History and development of AEGON 1 1 Selected financial data 12 Lines of businesses 15 Results of operations 16
INTRODUCTION FILING This document contains AEGON’s Annual Report 2011 and will also be filed as AEGON’s Annual Report on Form 20-F with the
Monetary Union that have adopted the single currency in accordance with the Treaty establishing the European
References to “USD,” and “US dollars” are to the lawful currency of the United States of America, references to
“GBP,” “pound sterling” and the “UK pound” are to the lawful currency of the United Kingdom, references to “CAD” and
ABOUT THIS REPORT This report serves as the Annual Report in accordance with
International Financial Reporting Standards (IFRS), as adopted by the European Union (EU), with IFRS as issued by the
Exchange Commission for the year ended December 31, 2011, for AEGON N.V. (the company) and its subsidiaries (collectively known as AEGON). This report presents the Consolidated
The reorganization of our operations in the United States that began in 2009 is now complete with the consolidation of 12 divisions into three core operating divisions. Going forward in the UK, we are well-positioned to capture new growth opportunities arising from changes in consumer trends and market developments. An essential component of our strategy is to expand in those markets that offer strong growth and high returns given favorable demographics as well as political and economic developments. This is why we have established a new regional headquarters in Hong Kong. Our new team there is now responsible for coordinating AEGON’s activities throughout Asia and fully leveraging our capabilities to support our ambitions in China, Japan and India, as well as in our other Asian markets. In India we have been the first to introduce direct sales with the development of a new online life insurance product known as iTerm. This is an example of how we are exploiting innovation and technology to serve the growing demand for life insurance in this important emerging market for AEGON. We are also focused on capturing opportunities throughout the Central & Eastern
Similarly, Latin America is a key market for AEGON where we are pursuing growth in Brazil through our partnership,
Loyalty. In every market around the world, individuals and families increasingly realize that their financial security depends on the decisions they make to build and protect their assets. As such, we are committed to providing simpler,
economic recovery has been slow, with conditions improving in the last quarter of the year. The resulting historically low interest rate environment continues to pose particular challenges for our business. Despite these adverse factors, however, I am pleased to report that we achieved meaningful progress in delivering on AEGON’s strategic priorities, not least of which was the full repurchase of the capital provided by the Dutch State in 2008. Our ability to fulfill this key objective – and within the time frame promised – is clear evidence that our strategy is delivering its intended results.
Over the past year, we pursued a broad range of actions to realign our operations to the new realities of today’s environment and enable us to fully exploit the substantial opportunities for our core businesses of life insurance, pensions and asset management. These actions reflect our focus on four strategic areas that are critical to
No single factor is more critical to the success of a financial services company than the trust of its customers. At AEGON, we regard the trust and confidence of those who rely on us to help them take responsibility for their financial security as both a measure of our performance and the strength of our potential. In what continues to be a time of considerable economic uncertainty, we are committed to providing our customers reliable solutions that address the full range of financial security needs – at every stage of life and for an increasingly longer retirement. This is both our mission and promise.
– Delivering Operational Excellence – has been demonstrated over the past year by achieving substantial cost and operational efficiencies. In the United Kingdom, we achieved our 2011 target to reduce the overall cost base of operations by GBP 80 million, resulting in a more streamlined and focused organization. Supporting our aim to create a more responsive and efficient organization in the Netherlands, we implemented a significant restructuring program that will reduce costs by
EUR 100 million – the majority of which will be realized in 2012.
AEGON Global Technology (AGT) to leverage our investments in IT infrastructure for the benefit of all of AEGON’s operations in Europe, the Americas and Asia.
Alex Wynaendts Chief Executive Officer and Chairman of the Executive Board of AEGON N.V.
Bank, working in Amsterdam and London in the Dutch bank’s capital markets, asset management, corporate finance and private banking operations. In 1997, Mr. Wynaendts joined
Ernst & Young in 1980, becoming a partner in the firm in 1989.
Mr. Nooitgedagt headed Ernst & Young’s financial services business in the Netherlands for five years until his appointment in 2005 to the firm’s Executive Committee. A year later,
Netherlands and Belgium in July 2008. He was appointed member of AEGON’s Executive Board and Chief Financial
AEGON’s US subsidiaries, Diversified Investment Advisors, and as head of the company’s annuity and mutual fund businesses.
In January 2009, he was named President of AEGON Americas and became President and CEO of AEGON Americas and a member of the Management Board one year later.
Lybrand / Van Dien. Mr. Keim has also worked for aircraft maker Fokker Aircraft and NS Reizigers, part of the Dutch railway company, NS Group. In 1999, he joined Swiss Life in the Netherlands as a member of the Board. Three years later,
of AEGON Hungary. In that time, he has headed the expansion of AEGON’s businesses not only in Hungary but also across the Central & Eastern European region. Mr. Kepecs has been a member of AEGON’s Management Board since it was established in 2007.
Adrian Grace built his career at GE Capital, where he held a variety of business development roles including periods based in the US and Far East. Mr. Grace also held managing director roles at Sage Group, HBoS and Barclays Insurance, and is a member of the Board of Scottish Financial Enterprise. Mr. Grace was appointed Chief Operating Officer of AEGON UK in
The year 2011 was one of transformation for AEGON as its businesses continued to carry out significant restructuring programs to achieve greater operational and cost efficiencies and further sharpen the company’s focus on its core businesses – life insurance, pensions and asset management.
the full repurchase of the capital AEGON received from the Dutch State at the height of the financial crisis in 2008.
EUR 1.1 billion was paid in premium and interest. With the repurchase completed, AEGON has now even more focus on achieving sustainable profitable growth with a substantially improved risk-return profile.
Economic growth in Europe was mixed, but in general was negatively impacted by a deepening of the sovereign debt crisis. Growth in the emerging markets of Asia and Latin
America continued to be strong. In Central & Eastern Europe, the picture remained mixed with Poland experiencing strong growth and Hungary showing generally weak performance.
The differences in the growth profiles of the United States and
The S&P 500 closed the year at around the same level as it started. The FTSE ended slightly lower and the main continental European indices ended considerably lower.
The spreads rose to around 2002 recession levels, but remained clearly lower than the 2008 levels.
2012 began with some positive consumer confidence indicators and other favorable macroeconomic data, while equity markets continued to strengthen. However, in general the outlook for the year remains weak and there continues to be considerable economic uncertainty. Economic growth for the United States is expected to remain weak, but shows a positive trend. A shallow recession is expected for the euro zone. The actual outcome will be dependent on the development of the sovereign debt crisis, and as such, could be worse if the crisis deepens further.
The insurance and pensions industry is continuing to go through a period of significant change. AEGON’s opportunity and challenge is to understand the nature of this change, and respond effectively in each of its markets. The industry also faces the challenge of further reforms to financial regulations and capital adequacy requirements.
There are several factors creating significant growth potential for AEGON’s businesses: � In many countries, people are living longer, healthier lives.
However, they do have to face the challenge of low interest rates and low and volatile equity market returns.
� Emerging markets are becoming more important. Economic growth and political reform have opened up new markets in
� Distribution patterns are changing due to new technology and new laws and changes in regulatory environment.
� Customer behavior is also changing. Customers are more aware of financial risk and they want simpler, more transparent products with clear guarantees. At the same time, public trust in the financial sector has diminished.
In response, governments are introducing new regulations to protect consumers. The industry is responding by becoming more customer-centric.
AEGON’s core expertise and which adhere to AEGON’s risk and return requirements.
� Enhance Customer Loyalty – Establish a life-long relationship with customers to serve their diverse needs throughout the life cycle; providing simpler, transparent products and services.
� In moves to increase the earnings derived from fee-based business, instead of spread-based business, AEGON
achieved substantial growth in its retirement related products and services in the United States, including its strong variable annuity business.
� In order to ensure that AEGON’s businesses fully understand the developing needs of their customers, and regularly measure customer loyalty on a consistent basis, several of
� With a focus on creating a new culture of innovation,
� AEGON rebranded its asset management business in the United Kingdom to Kames Capital in order to enhance distinctive third party proposition in the marketplace.
� AEGON achieved its target to reduce costs in its operations in the United Kingdom by 25%, in order to improve returns, with GBP 80 million in cost reductions during 2011.
� With the aim of creating a more focused and efficient organization in the Netherlands, AEGON initiated a major transformation program within AEGON The Netherlands, targeting EUR 100 million in cost reductions by 2013.
� AEGON in the United States continued its restructuring program, during the course of 2011, consolidating a number of operations and functions to create greater cost and operational efficiencies. These included the consolidation of its Louisville, Kentucky, office with two operations in
AEGON believes it makes a valuable contribution to society both as a provider of long-term financial products and services and as a responsible employer and investor. The company’s approach to sustainability is based on two main considerations: � Responsible management of resources, whether financial, human or material resources.
Sustainability is at the heart of AEGON’s approach to business, its brand and values, as well as the company’s four strategic priorities: Optimize Portfolio, Enhance Customer Loyalty, Deliver
The Hague. This department is responsible for the company’s policies and initiatives in this area, and coordinates the work of those managers responsible for sustainability at the company’s individual country and operating units. The Global
As part of its approach, AEGON has a number of international commitments with regard to sustainability reporting, environmental standards and responsible investment.
In 2011, AEGON took a number of important steps to strengthen its sustainability perfomance, particularly in customer loyalty, employee engagement and responsible investment.
� The extension of NPS to at least 70% of AEGON’s businesses worldwide.
� The roll-out of action plans, based on results from the 2011 global Employee Survey, to improve employee engagement throughout the company.
� An assesment of AEGON’s leading suppliers to identify possible environmental, governance or social risks as part of a more integrated approach to supply chain management.
AEGON’s main markets are the United States, the Netherlands and the United Kingdom. AEGON operates in more than 20 countries in the Americas, Europe and Asia, serving about 47 million customers.
The company encourages product innovation and fosters an entrepreneurial spirit within its businesses. New products and services are developed by local business units with a continuous focus on helping people take responsibility for their financial futures. AEGON uses a multi-brand, multichannel distribution approach to meet its customers’ needs.
AEGON has the following reportable geographic segments: the Americas (which include the United States, Canada,
Mexico and Brazil), the Netherlands, the United Kingdom and New Markets, which includes Central & Eastern Europe,
The main operating units of AEGON are separate legal entities organized under the laws of their respective countries.
The shares of those legal entities are directly or indirectly held by two intermediate holding companies incorporated under
Dutch operations, and AEGON International B.V., which serves as a holding company for the Group companies of all countries except the Netherlands and AEGON Asset Management.
History and development of AEGON Business overview History and development of AEGON
Trust pass-through securities and (subordinated) borrowings 1 10,040 8,604 7,314 4,824 5,152 1 Excludes bank overdrafts.
The rate for annual dividends or distributions, if any, on preferred shares to be made in 2012 for the year 2011, as determined on January 1, 2011 is 2.75% and the annual dividends or distributions, if any, on preferred shares for the year 2011, based on the weighted average paid-in capital on the preferred shares during 2011 will be EUR 59 million.
Interim Final Total Interim Final Total 2009 – – – – – –
1 Paid, at each shareholder’s option, in cash or in stock. 2 Proposed.
The annual dividend on our class A and class B preferred shares is calculated on the basis of the paid-in capital on the preferred shares using a rate equal to the European Central
Products with mortality, morbidity, and longevity risks, including traditional and universal life, as well an employer, endowment, term, whole life insurance products, mortgages and annuity products.
Individual and group pensions usually sponsored by, or obtained via, an employer.
Immediate annuities, individual protection products, such as term insurance, critical illness and income protection.
Includes all business and operating units in Central & Eastern Europe, Asia, Spain and France as well as AEGON’s variable annuity activities in Europe and AEGON
Hungary, Poland, Romania, Slovakia and Turkey. Includes life insurance, individual and group pension products, savings and investments, as well as general insurance.
Income tax from certain proportionately consolidated associates included in income before tax 9 11 (18%)
Of which income tax from certain proportionately consolidated associates (9) (11) 18%
AEGON’s senior management is compensated based in part on AEGON’s results against targets using the non-IFRS measure presented herein. While many other insurers in AEGON’s peer group present substantially similar non-IFRS measures, the non-IFRS measure presented in this document may
Total life insurance gross premiums 6,232 3,213 6,474 1,317 – 17,236 (383) 16,853
Guardian during the third quarter 2011, and the subsequent loss of earnings, also contributed to the decrease.
For the Holding, underlying earnings before tax amounted to a loss of EUR 303 million which is the result of higher expenses related primarily to the preparation for implementation of
The significant decline compared to last year was driven mainly by lower results from fair value items in the Americas as AEGON lowered its interest rate assumptions which negatively impacted results during the third quarter with
EUR 452 million and amounted to EUR 388 million in 2011.
United Kingdom related primarily to exchange offers on specific holdings of European banks and in Central & Eastern
Net income in 2011 of EUR 872 million was lower than net income in 2010 (2010: EUR 1,760 million), primarily the result of lower underlying earnings before tax, less gains on investments and a significant decline in results on fair value items.
Underlying earnings before tax in the Americas decreased 5% to USD 1,823 million. Earnings from Life & Protection decreased mainly as a result of unfavorable persistency and lower spreads. Individual Savings & Retirement earnings remained stable as increased earnings from variable annuities and retail mutual funds were offset by lower earnings from fixed annuities as the product is de-emphasized. Earnings from
In the United Kingdom, underlying earnings before tax declined significantly to GBP 5 million. This was mainly due to charges and expenses related to an ongoing program to correct historical issues within customer policy records and the execution of this program partly offset by the one-time benefit of changes to employee benefit plans. The sale of
Europe impairments were largely attributable to new legislation in Hungary, related to Swiss Franc denominated mortgages, affecting the mortgage portfolio.
Other charges amounted to EUR 267 million, an improvement compared to charges of EUR 309 million in 2010. In the
Restructuring charges in the Netherlands related to a restructuring program to reduce operating expenses going forward amounted to EUR 92 million and a write-down of intangible assets related to the distribution businesses led to a charge of EUR 75 million. In the United Kingdom, restructuring charges amounted to EUR 86 million. In New Markets, charges of EUR 17 million related to the Hungarian bank tax are included, offset by a benefit of EUR 37 million related to a settlement of legal claims of Asset Management.
United Kingdom (EUR 48 million) and benefits from cross border intercompany reinsurance transactions (EUR 39 million).
New life sales declined mainly as a result of lower single premium production in the United Kingdom and the effect of the discontinuance of single premium universal life sales in the bank channel during the second half of 2010, as well as repricing of certain universal life products in 2011 in the Americas to reflect the low interest rate environment.
AEGON’s core capital excluding revaluation reserves amounted to EUR 17.5 billion, equivalent to 73.5% of the company’s total capital base at year-end 2011. AEGON is on track to reach a capital base ratio of at least 75% by the end of 2012.
Shareholders’ equity increased to EUR 21 billion mainly as a result of the appreciation of the US dollar against the euro
– reflected in the foreign currency translation reserves – and a significant increase in the revaluation reserves during the year. The revaluation reserves at December 31, 2011 increased mainly the result of a decrease in interest rates which had a positive effect on the value of fixed income securities.
In February 2011, AEGON issued ordinary shares in an amount of 10% of its share capital, via an accelerated book-build offering. The issue was conducted under AEGON’s US Shelf
The proceeds of EUR 903 million were used to fund part of
In June 2011, AEGON completed the repurchase of convertible core capital securities from the Dutch State with a final payment of EUR 1.125 billion to repurchase of 187.5 million convertible core capital securities for EUR 750 million and EUR 375 million in premium. With this payment, AEGON fulfilled its key
Results 2011 worldwide objective of repurchasing all of the EUR 3 billion core capital securities issued to the Dutch State at the height of the financial crisis in 2008. The total amount AEGON has paid to the Dutch State amounts to EUR 4.1 billion. Of this amount,
EUR 3 billion covered the original issue of convertible core capital securities, while an additional EUR 1.1 billion was paid in premium and interest.
AEGON believes the non-IFRS measure shown herein, when read together with AEGON’s reported IFRS financial statements, provides meaningful supplemental information for the investing public to evaluate AEGON’s business after eliminating the impact of current IFRS accounting policies for financial instruments and insurance contracts, which embed a number of accounting policy alternatives that companies may select in presenting their results (i.e. companies can use different local
Total life insurance gross premiums 6,877 3,185 7,425 1,306 – 18,793 (427) 18,366
Accident and health insurance premiums 1,850 201 – 72 – 2,123 (2) 2,121
Number of employees, including agent-employees 13,362 5,122 4,138 8,216 316 31,154 (3,680) 27,474
EUR 204 million in 2009. The improvement was driven by higher underlying earnings before tax, a turnaround in fair value results, higher realized gains on investments and considerably lower impairments. These positive effects were partly offset by higher losses for the run-off businesses and tax charges, where 2009 had included tax benefits. Results from fair value items amounted to EUR 0.2 billion compared with a loss for the previous year of EUR 0.5 billion. Most of the turnaround was attributable to an improvement in the fair value of guarantees net of related hedges in the Netherlands.
This was the lowest level of impairments in three years, but is still above AEGON’s long-term expectations. Impairments were primarily related to US housing related securities. Other charges amounted to EUR 309 million and included a payment for settlement of a dispute related to a bank-owned life insurance policy in the United States and restructuring charges in the United States, the United Kingdom and
Netherlands. Income tax amounted to EUR 165 million for 2010, while 2009 had included a tax credit of EUR 658 million.
The improvement was the result of growth of the business, cost savings, higher fee income as a result of higher account balances driven by a recovery in financial markets and the absence of reserve strengthening in the Americas. Underlying earnings before tax in the Netherlands remained strong.
AEGON’s operations in the United Kingdom reported higher underlying earnings before tax, while underlying earnings before tax from New Markets increased mainly as a result of the inclusion of AEGON Asset Management, only partly offset by higher claim experience in the nonlife business in Hungary.
AEGON’s new life sales in 2010 increased 6% compared with 2009 to EUR 2.1 billion. Sales across the company showed improvements during the year. Spain was an exception, as a consequence of continued weak economic conditions that affected one of AEGON’s joint venture partners there. Gross deposits – excluding run-off businesses – increased 18% to
Income before tax (excluding income tax from certain proportionately consolidated associates) 968 1,453 (33%) 696 1,100 (37%)
Of which income tax from certain proportionately consolidated associates (1) (2) 50% (1) (2) 50%
Accident and health insurance premiums 2,475 2,443 1% 1,780 1,850 (4%)
In the third quarter of 2011, to reflect the low interest rate environment, AEGON has lowered its long-term assumption for 10-year US Treasury yields by 50 basis points to 4.75%
In addition, AEGON has lowered its assumed return for separate account bond fund returns by 200 basis points to 4%
Americas decreased to USD 779 million mainly as a result of unfavorable persistency and lower spreads. Also higher
Executive Life of New York contributed unfavorably to the results. In addition, 2010 included an employee benefit release.
USD 51 million, while earnings from AEGON’s joint-ventures in Brazil and Mexico declined to USD 1 million.
AEGON’s businesses in the Americas showed a strong increase in net income and underlying earnings before tax mainly as a result of improved market conditions in 2010. During the year, AEGON announced that it would explore strategic options regarding its life reinsurance business, Transamerica Reinsurance. This followed the restructuring process started in 2009 and the company’s announcement in 2010 that it would sharpen its focus on its core businesses. AEGON also decided to discontinue its BOLI/COLI business in the United States and to pursue further operational and cost efficiencies by consolidating operations currently based in Louisville, Kentucky with other existing locations.
USD 2 billion, mainly as a result of significant cost reductions, lower restructuring charges, a decrease in employee benefit plan expenses and the transfer of asset management activities to AEGON Asset Management.
AEGON experienced a 12% increase in new life sales in the
Americas during the course of 2010 Due to strong retail new life sales in the United States and Latin America.
Net income from the Americas more than doubled compared with 2009 to USD 1.5 billion. This was mainly the result of higher underlying earnings before tax and realized gains on investments, a better performance from fair value items and fewer impairments. The result was only partly offset by higher charges that were mainly related to restructuring, the settlement of a dispute related to a BOLI policy and losses from the run-off businesses.
Underlying earnings before tax increased 80% during the year to USD 1.9 billion.
�� Underlying earnings before tax from Life & Protection remained stable as cost savings were offset by lower margins.
�� Individual Savings & Retirement returned to profit, mainly as a result of higher account balances driven by a recovery in financial markets and the absence of reserve strengthening.
Pensions increased as a result of continued strong growth of the business as well as an improvement in the financial markets.
AEGON USA, LLC is a principal holding company of AEGON USA.
AEGON USA was founded in 1989 when AEGON brought all of its operating companies in the United States under a single financial services holding company. Business is conducted through its subsidiaries. AEGON USA has operating licenses in every US state, the District of Columbia, Puerto Rico, the
AEGON USA’s operating companies by various distribution methods and sales channels. The line of business structure is designed to enable AEGON USA to manage the organization efficiently, to identify business synergies, to pursue crossselling opportunities, and to improve operating efficiencies.
Coordinated support services complement operations by providing functional support in systems technology, investment management, regulatory compliance, and various corporate functions. Products are also offered and distributed through one or more of the AEGON USA licensed insurance or brokerage subsidiary companies.
companies can trace their roots back as far as the mid-19th century. AEGON USA operates under one of the best known names in the US insurance business: Transamerica. AEGON
USA provides a wide range of life insurance, pensions, longterm savings and investment products.
uses a variety of distribution channels to ensure customers can access the products in a way that best suits their needs.
AEGON USA has long-standing relations with banks across the United States, and also distributes products and services through other channels: agents, broker-dealers, specialized financial advisors, internet as well as direct and worksite marketing.
Based in Toronto, AEGON Canada offers a range of insurance products and financial services, primarily through its
Total employment of AEGON Canada on December 31, 2011 was approximately 700.
1 Throughout this report, “AEGON USA” refers to subsidiary and affiliate AEGON companies managed from the United States. Similarly, “AEGON Canada” refers to all AEGON companies operating in Canada. AEGON’s operations in North America – the United States, Canada – and Latin America – Mexico and Brazil – are referred to collectively as AEGON Americas.
AEGON USA uses a variety of sales and distribution channels in the United States. These include: �� Independent and career agents
In addition, AEGON USA provides a range of products and services online, and uses direct and worksite marketing. This approach allows AEGON USA customers more ways to access products and services. Generally, AEGON USA companies are focused on particular products or market segments, ranging from lower income to high net worth individuals and large corporations.
AEGON Canada uses a variety of distribution channels which promote, and process business of, independent financial advisors. These channels are: �� Independent managing general agencies.
USA. Operating in a broad range of market segments and distribution channels, L&P services more than 15 million policies. Since the division was formed in 2009, significant progress has been made toward fully leveraging expertise and capabilities and achieving economies of scale. The diverse distribution channels within L&P are organized into business units that serve specific market segments. This focus, combined with a shared support platform, keeps L&P close to its customers.
Supplemental health insurance products include accidental death, other injury, critical illness, hospital indemnity, Medicare supplement, and student health. Specialty lines include travel, membership and creditor (installment/mortgage/guaranteed auto protection) products.
Long Term Care (LTC) insurance products provide benefits to policyholders who require care due to a chronic illness or cognitive impairment. LTC insurance serves as an asset
protection tool by reimbursing policyholders for costly expenses associated with LTC services, and it may also help a family better manage the financial, health and safety issues that are associated with LTC.
The business units are organized by distribution type and each focuses on a particular market segment.
Transamerica Financial Advisors, Inc. is a full service, registered independent broker-dealer and Registered
AEGON USA offers a wide range of savings and retirement products and services, including mutual funds, fixed and variable annuities, as well as investment advice to people who are entering their retirement years. The Individual Savings and
Variable annuities are sold to individuals and retirement plans in the United States.
Variable annuities allow a policyholder to provide for their financial future on a tax-deferred basis and to participate in equity or bond market performance. Variable annuities allow a policyholder to select payout options designed to help meet the policyholder’s need for income upon maturity; this includes lump sum payment, income for life or for a period of time.
The account value of variable annuities reflects the performance of the underlying funds. AEGON USA earns mortality and expense charges as well as various types of rider fees for providing guarantees and benefits. This category includes segregated fund products offered by AEGON Canada.
Variable products also contain interest rate risk and policyholder behavior risk, which are handled similarly to those in fixed annuities.
AEGON’s operations in the United States provide various investment products and administrative services, individual and group variable annuities, mutual funds, collective investment trusts and asset allocation (retirement planning)
The operations in the United States provide the fund manager oversight for the Transamerica Funds. AEGON USA selects, manages, and retains affiliated and non-affiliated managers from a variety of investment firms based on performance.
Fixed annuities include both deferred annuities and immediate annuities. A fixed deferred annuity exposes AEGON to interest rate risk and lapse risk. The insurer interest rate risk can be mitigated through product design, close asset/liability management and hedging, though the effects of policyholder behavior can never be fully mitigated. Surrender charges in early policy years serve as a deterrent to early duration lapses.
Fixed annuities sold in the United States contain significant interest rate and longevity risks created by guaranteed annuity options, and most also offer waiver of account value surrender charges upon the death of the insured. Immediate annuities contain interest rate risk and also longevity risk if annuity payments are life contingent.
Fixed deferred annuity contracts may be purchased on either a flexible or single premium basis. Deferred annuities are offered on a fixed interest crediting method or indexed basis.
United States also offer guaranteed minimum surrender values and payout options. Upon maturity of the annuity, the policyholder can select payout options that include a lump sum payment, income for life, or payment for a specified period of time. In the event of the death of the policyholder prior to receiving the benefits of the policy, the beneficiary receives either an accumulated cash value death benefit or an enhanced death benefit in the event there are benefit riders attached to the base contract. Early withdrawal by the policyholder of the cash value of the annuity is subject to surrender charges. These surrender charges are generally not a large form of revenue as policyholder surrender rates are
AEGON USA underwrites fixed and variable annuities through its various life insurance companies. Transamerica Capital Inc.
Retirement Management, Inc. (TRM) in 2006. This division is focused on providing consumers with personalized financial advice, brokerage products and guidance to help them successfully transition into and throughout retirement.
TRM helps pre-retirees develop an individual retirement plan that is tailored to be as simple or as detailed as necessary, depending on the growth or retirement income goals and needs of the individual. As of January 2012, this division will be part of Employer Solutions and Pensions.
Transamerica Retirement Services offers fully bundled and partially bundled retirement plan solutions to small and mid-sized employers. These plans are predominantly supported by a group variable annuity product, where plan assets are invested primarily in separate account investment choices, including bond and equity investment choices, and cash equivalent choices. A fixed account cash vehicle may also be available on most plans. The investment choices are selected by the client or by the client’s financial advisor.
Transamerica Employee Benefits offers life, supplemental health and Stop Loss products.
United States primarily to tax-qualified institutional entities such as 401(k) plans and other retirement plans. AEGON
provides a synthetic GIC ”wrapper” around fixed-income invested assets, which are owned by the plan and managed by the plan or a third party money manager hired by the plan.
Diversified Investment Advisors provides a comprehensive and customized approach to retirement plan management, catering to the mid- to large-sized defined contribution, defined benefit and non qualified deferred compensation retirement plans market. Diversified Investment Advisors’
Transamerica Retirement Services offers a number of specialized services, including innovative plan design, a wide array of investment choices, extensive education programs and online investment education.
United States, which are used by companies to decrease the liability of their defined benefit plans. This is a growing market segment as more employers look to reduce the cost and complexity of their pension liabilities, often driven by widespread economic and sector restructuring.
Transamerica Life Canada is AEGON Canada’s principal operating company. It offers a variety of individual life insurance products, predominantly universal life and term life insurance to consumers in the broad middle market.
competitive environment, and to strenghten the focus on the life side of its business.
Seguros Argos’s primary product is a twenty-year term life insurance product. Mongeral’s insurance activities include pension product distribution, individual and group life insurance products, and administrative services. Both insurance companies distribute their products in the worksite market.
This business was put into run-off during 2009. The primary products included guaranteed investment contracts (GICs), funding agreements (FAs) and medium term notes (MTNs).
GICs were generally issued to tax qualified plans, while FAs and MTNs were typically issued to non-tax qualified institutional investors.
AEGON USA utilized consolidated special purpose entities to issue MTNs that are backed by FAs. The proceeds of each note series were used to purchase a FA from an AEGON insurance company, which was used to secure that particular series of notes. The payment terms of any particular series substantially matched the payment terms of the FA that secured that series.
Ireland and was set up for the purpose of issuing MTNs to non-
US investors and investing in a diversified portfolio of eligible assets with the proceeds of the issued notes. AEGON Financial
Assurance Ireland Limited (AFA), another AEGON Ireland entity, provides a financial guarantee for the medium-term notes issued by AGIM.
USA no longer issues these contracts, but continues to administer the closed block of business. These contracts were typically purchased as a result of a lawsuit or a claim and the injured party receives special tax treatment. Rather than paying the injured party a lump sum, the payments were structured as a lifetime annuity with mortality risk, a period certain annuity, or a combination of both.
AEGON USA services life insurance products sold to the bank and corporate owned life insurance (BOLI/COLI) market in the
United States. BOLI/COLI helps institutional customers fund long-term employee benefits such as executive compensation and post-retirement medical plans. The corporation insures key employees and is the owner and beneficiary of the policies. New sales of BOLI/COLI were discontinued in 2010.
The conclusion of the transaction followed the final approval of the relevant regulatory authorities. In addition to allowing the company to concentrate its activities on its core businesses – life insurance, pensions and asset management –
Under the sale agreement, AEGON divested its global life reinsurance activities with the exception of select blocks of business. The retained businesses comprise mainly variable annuity guarantee business.
In the United States, Transamerica and related units deliver traditional life and protection products to a variety of markets, including the lower-middle, middle, upper-middle and affluent markets. The division faces competition from a broad range of competitors, including AIG, Genworth, John Hancock, Lincoln
Benefit, Lincoln Financial and MetLife. The result is a highly competitive marketplace and increasing commoditization in many product categories. In the current environment, AEGON
Most fixed annuity sales occur at banks. AEGON USA’s primary competitors for fixed annuity sales are AIG, New York Life,
AEGON USA competes in the variable annuity marketplace by maintaining an effective wholesaling force, focusing on strategic business relationships and by developing products with features, benefits and pricing that it believes are attractive in that market place. The market has shown a continued interest in guaranteed lifetime withdrawal products, and there is strong competition among providers. AEGON
The top five competitors in the mutual fund market are generally considered to be: American Funds, Fidelity, PIMCO,
Funds, Hartford Financial, Fidelity, and ING. In the single premium group annuity market, AEGON USA’s main competitors are Mass Mutual, Prudential, John Hancock,
RBC Life, Empire Life, Equitable Life, Desjardins Financial and BMO Life.
The AEGON USA insurance companies are subject to regulation and supervision in the states and jurisdictions in which they transact business, maintain offices or otherwise have a business presence. Supervisory agencies in each of those states and jurisdictions have broad powers to do any of the following: grant or revoke licenses to transact business, regulate trade and marketing practices, license agents, approve policy forms and certain premium rates, set reserve and capital requirements, determine the form and content of required financial reports, examine the insurance companies, prescribe the type and amount of investments permitted, levy fines and seek restitution for failure to comply with applicable regulations. The international businesses of AEGON USA are governed by the laws and regulations of the countries in which they transact business, maintain offices or otherwise have a business presence.
Insurance companies are subject to a mandatory audit every three to five years by their domestic regulatory authorities, and every year by their independent auditors. In addition, examinations by non-domestic state insurance departments are conducted, both on a targeted, random or cyclical basis.
States have risk-based capital (RBC) standards for life insurance companies, established by the National Association of Insurance Commissioners (NAIC). The RBC Model Act
insurance companies currently exceed all of the regulatory action levels as defined by the Model Act. Any modifications of these adjusted capital levels by the regulators or rating agency capital models may impact AEGON USA. States previously adopted conservative reserving requirements for term and universal life products that continue to cause capital strain for the life insurance industry. In volatile market conditions, funding for those reserves continues to be challenging.
Act and Regulation to enhance disclosure to regulators about risk exposure to insurers from within their holding company system, for potential adoption by jurisdictions in 2012. Existing insurance holding company statutes and the regulations of each insurer’s domiciliary state in the United States already impose various limitations on investments in affiliates, and require prior approval of the payment of dividends above certain threshold levels by the licensed insurer to AEGON
or its affiliates. The NAIC is also considering, in response to international developments, various other regulatory changes that may impact corporate governance, life insurance reserving and capital standards, and an “Own Risk and
Congress or state governments – that would either impose additional restrictions on the use and disclosure of customer information or would require financial institutions to enhance the security of personal information and impose new obligations in the event of data security breaches. States are considering – as the US Congress may also do again –
June of 2011. While the FIO does not have any direct regulatory authority over US insurers, it does have certain authority to represent the US government in establishing international regulatory standards for insurers, and to represent the US
Bureau, which has the authority to regulate the marketing practices of credit insurance as well as other financial products sold through banks. The Federal Reserve Board has also established certain disclosures relating to credit insurance sold in connection with a bank loan. The activities of the FIO
and other federal agencies under the Dodd-Frank Act may have a significant impact on the capital standards and sale of life insurance and annuities in the United States.
Finally, proposed Federal Reserve Board disclosures regarding credit insurance provided in connection with a loan, if promulgated as proposed, would adversely impact the market for credit insurance.
Exchange Commission (the SEC) and under certain state securities laws. The SEC conducts regular examinations of the insurance companies’ variable life insurance and variable annuity operations, and occasionally makes requests for information from these insurers in connection with examinations of affiliate and third party broker-dealers, investment advisers and investment companies. The SEC and other governmental regulatory authorities, including state securities administrators, may institute administrative or judicial proceedings that may result in censure, fines, issuance of cease-and-desist orders or other sanctions. Sales of variable insurance and annuity products are regulated by the SEC and the Financial Industry Regulatory Authority, Inc. (FINRA, formerly known as the National Association of Securities
Separate account interests under certain annuity contracts and insurance policies issued by the insurance companies are also registered under the Securities Act of 1933, as amended.
companies are registered under the Securities Act of 1933, as amended (the Securities Act), and the Investment Company
Act of 1940 (the Investment Company Act). With the exception of its investment accounts which fund private placement investment options that are exempt from registration, or support fixed rate investment options that are also exempt from registration, all of AEGON USA’s separate investment accounts that fund retail variable annuity contracts and retail variable life insurance products issued by AEGON USA
Investment Advisers Act of 1940. AEGON USA insurance companies and other subsidiaries also own or manage other investment vehicles that are exempt from registration under the Securities Act and the Investment Company Act but may be subject to other requirements of those laws, such as antifraud provisions and the terms of applicable exemptions.
The impact of regulations resulting from these studies cannot be predicted at this time.
insurance products, mutual funds, and other securities, as well as broker-dealers, continues to be under heightened scrutiny and increased regulation in various jurisdictions. Such scrutiny and regulations have included matters relating to so-called producer compensation arrangements, suitability of sales, selling practices, unclaimed property reporting, revenue sharing, and valuation issues involving mutual funds and life insurance separate accounts and their underlying funds.
AEGON USA companies, like other businesses in the financial services industry, have received inquiries, examinations, and requests for information from regulators and others relating to certain AEGON USA companies’ historical and current practices with respect to these and other matters. Some of those inquiries have led to investigations, which remain open or have resulted in fines, corrective actions or restitution.
AEGON USA companies continue to cooperate with these regulatory agencies. In certain instances, AEGON USA
Since 2004, there has been an increase in litigation across the industry, new legislation, regulations, and regulatory initiatives aimed at curbing alleged improper annuity sales to seniors.
As many of the estimated 77 million baby boomers are reaching the age of 60, the industry will likely see an increase in senior issues presented in various legal arenas. In addition, certain industry practices in respect of market conduct have been the subject of investigations by various state regulators.
With the significant decline in financial markets in late 2008 and early 2009, management expects there will be further regulation and litigation which could increase costs and limit
Some of AEGON USA companies offer products and services to individual retirement accounts, pension and welfare benefit plans that are subject to the federal Employment Retirement
(IRS). Accordingly, the DOL and IRS have jurisdiction to regulate the products and services sold by these AEGON USA
In an attempt to increase the number of workers covered by a retirement savings plan, several states have or are considering legislation that would permit non-governmental workers to join the state government workers retirement plan or a similar governmental plan. If enacted, this legislation could impact the products and services sold by some of AEGON USA companies to private employers in those states.
Proposals to remove or decrease the value of these tax preferences – both in and of themselves and relative to other investment vehicles – are debated periodically in the US
Congress. This risk is heightened when Congress seeks additional revenue needed to reduce the federal deficit.
The economic crisis of 2008 has resulted in proposals for regulatory reform of the financial services industry, both in the US and around the world. The Dodd-Frank Act generally leaves the state insurance regulatory system in place, but creates a Federal Insurance Office in part to represent the US
In addition, legislative and regulatory proposals are considered from time to time relating to the disclosure and nature of fees paid by defined contributions plans and participants in those plans for services AEGON USA companies provide to those plans, as well as the nature of education, advice or other services AEGON USA companies provide to defined contribution plans and participants in those plans. Finally, as noted above, proposals to change the structure, remove or decrease the US federal tax preferences of pension and annuity products, either as part of tax reform or pursuant to deficit reduction, would directly impact the cost and competitiveness of pension and annuity products and pension services sold to ensure Americans’ financial retirement security. AEGON USA companies also provide plans used to administer benefits distributed upon termination of defined benefit plans.
AEGON’s supplemental products. One component of the new law, the Community Living Assistance Services and Support program (CLASS Act) has been withdrawn by the Department of Health and Human Services. The CLASS program could have had an adverse impact on the private LTC insurance market.
Many other federal tax laws affect the business in a variety of ways. At the end of 2010, the US congress reinstated the federal estate tax rate at 45% for those estates over
USD 5 million. This will expire at the end of 2012. As a result, uncertainty remains in this area. AEGON believes a permanent repeal of the federal estate tax would have an adverse impact on sales and surrenders of life insurance in connection with estate planning.
The life insurance operations of Transamerica Life Canada are also governed by policy statements and guidelines established by the Canadian Life & Health Insurance Association.
The key investment strategy for traditional insurance-linked portfolios is asset/liability management, whereby predominately high-quality investment assets are matched in an optimal way to the corresponding insurance liability.
USA’s investment personnel are highly skilled and experienced in these investments.
AEGON USA regularly monitors the creditworthiness of its reinsurers. AEGON USA has experienced no material reinsurance recoverability problems in recent years. Where appropriate, the company arranges additional cover through letters of credit or trust agreements. Availability of letters of credit or other financing mechanics are scarce in difficult financial markets. For certain agreements, funds are withheld for investment by the ceding company.
The AEGON USA insurance companies also enter into contracts with company-affiliated reinsurers, both within the United States and overseas. These contracts have been excluded from the company’s consolidated financial statements.
In the normal course of business, TLC reinsures part of its mortality and morbidity risk with third-party reinsurers. The maximum life insurance exposure retained is CAD 1.25 million per life insured.
Net income from AEGON’s businesses in the Netherlands decreased to EUR 419 million. This decrease was mainly a result of a decline in fair value items, primarily guarantees net of related hedges, to EUR 156 million and other charges of
Commissions and expenses increased by 6% in 2011. Operating expenses increased 10% to EUR 823 million in 2011, mainly as a result of restructuring charges and investments in the further development of a new online banking proposition.
In 2011, AEGON initiated actions to make its business in the
The reorganization program and other initiatives are aimed at reducing the cost base by approximately 20% or EUR 100 million in comparison to the cost base for 2010.
EUR 27 million and benefited from stronger sales in income insurance products. General insurance production also increased 4% to EUR 27 million driven by increased sales for the Motor and Fire segments of the market.
Gross deposits decreased 14% to EUR 2.0 billion. The decline is a combination of less competitive interest rates on savings accounts offered and the transfer of third-party pension deposits to AEGON Asset Management as of the second quarter of 2011.
Share in underlying earnings before tax of associates (3) (1) –
successfully utilized its leading position in the Dutch pension market to secure a number of sizeable group pension contracts during the year. Individual life sales were level at
AEGON reported EUR 2.4 billion of gross deposits for 2010, a decrease of 31% compared with 2009 as a result of lower savings deposits. Net deposits turned negative for the year as a result of higher outflows from savings accounts due to lower interest rates offered on savings accounts.
�� Life & Savings increased to EUR 186 million as improved margins on savings account balances were only partly offset by a loss of underlying earnings before tax due to the sale of the funeral insurance business.
EUR 153 million, mainly as a result of lower investment income.
AEGON has a history in the Netherlands that dates back more than 150 years. Today, AEGON The Netherlands 1 is one of the country’s leading providers of life insurance and pensions, with millions of customers and approximately 5,000 employees. The fully owned Unirobe Meeùs Group is one of the largest intermediaries in the Netherlands. AEGON The Netherlands has its headquarters in The Hague and offices in Leeuwarden and Groningen.
1 Throughout this report, “AEGON The Netherlands” refers to all AEGON companies operating in the Netherlands.
AEGON The Netherlands provides a variety of individual savings products and a range of life insurance and personal protection products and services, including traditional, universal and term life. Life and savings is the largest line of business of AEGON The Netherlands, based on underlying earnings before tax.
The accumulation products pay benefits on the policy maturity date, subject to survival of the insured. In addition, most policies also pay death benefits in the event of death of the insured during the term of the contract. The death benefits may be stipulated in the policy or depend on the gross premiums paid to date. Premiums and amounts insured are established at inception of the contract. The amount insured can be increased as a result of profit sharing, if provided for under the terms and conditions of the product.
In September 2011, AEGON The Netherlands announced a restructuring plan that will result in a loss of 300 positions as part of previously announced strategic plans to reduce the size and costs of the Dutch business. This plan was also aimed at increasing the flexibility and strength of the organization.
EUR 100 million as compared to its costs in 2010. Most of the cost savings are expected to be achieved during 2012.
Netherlands operates through a number of other brands, including TKP Pensioen, OPTAS and Meeùs.
Term life insurance pays out death benefits in the event of death of the insured during the term of the contract. Whole life insurance pays out death benefits in the event of death, regardless of the timing of this event. Premiums and amounts insured are established at inception of the contract and are guaranteed. The amount insured may be adjusted on request of the policyholder. In principle, term life insurance policies will not include profit sharing arrangements. Part of the portfolio of whole life insurance has profit-sharing features, which are based on external indices or return of related assets.
Interest rebates are given on both single and regular premium annuity insurance, and may be based on a portfolio of Dutch government bonds, although other calculation bases are also applied. There are also profit sharing schemes set by reference to external indices that are based on pre-defined portfolios of
These products have a minimum benefit guarantee if premiums are invested in certain funds. The initial guarantee period is ten years.
Tontine plans in the Netherlands are unit linked contracts with a specific bonus structure. Policyholders can choose from several AEGON funds to invest premiums paid. The main characteristic of a tontine system is that at the death of the insured, the balance is not paid out to the policyholder’s estate, but is distributed at the end of the year to the surviving policyholders of the specific series to which the deceased policyholder belonged. When the policyholder dies before maturity, AEGON The Netherlands pays a death benefit.
Different types of residential mortgage loans are offered: interest-only, savings and unit-linked. Customers may also combine the different types in their own mortgage.
Savings accounts are offered which allow customers to retain flexibility to withdraw cash with limited restrictions. In addition deposit accounts are offered with a pre determined maturity.
Banksparen is a saving product for which amounts are deposited on a blocked account, exempt from capital gains tax.
Life and savings products are sold through AEGON’s intermediary channel and AEGON Bank. The Levensloop contracts offered by large organizations to their employees are sold through AEGON’s Corporate & Institutional Clients sales organization.
Pensions provides a variety of full service pension products to pension funds and companies. In 2011, it accounted for approximately 30% of the AEGON The Netherlands total underlying earnings before tax.
For most large companies and some small and medium-sized enterprises, AEGON The Netherlands provides defined benefit products for which profit sharing is based upon a pre-defined benchmark. Benefits for these products are guaranteed.
Premium levels are fixed over the contract period and the longevity risk lies with AEGON The Netherlands. Minimum interest guarantees are given for nominal benefits, based on 3%
actuarial interest (4% on policies sold before the end of 1999).
Non-life consists of general insurance and accident & health insurance. In 2011, Non-life accounted for approximately 2%
AEGON The Netherlands offers general insurance products in both the corporate and retail markets. They include house, inventory, car, fire and travel insurance.
AEGON The Netherlands offers a limited range of non-life insurance products through the AEGON intermediary channel and the direct channel through AEGON Bank and partnerships
Institutional Clients also provides products for larger corporations in the Netherlands.
AEGON The Netherlands offers financial advice, which includes selling insurance, pensions, mortgage loans, financing, savings and investment products. Unirobe Meeùs Group is the main distribution channel owned by AEGON The Netherlands.
Netherlands, comprising both pensions and life insurance, is very concentrated. The top six companies account for approximately 90% of premium income in the Netherlands
(Source: DNB Supervision Returns 2010). In the pensions market, AEGON The Netherlands ranks first, based on gross premium income in 2010. In the individual life insurance market AEGON The Netherlands takes sixth place, based on gross premium income 2010, behind ING, SNS Reaal, Eureko,
and ABN AMRO are the largest parties in the mortgage loan market (Source: Kadaster). AEGON The Netherlands is currently the largest insurance company in this market. In the savings segment, AEGON The Netherlands holds approximately 2% of the savings of Dutch households and is small compared to banks like Rabobank, ING, ABN AMRO and
Several changes in regulations in recent years have limited opportunities in the Dutch insurance market, especially in the life insurance market (e.g. company savings plans and premiums of certain products are no longer tax deductible).
Two institutions are responsible for the supervision of financial institutions in the Netherlands: �� De Nederlandsche Bank (the Dutch Central Bank) or DNB.
Supervision of the Financial System). This law pertains equally to banking and insurance operations and introduced a greater degree of consistency in both requirements and supervision.
The AFM supervises the conduct of and the provision of information by all parties on the financial markets in the
Separate licenses are required for each of the insurance company’s branches in which it conducts business. The regulatory body that issued the license (DNB) is responsible for monitoring the solvency of the insurer.
AEGON Bank N.V. falls under the supervision of the DNB and must file monthly regulatory reports and an Annual Report.
accord, the new regulatory framework for the banking sector, has been finalised and is currently being translated into
European legislation through the CRD IV framework. When finalized, the CRD IV framework will be implemented in the
The investment strategy of AEGON The Netherlands is determined and monitored by the AEGON The Netherlands
Most (insurance) liabilities of AEGON The Netherlands are nominal and long-term. Based on their characteristics, a longterm liability-driven benchmark is derived. Scenarios and optimization analyses are conducted with respect to the asset classes fixed income, equities and real estate. Various subclasses such as commodities, hedge funds and private equity are also included in the analyses. The result is an optimal asset allocation representing different investment risk-return profiles. Constraints such as the minimum return on equity and the maximum solvency risk also determine alternative strategic asset allocations. Most of AEGON The Netherlands’
investments are managed by AEGON Asset Management. For certain specialized investments, such as hedge funds and private equity, AEGON The Netherlands hires external
managers. Portfolio managers are allowed to deviate from the benchmark based on their short-term and medium-term investment outlook. Risk-based restrictions are in place to monitor and control the actual portfolio allocations compared to their strategic portfolio allocations. An internal framework limits investment exposure to any single counterparty.
Netherlands reinsures part of its insurance exposure with third-party reinsurers under traditional indemnity, quota share, and in some instances, “excess of loss” contracts. Reinsurance helps AEGON manage, mitigate and diversify its insurance risks and limit the maximum loss it may incur on risks that exceed policy retention limits.
AEGON The Netherlands remains contingently liable with respect to the amounts ceded, should the reinsurance company not be able to meet the obligations it has. To minimize its exposure to such defaults, AEGON The Netherlands regularly monitors the creditworthiness of its primary reinsurers.
AEGON The Netherlands has experienced no material reinsurance recoverability problems in recent years. Where appropriate, additional reinsurance protection is contracted either through letters of credit or, alternatively, through trust arrangements. Under certain conditions of these arrangements, funds are withheld for investment by the ceding company.
Any amount in excess of this is transferred to the reinsurer.
As of January 1, 2012, AEGON The Netherlands has ended this reinsurance contract and therefore retains the full death and disability risk.
Income before income tax on shareholders return (97) 19 – (112) 22 –
Earnings from AEGON’s operations in the United Kingdom were impacted by charges and expenses related to the customer redress program and restructuring charges related to a program to reduce operating expenses in the company’s Life & Pension businesses by 25%.
Net income amounted to a loss of GBP 45 million, mainly as a result of lower underlying earnings before tax and charges of
GBP 61 million, primarily driven by higher charges and expenses related to the customer redress program.
�� Earnings from Life increased to GBP 86 million, mainly as a result of one-time benefits related to the annuities business and a curtailment gain related to changes to the employee pension plan (GBP 8 million). In addition, the effect of cost reductions contributed to the increase.
Investments related to the development of AEGON’s new pension proposition amounted to GBP 26 million.
�� Distribution recorded a loss of GBP 6 million, comparable with the loss in 2010.
Income before income tax on shareholders return 19 (21) – 22 (24) –
which includes operating expenses of 390 413 (6%) 456 463 (2%)
Higher underlying earnings before tax and significantly lower impairments during the year more than offset a decline in fair value item results and lower realized gains on investments. Net income in 2010 also benefitted from tax credits, in particular a
Underlying earnings before tax from AEGON’s businesses in the United Kingdom increased 30% to GBP 61 million during 2010, as a result of growth of the business and improved financial markets.
2010 results included a GBP 25 million customer redress charge (2009 GBP 38 million).
to GBP 907 million. Higher sales of pensions and retirement products were offset by a planned decrease in sales of immediate annuities following repricing. Sales during 2009 included existing AEGON group personal pension business which was transferred internally to new group pension contracts. AEGON decided in 2010 not to include these rewrites as part of new business reporting. The company believes that the exclusion of such rewrites provides a clearer indication of new premium secured.
In the UK, AEGON is a leading provider of life insurance and pensions, and it also has a strong presence in the asset management market, through Kames Capital business unit, and in financial advice markets, through its owned adviser companies Origen and Positive Solutions. AEGON UK has some two million customers, around 3,000 employees and GBP 51 billion in revenue‑generating investments. AEGON UK’s main offices are in three locations: Edinburgh, London and Lytham St. Annes.
In all, there are an estimated 30,000 registered financial advisors in the United Kingdom. These advisors may be classified as “single-tied”, “multi-tied”, “whole of market”
(ISAs), investment bonds and other tax wrappers, It provides access to a wide range of investments and is focused on providing income solutions to customers who are planning their retirement. It allows customers to plan for the future, prepare for retirement, take an income and adapt to changing circumstances while in retirement. AEGON UK plans to launch a platform to meet the savings needs of employers and employees in 2012.
In 2011, AEGON UK successfully completed a restructuring of operations in the United Kingdom which reduced operating costs by 25 percent and refocused the business on two core markets – At Retirement and Workplace Savings. Both these markets present opportunities for growth and are markets where AEGON has a heritage of expertise. In November 2011,
Retirement Choices, which it believes will enable it to achieve growth in the At Retirement and Workplace Savings markets as the UK market develops following the regulatory changes brought about by the Retail Distribution Review and by pensions reform.
AEGON UK is organized into two distinct businesses: �� AEGON life and pensions, which provides pensions, annuities, investments and protection products for people and companies.
The AEGON UK life business comprises primarily individual protection and individual annuities. The protection business provides insurance for individuals against death or serious illness, as well as providing business protection. Annuities are used to convert savings accumulated as part of a pension plan into a regular income throughout retirement.
Individual protection and annuity products are distributed through intermediated advice channels.
AEGON UK provides a full range of personal and corporate pensions. The company also offers investment products, including onshore and offshore bonds, and trusts.
AEGON UK provides a wide range of personal pensions as well as associated products and services. These include: �� Flexible personal pensions.
�� Stakeholder pensions (a type of personal pension specific to the United Kingdom which has a maximum limit on charges and low minimum contributions).
As an alternative to annuities, AEGON UK also offers “Income for life”, a new retirement solution which bridges the gap between annuities and income drawdown products. It offers customers a guaranteed income for life, plus continued control over their investments up to age 75.
AEGON Retirement Choices (ARC) was launched in November 2011. ARC enables advisers and their customers to plan for retirement efficiently and effectively through a technology driven platform. The leading edge technology that AEGON
has employed delivers an intuitive method of saving for retirement, taking income in retirement and dealing with changing circumstances. It also provides valuable online reporting and lifestyle tools that enable advisers to demonstrate their professionalism and display their advice charges in a completely transparent way. These are the three main principals of the Retail Distribution Review (RDR) which will come into effect on January 1, 2013.
As a result of this trend, the market for new DB plans has shrunk dramatically in recent years, largely because of concerns over long-term liabilities. There are, however, opportunities for AEGON UK to take on the administration and management of existing plans.
AEGON UK also offers a group “SIPPs” designed to extend to group pension customers the benefits associated with individual SIPPs, such as greater investment choice.
The onshore bond is a type of life contract, aimed primarily at pre- and post-retirement customers looking for either a source of income or a way of growing their savings. The bond offers a wide range of investment options and funds, managed by some of the world’s leading asset managers.
While the onshore bond is aimed at a mass affluent market,
There is also a range of trusts designed to support inheritance tax planning. This is an area of growing demand as recent economic growth and rising wealth means more estates are falling under UK Inheritance Tax. Trusts help individuals manage and alleviate potential tax liabilities.
Ireland plc), and a guaranteed version of the income drawdown pension, which also provides a guaranteed income for life.
Investment products as well as individual and corporate pensions are distributed widely through independent financial advisors, tied distribution and, more recently, through partnerships with banks. In addition, AEGON UK also maintains close relations with a number of specialist advisors in these markets.
Through the company’s Origen and Positive Solutions businesses, AEGON UK also provides financial advice directly to both individuals and companies.
AEGON UK faces competition in each of its markets from two main sources: life and pension companies and financial advice firms.
Over the past few years, the life and pension market has been increasingly concentrated among the largest companies and those perceived to be financially strong.
The financial advisor market in the United Kingdom is fragmented, with a large number of relatively small firms.
Financial Services Authority Retail Distribution Review, which will radically change the advisory business models. Even so, fragmentation remains high. There are few firms with a genuine nationwide presence or a well-known brand outside specific local areas.
undertaking particular roles (e.g. finance/actuarial, fund managers, dealers, and salesmen) have responsibilities to the
Financial Services Authority as “Approved Persons”. As such, they are subject to rigorous pre-appointment checks on their integrity and competence, and are subject to ongoing supervision throughout their mandate as “Approved Persons”
For its with-profit business, AEGON UK’s general philosophy is to match guarantees with appropriate investments. However, the nature of with-profit businesses typically prevents perfect matching, and the role of the committee is therefore to monitor the capital implications of any mismatching. On an annual basis, detailed reports are produced for the relevant subsidiary Boards covering the impact of a range of possible investment scenarios on the solvency of each of the funds.
Board of AEGON UK. In respect of non-profit business, interest rate risk arises substantially on AEGON UK’s large book of annuities in payment. Assets are purchased to provide a close expected match to liability outflows, with regular reporting to the MIC on the capital implications of any mismatching.
For unit-linked business, the matching philosophy results in close matching of the unit liabilities with units in the relevant underlying funds. A proportion of the unit-linked assets is invested in funds managed by external investment managers.
An investment committee, which reports to the relevant subsidiary Boards, meets regularly to monitor the performance of the investment managers against fund benchmarks.
The invested assets, insurance and investment contract liabilities of AEGON UK’s with-profit funds are included in
“for account of policyholder assets and liabilities”. Assets and liabilities are always equal as any excess of assets over liabilities in respect of guaranteed benefits and constructive obligations are classified as an insurance or investment contract liability. The Scottish Equitable with-profit fund is a 100:0 fund, where all benefits are held for participating policyholders.
The operation of with-profit funds is complex. What is set out below is a brief summary of AEGON’s overall approach: GUARANTEES
“5 for Life” (which are written by AEGON Ireland plc), and the product guarantees within Investment Control and Income for
’policyholder-owned’ funds (otherwise called with-profit funds). These funds contain “free assets”, which, as yet, have not been fully distributed to individual policyholders. “Free assets” help meet the cost of guarantees and provide a buffer to protect the fund from the impact of adverse events.
AEGON UK has an exposure only once these assets have been exhausted. As outlined below, AEGON believes this exposure to be low.
The results of the with-profit funds’ investment performance is distributed to policyholders through a system of bonuses which depend on: �� The guarantees under the policy, including previous annual bonus additions.
�� The investment returns on the underlying assets, with an allowance for smoothing to reduce volatility. Although smoothing means that investment profits are spread from one year to the next, the aim is to pay out all of the investment profits earned by the fund over the long term.
On early withdrawals there are other measures to ensure that a fair share of total fund growth has been received.
AEGON UK to be remote based on applying the risk-based capital approach now required for solvency reporting in the
As all of AEGON UK’s with-profit funds are now closed to new business with investment guarantees, the process has begun of gradually distributing free assets to with-profit policyholders through the bonus system outlined above. Part of the management of this process involves endeavoring to ensure that any surpluses in the with-profit fund from other (historic)
business lines can be distributed to existing with-profit policyholders at a suitable rate. This helps avoid a tontine effect building up in the fund, as the number of with-profit policyholders declines.
AEGON UK’s reinsurance strategy is aimed at limiting overall mortality and morbidity volatility managing risk and maximizing the financial benefits that reinsurance can bring.
The actual percentage of business which is reinsured of course varies, depending chiefly on the appropriateness and value of reinsurance available in the market.
AEGON UK prefers to work only with reinsurance companies that have a strong credit rating subject to an economic assessment of the terms on offer. Using a reinsurer with a credit rating below AA requires the approval under AEGON
Gross deposits (on and off balance) Amounts in EUR million 2011 2010 %
increased to EUR 66 million as a result of business growth in Spain and the inclusion of earnings from Caixa Sabadell
EUR 9 million as growth of the business was offset by a true up of deferred policy acquisition cost and unfavorable currency movements. In addition, earnings in 2010 included a one-time benefit of EUR 5 million.
�� Earnings from AEGON Asset Management increased 30% to EUR 60 million for the year as a result of higher performance fees and cost savings.
Vida offset lower production at one of our distribution partners in Spain.
Net income from AEGON’s operations in New Markets declined 8% to EUR 84 million as higher underlying earnings before tax and lower other charges were more than offset by lower results on fair value items and higher impairment charges. Results on fair value items amounted to EUR (29)
The increase is mainly a result of higher underlying earnings from AEGON Asset Management.
Europe - and to a lesser extent Asia - was more than offset by a decline in Spain. Strong single premium production in the bank channel in Poland, continued growth in Hungary and a successful shift from pensions to life insurance in Turkey contributed to the 26% growth in new life sales in Central &
Eastern Europe. Sales in Asia increased 6% as a result of growth in both China and India, while the decrease in Spain was mainly due to lower sales from AEGON’s partnership with CAM.
Gross deposits rose to EUR 9.1 billion, mainly as a result of strong growth in AEGON Asset Management. The main reason for the 2010 net deposits of EUR 3.9 billion was new asset management mandates, but all units contributed and experienced net inflows.
Net income in 2010 included a charge related to the Hungarian pension legislation changes of EUR 23 million and EUR 19 million related to bank tax in Hungary.
Asset Management, which added EUR 46 million in underlying earnings before tax to New Markets.
EUR 39 million as a result of continued investments in the company’s joint ventures in China, India and Japan.
�� Variable Annuities Europe turned to profit during the year and contributed EUR 11 million as a result of continued growth of the business.
AEGON first entered the Central & Eastern European market in 1992 when the Group bought a majority stake in Hungary’s former state‑owned insurance company, Állami Biztosító. Hungary remains AEGON’s leading business in the region and a springboard for further expansion. Today, AEGON has operations in six Central & Eastern European countries: the Czech Republic, Hungary, Poland, Romania, Slovakia and Turkey.
The main guarantee in Hungary is variable crediting rates with minimum interest guarantees between 0% and 4% for universal life type products, plus 100% participation in actual interest earned. Traditional non-profit share products have 5.5% technical interest rates, but this is an insignificant block of business. Profit share products have a 2-4% technical interest rate and 85% participation in excess interest.
Similar products are sold in the Czech Republic and Slovakia with an announced interest guarantee of 2% and 1.5%
The profit-share product portfolio in Turkey has a guaranteed interest rate of 9% for Turkish Lira products that are closed to new business and 2% for those introduced in 2010. For foreign currency products, the guaranteed interest rate is 2.5% for the old portfolio and varies between 2% - 3.75% in case of new products introduced after the acquisition of the company in 2008. A minimum of 85% of the interest income in excess of guaranteed return is credited to policyholders’ funds in Turkey.
Through online channels AEGON sells mainly household and car insurance. Banks and loan centers are used to sell mainly life insurance, mortgages, mutual funds and household insurance.
Turkey. It includes mainly index life products that are not unitlinked but have guaranteed interest rates. Group life and preferred life are also part of traditional life insurance.
Central & Eastern Europe (CEE) region. The majority of the unit-linked portfolio (around 50%) was written in Poland, around 30% of the portfolio was written in Hungary and there are also some smaller unit-linked portfolios in the Czech
AEGON Hungary Composite Insurance Company. In the last two years, the mortgage lending shifted toward lending in
September 2011, was the introduction of the possibility for debtors having mortgage loans denominated in foreign currency of redeeming the outstanding loan amount at fixed, below market exchange rate and thus forcing the financial institutions to suffer the financial loss resulting from the difference of the fixed and current market exchange rates.
In four of the six CEE countries in which AEGON has businesses, AEGON has introduced mandatory private pension plans: Hungary, Slovakia, Poland and Romania in the past.
Additionally, at the end of 2011, AEGON had voluntary pension plans in three countries: Hungary, the Czech Republic and
Slovakia, as well as the voluntary pension fund in Hungary, are among the largest in their countries in terms of both membership and assets under management 1. As of December 2011, AEGON had a total of 1.7 million pension fund members in the CEE region.
The Hungarian pension legislation changes enacted at the end of 2010 had a significant impact on the private (formerly mandatory) pension system. One of the most important measures was that private pension members had been required to make their choice as to whether they wish to stay at private pension funds (under the condition that they lose the entitlement to state pension related to employment years following the end of 2011) or if they opt out of the private pension funds, transferring their accumulated savings to the state held pension system. As a result, approximately 3% of the members decided to remain enrolled in the private pension system and the rest (97%) stepped back to the state pension.
pension funds only on a voluntary basis. Additionally, the members may decide to return back to the state driven pension system till the end of March 2012.
In 2011, AEGON announced the withdrawal from the voluntary pension business in Slovakia.
funds need to be transformed and can continue operating in a new form as of 2013. Also, Pillar II was introduced by the new legislation enacted at the end of 2011.
total premium income, it is the fourth largest in Hungary. In terms of regular premium income AEGON is the second largest in the same period. (Source: Hungarian Insurance Association, www.mabisz.hu). Also based on the first nine months’ premium income, AEGON is the fourth largest on the Hungarian non life insurance market (Source: Hungarian Insurance Association, www.mabisz.hu). AEGON is also a significant market player on the Polish market, ranked as seventh based on the unit-linked products in September 2011 (Source: www.knf.gov.pl) based on gross written premiums. As AEGON Slovakia was incorporated in 2003, AEGON Czech Republic in 2004 and AEGON Romania in 2008 only, AEGON is not a significant player in these countries, just like AEGON’s business in Turkey that was acquired in 2008.
was ranked third both in terms of the number of members and in terms of its managed assets in June 2011. (Source: www.pszaf.hu). In terms of managed assets AEGON was ranked fifth on the Slovakian private pension market in December 2011
Companies). In Poland, AEGON is ranked sixth in terms of the number of members and eighth in terms of its managed assets in December 2011. (Source: www.knf.gov.pl). As of December 31, 2011, on the Romanian mandatory private pension market,
In Central & Eastern Europe, insurance companies can be licensed only for separate businesses; that is, a single company can conduct either life insurance or non-life insurance but not both together. However, in Hungary, insurance companies established before 1995, including
State supervision and oversight of the insurance industry is conducted by the following bodies and institutions: �� the Hungarian Financial Supervisory Authority (HFSA); �� the National Bank of Slovakia; �� the Czech National Bank; �� the Polish Financial Supervisory Authority (PFSA); �� the Insurance Supervisory Commission (CSA) (Romania); and
In addition to legal regulation, insurance companies are subject to a number of self-regulatory groups in their respective countries. These self-regulatory groups are the main forums for discussion among insurance companies.
Pension System Supervisory Commission (CSSPP) and the mandatory pension system is subject to Act 411/2004 on
Enterprises (CXII. 1996.) regulates the foundation, operation and reporting obligations of all the country’s financial institutions (including AEGON Mortgage). In addition,
The investment strategy and the asset liability management of the CEE region is overseen within AEGON by the Regional Risk and Capital Committee that meets on a quarterly basis.
AEGON CEE’s asset liability management focuses on asset liability duration calculations and liquidity. The performance of portfolios against benchmarks is also being evaluated during these meetings.
AEGON takes out reinsurance for both its life and its non-life businesses in Central & Eastern Europe. This strategy is aimed at mitigating insurance risk. AEGON’s companies in the region work only through large multinational reinsurers, which have well-established operations in the region in accordance with the AEGON Reinsurance Use Policy. For short tail business
�� Motor third party liability excess of loss treaty (EUR 0.4 million).
�� Property per risk excess of loss treaty (EUR 1.1 million).
Since January 2011, AEGON adopted a new organizational structure for its operations in Asia. Whereas in the past, a number of AEGON’s businesses in Asia were managed from the US, under the new structure all Asian based insurance businesses are managed as one regional division headquartered in Hong Kong. The aim is to leverage product and distribution expertise, capture efficiencies, and pursue organic growth of AEGON’s franchise in Asia. The integration will be carried out in 2011 and 2012, in line with AEGON’s strategy to achieve a greater geographical balance in favor of those regions and markets that offer higher growth and returns in the longer-term. Financial reporting reflecting the new organizational structure will start in 2012.
In China, AEGON sells its products via multiple distribution channels like agents, independent brokers, banks, direct marketing and the group channel. The agency channel mainly sells regular premium participating endowment and critical illness products. The key product of bancassurance channel is regular premium participating endowment, telemarketers mainly sell return of premium products and the popular products in the brokerage channel are return of premium,
Since 2003, AEGON-CNOOC has been steadily extending its network of offices and businesses in China. It now has licenses in Shanghai, Beijing, Hebei, Jiangsu, Shandong, Qingdao,
Enterprises Limited. This partnership began operations as a joint venture named AEGON Religare Life Insurance Co. Ltd.
Religare has a pan-India distribution footprint with 118 branches, across 84 cities and 23 states and has issued more than 200,000 policies.
(AEGON Sony Life) will initially focus on variable annuities sales in Japan, but the agreement also provides a platform for further cooperation between AEGON and Sony Life. The joint venture received its insurance license in Japan in August 2009 and its operations were launched on December 1, 2009. To date, the joint venture has signed up with one “mega bank”
and six regional banks as distribution partners as well as Sony
Reinsurance Ltd (SA Re), to provide AEGON Sony Life relief from applicable reserve and capital requirements. Access to such offshore reinsurance will allow AEGON Sony Life greater flexibility in the pricing and product design of its variable annuity products. SA Re was established during late 2009 and received its Bermuda insurance license in January 2010. The
Bermuda based reinsurance company is set up with Sony Life to hedge the guarantees of AEGON Sony Life’s annuities. SA
now has partnerships in place with several of China’s national banks including Industrial and Commercial Bank of China,
December 31, 2011 was in excess of 11,000. In addition, AEGON
brokers, and iv) to some extent via co-operative banks. Existing products are tailored to meet the specific customer requirements. There is focus on the gradual development of the on-line business by offering a protection and linked product online. AEGON Religare has been the pioneer for the launch of on-line protection business through its i-Term product.
AEGON’s joint venture partner, and the other is the bank distribution channel. Life planner began operations on
AEGON Sony Life launched a partnership with one of the largest national mega banks in February 2010 and intends to add other bank partners going forward. Bancassurance is expected to become an increasingly important channel in
In China AEGON-CNOOC’s agency channel mainly sells regular premium participating endowment and critical illness products while regular premium participating endowment product is key product for the bancassurance channel. Telemarketers mainly sell return of premium products and the popular products in the brokerage channel are return of premium, participating endowment and critical illness products.
AEGON Religare started operations with the launch of three term assurance and three unit-linked insurance plans (ULIPs).
ULIP products, the sale of the existing ULIPs had to be discontinued by the end of August 2010 and new ULIP
(including two group policies and one on-line), three traditional individual participating products, one traditional pension participating product, one traditional non-participating product, seven ULIP products (including one on-line), one group unit linked (group gratuity) product and a health product.
SA Re reinsures all minimum guarantees offered on the variable annuity products from AEGON Sony Life, including
GMAB, GMSB and GLWB. SA Re has been writing reinsurance contracts in relation to AEGON Sony Life guarantees since
As of December 31, 2011, AEGON Religare is selling a health product with the same nature as a “defined benefit” product
As most life insurers do not like to see the “unbalanced”
Many small and medium-sized life insurers are also developing broker channels, including, Happy Life, Sino Life, Greatwall
(2010-11) together with a shift towards non-linked products after the new regulatory changes effective as of September 1, 2010 with respect to pricing of unit linked products. The first year premium which is a measure of new business secured by the life insurers during 2010-11 was INR 1,264 billion as compared to INR 1,099 billion in 2009-10 registering a growth of 15%. In terms of linked and non linked business during the year of 2010-11, 37.4% of the total premium was underwritten in the linked segment while 62.6% of the business was in nonlinked segment (43.5% and 56.5% respectively in 2009-10).
(41.4% in 2009-10). During 2010-11, the growth in renewal premium was 6.2% (15.7% in 2009-10) (Source: IRDA Annual
The fall can be attributed to a drop in new business premium collection, down 22% in the same period. However, for the same period, the renewal premium collection grew 17% to around INR 736 billion, compared to around INR 628 billion in the corresponding period last year (Source: Article related to
The top five life insurance companies control 72.8% of the market, while the foreign life insurance companies occupied 4.0%, i.e. RMB 38.6 billion of total premium (Source: China
Channel contributions to the APE production ranked in the following order: bancassurance, brokerage, direct marketing, agency and group.
Life (Bank of Beijing). So far, these companies are slightly affected by regulator’s strict requirements on bancassurance business in 2011.
introduced various new circulars and guidelines to better protect policyholders and supervise bancassurance business of commercial banks and ensure both insurers and banks act prudently.
AEGON Religare has been making a steady progress in the vastly competitive Indian insurance market by striving to drive growth through the branches set-up, launching innovative products, building upon the third party distribution network through new alliances. Being the pioneer in the country for on-line protection product, the Company is working the on-line model for better offering.
The size of the VA market for the first three quarters 2011 was about JPY 0.4 trillion, which is about half the size of the previous year of JPY 0.9 trillion, and only 10% of the peak market size (Source: Website of Life Insurance Association of
At the end of September 2011, Allianz, one of the major players in GMAB announced its termination of new business from 2012. Although overall insurance savings market size is relatively stable, large part of the share was taken by SPWL in these two or three years. As fixed annuity (FA) market size is more or less stable, the VA market is now facing severe challenge. There are only ten active players in the VA market and AEGON Sony Life Insurance Co’s (ASLIC) position in
promotes consumer protection, sets the regulation of premium rates and reserve requirements, and has the right to investigate the financial position and solvency of the life insurers.
In 2011, in the field of business management, CIRC regulated operating behavior of bancassurance business and regulated agent qualification, operation rules, agency fee, sales methods, sales behavior, financial accounting and emergency mechanisms. In the field of corporate governance, CIRC
(CBRC) and CIRC introduced various new circulars and guidelines to better protect policyholders and supervise bancassurance business of commercial banks and ensure both insurers and banks act prudently.
IRDA introduced certain regulatory changes in 2011, major among them are the guidelines on outsourcing of activities by insurance companies (February 2011), distance marketing and web aggregator guidelines (October 2011), health insurance portability (October 2011) and IPO (initial public offering)
The Financial Services Agency (FSA) in Japan is the government agency supervising all insurance companies in the country. All new products or major amendments require a filing with and approval from the FSA. The standard examination period for approval is 90 days (60 days for minor changes). General policy provisions, statements of business procedure, pricing and valuation require approval. The FSA
A monthly asset liability management meeting is held to monitor duration and liquidity management. The duration of liabilities and assets are calculated separately by block and the duration-gap is analyzed. Considering that most insurance liabilities are single-pay products with benefit term ten years or less, AEGON-CNOOC purchased corporate bonds, government bonds, and statutory deposits to match this liability while operating funds are invested in the short-term bond, money-market fund and bond repurchase markets in order to achieve higher investment returns.
A regular review of risk and capital requirement is conducted across the committees. As the business mix has changed during the year with traditional products increasingly being sold, Asset Liability Management (ALM) becomes critical to the business. Monthly reviews are performed to ensure appropriate ALM for the closed block of business under the traditional products and at the end of each quarter, the ALM
AEGON Sony Life reinsures (cede) 100% of its guarantees on the variable annuities to SA Re. SA Re has a comprehensive hedging program in place that covers all the major risk dimensions. Execution of this program is outsourced to AEGON
USA Investment Management LLC. Comprehensive risk management procedures have been defined to ensure implementation of appropriate risk management activities in accordance with AEGON’s Risk Management Policy.
SA Re will cover payments under the guarantees to the extent that benefits to the policyholder exceed the variable annuity account value. The market risks are managed through the use of capital markets hedging techniques.
Policyholder behavior risks are managed through a combination of product design (for example, investment mix limitations), pricing techniques (for example, assuming that the riskiest investment mix is elected), and through hedge construction and rebalancing to reflect emerging experience, and are reflected in the reinsurance premium that is charged by SA Re to AEGON Sony Life. In addition to these pricing and hedging risk mitigation techniques, for certain products capital will contain a provision for adverse deviation. As such, increases in capital due to unexpected deviations in policyholder behavior or unfavorable basis error are cushioned by applying an assumption for hedge effectiveness in capital
(and reflected in pricing) that is lower than is expected to be realized based on results from a ten year back test of our hedge strategy (the back test spans the period June 1999 to
June 2009). SA Re’s Risk & Capital Committee meets on a quarterly basis.
AEGON first entered the Spanish market in 1980 when it bought local insurer, Seguros Galicia. In recent years, AEGON’s activities in Spain have grown rapidly, mainly due to distribution partnerships with some of the country’s leading saving banks.
AEGON is of the opinion that, in 2010, a change of control occurred in Caja de Ahorros de Mediterráneo (CAM), AEGON’s partner in Caja Mediterráneo Vida (MedVida). Subsequently,
November 2005. Caja Navarra has a total of 379 branches in the north of Spain, close to the border with France. Under the partnership agreement, AEGON acquired a 50 percent interest in Caja Navarra’s pension and life insurance business.
In 2010, Caja Navarra entered into a SIP named Banca Cívica, currently integrating the following entities: Caja Navarra, Caja
Burgos, Caja Sol and Caja Canarias. AEGON has signed an agreement with Banca Cívica to considerably improve its existing partnership agreement with Caja Navarra and to integrate 50% of the life business of Caja Burgos. Furthermore, AEGON and Banca Cívica undertake to extend and modify their agreement in the future in order to permit the incorporation of any other entity that becomes an integral part of the Banca Cívica Group (Caja Canarias and Cajasol).
A.I.E., a separate legal entity. In addition, AEGON operates through partnerships with the financial entities Caja
In Spain, over 70% of life insurance policies are sold through the country’s retail banks. In 2010, a process of restructuring was underway in Spain’s financial sector, with an aim to reduce the number of saving banks from 45 to 18. So far, there have been 7 merging processes involving 17 saving banks.
Additionally, 22 saving banks have been party to 5 agreements based on Spain’s Institutional Protection System (SIP). For these reasons, Spain in recent years has been an important part of AEGON’s efforts to expand its web of bank distribution partnerships.
AEGON now has partnerships in place with five of Spain’s leading financial entities, giving the AEGON Group access to nearly 2,100 branches across the country: �� Caja de Ahorros del Mediterráneo
Caja Badajoz has a network of 216 branches, primarily in the western region of Extremadura, which adjoins Spain’s border with Portugal. Under AEGON’s partnership with Caja Badajoz, also agreed in 2005, AEGON and Caja Badajoz have set up a 50/50 joint company to sell life insurance and pensions. In 2011, Caja Badajoz Vida entered into a SIP named Grupo Caja
Spain, with a total of 172 branches, located primarily in its home province of Cantabria. In 2011, Caja Cantabria Vida entered into a SIP named Liberbank, currently integrating
(Unnim). AEGON has signed an agreement with Unnim in order to integrate Caixa Sabadell and Caixa Manlleu into its existing joint venture with Caixa Terrasa. The integration of Caixa
Sabadell was completed on July 1, 2011. Unnim is one of the largest saving banks in Catalonia. As a result of this partnership, AEGON has access to one of the wealthiest areas of Spain. On September 30, 2011, Unnim was capitalized by a 100% state-owned fund (FROB), being de facto nationalized.
The Dirección General de Seguros (DGS) is the regulatory authority for the Spanish insurance industry. Insurance companies are required to report to the DGS on a quarterly basis. Spanish regulations incorporate all the requirements of the relevant EU Directives. In terms of solvency margin, local regulations are based on a percentage of the reserves for the life insurance business and on a percentage of premiums for the health insurance business.
AEGON’s partnership with La Mondiale gives AEGON a foothold in Europe’s second largest insurance market. As in
Charges for the guarantees are applied to the policyholder’s account value and typically vary according to the proportion of equity investment.
Variable annuities allow a customer to participate in equity or bond market performance with the assurance of a minimum level of future benefit, regardless of the performance of their account. Variable annuities allow a customer to select pay-out options designed to help meet their need for income upon maturity, including lump sum payment or income for life or for a period of time.
Premiums paid on variable annuity contracts are invested in underlying funds, including bond and equity funds and
The account value of variable annuities reflects the performance of the funds. The insurance provider earns administration and expense charges as well as guarantee charges for the guaranteed benefits. Surrender charges are generally not a large form of revenue as policyholder surrender rates are typically lower when a surrender charge penalty is still present. Any surrender charges collected are typically applied to recoup outstanding installation costs.
La Mondiale. AEGON NV has a 35% stake in La Mondiale
Variable annuities are advised products and primarily distributed through independent financial advisers (IFAs) and banks.
Regional Sales Centres, Access (telephony account management) and Partnerships with major third parties such as HSBC, Barclays and Openwork. AEGON Ireland launched three new variable annuity products in the United Kingdom in June 2011 to complement existing VA products.
– at the choice of the policyholder - to equities and fixed interest investments. The guarantees may take several different forms from guarantees of a minimum level of future income for life (immediate or deferred) or for a given term; capital guarantees over a defined period and death benefits.
AEGON has a 4.5% market share, placing it in seventh place.
(FOS) or freedom of establishment (FOE) basis, subject to the notification requirements set out in the 1994 Regulations.
AEGON Ireland currently operates on a FOS basis in the United
Kingdom and the Netherlands selling life insurance products in class III and I. AEGON Ireland must ensure it complies with the general good provisions that apply to insurers selling such policies in these jurisdictions.
Management (TIM), a unit within the United States was dissolved and the Netherlands based unit TKP Investments transferred into AEGON Asset Management. Furthermore, the
UK business was mandated to be a distinctive third party profit-driven asset manager.
�� Unit-linked business generally consists of funds on the insurers balance sheet where the policyholder return is determined by the investment return of the fund (hence this business is for the risk of policyholders rather than AEGON).
AEGON Asset Management competes with other asset management companies for open architecture unit-linked business and third party business. AEGON Asset
AEGON Asset Management Holding B.V., which is regulated by the DNB (Dutch Central Bank) under the European consolidated supervision rules. In Europe, regulation for asset management companies is different from that for insurers as it is based on separate European Directives. However, in most jurisdictions the same regulators oversee insurance and asset management; AEGON Asset Management’s underlying operating entities are regulated by their local regulators, including the AFM and DNB (for Dutch entities), the FSA (for
For AEGON, risk management involves: �� Understanding which risks the company is able to underwrite.
�� Measuring and monitoring risk exposures and actively maintaining oversight over the company’s overall risk and solvency positions.
By setting certain pre-defined tolerances and adhering to policies that limit the overall risk the company is exposed to,
AEGON is able to accept risk with the knowledge of potential returns and losses.
To accomplish this, AEGON has established a number of basic objectives for its risk management strategy: �� Financial strength: Ensure AEGON meets long-term obligations to policyholders. AEGON uses three measures to determine its approach to financial strength: � regulatory requirements.
AEGON’s risk management framework is represented across all levels of the organization. This ensures a coherent and integrated approach to risk management throughout the company. Similarly, AEGON has a number of company-wide risk policies in place, which detail specific operating guidelines and limits. These policies are designed to keep overall riskspecific exposures to a manageable level. Any breach of policy limits or warning levels triggers immediate remedial action or heightened monitoring. Further risk policies may be developed at a local level to cover situations specific to particular regions or operating units. AEGON’s risk management governance structure has three basic layers: �� The Supervisory Board (and the Supervisory Board Risk
Additionally, there are sub-committees and regional committees, who support the ERMC and GRCC.
AEGON’s Executive Board (EB) has an overall responsibility for risk management. The EB adopts the risk governance framework and determines AEGON’s overall risk tolerance and group risk policies. The Executive Board Risk Committee
(EBRC) is the body appointed by the EB for overseeing proper execution of the risk governance framework, as well as monitoring compliance with the risk tolerance and Group Risk
also has an individual responsibility in this regard and a direct reporting line to the Chairman of the Supervisory Board
reviews the company’s risk exposure as it relates to capital, earnings and market consistent value at risk and compliance with Group Risk policies. It is the responsibility of the EB and the Group CRO to inform the SB should any risks directly threaten the solvency, liquidity or operations of the company.
The GRCC focuses on managing AEGON’s overall solvency position, while ensuring that risk-taking is within the risk tolerance statements and Group Risk policies. The GRCC
The responsibilities and prerogatives of the RCCs are set out in their respective charters and are similar in content to those of the GRCC, but are tailored to local circumstances.
regarding material changes of risk methodology, risk governance, risk policies and risk tolerance.
AEGON’s risk management structure includes the establishment of three “lines of defense” to ensure conscious risk-return decisions and limit the magnitude of potential losses within defined levels of certainty. The objective of this structure is to avoid surprises, either due to unidentified risks materializing or losses that exceed pre-defined risk tolerance levels and related limit structures.
enterprise risk management across the company, i.e. audit functions and committees.
During 2011, AEGON took a series of measures to limit the company’s exposure to major financial risks.
During the year, AEGON took a number of specific steps to reduce its exposure to credit risk: �� Further restructuring of AEGON US’s investment portfolio increasing the allocation to US Treasury bonds.
As an international company, AEGON is exposed to movements in currency rates. However, AEGON does not consider this exposure to be material. The company holds its capital base in various currencies in amounts that correspond to the book value of individual country units, thus mitigating currency risk.
AEGON does hedge cash flows from operating subsidiaries as part of its broader capital and liquidity management.
AEGON regularly considers the most extreme liquidity stress scenarios, including the possibility of prolonged “frozen”
believes it has the capacity to take on more underwriting risk
Additional risks to which we are subject include, but are not limited to, the factors mentioned under “Forward-Looking
Other factors besides those discussed below or elsewhere in this Annual Report also could adversely affect AEGON’s business and operations, and the following risk factors should not be considered a complete list of potential risks that may affect AEGON and its subsidiaries.
Disruptions in the global financial markets and general economic conditions have affected and continue to affect, and could have material adverse effects on, AEGON’s business, results of operations, cash flows and financial condition.
AEGON’s results of operations and financial condition may be materially affected from time to time by general economic conditions, such as levels of employment, consumer lending or inflation in the countries in which we operate. Global financial markets experienced extreme and unprecedented volatility and disruption in 2008 and 2009. World economies experienced a significant slowdown in 2008 and 2009 and only slowly began to recover late in 2009 and throughout 2010, although the strength of recovery has varied by region and by country and has shown signs of slowing. Uncertainty in financial markets is expected to remain high in 2012, with signs of an economic slowdown apparent as national governments start to withdraw the financial stimuli that they introduced as a response to the slowdown in 2008 and 2009 and governments in the European Monetary Union openly consider the future viability of the euro currency. These developments have created an unfavorable environment for banking activity generally, bank lending has been reduced below the levels seen before the financial crisis for some time and the housing markets in Europe and North America remain depressed.
In addition to the other risks described in this section, these conditions have resulted and may continue to result in a reduction in demand for AEGON’s products as well as impairments and reductions in the value of the assets in
AEGON’s general account, separate account, and company pension schemes, among other assets. AEGON may also experience a higher incidence of claims and lapses or surrenders of policies. AEGON’s policyholders may choose to defer or stop paying insurance premiums. AEGON cannot predict definitively whether or when such actions, which could impact AEGON’s business, results of operations, cash flows and financial condition, may occur.
European Central Bank and the International Monetary Fund have prepared rescue packages for some of the affected countries. AEGON cannot predict with any certainty whether these packages or other rescue plans will be successful or the effect that they may have on the future viability of the euro
currency or the European Monetary Union nor the impact on AEGON’s business, results of operations, cash flows and financial condition if such rescue packages are not successful.
Union and elsewhere to address any of the foregoing could impact our business. AEGON cannot predict with any certainty the effect that these government actions and actions by the European Central Bank, the Federal Reserve or other governmental actions may have on the financial markets or on AEGON’s business, results of operations, cash flows and financial condition.
Credit risk is the risk of loss resulting from the default by, or failure to meet contractual obligations of issuers and counterparties. For general account products, we typically bear the risk for investment performance equaling the return of principal and interest. AEGON is exposed to credit risk on its general account fixed-income portfolio (debt securities, mortgages and private placements), over-the-counter (“OTC”)
A decline in equity markets may adversely affect AEGON’s profitability and shareholders’ equity, sales of savings and investment products and the amount of assets under management.
Interest rate volatility or sustained low interest rate levels may adversely affect AEGON’s profitability and shareholders’
Premiums in flexible premium policies may decrease as policyholders seek investments with higher perceived returns.
This activity may result in cash payments by AEGON requiring the sale of invested assets at a time when the prices of those assets are affected adversely by the increase in market interest rates. This may result in realized investment losses.
Life insurance and annuity products may be relatively more attractive to consumers, resulting in increased premium payments on products with flexible premium features and a higher percentage of insurance policies remaining in force year to year. Mortgages and redeemable bonds in the investment portfolio are more likely to be repaid as borrowers seek to re-finance at lower interest rates and AEGON may be required to reinvest the proceeds in securities bearing lower interest rates. Risk is heightened in the current market and economic environment in which certain securities may be unavailable. Accordingly, net income may decline 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.
The profitability of AEGON’s spread-based business depends in large part upon the ability to manage interest rate spreads, credit risk and other risks inherent in the investment portfolio.
As an international group, AEGON is subject to foreign currency translation risk. Foreign currency exposure also exists when policies are denominated in currencies other than
This balancing is intended to mitigate currency translation impacts on equity and leverage ratios. AEGON may also hedge the expected dividends from its principal operating units that maintain their equity in currencies other than the euro.
To the extent these expected dividends are not hedged or actual dividends vary from expected, AEGON’s net income and shareholders’ equity may fluctuate. As AEGON has significant business segments in the Americas and in the UK, 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.
The exchange rates between AEGON’s primary operating currencies (US dollar, euro and UK pound) continued to fluctuate during 2011. In 2011, the US dollar ranged by as much as 14% against the euro, finishing around 3% up on 2010.
For the UK segment, which primarily conducts its business in UK pounds, total revenues and net income in 2011 amounted to EUR 8.8 billion and EUR (52) million, respectively.
On December 31, 2011 AEGON has borrowed or swapped amounts in proportion to the currency mix of capital in units, which was denominated approximately 58% in US dollars, 25% in euro, 11% in UK pounds and 6% in Canadian dollars.
European Monetary Union member states, or in more extreme circumstances, the dissolution of the European Monetary
AEGON continued to maintain its reserves of cash and liquid assets in 2011. In depressed markets AEGON may be unable to sell or buy significant volumes of assets at quoted prices.
In 2011, approximately 40% of AEGON’s general account investments were not highly liquid.
Differences between actual claims experience and underwriting and reserve assumptions may require liabilities to be increased.
To the extent that actual claims experience is less favorable than the underlying assumptions used in establishing such liabilities, AEGON’s income would be reduced. Furthermore, if the less favorable claims experience were expected to be a sustained trend AEGON may be required to increase liabilities for other related products, which could reduce AEGON’s income. In addition, certain acquisition costs related to the sale of new policies and the purchase of policies already in force have been recorded as assets on the balance sheet and are being amortized into income over time. If the assumptions
relating to the future profitability of these policies (such as future claims, investment income and expenses) are not realized, the amortization of these costs could be accelerated and may even require write-offs due to an expectation of unrecoverability. This could have a material adverse effect on AEGON’s reported results of operations and financial condition.
In general, AEGON is at risk if policy lapses increase as sometimes AEGON is unable to fully recover up front expenses in selling a product despite the presence of commission recoveries or surrender charges and fees. AEGON sells certain types of policies that are at risk if mortality or morbidity increases, such as term life insurance and accident insurance.
Valuation of AEGON’s investments, allowances and impairments is subjective and discrepant valuations may adversely affect
Area may not be subject to Solvency II requirements and may thereby be better able to compete against AEGON, particularly in AEGON’s businesses in the US and Asia.
requires insurers in the US to establish additional statutory reserves for term life insurance policies with long-term premium guarantees. In addition, “The Application of the
AXXX, respectively. Additionally, regulators and the industry are reviewing the interpretation of Actuarial Guideline 38
In addition, AEGON may not be able to comply fully with, or obtain appropriate exemptions from, the wide variety of laws and regulations applicable to insurance companies and insurance holding companies. Failure to comply with or to obtain appropriate exemptions under any applicable laws could result in restrictions on AEGON’s ability to do business in one or more of the jurisdictions in which AEGON operates and could result in fines and other sanctions, which may have a material adverse effect on AEGON’s business, financial position or results of operations.
Union is adopting Solvency II as discussed above, the NAIC or state regulators may adopt revisions to applicable risk based capital formulas, local regulators in other jurisdictions in which
A downgrade in AEGON’s ratings may increase policy surrenders and withdrawals, adversely affect relationships with distributors and negatively affect AEGON’s results.
Claims paying ability and financial strength ratings are factors in establishing the competitive position of insurers. A rating downgrade (or the potential for such a downgrade) of AEGON
or any of its rated insurance subsidiaries may, among other things, materially increase the number of policy surrenders and withdrawals by policyholders of cash values from their policies. These withdrawals may require the sale of invested assets, including illiquid assets, at a price that may result in realized investment losses. These cash payments to policyholders would result in a decrease in total invested assets and a decrease in net income. Among other things, early withdrawals may also cause AEGON to accelerate amortization of DPAC, reducing net income.
AEGON has experienced downgrades and negative changes to its outlook in the past and, may experience downgrades and negative changes in the future. For example, during 2010, Fitch lowered the senior debt rating for AEGON N.V. to A– with a stable outlook. Fitch also lowered the insurance financial strength rating for AEGON USA to AA– with a stable outlook.
Additionally, the laws or regulations adopted or amended from time to time may be more restrictive or may result in higher costs than current requirements. The recent financial markets dislocation has resulted in, and may continue to result in further, extensive changes to existing laws, regulations and regulatory frameworks applicable to AEGON’s businesses in the countries in which it operates.
The Financial Stability Oversight Council has proposed a new rule specifying the criteria it will use to determine which non-banking financial institutions are systemically important.
Solvency II directive, see “AEGON may be required to increase its statutory reserves and/or hold higher amounts of statutory capital for certain of its products, which will decrease AEGON’s returns on these products unless AEGON increases its prices.”
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. For example, in Hungary, the
Parliament passed laws in 2011 that suspend money transfers to pension fund clients’ accounts and redirect the contributions to the state budget, with the aim to reduce the budget deficit. The new laws also allow pension fund customers to step back to the public non-funded pay-as-yougo pension system. It is possible that similar policy measures may be taken in other countries in which AEGON operates in Central & Eastern Europe or elsewhere.
In general, changes in laws and regulations may materially increase AEGON’s direct and indirect compliance and other expenses of doing business and have a material adverse effect on AEGON’s business, results of operations or financial condition.
Insurance companies are routinely the subject of litigation, investigation and regulatory activity by various governmental and enforcement authorities, individual claimants and policyholder advocate groups, involving wide-ranging subjects such as employment or third party relationships, adequacy of operational processes, environmental matters, anticompetition and intellectual property infringement. AEGON
is, for example, co-operating with an industry-wide inquiry initiated by various state controllers and various regulators in the US, including an inquiry by regulatory authorities in the
regulatory activity concerning common industry practices such as the disclosure of contingent costs, commissions and premiums and other issues relating to the transparency relating to certain products and services. Adequate transparency of product features and cost levels is important for customer satisfaction, especially when they apply for, or take effect over, a longer duration, as is the case for many of AEGON’s products. In addition, many of AEGON’s products offer returns that are affected by, among other things, fluctuations in equity markets as well as interest rate movements. As a result, such returns may prove to be volatile and occasionally disappointing. This from time to time results in disputes that lead to litigation and complaints to regulatory bodies. Complaints like these may then lead to inquiries or investigations, regardless of their merit.
AEGON and other US industry participants have been named in lawsuits alleging, among other things, that asset-based fees charged for investment products offered on 401(k) platforms were higher than those generally available in the market.
In the Netherlands, certain current and former customers, and groups representing customers have initiated litigation, and certain groups are encouraging others to bring lawsuits against AEGON and other insurers, in respect of certain products including securities leasing products and unit-linked products (so called ‘beleggingsverzekeringen’ including the
Woekerpolis Claim, and the matter is also subject of discussion in the Dutch Parliament. The settlements reached by the various market participants have been compared and there is a call on the insurance companies to re-examine the terms of their arrangements and apply “best of class” principles identified as part of that comparison. It is not yet possible to determine the outcome of this debate, including what actions
Amsterdam Court of Appeal, an intermediate appeals court, ruled with respect to the KoersPlan-product that customers are required to pay a reasonable premium.
Certain of the products AEGON sells are complex and involve significant investment risks that may be assumed by AEGON’s customers. AEGON has received claims from certain current and former customers, and groups representing customers, in respect of certain products, including in relation to employer owned life insurance products sold to banks and other corporations in the US. Certain claims remain under review and may lead to disputes in the future. AEGON has in the past agreed to make payments, in some cases substantial, or adjustments to policy terms to settle those claims or disputes if AEGON believed it was appropriate to do so. While AEGON
AEGON does not believe have merit, there can be no assurance that any claims brought against AEGON by its customers will
As a result of the European Commission’s approval of the core capital AEGON received from the Dutch State in 2008,
In December 2008, AEGON issued EUR 3 billion of non-voting convertible core capital securities to Vereniging AEGON, which was funded by the Dutch State and which subsequently required approval by the European Commission. In connection with the approval granted by the European Commission
AEGON agreed with the Dutch Ministry of Finance to certain requirements on AEGON and AEGON’s future actions. These requirements included behavioral constraints and structural measures. The behavioral constraints expired with the full repurchase of the convertible core capital securities and repayment of the Dutch State on June 15, 2011.
�� Full delta hedging of the US variable annuity guaranteed minimum income benefit back book.
�� Improvement, by December 2012, of the ratio of consolidated shareholders’ equity (excluding revaluation reserve) to total equity base (including equity, hybrids and net senior debt) from 70% to at least 75%; as at
The execution of these structural measures may have a material adverse effect on AEGON’s business, results of operations and financial condition.
proposed by the European Commission on October 20, 2011, if adopted, may require us to mandatorily trade certain types of OTC derivative transactions on regulated trading venues and clear certain types of transactions currently traded in the
This may limit AEGON’s ability to customize derivative transactions for its needs. As a result, AEGON may experience additional collateral requirements and costs associated with derivative transactions.
State statutes and regulators may limit or prohibit the aggregate amount of dividends payable by AEGON’s subsidiaries and AEGON N.V., thereby limiting AEGON’s ability to make payments on debt obligations.
AEGON’s ability to make payments on debt obligations and pay certain operating expenses is dependent upon the receipt of dividends from subsidiaries. Certain of these subsidiaries have regulatory restrictions that can limit the payment of dividends.
of local policyholders, are taking an increasingly restrictive stance with respect to permitting dividend payments, which may affect AEGON’s ability to satisfy its debt obligations or pay its operating expenses.
Since 2005, AEGON’s financial statements have been prepared and presented in accordance with IFRS. Any future change in these accounting principles may have a significant impact on AEGON’s reported results, financial condition and shareholders’ equity. This includes the level and volatility of reported results and shareholders’ equity. One of the standards that will be revised in the near future is IAS 19
AEGON is subject to the substance and interpretation of tax laws in all countries in which AEGON operates. Tax risk is the risk associated with changes in tax laws, or the interpretation of tax laws or the introduction of new taxes or tax laws.
Tax risk also includes the risk of changes in tax rates and the risk of consequences arising from failure to comply with procedures required by tax authorities. Failure to manage tax risks could lead to increased tax charges, including financial or operating penalties.
The US Congress has, from time to time, considered possible legislation that could make AEGON’s products less attractive to consumers, including legislation that would reduce or 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 and the possibility of permanent repeal of the estate tax continues to be discussed.
The US Government, as well as state and local governments, also considers from time to time tax law changes that could increase the amount of taxes that AEGON pays. For example, the US Treasury Department and the Internal Revenue Service may propose new regulations regarding the methodology to determine the dividends received deduction (“DRD”) related to variable life insurance and variable annuity contracts. The DRD
reduces the amount of dividend income subject to tax and is a significant component of the difference between AEGON’s effective tax rate and the federal statutory tax rate of 35%.
Any changes in US or Dutch tax law affecting AEGON’s products could have a material adverse effect on AEGON’s business, results of operations and financial condition.
The adverse market and economic conditions that began in the second half of 2007 and significantly worsened in 2008 and into 2009, with recovery beginning in late 2009 and in 2010, followed in 2011 by further periods of volatility and weakness, particularly in the eurozone, can be expected to result in changes in the competitive landscape. For example, the financial distress experienced by certain financial services industry participants as a result of weak economic conditions and newly imposed regulation may lead to acquisition opportunities. AEGON’s ability or that of AEGON’s competitors to pursue such opportunities may be limited due to lower earnings, reserve increases, capital requirements or a lack of access to debt capital markets and other sources of financing and limitations placed on companies that received state support by the European Commission. Such conditions may also lead to changes by AEGON or AEGON’s competitors in product offerings and product pricing that could affect AEGON
The failure of a sufficiently large and influential financial institution could disrupt securities markets or clearance and settlement systems in AEGON’s markets. This could cause market declines or volatility. Such a failure could lead to a chain of defaults that could adversely affect AEGON and
AEGON’s contract counterparties. In addition, such a failure could impact future product sales as a potential result of reduced confidence in the insurance industry.
As a global financial services enterprise with a decentralized management structure, AEGON relies, to a considerable extent, on the quality of local management in the various countries in which AEGON operates. The success of AEGON’s operations is dependent, among other things, on our ability to attract and retain highly qualified professional personnel.
These reinsurance agreements spread the risk and minimize the effect of losses. The amount of each risk retained depends on an evaluation of the specific risk, which is subject, in certain circumstances, to maximum limits based on the characteristics of coverage. Under the terms of the reinsurance agreements, the reinsurer agrees to reimburse for the ceded amount in the event the claim is paid. However,
In accordance with industry practices, AEGON reinsures a portion of its life insurance exposure with unaffiliated insurance companies under traditional indemnity reinsurance arrangements. In 2011, approximately 63% of our total direct and assumed (for which AEGON acts as a reinsurer for others)
SCOR SE (“SCOR”), Munich Re, RGA and Swiss Re. The major reinsurers of AEGON UK are Swiss Re, Munich Re, Pacific Re and XL Re. The major reinsurer for life insurance for AEGON
The Netherlands is Swiss Re while the non-life reinsurance is diversified across several providers including Lloyds market syndicates. The major reinsurers of AEGON Hungary for nonlife are Swiss Re, Munich Re and Hannover Re and for life insurance are Munich Re and RGA. AEGON Spain’s major reinsurers are General Re, RGA, National Re and SCOR. AEGON
August 2011, as a result of which AEGON is exposed to certain risks including enhanced counterparty exposure risk to SCOR, to which AEGON retroceded Transamerica Reinsurance’s liabilities and remaining collateral funding obligations.
Satisfying such funding obligations could limit AEGON’s ability to upstream cash to the Group level, pay dividends or make acquisitions.
AEGON may have difficulty managing its expanding operations and AEGON may not be successful in acquiring new businesses or divesting existing operations.
All of the foregoing could adversely affect AEGON’s businesses, results of operations and financial condition. Future acquisitions may also have a dilutive effect on the ownership and voting percentages of existing shareholders. There can be no assurance that AEGON will successfully identify suitable acquisition candidates or that AEGON will properly value acquisitions made. AEGON is unable to predict whether or when any prospective acquisition candidate will become available or the likelihood that any acquisition will be completed once negotiations have commenced.
Catastrophic events, which are often unpredictable by nature, could result in material losses and abruptly and significantly interrupt AEGON’s business activities.
AEGON’s operating results and financial position can be adversely affected by volatile natural and man-made disasters such as hurricanes, windstorms, earthquakes, terrorism, riots, fires and explosions, pandemic disease and other catastrophes.
AEGON regularly develops new financial products to remain competitive in its markets and to meet the expectations of its clients. If clients do not achieve expected returns on those products, AEGON may be confronted with legal claims, pressure groups and negative publicity.
AEGON’s products. New products that are less well understood and that have less of a historical performance track record may be more likely to be the subject of such claims. Any such claims could have a material adverse effect on AEGON’s results of operations, corporate reputation and financial condition.
AEGON would have to enforce and protect our intellectual property, or defend itself against a claim of infringement of a third party’s intellectual property, may require significant effort and resources and may not prove successful. As a result of any proceeding in which AEGON would have to enforce and protect its intellectual property, AEGON may lose intellectual property protection, which could have a material adverse effect on AEGON’s business, results of operation, financial condition and AEGON’s ability to compete. As a result of any proceeding in which AEGON would have to defend itself against a claim of infringement of a third party’s intellectual property, AEGON may be required to pay damages and provide injunctive relief, which could have a material adverse effect on AEGON’s business, results of operations and financial condition.
Notwithstanding these control measures, however, operational risk is part of the business environment in which AEGON
operates and is inherent in AEGON’s size and complexity as well as AEGON’s geographic diversity and the scope of the
businesses we operates. AEGON’s risk management activities cannot anticipate every economic and financial outcome or the specifics and timing of such outcomes. Furthermore, if the contractual arrangements put in place with any third party service providers, including providers of information technology, administrative or investment management services, are terminated, AEGON may not find an alternative provider on a timely basis or on equivalent terms. AEGON may incur losses from time to time due to these types of risks.
AEGON must commit significant resources to maintain and enhance its existing systems in order to keep pace with industry standards and customer preferences. If AEGON fails to keep up-to-date information systems, AEGON may not be able to rely on information for product pricing, risk management and underwriting decisions. In addition, even though back-up and recovery systems and contingency plans are in place, AEGON cannot assure investors that interruptions, failures or breaches in security of these process and systems will not occur, or if they do occur, that they can be adequately addressed. The occurrence of any of these events could have a material adverse effect on AEGON’s business, results of operations and financial condition.
AEGON uses computer systems to store, retrieve, evaluate and utilize customer and company data and information. AEGON’s business is highly dependent on its ability to access these systems to perform necessary business functions such as providing customer support, administering variable products, making changes to existing policies, filing and paying claims, managing our investment portfolios and producing financial statements. While AEGON has policies, procedures, automation and backup plans designed to prevent or limit the effect of failure, AEGON’s computer systems may be vulnerable to disruptions or breaches as a result of natural disasters, man-made disasters, criminal activity, pandemics or other events beyond AEGON’s control. The failure of AEGON’s computer systems for any reason could disrupt AEGON’s operations, result in the loss of customers and may adversely affect AEGON’s business, results of operations and financial condition.
AEGON’s computer systems that results in the disclosure of personally identifiable customer information could damage our reputation, exposes AEGON to litigation, increase regulatory scrutiny and requires AEGON to incur significant technical, legal and other expenses.
Netherlands gives binding effect to the judgment. It may, however, be possible for a US investor to bring an original action in a Dutch court to enforce liabilities against AEGON,
AEGON’s affiliates, directors, officers or any expert named therein who resides outside the US, based upon the US federal securities laws.
AEGON’s share price could be volatile and could drop unexpectedly, making it difficult for investors to resell
�� Actual or anticipated fluctuations in AEGON’s revenues or operating results.
�� News or analyst reports related to markets or industries in which AEGON operates; and
USD 8.03 and USD 3.62 respectively in 2011. All share prices are closing prices.
total authorized share capital consisted of 3,000,000,000 common shares, par value EUR 0.12 per share, and 1,000,000,000 preferred shares (divided into 500,000,000 class A and 500,000,000 class B preferred shares), par value
EUR 0.25 per share. All AEGON’s outstanding common shares are freely tradable, and all shareholders, including large shareholders such as Vereniging AEGON, are free to resell their shares at any time.
Prior to September 2002, Vereniging AEGON beneficially owned approximately 52% of the voting shares and thus held voting control over AEGON. In September 2002, Vereniging
purchase as many class B preferred shares as would enable it to prevent or offset a dilution to below its actual percentage of the voting shares, unless Vereniging AEGON as a result of exercising these option rights would increase its voting power to more than 33%. The option granted to Vereniging AEGON
The class B preferred shares would then be issued at par value
(EUR 0.25), unless a higher price is agreed. In the years 2003 through 2008, a total of 35,170,000 class B preferred shares were issued under these option rights. In 2009, Vereniging
AEGON exercised its option rights to purchase in aggregate an additional 33,860,000 class B preferred shares at par value to offset dilution caused by AEGON’s equity issue completed in
In addition, AEGON has implemented certain changes to its corporate governance structure and the relationship with
Vereniging AEGON may have substantial influence on the outcome of corporate actions requiring shareholder approval, including: �� Adopting amendments to the Articles of Association.
Amsterdam are quoted in euros and AEGON’s common shares listed on NYSE Euronext New York are quoted in US dollars, fluctuations in exchange rates between the euro and the
US dollars based on an exchange rate set the business day following the shareholder meeting approving the dividend.
Any such developments could negatively affect the value of AEGON’s common shares.
In line with its risk tolerance, the basis for AEGON’s capital and liquidity management is to secure a stable and strong capital adequacy for its businesses on various capital metrics to ensure the company is able to meet long-term obligations.
Risk Management Framework, and focuses on financial strength, continuity, steering of the risk preferences and desired risk culture. The core aim is to establish the organization’s tolerance for risk in order to assist management in carrying out AEGON’s strategy within the resources available to the group.
�� Manage and allocate capital efficiently to maximize returns and support the strategy.
�� Maintain efficient capital structure through its capital base and leverage.
�� Ensure AEGON’s continued access to international money and capital markets on competitive terms and thereby reduce the company’s overall cost of capital.
Taken together, AEGON believes these guiding principles strengthen the company’s ability to withstand adverse market conditions, enhance its financial flexibility and serve the longterm interests of both the company and its stakeholders.
The department acts as the working arm of the Group Risk
In recent years, AEGON has released a significant amount of capital from its existing businesses through a combination of risk reduction, greater capital efficiency and a more active capital management strategy. Given current uncertain economic and market conditions, AEGON intends to retain an adequate capital buffer for the foreseeable future.
�� The sale of our United Kingdom-based Guardian life and pension business.
AEGON has, in the meantime, continued to invest in growth markets in Asia, Latin America and Central & Eastern Europe.
AEGON has taken measures to improve its risk-return profile and lessen its exposure to world financial markets, while in turn, lowering the company’s overall capital requirements.
In addition, the company has taken measures to decrease its exposure to equity markets by divesting part of its direct equity exposure, increasing the hedge of the variable annuity back book in the United States to 100% and increasing the hedge of the guarantees in the Netherlands to 90%.
AEGON’s goal is to ensure that all units maintain a strong financial position, now and into the future, and are able to sustain losses from adverse business and market conditions.
Capital adequacy is managed at the company, country and operating unit level, as well as at the level of individual legal entities within the organization. As a matter of policy, AEGON
December 31, 2011, slightly down from 198% at the end of 2010.
This was mainly driven by the repurchase of the convertible core capital securities.
Please refer to note 31 of the consolidated financial statements for information regarding convertible core capital securities.
AEGON places limits on the amount of non-core capital in its overall capital base. Currently, the company’s aim is to ensure that core capital comprises at least 70% of the capital base, and that perpetual capital securities and dated subordinated and senior debt account for no more than 25% and 5%
core capital and 19.5% perpetual capital securities. Dated subordinated and senior debt accounted for the remaining 7%.
(December 31, 2010: EUR 17.9 billion) and group equity amounted EUR 22.2 billion (December 31, 2010: EUR 22.4 billion).
Most of AEGON’s debt is issued by AEGON N.V., the parent company. A limited number of other AEGON companies may also issue debt securities, but for the most part these securities are guaranteed by AEGON N.V. AEGON N.V. has regular access to international capital markets under a
AEGON also has access to domestic and international money markets through its USD 4.5 billion commercial paper programs. At December 31, 2011, AEGON had EUR 648 million outstanding under these programs.
AEGON maintains back-up credit facilities with international lenders to support outstanding amounts under these commercial paper programs. The company’s principal arrangement are syndicated facilities consisting of a
This facility has been replaced with a new EUR 2 billion revolving credit facility that AEGON N.V. signed at the beginning of 2012. There is an additional back-up facility for a total amount of USD 2,650 million. Of this amount,
AEGON’s capital base, it is an important source of liquidity and funding. Operational debt relates primarily to financing
AEGON’s mortgage portfolios through securitizations and warehouse facilities and the funding of US Regulation XXX
AEGON’s overall financial planning and capital allocation processes. AEGON’s aim is to ensure that liquidity is sufficient to meet cash demands even under extreme conditions.
AEGON’s subsidiaries are primarily engaged in the life insurance business, which is a long-term business with relatively illiquid liabilities and generally matching assets.
At December 31, 2011, AEGON N.V. held at group level a balance of EUR 1.5 billion in excess cash compared with EUR 1.7 billion as at the end of 2010.
AEGON’s excess liquidity is invested in highly liquid, short-term assets in accordance with the company’s internal risk management policies. AEGON believes its working capital, backed by its external funding programs and facilities, is ample for the company’s present requirements.
Throughout the recent financial crisis, AEGON’s aim has been to maintain excess capital over and above the amount required to maintain an AA financial strength rating. This remains the company’s objective, and plays an important role in determining the overall capital management strategy. AEGON
AEGON’s internal audit function assists the Executive Board in maintaining effective controls by independently and objectively evaluating the adequacy and effectiveness of the organization’s internal control and risk management systems. Criteria established under “Internal Control – Integrated Framework,”
Organizations (COSO), are used by AEGON’s Internal Audit to analyze and make recommendations to the Executive Board concerning the effectiveness of internal controls over AEGON’s financial reporting process and the company’s internal control framework. Based on risk assessments performed, the
In addition, the Executive Board is responsible for AEGON’s enterprise risk management framework under supervision of the Supervisory Board Risk Committee. AEGON’s risk management function monitors and controls AEGON’s solvency position and ensures that risk taking is within AEGON’s risk tolerance levels. The Executive Board is informed of any risks that threaten the economic/statutory solvency, reputation or operations of the company.
The risk management function develops and monitors compliance with risk policies and risk frameworks. This also involves the facilitation of risk identification (especially for operational and emerging risks) and reviewing risk assessments performed by the business. The risk management function is responsible for identifying risk management best practices and working with management to ensure that
� There are no indications to suggest that AEGON’s risk management and control systems will not continue to function properly in 2012.
The Executive Board is responsible for preparing the financial statements and the Annual Report in accordance with Dutch law and International Financial Reporting Standards (IFRS)
Executive Board confirms that, to the best of its knowledge, the financial statements prepared in accordance with applicable accounting standards give a true and fair view of the assets, liabilities, financial condition and profit or loss of the company and the undertakings included in the consolidation as a whole and that the Report of the Executive
In performing their duties, members of the Supervisory Board are guided by the interests of AEGON and the company’s stakeholders. The Supervisory Board is a separate corporate body, independent of the Executive Board. The Supervisory
Board itself. In addition, the Supervisory Board determines the remuneration of individual members of the Executive
Details of AEGON’s corporate governance structure and a summary of the company’s compliance with the Dutch
Board holds special approval rights for certain decisions of the Board.
In 2011, the Supervisory Board held a total of six regular meetings and several additional conference call meetings.
In accordance with AEGON’s Supervisory Board Rules, all regular meetings in 2011 were preceded by preparatory meetings, attended by the Chairman, the Vice Chairman of the Supervisory Board and the Chairman of the Audit
Members of AEGON’s Executive and Management Boards attended all Supervisory Board meetings held in 2011. Other company executives also attended the meetings at the request of the Supervisory Board to update it on various subjects.
issue of core capital securities, while an additional EUR 1.1 billion was paid in premium and interest. The Supervisory Board discussed at several occasions with management the repurchase, including the funding thereof. In meetings in
(Transamerica Reinsurance) was another important accomplishment in 2011. The Board and management extensively discussed and reviewed the transaction which was announced in April and closed in August 2011. With this transaction, AEGON made further progress on sharpening its focus on its core businesses of life insurance, pensions and asset management, while improving its risk return profile.
The Board also reviewed the sale of the Guardian life and pension business in the United Kingdom, which was completed in November 2011, and the significant restructuring of the UK
A recurring topic in the full Board and the Risk Committee was the general economic environment and the developing euro crisis in particular. AEGON’s capital position was a key point of focus for the Supervisory Board and its Risk Committee.
On February 20, 2011, the Supervisory Board convened to discuss the results of the fourth quarter of 2010. In March 2011, the Supervisory Board discussed AEGON’s audited annual results for 2010. The Board also reviewed and approved the company’s annual accounts for 2010.
Board reviewed AEGON’s first, second and third quarter results, as well as disclosures on value of new business and embedded value. In December, the Board reviewed and approved the budget for 2012. The Board also approved the 2012 Capital Plan and authorized the Executive Board to provide for AEGON’s funding needs as budgeted.
Survey, succession planning and talent management. The latter two topics were discussed extensively in the Nominating
During the year the Chairman of the Board and the chairs of the Audit Committee and Risk Committee met twice with officials of AEGON’s lead regulator, De Nederlandsche Bank
The topic for the educational session in May 2011 was IFRS 4
Insurance Contracts. The Board discussed with specialists the consequences for AEGON of this new method of measuring the value of the assets and liabilities of an insurance contract.
The performance of members of the Executive Board was discussed at Executive Meetings during the year.
The Supervisory Board requires its four committees to prepare specific issues for decision-making by the Board. Each of these committees is made up of members exclusively drawn from the Supervisory Board itself. In accordance with its charter, each committee reports its findings to the Supervisory Board during a subsequent Supervisory Board meeting.
The Audit Committee held seven meetings in 2011, one of which was a combined meeting with the Supervisory Board’s
Representatives from Ernst & Young, AEGON’s external auditor, also attended the majority of these meetings. Officials from AEGON’s Group Risk and the Actuarial departments were present at select meetings of the Audit Committee. In 2011, discussions focused on the following topics: the quarterly results, the annual accounts and the audit process, AEGON’s 2010 Embedded Value Report and annual VNB figures, actuarial analyses, accounting principles as defined by
Code. During most meetings, closed sessions were held with the internal and external auditors in the absence of management.
Committee to the Supervisory Board that shareholders be asked to reappoint Ernst & Young for the 2011 financial year.
Asset Management attended the meetings on certain occasions to provide insight in the developments of AEGON’s general account.
Risk Management (ERM) framework. The Committee also advises the Executive Board with respect to the company’s risk management strategy and policies. Consequently, the
Committee regularly reviews the company’s ERM framework, its risk exposure and compliance with company risk policies.
Individual Savings and Retirement business presented on products, distribution and enterprise risk management.
The Nominating Committee discussed in the year the composition of the Supervisory Board and its committees, as well as existing and upcoming vacancies. The committee also advised the Supervisory Board on the nominations for three reappointments to the Supervisory Board.
The CEO also discussed with the Nominating Committee changes in senior management within the company worldwide.
The committee on two occasions reviewed and discussed the initiatives taken by management with regard to talent management and international mobility as part of talent development.
meeting on May 12, 2011. New regulations were promulgated by the EU: the Capital Requirements Directive 3 (CRD3)
Subsequently, the Policy that was approved by shareholders in April 2010 was adjusted.
Framework and supporting documents. The Framework includes the Executive Board Remuneration Policy and policies for other senior management and Identified Staff of AEGON
Mr. Storm is not regarded as independent within the definition of the Code since he served as Chairman of AEGON’s
indebted to Ms. Kempler, as the Board benefitted significantly from her in-depth knowledge of AEGON’s business and careerlong involvement with leading industry organizations.
Supervisory Board has decided to nominate these persons for reappointment as members of the Board for further terms of four years each by the General Meeting of Shareholders.
This Annual Report includes the annual accounts for 2011, prepared by the Executive Board, discussed by both the Audit
The members of the Supervisory Board would like to thank both the Executive and Management Boards as well as the company’s employees for their combined efforts in meeting the many challenges, and for their continued dedication to providing quality products and services to AEGON’s valued customers around the world. Given the significant progress achieved in the course of 2011 and its continued strong financial position, the Supervisory Board remains confident that AEGON will indeed achieve its ambition to be the most recommended leader in its chosen markets in the coming years. The Board also acknowledges the importance of the longterm trust placed in AEGON by all of its customers, particularly during the severe economic turmoil of the past year.
Supervisory Board ends in 2012. Mr. Routs is also Chairman of the Supervisory Board of Royal DSM N.V. and Vice-Chairman of the Supervisory Board of Royal KPN N.V. He also sits on the Board of Directors at Canadian Utilities Limited,
A.P. Møller - Mærsk A/S, UPM (until March 30, 2012) and
Officer of Providian Corp., a former Managing Director of Chrysalis Ventures, and former Chairman of the Board of Directors of AEGON USA Inc. He was first appointed to
AEGON’s Supervisory Board in 2004. His current term will end in 2012. Mr. Bailey is also a member of the Board of Directors of Computer Sciences Corp. and Hospira, Inc. as well as a senior advisor to Chrysalis Ventures, Inc. (not listed).
Supervisory Board in 2007. His current term will end in 2015.
Nobel N.V. as well as a member of the Board of Directors of
Chief Financial Officer of the Renault Group. He was appointed to AEGON’s Supervisory Board in 2005 and his current term will end in 2013. He is also a member of the Supervisory
Zeeland in the Netherlands. Ms. Peijs was formerly a member of the European Parliament and Minister of Transport, Public
She was appointed to AEGON’s Supervisory Board in 2007 and her current term will end in 2015. Ms. Peijs is also currently a member of the Supervisory Boards of Q-Park N.V.
TomTom N.V. and Reed Elsevier N.V. as well as a non-executive member of the Board of Directors of Reed Elsevier PLC.
Nederland B.V. (not listed). He is advisor to the President and
Chief Executive Officer of Aon Corporation. Furthermore, he is Chairman of the Benelux Advisory Board of Leonardo & Co.
B.V. (not listed), member of the Advisory Boards of CVC Europe
(not listed) and OVG Re/developers (not listed), Chairman of the INSEAD Dutch Council, and Honorary Counsel of the
Principles are as follows: � AEGON remuneration is employee-oriented by: fostering a sense of value and appreciation in each individual employee; promoting the shorter and longer-term interests and wellbeing of all AEGON staff via adequate compensation, pension and/or other benefits; supporting the career development of its employees; supporting (international)
‘Identified Staff’ (internally equitable); aiming at controlled market competitive remuneration, by providing for total compensation packages in comparison with an appropriately established peer group at regional unit, country and/or functional level (externally equitable).
European Banking Supervisors (CEBS) and the 2011 Decree on Sound Remuneration Policy by De Nederlandsche Bank
Remuneration Policy for the Executive Board. They set out specific terms and conditions for the employment of various groups of staff. In addition, all steps in the remuneration process - as well as the involvement of Human Resources,
Framework and practices, both the Risk Management function and Compliance function are involved in the design and execution of the remuneration policies and practices.
Remuneration Policy and Report 1 Staff whose professional activities may materially influence AEGON’s business performance and risk profile. 2 Senior Staff in Control Functions positions (Compliance, Risk and Audit) at Group or country / regional unit level.
Compliance functions, together with the HR and Finance functions are responsible for the execution of the various ex- ante and ex-post measures that have been introduced by AEGON to ensure the Global Remuneration Framework and practices are aligned with the defined risk tolerances and behaviors. In this respect, risk mitigating measures that are undertaken prior to the payout of compensation to individual employees (regardless whether this compensation is deferred) are considered ex-ante measures. Retribution measures that are applied after payout to ensure sustainability of performance are considered ex-post measures.
AEGON has endeavored to seek an appropriate balance of exante and ex-post adjustments to ensure effectiveness both on short-term and longer term risk taking behavior of employees.
In the next sections more detailed information is provided on the compensation practice for the Supervisory Board and Executive Board.
Members of the Supervisory Board are entitled to the following: � A base fee for membership of the Supervisory Board itself.
No attendance fees are paid to members for the attendance of the six regular Supervisory Board meetings.
� An attendance fee of EUR 3,000 for each Supervisory Board meeting, attended in person or by video or telephone conference, other than one of the six regular Supervisory
Supervisory Board do not receive any performance or equityrelated compensation, and do not accrue pension rights with the company. These measures are designed to ensure the independence of Supervisory Board members and strengthen the overall effectiveness of AEGON’s corporate governance.
Members of AEGON’s Supervisory Board received the following payments (in EUR) in 2011: Robert J. Routs (Chairman) 101,250 98,435
The Executive Board of AEGON is remunerated on the basis of the principles described in AEGON’s Global Remuneration
AEGON’s Executive Board Remuneration Policy has four main objectives: � To enable AEGON to attract and retain highly-qualified members for its Executive Board.
� To ensure that the interests of Executive Board members are aligned with AEGON’s business strategy and risk tolerance as well as the objectives, values and long-term interests of the company.
1 Mr. Docters van Leeuwen stepped down from AEGON’s Supervisory Board in July 2011. 2 Ms. Kempler stepped down from AEGON’s Supervisory Board in February 2011. 3 Members of the Compensation Committee are as follows: Leo M. van Wijk (Chairman), Irving W. Bailey II, Karla M.H. Peijs and Robert J. Routs.
(Regeling beheerst beloningsbeleid WFt 2011- Rbb). It was adopted at the annual General Meeting of Shareholders on
The Compensation Committee of AEGON’s Supervisory Board has overall responsibility for the company’s Remuneration Policies, including the Executive Board Remuneration Policy. Members of the Committee 3 are drawn from the Supervisory Board.
AEGON’s Remuneration Policies to ensure they remain in line with prevailing international standards. This review is based partly on information provided by AEGON’s external advisor,
AEGON’s Executive Board Remuneration Policy is reviewed every year by the Compensation Committee. The Policy applies to all members of AEGON’s Executive Board.
Companies included in the peer group have been chosen according to the following criteria: � Industry (preferably life insurance).
The variable compensation is based on both company and individual performance. This performance is determined using a mix of financial and non-financial indicators. AEGON believes these indicators provide an accurate and reliable reflection of the company and individual performance. Performance is assessed by AEGON’s Compensation Committee and validated by the Audit Committee.
performance period. Starting 2011 the distinction between short-term and long-term performance period is no longer made. The 2011 performance period for variable compensation is one year.
At the beginning of each performance period, variable compensation is granted conditionally consisting of both cash and shares. The number of conditionally granted shares is calculated using the fair value of one AEGON share at the beginning of that financial year. This fair value is equal to the average price on the NYSE Euronext Amsterdam stock exchange for the period December 15 through January 15.
over a three year period. After an ex-post assessment, which may lower the vesting parts, the parts will be paid 50% in cash and 50% in shares. Vested shares are restricted for a further period of three years (with the exception of shares sold to meet income tax obligations).
In 2011, the peer group comprised the following companies: Aviva, Axa, CNP Assurances, Generali, ING Group, Legal &
General, Münchener Rückversicherung, Old Mutual, Prudential plc., Standard Life, Swiss Re and Zurich Financial Services.
Supervisory Board determines a maximum total compensation, reflecting the specific roles and responsibilities of the individual. Each year, the Supervisory Board will review total compensation levels to ensure they remain competitive and provide proper, risk-based incentives to members of AEGON’s
It is the responsibility of the Supervisory Board to determine fixed compensation for members of the Executive Board based on their qualifications, experience and expertise.
commitment to the Company’s business strategy, risk tolerance and long-term performance. Variable compensation is based on a number of performance indicators, regularly evaluated by experts in the company’s Finance, Risk, Audit,
1 The share price was set at EUR 4.727, being the share price at the beginning of performance year 2011.
The deferred parts will be paid 50% in cash (=100) and 50%
Variable compensation is initially granted based on performance, as measured against AEGON group targets and personal objectives. These objectives represent a mix of financial and non-financial measures, providing an accurate and reliable reflection of corporate and individual performance. The mix of group targets versus personal objectives is 75%-25%.
Group financial risk-adjusted based 30% Group market consistent value of new business 2011, group pre-tax return on economic required capital 2011
Personal objectives 25% Individual basket of strategic and personal objectives related to AEGON’s strategy
40% upfront 60% deferred cash shares holding period 1/3 1/3 1/3
At the end of the performance period, but prior to attribution of variable compensation, the Supervisory Board will assess whether (downward) modifications are needed. For this purpose quantitative measures as well as qualitative measures
(at Group, regional unit and individual level) will be taken into account, such as: � Breaches of laws and regulations.
The Supervisory Board will apply an ex-post risk assessment to deferred payouts of variable compensation in order to determine whether conditionally awarded (i.e. unvested)
variable compensation should become unconditional (i.e. will vest) or should be adjusted. This ex-post assessment will be based on informed judgment by the Supervisory Board, taking into account significant and exceptional circumstances that are not (sufficiently) reflected in the initially applied performance indicators.
� Significant changes in the Company’s economic or regulatory capital base.
The Supervisory Board will ask the Compensation Committee to review these criteria in detail at each moment of vesting and document its findings. Based on this analysis, the Committee may then put forward a proposal to the Supervisory Board to adjust unvested Variable Compensation. Deferred variable compensation may only be adjusted downwards. Ex-post, riskbased assessments concern deferred variable compensation, not fixed compensation.
Performance Indicators on hindsight), material financial restatements 1, or individual gross misconduct AEGON’s
Supervisory Board will have the right to re-claim variable compensation payments (in either cash and/or shares).
Members of AEGON’s Executive Board are offered pension arrangements and retirement benefits in line with local practice in their countries of residence and in line with those provided to executives at other multinational companies in those countries. Benefits are similarly offered consistent with
AEGON does not grant Executive Board members personal loans, guarantees or the like, unless in the normal course of business and on terms applicable to all employees, and only with the approval of the company’s Supervisory Board.
Members of the Executive Board are appointed for four years, and may then be reappointed for successive mandates also of four years.
1 Not resulting from mandatory restatements resulting from changes in IFRS and other applicable financial reporting regulations.
Chairman of the Executive Board. Mr. Wynaendts was appointed member of the Executive Board in 2003 for four years, and re-appointed in 2007. At the General Meeting of Shareholders on May 12, 2011, Mr. Wynaendts was re-appointed for another four years.
Fixed compensation paid in 2011 increased marginally as compared to 2010, in line with the general increase for all
General Meeting of Shareholders on May 16, 2012 variable compensation for Executive Board members is set in cash and shares, based on the company’s and their personal performance. Targets for the performance indicators have been set in line with the variable compensation targets and 2011 company budgets. Actual performance is being measured over 2011. Under the Executive Board Remuneration Policy 2011, the variable compensation Executive Board members are entitled to, will be paid out over a number of years. In 2012, 40% of variable compensation related to performance year 2011 is payable. This will be split 50/50 in a cash payment and an allocation of shares. Mr. Wynaendts and Mr. Nooitgedagt are eligible to receive a cash payment of EUR 163,591 and
The number of shares to be made available in 2012 is 34,607 and 22,501 for Mr. Wynaendts and Mr. Nooitgedagt respectively.
To these shares a retention (holding) period is applicable for a further three years, before they are at the disposal of the
No variable compensation payable in 2011 has been reclaimed in 2011. Mr. Wynaendts and Mr. Nooitgedagt have waived their right to payout of variable compensation under the short-term incentive compensation plan 2010 which would have been payable in 2011. The amounts waived by Mr. Wynaendts and
proxies from New York registry shareholders in line with common practice in the United States.
All resolutions are adopted by an absolute majority of votes cast, unless Dutch law or AEGON’s Articles of Association stipulate otherwise.
AEGON’s Executive Board is charged with the overall management of the company and is therefore responsible for achieving the company’s aims, strategy and associated risk profile, as well as overseeing any relevant sustainability issues and the development of the company’s earnings. Each member has duties related to his or her specific area of expertise.
2 The Dutch law currently provides for a threshold of 1% of the shares of the issued capital or a block of shares worth at least EUR 50 million. It is expected that the law will be amended and that the threshold will be increased to 3% of the shares and that the threshold of the value will be deleted. The Articles of Association of AEGON N.V. provide for a threshold of EUR 100 million. During the General Meeting of Shareholders in 2010 it was confirmed that the threshold of EUR 100 million in market value will not be effective unless the Dutch law is going to provide for such a threshold.
This includes electronically submitted proxies. All shareholders wishing to take part must provide proof of their identity and shareholding, and must notify the company ahead of time of their intention to attend the meeting. AEGON also solicits
Association – the Executive Board must seek prior approval from the Supervisory Board. In addition, the Supervisory
AEGON’s Executive Board is assisted in its work by the company’s Management Board, which has five members, including the members of the Executive Board 2011, AEGON’s Management Board was composed of
Executive Board contain provisions entitling them to severance payments, should their employment be terminated as a result of a merger or takeover2. The company’s Remuneration
Shareholders following nomination by the Supervisory Board itself. At present, AEGON’s Supervisory Board consists of nine non-executive members, one of whom is a former member of AEGON’s Executive Board.
The Supervisory Board also oversees the activities of several committees. These committees are composed exclusively of Supervisory Board members and deal with specific issues related to AEGON’s financial accounts, risk management strategy, executive remuneration and appointments. These committees are: � The Audit Committee
As a publicly listed company, AEGON is required to provide the following detailed information regarding any structures or measures that may hinder or prevent a third party from acquiring the company or exercising effective control over it.
All preferred shares are held by Vereniging AEGON, the company’s largest shareholder. In line with their higher par value, preferred shares may carry 25/12, or approximately 2.08, votes per share. The voting rights attached to preferred shares are subject to restrictions, as described hereunder under “Special Control Rights”. Under these restrictions each share carries one vote.
The capital contribution on class A preferred shares is a reflection of the market value of AEGON’s common shares at the time the contribution was made. In addition, preferred
shares carry the right to a preferred dividend on the paidin amount. No other dividend is paid on the preferred shares.
On December 31, 2011, Vereniging AEGON, AEGON’s largest shareholder, held a total of 171,974,055 common shares; 211,680,000 class A preferred shares and 101,072,000 class B
AEGON has the option, under the terms of the 1983 Merger
Agreement 1, to acquire additional class B preferred shares to prevent a dilution of its voting rights, unless, by exercising this option, the association increases its share of voting right to more than 33%.
Vereniging AEGON has voluntarily waived its right to cast 25/12 votes per preferred share, except in the event of a “special cause”.
� A proposed business combination by any person, or group of persons, whether acting individually or as a group, other than in a transaction approved by the company’s Executive and Supervisory Boards.
If Vereniging AEGON, acting at its sole discretion, determines that a special cause has arisen, it must notify the General
Vereniging AEGON would, for that limited period, command 32.99% of the votes at a General Meeting of Shareholders.
For more information on Vereniging AEGON, please refer to page 329 to 331 of the consolidated financial statements in this Annual Report, or the website of Vereniging AEGON
The General Meeting of Shareholders appoints members of both the Supervisory and Executive Boards, following nominations by the Supervisory Board. Providing at least two candidates are nominated, these nominations are binding.
Supervisory Board. Such a resolution also requires a two-thirds majority of votes cast and representing at least one half of
Shareholders with a two-thirds majority of votes cast, representing at least one half of AEGON’s issued capital, unless the suspension or dismissal has first been proposed by the company’s Supervisory Board. A member of the Executive
Board may also be suspended by the Supervisory Board, though the General Meeting of Shareholders has the power to annul this suspension.
New shares may be issued up to the maximum of the company’s authorized capital, following a resolution adopted 1 The 1983 Merger Agreement, as amended, is published on AEGON’s website (www.aegon.com). 2 The Preferred Shares Voting Rights Agreement is published on AEGON’s website (www.aegon.com).
by the General Meeting of Shareholders. Shares may also be issued following a resolution of the Executive Board, providing
Shareholders usually authorize the Executive Board to purchase the company’s shares under terms and conditions determined by the General Meeting.
As regards the transferability of preferred shares, please refer to clause 10.5 of the Amendment to the 1983 Merger
Senior executives at AEGON companies and other employees have been granted share appreciation rights and share options. For further details, please see note 14 of the notes to AEGON’s consolidated financial statements of this Annual
AEGON is not party to any significant agreements which would take effect, alter or terminate as a consequence of a change of control following a public offer for the outstanding shares of the company, other than those customary in the financial markets (for example, financial arrangements, loans and joint venture agreements).
The Code also promotes transparency in decision-making and helps strengthen the principles of good governance. The original Code, dated December 2003, was amended in 2008.
Supervisory and Executive Boards. Any substantial change to this structure is submitted to the General Meeting of
A detailed explanation is given below for those instances where AEGON does not fully apply the best practice provisions of the Code. In these few instances, AEGON adheres, as far as possible, to the spirit of the Code.
Dutch Corporate Governance Code requires that the maximum compensation in the event of dismissal should be one year’s salary – or two years’ salary for cases where one year’s salary would be manifestly unreasonable, such as a member who is dismissed in his or her first term of office.
Details of Executive Board members’ employment contracts may be found on AEGON’s corporate website.
AEGON’s CEO and CFO are specifically excluded from voting on issues directly related to AEGON or their position within it.
AEGON’s Supervisory Board holds the view that, given the 1 The 1983 Merger Agreement, as amended is published on AEGON’s website (www.aegon.com).
historic relationship between AEGON and Vereniging AEGON, it would not be in the company’s best interests to prevent them participating in discussions and decision-making related to Vereniging AEGON. For this reason, a protocol has been drawn up authorizing the CEO and CFO to continue their existing practice with respect to their dealings with Vereniging
However, to mitigate any possible negative effects from this, the Supervisory Board has decided that, in the absence of any hostile action, it will only make nominations for appointment of members to the Executive and Supervisory Boards that are non-binding in nature.
Generally, AEGON applies the best practice provisions set out in the Code. For an extensive review of AEGON’s compliance with the Code, please refer to the Corporate Governance
General Meeting of Shareholders, as inside directors are in the United States. The remuneration policy as regards the members of the Executive Board is adopted by the General
AEGON has adopted a code of ethics, titled the Code of
Conduct, which contains AEGON’s ethical principles in relation to various subjects. The Code of Conduct applies to AEGON
employees worldwide, including AEGON’s principal executive officer, principal financial officer, principal accounting officer or controller and persons performing similar functions.
Supervisory Board has the duty to supervise the performance of the Executive Board, the company’s general course of affairs and the business connected with it. The Supervisory
Board also assists the Executive Board by giving advice. Other powers of the Supervisory Board include the prior approval of certain important resolutions of the Executive Board. Members of the Supervisory Board are appointed for a four-year term and may be dismissed by the General Meeting of Shareholders.
The new Code of Conduct also gives a clearer commitment to a customer-centric approach. No waivers were granted in respect of the Code of Conduct. The Code of Conduct is posted on our website – www.aegon.com.
AEGON’s management carried out an evaluation, under the supervision and with the participation of its Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on this evaluation,
AEGON’s Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, the disclosure controls and procedures were effective in providing reasonable assurance regarding the reliability of financial reporting.
AEGON’s principal executive and financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of its published financial statements. Internal control over financial reporting includes policies and procedures that: � Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company.
� Provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with the generally accepted accounting principles.
� Provide reasonable assurance that receipts and expenditures are being made only in accordance with the authorizations of management and directors of the company.
Management assessed the effectiveness of AEGON’s internal control over financial reporting as of December 31, 2011.
We have audited AEGON N.V.’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Public Company Accounting Oversight Board (United States), the consolidated financial statements of AEGON N.V., which comprise the consolidated statements of financial position as of December 31, 2011 and 2010, the related consolidated income statements, statements of comprehensive income, statements of changes in equity, and cash flow statements for each of the three years in the period ended December 31, 2011 of AEGON N.V., and our report dated March 21, 2012 expressed an unqualified opinion thereon.
There have been no changes in internal controls over financial reporting during the period covered by this Annual Report that have materially affected, or reasonably likely to affect, over AEGON’s internal controls over financial reporting.
NOTES TO THE FINANCIAL STATEMENTS OF AEGON N.V. 1 General information 312 2 Summary of significant accounting policies 312 3 Shares in group companies 316 4 Loans to group companies 316 5 Other investments 317 7 Other assets 317 8 Share capital 317 9 Shareholders’ equity 319 10 Convertible core capital securities 321 11 Other equity instruments 322 12 Long­term borrowings 323 13 Short­term borrowings 323 14 Other liabilities 323 15 Number of employees 324 16 Accountants remuneration 324 17 Events after the balance sheet date 325
Amounts in EUR million (except per share data) Note 2011 2010 2009
Income before share in profit / (loss) of associates and tax 887 1,873 (487)
Earnings per share, excluding premium on convertible core capital securities 0.34 0.86 (0.09)
Earnings per share after potential attribution to convertible core capital securities 1 – 0.76 –
Diluted earnings per share after conversion of convertible core capital securities 1, 2 – 0.68 –
1 After deduction of preferred dividend, coupons on perpetuals and coupons and premium on core capital securities. 2 The potential conversion of the convertible core capital securities, only applicable to 2010 and 2009, is taken into account in the calculation of diluted earnings per share if this would have a dilutive effect (i.e. diluted earnings per share would be lower than the earnings after potential attribution to convertible core capital securities).
Consolidated financial statements of AEGON N.V. Consolidated income statement Consolidated financial statements of AEGON N.V. Consolidated income statement
Other comprehensive income: Gains / (losses) on revaluation of available-for-sale investments 3,113 3,873 7,860
Changes in revaluation reserve real estate held for own use 3 4 (1)
Aggregate tax effect of items recognized in other comprehensive income / (loss) (1,167) (1,409) (2,315)
CONSOLIDATED STATEMENT OF FINANCIAL POSITION OF AEGON N.V. AS AT DECEMBER 31
Issued capital and reserves attributable to equity holders of AEGON N.V. 25,720 23,532
Net income / (loss) recognized in the income statement – 869 – – – – 869 3 872
Other comprehensive income: Gains / (losses) on revaluation of availablefor -sale investments – – 3,113 – – 3,113 – 3,113
Equity movements of associates – – – (18) – – (18) – (18)
Coupons on perpetual securities – (177) – – – – (177) – (177)
Coupons and premiums on convertible core capital securities – (750) – – – – (750) – (750)
Net income / (loss) recognized in the income statement – 1,759 – – – – 1,759 1 1,760
Changes in cash flow hedging reserve – – 373 – – – 373 – 373
Equity movements of associates – – – (25) – – (25) – (25)
Disposal of group assets – – (22) – – – (22) – (22)
TOTAL COMPREHENSIVE INCOME / (LOSS) FOR 2010 – 1,766 2,667 961 – – 5,394 1 5,395
Repurchase of convertible core capital securities – – – – (500) – (500) – (500)
Movements in foreign currency translation and net foreign investment hedging reserves – – – (209) – – (209) – (209)
Disposal of group assets – – 59 35 – – 94 – 94
TOTAL COMPREHENSIVE INCOME / (LOSS) FOR 2009 – 194 5,458 (93) – – 5,559 4 5,563
Coupons on perpetual securities – (182) – – – – (182) – (182)
Purchase of investments (other than money market investments) (29,612) (42,691) (49,022)
Net purchase of investments for account of policyholders (1,577) (1,522) (3,837)
Acquisition of subsidiaries and associates, net of cash (99) (31) (202)
Repayment of TRUPS 1, subordinated loans and borrowings (4,342) (6,577) (4,529)
Coupons and premium on convertible core capital securities (750) (63) (273)
Net cash and cash equivalents at the beginning of the year 5,174 4,013 9,506
AEGON N.V. (or “the Company”), its subsidiaries and its proportionally consolidated joint ventures (AEGON or “the
�� IFRIC 14 (Amendment ) Prepayment of a minimum funding requirement.
�� IFRS 1 (amendment) First Time Adoption – Limited Exemption from Comparative IFRS 7 Disclosures for First Time
The following standards, amendments to existing standards and interpretations, published prior to January 1, 2012, were not early adopted by the Group, but will be applied in future years: �� IFRS 7 Financial Instruments: Disclosures – Enhanced Derecognition Disclosure Requirements.
�� IAS 1 Financial Statement Presentation – Presentation of Items of Other Comprehensive Income1.
�� IAS 12 Income Taxes – Recovery of Tax Assets 1.
IFRS 7 Financial Instruments: Disclosures – Offsetting Financial Assets and Financial Liabilities
The amendments to IFRS 7 are effective for annual periods beginning on or after January 1, 2013. The amendments enable users of the financial statements to better compare financial statements prepared in accordance with IFRS
and US GAAP with regard to offsetting of financial assets and financial liabilities. The new disclosures will provide users of financial statements with information about the effect or potential effect of netting arrangements on an entity’s financial position. AEGON is currently assessing the impact of this standard.
IFRS 9 Financial Instruments addresses classification and measurement of financial assets, is available for early adoption immediately but mandatory for accounting periods beginning on or after January 1, 2015. IFRS 9 replaces the multiple classification and measurement models in IAS 39 with a single model that has only two classification categories: amortized cost and fair value. IFRS 9 represents the first stage in the IASB’s planned replacement of IAS 39.
The standard applies to financial years beginning on or after January 1, 2013, and identifies the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent company. The standard provides additional guidance to assist in the determination of control where this is difficult to assess. AEGON is currently assessing the impact of this standard.
The standard applies to financial years beginning on or after January 1, 2013, and provides a definition of joint arrangements by focusing on the rights and obligations of the arrangement rather than its legal form. The standard requires a single method to account for interests in jointly controlled entities. AEGON is currently assessing the impact of this standard.
The amendments apply to financial years beginning on or after July 1, 2012. The amendments require the grouping together of items within other comprehensive income that may be reclassified to the profit or loss section of the income statement. The amendments also reaffirm existing requirements that items in other comprehensive income and profit or loss should be presented as either a single statement or two consecutive statements. The amendment affects presentation only and has therefore no impact on AEGON’s financial position or performance.
The amended standard is effective for annual periods beginning on or after January 1, 2012. The amendment provides a practical solution to the difficult and subjective assessment whether recovery will be through use or through sale when the asset is measured using the fair value model in IAS 40 Investment Property, by introducing a presumption that recovery of the carrying amount will, normally be through sale. AEGON does not expect any impact on its financial position or performance.
As a consequence of the new IFRS 11 and IFRS 12. IAS 28 has been renamed IAS 28 Investments in Associates and Joint
Ventures, and describes the application of the equity method to investments in joint ventures in addition to associates.
The following amendments to the existing standard and interpretation, published prior to January 1, 2012, were not early adopted by the Group as this amendments to existing standard and interpretation are not relevant for the Group: �� IFRS 1 First Time Adoption – Severe Hyperinflation and Removal of Fixed Dates for First Time Adopters.
�� IFRIC 20 – Stripping Costs in the Production Phase of a Surface Mine.
This error had no impact on AEGON’s income statement, including net income or earnings per share, reported in these periods. The net effect of the correcting adjustments, including the foreign exchange impact, on the individual financial statement line items of the consolidated financial statements for the periods presented are as follows: Consolidated statement of financial position
In 2011, AEGON amended its segment reporting to align with changes implemented in the way AEGON manages its businesses. Refer to note 2.5 Segment reporting for details about this change. The change in operating segments had no impact on equity or net income. The comparative segment information presented in note 5 has been adjusted to make the information consistent with the current period figures.
Special purpose entities are consolidated if, in substance, the activities of the entity are conducted on behalf of the
Group, the Group has the decision-power to obtain control of the entity or has delegated these powers through an autopilot, the Group can obtain the majority of the entity’s benefits or the Group retains the majority of the residual risks related to the entity or its assets.
Intra-group transactions, including AEGON N.V. shares held by subsidiaries, which are recognized as treasury shares in equity, are eliminated. Intra-group losses are eliminated, except to the extent that the underlying asset is impaired.
Non-controlling interests are initially stated at their share in the fair value of the net assets on the acquisition date and subsequently adjusted for the non-controlling share in changes in the subsidiary’s equity.
The excess of the consideration paid to acquire the interest and the fair value of any interest already owned, over the
Group’s share in the net fair value of assets, liabilities and contingent liabilities acquired is recognized as goodwill.
Transactions with non-controlling interests are accounted for as transactions with equity holders. Therefore disposals to non-controlling interests and acquisitions from non-controlling interests, not resulting in gaining or losing control of the subsidiary are recorded in other comprehensive income. Any difference between consideration paid or received and the proportionate share in net assets is accounted for in equity attributable to shareholders of AEGON N.V.
On consolidation of an investment fund, a liability is recognized to the extent that the Group is legally obliged to buy back participations held by third parties. The liability is presented in the consolidated financial statements as investment contracts for account of policyholders. Where this is not the case, other participations held by third parties are presented as non-controlling interests in equity. The assets allocated to participations held by third parties or by the
148 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 2.4 - 2.5 2.4 FOREIGN EXCHANGE TRANSLATION
The euro is also the currency of the primary economic environment in which the Company operates. Each company in the Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. Transactions in foreign currencies are initially recorded at the functional currency rate prevailing at the date of the transaction.
�� New Markets: Covers businesses operating in Central & Eastern Europe, Asia, Spain and France as well as AEGON’s variable annuity activities in Europe and AEGON Asset Management.
In addition, AEGON presents: �� The line item “Run-off businesses”, which includes earnings of certain business units where management has decided to exit the market and to run-off the existing block of business. This line item includes the earnings of the institutional spread-based business, structured settlements blocks of business, Bank-Owned and Corporate-Owned
This Annual Report includes the non-IFRS financial measure: underlying earnings before tax. The reconciliation of this measure to the most comparable IFRS measure is presented in note 5 to the consolidated financial statements.
measure presented herein. While many other insurers in AEGON’s peer group present substantially similar non-IFRS
Certain assets held by AEGON Americas, AEGON The Netherlands and AEGON UK are carried at fair value and managed on a total return basis, with no offsetting changes in the valuation of related liabilities. These include assets such as investments in hedge funds, private equities, real estate limited partnerships, convertible bonds and structured products. Underlying earnings exclude any over- or underperformance compared to management’s long-term expected return on assets. Based on current holdings and asset returns, the long-term expected return on an annual basis is 8-10%, depending on asset class, including cash income and market value changes. The expected earnings from these asset classes are net of deferred policy acquisition costs (DPAC) where applicable.
In addition, certain products offered by AEGON Americas contain guarantees and are reported on a fair value basis, including the segregated funds offered by AEGON Canada and the total return annuities and guarantees on variable annuities of AEGON USA. The earnings on these products are impacted by movements in equity markets and risk-free interest rates. Short-term developments in the financial markets may therefore cause volatility in earnings. Included in underlying earnings is a long-term expected return on these products and excluded is any over- or underperformance compared to management’s expected return. The fair value movements of certain guarantees and the fair value change of derivatives that hedge certain risks on these guarantees of AEGON The Netherlands and Variable Annuities Europe
(included in New Markets) are excluded from underlying earnings, and the long-term expected return for these guarantees is set at zero.
Holding and other activities include certain issued bonds that are held at fair value through profit or loss (FVTPL).
AEGON’s credit spread used in the valuation of these bonds is excluded from underlying earnings and reported under fair value items.
Fair value items include the over- or underperformance of investments and guarantees held at fair value for which the expected long-term return is included in underlying earnings. Changes to these long-term return assumptions are also included in the fair value items.
Includes realized gains and losses on available-for-sale investments, mortgage loans and loan portfolios.
Includes impairments and reversals on available-for-sale debt securities and impairments on shares including the effect of deferred policyholder acquisition costs, mortgage loans and loan portfolios on amortized cost and associates respectively.
Other income or charges is used to report any items which cannot be directly allocated to a specific line of business.
Also items that are outside the normal course of business are reported under this heading.