The paper used for this Annual Report meets the strictest environmental standards set by the Nordic Swan Council and is fully recyclable. It is made at a mill accredited to ISO 14001.
The pulp used to produce the paper is generated locally and bleached without the use of elemental chlorine.
Paul van de Geijn (Dutch), 56, started his career at one of AEGON’s predecessors in 1971 at the legal department. In 1984 he became Senior Vice-President and from 1986 till 1991 he was a member of the management board of AEGON The Netherlands and from 1991 till 2002 he was the CEO. As from 1992 he is a member of the Executive Board of AEGON N.V.
operations leading the way. We had a relatively good year for new production, with production up in many of our key product lines driven by our strong distribution capabilities. At the same time, we are addressing the issues financial markets are posing to us. We maintained the capital adequacy of the company at a high level and have approximately double the EU minimum required solvency. We are managing our balance sheet in a responsible way, for instance by increasing the average credit quality of our bond portfolio. And our operating units are committed to lowering their costs. Despite good new production in the US, operating costs were lower, and in the UK we are on track to cut operating costs 15% by year-end 2003.
In the course of the year, AEGON successfully completed a number of strategic transactions, including the capital realignment with Vereniging AEGON in September. As a result AEGON raised EUR 2.1 billion of additional equity capital and Vereniging AEGON gave up its majority voting power and now holds about 33% of the voting rights in AEGON. AEGON also established an alliance with La Mondiale, a leading French provider of life insurance and pensions sold through banks and financial institutions.
By taking a 20% interest in La Mondiale’s non-mutual activities, AEGON further signaled its commitment to the European private pension sector, a market we believe is set for rapid growth.
In the United States, AEGON’s largest market, our new life production grew 6% in 2002 from a broader distribution base, while we reduced operating costs by 4%. A major contributor to this structural improvement is the increased use of partnering as a means of expanding distribution and controlling costs. Our units are increasingly working together to improve efficiency through common processes, shared services, standardization or centralized ICT.
The Netherlands and AEGON Canada took a number of steps to strengthen relations with brokers and agents in their respective markets, through either expanded support services, financing or ownership.
In Asia, our Taiwan company posted revenues of over EUR 168 million (USD 159 million) and achieved just over break-even. In China we took an important step forward with the signing of a joint venture agreement with China National Offshore Oil Corporation and the appointment of a CEO and a management team.
Earnings per share growth of on average 10% per annum; the minimum return on investment is set to earn adequate returns well in excess of the cost of capital on the pricing of new business and acquisitions. Divestment of non-core activities and underperformers and disciplined expense management are key to the achievement of these objectives.
In the light of the recent highly volatile market environment, we have extensively re-examined our product portfolio and pricing strategies in terms of risk and reward. Today, financial turmoil underscores the need for products that give constant good value. Accordingly, we are modifying or eliminating the features of some products and scaling back exposures where required returns are not currently feasible at acceptable levels of risk. Similarly, following the corporate defaults of 2001 and 2002 we have reviewed and where appropriate redeployed our investment portfolio to reduce exposure to certain issuers and sectors. While we cannot immunize ourselves against defaults in the market, we are satisfied that the structure and performance of our bond portfolio compare well with our industry peers.
Once more, in 2002 the value of communication and transparency was confirmed. We recognized this and understand the need for straight talk and clear actions. Particular areas of communication force include providing more information on variable annuity policy acquisition costs, enhanced disclosure and coming changes in accounting rules. These issues are discussed in a special section (Straight talk, pages 7-10). In addition, a corporate responsibility program was launched under the direct supervision of the Executive Board and we are taking steps to codify and communicate what has always been our commitment to good corporate citizenship (page 40).
For our customers this means delivering products that provide financial protection, asset accumulation and a service level that aims to be the best practice among peers.
For stockholders the emphasis is on achieving attractive shareholder returns, high levels of security and reassurance through the clarity of our strategy, the quality of our management and our strong financial track record.
For the intermediaries and agents who sell our products in the market, creating better futures means giving them the market information, marketing tools, low operating costs and flexible administrative systems they need to deliver the best service to customers.
Demographic developments in our markets continue to bode well for AEGON; we expect the growth in pensions, savings and life insurance to exceed nominal GDP growth for many years to come, while the
In accordance with the Board’s Rules and Regulations, preparatory meetings attended by the Chairman and Vice-
Chairman of the Supervisory Board, as well as the Chairman and a member of the Executive Board, preceded the regular meetings. All Executive Board members attended the regular meetings. The directors of the Group Finance and Corporate
Ernst & Young, AEGON’s external auditor, attended the discussion regarding the results for 2001. As usual, special meetings of the Supervisory Board were dedicated to AEGON’s budget for 2003 and its business strategy. Please refer to page 2 for AEGON’s strategy.
Among the many other topics discussed in our meetings in 2002 were embedded value and fair value, the dividend policy and capital issues. We discussed and supported the Executive
Board’s intention to disclose AEGON’s embedded value in mid2003 and we endorsed and approved the transaction with
Netherlands, as well as the alliance with La Mondiale in France and the joint venture with China National Offshore
The Audit Committee, active since 1983, with Mr. Eustace as Chairman and Mrs. Rembe and Messrs. De Ruiter and
Sarbanes-Oxley Act, especially for the current procedures within AEGON, the Supervisory Board and its committees as well as for the external auditor. We will continue to keep the subject under review.
Committee is to review the major features of AEGON’s strategy, to look at alternative strategic approaches and to consider material factors related to the implementation of the strategy.
Mr. Posthumus will reach the retirement age of 70 in 2003 and will step down at the end of the AGM to be held on
April 17, 2003. We intend to fill this vacancy by appointing
Also in 2004, the four-year terms of office of Mrs. Peijs,
Chairman of the Executive Board and Mr. Van der Werf a member of the Executive Board, both as of April 18, 2002.
The Dutch Central Works Council had given its support and shareholders were duly notified of our intention to appoint
This annual report includes the annual accounts for 2002, as submitted by the Executive Board, advised upon by the
Audit Committee and adopted by us. We recommend that shareholders approve these accounts. Upon approval of the 2002 annual accounts, a total dividend for 2002 of EUR 0.74 per common share will be declared.
We would like to express our gratitude to the Executive Board and all other members of the AEGON community worldwide for their continuing strong commitment and dedication towards growing AEGON’s business. We thank them for their unabated energy and professionalism in responding to difficult and rapidly changing markets.
A: AEGON’s capital realignment in September was not a rights issue; no new shares were issued and the transaction was non-dilutive. Instead, our largest shareholder, the Association, reduced its voting interest from approximately 52% to approximately 33% by selling almost one quarter of the company’s common stock worth EUR 3.5 billion. Largely as a result of this transaction the Association was able to lower its own debt and increase the paid-up capital of its AEGON preferred shares by EUR 2.1 billion.
Q: In 2002, AEGON wrote down a substantial amount of the deferred policy acquistion costs (DPAC)
During 2002, we had record sales with EUR 10.0 billion of variable annuity deposits while at year-end 2002 variable annuity balances totaled EUR 27.4 billion. Also, a part of the unlocking of DPAC in 2002 is the result of a change in our return assumptions. We lowered our equity return assumptions at the end of 2002 to 12% for the first five years and 9% thereafter. This amounted to a DPAC unlocking of EUR 81 million in the USA.
Q: Are your capitalization practices in the US aggressive or are your commission rates high?
A: We only capitalize ‘pricing’ acquisition costs. If our actual acquisition costs exceed what has been priced in the product, the excess is directly expensed. If actual acquisition expenses are less than pricing assumptions, only actual expenses are capitalized. Acquisition costs include policy issue and internal marketing expenses. Commission rates are around 6% and we believe that we are in the middle of the compensation range.
Q: Have the additional charges changed the company's appetite for future new business?
A: Fundamentally, we believe the business is profitable. Business written prior to a market drop will not deliver expected returns unless the market recovers substantially. But business written prior to significant market appreciation will deliver superior returns. Continuing to sell business in up and down markets is important in order to avoid a concentration of business originated in a bad market. However, the risks arising from the guarantee features of these products are continuously critically evaluated and if appropriate product design altered to reduce or mitigate risk. At the beginning of 2003 we discontinued the guaranteed minimum income benefit feature on our variable annuity products.
Q: With the corporate default levels much higher than expected, are you continuing to get your priced spreads on fixed annuities? What are your priced spread assumptions?
Q: What are the new money rates on your fixed annuities and how do they compare with minimum interest credited guarantees?
states have approved this change, allowing us to lower crediting rates on new sales to levels, which are more consistent with our profitability objectives. At the same time, we are leading an industry effort in the US to tie the level of guarantees to actual interest rates. This effort is still in progress.
Q: Last August AEGON announced that in 2003 it would begin to disclose embedded value.
“Embedded value is a management tool showing the present value of future distributable earnings from an existing book of business.”
AEGON has long used embedded value as an internal management tool and will disclose it commencing in the summer of 2003. We believe that embedded value disclosure will help investors and analysts to understand our business and the value we create.
A: Listed European companies must apply IAS, the harmonized accounting system adopted by the
EXPANDING AND STRENGTHENING DISTRIBUTION AND FOCUSING ON COST MANAGEMENT ARE TWO KEY COMPONENTS SUPPORTING OUR LONGTERM STRATEGY FOR PROFITABLE GROWTH AND UNDERPINNING THE POWER OF PARTNERING.
Despite showing many of the characteristics of a global industry, life insurance and pension and savings products have strong regional characteristics. In southern Europe for example, banks are the dominant distribution channel for these products, while in northern Europe professional intermediaries such as agents, brokers and independent financial advisors (IFAs) are the prime producers of new business. In addition, new direct sales techniques are growing in importance in all markets. Customers are demanding access, convenience and flexibility, creating new opportunities to sell insurance and savings products when shopping, surfing the web, or at work.
Financial Institutions, brings the broadest product portfolio to clients, through commercial banks and leading brokerage firms. Offering an expanded portfolio of AEGON products through institutional partners has helped generate significant organic growth in 2002 for AEGON USA.
The growing importance of direct distribution techniques including direct mail, point of service, the internet, telemarketing and direct response advertising is evidenced by the strong performance of
AEGON Direct Marketing Services (ADMS), following the 2001 acquisition of J.C. Penney's direct marketing insurance operations. The success of ADMS operations in Korea - which achieved a high response rate in the marketing of supplementary health products - demonstrates how the partnering of technology with direct sales expertise can provide a highly efficient means of entry into new international markets.
AEGON The Netherlands has launched a number of initiatives to create a more integrated distribution network and to extend its reach to customers. For example, AEGON The Netherlands joined forces with oil major TotalFina to help distribute supplementary pension plan products to truck drivers with loyalty cards.
Joint venturing with strong local partners also provides the key to new growth markets. In China,
La Mondiale, the French mutual life insurance company. This alliance, formalized in December 2002, will create the first specialized European group pensions network, and the partners expect to benefit from the sharing of expertise, client referrals and administrative efficiency. In addition to serving the
French market, where La Mondiale is one of the leading pension providers, the alliance aims to distribute specialized pension products through bank and agency channels in other EU countries, complementing AEGON's existing position.
AEGON’s existing position as a leading pension provider in the Netherlands and the United Kingdom, and creates the first specialized European group pensions network.”
Preparations were made for the commencement of operations in neighboring Slovakia in 2003. In
AEGON's results with the increased efficiencies providing a foundation for the future growth of the business.
AEGON Canada is providing administrative support for an affiliated business that specializes in sales of individual life and pension products through a fast-growing agency network.
agents, helping them operate and compete more effectively through better database management and access to product support.
Higher credit losses, low interest rates, combined with lower fee income, seriously influenced financial performance. In the context of these developments, adhering to a disciplined long-term strategy that emphasizes diversification, excellent client and customer support, expense management and prudent risk management are of great importance.
DPAC amortization (USD 407 million in the USA and CAD 31 million in Canada) and an increase in guaranteed minimum benefits provisions (USD 203 million in the USA and CAD 88 million in Canada). The acquired J.C. Penney direct marketing insurance operations had a positive impact of USD 89 million on pre-tax earnings while 2001 results included the gain of
The diversity of products and expanded multiple distribution channels helped AEGON USA attain solid sales results in 2002.
Revenues increased 1% to USD 16.4 billion, while annuity and institutional spread-based deposits reached USD 26.9 billion.
Operating efficiency and client support was improved through internal partnering. AEGON USA’s accomplishments also include the development of offerings that kept pace with evolving customer preferences, outstanding customer service, increased cross-selling initiatives and the strengthening of key distribution channel relationships.
During the year, the Agency Group offered key distributors the benefit of expanded scale and resources. The administration, technology and service functions of four distribution groups were combined to form a new internal service operation known as AEGON Financial Partners (AFP). However, sales and marketing support for each of the distribution groups supported by AFP – Transamerica Insurance & Investment
Investment Management’s objective of maximizing long-term earnings while managing to appropriate levels of risk proved challenging in 2002, as market-wide corporate bond defaults escalated to unprecedented levels. Proactive efforts to reduce credit limits and tighten controls were put in place early in the year in anticipation of a difficult credit environment.
Fixed annuity earnings experienced the largest impacts from the weakened and volatile financial markets. Spread compression and bond defaults were the primary drivers for the decrease with 49%. Deposits increased to USD 7.2 billion in 2002, outpacing the previous year’s performance by 6%. In 2002, Transamerica Financial Institutions, Inc. (TFI) maintained its leadership role in the bank channel by strengthening the relationships with its major partners. Due in large part to TFI’s contributions, fixed annuity balances grew to USD 42.0 billion for the year.
AEGON USA’s variable annuity products. Outstanding wholesale efforts, quality products and leveraging the Transamerica brand spurred much of this growth. The weak equity markets reduced fee income and contributed to increased guaranteed minimum benefit provisions, resulting in a decline in variable annuity earnings.
USD 813 million for 2002, more than offsetting slower growth in variable life products. Transamerica Insurance & Investment
Life Investors Agency Group focused on expanding its presence in the independent producer market while
AEGON Institutional Markets Division (IMD) achieved good results in 2002. Earnings on the institutional spread business totaled USD 257 million for 2002, a 33% gain over 2001. Sales of stable value products, primarily to retirement plans, were robust as investors continued to diversify away from volatile equity markets. In the funding agreement markets, medium term note programs grew substantially to USD 7.8 billion, with growth coming primarily from US fixed-income investors.
Consistent with AEGON USA’s plan, the municipal reinvestment business remained steady. Funding agreement sales to money market funds slowed due to continued discipline in marketing conservatively designed products.
Investment Advisors, which focuses on the mid-to-large plan market, and Transamerica Retirement Services, which specializes in the smaller employer market, built on their solid foundations during a difficult year and increased assets.
At the same time, Transamerica Retirement Services asserted its leadership in the small business retirement plan market through a revitalized product line and by expanding relationships with strategic alliances, third-party administrators and broker-dealers.
USD 2.8 billion despite the further deterioration of the equity markets. Increased emphasis on marketing existing products and diversifying into other sources of money management such as managed separate accounts paved the way for this growth.
2002 heralded a stronger expense reduction focus, starting with minimizing operational costs and prioritizing resources on distribution critical functions. The new organizational structure, consisting of five operating subsidiaries created a wider framework for the fulfillment of AEGON Canada’s vision to provide multiple financial services offering to customers.
Transamerica Finance Corporation, with its focus on commercial finance, container leasing, equipment leasing and real estate information services, remains a non-core operation for AEGON USA. Nonetheless, it was a solid contributor in 2002, driven primarily by lower operating expenses across all business segments and improved credit quality within the Commercial Lending and Technology
The Pensioen en Advies unit – the Netherlands’ leading provider of group pension plans – performed well. Despite difficult market conditions, sales of group pensions outperformed 2001’s figure and the potential for future growth remains positive thanks to AEGON The Netherlands’
The core strengths of AEGON The Netherlands were shown during a challenging year characterized by continuing market volatility and customer uncertainty.
Net income was EUR 523 million compared to EUR 696 million for 2001. Depressed equity markets led to an additional provision for guaranteed minimum benefits of EUR 209 million.
Total revenues were level with the prior year at EUR 6,052 million, despite 2% lower investment income on insurance activities, attributable to lower investment yields.
Management as a separate business unit to profile itself as a professional third party investment manager.
The non-life sector had a good year with sound profit, notwithstanding the October storms in the Netherlands, and a strong contribution from the motor and fire portfolios, reflecting the emphasis on underwriting quality. The health and disability cover segment is gaining market share and performed well. This market is poised for renewed expansion once changes in the laws on benefits take effect.
Savings deposits decreased 21% in 2002 from 2001. Savings deposits at AEGON Bank showed a strong inflow during the first half-year, although increased competition led to pressure on overall profitability and growth in the second half. Yet,
Spaarbeleg provided intermediaries with better access to products and services in order to meet consumers’
requirements with respect to pension issues. In 2002 it became clear that under existing market conditions short-term equity savings plans or equity lease plans were currently not attractive to customers.
In 2002, AEGON The Netherlands entered into an agreement with major oil company TotalFina to create a loyalty program for truck drivers who can earn supplementary pension plan contributions by refuelling at the TotalFina stations.
AEGON UK is implementing strategies to take full advantage of the opportunities created to strengthen relationships with intermediaries – including ownership of distributors – to offer
lower than 2001 (GBP 638 million). Off balance sheet production increased to GBP 437 million, a 59% gain over 2001.
GBP 30 million reflecting higher general account assets and capital. Commissions and expenses increased to GBP 314 million, up GBP 93 million due to setting up provisions for restructuring costs, inclusion of operating costs of the acquired distribution companies, additional costs associated with the completion of a major ICT systems project and the growth in our protection businesses.
In addition, AEGON UK made minority investments in a number of other distributors with access to over 3,500 sales consultants, giving AEGON UK a strong presence in the
Cost management continued to be a key priority with the identification of considerable annual savings. AEGON UK is on track to cut costs by 15% at year-end 2003. A significant proportion of these cost savings result from investment in information technology made over the last three years, which are expected to improve profitability. Another part will come from the planned reduction of 600 jobs in the work force across the UK operations.
A significant development was the extension of AEGON UK’s offshore business to Dublin’s International Financial Services
Centre, a move that is expected to permit increased product flexibility and which contributed to the sales in 2002.
AEGON UK remains confident that the market for savings, pensions and insurance has significant growth potential and is strongly positioned to benefit from expected consolidation as weaker life companies withdraw from active market participation. AEGON UK will focus on delivery of cost savings in 2003, while continuing to invest in delivering excellence to its target markets of corporate pensions, employee benefit packages, pre- and post-retirement investment and insurance business.
Finally, management and process improvements in AEGON UK’s investment management are expected to deliver strong future performance in the equity and managed fund arena and to sustain growth in the institutional marketplace.
As one of the country’s top sellers of standard life insurance products and – as of 2002 – household insurance products, AEGON Hungary celebrated its 10th anniversary as part of the AEGON Group with a solid year, despite the less favorable economic environment, and maintained its leading market position.
AEGON Hungary experienced important developments in distribution in 2002 with the further expansion of its specialized life agent network to supplement the activities of its traditional distribution network. AEGON Hungary is also building support among brokers and independent agents and expects that a growing portion of sales will come from these new channels. Banks are also emerging as important distribution partners, particularly for life-linked mortgage insurance and mutual fund notes.
AEGON Hungary retained its position as one of the country’s top three asset managers and won the ‘Best Institutional
The Slovak venture will be set up as a branch office of
AEGON The Netherlands. A CEO has been appointed for the new venture, which is expected to commence activities in the second half of 2003.
In the immediate future, AEGON Spain will continue to concentrate on the recurring premiums business, a market whose growth in Spain has been limited by the lack of a specialist sales network. AEGON Spain also plans to double the number of specialized life agents in its network to over 2,000 within a period of three years.
In 2002, AEGON Spain continued to implement the strategy introduced in 1999: specialization in personal lines of business and a significant reduction in exposure to industrial risks.
Internal reorganization has led to a leading role for branch offices in ensuring portfolio quality and agent productivity, with consolidation of thirty-one provincial offices into fourteen regional areas. These measures have produced a sharp fall in loss ratios and administrative expenses. Positive results were again generated in the health insurance business, in line with recent years.
The Spanish life insurance market has been profoundly affected by the downturn in single premium issuance, which represents 72% of the total life insurance market. The extremely poor performance of the financial markets has caused a sharp drop in individual business, due to both a decline in new production and an increase in the lapse rate.
China’s third largest oil company, which is experienced in working with foreign partners. The joint venture has established offices in the Pudong business district near
The joint venture’s objective in 2003 is to establish a strong network of approximately 1,000 agents and to develop a distinctive marketing approach to build substantial annual premium income over the coming decade.
Elsewhere in Asia, AEGON’s Indian representative office continues to evaluate local partnership opportunities.
AEGON sold its activities in the Philippines in December 2002 in line with AEGON’s strategy to focus on markets where it has a leading position with sufficient scale.
AEGON Taiwan enjoyed a strong 2002, increasing revenues by 81% over 2001 and achieving just over break-even status seven years after its greenfield establishment. With its absorption of the business of Transamerica Taiwan and the acquisition of
AEGON Taiwan was one of the first companies in the Taiwanese market to introduce variable universal life insurance. Revenues on this product doubled in 2002 from the previous year and management expects continued fast growth in the future. This market also exhibits great potential for individual and group pension products as the Taiwanese government moves to implement a national pension plan.
During 2002 AEGON Taiwan successfully transformed from 100% agency distribution to multiple distribution channels.
In 2003, AEGON Taiwan will continue to emphasize profitability while strengthening and deepening its multiple distribution channels. Significant business growth will be generated by new distribution channels. AEGON Taiwan will also seek to exploit the emerging opportunities in the pension market, with an initial focus on the retail segment of the market. AEGON
Taiwan’s short-term objective is to be one of the top foreign insurers in Taiwan.
As at As at As at As at Dec. 31 Dec. 31 Dec. 31 Dec. 31 9.54 10.50 –9 Shareholders’ equity after full conversion2 9.10 11.91 –24
AEGON is committed to providing information on key factors that drive its business and affect its financial condition, results and value. Our disclosure practices have been developed over many years with due consideration of the needs and requirements of our stakeholders, including regulators, investors and research analysts. We have substantive supplemental information in our annual and quarterly accounts to provide transparency of our financial results. We have provided insight into the methodologies we apply to manage both risk and accounting practices for deferred policy acquisition costs and guaranteed minimum benefits. In the summer of 2003 we will begin reporting our embedded value and will also provide a detailed analysis of the sensitivity of our embedded value to various factors, such as equity market returns, interest rates, discount rates and lapse rates. This additional disclosure will be provided in order to give the financial community increased understanding of AEGON’s value now and in the future.
Net income for 2002 of EUR 1,547 million was 35% lower than last year. Results were adversely affected by additions to the provision for bond defaults (EUR 817 million), accelerated amortization of deferred policy acquisition costs (EUR 450 million) and increased provisions for products with guaranteed minimum benefit (EUR 482 million). Comparison with the prior year’s result is positively influenced by the additional earnings from the acquired J.C. Penney direct marketing insurance operations (EUR 94 million). The 2001 gain on the sale of operations in Mexico (EUR 343 million) and the loss of earnings on these divested operations (EUR 81 million) negatively influences the comparison with the prior year. Adjusting for the above items, pre-tax earnings would have been marginally higher in 2002 than in 2001. The influence of currency exchange rates on net income was minus 2%.
Total revenues were 2% lower (1% higher, excluding currency influence) and gross margin was 10% lower (excluding currency influence 6% lower). The decline in gross margin is due primarily to lower investment returns, higher bond default provisions and provisions for guaranteed minimum benefits.
The effective tax rate for 2002 was 19% compared to 28% for 2001. The lower effective tax rate is largely due to a reduction of the deferred tax liability, favorable adjustments resulting from the filing of the 2001 corporate tax returns in the US,
AEGON has an active investor relations program focusing on providing investors around the world with information required to make appropriate investment decisions.
Along with periodic news releases and shareholder reports, investor and analyst briefing materials, financial interviews and our corporate website, mainstays of our investor relations program include management ‘road shows’ and investor days, as well as web casts and teleconferencing. In addition, investor relations’ staff are available to answer questions and to maintain an open dialogue between AEGON and the financial community, including its investors.
Selected results of our sensitivity analyses are presented throughout this annual report to show the estimated sensitivity of net income and shareholders’ equity to various scenarios in 2003. It should be noted, however, that the results should be read as indicative only, as they are derived from static analyses which are performed without taking into account correlation between factors and assuming unchanged conditions for all other assets and liabilities and only limited management responsive actions.
Results of the analyses also cannot be extrapolated for wider variations since effects do not tend to be linear.
Results for Transamerica Finance Corporation were USD 48 million as compared to USD 64 million last year. This reflects lower asset balances for 2002 as well as tax benefits and investment gains included in 2001 results, which are nonrecurring.
Traditional life results of USD 813 million, up 3%, include USD
106 million, up 14%, reflecting lower expense levels. Variable annuity reported a loss of USD 437 million compared to a profit of USD 107 million in 2001. Due to declining equity markets and the adjustment of our equity return assumptions, additional
DPAC amortization of USD 327 million and CAD 31 million and guaranteed minimum benefit provisions of USD 199 million and
The 2001 results included earnings from divested pension operations in Mexico. Accident and health results increased 60% to USD 233 million due to the acquired direct marketing insurance operations of J.C. Penney.
EUR 26 million were EUR 10 million lower than in 2001 and reflect higher claims as well as lower investment returns.
EUR 8 million, down EUR 37 million from 2001, reflecting lower production and investment spreads, as well as increased provisions for credit risk.
decrease from 2001. The lower result was due primarily to lower results in Spain and start-up activities in Asia. Taiwan showed a modest profit for the first time.
The Executive Board has proposed a dividend of EUR 0.74 per common share for the year 2002 (2001: EUR 0.83). After taking into account the interim dividend of EUR 0.37, this represents a final dividend of EUR 0.37 per common share. The final dividend will be paid entirely in stock. For every 25 shares held one new share will be paid. The stock fraction for the share dividend has been based upon the average price of the AEGON
The Executive Board has proposed to pay the final 2002 dividend entirely in shares as a measure of prudence and to retain financial flexibility in uncertain political and economic times. Over the past years, approximately 45% of AEGON’s dividends have been paid in shares. AEGON recognizes the importance of offering its shareholders a stable and adequate dividend, which is supported by the company’s cash flow and capital position.
AEGON is exposed to a variety of risks. Some risks are related to the international nature of the Group, such as currency translation risk. Other risks include insurance-related risks, such as changes in mortality and morbidity. However, the largest part of our risk lies in our exposure to financial markets: changes which affect the value of our investments and provisions (including deferred policy acquisition costs) through our exposure to interest rate, credit and equity market risks.
In 2002, particularly weak equity markets and a high level of corporate bond defaults adversely impacted AEGON’s net income and capital.
The table on this page sets forth certain information concerning trends in the performance of equity markets (as represented by certain major indices) and US Treasury and
EUR 2,190 million as a result of currency translation, mainly caused by the effect that the decline of the US dollar had on the value of our US operations when expressed in euro. The lower average currency translation rate for both the US dollar and the UK pound had a negative effect of approximately 2%
1 Basic assumptions: no correlation between markets and risks; unchanged conditions for all other assets and liabilities; limited management actions taken; all changes are relative to net income and shareholders’ equity. Effects do not tend to be linear and therefore cannot be extrapolated for larger increases or decreases.
The keys to AEGON’s risk management are the asset liability management (ALM) processes and procedures we perform in our country units. All of our country units have robust ALM
models in place, which drive the risk management process of both the country units and the AEGON Group as a whole.
Group’s risk management practices, aiming to further optimize risk and capital management on a group-wide basis.
The technical provision for life insurance includes provisions for guaranteed minimum benefits related to products for which the regular technical provision is included in technical provisions with investments for the account of policyholders. The main products are: • guaranteed minimum benefits on variable products in the United States; • guaranteed minimum accumulation benefits on segregated funds in Canada; • guaranteed return on certain unit-linked products in the Netherlands.
For separate account products in the Americas (for account of policyholders), such as variable annuities, variable universal life and segregated funds, estimated gross profits are computed based upon assumptions related to the underlying policies including mortality, lapse, expenses, and asset growth rates.
All returns quoted above are gross returns and hence are before any asset management or insurance management and expense fees are deducted. Such fees would be deducted from the assumed market returns when projecting the policyholders’
Every year AEGON tests the recoverability of DPAC from the future profits and future premium loadings that are forecasted to emerge from in-force contracts. It should be noted that testing of the DPAC is focused on recoverability only for all products in the Netherlands and the United Kingdom and fixed premium products in the Americas. Flexible premium and investment type contracts in the Americas are tested for recoverability but also for the appropriateness of the proportional amortization. Additional amortization will occur for products in the Netherlands and the UK and for fixed premium products in the Americas only when DPAC is no longer deemed recoverable, while unlocking will occur for flexible premium insurance and investment type contracts in the
Americas when long-term return assumptions and therefore expected future profit streams are changed. Recoverability for these products could still be ample when unlocking occurs. This page shows some sensitivity of net earnings to changes in longterm return assumptions.
AEGON country units are responsible for the management of their own investment portfolios. The asset liability management policies employed in the units specify the level of risk and exposure that can be assumed by the relevant country unit based on changes in interest rates, credit quality, equity markets and exchange rates. Those policies are also monitored at AEGON Group level. As mentioned in this review, during 2003 we will continue the ongoing process of integrating asset and liability risk management with capital management.
Netherlands represented 97% of AEGON’s general account assets at December 31, 2002. The decrease during 2002 was mainly driven by currency exchange rate differences. In local currencies, the general account asset base of AEGON Americas grew 12.5% to USD 109 billion due to strong new production in traditional life products and fixed annuities. In the Netherlands, the total general account asset base decreased by 1 1.1%, mainly as a result of the decline of the value of our equity investments by 17.4% in 2002. In 2002, AEGON also rebalanced its portfolio from equities to fixed income investments while increasing slightly the credit quality of the fixed income portfolio despite the further deterioration of credit markets during the year by reinvesting at a slightly higher average credit quality.
Off balance sheet investments (third-party asset management, mutual funds and synthetic GICs), on which we also earn fees, represented 18.8% of total managed assets and declined slightly in 2002 to EUR 52 billion as a result of the lower USD
Effect on net earnings of lowering long-term fixed income assumptions by 1% -30 million
The general account fixed income portfolios of the Americas and AEGON The Netherlands accounted for 97.3% of the total general account fixed income portfolio of the AEGON Group at
December 31, 2002. AEGON USA and AEGON The Netherlands are the only country units that actively manage their duration mismatch. Presently, the other country units target the duration of their assets to equal approximately the duration of their liabilities. Duration means essentially the weighted average life of all cash flows related to an investment or a liability.
For our AEGON USA business, the average duration of assets is approximately 3.8 years. This relatively low duration as compared to the long-term nature of AEGON USA’s business is driven by the asset liability management process applied to the institutional markets business in the United States (GICs and funding agreements). Both the assets and the liabilities for this business are managed on a floating rate basis, with extensive use of interest rate swaps. As a result, these assets and liabilities, which represent a little over a quarter of the total general account assets and liabilities of AEGON USA, have an average effective duration of less than one year.
The maximum allowed duration mismatch between the assets and liabilities of AEGON USA is plus or minus one year.
In the Netherlands, the average duration of assets is approximately 5.4 years with a maximum allowed duration mismatch between assets and liabilities of plus or minus two years. The combined market value weighted duration mismatch of AEGON USA and AEGON The Netherlands was around 0.2 years at December 31, 2002.
EUR 25 million. Conversely, an increase of worldwide interest rates of 1% would have an approximately EUR 110 million negative influence on net earnings. The main driver for the asymmetric effects of an immediate change of interest rates up or down by 1% is the interest rate risk of AEGON USA. An immediate increase of 1% will have a negative effect on earnings mainly as a result of a sudden rise in lapse rates on fixed annuities. A sudden decrease of 1% will cause a positive effect as a result of lower lapse rates, which is largely offset by the compression of spreads. A gradual increase of interest rates would have a substantially more benign effect on earnings.
AEGON is exposed to credit risk on its fixed income portfolio, which includes bonds, mortgages, over-the-counter derivatives and reinsurance contracts. Country units apply specific guidelines for the acceptable level of credit risk and provide for default losses.
AEGON monitors its aggregate exposure to credit counterparties at AEGON Group level. For that purpose AEGON
AEGON USA. To manage its credit risk, AEGON USA applies exposure limits, including exposures from derivatives transactions, which depend on our assessment of the credit quality of a counterparty. The exposure limits are shown in the table elsewhere on this page.
Group’s general account securities rated BB or lower (below investment grade) are held by AEGON USA.
The modelling now takes into account increased market volatility and considers a wider range of outcomes before investment decisions are taken.
The fixed income portfolio of AEGON The Netherlands is of very high average credit quality. More than 80% of the portfolio is invested in AAA/AA-rated securities while of the remainder
AEGON’s exposure and use of the various derivatives contracts is explained in quantitative terms on page 71 and 72.
AEGON The Netherlands accounted for 96.3% of the total general account equity portfolio of the AEGON Group of
Of our country units, AEGON The Netherlands holds the largest amount of investments classified as equities, both in absolute terms and expressed as a percentage of total general account investments. The largest part of the equity portfolio of AEGON
The Netherlands consists of a diversified portfolio of global equities and 5% equity holdings in Dutch companies which include non-redeemable preferred shares. Convertible bonds and alternative investments are also included under equities, with common equity investments accounting for 15%.
AEGON’s shareholders’ equity is directly exposed to movements in the equity markets. Beginning in 2004, AEGON will change its accounting policy to recognize in income realized gains and losses on equities and real estate, which may lead to increased sensitivity of earnings to movements in equity markets. In addition, as 51% of investments held for the account of policyholders is currently allocated to equity securities, net income is sensitive to the fees earned on these assets as well as the amortization of deferred policy acquisition costs and provisioning for minimum product guarantees. The sensitivity analysis on this page shows that net income would be approximately EUR 280 million lower and shareholders’ equity approximately EUR 750 million lower in the event of a decrease of 10% in equity and real estate markets. Conversely, an increase of 10% in these markets would result in a positive impact on net income of approximately EUR 180 million and on shareholders’ equity of approximately EUR 715 million.
amortization, contributions to pension plans for our employees and guaranteed minimum benefits strengthening, when applicable. The main reason for the difference in effects of an additional immediate change up or down of 10% is that a change down will cause additional DPAC
SENSITIVITY ANALYSIS OF NET INCOME AND SHAREHOLDERS’ EQUITY TO EQUITY AND REAL ESTATE MARKETS1,2
Increase of equity and real estate markets of 10% approx. EUR 180 million approx. EUR 715 million Decrease of equity and real estate markets of 10% approx. EUR –280 million approx. EUR –750 million 1 Basic assumptions: no correlation between markets and risks; unchanged conditions for all other assets and liabilities; limited management actions taken; all changes are relative relative to net income and shareholders’ equity. Effects do not tend to be linear and therefore cannot be extrapolated for larger increases or decreases.
2 The effect of movements in equity and real estate markets is reflected as a one-time increase or decrease of worldwide equity and real estate markets on January 1.
EUR 15,923 million at December 31, 2001. The EUR 1,692 million decrease is primarily due to negative exchange rate differences of EUR 2,190 million, unrealized investment losses of EUR 1,560 million, net income of EUR 1,517 million after preferred dividend and paid-in capital on preferred stock of
EUR 2,064 million contributed on our existing preferred shares by Vereniging AEGON, our largest shareholder, as part of the capital realignment effected in September 2002. As a result, shareholders’ equity as a percentage of the capital base increased from 70% at December 31, 2001 to 71% at December
The purchase price for the 206.4 million common shares sold by Vereniging AEGON to AEGON was EUR 2,064 million which amount Vereniging AEGON contributed as additional paid-in capital on AEGON’s existing preferred shares, all held by
Vereniging AEGON. Through these transactions AEGON was able to raise equity capital without ownership dilution and to increase the free-float of AEGON’s common shares substantially. This has had a positive effect on AEGON’s weightings in equity indices.
Commercial Paper Program facilitates access to international and domestic money markets when required.
USD 4.5 billion (EUR 4.3 billion) of facilities committed by banks of excellent standing and credit quality. In addition, AEGON
During 2002, Standard and Poor’s maintained AEGON’s ratings at AA level with a negative outlook, while Moody’s Investors
Service lowered AEGON’s long-term credit ratings. AEGON’s senior debt is now rated A2 by Moody’s, while the important financial strength rating of the AEGON USA companies remained unchanged at Aa3 with a stable outlook.
At December 31, 2002, equity capital represented 71% of our capital base, while senior and dated subordinated debt raised to support insurance operations comprised 19% of our capital base. The remaining 10% comprised capital securities, consisting primarily of perpetual subordinated securities.
United States, we held in excess of 350% of the minimum required capital. Other indicators we use to monitor levels of capitalization include capital adequacy models developed by rating agencies.
TALKING ABOUT OUR CORPORATE RESPONSIBILITY AND INFORMATION ABOUT OUR COUNTRY UNITS, PRODUCTS AND SERVICES.
The focus on corporate responsibility is to support our business, and is a natural response to increasing interest expressed by stakeholders, customers, employees, shareholders and business partners.
An important achievement of 2002 was the development of a formal Code of Conduct and Values, the result of a company-wide effort to articulate standards that guide our business practices. It represents concepts gathered directly from our employees worldwide forming the foundation on which our actions and policies are based. This is a significant step on the AEGON Corporate Responsibility journey and implementation is being phased in through 2003. Full Corporate Responsibility implementation and integration are important for AEGON's continued inclusion in the major sustainability indices and also for assessment by external rating agencies.
Once more, in 2002 the value of communication and transparancy was confirmed. We recognized this and understand the need for straight talk and clear actions.
Traditional, universal and variable universal life insurance, bank- and corporate-owned life insurance; fixed and variable annuities, life reinsurance, supplemental health insurance, traditional and synthetic GICs, funding agreements, pensions and 401(k) plans, mutual funds
• Market leader in nearly every business segment • Products distributed through diverse, broad-based channels of distribution
• Full line of distribution channels with a broad range of communication instruments
• Strong relationships between business units and distribution channels; chain integration
• Focus the product line with emphasis on savings and specialized insurance and pension products
Individual and group life and pension products, asset management, mutual funds, third party pension scheme administration, financial advice
• Market leader in the pensions and protection markets • Experienced product provider with quality image and highly rated service capability
• Range of distribution channels • Targeted product development • Excellent cost control
• Segment and product specialization • Enhanced quality of the back-office service for agents
carries the investment risk, earns a spread (difference between investment performance and crediting rates to customers) and realizes mortality results.
Permanent life insurance provides life-long financial protection. Most permanent policies have a cash value feature with minimum rate guarantee that accumulates tax-deferred over the life of the policy and can be used to help fund financial goals, particularly in retirement. Whole life insurance is a common form of policy where premiums remain constant over the life of the policy.
Universal life insurance is a flexible or single premium, adjustable benefit contract that allows the customer to pay premiums at any time, in virtually any amount, subject to a minimum and a maximum. The interest rate at which the cash value accumulates adjusts periodically.
This category also includes life insurance sold as part of defined benefit pension plans, endowment policies and post-retirement annuity products. Bank- or company-owned life insurance (BOLI/COLI) funds the costs of employee benefits, usually with key employees of the company as the insured persons.
A fixed annuity is a contract upon which the client is guaranteed a fixed minimum payout. Payments can either start immediately or be deferred to start later. Should the insured die prior to annuitizing the policy, the beneficiary receives the accumulated cash value death benefit. Fixed annuities have a specified rate of interest that can be reset periodically.
GICs are contracts issued to tax qualified institutional investors, guaranteeing a rate of return on assets for a fixed period and payment of principal and accumulated interest at the end of the period (usually between three and five years).
GICs are sometimes used to fund the fixed-income plan in defined contribution plans, e.g. 401(k) plans.
Annuities allow the client to save for the future on a taxdeferred basis and allow payout options that meet the client’s need for income upon maturity. This can be in the form of a lump sum, income for life or income for a period of time.
Premiums paid on variable annuity contracts are invested in funds offered by the insurance company, including bond and stock funds. Selection of funds is dependent upon a client’s chosen level of risk. Account value reflects the performance of the funds. This category includes segregated funds (Canada).
by providing management, administrative or risk services related to off balance sheet assets (i.e. equity or bond funds, third-party managed assets and collective investment trusts).
DISTRIBUTION (independent) agents marketing organizations financial institutions worksite marketing franchise organizations brokers
Long-term care insurance protects the insured’s income and retirement savings from the costs of long-term nursing home or home health care.
Limited forms of general insurance offered in selected mar kets, i.e. car insurance, liability insurance, household insurance and fire protection.
United GENERAL ACCOUNT United States Canada Netherlands Kingdom Hungary Spain Taiwan
Life for account of policyholders 371 Variable annuities -462 Fee business 2 Accident and health insurance 278 General insurance 62 Banking 8
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31 In accordance with Dutch Accounting Principles Amounts in millions 48 AEGON GROUP
1,614 1,386 Accrued interest and rent 1,539 1,573 2,040 132 Other prepayments and accrued income 10 1,945 2,007
TECHNICAL PROVISIONS 14 1,043 683 Unearned premiums and unexpired risks 995 775 319 251 Profit sharing and rebates 304 285 -3,136 –2,727 Reinsurers’ share -2,990 –3,094
SUMMARIZED CONSOLIDATED INCOME STATEMENTS In accordance with Dutch Accounting Principles Amounts in millions (except for per share data)
48 64 Net income unconsolidated group companies 12 51 72 60 1.02 1.57 Net income per share fully diluted 1.08 1.75 1.55
CONSOLIDATED INCOME STATEMENTS In accordance with Dutch Accounting Principles Amounts in EUR millions
INVESTMENT INCOME ALLOCATED TO THE NON-TECHNICAL ACCOUNT 10 -1,030 –1,011 –940
Change in technical provision unearned premiums and unexpired risks Gross -439 –546 –198 Reinsurers’ share 155 198 –20 -284 –348 –218
CONSOLIDATED CASH FLOW STATEMENTS In accordance with Dutch Accounting Principles Amounts in millions
Invested and acquired -3,234 –3,564 Real estate and shares -3,416 –3,980 –7,072 -1,081 –1,498 Shares of group companies and subsidiaries -1,142 –1,673 –979 -95,210 –80,556 Other investments -100,560 –89,966 –53,671
-747 991 Change in subordinated and other long-term loans -789 1,107 588 0 –19 Repurchased and sold own shares 0 –21 –423 1,944 0 Paid-in capital / withdrawal of preferred shares 2,053 0 –15 -1 26 Change in deposits withheld from reinsurers -1 29 0 -6 –64 Cash settlement stock options -6 –71 –200 – –61 Cash settlement subordinated convertible loan – –68 –24 -695 –487 Dividend paid -734 –544 –298 681 128 CHANGE IN LIQUID ASSETS 719 143 –239 0.9468 0.8954 Translation rate EUR/USD: weighted average exchange rate
The cash flow statement has been set up according to the indirect method. Only those changes affecting liquid assets have been taken into account. The effects of revaluation and currency exchange rate differences have therefore not been included. The impact of currency exchange rate differences on liquid assets denominated in foreign currencies is not material.
Application of the accounting policies in the preparation of the annual accounts requires management to use judgements 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 from those estimates. Accounting policies that are critical to the financial statement presentation and that require significant judgement or involve complex estimates are the policies concerning the determination of default provisions for fixed rate investments, the other than temporary impairments of equity securities, the technical provisions for life insurance including amortization of deferred policy acquisition costs, the provisions for minimum benefit guarantees, and the pension expense. For further explanation refer to the notes of the related items.
As of 2002, in line with a new accounting guideline of the Council for Annual Reporting (CAR), the amount of dividend on common shares is not accrued until it is declared. The impact on shareholders’ equity at December 31, 2002 was EUR 516 million positive and on shareholders’ equity at January 1, 2002 EUR 631 million positive. Also in line with CAR accounting guidelines, valuation and classification of non-redeemable preferred shares were changed. These investments are now recognized under shares and valued at market value. In previous years these investments were shown under bonds and valued at amortized cost. The impact on shareholders’ equity at January 1, 2002 and on net income 2002 is not material. Prior year’s amounts have been adjusted for comparability.
In 1997 AEGON put a cap of 7% after tax on the indirect return. As announced in the annual report 2000, to bring the application of this method in line with current general practice, the cap on indirect return was removed in 2001. The positive impact on 2001 pretax earnings amounted to EUR 72 million.
On May 9, 2002, AEGON and the China National Offshore Oil Corporation (CNOOC) announced the establishment of a joint venture for life insurance activities in China. CNOOC and AEGON entered this joint venture as equal partners and will each contribute 50% to the initial capital base of approximately EUR 27 million. The joint venture’s headquarters will be located in Shanghai and, subject to receiving regulatory approval, will launch its operations in the course of 2003.
On September 5, 2002, AEGON and La Mondiale, established in Lille, France, announced that they had entered into an alliance for the development of new pension ventures in Europe. La Mondiale is a mutual life insurance company, specialized in life insurance and pensions. The cooperation has been given shape by AEGON taking a 20% participation in La Mondiale Participations, the holding company under which the non-mutual activities of La Mondiale have been grouped. The participation was realized on December 26, 2002. The agreement provides for extension of the participation to 35% in the next few years.
In September 2002, AEGON effectuated a non-dilutive capital restructuring whereby Vereniging AEGON sold 350 million common shares, of which 143.6 million common shares were sold directly in a secondary offering outside the United States and 206.4 million shares were purchased by AEGON and subsequently sold in a global offering. The purchase price for the 206.4 million common shares was EUR 2,064 million, which amount Vereniging AEGON contributed as paid-in capital on AEGON ‘s existing preferred shares, all of which Vereniging AEGON holds. Vereniging AEGON and AEGON agreed to set off their respective payment obligations to each other; accordingly, no cash was exchanged as part of these transactions. Due to this restructuring, the voting interest of Vereniging AEGON reduced from approximately 52% to approximately 33% (excluding issued common shares held in treasury).
In the course of the financial year AEGON announced the acquisition in whole or in part of several independent advisory companies in the United Kingdom. The purchases were realized through AEGON UK plc and form part of the strategic goal to invest in distribution capability in the United Kingdom.
In the consolidated financial statements of AEGON N.V. all group companies have been included, except group companies for which the aggregate financial effect is relatively insignificant and companies which are not intended to be held for a long-term. Also group companies of which the consolidation would not result in a fair view of the group because of dissimilar activities have not been consolidated. The consolidated financial statements of these latter companies have been added separately in the notes. Their results are presented in the income statements on a separate line.
AEGON’s capital base reflects the capital employed in its insurance activities. AEGON endeavors to manage its capital base to contain at least 70% shareholders’ equity, between 5% and 15% capital securities, and a maximum of 25% subordinated and senior debt. The decrease in senior debt is primarily caused by redemption of long-term liabilities out of the proceeds received from the transactions with Vereniging AEGON, and translation results on USD denominated debt.
Assets and liabilities denominated in foreign currencies are converted into euro at the year-end exchange rates after consideration of transfer risks, where necessary. Currency exchange rate differences resulting from the conversion of foreign currencies investments in equities and real estate are accounted for in shareholders’ equity.
Equity held in subsidiaries not accounted for in euro, to the level of self-imposed requirements applied within the group, is not hedged against currency exchange rate movements. Equity amounts in excess of these requirements held in subsidiaries can be hedged. All currency results related to equity held in subsidiaries and the funding thereof, including results and related costs from hedging transactions on those subsidiaries, are accounted for in shareholders’ equity under the caption currency exchange rate differences. Other currency exchange rate differences are included in the income statements.
Weighted average exchange rates applied for income statement items: US Dollar (USD) 0.94680 0.89540 0.92350 Pound Sterling (GBP) 0.62830 0.62130 0.60900 Canadian Dollar (CAD) 1.48470 1.38850 1.37450 Hungarian Forint (HUF) 242.88000 257.30000 260.05000 Taiwan Dollar (NTD) 32.77000 29.68200 28.78500
Provisions for future losses on fixed income investments (bonds, mortgage loans and private placements) are established as a result of default or other credit related issues. A regular process is in place for the monitoring of debt securities for signs of impairment. The provisions for debt securities are determined based on exposure limits, counterparty credit ratings and securities expected to have a higher probability of default relative to the market in which they trade. Credit risk on mortgages is monitored by assessing delay of payment classification combined with a related level of provision. Other asset provisions are formed when credit risk emerges. Assets identified with potential credit issues are monitored and placed on a watch list. Discussions about those assets on the watch list are held on a regular basis to determine necessary updates.
Real estate is shown at market value, being the selling-value under normal market circumstances. Each property is valued at least once in every five-year period. Valuation is largely based on external appraisal. In 2002 97% of the portfolio was valued. New property is valued at construction cost including interest during the construction period, or at purchase price. Unrealized and realized gains and losses on real estate investments as well as results, expenses and currency exchange rate differences from hedging transactions are recognized in the revaluation account, taking into account the related (deferred) taxes. The participation in the joint venture AMVEST Vastgoed is accounted for under this caption. Purchase price of the portfolio amounts to EUR 1,799 million (2001: EUR 1,832 million).
Shares in group companies: Transamerica Finance Corporation 873 1,273 Other group companies 153 59
Loans to group companies: Transamerica Finance Corporation 2,342 1,735 Other group companies 77 142
The interest in the Transamerica non-insurance businesses (Transamerica Finance Corporation) is accounted for under shares in group companies at net asset value. These group companies are not consolidated because the nature of their businesses is dissimilar to the rest of the AEGON Group businesses. Consolidated financial statements of Transamerica Finance Corporation are presented on page 84 and following.
NOTES TO THE CONSOLIDATED BALANCE SHEETS Amounts in EUR millions 58 AEGON GROUP
Bonds are shown at amortized cost less write-downs for uncollectable amounts, representing the cash value at the balance sheet date of future interest and principal repayment components based on the effective interest rate on the date of acquisition. Included in other fixed rate securities are redeemable preferred shares and money market investments. Redeemable preferred shares are valued at amortized cost; money market investments are valued at cost.
Redemption value of the bonds 76,496 74,516 Deferred purchase differences –4,931 –5,713
Amortization value bonds 71,565 68,803 Other fixed rate securities 4,132 4,058
Market value of the portfolio amounts to EUR 20,039 million (2001: EUR 21,179 million). As no market exists for these investments, market value is calculated based on current interest rate, maturity and risk assumptions. For a proper understanding it should be noted that this market value is not part of the matching of these investments with the related insurance liabilities, which are not stated at market value either.
The provision for doubtful debts for these investments amounts to EUR 38 million (2001: EUR 53 million). Impaired mortgage loans amount to EUR 123 million (2001: EUR 72 million). From the above provision an amount of EUR 23 million (2001: EUR 22 million) has been earmarked to reduce the carrying value of these mortgage loans to the expected future cash flows. Investment income related to impaired mortgage loans is recognized when received. Interest foregone for these loans was not material for 2002.
Mortgage backed loan agreements 7,010 197 –343 6,864 Corporate private placements 12,503 846 –474 12,875
Mortgage backed loan agreements 8,864 93 –226 8,731 Corporate private placements 15,197 549 –565 15,181
Due in one year or less 1,535 1,534 Due after one year through five years 7,709 7,903 Due after five years through ten years 6,787 7,019 Due after ten years 5,601 5,478
Market value of policy loans is set equal to book value. The market value of receivables out of share lease agreements and others amounts to EUR 2,672 million (2001: EUR 3,131 million). The provision for doubtful debts amounts to EUR 17 million (2001: EUR 34 million).
2 Of which a decrease of EUR 1,750 million from securitizations.
OVERVIEW DEFAULT PROVISIONS FOR INVESTMENTS GENERAL ACCOUNT Addition charged to Charged Balance at income for Balance at January 1 statement default Other December 31
NOTES TO THE CONSOLIDATED BALANCE SHEETS Amounts in EUR millions 62 AEGON GROUP
Investments for the account of policyholders and insurance-linked savings deposits are investments of which the investment risk is borne by the policyholders. They are valued at market value. Separated investments for group life contracts with full profit sharing are valued according to the terms of the related contracts. Total return of these investments is accounted for in the technical account life insurance on a separate line.
Disposed and redeemed –25,918 –40,866 Investment income including revaluations –11,524 –9,515 Currency exchange rate differences and other changes –12,5541 1,639
BALANCE AT DECEMBER 31 94,728 113,272 1 Including reallocation to the general account investments for an amount of EUR 1,278 million due to the final settlement of the Diversified Investment Advisors acquisition.
The provision for doubtful debts for these receivables amounts to EUR 149 million (2001: EUR 42 million).
Investment receivables 110 81 Sale partnership interests Mexico – 828 Other receivables 1,028 1,386
Other receivables mature within one year. The provision for doubtful debts for the total other receivables amounts to EUR 1 1 million (2001: EUR 9 million).
Equipment is shown at original cost less depreciation over the estimated useful life.
For an explanation of the prepaid pension costs on employee plans refer to page 80.
For the notes to the share capital, reserves, stock options and stock appreciation rights refer to page 99 and following.
Perpetual cumulative subordinated loans 1,517 1,517 Trust Pass-through Securities 491 584
Interest rate 8%, coupon date June 8 2005 114 114 Interest rate 77⁄8%, coupon date September 29 2005 114 114 Interest rate 73⁄4%, coupon date December 15 2005 136 136 Interest rate 71⁄8%, coupon date March 4 2011 203 203 Interest rate 75⁄8%, coupon date July 10 2008 114 114 Interest rate 71⁄4%, coupon date October 14 2008 136 136 Interest rate 67⁄8%, coupon date December 20 2005 700 700
The coupons for the EUR 1 14 million 8% bonds are set at 8% until June 8, 2005. The coupons for the EUR 203 million 71⁄8% bonds are set at 71⁄8% until March 4, 201 1, while the EUR 136 million 71⁄4% bonds are set at 71⁄4% until October 14, 2008. On these dates, and after every consecutive period of ten years, the coupons will be reset at the then prevailing yield of 9-10 years Dutch government bonds plus a surcharge of 0.85%. The coupons of the other four loans are fixed.
The loans have the same subordination provisions as dated subordinated debt. In addition, the conditions of the loans contain certain provisions for interest deferral and for the availability of principal amounts to meet losses.
Although the loans have no stated maturity, AEGON has the right to call the loans for redemption at par for the first time on the coupon date in the years as specified above. Thereafter AEGON has the right to call the loans for redemption at par every consecutive ten year period on the coupon date, with the exception of the 67⁄8% bond. This bond is callable every year on the coupon date after the initial call date in 2005.
This item comprises the following loans USD 100 million 74⁄5% Capital Trust Pass-through Securities 1996/2026 95 113 USD 225 million 713⁄20% Capital Trust Pass-through Securities 1996/2026 215 255 USD 190 million 75⁄8% Capital Trust Pass-through Securities 1997/2037 181 216
NOTES TO THE CONSOLIDATED BALANCE SHEETS Amounts in EUR millions 64 AEGON GROUP
The technical provision for life reinsurance assumed is included in this provision as well and amounts to EUR 2,966 million (2001: EUR 3,290 million). The average interest rate used is 5.04% (2001: 5.33%). Taking into account the capitalized interest rate rebates, the average interest rate used is 5.25% (2001: 5.57%).
In the United States a common feature in variable annuities is a guaranteed minimum death benefit (GMDB). This means that when the insured dies, the beneficiaries receive the highest of the account balance or the guaranteed amount. The latter is calculated using the total deposits made by the contract holder, less any withdrawals and sometimes includes a roll-up or step-up feature thereby increasing the guarantee with interest or with increases in the account value, respectively. The provision for life insurance includes a provision in connection with the guarantees issued. A cap and a floor for this provision is calculated using stochastic prospective methods (probability weighted calculation using multiple future scenarios) and current assumptions. Within the cap and floor corridor, the accrual method based on pricing assumptions with valuation interest less actual claims incurred is followed. Outside the cap and floor corridor, a surplus or shortfall of the provision will cause an extra charge or credit to the income statement.
The provision for GICs and funding agreements is the amount due for these products which are sold in the United States. Both Guaranteed Investment Contracts (GICs) and Funding Agreements (FAs) are generally issued on a fixed or floating rate basis and provide for a return of principal and a guaranteed rate of interest. In certain products the customer only receives a return based on the change in a published index such as the S&P 500. GICs are primarily sold to tax qualified benefit plans, while FAs are typically sold to non-tax qualified institutional investors. FAs are also issued to certain trusts or special purpose entities, which in turn issue medium term notes or commercial paper secured by these FAs to institutional investors. The benefit provisions are equal to the full accumulated contract values. These contracts contain provisions limiting surrenders, including penalties for early surrenders and minimum notice requirements. They also may contain put provisions which give customers the option to terminate a contract, at book value, prior to maturity provided they give a minimum notice period.
NOTES TO THE CONSOLIDATED BALANCE SHEETS Amounts in EUR millions 66 AEGON GROUP
Of which value of business acquired (VOBA) 5,347 7,158 1 Of which unlocking EUR 450 million (2001: EUR -22 million). 2 Mainly caused by currency exchange rate differences.
These policy acquisition costs are costs that are directly or indirectly related to the sale of life insurance contracts. Policy acquisition costs are deferred to the extent that they are recoverable from future expense loadings in the premiums or from expected gross profits, depending on the nature of the contract. Deferred policy acquisition costs are deducted from the technical provision life insurance.
The deferred policy acquisition costs are amortized over the life of the underlying contracts, which are periods not to exceed the premium-paying periods for fixed products (traditional life and fixed universal life) and for flexible insurance contracts and investment type contracts in proportion to emerging gross profits. The periods are generally between 7 and 40 years.
For fixed products deferral of policy acquisition costs is based on prudent assumptions including mortality, lapses and expected maturity. The costs for these products are amortized as a percentage of premiums over the life of the contracts. The amortization pattern can be disturbed by mortality and excess lapses. In case of mortality the unamortized DPAC write-off is covered by the mortality risk loadings included in the regular expense loadings. In case of lapses the unamortized DPAC can generally be recovered in whole or in part from surrender penalties; if not then an extra write-off will occur. Every year the deferred policy acquisition costs are tested by country unit and product line to assess the recoverability from future premium loadings. The amount not recoverable will be recognized as an expense in the income statement.
Movements in equity markets can have a significant impact on the value of the flexible contract accounts and the fees earned on these accounts. As a result estimated future profits increase or decrease with these movements. Similarly, changes in interest rate spreads for fixed annuity products (interest credited less interest earned) will affect management’s assumptions with respect to estimated gross profits.
In the United States (and Canada), the DPAC is amortized at a constant rate based on the present value of the estimated gross profit amounts expected to be realized over the life of the policies. If appropriate, the assumption for the annual long-term net growth rate of the equity markets used in the determination of DPAC amortization is adjusted. As equity markets do not move in a systematic manner, assumptions are made as to the net long-term growth rate after considering the net effects of short-term variances from the long-term assumptions (a ‘reversion to the mean’ assumption). At December 31, 2002 the US reversion to the mean assumptions for variable products, primarily annuities, were as follows: gross long-term equity growth rate is 9%, gross short-term growth rate is 12%, the reversion period for the short-term rate is five years, the gross short- and long-term fixed security growth rate is 6% and the gross short- and long-term growth rate for money market funds is 3.5%. The reconsideration of assumptions may affect the original DPAC amortization schedule, referred to as DPAC unlocking. The difference between the original DPAC amortization schedule and the revised schedule is recognized in the income statement as an expense or a benefit.
In the Netherlands, the United Kingdom and other countries the impact of equity market movements on estimated gross profits is covered by the yearly or, if appropriate, quarterly recoverability testing; a negative outcome is charged to the income statement immediately as an extra write-off.
Balance at January 1 424 432 Rebates granted during the year 50 94 Amortization charged to the income statement –84 –102 Other changes –1 0
Balance at January 1 1,202 545 Deferred during the year 401 302 Amortization charged to the income statement –328 –219 Other changes1 –166 574
BALANCE AT DECEMBER 31 1,109 1,202 1Mainly caused by currency exchange rate differences.
The provision for claims outstanding relates to claims incurred in the current and previous years, still unsettled at year-end. Calculation takes place either on an item by item basis or on the basis of statistical information, taking into account claims incurred but not yet reported. In calculating the provision, the future costs of processing claims are considered. A different method is applied to marine, aviation and transport insurance. The calculation is based on the ‘underwriting years system’ with premiums deferred and claims combined in a fund.
15 TECHNICAL PROVISIONS WITH INVESTMENTS FOR THE ACCOUNT OF POLICYHOLDERS Exchange
The provisions are generally shown at book value of the related investments. The provisions include an amount of EUR 1,239 million (2001: EUR 1,459 million) for pension provisions regarding own employees, primarily in the Netherlands and the United Kingdom.
The provisions for taxation are of a long-term nature. This caption includes both deferred taxation as well as other long-term tax liabilities.
The provision is equal to the discounted value of the future tax amounts. In the calculation discounted tax rates ranging from 0% to nominal rates are used, taking into account the estimated term to maturity of the related differences. Nominal value of these tax amounts is EUR 2,475 million.
Total tax losses carried forward 1,839 1,054 Tax losses carried forward not recognized within deferred tax assets 194 174
Tax losses carried forward recognized within deferred tax assets 1,645 880 Average tax rate 34.3% 33.6%
17 LONG-TERM LIABILITIES Remaining terms less than between between over Total Total 1 year 1-3 years 4-5 years 5 years 2002 2001
CAPITAL MARKET: OTHER: The repayment periods of borrowings vary from less than one year up to a maximum of 28 years. The coupons vary from 1.42% to 10.0% per annum. Borrowings include debenture loans for EUR 1,465 million, as at December 31, 2002. The market value of total long-term liabilities amounts to EUR 3,679 million (2001: EUR 4,781 million).
1Of which EUR 82 million relate to AEGON N.V. (2001: EUR 378 million)
Accrued interest 459 506 Deferred gains and losses on fixed rate investments 431 496
Both insurance and banking companies are required to maintain a minimum solvency margin based on local directives. The required solvency margin shown below is the sum of the individual margins of all AEGON’s insurance and banking companies based on European directives. Liability capital available includes shareholders’ equity, capital securities and subordinated loans of the group. The solvency position of the group has been outlined in the following table: Liability capital of the group 16,855 18,694 Required solvency margin 7,825 8,452
Solvency surplus 9,030 10,242 Solvency as a percentage of required solvency margin 215 221
AEGON uses common derivative financial instruments, such as swaps, options, futures and cross-currency derivatives, to hedge its exposures related to investments, liabilities and borrowings. In general, the accounting treatment of derivatives mirrors the accounting treatment of the underlying financial instrument. In the balance sheet, the book values of the derivatives are recognized under the captions of the related underlying financial instrument. Foreign currency amounts are converted at the year-end exchange rates. Realized and unrealized results on derivative financial instruments are recognized in the same period and likewise as the results of the related investments, liabilities and debt.
An interest rate swap is an agreement between two parties to exchange, at specific dates, the difference between a fixed interest rate and a floating interest rate payment on a predetermined principal amount. The principal amount is not exchanged, and usually the fixed and floating payments are netted, thus limiting actual cash outlay. The differential to be paid or received is recognized as an adjustment to interest expense over the period of the contract.
An equity swap is a swap agreement in which one party makes payments based on either a floating index or a fixed-rate, while the other party makes payments based on the return of an equity index, basket, or single stock. Equity swaps are valued at market value with changes going through the income statement.
AEGON engages into both exchange-traded derivatives contracts as well as over-the-counter (OTC) derivatives transactions. Because of its OTC derivatives positions, AEGON is exposed to counterparty credit risk. Counterparty credit risk is the risk of loss from a counterparty failing to meet is obligations according to the terms of the contract. The company continually monitors its position and the credit ratings of the counterparties to these derivative instruments. AEGON believes the risk of losses due to nonperformance by its counterparties is low due to their high credit quality. All OTC transactions are governed by ISDA Master Agreements, which allow for netting of positions with one specific counterparty. In addition, during 2002, AEGON has negotiated collateral agreements with some of its counterparties to further limit mutual credit exposure. The credit exposure of OTC derivatives is represented by the market value of the derivatives contract.
The following table represents aggregate notional amounts of derivatives that are for account of AEGON. The amounts listed for interest rate contracts will not be exchanged by parties and, thus, do not reflect an exposure of the company to market movements. The amounts listed for cross currency contracts will be exchanged at amounts calculated on the basis of the notional amounts and the terms of the derivatives, which are related to interest rates, exchange rates and/or certain indices.
Real estate –100 –8 Mortgage loans 366 276 Bonds and registered debentures: Private placements 84 55 Other:
These function mainly as collateral granted by AEGON subsidiaries abroad, to meet legal requirements. This item also includes collateral guarantees given by subsidiaries under reciprocal insurance contracts and guarantees on interest rate risk at early redemption of ceded and securitized mortgage loans.
For all services the related assets are owned by the customers and therefore they do not appear on the balance sheet of AEGON. Total assets involved in these operations amount to EUR 52 billion, (2001: EUR 54 billion).
AEGON Levensverzekering N.V. completed two private placed securitisation programs in 2002 whereby the economical ownership of in total EUR 1.7 billion of mortgage receivables is conveyed to third-parties. The transfer of the ownership title will take place upon notification of the borrowers by either AEGON or the third-parties. The third-parties have the right to notify the borrowers upon the occurrence of certain pre-defined ‘notification events’. A first preferred ‘silent’ right of pledge on the mortgage receivables has been given to the third-parties. At the same time AEGON entered into a fixed-floating swap agreement with the contract parties under which AEGON agreed to pay the floating rate (EURIBOR based) and receive the fixed rate (scheduled yield from the mortgage receivables). Under both programs AEGON has the right to repurchase all of the mortgage receivables at a price equal to the then current portfolio market value of the receivables provided that AEGON simultaneously terminates the swap upon payment of the market value of the swap. For one program that right exists for the remainder of the term. The other program only allows AEGON to repurchase the receivables between March 2003 and September 2003.
Banque Internationale à Luxembourg S.A. and Dexia Bank Belgium S.A. (‘Dexia’) have initiated legal proceedings against AEGON in connection with its acquisition in 2000 of Labouchere, at that time a subsidiary company of AEGON. Dexia alleges that AEGON has made certain misrepresentations and has breached some of the warranties contained in the purchase agreement. The alleged misrepresentations and breaches of warranties relate to the securities leasing products sold by Labouchere. Dexia’s claims include a claim for dissolution of the agreement and damages and, if honoured by the competent courts, may result in substantial damage to us. AEGON has taken the view that the sale of Labouchere to Dexia constitutes a transaction between two large financial institutions that was duly effected and that Dexia’s allegations are without merit. In view thereof, and given that the amount of damages due in case any of the claims of Dexia would succeed cannot be determined, no provision has been made for these claims in the annual accounts for 2002.
The principles for the determination of results are described in the notes to the balance sheets.
GRAND TOTAL 18,281 –1,257 17,024 2000 Life insurance Investments for the account of policyholders
NOTES TO THE CONSOLIDATED INCOME STATEMENTS Amounts in EUR millions 76 AEGON GROUP
RESULT TECHNICAL ACCOUNT NON-LIFE 157 –11 17 3 16 15 8 205
Bonds and other fixed rate securities 4,394 297 0 4,691 Loans guaranteed by mortgage 1,338 4 0 1,342
In the income statement the structural total return on investments in real estate and shares is recognized. This total return includes the direct income (rents and dividends) of the reporting period and an amount of indirect income.
Other investments and liquid assets 243 216 133 5 CHANGE IN TECHNICAL PROVISIONS
Technical provisions with investments for the account of policyholders –9,279 –5,504 –731
Commissions and profit sharing from reinsurers —305 —157 — —462 Banking and other activities — — 96 96
Commissions and profit sharing from reinsurers —335 —128 — –463 Banking and other activities — — 85 85
Expenses include allocated housing expenses from real estate in own use for an amount of EUR 14 million (2001: EUR 17 million and 2000: EUR 17 million), based on market conditions. Claims processing costs are included in benefits and surrenders respectively claims for own account; investment expenses are included in investment charges.
In the United States US GAAP (SFAS 87) is applied for the US pension plans. SFAS calculations require several assumptions, including future performance of financial markets, future composition of work force and best estimates of long-term actuarial assumptions. The pension expense in the income statement in a certain year under SFAS 87 includes the expected return on assets. The expected return on assets is calculated by applying the long-term return on a five year moving average of the fair value of the plan assets. In a period of market declines, such as recently experienced, this moving average is higher than the fair value of the assets at the reporting date. The difference between the expected return reflected in the income statements and the actual return on the assets in a certain year is deferred. Deferred gains or losses are amortized to the income statement applying a corridor approach. The corridor is defined as 10% of the greater of the moving average value of the plan assets or the projected benefit obligation. To the extent that the prepaid pension costs at the beginning of the year exceeds the moving average asset value less the pension benefit obligation by more than the 10% corridor, the excess is amortized over the employee’s average future years of service (approximately seven years).
In The Netherlands employees participate in a defined benefit scheme based on average salary and for the amount exceeding a certain level employees may opt for a defined contribution scheme. Indexation of vested rights are fully funded yearly and immediately charged to the income statements.
J.G. van der Werf (as of April 18, 2002) 364 — 36 400
H.B. van Wijk (up to May 4, 2000) 519 402 172 1,093 1Under an annual bonus scheme of EUR 25,344 per member per percent point increase in the preceding year earnings per share over the rate of inflation, with a maximum of that year’s salary. In addition Mr. Shepard has a performance allowance related to the earnings increase of AEGON USA over 2001, paid in 2002.
REMUNERATION OF ACTIVE AND RETIRED MEMBERS OF THE SUPERVISORY BOARD Amounts in EUR 2002 2001 2000
Sir Michael Jenkins — 34,034 — J.F.M. Peters (up to May 3, 2001) — 15,808 — G. van Schaik (up to May 4, 2000) — — 15,824
STOCK OPTIONS INCLUDING STOCK APPRECIATION RIGHTS AND INTERESTS IN THE COMPANY OF ACTIVE MEMBERS OF THE EXECUTIVE BOARD
P. van de Geijn 200,000 17.36 200,000 — — — —
The criteria for the number of stock options or stock appreciation rights offered to the members of the Executive Board are as follows: 1. Comparison of the AEGON share price with a peer group of nine financials (AIG, Allianz, AXA, Generali, Prudential, Zurich,
STOCK OPTIONS INCLUDING STOCK APPRECIATION RIGHTS OF ACTIVE MEMBERS OF THE SUPERVISORY BOARD
Balance at price price Balance at price January 1 EUR Lapsed Date EUR December 31 EUR
M. Tabaksblat 7,221 K.M.H. Peijs 757 T. Rembe 6,402 K.J. Storm 261,181 F.J. de Wit 7,203
Investment expenses and interest charges 296 9 710 1,015 9 MISCELLANEOUS INCOME AND EXPENDITURE NonLife Non-life technical Total
Addition to provision for doubtful debts 826 –1 55 880 Currency exchange rate differences –1 0 –13 –14 Other income and expenditure 37 45 –90 –8
NOTES TO THE CONSOLIDATED INCOME STATEMENTS Amounts in EUR millions 84 AEGON GROUP
Amounts paid in cash in 2002 for income taxes were EUR 311 million (2001: EUR 930 million and 2000: EUR 227 million).
From July 21, 1999 up to the first six months of 2000 dividends declared were included in earnings for an amount that offset the funding cost. Effective July 1, 2000, net income of the non-insurance businesses has been included in consolidated earnings. Transamerica Finance Corporation conducts business in commercial lending, intermodal leasing and real estate information services operations.
Due to their dissimilarity in operations in relation to the operations of AEGON, these group companies have not been consolidated. Following are the consolidated balance sheets, consolidated income statements and notes thereto of Transamerica Finance Corporation, established in Delaware and operating from Chicago, Illinois, USA. In addition, the statements include allocated expenses and financing costs from associated non-insurance companies The statements have been prepared in accordance with Dutch accounting principles.
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31 OF TRANSAMERICA FINANCE CORPORATION 2002 2001
Long-term borrowings 3,551 4,926 Short-term borrowings 2,220 3,182 Other liabilities 872 1,053 Accruals and deferred income 285 348 Provisions for deferred taxation 394 462 Shareholders’ equity 873 1,273
The low corporation tax in 2001 has been caused by the reversal of state tax liabilities that were no longer needed.
Income reported by AEGON: Dividend declared through June 30, 2000 — — 82 Net income reported from July 1, 2000 88 125 66 Funding costs on the related raised debt, net of tax –37 –53 –119
Net finance receivables 5,901 8,021 Less allowances for losses –173 –156
Depreciation –10 –26 Disposals and other changes –12 –106 Currency rate differences –39 10
Balance at January 1 1,256 1,542 Net income 51 72 Capital redemptions/contributions –161 –265 Dividends paid –59 –122 Goodwill — — Currency exchange rate differences –163 47 Other changes –65 –18
In the ordinary course of business, Transamerica Finance Corporation grants various credit related commitments to meet the financing needs of its customers. Such commitments include purchase obligations and partnership investment commitments, revolving lines of credit and financial guarantees, including guarantees of letters of credit and standby letters of credit. Commitments under such arrangements totaled EUR 2,338 million at December 31, 2002. Transamerica Finance Corporation also is party to various other financial guarantees that could require payment of certain obligations in the event of demand by third parties. These guarantees amounted to EUR 93 million at December 31, 2002.
Finance charges are generally recognized on an effective yield method. Charges collected in advance on distribution finance receivables are taken into income on a straight-line basis over the periods to which the charges relate, which generally averages 90 days. Related origination and other non-refundable fees and direct origination costs are deferred and amortized as an adjustment of finance charges over the contractual life of the transactions. Accrual of finance charges is suspended on accounts that contractually become past due in excess of 90 days or at the discretion of management.
Leasing –9 –12 8 Real estate information 42 42 24 Other –39 8 –18
Pension expenses –4 –6 –4 Social security charges 14 15 18 Other employee costs 61 37 64
Transamerica Finance Corporation employed approximately 3,900 people at December 31, 2002 (2001: 4,700; 2000: 5,400).
Book profit Mexico — 307 — 343 of which general account 1,468 1,760 –17 1,551 1,965 –21 of which policyholders account1 –326 274 –345 307
Total life insurance gross premiums 6,834 6,939 –2 7,218 7,750 –7 Accident and health insurance premiums 2,469 2,093 18 2,608 2,337 12
Investment income for the account of policyholders –5,648 –5,329 –6 –5,965 –5,951 0
Traditional life 552 614 –10 Life for account policyholders 49 192 –74
Life insurance 601 806 –25 Accident and health insurance 26 36 –28 General insurance 24 37 –35
Income before tax 659 924 –29 Corporation tax –136 –228 –40
Life general account single premiums 507 768 –34 Life general account recurring premiums 564 569 –1 Life policyholders account single premiums 1,171 814 44 Life policyholders account recurring premiums 1,331 1,486 –10
Single premiums 1,536 1,625 –5 Recurring premiums annualized 191 188 2 TOTAL RECURRING PLUS 1/10 SINGLE 345 351 –2
Life for account policyholders 140 215 –35 224 346 –35 Fee business –6 2 –10 4 of which general account 12 14 –14 19 22 –14 of which policyholders account1 134 217 –38 214 350 –39
Life general account single premiums 172 112 54 273 181 51 Life general account recurring premiums 81 49 65 129 79 63 Life policyholders account single premiums 2,636 2,710 –3 4,196 4,361 –4 Life policyholders account recurring premiums 1,153 1,098 5 1,835 1,767 4
Investment income for the account of policyholders –2,680 –2,066 –30 –4,266 –3,325 –28
TOTAL RECURRING PLUS 1/10 SINGLE 588 638 –8 936 1,028 –9
Mutual funds and other managed assets 437 275 59 696 442 57
TOTAL PRODUCTION OFF BALANCE SHEET 437 275 59 696 442 57 1 Includes also fee income.
Life for account of policyholders 3 –6 150 –11 –8 –38 –6 4 of which policyholders account1 10 1 –11 –8 –38 –6 4
Life general account single premium 1 0 0 7 43 –84 6 3 100 Life general account recurring premium 82 77 6 50 52 –4 143 89 61 Life policyholders account single premium 6 10 –40 16 45 –64 8 15 –47 Life policyholders account recurring premium 50 36 39 25 38 –34 123 98 26
Total USD GBP LIFE INSURANCE Americas Netherlands Kingdom Hungary Spain countries EUR
AS AT 31 DECEMBER 2002 in USD in EUR in GBP in EUR in EUR total
High yield (BB+ or less) 6,705 51 2 5 6,453 6
The United Other In % Americas Netherlands Kingdom countries Total of
AS AT 31 DECEMBER 20011 in USD in EUR in GBP in EUR in EUR total
The legally required list of participations as meant in articles 379 and 414 of Book 2 of the Dutch Civil Code, has been registered with the Trade Register in The Hague.
Shares in group companies 1 12,464 11,850 Loans to group companies 2 5,361 6,490
Other surplus fund 5 2,765 3,591 Net income available for the general meeting of shareholders1 1,517 2,394
Amounts owed to credit institutions 2,198 1,297 Other payables 135 2622
Balance at January 1 6,490 3,392 Additional loans 941 4,117 Repayments or payments received –1,019 –1,224 Other changes –1,051 205
BALANCE AT DECEMBER 31 352 435 4 CAPITAL AND RESERVES Common Preferred shares shares Total
Vereniging AEGON, based in The Hague, holds all of the issued preferred shares.
On June 29, 2001 AEGON N.V. entered into a Total Return Swap (TRS) with Vereniging AEGON in order to hedge the stock option plan for 2001. The TRS gives AEGON N.V. effectively the right to the capital gains on 1 1,288,800 AEGON N.V. shares at the termination date and to the dividends on these shares during the contract period. The capital gains are calculated based on an exercise price of EUR 32.04. Any losses compared to the exercise price will be paid by AEGON N.V. to Vereniging AEGON upon termination. AEGON N.V. in return will pay interest to Vereniging AEGON on a quarterly basis over the (remaining) amount outstanding under the TRS. The interest rate is equal to the three-month EURIBOR plus a spread. The TRS ends on March 12, 2006 but may be terminated earlier, either partly or entirely, at the option of AEGON N.V. The total return swap is carried at fair value with changes in fair value reported in equity.
On March 11, 2002 AEGON N.V. entered into a second Total Return Swap (TRS) with Vereniging AEGON in order to hedge the stock appreciation rights plan for 2002. The TRS gives AEGON N.V. the right to the capital gains on 7,800,000 AEGON N.V. shares at the termination date and to the dividends on these shares during the contract period. The capital gains are calculated based on the exercise price of EUR 26.70. Any losses compared to the exercise price will be paid by AEGON N.V. to Vereniging AEGON upon termination. AEGON N.V. in return will pay interest to Vereniging AEGON on a quarterly basis over the (remaining) amount outstanding under the TRS. The interest rate is equal to the 3-month EURIBOR plus a spread. The TRS matures on March 1 1, 2009, but may be terminated earlier, either partly or entirely, at the option of AEGON N.V. The TRS is carried at fair value with changes in fair value reported in equity.
Balance at January 1 1,422,253,234 1,350,523,905 Issuance of shares — 55,000,000 Stock dividend 22,325,888 16,484,329 Exercise of options — 245,000
The weighted average number of EUR 0.12 common shares over 2002 was 1,401,552,845 (2001: 1,357,349,252). The repurchased own shares, although included in the issued and outstanding number of shares, are eliminated in the calculation of the weighted average number of shares (see page 102).
5 SURPLUS FUNDS Paid-in Revaluation Other Total Total surplus account surplus fund 2002 2001
Balance at January 1 (2001 after appropriation of profit) 5,074 4,640 3,591 13,305 12,629 Reversal of presentation final dividend 2000 580
The minimum of the revaluation account for the consolidated investments as required by law amounts to EUR 542 million (2001: EUR 739 million). The legal reserve for currency differences on foreign subsidiaries refers to accumulated translation differences amounting to EUR 166 million (2001: EUR 1,653 million) and is included in the other surplus fund.
The paid in amount on preferred shares is EUR 2,064 million contributed by Vereniging AEGON less EUR 11 million related costs.
Balance of revaluations at January 1 4,640 6,177 Unrealized gains and losses on real estate and shares –1,560 –1,051 Unrealized gains and losses in previous years on real estate and shares sold in the reporting year 1,337 517 Realized gains and losses on real estate and shares –1,343 –507 Transfer to the income statements of indirect income on real estate and shares –758 –723 Changes in the provision for deferred taxation 323 306 Other changes –41 –79
By virtue of acquisition in accordance with article 98, paragraph 5 of Book 2 of the Dutch Civil Code, per balance sheet date AEGON kept 30,918,580 own common shares with a face value of EUR 0.12 each. The shares have been purchased to hedge stock option rights granted to executives and employees.
Movements in the numbers of shares were as follows: Balance at January 1 30,923,080 Purchase: 1 transaction, average price EUR 10.00 206,400,000 Sale: 4 transactions, average price EUR 10.00 –206,404,500
The purchase and sales values of the related shares have been deducted from respectively added to the other surplus fund.
Goodwill is the difference between acquisition price and net asset value, based on AEGON accounting principles. The calculated amount is charged to shareholders’ equity in the year of acquisition.
The repayment periods of borrowings vary from in excess of one year up to a maximum of 28 years. The interest rates vary from 1.42% to 9.875% per annum. The market value of the long-term liabilities amounts to EUR 1,552 million (2001: EUR 1,911 million).
AEGON N.V. has guaranteed and is severally liable for the following: Due and punctual payment of payables by the consolidated group companies AEGON Funding Corp. and AEGON Funding Corp. II with respect to bonds, notes issued and Commercial Paper Programs.
Appropriation of profit will be determined in accordance with article 24 of the Articles of Incorporation of AEGON N.V. The provisions can be summarized as follows: 1. The Supervisory Board may decide, upon the proposal of the Executive Board, to set aside part of the profit to augment and/or form surplus funds.
It is proposed to the Annual General Meeting of Shareholders on April 17, 2003, to pay a dividend for the year 2002 of EUR 0.74 per common share of EUR 0.12 par value, which after taking into account the EUR 0.37 interim dividend, leads to a final dividend of EUR 0.37 per common share. It is also proposed that the final dividend will be made available entirely in stock.
Upon approval of this proposal, profit will be appropriated as follows: Dividend on preferred shares 30 Interim dividend on common shares 382 Earnings to be retained 1,135
The objective of the Vereniging is the balanced representation of the interests of AEGON N.V. and all of its stakeholders, i.e. shareholders, AEGON group companies, insured parties, employees and other relations of the said companies. In accordance with the 1983 Merger Agreement, the Vereniging used to have a majority vote at the general meeting of shareholders of AEGON N.V. This was achieved by holding a minority interest in common shares and holding all issued preferred shares.
In September 2002 this majority position was abandoned and a recapitalisation agreement with AEGON N.V. was concluded. On that occasion the Vereniging disposed of 350 million of its common shares in AEGON N.V and was left with a 12% interest of issued common shares and all issued preferred shares, which in aggregate resulted in approximately 33% of voting shares (excluding issued common shares held in treasury). Part of the recapitalisation agreement is the amendment of the existing option rights of the Vereniging, under which the Vereniging is entitled to acquire additional preferred shares upon dilution of its majority position as a result of the issuance of common shares. The option rights of the Vereniging on the acquisition of additional preferred shares are now confined to such a number of preferred shares as required to maintain the current level of approximately 33% of voting.
Stock dividends received 4,702,469 Offering price of EUR 10.00 per share –350,000,000
The Annual Report 2002 of Vereniging AEGON and further information may be obtained through the Secretary (telephone: +31 70 3448288, e-mail: Secretariaat@VerenigingAEGON.nl, fax: +31 70 3477929).
In our opinion, the financial statements give a true and fair view of the financial position of the Company as at December 31, 2002, and of the result for the year then ended in accordance with accounting principles generally accepted in the Netherlands and comply with the financial reporting requirements included in Title 9, Book 2 of the Netherlands Civil Code.
AEGON N.V. is applying the large company corporate provisions (also referred to as ‘Structure Regime’), as provided for under Dutch Corporate law. The proposals made to the Dutch Parliament in January 2002 to amend the Structure Regime are still pending, but no decisions have been made so far. This development as well as the ongoing international corporate governance discussions have given the Executive Board and the Supervisory Board cause to review and evaluate the position of AEGON N.V. as a company governed by the Structure Regime and to consider proposing and implementing changes to the corporate governance structure of AEGON N.V. In addition, the recapitalisation agreement entered into between AEGON and Vereniging AEGON in September 2002 gave rise to a reassessment of the company’s relationship with its largest shareholder. The Executive Board expects to be in a position to make its proposals for changes to the corporate governance structure of AEGON N.V. to the Annual General Meeting of shareholders in April 2003. Currently AEGON N.V. is governed by the provisions of the Structure Regime, which has the following features: SUPERVISORY BOARD
In the performance of their duties, the members of the Supervisory Board shall follow the interests of the Company and its business. The Supervisory Board currently consists of ten members and acts as a body with collective responsibility and accountability. The members of the Board are (re)appointed by the Board itself, each time for a term of office of four years. They must retire at the latest at the conclusion of the Annual General Meeting of Shareholders (AGM) in the year in which they reach the age of 70 years. Shareholders, the Central Works Council in the Netherlands (CWC) and the Executive Board have the legal right to recommend candidates for the Supervisory Board. Moreover, shareholders and the CWC have the legal right to object to any candidate. The requirements, which the composition of the Board and the individual members have to meet, are outlined in the Profile. This Profile is available for shareholders at the secretariat of the Executive Board. According to the Profile, a total of ten Supervisory Board members is considered to be a suitable number, considering that the Executive Board is composed of four to five members, only one of the Supervisory Board members may be a former member of the Executive Board and Supervisory Board members may not be dependent on any interests associated with the Company and must fulfill their duties without mandate. (Re)Appointments have to be prepared and advised on by the Nominating Committee. Supervisory Board members are entitled to a fixed fee and an expense allowance. According to Dutch corporate law and the Articles of Incorporation, the Supervisory Board is the body that is authorized to appoint or discharge members of the Executive Board and to adopt the annual accounts. Moreover, certain important Executive Board resolutions, among which those concerning securities issues, are subject to the approval of the Supervisory Board. Rules and Regulations have been adopted, for internal use, in which procedures and the Board’s duties, activities and allocation of tasks are laid down.
The Executive Board, as a body, is charged with the management of the Company, whereby each individual member has specific areas of interest, within an allocation of duties as approved by the Supervisory Board. In principle, Executive Board members will be appointed for an indefinite period of time and shareholders have to be informed of an intended appointment. They can retire at the age of 60 and have to retire at the age of 62. The Supervisory Board determines the conditions of employment.
● To amend the Articles of Incorporation as proposed by the Executive Board and previously approved by the Supervisory Board. ● To authorize the Executive Board to repurchase AEGON’s own shares. ● To determine the Supervisory Board members’ fees.
The consolidated financial statements of AEGON N.V. have been prepared in accordance with Dutch accounting principles which differ in certain respects from those generally accepted in the United States (US GAAP). The following information is a summary of the effect on the AEGON’s shareholders’ equity and net income of the application of US GAAP, which is in further detail included in the Form 20-F report filed with the Securities and Exchange Commission. This report is, as usual, available on request, free of charge, and can also be retrieved from the EDGAR database of the SEC at www.sec.gov and via www.aegon.com.
Amounts in accordance with Dutch accounting principles 14,231 15,923 1,547 2,397 2,066
Debt securities 3,411 933 — — — The Netherlands: amortized cost for bonds and private placements United States: market value
Realized gains and losses on shares and real estate — — –2,251 –1,160 999 The Netherlands: added to the revaluation account. From this reserve amounts are released to income, so that together with the direct yield, a 30 year moving average total rate of return is recognized.
Derivatives –750 –377 182 –236 — The Netherlands: recognized in same period and likewise as related investments and debt United States: valued at market value, with changes included in earnings, except when hedge accounting is applied
AMOUNTS IN ACCORDANCE WITH US GAAP 17,554 20,669 –2,230 632 2,588
Other comprehensive income, net of tax: Foreign currency translation adjustments –2,692 701 659 Unrealized gains (losses) on available for sale securities during the period –673 –621 212 Reclassification adjustment for (gains) losses included in net income 1,193 377 –821 Cumulative effect of accounting change of adopting FAS 133 — 49 —
In 2002 major differences between amounts on Dutch accounting principles and those on US GAAP compared to the amounts of prior years are explained as follows: The goodwill amortization in 2002 primarily reflects impairments for Transamerica Finance Corporation (EUR 1,234 million) and AEGON USA insurance operations.
Comprehensive income is the change in shareholders’ equity during the year from transactions and other events and circumstances from non-owner sources. It includes all changes in shareholders’ equity during the year except those resulting from investments by owners and distributions to owners.
–101 –66 –82 –47 –296 Interest charges and Other –115 –71 –82 –45 –313
D.G. Eustace (1936), British nationality, is Chairman of Smith & Nephew plc (London, UK) and former Vice-Chairman of Royal Philips Electronics. He was appointed in 1997. He is also a member of the Supervisory Boards of a number of Dutch companies, among which Royal KLM and Royal KPN. He is the Chairman of the Audit Committee.
O.J. Olcay (1936), American nationality, is Vice-Chairman and Managing Director of Fischer, Francis, Trees and Watts, Inc. (New York, USA). He was appointed in 1993; his current term of office will end in 2004. He is Chairman of FFTW Funds Inc. in New York (USA), FFTW Funds Selection in Luxembourg and FFTW Funds in Dublin (Ireland). He is a member of the Nominating and Strategy Committees.
K.M.H. Peijs (1944), Dutch nationality, is a member of the European Parliament. She was appointed in 1992; her current term will end in 2004. She is also a Supervisory Board member of, among others, Royal Vendex KBB and Daimler Chrysler Nederland. She is a member of the Nominating Committee.
K.J. Storm (1942), Dutch nationality, is a former Chairman of the Executive Board of AEGON. He was appointed in 2002; his current term will end in 2006. He is a Chairman of the Supervisory Boards of Royal Wessanen and Laurus and a member of the Supervisory Boards of Interbrew (Leuven, Belgium), Royal KLM and Pon Holdings.
AEGON Equity Fund 2,544 –33.2 –18.1 –1.4 AEGON Equity North America Fund 2,286 –36.5 –16.8 –1.2 AEGON Mix Fund 2,268 –9.4 –2.8 3.9 AEGON Equity Europe Fund 1,978 –32.4 –17.4 –1.6 AEGON World Equity Fund 1,940 –34.0 –18.4 –1.1 AEGON Aandelenfonds 1,639 –31.1 –16.4 0.3
IDEX JCC Growth 1,153 1,100 –30.7 –29.1 –1.5 IDEX JCC Global 493 470 –27.0 –22.8 –1.3
The AEGON N.V. Annual General Meeting of Shareholders will be held at AEGON headquarters, AEGONplein 50, The Hague, the Netherlands on Thursday April 17, 2003 at 14.00 C.E.T.
Net income per share increases 7% to EUR 0.44 May 9/10 CNOOC and AEGON in joint venture for life insurance activities in China July 22 AEGON strengthens provisions: full year 2002 earnings lower than expected
August 8 Half year net income is EUR 763 million, a decrease of 34% Half year net income per share is EUR 0.55, a decrease of 37% An interim dividend of EUR 0.37 is declared
September 5 LA MONDIALE and AEGON to enter into an alliance in Europe September 15 Vereniging AEGON and AEGON N.V. launch non-dilutive capital restructuring September 16 Stock fraction interim dividend 2002 AEGON N.V. determined at 1/33 September 18 Offering price of AEGON common shares set at EUR 10.00 per bearer share and USD 9.71 per New York share
February 27 Calculation period for dividend value in shares (up to and including March 5) April 17 Annual General Meeting of Shareholders April 17 Ex dividend date in the USA April 22 Dividend record date April 23 Ex-dividend date in the Netherlands May 6 Release results first three months 2003
September 19 Interim dividend payable November 6 Release results first nine months 2003
The statements contained in this Annual Report that are not historical facts are forward-looking statements as defined in the US Private Securities Litigation Reform Act of 1995. Words such as ‘believe’, ‘estimate’, ‘intend’, ‘may’, ‘expect’, ‘anticipate’, ‘predict’, ‘project’, ‘counting on’, ‘plan’, ‘continue’, ‘want’, ‘forecast’, ‘should’, ‘would’, ‘is confident’ and ‘will’ and similar expressions as they relate to us are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. We undertake no obligation to publicly update or revise any forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. All forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from expectations, including, but not limited to, the following: ● changes in general economic conditions, particularly in the United States, The Netherlands and the United Kingdom; ● changes in the performance of financial markets, including emerging markets, including: ● the frequency and severity of defaults by issuers in our fixed income investment portfolios; and
AEGON Group businesses encourage product innovation and reward value creation. New products and service initiatives are developed by local business units who understand the needs of customers, intermediaries, partners and other distributors and are offered at the best price thanks to a continuous focus on cost control.
1 Report of the Executive Board 5 Report of the Supervisory Board 7 Straight talk 11 The power of partnering 17 Review of operations 29 Financial review
Board of AEGON N.V. 113 Survey of major AEGON investment funds 114 Corporate and shareholder information 115 Financial calendar 116 Forward-looking statements
Since May 2000 he has been a member of the Executive Board of AEGON N.V.