In addition to the annual report, AEGON publishes the historical data booklet 1994-2004, which provides further information and trend data over an 1 1-year period. Both publications are available on AEGON’s corporate website, which contains investor information and press releases in browsable and downloadable formats, www.aegon.com
Individual and group life insurance, pension products, savings and investment products, asset management, accident and health insurance, general insurance
In 2004, AEGON successfully issued junior perpetual capital securities to retail investors and completed a benchmark senior debt issue to institutional investors.
Board. All Executive Board members attended the regular meetings, held in March, June, August, November and
Pre-approval Policy relating to the services of AEGON’s independent auditor, Ernst & Young, and the Rules on Inside
The Compensation Committee is responsible for the design, development, implementation and review of the Remuneration
Ventures, and a former chairman of the Board of Directors of
Randstad Holding N.V. and Martinair, and a member of the Board of Directors of Northwest Airlines. He is currently a member of the Compensation Committee.
Messrs. Van der Werf’s and Wynaendts’, their achievable bonuses are higher, reflecting their role as value drivers for AEGON.
In the employment contracts with the current Executive Board members, the following specific severance payment arrangements regulate their entitlements in the event AEGON
In accordance with the STI plan 2003, the bonuses for the year 2003 were paid in 2004. Through this plan Mr. Shepard could earn USD 50,000 per percentage point increase in the preceding year earnings per share and the other members EUR 32,432 per percentage point increase in the preceding year earnings per share over the rate of European inflation. All bonuses have a maximum ceiling of 150% of the relevant year’s salary.
Please refer to page 1 19 for an overview of the STI bonuses for the year 2003.
To that end, our industry must be proactive in engaging the many constituencies that have an interest and in some way affect our business — regulators, analysts, investors, advisors, the media and of course, our customers. The industry and regulators can better work together to eliminate redundancies that only add costs and restrict the affordability and timeliness of services and products for our customers. Indeed, there is a great deal at stake.
What is your approach to managing in today’s financial market? We focus on growing product sales and profitability within acceptable levels of risk. In the interest rate and equity risk business, it is important to look at potential losses in relation to plausible correction scenarios. For example, we remain sensitive to the risks involved in writing large amounts of fixed annuity business when interest rates are at historically low levels. Simply put, when current crediting rates are at or near the minimum guarantee in the contract, the risk of not meeting our long-term profitability targets increases. In order to manage sales levels to meet our risk tolerance, we made the decision to reduce the minimum guarantees to 1.5% in most states and, in some instances, we decided to reduce commissions. While this was a difficult short-term decision, a disciplined approach to managing our risk is important for our long-term profitability and stability.
AEGON UK has cemented its existing distribution arrangement for pension products with St James’s Place by extending the range of products offered via their network of 1,100 advisors.
What are the advantages of consolidation in distribution for AEGON UK? The availability of quality and thorough advice throughout the sale process is a critical requirement for ensuring transparency in our products and sound business practices. This will continue to be a consistent requirement of AEGON UK’s strategy with respect to its provider and distribution businesses.
in million in million in million in million INCOME BY PRODUCT SEGMENT USD USD % EUR EUR %
USD 53 million. The 2003 results were negatively impacted by charges for accelerated Deferred Policy Acquisition Costs (DPAC)
Fixed annuity income before realized gains and losses on shares and real estate increased 22% to USD 389 million in 2004. The increase includes USD 137 million of lower additions to the default provision. The 2004 results reflect USD 20 million lower employee pension plan income compared to 2003. Product spreads have improved as crediting rates were lowered on both existing and new deposits throughout 2003 and early 2004, taking the majority of the existing book of contracts to the contractual minimum. Product spreads on an annual basis for 2004 on the largest segment of the fixed annuity book, which take into account 35 basis points for priced defaults, increased to 222 basis points from 168 basis points in 2003. The 2003 results included USD 13 million of interest from an IRS tax refund and
Employee pension plan income was USD 10 million lower in 2004.
Fee business income before realized gains and losses on shares and real estate was USD 17 million in 2004 compared to a loss of USD 20 million in 2003. The 2004 income reflects growth in assets due to mutual fund deposits and equity market appreciation. The 2003 results were impacted by an accrual for a long-term formula-based deferred compensation plan related to a participation in an investment management company.
USD 63 million related to repatriation of accumulated earnings from Canada pursuant to the American Jobs Creation Act. The increase in taxes compared to 2003 is driven by a higher increase in earnings relative to the growth in tax preference items.
INCOME BEFORE REALIZED GAINS AND LOSSES ON SHARES AND REAL ESTATE LIFE INSURANCE in GBP million1
Standardized new life production declined 41% to NTD 7,790 million in 2004. This reflects the industry-wide decrease in traditional life business, while AEGON Taiwan has chosen not to participate in single premium structured notes and interest sensitive annuity products given the inherent risks in those products.
Changes in fair value of these securities are expected to create a level of volatility in AEGON’s shareholders’ equity which does not reflect the underlying economics of the business.
Other Countries (in EUR) 374 399 481 592 1 The 2003 figures have been adjusted to reflect changes in accounting principles implemented as of January 1, 2004.
and AEGON The Netherlands accounted for 96% of the total general account fixed income portfolio of the AEGON Group at
Shift up 100 basis points EUR (60) million EUR (60) million Shift up 200 basis points EUR (248) million EUR (248) million Shift down 100 basis points EUR (40) million EUR (40) million Shift down 200 basis points EUR (65) million EUR (65) million 1 The accounting basis used for this table is DAP. The effects should not be used as a guide in providing directional and approximate magnitude impact on net income and shareholders’ equity in 2005 since starting January 1, 2005 AEGON adopted IFRS, which differs in significant respects from DAP in its treatment of the consequences of certain events, including interest rate changes, equity market changes and relative currency rate movements.
AEGON’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.
Accident and health insurance contributed 13% to AEGON’s line of business result1 in 2004 (15% in 2003 and 19% in 2002).
United GENERAL ACCOUNT United States Canada Netherlands Kingdom Hungary Slovakia Spain Taiwan China
1 Line of business result represents income before realized gains and losses, excluding interest charges and other.
Americas. The companies operating in the US are collectively referred to as AEGON USA.
Intersecurities, Inc. (ISI) is a fully licensed, independent brokerdealer and registered investment advisor. ISI’s 1,500 registered representatives are focused on helping clients meet their investment objectives through an array of financial products, including mutual funds, fixed and variable life insurance, annuities, and securities. ISI is positioning itself for growth by building an internal wholesaling unit for life products within already existing channels and leveraging the wholesaling expertise of its affiliate, Transamerica Capital, Inc., for variable products.
AEGON USA’s Financial Markets Group (FMG) consists primarily of Transamerica Capital Inc., Transamerica Investment
Diversified Investment Advisors (Diversified) is a registered investment advisory firm dedicated exclusively to retirement plan management. Diversified provides a customized approach to retirement plans, which includes comprehensive investment, administrative and technical services for 401(k), section 403(b)
AEGON UK operates three distinct businesses: • AEGON Life and Pensions — all manufacturing and sales operations relating to investment, protection and pensions markets in the UK. This business primarily operates under the Scottish Equitable brand name
The sale of group pensions is a prime focus of Scottish
Group pension products include flexible features such as access to a range of both internal and external funds, with premiums primarily paid monthly based on a preagreed proportion of salary costs. Single premium transfers are also common following the initial sale.
Management Rt. It offers six mutual funds to the public: domestic bond, domestic equity, international bond, international equity, money market and a mixed fund. AEGON Hungary
Hungary to keep a strong position in pension fund and life insurance new sales in 2004.
Company (Mandatory Pension Fund) received a licence. The mandatory pension fund market opened on January 1, 2005.
In 2004, AEGON operated in Spain through three insurance companies: AEGON Seguros Generales, AEGON Seguros Salud and AEGON Seguros de Vida. These companies are held by one holding company, AEGON España SA, an economic interest grouping which provides administrative and operational services to the various insurance companies.
Individual life products are sold in urban centers by specialized agents and brokers and in rural areas by specialized agents and on a direct marketing basis. Group life products are distributed through banks and financial institutions as well as through brokers and specialized agents.
Taiwan. The agency channel’s business is a mix of traditional and variable life insurance. The brokerage channel mainly sells whole life business written by independent agents. Whole life products are also sold via the bank channel. In group business,
successfully established multiple distribution channels, including the agency channel, the bancassurance channel and the telemarketing channel. In addition, AEGON-CNOOC started distribution via the brokerage channel, which is targeted to become a key source of business in the near future.
At the General Meeting of Shareholders all resolutions are adopted by an absolute majority of the valid votes, unless a greater majority is required by law or by the Articles of
The supervision of the management of the Executive Board and the general course of affairs of the company and the business connected with it is entrusted to the Supervisory Board, acting as a body with collective responsibility and accountability. The
Any performance shares granted must be retained for a period of at least five years from the date of the grant, or until at least the end of the employment, if the latter period is shorter.
Board is confident that by adhering to this protocol the deemed conflict of interests with Vereniging AEGON are adequately dealt with and that the best practice provisions of the code have been complied with in all material respects. The protocol is posted on
The report includes appropriate reference to the subjects discussed within the Supervisory Board during the relevant year.
AEGON attaches high importance to fair disclosure of information to its stakeholders and the financial markets in all relevant jurisdictions. The company applies the rules and regulations dealing with disclosure set by the various regulators and the stock exchanges on which AEGON is listed. Meetings with analysts, presentations to analysts, presentations to investors and institutional investors and press conferences shall be announced in advance on the company’s website and by means of press releases. All presentations made on these occasions are posted on AEGON’s website. In accordance with market practice, the company uses various press information services to distribute its press releases.
AEGON will apply this best practice provision to any future appointments to the Executive Board. The existing employment agreements with the current members of the
1.2436 1.1311 Translation rate EUR/USD: weighted average exchange rate 1The 2002 and 2003 numbers have been adjusted to reflect the changes in accounting principles implemented as of January 1, 2004.
Other loans represent private placements, which are shown at amortized cost less provisions for uncollectable amounts. Amortized cost represents the cash value at the balance sheet date of future interest and principal repayment components based on the effective interest rate on the date of acquisition.
CHANGES IN INVESTMENTS Currency exchange rate Balance at Disposed differences Balance at January 1, and Revalu- and other December 2004 Acquired redeemed ations changes 31, 2004
Guaranteed return on certain ‘fund plan’ and group life products in the Netherlands EUR 323 278 102 AEGON ANNUAL REPORT 2004
In the Netherlands, fund plan policies have a guaranteed return of 3% or 4% at maturity or upon the death of the insured if premium paid for a consecutive period of ten years is invested in the Mix Fund and/or the Fixed Income Fund. For this guaranteed return a provision is established based on stochastic modeling. The provision is developed applying the accrual method based on pricing assumptions less actual claims incurred. A corridor for the provision is determined regularly based on stochastic modeling methods. If the provision develops outside the corridor, a charge or credit to the income statement is recorded. Minimum interest guarantees on group pension contracts in the Netherlands are given for nominal benefits, based on the 3% or 4% actuarial interest, after retirement of the employees. Due to the nature of the product, these guarantees have a long-term horizon of about 30 to 60 years. The provision is developed applying the accrual method based on pricing assumptions less actual deductions.
Provisions for fixed annuities are for annuity contracts sold in the United States and Canada. Fixed annuities are typically single premium insurance products where the paid-in amounts accumulate with interest credits less applicable loads or fees. The interestcrediting rate is fixed during a period, at the end of which the company can reset it. The funds grow on a tax-deferred basis and have significant long term savings characteristics. The benefit reserves are equal to the fully accumulated contract values.
Total GICs and funding agreements 21,571 21,543 1Book value out: the amount equal to the sum of deposits less withdrawals with interest accrued at the contractual interest rate. 2Market value out: the amount equal to the book value out plus a market value adjustment to adjust for changes in interest rates.
The provision is equal to the discounted value of the future tax amounts. In the calculation discounted tax rates ranging from 0% to nominal rates are used, taking into account the estimated term to maturity of the related differences. Nominal value of these tax amounts is EUR 2,922 million.
Granted interest rate rebates amount to EUR 25 million (2003: EUR 38 million and 2002: EUR 50 million), entirely relating to the Dutch companies.
Expenses include allocated internal rent related to real estate for AEGON’s own use of EUR 8 million (2003: EUR 1 1 million and 2002: EUR 14 million), based on current market conditions. Claims processing costs are included in benefits and surrenders respectively in claims for own account; investment expenses are included in investment charges.
2Under the 2003 as well as the 2002 Short Term Incentive plan, Mr. Shepard may be entitled to receive USD 50,000 per percentage point increase in the preceding year’s earnings per share. The other members of the Executive Board may be entitled to receive EUR 32,432 over 2003 and EUR 31,765 over 2002 per percentage point increase in the preceding year’s earnings per share in excess of the rate of European inflation as indicated by the European Central Bank. All bonuses have a maximum ceiling of 150% of the relevant year’s salary. As of the STI-plan 2003, Executive Board members can opt for payment in cash or in shares. No bonuses were paid in 2003, relating to 2002.
I.W. Bailey, II (as of April 22, 2004) 23,562 — —
5,462 4,573 19 Life policyholders account recurring premiums 4,392 4,043 9 20,357 18,334 11 Total life insurance gross premiums 16,369 16,209 1 2,883 2,786 3 Accident and health insurance premiums 2,318 2,463 (6)
Life general account single premiums 176 189 (7) 259 274 (5)
INVESTMENTS, ASSETS AND LIABILITIES GEOGRAPHICALLY Amounts in EUR millions (unless otherwise stated)
Unrealized gains and losses on shares and real estate 598 575 122 104 720 679
Due and punctual payment of payables by the consolidated group companies AEGON Funding Corp., AEGON Funding Corp. II, Commonwealth General Corporation, Transamerica Corporation and Transamerica Finance Corp. with respect to bonds, capital trust pass-through securities and notes issued under commercial paper programs (EUR 1,519 million).
Under Dutch accounting principles real estate is shown at market value, which is the selling value under normal market circumstances. New property is valued at construction cost including interest during the construction period, or at purchase price. Unrealized gains and losses on real estate investments as well as results, expenses and currency exchange rate differences from hedging transactions are recognized in the revaluation account, taking into account the related (deferred) taxes. Realized gains and losses are recognized in the income statement.
The adjustment shown in the reconciliation in the shareholders’ equity column represents the reduction from market value to the historical cost less depreciation.
AEGON uses common derivative financial instruments such as swaps, options, futures and cross currency derivatives to hedge its exposures related to investments, liabilities and borrowings. In general, under Dutch accounting principles the accounting treatment of derivatives mirrors the accounting treatment of the underlying financial instrument. In the balance sheet, the book values of the derivatives are recognized under the captions of the related underlying financial instrument. Foreign currency amounts are converted at the year-end exchange rates. Realized and unrealized results on derivative financial instruments are recognized in the same period and likewise as the results of the related investments, liabilities and debt.
Under Dutch accounting principles deferred taxation is calculated on the basis of the difference between book value and valuation for tax purposes of the appropriate assets and liabilities. The provision is equal to the discounted value of the future tax amounts. In the calculation discounted tax rates ranging from 0% to nominal rates are used, taking into account the estimated term to maturity of the related differences.
May 1 1 Release results first three months 2005 May 1 1 Release embedded value report May 17 Final dividend 2004 payment date