Colophon Consultancy and design Pauffley, London (UK) Editing and production AEGON Group Corporate Affairs and Investor Relations (NL) Photography Mike Ellis (UK) Typesetting Pauffley, London (UK), Habo DaCosta bv (NL) Printing Habo DaCosta bv (NL) Binding Hexspoor (NL)
AT A GLANCE 4 Financial highlights 6 Geographical information 8 AEGON and the financial community
STRATEGY AND GOVERNANCE 10 Chairman’s letter 12 Members of the Executive Board of AEGON N.V. 13 Members and committees of the Supervisory Board of AEGON N.V. 14 Report of the Supervisory Board 17 Insight 23 Corporate governance 24 Dutch Corporate Governance Code 32 Corporate responsibility 33 Remuneration Policy and Report
REPORT OF THE EXECUTIVE BOARD 38 Review of operations 55 Risk and capital management
AEGON AROUND THE WORLD 66 Information about country units 80 Lines of business
FINANCIAL INFORMATION CONSOLIDATED FINANCIAL STATEMENTS OF AEGON GROUP 2005 82 Consolidated balance sheet 83 Consolidated income statements 84 Consolidated statement of changes in equity 86 Consolidated cash flow statement 87 Notes to the consolidated financial statements 172 Group companies 174 Remuneration Executive Board 176 Share options and share appreciation rights
Executive Board 177 Remuneration, share options and share appreciation rights Supervisory Board 182 Auditors’ report
196 Information based on US accounting principles 201 Quarterly results 202 Corporate and shareholder information 203 Financial calendar 204 Glossary 208 Forward-looking statements
The introduction of IFRS brings to an end the application of various sets of national accounting standards by listed companies in the different member states. For AEGON, this means that it no longer applies Dutch Accounting Principles (DAP) to its financial statements. All the numbers in the financial statements in this annual report, including the 2004 comparative numbers, are now based on IFRS. In previous annual reports, historical data covering an 11-year period was provided. Since IFRS came into effect in 2004, no information before this date is available.
While AEGON has been providing quarterly results in accordance with IFRS during 2005, the 2005 financial statements in this annual report are the first consolidated, audited financial statements reported under IFRS. AEGON will continue to provide reconciliations to US GAAP (Generally Accepted Accounting Principles in the United States) in accordance with the rules set by the Securities and Exchange Commission (SEC). However, AEGON supports the continued discussion on mutual recognition which will remove the requirement for reconciliation to US GAAP.
Finally, the application of IFRS should lead to better financial comparisons and enhanced transparency in financial reporting. These are objectives that AEGON fully supports. In addition, interested parties are encouraged to take into account other measures that will contribute to a better understanding of company performance.
AEGON FINANCIAL HIGHLIGHTS REVENUE GENERATING INVESTMENTS INCREASED BY EUR 53 BILLION TO EUR 358 BILLION
MAIN PRODUCT AREAS Traditional life, life for account of policyholders, pensions, fixed and variable annuities, institutional guaranteed products, fee business (incl. mutual funds), accident and health insurance, life reinsurance
MAIN DISTRIBUTION CHANNELS Independent agents and agentemployees, marketing companies, financial institutions, brokerdealers, wirehouses, affinity groups, direct response, worksite marketing, institutional intermediaries www.aegonins.com www.transamerica.com
MAIN PRODUCT AREAS Traditional life, life for account of policyholders, pensions, fee business (incl. mutual funds), accident and health insurance, general insurance, banking
MAIN DISTRIBUTION CHANNELS Independent brokers, tied agents, direct marketing, franchise sales force, worksite marketing www.aegon.nl
MAIN PRODUCT AREASTraditional life, life for account of policyholders, pensions, fee business (incl. mutual funds)
DISTRIBUTION CHANNELS Financial institutions, independent and tied agents, brokers, direct marketing, worksite marketing www.aegon.es
MAIN PRODUCT AREAS Traditional life, life for account of policyholders, pensions, variable annuities, accident and health insurance
DISTRIBUTION CHANNELS Tied agents, brokers, banks, worksite marketing, direct marketing www.aegon.com.tw
MAIN PRODUCT AREAS Traditional life, pensions, variable annuities, fee business (incl. mutual funds), accident and health insurance
MAIN DISTRIBUTION CHANNELS Independent and tied agents, pension advisors, direct marketing, worksite marketing www.aegon.hu 1 50/50 joint venture by China National Offshore Oil Corporation and AEGON N.V.
AEGON values its many trusted relationships within the global investment community and is committed to the highest standards of both of integrity and fair disclosure. The company’s international business activities are reflected in the geographical diversity of its investor base. AEGON’s Investor Relations program aims to enhance shareholder value through clear communication and ensures efficient and effective access to the global capital markets. AEGON’s common shares are listed on major stock exchanges including Euronext Amsterdam, the London Stock Exchange and the New York Stock Exchange.
In order to obtain a fair valuation for its securities, AEGON is committed to ensuring that equity and fixed income investors have an accurate understanding of the company’s performance and prospects. To this end, AEGON’s Investor Relations program focuses on providing the international investment community with the information required to make sound investment decisions. This includes information on key factors that drive AEGON’s businesses and influence its results, financial condition and value. AEGON remains committed to ensuring that both financial and non-financial information is accurately and thoroughly disclosed in a timely and consistent manner.
A major change in the financial reporting of all listed companies in the European Union took place in 2005 with the introduction of International Financial Reporting Standards (IFRS). AEGON was proactive in informing its stakeholders about this transition. Over the past two years, AEGON held a number of presentations to educate the financial community on the relevant changes in accounting standards and their effect on financial results. On April 14, 2005, AEGON was one of the first companies in the insurance industry to provide a comprehensive set of comparative key IFRS figures for 2004. Upon the publication of its first quarter 2005 results on May 11, 2005, AEGON started to report its results on an IFRS basis.
In addition to its IFRS results, AEGON believes value of new business and embedded value information should be considered in arriving at a balanced assessment of its underlying performance. AEGON supports the European Embedded Value Principles, which are aimed at improving the consistency and transparency of the life insurance industry’s embedded value reporting. In keeping with its commitment to further improve disclosure, AEGON will report quarterly value of new business information, beginning with the first quarter 2006 results. Additionally, AEGON will provide information on its various business activities in a statistical supplement to be included in its quarterly earnings releases.
In 2005, AEGON completed a number of capital markets transactions that include two successful offerings of perpetual capital securities, which strengthened the capital base in a nondilutive and cost effective manner.
With the aim of ensuring equal access to all relevant information, AEGON actively maintains contact with the financial community. Interactions with the financial community include roadshows throughout the USA, Europe and Asia, webcasts, press releases, and regularly scheduled investor days. Moreover, shareholders, bondholders and potential investors are encouraged to learn more about AEGON’s businesses and management decisions aimed at achieving its strategy of longterm profitable growth in AEGON’s major and developing markets. In keeping with its ongoing determination to maintain an open dialogue with the financial community, AEGON’s professional Investor Relations staff is available to answer questions at any time.
Reviewing briefly other highlights of 2005, AEGON’s position in Central and Eastern Europe was strengthened with the acquisition of a leading life insurance company in Poland. In Slovakia, enrollment in the pension fund which was begun in 2004 has continued to increase, and in June 2005, AEGON started operations in the Czech Republic. Furthermore, we have organized our activities in the region under the very capable leadership of AEGON Hungary’s CEO.
In Spain, two new bancassurance joint ventures with Caja de Badajoz and Caja Navarra will serve to complement AEGON’s successful partnership with Caja de Ahorros del Mediterráneo. We will be exploring additional opportunities in the bank channel in keeping with our aim to grow AEGON’s presence in Spain.
During the year, we made further progress in our growth strategy for Asia. In Taiwan, recurring life business continued to be the main driver of growth during the year. However, AEGON Taiwan has also been successful in its strategy to introduce unitlinked products in the market with encouraging early results.
AEGON successfully converted to International Financial Reporting Standards (IFRS) as of January 1, 2005. The overall objective of this major accounting change, which AEGON supports, is greater comparability among European-based
On behalf of the Executive Board, it is my pleasure to present AEGON’s 2005 Annual Report detailing the progress we have made across our businesses in the Americas, Europe and Asia. In addition to the increased earnings reported by all major country units for the year, notable progress was made to enhance AEGON’s broad-base distribution network, improve further AEGON’s solid capital position and strengthen AEGON’s leadership position in the growing retirement markets of the United States and Europe.
AEGON’s full-year 2005 results, reported on March 9, 2006, included a 21% increase in operating earnings, matched by a 21% improvement in net income and a 9% increase in new life sales for the Group. The increased sales and earnings achieved during the year, combined with enhanced distribution and improvements in our operations, indicate that we have made good progress and are in a solid position to pursue balanced growth.
At AEGON, it continues to be our view that the life insurance and pensions business presents substantial growth opportunity. Demographic trends are creating the opportunities for life and pension companies to serve the evolving needs of individuals and families for long-term protection, asset accumulation, dissavings and wealth transfer solutions. AEGON, as one of the world’s leading companies specializing in these products, is taking steps to claim its share of the potential.
In the United States, AEGON’s largest country unit, we continue to serve nearly every customer segment with a broad range of life insurance, pensions and related savings and investment products, delivered through a highly diversified distribution network. The diversity of both our products and distribution channels enables AEGON USA to achieve higher economic returns over time. In the retirement market, we are focused on serving the needs arising from people living longer and having to manage their accumulated assets for a longer period of time. We are also committed to providing need-specific products and advice to the underserved middle-income segment (some 60 million households). We are developing new worksite marketing initiatives and further leveraging the expertise of our direct marketing business to capture growth internationally.
AEGON maintains a multi-brand, decentralized business strategy and seeks to leverage the knowledge of local management to identify and deliver products and services that meet the evolving needs of customers, using distribution channels best suited to their local markets.
AEGON aims to achieve a long-term average net income growth rate of 10% per annum. In its pricing of new business and acquisitions, AEGON sets a minimum return on investment target well in excess of the cost of capital. Disciplined expense management, together with divestiture of non-core and structurally underperforming activities, are key to achieving these objectives.
Developments in AEGON’s embedded value and value of new business will continue to provide additional benchmarks for assessing our progress. While it will take some time to adjust to the new reporting standard, our shareholders, partners and employees can be assured that the underlying performance of AEGON’s business is unaffected by accounting changes.
We further commend AEGON’s dedicated staff and partners for enabling us to maximize the opportunities that we are identifying in our markets. Going forward, we will continue to leverage AEGON’s expertise and broad resources to strengthen the capabilities of local managers as they respond to the evolving needs of our customers with innovative need-specific products and services, delivered through a broad and efficient distribution network. Your ongoing interest in AEGON and support for our efforts is very much appreciated.
Donald J. Shepard, chairman of the Executive Board The Hague, March 8, 2006
JOHAN G. VAN DER WERF Johan G. van der Werf (1952, Dutch nationality) started his career in 1973 as an officer in the Merchant Marine. In 1982 he joined one of the predecessors of AEGON as a sales manager. From 1987 to 1992 he was chairman of the management board of Spaarbeleg and, in 1992, he became a member of the management board of AEGON The Netherlands. Since April 2002, he has been a member of the Executive Board of AEGON N.V. and CEO of AEGON The Netherlands. Mr. Van der Werf is also a member of the Supervisory Board of Delta Public Utilities N.V.
JOSEPH B.M. STREPPEL (1949, Dutch nationality) started his career in 1973 at one of AEGON’s predecessors occupying several treasury and investment positions. In 1986, he became CFO of FGH BANK, and in 1987 he joined the Executive Board of FGH BANK. In 1991, he became chairman and CEO of Labouchere and, in 1995, also chairman of FGH BANK. In 1998 he became CFO of AEGON N.V. Since May 2000, he has been a member of the Executive Board of AEGON N.V. Mr. Streppel is also a member of the Supervisory Boards of Royal KPN N.V. and Van Lanschot Bankiers N.V.
ALEXANDER R. WYNAENDTS (1960, Dutch nationality) started his career with ABN AMRO in 1984 and had several assignments in asset management (Amsterdam) and corporate finance (London). In 1997, he joined AEGON’s Group Business Development department and was promoted to executive vice-president and head of Group Business Development in May 1998. In 2003, he was appointed a member of the Executive Board of AEGON N.V.
DUDLEY G. EUSTACE — CHAIRMAN (1936, British nationality) is chairman of Smith & Nephew plc (London, UK) and a retired vice-chairman of Royal Philips Electronics. He was appointed to AEGON’s Supervisory Board in 1997 and his current term will end in 2009. He is also a member of the Supervisory Boards of Royal KPN N.V. and Hagemeyer N.V. He is currently chairman of the Supervisory Board Nominating and Strategy Committees.
IRVING W. BAILEY, II (1941, American nationality) is a senior advisor to Chrysalis Ventures. He is a retired chairman and CEO of Providian Corp., a former managing director of Chrysalis Ventures, and a former chairman of the Board of Directors of AEGON USA Inc. He was appointed to AEGON’s Supervisory Board in 2004 and his current term will end in 2008. He is also a member of the Board of Directors of Computer Sciences Corp., Hospira, Inc. He is currently a member of the Supervisory Board Strategy Committee.
SHEMAYA LEVY (1947, French nationality) is a retired executive vice-president and CFO of the Renault Group. He was appointed to AEGON’s Supervisory Board in 2005 and his current term will end in 2009. He is also a non-executive director of Nissan Motor Cy, Renault Finance, Renault Spain and the Safran Group, and a member of the Supervisory Boards of the Segula Technologies Group and TNT N.V. He is currently chairman of the Supervisory Board Audit Committee.
WILLEM F.C. STEVENS (1938, Dutch nationality) is a retired partner/senior counsel of Baker & McKenzie and was a senator in the Dutch Parliament until June 2003. He was appointed to AEGON’s Supervisory Board in 1997 and his current term will end in 2009. He is also a member of the Supervisory Boards of N.V. Luchthaven Schiphol, TBI Holdings B.V., AZL N.V., Goedland N.V., and Ermenegildo Zegna International N.V. He is currently a member of the Supervisory Board Audit and Compensation Committees.
PETER R. VOSER (1958, Swiss nationality) is chief financial officer of Royal Dutch Shell plc. Until 2004, he was Group CFO and a member of the Group Executive Committee of ABB (Asea Brown Boveri) Ltd. He was appointed to AEGON’s Supervisory Board in 2004 and his current term will end in 2008. He is also a non-executive member of the Board of Directors of UBS in Switzerland. He is currently a member of the Supervisory Board Audit Committee.
O. JOHN OLCAY — VICE-CHAIRMAN (1936, American nationality) is vicechairman and managing director of Fischer, Francis, Trees and Watts, Inc. (New York, USA). He was appointed to AEGON’s Supervisory Board in 1993 and his current term will end in 2008. He is also chairman of FFTW Funds Inc. in New York (USA), FFTW Funds Selection in Luxembourg and FFTW Funds in Dublin (Ireland). He is currently a member of the Supervisory Board Nominating and Strategy Committees.
KEES J. STORM (1942, Dutch nationality) is a former chairman of the Executive Board of AEGON N.V. He was appointed to AEGON’s Supervisory Board in 2002 and his current term will end in 2006. He is also chairman of the Supervisory Board of KLM Royal Dutch Airlines N.V., a member of the Supervisory Board of Pon Holdings B.V., and a member of the Board of Directors of InBev S.A. (Leuven, Belgium) and Baxter International Inc. (USA). He is currently a member of the Supervisory Board Strategy Committee.
LEO M. VAN WIJK (1946, Dutch nationality) is president and CEO of KLM Royal Dutch Airlines N.V. and vice-chairman of Air FranceKLM S.A. He was appointed to AEGON’s Supervisory Board in 2003 and his current term will end in 2007. He is also a member of the Supervisory Boards of Randstad Holding N.V. and Martinair, and a member of the Board of Directors of Northwest Airlines. He is currently a member of the Supervisory Board Compensation Committee.
STRATEGY COMMITTEE Dudley G. Eustace, chairman Irving W. Bailey, II, member O. John Olcay, member Kees J. Storm, member
AEGON’s Supervisory Board currently has ten non-executive members. The Board’s primary duties consist of providing counsel to and supervising the Executive Board’s management. With the assistance of its four specialized committees, the Supervisory Board recommends appointments and reappointments of Executive Board members when appropriate and deliberates and decides on compensation levels for Executive Board members. It also recommends to shareholders the appointment or reappointment of Supervisory Board members. Additionally, the Board discusses the following issues related to the company: quarterly results; embedded value; accounting principles; dividends; capital position; internal control procedures; and risk management. Together with the Executive Board, the Supervisory Board also regularly reviews AEGON’s business strategy. The Supervisory Board held a total of six meetings in 2005, and the attendance was over 95%. Meetings were typically preceded or followed by meetings of its various committees.
Please refer to page 23 and further for AEGON’s full report on corporate governance and its compliance with the Dutch Corporate Governance Code. In 2005, the Supervisory Board again discussed the Dutch Corporate Governance Code and its implications for AEGON’s corporate governance and approved the amendments to AEGON’s Articles of Incorporation necessitated by this Code. These amendments were subsequently approved by shareholders during the General Meeting of Shareholders (AGM) held on April 21, 2005. Corporate governance was also a separate item on the agenda of that AGM. AEGON’s compliance with the Dutch Corporate Governance Code was discussed by shareholders during the AGM, as recommended by the Corporate Governance Committee in the Dutch Corporate Governance Code.
In accordance with AEGON’s Supervisory Board Rules, the regular meetings in 2005 were preceded by preparatory meetings, attended by the chairman and vice-chairman of the Supervisory Board and the chairman and the chief financial officer of the Executive Board. The Executive Board members attended the meetings held in February, March, June, August, November, and December. In December 2005, in the absence of the Executive Board members, the Supervisory Board discussed its own composition and performance and those of the Executive Board. During the meeting held in February 2005, the Supervisory Board approved the Executive Board’s proposal that AEGON should enter into a settlement agreement with Dexia. The director of the Group Finance department attended the meetings during which the Supervisory Board discussed the quarterly and annual results; the dividend policy and the interim and final dividends; and press releases. Representatives from Ernst & Young, AEGON’s independent auditor, attended the discussion regarding the results for 2004.
AEGON’s embedded value and value of new business were included among the many topics discussed during the Supervisory Board meetings in 2005. AEGON’s 2004 Embedded Value Report was disclosed in May 2005 with the support of the Supervisory Board.
Attention was also devoted to partnerships, acquisitions, and divestitures. The Supervisory Board approved the partnerships with Caja de Badajoz and Caja Navarra in Spain as well as the acquisition of Nationwide Poland. The Supervisory Board also approved the divestiture of the German life operations and AEGON Spain’s general insurance business.
As is customary, a special Supervisory Board meeting was dedicated to AEGON’s budget and the Capital Plan budget for 2006. The Board followed the recommendation of the Audit Committee to approve the budget and the budgeted Capital Plan for 2006 and to authorize the Executive Board to fill AEGON’s funding needs as budgeted for 2006.
The Board followed the advice of the Audit Committee to adopt the amended Rules on Insider Trading, the Rules on Trading in non-AEGON Securities, and the AEGON Group Compliance Guidelines. The Board further endorsed the AEGON Group Compliance Program, which includes a web-based compliance training program within AEGON. The Rules have been disclosed on AEGON’s corporate website, www.aegon.com.
The Audit Committee was updated each quarter on the activities of the Group Internal Auditor and on AEGON’s worldwide compliance with SOX, as well as on general compliance issues. During its meeting in December, the Audit Committee engaged in a discussion on AEGON’s tax planning and on AEGON’s Risk Management Report as presented by the Chief Risk Officer. It also pre-discussed the budget for 2006 as well as the amended Insider Trading Rules; the Rules on Trading in nonAEGON Securities; AEGON Group Compliance Guidelines; and the AEGON Group Compliance Program. The Audit Committee subsequently advised the Supervisory Board to adopt these Rules and Guidelines.
The Nominating Committee held three meetings in 2005. The Executive Board’s chairman attended these meetings. The Nominating Committee discussed the composition of the Supervisory Board and its committees as well as existing and forthcoming vacancies. It also advised the Supervisory Board on a nomination for appointment in 2006. In addition, the Nominating Committee talked about reappointments to the Executive Board and advised the Supervisory Board on a nomination for reappointment in 2006. The Nominating Committee also discussed the introduction of an educational program for Supervisory Board members. Moreover, the Nominating Committee advised the Board to amend the Nominating Committee Charter. The proceedings of the Nominating Committee meetings were reported during subsequent Supervisory Board meetings.
Please refer to pages 33 to 36 for the full text of the Compensation Committee Remuneration Report and the Remuneration Policy, and to pages 174-177 for financial details. The Short-term and Long-term Incentive Plans, as adopted by the Supervisory Board in line with the company’s current Remuneration Policy, will run through 2006. The Compensation Committee decided to advise the Supervisory Board, and the Board agreed, to request that shareholders consent during the AGM in 2006 to extend the existing Remuneration Policy (which ends on December 31, 2006) until the AGM in 2007. It is the intention to propose to shareholders during the AGM in 2007 to adopt a new Remuneration Policy, which will replace the current one. The remuneration of the Supervisory Board members was increased by shareholders during the AGM in 2005, as proposed by the Supervisory Board and advised upon by the Compensation
Committee. The base salaries for the Executive Board, after having been assessed by the Compensation Committee, were not changed in 2005, save for the 1.25% increase in the base salaries of the Dutch Executive Board members in November 2005, following the new Central Labor Agreement (CAO) for the Dutch insurance industry.
In the Supervisory Board’s opinion, best practice provision III.2.1 of the Dutch Corporate Governance Code has been fulfilled because all but one Supervisory Board members are independent as defined by best practice provision III.2.2 of the Dutch Corporate Governance. Mr. Storm is not considered to be independent within the meaning of the Code because he was the chairman of AEGON’s Executive Board before his retirement in April 2002.
Mr. Voser has, after taking up his current assignment as CFO of Royal Dutch Shell plc, informed the Supervisory Board that he will step down from the Board at the AGM on April 25, 2006. The Board has accepted his resignation with great regret.
In 2006, the four-year term for Mr. Van der Werf will end. His performance was discussed in the Nominating Committee and the Supervisory Board and the Supervisory Board, following the advice of the Nominating Committee, has decided to nominate him to be reappointed for another four-year term by shareholders during the AGM in 2006.
The Supervisory Board members wish to commend the Executive Board and all members of the worldwide AEGON community for their unabated commitment to growing AEGON’s business profitably. The Board wishes to extend its appreciation for the dedication and professionalism they continuously demonstrate in responding to the ever-changing regulatory environment and market conditions.
The Hague, March 8, 2006 Dudley G. Eustace, chairman of the Supervisory Board
AEGON remains firmly focused on life insurance, pensions and investments. What makes this an attractive business and why have you chosen this focused strategy? At AEGON we continue to believe that it’s important to stay focused on what we know and do best. Life insurance, pensions and related investment products are lines of business that continue to present strong growth potential. People in general realize that they have to take responsibility for their own longterm financial needs and life companies have the expertise to provide the long-term protection, savings and investment solutions to serve those needs. Pension systems throughout much of Europe are being reformed and new systems based on private savings and investment are emerging.
At the same time, people are transitioning into retirement with a lifetime of accumulated assets that have to be managed for a longer period of time. AEGON is focused on assisting those individuals manage the drawdown of those assets in a fiscally attractive way. In the United States, for instance, there is an estimated USD 6 trillion in accumulated assets that will be distributed over the next six years. We expect a similar trend in other countries as wealth levels and life expectancies also increase. By continuing to develop need-specific products, ensuring quality service and advice, and strengthening AEGON’s broad distribution capability, we are confident that AEGON will continue to be a leader in the life and pensions market.
What do you consider to be AEGON’s main growth drivers, given its strong presence in a number of markets that are generally seen as relatively mature? We believe that there is sufficient growth opportunity in those markets where AEGON has a well-established presence. In the Netherlands, we have reorganized our operations to be more efficient and responsive to the needs of our customers, while at the same time making some good progress in growing our group pensions business. We anticipate further consolidation in the Dutch group pension market and AEGON is well-positioned to capture further growth given our strong presence in pension administration (TKP Pensioen), asset management and as a leading provider of insured pension solutions.
In addition to the steps we have taken to capture the growth that we see in our major markets, we have also made notable progress in growing our businesses in Central and Eastern Europe and in Asia. Life insurance penetration is still relatively low in these markets and it is clear that the economic developments underway will fuel further growth. In just the past five years, the areas where we are now active in Central and Eastern Europe have experienced double digit percentage growth in new life and pensions premiums. In China and Taiwan the market growth has been even more promising during the same period. Clearly, there is plenty of opportunity for our industry in general and we believe AEGON is well positioned to capture a fair share of the growth potential, with continued financial discipline and a view to the long term.
What is AEGON’s dividend policy and do you expect to continue to offer a cash and a stock alternative? AEGON recognizes the importance of offering its shareholders a dividend, which is consistent with the company’s cash flow and capital position. The total dividend for the full year is composed of an interim dividend, declared at the time of the publication of the six months’ results in August, and a final dividend proposed at the time of the year end results in March and to be approved at the annual General Meeting of Shareholders. It is part of AEGON’s dividend policy to offer shareholders a choice between a cash and a stock dividend. Over the past years, over 50% of AEGON’s dividends have been paid in shares. Although we expect this percentage to go down for the final dividend over 2005, following our proposal to set the value of the stock dividend approximately equal to the value of the cash dividend, we believe that a large number of our shareholders appreciate that they have the choice between cash and stock. As such, we will continue to offer shareholders this choice.
Interest rates have remained at relatively low levels. How is this environment affecting AEGON? Although interest rates are not at levels where they are causing any problems for AEGON, it is fair to say that we would like to see rates move higher, preferably in a gradual way. Low interest rates make some of our products, such as fixed annuities, less attractive when compared to certain other savings and investment products. Additionally, low interest rates lead to lower reinvestment rates for our investment portfolio. Over time, this could cause pressure on margins in certain product lines, particularly those where we have provided minimum guarantees.
The Dutch market has seen many changes in terms of legislation, regulation and tax treatment of products. What is the outlook for the Dutch market and how is AEGON positioned? In 2005, the social and fiscal legislation in the Netherlands changed dramatically in a number of different areas. The changes with regards to disability, pensions and the life cycle arrangement (Levensloop) have a major impact on the market for insurance and other financial products. All group pension schemes have to be thoroughly analyzed and in many cases need to be adjusted to comply with the new rules. This requires a lot of work, but it also creates new opportunities. Building on AEGON’s strong position in the group market, the life cycle arrangement is a typical worksite marketing opportunity. With a competitive and differentiated product line, we are off to a good start, and at the end of 2005, many employers signed life cycle arrangement contracts with AEGON for their employees. These contracts help employers to smoothly meet the requirements of the life cycle arrangement. In 2006, employees have to make their actual choice for a life cycle arrangement and start to save. Initial savings and sign up rates by employees are encouraging and AEGON The Netherlands expects to capture a substantial share of the life cycle market.
How do you see the distribution landscape in the Netherlands developing and does AEGON The Netherlands have sufficient distribution capabilities in the market? AEGON The Netherlands uses many different types of distribution, such as independent intermediaries, our subsidiary Meeùs and own sales organizations, such as Spaaradvies. Our own organizations, including Meeùs, comply with the requirements under the new legislation, the Wet Financiële Dienstverlening (Financial Services Law). Smaller, independent intermediaries will in some cases have more difficulty to comply with the Financial Service Law requirements. We are ready to help intermediaries to meet these requirements.
For distribution through independent intermediaries, AEGON The Netherlands uses service concepts that can be tailored to the specific needs and way of operating of different intermediaries. Whereas one may be focused on intensive advisebased products, the next might be eager to use new ways and means to work more efficiently and effectively. Some intermediaries operate locally, others nationally. Whatever the case may be, our service concepts fit their needs very well.
The group pension business is an area in which AEGON The Netherlands is particularly strong. What are the expectations for the development of this segment? In the group pensions market, the main changes will come from the fact that the requirements of regulators and the legislator with regards to content are making pension plan administration ever more difficult and complex. This is stimulating a consolidation trend in the market. Smaller company and industry pension funds are aligning themselves with larger funds. AEGON The Netherlands offers a broad spectrum of services for this market, both in terms of insured pension solutions and in offering services, such as through TKP Pensioen, to pension funds that wish to remain independent. TKP Pensioen can offer administration, asset management and a range of other support to the board of a fund, for example in the area of actuarial or legal services.
AEGON The Netherlands has been working hard to increase the customer focus of the organization. Can you provide some examples of how you want to achieve this and the progress made so far? The new organizational structure of AEGON The Netherlands has led to a more streamlined and unified organization. One of the principles behind the creation of the new organization is to eliminate duplication. As a result, AEGON The Netherlands can now service its intermediaries and customers more effectively, with high quality products and services. It will also enable us to further improve service levels in 2006. Our new products and services in the areas of immediate annuities, mortgages and asset management were partly made possible because of the new organizational structure. The AEGON brand is well recognized in the Netherlands. For a number of years, AEGON has been relatively low key in its advertising campaigns. In the fall of 2005, we started once again with a large scale, innovative TV campaign focused on pensions. In 2006, we will continue with new advertising campaigns.
Many insurers are pursuing the growth opportunities that exist in Asia. What is AEGON’s approach and how does it differ from that of its competitors? AEGON continues to focus on a limited number of markets in Asia that offer sufficient scale and growth opportunities. We currently have a strong presence in Taiwan, where AEGON is among the largest foreign life insurers in the sector. We are also present with fully-fledged life insurance activities in mainland China through our joint venture with CNOOC. This joint venture, which began in 2003 in Shanghai, has since expanded to include operations in Beijing and Nanjing, which is located in the prosperous Jiangsu region. Early in 2006, AEGON was among the first foreign insurers to gain access to the coastal province of Shandong. We also received a license to sell life insurance in Singapore. Other markets that potentially fit AEGON’s entry criteria for fully fledged life insurance activities in the region are India, Japan and South Korea.
Whereas many companies rely mostly on a large agent force, AEGON has used its multi-channel distribution approach to expand its operations. We now work with banks, brokers, agents and direct marketing distribution channels to sell our products in the region. I might add that AEGON Direct Marketing Services has enabled us to enter a number of countries in Asia, including South Korea, Taiwan, Thailand, Japan, and Australia.
What are the key capabilities that AEGON can transfer when entering new markets or establishing new partnerships? It has long been AEGON’s approach to leverage its expertise and capabilities that have contributed to success in our main markets to enter new markets. In addition to relying on multi-channel distribution and our direct marketing skills, which have both been put to good use in a number of countries, we look to transfer product features that can likewise serve the needs of customers in different geographic areas. AEGON, for instance, was one of the first companies to introduce a variable annuity product in Taiwan. We will also consider broadening the product range of our recently acquired Polish operations to include regular premium risk products, group and individual pensions, and credit/mortgage life insurance.
How is AEGON addressing cross-border pension needs? AEGON, with our partners at La Mondiale, is leading the effort to provide cross border pension solutions to multi-national companies and their employees through the AEGON Pension Network. Many international companies have expressed a clear desire for a more integrated approach to issues involving risk and asset pooling, reporting, the customization of local pension and employee benefit programs, as well as expatriate solutions.
In Spain, we announced new partnerships with two savings banks — Caja de Badajoz and Caja Navarra — which will complement our successful partnership with Caja de Ahorros del Mediterráneo and strengthen our position in the Spanish life and pension market. In China, we signed national cooperation agreements with two major banks to sell our products throughout the country. Clearly, distribution remains a key growth driver for AEGON in both our main and developing markets.
A hallmark of AEGON’s strategy is to concentrate on its core markets of life, pension and investment products, while at the same time developing market-leading breadth of product and distribution within that market. What do you view as the benefits of this diversity within AEGON USA? We see diversity as the real strength of AEGON in the United States, and consider it essential to maintaining our profitability and managing our risk. Products fall out of favor from time to time due to market, legislative and regulatory matters. At AEGON USA, other product lines pick up the pace. Thus, we can continue to grow without having to sacrifice profitability or our risk management disciplines, while more effectively managing our capital. Ultimately, diversity of both product and distribution channel allows AEGON USA to achieve higher economic returns.
What is your branding strategy in the US market and is having a strong brand becoming an increasingly important competitive factor? We continue to be a multi-brand player in the United States, but have focused more recently on building the Transamerica brand at both a retail and distributor level. Multiple brands provide us with the opportunity to sell our products through multiple distributors often in the same geographical area, thereby further penetrating a market than we would otherwise not be able to. However, some of our businesses increasingly require a strong and powerful brand at a retail level, so we will continue investing in and building our Transamerica name brand.
By forming a separate and new division, we will have specialists packaging these products as needed by our customers and then communicating results relative to the customers’ retirement goals.
Some consider the United States to be a mature market. What do you view as AEGON’s growth opportunities in the United States? We view most of our operating units as growth-oriented and still see many new opportunities emerging within our definition of core business. An example is the middle market. Sixty million households fall in the USD 25,000 to USD 100,000 annual income bracket. But there has been a 30% decrease in the number of agents covering them during the past 30 years. The result is that there has been a strong decline in households with life insurance, and currently less than half own an individual policy. A significant opportunity exists for tailored products, sold via both traditional and low-cost distribution techniques. We will launch our worksite marketing initiative over the next two years and see this as an efficient and effective channel to serve the middle market. In addition, we successfully launched a new product, EquityIndexed Universal Life, which we think is well suited for the middle market.
A third driver of growth is our opportunistic approach to leveraging AEGON USA specific skills to new markets outside the United States. Within AEGON Direct Marketing Services, for example, we are transferring a successful business model into new countries in Asia, Latin America and Europe with a low-cost, low-risk entry model. Bringing innovative distribution skills developed in the United States to new markets will continue to be a growth driver.
Although the process of arriving at a broad consensus about the future shape of pensions in the United Kingdom will inevitably be a difficult one, we believe that the life insurance industry can play a central role in achieving the objective of increasing individual retirement savings levels. The industry has an infrastructure in place which can deal with large volumes of regular amounts being invested in pensions products in a cost effective manner. We believe this expertise can be built upon to deliver the solutions which will allow individuals to save more efficiently for their retirement.
Overall, we believe that the pension landscape in the United Kingdom will undergo significant change. However, we see this not as a threat, but as an opportunity for our industry.
AEGON UK is very pleased to have concluded distribution partnerships with many of those businesses in the former category such as Openwork (formerly Zurich), St James’s Place, Royal Liver and The Principality Building Society. These arrangements mean that a range of AEGON products are being distributed by over 4,000 sales advisors with whom we previously had no connection.
We remain very confident about our position in the evolving UK market. By maximizing the opportunities available through the ownership of distribution, diversifying our product offering, and by taking decisive steps to ensure an efficient and responsive organization, we believe that AEGON UK’s leading position in the UK market will remain strong.
AEGON N.V. is a public company under Dutch law, and it is governed by three corporate bodies: the General Meeting of Shareholders, the Executive Board and the Supervisory Board.
Every shareholder is entitled to attend the General Meeting of Shareholders and to speak and vote in the meeting, either in person or by proxy granted in writing (including electronically embedded proxies). The participating shareholder must comply with the applicable statutory requirements pertaining to the provision of evidence of shareholder’s status and notification of intention to attend the meeting. When convening General Meeting of Shareholders, the Executive Board can set a record date for determining the entitlement of shareholders to attend and vote at the General Meeting of Shareholders.
As a participant of Stichting Communicatiekanaal Aandeelhouders, a Dutch foundation dedicated to enhancing the communication with and the participation of shareholders at General Meetings of Shareholders, AEGON welcomes the possibility of voting by proxy. Moreover, proxies are solicited from the New York Registry shareholders in accordance with the practice in the United States.
The Executive Board, as a body, is charged with the management of the company. Each Board member has an allocation of duties relating to his or her specific areas of interest. The number of Executive Board members and their terms of employment are determined by the Supervisory Board. The members of the Executive Board are appointed by the General Meeting of Shareholders upon nomination by the Supervisory Board.
Members of the Executive Board are eligible for retirement upon reaching the age of 60. Retirement is mandatory at the age of 62. The Articles of Incorporation require the Executive Board to obtain the prior approval of the Supervisory Board for a number of defined resolutions. Additionally, the Supervisory Board may subject other resolutions of the Executive Board to its prior approval.
The oversight of the management of the Executive Board and of the company’s business and general course of affairs is entrusted to the Supervisory Board, acting as a body with collective responsibility and accountability. The Supervisory Board also assists the Executive Board by giving advice. In performing their duties, the Supervisory Board members shall act in accordance with the interests of the company and its business.
The members of the Supervisory Board are appointed by the General Meeting of Shareholders upon nomination by the Supervisory Board. The Supervisory Board currently consists of ten non-executive members, one of whom is a former member of the Executive Board. Specific issues are prepared and dealt with in committees by the Supervisory Board members. With the goal of attaining a balanced composition of the Supervisory Board, a profile has been drawn up that outlines the required qualifications of its members. Upon reaching the age of 70, a member of the Supervisory Board is no longer eligible for reappointment, except with the approval of the Supervisory Board. The remuneration of the members of the Supervisory Board is fixed by the General Meeting of Shareholders.
In December 2003, a new Dutch Corporate Governance Code was adopted. The code came into effect on January 1, 2004.
The Articles of Incorporation were amended to reflect the agreed-upon four-year appointments with possible reappointment to the Executive Board.
AEGON closely pays attention to risk management and risk factors in each of its country and group units. For detailed information about AEGON’s risk management and the ‘in control’ statement please refer to page 55-63.
AEGON has adopted a Code of Conduct at group level. The Code of Conduct is implemented and monitored by a taskforce that reports directly to the Executive Board. This is in addition to the Codes of Conduct adopted earlier by the majority of AEGON’s country units. The Code of Conduct includes whistleblower provisions that give employees the ability to report on suspected irregularities without jeopardizing their employment. More detailed rules and regulations have been implemented regarding the reporting of finance-related complaints within the framework of the Financial Controls Complaints Procedure, which provides reports to the Audit Committee. Serious violations of the Code of Conduct, as well as any alleged irregularities concerning the functioning of Executive Board members, are reported directly to the chairman of the Supervisory Board. The Code of Conduct and the Financial Controls Complaints Procedure of AEGON N.V. are available on AEGON’s website www.aegon.com.
AEGON’s annual report includes information about the most important external factors and variables influencing the company’s performance. These analyses include AEGON’s longterm market projections and company sensitivity to interest rate fluctuations and to changes in equity, real estate, and currency markets. The Executive and Supervisory Boards will consider the publication of additional analyses if or when appropriate.
The Remuneration Policy for Executive Board members includes fixed and variable components. With respect to the variable components, the Supervisory Board has set clear and measurable criteria including measures relating to the value of new business and total shareholders return. For more details on the compensation of the Executive Board members, please refer to the chapter on remuneration on page 33 to 36 of this annual report.
The Remuneration Policy also sets out a plan for Executive Board members to be remunerated partly in share options (performance options) and performance shares. If Executive Board members are entitled to share options, the strike price of these options correspond to AEGON share price on Euronext Amsterdam at the close of trading on the date the options are granted. The terms under which share options and performance shares are issued shall not be altered during the reference period, except for technical alterations in accordance with market practice in events such as share splits, mergers and acquisitions, share issuances, and (super) dividends.
AEGON’s Remuneration Policy was adopted at the General Meeting of Shareholders on April 22, 2004. Any future changes to the Remuneration Policy will be submitted to the General Meeting of Shareholders for adoption. As indicated, the Supervisory Board will propose to extend the existing Remuneration Policy until the General Meeting of Shareholders in 2007.
The Supervisory Board explains in its Remuneration Report found on page 33 to 36 of this annual report the manner in which the Remuneration Policy pertaining to the members of the Executive Board has been applied. In addition, each year the annual report presents an overview of the current Remuneration Policy. For example, an overview of the Remuneration Policy for years 2004-2006 (proposed to be extended until 2007) is included in this annual report. The Remuneration Report is also included in this annual report. The principal points in the Remuneration Report are mentioned in the Report of the Supervisory Board.
The remuneration of the individual members of the Executive Board is determined by the Supervisory Board within the scope of the adopted Remuneration Policy. Upon conclusion of a contract with a new member of the Executive Board, the main elements of the member’s employment contract shall be made public.
Under the provisions of the Dutch Corporate Governance Code, the membership of Messrs. Shepard and Streppel on the Executive Committee of Vereniging AEGON may give rise to deemed conflicts of interest. The Articles of Association of Vereniging AEGON provide that Messrs. Shepard and Streppel are excluded from voting on certain issues relating directly to AEGON (including the adoption of annual accounts, discharge of members of the Executive Board and appointments to the Executive Board and Supervisory Board of AEGON). The Supervisory and Executive Boards have drawn up a protocol that provides that the members of the Executive Board who also serve on the Executive committee of Vereniging AEGON shall continue to participate in discussions and decision-making relating to possible transactions with Vereniging AEGON. The Supervisory Board is confident that by adhering to this protocol the deemed conflict of interests with Vereniging AEGON are adequately dealt with and that the best practice provisions of the Code have been complied with in all material respects. The protocol is posted on AEGON’s website www.aegon.com.
The Supervisory Board Rules contain provisions regarding the division of duties within the Supervisory Board; its internal procedures; and its interactions with the Executive Board and with the General Meeting of Shareholders. These regulations are posted on AEGON’s website www.aegon.com.
Under the Code’s composition profile, each member of the Supervisory Board is expected to be capable of assessing the broad outline of the overall policy, in addition to having the specific expertise required to fulfill his or her designated role. The profile also takes into account the nature of AEGON’s insurance business, the activities of the Supervisory Board, and the background of the Supervisory Board members. It is designed to ensure that the Supervisory Board as a whole is capable of the proper performance of its duties. The composition profile is available on AEGON’s website www.aegon.com, where shareholders and investors can also find the prescribed information about each member of the Supervisory Board as well as his or her retirement schedule.
Every year the Supervisory Board convenes to discuss its own performance and that of its individual members, as well as the performance of the Executive Board and that of the individual Executive Board members. Such meetings take place without Executive Board participation.
AEGON offers its newly appointed members of the Supervisory Board an orientation program that provides general information about AEGON’s financial affairs and facts regarding the insurance industry, AEGON’s business within the industry, and general legal affairs of the Group. The Supervisory Board regularly discusses whether there are any areas in which its members require further training.
Several members of the Supervisory Board also serve as members of Supervisory Boards of other Dutch-listed companies. The Supervisory Board has concluded that none of these memberships unduly or negatively impacts the respective individual’s performance of his or her duties as a member of AEGON’s Supervisory Board.
In accordance with the Dutch Corporate Governance Code, the Supervisory Board Rules state that no member can serve on AEGON’s Supervisory Board for more than three four-year terms.
The duties of the company secretary include assisting the Supervisory Board. In particular, the company secretary is responsible for the correct application of the statutory obligations under the Articles of Incorporation and the Supervisory Board Rules. The appointment of the company secretary is subject to the approval of the Supervisory Board.
Each of the Committees of the Supervisory Board has a charter in which the board’s composition, duties, and internal procedures are defined. The Committee Charters are available on AEGON’s website www.aegon.com.
The purpose of the Compensation Committee is to design, develop, implement, and review the Executive Board members’ compensation and terms of employment and the Supervisory Board members’ compensation to be adopted by the General Meeting of Shareholders. The Compensation Committee makes its recommendations to the Supervisory Board. The Compensation Committee is chaired by Mr. Dahan.
The purpose of the Nominating Committee is to advise the Supervisory Board on first-appointment candidates to fill Supervisory Board vacancies and member reappointments after each four-year term. The advice of the Nominating Committee shall be based on the profile for the Supervisory Board as it shall be in place from time to time. In addition, the Nominating Committee advises on and proposes to the Supervisory Board candidates to be nominated for appointments as members or as chairman of the Executive Board. The Nominating Committee reviews on a regular basis the individual performance of Executive Board and Supervisory Board members, as well as the selection criteria for senior management within the AEGON Group. The Nominating Committee is chaired by Mr. Eustace.
Rules regarding conflicts of interest applicable to members of the Supervisory Board are included in the Supervisory Board Rules. These Rules are compliant with the relevant provisions of the Dutch Corporate Governance Code and have been posted on AEGON’s website www.aegon.com.
AEGON places a high level of importance on dialogue with its shareholders. For this purpose, AEGON has an active department on Group level called Group Corporate Affairs & Investor Relations. One of the key opportunities for dialogue with its shareholders is the General Meeting of Shareholders.
AEGON has traditionally made an effort to maximize shareholder participation by allowing proxy voting, both in the United States (where AEGON has a significant shareholder base) and in the Netherlands through Stichting Communicatiekanaal Aandeelhouders.
The Supervisory Board and the Executive Board have evaluated the provisions in AEGON’s Articles of Incorporation containing the qualified majority requirements in light of the provisions of the Dutch Corporate Governance Code. Given the absence of anti-takeover protection, they concluded that the qualified majority requirements (in light of the voting rights of Vereniging AEGON) are an integral part of AEGON’s protection against unfriendly actions. Taken together, the qualified majority requirements and the voting rights of Vereniging AEGON constitute the only protection AEGON currently has in place. The protection thus accorded is in line with accepted market practice.
For the purpose of further mitigating the possible negative effects of the qualified majority requirements in the ordinary course, the Supervisory Board has decided that, absent unfriendly actions, it shall make nominations to the Executive
Board and the Supervisory Board only on a non-binding basis. This will provide the shareholders the opportunity to decide on the nomination with a simple majority. Thus, for all practical purposes, AEGON complies with the relevant principle and the relevant best practice provision. The preferred shares voting rights agreement entered into between AEGON and Vereniging AEGON, as further described before, clearly sets out those circumstances in which the protection may be invoked and a special cause may be declared.
In the event of a serious private bid for a business unit or a participating interest in excess of the threshold expected to be set in the Netherlands Civil Code the Executive Board will make public its position on the bid and its reasons for its position.
Changes to AEGON’s policy on profit appropriation (additions to reserves and on dividends) shall be discussed and accounted for as a separate item on the agenda of the annual General Meeting of Shareholders. Also, a resolution to pay a final dividend shall be dealt with as a separate item.
AEGON attaches high importance to fair disclosure of information to its stakeholders and the financial markets in all relevant jurisdictions. The company applies the rules and regulations dealing with disclosure set by the various regulators and the stock exchanges on which AEGON is listed. Meetings with analysts, presentations to analysts, presentations to investors and institutional investors, and press conferences shall be announced in advance on the company’s website and by means of press releases. All presentations made on these occasions are posted on AEGON’s website www.aegon.com. In accordance with market practice, the company uses various press information services to distribute its press releases.
AEGON in advance of their publication and AEGON pays no remuneration of any kind to analysts in the context of preparing such reports or their publication.
AEGON uses shareholders’ circulars to inform the shareholders about the facts and circumstances relevant to upcoming proposals. Shareholders’ circulars may take the form of an appropriate written explanation in the agenda of the General Meeting of Shareholders. Shareholders’ circulars are published in those instances where shareholders’ approval is prescribed (including delegations or authorizations requested from the General Meeting of Shareholders).
In compliance with local Codes of Conduct applicable to institutional investors, AEGON’s country units in the United States and the United Kingdom have detailed policies in place in relation to their exercise of the voting rights attaching to the shares held by them. AEGON Nederland N.V. has published on its Dutch website, www.aegon.nl, its existing policies regarding the exercise of the voting rights attaching to the shares held by AEGON Nederland N.V. in Dutch-listed companies. In addition, a report on how this policy was implemented in 2005 is published on the website of AEGON Nederland N.V. A record of whether, and if so, how AEGON Nederland N.V. has voted as shareholder in General Meetings of Shareholders of Dutch listed companies is also published on its website. At a minimum, this record is updated on a quarterly basis.
Based on its Charter, the Audit Committee of the Supervisory Board has determined the extent of the involvement of the independent auditor in the preparation and publication of financial reports (other than the annual accounts) in addition to setting up a Pre-approval Policy for any additional (non-audit) services that may be rendered by the independent auditor to the company.
Reports by the independent auditor of his findings in relation to the audit of the annual accounts are made to the Supervisory Board and the Executive Board simultaneously.
The independent auditor may request the chairman of the Audit Committee to call a meeting of the Audit Committee. The independent auditor customarily attends the meetings of the Audit Committee. In accordance with applicable laws, the independent auditor reports on its activities to the Executive Board and the Supervisory Board, raising issues in relation to his audit that require the attention of management. Pursuant to the Audit Committee Charter such issues include significant financial reporting issues and judgments made in connection with the preparation of the financial statements, including the quality of earnings, significant deviations between planned and actual performance, the selection or application of accounting principles (including any significant changes with respect thereto), any major issues as to the adequacy of its internal controls, and any special steps adopted in light of material control deficiencies.
• IV.1.1: this best practice provision provides that the General Meeting of Shareholders may pass a resolution canceling the binding nature of a nomination for appointment of a member of the Executive Board or the Supervisory Board by an absolute majority and a limited quorum. AEGON’s current Articles of Incorporation provide for a larger majority and a higher quorum than prescribed by the Code. As indicated before, the Supervisory Board takes the view that in light of the absence of any anti-takeover measures, the current text of the Articles of Incorporation is appropriate and in line with accepted practice with respect to anti-takeover measures in the Netherlands. For the purpose of further mitigating the possible negative effects of these provisions, the Supervisory Board has decided that, absent unfriendly actions, it shall make nominations to the Executive Board and the Supervisory Board only on a non-binding basis.
As one of the world’s largest life insurance and pensions companies, AEGON has a responsibility to contribute positively to the society and environment in which it operates.
In keeping with the Group’s decentralized strategy, AEGON’s country units have the autonomy to pursue at country level those CR issues relevant to their market and culture, and they comprise the core of AEGON’s CR activities. The country level CR efforts are supplemented by more broad based CR programs at the Group level.
We offer products and services that are designed to improve the futures and financial security of our customers.
We build long-term relationships with our customers by delivering products and services that are designed to improve their financial security and futures. We strive to provide them with clear, accurate and timely information to enable them to choose the right products and services. We respect our customers by soliciting feedback, acting upon it and honoring our commitments.
By living our values and balancing the interests of all stakeholders, we strive to create sustainable financial returns for our shareholders. Open, accurate and timely communication will allow our shareholders to make informed decisions.
We work together to create a culture in which we encourage and reward our employees for living the core values and being committed to each others success through teamwork. Everyone is expected to seek the opportunities, training and resources necessary to succeed. We hold each other accountable for living our values, demonstrating initiative and teamwork, and acting in the long-term interest of all of our stakeholders.
We strive to build long-term relationships with our business partners based upon our core values. Together we work to provide quality products and services. By striving to communicate openly and accurately and expecting our business partners to do the same, we enable all of our stakeholders to make informed decisions.
The Compensation Committee consists of three members, Messrs. Dahan (chairman), Stevens and Van Wijk.
This chapter presents the Remuneration Policy for 20042006 and the Executive and Supervisory Board members Remuneration Report for the year ended December 31, 2005.
The Remuneration Policy for the Executive Board is aimed at creating a reward-based structure that will allow the company to attract and retain qualified, expert executives by providing a wellbalanced and incentive-based compensation.
The shareholders adopted the Remuneration Policy on April 22, 2004. The Remuneration Policy took effect on January 1, 2004, for a three-year term. Any material changes in this Remuneration Policy shall be submitted to the General Meeting of Shareholders (AGM) for adoption. The Supervisory Board will propose to the 2006 AGM to extend the duration of the existing Remuneration Policy until the AGM in 2007.
The Supervisory Board has determined that, as of January 1, 2005, the term of appointment for new members of the Executive Board will be four years. Every appointment will be for the full term, and Executive Board members may be reappointed for successive periods of four years. However, members may have to leave before the end of their term if they reach the age of retirement.
Annually, the Compensation Committee will review the levels, considering circumstances that would justify adjustment, such as fundamental changes in the business environment or in the individual’s responsibilities.
The variable part of the remuneration is designed to strengthen the Board members’ commitment to the company and its objectives. A considerable part of the total remuneration consists of variable compensation linked to previously determined and measurable performance targets. As explained further on and in the plans posted on AEGON’s website, when performance is at target level, for Mr. Shepard approximately 75% of his total compensation is variable, whilst for the other members the variable portion is approximately 50%.
The amount of the STI Plan bonus will be determined by the level of achieved operating earnings (OE) relative to the OE target. The STI Plan bonus increases when the actual OE exceeds the target OE. In case the actual OE is equal to or higher than 150% of the target OE, then the STI Plan bonus reaches its maximum value. For example: when the actual OE is equal to the target OE, then Mr. Shepard could receive a STI Plan bonus of 118% of his base salary. The maximum STI Plan bonus Mr. Shepard could receive is equal to 189% of his base salary. The OE target is calculated as the rolling, three-year average OE, increased by 2.5% to reflect inflation.
Provided the VNB of the AEGON Group in the plan year was positive, Messrs. Shepard and Streppel are eligible for 100% of their STI Plan bonus, while Messrs. Van der Werf and Wynaendts are eligible for 40% of their STI Plan bonus. In the event that the VNB in the areas of their respective responsibilities was positive, Messrs. Van der Werf and Wynaendts become eligible for the remaining 60% of their STI Plan bonus.
Annually, the Compensation Committee will review the agreed parameters to ensure that they continue to provide the best reference. Independent external advisors, Tillinghast and Ernst & Young, will sign off on all relevant data.
The Long-term Incentive (LTI) Plan intends to orient members of the Executive Board toward long-term growth of sustainable value for the company’s shareholders. For this purpose, the Plan aims to reward Executive Board members for AEGON’s total shareholders return (TSR) performance over a three-year period. TSR is defined as the return, in terms of share price appreciation and dividends, to shareholders.
Each year, a LTI grant is determined to serve as a basis for the calculation of the achievable bonus under the LTI Plan. The LTI grant is determined as a fixed percentage of the base salary of the Executive Board members; that is 95% of Mr. Shepard’s base salary and 60 % of the base salary of the other members. The grant is a 50/50 combination of the value of performance shares and performance options. The actual value of the bonus paid under the LTI Plan is dependent on AEGON’s relative performance in terms of TSR.
Should AEGON rank nine through twelve within this group (after three years), the granted shares and options will not vest. The granted shares and options will only vest once AEGON achieves a number eight position or better, with an increasing percentage according to the following schedule.
Shares granted to Executive Board members under the LTI Plan shall be retained for a period of at least five years from the grant date or at least until the end of the employment if this latter period is shorter.
Neither the exercise price nor other conditions regarding the granted share options shall be modified during the term of the options, except in the case that such modification is prompted by structural changes in the company or its shares in accordance with established market practice. Please refer to page 175 for more information on the share options granted under the LTI Plan.
The Remuneration Policy aims at offering the Executive Board members pension arrangements that are in line with local practices in their countries of residence and retirement benefits that are consistent with those provided to executive directors of other multinational companies in those countries.
In addition, the arrangements include entitlements to a pension in the event of disability and a pension for spouse or dependent in the event of the participant’s death. Please refer to page 174 for more information on the costs.
Members of the Executive Board receive other benefits, based on their contractual agreements, local practices, and customary arrangements for executives of multinational companies, like the use of a company car, medical insurances, and other benefits and welfare plans. Moreover, it is the company’s policy not to grant Executive Board members any personal loans, guarantees or the like, unless in the normal course of business and on terms applicable to the personnel as a whole, and only after Supervisory Board approval. No remission of loans shall be granted.
* In case of intercontinental travel this will be EUR 2,500 per face-to-face meeting.
Please refer to pages 174-176 for information on the remuneration of members of the Executive Board.
OE per area STI bonus of responsibility (as % of STI amount
Policy and described in the STI Plan Rules. 2 The reported STI bonus percentages have been rounded off.
In addition, Mr. Shepard received EUR 1,663,000 in 2005 as an additional STI bonus related to AEGON’s net income over the financial year 2004, as reported in accordance with Dutch Accounting Principles.
OPERATING EARNINGS BEFORE TAX 2,147 1,772 21 Gains/(losses) on investments 1,157 1,203 (4) Impairment charges 14 (183) Other non-operating income/(charges) 277 (22) Share in profit/(loss) of associates 20 25 (20)
1Net income refers to net income attributable to equity holders of AEGON N.V.
Number of employees, including agent-employees 14,015 5,698 4,539 2,721 186 27,159 38 AEGON ANNUAL REPORT 2005
During 2005, AEGON strengthened its position in the three major markets — the United States, the United Kingdom and the Netherlands. In addition, AEGON continued to invest in Central and Eastern Europe, Spain and Asia, where the Group sees good growth prospects over time. AEGON has taken a number of steps to improve the operations of its businesses as well as to enhance AEGON’s strategic position in the life insurance and pension sectors overall. AEGON is pleased to report increased earnings from all major country units for the year, enhanced distribution and a stronger balance sheet. AEGON believes that the Group is well-positioned to deliver the products and services that will lead to the continued growth of its business.
In the Americas, AEGON achieved a 7% increase in new standardized life production over 2004, as well as a 17% increase in operating earnings for 2005. Production through the reinsurance division was particularly strong.
The variable annuity business in the Americas showed a 19% production growth for the year, led by a 41% increase through the wirehouse channel and a 24% increase in the pension business. Although fourth quarter retail sales were lower than previous quarters of the year, AEGON anticipates sales growth going forward driven by new product development as the Group continues to build its wholesaling capability. Despite the challenging interest rate environment in the United States, and against the backdrop of declining industry sales, AEGON has seen consecutive quarterly growth in the fixed annuity sales in 2005, due largely to new bank distribution agreements as well as the pension operations.
Central and Eastern Europe countries where AEGON is now active, with a total population of over 65 million, offer strong growth potential for life and pension products. AEGON Hungary achieved a notable increase of 26% in net income for the year. AEGON Poland, which was acquired in October, had record sales in the fourth quarter — its first as a member of the AEGON Group. Membership in AEGON’s pension fund in Slovakia continues to grow with over 70,000 currently enrolled, of which 57,000 are officially registered, and life sales have begun in the Czech Republic, where AEGON launched operations in April.
In China, AEGON has expanded from its base in Shanghai, having received licenses to begin operations in Beijing, Nanjing and most recently the Shandong province, where AEGON is among the first foreign insurers to gain access to the region. During the fourth quarter, AEGON-CNOOC’s multi-channel distribution advantage was strengthened with the addition of brokers. AEGON has made clear its long-term commitment to China and will continue to identify additional opportunities to expand its geographic presence.
In summary, 2005 was a good year and AEGON is confident about its prospects for capturing further growth in its core lines of business. The increased sales and earnings for the year, combined with enhanced distribution and improved operational efficiency, indicate that AEGON has made good progress within its three major markets while investing in new markets that offer long-term growth.
Operating earnings before tax in 2005 increased 21% to EUR 2,147 million. The three major country units, the Americas, the Netherlands and the United Kingdom, each reported increases in operating earnings before tax for the year. The increase in the Americas primarily reflects business growth, favorable mortality experience and the impact of volatile items, partly offset by decreased spreads in the institutional GIC business and lower investment yields. The increase in operating earnings before tax in the Netherlands is largely due to improved interest results and released provisions for policyholder profitsharing and employee benefits, increased technical life and non-life results, partially offset by additional provisions for guarantees and improvements to ‘Spaarkas’ life products in 2005.
In the United Kingdom, the increase mainly reflects the positive impact from higher equity and bond markets. The increase is largely offset by a charge for an incentive payout to registered individuals and relates to the accelerated acquisition of the remaining 40% of Positive Solution. The divestiture of the general insurance activities in Spain at the beginning of this year is the primary reason for the decline in operating earnings in Other countries.
Net income increased 21% to EUR 2,732 million in 2005, reflecting higher operating earnings, increased net gains on investments and impairment charges, and higher non-operating income. The effective tax rate increased to 24% from 19% in 2004, reflecting higher taxable earnings, higher policyholder taxes in the United Kingdom and a one time benefit in 2004.
AEGON America’s operating earnings before tax for 2005 of USD 2,365 million, increased USD 339 million or 1 7%, compared to the results for 2004. Operating earnings include certain volatile items under IFRS. In 2005, these items contributed USD 316 million to operating earnings compared to USD 255 million in 2004. These volatile items include a discontinued total return pass-through annuity product, Canadian segregated funds and financial assets carried at fair value, such as hedge funds, convertible bonds and certain limited partnerships, for which there is no offset in liabilities. A significant portion of the earnings from these volatile items is due to returns on hedge funds and limited partnership investments, which have exceeded long-term pricing expectations in both 2004 and 2005. Excluding these volatile items in both 2005 and 2004, operating earnings increased USD 278 million or 16%. See table on page 43 for the impact of volatile items in AEGON America’s operating earnings before tax.
Fixed annuities Fixed annuity operating earnings before tax of USD 529 million increased USD 176 million or 50% compared to the results for 2004. The total return annuity existing block of business and the fair value movements of certain financial assets carried at fair value contributed to an increase of USD 105 million to operating earnings in 2005. Excluding these volatile items, operating earnings before tax increased USD 71 million, or 22%. Earnings in 2004 were negatively impacted by a charge of USD 54 million related to reserve strengthening on a block of payout annuities. The remaining increase of USD 17 million is due to lower DPAC amortization resulting from the retail annuity products, favorable mortality on payout annuities and continued favorable persistency, with a partial offset due to slightly lower product spreads and lower account balances.
Product spreads on the largest segment of the fixed annuity book were 230 basis points for 2005. Excluding the volatile income related to certain financial assets carried at fair value, pre-tax operating spreads were 209 basis points for 2005.
Institutional guaranteed products Institutional guaranteed products operating earnings before tax of USD 349 million decreased USD 107 million or 23% compared to the results for 2004. The valuation of certain financial assets carried at fair value contributed USD 85 million to operating earnings before tax in 2005 compared to USD 94 million in 2004. Excluding this item, operating earnings decreased USD 98 million or 27%. The decrease includes USD 16 million from the one-time positive effect in 2004 related to the performance of a portfolio of loans. The remaining decrease is due primarily to lower investment spreads due to rising short term interest rates.
Asset recoveries of USD 176 million exceeded impairments of USD 125 million in 2005, which resulted in a net recovery of USD 51 million (USD 53 million after DPAC adjustment). This compares to 2004 asset losses of USD 311 million exceeding recoveries of USD 97 million, which resulted in a net loss of USD 214 million (USD 198 million after DPAC adjustment).
Recoveries are recognized on securities where market values increased significantly and objective evidence can be obtained as to the reason for the increase.
AEGON ANNUAL REPORT 2005 43 changes of USD 80 million were also recorded in 2004 to the reinsurance business. This included an increase of USD 54 million for a change in estimate of incurred but not reported claims resulting from a refinement of the calculation model and USD 26 million of reserve refinements and accrual changes related to the conversion to new reserve and administrative systems at Transamerica Reinsurance (TARe). The 2005 operating earnings include an USD 12 million positive adjustment to reflect the extension of a recapture provision in a fixed annuity reinsurance treaty and assumption refinement in retro-ceded life business, USD 11 million of additional earnings related to retrocession recoveries and USD (4) million of other one-time items. The remaining increase is primarily due to improved mortality in 2005 relative to poor mortality occurring primarily in the second quarter of 2004 and growth of the existing business.
For the Americas, operating earnings before tax on an IFRS basis are generally expected to be more volatile than income before realized gains and losses on shares and real estate reported on the previous Dutch accounting principles (DAP) basis. In particular, there are three items that are expected to create significant volatility due to the fair value nature of the underlying
Accident and health premiums of USD 2,456 million were slightly higher than those in 2004 due to increased sales through sponsored programs along with rate increases on certain health products, partially offset by discontinuance of new sales of longterm care policies.
Commissions and operating expenses of USD 4,063 million decreased 6% in 2005 compared to those in 2004. Commissions paid increased USD 174 million or 6% in 2005 compared to those in 2004, primarily due to higher recurring life premiums. Net DPAC capitalized increased USD 435 million due to higher first year life premiums.
Variable annuity deposits of USD 6,260 million increased 19% compared to 2004. The strong year over year growth is notable in both the retail and pension markets. The growth in the retail segment in 2005 was 13%, much of which is attributable to the ‘5 for Life’ product that was introduced in the fourth quarter of 2004. Production in the pension segment grew at 24%, largely due to strong production in the third and fourth quarters. The balances of variable annuities increased 8% to USD 48 billion in 2005.
Institutional guaranteed product production was USD 10,712 million in 2005, an increase of 13% compared to 2004. Higher sales were primarily in traditional and municipal GIC products and in medium term notes in conjunction with the launch of a new sales platform in Ireland. The tight credit spreads continue to negatively impact sales in 2005 as disciplined pricing is followed to achieve returns. The balance of GIC and funding agreements at December 31, 2005 consisted of USD 31.1 billion general account and USD 1.9 billion separate account business. The combined balances increased 6% over 2005.
Off balance sheet products include managed assets such as mutual funds, collective investment trusts and synthetic GICs. Off balance sheet production of USD 18.4 billion slightly decreased compared to that of 2004. Mutual fund sales of USD 10.1 billion decreased 9% in 2005 compared to 2004. Synthetic GIC sales of USD 8.2 billion in 2005 were 13% above those of 2004. Off balance sheet assets have increased 6% over 2005 and now total USD 80.8 billion.
AEGON The Netherlands’ operating earnings before tax for 2005 of EUR 322 million increased by EUR 126 million or 64% compared to 2004. The increase in the Netherlands is largely due to improved interest results, a release of provisions for profitsharing and employee benefits, as well as increased technical life and non-life results, partially offset by additions to provisions for products with certain guarantees and for improvements to certain spaarkas products, affecting life for account of policyholders. The release of the provision for employee benefits was mainly due to legislative changes. Operating earnings include certain volatile items under IFRS. In 2005, these items contributed EUR 62 million to operating earnings compared to EUR 12 million in 2004. These volatile items include financial assets carried at fair value, such as investments in private equity funds and derivatives used in portfolio allocation, for which there is no offset in liabilities. Excluding these volatile items in both 2005 and 2004, operating earnings increased EUR 76 million or 41%.
Life for account of policyholders operating earnings before tax amounted to an EUR 53 million loss in 2005 compared to a profit of EUR 45 million in 2004. The decrease was mainly caused by additional provisioning related to spaarkas products (EUR 42 million) and the additions to the guarantee provisions (EUR 163 million in 2005 compared to EUR 37 million in 2004). Lower amortization of DPAC mitigated the above mentioned losses.
Operating earnings before tax from fee business of EUR 15 million in 2005 decreased by EUR 11 million or 42% compared to 2004. Meeùs’ operational results decreased as significant investments were made in improving quality and generating growth. An expense management program commenced in the fourth quarter of 2005. TKP Pensioen and AEGON Asset Management have both performed better.
Traditional life 55 24 Life for account of policyholders 12 4
Traditional life (5) (12) Life for account of policyholders 0 (2)
For AEGON The Netherlands, operating earnings before tax on an IFRS basis are generally expected to be more volatile than income before realized gains and losses on shares and real estate as reported on the previous DAP basis. In particular, there are two items that are expected to create significant short-term volatility due to the fair value nature of the underlying valuation. In aggregate, these items contributed EUR 62 million to operating earnings in 2005, compared to EUR 12 million in 2004. These items are as follows: Asset valuation — certain financial assets, such as an investment in a private equity fund, are carried at fair value with no offsetting changes in the fair value of liabilities. As of December 31, 2005, these assets totaled EUR 225 million. This item contributed EUR 28 million to operating earnings before tax in 2004, compared to EUR 67 million in 2005.
Derivatives used in portfolio allocation — AEGON The Netherlands uses derivatives to manage the asset allocation of its investment portfolio. These derivatives are carried at fair value with no offsetting changes in the fair value of liabilities. The valuation of these derivatives contributed a negative EUR 16 million to operating earnings before tax in 2004 compared to a negative EUR 5 million in 2005.
Standardized new life production of EUR 231 million was 2% higher than that of 2004.
Non-life production decreased by 25% in comparison to 2004. Accident and health production declined in 2005 as a consequence of announced changes to legislation. The strong production in 2004 came from the new sick leave product (EUR 8 million) and from the disability product for self-employed. In 2005, AEGON The Netherlands developed new disability products for the group employee benefits market to address the changing needs as a result of the new disability system in the Netherlands as outlined in the WIA law. To date, AEGON The Netherlands has signed WIA contracts with 2,250 employers.
General insurance production amounted to EUR 40 million and showed a stable pattern throughout 2005 and 2004.
Revenues of EUR 6,164 million increased by 4% in 2005 compared to 2004. Life insurance gross premiums of EUR 3,021 million increased by 1%, accident and health insurance premiums of EUR 191 million increased by 2%, general insurance premiums of EUR 443 million remained stable, investment income of EUR 2,184 million increased by 8% and fees and commissions of EUR 325 million increased by 9%.
Income tax on shareholders return (17) (28) (39) (24) (41) (41)
Fee business reported a loss of GBP 27 million in 2005 compared to a profit of GBP 3 million in 2004. The lower result is due to the GBP 33 million charge for the incentive plan related to Positive Solutions, while equity markets and higher distribution business profits had a positive effect on operating earnings.
Revenues of GBP 5,155 million were up 5% from 2004. This reflects growth in annuity production over 2005.
Standardized new life production increased 4% compared to 2004. Changes in pricing and commission structures in the core pensions markets had a negative effect on production, especially impacting sales in the first quarter, while subsequent quarters showed a recovery in sales levels. AEGON UK continued to record solid growth in onshore bonds, protection business and annuities, illustrating the successful diversification into non-pension business. Higher margin non-pension products, such as annuities, bonds and protection products accounted for nearly one third of production in 2005.
OTHER COUNTRIES (INCLUDES AEGON HUNGARY, AEGON CZECH REPUBLIC, AEGON POLAND, AEGON SLOVAKIA,
Gains/(losses) on investments 12 15 (20) Impairment charges 0 (2) Other non-operating income/(charges) 176 0 Share in profit/(loss) of associates 16 9 78
Operating earnings before tax increased by HUF 2.7 billion to HUF 17.9 billion in 2005 mainly due to better technical results, a strict control of expenses and an increase in profit from fee — off balance sheet products.
Life operating earnings before tax increased by HUF 1.2 billion compared to 2004. Traditional life results decreased by HUF 1.1 billion as the portfolio runs-off. The increase in life for account of policyholders by HUF 1.5 billion is mainly coming from emphasizing high-profitable elements in life insurance products and lower commissions and expenses ratios. Increased operating results in the fee - off balance sheet line of business of HUF 0.8 billion is due to growing pension fund deposits and managed assets.
Net income increased from HUF 13.2 billion in 2004 to HUF 16.6 billion in 2005. Contributing to the increase are, in addition to higher operating earnings, higher non-operating earnings and a lower effective tax rate.
Commission and operating expenses increased by HUF 0.7 billion. Operating expenses increased by 5% in 2005 compared to 2004 as a result of strict cost control and despite increasing efforts needed to protect and retain pension plan portfolios due to growing competition.
Standardized new life production decreased by 6% in 2005 compared to 2004. To reverse a declining trend in production over the past few years, an intensive marketing campaign was launched in 2005. New life products were launched and the sales network has been restructured. New production started recovering slightly in the last quarter of 2005. Sales of household insurance increased by 6% mainly based on improving client service and price discounts. Strong competition in the motor insurance market caused a small reduction in market share since AEGON Hungary chose to maintain its pricing in order to maintain profitability.
AEGON started selling insurance products in the Czech Republic in the second quarter of 2005. Standardized new premium production was CZK 44 million and operating earnings before tax amounted to a loss of CZK 212 million.
AEGON Slovakia exceeded the threshold of 50,000 members required by regulatory authorities for a pension fund to be deemed viable, ahead of the June 2006 deadline. AEGON Slovakia has sold over 70,000 policies so far, of which 57,000 are officially registered, reflecting the good investment performance and an attractive fee structure of AEGON’s offering.
On October 4, 2005, the acquisition of AEGON Poland was completed. Standardized new premium production was PLN 41 million in the fourth quarter and operating earnings before tax amounted to a loss of PLN 4 million.
AEGON Spain’s operating earnings before tax was a loss of EUR 2 million for 2005, compared to a profit of EUR 63 million for 2004. The decrease mainly related to the sale of the general insurance activities as of January 1, 2005, which contributed EUR 56 million to operating earnings before tax in 2004 and to EUR 9 million of non-recurring costs associated with the sale of the general insurance business.
The effective tax rate for 2005 was 14% compared to 35% for 2004, mainly due to the low tax rate on the gain on the sale of the general insurance business.
Gross premiums of EUR 192 million for 2005 decreased by 59% compared to the same period of 2004, due to the sale of the general insurance business.
Regardless the impact of the sale of the general insurance business, the operating expenses increased by EUR 3 million.
In July 2005, AEGON Spain signed an agreement to set up a 50/50 partnership with Caja de Badajoz. This transaction has not received the approval from the Insurance authorities before December 31, 2005 and therefore no activity has been reported in 2005.
The partnership with Caja de Ahorros del Mediterráneo (CAM) continued its strong growth path, generating premium income of EUR 560 million and new life production of EUR 219 million, compared to EUR 177 million in 2004. The partnership has been successful in expanding sales of recurring premium products, which increased by 27% in 2005. The partnership with CAM is not consolidated by AEGON. AEGON includes its share in the results of the partnership in the line share in profit/(loss) of associates.
AEGON Taiwan reported operating earnings before tax of NTD 21 million whereas in 2004 an amount of NTD 149 million was reported. The variance is mainly the result of substantial growth in new business and higher hedging costs in connection with hedging the USD denominated bonds in the investment portfolio. The increase in hedging costs is a result of a widening of the interest differential between the NTD and USD.
Operating earnings before tax of traditional life amounted to a loss of NTD (141) million for the year 2005. The decrease compared to the NTD 57 million profit reported for the year 2004 is mainly due to higher hedging cost.
Gross premiums increased by 42% to NTD 35.4 billion mainly coming from growth in recurring premiums in the traditional life business.
AEGON’s share in operating earnings before tax amounted to a loss of CNY 68 million in 2005 compared to a loss of CNY 41 million in 2004.
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 employs risk management programs including asset liability management (ALM) processes and models, hedging programs (which are largely conducted via the use of derivatives) and insurance programs (which are largely conducted through the use of reinsurance). These risk management programs are in place in each country unit and are not only used to manage risk in each unit, but also for the Group. Derivative and reinsurance usage by the company are governed by derivative and reinsurance usage policies. These policies establish the control, authorization, execution and monitoring requirements of the usage of such instruments. In addition, these policies stipulate necessary mitigation of credit risk created through these risk management tools of derivatives and reinsurance. For derivatives, credit risk is often mitigated by requirements to post collateral via credit support annex agreements. For reinsurance, credit risk is often mitigated through funds withheld treaties (when AEGON owns the assets) or through assets held in trust for the benefit of AEGON (in the event of reinsurer insolvency).
As an international group, AEGON is subject to currency risk. Also, currency risk exists for any policy denominated in currencies other than the policy’s local currency. In the Netherlands, the majority of equity holdings are invested in an internationally diversified portfolio, rather than solely in Dutch equities. Equity held in subsidiaries is kept in local currencies to the extent shareholders’ equity is required to satisfy regulatory and self-imposed capital requirements. Therefore, currency exchange rate fluctuations may affect the level of shareholders’ equity as a result of translation into euro. AEGON holds the remainder of its capital base (capital securities, subordinated and senior debt) in various currencies in amounts that are targeted to correspond to the book value of its country units. This balancing mitigates currency translation impacts to equity and leverage ratios. Currency risk in the investment portfolios is managed using asset liability matching principles.
AEGON’s 2-year historical income before tax and capital in units on an IFRS basis are shown in table 1.
The exchange rates for US dollar and UK pound per euro for each of the last five year-ends are set forth in table 2.
During periods of sustained low interest rates, life insurance and annuity products may be relatively more attractive to consumers, resulting in increased premium payments on products with flexible premium features, and a higher percentage of insurance policies remaining in force from year to year. During such a period, investment earnings may be lower because the interest earnings on new fixed income investments likely will have declined with the market interest rates. In addition, mortgages and redeemable bonds in the investment portfolio are more likely to be repaid as borrowers seek to borrow at lower interest rates and AEGON may be required to reinvest the proceeds in securities bearing lower interest rates. Also, in a period of low interest rates, AEGON may not be able to reduce crediting rates on policies and still preserve margins as a result of minimum guaranteed crediting rates provided on policies. Accordingly, during periods of sustained low interest rates, net income may decline as a result of a decrease in the spread between either the interest rates credited to policyholders or the rates assumed in reserves and returns on the investment portfolio.
If interest rates rise, there may be unrealized losses on some of AEGON’s assets that will be recorded as negative income under IFRS. This is inconsistent with the IFRS accounting on much of the company’s liabilities where corresponding unrealized gains when interest rates rise do not affect income in the shorter term. Over time, the short-term reduction in income due to rising interest rates would be offset by higher income in later years all else equal. Therefore, rising interest rates are not considered a long-term risk to the company.
Estimated approximate Estimated approximate Movement of markets effects on net income effects on shareholders’ equity
Increase versus the euro of non-euro currencies of 15% increase between 12% and 13% increase between 14% and 15% Decrease versus the euro of non-euro currencies of 15% decrease between 12% and 13% decrease between 14% and 15%
2 The effect of currency exchange rate movements is reflected as a one-time shift up or down in the value of the non-euro currencies versus the euro on December 31, 2005.
The general account fixed income portfolios of AEGON Americas and AEGON The Netherlands accounted for 95% of the total general account fixed income portfolio of the AEGON Group on December 31, 2005. AEGON USA and AEGON The Netherlands manage their duration mismatch (which is the difference between the average life of liabilities and the average life of assets) on the basis of their expectations for the future level of interest rates within limits. Presently, other AEGON country units target the duration of their assets to equal approximately the duration of their liabilities where possible. In addition to point in time duration measurement, deterministic and stochastic scenarios are used to measure and manage interest rate risk. In these models, policyholder behavior changes are anticipated. These models are used by all country units and aggregated at group level.
For AEGON USA’s business, the average duration of assets is approximately 4.2 years. This relatively low duration, as compared to the long-term nature of most of AEGON USA’s businesses, is driven by the asset and liability management process applied to the institutional markets business in the United States (guaranteed investment contracts and funding agreements). Both the assets and the liabilities for this business are managed on a floating rate basis, with extensive use of interest rate swaps. As a result, the asset duration is short for this business. In the Netherlands, the average duration of assets is approximately 8.0 years. The combined market value weighted duration mismatch of AEGON USA and AEGON The Netherlands was around minus 1.0 years on December 31, 2005. This duration mismatch is an indication of the degree of interest rate risk on a fair value basis. As cash flows emerge and interest rates change, the actual impact of interest rate exposure could be higher or lower than what this static duration measure implies.
Table 4 shows each of the last five year end interest rates for the period from 2001 through 2005.
Under IFRS, income and shareholders’ equity are adversely affected when interest rates rise and favorably affected when interest rates fall. When interest rates shift up, there would be unrealized losses on certain assets that adversely affect net income and shareholders’ equity. However when rates shift up, IFRS does not recognize the unrealized gains in corresponding liabilities in net income and shareholders’ equity. Similarly, when rates shift down, there would be unrealized gains on certain assets that favorably affect net income and shareholders’ equity. However when rates shift down, IFRS also does not recognize the unrealized losses in corresponding liabilities in net income and
SENSITIVITY ANALYSIS OF NET INCOME AND SHAREHOLDERS’ EQUITY TO INTEREST RATES 1,2 (in EUR millions)
Fluctuations in the equity, real estate and capital markets have adversely affected AEGON’s profitability, capital position and sales of equity related products in the past and may continue to do so. Exposure to equity, real estate and capital markets exists in both assets and liabilities. Asset exposure exists through direct equity investment, where AEGON bears all or most of the
Equity market exposure is present in equity-linked products whereby policyholder funds are invested in equities at the discretion of the policyholder; here most of the risk remains with the policyholder. 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 benefits. AEGON is also at risk if returns are not sufficient to allow amortization of DPAC. It is possible under certain circumstances that AEGON would need to accelerate amortization of DPAC and to establish additional provisions for minimum guaranteed benefits, which would reduce net income and shareholders’ equity. Volatile or poor market conditions may also significantly reduce the popularity of some of AEGON’s savings and investment products, which could lead to lower sales and net income. AEGON’s general account equity and certain other investment holdings are shown in table 8.
The general account equity, real estate and other non-fixedincome portfolio of AEGON USA and AEGON The Netherlands accounted for 98% of the total general account equity, real estate and other non-fixed income portfolio of the AEGON Group. Of AEGON’s country units, AEGON The Netherlands holds the largest amount of equities, both in absolute terms and expressed as a percentage of total general account investments. The largest part of the equity portfolio of AEGON The Netherlands consists of a diversified portfolio of global equities and 5% equity holdings in Dutch companies, which include non-redeemable preferred shares.
Table 9 sets forth the year end closing levels of certain major indices.
EQUITY, REAL ESTATE AND NON-FIXED INCOME EXPOSURE IN GENERAL ACCOUNT ASSETS1 amounts in millions
AEGON AEGON THE AEGON OTHER HOLDINGS AND AMERICAS NETHERLANDS UK COUNTRIES ELIMINATIONS TOTAL
AEGON is exposed to currency fluctuations, changes in the fair value of its investments, the impact of interest rate, equity markets and credit spread changes and changes in mortality and longevity. AEGON uses common financial derivative instruments such as swaps, options, futures and forward contracts to hedge some of the exposures related to both investments backing insurance products and company borrowings. AEGON may not be able to manage the risks associated with these activities successfully through the use of derivatives. In addition, a counterparty may fail to honor the terms of its derivatives contracts with us.
On September 19, 2005, AEGON N.V. signed a USD 5 billion syndicated facility agreement with a syndicate of international banks. The facility has a term of five years and is extendable for two one-year periods. The facility is split between a revolving standby USD 3 billion loan and a USD 2 billion letter of credit facility.
Sources of underwriting risk include policy lapses and policy claims such as mortality, morbidity and expenses. In general, AEGON is at risk if policy lapses increase as sometimes AEGON is unable to fully recover up front expenses in selling a product despite the presence of commission recoveries or surrender charges and fees. For mortality and morbidity risk, AEGON sells certain types of policies that are at risk if mortality or morbidity increases, such as term life insurance and accidental insurance, and sells certain types of policies that are at risk if mortality decreases, such as annuity products. AEGON is also at risk if expenses are higher than assumed by management.
SENSITIVITY ANALYSIS OF NET INCOME AND SHAREHOLDERS’ EQUITY TO EQUITY AND REAL ESTATE MARKETS1,2 (in EUR millions)
Estimated approximate Estimated approximate Immediate change in effects on net income effects on shareholders’ equity
Real estate increase 10% 204 219 Real estate decrease 10% (204) (219) Real estate decrease 20% (408) (439)
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 in products, AEGON uses these analyses as the basis for modifying these charges, with a view to maintain a balance between policyholder and shareholder interests. AEGON also has the ability to reduce expense levels over time, thus mitigating unfavorable expense variation.
Insurance products enjoy certain tax advantages, particularly in the United States and the Netherlands, which permit the taxdeferred accumulation of earnings on the premiums paid by the holders of annuities and life insurance products under certain conditions and within limits. Taxes, if any, are payable on accumulated tax-deferred earnings when earnings are actually paid. The United States Congress has, from time to time, considered possible legislation that would eliminate the deferral of taxation on the accretion of value within certain annuities and life insurance products. In addition, the United States Congress passed legislation in 2001 that provided for reductions in the estate tax and the possibility of permanent repeal of the estate tax continues to be discussed; this could have an impact on insurance products and sales in the United States. Changes to tax laws in the Netherlands at the end of 2005 have reduced the attractiveness of early retirement plans, but tax advantages have been granted from January 1, 2006 for savings products known as ‘Levensloop’ (life cycle). Any changes in United States or Dutch tax law affecting products could have a material adverse effect on AEGON’s business, results of operations and financial condition.
Estimated approximate Estimated approximate Underwriting risk sensitivity effects on net income effects on shareholders’ equity
Lapses increase 20% (114) (114) Mortality/morbidity increases 10% (94) (94) Mortality/morbidity decreases 10% 90 90 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 decreases.
S&P rating A+ AA AA AA S&P outlook Stable Stable Stable Stable Moody’s rating A2 Aa3 Not rated A1 Moody’s outlook Stable Stable Not rated Stable Fitch rating AA– AA+ Not rated Not rated Fitch outlook Stable Stable Not rated Not rated
In addition, a downgrade may adversely affect relationships with broker-dealers, banks, agents, wholesalers and other distributors of AEGON’s products and services, which may negatively impact new sales and adversely affect AEGON’s ability to compete and thereby have a material adverse effect on AEGON’s business, results of operations and financial condition.
Negative changes in credit ratings may also increase AEGON’s cost of funding. During 2005, Standard and Poor’s maintained the credit ratings of AEGON N.V. at A+ with a stable outlook. Moody’s Investor Service maintained the senior debt rating of AEGON N.V. at A2 with a stable outlook. On January 30, 2006, Fitch assigned AEGON N.V. an AA– (double A minus) rating to AEGON N.V.’s senior debt with a stable outlook and A+ ratings to subordinated debt and perpetual securities. The current S&P, Moody’s and Fitch credit and insurance financial strength ratings and ratings outlook are shown in table 12 on page 61.
AEGON’s operating results and financial position can be adversely affected by volatile natural and man-made disasters such as hurricanes, windstorms, earthquakes, riots, fires and explosions. Over the past several years, changing weather patterns and climatic conditions have added to the unpredictability and frequency of natural disasters in certain parts of the world and created additional uncertainty as to future trends and exposure. AEGON generally seeks to reduce its exposure to these events through individual risk selection, monitoring risk accumulation and purchasing reinsurance. However, such events could lead to considerable financial losses.
The US Sarbanes-Oxley Act of 2002 (the Sox Act) and rules, subsequently implemented by the SEC and the New York Stock Exchange, require changes to some of AEGON’s reporting and corporate governance practices, including the requirement that AEGON issues a report on its internal controls over financial reporting, beginning for the year ending December 31, 2006 onwards. If AEGON is unable to maintain or achieve compliance with the SOX Act, it may have a material adverse impact on AEGON’s business.
The failure of a major market participant could disrupt securities markets or clearance and settlement systems in AEGON’s markets, which could cause market declines or volatility. Such a failure could lead to a chain of defaults that could adversely affect AEGON. In addition, such a failure could impact future product sales as a result of potential reduced confidence in the insurance industry.
The United States and the Netherlands do not currently have a treaty providing for the reciprocal recognition and enforcement of judgments (other than arbitration awards) in civil and commercial matters. Judgments of courts in the United States, including those predicated on the civil liability provisions of the federal securities laws of the United States, may not be enforceable in Dutch courts. Therefore, AEGON’s shareholders that obtain a judgment against AEGON in the United States may not be able to require the Group to pay the amount of the judgment unless a competent court in the Netherlands gives binding effect to the judgment. It may, however, be possible for a United States investor to bring an original action in a Dutch court to enforce liabilities against AEGON, its affiliates, directors, officers or any expert named therein who reside outside the United States, based upon the US federal securities laws.
AEGON’s internal audit departments are responsible for performing an annual risk assessment and conducting audits as necessary to evaluate the effectiveness of the design and operation of its internal controls. AEGON has also established a Group Risk and Capital Committee at the Group level. The objectives of the Group Risk and Capital Committee include monitoring AEGON’s overall risk exposures as well as making recommendations and overseeing remedial action where exposures are deemed excessive. Moreover, this Committee is responsible for ensuring that risks are well managed and measured within the country units. The Group Risk and Capital Committee regularly reports to the Executive Board and the Supervisory Board. In preparation for the formal attestation regarding to the financial year 2006 under section 404 of the Sarbanes-Oxley Act 2002 (SOX 404), the Executive Board has established a group wide framework to document, evaluate, and report on the effectiveness of the internal controls over the financial reporting process. Compliance with the Sarbanes-Oxley Act covers an extensive range of business procedures supporting the financial reporting process. Within this context, the COSO framework is applied.
The ratio of shareholders’ equity to total capital improved, mainly due to an increase in shareholders’ equity, supported by strong capital cash flows. In the future, AEGON’s capital base may be subject to regulatory requirements arising from new legislation in the Netherlands. Under IFRS accounting rules, reported equity has been subject to higher volatility. AEGON will monitor the development of its capital ratios under IFRS in order to ensure continued strong capitalization.
Operating leverage is not part of the capital base. At December 31, 2005, operating leverage was EUR 1.6 billion (2004: EUR 1.0 billion). Operating debt increased during 2005 due to the issuance of USD 500 million, 15-year fixed-rate notes to finance collateral reserve relief for business units of AEGON USA, as alternatives to current letter of credit requirements. This use of debt represents the largest portion of operating leverage. Other operating debt activities primarily relate to the financing of Transamerica Finance Corporation and its subsidiaries.
Internal sources of liquidity include distributions from operating subsidiaries on the basis of excess capital or cash and cash equivalents. During 2005, internal distributions from units were sufficient to cover interest expense, other holding company expenses, and dividend payments.
For detailed information about AEGON’s corporate governance and compliance with the Dutch Corporate Governance Code, please refer to pages 23 to 31. The Remuneration Policy and Report can be found on pages 33 to 36.
4. AEGON around the world Information about country units and product lines
InterSecurities, Inc. (ISI) is a fully licensed, independent brokerdealer and registered investment advisor. ISI’s registered representatives are focused on helping clients meet their investment objectives through an array of financial products that include mutual funds, fixed and variable life insurance, annuities, and securities. ISI is positioning itself for growth with the active recruitment of experienced financial professionals who appreciate the value of insurance products in an overall financial plan.
The Monumental division targets the lower and middle-income markets, selling individual traditional life and supplemental health insurance through three distinct distribution systems: Career Agency, PreNeed, and Military. Approximately 2,700 agents in 22 states reflect the diversity found in the communities they serve. The career agents provide face-to-face service to the policyholders. The PreNeed unit sells life insurance products through funeral directors and their agents to pre-fund funerals. In the Military unit, former military officers market life insurance and retirement savings products to commissioned and noncommissioned officers based in the United States and abroad.
The Long Term Care division administers an existing block of insurance products designed to meet clients’ long-term health care needs during retirement. Long-term care insurance products provide coverage primarily for care services provided at home, in an assisted living facility, or in a nursing home. Sales of long-term care insurance in this division were discontinued in 2005.
AEGON Direct Marketing Services (ADMS)is focused on customers that might not be reached by AEGON USA’s other distribution channels. ADMS aims to attract clients that might prefer to buy insurance products directly and not through an agent or intermediary. For this purpose, ADMS has developed a highly targeted approach using sophisticated database technology to increase its ability to develop niche markets and design products positioned to meet specific customer needs. Customers can purchase an extensive portfolio of products through direct mail, point-of-service, internet, and telemarketing. Products are also marketed using the endorsement of sponsoring organizations such as financial institutions, auto dealers, and various membership associations.
AEGON USA’s Financial Markets Group (FMG) consists primarily of Transamerica Capital Inc., Transamerica Investment Management, LLC, and Extraordinary Markets.
Transamerica Capital Inc. (TCI) works in partnership with many of the largest banks, national and regional broker-dealers, and financial planners in the United States to market fixed and variable annuities, mutual funds, 401(k) plans, and life insurance products. The bank distribution channel is particularly important to FMG. Working closely with its partners, FMG seeks to customize products and support to help banks expand their relationship with their customers.
Extraordinary Markets offers fixed and variable life insurance products through independent brokers to the bank- and corporate-owned life insurance market. Extraordinary Markets’ specialized team of product development, financial, actuarial and investment professionals has helped some of the world’s leading financial institutions and corporations fund employee and executive benefit and compensation programs through innovative insurance and investment solutions. The market is approached opportunistically and thus sales results can vary significantly from year to year.
AEGON Institutional Markets Division (IMD)is well positioned and long established in the competitive and mature institutional market. IMD entered the market with a distinctive floating-rate guaranteed investment contract (GIC) in 1982. Since then, it has significantly expanded its platform to include traditional fixedrate GICs, funding agreements and fee-based businesses such as synthetic GICs in which IMD holds a leading market (source: reports of LIMRA International and Stable Value Investment Association, Stable Value and Funding Agreement Products, 2005 Third Quarter Sales, IMD Market Research).
capital markets transactions such as writing credit default swaps, undertaking synthetic collateralized debt obligations, and providing guarantees of affordable housing tax credits. IMD also administers AEGON USA’s block of structured settlement pay-out annuities business. New sales for this product were discontinued in 2003.
In the annuity reinsurance market, Transamerica Reinsurance offers traditional coinsurance and modified coinsurance programs as well as reinsurance of general account guarantees on variable annuity products.
Transamerica Reinsurance writes business through various AEGON USA companies as well as offshore affiliates, Transamerica International Re (Bermuda) Ltd. and Transamerica International Reinsurance Ireland Limited.
Transamerica Retirement Services (TRS) serves the markets of defined contribution retirement plans and group fixed annuity contracts to qualified retirement plan sponsors terminating their defined benefit pension plans. In the defined contribution retirement plan market, TRS provides customized retirement plan solutions for small businesses and multiple employer plans. TRS offers a full line of 401(k), profit sharing, age-weighted, and new comparability retirement plans. TRS distributes these products and services through intermediaries, including life agents, brokers, registered representatives, and financial planners, as well as through a series of strategic alliance relationships. TRS distinguishes itself from its competitors by focusing on innovative plan design and Employee Retirement Income Security Act (ERISA) expertise and by offering a broad range of investment choices and employee educational services.
TRS is also a leading provider in the market for group fixed annuity contracts for terminating defined benefit plans. This market is primarily driven by certain market forces such as merger and acquisitions, business closures, and the need for plan-related cost savings. The financial strength and stability of AEGON’s insurance subsidiaries in the United States are key competitive factors as this market requires the effective management of long-term pension liabilities. Group fixed annuity products are distributed primarily through large benefit consulting firms or selected specialty brokers.
AEGON USA remains contingently liable with respect to the amounts ceded if the reinsurer fails to meet the obligations it assumed. To minimize its exposure to reinsurer insolvencies, AEGON USA annually monitors the creditworthiness of its primary reinsurers. It has experienced no material reinsurance recoverability problems in recent years. Where deemed appropriate, additional protection is arranged through letters of credit or trust arrangements, and, for certain arrangements, funds are withheld for investment by the ceding company. AEGON USA insurance subsidiaries also enter into reinsurance contracts with affiliated domestic and offshore companies. These have been eliminated in the consolidated statements, except for certain arrangements that involve producer profitsharing arrangements.
AEGON Canada operates multiple insurance, financial services, investment portfolio management, and fund management businesses; it also provides wealth management solutions through its subsidiary companies. AEGON Canada’s principal office is located in Toronto, Canada.
AEGON Canada’s operations are divided into six business segments: • Life insurance • Segregated funds • Retail mutual funds • Mutual fund dealership services • Retail financial planning services • Investment portfolio management and counseling services The primary operating companies of AEGON Canada are: • Transamerica Life Canada • Money Concepts (Canada) Limited • AEGON Dealer Services Inc. • AEGON Capital Management Inc. • AEGON Fund Management Inc. PRODUCTS AND DISTRIBUTION
Transamerica Life Canada (TLC) offers term and tax-sheltered universal life insurance, segregated funds, guaranteed interest accounts, and annuities. Money Concepts (Canada) Limited (MCC) is an independent Canadian financial planning company with an association of franchised planning centers that offer a diverse spectrum of planning products and services to investors. With 57 franchises across Canada, MCC is the only franchised financial planning company in Canada. MCC franchises and representatives benefit from AEGON Dealer Services Inc. (ADSCI), which provides advisors and distributors with mutual fund and segregated fund dealership capability. These services are also provided to TLC’s and AEGON Fund Management Inc. (AFM)’s advisors across Canada. AEGON Capital Management Inc. (ACM) was created in November 2001 from the spin off of the investment management division of TLC. ACM’s mandate is to develop products and services for the institutional, high net-worth individual, pension, and retail markets. AFM is the mutual fund subsidiary of AEGON Canada, which offers the imaxx brand of mutual funds as well as core fund portfolios featuring select investment managers from around the world to Canadian investors seeking customized portfolio solutions.
AEGON Canada’s principle means of distribution include various networks that are almost exclusively supported by independent advisors. The key channels of distribution are: • Independently managed general agencies • TLC-owned and operated profit center agencies • Bank-owned national broker-dealers • World Financial Group • Other national, regional and local niche broker-dealers INVESTMENT PRODUCTS
AEGON Canada’s current investment product offerings comprise the following: segregated funds, mutual funds, segregated funds offered through strategic alliances with investment management companies, guaranteed investment accounts, single premium annuities, and leverage-lending programs through strategic alliances with bank and trust companies. The imaxx range of mutual funds is offered by AFM. TLC offers all of AEGON Canada’s other investment products.
In the normal course of business, AEGON Canada limits the amount of loss on any one life and on certain levels of risk in various areas of exposure by reinsuring these risks with other insurers. The maximum life insurance exposure retained on any one individual is CAD 1.25 million.
AEGON Nederland N.V. is the holding company for the Group’s Dutch insurance and banking activities. AEGON’s operations in the Netherlands are collectively referred to as AEGON The Netherlands.
The head office of AEGON The Netherlands is located in The Hague, with additional offices in Leeuwarden, Groningen and Nieuwegein.
The sales organizations (SO) have been structured to serve different sales channels, such as independent brokers, AEGON affiliated organizations, and AEGON The Netherlands’ own advisors.
AEGON The Netherlands offers five product lines: • Pensions • Life insurance • Non-life insurance • Banking • Asset management While the majority of AEGON The Netherlands product are sold through brokers, some products are also sold via other channels such as direct marketing, specialized agents and tied agents. Institutional clients and large companies are directly targeted by the sales organization C&IC.
• Medium and small-sized enterprises (guaranteed) pensions • AEGON Pensioen Pakket (defined contribution) • AEGON Garantie Pensioen (defined benefit) Separate investment guaranteed contracts and separate investment capital contracts are defined benefit products with both single and recurring premiums and a disability rider. Profit sharing is based on the return of a pool of investments. Large group contracts also share technical results (mortality risk and disability risk). The assets are owned by AEGON The Netherlands but earmarked to form the basis for profit sharing for these contracts. The contract period is typically five years and the premium tariffs are fixed over this period. Separate investment capital contracts are only sold to company pension funds and AEGON The Netherlands has the option not to renew a contract at the end of the contract period; this ensures that the longevity risk lies with the pension fund. Separate investment guaranteed contracts provide a guarantee on the benefits paid. The longevity risk therefore lies with AEGON The Netherlands.
AEGON Garantie Pensioen and medium and small-sized enterprises growth pensions are also defined benefit products with single and recurring premiums. The initial contract period is ten years, with renewals for five-year periods. Profit-sharing is based on excess interest earned on the general account investment portfolio. Premium tariffs are fixed over the contract period and the longevity risk lies with AEGON The Netherlands. Minimum interest guarantees are given for nominal benefits, based on 3% actuarial interest (4% on policies sold before the end of 1999), after employee retirement.
TKP Pensioen offers administrative services for large pension funds. New acquisitions by this unit in 2005 have further enlarged its base of participants to a total of 220,000 and assets under management to EUR 8.9 billion.
The life insurance products are mainly sold by the sales organization Intermediary and by AEGON Spaarbeleg. The products are predominantly standardized financial products. The most important products are discussed below.
Spaarbeleg Kas N.V. and AEGON Spaarkas N.V. sell life products with both single and recurring premiums and profit-sharing based on a specific bonus system (tontine system). The main characteristic of a tontine system is that when the policyholder dies, the balance is not paid out to the policyholder’s estate, but is distributed at the end of the year to the surviving policyholders of the specific series (a new series starts at the beginning of each calendar year) to which the deceased policyholder belonged. When the policyholder dies before maturity, AEGON The Netherlands pays a death benefit equal to the premiums paid accumulated at a 4% compound interest, subject to a minimum of 110% of the fund value during the first half of the contract term. In addition to the tontine products, Spaarbeleg Kas N.V. sells a number of tax-driven products, and the seller has provided better access to products and services in order to meet consumers’ requests with respect to pension issues.
Over the past few years, the Dutch government has gradually withdrawn from the sick leave and workers disability market. In the property and casualty segment, AEGON The Netherlands’ strategy is to seek value creation rather than volume.
In 2005, AEGON The Netherlands developed new disability products for the group employee benefits market to address the changing needs as a result of the new disability system in the Netherlands as outlined in the WIA law.
AEGON Bank N.V. supplies savings accounts with straightforward conditions. The products are sold under the Spaarbeleg and AEGON Bank names through the various sales organizations. In 2005, AEGON The Netherlands developed an offering in the new ‘Levensloop’ market. Building on AEGON The Netherlands’ position in the group market, the ‘Levensloop’ arrangement has proved as a worksite marketing opportunity. This savings product provides investment options and is a tax-friendly means for individuals to save for paid leave or early retirement.
AEGON Asset Management’s (AAM) approach is to further develop the institutional market by winning asset management customers in cooperation with the sales organization C&IC. AAM is also the asset manager for AEGON The Netherlands’ insurance activities.
AEGON The Netherlands other activities consist primarily of the distribution units of the Meeùs Groep, which is an intermediary company specializing in insurance and real estate. Within the financial advice segment, the Meeùs Groep has developed a broad range of activities such as insurance, pensions, mortgages, financing, savings, and investments. In the real estate business, the Meeùs Groep acts as both a residential and commercial broker. The Meeùs Groep is also active in the real estate management business. Nedasco B.V is a service provider for independent financial advisors.
• AEGON Corporate — all manufacturing and scheme administration operations relating to the corporate pension and employee benefits markets in the United Kingdom
AEGON UK is a major financial services organization specializing in the long-term savings and protection markets. AEGON UK sells a range of products through financial advisor channels in the United Kingdom. The business is centered on two core markets: individual and corporate customers. This segmentation is driven by a desire to place the customer at the heart of the strategy.
AEGON Individual brings together individual pension and protection and onshore and offshore life businesses in order to focus on providing solutions to meet the protection, long-term savings, and retirement income needs of individuals. This business operates primarily through the Scottish Equitable brand.
AEGON Corporate provides group pensions and employee benefit solutions through the Scottish Equitable brand, scheme administration through the HS Administrative Services brand and worksite marketing software through the AEGON Benefit Solutions brand.
The UK government increase in the price cap for new stakeholder business to 1.5% for 10 years and then 1% thereafter was implemented in April 2005. So far, only a small number of product providers (including AEGON UK) have adopted the new charge cap, but others are expected to follow during 2006.
Sales of more specialized pensions remain strong, particularly in the area of income drawdown and phased retirement products. These allow individuals up to the age of 75 to access part of their pension income without having to fully purchase an annuity until a later date.
High standards of service are a key market differentiator for AEGON UK, with technology increasingly being used to improve efficiency for providers and advisors. AEGON UK is building on its success with SmartScheme, AEGON UK’s technology solution to pension administration. The company is involving financial advisors and clients in developing technology solutions to ensure that all parties derive benefit.
Individual pensions. AEGON Individual offers a comprehensive range of pension products, including stakeholder pensions, pensions for executives, transfers from other schemes, phased retirement, and income drawdown. AEGON Individual offers a Self Invested Personal Pension (SIPP) that allows the policyholder to invest in a range of investments, including insured funds and property.
AEGON UK distributes both UK and offshore bonds. The differences between these bonds lie in the tax advantages related to each type of bond. Offshore bonds offer the opportunity to defer personal tax as generally, tax is not paid until the bond is encashed.
AEGON Individual offers a range of internally managed funds as well as a comprehensive range of managed funds provided by a range of major fund managers.
In 2005, AEGON UK’s product range was extended with the addition of another charging basis on the open architecture contract (the Private Client Portfolio) and the launching of new sector funds on the insured bond (the Investment Portfolio).
AEGON Asset Management UK (AAM UK) is a major provider of asset management services both within AEGON UK and to institutional customers and individuals. As of December 31, 2005, AAM UK managed approximately GBP 45 billion of funds, providing both mutual and segregated funds for clients.
AEGON UK’s principal means of distribution is through the financial advisor channel in the United Kingdom market. These advisors provide their customers access to varying numbers and types of products depending on their regulatory status.
There are an estimated 60,000 active registered financial advisors in the United Kingdom, many of whom are grouped into networks of advisors that act as large national distributors. This estimate includes financial advisors operating in the multi-tied, single-tied, whole of market, and independent channels, reflecting different levels of restriction on the number of providers’ products that can be sold or advised on. AEGON UK has strong relationships with financial advisors across the market, but is particularly involved with the networks and with large local firms.
To support this activity, there are over 250 broker-consultants based in the United Kingdom that operate out of local branch offices and via a telephone sales center. They provide financial advisors with business development support, technical advice, and training.
AEGON UK reinsures risk where it believes it is prudent and economically sound to do so while maintaining a target credit rating requirement of AA by Standard & Poor’s. Credit exposure to other reinsurers is considered on a case by case basis.
AEGON Hungary’s main operations are life insurance, general insurance, pensions, and asset management. AEGON Hungary operations are organized by sales channels and functional areas.
AEGON Hungary has three subsidiaries: • AEGON Real Estate Limited Company • AEGON Pension Fund Management Company Limited by
AEGON Hungary is a composite insurance company offering both life insurance and non-life insurance products. The core business products are life, pension, mortgage, and household insurance. Strong pension fund sales have played a key role in the sales performance of AEGON Hungary in 2005. The life insurance product portfolio consists of traditional general account products and unit-linked products, although in recent years unit-linked sales have been much more significant than general account product sales. AEGON Hungary’s share in the household segment was 36% in 2004 (source: Annual Report of Hungarian Insurance Association). Margins for household insurance are attractive, and they present AEGON Hungary with opportunities for cross-selling life insurance products. Property and car insurance are also represented in the portfolio but are not core products.
Pension insurance is a core business product of AEGON Hungary. Pension fund administrative services are also offered. In 2004, the mandatory and voluntary pension funds of AEGON Hungary were among the largest in the country in terms of managed assets and number of members (source: www.pszaf.hu). The pension fund business concentrates its growth strategy on adding new members and taking over other pension funds.
Group life products are yearly renewable term products with optional accident and health coverage. These products are mainly unit-linked products that sometimes offer an interest guarantee.
AEGON started insurance operations in the Czech Republic within a locally founded company when it received a license from the Ministry of Finance in April 2005.
AEGON Czech Republic offered the following three basic products in 2005: • Regular premium product (unit-linked, traditional, tied agents/brokers)
AEGON Poland is a life insurance company offering mainly individual unit-linked products, including long-term savings and retirement products. AEGON Poland is first in this segment with a 21% share in the life insurance single premium segment. The company also achieved the fifth position in the total life insurance market with a 5% market share (based on premiums written, source: Annual Report of KNUiFE — Insurance and Pension Funds Supervisory Commission, 2004).
Open-architecture, unit-linked products are the most important products sold by AEGON Poland. AEGON Poland offers over 50 investment funds managed by different fund managers. In one product, a variable premium can be invested in 20 to 30 external investment funds and in one internal fund called the Guaranteed Fund. Both single premium and recurring premium products are sold. AEGON Poland charges asset management fees, policy fees, and risk charges to the fund. Death benefit in the unit-linked products is in most cases the higher of the fund value or the premium paid.
AEGON Poland’s reinsurance partners have a minimum Standard & Poor’s A rating. All products containing significant insurance risk, including risk riders and credit life, are reinsured. The company has both proportional and non-proportional protection.
• AEGON Pension Asset Management — the pension asset management company is a second pillar mandatory pension fund and received a license to do business on October 1, 2004. The mandatory pension fund market in Slovakia opened on January 1, 2005.
• Riders (accidental death, critical illness, waiver of premium, basic, and extended accidental rider)
Both AEGON companies are selling their products through their tied agents networks and the broker channel. Recently, the bank channel was added as a distribution channel for mortgage related products.
AEGON Life Insurance reinsures mortality and morbidity risk with Munich Re, which is rated A+. The retention is SKK 1,000,000 per life with respect to the death risk. The riders are reinsured using a quota share model.
AEGON entered the Spanish market in 1980 by acquiring Seguros Galicia. This was followed by the acquisition of Union Levantina in 1987, Union Previsora in 1988, Labor Medica in 1996, La Sanitaria in 1997, Caja de Prevision y Socorro in 1997, and Covadonga at the end of 1999.
Effective January 1, 2005, AEGON Seguros Generales was sold to Reale Mutua Group (Reale). It was additionally agreed that AEGON Seguros Generales’ distribution network in Spain will continue to sell AEGON’s life and health insurance products. Moreover, AEGON Spain acquired the Spanish life portfolio of Reale and gained access to Reale’s agent distribution network for five years and renewable thereafter.
In November 2005, AEGON Spain signed a strategic partnership agreement with the Spanish savings bank Caja Navarra (CN), whereby AEGON will acquire a 50% stake in CN’s life insurance and pensions subsidiary, Seguros Navarra S.A. The acquisition took place in two tranches; initially AEGON acquired a 15% stake and another 35% is acquired in February 2006. The acquisition is subject to approval by the Spanish and European regulatory authorities.
AEGON Spain will continue to expand its life insurance business by strengthening its agent distribution capability as well as by enhancing its existing bancassurance partnerships with CAM, CB and CN and pursuing new distribution opportunities.
AEGON Spain has proportional reinsurance protection for individual risk policies and non-proportional protection for group risk policies. AEGON Spain’s reinsurers generally have at least a Standard & Poor’s A rating.
AEGON Life Insurance Inc. (AEGON Taiwan) is a life insurance company that was formed in 2001 to conduct life insurance business in the Republic of China. AEGON Taiwan’s operations began in 1994 as a branch office of Life Investors Insurance Company of America, an AEGON USA life insurance company.
AEGON Taiwan offers a broad range of insurance products that meet a variety of consumer needs. These include whole life, endowment life, term life, accident and supplemental health, variable universal life, annuities, group life and health, and a range of policy riders. Variable universal life, introduced in April 2002, is one of the major products in the agency channel. In 2003, new product initiatives included an updated version of the whole life product series. Furthermore, AEGON Taiwan launched an innovative variable annuity product in 2004, targeted at long-term savings and retirement planning. Both products are sold through multiple distribution channels. The agency channel consists of a network of over 618 full-time professional career agents operating from 26 offices throughout Taiwan. The agency channel’s business is a mix of traditional and variable life insurance. The brokerage channel mainly sells whole life business written by independent agents. Whole life products are also sold via the bank channel. In the group business sector, AEGON Taiwan provides protection through yearly renewable life, accidental, or medical business to employees of its corporate clients.
AEGON-CNOOC Insurance Co., Ltd. (AEGON-CNOOC) is a 50/50 joint venture established in Shanghai, People’s Republic of China by China National Offshore Oil Corporation and AEGON. After a twelve-month preparatory period, AEGON-CNOOC commenced its operations in Shanghai in May 2003. AEGON-CNOOC is licensed to sell both traditional life insurance products as well as accident and health products in mainland China.
In April 2005, AEGON-CNOOC’s Beijing branch completed its business registration and started its full operation. Subsequently, in September 2005, the Jiangsu branch celebrated its opening ceremony in Nanjing and became one of the first joint venture life insurance company to enter into Jiangsu Province.
Being a newly established company, the asset liability management of AEGON-CNOOC is in an early stage. Considering that most insurance liability is derived from 5-year singlepremium products, AEGON-CNOOC purchased corporate bond, government bond, and statutory deposits to match this liability while operating funds are invested in the short-term bond, money-market fund, and bond repurchase markets to achieve higher investment return.
According to the regulations of the China Insurance Regulatory Commission (CIRC), AEGON-CNOOC cedes a quota share of accident and health business to the China Reinsurance Company. The quota share for the business written in 2003 is 15%, 10% for the business written in 2004, and 5% for the business written in 2005.
The AEGON companies around the world offer a range of insurance, pensions and investment products tailored to the specific needs of their customer bases.
Life for account of policyholders • • • • • • • • • • Variable annuities • • • Fee — off balance sheet products • • • • •
CONSOLIDATED INCOME STATEMENT OF AEGON GROUP FOR THE YEAR ENDED DECEMBER 31, 2005 Amounts in millions
3,403 2,806 NET INCOME ATTRIBUTABLE TO EQUITY HOLDERS OF AEGON N.V. 2,732 2,256
Dividend per share (cents per share) 46 0.45 0.42 1After deduction of preferred dividends and coupons on perpetuals
Transfers between revaluation reserves and retained earnings — 4 (4) — — — — — Gains/(losses) transferred to income statement on disposal and impairment — — 54 — — 54 — 54 Equity movements of associates — — — 19 — 19 — 19 Foreign currency translation differences — — 142 — — 142 — 142 Movements in foreign currency translation and net foreign investment hedging reserves — — — 1,515 — 1,515 — 1,515 Aggregate tax effect of items recognized directly in equity — — 242 — — 242 — 242
Other equity instruments issued — — — — 1,352 1,352 — 1,352 Dividends paid on ordinary shares — (256) — — — (256) — (256)
CONSOLIDATED CASH FLOW STATEMENT OF AEGON GROUP FOR THE YEAR ENDED DECEMBER 31, 2005 Amounts in millions 86 AEGON ANNUAL REPORT 2005
The Group’s financial statements are presented in euro. US dollar figures are included for information purposes only.
AEGON N.V. and its subsidiaries and joint ventures (AEGON or ‘the Group’) have life insurance and pensions operations in over ten countries in Europe, the Americas and Asia and are also active in savings and investment operations, accident and health insurance, general insurance and limited banking operations in a number of these countries. The largest operations are in the United States. Headquarters are located in The Hague, the Netherlands. The Group employs approximately 27,000 people worldwide.
These are the Group’s first consolidated financial statements prepared in accordance with IFRS, with the 2004 comparatives restated accordingly. Previously, the financial statements were prepared based on the reporting requirements embodied in Part 9 of Book 2 of the Netherlands Civil Code. The effects of the transition to IFRS as of January 1, 2004 on the financial position, financial performance and cash flows can be found in note 56.
New standards become effective on the date specified by IFRS, but may allow companies to opt for an earlier adoption date. In 2005, the Group has chosen to early adopt the following relevant standards: • The amendments to IAS 39 Fair value option — required date of adoption January 1, 2006; • The amendments to IAS 39 and IFRS 4 Financial Guarantee Contracts — required date of adoption January 1, 2006; • The amendments to IAS 19 Actuarial Gains and Losses, Group Plans and Disclosures — required date of adoption January 1, 2006.
The early adoption of these standards and interpretations did not have an impact on equity or net income. The amendments to IAS 39 Fair value option revised the fair value option previously included in IAS 39 by limiting its use to those financial instruments that meet certain conditions. The amendments to IAS 39 and IFRS 4 introducing a definition of a financial guarantee contract include requirements on the accounting for such contracts. The Group’s accounting policies, including the designation of financial instruments as at fair value through profit or loss, were not affected by the adoption of these two amendments.
The following standards and interpretations will be introduced in the coming years: • IFRS 7 Financial Instruments: Disclosures — required adoption date January 1, 2007; • The amendments to IAS 1 Capital Disclosures — required adoption date January 1, 2007; • The amendments to the guidance on implementation of IFRS 4 Insurance Contracts — required adoption date January 1, 2007; • The amendments to IAS 21 Net investments in foreign operations — required date of adoption January 1, 2006; • IFRIC 4 Determining whether an arrangement contains a lease — required date of adoption January 1, 2006; • IFRIC 8 Scope IFRS 2 Share-based Payment — required adoption date January 1, 2007.
The amendments to IAS 21 redefine which monetary items should be included in an entity’s net investment in a foreign operation. In order to meet the definition of a net investment in a foreign operation, monetary items no longer need to be denominated in either the functional currency of the parent company or the functional currency of the foreign operation. Also, the new standard clarifies that monetary items resulting from transactions between subsidiaries may also qualify.
IFRIC 4 addresses how to determine whether an arrangement is, or contains, a lease as defined in IAS 17 Leases, when the assessment or reassessment of the arrangement would be made and, if applicable, how the payments for the lease should be separated from payments for any other elements in the arrangement. IFRIC 8 clarifies that IFRS 2 Share-based Payment applies to all transactions in which an entity receives non-financial assets or services as consideration for the issue of its equity instruments, even where nil consideration seems to be received.
The Group intends to adopt the amendments to IAS 21, IFRIC 4 and IFRIC 8 effective January 1, 2006, subject to EU endorsement, and is currently investigating the effect of these standards and interpretations on its accounting.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON GROUP Amounts in EUR millions, unless otherwise stated 88 AEGON ANNUAL REPORT 2005 in Connection with Modifications or Exchanges of Insurance Contracts. This SOP provides guidance on the accounting for replacements of one contract by another. Depending on whether certain conditions are met, the replacement is accounted for as either an extinguishment or as a continuation of the replaced contract. The classification will affect the accounting for unamortized deferred policy acquisition costs (DPAC), unearned revenue liabilities and deferred sales inducement assets from the replaced contract.
The subsidiary’s assets, liabilities and contingent liabilities are measured at fair value on the acquisition date and are subsequently accounted for in accordance with the Group’s accounting principles and reporting year. Intra-group transactions, including AEGON N.V. shares held by subsidiaries, are eliminated. Intra-group losses are eliminated, except to the extent that the underlying asset is impaired. Minority interests are initially stated at their share in the net assets on the acquisition date and subsequently adjusted for the minority’s share in changes in the subsidiary’s equity.
When control is obtained in successive share purchases, each significant transaction is accounted for separately. The identifiable assets, liabilities and contingent liabilities are stated at fair value when control is obtained.
a. Translation of foreign currency transactions A group entity prepares its financial statements in the currency of the primary environment in which it operates. Transactions in foreign currencies are translated to the functional currency using the exchange rates prevailing at the date of the transaction.
As the Group’s risks and rates of return are predominantly affected by the fact that it operates in different countries, the primary basis for segment reporting is geographical segments. Geographical segments are defined based on the location of assets. Secondary information is reported for groups of related products.
Segment reporting includes information on operating earnings. Included in operating earnings are segment revenues and segment expenses. Segment revenues consist of premium income, investment income, fee and commission income, income from banking activities and other revenues. Segment expenses consist of premiums to reinsurers, policyholder claims and benefits (excluding the effect of charges to policyholders in respect of income tax), profit sharing and rebates and commissions and expenses. In addition to segment revenues the following income items are also included in the calculation of operating earnings: income from reinsurance ceded, fair value and foreign exchange gains and gains on investments for account of policyholders. Similarly, in addition to segment expenses, the following expense items are also included in the calculation of operating earnings: fair value and foreign exchange losses, losses on investments for account of policyholders and interest charges and related fees.
VOBA is amortized over the useful life of the acquired contracts, 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. Any change in estimates is recorded in the income statement. For all products, VOBA is assessed for recoverability at least annually on a country-by-country basis and the portion determined not to be recoverable is charged to the income statement. VOBA is considered in the liability adequacy test for each reporting period.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON GROUP Amounts in EUR millions, unless otherwise stated c. Future servicing rights On the acquisition of a portfolio of investment contracts without discretionary participation features under which AEGON will render investment management services, the present value of future servicing rights is recognized as an intangible asset. Future servicing rights can also be recognized on the sale of a loan portfolio or the acquisition of insurance agency activities.
The intangible assets are carried at cost less accumulated amortization and impairment losses. The depreciable amount of the asset is amortized over its useful life as the future economic benefits emerge and is recognized in the income statement as an expense. The amortization period and pattern are reviewed at each reporting date, with any changes recognized in the income statement.
Financial assets with fixed or determinable payments that are not quoted in an active market and that the Group does not intend to sell in the near future are accounted for as loans. To the extent that the Group has the intention and ability to hold a quoted financial asset with fixed payments to the maturity date, it is classified as held-to-maturity.
• Amortized cost 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, with the exception of future credit losses. Fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts are included in the calculation.
• Fair value The consolidated financial statements provide information on the fair value of all financial assets, including those carried at amortized cost where the values are provided as comparative data in the notes to the financial statements.
Derecognition A financial asset is derecognized when the contractual rights to the asset’s cash flows expire, when the Group has transferred the asset and substantially all the risks and rewards of ownership, or when the Group has transferred the asset without transfer or retaining of substantially all the risks and rewards of ownership, provided the other party can sell or pledge the asset. A transfer of an asset generally involves the transfer of the contractual right to receive cash flows of the asset. Financial assets, in respect of which the Group has neither transferred nor retained all the risks and rewards, are recognized to the extent of the Group’s continuing involvement.
A security that has been received under a borrowing or reverse repurchase agreement is not recognized as an asset in the financial statements. A receivable is recognized for any related cash collateral paid by AEGON. If the Group subsequently sells that security, a liability is recognized to repurchase the asset and measured at fair value.
On disposal of an asset, the difference between the net proceeds received and the carrying amount of the asset is recognized in the income statement. Any remaining attributable surplus in the revaluation reserve is transferred to retained earnings.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON GROUP Amounts in EUR millions, unless otherwise stated 2.9 DERIVATIVES
a. Definition Derivatives are financial instruments whose value changes in response to an underlying variable, that require little or no net initial investment and are settled at a future date.
Hedges that are no longer considered effective are discontinued prospectively. When hedge accounting is discontinued for a fair value hedge, the derivative continues to be carried on the balance sheet with changes in its fair value recognized in the income statement. When hedge accounting is discontinued for a cash flow hedge because it is no longer probable that a forecasted transaction will occur, the accumulated gain or loss in 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 equity are amortized into the income statement when the income statement is impacted by the variability of the cash flow from the hedged item.
Entities over which the Group has significant influence through power to participate in financial and operating policy decisions, but which do not meet the definition of a subsidiary or joint venture, are accounted for using the equity method. Interests held by venture capital entities, mutual funds and insurance funds that qualify as an associate are accounted for as an investment held at fair value through profit or loss.
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 by the associate directly in its equity are reflected in Group 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 equity investment and any other long-term interest that are part of the net investment are reduced to nil.
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 and are recognized immediately. Own equity instruments that are held by the associate are not eliminated.
a. Deferred policy acquisition costs DPAC relates to insurance contracts and investment contracts with discretionary participation features and represents the variable costs that are related to the acquisition or renewal of these contracts.
Other assets include fixed assets other than property, trade and other receivables and prepaid expenses. Fixed assets are initially carried at cost, depreciated on a straightline basis over their useful life to their residual value and are subject to impairment testing. Trade and other receivables are recognized at fair value when due and are subsequently measured at amortized cost.
Impairment losses are charged to equity to the extent that they offset a previously recorded revaluation reserve relating to the same item. Any further losses are recognized directly in the income statement.
b. Impairment of debt instruments Debt instruments are impaired when it is considered probable that not all amounts due will be collected as scheduled. Individually significant loans and other receivables are first assessed separately. All non-impaired assets measured at amortized cost are then grouped by credit risk characteristics and collectively tested for impairment.
Treasury shares are own equity instruments reacquired by the Group and are deducted from equity, regardless of the objective of the transaction. No gain or loss is recognized on the purchase, sale, issue or cancellation of the instruments. The consideration paid or received is recognized directly in equity. All treasury shares are eliminated in the calculation of earnings per share and dividend per share.
Trust pass-through securities, subordinated loans and other borrowings are initially recognized at their fair value 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. The liability is derecognized when the Group’s obligation under the contract expires or is discharged or cancelled.
Insurance contracts are contracts under which the Group accepts a significant risk — other than a financial risk — from a policyholder by agreeing to compensate the beneficiary on the occurrence of an uncertain future event by which he or she will be adversely affected. Contracts that do not meet this definition are accounted for as investment contracts. The Group reviews homogeneous books of contracts to assess whether the underlying contracts transfer significant insurance risk on an individual basis. This is considered the case when at least one scenario with commercial substance can be identified in which the Group has to pay significant additional benefits. Contracts that have been reclassified as insurance are not reclassified subsequently.
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 unexpired risks as well as for claims outstanding, which includes an estimate of the incurred claims that have not yet been reported to the Group.
Guaranteed minimum benefits The Group issues life insurance contracts, which, as a rule, do not expose the Group to interest risk as the account terms are not fixed or guaranteed or because the return on the investments held is passed on to the policyholder. However, in some cases these contracts 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.
d. Shadow accounting In some instances, realized gains or losses on investments have a direct effect on the measurement of the insurance assets and liabilities. For example, some insurance contracts include benefits that are contractually based on the investment returns realized by the insurer. In addition, realization of gains or losses on available-for-sale investments can lead to unlocking of VOBA or DPAC and can also affect the outcome of the liability adequacy test to the extent that the test considers actual future investment returns. In such cases, shadow accounting is applied. Shadow accounting ensures that all recognized gains and losses on investments affect the measurement of the insurance assets and liabilities in the same way, regardless of whether they are realized or unrealized and regardless of whether the gains and losses are recognized in the income statement or directly in equity. If an unrealized gain or loss triggers a shadow accounting adjustment to VOBA, DPAC or the insurance liabilities, the corresponding adjustment is recognized in equity, together with the unrealized gain or loss.
e. Liability adequacy testing At each reporting date the adequacy of the life insurance liabilities, net of VOBA and DPAC, is assessed using the existing liability adequacy test that is acceptable under local accounting principles. Additional recoverability tests for policies written in the last year may also result in loss recognition.
Onerous contracts With the exception of insurance contracts and investment contracts with discretionary participation features for which potential future losses are already considered in establishing the liability, a provision is recognized for onerous contracts in which the unavoidable costs of meeting the resulting obligations exceed the expected future economic benefits.
Defined contribution plans The contribution payable to a defined contribution plan for services provided is recognized as an expense in the income statement. An asset is recognized to the extent that the contribution paid exceeds the amount due for services provided.
For share option plans that are equity-settled, the expense recognized is based on the fair value on the grant date of the share options, which does not reflect any performance conditions other than conditions linked to the price of the Group’s shares. The cost is recognized in the income statement, together with a corresponding increase in equity, as the services are rendered. During this period the cumulative expense recognized at the reporting date reflects management’s best estimate of the number of shares expected to vest ultimately.
Share appreciation right plans are initially recognized at fair value at the grant date, taking into account the terms and conditions on which the instruments were granted. The fair value is expensed over the period until vesting, with recognition of a corresponding liability. The liability is remeasured at each reporting date and at the date of settlement, with any changes in fair value recognized in the income statement.
a. Current tax assets and liabilities Tax assets and liabilities for current and prior periods are measured at the amount that is expected to be received from or paid to the taxation authorities, using the tax rates that have been enacted or substantively enacted by the reporting date.
b. Deferred tax assets and liabilities Deferred tax assets and liabilities are recognized for the estimated future tax effects of temporary differences between the carrying value of an item and its tax value, with the exception of differences arising from the initial recognition of goodwill and of assets and liabilities that do not impact taxable or accounting profits. A tax asset is recognized for tax loss carryforwards to the extent that it is probable at the reporting date that future taxable profits will be available against which the asset can be utilized.
Premium loadings for installment payments and additional payments by the policyholder towards costs borne by the insurer are included in the gross premiums. Rebates that form part of the premium rate, such as non-claim rebates, are deducted from the gross premium; others are recognized as an expense. Depending on the applicable local accounting principles, bonuses that are used to increase the insured benefits may be recognized as gross premiums.
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.
Policyholder claims and benefits consists of claims and benefits paid to policyholders, including excess benefit claims for products for which deposit accounting is applied and the change in the valuation of liabilities for insurance and investment contracts. It includes internal and external claims handling costs that are directly related to the processing and settlement of claims. Amounts receivable in respect of salvage and subrogation are also considered.
The gains and losses on investments are aggregated by country, per category of financial assets and, in the case of available-for-sale financial assets, per type of instrument included in the category as reported in note 7 of the consolidated financial statements.
Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases, where the Group is the lessee, are charged to the income statement on a straight line basis over the period of the lease.
Actuarial assumptions The main assumptions used in measuring DPAC, VOBA and the liabilities for life insurance contracts with fixed or guaranteed terms relate to mortality, morbidity, investment return and future expenses. Depending on local accounting principles, surrender rates may be considered.
Mortality tables applied are generally developed based on a blend of company experience and industry wide studies, taking into consideration product characteristics, own risk selection criteria, target market and past experience. Mortality experience is monitored through regular studies, the results of which are fed into the pricing cycle for new products and reflected in the liability calculation when appropriate. For contracts insuring survivorship, allowance may be made for further mortality improvements. Morbidity assumptions are based on own claims severity and frequency experience, adjusted where appropriate for industry information.
Assumptions on future expenses are based on the current level of expenses, adjusted for expected expense inflation if appropriate. 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 lower levels of surrenders may indicate future claims will be higher or lower than anticipated. Such correlations are accounted for in the mortality and morbidity assumptions based on the emerging analysis of experience.
Fair value of investment contracts 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. 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.
Derivatives embedded in insurance and investment contracts Certain bifurcated embedded derivatives in insurance and investment products are not quoted in active markets and their fair values are determined by using valuation techniques. Because of the dynamic and complex nature of these cash flows, stochastic techniques
Impairment of financial assets 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. Also, there is a risk that new information obtained by the Group or changes in other facts and circumstances will lead the Group to change its investment decision. 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.
Objective evidence of impairment for an investment in an equity instrument 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.
Valuation of defined benefit plans The liabilities or assets recognized in the balance sheet 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.
The volatility is derived from quotations from external market sources and the expected dividend yield reflects AEGON’s current dividend yield. Future blackout periods are taken into account in the model in conformity with current blackout periods. The expected term is explicitly incorporated in the model by assuming that early exercise occurs when the share price is greater than or equal to a certain multiple of the exercise price. This multiple has been set at two based on empirical evidence. The risk-free rate is the interest rate for Dutch government bonds for periods ending on the last day of the exercise period.
This section contains a summary of the terms and conditions of the products sold and provides further background for an understanding of the business and its related risks. This is followed by an overview of the approach to risk management and highlights of specific risks to which the Group is exposed.
4.1 TERMS AND CONDITIONS OF THE PRODUCTS SOLD PER LINE OF BUSINESS
Traditional life products are sold in the United States, Canada, the Netherlands, the United Kingdom, Hungary, Slovakia, Spain, Taiwan and China.
Investment of future recurring premiums and reinvestment of premiums already received at prevailing market interest rates lower than priced for are also risks. In addition, some products provide minimum interest rate guarantees, exposing AEGON to interest rate risk in a prolonged low interest rate environment. In a rapidly rising interest rate environment, the company is exposed to disintermediation risk, although this risk is mitigated by surrender charges in early policy years.
Permanent life Permanent life insurance provides life-long financial protection. Most permanent policies have a cash value feature with implicit minimum interest rate guarantees prescribed by statutory requirements of between 4 and 5%. A customer may either withdraw the cash value, subject to withdrawal charges, or receive the benefit upon a predetermined event, such as the death of the insured.
Permanent life insurance is also known as whole life insurance in the United States. It can be participating or non-participating. Premiums are generally fixed and are payable over the life of the policy or for a limited time period. Participating policies allow the policyholder to receive policy dividends, as declared by the insurer’s board of directors. These dividends are not guaranteed and are based on the insurer’s experience for a given class of policies.
Term life insurance Term life insurance provides protection for a certain period of time and allows the customer to select the duration of coverage and the amount of protection. The policy pays death benefits only if the customer dies during the specified term. Term life policies do not accumulate a cash value. The policies can usually be renewed upon expiration and premiums normally increase upon renewal. Certain
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON GROUP Amounts in EUR millions, unless otherwise stated term life insurance products sold in the United States, such as mortgage insurance and credit life insurance, provide a death benefit that decreases over the term period, based on a stated method. The rate of decrease usually corresponds with the decrease in the principal balance of the loan.
Other Traditional life products also include life insurance sold as part of defined benefit pension plans, endowment policies, post-retirement annuity products and group risk products. Bank- or corporate-owned life insurance (BOLI/COLI) is sold to corporations as a method of funding employee benefit liabilities. The corporation insures key employees and is the owner and beneficiary of the policies.
CANADA The traditional life products sold by AEGON Canada include term life insurance, term to 100 and universal life. In addition, AEGON Canada also classifies its single premium immediate annuity product as part of its traditional life line of business.
Term to 100 Term to 100 is a permanent life insurance product with level premiums, level coverage amounts, minimal or no cash values and no expiry age. These policies are priced as lapse supported business and approximately 90% of the lapse and mortality exposures have been reinsured with third party reinsurers.
These products provide policyholders with a wide range of choices in determining the credited interest rate that will be applicable to the account values of their policies. The policyholder can choose a guaranteed interest rate for a guarantee period running between five and 25 years, a floating daily rate with a low minimum floor, a rate that is tied to the movement of various share and bond market indices, or a rate that is tied to the movement of various mutual funds. There is no minimum interest rate guarantee on the latter two options. Policyholders can divide their account values up such that the credited interest rate for each portion is tied to different investment options. Policyholders can switch among these various options.
The accumulation products pay benefits on the policy maturity date, subject to survival of the insured. In addition, most policies also pay death benefits if the insured dies during the term of the contract. The death benefits may be stipulated in the policy or equal the gross premiums paid to date. Premiums and amounts insured are established at inception of the contract. The amount insured can be increased as a result of profit sharing, if provided for under the terms and conditions of the product.
Minimum interest guarantees exist for all generations of accumulation products written. Older generations contain a 4% guarantee; in recent years the guarantee has decreased to 3%.
There are different kinds of profit sharing arrangements. Bonuses are either paid in cash (mainly in pension business, as discussed in the following section) or used to increase the sum assured. For one common form of profit sharing, the bonus levels are set by reference to external indices that are based on predefined portfolios of Dutch government bonds. The bonds included in the portfolio have different remaining durations and interest rates and together are considered an approximation of the long-term rate of return on Dutch high quality financial investments. Another common form of profit sharing are the interest rebates, whereby policyholders receive a discount on single premium business which reflects the expectation that the actual rate of return on the contract will exceed the minimum interest guarantee used to determine the premiums and sums assured. Here too, the expected actual rate of return is based on a portfolio of Dutch government bonds.
Term and whole life insurance Term life insurance pays out death benefits if the insured dies during the term of the contract. Whole life insurance pays out death benefits when the insured dies, regardless of when this event occurs. Premiums and amounts insured are established at inception of 104 AEGON ANNUAL REPORT 2005
the contract and are guaranteed. The amount insured may be adjusted on request of the insured. In principle, term life insurance policies will not include profit sharing arrangements. Part of the portfolio of whole life insurance has profitsharing features, which are based on external indices or return of related assets.
Pension and annuity insurance This category includes products in accumulation phase and in payout phase. Payout commences at a date determined in the policy and usually continues until death of the insured or the beneficiary. Premiums are paid at inception of the policy or during the accumulation phase of the policy. The contracts contain minimum guarantees of 3% or 4%.
OTHER COUNTRIES The main guarantee in Hungary is variable crediting rates with minimum interest guarantees between 0 and 4% for universal life type products, plus 100% participation in actual interest earned. Traditional non-profit share products have 5.5% technical interest rates, but this is a declining block of business. Profit share products mainly have a 3.5% technical interest rate and 85% participation in excess interest. The average minimum interest guarantee is about 3.4%.
In Spain a minimum interest guarantee of between 0 and 6% applies for traditional life products with fixed premiums. Current new business provides interest guarantees mostly between 2 and 3.4%.
The most significant guarantees in Taiwan relate to individual traditional life products with fixed premiums. These products carry interest guarantees at various levels. The current new business provides interest guarantees mostly at 2%. The average in force guarantee rate is approximately 3.3%. Business issued in 2003 and prior also carries the Ministry of Finance Dividend that requires the insurance company to pay to the policyholder a dividend referring to industry mortality experience and the average two-year term deposit rates.
AEGON provides an array of reinsurance solutions in the United States. The core life reinsurance offering, mortality risk transfer, is sold primarily through coinsurance, as well as yearly renewable term arrangements. Under a coinsurance arrangement, reinsurance is ceded and assumed in the same form as the direct policy and the reinsurer shares proportionately in the product risks, including mortality, persistency, investment and capital requirements. Yearly renewable term is a reinsurance plan for which the premium rates are not related to the original plan of insurance and the ceding company only reinsures the mortality risk.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON GROUP Amounts in EUR millions, unless otherwise stated 4.1.3 FIXED ANNUITIES
Fixed annuities are sold to individuals and pension funds in the United States and Canada.
In the United States, AEGON sells group and individual fixed annuities and retirement plan contracts to small and medium-sized institutions. Group fixed annuities are purchased with a single premium that funds the annuities for a group of employees. The single premium includes a fee for the administrative services which are provided by AEGON after the annuities are sold.
Terminal funding is a single premium non-participating group annuity product. This product is usually used for an insurance company takeover of a terminating defined benefit pension plan. The company receives a single deposit from the contractholder and in return guarantees the payment of benefits to participants. Usually these annuity payments are paid monthly for the life of the participant or participant and spouse, commencing immediately for retired participants or at some date in the future for deferred participants.
A structured settlement is a discontinued form of an immediate annuity previously sold by AEGON USA. These contracts are usually purchased by customers as a result of a lawsuit or a claim and the customer receives special tax treatment. Rather than paying the injured party a lump sum, the payments are structured as a lifetime annuity with mortality risk, or a period certain annuity, or a combination of both.
AEGON utilizes consolidated special purpose entities linked to medium-term notes for the issuance of certain funding agreements. The proceeds of each note series are used to purchase a FA from an AEGON insurance company, which is used to secure that particular series. The payment terms of any particular series substantially match the payment terms of the FA that secures that series. AEGON also sells fixed-rate AAA-wrapped municipal debt securities to consolidated special purpose entities, which issue floating-rate notes. AEGON receives residual income from these entities and provides certain guarantees to the noteholders in the event of early termination. These are reflected in FAs and notes issued to institutional investors in the table that follows.
Major components of GICs and FAs are summarized in the following table. The balances reflected are equal to the contract values.
Liabilities for GICs and FAs: GICs issued to defined contribution/benefit plans 3,203 3,089 FAs and notes issued to institutional investors 9,492 7,385 Cash market funding agreements 5,733 5,003 Municipal/governmental FAs/investment contracts 4,673 3,807 Other FAs 3,247 2,287
The following table presents liabilities for GICs and FAs by withdrawal regulation: Book value out1
As at December 31, 2005, the contractual maturities (based on nominal amounts) for all contracts with defined maturities were: • 2006 — EUR 5,623 million; • 2007 — EUR 4,703 million; • 2008 — EUR 1,576 million; • 2009 — EUR 2,462 million; • 2010 — EUR 1,753 million; and • Thereafter — EUR 4,870 million.
UNITED STATES Variable universal life products in the United States are similar to universal life products reported as part of the traditional life line of business, but include investment options and maintenance of investments for the account of policyholders. Some products contain minimum death benefit guarantees and the risk is that poor market performance may erode the policyholder account value to the extent that available cost of insurance charges prove inadequate. The fixed account has a minimum guaranteed interest rate of either 3% or 4% depending on the product. Newer products have a 2% guarantee. This product also contains a no lapse guarantee, which is an equity option. Under the no lapse guarantee, the contract is guaranteed to remain in force regardless of the level of underlying account value, provided the policyholder continues to meet minimum premium requirements. The value of this guarantee increases with higher cost of insurance charges and with lower minimum required premiums. This product is not sensitive to equity returns until the no lapse guarantee threshold is breached.
THE NETHERLANDS Tontine plans in the Netherlands are linked endowment savings contracts with a specific bonus structure. Policyholders can choose from several AEGON funds to invest premiums paid. The main characteristic of a tontine system is that when the policyholder dies, the balance is not paid out to the policyholder’s estate, but is distributed at the end of the year to the surviving policyholders of the specific series to which the deceased policyholder belonged. In general, a new series starts at the beginning of each calendar year, but there are also open ended tontine plans in the portfolio. When the policyholder dies before maturity, AEGON The Netherlands pays a death benefit equal to the premiums paid accumulated at a 4% compound interest, subject to a minimum of 110% of the fund value during the first half of the contract term.
The operation of with profit funds is complex. What is set out below is a brief summary of our overall approach.
Scottish Equitable and Guardian Assurance used to sell guaranteed annuity products in the United Kingdom. Certain policies also have a guaranteed minimum rate of return or guaranteed death or other benefits. Any guaranteed rates of return only apply if the policy is kept in force to the dates specified, or on the events described, in the policy conditions. The costs of all guarantees are borne by the with profits funds and therefore impact the payouts to with profits policyholders. AEGON UK’s main with profits classes are summarized at a very high level in the following sections.
• Scottish Equitable plc As part of its demutualization process before being acquired by AEGON N.V. on December 31, 1993 the business and assets of Scottish Equitable Life Assurance Society were transferred to Scottish Equitable plc. AEGON UK has no financial interest in Scottish Equitable plc’s with profits fund, apart from routine yearly fund management charges, costs and expenses that it takes on the basis agreed at the time of demutualization.
Guaranteed rates of return on with profits policies are typically in the range of 0 to 5.5% per year, with the highest rates closed to new premiums in 1999 and all funds closed to new business with investment guarantees from October 2002, except for a low level of increments.
Guaranteed returns on policies without guaranteed cash options or annuity payments are typically 0 to 3.5% per year. Those on policies with guaranteed cash options or annuity payments depend on the value of the options at retirement. Currently, the guaranteed annuities are in the money.
Management of the with profit funds It has been AEGON UK’s practice for each of the with profits funds to have an investment strategy that reflects the nature of the underlying guarantees. Funds can invest in a variety of different asset types; the main categories are United Kingdom and overseas equities, United Kingdom fixed interest securities, property and cash. Each with profits fund has a target range for the percentage of its assets that are invested in a combination of equities and property; the ranges may be varied. Within the target ranges, there is a policy of holding an appropriate mix of asset classes to reduce risk.
• The investment returns on the underlying assets, with an allowance for smoothing to reduce volatility. Although smoothing means that investment profits are spread from one year to the next, the aim is to pay out all of the investment profits earned by the fund over the long-term. On early withdrawal there are other measures to ensure that a fair share of total fund growth has been received. Indeed, a market value reduction may be applied under certain funds when, for cohorts of similar contracts, the face value of the benefits is greater than the value of the underlying assets. Policy conditions may state specific points at which a market value reduction will not apply.
OTHER COUNTRIES In Hungary a small part of the current new business provides a minimum interest guarantee of 2%. In Poland a guaranteed interest rate of 2.75% is offered on unit-linked products.
Variable annuities are sold to individuals and pension funds in the United States, Canada and Taiwan. Variable annuities allow a customer to save for the future on a tax-deferred basis and to participate in equity or bond market performance with a degree of downside protection. Furthermore, it allows a customer to select payout options that meet the customer’s need for income upon maturity, including lump sum payment or income for life or for a period of time.
The account value of variable annuities reflects the performance of the funds. AEGON earns mortality and expense charges as well as various types of rider fees for providing various forms of guarantees and benefits. This category includes segregated fund products offered by AEGON Canada.
CANADA 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 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. The management expense ratio charged to the funds is not guaranteed and can be increased at management’s discretion.
Products are sold in the United States, Canada, the Netherlands, the United Kingdom, Hungary and Slovakia. AEGON’s fee business comprises products that generate fee income by providing management, administrative or risk services related to off balance sheet assets (i.e. equity or bond funds, third party managed assets and collective investment trusts). Fee income is mainly sensitive to policyholder withdrawals and equity market decreases.
UNITED STATES AEGON’s operations in the United States provide various investment products and administrative services, individual and group variable annuities, mutual funds, collective investment trusts and asset allocation (retirement planning) services.
The operations in the United States provide the fund manager oversight for the Transamerica IDEX Mutual Funds (AEGON USA’s mutual funds) and Diversified Investors Funds Group family of mutual funds. AEGON selects and retains external managers based upon performance from a variety of investment firms. The external manager remains with the investment company and acts as a sub-advisor for AEGON’s mutual funds. AEGON earns investment management fees on these investment products.
CANADA In Canada, fees are earned through several special service and fund management companies, by providing administrative back office services that facilitate the sale of mutual funds and segregated fund products. In addition, a national network of financial planning franchises and representatives earn fees when products of non-affiliated companies are sold. Investment management fees are also earned by providing portfolio management and investment advisory services.
UNITED KINGDOM AEGON UK has invested in a number of independent advisors in the United Kingdom. The independent advisors deliver advice relating to financial needs to a range of customers (both individuals and companies). AEGON UK also provides asset management services.
OTHER COUNTRIES AEGON Hungary provides asset management services, including pension asset management.
Accident and health products are sold in the United States, Canada, the Netherlands, Spain, Hungary, Taiwan and China. AEGON offers limited forms of health insurance, including disability insurance in the Netherlands, Spain and Hungary and accidental death and dismemberment insurance in the United States, but does not offer major medical coverage. With accident and health the risk insured is morbidity. Uncertainties arise from the timing, frequency and severity of insured claims.