AEGON is one of the world’s largest life insurance and pension groups, and a strong provider of investment products. AEGON empowers local business units to identify and provide products and services that meet the evolving needs of our customers, using distribution channels best suited to local markets. AEGON takes pride in balancing a local approach with the power of an expanding global operation.
With headquarters in The Hague, the Netherlands, AEGON companies employ more than 30,000 people worldwide. AEGON’s businesses serve millions of customers in over twenty markets throughout the Americas,
Private Securities Litigation Reform Act of 1995. The following are words that identify such forward-looking statements: believe, estimate, target, intend, may, expect, anticipate, predict, project, counting on, plan, continue, want, forecast, should, would, is confident, will, and similar expressions as they relate to our company. 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. Actual results may differ materially from expectations conveyed in forward-looking statements due to changes caused by various risks and uncertainties. Such risks and uncertainties include but are not limited to the following: Changes in general economic conditions, particularly in the
Alex Wynaendts named new chairman AEGON announces that Alex Wynaendts, the Group’s
AEGON announces new asset management joint venture with China’s Industrial Securities, underscoring the Group’s commitment to the Chinese market.
Zhejiang province in eastern China. The joint venture now has businesses in provinces covering more than 200 million people.
United States. As part of the agreement, AEGON also buys Merril Lynch’s two life insurance businesses.
Merrill Lynch agreement finalized AEGON’s agreement with Merrill Lynch further widens the Group’s distribution network in the
UK bank alliance AEGON forms new distribution partnership with Barclays, one of the United Kingdom’s leading high street banks. May 2007.
as at December 31, 2007 211 Income statement of AEGON N.V.
for the year ended December 31, 2007 212 Notes to the fi nancial statements of AEGON N.V.
MAIN BUSINESS LINES: Life and protection, individual savings and retirement, pensions and asset management, institutional products, reinsurance.
Today, AEGON The Netherlands is one of the country’s leading providers of life insurance and pensions.
MAIN BUSINESS LINES: Life and protection, pensions and asset management, distribution.
MAIN BUSINESS LINES: Life and protection, individual savings and retirement, pensions and asset management, general insurance.
OTHER EUROPEAN COUNTRIES HISTORY: AEGON has had businesses in Spain since 1980 while the Group’s partnership with French insurer
La Mondiale goes back to 2002. In Spain, AEGON now has distribution partnerships in place with four regional savings banks.
Seguros Salud, CAM AEGON Holding Financiero, CAN Vida y Pensiones, Caja Badajoz Vida y Pensiones, La Mondiale
LIFE AND PROTECTION AEGON is one of the world’s leading providers of life insurance and financial protection products, serving millions of customers across the globe. AEGON companies offer a broad range of traditional, term, universal, permanent life insurance, as well as individual and group financial protection, including accident and health cover. Last year, AEGON’s life and protection business reported operating profit before tax of EUR 1.33 billion, up 15% from 2006 and accounting for more than 49% of the Group’s overall operating earnings before tax.
AEGON helps individuals and families around the world save for their retirements, increasingly important as people in many countries live longer, healthier lives. In the United States and elsewhere,
Pensions are an important part of AEGON’s businesses, not only in the United States, the
Netherlands and the United Kingdom, but also in new, emerging markets like the countries of
Central and Eastern Europe. In 2007, pensions and asset management accounted for approximately 17% of the Group’s operating earnings before tax.
INSTITUTIONAL PRODUCTS AEGON’s businesses cater to the needs not only of individuals, but also of institutional customers, such as banks, pension funds, municipalities and private companies. AEGON companies provide institutional guaranteed products, such as guaranteed investment contracts and funding agreements, as well as management, administration and risk services for off-balance sheet items and bank-owned and corporate-owned life insurance. In 2007, AEGON’s institutional products accounted for 13% of the Group’s operating earnings before tax.
Equitable in the United Kingdom and AEGON itself in the Netherlands.
United States, the Netherlands and the United Kingdom. The Group’s variable annuities, savings and mutual fund business is growing rapidly in other countries, too. A combination of strong economic growth and rising levels of personal wealth in recent years has supported an expansion of AEGON’s businesses in Asia, the Americas and Central and Eastern Europe.
Pensions are a core part of AEGON’s businesses across the world. With people living longer lives, and governments increasingly shifting responsibility for retirement provisioning to the private sector, AEGON believes demand for pensions will continue to grow in the years ahead. AEGON has a strong and expanding pension business in the United States, the Netherlands and the
Central and Eastern Europe, opening up new opportunities for the Group.
AEGON USA offers reinsurance services not only in the United States, but also in Asia and Latin
AEGON offers a range of property and casualty insurance in both the Netherlands and Hungary.
Generally, AEGON offers non-life insurance cover only when to do so it serves the Group’s distribution objectives.
Like you, we have kept a close eye on the recent turmoil in the world’s financial markets, brought on by the subprime crisis in the United States and the subsequent adverse effects on global credit markets. Keeping in mind that AEGON’s exposure to subprime mortgage-backed investments represents just over 2% of its general account investment portfolio, the Group experienced no material impairments to its portfolio during the year. The majority of AEGON’s subprime exposure continues to be rated either AAA or AA.
AEGON’s 2010 value of new business (VNB) target led us to increase that target by 14% to EUR 1.25 billion.
In 2007, we reported a record VNB of EUR 927 million,
November and a 13% increase in AEGON’s full year dividend to EUR 0.62 per common share are evidence of our continued strong cash flows and solid capital position.
We pursued a consistent strategy of profitable growth, strengthening distribution, increasing scale and capitalizing on key international expansion opportunities.
India, where we will soon be providing life insurance and asset management products with our partner Religare. We believe this approach to cross-border coordination gives us a distinct competitive advantage and helps AEGON maximize the opportunities of today’s rapidly evolving markets.
In Central and Eastern Europe, AEGON further strengthened its position in the emerging pension markets with the acquisition of PTE Ergo Hestia in Poland and with our new joint venture in Romania where we have formed a pension fund management company with Banca Transilvania. In the Netherlands, we enhanced our group pension business with the acquisition of OPTAS, a pension provider to port employees in Rotterdam and Amsterdam.
Also during 2007, we further strengthened AEGON’s broad distribution network, a key growth driver in both our established and developing markets. In May, AEGON formed a new partnership with Barclays in the United Kingdom to distribute its products through the bank’s network of more than 900 financial planners. In June, we announced a new partnership with Taiwan’s leading banking conglomerate,
Taishin, a group with more than four million customers and over 200 outlets across the country. In China, AEGON
secured another license to operate in the burgeoning coastal provinces of eastern China. With the addition of the Zhejiang province, AEGON-CNOOC’s businesses now have the potential to serve more than 200 million people in one of the world’s fastest growing economies.
I will step down as Chairman of the Executive Board on
Supervisory Board’s selection of Alex Wynaendts to succeed me in building on the progress we have made over the past several years. It has been my pleasure to serve with
Europe. AEGON today is in an even stronger position to capture growth in the world’s most important markets for life insurance and pensions.
I also want to thank the senior management in Europe, the
Operating Officer in 1985. In 1989, when Life Investors was consolidated with AEGON’s other US businesses, Mr. Shepard was appointed President and CEO of the newly created AEGON USA. In 1992, he became a member of AEGON’s Executive
Board the following year. In 1991, Mr. Streppel was appointed Chairman and CEO of the merchant bank Labouchère.
Senior Vice-President for Group Business Development. Since 2003, he has been a member of AEGON’s Executive Board, overseeing the Group’s international growth strategy. In April 2007, Mr. Wynaendts was named AEGON’s new Chief Operating
Officer and in April 2008, Mr. Wynaendts will take over from Mr. Shepard as Chairman of AEGON’s Executive Board.
Chief Financial Officer and Director of Tax and was appointed to his current position in March 2002. Mr. Baird has been a member of AEGON’s Management Board since the beginning of 2007. Mr. Baird is also a member of the board of directors at QCR Holdings in the United States.
Otto Thoresen joined Scottish Equitable in 1978, where he qualified as an actuary and worked in a number of roles including marketing manager. He left Scottish Equitable in 1988 to take up various management and executive roles at UK insurers
AEGON’s Management Board was established at the beginning of 2007 to further strengthen the management of the
Group’s worldwide business activities. Working alongside the Executive Board, the Management Board oversees a broad range of issues that impact AEGON’s international growth objectives. While the Executive Board remains
AEGON has shareholders and bondholders in countries around the world. AEGON’s investor relations program seeks to provide the Group’s investors with the clear, transparent, accurate and timely information they require to make sound investment decisions.
During 2007, AEGON made significant progress both in implementing its corporate strategy and in improving communication with shareholders and the broader financial community: AEGON returned a total of EUR 1.9 billion to shareholders through repurchases of 99.77 million shares and increased dividends; AEGON increased investment in its core businesses, strengthened its distribution networks and expanded its international presence; AEGON raised its 2010 value of new business target to EUR 1.25 billion; AEGON enhanced the transparency of its fi nancial communications by launching a new measure of operating earnings and a new lines of business reporting format, as well as publishing a quarterly fi nancial supplement and introducing new accounting rules in the Netherlands; AEGON introduced underlying earnings to provide additional information on the expected long-term performance of certain investment classes.
As part of this format, the following lines of business were established: Life and protection
In July, AEGON announced that it was changing the accounting principles the Group uses to value guarantees on certain products in the Netherlands. The change was aimed at increasing the transparency of AEGON’s financial results and enhancing the ability of investors, analysts and other interested parties to assess the economic performance of the Group’s Dutch businesses. Alongside this change, AEGON also began publication of ‘underlying earnings’, an additional measure of operating profit,
Group also provides additional information on its country unit operations in its quarterly financial supplement.
As a measure of business performance, embedded value is an indicator in the insurance industry. AEGON supports and endorses the European Embedded Value Principles.
These principles, introduced in 2004, provide a sound and responsible common method for calculating embedded value, enabling investors to compare the relative performance of Europe’s leading insurance companies.
Group’s businesses, its strategy for long-term growth and its expansion into new markets and emerging countries around the world.
AEGON has an international shareholder base, a reflection of the international spread of the Group’s businesses.
Approximately 86% of AEGON’s common shares are held by institutional investors (including Vereniging AEGON), with the remaining 14% in the hands of retail shareholders.
Based on information publicly available as of December 31, 2007, only one shareholder holds more than 5% of the
AEGON’s common shares are listed on four stock exchanges: Amsterdam, London, New York and Tokyo.
GBP 90 million to the Group’s total core capital; In May, AEGON closed an offering of USD 550 million worth of 30-year securities on behalf of its wholly owned US subsidiary LIICA Holdings LLC; In September, AEGON issued a USD 1.05 billion issuance of a 7.25% perpetual capital security.
Due to its strong capital position, AEGON was able to initiate a share repurchase program in August 2007, as part of the Group’s capital management strategy.
By mid-November, AEGON had completed this program, repurchasing a total of 74.6 million common shares for a total consideration of EUR 1 billion. In addition, AEGON
repurchased 25.2 million shares as part of the Group’s policy of repurchasing stock dividends distributed during the year to neutralize their dilution effect. Another 8 million common shares were repurchased in order to hedge granted option rights. A resolution proposing these shares to be cancelled will be presented to the Annual
AEGON’s AGM approved the cancellation of 11.6 million shares bought in 2006 as part of repurchased stock dividend.
AEGON’s total dividend for the year is composed of two parts: An interim dividend, announced at the same time as the
Payment of the interim and final dividend is made either in cash or stock. Stock dividends are generally paid from
AEGON’s paid-in surplus fund, tax free in the Netherlands, or, from the Group’s net income. If necessary, AEGON
management may alter the relative attractiveness of a cash versus a stock dividend.
Shareholders who elected to receive their interim dividend in AEGON shares were entitled to one new common share for every 47 common shares they already held. The value of the stock dividend was 5.6% lower than the cash dividend. The final dividend for the year, as proposed to the General Meeting of Shareholders, will be EUR 0.32 per common share. In total, AEGON’s 2007 dividend of
AEGON’s objective is to continue increasing dividend payments to shareholders, subject to the development of the Group’s cash flows and capital position.
(+20.7% in 2006). The total return on AEGON’s New Yorklisted shares came to minus 3.5% in 2007, down from plus 20% the previous year. This compares with shareholder returns from the S&P 500 Insurance Index of minus 6.3%
23 Annual General Meeting 25 Ex-dividend date fi nal dividend 2007 28 Start of the fi nal dividend 2007 election period 29 Final dividend 2007 record date
7 Second quarter 2008 results 8 Ex-dividend date interim dividend 2008 8 Start of interim dividend 2008 election period 12 Interim dividend 2008 record date 29 End of interim dividend 2008 election period
Today, AEGON is a global company, with revenuegenerating investments of over EUR 370 billion and major operations in the United States, the Netherlands and the
Whatever business it’s in and wherever that business is located, AEGON strives always to be a market leader.
This is essential to realize benefits of scale and to attract and retain talented managers and strong local business partners.
AEGON wants to strengthen its international presence by expanding into new markets that offer prospects for profitable, above-average, long-term growth. To achieve this, the Group seeks out opportunities both to grow existing businesses and to branch out into new areas through carefully selected acquisitions and partnerships.
Japan, this is leading to a fundamental shift away from simply saving for retirement to managing those savings for an increasingly costly old age. Moreover, in the next few years, millions of ‘baby boomers’ around the world will enter retirement, releasing billions of euros in accumulated pension assets and savings. In Japan, for example, an estimated JPY 50 trillion – approximately EUR 320 billion –
will be released from long-term savings over the next three years as around 8 million people enter retirement.
India and Central and Eastern Europe, recent economic growth, rising levels of personal wealth and the emergence of new, ambitious middle classes are also expected to fuel demand over the coming years.
Over the past several years, AEGON has expanded its international presence significantly, pushing out into new, high-growth emerging markets such as China, Mexico,
Today, AEGON is present in more than twenty markets in the Americas, Europe and Asia.
Company. The new partnership gives AEGON an entry into the rapidly growing Chinese asset management market.
AEGON-CNOOC secured an operating license for Zhejiang province in eastern China. The license means that
In August, authorities gave the go-ahead for BT AEGON’s new pension fund in Romania. BT AEGON – a joint venture between AEGON and Banca Transilvania, the country’s fourth largest commercial bank – is launching the new fund as Romania prepares to introduce new mandatory, privately run pension plans at the beginning of 2008.
For AEGON, banks are an extremely important means of distribution. In some countries, indeed, they are the
Clark Inc., a distributor of bank-owned and corporateowned life insurance in the United States. The acquisition was completed three weeks later, further strengthening
In July, AEGON unveiled its fourth bank distribution agreement in Spain, with Caja Cantabria, a regional savings bank in the north of the country. Together, AEGON and
AEGON will have access to some 1,800 bank branches across Spain and more than 3.5 million potential customers.
AEGON has sought to further broaden its range of products and services and strengthen its presence in strategic markets, such as pensions and variable annuities.
Four years after it was first set up, AEGON Global Pensions, the Group’s international pension unit, now serves customers throughout the Americas, Europe and Asia.
US subsidiary, will have access to Merrill Lynch’s distribution network for variable annuities. In 2007,
AEGON capitalized on new opportunities opening up in life insurance, pensions and long-term investment products.
AEGON returned a total of EUR 1.9 billion to shareholders as part of an efficient capital management strategy.
Europe; we’ve signed new partnerships in India and Japan, further strengthened our presence in China, and extended our commercial reach in places such as Spain, the
This expansion is the culmination of months, sometimes years of hard work and preparation. We believe our core markets will continue to grow in the years ahead. We want to capitalize on these growth opportunities, making sure we’re in the right markets and making sure, too, that our businesses – our insurance, pension and bank distribution businesses – work together as efficiently and effectively as possible.
Eastern Europe, we now have businesses in five countries: Hungary, Poland, the Czech Republic, Slovakia and, most recently, Romania. In India, we are launching new life insurance and asset management businesses with our partner, the Ranbaxy Promoter Group.
“For AEGON, however, there’s no such thing as growth for growth’s sake. Of course, we want to grow. But if we are to create lasting value for our shareholders and our customers, this growth has to be profitable and sustainable over the long term. From this viewpoint, our recent performance has been excellent. Our value of new business – the best measure we have of future profitability
– has risen in each of the past four years. In 2007, our VNB
rose 20% to a record EUR 927 million, putting us firmly on track to meet our upgraded 2010 target.
“Moreover, strong earnings growth has enabled us, in the past few months, to return more than EUR 1.9 billion in surplus capital to our shareholders by increasing our dividend payments and by repurchasing approximately 100 million of our own shares.
Network, AEGON Global Pensions is one of the few pension providers worldwide dedicated to helping multinational companies improve management of their international retirement and employee benefit plans. AEGON Global Pensions now serves customers in Europe, the Americas and Asia, helping them make the most of an increasingly global business environment.
The prospects for the Indian market are tremendous. The thing you have to bear in mind is that India has a very young population, more so than in China, for example.
“What strikes you first is the sheer scale. In India, you need ‘feet on the street’. That’s the big thing here.”
There are ten of us in all from AEGON UK working in India, plus another two from the Netherlands. We do six weeks in the country, then ten days back at home. What we’ve been doing is putting the whole chain in place from the products, to the sales, to the back office. We want our legacy in India to be one of quality. We want all the right processes and controls in place, so we know where every rupee belongs, where it comes from and where it’s going.
So, eventually, when we hand over to new management, we will have laid down a foundation for an effective, wellrun business.
AEGON UK Increase value of new business to GBP 213 million. Value of new business GBP 157 million.
Achieve a market share of 10%. Market share 7.9% (Q3 2007)
AEGON Other countries Minimum 30%-35% share of overall value of new business. ’Other countries’ accounted for 24% of overall value of new business.
Central and Eastern Europe Increase value of new business to EUR 100 million. Value of new business EUR 72 million.
Other European countries Increase value of new business from Spain and France to
AEGON will continue to invest in core products to capitalize on opportunities opening up in the life insurance, pensions and long-terms savings and investment markets; AEGON will seek ways of strengthening and expanding its distribution network, particularly through the world’s banks; AEGON will seek opportunities to expand its international presence by investing in markets that offer above-average long-term growth; AEGON’s main objective will be to grow its businesses organically, but it will pursue a selective acquisition policy aimed at strengthening the Group’s position in certain key markets, such as Ukraine, Turkey,
AEGON’s businesses delivered a solid performance in 2007, as demonstrated by increased sales, deposits and a further growth in underlying earnings. In addition, AEGON
AEGON’s business and country units. Net income was down 20%, mainly due to the impact of exceptional gains in the Netherlands in 2006. During the year, revenue generating investments grew by 2% (or 11% at constant currency exchange rates), reflecting a continued overall expansion of the Group’s businesses.
“AEGON delivered another very solid performance in 2007 despite difficult conditions in world markets and a weaker
US dollar. Our continued strong financial position is testimony to the Group’s effective risk and capital management during the year.“
In EUR million adjusted 1 pro forma 2 to pro forma
In EUR million adjusted to adjusted pro forma to pro forma
Share in net results of associates 36 32 13 32 13
REVENUE GENERATING INVESTMENTS 370,941 362,651 2 1 Together non-operating earnings before tax. 2 Net income attributable to equity holders of AEGON N.V.
The completion of a EUR 1 billion share repurchase plan in
Group’s full year dividend are further evidence of AEGON’s continued strong cash flows and solid capital position.
AEGON continues to have sufficient capital to support the organic growth of its businesses while at the same time pursuing acquisition opportunities consistent with the
Industrial Securities in China and the regional savings bank Caja Cantabria in Spain. In addition, AEGON’s new partnership with Merrill Lynch in the United States will further enhance the Group’s position as a leading provider of life insurance and variable annuity products to
AEGON has a culture of strong and effective risk management. There are robust processes and controls in place throughout the Group’s asset management organization. Credit risks are mainly concentrated in
AEGON USA’s general account portfolio. Over the last few years, AEGON has repositioned investments for its general account insurance portfolio, structuring them defensively in order to weather a stressed credit environment. The relative low level of impairments in the fourth quarter of 2007 demonstrates the high quality of AEGON’s investment portfolio and the limited impact the current stressed credit environment is having on expected cash flows from AEGON’s fixed income assets.
Net impairments on investments for the Americas amounted to EUR 48 million. The current dislocation of credit markets, however, is characterized by price and/or spread volatility, low liquidity and, for certain segments of the market, may result in changes to credit ratings. Most assets contained in AEGON’s general account portfolio are accounted for as ‘Available for Sale’ under IFRS, and thus are held at fair value on the balance sheet. Any changes to the fair value of these assets are recorded on an after tax-basis in shareholders’ equity.
indices (ABX). AEGON’s subprime ABS portfolio consists of 70% AAA-rated securities and 29% AA-rated securities.
(RMBS) portfolio includes securities of near prime residential mortgage loans, such as so-called Alt-A and negative amortization floaters. AEGON’s EUR 862 million in Alt-A holdings are backed by fixed-rate loans. Ninetynine percent of these securities are rated AAA. At the end of 2007 the Group’s Alt-A portfolio had total negative pretax revaluations of EUR 18 million, bringing the fair value of this portfolio to EUR 844 million, or approximately 98%. The negative amortization, or Option ARM floaters, are collateralized by affordability-type loan structures that allow for flexible monthly repayments. This EUR 1.6 billion portfolio is entirely AAA-rated and consists of super-senior AAA exposure. This means that subordination levels in the securitizations are four to five times what is typically required by rating agencies for a AAA rating.
For a fee, AEGON USA takes on credit exposure on a credit index, i.e. super-senior tranches of the CDX index, via a synthetic collateralized debt obligation program (synthetic
As these derivatives are marked to market through earnings, they may however cause substantial operating earnings volatility prior to maturity due to movements in credit spreads, but will not affect underlying earnings.
Assuming there are no cash losses from these positions, any mark to market effect on operating earnings will be reversed by maturity. At December 31, 2007, the notional amount of this program was EUR 4.5 billion with a negative market value of EUR 30 million.
EUR 2,692 million in 2007, virtually unchanged from pro forma operating earnings before tax of EUR 2,693 million for the previous year (constant currency figures show a 6%
Operating earnings can be significantly affected by movements in the value of financial assets carried at fair value, as well as total return annuity products and segregated fund guarantees. Earnings from these items in
EUR 2,047 million in 2007, down from a pro forma figure of EUR 2,139 million the previous year, due mainly to an increase in the Group’s effective tax rate. In addition, net operating earnings in 2006 included significant one-off gains relating to tax payments in the Netherlands.
In 2007, AEGON’s effective tax rate on operating earnings rose to 24%, up from 21% in 2006. The Group’s effective tax rate was higher in the Netherlands and Other countries
(primarily as a result of an increase in Taiwan), while it decreased in both the Americas and the United Kingdom.
Gains/(losses) on investments and impairment charges, totaled EUR 345 million in 2007, down from EUR 544 million the previous year. This decline was primarily the result of a decrease in the fair value of derivatives used to hedge guarantee provisions in the Netherlands, partly offset by a rise in net gains from the sale of bonds and shares in the Americas and the Netherlands.
Figures for 2006 had been lifted by USD 56 million from sales of investor-owned life insurance and a further
In the Netherlands, total new life sales increased by 5% in 2007, driven by a growth in pension sales, particularly via corporate and other financial institutions.
New life sales in the United Kingdom, rose 12% to GBP
New life sales in ‘Other countries’ totaled EUR 353 million in 2007, an increase of 37% due mainly to continued strong growth in Central and Eastern Europe and higher sales of unit-linked products in Taiwan.
Deposits rose 14% in 2007. In the Americas, deposits from the Group’s pension business were 28% higher than in 2006, while deposits from both fixed and variable annuities and mutual funds increased 8%. An overall increase in sales of institutional guaranteed products was driven by USD 6.6 billion in sales of synthetic CDOs, a new product in 2007.
Kingdom, sales of both retail and institutional asset management products increased, as did savings deposits in the Netherlands.
Number of employees, including agent-employees 15,157 6,200 4,990 3,876 191 30,414
The Group uses net operating earnings in its segment reporting as an important indicator of its financial performance. The reconciliation of this measure to the income before tax is shown below. AEGON believes that net operating earnings, together with the other information included in this report, provides a meaningful measure for the investing public to evaluate AEGON’s business relative to the businesses of its peers.
“We retain a very strong focus on cost control, risk management and profitability. That – along with ensuring a wide range of both products and distribution channels –
AEGON Americas reported operating earnings before tax of USD 2,876 million in 2007, an increase of 5% compared with the previous year, as a result of continued growth from most lines of business. Higher returns from hedge funds, as well as limited partnerships and convertible bond assets, also contributed significantly to the overall growth in earnings. There was, however, a decline in earnings from segregated funds in Canada and a significant decrease in the value of certain structured products.
USD 1,326 million. This increase was due mainly to the continued growth of existing in-force business, an update of mortality assumptions and reserve adjustments in
AEGON SERVES SOME 28 MILLION POLICYHOLDERS ACROSS THE UNITED STATES AND CANADA
in 2007 to USD 674 million. Earnings from variable annuities fell by USD 61 million as a result of lower returns from segregated funds in Canada.
AEGON Americas’ pensions and asset management business reported operating earnings before tax of
USD 188 million in 2007, an increase of 35%, due mainly to positive net cash flows and favorable equity markets during the year.
Clark Inc., a distributor of bank-owned and corporateowned life insurance. Overall earnings in both 2007 and 2006 reflect the strong outperformance of AEGON hedge funds and other fair value investments.
USD 524 million in 2006. The expected return before tax totaled USD 364 million, up from USD 260 million. The impact of these assets is particularly significant for the life, fixed annuity and institutional guaranteed products lines of business.
Net impairment charges, which totaled USD 66 million in 2007, continue to run well below long-term expectations, but were less favorable than the USD 15 million reported for 2006. The effective tax rate on net income rose to 31%
Recurring premiums were up 5%, due mainly to growth in the reinsurance business. Single premiums, meanwhile, grew by 30% compared with 2006, as a result of higher terminal funding sales. At USD 2.5 billion, accident and health premiums were stable compared with 2006.
AEGON Americas’ commissions and expenses decreased by 1% in 2007 to USD 4,569 million. Operating expenses were 9% higher at USD 2,124 million – a result of extra costs associated with the acquisition of Clark Inc. and the restructuring of AEGON Americas’ Kansas City-based life insurance operations.
Total life insurance gross premiums 10,885 9,687 12 7,955 7,709 3
USD 56 million in sales of investor-owned life insurance, discontinued in the third quarter. Excluding these items, retail life sales improved 18% in 2007.
Sales of accident and health cover fell USD 56 million in 2007, largely because of lower international sales from
higher than the previous year. The increase was due primarily to higher single premium group annuities production, growth in terminal funding sales and the inclusion of significant takeover amounts received in 2007 against sales made in 2006. Managed assets were 10%
BOLI-COLI standardized production was 3% higher in 2007 at USD 207 million. Reinsurance standardized life production was 4% higher in 2007 at USD 327 million.
AEGON USA is one of the leading life insurance organizations in the United States. It has more than twenty million customers and employs over 14,000 people.
AEGON USA companies can trace their roots back as far as the mid-nineteenth century. AEGON USA includes some of the best known names in the US insurance business, including Transamerica and Monumental Life. AEGON
As part of their joint venture, AEGON and Seguros Argos have set up a jointly-owned pension fund management company, Afore Argos.
AEGON’s operating companies in the United States are grouped together under a single financial services holding company, AEGON US Holding. Business is conducted through subsidiaries of two companies: AEGON USA Inc.
AEGON USA provides permanent life (or whole life), universal life, term life and variable universal life insurance and protection products. A number of the company’s subsidiaries also offer life insurance products tailored to specific segments of the US market. In 2007, life and protection accounted for more than 46% of AEGON
America’s overall operating earnings before tax, making it the unit’s most important single line of business.
Reinsurance also provides products and services to clients in Europe, the Asia-Pacific and Latin America.
AEGON Canada offers a range of segregated funds, mutual funds, guaranteed investment accounts, single premium annuities and leverage-lending programs. Some of these are offered through strategic alliances either with banks and trusts or with investment management companies.
AEGON The Netherlands. A successor will be announced in due course. In the interim, the
Share in net results of associates 3 7 (57) 7 (57)
REVENUE GENERATING INVESTMENTS 65,775 63,970 3 1 2007 data is compared to pro forma data for 2006. The pro forma fi gures are presented after the change in accounting principles and after the change in the defi nition of operating earnings to include AEGON’s share in net results of associates and to exclude the effect of any movements in the fair value of guarantees, as would have been the case had AEGON The Netherlands’ hedge program been in place for 2006.
AEGON The Netherlands’ individual savings business reported operating earnings before tax of zero in 2007, compared with a profit of EUR 35 million the previous year.
EUR 15 million related to the accelerated amortization of deferred expenses, as well as higher spending costs and lower interest margins. The increase in expenses is related to the repositioning of AEGON Bank, increased sales activity and a higher allocation of distribution expenses.
EUR 107 million in 2007, down from pro forma operating earnings of EUR 197 million the previous year. This decline can be attributed to fluctuations in fair value items during the year. The acquisition of OPTAS contributed a net EUR
11 million to overall operating earnings before tax from the pensions and asset management business line.
EUR 648 million to earnings in 2006. In 2007, net gains on investments (before tax) amounted to EUR 140 million compared to EUR 513 million in 2006. The 2007 net gains on investments included EUR 325 million of losses on fair value movements in guarantees net of related swaps.
Investment income, which includes direct investment income of both general account and account of policyholder investments, increased by 6% compared to 2006. The increase reflects the inclusion of OPTAS.
EUR 1,188 million in 2007. Operating expenses amounted to EUR 843 million in 2007 compared with EUR 708 million in 2006. The increase was mainly caused by the inclusion of Unirobe.
AEGON’s history in the Netherlands goes back to the burial funds of the mid-nineteenth century. Today, AEGON
The Netherlands is one of the country’s leading providers of life insurance and pensions, with millions of customers and approximately 6,200 employees. AEGON
Unirobe Meeùs Groep. In addition, AEGON itself is one of the most widely recognized brand names in the
AEGON The Netherlands operates through three sales organizations, each focusing on a separate segment of the
AEGON The Netherlands provides a range of life insurance and personal protection products and services, including traditional, universal and term life, endowment and annuity insurance as well as funeral insurance and accident and health cover. Life and protection is
AEGON The Netherlands provides a variety of individual savings and retirement products. These include the socalled ‘Levensloop’ (or Life Cycle) savings plans.
The Netherlands’ most important lines of business. In 2007, it accounted for 30% of the company’s operating earnings before tax. For many company and industry pension funds, AEGON The Netherlands provides a variety of pensions for both individuals and corporate customers and has a full range of pension solutions and administration-only services.
AEGON The Netherlands offers financial advice covering areas such as insurance, pensions, mortgages, financing, savings and investment products. The company also has a real estate management business and acts as a broker for both residential and commercial property. In 2007, AEGON
Schadeverzekering. These are aimed at both the corporate and retail markets. They include house, car and fire insurance. In 2007, general insurance accounted for approximately 2% of AEGON The Netherlands’ operating earnings before tax.
Barclays Bank. Both these factors bode well for future profitability at AEGON UK. AEGON UK excels in its core markets – pensions, life insurance, investments and longterm savings products. We are constantly finding new and better ways of getting our products and services to our customers. It’s a recipe that has worked extremely well for us – and we have every reason to believe it will continue to do so in 2008.”
GBP 186 million as a result of higher earnings from new business, particularly annuities, and an increase in fundrelated charges.
Operating earnings for the life and protection business totaled GBP 54 million in 2007, up from GBP 12 million the previous year. This significant increase was primarily the result of growth in AEGON UK’s annuity business, which included a one-off gain of GBP 21 million resulting from a transfer of a block of in-force annuities during the year.
Share in net results of associates 1 1 0 1 1 0
Income before income tax on shareholders return 178 174 2 260 256 2
Income tax on shareholder return 5 (16) 131 7 (24) 129 1 Included in other non-operating income/(charges) are charges made to policyholders with respect to income tax. There is an equal and opposite tax charge which is reported in the line Income tax attributable to policyholder return.
Net operating earnings totaled GBP 188 million in 2007, an increase of 6% compared with the previous year after an adjustment for a one-off tax credit of GBP 38 million in 2007, resulting from a decision to lower UK corporation tax from 30% to 28% in April 2008. This led to a reduction of GBP 38 million in deferred tax liabilities recognized in the second quarter of 2007.
GBP 647 million. This increase reflected growth in operating expenses and higher commissions from growth in AEGON UK’s distribution businesses. Operating expenses rose, meanwhile, by 4% to GBP 391 million. The increase in operating expenses was mainly the result of growth in the underlying business as well as additional project and investment costs.
1 Includes production on investment contracts without a discretionary participation feature of which the proceeds are not recognized as revenues but are directly added to AEGON’s investment contract liabilities.
AEGON UK’s leading operating subsidiaries are: Scottish Equitable (trading as AEGON Scottish
AEGON UK’s principal means of distribution is through the intermediated financial advice channel, which is the main sales route for long-term savings and retirement products in the United Kingdom. In all, there are an estimated 35,000 registered financial advisors in the United Kingdom.
These advisors may be classified as ‘single-tied’, ‘multitied ’, ‘whole of market’ or ‘independent’, depending on whether they are either restricted in the number of providers they deal with or are free to advise on all available products. AEGON UK is also exploring new distribution opportunities, including agreements with banks and affinity partnerships with other potential distributors.
AEGON UK’s life businesses comprise primarily individual and group protection, as well as individual and bulk annuities. The protection business provides insurance on individual or groups of lives for major life events such as death, critical illness and total or permanent disability.
Annuities are used to convert savings accumulated as part of a pension plan into a regular income throughout retirement. In 2007, the life and protection line of business accounted for approximately 29% of AEGON UK’s overall operating earnings before tax.
Through the company’s Origen and Positive Solutions businesses, AEGON UK also provides financial advice directly to both individuals and companies. Origen is a leading financial advice firm, with strong positions in both the corporate and high net worth individual markets. It promotes its services through a variety of different sales channels, including face-to-face, media and worksite marketing, as well as accessing customers through professional contacts with accountants and lawyers.
“Expansion into new emerging markets has been an important feature of AEGON’s corporate strategy over the past several years. These markets will provide the Group with an important source of growth for the years to come.”
“In Central and Eastern Europe, we now have businesses in five countries – Hungary, Poland, Slovakia, the Czech
Operating earnings before tax from Other countries totaled EUR 142 million in 2007, an increase of
EUR 81 million compared with 2006, primarily due to higher operating earnings from AEGON’s businesses in
Total operating earnings from life and protection amounted to EUR 53 million in 2007, up from
Eastern Europe and Taiwan. In Taiwan, the improvement in operating earnings reflects strong investment performance and higher sales volumes.
IN 2007, AEGON TOOK SIGNIFICANT STEPS TO EXPAND ITS BUSINESSES IN INDIA, CHINA AND CENTRAL AND EASTERN EUROPE
AEGON Other countries’ operating earnings from pensions and asset management increased significantly in 2007, primarily as a result of the expenses related to the expansion of the Group’s pension business in Slovakia in 2006. Results in Poland also improved but were offset by start-up expenses of EUR 6 million related to AEGON’s new mandatory pension fund in Romania and the launch of new voluntary pension funds in the Czech Republic and
Combined, these two factors resulted in an increase in operating earnings of EUR 10 million for the general insurance business in 2007.
AEGON’s share in the profit of associate companies increased by EUR 8 million (after tax) in 2007, split equally between the Group’s partnership with Spanish regional savings bank Caja de Ahorros del Mediterráneo (in which
Total revenues rose 25% to EUR 2.8 billion - a reflection of the growth in single premium sales and higher income from fees and commissions in Poland, as well as higher single premiums at Caja Navarra in Spain and higher premium and investment income in Taiwan.
New life sales in Other countries totaled EUR 353 million in 2007, an increase of 37% compared with the previous year.
EUR 687 million in 2007 compared with the previous year, thanks mainly to higher sales from bank partnerships in
Poland, supported by strong equity markets. Recurring premium sales increased 51% to EUR 58 million, a result of various successful distribution initiatives in the broker channel and the tied agent network across the region, particularly in Poland.
In 2007, new life sales in Spain increased to EUR 59 million, up from EUR 52 million in 2006, a year which included a large single premium group policy which was more than offset in 2007 by exceptionally high single premium bancassurance sales through AEGON’s joint venture with
EUR 116 million (on a 100% basis), while premium income from the partnership with CAM amounted to
TOTAL GROSS DEPOSITS 755 465 62 1 Includes production on investment contracts without a discretionary participation feature of which the proceeds are not recognized as revenues but are directly added to AEGON’s investment contract liabilities.
Pensions and asset management sales in Other countries amounted to EUR 579 million in 2007, up from
EUR 361 million the previous year. This increase reflected the launch of a new variable annuity product in Taiwan, strong mutual fund sales in Hungary and the inclusion of the newly acquired Polish pension fund management company PTE AEGON Poland. By the end of 2007, the total number of pension fund participants in Central and
Asia. In particular, AEGON has seen strong growth in its businesses in Central and Eastern Europe, as well as in other new, emerging markets such as China and Taiwan.
AEGON first entered the Central and Eastern European market in 1992 when the Group bought a majority stake in
Since then, the Group has expanded its operations in the region. AEGON has presence either directly or with joint venture partners in China, India, Japan and Taiwan.
AEGON has a 35% interest in La Mondiale’s subsidiairy company La Mondiale Participations.
AEGON’s international businesses operate through a number of subsidiaries and joint venture partnerships.
AEGON Pension Fund Management Company; Slovakia: AEGON Slovakia Life Insurance Company,
Taiwan: AEGON Life Insurance (Taiwan) Inc.; China: AEGON-CNOOC Life Insurance Co. Ltd. (50%).
AEGON’s activities in Central and Eastern Europe operate through a number of different sales channels. These include tied agents, insurance brokers and, particularly in
This range includes traditional life as well as unit-linked products. In recent years, sales of unit-linked products in the region have shown a considerably higher rate of growth than traditional general account products.
AEGON Hungary Investment Fund Management Company offers a range of mutual funds to retail investors. Besides this, AEGON Life Insurance Company offers unit-linked investment products in the Czech Republic.
In addition, AEGON provides a range of asset management services through AEGON Hungary Investment Fund
In addition to life insurance and pensions, AEGON Hungary also offers non-life cover. Generally, these are products and services inherited from Állami Biztosító, the former state-owned insurance company acquired by AEGON in 1992. In recent years, margins on household insurance in
AEGON has partnerships in place, for example, with many of China’s national banks, including: Industrial and Commercial Bank of China
launched its first variable life product in April 2007 to add to its range of universal and participating life products.
In particular, AEGON Spain offers pensions as well as both traditional life and unit-linked variable life products, a market traditionally dominated by the country’s retail banks. In France, AEGON works together with La Mondiale in a number of areas including pensions, asset management and distribution.
In Spain, some 70% of life insurance policies are sold through the country’s retail banks. For this reason, Spain in recent years has been an important part of AEGON’s efforts to expand its web of bank distribution partnerships.
AEGON remains committed to further expanding its distribution network in Spain. The Group’s current partnerships distribute a combination of life insurance and pension products. AEGON also uses specialized agents and brokers to distribute its products, particularly individual life insurance, throughout urban and rural areas.
Group initially took a 20% stake in La Mondiale’s subsidiairy, La Mondiale Participations, increasing it later to 35%. In 2005, the AEGON Pension Network was launched in collaboration with La Mondiale, renamed
AEGON’s partnership with La Mondiale – will create the country’s eighth largest life insurer, serving some 5.6 million customers. The new group was due to become operational at the start of 2008.
A description of AEGON’s risk management and control systems is given below on the basis of significant identified risks. Some risks, such as currency translation risk, are related to the international nature of AEGON’s business.
Other risks include insurance related risks, such as changes in mortality and morbidity. However, the Group’s most significant exposures are to changes in financial markets (e.g. interest rate, credit and equity market risks)
To manage its risk exposure, AEGON has risk policies in place. Many of these policies are group wide while others are specific to local businesses. The group level policies limit the company’s exposure to major risks such as equity, interest rates, credit and currency. The limits in these policies in aggregate remain within AEGON’s overall tolerance for risk as well as its financial resources.
They are used not only to manage risk in each unit, but are also part of overall Group Risk Management.
These policies establish the control, authorization, execution and monitoring requirements for the use of such instruments. In addition, these policies stipulate necessary mitigation of credit risk created through these derivatives and reinsurance risk management tools.
also measures the sensitivity of net income and shareholders’ equity under both stochastic and deterministic scenarios. Management uses the insight gained through these ’what if?’ scenarios to manage the
However, the shock will not have the same effect on the carrying amount of the related insurance liabilities that are measured using prudent assumptions or on management’s long-term expectations. Consequently, the different measurement bases for assets and liabilities leads to increased volatility in IFRS net income and equity.
As an international group, AEGON is subject to foreign currency translation risk. Foreign currency exposure exists when policies are denominated in currencies other than the issuer’s functional currency. Currency risk in the investment portfolios backing insurance and investment liabilities are managed using asset liability matching principles. Assets allocated to equity are kept in local currencies to the extent shareholders’ equity is required to satisfy regulatory and self-imposed capital requirements.
Therefore, currency exchange rate fluctuations may affect the level of shareholders’ equity as a result of translation of subsidiaries into euros, the Group’s presentation currency. AEGON holds the remainder of its capital base
(capital securities, subordinated and senior debt) in various currencies in amounts that are targeted to correspond to the book value of its country units. This balancing mitigates currency translation impacts on equity and leverage ratios. AEGON does not hedge the income streams from the main non-euro units and, as a result, earnings may fluctuate due to currency translation. As
AEGON has significant business segments in the Americas and in the 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.
AEGON operates a Currency Risk Policy under which direct currency speculation or program trading by country units is not allowed unless explicit approval has been granted by the Group Risk and Capital Committee.
In cases where cash flows are highly predictable, investing in assets that closely match the cashflow profile of the liabilities can offset this risk. For some AEGON country units, local capital markets are not well developed. This prevents the complete matching of assets and liabilities for those businesses. For some products, cash flows are less predictable as a result of policyholder actions that can be affected by the level of interest rates.
In periods of rapidly increasing interest rates, policy loans, surrenders and withdrawals may and usually do increase.
Premiums in flexible premium policies may decrease as policyholders seek investments with higher perceived returns. This activity may result in cash payments by
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. Mortgages and redeemable bonds in the investment portfolio are more likely to be repaid as borrowers seek to borrow at lower interest rates and AEGON may be required to reinvest the proceeds in securities bearing lower interest rates. Accordingly, net income declines as a result of a decrease in the spread between returns on the investment portfolio and the interest rates either credited to policyholders or assumed in reserves.
exposure during the year as significant events do not necessarily occur on January 1. Changes in sensitivities between 2006 and 2007 arise primarily from the completion of the hedging program of guarantees valued at fair value of AEGON The Netherlands.
In EUR million Estimated approximate effects on net income Estimated approximate effects on shareholders’ equity
Decrease by 15% of non-euro currencies relative to the euro (258) (2,298)
1 The effect of currency exchange movements is refl ected as a one-time shift up or down in the value of the non-euro currencies relative to the euro on December 31, 2007.
Table 3 shows interest rates at the end of each of the last five years.
The sensitivity analysis in table 4 on page 60 shows an estimate of the effect of a parallel shift in the yield curve on net income and equity. Increases in interest rates have a negative effect on IFRS equity and net income in the current year because it results in unrealized losses on investments that are carried at fair value. The offsetting economic gain on the insurance and investment contracts is however not fully reflected in the sensitivities because many of these liabilities are not measured at fair value.
Over time, the short-term reduction in net income due to rising interest rates would be offset by higher net income in later years, all else being equal. Therefore, rising interest rates are not considered a long-term risk to the company.
Shift down 100 basis points 414 2,496 four percent of the exposure is to the most senior of the super-senior tranches. i.e. the 30% - 100% tranche. That means that losses to AEGON would only occur if cumulative net losses on the CDX index exceeded 30%, where cumulative net loss is defined as bond defaults net of recoveries. AEGON considers the probability of losses at these levels to be extremely remote and hence does not expect any cash losses to occur from these synthetic CDO
Other fi nancial assets – carried at fair value 3,502 3,222
Other fi nancial assets – carried at amortized cost 30 24
GENERAL ACCOUNT EXPOSURE 135,674 138,776 1 Further information on equity risk is provided in the section ’equity market and other investment risk’.
AEGON manages credit risk exposure by individual counterparty, sector and asset class. Normally, it mitigates credit risk in derivative contracts by entering into collateral agreements where practical and in International Swaps and Derivatives Association (ISDA) master netting agreements for each of the Group’s legal entities to facilitate AEGON’s right to offset credit risk exposure. Main counterparties to these transactions are investment banks and are typically rated AA or higher. The credit support agreement will usually dictate the threshold over which collateral needs to be pledged by AEGON or its counterparty. Transactions requiring AEGON or its counterparty to post collateral are typically the result of over-the-counter derivative trades, comprised mostly of interest rate swaps, currency swaps, and credit swaps.
Credit Support Agreements that outline acceptable collateral require high quality instruments to be posted.
did not take possession of collateral or called on other credit enhancements.
The credit risk associated with financial assets subject to a master netting arrangement is eliminated only to the extent that financial liabilities due to the same counterparty will be settled after the assets are realized.
For the resulting net credit risk exposure, AEGON employs deterministic and stochastic credit risk modeling to assess the Group’s credit risk profile, associated earnings and capital implications due to various credit loss scenarios.
S&P) and AEGON’s internal rating of the counterparty. If an exposure exceeds the stated limit then the exposure must be reduced to the limit for the country unit and rating category as soon as possible. Exceptions to these limits may only be made after explicit approval from
AEGON group-wide counterparty exposure limits at the end of 2007 are: Credit rating In EUR million Limit
Past due and/or impaired assets 3 235 250 90 – 2 33 – 286 327
Table 8 shows the credit quality of the gross balance sheet positions for general account reinsurance assets: REPORT OF THE EXECUTIVE BOARD RISK MANAGEMENT
ABS housing 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.
AEGON USA categorizes asset backed securities issued by a securitization trust as having subprime mortgage exposure when the average credit score of the underlying mortgage borrowers in a securitization trust is below 660.
The market value of these securities is EUR 200 million with an amortized cost balance of EUR 193 million. All but one position have vintages of 2003 or prior. These amounts are not included in the subprime mortgage exposure in table 9.
Market value by quality In EUR million AAA AA A BBB < BBB Total
In cases where models indicate full recovery of principal and interest, AEGON does not consider those securities to be impaired. There are no individual issuers rated below investment grade in the ABS-housing sector whith unrealized loss positions greater than EUR 15 million.
AEGON USA holds EUR 5,039 million of residential mortgage backed securities (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. AEGON USA’s RMBS
Government Sponsored Enterprise (GSE) guaranteed passthroughs, whole loan passthroughs, Alt-A MBS and negative amortization MBS.
The unrealized loss on residential mortgage-backed securities is EUR 177 million. Of the RMBS unrealized losses, EUR 55 million is attributed to the generic shelf name, SASCO (Structured Asset Securities Corporation).
When SASCO holdings in the RMBS sector are combined with SASCO holdings in the ABS-housing sector, AEGON
holds EUR 700 million of the issuer’s securities with unrealized losses of EUR 70 million, all of which are rated
bonds in an unrealized loss position to 92%. The unrealized loss on SASCO is not credit driven but rather a reflection of the move in interest rates and credit spreads relative to the level at which these deals were originally priced.
AEGON USA’s RMBS exposure includes exposure to securitized home equity loans (Alt-A positions). This portfolio totaled EUR 844 million at December 31, 2007, with virtually all such securities rated AAA. Unrealized losses amount to EUR 18 million at December 31, 2007.
Alt-A loans are made to borrowers whose qualifying mortgage characteristics do not meet the standard underwriting criteria established by the GSEs (Government-
AEGON’s investments in Alt-A mortgages are in the form of mortgage backed securities. AEGON’s Alt-A investments are all backed by loans with fixed interest rates for the entire term of the loan. In addition, one-third of the Alt-A
portfolio is invested in super-senior tranches. Mortgagebacked securities classified as super-senior are those that substantially exceed the subordination requirements of
AEGON’s exposure to negative amortization mortgages is primarily AAA rated, with virtually all of these positions being ‘super-senior’ AAA-rated securities.
AEGON USA holds EUR 4,544 million of commercial mortgage backed securities (CMBS). The unrealized loss on CMBS is EUR 89 million. The fundamentals of the CMBS
market are, on average, strong but are starting to show signs of deterioration in some markets. The lending market remains virtually frozen as lenders continue to tighten their lending standards. A lack of liquidity in the market combined with a broad re-pricing of risk has led to increased spreads across the credit classes. The introduction of the 20% and 30% credit enhanced, supersenior AAA classes provides an offset to these negative fundamentals. Of the CMBS unrealized loss, 16% is attributed to the Lehman Brothers and UBS origination platform (LBUBS) deal shelf which is collateralized by diversified mortgages. The unrealized losses are a function of the absolute size of the Group’s LBUBS holdings,
AEGON believes that the underlying investments are well underwritten and have performed relatively better than other comparable CMBS structures. The unrealized loss on
AEGON does not consider the underlying investments to be impaired as of December 31, 2007.
EUR 14 million, although an insolvency by one of the monolines could create significant market price volatility for the affected holdings.
Fluctuations in the equity, real estate and capital markets have in the past affected AEGON’s profitability, capital position and sales of equity related products and may continue to do so. Exposure to equity, real estate and capital markets exists in both assets and liabilities. Asset exposure exists through direct equity investments, where
AEGON bears all or most of the volatility in returns and investment performance risk. 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
Past due but not impaired assets In EUR million 0-6 mnth 6-12 mnth > 1 year Total 0-6 mnth 6-12 mnth > 1 year Total
Bonds - carried at fair value 94 11 6 111 29 – 6 35
The general account equity, real estate and other nonfixed -income portfolio of AEGON is presented in table 12.
Table 13 sets out the closing levels of certain major indices at the end of each of the last five years.
equity to changes in equity prices is presented in table 14.
The sensitivity of shareholders’ equity and net income to changes in equity and real estate 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. In addition, more severe scenarios could cause accelerated DPAC amortization and guaranteed
General account equity, real estate and other non-fi xed income exposure
Real estate held for own use 215 132 – 37 14 329
EUR 7,745 million at December 31, 2006, to EUR 3,935 million at December 31, 2007.
AEGON operates a Liquidity Risk Policy under which country units are obliged to maintain sufficient levels of highly liquid assets to meet cash demands by policyholders and account holders over the next two years. Potential cash demands are assessed under a stress scenario including spikes in disintermediation risk because of rising interest rates and concerns over AEGON’s financial strength due to a hypothetical downgrade of the
Company’s credit rating. At the same time, the liquidity of assets other than cash and government issues is assumed to be severely impaired for an extended period of time. All units and AEGON Group must maintain enough liquidity without relying on surplus assets or bank lines in order to meet all cash needs under this extreme scenario.
The maturity analysis in table 15 shows the remaining contractual maturities of each category of financial liabilities. If the counterparty has a choice of when an amount is paid, the liability is included on the basis of the earliest date on which the country unit can be required to pay. Financial liabilities that the country unit can be required to repay on demand without any delay are reported in the category ’On demand’. If there is a notice period, the country unit should assume that notice is given immediately and present the repayment at the earliest date after the end of the notice period. When the amount payable is not fixed, the amount reported is determined by reference to the conditions existing at the reporting date.
Investment contracts for account of policyholders 1 11,219 10,329 – – – 21,548
Investment contracts for account of policyholders 1 11,893 10,742 – – – 22,635
Other fi nancial liabilities 8,303 7,164 285 – – 15,752 1 Excluding investment contracts with discretionary participating features. 2 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 cashfl ows related to the pay leg are taken into account for determining the gross undiscounted cashfl ows.
For example, when the amount payable varies with changes in an index, the amount disclosed may be based on the level of the index at the reporting date.
AEGON’s liquidity management is based on expected claims and benefit payments rather than on the contractual maturities. The projected cash benefit payments in table 16 are based on management’s best estimates of the expected gross benefits and expenses, partially offset by the expected gross premiums, fees and charges relating to the existing business in force. Estimated cash benefit payments are based on mortality, morbidity and lapse assumptions comparable with AEGON’s historical experience, modified for recently observed trends. Actual payment obligations may differ if experience varies from these assumptions. The cash benefit payments are presented on an undiscounted basis and are before deduction of tax and before reinsurance.
AEGON’s earnings depend significantly on the extent to which actual claims experience is consistent with the assumptions used in setting prices for products and establishing technical liabilities and liabilities for claims. To the extent that actual claims experience is less favorable than the underlying assumptions used in establishing such liabilities, income would be reduced. Furthermore, if these higher claims were part of a permanent trend, AEGON
In EUR million amount 1 < 5 yrs amount 5 < 10 yrs amount > 10 yrs amount
Group’s experience to industry experience as well as combining AEGON’s experience and industry experience based on the depth of the history of each source to the
Sensitivity analysis of net income and shareholders’ equity to various underwriting risks is shown in table 17. The sensitivities represent an increase or decrease of mortality and morbidity rates over 2007. Increases in mortality rates lead to an increase in the level of benefits and claims. The impact on net income and equity of sales transactions of investments required to meet the higher cash outflow are reflected in the sensitivities.
A shock in mortality or morbidity rates will generally not lead to a change in the assumptions underlying the measurement of the insurance liabilities as management will recognize that the shock is temporary.
Asset backed securities (ABSs) - Aircraft 81 – – – 81
Past due and/or impaired 227 66 – – 293 1 Includes investments of Holding and other activities.
Insurance products enjoy certain tax advantages, particularly in the United States and the Netherlands, which permit the tax-deferred accumulation of earnings on the premiums paid by the holders of annuities and life insurance products under certain conditions and within certain limits. Taxes on this ’inside build-up’ of earnings may not be payable at all and, if payable generally are due only when earnings are actually paid. The US Congress has, from time to time, considered possible legislation that would eliminate the deferral of taxation on the accretion of value within certain annuities and life insurance products. In addition, the US Congress passed legislation in 2001 that provided for reductions in the estate tax. The possibility of a permanent repeal of the estate tax continues to be discussed. This could have an impact on insurance products and sales in the United States. Changes to tax laws in the Netherlands at the end of 2005, meanwhile, have reduced the attractiveness of early retirement plans but tax advantages have been granted from January 1, 2006 for savings products known as
Dutch tax law affecting similar products could have a materially adverse effect on AEGON’s business, results of operations and financial condition.
Group’s ability to compete. This would have a materially adverse effect on AEGON’s business, results of operations and financial condition. The current Fitch, Moody’s and
While systems and processes are designed to support complex transactions and to avoid systems failure, fraud, information security failures, processing errors and breaches of regulation, any failure could lead to a materially adverse effect on AEGON’s results of operations and corporate reputation. In addition, AEGON must commit significant resources to maintaining and enhancing the
Group’s existing systems in order to keep pace with industry standards and customer preferences. If AEGON
fails to keep up-to-date information systems, it may not be able to rely on accurate information for product pricing, risk management and underwriting decisions.
AEGON’s operating results and financial position may be adversely affected by volatile natural and man-made disasters such as hurricanes, windstorms, earthquakes, terrorism, riots, fires and explosions. Over the past several years, changing weather patterns and climatic conditions have added to the unpredictability and frequency of natural disasters in certain parts of the world and created additional uncertainty as to future trends and exposure.
Generally, AEGON seeks to reduce its exposure to these events through individual risk selection, monitoring risk accumulation and purchasing reinsurance. However, such events could lead to considerable financial loss to AEGON’s business. Furthermore, natural disasters, terrorism and fires could disrupt AEGON’s operations and result in significant loss of property, key personnel and information about clients and about itself. If AEGON’s business continuity plans have not included effective contingencies for such events they could adversely affect AEGON’s business, results of operations, corporate reputation and financial condition for a substantial period of time.
The primary purpose of such regulation is to protect policyholders, not holders of securities. Changes in existing insurance laws and regulations may affect the way in which
Changes in pension and employee benefit regulation, social security regulation, financial services regulation, taxation and the regulation of securities products and transactions may adversely affect AEGON’s ability to sell new policies or claims exposure on existing policies.
Commission and the New York Stock Exchange, require changes to some of AEGON’s reporting and corporate governance practices, including the requirement that
The failure of a major market participant could disrupt securities markets or clearance and settlement systems in
in civil and commercial matters. Judgements of US courts, including those predicated on the civil liability provisions of the federal securities laws of the United States, may not be enforceable in Dutch courts. Therefore, AEGON’s shareholders who obtain a judgement against AEGON in the United States may not be able to require the company to pay the amount of the judgement unless a competent court in the Netherlands gives binding effect to the judgement. It may, however, be possible for a US investor to bring an original action in a Dutch court to enforce liabilities against AEGON, its affiliates, directors, officers or any expert named therein who reside outside the
Group in order to maximize returns, facilitate access to money and capital markets at competitive prices to minimize the cost of capital. At the same time, capital and liquidity management aims to ensure high standards of liquidity during periods of severely impaired financial markets and to manage capital adequacy to competitive standards within leverage tolerances consistent with strong capitalization.
AEGON manages capital adequacy at the level of its country units and their operating companies. AEGON
seeks to support its internal capital adequacy levels at whichever is the higher of local regulatory requirements, the relevant local Standard & Poor’s requirements for very strong capitalization or internally imposed (economic)
AEGON’s operating units continued to be very strong. All of AEGON’s units were capitalized within these tolerances.
November 2007. The program has enabled AEGON to manage its capital base more efficiently without limiting
AEGON’s organic growth potential or its ability to carry out value-enhancing add-on acquisitions. During 2007, the ratio of shareholders’ equity to total capital decreased, while capital leverage increased, mainly as a result of more efficient capital management. In September 2007,
AEGON’s funding strategy continues to be based on assuring excellent access to international capital markets, while minimizing the cost of capital. As part of this strategy, AEGON aims to offer institutionally targeted debt securities and to maintain excellent access to retail
1 2006 information has been adjusted to refl ect the retrospective application of the change in accounting principles relating to guarantees in the Netherlands, the change in defi nition of operating earnings to include our share in the net results of associates and a new line of business format. Refer to Note 2 in the fi nancial statement for more information.
have issued debt securities. AEGON N.V. has regular access to the capital markets under its USD 6 billion Euro
Medium Term Notes Program. Access to the US markets is facilitated by a separate US shelf registration. AEGON N.V.’s and AEGON Funding Corp.’s (guaranteed by AEGON N.V.)
Program provide access to domestic and international money markets. AEGON maintains back-up credit facilities to support outstanding amounts under its commercial paper programs.
Internal sources of liquidity include distributions from operating subsidiaries. During 2007, distributions from units exceeded interest expense, other holding company expenses and dividend payments. Internal distributions may be subject to (local) regulatory requirements. Excess liquidity is invested in highly liquid, short-term assets in accordance with internal risk management policies.
GBP 92 million by AEGON UK, a 30-year USD 550 million
USD 1.5 billion AXXX financing transaction with an initial size of USD 300 million. AEGON will continue to explore further opportunities for insurance-linked securitizations and other innovative capital market transactions as part of the Group‘s ongoing commitment to manage capital and reserve needs both efficiently and actively.
Committee, which monitors AEGON’s overall exposure to risk and makes recommendations for possible remedial action should it deem this risk to be excessive. This
Committee is also responsible for ensuring that risk is properly measured and managed at country unit level. The
Group Risk and Capital Committee reports its findings regularly to AEGON’s Executive and Supervisory Boards.
AEGON’s Executive Board documents and evaluates the effectiveness of internal controls over the Group’s financial reporting process. As part of this, AEGON applies criteria established under ‘Internal Control – Integrated
The risk management and control systems provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of its published financial statements; however, cannot provide absolute assurance that a misstatement of AEGON’S
AEGON’s corporate governance and compliance with the Dutch Corporate Governance Code, please refer to pages 97 to 100.
Board shall be guided by the interests of AEGON and its businesses and shall take into account the relevant interests of AEGON’s stakeholders. The Supervisory Board is a separate corporate body, independent from the
In addition, the Supervisory Board determines the remuneration of individual members of the Executive
Board in line with the Remuneration Policy as adopted by the AGM.
Details of AEGON’s corporate governance structure as well as a summary of the Group’s compliance with the
Dutch Corporate Governance Code may be found on pages 97 to 100 of this Annual Report. In 2007, there were no material changes to AEGON’s corporate governance structure. The full report on AEGON’s compliance with the
In 2007, the Supervisory Board held a total of seven meetings. The average attendance rate at the regular meetings was approximately 90%. No member of the
from the Executive Board. The committees of the Board held their meetings either before or after these meetings of the full Supervisory Board.
AEGON’s Director for Group Finance and Information also attended meetings during which the Supervisory Board discussed the annual results for 2006, interim and final shareholder dividends and all quarterly results and value of new business (VNB) figures published in 2007, as well as press releases related to these matters.
The Supervisory Board is entrusted with the task of supervising and advising the Executive Board on its management of the Group as well as overseeing AEGON’s general course of affairs and strategy.
In addition, the Board took time to review its own composition and performance and to discuss AEGON’s risk management strategy in greater depth during its annual educational session.
In May 2007, AEGON’s Supervisory Board held its annual strategy meeting in Shanghai, China. This meeting was part of a visit to AEGON-CNOOC, the Group’s life insurance joint venture in China, and to various government officials and regulators in Shanghai and Beijing. At the meeting the Supervisory Board discussed the Group’s strategy, risk management and other business developments. The
The Board also reviewed the Group’s annual accounts 2006 and a proposal to the AGM for a final dividend for the year 2006.
The Netherlands. This change served to increase the transparency of AEGON’s financial results.
Board reviewed the Group’s second and third quarter results as well as separate disclosures on the VNB.
At several meetings held in the second half of 2007, the
Supervisory Board and the Audit Committee were informed of developments in the US subprime market.
Discussions focused both on market developments in general, and on AEGON’s subprime exposure in particular.
Committee reviewed and discussed AEGON’s Capital Plan 2008 as well as the Group’s overall approach to questions of risk and capital management. The Board also received a separate report on these issues from AEGON’s Audit
During its meetings in 2007, the Supervisory Board discussed a number of proposed new partnerships and acquisitions. Those announced during the year include the following: The partnership with Sony Life in Japan; The acquisition of Clark Inc. in the United States; The joint venture agreement with Taishin in Taiwan; The acquisition of Dutch life insurer OPTAS; The acquisition of US life insurance subsidiaries belonging to Merrill Lynch; The merger between AEGON’s Polish pension fund management company with PTE Skarbiec-Emerytura.
In March, the Supervisory Board agreed that shareholders be asked to approve: A new four-year term for Mr. Alexander R. Wynaendts as a member of AEGON’s Executive Board; A new four-year term for Mr. Leo M. van Wijk as a member of the Group’s Supervisory Board; The appointment of Ms. Karla M.H. Peijs and
In November, AEGON’s Supervisory Board decided to appoint Mr. Alexander R. Wynaendts as successor to
Executive Board. Mr. Wynaendts will take up his new position on April 23, 2008, the date of Mr. Shepard’s retirement from the Executive Board.
In April, the AGM approved the amendment to the Articles of Incorporation, mainly dealing with facilitating electronic communications with shareholders and extending the locations for shareholders’ meetings.
In December, the Supervisory Board reviewed and discussed its own composition and performance as well as that of the Executive Board, without Executive Board members being present.
Also in December, an annual educational session was held for members of the Supervisory Board. During this session,
Supervisory Board considered the presentation and the discussion that followed as extremely valuable.
In November 2007, it was announced that Mr. Shepard would be stepping down as Chairman of AEGON’s
Mr. Shepard led AEGON through challenging market conditions, particularly when he first took over as
The Supervisory Board relies on its four committees, each made up of members selected from the Supervisory
Board, to prepare specific issues for decision-making by the Board. In accordance with its Charter, each Committee reports its findings to the Supervisory Board during a subsequent Supervisory Board meeting.
In its December meeting the Board decided that the increasing importance of risk management warranted a separate committee to strengthen supervision of the
AEGON’s 2006 Embedded Value Report and the Group’s annual VNB figures. In July, the Audit Committee convened to discuss a proposed change to the accounting principles used in the Netherlands (see above).
The Audit Committee recommended that Ernst & Young be reappointed for the 2007 financial year. It also discussed the role of independent auditors and the consequences of recent changes to the regulatory environment in both the United States and the Netherlands.
AEGON’s compliance with US SOX 404 legislation and an overview of fraud and general compliance issues. During these meetings, the Audit Committee held separate sessions with the Group’s Internal Auditor as well as with external auditors, to discuss their findings. Members of the Executive Board were not present at these sessions.
During its meeting in December, the Audit Committee discussed AEGON’s Risk Management Report with the
Board to authorize members of AEGON’s Executive Board to provide for the Group’s funding requirements as set out in the 2008 Capital Plan.
In addition, the Nominating Committee reviewed the composition of the Executive Board and subsequently advised the Supervisory Board on Mr. Wynaendts’
This new Remuneration Policy was proposed to and adopted by shareholders during their 2007 AGM in April and entered into effect January 1, 2007. The Committee also discussed AEGON’s worldwide stock option plan.
The AGM adopted a new Remuneration Policy on April 25, 2007. Please refer to pages 92-96 of this Annual Report for the current Remuneration Policy and the full text of the Compensation Committee Remuneration Report and to pages 203-205 for further financial details.
Ms. Rembe and Mr. Olcay for their long and distinguished service to AEGON. Also in 2008, the four-year term of Irving W. Bailey II and René Dahan will expire. During the 2008 AGM, the Board will propose shareholders reappoint Mr. Bailey for another four-year term. Mr. Dahan has informed the Board that, for personal reasons, he will not be available for reappointment. Following the advice of the Nominating Committee, the Supervisory Board has decided to nominate Cecelia Kempler, Rob Routs,
Their biographies will be provided together with the agenda for the 2008 AGM. These appointments bring the number of Supervisory Board members to twelve.
Group’s statutory executive body and legal representative of AEGON N.V., entrusted with the overall management and strategic direction of the company. The Management
Board, meanwhile, oversees a broad range of other issues that affect AEGON’s international business and growth objectives.
In January 2008, Mr. Van der Werf resigned as CEO of
Board would like to express their appreciation for the valuable contribution Mr. Van der Werf has made to AEGON
Dudley G. Eustace is a former Chairman of London-based Smith & Nephew PLC. He also served as Vice-Chairman of
Company and sits on the Council of the University of Surrey in the United Kingdom.
Chairman of the Supervisory Board’s Risk Committee and member of the Nominating and Strategy Committees
Irving W. Bailey is a senior advisor to Chrysalis Ventures. He is also a former Chairman and CEO of Providian Corp., a former managing director of Chrysalis Ventures, as well as a former Chairman of the board of directors at AEGON USA. Mr. Bailey has been a member of AEGON’s Supervisory Board since 2004. His current term will end in 2008. In addition to his position at AEGON, Mr. Bailey is also a member of the boards of directors at Computer Sciences Corp. and at Hospira Inc.
Supervisory Board of Akzo Nobel N.V. and a member of the board of directors of BP plc.
René Dahan was formerly Executive Vice-President and director of Exxon Corporation. He was appointed to AEGON’s
Chairman of the Supervisory Board’s Audit Committee and member of the Risk Committee
Board in 2005. His current term will end in 2009. In addition to his position at AEGON, Mr. Levy is a non-executive director of Nissan Motor Company, Renault Spain and Safran. He is also a member of the Supervisory Boards of Segula Technologies
Karla M.H. Peijs is Queen’s Commissioner for the province of Zeeland in the Netherlands. She was appointed to AEGON’s
Supervisory Board in 2000. Her current term will end in 2008. Ms. Rembe is also a member of the board of directors of
Willem F. C. Stevens is a retired partner of Baker & McKenzie and, until June 2003, served as a senator in the Dutch upper house. He joined AEGON’s Supervisory Board in 1997. His current term ends in 2009. Mr. Stevens is also a member of the
Supervisory Boards of N.V. Luchthaven Schiphol, TBI Holdings B.V., AZL N.V., Goedland N.V. and Ermenegildo Zegna
Chairman of the Supervisory Board of KLM Royal Dutch Airlines N.V., Vice-Chairman of the Supervisory Board of Pon
AEGON’s Compensation Committee is responsible for designing, developing, implementing and reviewing the
Group’s Remuneration policy. This policy outlines: The terms and conditions for employment of
Remuneration Policy based on information provided by the Group’s independent external advisors Towers Perrin.
Supervisory Board do not receive any performance or equity-related compensation and do not accrue pension rights with the Group. These measures are designed to guarantee the independence of Supervisory Board deliberations and strengthen the overall effectiveness of
AEGON pays a premium to members of its Audit Committee because of the additional workload involved.
AEGON has a clear and well-defined policy toward executive remuneration. This policy is reviewed and assessed each year by the Group’s Compensation
AEGON’s Remuneration Policy has four main objectives: To enhance the simplicity, transparency and credibility of executive remuneration; To ensure AEGON is able to attract and retain highly qualifi ed members for its Executive Board; To provide competitive, performance-related remuneration consisting of both fi xed and variable components; To ensure the interests of Executive Board members are closely aligned with those of shareholders by linking remuneration directly to company performance.
Board. In addition, it is also used as guidance when setting levels of remuneration for members of the Group’s
Management Board and other senior managers throughout the company. Executive Board members are appointed for an initial term of four years and may be reappointed for successive mandates also of four years. AEGON’s current
Remuneration Policy took effect January 1, 2007. It was approved by the AGM on April 25, 2007.
AEGON’s objective is to create stable and consistent peer groups. The Supervisory Board periodically reviews the composition of these two groups to ensure they continue to provide a reliable basis for comparison.
The two peer groups are made up of the following companies: United States
For each member of its Executive Board, AEGON sets a so-called ‘Target Total Compensation’. This reflects the particular responsibilities and expertise of each Executive
Target Total Compensation for Executive Board members comprises a fixed component, as well as both short-term and long-term incentive compensation. This structure ensures a balance between fixed and performancerelated pay.
Executive Board, based on his or her qualifications, experience and expertise.
Plan is granted once the Group’s annual accounts have been formally approved by the AGM.
The Long-Term Incentive compensation, or LTI, on the other hand, is paid in the form of conditional shares. The value of these shares is calculated using the fair market value of a single share at the start of the financial year.
Fifty percent of shares granted under AEGON’s LTI Plan vest four years after the grant date. The remaining 50%
Board makes use of its discretionary right to annul the grant, in case of: Termination of employment before the vesting date; For reasons other than death or disability of the participant; For any acts by a participant which the Supervisory
Variable compensation is only granted if the company’s performance matches a series of pre-determined performance indicators. Together, these indicators provide an accurate and reliable reflection of AEGON’s overall performance during the year in question.
At the beginning of every financial year, a target is set for each of the three indicators. A comparison is made at the end of the year between these targets and actual company performance. Entitlements for variable compensation are then calculated accordingly 2.
Members of AEGON’s Executive Board are offered pensions and other benefits in line with local practices in their countries of residence. Executive Board members may also receive other benefits based on their contracts of employment, local practices and comparable arrangements for executives at other similar, multinational companies.
AEGON does not grant Executive Board members personal loans, financial guarantees or the like, unless in the normal course of business and on terms applicable to all personnel.
Existing rights of current Executive Board members will be respected. For further information, please refer to the agreements published on AEGON’s website.
In 2007, AEGON’s Executive Board had three members: Donald J. Shepard, Chief Executive Offi cer, Chairman
Executive Board; Alexander R. Wynaendts, Chief Operating Offi cer, member Executive Board.
Executive Board for another four-year term. Mr. Streppel’s term as Executive Board member expires in 2010.
Board at the beginning of 2007 after being appointed to the Group’s Management Board. He stepped down as
AEGON sets a so-called ‘Target Total Compensation’ for each member of its Executive Board. This comprises both fixed and variable compensation. Please refer to pages 91-94 for full details of AEGON’s Remuneration Policy.
Fixed compensation provides Executive Board members with a base salary. The amount is paid each year. Variable compensation, on the other hand, is based on the company’s financial performance and amounts paid each year may vary as a result.
Messrs. Wynaendts and Streppel were both granted base salary increases at the beginning of 2007. These increases amounted to 17.6% and 6.2% respectively. Mr. Shepard’s base salary remained unchanged despite a significantly weaker US dollar-euro exchange rate. AEGON expects
Third, fi fty percent of the shares granted under the LTI
STI bonuses for members of the Executive Board determined in accordance with the 2006 and 2007 STI Plans may be found in the table below.
AEGON’s 2007 Long-Term Incentive Plan, agreed under the Group’s current Remuneration Policy, also matured at the beginning of 2008. Based on AEGON’s financial performance, the Group expects, as part of this 2007 plan, to: Pay in full the portion of variable compensation linked to the Group’s target for value of new business; Pay nothing with respect either to the targets for real net growth in operating earnings after tax or total shareholder return.
While AEGON reported 19.6% growth in its value of new business in 2007, operating earnings after tax were 4.3%
‘final average earnings’ calculation, equivalent to his five highest complete and consecutive calendar years of pensionable earnings. For Messrs. Wynaendts and
Streppel, their benefits are equal to 70% of their final base salary, provided they have completed 37 years of service.
A General Meeting of Shareholders is held at least once a year. Its main function is to decide matters such as the adoption of annual accounts, the approval of dividend payments and appointments to AEGON’s Executive and
Supervisory Boards. Meetings are convened by public notice. When deemed necessary, the Executive or
AEGON’s Articles of Incorporation, requests are granted providing they are supported by shareholders representing either at least 0.1% of the company’s issued capital or a block of shares worth at least EUR 50 million.
Vereniging AEGON, may cast 25/12 votes per share in certain circumstances (for further details please refer to page 215 of this Annual Report). Resolutions are adopted by an absolute majority of valid votes cast, unless the law or AEGON’s Articles of Incorporation stipulate otherwise.
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 and shall take into account the relevant interests of
The Code also promotes transparency in decision-making and helps strengthen the principles of good governance.
Executive Boards. Any significant change to this structure is submitted for debate to the General Meeting of
Corporate Governance Code recommends that the maximum compensation in the event of dismissal should be one year’s salary, or two years’ salary in the event a maximum of one year’s salary would be manifestly unreasonable for a member who is dismissed in his or her first term of office. AEGON is committed to applying this
Executive Board should not take part in discussions or decision-making related to a subject or a transaction in which he or she has a conflict of interest. The fact that currently AEGON’s CEO and CFO are also members of the
Vereniging AEGON, could be construed as a conflict of interest. In this connection it should be noted that the
CODE III.3.5: This provision of the Code stipulates that members of the Supervisory Board should serve no more than three consecutive four-year terms. For reasons of continuity, AEGON’s Supervisory Board has asked
Mr. O. John Olcay to complete his current term, which ends in 2008, though he had reached the maximum term stated in the Code in 2005.
CODE IV.1.1: The Dutch Corporate Governance Code recommends that the General Meeting of Shareholders may cancel the binding nature of nominations to the
Executive and Supervisory Board with an absolute majority of votes and a limited quorum.
AEGON’s current Articles of Incorporation, however, provide for a much larger majority and a higher quorum than those advocated by the Code. AEGON’s Supervisory
Board is of the view that, in the absence of any specific anti-takeover measures, the current system is appropriate within the context of the 1983 Merger Agreement. In order to mitigate the possible negative effects of these more stringent requirements in the ordinary course of AEGON’s businesses, the Supervisory Board has decided, in the absence of any unfriendly actions, that it will only make nominations to the Executive and Supervisory Board that are non-binding in nature. For more detailed information, please see AEGON’s corporate website.
As a publicly-listed company, AEGON is required to provide the following, detailed information regarding structures and measures that might hinder or prevent a third party from acquiring the company or exercising effective control over it.
AEGON has authorized capital of EUR 610,000,000, divided into 3,000,000,000 common shares, each with a par value of EUR 0.12, and 1,000,000,000 class A and class B preferred shares, with a par value of EUR 0.25. As of December 31, 2007, 1,636,544,530 common shares and 246,850,000 preferred shares were issued, representing respectively 76.1% and 23.9% of AEGON’s total issued and fully paid-up capital.
The capital contribution made by class A preferred shares is a reflection of the market value of AEGON’s common shares at the time this contribution was made. Preferred shares confer the right to receive 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 the preferred shares will be reimbursed before any payments on the common shares are made.
Each share carries one vote. However, the holder of the preferred shares may cast 25/12 (approximately 2.08)
Vereniging AEGON has option rights to acquire additional class B preferred shares in order to prevent its voting power being diluted by issues of common shares by
AEGON N.V., unless Vereniging AEGON as a result of exercising these option rights increases its voting power to more than 33%.
N.V. shares or a proposed business combination by any person or group of persons, whether individually or as a group, other than in a transaction approved by the
Shareholders. As a result of this and of the existence of certain qualified majority requirements specified in
AEGON’s Articles of Incorporation, Vereniging AEGON may effectively be in a position to block unfriendly actions by either a hostile bidder or others for a period of six months.
In the absence of a ‘special cause’, Vereniging AEGON’s share of AEGON’s voting capital represents 23.9%. For more information on Vereniging AEGON, please refer to page 215 of this Annual Report.
Senior executives at AEGON companies and other employees have been granted share appreciation rights and share options. For further details, please refer to page 189 of this Annual Report. Under the terms of the existing share option plans, AEGON cannot possibly influence the exercise of granted rights.
There are no restrictions whatsoever on the exercise of voting rights by holders of common shares, either with regard to the number of votes or to the time period in which they may be exercised. The voting rights attached to preferred shares held by Vereniging AEGON are limited as mentioned above. Depositary receipts for AEGON
AEGON has no knowledge of any agreement between shareholders that might restrict the transfer of shares or the voting rights pertaining to shares.
AEGON’s Articles of Incorporation or to dissolve the company in accordance with a proposal made by the
Executive Board members’ employment agreements, as published on AEGON’s website, contain provisions entitling members to severance payments should their employment be terminated as the result of a merger or takeover.
In line with this approach, country and business units are encouraged to focus on issues specific to their local situations. This approach helps ensure that AEGON’s common principles become an integral part of the
Group operates; AEGON endeavors always to provide clear, accurate, timely and transparent information so that investors, customers and other stakeholders can make the right fi nancial decisions for themselves and their families; AEGON has four core values to guide its decision-making: Respect, Quality, Transparency and Trust.
AEGON’s Code of Conduct contains rules, regulations and guidelines for employees that set out the Group’s core values and its underlying principles of business practice.
The Code, which applies to all AEGON employees, covers a number of different areas, including non-discrimination, protecting free and open competition in the Group’s markets, preventing insider trading and money laundering, as well as ensuring clear, accurate, timely and transparent disclosure of financial and other information.
provisions allowing employees to report suspected irregularities without jeopardizing their position.
AEGON’s Code of Conduct operates in conjunction with national laws and separate provisions set out at country unit level.
sets out a number of basic principles, providing a framework for strategies that are carried out generally by individual country units.
Policy to operate in conjunction with existing country unit voting policies.
In addition, AEGON adheres to a number of international agreements, which set out guidelines or minimum standards for pollution, human rights or labor conditions.
These funds invest only in companies that demonstrate ethically and environmentally sound business practices.
Typically, SRI funds avoid investing in certain sectors of the economy, including armaments, firearms and gambling.
of AEGON’s 2007 net income. Most of AEGON’s charitable donations in the United States are channelled through
AEGON places great importance on ensuring its customers have the information they need to make the right longterm financial decisions for themselves and their families.
In each of the Group’s three main markets – the United
These initiatives include: AEGON USA contributes to LIFE – the Life and Health
Sustainability and FTSE4Good indices for the past several years and was again in 2007. These indices rank companies according to their ability to manage a range of economic, social and environmental risks.
Other information 222 Proposal for profit appropriation 223 Major shareholders 225 Auditor’s report
Basic earnings per share (EUR per share) 2 42 1.47 1.87 1.25
Diluted earnings per share (EUR per share) 2 42 1.47 1.86 1.25
Dividend per share (EUR per share) 3 43 0.62 0.55 0.45 1 In 2007, AEGON changed its accounting policy regarding the valuation of minimum guarantees applied by AEGON The Netherlands. Further reference is made to note 2.2.1A.
Purchase of investments (other than money market investments) (70,162) (63,989) (64,310)
Net purchase of investments for account of policyholders (4,866) (5,361) (1,628)
Cash fl ow movements on operating items not refl ected in income (10,736) (1,307) (4,915)
Purchase of individual intangible assets (other than VOBA and future servicing rights) (10) (10) (17)
Disposal of individual intangible assets (other than VOBA and future servicing rights) – 1 –
Net cash and cash equivalents at the beginning of the year 12,391 6,068 6,804
NET CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR 13 7,385 12,391 6,068 1 In 2007, AEGON changed its accounting policy regarding the valuation of minimum guarantees applied by the AEGON The Netherlands. Further reference is made to note 2.2.1A.
CONSOLIDATED CASH FLOW STATEMENT OF AEGON GROUP FOR THE YEAR ENDED DECEMBER 31 > CONTINUATION
(Gains)/losses transferred to income statement on disposal and impairment – – 25 25 – 25
Foreign currency translation differences – – 32 – – 32 – 32
Movements in foreign currency translation and net foreign investment hedging reserves – – – (1,445) – (1,445) – (1,445)
Equity movements of associates – – – (66) – (66) – (66)
Movements in foreign currency translation and net foreign investment hedging reserves – – – (1,325) – (1,325) – (1,325)
Aggregate tax effect of items recognized directly in equity – – 281 – 2 283 – 283
Net income recognized directly in equity – (15) (996) (1,391) 2 (2,400) 1 (2,399)
Net income recognized in the income statement – 3,169 – – – 3,169 – 3,169
TOTAL RECOGNIZED NET INCOME FOR 2006 – 3,154 (996) (1,391) 2 769 1 770
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY OF AEGON GROUP FOR THE YEAR ENDED DECEMBER 31, 2006 - ADJUSTED 1
Equity movements of associates – – – 19 – 19 – 19
Movements in foreign currency translation and net foreign investment hedging reserves – – – 1,515 – 1,515 – 1,515
Aggregate tax effect of items recognized directly in equity – – 95 – – 95 – 95
Net income recognized directly in equity – (51) 503 1,534 – 1,986 2 1,988
Net income recognized in the income statement – 2,147 – – – 2,147 (2) 2,145
TOTAL RECOGNIZED NET INCOME FOR 2005 – 2,096 503 1,534 – 4,133 – 4,133
1 In 2007, AEGON changed its accounting policy regarding the valuation of minimum guarantees applied by AEGON The Netherlands. Further reference is made to note 2.2.1A.
2 Issued capital and reserves attributable to equity holders of AEGON N.V.
AEGON N.V., incorporated and domiciled in the Netherlands, is a limited liability share company organized under Dutch law and recorded in the Commercial Register of The Hague under its registered address at AEGONplein 50, 2591 TV The Hague. AEGON N.V. serves as the holding company for the AEGON Group and has listings of its common shares in Amsterdam, New York, London and Tokyo.
Committee (IFRIC): IFRS 7 Financial instruments: Disclosures; The amendments to IAS 1 Capital disclosures; The amendments to the guidance on implementation of IFRS 4
The adoption of these standards and interpretations did not have any impact on equity or net income.
IFRS 7, the related amendments to IAS 1 and the implementation guidance to IFRS 4 affect the disclosures on financial instruments, insurance contracts and capital provided in the Group’s consolidated financial statements.
IFRIC 11 concerns share-based payment arrangements that involve two or more entities within the same group. This interpretation is relevant to AEGON because employees of the subsidiaries are granted rights to AEGON N.V. shares as consideration for the services provided to the subsidiary. AEGON’s previous accounting policies were consistent with the guidance in IFRIC 11, and therefore the implementation has had no impact on equity or net income.
The amendments to IAS 23 remove the option of immediately recognizing as an expense borrowing costs that relate to assets that take a substantial period of time to get ready for use or sale. The adoption of the amendment will not impact equity or net income as
January 1, 2008 and is not expected to have a material impact on equity or net income.
19 Employee Benefits on the amount of the surplus that can be recognized as an asset in case of a surplus in the funding. It also explains how the pension asset or liability may be affected when there is a statutory or contractual minimum funding requirement. IFRIC 14 has a required adoption date of January 1, 2008. Adoption will not have a material impact on equity or net income.
Acquisition Costs in Connection with Modifi cations or Exchanges of Insurance Contracts.
Effective January 1, 2007, AEGON changed the accounting policies it uses to value minimum interest rate guarantees related to insurance products offered by AEGON The Netherlands, including group pension contracts and traditional products. As allowed by IFRS 4 Insurance
Contracts, the Group values its insurance contracts in accordance with the accounting principles that were applied prior to the transition to IFRS. The assets and liabilities relating to insurance contracts issued in the Netherlands are accounted for in accordance with Dutch
Accounting Principles (DAP). In December 2006, new guidelines, related to the treatment of guarantees as part of the mandatory liability adequacy test were published, with additional interpretation issued early 2007. These guidelines, which are part of DAP, require that minimum guarantees be valued explicitly, whereas previously there was a choice between the alternative treatments. As allowed under DAP, AEGON adopted this guideline retrospectively in its primary accounting for insurance liabilities.
Effective January 1, 2007, AEGON The Netherlands valued the guarantees at fair value. Changes in the fair value are recognized in
AEGON’s income statement. Prior to 2007, guarantees embedded in the group pension contracts were valued applying a corridor approach.
Changes in the provision, if outside the corridor, were reflected in operating earnings. The guarantees embedded in traditional products were not valued explicitly, but were considered in the liability adequacy test.
The change in accounting for the guarantee will ensure AEGON’s financial statements better reflect the economic matching of its assets and liabilities. AEGON The Netherlands initiated a program to hedge its interest rate risks in connection with these guarantees. The implementation of this program was completed by the end of 2006.
Derivative instruments used to hedge these interest rate risks are carried at fair value. Any changes in the fair value are recognized in
The impact of the change in accounting principles, is shown in the table below (in EUR million, except per share data): Net income attributable to equityholders of AEGON N.V. – based upon previous accounting principles 2,789 2,732
The change in accounting principle impacted various financial statements lines: Insurance contracts, Deferred tax liabilities,
Modifications or Exchanges of Insurance Contracts. This SOP provides guidance on the accounting for replacements of one contract by another. Depending on whether certain conditions are met, the replacement is accounted for as either an extinguishment or as a continuation of the replaced contract. The classification affects the accounting for unamortized deferred policy acquisition costs (DPAC), unearned revenue liabilities and deferred sales inducement assets from the replaced contract. The Group has prospectively adopted
Canada effective January 1, 2007. The adoption of SOP 05-1 is expected to result in an immaterial increase in DPAC amortization in future years. The actual impact will depend on policy modification activity as well as any possible exchange programs implemented in the future.
EUR 13 million charge, net of taxes, as the cumulative effect of adoption of this accounting principle on our IFRS equity, which has been included in Other within the statement of changes in equity. This change in accounting policy has been adopted prospectively effective
As of January 1, 2007, the following changes in presentation were adopted: Change in secondary segment reporting; Netting in income statement of fair value gains and losses and realized gains and losses on investments into results from fi nancial transactions.
reporting format more closely aligns with the way AEGON’s businesses are managed, whilst at the same time, highlights the performance of the key product groups (pensions, life insurance and investment products) and thereby provides an increased insight in the risks and returns of AEGON’s business activities.
It comprises products in the accumulation phase as well as in the pay-out phase. In addition, asset management services provided to third parties are included in this line; Institutional products, which includes earnings from spread-based products like Guaranteed Investment Contracts (GICs) and funding agreements sold by AEGON Americas which are marketed to institutional clients such as pension funds, retirement plans, college savings plans, money market funds. This line also includes synthetic GIC products and Bank- or Corporate-Owned Life
As of January 1, 2007 AEGON included its share of net results from associates in its operating earnings. Previously, results from associate companies were reported separately from operating earnings.
All gains and losses on investments, except for direct investment income, have been aggregated on the face of the income statement to one line item ‘Results from financial transactions’. Until 2007 gains and losses on investments were netted by country, per category of financial asset and, in the case of available-for-sale financial assets, per type of instruments. Subsequently all gain positions were aggregated and presented as ’Net gains on investments’, whilst all loss positions were aggregated and presented as ’Net losses on investments’. As of 2007, all gains and losses on investments are netted to one total amount which is presented as one line item on the face of the income statement. This change in presentation aligns the presentation in the income statement with industry practice. Included in Results from financial transactions are also fair value changes and foreign exchange gains and losses, to which a similar netting and aggregation methodology as described for gains and losses on investments has been applied.
The comparative information has been restated accordingly as follows: Net fair value and foreign exchange gains 837 698
Minus: Reclass of Impairment charges on non-fi nancial assets and receivables 38 9 12
RESULTS FROM FINANCIAL TRANSACTIONS 9,397 12,820 2.3 CHANGES IN ACCOUNTING ESTIMATES
In June 2007, AEGON The Netherlands refined its method of calculating the fair value of the guarantees included in its unit-linked products in order to align these calculations with the calculations introduced for the group pension contracts and traditional products of AEGON The Netherlands. This change in accounting estimate has been applied prospectively. The cumulative negative impact on net income recognized amounts to EUR 135 million and is reported as part of Other charges.
The actual impact will depend on the development of the interest yield curve and is therefore difficult to predict.
IFRS (January 1, 2004) have not been restated. No operations have been identified as assets held for sale or disposal unit.
The assessment of control is based on the substance of the relationship between the Group and the entity and, among other things, considers existing and potential voting rights that are currently exercisable and convertible.
The subsidiary’s assets, liabilities and contingent liabilities are measured at fair value on the acquisition date and are subsequently accounted for in accordance with the Group’s accounting principles and reporting year. Intra-group transactions, including AEGON N.V.
The excess of the cost of acquisition, comprising the consideration paid to acquire the interest and the directly related costs, 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. Also, goodwill is adjusted for changes in the estimated value of contingent considerations given in the business combination when they arise.
Contingent consideration is discounted and the unwinding is recognized in the income statement as an interest expense.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON GROUP NOTE 2.5 - 2.8
Subsidiaries are deconsolidated when control ceases to exist. Any difference between the net proceeds and the carrying amount of the subsidiary is recognized in the income statement.
are translated at average exchange rates or at the prevailing rates on the transaction date, if more appropriate. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are translated at the closing rates on the balance sheet date.
On disposal of a foreign entity the related cumulative exchange differences included in the reserve are recognized in the income statement.
On transition to IFRS on January 1, 2004, the foreign currency translation reserve was reset to nil.
Secondary segment information is reported for groups of related products – see note 2.2.2A for the change in presentation adopted as of January 1, 2007, which has been retrospectively applied in this Report.
The Group uses operating earnings before tax in its segment reporting as an important indicator of its financial performance. Included in operating earnings are segment revenues and segment expenses.
Segment revenues consist of premium income, investment income, fee and commission income, income from banking activities and other revenues. Segment expenses consist of premiums to reinsurers, policyholder claims and benefits (excluding the effect of charges to policyholders in respect of income tax), profit sharing and rebates and commissions and expenses. In addition to segment revenues, the following income items are also included in the calculation of operating earnings: reinsurance claims and benefits, fair value and foreign exchange gains, gains on investments for account of policyholders and share in net results of associates. Similarly, in addition to segment expenses, the following expense items are also included in the calculation of operating earnings: fair value and foreign exchange losses, losses on investments for account of policyholders and interest and related charges.
Operating earnings before tax excludes: realized gains and losses on investments on general account fi nancial assets, other than those classifi ed as at fair value through profi t or loss 1 ; gains and losses on investments in real estate 1 ; fair value changes in derivatives held for economic hedges for which no hedge accounting is applied and the economically hedged underlying assets or liabilities are not valued at fair value through profi t or loss 1, 2; the difference between fair value movements of certain guarantees and the fair value changes of derivatives that hedge certain risks of these guarantees 1 ; the ineffective portion of hedge transactions for which hedge accounting is applied 1 ; realized gains and losses on repurchased debt; impairment charges and reversals for fi nancial assets, excluding receivables and; certain other income (charges) items.
When a portfolio of insurance contracts is acquired, whether directly from another insurance company or as part of a business combination, the difference between the fair value and the carrying amount of the insurance liabilities is recognized as value of business acquired
On the acquisition of a portfolio of investment contracts without discretionary participation features under which AEGON will render investment management services, the present value of future servicing rights is recognized as an intangible asset. Future servicing rights can also be recognized on the sale of a loan portfolio or the acquisition of insurance agency activities.
Other intangible assets are recognized to the extent that the assets can be identified, are controlled by the Group, are expected to provide future economic benefits and can be measured reliably. The Group does not recognize internally generated intangible assets arising from research or internally generated goodwill, brands, customer lists and similar items.
Financial assets are recognized on the trade date when the Group becomes a party to the contractual provisions of the instrument and are classified for accounting purposes depending on the characteristics of the instruments and the purpose for which they were purchased.
Group has the intention and ability to hold a quoted financial asset with fixed payments to the maturity date, it is classified as held-tomaturity.
Loans and assets held-to-maturity are subsequently carried at amortized cost using the effective interest rate method. Financial assets at fair value through profit or loss are measured at fair value with all changes in fair value recognized in the income statement as incurred. Available-for-sale assets are recorded at fair value with unrealized changes in fair value recognized directly in shareholders’
A financial asset is derecognized when the contractual rights to the asset’s cash flows expire, when the Group has transferred the asset and substantially all the risks and rewards of ownership, or when the
Investments in real estate is property held to earn rentals or for capital appreciation, or both. Considering the Group’s asset liability management policies, under which both categories of property can be allocated to liabilities resulting from insurance and investment contracts, both are presented as investments.
Valuations of both investments in real estate and real estate held for own use are conducted with sufficient regularity to ensure the value correctly reflects the fair value at the balance sheet date. Valuations are mostly based on active market prices, adjusted for any difference in the nature, location or condition of the specific property. If such information is not available, other valuation methods are applied, considering the current cost of reproducing or replacing the property, the value that the property’s net earning power will support and the value indicated by recent sales of comparable properties. For property held for own use, valuers may also consider the present value of the future rental income cash flows that could be achieved had the real estate been let out.
The Group develops property itself with the intention to hold it as investments in real estate. During the construction phase both the land and the building are presented as real estate held for own use, are held at cost, including directly attributable borrowing costs, and are not depreciated. When the construction phase is completed, the property is transferred to investments in real estate and revalued at fair value. Any resulting gain or loss is recognized in the income statement.
Derivatives are financial instruments 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.
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 Group considers the similarity of the characteristics of the embedded derivative and the host contract. Embedded derivatives that transfer significant insurance risk are accounted for as insurance contracts.
The fair value is calculated net of the interest accrued to date and is based on market prices, when available. When market prices are not available, other valuation techniques, such as option pricing or stochastic modeling, are applied. The valuation techniques incorporate all factors that market participants would consider and are based on observable market data, when available.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON GROUP NOTE 2.10 - 2.13
Cash flow hedges are hedges of the exposure to variability in cash flows that is attributable to a particular risk of a forecasted transaction or a recognized asset or liability and could affect profit or loss. To the extent that the hedge is effective, the change in the fair value of the derivative is recognized in the related revaluation reserve in shareholders’ equity. Any ineffectiveness is recognized directly in the income statement. The amount recorded in shareholders’ equity is released to the income statement to coincide with the hedged transaction, except when the hedged transaction is an acquisition of a non-financial asset or liability. In this case, the amount in shareholders’
equity is included in the initial cost of the asset or liability.
The carrying amount is subsequently adjusted to reflect the change in the Group’s share in the net assets of the associate and is subject to impairment testing. The net assets are determined based on the
Gains and losses on transactions between the Group and the associate are eliminated to the extent of the Group’s interest in the entity, with the exception of losses that are evidence of impairment which are recognized immediately. Own equity instruments of AEGON N.V. that are held by the associate are not eliminated.
Reinsurance contracts are contracts entered into by the Group in order to receive compensation for losses on contracts written by the
Reinsurance contracts with insufficient insurance risk transfer are accounted for as investment or service contracts, depending on the nature of the agreement.
Other assets include trade and other receivables, prepaid expenses and fixed assets other than property. Trade and other receivables are initially recognized at fair value and are subsequently measured at amortized cost. Fixed assets are initially carried at cost, depreciated on a straight line basis over their useful life to their residual value and are subject to impairment testing.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON GROUP NOTE 2.14 - 2.18
net cash flows from the continuing use and ultimate disposal of the asset and reflects its known inherent risks and uncertainties.
With the exception of goodwill, impairment losses are reversed when there is objective evidence that there has been a change in the estimates used to determine the asset’s recoverable amount since the recognition of the last impairment loss. The reversal is recognized in the income statement to the extent that it reverses impairment losses previously recognized in the income statement. The carrying amount after reversal cannot exceed the amount that would have been recognized had no impairment taken place.
Assets that only generate cash flows in combination with other assets and liabilities are tested for impairment at the level of the cashgenerating unit. When impairing a cash-generating unit, any goodwill allocated to the unit is first written-off and recognized in the income statement. The remaining impairment loss is allocated on a pro rata basis among the other assets, on condition that the resulting carrying amounts do not fall below the individual assets’ recoverable amounts.
For debt instruments carried at amortized cost, the carrying amount of impaired financial assets is reduced through an allowance account.
For debt instruments classified as available-for-sale, the asset is impaired to its fair value. Any unrealized gain or loss previously recognized in shareholders’ equity is taken to the in the income statement in the impairment loss. After impairment the interest accretion on debt instruments that are classified as available-for-sale is based on the rate of return that would be required by the market for similar rated instruments at the date of impairment.
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 in the impairment loss. The amount exceeding the balance of previously recognized unrealized gains or loss is recognized in the income statement.
AEGON has the option to defer coupon payments at its discretion.
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 share.
Trust pass-through securities, subordinated loans and other borrowings are initially recognized at their fair value and are subsequently carried at amortized cost using the effective interest rate method, with the exception of specific borrowings that are designated as at fair value through profit or loss to eliminate, or significantly reduce, an accounting mismatch, or specific borrowings which are carried as at fair value through the profit and loss as part of a fair value hedge relationship. The liability is derecognized when the Group’s obligation under the contract expires, is discharged or is cancelled.
Insurance contracts are contracts under which the Group accepts a significant risk – other than a financial risk – from a policyholder by agreeing to compensate the beneficiary on the occurrence of an uncertain future event by which he or she will be adversely affected.
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 2.20C or, if bifurcated from the host contract, as described in 2.11.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON GROUP NOTE 2.19 - 2.20
Shadow accounting ensures that all gains and losses on investments affect the measurement of the insurance assets and liabilities in the same way, regardless of whether they are realized or unrealized and regardless of whether the unrealized gains and losses are recognized in the income statement or directly in equity in the revaluation reserve. In some instances, realized gains or losses on investments have a direct effect on the measurement of the insurance assets and liabilities. For example, some insurance contracts include benefits that are contractually based on the investment returns realized by the insurer. In addition, realization of gains or losses on available-forsale investments can lead to unlocking of VOBA or DPAC and can also affect the outcome of the liability adequacy test to the extent that it considers actual future investment returns. For similar changes in unrealized gains and losses, shadow accounting is applied. If an unrealized gain or loss triggers a shadow accounting adjustment to
Impairment losses resulting from liability adequacy testing can only be reversed if allowed by local accounting principles.
Non-life insurance contracts are insurance contracts where the insured event is not life-contingent. For non-life products the insurance liability generally includes reserves for unearned premiums, unexpired risk, inadequate premium levels and outstanding claims and benefits.
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.
Contracts issued by the Group that do not transfer significant insurance risk, but do transfer financial risk from the policyholder to the Group are accounted for as investment contracts. Depending on whether the Group or the policyholder runs the risks associated with the investments allocated to the contract, the liabilities are classified as investment contracts or as investment contracts for account of policyholders. Investment contract liabilities are recognized when the contract is entered into and are derecognized when the contract expires, is discharged or is cancelled.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON GROUP NOTE 2.21 - 2.23
Group has no further obligation than the payment of a fixed contribution. All other plans are classified as defined benefit plans.
In measuring the defined benefit obligation the Group uses the projected unit credit method and actuarial assumptions that represent the best estimate of future variables. The benefits are discounted using an interest rate based on the market yields for high-quality corporate bonds on the balance sheet date.
Plan assets are qualifying insurance policies and assets held by longterm employee benefit funds that can only be used to pay the employee benefits under the plan and are not available to the Group’s creditors. They are measured at fair value and are deducted in determining the amount recognized on the balance sheet.
Contingent assets are disclosed in the notes if the inflow of economic benefits is probable, but not virtually certain. When the inflow of
Policyholder claims and benefits consists of claims and benefits paid to policyholders, including benefit claims in excess of account value for products for which deposit accounting is applied and the change in the valuation of liabilities for insurance and investment contracts.
Net fair value change of general account financial investments at fair value through profit or loss, other than derivatives include fair value changes of financial assets carried at fair value through profit or loss.
In addition Results from financials transactions include gains/losses on real estate (general account and account of policyholder), net foreign currency gains/(loss) and net fair value change on borrowings and other financial liabilities and realized gains on repurchased debt.
Arrangements that do not take the form of a lease but convey a right to use an asset in return for a payment are assessed at inception to determine whether they are, or contain, a lease. This involves an assessment of whether fulfilment of the arrangement is dependent on the use of a specific asset and whether the purchaser (lessee) has the right to control the use of the underlying asset.
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.
Some insurance contracts without a guaranteed or fixed contract term contain guaranteed minimum benefits. Depending on the nature of the guarantee, it may either be bifurcated and presented as a derivative or be reflected in the value of the insurance liability in accordance with local accounting principles. Given the dynamic and complex nature of these guarantees, stochastic techniques under a variety of market return scenarios are often used for measurement purposes. Such models require management to make numerous estimates based on historical experience and market expectations.
Investment assumptions are either prescribed by the local regulator or based on management’s future expectations. In the latter case, the anticipated future investment returns are set by management on a countrywide basis, considering available market information and economic indicators. A significant assumption related to estimated gross profits on variable annuities and variable life insurance products in the United States, Canada and some of the smaller country units, is the annual long-term growth rate of the underlying assets. As equity markets do not move in a systematic manner, assumptions as to the long-term growth rate are made after considering the effects of short-term variances from the long-term assumptions (a reversion to the mean assumption). The reconsideration of this assumption may affect the original DPAC or VOBA amortization schedule, referred to as DPAC or VOBA unlocking. The difference between the original DPAC or VOBA amortization schedule and the revised schedule, which is based on estimates of actual and future gross profits, is recognized in the income statement as an expense or a benefit in the period of determination.
Lapse experience is correlated to mortality and morbidity levels, as higher or lower levels of surrenders may indicate future claims will be higher or lower than anticipated. Such correlations are accounted for in the mortality and morbidity assumptions based on the emerging analysis of experience.
(if they are designated as financial liabilities at fair value through profit or loss) or amortized cost (with fair value being disclosed in the notes to the consolidated financial statements). These contracts are not quoted in active markets and their fair values are determined by using valuation techniques, such as discounted cash flow methods and stochastic modeling or in relation to the unit price of the underlying assets. All models are validated and calibrated. A variety of factors are considered, including time value, volatility, policyholder behavior, servicing costs and fair values of similar instruments.
The valuation techniques incorporate all factors that market participants would consider and are based on observable market data when available. All models are validated before they are used and calibrated to ensure that outputs reflect actual experience and comparable market prices.
Fair values for exchange-traded derivatives, principally futures and certain options, are based on quoted market prices. Fair values for over-the-counter (OTC) derivative financial instruments represent amounts estimated to be received from or paid to a third party in settlement of these instruments. These derivatives are valued using pricing models based on the net present value of estimated future cash flows, directly observed prices from exchange-traded derivatives, other OTC trades, or external pricing services. Most valuations are derived from swap and volatility matrices, which are constructed for applicable indices and currencies using current market data from many industry standard sources. Option pricing is based on industry standard valuation models and current market levels, where applicable. The pricing of complex or illiquid instruments is based on internal models. For long-dated illiquid contracts, extrapolation methods are applied to observed market data in order to estimate inputs and assumptions that are not directly observable. The values for OTC derivatives are verified using observed market information, other trades in the market and dealer prices, along with management judgment.
Certain bifurcated embedded derivatives in insurance and investment products are not quoted in active markets and their fair values are determined by using valuation techniques. Because of the dynamic and complex nature of these cash flows, stochastic techniques under a variety of market return scenarios are often used. A variety of factors are considered, including expected market rates of return, market volatility, correlations of market returns, discount rates and actuarial assumptions.
The fair values of the general account financial instruments carried at fair value were determined as follows: Amounts in EUR million
3 Not based upon market observable input means that fair values are determined in whole or in part using a valuation technique (model) based on assumptions that are neither supported by prices from observable current market transactions in the same instrument nor are they based on available market data. Main asset classes in this category are hedge funds, private equity funds and limited partnerships.
There are a number of significant risks and uncertainties inherent in the process of monitoring investments and determining if impairment exists. These risks and uncertainties include the risk that the Group’s
Group or changes in other facts and circumstances will lead the Group to change its investment decision. Any of these situations could result in a charge against the income statement in a future period to the extent of the impairment charge recorded.
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) nationally recognized credit rating agency downgrades. Additionally, for asset-backed securities, cash flow trends and underlying levels of collateral are monitored. A security is impaired if there is objective evidence that a loss event has occurred after the initial recognition of the asset that has a negative impact on the estimated future cash flows. A specific security is considered to be impaired when it is determined that it is probable that not all amounts due (both principal and interest) will be collected as scheduled.
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. Equity securities held in an unrealized loss position that are below cost for over six months or significantly below cost at the balance sheet date are evaluated for possible impairment.
Provisions are established for contingent liabilities when it is probable that a past event has given rise to a present obligation or loss and the amount can be reasonably estimated. Management exercises judgment in evaluating the probability that a loss will be incurred. The estimate of the amount of a loss requires management judgment in the selection of a proper calculation model and the specific assumptions related to the particular exposure.
NET INCOME ATTRIBUTABLE TO EQUITY HOLDERS OF AEGON N.V. 1,596 606 267 73 (2) 11 2,551
Interest charges and other – – – – (260) (20) (280)
Share in net results of associates – 4 – 16 – – 20
Attributable to minority interest 2 – – – – – 2
Gains and losses on investments in real estate 33 137 134 222
Fair value changes on economic hedges for which no hedge accounting is applied 33 (340) (193) 200
Difference between fair value movements of certain guarantees and the fair value changes of derivatives that hedge certain risks on these guarantees 33, 35 (325) – –
Ineffective portion of hedge transactions for which hedge accounting is applied 33 16 12 32
Individual savings and retirement products 2,515 246 – 14 – – 2,775
Results from fi nancial transactions 1 3,565 (693) 968 46 2 10 3,898
Interest charges and related fees (213) (76) (13) (2) (1,009) 839 (474)
Share in net results of associates – 3 1 32 – – 36 1 Results from fi nancial transactions exclude certain results on fi nancial transactions (refer to note 2.6). 2 Charges to policyholders in respect of income tax in AEGON UK for an amount of EUR 8 million are excluded from segment expenses and included in other non-operating income/(charges).
Results from fi nancial transactions 1 5,524 536 2,669 135 – (6) 8,858
Individual savings and retirement products 2,898 246 – 2 – – 3,146
Results from fi nancial transactions 1 3,277 1,852 6,490 52 11 (18) 11,664
Impairment charges/(reversals) on fi nancial assets, excluding receivables 44 24 3 – – 71
Impairment charges/(reversals) on non-fi nancial assets and receivables 28 – – 2 – 30
Impairment charges/(reversals) on non–fi nancial assets and receivables 9 – – – – 9
Impairment charges/(reversals) on non-fi nancial assets and receivables 3 – – 2 7 12
Revenue from transactions between reporting segments were not material during the financial period, with the exception of the interest income on intercompany loans issued by a holding company in the
(2006: EUR 845 million and 2005: 620 million) and transactions related to international reinsurance business. All intercompany loans are transacted at an arms’ length basis, based on readily available information.
VOBA and future servicing rights 3,113 172 991 92 – – 4,368
Insurance contracts for account of policyholders 36,986 20,331 13,201 1,624 – – 72,142
Individual savings and retirement products 59,555 4,787 – 201 – – 64,543
Share in results of associates 24 32 17 405 – – 478 1 Segment assets include all assets, except income tax receivables.
Amortization / depreciation through income statement – 246 22 35 1 304
With the exception of goodwill, all intangible assets have a finite useful life and are amortized accordingly. VOBA and Future Servicing
Investments for general account comprise financial assets, excluding derivatives, as well as investments in real estate and real estate held for own use. Refer to note 7 for investments for which the investment risk is borne by the policyholders and to note 8 for details on general account derivatives.
Financial assets at fair value through profi t or loss (FVTPL) 1 7,863 9,548
Money market and other short-term investments 5,280 – – 107 5,387 4,387 – – 38 4,425
Deposits with fi nancial institutions – 1,322 – – 1,322 – 1,995 – – 1,995
Receivables out of share lease agreements – 137 – – 137 – 373 – – 373
Fair value of the loans amount to EUR 22,540 million at December 31, 2007 (2006: EUR 20,930 million).
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON GROUP NOTE 6
prior years. Also, it completed one publicly placed securitization transaction in 2006, whereby the economic ownership of EUR 2.1 billion of aggregate mortgage receivables was conveyed to a special purpose company. The special purpose company funded this purchase 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 company upon the occurrence of certain predefined ‘notification events’. At the same time AEGON entered into a fixed-to-floating swap agreement with the contract parties under which AEGON agreed to pay the floating rate (EURIBOR based) and receive the fixed rate (yield from the mortgage receivables). After a period of seven years, the interest of the notes issued by the special purpose company in respect of this transaction will step-up, together with a similar step-up in the fixed-to-floating swap agreement. At that same time, the special purpose company has the right to call the notes. A deferred purchase arrangement forming part of the contract to sell the mortgage loans to the special purpose company entitles
continues to be recognized as a financial asset on balance, representing the interest rate risk retained by AEGON in respect of the fourth publicly placed securitization contract.
AEGON’s continuing involvement with the assets in these SPEs, it consolidates these entities. The fair value of all such debt securities reflected in investments and also measured at fair value through profit or loss is EUR 592 million as of December 31, 2007 (2006: EUR 678 million). The acquisition of these securities was financed by the SPEs through issuance of floating rate notes at par value to third parties and issuance of a de minimus residual investment to AEGON.
Federal Home Loan Bank of Des Moines, Iowa, that are measured at par. 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.
Only other insignificants amounts of unquoted equity instruments are measured at cost. Refer to note 3 for information on the fair value measurement.
Movement on the loan allowance account during the year were as follows: Addition charged to earnings (6) (15)
Refer to note 47 for a discussion of collateral received and paid.
Transfers from real estate held for own use and mortgage loans 49 140
AEGON The Netherlands has entered into long-term residential property leases that can be terminated subject to a short-term notice.
Under Dutch law, the maximum annual rent increase on residential property rented for less than EUR 622 per month is specified by the
Dutch national government and equals the annual inflation rate plus a small margin.
Rental income of EUR 89 million (2006: EUR 90 million; 2005: EUR 92 million) is reported as part of investment income in the income statement. Of this amount, nil (2006: EUR 2 million; 2005: EUR 3 million) is attributable to rent on foreclosed real estate. Direct operating expenses (including repairs and maintenance) arising from investment property that generated rental income during the period amounted to
EUR 53 million (2006: EUR 28 million; 2005: EUR 33 million). EUR 1 million (2006: EUR 0 million; 2005: EUR 2 million) of direct operating expenses related to investment property that did not generate rental income during the period.
61% of the real estate held for own use was last revalued in 2007, based on market value appraisals by qualified internal and external appraisers. All of the appraisals in 2007 were performed by independent external appraisers.
Refer to note 46 for a summary of contractual commitments for the acquisition of real estate held for own use.
Total investments for account of policyholders at fair value through profi t or loss, excluding derivatives 1 139,876 133,060
No property interests held under operating leases are classified and accounted for as investment property. The investment property is fully leased out under operating leases.
Refer to note 46 for a summary of contractual obligations to purchase investment property or for repairs, maintenance or enhancements.
Derivatives not designated in a hedge 356 373 121 58 1 Refer to note 45 for a summary of all fi nancial assets and fi nancial liabilities at fair value through profi t or loss.
AEGON utilizes derivative instruments as a part of its asset liability risk management practices. The derivatives held for risk management purposes are classified as economic hedges to the extent that they do not qualify for hedge accounting, or that AEGON has elected not to apply hedge accounting. The economic hedges of certain exposures relate to an existing asset or liability or the future reinvestment risk.
Derivatives are used to add risk by selling protection in the form of single name credit default swaps and tranches of synthetic collateralized debt and commodity obligations. Another strategy used is to synthetically replicate corporate credit exposures with credit derivatives. This involves the purchase of high quality low risk assets and the sale of credit derivatives. The program is designed to purchase asset positions that are already subject to review by management, but may not be available under the same terms and conditions in the cash bond market. AEGON holds financial derivatives for trading purposes.
In addition to these instruments, 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.
(generally to six months or less LIBOR) in order to more closely match the performance of the assets and liabilities within AEGON’s portfolio.
AEGON has entered into cross-currency interest rate swap agreements that effectively convert certain foreign currency fixed- and floatingrate assets and liabilities to US dollar floating-rate assets and liabilities. These agreements involve the exchange of the underlying principal amounts.
recognized gains and losses related to the ineffective portion of designated fair value hedges of EUR 11 million, EUR 5 million and EUR
AEGON has entered primarily into interest rate swap agreements that effectively convert certain variable-rate assets and liabilities to a fixed-rate basis in order to match the cash flows of the assets and liabilities within AEGON’s portfolio more closely. These agreements involve the payment or receipt of variable-rate interest amounts in exchange for fixed-rate interest amounts over the life of the agreement without the exchange of the underlying principal amounts. AEGON is hedging its exposure to the variability of future cash flows from the interest rate movements for terms up to 29 years for hedges converting existing floating-rate assets and liabilities to fixed-rate assets. Approximately 5% of the hedged cash flows are expected to occur in within one year, 60% within 1- 10 years and 35% after 10 years.
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 25 years. Approximately 20% of the expected hedged cash flows are expected to occur in within one year, 50% within 1- 10 years and 30% after 10 years. The cash flows from these hedging instruments are expected to affect the profit and loss for approximately the next 44 years. For the year ended December 31, 2007, none of AEGON’s cash flow hedges has been discontinued, as it was probable that the original forecasted transactions would occur by the end of the originally specified time period documented at inception of the hedging relationship.
In addition, AEGON also makes use of cross currency swaps to convert variable foreign currency cash flows into fixed cash flows in local currencies. The cash flows from these hedging instruments are expected to occur over the next 25 - 30 years. These agreements involve the exchange of the underlying principal amounts.
For the year ended December 31, 2007 AEGON recognized a gain of
EUR 5 million of hedge ineffectiveness on cash flow hedges. In 2006 and 2005 respectively EUR 7 million and EUR 0 million of hedge ineffectiveness were recorded in the income statement. The amount of deferred gains or losses to be reclassified from equity into net income during the next twelve months is expected to be immaterial.
All associates are unlisted and are accounted for using the equity method and are considered to be non-current. The investments in associates include interest in insurance companies who are required to maintain a minimum solvency margin based on local directives.
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 49 for a listing of the principal investments in associates and the Group’s percentage holding.
Amounts due from reinsurers in respect of claims already paid by the
EUR 90 million of the reinsurance assets are current (2006: EUR 96 million).
Gross premium and deposits – existing and new business 970 103 1,073
Movements during the year in reinsurance assets relating to non-life insurance 2007 2006
At December 31, 2007, 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% (2006: 9%); gross short-term growth rate of 6% (2006: 4.75 %); gross short- and long-term fixed security growth rate of 6% (2006: 6%); and the gross short- and long-term growth rate for money market funds of 3.5% (2006: 3.5%). For Canada these assumptions, at December 31, 2007, were as follows: gross long-term equity growth rate of 9%
(2006: 9%); and gross short-term growth rate of 10.75% (2006: 9%).
For both countries the reversion period for the short-term rate is five years.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON GROUP NOTE 12 - 12.2
The movements in the provision for impairment during the year were as follows: Additions charged to earnings (2) (9)
(EUR 0.25), unless a higher issue price is agreed. In the years 2003 through 2006 29,290,000 class B preferred shares were issued under these option rights. In 2007, Vereniging AEGON exercised its option rights to purchase in aggregate 5,880,000 class B preferred shares at par value to correct dilution caused by AEGON’s stock dividend issuances and treasury stock sales during the year.
B preferred share. Instead, Vereniging AEGON has agreed to exercise one vote only per preferred share, except in the event of a ‘special cause’, such as the acquisition of a 15% interest in AEGON N.V., a tender offer for AEGON N.V. shares or a proposed business combination by any person or group of persons, whether individually or as a group, other than in a transaction approved by the Executive Board and
will notify the General Meeting of Shareholders and retain its right to exercise the full voting power of 25/12 vote per preferred share for a limited period of six months.
With regard to granted share appreciation rights and option rights and their valuation we refer to note 37.
On the balance sheet date AEGON N.V. and its subsidiaries held 136,330,982 of its own common shares with a face value of
Transactions in 2007: Purchase: 3 transactions, average price EUR 13.71 33,200
Transactions in 2005: Purchase: one transaction on May 17, price EUR 9.85 – – 3,821
The revaluation accounts for both available-for-sale investments and for real estate held for own use include unrealized gains and losses on these investments, net of tax. Upon sale, the amounts realized are recognized in the income statement or transferred to retained earnings. Upon impairment, unrealized losses are recognized in the
The cash flow hedging reserve is made up of (un)realized gains and losses on the effective portions of hedging instruments, net of tax.
Movement in foreign currency translation and net foreign investment hedging reserves (1,598) 153 – (1,445)
Junior perpetual capital securities Coupon rate Coupon date: quarterly, as of Year of fi rst call 2007 2006 2005
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON GROUP NOTE 15 - 16
The securities have been issued at par. The securities have subordination provisions and rank junior to all other liabilities. The conditions of the securities contain certain provisions for optional and required coupon payment deferral. Although the securities have no stated maturity, AEGON has the right to call the securities for redemption at par for the first time on the coupon date in the years as specified, or on any coupon payment date thereafter.
The bonds have the same subordination provisions as dated subordinated debt. In addition, the conditions of the bonds contain provisions for interest deferral and for the availability of principal
Coupon Coupon date Year of issue Year of maturity Year of fi rst call 2007 2006
USD 225 million 1 7.65% Semi-annually, June 1 1996 2026 n.a. 77 85
USD 12 million 2 Floating Quarterly, January 8 2003 2034 2009 8 –
USD 18 million 2 Floating Quarterly, February 23 2004 2034 2009 13 –
Trust pass-through securities are securities through which the holders participate in a trust. The assets of these trusts consist of junior subordinated deferrable interest debentures issued by Transamerica
Non-life insurance - Unearned premiums and unexpired risks 2,605 2,632 - Incurred but not reported claims 704 680
Gross premium and deposits – existing and new business 9,771 8,764
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON GROUP NOTE 17 - 18
Prior year run-off results, compared to opening balances of the nonlife reserve, are immaterial.
Gross premium and deposits – existing and new business 7,873 7,387
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON GROUP NOTE 19 - 20
Fair value of investment contracts without discretionary participation features 36,078 34,611
Investment contracts consist of the following: Institutional guaranteed products 24,004 24,531
Gross premium and deposits – existing and new business 3,996 7,459 11,455
Gross premium and deposits – existing and new business 4,984 8,512 13,496
On consolidation of an investment fund, participations held by third parties are classified as liabilities, as opposed to minority interests in equity, if the Group is legally obliged to buy back these participations.
A portion of the balance of investment contract liabilities relates to such participations held by third parties, amounting to EUR 116 million
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON GROUP NOTE 21 - 22
Debentures and other loans Coupon rate Issue / Maturity Coupon date 2007 2006
USD 50 million Zero Coupon Bonds 1 1982 / 07 – 35
USD 100 million Domestic Debentures 1 9.375% 1996 / 08 Semi-annually 68 77
USD 147 million Domestic Debentures 1 6.4% 1998 / 08 Semi-annually 94 98
USD 200 million Zero Coupon Bonds 1 1982 / 12 74 72
USD 750 million Senior Notes 4.75% 2003 / 13 Semi-annually 509 569
EUR 500 million Medium-Term Notes 4.125% 2004 / 14 December 8 474 485
EUR 75 million Medium-Term Notes 4.625% 2004 / 19 December 9 70 74
GBP 92 million Note issue agreement 2,3,4 2007 / 21 April 21 83 –
Included in debentures and other loans are EUR 980 million (2006: EUR 938 million) relating to borrowings measured at fair value.
Present value of wholly or partly funded obligations 4 4 4 –
Breakdown of plan assets for retirement benefi t plans 2007 2006
Accumulated post-employment benefi t obligation for medical cost 17 (16) 19 (19)
AEGON USA has defined benefit plans covering substantially all its employees that are qualified under the Internal Revenue Service
Code. The benefits are based on years of service and the employee’s compensation during the highest five, complete, consecutive years of employment. These defined benefit plans were overfunded by EUR
AEGON USA provides health care benefits to retired employees, which are predominantly unfunded. The post-retirement health benefit liability amounts to EUR 147 million.
AEGON The Netherlands has a number of defined benefit plans and a small defined contribution plan. The contributions to the retirement benefit plan of AEGON The Netherlands are paid by both the employees and the employer, with the employer contribution being variable. The benefits covered are retirement benefits, disability, death and survivor pension and are based on an average salary system.
AEGON The Netherlands also has a post-retirement medical plan that contributes to the health care coverage of employees and beneficiaries after retirement. The liability related to this plan amounted to EUR 48 million at December 31, 2007.
The assets of the scheme are held in policies effected with
Scottish Equitable plc. The scheme is closed to new entrants. Under
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON GROUP NOTE 25 - 26
Acquisitions through business combinations 1 – – – (2) – 1 –
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes relate to the same fiscal authority. The netting is reflected in the tables above. Deferred tax liabilities included in a net deferred tax asset position are presented as negative components of the deferred tax asset breakdown. Similarly, deferred tax assets included in a net deferred tax liability position are presented as negative components in the breakdown of the deferred tax liability.
Deferred corporate income tax assets are recognized for tax losses carried forward to the extent that the realization of the related tax benefit through the future taxable profits is probable. For an amount of EUR 1 million (2006: EUR 49 million) the realization of the deferred tax asset is dependent on future taxable profits in excess of the profits arising from the reversal of existing taxable temporary differences.
Losses amounting to EUR 423 million (2006: EUR 83 million) can be carried forward indefinitely; losses amounting to EUR 736 million
(2006: EUR 517 million) will expire within the next five years; losses amounting to EUR 40 million (2006: EUR 42 million) will expire in five to ten years.
AEGON did not recognize deferred corporate income tax assets in respect of taxable temporary differences relating to deferred acquisition costs and other items for the amount of EUR 7 million
Unremitted earnings totaled EUR 1,856 million (2006: EUR 1,810 million). All deferred taxes are non-current by nature.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON GROUP NOTE 27 - 28
Investment income from fi nancial assets held for general account 2007 2006 2005
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON GROUP NOTE 29 - 32
Net fair value change on investments in real estate for account of policyholders (402) 187 99
Net fair value change on borrowings and other fi nancial liabilities (2) 42 –
Net fair value change of general account fi nancial investments at fair value through profi t or loss, other than derivatives comprise: 2007 2006 2005
Net fair value change of derivatives comprise: 2007 2006 2005 - Net fair value change on derivatives 55 (74) (204)
- Ineffective portion of hedge transactions to which hedge accounting is applied 16 12 32 - Fair value changes on economic hedges for which no hedge accounting is applied (340) (193) 200 - Difference between fair value movements of certain guarantees and the fair value changes derivatives that hedge certain risks of these guarantees 1 (657) – –
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON GROUP NOTE 33 - 35
Investments for account of policyholders comprise of financial assets, investments in real estate and real estate for own use. Refer to note 7 for further information. Financial assets for account of policyholders are classified as at fair value through profit or loss. Investment income on investments for account of policyholders is included in investment income. Refer to note 30 for further information.
Other income in 2007 relates mainly to the acquisition of OPTAS N.V.
EUR 212 million higher than the acquisition price of EUR 1.5 billion resulting in a one-time gain at acquisition that is reported as part of
Change in valuation of liabilities for insurance and investment contracts 13,002 14,070 18,601
The change in valuation of liabilities for insurance and investment contracts include EUR 332 million of gains regarding fair value movements of guarantees and EUR 7 million of gains (2006: gains of
TOTAL PROFIT SHARING AND REBATES 83 133 171 37 COMMISSIONS AND EXPENSES
Plans for share appreciation rights and share options can only be established with prior consent of the annual General Meeting of
Shareholders. If, subsequently, the Executive Board decides to implement such plans, that decision has to be approved by the
units fully vest in three years and the exercise period is up to ten years, with the latest period ending in August 2008.
The following tables present the movements in number of share appreciation rights outstanding (SARs), as well as the breakdown by the year in which they were granted.
The following assumptions are used in estimating the fair value of share appreciation rights at December 31: Expected dividend yield 7.18% 3.99% 3.12%
(2006: EUR 26 million and 2005: EUR 40 million) and are recognized in the income statement as part of Commissions and expenses.
The weighted average share price at which the share options were exercised in 2007 is EUR 14.00 (2006: EUR 13.28).
Outstanding December 31, 2007 Exercise price in EUR Exercise period 1 Weighted average exercise price of the outstanding share options in USD calculated at the closing rate.
(2006: EUR 13 million and 2005: EUR 3 million) and are recognized in the income statement as part of Commissions and expenses.
December 31, 2007, AEGON N.V. held 34,057,633 of its own common shares with a face value of EUR 0.12 each by virtue of acquisitions for this purpose.
The breakdown of the share appreciation rights and share options granted in 2007 is as follows: Executive Board nil, other senior executives 4,157,500 and other employees 5,674,200 (2006: nil; 4,009,800 and 5,384,000 and 2005: nil; 4,711,960 and 5,449,800).
Refer to note 50 for detailed information about the SARs/share options and the shares and options conditionally granted to the
Impairment charges on fi nancial assets, excluding receivables 1 135 142 147
Impairment charges on non-fi nancial assets and receivables 30 9 11
Impairment reversals on fi nancial assets, excluding receivables, from: 2007 2006 2005
Income tax calculated using weighted average applicable statutory rates 973 1,272 959
Difference due to the effects of: Non-taxable income (261) (247) (229)
Net income attributable to ordinary shareholders for basic earnings per share calculation 2,291 2,946 1,936
Diluted earnings per share is calculated by adjusting the average number of shares outstanding for the dilutive effect of share options.
assumed that all dilutive share options have been exercised at the exercise price, or adjusted exercise price if necessary. The proceeds are regarded as having been received from the issue of ordinary shares at the average market price of the AEGON N.V. share during the year. The difference between the number of dilutive options issued and the number of ordinary shares that would have been
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON GROUP NOTE 42 - 44 issued at the average market price has been treated as an issue of ordinary shares for no consideration.
Net income attributable to ordinary shareholders for diluted earnings per share calculation 2,291 2,946 1,936
The dividend per share paid in 2007 (final 2006 and interim 2007)
and 2006 (final 2005 and interim 2006) were EUR 0.61 and EUR 0.47 respectively. A final dividend in respect of book year 2007 of EUR 0.32 per share, resulting in a total dividend of EUR 0.62 per share for 2007, is to be proposed at the General Meeting of Shareholders on April 23, 2008. These financial statements do not reflect the proposed final dividend payable.
AEGON’s capital base reflects the capital employed in insurance activities and consists of shareholders’ equity, capital securities and dated subordinated and senior debt. AEGON targets its capital base to comprise at least 70% shareholders equity (excluding the revaluation reserve), 25% perpetual capital securities (consisting of junior
AEGON is subject to legal restrictions on the amount of dividends it can pay to its shareholders. Under Dutch law the amount that is available to pay dividends consists of total shareholders’ equity less the issued and outstanding capital and less the reserves required by law. Retained earnings includes a EUR 770 million statutory reserve for subsidiaries.The revaluation account is a legal reserve established by AEGON N.V. in light of the investments held by group companies. In accordance with Book 2, Part 9 of the Dutch Civil Code it comprises the revaluation reserves held by group companies (EUR (516) million, 2006: EUR 1,648 million). Other reserves include the foreign currency translation reserve for an amount of EUR (2,010) million ( 2006: EUR
perpetual capital securities and perpetual cumulative subordinated bonds) and a maximum of 5% dated subordinated and senior debt related to insurance activities.
The table that follows reconciles total shareholders’ equity to the total capital base: Total shareholders’ equity 15,151 18,605
Borrowings not related to capital funding of insurance activities (4,766) (3,518)
Borrowings not related to capital funding of insurance activities mainly include operational funding of US regulation XXX and guideline
AXXX redundant reserves, funding of mortgage warehousing activities, short-term funding of cash and collateral management activities, and the proportional amount of other borrowings not immediately deployed for capital management activities. In the ordinary course of business, AEGON N.V. may at times have borrowings, which are offset by cash and cash equivalents available for future capital management activities, such as funding capital contributions in its subsidiaries, redemption of borrowings or payment of dividends to its shareholders. The Total Capital Base is a non-IFRS measure, as
Commissioners. At December 31, 2007, the combined risk-based capital ratio of AEGON’s life insurance subsidiaries in the United
Derivatives with positive values not designated as economic hedges 1,008 – 1,233 –
TOTAL FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS 1,079 147,668 2,018 141,823
Investments held for account of policyholders comprise assets that are linked to various insurance and investment contracts for which the financial risks are borne by the customer. Under the Group’s
Borrowings designated as at fair value through profit or loss include financial instruments that are managed on a fair value basis together with related financial assets and financial derivatives.
Gains and losses recognized in the income statement on financial assets and financial liabilities classified as at fair value through profit or loss can be summarized as follows: Trading Designated Trading Designated
Changes in the fair value of financial liabilities designated as at fair value through profit or loss were not attributable to changes in credit risk. There are also no differences between the carrying amounts of these financial liabilities and the contractual amounts payable at maturity (net of surrender penalties).
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 2008. 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.
Share of contingent liabilities incurred in relation to interests in joint ventures 675 615
(EUR 985 million), as well as payables with respect to certain derivative transactions of Transamerica Corporation (nominal amount EUR 793 million); Due and punctual payment of any amounts owed to third parties by the consolidated group company AEGON Derivatives N.V. in connection with derivative transactions. AEGON Derivatives N.V.
has been involved in over the last twelve months have not had any significant effects on the financial position or profitability of AEGON
subsidiaries modified business practices in response to such inquiries or the findings thereof. Certain AEGON subsidiaries have been informed that the regulators may seek fines or other monetary penalties or changes in the way AEGON conducts its business.
The assets are transferred in light of security lending and repurchase activities, in return for cash collateral or other financial assets.
Non-cash collateral is not recognized in the balance sheet. The fair value of non-cash received is EUR 66 million (2006: EUR 4 million).
AEGON cannot sell or repledge these assets and no assets have been sold or transferred.
The credit support agreement will normally dictate the threshold over which collateral needs to be pledged by AEGON or its counterparty.
Transaction requiring AEGON or its counterparty to post collateral are typically the result of over-the-counter derivative trades, comprised mostly of interest rate swaps, currency swaps and credit swaps.
Non-cash financial assets that are borrowed or purchased under agreement to resell are not recognized in the balance sheet. To the extent that cash collateral is paid, a receivable is recognized for the corresponding amount. If other non-cash financial assets are given as collateral, these are not derecognized. AEGON pledges non-cash financial assets that are on its balance sheet in securities borrowing and lending transactions, in repurchase and reverse repurchase transactions, and against long-term borrowings. In addition, in order to trade derivatives on the various exchanges, AEGON posts margin as collateral.
Merrill Lynch Life Insurance Company and ML Life Insurance Company of New York, companies that sell non-participation life insurance and annuity products such as variable life insurance, variable annuities, market value adjusted annuities and immediate annuities. The total purchase price amounted to EUR 849 million cash consideration.
EUR 9.9 billion respectively, the estimated fair values are subject to adjustment at the initial allocation for a one year period as more information relative to the fair values as of the acquisition date become available. As the acquisition was completed at the end of
December, the net income of the acquired operations was not material to the AEGON’s consolidated net income. Had the acquisition taken place on 1 January 2007, the contribution of these companies to the
Group’s net income is estimated at EUR 75 million; contribution to revenues would have been approximately EUR 271 million.
Clark debt assumed by AEGON and EUR 20 million cost basis of Clark common stock already owned by AEGON and transaction costs. Since the acquisition date, Clark has contributed EUR 4.6 million to the net income of AEGON. If the acquisition had taken place as of January 1, 2007, Clark should have contributed an amount of EUR 90 million to total revenues and EUR 4.7 million to net income of AEGON USA.
EUR 84 million, reflecting the future commission revenue from inforce contracts. In addition an intangible asset was established for the present value of future commission receivables in the amount of
In March 2007, AEGON has completed the acquisition of the Polish pension fund management company PTE Ergo Hestia S.A. The company was renamed to PTE AEGON Poland. The cost of the acquisition amounted to EUR 72 million, which was paid in cash.
Goodwill amounting to EUR 23 million reflects the future new business to be generated and potential synergies with existing businesses.
In September 2006, AEGON The Netherlands acquired the remaining 55% of the Unirobe shares. The distribution activities of the Dutch operations are placed under the Unirobe Meeùs Group. No operations have been disposed off as a result of the combination. The cost of acquiring the remaining 55% of the shares was EUR 59 million, which was paid in cash. In total an amount of EUR 96 million was paid to acquire the 100% interest. At the acquisition date assets and liabilities were recognized for EUR 186 million and EUR 134 million respectively which included a cash position of EUR 0 million. Since the acquisition date, Unirobe has contributed EUR 5 million to the net income of
EUR 49 million goodwill, of which EUR 18 million had previously been included in the measurement of the interest held in Unirobe as an associate. Goodwill reflects the commission income that is expected to be generated by Unirobe in future years.
In November 2005, AEGON signed a strategic partnership agreement with the Spanish savings bank Caja de Ahorros de Navarra (CN) under which AEGON acquired a 50% stake in CN’s life insurance and pensions subsidiary, Seguros Navarra S.A. The acquisition of 50% of
during 2005. These business combinations did not have a material impact on the consolidated financial statements of the Group.
S.A. for EUR 29 million, together with an earn-out arrangement. The cash and cash equivalents held at the end of March by Scottish Equitable
Trade Register in The Hague. AEGON N.V. has issued a statement of liability as meant in article 403 of Book 2 of the Dutch Civil Code for its subsidiary company AEGON Derivatives N.V.
Income Fund (PREFF), a newly created hedge fund formed as a limited partnership. As of December 31, 2007 AEGON is the only limited partner in this fund. As a limited partner, AEGON does not have any direct voting power. However, in addition to its limited partnership interest, AEGON has an equity interest in the general partner of the fund and also has derivative trading responsibilities through a subadvisory agreement. Based on these facts, AEGON concluded that it controls the limited partnership and has included the entity in its consolidated financial statements.
In both 2001 and 2002, AEGON N.V. entered into total return swaps with Vereniging AEGON in order to hedge the share option plan for each respective year. On April 15, 2005, these total return swaps were terminated, resulting in a positive impact on shareholders’ equity of
1.3 million pension premiums, EUR 0.8 million share-based payments and EUR 0.7 million other long-term benefits. Additional information on the remuneration and share-based compensation of members of the Executive Board and the Supervisory Board are disclosed in the sections below.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON GROUP NOTE 50
Salary Other 3 Cash 4 Shares 5 1 Mr. Shepard earns a salary of USD 1 million. 2 Includes base salary, the customary employee profi t sharing bonus, as well as a tax deferred employee savings scheme. 3 Other periodic payments are additional remuneration elements, including social security contributions borne by the Group. For Mr. Shepard, the Group has also borne expenses and non-monetary benefi ts which are provided in his employment agreement with AEGON. These benefi ts include compensation to the extent that the total actual annual taxation on his total income exceeds the taxation if he were only subject to U.S. taxes, personal life insurance and tax planning. The 2007 and 2006 amounts are affected by the expiration of a tax ruling as a result of which employer and employee pension contributions are no longer tax deferred in the Netherlands. For Mr. Wynaendts, the amount also includes compensation for relocation and cost of living related to his temporary secondment to AEGON USA in 2005 and 2006.
5 In accordance with the elections made by the Executive Board members under the terms of the 2003 STI plan, the Executive Board received bonus shares in April 2007. The number of bonus shares varied from 0 to 100% of the number of shares paid in 2003, calculated through performance based matching, on the basis of earnings per share growth over infl ation over the years 2004, 2005 and 2006. The number of shares for each member was: Mr. Shepard 16,143; Mr. Streppel 12,409; and Mr. Wynaendts 8,771. These have been converted using the share price of EUR 15.61 at April 25, 2007.
Alexander R. Wynaendts 301,000 270,000 1 Variable compensation for the 2007 fi nancial year will be paid after adoption of the Group’s fi nancial statements on April 24, 2008. The STI will be paid in cash. The LTI will be paid in the form of conditionally granted AEGON shares.
The two tables below show the number of shares and options conditionally granted based on LTI plans that existed prior to 2007.
The numbers of shares and options conditionally granted were based on the closing price on the day of the grant. This was also the exercise price of the options. The fair value information on the conditionally granted shares and options will be provided in the year when these vest.
Share appreciation rights and interests in AEGON N.V. held by active members of the Executive Board
Alexander R. Wynaendts 1 The share appreciation rights were granted before becoming a member of the Executive Board.
The above rights have been granted under the LTI plan in force until
December 31, 2003. Details of the exercise period are provided in note 37. For each of the members of the Executive Board, the shares held in AEGON as shown in the above table do not exceed 1% of total outstanding share capital at the balance sheet date. At the balance sheet date, the following members of the Executive Board had loans with AEGON or any AEGON related company: Mr. Streppel had a 5%
mortgage loan of EUR 608,934; and Mr. Wynaendts had two mortgage loans totaling EUR 635,292, with interest rates of 4.1% and 4.4%
respectively. In accordance with the terms of the contracts, no principal repayments were received on the loans in 2007. The terms of the board members’ loans have not been amended in 2007, with the exception of the interest rates for Mr. Wynaendts.
Under his Employment Agreement, Mr. Shepard shall be entitled to a specified amount of severance upon termination of his employment for reasons specified in the Employment Agreement. Under his
Employment Agreement, Mr. Shepard shall be entitled to severance in the amount of three year’s base salary and the aggregate short-term incentive compensation he received during the three years prior to the termination in the event that Mr. Shepard’s employment is terminated (a) by AEGON other than for urgent cause, death, disability, voluntary resignation or retirement, (b) by AEGON in connection with a merger, take-over or fundamental changes of policy and related organizational amendments, or (c) by Mr. Shepard in the event that his responsibilities or position are diminished by such circumstances.
AEGON USA Supplemental Executive Retirement Plan (SERP). In addition, three additional years of service will be credited for the purpose of calculating his benefits under the SERP.
Mr. Wynaendts would be entitled to three years’ fixed salary, only in the case of termination in connection with a merger or take-over.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON GROUP NOTE 51
Turkish life and pension company Ankara Emeklilik. Turkey, with its population of 74 million, has a low life insurance penetration and the private pensions market has an attractive growth potential. Ankara
Management of the company is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with International Financial Reporting Standards as adopted by the European Union, with International Financial Reporting
Standards as issued by the International Accounting Standards Board and with Part 9 of Book 2 of the Netherlands Civil Code, and for the preparation of the Report of the Executive Board in accordance with
Part 9 of Book 2 of the Netherlands Civil Code. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of the consolidated financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the 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. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
In our opinion, the consolidated financial statements give a true and fair view of the financial position of AEGON N.V. as at December 31, 2007, and of its result and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union, with International Financial Reporting
Financial statements of AEGON N.V. 2007 210 Balance sheet of AEGON N.V.
Notes to the financial statements of AEGON N.V. 212 General information 212 Summary of significant accounting policies 214 Shares in group companies 214 Loans to group companies 214 Other assets 215 Share capital 217 Shareholders’ equity 219 Other equity instruments 220 Long-term borrowings 220 Current liabilities 221 Number of employees 221 Events after the balance sheet date
INCOME STATEMENT OF AEGON N.V. FOR THE YEAR ENDED DECEMBER 31
AEGON N.V. and its subsidiaries and joint ventures (AEGON or ‘the
The financial statements have been prepared in accordance with accounting principles in the Netherlands as embodied in Part 9 of
During 2007, AEGON changed its accounting policy regarding accounting for minimum guarantees by AEGON The Netherlands. The change in accounting policy is applied retrospectively and impacted the Investments, Shareholders’ equity and net income lines of the financial statement of AEGON. Further reference is made to note 2.2.1a of the notes to the consolidated financial statements.
Treasury shares are own equity instruments of AEGON N.V. reacquired by the Group and are deducted from equity regardless of the objective of the transaction. No gain or loss is recognized on the purchase, sale, issue or cancellation of the instruments. The consideration paid or received is recognized directly in equity. All treasury shares are eliminated in the calculation of earnings per share and dividend per share.
Contingent assets are disclosed in the notes if the inflow of economic benefits is probable, but not virtually certain. When the inflow of economic benefits becomes virtually certain, the asset is no longer contingent and its recognition is appropriate. A provision is recognized for present legal or constructive obligations arising from past events, when it is probable that it will result in an outflow of economic benefits and the amount can be reliably estimated. If the outflow of economic benefits is not probable, a contingent liability is disclosed, unless the possibility of an outflow of economic benefits is remote.
The financial statements are adjusted to reflect events that occurred between the balance sheet date and the date when the financial statements are authorized for issue, provided they give evidence of conditions that existed at the balance sheet date. Events that are indicative of conditions that arose after the balance sheet date are disclosed, but do not result in an adjustment of the financial statements themselves.
For a list of names and locations of the most important group companies, refer to note 49 to the consolidated financial statements of the Group, page 200. The legally required list of participations as set forth in article 379 of Book 2 of the Netherlands Civil Code has been registered with the Commercial Register of The Hague.
NOTES TO THE FINANCIAL STATEMENTS OF AEGON N.V. NOTE 3 - 7
All issued common and preferred shares are fully paid. Repayment of capital can only be initiated by the Executive Board, is subject to approval of the Supervisory Board and must be resolved by the
B preferred share. Instead, Vereniging AEGON has agreed to exercise one vote only per preferred share, except in the event of a ‘special cause’, such as the acquisition of a 15% interest in AEGON N.V., a tender offer for AEGON N.V. shares or a proposed business combination by any person or group of persons, whether individually or as a group, other than in a transaction approved by the Executive
The following table shows the movement during the year in the number of common shares: Number of common shares 2007 2006
AEGON, although included in the issued and outstanding number of shares, are excluded from the calculation of the weighted average number of shares. The number has been adjusted for share dividend.
For detailed information on share appreciation rights and share options granted to senior executives and other AEGON employees, refer to note 37 of the consolidated financial statements of the Group, page 186-189.
Net income 2005 retained – – 2,147 (2,147) – – –
Changes in revaluation subsidiaries – – – – (996) – (996)
Repurchased and sold own shares – (242) (20) – – – (262)
Changes in foreign currency translation reserve – – – – – (1,445) (1,445)
Transfer to legal reserve – – 15 – (15) – –
Withdrawal of treasury shares (2) 172 (170) – – – –
Coupons on perpetuals, net of tax – – (175) – – – (175)
Retained earnings includes a EUR 770 million statutory reserve for subsidiaries.
The revaluation account is a legal reserve established by AEGON N.V.
Transactions in 2007: Purchase: 3 transactions, average price EUR 13.71 33,200,000 –
Share repurchase program: various transactions, average price EUR 13.41 74,569,902 –
Transactions in 2006: Purchase: 30 transactions, average price EUR 14.78 – 19,076,000
The securities have been issued at par. The securities have subordination provisions and rank junior to all other liabilities.
The conditions of the securities contain certain provisions for optional and required coupon payment deferral. Although the securities have no stated maturity, AEGON has the right to call the securities for redemption at par for the first time on the coupon date in the years as specified, or on any coupon payment date thereafter.
3 The coupon for the EUR 114 million bonds was set at 8% until June 8, 2005. As of this date, the coupon is set at 4.156% until 2015.
The bonds have the same subordination provisions as dated subordinated debt. In addition, the conditions of the bonds contain provisions for interest deferral and for the availability of principal amounts to meet losses. Although the bonds have no stated maturity,
The repayment periods of borrowings vary from in excess of one year up to a maximum of 25 years. The interest rates vary from 2.745 to 9.375% per annum. The market value of the long-term borrowings amounts to EUR 2,437 million (2006: EUR 2,603 million).
(2006: EUR 186 million) and income tax payable for EUR 272 million
NOTES TO THE FINANCIAL STATEMENTS OF AEGON N.V. NOTE 10 - 13
AEGON N.V. has entered into a net worth maintenance agreement with its indirect subsidiary AEGON Financial Assurance Ireland
Other than the Executive Board members, there were no employees employed by AEGON N.V. in either 2007 or 2006.
Emeklilik has a well-established presence in the Turkish life insurance and private pension market, with over 54,000 pension fund members and approximately EUR 35 million in assets under management.
Board, to set aside part of the profi t to augment and/or form reserves.
or at the expense of reserves. Subject to the approval of the
In order to reflect the prevailing market price of AEGON N.V. common shares fully within the indication provided, the number of dividend coupons that gives entitlement to a new common share of EUR 0.12 will be determined on May 16, 2008, after 5:30 p.m., based on the average share price quoted by Euronext Amsterdam in the five trading days from May 12, 2008 up to and including May 16, 2008.
Upon approval of this proposal, profit will be appropriated as follows: Dividend on preferred shares 85 85
AGO. In 1978, AGO demutualized and Vereniging AGO became the only shareholder of AGO Holding N.V., which was the holding company for its insurance operations. In 1983, AGO Holding N.V. and Ennia N.V.
N.V., giving it voting majority in AEGON N.V.. At that time Vereniging
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
Shareholders. AEGON’s Articles of Incorporation were subsequently amended on May 26, 2003.
The relationship between Vereniging AEGON and AEGON N.V. was changed as follows: The 440,000,000 preferred shares with nominal value of EUR 0.12 held by Vereniging AEGON were converted into 211,680,000 new class
A preferred shares with nominal value of EUR 0.25 and the paid-in capital on the preferred shares was increased by EUR 120,000 to EUR
B preferred shares at par value to correct dilution caused by AEGON’s stock dividend issuances and treasury stock sales during the year.
Vereniging AEGON, based on the number of outstanding and voting shares (excluding issued common shares held in treasury by
At December 31, 2007, the General Meeting of Members of Vereniging
Resolutions of the Executive Committee, other than with regard to amendment of the Articles of Association, are made with an absolute majority of the votes. When a vote in the Executive Committee results in a tie, the General Meeting of Members has the deciding vote. With regards to the amendment of the Articles of Association of Vereniging
To AEGON’s knowledge there are no other parties holding a capital/
We have audited the accompanying company financial statements for the year 2007 (as set out on pages 210-224) which are part of the financial statements of AEGON N.V., The Hague, which comprise the balance sheet as at December 31, 2007, the income statement for the year then ended and the notes.