Exhibit 99.1
Embedded value 2002
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Inquiries
AEGON N.V.
Group Communications Investor Relations
(NL) + 31 (0)70 344 83 44 (NL) + 31 (0)70 344 83 05
(USA) + 1 410 576 45 77
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Table of contents
1. Highlights ............................................................... 2
1.1 Introduction ......................................................... 2
1.2 Overview of embedded value life insurance and total embedded value ... 3
1.3 New business ......................................................... 4
2. Principles ............................................................... 5
2.1 Scope ................................................................ 5
2.2 Methodology and definitions .......................................... 6
2.3 Operating assumptions ................................................ 7
2.4 Economic assumptions ................................................. 9
2.5 Embedded options and guarantees ...................................... 9
3. Reconciliation of total capital base to adjusted net worth ............... 10
4. Outcome .................................................................. 12
4.1 Value components ..................................................... 12
4.2 Movement analysis of embedded value life insurance ................... 15
5. Sensitivities ............................................................ 18
5.1 Embedded value life insurance sensitivity ............................ 18
5.2 Value of new business sensitivity .................................... 19
6. Review statement ......................................................... 20
Addendum 1: Movement analysis based on regulatory surplus
requirement per country unit and product segment ............. 21
AEGON Group .............................................................. 21
Americas ................................................................. 22
The Netherlands .......................................................... 23
United Kingdom ........................................................... 24
Addendum 2: Outcome and movement analysis based on the internal
surplus requirement .......................................... 25
Addendum 3: Exchange rates .................................................. 27
Glossary and abbreviations .................................................. 28
Glossary ................................................................. 28
Abbreviations ............................................................ 30
Disclaimer .................................................................. 31
Embedded value 2002 -1-
1. Highlights
1.1 Introduction
Embedded value life insurance (EVLI) is an estimate of the economic value of a
company's existing life insurance business and is to a large extent actuarially
determined. It is not based on generally accepted accounting principles in the
Netherlands (DAP), which are used to prepare and present our financial
statements. Embedded value life insurance should not be viewed as a substitute
for DAP financial measures.
We have long used an embedded value life insurance process as a management tool
for our life insurance operations. We have decided to disclose this information,
because we believe that, in conjunction with other publicly disclosed financial
information, it can provide valuable additional information for investors and
shareholders to assess a reasonable range of values inherent in the business. We
do not believe that embedded value techniques provide a point estimate of the
embedded value life insurance; therefore the disclosure includes EVLI on
different solvency bases and sensitivity analyses. It also satisfies the demand
from the investment community to provide this additional information.
Embedded value life insurance represents the contributed capital invested in our
life operations available surplus or adjusted net worth (ANW) and the value of
in-force life business (VIF). The latter equals the present value of future
expected profits arising from the existing book of life insurance business and
new business sold in the reporting period less the cost of capital. Future new
business that is sold after the valuation date is not reflected in this value.
Total embedded value (TEV) represents the sum of the embedded value life
insurance, the value of all other business that is not included in EVLI (other
activities) and the adjustments in respect of holding companies (holding
activities). The holding activities largely represent the DAP book value of
AEGON's debt, capital securities and other net liabilities. TEV reflects a
measure used by management as an alternative in determining shareholders'
interest in the value of the business.
Embedded value life insurance calculations use local regulatory accounting
principles rather than company specific accounting principles (e.g. DAP) as
these regulatory requirements determine when profits can be distributed to
shareholders. This may facilitate comparisons between disclosed embedded value
life insurance of different companies. Still, differences in assumptions,
definitions, disclosure levels, etc., may cause inconsistency in these
comparisons.
Tillinghast-Towers Perrin has been engaged to review AEGON's embedded value life
insurance. The scope and conclusions of this review are presented in section 6.
Embedded value 2002 -2-
1.2 Overview of embedded value life insurance and total embedded value
A high level overview of our embedded value life insurance and our total
embedded value is contained in table 1. More details on these values, the
principles and assumptions used plus sensitivities of these values to changes in
underlying assumptions are included in this document and should be read
carefully in connection with the information presented below. All figures in
this document are presented on an after tax basis unless otherwise stated.
Table 1
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Embedded value regulatory surplus basis
(amounts in millions, net of tax)
Year-end Year-end Year-end Year-end
2002 2001 2002 2001
USD USD % EUR EUR %
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11,451 10,544 9% Adjusted net worth 10,919 11,964 -9%
11,592 11,768 -1% Value of in-force 11,054 13,353 -17%
23,043 22,312 3% Embedded value life insurance 21,973 25,317 -13%
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1,588 1,251 27% Other activities 1,514 1,420 7%
-8,209 -6,153 33% Holding activities -7,828 -6,982 12%
16,422 17,410 -6% Total embedded value 15,660 19,755 -21%
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14,924 14,033 6% Shareholders' equity 14,231 15,923 -11%
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The most important items impacting the change in embedded value life insurance
during 2002 are/1/:
.. Deviations in investment experience during 2002 from assumed levels: EUR
-3.7 billion.
.. A weakening of the US dollar and pound sterling against the euro: EUR -2.9
billion. Excluding the effects of currency exchange differences the
embedded value life insurance would have decreased by 2% only.
.. Net capital injections by AEGON holding into the country units: EUR +2.3
billion.
.. New business sold during 2002: EUR +0.6 billion.
.. Performance of the at January 1, 2002 existing business: EUR +0.5 billion.
The value of the holding activities decreased mainly as a result of net money
flows to subsidiaries to maintain solvency positions at desired levels (EUR -2.6
billion with EUR -2.3 billion relating to life business) and exceeding net
capital inflow from shareholders (EUR 1.3 billion).
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/1/ For a more detailed analysis, please refer to section 4.2 'Movement
analysis of embedded value life insurance'.
Embedded value 2002 -3-
1.3 New business
The profitability of the policies sold in 2002 can be measured by the gross
value of new business, which is equal to the value of new business (VNB)
generated by the sale of new policies during the reporting year, grossed up at
the relevant corporate tax rate and adjusted for the cost of carrying regulatory
required surplus. The value of new business is defined as the gross value of new
business adjusted for taxes and including the cost of carrying regulatory
required surplus.
Table 2
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Value new business regulatory surplus basis
(amounts in millions)
2002 2002
USD EUR
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1,002 Gross value of new business/(A)/ 1,058
-348 Tax -367
-121 Cost of capital -128
533 Value of new business 563
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/(A)/ Gross value of new business is derived by grossing up value of new
business. Normalized tax rates used are: 35% for the Americas (US and
Canada), 34.5% for the Netherlands and 30% for the United Kingdom.
Embedded value 2002 -4-
2. Principles
2.1 Scope
Each division in each country unit calculates the embedded value life insurance
(EVLI) for the relevant product segments within the life insurance entities
(life business) based on detailed actuarial calculations:
.. Traditional life (TL)
.. Fixed annuities (FA)
.. GICs and funding agreements (GICs)
.. Life for account of policyholders (LAP)
.. Variable annuities (VA)
.. Fee business (FEE)
.. Accident and health (A&H)/2/
Detailed results are presented for the following country units: the Americas,
including the United States (US) and Canada, the Netherlands (NL) and the United
Kingdom (UK). The other countries in which AEGON runs life operations, including
Hungary, Spain and Taiwan (Other), are included at net asset value based on our
primary accounting basis (DAP book value) rather than through a detailed
actuarial calculation because of their relative small size.
These other countries and all business not included in the life entities, such
as general insurance, A&H in non-life entities, mutual funds and banking
products is referred to as other activities/3/. Similar to the value of the
other countries, all business in non-life entities is valued at DAP book value.
The sum of the embedded value life insurance per country unit and the value of
the other activities is referred to as total embedded value per country unit.
The adjustments in respect of the holding activities comprise two parts:
.. Debt, capital securities and other net liabilities equal to their DAP book
values and are not discounted;
.. The present value of future after tax holding expenses, representing the
expenses incurred by the group staff departments not allocated to the
country units.
The sum of the total embedded value per country unit and the adjustment in
respect of the holding activities represents the total embedded value (TEV).
The assumptions, methods and results were subject to an independent external
review (refer to section 6).
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/2/ The A&H business in the life entities is modelled in detail and included in
the embedded value life insurance, while the A&H business in the non-life
entities is categorized as 'other activities'.
/3/ The exception to this rule is business in non-life companies that is either
identical to business written in the life business companies, or
inseparable from it. E.g. in the US, a detailed actuarial calculation for
the 401(k) retirement plan business that invests in mutual funds is
included in the embedded value life insurance even though it is written
through a non-life company. Basically, business in mutual fund companies
arising from investment of assets from life insurance business is included
in the EVLI, whereas pure retail mutual fund business is included in 'other
activities'. Some minor life businesses shown with the Netherlands results
have also been included at DAP book value and categorised as 'other
activities'.
Embedded value 2002 -5-
2.2 Methodology and definitions
Calculation of the embedded value life insurance requires a considerable number
of assumptions to be set with respect to both expected operational and economic
developments. The principles developed by AEGON to calculate its embedded value
life insurance and value of new business are intended to reflect industry best
practices for the purpose of supplementary reporting.
Embedded value life insurance
The embedded value life insurance only reflects the value that arises from
current business (assuming closed book) and therefore does not include a value
for future new business.
The embedded value life insurance is built up from the following components:
EVLI = Free surplus
Adjusted net worth
+ Required surplus
+ Present value of future profits
Value of in-force life business
- Cost of capital
The EVLI is defined as the adjusted net worth (ANW) plus value of in-force life
business (ViF)/4/.
ANW represents the market value of available assets in excess of liabilities
determined on the local regulatory basis. ANW is split between required surplus
and free surplus. The required surplus represents assets required to be present
in the company to support the in-force life business (solvency requirement). The
assets backing required surplus are marked-to-market. Free surplus represents
assets available at the valuation date that are not required to support the
in-force life business, and is the excess of assets over the sum of the
liabilities (on the regulatory basis) and the required surplus. Assets backing
the free surplus are marked-to-market. Refer to table 4 for a reconciliation of
the total capital base to ANW.
The ViF equals the present value of future profits (PVFP) less the cost of
capital (CoC). The PVFP represents the present value of future after tax
regulatory profits projected to emerge from business in the current life
insurance portfolio discounted at the discount rate. The discount rate both
reflects the time value of money and a risk margin. The CoC originates from the
fact that solvency requirements will constrain distributions to shareholders
while earning a net return less than the discount rate.
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/4/ Alternatively, the sum of the required surplus and present value
of future profits less the cost of capital is also known as the present
value of distributable earnings (PVDE). The value of the free surplus plus
the PVDE then equals the embedded value life insurance.
Embedded value 2002 -6-
The cost of capital depends on the level of required surplus and affects the
EVLI. The higher the required surplus, the greater the CoC, and hence the lower
the EVLI. The AEGON internal requirement is based on the higher of the local
regulatory requirements and 165% of the Standard and Poors' (S&P) local capital
adequacy models, plus any additional internally imposed requirements, if
applicable (internal basis). However, for comparison purposes, as a base case,
AEGON has prepared the embedded value life insurance analysis in this document
assuming required surplus on the regulatory requirements. Results have either
been modeled directly or by an appropriate adjustment from the internal basis.
The effect on the EVLI of the higher CoC on the internal basis is presented in
the sensitivity analysis; furthermore, addendum 2 includes the embedded value
components and the embedded value life insurance per country unit and per
product segment on an internal basis.
Movement analysis including new business
A movement analysis illustrates the change in embedded value life insurance from
one reporting period to the next. One of the components of the movement analysis
is the value of new business (VNB). The VNB is a measure of the value added by
production sold within the last reporting period. It is calculated at the end of
the reporting period and based on the beginning of year economic and end of year
operating assumptions. The change to end of year economic assumptions is
reflected under 'change in economic assumptions', while the difference between
the assumed and actual investment experience is reflected in the 'variance from
long term investment return'.
In case pre-tax numbers are presented, the calculations are carried out on an
after-tax basis and the profits are then grossed up for the relevant corporate
tax rate.
2.3 Operating assumptions
Operating assumptions are best estimate assumptions and based on historical data
where available. The assumptions fall into two categories: operating assumptions
involving policyholder behavior and operating assumptions involving company
policies, strategies and operations. All assumptions fall within the scope of
the external review and reflect a going concern basis.
Operating assumptions involving policyholder behavior
Operating assumptions involving policyholder behavior, such as premium
contributions, mortality, morbidity and persistency, each reflect the company's
"best estimate" of future experience and are based on the historical and current
experience of the company. These assumptions are adjusted to reflect known
changes in the environment and identifiable trends. If historical data is
insufficient to provide a reliable basis to develop assumptions, the company's
best judgment is used taking into consideration the company's pricing and/or
reserving assumptions and the experience of other companies with comparable
products, markets and operating procedures.
Embedded value 2002 -7-
Operating assumptions involving company policies, strategies and operations
Operating assumptions involving company policies, strategies and operations,
such as profit sharing/bonus rates and reinsurance and investment/reinvestment
strategies reflect contractual requirements as well as the most current
policies, strategies and operations.
Allowances for tax reflect best estimates of future taxes according to local
taxation rules, taking into account current 'substantially enacted' legislation
and tax rates. This best estimate of future taxes initially assumes no future
new business (i.e. is on a closed book basis) and includes both cash and accrual
adjustments (e.g., deferred taxes). The tax attributed to new business written
in the year is generally determined by considering the marginal impact of that
new business on the existing business tax position (allowing for any losses
carried forward). For the UK, the tax attributable to new business assumes that
existing business profits are first made available to relieve new business
strains, with any balance of such profits then being used to relieve carried
forward losses. The UK new business strains and current tax position of the fund
thus generate a negative tax variance, which has been included under
'miscellaneous impacts' in the movement analysis in section 4.2.
Expenses are based on current experience. Expenses that can clearly be
demonstrated as non-recurring are identified and omitted from maintenance or
acquisition costs and excluded from the determination of the appropriate unit
expense assumptions. Expenses are subject to inflation adjustments into the
future/5/. Anticipated efficiency gains (future expense improvements) have only
been included if a definite action plan has been approved to implement these
changes in the short term/6/. Holding expenses reflect the present value of
expected future expenses incurred by the holding companies (present value
holding expenses). These expenses are assumed to run off in line with the
in-force life business.
Operating assumptions are reviewed each year and a determination is made as to
whether they should be changed.
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/5/ Refer to section 2.4 'Economic assumptions' for inflation assumption.
/6/ Refer to section 4.2 'Movement analysis of embedded value life insurance'
for details on these expenses issues.
Embedded value 2002 -8-
2.4 Economic assumptions
The economic assumptions for 2001 and 2002 are presented in the table 3. The
investment and inflation assumptions are set using an active, market based
approach with rates that can vary by country unit and change from year to year
taking into account available empirical data.
Table 3
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US /(A)/ NL UK
Economic assumptions 2002 2001 2002 2001 2002 2001
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Discount rate 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%
Equity returns 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%
Property returns -- -- 6.5% 6.5% 8.0% 8.0%
Fixed interest returns /(B)/ 4.75% 4.75% 4.5% 5.0% 4.4% 5.0%
Net credit spread non-government bonds /(C)/ 117 113 56 56 70 70
Inflation rate 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%
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/(A)/ The Canadian assumptions are equal to the US assumptions with the
exception of: discount rate +0.5%, equity returns +0.5% and interest
+0.75%.
/(B)/ Fixed interest returns correspond to the government bond yield. In the US,
fixed interest returns grade from actual 2002 year-end levels to the
long-term assumption (e.g. 4.75%) over a period of approximately 5 years.
/(C)/ Average net credit spread in basis points (bps) of all corporate bonds,
mortgages, loans, etc. over the 'fixed interest returns'. Actual modelling
is done per rating category or at a portfolio level. US net credit spreads
grade from actual 2002 year-end levels to ultimate levels (e.g. 117 bps)
over a 2-year period.
All economic assumptions are reviewed each year and adjusted if appropriate. All
assumptions fall within the scope of the independent review and reflect a going
concern. The currency exchange rates are summarized in addendum 3.
2.5 Embedded options and guarantees
Insurance policies can have options and guarantees that are embedded in the
product design (embedded options and guarantees). These embedded options and
guarantees include minimum guarantee death/income benefits, minimum interest
guarantees (floors), minimum (cash) surrender values, annuity options, etc.
Generally, the embedded value life insurance is determined using a deterministic
approach: a single scenario that does not allow for deviations from this
scenario apart from sensitivity tests and might not fully reflect the exposure
to guarantees and other embedded options.
Contrary to this general approach, we have explicitly allowed for the exposure
of the majority of these embedded options and guarantees by including their
impact on embedded value life insurance using mostly stochastic modeling and
option pricing techniques.
Note that this impact does not represent the value of the embedded options and
guarantees on a stand-alone basis, but rather the company's net exposure to them
after taking into account the regulatory reserves that have already been set up
and the specific assets backing the liabilities (refer to section 4.1).
Embedded value 2002 -9-
3. Reconciliation of total capital base to adjusted net worth
The embedded value life insurance is not based on generally accepted accounting
principles in the Netherlands (DAP). The following reconciliation presents the
adjustments to the total capital base under DAP to arrive at the ANW that is
based on local regulatory accounting rules.
Table 4
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Reconciliation total capital base to ANW Change
(amounts in EUR millions) 2002 2001 to 2001
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Total capital
AEGON shareholders' equity 14,231 15,923 -11%
Capital securities & Subordinated debt 2,624 2,771 -5%
Senior debt related to insurance activities /(A)/ 3,203 3,982 -20%
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Total capital base 20,058 22,676 -12%
Other net liabilities /(B)/ 1,814 57
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Total capital base and other net liabilities 21,872 22,733 -4%
Invested in
Americas 15,751 15,795 0%
The Netherlands 2,605 3,654 -29%
The United Kingdom 3,117 2,910 7%
Other countries 399 374 7%
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Total 21,872 22,733 -4%
Allocated to
Life subsidiaries 20,358 21,313 -4%
Other activities 1,514 1,420 7%
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Total 21,872 22,733 -4%
Reconciliation capital in life subsidiaries to adjusted net worth
Capital in life subsidiaries 20,358 21,313 -4%
Adjustments to local equity -9,439 -9,349 1%
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Adjusted net worth (ANW) 10,919 11,964 -9%
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/(A)/ Long-term liabilities (of which allocated to insurance activities): EUR
3,856 mln (EUR 3,203 mln) in 2002 and EUR 5,084 mln (EUR 3,982 mln) in
2001.
/(B)/ Carried at the holding companies.
The capital base is largely invested in the life subsidiaries for which a
detailed actuarial calculation has been completed. The remaining capital
allocated to other activities is included at DAP book value. In the
reconciliation, the capital allocated to life subsidiaries is adjusted to local
regulatory accounting.
Embedded value 2002 -10-
The largest part of the adjustment relates to the non-admissibility on a
regulatory basis of DPAC/VOBA of the modeled life business in the Americas and
the UK/7/. The Netherlands' life insurance DPAC (EUR 0.8 billion after tax) is
not eliminated, as it is an admissible asset under Dutch regulatory accounting.
The after tax impact of the elimination of inadmissible DPAC/VOBA related to the
modeled life business equals EUR -10.6 billion. The balance of the adjustments
(EUR +1.2 billion) is mainly explained by the impact of the differing reserve
and asset valuation bases and the marking-to-market of the assets backing
surplus for the EVLI calculation.
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/7/ The non-admissibility of certain assets on a local basis simultaneously
decreases equity while increasing future profits as the margins that are
available to amortize these intangible assets on a DAP basis go straight to
the bottom-line under regulatory accounting. In other words, the decrease
in equity when going from DAP to the local basis is largely offset by an
increase in value of the in-force business.
Embedded value 2002 -11-
4. Outcome
This section presents the EVLI and TEV as of December 31, 2002 and 2001. All
profits and surplus are in millions of euro and based on local regulatory
accounting net of reinsurance and after tax. The level of required surplus is
based on local regulatory requirements.
4.1 Value components
The beginning of year (BoY) opening and end of year (EoY) closing values under
the earlier mentioned principles, scope and assumptions for the regulatory
solvency requirements are:
Table 5
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Embedded value components Nether- United Other Total Total Change
(amounts in EUR millions, after tax) Americas lands Kingdom countries 2002 2001 to 2001
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Life business
Adjusted net worth (ANW) 8,153 2,185 580 -- 10,919 11,964 -9%
Free surplus (FS) 4,598 256 393 -- 5,247 6,162 -15%
Required surplus (RS) 3,555 1,930 187 -- 5,672 5,803 -2%
Value of in-force life business (ViF) 6,510 2,395 2,149 -- 11,054 13,353 -17%
Present value future profits (PVFP) 7,385 2,796 2,239 -- 12,419 14,648 -15%
Cost of capital (CoC) -876 -400 -90 -- -1,365 -1,295 5%
Embedded value life insurance (EVLI) 14,663 4,581 2,729 -- 21,973 25,317 -13%
Other activities
DAP book value 773 383 -40 399 1,514 1,420 7%
Total embedded value per country unit 15,436 4,964 2,689 399 23,487 26,737 -12%
Holding activities -7,828 -6,982 12%
Debt, capital securities & other net
liabilities -7,641 -6,810 12%
Present value holding expenses -187 -172 8%
Total embedded value (TEV) 15,660 19,755 -21%
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The solvency requirement on which the business is managed is based on the more
stringent of the regulatory requirements and 165% of Standards and Poors' local
capital adequacy models, plus any additional internally imposed requirements, if
applicable. On this internal basis, the split between free and required surplus
differs: for 2002 free surplus was EUR 266 million plus required surplus of EUR
10,653 million, while for year-end 2001 the split between free and required
surplus was EUR 855 million and EUR 11,109 million/8/.
The prepaid pension costs on employee plans are included under other activities
at DAP book value of EUR 1.4 billion after tax (2001 EUR 1.5 billion) and
relates entirely to the US.
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/8/ Refer to section 5 'Sensitivities' for the impact on EVLI of moving from a
regulatory to an internal basis and to addendum 2 'Outcome and movement
analysis based on the internal surplus requirement' for a summary of the
EVLI and TEV on an internal basis.
Embedded value 2002 -12-
The embedded value life insurance decreased mainly as a result of deviations in
investment experience during 2002 from assumed levels and currency exchange
movements. For a more detailed discussion of the change in embedded value life
insurance from end of year 2001 to end of year 2002 refer to section 4.2.
The value of the holding activities decreased mainly as a result of net money
flows to subsidiaries to maintain solvency positions at desired levels (EUR -2.6
billion with EUR -2.3 billion relating to life business) exceeding net capital
inflow from shareholders (EUR 1.3 billion: EUR 2,053 million of additional
paid-in capital on preferred shares minus EUR 731 million dividends). Other
effects include foreign currency translation impact, debt interest payments and
market value changes of the total return swap agreement with Vereniging AEGON.
Embedded options and guarantee treatment
The Americas manages the exposure to embedded options and guarantees by matching
its assets and liabilities. To value the exposure of the non-mitigated risks a
stochastic scenario approach is used for the products that contain significant
guarantees or embedded options related to equity returns or interest rates.
Modeling on a deterministic basis would have increased the EVLI by EUR 399
million over and above the amounts for guarantees already reflected in the
regulatory reserves (EUR 389 million pre-tax).
In the Netherlands, the effect of minimum interest guarantees on individual
unit-linked and separate account group contracts are valued using a stochastic
scenario approach which had a negative impact on value of EUR 44 million over
and above the amounts for guarantees already reflected in the regulatory
reserves (EUR 250 million pre-tax). The exposure to the minimum interest
guarantees on traditional business is mitigated by matching assets to
liabilities. For part of the group life business, there is a further mitigation,
as the minimum interest guarantee applies to the total liability at the contract
level rather than to the increase in liability of each scheme member's benefits
separately. Also, minimum interest guarantees on traditional business have been
decreased from 4% to 3% for new individual policies sold after August 1999 and
for group contracts starting January 2000. The impact on value of the remaining
exposure to the minimum interest guarantees on traditional business has not been
quantified and is assumed to be reflected in the EVLI through the discount rate.
In the United Kingdom the guarantees and subsequently the cost for guarantees
arise within the policyholder funds and only to a very limited extent to
shareholder funds. In addition, a program of interest rate hedges has been put
in place to mitigate the impact of guaranteed annuity options Therefore, no
material exposure to and hence no allowance for the cost of these guarantees is
required in the EVLI.
In total, EUR 443 million is reflected in the year-end 2002 AEGON in-force value
for embedded options and guarantees over and above the amounts already reflected
in regulatory reserves.
Embedded value 2002 -13-
Non-recurring expenses and anticipated efficiency gains
The Americas considers an amount of EUR 52 million pre-tax related to the
overhaul of the retirement plan business record keeping systems as
non-recurring. The cost of this project is reflected in the 2002 in-force life
business performance but excluded from the determination of maintenance expense
assumptions on an ongoing basis.
The UK treated an amount of EUR 64 million of 2002 expenses as non-recurring
costs. The major components of this are EUR 32 million relating to the final
phase of a major new system development, EUR 16 million relating to the cost of
implementing the expense management program and EUR 16 million in relation to
other non-recurring costs. These after tax amounts have been included within
'miscellaneous impacts' in section 4.2.
In addition, an expense management program was undertaken in 2002 - 2003, which
is anticipated to reduce the cost base in the United Kingdom, excluding
exceptional expenses, by 15%. EUR 16 million (after tax) of 2002 acquisition
expenses have been treated as non-recurring, on the basis that they were
eliminated by the expense management program by the end of first quarter 2003.
The corresponding variance has been included within 'miscellaneous impacts' in
the movement analysis. The maintenance expense assumptions used at the end of
2002 also reflect planned savings of EUR 7 million after tax made through the
expense management program.
The Netherlands did not treat any expenses as non-recurring.
Embedded value 2002 -14-
4.2 Movement analysis of embedded value life insurance
The change from year-to-year embedded value life insurance is split into the
following components/9/:
Table 6
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Movement analysis 2002 Nether- United
(amounts in EUR millions, after tax) Americas lands Kingdom Total 2002
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Embedded value life insurance BoY 16,381 5,976 2,960 25,317
Value of new business (VNB) 495 43 25 563
Gross value of new business 896 114 48 1,058
Tax -314 -39 -14 -367
Cost of capital (after tax) -88 -32 -9 -128
In-force performance 122 227 142 490
Unwinding discount rate 938 457 211 1,606
Variance -793 -194 -65 -1,052
Change in operating assumptions -23 -36 -5 -64
Variance from long term inv. return -1,787 -1,537 -393 -3,717
Change in economic assumptions 67 -145 -93 -171
Currency exchange differences -2,703 0 -190 -2,893
Capital movements 1,924 37 340 2,302
Miscellaneous impacts 164 -21 -62 82
Embedded value life insurance EoY 14,663 4,581 2,729 21,973
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Other activities 1,514
Holding activities -7,828
Total embedded value 15,660
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/9/ Refer to addendum 1 'Movement analysis based on regulatory surplus
requirement per country unit and product segment' for a split per country
unit and per product segment and to addendum 2 'Outcome and movement
analysis based on the internal surplus requirement' for a corresponding
split of the movement on an internal basis.
Embedded value 2002 -15-
Value of new business represents the value created by new business sold during
the reporting period. Table 7 links this value to modeled written premium/10/.
Table 7
- -------------------------------------------------------------------------------------------------------------------
Modeled new business APE/(A)/, deposits
and A&H premium Nether- United
(amounts in EUR millions) Americas lands Kingdom Total 2002 VNB 2002
- -------------------------------------------------------------------------------------------------------------------
Premium business (TL, LAP) - APE /(C)/ 942 357 961 2,259 222
Deposit business (VA, FA, GIC's, FEE) - Deposits /(B)/ /(C)/ 40,743 40,743 293
Accident & health (A&H) - Premium /(C)/ 1,025 1,025 48
- -------------------------------------------------------------------------------------------------------------------
Total 563
- -------------------------------------------------------------------------------------------------------------------
/(A)/ APE = regular premium + 1/10 single premium
/(B)/ Including on and off balance sheet deposits (respectively EUR 25 bln and
EUR 16 bln)
/(C)/ The new premium and deposits are materially in line with new business
sales under AEGON's primary accounting basis (DAP). 2002 reported TL and
LAP APE for the Americas, The Netherlands and the UK were respectively EUR
1,039 mln, EUR 345 mln and EUR 936 mln; the differences occur due to
processing lags between DAP and embedded value life insurance data and
differences between actual and modelled business. Reported 2002 deposits
equalled EUR 48,320 mln; the difference compared to the above stated
number mainly relate to the elimination of deposits on existing contracts.
In-force performance variance relates mainly to the deteriorated credit markets
and the subsequent portfolio rebalancing that took place in the US. Rebalancing
the US bond portfolio took place in order to maintain credit quality in the face
of unprecedented bond downgrades. The rationale for the trading activity was and
is to ultimately control risk and reduce the cost of future potential credit
related losses. However due to the historically wide asset credit spreads, the
cost of this risk reduction activity comes in the form of reduced product
spreads going forward which is reflected in the in-force performance variance.
In addition, the combination of volatile US credit markets at the end of the
year coupled with strong deposit revenues led to a significant increase in
Treasury holdings as of year end (5.2% vs. 2.3% prior year). In general, the
Embedded Value models do not allow for immediate portfolio rebalancing, but
rather tilt reinvestment strategies with the goal of achieving a targeted asset
mix over time. To the extent the portfolio can be rebalanced sooner, this
reflects a conservative assumption in the modeling. All in, the impact from
product spread related variances was a decline in value of EUR 0.8 billion.
The Netherlands showed a negative variance mainly as a result of a change in
asset mix, variance on solvency and other charges. In the UK, the attribution of
tax to new business (as described in section 2.3), combined with the new
business strains and the tax position of the fund, resulted in a tax variance of
EUR -38 million. This has been included within 'miscellaneous impacts'.
- ----------
/10/ Refer to addendum 1 'Movement analysis based on regulatory surplus
requirement per country unit and product segment' for the split of VNB per
country unit and per reporting segment and to addendum 2 'Outcome and
movement analysis based on the internal surplus requirement' for a
corresponding split on an internal basis.
Embedded value 2002 -16-
Variance from long-term investment return assumptions reflects the value impact
of deviations from expected 2002 equity returns, interest rate levels and
corporate bond performance:
.. Variance from 2002 actual equity returns and interest rate movement vs.
projected (approximately EUR - 3.2 billion). Direct equity investment
losses in the general account portfolio amounted to approximately EUR 1.7
billion. Furthermore, declining interest rates decreased value to the
extent that these lower rates were not fully passed on to policyholders as
a result of the interest rate floor in certain products and competitive
crediting strategies. This together with the decline in current and future
revenue from fee driven business and the impact of the other embedded
options, produced losses of another EUR 1.5 billion.
.. Variance from 2002 actual bond default losses vs. projected (approximately
EUR -0.5 billion). This part of the variance reflects the difference
between actual and expected bond default losses.
Currency exchange differences mainly impact the value of the Americas due to the
stronger euro versus the US dollar (US dollar rate decreased by approximately
19% during 2002).
Capital movements reflect the net capital injections by the holding company into
the AEGON country units.
Embedded value 2002 -17-
5. Sensitivities
Table 8 and table 9 reflect the impact on respectively the EVLI and the VNB of
changing underlying assumptions. In each sensitivity analysis only the stated
assumption(s) has been changed, while keeping all else equal to the 'base case'.
The base case relates to the embedded value life insurance, i.e. to the value of
the modeled life business.
5.1 Embedded value life insurance sensitivity
Table 8
- ----------------------------------------------------------------------------------------------
Sensitivity analysis embedded value life insurance
(amounts in EUR milions, after tax) Americas NL UK All regions
- ----------------------------------------------------------------------------------------------
Base case embedded value-life insurance 2002 14,663 4,581 2,729 21,973
Required surplus at internal solvency requirement -8% -3% -1% -6%
1% decrease in discount rate 6% 11% 6% 7%
1% increase in discount rate -5% -9% -6% -6%
1% decrease equity, property and fixed income returns -11% -18% -8% -12%
1% increase equity, property and fixed income returns 7% 11% 7% 8%
10 basis points increase in general account spread 3% 2% 0% 3%
10% decrease in lapse rates 2% 0% 2% 2%
10% decrease in expenses 2% 2% 2% 2%
- ----------------------------------------------------------------------------------------------
The change from regulatory to internal required surplus decreases the value of
all country units. The size of the impact reflects the difference between the
internal requirement and the local regulatory requirements.
The impact as well as the asymmetry of the change in discount rate on the value
of the business depends on the timing of the future profits: the higher the
average remaining duration, the higher the sensitivity and the asymmetry to
changes in discount rates. The Dutch business shows the highest sensitivity as a
result of the relatively large block of (group) deferred annuities.
The remaining difference in sensitivity to changes in equity, property and fixed
income returns between the country units mainly reflects the composition of the
different in-force life portfolios and asset allocations. The asymmetry in
sensitivity to equity, property and fixed income returns can be attributed to
the minimum guarantees in many products. As a result of these guarantees, future
lower equity and fixed investment returns will not be fully offset by equally
lower crediting rates.
Embedded value 2002 -18-
5.2 Value of new business sensitivity
Table 9
- -------------------------------------------------------------------------------------------
Sensitivity analysis value new business
(amounts in EUR milions, after tax) Americas NL UK All regions
- -------------------------------------------------------------------------------------------
Base case value new business 2002 495 43 25 563
Required surplus at internal solvency requirement -19% 0% -8% -17%
1% decrease in discount rate 30% 48% 117% 35%
1% increase in discount rate -26% -37% -107% -30%
1% decrease equity, property and fixed income returns -54% -46% -154% -58%
1% increase equity, property and fixed income returns 37% 36% 130% 41%
10 basis points increase in general account spread 13% 3% 6% 12%
10% decrease in lapse rates 22% 9% 61% 23%
10% decrease in expenses 11% 20% 17% 12%
- -------------------------------------------------------------------------------------------
In general, the value of new business is more sensitive to changes in parameters
than the in-force. A relative small change in future profits can have a
relatively large impact on the relatively small VNB compared to the ViF. The
size and sign of the sensitivities depend on the profitability of the individual
products as well as the composition of the new business portfolio within a
country unit.
Similar to the impact on the in-force, the move to internal required surplus
decreases value as a result of the higher cost of capital. For new business in
the Dutch operations (mainly life for account of policyholders), the cost of
capital on internal required surplus is broadly equivalent to that on regulatory
requirements.
Embedded value 2002 -19-
6. Review statement
Introduction
Tillinghast-Towers Perrin, the financial services division of Towers, Perrin,
Forster & Crosby Inc. ('Tillinghast') has been engaged to review the
embedded values of AEGON's life insurance subsidiaries in the Americas, the
Netherlands and the United Kingdom.
Scope
Tillinghast's review covered:
.. Embedded values life insurance at 31 December 2001 and 31 December 2002,
and
.. Movement analysis and value of new business for 2002
The scope of Tillinghast's review included:
.. Assessment of AEGON's adherence to the AEGON principles
.. Reasonableness of methodology and assumptions
.. Review of the models; and
.. Review of the results
The scope did not include the review of the sensitivity results (as set out in
Section 5), the analysis by reporting segment (as set out in Addendum 1 and
Addendum 2, table 15) nor the value placed on 'other activities' (as these are
audited figures).
Opinion
Tillinghast has reported the results of its review to AEGON as follows:
"Tillinghast has reviewed the methodology and assumptions used by AEGON to
determine the embedded values life insurance and has reviewed on a test basis
the resulting embedded values life insurance and movement analysis. As a result
of this review, Tillinghast considers that the methodology adopted is
appropriate, that the assumptions used are reasonable, and that the embedded
value life insurance, total embedded value and movement analysis for the
Americas, the Netherlands and the United Kingdom as shown in tables 5, 6 and 14
have been properly prepared in accordance with the Principles as set out in
section 2 of this document and are reasonable. In giving this opinion,
Tillinghast has relied on the values placed on the 'other activities' by AEGON.
The estimates of value are based on common actuarial practice with regard to
embedded value methodology and assumptions and do not attempt to develop 'fair
value' or to interpret proposed IFRS accounting standards."
Embedded value 2002 -20-
Addendum 1: Movement analysis based on regulatory surplus requirement per
country unit and product segment
This addendum splits the movement analysis into product segments for AEGON as a
whole, the Americas, the Netherlands and the United Kingdom. First, the AEGON
totals split by reporting segment are presented in euro, then the movement of
the three country units per reporting segment is stated in local currency with
only the opening and closing value and the value of the other activities
translated into euro.
AEGON Group
Table 10
- -------------------------------------------------------------------------------------------------------
Movement analysis 2002
(amounts in EUR millions, after tax) TL FA GICs LAP VA FEE A&H Total
- -------------------------------------------------------------------------------------------------------
Embedded value life insurance BoY 10,110 3,892 1,616 6,213 1,459 411 1,616 25,317
Value of new business (VNB) 150 99 93 72 69 32 48 563
Gross value of new business 281 181 156 173 128 53 86 1,058
Tax -97 -63 -55 -59 -45 -18 -30 -367
Cost of capital (after tax) -34 -19 -8 -42 -14 -2 -8 -128
In-force performance 386 -351 6 303 1 20 125 490
Unwinding discount rate 688 206 79 454 63 24 92 1,606
Variance -273 -577 -68 -74 -78 -4 22 -1,052
Change in operating assumptions -29 20 -5 -76 16 0 11 -64
Variance from long term inv. return -1,136 -506 -190 -1,264 -507 -24 -90 -3,717
Change in economic assumptions -71 -8 14 -112 -1 0 6 -171
Currency exchange differences -1,061 -636 -282 -336 -241 -71 -265 -2,893
Capital movements 235 763 285 404 551 32 31 2,302
Miscellaneous impacts -84 160 43 -2 7 1 -43 82
Embedded value life insurance EoY 8,530 3,413 1,585 5,279 1,339 399 1,427 21,973
- -------------------------------------------------------------------------------------------------------
Other activities 1,514
Holding activities -7,828
Total embedded value 15,660
- -------------------------------------------------------------------------------------------------------
Embedded value 2002 -21-
Americas
Table 11
- ------------------------------------------------------------------------------------------------------------
Movement analysis 2002
(amounts in USD milions unless stated
otherwise, after tax) TL FA GICs LAP VA FEE A&H Total
- ------------------------------------------------------------------------------------------------------------
Embedded value life insurance BoY (EUR mln) 6,473 3,892 1,616 914 1,459 411 1,616 16,381
- ------------------------------------------------------------------------------------------------------------
Embedded value life insurance BoY 5,705 3,430 1,424 805 1,286 362 1,424 14,437
Value of new business (VNB) 119 93 88 27 66 30 45 469
Gross value of new business 220 172 148 57 121 50 81 848
Tax -77 -60 -52 -20 -42 -17 -28 -297
Cost of capital (after tax) -24 -18 -8 -10 -13 -2 -7 -83
In-force performance 299 -333 6 6 1 19 118 115
Unwinding discount rate 390 195 75 58 60 23 87 888
Variance -73 -546 -64 -10 -74 -4 21 -751
Change in operating assumptions -18 19 -5 -42 15 0 10 -22
Variance from long term inv. return -382 -479 -180 -62 -480 -23 -85 -1,692
Change in economic assumptions 49 -7 13 3 -1 0 6 63
Currency exchange differences 2 0 0 1 4 0 0 8
Capital movements 155 723 270 92 522 30 30 1,822
Miscellaneous impacts -44 151 40 41 7 1 -41 156
Embedded value life insurance EoY 5,903 3,579 1,662 913 1,404 419 1,497 15,377
- ------------------------------------------------------------------------------------------------------------
Embedded value life insurance EoY (EUR mln) 5,629 3,413 1,585 870 1,339 399 1,427 14,663
Other activities (EUR mln) 773
Total embedded value for the Americas (EUR mln) 15,436
- ------------------------------------------------------------------------------------------------------------
Embedded value 2002 -22-
The Netherlands
Table 12
- --------------------------------------------------------------------------------------------------------
Movement analysis 2002
(amounts in EUR millions, after tax) TL FA GICs LAP VA FEE A&H Total
- --------------------------------------------------------------------------------------------------------
Embedded value life insurance BoY (EUR mln) 3,509 -- -- 2,468 -- -- -- 5,976
- --------------------------------------------------------------------------------------------------------
Embedded value life insurance BoY 3,509 -- -- 2,468 -- -- -- 5,976
Value of new business (VNB) 10 -- -- 33 -- -- -- 43
Gross value of new business 19 -- -- 95 -- -- -- 114
Tax -7 -- -- -33 -- -- -- -39
Cost of capital (after tax) -2 -- -- -29 -- -- -- -32
In-force performance 69 -- -- 158 -- -- -- 227
Unwinding discount rate 266 -- -- 191 -- -- -- 457
Variance -193 -- -- -1 -- -- -- -194
Change in operating assumptions -4 -- -- -32 -- -- -- -36
Variance from long term inv. return -732 -- -- -805 -- -- -- -1,537
Change in economic assumptions -113 -- -- -32 -- -- -- -145
Currency exchange differences 0 -- -- 0 -- -- -- 0
Capital movements 16 -- -- 21 -- -- -- 37
Miscellaneous impacts -12 -- -- -9 -- -- -- -21
Embedded value life insurance EoY 2,747 -- -- 1,833 -- -- -- 4,581
- --------------------------------------------------------------------------------------------------------
Embedded value life insurance EoY (EUR mln) 2,747 -- -- 1,833 -- -- -- 4,581
Other activities (EUR mln) 383
Total embedded value for the Netherlands (EUR mln) 4,964
- --------------------------------------------------------------------------------------------------------
Embedded value 2002 -23-
United Kingdom
Table 13
- --------------------------------------------------------------------------------------------------------
Movement analysis 2002
(amounts in GBP millions unless stated otherwise,
after tax) TL FA GICs LAP VA FEE A&H Total
- --------------------------------------------------------------------------------------------------------
Embedded value life insurance BoY (EUR mln) 128 -- -- 2,832 -- -- -- 2,960
- --------------------------------------------------------------------------------------------------------
Embedded value life insurance BoY 78 -- -- 1,723 -- -- -- 1,801
Value of new business (VNB) 9 -- -- 7 -- -- -- 16
Gross value of new business 18 -- -- 12 -- -- -- 30
Tax -6 -- -- -4 -- -- -- -9
Cost of capital (after tax) -4 -- -- -1 -- -- -- -6
In-force performance 1 -- -- 88 -- -- -- 89
Unwinding discount rate 6 -- -- 127 -- -- -- 133
Variance -2 -- -- -39 -- -- -- -41
Change in operating assumptions -3 -- -- 0 -- -- -- -3
Variance from long term inv. return 0 -- -- -247 -- -- -- -247
Change in economic assumptions -6 -- -- -52 -- -- -- -58
Currency exchange differences 0 -- -- 0 -- -- -- 0
Capital movements 34 -- -- 179 -- -- -- 214
Miscellaneous impacts -16 -- -- -23 -- -- -- -39
Embedded value life insurance EoY 100 -- -- 1,675 -- -- -- 1,775
- --------------------------------------------------------------------------------------------------------
Embedded value life insurance EoY (EUR mln) 154 -- -- 2,575 -- -- -- 2,729
Other activities (EUR mln) -40
Total embedded value for the United Kingdom (EUR mln) 2,689
- --------------------------------------------------------------------------------------------------------
Embedded value 2002 -24-
Addendum 2: Outcome and movement analysis based on the internal surplus
requirement
The solvency requirement on which the business is managed is based on the more
stringent of the local regulatory requirement and 165% of the Standards and
Poors' local capital adequacy models.
Table 14
- -----------------------------------------------------------------------------------------------------------------
Embedded value components Internal Nether- United Other Total Total Change
(amounts in EUR millions, after tax) Americas lands Kingdom countries 2002 2001 to 2001
- -----------------------------------------------------------------------------------------------------------------
Life business
Adjusted net worth (ANW) 8,153 2,186 580 -- 10,919 11,965 -9%
Free surplus (FS) 173 -172/(A)/ 265 -- 266 855 -69%
Required surplus (RS) 7,980 2,358 315 -- 10,653 11,109 -4%
Value of in-force life business (ViF) 5,407 2,277 2,133 -- 9,817 12,071 -19%
Present value future profits (PVFP) 7,385 2,798 2,265 -- 12,448 14,647 -15%
Cost of capital (CoC) -1,979 -521 -132 -- -2,632 -2,576 2%
Embedded value life insurance (EVLI) 13,560 4,462 2,714 -- 20,736 24,036 -14%
Other activities
DAP book value 773 383/(A)/ -40 399 1,514 1,420 7%
Total embedded value per country unit 14,333 4,845 2,673 399 22,250 25,456 -13%
Holding activities -7,828 -6,982 12%
Debt, capital securities & other net
liabilities -7,641 -6,810 12%
Present value holding expenses -187 -172 8%
Total embedded value (TEV) 14,422 18,474 -22%
- -----------------------------------------------------------------------------------------------------------------
/(A)/ The negative free surplus in the modeled life business of the Netherlands
is more than offset by free surplus included in the DAP book value of
other activities.
Embedded value 2002 -25-
Table 15
- ----------------------------------------------------------------------------------------------------
Movement analysis 2002 - Internal
(amounts in EUR millions, after tax) TL FA GICs LAP VA FEE A&H Total
- ----------------------------------------------------------------------------------------------------
Embedded value life insurance BoY 9,638 3,489 1,499 6,134 1,413 395 1,468 24,036
Americas
Embedded value life insurance BoY 6,127 3,489 1,499 871 1,413 395 1,468 15,262
Value of new business (VNB) 97 72 82 21 62 29 37 401
In-force performance 331 -304 30 7 2 22 127 216
Other line items/(A)/ -1,259 -291 -145 -63 -189 -62 -310 -2,319
Embedded value life insurance EoY 5,295 2,967 1,467 836 1,289 383 1,323 13,560
The Netherlands
Embedded value life insurance BoY 3,382 -- -- 2,455 -- -- -- 5,838
Value of new business (VNB) 10 -- -- 33 -- -- -- 43
In-force performance 107 -- -- 137 -- -- -- 245
Other line items/(A)/ -843 -- -- -820 -- -- -- -1,663
Embedded value life insurance EoY 2,657 -- -- 1,805 -- -- -- 4,462
United Kingdom
Embedded value life insurance BoY 128 -- -- 2,808 -- -- -- 2,937
Value of new business (VNB) 14 -- -- 9 -- -- -- 23
In-force performance 2 -- -- 140 -- -- -- 142
Other line items/(A)/ 9 -- -- -397 -- -- -- -388
Embedded value life insurance EoY 154 -- -- 2,560 -- -- -- 2,714
Embedded value life insurance EoY 8,106 2,967 1,467 5,201 1,289 383 1,323 20,736
- ----------------------------------------------------------------------------------------------------
/(A)/ Other items include 'variance from long term investment return', 'change
in economic assumptions', 'currency exchange differences', 'capital
movements' and 'miscellaneous impacts' and are materially the same as in
tables 11-13
Embedded value 2002 -26-
Addendum 3: Exchange rates
The currency exchange rates used in this report are reflected below. The
weighted average exchange rates are used for the amounts in the movement
analysis where as the closing exchange rates are used for the year-end 2002 and
2001 amounts.
Table 16
- -------------------------------------------
Closing exchange rates at December 31, 2002
EUR USD GBP
- -------------------------------------------
1 EUR -- 1.049 0.651
1 USD 0.954 -- 0.620
1 GBP 1.537 1.612 --
- -------------------------------------------
- -------------------------------------------
Weighted average exchange rates 2002
EUR USD GBP
- -------------------------------------------
1 EUR -- 0.947 0.628
1 USD 1.056 -- 0.664
1 GBP 1.592 1.507 --
- -------------------------------------------
- -------------------------------------------
Closing exchange rates at December 31, 2001
EUR USD GBP
- -------------------------------------------
1 EUR -- 0.881 0.609
1 USD 1.135 -- 0.690
1 GBP 1.643 1.448 --
- -------------------------------------------
Embedded value 2002 -27-
Glossary and abbreviations
Glossary
Base case The EVLI, TEV and VNB calculated under the set of
assumptions and methodology outlined in section 2
Principles. Sensitivity tests reflecting a deviation
on the assumptions are presented in comparison to the
base case.
Closed book An assumption that the portfolio will run off after
the valuation date and is not expected to grow with
future new business.
Cost of capital The cost related to having to hold solvency capital
that will constrain distributions to shareholders.
The cost originates from the fact that the net return
earned on the assets backing this capital is lower
than the discount rate.
DAP book value Net asset value based on generally accepted Dutch
accounting principles.
Discount rate The rate at which future cash flows are discounted
back to the valuation date.
Embedded options and Can apply to both assets and liabilities of AEGON. On
guarantees assets, refers to choices that issuers of assets
owned by AEGON can make, such as the ability to
exercise and option to call, prepay or convert an
asset. On liabilities, refers to choices that
contract holders/policyholders of AEGON can make,
such as minimum guarantee death/income benefits,
minimum interest guarantees (floors), minimum (cash)
surrender values, annuity options, etc.
Embedded value life The present value of the existing life business at
insurance the valuation date and excluding any value
attributable to future new business.
Embedded value life The change in embedded value life insurance from one
insurance movement reporting year to another.
Free surplus Excess of assets available at the valuation date over
capital needed to support the business (liabilities
and required surplus).
Going concern basis Business outlook assumption that expects the business
to behave under normal conditions but excluding
future new business.
Gross value of new The value of new business, grossed-up at the relevant
business corporate tax rate, before allowance for the cost of
capital.
In-force business Contracts and policies that are in effect as at the
valuation date.
Internal basis The more stringent of local regulatory solvency
requirements and 165% of the Standard and Poors'
(S&P) solvency requirements, plus any additional
internally imposed requirements, if applicable.
Embedded value 2002 -28-
Mark-to-market The adjustment of the asset value from regulatory
value to market value.
Movement analysis An explanation of the change in embedded value life
insurance from one reporting period to the next.
Net asset spreads Excess of net investment return over the risk free
rate.
Persistency The rate at which policies and contracts remain
in-force.
Present value of The discounted value of expected future distributable
distributable earnings earnings as at the valuation date at the discount
rate.
Reporting segment The product type categories of business on which
AEGON reports externally for DAP and EVLI/TEV.
Required surplus The capital that AEGON is required to hold in order
to satisfy local regulatory solvency requirements or
to demonstrate financial strength (via ratings from
agencies such as Standards & Poors' and Moody's).
Reserve base Methodology or principle basis to calculate the level
of reserves.
Total embedded value The sum of the embedded value life insurance and the
value of the other activities and holding activities.
Time value of money The expected value of money at a certain valuation
date.
Unwinding discount Expected return on the beginning of year EVLI.
rate
Value of new business The present value of the block of business sold in
the latest reporting year.
Value of in-force The present value of the expected future profits
emerging from the business in-force as of the
valuation date minus the cost of capital.
Variance analysis Explanation of the difference between actual and
expected experience related to assumptions.
Embedded value 2002 -29-
Abbreviations
A&H Accident & health
ANW Adjusted net worth
APE Annualized premium equivalent
BoY Beginning of year
CoC Cost of capital
DPAC Deferred policy acquisition costs
DAP Dutch accounting principles
EoY End of year
EVLI Embedded value life insurance
FA Fixed annuities
FEE Fee business
FS Free surplus
GICs Guaranteed investment contracts and funding
agreements
IFRS International Financial Reporting Standards
LAP Life for the account of policyholders
PVDE Present value of distributable earnings
PVFP Present value of future profits
RS Required surplus
TEV Total embedded value
TL Traditional life
VA Variable annuities
ViF Value of in-force business
VNB Value of new business
VOBA Value of business acquired
Embedded value 2002 -30-
Disclaimer
The statements contained in this press release that are not historical facts are
forward-looking statements as defined in the U.S. Private Securities Litigation
Reform Act of 1995. Words such as 'believe', 'estimate', 'intend', 'may',
'expect', 'anticipate', 'predict', 'project', 'counting on', 'plan', 'continue',
'want', 'forecast', 'should', 'would', 'is confident' and 'will' and similar
expressions as they relate to us are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and
involve risks, uncertainties and assumptions that are difficult to predict. We
undertake no obligation to publicly update or revise any forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of their dates.
All forward-looking statements are subject to various risks and uncertainties
that could cause actual results to differ materially from expectations,
including, but not limited to, the following:
.. Changes in general economic conditions, particularly in the United States,
the Netherlands and the United Kingdom;
.. Changes in the performance of financial markets, including emerging
markets, including:
. The frequency and severity of defaults by issuers in our fixed income
investment portfolios; and
. The effects of corporate bankruptcies and/or accounting restatements
on the financial markets and the resulting decline in value of equity
and debt securities we hold;
.. The frequency and severity of insured loss events;
.. Changes affecting mortality, morbidity and other factors that may affect
the profitability of our insurance products;
.. Changes affecting interest rate levels and continuing low interest rate
levels;
.. Changes affecting currency exchange rates, including the EUR/USD and
EUR/GBP exchange rates;
.. Increasing levels of competition in the United States, the Netherlands, the
United Kingdom and emerging markets;
.. Changes in laws and regulations, particularly those affecting our
operations, the products we sell and the attractiveness of certain products
to our consumers;
.. Regulatory changes relating to the insurance industry in the jurisdictions
in which we operate;
.. Acts of God, acts of terrorism and acts of war;
.. Changes in the policies of central banks and/or foreign governments;
.. Litigation or regulatory action that could require us to pay significant
damages or change the way we do business;
.. Customer responsiveness to both new products and distribution channels;
.. Competitive, legal, regulatory, or tax changes that affect the distribution
cost of or demand for our products;
.. Our failure to achieve anticipated levels of earnings or operational
efficiencies as well as other cost saving initiatives.
Embedded value 2002 -31-