2009. His current term will end in 2013. Mr. Docters van Leeuwen is also Chairman of the Advisory Boards of Meesman Index Investments BV, Independent Risk Solutions and
Cecelia Kempler is a former partner and chair of the international life insurance practice at law firm LeBoeuf Lamb Greene & MacRae (now Dewey & LeBoeuf). Ms. Kempler was appointed to AEGON’s Supervisory Board in 2008. Her current term ends in 2012.
She was appointed to AEGON’s Supervisory Board in 2007 and her current term will end in 2011. She was formerly a member of the Provinciale Staten of the Province of Utrecht and a member of the European Parliament. She also served as Minister for Transport,
Mr. Storm is also Chairman of the Supervisory Boards of KLM Royal Dutch Airlines N.V.
Mr. Van der Veer is also a member of the Supervisory Boards of TomTom N.V., Reed Elsevier
Boards of Siemens Nederland N.V. (not listed) and the Dutch dairy company Royal
Supervisory Board of Robeco Group N.V. (not listed), as well as a member of the Supervisory
Projectontwikkeling, Chairman of the INSEAD Dutch Council and Honorary Counsel of the
Executive Officer of KLM Royal Dutch Airlines N.V. He was first appointed to AEGON’s
conditions for the employment of Executive Board members and the remuneration of members of the company’s Supervisory Board. The Compensation
Committee of AEGON’s Supervisory Board has overall responsibility for the company’s Remuneration Policies.
Fees and entitlements Members of the Supervisory Board 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 seven regular Supervisory Board meetings.
Board meeting, attended in person or by video or telephone conference, other than one of the seven regular Supervisory Board meetings.
Supervisory Board members and strengthen the overall effectiveness of AEGON’s corporate governance.
Board are entitled to the following fees: Base fee Amount in EUR per annum
AEGON’s Remuneration Policies set out terms and conditions for the employment of Executive Board members and the remuneration of members of the company’s Supervisory Board. AEGON’s current Remuneration Policy for members of the Executive Board has been in force since the beginning of 2010.
General Meeting of Shareholders on April 29, 2010, and introduced retroactively from January 1, 2010.
In 2010, the General Meeting of Shareholders also agreed to two adjustments to the Remuneration Policy for the members of the Supervisory Board.
However, given the recent difficult market environment, the Supervisory Board decided, just as in 2009, not to propose to shareholders an increase of the base fee, but instead submit two adjustments.
� Members of the Board are entitled to an attendance fee of EUR 3,000 for each Supervisory Board meeting that is organized on top of the seven regular
Supervisory Board meetings (quarterly results, annual report, strategy and budget meetings), attended either in person or by video or telephone conference.
� Members of the Board are also entitled to attendance fees for Committee meetings when attended by video or telephone conference.
Members of AEGON’s Supervisory Board received the following payments in 2010: Member In EUR 2010 2009
AEGON’s Remuneration Policy for members of the company’s Executive Board has four main objectives: 1. To enable AEGON to attract and retain highly-qualifi ed members for its Executive Board.
2. To provide a well-balanced and performance-related compensation package for Executive Board members.
members are aligned with AEGON’s business strategy and risk tolerance as well as the objectives, values and long-term interests of the company.
AEGON’s current Executive Board Remuneration Policy was introduced in 2010 as part of broader arrangements with the Dutch State. The Policy was formally adopted by the General Meeting of Shareholders on April 29, 2010, and took effect retroactively from January 1, 2010.
Review of the Policy AEGON’s Executive Board Remuneration Policy is reviewed every year by the company’s Compensation
Committee. If necessary, the Committee recommends amendments to the Supervisory Board. Any material changes are submitted by the Supervisory Board to the
Ensuring pay remains competitive AEGON regularly compares its levels of executive remuneration with those at other, comparable companies. Companies included in the peer group have been chosen according to the following criteria: � Industry (preferably life insurance).
In 2010, the peer group comprised the following companies: Aviva, Axa, CNP Assurances, Generali,
Board used 2009 remuneration levels as an initial reference point to help determine total compensation.
AEGON’s Executive Board. Total compensation will consist of two elements: � Fixed compensation
analysis” to determine the long-term effect of level and structure of compensation granted to members of the
Fixed compensation It is the responsibility of the Supervisory Board to determine fixed compensation for members of the
Executive Board members’ commitment to the company’s objectives, both short and long-term.
Payment is made once accounts for the financial year in question have been adopted by the company’s shareholders. Long-term incentive compensation, on the other hands, is paid in shares. At the beginning of each three-year performance period, conditional shares are made available. The number of conditional shares is calculated using the fair value of one AEGON share at the beginning of that financial year. This fair value is equal to the average price on the New York and
AEGON believes these indicators provide an accurate and reliable reflection of company and individual performance. Performance is assessed by AEGON’s
� The Compensation Committee reviews all circumstances in detail and documents its fi ndings.
� To refl ect such exceptional circumstances, variable compensation may be adjusted within a range of between 75% and 125% of the original entitlement, but may not exceed 100% of the maximum.
� Discretionary adjustments may not be made to fi xed compensation.
Claw-back provision In cases of material financial restatements or individual gross misconduct, AEGON’s Supervisory Board reserves the right to re-claim short-term incentive compensation payments. With regard to long-term incentive compensation, AEGON believes the three-year performance period already provides sufficient scope to identify any potential accounting errors or individual wrongdoing.
If AEGON wishes to terminate the employment of a member of its Executive Board, then the company must give six months’ notice. Termination arrangements conform to the provisions of the Dutch Corporate
Executive Board is equal to one year’s gross fixed compensation, providing the employment contract has been terminated or cancelled at the request of the company. The Supervisory Board has taken appropriate steps to ensure the contractual arrangements of members of the Executive Board remain in line with the company’s Remuneration Policy.
Executive Board Remuneration Policy 2011 In the second half of 2010, the Compensation Committee discussed developments regarding executive remuneration, such as the Dutch Insurance Code, the
At the end of December 2010, AEGON’s Executive Board had two members: � Alexander R. Wynaendts, Chief Executive Offi cer and Chairman of the Executive Board. Mr. Wynaendts was appointed member of the Executive Board in 2003 for four years. He was re-appointed in 2007 and is again up for re-appointment in 2011.
2 These numbers refl ect at target performance. The share price was set at EUR 4.851.
Executive Board is based on the company’s performance against three one-year indicators, earnings, profitable growth and a basket of strategic and personal objectives.
EUR 547,076 for 2010, including the additional pension benefit he receives from the company.
New York and London. AEGON has institutional and retail shareholders around the world. Around 80% is located in North America, the Netherlands and the
AEGON is a public company under Dutch law. It is governed by three corporate bodies: the General Meeting of Shareholders, which meets at least once every year, the Executive Board and the Supervisory Board. As a company based and registered in the Netherlands, AEGON is subject to the Dutch Corporate Governance Code 1.
entitlements with regard to their participation and voting rights. In accordance with the Dutch law, the record date will be set 28 days before the day of the
Aandeelhouders, a Dutch foundation dedicated to improving communication between listed companies in the Netherlands and their shareholders and to encouraging greater shareholder participation at general meetings. Shareholders may use the services of this foundation to vote by proxy. AEGON also solicits proxies from New York registry shareholders in line with common practice in the United States.
Voting at the General Meeting At the General Meeting, each share carries one vote.
However, under certain circumstances, AEGON’s largest shareholder, Vereniging AEGON, may cast 25/12 votes per preferred share 3. All resolutions are adopted by an absolute majority of votes cast, unless Dutch law or
1 For further details on how AEGON’s corporate governance practices differ from those required of US companies under New York Stock Exchange standards, please refer to the NYSE Listing standards in the Governance section of AEGON’s website at www.aegon.com.
Supervisory Board. Executive Board members are appointed by the General Meeting of Shareholders following nomination by the Supervisory Board.
For certain decisions – detailed in AEGON’s Articles of Association – the Executive Board must seek prior approval from the Supervisory Board. In addition, the
Remuneration Policy for the Executive Board also limits the exit arrangement to a maximum of one year’s fixed salary 3.
Supervisory Board AEGON’s Supervisory Board oversees the management of the Executive Board, as well as the overall course of the company’s business and corporate strategy. In its deliberations, the Supervisory Board must take into account the interests of all AEGON stakeholders. The
Appointment of Board members Members are appointed by the General Meeting of
Supervisory Board members’ remuneration is determined by the General Meeting of Shareholders.
AEGON’s ownership structure and exercise of control As a publicly listed company, AEGON is required to provide the following detailed information regarding any structures or measures that may hinder or prevent a third party from acquiring the company or exercising effective control over it.
Capital of the company AEGON has authorized capital of EUR 610 million, divided into three billion common shares, each with a par value of EUR 0.12 and one billion class A and class B
Depository receipts for AEGON shares are not issued with the company’s cooperation.
Common shares Each common share carries one vote. There are no restrictions whatsoever on the exercise of voting rights by holders of common shares, whether with regard to the number of votes or to the time period in which they may be exercised.
Preferred shares All preferred shares are held by Vereniging AEGON, the company’s largest shareholder. In line with their higher par value, preferred shares may carry 25/12, or approximately 2.08, votes per share. The voting rights attached to preferred shares are subject to restrictions, as described hereunder under “Special Control Rights”.
The capital contribution on class A preferred shares is a reflection of the market value of AEGON’s common shares at the time the contribution was made. In addition, preferred shares carry the right to a preferred dividend on the paid-in amount. No other dividend is paid on the preferred shares. In the event AEGON is liquidated, the paid-in amount on preferred shares will be reimbursed before any payments on common shares are made.
Special control rights Under the Preferred Shares Voting Rights Agreement 2,
If Vereniging AEGON, acting at its sole discretion, determines that a special cause has arisen, it must notify the General Meeting of Shareholders. In this event,
would, for that limited period, command 33% of the votes at a General Meeting of Shareholders.
Financial Statement in this Annual Report (see pages 244 to 245) or the website of Vereniging AEGON
Board appointments The General Meeting of Shareholders appoints members of both the Supervisory and Executive Boards, following nominations by the Supervisory Board. Providing at least two candidates are nominated, these nominations are binding. The General Meeting of Shareholders may cancel the binding nature of these nominations with a majority of two-thirds of votes cast, representing at least one half of AEGON’s issued capital.
the Supervisory Board. Such a resolution also requires a two-thirds majority of votes cast and representing at least one half of AEGON’s issued capital. Provisions on appointing Board members were included as part of a wider review of AEGON’s corporate governance framework. They were adopted at an Extraordinary
Qualified majority voting provisions were included to give AEGON temporary protection against potential unfriendly actions by hostile bidders. Vereniging AEGON,
Amending the Articles of Association The General Meeting of Shareholders may, with an absolute majority of votes cast, pass a resolution to amend AEGON’s Articles of Association or to dissolve the company, in accordance with a proposal made by the
AEGON is entitled to acquire its own fully paid-up shares, providing it acts within existing statutory restrictions.
Transfer of shares There are no restrictions on the transfer of common shares. As regards the transferability of preferred shares, please refer to clause 10.5 of the Amendment to the 1983 Merger Agreement 1.
Shareholder agreements AEGON has no knowledge of any agreement between shareholders that might restrict the transfer of shares or the voting rights pertaining to them.
Exercise of option rights Senior executives at AEGON companies and other employees have been granted share appreciation rights and share options. For further details, please see pages 199 to 202. Under the terms of existing share option plans, AEGON cannot influence the exercise of granted rights.
Signifi cant agreements and potential change of control AEGON is not party to any significant agreements which would take effect, alter or terminate as a consequence of a change of control following a public offer for the outstanding shares of the company, other than those customary in the financial markets (for example, financial arrangements, loans and joint venture agreements).
Dutch Corporate Governance Code As a company based in the Netherlands, AEGON adheres to the Dutch Corporate Governance Code. AEGON
regards the Code as an effective means of helping ensure that the interests of all stakeholders are duly represented and taken into account. The Code also promotes transparency in decision-making and helps strengthen the principles of good governance. The original Code, dated December 2003, was amended in 2008. The new, amended Code came into force on
Code II.2.8 For members of the Executive Board the Dutch Corporate Governance Code requires that the maximum compensation in the event of dismissal should be one year’s salary, or two years’ salary for cases when one year’s salary would be manifestly unreasonable for a member who is dismissed in his or her fi rst term of offi ce.
AEGON’s position on Code II.2.8. AEGON is committed to applying this best practice provision to all new Executive Board appointments.
This best practice provision is also embedded in the company’s Remuneration Policy for the Executive Board.
In accordance with the capital transaction concluded with the Dutch State on December 1, 2008, the more favorable severance payment arrangements in CEO
Code IV.1.1 The Dutch Corporate Governance Code states that the General Meeting of Share-holders may cancel the binding nature of nominations for the appointment of members to the Executive and Supervisory Boards with an absolute majority of votes and a limited quorum.
Agreement under which AEGON was formed. However, to mitigate any possible negative effects from this, the
NOTE 3 Critical accounting estimates and judgment in applying accounting policies 108
NOTE 49 Securities lending and repurchase activities and assets accepted and pledged as collateral 215
Issued capital and reserves attributable to equity holders of AEGON N.V. 23,414 18,873
Amounts in EUR million (except per share data) Note 2010 2009 2008
Income before share in profi t / (loss) of associates and tax 1,873 (487) (1,085)
Earnings per share after potential attribution to convertible core capital securities 1, 3 0.76 – –
Dividend per common share 44 – – 0.30 1 After deduction of preferred dividend, coupons on perpetuals and coupons and premium on core capital securities. 2 The potential conversion of the convertible core capital securities is taken into account in the calculation of diluted earnings per share if this would have a dilutive effect (i.e. diluted earnings per share would be lower than the earnings after potential attribution to convertible core capital securities). 3 Refl ects basic earnings per share. For 2009, basic earnings per share is EUR (0.16) and for 2008 EUR (0.92).
Changes in revaluation reserve real estate held for own use 4 (1) 8
Movement in foreign currency translation and net foreign investment hedging reserve 1,046 (204) (82)
Total comprehensive income / (loss) attributable to: Equity holders of AEGON N.V. 5,386 5,564 (7,900)
Other comprehensive income: Gains / (losses) on revaluation of availablefor -sale investments
Coupons and premiums on convertible core capital securities – (63) – – – – (63) – (63)
� CONSOLIDATED STATEMENT OF CHANGES IN EQUITY OF AEGON N.V FOR THE YEAR ENDED DECEMBER 31, 2010
Movements in foreign currency translation and net foreign investment hedging reserves – – – (204) – – (204) – (204)
TOTAL COMPREHENSIVE INCOME / (LOSS) FOR 2009 – 194 5,458 (88) – – 5,564 4 5,568
Net income / (loss) recognized in the income statement – (1,082) – – – – (1,082) – (1,082)
Changes in cash fl ow hedging reserve – – 798 – – – 798 – 798
Aggregate tax effect of items recognized in other comprehensive income / (loss) – – 2,964 (88) – – 2,876 – 2,876
TOTAL COMPREHENSIVE INCOME / (LOSS) FOR 2008 – (1,072) (6,651) (177) – – (7,900) (10) (7,910)
Convertible core capital securities issued – – – – 3,000 – 3,000 – 3,000
� CONSOLIDATED STATEMENT OF CHANGES IN EQUITY OF AEGON N.V. FOR THE YEAR ENDED DECEMBER 31, 2008
Net purchase of investments for account of policyholders (1,522) (3,837) (2,563)
� CONSOLIDATED CASH FLOW STATEMENT OF AEGON N.V. FOR THE YEAR ENDED DECEMBER 31
Purchase of equipment and real estate for own use (116) (202) (85)
Disposal of subsidiaries and associates, net of cash (158) 11 –
Net cash and cash equivalents at the beginning of the year 4,013 9,506 7,385
� CONSOLIDATED CASH FLOW STATEMENT OF AEGON N.V. FOR THE YEAR ENDED DECEMBER 31 > CONTINUATION
The Hague under its registered address at AEGONplein 50, 2591 TV The Hague. AEGON N.V. serves as the holding company for the AEGON Group and has listings of its common shares in
‘the Group’) have life insurance and pensions operations in over twenty countries in Europe, the Americas and Asia and are also active in savings and investment operations, accident and health insurance, general insurance and limited banking operations. Headquarters are located in The Hague, the
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards
and with Part 9 of Book 2 of the Netherlands Civil Code. The consolidated financial statements have been prepared in accordance with the historical cost convention as modified by the revaluation of investment properties and those financial instruments (including derivatives) and financial liabilities that have been measured at fair value. Information on the standards and interpretations that were adopted in 2010 is provided below in paragraph 2.1.1. Certain amounts in prior years have been reclassified to conform to the current year presentation. These reclassifications had no effect on net income, shareholders’
requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of
� NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. AMOUNTS IN EUR MILLION, UNLESS OTHERWISE STATED
revenues and expenses for the reporting period. Those estimates are inherently subject to change and actual results could differ from those estimates. Included among the material
(or potentially material) reported amounts and disclosures that require extensive use of estimates are: fair value of certain invested assets and derivatives, deferred acquisition costs, value of business acquired and other purchased intangible assets, goodwill, policyholder claims and benefits, insurance guarantees, pension plans, income taxes and the potential effects of resolving litigated matters.
In 2010, the following new standards issued by the IASB and
(formerly known as the IFRIC) became mandatory: � IFRS 3 (revised) Business Combinations.
90 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 2.1.1 - 2.3
28 ‘Investments in Associates’ and IAS 31 ‘Interests in Joint Ventures’
In addition, the following new standards, amendments to existing standards and interpretations are mandatory for the first time for the financial year beginning January 1, 2010 but are not currently relevant for the Group: � Amendments to IAS 39 Financial Instruments – Eligible hedged items.
This set of improvements to IFRS issued by the IASB in May 2010 makes a number of minor amendments to 7 different standards and interpretations. These amendments, which are effective for accounting periods beginning on January 1, 2011, will all be applied by AEGON in its 2011 financial statements to the extent they are relevant. None of these amendments are expected to have a material change to the classification, measurement or presentation of any items in AEGON’s financial statements.
January 1, 2011 or later periods but are not material for the
� IFRIC 14 (amendment ) Prepayment of a minimum funding requirement.
Business combinations that occurred before the adoption date of IFRS (January 1, 2004) have not been restated.
The excess of the consideration paid to acquire the interest and the fair value of any interest already owned, over the Group’s share in the net fair value of assets, liabilities and contingent liabilities acquired is recognized as goodwill. Negative goodwill is recognized directly in the income statement. If the fair value of the assets, liabilities and contingent liabilities acquired in the business combination has been determined provisionally, adjustments to these values resulting from the emergence of new evidence within twelve months after the acquisition date are made against goodwill. Contingent consideration is discounted and the unwinding is recognized in the income statement as an interest expense. Any changes in the estimated value of contingent considerations given in a business combination are recognised in the income statement.
Transactions with minority interests are accounted for as transactions with equity holders. Therefore disposals to minority interests and acquisitions from minority interests, not resulting in gaining or losing control of the subsidiary are recorded in equity. Any difference between consideration paid or received and the proportionate share in net assets is accounted for in equity attributable to shareholders of AEGON N.V..
92 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 2.3 - 2.5
Interests in joint ventures are recognized using proportionate consolidation, combining items on a line by line basis from the date the jointly controlled interest commences. Gains and losses on transactions between the Group and the joint venture are recognized to the extent that they are attributable to the interests of other ventures, with the exception of losses that are evidence of impairment and that are recognized immediately.
The Group’s consolidated financial statements are prepared in euros which is also the Company’s functional currency. That is the currency of the primary economic environment in which the Company operates. Each company in the Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. Transactions in foreign currencies are initially recorded at the functional currency rate prevailing at the date of the transaction.
‘foreign currency translation reserve’, which is part of shareholders’ equity. On disposal of a foreign entity the related cumulative exchange differences included in the reserve are recognized in the income statement.
Starting January 1, 2010, AEGON introduced a new reporting format for segment reporting that aligns with changes implemented in the way AEGON manages its business. AEGON’s operating segments are based on the businesses as presented in internal reports that are regularly reviewed by the Executive
The operating segments are: � AEGON Americas: Covers business units in the United States,
Europe, Asia, Spain and France as well as AEGON’s variable annuity activities in Europe and AEGON Asset Management.
For segment reporting purposes underlying earnings before tax, income before tax including associated companies and income tax including associated companies are calculated by consolidating on a proportionate basis the revenues and expenses of our associated companies in Spain, India, Brazil and
measures presented here. While other insurers in AEGON’s peer group present substantially similar non-IFRS measures, the non- IFRS measures presented in this document may nevertheless differ from the non-IFRS measures presented by other insurers. There is no standardized meaning to these measures under IFRS or any other recognized set of accounting standards and readers are cautioned to consider carefully the different ways in which AEGON and its peers present similar information before comparing them. Proportionately consolidated earnings from the Company’s associates in insurance companies in Spain, India, Brazil and Mexico are reported on an underlying earnings basis. AEGON has blocks of businesses other than those characterized as run-off businesses under IFRS for which sales have been discontinued of which the earnings are included in underlying earnings.
AEGON believes the non-IFRS measures shown herein, when read together with AEGON’s reported IFRS financial statements, provide meaningful supplemental information for the investing public to evaluate AEGON’s business after eliminating the impact of current IFRS accounting policies for financial instruments and insurance contracts, which embed a number of accounting policy alternatives that companies may select in presenting their results (i.e. companies can use different local
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.
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
Holding and other activities include certain issued bonds that are held at fair value through profit or loss. The interest rate risk on these bonds is hedged using swaps. The fair value movement resulting from changes in AEGON’s credit spread used in the valuation of these bonds are excluded from underlying earnings and reported under fair value items.
Includes realized gains and losses on available-for-sale investments, as well as mortgage and loan portfolios.
94 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 2.5 - 2.8
Includes impairments (reversals) on available-for-sale debt securities and impairments on shares including the effect of deferred policyholder acquisition costs and mortgage and loan portfolios on amortized cost and associates.
VOBA is amortized over the useful life of the acquired contracts, based on either the expected future premiums or the expected gross profit margins. The amortization period and pattern are reviewed at each reporting date; any change in estimates is recorded in the income statement. For all products,
The present value of the future servicing rights is amortized over the servicing period as the fees from services emerge and is subject to impairment testing. It is derecognized when the related contracts are settled or disposed of.
A financial asset is derecognized when the contractual rights to the asset’s cash flows expire and, when the Group retains the right to receive cash flows from the asset or has an obligation to pay received cash flows in full without delay to a third party and either: has transferred the asset and substantially all the risks and rewards of ownership, or has neither transferred nor retained all the risks and rewards but has transferred control of the asset. Financial assets of which the group has neither transferred nor retained significantly all the risk and rewards, are recognized to the extent of the Group’s continuing involvement. If significantly all risks are retained, the assets are not derecognized.
A security that has been received under a borrowing or reverse repurchase agreement is not recognized as an asset.
All property is initially recognized at cost. Such cost includes the cost of replacing part of the real estate and borrowing cost for long term construction projects if recognition criteria are met.
Subsequently, investments in real estate are measured at fair value with the changes in fair value recognized in the income statement. Real estate held for own use is carried at its revalued amount, which is the fair value at the date of revaluation less subsequent accumulated depreciation and impairment losses.
revalued to fair value. All fair value gains or losses are recognized in the income statement.
Investments held for account of policyholders consist of investments in financial assets, excluding derivatives, as well as investments in real estate. Investment return on these assets is passed on to the policyholder. Also included are the assets held by consolidated investment funds that are backing liabilities towards third parties. The accounting principles are the same as those applicable to general account investments, as described in note 2.8.
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.
Assets and liabilities may include derivative-like terms and conditions. With the exception of features embedded in contracts held at fair value through profit or loss, embedded derivatives that are not considered closely related to the host contract are bifurcated, carried at fair value and presented as derivatives. In assessing whether a derivative-like feature is closely related to the contract in which it is embedded, the
Qualitative methods may include comparison of critical terms of the derivative to the hedged item. Quantitative methods include a comparison of the changes in the fair value or discounted cash flow of the hedging instrument to the hedged item.
A hedging relationship is considered effective if the results of the hedging instrument are within a ratio of 80% to 125% of the result of the hedged item.
equity. Any ineffectiveness is recognized directly in the income statement. The amount recorded in shareholders’ equity is
The amount in shareholders’ equity is released to the income statement when the foreign operation is disposed of.
Reinsurance contracts are contracts entered into by the Group in order to receive compensation for losses on contracts written by the Group (outgoing reinsurance). For contracts transferring sufficient insurance risk, a reinsurance asset is recognized for the expected future benefits, less expected future reinsurance premiums. Reinsurance contracts with insufficient insurance risk transfer are accounted for as investment or service contracts, depending on the nature of the agreement.
margins. For products sold in the United States and Canada with amortization based on 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. For all products, DPAC, in conjunction with VOBA where appropriate, is assessed for recoverability at least annually on a country-bycountry basis and is considered in the liability adequacy test for each reporting period. If appropriate, the assumptions included in the determination of estimated gross profits are adjusted.
DPAC is adjusted to equal the effect that the realization of the gains or losses (through sale or impairment) would have had on its measurement. This is recognized directly in the related revaluation reserve in shareholders’ equity.
Incremental costs that are directly attributable to securing these investment management contracts are recognized as an asset if they can be identified separately and measured reliably and if it is probable that they will be recovered.
The deferred transaction costs are amortized in line with fee income, unless there is evidence that another method better represents the provision of services under the contract.
Other assets include trade and other receivables, prepaid expenses, real estate held for own use and equipment. Trade and other receivables are initially recognized at fair value and are subsequently measured at amortized cost. Equipment is initially carried at cost, depreciated on a straight line basis over its useful life to its residual value and is subject to impairment testing. The accounting for real estate held for own use is described in note 2.8.
Assets are tested individually for impairment when there are indications that the asset may be impaired. 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. The value in use represents the discounted future net cash flows from the
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 6 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.
Dividends and other distributions to holders of equity instruments are recognized directly in equity, net of tax. A
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
Accounting Principles, both with consideration of standards effective subsequent to the date of transition to IFRS.
102 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 2.19
A separate reserve for longevity may be established and included in the measurement of the liability. Furthermore, the liability for life insurance comprises reserves for unearned premiums and for claims outstanding, which includes an estimate of the incurred claims that have not yet been reported to the Group.
Other products with account terms that are not fixed or guaranteed are generally measured at the policyholder’s account balance. Depending on local accounting principles, the liability may include amounts for future services on contracts where the policy administration charges are higher in the initial years than in subsequent years. In establishing the liability, guaranteed minimum benefits issued to the policyholder are measured as described in note 2.19 c or, if bifurcated from the host contract, as described in note 2.10.
The liability for outstanding claims and benefits is established for claims that have not been settled and any related cash flows, such as claims handling costs. It includes claims that have been incurred but have not been reported to the Group.
The liability is calculated at the reporting date using statistical methods based on empirical data and current assumptions that may include a margin for adverse deviation. Liabilities for claims subject to periodic payment are calculated using actuarial methods consistent with those applied to life insurance contracts. Discounting is applied if allowed by the local accounting principles used to measure the insurance liabilities. Discounting of liabilities is generally applied when there is a high level of certainty concerning the amount and settlement term of the cash outflows.
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.
Share appreciation right plans are initially recognized at fair value at the grant date, taking into account the terms and conditions on which the instruments were granted. The fair value is expensed over the period until vesting, with recognition of a corresponding liability. The liability is remeasured at each
106 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 2.22 - 2.34 reporting date and at the date of settlement, with any changes in fair value recognized in the income statement.
Gross premiums, including recurring and single premiums, from life and non-life insurance and investment contracts with discretionary participation features are recognized as revenue when they become receivable. Not reflected as premium income are deposits from certain products that are sold only in the
United States and Canada, such as deferred annuities. For these products the surrender charges and charges assessed have been included in gross premiums.
Premium loadings for installment payments and additional payments by the policyholder towards costs borne by the insurer are 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.
Net fair value change on for account of policyholder fi nancial assets at fair value through profi t or loss
Net fair value change on for account of policyholder financial assets at fair value through profit or loss include fair value movements of investments held for account of policyholders
Impairment charges include impairments on investments in financial assets, impairments on the valuation of insurance assets and liabilities and other non-financial assets and receivables. Refer to note 39.
Where the Group is the lessor under an operating lease, the assets subject to the operating lease arrangement are presented in the balance sheet according to the nature of the asset. Income from these leases are recognized in the income statement on a straight line basis over the lease term, unless another systematic basis is more representative of the time pattern in which use benefit derived from the leased asset is diminished.
The liability for life insurance contracts with guaranteed or fixed account terms is either based on current assumptions or on the assumptions established at inception of the contract, reflecting the best estimates at the time increased with a margin for adverse deviation. All contracts are subject to liability adequacy testing which reflects management’s current estimates of future cash flows. To the extent that the liability is based on current assumptions, a change in assumptions will have an immediate impact on the income statement. Also, if a change in assumption results in the failure of the liability adequacy test, the entire deficiency is recognized in the income statement. To the extent that the failure relates to unrealized gains and losses on available-for-sale investments, the additional liability is recognized in the revaluation reserve in equity.
Estimated gross profits on variable life and variable annuity products in the Americas include a short- and long term equity market return assumption. As of the second quarter of 2010,
AEGON held its short-term equity market return assumption equal to its long-term assumption at 9%, reflecting continued volatility experienced in equity markets and the use of macro equity hedges.
At December 31, 2010, other assumptions applicable to the reversion to the mean assumptions for variable products, primarily variable annuities, were as follows in the United States: gross long-term equity growth rate of 9% (2009: 9%); gross short- and long-term fixed security growth rate of 6%
The estimated fair values of AEGON’s financial assets and liabilities are presented in the respective notes to the balance sheet 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
For fair values determined by reference to external quotation or evidenced pricing parameters, independent price determination or validation is utilized to corroborate those inputs. Further details of the validation processes are set out below.
The fair values of debt securities are determined by management after taking into consideration several sources of data. AEGON’s valuation policy dictates that publicly available prices are initially sought from several third party pricing services. In the event that pricing is not available from these services, 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. Only pricing services and brokers with a substantial presence in the market and with appropriate experience and expertise are used.
Third party pricing services will often determine prices using recently reported trades for identical or similar securities. The pricing service makes adjustments for the elapsed time from the trade date to the balance sheet date to take into account available market information. Lacking recently reported trades, third party pricing services and brokers will use modeling techniques to determine a security price where expected future cash flows are developed based on the performance of the underlying collateral and discounted using an estimated market rate. Also included within the modeling techniques for
ABS – Housing, RMBS, CMBS and CDO securities are estimates of the speed at which principal will be repaid over their remaining lives. These estimates are determined based on historical repayment speeds (adjusted for current markets)
Each month, AEGON performs an analysis of the inputs obtained from third party services and brokers to ensure that the inputs are reasonable and produce a reasonable estimate of fair value. AEGON’s asset specialists and investment valuation specialists consider both qualitative and quantitative factors as part of this analysis. Several examples of analytical procedures performed include, but are not limited to, recent transactional activity for similar debt securities, review of pricing statistics and trends and consideration of recent relevant market events.
AEGON’s portfolio of private placement securities (held at fair value under the classification of available-for-sale or fair value through profit or loss) is valued using a matrix pricing methodology. The pricing matrix is obtained from a third party service provider and indicates current spreads for securities based on weighted average life, credit rating, and industry sector. Each month, AEGON’s asset specialists review the matrix to ensure the spreads are reasonable by comparing them to observed spreads for similar bonds traded in the market. Other inputs to the valuation include coupon rate, the current interest rate curve used for discounting and an illiquidity premium to account for the illiquid nature of these securities. The illiquidity premiums are determined based upon the pricing of recent transactions in the private placements market; comparing the value of the privately offered security to a similar public security. The impact of the illiquidity premium for private placement securities to the overall valuation is insignificant.
The fair value of assets maturing within a year is assumed to be approximated by their carrying amount adjusted for credit risk where appropriate. Credit risk adjustments are based on market observable credit spreads if available, or management’s estimate if not market observable.
US life insurers differ significantly from that for European life insurers, AEGON’s assumptions are set by region to reflect these differences in the valuation of the guarantee embedded in the insurance contracts.
For equity volatility, AEGON uses a term structure assumption with market-based implied volatility inputs for the first five years and a long-term forward rate assumption of 25%
thereafter. The volume of observable option trading from which volatilities are derived generally declines as the contracts’ term increases, therefore, the volatility curve grades from implied volatilities for five years to the ultimate rate. The resulting volatility assumption in year 20 for the S&P 500 index
(expressed as a spot rate) was 24.8% at December 31, 2010 and 25.3% at December 31, 2009. Correlations of market returns across underlying indices are based on historical market returns and their inter-relationships over a number of years preceding the valuation date. Assumptions regarding policyholder behavior, such as lapses, included in the models
Correlations of market returns for various underlying indices are based on observed market returns and their interrelationships over a number of years preceding the valuation date. Current risk-free spot rates are used to determine the present value of expected future cash flows produced in the stochastic projection process.
Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable willing parties in an arm’s length transaction. Financial instruments measured at fair value on an ongoing basis include investments for the general account, investments for the account of policyholders, and investments designated at fair value and derivatives.
In accordance with IFRS 7 AEGON uses the following hierarchy for determining and disclosing the fair value of financial instruments: � Level I: quoted prices (unadjusted) in active markets for identical assets or liabilities that AEGON can access at the measurement date; � Level II: inputs other than quoted prices included within
� Level III: inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs)
The judgment as to whether a market is active may include, although not necessarily determinative, lower transaction volumes, reduced transaction sizes and, in some cases, no observable trading activity for short periods. In inactive markets, assurance is obtained that the transaction price provides evidence of fair value or determined that the adjustments to transaction prices are necessary to measure the fair value of the instrument.
is driven by unobservable inputs. ‘Unobservable’ in this context means that there is little or no current market data available from which to determine the price at which an arm’s length transaction would be likely to occur. It generally does not mean that there is no market data available at all upon which to base a determination of fair value.
Financial assets carried at fair value Level I Level II Level III Total
to Level II classification was EUR 469 million (2009: EUR 498 million). The reason for the change in level relates to changes in liquidity for specific debt securities.
Money market and other short-term instruments 10 – – – (10) – – – – – –
1 Includes impairments and movements related to fair value hedges. 2 Total gains / (losses) for the period during which the fi nancial instrument was in Level III.
Total gains or losses for the period included in profi t and loss for assets held at December
The amount of the total assets transferred was EUR 722 million
(2009: EUR 444 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 transfer, all such assets have been valued using valuation models incorporating significant non market-observable inputs.
Money market and other short-term investments b – – – 10 1 (1)
(EUR 1,117 million; 2009: EUR 1,239 million) and other structured debt securities (EUR 2,610 million; 2009: EUR 3,020 million). For corporate bonds the most signifi cant unobservable input for the valuation of these securities is the credit spread / illiquidity premium.
AEGON adjusted the price, based on the bid / ask spread
CMBS), the most signifi cant unobservable input for valuation of these securities is the credit spread / illiquidity premium.
AEGON adjusted the discount rate by 100 basis points up or down for this input.
c. Other investments at fair value include investments exposed to real estate (EUR 475 million; 2009: EUR 444 million) and private equity investments (EUR 692 million; 2009: EUR 575 million). AEGON adjusted the assumption pertaining to real estate values up or down by 10%.
This change is refl ective of the range presented to senior management when analyzing investment opportunities for approval. For private equity investments the underlying
118 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 3 investments are of a very diversifi ed nature in terms of type of investments, investment strategy and sector. There is no one signifi cant unobservable assumption or combination of assumptions that could be identifi ed and used to compute a reasonably possible alternative assumption analysis for this portfolio.
d. Derivatives exclude derivatives for account of policyholders amounting to EUR 140 million (2009: EUR 143 million).
Derivatives also include embedded derivatives related to guarantees (EUR 0.9 billion; 2009: EUR 0.8 billion) for which the most signifi cant unobservable input is the credit spread. The credit spread was increased or decreased by 20 basis points.
AEGON regularly monitors industry sectors and individual debt securities for evidence of impairment. This evidence may include one or more of the following: 1) deteriorating market to book ratio, 2) increasing industry risk factors, 3) deteriorating financial condition of the issuer, 4) covenant violations, 5) high probability of bankruptcy of the issuer or 6) recognized credit rating agency downgrades. Additionally, for ABS, cash flow trends and underlying levels of collateral are monitored.
Housing related ABS securities, CMBS and RMBS are monitored and reviewed on a monthly basis with detailed modeling completed on each portfolio quarterly. Model output is generated under a base and several stress-case scenarios. Housing related
ABS, CMBS and RMBS asset specialists utilize modeling software to perform a loan-by-loan, bottom-up approach to modeling. The
Housing related ABS models incorporate market estimates on the property market, borrowing characteristics, propensity of a borrower to default or prepay and the overall security structure.
The CMBS models incorporate market estimates on the property market, capital markets, property cash flows and loan structure.
In addition, at least quarterly, AEGON reviews all housing related ABS, CMBS and RMBS in relation to both severity and duration of unrealized losses. Reviews include a realized loss analysis and analysis where the remaining exposure to the issuer is in a material unrealized loss position. Housing related
AEGON impaired its particular tranche to fair value where it would not be able to receive all contractual cash flows.
Objective evidence of impairment of an investment in an equity instrument classified as available for sale includes information about significant changes with an adverse effect that have taken place in the technological, market, economic or legal environment in which the issuer operates, and indicates that the cost of the investment in the equity instrument may not be recovered. A significant or prolonged decline in the fair value of an investment in an equity instrument below its cost is also objective evidence of impairment.
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 manages risk at local level where business is transacted, based on principles and policies established at the Group level.
Many of these policies are Group wide while others are specific to the unique situation of local businesses. The Group level policies limit the Group’s exposure to major risks such as equity, interest rates, credit and currency. The limits in these policies in aggregate remain within the Group’s overall tolerance for risk and the Group’s financial resources. Operating within this policy framework, AEGON employs risk management programs including asset liability management (ALM) processes and models, hedging programs (which are largely conducted via the use of derivatives) and insurance programs (which are largely conducted through the use of reinsurance). These risk management programs are in place in each country unit and are not only used to manage risk in each unit, but are also part of the Group’s overall risk management.
’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.
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. Management action is taken into account to the extent that it is part of AEGON’s regular policies and procedures, such as established hedging programs. However, incidental management actions that would require a change in policies and procedures are not considered.
Each sensitivity analysis reflects the extent to which the shock tested would affect management’s critical accounting estimates and judgment in applying AEGON’s accounting policies 1. Marketconsistent assumptions underlying the measurement of nonlisted assets and liabilities are adjusted to reflect the shock tested. The shock may also affect the measurement of assets and liabilities based on assumptions that are not observable in the market. For example, a shock in interest rates may lead to changes in the amortization schedule of DPAC or to increased impairment losses on equity investments. Although management’s short-term assumptions may change if there is a reasonable change in a risk factor, long-term assumptions will generally not be revised unless there is evidence that the movement is permanent. This fact is reflected in the sensitivity analyses provided below.
’available for sale‘, which is one of the main reasons why the economic shocks tested have a different impact on net income than on shareholders’ equity. Unrealized gains and losses on these assets are not recognized in the income statement but are booked directly to the revaluation reserves in shareholders’
AEGON's target ratio for the composition of its capital base is based on shareholders' equity excluding the revaluation reserve.
does not hedge the income streams from the main non-euro units and, as a result, earnings may fluctuate due to currency translation. As AEGON has significant business segments in the
Americas and in the United Kingdom, the principal sources of exposure from currency fluctuations are from the differences between the US dollar and the euro and between the UK pound and the euro. AEGON may experience significant changes in net income and shareholders’ equity because of these fluctuations.
and shareholders’ equity in functional currency are shown in the table below: Net income (loss)
Increase by 15% of non-euro currencies relative to the euro 166 2,620
Decrease by 15% of non-euro currencies relative to the euro (166) (2,620)
During periods of sustained low interest rates, AEGON may not be able to preserve margins as a result of minimum interest rate guarantees and minimum guaranteed crediting rates provided on policies. Also, investment earnings may be lower because the interest earnings on new fixed-income investments are likely to have declined with the market interest rates.
AEGON is exposed to credit risk on its general account fixedincome portfolio (debt securities, mortgages and private placements), OTC derivatives and reinsurance contracts. Some issuers have defaulted on their financial obligations for various reasons, including bankruptcy, lack of liquidity, downturns in the economy, downturns in real estate values, operational failure and fraud. In the current weak economic environment, AEGON
Money market and other short-term investments – carried at fair value 10,800 10,064
Other fi nancial assets – carried at fair value 2,661 2,430
positions during 2009. For a fee, AEGON USA had taken credit exposure on a credit index, i.e. super-senior tranches of the CDX
Margin allocated to the Swaps is EUR 403 million. If losses attached to any of the CDO that exceeds the fair value of the
The Swaps also incorporate the unwind triggers that were built into the restructured long term notes. The triggers are defined by a matrix based on credit losses and credit spreads related to the underlying CDX.IG.7. If a trigger event occurs, AEGON will have the option to continue with the existing Swaps, settle the market value of the Swaps, or terminate the Swaps and enter
Transactions requiring AEGON or its counterparty to post collateral are typically the result of OTC derivative trades, comprised mostly of interest rate swaps, currency swaps, and credit swaps. Collateral received is mainly cash (USD and EUR).
The credit risk associated with financial assets subject to a master netting agreement is eliminated only to the extent that financial liabilities due to the same counterparty will be settled after the assets are realized.
Group Risk and Capital Committee (GRCC). The policy is reviewed regularly.
Under the Credit Name Limit Policy, AEGON’s largest credit exposures are to JPMorgan, ING, Barclays, Rabobank and Bank of America. AEGON had large investments in sovereign backed assets, the largest being in the UK, Germany, The Netherlands,
France and the USA, but AAA rated sovereign assets are excluded from the policy.
Past due and / or impaired assets 427 1,309 254 343 – 56 153 – 834 1,708
Past due and / or impaired assets 413 715 245 286 – 67 135 5 793 1,073 1 Includes investments of Holding and other activities.
128 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 4
The following table shows the credit quality of the gross balance sheet positions for general account reinsurance assets specifically: Carrying value 2010
ABSs – Collateralized Bond Obligations (CBOs) 595 655 – – 1,250 28
The fair value of AEGON Americas commercial mortgage portfolio as per December 31, 2010 amounts to EUR 9,317 million
AEGON foreclosed upon, or recovered EUR 169 million of real state. The impairments associated with these loans amounted to EUR 13 million.
(2009: 95%). A significant part of the portfolio (52%; 2009: 51%) is government guaranteed. 0.8% (2009: 1.0%) of the portfolio is in delinquency (defined as 60 days in arrears).
Included in the debt securities and money market investments are EUR 139 million of assets that have been classified as held-to-maturity and are therefore carried at amortized cost (2009: EUR 70 million). Of the EUR 139 million assets held-to-maturity, EUR 29 million are government bonds
(2009: EUR 11 million) and EUR 110 million is corporate exposure
130 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 4
Included in AEGON’s sovereign investments are exposures to central governments of the European peripheral countries of
AEGON Americas holds EUR 1,457 million (2009: EUR 1,341 million) of Housing related ABS securities of which AEGON USA
Housing related ABS securities are secured by pools of residential mortgage loans primarily those which are categorized as subprime. The unrealized loss is primarily due to decreased liquidity and increased credit spreads in the market combined with significant increases in expected losses on loans within the underlying pools. Expected losses within the underlying pools are generally higher than original expectations, primarily in certain later-vintage adjustable rate mortgage loan pools, which has led to some rating downgrades in these securities.
subprime mortgage exposure by quality and vintage. Disclosure of ratings follows a hierarchy of S&P, Moody’s, Fitch, internal and NAIC.
Total subprime mortgages - Floating rate 82 119 – 30 224 455 77
Comparative information on subprime ABS mortgage exposure by quality and vintage - 2009 figures: Amortized cost by Quality and Vintage
Additionally, AEGON USA has exposure to ABS collateralized by manufactured housing loans. The market value of these securities is EUR 125 million (2009: EUR 122 million) with an amortized cost balance of EUR 132 million (2009: EUR 135 million). All but three positions have vintages of 2003 or prior. These amounts are not included in AEGON’s subprime mortgage exposure tables above.
Where credit events may be impacting the unrealized losses, cash flows are modelled using effective interest rates. AEGON
of RMBS. RMBS are securitizations of underlying pools of noncommercial mortgages on real estate. The underlying residential mortgages have varying credit ratings and are pooled together and sold in tranches. The Group’s RMBS mainly includes government sponsored enterprise (GSE) guaranteed passthroughs, whole loan passthroughs, Alt-A MBS and negative amortization MBS.
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. In addition, a high percentage of the RMBS portfolio is comprised of floating rate securities, which has resulted in higher unrealized losses relative to fixed rate securities but not necessarily in higher default losses.
AAA AA A BBB <BBB Total amortized cost Total fair value
Reverse mortgage fl oaters – 342 – – 342 297 1 SSNR – super senior 2 SNR – senior 3 MEZZ – mezzanine 4 SSUP – senior support
Net unrealized losses amount to EUR 28 million at December 31, 2010 (2009: EUR 195 million). Alt-A loans are made to borrowers whose qualifying mortgage characteristics do not meet the standard underwriting criteria established by the
(2009: EUR 722 million), net unrealized losses on this portfolio amount to EUR 373 million at December 31, 2010
(typically 110% to 125% of the original loan amount), the loan recalibrates to a fully amortizing level and a new minimum payment amount is determined. The homeowner’s new minimum payment amount can be significantly higher than the original minimum payment amount. The timing of when these loans reach their negative amortization cap will vary, and is a function of the accrual rate on each loan, the minimum payment rate on each loan and the negative amortization limit itself. Typically, these loans are estimated to reach their negative amortization limit between three and five years from the date of origination.
AEGON’s exposure to Negative Amortization Floaters is primarily to super-senior securities. The following table provides the market values of the Negative Amortization
(2009: EUR 878 million). The underlying mortgages have varying risk characteristics and are pooled together and sold in different rated tranches. The Group’s CMBS include conduit, large loan, single borrower, commercial real estate collateral debt obligations (CRE CDOs), government agency, and franchise loan receivable trusts.
EUR 305 million, and the total net unrealized loss on CMBS
of AEGON USA is EUR 56 million. Over the past 24 months, the commercial real estate market experienced a deterioration in property level fundamentals, which has led to an increase in CMBS loan-level delinquencies. The introduction of the 20%
and 30% credit enhanced classes within the 2005-2008 vintage deals provide some offset to these negative fundamentals.
CDOs backed by ABS, Corp. Bonds, Bank loans 413 208 42 19 37 719 596
ABS-other includes debt issued by securitization trusts collateralized by various other assets including student loans, timeshare loans, franchise loans and other asset categories.
AEGON holds EUR 11,244 million (2009: EUR 11,871 million) of bonds issued by banks. The net unrealized loss on these bonds amount to EUR 386 million (2009: EUR 799 million). The capital bases of banks and other financial firms have been strained as they are forced to retain assets on their balance sheets that had previously been securitized and to write down certain mortgage-related and corporate credit-related assets. Financial companies within AEGON’s financial sector are generally high in credit quality, and as a whole represent a large portion of the corporate debt market. The financial sector has seen a large impact to valuations from the broader market volatility given it is a focal point of the current concerns. Governments across the world have attempted to stabilize market liquidity and investor confidence via extraordinary measures, including providing substantial support to banks and insurance companies.
The value of AEGON’s investments in deeply subordinated securities in the financial services sector may be significantly impacted if the issuers of such securities exercise the option to defer payment of optional coupons or dividends, are forced to accept government support or intervention, or grant majority equity stakes to their respective governments. These securities are broadly referred to as capital securities which can be categorized as Trust Preferred, Hybrid, Tier 1 or Upper Tier 2.
The ‘Trust Preferred’ category is comprised of capital securities issued by U.S.-based financial services entities where the capital securities typically have an original maturity of 30 years
banks and are perpetual with a non-cumulative deferrable coupon. Capital securities categorized as ‘Upper Tier 2’ are also issued by non-US banks but these positions are generally perpetual where the deferrable coupon is cumulative.
The follow table highlights AEGON’s credit risk to capital securities within the banking sector: Americas The
The unrealized losses in the brokerage, insurance and other finance sub-sector primarily reflect general spread widening on financial services companies (due to broad housing, mortgage market, equity market and economic issues plus increased liquidity and capital markets concerns).
About EUR 1.4 billion of the bonds in AEGON USA’s portfolio are insured by monoline insurers (2009: EUR 1.7 billion), of which
EUR 427 million of bonds (2009: EUR 381 million) in the
Bonds insured by monoline insurers Cost price Fair value Cost price Fair value
Of the EUR 1,382 million (2009: EUR 1,661 million) indirect exposure on the monoline insurers, 35% relates to MBIA, 24% to AMBAC, 10% to FGIC and 15% to FSA (2009: 35%
USA also has direct exposure of EUR 8 million (2009: EUR 38 million) via holdings in monoline insurers and derivative counterparty exposure where monoline insurers are AEGON’s counterparty. Of AEGON’s direct exposure 100% relates to MBIA
Group. An asset is past due when a counterparty has failed to make a payment when contractually due. Assets are impaired when an impairment loss has been charged to the income statement relating to this asset. After the impairment loss is reversed in subsequent periods, the asset is no longer considered to be impaired. When the terms and conditions of financial assets have been renegotiated, the terms and conditions of the new agreement apply in determining whether the financial assets are past due. There were renegotiated assets of EUR 13 million that would have been past due or impaired if they had not been renegotiated in the reporting year (2009: EUR 13 million). At December 31, 2010
AEGON's policy is to pursue realization of the collateral in an orderly manner as and when liquidity permits. AEGON generally does not use the non-cash collateral for its own operations.
Equity market exposure is also present in insurance and investment contracts for account of policyholders where funds are invested in equities, such as variable annuities, unit-linked products and mutual funds. Although most of the risk remains with the policyholder, lower investment returns can reduce the asset management fee earned by AEGON on the asset balance in these products. In addition, some of this business has minimum return or accumulation guarantees. AEGON also operates an Investment and Counterparty Policy that limits the Group’s overall counterparty risk exposure.
140 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 4
Other fi nancial assets 488 40 – 4 – 532 1 Common shares in Holdings and other activities refl ect the elimination of treasury shares in the general account.
Services non-cyclical – 12 – – 12 5 1 Includes investments of Holding and other activities.
142 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 4
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 DPAC amortization and guaranteed minimum benefits provisioning, while moderate scenarios may not.
Each asset purchased and liability sold has its own liquidity characteristics. Some liabilities are surrenderable while some assets, such as privately placed loans, mortgage loans, real estate and limited partnership interests, have low liquidity.
If AEGON requires significant amounts of cash on short notice in excess of normal cash requirements and existing credit facilities, it may have difficulty selling these investments at attractive prices or in a timely manner.
EUR 2,563 million which were unused at the end of the reporting period (2009: EUR 2,412 million).
AEGON’s liquidity management is based on expected claims and benefit payments rather than on the contractual maturities.
The following table details the Group’s liquidity analysis for its derivative financial instruments, based on the undiscounted contractual net cash inflows and outflows on derivative instruments that settle on a net basis, and the undiscounted gross inflows and outflows on those derivatives that require gross settlement.
(Contractual cash fl ows) 2009 On demand amount 1 < 5 yrs amount 5 < 10 yrs amount > 10 yrs amount
Net settled 1 Financial derivatives include all derivatives regardless whether they have a positive or a negative value. It does not include bifurcated embedded derivatives. These are presented together with the host contract. For interest rate derivatives only cash fl ows related to the pay leg are taken into account for determining the gross undiscounted cash fl ows.
Where policy charges are flexible in products, AEGON uses these analyses as the basis for modifying these charges, with a view to maintain a balance between policyholder and shareholder interests. AEGON also has the ability to reduce expense levels over time, thus mitigating unfavorable expense variation.
The sensitivities represent an increase or decrease of mortality and morbidity rates over best estimate. Increases in mortality rates lead to an increase in the level of benefits and claims.
On March 1, 2011 the European Court of Justice (ECJ) delivered a judgment in the Test Achats case which relates to the ability of an insurance company to use gender as a rating factor when pricing risk. The ECJ has ruled that using gender as a rating factor when pricing risk is invalid. However, the ECJ has granted a transitional period for relief for implementation. The effect of this is that, as from December 21, 2012, it will be unlawful to use gender-related factors for determining premiums and benefits
AEGON will consider the impact the judgment of the ECJ on its insurance business.
AEGON in December 2008 of EUR 3 billion of non-voting convertible core capital securities to Vereniging AEGON, which was funded by the Dutch State. The European Commission determined that the aid provided by the Dutch State was compatible with the common market, raised no objection to the aid and authorized the aid as emergency intervention in response to the financial crisis. In July 2010, the Dutch State submitted a final viability plan regarding AEGON’s status as a fundamentally sound institution to the European Commission.
Dutch Ministry of Finance to amend the terms and conditions of full repurchase of the then-remaining EUR 2 billion of convertible core capital securities. The conditions, which assume a full repurchase no later than June 30, 2011, impose certain requirements on AEGON and its future actions. For example, AEGON may not pay dividends on common shares, and may not pursue acquisitions, except for certain investments in bancassurance partnerships in Spain, provided that AEGON
does not increase its overall market share in the Spanish market. In addition, AEGON may not pursue a top-three price leadership position in its residential mortgage and internet savings businesses in the Netherlands. AEGON also agreed to request Standard & Poor’s to no longer publish its insurance financial strength rating on AEGON Levensverzekering N.V. in the Netherlands and to explore the sale or exit of certain businesses. These requirements may have a material adverse effect on AEGON’s business, results of operations and financial condition.
AEGON may be required to convert the convertible core capital securities into its ordinary shares, which may result in both the ability of the Dutch State to exert influence in its capacity as a large holder of AEGON’s ordinary shares and a significant dilution to existing shareholders. If full repurchase of the convertible core capital securities is not achieved before June 30, 2011, AEGON may face revised and / or additional conditions to repurchase and / or other operational restrictions, which could have a material adverse effect on AEGON’s business, results of operations and financial condition.
Realized gains / (losses) on investments 17 48 1 (5) – – 61 – 61
150 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 5
Realized gains and (losses) on repurchased debt 34 18 11 –
Amortization of deferred expenses, VOBA and future servicing rights 999 133 241 184 – 1,557
VOBA and future servicing rights 2,589 135 752 189 – – 3,665
Investments in real estate 729 2,055 – – – – 2,784
Separate accounts and investment funds 59,353 – 7,427 1,309 – – 68,089
Investments in real estate – – 1,134 – – – 1,134
Financial assets at fair value through profi t or loss 63,928 23,286 56,642 6,278 289 (8) 150,415
TOTAL INVESTMENTS ON BALANCE SHEET 152,998 60,231 66,962 8,949 293 (8) 289,425
Off balance sheet investments third parties 77,715 12,968 3,116 8,983 – – 102,782
Financial assets at fair value through profi t or loss 54,005 21,890 47,864 5,500 622 (8) 129,873
TOTAL INVESTMENTS ON BALANCE SHEET 135,690 57,893 56,742 8,062 1,671 (8) 260,050
Amortization / depreciation through income statement – 185 19 9 3 216
Netherlands respectively. Refer to note 50 for further information on the business combinations entered into by
Fair value less costs to sell calculations were estimated based on the appraisal value for the cash-generating units using embedded value principles. Appraisal value represents available net asset value and the shareholders’ interest in the long-term business plus a multiple of the value of new business. Key assumptions used for the calculation were pre-tax risk adjusted discount rates of 11% (2009: 11%), future premiums, commissions, inflation, persistency, mortality, morbidity and future investment returns.
currently recognized is amortized over an average period of 12 to 16 years, with an average remaining amortization period of 11 years (2009: 11 years). Future servicing rights are amortized over an average period up to 35 years, of which 14 remains at December 31, 2010 (2009: 13 years). Software is generally depreciated over a period of three to five years.
At December 31, 2010, the remaining depreciation period was 3 years (2009: 2 years).
TOTAL INVESTMENTS FOR GENERAL ACCOUNT 143,188 134,205 1 Refer to note 47 for a summary of all fi nancial assets and fi nancial liabilities at fair value through profi t or loss.
Receivables out of share lease agreements – – – 25 25 25
158 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 7.2
SAECURE 6 NHG have been derecognized with a total value of EUR 3.1 billion (2009: EUR 3.9 billion).
In the third quarter of 2010, in relation to the publicly placed securitization SAECURE 2, the special purpose entity decided to use its right to redeem all notes to the note holders and sold the mortgage loans back to AEGON Levensverzekering N.V., a wholly owned subsidiary of AEGON N.V. via AEGON Nederland
N.V., at market value. This transaction did not generate a profit or loss for AEGON.
With respect to the transactions SAECURE 3, 4, 5 and 6 NHG, the related mortgage loans have been sold and derecognized and the special purpose entities are not consolidated in the financial statements of AEGON. The structure of these transactions is as follows: the economic ownership of a certain amount of aggregate mortgage receivables was conveyed to a special purpose entity. This special purpose entity funded the purchase of mortgages from AEGON Levensverzekering N.V.
with the issuance of mortgage-backed securities. The transfer of ownership title will take place only if the borrowers are duly notified by the special purpose entity upon the occurrence of certain pre-defined ‘notification events’. At the same time
A deferred purchase arrangement forming part of the contract to sell the mortgage loans to the special purpose entity entitles
AEGON Levensverzekering N.V. to any specified residual positive value of the special purpose entity at maturity. A 3.3% portion of securitized mortgage loans forming part of SAECURE 4 and amounting to EUR 12 million (2009: EUR 13 million) continues to be recognized as a financial asset on balance, representing the interest rate risk retained by AEGON Levensverzekering N.V.
AEGON owns EUR 178 million (2009: EUR 194 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.
160 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 8 - 9
TOTAL INVESTMENTS FOR ACCOUNT OF POLICYHOLDERS 146,237 125,845 1 Refer to note 47 for a summary of all fi nancial assets and fi nancial liabilities at fair value through profi t or loss.
Rental income of EUR 73 million (2009: EUR 76 million; 2008: EUR 115 million) is reported as part of investment income in the income statement. There are no restrictions on the realizability of investment property or the remittance of income and proceeds of disposal.
Derivatives designated as cash fl ow hedges 479 315 393 354
The economic hedges of certain exposures relate to an existing asset or liability or the future reinvestment risk. In all cases, these are in accordance with internal risk guidelines and are closely monitored for continuing compliance.
Embedded derivatives that are not closely related to the host contracts have been bifurcated and recorded at fair value in the balance sheet. 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. As a result of movements in financial markets and of anticipated maturities of unit linked insurance contracts in 2010 the market value of the guarantees embedded in the written insurance contracts decreased significantly. Please refer to note 45 for more disclosures about these guarantees.
AEGON recognized gains and (losses) related to the ineffective portion of designated fair value hedges of EUR (6) million,
EUR (31) million and EUR 38 million respectively. No portion of derivatives was excluded when assessing hedge effectiveness.
AEGON uses forward starting interest rate swap agreements to hedge the variability in future cash flows associated with the forecasted purchase of fixed-income assets. These agreements reduce the impact of future interest rate changes on the forecasted transaction. Fair value adjustments for these interest rate swaps are deferred and recorded in equity until the occurrence of the forecasted transaction at which time the interest rate swaps will be terminated. The accumulated gain or loss in equity will be amortized into investment income as the acquired asset affects income. AEGON is hedging its exposure to the variability of future cash flows from interest rate movements for terms up to 22 years. The cash flows from these hedging instruments are expected to affect the profit and loss for approximately the next 41 years. For the year ended
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
The summarized financial information is based on the Group’s relative holding and excludes any goodwill included in the measurement of the investment in associates. Refer to note 51 for a listing of the principal investments in associates and the
164 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 11 - 12
Movements during the year in reinsurance assets relating to non-life insurance: 2010 2009
Gross premium and deposits – existing and new business 224 211
DPAC for insurance contracts and investment contracts with discretionary participation features 11,340 10,900
166 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 13 - 13.1
168 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 13.2 - 14
Refer to note 48 for a summary of contractual commitments for the acquisition of general account real estate held for own use.
None of the equipment is held for lease (2009: 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.
EUR 12.7 billion (2009: EUR 8.9 billion) cash collateral is received of which EUR 891 million (2009: EUR 992 million) is included in cash and cash equivalents. This collateral relates to security lending and repurchase agreements and margins on derivatives transactions. A corresponding liability to repay the cash is recognized in other liabilities (note 28). Refer to note 49 for a discussion of collateral received and paid.
Investment of cash collateral received is restricted through limitations on credit worthiness, duration, approved investment categories and borrower limits. AEGON earns a share of the spread between the collateral earnings and the rebate paid to the borrower of the securities. Income from security lending programs was approximately EUR 10 million
For the purposes of the cash flow statement, cash and cash equivalents comprise the following: Cash and cash equivalents 5,231 4,314
170 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 15 - 15.1
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 46 for a description of these requirements.
172 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 15.2 - 15.4
Upon sale, the amounts realized are recognized in the income statement or transferred to retained earnings. Upon impairment, unrealized losses are recognized in the income statement.
Movement in foreign currency translation and net foreign investment hedging reserves (104) (94) – (198)
The net foreign investment hedging reserve is made up of gains and losses on the effective portions of hedging instruments, net of tax. The amounts are recognized in the income statement at the moment of realization of the hedged position to offset the gain or loss from the net foreign investment.
Refer to note 53 for disclosure about a repurchase of convertible core capital securities after December 31, 2010.
176 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 17 - 18
USD 500 million fl oating CMS rate 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 Year of 1 The coupon of the EUR 203 million bonds is set at 7.125% until March 4, 2011. 2 The coupon of the EUR 114 million bonds was originally set at 8% until June 8, 2005. As of this date, the coupon is reset at 4.156% until 2015. 3 The coupon of the EUR 136 million bonds was originally set at 7.25% until October 14, 2008. As of this date, the coupon is reset at 5.185% until
USD 18 million 1 Floating Quarterly, July 23 2004 2034 2011 14 13
178 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 19
Gross premium and deposits – existing and new business 1,767 1,625
Fair value of investment contracts without discretionary participation features 22,989 27,297
Investment contracts for account of policyholders 1 69,527 57,421 1 Refer to note 47 for a summary of all fi nancial assets and fi nancial liabilities at fair value through profi t or loss.
Gross premium and deposits – existing and new business 5,436 6,464 11,900
EUR 308 million of the debentures and other loans are pledged as collateral (2009: nil).
USD 750 million Senior Notes 4.75% Semi–annually 2003 / 13 561 521
EUR 500 million Medium-Term Notes 4.125% December 8 2004 / 14 521 507
EUR 75 million Medium-Term Notes 4.625% December 9 2004 / 19 72 73
GBP 400 million Senior Unsecured Notes 6.625% Semi–annually 2009 / 39 457 443 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 Part of the Long Term Refi nancing Operation (LTRO) program and fully collateralized. 5 The fi rst 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.
6 Outstanding amounts can vary up to the maximum stated nominal amount. 7 Private Value-in-Force (ViF) securitization by AEGON UK to monetize a portion of future profi ts associated with an existing book of unit-linked business. 8 The fi rst 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.
(2009: EUR 959 million) relating to borrowings measured at fair value. Proceeds have been swapped to US dollar floating-rate.
For the year 2010, AEGON’s credit spread had a negative impact of EUR 6 million on income before tax (2009: negative impact of EUR 189 million) and a negative impact of EUR 4 million on shareholders’ equity (2009: negative impact of EUR 132 million).
The cumulative negative impact of AEGON’s credit spread, based on observable market data, on income before tax amounted to EUR 42 million (2009: EUR 36 million).
The difference between the contractually required payment at maturity date and the carrying amount of the borrowing amount to EUR 59 million (2009: EUR 43 million).
Movements during the year in defi ned benefi t plans: Retirement benefi t plans
included in planned assets was nil in both 2010 and 2009.
Movements during the year in plan assets for retirement benefi t plans: 2010 2009
An experience adjustment on plan liabilities is the difference between the actuarial assumptions underlying the scheme and the actual experience during the period. This excludes the effect of changes in the actuarial assumptions that would also
Best estimate of contributions expected for the next annual period 104
AEGON The Netherlands and AEGON UK. The following sections contain a general description of the plans in each of these subsidiaries, a summary of the principal actuarial assumptions applied in determining the value of defined benefit plans and a description of the basis used to determine the overall expected rate of return on plan assets.
Service Code. The benefits are based on years of service and qualify as actuarial gains and losses. Experience adjustments on plan assets are the difference between expected and actual return on assets.
the employee’s eligible annual compensation. The defined benefit plans were unfunded by EUR 171 million at December 31, 2010 (2009: EUR 113 million unfunded).
Assumptions used to determine net periodic benefi t cost for the year ended December 31: Discount rate 6.00% 6.50%
The expected return on plan assets is set at the long-term rate expected to be earned based on the long-term investment strategy and the various classes of the invested funds. For each asset class, a long-term asset return assumption is developed taking into account the long-term level of risk of the asset and historical returns of the asset class. A weighted average expected long-term rate was developed based on long-term returns for each asset class and the target asset allocation of the plan.
Target allocation of plan assets for retirement benefi t plans for the next annual period is: 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
EUR 45,296 per year (as at January 1, 2010) 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 1,756 million at December 31, 2010 (2009: EUR 1,631 million). Assets held by
Assumptions used to determine benefit obligations at year-end: Discount rate 5.40% 5.70%
Target allocation of plan assets for retirement benefi t plans for the next annual period is: Equity instruments 50% 50%
192 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 27
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 124 million; tax EUR 39 million
Deferred corporate income tax asset dependent on retaining bonds and similar investments until the earlier of market recovery or maturity 2,407 4,621 811 1,571
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 totalled gross EUR 1,757 million; tax EUR 438 million
Financial assets designated at fair value through profi t or loss 155 143 223
Realized gains and losses on fi nancial investments 564 475 99
Gains and (losses) on investments in real estate 135 (179) (48)
Net fair value change on for account of policyholder fi nancial assets at fair value through profi t or loss 13,217 15,219 (27,490)
Net fair value change on investments in real estate for account of policyholders 73 (37) (557)
Net fair value change of general account fi nancial investments at fair value through profi t or loss, other than derivatives comprise: 2010 2009 2008
Net fair value change on free standing derivatives 747 (1,795) 2,713
Ineffective portion of hedge transactions to which hedge accounting is applied (1) (41) 50
198 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 35 - 38
Fair value change on hedged items in a fair valued hedge (152) (158) 202
Other income primarily includes a gain of EUR 33 million relating to the sale of the funeral insurance business in the
Change in valuation of liabilities for insurance and investment contracts 13,159 12,548 (4,036)
The change in valuation of liabilities for insurance and investment contracts include gains of EUR 283 million regarding fair value movements of guarantees and
Included in administration expenses above is depreciation amounting to EUR 88 million (2009: EUR 90 million; 2008: EUR 84 million) that relates to equipment, software and real estate held for own use. The direct operating expenses relating to investments in real estate that generated rental income was
EUR 83 million (2009: EUR 72 million; 2008: EUR 59 million).
Included in employee expenses is EUR 29 million (2009: EUR 27 million; 2008: EUR 26 million) regarding defined contribution expenses.
that is classified for segment reporting purposes as non underlying earnings as an offset against realized gains and losses and impairments on financial investments. Included in employee expenses is EUR 74 million that is classified for segment reporting purposes as non underlying earnings (2009 and 2008: nil).
200 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 38
Decisions by the Executive Board to implement share appreciation rights and share option plans are subject to approval by the Supervisory Board. If, subsequently, the
EUR 4 million (2009: EUR (5) million; 2008: EUR (34) million)
The costs related to the share options amount to EUR (7) million
No share appreciation rights and share options were granted in 2009 and 2010. The fair value of a share appreciation right or share option at the grant date in 2008 amounted to EUR 1.57.
This amount is equal to the weighted average fair value for 2008.
No share options were exercised and no SARs were paid during 2009 and 2010. The total intrinsic value of share options exercised and SARs paid during 2008 amounted to EUR 1 million.
EUR 1 million (2009: EUR 5 million). The weighted average period over which it is expected to be recognized is 0.25 years
No cash is received from exercise of share options during 2010, 2009 and 2008. Cash used to settle share appreciation rights amounts to EUR 0 million in 2010 (2009: EUR 0 million; 2008: EUR 0.4 million).
202 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 39 - 42
Refer to note 52 for detailed information about the SARs / share options and the shares and options conditionally granted to the
Impact of the above impairments on the valuation of insurance assets and liabilities – 4 (7)
The interest charges accrued on financial assets and liabilities that are not carried at fair value through profit or loss amounted to EUR 303 million (2009: EUR 288 million charge; 2008: EUR 375 million gain).
Included in interest charges and related fees is EUR 27 million that is classified for segment reporting purposes as non underlying earnings (2009 and 2008: nil).
Difference due to the effects of: Non-taxable income (71) 21 2
2008: 39.9%). The change from 2009 to 2010 is primarily due to a change in the profitability of the countries and, to a limited extent, due to a change in applicable statutory tax rates. The decrease of the weighted average applicable tax rate compared to 2009 and 2008 is mainly caused by a positive result by the higher taxed countries compared to a negative result in 2009 and 2008 in combination with an increased share in the overall profit of the lower taxed countries.
Basic earnings per share is calculated by dividing the net income attributable to equity holders, after deduction of preferred dividends declared, accrued 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 15.3).
Net income / (loss) attributable to equity holders 1,759 204 (1,082)
Net income / (loss) attributable to common shareholders for basic earnings per share calculation 1,292 (248) (1,383)
Diluted earnings per share is calculated by adjusting the average number of shares outstanding for share options. For the purpose of calculating diluted earnings per share,
The number of share options that has not been included in the weighted average number of common shares used in the calculation of diluted earnings per share amounted to 2009, the average share price did not exceed the exercise price and in 2008, the share options would have had an anti-dilutive effect. At December 31, 2010, the exercise prices of these share options range from EUR 8.93 to EUR 14.98.
The potential conversion of the convertible core capital securities is not taken into account in the calculation of the diluted earnings per share for the years 2009 and 2008 as this would have an anti-dilutive effect.
Net income / (loss) attributable to common shareholders for diluted earnings per share calculation 1,482 (248) (1,383)
Weighted average number of common shares for diluted earnings per share calculation (millions) 2,165 1,587 1,507
The dividend per common share paid in 2010 (final 2009 and interim 2010) and 2009 (final 2008 and interim 2009) was nil in both years. It was decided not to declare dividend for 2009 and an interim dividend for 2010. As part of the European
committed itself not to pay any dividend to common shareholders until the convertible core capital securities have been fully repurchased.
For financial reporting purposes AEGON distinguishes between the following types of minimum guarantees: � Financial guarantees: these guarantees are treated as bifurcated embedded derivatives, valued at fair value and presented as derivatives (refer to note 2.10 and note 3).
� Life contingent guarantees in the United States: these guarantees are not bifurcated from their host contracts, valued in accordance with insurance accounting (ASC 944,
Financial Services - Insurance) and presented together with insurance liabilities (refer to note 2.19 and note 3); and
� Life contingent guarantees in the Netherlands: these guarantees are not bifurcated from their host contracts, valued at fair value and presented together with the underlying insurance contracts (refer to note 2.19 and note 3).
In Canada, variable products sold are known as ’Segregated funds‘. Segregated funds are similar to variable annuities, except that they include a capital protection guarantee for mortality and maturity benefits (guaranteed minimum accumulation benefits). The initial guarantee period is ten years. The ten-year period may be reset at the contractholder’s option for certain products to lock-in market gains. The reset feature cannot be exercised in the final decade of the contract and for many products can only be exercised a limited number of times per year. The management expense ratio charged to the funds is not guaranteed and can be increased by management decision. In addition, AEGON Canada recently introduced a contract with a minimum guaranteed withdrawal benefit. The contract provides capital protection for longevity risk in the form of a guaranteed minimum annuity payment.
In The 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.
1 Guaranteed minimum accumulation and withdrawal benefi ts. 2 Fund plan and unit-linked guarantees. 3 Balances are included in the derivatives liabilities on the face of the balance sheet; refer to note 9. 4 The net amount at risk represents the difference between the maximum amount payable under the guarantees and the account value.
(typically a mix of corporate and convertible bonds) subject to a cumulative minimum guarantee. Both the assets and liabilities are carried at fair value, however, due to the minimum guarantee not all of the changes in the market value of the asset will be offset in the valuation of the liability. This product exists in both the fixed annuity and life reinsurance lines of business and in both cases represents closed blocks. The reinsurance contract is in the form of modified coinsurance, so only the liability for the minimum guarantee is recorded on our books.
Product balances as of December 31, 2010 were EUR 572 million in fixed annuities (2009: EUR 657 million) and EUR 137 million in life reinsurance (2009: EUR 149 million).
2 Guaranteed minimum income benefi t in the United States. 3 Note that the variable annuity contracts with guarantees may offer more than one type of guarantee in each contract; therefore, the amounts listed are not mutually exclusive.
Netherlands include various products that accumulate a cash value. Premiums are paid by customers at inception or over the term of the contract. The accumulation products pay benefits on the policy maturity date, subject to survival of the insured. In addition, most policies also pay death benefits if the insured dies during the term of the contract. The death benefits may be stipulated in the policy or depend on the gross premiums paid to date. Premiums and amounts insured are established at inception of the contract. The amount insured can be increased as a result of profit sharing, if provided for under the terms and conditions of the product. Minimum interest guarantees exist for all generations of accumulation products written, except for universal life type products for which premiums are invested solely in equity funds. Older generations contain a 4%
These guarantees are valued at fair value and are included as part of insurance liabilities with the underlying host insurance contracts in note 19.
Net amount at risk 3 1,853 1,658 1 Guaranteed minimum benefi t in the Netherlands. 2 Balances are included in the insurance liabilities on the face of the balance sheet; refer to note 19. 3 The net amount at risk represents the difference between the maximum amount payable under the guarantees and the account value.
The expected returns are based on risk-free rates. AEGON adds 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
(2009: EUR 136 million and EUR 145 million higher or lower).
Had AEGON used a long-term equity implied volatility assumption that was 5 volatility points higher or lower, the impact on income before tax would have been a decrease of
EUR 144 million or an increase of EUR 127 million, respectively, in 2010 IFRS income before tax (2009: EUR 155 million decrease and EUR 136 million increase).
Guarantees valued at fair value contributed a net gain before tax of EUR 356 million (2009: loss of EUR 76 million) to earnings. This net gain is attributable to a decrease in the total guarantee reserves of EUR 109 million (2009: decrease of
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.
Core capital, which consists of shareholders’ equity, excluding revaluation reserve, and the convertible core capital securities that were issued in 2008 (see below), was EUR 18,710 million at December 31, 2010 compared to EUR 14,164 million at
The table that follows reconciles total shareholders’ equity to the total capital base: Total shareholders’ equity 17,210 12,164
Borrowings not related to capital funding of insurance activities (7,331) (6,527)
TOTAL CAPITAL BASE EXCLUDING REVALUATION RESERVE 23,637 21,311 1 Capital securities that are denominated in foreign currencies are, for purpose of calculating the capital base, revalued to the period-end exchange rate.
AEGON N.V. is subject to certain financial covenants in some of its financial agreements (such as issued debentures, credit facilities and ISDA agreements). Under these financial covenants, an event of default may occur if and when any financial indebtedness of any member of the Group is not paid when due, or not paid within any applicable grace period. The financial agreements may also include a cross default provision which may be triggered if and when any financial indebtedness of any member of the Group is declared to be or otherwise becomes due and payable prior to its specified maturity as a result of an event of default.
AEGON UK), and local regulatory solvency measurements for non-EU entities. Specifically, required capital for the life insurance companies in the US is calculated as two times the upper end of the Company Action Level range (200%) as applied by the National Association of Insurance Commissioners in the US. The calculation of the IGD ratio excludes the available and required capital of the UK With-profit funds. In the UK
In the United States, regulation of the insurance business is principally at the state level. State insurance regulators and the
Company has to submit a plan to its state regulators. The CAL is 200% of the authorized control level (ACL), the level at which regulators are permitted to seize control of the Company. At the end of 2010, the combined risk based capital ratio of AEGON’s life insurance subsidiaries in the United States was approximately 412% of the CAL RBC.
212 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 47 - 48
AEGON N.V. is subject to legal restrictions on the amount of dividends it can pay to its shareholders. Under Dutch law, the amount that is available to pay dividends consists of total shareholders’ equity less the issued and outstanding capital and less the reserves required by law. The revaluation account and legal reserves, foreign currency translation reserve and other, cannot be freely distributed. In case of negative balances for individual reserves legally to be retained, no distributions can be made out of retained earnings to the level of these negative amounts. Total distributable reserves under Dutch law amount to EUR 7,271 million at December 31, 2010 (2009: EUR 7,623 million).
Derivatives with negative values not designated as hedges 4,789 – 4,618 –
Total fi nancial liabilities at fair value through profi t or loss 4,789 26,590 4,618 21,436
The Group manages certain portfolios on a total return basis which have been designated at fair value through profit or loss.
together with related liabilities on a fair value basis in accordance with a documented policy of asset and liability management. In accordance with Group’s accounting policies, these assets have been designated as at fair value through profit or loss.
Borrowings designated as at fair value through profit or loss includes financial instruments that are managed on a fair value basis together with related financial assets and financial derivatives.
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 2011. The amounts represent the future outflow and inflow, respectively, of cash related to these investment transactions that are not reflected in the consolidated balance sheet.
214 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 49
Share of contingent liabilities incurred in relation to interests in joint ventures 75 717
A group company entered into a net worth maintenance agreement with AEGON’s subsidiary Transamerica Life
International (Bermuda) Ltd, ensuring the company is adequately capitalized and has sufficient cash for its operations.
� Due and punctual payment of payables by the consolidated group companies Transamerica Corporation, AEGON Funding
Transamerica Finance Corp. with respect to bonds, capital trust pass-through securities and notes issued under commercial paper programs (EUR 620 million; 2009: EUR 668 million), as well as payables with respect to certain derivative transactions of Transamerica Corporation (nominal amount EUR 2,094 million; 2009: EUR 1,870 million).
� Due and punctual payment of any amounts owed to third parties by the consolidated group company
In addition, in recent years, the insurance industry has increasingly been the subject of litigation, investigations, regulatory activity and challenges by various governmental and enforcement authorities and policyholder advocate groups concerning certain practices. AEGON subsidiaries have received inquiries from local authorities and policyholder advocate groups in various jurisdictions including the United States, the United Kingdom and the Netherlands. In the normal course of business, reviews of processes and procedures are undertaken to ensure that customers have been treated fairly, and to respond to matters raised by policyholders and their representatives. In 2010, AEGON UK received a fine of
AEGON does not believe that material liabilities will arise from such reviews, however there is a risk that the Group is not able to resolve 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. Certain
Financial assets at fair value through profi t or loss 89 51
The carrying amount of non-cash financial assets that have been transferred to another party under security lending and repurchase activities where the counterparty does not have the right to sell or repledge amount to EUR 172 million (2009: EUR 57 million).
216 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 50
AEGON has pledged EUR 7,092 million (2009: EUR 9,532 million) financial assets as collateral for general account liabilities and contingent liabilities. None (2009: none) of the financial assets pledged can be sold or repledged by the counterparty.
cash collateral on securities borrowed and derivative transactions and EUR 923 million (2009: EUR 9 million) on reverse repurchase agreements, refer to note 13.2.
As part of AEGON’s mortgage funding program EUR 1.8 billion have been given as security for notes issued (refer to note 23).
(Romania), a pension fund management company earlier run as a 50%-50% joint venture with Banca Transilvania. The total purchase price amounted to EUR 11 million. Acquired assets included EUR 1 million cash positions. Goodwill of EUR 3 million was recognized. Since the acquisition date, the company has attributed EUR 0 million to net income. If the acquisition had been as of January 1, 2009, contribution to net income and total revenues would amount to EUR 0.3 million and
EUR 186 million. Acquired assets included EUR 11 million cash positions. Goodwill of EUR 167 million was recognized. Since the acquisition date, the company has attributed EUR 0 million to net income in 2008. If the acquisition had been as of January 1, 2008, contribution to net income and total revenues would amount to EUR 4 million and EUR 109 million respectively.
In July 2008, AEGON finalized the acquisition of 100% of the shares of the Turkish life insurance and pension company
Ankara Emeklilik Anonim S̨irketi. The total purchase price amounted to EUR 34 million. Since the acquisition date, the company has attributed EUR (3) million (loss) to net income in 2008. If the acquisition had been as of January 1, 2008, contribution to net income and total revenues would amount to respectively EUR (7) million (loss) and EUR 11 million. As a result of the acquisition, assets and liabilities were recognized for
EUR 2 million and EUR 4 million. As a result of the acquisition, assets and liabilities were recognized for EUR 24 million and
On August 31, 2009 AEGON completed the sale of its Taiwanese life insurance business to Zhongwie Company Ltd, announced on April 22, 2009 for an amount of EUR 11 million. The result on the disposal presented under other charges (note 41) was a loss of EUR 385 million.
Book 2 of the Dutch Civil Code for its subsidiary Company
220 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 52
AEGON more than half of the voting power of Prisma LP.
EUR 44 million. Refer to note 16 for for disclosure about the convertible core capital securities.
Donald J. Shepard 244 1 Other periodic benefi ts are additional remuneration elements, including non-monetary benefi ts, social security contributions and tax expenses related to the company car, borne by the Group. For Mr. Shepard, the Group had also borne expenses and non-monetary benefi ts which were provided in his employment agreement with AEGON. These benefi ts included compensation to the extent that the total actual annual taxation on his total income exceeded the taxation if he were only subject to U.S. taxes, personal life insurance and tax planning.
3 The LTI Plan 2006 matured in 2009 and the shares and option rights vested for 75%. In accordance with the terms of the 2006 LTI plan, the Executive Board received shares in April 2009. The number of shares for each member was: Mr. Wynaendts 8,827; Mr. Streppel 10,432 and, Mr. Shepard 19,660. These have been converted using the share price of EUR 3.18 at April 27, 2009. In accordance with the terms of the 2005 LTI plan, the Executive Board received shares in April 2008. The number of shares for each member was: Mr. Shepard 38,542; Mr. Streppel 20,169; and Mr. Wynaendts 17,066. These have been converted using the share price of EUR 10.275 at April 22, 2008.
4 Mr. Wynaendts’ pension benefi ts consists of a pension plan based on 70% of his fi nal base salary, providing he completes 37 years of service, and an additional pension contribution equal to 28% of his base salary. This refl ects the terms of Mr. Wynaendts’ appointment as Chairman of the Executive Board on April 23, 2008. For Mr. Nooitgedagt, the defi ned benefi t contribution equals 25% of his base salary. Pension premiums include a provision for post employment health care, 0.5% of base salary.
5 Base salary was adjusted in 2010 in line with the general increase for all Dutch employees based on the collective labor agreement. 6 Mr. Nooitgedagt was appointed as CFO and Member of AEGON’s Executive Board in April 2009. 7 Mr. Streppel retired as CFO and Member of AEGON’s Executive Board in April 2009. 8 Mr. Shepard retired as CEO and Chairman of AEGON’s Executive Board in April 2008.
222 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 52
The table below show the number of conditional shares and options based on LTI plans.
Jan J. Nooitgedagt 2009–2011 96,663 2012/2013 1 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. For retired members the shares will vest two years after retirement.
2 The conditions of the long term 2009-2011 plan were fi nalised in 2010. The conditional shares will vest in 2012 subject to targets over 2009-2011 being met. 3 Number of shares refl ect a target performance. These shares will vest in 2013 subject to targets over 2010-2012 being met. The maximum performance would result in 130,644 shares for Mr. Wynaendts and 96,114 shares for Mr. Nooitgedagt.
At the balance sheet date, Mr. Wynaendts had mortgage loans with AEGON totalling to EUR 1,485,292, with interest rates of 4.1%, 4.3%, 4.4% and 5.4%. These loans were made in AEGON’s ordinary course of business, pursuant to a widely available employee benefit program on terms comparable to other
Robert J. Routs (as of April 23, 2008) 98,435 70,942 40,673
Ben van der Veer (as of October 1, 2008) 91,096 63,000 18,000
Dirk P.M. Verbeek (as of April 23, 2008) 88,000 66,258 33,481
Willem F.C. Stevens (up to April 22, 2009) – 20,762 73,000
Shares held by Supervisory Board members are only disclosed for the period they have been part of the Supervisory Board.
224 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 53
EUR 0.12. The shares were sold at a price of EUR 5.20 per share.
In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated 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 consolidated financial statements.
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with Dutch law, including the
Dutch Standards on Auditing. This requires that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
� NOTES TO THE FINANCIAL STATEMENTS OF AEGON N.V. AMOUNTS IN EUR MILLION, UNLESS OTHERWISE STATED
AEGON N.V., incorporated and domiciled in the Netherlands, is a public limited liability share company organized under Dutch law and recorded in the Commercial Register of The Hague under its registered address at AEGONplein 50, 2591 TV
Group’) have life insurance and pensions operations in over twenty countries in Europe, the Americas and Asia and are also active in savings and investment operations, accident and health insurance, general insurance and limited banking operations. Headquarters are located in The Hague, the Netherlands. The Group employs approximately 27,500 people worldwide.
230 NOTES TO THE FINANCIAL STATEMENTS OF AEGON N.V. NOTE 2.5 - 3
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.
Other assets include fixed assets, derivatives with positive fair values, other receivables and prepaid expenses. Other receivables are recognized at fair value and are subsequently measured at amortized cost.
Tangible, intangible and financial assets, if not held at fair value through profit or loss, are tested for impairment when there are indications that the asset may be impaired.
Irrespective of the indications, goodwill and other intangible assets that are not amortized are tested at least annually.
Dividends and other distributions to holders of equity instruments are recognized directly in equity, net of tax.
Group. They are deducted from shareholders’ equity, regardless of the objective of the transaction. No gain or loss is recognized
in the income statement on the purchase, sale, issue or cancellation of the instruments. If sold, the difference between the carrying amount and the proceeds is reflected in retained earnings. The consideration paid or received is recognized directly in shareholders’ equity. All treasury shares are eliminated in the calculation of earnings per share and dividend per common share.
A financial instrument issued by the Company is classified as a liability if the contractual obligation must be settled in cash or another financial asset or through the exchange of financial assets and liabilities at potentially unfavorable conditions for the Company.
These government bonds were transferred to another party under repurchase activities. AEGON retained substantially all risk and rewards of the transferred assets. The assets were transferred in return for cash collateral (refer to note 14).
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 46 to the consolidated financial statements of the
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
preferred shares will then be issued at par value (EUR 0.25), unless a higher issue price is agreed. In the years 2003 through 2007, 35,170,000 class B preferred shares were issued under these option rights. In 2008, no option rights were exercised. In 2009, Vereniging AEGON exercised its option rights to purchase in aggregate 33,860,000 class B preferred shares at par value to correct dilution caused by AEGON’s EUR 1 billion equity issue as completed in August 2009.
EUR 1 billion of capital. As part of the issuance 157.8 million ordinary shares of a par value of EUR 0.12 were issued and 32.7 million treasury shares were reissued. The shares were issued at EUR 5.25 per share. Expenses relating to this share issuance amounting to EUR 14 million have been charged to retained earnings. On October 1, 2009, Vereniging AEGON
used its right to purchase preferred shares B for an amount of EUR 8.5 million representing 33.9 million shares. After the transaction, Vereniging AEGON holds 22.8% of the voting rights in AEGON N.V.
The following table shows the movement during the year in the number of common shares: Number of common shares 2010 2009
Supervisory Board along with information about shares held in AEGON by the members of the Boards is included in note 52 to the consolidated financial statements of the Group.
Dividend preferred shares – – – – – (90) – – (90)
Total net income / (loss) – – – – – (1,082) – 1,286 204
Changes in revaluation subsidiaries – – 5,361 – – – – – 5,361
Disposal of group assets – – 59 29 – – – – 88
(2009: EUR 2,787 million) of items with positive revaluation and for EUR (2,420) million of items with negative revaluation
In case of negative balances for individual reserves legally to be retained, no distributions can be made out of retained earnings to the level of these negative amounts.
Certain of 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 895 million (2009: EUR 861 million) which are restricted. Included in AEGON N.V.’s legal reserves is an amount of EUR 355 million related to OPTAS N.V. which represents the increase in statutory reserves since the acquisition of OPTAS N.V.
against issuance of 750 million non-voting convertible core capital securities at EUR 4.00 per security. The newly issued securities rank equal to common shares (pari passu), but carry no voting rights. This structure was designed to avoid dilution of voting rights of existing shareholders. The proceeds from the convertible core capital securities may only be used for general corporate purposes in the ordinary course of business; investments in subsidiaries chargeable to the additional capital in excess of EUR 300 million outside the European Union require prior approval from the Dutch Central Bank.
Refer to note 17 for disclosure about a repurchase of convertible core capital securities after December 31, 2010.
238 NOTES TO THE FINANCIAL STATEMENTS OF AEGON N.V. NOTE 11 - 12
USD 250 million fl oating LIBOR rate 1 Quarterly, December 15 2011 212 212 212
EUR 950 million fl oating DSL rate 2 Quarterly, July 15 2014 950 950 950
Year of 1 The coupon of the EUR 203 million bonds is set at 7.125% until March 4, 2011. 2 The coupon of the EUR 114 million bonds was originally set at 8% until June 8, 2005. As of this date, the coupon is reset at 4.156% until 2015. 3 The coupon of the EUR 136 million bonds was originally set at 7.25% until October 14, 2008. As of this date, the coupon is reset at 5.185% until
AEGON received cash collateral related to repurchase agreements for which an offsetting liability has been set up as
AEGON was obligated to return this amount upon termination of the repurchase agreements (refer note 5). In 2010 AEGON
Other than the Executive Board members, there were no employees employed by AEGON N.V. in either 2010 or 2009.
In our opinion, the company financial statements give a true and fair view of the balance sheet of AEGON N.V. as at
December 31, 2010 and of its result and for the year then ended in accordance with Part 9 of Book 2 of the Dutch Civil Code.
3. From the net profi t as refl ected in the profi t and loss account, if it is suffi cient to this end after a part of the profi t has been set aside for augmenting and / or forming reserves in accordance with 2, fi rst of all the holders of preferred shares shall receive, on the average amount paid on their preferred shares, a dividend the percentage of which, on an annual basis, shall be equal to the European Central Bank’s fi xed interest percentage for basic refi nancing transactions, to be increased by 1.75 percentage points, all applicable to the fi rst trading day on Euronext Amsterdam in the fi nancial year to which the dividend relates. Apart from this, no other dividend is to be paid on the preferred shares. The authority to charge the payment of preferred dividends to the reserves of the
Dutch State is fully repaid. A cash dividend of 2.75% on the amount paid-in on the class A and class B preferred shares shall be paid to the holder of the preferred shares.
NET INCOME / (LOSS) ATTRIBUTABLE TO EQUITY HOLDERS OF AEGON N.V. 1,759 204
AEGON N.V. subsequently sold these common shares in a global offering. The purchase price for the 206,400,000 common shares sold by Vereniging AEGON to AEGON N.V.
was EUR 2,064,000,000, which amount (less EUR 12,000,000 related costs) Vereniging AEGON contributed as additional paid-in capital on the existing AEGON N.V. preferred shares, all held by Vereniging AEGON. As a result of these transactions,
Vereniging AEGON’s beneficial ownership interest in AEGON N.V.’s common shares decreased from approximately 37% to approximately 12% and its beneficial ownership interest in
and AEGON N.V. was changed as follows: The 440,000,000 preferred shares with nominal value of
AEGON N.V. and Vereniging AEGON have amended the option arrangements under the 1983 Merger Agreement. Under the amended option arrangements Vereniging AEGON, in case of an issuance of shares by AEGON N.V., may purchase as many class B preferred shares as would enable Vereniging AEGON
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, 2010, amounts to approximately 22.8%. In the event of a ‘special cause’, Vereniging AEGON’s voting rights will increase, currently to 33%, for up to six months per ‘special cause’.
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
Share in underlying earnings before tax of associates 13 9 15 13 50 144 21 38 315 518 Realized gains / (losses) on investments 126 148 129 255 658
(1,271) (568) (1,380) (5,585) (8,804) Net deposits (on and off balance sheet) (1,458) (839) 2,666 (1,946) (1,577)
New premium production accident & health insurance 148 148 146 180 622 12 11 12 21 56 New premium production general insurance 14 15 14 15 58
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 benefi ts; and
� Are available to be used only to pay or fund employee benefi ts and are not available to the reporting entity’s own creditors.
The valuation process is iterative; it starts at each final node and then works backwards through the lattice to the first node, which is the valuation date, where the calculated result is the value of the option.
Currency risk is a market risk, namely the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates.
Deferred policy acquisition cost (DPAC) are the variable costs related to the acquisition or renewal of insurance contracts and investment contracts with discretionary participation features.
• The profi t or loss of the company, fund or other entity that issues the contract.
Financial asset is any asset that is: � Cash; � An equity instrument of another entity; � A contractual right to receive cash or another fi nancial asset from another entity or to exchange fi nancial instruments with another party under conditions that are potentially favorable; or
• A derivative that will or may be settled other than by the exchange of a fi xed amount of cash or another fi nancial asset for a fi xed number of the entity’s own equity instruments.
Functional currency is the currency of the primary economic environment in which an entity within the Group operates.
(the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder.
Private loans are not embodied in securities. When a private loan takes the form of a private placement of bonds or other investments directly to an institutional investor like an insurance company, it has more the character of a bond loan and such financial instruments are classified as available-forsale investments rather than as loans and receivables.
Recognition is the process of incorporating in the balance sheet or income statement an item that meets the definition of an element and satisfies the following criteria for recognition: � It is probable that any future economic benefi t associated with the item will fl ow to or from the entity; and
Trust pass-through securities are securities through which the holders participate in a trust. The assets of these trusts consist of debentures issued by an AEGON Group company.
� Acts of God, acts of terrorism, acts of war and pandemics.
� Lowering of one or more of our debt ratings issued by recognized rating organizations and the adverse impact such action may have on our ability to raise capital and on our liquidity and fi nancial condition.
� Litigation or regulatory action that could require us to pay signifi cant damages or change the way we do business.
� Competitive, legal, regulatory, or tax changes that affect the distribution cost of or demand for our products.
� Our failure to achieve anticipated levels of earnings or operational effi ciencies as well as other cost saving initiatives.
� Our inability to obtain consent from the Dutch Central Bank to repurchase our Core Capital Securities; and
� Our inability to divest Transamerica Reinsurance on terms acceptable to us or the failure of any of the conditions for completion of such divestment agreement.
Further details of potential risks and uncertainties affecting the company are described in the company’s filings with Euronext
The statements contained in this Annual Report that are not historical facts are forward-looking statements as defined in the US Private 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. We undertake 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.
� Changes affecting interest rate levels and continuing low or rapidly changing interest rate levels.
� Changes in laws and regulations, particularly those affecting our operations, the products we sell, and the attractiveness of certain products to our consumers.