ABOUT AEGON AEGON is one of the world’s largest life insurance and pension companies, and a strong provider of investment products. We empower our local business units to identify and provide products and services that meet the evolving needs of our customers, using distribution channels best suited to their local markets. We take pride in balancing a local approach with the power of an expanding global operation.
AEGON is driven to deliver new thinking and our ambition is to be the best in the industry.
21%Netherlands 2121%%NNeetherlandstherlands 1% Other countries 373737million 1%1%% Other countriesOther countries millionmillion 71% Americas71%71%
Financial statements of AEGON N.V. 2006 225 Balance sheet 226 Income statement 227 Notes to the fi nancial statements
Other information 237 Proposal for profi t appropriation 238 Major shareholders 240 Auditors’ report
1. AT A GLANCE 4 AEGON around the world 6 AEGON and the fi nancial community 8 Financial calendar 2. GROWTH AND PROFITABILITY
10 Chairman’s letter 13 Management Board 14 Strategy in action 16 Ambitious growth targets 3. REPORT OF THE EXECUTIVE BOARD
MAIN PRODUCT AREAS Traditional life, life for account of policyholders, pensions, fi xed and variable annuities, institutional guaranteed products, fee business (incl. mutual funds), accident and health insurance, life reinsurance
MAIN PRODUCT AREAS Traditional life, life for account of policyholders, pensions, fee business (incl. mutual funds)
MAIN PRODUCT AREAS Traditional life, universal life, accident and health insurance
MAIN DISTRIBUTION CHANNELS Tied agents, banks, direct marketing, brokers www.aegon-cnooc.com * 50/50 joint venture by China National Offshore Oil Corporation and AEGON N.V.
AEGON’s investor relations program aims to enhance shareholder value through clear communication and ensures effi cient and effective access to the global capital markets. AEGON’s common shares are listed on major stock exchanges including Euronext
AEGON is also active in the global debt capital markets. Using its strong credit ratings, AEGON has issued a variety of debt instruments in various major currencies in order to optimize its capital structure and reduce funding costs.
In 2006, AEGON completed a number of capital markets transactions that include two successful offerings of perpetual capital securities, which strengthened the capital base in a non-dilutive and cost effective manner.
With the objective of obtaining a fair valuation for its securities,
AEGON’s businesses and infl uence its results, fi nancial condition and value. AEGON remains committed to ensuring that both fi nancial and non-fi nancial information is accurately and thoroughly disclosed in a timely and consistent manner.
AEGON’s primary reporting basis is by geography and the secondary basis is by line of business. Starting with the fi rst quarter of 2007,
AEGON has started to report quarterly value of new business information and internal rate of return of the new business, beginning with the fi rst quarter 2006 results.
Interactions with the fi nancial community include roadshows throughout the USA, Europe, and Asia, webcasts, press releases and regularly scheduled investor days. Moreover, shareholders, bondholders and potential investors are encouraged to learn more about
In keeping with its ongoing determination to maintain an open dialogue with the fi nancial community, AEGON’s professional investor relations staff is available to answer questions at any time.
Exchange in Germany and on the SWX Swiss Exchange in Zurich, Switzerland wil be discontinued as per March 13, 2007.
results in August, and a fi nal dividend proposed at the time of the year end results in March and approved at the annual General
In 2006, AEGON declared an interim dividend of EUR 0.24 per common share. The stock fraction was determined at 1/62 resulting in an approximately 5.6 percent lower value for the stock dividend compared to an interim dividend in cash. To neutralize the effect of the stock dividend, AEGON repurchased 11.6 million shares in the open market. The fi nal dividend of 2006 proposed to the AGM
common shares). For more information on Vereniging AEGON please refer to page 238.
AEGON VALUES ITS MANY TRUSTED RELATIONSHIPS WITHIN THE GLOBAL INVESTMENT COMMUNITY
EUR 0.23 and in September 2006 an interim dividend of EUR 0.24 for 2006. Including the dividends paid in 2006 the total return1 for an AEGON common share in 2006 was 8.7 percent (2005: 42.8 percent). This compares to total returns1 for the European Insurance
1 The source for the total return calculation and comparison is Bloomberg. The calculation assumes reinvestment of the dividend in the stock or in the index.
AEGON COMMON SHARES ARE INCLUDED IN A NUMBER OF THE MAJOR EQUITY MARKET INDICES, AMONGST OTHERS, IN THE FOLLOWING KEY INDICES: AEX MSCI Euro Index
May 7 First quarter 2008 results and Embedded Value Report 2007
longer retirement. It is for this reason that AEGON has identifi ed pensions as a global growth initiative. By coordinating product concepts and sharing the broad expertise of our various business and country units, we believe that AEGON will further strengthen its leading position in the growing retirement market. Another indication of our concerted focus on the pension opportunity was our decision to acquire PTE Ergo Hestia, a top-ten pension fund management company in Poland. This will provide a strong complement to our successful life operations in Poland, following our entry into the Polish market in 2005.
DEAR READER, During the past year, we took a number of important steps to strengthen AEGON’s position as a leading provider of life insurance, pensions and related savings and investment products internationally. On behalf of the Executive Board, I am pleased to present this Annual Report detailing our progress and ongoing commitment to providing our customers with reliable, need-specifi c products and services while creating long-term value for AEGON’s many stakeholders.
EUR 1.1 billion by 2010. We are confi dent that our businesses in the
European countries and in Asia, will constitute an increased proportion of new business growth in the next several years.
acquired the remaining 55 percent of Unirobe, a leading company of independent fi nancial advisors in the Netherlands.
AEGON’s businesses internationally. In addition to my Executive Board colleagues Jos Streppel and Alex Wynaendts, the Management Board also includes the leaders of AEGON’s major country units: Pat Baird,
Executive Board will continue its role as the statutory governing body of AEGON N.V. The Management Board will work to identify business opportunities consistent with AEGON’s international growth strategy.
The formation of the Management Board refl ects the clear and increasing need for closer cooperation between country and business units and the importance of coordinating global initiatives and leveraging AEGON’s broad expertise.
During the year, we also continued the roll-out of our operations in the highly developed coastal provinces in China with the opening of
AEGON-CNOOC’s Shandong branch, and in December we fi nalized our new partnership with the Ranbaxy Promoter Group in India to provide life insurance and asset management products through Ranbaxy’s subsidiary, Religare. In January 2007, we fulfi lled our intention to enter
Banca Transilvania, in anticipation of the mandatory pension system next year. In addition, AEGON will also establish a life insurance company in Romania that will enter into a distribution agreement with
Banca Transilvania to sell co-branded products through the bank’s extensive network of 340 branches.
Efforts to enhance further AEGON’s broad distribution network were also successful in 2006. In November, we announced our agreement to acquire Clark Incorporated, a leading distributor of bank-owned and corporate-owned life insurance in the United States. AEGON also
Inc., an insurance holding company, in 1970. Serving in various management and executive functions with Life Investors, he became executive vice-president and chief operating offi cer in 1985, a position he held until AEGON consolidated its other United States operations with Life Investors to form AEGON USA in 1989, whereupon Mr. Shepard becam e president and CEO. In 1992,
Mr. Shepard became a member of the Executive Board of AEGON N.V.
(1949, Dutch nationality) began his career in 1973 at one of AEGON’s predecessors occupying several treasury and investment positions.
(1960, Dutch nationality) began his career with ABN AMRO in 1984 and had several assignments in asset management (Amsterdam) and corpo rate fi nance (London). In 1997, he joined AEGON’s Group Busi ness
Develop ment department and was promoted to executive vicepresident and head of Group Business Development in May 1998. In 2003 he was appointed a member of the Executive Board of AEGON N.V.
USA, Inc. He was appointed a member of the Management Board of
(1956, British nationality) began his career at Scottish Equitable in 1978. After qualifying as an actuary he served as marketing manager until leaving Scottish Equitable in 1988 to follow senior roles with
Abbey Life and Royal Insurance before returning to AEGON UK in 1994 as development director. He was appointed fi nance director in 2002 and then became CEO of AEGON UK in 2005. He was appointed a member of the Management Board of AEGON N.V., effective January 1, 2007.
(1952, Dutch nationality) began his career in 1973 as an offi cer in the
AEGON as a sales manager. From 1987 to 1992 he was chairman of the Management Board of Spaarbeleg and, in 1992, he became a member of the Management Board of AEGON The Netherlands. In
April 2002, he was appointed CEO of AEGON The Netherlands and a member of the Executive Board of AEGON N.V.. Mr. Van der Werf stepped down from the Executive Board when he was appointed to the Management Board of AEGON N.V., effective January 1, 2007.
Given changing demographics, AEGON believes its core businesses of life insurance, pensions and related investment products offer signifi cant potential for growth in the years ahead. Aging populations in the developed world and shrinking workforces mean that growth in the pension business will prove particularly strong.
In 2006, AEGON took a number of important steps to expand its worldwide pension business and is well positioned to capture future growth in both its established markets of the United States, the
AEGON will soon manage the pension accounts of more than 1.2 million people throughout Central and Eastern Europe.
In the United States, AEGON’s largest market, a key initiative is underway to provide fi nancial solutions to customers entering reitrement. Transamerica Retirement Management was launched as a new business unit in 2006, aimed specifi cally at helping customers manage their assets during retirement. As life expectancy rates increase, more people are having to manage their pension assets over longer periods of time and AEGON believes it can offer broad and innovative solutions to serve this rapidly-expanding segment of the retirement market.
Pension Network has been expanding steadily. Its members now include HDI Pensionsmanagement AG, Germany’s third largest pensions provider.
In 2006, AEGON also extended its partnerships with banks in a number of countries – an essential part of the company’s multichannel distribution strategy. AEGON’s two new joint ventures in
Spain – with leading savings banks Caja de Badajoz and Caja Navarra –
In Asia, AEGON was among the fi rst to introduce bancassurance to
In addition, AEGON further strengthened its distribution network in 2006 by acquiring the remaining 55 percent of Unirobe, a leading provider of fi nancial advice in the Netherlands, and with its acquisition of Clark Inc., a distributor of bank- and corporate-owned life insurance in the United States.
The decision to set out a new fi nancial target refl ects AEGON’s confi dence in the strong growth potential of its core businesses.
In 2006, AEGON made signifi cant progress in its efforts to expand its international presence. During the year, AEGON fulfi lled its ambition to re-enter the Mexican market, buying a 49 percent stake in life insurer Seguros Argos. In Poland, AEGON bought PTE Ergo Hestia, a pension fund management company. And in India, AEGON signed a new joint venture with the Ranbaxy Promoter Group and achieved further expansion in China with the opening of its new branch in the
Banca Transilvania, the country’s fi fth largest commercial bank, in anticipation of a new mandatory pension system, to be introduced in the country in early 2008. In addition, AEGON also agreed to establish a new joint venture with Sony Life in Japan, providing access to the world’s second largest life insurance market. In the coming year, AEGON will continue to pursue opportunities for international expansion, in line with its strategy of ensuring longterm growth and profi tability for its products and services.
AEGON is focused on the long-term fi nancial protection and asset accumulation needs of its clients, with a primary focus on delivering life insurance, pension, savings and investment products.
relies on the knowledge of local management to identify and serve the evolving needs of its customers. AEGON further seeks to deliver innovative products and services through multi-channel distribution networks best suited to local markets.
AEGON pursues a strategy of long-term profi tability and sustainable growth. AEGON aims to achieve a long-term average net income growth rate of 10 percent per annum.
In 2006, AEGON launched its new global growth initiatives. These initiatives seek to capitalize on significant opportunities in three areas: pensions, distribution through banks and international expansion. Executive Board member Alex Wynaendts has been given responsibility for coordinating efforts on these initiatives across the entire AEGON Group. For the first time in 2006, AEGON also set out an ambitious new medium-term financial growth target.
These changes are driving demand for the type of pension and longterm savings products in which AEGON specializes, as many individuals now have to manage their retirement assets for considerably longer periods of time than in the past. For these reasons, AEGON is determined to enhance its already significant presence in the worldwide pension business, not only in its established markets of the United States, the Netherlands and the
Central and Eastern Europe and Asia. As the baby-boomer generation enters retirement, much of the focus in Europe and the
For AEGON, partnerships with banks with well-established local branches are an essential means of distribution, given banks’
growing role as providers of a wide range of financial and retirement solutions. For this reason, AEGON is determined to extend its network of bank partnerships as part of its broader, multi-channel distribution strategy. In many cases, particularly in the United States,
As part of its overall growth strategy, AEGON is working to expand its international presence targeting, through selected partnerships and joint ventures, markets that will offer above-average growth in the years ahead. These emerging markets promise significant potential.
Poland and Slovakia mandatory private pensions systems have already been introduced. It is expected that Romania will introduce a similar system in 2008, the reason AEGON signed a new joint venture partnership with Banca Transilvania in early 2007.
For the first time, in 2006, AEGON set out a medium-term financial target, a measure of the company’s confidence in its core markets and businesses and the significant growth opportunities that will emerge in the coming years. AEGON’s objective is to double the value of its new business by 2010 to EUR 1.1 billion. AEGON believes this target is ambitious, but realistic. Expanding the company’s pension business, extending its network of bancassurance deals and targeting new, fast-growing emerging markets will all be vital, over the next few years, to achieve this objective.
“ AEGON is an avid supporter of developments that can lead to increased transparency and comparability.”
In addition, AEGON’s cash flows and capital position improved further, allowing us to increase the dividend substantially. AEGON will propose to pay a final dividend of EUR 0.31 per share and taking into account the interim dividend, this will bring the total dividend for 2006 to EUR 0.55 per share. This represents an increase of 22 percent compared to the previous year. As in the case of the interim dividend,
Netherlands United kingdom Other countries holdings, other activities and eliminations TotalAmounts in EUR million
Accident and health insurance premiums 1,981 191 0 69 0 2,241
Number of employees, including agent-employees 14,236 6,404 4,639 3,274 173 28,726
This leads to lower economic capital requirements, a benefit which is much more difficult to obtain for smaller, local insurance companies operating in specific niches.
Embedded Value Report which will provide an important additional set of information about AEGON’s financial performance.
During the past year, AEGON made significant progress in line with
The decrease of operating earnings before tax in Other countries primarily reflects investments to grow AEGON’s businesses in
Net income increased 2 percent to EUR 2,789 million (3 percent at constant currency exchange rates) in 2006. Higher operating earnings were offset by lower net gains on investments and lower other non-operating income. The effective tax rate decreased to 18 percent from 24 percent in 2005, mainly due to higher tax-exempt gains in the Netherlands and the impact of the reduction in 2007 of
Commissions and expenses increased 10 percent to EUR 6,085 million (11 percent at constant currency exchange rates) refl ecting a change in business mix, growth in the businesses and higher DPAC
Americas increased 11 percent to USD 21.3 billion, compared to 2005.
(GICs), strong sales in retail mutual funds in the US and the UK, and continued growth of AEGON’s pension fund business in Central and
In 2006, we focused on growing the value of our business and accomplished this growth in three ways – through organic growth domestically, leveraging our capabilities to support AEGON’s growth in existing and developing markets in Europe and Asia, and through new acquisitions.
Through our intense recruiting efforts, World Financial Group has increased its network of licensed agents.
This unit is devoted to helping the aging baby boomer generation manage its assets as they enter retirement in increasing numbers.
This initiative includes tailoring existing AEGON products to address a broader range of retirement needs, while relying on our broad network of distribution channels.
Cost-saving measures introduced in 2006 included consolidating some of our back-offi ce functions, investing in new technology to create effi ciencies and improve services, as well as reducing the number of administrative platforms we operate. We anticipate saving between USD 15 million and USD 20 million because of recent consolidation.
US company with a strong presence in the bank- and corporateowned life insurance (BOLI/COLI) market.
Operating earnings before tax were USD 2,732 million for 2006, an increase of USD 367 million or 16 percent compared to 2005. The return on hedge funds, limited partnership and convertible bond assets contributed signifi cantly to the earnings growth. The returns on these portfolios outperformed long-term expectations in both 2006 and 2005, and strong returns were particularly noticeable in the fourth quarter of 2006. In addition, the year over year earnings improvement is due to growth in most lines of business and improved mortality experience.
Product spreads on the largest segment of the fi xed annuity book were 247 basis points in 2006 on a pre-tax operating basis compared to 230 basis points in 2005. Product spreads in 2006 include 40 basis points from the impact of valuation of certain fi nancial assets carried at fair value compared to 21 basis points in 2005.
On a normalized basis, the expected contribution to product spreads from the valuation of these assets is approximately 17 basis points.
USD 164 million compared to USD 85 million in 2005, and growth due to strong sales were offset by reduced product spreads due to the continued rise of short-term interest rates early in 2006.
AEGON provides long-term return expectations for certain fi nancial assets that are managed on a total return basis with no offsetting changes to the fair value of liabilities. Long-term annual earnings on these assets, as described in more detail below, are based on longterm expected returns in fi nancial markets, but should not be used as an explicit forecast for the year as actual results can and will deviate from these expectations.
Net impairment charges of USD 15 million in 2006 were well below long-term expectations, but less favorable than the net impairment recoveries of USD 53 million recorded during 2005.
The effective tax rate of 27 percent for 2006 is slightly higher than the effective rate of 26 percent in 2005.
Revenues of USD 20.6 billion increased 11 percent in 2006 compared to those in 2005. Life insurance gross premiums of USD 9.7 billion increased 17 percent. Life general account premiums increased by 5 percent compared to 2005, refl ecting a 7 percent increase in single premiums and a 5 percent increase in recurring premiums, primarily in the reinsurance business. Life for account of policyholders premiums increased by 62 percent compared to 2005, a result of a large single premium BOLI/COLI case in 2006. The 2006 fi gure includes USD 95 million of premiums from the acquisition of a block of credit life insurance.
Investment income increased 7 percent in 2006 compared to 2005, primarily due to rising short-term rates, higher volume and increased book yield from reinvestment of the portfolio.
USD 56 million or 22 percent over 2005 due to growth in both domestic and international sales.
Fixed annuity new deposits declined by USD 52 million, or 2 percent, to USD 2,169 million in 2006. Retail fi xed annuity new deposits declined 19 percent as fi xed annuity sales continued to be diffi cult due to the inverted yield curve and competition from other bank-sold products. However, new deposits in the pension channel increased 48 percent to USD 799 million. The increase in pension sales is primarily related to fourth quarter 2006 terminal funding sales of
USD 228 million. Fixed annuity account balances of USD 48.0 billion were USD 4.9 billion lower than year-end 2005 as policyholder withdrawals continued to exceed new deposits. The total decrement rate on the retail annuity segment increased to 23 percent in 2006, up from 14 percent in 2005.
Variable annuity new deposits of USD 6.6 billion increased 6 percent compared to 2005. The retail segment increased 15 percent over last year due to an increase in demand for variable annuity products and increased wholesaler distribution. Sales in the pension segment declined 3 percent from last year, primarily due to strong takeover deposits in the third quarter of 2005. Variable annuity balances of
Sales of institutional guaranteed products amounted to USD 12.5 billion, an increase of 17 percent during 2006. The increased sales were primarily due to higher medium term note issuance. The balance of institutional guaranteed products increased to USD 34.3 billion compared to USD 32.9 billion at year-end 2005.
Institutional asset management sales decreased from USD 2.9 billion in 2005 to USD 1.4 billion in 2006, primarily due to a strong fi rst quarter 2005 prior to a change in investment personnel. Off balance sheet assets of USD 94.6 billion at December 31, 2006 increased 17 percent compared to year-end 2005 due to continued strong mutual fund and synthetic GIC sales and favorable equity market returns.
AEGON Canada Inc., and the Mexican activities, which are collectively referred to as AEGON Americas. The companies operating in the
AEGON USA Inc., the principal holding company of AEGON USA, was formed in 1989 when AEGON consolidated its holding companies in the United States under one fi nancial services holding company.
Business operations are conducted through life insurance subsidiaries of AEGON USA Inc., and Commonwealth General, with licenses in every state of the United States, the District of Columbia,
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. Traditional life is AEGON USA’s largest business segment.
AEGON’s subsidiary companies in the United States contain fi ve operating groups acting through one or more of the AEGON USA life insurance companies: Agency, Direct Marketing Services, Financial
The Agency Group divisions offer a wide range of insurance products through agents dedicated to selling AEGON products as well as independent agents, registered representatives, fi nancial advisors, and specialized marketing organizations. The Agency Group targets distinct market segments ranging from lower-income clients to the advanced market with higher net-worth customers whom it serves by providing various tax and estate planning products.
InterSecurities, Inc. (ISI) is a fully licensed, independent broker-dealer and registered investment advisor. ISI’s registered representatives are focused on helping clients meet their investment objectives through an array of fi nancial products that includes mutual funds, fi xed and variable life insurance, annuities, and securities. ISI is positioning itself for growth with the active recruitment of experienced fi nancial professionals who appreciate the value of insurance products in an overall fi nancial plan.
Organizations group (IMO) has seen growth in both recruiting and sales. This unit focuses on developing relationships with independent marketing organizations and managing general agents throughout the United States.
Monumental targets the lower and middle-income markets, selling individual traditional life and supplemental health insurance through three distinct distribution systems: Career Agency, IMO, and Pre-Need.
In the Career Agency channel, 2,483 agents in 22 states provide faceto -face sales and services to policyholders, and refl ect the diversity found in the communities they serve. In the IMO channel, approximately 500 general agents market to military families on or near military installations in the United States and abroad.
The typical agent is a former military offi cer. In 2006, the division expanded its IMO focus to provide fi nal expense coverage for middleincome customers in the rapidly growing senior market, with simplifi ed products and face values up to USD 25,000. The Pre-Need unit sells life insurance products to pre-fund funerals through funeral directors and their agents.
focuses on the upper-middle and affl uent markets, in addition to a number of niche markets that include small to mid-sized businesses and various ethnic groups. In May 2006, TOLIC announced the establishment of a Bermuda company, Transamerica Life (Bermuda) Ltd., a subsidiary of TOLIC with branch offi ces in Hong Kong and Singapore.
Advisors, Inc. TIIG also has a National Accounts channel through which it provides life insurance products to customers via the brokerdealer community. In 2006, TIIG celebrated the 100th anniversary of the founding of the original Transamerica life company, Occidental
TCI’s broker distribution channel focuses on less-highly customized products, in an administrative and service environment designed to assist the representative. The fi nancial planner channel is a growing area for TCI. TCI strives to assist fi nancial professionals to build client portfolios with a diverse range of products and the convenience of working with one organization.
team of product development, fi nancial, actuarial and investment professionals has helped some of the world’s leading fi nancial institutions and corporations fund employee and executive benefi t and compensation programs through innovative insurance and investment solutions. The market is approached opportunistically and thus sales results can vary signifi cantly from year to year.
AEGON Institutional Markets Division (IMD) is well positioned and long established in the competitive and relatively mature institutional market. IMD entered the market with a distinctive fl oating-rate guaranteed investment contract (GIC) in 1982. Since then, it has signifi cantly expanded its platform to include traditional fi xed-rate
GICs, funding agreements, notes and fee-based products such as synthetic GICs in which IMD holds a leading market position (Source: reports from LIMRA International and Stable Value Investment
In the United States, Transamerica Reinsurance provides traditional life reinsurance solutions for term, universal life, variable universal life and whole life products. Reinsurance products include coinsurance, yearly renewable term (YRT) and modifi ed coinsurance agreements. In recent years, most clients seeking reinsurance of term life insurance contracts are opting for coinsurance reinsurance agreements to achieve both mortality risk transfer and reserve fi nancing. Additionally, clients looking for ways to stay competitive in the individual life insurance market can work jointly with
Transamerica Reinsurance experts to develop, underwrite, and administer these products. Transamerica Reinsurance offers a continuum of back offi ce services for life insurance: from product development to private label creation.
In the annuity reinsurance market, Transamerica Reinsurance offers traditional coinsurance and modifi ed coinsurance programs as well as reinsurance of general account guarantees on variable annuity products.
Transamerica Reinsurance has an established presence in the Asian and Latin American life reinsurance markets with offi ces in Taiwan,
Diversifi ed provides a customized approach to retirement plans, which includes comprehensive investment, administrative, and technical services for 401(k), 403(b), defi ned benefi t, profi t sharing, money purchase, NQDC, and 457(b) plan types. Diversifi ed provides retirement products and services for the mid to large-sized pension market, which generally includes companies with between 250 and 100,000 employees and with between USD 5 million and USD 1 billion in pension assets. These products and services are sold through a variety of intermediaries, including benefi t consulting fi rms, brokerdealers, and brokers.
Call Center, licensed transition experts are on call to help clients assess, defi ne and reach their goals in retirement. The TRM website also has comprehensive assessment tools, education resources, and timely information geared toward a full and satisfying client experience.
Account, which is a comprehensive lineup of competitive fi nancial and insurance products in a single location, allowing easy management of clients’ income needs and asset growth opportunities. Clients can also address retirement health insurance needs, such as Medigap and long-term care.
Transamerica Investment Management (TIM) is a registered investment advisor that provides investment management services to mutual funds, institutional accounts, pension funds, variable annuity, variable life insurance company separate accounts, high networth individuals, and retail accounts.
AEGON USA reinsures portions of its life insurance exposure with unaffi liated 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 industry. AEGON USA
The maximum retention limit on any one life varies by product and risk classifi cation, and is generally between USD 300,000 and
AEGON USA remains contingently liable with respect to the amounts ceded if the reinsurer fails to meet the obligations it assumed. To minimize its exposure to reinsurer insolvencies, AEGON USA annually monitors the creditworthiness of its primary reinsurers.
It has experienced no material reinsurance recoverability problems in recent years. Where deemed appropriate, additional protection is arranged through letters of credit or trust arrangements, and, for certain arrangements, funds are withheld for investment by the ceding company. AEGON USA’s insurance subsidiaries also enter into reinsurance contracts with affi liated domestic and offshore companies. These have been eliminated in the consolidated statements, except for certain arrangements that involve producer profi t-sharing arrangements.
AEGON Canada operates multiple insurance, fi nancial services, investment portfolio management, and fund management businesses; it also provides wealth management solutions through its subsidiary companies. AEGON Canada’s principal offi ce is located in Toronto,
TLC. ACM’s mandate is to develop products and services for the institutional, high net-worth individual, pension, and retail markets.
AFM is the mutual fund subsidiary of AEGON Canada, which offers the imaxx brand of mutual funds as well as core fund portfolios featuring select investment managers from around the world to
AEGON Canada’s principal means of distribution include various networks that are almost exclusively supported by independent advisors. The key channels of distribution are: Independently managed general agencies
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.
Reinsurance ceded does not discharge AEGON Canada’s liability as the primary insurer. Failure of reinsurers to honor their obligations could result in losses to AEGON Canada. Consequently, AEGON
Canada evaluates the fi nancial condition of its reinsurers and monitors their credit risk to minimize its exposure to losses from reinsurer insolvency. AEGON Canada only contracts business with reinsurers who are registered with the Offi ce of the Superintendent of Financial Institutions Canada.
In 2003, AEGON The Netherlands decided to combine its various business units into a more centralized structure. This has benefited the company, bringing product knowledge, administration and IT
infrastructure under one roof and creating a more efficient and better organized sales force.
In 2006, new legislation was introduced that reduced state sickness benefits and further extended company obligations toward employees who become sick and are unable to work. Under the legislation, companies in the Netherlands must assume greater responsibility for meeting the costs of an employee’s illness and take steps to enable employees to return as quickly as possible to the workforce. Such legislation can prove costly, especially for small and medium-sized companies. AEGON The Netherlands therefore introduced a new product providing additional disability coverage. This product was extremely successful and generated sales in 2006 of approximately
In 2006, AEGON The Netherlands decided to strengthen its position in the highly competitive Dutch mortgage market. The company redesigned its leading products and, thanks to its solid financial base, was able to offer borrowers competitive long-term interest rates. These measures enabled AEGON The Netherlands to triple its share of the market, as homebuyers took advantage of historically favorable interest rates available during the year.
AEGON The Netherlands also strengthened its distribution network in 2006, with the acquisition of Unirobe, a company that mainly provides independent financial advice to large companies. Together
As expected, 2006 marked an improvement in fortunes for AEGON The Netherlands.
Single Recurring annualized with Meeùs, AEGON is now the largest distribution company in the Netherlands. AEGON The Netherlands also continued its extensive education program for smaller, independent insurance agencies, in order to develop their capacity to provide effective and successful financial advice. AEGON The Netherlands believes that the advisory business will remain a critical one in the market.
Operating earnings before tax amounted to EUR 634 million in 2006, compared to EUR 322 million in 2005. Provisions for guarantees and fair value movements of related hedge instruments signifi cantly infl uenced operating earnings. The net impact of guarantee provisions and related hedging results on operating earnings in 2006 was a positive EUR 167 million, whereas EUR 165 million was added to guarantee provisions in 2005.
Certain insurance products include minimum interest rate guarantees that are not offset by matching investments. In the second half of 2006, AEGON The Netherlands implemented a hedging program to extend and enhance its active risk management strategy. In addition to the established derivatives program of 2004 to lengthen the asset duration, AEGON The Netherlands has implemented a hedging strategy using derivative instruments to mitigate most of the interest rate risks related to guarantees embedded in traditional life, unit-linked and certain group pension products.
Certain fi nancial assets that are carried at fair value with no offsetting changes in the fair value of liabilities contributed
products, which were offset by provision releases for employee benefi ts and profi ts sharing in 2005. Earnings of 2006 contain an accelerated depreciation of deferred acquisition expenses of EUR 17 million related to group pension business, as a result of the new pension law which no longer allows surrender charges.
The decrease mainly refl ects lower investment income, including a smaller contribution from assets carried at fair value, provision releases in 2005, and normalized technical results compared to favorable results in 2005.
AEGON The Netherlands, as of the fourth quarter of 2006, 100 percent of the results were included compared to 45 percent before.
Accident and health operating earnings before tax were EUR 34 million compared to EUR 45 million in 2005. Technical results were lower compared to the favorable results in 2005, mainly as a result of more normalized claim experience and lapses in the sickness benefi t market.
EUR 26 million in 2006 compared to EUR 30 million in 2005. Better technical results were offset by lower investment income and pricing pressure due to increased competition in some markets.
EUR 35 million, compared to EUR 15 million in 2005. The increase primarily refl ects the absence of additions to provisions for equity lease products and higher interest spreads.
These assets include an investment in a private equity fund and totaled EUR 243 million as of December 31, 2006. Operating earnings in 2006 include a gain of EUR 43 million related to these asset classes. Based on current holdings and asset class returns consistent with long-term historical experience, the long-term expected return on an annual basis is 8 percent before tax. The impact of the fair valuation of assets is notable in the traditional life and life for account of policyholders lines of business.
Fees and commission income were 15 percent higher than in 2005.
pension and growth in the investment portfolios contributed to the higher fee income in 2006.
Commissions and expenses amounted to EUR 1,087 million in 2006, equal to 2005. Operating expenses amounted to EUR 708 million, 6 percent lower than in 2005. This is primarily due to the absence of additional provisions for ‘Spaarkas’ and equity lease products. This decrease was partly offset by the consolidation of Unirobe in the fourth quarter of 2006.
New life sales in the Netherlands increased 7 percent to EUR 248 million, driven by the growth of individual life sales through the intermediary channel and increased activity in the group pensions business. Immediate annuities were an important driver for individual life sales. A larger number of smaller contracts were sold in the group pension business in 2006 as opposed to a relatively small number of large cases in 2005.
During the fi rst half of the year, employees of Dutch companies had the opportunity to establish a Levensloop (Live cycle) account. New
AEGON’s operations in the Netherlands are collectively referred to as AEGON The Netherlands. AEGON The Netherlands is active in both the life and non-life insurance businesses, provides banking, fi nancial, and asset management services, and is involved in distribution (intermediary) activities and pension administration.
Various activities have been clustered as support units and are coordinated centrally, for example marketing, IT, and facilities services. The distribution activities of the Unirobe Meeùs Groep and
AEGON The Netherlands provides full service pension solutions and also provides administration-only services via TKP Pensioen. The full service pension products for account of policyholders are separate account group contracts with or without guarantees. Profi t sharing is based on the return of a pool of investments. The assets are owned by AEGON The Netherlands but earmarked to form the basis for profi t sharing for these contracts. Large group contracts also share technical results (mortality risk and disability risk). The contract period is typically fi ve years and the premium tariffs are fi xed over this period. Separate account guaranteed group contracts provide a guarantee on the benefi ts paid. The longevity risk therefore lies with AEGON The Netherlands. Non-guaranteed separate account group contracts do provide little guarantee on the benefi ts. AEGON The Netherlands has the option not to renew a contract at the end of the contract period.
Netherlands. Minimum interest guarantees are given for nominal benefi ts, based on 3 percent actuarial interest (4 percent on policies sold before the end of 1999).
For small and medium-sized enterprises, AEGON The Netherlands provides pensions that are defi ned contribution products with single and recurring premiums.
Profi t sharing is based on investment returns on specifi ed funds.
Premium tariffs are not fi xed over the contract period. Minimum interest guarantees are given for nominal benefi ts, based on 0 percent or 3 percent actuarial interest (4 percent on policies sold before the end of 1999).
AEGON Intermediary and AEGON Spaarbeleg. The products are predominantly standardized fi nancial products. The most important products are detailed below.
Universal life products are mainly endowment and savings type products, both single premium and recurring premiums with profi t sharing based on a selected fund performance. A customer may choose from a variety of AEGON funds. AEGON The Netherlands has issued a guarantee of 3 percent for investments in the Mix Fund and the Fixed Income Fund (4 percent on policies sold before the end of 1999) at the maturity date providing the policyholder has invested in these funds for a consecutive period of at least ten years or on the demise of the insured. AEGON The Netherlands also provides immediate annuities for own and third party money.
AEGON The Netherlands provides mortgage loans to customers for a period of twenty or thirty years. The loan is repaid in full or in part at the redemption date with the proceeds from a savings policy. AEGON
The Netherlands provides a wide range of possible ways to invest and also offers an interest-only version. If the insured dies within the policy contract period, the benefi t payment from the pledged life insurance policy is used to repay the mortgage loan. The interest paid on the loan is usually tax deductible, and the customer retains the full income tax benefi t over the contract period.
AEGON Intermediary. Non-life products consist primarily of accident and health (‘subject’ insurance) and property and casualty (‘object’
Netherlands as outlined in the ‘WIA’ law (Law on Work and Income by work capacity). The distribution of subject products is not limited to the AEGON Intermediary channel but now includes the Corporate
Banking products are sold under the Spaarbeleg and AEGON Bank labels through all three sales organizations. Most of these products are savings accounts and investment plans with straightforward conditions accessible predominantly via Internet banking. In 2006,
Levensloop (Life cycle) market. This savings product is a tax-friendly means for individuals to save for paid leave or early retirement.
Asset management products are sold mainly via the sales organization C&IC. Both AEGON Asset Management (AEAM) and TKP
provide asset management products with AEAM having strengths in in-house managed fi xed income and Asian equities and TKPI
AEGON The Netherlands’ other activities consist primarily of the distribution units of the Unirobe Meeùs Groep, which is an AEGON
Nedasco. The Unirobe Meeùs Groep was created in 2006 to cluster the activities of the Meeùs Group with those of the Unirobe Group following the purchase of the remaining 55 percent of the shares of
AEGON The Netherlands reinsures portions of its insurance exposure with unaffi liated insurance companies under traditional indemnity, quota share reinsurance contracts, and, in some instances, excess of loss reinsurance. Such reinsurance arrangements are in accordance with standard reinsurance practices within the industry. AEGON
The Netherlands enters into these arrangements to assist in diversifying its risks and to limit the maximum loss on risks that exceed policy retention limits.
AEGON Levensverzekering N.V. and Swiss Re. The contract is set up so that AEGON NL retains a maximum exposure of EUR 900,000 per insured person with respect to death risk and EUR 25,000 annually for disability risk. Risks in excess of these retentions are transferred to the reinsurer.
We have been delighted with the progress we have made toward realizing our medium-term plans. We have moved to underline our global strength by giving the AEGON name a higher profile and repositioning the established Scottish Equitable brand as AEGON
Individual and Corporate businesses in late 2005 is already having a positive impact in the market. Last year also saw AEGON UK bring new propositions to the market designed to meet the changing demands of its corporate and individual customers as people live longer and need to fund longer retirements.
“ AEGON UK brought new propositions to the market designed to meet the changing demands of its customers.”
Life for account of policyholders 139 139 0 204 203 0
Income before income tax on shareholders return 174 115 51 256 168 52
UK market. On the corporate side, our bulk annuity proposition launched in November offered new fl exibility to small and medium sized businesses.
Net income, which includes net gains/losses on investments and impairment charges, increased to GBP 158 million from GBP 98 million in 2005. Other non-operating income includes a gain of GBP 11 million in the fi rst quarter of 2006 related to the sale of the Luxembourgbased subsidiary Scottish Equitable International to La Mondiale
Revenues of GBP 8,106 million were up 57 percent from 2005. In comparison to 2005, life general account premiums increased by 94 percent to GBP 1,085 million refl ecting continued strong growth in immediate annuity production and the maturing of the individual protection business. Life policyholders for account of premiums increased by 75 percent refl ecting higher pension production primarily refl ecting ‘Pension A-Day’ activity. Investment income increased by 11 percent compared to 2005 refl ecting the increase in investments from the growth in business. Fees and commission income in 2006 increased by GBP 36 million due to strong growth in Positive Solutions and commission income on onshore and offshore bonds.
A portion of the higher pension sales can be attributed to exceptional activity due to ‘Pension A-Day’ with single premium pension sales more than doubling. Compared to 2005, non-pension sales grew 25 percent to GBP 263 million in annualized premium equivalent. In asset management, the retail business continued its strong performance. With
the majority of sales coming from bond funds, this further emphasizes
AEGON’s fi xed income capability. Institutional sales were lower as three large institutional mandates were won in 2005, compared to two major contracts in 2006. Total off balance sheet production amounted to GBP
808 million in 2006, compared to GBP 1,032 million in 2005.
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. AEGON UK, a company limited by shares, has its registered offi ce in England. It was incorporated on December 1, 1998.
Sales of more specialized pensions remain strong, particularly phased retirement products. These allow individuals to access part of their pension income without having to fully purchase an annuity until a later date.
Self invested pensions have increased in popularity, fueled partly by the changes to pension legislation in the UK in April 2006 and partly by increasing desire among individuals to retain control over their own investment.
that allows the policyholder to invest in a wide range of investments, including insured funds, a fund supermarket and property.
All operations relating to the individual investment, protection, and pension in the United Kingdom. This business operates under the AEGON Scottish Equitable brand name.
contract has also been launched to provide all the benefi ts of the individual SIPP contract to group pension plans .
Designed for customers in the United Kingdom, the investment products proposition is made up of the investment bond offered by AEGON Scottish Equitable (the onshore bond) and the products offered by AEGON Scottish Equitable International
The onshore bond is a life contract which offers a wide range of investment choices including funds managed by some of the world’s leading managers. It is a mass-market product aimed at pre-retirement and retirement customers looking for growth and/or income.
Offshore investment contracts are increasingly forming part of the holistic retirement planning process. This is because there is less restriction on how and when benefi ts can be taken. The growing trend of the British retiring abroad again favors offshore contracts.
An offshore contract – 5 for Life – was launched in 2006. Based on the United States variable annuity product and using the hedging expertise of AEGON USA, this was the fi rst personal investment contract available to the UK market that offered a guaranteed income for life.
AEGON Scottish Equitable is now established as a top fi ve provider, measured by market share (Source: Association of British Insurers, 2006). Products are distributed through intermediated advice channels. AEGON Scottish Equitable offers a menu product, which can meet the personal and business protection needs of individual and corporate customers, and will launch a basic product in 2007 to take advantage of new distribution opportunities.
AEGON Corporate provides employee benefi t communication software via a limited number of independent distributors in the corporate market. The software provides solutions for fl exible benefi ts; total reward statements; holiday and absence management; pension aggregation and forecasting; self-service HR; discounted voluntary benefi ts; generic fi nancial education in the workplace and full self-service administrative functionality of the employee benefi t package. The platform is modular so clients can pick and choose the services they require.
AEGON Asset Management UK (AAM UK) is a major provider of asset management services both within AEGON UK and to institutional customers and individuals. As of December 31, 2006, AAM UK
managed and administrated approximately GBP 49 billion of funds, providing both mutual and segregated funds for clients.
There are an estimated 60,000 active registered fi nancial advisors in the United Kingdom, many of whom are grouped into networks of advisors that act as large national distributors. This estimate of fi nancial advisors operating in the multi-tied, single-tied, whole of market, and Independent channels, refl ects different levels of restriction on the number of providers’ products that can be sold or advised on. AEGON UK has strong relationships with fi nancial advisors across the market.
Solutions (Financial Services) Ltd, delivers advice relating to the fi nancial needs of both individual and corporate customers. Origen uses a range of distribution methods, primarily face-to-face contact but also media and worksite marketing, and distribution agreements with closed-book life offi ces. Positive Solutions provides management services to self-employed IFAs via sophisticated technology platforms, to support the advice and transaction processes.
In general the approach adopted within AEGON UK is to limit morbidity and mortality risk through widespread use of reinsurance.
For mortality and morbidity new business the policy is to substantially reinsure risk. Currently this results in reinsurance of around 85 percent of the benefi t at risk for long-term business and 30 percent for short-term business. Variations from this level will occur from time to time to refl ect the terms available in the market, the type of business (life, critical illness, permanent health insurance)
During 2006, and in the first few months of 2007, we enhanced
The economies of Central and Eastern European countries, in particular, continue to develop at a rapid pace and life insurance penetration levels are still relatively low. The governments in this region continue to shift pension responsibility to the private sector, creating a growing opportunity for providers, such as AEGON. It is for these reasons that AEGON has pursued expansion beyond its strong base in Hungary, to include Slovakia, the Czech Republic, Poland, and more recently Romania. During 2006, membership of AEGON
Hungary’s pension fund grew by a substantial 8 percent. Similarly, in
Elsewhere in Europe, AEGON has continued to develop its presence in the important bank channel in Spain. The majority of life insurance products are distributed through banks in Spain. AEGON’s two new joint ventures with Caja de Badajoz and Caja Navarra became operational mid-way through the year. Together with our strong partnership with Caja de Ahorros del Mediterráneo, AEGON’s products are now sold in over 1,500 bank branches across the country.
We will be looking to further expand AEGON’s presence in Spain through savings banks in the months ahead.
AEGON Pension Network, developed to provide local pensions solutions in an international framework for multi-national corporate clients and their employees. With the addition of Germany’s HDI
AEGON strengthened its position in Asia during 2006 with new operations in the coastal province of Shandong in China and with the fulfillment of our intention to enter India through our new partnership with the Ranbaxy Promoter Group. India has long been identified as one of AEGON’s target markets given its sizable population and rapidly developing economy, the relatively low penetration level of insurance in the country, and the continued strong growth rates projected for the insurance sector in coming years. AEGON’s entry into Japan in early 2007 is also a notable accomplishment. We very much look forward to combining AEGON’s product expertise and skills with the highly-respected brand and distribution strength of Sony Life given the importance and growth potential of the Japanese market in the coming years.
Finally, in Taiwan our efforts to transition from traditional whole and term life products to higher margin unit-linked insurance products is proving successful. While sales have been lower during this transitional phase, the profitability of sales continues to be considerably higher.
“In nearly every market, the need for a broader range of protection and retirement products and services is significant.”
The new target of doubling AEGON’s value of new business by 2010 reflects our confidence that a larger portion of new business will come from Europe. Continued strong growth in Central and Eastern
Europe and a very substantial increase in VNB from AEGON’s operations in Other European countries such as France and Spain will be the drivers behind this. Based on current business plans, it is estimated that between 25 to 30 percent of AEGON’s total VNB will come from our Other countries in 2010. However, given the continued potential presented by the pension opportunity in the
contribution could approximate as much as 30 to 35 percent of the
We have been pleased by the progress made to expand AEGON’s presence internationally, an important growth initiative formally identified by the Executive Board in 2006, along with the opportunity for pensions and distribution through banks globally. Going forward, we will continue to identify opportunities in emerging markets that offer growth potential consistent with AEGON’s requirements of long-term profitability and the creation of shareholder value.
AEGON Poland, AEGON Slovakia, AEGON Spain, AEGON Taiwan and AEGON-CNOOC) 2006 200� %
Total traditional life insurance operating earnings before tax from Other countries amounted to EUR 10 million, compared to
EUR 13 million in 2005. This refl ects lower results in Taiwan, due to the decline in sales, and sales growth in China, where acquisition costs are not yet deferred.
Other countries amounted to a negative EUR 14 million, against a positive EUR 4 million in 2005, refl ecting acquisition costs of EUR 27 million in 2006 to grow the Slovakian pension business which are immediately expensed. The decline was partly offset by higher earnings in Hungary.
amounted to EUR 24 million, compared to EUR 16 million in 2005.
Group sales have been adversely affected by uncertainty about changes in tax law in 2006. Also, the changes have removed tax advantages on certain individual life insurance products. AEGON
HUF 34 billion (EUR 127 million) mainly as a result of solid sales growth and a high retention rate of household insurance. Non-life premiums in Spain, which only include health business, increased 2 percent to EUR 67 million.
AEGON’s new pension fund business in Slovakia was very successful in attracting new members in 2006. Approximately 154,000 members were registered in the mandatory pension fund, bringing the total to over 200,000.
Weighted average exchange rates for the currencies of the countries included in the Other countries segment, and which do not report in euro, are summarized in the table.
AEGON’s Central Eastern European Region (AEGON CEE) was created in 2006. The member countries are AEGON Hungary, AEGON Poland,
On November 9, 2006, AEGON announced that it had agreed with
Ergo Hestia to buy 100 percent of the pension fund management company PTE Ergo Hestia S.A. in Poland. The acquisition is subject to approval by the Polish Financial Supervision Commission and antitrust authorities, but is expected to be completed in 2007.
In 2005, AEGON Hungary was the fi rst to launch a preferred life product in the CEE region. This product is a term insurance with different competitive premium rates for four pre-determined risk categories.
Unit-linked products are AEGON CEE’s most important products and make up the largest part of AEGON CEE’s new sales. The unit-linked products cover all types of life insurance, including pensions, endowment and savings. AEGON Poland is the leading provider in the life insurance single premium market segment with its openarchitecture, unit-linked products, which offer more than 80 investment funds managed by different fund managers (Source: www.knf.gov.pl).
AEGON CEE’s main distribution channels are tied network, brokers and, especially in Poland, banks. Through the tied network, brokers and call centers, AEGON CEE sells life, pension, and non-life products.
Through banks, it sells life products and, through the loan centers, mortgages.
AEGON CEE has reinsurance ceded for both its life and non-life businesses. AEGON CEE’s reinsurance partners are large reinsurers active in the European market with a minimum Standard & Poor’s rating of A. The three most important reinsurance programs currently in operation are the Property Catastrophe Excess of Loss Treaty, the
Motor Third Party Liability Excess of Loss Treaty, and the Property per
The retention level is EUR 5.9 million in the case of the Catastrophe
Levantina in 1987, Union Previsora in 1988, Labor Medica in 1996,
La Sanitaria in 1997, Caja de Prevision y Socorro in 1997, and
Spain will continue to expand its life insurance business by strengthening its own agent distribution capabilities, by enhancing its existing bancassurance partnerships with CAM, CB and CN as well as pursuing new distribution opportunities.
Over the past several years, AEGON Spain has focused on its life insurance business for portfolio growth. By marketing unit-linked variable life products through multiple distribution channels signifi cant inroads have been made into a market traditionally dominated by banks. AEGON Spain focuses on the individual consumer segment. AEGON Spain’s principal lines of business are traditional life and unit-linked insurance products. These products are distributed on the one hand through the agency channel, using a network of agents and brokers and on the other hand, in the case of joint ventures with the before mentioned saving banks, through their networks. Individual life products are sold by specialized agents and brokers in urban centers and by the saving banks branch networks both in urban centers and rural areas. Group life products are distributed through banks and fi nancial institutions as well as through brokers and specialized agents.
AEGON Spain has proportional reinsurance protection for individual risk policies and non-proportional protection for group risk policies.
Such reinsurance arrangements are in accordance with standard reinsurance practices within the industry. AEGON Spain enters into these arrangements to assist in diversifying its risks and to limit the maximum loss on risks that exceed policy retention limits.
Account policyholders Accident & health Fee - off balance sheet Other
AEGON Taiwan offers a broad range of insurance products that meet a variety of consumer needs. These include whole life, endowment life, term life, accident and supplemental health, variable universal life, annuities, group life and health, and a range of policy riders.
AEGON Taiwan distributes through a variety of channels, which has been a key to the company’s rapid growth in recent years. These channels include a force of over 700 full time professional career agents, independent brokers, banks, group and worksite marketing, as well as direct marketing. Each channel sells a mix of products tailored to their distribution system and the consumer segments they serve. In the past year, the company’s agency, brokerage, and bank channels have all increased their sales of variable life insurance, driven by the demands of the market, as well as AEGON Taiwan’s focus on growing that business line. The worksite marketing channel, which was started in 2005, has also grown steadily, offering a range of tailored retirement planning and insurance solutions to employees of corporate clients.
AEGON Taiwan has its mortality and morbidity risks reinsured by local and international reinsurers. All reinsurers that have signifi cant business arrangements with AEGON Taiwan have a rating of AA- and above, except for the Central Reinsurance Company (CRC), which used to be a government company but has gone through a successful privatization. CRC’s credit rating was upgraded from its previous
started operations in Shanghai in May 2003. AEGON-CNOOC is licensed to sell both life insurance products as well as accident and health products in mainland China.
Since its inception in 2003, AEGON-CNOOC has successfully established multiple distribution channels, including agency, banks, direct marketing, telemarketing, and group channels.
Regular premium products, such as Juvenile Endowment, also became a major source of business through the bank channel. The major product for the telemarketing channel is a yearly-renewable personal accident product. The primary products sold through the brokerage channel are universal life and traditional life products as well as short-term accident and long-term health products.
Company. The quota share for the business written in 2003, 2004 and 2005 was 15 percent, 10 percent and 5 percent respectively and decreased to 0 percent for the business written in 2006. This compulsory reinsurance requirement ends thereafter.
Similar types of products are grouped together and reported on in a certain line of business. For example: whole life, term life, and universal life insurance products are grouped together in the traditional life line of business. The table on this page provides a broad overview of the lines of business for each country unit. More details on the specifi c products sold in each country unit are given in the country sections of this Report of the Executive Board and in the fi nancial statements information about products is also included.
Traditional life • • • • • • • • • • Fixed annuities • • Institutional guaranteed products* •
Life for account of policyholders • • • • • • • • • • Variable annuities • • • Fee — off balance sheet products • • • • • • •
A description of AEGON’s risk management and control systems is given on the basis of signifi cant identifi ed risks for AEGON. Some risks, such as currency translation risk, are related to the international nature of AEGON’s business. Other risks include insurance related risks, such as changes in mortality and morbidity.
However, AEGON’s largest exposures are to changes in fi nancial markets (e.g. interest rate, credit and equity market risks) that affect the value of the investments, liabilities from products that AEGON
To manage its risk exposure, AEGON employs risk management programs including asset liability management (ALM) processes and models, hedging programs (which are largely conducted via the use of derivatives) and insurance programs (which are largely conducted through the use of reinsurance). These risk management programs are in place in each country unit and are not only used to manage risk in each unit, but also for the Group. Derivative and reinsurance usage by the company are governed by derivative and reinsurance usage policies. These policies establish the control, authorization, execution and monitoring requirements of the usage of such instruments. In addition, these policies stipulate necessary mitigation of credit risk created through these derivatives and reinsurance risk management tools. For derivatives, credit risk is often mitigated by requirements to post collateral via credit support annex agreements.
As an international group, AEGON is subject to currency risk. Also, currency risk exists for any policy denominated in currencies other than the policy’s local currency. In the Netherlands, the majority of
AEGON’s equity holdings are invested in an internationally diversifi ed portfolio, rather than solely in Dutch equities. Equity held in subsidiaries is kept in local currencies to the extent shareholders’
Therefore, currency exchange rate fl uctuations may affect the level of shareholders’ equity as a result of translation into euro. AEGON
United States and in the United Kingdom, the principal sources of exposure from currency fl uctuations are from the differences between the US dollar and the euro and between the UK pound and the euro. AEGON may experience signifi cant changes in net income and shareholders’ equity because of these fl uctuations.
AEGON’s 3-year historical income before tax and capital in units on an IFRS basis are shown in table 1.
country units, local capital markets are not well developed which prevents a complete matching of assets and liabilities for those businesses. For some products, cash fl ows are less predictable as a result of policyholder actions that can be affected by the level of interest rates.
Sensitivity analysis of net income and shareholders’ equity to currency exchange rate markets 1, 2
Movement of markets Estimated effects on net income Estimated effects on shareholders’ equity
Increase by 15% of non-euro currencies relative to the euro increases between 11% and 12% increases between12% and 13%
Also, in a period of low interest rates, AEGON may not be able to reduce crediting rates on policies and still preserve margins as a result of minimum guaranteed crediting rates provided on policies.
If interest rates rise, there may be unrealized losses on some of
AEGON’s assets that will be recorded as negative income under IFRS.
This is inconsistent with the IFRS accounting on much of the company’s liabilities where corresponding unrealized gains when interest rates rise do not affect income in the shorter term. Over time, the shortterm reduction in income due to rising interest rates would be offset by higher income in later years all else being equal. Therefore, rising interest rates are not considered a long-term risk to the company.
AEGON The Netherlands accounted for 93 percent of the total general account fi xed income portfolio of AEGON on December 31, 2006. AEGON USA and AEGON The Netherlands manage – within limits – their duration mismatch on the basis of their expectations for the future level of interest rates. Presently, other AEGON country units target the duration of their assets to equal approximately the duration of their liabilities where possible. In addition to point in time duration measurement, deterministic and stochastic scenarios are used to measure and manage interest rate risk. In these models, policyholder behavior changes are anticipated. These models are used by all country units and aggregated at the group level.
For AEGON USA’s business, the average duration of assets is approximately 3.8 years. This relatively low duration, as compared to the long-term nature of most of AEGON USA’s businesses, is driven by the asset and liability management process applied to the institutional markets business in the United States (GICs and funding agreements). Both the assets and the liabilities for this business are managed on a fl oating rate basis, with extensive use of interest rate swaps. As a result, the asset duration is short for this business. In the Netherlands, the average duration of assets is approximately 6.9 years. AEGON The Netherlands actively uses derivatives to manage its interest rate risk. During 2006, AEGON The Netherlands signifi cantly increased its derivative positions to reduce the interest rate mismatch with its liabilities. The combined effective duration mismatch of AEGON USA and AEGON The Netherlands was minus 0.1 years on December 31, 2006. This duration mismatch is an indication of the degree of interest rate risk on a fair value basis. As cash fl ows emerge and interest rates change, the actual impact from interest rate exposure could be higher or lower than what this static duration measure implies.
Shift down 200 basis points 3,559 4,947 1 Basic assumptions: no correlation between markets and risks; unchanged conditions for all other assets and liabilities; limited management actions taken. All changes are relative to net income and shareholders’ equity. Effects do not tend to be linear and therefore cannot be extrapolated for larger increases or decreases.
2 Interest rate movements are applied as a one-time parallel shift either up or down of all relevant yield curves on December 31, 2006.
The sensitivity analysis in table 5 on page 58 shows an estimate of the effect of interest rate movements on net income and shareholders’
equity. However when rates shift up, IFRS does not recognize the unrealized gains in corresponding liabilities in net income and shareholders’ equity. Similarly, when rates shift down, there would be unrealized gains on certain assets that favorably affect net income and shareholders’ equity. However when rates shift down,
IFRS, the impact of interest rate changes on net income and shareholders’ equity can give an incomplete and even incorrect impression of the true risk exposure of the company. In fact, the company is at risk if rates decline as AEGON’s assets are currently shorter in duration than AEGON’s liabilities and as a result of minimum guarantees present in some products. Similarly when interest rates rise, the company is currently better off since AEGON’s assets are currently shorter in duration than AEGON’s liabilities.
When interest rates rise sharply, this benefi t would be partially offset in the short-term due to a likely sudden rise in lapse rates on fi xed annuity products in AEGON USA.
COUNTRY UNITS APPLY SPECIFIC GUIDELINES FOR ACCEPTABLE LEVELS OF CREDIT RISK
AEGON actively manages its credit risk exposure by individual counterparty, sector and asset class. AEGON may mitigate credit risk in derivative contracts by entering in collateral agreements where practical and in International Swaps and Derivatives Association
(ISDA) master netting agreements for each of AEGON’s legal entities to facilitate AEGON’s right to offset credit risk exposure. AEGON may also mitigate credit risk in reinsurance contracts where possible by retaining ownership of assets required to support liabilities ceded or by requiring the reinsurer to hold assets in trust.
Country units apply specifi c guidelines for the acceptable levels of credit risk. AEGON monitors its aggregate exposure to credit counterparties at group level. For this purpose, AEGON aggregates exposures from its country units to assess overall credit risk. To manage its credit risk, AEGON has a single credit counterparty limit policy to be applied to all forms of credit risk. All forms of credit risk are required to be aggregated by counterparty and measured for compliance against country unit credit limits and group-wide credit limits. The group-wide limits are shown in table 7.
If an exposure exceeds the stated limit as a result of a downgrade, the exposure must be readjusted to the limit for that rating category as soon as practicable. The limits vary with the asset quality of the security as can be seen in table 7. Exceptions to these limits can only be made after explicit approval from AEGON’s Group Risk and Capital
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. General economic conditions, as well as signifi cant events – like terrorist actions – have led to and may again result in signifi cant decreases in the value of
TOTAL EQUITY, REAL ESTATE AND NON-FIXED INCOME EXPOSURE 6,810 7,418 49 142 (6) 12,798 1 Of AEGON The Netherlands common shares EUR 485 million are invested in a property company and are therefore internally viewed as real estate exposure. For the purpose of sensitivities, this exposure is included in the real estate section.
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
Table 9 shows the year-end closing levels of certain major indices.
Sensitivity analysis of net income and shareholders’ equity to equity and real estate markets 1, 2
Immediate change in Estimated approximate effects on net income Estimated approximate effects on shareholders’ equity
AEGON may not be able to manage the risks associated with these activities successfully through the use of derivatives. In addition, counterparty may fail to honor the terms of its derivatives contracts with us. AEGON’s inability to manage risks successfully through derivatives or counterparty’s failure to honor its obligations could have a material adverse effect on AEGON’s business, results of operations and fi nancial condition.
AEGON monitors and manages its underwriting risk by 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
The sensitivity analysis of net income and shareholders’ equity to various underwriting risks is shown in table 11.
Estimated approximate effect on net income/equity 20% increase in lapse rates (44)
10% decrease in morbidity rates 61 1 Basic assumptions: no correlation between markets and risks, unchanged conditions for all other assets and liabilities and limited management actions taken. All changes are relative to net income and shareholders’ equity. Effects do not tend to be linear and there fore cannot be extrapolated for larger increases or decreases.
2 The mortality/morbidity sensitivities assume that increases or decreases are for all products regardless of whether a product produces a gain or a loss on the direction of the change.
United States and the Netherlands, which permit the tax-deferred accumulation of earnings on the premiums paid by the holders of annuities and life insurance products under certain conditions and within limits. Taxes, if any, are payable on accumulated tax-deferred earnings when earnings are actually paid. The US Congress has, from time to time, considered possible legislation that would eliminate the deferral of taxation on the accretion of value within certain annuities and life insurance products. In addition, the
US Congress passed legislation in 2001 that provided for reductions in the estate tax and the possibility of permanent repeal of the estate tax continues to be discussed; this could have an impact on insurance products and sales in the United States. Changes to tax laws in the Netherlands at the end of 2005 have reduced the attractiveness of early retirement plans, but tax advantages have been granted from January 1, 2006 for savings products known as
(or the potential for such a downgrade) of AEGON or any of its rated insurance subsidiaries may, among other things, materially increase the number of policy surrenders and withdrawals by policyholders of cash values from their policies. The outcome of this may be cash payments requiring the sale of invested assets, including illiquid assets, at a price that 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 cause AEGON to accelerate amortization of policy acquisition costs, reducing net income.
AEGON’s products and services, which may negatively impact new sales and adversely affect its ability to compete and thereby have a material adverse effect on AEGON’s business, results of operations and fi nancial condition.
Negative changes in credit ratings may also increase AEGON’s cost of funding. During 2006, Standard and Poor’s maintained the credit ratings of AEGON N.V. at A+ with a stable outlook. Moody’s Investor
Service maintained the senior debt rating of AEGON N.V. at A2, with a stable outlook. On January 30, 2006, Fitch Ratings assigned AA-
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. In addition, AEGON must commit signifi cant resources to maintain and enhance its existing systems in order to keep pace with industry standards and customer preferences. If AEGON fails to keep up-to-date information systems,
AEGON generally seeks to reduce its exposure to these events through individual risk selection, monitoring risk accumulation and purchasing reinsurance. However, such events could lead to considerable fi nancial loss to AEGON’s business. Furthermore, natural disasters, terrorism and fi res could disrupt AEGON’s operations and result in signifi cant loss of property, key personnel and information about AEGON’s clients and AEGON. If AEGON’s business continuity plans have not included effective contingencies for such events, they could adversely affect AEGON’s business, results of operations, corporate reputation and fi nancial condition for a substantial period of time.
Changes in existing insurance laws and regulations may affect the way in which AEGON conducts business and the products offered.
AEGON faces signifi cant risks of litigation and regulatory investigations and actions in connection with activities as an insurer, securities issuer, employer, investment advisor, investor and taxpayer.
Since 2005, AEGON’s fi nancial statements have been prepared and presented in accordance with IFRS as adopted by the European
Union. Any future change in these accounting principles may have a signifi cant impact on AEGON’s reported results, fi nancial condition and shareholders’ equity. This includes the level and volatility of reported results and shareholders’ equity.
The United States and the Netherlands do not currently have a treaty providing for the reciprocal recognition and enforcement of judgments (other than arbitration awards) in civil and commercial matters. Judgments of US courts, including those predicated on the civil liability provisions of the federal securities laws of the United
States may not be able to require the company to pay the amount of the judgment unless a competent court in the Netherlands gives binding effect to the judgment. It may, however, be possible for a US
investor to bring an original action in a Dutch court to enforce liabilities against AEGON, its affi liates, directors, offi cers or any expert named therein who reside outside the United States, based upon the US federal securities laws.
The risk management and control systems provide reasonable assurance regarding the reliability of fi nancial reporting and the preparation and fair presentation of its published fi nancial statements; however, cannot provide absolute assurance that a misstatement of our fi nancial statements would be prevented or detected.
THE GROUP RISK AND CAPITAL MANAGEMENT COMMITTEE IS RESPONSIBLE FOR ENSURING THAT RISKS ARE WELL MANAGED AND MEASURED
AEGON’s focus on the fi xed income investor base continues to be supported by an active investor relations program to keep investors well informed on AEGON’s strategy and results. Most of AEGON’s external debt is issued by the parent company, AEGON N.V., as well as a limited number of other AEGON companies whose securities are guaranteed by AEGON N.V. AEGON N.V. has employed its regular access to the capital markets through transactions issued under its
AEGON maintains back-up credit facilities to support outstanding amounts under its Commercial Paper Programs. The principal arrangement is a USD 5 billion syndicated facility maturing in 2011 and extendable until 2013, of which USD 3 billion acts as a back-up facility. At December 31, 2006, AEGON N.V. had EUR 2.0 billion outstanding under its Medium Term Notes Program and no amounts under its Commercial Paper Programs. In order to further optimize
AEGON conducts its capital management processes at various levels in the organization. The main goal of AEGON’s capital management is to manage the capital adequacy of its operating companies to high standards within leveraged tolerances consistent with strong capitalization.
AEGON applies leverage tolerances to its capital base. The capital base refl ects the capital employed in core activities and consists of shareholders’ equity, capital securities, and dated subordinated and senior debt. AEGON targets its capital base (excluding revaluation reserve) to comprise at least 70 percent shareholders’ equity
At December 31, 2006, AEGON’s capital base was within these prescribed tolerances: shareholders’ equity capital represented 77 percent of its total capital base, while perpetual capital securities comprised 16 percent of its total capital base. Senior and dated subordinated debt accounted for the remaining 7 percent. The ratio of shareholders’ equity to total capital (excluding revaluation reserve) improved, and capital leverage decreased, mainly due to a strong operating cashfl ow. In June 2006, AEGON N.V. successfully issued USD 500 million of junior perpetual securities, which was subsequently increased by USD 50 million in July 2006. Additionally, in July 2006, AEGON N.V. issued EUR 200 million of junior perpetual capital securities. This further improved the quality of the capital base and reduced refi nancing risk.
Operating leverage is not part of the capital base. At December 31, 2006, operating leverage was EUR 1.6 billion (2005: EUR 1.6 billion).
Internal sources of liquidity include distributions from operating subsidiaries on the basis of excess capital or cash and cash equivalents. During 2006, internal distributions from units were suffi cient to cover interest expense, other holding company expenses, and dividend payments. Internal distributions may be subject to (local) regulatory requirements. Each business unit further controls its liquidity by closely managing the liquidity of its investment portfolio. The duration profi le of AEGON’s capital leverage is managed in line with the duration of surplus assets related to investments in its subsidiaries, subject to liquidity needs, capital, and other requirements.
CF certifi cates) and their replacement with registered shares, which can be traded in the Dutch giro-system. The latter required an amendment to the Articles of Incorporation and shareholders approved this amendment during the AGM on April 25, 2006.
Central and Eastern Europe to exchange a broad range of information about AEGON in general and AEGON’s activities in the
Recognizing the increasing importance of economic capital, capital management and effective risk management, the Audit Committee discussed these issues, reviewed the measures that AEGON has implemented, and reported on these to the Supervisory Board during
The Supervisory Board makes recommen dations regarding appointments, reappointments and dismissals of Executive Board members when appropriate and it deliberates and decides on compensation levels for Executive Board members and reviews
AEGON’s business strategy. The Supervisory Board also makes recommendations to shareholders regarding the appointment, reappointment or dismissal of Supervisory Board members. Additionally, the Board discusses the following issues related to the company: quarterly results, embedded value, accounting principles, dividends, capital position, internal control procedures and risk management.
In accordance with AEGON’s Supervisory Board Rules, the regular meetings in 2006 were preceded by preparatory meetings, attended by the chairman and vice-chairman of the Supervisory Board and the chairman and the chief fi nancial offi cer of the Executive Board. The
Board reviewed its own composition and performance and those of the
Executive Board, without Executive Board members present. The outcome of this review was subsequently discussed in March 2007.
WE WISH TO EXPRESS OUR APPRECIATION TO THE EXECUTIVE BOARD AND ALL MEMBERS OF THE WORLDWIDE AEGON COMMUNITY
Board followed the recommendation of the Audit Committee to approve the budget and the budgeted Capital Plan for 2007 and to authorize the Executive Board to fi ll AEGON’s funding needs as budgeted for 2007. In March 2007, the Supervisory Board approved an increase of this autorization. The Supervisory Board also approved a long-term incentive plan for AEGON staff worldwide to be implemented in 2007, by which stock option rights will be granted to AEGON staff worldwide in March 2007. The Supervisory Board also approved the hedging of these stock option rights.
The Supervisory Board discussed AEGON’s embedded value (EV) and value of new business (VNB), as previously discussed by the Audit
TOGETHER WITH THE EXECUTIVE BOARD, THE SUPERVISORY BOARD REGULARLY REVIEWS AEGON’S BUSINESS STRATEGY
Actuarial Offi cer gave presentations on AEGON’s capital management, economic framework (including economic capital) and embedded value, which were followed by discussion. The Supervisory
The Supervisory Board relies on its four committees, each made up of members selected from the Supervisory Board, to prepare specifi c issues for decision-making by the Supervisory Board. In accordance with its Charter, each Committee reports its fi ndings to the
The Audit Committee held seven regular meetings during 2006, which also were attended by the CFO and, if required or appropriate, other members of the Executive Board, the director of Group Finance &
Information, and representatives of Ernst & Young, AEGON’s independent auditor. The Group Internal Auditor, the Chief Risk
Offi cer and the Group Actuarial Offi cer also periodically attended
US-GAAP, fi nancial reports as fi led with the SEC, AEGON’s Capital
Code. In accordance with legal requirements, the Audit Committee approved and recommended to the Supervisory Board the adoption
of the Pre-approval Policy for 2006. Two meetings, in March and
September, were devoted to AEGON’s fi lings with the SEC, the annual report 2005 (Form 20-F), and the results for the fi rst six months 2006 (Form 6-K).
Board. During its meeting in December, the Audit Committee engaged in a discussion on AEGON’s Risk Management Report as presented by the Chief Risk Offi cer. It also conducted a review and discussion of the budget for 2007, the budgeted Capital Plan for 2007 and the VNB targets for later years until 2010 and advised the
Board, and the minutes of these meetings were a regular item on the agenda of the Supervisory Board meetings.
Strategy Committee is to review the major features of AEGON’s business strategy, in addition to considering alternative strategies and material aspects relating to the implementation of the strategy. The
Committee were reported to the Supervisory Board, and the minutes of these meetings were a regular item on the agenda of the Supervisory
Board and the institution of a Management Board and subsequently advised the Supervisory Board on the nomination for reappointment of Mr. Wynaendts to the Executive Board in 2007. The proceedings of the Nominating Committee meetings were reported during subsequent Supervisory Board meetings.
of the Executive Board. The Compensation Committee discussed the Executive Board’s Short-term and Long-term Incentive Plans and advised the Supervisory Board on those incentives payable in 2006. The main item of discussion during the meetings in 2006 concerned the preparation of a new Remuneration Policy for the
Committee, the remuneration of the Supervisory Board members was not changed in 2006 nor were the base salaries for the
Executive Board members except for an increase of the base salaries of the Dutch Executive Board members, in line with the Central
In the Supervisory Board’s opinion, best practice provision III.2.1 of the Dutch Corporate Governance Code has been fulfi lled because all but one Supervisory Board members are independent as defi ned by best practice provision III.2.2 of the Dutch Corporate Governance
Their biographies will be provided together with the agenda for the 2007 AGM.
Mr. Van Wijk’s four-year term of offi ce will expire in 2007. He is eligible for reappointment and the Supervisory Board, following the advice of the Nominating Committee, has decided to nominate him for reappoint ment for another term by shareholders during the AGM
Executive Board member, effective December 31, 2006, because he was appointed at the Management Board of AEGON N.V., effective
In 2007, Mr. Wynaendts’ four-year term will expire. His performance was discussed in the Nominating Committee and the Supervisory
Executive Board and recommended by the Nominating Committee, to establish a Management Board in order to enhance the coordination and manage ment of AEGON’s business activities worldwide. The
Management Board became effective on January 1, 2007. In this new management structure the Executive Board continues to be the statutory executive body and legal representative of AEGON N.V.
Management Board will oversee a broad range of management issues that impact AEGON’s business and growth objectives internationally.
This would entail a fi nal dividend payment of EUR 0.31 per common share since an interim dividend payment of EUR 0.24 per common share was made in September 2006.
Council for Rothschilds, the Council of the University of Surrey and chairman of the Supervisory Board of VNU N.V. He is currently chairman of the Supervisory Board Nominating and Strategy
(1936, American nationality) is vice-chairman and managing director of Fischer, Francis, Trees and Watts, Inc. (New York, USA). He was appointed to AEGON’s Supervisory Board in 1993 and his current term will end in 2008. He is also chairman of FFTW Funds Inc.
AEGON’s Supervisory Board in 2004 and his current term will end in 2008. He is also a member of the Board of Directors of Computer
(1941, Dutch nationality) is a retired executive vice-president and director of Exxon Corporation. He was appointed to AEGON’s
Safran Group, and a member of the Supervisory Boards of the
Segula Technologies Group and TNT N.V. He is currently chairman of the Supervisory Board Audit Committee.
(1942, Dutch nationality) is a former chairman of the Executive Board of AEGON N.V. He was appointed to AEGON’s Supervisory Board in 2002 and his current term will end in 2010. He is also chairman of the Supervisory Board of KLM Royal Dutch Airlines N.V., a nonexecutive director of Unilever N.V. of Rotterdam and Unilever PLC
and a member of the Board of Directors of InBev S.A. (Leuven,
Belgium) and Baxter International Inc. (USA). He is currently a member of the Supervisory Board Strategy Committee.
(1946, Dutch nationality) is president and CEO of KLM Royal Dutch
The Compensation Committee, one of the Supervisory Board’s four committees, is responsible for the design, development, implementation, and review of the Remuneration Policy. This policy outlines the terms and conditions of Executive Board member employment and remuneration of Supervisory Board members. The Compen sation
Each year, the Compensation Committee reviews the adequacy of the Remuneration Policy, based on information from an independent external advisor (Towers Perrin). Subsequently, it makes recommendations to the Supervisory Board. Any material changes to the Remuneration Policy are submitted to the General Meeting of
This section details the Remuneration Policy for the period 2004- 2006 and the Executive and Supervisory Board Remuneration
The remuneration of the members of the Supervisory Board is made up of three separate components, each of fi xed amounts.
Supervisory Board members do not receive any performance or equity related compensation and do not accrue any pension rights with AEGON.
Policy may be summarized as follows: The remuneration structure should enable the company to attract and retain highly qualifi ed, expert members for its Executive Board by providing well-balanced and performance-related remuneration.
The structure should ensure the interests of Executive Board members are closely aligned with those of shareholders by linking
Target Total Compensation for Executive Board members should be based on market standards for executives from selected peer companies and should consist of a fi xed component and a variable component. Actual Variable Compensation will be based on company performance.
New members of the Executive Board will be appointed for a period of four years and may then be reappointed for successive periods of four years.
The remuneration of Executive Board members comprises the following components: (1) fi xed compensation (base salary)
Each year, the Compensation Committee reviews remuneration levels, taking into account circumstances that might justify any adjustment, such as fundamental changes in the business environment or in the individual’s responsibilities.
The variable part of the remuneration is designed to strengthen the
Executive Board members’ commitment to the company and its objectives. The greater part of the total remuneration consists of variable compensation linked to previously determined and measurable performance targets.
The STI Plan bonus increases as the actual OE exceeds the target OE; in the event that the actual OE is equal to or higher than 150 percent of the target OE, the STI Plan bonus will be regarded as having reached its maximum value. The OE target is calculated as the rolling three-year average OE, increased by 2.5 percent to refl ect infl ation.
Actual OE equals or is higher than 150% of target OE
Streppel are eligible for 100 percent of their STI Plan bonus, while
Wynaendts become eligible for the remaining 60 percent of their STI
Neither the exercise price nor other conditions regarding the granted share options shall be modified during the term of the options, except in the case that such modification is prompted by structural changes in the company or its shares in accordance with established market practice. Please refer to page 220 to 221 for more information on the shares and share options granted under the LTI Plan.
Supervisory Board on the percentage of the LTI grant to be vested.
The Compensation Committee will also ensure that the peer group composition and the performance incentive zone continue to provide an appropriate reference.
dependent in the event of the participant’s death. Please refer to page 219 for more information on the costs of the pension arrangements.
Termination of the employment contracts requires a three-month notice period for the current members of the Executive Board. In the event of contract termination by AEGON, the company must adhere to a notice period of six months and, unless terminated for urgent cause, the members of the Executive Board would be entitled to a severance arrangement.
USA Supplemental Executive Retirement Plan (SERP). In addition, three additional years of service will be credited for the purpose of calculating his benefi ts under the SERP.
Messrs. Van der Werf and Wynaendts would be entitled to three years’ fi xed salary, only in the case of termination in connection with a merger or take-over.
Board would contain a notice period of three months for the
have been reappointed for a four-year term. Mr. Van der Werf however, resigned from the Executive Board as of January 1, 2007, upon his appointment as a member of the Management Board as of that date. Mr. Wynaendts is eligible for reappointment in 2007.
Please refer to page 219 for information on the remuneration of members of the Executive Board.
Wynaendts EUR 575,086 1 For Dutch members the amounts include an increase due to Dutch Central Labor Agreement, the customary employee profi t sharing bonus as well as a tax deferred employee savings plan.
In line with the regulations of the STI Plan, it was established that the 2005 VNB of the AEGON Group and of the relevant country units was positive, as stated in the 2005 Embedded Value Report.
Subsequently, operating earnings (OE) have been compared to the relevant target OE. On this basis and after adoption of the 2005 annual accounts by shareholders, this translated into the following
The bonuses for the 2006 Plan, as well as Mr. Shepard’s additional
The LTI grant is determined as a percentage of the fi xed compensation of the Executive Board members.
Number of options 1 LTI target bonus amounts have been calculated from base salaries as per January 1, 2006.
2 Calculation example Mr. Shepard: EUR 762,807 : 2 = 381,403.50 : EUR 14.55 = 26,213 shares.
The pension plan for Dutch Executive Board members was reconciled with new regulations in the Netherlands (the so-called VPL law; Wet Vut Prepensioen en Levensloop) as from January 2006.
August 2005 to September 2006. In determining the specifi c provisions of the secondment, AEGON engaged independent external advisors to ensure that the arrangements were in line with customary practices. The Compensation Committee reviewed and approved these provisions.
At the General Meeting of Shareholders, an absolute majority of the valid votes can adopt all resolutions unless a greater majority is required by law or by the Articles of Incorporation.
Board members shall act in accordance with the interests of the company and its business.
The members of the Supervisory Board are appointed by the General
Executive Board and the Supervisory Board. For a discussion of the signifi cant ways in which AEGON’s corporate governance practices differ from those required by U.S. companies under NYSE standards, please see the Corporate Governance section at www.aegon.com.
Shareholders and to speak and vote in the meeting, either in person or by proxy granted in writing (including electronically embedded proxies). The participating shareholder must comply with the applicable statutory requirements pertaining to the provision of evidence of shareholder’s status and notifi cation of intention to attend the meeting. When convening a 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
Moreover, proxies are solicited from the New York Registry shareholders in accordance with the practice in the United States.
At the General Meeting of Shareholders, each share is entitled to one vote. However, the holder of preferred shares, Vereniging AEGON, is
As a publicly listed company, AEGON N.V. is required to explicitly provide the following detailed information regarding structures and measures that could hinder the acquisition and exercise of control over the company by an offeror. To the extent necessary, an explanation is given with each item below.
The authorized capital of the company amounts to EUR 610,000,000, divided into 3,000,000,000 common shares with par value of
EUR 0.12 each and 1,000,000,000 class A and class B preferred shares with par value of EUR 0.25 each. At December 31, 2006, 1,622,927,058 common shares and 240,970,000 preferred shares were issued. Common shares and preferred shares represent 76.4 percent respectively 23.6 percent of the total issued and fully paid up capital. The capital contribution made on the preferred shares class A is refl ective of the market value of AEGON’s common shares at the time the capital contribution was made. Preferred shares are entitled to receive a preferred dividend on the paid in amount. No other dividend is paid on the preferred shares. Upon liquidation of the company the paid in amount on the preferred shares is reimbursed before any payment will be made on the common shares. Each share confers the right to cast one vote. However, the holder of preferred shares is entitled to cast 25/12 (= approximately 2.08) votes per preferred share in line with the higher par value of the preferred shares.
There are no restrictions on the transfer of common shares. As regards the transferability of the preferred shares reference is made to the arrangements of clause 10.5 of the Amendment of the 1983
‘special cause’, this holding represents 22.6 percent of the voting capital. 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 Vereniging AEGON in order to prevent Vereniging AEGON’s voting power from being diluted as a result of issuances of common shares.
AEGON has voluntarily waived its right to cast 25/12 vote per class A
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
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 period of six months. Based on its current aggregate holdings of common and preferred shares, Vereniging AEGON would in that case command 32.3 percent of the votes at a General Meeting of Shareholders. As a result of the foregoing and certain qualifi ed majorities specifi ed in AEGON’s Articles of Incorporation, in the event of a ‘special cause’ and for a period of six months, Vereniging
The General Meeting of Shareholders may, with an absolute majority of votes, pass a resolution to amend the Articles of Incorporation or to dissolve the company upon a proposal of the Executive Board as approved by the Supervisory Board.
The members of the Executive and Supervisory Boards are appointed by the General Meeting of Shareholders upon nomination by the
Shareholders may cancel the binding character of such nominations with a majority of two-thirds of the votes cast representing at least one-half of the issued capital. A resolution of the General Meeting of
Shareholders to appoint a person other than in accordance with a nomination by the Supervisory Board requires a majority of two-thirds of the votes cast representing at least one-half of the issued capital. In addition, members of the Executive and Supervisory Board can only be dismissed by the General Meeting of Shareholders with the same qualifi ed majority, except if proposed by the Supervisory Board.
Meeting of Shareholders up to the maximum of the authorized capital. Shares may also be issued following a resolution of the
The company is entitled to acquire its own fully paid-up shares for consideration within the limits set by the applicable legal requirements. The annual General Meeting of Shareholders usually authorizes the Executive Board to acquire shares of the company on conditions set by the General Meeting of Shareholders.
The employment agreements of the company with the members of the
Executive Board, as published on AEGON’s website, contain provisions which entitle the members to severance payments in case of termination of employment in connection with a merger or take-over.
The code came into effect on January 1, 2004. AEGON endorses the code and the principles of good corporate governance included therein. AEGON has welcomed the guidance given by the Monitoring Committee Corporate Governance.
include detailed parameters to be applied in relation to the strategy, such as the company’s fi nancial ratios and capital adequacy levels.
AEGON closely pays attention to risk management and risk factors in each of its country and group units. For detailed information about
Executive and Super visory Boards will consider the publication of additional analyses if or when appropriate.
Conduct, as well as any alleged irregularities concerning the functioning of Executive Board members, are reported directly to the chairman of the Supervisory Board. The Code of Conduct and the Financial Controls Complaints Procedure of AEGON N.V. are available on AEGON’s website.
In accordance with this schedule, the 2006 annual General Meeting of Shareholders reappointed Mr. J.G. van der Werf as a member of the Executive Board for a term of four years. The Supervisory Board intends to propose to the annual General Meeting of Shareholders in 2007 that Mr. A.R. Wynaendts be reappointed as a member of the
In accordance with AEGON past practice, the Executive Board will sub mit the company’s operational and fi nancial objectives along with the strategy to achieve stated goals to the Supervisory Board for its conside ration and approval. The outlined objectives and strategy
Executive Board members intending to accept any other signifi cant professional position will notify the Supervisory Board prior to accepting such position.
Policy until the annual General Meeting of Shareholders of April 25, 2007. At that meeting a new Remuneration Policy will be proposed.
AEGON places a high importance on attracting and retaining qualifi ed directors and personnel, while at the same time safeguarding and promoting the company’s medium and long-term interests. The Remuneration Policy currently in force for members of the Executive Board is refl ective of these objectives. It was designed to support AEGON’s strategy of value creation and shareholder alignment, in addition to establishing standards for evaluating performance and business results. The Remuneration Policy also offers an incentive for Board members with performance-linked pay, refl ecting both individual member and collective Executive Board performance. Moreover, the Remuneration Policy takes into consideration corporate governance guidelines and compensation levels in relevant reference markets.
The Remuneration Policy 2004-2006 for Executive Board members includes fi xed and variable components. With respect to the variable components, the Supervisory Board has set clear and measurable criteria including measures relating to the value of new business and total shareholders return. For more details on the compensation of the Executive Board members, please refer to the chapter on remuneration on page 76 to 81 of this annual report. The current
dividends. Any performance shares granted must be retained for a period of at least fi ve years from the date of the grant or at least until the end of employment, if the latter period is shorter.
Remuneration Policy with regard to severance payments owed to new members of the Executive Board. Changes will include setting a maximum severance payment in the event of termination, limited to the fi xed component of the particular member’s salary for one year, or two years in cases where a maximum of one year’s salary would be manifestly unreasonable for a Executive Board member who is dismissed in his or her fi rst term of offi ce. The Supervisory Board has agreed with the current members of the Executive Board not to amend the existing severance payment arrangements that apply to them in order to respect the existing employment agreements and in consideration of varying employment conditions in the United States and the Netherlands. The employment agreements of the members of the Executive Board can be found on AEGON’s website.
As consistently disclosed in AEGON’s annual reports, members of the Executive Board of AEGON are entitled to mortgage loans provided by AEGON in the normal course of its business and under the terms applicable to employees in the Netherlands. Such loans to
AEGON PLACES A HIGH IMPORTANCE ON ATTRACTING AND RETAINING QUALIFIED DIRECTORS AND PERSONNEL
The Remuneration Report of the Supervisory Board, as included in this annual report (pages 76 to 81) and available on the company’s
In AEGON’s annual accounts, the value of options and share appreciation rights, granted to the Executive Board and personnel is recognized with an indication as to how the value is determined.
Under the provisions of the Dutch Corporate Governance Code, the membership of Messrs. Shepard and Streppel on the Executive
Committee of Vereniging AEGON may give rise to deemed confl icts of interest. The Articles of Association of Vereniging AEGON provide that Messrs. Shepard and Streppel are excluded from voting on certain issues relating directly to AEGON (including the adoption of annual accounts, discharge of members of the Executive Board and appoint ments to the Executive Board and Supervisory Board of AEGON).
The Supervisory and Executive Boards have drawn up a protocol that provides that the members of the Executive Board who also serve on the Executive committee of Vereniging AEGON shall continue to participate in discussions and decision-making relating to possible transactions with Vereniging AEGON. The Supervisory Board is confi dent that by adhering to this protocol the deemed confl ict of interests with Vereniging AEGON are adequately dealt with and that the best practice provisions of the Code have been complied with in all material respects. The protocol is posted on AEGON’s website.
Annually the Supervisory Board evaluates its own performance and that of its individual members, as well as the performance of the
Supervisory Board shall resign if the Supervisory Board has determined that this member is no longer fi t to function due to inadequate performance, fundamental differences of opinion, or other impeding circumstances.
Board and with the General Meeting of Shareholders. These regula tions are posted on AEGON’s website www.aegon.com. The
The current composition of the Supervisory Board is in compliance with the best practice provisions of the Dutch Corporate Governance
The sole member that does not qualify as ‘independent’ within the meaning of these provisions is Mr. Storm who served as chairman of the Executive Board immediately prior to his appointment as a member of the Supervisory Board in 2002.
Meeting of Shareholders. For the purpose of making nominations to the Supervisory Board, including any nominations for reappointment, the Supervisory Board has drawn up a profi le that specifi es requirements for individual members as well as the desired composition and competences of the Supervisory Board as a whole.
Supervisory Board is expected to be capable of assessing the broad outline of the overall policy, in addition to having the specifi c expertise required to fulfi ll his or her designated role. The profi le also takes into account the nature of AEGON’s business, the activities of the Supervisory Board, and the background of the Supervisory
Board members. It is designed to ensure that the Supervisory Board as a whole is capable of the proper performance of its duties. The composition profi le is available on AEGON’s website, as is the prescribed information about each member of the Supervisory
Board an orientation program that provides general information about AEGON’s fi nancial affairs and facts regarding the insurance industry, AEGON’s business within the industry, and general legal affairs of the Group. The Supervisory Board regularly discusses whether there are any areas in which its members require further training.
However, in 2005 in the interest of continuity, the Supervisory Board requested Mr. Olcay to complete his current term in offi ce ending in 2008, despite the fact that he had served the maximum term allowed by the Code in 2005.
Code, the Supervisory Board maintains four standing committees that are comprised of its members. These committees are: the
Committee is chaired by Mr. Levy. The Audit Committee has determined that its group, which includes one fi nancial expert,
satisfi es the criteria of independence specifi ed by the New York
The Strategy Committee is responsible for reviewing the major fea tures of the strategy proposed by the Executive Board and preparing the presentation of the strategy for the Supervisory
Board. The Strategy Committee also considers strategy options and alternatives in addition to considering the material aspects related to the imple mentation of the agreed strategy. Finally, the Strategy
Committee acts as a consultative body for the Executive Board with its strategy development. The Strategy Committee is chaired by
AEGON’s profi t. The members of the 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 benefi ts.
AEGON places a high level of importance on dialogue with its shareholders. For this purpose, AEGON has an active department on
Meeting of Shareholders. AEGON has traditionally made an effort to maximize shareholder participation by allowing proxy voting, both in the United States (where AEGON has a signifi cant shareholder base)
Aandeelhouders. The Supervisory Board and the Executive Board welcome increased shareholder participation. According to the
Articles of Incorporation resolutions of the Executive Board entailing signifi cant changes to the identity or character of AEGON or its business are subject to approval of the General Meeting of
Currently, Vereniging AEGON holds 29,290,000 preferred shares class B, representing approximately 1.6 percent 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 Vereniging AEGON in order to prevent
Vereniging AEGON’s voting power from being diluted as a result of issuances of common shares. In addition, AEGON and Vereniging
AEGON have entered into a preferred shares voting rights agreement. Pursuant to this agreement, voting power attached to the preferred shares classes A and B is, under normal circumstances, limited to one vote per share. The preferred shares voting rights agreement allows Vereniging AEGON to exercise the full voting power on its preferred shares (25/12 votes per preferred share) in the event of a special cause (as defi ned in the preferred shares voting rights agreement) for up to six months. As a result of the foregoing and certain qualifi ed majorities specifi ed in AEGON’s
Supervisory 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 May 9, 2003. The qualifi ed majority requirement was included in order to give AEGON a temporary protection against unfriendly actions by a hostile bidder, for example. Effectively, Vereniging AEGON may for a period of six months block unfriendly attempts to replace the
Dutch Corporate Governance Code. Given the absence of antitakeover protection, they concluded that the qualifi ed majority requirements (in light of the voting rights of Vereniging AEGON) are an integral part of AEGON’s protection against unfriendly actions.
currently has in place. The protection thus accorded is in line with accepted market practice.
Supervisory Board only on a non-binding basis. This will provide the shareholders the opportunity to decide on the nomination with a simple majority. Thus, for all practical purposes, AEGON complies with the relevant principle and the relevant best practice provision.
AEGON and Vereniging AEGON, as further described before and published on AEGON’s website, clearly sets out those circumstances in which the protection may be invoked and a special cause may be declared.
Board will make public its position on the bid and its reasons for its position.
Shareholders. Also, a resolution to pay a fi nal dividend shall be dealt with as a separate item.
AEGON intends to continue its practice of providing for the determination of a registration date for the exercise of the voting rights and the rights relating to General Meetings of Shareholders.
AEGON attaches high importance to fair disclosure of information to its stakeholders and the fi nancial markets in all relevant jurisdictions.
The company applies the rules and regulations dealing with disclosure set by the various regulators and the stock exchanges on which AEGON is listed. Meetings with analysts, presentations to analysts, presentations to investors and press conferences shall be announced in advance on the company’s website and by means of press releases. All presentations made on these occasions are posted on AEGON’s website. In accordance with market practice, the company uses various press information services to distribute its press releases.
AEGON ATTACHES HIGH IMPORTANCE TO FAIR DISCLOSURE OF INFORMATION TO ITS STAKEHOLDERS AND THE FINANCIAL MARKETS
circulars may take the form of an appropriate written explanation in the agenda of the General Meeting of Shareholders. Shareholders’
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 no 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. Such reaction is channeled through 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.
AEGON’s country units in the United States and the United Kingdom have detailed policies in place in relation to their exercise of the voting rights attaching to the shares held by them. AEGON
AEGON, on a ongoing basis, reviews its internal procedures relating to the composition, preparation, and publication of its fi nancial reporting. The Executive Board has instituted procedures aimed at ensuring that major fi nancial information is delivered to the
Board receives the fi nancial information from the country units directly. The Supervisory Board, acting primarily through the
Policy for any additional (non-audit) 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. The Executive Board and the Audit Committee report annually to the Supervisory Board on their dealings with the independent auditor, particularly with regard to assessing its independence. At least every four years the Audit Committee and the Supervisory Board conduct a thorough assessment of the functioning of the independent auditor. The fi ndings 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.
Shareholders. As part of standing procedures, the independent auditor receives the information underlying the annual accounts and the quarterly fi gures and is given ample opportunity to respond to all information. Reports by the independent auditor of his fi ndings in relation to the audit of the annual accounts are made to the
From the foregoing it follows that AEGON complies with the principles of the Dutch Corporate Governance Code. Moreover, AEGON generally also applies the best practice provisions of the Code. Where AEGON
does not apply the best practice provisions, the reasons have been stated at the appropriate places. In those limited cases where AEGON
does not apply the best practice provisions, AEGON follows the spirit of the Dutch Corporate Governance Code as much as possible.
This best practice provision provides that a person may be appointed to the Supervisory Board for a maximum of three fouryear terms. The Supervisory Board has asked Mr. Olcay to complete his current term, thus exceeding the maximum stated in the code.
AEGON’s current Articles of Incorporation provide for a larger majority and a higher quorum than prescribed by the Code. As indicated before, the Supervisory Board takes the view that in light of the absence of any anti-takeover measures, the current text of the
Merger Agreement. For the purpose of further mitigating the possible negative effects of these provisions, the Supervisory Board has decided that, absent unfriendly actions, it shall make nominations to the Executive Board and the Supervisory Board only on a nonbinding basis.
USA is a major contributor to the Life and Health Insurance
Conduct become a vital and indispensable part of the daily operations of all AEGON’s country units. The company also expects employee to come to understand and abide by these basic principles and to put them into practice in their everyday customer and business relationships. To heighten awareness of the Code of Conduct and to ensure it is implemented as effectively as possible, AEGON has put in place an intranet-based training program which was rolled out last year across its business and country units. This additional resource complements existing employee training programs that have long been a part of AEGON’s corporate culture.
AEGON’s structure, which emphasizes the importance of local businesses within a global framework, is also refl ected in the company’s approach to issues of corporate responsibility. While
All country units, however, share common objectives. These include a commitment to providing sound and transparent fi nancial products that add value for customers, working with employees who are
AEGON is determined to build on the achievements of 2006 and further improve its corporate responsibility record in the coming year. Already in 2007, AEGON has signed up to the Carbon Disclosure
Project, which encourages companies around the world to be more open about their greenhouse gas emissions. Going forward, AEGON
AEGON builds long-term relationships with all its customers by delivering products and services designed to improve their fi nancial security, both now and in the future. The company ensures its customers have clear, accurate and timely information, allowing them to choose the right products and services for their evolving needs. AEGON shows its customers respect by honoring its commitments to them, by soliciting their views and, where appropriate, acting upon them.
AEGON works hard to create sustainable fi nancial returns for its shareholders, while making sure the company also respects its core values and the concerns of all its other stakeholders. Open, accurate and timely fi nancial communication allows shareholders to make informed decisions regarding their investments in the company.
AEGON provides its employees with the incentives they need to translate the company’s core values of respect, quality, transparency and trust into practice. AEGON encourages a culture in which employees are committed to working together. Training is a high priority for AEGON and the company provides formal skills and development training for employees at all levels.
AEGON strives to communicate openly and accurately and expects its business partners to do the same.
AEGON endeavors to establish long-term relationships within the communities in which it operates. Through employment and the opportunities AEGON provides for personal development, as well as through respect for the local environment, AEGON hopes to enrich the communities in which its employees live and work.
AEGON’S DISCIPLINED FINANCIAL MANAGEMENT AIMS TO ENSURE THE CREATION OF LONG-TERM VALUE FOR ALL STAKEHOLDERS
Notes to the consolidated fi nancial statements of AEGON Group 2006 105 General information 1 105 Summary of signifi cant accounting principles 2 120 Critical accounting estimates and judgement in applying accounting policies 3 123 Management of insurance and fi nancial risk 4 142 Segment information 5 152 Intangible assets 6 161 Investments for account of policyholders 8 168 Investments in associates 10 168 Reinsurance assets 11 170 Deferred expenses and rebates 12 171 Other assets and receivables 13 173 Cash and cash equivalents 14 174 Shareholders’ equity 15 179 Other equity instruments 16 180 Trust pass-through securities 17 181 Subordinated borrowings 18 181 Insurance contracts 19 184 Insurance contracts for account of policyholders 20 184 Investment contracts 21 187 Investment contracts for account of policyholders 22 189 Defi ned benefi t plans 25 196 Deferred revenue liabilities 26 196 Deferred tax 27 198 Other liabilities 28 199 Premium income and premiums to reinsurers 30 200 Investment income 31 200 Fee and commission income 32 200 Other revenues 33 201 Fair value and foreign exchange gains and losses 34 201 Net gains and losses on investments for account of policyholders 35 202 Net gains and losses on investments 36 202 Other income 37 203 Policyholder claims and benefi ts 38 203 Profi t sharing and rebates 39 203 Commissions and expenses 40 207 Impairment charges/(reversals) 41 207 Interest charges and related fees 42 207 Other charges 43 208 Income tax 44 209 Earnings per share 45 210 Dividend per share 46 210 Capital and solvency 47 21 1 Summary of total fi nancial assets and fi nancial liabilities at fair value through profi t or loss 48 213 Commitments and contingencies 49 216 Business combinations 51 216 Group companies 52 218 Related party transactions 53 219 Remuneration Executive Board 53 222 Remuneration Supervisory Board 53 223 Events after the balance sheet date 54 224 Auditors’ report
Notes to the fi nancial statements of AEGON N.V. 2006 227 General information 1 227 Summary of signifi cant accounting policies 2 229 Shares in group companies 3 229 Loans to group companies 4 229 Other loans 5 229 Other assets 6 230 Share capital 7 232 Shareholders’ equity 8 234 Other equity instruments 9 235 Current liabilities 11 236 Number of employees 12 236 Events after the balance sheet date 13
ISSUED CAPITAL AND RESERVES ATTRIBUTABLE TO EQUITY HOLDERS OF AEGON N.V. 23,169 22,655
Amounts in EUR million (except per share data) Note 2006 2005 2004
Net fair value and foreign exchange gains 34 937 698 206
Net gains on investments for account of policyholders 35 9,313 11,340 5,873
Income before share in profi t/(loss) of associates and tax 3,358 3,595 2,770
NET INCOME ATTRIBUTABLE TO EQUITY HOLDERS OF AEGON N.V. 2,789 2,732 2,256
Basic earnings per share (EUR per share) 1 45 1.63 1.63 1.38
Diluted earnings per share (EUR per share) 1 45 1.62 1.63 1.38
Dividend per share (EUR per share) 46 0.55 0.45 0.42 1 After deduction of preferred dividends and coupons on perpetuals.
Gains and losses on investments (including foreign exchange differences) (9,397) (12,820) (7,166)
Purchase of investments (other than money market investments) (63,989) (64,310) (70,078)
Disposal of investments (other than money market investments) 64,046 61,943 62,819
CONSOLIDATED CASH FLOW STATEMENT OF AEGON GROUP FOR THE YEAR ENDED DECEMBER 31, 2006
Disposal of individual intangible assets (other than VOBA and future servicing rights) 1 – –
NET CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR 14 12,391 6,068 6,804 1 In 2006, AEGON changed its presentation of cash fl ows from purchases and disposals of fi nancial assets (excluding derivatives and fi nancial assets through profi t or loss), investments in real estate and real estate held for own use. The 2005 and 2004 comparatives have been adjusted accordingly. Refer to note 2.2 for more details.
The cash fl ow statement is prepared according to the indirect method.
Aggregate tax effect of items recognized directly in equity – – 134 – 2 136 – 136
Dividends paid on ordinary shares – (391) – – – (391) – (391)
Aggregate tax effect of items recognized directly in equity – – 242 – – 242 – 242
Net income recognized in the income statement – 2,732 – – – 2,732 (2) 2,730
TOTAL RECOGNIZED NET INCOME FOR 2005 – 2,681 152 1,534 – 4,367 – 4,367
Dividends paid on ordinary shares – (193) – – – (193) – (193)
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY OF AEGON GROUP FOR THE YEAR ENDED DECEMBER 31, 2005
Aggregate tax effect of items recognized directly in equity – (29) (329) – – (358) – (358)
NET INCOME RECOGNIZED DIRECTLY IN EQUITY – (24) 481 (696) – (239) (16) (255)
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY OF AEGON GROUP FOR THE YEAR ENDED DECEMBER 31, 2004
Group’) have life insurance and pensions operations in over ten countries in Europe, the Americas and Asia and are also active in savings and investment operations, accident and health insurance, general insurance and limited banking operations in a number of these countries. The largest operations are in the United States.
Board (IASB). AEGON therefore also complies with IFRS as published by the IASB.
Part 9 of Book 2 of the Netherlands Civil Code has been applied, allowing a simplifi ed format. Certain amounts in prior years have been reclassifi ed to conform to the current year presentation.
New standards become effective on the date specifi ed by IFRS, but may allow companies to opt for an earlier adoption date.
IFRIC 4 addresses how to determine whether an arrangement is, or contains, a lease as defi ned in IAS 17 Leases, when the assessment or reassessment of the arrangement would be made and, if applicable, how the payments for the lease should be separated from payments for any other elements in the arrangement.
The adoption of these standards and interpretations did not have an impact on equity or net income. The Group has not opted to early adopt any standards or interpretations in 2006.
The following standards and interpretations will be implemented in the coming years: IFRS 7 Financial Instruments: Disclosures – required adoption date January 1, 2007; The amendments to IAS 1 Capital Disclosures – required adoption date January 1, 2007; The amendments to the guidance on implementation of IFRS 4
The Group intends to apply these standards and interpretations as of the required dates of adoption, subject to EU endorsement, with the exception of IFRS 8 which will be early adopted in 2007.
IFRS 7, the related amendments to IAS 1 and the implementation guidance to IFRS 4 will affect the disclosures on fi nancial instruments, insurance contracts and capital provided in the Group’s consolidated fi nancial statements. The standards are not expected to have an impact on equity or net income.
intends to early adopt IFRS 8 as it allows for a better portrayal of the
Group’s operating segments’ performance as the information reported is consistent with that used internally for management purposes.
IFRIC 8 clarifi es that IFRS 2 Share-based Payment applies to all transactions in which an entity receives non-fi nancial assets or services as consideration for the issue of its equity instruments, even where nil consideration appears to be received.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON GROUP Amounts in EUR million, unless otherwise stated
IFRIC 9 provides additional guidance to the principle in IAS 39 to assess whether a contract contains embedded derivatives that require bifurcation when the company fi rst becomes a party to the contract. IFRIC 9 requires an additional assessment to be performed when there is a change in the terms of the contract that signifi cantly modifi es the contract’s cash fl ows.
The interpretation prohibits subsequent reassessments to be performed in other instances, with the exception of business combinations for which a scope exclusion is made. IFRIC 9 is consistent with the Group’s current policy on the reassessment of embedded derivatives. Therefore, no impact on equity or net income is expected.
IFRIC 10 prohibits entities from reversing impairment losses recognized in previous interim periods in respect of goodwill or an investment in either an equity instrument or a fi nancial asset carried at cost. The interpretation is not expected to have an impact on equity or net income.
The Group will adopt SOP 05-1 for insurance contracts issued in the
AEGON believes it is more relevant to group together all cash fl ows from transactions related to policyholders and contractholders, including premiums and deposits, claims and other benefi ts, and the associated purchase and sale of investments related to the cash fl ows from transactions with policyholders and contractholders, as cash fl ows from operating activities because all of these activities relate to AEGON’s principal revenue producing activity of entering into insurance and investment contracts with policyholders and contractholders and subsequently investing the premiums and deposits received to meet the obligations resulting from these contracts. Furthermore, AEGON has refi ned its defi nition of investing activities to include only those investing activities not related to transactions with policyholders and contractholders, as well as the defi nition of fi nancing activities to include only those items that
AEGON views as part of the fi nancing of the Group’s activities. The 2005 and 2004 comparatives have been reclassifi ed accordingly.
The consolidated fi nancial statements include the fi nancial statements of AEGON N.V. and its subsidiaries. Subsidiaries are entities over which AEGON has direct or indirect power to govern the fi nancial and operating policies so as to obtain benefi ts from its activities (‘control’). The assessment of control is based on the substance of the relationship between the Group and the entity and, among other things, considers existing and potential voting rights that are currently exercisable and convertible.
Special purpose entities are consolidated if, in substance, the activities of the entity are conducted on behalf of the Group, the
The subsidiary’s assets, liabilities and contingent liabilities are measured at fair value on the acquisition date and are subsequently
When control is obtained in successive share purchases, each signifi cant transaction is accounted for separately. The identifi able assets, liabilities and contingent liabilities are stated at fair value when control is obtained.
Investment funds managed by the Group in which the Group holds an interest are consolidated in the fi nancial statements if the Group can govern the fi nancial and operating policies of the fund. In assessing control all interests held by the Group in the fund are considered, regardless of whether the fi nancial risk related to the investment is borne by the Group or by the policyholders.
On consolidation of an investment fund, a liability is recognized to the extent that the Group is legally obliged to buy back participations held by third parties. Where this is not the case, other participations held by third parties are presented as minority interests in equity.
The assets allocated to participations held by third parties or by the
Group on behalf of policyholders are presented in the consolidated fi nancial statements as investments for account of policyholders.
Equity instruments issued by the Group that are held by the investment funds are eliminated on consolidation. However, the elimination is refl ected in equity and not in the measurement of the related fi nancial liabilities towards policyholders or other third parties.
Interests in joint ventures are recognized using proportionate consolidation, combining items on a line by line basis from the date the jointly controlled interest commences. Gains and losses on transactions between the Group and the joint venture are recognized to the extent that they are attributable to the interests of other venturers, with the exception of losses that are evidence of impairment and that are recognized immediately.
The acquisition of an interest in a joint venture may result in goodwill, which is accounted for consistently with the goodwill recognized on the purchase of a subsidiary.
A group entity prepares its fi nancial statements in the currency of the primary environment in which it operates. Transactions in foreign currencies are translated to the functional currency using the exchange rates prevailing at the date of the transaction.
Exchange differences on non-monetary items are recognized in equity or the income statement, consistently with other gains and losses on these items.
The resulting exchange differences are recognized in the ‘foreign currency translation reserve’, which is part of shareholders’ equity.
The Group uses operating earnings before tax in its segment reporting as an important indicator of its fi nancial performance.
Operating earnings before tax excludes the effect from net gains and losses on investments, impairment charges and non-recurring income and expense items. Net gains/losses on investments includes net realized gains and losses on general account fi nancial assets, other than those classifi ed as at fair value through profi t or loss, and net gains and losses on investments in real estate. Net gains/losses also includes fair value changes for derivatives for which no hedge accounting is applied and the economically hedged underlying assets or liabilities are not valued at fair value through profi t or loss.
Derivatives included in gains and losses on investments are considered economic hedges of certain exposures related to an existing asset or liability and are part of the Group’s asset liability management. Gains and losses on investments also include the ineffective portions of hedge transactions. DPAC and VOBA offsetting charges for realized gains and losses and impairments on investments are included in other income/other charges and excluded from operating earnings.
Financial assets and liabilities are offset in the balance sheet when the Group has a legally enforceable right to offset and has the intention to settle the asset and liability on a net basis or simultaneously.
VOBA is amortized over the useful life of the acquired contracts, based on either the expected future premiums or the expected gross profi t margins. For products sold in the United States and Canada, with amortization based on expected gross profi t margins, the amortization period and pattern are reviewed at each reporting date.
Group does not recognize internally generated intangible assets arising from research or internally generated goodwill, brands, customer lists and similar items.
The intangible assets are carried at cost less accumulated depreciation and impairment losses. Depreciation of the asset is over its useful life as the future economic benefi ts emerge and is recognized in the income statement as an expense. The depreciation period and pattern are reviewed at each reporting date, with any changes recognized in the income statement.
Investments for general account comprise fi nancial assets, excluding derivatives, as well as investments in real estate and real estate held for own use.
Financial assets are recognized on the trade date when the Group becomes a party to the contractual provisions of the instrument and are classifi ed for accounting purposes depending on the characteristics of the instruments and the purpose for which they were purchased.
The following fi nancial assets are measured at fair value through profi t or loss: fi nancial assets held for trading, fi nancial assets managed on a fair value basis in accordance with the Group’s risk management and investment strategy and fi nancial assets containing an embedded derivative that is not closely related and that cannot be reliably bifurcated. In addition, in certain instances the Group designates fi nancial assets to this category when by doing so a potential accounting mismatch in the fi nancial statements is eliminated or signifi cantly reduced.
Financial assets with fi xed or determinable payments that are not quoted in an active market and that the Group does not intend to sell in the near future are accounted for as loans. To the extent that the Group has the intention and ability to hold a quoted fi nancial asset with fi xed payments to the maturity date, it is classifi ed as held-to-maturity.
All remaining non-derivative fi nancial assets are classifi ed as available-for-sale.
Financial assets are initially recognized at fair value excluding interest accrued to date plus, in the case of a fi nancial asset not at fair value through profi t or loss, any directly attributable incremental transaction costs.
The amortized cost of a debt instrument is the amount at which it is measured at initial recognition minus principal repayments, plus or minus the cumulative amortization of any difference between the initial amount and the maturity amount, and minus any reduction for impairment. The effective interest rate method is a method of calculating the amortized cost and of allocating the interest income or expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the debt instrument or, when appropriate, a shorter period to the net carrying amount of the instrument. When calculating the effective interest rate, all contractual terms are considered. Possible future credit losses are not taken into account. Charges and interest paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts are included in the calculation.
The consolidated fi nancial statements provide information on the fair value of all fi nancial assets, including those carried at amortized cost where the values are provided in the notes to the fi nancial statements.
present value based or other valuation techniques. Where discounting techniques are applied the discount rate is based on current market rates applicable to fi nancial instruments with similar characteristics.
Interest accrued to date is not included in the fair value of the fi nancial asset.
Group has transferred the asset without transfer of substantially all the risks and rewards of ownership, provided the other party can sell or pledge the asset. Financial assets, in respect of which the Group has neither transferred nor retained all the risks and rewards, are recognized to the extent of the Group’s continuing involvement. If signifi cantly all risks are retained, the assets are not derecognized.
On derecognition, the difference between the disposal proceeds and the carrying amount is recognized in the income statement as a realized gain or loss. Any cumulative unrealized gain or loss previously recognized in the revaluation reserve in shareholders’
Valuations of both investments in real estate and real estate held for own use are conducted with suffi cient regularity to ensure the value correctly refl ects the fair value at the balance sheet date. Valuations are mostly based on active market prices, adjusted for any difference in the nature, location or condition of the specifi c property. If such information is not available, other valuation methods are applied, considering the current cost of reproducing or replacing the property, the value that the property’s net earning power will support and the value indicated by recent sales of comparable properties. For property held for own use, valuers may also consider the present value of the future rental income cash fl ows that could be achieved had the real estate been let out.
Notes to the consolidated fi nancial statements of AEGON Group Note 2.8 – 2.10
Assets and liabilities may include derivative-like terms and conditions. With the exception of features embedded in contracts held at fair value through profi t or loss, embedded derivatives that are not considered closely related to the host contract are bifurcated, carried at fair value and presented as derivatives. In assessing whether a derivative-like feature is closely related to the contract in which it is embedded, the Group considers the similarity of the characteristics of the embedded derivative and the host contract. Embedded derivatives that transfer signifi cant insurance risk are accounted for as insurance contracts.
Derivatives with positive values are reported as assets and derivatives with negative values are reported as liabilities.
N.V. equity instruments are accounted for in shareholders’ equity and are therefore discussed in the notes on equity.
All derivatives are recognized on the balance sheet at fair value. All changes in fair value are recognized in the income statement, unless the derivative has been designated as a hedging instrument in a cash fl ow hedge or a hedge of a net foreign investment.
To qualify for hedge accounting, the hedge relationship is designated and formally documented at inception, detailing the particular risk management objective and strategy for the hedge (which includes the item and risk that is being hedged), the derivative that is being used and how hedge effectiveness is being assessed. A derivative has to be effective in accomplishing the objective of offsetting either changes in fair value or cash fl ows for the risk being hedged. The effectiveness of the hedging relationship is evaluated on a prospective and retrospective basis using qualitative and quantitative measures of correlation. Qualitative methods may include comparison of critical terms of the derivative to the hedged item. Quantitative methods include a comparison of the changes in the fair value or discounted cash fl ow of the hedging instrument to the hedged item. A hedging relationship is considered effective if the actual results of the hedge are within a ratio of 80% to 125%.
Hedge accounting is discontinued prospectively for hedges that are no longer considered effective. When hedge accounting is discontinued for a fair value hedge, the derivative continues to be carried on the balance sheet with changes in its fair value recognized
in the income statement. When hedge accounting is discontinued for a cash fl ow hedge because the cash fl ow is no longer expected to occur, the accumulated gain or loss in shareholders’ equity is recognized immediately in the income statement. In other situations where hedge accounting is discontinued for a cash fl ow hedge, including those where the derivative is sold, terminated or exercised, accumulated gains or losses in shareholders’ equity are amortized into the income statement when the income statement is impacted by the variability of the cash fl ow from the hedged item.
Interests in associates are initially recognized at cost, which includes positive goodwill arising on acquisition. Negative goodwill is recognized in the income statement on the acquisition date. If associates are obtained in successive share purchases, each signifi cant transaction is accounted for separately.
Gains and losses on transactions between the Group and the associate are eliminated to the extent of the Group’s interest in the entity, with the exception of losses that are evidence of impairment which are recognized immediately. Own equity instruments of
AEGON N.V. that are held by the associate are not eliminated.
Group (outgoing reinsurance). For contracts transferring suffi cient insurance risk, a reinsurance asset is recognized for the expected future benefi ts, less expected future reinsurance premiums.
Reinsurance assets are measured consistently with the amounts associated with the underlying insurance contracts and in accordance with the terms of each reinsurance contract. They are subject to impairment testing and are derecognized when the contractual rights are extinguished or expire or when the contract is transferred to another party.
Acquisition costs are deferred to the extent that they are recoverable and are subsequently amortized based on either the expected future premiums or the expected gross profi t margins. For products sold in the United States and Canada with amortization based on expected gross profi t margins, the amortization period and pattern are reviewed at each reporting date and any change in estimates is recognized in the income statement. Estimates include, but are not limited to: an economic perspective in terms of future returns on bond and equity instruments, mortality, disability and lapse assumptions, maintenance expenses and expected infl ation rates.
investment management services. Incremental costs that are directly attributable to securing these investment management contracts are recognized as an asset if they can be identifi ed separately and measured reliably and if it is probable that they will be recovered.
The other transaction costs are included in the carrying amount of the fi nancial liability.
An interest rebate is a form of profi t sharing whereby the Group gives a discount on the premium payable (usually single premium)
based on the expected surplus interest that will be earned on the contract. The expected surplus interest is calculated with reference to a portfolio of government bonds. The rebate can be subject to additional conditions concerning actual returns or the continuation of the policy for a specifi ed number of years.
Cash comprises cash at banks and in-hand. Cash equivalents are short-term, highly liquid investments that are readily convertible to known cash amounts, are subject to insignifi cant risks of changes in value and are held for the purpose of meeting short-term cash requirements. Money market investments that are held for investment purposes (backing insurance liabilities, investment liabilities or equity based on asset liability management considerations) are not included in cash and cash equivalents but are presented as investment or investment for account of policyholders.
An asset is impaired if the carrying amount exceeds the amount that would be recovered through its use or sale. For tangible and intangible assets, fi nancial assets and reinsurance assets, if not held at fair value through profi t or loss, the recoverable amount of the asset is estimated when there are indications that the asset may be impaired. Irrespective of the indications, goodwill and other intangible assets with an indefi nitive useful life that are not amortized, are tested at least annually.
With the exception of goodwill, impairment losses are reversed when there is objective evidence that there has been a change in the estimates used to determine the asset’s recoverable amount since the recognition of the last impairment loss. The reversal is recognized in the income statement to the extent that it reverses impairment losses previously recognized in the income statement.
Assets that only generate cash fl ows in combination with other assets and liabilities are tested for impairment at the level of the cash-generating unit. When impairing a cash-generating unit, any goodwill allocated to the unit is fi rst written-off and recognized in the income statement. The remaining impairment loss is allocated on a pro rata basis among the other assets, on condition that the resulting carrying amounts do not fall below the individual assets’
Debt instruments are impaired when it is considered probable that not all amounts due will be collected as scheduled. Individually signifi cant loans and other receivables are fi rst assessed separately.
For debt instruments carried at amortized cost, the carrying amount of impaired fi nancial assets is reduced through an allowance account.
The impairment loss is calculated as the difference between the carrying and recoverable amount of the investment. The recoverable amount is determined by discounting the estimated probable future cash fl ows at the original effective interest rate of the asset. For variable interest debt instruments, the current effective interest rate under the contract is applied.
For debt instruments classifi ed as available-for-sale, the asset is impaired to its fair value. Any unrealized gain or loss previously recognized in shareholders’ equity is taken to the in the income statement in the impairment loss. After impairment the interest accretion on debt instruments that are classifi ed as available-forsale is based on the rate of return that would be required by the market for similar rated instruments at the date of impairment.
Financial instruments that are issued by the Group are classifi ed as equity if they represent a residual interest in the assets of the Group after deducting all of its liabilities. In addition to common shares and preferred shares, the Group has issued perpetual securities that are classifi ed as equity, rather than as debt, as these securities have no fi nal maturity date, repayment is at the discretion of AEGON and
A fi nancial instrument issued by the Group is classifi ed as a liability if the contractual obligation must be settled in cash or another fi nancial asset or through the exchange of fi nancial assets and liabilities at potentially unfavorable conditions for the Group.
Insurance contracts are contracts under which the Group accepts a signifi cant risk – other than a fi nancial risk – from a policyholder by agreeing to compensate the benefi ciary on the occurrence of an uncertain future event by which he or she will be adversely affected.
In order to refl ect the specifi c nature of the products written, subsidiaries are allowed to apply local accounting principles to the measurement of insurance contracts. All valuation methods used by the subsidiaries are based on the general principle that the carrying amount of the net liability must be suffi cient to meet any reasonably foreseeable obligation resulting from the insurance contracts.
Life insurance contracts are insurance contracts with guaranteed life-contingent benefi ts. The measurement of the liability for life insurance contracts varies depending on the nature of the product.
Some products, such as traditional life insurance products in continental Europe and products in the United States, for which account terms are fi xed and guaranteed, are measured using the net premium method. The liability is determined as the sum of the discounted value of the expected benefi ts and future administration expenses directly related to the contract, less the discounted value of the expected theoretical premiums that would be required to meet the future cash outfl ows based on the valuation assumptions used.
The liability is either based on current assumptions or calculated using the assumptions established at the time the contract was issued, in which case a margin for risk and adverse deviation is generally included. A separate reserve for longevity may be established and included in the measurement of the liability.
Furthermore, the liability for life insurance comprises reserves for unearned premiums and unexpired risks as well as for claims outstanding, which includes an estimate of the incurred claims that have not yet been reported to the Group.
The liability for the insurance contracts for account of policyholders is measured at the policyholder account balance. Contracts with unit-denominated payments are measured at current unit values, which refl ect the fair values of the assets of the fund. If applicable, the liability representing the nominal value of the policyholder unit account is amortized over the term of the contract so that interest on actuarial funding is at an expected rate of return.
In the United States the additional liability for guaranteed minimum benefi ts that are not bifurcated is determined each period by estimating the expected value of benefi ts in excess of the projected account balance and recognizing the excess over the accumulation period based on total expected assessments. The estimates are reviewed regularly and any resulting adjustment to the additional liability is recognized in the income statement.
Due to the nature of the product, these guarantees have a long-term horizon of 30 to 60 years.
Some profi t sharing schemes issued by the Group entitle the policyholder to a bonus which is based on the actual total return on specifi c assets held. To the extent that the bonus relates to gains on available-for-sale investments for which the unrealized gains are recognized in the revaluation reserve in equity, shadow accounting is applied. This means that the increase in the liability is also charged to equity to offset the unrealized gains rather than to the income statement.
To the extent that the tests involve discounting of future cash fl ows, the interest rate applied may be prescribed by the local regulator or may be based on management’s expectation of the future return on investments. In the Netherlands, the discount rate is the lower of the tariff rate and management’s prudent assumption based on current market interest rates.
Non-life insurance contracts are insurance contracts where the insured event is not life-contingent. For non-life products the insurance liability generally includes reserves for unearned premiums, unexpired risk, inadequate premium levels and outstanding claims and benefi ts. No catastrophe or equalization reserves are included in the measurement of the liability.
The liability for outstanding claims and benefi ts is established for claims that have not been settled and any related cash fl ows, such as claims handling costs. It includes claims that have been incurred but have not been reported to the Group. The liability is calculated at the reporting date using statistical methods based on empirical data and current assumptions that may include a margin for adverse deviation. Liabilities for claims subject to periodic payment are calculated using actuarial methods consistent with those applied to
Notes to the consolidated fi nancial statements of AEGON Group Note 2.19 – 2.20
Discounting of liabilities is generally applied when there is a high level of certainty concerning the amount and settlement term of the cash outfl ows.
The adequacy of the non-life insurance liability is tested at each reporting date. Changes in expected claims that have occurred, but that have not been settled, are refl ected by adjusting the liability for claims and future benefi ts. The reserve for unexpired risk is increased to the extent that the future claims and expenses in respect of current insurance contracts exceed the future premiums plus the current unearned premium reserve.
Some unitized investment contracts provide policyholders with the option to switch between funds with and without discretionary participation features. The entire contract is accounted for as an investment contract with discretionary participation features if there is evidence of actual switching resulting in discretionary participation benefi ts that are a signifi cant part of the total contractual benefi ts.
Subsequently, contracts designated as at fair value through profi t or loss are measured at fair value, which generally equals the contractholder’s account value. All changes in the fair value are recognized in the income statement as incurred. Other investment contracts without discretionary participation features are carried at amortized cost based on the expected cash fl ows and using the effective interest rate method. The expected future cash fl ows are re-estimated at each reporting date and the carrying amount of the fi nancial liability is recalculated as the present value of estimated future cash fl ows using the fi nancial liability’s original effective interest rate. Any adjustment is immediately recognized in the income statement.
Investment contracts for account of policyholders are investment contracts for which the actual return on investments allocated to the contract is passed on to the policyholder. Also included are participations held by third parties in consolidated investment funds that meet the defi nition of a fi nancial liability.
Investment contracts for account of policyholders are designated as at fair value through profi t or loss. Contracts with unit-denominated payments are measured at current unit values, which refl ect the fair values of the assets of the fund.
With the exception of insurance contracts and investment contracts with discretionary participation features for which potential future losses are already considered in establishing the liability, a provision is recognized for onerous contracts in which the unavoidable costs of meeting the resulting obligations exceed the expected future economic benefi ts.
A liability is recognized for the undiscounted amount of short-term employee absences expected to be paid within one year after the end of the period in which the service was rendered. Accumulating short-term absences are recognized over the period in which service is provided. Benefi ts that are not service-related are recognized when the event that gives rise to the obligation occurs.
The contribution payable to a defi ned contribution plan for services provided is recognized as an expense in the income statement. An asset is recognized to the extent that the contribution paid exceeds the amount due for services provided.
The defi ned benefi t obligation is based on the terms and conditions of the plan applicable on the balance sheet date. Plan improvements are charged directly to the income statement, unless they are conditional on the continuation of employment. In this case the related cost is deducted from the liability as past service cost and amortized over the vesting period. In measuring the defi ned benefi t obligation the Group uses the projected unit credit method and actuarial assumptions that represent the best estimate of future variables. The benefi ts are discounted using an interest rate based on the market yields for high-quality corporate bonds on the balance sheet date.
Plan assets are qualifying insurance policies and assets held by longterm employee benefi t funds that can only be used to pay the employee benefi ts under the plan and are not available to the
Group’s creditors. They are measured at fair value and are deducted in determining the amount recognized on the balance sheet.
The unrecognized actuarial gains and losses are amortized in a straight line over the average remaining working life of the employees covered by the plan, to the extent that the gains or losses exceed the corridor limits. The corridor is defi ned as ten percent of the greater of the defi ned benefi t obligation or the plan assets. The amortization charge is reassessed at the beginning of each year. The corridor approach described above was not applied retrospectively to periods prior to the transition to IFRS (January 1, 2004).
For share option plans that are equity-settled, the expense recognized is based on the fair value on the grant date of the share options, which does not refl ect any performance conditions other than conditions linked to the price of the Group’s shares. The cost is recognized in the income statement, together with a corresponding increase in shareholders’ equity, as the services are rendered. During this period the cumulative expense recognized at the reporting date refl ects management’s best estimate of the number of shares expected to vest ultimately.
settlement, with any changes in fair value recognized in the income statement.
Deferred tax assets and liabilities are recognized for the estimated future tax effects of temporary differences between the carrying value of an item and its tax value, with the exception of differences arising from the initial recognition of goodwill and of assets and liabilities that do not impact taxable or accounting profi ts. A tax asset is recognized for tax loss carryforwards to the extent that it is probable at the reporting date that future taxable profi ts will be available against which the unused tax losses and unused tax credits can be utilized.
Deferred tax assets and liabilities are reviewed at the balance sheet date and are measured at tax rates that are expected to apply when the asset is realized or the liability is settled. The carrying amount is not discounted and refl ects the Group’s expectations concerning the manner of recovery or settlement.
Gross premiums, including recurring and single premiums, from life and non-life insurance and investment contracts with discretionary participation features are recognized as revenue when they become receivable. Not refl ected as premium income are deposits from certain products that are sold only in the United States and Canada, such as deferred annuities. For these products the surrender charges and charges assessed have been included in gross premiums.
For interest-bearing assets, interest is recognized as it accrues and is calculated using the effective interest rate method. Fees and commissions that are an integral part of the effective yield of the fi nancial assets or liabilities are recognized as an adjustment to the effective interest rate of the instrument.
Policyholder claims and benefi ts consists of claims and benefi ts paid to policyholders, including benefi t claims in excess of account value for products for which deposit accounting is applied and the change in the valuation of liabilities for insurance and investment contracts.
Net fair value and net foreign exchange gains and losses include fair value changes of general account fi nancial assets and liabilities carried at fair value through profi t or loss, foreign exchange results and fair value changes of derivatives for which hedge accounting is applied, excluding the ineffective portion. It also includes fair value changes for hedging derivatives for which no hedge accounting is applied but the economically hedged underlying assets or liabilities are valued at fair value through profi t or loss. Fair value and foreign exchange gains and losses are aggregated to net gains or net losses by country, per type of instrument.
Group’s asset liability management. Gains and losses on investments also include the ineffective portions of hedge transactions.
Impairment charges on investments in fi nancial assets are disclosed in note 41. Other impairment charges are included in fair value and foreign exchange losses.
Where the Group is the lessor under an operating lease, the assets subject to the operating lease arrangement are presented in the balance sheet according to the nature of the asset. Income from these leases are recognized in the income statement on a straight line basis over the lease term, unless another systematic basis is more representative of the time pattern in which use benefi t derived from the leased asset is diminished.
Events that are indicative of conditions that arose after the balance sheet date are disclosed, but do not result in an adjustment of the fi nancial statements themselves.
Notes to the consolidated fi nancial statements of AEGON Group Note 2.30 – 3
The main assumptions used in measuring DPAC, VOBA and the liabilities for life insurance contracts with fi xed or guaranteed terms relate to mortality, morbidity, investment return and future expenses.
Mortality tables applied are generally developed based on a blend of company experience and industry wide studies, taking into consideration product characteristics, own risk selection criteria, target market and past experience. Mortality experience is monitored through regular studies, the results of which are fed into the pricing cycle for new products and refl ected in the liability calculation when appropriate. For contracts insuring survivorship, allowance may be made for further longevity improvements. Morbidity assumptions are based on own claims severity and frequency experience, adjusted where appropriate for industry information.
Assumptions on future expenses are based on the current level of expenses, adjusted for expected expense infl ation if appropriate.
Surrender rates depend on product features, policy duration and external circumstances such as the interest rate environment and competitor and policyholder behavior. Credible own experience, as well as industry published data, are used in establishing assumptions.
Where quoted market prices are not available, other valuation techniques, such as option pricing or stochastic modeling, are applied. The valuation techniques incorporate all factors that market participants would consider and are based on observable market data when available. All models are validated before they are used and calibrated to ensure that outputs refl ect actual experience and comparable market prices.
There are a number of signifi cant risks and uncertainties inherent in the process of monitoring investments and determining if impairment exists. These risks and uncertainties include the risk that the Group’s assessment of an issuer’s ability to meet all of its contractual obligations will change based on changes in the credit characteristics of that issuer and the risk that the economic outlook will be worse than expected or have more of an impact on the issuer than anticipated. Also, there is a risk that new information obtained by the Group or changes in other facts and circumstances will lead the Group to change its investment decision. Any of these situations could result in a charge against the income statement in a future period to the extent of the impairment charge recorded.
Debt instruments are impaired when it is considered probable that not all amounts due will be collected as scheduled. Factors considered include industry risk factors, fi nancial condition, liquidity position and near-term prospects of the issuer, nationally recognized credit rating declines and a breach of contract.
Objective evidence of impairment for an investment in an equity instrument includes information about signifi cant changes with an adverse effect that have taken place in the technological, market, economic or legal environment in which the issuer operates, and indicates that the cost of the investment in the equity instrument may not be recovered. A signifi cant or prolonged decline in the fair value of an investment in an equity instrument below its cost is also objective evidence of impairment.
As an insurance company, AEGON is in the risk business and as a result is exposed to a variety of risks. Some risks, such as currency translation risk, are related to the international nature of AEGON’s business. Other risks include insurance related risks, such as changes in mortality, morbidity and lapses. However, the Group’s largest exposures are to changes in fi nancial markets (for example interest rate, credit and equity market risks) that affect the value of the investments, liabilities related to the products sold, VOBA and deferred expenses.
With general account life insurance products, AEGON typically bears the investment risk, earns a spread (the difference between investment performance and crediting rates to customers), realizes underwriting results (on mortality, morbidity, persistency and expenses) or targets a combination thereof.
Traditional life products are sold in the United States, Canada, the
A key risk for all countries selling traditional life business is mortality risk. The most signifi cant factors that could increase the overall frequency or timing of claims are epidemics, natural or man made disasters, or a general deterioration in population mortality due to lifestyle changes.
Insured mortality risk can usually be reasonably predicted under normal circumstances with thorough underwriting and with a large number of insureds. The level of underwriting employed by the company depends on the materiality of the mortality risk relative to other product attributes, the size of the sum assured and the costbenefi t analysis for each product.
The timing and extent of policyholder lapses is another risk of these products. Early policyholder lapsation before acquisition costs have been fully recovered and without suffi cient commission claw back clauses can cause a loss. In some products, lapses signifi cantly below expectations can result in more future claims than anticipated in the premium pricing and contribute to losses.
Permanent life insurance is also known as whole life insurance in the
United States. It can be participating or non-participating. Premiums are generally fi xed and are payable over the life of the policy or for a limited time period. Participating policies allow the policyholder to receive policy dividends, as declared by the insurer’s board of directors. These dividends are not guaranteed and are based on the insurer’s experience for a given class of policies.
The traditional life products sold by AEGON Canada include term life insurance, term to 100 and universal life. In addition, AEGON Canada also classifi es its single premium immediate annuity product as part of its traditional life line of business.
Notes to the consolidated fi nancial statements of AEGON Group Note 4.1.1
The terms and conditions of AEGON Canada’s term life insurance product are consistent with those described for the operations of the
Universal life insurance is another form of permanent life insurance and has features similar to those described for the United States.
The traditional life products of AEGON The Netherlands consist largely of endowment insurance and pensions and annuity insurance.
This category includes products that accumulate a cash value and term life insurance products. Premiums are paid at inception or over the term of the contract.
The accumulation products pay benefi ts on the policy maturity date, subject to survival of the insured. In addition, most policies also pay death benefi ts if the insured dies during the term of the contract.
The death benefi ts may be stipulated in the policy or equal the gross premiums paid to date. Premiums and amounts insured are established at inception of the contract. The amount insured can be increased as a result of profi t sharing, if provided for under the terms and conditions of the product.
Term life insurance pays out death benefi ts when the insured dies during the term of the contract. Whole life insurance pays out death benefi ts when the insured dies, regardless of the timing of this event.
Premiums and amounts insured are established at inception of the contract and are guaranteed. The amount insured may be adjusted on request of the insured. In principle, term life insurance policies will not include profi t sharing arrangements. Part of the portfolio of whole life insurance has profi tsharing features, which are based on external indices or return of related assets.
Premiums are paid at inception of the policy or during the accumulation phase of the policy. The contracts contain minimum guarantees of 3% or 4%.
Dutch government bonds, although other calculation bases are also applied. There are also profi t sharing schemes set by reference to external indices that are based on predefi ned portfolios of Dutch government bonds.
The main guarantee in Hungary is variable crediting rates with minimum interest guarantees between 0% and 4% for universal life type products, plus 100% participation in actual interest earned. Traditional non-profi t share products have 5.5% technical interest rates, but this is a declining block of business. Profi t share products mainly have a 3.5% technical interest rate and 85%
participation in excess interest. The average minimum interest guarantee is about 3.4%.
In Spain a minimum interest guarantee of between 0% and 6%
The most signifi cant guarantees in Taiwan relate to individual traditional life products with fi xed premiums. These products carry interest guarantees at various levels. The current new business provides interest guarantees mostly at 2%. The average in force guarantee rate is approximately 3.3%. Business issued in 2003 and prior also carries the Ministry of Finance Dividend that requires the insurance company to pay to the policyholder a dividend referring to industry mortality experience and the average two-year term deposit rates.
Life for account of policyholder products are sold in the United
Premiums can be allocated among a variety of investments that offer different degrees of risk and reward, including shares, bonds, combinations of both, or investment products that guarantee interest and principal. The customer retains the investment risk and
These products include: Variable universal life in the United States; Tontine plans in the Netherlands; Separate account group contracts in the Netherlands; Unit-linked contracts in the Netherlands, the United Kingdom,
Variable universal life products in the United States are similar to universal life products reported as part of the traditional life line of business, but include investment options and maintenance of investments for the account of policyholders. Some products contain minimum death benefi t guarantees and the risk is that poor market performance may erode the policyholder account value to the extent that available cost of insurance charges prove inadequate. The fi xed account has a minimum guaranteed interest rate of either 3% or 4%
This product is not sensitive to equity returns until the no lapse guarantee threshold is breached.
compound interest, subject to a minimum of 110% of the fund value during the fi rst half of the contract term.
Separate account group contracts of AEGON The Netherlands are large group contracts that have an individually determined asset investment underlying the pension contract. The guarantee given is that the profi t sharing is the minimum of the technical interest of either 3% or 4% or the realized return (on an amortized cost basis).
If there is a negative profi t sharing, the minimum is effective, but the loss in any given year is carried forward to be offset against any future surpluses during the contract period. In general, a guarantee is given for the life of the underlying employees so that their pension benefi t is guaranteed.
(MER) charged to the funds is not guaranteed and can be increased at management’s discretion.
The main life for account of policyholder products currently sold in the United Kingdom are: Unit-linked pensions, for individuals or groups of lives, through regular and/or single premium contributions and
A wide variety of different internal and external fund choices is available. This includes internal funds offering smoothing of returns with discretionary participation features, but without investment guarantees.
All AEGON UK contracts with investment guarantees have been written in ’policyholder-owned’ funds (called with profi t funds) that contain assets which, as yet, have not been distributed to individual policyholders. These ‘free assets’ help meet the cost of guarantees and provide a buffer to deal with adverse events; an exposure for
AEGON UK only arises once these have been exhausted and, as also outlined later, AEGON believes this exposure to be low.
Scottish Equitable and Guardian Assurance used to sell guaranteed annuity products in the United Kingdom. Certain policies also have a guaranteed minimum rate of return or guaranteed death or other benefi ts. Any guaranteed rates of return only apply if the policy is kept in force to the dates specifi ed, or on the events described, in the policy conditions. The costs of all guarantees are borne by the with profi ts funds and therefore impact the payouts to with profi ts policyholders. AEGON UK’s main with profi ts classes are summarized at a very high level in the following sections.
AEGON N.V., on December 31, 1993 the business and assets of
Scottish Equitable plc. AEGON UK has no fi nancial interest in Scottish
Equitable plc’s with profi ts fund, apart from routine yearly fund management charges, costs and expenses that it takes on the basis agreed at the time of demutualization.
(including guaranteed annuity options). As longevity has improved and interest rates have fallen over time, these minimum guarantees are now often valuable.
It has been AEGON UK’s practice for each of the with profi ts funds to have an investment strategy that refl ects the nature of the underlying guarantees. Funds can invest in a variety of different asset types; the main categories are United Kingdom and overseas equities, United Kingdom fi xed interest securities, property and cash.
The investment returns on the underlying assets, with an allowance for smoothing to reduce volatility. Although smoothing means that investment profi ts are spread from one year to the next, the aim is to pay out all of the investment profi ts earned by the fund over the long-term.
On early withdrawal there are other measures to ensure that a fair share of total fund growth has been received. Indeed, a market value reduction may be applied under certain funds when, for cohorts of similar contracts, the face value of the benefi ts is greater than the value of the underlying assets. Policy conditions may state specifi c points at which a market value reduction will not apply.
As mentioned before, the ‘free assets’ (i.e. assets which, as yet, have not been distributed to policyholders) help meet the cost of guarantees and provide a buffer to deal with adverse events. An exposure for AEGON UK only arises once ‘free assets’ have been exhausted; this has been assessed by AEGON UK to be immaterial through extending the risk based capital approach now required for solvency reporting to the regulator in the United Kingdom.
Fixed annuities include both deferred annuities and immediate annuities. A fi xed deferred annuity exposes AEGON to interest rate risk and lapse risk. The insurer interest rate risk can be mitigated through asset liability matching and hedging, though policyholder behavior can never be fully matched. Surrender charges in early policy years serve as a deterrent to early duration lapses. Fixed annuities sold in the United States contain a signifi cant longevity risk created by guaranteed annuity options and may also offer waiver of account value surrender charges upon the death of the insured.
An immediate annuity is purchased with a single lump sum premium payment and the benefi t payments generally begin within a year after the purchase. The benefi t payment period can be for a fi xed period, for as long as the benefi ciary is alive, or a combination of the two. Immediate annuities and payout options under deferred annuities may also offer riders, which provide the owner or benefi ciaries with the option to surrender the annuity to have access to the account value if needed for unexpected events.
Notes to the consolidated fi nancial statements of AEGON Group Note 4.1.2 – 4.1.4
A structured settlement is a form of an immediate annuity previously issued by AEGON USA. These contracts were typically purchased by customers as a result of a lawsuit or a claim and the customer receives special tax treatment. Rather than paying the injured party a lump sum, the payments were structured as a lifetime annuity with mortality risk, a period certain annuity, or a combination of both.
Minimum interest rate guarantees exist in all generations of deferred annuity products, as they are required by state non-forfeiture regulations. On average, minimum interest guarantees are at around 3%, with new products at 1.5%. Equity indexed annuities offer additional returns that are indexed to S&P 500, with a minimum cash value equal to a percentage of the premium increased at a minimum rate that varies, and a cap on the return. The cap is reset periodically and is currently at 7.0%.
Besides the minimum interest rate guarantee, certain fi xed deferred annuity products also offer a bailout provision. Under the bailout provision, if the crediting rate falls below the bailout rate, policyholders can surrender their contracts without incurring any surrender charges. The bailout provision serves as an additional insurance to the customers during the surrender charge period.
Most redeemable contracts are sold on the basis that a market value adjustment will apply for surrenders prior to maturity, while a small number use a fi xed surrender charge. Contracts sold on a redeemable basis provide a lower rate of interest than the non-redeemable contracts. There are no minimum interest rate guarantees on these products.
Variable annuities allow a customer to provide for the future on a tax-deferred basis and to participate in equity or bond market performance with a degree of downside protection. Variable annuities allow a customer to select payout options that meet the customer’s need for income upon maturity, including lump sum payment or income for life or for a period of time.
The account value of variable annuities refl ects the performance of the funds. AEGON USA earns mortality and expense charges as well as various types of rider fees for providing various guarantees and benefi ts. This category includes segregated fund products offered by
AEGON Canada. Surrender charges are generally not a large form of revenue as policyholder surrender rates are typically lower when a surrender charge penalty is still present. Any surrender charges collected are typically used to recoup any acquisition costs paid or to write down any remaining deferred acquisition cost.
Under a guaranteed minimum death benefi t, the benefi ciaries receive the greater of the account balance or the guaranteed amount upon the death of the insured. The guaranteed minimum income benefi t feature provides for minimum payments if the contractholder elects to convert to an immediate payout annuity.
This line of business primarily includes the issuance of Guaranteed investment contracts (GICs). Funding agreements (FAs) and notes which are marketed to institutional investors, such as pension funds, retirement plans, college savings plans, money market funds, municipalities United States investors and non-US investors. GICs are generally issued to tax qualifi ed plans, while FAs and notes are typically issued to non-tax qualifi ed institutional investors. These products are marketed through an internal sales force in the United
These spread-based products are issued on a fi xed-rate or fl oatingrate basis and provide the customer a guarantee of principal and a specifi ed rate of return. Practically all of the fi xed-rate contracts are swapped to fl oating-rate via swap agreements and contracts issued in foreign currencies are swapped to US dollars to eliminate currency risk at issuance. Credited interest on fl oating-rate contracts predominately resets on a monthly basis to various market indices.
The term of the contract can be fi xed, generally from six months up to ten years, or it can have an indefi nite maturity. Market-indexed contracts provide a return based on the market performance of a designated index, such as the S&P 500. Futures or swap contracts are used to hedge the market risk on market-indexed contracts and effectively convert such contracts to a fl oating-rate. Indeterminatematurity contracts allow the customer to withdraw funds without a withdrawal penalty by providing the customer with a put option whereby the contract may be terminated with advance written notice. Historically, this advance notice period would range from three to twelve months: however, a recent decision was made to eliminate practically all contracts with advance notice periods prior to twelve months. Other contracts offer benefi t-responsive withdrawal rights to the customer, but these withdrawals cannot be for economic reasons. The account balances at December 31, 2006 consisted of fi xed-rate, fi xed-maturity contracts (48%); fl oating-rate, fi xed-maturity contracts (35%); indeterminate-maturity contracts
TOTAL INSTITUTIONAL GUARANTEED PRODUCTS 24,531 26,348 1 Book value out: the amount equal to the sum of deposits less withdrawals with interest accrued at the contractual interest rate. 2 Market value out: the amount equal to the book value out plus a market value adjustment to adjust for changes in interest rates.
Products are sold in the United States, Canada, the Netherlands, the United Kingdom, Hungary, Slovakia and Spain. AEGON’s fee business comprises products that generate fee income by providing management, administrative or risk services related to off balance sheet assets (i.e. equity or bond funds, third party managed assets and collective investment trusts). Fee income is mainly sensitive to policyholder withdrawals and equity market decreases.
AEGON’s operations in the United States provide various investment products and administrative services, individual and group variable annuities, mutual funds, collective investment trusts and asset allocation (retirement planning) services.
A ‘manager of managers’ investment approach is generally used specifi cally for the retirement plans market, which allows clients access to institutional investment managers across the major asset classes. These funds are generally available in a ‘core-and-feeder’
The operations in the United States provide the fund manager oversight for the Transamerica/IDEX Mutual Funds, the Premier
AEGON USA selects, manages, and retains affi liated and nonaffi liated managers from a variety of investment fi rms based on performance. The manager remains with the investment company and acts as a sub-advisor for AEGON USA’s mutual funds. AEGON
USA earns investment management fees on these investment products. AEGON USA also earns direct investment management fees through affi liated managers acting as sub-advisors.
In the United States, synthetic GICs are sold primarily to tax-qualifi ed institutional entities such as 401(k) plans and other retirement plans, as well as college savings plans. AEGON provides a synthetic GIC
AEGON UK has invested in a number of independent advisors in the
United Kingdom. The independent advisors deliver advice relating to fi nancial needs to a range of customers (both individuals and companies). AEGON UK also provides asset management services.
AEGON USA also assumes fi xed annuity business on a coinsurance basis. Under a coinsurance arrangement, reinsurance is ceded in the same form as the direct policy and the client company typically pays the reinsurer premiums equal to its share of the premiums that the client company receives on the underlying policies. The reinsurer will pay the client death or surrender benefi ts upon death or surrender of the policyholder and will reimburse the client specifi c allowances which cover its share of expenses.
AEGON USA also reinsures fi xed and variable annuity business on a modifi ed coinsurance basis. Like coinsurance, modifi ed coinsurance is ceded and assumed in the same form as the direct policy however, the reserves and assets backing the transaction remain with the ceding company in its accounts. AEGON USA typically fi nances variable annuity acquisition costs in exchange for a fi xed fee reinsurance premium that is based upon the account value. Lapse risk is a signifi cant risk assumed by the reinsurer.
AEGON USA assumes certain guaranteed minimum withdrawal, death and income benefi ts associated with variable annuity policies in exchange for a fee typically expressed as a fi xed percentage of the account value. AEGON USA pays a portion of the guaranteed benefi ts that cannot be funded from the underlying policyholder’s account value.
Accident and health products are sold in the United States, Canada, the Netherlands, Spain, Hungary, Taiwan and China.
When the premium is not guaranteed, AEGON reserves the right to raise premiums, if justifi ed by adverse experience. A related risk is persistency, in that greater than expected persistency may increase the aggregate level of claims beyond what was anticipated in the pricing. An additional risk is investment related, in that recurring future premiums are subject to investment at future rates that may be less than those assumed when pricing the product.
In Canada, AEGON offers accidental death, critical illness and out-ofthe -country medical expense coverage.
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.
For some products, cash fl ows are less predictable as a result of 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 and usually do increase. Premiums in fl exible 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; this 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.
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 fl exible 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 fi xed-income investments likely will have declined with the market interest rates. In addition, mortgages and redeemable bonds in the investment portfolio are more likely to be repaid as borrowers seek to borrow at lower interest rates and AEGON may be required to reinvest the proceeds in securities bearing lower interest rates.
If interest rates rise, there may be unrealized losses on some of our assets that will be recorded as negative income under IFRS. This is inconsistent with the IFRS accounting on much of the company’s liabilities where, when interest rates rise, corresponding unrealized gains do not affect income in the shorter term. Over time, the shortterm reduction in income due to rising interest rates would be offset
As part of these risk management programs, AEGON takes inventory of its current risk position across risk categories. AEGON also measures the sensitivity of net income and shareholders’ equity to stochastic and deterministic scenarios. 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 regularly and updated if necessary.
As an international group, AEGON is subject to currency risk. Also, currency risk exists for any policy denominated in currencies other than the policy’s local currency. Equity held in subsidiaries is kept in local currencies to the extent shareholders’ equity is required to satisfy regulatory and self-imposed capital requirements. Therefore, currency exchange rate fl uctuations may affect the level of shareholders’ equity as a result of translation into euro. The remainder of the capital base (perpetual capital securities, perpetual cumulative subordinated bonds, subordinated and senior debt) is held in, or swapped to, the various currencies in amounts that are targeted to correspond proportionally to the book value of its country units. This balancing mitigates currency translation impacts to equity and leverage ratios. Currency risk in the investment portfolios is managed using asset liability matching principles. In the
AEGON does not hedge the income streams from the main non-euro units and, as a result, earnings may fl uctuate due to currency translation. As AEGON has signifi cant business segments in the
Bonds, money market and other short–term investments 9,472 5.40% 29,033 5.43% 28,176 5.52% 35,298 5.90%
Bonds, money market and other short–term investments 7,992 6.03% 30,895 4.92% 37,680 5.42% 34,581 5.85%
Trust pass–through securities – – – – – – 437 7.67%
Insurance contracts for account of policyholders 1 5,169 21,504 19,833 74,481