Presentation of certain information Aegon N.V. is referred to in this document as “Aegon”, or
“the company” Aegon N.V. together with its member companies are referred to as “Aegon Group”. For such purposes, “member companies” means, in relation to Aegon N.V., those companies that are required to be consolidated in accordance with the legislative requirements of the Netherlands relating to consolidated accounts.
Union; “USD” and “US dollar” when referring to the lawful currency of the United States of America; “GBP”, “UK pound” and
In each of our chosen markets, profound and lasting market changes are driving increased demand for reliable financial solutions. People are living longer than at any time in history; the post-war (“baby boomer”) generation is now entering retirement with an immense pool of accumulated and still-growing assets that will need to be managed for an increasingly longer retirement; governments are continuing to withdraw from traditional means of publicly-provided pension support; and companies have considerably decreased, or ended altogether, their contributions to employee retirement plans. In many developing markets, strong economic growth is creating a sizable and growing affluent middle class that will inevitably seek the same financial protection and long-term security solutions as those in more mature economies. All of these factors provide excellent growth opportunities for our business and confirm that our products and services have never been more needed.
Beyond what we have done to fulfil our commitments to our customers over the past year – paying just over EUR 20 billion in claims and benefits – our businesses have also contributed financially and our employees given generously of their time and talents to make a difference in the communities in which they live and work. Aegon takes seriously its broader commitments to the communities where we operate and to society at large.
This, we believe, is as critical to our long-term business success as our disciplined risk and financial management.
Thank you for your ongoing interest in Aegon and in all that we are doing to assist our current and future customers in planning and achieving a secure financial future. Ensuring that we continue to be in a strong position to deliver on our promises remains our most important priority.
Corporate Financial Center. In 2013, Mr. Button was appointed as CFO and member of the Executive Board of Aegon. He is also a member of the Management Board.
Management Board since February 2012. He sits on the Board of the Association of British Insurers.
Member of the Management Board Chief Risk Officer of Aegon N.V. Tom Grondin was appointed Chief Risk Officer of Aegon N.V. in
Framework. The Economic Framework has helped guide Aegon’s risk and business strategy over the years. He joined Aegon in 2000 in one of Aegon USA’s larger operations. Mr. Grondin had overall responsibility for pricing, profitability and risk management for the business. Prior to joining Aegon, he was employed as a consultant at Tillinghast–Towers Perrin and before that as asset liability manager at Manulife Financial.
Mr. Mullin has served as President and CEO of one of Aegon’s US
CEO of Aegon Americas and a member of the Management Board one year later.
Aegon’s risk-return requirements, or contribute to its long-term ambitions; �� To enhance customer loyalty by improving customer service, investing in new distribution capabilities, and expanding the company’s online presence to connect better and more frequently with its customers; �� To deliver operational excellence by improving efficiency and reducing costs, innovating and making better use of its resources around the world; �� To empower employees by providing the tools, training and internal culture necessary to better serve the developing needs of its customers, while also enabling employees to realize their full potential.
Optimize portfolio Aegon targeted opportunities in its core markets in the Americas,
Republic, and expanding the life and pensions business in Romania; �� Expanding into new markets – through the acquisition of Fidem Life, one of Ukraine’s leading providers in the emerging life insurance market, and the opening of a new office in Germany in the second half of 2013 to market variable annuities; Aegon’s purpose is to help people take responsibility for their financial future. To achieve this, the company strives to provide easy-to-understand products that help customers make better financial decisions for themselves and their families.
As a company, Aegon believes that everyone, regardless of their income, deserves to retire with dignity and peace of mind.
Recognizing the increasing demand for asset protection, accumulation and long-term retirement security products and services, Aegon is investing in new approaches to better serve the full range of customers’ financial needs throughout their life cycle. This includes accelerating investment in technology to enable Aegon’s businesses to interact directly with customers.
Aegon’s overall product mix to reduce capital requirements and improve profitability; �� Restructuring in Spain – by securing a twenty-five year joint venture and distribution partnership with Banco Santander, the country’s largest bank, and exiting some former joint ventures; �� Entering new distribution partnerships with other key banks, including Barclays Bank in the United Kingdom.
Netherlands, Aegon launched Kroodle, a social media platform to sell general insurance, and in recent years has begun distribution through the drugstore chain Kruidvat; �� Expanding the company’s variable annuities business, and launching other related products, such as a new series of mutual funds in the United States, and new additional risk riders with products in Central & Eastern Europe; �� Implementing a common measurement for customer loyalty.
– while making sure that, before any new product or service is introduced, customer benefits are fully assessed and taken into account through an updated Pricing & Product
Aegon's product range, and helps them to provide the right advice to Aegon's customers; �� Opening up access to Aegon’s Global Ethics Line to make it easier for outside parties to report suspected misconduct and violations of the company’s Code of Conduct; �� Completing a second transaction to reduce the risk associated with longer life expectancy in the Netherlands and cover EUR
Empower employees Aegon strengthened employee engagement, and improved the working environment by: �� Introducing limited paid time off for volunteer work. By the end of 2013, 91% of Aegon’s employees worldwide had access to this benefit; �� Helping employees establish new affinity groups in the United
States and the Netherlands in support of broader efforts to improve workforce diversity; �� Deepening Aegon’s regular talent review, which maps employees’ skills against the company’s long-term requirements; �� Supporting employees impacted by company restructuring with social plans and programs to find new employment within and outside the company; �� Implementing local action plans based on the findings from the 2013 Global Employee Engagement Survey. Aegon identified three main priorities: do more to explain the company’s business strategy to employees; strengthen employees’ focus on customers; provide additional opportunities for career development; �� Developing an Employer Value Proposition, which sets out the advantages of working for Aegon among prospective employees. The Employer Value Proposition will support wider efforts in new recruitment.
Market conditions The global economy continued to recover in 2013, but growth was low in many countries, and business confidence remained depressed. Overall, world output expanded by 2.9%, the lowest annual rate of growth since the end of the previous recession in 2009. Growth is forecast to accelerate in 2014, but the global economy still faces significant downside risks.
In the United States, economic growth improved. There was further improvement in the US housing market. Unemployment decreased – though much of the decline in reported rates was attributed to people withdrawing from the labor force rather than to job creation. Cuts in government spending subdued economic growth, however.
In Europe, growth rates continued to lag behind those of the
Many European countries continued to struggle with structural, economic and financial sector reform.
Overall growth in emerging markets was relatively strong, though at a much lower rate than in previous years. In China, the world’s second largest economy, growth slowed to 7.6%, with export markets sluggish and the Chinese economy re-focusing on internal consumption. In Central & Eastern Europe, growth rates improved, due in part to a stronger performance from the region’s main trading partners in Western Europe.
Share prices in both the United States and Europe rose to new highs on signs of renewed economic growth. The Dow Jones
Industrial Average ended the year up nearly 26%; over the same period, the FTSE-100 gained almost 15%. The long-term yield on
Increased financial stability in the eurozone strengthened the euro. By the end of 2013, the euro had gained just over 3.6%
Economists are optimistic about further economic growth in 2014. Nevertheless, the global economy faces considerable risks, particularly from the future direction of Federal Reserve monetary policy and the management of the US government budget. Uncertainty also persists with regard to structural economic reform in Europe, and continued weak labor markets on both sides of the Atlantic. Emerging market growth remains relatively high, but may be impacted as the global economy adjusts to historically low GDP growth rates, especially in
The world’s population is growing older. By the middle of the century, the United Nations estimates that worldwide almost 1.5 billion people will be over the age of 65. More than three quarters will live in less developed economies. Rising life expectancy will increase the length of retirement. At the same time, governments are no longer able to afford generous state pensions. This means greater demand for life insurance, pensions and other long-term savings and investment products as individuals seek ways to achieve a secure financial future.
There is change in the way insurance and pension products are sold and purchased. The regulatory environment has changed significantly in many of Aegon’s markets. In the United States, for example, there has been major healthcare and financial services reform. In the United Kingdom and the Netherlands, new legislation has effectively ended commissions for brokers and other intermediaries. As a result, financial services providers like Aegon, and financial advisors and intermediaries, are seeking to interact better and more regularly with their customers to serve their broader needs. Meanwhile, new technology is increasing the ability of customers to research and buy financial products online. Emerging competition from online-only providers has begun to challenge established business models.
Aegon N.V., domiciled in the Netherlands, is a public limited liability company organized under Dutch law. Aegon N.V. was formed in 1983 through the merger of AGO and Ennia, both of which were successors to insurance companies founded in the 1800s.
Application of the accounting policies in the preparation of the financial statements requires management to apply judgment involving assumptions and estimates concerning future results or other developments, including the likelihood, timing or amount of future transactions or events. There can be no assurance that actual results will not differ materially from those estimates. Accounting policies that are critical to the presentation of the financial statements and that require complex estimates or significant judgment are described in the notes to the financial statements.
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 included elsewhere in this Annual Report.
3 Excluded from the income statements prepared in accordance with IFRS are receipts related to investment-type annuity products and investment contracts.
Selected consolidated balance sheet information In million EUR (except per share amount) 2013 2012 1) 2011 2) 2010 2) 2009 2)
EUR 0.11 per common share (at each shareholders option in cash or in stock), which will bring the total dividend for 2013 to
Aegon's common shares traded on NYSE Euronext Amsterdam and, as a result, are likely to impact the market price of Aegon's common shares in the United States. Such fluctuations will also affect any US dollar amounts received by holders of common shares upon conversion of any cash dividends paid in euros on
The average exchange rates for the US dollar per euro for the five years ended December 31, 2013, calculated by using the average of the exchange rates on the last day of each month during the period, are set forth below: Year ended December 31, Average rate 1)
• Life & Protection Products with mortality, morbidity and longevity risks, including traditional and universal life, as well as endowment, term, and whole life insurance products. Accident and health business, including supplemental health, accidental death and dismemberment insurance, critical illness, cancer treatment, credit/disability, income protection, and long-term care insurance.
• Distribution Independent distribution channel, offering both life and non-life insurance solutions.
United Kingdom • Life Immediate annuities, individual protection products, such as term insurance, critical illness, and income protection.
• Pensions Individual pensions, including self-invested personal pensions and income drawdown products. Group pensions, sponsored by, or obtained via, an employer. Also includes the tied-agent distribution business.
Europe, Asia, Spain and France, as well as Aegon’s variable annuity activities in Europe and Aegon Asset Management.
• Central & Eastern Europe Active in the Czech Republic, Hungary, Poland, Romania, Slovakia,
Direct & Affinity Marketing Services. Aegon offers life insurance to high-net-worth individuals via the Transamerica brand.
Aegon has joint ventures in China, India, and Japan. Products include (term) life insurance in China and India, and variable annuities in Japan.
• Variable Annuities Europe Variable annuities offered by Aegon companies operating in
IFRS or any other recognized set of accounting standards and readers are cautioned to consider carefully the different ways in which Aegon and its peers present similar information before comparing them. Aegon believes the non-IFRS measure shown herein, when read together with Aegon’s reported IFRS financial statements, provides meaningful supplemental information for the investing public to evaluate Aegon’s businesses after eliminating the impact of current IFRS accounting policies for financial instruments and insurance contracts, which embed a number of accounting policy alternatives that companies may select in presenting their results (that is, companies may use different local generally accepted accounting principles
Gross deposits (on and off balance) Amounts in EUR millions 2013 2012 %
Total life insurance gross premiums 6,187 3,515 6,537 1,349 (59) 17,529 (416) 17,112
Accident and health insurance premiums 1,787 243 - 170 - 2,200 (10) 2,190
Aegon Asset Management. �� Total holding costs decreased 50% to EUR 113 million, mainly as a result of lower net interest costs following debt redemptions, lower operating expenses and a gain of
EUR 1,309 million. The loss was mainly driven by equity macro hedges (EUR 590 million) and long-term economic assumption changes (EUR 405 million) in the Americas and a loss of
over the next 10 years and 6% thereafter from its previous assumptions of 4% over the next 5 years and 6% thereafter.
In addition, Aegon changed its long-term equity market return assumption for the estimated gross profit in variable life and variable annuity products in the Americas from 9% to 8%. In total, these assumption changes led to a negative impact on earnings of EUR 405 million in 2013. Both the assumptions for the bond fund and that for the long-term equity market are gross assumptions from which asset management and policy fees are deducted to determine the policyholder return.
The loss on fair value hedges in the Americas was mainly driven by the loss on the equity macro hedges, which have been set up to protect Aegon’s capital position, as a result of strong US
1,582 million in 2012. Higher underlying earnings, realized gains on investments, lower impairments and other charges were more than offset by losses from fair value items.
Distribution Review and investment in technology. �� Underlying earnings before tax from New Markets declined 14% to EUR 236 million. Higher earnings in Asia and
Netherlands during the second half of the year to bring it in line with the new regulatory yield curve, as well as normal trading activity.
Impairment charges Impairment charges improved by EUR 55 million to EUR 121 million in 2013, mostly due to recoveries on investments in subprime residential mortgage-backed securities in the United States.
Income tax Income tax amounted to EUR 130 million. The effective tax rate on total income was 13%, driven mostly by the combined effects of negative fair value items taxed at nominal rates, tax credits and tax exempt items. There was also a tax charge of
EUR 50 million in the Americas related to hedging losses in 2013, and a benefit of EUR 93 million in the United Kingdom from a reduction in the corporate tax rate from 23% to 20%.
Commissions and expenses Commissions and expenses in 2013 increased 1% compared to 2012 to EUR 5,809 million. Operating expenses increased 5% to
EUR 3,328 million, driven mainly by higher sales and employee performance related expenses due to growth in the Americas, restructuring costs in the Americas and United Kingdom, and higher investments in technology to support future growth.
States and Aegon Asset Management. New life sales were down 2%. Higher pension production in the United Kingdom was offset primarily by lower universal life sales in the Americas due to product withdrawals and product redesign, resulting from focus on value creation, as well as adverse currency movements.
Aegon’s Insurance Group Directive (IGD) ratio decreased to 212%, mainly due to the impact of IAS 19 and the switch to the swap curve for regulatory solvency calculations in the Netherlands.
The combined risk-based capital ratio of Aegon’s life insurance subsidiairies in the United States was approximately 440% of the Company Action Level (CAL) risk-based capital. The IGD ratio in the Netherlands, excluding Aegon Bank, was approximately 240%. The Pillar I ratio in the United Kingdom, including the
Gross deposits (on and off balance) Amounts in EUR millions 2012 2011 %
Number of employees, including agent employees 11,967 4,457 2,793 7,160 473 26,850 (2,443) 24,407
Results 2012 worldwide Aegon’s 2012 net income of EUR 1,582 million and underlying earnings before tax of EUR 1,851 million were higher than in 2011, as a result of business growth, implemented cost reduction programs, the non-recurrence of certain charges in the United Kingdom, and favorable markets. Sales and deposits increased compared to 2011 despite repricing and product changes made to reflect the continued low interest rate environment. Growth was driven mostly by pensions, variable annuities, mortgages, and asset management. Aegon has continued to maintain a strong capital position while maintaining its commitment to delivering sustainable earnings growth with an improved risk-return profile.
EUR 1,851 million in 2012. This was the result of business growth, implemented cost reduction programs, the nonrecurrence of certain charges in the United Kingdom, and favorable equity markets and currency movements.
and lower Life & Protection earnings, mostly the result of the non-recurrence of favorable items in 2011, recurring charges for Corporate Center expenses implemented in 2012, higher performance-related expenses, and an increase in employee benefit expenses.
EUR 325 million. The 9% increase compared to 2011 was mainly due to cost savings, lower funding costs, and the wind up of several contracts in Pensions, partly offset by a higher claim ratio and investments in banking activities. Higher earnings in Life &
In the United Kingdom, underlying earnings before tax increased to EUR 110 million. This improvement in earnings compared to 2011 was driven by the implementation of the cost reduction program and the non-recurrence of charges and execution expenses related to a program to correct historical issues within customer policy records, partly offset by the benefit of changes to employee benefit plans recorded in 2011. Earnings were negatively impacted in 2012 by additional DPAC amortization related to adverse persistency and investments in new propositions in the pension business.
For the holding, underlying earnings before tax amounted to a loss before tax of EUR 224 million. This EUR 79 million improvement compared to 2011 was driven mostly by lower expenses as Aegon’s Corporate Center expenses were now being charged, in part, to operating units. These charges reflected the services and support provided to operating units by the
EUR 176 million and continue to be linked primarily to residential mortgage-backed securities in the Americas.
Other charges Other charges in 2012 amounted to EUR 162 million and were primarily the result of a EUR 265 million charge in the
Netherlands related to the acceleration of product improvements for unit-linked insurance policies and a BOLI wrap charge in the
EUR 2 million, with positive results from the institutional spread-based business only partially offset by accelerated amortization of the pre-paid cost of reinsurance asset related to the divestment of the life reinsurance activities in 2011 due to increased transfers of clients from Aegon to SCOR.
Income tax Net income contained a tax charge of EUR 351 million in 2012
(including a tax charge of EUR 15 million related to profits of joint ventures and associates), resulting in an effective tax rate of 18%. Deviation from the nominal tax rate is largely the result of tax exempt items in the United States and the Netherlands, tax credits which primarily relate to low income housing and renewable energy in the United States (EUR 69 million), benefits from a tax rate reduction in the United Kingdom (EUR 70 million), benefits from cross border intercompany reinsurance transactions (EUR 38 million), and a benefit related to the run-off of the company’s institutional spread-based activities in
Ireland (EUR 51 million). These benefits were partly offset by charges for non-recognition and impairment of deferred tax assets (EUR 56 million), mainly in the United Kingdom.
Americas and the United Kingdom, partially offset by decreases in the Netherlands and New Markets. Gross deposits increased by 25%, driven by variable annuity, retail mutual fund, retirement plan, and asset management deposits. New premium production for accident and health insurance increased by 19% for the year, mainly driven by travel and supplemental health insurance sales in the Americas and growth in Central & Eastern Europe.
Income before tax (excluding income tax from certain proportionately consolidated joint ventures and associates) 734 1,699 (57%) 553 1,322 (58%)
New premium production accident and health insurance 902 905 0% 680 705 (4%)
USD 18 million, primarily as a result of actuarial assumption changes and model refinements. In Latin America underlying earnings before tax were down to USD 6 million.
Production New life sales decreased 8% to USD 615 million in 2013, as lower universal life sales due to product withdrawals and product redesign were only partly offset by higher sales of term life products. New premium production for accident & health insurance was stable compared to 2012 and amounted to USD 902 million. This was the result of strong sales of the
Net income Net income for the Americas decreased to USD 592 million in 2013. Higher underlying earnings, other income as well as lower impairments were more than offset by the increase of the loss on fair value items. Results on fair value items amounted to a loss of USD 1,288 million, which were primarily the result of long-term economic assumption changes of USD 514 million and the loss on equity hedges of USD 804 million, which was primarily caused by rising equity markets. Realized gains on investments amounted to USD 148 million, while impairment charges improved to USD 56 million. Other income was
Underlying earnings before tax 2013 underlying earnings before tax increased 3% to
33 million, resulting from growth of the business and favorable markets.
Income before tax (excluding income tax from certain proportionately consolidated joint ventures and associates) 1,699 934 82% 1,322 671 97%
Income tax from certain proportionately consolidated joint ventures and associates included in income before tax 4 1 - 3 1 -
Accident and health insurance premiums 2,356 2,326 1% 1,833 1,672 10%
New premium production accident and health insurance 905 812 11% 705 584 21%
Results 2012 Americas Aegon’s businesses in the Americas 1 continued to perform well in 2012. Sales of life, accident and health insurance all increased over 2011 on expanded distribution capabilities. Variable annuity, pension and retail mutual fund balances increased while fixed annuity balances continued to decline, a direct result of Aegon’s efforts to grow its fee-based earnings.
Underlying earnings before tax Underlying earnings before tax from the Americas amounted to
USD 359 million as the benefit of higher account balances was offset mainly by the negative effect of policyholder assumption changes of USD 55 million. Earnings from retail mutual funds increased slightly to USD 25 million.
�� Employer Solutions & Pensions underlying earnings before tax increased by 15% to USD 319 million in 2012 driven mostly by growing retirement plan account balances. �� Underlying earnings before tax from Canada decreased to
USD 40 million in 2012. In Latin America underlying earnings before tax increased to USD 12 million driven by improvements in both Brazil and Mexico.
Overview of Americas Aegon Americas comprises Aegon USA, Aegon Canada and the operations in Brazil and Mexico.
companies operate under the Transamerica brand, one of the best known names2 in the United States insurance business.
Baltimore, Maryland, with affiliated companies’ offices located throughout the United States.
USA provides a wide range of life insurance, pensions, long-term savings and investment products.
Like other Aegon companies, Aegon USA uses a variety of distribution channels to help customers access its products as best suits their needs. Aegon USA has long-standing relations with banks across the United States, and also distributes products and services through agents, broker-dealers, Registered
Aegon Mexico In 2006, Aegon acquired a 49% interest in Seguros Argos
S.A. de C.V., a Mexican life insurance company. At December 31, 2013, Aegon Mexico had approximately 84 employees.
“Aegon USA” throughout this document refers to the operating subsidiaries in the United States, through which Aegon USA
state, as well as the District of Columbia, Puerto Rico, the Virgin
In addition, Aegon USA provides a range of products and services online, and uses direct and worksite marketing. Generally, Aegon
Term life insurance provides protection for a stated period of time. Benefits are paid to policy beneficiaries in the event of the death of the insured during a specified period.
Whole (or permanent) life insurance provides life-long death benefit protection as long as required premiums are paid, while accumulating tabular cash values based on statutory requirements. Premiums are generally fixed and usually payable over the life of the policy.
Supplemental health insurance products are sold primarily through affinity markets and include accidental death, other injury, critical illness, hospital indemnity, Medicare supplement, retiree medical and student health. Specialty lines include travel, membership and creditor (installment, mortgage or guaranteed auto protection) products.
The L&P division is organized by distribution channel, with a shared services support platform. Each channel focuses on a specific type of distribution method and target market. The
L&P distribution channels include affinity markets, agency group, brokerage, worksite, and broker-dealer.
The Affinity Markets group markets directly to consumers through either broad market or affinity relationships, including associations, employers, financial institutions, retailers, and other sponsor groups. Life, supplemental health, and specialty accident and membership products are offered through a variety
of direct response marketing channels, including mail, phone, digital, direct response TV, and point-of-sale.
Transamerica Brokerage offers life and long-term care insurance products and services through independent brokerage distributors and financial institutions to high-net-worth, affluent, emerging affluent and middle income individuals, families and businesses. These products are designed for family protection, business needs, and estate and legacy planning.
Commission (SEC) Registered Investment Adviser with approximately 5,000 Registered Representatives. TFA helps clients create, grow and protect wealth through a range of financial products and services.
(IS&R) division administers and distributes these products through a variety of channels, including wirehouse firms, banks, regional broker dealers, independent financial planners, and direct to consumer.
Aegon USA’s fee-based business comprises asset management and insurance products that generate fee income by providing investment management, administrative or risk transfer services.
Generally, fee income is sensitive to withdrawals and equity market movements.
The operations in the United States provide the fund managers with oversight for the Transamerica mutual funds. Aegon USA
Collected surrender charges are typically used to recoup unamortized deferred acquisition costs.
Certain variable annuity contracts also provide guaranteed minimum death benefits and guaranteed minimum income benefits. Under a guaranteed minimum death benefit, upon the death of the insured the beneficiaries receive the greater of the account balance or the guaranteed amount upon the death of the insured. The guaranteed minimum income benefit feature, which has not been offered on new business since 2003, provides for minimum payments if the policyholder elects to convert to an immediate payout annuity. The guaranteed amount is calculated using the total deposits made by the policyholder, less any withdrawals, and sometimes includes a roll-up or step-up feature that increases the value of the guarantee with interest or with increases in the account value.
These guaranteed benefits subject the company to interest rate risk and market risk. Poor market performance may cause the guaranteed benefits to exceed the policyholder account value.
Fixed annuities include deferred annuities, fixed index annuities, and immediate annuities. These product lines have been deemphasized due to the low interest rate environment. A fixed annuity exposes Aegon to interest rate risk and behavior and mortality risk. The insurer’s interest rate risk may be mitigated through product design, close asset liability management and hedging, although the effects of policyholder behavior cannot be fully mitigated. Immediate annuities have lower behavior risks than deferred annuities, but contain interest rate risk, and longevity risk if annuity payments are life contingent.
(TCI), the underwriting and wholesaling broker-dealer, distributes variable annuities and mutual funds through major wirehouse firms, regional broker-dealers, and a large bank network. TCI
United States; �� Deferred compensation plan - a plan or agreement that defers the payment of a portion of the employee’s compensation to a future date and which may also include a contribution made by the employer for the employee’s benefit; �� Defined benefit - a pension plan in which an employer promises a specified monthly benefit on retirement that is predetermined by a formula based on the employee's earnings history, tenure of service and age; �� Defined contribution - a plan in which the contributions made to the plan by the employee and/or employer are allocated to the employee’s individual account under the plan. Examples of defined contribution plans include 401(k) plans, 403(b)
In the emerging market, Transamerica Retirement Solutions offers fully bundled and partially bundled retirement plan solutions to small and mid-sized employers. These plans are predominantly supported by a group variable annuity product, where plan assets are invested primarily in separate account investment choices, including bond and equity investment choices, and cash equivalent choices. A fixed account cash vehicle may also be available on most plans. The investment choices are selected by the client or by the client’s financial adviser.
Transamerica Stable Value Solutions (SVS) provides synthetic guaranteed investment contracts (GICs) in the United States, primarily to tax-qualified institutional entities such as 401(k)
'wrapper' around fixed-income invested assets, which are owned by the plan and managed by the plan or a third party money manager hired by the plan. A synthetic GIC is typically issued with an evergreen maturity and may be terminated under certain conditions. Such a contract helps to reduce fluctuations in the value of the wrapped assets for plan participants, and provides book value benefit-responsiveness.
Transamerica Retirement Solutions’ retirement plan products and services are distributed through intermediaries such as retirement plan advisors, benefit consultants, and financial planners. Transamerica Retirement Solutions works closely with strategic alliance relationships and more broadly with many broker-dealers.
For those individual plan participants who are in transition due to a lay-off, job change or planned retirement,
Transamerica Retirement Solutions provides personal retirement services by telephone through a team of experienced registered representatives and investment advisors. In addition,
Transamerica Retirement Solutions provides pre-retirees guidance and decision support to transition to and through retirement. Transamerica Retirement Solutions offers a variety of solutions, including Individual Retirement Accounts (IRAs), advisory services, annuities and access to other insurance related products and resources. Each "plan for retirement" can be tailored to the goals and needs of the individual.
Aegon’s insurance activities include pension product distribution, individual and group life insurance products, and administrative services. Seguros Argos’s primary product is a twenty-year term life insurance product. Both insurance companies distribute their products in the worksite market. In December 2013, Aegon became a 50% owner of a joint venture with
GICs and FAs are spread-based products issued on a fixed-rate or floating-rate basis. They provide the customer a guarantee of principal and a specified rate of return. Some spread products were issued by pledging, selling with the intent to repurchase, or lending investment securities that serve as collateral to these products. Practically all of the liabilities represented by the fixed-rate contracts were effectively converted to a floating-rate via swap agreements, and contracts issued in foreign currencies were converted at issuance to US dollars through swap agreements to eliminate currency risk. Usually, credited interest on floating-rate contracts resets on a monthly basis to various market indices. The term of the contract may be fixed, generally from six months to ten years, or have an indefinite maturity.
Market-indexed contracts provide a return based on the market performance of a published index designated in the contract.
MTNs that are backed by FAs. The proceeds of each note series were used to purchase an FA from an Aegon insurance company, which was used to secure that particular series of notes. The payment terms of any particular series substantially matched the payment terms of the FA that secured that series.
no longer issues these contracts, but continues to administer the closed block of business. These contracts were typically purchased as a result of a lawsuit or claim, with the injured party receiving special tax treatment. Rather than paying the injured party a lump sum, the payments were structured as a lifetime annuity with mortality risk, a period certain annuity, or a combination of both.
Clark Consulting specializes in the servicing and administration of bank-owned life insurance. Clark Consulting’s relationships and service model help maintain strong persistency for the block of business.
Life reinsurance In August 2011, Aegon completed the divestment of its life reinsurance business, Transamerica Reinsurance, to SCOR, a global reinsurance company based in France. Under the
agreement, Aegon divested its global life reinsurance activities with the exception of select blocks of business. The retained businesses comprise mainly variable annuity guarantee business.
Financial. The result is a highly competitive marketplace and increasing commoditization in many product categories.
Mutual, New York Life, Principal Financial, and Prudential. In the emerging market segment and the multiple employer plan segment, Aegon USA’s main competitors are American Funds,
Insurance companies are subject to a mandatory audit every three to five years by their domestic state insurance departments, and every year by their independent auditors.
RBC Model Act (Model Act) provides for various actions should an insurer’s adjusted capital, based on statutory accounting principles, fall below certain prescribed levels, which are defined 1 Source: Reports from LIMRA International and the Stable Value Investment Association’s Stable Value and Funding Agreement Products as of the first three quarters of 2013.
Regulation to enhance disclosure to regulators about risk exposure to insurers from within their holding company system, for adoption by jurisdictions from 2012. Existing insurance holding company statutes and the regulations of each insurer’s domiciliary state in the United States already impose various limitations on investments in affiliates, and require prior approval of the payment of dividends above certain threshold levels by the licensed insurer to Aegon or its affiliates. In response to international developments, the NAIC also passed a new Own
Seven states, none in Aegon USA’s domestic jurisdictions, passed the SVL in 2013. As adoption by a super-majority of states is required for PBR to be effective in any state, the effective date of PBR is expected to be 2016 or later. The NAIC will continue to consider changes to corporate governance and insurers’
States has not regulated the insurance business, many federal laws impact the insurance business in a variety of ways.
US federal and state privacy laws and regulations impose restrictions on financial institutions’ use and disclosure, as well as the security of customer information, including obligations in the event of data security breaches. Congress is considering proposals intended to assist in combating cyberthreats.
Proposals designed to assist the federal government in combating cyberthreats could impose additional obligations on companies to provide information relative to the effort. At this time, it is uncertain what impact, if any, these proposals may have on insurers.
In addition to the US Congress, non-traditional insurance regulators are increasingly involved in insurance matters traditionally reserved for State regulation; for example, the
US government in establishing international regulatory standards for insurers, and to represent the US insurance industry in international matters. The FIO is also authorized to monitor all aspects of the insurance industry, including identifying issues or gaps in the regulation of insurers that could contribute to a systemic crisis in the insurance industry of the US financial system. On December 12, 2013, the FIO submitted to Congress and released to the public a report on how to modernize and improve the system of insurance regulation in the United States.
insurance regulatory system and outlines near-term reforms for states to undertake regarding capital adequacy, safety and soundness, reform of insurer resolution practices, and marketplace regulation. The report also outlines areas for federal involvement in insurance regulation, including pursuing national uniform treatment for reinsurers, adopting national standards for agent licensing and other provisions of The National Association of Registered Agents and Brokers Reform Act of 2013, and studying the use of personal information for insurance pricing and coverage purposes. The FIO is expected to continue to monitor state insurance activities, coordinate policy, and engage in other actions as necessary to pursue the recommendations made in its report. .
Supervisors (IAIS), which includes the Federal Reserve, FIO and representatives of state regulators, is developing international capital and supervisory standards for internationally active life insurance groups, such as Aegon. It is still to be determined the extent to which these developments or the activities of the
FIO and the Federal Reserve will impact Aegon USA and the regulation of insurance in the United States, or life insurers in the United States or internationally.
Protection Bureau, which has the authority to regulate the marketing practices of credit insurance and other financial products sold through banks. The Federal Reserve Board has also established certain disclosures relating to credit insurance sold in connection with a bank loan.
prohibit telephone solicitations to customers who have placed their telephone numbers on the National Do Not Call Registry.
of Aegon USA, and new proposals, if enacted, will likely impact direct mail efforts. Proposed Federal Reserve Board disclosures regarding credit insurance provided in connection with a loan, if enacted as proposed, would adversely impact the market for credit insurance.
Sales of variable insurance and annuity products are regulated by the SEC and the FINRA. The SEC, the FINRA and other regulators have from time to time investigated certain sales practices involving variable annuities and transactions in which an existing variable annuity is replaced by, or exchanged for, another annuity.
Certain separate accounts of Aegon USA insurers are registered as investment companies under the Investment Company Act of 1940, as amended (the Investment Company Act). Separate account interests under certain annuity contracts and insurance policies issued by the insurance companies are also registered under the Securities Act of 1933, as amended (the Securities
Company Act but may be subject to other requirements of those laws, such as anti-fraud provisions and the terms of applicable exemptions.
Advisers Act of 1940. In accordance with Dodd-Frank Act requirements, the SEC studied and recommended a harmonized standard of care for broker-dealers, investment advisors and persons associated with these firms who provide personalized investment advice. The SEC has solicited comments on the costs and benefits of regulations to establish a harmonized standard of care; however, it has not set a date for proposal of those regulations. Legislation has been proposed in prior congresses that would establish a self-regulatory organization for the examination of investment advisors; however, no action was taken on the legislation. Finally, the SEC and Congress are considering changes to the regulation of money market funds.
Retirement Income Security Act (ERISA). ERISA is administered by the US Department of Labor (DOL) and Internal Revenue
Service (IRS). Accordingly, the DOL and IRS have jurisdiction to regulate the products and services sold by these Aegon USA
federal legislation has also been proposed that is designed to increase savings in employer retirement plans and to facilitate managing those retirement savings as income in retirement through annuities. The likelihood of passage of these legislative proposals or finalization of the regulatory guidance cannot be predicted at this time. However, the proposed legislation and guidance, if enacted and finalized as proposed, would increase the awareness of the benefits of annuitization and/or would significantly reduce the administrative burden of offering annuities within a retirement savings plan or as a distribution option from the plan.
In an attempt to increase the number of workers covered by a retirement savings plan, California has enacted legislation that would permit non-governmental workers to join the state government workers’ retirement plan or a similar governmental plan. Certain steps must be taken, however, before the legislation can be implemented. Several other states are considering similar legislation. The opening of state retirement plans to non-governmental workers could impact the products and services sold by some Aegon USA companies to private employers in those states.
US federal tax treatment of life insurance, pension and annuity products is governed by the US federal tax code. Proposals to remove or decrease the value of these tax incentives for these products – both in and of themselves and relative to other investment vehicles – have been debated periodically in the
Congress before they become law. The risk of tax law changes is heightened when additional revenue is sought to reduce the federal deficit. In addition, tax reform initiatives of the type currently being considered by congressional committees further increase the risk of changes to the tax incentives for short- and long-term savings products, to the tax treatment of derivatives used by life insurers to hedge product-related liabilities, and perhaps even to the taxation of life insurers. These changes, if enacted, would directly impact the cost and competitiveness of life insurance, annuity and pension products sold to ensure
Regulations announced under the Dodd-Frank Act that limit investment by banks in certain financial services products or increase the cost of issuing certain life insurance products would adversely impact the sale of life insurance products. In particular, the market for stable value products sold to defined contribution plans, as well as other insurance products, would be adversely affected if it was decided that these products should be regulated as derivatives. Finally, proposed legislation that would limit the ability of an insurer to access the US Social Security
Aegon USA, or the life insurance market in general, cannot be fully determined until the regulations implementing the
While Aegon USA has not to date been identified by FSOC as systemically significant, the likelihood of future identification of
Aegon USA as systemically significant and/or the impact of any designation of other insurers as systemically significant on the competitive position of Aegon USA cannot be predicted at this time.
The American Taxpayer Relief Act (ATRA), enacted in January 2013, made permanent, with some modifications, many of the tax cuts enacted in 2001 and 2003 during the Bush administration. The ATRA provisions that are most significant for the Aegon USA companies’ business include those: (a) on the estate tax (setting the unified estate and gift tax exemption threshold at USD 5 million (adjusted for inflation after 2011), and the maximum tax rate at 40%); (b) on Roth conversions
Insurance Companies Act (Canada). The primary regulator is the Office of the Superintendent of Financial Institutions. In addition, TLC and CPL are subject to the laws, regulations and insurance commissions of each of Canada’s ten provinces and three territories in which it carries on business. The laws of these jurisdictions generally establish supervisory agencies with broad administrative powers that include granting and revoking licenses to conduct business, regulating trade practices, licensing agents, establishing reserve requirements, determining permitted investments, and establishing minimum levels of capital. TLC’s ability to continue to conduct its insurance business depends upon the maintenance of its licenses at both the federal and provincial/territorial levels. It is also governed by policy statements and guidelines established by the Canadian Life &
Aegon Canada are governed by the Securities Acts of each province and territory.
Asset diversification and quality considerations are also taken into account, along with considerations of the policyholders’
computer simulations, which model assets and liabilities under projected interest rate scenarios and commonly used stress-test interest rate scenarios. Based on the results of these simulations, an investment portfolio is constructed to best match the cash flow and interest sensitivity of the underlying liabilities while trying to maximize the spread between the yield on the portfolio assets and the rate credited on the policy liabilities. Interest rate scenario testing is a continual process and the analysis of the expected values and variability for four critical risk measures
Reinsurance ceded Aegon USA reinsures part of its life insurance exposure with third party reinsurers under both quota share (traditional indemnity) reinsurance treaties, and excess-of-loss contracts.
USA’s overall risk and limit the maximum loss on risks that exceed policy retention levels. The maximum retention limits vary by product and class of risk, but generally fluctuate between
The Aegon USA insurance companies also enter into contracts with company-affiliated reinsurers, both within the United States and overseas. These contracts have been excluded from the company’s consolidated financial statements.
Share in underlying earnings before tax of associates 2 2 0%
Results 2013 the Netherlands 1 2013 net income increased to EUR 292 million compared to 2012 due to higher realized gains on investments and higher underlying earnings before tax, which is partly offset by a loss on fair value items (compared to a gain in 2012). The increase in underlying earnings before tax was mostly driven by improved Pensions earnings and lower operating expenses following implemented cost reduction inititatives.
Net income Net income from Aegon’s businesses in the Netherlands amounted to EUR 292 million. Realized gains on investments totaled EUR 342 million and were primarily the result of adjustments to the asset mix to bring it in line with the new regulatory yield curve and selective de-risking activities.
Results on fair value items amounted to a loss of EUR 240 million, which was primarily driven by adverse real estate revaluations of
EUR 74 million and a loss in the guarantee portfolio of
Netherlands increased 9% to EUR 355 million compared to 2012 as higher earnings in Pensions more than offset lower earnings in Life & Savings.
Commissions and expenses Commissions and expenses decreased by 4% in 2013 compared to 2012. Operating expenses decreased by 2% compared to 2012, to EUR 732 million, as realized cost savings and lower employee benefit expenses offset investments in the business.
Individual life sales declined 13% to EUR 40 million in 2013, as the ongoing shift to banksparen products more than offset higher term life sales related to new mortgage production.
Pensions sales declined 17% compared to 2012 as signing multiple new contracts was more than offset by the nonrecurrence of a very large transaction in 2012. Production of mortgage loans in 2013 amounted to EUR 3.2 billion, up EUR
EUR 24 million up from EUR 21 million in 2012. General insurance production declined 13% to EUR 26 million.
Net income Net income from Aegon’s businesses in the Netherlands amounted to EUR 267 million and included a charge of
Netherlands increased 9% in 2012 to EUR 325 million as higher earnings in Life & Savings more than offset lower earnings in
EUR 17 million resulting from updated mortality tables. �� Non-life recorded an underlying loss before tax of
Losses on these products led to the implementation of actions to improve future results with disability insurance products already showing improvements in 2012. �� In 2012, the distribution businesses recorded underlying earnings before tax of EUR 16 million, an improvement compared to 2011 due to cost savings and lower amortization of value of business acquired following an impairment in 2011.
Production New life sales decreased by 3% in 2012 to EUR 246 million. The decline in Individual life sales to EUR 46 million, primarily driven by a shrinking Dutch life insurance market, more than offset the 16% increase in pension sales. Production of mortgages in 2012 amounted to EUR 2.7 billion down from EUR 3.3 billion in 2011.
Overview of the Netherlands Aegon has operated in the Netherlands for more than 150 years, and is today known as Aegon the Netherlands, one of the country's leading1 providers of life insurance and pensions, with approximately 4,300 employees. Aegon the Netherlands is headquartered in The Hague, has offices in Leeuwarden and Groningen, and owns the Unirobe Meeùs Group, one of the largest2 intermediaries in the Netherlands.
Aegon the Netherlands has four lines of business: �� Life & Saving; �� Pensions; �� Non-life; �� Distribution.
Pensions business line includes Sales and account management, which serves large corporations and financial institutions such as company and industry pension funds. In general all business lines use the intermediary channel, which focuses on independent agents and retail sales organizations in the Netherlands. Aegon
Schadeverzekering has strategic partnerships for the sale of its products and uses an online channel. Aegon the Netherlands launched online bank Knab in 2012 and online insurer Kroodle in 2013, in line with its drive to embrace technology to meet the evolving needs of its customers. Furthermore, Aegon the
Death benefits may be stipulated in the policy or depend on the gross premiums paid to date. Premiums and amounts insured are established at inception of the contract. The amount insured can be increased as a result of profit sharing, if provided for under the terms and conditions of the product.
The contracts contain minimum guarantees of 3%, or 4% and prior to 1999 of 4%. Interest rebates are given on both single and regular premium annuity insurance, and may be based on a portfolio of Dutch government bonds, although other calculation benchmarks may also be applied. There are also profit-sharing schemes set by reference to external indices that are based on pre-defined portfolios of Dutch government bonds.
Tontine plans are unit-linked contracts with a specific bonus structure. At the end of the year in which the insured dies, the policy balance is distributed to the surviving policyholders who belong to the same tontine series, rather than to the policyholder’s estate. Should the policyholder die before the policy matures, a death benefit is paid to the dependants.
Banksparen is a saving product for which amounts are deposited in a "locked" bank account exempt from capital gains tax. The amount saved is available for specific purposes after a certain time period.
Aegon the Netherlands launched online bank Knab in 2012. The platform provides customers with insights into their financial future and uses a fee-based model to empower informed decision making by customers. A product of collaboration with customers, experts and critics, Knab is designed to meet contemporary customer needs.
Netherlands to purchase insurance and manage their accounts through their Facebook profile.
Sales and distribution Aegon the Netherland’s life and savings products are sold through Aegon’s intermediary and direct channels.
Products Aegon the Netherlands provides full-service pension solutions and administration-only services to company and industry pension funds and large companies. The full-service pension products for account of policyholders are separate account group contracts with and without guarantees.
Sales and account management and Aegon’s intermediary channel. Customers include individuals, company and industry pension funds, and small, medium and large corporations. Aegon the Netherlands is one of the country's leading providers of pensions1.
For the majority of company and industry customers, Aegon the Netherlands provides a full range of pension products and services. In addition, TKP Pensioen specializes in pension administration for company and industry pension funds and provides defined contribution plans to corporate and institutional clients, Aegon PPI offers defined contribution plans for small and medium companies.
Non-life The Non-life business consists of general insurance and accident and health insurance.
Sales and distribution Aegon the Netherlands offers non-life insurance products primarily through the Aegon intermediary channel, and through the direct channel Aegon Online and strategic partnerships, such as with local retailer Kruidvat. Aegon also uses the co-assurance market for the corporate sector, and Sales and account management provides products for larger corporations in the
Distribution Unirobe Meeùs Group is the main distribution channel owned by
Competition Aegon the Netherlands faces strong competition in all of its markets from insurers, banks and investment management companies. The main competitors are ING Group, Eureko
Furthermore, low economic growth and financial market volatility has made customers more reluctant to commit to long-term contracts. These changes have increased competition, resulting in a greater focus on competitive pricing, improved customer service and retention, and product innovation. Since 2011, Aegon the
In response, pension funds are seeking to reduce risk exposure by insuring the whole or part of a fund. This is an opportunity for pension providers.
for transparent and cost efficient pension products. As a result, significant economies of scale will be required to service this market effectively and the number of providers is expected to shrink within a few years. Aegon the Netherlands has identified this market as an opportunity for growth and plans to invest in building a leadership position.
DNB is responsible for safeguarding financial stability, and supervising financial institutions and the financial sector.
Netherlands. The objectives of the AFM are to promote an orderly and transparent market process within the financial markets, integrity of relations between market players, and consumer protection.
Financial supervision of insurance companies The European Union Insurance Directives referred to collectively as Solvency I are incorporated into Dutch law. The Directives are based on the ‘home country control’ principle: an insurance company with a license issued by the regulatory authorities in its home country is allowed to conduct business in any country of the European Union, either directly or through a branch. Separate licenses are required for each branch of the insurance company where it conducts business. The regulatory body that issued the license (DNB in the Netherlands) is responsible for monitoring the solvency of the insurer.
Every life and non-life insurance company licensed by, and falling under the supervision of, DNB must file audited regulatory
reports on at least an annual basis. These reports, primarily designed to enable DNB to monitor the solvency of the insurance company, include a (consolidated) balance sheet, a (consolidated)
DNB have taken measures for a more risk-based and forwardlooking supervision of insurance companies. Before Solvency
DNB also supervises pension funds, including premium pension institutions (PPIs), and investment companies. PPIs are required to maintain shareholders’ equity of at least EUR 0.2 million.
Asset liability management Aegon the Netherlands Risk & Capital Committee, which meets every two months, determines and monitors the balance sheet and profit and loss. The focus of these meetings is, among other activities, to ensure an optimal strategic asset allocation, to decide on interest rate hedging strategies to reduce interest rate risks, to manage and possibly hedge actuarial risks, and to decide on the need for securitizations of residential mortgage portfolios to improve the liquidity and funding position of Aegon the Netherlands.
In 2012, Aegon the Netherlands partially offset the risk of future longevity increases related to a part of its insurance liabilities by buying a longevity index derivative from Deutsche Bank. This will pay out if in twenty years the mortality rates have decreased more than a predetermined percentage compared to the base scenario at the moment of signing the contract. Either of
Reinsurance ceded Like other Aegon companies around the world, Aegon the
Netherlands reinsures part of its insurance exposure with thirdparty reinsurers under traditional indemnity, and "excess of loss"
Prior to 2011, Aegon the Netherlands reinsured its life exposure through a profit-sharing contract between its subsidiary Aegon
For marine insurance there is also an “excess of loss” contract in place with a retention level of EUR 2 million for each event.
Income before tax on shareholders return 19 127 (85%) 22 157 (86%)
Commissions declined due to the sale of Positive Solutions and the impact of the implementation of RDR on Pension business commission.
79 million related to a reduction in the corporate tax rate.
Underlying earnings before tax Underlying earnings before tax in the United Kingdom declined 6% to GBP 84 million compared to 2012. The positive impact of higher equity markets was more than offset by adverse persistency related to RDR and investments in technology. �� Earnings from Life increased 26% to GBP 83 million compared to 2012, driven by improved mortality in annuities, lower operating expenses and a GBP 8 million benefit from reserving changes for annuity products. �� Earnings from Pensions declined to GBP 2 million compared to 2012. Adverse persistency amounted to GBP 19 million, which the UK insurance industry experienced as a result of the implementation of RDR. Earnings benefited from the favorable impact of higher equity markets. This was offset by
GBP 13 million of expenses related to creating a digital capability for the non-advised client group in order to facilitate the upgrade to the platform.
Net income Net income improved to GBP 140 million driven by higher underlying earnings before tax, higher realized gains on investments, and the absence of impairment charges and restructuring charges. Results on fair value items amounted to a loss of GBP 26 million, driven by losses on hedges as a result of higher equity markets. Realized gains on investments amounted to GBP 68 million and were mainly the result of switching from gilts into high quality credits. There were no impairments during the year. A reduction in the corporate tax rate in the United
Commissions and expenses Commissions and expenses declined by 18% in 2012 compared to 2011 mainly due to lower operating expenses. Operating expenses declined 33% to GBP 269 million, following the implementation of a cost reduction program in the United
2013 was a year of great regulatory change in the United
In addition to selling and servicing traditional stand-alone pensions, investment and protection products for its core markets, Aegon UK also maintains an award-winning online platform1, has launched the SmartEnrol auto-enrolment online
‘hub’ to support employers with their new Pensions Reform duties, and has successfully expanded its distribution network by securing deals with significant global players in the workplace savings market.
Award-winning platform Aegon UK’s award-winning platform1 provides customers with a seamless transition from saving while working to drawing an income in retirement. The platform is unique in that it allows customers to do both of these things in one place, and enables advisors to offer clients various levels of self-service through a unique gating facility.
Together, the At Retirement and Workplace Savings propositions are known as Aegon Retirement Choices (ARC). ARC allows customers’ investments and savings, workplace pensions and retirement income to be managed from one online solution.
One Retirement is an online single retirement account for retirement savings and income drawdown. It offers a range of investment and retirement income options, providing customers with flexible choices for their individual retirement needs, and is easy to use, allowing customers to engage in their retirement planning, and putting advisors in control. As such, it allows
Aegon UK to develop a lasting relationship with customers throughout working life, transition into retirement, and retirement. This innovative and unique platform proposition also positions Aegon UK to take advantage of opportunities in the post-RDR world.
February, the company secured a significant corporate pensions distribution deal with Barclays bank, supporting Aegon UK’s strategy to diversify its distribution and sending a powerful message to the market about its corporate ambition and capability.
In July, Aegon UK was appointed by Mercer to become one of three preferred suppliers for its large-client workplace savings service, Mercer Workplace Savings. In addition, Aegon UK will become the only supplier for Mercers Elect, which focuses on the small and medium-sized enterprises workplace savings market.
As the UK market develops following the regulatory changes triggered by the RDR and by Pensions Reform, Aegon UK is well placed to provide advisors and customers with appropriate, transparent and affordable retirement solutions that address the needs of a market in which increasing longevity, evolving retirement patterns and investment risk are key challenges.
Overview of sales and distribution channels Aegon UK’s principal means of distribution is through the intermediated financial advice channel, which is the main sales route for long-term savings, protection and retirement products in the United Kingdom. The advisors provide customers with access to various products, depending on the advisor regulatory status, together with advice on the solution that best suits their financial needs.
From this date, retail financial advisors have been classed as either independent or restricted and are remunerated directly by the customer based on the service provided. Aegon UK continues to maintain strong links with financial advisors in all segments of the market. This registration excludes corporate advisors and
Overview of business lines Aegon UK has two business lines: �� Life; �� Pensions.
Life The Aegon UK life business primarily comprises individual protection and individual annuities.
Individual protection Aegon UK offers a range of products for individual customers, including life cover, critical illness and income protection. It also provides products for companies wishing to insure key personnel.
Sales and distribution Individual protection products are distributed through intermediated advice channels. Annuity products comprise internally vested immediate annuities and those available through intermediated advice channels.
Pensions Aegon UK provides a full range of personal and corporate pensions. The company also offers investment products, including ISAs, General Investment Accounts (GIAs), offshore bonds and trusts.
Platform Aegon Retirement Choices (ARC) helps advisors and their customers with the transition from work to retirement efficiently and effectively through a technology-driven platform. Aegon
UK has deployed leading edge technology to the platform, delivering an intuitive method of saving for retirement through the workplace, taking income in retirement, and dealing with changing circumstances. It also provides valuable online reporting and lifestyle tools that enable advisors to demonstrate their professionalism and display their charges for advice in a transparent way. Professionalism and transparency are key principles of the Retail Distribution Review which came into effect on January 1, 2013. In addition to the self-invested personal pensions (SIPPs), which provide a range of pre- and post-retirement investment options for high-net-worth customers, including insured funds and real estate, the platform also offers ISAs and GIAs.
Corporate pensions One of Aegon UK’s largest product lines is providing pension plans for companies. Aegon UK offers group pension solutions on- and off-platform, depending on the needs of the employer and employee. In the United Kingdom, Pensions Reform
(automatic enrollment) is expected to have a dramatic effect on the workplace savings market, increasing the number of employees who will engage with saving through their employers’
The move away from 'defined benefit' (DB) arrangements, which provide a guaranteed percentage of salary on retirement, toward
Investment gateway Many DC and “master trust” pension schemes are managed by a third party with an insurance contract. These are typically trust-based pensions for which the corporate customer
Aegon UK provides a low cost service that uses electronic messaging to automate the process and minimize risk.
This offers a centrally-funded asset solution to support a multinational providing employee benefits in multiple countries.
As an alternative to annuities, Aegon UK also offers "Income for Life", a retirement solution which bridges the gap between annuities and income drawdown products. It offers customers a guaranteed income for life, plus continued control over their investments until the age of 75.
Unit-linked guarantees Aegon UK offers a range of investment products which provide valuable guarantees for the At-Retirement market. There is an offshore investment plan which provides a guaranteed income for life and an offshore bond which provides capital guarantees
UK also maintains close relations with a number of specialist advisors in these markets. Aegon UK is building and diversifying its workplace distribution capability, partnering with Mercer and
Competition Aegon UK faces competition from three main sources, life and pension companies, retail investment firms, and retail platform service companies.
Regulation and supervision All relevant Aegon UK companies are regulated by the Prudential
The PRA is responsible for the prudential regulation of deposit takers, insurers and major investment firms. The FCA is responsible for regulating firms’ conduct in retail and wholesale markets. It is also responsible for the prudential regulation of those firms that do not come under the PRA’s remit.
For non-profit business, interest rate risk arises substantially on Aegon UK’s large book of annuities in payment. Assets are purchased to provide a close expected match to liability outflows, with regular reporting to the MIC on the capital implications of any mismatching.
The operation of the Scottish Equitable with-profit fund is complex. Below is a summary of Aegon UK’s overall approach.
Life, which are written by Aegon Ireland plc, and the product guarantees within Investment Control and Income for Life, which are reinsured to Aegon Ireland plc, all Aegon UK contracts with investment guarantees are written in policyholder-owned funds
(otherwise called with-profit funds). These funds contain free assets which have not yet been fully distributed to individual policyholders. Free assets help meet the cost of guarantees and provide a buffer to protect the fund from the impact of adverse events. Aegon UK has an exposure only once these assets have been exhausted. As outlined below, Aegon UK believes this exposure to be low.
The costs of all guarantees are borne by the with-profit funds and therefore impact the pay-outs to with-profit policyholders.
For a number of contracts written mainly in the 1970s and 1980s, Scottish Equitable also offered minimum pension guarantees, including guaranteed annuity options. As life expectancy rates have improved and interest rates have fallen over time, these minimum guarantees are now often valuable.
As the Scottish Equitable with-profit fund is now closed to new business with investment guarantees, the free assets are being distributed gradually to with-profit policyholders through the bonus system outlined above. This includes ensuring that any surpluses in the with-profit fund from other (historic) business lines can be distributed to existing with-profit policyholders at a suitable rate, helping to prevent a tontine effect as the number of with-profit policyholders’ declines.
Aegon UK prefers to work with reinsurance companies with a strong credit rating, subject to an economic assessment of the terms on offer. Using a reinsurer with a credit rating below AA
Income tax from certain proportionately consolidated joint ventures and associates included in income before tax 5 15 (67%)
Commissions and expenses In 2013, commission and expenses increased 14% to
Production New life sales decreased 10% to EUR 228 million compared to 2012. �� In Central & Eastern Europe, new life sales declined 5% to
Management increased 31% to EUR 13 billion, mainly driven by strong growth in institutional sales in the United States and the Netherlands and retail sales in the United Kingdom. Gross deposits in Asia more than tripled to EUR 587 million driven by strong sales of variable annuities in Japan, while deposits in
Net income 2013 net income declined to EUR 133 million. Higher losses from fair value items and lower gains on investments compared to 2012 were only partly offset by lower impairment charges.
EUR 59 million compared to 2012, which was primarily driven by the introduction of the insurance tax in Hungary and lower non-life results in Hungary from adverse claim experience.
Additionally, earnings were impacted by investments related to the inclusion of the business in Ukraine. �� Results from Asia increased 121% to EUR 42 million compared to 2012, driven mainly by actuarial assumption changes and model refinements of EUR 22 million. The positive impact of growth of the business and cost savings was offset by higher non-deferred acquisition costs driven by strong growth in variable annuities production in Japan where
EUR 33 million compared to 2012 due to the divestment of the joint ventures with CAM, Civica and Unnim. The new joint venture with Santander contributed to underlying earnings, which was mostly offset by investments in developing a direct distribution channel. The earnings contribution from partner
Income tax from certain proportionately consolidated joint ventures and associates included in income before tax 15 8 88%
Net income Net income from Aegon’s operations in New Markets increased to EUR 249 million, driven by strong underlying earnings, the gains on the divestments of the Banca Cívica joint venture (EUR
35 million) and Prisma (EUR 100 million). Impairment charges were lower during the year, due to lower mortgage related impairments in Hungary.
Europe were lower than in 2011 at EUR 85 million in 2012, driven mainly by the negative impact of the pension legislation changes in Poland and lower mortgage margins in Hungary.
The earnings contribution from partner La Mondiale in France remained stable compared to 2011 and amounted to
Europe amounted to nil which was mainly the result of project spending to position the company for future growth. �� Underlying earnings before tax from Aegon Asset
Management increased to EUR 101 million, as a result of asset growth and higher performance fees, partly offset by the divestment of Prisma as of the fourth quarter of 2012.
Annuities Europe driven by investments to support future growth, the inclusion of the company’s Canadian investment management activities within Aegon Asset Management and recurring charges for Corporate Center expenses, partly offset by the divestment of the Banca Cívica joint venture and the exclusion of CAM.
Production New life sales declined 19% to EUR 253 million in 2012. �� In Central & Eastern Europe, new life sales increased 4% to
Turkey, Slovakia and the Czech Republic due to distribution improvements and product innovation offset lower production in Hungary due to difficult market circumstances. �� In Asia, new life sales declined to EUR 53 million in 2012.
United Kingdom. In 2012, in Central & Eastern Europe gross deposits declined following pension legislation changes in
Overview of Central & Eastern Europe Aegon has operations in the Central & Eastern European (CEE) countries of the Czech Republic, Hungary, Poland, Romania, Slovakia, Turkey, and Ukraine. Aegon first entered the Central & Eastern European market in 1992 with the purchase of a majority stake in Hungary’s former state-owned insurance company, Állami Biztosító. Aegon Hungary is Aegon's leading business in the region and a springboard for further expansion. Aegon’s regional expansion continued in 2013 with entry into the Ukrainian market.
Organizational structure Aegon’s main subsidiaries and affiliates in Central & Eastern
Central & Eastern Europe. These include tied agents, insurance brokers, call centers, online channels and, particularly in Hungary,
Traditional general account life insurance is mainly index life products that are not unit-linked but have guaranteed interest rates, as well as group life and preferred term life products.
The main guarantee in Hungary is variable crediting rates with minimum interest guarantees of between 0% and 4% for universal life type products, plus 100% participation in actual interest earned. Profit-share products have a technical interest rate of 2-4% and 85% participation in excess interest. The average minimum interest guarantee is around 3%. In Hungary, a small amount of new business provides a minimum interest guarantee of 2%.
Aegon subsidiaries, including Hungary, focus on unit-linked products, in addition to various accident and health riders.
In 2013, Aegon Hungary Composite Insurance Company incorporated a new subsidiary, Aegon Hungary Home Savings and Loan Association. The new entity provides a savings product combined with a preferential loan option which is subsidized by the state during the savings period.
Insurance Company. In the last four years, the mortgage lending shifted toward lending in the Hungarian forint.
Pensions Aegon’s pension business in Central & Eastern Europe experienced considerable growth before the financial crisis of 2008, due mainly to the region’s strong economic growth, and pension system reform in many of the countries in the region.
In the formerly mandatory private pension market, Aegon was active in Slovakia, Poland, and Romania in 2013, having exited
Hungary. In the voluntary pension market, Aegon was active in Hungary and Turkey, having exited Slovakia and the Czech
Aegon’s regional country units has impacted this line of business significantly. The most significant impact was in Hungary and another significant impact is expected in Poland.
Further legislative changes, enacted in Hungary at the end of 2011, required that all contributions deducted from the monthly wages of members were transferred to the state driven pension system (Pillar I). Members were able to transfer contributions to the private (formerly mandatory) pension funds only on a voluntary basis.
Following the above mentioned changes, on May 31, 2012, the delegate general meeting agreed to terminate the Aegon private pension fund without any legal successor in Hungary.
In Poland, in accordance with legislative changes enacted in 2011, the contribution level payable into the private pension fund was reduced significantly. As of 2012, new members may no longer be actively recruited into private pension funds by pension management companies. Also, in accordance with the legislative changes coming into force on January 31, 2014, the
Polish treasury bonds, treasury bills and other state backed debt instruments, representing around 50% of the value of the managed pension fund, are to be transferred back to the 1 Sources: Polish Financial Supervision Authority, www.knf.gov.pl; the Association of Pension Fund Management Companies, Slovakia, www.adss.sk; Authority for
is to provide the retirement benefits to members, requiring a management company to transfer to ZUS the remaining assets, commencing ten years before a member reaches retirement age.
As a result, Aegon wrote off the intangible assets on its balance sheet in 2013, resulting in a loss of EUR 192 million before tax.
In Slovakia, Aegon announced its withdrawal from the voluntary pension business in 2011, and exited the market in 2013.
In the Czech Republic, as of January 2013, former pension companies were transformed into management companies managing newly launched Pillar II and Pillar III pension funds.
Non-life Aegon Hungary offers non-life cover (household, car insurance, and some wealth industrial risk). Aegon is the leading1 insurance company in the Hungarian household market. In recent years, margins on non-life insurance in Hungary have been attractive. Moreover, household insurance provides considerable opportunities for cross-selling life insurance.
Competition Aegon is among the biggest providers operating in the life insurance market in Hungary. In 2013, it was the second largest2 provider in Hungary, based on the first nine months’ standardized premium income, and the third largest3 provider in the non-life insurance market. Aegon is also a significant market participant in Poland4 and Ukraine5. As of September 2013, it was ranked fifth for unit-linked products in Poland, based on gross written premiums. Aegon is not a significant market participant in those markets in which it was relatively recently incorporated: Aegon Slovakia (incorporated in 2003); Aegon Czech Republic
Pension Funds (XCVI. 1993). Although, for Aegon, these activities are outsourced to Aegon Hungary Pension Fund
Management Company, its operations must still comply with this legislation. This activity is also supervised by the MNB.
Slovakia’s pension market is regulated by Act 43/2004 on pension asset management companies and respective notices.
Pension Funds Act. In Turkey, the voluntary pension funds are under the supervision of the Undersecretariat of Treasury and the companies are subject to Individual Retirement Saving and
(including Aegon Hungary Mortgage Finance Company). In addition, Aegon Hungary Mortgage Finance Company is under the supervision of the MNB.
Capital Committee that meets on a quarterly basis. Aegon CEE’s asset liability management focuses on asset liability duration and liquidity. The performance of the portfolios against benchmarks is also evaluated during these meetings.
Joint ventures In 2002, Aegon signed a joint venture agreement with
Ltd (Aegon-CNOOC) began operations in 2003. The joint venture is licensed to sell both life insurance and accident and health products in the provinces of mainland China. Aegon-CNOOC
has extended its network of offices and business in China since 2003. Its geographic spread provides access to a potential market of more than 640 million people, many in the booming coastal provinces of eastern China.
India distribution network with 70 branches, across 55 cities and 21 states, and had issued more than 345.000 policies to over 300.000 customers.
(Aegon Sony Life). By December 2013, the joint venture had signed distribution partnerships with one ’mega bank’ and fourteen regional banks, in addition to Sony Life’s Life Planner channel of over 4,000 professionals. The focus of the joint venture is annuity sales in Japan.
Asia division of the New Markets operating unit. The objective is to leverage product and distribution expertise, capture efficiencies, and pursue organic growth of Aegon’s franchise in Asia. Previously these entities reported under the Americas operating unit.
TLB has served the high-net-worth market in Asia in an off- and on-shore capacity since the early 1990s.
As of December 2013, Aegon Religare’s widespread agency network, which it had established by 2010, comprised more than 7,000 agents, following some consolidation in 2012. In addition to agency distribution, there has been an increase in Direct to
Aegon Sony Life in Japan has two primary channels of distribution, the Life Planner channel of Sony Life, Aegon’s joint venture partner, and the bank distribution channel, which now comprises fourteen regional banks. In 2010, Aegon Sony
marketing services companies in Asia by both geographic footprint and premiums. ADAMS specializes in direct and affinity marketing, and services business partners across the direct marketing value chain. It has developed significant capabilities in customer analytics and data management, integrated marketing and operational execution, and is investing in and building digital and e-commerce capabilities to expand opportunities with existing business partners beyond telemarketing.
Overview of business lines Life and savings Aegon provides a broad range of life insurance products through its businesses in China and India. These include unit-linked and traditional life products, as well as endowment, term life, health, group life, accident, and annuities.
per annum during the deferral period and a guaranteed minimum accumulation benefit (GMAB). The GMAB product has a 105%
China is following global trends in the use of digital channels, and Chinese government agencies attach great importance to the e-business industry development. With a ‘netizen’ population of around 591 million1, a growing number of people in
Zhong An Online Property and Casualty Insurance Company began operations in Shanghai to become China’s first online insurance company. The company’s main focus is corporate and household insurance for internet transactions. The company’s key shareholders are Alibaba, Tencent, and China Ping An Group.
Aegon-CNOOC began e-sales in early 2013. Digital sales and service platforms allow Aegon-CNOOC to interact with its customers directly, and offer the convenience of around-theclock service from any location. As of November 30, 2013, about 35 life insurance companies had launched an e-sales channel.
In addition, large insurance groups such as New China Life are establishing wholly-owned e-business companies. Insurers such as Taikang Life and Guohua Life have introduced mobile platforms for insurance services and product purchasing, such as
Of this, 53.6% was underwritten in the individual segment and 46.4% in the group segment, compared to 58.6% and 41.4%
INR 174 billion in 2011-2012, based on the latest information available on a fiscal year basis from April to March. Non-linked business collections were INR 965 billion in 2012-2013, compared to INR 966 billion in 2011-2012. Total premiums underwritten by the life insurance sector in 2012-2013 were flat at INR 2,872 billion, against INR 2,870 billion in 2011-2012.
Renewal premiums accounted for 62.6% of this total, compared to 60.3% in 2011-2012, and first year premiums contributed the remaining 37.4%, against 39.7% in 2011-2012. Agency sales forces continue to be an important distribution channel. Life insurers with banking partners are able to scale up distribution platforms, which are gradually increasing volumes.
December 2013. The Life Insurance Corporation of India remains dominant with a 73% share of new business premiums, with the balance dispersed among private sector companies.
Japan - Aegon Sony Life The bancassurance channel is a key growth area in the Japanese insurance market. The largest share of market growth is from single premium whole life products. The surrender payment rate of these is higher than savings account interest, and the commission rate incentivizes strong sales by bancassurance representatives.
Hong Kong and Singapore - TLB One of the key challenges affecting Hong Kong and Singapore is the number of new providers entering the high-net-worth and affluent market, alongside the well-established players HSBC
2 Source: Monthly New Business Report from Insurance Regulatory and Development Authority (IRDA) / IRDA Annual Report 2012-2013.
Regulation and supervision China - Aegon-CNOOC The insurance industry in China is regulated by the CIRC. Its regulatory supervision is described as ‘enhancing services, reinforcing regulation, preventing risks, and promoting development’.
The CIRC’s priorities are to promote healthy and continuous development of business, maintain market stability, and prevent systematic and regional risks. It pays increasing attention to risks concerning maturity payment and surrender, fund utilization, and low solvency.
The CIRC also strengthens supervision of insurance corporations, and promotes the China Risk-Oriented Solvency System. A key focus is the implementation of regulations with the aim of making current corporate governance system more effective.
The IRDA is very active in bringing new regulation. For example, in 2013, the IRDA updated existing and released new regulatory guidelines. Significant changes were made to the following: guidelines on various features of traditional and linked products; investment regulations and fixed income derivatives regulations, including the allowance of interest rate swaps for the purpose of hedging liabilities with interest rate exposure.
In late 2012, the FSA issued a new solvency margin risk standard which limits the assets used while broadening the measurement for solvency risk. Most recently, the FSA has strictly monitored the solicitation of insurance products to the elderly; as a result,
Asia - ADAMS In Hong Kong, the Privacy Commissioner for Data Protection ordered Aegon Direct, a broker company and a wholly owned subsidiary of ADAMS, to delete personal information collected from customers by a vendor which may have misled some of those individuals into providing their information, or did not properly disclose how the information would be used. Aegon Direct was permitted to avoid the deletion by obtaining new customer consent from each individual, and was able to retain thousands of customers through a calling outreach program which ended in
August. Aegon removed those customers it was not able to reach by the regulatory deadline of September 30, 2013.
In direct markets, an evolving regulatory environment relates in particular to the use of personal data for marketing purposes.
ADAMS remains abreast of any changes or proposed changes to regulations governing personal data in all of its markets. Where appropriate, ADAMS implements industry standard compliance programs, such as PCI Compliance in Australia and P-Mark in Japan.
Hong Kong and Singapore - TLB TLB is incorporated in Bermuda and is regulated by the
India - Aegon Religare Aegon Religare has a board-level Investment Committee and a board-level Risk Management & Capital Committee
RCC and RMC. Asset liability management (ALM) became critical to the business in 2012 as the business mix changed and sales of traditional products increased. Monthly reviews are performed to ensure appropriate ALM for the closed block of business under traditional products; at the end of each quarter the ALM report is tabled at the RCC meeting.
(SARe’s functional currency): currency exposure is hedged with foreign currency forwards. The hedging program requires regular determination of risk exposures, and regular market monitoring and trading. The program requires substantial cash reserves to cover potential losses on hedging instruments, transaction costs and other charges, all of which are supported by the shareholders as necessary. The hedge strategy is not expected to eliminate all of the volatility from guarantee value changes.
The hedge objective is to minimize economic volatility, which is expected to be reduced by approximately 70%-80%. The hedge will not fund all changes in capital, as a strategy to minimize capital volatility is different to its strategy to minimize economic or income volatility.
CNOOC reviews the reinsurance structure regularly and adjusts it based on the claim experience and its risk acceptance capability.
Japan - Aegon Sony Life and SARe Aegon Sony Life reinsures 100% of its guarantees on variable annuities with SARe. Aegon Sony Life may use third party reinsurance for a minor part of this, taking into account transfer pricing issues.
Asia - ADAMS ADAMS’ business model mainly creates value by offshore reinsurance through an Aegon reinsurer, whereby risk-based premium is acquired for the group. ADAMS positions itself as an independent marketing services provider, which allows it to front partnerships with local insurers, particularly where Aegon does not have a local presence. ADAMS also generates some fee income from its services.
Hong Kong and Singapore - TLB TLB uses third party mortality reinsurance for its universal life and traditional policies. Mortality reinsurance takes the form of yearly-renewable term excess-of-retention or quota-share arrangements, and is typically arranged through a pool of reinsurers, which are generally the leading providers in the reinsurance industry.
Overview of sales and distribution channels The challenging economic situation in Spain, which is expected to continue in 2014, has affected all channels, particularly bancasurance. The banking sector has undergone deep change since 2012, when a structural reform program was implemented in Spain. This resulted in the restructuring of the banking sector and triggered a wave of mergers and acquisitions aimed at consolidation, an ongoing process which continues to affect
The main distribution channel in the Spanish market is bancassurance, which accounts for 72% of life sales, compared to 27% for brokers and a negligible share for direct customers.
Cantabria Vida y Pensiones and Liberbank Vida Caja Cantabria is one of the largest savings banks in northern
Aegon Santander Generales Seguros y Reaseguros and Aegon Santander Vida Seguros y Reaseguros In December 2012, Aegon and Banco Santander entered an alliance for the distribution of certain insurance products.
Santander concerns the business lines of pure life risk and the general insurance products accident, home and commercial multi-risk insurance, and sickness. These are to be sold through two insurance entities, Aegon Santander Vida for pure life risk products, and Aegon Santander Generales for general insurance products. Aegon’s share in each entity is 51%.
Distribution Aegon Spain distributes life insurance, general insurance, health and pension products. It uses two main distribution channels,
Aegon Spain to begin offering general insurance. The gross premium written contribution in 2013 for each of Aegon Spain’s business lines was 69% for life insurance, 20% for accident and health insurance, and 11% for general insurance.
European Union directives. The local regulations for solvency margin are based, respectively, on percentages of the reserves for the life insurance business and of the premiums and sum at risk for the health and general insurance business. The local regulations for investments require the appropriate matching of investments and technical provisions, and also establish different levels of restrictions on the type of assets in which the insurance company may invest.
La Mondiale Participations offers a wide range of life insurance, pensions, savings, investment and asset management services to corporate and individual retail customers through three subsidiaries, Arial Assurance, La Mondiale Partenaire and
La Mondiale Europartenaire. In 2004, Aegon increased its stake in La Mondiale Participations from 20% to 35%. In 2005, the
La Mondiale. In July 2007, La Mondiale and fellow insurer AG2R
announced a merger. The merger, which has not affected Aegon’s partnership with La Mondiale, created a significant insurer in
has a 35% stake in La Mondiale Participations, including the insurance entity with which Aegon Ireland cooperates.
Germany in August 2013. Key distribution channels are broker pools and financial adviser networks, serviced through the branch office in Frankfurt.
In France, AG2R La Mondiale sells a single variable annuity product, of which the guaranteed lifetime income option is reinsured to Aegon Ireland. The product is sold through AG2R
Overview of business lines Variable annuities Variable annuity products are essentially unit-linked life insurance products with guarantees. They typically offer a range of investment fund options linked in proportions selected by the policyholder to equities and fixed interest investments. The guarantees may take several different forms, from guarantees of a minimum level of future income for life (immediate or deferred)
or a given term to capital guarantees over a defined period and death benefits. Charges for the guarantees are applied to the policyholder’s account value and typically vary according to the proportion of equity investment.
Variable annuities allow a customer to select payout options designed to help meet their need for income upon maturity, including lump sum payment or income for life or a period of time.
Premiums paid on variable annuity contracts are invested in underlying funds, including bond and equity funds and, usually, a cash fund. For most products, the client selects investment options based on the their preferred level of risk. The assets related to this product are segregated for the benefit of policyholders in separate accounts of the insurance company.
Offshore Wealth Management products allow a customer to make regular withdrawals from their policy provided there is sufficient value in the underlying fund. The death benefit is typically 100.1% of the surrender value of the policy on the death of the last life assured. Offshore Wealth Management products do not have explicit guarantees. The surrender value reflects the performance of the funds selected by the client and, therefore, the final surrender value of the policy may be less than the original investment.
Collected surrender charges are typically applied to recoup deferred acquisition costs.
Competition Variable annuities From 2012 to 2013, the competitive environment for variable annuities in Europe has experienced no significant change.
Ongoing difficult economic and financial conditions have limited new product launches. In the United Kingdom, there are two competitors, Axa and MetLife. MetLife is the market leader, with a total variable annuity market solution covering both pensions and onshore bonds.
In France, AXA and Allianz are the only other providers offering variable annuities, with AXA leading the market.
Aegon Ireland operates on an FOE basis in Germany (with a branch office in Frankfurt) and on an FOS basis in the United
Kingdom and the Netherlands, selling life insurance products in Class III (contracts linked to investment funds) and Class I
(life insurance and contracts to pay annuities on human life), excluding contracts written in Class II (contracts of insurance to provide a sum on marriage or on the birth of a child). Aegon
Overview of Aegon Asset Management Aegon Asset Management was formed in October 2009, and brings together Aegon’s asset management businesses from around the world. Aegon reports results from Aegon Asset Management through the New Markets reporting line.
Aegon Asset Management is managed by a global board representing a number of global functions and local leadership roles.
General account business consists of funds held on the balance sheet of Aegon insurance companies to meet policyholder liabilities, typically where the insurer has given the policyholder a guarantee. These assets are managed to match the insurers’
Affiliate sales business generally consists of funds sold by affiliate insurers where the policyholder return is determined by the investment return of the fund, so that the risk is for the policyholder rather than Aegon. The funds have various legal structures, and are usually managed against a benchmark or peer group target. The main asset classes include fixed income, equities, real estate, mortgage loans and alternatives. In the
United States and the United Kingdom, a significant element of affiliate sales is conducted on an open architecture basis.
The institutional businesses typically sell tailored services to large corporations or pension funds. They employ a full range of asset classes and manage the funds against objectives, targets and risk profiles agreed with clients. Both absolute and relative return products are offered. Aegon Asset Management distributes these services internationally.
Competition in main locations Aegon Asset Management competes with other asset management companies on insurance platforms to acquire business from open-architecture Aegon insurance units and third parties. Aegon Asset Management’s competitors include global asset managers, which either belong to a financial conglomerate or are stand-alone, and local specialists in the countries where it is active. Generally, there are different competitors for different types of asset class or different styles of management.
In the United States, fixed income, asset allocation and real estate loans are the focus. In the wholesale market, Aegon Asset
Dutch Act on Financial Supervision. In Europe, regulation for asset management companies is different from that for insurers as it is based on separate European Union directives. Aegon
& Exchange Commission) for United States based entities, and the CSRS (Chinese Securities Regulatory Commission) for
Risk management General As an insurance group, Aegon manages risk on behalf of its customers and other stakeholders. As a result, the company is exposed to a range of underwriting, operational and financial risks. Aegon’s risk management and control systems are designed to ensure that these risks are managed effectively and efficiently in a way that is aligned with the company’s strategy.
Definition and tolerances For Aegon, risk management involves: �� Understanding which risks the company is able to underwrite; �� Establishing a company-wide framework through which the risk-return trade-off associated with these risks can be assessed; �� Establishing risk tolerances and supporting policies to limit exposure to a particular risk or combination of risks; �� Measuring and monitoring risk exposures and actively maintaining oversight of the company’s overall risk and solvency positions.
By setting certain predefined tolerances and adhering to policies that limit the overall risk to which the company is exposed,
Governance structure Aegon’s risk management framework is represented across all levels of the organization. This ensures a coherent and integrated approach to risk management throughout the company. Similarly, Aegon has a comprehensive suite of company-wide risk policies, which detail specific operating guidelines and limits. These policies are designed to keep overall risk-specific exposures to a manageable level. Any breach of policy limits or warning levels triggers immediate remedial action or heightened monitoring. Further risk policies may be developed at a local level to cover situations specific to particular regions or business units. Aegon’s risk management governance structure has three basic layers: �� The Supervisory Board (SB) and the Supervisory Board Risk
Committee (SBRC); �� The Executive Board (EB) and the Management Board (MB); �� The Enterprise Risk Management Committee (ERMC) and the
EB adopts the risk strategy, risk governance, risk tolerance and material changes in risk methodology and risk policies. The Group
Chief Risk Officer (CRO) attends EB meetings and has a direct reporting line to the SB to discuss enterprise risk management and related matters, and is a member of the MB.
enterprise risk management, in particular the risk strategy, risk governance, risk tolerance, and material changes in risk methodology and risk policies.
The SBRC is responsible for overseeing Aegon's enterprise risk management framework, including risk governance and measures taken to ensure risk management is integrated properly into the company's broader strategy. The SBRC oversees the company's risk exposure as it relates to capital, earnings and compliance with Group Risk policies. It is the responsibility of the EB and the
Group CRO to inform the SB of any risk that directly threatens the solvency, liquidity or operations of the company. Details of members of the SBRC can be found on pages 96 and 97 of this
The MB is supported by two committees: �� The Enterprise Risk Management Committee (ERMC), which supports Enterprise Risk Management (ERM) framework development and maintenance, including risk strategy, risk governance, risk tolerance, risk methodology and risk policies; �� The Group Risk & Capital Committee (GRCC), which, as the primary balance sheet management committee of Aegon, supports risk oversight.
The ERMC can seek advice on significant ERM framework development work from temporary working groups comprising subject matter experts who represent the company’s businesses.
The GRCC focuses on managing Aegon’s overall solvency and liquidity position, while ensuring that risk taking is within the risk tolerance statements and Group Risk policies. The GRCC informs the MB about any identified or near breaches of overall tolerance levels, as well as any potential threats to the company’s solvency, liquidity or operations. Risk & Capital Committees
Business unit CROs have a direct reporting line into the Group
CRO or one of the regional CROs that report directly into the
Lines of defense Aegon’s risk management structure is organized into three
States Federal Reserve Board relating to its policy of quantitative easing. Interest rates remain low, although a significant increase was seen in the third quarter of 2013. Credit spreads remained at the level of end of 2012.
United Kingdom were invested in high-rated sovereign-linked paper. In the general account investment portfolio, Aegon retained minimum exposure to peripheral European countries.
Interest rate risk Similar to 2012, interest rates remained low in the first half of 2013. In the second half of the year, long-term swap rates in the United States, United Kingdom and the Eurozone increased 61 bps. In the United States, the duration of the investment portfolio was increased by investing in long-term treasuries and forward starting swaps. The US operations also finalized a hedging program to project the capital position against a sharp rise in interest rates. Also in 2013, the existing interest rate programs remained in place for hedging guarantees for Aegon’s operations in the Netherlands and at Variable Annuities.
Currency exchange rate risk As an international company, Aegon is exposed to movements in currency exchange rates. However, Aegon does not consider this exposure to be material. The company holds its capital base in various currencies in amounts that correspond to the book value of individual business units, thus mitigating currency exchange rate risk.
Aegon considers extreme liquidity stress scenarios, including the possibility of prolonged ‘frozen’ capital markets, an immediate and permanent rise in interest rates, and policyholders withdrawing liabilities at the earliest conceivable date.
In 2013, Aegon retained significant holdings of cash and highly liquid assets as a precaution against potential adverse market developments. Stress tests show that available liquidity would more than match the company’s liquidity requirements, even if market conditions were to significantly deteriorate.
Underwriting risk Aegon’s earnings depend, to a significant degree, on the extent to which claims experience is consistent with assumptions used to price products and establish technical liabilities. Changes in, among other things, morbidity, mortality, longevity trends and policyholder behavior may have a considerable impact on Aegon’s income. While Aegon believes it has the capacity to take on more underwriting risk to capitalize on growth opportunities in its main life insurance and pension markets, the company has also reduced exposure to longevity risk via a longevity swap transaction.
A description of risks relating to Aegon’s businesses and risks relating to Aegon’s common shares can be found on pages 317 to 332 of this Annual Report.
Liquidity and capital resources In line with its risk tolerance, the goal of Aegon’s capital and liquidity management is to promote stable and strong capital adequacy levels for its businesses on various capital metrics to ensure that the company is able to meet its obligations.
Risk Management Framework, and focuses on financial strength, continuity, steering of the risk balance and desired risk culture.
The core aim is to establish the organization’s tolerance for risk to assist management in carrying out Aegon’s strategy within the
Guiding principles Aegon follows a number of guiding principles, which determine its approach to capital and liquidity management: �� To promote strong capital adequacy in Aegon’s businesses and operating units; �� To manage and allocate capital efficiently to maximize returns and support the strategy; �� To maintain an efficient capital structure with an emphasis on optimizing Aegon’s cost of capital; �� To ensure sufficient liquidity by enforcing stringent liquidity risk policies for both business units and the holding; �� To maintain continued access to international money and capital markets on competitive terms.
Improving risk profile Aegon continues to take measures to improve its risk-return profile and lower overall capital requirements. These measures include, for instance, the continued run-off of Aegon’s spreadbased institutional business in the United States, the strategic growth in fee-based earnings and extensive asset-liability management and hedging programs. Examples of these programs include hedging the interest rate and equity risk from guarantees in the Netherlands and hedging the capital position in the Americas against adverse equity and fixed income market swings.
EUR 25.5 billion (EUR 27.3 billion at end 2012). Its gross financial leverage was 30.1% (31.9% at end 2012) and its fixed charge coverage was 5.1x (4.5x at end 2012). Aegon targets a gross financial leverage ratio of 26-30% and a fixed charge coverage of 6.0-8.0x and expects a continued deleveraging in 2014 supporting Aegon’s commitment to these targets.
At December 31, 2013, Aegon had EUR 135 million outstanding under these programs.
reserves) and universal life insurance with secondary guarantees (subject to Regulation AXXX reserves) to support lower-risk statutory reserves at a lower cost for policyholders and shareholders; �� Managing variable annuity hedging programs; �� Managing and segregating risks; �� Monetizing embedded value.
(Commitments and contingencies). These letters of credit have been provided by third parties for the benefit of the affiliated company whose liabilities are reinsured.
At Aegon N.V., liquidity is sourced from internal dividends from operating companies and by accessing capital and money markets. The main sources and uses of liquidity at Aegon N.V. are dividends from subsidiaries and to shareholders, movements in debt, net expenses (including interest), funding operations, and the balance of acquisitions and divestitures.
In order to ensure the holding company’s ability to fulfil its cash obligations, it is Aegon’s policy that the holding company holds liquid assets in reserve to fund at least 1.5 years of holding company operating and funding expenses without having to rely on the receipt of funds from its subsidiaries and without the need to access capital and money markets.
100% of the Authorized Control Level (“ACL”) for US insurance entities, 100% Solvency I required capital for Dutch insurance companies and 100% Solvency I Pillar 1 capital for insurance companies in the United Kingdom.
The minimum regulatory capital requirements for our main subsidiaries and the actual capitalization levels as per
December 31, 2013, are included in the following table: Capital requirements Legal/regulatory minimum capital requirement Actual capitalization Excess over legal/
100% Authorized Control Level (NAIC RBC ACL) ~880% of combined ACL ~EUR 5.1 bln
United Kingdom3) 100% Solvency I (Pillar 1) ~150% Solvency I (Pillar 1) ~EUR 0.7 bln 1 Capitalization for the United States represents the internally defined combined risk-based capital ("RBC") ratio of Aegon's life insurance subsidiaries in the
United States. The combined RBC ratio unilizes the NAIC RBC ratio excluding affiliated notes and taking into account excess or deficient amounts related to offshore life affiliates.
Local insurance regulators generally use their discretionary authority and judgment to restrict and/or prohibit the transfer of funds to the holding company to capital levels well above the minimum capital requirements contained in the applicable insurance regulations. The discretionary nature of the regulatory assessment of capital adequacy creates a natural ambiguity around the exact level of capital that is required by local regulatory authorities. Precise capitalization levels effectively required by local insurance regulators are often not known in advance, in part because the views and risk tolerances of certain regulators for certain asset classes continue to develop over time, in line with the development and evolution of local, regional and global regulatory capital frameworks. In practice and for transfer of funds purposes, Aegon manages the capitalization of its subsidiaries in excess of the minimum regulatory capital requirements contained in the applicable regulations, as shown in the table above.
The capitalization level and shareholders’ equity of the subsidiaries can be impacted by various factors (e.g. general economic conditions, capital markets risks, underwriting risk factors, changes in government regulations, legal and arbitrational proceedings). To mitigate the impact of such factors on the ability of subsidiaries to transfer funds, the subsidiaries hold additional capital in excess of the levels required by local insurance regulations.
EUR 2.2 billion in excess capital at group level, compared with EUR 2.0 billion at the end of 2012.
External dividends Aegon aims to pay out a sustainable dividend, which may increase based on Aegon’s performance, to allow equity investors to share in Aegon’s performance. After investments have been made in new business to generate organic growth, capital generated by Aegon’s operating subsidiaries is available for distribution to the holding company, while maintaining a capital and liquidity position in the operating subsidiaries in line with
Ratings Aegon's objective is to maintain excess capital over and above the amount required to maintain an AA financial strength rating and this plays an important role in determining the overall capital management strategy. Aegon maintains strong financial strength ratings from leading international rating agencies for its operating subsidiaries and a strong credit rating for the holding.
Aegon’s internal audit function assists the Executive Board in maintaining effective controls by independently and objectively evaluating the adequacy and effectiveness of the organization’s internal control and risk management systems.
Sponsoring Organizations (COSO, 1992 framework), are used by Aegon’s internal audit function to analyze and make recommendations to the Executive Board concerning the effectiveness of internal controls over Aegon’s financial reporting process and the company’s internal control framework.
Based on risk assessments performed, the Executive Board, under the supervision of the Supervisory Board and its Audit
The Executive Board is informed of any risks that threaten the company’s economic/statutory solvency, reputation, reliability of financial reporting, or operations.
On the basis of the above, Aegon’s Executive Board states the following regarding risks to the company’s financial reporting: �� Aegon’s risk management and control systems provide reasonable assurance that the company’s financial reporting does not contain any material inaccuracies; �� Aegon’s risk management and control systems functioned properly in 2013; �� There are no indications to suggest that Aegon’s risk management and control systems will not continue to function properly in 2014.
The risk management and control systems provide reasonable assurance for the reliability of financial reporting and the preparation and fair presentation of Aegon’s published financial statements. However, they cannot provide absolute assurance that a misstatement of Aegon’s financial statements can be prevented or detected.
Responsibilities for the financial statements and the Annual Report The Executive Board is responsible for preparing the financial statements and the Annual Report in accordance with Dutch law and the International Financial Reporting Standards adopted by the European Union (IFRS).
The Supervisory Board is entrusted with the task of supervising and advising the Executive Board on management of the company, and overseeing Aegon’s strategy and the general course of its businesses.
D. Button, Chief Financial Officer (CFO). Mr. Button was appointed to the Executive Board for a term of four years by the shareholders on May 15, 2013, succeeding Jan J. Nooitgedagt as
CFO. The Board extends its gratitude to Jan Nooitgedagt, who joined Aegon as CFO in 2009 during the financial crisis for his important contributions to steering Aegon to where it is today, with a strong capital position and solid balance sheet.
Supervisory Board meetings Attendance In 2013, the Supervisory Board held a total of seven regular
Board are guided by the interests of Aegon and the company’s stakeholders. The Supervisory Board is a separate corporate body, independent of the Executive Board. The Supervisory Board consists of nine members (for further details of the individual members of Aegon’s Supervisory Board, please see pages 99 and 100). The Supervisory Board makes recommendations to the
Board determines the remuneration of individual members of the Executive Board in line with the Remuneration Policy adopted at the company’s General Meeting of Shareholders.
Overall accountability for Aegon's remuneration governance also sits with the Supervisory Board, such to be advised by its Compensation Committee. This includes the responsibility for designing, approving and maintaining the Aegon Global
Remuneration Framework, including the remuneration policies for the Executive Board, Identified Staff and for staff in Control
Corporate governance Details of Aegon’s corporate governance structure and a summary of the company’s compliance with the Dutch
Corporate Governance Code are on pages 108 to 111 of the
Composition of the Supervisory Board and Executive Board Supervisory Board The composition of the Board is discussed in meetings of the
Dona Young1) 4/4 3/3 4/4 4/4 1 Where a Supervisory Board member retired from the SB or stepped down from a Committee or was appointed during the year, only meetings that were held during his / her tenure are taken into account.
Sessions, meetings of the Supervisory Board absent of members of the Executive or Management Boards. In accordance with
Board, the Chairman of the Audit Committee, the Chairman of the Risk Committee, and the CEO and CFO who sit on the company’s Executive Board.
Highlights A key development in 2013 was the cancellation of the preferred shares owned by Vereniging Aegon, which was announced on February 15, 2013, and approved by shareholders at the annual General Meeting of Shareholders on May 15, 2013.
In 2013, the Board focused on the continued execution of the strategic objectives, most notably the shift from spread to fee income, and the growth of the at-retirement business in the company’s established markets, and the protection and savings business in its developing markets. The Board discussed with management the company’s progress toward customer centricity, supported by investments in digital capabilities and the extension of its distribution reach through partnerships with several trusted financial and non-financial brands. Another key topic was the refinement of the financial strategy presented to investors and analysts in June 2013, which supports a balanced capital deployment strategy and a sustainable dividend.
Global Chief Technology Officer, further strengthening Aegon’s long-term strategic commitment to a culture of innovation and the use of technology to improve customer relationships and pursue operational excellence. She is also entrusted with ensuring the suitability and quality of the Aegon’s IT
Union and the European Commission reached an agreement on the Omnibus II Directive that amends the Solvency II Framework agreed in 2009. The starting date for the application of Solvency
II is January 1, 2016. More detail on Solvency II can be found on page 11 of this annual report.
Enterprise Business Services unit. The Board and management also discussed consolidation developments in Aegon’s main markets, and the Board approved the updated financial strategy.
Results and budget In its meeting of February 14, 2013, the Supervisory Board convened to discuss the results of the fourth quarter of 2012.
Legal and compliance In 2013, the Supervisory Board and the Audit Committee discussed with management, the General Counsel and the Group
Educational sessions and Board review The Board received presentations from internal and external experts on International Financial Reporting Standards (IFRS)
The performance of the members of the Executive Board was discussed regularly in 2013 at Executive Sessions, and at a dedicated meeting of the Board in December, at which the
As per December 31, 2013, the composition of the Committees is as follows: Audit Committee: Shemaya Levy (Chair); Antony Burgmans; Ben van der Veer; Dirk P.M. Verbeek; Dona D. Young.
Nominating Committee: Robert J. Routs (Chair); Shemaya Levy; Kornelis J. Storm; Leo M. van Wijk.
Compensation Committee: Leo M. van Wijk (Chair); Irving W. Bailey II; Robert J. Routs.
Committees meetings are open to all members of the Board, regardless of membership of the Committees. The Chairman attends all meetings in whole or in part.
The Audit Committee meetings were attended by Aegon’s CFO, the Corporate Controller, the Chief Risk Officer and the Internal
Audit Committee. At various meetings the Audit Committee and the full Board also reviewed the proposed changes to Aegon’s accounting policies related to deferred policy acquisition costs and longevity reserves as part of the execution of the financial strategy, as announced in January 2014, together with the redemption of USD 550 million in perpetual capital securities.
Committee in 2013 and provided quarterly updates on the activities of the internal audit function and provided details of progress on internal audits. The Audit Committee approved the internal audit plan. The Audit Committee also held private sessions with the internal auditor and the external auditor to discuss the findings. Members of the Executive Board were not present at these sessions.
Mr. Ben van der Veer qualify as financial experts within the terms and conditions of both the Dutch Corporate Governance
Aegon Americas. The company’s Chief Risk Officer attended all meetings, while the members of Aegon’s Executive Board attended most of the meetings. Representatives of other businesses or functional areas presented on specific topics.
For example, Aegon Asset Management provided insight into developments in Aegon’s general account investment portfolio.
and regulatory issues. The Committee examined in depth the company’s Pricing and Product Development Policy, model validation, use of derivatives, and identification of hedging and emerging risk. At the meeting in Washington, the Committee specifically discussed Aegon Realty, which advises clients on investments in real estate asset classes, and the United States private placement business.
Committee also advised the Supervisory Board on the nomination for the reappointment of Mr. Shemaya Levy to the Supervisory
Board in 2013 for a third and final term of four years. When making these recommendations for (re)appointments, the
Board. In 2013, the members of the Committee reviewed and interviewed a number of candidates for upcoming vacancies. In accordance with the aim to have a balanced composition, the
Meeting of Shareholders in 2014. The Board is of the opinion that with these proposed appointments its composition continues to meet the requirements of the Supervisory Board profile.
Aegon’s Executive Board consists of two members. As a result gender diversity is not easy to achieve. Moreover, selection and appointment of members of the Executive Board is based on expertise, skills and relevant experience. The Supervisory Board will also consider gender diversity in view of the aim of balanced
Requirements Directive III and IV (CRD III and IV), and the
Remuneration Policy for Identified Staff. This included setting the 2013 targets, establishing the 2012 variable compensation amounts, the scenario analysis of pay-out levels under the
Executive Board Remuneration Policy, reviewing and/or approving the ex-ante assessments and ex-post assessments, any exemption requests under the remuneration policies and changes to the list of Identified Staff. In addition, the Committee discussed the results of reviews by De Nederlandsche Bank and the Internal Audit Department on the implementation process of the remuneration policies.
During the year, the Committee considered advice from independent external consultants on specific topics and ascertained that these consultants did not also advise the members of the Executive Board.
Committee and the Supervisory Board, signed by the members of the Executive Board and the Supervisory Board, and submitted for adoption to the shareholders. The Supervisory Board recommends that the shareholders adopt the annual accounts.
Finally, the Board thanks Aegon’s investors for their confidence and trust in Aegon.
Robert J. Routs (1946, Dutch) Chairman of the Supervisory Board Chairman of the Nominating Committee Member of the Compensation Committee Robert J. Routs is a former Executive Director for Downstream at the energy company Royal Dutch Shell. He was appointed to
Aegon’s Supervisory Board in 2008 and became Chairman in 2010. His current term as a member of the Aegon Supervisory
Board ends in 2016. Mr. Routs is also Chairman of the
Supervisory Board of Royal KPN N.V (membership ends in April 2014). He also sits on the Board of Directors at ATCO Ltd., A.P.
Board in 2004. His current and final term will end in 2016. Mr.
Kornelis J. Storm (1942, Dutch) Member of the Risk Committee Member of the Nominating Committee Kees J. Storm is former Chairman of the Executive Board of
as well as a non-executive member of the Boards of Reed
(not listed). He is adviser to the President and Chief Executive
Leo M. van Wijk (1946, Dutch) Chairman of the Compensation Committee Member of the Nominating Committee Leo M. van Wijk is former President and CEO of KLM Royal Dutch
Ajax N.V. as well as Chairman of the Governing Board of Skyteam.
Dona D. Young (1954, American) Member of the Audit Committee Member of the Risk Committee Dona Young is an executive/board consultant and retired
Board. The policies define specific terms and conditions for the employment of various groups of staff. In addition, all steps in the remuneration process, as well as the involvement of
Risk Management is involved in deciding which positions are qualified as Identified Staff. Furthermore, where exceptions to the policies are made to reflect local practices or regulations,
Risk Management and Compliance are involved to ensure such exceptions do not undermine effective risk management and sufficient mitigating measures are undertaken. Since 2011, in conjunction with Risk Management and Compliance, existing remuneration policies have been amended, including deferral and holding arrangements, payment in non-cash instruments, and specific ex-ante and ex-post measures.
Remuneration Framework (GRF). The GRF, which covers all staff of the Aegon Group, contains the guiding principles to support sound and effective remuneration policies and practices by ensuring consistency in remuneration policies and practices throughout the Aegon Group. The GRF is designed in accordance
Aegon endeavors to seek an appropriate balance of ex-ante and ex-post assessments to ensure effectiveness in both the shortand longer-term risk taking behavior of employees.
Supervisory Board is aimed at ensuring fair compensation, and protecting the independence of the Board´s members. Terms and conditions for members of the Supervisory Board are part of
Given the significant rise in the Supervisory Boards activities in combination with the results from a peer review amongst comparable Dutch and European companies, the General Meeting of Shareholders on May 15, 2013, approved amendments to the
Board’s Committees; �� An attendance fee for each Committee meeting attended in person or through video and/or telephone conference; �� An additional fee for attending meetings that require intercontinental travel between the Supervisory Board member's home location and the meeting location.
May 15, 2013, members of the Supervisory Board are entitled to the following fees: Base fee for membership of the Supevisory Board EUR / year Chairman 80,000
Compensation and Risk, may be found on pages 95 to 97.
Supervisory Board Remuneration Report 2013 Members of Aegon’s Supervisory Board received the following payments (in EUR) in 2013: in EUR 2013 2012
Not included in the table above is a premium for state health insurance paid on behalf of Dutch Supervisory Board members
Executive Board Remuneration Policy 2013 Executive Board remuneration The Executive Board of Aegon is remunerated on the basis of the principles described in Aegon’s GRF. Aegon’s remuneration policy for members of the Executive Board is derived from this
The Executive Board Remuneration Policy was prepared in accordance with the Dutch Corporate Governance Code and the Decree on Sound Remuneration Policy (Regeling beheerst beloningsbeleid WFt 2011-Rbb) by DNB. It was adopted at the
General Meeting of Shareholders on May 12, 2011. The Policy will remain in force until such time as the Supervisory Board proposes changes or amendments.
Review of the Remuneration Policy Aegon’s Executive Board Remuneration Policy is reviewed every year by the Compensation Committee. The policy applies to all members of Aegon’s Executive Board.
Ensuring pay remains competitive The company regularly compares its levels of executive remuneration with those at other, comparable companies.
Companies included in the peer group have been chosen according to the following criteria: �� Industry (preferably life insurance); �� Size (companies with similar assets, revenue and market capitalization); �� Geographic scope (preferably companies operating globally); �� Location (companies based in Europe).
Supervisory Board (Compensation Committee) has discussed and endorsed the 2013 total compensation for the Executive Board.
Executive Board members´ commitment to the company´s objectives and strengthens the Executive Board members´
commitment to the company´s business strategy, risk tolerance and long-term performance. Variable compensation is based on a number of individual and company performance indicators, regularly evaluated by experts in the company´s Finance, Risk,
Performance is assessed by Aegon´s Compensation Committee and validated by the full Supervisory Board.
Euronext Amsterdam stock exchange for the period December 15 through January 15. After the performance year, the company will assess the realized performance against the performance indicators and compare the minimum, target and maximum levels of the performance indicators with the realized performance.
The allocated variable compensation consists of equal parts of cash and shares, of which 40% will be paid out (or vest)
1 Based on VWAP December 15, 2012 - January 15, 2013.
Variable compensation 2013 Variable compensation is initially granted based on performance, as measured against Aegon group targets and personal objectives. These objectives represent a mix of financial and nonfinancial measures, providing an accurate and reliable reflection of corporate and individual performance. The mix of group measures versus personal performance measures is 75%-25%.
Group financial IFRS based 30% Group underlying earnings after tax, return on equity
Personal objectives 25% Individual basket of strategic and personal objectives related to Aegon's strategy
At an aggregate level, payments are made as follows: �� 50% of the maximum variable compensation if the threshold target is reached; �� 80% if the pre-determined performance targets are met; �� Up to 100% if the targets are exceeded.
Pension arrangements Members of Aegon’s Executive Board are offered pension arrangements and retirement benefits in line with local practices in their countries of residence and the provision of the same to executives at other multinational companies in those countries.
Mr. Button has been appointed after the new law on supervision
(‘Wet Bestuur en Toezicht’) came in to force in January 2013.
Aegon NV, rather than a contract of employment. Seperately, his employment by Transamerica Life Insurance continues, whilst he is seconded on an expatriate assignment to the Netherlands.
Members of the Executive Board may terminate their employment with a notice period of three months. If Aegon wishes to terminate the employment of a member of its
Executive Board Remuneration Report1 At the end of December 2013, Aegon’s Executive Board had two members: �� Alexander R. Wynaendts, Chief Executive Officer and
Executive Board for four years at the annual General Meeting of shareholders on May 15, 2013. Mr. Button succeeded
Fixed compensation The fixed compensation of the Executive Board members remained unchanged in 2013.
1 For complete disclosures on Executive Board Remuneration see pages 283 to 286.
Meeting of Shareholders on May 21, 2014, variable compensation for Executive Board members is set in cash and shares, based on both their individual and the company´s performance. Targets for the performance indicators have been set in line with the agreed variable compensation targets and 2013 company budgets. Actual performance is being measured over 2013. Under the Executive Board Remuneration Policy 2011, the variable compensation Executive Board members are entitled to will be paid out over a number of years.
Mr. Wynaendts and Mr. Button are eligible to receive in 2014 a cash payment of EUR 206,327 and
Mr. Wynaendts and 19,146 for Mr. Button. With regard to vested shares (with the exception of shares sold to meet income tax obligations), a retention (holding) period is applicable for a further three years, before they are at the disposal of the
No circumstances have been identified to lower payout of the deferred payment from prior performance years that vests in 2014 (the so called “ex post assessment”) or to lower the payout of the up-front payment of the 2013 performance year variable compensation that vests in 2014 (the so called
3 Mr. Button was appointed as CFO and member of Aegon’s Executive Board per May 15, 2013. Conditional variable compensation is disclosed for the period that Mr. Button has been part of the Executive Board.
4 Mr. Nooitgedagt’s conditional variable compensation is reflective of his time with Aegon till retirement as per August 1, 2013.
5 Mr. Nooitgedagt’s variable compensation is paid out as follows. 40% equally split in cash (EUR 86,792) and shares (17,650) both vesting in 2014.
The shareholders Listing and shareholder base Aegon’s common shares are listed on the stock exchanges in
Amsterdam and New York. Aegon has institutional and retail shareholders around the world. More than three-quarters of shareholders are located in Aegon’s three main markets, the
Netherlands, North America and the United Kingdom. Aegon’s largest shareholder is Vereniging Aegon, a Dutch association with a special purpose, to protect the broader interests of the company and its stakeholders.
General Meeting of Shareholders is to decide matters such as the adoption of annual accounts, the approval of dividend payments and (re) appointments to the Supervisory Board and Executive
This includes proxies submitted electronically. All shareholders wishing to take part must provide proof of their identity and shareholding, and must notify the company ahead of time of their intention to attend the meeting. Aegon also solicits proxies from New York registry shareholders in line with common practice in the United States.
Supervisory Board Aegon’s Supervisory Board oversees the management of the Executive Board, as well as the company’s business and corporate strategy. The Supervisory Board must take into account the interests of all Aegon stakeholders. The Supervisory
Board members are no longer eligible for appointment after the age of 70, unless the Supervisory Board decides to make an exception. Remuneration of the members of the Supervisory
2 For more details, please see Major Shareholders on page 307 to 309.
Committees The Supervisory Board also oversees the activities of several of its committees. These committees are composed exclusively of
Aegon’s Articles of Association determine that for certain decisions the Executive Board must seek prior approval from the
Officer, and Darryl Button, who is member of the Executive Board and Aegon’s Chief Financial Officer.
The number of Executive Board members and their terms of employment are determined by the company’s Supervisory Board.
Executive Board members are appointed by the General Meeting of Shareholders, following nomination by the Supervisory Board.
Executive Board contain provisions entitling them to severance payments, should their employment be terminated as a result of a merger or takeover. The company’s remuneration policy for the
Capital, significant shareholders and exercise of control As a publicly listed company, Aegon is required to provide the following detailed information regarding any structures or measures that may hinder or prevent a third party from acquiring the company or exercising effective control over it.
The financial rights attached to a common share B are onefortieth (1/40th) of the financial rights attached to a common share. The financial right attached to the shares of both classes are otherwise identical. For the purpose of issuance of shares, reduction of issued capital and the transfer of common shares B, the value or the price of a common share B will be determined as one-fortieth (1/40th ) of the value of a common share. For such purposes, no account will be taken of the difference between common shares and common shares B in terms of the proportion between financial rights and voting rights.
Significant shareholdings On December 31, 2013, Vereniging Aegon, Aegon’s largest shareholder, held a total of 292.687.444 common shares and 579.005.440 common shares B.
2 For further information, please see here under for the description of special control rights.
to keep or restore its total stake to 32.6% of the voting rights, irrespective of the circumstances which caused the total shareholding to be or become lower than 32.6%.
Cause, Vereniging Aegon will no longer be allowed to exercise more votes than is proportionate to the financial rights represented by its shares. This means that in the absence of a Special 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. In the event of a Special Cause Vereniging
Aegon may cast one vote for every common share and one vote for every common share B. A Special Cause may include: �� The acquisition by a third party of an interest in Aegon N.V.
amounting to 15% or more; �� A tender offer for Aegon N.V. shares; �� A proposed business combination by any person or group of persons, whether acting individually or as a group, other than in a transaction approved by the company’s Executive and
Based on its current shareholding, Vereniging Aegon would, for that limited period, command 32.6% of the votes at a General
Aegon has no knowledge of any agreement between shareholders that might restrict the transfer of shares or the voting rights pertaining to them.
Exercise of option rights Senior executives at Aegon companies and other employees have been granted share appreciation rights and share options.
For further details, please see note 14 of the notes to Aegon’s consolidated financial statements of this Annual Report. Under the terms of existing share plans Aegon cannot influence the exercise of granted rights.
Dutch Corporate Governance Code and supports its principles for sound and responsible corporate governance. Aegon regards the
CEO Alex Wynaendts contains more favorable severance payment terms should his employment be terminated as a result of a merger or takeover. The Board Agreement between mr Button and Aegon N.V. does not entitle him to any special terms under these circumstances. Should these occur he will repatriated to the USA, where equivalent employment will be sought. Details of
Executive Board members’ employment contracts may be found on Aegon’s corporate website, aegon.com.
Aegon’s position on Code IV.1.1 Aegon’s Articles of Association provide for a larger majority and a higher quorum than those advocated by the Code. Given that the company has no specific anti-takeover measures, the current system is deemed appropriate within the context of the 1983 Merger Agreement under which Aegon was formed.
Dutch company law is different from US law in the following respects: Aegon, like most large Dutch public companies, has a two-tier governance system involving an Executive Board and a Supervisory Board. The Executive Board is the executive body and its members are employed by the company1. Members of the Executive Board are appointed and dismissed by the General
States. The Remuneration Policy as regards the members of the Executive Board is adopted by the General Meeting of
Shareholders. The number of the Executive Board members and the terms of their employment are determined by the Supervisory
Aegon has in place a code of ethics, titled the Code of Conduct, which contains Aegon’s ethical principles in relation to various subjects. The Code of Conduct applies to Aegon employees worldwide, including Aegon’s Chief Executive Officer, Chief
Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Officer and Chief Financial Officer, of the effectiveness of the design and operation of Aegon's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on this evaluation,
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
December 31, 2013 and 2012, the related consolidated income statements, statements of comprehensive income, statements of changes in equity, and cash flow statements for each of the three years in the period ended December 31, 2013 of
Purchases of equity securities by the issuer and affiliated purchasers 347
EUR USD GBP CAD CNY PLN RON TRY UAH CZK HUF
Amounts in EUR million (except per share data) Note 2013 2012 1) 2011 1)
Income before share in profit / (loss) of joint ventures, associates and tax 950 1,903 909
Net income / (loss) attributable to: Equity holders of Aegon N.V. 846 1,581 884
Earnings per share (EUR per share) 19 Basic earnings per common share 0.29 0.70 (0.05)
Diluted earnings per common share B 0.01 - 1 Amounts for 2012 and 2011 have been restated for the changes in accounting policies IFRS 10, 11 and IAS 19. Refer to note 2 for details about these changes.
Items that will not be reclassified to profit or loss: Changes in revaluation reserve real estate held for own use (6) (5) 3
Income tax relating to items that will not be reclassified (201) 38 179
Movement in foreign currency translation and net foreign investment hedging reserves (784) (110) 380
Non-controlling interests (3) (1) 3 1 Amounts for 2012 and 2011 have been restated for the changes in accounting policies IFRS 10, 11 and IAS 19. Refer to note 2 for details about these changes.
Total equity and liabilities 353,621 364,884 343,776 1 Amounts for 2012 and January 1, 2012 have been restated for the changes in accounting policies IFRS 10, 11 and IAS 19. Refer to note 2 for details about these changes.
Movements in foreign currency translation and net foreign investment hedging reserves - - - 19 (803) - (784) - (784)
Income tax relating to items that may be reclassified - - 1,265 - 21 - 1,286 - 1,286
Total comprehensive income / (loss) for 2013 ­ 842 (3,075) 379 (732) ­ (2,585) (3) (2,588)
Share options and share-based incentive plans - 30 - - - (3) 27 - 27
Net income / (loss) recognized in the income statement - 1,581 - - - - 1,581 1 1,582
Items that may be reclassified subsequently to profit or loss: Gains / (losses) on revaluation of available-for-sale investments - - 4,176 - - - 4,176 4,176
(Gains) / losses transferred to income statement on disposal and impairment of available-
Income tax relating to items that may be reclassified - (6) (1,048) - 3 - (1,051) - (1,051)
Total other comprehensive income / (loss) ­ (25) 2,592 (106) (64) ­ 2,397 (2) 2,395
Cost of issuance of noncumulative subordinated notes (net of tax) - (10) - - - - (10) - (10)
At January 1, 2011 (as previously stated) 8,184 9,529 958 - (1,343) 1,500 4,704 23,532 11 23,543
Changes in accounting policies relating to IAS 192) - - - (547) - - - (547) - (547)
Remeasurements of defined benefit plans - - - (583) - - - (583) - (583)
(Gains) / losses transferred to income statement on disposal and impairment of available-for-sale investments - - (513) - - - - (513) - (513)
Changes in cash flow hedging reserve - - 1,058 - - - - 1,058 - 1,058
Income tax relating to items that may be reclassified - - (1,154) (12) - - (1,166) - (1,166)
Total other comprehensive income / (loss) ­ 4 2,506 (432) 379 ­ ­ 2,457 ­ 2,457
Share options and share-based incentive plans - - - - - - 16 16 - 16 1 Issued capital and reserves attributable to equity holders of Aegon N.V. 2 Amounts have been restated for the changes in accounting policy IAS 19. Refer to note 2 for details about these changes.
Insurance and investment liabilities for account of policyholders 18,787 10,801 (154)
Net purchase of investments for account of policyholders (1,395) 1,197 (1,577)
Cash flow movements on operating items not reflected in income (2,899) 2,279 6,609
Acquisition of subsidiaries, joint ventures and associates, net of cash (291) (23) (99)
Disposal of subsidiaries, joint ventures and associates, net of cash 811 276 823
Repayment of TRUPS 1), subordinated loans and borrowings (3,519) (3,737) (4,342)
Net cash and cash equivalents at the beginning of the year 9,497 7,717 5,174
Net cash and cash equivalents at the end of the year 31 5,652 9,497 7,826 1 Trust pass-through securities. 2 Included in net increase / (decrease) in cash and cash equivalents are interest received (2013: EUR 6,731 million , 2012: EUR 8,091 million, 2011 and
3 Amounts for 2012 and 2011 have been restated for the changes in accounting policies IFRS 10, 11 and IAS 19. Refer to note 2 for details about these changes.
Aegon N.V. serves as the holding company for the Aegon Group and has listings of its common shares in Amsterdam and New York.
Aegon N.V. (or 'The company') and its subsidiaries ('Aegon' or 'The Group') have life insurance and pensions operations in over twenty countries in the Americas, Europe and Asia and are also active in savings and asset management operations, accident and health insurance, general insurance and to a limited extent banking operations. Headquarters are located in The Hague, the Netherlands.
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. Certain amounts in prior years have been reclassified to conform to the current year presentation. These reclassifications had no effect on net income, shareholders’ equity or earnings per share.
The consolidated financial statements of Aegon N.V. were approved by the Executive Board and by the Supervisory Board on March 19, 2014. The financial statements are put to the Annual General Meeting of Shareholders on May 21, 2014 for adoption.
Notes to the consolidated financial statements of Aegon N.V. Note 2 2.1.1 Adoption of new IFRS accounting standards Aegon adopted new and amended standards that require restatement of previous financial statements. These include IFRS 10
Statements”. Application of IFRS 13 “Fair Value Measurement” is required prospectively as of the beginning of the annual reporting period.
The nature and the impact of each new standard/amendment that has been applied for the first time in 2013 is described below: IFRS 7 Financial Instruments: Disclosures – Offsetting Financial Assets and Financial Liabilities
IFRS 10 replaces all the guidance on control and consolidation in IAS 27, “Consolidated and Separate Financial Statements”, and
SIC-12, “Consolidation – Special Purpose Entities”. The application of this new standard impacted the financial position of Aegon by consolidating one securitization vehicle that was previously not consolidated. In addition, for several investment funds the consolidation conclusion has been evaluated which resulted in changes compared to previous years (note 3). The impact of the adoption of IFRS 10 on the financial position of Aegon is described in note 2.1.2. For the corresponding accounting policy refer to note 2.2.
Venturers”. IFRS 11 removes the option to account for joint arrangements using proportionate consolidation. Instead, joint arrangements that meet the definition of a joint venture under IFRS 11 must be accounted for using the equity method. Aegon has assessed the nature of its joint arrangements and determined them to be joint ventures. Therefore Aegon has changed its accounting treatment for joint ventures from proportionate consolidation to equity accounting. The impact of the adoption of IFRS 11 on the financial position of Aegon is described in note 2.1.2. For the corresponding accounting policy refer to note 2.10.
IFRS 13 establishes a single source of guidance under IFRS for all fair value measurements. IFRS 13 provides guidance on how to measure fair value under IFRS when fair value is required or permitted. The application of IFRS 13 has not impacted the fair value measurements carried out by the Group, which is described in note 3. IFRS 13 requires specific disclosures on fair values, some of which replace existing disclosure requirements in other standards, including IFRS 7 Financial Instruments: Disclosures. In accordance with the transitional provisions of IFRS 13, comparatives are not presented. Aegon provides these disclosures in note 3.
IAS 1 Financial Statement Presentation – Presentation of Items of Other Comprehensive Income
The amendments streamline the presentation of changes in assets and liabilities arising from defined benefit plans, including requiring remeasurements to be presented in other comprehensive income, to immediately recognize all past service costs and to replace interest cost and expected return on plan assets with a net interest amount that is calculated by applying the discount rate to the net defined benefit liability (asset). Aegon has used the “corridor method” in previous years, therefore upon adoption of IAS 19 the actuarial gains and losses are recognized and included in the defined benefit plan. Further details on the impact of the adoption of the revised IAS 19 on the financial position of Aegon are described in note 2.1.2. For the corresponding accounting policy refer to note 2.22.
Interest charges and related fees 467 52 - 519 491 - 491
Share in net result of joint ventures - (13) - (13) - - -
Share in net result of associates 26 2 - 28 29 - 29
Coupons on other equity instruments (195) - - (195) (177) - (177)
Weighted average number of common shares outstanding (in million) 1,907 - - 1,907 1,852 - 1,852
Impact of changes in accounting policies on the consolidated statement of comprehensive income
Movement in foreign currency translation and net foreign investment hedging reserves (116) - 6 (110) 409 (29) 380
Other comprehensive income for the period (1) (1) - (2) 4 4
Impact of changes in accounting policies on the consolidated statement of financial position
Issued capital and reserves attributable to equity holders of Aegon N.V. 29,687 (154) (1,027) 28,506 25,720 (122) (964) 24,634
Insurance contracts for account of policyholders 76,871 (702) - 76,169 73,425 (866) - 72,559
Impact of changes in accounting policies on the statement of changes in equity
Impact of changes in accounting policies on the consolidated cash flow statement
Release of cash flow hedging reserve (62) - - (62) (18) - (18)
Adjustments of non­cash items (11,537) (53) (149) (11,739) 2,136 (583) 1,553
Purchase of investments (other than money market investments) (32,464) 446 - (32,018) (29,612) - (29,612)
Net purchase of investments for account of policyholders 960 237 - 1,197 (1,577) - (1,577)
Net cash flows from operating activities (966) (31) ­ (997) 2,266 ­ 2,266 Purchase of individual intangible assets (other than VOBA and
Purchase of equipment and real estate for own use (65) 2 - (63) (72) - (72)
Acquisition of subsidiaries and associates, net of cash (126) 103 - (23) (99) - (99)
Net cash flows from investing activities 71 166 ­ 237 653 ­ 653
Issuance of non-cumulative subordinated notes 271 - - 271 - - -
Proceeds from TRUPS, subordinated loans and borrowings 6,693 (240) - 6,453 5,627 - 5,627
Repurchase of convertible core capital securities - - - - (1,500) - (1,500)
Net cash flows from financing activities 2,602 (91) ­ 2,511 (374) ­ (374)
Net increase / (decrease) in cash and cash equivalents 1,707 44 ­ 1,751 2,545 ­ 2,545
Net cash and cash equivalents at the beginning of the year 7,826 (109) - 7,717 5,174 - 5,174
Effects of changes in exchange rate 27 2 - 29 107 - 107
Net cash and cash equivalents at the end of the year 9,560 (63) ­ 9,497 7,826 ­ 7,826
Net cash and cash equivalents 9,560 (63) ­ 9,497 7,826 ­ 7,826
IASB made a narrow-scope amendment to IAS 39 to permit the continuation of hedge accounting in certain circumstances in which the counterparty to a hedging instrument changes in order to achieve clearing for that instrument. The amendment is to be applied retrospectively with effective date January 1, 2014. Aegon expects that the amendment does not result in any changes to the classification, measurement or presentation of any items in the financial statements.
Aegon has applied the new policy for consolidated financial statements on or after January 1, 2012. In accordance with the transitional provisions of IFRS 10, if control in a former subsidiary was lost before January 1, 2013, Aegon has not restated the carrying amount of
On consolidation of an investment fund, a liability is recognized to the extent that the Group is legally obliged to buy back participations held by third parties. The liability is presented in the consolidated financial statements as investment contracts for account of policyholders. Where this is not the case, other participations held by third parties are presented as non-controlling interests in equity. The assets allocated to participations held by third parties or by the Group on behalf of policyholders are presented in the consolidated financial statements as investments for account of policyholders.
b. Joint arrangements In general, joint arrangements are contractual agreements whereby the Group undertakes with other parties an economic activity that is subject to joint control. Joint control exists when it is contractually agreed to share control of an economic activity. Joint control exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control.
Aegon has applied the new policy for interests in joint ventures occurring on or after January 1, 2012, in accordance with the transitional provisions of IFRS 11. The Group recognized its investment in joint ventures at January 1, 2012, as the total of the carrying amounts of the assets and liabilities previously proportionately consolidated by the Group. This is the deemed cost of the Group’s investments in joint ventures for applying the equity method of accounting. In accordance with the transitional provisions of IFRS 11, comparative numbers of 2011 are not restated.
The effects of the change in accounting policies on the financial position, comprehensive income, the cash flows and statement of changes in equity of the group at January 1, 2012 and December 31, 2012 are included in note 2.1.2.
2.4 Segment reporting Aegon’s operating segments are based on the businesses as presented in internal reports that are regularly reviewed by the Executive
Board which is regarded as the “chief operating decision maker”. The operating segments are: �� Aegon Americas: Covers business units in the United States, Canada, Mexico and Brazil, including any of the units’ activities located outside these countries.
�� Aegon the Netherlands: Covers businesses operating in the Netherlands. �� Aegon United Kingdom: Covers businesses operating in the United Kingdom.
2.5 Offsetting of assets and liabilities Financial assets and liabilities are offset in the statement of financial position when the Group has a legally enforceable right to offset and has the intention to settle the asset and liability on a net basis or simultaneously.
b. Value of business acquired When a portfolio of insurance contracts is acquired, whether directly from another insurance company or as part of a business combination, the difference between the fair value and the carrying amount of the insurance liabilities is recognized as value of business acquired (VOBA). The Group also recognizes VOBA when it acquires a portfolio of investment contracts with discretionary participation features.
VOBA is amortized over the useful life of the acquired contracts, based on either the expected future premiums or the expected gross profit margins. The amortization period and pattern are reviewed at each reporting date; any change in estimates is recorded in the income statement. For all products, VOBA, in conjunction with DPAC where appropriate, is assessed for recoverability at least annually on a country-by-country basis and the portion determined not to be recoverable is charged to the income statement. VOBA is considered in the liability adequacy test for each reporting period.
Software and other intangible assets are carried at cost less accumulated depreciation and impairment losses. Depreciation of the asset is over its useful life as the future economic benefits emerge and is recognized in the income statement as an expense.
An intangible asset is derecognized when it is disposed of or when no future economic benefits are expected from its use or disposal.
2.7 Investments Investments comprise financial assets, excluding derivatives, as well as investments in real estate.
Embedded derivatives that transfer significant insurance risk are accounted for as insurance contracts.
ventures net income is recognized as a separate line item in the consolidated income statement. The Group’s share in losses is recognized until the investment in the joint ventures' equity and any other long-term interest that are part of the net investment are reduced to nil, unless guarantees exist.
2.12 Reinsurance assets Reinsurance contracts are contracts entered into by the Group in order to receive compensation for losses on contracts written by the Group (outgoing reinsurance). For contracts transferring sufficient insurance risk, a reinsurance asset is recognized for the expected future benefits, less expected future reinsurance premiums. Reinsurance contracts with insufficient insurance risk transfer are accounted for as investment or service contracts, depending on the nature of the agreement.
Reinsurance premiums are accounted for in the same way as the original contracts for which the reinsurance was concluded.
Notes to the consolidated financial statements of Aegon N.V. Note 2 2.13 Deferred expenses a. Deferred policy acquisition costs ('DPAC') DPAC relates to all insurance contracts and investment contracts with discretionary participation features and represents mainly the variable costs that are related to the acquisition or renewal of these contracts.
b. Deferred cost of reinsurance A deferred cost of reinsurance is established when Aegon enters into a reinsurance transaction. Aegon is not relieved of its legal liabilities, so the reserves relating to the underlying reinsured contracts will continue to be reported on the consolidated statement of financial position during the run-off period of the underlying business.
2.14 Other assets and receivables Other assets include trade and other receivables, prepaid expenses, equipment and real estate held for own use. Trade and other receivables are initially recognized at fair value and are subsequently measured at amortized cost. Equipment is initially carried at cost, depreciated on a straight line basis over its useful life to its residual value and is subject to impairment testing. The accounting for real estate held for own use is described in note 2.7.
2.15 Cash and cash equivalents Cash comprises cash at banks and in-hand. Cash equivalents are short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known cash amounts, are subject to insignificant risks of changes in value and are held for the purpose of meeting short-term cash requirements. Money market investments that are held for investment purposes (backing
insurance liabilities, investment liabilities or equity based on asset liability management considerations) are not included in cash and cash equivalents but are presented as investment or investment for account of policyholders.
Notes to the consolidated financial statements of Aegon N.V. Note 2 c. Impairment of equity instruments For equity instruments, a significant or prolonged decline in fair value below initial cost is considered objective evidence of impairment and always results in a loss being recognized in the income statement. Significant or prolonged decline is defined as an unrealized loss position for generally more than six months or a fair value of less than 80% of the cost price of the investment. Equity investments are impaired to the asset’s fair value and any unrealized gain or loss previously recognized in shareholders’ equity is taken to the income statement as an impairment loss. The amount exceeding the balance of previously recognized unrealized gains or losses is recognized in the income statement.
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 pass­through securities, subordinated borrowings and other 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.
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, with certain modifications allowed by IFRS
4 for standards effective subsequent to adoption. Aegon applies non-uniform accounting policies for insurance liabilities and related deferred policy acquisition costs and 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 specific product features in these local markets. At the time of IFRS adoption, Aegon was applying US GAAP for its
United States operations whereas in the Netherlands and the United Kingdom, Aegon was applying Dutch Accounting Principles. Since adoption of IFRS, Aegon has considered new and amended standards in those GAAP’s which have become effective subsequent to the date of transition to IFRS.
Some products, such as traditional life insurance products in continental Europe and products in the United States, for which account terms are fixed and guaranteed, are measured using the net premium method. The liability is determined as the sum of the discounted value of the expected benefits and future administration expenses directly related to the contract, less the discounted value of the expected theoretical premiums that would be required to meet the future cash outflows based on the valuation assumptions used. The liability is either based on current assumptions or calculated using the assumptions established at the time the contract was issued, in which case a margin for risk and adverse deviation is generally included. A separate reserve for longevity may be established and included in the measurement of the liability. Furthermore, the liability for life insurance comprises reserves for unearned premiums and accrued annuity benefits payable.
The liability for outstanding claims and benefits is established for claims that have not been settled and any related cash flows, such as claims handling costs. It includes claims that have been incurred but have not been reported to the Group. The liability is calculated at the reporting date using statistical methods based on empirical data and current assumptions that may include a margin for adverse deviation. Liabilities for claims subject to periodic payment are calculated using actuarial methods consistent with those applied to life insurance contracts. Discounting is applied if allowed by the local accounting principles used to measure the insurance liabilities.
Notes to the consolidated financial statements of Aegon N.V. Note 2 a. Investment contracts with discretionary participation features Some investment contracts have participation features whereby the policyholder has the right to receive potentially significant additional benefits which are based on the performance of a specified pool of investment contracts, specific investments held by the Group or on the issuer’s net income. If the Group has discretion over the amount or timing of the distribution of the returns to policyholders, the investment contract liability is measured based on the accounting principles that apply to insurance contracts with similar features.
Investment contracts without discretionary participation features are carried at amortized cost based on the expected cash flows and using the effective interest rate method. The expected future cash flows are re-estimated at each reporting date and the carrying amount of the financial liability is recalculated as the present value of estimated future cash flows using the financial liability’s original effective interest rate. Any adjustment is immediately recognized in the income statement.
The amount recognized as a provision is the best estimate of the expenditure required to settle the present obligation at the balance sheet date, considering all its inherent risks and uncertainties, as well as the time value of money. The unwinding of the effect of discounting is recorded in the income statement as an interest expense.
The contribution payable to a defined contribution plan for services provided is recognized as an expense in the income statement.
An asset is recognized to the extent that the contribution paid exceeds the amount due for services provided.
Under the revised IAS 19, the cost of the 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; Remeasurements of the net defined benefit liability (asset) which is recognized in other comprehensive income are revisited quarterly.
Any employee contributions are deducted from the current year service cost. Net interest on the net defined benefit liability (asset)
Notes to the consolidated financial statements of Aegon N.V. Note 2 defined benefit liability (asset) comprises interest income on plan assets and interest cost on the defined benefit obligation. Whereby interest income on plan assets is a component of the return on plan assets and is determined by multiplying the fair value of the plan assets by the applicable discount rate. The difference between the interest income on plan assets and the actual return on plan assets is included in the remeasurement of the net defined benefit liability (asset).
Prior to January 1, 2013, gains or losses on the curtailment or settlement of a defined benefit plan included any related actuarial gains and losses and past service cost that had not previously been recognized. Under the revised IAS 19 the gain or loss on a curtailment or settlement is the difference between: �� The present value of the defined benefit obligation being settled, as determined on the date of settlement; and �� The settlement price, including any plan assets transferred and any payments made directly by Aegon in connection with the settlement.
The effects of the change in accounting policies on the financial position, comprehensive income, and changes in equity of the Group are summarized in note 2.1.2.
2.24 Tax assets and liabilities a. Current tax assets and liabilities
Deferred tax assets and liabilities are recognized for the estimated future tax effects of temporary differences between the carrying value of an item and its tax value, with the exception of differences arising from the initial recognition of goodwill and of assets and liabilities that do not impact taxable or accounting profits. A tax asset is recognized for tax loss carryforwards to the extent that it is
Deferred tax assets and liabilities are reviewed at the balance sheet date and are measured at tax rates that are expected to apply when the asset is realized or the liability is settled. The carrying amount is not discounted and reflects the Group’s expectations concerning the manner of recovery or settlement.
Net fair value change of general account financial investments at fair value through profit or loss, other than 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 are offset by the fair value movements of the hedged item, and the resulting hedge ineffectiveness, if any, is included in this line. In addition, the fair value movements of bifurcated embedded derivatives are included in this line.
2.31 Impairment charges/(reversals) Impairment charges and reversals include impairments and reversals on investments in financial assets, impairments and reversals on the valuation of insurance assets and liabilities and other non-financial assets and receivables. Refer to note 15.
2.35 Future adoption of voluntary changes in accounting policies Aegon will make voluntary changes in accounting policies, effective January 1, 2014 which will be applied retrospectively for all periods presented. Changes to these policies relate to deferred policy acquisition costs and how Aegon accounts for longevity assumptions in the Netherlands. In the paragraphs below, details are provided for these changes in accounting policies.
Thus, in developing the new policy, Aegon considered and sought alignment with the proposed description of deferrable policy acquisition costs within the IFRS Insurance Contracts Phase II exposure draft (Exposure Draft). In the absence of detailed guidance in the Exposure Draft, Aegon also considered the recently adopted guidance in U.S. GAAP (ASU 2010-26 “Accounting for Costs
Under the new accounting policy, deferred policy acquisition costs include costs that are directly attributable to the acquisition or renewal of insurance contracts. The previous accounting policy was based on a broader definition of costs that could be deferred.
The adoption of the new accounting policy for deferred policy acquisition costs is expected to decrease shareholders' equity at the date of adoption (January 1, 2014), by between EUR 1.4 and 1.6 billion. The company estimates that this accounting change will reduce net income by approximately EUR 85 million, EUR 65 million and EUR 60 million for the years 2013, 2012 and 2011 respectively, as certain expenses are no longer deferrable and are directly accounted for in the income statement.
Mortality tables will be updated annually based on the prospective tables taking into account longevity trends. The new methodology will take into account the contractual cash flows related to the longevity risk assumed. Previously the methodology applied by Aegon the Netherlands only considered realized mortalities based on observed mortality tables.
The company estimates that this change will increase net income by approximately EUR 180 million, EUR 150 million and
In addition, certain acquisition costs related to the sale of new policies and the purchase of policies already in force are recorded as
Surrender rates depend on product features, policy duration and external circumstances such as the interest rate environment and competitor and policyholder behavior. For policies with account value guarantees based on equity market movements, a dynamic lapse assumption is utilized to reflect policyholder behavior based on whether the guarantee is in the money. Own experience, as well as industry published data, are used in establishing assumptions. Lapse experience is correlated to mortality and morbidity levels, as higher or lower levels of surrenders may indicate future claims will be higher or lower than anticipated. Such correlations are accounted for in the mortality and morbidity assumptions based on the emerging analysis of experience.
In the third quarter of 2013, to reflect the low interest rate environment, Aegon lowered its long-term assumption for 10-year
US Treasury yields by 50 basis points to 4.25% and extended the uniform grading period from 5 years to 10 years. Aegon also changed its assumed returns for US separate account bond fund to 4% over the next 10 years and 6% thereafter from its previous assumptions of 4% over the next 5 years and 6% thereafter. In addition, Aegon changed its long-term equity market return assumption for the estimated gross profit in variable life and variable annuity products in the Americas from 9% to 8%. In total, these assumption changes led to a negative impact on earnings of EUR 405 million in the third quarter of 2013. Both the assumptions for the bond fund and that for the long-term equity market are gross assumptions from which asset management and policy fees are deducted to determine the policyholder return. The 90-day Treasury yield is 0.07% at December 31, 2013 and is assumed to remain level for the next two years followed by an eight year grade to 2.5%. On a quarterly basis, the estimated gross profits are updated for the difference between the estimated equity market return and the actual return.
In 2012, Aegon kept its long-term equity market return assumption for the estimated gross profits on variable life and variable annuity products in the Americas at 9% (2011: 9%). The 90-day Treasury yield was 0.05% at December 31, 2012 and was assumed to remain level for the next two years followed by a three year grade to 3%. Aegon’s assumptions on the long term credit spread or default assumptions, remained unchanged in 2012.
In 2011, to reflect the low interest rate environment, Aegon lowered its long-term assumption for 10-year US treasury yields by 50 basis points to 4.75% (graded uniformly over the next five years) and lowered the 90-day treasury yield to 0.02% for the next two years followed by a three year grade to 3%. In addition, Aegon lowered its assumed return for US separate account bond fund returns by 200 basis points to 4% over the next five years, followed by a return of 6% thereafter.
For the fixed annuities and fixed universal life insurance products, the estimated gross profits (“EGP”) calculations include a net interest rate margin, which Aegon assumes will remain practically stable under any reasonably likely interest-rate scenario.
Determination of having control over investees In making the determination whether Aegon controls an investee, Aegon analyses whether it has power over the investee (existing rights that give it the current ability to direct the relevant activities). The outcome of this analysis depends on the following criteria: �� Purpose and design of the investee; �� What are the relevant activities (that drive the investee’s returns) and how decisions about them are taken; and �� Whether rights of the investor give current ability to direct the relevant activities.
In specific cases, which are described below, Aegon applied judgment involving the criteria for consolidation to come to the conclusion whether Aegon controls an investee.
Investment vehicle An investment vehicle is considered to be any vehicle (fund) whose primary objective is investing and managing its assets with a view to generate returns. For the purpose of determining whether Aegon controls an investment vehicle and whether Aegon is an agent or a principal, the following has been analyzed: �� The scope of its decision-making authority over the investee; �� The rights held by other parties; �� The remuneration to which it is entitled in accordance with the remuneration agreement; and �� The decision maker’s exposure to variability of returns from other interests that it holds in the investee.
Investment funds managed by the Group in which the Group holds an interest are consolidated in the financial statements if the Group has power over that investment fund and it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. In assessing control, all interests held by the Group in the fund are considered, regardless of whether the financial risk related to the investment is borne by the Group or by the policyholders (unless the fund meets the definition of a deemed separate entity or under strict facts and circumstances a direct link between the policyholder and the fund can be assumed).
10 resulted in a change in consolidation conclusion for a structured entity, as Aegon concluded it has control over that structured entity. Aegon has been involved in the design of certain mortgage backed securitization deals and Aegon also has the ability to use its power to affect the amount of the investee’s returns. Furthermore, Aegon fully services the investees and can therefore influence the defaults of the mortgage portfolios. In addition, for several of these securitization deals the majority of risks are maintained by
Aegon. These factors contributed to the conclusion that Aegon has control. Restatements due to the implementation of IFRS 10 are disclosed in note 2.1.2.
could result in a different estimate of fair value at the reporting date.
Valuation techniques are used when Aegon determines the market is inactive or quoted market prices are not available for the asset or liability at the measurement date. However, the fair value measurement objective remains the same, that is, to estimate the price
Periodically, Aegon performs an analysis of the inputs obtained from third-party pricing services and brokers to ensure that the inputs are reasonable and produce a reasonable estimate of fair value. Aegon’s asset specialists and investment valuation specialists consider both qualitative and quantitative factors as part of this analysis. Several examples of analytical procedures performed include, but are not limited to, recent transactional activity for similar debt securities, review of pricing statistics and trends and consideration of recent relevant market events. Other controls and procedures over pricing received from indices, third-party pricing services, or brokers include validation checks such as exception reports which highlight significant price changes, stale prices or un-priced securities. Additionally,
Aegon’s portfolio of private placement securities (held at fair value under the classification of available-for-sale or fair value through profit or loss) is valued using a matrix pricing methodology. The pricing matrix is obtained from a third-party service provider and indicates current spreads for securities based on weighted average life, credit rating, and industry sector. Each month, Aegon’s asset specialists review the matrix to ensure the spreads are reasonable by comparing them to observed spreads for similar bonds traded in the market. Other inputs to the valuation include coupon rate, the current interest rate curve used for discounting and an illiquidity premium to account for the illiquid nature of these securities. The illiquidity premiums are determined based upon the pricing of recent transactions in the private placements market; comparing the value of the privately offered security to a similar public security.
When available, Aegon uses quoted market prices in active markets to determine the fair value of its sovereign debt investments. When
Aegon cannot make use of quoted market prices, market prices from indices or quotes from third-party pricing services or brokers are used.
Tax credit investments The fair value of tax credit investments is determined by using a discounted cash flow valuation technique. This valuation technique takes into consideration projections of future capital contributions and distributions, as well as future tax credits and the tax benefits of future operating losses. The present value of these cash flows is calculated by applying a discount rate. In general, the discount rate is determined based on the cash outflows for the investments and the cash inflows from the tax credits/tax benefits (and the timing of those cash flows). These inputs are unobservable in the market place.
Notes to the consolidated financial statements of Aegon N.V. Note 3
credit spread, expected market rates of return, equity and interest rate volatility, correlations of market returns, discount rates and actuarial assumptions. The most significant unobservable factor is credit spread.
The expected returns are based on risk-free rates. Aegon added a premium to reflect the credit spread as required. The credit spread is set by using the Credit default swap (CDS) spreads of a reference portfolio of life insurance companies (including Aegon), adjusted to reflect the subordination of senior debt holders at the holding company level to the position of policyholders at the operating company level (who have priority in payments to other creditors). Aegon’s assumptions are set by region to reflect differences in the valuation of the guarantee embedded in the insurance contracts.
The expected returns are based on risk-free rates, such as the current London Inter-Bank Offered Rate (LIBOR) swap rates and associated forward rates or the current rates on local government bonds. Market volatility assumptions for each underlying index are based on observed market implied volatility data and/or observed market performance. Correlations of market returns for various underlying indices are based on observed market returns and their inter-relationships over a number of years preceding the valuation date. Current risk-free spot rates are used to determine the present value of expected future cash flows produced in the stochastic projection process.
Trust pass-through securities, subordinated borrowings and other borrowings Trust pass-through securities, subordinated borrowings and other 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 is used.
Liabilities carried at fair value Investment contracts for account of policyholders 12,872 19,641 114 32,628
Total liabilities at fair value 13,413 30,524 1,545 45,482 1 The investments for account of policyholders included in the table above represents those investments carried at fair value through profit or loss. 2 Total borrowings on the statement of financial position contain borrowings carried at amortized cost that are not included in the above schedule.
Significant transfers between Level I and II Aegon’s policy is to record transfers of assets and liabilities between Level I and Level II at their fair values as of the beginning of each reporting period. During 2013, the amount of assets transferred from Level I to Level II classification was EUR 2 million. During 2013, the amount of assets and liabilities transferred from Level II to Level I classification was EUR 473 million. Transfers are identified based on transaction volume and frequency which are indicative of an active market.
The table below shows transfers between Level I and Level II for assets recorded at fair value on a recurring basis during 2013: Total 2013
Fair value through profit or loss Investments for account of policyholders - 263
There were no transfers between Level I and Level II for liabilities recorded at fair value on a recurring basis during 2013.
Movements in Level III financial instruments measured at fair value The following table summarizes the change of all assets and liabilities measured at estimated fair value on a recurring basis using significant unobservable inputs (Level III), including realized and unrealized gains (losses) of all assets and liabilities and unrealized gains (losses) of all assets and liabilities still held at the end of the respective period.
Investments in real estate for policyholders 1,008 (12) - 205 (180) - (25) - - 996 (12)
Real estate held for own use 305 (2) (5) (2) (1) - (7) - - 287 (2)
Liabilities carried at fair value Investment contracts for account of policyholders (109) (20) - (3) 13 - 5 - - (114) (19)
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. 2 Total gains and losses are recorded in line items: Gains/(losses) on revaluation of available-for-sale investments, (Gains)/losses transferred to the income statement on disposal and impairment of available-for-sale investment and Changes in revaluation reser real estate held for own use of the statement of other comprehensive income.
Aegon’s policy is to record transfers of assets and liabilities between Level I, Level II and Level III at their fair values as of the beginning of each reporting period. During 2013, Aegon transferred certain financial instruments from Levels I and 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. Prior to transfer, the fair value for the Level I and Level II securities was determined using observable market transactions or corroborated broker quotes respectively for the same or similar instruments. Since the transfer, all such assets have been valued using valuation models incorporating significant non market-observable inputs or uncorroborated broker quotes.
Similarly, during 2013, Aegon transferred certain financial instruments from Level III to other levels of the fair value hierarchy.
Assets carried at fair value Available­for­sale investments Shares 203 Broker quote n.a. n.a.
7 Other n.a. n.a. ABS 202 Discounted cash flow Discount rate 3% - 8% (6.62%)
Fair value through profit or loss Debt securities 17 Other n.a. n.a.
Longevity swap 128 Discounted cash flow Mortality n.a. Other 124 Other n.a. n.a.
Real estate Investments in real estate 595 Direct capitalization technique Capitalization rate 4.50% - 11.50% (7.3%)
Liabilities carried at fair value Derivatives Embedded derivatives in insurance contracts 1,213 Discounted cash flow Credit spread 0.50% Other 218 Other n.a. n.a.
The impact of changes in inputs may not be independent, therefore the descriptions provided below indicate the impact of a change in an input in isolation.
Increasing or decreasing the liquidity premium respectively decreases or increases the value of the investment. Aegon adjusted the discount rate with 100 basis points up or down for this input.
b. For corporate bonds the most significant unobservable input for the valuation of these securities is the credit spread. An increase in credit spread results in a lower valuation, while a decrease in credit spread results in a higher valuation. Aegon adjusted the discount rate by 50 basis points up or down for this input.
Assets Mortgage loans - held at amortized cost 29,245 - 2 32,867 32,869
Certain financial instruments that are not carried at fair value are carried at amounts that approximate fair value, due to their shortterm nature and generally negligible credit risk. These instruments include cash and cash equivalents, short-term receivables and accrued interest receivable, short-term liabilities, and accrued liabilities. These instruments are not included in the table above.
Debt securities Aegon regularly monitors industry sectors and individual debt securities for evidence of impairment. This evidence may include one or more of the following: 1) deteriorating market to book ratio, 2) increasing industry risk factors, 3) deteriorating financial condition of the issuer, 4) covenant violations, 5) high probability of bankruptcy of the issuer or 6) recognized credit rating agency downgrades.
Additionally, for ABS, cash flow trends and underlying levels of collateral are monitored.
Significant or prolonged decline is defined as an unrealized loss position for more than six months or a fair value of less than 80%
of the original cost price of the investment. Additionally, as part of an ongoing process, the equity analysts actively monitor earnings releases, company fundamentals, new developments and industry trends for any signs of possible impairment. If an available-for-sale equity security is impaired based upon Aegon’s qualitative or quantitative impairment criteria, any further declines in the fair value at subsequent reporting dates are recognized as impairments. Therefore, at each reporting period, for an equity security that is determined to be impaired based upon Aegon’s impairment criteria, an impairment is recognized for the difference between the fair value and the original cost basis, less any previously recognized impairments.
Since there is no absolute assurance that these assets will ultimately be realized, management reviews Aegon’s deferred tax positions periodically to determine if it is probable that the assets will be realized. Periodic reviews include, among other things, the nature and amount of the taxable income and deductible expenses, the expected timing when certain assets will be used or liabilities will be required to be reported and the reliability of historical profitability of businesses expected to provide future earnings. Furthermore, management considers tax-planning strategies it can utilize to increase the likelihood that the tax assets will be realized. These strategies are also considered in the periodic reviews.
Recognition of provisions Provisions are established when it is probable that a past event has given rise to a present obligation or loss, the settlement of the obligation will probably lead to an outflow of resources embodying economic benefits and the amount can be reasonably estimated. Management exercises judgment in evaluating the probability that a loss will be incurred. The estimate of the amount of a loss requires management judgment in the selection of a proper calculation model and the specific assumptions related to the particular exposure.
4 Financial and insurance risks General As an insurance group, Aegon is in the “business of risk” and as a result is exposed to a variety of risks. A description of Aegon’s risk management and control systems is given below on the basis of significant identified risks for the company. Some risks, such as currency translation risk, are related to the international nature of Aegon’s business. Other risks include insurance related risks, such as changes in mortality and morbidity. However, Aegon’s largest exposures are to changes in financial markets (e.g. interest rate, credit and equity market risks) that affect the value of the investments, liabilities from products that Aegon sells, deferred expenses and value of business acquired.
A risk tolerance framework is in place which sets risk limits per risk type and which promotes diversification across risk types. �� Concentration per counterparty: Risk exposure are measured and risk limits are in place per counterparty as part of the Counterparty
Currency exchange rate risk As an international group, Aegon is subject to foreign currency translation risk. Foreign currency exposure exists 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 non-euro units and, as a result, earnings may fluctuate due to currency translation. As Aegon has significant business segments in the Americas and in the United Kingdom, the principal sources of exposure from currency fluctuations are from the differences between the US dollar and the euro and between the UK pound and the euro. Aegon may experience significant changes in net income and shareholders’
Information on Aegon’s 3-year historical net income / (loss) and shareholders’ equity in functional currency are shown in the table below: Net income Americas (in USD) 592 1,357 907
The exchange rates for US dollar and UK pound per euro for each of the last five year-ends are set forth in the table below: Aegon Group companies’ foreign currency exposure from monetary assets and liabilities denominated in foreign currencies is not material.
Decrease by 15% of non-euro currencies relative to the euro (61) (1,950)
Decrease by 15% of non-euro currencies relative to the euro (193) (2,621) 1 The effect of currency exchange movements is reflected as a one-time shift up or down in the value of the non-euro currencies relative to the euro on
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 51 and note 52 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 29,245 1,717 - 1,810 39,447 - 2 42,976 14,442 711
Private loans - carried at amortized cost 1,012 - - - - - - - - 1,012
Other loans - carried at amortized cost 2,350 - - - - - 2,073 2,073 1,324 1,601
Several bonds in Aegon USA’s portfolio are insured by monoline insurers. Further information on the monoline insurers is provided in section “ Additional information on credit risk, unrealized losses and impairments”.