Included under insurance contracts are interest rate rebates. Interest rate rebate is a form of profit sharing whereby the Group determines the premium based on the expected interest that will be earned on the contract. The expected interest is calculated with reference to a portfolio of government bonds. Interest rate rebates that are expected to be recovered in future periods are deferred and amortized as the interest is realized. The amortization is recognized in Aegon’s income statement. They are considered in the liability adequacy test for insurance liabilities. Deferred interest rebates are derecognized when the related contracts are settled or disposed of.
a. Life insurance contracts Life insurance contracts are insurance contracts with guaranteed life-contingent benefits. The measurement of the liability for life insurance contracts varies depending on the nature of the product.
d. Shadow accounting Shadow accounting ensures that all gains and losses on investments affect the measurement of the insurance assets and liabilities in the same way, regardless of whether they are realized or unrealized and regardless of whether the unrealized gains and losses are recognized in the income statement or directly in equity in the revaluation reserve. In some instances, realized gains or losses on investments have a direct effect on the measurement of the insurance assets and liabilities. For example, some insurance contracts include benefits that are contractually based on the investment returns realized by the insurer. In addition, realization of gains or losses on available-for-sale investments can lead to unlocking of VOBA or DPAC and can also affect the outcome of the liability adequacy test to the extent that it considers actual future investment returns. For similar changes in unrealized gains and losses, shadow accounting is applied. If an unrealized gain or loss triggers a shadow accounting adjustment to VOBA, DPAC or the insurance liabilities, the corresponding adjustment is recognized through other comprehensive income in the revaluation reserve, together with the unrealized gain or loss.
The reserve for unearned premiums includes premiums received for risks that have not yet expired. Generally, the reserve is released over the term of the contract and is recognized as premium income.
f. Liability adequacy testing At each reporting date the adequacy of the life insurance liabilities, net of VOBA and DPAC, is assessed using a liability adequacy test.
All tests performed within the Group are based on current estimates of all contractual future cash flows, including related cash flows from policyholder options and guarantees. A number of valuation methods are applied, including discounted cash flow methods, option pricing models and stochastic modeling. Aggregation levels are set either on geographical jurisdiction or at the level of portfolio of contracts that are subject to broadly similar risks and managed together as a single portfolio. Specifically, in the Netherlands the liability adequacy test is performed on a consolidated basis for all life and non-life business, whereas in the Americas and the UK
2.20 Investment contracts Contracts issued by the Group that do not transfer significant insurance risk, but do transfer financial risk from the policyholder to the
Group are accounted for as investment contracts. Depending on whether the Group or the policyholder runs the risks associated with the investments allocated to the contract, the liabilities are classified as investment contracts or as investment contracts for account of policyholders. Investment contract liabilities are recognized when the contract is entered into and are derecognized when the contract expires, is discharged or is cancelled.
a. Investment contracts with discretionary participation features Some investment contracts have participation features whereby the policyholder has the right to receive potentially significant additional benefits which are based on the performance of a specified pool of investment contracts, specific investments held by the Group or on the issuer’s net income. If the Group has discretion over the amount or timing of the distribution of the returns to 159Annual Report 2012
Notes to the consolidated financial statements of Aegon N.V. Note 2 policyholders, the investment contract liability is measured based on the accounting principles that apply to insurance contracts with similar features.
Investment contracts for account of policyholders are designated at fair value through profit or loss. Contracts with unit-denominated payments are measured at current unit values, which reflect the fair values of the assets of the fund.
2.21 Provisions A provision is recognized for present legal or constructive obligations arising from past events, when it is probable that it will result in an outflow of economic benefits and the amount can be reliably estimated.
Onerous contracts With the exception of insurance contracts and investment contracts with discretionary participation features for which potential future losses are already considered in establishing the liability, a provision is recognized for onerous contracts in which the unavoidable costs of meeting the resulting obligations exceed the expected future economic benefits. The unavoidable costs under a contract reflect the
least net cost of exiting from the contract, which is the lower of the cost of fulfilling it and any compensation or penalties arising from failure to fulfill it.
The unrecognized actuarial gains and losses are amortized in a straight line over the average remaining working life of the employees covered by the plan, to the extent that the gains or losses exceed the corridor limits. The corridor is defined as ten percent of the greater of the defined benefit obligation or the plan assets. The amortization charge is reassessed at the beginning of each year.
The corridor approach described above was not applied retrospectively to periods prior to the transition to IFRS (January 1, 2004).
Notes to the consolidated financial statements of Aegon N.V. Note 2 is recognized in the income statement, together with a corresponding increase in shareholders’ equity, as the services are rendered.
2.30 Results from financial transactions Results from financial transactions include: Net fair value change of general account financial investments at fair value through profit or loss, other than derivatives
Net fair value change on for account of policyholder financial assets at fair value through profit or loss includes fair value movements of investments held for account of policyholders (refer to note 2.9). The net fair value change does not include interest or dividend income.
Notes to the consolidated financial statements of Aegon N.V. Note 3 2.32 Interest charges and related fees Interest charges and related fees includes interest expense on trust pass-through securities and other borrowings. Interest expense on trust pass-through securities and other borrowings carried at amortized cost is recognized in profit or loss using the effective interest method.
3 Critical accounting estimates and judgment in applying accounting policies Application of the accounting policies in the preparation of the financial statements requires management to apply judgment involving assumptions and estimates concerning future results or other developments, including the likelihood, timing or amount of future transactions or events. There can be no assurance that actual results will not differ materially from those estimates. Accounting policies that are critical to the financial statement presentation and that require complex estimates or significant judgment are described in the following sections.
Investment assumptions are either prescribed by the local regulator or based on management’s future expectations. In the latter case, the anticipated future investment returns are set by management on a countrywide basis, considering available market information and economic indicators. A significant assumption related to estimated gross profits on variable annuities and variable life insurance products in the United States and some of the smaller country units, is the annual long-term growth rate of the underlying assets.
For 2012, Aegon kept its long-term equity market return assumption for the estimated gross profits on variable life and variable annuity products in the Americas at 9% (2011: 9%). On a quarterly basis, the difference between the estimated equity market return and the actual market return is trued-up.
Canada amounted to EUR 2.1 billion at December 31, 2012 (2011: EUR 2 billion).
Applying a reasonably possible increase to the mortality assumption, which varies by block of business, would reduce net income by approximately EUR 53 million (2011: EUR 60 million). A relative 20% increase in the lapse rate assumption would increase net income by approximately EUR 42 million (2011: EUR 29 million).
Any reasonably possible changes in the other assumptions Aegon uses to determine EGP margins (i.e. maintenance expenses, inflation and disability) would reduce net income by less than EUR 39 million (per assumption change) (2011: EUR 37 million).
Determination of fair value and fair value hierarchy The following is a description of Aegon’s methods of determining fair value, and a quantification of its exposure to financial instruments measured at fair value.
Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable willing parties in an arm’s length transaction. Financial instruments measured at fair value on an ongoing basis include investments for the general account, investments for the account of policyholders, investments designated at fair value and derivatives, as well as investment contracts, investment contracts for account of policyholders and borrowings.
In accordance with IFRS 7, Aegon uses the following hierarchy for determining and disclosing the fair value of financial instruments: �� Level I: quoted prices (unadjusted) in active markets for identical assets or liabilities that Aegon can access at the measurement date; �� Level II: inputs other than quoted prices included within Level I that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices of identical or similar assets and liabilities) using valuation techniques for which all significant inputs are based on observable market data; and
�� Level III: inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) using valuation techniques for which any significant input is not based on observable market data.
However, certain financial instruments are valued on the basis of valuation techniques that feature one or more significant market inputs that are unobservable and, for such financial instruments, the derivation of fair value is more judgmental. An instrument in its entirety is classified as valued using significant unobservable inputs (Level III) if, in the opinion of management, a significant proportion of the instrument’s carrying amount is driven by unobservable inputs. “Unobservable” in this context means that there is little or no current market data available from which to determine the price at which an arm’s length transaction would be likely to occur. It generally does not mean that there is no market data available at all upon which to base a determination of fair value. Additional information is provided in the section headed “Effect of changes in significant unobservable assumptions to reasonably possible alternatives” below.
Aegon employs an oversight structure over valuation of financial instruments that includes appropriate segregation of duties. Senior management, independent of the investing functions, is responsible for the oversight of control and valuation policies and for reporting the results of these policies. For fair values determined by reference to external quotation or evidenced pricing parameters, independent price determination or validation is utilized to corroborate those inputs. Further details of the validation processes are set out below.
The fair values of investments held in non-quoted investment funds (hedge funds, private equity funds) are determined by management after taking into consideration information provided by the fund managers. Aegon reviews the valuations each month and performs analytical procedures and trending analyses to ensure the fair values are appropriate.
Periodically, Aegon performs an analysis of the inputs obtained from third-party pricing services and brokers to ensure that the inputs are reasonable and produce a reasonable estimate of fair value. Aegon’s asset specialists and investment valuation specialists consider both qualitative and quantitative factors as part of this analysis. Several examples of analytical procedures performed include, but are 167Annual Report 2012
Notes to the consolidated financial statements of Aegon N.V. Note 3 not limited to, recent transactional activity for similar debt securities, review of pricing statistics and trends and consideration of recent relevant market events. Other controls and procedures over pricing received from indices, third-party pricing services, or brokers include validation checks such as exception reports which highlight significant price changes, stale prices or un-priced securities. Additionally,
The fair value of floating interest rate mortgage loans, policy loans and private placements used for disclosure purposes is assumed to be approximated by their carrying amount, adjusted for changes in credit risk. Credit risk adjustments are based on market observable credit spreads if available, or management’s estimate if not market observable.
In 2012, Aegon The Netherlands changed the discount rate used in determining the fair value of its mortgage loan portfolio. One of the main changes in discount rate is the replacement of an entity specific funding spread by a more generic liquidity premium. As a result the disclosed fair value is better aligned with available market information. As the mortgage loan portfolio is measured at amortized cost, this change in fair value measurement does not impact net income or shareholders’ equity of Aegon The Netherlands.
Most valuations are derived from swap and volatility matrices, which are constructed for applicable indices and currencies using current market data from many industry standard sources. Option pricing is based on industry standard valuation models and current market levels, where applicable. The pricing of complex or illiquid instruments is based on internal models or an independent third party. For long-dated illiquid contracts, extrapolation methods are applied to observed market data in order to estimate inputs and assumptions that are not directly observable. To value OTC derivatives, management uses observed market information, other trades in the market
Aegon normally mitigates counterparty credit risk in derivative contracts by entering into collateral agreements where practical and in ISDA master netting agreements for each of the Group’s legal entities to facilitate Aegon’s right to offset credit risk exposure. In the event no collateral is held by Aegon or the counterparty, the fair value of derivatives is adjusted for credit risk based on market observable spreads. Changes in the fair value of derivatives attributable to changes in counterparty credit risk were not significant.
Derivatives embedded in insurance contracts including guarantees Certain guarantees for minimum benefits in insurance and investment contracts are carried at fair value. These guarantees include guaranteed minimum withdrawal benefits (GMWB) in the United States, United Kingdom and Japan which are offered on some variable annuity products and are also assumed from a ceding company; minimum interest rate guarantees on insurance products offered in the
Netherlands, including group pension and traditional products; variable annuities sold in Europe and Japan; and guaranteed minimum accumulation benefits on segregated funds sold in Canada.
Since many of the assumptions are unobservable and are considered to be significant inputs to the liability valuation, the liability included in future policy benefits has been reflected within Level III of the fair value hierarchy. Refer to note 46 for more details about
Fair value hierarchy The following table shows an analysis of financial instruments recorded at fair value by level of the fair value hierarchy: Financial assets carried at fair value Level I Level II Level III Total 2012
Financial liabilities carried at fair value Investment contracts for account of policyholders 7,916 18,605 166 26,687 1 The investments for account of policyholders included in the table above represents those investments carried at fair value through profit or loss. 2 Borrowings included in the table above contain those borrowings that are carried at fair value through profit or loss. Total borrowings on the statement of financial position also contain borrowings carried at amortized cost that are not included in the above schedule.
Significant transfers between Level I and II During 2012, the amount of assets transferred from Level I to Level II classification was EUR 1 million (2011: EUR 4 million), due to changes in liquidity for specific debt securities.
Other investments at fair value 799 (132) 61 223 (40) (14) (15) 1 - 883 -
Investments for account of policyholders 2,225 57 - 185 (839) - 9 230 (152) 1,715 58
Investment contracts for account of policyholders (166) 2 - - 54 - 1 - - (109) 1 Includes impairments and movements related to fair value hedges. 2 Total gains / (losses) for the period during which the financial instrument was in Level III.
Total gains or losses for the period included in the profit and loss for assets held at December 31,
Other investments at fair value 805 (120) 32 133 (65) (8) 22 - - 799 -
Effect of changes in significant unobservable assumptions to reasonably possible alternatives The following table shows the sensitivity of the fair value of Level III instruments to changes in key assumptions, by class of instrument: Financial assets carried at fair value Note Carrying amount
Other investments at fair value d 1,416 124 (124) 1,428 142 (142)
that are measured at par. The bank has implicit financial support from the United States government. The redemption value of the shares is fixed at par and can only be redeemed by the bank. Remaining share positions were stressed by 10% up or down.
(EUR 1,975 million; 2011: EUR 1,962 million). For corporate bonds the most significant unobservable input for the valuation of these securities is the credit spread / illiquidity premium. Aegon adjusted the price, based on the bid / ask spread Aegon observed in the market for these types of securities. For investments in structured debt securities (ABS, RMBS and CMBS), the most significant unobservable input for valuation of these securities is the credit spread / illiquidity premium. Aegon adjusted the discount rate by 100 basis points up or down for this input.
d. Other investments at fair value include investments exposed to real estate (EUR 667 million; 2011: EUR 522 million) and private equity investments (EUR 647 million; 2011: EUR 731 million). Aegon adjusted the assumption pertaining to real estate values up or down by 10%. This change is reflective of the range presented to senior management when analyzing investment opportunities for approval. For private equity investments the underlying investments are of a very diversified nature in terms of type of investments, investment strategy and sector. There is no one significant unobservable assumption or combination of assumptions that could be identified and used to compute a reasonably possible alternative assumption analysis for this portfolio.
Aegon adjusted longevity with 2% up or down for this input, compared to the prospective mortality table in determining the value of this derivative. Derivatives exclude derivatives for account of policyholders amounting to EUR 119 million (2011: EUR 294 million).
f. Derivatives mainly consist of embedded derivatives related to guarantees for which the most significant unobservable input is the credit spread. The credit spread was increased or decreased by 20 basis points.
Residential mortgage-backed securities (RMBS) are monitored and reviewed on a monthly basis. Detailed cash flow models using the current collateral pool and capital structure on the portfolio are performed quarterly. Model output is generated under a base and several stress-case scenarios. Aegon’s RMBS asset specialists utilize industry modeling software to perform a loan-by-loan, bottomup approach to modeling. Key assumptions used in the models are projected defaults, loss severities, and prepayments. Each of these key assumptions varies greatly based on the significantly diverse characteristics of the current collateral pool for each security.
Loan-to-value, loan size, and borrower credit history are some of the key characteristics used to determine the level of assumption that is utilized.
Significant or prolonged decline is defined as an unrealized loss position for more than 6 months or a fair value of less than 80% of the original cost price of the investment. Additionally, as part of an ongoing process, the equity analysts actively monitor earnings releases, company fundamentals, new developments and industry trends for any signs of possible impairment. If an available-forsale equity security is impaired based upon Aegon’s qualitative or quantitative impairment criteria, any further declines in the fair value at subsequent reporting dates are recognized as impairments. Therefore, at each reporting period, for an equity security that is 175Annual Report 2012
Notes to the consolidated financial statements of Aegon N.V. Note 4 determined to be impaired based upon Aegon’s impairment criteria, an impairment is recognized for the difference between the fair value and the original cost basis, less any previously recognized impairments.
The recoverable amount is the higher of the value in use and fair value less costs to sell for a cash-generating unit. Impairment testing requires the determination of the value in use or fair value less costs for each of Aegon’s identified cash generating units.
credit and currency. The limits in these policies in aggregate remain within the Group’s overall tolerance for risk and the Group’s financial resources. Operating within this policy framework, Aegon employs risk management programs including asset liability management (ALM) processes and models, hedging programs (which are largely conducted via the use of derivatives) and insurance programs (which are largely conducted through the use of reinsurance). These risk management programs are in place in each country unit and are not only used to manage risk in each unit, but are also part of the Group’s overall risk management.
Aegon operates a Derivative Use Policy and a Reinsurance Use Policy to govern its usage of derivatives and reinsurance. These policies establish the control, authorization, execution and monitoring requirements of the usage of such instruments. In addition, these policies stipulate necessary mitigation of credit risk created through these derivatives and reinsurance risk management tools. For derivatives, credit risk is normally mitigated by requirements to post collateral via credit support annex agreements. For reinsurance, credit risk is normally mitigated by downgrade triggers allowing Aegon’s recapture of business, funds withheld by treaties (when Aegon owns the assets) and assets held in trust for the benefit of Aegon (in the event of reinsurer insolvency).
Management action is taken into account to the extent that it is part of Aegon’s regular policies and procedures, such as established hedging programs. However, incidental management actions that would require a change in policies and procedures are not considered.
Each sensitivity analysis reflects the extent to which the shock tested would affect management’s critical accounting estimates and judgment in applying Aegon’s accounting policies. Market-consistent assumptions underlying the measurement of non-listed assets and liabilities are adjusted to reflect the shock tested. The shock may also affect the measurement of assets and liabilities based on assumptions that are not observable in the market. For example, a shock in interest rates may lead to changes in the amortization schedule of DPAC or to increased impairment losses on equity investments. Although management’s short-term assumptions may change if there is a reasonably possible change in a risk factor, long-term assumptions will generally not be revised unless there is evidence that the movement is permanent. This fact is reflected in the sensitivity analyses provided below.
The accounting mismatch inherent in IFRS is also apparent in the reported sensitivities. A change in interest rates has an immediate impact on the carrying amount of assets measured at fair value. However, the shock will not have a similar effect on the carrying amount of the related insurance liabilities that are measured based on prudent assumptions or on management’s long-term expectations. Consequently, the different measurement bases for assets and liabilities lead to increased volatility in IFRS net income and shareholders’ equity. Aegon has classified a significant part of its investment portfolio as “available-for-sale”, which is one of the main reasons why the economic shocks tested have a different impact on net income than on shareholders’ equity. Unrealized gains and losses on these assets are not recognized in the income statement but are booked directly to the revaluation reserves in shareholders’
equity, unless impaired. As a result, economic sensitivities predominantly impact shareholders’ equity but leave net income unaffected.
Nor are the results of the sensitivities intended to be an accurate prediction of Aegon’s future shareholders’ equity or earnings. The analysis does not take into account the impact of future new business, which is an important component of Aegon’s future earnings.
It also does not consider all methods available to management to respond to changes in the financial environment, such as changing investment portfolio allocations or adjusting premiums and crediting rates. Furthermore, the results of the analyses cannot be extrapolated for wider variations since effects do not tend to be linear. No risk management process can clearly predict future results.
Information on Aegon’s 3-year historical net income / (loss) and shareholders’ equity in functional currency are shown in the table below: Net income Americas (in USD) 1,316 895 1,458
During periods of sustained low interest rates, Aegon may not be able to preserve margins as a result of minimum interest rate guarantees and minimum guaranteed crediting rates provided on policies. Also, investment earnings may be lower because the interest earnings on new fixed-income investments are likely to have declined with the market interest rates. Mortgages and redeemable bonds in the investment portfolio are more likely to be repaid as borrowers seek to borrow at lower interest rates and Aegon may be required to reinvest the proceeds in securities bearing lower interest rates. Accordingly, net income declines as a result of a decrease in the spread between returns on the investment portfolio and the interest rates either credited to policyholders or assumed in reserves.
Notes to the consolidated financial statements of Aegon N.V. Note 4 measured at fair value. Over time, the short-term reduction in net income due to rising interest rates would be offset by higher net income in later years, all else being equal. Therefore, rising interest rates are not considered a long-term risk to the Group.
Credit risk As premiums and deposits are received, these funds are invested to pay for future policyholder obligations. For general account products, Aegon typically bears 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), OTC derivatives and reinsurance contracts. Some issuers have defaulted on their financial obligations for various reasons, including bankruptcy, lack of liquidity, downturns in the economy, downturns in real estate values, operational failure and fraud. During the financial crisis, Aegon incurred significant investment impairments on Aegon’s investment assets due to defaults and overall declines in the capital markets.
The table that follows shows the Group’s maximum exposure to credit risk from investments in general account financial assets, as well as general account derivatives and reinsurance assets, collateral held and net exposure. Please refer to note 49 and note 50 for further information on capital commitments and contingencies, and on collateral given, which may expose the Group to credit risk.
Debt securities - carried at fair value 97,819 - - 822 - - - 822 - 96,997
Debt securities - carried at amortized cost 189 - 9 - - - - 9 - 180
Money market and other short-term investments - carried at fair value 9,797 - 718 - - - - 718 17 9,096
Other loans - carried at amortized cost 2,490 - - - - - 2,073 2,073 1,324 1,741
Debt securities - carried at fair value 96,251 - - 1,009 - - - 1,009 - 95,242
Money market and other short-term investments - carried at fair value 10,472 - 1,345 - - - - 1,345 28 9,155
Mortgage loans - carried at amortized cost 26,012 1,146 - 1,187 36,027 - 1 38,361 13,117 768
Other loans - carried at amortized cost 2,797 - - - - - 2,160 2,160 972 1,609
Several bonds in Aegon USA’s portfolio are insured by monoline insurers. Further information on the monoline insurers is provided in section “Additional information on credit risk, unrealized losses and impairments”.
The real estate collateral for mortgages includes both residential and commercial properties. The collateral for commercial mortgage loans in Aegon Americas is measured at fair value. At a minimum, on an annual basis, a fair value is estimated for each individual real estate property that has been pledged as collateral. When a loan is originally provided, an external appraisal is obtained to estimate the value of the property. In subsequent years, the value is typically estimated internally using various professionally accepted valuation methodologies. Internal appraisals are performed by qualified, professionally accredited personnel. International valuation standards are used and the most significant assumptions made during the valuation of real estate are the current cost of reproducing or replacing the property, the value that the property’s net earning power will support, and the value indicated by recent sales of comparable properties. Valuations are primarily supported by market evidence. For Aegon The Netherlands collateral for the residential mortgages is measured as the foreclosure value which is indexed periodically.
Further information on the related reinsurance transactions is included in note 26.
collateralized debt obligations. The table above provides a breakdown to credit quality of these credit derivatives. Refer to note 24 for more details.
Aegon manages credit risk exposure by individual counterparty, sector and asset class, including cash positions. Normally, Aegon mitigates credit risk in derivative contracts by entering into collateral agreements, where practical, and in ISDA master netting agreements for each of Aegon’s legal entities to facilitate Aegon’s right to offset credit risk exposure. Main counterparties to these transactions are investment banks which are typically rated A or higher. The credit support agreement will normally dictate the threshold over which collateral needs to be pledged by Aegon or its counterparty. Transactions requiring Aegon or its counterparty to post collateral are typically the result of OTC derivative trades, comprised mostly of interest rate swaps, currency swaps, and credit swaps. Collateral received is mainly cash (USD and EUR). The Credit Support Agreements that outline the acceptable collateral require high quality instruments to be posted. In 2012 and 2011, Aegon did not take possession of collateral or call on other credit enhancements. The credit risk associated with financial assets subject to a master netting agreement is eliminated only to the extent that financial liabilities due to the same counterparty will be settled after the assets are realized.
Aegon’s GRCC and one from the US RCC. Two violations were casued by downgrades. Exposures to these names are being reduced.
Aegon’s GRCC. The second one was a minor violation resulting from exchange rate movements.
At December 31, 2012, Aegon’s largest credit exposures are to Austria, France, HSBC, JP Morgan and Rabobank. Aegon had large investments in sovereign backed assets, the largest being in Germany, the Netherlands, USA, UK and Austria. Highly rated sovereign assets (AAA rated) and domestically issued and owned in local currency sovereign exposures are excluded from the Credit Name
Aegon Group level long-term counterparty exposure limits at the end of 2012 (unchanged compared to 2011) are as follows: Amounts in EUR million Group Limit AAA 900
The ratings distribution of general account portfolios of Aegon’s major country units, excluding reinsurance assets, are presented in the table that follows, organized by rating category and split by assets that are valued at fair value and assets that are valued at amortized cost. Disclosure of ratings follows a hierarchy of S&P, Moody’s, Fitch, Internal and National Association of Insurance
Past due and / or impaired assets 172 1,506 522 266 - 30 161 7 856 1,810 2,666 1 Includes investments of Holding and other activities.
Credit risk concentrations - debt securities and money market investments 2012 Americas
Residential mortgage backed securities (RMBSs) 5,079 1,141 639 323 7,183 1,232
Of which past due and / or impaired assets 185Annual Report 2012
Credit risk concentrations - debt securities and money market investments 2011 Americas
The fair value of Aegon Americas commercial and agricultural mortgage loan portfolio as per December 31, 2012 amounts to
(2011: 2.37%) is in delinquency (defined as 60 days in arrears). In 2012, Aegon Americas recognized EUR 24 million impairments
The fair value of Aegon The Netherlands mortgage loan portfolio as per December 31, 2012 amounts to EUR 24,114 million
(2011: EUR 18,910 million). The LTV amounts to about 92% (2011: 94%). A significant part of the portfolio (53%; 2011: 54%) is government guaranteed. Of the portfolio, 2.4% (2011: 1.0%) is in delinquency (defined as 60 days in arrears). Impairments in 2012 amounted to EUR 16 million (2011: EUR 12 million). Historical defaults of the portfolio have been between 2 and 9 basis points per year.
Included in the debt securities and money market investments are EUR 189 million of assets that have been classified as held-to-maturity and are therefore carried at amortized cost (2011: EUR 168 million), of which EUR 31 million government bonds
Of the EUR 892 million (2011: EUR 1,147 million) indirect exposure on the monoline insurers, 34% relates to MBIA, 27% to AMBAC, 7% to FGIC and 24% to FSA (2011: 34% related to MBIA, 25% to AMBAC, 10% to FGIC and 26% to FSA).
and held to maturity (HTM) portfolios, are as follows as of December 31: Amortized cost Unrealized gains Unrealized losses Total fair value
Of which held by Aegon Americas, NL and UK 93,066 10,793 (1,397) 102,462 90,513 11,949 187Annual Report 2012
Unrealized bond losses by sector The composition by industry categories of debt securities and money market investments that are included in Aegon’s available-for-sale and held to maturity portfolios in an unrealized loss position held by Aegon at December 31 is presented in the following table: Unrealized losses - debt securities and money market investments
Of which held by Aegon Americas, NL and UK 11,590 (1,341) 20,851 (3,114)
Unrealized losses - debt securities and money market investments held by Aegon Americas, Aegon The Netherlands and Aegon UK
Asset Backed Securities (ABSs) - CDOs backed by ABS, Corp. Bonds, Bank loans 993 (86) 1,277 (197)
The information presented above is subject to rapidly changing conditions. As such, Aegon expects the level of securities with overall unrealized losses to fluctuate. The recent volatility of financial market conditions has resulted in increased recognition of both investment gains and losses, as portfolio risks are adjusted through sales and purchases.
of the total unrealized loss position. The largest single issuer unrealized loss is EUR 51 million and relates to Belfius Bank SA, a bank owned by the Belgian government which was created subsequent to the restructuring of Dexia SA.
U.S., the Federal Reserve maintained a Fed Funds rate near zero. US Treasury rates remained in a relatively low yield range during the second half of 2012, reflecting concerns about future growth, strong Federal Reserve market intervention, and reduced market concern about inflation. Corporate default rates remained low in 2012 due largely to readily available access to funding and strong corporate balance sheet fundamentals. Commodity prices have been mixed in 2012 with energy prices generally low.
A security is impaired if there is objective evidence that a loss event has occurred after the initial recognition of the asset that has a 189Annual Report 2012
Notes to the consolidated financial statements of Aegon N.V. Note 4 negative impact on the estimated future cash flows. A specific security is considered to be impaired when it is determined that not all amounts due (both principal and interest) will be collected as contractually scheduled.
Residential mortgage-backed securities Aegon Americas, Aegon The Netherlands and Aegon UK hold EUR 6,763 million of residential mortgage-backed securities (RMBS), of which EUR 4,979 million is held by Aegon USA, EUR 639 million by Aegon UK and EUR 1,141 million by Aegon The Netherlands.
The underlying residential mortgages have varying credit characteristics and are pooled together and sold in tranches. The following table shows the breakdown of Aegon USA’s RMBS available-for-sale portfolio. Additionally, Aegon USA has investments in RMBS
Loss severity assumptions were determined by obtaining historical rates from broader market data and by adjusting those rates for vintage, specific pool performance, collateral type, mortgage insurance and estimated loan modifications. Prepayments were estimated by examining historical averages of prepayment activity on the underlying collateral. Quantitative ranges of significant assumptions within Aegon’s modeling process for Prime Jumbo, Alt-A and Negative Amortization RMBS are as follows: prepayment assumptions range from approximately 0.5% to 25% with a weighted average of approximately 4.8%, assumed defaults on delinquent loans range from 50% to 100% with a weighted average of approximately 84.6%, assumed defaults on current loans are dependent on the specific security’s collateral attributes and historical performance, while loss severity assumptions range from approximately 13.9% to 75%, with a weighted average of approximately 54.3%. Additionally, quantitative ranges of significant assumptions within Aegon’s modeling process for the RMBS subprime mortgage portfolio are as follows: prepayment assumptions range from approximately 2% to 6% with a weighted average of approximately 5.2%, assumed defaults on delinquent loans range from 60% to 100% with a weighted average of approximately 87.2%, assumed defaults on current loans are dependent on the specific security’s collateral attributes and historical performance, while loss severity assumptions range from approximately 62% to 103%, with a weighted average of approximately 72.9%.
The fair values of Aegon USA’s RMBS instruments were determined as follows: Level II Level III Total 2012 Level II Level III Total 2011
As part of Aegon’s RMBS portfolio, Aegon holds EUR 858 million of securitized negative amortization mortgages with net unrealized gains of EUR 32 million at December 31, 2012, fully owned by Aegon USA. Negative amortization mortgages (also known as Option
ARMs) are loans whereby the payment made by the borrower may be less than the accrued interest due and the difference is added to the loan balance. When the accrued balance of the loan reaches the negative amortization limit (typically 110% to 125% of the original loan amount), the loan recalibrates to a fully amortizing level and a new minimum payment amount is determined. The homeowner’s new minimum payment amount can be significantly higher than the original minimum payment amount. The timing of when these loans reach their negative amortization cap will vary, and is a function of the accrual rate on each loan, the minimum payment rate on each loan and the negative amortization limit itself. Typically, these loans are estimated to reach their negative amortization limit between 3 and 5 years from the date of origination.
USA. Additionally, Aegon USA has investments in RMBS negative amortization mortgages of EUR 0.2 million (2011: EUR 1 million), which are classified as fair value through profit or loss.
Aegon categorizes mortgage backed securities issued by a securitization trust as having subprime mortgage exposure when the average credit score (FICO) of the underlying mortgage borrowers in a securitization trust is below 660 at issuance. Aegon also categorizes mortgage backed securities issued by a securitization trust with second lien mortgages as subprime mortgage exposure, even though a significant percentage of second lien mortgage borrowers may not necessarily have credit scores below 660 at issuance. The table below summarizes vintage and quality of the AFS RMBS - Subprime mortgage portfolio of Aegon USA. Additionally, Aegon USA has investments in RMBS Subprime mortgages of EUR 4 million (2011: EUR 4 million), which are classified as fair value through profit or loss.
The table below summarizes the comparative information on vintage and quality of the AFS RMBS - subprime mortgage portfolio of Aegon USA.
Total Sub-prime Mortgages- floating rate 6 4 5 31 204 250 52 169 1 Second lien collateral primarily composed of loans to prime and Alt-A borrowers.
For the RMBS - Subprime mortgage holding, the underlying collateral pool has experienced higher than expected delinquencies and losses, which was further exacerbated by the impact of declining home values on borrowers using affordability products. This has led to the underlying collateral pool having reduced cash flows in comparison to expectations at origination. Increased losses have eroded the subordination in this security, which in turn has led to a decline in the level of protection to Aegon’s tranche within the collateral pool.
Despite the decline in the level of protection provided by the subordination for this security, cash flow modeling continues to indicate full recovery of principal and interest.
(CMBS), of which EUR 5,137 million is held by Aegon USA, EUR 438 million by Aegon UK and EUR 8 million by Aegon The Netherlands.
CMBS are securitizations of underlying pools of mortgages on commercial real estate. The underlying mortgages have varying risk characteristics and are pooled together and sold in different rated tranches. The company’s CMBS include conduit, large loan, single borrower, commercial real estate collateral debt obligations (CRE CDOs), collateral debt obligations (CDOs), government agency, and franchise loan receivable trusts.
The introduction of 30% credit enhanced tranches within the 2005-2008 vintage deals provide some offset to these negative fundamentals. Over the last year, the CMBS market experienced several positive factors as commercial real estate fundamentals have begun to display some signs of stabilization. The pace of credit deterioration appears to be moderating as property transactions have increased and there is greater availability of financing for commercial real estate. Liquidity has improved within the CMBS market, but a broad re-pricing of risk has kept credit spreads on legacy subordinate CMBS tranches at wide levels.
The table below summarizes vintage and quality of the available-for-sale CMBS portfolio of Aegon USA.
The fair values of Aegon USA’s CMBS instruments were determined as follows: Level II Level III Total 2012 Level II Level III Total 2011
CDOs backed by ABS, Corp. Bonds, Bank loans 343 298 23 - 36 700 634
The fair values of Aegon USA’s ABS instruments were determined as follows: Level II Level III Total 2012 Level II Level III Total 2011
The net unrealized loss on the ABS - small business loans is EUR 58 million. The unrealized loss in the ABS - small business loan portfolio is a function of increased credit spreads for existing positions and a lengthening of expected cash flows as refinancing activities within this sector have slowed. Additionally, delinquencies and losses in the collateral pools within Aegon’s small business loan securitizations have increased since 2007, as a result of the overall economic slowdown. Banks and finance companies have also scaled back their lending to small businesses. Aegon’s ABS - small business loan portfolio is concentrated in senior note classes.
Thus in addition to credit enhancement provided by the excess spread, reserve account, and over-collateralization, Aegon’s positions are also supported by subordinated note classes. Aegon’s ABS - small business loan portfolio is also primarily secured by commercial real estate, with the original loan to value (LTV) of the underlying loans typically ranging between 60-70%. Positions are monitored monthly with cash flow modeling updated and reviewed quarterly on all securities within the sector. Assumed defaults on delinquent loans are dependent on the specific security’s collateral attributes and historical experience. Results are then closely analyzed by the asset specialist to determine whether or not a principal or interest loss is expected to occur. Securities are impaired to fair value when
Aegon expects that it will not receive all contractual cash flows on its tranches. The remaining ABS - small business loan portfolio positions are not considered impaired as of December 31, 2012.
Aegon’s financial sector are generally high in credit quality and, as a whole, represent a large portion of the corporate debt market.
In spite of weak global economic growth, market sentiment improved in the second half of 2012 following important steps towards addressing the European Sovereign Debt Crisis coupled with large-scale interventions by central banks. Beginning with the EU Summit in June, EU leaders have committed to decisive steps to strengthen the common currency, including steps to create a stronger Banking
Union and Fiscal Union for the euro area. The creation of the European Stability Mechanism (ESM) and a Single Supervisory Mechanism to regulate banks in the Eurozone has helped calm concerns that the euro currency is not strong enough to survive a funding crisis or banking crisis in a member state. Furthermore the European Central Bank has committed to stabilize the common currency by purchasing government bonds under its new Outright Monetary Purchase (OMT) program. In the U.S. economic conditions appear to be improving, the Federal Reserve has committed to ongoing quantitative easing until labor market conditions improve, and the Fiscal Cliff agreement provided near-term relief.
(2011: EUR 680 million). The unrealized losses in the banking sub-sector primarily reflect the size of Aegon’s holdings, low floating
rate coupons on some securities, and credit spread widening in the sector due to the Sovereign debt crisis in Europe as well as residual impact from both the U.S. financial crisis concerns over the U.S. Fiscall Cliff. As a whole, the sub-sector improved in the second half of 2012, following a volatile first half. Decisive steps by EU leaders and world central banks to stabilize the euro and improve funding conditions calmed investor concerns that a euro breakup was imminent. Credit spreads continue to reflect some uncertainty over new efforts by regulators to impose “burden sharing” on creditors in order to quickly stabilize or wind up troubled banks. While these measures have made securities more volatile in the near-term, new, more stringent global legislation on bank capital and liquidity requirements, is intended to reduce overall risk in the sector going forward and decouple troubled banks from the Sovereign.
Furthermore, central banks appear committed to providing liquidity to the market, while asset write-downs and credit losses have diminished substantially in all but the most troubled countries.
Lloyds Banking Group PLC Banking 49 (33) BB+ / BB > 24 months
during the first half of 2012. Payments continue to be made on Aegon’s holdings in accordance with the original bond agreements.
Aegon evaluated the near-term prospects of the issuer and it is believed that the contractual terms of these investments will be met and these investments are not impaired as of December 31, 2012.
depending on the individual features of the debt securities. As of December 31, 2012 gross unrealized losses were EUR 34 million, of which EUR 33 million relates to holdings rated below investment grade. Lloyds Banking Group PLC was created from the merger of Lloyds TSB and HBOS PLC in the fall of 2008 as the shutdown in capital markets threatened the sustainability of HBOS PLC’s wholesale funding and specialist lending model. Following an emergency capital injection, the UK Government currently owns 40.2% of the combined Lloyds Banking Group PLC. As a result of the state aid that Lloyds received during the height of the crisis, the European
Commission, among other things, required the Group to cancel dividends and coupons on existing discretionary-pay hybrid securities for a two year period beginning January 31, 2010. As a result of the coupon ban, in 2010 Aegon impaired its Lloyds securities with optional deferral language and non-cumulative coupons. The two-year ban has expired and Lloyds is paying coupons (and paid all arrears of interest) on Aegon’s securities. Lloyds continues to make progress on its restructuring plans, showing improvement in the profitability levels of its core businesses, lowering balance sheet leverage, improving capital ratios, reducing reliance on wholesale funding, and significantly increasing liquidity reserves. Aegon evaluated the near-term prospects of the issuer and it is believed that the contractual terms of these investments will be met going forward and these remaining investments are not impaired as of December 31, 2012.
EUR 30 million related to holdings rated below investment grade. RBS is one of the world’s largest universal banks with historically prominent positions in both global wholesale banking and in UK financial services. The bank was impacted by the global financial market crisis in 2008 and, ultimately, the UK government was forced to take a majority equity stake in the bank to stabilize it. In addition, a large portion of RBS’ riskiest assets where placed under the UK’s Asset Protection Plan (APS), limiting the potential loss to RBS. RBS announced its exit from the APS program in October, the culmination of several years of hard work to get its balance sheet and funding needs downsized to a sustainable level. In light of the significant amount of state aid that RBS received, the
Aegon’s available-for-sale debt securities for Bank of America Corp (BAC) have a fair value of EUR 104 million as December 31, 2012, of which EUR 89 million relates to holdings rated below investment grade. As of December 31, 2012 gross unrealized losses were
The unrealized losses in this sub-sector primarily reflect general spread widening on companies due to several factors. These include mortgage market, low interest rate environment, equity market and economic issues plus increased liquidity and capital markets concerns, which has been compounded in some cases by the structure of the securities (subordination or other structural features and duration). Aegon evaluated the near-term prospects of the issuers in relation to the severity and duration of the unrealized loss and does not consider those investments to be impaired as of December 31, 2012.
As part of Aegon’s de-risking activities, exposure to the European peripheral countries (Portugal, Italy, Ireland, Greece and Spain)
Aegon does not have credit protection against exposure in the countries included in the tables.
Unrealized loss by maturity The table below shows the composition by maturity of all debt securities, both available-for-sale and held to maturity, in an unrealized loss position held by Aegon Americas, Aegon The Netherlands and Aegon UK.
Unrealized loss by credit quality The table below shows the composition by credit quality of debt securities, both available-for-sale and held to maturity, in an unrealized loss position held by Aegon Americas, Aegon The Netherlands and Aegon UK.
Realized gains and losses on debt securities of Aegon Americas, Aegon The Netherlands and Aegon UK
Impairment losses and recoveries The composition of Aegon Americas, Aegon The Netherlands and Aegon UK’s bond impairment losses and recoveries by issuer for the period ended December 31, 2012 is presented in the table below. Those issuers with impairments or recoveries above EUR 25 million are specifically noted.
During 2012, Aegon recognized EUR 54 million (2011: EUR 48 million) in recoveries on previously impaired securities. In each case where a recovery was taken on structured securities, improvements in underlying cash flows for the security were documented and modeling results improved significantly. Recoveries on non-structured securities were supported by documented credit events combined with significant market value improvements.
Debt securities - carried at fair value 1 63 24 88 54 70 49 173
Other financial assets - carried at fair value 23 30 205Annual Report 2012
These factors typically require significant management judgment. The impairment review process has resulted in EUR 1 million of impairment charges for the period ended December 31, 2012 (2011: EUR 10 million) for Aegon Americas, Aegon The Netherlands and Aegon UK.
The composition of shares by industry sector in an unrealized loss position held by Aegon Americas, Aegon The Netherlands and Aegon
UK at December 31, 2012 and December 31, 2011 is presented in the table below.
Impairment losses on shares The table below provides the length of time the shares held by Aegon Americas, Aegon The Netherlands and Aegon UK were below cost prior to the impairment in 2012.
Holding and other activities Total 2012 1 Common shares in Holding and other activities includes the elimination of treasury shares in the general account for an amount of EUR 8 million.
Holding and other activities Total 2011 1 Common shares in Holding and other activities includes the elimination of treasury shares in the general account for an amount of EUR 6 million.
DPAC amortization and guaranteed minimum benefits provisioning, while moderate scenarios may not. Aegon generally has positive income benefits from equity market increases and negative impacts from equity market declines as it earns fees on policyholder account balances and provides minimum guarantees for account values. Aegon added out-of-money options in its portfolio to provide additional protection for equity market declines without negative impacts when equity markets rise.
Liquidity risk Liquidity risk is inherent in much of Aegon’s business. Each asset purchased and liability sold has its own liquidity characteristics. Some liabilities are surrenderable while some assets, such as privately placed loans, mortgage loans, real estate and limited partnership interests, have low liquidity. If Aegon requires significant amounts of cash on short notice in excess of normal cash requirements and existing credit facilities, it may have difficulty selling these investments at attractive prices or in a timely manner.
meet cash demands by policyholders and account holders over the next two years. Potential cash demands are assessed under a stress scenario including spikes in disintermediation risk due to rising interest rates and concerns over Aegon’s financial strength due to multiple downgrades of the Group’s credit rating. At the same time, the liquidity of assets other than cash and government issues is assumed to be severely impaired for an extended period of time. All units and Aegon Group must maintain enough liquidity in order to meet all cash needs under this extreme scenario.
Aegon holds EUR 34,295 million of general account investments in cash, money market products and sovereign bonds that are readily saleable or redeemable on demand (2011: EUR 32,773 million). The Group expects to meet its obligations, even in a stressed liquidity event, from operating cash flows and the proceeds of maturing assets as well as these highly liquid assets. Further, the Group has access to back up credit facilities, as described in note 39, amounting to EUR 3,268 million which were unused at the end of the reporting period (2011: EUR 3,623 million).
Maturity analysis - gross undiscounted contractual cash flows (for nonderivatives ) On demand
Investment contracts for account of policyholders2 17,758 5,386 - - - 23,144 1 Borrowings include debentures and other loans, short term deposits, bank overdrafts and commercial paper; refer to note 39 for more details. 2 Excluding investment contracts with discretionary participating features.
Aegon’s liquidity management is based on expected claims and benefit payments rather than on the contractual maturities. The projected cash benefit payments in the table below are based on management’s best estimates of the expected gross benefits and expenses, partially offset by the expected gross premiums, fees and charges relating to the existing business in force. Estimated cash benefit payments are based on mortality, morbidity and lapse assumptions based on Aegon’s historical experience, modified for recently observed trends. Actual payment obligations may differ if experience varies from these assumptions. The cash benefit payments are presented on an undiscounted basis and are before deduction of tax and before reinsurance.
Investment contracts for account of policyholders 95 6,023 20,712 19,853 68,182 114,865 1 The liability amount in the consolidated financial statements reflects the discounting for interest as well as adjustments for the timing of other factors as described above. As a result, the sum of the cash benefit payments shown for all years in the table exceeds the corresponding liability amounts included in notes 35, 36, 37 and 38.
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 unrecoverability. This could have a materially adverse effect on Aegon’s business, results of operations and financial condition.
Sensitivity analysis of net income and shareholders’ equity to various underwriting risks is shown in the table that follows. The sensitivities represent an increase or decrease of mortality and morbidity rates over best estimate. Increases in mortality rates lead to an increase in the level of benefits and claims. The impact on net income and shareholders’ equity of sales transactions of investments required to meet the higher cash outflow is reflected in the sensitivities.
A change in actual experience with mortality or morbidity rates may not lead to a change in the assumptions underlying the measurement of the insurance liabilities as management may recognize that the change is temporary. Life insurers are also exposed to longevity risk. Increased life expectation above Aegon’s assumed life expectation at the time of underwriting negatively impacts its results. Refer to note 2.19 for a discussion on how longevity assumptions are accounted for.
In 2012, Aegon The Netherlands partially hedges the risk of future longevity increases in the Netherlands related to a part of its insurance liabilities. Aegon The Netherlands bought a longevity index derivative, which will pay out if in twenty years the mortality rates have decreased more than a predetermined percentage compared to the base scenario at the moment of signing the contract. Payout of the derivative is defined based on a ‘cumulative cash index’, which represents the cumulative payout to a predefined (synthetic)
December 21, 2012, it will be unlawful to use gender-related factors for determining premiums and benefits under insurance policies.
Other risks 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 its 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.
The structural measures that remained in force throughout 2012 include a reduction of the total U.S. general account assets, full delta hedging of the U.S. variable annuity guaranteed minimum income benefit back book, improvement of the ratio of consolidated shareholders’ equity to total equity base to at least 75% by December 2012, acceleration of the run-off of certain portfolios, and selling or putting into run-off Aegon’s U.K. bulk purchase annuity business.
Realized gains / (losses) on investments 175 138 84 10 - - 407 - 407
Realized gains / (losses) on investments 376 155 14 17 96 - 658 (2) 656
Realized gains and (losses) on financial investments 10 549 803 564
Ineffective portion of hedge transactions for which hedge accounting is applied 10 6 13 (1)
Amortization of deferred expenses, VOBA and future servicing rights 1,092 91 258 131 - 1,572
Impairment charges / (reversals) on financial assets, excluding receivables 271 15 63 57 - 406
Impairment charges / (reversals) on non- financial assets and receivables (1) 71 5 2 - 77
Impairment charges / (reversals) on financial assets, excluding receivables 454 11 36 24 - 525
Assets VOBA and future servicing rights 1,563 66 396 218 - - 2,243
Assets VOBA and future servicing rights 1,794 73 401 215 - - 2,483
Investment contracts for account of policyholders 17,823 - 50,132 3,478 - - 71,433
Investments for account of policyholders 65,970 25,094 55,886 6,726 - (6) 153,670
Financial assets at fair value through profit or loss 70,482 25,331 54,924 6,825 740 (8) 158,294
Separate accounts and investment funds 61,729 - 8,495 1,060 - - 71,284
Investments for account of policyholders 61,729 23,223 51,166 6,415 - (4) 142,529
Off balance sheet investments third parties 91,951 - - 44,959 - - 136,910
Total investments on balance sheet 151,302 62,242 61,118 11,197 755 (6) 286,608 6 Premium income and premiums to reinsurers
Notes to the consolidated financial statements of Aegon N.V. Note 7 7 Investment income
Included in interest income is EUR 197 million (2011: EUR 118 million; 2010: EUR 122 million) in respect of interest income accrued on impaired financial assets. The interest income on financial assets that are not carried at fair value through profit or loss amounted to EUR 5,643 million (2011: EUR 5,540 million; 2010: EUR: 5,854 million).
Gains and (losses) on investments in real estate (53) (49) 135
Net fair value change on for account of policyholder financial assets at fair value through profit or loss 11,855 (2,133) 13,217
Net fair value change on investments in real estate for account of policyholders (46) 20 73
Net fair value change on borrowings and other financial liabilities (48) (24) (2)
Other in 2012 mainly includes net fair value changes of alternative investments.
Fair value change on hedged items in fair value hedge 80 111 (152)
Net fair value change on for account of policyholder financial assets at fair value through profit or loss comprise: 2012 2011 2010
Other income in 2012 mainly included the gain on the sale of Aegon’s interest in Prisma Capital Partners LP (“Prisma”) of
Change in valuation of liabilities for insurance and investment contracts 7,923 4,014 13,206
Claims and benefits reflects the claims and benefits paid to policyholders, including claims and benefits in excess of account value for products for which deposit accounting is applied and the change in valuation of liabilities for insurance and investment contracts. In addition, Claims and benefits includes commissions and expenses, as well as premium paid to reinsurers. Claims and benefits fluctuates mainly as a result of changes in technical provisions resulting from fair value changes on for account of policyholder financial assets included in Results from financial transactions (note 10).
EUR 388 million, 2010: gains of EUR 283 million) regarding fair value movements of guarantees and EUR 39 million of gains
(2011: gains of EUR 41 million, 2010: gains of EUR 60 million) related to policyholder tax and other charges that are classified for segment reporting purposes as non underlying earnings.
In 2012, Aegon decided to bring forward the measures, as Aegon committed to the ‘best of class’ principles of the Dutch Ministry of
Finance, to reduce future costs for its customers with unit-linked insurance policies in the Netherlands. This decision has lead to an increase in the technical provisions (which is included in the Change in valuation of liabilities for insurance and investment contracts line in the table above) by EUR 265 million. Refer to note 49 Commitments and contingencies for more details.
Profit appropriated to policyholders 28 48 27 14 Commissions and expenses
Included in administration expenses above is depreciation amounting to EUR 90 million (2011: EUR 77 million; 2010: EUR 88 million)
Out of the EUR 169 million of VOBA and future servicing rights amortization, EUR 13 million (2011: EUR 25 million, 2010: EUR 3 million) is classified as non underlying earnings for segment reporting purposes. Included in employee and administration expenses is EUR 27 million of restructuring charges (2011: EUR 206 million; 2010: EUR 74 million) that are classified as non underlying earnings for segment reporting purposes.
III) remuneration principles, the 2010 Guidelines on Remuneration Policies and Practices by the Committee of European Banking
Staff. After the performance period, and based on the framework, variable compensation is partially made available and partly deferred.
In 2010, 4,266,107 shares were conditionally granted to participants in the 2010 Long Term Incentive Plan. The shares were granted using the share price of EUR 4.851. At December 31, 2012, 3,596,239 granted shares were outstanding. Actual allocation of the shares takes place in 2013 on the basis of realized performance, after which the shares will be unconditional. Holding periods of up to two years may apply.
Following the 2011 performance year 5,652,488 shares are outstanding to participants in the 2011 Long Term Incentive Plan and the 2011 Variable Compensation Plan for Identified Staff. The shares have been granted using the share price of EUR 4.727.
In 2012, 9,195,284 shares were conditionally granted (at target performance level) to participants in the 2012 Long Term Incentive
Plan and the 2012 Variable Compensation Plan for Identified Staff. The shares have been granted using the share price of EUR 3.126.
After 2008 no share option or share appreciation rights have been granted.
Refer to note 3 for a further description of the method used to estimate the fair value and a description of the significant assumptions.
The liability related to share appreciation rights is valued at fair value at each balance sheet date. There were no costs related to the share appreciation rights in 2012 (2011: nil; 2010: EUR 4 million). In prior years these costs were recognized in the income statement as part of “Commissions and expenses”.
Share appreciation rights and share options No SARs and share options were granted after 2008. With regard to the SARs and options granted before 2009, no share options were exercised and no SARs were paid during 2010, 2011 and 2012. Similarly, no cash is received from exercise of share options during
Impairment charges on non-financial assets and receivables2 26 77 176 1 Impairment charges/(reversals) on financial assets, excluding receivables, are excluded from underlying earnings before tax for segment reporting (refer to note 5). 2 Of impairment charges on non-financial assets and receivables EUR 0 million is excluded from underlying earnings before tax for segment reporting (refer to note 5)
Owned Life Insurance contract in the United States and a charge of EUR 16 million related to the annual bank tax by the Hungarian
Other charges in 2011 mainly include EUR 37 million related to increased reserves in connection with the company’s use of the Social
Changes in deferred tax assets as a result of recognition / write off of previously not recognized / recognized tax losses, tax credits and deductible temporary differences (3) (31) (218)
Income tax calculated using weighted average applicable statutory rates 591 279 566
Changes in deferred tax assets as a result of recognition/write off of previously not recognized/ recognized tax losses, tax credits and deductible temporary differences (3) (31) (218)
Tax effect of (profit) / losses from associates - - 1
Income tax for the period (income) / charge 333 44 154
UK. The corporate income tax rate decreased from 26% in 2011 to 24% as from April 1, 2012. The rate will further decrease to 23%
Diluted earnings per share Diluted earnings per share is calculated by adjusting the average number of shares outstanding for share options. For the purpose of calculating diluted earnings per share, Aegon assumed that all dilutive share options have been exercised at the exercise price, or adjusted exercise price if necessary. The proceeds are regarded as having been received from the issue of common shares at the average market price of the Aegon N.V. share during the year. The difference between the number of dilutive options issued and the number of common shares that would have been issued at the average market price has been treated as an issue of common shares for no consideration.
Coupons and premium on convertible core capital securities - (750) -
Net income / (loss) attributable to common shareholders for diluted earnings per share calculation 1,316 (117) 1,482
Adjustments for: - Convertible core capital securities (millions) - - 458
In the second quarter of 2012, a final dividend of EUR 0.10 per common share was paid relating to the second half year of 2011.The dividend per common share paid in 2011 (final dividend 2010 and interim dividend 2011) and 2010 (final dividend 2009 and interim dividend 2010) was nil in both years. As part of the European Commission’s approval granted in August 2010 regarding the state support received in December 2008, Aegon committed itself not to pay any dividend to the common shareholder until the convertible core capital securities had been fully repurchased. The repurchase of the convertible core capital securities was completed in 2011, refer to note 31 for additional information on this repurchase.
Amortization / depreciation through income statement - 183 26 8 3 220 229Annual Report 2012
The addition of goodwill in 2011 was attributable to the extension of Aegon’s life and health insurance and pension partnership with Unnim, effective July 1, 2011, which included the acquisition of Caixa Sabadell Vida. Refer to note 51 for further information on business combinations.
Goodwill in Aegon USA is allocated to its divisions. Value in use calculations of Aegon USA have been actuarially determined based on business plans covering a period of typically five years and pre-tax risk adjusted discount rates. The value in use test in the USA for the Individual Savings & Retirement cash generating unit (EUR 111 million; 2011: EUR 112 million) assumes business plans covering a period of five years further extrapolated to ten years where the new business levels for years 6-10 assumed a 5% growth rate
For the other businesses in Spain, value in use calculations have been used. Value in use calculations of Aegon Spain have been determined taking into account an appraisal value based on a business plan covering a period of typically five years, pre-tax risk adjusted discount rate of 11%-13.5% (2011: 11%-13.5%) and assumptions for future premiums, commissions, inflation, persistency, mortality, morbidity and future investment returns in line with Aegon´s European embedded value assumptions (market consistent methodology for 2012 operations). The mentioned Appraisal Value represents available net asset value plus the value of in force business plus future new business assuming business plans covering a period of 5 years. Future new business is estimated as a multiple of the last year’s value of new business. This multiple is based on the value of new business growth in the last 4 years.
Operating assumptions are best estimate assumptions and based on historical data where available. Economic assumptions are based on observable market data and projections of future trends.
VOBA The movement in VOBA over 2012 can be summarized and compared to 2011 as follows: Disposal of a business (14) (857)
Individual savings and retirement products 177 - - - 177 231Annual Report 2012
Total investments for general account 146,234 144,079 1 Refer to note 48 for a summary of all financial assets and financial liabilities at fair value through profit or loss.
Money market and other short-term investments 8,713 1,084 - - 9,797 9,797
Money market and other short-term investments 9,382 1,090 - - 10,472 10,472
Of the debt securities, money market and other short-term investments, mortgage loans and private loans EUR 16,335 million is current (2011: EUR 17,164 million).
In 2012, 92% of the value of Aegon’s properties, both for general account and for account of policyholders, were appraised
Aegon USA has entered into commercial property leases on its investment property portfolio, consisting of office, retail and industrial buildings. These non-cancellable leases have remaining lease terms up to 20 years. Most leases include a clause to enable upward revision of the rental charge on an annual basis according to either a fixed schedule or prevailing market conditions.
Notes to the consolidated financial statements of Aegon N.V. Note 23 23 Investments for account of policyholders Investments for account of policyholders comprise financial assets at fair value through profit or loss, excluding derivatives, and investments in real estate.
Total investments for account of policyholders at fair value through profit or loss, excluding derivatives 1) 152,662 141,397
Total investments for account of policyholders 153,670 142,529 1 Refer to note 48 for a summary of all financial assets and financial liabilities at fair value through profit or loss.
Rental income of EUR 65 million (2011: EUR 73 million; 2010: EUR 73 million) is reported as part of investment income in the income statement. There are no restrictions on the realizability of investment property or the remittance of income and proceeds of disposal.
Derivatives for general account Derivatives not designated in a hedge 19,058 12,744 16,756 11,623
Of these derivatives EUR 820 million net asset is current (2011: EUR 1,033 million net asset).
Certain derivatives are used to add risk by selling protection in the form of single name and index based credit default swaps and tranches of synthetic collateralized debt obligations. Another strategy used is to synthetically replicate corporate and sovereign credit exposures with credit derivatives. Refer to note 4 for details about these credit derivatives. This involves the purchase of high quality low risk assets and the sale of credit derivatives.
For the year ended December 31, 2012, Aegon recognized EUR (51) million of fair value changes on derivatives designated under fair value hedge accounting under the EU ‘carve-out’ in the income statement. This amount was offset by EUR 52 million fair value changes recognized on hedged items.
In addition, Aegon also makes use of cross currency swaps to convert variable or fixed foreign currency cash flows into fixed cash flows in local currencies. The cash flows from these hedging instruments are expected to occur over the next 29 years. These agreements involve the exchange of the underlying principal amounts.
In 2011 and 2010, gains of EUR 1 million and EUR 5 million respectively of hedge ineffectiveness were recorded in the income statement. In 2012, EUR (62) million was released from equity into investment income (2011: EUR (18) million, 2010: EUR (8) million).
The amount of deferred gains or losses to be reclassified from equity into net income during the next 12 months is expected to be
< 1 year 1 - 5 years 5 - 10 years > 10 years 2011 Total
The summarized financial information is based on the Group’s relative holding and excludes any goodwill included in the measurement of the investment in associates. Refer to note 52 for a listing of the principal investments in associates and the
Notes to the consolidated financial statements of Aegon N.V. Note 26 26 Reinsurance assets
EUR 13 million of the reinsurance assets are current (2011: EUR 18 million).
Gross premium and deposits - existing and new business 2,772 66 2,838
Gross premium and deposits - existing and new business 2,279 63 2,342
EUR 1.1 billion ceded in 2011 and an additional EUR 1.2 billion in 2012. Also in 2011, EUR 1.8 billion was ceded to Liberty Life
The reinsured policies consist of fixed annuity contracts issued by Transamerica Life Insurance Company in the U.S. between 2004 and early 2009 that were previously reinsured to Transamerica International Reinsurance Ireland (TIRI) on a 90% quota share basis. Over half of the business was sold in 2008 and primarily included products with 3 and 5 year surrender charge periods. Most of the business have an initial credited rate guarantee matching the surrender charge period followed by annual renewals after the initial period.
Movements during the year in reinsurance assets relating to non-life insurance: 2012 2011
Gross premium and deposits - existing and new business 259 227
DPAC for insurance contracts and investment contracts with discretionary participation features 11,282 11,027
The amortization in 2012 amounts to EUR 68 million (2011: EUR 38 million).
Individual savings and retirement products 1,109 - - 30 1,139 28 Other assets and receivables
Real estate held for own use and equipment 28.1 526 561
General account real estate held for own use are mainly held by Aegon USA and Aegon The Netherlands, with relatively smaller holdings in Hungary and Spain and are carried at revalued amounts taking into account amortization and impairments. The carrying value under a historical cost model amounts to EUR 321 million (2011: EUR 331 million).
44% of the value of the general account real estate held for own use was last revalued in 2012 (2011: 22%), based on market value appraisals by qualified internal and external appraisers. 97% of the appraisals in 2012 were performed by independent external appraisers (2011: 96%).
Depreciation expenses are charged in “Commissions and expenses” in the income statement. The useful lives of buildings range between 40 and 50 years.
The movements in the provision for doubtful debts during the year were as follows: Additions charged to earnings (16) (4)
EUR 1,636 million of accrued income is current (2011: EUR 2,489 million).
EUR 12.3 billion (2011: EUR 13.2 billion) of cash collateral is received of which EUR 258 million (2011: EUR 408 million) is included in cash and cash equivalents. This collateral relates to security lending and repurchase agreements and margins on derivatives transactions. A corresponding liability to repay the cash is recognized in other liabilities (note 44). Refer to note 50 for details on collateral received and paid. Investment of cash collateral received is restricted through limitations on credit worthiness, duration, approved investment categories and borrower limits. Aegon earns a share of the spread between the collateral earnings and the rebate paid to the borrower of the securities. Income from security lending programs was approximately EUR 11 million (2011: EUR 12 million; 2010: EUR 10 million).
The weighted effective interest rate on short-term deposits was 0.07% (2011: 0.51%) and these deposits have an average maturity of
The majority of cash is not subject to any restrictions. However, the Dutch Central Bank requires Aegon The Netherlands to hold 1%
(2011: 2%) of its assets relating to banking activities in an account with the Dutch Central Bank. This amount on deposit is reassessed on a monthly basis and carries interest at approximately 0.75% (2011: 1.0%). The average balance for 2012 was EUR 44 million
Analysis of IFRS cash flows 2012 compared to 2011 Net cash flows from operating activities
Total net cash flows from operating activities decreased by EUR 3,232 million to a EUR 966 million outflow (2011: EUR 2,266 million inflow). The change from inflow in 2011 to outflow in 2012 is driven by lower net general account investments, lower disposals of derivatives and lower net change in cash collateral. These reductions are partly offset by higher net investments for account of policyholders and income before tax.
The improvement is mainly a result of additional borrowings and the issuance of 8.00% non-cumulative subordinated borrowings which provided USD 525 million.
Net cash flows from investing activities improved by EUR 931 million to a EUR 653 million inflow (2010: EUR 278 million outflow).
Net cash flows from financing activities decreased by EUR 493 million to a EUR 374 million outflow (2010: EUR 119 million inflow).
The decrease is mainly the result of the payment to the Dutch State amounting to EUR 2,250 million of which EUR 1,500 million related to the repurchase of 375 million convertible core capital securities and EUR 750 million related to the premium attached to this repurchase. A share issuance in early 2011 provided EUR 913 million of cash and additional borrowings provided EUR 1,259 million, partly offset by coupon payments on perpetual capital securities and dividends on the preferred shares.
On March 1, 2011, Aegon completed the issue of 173,604,912 new common shares of Aegon N.V. with a par value of EUR 0.12.
The new shares have been listed on NYSE Euronext Amsterdam, the principal market for Aegon’s common shares.
Aegon N.V., a tender offer for Aegon N.V. shares or a proposed business combination by any person or group of persons, whether individually or as a group, other than in a transaction approved by the Executive Board and Supervisory Board. If, in its sole discretion,
30.3 Treasury shares On the balance sheet date Aegon N.V. and its subsidiaries held 28,713,730 of its own common shares with a par value of
Movements in the number of treasury shares were as follows: Number of shares
Notes to the consolidated financial statements of Aegon N.V. Note 30 30.4 Revaluation reserves
Available- for-sale investments Real estate held for own use Cash flow hedging reserve Total
Net (gains) / losses transferred to income statement (465) - (62) (527)
Movement in foreign currency translation and net foreign investment hedging reserves 1,299 (262) - 1,037
On November 30, 2009, Aegon repurchased 250 million of convertible core capital securities. The total payment to the Dutch government amounted to EUR 1.15 billion. Under the terms of Aegon’s agreement with the Dutch government, the premium for repurchase amounted to EUR 108 million based on the volume weighted average share price of Aegon shares of EUR 4.8315 during the five trading days from November 23 until November 27. The amount repurchased includes accrued interest from May 22, 2009 of
USD 500 million floating CMS rate 3) Quarterly, July 15 2014 402 402 402 1 The coupon of the USD 250 million junior perpetual capital securities is reset each quarter based on the then prevailing three-month LIBOR yield plus a spread of 87.5 basis points, with a minimum of 4%.
October 14, 2018. 3 The coupon of the EUR 203 million bonds was originally set at 7.125% until March 4, 2011. Subsequently, the coupon has been reset at 4.26% until 4 If the bonds are not called on the respective call dates, the coupons will be reset at the then prevailing effective yield of ten-year Dutch government securities plus a spread of 85 basis points.
On February 7, 2012, Aegon issued USD 525 million in aggregate principal amount of 8.00% non-cumulative subordinated notes, due 2042, in an underwritten public offering in the United States registered with the U.S. Securities and Exchange Commission. The subordinated notes bear interest at a fixed rate of 8.00% and have been priced at 100% of their principal amount. Any cancelled interest payments will not be cumulative.
The interest cash flows on substantially all of these securities has been swapped to an EURIBOR based interest rate.
EUR 271 million, subordinated borrowings amounts to EUR 42 million and a deferred tax liability amounting to EUR 89 million.
Notes to the consolidated financial statements of Aegon N.V. Note 34
Trust pass-through securities are securities through which the holders participate in a trust. The assets of these trusts consist of junior subordinated deferrable interest debentures issued by Transamerica Corporation and Clark Consulting Inc. The trust pass-through securities carry provisions with regard to deferral of distributions for extension periods up to a maximum of ten consecutive semi-annual periods. The trust pass-through securities are subordinated to all other unsubordinated borrowings and liabilities.
The fair value of these loans amounts to EUR 129 million (2011: EUR 114 million).
Subordinated borrowings include a liability of EUR 42 million relating to the non-cumulative subordinated notes issued on February 7, 2012. The liability component of the non-cumulative subordinated notes is related to the redemption amount. For further information on the non-cumulative subordinated notes and its subordination refer to note 32.
Gross premium and deposits - existing and new business 6,713 6,008
Loss recognized as a result of liability adequacy testing 170 -
Gross premium and deposits - existing and new business 1,816 1,702
Net exchange differences (54) 125 36 Insurance contracts for account of policyholders
Fair value of investment contracts without discretionary participation features 17,465 20,494
Investment contracts for account of policyholders1 78,418 71,433 1 Refer to note 48 for a summary of all financial assets and financial liabilities at fair value through profit or loss.
During 2012, residential mortgage backed securities (RMBSs) were issued under the Dutch SAECURE program for a total amount of
EUR 1.0 billion Senior Notes 7.00% April 29 2009 / 12 - 999
Revolving Loan Facility Warehouse Mortgage Loans2 Floating Monthly 2011 / 13 249 35
EUR 500 million Medium-Term Notes11 4.125% December 8 2004 / 14 532 516
EUR 1,500 million ECB LTRO2 Floating At Maturity 2012 / 15 1,500 -
EUR 842 million “SAECURE 9” RMBS Note2, 9 Floating Quarterly 2010 / 16 735 778
EUR 1,365 million “SAECURE 12” RMBS Note2, 10 Floating Quarterly 2012 / 17 1,365 -
EUR 160 million Mortgage loan3 Floating Quarterly 2011 / 17 159 154
EUR 75 million Medium-Term Notes1, 11 4.625% December 9 2004 / 19 82 75
USD 500 million Senior Notes1, 11 5.75% Semi-annually 2005 / 20 436 419
USD 305 million Note issue agreement2 5.54% / 8.88% Quarterly 2002 / 22 78 94
Of the debentures and other loans EUR 531 million is pledged as collateral (2011: EUR 556 million).
The provisions mainly consist of provisions for contingent consideration relating to business combinations (earn out) of EUR 187 million
(2011: EUR 196 million), restructuring provision of EUR 56 million (2011: EUR 135 million), provision for unearned commission of
EUR 33 million (2011: EUR 38 million) and litigation provisions of EUR 10 million (2011: EUR 19 milion).
Present value of wholly unfunded obligations1 2,412 2,272 1,952 1,831 1,644
Present value of wholly or partly funded obligations - 3 3 3 4
Present value of wholly or partly funded obligations 3,617 3,312 2,928 2,548 2,148
The fair value of Aegon’s own financial instruments included in plan assets and the fair value of other assets used by Aegon included in planned assets was nil in both 2012 and 2011.
The amounts recognized in the income statement are as follows: Defined benefit expenses
Accumulated post-employment benefit obligation for medical cost 16 (15) 18 (17)
An experience adjustment on plan liabilities is the difference between the actuarial assumptions underlying the scheme and the actual experience during the period. This excludes the effect of changes in the actuarial assumptions that would also qualify as actuarial gains and losses. Experience adjustments on plan assets are the difference between expected and actual return on assets.
Aegon USA provides health care benefits to retired employees, which are predominantly unfunded. The post-retirement health benefit liability amounts to EUR 175 million (2011: EUR 197 million).
The principal actuarial assumptions that apply for the year ended December 31 are as follows: Assumed health care trend rates
Health care cost trend rate assumed for next year 7.25% 7.25%
Aegon The Netherlands also has a post-retirement medical plan that contributes to the health care coverage of employees and beneficiaries after retirement. The liability related to this plan amounted to EUR 44 million at December 31, 2012
Equitable plc. In 2011, the scheme was closed to future accrual with effect from March 31, 2013. This resulted in a curtailment gain of EUR 56 million. The remaining unrecognized actuarial losses amount to EUR 200 million (2011: EUR 177 million). Under IAS 19, the defined benefit plan has a deficit of EUR 256 million at December 31, 2012 (2011: EUR 242 million).
Assumptions used to determine net periodic benefit cost for the year ended December 31
The increase of deferred tax liabilities primarily relates to unrealized profits in 2012 in respect of financial assets due to a decrease in market interest rates.
(2011: gross EUR 128 million; tax EUR 29 million) the realization of the deferred tax asset is dependent on the projection of future taxable profits from existing business in excess of the profits arising from the reversal of existing taxable temporary differences.
Deferred corporate income tax assets in respect of deductible temporary differences are recognized to the extent that the realization of the related tax benefit through future taxable profits is probable. For the following amounts relating to available-for-sale financial assets the recognition of the deferred corporate income tax asset is dependent on future taxable profits in excess of the profits arising from the reversal of existing taxable temporary differences: Gross amounts Deferred tax assets
contracts and other items for the amount of gross EUR 64 million; tax EUR 15 million (2011: gross EUR 56 million; tax EUR 14 million).
EUR 1,754 million; tax EUR 438 million (2011: gross EUR 1,749 million; tax EUR 437 million).
46 Guarantees in insurance contracts For financial reporting purposes Aegon distinguishes between the following types of minimum guarantees: �� Financial guarantees: these life contingent guarantees are treated as bifurcated embedded derivatives, valued at fair value and presented as derivatives (refer to note 2.10 and note 3); �� Total return annuities: these guarantees are not bifurcated from their host contracts because they are valued at fair value and presented as part of insurance contracts (refer to note 2.19); �� Life contingent guarantees in the United States: these guarantees are not bifurcated from their host contracts, valued in accordance with insurance accounting (ASC 944, Financial Services - Insurance) and presented together with insurance liabilities (refer to note 2.19 and note 3); and
In addition to the guarantees mentioned above, Aegon has traditional life insurance contracts that include minimum guarantees that are not valued explicitly; however, the adequacy of all insurance liabilities, net of VOBA and DPAC, are assessed periodically (refer to note 2.19).
Average attained age of contractholders 67 67 67 66 1 Guaranteed minimum death benefit in the United States.
Premiums are paid by customers at inception or over the term of the contract. The accumulation products pay benefits on the policy maturity date, subject to survival of the insured. In addition, most policies also pay death benefits if the insured dies during the term of the contract. The death benefits may be stipulated in the policy or depend on the gross premiums paid to date. Premiums and amounts insured are established at inception of the contract. The amount insured can be increased as a result of profit sharing, if provided for under the terms and conditions of the product. Minimum interest guarantees exist for all generations of accumulation products written, except for universal life type products for which premiums are invested solely in equity funds. Older generations contain a 4%
Net amount at risk 3 3,841 3,462 1 Guaranteed minimum benefit in the Netherlands. 2 Balances are included in the insurance liabilities on the face of the statement of financial position; refer to note 35. 3 The net amount at risk represents the difference between the maximum amount payable under the guarantees and the account value.
Fair value measurement of guarantees in insurance contracts The fair values of guarantees mentioned above (with the exception of life contingent guarantees in the United States) are calculated as the present value of future expected payments to policyholders less the present value of assessed rider fees attributable to the guarantees. Given the long-term nature of these guarantees, their fair values are determined by using valuation techniques. Because of the dynamic and complex nature of these cash flows, Aegon uses stochastic techniques under a variety of market return scenarios. A
variety of factors are considered, including expected market rates of return, equity and interest rate volatility, credit risk, correlations of market returns, discount rates and actuarial assumptions.
For equity volatility, Aegon uses a term structure assumption with market-based implied volatility inputs for the first five years and a long-term forward rate assumption of 25% thereafter. The volume of observable option trading from which volatilities are derived generally declines as the contracts’ term increases, therefore, the volatility curve grades from implied volatilities for five years to the ultimate rate. The resulting volatility assumption in year 20 for the S&P 500 index (expressed as a spot rate) was 24.4% at
December 31, 2012 and 25.7% at December 31, 2011. Correlations of market returns across underlying indices are based on historical market returns and their inter-relationships over a number of years preceding the valuation date. Assumptions regarding policyholder behavior, such as lapses, included in the models are derived in the same way as the assumptions used to measure insurance liabilities.
Had Aegon used a long-term equity implied volatility assumption that was five volatility points higher or lower, the impact on income before tax would have been a decrease of EUR 118 million or an increase of EUR 104 million, respectively, in 2012 IFRS income before tax (2011: EUR 97 million decrease and EUR 86 million increase).
EUR 152 million) to earnings. The main drivers of increase in net gain before tax are EUR (714) million related to decreases in risk free rates (2011: EUR 3,081 million loss), EUR 491 million related to an increase in equity markets (2011: EUR 160 loss), EUR 124 million related to decreases in equity volatilities (2011: EUR 75 million loss) offset by EUR (465) million related to movements in the spread of credit risk (2011: EUR 592 million gain). Hedges related to these guarantee reserves contributed fair value gains of
EUR 407 million to income before tax (2011: EUR 2,805 million gains) and DAC offset and other contributed a gain of EUR 446 million
Core capital, which consists of shareholders’ equity, excluding revaluation reserve, was EUR 18,587 million at December 31, 2012 compared to EUR 17,536 million at December 31, 2011.
EUR 29,700 million at December 31, 2012, compared to EUR 25,734 million at December 31, 2011.
The following table reconciles total shareholders’ equity to the total capital base: Total shareholders’ equity 24,669 21,000
Total capital base excluding revaluation reserve 24,232 23,842 1 Other equity instruments that are denominated in foreign currencies are, for purpose of calculating the capital base, revalued to the period-end exchange rate
The total capital base includes separate presentation of borrowings based on the deployment of the proceeds and is provided to senior management to manage capital.
Insurance, reinsurance, investment management and banking companies are required to maintain a minimum solvency margin based on applicable local regulations. For managing Aegon’s capital, the life insurance and life reinsurance regulations in the EU and the
United States are of main importance. Aegon’s Insurance Group Directive ratio (IGD ratio) was 228% at the end of 2012 (2011: 195%).
UK solvency surplus calculation the local regulator only allows the available capital number of the With-Profit funds included in overall local available capital to be equal to the amount of With-Profit funds’ required capital.
The CAL is 200% of the authorized control level (ACL), the level at which regulators are permitted to seize control of the company. At
The Financial Services Authority (FSA) regulates insurance companies in the United Kingdom under the Financial Services and Markets
which represents the increase in statutory reserves since the acquisition of OPTAS N.V. by Aegon.
48 Summary of total financial assets and financial liabilities at fair value through profit or loss The table that follows summarizes the carrying amounts of financial assets and financial liabilities that are classified as at fair value through profit or loss, with appropriate distinction between those financial assets and financial liabilities held for trading and those that, upon initial recognition, were designated as at fair value through profit or loss.
Derivatives with positive values not designated as hedges 19,368 - 13,457 -
Total financial assets at fair value through profit or loss 20,122 157,540 14,197 146,188
Derivatives with negative values not designated as hedges 16,830 - 11,697 -
Total financial liabilities at fair value through profit or loss 16,830 30,238 11,697 27,697
Investments for general account The Group manages certain portfolios on a total return basis which have been designated at fair value through profit or loss.
This includes portfolios of investments in limited partnerships and limited liability companies (primarily hedge funds) for which the performance is assessed internally on a total return basis. In addition, some investments that include an embedded derivative that 271Annual Report 2012
Borrowings Borrowings designated as at fair value through profit or loss includes financial instruments that are managed on a fair value basis together with related financial assets and financial derivatives.
Refer to note 39 Borrowings for the impact of Aegon’s credit spread on the fair value of the borrowings designated at fair value through profit or loss.
Mortgage loans commitments represent undrawn mortgage loan facility provided and outstanding proposals on mortgages. Other commitments include future purchases of interests in investment funds and limited partnerships.
“AA” financial strength rating and capital sufficient to comply with the requirements of the countries in which its branches are located.
Aegon N.V. subsidiary company Aegon USA, LLC has a parental guarantee with its indirect subsidiary TLIC Riverwood Reinsurance,
Aegon N.V. has guaranteed and is severally liable for the following: �� Due and punctual payment of payables due under letter of credit agreements applied for by Aegon N.V. as co-applicant with its subsidiary companies Transamerica Corporation, Aegon USA, LLC and Commonwealth General Corporation. At December 31, 2012, the letter of credit arrangements amounted to EUR 3,606 million (2011: EUR 3,773 million); as at that date no amounts had been drawn, or were due under these facilities; �� Due and punctual payment of payables by the consolidated group companies Transamerica Corporation, Aegon Funding Company
July 2009. With these measures, Aegon committed to the ‘best of class’ principles of the Dutch Ministry of Finance for certain existing unit-linked products. These principles are the result of an industry-wide review by the Ministry of the various agreements reached between individual insurance companies and customer interest groups in relation to unit-linked insurance policies. The Ministry made a strong appeal to all industry participants to apply its principles. Aegon had previously made substantial product improvements to the unit-linked insurance policies which its Dutch business sold before January 1, 2008. Aegon’s approach was to settle compensation with clients when the policy expires. However, to comply with the Ministry’s principles, Aegon undertook to make direct additions to policy values before year-end 2012. As a result of this acceleration of these previously announced measures, in the second quarter of 2012 Aegon took a one-off charge of EUR 265 million before tax. In addition, Aegon will reduce future policy costs beginning in 2013 onward for the large majority of its unit-linked portfolio. This will decrease income before tax over the remaining duration of the policies by approximately EUR 125 million, based on the current present value. While parties such as the Ombudsman Financiële
Certain of the products we sell are complex and involve significant investment risks that may be assumed by Aegon’s customers. Aegon has have received claims from certain current and former customers, and groups representing customers, in respect of certain products.
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 we believed it was appropriate to do so.
period 1989-1998 entailed an obligation on the part of customers to pay a premium for a death benefit. However, the Court ruled that
Aegon should have more clearly informed its customers about the amount of premium which the company charged in relation to the embedded death benefit. Prior to the ruling Aegon had already taken steps to improve its communications with customers as well as adjusting the amounts charged to Koersplan-customers.
The Supreme Court is not obliged to follow the advice of the Attorney General, although it will consider it. The Supreme Court could elect to follow the advice of the Attorney General or to refer the case back to another court for reassessment on different or additional grounds. If the Supreme Court were instead to confirm the decision taken by the Amsterdam Court of Appeal and the principles underlying such decision were applied to Aegon’s entire KoersPlan-portfolio (instead of solely to the holders of KoersPlan-products who are plaintiffs in the pending litigation), Aegon estimates the financial effect to be approximately EUR 150 million, after tax.
In the normal course of business Aegon is involved in the following transactions: �� Transferred financial assets that are not derecognized in their entirety: �� securities lending; whereby Aegon legally (but not economically) transfers assets and receives cash and non-cash collateral.
The transferred assets are not derecognized. The obligation to repay the cash collateral is recognized as a liability. The non-cash collateral is not recognized on the balance sheet; �� repurchase activities; whereby Aegon receives cash for the transferred assets. The financial assets are legally (but not economically) transferred, but are not derecognized. The obligation to repay the cash received is recognized as a liability.
�� Transferred financial assets that are derecognized in their entirety and Aegon does not have a continuing involvement (normal sale).
�� Collateral pledged in the case of (contingent) liabilities, repurchase agreements, securities borrowing and derivative transactions.
Notes to the consolidated financial statements of Aegon N.V. Note 50
Aegon retains substantially all risks and rewards of those transferred assets, this includes credit risk, settlement risk, country risk and market risk. The assets are transferred in return for cash collateral or other financial assets. Non-cash collateral is not recognized in the statement of financial position. Cash collateral is recorded on the statement of financial position as an asset and an offsetting liability is established for the same amount as Aegon is obligated to return this amount upon termination of the lending arrangement. Cash collateral is usually invested in pre-designated high quality investments. The sum of cash and non-cash collateral is typically greater than the market value of the related securities loaned. Refer to 50.3 and 50.4 for an analysis of collateral accepted and pledged in relation to securities lending and repurchase agreements.
50.2 Transferred financial assets that are derecognized in their entirety, but where Aegon has continuing involvement Aegon has derecognized certain financial assets that have been transferred in their entirety, but where Aegon has a continuing involvement.
As part of the Aegon Levensverzekering N.V. funding program the company regularly enters into securitization contracts for its mortgage loans. Currently, as at December 31, 2012, SAECURE 6, is held off-balance.
Total income recognized from Aegon’s continuing involvement in 2012 for SAECURE 6 BV is EUR 47 million (2011: EUR 56 million) and the cumulative gain 2006-2012 is EUR 153 million, equaling the fair value movement of the swap.
In the third quarter of 2012, SAECURE 5, sold EUR 424 million of mortgage loans back to Aegon N.V. at fair value. This transaction did not generate a significant profit or loss for Aegon.
50.3 Assets accepted Aegon receives collateral related to securities lending and reverse repurchase activities. Non-cash collateral is not recognized in the statement of financial position. To the extent that cash is paid for reverse repurchase agreements, a receivable is recognized for the corresponding amount.
Non-cash collateral that can be sold or repledged in the absence of default 3,710 1,425
In addition, Aegon can receive collateral related to derivative transactions that it enters into. The credit support agreement will normally dictate the threshold over which collateral needs to be pledged by Aegon or its counterparty. Transactions requiring
The following tables analyze the carrying amount of collateral pledged and the corresponding amounts.
Non-cash collateral that can be sold or repledged by the counterparty - 277Annual Report 2012
Terrassa, Caixa Sabadell and Caixa Manlleu. Aegon Spain is the sole insurance partner of Unnim to provide life and pension insurance products. Since the acquisition date, the company has attributed EUR 5 million to net income in 2011. If the acquisition had been as of
January 1, 2011, contribution to net income and total revenues would amount to EUR 9 million and EUR 134 million respectively.
Effective October 31, 2011, Aegon entered into a Joint Venture contract with Banca Civica, an entity created by a Spanish institutional protection system (similar to a merger) of Caja Navarra, Cajasol, Caja Burgos and Caja Canarias. Aegon Spain is the sole insurance partner of Banca Civica to provide life, health and pension insurance products for products sold by the Caja Navarra and Caja Burgos network. Since the acquisition date, the company has attributed EUR 0 million to net income in 2011. If the acquisition had been as of
January 1, 2011, contribution to net income and total revenues would amount to EUR 0 million and EUR 8 million respectively.
Following the announced merger between Banca Cívica and CaixaBank in Spain, Aegon reached an agreement, on August 3, 2012, with
On November 24, 2011, Aegon completed the sale of its UK-based Guardian life and pension business for a total cash consideration of
GBP 129 million and net income for 2010 was GBP 26 million.
The business residing in Transamerica International Reinsurance, Bermuda (TIRe) has been retroceded to SCOR. TIRe will continue to provide reserve credit security for redundant reserves to Aegon USA’s ceding companies. Aegon will maintain approximately half of the collateral requirements needed for reinsurance reserve financing. This obligation provides reserve credit security and will run off over approximately 15 years. Refer to note 26 and 27 for details on the reinsurance treatment of this divestment.
�� Transamerica Advisors Life Insurance Company, Little Rock, Arkansas (United States)
�� Transamerica Financial Life Insurance Company, Inc., Albany, New York (United States)
�� Western Reserve Life Assurance Co. of Ohio, Columbus, Ohio (United States)
Notes to the consolidated financial statements of Aegon N.V. Note 52
The Netherlands �� AMVEST Vastgoed B.V., Utrecht (50%), property management and development
�� Unnim Vida, SA de Seguros y Reaseguros, Terrassa (Spain) life insurance and pension company (50%)
Banca Civica joint venture partners 31 849 9 728 243 226
On October 15, 2012 Vereniging Aegon exercised its option rights to purchase in aggregate 3,907,000 class B preferred shares at par value to correct dilution caused by Aegon’s issuance of shares on September 15, 2012, being the interim-dividend 2012 in the form of stock-dividend.
Aegon had repurchased the full EUR 3 billion convertible core capital securities from the Dutch State. 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 core capital securities, while an additional EUR 1.1 billion was paid in premium and interest.
On March 15, 2011 Vereniging Aegon exercised its option rights to purchase in aggregate 41,042,000 class B preferred shares at par value to correct dilution caused by Aegon’s issuance of shares conducted under Aegon’s US Shelf Registration through the sale of 173,604,912 common shares of Aegon N.V. at a price of EUR 5.20 per share in March 2011.
In August 2010, the European Commission approved the capital support provided to Aegon by the Dutch State through Vereniging
These behavioral constraints expired with the full repurchase of the core capital securities and repayment of the Dutch State on 281Annual Report 2012
On November 30, 2009, Aegon redeemed EUR 1 billion in principal amount of those convertible core capital securities for
(2011: EUR 0.8 million) other benefits, EUR 2.3 million (2011: EUR 1.3 million) pension premiums, EUR nil (2011: EUR 0.4 million)
other long-term benefits, and EUR 0.6 million (2011: nil) one time 16% crisis tax was accrued for Dutch members of the
Additional information on the remuneration and share-based compensation of members of the Executive Board and the remuneration of the Supervisory Board is disclosed in the sections below (all amounts in EUR '000, except where indicated otherwise).
EUR 204 and EUR 140 respectively. The number of shares to be made available in 2013 related to performance year 2012 is 65,111 and 44,741 for Mr. Wynaendts and Mr. Nooitgedagt respectively, with the exception of shares sold to meet income tax obligations.
Over the performance year 2011 Mr. Wynaendts was awarded EUR 818 in total conditional variable compensation. Mr. Nooitgedagt was awarded EUR 532.
The remaining part of variable compensation for the performance year 2011 (60%), for Mr. Wynaendts EUR 245 and 51,912 shares and for Mr. Nooitgedagt EUR 160 and 33,750 shares, is to be paid out in 2013 and following years, subject to ex-post assessments, that may result in downward adjustments and may be subject to additional conditions being met. In each of the years 2013, 2014 and 2015, 20% of the total variable compensation over 2011 may be made available. Any payout will be split 50/50 in a cash payment and an allocation of shares vesting (with the exception of shares sold to meet income tax obligations). To the vested shares a retention (holding) period is applicable for a further three years, before they are at the disposal of the Executive Board members.
The table below illustrates all the conditionally awarded cash and shares of the active members of the Executive Board (on the left side), and the years in which each component will be paid out and/or vest, subject to the conditions as mentioned (on the right side): Reference period Conditional granted performance related remuneration Timing of vesting, subject to targets and conditions
1 The number of shares is based on the share price at grant of EUR 4.727. 2 The number of shares is based on the share price at grant of EUR 3.126.
4 These shares vested in 2012 and are subject to an additional two year holding period. 5 These shares vested in 2013 on basis of actual realized performance and are subject to an additional two year holding period. 6 Vested and paid out in 2008. 7 All performance related cash remuneration granted over 2010 was waived by both Mr. Wynaendts (EUR 317,000) and Mr. Nooitgedagt (EUR 233,000). 8 The performance related cash remuneration granted over 2011, payable in 2012, of EUR 163,591 was waived by Mr. Wynaendts. 9 The performance related cash remuneration granted over 2011, payable in 2012, of EUR 106,359 was waived by Mr. Nooitgedagt.
Other benefits concern non-monetary benefits (e.g. company car), social security contributions by the employer, and tax expenses borne by the Group.
The 2012 contribution for Mr. Wynaendts to the Aegon pensionfund reflects the increase to his fixed salary. These backservice costs are negatively enhanced by the current low interest rate. Amounts include tax expenses borne by the Group. For Mr. Nooitgedagt, the defined benefit contribution equals 37% of his base salary; 2012 include costs related to previous years.
Total In 2012 the Dutch Government introduced a special tax-levy for employers: the ‘crisis tax’ (16% payable on salary expenses above EUR 150). This caused an increase of Aegon’s total remuneration expenses for Alexander R. Wynaendts (EUR 311)
Share options and interests in Aegon N.V. held by active members of the executive board
At the balance sheet date, Mr. Wynaendts had mortgage loans with Aegon totalling to EUR 1,485,292 with interest rates of 4.1%,
Remuneration of active and retired members of the Supervisory Board in EUR 2012 2011
Arthur W.H. Docters van Leeuwen (as of April 22, 2009 up to July 31, 2011) - 40,000
On February 15, 2013, Aegon and Vereniging Aegon reached an agreement to exchange, subject to approval by the Annual General
to end the life, health and pension partnership with Unnim Banc and sell its 50% interest in the joint ventures to BBVA for a total consideration of EUR 353 million. The transaction is expected to be closed in Q2 2013 after obtaining regulatory approval. The sale is expected to result in a book gain of approximately EUR 105 million before tax. Aegon’s share in underlying earnings before tax of the joint venture totaled EUR 20 million in 2012.
Report on the consolidated financial statements We have audited the accompanying consolidated financial statements 2012 of Aegon N.V., The Hague (as set out on pages 132 to 286), which comprise the consolidated statement of financial position as at December 31, 2012, the consolidated income statement and statements of comprehensive income, changes in equity and cash flow for the year then ended and notes, comprising a summary of the significant accounting policies and other explanatory information.
Management's responsibility Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with
In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
Notes to the consolidated financial statements of Aegon N.V. Other information
Other information Independent auditor’s report 305 Proposal for profit appropriation 306 Major shareholders 307 289Annual Report 2012
Statement of financial position of Aegon N.V. Statement of financial position of Aegon N.V.
Aegon N.V. (or “the company”), its subsidiaries and its proportionally consolidated joint ventures (“Aegon” or “the Group”) have life insurance and pensions operations in over twenty countries in the Americas, Europe and Asia and are also active in savings and asset management operations, accident and health insurance, general insurance and to a limit extent banking operations. Headquarters are located in The Hague, the Netherlands. The Group employs approximately 24,500 people worldwide (2011: 25,000).
2 Summary of significant accounting policies 2.1 Basis of preparation The financial statements have been prepared in accordance with accounting principles in the Netherlands as embodied in Part 9 of
Notes to the financial statements Notes to the financial statements Notes to the financial statements
The fair value of an asset is the amount for which it could be exchanged between knowledgeable, willing parties in an arm’s length transaction. For quoted financial assets for which there is an active market, the fair value is the bid price at the balance sheet date. In the absence of an active market, fair value is estimated by using present value based or other valuation techniques. Where discounting techniques are applied, the discount rate is based on current market rates applicable to financial instruments with similar characteristics. The valuation techniques that include non-market observable inputs can result in a different outcome than the actual transaction price at which the asset was acquired. Such differences are not recognized in the income statement immediately but are deferred. They are released over time to the income statement in line with the change in factors (including time) that market participants would consider in setting a price for the asset. Interest accrued to date is not included in the fair value of the financial asset.
A security that has been received under a borrowing or reverse repurchase agreement is not recognized as an asset. A receivable is recognized for any related cash collateral paid by Aegon. The difference between sale and repurchase price is treated as investment income. If the Group subsequently sells that security, a liability to repurchase the asset is recognized and initially measured at fair value.
Non-cumulative subordinated notes are identified as a compound instrument due to the nature of this financial instrument. For these non-cumulative subordinated notes, Aegon has an unconditional right to avoid delivering cash or another financial asset to settle the coupon payments. The repayment of the principal is however not at the discretion of Aegon and therefore Aegon has a contractual obligation to settle the repayment in cash or another financial asset or through the exchange of financial assets and liabilities at potentially unfavorable conditions for Aegon. Compound instruments are separated into liability components and equity components.
Treasury shares are own equity instruments reacquired by the Group. They are deducted from shareholders’ equity, regardless of the objective of the transaction. No gain or loss is recognized in the income statement on the purchase, sale, issue or cancellation of the instruments. If sold, the difference between the carrying amount and the proceeds is reflected in retained earnings. The consideration paid or received is recognized directly in shareholders’ equity. All treasury shares are eliminated in the calculation of earnings per share and dividend per common share.
2.10 Borrowings A financial instrument issued by the company is classified as a liability if the contractual obligation must be settled in cash or another financial asset or through the exchange of financial assets and liabilities at potentially unfavorable conditions for the company.
Borrowings include the liability component of non-cumulative subordinated notes. These notes are identified as a compound instrument due to the nature of this financial instrument. Compound instruments are separated into equity components and liability components. The liability component for the non-cumulative subordinated notes is related to the redemption amount. For further information on accounting policy of the non-cumulative subordinated notes refer to note 2.9.
Vereniging Aegon, based in The Hague, holds all of the issued preferred shares. Vereniging Aegon, in case of an issuance of shares by
Aegon N.V., may purchase as many class B preferred shares as would enable Vereniging Aegon to prevent or correct dilution to below its actual percentage of voting shares, unless Vereniging Aegon as a result of exercising these option rights would increase its voting power to more than 33%. Class B preferred shares will then be issued at par value (EUR 0.25), unless a higher issue price is agreed.
Vereniging Aegon determines that a “special cause” has occurred, Vereniging Aegon will notify the General Meeting of Shareholders and retain its right to exercise the full voting power of 25/12 vote per preferred share for a limited period of six months.
The following table shows the movement during the year in the number of common shares: Number of common shares 2012 2011
The weighted average number of EUR 0.12 common shares for 2012 was 1,907,382,542 (2011: 1,851,813,352).
Long term incentive plan, share appreciation rights and share options For detailed information on the long term incentive plan, share appreciation rights and share options granted to senior executives and other Aegon employees, refer to note 14 to the consolidated financial statements of the Group.
Board remuneration Detailed information on remuneration of active and retired members of the Executive Board including their share and share option rights, remuneration of active and retired members of the Supervisory Board along with information about shares held in Aegon by the members of the Boards is included in note 53 to the consolidated financial statements of the Group.
Coupons and premium on convertible core capital securities and coupon on perpetual securities, net of tax - - - - - (195) - - (195)
Changes in equity from relation with shareholders 9 (7) - - - (415) 9 - (404)
Changes in equity from relation with shareholders 32 881 - - - (999) - - (86)
The balance of the revaluation account, which includes revaluation reserves for real estate and investments that do not have a frequent market listing, consists for EUR 9,844 million (2011: EUR 7,893 million) of items with positive revaluation and for EUR (960) million of items with negative revaluation (2011: EUR (1,699) million).
OPTAS N.V., an indirect subsidiary of Aegon N.V., holds statutory reserves of EUR 981 million (2011: EUR 936 million) which are restricted. Included in Aegon N.V.’s legal reserves is an amount of EUR 441 million related to OPTAS N.V. which represents the increase in statutory reserves since the acquisition of OPTAS N.V. by Aegon (2011: EUR 396 million). The statutory reserves of OPTAS N.V. are linked to the acquired negative goodwill related to OPTAS N.V. at acquisition date.
Transactions in 2011: Sale: 1 transaction, price EUR 5.39 - (16,771)
USD 250 million floating LIBOR rate 1 Quarterly, December 15 2013 212 212 212
The bonds have the same subordination provisions as dated subordinated debt. In addition, the conditions of the bonds provide for interest deferral and for the availability of principal amounts to meet losses. Although the bonds have no stated maturity, Aegon has the right to call the bonds for redemption at par for the first time on the coupon date in the years as specified.
Non-cumulative subordinated notes Coupon rate Coupon date, as of Year of next call 2012 2011 2010
On February 7, 2012, Aegon issued USD 525 million in aggregate principal amount of 8.00% non-cumulative subordinated notes, due 2042, in an underwritten public offering in the United States registered with the U.S. Securities and Exchange Commission. The subordinated notes bear interest at a fixed rate of 8.00% and have been priced at 100% of their principal amount. Any cancelled interest payment will not be cumulative.
The securities are subordinated and rank senior to the junior perpetual capital securities, equally with the perpetual cumulative subordinated bonds and junior to all other liabilities. The conditions of the securities contain certain provisions for optional and required cancellation of interest payments. The securities have a maturity of 30 years, however Aegon has the right to call the securities for redemption at par for the first time on the coupon date in 2017, or on any coupon payment date thereafter.
14 Other liabilities Loans from and payables to group companies have a maturity of less than one year. Other includes derivatives with negative fair values of EUR 350 million (2011: EUR 321 million).
Aegon N.V. also entered into a contingent capital letter for an amount of JPY 7.5 billion (EUR 66 million) to support its joint venture
After the acquisition of Unnim Banc by BBVA on July, 27 2012, Aegon has reached an agreement, on February 1, 2013, with BBVA
On January 29, 2013 Aegon announced that it will take over Eureko’s life insurance and pension business in Romania. The transaction is expected to close in the second half of 2013, pending regulatory approval. Eureko's Romanian life insurance portfolio and pension fund business will be integrated into the operations of Aegon Romania and into the governance and management structure of Aegon CEE.
Report on the company financial statements We have audited the accompanying company financial statements 2012 of Aegon N.V., The Hague (as set out on pages 290 to 304), which comprise the statement of financial position as at December 31, 2012, the income statement for the year then ended and the notes, comprising a summary of the significant accounting policies and other explanatory information.
Auditor's responsibility Our responsibility is to express an opinion on the company financial statements based on our audit. We conducted our audit in accordance with Dutch law, including the Dutch Standards on Auditing. This requires that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the company financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the company financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the company financial statements, whether due to fraud or error.
3. From the net profit as reflected in the profit and loss account, if it is sufficient to this end after a part of the profit has been set aside for increasing and/or forming reserves in accordance with 2, first of all the holders of Class A and Class B preferred shares shall receive, on the average amount paid on their preferred sharesof the class concerned (nominal value and share premium, where applicable), a dividend the percentage of which, on an annual basis, shall be equal to the European Central Bank’s fixed interest percentage for basic refinancing transactions, to be increased by 1.75 percentage points, all applicable to the first trading day on Euronext Amsterdam in the financial year to which the dividend relates. Apart from this, no other dividend is to be paid on the preferred shares. The authority to charge the payment of preferred dividends to the reserves of the company rests with the
Board, the Executive Board shall also determine the conditions applicable to the aforementioned choices.
Relating to the year 2012, a cash dividend of 2.75% on the amount paid-in on the class A and class B preferred shares shall be paid to the holder of the preferred shares.
If the proposed dividend is approved by shareholders, Aegon shares will be quoted ex-dividend on May 17, 2013. The record date for the dividend will be May 21, 2013. Shareholders can elect to receive a dividend in cash or in shares during the dividend election period, which will run from May 23, 2013 up to and including June 7, 2013. The dividend will be payable as of June 14, 2013.
Proposal for profit appropriation Proposal for profit appropriation Proposal for profit appropriation
All of Aegon’s common shares and preferred shares are fully paid and not subject to calls for additional payments of any kind. All of
As of December 31, 2012, 215 million common shares were held in the form of New York Registry shares. As of December 31, 2012, there were approximately 22,300 record holders resident in the United States, of Aegon’s New York Registry shares.
Meeting of Shareholders of Aegon N.V. In September 2002, Aegon N.V. effected a non-dilutive capital restructuring whereby Vereniging
Aegon sold 350,000,000 of its common shares, of which 143,600,000 common shares were sold directly by Vereniging Aegon in a secondary offering outside the United States and 206,400,000 common shares were purchased by Aegon N.V. from Vereniging Aegon.
to approximately 12% and its beneficial ownership interest in Aegon N.V.’s voting shares (excluding issued common shares held in treasury by Aegon N.V.) decreased from approximately 52% to approximately 33%.
On May 9, 2003, Aegon’s shareholders approved certain changes to Aegon’s corporate governance structure and Aegon’s relationship with Vereniging Aegon in an extraordinary General Meeting of Shareholders. Aegon’s Articles of Association were subsequently amended on May 26, 2003. The relationship between Vereniging Aegon and Aegon N.V. was changed as follows: �� The 440,000,000 preferred shares with nominal value of EUR 0.12 held by Vereniging Aegon were converted into 211,680,000 new class A preferred shares with nominal value of EUR 0.25 and the paid-in capital on the preferred shares was increased by
EUR 120,000 to EUR 52,920,000. The voting rights pertaining to the new preferred shares (the class A preferred shares as well as the class B preferred shares which may be issued to Vereniging Aegon under the option agreement as described in the following sections) were adjusted accordingly to 25/12 vote per preferred share.
�� Aegon N.V. and Vereniging Aegon have entered into a preferred shares voting rights agreement, pursuant to which Vereniging
�� In May 2003, Aegon N.V. and Vereniging Aegon have amended the option arrangements under the 1983 Merger Agreement. Under the amended option arrangements Vereniging Aegon, in case of an issuance of shares by Aegon N.V., may purchase as many class
preferred shares will then be issued at par value (EUR 0.25), unless a higher issue price is agreed. In the years 2003 through 2009 69,030,000 class B preferred shares were issued under these option rights. In 2010, no option rights were exercised. In March 2011
Vereniging Aegon exercised its option rights to purchase in aggregate 41,042,000 class B preferred shares at par value to correct dilution caused by Aegon’s issuance of shares conducted under Aegon’s US Shelf Registration through the sale of 173,604,912 common shares of Aegon N.V. at a price of EUR 5.20 per share in March 2011. In August 2012 and October 2012 exercised its option rights to purchase in aggregate 8,021,000 class B Preferred Shares at par value to correct dilution caused by Aegon’s issuance of shares on 15 June 2012, being the final dividend 2011 in the form of stock-dividend, and the issuance of shares on 15
At December 31, 2012, the General Meeting of Members of Vereniging Aegon consisted of eighteen members. The majority of the voting rights is with the sixteen members who are not employees or former employees of Aegon N.V. or one of the Aegon Group companies, nor current or former members of the Supervisory Board or the Executive Board of Aegon N.V. The two other members are both elected by the General Meeting of Members of Vereniging Aegon from among the members of the Executive Board of Aegon N.V.
Aegon N.V.. Furthermore, the two members of the Executive Board of Aegon N.V. who are also members of the Executive Committee have no voting rights in respect of several decisions, set out in the Articles of Association, that relate to Aegon N.V.
Other major shareholders To Aegon’s knowledge, only one other party holds a capital and voting interest in Aegon N.V in excess of 5%. According to its filing with the United States Securities and Exchange Commission on February 13, 2013, US-based investment management firm Dodge & Cox owns over 195 million common shares.
Aegon in cash and the equivalent of EUR 655 million in common shares in addition to a total of EUR 83 million of dividends on the preferred shares. The number of common shares to be received by Vereniging Aegon is based on the volume-weighted average price of Aegon common shares on Euronext Amsterdam from February 15 up to, and including, February 28, 2013. The volume-weighted average price over this period was EUR 4.86. Based on this share price, the preferred shares will be converted into 121 million common shares and 566 million common shares B.
B, each with a nominal value of EUR 0.12. The financial rights attached to a common share B are 1/40 of a common share. The combination of common shares and common shares B will be determined such that the aggregate nominal value of the preferred shares which are converted equals the aggregate nominal value of the common shares and common shares B resulting from the conversion.
1 Includes 14 million common shares which represent the economic equivalent of 566 million common shares B.
As at December 31, 2012 Amounts in million EUR Cost 1 Fair value Book value
European Union legislation (Directive 98/79/EC) adopted in 1998, the supervisory authority in the Netherlands (De Nederlandsche
Texas; Harrison, New York; Little Rock, Arkansas; Atlanta, Georgia; and Exton, PA.
Other principal offices owned by Aegon are located in The Hague, The Netherlands; Budapest, Hungary; and Madrid, Spain. Aegon owns its headquarters and leases other offices in the Netherlands (Leeuwarden), the United Kingdom and Canada under long-term leases.
Employees and labor relations At the end of 2012, Aegon had 24,407 employees of which were 2,847 agent-employees. Approximately 48% are employed in the
Aegon Nederland N.V., including the right to make non-binding recommendations for appointments to its Supervisory Board and the 315Annual Report 2012
right to enter objections against proposals for appointments to that Supervisory Board. Moreover, the Central Works Council of Aegon
The Netherlands is to be consulted as regards a nomination for appointment pertaining to one seat on the Supervisory Board of Aegon.
Board, may also determine the currency or currencies in which the dividends will be paid.
preferred shares was paid to the holder of the preferred shares. Consequently, no final dividend to common shares for 2010 and no interim dividend for 2011 to common shares was declared. On June 15, 2011 Aegon fully repaid the Dutch State.
Following, the Annual General Meeting of shareholders on May 16, 2012, during which the shareholders approved a final dividend for 2011 of EUR 0.10 per common share related to the second half of 2011, the company resumed payment of dividend to the holders of common shares.
Holders of common shares have generally been permitted to elect to receive dividends, if any, in cash or in common shares. For dividends, which holders may elect to receive in either cash or common shares, the value of the stock alternative may differ slightly from the value of the cash option. Aegon pays cash dividends on shares of New York registry in US dollars through Citibank, N.A.,
The offer and listing The offer and listing 317Annual Report 2012
Common Characteristics of the Common and Preferred Shares �� All shares are in registered form.
Supervisory Board. If Vereniging Aegon, acting at its sole discretion, determines that a “special cause” has arisen, Vereniging Aegon shall notify the General Meeting of Shareholders. In this event, Vereniging Aegon retains full voting rights on the preferred shares for a period limited to six months.
�� In the event of liquidation, all shares have the right to participate in any remaining balance after settlement of all debts.
Furthermore, a resolution of the General Meeting of Shareholders to amend the Articles of Association which has the effect of reducing the rights attributable to holders of preferred shares of a specific class shall be subject to the approval of the meeting of holders of preferred shares of such class.
Limitation on the right to own securities There are no limitations, either under the laws of the Netherlands or in Aegon’s Articles of Association, on the rights of non-residents of the Netherlands to hold or vote Aegon common shares.
In the event a “special cause” occurs (such as the acquisition of 15% of Aegon’s voting shares, a tender offer for Aegon’s shares or a proposed business combination by any person or group of persons, whether individually or as a group, other than in a transaction approved by the Executive Board and Supervisory Board), Vereniging Aegon will be entitled to exercise its full voting rights of 25/12 votes per preferred share for up to six months per “special cause”, thus increasing its current voting rights to 32.64%.
European Commission approval of State support In August 2010 the European Commission approved the capital support obtained from the Dutch State at the height of the global financial crisis. The Commission gave its approval for the state support, but imposed a number of conditions on the company, which will remain in place until the support is fully repaid. These conditions include both structural measures and temporary behavioral constraints.
(deelnemingsvrijstelling) of the Netherlands corporate income tax act 1969 (Wet op de vennootschapsbelasting 1969). Generally speaking, a shareholding is considered to qualify as a participation for the participation exemption if it represents an interest of 5%
Non-residents of the Netherlands If a holder of Aegon common shares is a resident of a country other than the Netherlands and if a treaty for the avoidance of double taxation with respect to taxes on income is in effect between the Netherlands and that country, and such holder is a resident for the purposes of such treaty, such holder may, depending on the terms of that particular treaty, qualify for full or partial relief at source or for a refund in whole or in part of the Netherlands dividend tax. A refund of the Netherlands dividend tax is available to entities resident in another EU member state, Norway, Iceland, or Liechtenstein if (i) these entities are not subject to corporate income tax there and (ii) these entities would not be subject to Netherlands corporate income tax, if these entities would be tax resident in the Netherlands for corporate income tax purposes and (iii) these entities are not comparable to investment institutions (fiscale beleggingsinstellingen) or exempt investment institutions (vrijgestelde beleggingsinstellingen). Furthermore, a similar refund of
Corporate and Individual Income Tax Residents of the Netherlands If a holder of Aegon common shares is a resident or deemed to be a resident of the Netherlands for Netherlands corporate income tax purposes and is fully subject to Netherlands corporate income tax or is only subject to Netherlands corporate income tax in respect of an enterprise to which Aegon common shares are attributable, income derived from Aegon common shares and gains realised upon the redemption or disposal of Aegon common shares are generally taxable in the Netherlands (at up to a maximum rate of 25%) under the
Netherlands income tax in respect of income derived from Aegon common shares and gains realised upon the redemption or disposal of
Aegon common shares, except if: i. the person is not an individual and (1) has an enterprise that is, in whole or in part, carried on through a permanent establishment or a permanent representative in the Netherlands to which permanent establishment or a permanent representative Aegon common shares are attributable, or (2) is (other than by way of securities) entitled to a share in the profits of an enterprise or a co-entitlement to the net worth of an enterprise, which is effectively managed in the Netherlands and to which enterprise Aegon common shares are attributable. This income and these gains are subject to Netherlands corporate income tax at up to a maximum rate of 25%.
ii. the person is an individual that (1) has an enterprise or an interest in an enterprise that is, in whole or in part, carried on through a permanent establishment or a permanent representative in the Netherlands to which permanent establishment or permanent representative Aegon common shares are attributable, or (2) realises income or gains with respect to Aegon common shares that qualify as income from miscellaneous activities (resultaat uit overige werkzaamheden) in the Netherlands which includes activities with respect to Aegon common shares that exceed regular, active portfolio management (normaal, actief vermogensbeheer), or (3)
Tax Consequences to US Holders Distributions The gross amount of any distribution (including any amounts withheld in respect of Dutch withholding tax) actually or constructively received by a US holder with respect to common shares will be taxable to the US holder as a dividend to the extent of Aegon’s current and accumulated earnings and profits as determined under US Federal income tax principles. Such dividends will not qualify for the dividends received deduction otherwise allowable to corporations. Distributions in excess of current and accumulated earnings and profits are treated under US tax law as non-taxable return of capital to the extent of the US holder’s adjusted tax basis in the common shares. Distributions in excess of earnings and profits and such adjusted tax basis will generally be taxable to the US holder as capital gain from the sale or exchange of property. However, Aegon does not maintain calculations of its earnings and profits under US
Accordingly, dividends paid by Aegon to individual US holders on shares held for the minimum holding period may qualify for a reduced income tax rate. Each US holder should consult their tax advisor regarding the applicable tax rate.
Dividends received by a US holder with respect to common shares will be treated as foreign source income for foreign tax credit limitation purposes. Subject to certain conditions and limitations, any Dutch income tax withheld on dividends may be deducted from
taxable income or credited against a US holder’s Federal income tax liability. The limitation on foreign taxes eligible for the US foreign tax credit is calculated separately with respect to “passive category income” and “general category income”. Dividends distributed by
Aegon generally will constitute “passive category income”, or, in the case of certain US holders, “financial services income”, which is treated as general category income. Each US holder should consult their tax advisor regarding the availability of the foreign tax credit under their particular circumstances.
The amount of the qualified dividend income paid by Aegon to a US holder that is subject to the reduced dividend income tax rate and that is taken into account for purposes of calculating the US holder’s US foreign tax credit limitation must be reduced by the
“rate differential portion” of such dividend (which, assuming a US holder is in the highest income tax bracket, would generally require a reduction of the dividend amount by approximately 57.14% in 2012 and 49.49% in 2013 and subsequent years). Each US holder should consult their tax advisor regarding the implications of the rules relating to qualified dividend income on the calculation of US
Sale or Other Disposition of Shares Upon the sale or exchange of common shares, a US holder will generally recognize gain or loss for US Federal income tax purposes on the difference between the US dollar value of the amount realized from such sale or exchange and the tax basis in those common shares. This gain or loss will be a capital gain or loss and will generally be treated as from sources within the United States. Investors should consult their tax advisors with respect to the treatment of capital gains (which may be taxed at lower rates than ordinary income for taxpayers who are individuals, trusts or estates that have held the common shares for more than one year) and capital losses (the deductibility of which is subject to limitations).
They also include fees billed for other audit services, which are those services that only the external auditor reasonably can provide, and include statutory audits or financial audits for subsidiaries or affiliates of the company and services associated with SEC registration statements, periodic reports and other documents filed with the SEC or other documents issued in connection with securities offerings.
Audit-related fees consist of fees billed for audit-related services including assurance and related services that are reasonably related to the performance of the audit or review of Aegon’s financial statements or that are traditionally performed by the independent auditor. Audit-related services include, among others, assurance services to report on internal controls for third parties, due diligence services pertaining to potential business acquisitions/dispositions; accounting consultations related to accounting, financial reporting or disclosure matters not classified as “Audit services”; assistance with understanding and implementing new accounting and financial reporting guidance from rulemaking authorities; financial audits of employee benefit plans; agreed-upon or expanded audit procedures related to accounting and/or billing records required to respond to or comply with financial, accounting or regulatory reporting matters; and assistance with internal control reporting requirements.
�� May be pre-approved by the Audit Committee without consideration of specific case-by-case services (“general pre-approval”); or
�� Require the specific pre-approval of the Audit Committee (“specific pre-approval”). Appendices to the Pre-approval Policy (that are adopted each year) set out the audit, audit-related, tax and other services that have received general pre-approval of the Audit
For the period 2010 to 2012, all services provided to Aegon by Ernst & Young Accountants were pre-approved by the Audit Committee in accordance with the Pre-approval Policy.
Glossary Acquisition date is the date on which the acquirer effectively obtains control of the acquiree. In most cases this includes at least the transfer of risks and rewards related to the acquired business or assets/liabilities.
That are contractually based on: �� The performance of a specified pool of contracts or a specified type of contract; �� Realized and/or unrealized investment returns on a specified pool of assets held by the issuer; or
Effective interest rate method is a method of calculating the amortized cost of a financial asset or liability and of allocating the interest income or expense over the relevant period.
Financial asset is any asset that is: �� Cash; �� An equity instrument of another entity; �� A contractual right to receive cash or another financial asset from another entity or to exchange financial instruments with another party under conditions that are potentially favorable; or
�� A non-derivative for which the entity is or may be obliged to receive a variable number of the entity’s own equity instruments; or
an entity that undertakes a number of financial instrument transactions with a single counterparty to make a single net settlement of all financial instruments covered by the agreement in the event of default on, or termination of, any contract.
Qualifying insurance policies are a component of plan assets. These are insurance policies issued by an insurer that is not a related party of the reporting entity, if the proceeds of the policies: �� Can be used only to pay or fund employee benefits under a defined benefit plan; and
�� The item has a cost or value that can be measured with reliability.
Solvency II is the fundamental reform of European insurance solvency and risk governance legislation.
Gross deposits (on and off balance sheet) 11,043 9,757 9,426 9,246 39,472 7,377 6,715 10,496 7,100 31,688
Net deposits (on and off balance sheet) 1,079 811 1,325 390 3,605 (2,945) (2,687) 3,276 (1,548) (3,904)
Disclaimer Cautionary note regarding non-GAAP measures This report includes the non-IFRS financial measures: underlying earnings before tax, income tax (including associated companies) and income before tax (including associated companies). The reconciliation of these measures to the most comparable IFRS measures is presented in the tables in note 5 of this report. These non-IFRS measures are calculated by consolidating on a proportionate basis the revenues and expenses of Aegon’s associated companies in Spain, India, Brazil and Mexico. Aegon believes that its non-IFRS measures provide meaningful information about the underlying operating results of Aegon’s business including insight into the financial measures that senior management uses in managing the business.
Kingdom because those businesses operate and are managed primarily in those currencies. None of this information is a substitute for or superior to financial information about us presented in EUR, which is the currency of Aegon’s primary financial statements.
�� Changes affecting interest rate levels and continuing low or rapidly changing interest rate levels.
�� Changes in customer behavior and public opinion in general related to, among other things, the type of products also Aegon sells, including legal, regulatory or commercial necessity to meet changing customer expectations.
�� As Aegon’s operations support complex transactions and are highly dependent on the proper functioning of information technology, a computer system failure or security breach may disrupt Aegon’s business, damage its reputation and adversely affect its results of operations, financial condition and cash flows.
�� Changes in accounting regulations and policies may affect Aegon’s reported results and shareholder’s equity.
�� The impact of acquisitions and divestitures, restructurings, product withdrawals and other unusual items, including Aegon’s ability to integrate acquisitions and to obtain the anticipated results and synergies from acquisitions.