Individual and group life insurance, pension products, asset management, mutual funds, third party pension scheme administration, financial advice
Independent agents and agent-employees, marketing companies, financial institutions, broker-dealers, wirehouses, affinity groups, direct response, worksite marketing, institutional intermediaries www.aegonins.com www.transamerica.com
Traditional, universal and term life insurance, segregated funds, mutual funds, annuities, mutual fund dealer services, financial planning services, professional portfolio management
Independent and tied agents, pension advisors, direct marketing, worksite marketing www.aegon.hu
AEGON’S THREE MAJOR MARKETS ARE THE UNITED STATES, THE NETHERLANDS AND THE UNITED KINGDOM. IN ADDITION, THE GROUP IS PRESENT IN A NUMBER OF OTHER COUNTRIES INCLUDING CANADA, HUNGARY, SLOVAKIA, SPAIN AND TAIWAN. AEGON IS ALSO ACTIVE IN CHINA.
AEGON ENCOURAGES PRODUCT INNOVATION AND FOSTERS AN ENTREPRENEURIAL SPIRIT WITHIN ITS BUSINESSES. NEW PRODUCTS AND SERVICES ARE DEVELOPED BY LOCAL BUSINESS UNITS, WITH A CONTINUOUS FOCUS ON COST CONTROL, USING A MULTI-BRAND, MULTI-CHANNEL DISTRIBUTION APPROACH TO MEET CUSTOMERS’ NEEDS.
RESPECT, QUALITY, TRANSPARENCY AND TRUST CONSTITUTE AEGON’S CORE VALUES AS THE COMPANY CONTINUALLY STRIVES TO NOT ONLY MEET, BUT EXCEED THE EXPECTATIONS OF CUSTOMERS, SHAREHOLDERS, EMPLOYEES, BUSINESS PARTNERS AND OTHER STAKEHOLDERS. PURSUING ITS MISSION OF CREATING BETTER FINANCIAL FUTURES FOR ALL STAKEHOLDERS, AEGON WILL CONTINUE TO EXPLORE NEW OPPORTUNITIES FOR PROFITABLE GROWTH.
In order to obtain a fair valuation for its securities, AEGON is committed to ensuring that equity and fixed income investors
Amsterdam Euronext Amsterdam Frankfurt Deutsche Börse London London Stock Exchange New York New York Stock Exchange Tokyo Tokyo Stock Exchange Zurich Swiss Exchange
Source: Bloomberg, Datastream take place on April 14, 2005, when AEGON will provide comparative key IFRS figures for 2004. Starting with the publications of its first quarter results 2005 on May 1 1, 2005, AEGON will report its results on an IFRS basis.
On May 5, 2004, the European life insurance industry took an important step towards improving the consistency and transparency of life insurance reporting through the launch of the European Embedded Value Principles. AEGON has supported this initiative and expects that, in all material aspects, the AEGON principles will be consistent with embedded value life insurance under the new rules.
AEGON focuses on the financial protection and asset accumulation needs of its clients and offers insurance products, with a strong emphasis on life insurance and pensions, savings and investment products.
AEGON’s objective is to achieve a leading position in chosen markets in order to achieve benefits of scale.
AEGON already has a presence, in order to build scale and enhance distribution.
We treat all our stakeholders the way that we want to be treated with consideration for individual and cultural diversity.
AEGON WAS SUCCESFULL IN PROFITABLY GROWING ITS BUSINESS IN BOTH EXISTING AND DEVELOPING MARKETS
generation (‘baby boomers’), which represents the single greatest asset accumulation population pool in history, we see significant growth potential for our core lines of business.
Relying on a decentralized operating model, AEGON is well positioned to respond to the changes in the marketplace, as well as to the changing needs of its customers through innovative product development. Moreover, AEGON remains committed to seeking a leading position in chosen markets and to maintaining its status as a quality, cost-effective provider.
AEGON’s successful strategic partnership with Caja de Ahorros del Mediterráneo (CAM), providing access to one of Spain’s leading bank distribution channels. In France, AEGON increased its stake from 20% to 35% in La Mondiale Participations in keeping with our aim of expanding our presence in the French life and pensions market. Additionally, we were pleased with our increasing participation in the fast growing Asian market during 2004. Having secured a license to conduct business in Beijing,
We are grateful to the many dedicated staff of the AEGON
AEGON N.V. Since May 2000 he has been a member of the
Dutch nationality, started his career in 1973 as an officer in the Merchant Marine. In 1982 he joined one of the predecessors of AEGON as a sales manager. From 1987 to 1992 he was chairman of the management board of
DONALD J. SHEPARD JOSEPH B.M. STREPPEL JOHAN G. VAN DER WERF ALEXANDER R. WYNAENDTS
Additionally, the members of the Board discuss quarterly results, accounting principles, dividends, AEGON’s capital position, internal control procedures as well as risk management. Together with the Executive Board, the Supervisory Board regularly reviews AEGON’s corporate strategy. The Supervisory Board held a total of eight meetings in 2004. Meetings were typically preceded or followed by meetings of the various committees.
In accordance with the Supervisory Board Rules, preparatory meetings preceded the regular meetings, attended by the chairman and vice-chairman of the Supervisory Board as well as the chairman and the chief financial officer of the Executive
Board meetings in 2004 were embedded value, dividend policy, capital management and risk management.
Topics of particular interest to the Supervisory Board included equity lease in the Netherlands as well as regulatory and other legal issues in the USA and in Europe. Following the adoption of the United States Sarbanes-Oxley Act (SOX), and the Dutch Corporate Governance Code, the Board amended the Supervisory Board Rules, the Audit Committee Charter, the
The Supervisory Board relies on four committees to prepare specific issues for decision-making by the Board. The members of the Committees are selected from the Supervisory Board.
In accordance with its Charter, each Committee reports its findings to the Supervisory Board during a subsequent
Committee were dominated by its permanent agenda: the quarterly results, the annual accounts and the auditing of those by Ernst & Young; the accounting principles; the financial reports as filed with the Securities and Exchange Commission (SEC),
AEGON’s Capital Plan, in addition to reports on currency exposure, internal control systems as well as Risk Management and Ernst & Young’s independence and fees. The Committee advised the Supervisory Board to recommend to the
Governance Code. In accordance with legal requirements, the Committee approved and recommended to the Supervisory
Furthermore, it was determined that the Committee shall establish procedures for the receipt and retention of complaints relating to accounting and internal control issues. The Committee also approved the Financial Control Complaints Procedure.
Each quarter, the Committee was updated on the activities of the Group internal auditor and on AEGON’s worldwide compliance with SOX as well as on general compliance issues.
The Strategy Committee held two meetings, which were also attended by the Executive Board members. The purpose of this
The Compensation Committee has reported on its activities in 2004. Please refer to page 14 for the full text of this report as well as of the Remuneration Policy and to page 1 19 and 120 for financial details. The Short Term and Long Term Incentive plans were adopted by the Supervisory Board in line with the company’s current Remuneration Policy. The base salaries of the members of the Executive Board and the remuneration of the
Stevens and Tabaksblat will expire. Messrs. Eustace and Stevens are eligible for reappointment and the Supervisory Board has decided to nominate them for reappointment for another term.
12 AEGON ANNUAL REPORT 2004 of the Board as a result of retirements. Mr. Olcay has agreed to continue his service on the Board for the duration of his current term, which expires in 2008.
In order to fill the vacancies, the Supervisory Board has on the advice of the Nominating Committee decided to nominate
The Supervisory Board has decided to nominate them for reappointment for a four-year term.
The Supervisory Board recommends that shareholders adopt these accounts. A total dividend for 2004 of EUR 0.42 per common share is proposed. Since an interim dividend payment of EUR 0.21 per common share was made in September 2004, this entails a proposed final dividend payment of EUR 0.21 per common share.
community for their strong commitment to growing AEGON’s business. The Board wishes to extend its appreciation for the dedication and professionalism they continuously demonstrate in responding to ever-changing market conditions and an increasingly challenging regulatory environment.
He was appointed in 1990. His current term will end in 2005 and he will step down at the end of the AGM to be held on April 21, 2005. He is also chairman of the Supervisory Board of TPG N.V.
AEGON USA Inc. He was appointed in 2004 and his current term will end in 2008. He is also a member of the Board of Directors of Computer Sciences Corp., Hospira Inc., as well as of the
Royal Ahold N.V., a member of the Supervisory Boards of TPG
N.V. and VNU N.V. and a member of the International Advisory
O.J. Olcay (1936, American nationality) is vice-chairman and managing director of Fischer, Francis, Trees and Watts, Inc. (New
York, USA). He was appointed in 1993 and his current term will end in 2008. He is chairman of FFTW Funds Inc. in New York
T. Rembe (1936, American nationality) is a retired partner/senior counsel of Pillsbury Winthrop LLP (San Francisco, USA). She was appointed in 2000 and her current term will end in 2008. She is a member of the Board of Directors of SBC Communications Inc.
W.F.C. Stevens (1938, Dutch nationality) is a retired partner/senior counsel of Baker & McKenzie and was a senator in the Dutch
Parliament until June 2003. He was appointed in 1997 and his current term will end in 2005. He is eligible for reappointment and is willing to remain on the Supervisory Board. He is chairman of the Supervisory Board of NIB Capital N.V. and a member of the Supervisory Boards of N.V. Luchthaven Schiphol, TBI
Executive Board of AEGON N.V. He was appointed in 2002 and his current term will end in 2006. He is chairman of the Supervisory
Airlines N.V. and a member of the Supervisory Board of Pon
Holdings B.V. He is also a member of the Board of Directors of
Group of Companies. Until 2004 he was group CFO and a member of the Group Executive Committee of ABB (Asea Brown
L.M. van Wijk (1946, Dutch nationality) is president and CEO of
Committee will ensure that base salary levels are realistic and competitive, taking into account individual roles and responsibilities of the Board members and considering benchmark information provided by independent external advisors. Annually, the Committee will review the levels, considering circumstances that would justify adjustment, such as fundamental changes in the business environment or in the individual responsibilities.
Werf and Wynaendts the bonus is based on the income before realized gains and losses on shares and real estate of the country unit(s) under their responsibility (60%) and on AEGON’s income before realized gains and losses on shares and real estate (40%).
This chapter sets out the Remuneration Policy 2004-2006 and the remuneration of the members of the Executive Board and the members of the Supervisory Board for the year ended
The remuneration of the members of the Supervisory Board is based on a base compensation and a compensation relating to committee meetings. The members of the Supervisory
Board do not receive any performance or equity-related compensation and do not accrue any pension rights with AEGON.
The compensation of members of the Supervisory Board is reviewed every three years. Any change in the compensation will be submitted to the shareholders for adoption.
The annual General Meeting of Shareholders (AGM) adopted this Remuneration Policy on April 22, 2004. The Remuneration
The Supervisory Board has determined that, as from January 1, 2005, the term in office for new members of the Executive Board
Annually, the Compensation Committee will review the agreed parameters to ensure that they continue to provide the best reference. Independent external advisors, Tillinghast and
Long-term incentive (LTI) bonuses aim to reward Executive Board members when the company achieves previously determined objectives. The LTI bonus relates to their base salary and the value forms a combination of performance options and performance shares. At the beginning of every plan term, the
LTI bonus value (amount) is determined and the corresponding number of options and shares is granted. Vesting of those rights is conditional upon the attainment of the agreed performance.
performance against that of a select peer group. This group comprises companies that are comparable in type of business, size and geographical presence, and that are generally recognized as the most appropriate reference group.
Performance relative to that zone will determine which portion of the performance grant will vest at which performance level.
The pension arrangements aim at creating a reliable retirement provision for Executive Board members that conforms to market practice.
In addition, he shall be entitled to receive an amount equal to the aggregate short-term incentive compensation he received during the three years prior to the termination.
In the event of termination of employment by AEGON in connection with a merger, takeover or fundamental changes of policy and related organizational amendments, or by Mr. Shepard in the event his responsibilities or position are diminished by such circumstances, AEGON will pay Mr. Shepard compensation in the amount of three years’ base salary. Furthermore, he shall be entitled to receive an amount equal to the aggregate short-term incentive compensation he received during the three years prior to the termination and such severance payments shall be taken into account in determining the amounts payable to Mr. Shepard under his AEGON USA Supplemental Executive Retirement Plan and three additional years of service will be credited for the purpose of calculating his benefit thereunder. Mr Streppel would be entitled to compensation according to the ‘Zwartkruis formula’, which means that the severance payment would be calculated on the basis of and depending on age, years of service, functional level and the probability of finding an equivalent position.
Remuneration of the Supervisory Board members was not changed in 2004.
The base salaries of the Executive Board members were not changed on January 1, 2004, save the adaptation in accordance with the general salary rounds applicable to AEGON employees in the Netherlands, as stipulated in the employment contracts with the Dutch Executive Board members.
For an overview of the base salaries received by the Executive
AEGON N.V. common shares, which shares are restricted (nontransferable ) for a period of three years. After this three-year period, the Executive Board members will be entitled to bonus shares, provided that they are still employed by AEGON. The number of bonus shares will be calculated through performance based matching, on the basis of an earnings per share (EPS)
In addition, Mr. Shepard received a STI equal to 0.1% of the net income of AEGON in 2003, amounting to EUR 1,793,000.
The STI bonus related to AEGON’s net income over the financial year 2004 for Mr. Shepard, will be paid in 2005, provided shareholders adopt the annual accounts for 2004.
Rights (SARs), subject to three criteria: • Comparison of AEGON with a peer group of nine financial companies (ABN AMRO, AIG, Allianz, AXA, Fortis, Generali,
Board member would earn 100,000 SARs. Should the share price performance rank in the bottom group (three companies), 50,000 SARs would be granted.
(based on the share price performance over 2001, 2002 and 2003) ranked in the bottom group, as a result of which each
Please refer to page 1 19 for an overview of the LTI grants for the year 2004.
AEGON’S EXECUTIVE BOARD AND COUNTRY HEADS OF AEGON USA, AEGON THE NETHERLANDS AND AEGON UK ADDRESS SOME KEY ISSUES
so much a part of AEGON’s culture is a real advantage in terms of making sure that we stay close to the local situations where we conduct our business, and even more importantly, close to our customers. Whether in Cedar Rapids, Iowa, The Hague,
Finally, I believe AEGON is distinguished for its clear and consistent focus on what we know and do best — life insurance, pensions, and associated asset accumulation products. During a time of change and economic volatility on a global scale, a company must be disciplined and not allow itself to be distracted from its area of expertise. At AEGON, we believe we have maintained our focus and are well-positioned to pursue our ongoing strategy of profitable and sustainable growth in our major and developing markets.
What is your assessment of the current regulatory environment for the insurance industry? Clearly, insurance is one of the more regulated sectors of the financial services industry. This is not necessarily a bad thing.
These days, people are living longer and this is a trend that is expected to continue. As a result, the products and services we offer will have greater appeal and demand. There will also be a need for an even broader range of products to ensure that customers have the resources they require over time, including pre- and post-retirement asset accumulation products, as well as a wider array of wealth preservation products. There is an unprecedented amount of retirement savings moving into the payout phase and life insurers are particularly well equipped to offer disinvestment products that address the specific needs involved.
What distinguishes AEGON among its peers? In any discussion of competitive advantage, I believe you have to begin with the people who are the backbone of the company, those responsible for selling, managing, servicing and distributing AEGON’s products. This is what ultimately distinguishes AEGON. The decentralized operating model that is
I’m pleased to say that AEGON has a very innovative and successful management development program. AEGON
What is AEGON's view on the recent corporate governance developments in the Netherlands? On January 1, 2004, a new and enhanced era of corporate governance came into effect in the Netherlands with the enactment of the Dutch Corporate
Stichting Communicatiekanaal Aandeelhouders, a Dutch foundation aimed at enhancing communication with and the participation of shareholders at General Meetings. AEGON
welcomes the possibility of proxy voting and, for the first time, shareholders will be able to vote electronically even if they are not present at the upcoming shareholders’ meeting.
reported under Dutch Accounting Principles (DAP). From 2005 onwards, AEGON and all exchange-listed companies in the
How important is multi-channel distribution in AEGON’s strategy? Multi-channel distribution has always been an integral part of
In 2004, we took some important steps to further enhance our distribution reach. In Spain, for instance, the joint-venture with Caja de Ahorros del Mediterráneo became operational in June and has been off to a very promising start. We are exploring opportunities to strike similar arrangements in other parts of the country. In China, we signed a national cooperation agreement with the Agricultural Bank of
What are AEGON’s expectations for further growth in other parts of Europe? We believe that developments in the European life and pensions market could potentially unlock a vast growth opportunity, albeit not necessarily in the immediate future. Government programs for retirement in many European countries are becoming increasingly expensive as populations age and dependency ratios increase. Many current programs are unsustainable in the long run. Many governments face this reality and they are increasingly showing political courage in starting to implement reforms. In any case, it is clear that European citizens will be required to make a larger contribution to their own retirement provisions.
European countries. The question remains whether governments will allow the private sector to address this opportunity in a profitable way, or if excess regulation will make it unattractive for the private sector. In the long-term, we expect governments to realize that the only way to successfully solve the persistent
Although the transition to IFRS is a very important process with far reaching consequences, it does not change the fundamental economic realities of AEGON’s business or the way we manage the business. The main impact of the transition is the timing of the recognition of earnings, rather than a change in the underlying economic value of the business. Furthermore,
further strengthened the quality of its capital base by replacing maturing senior debt with EUR 950 million and USD 500 million of Junior Perpetual Capital Securities.
retirement/pension issues is to ensure the active participation of the private sector. With its strong experience in pensions business in the Netherlands and the United Kingdom, AEGON has a wealth of expertise that it can leverage in other parts of
Following the successful start in Slovakia, the Czech Republic was identified as the next country for expansion and the business there will become operational in the early part of 2005.
What is AEGON’s strategy to seize growth opportunities in Asia? AEGON continues to pursue a focused growth strategy in Asia, directed at markets that combine solid growth potential with sufficient market size in a stable political environment. AEGON is currently active in Taiwan and, through its joint-venture with
AEGON corporate culture, but talented operational management as well. Also in line with the group’s fundamental business strategy, AEGON does not indiscriminately chase volume growth in its Asian operations, but is committed to growing the top line while maintaining the focus on profitability.
Furthermore, several new legislative steps are creating opportunities for private insurers to actively operate in areas that have been traditionally reserved for the public domain.
For example, new laws soon to take effect have created significant opportunities in the disability market. Thanks to our demonstrated success in reintroducing people to the labor process more quickly and efficiently, we can play an important role in this new environment. Also, the introduction of the so called ‘levensloop’ or lifecycle scheme is aimed at providing new savings plans to individuals who would like to retire early or take a sabbatical. Then, of course, there continues to be a strong demand for creative solutions in the pensions market, since the majority of the Dutch population does not have adequate provisions for retirement.
Our main focus continues to be on providing pensions, life insurance and disability coverage. However, general insurance, banking and investment products also pose significant opportunity. We believe that by ensuring a disciplined and transparent execution of our strategy, AEGON The Netherlands will be well positioned to seize the opportunities of a changing market and ensure long-term and healthy growth.
security. Research shows that at a time when confidence in government policies, politics and the economy is decreasing, there is a particularly strong interest in and need for alternative financial solutions. AEGON The Netherlands has positioned itself as an engaged and solid insurer.
What is AEGON Americas doing to seize growth opportunities? AEGON Americas’ extensive mix of products and distribution allows it to meet a broad range of customer needs through various channels. We have many opportunities for growth, with various initiatives under way and on the drawing board. What is exciting is that several of these opportunities involve simply capitalizing on our current mix of businesses and customer base.
The middle-income life insurance market, a key market for our company, has tremendous potential. According to industry research, over one-third of all US households have no life insurance and more than half with incomes of USD 35,000 or less say they need more. This underserved market segment has good persistency and meets our risk and profitability requirements. Not only do we have the right products in place, we believe that with our agency, direct-to-consumer and worksite marketing channels, we have the expertise and resources to capture a bigger share of this segment.
Reinsurance is another opportunity for excellent growth and attractive returns. Recently there has been a strain on life reinsurance capacity as reinsurance providers have exited the market or been acquired. At the same time, the need for reinsurance capacity remains stronger than ever. With more favorable pricing and fewer players today — particularly those with the full range of capabilities our company possesses — the outlook for growth is promising.
It is rare that we have a single product franchise with any one distributor. Rather, we have broad financial services relationships independent business units with service centers and marketing and sales units that operate jointly and in cooperation. A number of efficiencies have been realized, including the reduction of locations from six to four, the reassignment of 300 employees to new locations and a reduction of 244 in the number of backoffice employees through natural attrition.
What is AEGON doing to ensure responsible corporate behavior? More than ever, consumers are keenly attuned to how companies perform as corporate citizens and define the terms for sound corporate ethics. AEGON recognized corporate responsibility and reliability at an early stage as an integral part of doing business in today’s world. These concepts have been integrated throughout the organization worldwide and serve as guiding principles in our daily operations. Respect, quality, transparency and trust have been identified as intrinsic values of AEGON which will continue to support our mission of creating better futures for all our stakeholders.
Notwithstanding, we do continue to sell a certain level of fixed annuities as well as an array of other products to remain active in the market and within each distribution channel.
But regardless of whether it is considered a growth, mature or changing market, there are a number of ways we can achieve our desired hurdle rates in each business.
This will be my last contribution to this publication as I will retire in April after having served for eight years as Chief Executive of AEGON UK and more than 33 years in the organization.
Equitable was well positioned to take advantage of that opportunity. Following a difficult period at the start of this decade, UK financial services is again an attractive industry to be in and AEGON UK (including Scottish
‘Treating Customers Fairly’, is but one example supported by all major insurance providers. This code of conduct aims to ensure that customers are treated fairly in accordance with the spirit as well as the letter of the law. With the active participation of senior management, AEGON will continue to play a significant role in reclaiming consumer confidence and ensuring sound business practices for the benefit of all our stakeholders. We are confident that this work represents a new era of due diligence and corporate responsibility on a broad scale
Report, which was published in October 2004 and widely covered in the mainstream media, indicate that both the UK Government and consumers in general are becoming much more aware of the need for individuals to make adequate provisions for their retirement. There is also a far greater appreciation of the vital role of the long-term savings and investment industry in helping individuals meet their retirement needs. There is no doubt in my mind that the market for long-term savings products in the UK
The introduction of price capping, through the stakeholder pension, has posed a serious challenge. The prevailing issue for insurance companies is how to adequately make the necessary
return on capital commensurate with the risk involved in supplying products which take many years to produce a cash pay back. The industry in general, and AEGON UK in particular, has embraced technology solutions and delivered operating efficiencies to assist in this process. In this context, the recent relaxation of price caps is a welcome development.
While we expect the UK market to remain extremely competitive over the next few years, we also expect it to present ample opportunities for steady growth this year. The number of active scale players in the UK market has declined significantly and we believe that AEGON UK is very well placed to broaden its foothold in the UK long-term savings market.
Since December 1, 2004, new rules have allowed businesses to establish relationships with more than one provider. We remain convinced that independent advisors offer the best customer proposition for many key market sectors, but we also see significant opportunities for the AEGON UK group in businesses moving to a multi-tie model. These opportunities arise in the sectors of the IFA market which may be considering a multi-tie proposition for areas of its business and, more significantly, in the previously tied sector which now has the opportunity to distribute better value products from a range of providers.
We will continue to pursue other opportunities that depolarization will inevitably bring about.
Income before realized gains and losses on shares and real estate increased 22% to EUR 1,783 million in 2004. The increase, to which all major country units contributed, mainly reflects improved credit and equity markets and actions taken by management to improve product spreads and overall profitability.
Net income before realized gains and losses on shares and real estate and before exceptional items increased 9% to EUR 1,386 million in 2004. This increase reflects the improved results from
Revenue generating investments amounted to EUR 296 billion on December 31, 2004. This represents an increase of 4% over the prior year.
Net income before realized gains and losses on shares and real estate and before exceptional items 1,386 1,277
Included in this report are financial measures, pre-tax as well as after tax, that exclude realized gains and losses on shares and real estate and exceptional items. Net income before realized gains and losses on shares and real estate and before exceptional items is a non-GAAP measure. Management uses this non-GAAP
AEGON’s financial performance and believes that the presentation of this measure provides useful and important information to analysts and investors. This non-GAAP measure should be seen as part of a range of supplementary measures, that assist in achieving greater transparency and understanding of insurance reporting and can help investors and analysts in comparing AEGON with its peers. Reconciliation of this measure to the most comparable GAAP measure is provided below.
(USD 204 million in 2004 versus USD 516 million in 2003).
Traditional life income before realized gains and losses on shares and real estate of USD 649 million increased 4% compared to 2003. Lower additions to the default provision of USD 1 14 million during 2004 and improved product spreads and business growth have contributed to the increase. In addition, results in 2003 included the impact of the accelerated DPAC amortization of USD 28 million. These improvements were partially offset by a non-recurring reserve increase in the reinsurance business of
GICs and funding agreements income before realized gains and losses on shares and real estate increased 37% to USD 254 million compared to 2003. The increase includes USD 37 million of lower additions to the default provision and a one-time positive effect related to the performance of a loan portfolio
Life for account of policyholders income before realized gains and losses on shares and real estate of USD 101 million increased 49% for 2004 compared to 2003. The increase included USD 12 million of lower accelerated DPAC amortization, higher fee income due to asset growth in the portfolio as a result of continued equity market growth and improved mortality and persistency.
On July 1, 2004, AEGON USA announced that it would cease new long term care sales during the first half of 2005.
Net income, which includes realized gains and losses on shares and real estate in both 2004 and 2003, increased 52% to USD 1,569 million compared to USD 1,034 million in 2003. For 2004, realized gains on shares and real estate were USD 276 million while for 2003 a realized loss was incurred of USD 74 million.
Revenues of USD 18,341 million increased 1 1% compared to 2003.
increased 10% (4% excluding realized gains and losses on shares and real estate), and fees and commissions of USD 1,009 million increased 4%.
Strong sales in Agency Group markets and assumed reinsurance premiums contributed to the growth in recurring premiums.
Life for account of policyholders premiums of USD 1,903 million were up 46% in 2004 compared to 2003. Single premiums of
USD 651 million increased significantly in the fourth quarter of 2004 due to the sale of a large Bank Owned Life Insurance
(USD 446 million) were reported as single premiums in prior years but are reported as recurring in 2004.
Communications Commission and Federal Trade Commission regulations including the national ‘Do not call’ list.
Commissions and expenses of USD 4,191 million increased 9% in 2004 compared to 2003. Excluding additional employee pension plan expense, operating expenses of USD 1,819 million were level compared to 2003. Additional employee pension expense caused operating expenses to increase by USD 53 million for the year.
Standardized new life production increased by 1% to USD 1,087 million (5% on a comparable basis to 2003 — certain additional variable universal life deposits were reported as single premiums in prior years but are reported as recurring in 2004), reflecting growth in general account sales due to solid agent recruiting.
in 2004 compared to 2003. Lower fixed annuity production reflects AEGON’s continued pricing discipline in this market, which has been affected by the current low interest rate environment. In response to the low interest rate environment during 2003, AEGON introduced new products with a lower guaranteed annual interest rate. Withdrawals from existing contracts during 2004 were above last year’s level but remain at historically low levels, reflecting the relatively low new money interest rates available on new policies. Fixed annuity balances of
GIC and funding agreement production of USD 9.5 billion increased slightly in 2004 compared to 2003. Higher traditional
GIC sales were partially offset by lower medium term funding agreement sales. The tight credit spreads in the market negatively impacted sales in 2004 as disciplined pricing was maintained to achieve acceptable returns. The balance of GIC and funding agreements at December 31, 2004, consists of USD 29.4 billion general account and USD 1.7 billion separate account. The combined balances increased 7% over 2003.
Variable annuity deposits of USD 5.6 billion decreased 12% in 2004 compared to 2003. The decrease is due to the discontinuance of the guaranteed minimum income benefit
Off balance sheet products include managed assets such as mutual funds, collective investment trusts and synthetic GICs.
sales of USD 7.3 billion decreased 45% as equity products are now attracting more funds than stable value alternatives.
in million in million INCOME BY PRODUCT SEGMENT EUR EUR %
INCOME BEFORE REALIZED GAINS AND LOSSES ON SHARES AND REAL ESTATE 352 303 16
NET INCOME 637 25 1The numbers have been adjusted to reflect the changes in accounting principles implemented as of January 1, 2004
Income before realized gains and losses on shares and real estate on fee business more than doubled in 2004 to EUR 28 million, reflecting the inclusion of TKP and AEGON Asset
Accident and health income before realized gains and losses on shares and real estate decreased by 36% to EUR 28 million in comparison to 2003 mainly due to a one time reinsurance gain taken in 2003, whereas 2004 showed a more normal level of claims experience.
EUR 36 million, mainly due to new business and good claims experience, particularly in the fire branch.
Net income, which includes realized gains and losses on shares and real estate, amounted to EUR 637 million, compared to a net profit of EUR 25 million in 2003 mainly due to increased realized gains on shares and real estate in 2004, which amounted to
EUR 368 million in comparison to a loss of EUR 191 million in 2003.
The effective tax rate is 1 1.5%, primarily as a result of the participation exemption on realized gains and losses on shares.
Premium income decreased by 4%, which was more than offset by higher investment income.
Traditional life recurring premiums declined in 2004, whereas single premiums remained stable in comparison to 2003. The decline in recurring premiums is due to a lack of new contracts in the group pension markets. Life for account of policyholder premiums decreased in comparison to 2003 mainly because of a decline in single premium back services on existing contracts caused by the low economic growth and a shift from defined benefit towards defined contribution plans. Recurring premium showed growth from the existing portfolio.
General insurance premiums were 3% lower than in 2003 almost entirely due to the divestiture in 2003 of certain blocks of business.
Investment income improved in 2004 owing to higher direct income from fixed income investments, (preferred) shares and real estate and most significantly because of realized gains on shares and real estate of EUR 368 million in 2004, which far exceeded realized losses of EUR 191 million in 2003.
EUR 670 million, 13% higher than in 2003 and were impacted by various factors including additional contributions for postretirement employee benefits and restructuring expenses.
EUR 13 million of expenses were incurred in 2004 in relation to restructuring. In addition, a provision of EUR 22 million for the early retirement of employees in 2005 and 2006 was taken in 2004.
(36%) and general insurance (9%). Accident and health production was particularly good in the sick leave market.
Total assets under management have grown by EUR 3.6 billion since year-end 2003. A net increase in the value of asset-only contracts of EUR 1 billion, positive revaluations and reinvested operating cash flow were the important drivers for the increase.
Realized gains and losses on shares and real estate (3) (10) 70 (4) (15) 73 1The numbers have been adjusted to reflect the changes in accounting principles implemented as of January 1, 2004
Traditional life reported a loss of GBP 7 million before realized gains and losses on shares and real estate, a decline of GBP 8 million compared to 2003. The main reason is that the 2003 result included a number of one-off mortality profits and provision releases.
The increase in fee and commission revenues is due to growth
AEGON UK’s operations. The charges arose from the costs of redundancies and the provision for vacant property as a result of the rationalization of accommodation.
Operating expenses decreased 1% to GBP 333 million, including GBP 24 million of cost reductions due to the cost reduction programs, partially offset by restructuring costs and growth in IFAs.
Income before realized gains and losses on shares and real estate amounted to EUR 109 million in 2004, a 43% increase compared to the year 2003. Net income, which includes realized gains and losses on shares and real estate, increased 60% to EUR 91 million.
Please note that the Other countries segment is accounted for in the financial statements in euro, but the operating results for the individual country units within Other countries are accounted for, and discussed, in terms of the local currencies of those country units.
INCOME BEFORE REALIZED GAINS AND LOSSES ON SHARES AND REAL ESTATE 109 76 43
Realized gains and losses on shares and real estate 14 1
Life for account of policyholder income before realized gains and losses on shares and real estate was 54% higher than last year due to growth in the portfolio, a higher technical result and higher results on expenses. Fee business income increased 6%
to HUF 2.2 billion compared to 2003, mainly from growth in the pension fund management business.
The effective tax rate decreased from 17.1% in 2003 to 14.6% in 2004 due to a reduction in the statutory corporate tax rate. Net income increased from HUF 13.8 billion in 2003 to HUF 14.6 billion in 2004.
Investment income increased by 6% to HUF 17.6 billion. The increase reflects HUF 3.6 billion of realized gains on shares and real estate. Interest rates increased sharply at the end of 2003 and started to decline again in the second half of 2004. The high reinvestment rate had a positive impact on interest income in 2004.
Pension Fund Management company, partially offset by pressure on fees due to strong competition. The assets managed by the
HUF 51 billion on the back of a continued strong expansion of the pension fund management business. The number of pension fund members increased significantly.
Standardized new premium production amounted to SKK 133 million compared to SKK 5 million in 2003.
STANDARDIZED NEW PREMIUM PRODUCTION Hungary in EUR million 1The numbers have been adjusted to reflect the effect of changes in accounting principles implemented as of January 1, 2004
AEGON Spain reported income before realized gains and losses on shares and real estate of EUR 65 million over 2004, an increase of 86% compared to 2003. Income before realized gains and losses in the life business amounted to EUR 3.6 million, a decrease of EUR 0.3 million compared to 2003. The non-life business reported income before realized gains and losses of
EUR 61 million compared to EUR 31 million in 2003. The increase is mainly due to a refinement in the calculation of technical provisions and an improvement in the claims ratio, which started in 2003 and continued in 2004.
Net income amounted to EUR 44 million in 2004 compared to
EUR 22 million in 2003. The effective tax rate was 33.3% in 2004 and in 2003.
Total revenues of EUR 516 million increased by 9% compared to 2003, mainly reflecting higher premium income.
Compared to 2003, life premiums increased by 17%. Recurring premiums increased by 21% due to an increase in production and improved persistency of the portfolio. Single premiums increased
AEGON Spain in 2004 continued to concentrate on personal lines and small companies, while de-emphasizing products which are not considered strategic.
On December 30, 2004, AEGON N.V. announced that it had entered into an agreement to sell AEGON Seguros Generales, its general insurance subsidiary in Spain, to Italian mutual insurance company Reale Mutua Group effective January 1, 2005.
The price of the sale is approximately EUR 250 million and will be fixed at completion. The transaction will result in a book profit of approximately EUR 130 million after tax. The sale is subject to regulatory approval and is expected to be completed in the second quarter of 2005. The proceeds will be used to redeem debt. AEGON’s general insurance activities in Spain generated gross premiums of EUR 254 million and pre-tax income of
At the same time, AEGON will acquire the life portfolio of Reale
Vida in Spain (with total premium of EUR 14 million in 2004), which will give AEGON access to Reale Mutua’s existing agent distribution network. The distribution agreements are on an exclusive basis, valid for five years and renewable thereafter.
This transaction reinforces AEGON’s strategic focus on its core businesses of life insurance, pensions, savings and investment products. AEGON will continue to expand its life insurance business in Spain by further strengthening its own agent distribution capability, by enhancing its existing bancassurance partnership with Caja de Ahorros del Mediterráneo (CAM) and by pursuing new distribution opportunities.
1The numbers have been adjusted to reflect the effect of changes in accounting principles implemented as of January 1, 2004
Life for account of policyholder income before realized gains and losses on shares and real estate decreased from NTD 89 million in 2003 to NTD 32 million in 2004, mainly due to higher expenses.
Gross premium income increased by 39% to NTD 25 billion compared to NTD 18 billion in 2003. The increase reflects strong sales of recurring premium business in 2004 and good persistency. Traditional life insurance gross premiums of
NTD 6,044 million for the full year 2004, compared to NTD 4,821 million in 2003. Deferred policy acquisition costs were down 7%
to NTD 3,627 million compared to NTD 3,901 million in 2003.
In 2004, AEGON Taiwan started to sell variable annuity products. Deposits amounted to NTD 516 million in 2004.
Included in 2004 results is a EUR 2 18 million expense recorded as an exceptional item in connection with the agreement with
At the end of the second quarter of 2004, AEGON acquired a 49.9% interest in Caja de Ahorros del Mediterráneo (CAM).
Sheet’, will therefore be the starting point for AEGON to apply
It is AEGON’s intention to disclose comparative IFRS 2004 figures on April 14, 2005 for both the full year and on a quarterly basis. The IFRS information that will be published will include a condensed balance sheet at January 1, 2004 and at December 31, 2004, quarterly results per line of business by reporting segment on an IFRS basis, as well as reconciliations from DAP to IFRS for shareholders’ equity and net results.
Key impacts have been derived from accounting policies based on IFRS as at March 31, 2004. These accounting policies may still change due to changes in IFRS up to December 31, 2005. In addition, further reviews, analysis and audit procedures may cause key impacts to change.
Sheet. The way these securities will be classified under IFRS as either ‘available for sale’ or at ‘fair value through profit and loss’, determines how unrealized movements in fair value from period to period are recognized, either directly in shareholders’ equity or in the income statement respectively.
The classification of products that AEGON sells determines the accounting treatment of technical provisions, DPAC and VOBA
under IFRS. AEGON’s products are either classified as ‘insurance contracts’, ‘investment contracts with discretionary participation features’ or ‘investment contracts without discretionary
‘investment contracts without discretionary participation features’ to be valued at either fair value or at amortized cost.
This choice affects the way DPAC is valued under IFRS. AEGON
will value certain portfolios at fair value and others at amortized cost. Overall the DPAC for products classified as ‘investment contracts without discretionary participation features’ is reduced in the Opening Balance Sheet and the amount of acquisition costs that can be deferred in the future under IFRS will be less than was the case under DAP.
For defined benefit plans that are in place for AEGON’s own employees, IFRS allows to make use of the so-called ‘fresh-start’
approach for the Opening Balance Sheet. AEGON elected to make use of this approach and it means that part of the asset that existed in the DAP balance sheet, which related to AEGON USA, will be debited to shareholders’ equity in the Opening Balance
AEGON CONTINUES TO CLOSELY ALIGN ITS CAPITAL MANAGEMENT WITH RISK MANAGEMENT
AEGON is exposed to a variety of risks. Some risks are related to the international nature of AEGON’s business, such as currency translation risk. Other risks include insurance related risks, such as changes in mortality and morbidity. However,
(e.g. interest rate, credit and equity market risks) that affect the value of the investments and technical provisions (including deferred policy acquisition costs).
AEGON continues to embed advanced risk management techniques in its capital management framework. This process is primarily aimed at achieving further efficiencies in capital management while sharing best risk management practices and improving consistency in internal risk reporting. Similar to 2003, this resulted in a more coordinated and proactive approach towards risk and capital management procedures. AEGON
(ALM) processes and models. These processes and models are in place in each country unit and are not only used to manage risk in each unit, but also for the Group. AEGON takes inventory of its current risk position across all risk categories. It also measures the sensitivity of net income and shareholders’ equity to stochastic and deterministic scenarios. AEGON’s management uses the insight gained through these ‘what if?’ scenarios to manage the Group’s risk exposure and capital position.
The models, scenarios and assumptions used are reviewed and, if necessary, updated each year.
and IFRS on risk sensitivities is currently expected to be greatest for interest rate changes, equity market changes and relative currency rate movements.
Also, currency risk exists for any policy denominated in currencies other than the policy’s local currency. In the
The five-year historical income before tax and capital in units for
AEGON bears interest rate risk in many of its products. In cases where cash flows are highly predictable, investing in assets that closely match the liabilities can mitigate this risk — a method that
AEGON employs. However in some products, liability cash flows are less predictable. The uncertainty arises from policyholder actions that can be affected by the level of interest rates.
In periods of rapidly increasing interest rates, policy loans, surrenders and withdrawals may increase and usually do increase. Premiums in flexible premium policies may decrease as policyholders seek investments with higher perceived returns.
This activity may result in cash payments requiring the sale of invested assets at a time when the prices of those assets are adversely affected by the increase in market interest rates, which may result in realized investment losses. These cash payments to policyholders result in a decrease in total invested assets and a decrease in net income. Among other things, early withdrawals may also require AEGON to accelerate amortization of policy acquisition costs, reducing net income.
During periods of sustained low interest rates, life insurance and annuity products may be relatively more attractive to consumers, resulting in increased premium payments on products with flexible premium features, and a higher percentage of insurance policies remaining in force from year to year. During such a period, investment earnings may be lower because the interest earnings on new fixed income investments will likely have declined with the market interest rates. In addition, mortgages and redeemable bonds in the investment portfolio are more likely to be repaid as borrowers seek to borrow at lower interest rates and AEGON may be required to reinvest the
Estimated Estimated approximate approximate effects on Movement of markets effects on net income shareholders’ equity
Increase versus the euro increase between increase between of non-euro currencies of 15% 10% and 1 1% 15% and 16% Decrease versus the euro decrease between decrease between of non-euro currencies of 15% 10% and 1 1% 15% and 16%
2Basic assumptions: no correlation between markets and risks; unchanged conditions for all other assets and liabilities; limited management actions taken. All percentage changes are relative to net income and shareholders’ equity. Effects do not tend to be linear and therefore cannot be extrapolated for larger increases or decreases.
3The effect of currency exchange rate movements is reflected as a one-time shift up or down in the value of the non-euro currencies versus the euro on December 31, 2004.
December 31, 2004. AEGON USA and AEGON The Netherlands manage their duration mismatch on the basis of their expectations for the future level of interest rates. Presently, the other country units target the duration of their assets to equal approximately the duration of their liabilities. In addition to point in time duration measurement, deterministic and stochastic scenarios are used to measure and manage interest rate risk.
AMERICAS THE NETHERLANDS UK COUNTRIES TOTAL Rating category (in USD) (in EUR) (in GBP) (in EUR) (in EUR)
change of interest rates up or down by 1% or 2% is the interest rate risk of AEGON USA. It is estimated that an immediate increase of 1% or 2% will have a negative effect on earnings mainly as a result of an expected sudden rise in lapse rates on fixed annuities. An immediate decrease of 1% or 2% is also expected to have a negative effect as a result of compression of spreads. It is estimated that a gradual increase of interest rates would have a substantially more benign effect on earnings.
Accordingly, during periods of sustained low interest rates, net income may decline as a result of a decrease in the spread between either the interest rates credited to policyholders, due to the presence of minimum guarantees, or the rates assumed in reserves and returns on the investment portfolios.
As premiums and deposits are received, these funds are invested to pay for future policyholder obligations. For general account products, AEGON typically bears the risk for investment performance — return of principal and interest. AEGON is exposed to credit risk on its general account fixed income portfolio
In the past, poor economic and investment climates in AEGON’s major markets resulted in significant investment impairments on
AEGON’s investment assets due to defaults and overall declines in the securities markets. Although credit default rates were moderate in 2004, a reversion to excessive defaults, or other reductions in the value of these securities and loans, could have a material adverse effect on AEGON’s business, results of operations and financial condition.
Country units apply specific guidelines for the acceptable levels of credit risk and provide for default losses. AEGON
monitors its aggregate exposure to credit counterparties at group level. For this purpose, AEGON aggregates exposures from its country units to assess overall credit risk. To manage its credit risk, AEGON has a single credit counterparty limit policy that is applied to all forms of credit risk. All forms of credit risk are aggregated by counterparty and measured for compliance against country unit credit limits and group-wide credit limits.
CCC or lower 50 1 The fixed income issuer rating is used when applying the credit counterparty limit exposure policy
If an exposure exceeds the stated limit as a result of a downgrade, the exposure must be readjusted as soon as practicable to the limit for that rating category. The limits vary with the asset quality of the security. In all cases, exceptions to these limits can only be made after explicit approval in advance from AEGON senior management.
Exposure to equity, real estate and capital markets exists in both assets and liabilities. Asset exposure exists through direct equity investment, where AEGON bears all or most of the volatility in returns and investment performance risk. Significant terrorist actions, as well as general economic conditions, have led to and may continue to result in significant decreases in the value of
Examples of these products include variable annuities, variable universal life, unit-linked products and mutual funds. AEGON
sufficient to allow amortization of deferred policyholder acquisition costs. It is possible under certain circumstances that
AEGON would need to accelerate amortization of DPAC and to establish additional provisions for minimum guaranteed benefits, which would reduce net income and shareholders’ equity. Volatile or poor market conditions may also significantly reduce the popularity of some of AEGON’s savings and investment products, which could lead to lower sales and net income. AEGON’s general account equity holdings are shown in table 8 below.
Of AEGON’s country units, AEGON The Netherlands holds the largest amount of equities, both in absolute terms and expressed as a percentage of total general account investments. The largest part of the equity portfolio of AEGON The Netherlands consists of a diversified portfolio of global equities and 5% equity holdings in
Sensitivity analysis of net income and shareholders’ equity to equity and real estate markets is presented in table 10 on page 47.
The sensitivity of shareholders’ equity and net income to changes in equity and real estate markets reflects changes in the market value of AEGON’s portfolio, changes in DPAC amortization, contributions to pension plans for AEGON’s employees and the strengthening of the guaranteed minimum benefits, when applicable. The main reason for the non-linearity of results is that more severe scenarios can cause accelerated DPAC amortization and guaranteed minimum benefits provisioning, while moderate scenarios may not.
AEGON is exposed to currency fluctuations, changes in the fair value of its investments, the impact of interest rate and credit spread changes and changes in mortality and longevity. AEGON
uses common financial derivative instruments such as interest rate swaps, options, futures and forward contracts to hedge some of the exposures related to both investments backing insurance products and company borrowings. AEGON may not be able to manage the risks associated with these activities successfully through the use of derivatives. In addition, a counter party may fail to honor the terms of its derivatives contracts with AEGON.
EQUITY, REAL ESTATE AND NON-FIXED INCOME EXPOSURE IN GENERAL ACCOUNT ASSETS amounts in millions
ASSETS (in USD) (in EUR) (in GBP) (in EUR) (in EUR)
Total equity, real estate and other non-fixed income exposure 4,455 5,534 56 92 8,977 1 Of the Netherlands common shares, EUR 643 million are invested in a property company and therefore internally viewed as real estate exposure. For the purpose of the sensitivities this exposure is included in the real estate section.
requires significant amounts of cash on short notice in excess of normal cash requirements, AEGON may have difficulty selling these investments at fair prices, in a timely manner, or both.
AEGON’s earnings depend significantly upon the extent to which actual claims experience is consistent with the assumptions used in setting the prices for products and establishing the technical provisions and liabilities for claims. To the extent that actual claims experience is less favorable than the underlying assumptions used in establishing such liabilities, income would be reduced. Furthermore, if these higher claims were part of a trend,
AEGON may be required to increase liabilities, which may reduce income. In addition, certain acquisition costs related to the sale of new policies and the purchase of policies already in force have been recorded as assets on the balance sheet and are being amortized into income over time. If the assumptions relating to the future profitability of these policies (such as future claims, investment income and expenses) are not realized, the amortization of these costs could be accelerated and may even require write-offs due to unrecoverability. This could have a material adverse effect on AEGON’s business, results of operations and financial condition.
AEGON actively monitors and manages its underwriting risk by each underwriting risk type. Attribution analysis is performed on earnings and reserve movements in order to understand the source of any material variation in actual results from what was expected. AEGON’s units also perform experience studies for underwriting risk assumptions, comparing AEGON’s experience to industry experience as well as combining AEGON’s experience and industry experience based on the depth of the history of each source to AEGON’s underwriting assumptions. Where policy charges are flexible in products, AEGON uses these analyses as the basis for modifying these charges, maintaining a balance between policyholder and shareholder interests. AEGON also has the ability to reduce expense levels thus mitigating unfavorable expense variation.
Regardless of the suitability of products for AEGON’s customers, or the adequacy of the disclosure provided to its customers by
Insurance products enjoy certain tax advantages, particularly in the United States and the Netherlands, which permit the taxdeferred accumulation of earnings on the premiums paid by the holders of annuities and life insurance products under certain conditions and within limits. Taxes, if any, are payable on
SENSITIVITY ANALYSIS OF NET INCOME AND SHAREHOLDERS’ EQUITY TO EQUITY AND REAL ESTATE MARKETS1,2,3
Estimated approximate Estimated approximate effects Immediate change in effects on net income on shareholders’ equity
Equity increase 10% EUR 1 26 million EUR 371 million Equity decrease 10% EUR (96) million EUR (341) million Equity decrease 20% EUR (287) million EUR (693) million
Real estate increase 10% EUR 0 million EUR 1 76 million Real estate decrease 10% EUR (15) million EUR (176) million Real estate decrease 20% EUR (43) million EUR (352) million 1 The accounting basis used for this table is DAP. The effects should not be used as a guide in providing directional and approximate magnitude impact on net income and shareholders’ equity in 2005 since starting January 1, 2005 AEGON adopted IFRS, which differs in significant respects from DAP in its treatment of the consequences of certain events, including interest rate changes, equity market changes and relative currency rate movements.
3The effect of movements in equity and real estate markets is reflected as a one-time increase or decrease of worldwide equity and real estate markets on December 31, 2004.
The current administration in the Netherlands has indicated that it is contemplating further changes in law that would eliminate the tax advantages of certain other products, including group savings products. Any changes in United States or Dutch tax law affecting products could have a material adverse effect on
AEGON to accelerate amortization of policy acquisition costs, reducing net income.
In addition, a downgrade may adversely affect relationships with broker-dealers, banks, agents, wholesalers and other distributors of AEGON’s products and services, which may negatively impact new sales and adversely affect AEGON’s ability to compete and thereby have a material adverse effect on AEGON’s business, results of operations and financial condition. Negative changes in credit ratings may also increase AEGON’s cost of funding.
at A2, and changed the negative outlook to stable. In July 2004,
The current S&P and Moody’s insurance financial strength ratings and ratings outlook are in shown in table 12.
While systems and processes are designed to support complex transactions and to avoid systems failure, fraud, information security failures, processing errors and breaches of regulation, any failure could lead to a material adverse effect on AEGON’s results of operation and corporate reputation.
If AEGON’s business continuity plans have not included effective contingencies for such an event, this could adversely affect AEGON’s business, results of operations, corporate reputation and financial condition for a substantial period of time.
Estimated approximate Estimated approximate effects Underwriting risk sensitivity effects on net income on shareholders’ equity
Lapses increase 20% EUR (62) million EUR (62) million Mortality increases 10% EUR (58) million EUR (58) million Mortality decreases 10% EUR 59 million EUR 59 million Expenses increase 10% EUR (95) million EUR (95) million 1 The accounting basis used for this table is DAP. The effects should not be used as a guide in providing directional and approximate magnitude impact on net income and shareholders’ equity in 2005 since starting January 1, 2005 AEGON adopted IFRS, which differs in significant respects from DAP in its treatment of the consequences of certain events, including interest rate changes, equity market changes and relative currency rate movements.
AEGON USA AA Stable Aa3 Stable AEGON The Netherlands AA Stable Not rated Not rated Scottish Equitable AA Stable A1 Stable
AEGON’s insurance business is subject to comprehensive regulation and supervision in all countries in which AEGON
AEGON conducts business and the products offered. Changes in pension and employee benefit regulation, social security regulation, financial services regulation, taxation and the regulation of securities products and transactions may adversely affect AEGON’s ability to sell new policies or claims exposure on existing policies. Additionally, the insurance laws or regulations adopted or amended from time to time may be more restrictive or may result in higher costs than current requirements.
AEGON’s 2004 financial statements have been prepared and presented in accordance with Dutch Accounting Principles. Any change in these accounting principles, such as the conversion to
AEGON manages capital adequacy at the level of its country units and their operating companies. AEGON seeks to maintain its internal capital adequacy levels at the higher of local regulatory requirements, 165% of the relevant local Standard &
Poor’s capital adequacy models or internally imposed requirements. During 2004, the capital adequacy of AEGON’s operating units continued to be strong. All of AEGON’s units were capitalized within these tolerances. In the United States, at December 31, 2004, AEGON held 370% of the minimum capital required by the National Association of Insurance Commissioners.
AEGON applies leverage tolerances to its capital base. The capital base reflects the capital employed in core activities and consists of shareholders’ equity, capital securities and dated subordinated and senior debt. AEGON has managed its capital base to comprise at least 70% shareholders’ equity, at least 5% capital securities, and a maximum of 25% dated subordinated and senior debt. At December 31, 2004, AEGON’s leverage was within these prescribed tolerances: equity capital represented 72% of its total capital base, while senior and dated subordinated debt comprised 12% of its total capital base. Capital securities accounted for the remaining 16%. In the second half of 2004,
In the future, AEGON’s capital base may be subject to regulatory requirements arising out of current legislation drafted by the
Dutch Government. Under IFRS accounting rules, the composition of reported equity will change and be subject to higher volatility.
IFRS, and review the definitions to remain consistent with historical tolerances, if necessary, in an effort to ensure continued strong capitalization.
AEGON’s funding strategy continues to be based on assuring excellent access to international capital markets at low costs. As part of this strategy, AEGON aims to offer institutionally targeted debt securities in amounts that are eligible for benchmark inclusion and supports maintenance of liquid secondary markets in these securities. AEGON also aims to maintain excellent access to retail investors, as witnessed by the successful issuance of the
Commercial Paper Program (guaranteed by AEGON N.V.) facilitate access to international and domestic money markets, when required. Additionally, AEGON N.V. utilizes a USD 300 million Euro
Commercial Paper Program. AEGON maintains back-up credit facilities to support outstanding amounts under its Commercial
Paper programs. Its committed credit facilities, provided by banks with strong credit standing, exceed USD 3 billion. AEGON also has additional credit lines. At December 31, 2004, AEGON N.V. had
The duration profile of AEGON’s capital debt and interest rate structure is managed in line with the duration of surplus assets related to its investments in its subsidiaries, subject to liquidity needs, capital and other requirements. Of AEGON’s total capital debt at December 31, 2004, approximately EUR 0.7 billion matures within three years, EUR 0.9 billion between three and five years, and EUR 1.4 billion thereafter. AEGON believes its working capital, backed by the external funding programs and facilities, is amply sufficient for the group’s present requirements.
With general account life insurance products, AEGON typically carries the investment risk, earns a spread (the difference between investment performance and crediting rates to the customers), realizes mortality results or targets a combination thereof.
Traditional life products contributed 33% of AEGON’s line of business result1 in 2004 (41% in 2003 and 68% in 2002).
Universal life insurance has a stated minimum interest rate that will be paid on the policy’s cash value. An indexed version of universal life is also offered where the crediting rate is tied to the change, either positive or negative, in a designated stock market index. There is no minimum interest for indexed universal life.
AEGON USA offers, as part of the traditional life portfolio, traditional risk and capital management reinsurance, facultative and contract underwriting services, product development services and term insurance wholesaling. Coinsurance and modified coinsurance of fixed and variable annuities are also offered by AEGON USA as part of this portfolio. Client focus for these products is on large, primary insurance carriers and other significant businesses in the financial services arena and reinsurance is also written directly with ceding company clients rather than through brokers.
A fixed annuity is an annuity contract offering discretionary crediting rates for consumers as well as minimum guarantee surrender values and payout options. The fixed annuity products
Should the customer die prior to receiving the benefits of the policy, the beneficiary receives the accumulated cash value death benefit. The customer can surrender the annuity prior to maturity and receive the cash value less surrender charges.
52 AEGON ANNUAL REPORT 2004 1 Line of business result represents income before realized gains and losses, excluding interest charges and other.
AEGON’s operations in the United States sell group and individual fixed annuities and 401(k) contracts to small and medium-sized institutions. Group fixed annuities are purchased with a single premium that funds the annuities for a group of employees. The single premium includes a fee for the administrative services to be provided by AEGON after the annuities are sold.
pension funds* (independent) agents financial institutions* brokers money market funds** direct municipalities**
(FAs) contributed 9% of AEGON’s line of business result1 in 2004
(9% in 2003 and 14% in 2002). GICs and FAs are marketed only to institutional investors such as pension funds, retirement plans, college savings programs, money market funds, municipalities and US and overseas investors. GICs are primarily sold to tax qualified plans while FAs are typically sold to non-tax qualified institutional investors. The products are marketed through an internal sales force in the United States and internationally.
GICs and FAs are spread based products that are generally issued on a fixed or floating rate basis and provide the customer a guarantee of principal and a specified rate of return. For some of the products, the customer receives a return based on a change in a published index, such as the S&P 500. The term of the contract can be fixed (primarily from six months up to ten years) or it can have an indefinite maturity. Contracts with an indefinite maturity provide the customer with a put option whereby the contract will be terminated with advance notice, ranging from three to 13 months.
The payment terms of any particular series substantially match the payment terms of the funding agreement that secures that series.
(independent) agents, marketing organizations, financial institutions, worksite marketing, franchise organizations and brokers in the United States, the Netherlands, the United
compound interest, subject to a minimum of 1 10% of the fund value during the first half of the contract term. This death benefit is charged on a yearly risk premium basis. The amount of death benefit that is charged for is equal to the total benefit paid to the policyholder plus any unrecouped acquisition costs. When death occurs, the balance in the investment account is not paid out to the policyholder’s estate, but is distributed at the end of the year to the surviving policyholders of the specific series (a new series starts at the beginning of each calendar year) to which the
AEGON ANNUAL REPORT 2004 53 1 Line of business result represents income before realized gains and losses, excluding interest charges and other.
(independent) agents, marketing organizations, brokers and financial institutions in the United States, Canada and Taiwan.
individuals (independent) agents pension funds marketing organizations asset managers financial institutions direct
Fee business contributed 2% to AEGON’s line of business result1 in 2004 (0.3% in 2003 and 0.0% in 2002). Products are sold to individuals, pension funds and asset managers through
(independent) agents, marketing organizations, financial institutions and direct marketing in the United States, Canada, the Netherlands, the United Kingdom, Hungary and Slovakia.
• not-for-profit organizations qualifying for tax qualified annuities under section 403(b) of the US Internal Revenue
The operations in the United States provide the fund manager oversight for the Transamerica IDEX Mutual Funds (AEGON USA’s mutual funds) and Diversified Investors Funds Group family of mutual funds. AEGON builds alliances with investment companies and selects and retains external managers based upon performance from a variety of investment firms. The external manager remains with the investment company and acts as a sub-advisor for AEGON’s mutual funds. AEGON earns investment management fees on these investment products.
54 AEGON ANNUAL REPORT 2004 1 Line of business result represents income before realized gains and losses, excluding interest charges and other.
AEGON also earns fee income from capital markets transactions such as writing credit default swaps, undertaking synthetic collateralized debt obligations, and providing guarantees of affordable housing tax credits. The buyer of a credit default swap is insured against third party credit losses.
If the third party defaults, AEGON will have to purchase the defaulted asset from the insured party and also pay the insured the remaining interest on the debt and the principal.
In Canada, fees are earned through several special service and fund management companies. Fees are earned by providing administrative back office services that facilitate the sale of mutual funds and segregated fund products. In addition, a national network of financial planning franchises and representatives earn fees when products of non-affiliated companies are sold. Investment management fees are also earned by providing portfolio management and investment advisory services.
AEGON’s operations in the Netherlands offer financial advice, provide asset management services and are involved in intercession activities in real estate. The financial advice activities include selling insurance, pensions, mortgages, financing, savings and investment products. The intercession activities in real estate comprise brokerage activities of residential as well as commercial real estate and real estate management business.
AEGON Hungary provides asset management services through its subsidiary AEGON Hungary Investment Fund Management.
Accident and health products are sold to individuals and companies through (independent) agents, brokers and direct marketing in the United States, Canada, the Netherlands, Spain
AEGON USA also offers cancer treatment, heart disease policies as well as intensive care policies in the United States, that are sold to individuals on a voluntary basis at their place of employment with premium payment made through payroll deduction.
These plans provide specified income payments during hospitalization, scheduled benefits for specific hospital/surgical expenses and cancer treatments, hospice care, and cover deductible and co-payment amounts not covered by other health insurance and Medicare supplement products.
AEGON offers limited forms of general insurance in selected markets, such as automobile insurance, liability insurance, household insurance and fire protection.
Banking products contributed 1% to AEGON’s line of business result1 in 2004 (1% in 2003 and 0.6% in 2002) and are only sold by AEGON The Netherlands. Distribution channels are direct marketing, (independent) agents and franchise organizations.
Traditional life ■ ■ ■ ■ ■ ■ ■ ■ ■
AEGON’s banking products include savings accounts and investment contracts. These products generate investment fees and/or spread income for AEGON. Savings accounts offer attractive interest rates while retaining flexibility to withdraw cash with limited restrictions. AEGON discontinued selling security lease products in early 2003. Banking products also include investment products that offer index-linked returns and generate fee income on the performance of the investments.
AEGON USA was formed in 1989 when AEGON decided to consolidate the holding companies in the United States under one financial services holding company. Business operations are conducted through life insurance subsidiaries of AEGON USA Inc.,
The primary insurance subsidiaries in the United States, all of which are wholly-owned, are: • Life Investors Insurance Company of America
The operations in the United States (carried out by the collective group of operating companies in the United States) primarily sell life insurance products. AEGON’s operations in the United States also sell accident and health insurance, but made the strategic decision to move away from primary health coverage a number of years ago to concentrate health operations in the supplemental coverage sector. The majority of earnings from
The Agency Group consists of the following: • AEGON Financial Partners
AEGON Financial Partners (AFP) was formed in early 2002 as a new internal service organization to enable the Agency Group to take better advantage of its combined size and strength by integrating the operations, technology and service functions of separate but similar operating groups. AFP provides services to
National Accounts initiative for its fixed and variable products, focusing on establishing and maintaining business relationships with key national accounts and driving marketing programs aimed at increasing production from sales representatives.
TIIG has developed relationships with a number of distribution groups, which solely focus on this market. Those groups are
World Financial Group (WFG) targets the middle-income market, selling variable universal life insurance, variable annuities and mutual funds. WFG affords its more than 50,000 associates (8,500 of whom are securities brokers registered with
World Group Securities, Inc., a registered broker-dealer) the opportunity to build financial services and insurance businesses on their own terms.
Monumental Division targets the lower and middle-income markets, selling individual traditional life and supplemental health insurance through three distinct distribution systems: Career Agency, PreNeed and Military. Approximately 2,700 agents in 22 states reflect the diversity found in the communities they serve. The career agents provide face-to-face service to the policyholders. The PreNeed unit sells life insurance products through funeral directors and their agents to prefund funerals. In the Military unit, former military officers market life insurance and retirement savings products to commissioned and noncommissioned officers based in the United States and abroad.
The Long Term Care Division provides insurance products designed to meet the long-term health care needs of consumers during retirement. Long-term care insurance products provide coverage primarily for care services provided at home, in an assisted living facility or in a nursing home. This division has been active in the market since the late 1980’s and was integrated with the Transamerica Long Term Care operations.
Products are sold directly through independent brokerage agents, captive/career agents and general agents. Sales of longterm care insurance in this division will be discontinued in 2005, as announced in 2004.
AEGON Direct Marketing Services (ADMS) is focused on customers that might not be reached by AEGON USA’s other distribution channels, or might prefer to buy insurance products directly and not through an agent or intermediary. ADMS has developed a highly targeted approach using sophisticated database technology to increase its ability to develop niche markets and design products positioned to meet specific customers’ needs. Customers can purchase an extensive portfolio of products through direct mail, point-of-service, internet and telemarketing. Products are also marketed using the endorsement of sponsoring organizations such as financial institutions, auto dealers and various membership associations.
Transamerica Capital Inc. (TCI) works in partnership with many of the largest banks, national and regional broker-dealers and financial planners in the United States to market fixed and variable annuities, mutual funds, 401(k) plans and life insurance.
USA. Working closely with its partners, AEGON USA seeks to customize products and support to help banks expand their relationship with their customers.
Extraordinary Markets offers fixed and variable life insurance products to the bank and corporate-owned life insurance market through independent brokers. Extraordinary Markets’ specialized team of product development, financial, actuarial and investment professionals has helped some of the world’s leading financial institutions and corporations fund employee and executive benefit and compensation programs through innovative insurance and investment solutions. The market is approached opportunistically and thus sales results can vary significantly from year to year.
AEGON Institutional Markets Division (IMD) is well positioned and long established in the competitive and mature institutional market. IMD entered the market with a distinctive floating-rate
Institutional Markets holds the leading market position (source: reports of LIMRA International and Stable Value Investment
Transamerica Reinsurance provides traditional risk and capital management, facultative and contract underwriting services and product development services. It also provides coinsurance and modified coinsurance solutions for fixed and variable annuities.
In the United States, customer focus is on large, primary insurance carriers and other significant businesses in the financial services arena. Transamerica Reinsurance writes reinsurance directly with its ceding company clients rather than through brokers. This direct relationship produces an expense advantage and a more complete understanding of risks while contributing to more favorable underwriting results and deeper, longer lasting customer relationships. Transamerica Reinsurance
of the Employee Retirement Income Security Act of 1973, as amended (ERISA), defined benefit, profit sharing, money purchase, NQDC, and 457(b) plan types. Diversified provides retirement products and services for the mid- to large-sized pension market, which includes companies with between 250 and 100,000 employees and pension assets between USD 5 million and USD 1 billion. These products and services are sold through a variety of intermediaries, including benefit consulting firms, broker-dealers, agents and brokers.
AEGON USA reinsures portions of its life insurance exposure with unaffiliated insurance companies under traditional indemnity, quota share reinsurance contracts and, in some instances, excess loss reinsurance. Such reinsurance arrangements are in accordance with standard reinsurance practices within the
AEGON Dealer Services Inc. (ADSCI) provides advisors and distributors with mutual fund and segregated fund dealership capability to the benefit of the MCC franchises and representatives, as well as to TLC’s and AEGON Fund
November 2001 through the spin-off of the investment management division of TLC. ACM’s mandate is to develop products and services for the institutional, high net-worth individual, pension and retail markets.
AEGON Fund Management (AFM) is the mutual fund subsidiary of ACI, offering the imaxx™ brand of mutual funds to Canadian investors seeking customized portfolio solutions, as well as core fund portfolios featuring select investment managers from around the world.
AEGON Canada’s current investment product offerings comprise the following: segregated funds, mutual funds, segregated funds offered through strategic alliances with investment management companies, guaranteed investment accounts, single premium annuities and leverage-lending programs through strategic alliances with bank and trust companies. The imaxx™ range of mutual funds is offered by AFM. TLC offers all of AEGON
AEGON Canada’s principle means of distribution includes a number of networks that are almost exclusively supported by independent advisors.
The key channels of distribution are: • independent managing general agencies
The primary operational subsidiaries in the Netherlands are: • AEGON Levensverzekering N.V.
The MSO’s are: • Corporate & Institutional Clients (C&IC), which focuses on large companies as well as company pension funds and industry pension funds
While the majority of AEGON The Netherlands products are sold through agents, products are also sold via other channels such as direct marketing, specialized agents and tied agents.
Institutional clients and large companies are directly targeted by the marketing and sales organization C&IC.
Separate investment guaranteed contracts and separate investment capital contracts are defined benefit products with both single and recurring premiums and a disability rider. Profit sharing is based on the return of a pool of investments. Large group contracts also share technical results (mortality risk and disability risk). The assets are owned by AEGON The Netherlands but earmarked to form the basis for profit sharing for these contracts. The contract period is typically five years and the premium tariffs are fixed over this period. Separate investment capital contracts are only sold to company pension funds and
TKP Pensioen offers administrative services for large pension funds. During 2004, this unit enlarged its base with the acquisition of a large account, which increased the number of participants to a total of 220,000.
The products are predominantly standard financial products; the most important products are discussed below.
Endowment and savings products. Endowment and savings products have recurring premiums with contractual surplus interest profit sharing.
LevenHypotheek, a universal life-based mortgage investment product. The loan is repaid at the redemption date, in full or in part with the proceeds from a savings policy. Upon the death of the insured within the policy contract period, the benefit payment is used to repay the mortgage loan. The customer can choose from six funds in which to invest the savings premiums; two of these six funds offer limited guaranteed benefit payments on maturity date. The ultimate amount available at the maturity date will vary depending on the performance of the underlying funds.
Non-life insurance products are mainly sold by the marketing and sales organizations Intermediary and Meeùs. Non-life products consist primarily of accident and health and property and casualty. Over the past few years the Dutch government has gradually withdrawn from the sick leave (ziekteverzuim) and workers disability market. In the property and casualty segment,
With regard to the fire insurance business, an excess of loss reinsurance strategy is in place, with a retention of
EUR 5.0 million per risk and EUR 21.0 million per event.
The motor business is also reinsured on an excess of loss basis, with a retention of EUR 2.5 million per event.
The principal holding company within the AEGON UK Group of companies is AEGON UK plc (AEGON UK), incorporated as a public limited company under the Companies Act 1985 and having its registered office in England. It is a company limited by shares, incorporated on December 1, 1998.
AEGON UK is a major financial services organization specializing in the long-term savings and protection markets. AEGON UK sells primarily through the Independent Financial Advice channel.
for ten years and then 1% thereafter from the previous 1% flat charge. This is expected to reduce margin pressure in this area.
Changes to many aspects of pension legislation and taxation continue to impact the industry. The most significant aspect relates to the introduction of a simpler and unified tax regime, which will apply to all types of pension arrangements.
SmartScheme, which allows customers and the intermediary to interact with SE online throughout the process.
The difference between these bonds lies in the tax advantages related to each type of bond, as offshore bonds allow gross rollup of assets, allowing personal tax to be deferred until the monies are repatriated to the UK.
Offshore bonds. Scottish Equitable International (Dublin) plc is a provider of offshore life contracts. These are sophisticated packaged investment products with tax advantages for clients in the United Kingdom and overseas. The products meet the needs of high net-worth individuals for investment choice and flexibility, inheritance tax planning (in conjunction with trust arrangements)
Flexible Investment Plan, that is designed to take regular premiums, and can be used in retirement planning for the high net-worth market. It can be taken out by individuals or be company sponsored.
A fast growing area within the individual protection market is the ability to transact business electronically and AIP’s proposition development is adapting to reflect this. Development of an electronic proposition has been a key focus area for AIP
over the last twelve months and will continue to be so throughout 2005, delivering straight-through processing.
Menu. This product is purchased by the employer at a predefined cost, and allows each individual employee to select appropriate levels of protection to suit their individual needs.
AEGON UK’s principal means of distribution is through the independent financial advisor (IFA) channel in the United
GBP 14 billion invested. A dedicated sales force has been established to exploit this capability with both retail and institutional clients.
In 2002 and 2003, AEGON UK acquired six independent financial advisors in the UK. On May 18, 2004 a new business, Origen, was launched as a result of combining five of these businesses and it will be fully operational during the first quarter of 2005.
The sixth firm acquired, Positive Solutions, provides management services to self-employed IFAs, using a marketleading technology platform.
AEGON UK reinsures mortality and morbidity risk where it believes it is prudent and economically sound to do so with a target minimum credit rating requirement of AA by Standard
AEGON UK also uses reinsurance to offer pension contract holders access to a number of external fund management organizations. Under these contracts, which relate to unit-linked businesses, the unit liability is reinsured to the third party organization. The credit risk relating to the investments is borne by the pension contract holders while AEGON UK retains ultimate credit risk relating to the external fund managers.
Traditional general account products consist mainly of small life policies that were issued before AEGON Hungary became part of the AEGON Group. The premium income from these policies is small and the profit margin is very low. Traditional general account products also include indexed life products that are not unit-linked but have guaranteed interest. AEGON Hungary no longer offers either of these products.
Group life products are group life yearly renewable term products with optional accident and health coverage. These products are mainly unit-linked products, sometimes with an interest guarantee.
Investment Fund Management Rt is responsible for all the investment activities in Hungary and the Central Eastern
Hungary) has been a member of the AEGON Group since 1992.
AEGON Hungary has four subsidiaries: • AEGON Hungary Financial Services Rt
AEGON Hungary is a composite insurance company offering both life insurance and non-life insurance products. The core business products are life, pension, mortgage and household insurance.
Strong pension fund sales have played a key role in the sales performance of AEGON Hungary. The life insurance product portfolio consists of traditional general account products and unit-linked products, although in recent years unit-linked sales have been much more significant than general account product sales. AEGON Hungary’s market share in the household segment is 37% (source: Annual Report of Hungarian Insurance
Association, 2003). Margins for household insurance are attractive and present AEGON Hungary with opportunities for cross-selling life insurance products. Property and car insurance are also represented in the portfolio but are not core products.
Therefore pension fund services are also offered. The mandatory and voluntary pension funds of AEGON Hungary are in 2003 among the largest in the country in terms of managed assets and
AEGON Hungary’s distribution channels comprise a composite network (selling both life and non-life products), a specialized team targeting the Budapest market, independent agents and brokers.
The composite network and the specialized team work with agents. AEGON Hungary also uses alternative channels and partners to increase sales. This approach enabled AEGON
AEGON Hungary also endeavors to develop relationships with banks. AEGON Hungary’s current partner banks offer mortgage products, simple savings products and units of AEGON Hungary
The three most important programs in force in the last ten years are the Catastrophe Excess of Loss Treaty, the Motor Third
Party Liability Excess of Loss Treaty and the Property per Risk
In addition to tied agents, brokers are contracted for product distribution.
Spain will continue to sell AEGON’s life and health insurance products. At the same time, AEGON will acquire the life portfolio of Reale in Spain, which will give AEGON access to Reale’s existing agent distribution network, valid for five years and renewable thereafter.
Over the past several years, AEGON Spain has focused on life insurance business for growth in the portfolio. By marketing unitlinked variable life products to professionals through multiple distribution channels, it made significant inroads into a market, which has been traditionally dominated by banks.
AEGON Spain with exclusive access to a broader agents distribution network in 2005.
AEGON Spain has both proportional and non-proportional reinsurance protection, primarily for fire and general liability insurance. AEGON Spain’s reinsurers are generally at least
The agency channel consists of a network of over 500 full-time professional career agents operating from 26 offices throughout
AEGON Taiwan has its mortality and morbidity risks reinsured by international reinsurers as well as the local Central
The reinsurance covers both excess surplus risks and catastrophic concentration risks.
AEGON Life Insurance (Taiwan) Inc. is a life insurance company that was formed in 2001 to conduct life insurance business in the
AEGON Taiwan’s operations began in 1994 as a branch office of Life Investors Insurance Company of America, an AEGON USA
life insurance company. In 1998, AEGON Taiwan took over a block of business comprised of 55,000 policies of American Family Life
Taiwan acquired a block of business comprised of 57,000 policies of National Mutual Life Association of Australia, AXA’s Taiwan life operation.
AEGON Taiwan offers a broad range of insurance products meeting a variety of consumer needs, including whole life, endowment life, term life, accident and supplemental health, variable universal life, annuities, group life and health, as well as a range of policy riders. Variable universal life, introduced in April 2002, is one of the major products in the agency channel. In 2003, new product initiatives included an updated version of the whole life product series. Furthermore, AEGON Taiwan launched an innovative variable annuity product in 2004, targeted at longterm savings and retirement planning. Both products are sold through multiple distribution channels.
AEGON-CNOOC Insurance Co., Ltd. (AEGON-CNOOC) is a 50/50 joint venture established in Shanghai, People’s Republic of China by China National Offshore Oil Corporation and AEGON. After a 12-month preparatory period, AEGON-CNOOC commenced its operations in Shanghai in May 2003. AEGON-CNOOC is licensed to sell both traditional life insurance products as well as accident and health products in mainland China.
On December 1, 2004, AEGON-CNOOC received a license from the regulatory authorities to start life insurance activities in Beijing, which will be the first branch of AEGON-CNOOC.
The product portfolio of the agency channel consists primarily of traditional life products, such as level whole life, coupon whole life, endowment life and term life as well as short-term accident and long-term health products. The most important product for the bancassurance channel is a single premium short-term endowment product. AEGON-CNOOC is also planning to develop more regular premium products for the bancassurance channel in the near future. The major product for the telemarketing channel is a yearly-renewable personal accident product.
Commission (CIRC), AEGON-CNOOC cedes a quota share of accident and health business to the China Reinsurance Company.
In addition, AEGON-CNOOC enters into several commercial reinsurance arrangements to achieve a diversification of risks and limit the maximum loss on risks that exceed policy retention limits.
Extraordinary General Meetings of Shareholders may be convened by the Supervisory Board or the Executive Board whenever deemed necessary. In accordance with the Articles of
General Meeting of Shareholders made by shareholders representing at least 0.1% of the issued common shares will generally be honored.
Shareholders and to speak and vote in the meeting, either in person or by proxy granted in writing (including electronically embedded proxies), provided the shareholder complies with the applicable statutory provisions for providing of evidence of shareholders’ status or notification of the intention to attend the meeting. When convening General Meeting of Shareholders, the
Executive Board can set a record date for determining the entitlement of shareholders to attend and vote at the General
Aandeelhouders (a Dutch foundation with the purpose of enhancing communication with and participation of shareholders at General Meetings) AEGON welcomes the possibility of voting by proxy. Moreover, proxies are solicited from the New York
At the General Meeting of Shareholders each share is entitled to one vote; however, the holder of preferred shares, Vereniging
AEGON, is entitled to cast 2.08 votes per preferred share in the event Vereniging AEGON, in its sole discretion, has determined that a special cause has occurred and then only limited to a period of six months per special cause. In this respect reference is made to the section on Vereniging AEGON on page 146 in this annual report’s Financial Statements.
Governance Code AEGON initiated a review process aimed at implementing the code in the company’s corporate governance.
The chapter on AEGON’s compliance with the code has been discussed as a separate item during the annual General Meeting of Shareholders held on April 22, 2004. Following the annual
General Meeting of Shareholders AEGON has taken further steps to implement the code.
Shareholders to be held on April 21, 2005. In addition, this chapter outlines the proposals that will be made to the General
Governance Code have been included for easy reference in addition to references to the individual clauses.
The Executive Board and the Supervisory Board will continue to take responsibility for the corporate governance structure of
AEGON. The paragraphs dealing with corporate governance that are typically included in the annual report have been expanded in the annual report over the financial year 2003 to include a more comprehensive overview of the corporate governance structure.
AEGON with the code shall be submitted to the General Meeting of Shareholders for discussion under a separate agenda item.
The current members of the Executive Board are appointed for an indefinite term. The Supervisory Board has agreed with the
Executive Board be for four-year periods, subject to reappointment. In accordance with past practice within AEGON, the Executive Board will submit to the Supervisory Board for its consideration and approval the operational and financial objectives of AEGON, the strategy to be used to achieve these objectives, as well as the parameters that are applied in relation to the strategy (including the financial ratios and capital adequacy levels). A summary hereof will continue to form part of
Risk and Capital Committee at group level. This is in addition to the pre-existing risk management systems established at country unit level. The objectives of the Group Risk and Capital
Committee include monitoring AEGON's overall risk exposures as well as making recommendations and overseeing remedial action where exposures are deemed excessive. Moreover, this committee is responsible for ensuring that risks are well measured and managed within the country units. The Group Risk and Capital
financial reporting process. In this context the COSO framework is applied. Based on these activities the Executive Board believes, to the best of its knowledge, that it can assert with reasonable assurance that the internal risk management and control systems were effective during 2004. However, the design and effectiveness of the risk management and control systems remain subject to continuous improvement. Since the internal control systems throughout the whole organization are currently under review in view of the future obligations pursuant to
Conduct, as well as any alleged irregularities concerning the functioning of Executive Board members are reported directly to the chairman of the Supervisory Board. The Code of Conduct of
AEGON’s annual report includes information about the most important external factors and variables influencing the results of the company. These sensitivity analyses customarily provided in AEGON’s annual report include the sensitivity to interest rates, equity and real estate markets, long-term assumptions of AEGON
Board will continue to consider the publication of additional sensitivity analyses if and when appropriate.
None of the members of the Executive Board is a member of the Supervisory Board of more than two Dutch listed companies nor is a chairman of the Supervisory Board of a listed company.
Euronext Amsterdam at the close of trading on the date of the granting of options. The terms under which stock options and performance shares are issued shall not be altered during the term thereof except for technical alterations in accordance with market practice in events such as a stock split, mergers and acquisitions, share issuances and (super) dividends.
In its remuneration report, included on pages 14-16 of this annual report, the Supervisory Board has accounted for the manner in which the Remuneration Policy regarding members of the Executive Board has been applied In addition, each year the annual report provides an overview of the then current
The remuneration report is posted on AEGON’s website www.aegon.com. The principal points in the remuneration report are mentioned in the report of the Supervisory Board.
Executive Board have drawn up a protocol which provides that the members of the Executive Board who also serve on the executive committee of Vereniging AEGON shall continue to participate in discussions and decision making relating to possible transactions with Vereniging AEGON. The Supervisory
stock. These regulations are in conformity with the regulations prescribed by the Dutch regulators and have been further refined in light of the more detailed best practice provisions of the Dutch
Corporate Governance Code. Compliance with these regulations is supervised by the Group Compliance Officer, who acts alongside compliance officers appointed by country units and the business units. The regulations applicable to members of the
Executive Board, members of the Supervisory Board, major shareholders and the independent auditor on the one hand, and
AEGON. The Supervisory Board assists the Executive Board by giving advice. In performing their duties, the members of the
Rules, the Supervisory Board is empowered to obtain all information they deem necessary for the performance of their duties, including the right to obtain information from officers of the company and external experts.
The Supervisory Board Rules contain provisions regarding the division of duties within the Supervisory Board and its internal procedures and contacts with the Executive Board, as well as with the General Meeting of Shareholders. These regulations are posted on AEGON’s website.
The Supervisory Board shall continue its existing practice to include a detailed account of its activities in the relevant financial year in each annual report. This will also include the information prescribed in the Dutch Corporate Governance Code.
The current composition of the Supervisory Board is in compliance with the best practice provisions of the Dutch
Mr. K.J. Storm who served as chairman of the Executive Board immediately prior to his appointment as a member of the
Under the composition profile, it is expected that each member of the Supervisory Board shall be capable of assessing the broad outline of the overall policy, in addition to the specific expertise required for the role that an individual member will be designated to fulfill. The profile also takes into account the nature of the insurance business of AEGON, the activities of the
Supervisory Board and the background of the Supervisory Board members and is designed to ensure that the Supervisory Board as a whole is capable of the proper performance of its duties.
Supervisory Board an introduction program covering the general financial affairs of AEGON, general aspects of the insurance industry, and to those pertaining to AEGON specifically, as well general legal affairs of the group. The Supervisory Board regularly discusses whether there are any areas in which its members require further training.
The Supervisory Board has concluded that none of these memberships unduly or negatively influences the proper performance of the relevant members of their duties as member of the Supervisory Board. Mr. Tabaksblat, the chairman of the
Supervisory Board currently holds more than the maximum number of Supervisory Board positions with Dutch listed companies (including chairmanships) set forth in the Dutch
Corporate Governance Code. Mr. Tabaksblat is not available for reappointment upon the end of his current term in 2005 since he will have reached the maximum of three four-year terms specified in the Dutch Corporate Governance Code. Consequently, he will step down at the annual General Meeting of Shareholders to be held on April 21, 2005.
Corporate Governance Code. The Supervisory Board has determined that given the high number of vacancies recently filled and yet to be filled, it is prudent to request Mr. Olcay to serve on the Supervisory Board until the end of his current term in office in the interest of continuity.
In accordance with the Supervisory Board Rules, the chairman is responsible for overseeing the day-to-day functions of the
Supervisory Board as a whole and its committees, for keeping close track of the flow of information to the Supervisory Board and for the consultation and decision-making processes within the Supervisory Board. The chairman is also responsible for initiating the assessment of the individual members of the
Supervisory Board and the Executive Board and for maintaining appropriate contact with the Executive Board and the Dutch
Supervisory Board. In particular, the company secretary is responsible for the correct application of the statutory obligations under the Articles of Incorporation and the
Supervisory Board Rules. The appointment of the company secretary is subject to the approval of the Supervisory Board.
Each of the committees of the Supervisory Board has a charter in which the duties of the committee, the composition and its internal procedures are defined. The committee charters are available on AEGON’s website.
The Audit Committee is appointed by the Supervisory Board to assist the Supervisory Board in monitoring (1) the integrity of the
Mr. Eustace. The Audit Committee has determined that its composition satisfies the criteria of independence specified by the New York Stock Exchange as well as the provision of the code and the United States Sarbanes-Oxley Act that at least one financial expert sits on the Audit Committee. Meetings of the
Board members, the director of the Group Finance Department and the independent auditor. In addition, at least once per year
The Strategy Committee is responsible for reviewing the major features of the strategy proposed by the Executive Board and preparing the presentation of the strategy to the Supervisory
Supervisory Board do not receive any shares or rights to shares by way of remuneration. Members of the Supervisory Board are not eligible to receive any personal loans, guarantees or similar benefits.
Relations. One of the key opportunities for dialogue with its shareholders is the General Meeting of Shareholders.
The Supervisory Board and Executive Boards welcome increased shareholder participation. It is further proposed to the
General Meeting of Shareholders that further amendments be made to the Articles of Incorporation that would require certain resolutions of the Executive Board that entail significant changes to the identity or character of AEGON or its business be subject to the approval of the General Meeting of Shareholders.
Currently, Vereniging AEGON holds 16,900,000 preferred shares class B, representing approximately 1.0% of voting shares
under normal circumstances. The 1983 Merger Agreement (as amended) provides that additional preferred shares class B are to be issued by AEGON to Vereniging AEGON at the option of
As a result of the foregoing and certain qualified majorities specified in AEGON’s Articles of Incorporation, in the event of a special cause (as referred to above), for a period of six months
The Supervisory Board and the Executive Board take the view that this arrangement is in accordance with the principles that the Dutch Corporate Governance Committee has recommended to the legislature and which should be taken into consideration when drafting a law on anti-takeover measures.
Board). These provisions were included at the time of the overall review of AEGON’s corporate governance and were adopted at the extraordinary General Meeting of Shareholders on
AEGON) are an integral part of AEGON’s protection against unfriendly actions. Taken together the qualified majority requirements and the voting rights of Vereniging AEGON
For the purpose of further mitigating the possible negative effects of the qualified majority requirements in the ordinary course the Supervisory Board has decided that, absent unfriendly actions, it shall make nominations to the Executive Board and the
Supervisory Board only on a non-binding basis. This will allow the shareholders the opportunity to decide on the nomination with a simple majority. Thus for all practical purposes the relevant principle and the relevant best practice provision are complied with. The preferred shares voting agreement entered into between AEGON and Vereniging AEGON, as further described above, clearly sets out those circumstances in which the protection may be invoked and a special cause may be declared.
AEGON’s policy on profit appropriation (additions to reserves and on dividends) shall be discussed and accounted for as a separate item on the agenda of the annual General Meeting of
Shareholders. Also, a resolution to pay a final dividend shall be dealt with as a separate item.
Board for their supervision will be separately voted upon in the annual General Meeting of Shareholders.
United States’ Sarbanes-Oxley legislation. These communications and filings are made available on AEGON’s website.
AEGON refrains from any actions that may jeopardize the independence of analysts in relation to the company. Other than factually, analysts’ reports and valuations (including earnings
AEGON in advance of their publication and AEGON pays no remuneration of whatever kind to any such analysts in the context of preparing such reports or their publication.
The Executive Board and the Supervisory Board will provide the General Meeting of Shareholders with all requested information, unless overriding interests of AEGON are better served by not providing the requested information. If such overriding interests are invoked, those reasons will be substantiated.
AEGON uses shareholders’ circulars to inform the shareholders about the facts and circumstances relevant to upcoming proposals. Shareholders’ circulars may take the form of an appropriate written explanation to the agenda of the
approval is prescribed (including delegations or authorizations requested from the General Meeting of Shareholders).
As a general rule, the report of the General Meeting of
Shareholders shall be made available, upon request, to the shareholders not later than three months after the meeting.
Shareholders are given three months to react to the report prior to its adoption in accordance with the Articles of Incorporation by the chairman of the General Meeting of Shareholders and the secretary appointed by the chairman for that purpose. The report is posted on AEGON’s website.
In addition to AEGON’s responsibility to its shareholders and other stakeholders, the company also is an institutional investor.
In compliance with local Codes of Conduct applicable to institutional investors, AEGON’s country units in the United
Dutch website, www.aegon.nl, its existing policies regarding the exercise of the voting rights attaching to the shares held by
AEGON Nederland N.V. in Dutch listed companies. In addition, starting in 2005 it is intended that a report on how this policy was implemented in any given financial year is published on the website of AEGON Nederland N.V. A record of whether, and if so, how AEGON Nederland N.V. has voted as shareholder in general meetings of shareholders of Dutch listed companies is also published on its website. At a minimum, this record shall be updated on a quarterly basis.
Board receives the financial information from the country units directly. The Supervisory Board, acting primarily through the
services that may be rendered by the independent auditor to the company.
The independent auditor is appointed annually by the shareholders at the annual General Meeting of Shareholders.
The shareholders will be given the opportunity to question the independent auditor at the General Meeting of Shareholders in relation to his or her statement on the fairness of the annual accounts.
Supervisory Board conduct a thorough assessment of the functioning of the independent auditor. The findings of this assessment will be shared with the General Meeting of
Shareholders for the purposes of its deliberations on the annual appointment of the independent auditor.
In 2003, AEGON appointed an internal auditor on group level who reports directly to the Executive Board. This is in addition to the internal auditors that have been appointed on the level of
Auditor was determined with involvement of the Audit Committee and the independent auditor. The findings of the internal auditor are made available to the Executive Board, the Audit Committee as well as the independent auditor.
The Supervisory Board meets with the independent auditor at least once a year on the occasion of the discussion of the annual accounts that are to be submitted for adoption to the General
Meeting of Shareholders. As part of standing procedures, the independent auditor receives the information underlying the annual accounts and the quarterly figures and is given ample opportunity to respond to all information.
Reports by the independent auditor of his findings in relation to the audit of the annual accounts are made to the Supervisory
Audit Committee. In accordance with applicable laws, the independent auditor reports on its activities to the Executive
Audit Committee Charter such issues include significant financial reporting issues and judgments made in connection with the preparation of the financial statements, including the quality of earnings, significant deviations between planned and actual performance, the selection or application of accounting principles (including any significant changes with respect thereto), any major issues as to the adequacy of its internal controls and any special steps adopted in light of material control deficiencies.
From the foregoing it follows that AEGON complies with the principles of the Dutch Corporate Governance Code. Moreover,
Code. Where AEGON does not apply the best practice provisions, the reasons have been stated at the appropriate place. In those limited cases where AEGON does not apply the best practice provisions, AEGON follows the spirit of the Dutch Corporate
Executive Board, the severance arrangements to which current members of the Executive Board are entitled are not in line with this best practice provision.
Given the position of AEGON’s CEO and CFO on the executive committee of AEGON’s largest shareholder,
Vereniging AEGON, this could technically give rise to a deemed conflict of interest. The Supervisory Board has determined that also given the historic relationship with
Vereniging AEGON it is not in the best interests of AEGON
that the CEO and CFO would be precluded from participating in discussions and decision making relating to Vereniging
• III.3.5: this best practice provision provides that a person may be appointed to the Supervisory Board for a maximum of three four-year terms. The Supervisory Board has asked
Meeting of Shareholders may pass a resolution cancelling the binding nature of a nomination for appointment of a member of the Executive Board or the Supervisory Board by an absolute majority and a limited quorum. The current Articles of Incorporation of AEGON provide for a larger majority and a higher quorum than prescribed by the Code. As indicated above, the Supervisory Board takes the view that in light of the absence of any anti-takeover measures, the current text of the Articles of Incorporation is appropriate and in line with accepted practice with respect to anti-takeover measures in the Netherlands. For the purpose of further mitigating the possible negative effects of these provisions, the Supervisory
Board has decided that, absent unfriendly actions, it shall make nominations to the Executive Board and the
2,460 3,189 Receivables out of direct insurance 6 1,806 2,525 836 1,136 Receivables out of reinsurance 614 899
TECHNICAL PROVISIONS 14 1,722 1,330 Unearned premiums and unexpired risks 1,264 1,053 441 386 Profit sharing and rebates 324 306
4,248 3,391 Payables out of direct insurance 3,119 2,685 898 591 Payables out of reinsurance 659 468 2,685 3,336 Amounts owed to credit institutions 1,971 2,641 7,517 7,144 Entrusted savings accounts and deposits 5,519 5,656 324,859 295,512 TOTAL EQUITY AND LIABILITIES 238,499 233,976 1The 2003 numbers have been adjusted to reflect the changes in accounting principles implemented as of January 1, 2004.
2,963 1,349 Income before tax and exceptional items 2,383 1,193 (315)
11 247 Net income non-consolidated ventures 9 218 51 1.31 0.72 Net income per share fully diluted2 34 1.05 0.64 (0.18)
CONSOLIDATED INCOME STATEMENTS In accordance with Dutch Accounting Principles Amounts in EUR millions 88 AEGON ANNUAL REPORT 2004
1,864 1,890 Amortization of deferred policy acquisition costs 1,499 1,671 1,848 73 82 Amortization of interest rate rebates 59 72 84
1,063 1,165 Change in subordinated and other long-term loans 855 1,030 (789) 33 21 Repurchased and sold own shares 26 19 0 0 0 Paid in capital/withdrawal preferred shares 0 0 2,053 0 0 Change in deposits withheld from reinsurers 0 0 (1)
These financial statements have been drawn up in accordance with the rules for financial statements of insurance companies in the Netherlands, embodied in Title 9, Book 2 of the Dutch Civil Code. A summarized consolidated income statement has been added to the required balance sheet and profit and loss account in order to present a comprehensible view of the results of the AEGON Group (AEGON).
AEGON is exposed to a variety of risks. Some risks are related to the international nature of AEGON’s business, such as currency translation risk. Other risks include insurance-related risks, such as changes in mortality and morbidity. However, the largest exposure is to changes in financial markets (i.e. interest rate, credit and equity market risks) that affect the value of the investments and technical provisions (including deferred policy acquisition costs). For detailed information about risks and the sensitivity of AEGON to movements in interest rates, currency markets and equity and real estate markets, and their effects on net income and shareholders’ equity on a DAP basis, refer to the review of risk factors on page 41.
Application of the accounting policies in the preparation of the annual accounts requires management to use judgments 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 from those estimates. Accounting policies that are critical to the financial statement presentation and that require significant judgment or involve complex estimates are the policies concerning the determination of default provisions for fixed rate investments, the other than temporary impairments of equity securities, the technical provisions for life insurance including amortization of deferred policy acquisition costs, the provisions for minimum benefit guarantees, and the pension expense. For further explanation refer to the notes of the related items.
As of January 1, 2004, the following changes in accounting principles have been adopted: • With International Financial Reporting Standards (IFRS) becoming AEGON’s required reporting standard in 2005, AEGON decided to discontinue the indirect income method of accounting for capital gains and losses. Gains and losses on shares and real estate are now recognized in the income statement when realized; • Statement of Position (SOP) 03-01 issued by the Accounting Standards Executive Committee (AcSEC) of the AICPA is implemented by AEGON USA. SOP 03-01 addresses a number of items within FAS 97, and two elements in particular had an effect on AEGON USA: 1. The establishment of additional mortality-based provisions on universal life contracts. SOP 03-01 changes the timing of the recognition of mortality profits into earnings; 2. SOP 03-01 changes the methodology for calculating provisions for minimum guaranteed living and death benefits on variable annuity and variable life contracts.
As a result of the new accounting principles adopted in 2004, the 2003 and 2002 results included in these financial statements have been adjusted as follows for comparison: Amounts in EUR millions 2003 2002
Realized gains and losses on shares and real estate (270) (1,343)
As a result of the discontinuation of the indirect income method, the realized portion of the revaluation account at December 31, 2003, amounting to EUR 1,281 million was transferred to the other surplus fund as of January 1, 2004. This change in accounting principles did not have an impact on total shareholders’ equity.
On January 28, 2004, Caja de Ahorros del Mediterráneo (CAM) and AEGON reached a final agreement on a strategic partnership. The partners have created a company, which combines CAM's customer reach through its banking network and AEGON’s expertise in life insurance and pensions.
On December 13, 2004, AEGON announced the increase of its stake in La Mondiale Participations from 20% to 35%, through an increase of capital of La Mondiale Participations, effective December 31, 2004.
The interest in the TFC non-insurance businesses was accounted for under shares in group companies at net asset value until December 31, 2003. These group companies were not consolidated because the nature of their business was dissimilar to the rest of the AEGON Group businesses. Most of TFC’s non-insurance business was sold with the sale of most of its commercial lending business in early 2004. The remaining TFC businesses are consolidated as of January 1, 2004.
Assets and liabilities denominated in foreign currencies are converted into euro (EUR) at the year-end exchange rates. Currency exchange rate differences resulting from the conversion of foreign currencies investments in shares and real estate are accounted for in shareholders’ equity.
Income statement items in foreign currencies are converted at the weighted average currency exchange rates for the reporting period. Calculation differences resulting from using year-end exchange rates in the balance sheet and weighted average exchange rates in the income statement are charged or credited directly to shareholders’ equity under the caption ‘currency exchange rate differences’.
Equity held in subsidiaries not accounted for in euro, to the level of self-imposed requirements applied within the Group, is not hedged against currency exchange rate movements. Equity held in subsidiaries in excess of these requirements may be hedged. All currency results related to equity held in subsidiaries and the funding thereof, including results and related costs from hedging transactions on those subsidiaries, are accounted for in shareholders’ equity under the caption ‘currency exchange rate differences’.
The most important closing rates at December 31 are: US Dollar (USD) 1.3621 1.2630
Weighted average exchange rates applied for income statement items: US Dollar (USD) 1.2436 1.1311 0.9468
In the United States, a reduction in the carrying value is made and charged against the default provision when impairment of a specific fixed income investment is determined. The determination of the amount of the write-down is based upon management’s best estimate of the future recoverable value of the fixed income investment and takes into account underlying collateral or estimations of the liquidation values of the issuers.
Unrealized gains and losses on real estate investments as well as results, expenses and currency exchange rate differences from hedging transactions are recognized in the revaluation account, taking into account the related (deferred) taxes. Realized gains and losses are recognized in the income statement when realized. The impairments for the financial year amounted to EUR 1 million (2003: EUR 79 million). The 50% participation in the real estate joint venture AMVEST Vastgoed is accounted for under this caption.
Interests in companies in which AEGON is able to influence operating policy but where AEGON has no control, as well as interests in group companies which are not consolidated because of their relative financial insignificance, are accounted for by inclusion of AEGON’s proportion of the equity and the net income of the companies, based on AEGON accounting principles. Loans to group companies and other participations are valued at face value.
Interests in short-term holdings are valued at cost less certain provisions where necessary. Dividends declared are included in the consolidated income statements.
A realized loss is recorded for shares whose market value is considered to be impaired on an ‘other than temporary’ basis. Shares held in an unrealized loss position that are below cost for over six months are evaluated for a possible other than temporary impairment.
However, independent third party documentation about the financial condition and near-term prospects of the issuer and the intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery are also important factors taken into account in identifying other than temporarily impaired shares. These factors typically require significant management judgment. The impairments for the financial year amounted to EUR 25 million (2003: EUR 273 million). When an optional dividend is taken in shares, an amount equal to the cash dividend is credited to income. The 95% participation in AEGON Global Investment Fund N.V. is accounted for under this caption. Shares and convertible debentures lent out are included and amount to EUR 96 million (2003: EUR 826 million). No shares and convertible debentures were borrowed.
The composition by industry categories of shares in an unrealized loss position at December 31 is presented in the table below.
Carrying value of shares with gross unrealized losses Gross unrealized losses
Total shares in an unrealized loss position 752 986 (69) (92)
Bonds are shown at amortized cost less provisions for uncollectable amounts, representing the cash value at the balance sheet date of future interest and principal repayment components based on the effective interest rate on the date of acquisition. Included in other fixed rate securities are redeemable preferred shares and money market investments. Redeemable preferred shares are valued at amortized cost; money market investments are valued at cost.
The carrying value and market value of the bonds and other fixed rate securities are as follows: Carrying Unrealized Market value gains losses value
The provision for doubtful debts for these investments amounts to EUR 71 million (2003: EUR 47 million).
Unless the loss is considered a default loss, realized gains and losses from transactions within the private placement and bond portfolios valued at amortized cost are deferred and released to the income statements in annual installments over the estimated average remaining term to maturity of the investments sold. In the United States a reduction in the carrying value is made for loans which are in default or have experienced a significant downgrade in their credit rating. Such reductions are charged against the loans default provision. In the other countries the provision is accrued until the receivable has legally ceased to exist.
The carrying value and market value of the private placements are as follows: Carrying Unrealized Market value gains losses value
As no market exists for these investments, market value is calculated based on current interest rates, term to maturity and risk assumptions. Asset-backed loan agreements are priced by outside brokers and corporate private placements are matrix-priced primarily with spreads and interest rates from outside sources. In isolated instances, spreads or prices are adjusted for credit-specific issues. These assets are valued similarly to a forced sale, therefore large discounts are included for liquidity premiums and the uniqueness of each structure.
The provision for doubtful debts for not yet written-down private placements is EUR 91 million (2003: nil).
Market value of policy loans is equal to book value. The market value of receivables from share lease agreements and others amounts to EUR 2,214 million (2003: EUR 2,595 million). The provision for doubtful debts amounts to EUR 98 million (2003: EUR 19 million).
Bonds and other fixed rate securities 71,576 51,389 (42,529) (4,164) 76,272 1Included in this amount is EUR (2,673) million resulting from the consolidation of TFC as of January 1, 2004.
The composition by industry categories of bonds, other fixed rate securities and private placements in an unrealized loss position at December 31 is presented in the table below.
Total bonds, other fixed rate securities and private placements in an unrealized loss position 20,057 21,671 (361) (743)
Bonds and other fixed rate securities 249 435 (440) (50) 194 5 INVESTMENTS FOR ACCOUNT OF POLICYHOLDERS
NOTES TO THE CONSOLIDATED BALANCE SHEETS Amounts in EUR millions 8 EQUIPMENT
Data furniture Equipment processing and other held for Total systems equipment lease equipment
USD 500 million, coupon date October 15, January 15, April 15, July 15 2014 367 —
The market value of these securities amounts to EUR 1,320 million.
The coupons for the EUR 114 million 8% bonds are set at 8% until June 8, 2005. The coupons for the EUR 203 million 71⁄8% bonds are set at 71⁄8% until March 4, 2011, while the EUR 136 million 71⁄4% bonds are set at 71⁄4% until October 14, 2008. On these dates, and after every consecutive period of ten years, the coupons will be reset at the then prevailing yield of 9-10 year Dutch government bonds plus a surcharge of 0.85%. The coupons of the other four bonds are fixed.
The bonds have the same subordination provisions as dated subordinated debt. In addition, the conditions of the bonds contain certain provisions for interest deferral and for the availability of principal amounts to meet losses.
The market value of these bonds amounts to EUR 1,602 million (2003: EUR 1,589 million).
This item comprises the following loans: USD 100 million 74⁄5% Capital Trust Pass-through Securities 1996/2026 73 79
USD 190 million 75⁄8% Capital Trust Pass-through Securities 1997/2037 140 151
The market value of these loans amounts to EUR 468 million (2003: EUR 509 million).
Included in premiums is a loading for expenses. When the premiums are actually received or become receivable, the loadings emerge and are available to offset actual expenses, including maintenance expenses, non-deferrable acquisition expenses and amortization of the deferred policy acquisition costs (DPAC). For products that have guaranteed benefits over the lifetime of the policy or at maturity, the premiums also include loadings for the expected cost of the guarantee. The pricing of the guarantee is based on assumptions for future investment performance, including reinvestment assumptions. Part of the risk is covered by reinsurance contracts.
Guaranteed minimum accumulation benefits on segregated funds in Canada CAD 191 166
In the United States, a common feature in variable annuities is a guaranteed minimum death benefit (GMDB). This means that when the insured dies, the beneficiaries receive the higher of the account balance or the guaranteed amount. The latter is calculated using the total deposits made by the contract holder less any withdrawals and sometimes includes a roll-up or step-up feature that increases the guarantee with interest or with increases in the account value, respectively. The Statement of Position 03-01 (SOP 03-01), issued by AcSEC, changed the provisioning for mortality on universal life contracts and for guaranteed living and death benefits on variable annuity and variable life contracts in the United States.
Universal life-type contracts that assess charges for a mortality benefit feature in a manner that is expected to result in profits in earlier years and losses in subsequent years are now required to establish a reserve in addition to the account balance to recognize the portion of such assessments that compensates the insurance enterprise for benefits to be provided in future periods. The consequence of SOP 03-01 is that a product that fails this test for any future year is required to establish a reserve that would cause mortality margins to be more level over the policy life. The reserve is not limited to the amount of the losses for those years with a mortality loss.
The provision for GICs and funding agreements is the amount due for these products which are sold in the United States to a broad array of institutional customers including defined contribution plans, defined benefit plans, public employee plans, municipalities, money market funds, and United States and overseas investors. GICs are generally issued to tax-qualified plans while funding agreements are issued to non-qualified institutional investors both in domestic and international markets. AEGON utilizes consolidated special purpose entities linked to medium term notes or asset-backed commercial paper for the issuance of certain funding agreements. Under these programs, the proceeds of each note series or commercial paper issuance are used to purchase a funding agreement from an AEGON insurance company, which is used to secure that particular series. The payment terms of any particular series substantially match the payment terms of the funding agreement that secures that series. The benefit provisions are equal to the fully accumulated contract values. AEGON also consolidates SPEs that issue floating rate notes and own fixed rate AAA-wrapped municipal debt securities. AEGON owns a residual interest in these SPEs and also provides certain guarantees to the noteholders.
Medium Term Note funding agreements issued to a special purpose entity 6,675 6,444
The following table presents provisions for guaranteed investment contracts and funding agreements by withdrawal regulation: Book value out1
As of December 31, 2004, the contractual maturities for all contracts with defined maturities were for 2005: EUR 3,979 million; for 2006: EUR 3,757 million; for 2007: EUR 2,606 million; for 2008: EUR 1,1 19 million; for 2009: EUR 1,688 million; and thereafter EUR 3,739 million.
Of which value of business acquired life (VOBA) 3,427 3,866 1Mainly caused by currency exchange rate differences.
These policy acquisition costs are costs that are directly or indirectly related to the acquisition of new or renewal life insurance contracts. Such costs consist principally of commissions, certain marketing, underwriting and contract issue expenses. Policy acquisition costs are deferred (DPAC) to the extent that they are recoverable from future expense charges in the premiums or from expected gross profits, depending on the nature of the contract. Acquisition costs are also deferred for certain non-insurance investment type products related to 401(k) plans in the United States. DPAC are deducted from the technical provision life insurance.
For flexible premium products, including fixed and variable annuities, variable universal life and unit-linked contracts, amortization of DPAC is based on expected gross profits, which are determined based on management’s best estimates as to future expectations. These estimates include but are not limited to: an economic perspective in terms of long-term bonds and equity returns, mortality, disability and lapse assumptions, maintenance expenses, and future expected inflation rates. DPAC for flexible premium insurance contracts and investment type contracts are amortized in proportion to the emergence of estimated gross profits over the life of the contracts. Movements in equity markets can have a significant impact on the value of the flexible contract accounts and the fees earned on these accounts. As a result, estimated future gross profits increase or decrease with these movements. Similarly, changes in interest rate spreads for fixed annuity products (interest credited less interest earned) will affect management’s assumptions with respect to estimated gross profits.
Included in the DPAC is an amount of value of business acquired (VOBA) resulting from acquisitions, which is equal to the present value of estimated future profits of insurance policies in force related to business acquired at the time of the acquisition. The VOBA is fundamentally the same as DPAC and is subject to the same recoverability testing. The VOBA is amortized against expense loadings included in the premiums of the acquired portfolios or for acquired unit-linked business against charges arising from the related acquired business.
The changes in the carrying value of the VOBA (life and non-life) were as follows: Balance at January 1 4,110 5,502
Of which value of business acquired non-life (VOBA) 190 244 1Mainly caused by currency exchange rate differences.
A different method is applied to marine, aviation and transport insurance. The calculation is based on the ‘underwriting years system’ with premiums deferred and claims combined in a fund.
These consist mainly of insurance deposits under Dutch group life contracts, which are designated for improvement of retirement benefits under such contracts. Maturity is undetermined. Interest credited to such deposits is linked with the average yield on long-term Dutch government bonds.
The following amounts on account of reinsurance ceded have been deducted from the technical provisions: Life insurance 2,320 2,075
Reinsurance premiums, commissions and claims settlements, as well as technical provisions relating to reinsurance, are accounted for in the same way as the original contracts for which the reinsurance was concluded. Reinsurers’ share in technical provisions resulting from reinsurance agreements are deducted from the liabilities relating to the original insurance contracts. At December 31, 2004, there were no reinsurance receivables associated with a single reinsurer with a carrying value in excess of 5% of total assets of AEGON N.V.
AEGON insurance subsidiaries cede premiums to other insurers under various agreements that cover individual risks, group risks or defined blocks of business, on a coinsurance, yearly renewable term, quote share, excess or catastrophe excess basis. These reinsurance agreements spread the risk and reduce the effect of losses. The amount of each risk retained depends on its evaluation of the specific risk, subject, in certain circumstances, to maximum limits based on characteristics of coverages. Under the terms of the reinsurance agreements, the reinsurer agrees to reimburse the ceded amount in the event the claim is paid. However, AEGON insurance subsidiaries remain liable to their policyholders with respect to ceded insurance if any reinsurer fails to meet the obligations assumed by it. To limit this risk, reinsurance treaties are entered into with only well capitalized, highly rated reinsurers. Where deemed appropriate additional protection is arranged through letters of credit or trust arrangements.
AEGON UK also uses reinsurance to offer pension contract holders access to a number of external fund management organizations. Under these contracts, which relate to unit-linked business, the unit liability is reinsured to the third party organization. The credit risk relating to the investments is borne by the pension contract holders while AEGON UK retains ultimate credit risk relating to the external fund managers.
Increase rate Balance at debited to fluctuations Balance at January 1, the income and other December
As at December 31, the provisions for taxation consist of: Deferred tax liabilities relating to: Deferred policy acquisition costs 3,219 2,772
Tax losses carried forward recognized within deferred tax assets 1,967 2,251
The movements in provisions for taxation were as follows: Balance at January 1 1,653 1,724
BALANCE AT DECEMBER 31 2,290 1,653 108 AEGON ANNUAL REPORT 2004
The following table provides the detail of long-term liabilities: Period Coupon date 2004 2003
USD 200 mln 63⁄4% Domestic Debentures (Transamerica Corp.) 1996/06 May/Nov 15 146 158
USD 100 mln 93⁄8% Domestic Debentures (Transamerica Corp.) 1996/08 March/Sept 1 73 79
USD 500 mln 7% Eurobonds (AEGON Funding Corp.) 1999/04 September 10 — 396
EUR 350 mln 43⁄4% Eurobonds (AEGON Funding Corp. II) 2001/05 February 28 350 350
This item represents liabilities to reinsurers in connection with assets withheld under reinsurance treaties executed on a funds withheld basis. The term to maturity of these liabilites exceeds one year.
The principles for the determination of results are described in the notes to the balance sheets. Additionally, certain principles for specific income statement items are described in this section.
Investment income is recognized as revenue on an accrued basis for all interest-bearing assets. Investment income includes changes in the amortized cost basis of investments and amortization of deferred gains and losses on fixed rate investments. It also includes net income from group companies and participations, actual dividends received and rental income due. Income from banking activities includes investment income and other income from banking operations. Fees and commissions from asset management services and mutual funds and from sales activities are recognized as revenue over the period in which the services are performed or the sales have been closed.
Investment income allocated to the non-technical account (12) (3) (1) (1) (2) 0 (1) (20)
RESULT TECHNICAL ACCOUNT NON-LIFE 258 (7) 22 1 28 (2) 5 305
Investment income allocated to the non-technical account (14) (4) (2) (1) (2) (2) (1) (26)
RESULT TECHNICAL ACCOUNT NON-LIFE 220 (10) 2 2 12 10 10 246
Other investments and liquid assets 157 202 243 26 CHANGE IN TECHNICAL PROVISIONS
Technical provisions with investments for account of policyholders 8,532 14,141 (9,279)
CHANGE IN TECHNICAL PROVISIONS 5,432 6,448 7,556 27 PROFIT SHARING AND REBATES
In the United States US GAAP (SFAS 87) is applied for the US pension plans. SFAS calculations require several assumptions, including future performance of financial markets, future composition of work force and best estimates of long-term actuarial assumptions. The pension expense in the income statement in a certain year under SFAS 87 includes the expected return on assets. The expected return on assets is calculated by applying the long-term return on a five-year moving average of the market value of the plan assets. In a period of market declines, such as recently experienced, this moving average is higher than the market value of the assets at the reporting date. The difference between the expected return reflected in the income statements and the actual return on the assets in a certain year is deferred. Deferred gains or losses are amortized to the income statement applying a corridor approach. The corridor is defined as 10% of the greater of the moving average value of the plan assets or the projected benefit obligation. To the extent that the prepaid pension costs at the beginning of the year exceeds the moving average asset value less the pension benefit obligation by more than the 10% corridor, the excess is amortized over the employees’ average future years of service (approximately seven years). The amount in note 10 (page 100) for prepaid pension costs on employee pension plans relates entirely to AEGON in the United States. The amount is a combination of unrecognized net losses, unrecognized prior service costs and the positive difference between the market value of the pension plan assets at the reporting date and the projected benefit obligation. In the Netherlands employees participate in a defined benefit scheme based on average salary and for the amount exceeding a certain level employees may opt for a defined contribution scheme. Indexation of vested rights is fully funded yearly and immediately charged to the income statements. In the United Kingdom, AEGON UK has a defined benefit scheme which covers the great majority of employees. With effect from April 1, 2003, this fund was closed to new entrants who are now placed in a defined contribution scheme. In addition, current employees in the defined benefit scheme will either have future benefit entitlements reduced or will have to pay 5% of salary to maintain benefits at their current level. Employer contributions at the rate of 14% commenced with effect from January 1, 2003.
The average number of employees in 2004 was 27,906 of which 5,146 were agent-employees (2003: 28,521 of which 5,136 were agent-employees and 2002: 25,903 of which 3,985 were agent-employees). The specification per geographical area is as follows: The average number of employees of joint ventures have been included proportionally. The total number employed at these joint 118 AEGON ANNUAL REPORT 2004
P. van de Geijn (pro rata for the year 2003) — 241 — 241 — 241
P. van de Geijn (up to October 31, 2003) 4205 0 — 0 143 563
5Base salary including increase from Dutch collective labor agreement, the employee profit sharing bonus (for 2004 and 2002 only) as well as a tax deferred employee savings scheme.
For a detailed description of the remuneration policy regarding the members of the Executive Board refer to page 14.
J.G. van der Werf 48,000 46.95 48,000 — — — —
1Stock appreciation rights. For a description refer to page 141. 2The stock appreciation rights were granted before becoming a member of the Executive Board.
The criteria for the number of stock appreciation rights or stock option rights to be offered to the members of the Executive Board under the LTI plan in force until December 31, 2003, are as follows: 1. Comparison of the AEGON share price with the share prices of a peer group of nine financial companies (ABN Amro, AIG, Allianz,
At the end of the plan term it was determined that the average AEGON share price performance compared with those of the peer group (based on the share price performance over 2001, 2002, and 2003) ranked in the bottom group, as a result of which each Executive Board member received 50,000 SARs in 2004.
L.M. van Wijk (as of April 17, 2003) 34,034 21,205 —
The remuneration of members of the Supervisory Board is related to the functions of the individual member within the Supervisory Board. The chairman and the vice-chairman, as well as the members of the Audit Committee, are entitled to certain additional payments as reflected in the table above.
STOCK OPTIONS INCLUDING STOCK APPRECIATION RIGHTS OF ACTIVE MEMBERS OF THE SUPERVISORY BOARD Stock Stock options Exercise Market options Exercise Balance at price price Balance at price January 1 EUR Lapsed Date EUR December 31 EUR
The options have been granted by reason of membership of the Executive Board in the related years.
Investment expenses and interest charges 271 2 691 964 30 MISCELLANEOUS INCOME AND EXPENDITURE Non-
Income on investments held against shareholders’ equity does not form a part of the technical results. The amounts transferred to the non-technical account include the direct yield on allocated investments or are based on the average direct yield of the investment portfolio.
In February 2005, AEGON settled legal proceedings brought by Banque Internationale à Luxembourg S.A. (BIL) and Dexia Bank Belgium S.A. (Dexia) in connection with AEGON’s sale in 2000 of Labouchere, at that time a subsidiary company of AEGON. Dexia had alleged that AEGON had made certain misrepresentations and breached certain warranties contained in the purchase agreement. The alleged misrepresentations and breaches of warranties related to securities leasing products sold by Labouchere. Without admitting the claims brought by BIL and Dexia, AEGON agreed to pay EUR 218 million in cash to BIL and Dexia in full and final settlement of all and any claims in this regard. The settlement amount was paid on February 14, 2005. The payment was accounted for as an exceptional item in the 33 CORPORATION TAX
The tax burden for AEGON as a group is made up of the direct and future taxes payable on profits of the units operating in the various countries.
The following table provides the information underlying the calculation of net income per share. Net income per share excludes dilution and is computed by dividing net income available to common shareholders, which is after deduction of dividends on the preferred shares, by the weighted average number of common shares (EUR 0.1 2 par value) outstanding. Fully diluted net income per share is computed based on the weighted average number of common shares outstanding during the year plus dilutive potential common shares considered outstanding during the year (treasury stock method). The weighted average number of common shares has been adjusted retroactively for all periods presented to reflect stock dividends.
NET INCOME USED IN CALCULATION DILUTED NET INCOME PER SHARE 1,584 938 (258)
Derivatives denominated in foreign currency amounts are converted at the year-end exchange rates.
Interest rate contracts are used to manage AEGON’s exposure to interest rate risks. These contracts are designated as economic hedges to AEGON’s risk exposures. The main types of derivative financial instruments used are interest rate swaps, swaptions, caps/floors and forward rate agreements/futures: • An interest rate swap is an agreement between two parties to exchange, at specific dates, the difference between a fixed interest rate and/or a floating interest rate payment on a predetermined notional amount.
• A swaption is an option to enter into an interest rate swap at a specific future date.
Foreign exchange contracts are used to manage AEGON’s exposure on its net investment in subsidiaries denominated in foreign currencies and other investments. The main types of derivative financial instruments used are cross currency swaps and forward foreign exchange contracts: • Cross currency swap agreements are contracts to exchange two principal amounts of two currencies at the prevailing exchange rate at inception of the contract. During the life of the swap the counterparties exchange fixed or floating rate interest payments in the swapped currencies and at maturity the principal amounts are again swapped at a predetermined rate of exchange.
Other derivative transactions are used to manage equity and credit related exposures. The main types of derivative financial instruments used are equity swaps, options, futures and credit derivatives: • An equity swap is a swap agreement in which one party makes payments based on either a floating index or a fixed rate, while the other party makes payments based on the return of an equity index, basket, or single stock.
• Options are contracts that give the option purchaser the right, but not the obligation, to buy or sell, at or before a specified future date, a financial instrument at a specified price.
• Futures are contractual obligations to buy or sell financial instruments on a future date at a specified price.
• A commonly used credit derivative instrument is a credit default swap. A credit default swap allows the transfer of third party credit risk from one party to another. In essence, the buyer of a credit default swap is insured against third party credit losses. If the third party defaults, the party providing insurance will have to purchase the defaulted asset from the insured party or settle net in cash. AEGON uses credit derivatives to hedge credit exposures.
A separate category of derivatives is the synthetic guaranteed investment contracts (GICs). Synthetic GICs guarantee to plan sponsors benefit responsiveness, in the event that qualified plan benefit requests exceed plan cash flows. AEGON writes these contracts as part of its ordinary course of business. The synthetic GICs are presented as off balance sheet assets and are part of the off balance sheet assets as disclosed on page 128; realized results are recognized in income.
The bonds and other fixed rate investments function mainly as collateral granted by AEGON subsidiaries abroad to meet legal requirements and include collateral guarantees given by subsidiaries under reciprocal insurance contracts. The guarantees on ceded and securitized mortgage loans cover the interest rate risk at early redemption of these loans.
Other commitments include private placement commitments, mortgage loan commitments, and limited partnership commitments. Certain insurance and investment products have minimum guarantees for which provisions have been made in the technical provisions and are therefore not included in the above table. These guarantees are discussed in note 14.
For all services the related assets are owned by customers and therefore they do not appear on the balance sheet of AEGON. Total assets involved in these operations amount to EUR 69 billion (USD 94 billion), (2003: EUR 63 billion, USD 79 billion).
In 2003, AEGON Levensverzekering N.V. completed two mortgage-related publicly placed securitization programs of in total EUR 2.3 billion that were similarly structured as the above described 2004 securitization.
2,388 2,006 19 Life general account single premiums 1,920 1,773 8 6,791 6,162 10 Life general account recurring premiums 5,461 5,448 0 5,716 5,593 2 Life policyholders account single premiums 4,596 4,945 (7)
10,551 14,544 (27) INVESTMENT INCOME FOR ACCOUNT OF POLICYHOLDERS 8,484 12,858 (34)
21,727 24,281 (11) TOTAL PRODUCTION ON BALANCE SHEET 17,471 21,467 (19)
12,671 13,020 (3) Mutual funds/Collective Trusts and other managed assets 10,189 11,511 (11)
Life for account of policyholders 101 68 49 81 60 35
ON SHARES AND REAL ESTATE 1,931 1,499 29 1,553 1,325 17
Life general account single premiums 1,199 916 31 964 810 19
Life policyholders account recurring premiums2 1,252 779 61 1,007 689 46
TOTAL PRODUCTION OFF BALANCE SHEET 18,435 21,547 (14) 14,824 19,050 (22)
4Reflected in the column total year 2004 is an adjustment of EUR 410 million to savings deposits relating to Q1 2004.
Realized gains and losses on shares and real estate (3) (10) 70 (4) (15) 73
Life general account recurring premiums 147 104 41 216 151 43
Life policyholders account single premiums 2,499 2,675 (7) 3,680 3,872 (5)
Life policyholders account recurring premiums 1,183 1,159 2 1,743 1,677 4
Mutual funds and other managed assets 143 332 (57) 210 481 (56)
Life general account single premiums 1 1 0 16 11 45 2 1 100
FIXED INCOME INVESTMENTS GENERAL ACCOUNT Amounts in EUR millions (unless otherwise stated)
AT DECEMBER 31, 2003 in USD in EUR in GBP in EUR in EUR total
High yield (BB+ or less) 7,421 62 0 2 5,940 6
USD GBP LIFE INSURANCE Americas Netherlands Kingdom Hungary Spain countries EUR
The United Other AT DECEMBER 31, 2004 Americas Netherlands Kingdom countries Total
The United Other AT DECEMBER 31, 2003 Americas Netherlands Kingdom countries Total
Life for account of policyholders 823 798 3,561 28 5,210 136 AEGON ANNUAL REPORT 2004
AEGON USA, Inc., Cedar Rapids, Iowa (USA) Commonwealth General Corporation, Wilmington, Delaware (USA) Life Investors Insurance Company of America, Cedar Rapids, Iowa (USA) Monumental Life Insurance Company, Baltimore, Maryland (USA) Peoples Benefit Life Insurance Company, Cedar Rapids, Iowa (USA) Stonebridge Casualty Insurance Company, Columbus, Ohio (USA) Stonebridge Life Insurance Company, Rutland, Vermont (USA) Transamerica Corporation, Wilmington, Delaware (USA) Transamerica Financial Life Insurance Company, Inc., Purchase, New York (USA) Transamerica Life Canada, Scarborough, Ontario (Canada) Transamerica Life Insurance and Annuity Company, Charlotte, North Carolina (USA) Transamerica Life Insurance Company, Cedar Rapids, Iowa (USA) Transamerica Occidental Life Insurance Company, Cedar Rapids, Iowa (USA) Veterans Life Insurance Company, Springfield, Illinois (USA) Western Reserve Life Assurance Co. of Ohio, Columbus, Ohio (USA)
TOTAL EQUITY AND LIABILITIES 22,501 20,203 1 The 2003 numbers have been adjusted to reflect changes in accounting principles implemented as of January 1, 2004.
BALANCE AT DECEMBER 31 95 201 4 SHARE CAPITAL Common Preferred Preferred shares shares A shares B Total
AEGON N.V. and Vereniging AEGON have entered into a preferred shares voting rights agreement, pursuant to which Vereniging AEGON has voluntarily waived its right to cast 25/12 vote per class A or class B preferred share. Instead, Vereniging AEGON has agreed to exercise one vote only per preferred share, except in the event of a ‘special cause’, such as the acquisition of a 15% interest in AEGON N.V., a tender offer for AEGON N.V. shares or a proposed business combination by any person or group of persons, whether individually or as a group, other than in a transaction approved by the Executive Board and Supervisory Board. If, in its sole discretion, Vereniging AEGON determines that a ‘special cause’ has occurred, Vereniging AEGON will notify the General Meeting of Shareholders and retain its right to exercise the full voting power of 25/12 vote per preferred share for a limited period of six months.
The following tables set forth the changes in the years 2002, 2003, and 2004 as well as the breakdown of stock appreciation rights (SARs) and options outstanding.
Options/SARs number1 20041 20041 in EUR1 Exercise period 1 Adjusted for the stock splits in 1998 and 2000 as appropriate.
5 Number of SARs that vested in 2004 for employees that were still employed by AEGON at the date of vesting.
Stock options exercisable as of December 31, 2004, amount to 31,727,598 (2003: 18,070,310 and 2002: 20,395,702) and their weighted average exercise price amounts to EUR 31.90 (2003: EUR 38.66 and 2002: EUR 35.24).
SHAREHOLDERS’ EQUITY AS AT DECEMBER 31 243 7,112 1,448 3,947 1,663 14,413 13,947 1 This item represents the total gain on the sale of most of TFC’s commercial lending business, the maritime container business and the European trailer business.
As of January 1, 2004, changes in accounting principles have been adopted as described on page 90. The effect on shareholders’ equity of these changes can be summarized as follows: January 1 January 1
Revaluations account at January 1 — adjusted 876 180 517 362 1,393 542
Unrealized gains and losses in previous years on shares and real estate sold in the reporting year (499) 249 (120) 21 (619) 270
Movements in the number of repurchased own shares were as follows: Balance at January 1 27,429,342
The purchase and sale value of the related shares have been deducted from respectively added to the other surplus fund. Goodwill is the difference between acquisition price and net asset value, based on AEGON accounting principles. The calculated amount is charged to shareholders’ equity in the year of acquisition or at first time consolidation. Results on the sale of subsidiaries are reflected directly in shareholders’ equity as far as the results do not exceed the goodwill, if any, charged to equity for that particular subsidiary.
Redemptions are included in long-term liabilities. The repayment periods of borrowings vary from in excess of one year up to a maximum of 22 years. The interest rates vary from 1.49% to 9.00% per annum. The market value of the long-term liabilities amounts to EUR 2,891 million (2003: EUR 2,896 million).
Due and punctual payment of any amounts owed to third parties by the consolidated group company AEGON Derivatives N.V. in connection with derivative transactions. AEGON Derivatives N.V. only enters into derivative transactions with counterparties with which ISDA Master Agreements including Collateral Support Annex agreements have been agreed; net (credit) exposure on derivative transactions with these counterparties was therefore minimal as of December 31, 2004.
With respect to the former subsidiary FGH Bank N.V. (sold to Hypo-Vereinsbank): a. payables due to all unsubordinated and non-privileged creditors of FGH Bank on account of deeds prior to February 27, 1987, and loans contracted by FGH Bank after February 27, 1987, up to March 30, 1998; and b. payables due by FGH Bank under guarantees rendered or several liabilities assumed prior to February 27, 1987. The sales agreement with Hypo-Vereinsbank includes recourse against that bank for liabilities emerging from the above guarantees.
3. From the remaining net profit, if it is sufficient to this end, first of all the holders of preferred shares shall receive a dividend on the amount paid-in on their preferred shares, the percentage of which, on an annual basis, shall be equal to the European Central Bank’s fixed interest percentage for basic refinancing transactions to be increased by 1.75 percentage points, all applicable to the first trading day on Euronext Amsterdam in the financial year to which the dividend relates. Apart from this, no other dividend is to be paid on the preferred shares.
Upon approval of this proposal, profit will be appropriated as follows: Dividend on preferred shares 79
In February 2005, AEGON settled legal proceedings brought by Banque Internationale à Luxembourg S.A. (BIL) and Dexia Bank Belgium S.A. (Dexia) in connection with AEGON’s sale in 2000 of Labouchere, at that time a subsidiary company of AEGON. Dexia had alleged that AEGON had made certain misrepresentations and breached certain warranties contained in the purchase agreement. The alleged misrepresentations and breaches of warranties related to securities leasing products sold by Labouchere. Without admitting the claims brought by BIL and Dexia, AEGON agreed to pay EUR 218 million in cash to BIL and Dexia in full and final settlement of all and any claims in this regard. The settlement amount was paid on February 14, 2005. The payment was accounted for as an exceptional item in the 2004 results.
On February 16, 2005, AEGON announced it had reached agreement on the sale of TFC’s European trailer leasing business. Together with the sale of the maritime container leasing business, AEGON has completed the divestiture of its non-core TFC operating businesses. The financial effect of these divestitures, which under Dutch Accounting Principles has been reported in shareholders’ equity in 2004, was not material.
Vereniging AEGON is the continuation of the former mutual insurer AGO. In 1978, AGO demutualized and Vereniging AGO became the only shareholder of AGO Holding N.V., which was the holding company for its insurance operations. In 1983, AGO Holding N.V. and Ennia N.V. merged into AEGON N.V. Vereniging AGO initially received approximately 49% of the common shares (which gradually was reduced to less than 40%) and all of the preferred shares in AEGON N.V., giving it voting majority in AEGON N.V., and changed its name into Vereniging AEGON.
On May 9, 2003, AEGON’s shareholders approved certain changes to AEGON’s corporate governance structure and AEGON’s relationship with Vereniging AEGON in an extraordinary General Meeting of Shareholders. AEGON’s Articles of Incorporation were subsequently amended on May 26, 2003. The relationship between Vereniging AEGON and AEGON N.V. was changed as follows: • The 440,000,000 preferred shares with nominal value of EUR 0.12 held by Vereniging AEGON were converted into 21 1,680,000 new class A preferred shares with nominal value of EUR 0.25 and the paid-in capital on the preferred shares was increased by EUR 120,000 to EUR 52,920,000. The voting rights pertaining to the new preferred shares (the class A preferred shares as well as the class B preferred shares which may be issued to Vereniging AEGON under the option agreement as discussed below) were adjusted accordingly to 25/12 vote per preferred share.
• AEGON N.V. and Vereniging AEGON have entered into a preferred shares voting rights agreement, pursuant to which Vereniging AEGON has voluntarily waived its right to cast 25/12 vote per class A or class B preferred share. Instead, Vereniging AEGON has agreed to exercise one vote only per preferred share, except in the event of a ‘special cause’, such as the acquisition of a 15% interest in AEGON N.V., a tender offer for AEGON N.V. shares or a proposed business combination by any person or group of persons whether individually or as a group, other than in a transaction approved by the Executive Board and the Supervisory Board. If, in its sole discretion, Vereniging AEGON determines that a ‘special cause’ has occurred, Vereniging AEGON will notify the General Meeting of Shareholders and retain its right to exercise the full voting power of 25/12 vote per preferred share for a limited period of six months.
• AEGON N.V. and Vereniging AEGON have amended the option arrangements under the 1983 Merger Agreement. Under the amended option arrangements Vereniging AEGON, in case of an issuance of shares by AEGON N.V., has the right to have issued to it as many class B preferred shares as shall enable Vereniging AEGON to prevent or correct dilution to below its actual percentage of total voting shares. Class B preferred shares will then be issued at par value (EUR 0.25), unless a higher issue price is agreed. In 2003, Vereniging AEGON exercised its option rights to purchase in aggregate 1 1,100,000 class B preferred shares at par value to correct dilution caused by AEGON’s stock dividend issuances and treasury stock sales during the year. In 2004, Vereniging AEGON exercised its option rights to purchase in aggregate 5,800,000 class B preferred shares at par value to correct dilution caused by AEGON’s stock dividend issuances and treasury stock sales during this year.
Development of shareholding in AEGON N.V. Common Preferred A Preferred B
Sale of stock, offering price of EUR 9.1990 per share (4,094,620) — —
At December 31, 2004, the General Meeting of Members of Vereniging AEGON consisted of 18 members. The majority of the voting rights is with the 16 of the members not being employees or former employees of AEGON N.V. or one of the AEGON group companies, nor current or former members of the Supervisory Board or the Executive Board of AEGON N.V. The two other members are both elected by the General Meeting of Members from among the members of the Executive Board of AEGON N.V.
We have audited the financial statements of AEGON N.V., The Hague, for the year 2004. These financial statements are the responsibility of the company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
Alexander F.J. van Overmeire Chris J. Westerman 148 AEGON ANNUAL REPORT 2004
Amounts in accordance with Dutch accounting principles 14,413 13,947 1,663 1,033 (228)
Deferred taxation on US GAAP adjustments (680) (771) 130 (266) (184)
Other comprehensive income, net of tax: Foreign currency translation adjustments (971) (2,384) (2,749)
Unrealized gains and (losses) on available for sale securities during the period 911 1,223 (673)
1 The shareholders’ equity and net income determined in accordance with DAP have been adjusted to reflect changes in accounting principles implemented as of January 1, 2004. The changes in accounting principles had no effect on last years’ reported shareholders’ equity and net income in accordance with US GAAP. As a result, the DAP – US GAAP adjustments of the affected reconciling items have been adjusted to reflect the changes in accounting principles in DAP. See page 90 for a reconciliation of 2003 reported DAP numbers to adjusted DAP numbers.
In 2004 major differences between amounts on Dutch accounting principles and those on US GAAP compared to the amounts of prior years are explained as follows: Net income of EUR 1,430 million was reported for 2004 based on US GAAP, compared to a net profit of EUR 1,531 million for 2003. Realized gains and losses on bonds and private placements less the reversal of the amortization of deferred gains and losses totaled EUR 245 million for the year ended December 31, 2004 (2003: EUR 893 million, 2002: EUR 8 million). Under Dutch accounting principles gains and losses are deferred and amortized to the income statement over future periods. Under US GAAP these gains and losses, together with the annual amortization charge, are reported in the income statement when they are realized.
Under Dutch accounting principles bonds and private placements are shown at amortized cost less provisions for uncollectable amounts, representing the cash value at the balance sheet date of future interest and principal repayment components based on the effective interest rate on the date of acquisition.
AEGON has classified the vast majority of its debt securities as available-for-sale securities and the remainder as trading securities. Under US GAAP, when evidence indicates there is a decline in a debt security’s value, which is other than temporary, the security is written down to fair value and the difference is charged to current year’s earnings.
Under Dutch accounting principles realized gains and losses from transactions within the bonds and private placements portfolios, unless a loss is considered a default loss, are deferred and released to the income statements in annual installments over the estimated average remaining maturity term of the investments sold.
Under Dutch accounting principles, policy acquisition costs, which are costs that are directly or indirectly related to the acquisition of new or renewal insurance contracts, are deferred to the extent that they are recoverable from future expense charges in the premiums or from expected gross profits, depending on the nature of the contract. Acquisition costs are also deferred for certain non-insurance investment type products related to 401(k) plans in the United States. Deferred policy acquisition costs (DPAC) are amortized over the life of the underlying contracts, which are periods not to exceed the premium-paying periods for fixed premium products (traditional life and fixed universal life) and for flexible premium insurance contracts and investment type contracts in proportion to the emergence of estimated gross profits.
For fixed premium products in all countries, the DPAC are tested at least annually by country unit and product line to assess the recoverability. The amount not recoverable is recognized as an expense in the income statement in the period of determination. In the United States and Canada, the DPAC on flexible premium products, including fixed and variable annuities, variable universal life and unitlinked contracts, are amortized at a constant rate based on the present value of the estimated gross profit amounts expected to be realized over the life of the policies. If appropriate, the assumptions included in the determination of estimated gross profits are adjusted. A significant assumption related to estimated gross profits on variable annuities and life insurance products is the annual long term net growth rate of the underlying assets. The reconsideration of assumptions may affect the original DPAC amortization schedule, referred to as DPAC unlocking. The difference between the original DPAC amortization schedule and the revised schedule, which is based upon actual gross profits earned to date and revised estimates of future gross profits, is recognized in the income statement as an expense or a benefit. In the Netherlands, the United Kingdom and Other countries the impact of equity market movements on estimated gross profits on flexible premium products is covered by the yearly or, if appropriate, quarterly recoverability testing; a negative outcome is charged to the income statement in the period of determination. If appropriate, the assumptions included in the determination of estimated gross profits are adjusted for future periods.
Under US GAAP for fixed premium products the accounting is the same as under Dutch accounting principles in all countries. For flexible premium products sold in the United States and Canada, US GAAP is the same as Dutch accounting principles. For flexible premium products sold in the Netherlands, the United Kingdom and Other countries an unlocking adjustment is made using a revised DPAC amortization schedule based on actual gross profits earned to date and revised estimates of future gross profits. Acquisition costs related to non-insurance investment type products related to 401(k) plans in the United States are expensed as incurred as opposed to being deferred and amortized in accordance with Dutch accounting principles.
Pursuant to the adoption of SFAS 142, ‘Goodwill and Other Intangible Assets’, as of January 1, 2002, goodwill is reviewed and tested for impairment under a fair value approach. Goodwill must be tested for impairment at least annually or more frequently as a result of an event or change in circumstances that would indicate impairment may be necessary. Impairment testing requires the determination of the fair value for each of the identified reporting units. The reporting units identified for AEGON based upon the SFAS 142 rules include: AEGON USA, AEGON Canada, AEGON The Netherlands, AEGON UK insurance companies and AEGON UK distribution companies and Other Countries. The fair value of the insurance operations is determined using valuation techniques consistent with market appraisals for insurance companies, a discounted cash flow model requiring assumptions as to a discount rate, the value of existing business and expectations with respect to future growth rates and term. The valuation utilized the best available information, including assumptions and projections considered reasonable and supportable by management. The assumptions used in the determination of fair value involve significant judgments and estimates. The discount rates used are believed to represent market discount rates, which would be used to value businesses of similar size and nature.
The goodwill write-down in 2002 primarily reflects impairments for Transamerica non-insurance amounting to EUR 1,234 million and for AEGON USA insurance operations.
The provision for life insurance represents the present value of future benefits to be paid to or on behalf of policyholders and related expenses less the present value of future net premiums. The provision is calculated using actuarial methods that include assumptions such as estimates of premiums, mortality, investment performance, lapses, surrenders and expenses. These assumptions are initially based on best estimates of future experience at policy inception date, in some instances taking into account a margin for the risk of adverse deviation. The assumptions used are regularly reviewed, compared to actual experience and, if necessary, depending on the type of products, updated.
In various countries products are sold that contain minimum guarantees. For these products the regular technical provision is recognized under technical provisions with investments for account of policyholders. The technical provision life insurance includes provisions for guaranteed minimum benefits related to contracts where the policyholder otherwise bears the investment risk.
In the United States, a common feature in variable annuities is a guaranteed minimum death benefit (GMDB). This means that when the insured dies, the beneficiaries receive the highest of the account balance or the guaranteed amount. Many variable annuity products also contain a guaranteed minimum income benefit (GMIB) feature that provides for minimum payments if the contract holder elects to convert to an immediate payout annuity. The guaranteed amount is calculated using the total deposits made by the contract holder, 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, respectively.
The GMIB liability is determined each period end by estimating the expected value of the annuitization benefits in excess of the projected account balance at the date of annuitization and recognizing the excess ratably over the accumulation period based on total expected assessments. AEGON regularly evaluates estimates used and adjusts the additional liability balance, with a related charge or credit to benefit expense, if actual experience or other evidence suggests that earlier assumptions should be revised. The assumptions used for calculating the GMIB liability as of December 31, 2004, are consistent with those used for calculating the GMDB liability. In addition, the calculation of the GMIB liability incorporates a percentage of the potential annuitizations that may be elected by the contract holder.
In Canada the variable annuity products sold are known as segregated funds. The provision for life insurance includes a provision in connection with the guarantees issued. A cap and a floor for this provision is calculated using stochastic prospective methods (probability weighted calculation using multiple future scenarios) and current assumptions. Within the cap and floor corridor, the accrual method based on pricing assumptions with valuation interest less actual claims incurred is followed. Outside the cap and floor corridor, a surplus or shortfall of the provision will cause an extra credit or charge to the income statement.
Provisions for fixed annuities, guaranteed investment contracts (GICs) and funding agreements (FAs) are equal to the accumulated contract balance.
The provision for guaranteed living and death benefits on variable annuity and variable life contracts in the United States is the same as described for DAP. For US GAAP, the impact from the adoption of SOP 03-01 was recorded as a cumulative effect of a change in accounting principles as of January 1, 2004.
Also, US GAAP technical provisions include the part of the change in value of the debt securities that must be allocated to policyholders based on the effects of the application of SFAS 115. The SFAS 115 effect on US GAAP equity is at December 31, 2004, EUR (312) million (year-end 2003: EUR (300) million).
In addition, to the extent that the contract contains an embedded derivative as defined by US GAAP, the contract is unbundled and the derivative is marked to fair value with changes recognized in the income statement. This adjustment is included in the Derivatives line in the reconciliation.
Certain items are recorded differently or in different periods on the two bases of accounting.
QUARTERLY RESULTS Amounts in millions 154 AEGON ANNUAL REPORT 2004 2004 USD 2004 EUR I II III IV Total I II III IV Total
March 12 AEGON reports on full year 2003 results March 12 Proposed changes in composition Supervisory Board AEGON N.V. March 18 Proposed changes in composition Supervisory Board AEGON N.V.
April 22 Resolutions of the annual General Meeting of Shareholders May 10 Stock fraction final dividend 2003 AEGON N.V. determined at 1/51 May 12 AEGON reports on first quarter 2004 results
June 7 AEGON discloses its embedded value 2003 June 9 CAM and AEGON set up holding for their strategic partnership July 12 AEGON issues EUR 450 million and USD 250 million in Junior Perpetual Capital securities July 13 AEGON increases euro tranche of Junior Perpetual Capital Securities to EUR 500 million
August 12 AEGON reports on first half year 2004 results September 20 Stock fraction interim dividend 2004 AEGON N.V. determined at 1/42
December 13 La Mondiale and AEGON strengthen their partnership by an increase of capital in La Mondiale Participations December 30 AEGON sells general insurance activities in Spain to Reale Mutua
April 25 – May 2 Election period for cash/stock dividend May 3 – May 9 Determination period for value stock dividend
September 23 Interim dividend payment date November 10 Release results first nine months 2005
The AEGON N.V. annual General Meeting of Shareholders will be held at AEGON headquarters, AEGONplein 50, The Hague, the Netherlands on Thursday April 21, 2005, at 10.00 C.E.T.
The statements contained in this Annual Report that are not historical facts are forward-looking statements as defined in the US Private Securities Litigation Reform Act of 1995. Words such as ‘believe’, ‘estimate’, ‘intend’, ‘may’, ‘expect’, ‘anticipate’, ‘predict’, ‘project’, ‘counting on’, ‘plan’, ‘continue’, ‘want’, ‘forecast’, ‘should’, ‘would’, ‘is confident’ and ‘will’ and similar expressions as they relate to us are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. We undertake no obligation to publicly update or revise any forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. All forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from expectations, including, but not limited to, the following: • changes in general economic conditions, particularly in the United States, the Netherlands and the United Kingdom; • changes in the performance of financial markets, including emerging markets, including: – the frequency and severity of defaults by issuers in our fixed income investment portfolios; and
– the effects of corporate bankruptcies and/or accounting restatements on the financial markets and the resulting decline in value of equity and debt securities we hold; • the frequency and severity of insured loss events; • changes affecting mortality, morbidity and other factors that may affect the profitability of our insurance products; • changes affecting interest rate levels and continuing low interest rate levels and rapidly changing interest rate levels; • changes affecting currency exchange rates, including the EUR/USD and EUR/GBP exchange rates; • increasing levels of competition in the United States, the Netherlands, the United Kingdom and emerging markets; • changes in laws and regulations, particularly those affecting our operations, the products we sell and the attractiveness of certain products to our consumers; • regulatory changes relating to the insurance industry in the jurisdictions in which we operate; • acts of God, acts of terrorism and acts of war; • changes in the policies of central banks and/or foreign governments; • litigation or regulatory action that could require us to pay significant damages or change the way we do business; • customer responsiveness to both new products and distribution channels; • competitive, legal, regulatory, or tax changes that affect the distribution cost of or demand for our products; • our failure to achieve anticipated levels of earnings or operational efficiencies as well as other cost saving initiatives; and
Colophon Consultancy and design Pauffley, London (UK) Editing and production AEGON Group Corporate Affairs & Investor Relations (NL) Photography Sascha Nowotka (UK) Typesetting Pauffley, London (UK), Habo DaCosta bv (NL) Printing Habo DaCosta bv (NL) Binding Hexspoor (NL)