Earnings from AEGON’s associates in insurance companies in Spain, India, Brazil and Mexico are reported on an underlying earnings basis. Other associates are included on a net income basis.
Financial assets and liabilities are offset in the statement of financial position when the Group has a legally enforceable right to offset and has the intention to settle the asset and liability on a net basis or simultaneously.
Goodwill is recognized as an intangible asset for interests in subsidiaries and joint ventures acquired after January 1, 2004 and is measured as the positive difference between the acquisition cost and the Group’s interest in the net fair value of the entity’s identifiable assets, liabilities and contingent liabilities. Subsequently, goodwill is carried at cost less accumulated impairment charges. It is derecognized when the interest in the subsidiary or joint venture is disposed of.
When a portfolio of insurance contracts is acquired, whether directly from another insurance company or as part of a business combination, the difference between the fair value and the carrying amount of the insurance liabilities is recognized as value of business acquired (VOBA). The Group also recognizes VOBA when it acquires a portfolio of investment contracts with discretionary participation features.
VOBA is amortized over the useful life of the acquired contracts, based on either the expected future premiums or the expected gross profit margins. The amortization period and pattern are reviewed at each reporting date; any change in estimates is recorded in the income statement. For all products, VOBA, in conjunction with DPAC where appropriate, is assessed for recoverability at least annually on a country-by-country basis and the portion determined
Software and other intangible assets are carried at cost less accumulated depreciation and impairment losses.
Loans and financial assets held-to-maturity are subsequently carried at amortized cost using the effective interest rate method. Financial assets at fair value through profit or loss are measured at fair value with all changes in fair value recognized in the income statement as incurred. Available-for-sale assets are recorded at fair value with unrealized changes in fair value recognized in other comprehensive income. Financial assets that are designated as hedged items are measured in accordance with the requirements for hedge accounting.
The amortized cost of a debt instrument is the amount at which it is measured at initial recognition minus principal repayments, plus or minus the cumulative amortization of any difference between the initial amount and the maturity amount, and minus any reduction for impairment. The effective interest rate method is a method of calculating the amortized cost and of allocating the interest income or expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the debt instrument or, when appropriate, a shorter period to the net carrying amount of the instrument. When calculating the effective interest rate, all contractual terms are considered. Possible future credit losses are not taken into account.
Such differences are not recognized in the income statement immediately but are deferred. They are released over time to the income statement in line with the change in factors (including time) that market participants would consider in setting a price for the asset. Interest accrued to date is not included in the fair value of the financial asset.
Land is not depreciated. On revaluation the accumulated depreciation is eliminated against the gross carrying amount of the asset and the net amount is restated to the revalued amount. Increases in the net carrying amount are recognized in the related revaluation reserve in shareholders’ equity and are released to other comprehensive income over the remaining useful life of the property.
Investments held for account of policyholders consist of investments in financial assets, excluding derivatives, as well as investments in real estate. Investment return on these assets is passed on to the policyholder. Also included are the assets held by consolidated investment funds that are backing liabilities towards third parties. Investments for account of policyholders are valued at fair value through profit or loss.
Assets and liabilities may include derivative-like terms and conditions. With the exception of features embedded in contracts held at fair value through profit or loss, embedded derivatives that are not considered closely related to the host contract are bifurcated, carried at fair value and presented as derivatives. In assessing whether a derivative-like feature is closely related to the contract in which it is embedded, the Group considers the similarity of the characteristics of the embedded derivative and the host contract. Embedded derivatives that transfer significant insurance risk are accounted for as insurance contracts.
Derivatives for which the contractual obligation can only be settled by exchanging a fixed amount of cash for a fixed amount of AEGON N.V. equity instruments are accounted for in shareholders’ equity and are therefore discussed in the notes on equity, refer to note 32 Other equity instruments.
All derivatives recognized on the statement of financial position are carried at fair value.
(being hedged item) that is not held at fair value through profit or loss. The hedged item is remeasured to fair value in respect of the hedged risk and any resulting adjustment is recorded in the income statement.
equity is recognized immediately in the income statement. In other situations where hedge accounting is discontinued for a cash flow hedge, including those where the derivative is sold, terminated or exercised, accumulated gains or losses in shareholders’ equity are amortized into the income statement when the income statement is impacted by the variability of the cash flow from the hedged item.
The carrying amount is subsequently adjusted to reflect the change in the Group’s share in the net assets of the associate and is subject to impairment testing. The net assets are determined based on the Group’s accounting policies.
Any gains and losses recorded in other comprehensive income by the associate are reflected in other reserves in shareholders’ equity, while the share in the associate’s net income is recognized as a separate line item in the consolidated income statement. The Group’s share in losses is recognized until the investment in the associate’s equity and any other long-term interest that are part of the net investment are reduced to nil, unless guarantees exist.
Gains and losses on transactions between the Group and the associate are eliminated to the extent of the Group’s interest in the entity, with the exception of losses that are evidence of impairment which are recognized immediately.
DPAC relates to all insurance contracts and investment contracts with discretionary participation features and represents mainly the variable costs that are related to the acquisition or renewal of these contracts.
Acquisition costs are deferred to the extent that they are recoverable and are subsequently amortized based on either the expected future premiums or the expected gross profit margins. For products sold in the United States and Canada with amortization based on expected gross profit margins, the amortization period and pattern are reviewed at each reporting date and any change in estimates is recognized in the income statement. Estimates include, but are not limited to: an economic perspective in terms of future returns on bond and equity instruments, mortality, disability and lapse assumptions, maintenance expenses and expected inflation rates. For all products, DPAC, in conjunction with VOBA
where appropriate, is assessed for recoverability at least annually on a country-by-country basis and is considered in the liability adequacy test for each reporting period. If appropriate, the assumptions included in the determination of estimated gross profits are adjusted. The portion of DPAC that is determined not to be recoverable is charged to the income statement.
For products sold in the United States or Canada, when unrealized gains or losses arise on available-for-sale assets,
158 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 2.14 - 2.16
An interest rebate is a form of profit sharing whereby the Group gives a discount on the premium payable (usually single premium) based on the expected surplus interest that will be earned on the contract. The expected surplus interest is calculated with reference to a portfolio of government bonds. The rebate can be subject to additional conditions concerning actual returns or the continuation of the policy for a specified number of years.
Equipment is initially carried at cost, depreciated on a straight line basis over its useful life to its residual value and is subject to impairment testing. The accounting for real estate held for own use is described in note 2.8.
An asset is impaired if the carrying amount exceeds the amount that would be recovered through its use or sale.
For tangible and intangible assets, financial assets and reinsurance assets, if not held at fair value through profit or loss, the recoverable amount of the asset is estimated when there are indications that the asset may be impaired. Irrespective of the indications, goodwill and other intangible assets with an indefinite useful life that are not amortized, are tested at least annually.
Assets are tested individually for impairment when there are indications that the asset may be impaired. The impairment loss is calculated as the difference between the carrying and the recoverable amount of the asset, which is the higher of an asset’s value in use and its net selling price. The value in use represents the discounted future net cash flows from the continuing use and ultimate disposal of the asset and reflects its known inherent risks and uncertainties.
For debt instruments carried at amortized cost, the carrying amount of impaired financial assets is reduced through an allowance account. The impairment loss is calculated as the difference between the carrying and recoverable amount of the investment. The recoverable amount is determined by discounting the estimated probable future cash flows at the original effective interest rate of the asset. For variable interest debt instruments, the current effective interest rate under the contract is applied.
Impairment losses recognized for debt instruments can be reversed if in subsequent periods the amount of the impairment loss decreases and that decrease can be objectively related to a credit event occurring after the impairment was recognized. For debt instruments carried at amortized cost, the carrying amount after reversal cannot exceed its amortized cost at the reversal date.
For equity instruments, a significant or prolonged decline in fair value below initial cost is considered objective evidence of impairment and always results in a loss being recognized in the income statement. Significant or prolonged decline is defined as an unrealized loss position for generally more than six months or a fair value of less than 80% of the cost price of the investment. Equity investments are impaired to the asset’s fair value and any unrealized gain or loss previously recognized in shareholders’ equity is taken to the income statement as an impairment loss. The amount exceeding the balance of previously recognized unrealized gains or losses is recognized in the income statement.
Group has issued perpetual securities. Perpetual securities have no final maturity date, repayment is at the discretion of AEGON and for junior perpetual capital securities AEGON has the option to defer coupon payments at its discretion.
The perpetual capital securities are classified as equity rather than debt, are measured at par and those that are denominated in US dollars are translated into euro using historical exchange rates.
Treasury shares are own equity instruments reacquired by the Group. They are deducted from Group equity, regardless of the objective of the transaction. No gain or loss is recognized in the income statement on the purchase, sale, issue or cancellation of the instruments. If sold, the difference between the carrying amount and the proceeds is reflected in retained earnings. The consideration paid or received is recognized directly in shareholders’ equity. All treasury shares are eliminated in the calculation of earnings per share and dividend per common share.
Trust pass-through securities, subordinated borrowings and other borrowings are initially recognized at their fair value including directly attributable transaction costs and are subsequently carried at amortized cost using the effective interest rate method, with the exception of specific borrowings that are designated as at fair value through profit or loss to eliminate, or significantly reduce, an accounting mismatch, or specific borrowings which are carried as at fair value through the profit and loss as part of a fair value hedge relationship. The liability is derecognized when the
or she will be adversely affected. Contracts that do not meet this definition are accounted for as investment contracts.
Some products, such as traditional life insurance products in continental Europe and products in the United States, for which account terms are fixed and guaranteed, are measured using the net premium method. The liability is determined as the sum of the discounted value of the expected benefits and future administration expenses directly related to the contract, less the discounted value of the expected theoretical premiums that would be required to meet the future cash outflows based on the valuation assumptions used. The liability is either based on current assumptions or calculated using the assumptions established at the time the contract was issued, in which case a margin for risk and adverse deviation is generally included. A separate reserve for longevity may be established and included in the measurement of the liability. Furthermore, the liability for life insurance comprises reserves for unearned premiums and for claims outstanding, which includes an estimate of the incurred claims that have not yet been reported to the Group.
Other products with account terms that are not fixed or guaranteed are generally measured at the policyholder’s account balance. Depending on local accounting principles, the liability may include amounts for future services on contracts where the policy administration charges are higher in the initial years than in subsequent years.
In establishing the liability, guaranteed minimum benefits issued to the policyholder are measured as described in note 2.19 c or, if bifurcated from the host contract, as described in note 2.10.
162 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 2.20
The Group issues life insurance contracts, which do not expose the Group to interest rate risk as the account terms are not fixed or guaranteed or because the return on the investments held is passed on to the policyholder. Some of these contracts, however, may contain guaranteed minimum benefits. An additional liability for life insurance is established for guaranteed minimum benefits that are not bifurcated. Bifurcated guaranteed minimum benefits are classified as derivatives.
In the Netherlands, an additional liability is established for guaranteed minimum benefits that are not bifurcated on group pension plans and on traditional insurance contracts with profit sharing based on an external interest index.
These future returns on investments take into account management’s best estimate related to the actual investments and, where applicable, reinvestments of these investments at maturity.
164 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 2.21 -2.22
Subsequently, contracts designated as at fair value through profit or loss are measured at fair value, which generally equals the contractholder’s account value. All changes in the fair value are recognized in the income statement as incurred. Other investment contracts without discretionary participation features are carried at amortized cost based on the expected cash flows and using the effective interest rate method. The expected future cash flows are reestimated at each reporting date and the carrying amount of the financial liability is recalculated as the present value of estimated future cash flows using the financial liability’s original effective interest rate. Any adjustment is immediately recognized in the income statement.
For unit-linked contracts without discretionary participation features and subject to actuarial funding, the Group recognizes a liability at the funded amount of the units. The difference between the gross value of the units and the funded value is treated as an initial fee paid by the policyholder for future asset management services and is deferred.
The amount recognized as a provision is the best estimate of the expenditure required to settle the present obligation at the balance sheet date, considering all its inherent risks and uncertainties, as well as the time value of money.
With the exception of insurance contracts and investment contracts with discretionary participation features for which potential future losses are already considered in establishing the liability, a provision is recognized for onerous contracts in which the unavoidable costs of meeting the resulting obligations exceed the expected future economic benefits. The unavoidable costs under a contract reflect the least net cost of exiting from the contract, which is the lower of the cost of fulfilling it and any compensation or penalties arising from failure to fulfill it.
A liability is recognized for the undiscounted amount of short-term employee absences benefits expected to be paid within one year after the end of the period in which the service was rendered. Accumulating short-term absences are recognized over the period in which the service is provided. Benefits that are not service-related are recognized when the event that gives rise to the obligation occurs.
166 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 2.23 - 2.29
�� Any related actuarial gains and losses and past service cost that had not previously been recognized.
tax loss carryforwards to the extent that it is probable at the reporting date that future taxable profits will be available against which the unused tax losses and unused tax credits can be utilized.
Deferred tax assets and liabilities are recognized in relation to the underlying transaction either in profit and loss, other comprehensive income or directly in equity.
For interest-bearing assets, interest is recognized as it accrues and is calculated using the effective interest rate method. Fees and commissions that are an integral part of the effective yield of the financial assets or liabilities are recognized as an adjustment to the effective interest rate of the instrument. Investment income includes the interest income and dividend income on financial assets carried at fair value through profit or loss.
Policyholder claims and benefits consist of claims and benefits paid to policyholders, including benefit claims in excess of account value for products for which deposit accounting is applied and the change in the valuation of liabilities for
Net fair value change on for account of policyholder financial assets at fair value through profit or loss
Impairment charges and reversals include impairments and reversals on investments in financial assets, impairments and reversals on the valuation of insurance assets and liabilities and other non-financial assets and receivables. Refer to note 15.
Interest charges and related fees includes interest expense on trust pass-through securities and other borrowings.
Leases that do not transfer substantially all the risks and rewards of ownership are classified as operating leases.
Where the Group is the lessor under an operating lease, the assets subject to the operating lease arrangement are presented in the statement of financial position according to the nature of the asset. Income from these leases are recognized in the income statement on a straight line basis over the lease term, unless another systematic basis is more representative of the time pattern in which use benefit derived from the leased asset is diminished.
170 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 3
Investment assumptions are either prescribed by the local regulator or based on management’s future expectations.
DPAC or VOBA amortization schedule and the revised schedule, which is based on estimates of actual and future gross profits, is recognized in the income statement as an expense or a benefit in the period of determination.
For 2011, AEGON kept its long-term equity market return assumption for the estimated gross profits on variable life and variable annuity products in the Americas at 9% (2010: 9%). On a quarterly basis, the difference between the estimated equity market return and the actual market return is unlocked.
No change has been made to the long-term credit spread or default assumptions. In addition, AEGON has lowered its assumed return for US separate account bond fund returns by 200 basis points to 4% over the next five years, followed by a return of 6% thereafter (2010: 6% and 6% respectively). The bond fund return is a gross assumption from which asset management and policy fees are deducted to determine the policyholder return. In total, these assumption changes led to a charge of USD 237 million in the third quarter of 2011.
A 1% decrease in the expected long-term equity growth rate with regards to AEGON’s variable annuities and variable life insurance products in the United States and Canada would result in a decrease in DPAC and VOBA balances and reserve strengthening of approximately EUR 159 million. The DPAC and VOBA balances for these products in the
Applying a reasonably possible increase to the mortality assumption, which varies by block of business, would reduce net income by approximately EUR 93 million. A 20% increase in the lapse assumption would increase net income by approximately EUR 44 million.
Surrender rates depend on product features, policy duration and external circumstances such as the interest rate environment and competitor and policyholder behavior. Credible own experience, as well as industry published data, are used in establishing assumptions. Lapse experience is correlated to mortality and morbidity levels, as higher or
Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable willing parties in an arm’s length transaction. Financial instruments measured at fair value on an ongoing basis include investments for the general account, investments for the account of policyholders, and investments designated at fair value and derivatives as well as investment contracts, investment contracts for account of policyholders and borrowings.
The majority of valuation techniques employ only observable market data, and so the reliability of the fair value measurement is high. However, certain financial instruments are valued on the basis of valuation techniques that feature one or more significant market inputs that are unobservable and, for such financial instruments, the derivation of fair value is more judgmental. An instrument in its entirety is classified as valued using significant unobservable inputs (Level III) if, in the opinion of management, a significant proportion of the instrument’s carrying amount is driven by unobservable inputs. “Unobservable” in this context means that there is little or no current market data available from which to determine the price at which an arm’s length transaction would be likely to occur. It generally does not mean that there is no market data available at all upon which to base a determination of fair value. Additional information is provided in the section headed “Effect of changes in significant unobservable assumptions to reasonably possible alternatives” below.
Periodically, this logic for assigning fair value levels is reviewed to determine if any modifications are necessary in the context of the current market environment.
Third-party pricing services will often determine prices using recently reported trades for identical or similar securities.
The third-party pricing service makes adjustments for the elapsed time from the trade date to the balance sheet date to take into account available market information. Lacking recently reported trades, third-party pricing services and brokers will use modeling techniques to determine a security price where expected future cash flows are developed based on the performance of the underlying collateral and discounted using an estimated market rate. Also included within the modeling techniques for RMBS, CMBS and CDO securities are estimates of the speed at which the principal will be repaid over their remaining lives. These estimates are determined based on historical repayment speeds
Periodically, AEGON performs an analysis of the inputs obtained from third-party pricing services and brokers to ensure that the inputs are reasonable and produce a reasonable estimate of fair value. AEGON’s asset specialists and investment valuation specialists consider both qualitative and quantitative factors as part of this analysis. Several examples of analytical procedures performed include, but are not limited to, recent transactional activity for similar debt securities, review of pricing statistics and trends and consideration of recent relevant market events. Other controls and procedures over pricing received from indices, third-party pricing services, or brokers include validation checks such as exception reports which highlight significant price changes, stale prices or un-priced securities.
Additionally, during 2011, AEGON began performing back testing on a sample basis. Back testing involves selecting a sample of securities trades and comparing the prices in those transactions to prices used for financial reporting.
For private loans, fixed interest mortgage and other loans originated by the Group, the fair value used for disclosure purposes is estimated by discounting expected future cash flows using a current market rate applicable to financial instruments with similar yield, credit quality and maturity characteristics.
174 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 3
Where quoted market prices are not available, other valuation techniques, such as option pricing or stochastic modeling, are applied. The valuation techniques incorporate all factors that a typical market participant would consider and are based on observable market data when available. Models are validated before they are used and calibrated to ensure that outputs reflect actual experience and comparable market prices.
Fair values for exchange-traded derivatives, principally futures and certain options, are based on quoted market prices in active markets. Fair values for over-the-counter (OTC) derivative financial instruments represent amounts estimated to be received from or paid to a third party in settlement of these instruments. These derivatives are valued using pricing models based on the net present value of estimated future cash flows, directly observed prices from exchangetraded derivatives, other OTC trades, or external pricing services. Most valuations are derived from swap and volatility matrices, which are constructed for applicable indices and currencies using current market data from many industry standard sources. Option pricing is based on industry standard valuation models and current market levels, where applicable. The pricing of complex or illiquid instruments is based on internal models or an independent third party.
The fair values of these guarantees are calculated as the present value of future expected payments to policyholders less the present value of assessed rider fees attributable to the guarantees. Given the complexity and long-term nature of these guarantees which are unlike instruments available in financial markets, their fair values are determined by using stochastic techniques under a variety of market return scenarios. A variety of factors are considered, including expected market rates of return, equity and interest rate volatility, credit spread, correlations of market returns, discount rates and actuarial assumptions.
The expected returns are based on risk-free rates. The credit spread is set by using the credit default swap (CDS)
spreads of a reference portfolio of life insurance companies (including AEGON), adjusted to reflect the subordination of senior debt holders at the holding company level to the position of policyholders at the operating company level
For equity volatility, AEGON uses a term structure assumption with market-based implied volatility inputs for the first five years and a long-term forward rate assumption of 25% thereafter. The volume of observable option trading from which volatilities are derived generally declines as the contracts’ term increases, therefore, the volatility curve grades from implied volatilities for five years to the ultimate rate. The resulting volatility assumption in year 20 for the S&P
500 index (expressed as a spot rate) was 25.7% at December 31, 2011 and 24.8% at December 31, 2010. Correlations of market returns across underlying indices are based on historical market returns and their inter-relationships over a number of years preceding the valuation date. Assumptions regarding policyholder behavior, such as lapses, included in the models are derived in the same way as the assumptions used to measure insurance liabilities.
These assumptions are reviewed at each valuation date, and updated based on historical experience and observable market data, including market transactions such as acquisitions and reinsurance transactions.
Investment contracts issued by AEGON are either carried at fair value (if they are designated as financial liabilities at fair value through profit or loss) or amortized cost (with fair value being disclosed in the notes to the consolidated financial statements). These contracts are not quoted in active markets and their fair values are determined by using valuation techniques, such as discounted cash flow methods and stochastic modeling or in relation to the unit price of the underlying assets. All models are validated and calibrated. A variety of factors are considered, including time value, volatility, policyholder behavior, servicing costs and fair values of similar instruments.
The expected returns are based on risk-free rates, such as the current London Inter-Bank Offered Rate (LIBOR) swap rates and associated forward rates or the current rates on local government bonds. Market volatility assumptions for each underlying index are based on observed market implied volatility data and/or observed market performance.
176 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 3
Financial assets carried at fair value Level I Level II Level III
Total gains or (losses) for the period included in profit and loss for positions held at
Other investments at fair value 805 (120) 32 133 (65) (8) 22 – – 799 –
Other investments at fair value 1,205 116 – 107 (170) – 48 203 (81) 1,428 128
Investment contracts for account of policyholders (178) 9 – – 7 – (4) – – (166) –
Other investments at fair value 842 (140) (73) 172 (47) (17) 68 – – 805 –
Investments for account of policyholders 2,776 153 – 396 (1,108) – 100 191 (156) 2,352 106
1 Includes impairments and movements related to fair value hedges. 2 Total gains / (losses) for the period during which the financial instrument was in Level III.
180 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 3
During 2011, AEGON transferred certain financial instruments from Levels I and II to Level III of the fair value hierarchy.
The following table shows the sensitivity of the fair value of Level III instruments to changes in key assumptions, by class of instrument: Financial assets carried at fair value Note
Other investments at fair value c 1,428 142 (142) 1,205 177 (177)
Policyholder assets, and their returns, belong to policyholders and do not impact AEGON’s net income or equity.
(2010: EUR 178 million) that are measured at par. The bank has implicit financial support from the United States government. The redemption value of the shares is fixed at par and can only be redeemed by the bank.
b. Debt securities mainly consist of corporate bonds (EUR 742 million; 2010: EUR 1,117 million) and other structured debt securities (EUR 1,962 million; 2010: EUR 2,610 million). For corporate bonds the most significant unobservable input for the valuation of these securities is the credit spread / illiquidity premium. AEGON adjusted the price, based on the bid / ask spread AEGON observed in the market for these types of securities.
c. Other investments at fair value include investments exposed to real estate (EUR 522 million; 2010: EUR 475 million)
d. Derivatives exclude derivatives for account of policyholders amounting to EUR 294 million (2010: EUR 140 million).
e. Investment contracts reflect the fair value of guarantees issued for which the most significant unobservable input is the credit spread. The credit spread was increased or decreased by 20 basis points.
f. Derivatives that depend on the yield were stressed using a decrease of the yield by 75 basis points. Derivatives also include embedded derivatives related to guarantees (EUR 1.3 billion; 2010: EUR 0.9 billion) for which the most significant unobservable input is the credit spread. The credit spread was increased or decreased by 20 basis points.
There are a number of significant risks and uncertainties inherent in the process of monitoring investments and determining if impairment exists. These risks and uncertainties include the risk that the Group’s assessment of an issuer’s ability to meet all of its contractual obligations will change based on changes in the credit characteristics of that issuer and the risk that the economic outlook will be worse than expected or have more of an impact on the issuer than anticipated. Any of these situations could result in a charge against the income statement in a future period to the extent of the impairment charge recorded.
AEGON regularly monitors industry sectors and individual debt securities for evidence of impairment. This evidence may include one or more of the following: 1) deteriorating market to book ratio, 2) increasing industry risk factors, 3)
Residential mortgage-backed securities (RMBS) are monitored and reviewed on a monthly basis. Detailed cash flow models using the current collateral pool and capital structure on the portfolio are performed quarterly. Model output is generated under a base and several stress-case scenarios. AEGON’s RMBS asset specialists utilize industry modeling software to perform a loan-by-loan, bottom-up approach to modeling. Key assumptions used in the models are projected defaults, loss severities, and prepayments. Each of these key assumptions varies greatly based on the significantly diverse characteristics of the current collateral pool for each security. Loan-to-value, loan size, and borrower credit history are some of the key characteristics used to determine the level of assumption that is utilized.
Defaults were estimated by identifying the loans that are in various delinquency buckets and defaulting a certain percentage of them over the near-term and long-term. Assumed defaults on delinquent loans are dependent on the specific security’s collateral attributes and historical performance. Loss severity assumptions were determined by obtaining historical rates from broader market data and by adjusting those rates for vintage, specific pool performance, collateral type, mortgage insurance and estimated loan modifications. Prepayments were estimated by examining historical averages of prepayment activity on the underlying collateral. Once the entire pool is modeled, the results are analyzed by internal asset specialists to determine whether or not a particular tranche or holding is at risk for not collecting all contractual cash flows taking into account the seniority and other terms of the tranches held. AEGON
182 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 4
Objective evidence of impairment of an investment in an equity instrument classified as available-for-sale includes information about significant changes with an adverse effect that have taken place in the technological, market, economic or legal environment in which the issuer operates, and indicates that the cost of the investment in the equity instrument may not be recovered. A significant or prolonged decline in the fair value of an investment in an equity instrument below its cost is also objective evidence of impairment. Significant or prolonged decline is defined as an unrealized loss position for more than 6 months or a fair value of less than 80% of the original cost price of the investment. Additionally, as part of an ongoing process, the equity analysts actively monitor earnings releases, company fundamentals, new developments and industry trends for any signs of possible impairment. If an availablefor -sale equity security is impaired based upon AEGON’s qualitative or quantitative impairment criteria, any further declines in the fair value at subsequent reporting dates are recognized as impairments. Therefore, at each reporting period, for an equity security that is determined to be impaired based upon AEGON’s impairment criteria, an impairment is recognized for the difference between the fair value and the original cost basis, less any previously recognized impairments.
The liabilities or assets recognized in the statement of financial position in respect of defined benefit plans is the difference between the present value of the projected defined benefit obligation at the balance sheet date and the fair value of plan assets, together with adjustments for unrecognized actuarial gains or losses and past service costs.
The present value of the defined benefit obligation is determined by discounting the estimated future cash flows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity that approximate the terms of the related pension liability. Actuarial assumptions used in the measurement of the liability include the discount rate, the expected return on plan assets, estimated future salary increases and estimated future pension increases. To the extent that actual experience deviates from these
assumptions, the valuation of defined benefit plans and the level of pension expenses recognized in the future may be affected.
Deferred tax assets are established for the tax benefit related to deductible temporary differences, carry forwards of unused tax losses and carry forwards of unused tax credits when in the judgment of management it is more likely than not that AEGON will receive the tax benefits. Since there is no absolute assurance that these assets will ultimately be realized, management reviews AEGON’s deferred tax positions periodically to determine if it is more likely than not that the assets will be realized. Periodic reviews include, among other things, the nature and amount of the taxable income and deductible expenses, the expected timing when certain assets will be used or liabilities will be required to be reported and the reliability of historical profitability of businesses expected to provide future earnings. Furthermore, management considers tax-planning strategies it can utilize to increase the likelihood that the tax assets will be realized. These strategies are also considered in the periodic reviews.
Because of the inability to measure the fair value of employee services directly, fair value is measured by reference to the fair value of the rights and options granted. This value is estimated using the binomial option pricing model, taking into account the respective vesting and exercise periods of the share appreciation rights and share options.
Some risks, such as currency translation risk, are related to the international nature of AEGON’s business. Other risks include insurance related risks, such as changes in mortality and morbidity. However, AEGON’s largest exposures are to changes in financial markets (e.g. interest rate, credit and equity market risks) that affect the value of the investments, liabilities from products that AEGON sells, deferred expenses and value of business acquired.
To manage its risk exposure, AEGON has risk policies in place. Many of these policies are group-wide while others are specific to the unique situation of local businesses. The Group level policies limit the Group’s exposure to major risks such as equity, interest rates, credit and currency. The limits in these policies in aggregate remain within the Group’s overall tolerance for risk and the Group’s financial resources. Operating within this policy framework, AEGON employs risk management programs including asset liability management (ALM) processes and models, hedging programs
(which are largely conducted via the use of derivatives) and insurance programs (which are largely conducted through
As part of its risk management programs, AEGON takes inventory of its current risk position across risk categories.
AEGON also measures the sensitivity of net income and shareholder’s equity under both stochastic and deterministic scenarios. Management uses the insight gained through these “what if?” scenarios to manage the Group’s risk exposure and capital position. The models, scenarios and assumptions used are reviewed regularly and updated as necessary.
1 Please refer to note 3 for a description of the critical accounting estimates and judgments.
equity as a result of translation of subsidiaries into euro, the Group’s presentation currency. AEGON holds the remainder of its capital base (perpetual capital securities, subordinated and senior debt) in various currencies in amounts that are targeted to correspond to the book value of the country units. This balancing mitigates currency translation impacts on shareholders’ equity and leverage ratios. AEGON does not hedge the income streams from the main non-euro units and, as a result, earnings may fluctuate due to currency translation. As AEGON has significant business segments in the Americas and in the United Kingdom, the principal sources of exposure from currency fluctuations are from the differences between the US dollar and the euro and between the UK pound and the euro.
AEGON may experience significant changes in net income and shareholders’ equity because of these fluctuations.
Information on AEGON’s 3-year historical net income / (loss) and shareholders’ equity in functional currency are shown in the table below: Net income / (loss)
186 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 4
Parallel Movement of Yield Curve Estimated approximate effects on net income
188 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 4
Debt securities - carried at fair value 96,251 – – 1,009 – – – 1,009 – 95,242
Mortgage loans - carried at amortized cost 26,012 1,146 – 1,187 36,027 – 1 38,361 13,117 768
Private loans - carried at amortized cost 927 – – – – – – – – 927
Money market and other short-term investments - carried at fair value 10,800 – 1,324 – – – – 1,324 35 9,511
Mortgage loans - carried at amortized cost 23,781 884 – 1,007 33,703 – 2 35,596 12,293 478
Other financial assets - carried at fair value 2,661 – 7 – – – – 7 – 2,654
The collateral reported for the money market and short term investments are related to tri-party repurchase agreements
190 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 4
The real estate collateral for mortgages includes both residential and commercial properties. The collateral for commercial mortgage loans in AEGON Americas is measured at fair value. At a minimum, on an annual basis, a fair value is estimated for each individual real estate property that has been pledged as collateral. When a loan is originally provided, an external appraisal is obtained to estimate the value of the property. In subsequent years, the value is typically estimated internally using various professionally accepted valuation methodologies. Internal appraisals are performed by qualified, professionally accredited personnel. International valuation standards are used and the most significant assumptions made during the valuation of real estate are the current cost of reproducing or replacing the property, the value that the property’s net earning power will support, and the value indicated by recent sales of comparable properties. Valuations are primarily supported by market evidence. For AEGON The Netherlands collateral for the residential mortgages is measured as the foreclosure value which is indexed periodically.
Cash collateral for mortgage loans includes the savings that have been received to redeem the underlying mortgage loans at redemption date. These savings are separately presented on the credit side of the statement of financial position, but reduce the credit risk for the mortgage loan as a whole.
Guarantee (NHG) are presented in the letters of credit/guarantees column. These specific mortgage loans are partly guaranteed by a Dutch Government Trust (Stichting Waarborgfonds Eigen Woningen). The guarantee encompasses the remaining debt for these mortgage loans (being the remainder of the mortgage loan minus the forced sale auction value).
The collateral related to the reinsurance assets include assets in trust that are held by the reinsurer for the benefit of AEGON. The assets in trust can be accessed to pay policyholder benefits in the event the reinsurers fail to perform under the terms of their contract. Further information on the related reinsurance transactions is included in note 26.
�� 30%-60% tranche of the CDX.IG.6 index (EUR 766 million notional) maturing 6/20/2016
The credit support agreement will normally dictate the threshold over which collateral needs to be pledged by AEGON
derivative trades, comprised mostly of interest rate swaps, currency swaps, and credit swaps. Collateral received is mainly cash (USD and EUR). The Credit Support Agreements that outline the acceptable collateral require high quality instruments to be posted. Nearly all securities received as collateral are US Treasuries or US Agency bonds. In 2010 and 2011, AEGON did not take possession of collateral or call on other credit enhancements. The credit risk associated with financial assets subject to a master netting agreement is eliminated only to the extent that financial liabilities due to the same counterparty will be settled after the assets are realized.
The extent to which the exposure to credit risk is reduced through a master netting agreement may change substantially within a short period of time because the exposure is affected by each transaction subject to the arrangement. AEGON
AEGON operates a Credit Name Limit Policy under which limits are placed on the aggregate exposure that it has to any one counterparty. Limits are placed on the exposure at both group level and individual country units. The limits also vary by a rating system, which is a composite of the main rating agencies (S&P, Moody’s and Fitch) and AEGON’s internal rating of the counterparty. If an exposure exceeds the stated limit, then the exposure must be reduced to the
192 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 4 limit for the country unit and rating category as soon as possible. Exceptions to these limits can only be made after explicit approval from AEGON’s Group Risk and Capital Committee (GRCC). The policy is reviewed regularly.
At December 31, 2011, there were two violations of the Credit Name Limit Policy at Group level. One was granted an exemption from AEGON’s GRCC. The second one was a minor violation resulting from exchange rate movements.
At December 31, 2010, there were two violations of the Credit Name Limit Policy at Group level, both of which received exemption from AEGON’s GRCC.
AEGON had large investments in sovereign backed assets, the largest being in The Netherlands, UK, Germany, the
Past due and / or impaired assets 291 1,435 367 227 – 24 169 – 827 1,686
AT DECEMBER 31 11,412 82,491 15,630 23,967 9 9,260 792 2,042 27,843 118,283 1 Includes investments of Holding and other activities.
The following table shows the credit quality of the gross positions in the statement of financial position for general account reinsurance assets specifically: Carrying value 2011 Carrying value 2010
Asset Backed Securities (ABSs) - CDOs backed by ABS, Corp. Bonds, Bank loans 633 732 – – 1,365 23 1 Includes investments of Holding and other activities.
194 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 4
Residential mortgage backed securities (RMBSs) 5,586 1,362 433 186 7,567 957
Asset Backed Securities (ABSs) - CDOs backed by ABS, Corp. Bonds, Bank loans 692 754 – – 1,446 43 1 Includes investments of Holding and other activities.
The fair value of AEGON Americas commercial mortgage loan portfolio as per December 31, 2011 amounts to
EUR 23 million impairments (net of recoveries) on this portfolio. AEGON Americas foreclosed upon, or recovered
EUR 71 million of real state. The recoveries associated with these loans amounted to EUR 1 million.
The fair value of AEGON The Netherlands mortgage loan portfolio as per December 31, 2011 amounts to EUR 18,910 million
Impairments in 2011 amounted to EUR 12 million (2010: EUR 9 million). Historical defaults of the portfolio have been between 4 and 8 basis points per year.
About EUR 1.2 billion of the bonds in AEGON USA’s portfolio are insured by monoline insurers (2010: EUR 1.4 billion), of which EUR 516 million of bonds (2010: EUR 584 million) in the EUR 1.4 billion subprime portfolio (2010: EUR 1.6 billion).
Expected claims against the monolines amount to EUR 120 million (2010: EUR 122 million), although an insolvency by one of the monolines could create significant market price volatility for the affected holdings.
The following table breaks down bonds in AEGON USA’s portfolio that are insured by monoline insurers. The disclosure by rating follows a hierarchy of S&P, Moody’s, Fitch, Internal and NAIC.
(2010: EUR 8 million) via holdings in monoline insurers and derivative counterparty exposure where monoline insurers are AEGON’s counterparty. Of AEGON’s direct exposure 100% relates to MBIA (2010: 100% to MBIA).
Of which held by AEGON Americas, NL and UK 102,883 4,619 (3,380) 104,122 74,480 29,642
The composition by industry categories of debt securities and money market investments that are included in
Of which held by AEGON Americas, NL and UK 21,052 (3,138) 29,032 (3,273)
198 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 4
Unrealized losses – debt securities and money market investments held by AEGON Americas, AEGON The Netherlands and AEGON UK In EUR million
The information presented above is subject to rapidly changing conditions. As such, AEGON expects the level of securities with overall unrealized losses to fluctuate. The recent volatility of financial market conditions has resulted in increased recognition of both investment gains and losses, as portfolio risks are adjusted through sales and purchases.
Standard & Poor’s on August 5, 2011. Most world equity markets performed well during the early months of 2011, but have generally been softer during the remainder of the year and most markets ended 2011 significantly down. In the US, the Federal Reserve maintained a Fed Funds rate near zero. US Treasury rates fell sharply, reflecting concerns about prospective growth, fears over European sovereign debt impacts, and reduced market concern about inflation.
Corporate default rates continued to fall in 2011 due largely to improved access to funding and better economic conditions. Commodity prices have also been mixed in 2011 as growth expectations have fluctuated.
USA’s AFS RMBS portfolio, by credit quality *. Additionally, AEGON USA has investments in RMBS of EUR 133 million
AFS RMBS by quality AAA AA A BBB <BBB Total amortized cost Total fair value 1 Reported as part of asset backed securities in the table on page 196.
Once the entire pool is modeled, the results are closely analyzed by AEGON’s asset specialists to determine whether or not AEGON’s particular tranche or holding is at risk for not collecting all contractual cash flows taking into account the seniority and other terms of the tranches held. AEGON impaired its particular tranche to fair value where it would not be able to receive all contractual cash flows.
The total gross unrealized loss on AFS RMBS of AEGON Americas, AEGON The Netherlands and AEGON UK amount to EUR 814 million, of which EUR 723 million relates to positions of AEGON USA, and the total net unrealized loss on available-for-sale RMBS is EUR 537 million, including a EUR 575 million net unrealized loss relating to positions of AEGON USA. The unrealized loss in the sector is primarily a result of the housing downturn the United States
AEGON USA’s investments in Alt-A mortgages are in the form of mortgage-backed securities. AEGON USA’s Alt-A
202 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 4
AEGON categorizes mortgage backed securities issued by a securitization trust as having subprime mortgage exposure when the average credit score (FICO) of the underlying mortgage borrowers in a securitization trust is below 660 at issuance. AEGON also categorizes mortgage backed securities issued by a securitization trust with second lien mortgages as subprime mortgage exposure, even though a significant percentage of second lien mortgage borrowers may not necessarily have credit scores below 660 at issuance. The table below summarizes vintage and quality * of the
Total subprime mortgages - fixed rate 366 283 6 15 180 850 194 746 2008 – – – – – – – –
The table below summarizes the comparitive information on vintage and quality * of the AFS RMBS – subprime mortgage portfolio of AEGON USA.
Total subprime mortgages - fixed rate 410 184 32 15 148 789 189 702
Total subprime mortgages - floating rate 82 119 – 30 224 455 77 328 1 Second lien collateral primarily composed of loans to prime and Alt-A borrowers. *
For the RMBS - Subprime mortgage holding, the underlying collateral pool has experienced higher than expected delinquencies and losses, which is further exacerbated by the impact of declining home values on borrowers using affordability products. This has led to the underlying collateral pool having reduced cash flows in comparison to expectations at origination. Increased losses have eroded the subordination in this security, which in turn has led to a decline in the level of protection to AEGON's tranche within the collateral pool. Despite the decline in the level of protection provided by the subordination for this security, cash flow modeling continues to indicate full recovery of principal and interest.
There are no other individual issues rated below investment grade in the RMBS sector which have unrealized loss positions greater than EUR 25 million.
Securities are impaired to fair value when we expect that we will not receive all contractual cash flows on AEGON's tranches. As the remaining unrealized losses in the RMBS portfolio relate to holdings where AEGON expects to receive full principal and interest, AEGON does not consider the underlying investments to be impaired as of December 31, 2011.
(CRE CDOs), collateral debt obligations (CDOs), government agency, and franchise loan receivable trusts.
EUR 211 million, of which EUR 210 million relates to positions of AEGON USA. The total net unrealized gain on CMBS is
The tables below summarize the credit quality * of AEGON USA’s AFS CMBS portfolio. Additionally, AEGON USA has investments in CMBS of EUR 81 million (2010: EUR 108 million), which are classified as fair value through profit or loss.
Ratings based on a hierarchy of S&P, Moody’s, Fitch, Internal, NAIC.
The table below summarizes vintage and quality * of the available-for-sale CMBS portfolio of AEGON USA.
CMBS of AEGON USA are monitored and reviewed on a monthly basis. Detailed cash flow models using the current collateral pool and capital structure on the portfolio are updated and reviewed quarterly. Model output is generated under base and several stress-case scenarios by AEGON's internal CMBS asset specialists. For conduit securities, a widely recognized industry modeling software is used to perform a loan-by-loan, bottom-up approach. For non-conduit securities, a CMBS asset specialist works closely with AEGON’s real estate valuation group to determine underlying asset valuation and risk. Both methodologies incorporate external estimates on the property market, capital markets, property cash flows, and loan structure. Results are then closely analyzed by the asset specialist to determine whether or not a principal or interest loss is expected to occur. AEGON impairs its particular tranche to fair value where it would not be able to receive all contractual cash flows.
CDOs backed by ABS, Corp. Bonds, Bank loans 343 298 23 – 36 700 633
CDOs backed by ABS, Corp. Bonds, Bank loans 314 377 16 19 40 766 691
208 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 4 the collateral pools within AEGON’s small business loan securitizations have increased since 2007, as a result of the overall economic slowdown. Banks and finance companies have also scaled back their lending to small businesses.
Positions are monitored monthly with cash flow modeling updated and reviewed quarterly on all securities within the sector. Assumed defaults on delinquent loans are dependent on the specific security’s collateral attributes and historical experience. Results are then closely analyzed by the asset specialist to determine whether or not a principal or interest loss is expected to occur. AEGON impaired its particular tranche to fair value where it would not be able to receive all contractual cash flows. The remaining ABS – small business loan portfolio positions are not considered impaired as of December 31, 2011.
There are no individual issuers rated below investment grade in the ABS – small business loan sector which have unrealized loss positions greater than EUR 25 million.
The net unrealized loss on the CDOs backed by ABS, Corporate Bonds, and Bank Loans is EUR 67 million. CDO’s are primarily secured by pools of corporate bonds and leveraged bank loans. The unrealized loss is a function of decreased liquidity and increased credit spreads in the market for structured finance. All of the individual debt securities have been modeled using the current collateral pool and capital structure. Assumed defaults on delinquent loans are dependent on the specific security’s collateral attributes and historical experience. Results are then closely analyzed by the asset specialist to determine whether or not a principal or interest loss is expected to occur. AEGON impaired its particular tranche to fair value when it would not be able to receive all contractual cash flows. The remaining CDO
(policy is with AMBAC); as such, the unrealized loss on the position is partly attributable to the weakened financial position of the financial guarantee provider. Cash flow modeling of this holding continues to indicate full recovery of principal and interest without considering the financial guaranty policy. The long duration of this security combined with the increased credit spreads associated with negative ratings migrations since issuance have resulted in an unrealized loss.
In 2011, the European Sovereign debt crisis reintroduced significant stress into the Financial sector as public funding markets began shutting down for all but the strongest financial institutions. Concerns grew throughout the year as
Greece’s financial crisis lead to funding pressures for Italy and Spain. The Federal Reserve Board and the European
Central Bank responded to the freeze in bank funding by providing extensive financing to banks. This, combined with stronger capital levels and improved asset quality, has prevented a global banking crisis and given Sovereign nations additional time to address their debt levels and budget deficits.
The banking sub-sector in AEGON’s portfolio is large, diverse, and of high quality. AEGON holds EUR 10,209 million
(2010: EUR 386 million). The unrealized losses in the banking sub-sector primarily reflect the size of AEGON's holdings, low floating rate coupons on some securities, and credit spread widening in the sector due to the Sovereign debt crisis as well as residual impact from the U.S. financial crisis. As a whole, the sub-sector remained volatile in 2011 as financial bail-outs in Greece, Ireland, and Portugal led to fears that Italy and Spain may require similar International bail-outs.
210 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 4 conditions. Capital securities categorized as “Upper Tier 2” are generally perpetual with a cumulative coupon that is deferrable under certain conditions. The deeply subordinated securities issued by US Banks can be categorized as Trust
Preferred or Hybrid. Capital securities categorized as trust preferred typically have an original maturity of 30 years with call features after 10 years with a cumulative coupon that is deferrable under certain conditions. Capital securities categorized as hybrid typically have an original maturity of more than 30 years, may be perpetual and are generally subordinate to traditional trust preferred securities.
There are four individual issuers rated below investment grade in the banking sub-sector which have unrealized losses greater than EUR 25 million.
AEGON’s available-for-sale debt securities for Dexia Bank Belgium have a fair value of EUR 72 million as of
AEGON evaluated the near-term prospects of the issuer and it is believed that the contractual terms of these investments will be met and these investments are not impaired as of December 31, 2011.
Upper Tier 2 securities are rated from BB to C depending on the individual features of the debt securities. As of
December 31, 2011 unrealized losses were EUR 47 million, of which EUR 39 million relates to holdings rated below investment grade. Lloyds Banking Group PLC was created from the merger of Lloyds TSB and HBOS PLC in the fall of 2008 as the shutdown in capital markets threatened the sustainability of HBOS PLC’s wholesale funding and specialist lending model. Following an emergency capital injection, the UK Government currently owns 43.4% of the combined
Lloyds Banking Group PLC. As a result of the state aid that Lloyds received during the height of the crisis, it was required to submit a restructuring plan to the European Commission. As a condition of approving Lloyd’s restructuring plan, the European Commission asked Lloyds to undertake certain “burden sharing” measures. As part of the “burden sharing” measures, Lloyds will not pay dividends or coupons on existing hybrid securities or exercise any call options for a two year period unless there is a legal obligation to do so. As such, in 2010 AEGON impaired its Lloyds securities with optional deferral language and non-cumulative coupons. The remaining Lloyds securities are deemed either
AEGON’s available-for-sale debt securities for Royal Bank of Scotland Group plc (RBS) have a fair value of EUR 238 million as of December 31, 2011, of which EUR 59 million relates to holdings rated below investment grade. The Tier 1 and Upper
In light of the significant amount of state aid that RBS received, it was required to submit a restructuring plan to the
There are no other individual issuers rated below investment grade in the Banking sector which have unrealized loss positions greater than EUR 25 million.
The Industrial sector is further subdivided into various sub sectors with the majority of the gross unrealized losses in the Capital Goods, Consumer Cyclical, and Communications sub sectors.
The Capital Goods sub-sector encompasses various industries ranging from aerospace, to building materials and diversified manufacturing. Building materials continue to be impacted by the delay or reduction in infrastructure spending at the state and federal level as well as the continued weakness in the US housing market which has been further impacted by weak consumer spending. Fundamentals for the aerospace and defense industry have begun to weaken as fiscal austerity measures are impacting defense budgets across developed markets. While the industry remains healthy overall, some companies are seeing more weakness than others due to exposure to certain end markets. Fundamentals of the diversified manufacturing industry continue to be pressured as a result of global economic uncertainty, leading to slower growth in developed and emerging markets. AEGON evaluated the near-term prospects of the issuers and it is believed that the contractual terms of these investments will be met and these investments are not impaired as of December 31, 2011.
evaluated the near-term prospects of the issuers and it is believed that the contractual terms of these investments will be met and these investments are not impaired as of December 31, 2011.
There are no individual issuers rated below investment grade in the consumer cyclical sub-sector which have unrealized loss positions greater than EUR 25 million.
All of the issuers in the sovereign sector continue to make payments in accordance with the original bond agreements.
AEGON evaluated the near-term prospects of the issuers and it is believed that the contractual terms of these investments will be met and these investments are not impaired as of December 31, 2011.
Given recent downgrades, concerns around exposure to the European peripheral countries (Portugal, Italy, Ireland,
The table below shows the composition by maturity of all debt securities, both available-for-sale and held to maturity, in an unrealized loss position held by AEGON Americas, AEGON The Netherlands and AEGON UK.
The table below shows the composition by credit quality of debt securities, both available-for-sale and held to maturity, in an unrealized loss position held by AEGON Americas, AEGON The Netherlands and AEGON UK.
CV < 40 % of amortized cost – – – –
CV < 40 % of amortized cost – – 2 (3)
Realized gains and losses on debt securities of AEGON Americas, AEGON The Netherlands and AEGON UK Year ended December 31 Gross realized gains Gross realized losses
Gross realized losses 0 ­ 12 months > 12 months Total
The composition of AEGON Americas, AEGON The Netherlands and AEGON UK’s bond impairment losses and recoveries by issuer for the period ended December 31, 2011 is presented in the table below. Those issuers with impairments or recoveries above EUR 25 million are specifically noted.
While impairments remain elevated in the current weak economic environment, AEGON’s 2011 net impairments improved significantly from 2010. Net impairments during 2011 totaled EUR 294 million (2010: EUR 399 million), including EUR 251 million (2010: EUR 320 million) related to residential mortgage asset backed securities in the
During 2011, AEGON recognized EUR 48 million (2010: EUR 74 million) in recoveries on previously impaired securities.
Objective evidence of impairment of an investment in an equity instrument classified as available-for-sale includes information about significant changes with an adverse effect that have taken place in the technological, market, economic or legal environment in which the issuer operates, and indicates that the cost of the investment in the equity instrument may not be recovered. A significant or prolonged decline in the fair value of an investment in an equity instrument below its cost is also objective evidence of impairment. Significant or prolonged decline is generally defined within AEGON as an unrealized loss position for more than six months or a fair value of less than 80% of the cost price of the investment. Additionally, as part of an ongoing process, the equity analysts actively monitor earnings releases, company fundamentals, new developments and industry trends for any signs of possible impairment.
These factors typically require significant management judgment. The impairment review process has resulted in
and investment contracts policyholder accounts where funds are invested in equities, backing variable annuities, unitlinked products and mutual funds. Although most of the risk remains with the policyholder, lower investment returns can reduce the asset management fee earned by AEGON on the asset balance in these products. In addition, some of this business has minimum return or accumulation guarantees. AEGON also operates an Investment and Counterparty
Other alternative investments 1,458 – – – – 1,458 1 Common shares in Holdings and Other activities reflect the elimination of treasury shares in the general account.
Services non-cyclical – 8 – – 8 1 1 Includes investments of Holding and other activities.
The sensitivity analysis of net income and shareholders’ equity to changes in equity prices is presented in the table below. The sensitivity of shareholders’ equity and net income to changes in equity markets reflects changes in the market value of AEGON’s portfolio, changes in DPAC amortization, contributions to pension plans for AEGON’s employees and the strengthening of the guaranteed minimum benefits, when applicable. The results of equity sensitivity tests are non-linear. The main reason for this is due to equity options sold to clients that are embedded in some of these products and that more severe scenarios could cause accelerated DPAC amortization and guaranteed minimum benefits provisioning, while moderate scenarios may not. AEGON generally has positive income benefits from equity market increases and negative impacts from equity markets declines as it earns fees on policyholder account balances and provides minimum guarantees for account values. AEGON added out-of-money options in its portfolio to provide additional protection for equity market declines without negative impacts when markets rise. Minimum benefit guarantees are slidely more in the money at the end of 2011, increasing the impact of the sensitivities.
AEGON operates a Liquidity Risk Policy under which country units are obliged to maintain sufficient levels of highly liquid assets to meet cash demands by policyholders and account holders over the next two years. Potential cash demands are assessed under a stress scenario including spikes in disintermediation risk due to rising interest rates and concerns over AEGON’s financial strength due to multiple downgrades of the Group’s credit rating. At the same time, the liquidity of assets other than cash and government issues is assumed to be severely impaired for an extended period of time. All units and AEGON Group must maintain enough liquidity in order to meet all cash needs under this extreme scenario.
The maturity analysis below shows the remaining contractual maturities of each category of financial liabilities
(including coupon interest). When the counterparty has a choice of when an amount is paid, the liability is included on the basis of the earliest date on which it can be required to be paid. Financial liabilities that can be required to be paid on demand without any delay are reported in the category “On demand”. If there is a notice period, it has been assumed that notice is given immediately and the repayment has been presented at the earliest date after the end of the notice period. When the amount payable is not fixed, the amount reported is determined by reference to the conditions existing at the reporting date. For example, when the amount payable varies with changes in an index, the amount disclosed may be based on the level of the index at the reporting date.
To manage the liquidity risk arising from financial liabilities, AEGON holds liquid assets comprising cash and cash equivalents and investment grade investment securities for which there is an active and liquid market. These assets can be readily sold to meet liquidity requirements. Hence, AEGON believes that it is not necessary to disclose a maturity analysis in respect of these assets to enable users to evaluate the nature and extent of liquidity risk.
Investment contracts for account of policyholders 2 17,758 5,386 – – – 23,144
Investment contracts for account of policyholders 2 16,516 5,717 – – – 22,233 1 Borrowings include debentures and other loans, short term deposits, bank overdrafts and commercial paper; refer to note 39 for more details. 2 Excluding investment contracts with discretionary participating features.
< 1 yr amount 1 < 5 yrs amount 5 < 10 yrs amount > 10 yrs amount
(Contractual cash flows) 2011 On demand amount 1 < 5 yrs amount 5 < 10 yrs amount > 10 yrs amount
Sources of underwriting risk include policy lapses and policy claims (such as mortality and morbidity). In general,
AEGON’s experience to industry experience as well as combining AEGON’s experience and industry experience based on the depth of the history of each source to AEGON’s underwriting assumptions. Where policy charges are flexible
Sensitivity analysis of net income and shareholders’ equity to various underwriting risks is shown in the table that follows. The sensitivities represent an increase or decrease of mortality and morbidity rates over best estimate.
Increases in mortality rates lead to an increase in the level of benefits and claims. The impact on net income and shareholders’ equity of sales transactions of investments required to meet the higher cash outflow is reflected in the sensitivities.
A change in actual experience with mortality or morbidity rates may not lead to a change in the assumptions underlying the measurement of the insurance liabilities as management may recognize that the change is temporary. Life insurers are also exposed to longevity risk. Increased life expectation above AEGON’s assumed life expectation at the time of underwriting negatively impacts its results. Refer to note 2.19 for a discussion on how longevity assumptions are accounted for.
In December 2008, AEGON issued EUR 3 billion of non-voting convertible core capital securities to Vereniging AEGON, which was funded by the Dutch State and which subsequently required approval by the European Commission.
In connection with the approval granted by the European Commission AEGON agreed with the Dutch Ministry of Finance to certain requirements on AEGON and its future actions. These requirements included behavioral constraints and structural measures. The behavioral constraints expired with the full repurchase of the core capital securities and repayment of the Dutch State on June 15, 2011.
The structural measures that remain in force include a reduction of the total U.S. general account assets, full delta hedging of the U.S. variable annuity guaranteed minimum income benefit back book, improvement of the ratio of consolidated shareholders' equity to total equity base to at least 75% by December 2012, acceleration of the run-off of certain portfolios, and selling or putting into run-off AEGON’s UK bulk purchase annuity business.
The execution of these structural measures may have a material adverse effect on AEGON’s business, results of operations, cash flow, financial position and solvency.
228 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 5
Gains and (losses) on investments in real estate 10 (49) 135 (179)
Fair value changes on economic hedges for which no hedge accounting is applied 10 (117) (119) 152
Ineffective portion of hedge transactions for which hedge accounting is applied 10 13 (1) (41)
Amortization of deferred expenses, VOBA and future servicing rights 1,114 91 258 109 – 1,572
Impairment charges / (reversals) on non financial assets and receivables (1) 71 5 2 – 77
Amortization of deferred expenses, VOBA and future servicing rights 1,061 99 250 100 – 1,510
Impairment charges / (reversals) on financial assets, excluding receivables 456 11 36 22 – 525
Insurance contracts for account of policyholders 43,909 24,488 2,091 2,937 – – 73,425
Investment contracts for account of policyholders 17,823 – 50,132 3,478 – – 71,433
230 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 5
Investments in real estate – – 1,132 – – – 1,132
Financial assets at fair value through profit or loss 66,209 23,392 50,082 6,523 728 (6) 146,928
TOTAL INVESTMENTS ON BALANCE SHEET 152,755 62,242 61,118 9,744 755 (6) 286,608
The increase in premiums to reinsures to EUR 3,407 million (2010: EUR 1,859 million; 2009: EUR 1,727 million) is primarily the result of the divestment of the life reinsurance business, Transamerica Reinsurance (TARe), to SCOR.
Financial assets designated at fair value through profit or loss 125 155 143
Included in interest income is EUR 118 million (2010: EUR 122 million; 2009: EUR 42 million) in respect of interest income accrued on impaired financial assets. The interest income on financial assets that are not carried at fair value through profit or loss amounted to EUR 5,540 million (2010: EUR 5,854 million; 2009: EUR: 5,750 million).
Included in fee and commission income is EUR 76 million of fees on trust and fiduciary activities (2010: EUR 109 million; 2009: EUR 103 million). EUR 4 million of fees were recognized on financial assets and liabilities that are not carried at fair value with changes in the fair value recognized in the income statement (2010: EUR 3 million; 2009: EUR 4 million).
Net fair value change of general account financial investments at fair value through profit or loss, other than derivatives 44 257 193
Net fair value change on for account of policyholder financial assets at fair value through profit or loss (2,133) 13,217 15,219
Net fair value change on investments in real estate for account of policyholders 20 73 (37)
Net fair value change on borrowings and other financial liabilities (24) (2) (138)
Net fair value change of general account financial investments at fair value through profit or loss, other than derivatives comprise: 2011 2010 2009
Realized gains and losses on financial investments comprise: 2011 2010 2009
Fair value change on hedging instruments in a fair value hedge (99) 146 127
Fair value change on hedged items in fair valued hedge 111 (152) (158)
Net fair value change on for account of policyholder financial assets at fair value through profit or loss comprise: 2011 2010 2009
In 2010 other income primarily included a gain of EUR 33 million relating to the sale of the funeral insurance business in the Netherlands.
Gains / (losses) on separate accounts and investment funds (598) 6,013 8,043
(2010: gains of EUR 283 million: 2009: nil) regarding fair value movements of guarantees and EUR 41 million of gains
Decrease in amortization of deferred expenses is a result of the divestment of the life reinsurance business,
Decisions by the Executive Board to implement share appreciation rights and share option plans are subject to approval by the Supervisory Board.
In 2010, AEGON implemented a Long Term Incentive Plan which replaced the option plan, share appreciation plans, share plans or similar plans relating to AEGON shares. Members of the Executive Board and the Management Board, as well as other senior managers within AEGON, were granted the right to receive AEGON shares if certain performance indicators are met and depending on continued employment of the individual employee to whom the rights have been granted. The shares were granted in May 2010 at the average share price on the NYSE Euronext stock exchange in Amsterdam during the period between December 15 preceding a plan year and January 15 of a plan year.
238 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 14
In 2011, Senior managers within AEGON, not classified as “Identified Staff”, have been granted the right to receive
December 15 preceding a plan year and January 15 of the plan year. The performance indicators apply over a performance period of one year and consist of financial and non-financial targets set by the Supervisory Board or the local remuneration committees. For Members of the Executive Board and the Management Board all variable compensation has vested after three years following the performance period. After the vesting period, the variable compensation is transferred to the individual employees. Additional holding periods may apply for vested shares.
In 2011, 4,075,460 shares were granted to participants in the Long Term Incentive Plan and the Variable Compensation
Plan for Identified Staff of which 77,483 shares were subsequently forfeited. The shares have been granted using the share price of EUR 4.727.
The volatility is derived from quotations from external market sources and the expected dividend yield is derived from quotations from external market sources and the binomial option pricing model. Refer to note 3 for a further description of the method used to estimate the fair value and a description of the significant assumptions.
In prior years these costs were recognized in the income statement as part of “Commissions and expenses”.
and are recognized in the income statement as part of “Commissions and expenses”.
240 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 15 - 17
EUR 0 million (2010: EUR 1 million; 2009: EUR 5 million). The weighted average period over which it is expected to be recognized is 0 years (2010: 0.25 years; 2009: 0.8 years).
Refer to note 53 for detailed information on conditional shares and share options granted to the Executive Board.
Impact of the above impairments on the valuation of insurance assets and liabilities – – 4
Impairment reversals on financial assets, excluding receivables, from: 2011 2010 2009
Other charges is fully excluded from underlying earnings for segment reporting purposes (refer to note 2.5).
Changes in deferred tax assets as a result of recognition / write off of previously not recognized / recognized tax losses, tax credits and deductible temporary differences (31) (218) (47)
Difference due to the effects of: Non-taxable income (66) (71) 21
INCOME TAX FOR THE PERIOD (INCOME) / CHARGE 44 154 (668)
Basic earnings per share is calculated by dividing the net income attributable to equity holders, after deduction of preferred dividends declared, accrued coupons on perpetual securities, coupons and premium on convertible core capital securities and potential coupon on convertible core capital securities by the weighted average number of common shares, excluding common shares purchased by the Company and held as treasury shares (refer to note 30.3).
Net income / (loss) attributable to equity holders 869 1,759 204
Net income / (loss) attributable to common shareholders for basic earnings per share calculation (117) 1,292 (248)
For the purpose of calculating diluted earnings per share, AEGON assumed that all dilutive share options have been exercised at the exercise price, or adjusted exercise price if necessary. The proceeds are regarded as having been received from the issue of common shares at the average market price of the AEGON N.V. share during the year.
Coupons and premium on convertible core capital securities (750) – (148)
Net income / (loss) attributable to common shareholders for diluted earnings per share calculation (117) 1,482 (248)
Amortization / depreciation through income statement – 183 26 8 3 220
Impairment losses are recorded on goodwill and VOBA relating to the distribution business in the Netherlands.
Corporate Owned Life Insurance (BOLI/COLI) business in the Americas and unfavorable pension legislation changes in Hungary.
With the exception of goodwill, all intangible assets have a finite useful life and are amortized accordingly. VOBA and future servicing rights are amortized over the term of the related insurance contracts, which can vary significantly depending on the maturity of the acquired portfolio. VOBA currently recognized is amortized over an average period of 24 years, with an average remaining amortization period of 12 years (2010: 11 years). Future servicing rights are amortized over an average period up to 30 years, of which 14 remains at December 31, 2011 (2010: 14 years). Software is generally depreciated over an average period of 5 years. At December 31, 2011, the remaining depreciation period was 3 years (2010: 3 years).
The economic assumptions used in all the calculations are based on observable market data and projections of future trends. All the cash-generating units tested showed that the recoverable amounts were higher than their carrying values, including goodwill. A reasonably possible change in any key assumption is not expected to cause the carrying value of the cash-generating units to exceed its recoverable amount.
The value in use test in the USA for the Individual Savings & Retirement cash generating unit (EUR 112 million) assumes business plans covering a period of five years further extrapolated to ten years where the new business levels for years 6-10 assumed a 5% growth rate and pre-tax risk adjusted discount rate of 17% (2010: 17%).
Value in use calculations of AEGON Spain have been determined based on a business plan covering a period of typically five years, pre-tax risk adjusted discount rate of 11%-13.5% and assumptions for future premiums, commissions, inflation, persistency, mortality, morbidity and future investment returns in line with AEGON´s European embedded value assumptions (market consistent for 2011 operations).
To determine the recoverable amounts of the cash generating units of AEGON CEE, value in use was calculated, and compared to the carrying amounts. Key assumptions used for the calculation were new business, contribution, renewals, asset fees, investment return, persistency and expenses. Operating assumptions are best estimate assumptions and based on historical data where available. Economic assumptions are based on observable market data and projections of future trends,
Investments for general account comprise financial assets, excluding derivatives, as well as investments in real estate.
Money market and other short-term investments 9,382 1,090 – – 10,472 10,472
Of the debt securities, money market and other short-term investments, mortgage loans and private loans
As part of the AEGON Levensverzekering N.V. funding program the Company regularly enters into securitization contracts for its mortgage loans. At December 31, 2011 securitization contracts named SAECURE 5 and SAECURE 6 NHG
“notification events”. At the same time AEGON Levensverzekering N.V. entered into a fixed-to-floating swap agreement with the contract parties agreed to pay the floating rate (EURIBOR based) and receive the fixed rate (yield from the mortgage receivables). After a period of seven years, the interest of the notes issued by the special purpose entity in respect of this transaction will step-up, together with a similar step-up in the fixed-to-floating swap agreement. At that same time, the special purpose entity has the right to call the notes. A deferred purchase arrangement forming part of the contract to sell the mortgage loans to the special purpose entity entitles AEGON Levensverzekering N.V. to any specified residual positive value of the special purpose entity at maturity.
The redemption value of the shares is fixed at par and can only be redeemed by the bank.
Movement on the loan allowance account during the year were as follows: Addition charged to income statement (99) (114)
EUR 7 million (2010: EUR 9 million; 2009: EUR 2 million) of direct operating expenses is related to investment property that did not generate rental income during the period.
TOTAL INVESTMENTS FOR ACCOUNT OF POLICYHOLDERS 142,529 146,237 1 Refer to note 48 for a summary of all financial assets and financial liabilities at fair value through profit or loss.
Rental income of EUR 73 million (2010: EUR 73 million; 2009: EUR 76 million) is reported as part of investment income in the income statement. There are no restrictions on the realizability of investment property or the remittance of income and proceeds of disposal.
Derivatives not designated in a hedge 713 529 59 401 1 Refer to note 48 for a summary of all financial assets and financial liabilities at fair value through profit or loss.
AEGON utilizes derivative instruments as a part of its asset liability risk management practices. The derivatives held for risk management purposes are classified as economic hedges to the extent that they do not qualify for hedge accounting, or that AEGON has elected not to apply hedge accounting. The economic hedges of certain exposures relate to an existing asset or liability or the future reinvestment risk. In all cases, these are in accordance with internal risk guidelines and are closely monitored for continuing compliance.
As a result of movements in financial markets in 2011, the market value of the guarantees embedded in the written insurance contracts increased significantly. Please refer to note 46 for more disclosures about these guarantees.
AEGON has entered into interest rate swap agreements that effectively convert certain fixed-rate assets and liabilities to a floating-rate basis (generally to six months or less LIBOR). These hedges are used for portfolio management to better match assets to liabilities or to protect the value of the hedged item from interest rate movements. These agreements involve the payment or receipt of fixed-rate interest amounts in exchange for floating-rate interest amounts over the life of the agreement without the exchange of the underlying principal amounts. Some of the arrangements use forward starting swaps to better match the duration of assets and liabilities.
AEGON has entered into cross-currency interest rate swap agreements that effectively convert certain foreign currency fixed-rate and floating-rate assets and liabilities to US dollar floating-rate assets and liabilities. These agreements involve the exchange of the underlying principal amounts.
For the years ended December 31, 2011, 2010 and 2009, AEGON recognized gains and (losses) related to the ineffective portion of designated fair value hedges of EUR 11 million, EUR (6) million and EUR (31) million respectively. No portion of derivatives was excluded when assessing hedge effectiveness.
AEGON is hedging its exposure to the variability of future cash flows from interest rate movements for terms up to 21 years. The cash flows from these hedging instruments are expected to affect the profit and loss for approximately the next 40 years. For the year ended December 31, 2011, the contracts for which cash flow hedge accounting was terminated resulted in deferred gains of EUR 131 million (2010: EUR 57 million) that are recognized directly in equity to be reclassified into net income during the period when the cash flows occur of the underlying hedged items.
All associates are unlisted and are accounted for using the equity method and are considered to be non-current.
The investments in associates include interest in insurance companies that are required to maintain a minimum solvency margin based on local directives. Such restrictions can affect the ability of these associates to transfer funds in the form of cash dividends, or repayment of loans or advances, and therefore, there can be no assurance that these restrictions will not become a limitation in the future. There are no unrecognized shares of losses in associates.
position, including a negative revaluation reserve of EUR 64 million. Upon sale of the associate, any revaluation reserve needs to be recycled through the income statement. Considering possible alternative outcomes of the arbitration process, AEGON expects that it will recover at least the book value as at December 31, 2011.
The summarized financial information is based on the Group’s relative holding and excludes any goodwill included in the measurement of the investment in associates. Refer to note 52 for a listing of the principal investments in associates and the Group’s percentage holding.
Amounts due from reinsurers in respect of claims already paid by the Group on the contracts that are reinsured are included in other assets and receivables (refer to note 28).
EUR 18 million of the reinsurance assets are current (2010: EUR 19 million).
Movements during the year in reinsurance assets relating to life insurance: Life insurance general account
Structuring the transaction as a reinsurance arrangement leaves AEGON exposed to a counter-party risk of SCOR not performing on the reinsurance contracts as the business matures. For such an event, certain levels of collateral related to the reinsured contracts have been placed in trust for AEGON’s benefit. SCOR is rated A2/A by Moody’s and Standard
In addition, various administration, service and asset management contracts are part of the transaction. The combined result, consisting primarily of the amortization of the deferred cost of reinsurance, is approximately EUR 29 million
AEGON USA reinsured approximately EUR 2.9 billion of fixed annuities on a quota share basis in two separate transactions during 2011. In the second quarter EUR 1.1 billion was ceded to Commonwealth Annuity and Life Insurance
between 2004 and early 2009 that were previously reinsured to Transamerica International Reinsurance Ireland (TIRI)
on a 90% quota share basis. Over half of the business was sold in 2008 and primarily included products with 3 and 5 year surrender charge periods. Most of the business have an initial credited rate guarantee matching the surrender charge period followed by annual renewals after the initial period.
Investment assets and cash were transferred as part of these transactions with any related gain/(loss) being recognized. In order to secure the obligations of the reinsurer, AEGON has required the establishment of trust accounts to hold collateral supporting ceded policy reserves. A deferred cost of reinsurance was established and has a 2011 ending balance of EUR 77 million. This will be amortized based on gross profits of the underlying contracts.
This transaction is treated as a financing arrangement since the MTN contracts do not qualify as insurance contracts.
The financing cost of approximately EUR 6 million will be amortized over the expected life of the contracts.
DPAC balances include deferred cost of reinsurance for an amount of EUR 579 million (2010: nil). The amortization in 2011 amounts to EUR 38 million (2010: nil).
260 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 28.2 - 29
General account real estate held for own use are mainly held by AEGON USA and AEGON The Netherlands, with relatively smaller holdings in Hungary and Spain and are carried at revalued amounts. The carrying value under a historical cost model amounts to EUR 331 million (2010: EUR 351 million).
22% of the value of the general account real estate held for own use was last revalued in 2011 (2010: 5%), based on market value appraisals by qualified internal and external appraisers. 96% of the appraisals in 2011 were performed by independent external appraisers (2010: 81%).
None of the equipment is held for lease (2010: EUR 0 million). Equipment has not been pledged as security for liabilities, nor are there any restrictions on title. Depreciation expenses have been charged in “Commissions and expenses” in the income statement. Equipment is generally depreciated over a period of three to five years.
is included in cash and cash equivalents. This collateral relates to security lending and repurchase agreements and margins on derivatives transactions. A corresponding liability to repay the cash is recognized in other liabilities (note 44). Refer to note 50 for a discussion of collateral received and paid. Investment of cash collateral received is restricted through limitations on credit worthiness, duration, approved investment categories and borrower limits. AEGON earns a share of the spread between the collateral earnings and the rebate paid to the borrower of the securities. Income from security lending programs was approximately EUR 12 million (2010: EUR 10 million; 2009: EUR 16 million).
262 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 30 - 30.1
(2010: EUR 1,263 million inflow). This increase is predominantly driven by higher net disposals of investments, partly offset by a lower net change in cash collateral. The net change in cash collateral in 2011 is mainly due to derivatives transactions while the net change in cash collateral in 2010 was mainly related to securities lending transactions.
Net cash flows from financing activities decreased by EUR 493 million to a EUR 374 million outflow (2010: EUR 119 million inflow). The decrease is mainly the result of the payment to the Dutch State amounting to EUR 2,250 million of which
EUR 3,003 million in 2010, compared to an outflow of EUR 4,979 million in 2009).
Net cash flows from investing activities improved by EUR 47 million to EUR 278 million outflow (2009: EUR 325 million outflow). The improvement is a result of lower purchases of equipment and real estate for own use and reduced acquisition of subsidiaries and associates. These improvements are partially offset by the sale of AEGON Nabestaandenzorg
(a subsidiary of AEGON Netherlands), where actual cash and cash equivalents balances in the entity exceeded the cash proceeds received upon the sale, and a lower dividend received from associates.
On March 1, 2011, AEGON completed the issue of 173,604,912 new common shares of AEGON N.V. with a par value of
EUR 0.12. The shares were issued at a price of EUR 5.20 per share. The proceeds of EUR 903 million were used to fund part of the repurchase of the convertible core capital securities described in note 31.
The new shares have been listed on NYSE Euronext Amsterdam, the principal market for AEGON’s common shares.
On March 15, 2011, Vereniging AEGON exercised its option rights to purchase 41,042,000 class B preferred shares at par value of EUR 0.25 (total proceeds of EUR 10 million) in order to avoid dilution of its voting rights following the issuance of 10% new common shares completed on March 1, 2011.
Board, is subject to approval of the Supervisory Board and must be resolved by the General Meeting of Shareholders.
In March 2011 Vereniging AEGON exercised its option rights to purchase in aggregate 41,042,000 class B preferred shares at par value to correct dilution caused by AEGON’s issuance of shares conducted under AEGON’s US Shelf
On the balance sheet date AEGON N.V. and its subsidiaries held 29,365,980 of its own common shares with a par value of EUR 0.12 each.
Movements in the number of treasury shares were as follows: Number of shares (thousands)
Transactions in 2010: Sale: 1 transaction, price EUR 4.75 – (52) –
Transactions in 2009: Sale: 1 transaction, price EUR 5.25 – – (32,654)
266 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 30.4 - 31 30.4 REVALUATION RESERVES
Net (gains) / losses transferred to income statement (513) – (18) (531)
Movement in foreign currency translation and net foreign investment hedging reserves 1,299 (262) – 1,037
The equity movements of associates reflect AEGON's share of changes recognized directly in the associate’s equity.
AEGON repurchased, 375 million convertible core capital securities, in two equal tranches on March 15, 2011 and June 15, 2011 respectively. The total payment to the Dutch State amounted to EUR 2,250 million of which EUR 1,500 million related to the repurchase of the convertible core capital securities and EUR 750 million related to the premium attached to this repurchase. With these transactions AEGON completed the repurchase of all EUR 3 billion convertible core capital securities issued to the Dutch State in 2008.
268 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 32 - 34
Year of next call 2011 2010 2009 1 The coupon of the EUR 114 million bonds was originally set at 8% until June 8, 2005. Subsequently, the coupon has been reset at 4.156% until 2015. 2 The coupon of the EUR 136 million bonds was originally set at 7.25% until October 14, 2008. Subsequently, the coupon has been reset at 5.185%
USD 18 million 1 Floating Quarterly, July 23 2004 2034 2012 15 14
These loans are subordinated to all other unsubordinated borrowings and liabilities. There are no defaults or breaches of conditions during the period. The fair value of these loans amounts to EUR 18 million at December 31, 2011.
270 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 35 - 36 35 INSURANCE CONTRACTS
Gross premium and deposits – existing and new business 6,008 6,850
Gross premium and deposits – existing and new business 1,702 1,767
272 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 37 - 39 37 INVESTMENT CONTRACTS
Fair value of investment contracts without discretionary participation features 20,494 22,989
On April 14, 2011, AEGON The Netherlands sold EUR 1.5 billion Class A residential mortgage-backed securities (RMBS)
to a broad group of institutional investors. These securities consist of two tranches: �� EUR 375 million of class A1 notes with an expected weighted average life of 1.9 years and priced at par with a coupon of three month EURIBOR plus 0.95 %; and
�� EUR 1,125 million of class A2 notes with an expected weighted average life of 4.9 years and priced at par with a coupon of three month EURIBOR plus 1.35 %.
EUR 556 million of the debentures and other loans are pledged as collateral (2010: EUR 308 million).
EUR 1.0 billion Senior Notes 7.00% April 29 2009 / 12 999 998
EUR 135 million Mortgage loan 3 Floating Quarterly 2010 / 12 – 135
USD 750 million Senior Notes 4.75% Semi–annually 2003 / 13 578 561
EUR 160 million Mortgage loan 3 Floating Quarterly 2011 / 17 154 –
USD 500 million Senior Notes 1, 9 5.75% Semi–annually 2005 / 20 419 375
GBP 250 million Note issue agreement 2, 5, 6 Floating April 21 2008 / 23 156 208
USD 550 million Floating Rate Guaranteed Note 2, 5 Floating Quarterly 2007 / 37 366 355
8 The first optional redemption date is March 2016; the legal maturity date is September 2092. Notes are fully collateralized by mortgage loans which are part of AEGON’s general account investment.
(2010: EUR 6 million) and a positive impact of EUR 21 million on shareholders’ equity (2010: EUR 4 million).
The difference between the contractually required payment at maturity date and the carrying amount of the borrowing amount to EUR 16 million (2010: EUR 59 million).
THE AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL POSITION ARE DETERMINED AS FOLLOWS: Present value of wholly or partly funded obligations 3,309 2,925 2,545 2,144 2,357
Present value of wholly or partly funded obligations 3 3 3 4 4
Present value of wholly or partly funded obligations 3,312 2,928 2,548 2,148 2,361
Present value of wholly unfunded obligations 1 2,543 2,208 2,055 1,875 1,846
Unrecognized past service cost – – – – 2 1 Assets held by AEGON The Netherlands backing retirement benefits of EUR 2,039 million (2010: EUR 1,747 million) do not meet the definition of plan assets and as such were not deducted in calculating this amount. Instead, these assets are recognized as general account assets. Consequently, the return on these assets also does not form part of the calculation of defined benefit expenses.
Expected return on plan assets (160) – (160) (162) – (162)
Actuarial (gains) / losses recognized 47 – 47 51 – 51
Movements during the year of the present value of the defined benefit obligations: 2011 2010
Accumulated post-employment benefit obligation for medical cost 18 (17) 18 (16)
Best estimate of contributions expected for the next annual period 103
Defined benefit plans are mainly operated by AEGON USA, AEGON The Netherlands and AEGON UK. The following sections contain a general description of the plans in each of these subsidiaries, a summary of the principal actuarial assumptions applied in determining the value of defined benefit plans and a description of the basis used to determine the overall expected rate of return on plan assets.
The principal actuarial assumptions that apply for the year ended December 31, 2011 are as follows: Assumed health care trend rates: Health care cost trend rate assumed for next year 7.25% 7.50%
Target allocation of plan assets for retirement benefit plans for the next annual period is: The overall goal of the plans is to maximize total investment returns to provide sufficient funding for the present and anticipated future benefit obligations within the constraints of a prudent level of portfolio risk and diversification.
AEGON believes that the asset allocation is an important factor in determining the long-term performance of the plans.
AEGON The Netherlands has a number of defined benefit plans and a small defined contribution plan. The contributions to the retirement benefit plan of AEGON The Netherlands are paid by both the employees and the employer, with the employer contribution being variable. The benefits covered are retirement benefits, disability, death and survivor pension and are based on an average salary system. Employees earning more than EUR 45,749 per year (as at January 1, 2011) have an option to contribute to a defined contribution plan for the excess salary. However, the cost for the company remains the same. The defined benefit plans were unfunded by EUR 2,050 million at December 31, 2011 (2010: EUR 1,756 million).
Assumptions used to determine benefit obligations at year-end: Discount rate 4.60% 5.25%
Assumptions used to determine net periodic benefits costs for the year ended December 31,: Discount rate 5.25% 5.30%
Rate that the cost trend rate gradually declines to 2.00% 0.00–2.00%
The assets of the scheme are held under trust separately from those of the Group. The assets of the scheme are held in policies affected with Scottish Equitable plc. In 2011, the scheme was closed to new entrants. This resulted in a curtailment gain of EUR 56 million. The remaining unrealized actuarial losses amount to EUR 177 million. Under IAS 19, the defined benefit plan has a deficit of EUR 242 million at December 31, 2011 (2010: EUR 247 million).
For each asset class, a long-term return assumption is derived taking into account market conditions, historical returns
(both absolute returns and returns relative to other asset classes) and general forecasts for future returns. Government bonds are taken as providing the return with the least risk. The expected long-term rate of return is calculated as a weighted average of these assumed rates, taking account of the long-term strategic allocation of funds across the different classes adopted by the trustees of the scheme.
Acquisitions through business combinations – – – 12 – – – 12
Disposal of a business – – (1) (85) – – – (86)
EUR 29 million (2010: gross EUR 124 million; tax EUR 39 million) the realization of the deferred tax asset is dependent on the projection of future taxable profits from existing business in excess of the profits arising from the reversal of existing taxable temporary differences.
Deferred corporate income tax asset dependent on retaining bonds and similar investments until the earlier of market recovery or maturity 1,900 2,407 656 811
AEGON did not recognize deferred corporate income tax assets in respect of deductible temporary differences relating to insurance contracts, available-for-sale financial assets and other items for the amount of gross EUR 56 million; tax EUR 14 million (2010: gross EUR 31 million; tax EUR 8 million).
Deferred corporate income tax liabilities have not been recognized for withholding tax and other taxes that would be payable on the unremitted earnings of certain subsidiaries, branches, associates and joint ventures. The unremitted earnings totaled gross EUR 1,749 million; tax EUR 437 million (2010: gross EUR 1,757 million; tax EUR 438 million).
In the United States and the United Kingdom, a guaranteed minimum withdrawal benefit (GMWB) is offered directly on some variable annuity products AEGON issues and is also assumed from a ceding company. Variable annuities allow a customer to provide for the future on a tax-deferred basis and to participate in equity or bond market performance.
upon maturity, including lump sum payment or income for life or for a period of time. This benefit guarantees that a policyholder can withdraw a certain percentage of the account value, starting at a certain age or duration, for either a fixed period or during the life of the policyholder.
In Canada, variable products sold are known as “Segregated Funds”. Segregated funds are similar to variable annuities, except that they include a capital protection guarantee for mortality and maturity benefits (guaranteed minimum accumulation benefits). The initial guarantee period is ten years. The ten-year period may be reset at the contractholder’s option for certain products to lock-in market gains. The reset feature cannot be exercised in the final decade of the contract and for many products can only be exercised a limited number of times per year.
In The Netherlands, individual variable unit-linked products have a minimum benefit guarantee if premiums are invested in certain funds. The sum insured at maturity or upon the death of the beneficiary has a minimum guaranteed return
286 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 44 -46
The reinsurance contract is accounted for as a derivative and is carried in AEGON’s statement of financial position at fair value. At December 31, 2011, the contract had a value of EUR 145 million (2010: EUR 71 million). AEGON entered into a derivative program to mitigate the overall exposure to equity market and interest rate risks associated with the reinsurance contract. This program involves selling equity futures contracts (S&P 500, Nasdaq, FTSE100 and NKY225 in accordance with AEGON's exposure) to mitigate the effect of equity market movement on the reinsurance contract and the purchase of over-the-counter interest rate swaps to mitigate the effect of movements in interest rates on the reinsurance contracts.
The traditional life and pension products offered by AEGON in the Netherlands include various products that accumulate a cash value. Premiums are paid by customers at inception or over the term of the contract.
These guarantees are valued at fair value and are included as part of insurance liabilities with the underlying host insurance contracts in note 35.
288 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 47
Net amount at risk 3 3,462 1,853 1 Guaranteed minimum benefit in the Netherlands. 2 Balances are included in the insurance liabilities on the face of the statement of financial position; refer to note 35. 3 The net amount at risk represents the difference between the maximum amount payable under the guarantees and the account value.
The fair values of guarantees mentioned above (with the exception of life contingent guarantees in the United States)
uses stochastic techniques under a variety of market return scenarios. A variety of factors are considered, including expected market rates of return, equity and interest rate volatility, credit risk, correlations of market returns, discount rates and actuarial assumptions.
The expected returns are based on risk-free rates. AEGON added a premium to reflect the credit spread as required.
AEGON’s assumptions reflect these differences in the valuation. If the credit spreads were 20 basis points higher or lower respectively, and holding all other variables constant in the valuation model, 2011 income before tax would have been EUR 268 million and EUR 289 million higher or lower respectively (2010: EUR 158 million and EUR 173 million higher or lower).
Had AEGON used a long-term equity implied volatility assumption that was five volatility points higher or lower, the impact on income before tax would have been a decrease of EUR 97 million or an increase of EUR 86 million, respectively, in 2011 IFRS income before tax (2010: EUR 144 million decrease and EUR 127 million increase).
AEGON utilizes different risk management strategies to mitigate the financial impact of the valuation of these guarantees on the results including asset and liability management and derivative hedging strategies to hedge certain aspects of the market risks embedded in these guarantees. Guarantees valued at fair value contributed a net gain before tax of EUR 152 million (2010: gain of EUR 356 million) to earnings. Guarantee reserves increased
AEGON’s capital base reflects the capital employed in insurance activities and consists of shareholders’ equity, perpetual capital securities and dated subordinated debt and senior debt. AEGON targets its capital base to comprise at least 70% core capital (excluding the revaluation reserve), and targets 25% perpetual capital securities (consisting of junior perpetual capital securities and perpetual cumulative subordinated bonds) and 5% dated subordinated and senior debt related to insurance activities.
of EUR 869 million. There were a number of other effects, including preferred dividend paid (EUR 59 million).
The table that follows reconciles total shareholders’ equity to the total capital base: Total shareholders’ equity 21,000 17,328
XXX and guideline AXXX redundant reserves. In the ordinary course of business, AEGON N.V. may at times have borrowings, which are offset by cash and cash equivalents available for future capital management activities, such as funding capital contributions in its subsidiaries, redemption of borrowings or payment of dividends to its shareholders.
Insurance, reinsurance, investment management and banking companies are required to maintain a minimum solvency margin based on applicable local regulations. For managing AEGON’s capital, the life insurance and life reinsurance regulations in the EU and the United States are of main importance. AEGON’s Insurance Group Directive ratio (IGD ratio)
was 195% at the end of 2011. The calculation of the IGD ratio is based on Solvency I capital requirements for entities within the EU (Pillar 1 for AEGON UK), and local regulatory solvency measurements for non-EU entities. Specifically, required capital for the life insurance companies in the US is calculated as two times the upper end of the Company
In the United States, regulation of the insurance business is principally at the state level. State insurance regulators and the National Association of Insurance Commissioners have adopted risk-based capital (RBC) requirements for insurance companies. RBC calculations measure the ratio of a company’s statutory capital, which is measured on a prudent regulatory accounting basis, to a minimum capital amount determined by the RBC formula. The RBC formula measures exposures to investment risk, insurance risk, market risk, and general business risk. Life reinsurance is treated as life insurance. The most pertinent RBC measure is the company action level (CAL) RBC. This is the highest regulatory intervention level and is the level at which a company has to submit a plan to its state regulators. The CAL is 200%
of the authorized control level (ACL), the level at which regulators are permitted to seize control of the Company.
At the end of 2011 the combined risk based capital ratio of AEGON’s life insurance subsidiaries in the United States was approximately 453% of the CAL RBC.
capital requirement is by and large the sum of 4% of insurance and investment liabilities for general account and 1%
At the end of 2011, AEGON The Netherlands consolidated solvency capital ratio based on IFRS was approximately 195%.
Services and Markets Act 2000 and sets minimum solvency standards. Companies must manage their solvency positions according to the most stringent of the published Solvency I measure (Pillar 1) and a privately submitted economic capital measure (Pillar 2). For AEGON UK, the published measure continues to be the most stringent requirement. At the end of 2011 AEGON UK’s aggregate Pillar 1 capital ratio was approximately 149% (excluding with profit funds). In the local solvency surplus calculation for regulatory filings the local regulator (FSA) only allows the available capital number of the With-Profits Funds included in overall available capital to be equal to the amount of
AEGON N.V. is subject to legal restrictions on the amount of dividends it can pay to its shareholders. Under Dutch law the amount that is available to pay dividends consists of total shareholders’ equity less the issued and outstanding capital and less the reserves required by law. The revaluation account and legal reserves, foreign currency translation reserve and other, cannot be freely distributed. In case of negative balances for individual reserves legally to be retained, no distributions can be made out of retained earnings to the level of these negative amounts. Total distributable reserves under Dutch law amount to EUR 9,512 million at December 31, 2011 (2010: EUR 7,389 million).
OPTAS N.V., an indirect subsidiary of AEGON N.V., holds statutory reserves of EUR 936 million (2010: EUR 895 million)
which are restricted. Included in AEGON N.V.’s legal reserves is an amount of EUR 396 million (2010: EUR 355 million)
Derivatives with positive values not designated as hedges 13,457 – 5,231 –
Total financial liabilities at fair value through profit or loss 11,697 27,697 4,789 26,590
The Group manages certain portfolios on a total return basis which have been designated at fair value through profit or loss. This includes portfolios of investments in limited partnerships and limited liability companies (primarily hedge funds) for which the performance is assessed internally on a total return basis. In addition, some investments that include an embedded derivative that would otherwise have required bifurcation, such as convertible instruments, preferred shares and credit linked notes, have been designated at fair value through profit or loss.
Investments for general account backing insurance and investment liabilities, that are carried at fair value with changes in the fair value recognized in the income statement, are designated at fair value through profit or loss. The Group elected to designate these investments for account of policyholders at fair value through profit or loss, as a classification of financial assets as available-for-sale would result in accumulation of unrealized gains and losses in a revaluation reserve within equity whilst changes to the liability would be reflected in net income (accounting mismatch).
Investments held for account of policyholders comprise assets that are linked to various insurance and investment contracts for which the financial risks are borne by the customer. Under the Group’s accounting policies these insurance and investment liabilities are measured at the fair value of the linked assets with changes in the fair value recognized in the income statement. To avoid an accounting mismatch the linked assets have been designated as at fair value through profit or loss.
In the normal course of business, the Group has committed itself through purchase and sale transactions of investments, mostly to be executed in the course of 2012. The amounts represent the future outflow and inflow, respectively, of cash related to these investment transactions that are not reflected in the consolidated statement of financial position.
AEGON N.V. has a net worth maintenance agreement with its indirect subsidiary AEGON Financial Assurance Ireland
A group company has a net worth maintenance agreement with AEGON subsidiary Transamerica Life International
Corporation. At December 31, 2011, the letter of credit arrangements amounted to EUR 3,773 million (2010: EUR 3,489 million); as at that date no amounts had been drawn, or were due under these facilities; �� Due and punctual payment of payables by the consolidated group companies Transamerica Corporation, AEGON
(nominal amount EUR 2,207 million; 2010: EUR 2,094 million); �� Due and punctual payment of any amounts owed to third parties by the consolidated group company AEGON
In addition, in recent years, the insurance industry has increasingly been the subject of litigation investigations, regulatory activity and challenges by various governmental and enforcement authorities and policyholder advocate groups concerning certain practices. We are, for example, co-operating with both an industry-wide inquiry initiated by various state controllers and various regulators in the U.S., including an inquiry by regulatory authorities in the State of New York, in each case into the application by insurers of unclaimed property laws and related claims practices.
Financial Services Authority that occurred over the past two decades. There is a risk that the Group is not able to resolve some or all such matters in the manner that it expects. In certain instances, AEGON subsidiaries modified business practices in response to such inquiries or the findings thereof. We have also sought and intend to continue to seek to settle certain claims, including via policy modifications, in appropriate circumstances such as the settlement we reached in 2009 with Stichting Verliespolis and Stichting Woekerpolis in The Netherlands, that among other things,
Woekerpolis Claim, and the matter is also the subject of discussion in the Dutch Parliament. The settlements reached by the various market participants have been compared and there is a call on insurance companies to reexamine the terms of their arrangements and apply “best of class” principles identified as part of that comparison. It is not yet possible to determine the outcome of this debate, including what actions we may take in response to the call for general application of those principles, or the impact that any such actions may have on AEGON’s results of operations or financial position. In addition to the above, certain AEGON subsidiaries have been informed that the regulators may seek fines or other monetary penalties or changes in the way AEGON conducts its business.
Certain of the products we sell are complex and involve significant investment risks that may be assumed by AEGON’s customers. We have received claims from certain current and former customers, and groups representing customers, in respect of certain products, including in relation to employer owned life insurance products sold to banks and other corporations in the U.S. Certain claims in this area remain under review and may lead to disputes in the future. We have in the past agreed to make payments, in some cases substantial, or adjustments to policy terms to settle those claims or disputes if we believed it was appropriate to do so. In 2010, AEGON Americas had a one-time provision of
AEGON and other US industry participants have been named in lawsuits alleging, among other things, that asset-based fees charged for investment products offered on 401(k) platforms were higher than those generally available in the market. Matters like these are being defended vigorously; however, at this time, due to its nature and the type of claims, it is not practicable for AEGON to quantify a range or maximum liability or the timing of the financial impact, if any.
On July 26, 2011, the Amsterdam Court of Appeal, an intermediate appeals court, ruled with respect to a specific
AEGON unit-linked product, the “Koersplan”-product. The Amsterdam Court of Appeal accepted AEGON's positions that
Koersplan-products sold during the period 1989-1998 entailed an obligation on the part of customers to pay a premium for a death benefit. However, the Court ruled that AEGON should have more clearly informed its customers about the amount of premium which the company charged in relation to the embedded death benefit. Prior to the ruling AEGON
Financial assets at fair value through profit or loss 29 89
The carrying amount of non-cash financial assets that have been transferred to another party under security lending and repurchase activities where the counterparty does not have the right to sell or repledge amount to EUR 0 million
AEGON receives collateral related to securities lending and reverse repurchase activities. Non-cash collateral is not recognized in the statement of financial position.
Cash collateral is recorded on the statement of financial position as an asset and an offsetting liability is established for the same amount as AEGON is obligated to return this amount upon termination of the lending arrangement.
Non-cash collateral that can be sold or repledged in the absence of default 4,133 4,154
In addition, AEGON can receive collateral related to derivative transactions that it enters into. The credit support agreement will normally dictate the threshold over which collateral needs to be pledged by AEGON or its counterparty.
AEGON pledges assets that are on its statement of financial position in securities borrowing transactions, in repurchase transactions, and against long-term borrowings. In addition, in order to trade derivatives on the various exchanges,
These transactions are conducted under terms that are usual and customary to standard long-term borrowing, derivative and securities borrowing activities, as well as requirements determined by exchanges where the bank acts as intermediary.
EUR 303 million of the financial assets and other assets were pledged as collateral for liabilities and contingent liabilities for account of policyholders in 2011 (2010: EUR 459 million).
AEGON has pledged EUR 1,200 million (2010: EUR 940 million) cash collateral on securities borrowed and derivative transactions and EUR 511 million (2010: EUR 923 million) on reverse repurchase agreements, refer to note 28.2.
As part of AEGON’s mortgage loan funding program in the Netherlands, EUR 3.2 billion (2010: EUR 1.8 billion) have been given as security for notes issued (refer to note 39).
AEGON Spain is the sole insurance partner of Banca Civica to provide life, health and pension insurance products for products sold by the Caja Navarra and Caja Burgos network. Since the acquisition date, the company has attributed
EUR 3 million reflects the future new business and synergies with existing business.
In May 2009, AEGON completed the acquisition of a 50% (non-controlling) interest in Mongeral SA Seguros e Previdência (Brazil). The total consideration paid amounted to EUR 44 million. An additional earn-out payment of EUR 11 million will be payable if certain targets are met in the future.
On November 24, 2011, AEGON completed the sale of its UK-based Guardian life and pension business for a total cash consideration of GBP 275 million to Cinven, a European private equity group. The sale of the Guardian life and pension business in the United Kingdom resulted in a loss of EUR 7 million, mainly originated from the disentaglement costs associated with the sale.
Underlying earnings before tax for Guardian life and pension totaled GBP 23 million in 2010. Gross written premiums for 2010 was GBP 129 million and net income for 2010 was GBP 26 million.
On August 9, 2011, AEGON completed the divestment of its life reinsurance business, Transamerica Reinsurance (TARe), to SCOR. The divestment resulted in a total after-tax consideration of USD 1.4 billion, consisting of cash proceeds of USD 0.9 billion and capital release of USD 0.5 billion. AEGON has retained certain blocks of business consisting primarily of variable annuity guarantee products with a book value of USD 0.4 billion. The divestment of TARe consists of a series of reinsurance agreements between various statutory insurance entities and SCOR for the US domestic business. In addition, SCOR has acquired Transamerica International Reinsurance Ireland (TIRI), a company that includes reinsurance contracts that are assumed by AEGON US domestic companies which have been retroceded to TIRI, and has taken over the operational assets and systems of TARe.
TIRe will continue to provide reserve credit security for redundant reserves to AEGON USA’s ceding companies. AEGON
will maintain approximately half of the collateral requirements needed for reinsurance reserve financing. This obligation provides reserve credit security and will run off over approximately 15 years. Refer to note 26 and 27 for details on the reinsurance treatment of this divestment.
On April 1, 2010, AEGON completed the sale of its funeral insurance business in the Netherlands to Dutch investment firm Egeria for EUR 212 million. The actual proceeds from the sale amounted to EUR 162 million, the remainder was upstreamed as a dividend prior to the sale. The value of the assets and liabilities sold amounted to EUR 1,084 million and EUR 933 million respectively. The assets included an amount of EUR 320 million of cash. Included in the gain are unrealized gains in an amount of EUR 22 million, reflecting revaluation reserves which were recycled through the income statement. In 2009, AEGON’s funeral insurance business generated EUR 70 million in gross written premiums.
On August 31, 2009 AEGON completed the sale of its Taiwanese life insurance business to Zhongwie Company Ltd, announced on April 22, 2009 for an amount of EUR 11 million. The result on the disposal presented under other charges
�� Transamerica Advisors Life Insurance Company of New York, New York, New York (United States)
�� Transamerica Financial Life Insurance Company, Inc., Purchase, New York (United States)
�� Caja Badajoz Vida y Pensiones, SA de Seguros, Badajoz (Spain), life insurance and pension company (50%)
(50%) and CAN Seguros de Salud, SA (Spain), health insurance company (50%)
�� Cantabria Vida y Pensiones, SA de Seguros y Reaseguros, Santander (Spain), life insurance and pension company (50%)
�� Unnim joint venture partners: Unnim Vida, SA de Seguros y Reaseguros (Spain) former Caixa Terrassa Vida y
�� AEGON Industrial Fund Management Co., Ltd, Shanghai (China), investment management company (49%)
Related party transactions include, among others, transactions between AEGON N.V. and Vereniging AEGON.
On June 15, 2011, AEGON repurchased 187.5 million of the convertible core capital securities. The total payment to the
The total amount AEGON has paid to the Dutch State amounts to EUR 4.1 billion. Of this amount, EUR 3 billion covered the original issue of core capital securities, while an additional EUR 1.1 billion was paid in premium and interest.
Vereniging AEGON. The Commission gave its approval for the state support, but imposed a number of behavioral constraints on the Company, which will remain in place until the support is fully repaid. To secure the European
Commission’s approval, AEGON committed itself not to pay any dividend to the common shareholder until the convertible core capital securities have been fully repurchased. Dividend payment on preference shares will remain possible. Vereniging AEGON will use income from the non-voting securities to service the loan from the Dutch government.
On November 30, 2009, AEGON redeemed EUR 1 billion in principal amount of those convertible core capital securities for EUR 1.15 billion and an amount of EUR 1 billion of the senior loan provided by the Dutch State through Vereniging
AEGON was repaid. The total payment to the Dutch government amounted to EUR 1.15 billion. Under the terms of
AEGON’s agreement with Vereniging AEGON and Vereniging AEGON’s agreement with the Dutch government, the premium for repurchase amounted to EUR 108 million based on the volume weighted average share price of AEGON
On October 1, 2009, Vereniging AEGON exercised its option rights to purchase in aggregate 33,860,000 class B
AEGON provides reinsurance, asset management and administrative services for employee benefit plans relating to pension and other post-employment benefits of AEGON employees. Certain post-employment insurance benefits are provided to employees in the form of insurance policies issued by affiliated insurance subsidiaries.
The Management Board, which assists the Executive Board in pursuing AEGON’s strategic goals, is formed by members of the Executive Board, and the CEO’s of AEGON USA, AEGON The Netherlands, AEGON UK (till March 31, 2011) and
4 Mr. Wynaendts’ pension benefits consists of a pension plan based on 70% of his final base salary, providing he completes 37 years of service, and an additional pension contribution equal to 28% of his base salary. For Mr. Nooitgedagt, the defined benefit contribution equals 25% of his base salary. Pension premiums include a provision for post employment health care, 0.5% of base salary.
The numbers of shares within the table reflects at target performance.
1 The shares have been converted using the share price of EUR 4.727. 2 During the vesting period, dividend payments on these shares are deposited in blocked savings accounts on behalf of the executive members.
For active members of the Executive Board 50% of the shares will vest in 2012 and 50% will vest in 2016. 3 These shares will vest in 2012 and are subject to an additional two year holding period. 4 Vested and paid out in 2008. 5 Total performance related cash remuneration granted over 2010 was waived by Mr. Wynaendts and Mr. Nooitgedagt. 6 The performance related cash remuneration granted over 2011 of EUR 163,591 was waived by Mr. Wynaendts. 7 The performance related cash remuneration granted over 2011 of EUR 106,359 was waived by Mr. Nooitgedagt.
Jan. J. Nooitgedagt – – – – – – – 125,0003 1 These share options can be exercised till March 7, 2012. 2 These share options can be exercised till March 13, 2013. 3 Mr. Nooitgedagt purchased 125,000 shares on August 16, 2011.
At the balance sheet date, Mr. Wynaendts had mortgage loans with AEGON totalling to EUR 1,485,292, with interest
Remuneration of active and retired members of the Supervisory Board In EUR 2011 2010 2009
Arthur W.H. Docters van Leeuwen (as of April 22, 2009 up to July 31, 2011) 40,000 84,000 72,000
Dudley G. Eustace (up to April 29, 2010) – 37,815 80,750
AEGON’s Supervisory Board members are entitled to the following: �� A base fee for membership of the Supervisory Board itself. No attendance fees are paid to members for the attendance of the regular Supervisory Board meetings (2011: 6 meetings, 2010: 7 meetings).
�� An attendance fee for each Committee meeting attended in person or through video- and telephone conferencing facilities.
306 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V. NOTE 54
Common shares held by Supervisory Board members Shares held in AEGON at December 31 2011 2010 2009
The new facility replaces AEGON's current USD 3 billion syndicated letter of credit and revolving credit facilities, which would have expired in September 2012.
Book 2 of the Dutch Civil Code. Furthermore management is responsible for such internal control as it determines is necessary to enable the preparation of the consolidated Financial statements that are free from material misstatement, whether due to fraud or error.
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with Dutch law, including the Dutch Standards on Auditing. This requires that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control.
Section 2:392 sub 1 at b-h has been annexed. Further we report that the Report of the Executive Board, to the extent we can assess, is consistent with the consolidated financial statements as required by Section 2:391 sub 4 of the
STATEMENT OF FINANCIAL POSITION OF AEGON N.V. AS AT DECEMBER 31
312 FINANCIAL STATEMENTS OF AEGON N.V. 2011 NOTE 1 - 2.5
NOTES TO THE FINANCIAL STATEMENTS OF AEGON N.V. AMOUNTS IN EUR MILLION, UNLESS OTHERWISE STATED
Dutch law and recorded in the Commercial Register of The Hague under its registered address at AEGONplein 50, 2591 TV The Hague. AEGON N.V. serves as the holding company for the AEGON Group and has listings of its common shares in Amsterdam, New York and London.
AEGON identified an immaterial error in AEGON’s financial statements issued prior to 2009. This error is related to the value of AEGON’s deferred tax and current tax balances in the Americas, resulting in an understatement of shares in group companies and a net understatement of equity in the comparative periods. AEGON assessed the qualitative and quantitative impact of this correction on previously issued financial statements and concluded that it was immaterial in all prior periods. AEGON has therefore made correcting adjustments to the opening balances of 2010
This error had no impact on AEGON’s income statement reported in these periods.
equity Total equity * Changes on impact on legal reserves – FCTR are the result of USD/EUR exchange rate movements.
AEGON N.V.’s financial statements are prepared in euros, which is also AEGON N.V.’s functional currency. The euro is also the currency of the primary economic environment in which AEGON N.V. operates. Each company in the Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. Transactions in foreign currencies are translated to the functional currency using the exchange rates prevailing at the date of the transaction.
At the balance sheet date monetary assets, monetary liabilities and own equity instruments in foreign currencies are translated to the functional currency at the closing rate of exchange prevailing on that date. Non-monetary items carried at cost are translated using the exchange rate at the date of the transaction, whilst assets carried at fair value are translated at the exchange rate when the fair value was determined.
Financial assets and liabilities are offset in the statement of financial position when AEGON N.V. has a legally enforceable right to offset and has the intention to settle the asset and liability on a net basis or simultaneously.
The group companies are stated at their net asset value, determined on the basis of IFRS as applied in the consolidated financial statements of the Group. For details on the accounting policies applied for the group companies refer to the consolidated financial statements.
The fair value of an asset is the amount for which it could be exchanged between knowledgeable, willing parties in an arm’s length transaction. For quoted financial assets for which there is an active market, the fair value is the bid price at the balance sheet date. In the absence of an active market, fair value is estimated by using present value based or other valuation techniques. Where discounting techniques are applied, the discount rate is based on current market rates applicable to financial instruments with similar characteristics. The valuation techniques that include non-market observable inputs can result in a different outcome than the actual transaction price at which the asset was acquired.
Other assets include fixed assets, derivatives with positive fair values, other receivables and prepaid expenses.
Other receivables are recognized at fair value and are subsequently measured at amortized cost.
Tangible, intangible and financial assets, if not held at fair value through profit or loss, are tested for impairment when there are indications that the asset may be impaired. Irrespective of the indications, goodwill and other intangible assets that are not amortized are tested at least annually. For assets denominated in a foreign currency, a decline in the foreign exchange rates is considered an indication of impairment.
Financial instruments that are issued by the Company are classified as equity if they represent a residual interest in the assets of the Company after deducting all of its liabilities and the Company has an unconditional right to avoid delivering cash or another financial asset to settle its contractual obligation. In addition to common shares and
Treasury shares are own equity instruments reacquired by the Group. They are deducted from shareholders’ equity, regardless of the objective of the transaction. No gain or loss is recognized in the income statement on the purchase, sale, issue or cancellation of the instruments. If sold, the difference between the carrying amount and the proceeds is reflected in retained earnings. The consideration paid or received is recognized directly in shareholders’ equity.
For a list of names and locations of the most important group companies, refer to note 52 of the consolidated financial statements of the Group. The legally required list of participations as set forth in article 379 of Book 2 of the Netherlands
Moreover, repayment on preferred shares needs approval of the related shareholders. There are restrictions on the amount of funds that companies within the Group may transfer in the form of cash dividends or otherwise to the parent company. These restrictions stem from solvency and legal requirements. Refer to note 47 to the consolidated financial statements of the Group for a description of these requirements.
Vereniging AEGON, based in The Hague, holds all of the issued preferred shares. Vereniging AEGON, in case of an issuance of shares by AEGON N.V., may purchase as many class B preferred shares as would enable Vereniging AEGON
to prevent or correct dilution to below its actual percentage of voting shares, unless Vereniging AEGON as a result of exercising these option rights would increase its voting power to more than 33%. Class B preferred shares will then be issued at par value (EUR 0.25), unless a higher issue price is agreed.
On March 1, 2011 AEGON completed the issue of 173,604,912 new common shares of AEGON N.V. with a par value of
EUR 0.12. The shares were issued at a price of EUR 5.20 per share. The proceeds of EUR 903 million were used to fund part of the repurchase of the convertible core capital securities described in note 10 to the Company financial statements.
On March 15, 2011, Vereniging AEGON exercised its option rights to purchase 41,042,000 class B preferred shares at par value of EUR 0.25 (proceeds of EUR 10 million) in order to avoid dilution of its voting rights following the issuance of new common shares completed on March 1, 2011.
The weighted average number of EUR 0.12 common shares for 2011 was 1,851,813,352 (2010: 1,706,782,188).
For detailed information on the long term incentive plan, share appreciation rights and share options granted to senior executives and other AEGON employees, refer to note 14 to the consolidated financial statements of the Group.
Net income 2010 retained – – – – – 1,759 – (1,759) –
Total net income / (loss) – – – – – 1,759 – (890) 869
Foreign currency translation differences and movement in foreign investment hedging reserves – – – 397 – – – – 397
Transfer to / (from) legal reserve – – (40) – (405) 427 – – (18)
Net loss 2009 retained – – – – – 204 – (204) –
Foreign currency translation differences and movement in foreign investment hedging reserves – – – 1,003 – – – – 1,003
Changes in revaluation subsidiaries – – 2,689 – – – – – 2,689
Transfer to / (from) legal reserve – – (125) – 2,214 (2,114) – – (25)
Disposal of group assets – – (22) – – – – – (22)
which are restricted. Included in AEGON N.V.’s legal reserves is an amount of EUR 396 million related to OPTAS N.V. which represents the increase in statutory reserves since the acquisition of OPTAS N.V. by AEGON (2009: EUR 355 million).
In 2009 the acquired negative goodwill related to OPTAS (EUR 212 million) has been reclassified to the legal reserves in respect of group companies.
On the balance sheet date AEGON N.V. and its subsidiaries held 29,265,890 of its own common shares with a face value of EUR 0.12 each. Most of the shares have been purchased to neutralize the dilution effect of issued share dividend and to hedge share appreciation rights and stock options granted to executives and employees. Movements in the number of repurchased own shares held by AEGON N.V. were as follows: NOTE 10
Transactions in 2010: Sale: 1 transaction, price EUR 4.75 – (51,609)
322 FINANCIAL STATEMENTS OF AEGON N.V. 2011 NOTE 11 - 14 11 OTHER EqUITY INSTRUMENTS
Loans from and payables to group companies have a maturity of less than one year. Other includes derivatives with negative fair values of EUR 321 million (2010: EUR 313 million) and income tax payable for EUR 206 million
AEGON N.V., together with certain of its subsidiaries, is part of a tax grouping for Dutch corporate income tax purposes.
The members of the fiscal entity are jointly and severally liable for any taxes payable by the Dutch tax grouping.
AEGON N.V. has guaranteed and is severally liable for the following: �� Due and punctual payment of payables due under letter of credit agreements applied for by AEGON N.V. as co-applicant with its subsidiary companies Transamerica Corporation, AEGON USA, LLC and Commonwealth
General Corporation. At December 31, 2011, the letter of credit arrangements amounted to EUR 3,773 million
(2010: EUR 3,489 million); as at that date no amounts had been drawn or were due under these facilities; �� Due and punctual payment of payables by the consolidated group companies Transamerica Corporation,
Corporation (nominal amount EUR 2,207 million; 2010: EUR 2,094 million); �� Due and punctual payment of any amounts owed to third parties by the consolidated group company AEGON
Furthermore management is responsible for such internal control as it determines is necessary to enable the preparation of the company financial statements that are free from material misstatement, whether due to fraud or error.
In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the company financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control.
An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the company financial statements.
Pursuant to the legal requirement under Section 2:393 sub 5 at e and f of the Dutch Civil Code, we have no deficiencies to report as a result of our examination whether the Report of the Executive Board, to the extent we can assess, has been prepared in accordance with Part 9 of Book 2 of this Code, and whether the information as required under Section 2:392 sub 1 at b-h has been annexed. Further we report that the Report of the Executive Board, to the extent we can assess, is consistent with the company financial statements as required by Section 2:391 sub 4 of the Dutch Civil Code.
This independent auditor’s report does not form part of AEGON's Annual Report as filed with the SEC.
Appropriation of profit will be determined in accordance with the articles 31 and 32 of the Articles of Association of AEGON N.V.
3. From the net profit as reflected in the profit and loss account, if it is sufficient to this end after a part of the profit has been set aside for augmenting and/or forming reserves in accordance with 2, first of all the holders of preferred shares shall receive, on the average amount paid on their preferred shares, a dividend the percentage of which, on an annual basis, shall be equal to the European
The Executive Board, subject to the approval of the Supervisory Board, shall make a proposal for that purpose. A proposal to pay a dividend shall be dealt with as a separate agenda item at the General Meeting of Shareholders.
If the proposed dividend is approved by shareholders, AEGON shares will be quoted ex-dividend on May 18, 2012. The record date for the dividend will be May 22, 2012. Shareholders can elect to receive a dividend in cash or in shares during the dividend election period, which will run from May, 23 2012 up to and including June 8, 2012. The dividend will be payable as of June 15, 2012.
In order to reflect the prevailing market price of AEGON N.V. common shares fully within the indication provided, the number of dividend coupons that give entitlement to a new common share of EUR 0,12 will be determined on June 8, 2012 after 5.30 pm, based on the average shareprice on NYSE Euronext Amsterdam in the five trading days from June 5, 2012 up to and including June 8, 2012.
As of December 31, 2011, AEGON’s total authorized share capital consisted of 3,000,000,000 common shares with a par value of EUR 0.12 per share and 1,000,000,000 preferred shares (divided into 500,000,000 class A and 500,000,000 class B preferred shares), each with a par value of EUR 0.25 per share. At the same date, there were 1,909,654,051 common shares, 211,680,000 class A preferred shares and 110,072,000 class B preferred shares issued. Of the issued common shares, 27,503,300 common shares were held by AEGON N.V. as treasury shares and 1,862,680 treasury shares were held by its subsidiaries.
All of AEGON’s common shares and preferred shares are fully paid and not subject to calls for additional payments of any kind. All of AEGON’s common shares are registered shares. Holders of shares of New York registry hold their common shares in registered form issued by AEGON’s New York transfer agent on AEGON’s behalf. Shares of New York registry and shares of Netherlands registry are exchangeable on a one-to-one basis and are entitled to the same rights, except that cash dividends are paid in US dollars on shares of New York registry.
In 1983, AGO Holding N.V. and Ennia N.V. merged into AEGON N.V. Vereniging AGO initially received approximately 49%
of the common shares (which was reduced gradually to less than 40%) and all of the preferred shares in AEGON N.V., giving it voting majority in AEGON N.V. At that time Vereniging AGO changed its name into Vereniging AEGON.
On May 9, 2003, AEGON’s shareholders approved certain changes to AEGON’s corporate governance structure and AEGON’s relationship with Vereniging AEGON in an extraordinary General Meeting of Shareholders. AEGON’s
and AEGON N.V. was changed as follows: The 440,000,000 preferred shares with nominal value of EUR 0.12 held by Vereniging AEGON were converted into 211,680,000 new class A preferred shares with nominal value of EUR 0.25 and the paid-in capital on the preferred
(the class A preferred shares as well as the class B preferred shares which may be issued to Vereniging AEGON under the option agreement as described in the following sections) were adjusted accordingly to 25/12 vote per preferred share.
Vereniging AEGON has voluntarily waived its right to cast 25/12 vote per class A or class B preferred share. Instead,
Vereniging AEGON has agreed to exercise one vote only per preferred share, except in the event of a “special cause”, such as the acquisition of a 15% interest in AEGON N.V., a tender offer for AEGON N.V. shares or a proposed business combination by any person or group of persons whether individually or as a group, other than in a transaction approved by the Executive Board and the Supervisory Board. If, in its sole discretion, Vereniging AEGON determines that a “special cause” has occurred, Vereniging AEGON will notify the General Meeting of Shareholders and retain its right to exercise the full voting power of 25/12 vote per preferred share for a limited period of six months.
Accordingly, under normal circumstances the voting power of Vereniging AEGON, based on the number of outstanding and voting shares (excluding issued common shares held in treasury by AEGON N.V.) at December 31, 2011, amounts to approximately 22,4%. In the event of a “special cause”, Vereniging AEGON’s voting rights will increase, currently to 32,99%, for up to six months per “special cause”.
Vereniging AEGON has an Executive Committee consisting of seven members, five of whom, including the chairman and the vice-chairman, are not nor have ever been, related to AEGON. The other two members are also members of the Executive Board of AEGON N.V. Resolutions of the Executive Committee, other than with regard to amendment of the Articles of Association, are made with an absolute majority of the votes. When a vote in the Executive Committee results in a tie, the General Meeting of Members has the deciding vote. With regards to the amendment of the Articles of
Association of Vereniging AEGON, a special procedure is in place to provide for the need of a unanimous proposal from the Executive Committee, thereby including the consent of the representatives of AEGON N.V. at the Executive Committee.
Following the amendment of the Articles of Association as effected on September 13, 2005, this requirement does not apply in the event of a hostile change of control at the General Meeting of Shareholders of AEGON N.V., in which event
Vereniging AEGON may amend its Articles of Association without the cooperation of AEGON N.V.. Furthermore, the two members of the Executive Board of AEGON N.V. who are also members of the Executive Committee have no voting rights in respect of several decisions, set out in the Articles of Association, that relate to AEGON N.V.
According to its filing with the United States Securities and Exchange Commission on February 10, 2012, US-based investment management firm Dodge & Cox owns over 195 million common shares, which is approximately 7.6% of
AEGON’s issued share-capital. Comparing the shareholding of Dodge & Cox with the first filing of Dodge & Cox with the United States Securities and Exchange Commission which related to AEGON on February 10, 2011, this is an increase of 0.5% compared to the situation at December 31, 2010.
Dodge & Cox are holders of common shares which have no special rights attached to it.
The AEGON N.V. parent company only column in this condensed consolidated financial information presents investments in subsidiaries under the equity method of accounting. The TFC column in this condensed consolidated financial information presents the individual line items for TFC. TFC is reported as a component of Holdings and other activities, which includes additional parent company interest charges.
Share in profit / (loss) of associates – – 29 – 29
Share in profit / (loss) of associates – – 41 – 41
Insurance contracts for account of policyholders – – 73,425 – 73,425
Issuance and repayments of share capital 913 – – – 913
Issuance, repurchase and coupons of perpetual securities (237) – – – (237)
Year ended December 31, 2010 Amounts in EUR million AEGON N.V. TFC
Purchase and disposal of intangible assets (1) – (17) – (18)
Issuance and repayments of share capital – – – – –
Issuance, repurchase and coupons of convertible core capital securities (563) – – – (563)
NET INCREASE / (DECREASE) IN CASH AND CASH EQUIVALENTS (25) 2 1,127 – 1,104
Purchase and disposal of intangible assets (3) – (7) – (10)
Purchase, disposal and dividend of subsidiaries and associates – – (114) (24) (138)
Issuance, repurchase and coupons of perpetual securities (244) – – – (244)
Other investments at fair value through profit or loss 3,020 3,034 3,034
GRAND TOTAL 138,844 144,079 1 Cost is defined as original cost for available-for-sale shares and amortized cost for available-for-sale and held-to-maturity bonds.
NET INCREASE / (DECREASE) IN CASH AND CASH EQUIVALENTS (214) (25) (2,021)
Other policy claims and benefits Premium revenue 1 Includes Accident and Health insurance
We have audited the accompanying consolidated statement of financial position of AEGON N.V., as of December 31, 2011 and 2010, and the related consolidated income statements, statements of comprehensive income, statements of changes in equity, and cash flow statements for each of the three years in the period ended December 31, 2011.
We conducted our audits in accordance with auditing standards generally accepted in The Netherlands and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
Commission and our report dated March 21, 2012, expressed an unqualified opinion thereon.
1 Identity of Directors, Senior Management and Advisers n/a 2 Offer Statistics and Expected Timetable n/a 3 Key Information 3A Selected financial data 12–14 3B Capitalization and indebtedness n/a 3C Reasons for the offer and use of proceeds n/a 3D Risk factors 88–104 4 Information on the Company 4A History and development of the company 11; 298–299 4B Business overview 15; 30–42; 47–52; 57–61; 68–84 4C Organizational structure 11 4D Property, plants and equipment 354 4A Unresolved Staff Comments n/a 5 Operating and Financial Review and Prospects 5A Operating results 16–29; 43–46; 53–56; 62–67; 169–182; 183–224; 284–288 5B Liquidity and capital resources 105–107; 261–262; 289–291 5C Research and development, patent and licenses etc. n/a 5D Trend information 7–8 5E Off-balance sheet arrangements 248–249; 293–296 5F Tabular disclosure of contractual obligations 222; 293–296; 296–297 5G Safe harbor n/a 6 Directors, Senior Management and Employees 6A Directors and senior management 6; 113–114 6B Compensation 115–121; 125; 236–240; 301–306 6C Board practices 6; 108–114; 122–126 6D Employees 354 6E Share ownership 124–125; 301–306 7 Major Shareholders and Related Party Transactions 7A Major shareholders 329–321 7B Related party transactions 301–306 7C Interest of experts and counsel n/a 8 Financial Information 8A Consolidated Statements and Other Financial Information 132–139; 332–342 8B Significant Changes n/a 9 The Offer and Listing 9A Offer and listing details 357 9B Plan of distribution n/a 9C Markets 357 9D Selling shareholders n/a 9E Dilution n/a 9F Expenses of the issue n/a 10 Additional Information 10A Share capital n/a 10B Memorandum and articles of association 358–360 10C Material contracts 360–361 10D Exchange controls 361 10E Taxation 361–370 10F Dividends and paying agents n/a 10G Statement by experts n/a 10H Documents on display 381 10I Subsidiary Information n/a
Material Modifications to the Rights of Security Holders and Use of Proceeds n/a 15 Controls and Procedures 128–129 16A Audit committee financial expert 110 16B Code of Ethics 127 16C Principal Accountant Fees and Services 371–372 16D Exemptions from the Listing Standards for Audit Committees n/a 16E Purchases of Equity Securities by the Issuer and Affiliated Purchasers 372 16F Change in Registrant’s Certifying Accountant n/a 16G Corporate Governance 122–126 16H Mine Safety Disclosure n/a 17 Financial Statements 132–308 18 Financial Statements 132–308 19 Exhibits 346–353
(2) Incorporated by reference to Exhibit 4.2 to Form F-3 (file no. 333-106497) filed with the SEC on June 25, 2003.
(10) Incorporated by reference to Exhibit 4.10 to Form 20-F 2008 filed with the SEC on March 31, 2009.
(13) Incorporated by reference to Exhibit 4.12 to Form 20-F 2010 filed with the SEC on March 30, 2011.
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
Earnings: Add: Fixed charges included in earnings 2,148 2,438 2,632 2,688 3,334
Fixed charges: Interest on fixed annuities, investment contracts and savings accounts 1,657 2,012 2,220 2,162 2,860
Sub-total fixed charges included in earnings 2,148 2,438 2,632 2,688 3,334
Ratio excluding interest on fixed annuities, investment contracts and savings accounts 1.8 3.2 (0.1) (0.6) 4.3
I, Alexander R. Wynaendts, certify that 1. I have reviewed this Annual Report of AEGON N.V.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report; 4. The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and 5. The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors
(or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting.
Executive Officer of the Company and Jan J. Nooitgedagt, the Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and The information contained in the Report fairly represents, in all material respects, the financial condition and results of operations of the Company.
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to AEGON and will be retained by AEGON and furnished to the Securities and Exchange Commission or its staff upon request.
The foregoing certification is being furnished solely pursuant to 18 U.S.C. section 1350 and is not being filed as part of the Report or as a separate disclosure document.
We consent to the incorporation by reference in the following Registration Statements: 1. Registration Statement (Form F-3 No. 333-178225) pertaining to AEGON USA Producer Stock Option and Award
Plan, 2. Registration Statement (Form F-3 No. 333-178224) pertaining to AEGON USA Producers’ Stock Purchase Plan, 3. Registration Statement (Form F-3 No. 333-150786) pertaining to AEGON Funding Company LLC, 4. Registration Statement (Form F-3 No. 333-174878) pertaining to AEGON Funding Company LLC, 5. Registration Statement (Form S-8 No. 333-89814) pertaining to AEGON USA, Inc. Profit Sharing Plan, 6. Registration Statement (Form S-8 No. 333-129662) pertaining to AEGON USA Companies Management Stock Option
Plan – 2006, 9. Registration Statement (Form S-8 No. 333-138210) pertaining to AEGON USA Companies Management Stock Option
Plan – 2008, 13. Registration Statement (Form S-8 No. 333-151983) pertaining to AEGON USA Companies Management Stock Option
“supplementary supervision”. The supplementary supervision of insurance companies in an insurance group enables
EU supervisors to make a detailed assessment of the financial position of the EU insurance companies that are part of that group. The Directive requires DNB to take into account the relevant financial affiliations between the insurance companies and other entities in the group. In this respect, AEGON is required to submit reports to its supervisors twice a year setting out supplemental capital adequacy calculations of the insurance companies, risk concentrations and significant transactions and positions between insurance and non-insurance companies in the AEGON Group.
Since the beginning of October 2009, AEGON has been subject to supplemental group supervision by the Dutch Central
Bank in accordance with the requirements of the European Union’s Financial Conglomerate Directive. Supplemental group supervision pursuant to the Financial Conglomerate Directive includes supplementary capital adequacy requirements for financial conglomerates and supplementary supervision on risk concentrations and intra-group transactions in the financial conglomerate.
Both the insurance and banking companies in the AEGON Group are required to maintain a minimum solvency margin based on local requirements. The required solvency margin is the sum of the margins of each of AEGON’s insurance and banking subsidiaries, based on the local requirements. Available liability capital includes shareholders’ equity, convertible core capital securities, perpetual capital securities, and dated subordinated debt and senior debt.
In addition, as part of the European Commission’s approval granted in August 2010, AEGON will implement measures to improve the quality of the company’s capital base, primarily be increasing the shareholders’ equity to at least 75%
Spain. AEGON owns its headquarters and leases other offices in the Netherlands (Leeuwarden), the United Kingdom and Canada under long-term leases. AEGON believes that its properties are adequate to meet its current needs.
At the end of 2011, AEGON had 25,288 employees of which were 3,039 agent-employees. Approximately 48%
All of AEGON’s employees in the Netherlands, other than senior management, are covered by collective labor agreements, which are generally renegotiated annually on an industry wide basis. Individual companies then enter into employment agreements with their employees based on the relevant collective agreement. Since its founding, AEGON
AEGON has experienced no significant strike, work stoppage or labor dispute in recent years.
Supervisory Board. Moreover, the Central Works Council of AEGON The Netherlands is to be consulted as regards a nomination for appointment pertaining to one seat on the Supervisory Board of AEGON.
The convertible core capital securities ranked pari passu with AEGON’s common shares and were entitled to a coupon only in the event and to the extent we elect to pay a dividend on the common shares. For that reason it was decided not to declare a dividend for 2009 and an interim-dividend for 2010.
aims to pay out a sustainable dividend to allow equity investors to share in AEGON’s performance, which can grow over time if AEGON’s performance so allows. After investment in new business to generate organic growth, capital generation in AEGON’s operating subsidiaries is available for distribution to the holding company, while maintaining a capital and liquidity position in the operating subsidiaries in line with AEGON’s capital management and liquidity risk policies.
When determining whether to declare or propose a dividend, AEGON’s Executive Board has to balance prudence versus offering an attractive return to shareholders, for example in adverse economic and/or financial market conditions.
On NYSE Euronext Amsterdam only Euronext registered shares may be traded and on the NYSE Euronext New York only New York Registry Shares may be traded.
AEGON is registered under number 27076669 in the Commercial Register of the Chamber of Commerce and Industries for Haaglanden, The Hague, the Netherlands.
Certain provisions of AEGON’s current Articles of Association are discussed below.
2. In achieving the aforesaid objects due regard shall be taken, within the scope of sound business operations, to provide fair safeguards for the interests of all the parties directly or indirectly involved in AEGON.
For information with respect to provisions in the Articles of Association relating to members of the Supervisory Board and Executive Board, refer to cross reference table Form 20-F item 6, “Directors, Senior Management and Employees”.
AEGON has two types of shares: Common shares (par value EUR 0.12) and (class A and class B) Preferred shares
2. All shares have dividend rights except for those shares (if any) held by AEGON as treasury stock. Dividends which have not been claimed within five years lapse to AEGON.
However, in line with the higher par value of the preferred shares, the holder of the preferred shares, Vereniging
6. The General Meeting of Shareholders may, at the proposal of the Executive Board, as approved by the Supervisory
Board, resolve to reduce the outstanding capital either by (i) repurchasing shares and subsequently canceling them, or (ii) by reducing their nominal share value.
8. All issued shares are fully paid-up; so there is no liability for further capital calls.
4. Any remaining balance after settlement of all debts in the event of liquidation, will first be allocated (to the extent possible) to repaying the paid-in capital on the preferred shares.
5. Holders of common shares have pre-emptive rights in relation to any issuance of common shares, while holders of preferred shares have no such pre-emptive rights.
A change to the rights of shareholders would require an amendment to the Articles of Association. The General
Annual General Meetings and extraordinary General Meetings of Shareholders shall be convened by public notice.
Notice must be given no later than forty-two days prior to the date of the meeting. The notice must contain a summary agenda and indicate the place where the complete agenda together with the documents pertaining to the agenda may be obtained. The agenda is also sent to shareholders registered with the Company Register. New York Registry shareholders or their brokers receive a proxy solicitation notice.
There are no limitations, either under the laws of the Netherlands or in AEGON’s Articles of Association, on the rights of non-residents of the Netherlands to hold or vote AEGON common shares.
A resolution of the General Meeting of Shareholders to suspend or dismiss a member of the Executive Board or a member of the Supervisory Board, other than pursuant to a proposal by the Supervisory Board, shall require at least two-thirds of the votes cast representing more than one-half of the issued capital.
In the event a “special cause” occurs (such as the acquisition of 15% of AEGON’s voting shares, a tender offer for
AEGON’s shares or a proposed business combination by any person or group of persons, whether individually or as a group, other than in a transaction approved by the Executive Board and Supervisory Board), Vereniging AEGON will be entitled to exercise its full voting rights of 25/12 votes per preferred share for up to six months per “special cause”, thus increasing its current voting rights to 32.99%.
MATERIAL DIFFERENCES BETWEEN DUTCH LAW AND US LAW WITH RESPECT TO THE ITEMS ABOVE
There are no conditions more stringent than what is required by law.
Vereniging to purchase capital securities from the company at a corresponding amount and terms and conditions similar to the loan. AEGON issued 750 million convertible core capital securities at EUR 4.00 per security to Vereniging
AEGON. These securities ranked equal to common shares (pari passu), but did not carry voting rights.
With regards to the payment of interest on the securities, the following was agreed in 2008. Payment of interest on the securities as well as on the state loan provided to Vereniging AEGON was conditional upon the payment of dividends
For consecutive years the coupon would be the higher of either 8.5% or an amount linked to the cash dividend paid on the common shares in the preceding year: in the second year 110% of the dividend paid per share, rising to 120% in the third year, 125% in the fourth and subsequent years. The coupon was not deductible for corporate income tax.
AEGON had the right to repurchase all of the securities at a purchase price equal to EUR 6.00 per security and no interest would be payable. After June 30, 2011 AEGON could at any time repurchase the remaining securities on the terms and conditions as determined in the agreement of with the Dutch State in December 2008.
As part of the transaction, the Supervisory Board committed to nominate two representatives as proposed by the Dutch
In August 2010 the European Commission approved the capital support obtained from the Dutch State at the height of the global financial crisis. The Commission gave its approval for the state support, but imposed a number of conditions on the company, which will remain in place until the support is fully repaid. These conditions include both structural measures and temporary behavioral constraints.
There are no legislative or other legal provisions currently in force in the Netherlands or arising under AEGON’s Articles of Association restricting remittances to holders of AEGON’s securities that are not resident in the Netherlands. Cash dividends payable in euros on AEGON’s common shares may be officially transferred from the Netherlands and converted into any other convertible currency.
Each holder or prospective investor should therefore consult their own tax advisor with respect to the tax consequences in relation to the acquiring, owning and disposing of AEGON’s common shares.
Corporate Entities”), excluding: i. corporate entities that are not subject to Dutch corporate income tax; ii. pension funds and other entities that are exempt from Dutch corporate income tax or are exempt from
Dutch Individuals engaged or deemed to be engaged in an enterprise and Dutch Corporate Entities.
“dividends we distribute” used in this section includes, but is not limited to: �� Direct or indirect distributions in cash or in kind, deemed and constructive distributions, and (partial) repayments of paid-in capital not recognized for Dutch dividend withholding tax purposes.
�� The par value of common shares issued to a holder of AEGON’s common shares or an increase of the par value of common shares (unless distributed out of qualifying paid-in capital for Dutch dividend withholding tax purposes), to the extent that it does not appear that a contribution, recognized for Dutch dividend withholding tax purposes, has been made or will be made; and
�� Partial repayment of paid-in capital, recognized for Dutch dividend withholding tax purposes, if and to the extent that we have (cumulative) net profits, or can expect to derive such profits (anticipated profits), unless: � a general meeting of AEGON’s shareholders has resolved in advance to make such repayment; and
� prior to the repayment the par value of AEGON’s common shares concerned has been reduced by an equal amount by way of an amendment of AEGON’s articles of association.
�� The recipient is entitled to a larger reduction or refund of withholding tax than such person; and
A liability to gift tax will arise in the Netherlands with respect to an acquisition of AEGON’s common shares by way of a gift when the gift is made by an individual who is resident in the Netherlands or a corporate entity that is a tax resident of the Netherlands. A liability to inheritance tax will arise in the Netherlands with respect to an acquisition or deemed acquisition of AEGON’s common shares by way of an inheritance or bequest on the death of an individual who is resident in the Netherlands.
For purposes of Dutch gift and inheritance taxes, an individual who holds Dutch nationality will, inter alia, be deemed to be resident in the Netherlands if he has been resident in the Netherlands at any time during the ten years preceding the date of the gift or his death. For purposes of Dutch gift tax, an individual not holding Dutch nationality will be deemed to be resident in the Netherlands if he has been resident in the Netherlands at any time during the 12 months preceding the date of the gift.
It is noted that a Non-Resident Shareholder will not become resident, or be deemed to become resident, in the Netherlands solely as a result of holding AEGON’s common shares, or of the performance, execution, delivery and/or enforcement of rights in respect of AEGON’s common shares; provided that no Non-Resident Shareholder holds a substantial interest
(aanmerkelijk belang) within the meaning of Chapter 4 of the Individual Income Tax Act 2001 in us.
(other than withholding tax described below) or in respect of any capital gain realized on the disposal of AEGON’s common shares, provided that: �� Such Non-Resident Shareholder does not derive profits from an enterprise, whether as an entrepreneur or pursuant to a co-entitlement to the net worth of such enterprise (other than as an entrepreneur or a shareholder) which enterprise is, in whole or in part, carried on through a (deemed) permanent establishment or a permanent representative in the Netherlands and to which permanent establishment or permanent representative, as the case may be, AEGON’s common shares are attributable.
�� Such Non-Resident Shareholder does not have a substantial interest or a deemed substantial interest in us, or, if such holder does have such an interest, it forms part of the assets of an enterprise.
�� If such Non-Resident Shareholder is an individual, the benefits derived from the shares are not taxable in the hands of such holder as a “benefit from miscellaneous activities” in the Netherlands, which includes activities that exceed normal active portfolio management.
�� If such Non-Resident Shareholder is an individual, he or she does not opt to be taxed as a resident of the Netherlands for purposes of Dutch taxation.
For certain other legal entities resident in a member state of the European Union that, should that entity be a resident in the Netherlands, would not be subject to Dutch corporate income tax, it may be a breach of the European freedom of capital that they are not entitled to a refund of the Dutch dividend withholding tax withheld.
If a holder of common shares, whether an individual or an entity, is resident in a country other than the Netherlands and if a treaty for the avoidance of double taxation with respect to taxes on income is in effect between the Netherlands and that country, and the holder is a qualifying resident for purposes of such treaty, such holder may, depending on the terms of that particular treaty, qualify for full or partial relief at source or for a refund (in whole or in part) of the Dutch dividend withholding tax.
The reduction is applied to the Dutch dividend withholding tax that we must pay to the Dutch tax authorities and not to the Dutch dividend withholding tax that we must withhold.
Both the EFTA Court as well as the ECJ issued judgments concerning outbound dividend payments to foreign shareholders.
According to both courts, it is a breach of the European freedom of capital and the freedom of establishment to treat outbound dividend payments less favorably than dividend payments to domestic shareholders. As of January 1, 2007, in general, dividend payments to certain qualifying EU and Iceland and Norway resident corporate shareholders are treated the same as dividend payments to certain qualifying Dutch resident corporate shareholders. Dividend payments to corporate shareholders residing outside the EU are, in general, still treated less favorably as opposed to dividend payments to certain qualifying Dutch resident corporate shareholders. The above stated court cases may have significant implications for certain non-EU resident shareholders that receive dividends that are subject to Netherlands dividend withholding tax (i.e. the aforementioned different treatment may be a breach of the European freedom of capital).
Although the freedom of capital generally also applies to capital movements to and from third countries, such as the United States, it cannot be ruled out that the freedom of capital movements to and from third countries must be interpreted more stringent as opposed to the freedom of capital movements to and from EU member states.
Furthermore, the freedom of capital movements to and from third countries is generally subject to grandfathering
Netherlands Supreme Court it may be held that these stand still provisions do not apply in the specific case of claiming a refund of the Netherlands dividend withholding tax by a shareholder who did not acquire AEGON’s shares with a view to establishing or maintaining lasting and direct economic links between us and the shareholder which allow the shareholder to participate effectively in the management of the company or in its control.
�� Legal entities not subject to a profit based tax in their country of residence that, should that entity be a resident in the Netherlands, would not be subject to Dutch corporate income tax and that would, because of this, be eligible for a refund of the Dutch dividend withholding tax withheld at their expense.
Residents of the United States that qualify for, and comply with the procedures for claiming benefits under, the income tax convention between the Netherlands and the United States (the “US/NL Income Tax Treaty”) may, under various specified conditions, be eligible for a reduction of the dividend withholding tax rate from 15% to 5% if the beneficial owner is a company which holds directly at least 10% of AEGON’s voting power. The US/NL Income Tax Treaty provides, subject to certain conditions, for a complete exemption from, or refund of, Dutch dividend withholding tax for dividends received by exempt pension trusts and exempt organizations, as defined therein.
Subject to compliance with the procedures for claiming benefits, a holder of common shares will generally qualify for benefits under the US/NL Income Tax Treaty, if the holder: �� Is the beneficial owner of the dividends paid on AEGON’s common shares.
�� Is resident in the United States according to the US/NL Income Tax Treaty.
�� Is not restricted in claiming the benefits of the US/NL Income Tax Treaty under article 26 of the US/NL Income Tax
�� Does not carry on business in the Netherlands through a permanent establishment of which AEGON’s common shares form part of the business property.
No liability for gift or inheritance taxes will arise in the Netherlands with respect to an acquisition of AEGON’s common shares by way of a gift by, or on the death of, a Non-Resident Shareholder, unless a gift of AEGON’s common shares was made by an individual who at the time of the gift was a Non-Resident Shareholder, such individual dies within 180 days after the date of the gift while (at the time of his death) being resident or deemed to be resident in the Netherlands.
No Dutch capital contribution tax, registration tax, transfer tax, stamp duty or any other similar documentary tax or duty will be payable in the Netherlands by the investors in respect of or in connection with the subscription, issue, placement, allotment or delivery of AEGON’s common shares.
This section describes certain US Federal income tax consequences to beneficial holders of common shares that are held as capital assets. This section does not address all US Federal income tax matters that may be relevant to a particular holder. Each investor should consult their tax advisor with respect to the tax consequences of an investment in the common shares. This section does not address tax considerations for holders of common shares subject to special tax rules including, without limitation, the following: �� Financial institutions
�� Persons that will hold the common shares as part of a “hedging” or “conversion” transaction or as a position in a
�� Partnerships or pass-through entities or persons who hold common shares through partnerships or other pass-through entities; and
For the purposes of this section, a “US holder” is a beneficial owner of common shares that is, for US Federal income tax purposes: �� A citizen or individual resident of the United States; �� A corporation created or organized in or under the laws of the United States or any state of the United States
rates applicable to "qualified dividend income" are currently scheduled to expire on December 31, 2012, unless further extended by Congress. Each US holder should consult their tax advisor regarding the reduced rate.
Distributions paid in currency other than US dollars (a “foreign currency”), including the amount of any withholding tax thereon, must be included in the gross income of a US holder in an amount equal to the US dollar value of the foreign currency calculated by reference to the exchange rate in effect on the date of receipt. This is the case regardless of whether the foreign currency is converted into US dollars. If the foreign currency is converted into US dollars on the date of receipt, a US holder generally should not be required to recognize foreign currency gain or loss in respect of the dividend. If the foreign currency received in the distribution is not converted into US dollars on the date of receipt, a US
Dividends received by a US holder with respect to common shares will be treated as foreign source income for foreign tax credit limitation purposes. Subject to certain conditions and limitations, any Dutch income tax withheld on dividends may be deducted from taxable income or credited against a US holder’s Federal income tax liability. The limitation on foreign taxes eligible for the US foreign tax credit is calculated separately with respect to “passive category income”
Backup withholding and information reporting requirements may apply to certain payments on the common shares and to proceeds of a sale or redemption of the common shares to US holders made within the United States. AEGON, its agent, a broker, or any paying agent, as the case may be, may be required to withhold tax from any payment that is subject to backup withholding if a US holder fails to furnish the US holder’s taxpayer identification number, fails to certify that such US holder is not subject to backup withholding, or fails to otherwise comply with the applicable requirements of the backup withholding rules. Certain US holders are not subject to the backup withholding and information reporting requirements.
Non-US holders that provide the required tax certifications of exempt or foreign status will generally be exempt from
US information reporting requirements and backup withholding. However, sales proceeds a non-US holder receives on a sale of common shares through a broker may be subject to information reporting and backup withholding if the non-US holder is not eligible for an exemption.
Ernst & Young Accountants has served as AEGON’s independent public accountant for each of the fiscal years in the three-year period ended December 31, 2011, for which audited financial statements appear in this Annual Report.
The following table presents the aggregate fees for professional services and other services rendered by Ernst & Young
registration statements, periodic reports and other documents filed with the SEC or other documents issued in connection with securities offerings.
�� Audit-related fees consist of fees billed for audit-related services including assurance and related services that are reasonably related to the performance of the audit or review of AEGON’s financial statements or that are traditionally performed by the independent auditor. Audit-related services include, among others, assurance services to report on internal controls for third parties (e.g. SAS 70 audits), due diligence services pertaining to potential business acquisitions/dispositions; accounting consultations related to accounting, financial reporting or disclosure matters not classified as “Audit services”; assistance with understanding and implementing new accounting and financial reporting guidance from rulemaking authorities; financial audits of employee benefit plans; agreed-upon or expanded audit procedures related to accounting and/or billing records required to respond to or comply with financial, accounting or regulatory reporting matters; and assistance with internal control reporting requirements.
�� All other fees include fees billed for permissible non-audit services that AEGON believes are routine and recurring services, would not impair the independence of the auditor and are consistent with the SEC’s rules on auditor independence.
AEGON’s Audit Committee is responsible, among other matters, for the oversight of the external auditor. The Audit
�� May be pre-approved by the Audit Committee without consideration of specific case-by-case services (“general preapproval ”); or
Policy (that are adopted each year) set out the audit, audit-related, tax and other services that have received the general pre-approval of the Audit Committee. All other audit, audit-related, tax and other services must receive specific pre-approval from the Audit Committee.
Alt-A borrower has a credit score high enough to obtain an: ”A” standing. Alt-A mortgages are primarily backed by loans with fixed interest rates for the entire term of the loan.
Asset Backed Securities (ABS) are securities whose value and income payments are derived from and collateralized
�� Are available to be used only to pay or fund employee benefits and are not available to the reporting entity’s own creditors.
Deferred Policy Acquisition Cost (DPAC) are the variable costs related to the acquisition or renewal of insurance contracts and investment contracts with discretionary participation features.
� The profit or loss of the company, fund or other entity that issues the contract.
�� A contract that will or may be settled in the entity’s own equity instruments; and is: � A non-derivative for which the entity is or may be obliged to deliver a variable number of the entity’s own equity instruments; or
Financial liability is any liability that is: �� A contractual obligation to deliver cash or another financial asset to another entity or to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavorable to the entity; or
�� A contract that will or may be settled in the entity’s own equity instruments; and is
� A derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity’s own equity instruments.
Foreign operation is an entity that is a subsidiary, associate, joint venture or branch of a reporting entity within the
Negative amortization mortgages are loans whereby the payment made by the borrower may be less than the accrued interest due and the difference is added to the loan balance. When the accrued balance of the loan reaches the negative amortization limit (typically 110% to 125% of the original loan amount), the loan recalibrates to a fully amortizing level and a new minimum payment amount is determined.
Residential Mortgage Backed Security (RMBS) is an asset-backed security that is secured by a mortgage or collection of mortgages.
Trust Pass-Through securities are securities through which the holders participate in a trust. The assets of these trusts consist of debentures issued by an AEGON Group company.
Unlocking of DPAC and VOBA refers to the process of updating the DPAC or the VOBA amortization schedule to reflect changes between the past and current expectations of key assumptions used in the projection of future gross profits.
New premium production accident & health insurance 148 148 146 180 622 13 14 12 13 52 New premium production general insurance 14 15 14 15 58 1 Run-off businesses of 2010 have been restated to reflect the reclassification of the BOLI / COLI and Life reinsurance business to run-off businesses.
AEGON files annual reports with and furnishes other information to the Securities and Exchange Commission. You may read and copy any document filed with or furnished to the SEC by AEGON at the SEC’s public reference room at 450
The SEC allows AEGON to “incorporate by reference” information into this Annual Report, which means that: �� Incorporated documents are considered part of this Annual Report; and
�� AEGON can disclose important information to you by referring you to those documents.
AEGON undertakes no obligation to publicly update or revise any forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which merely reflect company expectations at the time of writing. Actual results may differ materially from expectations conveyed in forward-looking statements due to changes caused by various risks and uncertainties. Such risks and uncertainties include but are not limited to the following: � Changes in general economic conditions, particularly in the United States, the Netherlands and the United Kingdom.
� The effects of corporate bankruptcies and/or accounting restatements on the financial markets and the resulting decline in the value of equity and debt securities AEGON holds; � The effects of declining creditworthiness of certain private sector securities and the resulting decline in the value of sovereign exposure that AEGON holds.
� Reinsurers to whom AEGON has ceded significant underwriting risks may fail to meet their obligations.
� Changes in the availability of, and costs associated with, liquidity sources such as bank and capital markets funding, as well as conditions in the credit markets in general such as changes in borrower and counterparty creditworthiness.
� Increasing levels of competition in the United States, the Netherlands, the United Kingdom and emerging markets.
� Changes in laws and regulations, particularly those affecting AEGON’s operations, ability to hire and retain key personnel, the products the company sells, and the attractiveness of certain products to its consumers.
� Regulatory changes relating to the insurance industry in the jurisdictions in which AEGON operates.
� Lowering of one or more of insurer financial strength ratings of AEGON’s insurance subsidiaries and the adverse impact such action may have on the premium writings, policy retention, profitability of its insurance subsidiaries and liquidity.
� As AEGON’s operations support complex transactions and are highly dependent on the proper functioning of information technology, a computer system failure or security breach may disrupt the company’s business, damage its reputation and adversely affect its results of operations, financial condition and cash flows.
� Changes in accounting regulations and policies may affect AEGON’s reported results and shareholder’s equity.
Further details of potential risks and uncertainties affecting the company are described in the company’s filings with NYSE Euronext
Amsterdam and the US Securities and Exchange Commission, including the Annual Report. These forward-looking statements speak only as of the date of this document. Except as required by any applicable law or regulation, the company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the company’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
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