Notes to the consolidated financial statements 155 1 General information 155 2 Significant accounting policies 183 3 Critical accounting estimates and judgment in applying accounting policies 187 4 Financial risks 214 5 Segment information 227 6 Premium income and premiums paid to reinsurers 227 7 Investment income 228 8 Fee and commission income 228 9 Income from reinsurance ceded 228 10 Results from financial transactions 230 11 Other income 230 12 Policyholder claims and benefits 230 13 Profit sharing and rebates 230 14 Commissions and expenses 232 15 Impairment charges / (reversals) 233 16 Interest charges and related fees 233 17 Other charges 234 18 Income tax 235 19 Earnings per share 236 20 Dividend per common share 237 21 Cash and cash equivalents 241 23 Investments for account of policyholders 245 25 Investments in joint ventures and associates 247 26 Reinsurance assets 249 27 Deferred expenses 249 28 Other assets and receivables 253 29 Intangible assets 255 30 Shareholders’ equity 261 31 Other equity instruments 263 32 Subordinated borrowings 263 33 Trust pass-through securities 263 34 Insurance contracts 267 35 Investment contracts 268 36 Guarantees in insurance contracts 274 39 Defined benefit plans 281 40 Deferred tax 283 41 Other liabilities 283 43 Capital management and solvency 288 44 Fair value 300 45 Commitments and contingencies 304 46 Transfers of financial assets 307 47 Offsetting, enforceable master netting arrangements and similar agreements 308 48 Business combinations 310 49 Group companies 311 50 Related party transactions 313 51 Events after the reporting period
Other non-financial information 413 Non-financial data 416 Basis of preparation 419 Reference tables 419  International Integrated Reporting Council (IIRC)
430  International Responsible Business Conduct Agreement 431 Glossary 437 Abbreviations 438 Disclaimer 440 Contact
A summary of historical financial data is provided in the table below. It is important to read this summary in conjunction with the consolidated financial statements and related notes (see pages 148-313) of this Annual Report.
In EUR million (except per share amount) 2019 2018 2017 2016 2015
Results of operations This Integrated Annual Report includes the non-IFRS-EU financial measure underlying earnings before tax. The reconciliation of this measure to the most comparable IFRS-EU measure is presented in note 5 'Segment information' of the consolidated financial statements. This non-IFRS-EU measure is calculated by consolidating on a proportionate basis the revenues and expenses of Aegon's joint ventures in China, India, Japan, Mexico, the Netherlands, Portugal and Spain and Aegon's associates in Brazil, France, the Netherlands and United Kingdom.
Aegon believes that these non-IFRS-EU measures provides meaningful supplemental information about the underlying operating results of Aegon's businesses, including insight into the financial measures that senior management uses in managing the businesses.
Aegon's senior management is compensated based in part on Aegon's results against targets using the non-
IFRS-EU measures presented in this report. While many other insurers in Aegon's peer group present substantially similar non-IFRS-EU measures, the non-IFRS-EU measures presented in this document may nevertheless differ from the non-
Aegon and its peers present similar information before making a comparison. Aegon believes the non-IFRS-EU measures present within this report, when read together with Aegon's reported
IFRS-EU financial statements, provide meaningful supplemental information for the investing public. This enables them to evaluate Aegon's businesses after eliminating the impact of current IFRS-EU accounting policies for financial instruments and insurance contracts, which embed a number of accounting policy alternatives that companies may select in presenting their results (as companies may use different local generally accepted accounting principles (GAAPs)), and this may make the comparability difficult between time periods.
Net underlying earnings 1,651 1,754 (6) Tax on underlying earnings 322 320 1
 Results 2019 worldwide  Results 2019 worldwide Results of operations - Worldwide
en tu re s el im in at io n s
Total life insurance gross premiums 7,279 1,765 6,282 552 8,598 737 - 3 16,617 (691) 15,926
Accident and health insurance premiums 1,416 228 28 110 366 91 - - 1,872 (50) 1,823
Number of employees, including agent employees 8,570 3,582 2,261 2,853 8,696 4,540 1,535 416 23,757
H o ld in g o th er ac ti vi ti es a n d el im in at io n s
Net income Net income amounted to EUR 1,528 million in 2019, as underlying earnings before tax of EUR 1,973 million were partly offset by fair value losses, other charges, net impairments and income taxes. These items in turn offset gains on investments and gains from run-off businesses. The effective tax rate amounted to 18%, mainly as a result of tax exempt income items and the use of tax credits in the United States and in the United Kingdom the own employee pension plan moving into surplus.
 In Europe, underlying earnings before tax in 2019 increased by 4% compared with 2018 to EUR 875 million as a result of growth in the Netherlands and the United Kingdom, more than offsetting the lower earnings from Southern & Eastern
compared with 2018 to EUR 62 million in 2019. This was mainly driven by Aegon Insights, reflecting expense savings and favorable claims experience.
Fair value items The loss from fair value items amounted to EUR 226 million in 2019. Fair value losses in Europe were the main driver, totaling EUR 490 million in 2019. This was primarily related to the Netherlands, where the liability adequacy test (LAT)
Realized gains on investments Realized gains on investments amounted to EUR 405 million in 2019, driven by Europe and the Americas. In Europe these related largely to optimization of the investment portfolio in the Netherlands. In the Americas, the realized gains on investments were driven by bond calls and prepayments, mortgage loan gains, and normal trading activity.
Impairment charges Net impairments of EUR 22 million in 2019 mainly related to the impairments of corporate bonds resulting from bankruptcy filings in the United States and the impairment of consumer loans in the Netherlands. These were partly offset by recoveries for structured assets in the Americas, all of which were originally impaired between 2008 and 2013.
The Americas recorded other charges of EUR 156 million in 2019 mainly due to unfavorable impacts from model and assumption changes. Furthermore, other charges were recorded in relation to the operation of administration partnerships with TCS and LTCG, as well as following the decision to exit the Akaan Transamerica joint venture in Mexico. For Europe, the other charges totaled EUR 5 million. The main negative elements were unfavorable impacts from model and assumption changes and restructuring charges, both in the Netherlands and the United Kingdom. The main positive items were a provision release in the Netherlands following the change in pension scheme for own employees and a gain resulting from the sale of Aegon’s Czech and Slovak operations. For the Holdings, other charges amounted to EUR 95 million and resulted primarily from
Commissions and expenses Commissions and expenses decreased by 1% compared with 2018 to EUR 6.6 billion in 2019. Operating expenses increased by 4% compared with 2018 to EUR 3.9 billion in 2019. This increase primarily reflects lower restructuring expenses being more than offset by investments to support growth and customer experience in addition to higher IFRS 9
Fund Management Company (AIFMC). Net outflows during 2019 amounted to EUR 25.1 billion and were primarily due to outflows in the Americas in the Retirement Plan business following contract discontinuances and higher participant withdrawals.
Asset Management also recorded net inflows, primarily driven by the strategic partnership AIFMC. New life sales improved by 5% compared with 2018 to EUR 861 million in 2019, mainly driven by Europe, primarily as a result of a buy-out deal and a purchase of additional yearly pension increases by an existing customer, both in the Netherlands. New premium production for
Accident & Health and property & casual insurance decreased by 16% in 2019 compared with 2018 to EUR 359 million in 2018, mainly driven by the previously announced strategic decision to exit the travel insurance, affinity and stop loss insurance segments in the United States.
The gross leverage ratio improved to 28.5% on December 31, 2019, compared with 29.2% at the end of 2018, which was mostly the result of the higher shareholders’ equity excluding revaluation reserves, in combination with a net deleveraging during 2019. Excess cash in the holding declined in 2019 compared with 2018 to EUR 1.2 billion, as remittances from business units were more than offset by dividends to shareholders, interest payments, operating expenses and capital injections into the units, and net debt deleveraging and the associated costs.
On December 31, 2019, Aegon's estimated Solvency II ratio amounted to 201%, down from 211% at the end of 2018.
This decrease was driven by unfavorable impacts from market movements and model and assumption updates, more than offsetting normalized capital generation. The RBC
II ratio at the end of 2019 of Aegon United Kingdom amounted to 157%, down from 184% at the end of 2018. The decrease was mainly driven by remittance payments to the holding, including a special dividend, and the adverse impact of markets and assumption updates.
EUR 401 million on capital injections, including earn-out payments, while the proceeds from divestments amounted to EUR 131 million.
Gains / (losses) on investments 140 (241) n.m. 125 (204) n.m.
Income tax from certain proportionately consolidated joint ventures and associates included in income before tax 6 2 134 5 2 147
Accident and health insurance premiums 1,585 1,856 (15) 1,416 1,571 (10)
Total net deposits excluding run-off businesses (32,886)‍ (17,409)‍ (89) (29,371)‍ (14,734)‍ (99)
Results 2019 Americas The net income from the Americas amounted to USD 1.3 billion in 2019. Underlying earnings before tax in 2019 decreased by 12% compared with 2018 to USD 1.3 billion caused by lower fee income in Retirement Plans and Variable Annuities, product exits in the Health business, investments in the business to support growth and the impact of unfavorable economic movements on Life. Gross deposits were stable at USD 45.2 billion in 2019 compared with 2018, as higher gross deposits in Variable Annuities, Fixed Annuities, and from Latin America compensated lower gross deposits in Mutual funds. New life sales declined to USD 469 million in 2019 compared with USD 496 million in 2018 due to lower universal life and term life sales. New premium production for Accident & Health insurance was down 38% compared with 2018 to USD 194 million in 2019, reflecting the strategic decision to exit travel insurance, affinity and stop loss insurance segments.
 Hedges without an accounting match under IFRS resulted in a gain of USD 157 million. This was driven by gains on the macro hedge net of reserve movements, reflecting favorable equity markets.
 The result on fair value hedges with an accounting match amounted to a loss of USD 9 million.
Realized gains on investments were USD 140 million resulting from bond calls and prepayments, mortgage loan gains, and normal trading activity. Net impairments amounted to gains of USD 16 million, reflecting recoveries on multiple structured assets with sustained improvements in cash flows, partly offset by corporate bond impairments resulting from bankruptcy filings.
 Accident & Health underlying earnings before tax decreased to USD 241 million in 2019 compared with USD 259 million in 2018, mainly due to exiting affinity, accident, and travel products.
USD 195 million in 2018. This was the result of lower fee income from lower asset balances, a lower investment margin, and operating expenses to support growth and improve the
USD 469 million in 2018, driven by lower fee income from lower average balances. This was partly offset by lower benefits incurred due to both lower claims volume and lower average benefits.
USD 93 million in 2018 caused by margin pressure in a competitive market.
Production Gross deposits were stable at USD 45.2 billion in 2019 compared with 2018, driven by lower gross deposits in Mutual funds which were compensated by higher gross deposits in Variable Annuities,
Introduction Europe The results 2019 Europe cover the following operating segments: The Netherlands, United Kingdom and Southern & Eastern Europe.
Board which is regarded as Aegon's chief operating decision maker. For Europe, the underlying businesses are separate operating segments which under IFRS 8 cannot be aggregated, therefore further details will be provided for these operating segments in this section. Management is of the opinion that presenting the information for the entire European area is beneficial to the users of the financial information as it aligns to how Aegon management is looking at the information following convergence in Europe from a regulatory standpoint and financial markets perspective.
Underlying earnings before tax by product segment 648 139 88 875 615 128 96 839
Income / (loss)‍ before tax (excluding income tax from certain proportionately consolidated joint ventures and associates)‍ 496 (27)‍ 155 625 815 19 76 909
 Results 2019 Europe  Results 2019 Europe Results of operations - Europe
Net underlying earnings 723 674 7 Tax on underlying earnings 152 165 (8)
Income tax from certain proportionately consolidated joint ventures and associates included in income before tax 14 11 36
Of which Income tax from certain proportionately consolidated joint ventures and associates included in income before tax (14) (11) (36)
Net income for the Netherlands Net income from Aegon's businesses in the Netherlands amounted to EUR 383 million in 2019, driven by underlying earnings before tax of EUR 648 million, partly offset by negative fair value items. The result on fair value items deteriorated compared with 2018 to a loss of EUR 365 million in 2019, caused by a EUR 1,488 million LAT shortfall, partly offset by EUR 521 million fair value gains on derivatives, a EUR 434 million gain on the guarantee provision and EUR 183 million real estate revaluations. Realized gains of EUR 240 million in 2019 were the result of investment portfolio optimization. Net impairments amounted to EUR 26 million in 2019. Other charges were EUR 1 million in 2019 as charges from model and assumption changes and restructuring expenses were offset by the release of a provision for future salary increases as a consequence of the transition to a defined contribution plan for new pension accruals of Aegon’s own employees.
Net income for Southern and Eastern Europe Net income from Aegon's businesses in Southern and Eastern Europe (SEE) amounted to EUR 136 million in 2019 and reflect underlying earnings before tax of EUR 88 million. Gains on investments amounted to EUR 27 million and were driven by a
Underlying earnings before tax Underlying earnings before tax in 2019 increased by 4% compared with 2018 to EUR 875 million as a result of growth in the Netherlands and the United Kingdom.
 Underlying earnings before tax from Non-life were down by 23% compared with 2018 to EUR 31 million, due to lower disability provision releases.
 Banking’s underlying earnings before tax declined by 1% compared with 2018 to EUR 102 million, as a higher net interest margin as a result of balance sheet growth was more than offset by higher expenses to ensure regulatory compliance focusing on customer due diligence and anti-money laundering initiatives.
compared with 2018. This decrease was caused by the sale of Aegon’s businesses in the Czech Republic and Slovakia.
Commissions and expenses Commissions and expenses increased by 2% compared with 2018 to EUR 2,032 million in 2019. Operating expenses were up by 6%
Commissions and expenses for the United Kingdom Commissions and expenses increased compared with 2018 to EUR 707 million in 2019. Operating expenses rose by 2%
New life sales increased by 12% compared with 2018 to EUR 311 million in 2019, driven by a pension buy-out in the Netherlands. New premium production for Accident
Production for the United Kingdom Gross deposits decreased by 26% compared with 2018 to EUR 9.7 billion in 2019 as the retail business was impacted by lower overall market activity including a slowdown in defined benefit transfers, and prior service issues. New life sales rose by 3% compared with 2018 to EUR 41 million in 2019, due to higher protection sales.
Production for Southern and Eastern Europe Gross deposits decreased by 14% compared with 2018 to EUR 351 million in 2019, largely caused by the divestment of Aegon’s businesses in the Czech Republic and Slovakia as well as the non-core activities in Hungary. New life sales declined by 3% compared with 2018 to EUR 133 million in 2019, reflecting the divestment of Aegon’s businesses in the Czech
Republic and Slovakia. This was partly offset by higher production in Turkey and in the bancassurance joint ventures in Spain.
Gains / (losses) on investments 10 (10) n.m. 9 (8) n.m.
Income before tax (excluding income tax from certain proportionately consolidated joint ventures and associates)‍ 53 43 25 48 36 32
Income tax from certain proportionately consolidated joint ventures and associates included in income before tax (1) 15 n.m. (1) 13 n.m.
Gross deposits (on and off balance)‍ 2019 2018 % 2019 2018 %
USD 24 million in 2018, mainly driven by lower taxes, reflecting a commission tax law change in China. Fair value items were a loss of USD 5 million in 2019, caused by hedge losses in Japan, compared with a gain of USD 3 million in 2018. Realized gains amounted to USD 10 million in 2019, reflecting bond calls and prepayments, compared with a USD 10 million realized loss in 2018. Other charges worsened to USD 21 million in 2019 compared with USD 9 million in 2018, largely due to a
USD 9 million correction of modelled premium paying periods for a specific Accident & Health book and a USD 5 million remediation of policies sold via the telemarketing channel in the run-off book of Aegon Insights. Income tax decreased to USD 16 million in 2019 compared with USD 29 million in 2018, driven by a commission tax law change in China, reducing the effective tax rate and also leading to a one-time
 Underlying earnings before tax in Aegon Insights increased to USD 12 million in 2019 compared with USD 9 million in 2018, reflecting expense savings and favorable claims experience. This was partly offset by the reduction of the in-force book in line with the strategy for this business.
Indonesia to Thailand. The joint ventures in India and Japan improved earnings but remained loss-making. Aegon and
Income before tax (excluding income tax from certain proportionately consolidated joint ventures and associates)‍ 133 149 (11)
 Results 2019 Aegon Asset Management  Results 2019 Aegon Asset Management Results of operations - Aegon Asset Management
Results 2019 Aegon Asset Management Net income in 2019 decreased to EUR 97 million compared with EUR 105 million in 2018 as a result of lower underlying earnings before tax compared with 2018. Gross flows in external third-party asset management increased by 36% to EUR 80.9 billion in 2019 compared with 2018. Higher gross inflows in Strategic partnerships were partly offset by lower inflows in the Americas and Europe. The higher gross flows were driven by the Chinese joint venture Aegon Industrial Fund Management Company (AIFMC).
Net income Net income in 2019 decreased by 8% compared with 2018 to EUR 97 million. This was mainly driven by lower underlying earnings before tax in 2019 compared with 2018.
Underlying earnings before tax Underlying earnings before tax decreased by 8% in 2019 compared with 2018 to EUR 139 million. This decrease was mainly driven by lower underlying earnings before tax in 2019 compared with 2018 from Europe and the Americas. These more than offset an increase of underlying earnings before tax in 2019 compared with 2018 in the Rest of World.
 Americas underlying earnings before tax decreased to EUR 56 million in 2019, compared with EUR 62 million in 2018, mainly driven higher expenses, which more than offset higher management fees.
 Underlying earnings before tax from Europe in 2019 decreased by EUR 15 million to EUR 16 million compared with 2018. The decrease can be attributed to the United Kingdom and mainly resulted from outflows. This is partly offset by an increase in underlying earnings before tax in 2019 in the
 Underlying earnings before tax from Strategic partnerships remained stable in 2019 at EUR 69 million compared with 2018. The main contributor is Aegon’s Chinese asset management joint venture AIFMC.
Commissions and expenses Commissions and expenses increased by 5 million in 2019 to EUR 493 million compared with 2018. Operating expenses increased by 1% compared with 2018 to EUR 445 million in 2019. This increase was mainly driven by higher expenses in the Americas to support new business in combination with strengthening of the US dollar versus the Euro in 2019. These effects were more than offset by lower administration expenses in all units as a consequence of strict cost discipline. The cost/
For Europe, this was driven by the UK, in part due to uncertainty throughout 2019 surrounding Brexit.
Assets under management Assets under management increased by EUR 36 billion in 2019 to EUR 352 billion compared with the end of 2018. This was primarily driven by favorable market movements. This, in combination with net inflows in external third parties and favorable currency movements, more than offset outflows in the general account and affiliated business
Consolidated financial statements of Aegon N.V. Exchange rates Exchange rates Consolidated financial statements of Aegon N.V. Exchange rates
Share in profit / (loss) of joint ventures 25 214 210 161
Consolidated financial statements of Aegon N.V. Consolidated income statement of Aegon N.V. Consolidated income statement of Aegon N.V.
Items that will not be reclassified to profit or loss: Changes in revaluation reserve real estate held for own use (4) (32) 8
Income tax relating to items that will not be reclassified 92 (8) (166)
Non-controlling interests (1) 2 (3) 1 Amounts have been restated to reflect voluntary changes in accounting policies related to liability adequacy testing that was adopted by Aegon effective
Total equity and liabilities 441,123 393,031 396,291 1 Amounts have been restated to reflect voluntary changes in accounting policies related to liability adequacy testing that was adopted by Aegon effective
Consolidated statement of changes in equity of Aegon N.V. For the year ended December 31, 2019
Mandatory change in accounting policy 2.1.1 - (44) - - - - (44) - (44)
Net income / (loss) recognized in the income statement - 1,528 - - - - 1,528 - 1,528
Remeasurements of defined benefit plans - - - (612) - - (612) - (612)
Income tax relating to items that may be reclassified - - (627) - (5) - (632) - (632)
Total comprehensive income / (loss)‍ for 2019 - 1,568 2,433 (547)‍ 307 - 3,761 (1)‍ 3,760
Dividends paid on common shares (273) (309) - - - - (583) - (583)
Coupons on non-cumulative subordinated notes - - - - - - - - 1 Issued capital and reserves attributable to owners of Aegon N.V. 2 See note 2.1.1 for details about the impact of adopting IFRS 16 on Leases and note 2.1.2 for details about the impact of voluntary change in accounting policy on Liability
Other comprehensive income: Items that will not be reclassified to profit or loss: Changes in revaluation reserve real estate held for own use - - (32) - - - (32) - (32)
Remeasurements of defined benefit plans - - - (134) - - (134) - (134)
Total comprehensive income / (loss)‍ for 2018 - 741 (1,462)‍ (182)‍ 539 - (364)‍ 2 (362)‍
Dividends paid on common shares (244) (329) - - - - (573) - (573)
Coupons on non-cumulative subordinated notes - (11) - - - - (11) - (11)
1 Issued capital and reserves attributable to owners of Aegon N.V. 2 Amounts have been restated to reflect voluntary changes in accounting policies related to liability adequacy testing that was adopted by Aegon effective January 1, 2019.
At January 1, 2017 (as previously stated)‍ 8,193 7,812 5,381 (1,820) 1,347 3,797 24,710 23 24,734
Changes in accounting policies related to liability adequacy testing 2.1.2 - - (92) - - - (92) - (92)
Other comprehensive income: Items that will not be reclassified to profit or loss: Changes in revaluation reserve real estate held for own use - - 8 - - - 8 - 8
(Gains) / losses transferred to income statement on disposal and impairment of available-for-sale investments - - (1,330) - - - (1,330) - (1,330)
Refer to note 2.1.2 Voluntary changes in accounting policies for details about this change.
Amounts in EUR million Note 2019 2018 2017 Income / (loss)‍ before tax 1,832 782 2,393 Results from financial transactions (36,309) 11,486 (23,304) Amortization and depreciation 1,185 1,315 781
Net cash flows from operating activities 21 7,302 517 553 Purchase of individual intangible assets (other than VOBA and future servicing rights) (46) (42) (34) Purchase of equipment and real estate for own use (102) (81) (72) Acquisition of subsidiaries, net of cash (1) (89) (52) Acquisition/capital contributions joint ventures and associates (269) (146) (121) Disposal of intangible asset 1 2 1 Disposal of equipment 63 14 5 Disposal of subsidiaries and businesses, net of cash 137 (200) (1,054) Disposal joint ventures and associates 1 7 2 Dividend received from joint ventures and associates 130 97 129
Issuance of treasury shares 1 - 2 Issuance of perpetuals 496 - Purchase of treasury shares (318) (248) (266) Proceeds from TRUPS 1), Subordinated borrowings and borrowings 4,923 4,185 9,170 Repayment of TRUPS 1), Subordinated borrowings and borrowings (7,014) (5,211) (7,918) Repayment of perpetuals (1,343) (200) Repayment of non-cumulative subordinated note - (443) -
Coupons on perpetual securities (112) (136) (138) Coupons on non-cumulative subordinated notes (54) (14) (37)
dividends received EUR 1,702 million (2018: EUR 1,222 million and 2017: EUR 1,292 million) and interest paid EUR 407 million (2018: EUR 400 million and 2017: EUR 311 million). All included in operating activities except for dividend received from joint ventures and associates EUR 130 million (2018: EUR 97 million and 2017: EUR 129 million).
The consolidated financial statements have been prepared in accordance with the historical cost convention as modified by the revaluation of (investment) properties and those financial instruments (including derivatives) and financial liabilities that have been measured at fair value. Information on the standards and interpretations that were adopted in 2019 is provided below in note 2.1.1. Aegon also adopted voluntary changes in accounting policies, effective January 1, 2019, disclosed in note 2.1.2.
The consequence is that the rounded amounts may not add up to the rounded total in all cases. All ratios and variances are calculated using the underlying amount rather than the rounded amount.
The consolidated financial statements of Aegon N.V. were approved by the Executive Board and by the Supervisory Board on March 18, 2020. The financial statements will be put for adoption to the Annual General Meeting of Shareholders on May 15, 2020.
IFRIC 23 Uncertainty over Tax Treatments January 1, 2019 Yes Low
Except for IFRS 16 Leases and Interest Rate Benchmark Reform (early adopted by the Group), the new standards and amendments to existing standards are currently not relevant or do not significantly impact the financial position or financial statements (total adverse impact on the opening balance of retained earnings is EUR 3 million).
IFRS 16 Leases was issued by the IASB in January 2016 and replaced IAS 17 Leases and IFRIC 4 on January 1, 2019. The most significant change of IFRS 16 is related to leases that were identified as operational leases held by a lessee under IAS 17. Under IAS
The accounting policy for leases applicable from January 1, 2019 is included in note 2.33 Leases.
The Group has applied IFRS 16 using the modified retrospective approach and therefore the comparative information has not been restated and continues to be reported under IAS 17 and IFRIC 4. At transition, the cumulative effect of initial application was recognized as an adjustment to the opening balance of retained earnings on January 1, 2019.
The Group has adopted a number of key options and practical expedients allowed under IFRS 16, of which the following are the most significant:  The Group has applied the modified retrospective approach and therefore has not restated the comparative amounts for the year prior to initial application. Under this approach, on a lease-by-lease basis, the following two options are available: (i) right-of-use assets (mainly high value properties) measured on transition as if the new rules had always been applied, but discounted using the lessee’s incremental borrowing rate at the date of initial application; or (ii) right-of-use assets measured at the amount of the lease liability on adoption (adjusted for any prepaid or accrued lease expenses). The group has applied these two available options on a lease-by-lease basis;  The Group has applied the exemption not to recognize right-of-use assets and liabilities for liabilities with less than 12 months of lease term;  The Group has elected to apply the 'grandfather' option, which means that all conclusions previously reached under IAS 17 (and
IFRIC 4 Determining Whether an Arrangement Contains a Lease) are deemed compliant with IFRS 16; and  The Group has elected to use hindsight in areas that involve judgment or estimation, such as in determining the lease term if the contract contains options to extend or terminate the lease.
The Group is not required to make any adjustments on transition to IFRS 16 for leases in which it acts as a lessor, except for a sublease. The Group accounted for its leases in accordance with IFRS 16 from the date of initial application.
At transition, the Group recognized EUR 235 million of right-of-use assets and lease liabilities of EUR 285 million, recognizing the adverse impact of EUR 41 million in shareholders’ equity, in retained earnings. The right-of-use assets mainly consist of approximately EUR 212 million real estate and of approximately EUR 23 million equipment. The largest right-of-use assets are office buildings located in the United Kingdom and US for an amount of EUR 116 million and EUR 50 million respectively. The Group does not expect material movements in net income going forward.
When measuring lease liabilities, the Group discounted lease payments using its incremental borrowing rate at January 1, 2019.
reforms does not result in early termination of hedge accounting, notably because the retrospective effectiveness may fall outside of the required range due to the IBOR reform.
Please refer to note 24 Derivatives for the required disclosures of the uncertainty arising from IBOR reform for hedging relationships for which the Group applied the reliefs.
The change does not impact other reporting units within Aegon as this change is specific to Aegon the Netherlands.
Equity and liabilities 1 As reported in Aegon’s 2018 Integrated Annual Report dated March 21, 2019.
IFRS 17 Insurance contracts January 1, 2021 Not yet No See below for comments
Amendments to IFRS 9 Financial instruments on prepayment features with negative compensation January 1, 2019 1) Yes No
Amendments to References to the Conceptual Framework in IFRS Standards January 1, 2020 Yes No Low
An entity is eligible to apply the temporary exemption if the carrying amount of its liabilities connected with insurance activities is  Greater than 90% of the total carrying value of all liabilities; or  Between 80% and 90% of the total carrying value of all its liabilities, and the insurer does not have significant activities unrelated to insurance.
equity, income and/or other comprehensive income and disclosures. An implementation project was started in 2017 and is combined with the implementation of IFRS 17 Insurance Contracts.
Aegon is required to disclose information to enable users of financial statements to compare insurers applying the temporary exemption with entities applying IFRS 9. This information is presented below: Fair value changes The table below presents an overview of the fair value of the classes of financial assets as of December 31, 2019, as well as the change in fair value during the reporting period. The asset classes are divided into two categories:  SPPI: assets of which cash flows represent solely payments of principal and interest (SPPI) on an outstanding principal amount, excluding any financial assets that meet the definition of held for trading in IFRS 9, or that are managed and whose performance is evaluated on a fair value basis; and  Other: all financial assets other than those specified in SPPI:  with contractual terms that do not give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding;  that meet the definition of held for trading in IFRS 9; or
The fair value at the end of the reporting period in the table reconciles back to the respective table in note 22.1 Financial assets, excluding derivatives.
Credit Risk The table below details the credit risk rating grades, as of December 31, 2019, for financial assets with cash flows that are SPPI, excluding any financial assets that meet the definition of held for trading in IFRS 9, or that are managed and whose performance is evaluated on a fair value basis. The tables show the carrying value of those financial assets applying IAS 39 (in the case of financial assets measured at amortized cost, before adjusting for any impairment allowances).
Shares – Carried at fair value - - - 43 27 - - - 70
Mortgage loans– Carried at amortized cost 1,311 3,671 3,580 369 15 4 - 29,574 38,524
Debt securities – Carried at fair value 3,894 3,894 4,035 4,035
Private loans – Carried at amortized cost 1,431 1,488 1,189 1,225
Deposits with financial institutions – Carried at amortized cost 76 76 70 70
17 establishes principles for the recognition, measurement, presentation and disclosure of insurance contracts issued, reinsurance contracts held and investment contracts with discretionary participating features issued. The objective of the Standard is to ensure that entities provide relevant information in a way that faithfully represents those contracts. This information should provide users of financial statements with a basis to assess the effects that the contracts have on the financial position, financial performance and cash flows of the insurer. The Standard also specifies presentation and disclosure requirements to enhance comparability between insurance companies.
Standard is expected by the IASB to be issued in June 2020. As a consequence of the IFRS 17 deferral, the IASB also agreed to revise the fixed expiry date of the temporary exemption from IFRS 9 in IFRS 4 to allow entities to continue applying the temporary exemption from IFRS 9 until January 1, 2022. As this decision is still subject to IASB due process, this could lead to another year of deferral.
2.1.4 Future adoption of voluntary change in accounting policy Reinsurance accounting
The new policy will be adopted because it better reflects the economics of Aegon’s reinsurance transactions and aligns to current market practice. The previous accounting policy would have resulted in significant income volatility in the event of incurred claims with large sums insured, despite the fact that a significant part of the losses is reinsured.
The excess of the consideration paid to acquire the interest and the fair value of any interest already owned, over the Group’s share in the net fair value of assets, liabilities and contingent liabilities acquired is recognized as goodwill. Negative goodwill is recognized directly in the income statement. If the fair value of the assets, liabilities and contingent liabilities acquired in the business combination has been determined provisionally, adjustments to these values resulting from the emergence of new evidence within 12 months after the acquisition date are made against goodwill. Aegon recognized contingent considerations either as provision or as financial liability depending on the characteristics. Any contingent consideration payable is recognized at fair value at the acquisition date.
If the contingent consideration is classified as equity, it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes to the fair value of the contingent consideration are recognized in the income statement.
In determining whether Aegon has power over an investment fund all facts and circumstances are considered, including the following:  Control structure of the asset manager (i.e. whether an Aegon subsidiary);  The investment constraints posed by investment mandate;  Legal rights held by the policyholder to the separate assets in the investment vehicle (e.g. policyholders could have the voting rights related to these investments);  The governance structure, such as an independent board of directors, representing the policyholders, which has substantive rights
Exposure or rights to variability of returns can be the result of, for example:  General account investment of Aegon;  Aegon's investments held for policyholder;  Guarantees provided by Aegon on return of policyholders in specific investment vehicles;  Fees dependent on fund value (including, but not limited to, asset management fees); and  Fees dependent on performance of the fund (including, but not limited to, performance fees).
Disposal groups are classified as held for sale if they are available for immediate sale in their present condition, subject only to the customary sales terms of such assets and disposal groups and their sale is considered highly probable. Management must be committed to the sale, which is expected to occur within one year from the date of classification as held for sale.
Classification into or out of held for sale does not result in restating comparative amounts in the statement of financial position.
At the reporting date, monetary assets and monetary liabilities in foreign currencies are translated to the functional currency at the closing rate of exchange prevailing on that date, except for own equity instruments in foreign currencies which are translated using historical exchange rates. Non-monetary items carried at cost are translated using the exchange rate at the date of the transaction, while assets carried at fair value are translated at the exchange rate when the fair value was determined.
th er n o n -fin an cial in fo rm atio n b. Translation of foreign currency operations On consolidation, the financial statements of group entities with a foreign functional currency are translated to euro, the currency in which the consolidated financial statements are presented. Assets and liabilities are translated at the closing rates on the reporting date. Income, expenses and capital transactions (such as dividends) are translated at average exchange rates or at the prevailing rates on the transaction date, if more appropriate. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are translated at the closing rates on the reporting date.
Subsequently, goodwill is carried at cost less accumulated impairment charges. It is derecognized when the interest in the subsidiary is disposed.
Where applicable, Aegon recognizes other intangibles on the acquisition of a business combination such as those related to customer relationships. This can include customer contracts, distribution agreements and client portfolios. For these intangibles the present
Financial assets are initially recognized at fair value plus, in the case of a financial asset not at fair value through profit or loss, any directly attributable incremental transaction costs.
Aegon applies fair value hedge accounting to portfolio hedges of interest rate risk (fair value macro hedging) under the EU ‘carve out’
‘carve out’, ineffectiveness in fair value hedge accounting only arises when the revised projection of the amount of cash flows in scheduled time buckets falls below the designated amount of that bucket. Aegon applies fair value hedge accounting for portfolio hedges of interest rate risk (macro hedging) under the EU ‘carve out’ to mortgage loans. Changes in the fair value of the derivatives are recognized in the profit and loss account, together with the fair value adjustment on the mortgages (hedged items) insofar as attributable to interest rate risk (the hedged risk).
The carrying amount is subsequently adjusted to reflect the change in the Group’s share in the net assets of the joint venture and is subject to impairment testing. The net assets are determined based on the Group’s accounting policies. Any gains and losses recorded in other comprehensive income by the joint venture are recognized in OCI and reflected in other reserves in shareholders’
On disposal of an interest in a joint venture, the difference between the net proceeds and the carrying amount is recognized in the income statement and gains and losses previously recorded directly in the revaluation reserve are reversed and recorded through the income statement.
For all products, DPAC, in conjunction with VOBA where appropriate, is assessed for recoverability at least annually as part of the liability adequacy test for each reporting period. If appropriate, the assumptions included in the determination of estimated gross profits or revenues are adjusted. The portion of DPAC that is determined not to be recoverable is charged to the income statement.
For products sold in the United States and Asia, when unrealized gains or losses arise on available-for-sale assets backing the insurance liabilities, DPAC is adjusted to equal the effect that the realization of the gains or losses (through sale or impairment) would have had on its measurement. This is recognized in OCI and accumulated in the related revaluation reserve in shareholders’ equity.
In the Netherlands, the amortization is based on the percentage of premium paid on the reinsurance contract. The amortization is recognized in the income statement.
With the exception of goodwill, impairment losses are reversed when there is evidence that there has been a change in the estimates used to determine the asset’s recoverable amount since the recognition of the last impairment loss. The reversal is recognized
th er n o n -fin an cial in fo rm atio n in the income statement to the extent that it reverses impairment losses previously recognized in the income statement. The carrying amount after reversal cannot exceed the amount that would have been recognized had no impairment taken place.
For debt instruments classified as available-for-sale, the asset is impaired to its fair value. Any unrealized loss previously recognized in other comprehensive income is taken to the income statement in the impairment loss.
2.17 Equity Financial instruments that are issued by the Group are classified as equity if they represent a residual interest in the assets of the Group after deducting all of its liabilities and the Group has an unconditional right to avoid delivering cash or another financial asset to settle its contractual obligation. In addition to common shares, the Group has issued perpetual securities. Perpetual securities have no final maturity date, repayment is at the discretion of Aegon and for junior perpetual capital securities, Aegon has the option to defer coupon payments at its discretion. The perpetual capital securities are classified as equity rather than debt, are measured at par and those that are denominated in US dollars are translated into euro using historical exchange rates.
Treasury shares are shares issued by Aegon N.V. that are held by Aegon, one of its subsidiaries or by another entity controlled by Aegon. Treasury shares are deducted from Group equity, regardless of the objective of the transaction. No gain or loss is recognized in the income statement on the purchase, sale, issue or cancellation of the instruments. If sold, the difference between the carrying amount and the proceeds is reflected in retained earnings. The consideration paid or received is recognized directly in shareholders’
2.18 Trust pass-through securities and (subordinated)‍ borrowings A financial instrument issued by the Group is classified as a liability if the contractual obligation must be settled in cash or another financial asset or through the exchange of financial assets and liabilities at potentially unfavorable conditions for the Group.
Subordinated borrowings include the liability component of non-cumulative subordinated notes. These notes are identified as a compound instrument due to the nature of this financial instrument. Compound instruments are separated into equity components and liability components. The liability component for the non-cumulative subordinated notes is related to the redemption amount. For further information on the accounting policy of the non-cumulative subordinated notes refer to note 2.17 Equity.
2.19 Insurance contracts Insurance contracts are accounted for under IFRS 4 Insurance Contracts. In accordance with this standard, Aegon continues to apply the existing accounting policies that were applied prior to the adoption of IFRS-EU with certain modifications allowed by IFRS 4 for standards effective subsequent to adoption. Aegon applies, in general, non-uniform accounting policies for insurance liabilities and insurance related intangible assets to the extent that it was allowed under Dutch Accounting Principles. As a result, specific methodologies applied may differ between Aegon’s operations as they may reflect local regulatory requirements and local practices for
Some profit sharing schemes issued by the Group entitle the policyholder to a bonus which is based on the actual total return on specific assets held. To the extent that the bonus relates to gains or losses on available-for-sale investments for which the unrealized gains or losses are recognized through other comprehensive income in the revaluation reserve in shareholders'
equity, shadow accounting is applied. This means that the increase in the liability is also charged through other comprehensive income to shareholders' equity to offset the unrealized gains rather than to the income statement.
All tests performed within the Group are based on current estimates of all contractual future cash flows, including related cash flows from policyholder options and guarantees. A number of valuation methods are applied, including discounted cash flow methods, option pricing models and stochastic modeling. Aggregation levels are set either on geographical jurisdiction or at the level of portfolio of contracts that are subject to broadly similar risks and managed together as a single portfolio. Specifically, in the Netherlands the liability adequacy test is performed on a consolidated basis for all life and non-life business, whereas in the Americas and the UK it is performed at the level of the portfolio of contracts. To the extent that the tests involve discounting of future cash flows, the interest rate applied is based on market rates or is based on management’s expectation of the future return on investments. These future returns on investments take into account management’s best estimate related to the actual investments and, where applicable, reinvestments of these investments at maturity. Aegon the Netherlands, as required locally, adjusts the outcome of the liability adequacy test for the difference between the fair value and the book value of the assets that are measured at amortized cost in the statement of financial position. For details on the fair value (measurement) of Aegon's assets and liabilities, please refer to note 44 Fair value. Only differences between the fair value and the book value build up during the period when the asset were allocated to the insurance portfolio are included in the LAT.
2.20 Investment contracts Aegon conducts its operations through the following type of investment contracts: Contracts issued by the Group that do not transfer significant insurance risk, but do transfer financial risk from the policyholder to the Group are accounted for as investment contracts. Depending on whether the Group or the policyholder runs the risks associated with the investments allocated to the contract, the liabilities are classified as investment contracts or as investment contracts for account of policyholders. Investment contract liabilities are recognized when the contract is entered into and are derecognized when the contract expires, is discharged, cancelled or substantially modified.
2.21 Provisions A provision is recognized for present legal or constructive obligations arising from past events, when it is probable that it will result in an outflow of economic benefits and the amount can be reliably estimated. Management exercises judgment in evaluating the probability that a loss will be incurred.
The cost of the defined benefit plans are determined at the beginning of the year and comprise the following components:  Current year service cost which is recognized in profit or loss; and  Net interest on the net defined benefit liability (asset) which is recognized in profit or loss.
2.23 Deferred gains Initial fees and front-end loadings paid by policyholders and other clients for future investment management services related to investment contracts without discretionary participation features are deferred and recognized as revenue when the related services are rendered.
2.24 Tax assets and liabilities a. Current tax receivables and payables Tax receivables and payables for current and prior periods are measured at the amount that is expected to be received from or paid to the taxation authorities. The tax treatment of transactions or events requires judgement and is often complex and may lead to discussions with tax authorities. Consequently, in a number of jurisdictions, prior year tax returns remain open and subject to tax authority approval or pending litigation for a number of years. The tax assets and liabilities reported are based on the best available information, supported by external advice if necessary, and are reflecting uncertainties. Differences between the final outcome and the estimates originally made are accounted for in the current and deferred tax assets and liabilities in the period in which reasonable certainty is obtained. Measurement is done using the tax rates that have been enacted or substantively enacted by the reporting date.
Net fair value change of derivatives All changes in fair value are recognized in the income statement, unless the derivative has been designated as a hedging instrument in a cash flow hedge or a hedge of a net investment in a foreign operation. Fair value movements of fair value hedge instruments
Other In addition, results from financial transactions include gains/losses on real estate (general account and account of policyholders), net foreign currency gains/(losses) and net fair value change on borrowings and other financial liabilities and realized gains on repurchased debt.
2.33 Leases The Group has applied IFRS 16 using the modified retrospective approach and therefore the comparative information has not been restated and continues to be reported under IAS 17 and IFRIC 4. For further information on the revised Leases standard refer to note 2.1.1. Adoption of new IFRS-EU accounting standards and amendments effective in 2019.
The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. The estimated useful lives of right-of-use assets are determined on the same basis as those of real estate and equipment. In addition, the right-of-use asset is periodically reduced by impairment losses (using the same rate to measure the lease liability), if any, and adjusted for certain remeasurements of the lease liability.
The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group’s incremental borrowing rate. Generally, the Group uses its incremental borrowing rate as the discount rate.
The Group has elected not to recognize right-of-use assets and lease liabilities for short-term leases that have a lease term of 12
th er n o n -fin an cial in fo rm atio n months or less and leases of low-value assets, including small office equipment. The Group recognizes the lease payments associated with these leases as an expense on a straight-line basis over the lease term.
Policy applicable before January 1, 2019 As a lessee Arrangements that do not take the form of a lease but convey a right to use an asset in return for a payment are assessed at inception to determine whether they are, or contain, a lease. This involves an assessment of whether fulfillment of the arrangement is dependent on the use of a specific asset and whether the purchaser (lessee) has the right to control the use of the underlying asset.
Valuation of assets and liabilities arising from life insurance contracts The valuation of certain assets and liabilities arising from insurance contracts is developed using complex valuation models. The liability for life insurance contracts with guaranteed or fixed account terms is either based on current assumptions, on the assumptions established at inception of the contract, reflecting the best estimates at the time increased with a margin for adverse deviation, or on the valuation assumptions (historical cost), without risk margin. All contracts are subject to liability adequacy testing which reflects management’s current estimates of future cash flows (including investment returns). To the extent that the liability is based on current assumptions, a change in assumptions will have an immediate impact on the income statement. Also, if a change in assumption results in not passing the liability adequacy test, the entire deficiency is recognized in the income statement. To the extent that the deficiency relates to unrealized gains and losses on available-for-sale investments, the additional liability is recognized through other comprehensive income in the related revaluation reserve in shareholders' equity.
Sensitivities Please note that the sensitivities listed in the disclosures below represent sensitivities to Aegon’s position at the balance sheet date for the respective years. The sensitivities reflect single shocks where other elements remain unchanged. Real world market impacts (e.g.
Sensitivity on variable annuities and variable life insurance products in the United States A 1% decrease in the expected long-term equity growth rate with regard to Aegon’s variable annuities and variable life insurance products in the United States would result in a decrease in DPAC and VOBA balances and reserve strengthening of approximately
A relative increase of 10% to the mortality assumption was used, dependent on product and characteristics of the block of business, would reduce net income by approximately EUR 204 million (2018: EUR 207 million). A relative 20% increase in the lapse rate assumption would increase net income by approximately EUR 126 million (2018: EUR 89 million).
Any reasonably possible changes in the other assumptions Aegon uses to determine EGP margins (i.e. maintenance expenses) would reduce net income by less than EUR 13 million (2018: EUR 9 million).
EUR 178 million (2018: EUR 170 million). A 5% decrease in the incidence rates with regard to Aegon’s long term care products would result in a GPV decrease of approximately EUR 178 million (2018: EUR 170 million).
Removing the morbidity improvement, which is a component of the incidence assumption, would result in a GPV increase of approximately EUR 535 million (2018: EUR 500 million), of which EUR 445 million (2018: EUR 425 million) relates to the loss recognition block.
Reducing mortality 10% would result in a GPV increase of approximately EUR 89 million (2018: EUR 85 million). Increasing mortality 10% would result in a GPV decrease of approximately EUR 89 million (2018: EUR 85 million).
Removing future mortality improvement would result in a GPV decrease of approximately EUR 89 million (2018: EUR 85 million).
During 2019 the outcome of the liability adequacy test in Aegon the Netherlands triggered a review of the existing sensitivities. As a result, starting from 2019, Aegon discloses sensitivities on interest rate, bond credit spread, mortgage spread and liquidity premium assumptions to assess the impact on the LAT test, without taking into account the impact of shadow loss recognition.
Increasing 50 bps in bond credit spread would lead to an increase in LAT deficit of EUR 0.2 billion. A decrease of 50 bps would result in a decrease in LAT deficit of EUR 0.2 billion.
A shift up or down by 5 bps in liquidity premium would not result in a significant movement in the LAT deficit.
This impact on the income statement will be partially offset by the application of shadow loss recognition, triggered by the interest rate shock.
Determination of fair value and fair value hierarchy The following is a description of Aegon’s methods of determining fair value, and a quantification of its exposure to assets and liabilities measured at fair value.
The best evidence of fair value is a quoted price in an actively traded market. In the event that the market for a financial instrument is not active or quoted market prices are not available, a valuation technique is used.
The majority of valuation techniques employ only observable market data, and so the reliability of the fair value measurement is high.
The valuation techniques applied to financial instrument affected by IBOR reforms remain consistent with those of other market participants, and the uncertainty on the outcome of the reforms has not affected the classification of the instruments.
4 Financial risks General As an insurance group, Aegon is exposed to a variety of risks. Aegon's largest exposures are to changes in financial markets (e.g.
Each sensitivity analysis reflects the extent to which the shock tested would affect management's critical accounting estimates and judgment in applying Aegon's accounting policies. Market-consistent assumptions underlying the measurement of non-listed assets and liabilities are adjusted to reflect the shock tested. The shock may also affect the measurement of assets and liabilities based on assumptions that are not observable in the market. For example, a shock in interest rates may lead to changes in the amortization schedule of DPAC or to increased impairment losses on equity investments. Although management's short-term assumptions may change if there is a reasonably possible change in a risk factor, long-term assumptions will generally not be revised unless there is evidence that the movement is permanent. This fact is reflected in the sensitivity analyses.
Unrealized gains and losses on these assets are not recognized in the income statement but are booked through other comprehensive income to the revaluation reserves in shareholders' equity, unless impaired. As a result, economic sensitivities predominantly impact shareholders' equity but leave net income unaffected. The effect of movements of the revaluation reserve on capitalization ratios and capital adequacy are minimal. Aegon's target ratio for the composition of its capital base is based on shareholders' equity excluding the revaluation reserve.
Concentration risk for financial risks are measured and managed at the following levels:  Concentration per risk type: Risk exposures are measured per risk type as part of Aegon’s internal economic framework. A risk tolerance framework is in place which sets risk limits per risk type to target desired risk balance and promote diversification across risk types;  Concentration per counterparty: Risk exposure is measured and risk limits are in place per counterparty as part of the Counterparty
Name Limit Policy; and  Concentration per sector, geography and asset class: Aegon’s investment strategy is translated in investment mandates for its internal and external asset managers. Through these investment mandates limits on sector, geography and asset class are set.
Aegon's significant financial risks and related financial information are explained in the order as follows:  Credit risk  Equity market risk and other investment risks  Interest rate risk  Currency exchange risk  Liquidity risk
Credit risk As premiums and deposits are received, these funds are invested to pay for future policyholder obligations. For general account products, Aegon typically bears the risk for investment performance which is equal to the return of principal and interest. Aegon is exposed to credit risk on its general account fixed-income portfolio (debt securities, mortgages and private placements), over-thecounter derivatives and reinsurance contracts. Some issuers have defaulted on their financial obligations for various reasons, including bankruptcy, lack of liquidity, downturns in the economy, downturns in real estate values, operational failure and fraud. During financial downturns, Aegon can incur defaults or other reductions in the value of these securities and loans, which could have a materially adverse effect on Aegon's business, results of operations and financial condition. Investments for account of policyholders are excluded as the policyholder bears the credit risk associated with the investments.
The table that follows shows the Group's maximum exposure to credit risk from investments in general account financial assets, as well as general account derivatives and reinsurance assets, collateral held and net exposure. Please refer to note 45 and 46 for further information on capital commitments and contingencies and on collateral given, which may expose the Group to credit risk.
Mortgage loans - carried at amortized cost 38,524 2,648 - 65 61,159 - - 63,872 26,249 901
Private loans - carried at amortized cost 4,487 51 - - - - - 51 - 4,436
Money market and other short-term investments - carried at fair value 6,307 - 484 - - - - 484 29 5,852
Mortgage loans - carried at amortized cost 36,639 2,535 - 136 57,009 - - 59,680 23,589 548
Other loans - carried at amortized cost 2,310 - - - - - 1,960 1,960 1,238 1,589
Other financial assets - carried at fair value 3,551 - - - - - - - - 3,551
A substantial part of Aegon's Dutch residential mortgage loan portfolio benefits from guarantees by a Dutch government-backed trust (Stichting Waarborgfonds Eigen Woning) through the Dutch Mortgage loan Guarantee program (NHG). With exception of NHGbacked mortgage loans originated after January 1, 2014, for which a 10% lender-incurred haircut applies on realized losses on each defaulted loan, these guarantees cover all principal losses, missed interest payments and foreclosure costs incurred upon termination and settlement of defaulted mortgage loans when lender-specific terms and conditions of the guarantee are met. When not fully met, the trust may pay claims in part or in full, depending on the severity of the breach of terms and conditions. For each specific loan, the guarantee amortizes in line with an equivalent annuity mortgage loan. When the remaining loan balance at default does not exceed the amortized guarantee, it covers the full loss under its terms and conditions. Any loan balance in excess of this decreasing guarantee profile serves as a first loss position for the lender.
The assets in trust can be accessed to pay policyholder benefits in the event the reinsurers fail to perform under the terms of their contract. Further information on the related reinsurance transactions is included in note 26 Reinsurance assets.
Aegon manages credit risk exposure by individual counterparty, sector and asset class, including cash positions. Normally, Aegon mitigates credit risk in derivative contracts by entering into credit support agreement, where practical, and in ISDA master netting agreements for most of Aegon's legal entities to facilitate Aegon's right to offset credit risk exposure. Main counterparties to these transactions are investment banks which are typically rated 'A' or higher. The credit support agreement will normally dictate the threshold over which collateral needs to be pledged by Aegon or its counterparty. Transactions requiring Aegon or its counterparty to post collateral are typically the result of derivative trades, comprised mostly of interest rate swaps, equity swaps, currency swaps and credit swaps. Collateral received is mainly cash (USD and EUR). The credit support agreements that outline the acceptable collateral require high-quality instruments to be posted. Over the last three years, there was no default with any derivatives counterparty. The credit risk associated with financial assets subject to a master netting agreement is eliminated only to the extent that financial liabilities due to the same counterparty will be settled after the assets are realized. Eligible derivative transactions are traded via Central Clearing Houses as required by EMIR and the Dodd-Frank act. Credit risk in these transactions is mitigated through posting of initial and variation margins.
Aegon may also mitigate credit risk in reinsurance contracts by including downgrade clauses that allow the recapture of business, retaining ownership of assets required to support liabilities ceded or by requiring the reinsurer to hold assets in trust. For the resulting net credit risk exposure, Aegon employs deterministic and stochastic credit risk modeling in order to assess the Group's credit risk profile, associated earnings and capital implications due to various credit loss scenarios.
Aegon operates a Credit Name Limit Policy (CNLP) under which limits are placed on the aggregate exposure that it has to any one counterparty. Limits are placed on the exposure at both group level and individual country units. The limits also vary by a rating system, which is a composite of the main rating agencies (S&P, Moody's and Fitch) and Aegon's internal rating of the counterparty. If an exposure exceeds the stated limit, then the exposure must be reduced to the limit for the country unit and rating category as soon as possible. Exceptions to these limits can only be made after explicit approval from Aegon's Group Risk and Capital Committee (GRCC).
At December 31, 2019, there were two violations of the Credit Name Limit Policy at Group level (December 31, 2018: nil). These related to Bank of America and Republic of Turkey. The Bank of America violation was addressed in early 2020 and the Turkey violation is being monitored.
The ratings distribution of general account portfolios of Aegon's major reporting units, excluding reinsurance assets, are presented in the table that follows, organized by rating category and split by assets that are valued at fair value and assets that are valued at amortized cost. Aegon uses a composite rating based on a combination of the external ratings of S&P, Moody's, Fitch and National
The following table shows the credit quality of the gross positions in the statement of financial position for general account reinsurance assets specifically: Carrying value 2019 Carrying value 2018
Residential mortgage-backed securities (RMBSs) 2,289 311 - - 311 128 - 2,729 909
Commercial mortgage-backed securities (CMBSs) 3,314 35 127 - 162 537 - 4,013 14
Asset-backed securities (ABSs) - CDOs backed by ABS, Corp. bonds, Bank loans 717 1,669 - - 1,669 61 - 2,447 3 1 Includes investments of Holding and other activities.
Credit risk concentrations – Credit rating 2018 2)‍ Government bonds Corporate bonds RMBSs
Of the portfolio 1.06% (2018: 1.25%) is in delinquency (defined as 60 days in arrears). In 2019, Aegon Americas recognized
The fair value of Aegon the Netherlands mortgage loan portfolio as per December 31, 2019, amounted to EUR 33,111 million
(2018: EUR 31,686 million). The LTV amounted to approximately 67% (2018: 70%). A significant part of the portfolio 49% (2018: 46%) is government guaranteed. Of the portfolio, 0.1% (2018: 0.2%) is in delinquency (defined as 60 days in arrears). Impairments in 2019 amounted to EUR 0 million (2018: EUR 0 million). During the last ten years defaults of the portfolio have been 5 basis points on average.
Any existing commitments such as future purchases of interests in investment funds are disclosed in note 45 Commitments and contingencies.
Aegon invests primarily in senior notes of RMBSs, CMBSs and ABSs. Additional information on credit ratings for Aegon's investments in RMBSs, CMBSs and ABSs are disclosed in the sections that describe per category of debt securities the composition and impairment assessments. The composition of the RMBSs, CMBSs and ABSs portfolios of Aegon are widely dispersed looking at the individual amount per entity, therefore Aegon only has non-controlling interests in individual unconsolidated structured entities. Furthermore these investments are not originated by Aegon.
Additional information on credit risk, unrealized losses and impairments Debt instruments The amortized cost and fair value of debt securities, money market investments and other, included in Aegon's available-for-sale (AFS)
Total held by Aegon Americas and NL 5,153 (327)‍ 24,528 (1,352)‍ Held by other segments 650 (18) 4,415 (197)
EUR 327 million (December 31, 2018: EUR 1,352 million) of gross unrealized losses in the AFS debt securities, money markets and other portfolio of Aegon Americas and Aegon the Netherlands.
Reserve paused its tightening cycle at the beginning of 2019, and began easing in July, ultimately reducing the Fed Funds rate target by 75 basis points. US Treasury rates declined sharply. Corporate default rates remained low. Oil prices ended the year higher than the very low levels at the end of 2018, but lower than where they traded during most of 2018. Tighter credit spreads and lower
US Treasury rates increased the market values of fixed income holdings.
(TLTROs) to ease credit conditions. In September the ECB decided to also reinstate the asset purchase program (APP) at a monthly pace of EUR 20 billion and to lower the deposit rate further into negative territory to -0.5%.
In the sections below a description is provided on the composition of the categories of debt securities and money market investments.
RMBS of Aegon Americas are monitored and reviewed on a monthly basis. Detailed cash flow models using the current collateral pool and capital structure on the portfolio are updated and reviewed quarterly. Model output is generated under base and stresscase scenarios. Aegon's RMBS asset specialists utilize widely recognized industry modeling software to perform a loan-by-loan, bottom-up approach to modeling. Key assumptions used in the models are projected defaults, loss severities, and prepayments.
Prepayments and loss severity assumptions were determined by obtaining historical rates from broader market data and by adjusting those rates for vintage, specific pool performance, collateral type, mortgage insurance and estimated loan modifications. Prepayments were estimated by examining historical averages of prepayment activity on the underlying collateral. Quantitative ranges of significant assumptions within Aegon’s modeling process for Prime Jumbo, Alt-A, Negative Amortization and subprime RMBS are as follows: prepayment assumptions range from approximately 0% to 33% with a weighted average of approximately 8.44% (2018: 5.45%),
Assumed loan defaults range from 0% to 56% with a weighted average of approximately 20.42% and are dependent on the specific security's collateral attributes and historical performance, while loss severity assumptions range from approximately 0% to 105%, with a weighted average of approximately 50.19% (2018: 56.96%).
Once the entire pool is modeled, the results are closely analyzed by Aegon's asset specialists to determine whether or not
The total gross unrealized loss on available-for-sale RMBS of Aegon Americas and Aegon the Netherlands amounted to EUR 18 million
The United States’ housing market remains buoyant but has transitioned to a more moderate growth trajectory. The housing market continues to benefit from favorable interest rates, high employment, income growth, demographic and supply conditions and has manifested itself in low borrower delinquencies, better recoveries upon liquidation and short property sale timelines. Although housing affordability has come under pressure from years of price appreciation outpacing wage growth, declining mortgage rates during 2019 have mitigated this risk. The confluence of large rates moves, modest spread tightening and rapid deleveraging helped facilitate modest positive returns for legacy non-agency in second half of 2019.
In general, the European housing market showed further improvement in 2019. House prices are increasing and affordability remains high given the low level of interest rates. Although economic development was healthy, markets are expecting (global) growth to slow.
The fair values of Aegon Americas' available-for-sale (AFS) RMBS instruments were determined as follows: Level II Level III Total 2019 Level II Level III Total 2018
Commercial mortgage-backed securities As of December, 31, 2019, Aegon Americas and Aegon the Netherlands hold EUR 3,440 million (December 31, 2018: EUR 3,349 million) of AFS commercial mortgage-backed securities (CMBS), of which EUR 3,427 million (December 31, 2018: EUR 3,314 million) is held by Aegon Americas and EUR 13 million (December 31, 2018: EUR 35 million) by Aegon the Netherlands.
loan resolutions. Despite modest spread widening during the 2nd half of 2019, US CMBS prices continue to be supported by lower interest rates.
December 31, 2019, Aegon Americas has no investments in CMBS (December 31, 2018: EUR nil), which are classified as fair value through profit or loss.
Aegon does not consider the underlying investments to be impaired as of December 31, 2019.
Asset-backed securities Aegon Americas and Aegon the Netherlands hold EUR 3,332 million (December 31, 2018: EUR 4,503 million) of AFS ABS instruments of which EUR 2,239 million (December 31, 2018: EUR 2,626 million) is held by Aegon Americas and EUR 1,093 million (December 31, 2018: EUR 1,877 million) by Aegon the Netherlands. Additionally, as of December 31, 2019, Aegon Americas has investments in ABS
In the United States, increasing investor demand has been met with new issuance in the asset-backed sector. Spreads in the assetbacked sector tightened in 2019. In the second half of 2019, the European ABS market showed a positive performance. Spreads declined in most of the European ABS sectors. Our outlook for European ABS markets remains moderately positive for the short to medium term. Despite the bleaker macroeconomic picture, we still consider ABS fundamentals to be supportive for most European
The breakdown by quality of the available-for-sale (AFS) ABS portfolio of Aegon Americas and Aegon the Netherlands is as follows: ABS US and NL AAA AA A BBB <BBB
Below investment grade carrying value of securities with unrealized losses Investment grade unrealized loss
The unrealized loss increased during 2019 due mainly to widening credit spreads and increasing US Treasury rates.
Aging and severity unrealized losses debt securities Carrying value Unrealized losses Carrying value Unrealized losses
Impairment losses and recoveries The composition of Aegon Americas and Aegon the Netherlands' bond impairment losses and recoveries by issuer for the periods ended
For the twelve months ended December 31, 2019, Aegon recognized EUR 66 million (twelve months ended December 31, 2018: EUR 34 million) in recoveries on previously impaired securities. In each case where a recovery was taken on structured securities, improvements in underlying cash flows for the security were documented and modeling results improved significantly. Recoveries on non-structured securities were supported by documented credit events combined with significant market value improvements.
These factors typically require significant management judgment. The impairment review process has resulted in EUR 7 million of impairment charges for the twelve months ended December 31, 2019 (twelve months ended December 31, 2018: EUR 4 million) for
Impairment losses on shares The table below provides the length of time the shares held by Aegon Americas and Aegon the Netherlands were below cost prior to their impairment in 2019 and 2018.
Total 2018 1 Common shares in Holding and other activities includes the elimination of treasury shares in the general account for an amount of EUR nil million.
The table that follows sets forth the closing levels of certain major indices at the end of the last five years.
The sensitivity of shareholders' equity and net income to changes in equity markets reflects changes in the market value of Aegon's portfolio, changes in DPAC amortization, contributions to pension plans for Aegon's employees and the strengthening of the guaranteed minimum benefits, when applicable. Aegon generally has positive income benefits from equity market increases and negative impacts from equity market declines as it earns fees on policyholder account balances and provides minimum guarantees for account values. Aegon uses options and other equity derivatives to provide protection against the negative impact of equity market declines.
Sensitivity analysis of net income and shareholders’ equity to equity markets
Immediate change of Estimated approximate effects on net income Estimated approximate effects on shareholders' equity
Aegon manages interest rate risk closely, taking into account all of the complexity regarding policyholder behavior and management action. Aegon employs sophisticated interest rate measurement techniques and actively uses derivatives and other risk mitigation tools to closely manage its interest rate risk exposure. Aegon operates an Investment & Counterparty Risk policy that limits the amount of interest rate risk to which the Group is exposed. All derivative use is governed by Aegon's Derivative Use Policy. A detailed description on the use of derivatives within Aegon is included in note 24 Derivatives.
The sensitivity analysis in the table below shows an estimate of the effect of a parallel shift in the yield curves on net income and shareholders' equity arising from the impact on general account investments and offset due to liabilities from insurance and investment contracts. In general, increases in interest rates are beneficial to Aegon. However, timing and valuation differences between assets and liabilities may cause short-term reductions in net income as rates rise. Rising interest rates would also cause the fair value of the available-for-sale bond portfolio to decline and the level of unrealized gains could become too low to support recoverability of the full deferred tax asset triggering an allowance charge to income. The offsetting economic gain on the insurance and investment contracts is however not fully reflected in the sensitivities because many of these liabilities are not measured at fair value. The short to medium term reduction in net income due to rising interest rates would be offset by higher net income in later years, all else being equal. Therefore, higher interest rates are not considered a long-term risk to the Group. However, a long sustained period of low interest rates will erode net income due to lower returns earned on reinvestments and due to lower long term returns from decreased overall portfolio yields.
Currency exchange rate risk As an international group, Aegon is subject to foreign currency translation risk. Foreign currency exposure exists mainly when policies are denominated in currencies other than the issuer's functional currency. Currency risk in the investment portfolios backing insurance and investment liabilities is managed using asset liability matching principles. Assets allocated to equity are kept in local currencies to the extent shareholders' equity is required to satisfy regulatory and self-imposed capital requirements. Therefore, currency exchange rate fluctuations will affect the level of shareholders' equity as a result of translation of subsidiaries into euro, the Group's presentation currency. Aegon holds the remainder of its capital base (perpetual capital securities, subordinated and senior debt) in various currencies in amounts that are targeted to correspond to the book value of the country units. This balancing mitigates currency translation impacts on shareholders' equity and leverage ratios. Aegon does not hedge the income streams from the main
Aegon operates an investment & Counterparty Risk Policy which applies currency risk exposure limits both at Group and regional levels, and under which direct currency speculation or program trading by country units is not allowed unless explicit approval has been granted by the Group Risk and Capital Committee and the Management Board. Assets should be held in the functional currency of the business written or hedged back to that currency. Where this is not possible or practical, remaining currency exposure should be sufficiently documented and limits are placed on the total exposure at both group level and for individual country units.
United Kingdom (in GBP) 1,358 1,671 1,905 1 Comparative figures have been reclassified to conform to the current year presentation as the elimination logic has changed. This reclassification is not considered material as there is no effect on consolidated group figures.
The sensitivity analysis in the following table shows an estimate of the effect of movements in the exchange rates of Aegon's non-euro currencies relative to the euro on net income and shareholders' equity.
Increase by 15% of non-euro currencies relative to the euro 211 2,906
Decrease by 15% of GBP currencies relative to the euro 9 (163)
Decrease by 15% of non-euro currencies relative to the euro (150) (2,094)
Some liabilities are surrenderable while some assets, such as privately placed loans, mortgage loans, real estate and limited partnership interests, have low liquidity. If Aegon requires significant amounts of cash on short notice in excess of normal cash requirements and existing credit facilities, it may have difficulty selling these investments at attractive prices or in a timely manner. Liquidity risk is also affected by our use of collateralized financial derivatives to mitigate risk.
Aegon operates a Liquidity Risk Policy under which country units are obliged to maintain sufficient levels of highly liquid assets to meet cash demands by policyholders and account holders over the next two years. Potential cash demands are assessed under a stress scenario including spikes in disintermediation risk due to rising interest rates and concerns over Aegon's financial strength due to multiple downgrades of the Group's credit rating. At the same time, the liquidity of assets other than cash and government issues is assumed to be severely impaired for an extended period of time. All legal entities and Aegon Group must maintain enough liquidity in order to meet all cash needs under this extreme scenario.
Aegon held EUR 31,066 million of general account investments in cash, money market products and government bonds that are readily saleable or redeemable on demand (2018: EUR 32,116 million). The Group expects to meet its obligations, even in a stressed liquidity event, from operating cash flows and the proceeds of maturing assets as well as these highly liquid assets. Further, the Group has access to back-up credit facilities, as disclosed in note 37 Borrowings, amounting to EUR 3,403 million which were unused at the end of the reporting period (2018: EUR 3,680 million).
The projected cash benefit payments in the table below are based on management's best estimates of the expected gross benefits and expenses, partially offset by the expected gross premiums, fees and charges relating to the existing business in force. Estimated cash benefit payments are based on mortality, morbidity and lapse assumptions based on Aegon's historical experience, modified for recently observed trends. Actual payment obligations may differ if experience varies from these assumptions. The cash benefit payments are presented on an undiscounted basis and are before deduction of tax and before reinsurance.
Insurance contracts for account of policyholders - 9,666 36,782 36,571 130,299 213,318
< 1 yr amount 1 < 5 yrs amount 5 < 10 yrs amount > 10 yrs amount Total amount
activities located outside these countries;  Europe: which covers the following operating segments: the Netherlands, United Kingdom and Southern and Eastern Europe;  Asia: one operating segment which covers businesses operating in Hong Kong, Singapore, China, Japan, India and Indonesia including any of the units’ activities located outside these countries;  Asset Management: one operating segment which covers business activities from Aegon Asset Management;  Holding and other activities: one operating segment which includes financing, reinsurance activities, employee and other administrative expenses of holding companies.
For Europe, the underlying businesses (the Netherlands, United Kingdom, Southern and Eastern Europe) are separate operating segments which under IFRS 8 cannot be aggregated, therefore further details will be provided for these operating segments in this segment note.
Performance Measure Aegon uses the non-IFRS-EU performance measure underlying earnings before tax. Underlying earnings before tax reflects
Aegon’s profit from underlying business operations and mainly excludes components that relate to accounting mismatches that are dependent on market volatility, updates to best estimate actuarial and economic assumptions and model updates or events that are considered outside the normal course of business. There is no standardized meaning to these measures under IFRS-EU or any other recognized set of accounting standards.
Aegon believes that its performance measure underlying earnings before tax provides meaningful information about the underlying results of Aegon’s business, including insight into the financial measures that Aegon’s senior management uses in managing
th er n o n -fin an cial in fo rm atio n the business. Among other things, Aegon’s senior management is compensated based in part on Aegon’s results against targets using underlying earnings before tax. While many other insurers in Aegon’s peer group present substantially similar performance measures, the performance measures presented in this document may nevertheless differ from the performance measures presented by other insurers.
Included in underlying earnings before tax is management's best estimate expected return on these products. Any overor underperformance compared to management’s expected return is excluded from underlying earnings before tax.
In addition, certain products offered by Aegon Americas contain guarantees and are reported on a fair value basis and include the total return annuities and guarantees on variable annuities. The earnings on these products are impacted by movements in equity markets and risk-free interest rates. Short-term developments in the financial markets may therefore cause volatility in earnings.
Impairment charges/(reversals)‍ Impairment charges/(reversals) include impairments on available-for-sale debt securities, shares including the effect of deferred policyholder acquisition costs, mortgage loans and other loan portfolios at amortized cost, joint ventures and associates. Impairment reversals include reversals on available-for-sale debt securities. For Aegon the Netherlands, the expected impairments on alternative assets classes (e.g. illiquid investments – including consumer loans and catastrophe bonds – and residential real estate) are allocated to underlying earnings in order to present management's best estimate investment return in underlying earnings. Deviations from the expected impairments are presented as part of impairment charges / (reversals) in non-underlying earnings.
Other income or charges Other income or charges includes the following:  Items which cannot be directly allocated to a specific line of business;  The impact of actuarial and economic assumption and model updates used to support calculations of our liabilities for insurance and investment contracts sold to policyholders and related assets (refer to note 3 Critical accounting estimates and judgement in applying accounting policies); and  Items that are outside the normal course of business, including restructuring charges.
Share in earnings of joint ventures and associates Earnings from Aegon’s joint ventures in China, India, Japan, Mexico, the Netherlands, Spain and Portugal, and Aegon’s associates in Brazil, France, the Netherlands and United Kingdom are reported on an underlying earnings before tax basis.
Jo in t ve n tu re s an d as so ci at es el im in at io n s
Realized gains / (losses) on investments (204) 46 83 - 129 (8) 2 4 - (77) (2) (79)
Elimination of share in earnings of joint ventures and associates 50 72 61
Net fair value change of general account financial investments at fair value through profit or loss, other than derivatives 10 (17) (295) (437)
Gains and (losses) on investments in real estate 10 317 261 193
Realized gains and (losses) on repurchased debt 10 - 1 1
Change in valuation of liabilities for insurance contracts 12 (1,231) (341) (254)
Change in valuation of liabilities for investment contracts 12 (13) 13 (19)
 Net fair value change of general account financial investments at fair value through profit or loss, other than derivatives is reported as part of the respective line in note 10 and reflects the over- or underperformance of investments and guarantees held at fair value for which the expected long-term return is included in underlying earnings before tax.
Income Benefit and to the returns on Equity-Index Universal Life. In the second half of 2019, a negative impact of EUR 75 million resulted mostly fom expenses assumption updates in the Americas. Assumption changes and model updates in the Netherlands led to negative impact of EUR 57 million mainly related to model enhancements and expense assumption updates which more than offset favorable longevity assumption changes.
Impairment charges / (reversals) on non- financial assets and receivables 19 15 1 - 16 1 - - - 36
Amortization of deferred expenses, VOBA and future servicing rights 336 27 134 55 217 33 - - - 586
Impairment charges / (reversals) on non- financial assets and receivables (2) 3 - - 2 - - - - -
Of which Aegon's share of employees in joint ventures and associates 559 - 58 86 144 5,983 168 - 6,854
Of which Aegon's share of employees in joint ventures and associates 549 - - 83 83 5,702 163 - 6,497
Investments for account of policyholders 107,963 25,491 91,848 994 118,332 82 - - (4) 226,374
Investment contracts for account of policyholders 29,976 2,301 61,305 181 63,788 62 - - - 93,826
Investments for account of policyholders 95,343 23,767 73,958 1,187 98,912 103 - - (5) 194,353
Insurance contracts for account of policyholders 68,126 23,855 24,086 1,022 48,963 24 - - - 117,113
Amounts included in the tables on investments are presented on an IFRS basis, which means that investments in joint ventures and associates are not consolidated on a proportionate basis. Instead, these investments are included on a single line using the equity method of accounting.
Off-balance sheet investments third parties 220,039 4,802 123,904 5,461 134,167 1,001 170,158 - (818) 524,547
Financial assets at fair value through profit or loss 111,565 30,193 91,740 997 122,930 100 113 164 (4) 234,867
Premium income decreased by EUR 1,178 million in 2019 (2018: EUR 3,510 million) mainly driven by a reduction of upgraded
Life insurance policies to the retirement platform in the UK, which represents EUR 1,777 million (2018: EUR 3,439 million; 2017: EUR 5,139 million) of total premium income Life insurance.
Lease income is included within rental income. Please refer to note 45 Commitments and Contingencies for future lease payments
Included in fee and commission income is EUR 225 million of fees on trust and fiduciary activities (2018: EUR 215 million; 2017: EUR 190 million).
Gains and (losses) on investments in real estate 317 261 193
Net fair value change on account of policyholder financial assets at fair value through profit or loss 33,188 (11,326) 20,524
Realized gains and losses on financial investments comprise: 2019 2018 2017
Realized gains and losses on financial investments comprise: 2019 2018 2017 Available-for-sale investments 368 (108) 411
Net fair value change of derivatives comprise: 2019 2018 2017 Net fair value change on economic hedges where no hedge accounting is applied 2,636 317 (63)
Fair value change on hedged items in a fair value hedge 377 23 (127)
Net fair value change on for account of policyholder financial assets at fair value through profit or loss comprise: 2019 2018 1) 2017 1)
Meeùs Groep. Furthermore, a release of an expense reserve of EUR 82 million (GBP 71 million) was recorded that was embedded in the liabilities for insurance contracts following the completion of the Part VII transfer to Rothesay Life. Also EUR 17 million
An insurance business transfer scheme under Part VII of the United Kingdom Financial Services and Markets Act 2000 allows an insurer to transfer policies as at a fixed time and date to another insurer, along with related contracts with other parties. For more details refer to note 48 Business combinations.
Change in valuation of liabilities for insurance contracts 30,620 (2,639) 22,741
Change in valuation of liabilities for investment contracts 5,768 (8,143) (2,644)
Included in administration expenses is an amount of EUR 87 million of depreciation and amortization that relates to equipment, software and real estate held for own use (2018: EUR 80 million; 2017: EUR 105 million).
Long Term Incentive Plans Selected senior employees within Aegon, who have not been classified as ‘Material Risk Takers’, can be granted the conditional right to receive Aegon shares at the start of a performance year. The grant price for these shares is equal to the volume weighted average price (VWAP) on the Euronext stock exchange in Amsterdam during the period between December 15 preceding a plan year and January 15 of a plan year. The actual allocation of these shares to eligible employees depends on Aegon Group performance, the employee’s unit performance and individual performance on predefined financial and non-financial performance indicators and targets, as well as the continued employment of the employee.
Variable Compensation Material Risk Takers Members of the Executive Board and the Management Board as well as other senior employees are classified as ‘Material Risk Takers’
The deferred shares of the variable compensation award cliff-vest three years after allocation, while the deferred parts for members of the Executive Board tranche-vest during a three-year period after allocation. The latter vesting schedule also applied to variable compensation of Identified Staff in the Netherlands up to 2018. Before each vesting moment, the Supervisory Board can decide to adjust an award downwards based on the annual ex-post risk assessment, which takes into account significant and exceptional circumstances which were not (sufficiently) reflected in the initial performance assessment.
The following overview contains the cumulative number of shares and their status in relation to active Long Term Incentive Plans and variable compensation allocated to Material Risk Takers.
1 The at target number of shares which were conditionally granted for the plan year. 2 The allocated number of shares based on the actual performance during the plan year.
1 The at target number of shares which were conditionally granted for the plan year. 2 The allocated number of shares based on the actual performance during the plan year. Per 2017 sign-on shares are not allocated anymore to the plan year(s) in which the vesting takes place. Instead, sign-on shares are allocated in the calendar year of commencement. Allocation to a previous plan year concerns backdated corrections to the administration (e.g. the allocation to the 2016 plan year, during the 2018 calendar year).
3 This is the volume weighted average price (VWAP) of Aegon on the Euronext Amsterdam stock exchange for the period December 15 to January 15. For instance for the 2019 plan year, this is the VWAP for the period December 15, 2018 to January 15, 2019.
Impairment charges / (reversals)‍ comprise: 2019 2018 2017 Impairment charges on financial assets, excluding receivables 133 71 70
Impairment charges and reversals on non-financial assets and receivables 109 46 4
Impairment reversals on financial assets, excluding receivables, from: 2019 2018 2017 Debt securities and money market instruments (67) (34) (17)
Other includes interest charges on short term borrowings and bank fees.
The interest charges accrued on financial assets and liabilities that are not carried at fair value through profit or loss amounted to EUR 298 million (2018: EUR 143 million; 2017: EUR 162 million).
These adjustments were necessitated by, among other factors, low long-term interest rates and changes in future mortality experience, and were in accordance with the contractual terms of the policies. Nonetheless, the increases were challenged by policyholders in several court cases. To remove the uncertainty of ongoing litigation for Aegon and its customers, the decision was made to settle with the plaintiffs. In January 2019, a court approved the aforementioned settlement with universal life policyholders. Resolution of this class action ended a number of other related cases, including other related class actions. Over 99% of affected policyholders participated in the settlement. While less than 1% of policyholders opted out of the settlement, they represented approximately 43%
of the value of the settlement fund. The settlement fund was reduced proportionally for opt outs, although Aegon continues to hold a provision for these policyholders. The charge to the income statement for 2018 was EUR 140 million (USD 166 million). Included in the charge is a release of the technical provision (USD 38 million) and a reduction of the amortization of other intangible assets
Other charges in 2018 also include a loss of EUR 93 million (USD 110 million) related to the divestment of the last substantial block of its life reinsurance business to SCOR Global Life. Under the terms of the agreement, Aegon's Transamerica life subsidiaries reinsured approximately USD 700 million of liabilities through SCOR Global Life. The transaction covered the last substantial block of life reinsurance business that Transamerica retained after it divested the vast majority of its reinsurance business to SCOR Global Life in 2011 and 2017.
Other charges in 2017 of EUR 235 million mainly relate to the book loss of EUR 105 million (USD 119 million) regarding the divestment of a block of life reinsurance business in the Americas and a charge of EUR 85 million (USD 100 million), regarding a provision in anticipation of a possible settlement in connection with an investigation by the SEC. In addition, an impairment of deferred transaction costs of EUR 36 million (GBP 32 million) was recorded as a result of the agreed sale of Aegon Ireland plc.
For more details on the divestment of a block of US reinsurance run off business and Aegon Ireland plc. refer to note 48 Business combinations.
Deferred tax 40 Origination / (reversal) of temporary differences 162 32 363
Income tax calculated using weighted average applicable statutory tax rates 386 185 710
Difference due to the effects of: Non-taxable income (76) (78) (155)
The weighted average applicable statutory tax rate for 2019 is 21.1% (2018: 23.7%; 2017: 29.7%). The decrease in the weighted average applicable statutory tax rate compared to 2018 is mainly due to the relatively high contribution of income before tax in the United States versus income before tax in the Netherlands and negative income before tax in the United Kingdom.
Non-taxable income in 2019 comprises of the regular non-taxable items such as the Dividend Received Deduction in the US and the Participation Exemption in the Netherlands. Compared to 2017 the non- taxable income decreased because of the decrease of the US corporate income tax rate from 35% to 21% as from January 1, 2018. Non-taxable income in 2017 includes the tax exempt sale proceeds of the Dutch Unirobe Meeùs Group.
In the Netherlands, the corporate income tax rate will decrease from 25% to 21.7% as from January 1, 2021. The beneficial impact of the previous enacted tax rate change in the Netherlands is included in the 2018 change in tax rate/base. In 2019 part of this beneficial impact is reversed due to the new enacted tax rate. In the UK, the corporate income tax rate will decrease from 19% to 17%
Tax credits include tax benefits from US investments that provide affordable housing to individuals and families that meet median household income requirements.
Adjustments to prior year consists of one time tax benefit in the Netherlands in respect of the 2017 and 2018 tax returns filed.
Other mainly relates to the one off tax benefit in the UK due to the release of the historic deferred tax balances held in respect of the pension scheme deficit when the Defined Benefit pension scheme moved to surplus.
Total income tax related to components of other comprehensive income (541)‍ 486 762
In 2017, the income tax related to components of OCI included a deferred tax benefit of EUR 479 million caused by the decrease of the US corporate income tax rate from 35% to 21% as from January 1, 2018.
Net income / (loss) attributable to common shareholders B 10 4 16
Weighted average number of common shares outstanding (in million) 2,042 2,036 2,042
Weighted average number of common shares B outstanding (in million) 572 571 575
Basic earnings per common share (EUR per share) 0.70 0.31 1.08
Basic earnings per common share B (EUR per share) 0.02 0.01 0.03
Interim dividend 2019 The interim dividend 2019 was paid in cash or stock at the election of the shareholder. Approximately 55% of holders of common shares elected to receive the cash dividend. The remaining 45% opted for stock dividend. The cash dividend amounted to EUR 0.15 per common share, the stock dividend amounted to one new Aegon common share for every 25 common shares held. The stock dividend and cash dividend are approximately equal in value. The interim dividend was payable as of September 20, 2019. The interim dividend 2019 for common shares B amounted to 1/40th of the dividend paid on common shares.
The stock dividend and cash dividend are approximately equal in value. The interim dividend was payable as of September 15, 2017.
The interim dividend 2017 for common shares B amounted to 1/40th of the dividend paid on common shares.
EUR 7.2 billion (2018: EUR 6.2 billion) of cash collateral is received related to securities lending, repurchase agreements and margins on derivatives transactions. A corresponding liability to repay the cash is recognized in other liabilities (refer to note 41 Other liabilities).
For the purposes of the cash flow statement, cash and cash equivalents comprise the following: Cash and cash equivalents 12,263 8,744 10,768
Cash and cash equivalents include cash and demand balances held at the Dutch Central Bank. The Dutch Central Bank requires Aegon
The interest paid on this deposit is equal to the ECB deposit rate which was -50bp as from 18 September 2019 (-40bp throughout 2018 up to 18 September 2019). The year-end minimum required balance on deposit by the Dutch Central Bank was EUR 79 million
(2018: EUR 70 million). These deposits are therefore not freely available.
Net cash flows from investing activities increased by EUR 352 million to a EUR 86 million outflow (2018: EUR 438 million outflow).
The total consideration paid for acquisitions/capital contributions in joint ventures and associates, was EUR 269 million. The total consideration received for disposals, excluding transferred assets and reinsurance assets from reinsurance transactions, was
Total net cash flow from operating activities decreased slightly by EUR 36 million to a EUR 517 million inflow (2017: EUR 553 million inflow). The main movements are the inflow from results from financial transactions (refer to note 10 Result from financial transactions) offset by cash outflows regarding insurance and investment liabilities for account of policyholder (refer to note 34 Insurance contracts and note 35 Investment contracts).
Net cash flows from investing activities increased by EUR 758 million to a EUR 438 million outflow (2017: EUR 1,196 million outflow). The total consideration paid for acquisitions, including cash in acquired entities, was EUR 89 million. The total consideration received for disposals, excluding transferred assets and reinsurance assets from reinsurance transactions, was EUR 214 million. Total consideration received in cash and cash equivalents amounted to EUR 202 million, as an earn-out of EUR 2 million was part of the total consideration. Transferred cash and cash equivalents amounts to an outflow of EUR 416 million as a result of reinsurance transactions and disposal of entities over which control is lost. The outflow in 2018 is mainly driven by the acquisition of Robidus, the divestment of Aegon Ireland plc and the divestment of the last substantial block of US Life reinsurance business (refer to note 48 Business combinations).
The decrease is a result of proceeds and repayments of borrowings (refer to the table below and note 37 Borrowings) and other equity instruments redeemed (refer to note 31 Other equity instruments).
Reconciliation of liabilities arising from financing activities The table below shows the reconciliation between the net cash flows from financing activities and the liabilities as included in the consolidated statement of financial position.
D is p o sa l o f a b u si n es s
Assets held to hedge Trust pass-through securities 15 - - - (6) - - - - 1 10
Total financial assets, excluding derivatives 22.1 143,849 136,324 Investments in real estate 22.2 2,901 2,700
Total investments for general account 146,750 139,024 22.1 Financial assets, excluding derivatives
Money market and other short-term investments 5,955 352 - 6,307 6,307
Of the debt securities, money market and other short-term investments, mortgage loans and private loans EUR 14,736 million is current (2018: EUR 13,324 million).
th er n o n -fin an cial in fo rm atio n 22.2 Investments in real estate
Total investments for account of policyholders at fair value through profit or loss, excluding derivatives 225,788 193,741
Refer to note 44 Fair value for a summary of all financial assets and financial liabilities at fair value through profit or loss.
Derivatives designated as Net foreign investment hedges 112 115 96 114
The fair value of derivatives on the asset and liability side of the consolidated statement of financial position increased during 2019 mainly due to changes in interest rates and changes in the credit spread, as well as purchases, disposals and maturities. Refer to note 44 Fair value for details on fair value measurement of derivatives.
Of the derivatives EUR 581 million (2018: EUR 1,643 million) and EUR 2,300 million (2018: EUR 1,886 million) are current derivative assets and liabilities respectively.
The derivatives are measured at fair value through profit or loss in accordance with IAS 39. The value of the longevity derivatives are calculated using an internal model as there is no active market for this type of derivatives. For more details refer to the paragraph on underwriting risk included in note 34 Insurance contracts and the paragraph on derivatives included in note 44 Fair value.
Bifurcated embedded derivatives that are not closely related to the host contracts have been bifurcated and recorded at fair value in the consolidated statement of financial position. These bifurcated embedded derivatives are embedded in various institutional products, modified coinsurance and unit-linked insurance contracts in the form of guarantees for minimum benefits. Please refer to note 36 Guarantees in insurance contracts for more disclosures about these guarantees.
Certain derivatives are used to add risk by selling protection in the form of single name and index based credit default swaps. This involves the purchase of high quality, low risk assets and the sale of credit derivatives. The table above provides a breakdown in credit quality of these credit derivatives.
For the year ended December 31, 2019, Aegon the Netherlands recognized EUR 375 million positive fair value changes on mortgage loans using fair value hedge accounting under the EU carve out version of IAS 39 in the income statement (2018: EUR 31 million positive). This amount was offset by EUR 354 million negative fair value changes recognized on the derivatives used as hedging instrument (2018: EUR 45 million negative).
Fair value adjustments for these interest rate swaps are deferred and recorded in equity until the occurrence of the forecasted transaction at which time the interest rate swaps will be terminated. The accumulated gain or loss in equity will be amortized into investment income as the acquired asset affects income. Aegon hedges its exposure to the variability of future cash flows from interest rate movements for terms up to 24 years. The cash flows from these hedging instruments are expected to affect the profit and loss for approximately the next 33 years. For the year ended December 31, 2019, the contracts for which cash flow hedge accounting was terminated resulted in deferred gains of EUR 112 million (2018: EUR 57 million) that are recognized directly in equity to be reclassified into net income during the period when the cash flows occur of the underlying hedged items. During the year ended December 31, 2019, none of Aegon's cash flow hedges were discontinued as it was highly probable that the original forecasted transactions would occur by the end of the originally specified time period documented at the inception of the hedging relationship. Aegon projects investment needs many years into the future in order to support the insurance liabilities and pay all contractual obligations arising from the policies in force today.
In addition, Aegon also makes use of cross currency swaps to convert variable or fixed foreign currency cash flows into fixed cash flows in local currencies. The cash flows from these hedging instruments are expected to occur over the next 31 years. These agreements involve the exchange of the underlying principal amounts.
For the year ended December 31, 2019, Aegon recognized EUR 0 million of hedge ineffectiveness on cash flow hedges (2018: EUR 2 million loss; 2017: EUR 0 million). In 2019, EUR 51 million gain was reclassified from equity into the income statement (2018: EUR 62 million loss, 2017: EUR 113 million loss). The amount of deferred gains or losses to be reclassified from equity into net income during the next 12 months is expected to be EUR 89 million gain.
The majority of the fair value and cash flow hedges are directly exposed to changes in benchmark rates (predominantly Eonia, Euribor, and USD Libor), as it is not clear until when these benchmark rates will be continued and how they will transition to alternative rates.
Aegon applies the reliefs offered in IAS 39 to ensure that this uncertainty does not result in the early termination of hedge accounting, whilst also assuming for measurement purposes that, owing to the general principle of equivalence, transitions to alternative rates will not result in significant contract modifications.
Net foreign investment hedges Aegon funds its investments in insurance subsidiaries with a mixture of debt and equity. Aegon aims to denominate debt funding in the same currency as the functional currency of the investment. Investments outside the Eurozone, the United States and the United
An overview of the summarized financial information of the carrying amount of the joint ventures is as follows: AMVEST Other Joint ventures
The summarized financial information of associates presented above is based on the Group’s relative holding.
Assets arising from reinsurance contracts related to: 2019 2018 Life insurance general account 19,046 18,712
Amounts due from reinsurers in respect of claims already paid by the Group are included in note 28 Other assets and receivables.
Of the reinsurance assets EUR 13 million is current (2018: EUR 12 million).
Gross premium and deposits – existing and new business 2,170 - 2,170
Movements during the year in reinsurance assets relating to non-life insurance: 2019 2018
Assets arising from reinsurance contracts related to: 2019 2018 Normal course of business 7,101 6,900
Costs deferred during the year 807 360 24 802 - 29
None of the equipment is held for lease (2018: none). Equipment has not been pledged as security for liabilities, nor are there any restrictions on title. Depreciation expenses have been recorded in Commissions and expenses in the income statement. Equipment is generally depreciated over a period of three to five years.
Net book value Real estate for own use Equipment Other Total
Right-of-use assets are mainly held by Aegon UK and Aegon Americas and they are mainly office buildings held for own use.
th er n o n -fin an cial in fo rm atio n 29 Intangible assets
With the exception of goodwill, all intangible assets have a finite useful life and are amortized accordingly. VOBA and future servicing rights are amortized over the term of the related insurance contracts, which can vary significantly depending on the maturity of the acquired portfolio. The amortization is based on either the expected future premiums, revenues or the expected gross profit margins, which for the most significant blocks of business ranges between 50 and 80 years. Future servicing rights are amortized over a period of 10 to 30 years of which 15 years remain at December 31, 2019 (2018: 13 years). Software is generally depreciated over an average period of 3 to 5 years of which 4 years remain at December 31, 2019 (2018: 4 years).
A geographical summary of the cash-generating units to which the goodwill is allocated is as follows: Southern & Eastern Europe 29 30
As of 2018, goodwill that was provisionally allocated to the cash-generating unit – Cofunds Ltd., is allocated to Aegon UK, whose value in use exceeded its carrying value. Assessment of value in use at this level is considered to reflect the expected benefit flowing to Aegon UK from the synergies arising from the acquisition of Cofunds. The value in use of Scottish Equitable plc (SE plc) is the most material part of the Aegon UK value in use calculation, and it is determined using SE plc’s Solvency II own funds value with adjustments for contract boundaries, risk margin and SE plc’s share of the defined benefit pension scheme liability. An allowance has also been made for the present value of the next 3 years profits, from expected new business. This is considered a key assumption which if it does not arise would reduce the value in use, however a headroom would still remain.
For Aegon the Netherlands, goodwill was allocated to Robidus - a cash generating unit whose value in use exceeds its carrying value.
Share capital transactions relating to common shares 2019 2018 2017 Number of shares
Share buyback program (final dividend 2016 and interim dividend 2017) 51,865 1 Dividend distribution paid from treasury shares (note 30.3) 2 Dividend distribution paid from treasury shares (note 30.3) and issuance of common shares performed in the year.
Transactions in 2017: Sale: transactions, average price EUR 3.44 (4,085) (14)
Movements in the number of treasury common shares B held by Aegon N.V. were as follows: Number of shares (thousands) Amount
th er n o n -fin an cial in fo rm atio n 30.4 Revaluation reserves
Net (gains) / losses transferred to retained earnings - (32) - (32)
The closing balances of the revaluation reserve for available-for-sale investments relate to the following instruments: Revaluation reserve for available-for-sale investments 4,348 1,910 3,427
The amounts are recognized in the income statement at the moment of realization of the hedged position to offset the gain or loss from the hedged cash flow. No amounts have been released from equity to be included in the initial measurement of non-financial assets or liabilities.
The equity movements of joint ventures and associates reflect Aegon's share of changes recognized directly in the joint venture's and associate’s equity.
th er n o n -fin an cial in fo rm atio n 31 Other equity instruments
Plans 1) Total 1 Long Term Incentive Plans include the shares granted to personnel which are not yet vested.
Junior perpetual capital securities Coupon rate Coupon date, as of Year of next call 2019 2018 2017 USD 500 million 6.50% Quarterly, December 15 Called in 2019 - 424 424
USD 500 million floating CMS rate 2) Quarterly, July 15 2020 402 402 402
USD 1 billion 6.375% Quarterly, June 15 Called in 2019 - 821 821
The securities have been issued at par. The securities have subordination provisions, rank junior to all other liabilities and senior to shareholders' equity only. The conditions of the securities contain certain provisions for optional and required coupon payment deferral and, in situations under Aegon's control, mandatory coupon payment events. Although the securities have no stated maturity,
Perpetual cumulative subordinated bonds Coupon rate Coupon date Year of next call 2019 2018 2017 1 The coupon of the EUR 203 million bonds was originally set at 7.125% until March 4, 2011. Subsequently, the coupon has been reset at 4.26% until March 4, 2021.
2 The coupon of the EUR 114 million bonds was originally set at 8% until June 8, 2005. Subsequently, the coupon has been reset at 4.156% until June 8, 2015 and 1.506% until June 8, 2025.
Non-cumulative subordinated notes Coupon rate Coupon date Year of next call 2019 2018 2017 USD 525 million 8% Quarterly, February 15 Called in 2018 - - 271
th er n o n -fin an cial in fo rm atio n 32 Subordinated borrowings
The subordinated debt securities of USD 925 million issued on October 22, 2019 have a fixed coupon of 5.1%. The securities are first callable on December 15, 2024 and maturing on December 15, 2049.
Coupon rate Coupon date Year of issue Year of maturity Year of next call 2019 2018
USD 225 million 1) 7.65% Semi-annually, December 1 1996 2026 n.a. 92 90
Trust pass-through securities are securities through which the holder participates in a trust. The assets of these trusts consist of junior subordinated deferrable interest debentures issued by Transamerica Corporation. The trust pass-through securities carry provisions with regard to deferral of distributions for extension periods up to a maximum of 10 consecutive semi-annual periods. The trust passthrough securities are subordinated to all other unsubordinated borrowings and liabilities of Transamerica Corporation.
34 Insurance contracts 34.1 Underwriting risk Aegon’s earnings depend significantly upon the extent to which actual claims experience differs from the assumptions used in setting the prices for products and establishing the technical liabilities and liabilities for claims. To the extent that actual claims experience is less favorable than the underlying assumptions used in establishing such liabilities, income would be reduced. Furthermore, if these higher claims were part of a permanent trend, Aegon may be required to change best estimate assumptions for future claims which could increase the required reserves for these future claims, which could reduce income. In addition, certain acquisition costs related to the sale of new policies and the purchase of policies already in force have been recorded as assets on the statement of financial position and are being amortized into the income statement over time. If the assumptions relating to the future profitability of these policies (such as future claims, investment income and expenses) are not realized, the amortization of these costs could be accelerated and may even require write offs should there be an expectation of unrecoverability. This could have a materially adverse effect on Aegon’s business, results of operations and financial condition.
Sensitivity analysis of net income and shareholders’ equity to various underwriting risks is shown in the table that follows. Aegon's best estimate assumptions already include expected future developments and the sensitivities represent an increase or decrease of lapse rates, mortality rates and morbidity rates, compared to Aegon's best estimate assumptions. These underwriting sensitivities were run using a permanent shock applied to all of Aegon's products, exposed to an increase and to a decrease in the rates. The table below indicates that the morbidity sensitivity has the largest impact and in aggregate, Aegon is exposed to a decrease in mortality rates.
Sensitivity analysis of net income and shareholders’ equity to changes in various underwriting risks
Loss recognized as a result of liability adequacy testing 1,587 49
Transfer (to) / from insurance contracts for account of policyholders 1,050 27
December 31, 2019 is recorded in the income statement and led to the recognition of an increase in insurance contracts liabilities as at
Due to the positive LAT headroom of Aegon the Netherlands at the end of 2018, changes in the LAT margin triggered by up or down interest shocks could be absorbed by the revaluation reserves on available for sale assets (shadow accounting). However, due to the current deficit, changes in the LAT margin of Aegon the Netherlands, triggered by up or down interest shocks, will now be directly recognized in the income statement.
As a result, the IFRS income statement of Aegon the Netherlands is now less sensitive for interest movements as the interest risk was, and is, economically hedged using derivatives largely offsetting the impact of a changed LAT margin. Please refer to note 4 Financial risks for the updated Group sensitivities on interest rate risk.
Furthermore, as a result of the current negative LAT headroom position, future results will become more volatile due to changes in credit spreads as these are not hedged. Please find below the estimated sensitivities on shareholders’ equity and on net income, for up and down shocks for credit spreads, mortgage spreads for the bond and mortgage portfolio and liquidity premium shocks for general account insurance liabilities.
th er n o n -fin an cial in fo rm atio n 34.3 Insurance contracts for account of policyholders
Gross premium and deposits – existing and new business 9,122 9,716
Net exchange differences 2,868 3,092 35 Investment contracts 35.1 Investment contracts for general account
Investment contracts consist of the following: 2019 2018 Institutional guaranteed products 339 944
The addition in investment contracts for account of policyholders in 2018 of EUR 18.4 billion (GBP 16.3 billion) reflects the completion of the BlackRock Part VII transfer on July 1, 2018, in the UK.
In addition to the guarantees mentioned above, Aegon has traditional life insurance contracts that include minimum guarantees that are not valued explicitly; however, the adequacy of all insurance liabilities, net of VOBA and DPAC, and including all guarantees, are assessed periodically (refer to note 2.19).
th er n o n -fin an cial in fo rm atio n if the premium has been paid for a consecutive period of at least ten years and is invested in a mixed fund and/or fixed-income funds.
The increase of incurred guarantee benefits mainly relates to decreasing interest rates and credit spreads movements offset by rising equity markets in 2019. The decreasing interest rates and rising equity markets also increased the account value in 2019.
The GMWB rider Aegon assumed from the ceding company is accounted for as a derivative and is carried in Aegon’s statement of financial position at fair value. At December 31, 2019, the contract had a value of EUR 37 million (2018: EUR 36 million).
The following table provides information on the liabilities for guarantees for minimum benefits that are included in the valuation of the host contracts: GMDB 1) GMIB 2) Total 4)‍ GMDB 1) GMIB 2) Total 4)
Average attained age of contract holders 70 71 70 71 1 Guaranteed minimum death benefit in the United States.
4 Balances are included in the insurance liabilities on the face of the statement of financial position; refer to note 34 Insurance contracts. 5 Incurred guarantee benefits mainly comprise the effect of guarantees from new contracts, releases related to expired out-of-the-money guarantees and value changes as a consequence of interest movements during the reporting year. 6 Account value reflects the actual fund value for the policyholders. 7 The net amount at risk is defined as the present value of the minimum guaranteed annuity payments available to the contract holder determined in accordance with the terms of the contract in excess of the current account balance.
The traditional group pension contracts offered by Aegon in the Netherlands include large group insurance contracts that have an individually determined asset investment strategy underlying the pension contract. The guarantee given is that the profit sharing is the maximum of 0% and the realized return on an asset portfolio specified in the policy conditions, adjusted for technical interest rates ranging from 3% to 4%. If the adjusted return is negative, the 0% minimum is effective, but the loss in any given year is carried forward to be offset against any future surpluses within the contract period. In general, a guarantee is given for the life
These guarantees are valued at fair value and are included as part of insurance liabilities with the underlying host insurance contracts in note 34 Insurance contracts.
For equity volatility, Aegon uses a term structure assumption with market-based implied volatility inputs for the first five years and a long-term forward rate assumption of 25% thereafter. The volume of observable option trading from which volatilities are derived generally declines as the contracts’ term increases, therefore, the volatility curve grades from implied volatilities for five years to the ultimate rate. The resulting volatility assumption in year 20 for the S&P 500 index (expressed as a spot rate) was 21.1% at December 31, 2019, and 23.3% at December 31, 2018. Correlations of market returns across underlying indices are based on historical market returns and their inter-relationships over a number of years preceding the valuation date. Assumptions regarding policyholder behavior, such as lapses, included in the models are derived in the same way as the assumptions used to measure insurance liabilities.
The main drivers of this gain before tax are a gain of EUR 1,585 million related to an increase in equity markets (2018: EUR 532 million loss), a gain of EUR 12 million related to increases in equity volatility (2018: EUR 8 million loss), a fair value gain on hedges related to the guarantee reserves of EUR 1,840 million (2018: EUR 527 million gain), a gain of EUR 42 million related to widening own credit spread (2018: EUR 148 million gain) and other and DPAC offset contributed a gain of EUR 273 million (2018: EUR 233 million loss). These gains are partly offset by negative results related to decreases in risk free rates of EUR 3,281 million (2018: EUR 32 million gain).
EUR 75 million Medium-Term Notes 1) 4.625% December 9 2004 / 19 - 78
USD 500 million Senior Notes 1), 2) 5.75% Semi-annually 2005 / 20 461 457
GBP 400 million Senior Unsecured Notes 6.625% Semi-annually 2009 / 39 467 440 1 Measured at fair value. 2 Issued by subsidiaries of, and guaranteed by, Aegon N.V.
Operational funding During 2019, the operational funding decreased by EUR 2.7 billion mainly due to the early redemption of a USD 1.54 billion Variable
Funding Surplus Note (EUR 1.4 billion), following a restructuring of this financing transaction in the US. In addition, a further decrease was driven by the redemption of ‘SAECURE 14’ of EUR 0.9 billion and the pay down of FHLB advances of EUR 1.7 billion. This was partly offset by an increase in other mortgage loan funding of EUR 0.5 billion, the issuance of EUR 500 million senior non-preferred notes with a coupon of 0.625%, and a transaction under the Dutch SAECURE program ('SAECURE 18') to sell Class A mortgage backed securities (RMBS). ‘SAECURE 18 NHG’ consists of EUR 512 million of class A notes with an expected weighted average life of 4.8 years and a coupon of 3 month Euribor plus 40bps.
Revolving Loan Facility Warehouse Mortgage Loans 1) Floating Monthly - / 2020-22 817 375
EUR 1,443 million "SAECURE 15" RMBS Note 1), 3) Floating Quarterly 2014 / 20 917 1,038
EUR 875 million "SAECURE 16" RMBS Note 1), 4) Floating Quarterly 2018 / 23 820 875
EUR 512 million "SAECURE 18" RMBS Note 1), 5) Floating Quarterly 2019/25 491 -
EUR 500 million Conditional Pass-Through Covered Bond 1), 7) 0.250% Annual 2016 / 23 498 497
EUR 500 million Conditional Pass-Through Covered Bond 1), 8) 0.750% Annual 2017 / 27 489 488
EUR 500 million Conditional Pass-Through Covered Bond 1), 9) 0.375% Annual 2017 / 24 498 497
USD 1.54 billion Variable Funding Surplus Note 10), 11) Floating Quarterly 2006 / 36 - 1,388
3 The first optional redemption date is January 30, 2020; the final maturity date is January 30, 2092. Notes are fully collateralized by mortgage loans which are part of Aegon’s general account investments.
5 The first optional redemption date is July 28, 2025; the final legal maturity date is April 28, 2092. Notes are fully collateralized by mortgage loans which are part of Aegon’s general account investments.
The difference between the contractually required payment at maturity date and the carrying amount of the borrowings amounted to EUR 40 million negative (2018: EUR 8 million negative).
Undrawn committed borrowing facilities: 2019 2018 Floating-rate - Expiring within one year 516 260 - Expiring beyond one year 2,887 3,420
The provisions as at December 31, 2019 mainly consist of litigation provisions of EUR 90 million (2018: EUR 198 million)
mainly related to a settlement in the US relating to increases in monthly deduction rates on universal life products (refer to note 45 Commitments and contingencies), restructuring provisions of EUR 43 million (2018: EUR 30 million), provisions regarding fees payable upon purchase and surrender of unit-linked policies in the Polish Life Insurance portfolio of EUR 14 million (2018: EUR 17 million) and other provisions of EUR 66 million (2018: EUR 76 million) including the remaining provision related to the harbor workers’ former pension fund Optas.
Remeasurements of defined benefit plans 607 5 612 157 (23) 134 1 In 2019, ‘Other’ mainly relates to the plan amendment from The Netherlands as described in the section on ‘Aegon the Netherlands’ in this note.
The amounts recognized in the statement of financial position are determined as follows: Aegon Integrated Annual Report 2019
Present value of wholly or partly funded obligations 4,807 - 4,807 4,027 - 4,027
Fair value of plan assets (4,420) - (4,420) (3,525) - (3,525)
Net interest on the net defined benefit liability (asset) 80 9 89 87 8 96
Net interest on the net defined benefit liability (asset) 99 10 109
Movements during the year of the present value of the defined benefit obligations 2019 2018
Aegon USA Aegon USA has defined benefit plans covering substantially all its employees that are qualified under the Internal Revenue Service
Code, including all requirements for minimum funding levels. The defined benefit plans are governed by the Board of Directors of Transamerica Corporation. The Board of Directors has the full power and discretion to administer the plan and to apply all of its provisions, including such responsibilities as, but not limited to, developing the investment policy and managing assets for the plan, maintaining required funding levels for the plan, deciding questions related to eligibility and benefit amounts, resolving disputes that may arise from plan participants and for complying with the plan provisions, and legal requirements related to the plan and its operation. The benefits are based on years of service and the employee’s eligible annual compensation. The plans provide benefits based on a traditional final average formula or a cash balance formula (which defines the accrued benefit in terms of a stated account balance), depending on the age and service of the plan participant. The defined benefit plans have a deficit of EUR 388 million at December 31, 2019 (2018: EUR 450 million deficit).
The benefits are based on years of service and the employee’s eligible annual compensation. The plans provide benefits based on a traditional final average formula or a cash balance formula (which defines the accrued benefit in terms of a stated account balance), depending on the age and service of the plan participant. The company funds the benefit payments of the supplemental retirement plans from its general account assets. The unfunded amount related to these plans, for which a liability has been recorded, was
Under the Employee Retirement Income Security Act (ERISA), Aegon USA has the fiduciary responsibility to monitor the quality of services provided by the third-party claims administrator and to replace the third-party administrator if needed. In addition, Aegon
The weighted average duration of the defined benefit obligation is 12.6 years (2018: 12.2 years).
Health care trend rate 6.60% 7.00% 1 2019 assumption- PRI-2012 Employee, Health Annuitant and Contingent Survivor Tables (90% white collar/ 10% blue collar) projected with Scale MP -2019. 2 2018 Assumption- RP2014 Employee and Health Annuitant Tables projected with Scale MP - 2018 3 Aegon USA has separate discount rates beginning with 2018 – 3.23% for all pension plans and 3.02% for post retirement welfare plan 2019.
100 basis points decrease in discount rate 514 430 100 basis points increase in salary increase rate 29 29 100 basis points decrease in salary increase rate (27) (26)
1 Aegon Nederland deducts employee contributions from the total pension expenses.
Aegon the Netherlands Aegon the Netherlands has a number of defined benefit plans and a small number of defined contribution plans. The defined benefit plans are subject to Dutch Pension regulations and governed by the Board of Directors of Aegon the Netherlands. The Board of Directors has the full power and discretion to administer the plan including developing investment policy and managing assets for the plans (although these assets do not qualify as ‘plan assets’ as defined by IFRS), deciding questions related to eligibility and benefit amounts, and any disputes that may arise from plan participants and for complying with the plan provisions, and legal requirements related to the plan and its operation. Aegon the Netherlands runs, in principle, full actuarial and investment risk regarding the defined benefit plans. This includes the risks of low interest rates, low returns and increased longevity. A part of this risk can be attributed to plan participants by lowering indexation or by increasing employee contributions.
Furthermore, the specific statutory requirements governing the administration of group pension schemes have been laid down in the Pension Act (Pensioenwet / Pw). Insurers are subject to prudential supervision pursuant to the Financial Supervision Act (Wet op het financieel toezicht / Wft).
The contributions to the retirement benefit plan of Aegon the Netherlands are paid by both the employees and the employer, with the employer contribution being variable1. The benefits covered are retirement benefits, disability, death and survivor pension and are based on an average wage system. The defined benefit plans were unfunded by EUR 3,413 million at December 31, 2019. (2018: EUR 2,967 million). The defined benefit plans are largely backed by investment, although these assets do not qualify as ‘plan assets’
as defined by IFRS. The average remaining duration of the defined benefits obligation is 21.9 years (2018: 20.9 years).
The liabilities related to these other post-employment benefit plans are fully unfunded and amount to EUR 65 million at December 31, 2019 (2018: EUR 65 million). The weighted average duration of the other post-employment benefit plans is 12.4 years (2018: 11.7 years).
Pension Plan will be between Aegon the Netherlands and Aegon Cappital and comes into effect on January 1, 2020.
The minimum tax-qualified retirement age for occupational retirement plans in the Netherlands is triggered by an increase in average life expectancy as determined by the Central Bureau of Statistics. Effective January 1, 2018, the tax-qualified retirement age in combination with the maximum annual benefit accrual of 1.875% becomes 68. As a result Aegon has changed the retirement age of its pension plan from 67 to 68 years as from January 1, 2018.
The principal actuarial assumptions that apply for the year-ended December 31 are as follows: Actuarial assumptions used to determine defined benefit obligations at year-end 2019 2018 Demographic actuarial assumptions
Financial actuarial assumptions 100 basis points increase in discount rate (645) (534)
100 basis points decrease in discount rate 893 733 100 basis points increase in salary increase rate 1 18 100 basis points decrease in salary increase rate - (18)
The pension scheme Trustees are required to carry out triennial valuations on the scheme’s funding position, with the latest valuation being as at March 31, 2019. As part of this triennial valuation process, a schedule of contributions is agreed between the Trustees and Aegon UK in accordance with UK pensions legislation and guidance issued by the Pensions Regulator in the UK. The schedule of contributions includes deficit reduction contributions to clear any scheme deficit. Under IAS 19, the defined benefit plan has a surplus of EUR 1.5 million at December 31, 2019 (2018: EUR 51 million deficit). During 2019, EUR 83 million (2018: EUR 55 million)
of contributions were paid into the scheme. The 2019 contributions included a one off payment of EUR 29 million in addition to the schedule of contributions.
During 2019, the scheme purchased a buy-in policy in the name of the Trustee to cover full scheme benefits for a group of pensioners.
The liability (and matching asset) calculated on the year end assumptions has been included in the funded position as at
The principal actuarial assumptions that apply for the year ended December 31 are as follows: Actuarial assumptions used to determine defined benefit obligations at year-end 2019 2018 Demographic actuarial assumptions
Deferred tax liabilities comprise temporary differences on: 2019 2018 Real estate 124 520
Transfer to/from other headings - - - - - (473) 473 -
In 2019, the increase of deferred tax liability primarily related to an increase of unrealized profits in respect of financial assets mainly driven by a decrease in interest rates.
In 2018, the movement in other of EUR 90 million is caused by the redemption of the non-cumulative subordinated note. Refer to note 31 "Other equity instruments".
Deferred corporate income tax assets are recognized for tax losses and credits carried forward to the extent that the realization of the related tax benefit through future taxable profits is probable. For an amount of gross EUR 1,379 million; tax EUR 236 million related to tax losses carried forward (2018: gross EUR 1,317 million; tax EUR 225 million) and an amount of tax EUR 391 million related to tax credits carried forward (2018; tax EUR 473 million) the realization of the deferred tax asset is dependent on the projection of future taxable profits as well as foreign income from existing business in excess of the profits arising from the reversal of existing taxable temporary differences. For comparative purposes the figures relating to the gross amount and tax amount for 2018 have been adjusted since several entities with deferred tax assets dependent on future taxable profits reported profits and were therefore not required to be included.
Deferred corporate income tax assets in respect of deductible temporary differences are recognized to the extent that the realization of the related tax benefit through future taxable profits is probable. For an amount of gross EUR 406 million; tax EUR 99 million
Deferred corporate income tax liabilities have not been recognized for withholding tax and other taxes that would be payable on the unremitted earnings of certain subsidiaries. The unremitted earnings totaled gross EUR 1,774 million; tax EUR 383 million
43 Capital management and solvency Strategic importance Aegon’s approach towards capital management plays a vital role in supporting the execution of its strategy. The key capital management priority is to ensure adequate capitalization to cover Aegon’s obligations towards its policyholders and debtholders while providing sustainable dividends to shareholders. This priority is accomplished by allocating capital to products that offer high growth and return prospects. Furthermore, a priority for capital management for several years has been to shift the product portfolio from focusing mostly on capital intensive spread business to diversifying the portfolio to include more capital light fee business.
Capital adequacy The capitalization of the Aegon Group and its operating units is managed in relation to the most stringent of local regulatory requirements, rating agency requirements and/or self-imposed criteria. Aegon manages its Solvency II capital in relation to the required capital. Under Aegon’s capital management framework the own funds are managed such that the Group Solvency II ratio remains within the target range of 150% - 200% even in an adverse event. The Solvency contribution of Aegon US insurance entities under Deduction
Minimum solvency requirements Insurance laws and regulations in local regulatory jurisdictions often contain minimum regulatory capital requirements. For insurance companies in the European Union, Solvency II formally defines a lower capital requirement, being the Minimum Capital Requirement
With the introduction of Solvency II for EEA countries, Aegon views the higher capital requirement, 100% of the SCR, as the level around which EU supervisors will formally require management to provide regulatory recovery plans. For the US insurance entities this is viewed at 100% Company Action Level (CAL).
Spain). Aegon Spain used to apply a transitional arrangement related to its technical provisions and applied the Solvency II matching adjustment. At the instruction of the Spanish Insurance Regulator (DGSFP), Aegon Spain no longer applies the matching adjustment and the transitional arrangements. As a consequence of this, the Solvency II ratio of Aegon Spain dropped below the 100% and Aegon
The below table provides the composition of Aegon's available own funds across Tiers: Aegon Integrated Annual Report 2019
As at December 31, 2019, Tier 1 capital accounted for 83% of own funds (2018: 89%), including EUR 1,617 million of junior perpetual capital securities (2018: EUR 2,931 million) and EUR 479 million of perpetual cumulative subordinated bonds (2018: EUR 476 million)
which are both classified as grandfathered restricted Tier 1 capital. In addition, Aegon issued EUR 500 million perpetual contingent convertible security in 2019, which is Solvency II compliant capital contributing EUR 518 million to restricted Tier 1 capital.
IFRS adjustments for Other Equity instruments and non controlling interests 2,591 3,342
Available own funds 18,470 17,602 1 This includes the transferability restriction related to the RBC CAL conversion methodology. 2 Amongst others, this contains the exclusion of Aegon Bank.
The Solvency II revaluations and reclassification of EUR 8,214 million negative (2018: EUR 6,911 million negative) mainly stem from the difference in valuation and presentation between IFRS-EU and Solvency II frameworks. The change in Solvency II revaluations per
The transferability restrictions reflect the restrictions on US Life Companies DTA and capping of Tier 1 unrestricted own funds as a consequence of the RBC CAL conversion methodology as described above.
These limitations refer to charitable trusts in the Americas for which the local Supervisory Authority could limit the upstream of capital to the Group and Aegon Bank which is under a different regulatory regime but under the same Supervisory Authority and therefore excluded for Solvency II purposes.
Aegon’s total capitalization comprises the following components:  Shareholders’ equity excluding revaluation reserves based on IFRS as adopted by the EU;  Non-controlling interests and Long Term Incentive Plans not yet vested; and  Total financial leverage.
The following table shows the composition of Aegon's total capitalization, the calculation of the gross financial leverage ratio and its fixed charge coverage: Total shareholders’ equity - based on IFRS as adopted by the EU 30 22,457 19,518
Non-controlling interests and Long Term Incentive Plans not yet vested 31, SOFP 2)‍ 73 80
Adjusted shareholders' equity 16,662 16,162 Perpetual contingent convertible securities 31 500 -
Aegon N.V. is subject to legal restrictions with regard to the amount of dividends it can pay to its shareholders. Under Dutch law, the amount that is available to pay dividends consists of total shareholders' equity less the issued and outstanding capital and the reserves required by law. The legal reserves in respect of the foreign currency translation reserve (FCTR), group companies and the revaluation reserves, cannot be freely distributed. In case of negative balances for individual reserves legally to be retained, no distributions can be made out of retained earnings to the level of these negative amounts. Total distributable items under Dutch law amounted to EUR 13,569 million as at December 31, 2019 (2018: EUR 13,307 million). The following table shows the composition of the total distributable items: Distributable items 1)‍ 2019 2018 Equity attributable to shareholders 22,457 19,518
Fair value hierarchy The table below provides an analysis of assets and liabilities recorded at fair value on a recurring basis by level of the fair value hierarchy: Level I Level II Level III Total 2019
Liabilities carried at fair value Investment contracts for account of policyholders 2) - 59,759 197 59,956
Other investments at fair value 493 - - (100) (56) 183 (25) (23) 9 - - - - 482 -
Other investments at fair value 1,376 - - 34 - 884 (268) - 23 - 85 (86) - 2,049 36
Investments for account of policyholders 1,871 - - 45 - 435 (567) - 20 - - - - 1,805 86
Liabilities carried at fair value Investment contracts 2,695 - - 605 4 4 (46)‍ - 15 - - - - 3,278 75 1 Includes impairments and movements related to fair value hedges. Gains and losses are recorded in the line item Results from financial transactions of the income statement.
A cq u is it io n s th ro u g h b u si n es s co m b in at io n s
Tr an sf er s fr o m l ev el s
To ta l u n re al iz ed g ai n s an d
Total assets at fair value 9,130 130 (1)‍ 435 (87)‍ 2,570 (1,624)‍ (472)‍ 185 42 151 (382)‍ - 10,077 388
During 2019, Aegon transferred certain financial instruments from Level II to Level III of the fair value hierarchy. The reason for the change in level was that the market liquidity for these securities decreased, which led to a change in market observability of prices.
Similarly, during 2019, Aegon transferred EUR 517 million (2018: EUR 382 million) of financial instruments from Level III to other levels of the fair value hierarchy. The change in level was mainly the result of a return of activity in the market for these securities and that for these securities the fair value could be determined using observable market transactions or corroborated broker quotes for the same or similar instruments.
Assets carried at fair value Available-for-sale Shares Net asset value 3) n.a. 119 n.a. 205 n.a.
Fair value through profit or loss Shares Other n.a. 1,401 n.a. 1,226 n.a. Debt securities Other n.a. 4 n.a. 17 n.a.
Other investments at fair value Investment funds Net asset value 3) n.a. 1,984 n.a. 1,334 n.a. Other Other n.a. 65 n.a. 42 n.a.
Derivatives Longevity swap Discounted cash flow Mortality 55 n.a. 33 n.a. Other Other n.a. - n.a. - n.a.
Total liabilities at fair value 3,081 2,489 1 Other in the table above (column Valuation technique) includes investments for which the fair value is uncorroborated and no broker quote is received. 2 Not applicable (n.a.) has been included when the unobservable inputs are not developed by the Group and are not reasonably available. Refer to the section Fair value measurement in this note for a detailed description of Aegon’s methods of determining fair value and the valuation techniques. 3 Net asset value is considered the best approximation to the fair value of these financial instruments. 4 Investments for account of policyholders are excluded from the table above and from the disclosure regarding reasonably possible alternative assumptions.
Policyholder assets, and their returns, belong to policyholders and do not impact Aegon’s net income or equity. The effect on total assets is offset by the effect on total liabilities. Derivatives exclude derivatives for account of policyholders amounting to EUR 1 million (2018: EUR 2 million).
Effect of changes in significant unobservable assumptions to reasonably possible alternatives From all significant unobservable inputs, own credit spread as included in the discount rate for embedded derivatives in insurance contracts is considered significant. It is estimated that changing the other significant unobservable inputs to reflect reasonable possible alternatives in valuation would have no significant impact for the Group.
An increase in own credit spread results in lower valuation, while a decrease results in a higher valuation of the embedded derivatives.
Financial liabilities carried at fair value Embedded derivatives in insurance contracts 3,072 158 (152) 2,484 131 (126)
Fair value information about assets and liabilities not measured at fair value The following table presents the carrying values and estimated fair values of assets and liabilities, excluding assets and liabilities which are carried at fair value on a recurring basis.
Assets Mortgage loans - held at amortized cost 38,524 - 1 42,566 42,567
Trust pass-through securities - held at amortized cost 136 - 144 - 144
Borrowings – held at amortized cost 8,845 1,728 30 7,565 9,322
Investment contracts - held at amortized cost 18,382 - - 18,964 18,964
Assets Mortgage loans - held at amortized cost 36,639 - 1 39,757 39,758
Trust pass-through securities - held at amortized cost 133 - 128 - 128
Borrowings – held at amortized cost 11,525 1,570 28 10,287 11,885
Investment contracts - held at amortized cost 17,825 - - 18,028 18,028
III unquoted shares, the net asset value can be considered the best approximation to the fair value. Net asset value is the value of an entity's assets minus the value of its liabilities and may be the same as the book value or the equity value of the entity.
Also for unquoted shares, the fair value may be estimated using other methods, such as observations of the price/earnings or price/
When broker quotes are not available, securities are priced using internal cash flow modeling techniques. These valuation methodologies commonly use the following inputs: reported trades, bids, offers, issuer spreads, benchmark yields, estimated prepayment speeds, issue specific credit adjustments, indicative quotes from market makers and/or estimated cash flows.
Aegon’s view of the risk associated with each security. However, Aegon does not rely solely on external credit ratings and there is an internal process, based on market observable inputs, for determining Aegon’s view of the risks associated with each security.
Aegon's portfolio of debt securities can be subdivided into Residential mortgage-backed securities (RMBS), Commercial mortgagebacked securities (CMBS), Asset-backed securities (ABS), Corporate bonds and Government debt. Below relevant details of the valuation methodologies for these specific types of debt securities are described.
Money market and other short-term investments and deposits with financial institutions
The fair values of investments held in non-quoted investment funds are determined by management after taking into consideration information provided by the fund managers. Aegon reviews the valuations each month and performs analytical procedures and trending analyses to ensure the fair values are appropriate. The net asset value is considered the best valuation method that approximates the fair value of the funds.
Depending on the duration of the longevity swaps either the projected mortality development or discount rate are the most significant unobservable inputs.
Trust pass-through securities and subordinated borrowings Trust pass-through securities and subordinated borrowings 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). For the determination of the fair value of these instruments, the level hierarchy as described by IFRS-EU is used.
The preferred method of obtaining the fair value of the fair value option bonds is the quoted price (Level I). In case markets are less liquid or the quoted prices are not available, an internal model is used, based on parameters which are market observable (Level II).
Derivatives with positive values not designated as hedges 10,527 - 7,015 -
Total financial assets at fair value through profit or loss 10,804 234,591 7,188 202,165
Total financial liabilities at fair value through profit or loss 10,391 60,417 6,424 50,383
Aegon has certain insurance and investment liabilities that are carried at fair value with changes in the fair value recognized in the income statement. The Group has elected to designate the investments backing those liabilities at fair value through profit or loss, as a classification of available-for-sale would result in accumulation of unrealized gains and losses in a revaluation reserve within equity whilst changes to the liability would be reflected in net income (accounting mismatch).
Refer to note 37 Borrowings for the impact of Aegon’s own credit spread on the fair value of the borrowings designated at fair value through profit or loss.
45 Commitments and contingencies Investments contracted In the normal course of business, the Group has committed itself through purchase and sale transactions of investments, mostly to be executed in the course of 2020. The amounts represent the future outflow and inflow, respectively, of cash related to these investment transactions that are not reflected in the consolidated statement of financial position.
Mortgage loans commitments represent undrawn mortgage loan facility provided and outstanding proposals on mortgages. The sale of mortgage loans relates to pre-announced redemptions on mortgage loans. Private loans represents deals on Aegon's portfolio of private placement securities that Aegon has committed to, but have not yet settled and funded. Other commitments include future purchases of interests in investment funds and limited partnerships.
< 1 year amounts 1 < 2 years amounts 2 < 3 years amounts 3 < 4 years amounts 4 < 5 years amounts > 5 years amounts
Share of contingent liabilities incurred in relation to interests in joint ventures 14 49
Contractual obligations In March 2019, affiliates of Transamerica Corporation entered into a series of agreements with Long Term Care Group (LTCG), an independent third party administrator, to transfer the administration and claims management of its long term care insurance business line. The transaction enables Transamerica to accelerate the enhancement of its digital capabilities and the modernization of its long term care insurance platform. Over the course of the multi-year contract, Transamerica will pay approximately
USD 390 million to LTCG. These fees represents compensation for administering Transamerica’s long term care product line including new business, policyholder service, claims processing and care management. The agreement also contains a termination clause in which case Transamerica – subject to certain limitations – agrees to compensate LTCG, on a specified schedule, for early termination.
Transamerica to accelerate the enhancement of its digital capabilities and the modernization of its platforms to service its customers in all lines of business. Over the course of the multi-year contract, Transamerica will pay more than USD 2 billion to TCS. These fees represent compensation for administering Transamerica’s over 10 million policies and are driven by both new business and policies already in force. In addition, this commitment includes remaining transition and conversion charges of approximately USD 107 million
(period 2020-2022) as well as administrative, IT and finance service fees which are contingent on TCS meeting specified milestones in the underlying agreement with Transamerica. The agreement also contains a termination clause in which case Transamerica – subject to certain limitations – agrees to compensate TCS, on a specified schedule, for early termination.
Life Insurance Company, to the extent that the assets in the captive (TRRI) are not sufficient to cover reinsurance obligations. As of
December 31, 2018, this amounted to EUR 1,892 million (2017 EUR: 1,793 million). In 2019, the parental guarantee was cancelled resulting in a EUR 0 balance.
In November 2018, Aegon UK announced an extended partnership with Atos BPS Ltd (Atos) to service and administer its Existing
Business (non-Platform customers). The agreement is a 15-year contract under which Aegon UK pays Atos to administer around 1.4 million customers, which took effect on 1 June 2019 as planned. At year-end 2019, outstanding transition and conversion charges are estimated to amount to approximately GBP 60 million, which are expected to be recorded over the next two years, with fixed payments to Atos defined in the agreement and subject to completion of milestones which have been agreed with Aegon UK.
On October 31, 2017 Aegon the Netherlands sold its shares in Unirobe Meeùs Groep (UMG) for EUR 295 million to Aon Groep
'AA' financial strength rating and capital sufficient to comply with the requirements of the countries in which its branches are located.
Aegon N.V. has guaranteed and is severally liable for the following:  Due and punctual payment of payables under letter of credit agreements applied for by Aegon N.V. as co-applicant with its captive insurance companies that are subsidiaries of Transamerica Corporation and Commonwealth General Corporation. At December 31, 2019, the letter of credit arrangements utilized by captives to provide collateral to affiliates amounted to EUR 2,249 million (2018: EUR 3,469 million); as of that date no amounts had been drawn, or were due under these facilities. Other letter of credit arrangements for subsidiaries amounted to EUR 10 million (2018: EUR 60 million); as of that date no amounts had been drawn, or were due under these facilities;  Due and punctual payment of payables under letter of credit agreements or guarantees provided for subsidiaries of Transamerica
LLC and Commonwealth General Corporation with respect to fixed subordinated notes, bonds, capital trust pass-through securities and notes issued under commercial paper programs amounting to EUR 1,449 million (2018: EUR 614 million); and  Due and punctual payment of any amounts owed to third parties by the consolidated group company Aegon Derivatives N.V. in connection with derivative transactions. Aegon Derivatives N.V. only enters into derivative transactions with counterparties with which ISDA master netting agreements, including collateral support annex agreements, have been agreed. Net (credit) exposure on derivative transactions with these counterparties was therefore limited as of December 31, 2019.
or the imposition of monetary fines, penalties and/or disgorgement as well as other remedies, sanctions, damages and restitutionary amounts. There can be no assurance that government and regulatory investigations will not have a material and adverse effect on Aegon's reputation, financial position, results of operations or liquidity.
th er n o n -fin an cial in fo rm atio n to change its business practices, which could have a material adverse impact on Aegon’s businesses, results of operations, cash flows and financial position.
Aegon has defended and will continue to defend itself when it believes claims are without merit. Aegon has also settled and will seek to settle certain claims, including through policy modifications, as it believes appropriate. While Aegon intends to resist claims, there can be no assurance that claims brought against Aegon will not have a material adverse impact on its businesses, results of operations, and financial position.
Over 99% of affected policyholders participated in the settlement. While less than 1% of policyholders opted out, they represent approximately 43% of the value of the settlement fund. The settlement fund was reduced proportionally for opt outs, although
Unclaimed property administrators and state insurance regulators performed examinations and multi-state examinations of the life insurance industry in the United States, including certain of Aegon's subsidiaries. Aegon subsidiaries, like other major US insurers, entered into resolutions with state treasurers and insurance regulators regarding unclaimed property and claims settlement practices.
As of December 2019, there remained a provision of USD 25 million for unclaimed property obligations, which is management's best estimate of the still-outstanding exposure. The final amount may vary based on subsequent regulatory review.
Aegon’s US-based subsidiaries may face employment-related lawsuits from time to time. For example, several US-based Aegon subsidiaries have been named in a class action alleging that the business model inappropriately characterizes distributors as independent contractors instead of employees. Depending on the outcome, these lawsuits, along with similar claims against other companies, as well as regulatory action could necessitate a change in the distribution model and could result in significant settlements or judgments.
That dispute was resolved in Delaware court for USD 235 thousand plus interest in 2010. The plaintiff took the Delaware judgment relating to the 1976 dispute to a Nigerian court and alleged that it was entitled to approximately the same damages for 1977 through 1984 despite the absence of any contract relating to those years. The Nigerian trial court issued a judgment in favor of the plaintiff of the alleged actual damages as well as pre-judgment interest of approximately USD 120 million. On appeal this decision was reversed on procedural grounds and remanded back to the trial court which ruled to dismiss the case; however, the Plaintiff appealed the trial court’s ruling. The appeal is still pending. Aegon has no material assets located in Nigeria.
Sprintplan. Allegations include, among other things, a lack of a proper license of the brokers involved. In October 2017, the district court of The Hague ruled in favor of Aegon that the Sprintplan liability had been conclusively determined in earlier proceedings and there were no grounds to hold further collective proceedings. The plaintiff appealed. In February 2020, the Court of Appeal rejected all claims filed by Platform Aandelenlease against Aegon Bank. Platform Aandelenlease may appeal in cassation against this ruling.
The transferred assets are not derecognized. The obligation to repay the cash collateral is recognized as a liability. The non-cash collateral is not recognized in the statement of financial position; and
Cash collateral is usually invested in pre-designated high quality investments. The sum of cash and non-cash collateral is typically greater than the market value of the related securities loaned. Refer to note 46.3 Assets accepted and note 46.4 Assets pledged for an analysis of collateral accepted and pledged in relation to securities lending and repurchase agreements.
46.2 Transferred financial assets that are derecognized in their entirety, but where Aegon has continuing involvement Aegon has no transferred financial assets with continuing involvement that are derecognized in their entirety as per year-end
The following tables present the fair value of the assets received in relation to securities lending and reverse repurchase activities: Securities lending 2019 2018 Carrying amount of transferred financial assets 2,734 3,718
Non-cash collateral that can be sold or repledged in the absence of default 618 1,171
46.4 Assets pledged Aegon pledges assets that are on its statement of financial position in securities borrowing transactions, in repurchase transactions, in derivative transactions and against long-term borrowings. In addition, in order to trade derivatives on the various exchanges, Aegon posts margin as collateral.
Non-cash financial assets that are borrowed or purchased under agreement to resell are not recognized in the statement of financial position.
The following tables present the carrying amount of collateral pledged and the corresponding amounts.
As part of Aegon’s mortgage loan funding program in the Netherlands, EUR 5.5 billion (2018: EUR 6 billion) has been pledged as security for notes issued (refer to note 37 Borrowings). In addition, in order to trade derivatives on the various exchanges, Aegon posts margin as collateral. The amount of collateral pledged for derivative transactions was EUR 2.4 billion (2018: EUR 1.4 billion).
Gross amounts of recognized financial liabilities set off in the statement of financial position
As shown in the second column there are no financial assets and liabilities offset in 2019 and 2018.
On July 3, 2018, Aegon agreed to expand its joint venture arrangement with Banco Santander in Spain and will pay an upfront consideration of EUR 215 million and an additional amount of up to EUR 75 million to be paid after 5 years, depending on the performance of the partnership. The consideration will be funded from Holding excess cash. The final terms (including closing and date of payment) of the transaction are subject to due diligence, regulatory approval, several other conditions and to the process of terminating the existing alliances of Banco Popular.
(EUR 116 million), of which GBP 25 million (EUR 29 million) related to “customer intangibles”, resulting in goodwill of GBP 48 million
Under the terms of the agreement, Aegon’s Transamerica life subsidiaries reinsured approximately USD 700 million of liabilities through SCOR. The transaction covered the block of life reinsurance business that Transamerica retained after it divested the vast majority of its life reinsurance business to SCOR in 2011 and 2017. The transaction had a one-time benefit of USD 50 million on Transamerica’s capital position.
The business consists mainly of unit linked life insurance coverage, term life products and pension services. Based on the book value as of December 31, 2018, the book gain is expected to amount to approximately EUR 80 million and will be reported in Other income upon completion. As a consequence of this transaction, annual income before tax and underlying earnings before tax will decrease. In 2018, the underlying earnings before tax of the combined operations amounted to EUR 17 million. The transaction has closed early 2019.
The loss on the reinsurance transaction amounted to USD 1,813 million (EUR 1,675 million) being the difference of the reinsurance premium paid and the reinsurance asset received related to the insurance liabilities. Upon disposal an amount of USD 979 million
On June 30, 2017, following court approval on the Part VII transfer, the sale of the annuity portfolio to Rothesay Life has been completed. On September 22, 2017, following court approval on the Part VII transfer, the sale of the annuity portfolio to Legal &
On December 28, 2017, Aegon agreed to divest a block of life reinsurance business and to dissolve a related captive insurance company. Under the terms of the agreement, Aegon's Transamerica life subsidiaries reinsured approximately USD 750 million of liabilities. The transaction covers approximately half of the life reinsurance business that Transamerica retained after it divested the vast majority of its life reinsurance business to SCOR in 2011.
49 Group companies Subsidiaries The principal subsidiaries of the parent company Aegon N.V. are listed by geographical segment. All are wholly owned, directly or indirectly, unless stated otherwise, and are involved in insurance or reinsurance business, pensions, asset management or services related to these activities. The voting power in these subsidiaries held by Aegon is equal to the shareholdings.
Southern and Eastern Europe  Aegon Magyarország Általános Biztosító Zártkörűen Működő Részvénytársaság, Budapest (Aegon Hungary Composite
transaction. The repurchase of common shares B was executed to align the shareholding of Vereniging Aegon in Aegon N.V. with its special cause voting rights of 32.6%.
On May 18, 2018, Vereniging Aegon exercised its options rights to purchase 1,489,200 common shares B at fair value of a common share B (being 1/40th of the market value of a common share in the capital of the Company at the time of issuance) to mitigate dilution caused by the issuance of shares on May 18, 2018, in connection with the Long Term Incentive Plans for senior management.
Remuneration of members of the Supervisory Board, Executive Board and Key Management The following table includes the expenses for remuneration, with amounts reflective of time spent on the Board.
Management consists of all members of the Supervisory Board, Executive Board and Management Board (see the chapter Composition of the Boards for more details).
Shares held by Supervisory Board members are only disclosed for the period for which they have been part of the Supervisory
51 Events after the reporting period On January 29, 2020, Aegon announced the completion of the sale of its 50% stake in the Japanese variable annuity joint ventures,
Since January 2020, the Coronavirus disease (COVID-19) outbreak is causing significant disruption to society, impacting Aegon, its employees, suppliers and customers worldwide.
TOC 3 Financial statements of Aegon N.V. Financial statements of Aegon N.V. Financial statements of Aegon N.V. Financial statements of Aegon N.V.
Before profit appropriation, amounts in EUR million Note 2019 2018 1)
Total equity and liabilities 28,445 26,504 1 Amounts have been restated to reflect voluntary changes in accounting policies related to liability adequacy testing that was adopted by Aegon effective
Statement of financial position of Aegon N.V. Statement of financial position of Aegon N.V. Statement of financial position of Aegon N.V.
2 Significant accounting policies The financial statements have been prepared in accordance with accounting principles in the Netherlands as embodied in Part 9 of
Legal reserves in respect of group companies include net increases in net asset value of subsidiaries and associates since their first inclusion, less any amounts that can be distributed without legal restrictions.
Net fair value change on borrowings and other financial liabilities 4 4
th er n o n -fin an cial in fo rm atio n A
Notes to the financial statements Notes to the financial statements Notes to the financial statements Notes to the financial statements
Tax on income on Dutch corporate income tax rate 45 31
For a list of names and locations of the most important group companies, refer to note 49 Group companies of the consolidated financial statements of the Group. The legally required list of participations as set forth in article 379 of Book 2 of the Netherlands
10 Receivables Receivables from group companies and other receivables have a maturity of less than one year.
1,384,046 based on 1/40th of the Value Weight Average Price of the common shares on the five trading days preceding this transaction. The repurchase of common shares B was executed to align the shareholding of Vereniging Aegon in Aegon N.V. with its special cause voting rights of 32.6%.
The following table shows the weighted average number of common shares and common shares B: Weighted average number of common shares (thousands)
Board remuneration Detailed information on remuneration of active and retired members of the Executive Board including their share plans, remuneration of active and retired members of the Supervisory Board along with information about shares held in Aegon by the members of the Boards is included in note 50 Related party transactions to the consolidated financial statements of the Group and in the remuneration report on page 54.
Mandatory change in accounting policy - - - - - (44) - - - (44)
Remeasurement of defined benefit plans of group companies - - - - - - (522) - - (522)
Dividends paid on common shares - (273) - - - (309) - - - (583)
R et ai n ed e ar n in g s
Changes in accounting policies related to liability adequancy testing - - (22) - - - - - - (22)
Remeasurement of defined benefit plans of group companies - - - - - - (150) - - (150)
Coupons and premium on convertible core capital securities and coupon on perpetual securities, net of tax - - - - - (113) - - - (113)
1 See in consolidated financial statements note 2.1.2 for details about the impact of voluntary change in accounting policy on Liability Adequacy Testing
On the reporting date, Aegon N.V., and its subsidiaries held 66,583,671 of its own common shares (2018: 62,562,070) with a par value of EUR 0.12 each. Most of the shares have been purchased to neutralize the dilution effect of issued share dividend and to hedge share based payment plans for executives and employees. Aegon N.V. held 25,309,920 of its own common shares B (2018:13,856,480) with a par value of EUR 0.12 each.
Transactions in 2019: Sale: transactions, average price EUR 5.10 (3,657) (19)
Transactions in 2018: Sale: transactions, average price EUR 3,76 (3,070) (12)
Long Term Incentive Plans 1) Total 1 Long Term Incentive Plans include the shares granted to personnel which are not yet vested.
equity only. The conditions of the securities contain certain provisions for optional and required coupon payment cancelation. Although the securities have no stated maturity, Aegon has the right to call the securities for redemption at par for the first time between April 15, 2029 and October 15, 2029 and every reset date (October 15, with five year intervals) thereafter. Upon breach of certain regulatory capital requirement levels, the securities convert into common shares.
Junior perpetual capital securities Coupon rate Coupon date, as of Year of next call 2019 2018 USD 500 million 6.50% Quarterly, December 15 Called in 2019 - 424
USD 250 million floating LIBOR rate 1) Quarterly, December 15 2020 212 212
USD 500 million floating CMS rate 2) Quarterly, July 15 2020 402 402
USD 1 billion 6.375% Quarterly, June 15 Called in 2019 - 821
EUR 950 million floating DSL rate 3) Quarterly, July 15 2020 950 950 1 The coupon of the USD 250 million junior perpetual capital securities is reset each quarter based on the then prevailing three-month LIBOR yield plus a spread of 87.5 basis points, with a minimum of 4%.
2 The coupon of the USD 500 million junior perpetual capital securities is reset each quarter based on the then prevailing ten-year US dollar interest rate swap yield plus a spread of ten basis points, with a maximum of 8.5%.
Aegon has the right to call the securities for redemption at par for the first time on the coupon date in the years as specified, or on any coupon payment date thereafter.
Perpetual cumulative subordinated bonds Coupon rate Coupon date Year of next call 2019 2018 1 The coupon of the EUR 203 million bonds was originally set at 7.125% until March 4, 2011. Subsequently, the coupon has been reset at 4.26% until March 4, 2021.
The repayment periods of borrowings vary from 4 years up to 19 years. The interest rates vary from 1.000% to 6.625% per annum.
19 Number of employees There were no employees employed by Aegon N.V. in 2019 (2018: nil).
21 Events after the reporting period On January 29, 2020, Aegon announced the completion of the sale of its 50% stake in the Japanese variable annuity joint ventures,
The Company is continuously monitoring the market and economic turbulence that has arisen as a consequence of the COVID-19 outbreak, and its impact on Aegon. The most significant risks Aegon N.V. is facing, directly or indirectly through its subsidiaries are related to financial markets (particularly credit, equity and interest rates), and underwriting risks (particularly related to mortality, morbidity and policyholder behavior). The notes to Aegon’s consolidated financial statements include elaborate descriptions and related financial market sensitivities. Aegon N.V.’s subsidiaries continue to monitor claim activity, including mortality and morbidity claims, and policyholder behavior. At the date of this report it is too early to tell what the impact of the COVID-19 crisis is on Aegon N.V.’s subsidiaries’ underwritings results and Aegon N.V.’s subsidiaries’ long term underwriting and economic assumptions, if any, affecting the value of Aegon N.V..
22 Proposal for profit appropriation At the Annual General Meeting of Shareholders currently scheduled for May 15, 2020, the Executive Board will, in line with its earlier announcement and absent a further significant deterioration of market circumstances, propose a final dividend for 2019 of EUR 0.16 per common share and EUR 0.004 per common share B. The final dividend will be paid in cash or stock at the election of the shareholder. The value of the stock dividend will be approximately equal to the cash dividend.
Our opinion In our opinion:  The consolidated financial statements of Aegon N.V. together with its subsidiaries (‘the Group’) give a true and fair view of the financial position of the Group as at December 31, 2019, and of its result and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union (IFRS-EU) and with Part 9 of Book 2 of the
Dutch Civil Code;  The company financial statements of Aegon N.V. (‘the Company’) give a true and fair view of the financial position of the Company as at December 31, 2019, and of its result for the year then ended in accordance with Part 9 of Book 2 of the Dutch Civil Code.
The financial reporting framework applied in the preparation of the financial statements is EU-IFRS and the relevant provisions of Part 9 of Book 2 of the Dutch Civil Code for the consolidated financial statements and Part 9 of Book 2 of the Dutch Civil Code for the company financial statements.
‘Verordening gedrags- en beroepsregels accountants’ (VGBA, Dutch Code of Ethics for Professional Accountants, a regulation with respect to rules of professional conduct).
Our audit approach Overview and context Aegon N.V. is a provider of mainly life insurance, pension and asset management services. The Group is comprised of several components. Aegon’s main operating units are separate legal entities and operate under the laws of their respective countries.
We paid specific attention to the areas of focus driven by the operations of the Group, as set out below.
Volatility in the year over year results of the Group affected the way in which we determined our group materiality, as set out in the section ‘Materiality’. In particular, we considered where management made important judgments, for example, in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain.
In Note 3 ‘Critical accounting estimates and judgment in applying accounting policies’, the Group describes the areas of judgment in applying accounting policies and the key sources of estimation uncertainty. Given the significant estimation uncertainty and the related higher inherent risks of material misstatement in the valuation of certain assets and liabilities arising from insurance contracts and the valuation of certain Level 3 investments, we considered these matters as key audit matters as set out in the section
We ensured that the audit teams at both group (consolidation) and component level included the appropriate skills and competences which are needed for the audit of a complex financial conglomerate, such as Aegon N.V. This includes industry expertise in life and non-life insurance, banking and asset management. We included experts and specialists in the areas of risk assurance (IT), tax services, actuarial services, global human resource services and valuation services for certain types of assets (e.g. complex financial instruments and real estate) in our team.
Southern & Eastern Europe, Asia, Asset Management and Holding.  Site visits were conducted to the United States for Americas, the Netherlands for the segments the Netherlands and Asset Management, the United Kingdom for the segment United Kingdom and Hungary for the segment Southern & Eastern Europe. For the segment Holding, we performed the audit work ourselves.
 Audit coverage: 93% of consolidated revenue, 96% of consolidated total assets and 93% of consolidated profit before tax.
Materiality The scope of our audit is influenced by the application of materiality, which is further explained in the section ‘Our responsibilities for the audit of the financial statements’.
Based on our professional judgment we determined certain quantitative thresholds for materiality, including the overall materiality for the financial statements as a whole as set out in the table below. These, together with qualitative considerations, helped us to determine the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and to evaluate the effect of identified misstatements, both individually and in aggregate, on the financial statements as a whole and on our opinion.
We believe that income before tax is a generally accepted auditing practice, based on our analysis of the common information needs of users of the financial statements of listed entities. We believe that income before tax is an important metric for the group’s financial performance.
Component materiality To each component in our audit scope, we, based on our judgment, allocate materiality that is less than our overall group materiality. The range of materiality allocated across components was between EUR 30 million and EUR 82 million.
The scope of our group audit Aegon N.V. is the parent company of a group of entities. The Group is structured predominately along geographical lines referred to as
We tailored the scope of our audit to ensure that we, in aggregate, provide sufficient coverage of the financial statements for us to be able to give an opinion on the financial statements as a whole, taking into account the management structure of the Group, the nature of operations of its components, the accounting processes and controls, and the markets in which the components of the Group operate. In establishing the overall group audit strategy and plan, we determined the type of work required to be performed at the component level by the Group engagement team and by each component auditor.
Additionally, we selected Southern & Eastern Europe, Asia, Asset Management and Holding for audit procedures to achieve appropriate coverage on financial line items in the consolidated financial statements. Note that the procedures for Holding were performed by the Group engagement team. For areas that were not in scope of the Group audit, we performed analytical procedures at group level.
In total, in performing these procedures and excluding our group analytical procedures, we achieved the following coverage on the financial line items: Revenue 93%
We analyzed the extensive reports received from the component auditors and performed regular site visits to attend closing meetings and/or meet local management. The group engagement team visited the United States for Americas, the Netherlands for segments the Netherlands and Asset Management, the United Kingdom for segment United Kingdom and Hungary for segment Southern &
The group engagement team performed the audit work on the group consolidation and financial statement disclosures.
Our focus on the risk of fraud and non-compliance with laws and regulations Our objectives The objectives of our audit are: In respect to fraud:  to identify and assess the risks of material misstatement of the financial statements due to fraud;  to obtain sufficient appropriate audit evidence regarding the assessed risks of material misstatement due to fraud, through designing and implementing appropriate audit responses; and  to respond appropriately to fraud or suspected fraud identified during the audit.
The primary responsibility for the prevention and detection of fraud and non-compliance with laws and regulations lies with the Executive Board with the oversight of the Supervisory Board. We refer to the sections ’Aegon’s business environment’,
As in all of our audits, we addressed the risk of management override of internal controls, including evaluating whether there was evidence of bias by management that may represent a risk of material misstatement due to fraud. We evaluated the design and the implementation and, where considered appropriate, tested the operating effectiveness of internal controls that mitigate fraud risks, tested high-risk manual journal entries and evaluated key estimates and judgments for bias by management, and finally we incorporated elements of unpredictability in our audit. We refer to the key audit matters on valuation of insurance contracts and certain investments, that are examples of our approach related to areas of higher risk due to accounting estimates where management makes significant judgments.
Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in the audit of the financial statements. We have communicated the key audit matters to the Supervisory Board. The key audit matters are not a comprehensive reflection of all matters identified by our audit and that we discussed. In this section, we described the key audit matters and included a summary of the audit procedures we performed on those matters.
Compared to 2018, the outsourcing strategy was a key audit matter impacting 2018 significantly, however, it does not affect 2019 in a similar manner and is therefore no longer a key audit matter in 2019. The remaining key audit matters are related to the nature of the Company and are therefore expected to occur year over year.
To assess the adequacy of the liabilities for insurance contracts and the recoverability of DPAC and VOBA, at each reporting date, Aegon performs liability adequacy testing. This test is done to verify that the valuation of these assets and liabilities are adequate as compared to the expected future contractual cash flows. Consistent with the insurance industry, Aegon uses valuation models to support the calculations of the insurance contract liabilities. The complexity of the models may give rise to errors as a result of inadequate/incomplete data or design or application of the models. Models considered more complex and/or requiring significant judgment in the setting of assumptions are those in respect of the guarantees associated with universal life and annuities along with long-term care in the Americas and the corporate pension guarantees in the Netherlands.
During 2019, Aegon continued a multi-year review of their actuarial models with focus on those considered medium and high risk. Model updates in combination with the Group’s actuarial and economic assumptions update resulted in a EUR 196 million (2018: EUR 121 million) pre-tax charge for the year as explained in Note 5 ‘Segment information’.
Our audit focused on the application of complex valuation models and the judgments applied in the assumption setting process. We assessed the design and tested the operating effectiveness of internal controls over the actuarial process that were relevant for the purpose of our audit, including management’s process for setting economic and actuarial assumptions, controls over management’s actuarial analyses including estimated versus actual results and experience studies, controls over data integrity and change management for internally operated valuation models (including Aegon’s model validation process) and controls over the valuation of mortgage loans. Our procedures did not identify significant deficiencies.
We performed audit procedures over the complex valuation models and the model updates to determine the appropriateness of those. We tested the impact of model updates against supporting evidence. For the models used, we tested the completeness and accuracy of key data underlying the development of the aforementioned significant assumptions, as well as actuarial judgments applied, which may vary depending on the product and/or the specifications of the product, and the compliance of the models with the applicable accounting standards. We evaluated the reasonableness of management’s significant assumptions.
The Group had investments of EUR 146.8 billion (2018: EUR 139.0 billion) as of December 31, 2019, of which EUR 4 billion were categorized as Level 3 debt securities and investments in real estate in the valuation hierarchy.
Management’s estimation of the valuation of Level 3 debt securities and investments in real estate is developed using quotes from third-party brokers, internal cash flow modelling techniques and external appraisals that use significant unobservable inputs, including discount and capitalization rates, default rate and liquidity assumptions, issue specific credit adjustments and indicative quotes from market makers. These investments involve significant judgment by management and have a higher potential risk to be affected by error or management bias. Therefore, these areas are considered a key audit matter.
We performed retrospective testing to assess the quality of previous estimates and assumptions. We performed substantive audit procedures to supplement procedures over internal control testing. These procedures included, among others, developing an independent estimate of the value for a sample of investments by obtaining independent pricing from third party vendors, if available. Also, on a sample basis for certain Level 3 investments, we evaluated the reasonableness of management’s estimate by developing an independent range of prices utilizing a range of prices and comparing management’s estimate to the independently developed ranges. Developing the independent estimate involved utilizing a range of available market inputs and assumptions and testing the completeness and accuracy of data provided by management.
We tested that the Group has properly reflected the claims and litigations in either the provisions or the contingent liabilities by assessing these against the criteria in IAS 37. In this respect we assessed whether the Group has a present obligation (legal or constructive) as a result of a past event, if it is probable (i.e. more likely than not) that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.
Report on the other information included in the annual report In addition to the financial statements and our auditor’s report thereon, the integrated annual report contains other information that consists of:  the directors’ report, consisting of ‘2019 at a glance’, ‘Aegon, a global provider of financial solutions’, ‘Value creation’, ‘Aegon’s business environment’, ‘Aegon’s strategy’, ‘Performance in 2019’ consisting of ‘Responsible business’, ‘Responsible investment’, ‘Aegon: A partner to the world’, ‘Safeguarding value creation’ (which includes the remuneration report) and ‘Financial information’;  Other information;  Other financial information;  Additional information; and  Other non-financial information
We have read the other information. Based on our knowledge and understanding obtained in our audit of the financial statements or otherwise, we have considered whether the other information contains material misstatements.
By performing our procedures, we comply with the requirements of Part 9 of Book 2 and Section 2:135b subsection 7 of the Dutch
Civil Code and the Dutch Standard 720. The scope of such procedures was substantially less than the scope of those performed in our audit of the financial statements.
The Executive Board is responsible for the preparation of the other information, including the directors’ report and the other information in accordance with Part 9 of Book 2 of the Dutch Civil Code and the remuneration report in accordance with the Sections 2:135b and 2:145 subsection 2 of the Dutch Civil Code.
No prohibited non-audit services To the best of our knowledge and belief, we have not provided prohibited non-audit services as referred to in Article 5(1)
Responsibilities for the financial statements and the audit Responsibilities of management and the Supervisory Board for the financial statements The Executive Board is responsible for:  the preparation and fair presentation of the financial statements in accordance with EU-IFRS and with Part 9 of Book 2 of the Dutch
Our responsibilities for the audit of the financial statements Our responsibility is to plan and perform an audit engagement in a manner that allows us to obtain sufficient and appropriate audit evidence to provide a basis for our opinion. Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error and to issue an auditor’s report that includes our opinion.
Appendix to our auditor's report on the financial statements 2019 of Aegon N.V. In addition to what is included in our auditor’s report, we have further set out in this appendix our responsibilities for the audit of the financial statements and explained what an audit involves.
The auditor's responsibilities for the audit of the financial statements We have exercised professional judgment and have maintained professional scepticism throughout the audit in accordance with Dutch
 Evaluating the overall presentation, structure and content of the financial statements, including the disclosures, and evaluating whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
From the matters communicated with the Supervisory Board, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, not communicating the matter is in the public interest.
CONTENTSCONTENTS Notes to the financial statements Notes to the financial statements
Vereniging Aegon, among others, sold 206,400,000 common shares to Aegon N.V. for the amount of EUR 2,064,000,000; Vereniging
The simplified capital structure entailed, but was not limited to, the amendment of the Articles of Association of Aegon N.V., including the conversion of all outstanding 329,773,000 preferred shares A and B, with a nominal value of EUR 0.25 each, into 120,713,389
Cause Vereniging Aegon may cast one vote for every common share it holds and one vote only for every 40 common shares B it holds. As Special Cause qualifies the acquisition of a 15% interest in Aegon N.V., a tender offer for Aegon N.V. shares or a proposed business combination by any person or group of persons, whether individually or as a group, other than in a transaction approved by the Executive Board and the Supervisory Board. If, in its sole discretion, Vereniging Aegon determines that a Special Cause has occurred, Vereniging Aegon will notify the General Meeting of Shareholders and retain its right to exercise the full voting power of one vote per common share B for a limited period of six months.
In the years 2003 through 2012, 118,093,000 class B preferred shares were issued under these option rights and in the years 2013 through 2016 Vereniging Aegon purchased in aggregate 18,708,465 common shares B under its call option right. During this period
Aegon N.V. repurchased 13,450,835 Common Shares and 17,324,960 Common Shares B from Vereniging Aegon.
On May 17, 2019, Vereniging Aegon exercised its options rights to purchase in aggregate 1,773,680 common shares B at fair value of a common share B (being 1/40th of the market value of a common share in the capital of the Company at the time of issuance)
to mitigate dilution caused the issuance of shares on May 17, 2019, in connection with the Long Term Incentive Plans for senior management.
On December 23, 2019, Aegon N.V. repurchased 13,227,120 common shares B from Vereniging Aegon for the amount of EUR 1,384,046 based on 1/40th of the Value Weight Average Price of the common shares of the five trading days preceding this transaction. The repurchase of common shares B was executed to align the aggregate holding of voting shares by Vereniging Aegon in Aegon N.V. with its special cause voting rights of 32.6% following the completion of the Share Buy Back Program, initiated by Aegon
N.V. in October 2019 to neutralize the dilutive effect of the distribution of interim dividend 2019 in stock.