Investment contracts for account of policyholders 1, 2 4,214 19,290 21,940 83,098 1 The projected cash benefi t payments are based on managements’ best estimates of the expected gross benefi ts and expenses partially offset by the expected gross premiums, fees and charges relating to the existing business in force. Estimated cash benefi t payments are based on mortality, morbidity and lapse assumptions comparable with AEGON’s historical experience, modifi ed for recent observed trends. Actual payment obligations may differ if experience varies from these assumptions. The cash benefi t payments are presented on an undiscounted basis and are before deduction of tax and before reinsurance. The liability amount in our consolidated fi nancial statement refl ects the discounting for interest as well as adjustments for the timing of other factors as described above. As a result, the sum of the cash benefi t payments shown for all years in the table exceeds the corresponding liability amounts included in notes 19, 20 and 22. More details on the products, terms and conditions are included in note 4.1.
Some issuers have defaulted on their fi nancial obligations for various reasons, including bankruptcy, lack of liquidity, downturns in the economy or downturns in real estate values, operational failure and fraud. In the past, poor economic and investment climates in
AEGON’s major markets resulted in signifi cant investment impairments on AEGON’s investment assets due to defaults and overall declines in the securities markets. Credit default rates have been benign in 2005 and 2006. However, a return to excessive defaults or other reductions in the value of these securities and loans could have a material adverse effect on AEGON’s business, results of operations and fi nancial condition. AEGON manages credit risk exposure by individual counterparty, sector and asset class. It may mitigate credit risk in derivative contracts by entering in collateral agreements where practical and in International Swaps and
AEGON may also mitigate credit risk in reinsurance contracts where possible by retaining ownership of assets required to support liabilities ceded or by requiring the reinsurer to hold assets in trust.
The ratings distribution of general account portfolios of AEGON’s major country units are presented in the table that follows, organized by rating category.
Kingdom Other countries Total 1 2005 Rating category 101,088 28,202 4,831 4,332 138,776 149,312 1 Includes investments of Holding and other activities .
Refer to note 49 and note 50 for further information on capital commitments and contingencies and on collateral given, which may expose the Group to credit risk.
Country units apply specifi c guidelines for the acceptable levels of credit risk. AEGON monitors its aggregate exposure to credit counterparties at group level. For this purpose, AEGON aggregates exposures from its country units to assess overall credit risk. To manage its credit risk, AEGON has a single credit counterparty limit policy to be applied to all forms of credit risk. All forms of credit risk are required to be aggregated by counterparty and measured for compliance against country unit credit limits and group-wide credit limits. The group-wide limits are shown in the table that follows.
Credit rating Limit 1 The fi xed-income issuer rating is used when applying the credit counterparty limit exposure policy.
Notes to the consolidated fi nancial statements of AEGON Group Note 4.2
Kingdom Other countries Total 1 2005 Credit risk concentrations – shares 2,135 5,451 73 106 7,745 7,896 1 Includes investments of Holding and other activities.
Kingdom Other countries Total 2006 Total 2005 Credit risk concentrations – mortgages
Fluctuations in the equity, real estate and capital markets have adversely affected AEGON’s profi tability, capital position and sales of equity related products in the past and may continue to do so.
Examples of these products include variable annuities, variable universal life, unit-linked products and mutual funds. AEGON typically earns a fee on the asset balance in these products and therefore has a risk related to the investment performance. In addition, some of this business has minimum return or accumulation guarantees, which are often life contingent or contingent upon policyholder persistency. AEGON is at risk if equity market returns do not exceed these guarantee levels and the company may need to set up additional reserves to fund these future guaranteed benefi ts. AEGON
is also at risk if returns are not suffi cient to allow amortization of
DPAC and deferred transaction costs. It is possible under certain circumstances that AEGON would need to accelerate amortization of
DPAC and deferred transaction costs and to establish additional reserves for minimum guaranteed benefi ts, which would reduce net income and shareholders’ equity. Volatile or poor market conditions may also signifi cantly reduce the popularity of some of AEGON’s savings and investment products, which could lead to lower sales and lower net income.
The general account equity, real estate and other non-fi xed-income portfolio of AEGON USA and AEGON The Netherlands accounted for 99% of the total general account equity, real estate and other nonfi xed-income portfolio of the Group at December 31, 2006. Of
AEGON’s shareholders’ equity is directly exposed to, among other things, movements in the equity and real estate markets and to movements in interest rates. In addition, net income is sensitive to the fees earned on equity investments held for the account of policyholders as well as the amortization of DPAC and deferred transaction costs and provisioning for minimum product guarantees.
AEGON’s earnings depend signifi cantly upon the extent to which actual claims experience is consistent with the assumptions used in setting the prices for products and establishing the technical liabilities and liabilities for claims. To the extent that actual claims experience is less favorable than the underlying assumptions used in establishing such liabilities, income would be reduced. Furthermore, if these higher claims were part of a trend, AEGON may be required to increase liabilities, which could reduce income. In addition, certain acquisition costs related to the sale of new policies and the purchase of policies already in force have been recorded as assets on the balance sheet and are being amortized into income over time. If the assumptions relating to the future profi tability of these policies (such as future claims, investment income and expenses) are not realized, the amortization of these costs could be accelerated and may even require write offs due to unrecoverability. This could have a material adverse effect on AEGON’s business, results of operations and fi nancial condition.
AEGON monitors and manages its underwriting risk by underwriting risk type. Attribution analysis is performed on earnings and reserve movements in order to understand the source of any material variation in actual results from what was expected. AEGON’s units also perform experience studies for underwriting risk assumptions, comparing 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 fl exible in products, AEGON
Sensitivity analysis of net income and shareholders’ equity to various underwriting risks1,2.
Estimated approximate effects on net income/equity 20% increase in lapse rates (44)
10% decrease in mortality rates 88 10% increase in morbidity rates (61)
10% decrease in morbidity rates 61 1 Basic assumptions: no correlation between markets and risks, unchanged conditions for all other assets and liabilities and limited management actions taken. All changes are relative to net income and shareholders’ equity. Effects do not tend to be linear and therefore cannot be extrapolated for larger increases or decrease.
Life for account of policyholders 87 315 204 8 – – 614
Income before share in profi t/loss of associates and tax 2,140 1,035 330 57 (196) (8) 3,358
NET INCOME ATTRIBUTABLE TO EQUITY HOLDERS OF AEGON N.V. 1,553 1,040 232 36 (64) (8) 2,789
Fee – off balance sheet products 54 15 (40) 4 – – 33
Share in profi t/(loss) of associates – 4 – 16 – – 20
NET INCOME ATTRIBUTABLE TO EQUITY HOLDERS OF AEGON N.V. 1,617 1,014 144 211 (234) (20) 2,732
Fee – off balance sheet products (1) 26 5 6 – – 36
Income before share in profi t/loss of associates and tax 1,695 1,084 220 126 (356) 1 2,770
Income statement – Segment revenues 2006 Amounts in EUR million Americas
Holding and other activities – – – – 895 (845) 50
Net fair value and foreign exchange gains 612 264 15 5 45 (4) 937
Net gains on investments for account of policyholders 4,963 528 3,668 156 – (2) 9,313
Net fair value and foreign exchange losses (59) – – (23) (45) – (127)
Net losses on investments for account of policyholders (1) (156) (1,014) (3) – – (1,174)
Fee – off balance sheet products 459 269 142 20 – – 890
Net fair value and foreign exchange gains 270 303 13 2 117 (7) 698
Net losses on investments for account of policyholders – – – (2) – – (2)
Notes to the consolidated fi nancial statements of AEGON Group Note 5
Life for account of policyholders 1,168 2,720 6,476 130 – – 10,494
Fee – off balance sheet products 417 257 113 15 – – 802
Holding and other activities – – – – 837 (518) 319
Net gains on investments for account of policyholders 3,424 50 2,359 39 – 1 5,873
Net fair value and foreign exchange losses (114) (79) – (2) (4) – (199)
Net losses on investments for account of policyholders – – – (13) – – (13)
Interest charges and related fees (29) (60) (1) – (825) 517 (398)
1 Charges to policyholders in respect of income tax in AEGON UK to the amount of EUR 58 million are excluded from segment expenses and included in other non-operating income/(charges).
Impairment charges/(reversals) on fi nancial assets, excluding receivables 12 12 1 – – 25
Amortization of deferred expenses, VOBA and future servicing rights 1,004 242 176 54 – 1,476
Revenue from transactions between reporting segments were not material during the fi nancial period, with the exception of the interest income on intercompany loans issued by a holding company in the Holdings and other activities segment amounting to
EUR 845 million (2005: EUR 620 million and 2004: EUR 518 million).
Investment contracts for account of policyholders 11,201 798 52,075 23 – – 64,097
Investments for account of policyholders 47,448 19,782 59,379 974 – (36) 127,547
Fee – off balance sheet products 578 423 142 61 – – 1,204
Fee – off balance sheet products 516 172 170 56 – – 914 1 Segment assets include all assets, except income tax receivables.
Please refer to note 51 for information on the business combinations entered into by AEGON in 2005 and 2006. The deferred tax in 2006 relates to an adjustment to goodwill resulting from the subsequent recognition of a deferred tax asset for the acquisition of Nationwide
With the exception of goodwill, all intangible assets have a fi nite useful life and are amortized accordingly. VOBA and Future Servicing
Rights are amortized over the term of the related insurance contracts, which can vary signifi cantly depending on the maturity of the acquired portfolio. Software is generally amortized over a period of three to fi ve years.
Financial assets at fair value through profi t or loss (FVTPL) 1 7.4 9,548 10,739
TOTAL INVESTMENTS FOR GENERAL ACCOUNT 136,131 146,075 1 Refer to note 48 for a summary of all fi nancial assets and fi nancial liabilities at fair value through profi t or loss.
Deposits with fi nancial institutions – 1,995 – – 1,995 – 1,342 – – 1,342
Actual maturities are generally expected to differ from contractual maturities for mortgage loans, as borrowers may have the right to call or apply for earlier redemptions, with or without call or prepayment penalties.
As part of the AEGON Levensverzekering N.V. funding program the company regularly enters into securitization contracts for its mortgage loans. At December 31, 2006 a total of six publicly placed and one privately placed securitization contracts were outstanding with a total value of EUR 5.8 billion.
entered into a fi xed-to-fl oating swap agreement with the contract parties under which AEGON agreed to pay the fl oating rate
(EURIBOR based) and receive the fi xed rate (scheduled yield from the mortgage receivables). After a period of seven years, the interest of the notes issued by the special purpose company in respect of this transaction will step-up, together with a similar step-up in the fi xedto -fl oating swap agreement. At that same time, the special purpose company has the right to call the notes. A deferred purchase arrangement forming part of the contract to sell the mortgage loans
Notes to the consolidated fi nancial statements of AEGON Group Note 7 – 7.1
N.V. to any residual positive value of the special purpose entity at maturity. The value of this arrangement is included in the valuation of the interest rate swap as it is viewed as a correction on the assumptions underlying the cash fl ow forecasts. In 2005, AEGON
(2005: EUR 866 million). The acquisition of these securities was fi nanced by the QSPEs through issuance of fl oating rate notes at par value to third parties and issuance of a de minimus residual investment to AEGON. Upon early termination of a QSPE, up to 10%
AEGON owns EUR 113 million (2005: EUR 126 million) of shares in the
Federal Home Loan Bank of Des Moines, Iowa, that are measured at par. The bank has implicit fi nancial support from the United States government. The redemption value of the shares is fi xed at par and can only be redeemed by the bank.
Only insignifi cants amounts of unquoted equity instruments are measured at cost.
Refer to note 50 for a discussion of collateral received and paid.
Proceeds, realized gains and realized losses from sales of available-for-sale instruments 2006 2005
Receivables out of share lease agreements 373 – – 373 352 21
Notes to the consolidated fi nancial statements of AEGON Group Note 7.2 – 7.5
Net exchange differences (43) 49 94% of all properties were last valued in 2006. More than 99% of these valuations were performed by independent external appraisers.
AEGON The Netherlands has entered into long-term residential property leases that can be terminated subject to a short term notice. Under Dutch law, the maximum annual rent increase on residential property rented for less than EUR 615 per month is specifi ed by the Dutch national government and equals to the annual infl ation rate plus a small margin. Refer to note 49 for description of non-cancellable lease rights.
Rental income of EUR 90 million (2005: EUR 92 million; 2004: EUR 106 million) is reported as part of investment income in the income statement. Of this amount EUR 2 million (2005: EUR 3 million; 2004: EUR 1 million) is attributable to rent on foreclosed real estate.
61% of the real estate held for own use was last revalued in 2006, based on market value appraisals by qualifi ed internal and external appraisers. Approximately 75% of the appraisals in 2006 were performed by independent external appraisers.
Real estate held for own use has not been pledged as security for liabilities, nor are there any restrictions on title.
Refer to note 49 for a summary of contractual commitments for the acquisition of real estate held for own use.
Notes to the consolidated fi nancial statements of AEGON Group Note 7.6 – 8
No property interests held under operating leases are classifi ed and accounted for as investment property.
Rental income of EUR 90 million (2005: EUR 10 million; 2004: EUR 10 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.
AEGON uses derivative fi nancial instruments to hedge its exposures related to investments, liabilities and borrowings, to optimize credit risk exposure and as part of its ordinary underwriting activities.
A swaption is an option to enter into an interest rate swap at a specifi c future date.
Forward rate agreements/futures are commitments to purchase or sell a fi nancial instrument at a future date for a specifi c price.
Other derivative transactions are used to manage equity and credit related exposures. The main types of derivative fi nancial instruments used are equity swaps, options, futures and credit derivatives: An equity swap is a swap agreement in which one party makes payments based on either a fl oating index or a fi xed-rate, while the other party makes payments based on the return of an equity index, basket, or single shares.
Options are contracts that give the option purchaser the right, but not the obligation, to buy or sell, at or before a specifi ed future date, a fi nancial instrument at a specifi ed price.
Futures are contractual obligations to buy or sell fi nancial instruments on a future date at a specifi ed price.
Credit derivatives are contracts between two parties that allow for transfer of credit risk from one party to another. The party transferring the risk has to pay a fee to the party that assumes the risk.
A commonly used credit derivative instrument is a credit default swap. A credit default swap allows the transfer of third party credit risk from one party to another. In essence, the buyer of a credit default swap is insured against third party credit losses. If the third party defaults, the party providing insurance will have to purchase the defaulted asset from the insured party or settle net in cash.
AEGON holds fi nancial derivatives for trading purposes. It also utilizes derivative instruments as a part of its asset liability risk management practices. The derivatives held for risk management purposes are classifi ed as ‘Derivatives not designated in a hedge’ to the extent that they do not qualify for hedge accounting, or that
Derivatives are used to add risk by selling protection in the form of single name credit default swaps and tranches of synthetic collateralized debt and commodity obligations. Another strategy used is to synthetically replicate corporate credit exposures with credit derivatives. This involves the purchase of high quality low risk assets and the sale of credit derivatives. The program is designed to purchase asset positions that are already subject to review by management, but may not be available under the same terms and conditions in the cash bond market.
In addition to these instruments, embedded derivatives that are not closely related to the host contracts have been bifurcated and recorded at fair value in the balance sheet. These bifurcated embedded derivatives are embedded in various institutional products, modifi ed coinsurance and insurance contracts in the form of guarantees for minimum benefi ts.
The total values of these bifurcated embedded derivatives can be summarized as follows: Derivative asset Derivative liability
Paid guarantee benefi ts – – – – – – – –
Total 1 Guaranteed minimum accumulation and withdrawal benefi ts. 2 Fund plan and unit-linked guarantees.
In addition, AEGON reinsures the elective guaranteed minimum withdrawal benefi t rider issued with a ceding company’s variable annuity contracts. The rider is essentially a return of premium guarantee, which is payable over a period of at least fourteen years from the date that the policyholder elects to start withdrawals. At contract inception, the guaranteed remaining balance is equal to the premium payment. The periodic withdrawal is paid by the ceding company until the account value is insuffi cient to cover additional withdrawals. Once the account value is exhausted, AEGON pays the periodic withdrawals until the guaranteed remaining balance is exhausted. At December 31, 2006, the reinsured account value was
The reinsurance contract is accounted for as a derivative and is carried in AEGON’s balance sheet at fair value. At December 31, 2006, the contract had a value of EUR 15 million (2005: EUR 14 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 S&P 500 futures contracts 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.
AEGON has entered into cross-currency interest rate swap agreements that effectively convert certain foreign currency fi xedand fl oating-rate assets and liabilities to US dollar fl oating-rate assets and liabilities. These agreements involve the exchange of the underlying principal amounts.
EUR 37 million respectively. No portion of derivatives was excluded when assessing hedge effectiveness.
AEGON uses forward starting interest rate swap agreements to hedge the variability in future cash fl ows associated with the forecasted purchase of fi xed-income assets. These agreements reduce the impact of future interest rate changes on the forecasted transaction. Fair value adjustments for these interest rate swaps are deferred and recorded in equity until the occurrence of the forecasted transaction at which time the interest rate swaps will be terminated. The accumulated gain or loss in equity will be amortized into investment income as the acquired asset affects income. AEGON
is hedging its exposure to the variability of future cash fl ows from interest rate movements for terms up to sixteen and a half years.
In addition, AEGON also makes use of cross currency swaps to convert variable foreign currency cash fl ows into fi xed cash fl ows in local currencies. The cash fl ows from these hedging instruments are expected to occur over the next 30 - 35 years. These agreements involve the exchange of the underlying principal amounts.
Immaterial amounts of hedge ineffectiveness were recorded in the income statement during 2006, 2005 and 2004. The amount of deferred gains or losses to be reclassifi ed from equity into net income during the next twelve months is expected to be immaterial.
AEGON did not exclude any portion of the derivative when assessing hedge effectiveness.
AEGON funds its investments in insurance subsidiaries with a mixture of debt and equity. AEGON aims to denominate debt funding in the same currency as the functional currency of the investment.
The following table represents aggregate notional amounts and fair values of derivatives, held for own account as well as for account of policyholders. The notional amounts listed for interest rate contracts will not be exchanged by parties and, thus, do not refl ect an exposure of the company. The amounts listed for cross currency swaps, included under ‘Foreign exchange contracts’ will be exchanged at amounts calculated on the basis of the notional amounts and the terms of the derivatives, which are related to interest rates, exchange rates and/or certain indices.
The fair value of the derivatives refl ects the estimated amounts that
While management does not believe that such restrictions will affect the ability of these associates to transfer funds in the form of cash dividends, or repayment of loans or advances, there can be no assurance that these restrictions will not become a limitation in the future. There are also no unrecognized shares of losses of associates.
The summarized fi nancial 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.
Movements during the year in reinsurance assets relating to non-life insurance 2006 2005
At December 31, 2006, the reversion to the mean assumptions for variable products, primarily variable annuities, were as follows in the
(2005: 9%); and gross short-term growth rate of 9% (2005: 9.75%).
For both countries the reversion period for the short-term rate is fi ve years. For Hungary and the Eastern European countries, the assumption for the gross long-term growth rate on external investment funds was 5.27% (2005: 5.27%).
Notes to the consolidated fi nancial statements of AEGON Group Note 12 – 13.1
Included in the net book amounts of equipment are equipment held for lease of EUR 40 million (2005: EUR 66 million).
Equipment has not been pledged as security for liabilities, nor is there any restrictions on title.
Included in the balances for short-term deposits, money market investments and short term collateral is cash collateral received of
EUR 10.0 billion (2005: EUR 4.6 billion), of which EUR 8.5 billion
Dutch National Bank (DNB) requires AEGON The Netherlands to hold 2% of its assets relating to banking activities in an account with the
DNB. This amount on deposit is reassessed on a monthly basis and carries interest at approximately 2%. The balance at the end of the year was EUR 90 million (2005: EUR 103 million).
Furthermore, AEGON The Netherlands holds required funds related to post-employment benefi ts for former employees in a bank deposit, amounting to EUR 61 million at year end (2005: EUR 102 million).
decrease in operating assets and liabilities, excluding the effect of acquisitions and exchange rate differences on consolidation.
TOTAL SHAREHOLDERS’ EQUITY 19,137 19,276 14,875 15.1 SHARE CAPITAL – PAR VALUE
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 for a description of these requirements. Vereniging AEGON, based in The Hague, holds all of the issued preferred shares.
AEGON exercised its option rights to purchase in aggregate 5,440,000 class B preferred shares at par value to correct dilution caused by AEGON’s stock dividend issuances during the year.
Sale: three transactions on April 1, April 22 and July 19, average price EUR 10.29 – – (9,663)
On the balance sheet date AEGON N.V. and its subsidiaries held 40,809,710 of its own common shares with a face value of EUR 0.12 each. Movements in the number of repurchased own shares held by
The revaluation accounts for both available-for-sale investments and for real estate held for own use include unrealized gains and losses on these investments, net of tax. Upon sale, the amounts realized are recognized in the income statement or transferred to retained earnings. There are restrictions on the distribution of the balance of the revaluation reserve related to real estate held for own use to shareholders.
The closing balances of the revaluation reserve for available-for-sale investments relate to the following instruments: The cash fl ow hedging reserve is made up of unrealized gains and losses on the effective portions of hedging instruments, net of tax.
The amounts are recognized in the income statement at the moment of realization of the hedged position to offset the gain or loss from the hedged cash fl ow. No amounts have been released from equity to be included in the initial measurement of non-fi nancial assets or liabilities.
Movement in foreign currency translation and net foreign investment hedging reserves 2,143 (628) – 1,515
The equity movements of associates refl ect AEGON’s share of changes recognized directly in the associate’s equity.
USD 250 million fl oating LIBOR rate 1 March 15 2010 212 212 –
EUR 950 million fl oating CMT rate 2 January 15 2014 950 950 950
Coupon Coupon date Year of issue Year of maturity 2006 2005
Transamerica Corporation. The trust pass-through securities carry provisions with regard to deferral of distributions for extension periods up to a maximum of ten consecutive semi-annual periods.
USD 190 million 7.625% trust pass-through securities were partially redeemed in 2006 through a cash tender offer.
The trust pass-through securities are subordinated to all other unsubordinated borrowings and liabilities.
The fair value of these loans amounts to EUR 123 million (2005: EUR 574 million).
Notes to the consolidated fi nancial statements of AEGON Group Note 16 – 19
These loans are subordinated to all other unsubordinated borrowings and liabilities. There were no defaults or breaches of conditions during the period. The effective interest rate on the subordinated loan was 6.51% (2005: 6.51% to 8.18%). The fair value of these loans amounts to EUR 35 million (2005: EUR 309 million).
Losses recognized as a result of liability adequacy testing – 151
The following table provides information on the liabilities for guarantees that are included in the valuation of the host contracts: GMDB 1 GMIB 2 GMAB 3 2006 Total GMDB 1 GMIB 2 GMAB 3 2005 Total
1 Guaranteed minimum death benefi t in the United States. 2 Guaranteed minimum income benefi t in the United States.
3 Guaranteed minimum accumulation benefi t in the Netherlands. 4 Note that the variable annuity contracts with guarantees may offer more than one type of guarantee in each contract; therefore, the amounts listed are not mutually exclusive.
Refer to note 4 for a discussion of these guarantees for minimum benefi ts.
Gross premium and deposits – existing and new business 1,441 1,244
Included in the total balance for fi xed annuities is EUR 4,043 million
The balance of investment contracts with discretionary participation features refl ects the excess of the liability over the funded value of the units.
Notes to the consolidated fi nancial statements of AEGON Group Note 21 – 22
A portion of the balance of investment contract liabilities relates to such participations held by third parties, amounting to EUR 910 million
Debentures and other loans Coupon rate Issue / Maturity Coupon date 2006 2005
USD 100 million Domestic Debentures 1 9.375% 1996 / 08 Semi-annually 77 87
USD 147 million Domestic Debentures 1 6.4% 1998 / 08 Semi-annually 98 102
EUR 75 million Medium-Term Notes 4.625% 2004 / 19 December 9 74 79
USD 500 million Medium-Term Notes 1 5.75% 2005 / 20 December 15 379 434
Notes to the consolidated fi nancial statements of AEGON Group Note 23 – 25
Fair value of AEGON’s own fi nancial instruments included in plan assets 678 574
Fair value of other assets used by AEGON included in plan assets – 1
Actuarial (gains)/losses recognized on present value of defi ned benefi t obligation – 26 26
Movements during the year of the present value of the defi ned benefi t obligations 2006 2005
Assumed medical cost trend rates have an effect on the amounts reported for the health care plans. A one-percentage change in assumed medical cost trend rates would have the following effects: Aggregate of current service cost and interest cost components of net periodic post-employment medical costs 2 (1) 1 (1)
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 defi ned benefi t plans and a description of the basis used to determine the overall expected rate of return on plan assets.
AEGON USA has defi ned benefi t plans covering substantially all its employees that are qualifi ed under the Internal Revenue Service Code.
AEGON USA also sponsors supplemental retirement plans to provide senior management with benefi ts in excess of normal pension benefi ts. These plans are unfunded and non-qualifi ed under the
Assumptions used to determine benefi t obligations at year-end 2006 2005
Assumptions used to determine net periodic benefi t cost for the year ended December 31
December 31, 2006 (that is at January 1, 2006) are as follows: Assumed health care trend rates
Health care cost trend rate assumed for next year 8.00% 9.00%
Year that the rate reaches the rate that it is assumed to remain at 2009 2009
AEGON The Netherlands has a defi ned benefi t plan. The contributions to the retirement benefi t plan of AEGON The Netherlands are paid by both the employees and employer, with the employer contribution being variable. The benefi ts covered are retirement benefi ts, disability, death and survivor pension and are based on an average salary system. Employees earning more than EUR 40,039 per year
The Netherlands for retirement benefi ts do not meet the defi nition 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 do not form part of the calculation of defi ned benefi t expenses.
AEGON The Netherlands also has a post-retirement medical plan that contributes to the health care coverage of employees and benefi ciaries after retirement. The liability related to this plan amounted to EUR 61 million at December 31, 2006.
Notes to the consolidated fi nancial statements of AEGON Group Note 25
Rate that the cost trend rate gradually declines to 2.00% 2.50%
Year that the rate reaches the rate it is assumed to remain at N/A 2014
Equitable plc. The scheme is closed to new entrants. Under IAS 19, the defi ned benefi t plan has a defi cit of EUR 234 million at
The target asset allocation is moving over time to a target of 65%
The other countries mostly operate defi ned contribution plans, with the exception of smaller defi ned benefi t plans in AEGON Canada,
Acquisitions through business combinations – – – – – – 14 14
Notes to the consolidated fi nancial statements of AEGON Group Note 26 – 27
Deferred income tax assets are recognized for tax losses carried forward to the extent that the realization of the related tax benefi t through the future taxable profi ts is probable. For an amount of
EUR 49 million (2005: EUR 10 million) the realization of the deferred tax asset is dependent on future taxable profi ts in excess of the profi ts arising from the reversal of existing taxable temporary differences.
AEGON did not recognize deferred income tax assets in respect of losses amounting to EUR 642 million (2005: EUR 474 million)
Investment income from: - Bonds and money market instruments 7,591 7,522 6,894
Impairment charges on non-fi nancial assets and receivables 9 12 96 35 NET GAINS AND LOSSES ON INVESTMENTS FOR ACCOUNT OF POLICYHOLDERS
Net gains on investments for account of policyholders 9,313 11,340 5,873
Net losses on investments for account of policyholders 1,174 2 13
Investments for account of policyholders comprise of fi nancial assets, investments in real estate and real estate for own use. Refer to note 8 for further information. Financial assets for account of policyholders are classifi ed as at fair value through profi t or loss.
Net gains on investments for account of policyholders comprise 2006 2005 2004
Positive fair value changes of investments in real estate for account of policyholders 187 100 53
Negative fair value changes of for account of policyholder fi nancial assets at fair value through profi t or loss 1,174 2 13
Fair value gains on economic hedges for which no hedge accounting is applied 7 311 372
Fair value losses on economic hedges for which no hedge accounting is applied 300 112 1
Change in valuation of liabilities for insurance and investment contracts 14,651 17,782 15,718 39 PROFIT SHARING AND REBATES
Included in administration expenses above is depreciation amounting to EUR 112 million (2005: EUR 125 million and 2004: EUR 264 million)
The direct operating expenses relating to investments in real estate that generated rental income was EUR 32 million (2005: EUR 33 million and 2004: EUR 25 million). Minimum lease payments recognized as expense amounted to EUR 6 million.
employees, have been offered both share appreciation rights and share options. These share appreciation rights and share options have been granted at an exercise price equal to the market price of the shares at the date of the grant. The rights and options granted in 2006, 2005 and 2004 vest after three years and can only be exercised during the four years after the vesting date. The rights and options granted in 2003 and 2002 vest after two years and can only be exercised during the fi ve years after the vesting date. The plan for 2001 can be exercised three years after being granted and then during a period of two years. Vesting and exercisability depend on continuing employment of the individual employee to which the rights and options have been granted. Option plans are settled in equity, whilst stock appreciation rights are settled in cash or provide the employee with the choice of settlement.
The liability related to share appreciation rights is valued at fair value at each balance sheet date. Refer to note 28 for details. The costs related to the share appreciation rights amount to EUR 26 million
The weighted average share price at which the share options were exercised in 2006 is EUR 13.28 (2005: EUR 11.14).
The costs related to the share options amount to EUR 13 million
The fair value of a share appreciation right or share option at the grant date in 2006 amounted to EUR 3.14 (2005: EUR 2.32 and 2004: EUR 2.73). These amounts are equal to the weighted average fair value for the respective years.
The total intrinsic value of share options exercised and SARs paid during 2006 amounts to EUR 11 million (2005: EUR 17 million and 2004: nil).
At December 31, 2006, the total compensation cost related to nonvested awards not yet recognized is estimated at EUR 27 million.
The weighted average period over which it is expected to be recognized is 1.5 years.
No cash is received from exercise of share options during 2006, 2005 and 2004. Cash used to settle share appreciation rights amounts to EUR 10 million in 2006 (2005: EUR 18 million and 2004: nil).
Refer to note 53 for detailed information about the SARs/share options and the shares and options conditionally granted to the
Notes to the consolidated fi nancial statements of AEGON Group Note 40 – 43
Impact of impairments on the valuation of insurance assets and liabilities – (1) (13)
Belgium S.A. (Dexia) in connection with AEGON’s sale in 2000 of
Labouchère, at that time a subsidiary company of AEGON. Dexia had alleged that AEGON had made certain misrepresentations and breached certain warranties contained in the purchase agreement.
The alleged misrepresentations and breaches of warranties related to securities leasing products sold by Labouchère. Without admitting the claims brought by BIL and Dexia, AEGON agreed to pay EUR 218 million in cash to BIL and Dexia in full and fi nal settlement of all and any claims in this regard. The settlement amount was paid on
Deferred tax - Origination / (reversal) of temporary differences 27 444 245 164 - Changes in tax rates/bases (80) (48) (49)
Income tax calculated using weighted average applicable statutory rates 1,100 1,217 956
Difference due to the effects of: - Non-tax deductible expenses 22 8 79 - Changes in tax rate/base (80) (48) (49)
September 1, 2006 in addition to the already existing corporate tax rate of 16%. The solidarity tax is imposed on the Hungarian accounting profi t before tax adjusted for specifi c items. The general corporate income tax rate of 21% for Canada will be reduced in 2008 to 20.5%, in 2009 to 20% and in 2010 to 19%.
Basic earnings per share is calculated by dividing the net income attributable to equity holders, after deduction of preferred dividends declared and accrued coupons on perpetuals, by the weighted average number of ordinary shares, excluding ordinary shares purchased by the company and held as treasury shares (refer to note 15).
assumed that all dilutive share options have been exercised at the exercise price, or adjusted exercise price if necessary. The proceeds are regarded as having been received from the issue of ordinary shares at the average market price of the AEGON N.V. share during the year. The difference between the number of dilutive options issued and the number of ordinary shares that would have been issued at the average market price has been treated as an issue of ordinary shares for no consideration.
NET INCOME ATTRIBUTABLE TO ORDINARY SHAREHOLDERS FOR DILUTED EARNINGS PER SHARE CALCULATION 2,566 2,521 2,077
and 2005 (interim 2005 and fi nal 2004) were EUR 0.47 and EUR 0.43 respectively. A fi nal dividend in respect of bookyear 2006 of EUR 0.31 per share, resulting in a total dividend of EUR 0.55 per share for 2006, is to be proposed at the annual General Meeting of Shareholders on
Commissioners. At December 31, 2006, the combined risk-based capital ratio of AEGON’s life insurance subsidiaries in the United
United Kingdom under the Financial Services and Markets Act 2000 and sets minimum standards for capital adequacy and solvency.
The required solvency margin shown in the table that follows is the sum of the individual margins of all AEGON’s insurance and banking companies based on European directives implemented in Dutch legislation. Liability capital available includes shareholders’ equity, capital securities and subordinated loans of the Group.
The table that follows reconciles total shareholders’ equity to the total capital base: Notes to the consolidated fi nancial statements of AEGON Group Note 46 – 48
The table that follows summarizes the carrying amounts of fi nancial assets and fi nancial liabilities that are classifi ed as at fair value through profi t or loss, with appropriate distinction between those fi nancial assets and fi nancial liabilities held for trading and those that, upon initial recognition, were designated as at fair value through profi t or loss.
Derivatives with positive values not designated as hedges 1,233 – 1,498 –
TOTAL FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS 2,018 141,823 2,272 136,106
Derivatives with negative values not designated as hedges 1,137 – 1,368 –
The Group manages certain portfolios on a total return basis which have been designated as at fair value through profi t or loss. This includes portfolio 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 investment that include an embedded derivative that would otherwise have required bifurcation, such as convertible instruments, preferred shares and credit linked notes, have been designated as at fair value through profi t or loss.
With the exception of the fi nancial liabilities with discretionary participating features that are not subject to the classifi cation and measurement requirements for fi nancial instruments, all investment contracts for account of policyholders that are carried at fair value or at the fair value of the linked assets are included in the table on page 211.
Gains and losses recognized in the income statement on fi nancial assets and fi nancial liabilities classifi ed as at fair value through profi t or loss can be summarized as follows: Trading Designated Trading Designated
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 2007. The amounts represent the future outfl ow and infl ow, respectively, of cash related to these investment transactions that are not refl ected in the consolidated balance sheet.
United States. Standby letters of credit amounts refl ected above are the liquidity commitment notional amounts.
On November 1, 2006, AEGON entered into an agreement to acquire 100% of the outstanding common shares of Clark Inc. (Clark), a public company specializing in the sale of corporate-owned life insurance, bank-owned life insurance and other benefi t programs.
The acquisition is expected to be closed in March 2007, after the publication date of the 2006 fi nancial statements. The estimated aggregate purchase price is approximately EUR 273 million, consisting of EUR 208 million cash consideration, EUR 44 million of
Group. The transactions are expected to be completed in the second half of 2007.
AEGON N.V. or the Group. However, there can be no assurances that
AEGON will be able to resolve existing litigation in the manner it expects or that existing or future litigation will not result in unexpected liability.
In addition, in recent years, the insurance industry has increasingly been the subject of litigation, investigations and regulatory activity by various governmental and enforcement authorities concerning certain practices. AEGON subsidiaries have received inquiries from local authorities in various jurisdictions including the United States, the United Kingdom and the Netherlands. In certain instances,
AEGON subsidiaries modifi ed business practices in response to such inquiries or the fi ndings thereof. Certain AEGON subsidiaries have been informed that the regulators may seek fi nes or other monetary penalties or changes in the way AEGON conducts its business.
When AEGON pays cash collateral as part of security borrowing or reverse repurchase transactions, an asset is recorded to receive back the cash pledged. The balance of these receivables, as also refl ected in note 13, are as follows: Cash collateral paid as part of security borrowing 34 –
AEGON does not account for the receipt of the securities, as the
received EUR 23 billion (2005: EUR 22 billion) of cash and non cash collateral. For cash collateral received, AEGON recognized a liability to repay the cash, which is included in other liabilities in note 28, for the following amounts: Cash collateral repayable on security lending and repurchase agreements 9,315 3,917 51 BUSINESS COMBINATIONS
(CB), have reached an agreement to establish a 50/50 joint venture to sell life insurance, accident insurance and pension products through the branch network of CB. The new entity, Caja de Badajoz Vida y
As a consequence of the acquisition goodwill of EUR 20 million was reported.
Ubezpieczen na Zycie S.A. (Nationwide Poland) in early October 2005 and consolidated the business as of October 1, 2005.
March by Scottish Equitable International S.A. prior to the sale was
is a 35% associate of AEGON. 35% of the gain on the sale was eliminated on consolidation.
Notes to the consolidated fi nancial statements of AEGON Group Note 51 – 52
concluded that it controls the limited partnership and has included the entity in its consolidated fi nancial statements.
AEGON has less than half of the voting power of SERVES, an entity whose primary activity is participating in a total return swap based on the performance of a portfolio of bank loans. In addition to its equity interest (EUR 67 million), AEGON is the owner of 100% of the debt issued by the entity and serves as the investment manager of the bank loan portfolio. As a result, AEGON concluded that it controls the entity and should include the entity in its consolidated fi nancial statements.
Summarized fi nancial information of joint ventures for 2006 accounted for using proportionate consolidation
Partners LP (‘Prisma LP’) which serves as an investment manager for certain of AEGON’s hedge fund investments as well as for other third parties, in exchange for management fees. Two unrelated entities, Prisma Capital Partners I, LP and Prisma Capital Partners
EH LLC own 31% and 8% of Prisma LP, respectively. An unrelated entity, Prisma GP LLC is the general partner with a 1% interest and is responsible for day-to-day activities. A management board with seven voting members (three appointed by AEGON, three appointed by Prisma GP LLC and one independent member appointed collectively by the other six voting members) must approve certain actions, including restructuring transactions, hiring senior management and the annual operating budget. As a result, notwithstanding our 60% economic interest, AEGON can not exercise voting control since we only appoint three out of the seven board members, AEGON cannot remove the majority of the management board members and AEGON does not have other arrangements, contractual or otherwise, that would give AEGON
Related party transactions for the period under review include transactions between AEGON N.V and Vereniging AEGON, as well as selling a 100% subsidiary to the associate La Mondiale
International SA for EUR 29 million to La Mondiale Participations S.A., a 35 % associate. Details of the transaction are provided in note 51.
Notes to the consolidated fi nancial statements of AEGON Group Note 52 – 53
3 Other periodic payments are additional remuneration elements, including social security contributions borne by the Group. For Mr. Shepard, the Group has also borne expenses and non-monetary benefi ts which are provided in his employment agreement with AEGON. These benefi ts include compensation to the extent that the total actual annual taxation on his total income exceeds the taxation if he were only subject to U.S. taxes, personal life insurance and tax planning. The 2006 amount is affected by the expiration of a tax ruling as a result of which employer and employee pension contributions are no longer tax deferred in the Netherlands. For Mr. Wynaendts, the amount also includes compensation for relocation and cost of living related to his temporary secondment to AEGON USA in 2005 and 2006.
AEGON’s total shareholders return performance relative to that of the peer group over a three-year period. The number of shares and options vesting after the three year period is in the range from 0%
to 200% of the granted number. The number of shares and options in the table represent a 100% vesting of the grant (target award).
Reference period 1 These shares have not vested in 2006 and have subsequently expired.
Number of exercisable options Exercise price Reference period 1 These shares have not vested in 2006 and have subsequently expired.
The numbers of shares and options conditionally granted were based on the closing price on the day of the grant. This was also the exercise price of the options.
The fair value information on the conditionally granted shares will be provided when the shares and options vest.
J.G. van der Werf 12-Mar-01 50,000 50,000 1 Share appreciation rights. 2 The share appreciation rights were granted before becoming a member of the Executive Board.
At the balance sheet date, the following members of the Executive
floating-rate at year end; and Mr. Wynaendts had two mortgage loans totalling EUR 635,292, with interest rates of 3.9% and 4.1%
‘Zwartkruis formula’, which means that the severance payment would be calculated on the basis of and depending on age, years of service, functional level and the probability of finding an equivalent position. Messrs. Van der Werf and Wynaendts would be entitled to three years’ fixed salary, only in the case of termination in connection with a merger or take-over.
C. Sobel (from April 25, 2006 up to July 17, 2006) 9,231 – –
On January 19, 2007 AEGON announced the signing of a memorandum of understanding with Banca Transilvania to jointly develop and operate a mandatory pension company in Romania. The 50/50 joint venture company will be established in the summer of 2007 in anticipation of introduction of a mandatory pension system in
Romania, expected by early 2008. In addition AEGON will establish a life insurance company in Romania that will enter into a distribution agreement with Banca Transilvania to sell co-branded products through the bank’s branch network.
On January 25, 2007 AEGON N.V. and Sony Life Insurance Co., Ltd.
On January 29, 2007 AEGON announced that it successfully completed a transaction involving a private Value of in-force (ViF)
(GBP 90 million) to the total core capital of AEGON. The capital created by the transaction will be used by AEGON UK to return capital to the Group. These transactions provide the company with fl exible solutions that help manage reserves and capital in a cost effi cient manner. AEGON will continue to explore further opportunities for securitizations and structured fi nancing as part of its ongoing commitment to effi ciently manage capital and reserve needs.
We have audited the accompanying consolidated fi nancial statements for the year 2006 (as set out on pages 98 to 223) which are part of the fi nancial statements of AEGON N.V., The Hague, which comprise the consolidated balance sheet as at December, 31, 2006, the consolidated income statement, statement of changes in equity and cash fl ow statement for the year then ended and a summary of signifi cant accounting policies and other explanatory notes.
Netherlands Civil Code. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of the consolidated fi nancial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.
Our responsibility is to express an opinion on the consolidated fi nancial statements based on our audit. We conducted our audit in accordance with Dutch law. This law requires that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the consolidated fi nancial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated fi nancial statements. The procedures selected depend on the auditors’
judgment, including the assessment of the risks of material misstatement of the consolidated fi nancial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated fi nancial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated fi nancial statements.
In our opinion, the consolidated fi nancial statements give a true and fair view of the fi nancial position of AEGON N.V. as at December 31, 2006, and of its result and its cash fl ows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union and with Part 9 of Book 2 of the
Netherlands Civil Code, we report, to the extent of our competence, that the Report of the Executive Board is consistent with the consolidated fi nancial statements as required by 2:391 sub 4 of the
BALANCE SHEET OF AEGON N.V. AS AT DECEMBER 31, 2006 Financial information
INCOME STATEMENT OF AEGON N.V. FOR THE YEAR ENDED DECEMBER 31, 2006
AEGON N.V., incorporated and domiciled in the Netherlands, is a limited liability share company organized under Dutch law and recorded in the Commercial Register of The Hague under its registered address at AEGONplein 50, 2591 TV The Hague. AEGON
The fi nancial statements have been prepared in accordance with accounting principles in the Netherlands as embodied in Part 9 of
International Financial Reporting Standards (IFRS), as used for the preparation of the consolidated fi nancial statements of the Group.
Part 9 of Book 2 of the Netherlands Civil Code has been applied, allowing a simplifi ed format.
The group companies are stated at their net asset value, determined on the basis of IFRS as applied in the consolidated fi nancial statements of the Group. For details on the accounting policies applied for the group companies refer to the consolidated fi nancial statements on page 105 and following.
Other assets include fi xed assets, derivatives with positive fair values, other receivables and prepaid expenses. Other receivables are recognized at fair value when due and are subsequently measured at amortized cost.
An asset is impaired if the carrying amount exceeds the amount that would be recovered through its use or sale. Tangible, intangible and fi nancial assets, if not held at fair value through profi t 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.
NOTES TO THE FINANCIAL STATEMENTS OF AEGON N.V. Amounts in EUR million, unless otherwise stated
Financial instruments that are issued by the company are classifi ed as equity if they evidence a residual interest in the assets of the company after deducting all of its liabilities. In addition to common shares and preferred shares, the company has issued perpetual securities that are classifi ed as equity, rather than as debt, as these securities have no fi nal maturity date, repayment is at the discretion of the issuer and AEGON has the option to defer coupon payments at its discretion. These securities are measured at par and are translated using historical exchange rates.
The fi nancial statements are adjusted to refl ect events that occurred between the balance sheet date and the date when the fi nancial statements are authorized for issue, provided they give evidence of conditions that existed at the balance sheet date.
In the years 2003 through 2005 23,850,000 class B preferred shares were issued under these option rights. In 2006, Vereniging
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
In both 2001 and 2002, AEGON N.V. entered into total return swaps with Vereniging AEGON in order to hedge the share option plan for each respective year. On April 15, 2005, these total return swaps were terminated, resulting in a positive impact on shareholders’
Notes to the fi nancial statements of AEGON N.V. Note 7
For detailed information on share appreciation rights and share options granted to senior executives and other AEGON employees, refer to note 40 on page 203 of the consolidated fi nancial statements of the Group.
Board along with information about shares held in AEGON by the members of the Boards is included on page 219 of the consolidated fi nancial statements of the Group.
Net income 2005 retained – – 2,256 (2,256) – – –
Coupons on perpetuals, net of tax – – (132) – – – (132)
Changes in equity from relation with shareholders 8 214 (188) – – – 34
Net income 2005 retained – – 2,732 (2,732) – – –
Changes in revaluation subsidiaries – – – – (645) – (645)
(2005: EUR 760 million). The amounts are released to the income statement upon the sale of the subsidiary. In case of a negative balance, no distributions can be made out of the retained earnings to the level of this negative amount.
Sale: one transaction on January 13, price EUR 13.71 and one transaction on March 31, price EUR 13.22 (3,000) –
USD 250 million fl oating LIBOR rate March 15 2010 212 212
USD 500 million fl oating CMS rate January 15 2014 402 402
The coupon of the USD 250 million junior perpetual capital securities, callable in 2010, is based on the yield of three-month
LIBOR yield, with a minimum of 4%. The coupon of the euro junior perpetual capital securities is based on the yield of ten-year Dutch government bonds (‘CMT’) plus an additional spread of ten basis points. The coupon will be reset each quarter based on the then prevailing ten-year Dutch government bond yield, with a maximum of 8%. The coupon of the USD 500 million junior perpetual capital securities, callable in 2014, is based on the yield of ten-year US dollar interest rate swaps (‘CMS’), with an additional spread of ten basis points.
The coupon for the EUR 114 million 8% bonds was set at 8% until
June 8, 2005. As of this date, the coupon is set at 4.156% until 2015.
The coupon for the EUR 136 million 7.25% bonds is set at 7.25% until
October 14, 2008, while the coupon for the EUR 203 million 7.125%
bonds is set at 7.125% until March 4, 2011. On these dates, and after every consecutive period of ten years, the coupons will be reset at the then prevailing effective yield of nine- to ten-year Dutch government securities and 0.85%.
The coupon of the EUR 114 million with an interest rate of 7.625%
The market value of the long-term liabilities amounts to EUR 2,603 million (2005: EUR 2,712 million).
Other than the Executive Board, there were no employees employed by AEGON N.V. in either 2006 or 2005.
Japan. The 50/50 joint venture will develop annuity products, initially focusing on variable annuity products that will be distributed though Sony Life’s Lifplanner® channel as well as through banks an other fi nancial institutions. The partnership between AEGON and
3. From the net profi t as refl ected in the profi t and loss account, if it is suffi cient to this end after a part of the profi t has been set aside for augmenting and/or forming reserves in accordance with 2, fi rst of all the holders of preferred shares shall receive, on the amount paid on their preferred shares, a dividend the percentage of which, on an annual basis, shall be equal to the
European Central Bank’s fi xed interest percentage for basic refi nancing transactions, to be increased by 1.75 percentage points, all applicable to the fi rst trading day on Euronext
Amsterdam in the fi nancial year to which the dividend relates.
4. The profi ts remaining after application of the above shall be put at the disposal of the General Meeting of Shareholders. The
or as a payment in common shares, in all cases out of the profi t and/or at the expense of reserves. Subject to the approval of the
In accordance with article 32, paragraph 3 of the Articles of
Incorporation, a cash dividend equal to 4% of the amount paid on the preferred shares will be distributed.
Upon approval of this proposal, profi t will be appropriated as follows: Dividend on preferred shares 85 79
N.V., giving it voting majority in AEGON N.V. At that time Vereniging
Vereniging AEGON. AEGON N.V. subsequently sold these common shares in a global offering. The purchase price for the 206,400,000 common shares sold by Vereniging AEGON to AEGON N.V. was
to approximately 12% and its benefi cial ownership interest in AEGON
N.V.’s voting shares (excluding issued common shares held in treasury by AEGON N.V.) decreased from approximately 52% to approximately 33%.
AEGON’s corporate governance structure and AEGON’s relationship with Vereniging AEGON in an extraordinary General Meeting of
In the years 2003 through 2005 23,850,000 class B preferred shares were issued under these option rights. In 2006,
at December 31, 2006, amounts to approximately 22.61%. In the event of a ‘special cause’, Vereniging AEGON’s voting rights will increase, currently to 32.29%, for up to six months per ‘special cause’.
Vereniging AEGON consisted of eighteen members. The majority of the voting rights is with the sixteen members not being employees or former employees of AEGON N.V. or one of the AEGON group companies, nor current or former members of the Supervisory Board or the Executive Board of AEGON N.V. The two other members are both elected by the General Meeting of Members of Vereniging
AEGON from among the members of the Executive Board of AEGON N.V.
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
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
We have audited the accompanying company fi nancial statements for the year 2006 (as set out on pages 225 to 239) which are part of the fi nancial statements of AEGON N.V., The Hague, which comprise the balance sheet as at December, 31 2006, the income statement for the year then ended and the notes.
In our opinion, the company fi nancial statements give a true and fair view of the fi nancial position of AEGON N.V. as at December, 31 2006, and of its result for the year then ended in accordance with Part 9 of
By product segment 60 14 90 79 243 Life for account of policyholders 320 127 74 93 614 20 32 (9) (10) 33 Fee - off balance sheet products 14 14 14 33 75 204 27 22 24 277 Other non-operating income/(charges) 38 (29) 39 38 86 3 11 (2) 8 20 Share in profi t/(loss) of associates 6 7 6 13 32
Standardized new premium production insurance (life total recurring plus 1/10 single) 686 737 756 872 3,051
Actuarial gains and losses relate to the accounting for postemployment benefi t plans. They comprise the effects of experience adjust ments and changes in assumptions used to determine the cost of a plan.
Business combination is the bringing together of separate entities or operations of entities into one reporting entity. This can be realized through a purchase transaction or by means of a merger. A
under common control is a business combination in which all of the combining entities (or operations of entities) ultimately are controlled by the same party or parties both before and after the combination, and that control is not transitory.
Cash generating unit is the smallest identifi able group of assets that generates cash infl ows that are largely independent of the cash infl ows from other assets or groups of assets.
These costs include internal administration and payout costs, but also such items as attorney’s fees and investigation expenses.
Compound fi nancial instruments are fi nancial instruments that, from the issuer’s perspective, contain both a liability and an equity element.
Defi ned benefi t obligation is the present value, without deducting any plan assets, of expected future payments required to settle the obligation resulting from employee service in the current and prior periods.
Defi ned benefi t plans are post-employment benefi t plans other than defi ned contribution plans.
Defi ned contribution plans are post-employment benefi t plans under which an entity pays fi xed contributions into a separate entity
Discretionary participation feature is a contractual right to receive, as a supplement to guaranteed benefi ts, additional benefi ts: That are likely to be a signifi cant portion of the total contractual benefi ts; Whose amount or timing is contractually at the discretion of the issuer; and
That are contractually based on: • The performance of a specifi ed pool of contracts or a specifi ed type of contract; • Realized and/or unrealized investment returns on a specifi ed pool of assets held by the issuer; or
Effective interest rate method is a method of calculating the amortized cost of a fi nancial asset or liability 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 fi nancial instrument or, when appropriate, a shorter period to the net carrying amount of the fi nancial asset or liability.
Embedded derivative is a component of a hybrid instrument that also includes a non-derivative host contract, with the effect that some of the cash fl ows of the combined instrument vary in a way similar to a derivative.
Equity method is a method of accounting whereby the investment is initially recognized at cost and adjusted thereafter for the postacquisition change in the investor’s share of net assets of the investee. The profi t or loss of the investor includes the investor’s share of the profi t or loss of the investee.
• A non-derivative for which the entity is or may be obliged to receive a variable number of the entity’s own equity instruments; or
Financial liability is any liability that is: A contractual obligation to deliver cash or another fi nancial asset to another entity or to exchange fi nancial assets or fi nancial liabilities with another entity under conditions that are potentially unfavorable to the entity; or
• 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 risks are risks of a possible future change in one or more of the following variables: a specifi ed interest rate, fi nancial instrument price, commodity price, foreign exchange rate, index or prices or rates, credit rating or credit index or other variable, provided in the case of a non-fi nancial variable, that the variable is not specifi c to a party to the contract.
Firm commitment is a binding agreement for the exchange of a specifi ed quantity of resources at a specifi ed price on a specifi ed future date or dates.
Goodwill is the amount of future economic benefi ts arising from assets that are not capable of being individually identifi ed and separately recognized as an asset in a business combination.
Insurance risk is a risk, other than fi nancial risk, transferred from the holder of a contract to the issuer.
Liability adequacy testing is an assessment of whether the carrying amount of an insurance liability needs to be increased (or the carrying amount of related deferred acquisition costs or related intangible assets decreased) based on a review of future cash fl ows.
Liquidity risk is the risk that an entity will encounter diffi culty in raising funds to meet commitments associated with fi nancial instruments.
Master netting agreement is an agreement providing for an entity that undertakes a number of fi nancial instrument transactions with a single counterparty to make a single net settlement of all fi nancial instruments covered by the agreement in the event of default on, or termination of, any contract.
Minority interests are that portion of the profi t or loss and net assets of a subsidiary attributable to equity interests that are not owned, directly or indirectly through subsidiaries, by the parent.
Monetary items are units of currency held and assets and liabilities to be received or paid in a fi xed or determinable number of units of currency.
Past service cost is the increase in the present value of the defi ned benefi t obligation for employee service in prior periods, resulting in the current period from the introduction of, or changes to, postemployment benefi ts.
Presentation currency is the currency in which the fi nancial statements are presented.
Private loan is a non-derivative fi nancial asset with a fi xed interest rate and a maturity date, which is not bought in an active market but negotiated between the two parties involved. Private loans are not embodied in securities. When a private loan takes the form of a private placement of bonds or other investments directly to an institutional investor like an insurance company, it has more the character of a bond loan and such fi nancial instruments are classifi ed as available-for-sale investments rather than as loans and receivables.
Recognition is the process of incorporating in the balance sheet or income statement an item that meets the defi nition of an element and satisfi es the following criteria for recognition: It is probable that any future economic benefi t associated with the item will fl ow to or from the entity; and
The item has a cost or value that can be measured with reliability.
Renewal of a contract is when a policyholder takes whatever action is required, typically payment of a premium, in order to maintain benefi ts under the contract.
Reverse repurchase agreement is a purchase of securities with the agreement to resell them at a later specifi ed date and price.
Settlement date is the date that a fi nancial asset is delivered to the entity that purchased it.
Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a fi nancial asset or liability.
DPAC or the VOBA amortization schedule to refl ect changes between the past and current expectations of key assumptions used in the projection of future gross profi ts.
Editing and production AEGON Group Corporate Affairs and Investor Relations (NL)
The frequency and severity of insured loss events; Changes affecting mortality, morbidity and other factors that may impact the profi tability of our insurance products; Changes affecting interest rate levels and continuing low or rapidly changing interest rate levels; Changes affecting currency exchange rates, in particular the
Netherlands, the United Kingdom and emerging markets; Changes in laws and regulations, particularly those affecting our operations, the products we sell, and the attractiveness of certain products to our consumers; Regulatory changes relating to the insurance industry in the jurisdictions in which we operate; Acts of God, acts of terrorism, acts of war and pandemics; Changes in the policies of central banks and/or governments; Litigation or regulatory action that could require us to pay signifi cant damages or change the way we do business; Customer responsiveness to both new products and distribution channels; Competitive, legal, regulatory, or tax changes that affect the distribution cost of or demand for our products; Our failure to achieve anticipated levels of earnings or operational effi ciencies as well as other cost saving initiatives; and
The statements contained in this Annual Report that are not historical facts are forward-looking statements as defi ned in the US Private
Securities Litigation Reform Act of 1995. The following are words that identify such forward-looking statements: believe, estimate, target, intend, may, expect, anticipate, predict, project, counting on, plan, continue, want, forecast, should, would, is confi dent, will, and similar expressions as they relate to our company. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are diffi cult to predict. We undertake no obligation to publicly update or revise any forward-looking statements.
Readers are cautioned not to place undue reliance on these forwardlooking statements, which merely refl ect 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; Changes in the performance of fi nancial markets, including emerging markets, such as with regard to: • The frequency and severity of defaults by issuers in our fi xed income investment portfolios; and
• The effects of corporate bankruptcies and/or accounting restatements on the fi nancial markets and the resulting decline in the value of equity and debt securities we hold;