May 9 First quarter 2007 results and Embedded Value Report 2006
AEGON has long focused on achieving and maintaining fi nancial strength. In addition to providing the basis for continued growth and expansion, it is also an important measure of a company’s future ability to deliver on the promises it makes to its customers, business partners and shareholders. During 2006, AEGON’s capital position improved further. This enabled us to continue our investments in new partnerships and acquisitions, as well as increase the shareholder dividend by 22 percent to EUR 0.55. Also, we initiated a program to repurchase shares in 2006 to neutralize the effect of stock dividends.
AEGON pursues growth in countries that offer long-term profi table growth for the products and services it provides. AEGON seeks to expand its presence in its chosen markets through organic growth and through select acquisitions and partnerships.
This review of operations should be read in conjunction with the fi nancial statements in this annual report.
Fee — off balance sheet products 68 67 1 54 54 0
Our businesses are strong and they are growing. We will continue to support international expansion, while identifying ways to reduce costs and acquisition opportunities that will further boost our growth.
Net income, which includes net gains/losses on investments and impairment charges, decreased 3 percent to USD 1,951 million. Net gains/losses on investments amounted to a loss of USD 28 million in 2006 compared to a gain of USD 299 million in 2005. The loss in 2006 is primarily due to normal trading activity in the bond portfolio during the second quarter of 2006 in a rising interest rate environment.
Operating expenses increased primarily due to growth initiatives in variable annuities and off balance sheet asset management, as well as increased regulatory and compliance costs. On January 11, 2007
Organi za tions target the middle to upper-income markets, selling primarily interest-sensitive and ordinary life insurance. Life Investors offers support to agencies and provides agents with quality products, technology tools, and a high-level of home offi ce training and support. During the past few years, the Independent Marketing
expertise and by offering a broad range of investment choices and employee educational services.
Net income, which includes net gains/losses on investments, impairment charges and the share in profi t of associates, increased 3 percent to EUR 1,040 million. Net gains on investments (before tax) amounted to EUR 413 million compared to EUR 985 million in 2005. The gains and losses on investments (before tax) include a negative EUR 352 million from the decrease in market value of derivatives used for asset and liability management purposes, compared to a positive contribution of EUR 306 million in 2005.
Life general account premiums increased by 24 percent compared to 2005, due to a 57 percent increase in single premiums, both in immediate annuities and pension contracts. Recurring premiums were 5 percent lower.
Investment income, which includes direct investment income of both general account and account of policyholder investments, decreased 8 percent compared to 2005 primarily due to lower coupons. Other factors include lower deferred purchase price recognition in 2006, lower dividends as a consequence of the sale of shares and lower interest returns on loans offset by income generated on reinvestments and increased interest on mortgages.
The product lines of AEGON The Netherlands are pensions, life insurance (including mortgages), non-life insurance, banking and asset management. Pension products are mainly sold through the sales organizations C&IC and AEGON Intermediary. Pension products are offered to company and industry pension funds, large companies, small and medium-sized enterprises and individuals. For the majority of the company/industry pensions funds and some large companies,
Since then, however, this has not been the case and therefore we have not reinsured longevity risk.
EUR 2 million in 2005. General insurance operating earnings before tax increased to EUR 29 million from EUR 25 million in 2005 as a result of favorable claim experience in the Hungarian household insurance business.
Commissions and expenses increased 19 percent to EUR 342 million mainly due to lower deferral of commissions in Taiwan, following a change in business mix, and strong pension sales in Slovakia.
The partnership with CAM experienced a decrease of 24 percent in new life sales to EUR 168 million (on a 100 percent basis). The return on the new business improved as the product mix continues to shift from single premium savings products to recurring premium risk and protection products. Premium income for the partnership with CAM
AEGON includes its share in the results of the partnership in the line share in profit /(loss) of associates.
AEGON CEE is involved in both the life and non-life insurance businesses and provides a range of fi nancial, pension fund and asset management services.
The acquisition of 50 percent of Seguros Navarra S.A. took place in two tranches. In the fourth quarter of 2005, 15 percent was acquired, followed by another 35 percent in the fi rst quarter of 2006. AEGON
Taiwan took over a block of business comprised of 55,000 policies of
Transamerica Taiwan branch was added to AEGON’s business as a result of AEGON’s acquisition of Transamerica. The integration with the existing operations was completed in 2001. At the end of 2001,
In April 2005, AEGON-CNOOC’s Beijing branch completed its business registration and started full operations. Subsequently, in September 2005, the Jiangsu branch celebrated its opening ceremony in Nanjing and became one of the fi rst joint venture life insurance companies to enter into the Jiangsu Province. The Shandong branch became operational following formal approval from the China Insurance
Swiss Re, and General Re. The retention limit on any one individual life is generally CNY 200,000.
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 AEGON’s risk exposure and capital position. The models, scenarios and assumptions used are reviewed regularly and updated as necessary.
Results of AEGON’s sensitivity analyses are presented throughout this section to show the estimated sensitivity of net income and shareholders’ equity to various scenarios. These sensitivity analyses are presented according to IFRS. These scenario results do not consider the actions that might be taken to mitigate losses inherent in AEGON’s risk management processes. As fi nancial markets fl uctuate, these actions may involve selling investments, changing investment portfolio allocation and adjusting interest rates or bonuses credited to policyholders. Also, the results do not take into account correlation between factors and assume unchanged conditions for all other assets and liabilities. Results of the analyses also cannot be extrapolated for wider variations since effects do not tend to be linear. No risk management process can clearly predict future results.
Sensitivity analysis of net income and shareholders’ equity to interest rates 1, 2
Examples of these products include variable annuities, variable universal life, unit-linked products and mutual funds. AEGON typically earns a fee on the asset balance in these products and therefore has a risk related to the investment performance. In addition, some of this business has minimum return or accumulation guarantees, which are often life contingent or contingent upon policyholder persistency. AEGON is at risk if equity market returns do not exceed these guarantee levels and the company may need to set up additional reserves to fund these future guaranteed benefi ts.
The sensitivity of shareholders’ equity and net income to changes in equity and real estate markets refl ects changes in the market value of AEGON’s portfolio, changes in DPAC amortization, contributions to pension plans for AEGON’s employees and the strengthening of the guaranteed minimum benefi ts, when applicable. The main reason for the non-linearity of results in the equity portion of the sensitivity is that more severe scenarios could cause accelerated DPAC
amortization and guaranteed minimum benefi ts provisioning, while moderate scenarios may not.
Liquidity risk is inherent to much of AEGON’s business. Each asset purchased and liability sold has liquidity characteristics that are unique. Some liabilities are surrenderable while some assets, such as privately placed loans, mortgage loans, real estate and limited partnership interests, have low liquidity. If AEGON requires signifi cant amounts of cash on short notice in excess of normal cash requirements and existing credit facilities, AEGON may have diffi culty selling these investments at attractive prices or in a timely manner, or both. Illiquid assets amounted to EUR 35 billion or 25 percent of general account investments at the end of 2006 (EUR 39 billion, or 26 percent in 2005).
Sensitivity of net income and total equity to changes in various underwriting risks 1, 2
On the basis thereof, the Executive Board declares the following regarding AEGON’s fi nancial reporting risks: The risk management and control systems provide reasonable assurance that the fi nancial reporting does not contain any material inaccuracies.
There are no indications that the risk management and control systems will not work properly in 2007.
combined USD 4.5 billion Euro and US Commercial Paper Program facilitates access to domestic and international money markets, when required.
AEGON N.V.’s capital structure, Transamerica Corporation successfully redeemed USD 381 million outstanding trust passthrough securities in November and December 2006.
For detailed information about AEGON’s corporate governance and compliance with the Dutch Corporate Governance Code, please refer to pages 85 to 92. The Remuneration Policy and Report can be found on pages 76 to 81.
Audit Committee meetings. Discussions regarding the following dominated the meetings permanent agenda: the quarterly results, the annual accounts and the auditing of those by Ernst & Young, actuarial analyses, accounting principles according to IFRS and
Committee Remuneration Report and the Remuneration Policy, and to pages 219 to 221 for fi nancial details. During the AGM on April 25, 2006, it was decided to extend the application of the current Shortterm and Long-term Incentive Plans to the date of the AGM in 2007 with the understanding that shareholders will then be able to adopt a new Remuneration Policy, to be retroactively effective as from
In 2006, the Supervisory Board decided, on a proposal from the
He is also a member of the Supervisory Board of Royal KPN N.V, the Supervisory Board of Hagemeyer N.V., the European Advisory
of London, a member of the Supervisory Board of Pon Holdings B.V.
Airlines N.V. and vice-chairman of Air France-KLM S.A. He was appointed to AEGON’s Supervisory Board in 2003 and his current term will end in 2007. He is also a member of the Supervisory Boards 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
This Remuneration Policy took effect on January 1, 2004, for a three-year term. The AGM approved an extension of the existing
Services, Prudential Financial, Lincoln National, Metlife, Nationwide, and Prudential PLC. Should AEGON rank nine through twelve within this group (after three years), the granted shares and options will not vest.
The granted shares and options will only vest if AEGON achieves a number eight position or better, with an increasing percentage according to the vesting schedule.
The compensation arrangement of the Supervisory Board members is reviewed every three years. The last review took place in 2005.
AEGON’s risk management and the ‘in control’ statement please refer to page 66.
AEGON’s annual report includes information about the most important external factors and variables infl uencing the company’s performance. These analyses include AEGON’s long-term market projections and company sensitivity to interest rate fl uctuations and to changes in equity, real estate, and currency markets. The
Financial Controls Complaints Procedure more detailed rules and regulations have been implemented regarding the reporting of fi nance-related complaints. Serious violations of the Code of
The Code of Conduct addresses confl icts of interest that may occur between AEGON and its employees, including the members of the
Moreover, the Supervisory Board Rules provide that a member of the
These Rules are compliant with the relevant provisions of the Dutch
AEGON has preferred shares class A and preferred shares class B, all of which are held by Vereniging AEGON. The capital contribution made on the outstanding 211,680,000 preferred shares class A is refl ective of the market value of AEGON’s common shares at the time the capital contribution was made.
General Meeting of Shareholders with all requested information, unless overriding interests of AEGON are better served by not providing the requested information. If such overriding interests are invoked, those reasons will be substantiated. AEGON uses shareholders’ circulars to inform the shareholders about the facts and circumstances relevant to upcoming proposals. Shareholders’
Nederland N.V. has published on its Dutch website, www.aegon.nl, its existing policies regarding the exercise of the voting rights attaching to the shares held by AEGON Nederland N.V. in Dutch-listed companies. In addition, a report on how this policy was implemented in 2006 is published on the website of AEGON Nederland N.V.
The work schedule for the Group Internal Auditor was determined with the involvement of the Audit Committee and the independent auditor. The fi ndings of the internal auditor are made available to the Executive Board, the Audit Committee as well as the independent auditor.
will apply this best practice provision to any future appointments to the Executive Board. The existing employment agreements with the current members of the Executive Board, and more in particular the severance arrangements to which current members of the Executive Board are entitled, are not in line with this best practice provision.
CEO and CFO on the Executive Committee of AEGON’s largest shareholder, Vereniging AEGON, this could technically give rise to a deemed confl ict of interest. The Supervisory Board has determined that, also given the historic relationship with
Foundation for Education (LIFE). Both projects are designed to address the growing need for instruction about life, health, disability, pensions, and long-term care insurance. In the Netherlands, AEGON
also has an extensive training program aimed at better preparing salesmen and intermediaries to advise customers on their insurance and savings requirements.
Net income recognized in the income statement – 2,789 – – – 2,789 – 2,789
Interpretations Committee (IFRIC): The amendments to International Accounting Standard (IAS) 21
An intangible asset is derecognized when it is disposed of or when no future economic benefi ts are expected from its use or disposal.
Investments held for account of policyholders consist of investments in fi nancial assets, excluding derivatives, as well as investments in real estate and real estate held for own use. Investment return on these assets is passed on to the policyholder. Also included are the assets held by consolidated investment funds that are backing liabilities towards third parties. The accounting principles are the same as those applicable to general account investments, as described in note 2.8.
Reinsurance contracts with insuffi cient insurance risk transfer are accounted for as investment or service contracts, depending on the nature of the agreement.
Trust pass-through securities, subordinated loans and other borrowings are initially recognized at their fair value and are subsequently carried at amortized cost using the effective interest rate method, with the exception of specifi c borrowings that are designated as at fair value through profi t or loss to eliminate, or signifi cantly reduce, an accounting mismatch, or specifi c borrowings which are carried as at fair value through the profi t and loss as part of a fair value hedge relationship. The liability is derecognized when the Group’s obligation under the contract expires or is discharged or cancelled.
Notes to the consolidated fi nancial statements of AEGON Group Note 2.16 – 2.19
Depending on local accounting principles, the liability may include amounts for future services on contracts where the policy administration charges are higher in the initial years than in subsequent years. In establishing the liability, guaranteed minimum benefi ts issued to the policyholder are measured as described in 2.19c or, if bifurcated from the host contract, as described in 2.10.
The Group issues life insurance contracts, which, as a rule, do not expose the Group to interest risk as the account terms are not fi xed or guaranteed or because the return on the investments held is passed on to the policyholder. However, in some cases these contracts may contain guaranteed minimum benefi ts. An additional liability for life insurance is established for guaranteed minimum benefi ts that are not bifurcated. Bifurcated guaranteed minimum benefi ts are classifi ed as derivatives.
Contingent assets are disclosed in the notes if the infl ow of economic benefi ts is probable, but not virtually certain. When the infl ow of economic benefi ts becomes virtually certain, the asset is no longer contingent and its recognition is appropriate.
Correlations of market returns across underlying indices are based on actual observed market returns and relationships over a number of years preceding the valuation date. The current risk-free spot rate is used to determine the present value of expected future cash fl ows produced in the stochastic projection process.
The liabilities or assets recognized in the balance sheet in respect of defi ned benefi t plans is the difference between the present value of the projected defi ned benefi t obligation at the balance sheet date and the fair value of plan assets, together with adjustments for unrecognized actuarial gains or losses and past service costs. The present value of the defi ned benefi t obligation is determined by discounting the estimated future cash fl ows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefi ts will be paid and that have terms to maturity that approximate the terms of the related pension liability. Actuarial assumptions used in the measurement of the liability include the discount rate, the expected return on plan assets, estimated future salary increases and estimated future pension increases. To the extent that actual experience deviates from these assumptions, the valuation of defi ned benefi t plans and the level of pension expenses recognized in the future may be affected.
The volatility is derived from quotations from external market sources and the expected dividend yield refl ects AEGON’s current dividend yield. Future blackout periods are taken into account in the model in conformity with current blackout periods. The expected term is explicitly incorporated in the model by assuming that early exercise occurs when the share price is greater than or equal to a certain multiple of the exercise price. This multiple has been set at two based on empirical evidence. The risk free rate is the interest rate for Dutch government bonds.
Investment of future recurring premiums and reinvestment of premiums already received at prevailing market interest rates lower than priced for are also risks. In addition, some products provide minimum interest rate guarantees, exposing AEGON to interest rate risk in a prolonged low interest rate environment. In a rapidly rising interest rate environment, the company is exposed to lapse risk, although this risk is mitigated by surrender charges in early policy years.
In the United States traditional life products consist largely of permanent life, universal life and term life insurance.
Tontine plans in the Netherlands are linked endowment savings contracts with a specifi c bonus structure. Policyholders can choose from several AEGON funds to invest premiums paid. The main characteristic of a tontine system is that when the policyholder dies, the balance is not paid out to the policyholder’s estate, but is distributed at the end of the year to the surviving policyholders of the specifi c series to which the deceased policyholder belonged. In general, a new series starts at the beginning of each calendar year, but there are also open ended tontine plans in the portfolio. When the policyholder dies before maturity, AEGON The Netherlands pays a death benefi t equal to the premiums paid accumulated at a 4%
Under a number of contracts written mainly in the 1970s and 1980s,
In Hungary a small part of the current new business provides a minimum interest guarantee of 2%. In Poland an insurance fund with minimum rate reset quarterly and annually is offered on unit-linked products.
Fixed annuities are sold to individuals and pension funds in the
Premiums paid on variable annuity contracts are invested in underlying funds offered by AEGON USA and other third party providers, including bond and equity funds. A fi xed account may also be available on most products. In most products, the investment options are selected by a client based on the client’s preferred level of risk. The assets and liabilities related to this product are legally segregated for the benefi t of particular policyholders in separate accounts of the insurance company. These separate accounts are classifi ed as investments for the account of policyholders. Various riders are available on variable annuity contracts, providing guaranteed minimum death, maturity, withdrawal or income benefi ts.
AEGON USA undertakes to address equity market risk by using hedging strategies. Variable products also contain a degree of interest rate risk and policyholder behavior risk, which are handled similarly to those in fi xed annuities.
With accident and health the risk insured is morbidity. Uncertainties arise from the timing, frequency and severity of insured claims.
AEGON The Netherlands offers sick leave products that cover the sick leave payments to employees that are not covered by social security and where the employers bear the risk.
20% decrease in lapse rates 44 10% increase in mortality rates (88)
Impairment charges/(reversals) on non-fi nancial assets and receivables 95 – – 1 – 96
Deposits with fi nancial institutions 1,342 – – 1,342 1,342 –
Receivables out of share lease agreements 772 4 – 776 776 –
Total investments for account of policyholders at fair value through profi t or loss, excluding derivatives 1 133,060 126,141
fl oors and forward rate agreements/futures: An interest rate swap is an agreement between two parties to exchange, at specifi c dates, the difference between a fi xed interest rate and/or a fl oating interest rate payment on a predetermined notional amount.
EUR 8.4 billion (2005: EUR 9.9 billion) and the guaranteed remaining balance was EUR 5.5 billion (2005: EUR 7.3 billion).
DPAC and deferred transaction costs per line of business 2006 2005 2006 2005
Notes to the consolidated fi nancial statements of AEGON Group Note 15 – 15.1
General Meeting of Shareholders. Moreover, repayment on preferred shares needs approval of the related shareholders.
With regard to granted share appreciation rights and option rights and their valuation we refer to note 40.
Net exchange differences 4,295 24 4,319 1 Refer to note 48 for a summary of all fi nancial assets and fi nancial liabilities at fair value through profi t or loss.
Investment contracts consist of the following: Institutional guaranteed products 24,531 26,348
On consolidation of an investment fund, participations held by third parties are classifi ed as liabilities, as opposed to minority interests in equity, if the Group is legally obliged to buy back these participations.
USD 50 million Zero Coupon Bonds 1 1982 / 07 35 34
1 Issued by subsidiaries of, and guaranteed by AEGON N.V. 2 Issued by a subsidiary of AEGON N.V.
Changes to AEGON’s credit spread had no signifi cant impact on the valuation of these borrowings throughout the year.
TOTAL DEFINED BENEFIT PLANS 1,642 1,606 1 Assets held by AEGON The Netherlands for retirement benefi ts do not meet the defi nition of plan assets and as such were not deducted in calculating this amount. Instead, these assets are recognized as general account assets. Consequently, the return on these assets also do not form part of the calculation of defi ned benefi t expenses.
Breakdown of plan assets for retirement benefi t plans 2006 2005
Net fair value and foreign exchange losses comprise: Negative fair value changes of general account fi nancial assets and liabilities at fair value through profi t or loss, other than derivatives 1 27 4
Positive fair value changes of for account of policyholder fi nancial assets at fair value through profi t or loss 9,126 11,240 5,820
Other income in 2005 relates to the sale of Seguros Generales, the general insurance company in Spain. The corresponding amount in 2004 relates to the gain on the sale of businesses of Transamerica
Outstanding January 1, 2006 December 31, 2006 Exercise price in EUR Exercise period 1 Weighted average exercise price of the outstanding share options in USD calculated at the closing rate.
The exposure from the issued share appreciation rights and share options is economically hedged by a position in treasury shares.
Impairment charges from - Bonds and money market instruments 80 91 229
The weighted average applicable tax rate is 32.4% (2005: 33.7% and 2004: 34.2%). The change from 2005 to 2006 is due to a change in the profi tability of the countries and a change in applicable statutory tax rates. The Dutch statutory tax rate has changed from 31.5% in 2005 to 29.6% in 2006 (2004: 34.5%). The rate will decrease to 25.5% in 2007. In Spain, the corporate tax rate of 35% will be reduced in 2007 (to 32.5%) and 2008 (to 30%). In the Czech Republic the corporate tax rate is 24% in 2006 (2005: 26%). In Hungary the so called solidarity tax was introduced at a rate as of 4% as at
NET INCOME ATTRIBUTABLE TO ORDINARY SHAREHOLDERS FOR BASIC EARNINGS PER SHARE CALCULATION 2,566 2,521 2,077
TOTAL CAPITAL BASE 24,815 25,450 1 Borrowings not related to capital funding of insurance activities mainly include operational funding of TFC businesses, operational funding of collateral reserve relief for the AEGON USA reinsurance business and short-term funding of cash and collateral management activities.
Investment for general account backing insurance and investment liabilities that are carried at fair value with changes in the fair value recognized in the income statement are designated as at fair value through profi t or loss. Classifi cation of the fi nancial assets as available-for sale would result in accumulation of unrealized gains and losses in a revaluation reserve within equity whilst changes to the liability would be refl ected in net income (accounting mismatch).
Share of contingent liabilities incurred in relation to interests in joint ventures 615 676
In November 2005, AEGON signed a strategic partnership agreement with the Spanish savings bank Caja de Ahorros de Navarra (CN)
under which AEGON acquired a 50% stake in CN’s life insurance and pensions subsidiary, Seguros Navarra S.A. The acquisition of 50% of
Investors, LLC during 2005. These business combinations did not have a material impact on the consolidated fi nancial statements of the Group.
Mr. Shepard shall be taken into account in determining the amounts payable to him under his AEGON USA Supplemental Executive
H. de Ruiter (up to April 22, 2004) – – 14,137
Common shares held by Supervisory Board members Shares held in AEGON at December 31
securitization by AEGON UK, enabling AEGON UK to monetize a portion of future profi ts associated with an existing book of unitlinked business. The securitization will add around EUR 134 million
Executive Board in accordance with Part 9 of Book 2 of the
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. Derivatives with positive fair values are reported as other assets and derivatives with negative values are reported as other liabilities.
Incremental external costs that are directly attributable to the issuing or buying back of own equity instruments are recognized in equity, net of tax.
or class B preferred share. Instead, Vereniging AEGON has agreed to exercise one vote only per preferred share, except in the event of a
‘special cause’, such as the acquisition of a 15% interest in AEGON
Finance Corp. with respect to bonds, capital trust pass-through securities and notes issued under commercial paper programs
On March 7, 2007, AEGON announced the expiration of its tender offer to purchase all the outstanding shares of Clark, Inc. (Clark)
Notes to the fi nancial statements of AEGON N.V. Note 12 – 13
Supervisory Board, make one or more interim distributions to the holders of common shares and/or to the holders of preferred shares, the latter subject to the maximum dividend amount set forth under 3.