NOTE 1 General information

AEGON N.V., incorporated and domiciled in the Netherlands, is a public limited liability share company organized under Dutch law and recorded in the Commercial Register of The Hague under its registered address at AEGONplein 50, 2591 TV The Hague. AEGON N.V. serves as the holding company for the AEGON Group and has listings of its common shares in Amsterdam, New York and London.

AEGON N.V. (or ‘the Company’), its subsidiaries and its proportionally consolidated joint ventures (AEGON or ‘the Group’) have life insurance and pensions operations in over twenty countries in Europe, the Americas and Asia and are also active in savings and investment operations, accident and health insurance, general insurance and limited banking operations. Headquarters are located in The Hague, the Netherlands. The Group employs approximately 27,500 people worldwide.

NOTE 2 Summary of significant accounting policies

NOTE 2.1 Basis of presentation

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS), as adopted by the European Union (EU), with IFRS as issued by the International Accounting Standards Board (IASB) and with Part 9 of Book 2 of the Netherlands Civil Code. The consolidated financial statements have been prepared in accordance with the historical cost convention as modified by the revaluation of investment properties and those financial instruments (including derivatives) and financial liabilities that have been measured at fair value. Information on the standards and interpretations that were adopted in 2010 is provided below in paragraph 2.1.1. Certain amounts in prior years have been reclassified to conform to the current year presentation. These reclassifications had no effect on net income, shareholders’ equity or earnings per share. The consolidated financial statements are presented in euros and all values are rounded to the nearest million except when otherwise indicated.

With regard to the income statement of AEGON N.V., article 402, Part 9 of Book 2 of the Netherlands Civil Code has been applied, allowing a simplified format.

The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses for the reporting period. Those estimates are inherently subject to change and actual results could differ from those estimates. Included among the material (or potentially material) reported amounts and disclosures that require extensive use of estimates are: fair value of certain invested assets and derivatives, deferred acquisition costs, value of business acquired and other purchased intangible assets, goodwill, policyholder claims and benefits, insurance guarantees, pension plans, income taxes and the potential effects of resolving litigated matters.

The consolidated financial statements of AEGON N.V. were approved by the Executive Board and by the Supervisory Board on March 23, 2011. The financial statements are put to the Annual General Meeting of Shareholders on May 12, 2011 for adoption. The shareholders’ meeting can decide not to adopt the financial statements but cannot amend them.

NOTE 2.1.1 Adoption of new IFRS accounting standards

New standards become effective on the date specified by IFRS, but may allow companies to opt for an earlier adoption date. In 2010, the following new standards issued by the IASB and Interpretations issued by the IFRS Interpretations Committee (formerly known as the IFRIC) became mandatory:

• IFRS 3 (revised) Business Combinations.
• IAS 27 (revised) Consolidated and separate financial statements.
• Improvements to IFRS (2009).

IFRS 3 (revised) ‘Business Combinations’

The revised IFRS 3, applicable prospectively to all new acquisitions undertaken after January 1, 2010, continues to require the application of the acquisition method to business combinations, with some significant changes. For example, all payments to purchase a business will be recorded at fair value at the acquisition date, with contingent payments classified as liabilitty subsequently re-measured at fair value through profit or loss. There is a choice on an acquisition-by-acquisition basis to measure the non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets. All acquisition-related transaction costs will be expensed.

The adoption of IFRS 3 (revised) does not change the accounting treatment, including the accounting for contingent consideration, for past acquisitions. The adoption of this standard did not have any impact during the current period as there were no acquisitions.

IAS 27 (revised) ‘Consolidated and separate financial statements’ and consequential amendments to IAS 28 ‘Investments in Associates’ and IAS 31 ‘Interests in Joint Ventures’

The revised IAS 27, applicable prospectively to all new transactions undertaken with non-controlling interest (minority interest) after January 1, 2010, requires the recording of the effect of all transactions in equity if there is no change in control. Where an interest is disposed and control (or significant influence or joint control) is lost, any remaining interest in the entity is re-measured to fair value and a gain or loss is recognized in profit and loss. In the past, the effect of transactions with non-controlling interests were accounted for as partial acquisitions and disposals and reflected either as goodwill or within the profit and loss account. The adoption of IAS 27 (revised) had no impact during the current period as there were no transactions with non-controlling interests and no disposals where an interest in an entity was retained after the loss of control (or significant influence or joint control) of that entity.

Improvements to IFRS (2009)

The IASB issued, in April 2009, a number of minor amendments to IFRS which resulted from the IASB’s 2009 annual improvements project. These amendments, which were effective either from July 1, 2009 or January 1, 2010, deal with minor changes to the wordings used in the individual standards and seek to remove editorial and other inconsistencies in the literature. AEGON adopted all the relevant changes from the improvements project to its accounting policies. The improvements project did not result in any changes to the classification, measurement or presentation of any items in the financial statements.

In addition, the following new standards, amendments to existing standards and interpretations are mandatory for the first time for the financial year beginning January 1, 2010 but are not currently relevant for the Group:

• Amendments to IAS 39 Financial Instruments – Eligible hedged items.
• IFRIC 17 Distributions of non-cash assets to owners.
• IFRIC 18 Transfers of assets from customers.
• IFRS 1 (revised) First time adoption of IFRS – additional exemptions.
• Amendment to IFRS 2 Share Based Payments (Group cash settled and share based payment transactions.
• Amendment to IAS 32 Classification of Rights Issues.

NOTE 2.1.2 Future adoption of new IFRS accounting standards

The following standards, amendments to existing standards and interpretations, published prior to January 1, 2011, were not early adopted by the Group and will be applied in future years:

• IFRS 9 Financial Instruments*.
• IFRS 7 (amendment) Financial Instruments - Disclosures (adopted October 2010).
• Improvements to IFRS (2010).

 

IFRS 9 ‘Financial Instruments’

IFRS 9 Financial Instruments addresses classification and measurement of financial assets, is available for early adoption immediately but mandatory only for accounting periods beginning on or after January 1, 2013. IFRS 9 replaces the multiple classification and measurement models in IAS 39 with a single model that has only two classification categories: amortized cost and fair value. IFRS 9 represents the first stage in the IASB’s planned replacement of IAS 39. IFRS 9 is expected to have a significant impact on the Group’s financial statements because it will likely result in a reclassification and re-measurement of AEGON’s financial assets. However the full impact of IFRS 9 will only be clear after the remaining stages of the IASB’s project on IAS 39 are completed and issued.

Improvements to IFRS (2010)

This set of improvements to IFRS issued by the IASB in May 2010 makes a number of minor amendments to 7 different standards and interpretations. These amendments, which are effective for accounting periods beginning on January 1, 2011, will all be applied by AEGON in its 2011 financial statements to the extent they are relevant. None of these amendments are expected to have a material change to the classification, measurement or presentation of any items in AEGON’s financial statements.

In addition to the above, the following standards, amendments to standards and interpretations have been published and are mandatory for accounting periods beginning on or after January 1, 2011 or later periods but are not material for the Group’s operations:

• IAS 24 (revised) Related Party Disclosures.
• IFRIC 14 (amendment ) Prepayment of a minimum funding requirement.
• IFRIC 19 Extinguishing financial liabilities with equity instrument.
• IFRS 1 (amendment) First Time Adoption – Limited Exemption from Comparative IFRS 7 Disclosures for First Time Adopters.

NOTE 2.2 Changes in presentation

Starting January 1, 2010, AEGON introduced a new reporting format for segment reporting that aligns with changes implemented in the way AEGON manages its businesses. Refer to section 2.5 Segment reporting for details about this change.

The change in operating segments had no impact on equity or net income. The comparative segment information presented in note 5 has been adjusted to make the information consistent with the current period figures.

NOTE 2.3 Basis of consolidation

Business combinations that occurred before the adoption date of IFRS (January 1, 2004) have not been restated.

a. Subsidiaries

The consolidated financial statements include the financial statements of AEGON N.V. and its subsidiaries. Subsidiaries are entities over which AEGON has direct or indirect power to govern the financial and operating policies so as to obtain benefits from its activities (‘control’). The assessment of control is based on the substance of the relationship between the Group and the entity and, among other things, considers existing and potential voting rights that are currently exercisable and convertible.

Special purpose entities are consolidated if, in substance, the activities of the entity are conducted on behalf of the Group, the Group has the decision-power to obtain control of the entity or has delegated these powers through an autopilot, the Group can obtain the majority of the entity’s benefits or the Group retains the majority of the residual risks related to the entity or its assets.

The subsidiary’s assets, liabilities and contingent liabilities are measured at fair value on the acquisition date and are subsequently accounted for in accordance with the Group’s accounting principles, which is consistent with IFRS. Intra-group transactions, including AEGON N.V. shares held by subsidiaries, which are recognized as treasury shares in equity, are eliminated. Intra-group losses are eliminated, except to the extent that the underlying asset is impaired. Minority interests are initially stated at their share in the fair value of the net assets on the acquisition date and subsequently adjusted for the minority’s share in changes in the subsidiary’s equity.

The excess of the consideration paid to acquire the interest and the fair value of any interest already owned, over the Group’s share in the net fair value of assets, liabilities and contingent liabilities acquired is recognized as goodwill. Negative goodwill is recognized directly in the income statement. If the fair value of the assets, liabilities and contingent liabilities acquired in the business combination has been determined provisionally, adjustments to these values resulting from the emergence of new evidence within twelve months after the acquisition date are made against goodwill. Contingent consideration is discounted and the unwinding is recognized in the income statement as an interest expense. Any changes in the estimated value of contingent considerations given in a business combination are recognised in the income statement.

The identifiable assets, liabilities and contingent liabilities are stated at fair value when control is obtained.

Subsidiaries are deconsolidated when control ceases to exist. Any difference between the net proceeds plus the fair value of any retained interest and the carrying amount of the subsidiary including non-controlling interest is recognized in the income statement.

Transactions with minority interests

Transactions with minority interests are accounted for as transactions with equity holders. Therefore disposals to minority interests and acquisitions from minority interests, not resulting in gaining or losing control of the subsidiary are recorded in equity. Any difference between consideration paid or received and the proportionate share in net assets is accounted for in equity attributable to shareholders of AEGON N.V..

Investment funds

Investment funds managed by the Group in which the Group holds an interest are consolidated in the financial statements if the Group can govern the financial and operating policies of the fund. In assessing control all interests held by the Group in the fund are considered, regardless of whether the financial risk related to the investment is borne by the Group or by the policyholders.

On consolidation of an investment fund, a liability is recognized to the extent that the Group is legally obliged to buy back participations held by third parties. The liability is presented in the consolidated financial statements as investment contracts for account of policyholders. Where this is not the case, other participations held by third parties are presented as minority interests in equity. The assets allocated to participations held by third parties or by the Group on behalf of policyholders are presented in the consolidated financial statements as investments for account of policyholders.

Equity instruments issued by the Group that are held by the investment funds are eliminated on consolidation. However, the elimination is reflected in equity and not in the measurement of the related financial liabilities towards policyholders or other third parties.

b. Jointly controlled entities

Joint ventures are contractual agreements whereby the Group undertakes with other parties an economic activity that is subject to joint control.

Interests in joint ventures are recognized using proportionate consolidation, combining items on a line by line basis from the date the jointly controlled interest commences. Gains and losses on transactions between the Group and the joint venture are recognized to the extent that they are attributable to the interests of other ventures, with the exception of losses that are evidence of impairment and that are recognized immediately. The use of proportionate consolidation is discontinued from the date on which the Group ceases to have joint control.

The acquisition of an interest in a joint venture may result in goodwill, which is accounted for consistently with the goodwill recognized on the purchase of a subsidiary.

NOTE 2.4 Foreign exchange translation

a. Translation of foreign currency transactions

The Group’s consolidated financial statements are prepared in euros which is also the Company’s functional currency. That is the currency of the primary economic environment in which the Company operates. Each company in the Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. Transactions in foreign currencies are initially recorded at the functional currency rate prevailing at the date of the transaction.

At the balance sheet date monetary assets and monetary liabilities in foreign currencies are retranslated to the functional currency at the closing rate of exchange prevailing on that date. Non-monetary items carried at cost are translated using the exchange rate at the date of the transaction, whilst assets carried at fair value are translated at the exchange rate when the fair value was determined.

Exchange differences on monetary items are recognized in the income statement when they arise, except when they are deferred in equity as a result of a qualifying cash flow or net investment hedge. Exchange differences on non-monetary items carried at fair value are recognized in equity or the income statement, consistently with other gains and losses on these items.

b. Translation of foreign currency operations

On consolidation, the financial statements of group entities with a foreign functional currency are translated to euro, the currency in which the consolidated financial statements are presented. Assets and liabilities are translated at the closing rates on the balance sheet date. Income, expenses and capital transactions (such as dividends) are translated at average exchange rates or at the prevailing rates on the transaction date, if more appropriate. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are translated at the closing rates on the balance sheet date.

The resulting exchange differences are recognized in the ‘foreign currency translation reserve’, which is part of shareholders’ equity. On disposal of a foreign entity the related cumulative exchange differences included in the reserve are recognized in the income statement.

On transition to IFRS on January 1, 2004, the foreign currency translation reserve was reset to nil.

NOTE 2.5 Segment reporting

Starting January 1, 2010, AEGON introduced a new reporting format for segment reporting that aligns with changes implemented in the way AEGON manages its business. AEGON’s operating segments are based on the businesses as presented in internal reports that are regularly reviewed by the Executive Board which is regarded as the ’chief operating decision maker’. The operating segments are:

• AEGON Americas: Covers business units in the United States, Canada, Mexico and Brazil, including any of the units’ activities located outside these countries.
• AEGON The Netherlands: Covers businesses operating in the Netherlands.
• AEGON UK: Covers businesses operating in the United Kingdom.
• New Markets: Covers businesses operating in Central & Eastern Europe, Asia, Spain and France as well as AEGON’s variable annuity activities in Europe and AEGON Asset Management.
• Holding and other activities: Includes financing, employee and other administrative expenses of Holding companies.

 

In addition, AEGON made the following other changes:

• The use of ’operating earnings’ is discontinued to further simplify AEGON’s reporting and to focus on the key performance indicator ’underlying earnings’.
• The line item ’Run-off businesses’ is introduced which includes earnings of certain business units where management has decided to exit the market and to run-off the existing block of business. Currently, this line item includes the earnings of the institutional spread-based business and structured settlements (payout annuities) business of AEGON Americas. AEGON believes that excluding the earnings of these blocks of business enhances the comparability from period to period of AEGON’s key earnings measure, underlying earnings.
• Earnings from the Company’s associates in insurance companies in Spain, India, Brazil and Mexico are reported on an underlying earnings basis.

 

Non-IFRS measures

For segment reporting purposes underlying earnings before tax, income before tax including associated companies and income tax including associated companies are calculated by consolidating on a proportionate basis the revenues and expenses of our associated companies in Spain, India, Brazil and Mexico. AEGON believes that the non-IFRS measures provide meaningful information about the underlying operating results of its business including insight into the financial measures that senior management uses in managing AEGON’s business.

Among other things senior management is compensated based in part on AEGON's results against targets using the non-IFRS measures presented here. While other insurers in AEGON’s peer group present substantially similar non-IFRS measures, the non- IFRS measures presented in this document may nevertheless differ from the non-IFRS measures presented by other insurers. There is no standardized meaning to these measures under IFRS or any other recognized set of accounting standards and readers are cautioned to consider carefully the different ways in which AEGON and its peers present similar information before comparing them. Proportionately consolidated earnings from the Company’s associates in insurance companies in Spain, India, Brazil and Mexico are reported on an underlying earnings basis. AEGON has blocks of businesses other than those characterized as run-off businesses under IFRS for which sales have been discontinued of which the earnings are included in underlying earnings.

AEGON believes the non-IFRS measures shown herein, when read together with AEGON’s reported IFRS financial statements, provide meaningful supplemental information for the investing public to evaluate AEGON’s business after eliminating the impact of current IFRS accounting policies for financial instruments and insurance contracts, which embed a number of accounting policy alternatives that companies may select in presenting their results (i.e. companies can use different local GAAPs) and that can make the comparability from period to period difficult. The reconciliation of this measure to the most comparable IFRS measures is shown in the table Segment reporting here.

Underlying earnings

Certain assets held by AEGON Americas, AEGON The Netherlands and AEGON UK are carried at fair value and managed on a total return basis, with no offsetting changes in the valuation of related liabilities. These include assets such as investments in hedge funds, private equities, real estate limited partnerships, convertible bonds and structured products. Underlying earnings exclude any over- or underperformance compared to management’s long-term expected return on assets. Based on current holdings and asset returns, the long-term expected return on an annual basis is 8-10%, depending on asset class, including cash income and market value changes. The expected earnings from these asset classes are net of Deferred Policy Acquisition Costs (DPAC) where applicable.

In addition, certain products offered by AEGON Americas contain guarantees and are reported on a fair value basis, including the segregated funds offered by AEGON Canada and the total return annuities and guarantees on variable annuities of AEGON USA. The earnings on these products are impacted by movements in equity markets and risk free interest rates. Short-term developments in the financial markets may therefore cause volatility in earnings. Included in underlying earnings is a long-term expected return on these products and excluded is any over- or underperformance compared to management’s expected return. The fair value movements of certain guarantees and the fair value change of derivatives that hedge certain risks on these guarantees of AEGON The Netherlands and Variable Annuities Europe (included in New Markets) are excluded from underlying earnings, the long-term expected return for these guarantees is set at zero.

Holding and other activities include certain issued bonds that are held at fair value through profit or loss. The interest rate risk on these bonds is hedged using swaps. The fair value movement resulting from changes in AEGON’s credit spread used in the valuation of these bonds are excluded from underlying earnings and reported under fair value items.

Fair value items

Fair value items include the ‘over’ or ‘under’ performance of investments and guarantees held at fair value for which the expected long-term return is included in underlying earnings, the gains (losses) on real estate and hedge ineffectiveness.

In addition, hedge ineffectiveness on hedge transactions, fair value changes on economic hedges without natural offset in earnings and for which no hedge accounting is applied and fair value movements on real estate are included under Fair value items.

Realized gains or losses on investments

Includes realized gains and losses on available-for-sale investments, as well as mortgage and loan portfolios.

Impairment charges / (reversals)

Includes impairments (reversals) on available-for-sale debt securities and impairments on shares including the effect of deferred policyholder acquisition costs and mortgage and loan portfolios on amortized cost and associates.

Other income or charges

Other income or charges is used to report any items which cannot be directly allocated to a specific line of business. Also items that are outside the normal course of business are included under this heading.

Other charges include restructuring charges that are considered other charges for segment reporting purposes because these are outside the normal course of business. In the IFRS financial statements, these charges are included in commissions and expenses or impairment charges.

Run-off businesses

Includes results of business units where management has decided to exit the market and to run-off the existing block of business. Currently, this line includes the run-off of the institutional spread-based business and structured settlements blocks of business in the United States. AEGON has other blocks of businesses for which sales have been discontinued of which the earnings are included in underlying earnings.

Share in earnings of associates

Earnings from the Company’s associates in insurance companies in Spain, India, Brazil and Mexico are reported on an underlying earnings basis. Other associates are included on a net income basis.

NOTE 2.6 Offsetting of assets and liabilities

Financial assets and liabilities are offset in the balance sheet when the Group has a legally enforceable right to offset and has the intention to settle the asset and liability on a net basis or simultaneously.

NOTE 2.7 Intangible assets

a. Goodwill

Goodwill is recognized as an intangible asset for interests in subsidiaries and joint ventures acquired after January 1, 2004 and is measured as the positive difference between the acquisition cost and the Group’s interest in the net fair value of the entity’s identifiable assets, liabilities and contingent liabilities. Subsequently, goodwill is carried at cost less accumulated impairment charges. It is derecognized when the interest in the subsidiary or joint venture is disposed of.

b. Value of business acquired

When a portfolio of insurance contracts is acquired, whether directly from another insurance company or as part of a business combination, the difference between the fair value and the carrying amount of the insurance liabilities is recognized as value of business acquired (VOBA). The Group also recognizes VOBA when it acquires a portfolio of investment contracts with discretionary participation features.

VOBA is amortized over the useful life of the acquired contracts, based on either the expected future premiums or the expected gross profit margins. The amortization period and pattern are reviewed at each reporting date; any change in estimates is recorded in the income statement. For all products, VOBA, in conjunction with DPAC where appropriate, is assessed for recoverability at least annually on a country-by-country basis and the portion determined not to be recoverable is charged to the income statement. VOBA is considered in the liability adequacy test for each reporting period.

When unrealized gains or losses arise on available-for-sale assets, VOBA is adjusted to equal the effect that the realization of the gains or losses (through a sale or impairment) would have had on VOBA. The adjustment is recognized directly in shareholders’ equity. VOBA is derecognized when the related contracts are settled or disposed of.

c. Future servicing rights

On the acquisition of a portfolio of investment contracts without discretionary participation features under which AEGON will render investment management services, the present value of future servicing rights is recognized as an intangible asset. Future servicing rights can also be recognized on the sale of a loan portfolio or the acquisition of insurance agency activities.

The present value of the future servicing rights is amortized over the servicing period as the fees from services emerge and is subject to impairment testing. It is derecognized when the related contracts are settled or disposed of.

d. Software and other intangible assets

Software and other intangible assets are recognized to the extent that the assets can be identified, are controlled by the Group, are expected to provide future economic benefits and can be measured reliably. The Group does not recognize internally generated intangible assets arising from research or internally generated goodwill, brands, customer lists and similar items.

Software and other intangible assets are carried at cost less accumulated depreciation and impairment losses. Depreciation of the asset is over its useful life as the future economic benefits emerge and is recognized in the income statement as an expense. The depreciation period and pattern are reviewed at each reporting date, with any changes recognized in the income statement.

An intangible asset is derecognized when it is disposed of or when no future economic benefits are expected from its use or disposal.

NOTE 2.8 Investments

Investments comprise financial assets, excluding derivatives, as well as investments in real estate.

a. Financial assets, excluding derivatives

Financial assets are recognized on the trade date when the Group becomes a party to the contractual provisions of the instrument and are classified for accounting purposes depending on the characteristics of the instruments and the purpose for which they were purchased.

Classification

The following financial assets are measured at fair value through profit or loss: financial assets held for trading, financial assets managed on a fair value basis in accordance with the Group’s risk management and investment strategy and financial assets containing an embedded derivative that is not closely related and that cannot be reliably bifurcated. In addition, in certain instances the Group designates financial assets to this category when by doing so a potential accounting mismatch in the financial statements is eliminated or significantly reduced.

Financial assets with fixed or determinable payments that are not quoted in an active market and that the Group does not intend to sell in the near future or for which the holder may not recover substantially all of its initial investment, other than because of credit deterioration, are accounted for as loans. To the extent that the Group has the intention and ability to hold a quoted financial asset with fixed payments to the maturity date, it is classified as held-to-maturity.

All remaining non-derivative financial assets are classified as available-for-sale.

Measurement

Financial assets are initially recognized at fair value excluding interest accrued to date plus, in the case of a financial asset not at fair value through profit or loss, any directly attributable incremental transaction costs.

Loans and financial assets held-to-maturity are subsequently carried at amortized cost using the effective interest rate method. Financial assets at fair value through profit or loss are measured at fair value with all changes in fair value recognized in the income statement as incurred. Available-for-sale assets are recorded at fair value with unrealized changes in fair value recognized in other comprehensive income. Financial assets that are designated as hedged items are measured in accordance with the requirements for hedge accounting.

Amortized cost

The amortized cost of a debt instrument is the amount at which it is measured at initial recognition minus principal repayments, plus or minus the cumulative amortization of any difference between the initial amount and the maturity amount, and minus any reduction for impairment. The effective interest rate method is a method of calculating the amortized cost and of allocating the interest income or expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the debt instrument or, when appropriate, a shorter period to the net carrying amount of the instrument. When calculating the effective interest rate, all contractual terms are considered. Possible future credit losses are not taken into account. Charges and interest paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts are included in the calculation.

Fair value

The consolidated financial statements provide information on the fair value of all financial assets, including those carried at amortized cost where the values are provided in the notes to the financial statements.

The fair value of an asset is the amount for which it could be exchanged between knowledgeable, willing parties in an arm’s length transaction. For quoted financial assets for which there is an active market, the fair value is the bid price at the balance sheet date. In the absence of an active market, fair value is estimated by using present value based or other valuation techniques. Where discounting techniques are applied, the discount rate is based on current market rates applicable to financial instruments with similar characteristics. The valuation techniques that include non-market observable inputs can result in a different outcome than the actual transaction price at which the asset was acquired. Such differences are not recognized in the income statement immediately but are deferred. They are released over time to the income statement in line with the change in factors (including time) that market participants would consider in setting a price for the asset.

Interest accrued to date is not included in the fair value of the financial asset.

Derecognition

A financial asset is derecognized when the contractual rights to the asset’s cash flows expire and, when the Group retains the right to receive cash flows from the asset or has an obligation to pay received cash flows in full without delay to a third party and either: has transferred the asset and substantially all the risks and rewards of ownership, or has neither transferred nor retained all the risks and rewards but has transferred control of the asset. Financial assets of which the group has neither transferred nor retained significantly all the risk and rewards, are recognized to the extent of the Group’s continuing involvement. If significantly all risks are retained, the assets are not derecognized.

On derecognition, the difference between the disposal proceeds and the carrying amount is recognized in the income statement as a realized gain or loss. Any cumulative unrealized gain or loss previously recognized in the revaluation reserve in shareholders’ equity is also recognized in the income statement.

Security lending and repurchase agreements

Financial assets that are lent to a third party or that are transferred subject to a repurchase agreement at a fixed price are not derecognized as the Group retains substantially all the risks and rewards of the asset. A liability is recognized for cash collateral received, on which interest is accrued.

A security that has been received under a borrowing or reverse repurchase agreement is not recognized as an asset. A receivable is recognized for any related cash collateral paid by AEGON. The difference between sale and repurchase price is treated as investment income. If the Group subsequently sells that security, a liability to repurchase the asset is recognized and initially measured at fair value.

Collateral

With the exception of cash collateral, assets received as collateral are not separately recognized as an asset until the financial asset they secure defaults. When cash collateral is recognized, a liability is recorded for the same amount.

b. Real estate

Investments in real estate includes property held to earn rentals or for capital appreciation, or both. Investments in real estate are presented as investments. Property that is occupied by the Group and that is not intended to be sold in the near future is classified as real estate held for own use and is presented in ‘Other assets and receivables’.

All property is initially recognized at cost. Such cost includes the cost of replacing part of the real estate and borrowing cost for long term construction projects if recognition criteria are met. Subsequently, investments in real estate are measured at fair value with the changes in fair value recognized in the income statement. Real estate held for own use is carried at its revalued amount, which is the fair value at the date of revaluation less subsequent accumulated depreciation and impairment losses. Depreciation is calculated on a straight line basis over the useful life of a building. Land is not depreciated. On revaluation the accumulated depreciation is eliminated against the gross carrying amount of the asset and the net amount is restated to the revalued amount. Increases in the net carrying amount are recognized in the related revaluation reserve in shareholders’ equity and are released to other comprehensive income over the remaining useful life of the property.

Valuations of both investments in real estate and real estate held for own use are conducted with sufficient regularity to ensure the value correctly reflects the fair value at the balance sheet date. Valuations are mostly based on active market prices, adjusted for any difference in the nature, location or condition of the specific property. If such information is not available, other valuation methods are applied, considering the current cost of reproducing or replacing the property, the value that the property’s net earning power will support and the value indicated by recent sales of comparable properties. For property held for own use, valuers may also consider the present value of the future rental income cash flows that could be achieved had the real estate been let out.

On disposal of an asset, the difference between the net proceeds received and the carrying amount is recognized in the income statement. Any remaining surplus attributable to real estate in own use in the revaluation reserve is transferred to retained earnings.

Property under construction

The Group develops property itself with the intention to hold it as investments in real estate. During the construction phase both the land and the building are presented as investments in real estate and carried at fair value unless this cannot be determined reliably in which case the real estate is valued at directly attributable costs, including borrowing costs. This represents a change in accounting policy which has been applied with effect from January 1, 2009. In prior years, such real estate was included in ‘Other assets and receivables’, carried at cost and not depreciated. When the construction phase was completed, the properties were transferred to investments in real estate at their carrying value and only then revalued to fair value. All fair value gains or losses are recognized in the income statement.

Maintenance costs and other subsequent expenditure

Expenditure incurred after initial recognition of the asset is capitalized to the extent that the level of future economic benefits of the asset is increased. Costs that restore or maintain the level of future economic benefits are recognized in the income statement as incurred.

NOTE 2.9 Investments for account of policyholders

Investments held for account of policyholders consist of investments in financial assets, excluding derivatives, as well as investments in real estate. 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.

NOTE 2.10 Derivatives

a. Definition

Derivatives are financial instruments, classified as held for trading financial assets, of which the value changes in response to an underlying variable, that require little or no net initial investment and are settled at a future date.

Assets and liabilities may include derivative-like terms and conditions. With the exception of features embedded in contracts held at fair value through profit or loss, embedded derivatives that are not considered closely related to the host contract are bifurcated, carried at fair value and presented as derivatives. In assessing whether a derivative-like feature is closely related to the contract in which it is embedded, the Group considers the similarity of the characteristics of the embedded derivative and the host contract. Embedded derivatives that transfer significant insurance risk are accounted for as insurance contracts.

Derivatives with positive values are reported as assets and derivatives with negative values are reported as liabilities. Derivatives for which the contractual obligation can only be settled by exchanging a fixed amount of cash for a fixed amount of AEGON N.V. equity instruments are accounted for in shareholders’ equity and are therefore discussed in the notes on equity.

b. Measurement

All derivatives recognized on the balance sheet are carried at fair value.

The fair value is calculated net of the interest accrued to date and is based on market prices, when available. When market prices are not available, other valuation techniques, such as option pricing or stochastic modeling, are applied. The valuation techniques incorporate all factors that market participants would consider and are based on observable market data, when available.

c. Hedge accounting

As part of its asset liability management, the Group enters into economic hedges to limit its risk exposure. These transactions are assessed to determine whether hedge accounting can and should be applied.

To qualify for hedge accounting, the hedge relationship is designated and formally documented at inception, detailing the particular risk management objective and strategy for the hedge (which includes the item and risk that is being hedged), the derivative that is being used and how hedge effectiveness is being assessed. A derivative has to be effective in accomplishing the objective of offsetting either changes in fair value or cash flows for the risk being hedged. The effectiveness of the hedging relationship is evaluated on a prospective and retrospective basis using qualitative and quantitative measures of correlation. Qualitative methods may include comparison of critical terms of the derivative to the hedged item. Quantitative methods include a comparison of the changes in the fair value or discounted cash flow of the hedging instrument to the hedged item. A hedging relationship is considered effective if the results of the hedging instrument are within a ratio of 80% to 125% of the result of the hedged item.

For hedge accounting purposes, a distinction is made between fair value hedges, cash flow hedges and hedges of a net investment in a foreign operation.

Fair value hedges are hedges of a change in the fair value of an unrecognized firm commitment or an asset or liability (being hedged item) that is not held at fair value through profit or loss. The hedged item is remeasured to fair value in respect of the hedged risk and any resulting adjustment is recorded in the income statement.

Cash flow hedges are hedges of the exposure to variability in cash flows that is attributable to a particular risk of a forecasted transaction or a recognized asset or liability and could affect profit or loss. To the extent that the hedge is effective, the change in the fair value of the derivative is recognized in the related revaluation reserve in shareholders’ equity. Any ineffectiveness is recognized directly in the income statement. The amount recorded in shareholders’ equity is released to the income statement to coincide with the hedged transaction, except when the hedged transaction is an acquisition of a non-financial asset or liability. In this case, the amount in shareholders’ equity is included in the initial cost of the asset or liability.

Net investment hedges are hedges of currency exposures on a net investment in a foreign operation. To the extent that the hedge is effective, the change in the fair value of the hedging instrument is recognized in shareholders’ equity. Any ineffectiveness is recognized in the income statement. The amount in shareholders’ equity is released to the income statement when the foreign operation is disposed of.

Hedge accounting is discontinued prospectively for hedges that are no longer considered effective. When hedge accounting is discontinued for a fair value hedge, the derivative continues to be carried on the balance sheet with changes in its fair value recognized in the income statement. When hedge accounting is discontinued for a cash flow hedge because the cash flow is no longer expected to occur, the accumulated gain or loss in shareholders’ equity is recognized immediately in the income statement. In other situations where hedge accounting is discontinued for a cash flow hedge, including those where the derivative is sold, terminated or exercised, accumulated gains or losses in shareholders’ equity are amortized into the income statement when the income statement is impacted by the variability of the cash flow from the hedged item.

NOTE 2.11 Investments in associates

Entities over which the Group has significant influence through power to participate in financial and operating policy decisions, but which do not meet the definition of a subsidiary or joint venture, are accounted for using the equity method. Interests held by venture capital entities, mutual funds and investment funds that qualify as an associate are accounted for as an investment held at fair value through profit or loss. Interests held by the Group in venture capital entities, mutual funds and investment funds that are managed on a fair value basis, are also accounted for as investments held at fair value through profit or loss.

Interests in associates are initially recognized at cost, which includes positive goodwill arising on acquisition. Negative goodwill is recognized in the income statement on the acquisition date. If associates are obtained in successive share purchases, each significant transaction is accounted for separately.

The carrying amount is subsequently adjusted to reflect the change in the Group’s share in the net assets of the associate and is subject to impairment testing. The net assets are determined based on the Group’s accounting policies. Any gains and losses recorded in other comprehensive income by the associate are reflected in other reserves in shareholders’ equity, while the share in the associate’s net income is recognized as a separate line item in the consolidated income statement. The Group’s share in losses is recognized until the investment in the associate’s equity and any other long-term interest that are part of the net investment are reduced to nil, unless guarantees exist.

Gains and losses on transactions between the Group and the associate are eliminated to the extent of the Group’s interest in the entity, with the exception of losses that are evidence of impairment which are recognized immediately. Own equity instruments of AEGON N.V. that are held by the associate are not eliminated.

On disposal of an interest in an associate, the difference between the net proceeds and the carrying amount is recognized in the income statement and gains and losses previously recorded directly in the revaluation reserve are reversed and recorded through the income statement.

NOTE 2.12 Reinsurance assets

Reinsurance contracts are contracts entered into by the Group in order to receive compensation for losses on contracts written by the Group (outgoing reinsurance). For contracts transferring sufficient insurance risk, a reinsurance asset is recognized for the expected future benefits, less expected future reinsurance premiums. Reinsurance contracts with insufficient insurance risk transfer are accounted for as investment or service contracts, depending on the nature of the agreement.

Reinsurance assets are measured consistently with the amounts associated with the underlying insurance contracts and in accordance with the terms of each reinsurance contract. They are subject to impairment testing and are derecognized when the contractual rights are extinguished or expire or when the contract is transferred to another party.

NOTE 2.13 Deferred expenses and rebates

a. Deferred policy acquisition costs

DPAC relates to all insurance contracts and investment contracts with discretionary participation features and represents the variable costs that are related to the acquisition or renewal of these contracts.

Acquisition costs are deferred to the extent that they are recoverable and are subsequently amortized based on either the expected future premiums or the expected gross profit margins. For products sold in the United States and Canada with amortization based on expected gross profit margins, the amortization period and pattern are reviewed at each reporting date and any change in estimates is recognized in the income statement. Estimates include, but are not limited to: an economic perspective in terms of future returns on bond and equity instruments, mortality, disability and lapse assumptions, maintenance expenses and expected inflation rates. For all products, DPAC, in conjunction with VOBA where appropriate, is assessed for recoverability at least annually on a country-by-country basis and is considered in the liability adequacy test for each reporting period. If appropriate, the assumptions included in the determination of estimated gross profits are adjusted. The portion of DPAC that is determined not to be recoverable is charged to the income statement.

For products sold in the United States or Canada, when unrealized gains or losses arise on available-for-sale assets, DPAC is adjusted to equal the effect that the realization of the gains or losses (through sale or impairment) would have had on its measurement. This is recognized directly in the related revaluation reserve in shareholders’ equity.

DPAC is derecognized when the related contracts are settled or disposed of.

 

b. Deferred transaction costs

Deferred transaction costs relate to investment contracts without discretionary participation features under which AEGON will render investment management services. Incremental costs that are directly attributable to securing these investment management contracts are recognized as an asset if they can be identified separately and measured reliably and if it is probable that they will be recovered.

For contracts involving both the origination of a financial liability and the provision of investment management services, only the transaction costs allocated to the servicing component are deferred. The other transaction costs are included in the carrying amount of the financial liability.

The deferred transaction costs are amortized in line with fee income, unless there is evidence that another method better represents the provision of services under the contract. Deferred transaction costs are subject to impairment testing at least annually.

 

c. Deferred interest rebates

An interest rebate is a form of profit sharing whereby the Group gives a discount on the premium payable (usually single premium) based on the expected surplus interest that will be earned on the contract. The expected surplus interest is calculated with reference to a portfolio of government bonds. The rebate can be subject to additional conditions concerning actual returns or the continuation of the policy for a specified number of years.

Interest rebates that are expected to be recovered in future periods are deferred and amortized as the surplus interest is realized. They are considered in the liability adequacy test for insurance liabilities.

NOTE 2.14 Other assets and receivables

Other assets include trade and other receivables, prepaid expenses, real estate held for own use and equipment. Trade and other receivables are initially recognized at fair value and are subsequently measured at amortized cost. Equipment is initially carried at cost, depreciated on a straight line basis over its useful life to its residual value and is subject to impairment testing. The accounting for real estate held for own use is described in note 2.8.

NOTE 2.15 Cash and cash equivalents

Cash comprises cash at banks and in-hand. Cash equivalents are short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known cash amounts, are subject to insignificant risks of changes in value and are held for the purpose of meeting short-term cash requirements. Money market investments that are held for investment purposes (backing insurance liabilities, investment liabilities or equity based on asset liability management considerations) are not included in cash and cash equivalents but are presented as investment or investment for account of policyholders.

NOTE 2.16 Impairment of assets

An asset is impaired if the carrying amount exceeds the amount that would be recovered through its use or sale. For tangible and intangible assets, financial assets and reinsurance assets, if not held at fair value through profit or loss, the recoverable amount of the asset is estimated when there are indications that the asset may be impaired. Irrespective of the indications, goodwill and other intangible assets with an indefinite useful life that are not amortized, are tested at least annually.

a. Impairment of non-financial assets

Assets are tested individually for impairment when there are indications that the asset may be impaired. The impairment loss is calculated as the difference between the carrying and the recoverable amount of the asset, which is the higher of an asset’s value in use and its net selling price. The value in use represents the discounted future net cash flows from the continuing use and ultimate disposal of the asset and reflects its known inherent risks and uncertainties.

Impairment losses are charged to shareholders’ equity to the extent that they offset a previously recorded revaluation reserve relating to the same item. Any further losses are recognized directly in the income statement.

With the exception of goodwill, impairment losses are reversed when there is evidence that there has been a change in the estimates used to determine the asset’s recoverable amount since the recognition of the last impairment loss. The reversal is recognized in the income statement to the extent that it reverses impairment losses previously recognized in the income statement. The carrying amount after reversal cannot exceed the amount that would have been recognized had no impairment taken place.

Non-financial assets that only generate cash flows in combination with other assets and liabilities are tested for impairment at the level of the cash-generating unit. The goodwill acquired in a business combination, for the purpose of impairment testing, is allocated to cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination. The allocation is based on the level at which goodwill is monitored internally and cannot be larger than an operating segment. When impairing a cash-generating unit, any goodwill allocated to the unit is first written-off and recognized in the income statement. The remaining impairment loss is allocated on a pro rata basis among the other assets, on condition that the resulting carrying amounts do not fall below the individual assets’ recoverable amounts.

b. Impairment of debt instruments

Debt instruments are impaired if there is objective evidence that a loss event has occurred after the initial recognition of the asset that has a negative impact on the estimated future cash flows. A specific security is considered to be impaired when it is determined that it is probable that not all amounts due (both principal and interest) will be collected as scheduled. Individually significant loans and other receivables are first assessed separately. All non-impaired assets measured at amortized cost are then grouped by credit risk characteristics and collectively tested for impairment.

For debt instruments carried at amortized cost, the carrying amount of impaired financial assets is reduced through an allowance account. The impairment loss is calculated as the difference between the carrying and recoverable amount of the investment. The recoverable amount is determined by discounting the estimated probable future cash flows at the original effective interest rate of the asset. For variable interest debt instruments, the current effective interest rate under the contract is applied.

For debt instruments classified as available-for-sale, the asset is impaired to its fair value. Any unrealized gain or loss previously recognized in other comprehensive income is taken to the income statement in the impairment loss. After impairment the interest accretion on debt instruments that are classified as available-for-sale is based on the rate of return that would be required by the market for similar rated instruments at the date of impairment.

Impairment losses recognized for debt instruments can be reversed if in subsequent periods the amount of the impairment loss decreases and that decrease can be objectively related to a credit event occurring after the impairment was recognized. For debt instruments carried at amortized cost, the carrying amount after reversal cannot exceed its amortized cost at the reversal date.

c. Impairment of equity instruments

For equity instruments, a significant or prolonged decline in fair value below initial cost is considered objective evidence of impairment and always results in a loss being recognized in the income statement. Significant or prolonged decline is defined as an unrealized loss position for generally more than 6 months or a fair value of less than 80% of the cost price of the investment. Equity investments are impaired to the asset’s fair value and any unrealized gain or loss previously recognized in shareholders’ equity is taken to the income statement as an impairment loss. The amount exceeding the balance of previously recognized unrealized gains or losses is recognized in the income statement.

Impairment losses on equity instruments cannot be reversed.

d. Impairment of reinsurance assets

Reinsurance assets are impaired if there is objective evidence, as a result of an event that occurred after initial recognition of the reinsurance asset, that not all amounts due under the terms of the contract will be received and the impact of the event on the amount to be received from the reinsurer can be reliably measured. Impairment losses are recognized in the income statement.

NOTE 2.17 Equity

Financial instruments that are issued by the Group are classified as equity if they represent a residual interest in the assets of the Group after deducting all of its liabilities and the Group has an unconditional right to avoid delivering cash or another financial asset to settle its contractual obligation. In addition to common shares and preferred shares, the Group has issued perpetual securities and convertible core capital securities. Perpetual securities have no final maturity date, repayment is at the discretion of AEGON and for junior perpetual capital securities AEGON has the option to defer coupon payments at its discretion. Convertible core capital securities can be converted into ordinary shares of AEGON, through a predetermined formula, or repaid at the discretion of AEGON and coupon payments are payable only if AEGON pays dividends on ordinary shares. Both the perpetual and convertible core capital securities are classified as equity rather than debt, are measured at par and those that are denominated in US dollars are translated using historical exchange rates.

Incremental external costs that are directly attributable to the issuing or buying back of own equity instruments are recognized in equity, net of tax.

Dividends and other distributions to holders of equity instruments are recognized directly in equity, net of tax. A liability for non-cumulative dividends payable is not recognized until the dividends have been declared and approved.

Treasury shares are own equity instruments reacquired by the Group. They are deducted from Group equity, regardless of the objective of the transaction. No gain or loss is recognized in the income statement on the purchase, sale, issue or cancellation of the instruments. If sold, the difference between the carrying amount and the proceeds is reflected in retained earnings. The consideration paid or received is recognized directly in shareholders’ equity. All treasury shares are eliminated in the calculation of earnings per share and dividend per common share.

NOTE 2.18 Trust pass-through securities and other borrowings

A financial instrument issued by the Group is classified as a liability if the contractual obligation must be settled in cash or another financial asset or through the exchange of financial assets and liabilities at potentially unfavorable conditions for the Group.

Trust pass-through securities and other borrowings are initially recognized at their fair value including directly attributable transaction costs and are subsequently carried at amortized cost using the effective interest rate method, with the exception of specific borrowings that are designated as at fair value through profit or loss to eliminate, or significantly reduce, an accounting mismatch, or specific borrowings which are carried as at fair value through the profit and loss as part of a fair value hedge relationship. The liability is derecognized when the Group’s obligation under the contract expires, is discharged or is cancelled.

NOTE 2.19 Insurance contracts

Insurance contracts are accounted for under IFRS 4 – Insurance Contracts. In accordance with this standard AEGON continues to apply the existing accounting policies that were applied prior to the adoption of IFRS, with certain modifications allowed by IFRS 4 for standards effective subsequent to adoption. AEGON applies non-uniform accounting policies for insurance liabilities and related deferred acquisition costs and intangible assets, as was allowed under Dutch Accounting Principles. As a result, specific methodologies applied may differ between our operations as they may reflect local regulatory requirements and local practices for specific product features in these local markets. In the United States we apply US GAAP and in the Netherlands and the United Kingdom we apply Dutch Accounting Principles, both with consideration of standards effective subsequent to the date of transition to IFRS.

Insurance contracts are contracts under which the Group accepts a significant risk – other than a financial risk – from a policyholder by agreeing to compensate the beneficiary on the occurrence of an uncertain future event by which he or she will be adversely affected. Contracts that do not meet this definition are accounted for as investment contracts. The Group reviews homogeneous books of contracts to assess whether the underlying contracts transfer significant insurance risk on an individual basis. This is considered the case when at least one scenario with commercial substance can be identified in which the Group has to pay significant additional benefits to the policyholder. Contracts that have been classified as insurance are not reclassified subsequently.

Insurance liabilities are recognized when the contract is entered into and the premiums are charged. The liability is derecognized when the contract expires, is discharged or is cancelled.

Insurance assets and liabilities are valued in accordance with the accounting principles that were applied by the Group prior to the transition to IFRS, as further described in the following paragraphs. In order to reflect the specific nature of the products written, subsidiaries are allowed to apply local accounting principles to the measurement of insurance contracts. All valuation methods used by the subsidiaries are based on the general principle that the carrying amount of the net liability must be sufficient to meet any reasonably foreseeable obligation resulting from the insurance contracts.

a. Life insurance contracts

Life insurance contracts are insurance contracts with guaranteed life-contingent benefits. The measurement of the liability for life insurance contracts varies depending on the nature of the product.

Some products, such as traditional life insurance products in continental Europe and products in the United States, for which account terms are fixed and guaranteed, are measured using the net premium method. The liability is determined as the sum of the discounted value of the expected benefits and future administration expenses directly related to the contract, less the discounted value of the expected theoretical premiums that would be required to meet the future cash outflows based on the valuation assumptions used. The liability is either based on current assumptions or calculated using the assumptions established at the time the contract was issued, in which case a margin for risk and adverse deviation is generally included. A separate reserve for longevity may be established and included in the measurement of the liability. Furthermore, the liability for life insurance comprises reserves for unearned premiums and for claims outstanding, which includes an estimate of the incurred claims that have not yet been reported to the Group.

Other products with account terms that are not fixed or guaranteed are generally measured at the policyholder’s account balance. 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 benefits issued to the policyholder are measured as described in note note 2.19 c or, if bifurcated from the host contract, as described in note 2.10.

One insurance product in the United States is carried at fair value through profit or loss as it contains an embedded derivative that could not be reliably bifurcated. The fair value of the contract is measured using market consistent valuation techniques.

b. Life insurance contracts for account of policyholders

Life insurance contracts under which the policyholder bears the  risks associated with the underlying investments are classified as insurance contracts for account of policyholders.

The liability for the insurance contracts for account of policyholders is measured at the policyholder account balance. Contracts with unit-denominated payments are measured at current unit values, which reflect the fair values of the assets of the fund. If applicable, the liability representing the nominal value of the policyholder unit account is amortized over the term of the contract so that interest on actuarial funding is at an expected rate of return.

c. Embedded derivatives and participation features

Life insurance contracts typically include derivative-like terms and conditions. With the exception of policyholder options to surrender the contract at a fixed amount, contractual features that are not closely related to the insurance contract and that do not themselves meet the definition of insurance contracts are accounted for as derivatives. If the embedded derivative cannot be reliably bifurcated, the entire insurance contract is carried at fair value through profit or loss.

Other terms and conditions, such as participation features and expected lapse rates are considered when establishing the insurance liabilities. Where the Group has discretion over the amount or timing of the bonuses distributed resulting from participation features, a liability is recognized equal to the amount that is available at the balance sheet date for future distribution to policyholders.

Guaranteed minimum benefits

The Group issues life insurance contracts, which, do not expose the Group to interest risk as the account terms are not fixed or guaranteed or because the return on the investments held is passed on to the policyholder. Certain of these contracts, however, may contain guaranteed minimum benefits. An additional liability for life insurance is established for guaranteed minimum benefits that are not bifurcated. Bifurcated guaranteed minimum benefits are classified as derivatives.

In the United States, the additional liability for guaranteed minimum benefits that are not bifurcated is determined each period by estimating the expected value of benefits in excess of the projected account balance and recognizing the excess over the accumulation period based on total expected assessments. The estimates are reviewed regularly and any resulting adjustment to the additional liability is recognized in the income statement. The benefits used in calculating the liabilities are based on the average benefits payable over a range of stochastic scenarios. Where applicable, the calculation of the liability incorporates a percentage of the potential annuitizations that may be elected by the contract holder.

In the Netherlands, an additional liability is established for guaranteed minimum benefits that are not bifurcated on group pension plans and on traditional insurance contracts with profit sharing based on an external interest index. These guarantees are measured at fair value.

d. Shadow accounting

Shadow accounting ensures that all gains and losses on investments affect the measurement of the insurance assets and liabilities in the same way, regardless of whether they are realized or unrealized and regardless of whether the unrealized gains and losses are recognized in the income statement or directly in equity in the revaluation reserve. In some instances, realized gains or losses on investments have a direct effect on the measurement of the insurance assets and liabilities. For example, some insurance contracts include benefits that are contractually based on the investment returns realized by the insurer. In addition, realization of gains or losses on available-for-sale investments can lead to unlocking of VOBA or DPAC and can also affect the outcome of the liability adequacy test to the extent that it considers actual future investment returns. For similar changes in unrealized gains and losses, shadow accounting is applied. If an unrealized gain or loss triggers a shadow accounting adjustment to VOBA, DPAC or the insurance liabilities, the corresponding adjustment is recognized through other comprehensive income in the revaluation reserve, together with the unrealized gain or loss.

Some profit sharing schemes issued by the Group entitle the policyholder to a bonus which is based on the actual total return on specific assets held. To the extent that the bonus relates to gains or losses on available-for-sale investments for which the unrealized gains or losses are recognized in the revaluation reserve in equity, shadow accounting is applied. This  means that the increase in the liability is also charged to equity to offset the unrealized gains rather than to the income statement.

e. Non-life insurance contracts

Non-life insurance contracts are insurance contracts where the insured event is not life-contingent. For non-life products the insurance liability generally includes reserves for unearned premiums, unexpired risk, inadequate premium levels and outstanding claims and benefits. No catastrophe or equalization reserves are included in the measurement of the liability.

The reserve for unearned premiums includes premiums received for risks that have not yet expired. Generally the reserve is released over the term of the contract and is recognized as premium income.

The liability for outstanding claims and benefits is established for claims that have not been settled and any related cash flows, such as claims handling costs. It includes claims that have  been incurred but have not been reported to the Group. The liability is calculated at the reporting date using statistical methods based on empirical data and current assumptions that may include a margin for adverse deviation. Liabilities for claims subject to periodic payment are calculated using actuarial methods consistent with those applied to life insurance contracts. Discounting is applied if allowed by the local accounting principles used to measure the insurance liabilities. Discounting of liabilities is generally applied when there is a high level of certainty concerning the amount and settlement term of the cash outflows.

f. Liability adequacy testing

At each reporting date the adequacy of the life insurance liabilities, net of VOBA and DPAC, is assessed using a liability adequacy test. Additional recoverability tests for policies written in the last year may also result in loss recognition.

Life insurance contracts for account of policyholders and any related VOBA and DPAC are considered in the liability adequacy test performed on insurance contracts. To the extent that the account balances are insufficient to meet future benefits and expenses, additional liabilities are established and included in the liability for life insurance.

All tests performed within the Group are based on current estimates of all contractual future cash flows, including related cash flows from policyholder options and guarantees. A number of valuation methods are applied, including discounted cash flow methods, option pricing models and stochastic modelling. Aggregation levels are set either on geographical jurisdiction or at the level of portfolio of contracts that are subject to broadly similar risks and managed together as a single portfolio. To the extent that the tests involve discounting of future cash flows, the interest rate applied is based on market rates or is based on management’s expectation of the future return on investments. These future returns on investments take into account management’s best estimate related to the actual investments and, where applicable, reinvestments of these investments at maturity.

Any resulting deficiency is recognized in the income statement, initially by impairing the DPAC and VOBA and subsequently by establishing an insurance liability for the remaining loss, unless shadow loss recognition has taken place.

The adequacy of the non-life insurance liability is tested at each reporting date. Changes in expected claims that have occurred, but that have not been settled, are reflected by adjusting the liability for claims and future benefits. The reserve for unexpired risk is increased to the extent that the future claims and expenses in respect of current insurance contracts exceed the future premiums plus the current unearned premium reserve.

NOTE 2.20 Investment contracts

Contracts issued by the Group that do not transfer significant insurance risk, but do transfer financial risk from the policyholder to the Group are accounted for as investment contracts. Depending on whether the Group or the policyholder runs the risks associated with the investments allocated to the contract, the liabilities are classified as investment contracts or as investment contracts for account of policyholders. Investment contract liabilities are recognized when the contract is entered into and are derecognized when the contract expires, is discharged or is cancelled.

a. Investment contracts with discretionary participation features

Some investment contracts have participation features whereby the policyholder has the right to receive potentially significant additional benefits which are based on the performance of a specified pool of investment contracts, specific investments held by the Group or on the issuer’s net income. If the Group has discretion over the amount or timing of the distribution of the returns to policyholders, the investment contract liability is measured based on the accounting principles that apply to insurance contracts with similar features.

Some unitized investment contracts provide policyholders with the option to switch between funds with and without discretionary participation features. The entire contract is accounted for as an investment contract with discretionary participation features if there is evidence of actual switching resulting in discretionary participation benefits that are a significant part of the total contractual benefits.

b. Investment contracts without discretionary participation features

At inception investment contracts without discretionary features are designated as at fair value through profit or loss if by doing so a potential accounting mismatch is eliminated or significantly reduced or if the contract is managed on a fair value basis. Some investment contracts with embedded derivatives that have not been bifurcated are also carried at fair value through profit or loss. All other contracts are carried at amortized cost.

The contracts are initially recognized at transaction price less, in the case of investment contracts not carried at fair value through profit or loss, any transaction costs directly attributable to the issue of the contract. Fees and commissions incurred with the recognition of a contract held at fair value through profit or loss and that are not related to investment management services provided under the contract are recognized immediately in the income statement.

Subsequently, contracts designated as at fair value through profit or loss are measured at fair value, which generally equals the contractholder’s account value. All changes in the fair value are recognized in the income statement as incurred. Other investment contracts without discretionary participation features are carried at amortized cost based on the expected cash flows and using the effective interest rate method. The expected future cash flows are re-estimated at each reporting date and the carrying amount of the financial liability is recalculated as the present value of estimated future cash flows using the financial liability’s original effective interest rate. Any adjustment is immediately recognized in the income statement.

The consolidated financial statements provide information on the fair value of all financial liabilities, including those carried at amortized cost. As these contracts are not quoted in active markets, their value is determined by using valuation techniques, such as discounted cash flow methods and stochastic modeling. For investment contracts that can be cancelled by the policyholder, the fair value cannot be less than the surrender value.

c. Investment contracts for account of policyholders

Investment contracts for account of policyholders are investment contracts for which the actual return on investments allocated to the contract is passed on to the policyholder. Also included are participations held by third parties in consolidated investment funds that meet the definition of a financial liability.

Investment contracts for account of policyholders are designated as at fair value through profit or loss. Contracts with unit-denominated payments are measured at current unit values, which reflect the fair values of the assets of the fund.

For unit-linked contracts without discretionary participation features and subject to actuarial funding, the Group recognizes a liability at the funded amount of the units. The difference between the gross value of the units and the funded value is treated as an initial fee paid by the policyholder for future asset management services and is deferred. It is subsequently amortized over the life of the contract or a shorter period, if appropriate.

NOTE 2.21 Provisions

A provision is recognized for present legal or constructive obligations arising from past events, when it is probable that it will result in an outflow of economic benefits and the amount can be reliably estimated.

The amount recognized as a provision is the best estimate of the expenditure required to settle the present obligation at the balance sheet date, considering all its inherent risks and uncertainties, as well as the time value of money. The unwinding of the effect of discounting is recorded in the income statement as an interest expense.

Onerous contracts

With the exception of insurance contracts and investment contracts with discretionary participation features for which potential future losses are already considered in establishing the liability, a provision is recognized for onerous contracts in which the unavoidable costs of meeting the resulting obligations exceed the expected future economic benefits.

NOTE 2.22 Assets and liabilities relating to employee benefits

a. Short-term employee benefits

A liability is recognized for the undiscounted amount of short-term employee absences benefits expected to be paid within one year after the end of the period in which the service was rendered. Accumulating short-term absences are recognized over the period in which the service is provided. Benefits that are not service-related are recognized when the event that gives rise to the obligation occurs.

b. Post-employment benefits

The Group has issued defined contribution plans and defined benefit plans. A plan is classified as a defined contribution plan when the Group has no further obligation than the payment of a fixed contribution. All other plans are classified as defined benefit plans.

Defined contribution plans

The contribution payable to a defined contribution plan for services provided is recognized as an expense in the income statement. An asset is recognized to the extent that the contribution paid exceeds the amount due for services provided.

Defined benefit plans

The defined benefit obligation is based on the terms and conditions of the plan applicable on the balance sheet date. Plan improvements are charged directly to the income statement, unless they are conditional on the continuation of employment. In this case the related cost is deducted from the liability as past service cost and amortized over the vesting period. In measuring the defined benefit obligation the Group uses the projected unit credit method and actuarial assumptions that represent the best estimate of future variables. The benefits are discounted using an interest rate based on the market yields for high-quality corporate bonds on the balance sheet date.

Plan assets are qualifying insurance policies and assets held by long-term employee benefit funds that can only be used to pay the employee benefits under the plan and are not available to the Group’s creditors. They are measured at fair value and are deducted in determining the amount recognized on the balance sheet.

The cost of the plans is determined at the beginning of the year, based on the prevalent actuarial assumptions, discount rate and expected return on plan assets. Changes in assumptions, discount rate and experience adjustments are not charged to the income statement in the period in which they occur, but are deferred.

The unrecognized actuarial gains and losses are amortized in a straight line over the average remaining working life of the employees covered by the plan, to the extent that the gains or losses exceed the corridor limits. The corridor is defined as ten percent of the greater of the defined benefit obligation or the plan assets. The amortization charge is reassessed at the beginning of each year. The corridor approach described above was not applied retrospectively to periods prior to the transition to IFRS (January 1, 2004).

c. Share-based payments

The Group has issued share-based plans that entitle employees to receive equity instruments issued by the Group or cash payments based on the price of AEGON N.V. common shares. Some plans provide employees of the Group with the choice of settlement.

For share option plans that are equity-settled, the expense recognized is based on the fair value on the grant date of the share options, which does not reflect any performance conditions other than conditions linked to the price of the Group’s shares. The cost is recognized in the income statement, together with a corresponding increase in shareholders’ equity, as the services are rendered. During this period the cumulative expense recognized at the reporting date reflects management’s best estimate of the number of shares expected to vest ultimately.

Share appreciation right plans are initially recognized at fair value at the grant date, taking into account the terms and conditions on which the instruments were granted. The fair value is expensed over the period until vesting, with recognition of a corresponding liability. The liability is remeasured at each reporting date and at the date of settlement, with any changes in fair value recognized in the income statement.

Share option plans that can be settled in either shares or cash at the discretion of the employee are accounted for as a compound financial instrument, which includes a debt component and an equity component.

NOTE 2.23 Deferred revenue liability

Initial fees and front-end loadings paid by policyholders and other clients for future investment management services related to investment contracts without discretionary participation features are deferred and recognized as revenue when the related services are rendered.

NOTE 2.24 Tax assets and liabilities

a. Current tax assets and liabilities

Tax assets and liabilities for current and prior periods are measured at the amount that is expected to be received from or paid to the taxation authorities, using the tax rates that have been enacted or substantively enacted by the reporting date.

b. Deferred tax assets and liabilities

Deferred tax assets and liabilities are recognized for the estimated future tax effects of temporary differences between the carrying value of an item and its tax value, with the exception of differences arising from the initial recognition of goodwill and of assets and liabilities that do not impact taxable or accounting profits. A tax asset is recognized for tax loss carryforwards to the extent that it is probable at the reporting date that future taxable profits will be available against which the unused tax losses and unused tax credits can be utilized.

Deferred tax liabilities relating to investments in subsidiaries, associates and joint ventures are not recognized if the Group is able to control the timing of the reversal of the temporary difference and it is probable that the difference will not be reversed in the foreseeable future.

Deferred tax assets and liabilities are reviewed at the balance sheet date and are measured at tax rates that are expected to apply when the asset is realized or the liability is settled. The carrying amount is not discounted and reflects the Group’s expectations concerning the manner of recovery or settlement.

Deferred tax assets and liabilities are recognised in correlation to the underlying transaction either in profit and loss, other comprehensive income or directly in equity.

NOTE 2.25 Contingent assets and liabilities

Contingent assets are disclosed in the notes if the inflow of economic benefits is probable, but not virtually certain. When the inflow of economic benefits becomes virtually certain, the asset is no longer contingent and its recognition is appropriate.

A provision is recognized for present legal or constructive obligations arising from past events, when it is probable that it will result in an outflow of economic benefits and the amount can be reliably estimated. If the outflow of economic benefits is not probable, a contingent liability is disclosed, unless the possibility of an outflow of economic benefits is remote.

NOTE 2.26 Premium income

Gross premiums, including recurring and single premiums, from life and non-life insurance and investment contracts with discretionary participation features are recognized as revenue when they become receivable. Not reflected as premium income are deposits from certain products that are sold only in the United States and Canada, such as deferred annuities. For these products the surrender charges and charges assessed have been included in gross premiums.

Premium loadings for installment payments and additional payments by the policyholder towards costs borne by the insurer are included in the gross premiums. Rebates that form part of the premium rate, such as no-claim rebates, are deducted from the gross premium, others are recognized as an expense. Depending on the applicable local accounting principles, bonuses that are used to increase the insured benefits may be recognized as gross premiums.

NOTE 2.27 Investment income

For interest-bearing assets, interest is recognized as it accrues and is calculated using the effective interest rate method. Fees and commissions that are an integral part of the effective yield of the financial assets or liabilities are recognized as an adjustment to the effective interest rate of the instrument. Investment income includes the interest income and dividend on financial assets carried at fair value through profit or loss.

Investment income also includes dividends accrued and rental income due, as well as fees received for security lending.

NOTE 2.28 Fee and commission income

Fees and commissions from investment management services and mutual funds, and from sales activities are recognized as revenue over the period in which the services are performed or the sales have been closed.

NOTE 2.29 Policyholder claims and benefits

Policyholder claims and benefits consist of claims and benefits paid to policyholders, including benefit claims in excess of account value for products for which deposit accounting is applied and the change in the valuation of liabilities for insurance and investment contracts. It includes internal and external claims handling costs that are directly related to the processing and settlement of claims. Amounts receivable in respect of salvage and subrogation are also considered.

NOTE 2.30 Results from financial transactions

Results from financial transactions include:

Net fair value change of general account financial investments at fair value through profit or loss, other than derivatives

Net fair value change of general account financial investments at fair value through profit or loss, other than derivatives include fair value changes of financial assets carried at fair value through profit or loss. The net gains and losses do not include interest or dividend income.

Realized gains and losses on financial investments

Gains and losses on financial investments include realized gains and losses on general account financial assets, other than those classified as at fair value through profit or loss.

Net fair value change of derivatives

All changes in fair value are recognized in the income statement, unless the derivative has been designated as a hedging instrument in a cash flow hedge or a hedge of a net investment in a foreign operation. Fair value movements of fair value hedge instruments are offset by the fair value movements of the hedged item, the resulting hedge ineffectiveness, if any, is included in this line. In addition the fair value movements of bifurcated embedded derivatives are included in this line.

Net fair value change on for account of policyholder financial assets at fair value through profit or loss

Net fair value change on for account of policyholder financial assets at fair value through profit or loss include fair value movements of investments held for account of policyholders (refer to note 2.9). The net fair value change does not include interest or dividend income.

Other

In addition, results from financial transactions include gains / losses on real estate (general account and account of policyholder), net foreign currency gains / (losses) and net fair value change on borrowings and other financial liabilities and realized gains on repurchased debt.

NOTE 2.31 Impairment charges

Impairment charges include impairments on investments in financial assets, impairments on the valuation of insurance assets and liabilities and other non-financial assets and receivables. Refer to note 39.

NOTE 2.32 Interest charges and related fees

Interest charges and related fees includes interest expense on trust pass-through securities and other borrowings. Interest expense on trust pass-through securities and other borrowings carried at amortized cost is recognized in profit or loss using the effective interest method.

NOTE 2.33 Leases

Arrangements that do not take the form of a lease but convey a right to use an asset in return for a payment are assessed at inception to determine whether they are, or contain, a lease. This involves an assessment of whether fulfillment of the arrangement is dependent on the use of a specific asset and whether the purchaser (lessee) has the right to control the use of the underlying asset.

Leases that do not transfer substantially all the risks and rewards of ownership are classified as operating leases.

Payments made under operating leases, where the Group is the lessee, are charged to the income statement on a straight line basis over the period of the lease.

Where the Group is the lessor under an operating lease, the assets subject to the operating lease arrangement are presented in the balance sheet according to the nature of the asset. Income from these leases are recognized in the income statement on a straight line basis over the lease term, unless another systematic basis is more representative of the time pattern in which use benefit derived from the leased asset is diminished.

NOTE 2.34 Events after the balance sheet date

The financial statements are adjusted to reflect events that occurred between the balance sheet date and the date when the financial statements are authorized for issue, provided they give evidence of conditions that existed at the balance sheet date.

Events that are indicative of conditions that arose after the balance sheet date are disclosed, but do not result in an adjustment of the financial statements themselves.

NOTE 3 Critical accounting estimates and judgment in applying accounting policies

Application of the accounting policies in the preparation of the financial statements requires management to apply judgment involving assumptions and estimates concerning future results or other developments, including the likelihood, timing or amount of future transactions or events. There can be no assurance that actual results will not differ materially from those estimates. Accounting policies that are critical to the financial statement presentation and that require complex estimates or significant judgment are described in the following sections.

Valuation of assets and liabilities arising from life insurance contracts

The liability for life insurance contracts with guaranteed or fixed account terms is either based on current assumptions or on the assumptions established at inception of the contract, reflecting the best estimates at the time increased with a margin for adverse deviation. All contracts are subject to liability adequacy testing which reflects management’s current estimates of future cash flows. To the extent that the liability is based on current assumptions, a change in assumptions will have an immediate impact on the income statement. Also, if a change in assumption results in the failure of the liability adequacy test, the entire deficiency is recognized in the income statement. To the extent that the failure relates to unrealized gains and losses on available-for-sale investments, the additional liability is recognized in the revaluation reserve in equity.

Some insurance contracts without a guaranteed or fixed contract term contain guaranteed minimum benefits. Depending on the nature of the guarantee, it may either be bifurcated and presented as a derivative or be reflected in the value of the insurance liability in accordance with local accounting principles. Given the dynamic and complex nature of these guarantees, stochastic techniques under a variety of market return scenarios are often used for measurement purposes. Such models require management to make numerous estimates based on historical experience and market expectations. Changes in these estimates will immediately affect the income statement.

In addition, certain acquisition costs related to the sale of new policies and the purchase of policies already in force are recorded as DPAC and VOBA assets respectively and are amortized to the income statement over time. If the assumptions relating to the future profitability of these policies are not realized, the amortization of these costs could be accelerated and may even require write offs due to unrecoverability.

Actuarial assumptions

The main assumptions used in measuring DPAC, VOBA and the liabilities for life insurance contracts with fixed or guaranteed terms relate to mortality, morbidity, investment return and future expenses. Depending on local accounting principles, surrender rates may be considered.

Mortality tables applied are generally developed based on a blend of company experience and industry wide studies, taking into consideration product characteristics, own risk selection criteria, target market and past experience. Mortality experience is monitored through regular studies, the results of which are fed into the pricing cycle for new products and reflected in the liability calculation when appropriate. For contracts insuring survivorship, allowance may be made for further longevity improvements. Morbidity assumptions are based on own claims severity and frequency experience, adjusted where appropriate for industry information.

Investment assumptions are either prescribed by the local regulator or based on management’s future expectations. In the latter case, the anticipated future investment returns are set by management on a countrywide basis, considering available market information and economic indicators. A significant assumption related to estimated gross profits on variable annuities and variable life insurance products in the United States and some of the smaller country units, is the annual long-term growth rate of the underlying assets. As equity markets do not move in a systematic manner, assumptions as to the long-term growth rate are made after considering the effects of short-term variances from the long-term assumptions (a reversion to the mean assumption) and the effects of hedging. The reconsideration of this assumption may affect the original DPAC or VOBA amortization schedule, referred to as DPAC or VOBA unlocking. The difference between the original DPAC or VOBA amortization schedule and the revised schedule, which is based on estimates of actual and future gross profits, is recognized in the income statement as an expense or a benefit in the period of determination.

Estimated gross profits on variable life and variable annuity products in the Americas include a short- and long term equity market return assumption. As of the second quarter of 2010, AEGON held its short-term equity market return assumption equal to its long-term assumption at 9%, reflecting continued volatility experienced in equity markets and the use of macro equity hedges.

At December 31, 2010, other assumptions applicable to the reversion to the mean assumptions for variable products, primarily variable annuities, were as follows in the United States: gross long-term equity growth rate of 9% (2009: 9%); gross short- and long-term fixed security growth rate of 6% (2009: 6%); and the gross short- and long-term growth rate for money market funds of 3.5% (2009: 3.5%).

Assumptions on future expenses are based on the current level of expenses, adjusted for expected expense inflation if appropriate.

Surrender rates depend on product features, policy duration and external circumstances such as the interest rate environment and competitor and policyholder behavior. Credible own experience, as well as industry published data, are used in establishing assumptions. Lapse experience is correlated to mortality and morbidity levels, as higher or lower levels of surrenders may indicate future claims will be higher or lower than anticipated. Such correlations are accounted for in the mortality and morbidity assumptions based on the emerging analysis of experience.

Fair value of financial instruments, borrowings and derivatives determined using valuation techniques

Investment contracts issued by AEGON are either carried at fair value (if they are designated as financial liabilities at fair value through profit or loss) or amortized cost (with fair value being disclosed in the notes to the consolidated financial statements). These contracts are not quoted in active markets and their fair values are determined by using valuation techniques, such as discounted cash flow methods and stochastic modeling or in relation to the unit price of the underlying assets. All models are validated and calibrated. A variety of factors are considered, including time value, volatility, policyholder behavior, servicing costs and fair values of similar instruments. Credit spread is considered in measuring the fair value of derivatives (including derivatives embedded in insurance contracts), borrowings and other liabilities.

Fair value of financial assets and liabilities

The estimated fair values of AEGON’s financial assets and liabilities are presented in the respective notes to the balance sheet together with their carrying values. The estimated fair values correspond with the amounts at which the financial instruments at AEGON’s best estimate could have been traded at the balance sheet date between knowledgeable, willing parties in arm’s length transactions. When available, AEGON uses quoted market prices in active markets to determine the fair value of investments and derivatives. In the absence of an active market, the fair value of investments in financial assets is estimated by using other market observable data such as corroborated external quotes and present value or other valuation techniques. An active market is one in which transactions are taking place regularly on an arm’s length basis. Although not necessarily determinative, indicators that a market is inactive are lower transaction volumes, reduced transaction sizes and, in some cases, no observable trading activity for short periods. A fair value measurement assumes that an asset or liability is exchanged in an orderly transaction between market participants, and accordingly, fair value is not determined based upon a forced liquidation or distressed sale.

Valuation techniques are used when AEGON determines the market is inactive or quoted market prices are not available for the asset or liability at the measurement date. However, the fair value measurement objective remains the same, that is, to arrive at the price at which an orderly transaction would occur between market participants at the measurement date. Therefore, unobservable inputs reflect AEGON’s own assumptions about the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk). These inputs are developed based on the best information available.

AEGON employs an oversight structure over valuation of financial instruments that includes appropriate segregation of duties. Senior management, independent of the investing functions, is responsible for the oversight of control and valuation policies and for reporting the results of these policies. For fair values determined by reference to external quotation or evidenced pricing parameters, independent price determination or validation is utilized to corroborate those inputs. Further details of the validation processes are set out below.

Shares

Fair values for unquoted shares are estimated using observations of the price / earnings or price / cash flow ratios of quoted companies considered comparable to the companies being valued. Valuations are adjusted to account for company-specific issues and the lack of liquidity inherent in an unquoted investment. Illiquidity adjustments are generally based on available market evidence. In addition, a variety of other factors are reviewed by management, including, but not limited to, current operating performance, changes in market outlook and the third-party financing environment.

The fair values of investments held in non-quoted investment funds (hedge funds, private equity funds) are determined by management after taking into consideration information provided by the fund managers. AEGON reviews the valuations each month and performs analytical procedures and trending analyses to ensure the fair values are appropriate.

Debt securities

When available, AEGON uses quoted market prices in active markets to determine the fair value of its debt securities. These market quotes are obtained through index prices or pricing services.

The fair values of debt securities are determined by management after taking into consideration several sources of data. AEGON’s valuation policy dictates that publicly available prices are initially sought from several third party pricing services. In the event that pricing is not available from these services, those securities are submitted to brokers to obtain quotes. The majority of brokers’ quotes are non-binding. As part of the pricing process, AEGON assesses the appropriateness of each quote (i.e., as to whether the quote is based on observable market transactions or not) to determine the most appropriate estimate of fair value. Lastly, securities are priced using internal cash flow modeling techniques. These valuation methodologies commonly use the following inputs: reported trades, bids, offers, issuer spreads, benchmark yields, estimated prepayment speeds, and / or estimated cash flows. Only pricing services and brokers with a substantial presence in the market and with appropriate experience and expertise are used.

Third party pricing services will often determine prices using recently reported trades for identical or similar securities. The pricing service makes adjustments for the elapsed time from the trade date to the balance sheet date to take into account available market information. Lacking recently reported trades, third party pricing services and brokers will use modeling techniques to determine a security price where expected future cash flows are developed based on the performance of the underlying collateral and discounted using an estimated market rate. Also included within the modeling techniques for ABS – Housing, RMBS, CMBS and CDO securities are estimates of the speed at which principal will be repaid over their remaining lives. These estimates are determined based on historical repayment speeds (adjusted for current markets) as well as the structural characteristics of each security.

Each month, AEGON performs an analysis of the inputs obtained from third party services and brokers to ensure that the inputs are reasonable and produce a reasonable estimate of fair value. AEGON’s asset specialists and investment valuation specialists consider both qualitative and quantitative factors as part of this analysis. Several examples of analytical procedures performed include, but are not limited to, recent transactional activity for similar debt securities, review of pricing statistics and trends and consideration of recent relevant market events.

Credit ratings are also an important consideration in the valuation of securities and are included in the internal process for determining AEGON’s view of the risk associated with each security. However, AEGON does not rely solely on external credit ratings and there is an internal process, based on market observable inputs, for determining AEGON’s view of the risks associated with each security.

AEGON’s portfolio of private placement securities (held at fair value under the classification of available-for-sale or fair value through profit or loss) is valued using a matrix pricing methodology. The pricing matrix is obtained from a third party service provider and indicates current spreads for securities based on weighted average life, credit rating, and industry sector. Each month, AEGON’s asset specialists review the matrix to ensure the spreads are reasonable by comparing them to observed spreads for similar bonds traded in the market. Other inputs to the valuation include coupon rate, the current interest rate curve used for discounting and an illiquidity premium to account for the illiquid nature of these securities. The illiquidity premiums are determined based upon the pricing of recent transactions in the private placements market; comparing the value of the privately offered security to a similar public security. The impact of the illiquidity premium for private placement securities to the overall valuation is insignificant.

Mortgages, policy loans and private loans (held at amortized cost)

For private loans, fixed interest mortgage and other loans originated by the Group, the fair value used for disclosure purposes is estimated by discounting expected future cash flows using a current market rate applicable to financial instruments with similar yield, credit quality and maturity characteristics.

The fair value of floating interest rate mortgages, policy loans and private placements used for disclosure purposes is assumed to be approximated by their carrying amount adjusted for changes in credit risk. Credit risk adjustments are based on market observable credit spreads if available, or management’s estimate if not market observable.

Money market and other short term investments and deposits with financial institutions

The fair value of assets maturing within a year is assumed to be approximated by their carrying amount adjusted for credit risk where appropriate. Credit risk adjustments are based on market observable credit spreads if available, or management’s estimate if not market observable.

Free standing financial derivatives

Where quoted market prices are not available, other valuation techniques, such as option pricing or stochastic modeling, are applied. The valuation techniques incorporate all factors that a typical market participant would consider and are based on observable market data when available. Models are validated before they are used and calibrated to ensure that outputs reflect actual experience and comparable market prices.

Fair values for exchange-traded derivatives, principally futures and certain options, are based on quoted market prices in active markets. Fair values for over-the-counter (OTC) derivative financial instruments represent amounts estimated to be received from or paid to a third party in settlement of these instruments. These derivatives are valued using pricing models based on the net present value of estimated future cash flows, directly observed prices from exchange-traded derivatives, other OTC trades, or external pricing services. Most valuations are derived from swap and volatility matrices, which are constructed for applicable indices and currencies using current market data from many industry standard sources. Option pricing is based on industry standard valuation models and current market levels, where applicable. The pricing of complex or illiquid instruments is based on internal models or  an independent third party. For long-dated illiquid contracts, extrapolation methods are applied to observed market data in order to estimate inputs and assumptions that are not directly observable. To value OTC derivatives, management uses observed market information, other trades in the market and dealer prices.

AEGON normally mitigates counterparty credit risk in derivative contracts by entering into collateral agreements where practical and in ISDA master netting agreements for each of the Group’s legal entities to facilitate AEGON’s right to offset credit risk exposure. In the event no collateral is held by AEGON or the counterparty, the fair value of derivatives is adjusted for credit risk based on market observable spreads. Changes in the fair value of derivatives attributable to changes in counterparty credit risk were not significant.

Derivatives embedded in insurance contracts including guarantees

Certain guarantees for minimum benefits in insurance and investment contracts are carried at fair value. These guarantees include guaranteed minimum withdrawal benefits (GMWB) in the United States which are offered on some AEGON variable annuity products and are also assumed from a ceding company; minimum interest rate guarantees on insurance products offered in The Netherlands, including group pension and traditional products; Variable annuities sold in Europe; and guaranteed minimum accumulation benefits on segregated funds sold in Canada.

The fair values of these guarantees are calculated as the present value of future expected payments to policyholders less the present value of assessed rider fees attributable to the guarantees. Given the complexity and long-term nature of these guarantees which are unlike instruments available in financial markets, their fair values are determined by using stochastic techniques under a variety of market return scenarios. A variety of factors are considered, including expected market rates of return, equity and interest rate volatility, credit spread, correlations of market returns, discount rates and actuarial assumptions.

The expected returns are based on risk-free rates. The credit spread is set by using the credit default swap (CDS) spreads of a reference portfolio of life insurance companies (including AEGON), adjusted to reflect the subordination of senior debt holders at the holding company level to the position of policyholders at the operating company level (who have priority in payments to other creditors). Because CDS spreads for US life insurers differ significantly from that for European life insurers, AEGON’s assumptions are set by region to reflect these differences in the valuation of the guarantee embedded in the insurance contracts.

For equity volatility, AEGON uses a term structure assumption with market-based implied volatility inputs for the first five years and a long-term forward rate assumption of 25% thereafter. The volume of observable option trading from which volatilities are derived generally declines as the contracts’ term increases, therefore, the volatility curve grades from implied volatilities for five years to the ultimate rate. The resulting volatility assumption in year 20 for the S&P 500 index (expressed as a spot rate) was 24.8% at December 31, 2010 and 25.3% at December 31, 2009. Correlations of market returns across underlying indices are based on historical market returns and their inter-relationships over a number of years preceding the valuation date. Assumptions regarding policyholder behavior, such as lapses, included in the models are derived in the same way as the assumptions used to measure insurance liabilities.

These assumptions are reviewed at each valuation date, and updated based on historical experience and observable market data, including market transactions such as acquisitions and reinsurance transactions.

Since many of the assumptions are unobservable and are considered to be significant inputs to the liability valuation, the liability included in future policy benefits has been reflected within Level III of the fair value hierarchy. Refer to note 45 for more details about AEGON’s guarantees.

Investment contracts

Similar to embedded derivatives in insurance contracts, certain investment products are not quoted in active markets and their fair values are determined by using valuation techniques. Because of the dynamic and complex nature of these cash flows, stochastic or similar techniques under a variety of market return scenarios are often used. A variety of factors are considered, including expected market rates of return, market volatility, correlations of market returns, discount rates and actuarial assumptions.

The expected returns are based on risk-free rates, such as the current London Inter-Bank Offered Rate (LIBOR) swap rates and  associated forward rates or the current rates on local government bonds. Market volatility assumptions for each underlying index are based on observed market implied volatility data and / or observed market performance. Correlations of market returns for various underlying indices are based on observed market returns and their inter-relationships over a number of years preceding the valuation date. Current risk-free spot rates are used to determine the present value of expected future cash flows produced in the stochastic projection process.

Assumptions on customer behavior, such as lapses, included in the models are derived in the same way as the assumptions used to measure insurance liabilities.

Determination of fair value and fair value hierarchy

The following is a description of AEGON’s methods of determining fair value, and a quantification of its exposure to financial instruments measured at fair value.

Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable willing parties in an arm’s length transaction. Financial instruments measured at fair value on an ongoing basis include investments for the general account, investments for the account of policyholders, and investments designated at fair value and derivatives.

In accordance with IFRS 7 AEGON uses the following hierarchy for determining and disclosing the fair value of financial instruments:

• Level I: quoted prices (unadjusted) in active markets for identical assets or liabilities that AEGON can access at the measurement date;
• Level II: inputs other than quoted prices included within Level I that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices of identical or similar assets and liabilities) using valuation techniques for which all significant inputs are based on observable market data; and
• Level III: inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) using valuation techniques for which any significant input is not based on observable market data.

The best evidence of fair value is a quoted price in an actively traded market. In the event that the market for a financial instrument is not active or quoted market prices are not available, a valuation technique is used.

The judgment as to whether a market is active may include, although not necessarily determinative, lower transaction volumes, reduced transaction sizes and, in some cases, no observable trading activity for short periods. In inactive markets, assurance is obtained that the transaction price provides evidence of fair value or determined that the adjustments to transaction prices are necessary to measure the fair value of the instrument.

The majority of valuation techniques employ only observable market data, and so the reliability of the fair value measurement is high. However, certain financial instruments are valued on the basis of valuation techniques that feature one or more significant market inputs that are unobservable and, for such financial instruments, the derivation of fair value is more judgmental. An instrument in its entirety is classified as valued using significant unobservable inputs if, in the opinion of management, a significant proportion of the instrument’s carrying amount and / or inception profit (‘day 1 gain or loss’) is driven by unobservable inputs. ‘Unobservable’ in this context means that there is little or no current market data available from which to determine the price at which an arm’s length transaction would be likely to occur. It generally does not mean that there is no market data available at all upon which to base a determination of fair value.

Additional information is provided in the section headed ‘Effect of changes in significant unobservable assumptions to reasonably possible alternatives’ below.

Financial assets carried at fair value	Level I	Level II	Level III	Total 2010
Available-for-sale investments
Shares	680	63	555	1,298
Debt securities	18,148	73,000	3,788	94,936
Money market and other short-term instruments	–	10,141	–	10,141
Other investments at fair value	60	10	805	875
	18,888	83,214	5,148	107,250
Fair value through profit or loss
Shares	813	264	1	1,078
Debt securities	46	1,611	132	1,789
Money market and other short-term instruments	289	370	–	659
Other investments at fair value	–	581	1,205	1,786
Investments for account of policyholders1	81,442	61,309	2,352	145,103
Derivatives	24	6,049	178	6,251
	82,614	70,184	3,868	156,666
Total financial assets at fair value	101,502	153,398	9,016	263,916
Financial liabilities carried at fair value
Investment contracts	–	–	1,656	1,656
Investment contracts for account of policyholders	5,020	20,405	178	25,603
Borrowings2	520	467	–	987
Derivatives	10	4,911	1,050	5,971
	5,550	25,783	2,884	34,217
The investments for account of policyholders included in the table above represents those investments carried at fair value through profit or loss. Borrowings included in the table above contain those borrowings that are carried at fair value through profit or loss. Total borrowings on the balance sheet also contain borrowings carried at amortized cost that are not included in the above schedule.

Financial assets carried at fair value	Level I	Level II	Level III	Total 2009
Available-for-sale investments
Shares	531	123	443	1,097
Debt securities	17,487	67,895	4,334	89,716
Money market and other short-term instruments	1	9,178	10	9,189
Other investments at fair value	57	10	842	909
	18,076	77,206	5,629	100,911
Fair value through profit or loss
Shares	823	162	14	999
Debt securities	27	1,513	142	1,682
Money market and other short-term instruments	622	253	–	875
Other investments at fair value	–	440	1,080	1,520
Investments for account of policyholders1	70,224	51,797	2,776	124,797
Derivatives	96	4,651	170	4,917
	71,792	58,816	4,182	134,790
Total financial assets at fair value	89,868	136,022	9,811	235,701
Financial liabilities carried at fair value
Investment contracts	–	–	1,145	1,145
Investment contracts for account of policyholders	3,924	16,032	521	20,477
Borrowings2	506	453	–	959
Derivatives	29	4,004	1,683	5,716
	4,459	20,489	3,349	28,297
The investments for account of policyholders included in the table above represents those investments carried at fair value through profit or loss. Borrowings included in the table above contain those borrowings that are carried at fair value through profit or loss. Total borrowings on the balance sheet also contain borrowings carried at amortized cost that are not included in the above schedule.

Significant transfers between Level I and II

During 2010, the amount of assets transferred from Level I to Level II classification was EUR 469 million (2009: EUR 498 million). The reason for the change in level relates to changes in liquidity for specific debt securities.

Movements in Level III financial instruments measured at fair value

Financial assets carried at fair value	At January 1, 2010	Total gains / (losses) in income state ment1	Total gains / (losses)in OCI	Pur- chases	Sales	Settle- ments	Net ex-change differ- ences	Transfers from Levels I and II	Transfers to Levels I and II	At December 31, 2010	Total gains or losses for the period included in profit and loss for assets held at December 31, 20102
Available- for-sale investments
Shares	443	3	52	163	(159)	–	16	37	–	555	–
Debt securities	4,334	(85)	475	460	(339)	(418)	311	375	(1,325)	3,788	–
Money market and other short-term instruments	10	–	–	–	(10)	–	–	–	–	–	–
Other investments at fair value	842	(140)	(73)	172	(47)	(17)	68	–	–	805	–
	5,629	(222)	454	795	(555)	(435)	395	412	(1,325)	5,148	–
Fair value through profit or loss
Shares	14	1	–	–	(15)	–	1	–	–	1	–
Debt securities	142	–	2	1	(25)	(1)	1	19	(7)	132	(2)
Other investments at fair value	1,080	66	–	159	(149)	–	84	77	(112)	1,205	62
Investments for account of policyholders	2,776	153	–	396	(1,108)	–	100	191	(156)	2,352	106
Derivatives	170	(28)	–	18	(6)	(6)	7	23	–	178	(2)
	4,182	192	2	574	(1,303)	(7)	193	310	(275)	3,868	164
Financial liabilities carried at fair value
Investment contracts	(1,145)	(511)	–	–	–	–	–	–	–	(1,656)	(511)
Investment contracts for account of policyholders	(521)	(18)	–	(24)	430	–	(45)	–	–	(178)	–
Derivatives	(1,683)	720	1	(1)	9	–	(96)	–	–	(1,050)	–
	(3,349)	191	1	(25)	439	–	(141)	–	–	(2,884)	(511)
Includes impairments and movements related to fair value hedges. Total gains / (losses) for the period during which the financial instrument was in Level III.

Financial assets carried at fair value	At January 1, 2009	Total gains / (losses) in income state- ment1	Total gains / (losses) in OCI	Pur- chases	Sales	Settle- ments	Net ex- change differ- ences	Trans- fers from Levels I and II	Trans- fers to Levels I and II	At December 31, 2009	Total gains or losses for the period included in profit and loss for assets held at December 31, 20092
Available-for-sale investments
Shares	729	115	(295)	264	(363)	–	(7)	–	–	443	–
Debt securities	6,234	(341)	930	847	(358)	(727)	(130)	343	(2,464)	4,334	–
Money market and other short-term instruments	61	–	–	–	(51)	–	–	–	–	10	–
Other investments at fair value	841	(141)	(22)	230	(35)	(2)	(29)	–	–	842	–
	7,865	(367)	613	1,341	(807)	(729)	(166)	343	(2,464)	5,629	–
Fair value through profit or loss
Shares	73	4	–	–	(62)	–	(1)	–	–	14	1
Debt securities	217	(11)	9	–	(66)	(7)	2	6	(8)	142	5
Other investments at fair value	1,379	(216)	–	126	(160)	–	(41)	95	(103)	1,080	(233)
Investments for account of policyholders	3,344	(196)	–	480	(840)	–	(12)	–	–	2,776	(25)
Derivatives	296	(129)	–	18	(2)	(34)	21	–	–	170	(118)
	5,309	(548)	9	624	(1,130)	(41)	(31)	101	(111)	4,182	(370)
Financial liabilities carried at fair value
Investment contracts	(2,410)	1,265	–	–	–	–	–	–	–	(1,145)	1,265
Investment contracts for account of policyholders	(301)	31	–	(287)	20	–	16	–	–	(521)	–
Derivatives	(2,354)	744	–	(3)	36	–	(106)	–	–	(1,683)	(32)
	(5,065)	2,040	–	(290)	56	–	(90)	–	–	(3,349)	1,233
Includes impairments and movements related to fair value hedges. Total gains / (losses) for the period during which the financial instrument was in Level III.

During 2010, AEGON transferred certain financial instruments from Levels I and II to Level III of the fair value hierarchy. The amount of the total assets transferred was EUR 722 million (2009: EUR 444 million). The reason for the change in level was that the market for these securities had become inactive, which led to a change in market observability of prices. Prior to transfer, the fair value for the Level I and II securities was determined using observable market transactions or corroborated broker quotes for the same or similar instruments. Since transfer, all such assets have been valued using valuation models incorporating significant non market-observable inputs.

Similarly, during 2010, AEGON transferred certain financial instruments from Level III to other levels of the fair value hierarchy. The recorded amount of the total assets transferred was EUR 1,600 million (2009: EUR 2,575 million). The change in level was mainly the result of a return of activity in the market for these securities.

The total net amount of gains recognized in the income statement on Level III financial instruments amount to EUR 161 million (pre-tax) (2009: EUR 1,125 million).

The following table shows the sensitivity of the fair value of Level III instruments to changes in key assumptions, by class of instrument:

Financial assets carried at fair value	Note	December 31, 2010			December 31, 2009
		Carrying amount	Effect of reasonably possible alternative assumptions (+/-)		Carrying amount	Effect of reasonably possible alternative assumptions (+/-)
			Increase	Decrease		Increase	Decrease
Available-for-sale investments
Shares	a	555	31	(31)	443	20	(20)
Debt securities	b	3,788	189	(189)	4,334	219	(219)
Money market and other short-term investments	b	–	–	–	10	1	(1)
Other		805	11	(10)	842	13	(13)
Financial assets designated at fair value through profit or loss 1
Shares		–	–	–	14	1	(1)
Debt securities		132	7	(7)	142	15	(15)
Other investments at fair value	c	1,205	177	(177)	1,080	136	(136)
Derivatives	d	38	3	(3)	27	3	(3)
Financial liabilities carried at fair value
Investment contracts	e	1,656	126	(118)	1,145	94	(87)
Derivatives	f	1,050	102	(99)	1,683	103	(96)
Investments for account of policyholders are excluded from the reasonably possible alternative assumptions disclosure. Policyholder assets, and their returns, belong to policyholders and do not impact AEGON’s net income or equity. The effect on total assets is offset by the effect on total liabilities.

In order to determine reasonably possible alternative assumptions, AEGON adjusted key unobservable models inputs as follows:

1. Available-for-sale shares include shares in the Federal Home Loan Bank for an amount of EUR 178 million (2009: EUR 194 million) that are measured at par. The bank has implicit financial support from the United States government. The redemption value of the shares is fixed at par and can only be redeemed by the bank. Remaining share positions were stressed by 10% up or down.
2. Debt securities and money market and other short-term investments mainly consist of corporate bonds (EUR 1,117 million; 2009: EUR 1,239 million) and other structured debt securities (EUR 2,610 million; 2009: EUR 3,020 million). For corporate bonds the most significant unobservable input for the valuation of these securities is the credit spread / illiquidity premium. AEGON adjusted the price, based on the bid / ask spread AEGON observed in the market for these types of securities. For investments in structured debt securities (ABS, RMBS and CMBS), the most significant unobservable input for valuation of these securities is the credit spread / illiquidity premium. AEGON adjusted the discount rate by 100 basis points up or down for this input.
3. Other investments at fair value include investments exposed to real estate (EUR 475 million; 2009: EUR 444 million) and private equity investments (EUR 692 million; 2009: EUR 575 million). AEGON adjusted the assumption pertaining to real estate values up or down by 10%. This change is reflective of the range presented to senior management when analyzing investment opportunities for approval. For private equity investments the underlying investments are of a very diversified nature in terms of type of investments, investment strategy and sector. There is no one significant unobservable assumption or combination of assumptions that could be identified and used to compute a reasonably possible alternative assumption analysis for this portfolio.
4. Derivatives exclude derivatives for account of policyholders amounting to EUR 140 million (2009: EUR 143 million).
5. Investment contracts reflect the fair value of guarantees issued for which the most significant unobservable input is the credit spread. The credit spread was increased or decreased by 20 basis points.
6. Derivatives that depend on the yield were stressed using an increase or decrease of the yield by 100 basis points. Derivatives also include embedded derivatives related to guarantees (EUR 0.9 billion; 2009: EUR 0.8 billion) for which the most significant unobservable input is the credit spread. The credit spread was increased or decreased by 20 basis points.

 

Impairment of financial assets

There are a number of significant risks and uncertainties inherent in the process of monitoring investments and determining if impairment exists. These risks and uncertainties include the risk that the Group’s assessment of an issuer’s ability to meet all of its contractual obligations will change based on changes in the credit characteristics of that issuer and the risk that the economic outlook will be worse than expected or have more of an impact on the issuer than anticipated. Any of these situations could result in a charge against the income statement in a future period to the extent of the impairment charge recorded.

Debt securities

AEGON regularly monitors industry sectors and individual debt securities for evidence of impairment. This evidence may include one or more of the following: 1) deteriorating market to book ratio, 2) increasing industry risk factors, 3) deteriorating financial condition of the issuer, 4) covenant violations, 5) high probability of bankruptcy of the issuer or 6) recognized credit rating agency downgrades. Additionally, for ABS, cash flow trends and underlying levels of collateral are monitored.

Housing related ABS securities, CMBS and RMBS are monitored and reviewed on a monthly basis with detailed modeling completed on each portfolio quarterly. Model output is generated under a base and several stress-case scenarios. Housing related ABS, CMBS and RMBS asset specialists utilize modeling software to perform a loan-by-loan, bottom-up approach to modeling. The Housing related ABS models incorporate market estimates on the property market, borrowing characteristics, propensity of a borrower to default or prepay and the overall security structure. The CMBS models incorporate market estimates on the property market, capital markets, property cash flows and loan structure. The RMBS models incorporate external loan-level analytics to identify the riskiest securities. Once the entire pool is modelled, the results are analyzed by internal asset specialists to determine whether or not a particular tranche or holding is at risk for not collecting all contractual cash flows taking into account the seniority and other terms of the tranches held. AEGON impaired its particular tranche to fair value where it would not be able to receive all contractual cashflows.

In addition, at least quarterly, AEGON reviews all housing related ABS, CMBS and RMBS in relation to both severity and duration of unrealized losses. Reviews include a realized loss analysis and analysis where the remaining exposure to the issuer is in a material unrealized loss position. Housing related ABS, CMBS and RMBS noted on exception reports are specifically addressed by research and credit analysts who evaluate the unrealized losses based upon current market conditions, changes in credit spreads specific to the asset class, fundamentals related to the issuer and, if applicable, the available protection of the monoline wrapper. AEGON impairs a particular tranche to fair value where it would not be able to receive all contractual cash flows. The impairment analysis is therefore based on a combination of models and analyst reviews of market events on individual securities.

As at the reporting date, AEGON performed stress testing on each security within its subprime mortgage portfolio. The stress testing revealed a significant reduction in the level of protection provided by the subordination for all fixed rate and senior floating rate mortgage products. Factors included in the analysis depend upon the type of collateral but for subprime mortgages they include delinquencies, prepayment assumptions, the percentage of borrowers with mortgage insurance, the percentage of borrowers in states more at risk for declining home values (Florida, California, etc.) and credit enhancements.

More detailed cash flow modeling was performed on issuances identified through stress testing as being most at risk for payment interruption, such as issuances with a disproportionate number of borrowers from states experiencing significant declines in home values. Key assumptions used in the models are projected defaults, loss severities and prepayments. Each of these key assumptions varies greatly based on the significantly diverse characteristics of the current collateral pool for each security. Loan-to-value, loan size and borrower credit history are some of the key characteristics used to determine the level of assumption that is utilized. Defaults were estimated by identifying the loans that are in various delinquency buckets and defaulting a certain percentage of them over the near-term and long-term. Assumed defaults on delinquent loans are dependent on the specific security’s collateral attributes and historical performance. Loss severity assumptions were determined by observing historical rates from broader market data, while being adjusted for specific pool performance, collateral type, mortgage insurance and estimated loan modifications. Prepayments were estimated by examining historical averages of prepayment activity on the underlying collateral. Once the entire pool is modelled, the results are analyzed by the internal asset specialist to determine whether or not particular tranches or holdings are at risk for not collecting all contractual cash flows taking into account the seniority and other terms of the tranches held. AEGON impaired its particular tranche to fair value where it would not be able to receive all contractual cash flows.

Shares

Objective evidence of impairment of an investment in an equity instrument classified as available for sale includes information about significant changes with an adverse effect that have taken place in the technological, market, economic or legal environment in which the issuer operates, and indicates that the cost of the investment in the equity instrument may not be recovered. A significant or prolonged decline in the fair value of an investment in an equity instrument below its cost is also objective evidence of impairment.

Goodwill

Goodwill is reviewed and tested for impairment under a fair value approach. Goodwill must be tested for impairment at least annually or more frequently as a result of an event or change in circumstances that would indicate an impairment charge may be necessary. The recoverable amount is the higher of the value in use and fair value less costs to sell for a cash-generating unit. Impairment testing requires the determination of the value in use or fair value less costs for each of AEGON’s identified cash generating units.

The valuation utilized the best available information, including assumptions and projections considered reasonable and supportable by management. The assumptions used in the valuation involve significant judgments and estimates. Refer note 6 for more details.

Valuation of defined benefit plans

The liabilities or assets recognized in the balance sheet in respect of defined benefit plans is the difference between the present value of the projected defined benefit 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 defined benefit obligation is determined by discounting the estimated future cash flows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits 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 defined benefit plans and the level of pension expenses recognized in the future may be affected.

Recognition of deferred tax assets

Deferred tax assets are established for the tax benefit related to deductible temporary differences, carry forwards of unused tax losses and carry forwards of unused tax credits when in the judgment of management it is more likely than not that AEGON will receive the tax benefits. Since there is no absolute assurance that these assets will ultimately be realized, management reviews AEGON’s deferred tax positions periodically to determine if it is more likely than not that the assets will be realized. Periodic reviews include, among other things, the nature and amount of the taxable income and deductible expenses, the expected timing when certain assets will be used or liabilities will be required to be reported and the reliability of historical profitability of businesses expected to provide future earnings. Furthermore, management considers tax-planning strategies it can utilize to increase the likelihood that the tax assets will be realized. These strategies are also considered in the periodic reviews.

Valuation of share appreciation rights and share options

Because of the inability to measure the fair value of employee services directly, fair value is measured by reference to the fair value of the rights and options granted. This value is estimated using the binomial option pricing model, taking into account the respective vesting and exercise periods of the share appreciation rights and share options.

The volatility is derived from quotations from external market sources and the expected dividend yield is derived from quotations from external market sources and the binomial option pricing model. 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.

Recognition of provisions

Provisions are established for contingent liabilities when it is probable that a past event has given rise to a present obligation or loss and the amount can be reasonably estimated. Management exercises judgment in evaluating the probability that a loss will be incurred. The estimate of the amount of a loss requires management judgment in the selection of a proper calculation model and the specific assumptions related to the particular exposure.

NOTE 4 financial and insurance risks

General

As an insurance company, AEGON is in the ‘business of risk’ and as a result is exposed to a variety of risks. A description of AEGON’s risk management and control systems is given below on the basis of significant identified risks for us. Some risks, such as currency translation risk, are related to the international nature of AEGON’s business. Other risks include insurance related risks, such as changes in mortality and morbidity. However, AEGON’s largest exposures are to changes in financial markets (e.g. interest rate, credit and equity market risks) that affect the value of the investments, liabilities from products that AEGON sells, deferred expenses and value of business acquired.

AEGON manages risk at local level where business is transacted, based on principles and policies established at the Group level. AEGON’s integrated approach to risk management involves common measurement of risk and scope of risk coverage to allow for aggregation of the Group’s risk position.

To manage its risk exposure, AEGON has risk policies in place. Many of these policies are Group wide while others are specific to the unique situation of local businesses. The Group level policies limit the Group’s exposure to major risks such as equity, interest rates, credit and currency. The limits in these policies in aggregate remain within the Group’s overall tolerance for risk and the Group’s financial resources. Operating within this policy framework, AEGON employs risk management programs including asset liability management (ALM) processes and models, hedging programs (which are largely conducted via the use of derivatives) and insurance programs (which are largely conducted through the use of reinsurance). These risk management programs are in place in each country unit and are not only used to manage risk in each unit, but are also part of the Group’s overall risk management.

AEGON operates a Derivative Use Policy and a Reinsurance Use Policy to govern its usage of derivatives and reinsurance. These policies establish the control, authorization, execution and monitoring requirements of the usage of such instruments. In addition, these policies stipulate necessary mitigation of credit risk created through these derivatives and reinsurance risk management tools. For derivatives, credit risk is normally mitigated by requirements to post collateral via credit support annex agreements. For reinsurance, credit risk is normally mitigated by downgrade triggers allowing AEGON’s recapture of business, funds withheld by treaties (when AEGON owns the assets) and assets held in trust for the benefit of AEGON (in the event of reinsurer insolvency).

As part of its 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 under both stochastic and deterministic scenarios. Management uses the insight gained through these ’what if?’ scenarios to manage the Group’s risk exposure and capital position. The models, scenarios and assumptions used are reviewed regularly and updated 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. For each type of market risk, the analysis shows how net income and shareholders’ equity would have been affected by changes in the relevant risk variable that were reasonably possible at the reporting date. For each sensitivity test the impact of a reasonably possible change in a single factor is shown. The analysis considers the interdependency between interest rates and lapse behavior for products sold in the Americas where there is clear evidence of dynamic lapse behavior. Management action is taken into account to the extent that it is part of AEGON’s regular policies and procedures, such as established hedging programs. However, incidental management actions that would require a change in policies and procedures are not considered.

Each sensitivity analysis reflects the extent to which the shock tested would affect management’s critical accounting estimates and judgment in applying AEGON’s accounting policies*. Market-consistent assumptions underlying the measurement of non-listed assets and liabilities are adjusted to reflect the shock tested. The shock may also affect the measurement of assets and liabilities based on assumptions that are not observable in the market. For example, a shock in interest rates may lead to changes in the amortization schedule of DPAC or to increased impairment losses on equity investments. Although management’s short-term assumptions may change if there is a reasonable change in a risk factor, long-term assumptions will generally not be revised unless there is evidence that the movement is permanent. This fact is reflected in the sensitivity analyses provided below.

The accounting mismatch inherent in IFRS is also apparent in the reported sensitivities. A change in interest rates has an immediate impact on the carrying amount of assets measured at fair value. However the shock will not have a similar effect on the carrying amount of the related insurance liabilities that are measured based on prudent assumptions or on management’s long-term expectations. Consequently, the different measurement bases for assets and liabilities lead to increased volatility in IFRS net income and shareholders’ equity. AEGON has classified a significant part of its investment portfolio as ’available for sale‘, which is one of the main reasons why the economic shocks tested have a different impact on net income than on shareholders’ equity. Unrealized gains and losses on these assets are not recognized in the income statement but are booked directly to the revaluation reserves in shareholders’ equity, unless impaired. As a result, economic sensitivities predominantly impact shareholders’ equity but leave net income unaffected. The effect of movements of the revaluation reserve on capitalization ratios and capital adequacy are minimal. AEGON's target ratio for the composition of its capital base is based on shareholders' equity excluding the revaluation reserve.

The sensitivities do not reflect what the net income for the period would have been if risk variables had been different because the analysis is based on the exposures in existence at the reporting date rather than on those that actually occurred during the year. Nor are the results of the sensitivities intended to be an accurate prediction of AEGON’s future shareholders’ equity or earnings. The analysis does not take into account the impact of future new business, which is an important component of AEGON’s future earnings. It also does not consider all methods available to management to respond to changes in the financial environment, such as changing investment portfolio allocations or adjusting premiums and crediting rates. Furthermore, the results of the analyses cannot be extrapolated for wider variations since effects do not tend to be linear. No risk management process can clearly predict future results.

Currency exchange rate risk

As an international group, AEGON is subject to foreign currency translation risk. Foreign currency exposure exists when policies are denominated in currencies other than the issuer’s functional currency. Currency risk in the investment portfolios backing insurance and investment liabilities is managed using asset liability matching principles. Assets allocated to equity are kept in local currencies to the extent shareholders’ equity is required to satisfy regulatory and self-imposed capital requirements. Therefore, currency exchange rate fluctuations will affect the level of shareholders’ equity as a result of translation of subsidiaries into euro, the Group’s presentation currency. AEGON holds the remainder of its capital base (convertible core capital securities, perpetual capital securities, subordinated and senior debt) in various currencies in amounts that are targeted to correspond to the book value of the country units. This balancing mitigates currency translation impacts on shareholders’ equity and leverage ratios. AEGON does not hedge the income streams from the main non-euro units and, as a result, earnings may fluctuate due to currency translation. As AEGON has significant business segments in the Americas and in the United Kingdom, the principal sources of exposure from currency fluctuations are from the differences between the US dollar and the euro and between the UK pound and the euro. AEGON may experience significant changes in net income and shareholders’ equity because of these fluctuations.

AEGON operates a Currency Risk Policy under which direct currency speculation or program trading by country units is not allowed unless explicit approval has been granted by the Group Risk and Capital Committee. Assets should be held in the functional currency of the business written or hedged back to that currency. Where this is not possible or practical, remaining currency exposure is subject to documentation requirements and limits are placed on the total exposure at both group level and for individual country units.

Information on AEGON’s 3-year historical net income / (loss) and shareholders’ equity in functional currency are shown in the table below:

	2010	2009	2008
Net income (loss)
AEGON Americas (in USD)	1,494	697	(2,022)
AEGON The Netherlands (in EUR)	711	241	94
United Kingdom (in GBP)	72	8	84
New Markets (in EUR)	91	(289)	(34)
Equity in functional currency
AEGON Americas (in USD)	21,335	17,586	10,617
AEGON The Netherlands (in EUR)	4,080	3,544	2,954
United Kingdom (in GBP)	2,469	2,168	1,200
New Markets (in EUR)	1,853	1,778	2,008

 

The exchange rates for US dollar and UK pound per euro for each of the last five year-ends are set forth in the table below:

Closing rates	2010	2009	2008	2007	2006
USD	1.34	1.44	1.39	1.47	1.32
GBP	0.86	0.89	0.95	0.73	0.67

AEGON Group companies’ foreign currency exposure from monetary assets and liabilities denominated in foreign currencies is not material.

The estimated approximate effects on net income and shareholders’ equity of movements in the exchange rates of AEGON’s non-euro currencies relative to the euro as included in the table below are due to the translation of subsidiaries and joint-ventures in the consolidated financial statements.

Sensitivity analysis of net income and shareholders’ equity to translation risk

Movement of markets1	Estimated approximate effects on net income	Estimated approximate effects on shareholders’ equity
2010
Increase by 15% of non-euro currencies relative to the euro	166	2,620
Decrease by 15% of non-euro currencies relative to the euro	(166)	(2,620)
2009
Increase by 15% of non-euro currencies relative to the euro	78	2,009
Decrease by 15% of non-euro currencies relative to the euro	(78)	(2,009)
The effect of currency exchange movements is reflected as a one-time shift up or down in the value of the non-euro currencies relative to the euro on December 31.

Interest rate risk

AEGON bears interest rate risk with many of its products. In cases where cash flows are highly predictable, investing in assets that closely match the cashflow profile of the liabilities can offset this risk. For some AEGON country units, local capital markets are not well developed, which prevents the complete matching of assets and liabilities for those businesses. For some products, cash flows are less predictable as a result of policyholder actions that can be affected by the level of interest rates.

In periods of rapidly increasing interest rates, policy loans, surrenders and withdrawals may and usually do increase. Premiums in flexible premium policies may decrease as policyholders seek investments with higher perceived returns. This activity may result in cash payments by AEGON requiring the sale of invested assets at a time when the prices of those assets are adversely affected by the increase in market interest rates; this may result in realized investment losses. These cash payments to policyholders result in a decrease in total invested assets and a decrease in net income. Among other things, early withdrawals may also require accelerated amortization of DPAC, which in turn reduces net income.

During periods of sustained low interest rates, AEGON may not be able to preserve margins as a result of minimum interest rate guarantees and minimum guaranteed crediting rates provided on policies. Also, investment earnings may be lower because the interest earnings on new fixed-income investments are likely to have declined with the market interest rates. Mortgages and redeemable bonds in the investment portfolio are more likely to be repaid as borrowers seek to borrow at lower interest rates and AEGON may be required to reinvest the proceeds in securities bearing lower interest rates. Accordingly, net income declines as a result of a decrease in the spread between returns on the investment portfolio and the interest rates either credited to policyholders or assumed in reserves.

AEGON manages interest rate risk closely taking into account all of the complexity regarding policyholder behavior and management action. AEGON employs sophisticated interest rate measurement techniques and actively uses derivatives and other risk mitigation tools to closely manage its interest rate risk exposure. AEGON operates an Interest Rate Risk policy that limits the amount of interest rate risk to which the Group is exposed. All derivative use is governed by AEGON’s Derivative Use Policy.

The table that follows shows interest rates at the end of each of the last five years.

	2010	2009	2008	2007	2006
3-month US LIBOR	0.30%	0.25%	1.42%	4.70%	5.36%
3-month EURIBOR	1.01%	0.70%	2.89%	4.69%	3.73%
10-year US Treasury	3.29%	3.83%	2.22%	4.03%	4.70%
10-year Dutch government	3.15%	3.56%	3.54%	4.32%	3.97%

The sensitivity analysis in the table below shows an estimate of the effect of a parallel shift in the risk free yield curves on net income and shareholders’ equity. Increases in interest rates have a negative effect on shareholders’ equity and net income in the current year because it results in unrealized losses on investments that are carried at fair value. The rising interest rates would also cause the fair value of the available-for-sale bond portfolio to decline and the level of unrealized gains would become too low to support recoverability of the full deferred tax asset triggering an allowance charge to income. The offsetting economic gain on the insurance and investment contracts is however not fully reflected in the sensitivities because many of these liabilities are not measured at fair value. Over time, the short-term reduction in net income due to rising interest rates would be offset by higher net income in later years, all else being equal. Therefore, rising interest rates are not considered a long-term risk to the Group.

The sensitivity analysis reflects the assets and liabilities held at year end. This does not necessarily reflect the risk exposure during the year as significant events do not necessarily occur on January 1.

Parallel Movement of Yield Curve	Estimated approximate effects on net income	Estimated approximate effects on shareholders’ equity
2010
Shift up 100 basis points	(77)	(3,529)
Shift down 100 basis points	(142)	3,432
2009
Shift up 100 basis points	(270)	(3,820)
Shift down 100 basis points	(111)	3,463

Credit risk 

As premiums and deposits are received, these funds are invested to pay for future policyholder obligations. For general account products, AEGON typically bears the risk for investment performance equalling the return of principal and interest. AEGON is exposed to credit risk on its general account fixed-income portfolio (debt securities, mortgages and private placements), OTC derivatives and reinsurance contracts. Some issuers have defaulted on their financial obligations for various reasons, including bankruptcy, lack of liquidity, downturns in the economy, downturns in real estate values, operational failure and fraud. In the current weak economic environment, AEGON incurred significant investment impairments on AEGON’s investment assets due to defaults and overall declines in the capital markets. Further excessive defaults or other reductions in the value of these securities and loans could have a materially adverse effect on AEGON’s business, results of operations and financial condition.

The table that follows shows the Group’s maximum gross credit exposure from investments (credit protection not taken into account) in general account financial assets, as well as general account derivatives and reinsurance assets. Please refer to note 48 and note 49 for further information on capital commitments and contingencies and on collateral given, which may expose the Group to credit risk.

General account exposure	Exposure 2010	Exposure 2009
Shares1	2,376	2,096
Debt securities – carried at fair value	96,725	91,398
Debt securities – carried at amortized cost	139	70
Money market and other short-term investments – carried at fair value	10,800	10,064
Mortgage loans – carried at amortized cost	23,781	21,525
Private loans – carried at amortized cost	829	760
Other loans – carried at amortized cost	3,093	3,283
Other financial assets – carried at fair value	2,661	2,430
Derivatives with positive values	5,722	4,428
Reinsurance assets	5,489	4,953
At December 31	151,615	141,007
Further information on equity risk is provided in section ‘equity market and other investment risk.

AEGON has entered into free-standing credit derivative transactions (Single Tranche Synthetic CDOs and Single Name Credit Default Swaps - CDSs). The positions outstanding at the end of the year were:

CDOs and CDSs		2010		2009
	Notional	Fair value	Notional	Fair value
Synthetic CDOs	78	–	80	(6)
CDSs	3,306	(6)	989	(11)

AEGON USA unwound significantly all of its synthetic CDO positions during 2009. For a fee, AEGON USA had taken credit exposure on a credit index, i.e. super-senior tranches of the CDX index, via a synthetic collateralized debt obligation program (synthetic CDO).

In August 2007, the Canadian asset backed commercial paper markets froze, which ultimately resulted in a restructuring of the Asset Backed Commercial Paper (ABCP) into long term asset backed notes. The restructuring required AEGON to restructure its EUR 113 million notional liquidity facility agreement backing the original ABCP. To restructure the liquidity facility, AEGON entered into swaps (the “Swaps”) that are linked to three collaterilized debt obligations comprising the assets within the liquidity facility backed ABCP (the “CDO”). The three CDOs are as follows:

• 15%-30% tranche of a bespoke CDO (EUR 957 million notional) maturing 6/20/2013
• 30%-60% tranche of the CDX.IG.6 index (EUR 766 million notional) maturing 6/20/2016
• 30%-60% tranche of the CDX.IG.7 index (EUR 287 million notional) maturing 12/20/2016

AEGON has issued the Swaps under an ISDA Master Agreement requiring collateralization of the Swap’s market value. The amount of collateral to be posted by AEGON is subject to a threshold of EUR 15 million, provided AEGON maintains it current credit rating.

The Swaps exposure to the CDO will be reduced by a proportionate share of the assets that supported the original ABCP and from additional funding sources negotiated as part of the ABCP restructuring (the “Margin”). The market value of the Margin allocated to the Swaps is EUR 403 million. If losses attached to any of the CDO that exceeds the fair value of the Margin, then AEGON will recognize a loss on its Swaps. AEGON considers it remote that a loss will be incurred due to the attachment point on the tranches and the amount of Margin.

The Swaps also incorporate the unwind triggers that were built into the restructured long term notes. The triggers are defined by a matrix based on credit losses and credit spreads related to the underlying CDX.IG.7. If a trigger event occurs, AEGON will have the option to continue with the existing Swaps, settle the market value of the Swaps, or terminate the Swaps and enter directly into the reference CDO while taking ownership of a proportionate share of the Margin.

AEGON manages credit risk exposure by individual counterparty, sector and asset class, including cash positions. Normally, AEGON mitigates credit risk in derivative contracts by entering into collateral agreements, where practical, and in ISDA master netting agreements for each of AEGON’s legal entities to facilitate AEGON’s right to offset credit risk exposure. Main counterparties to these transactions are investment banks which are typically rated A or higher. The credit support agreement will normally dictate the threshold over which collateral needs to be pledged by AEGON or its counterparty. Transactions requiring AEGON or its counterparty to post collateral are typically the result of OTC derivative trades, comprised mostly of interest rate swaps, currency swaps, and credit swaps. Collateral received is mainly cash (USD and EUR). The Credit Support Agreements that outline the acceptable collateral require high quality instruments to be posted. Nearly all securities received as collateral are US Treasuries or US Agency bonds. In 2009 and 2010 AEGON did not take possession of collateral or call on other credit enhancements. The credit risk associated with financial assets subject to a master netting agreement is eliminated only to the extent that financial liabilities due to the same counterparty will be settled after the assets are realized.

The extent to which the exposure to credit risk is reduced through a master netting agreement may change substantially within a short period of time because the exposure is affected by each transaction subject to the arrangement. AEGON may also mitigate credit risk in reinsurance contracts by including down-grade clauses that allow the recapture of business, retaining ownership of assets required to support liabilities ceded or by requiring the reinsurer to hold assets in trust. For the resulting net credit risk exposure, AEGON employs deterministic and stochastic credit risk modelling in order to assess the Group’s credit risk profile, associated earnings and capital implications due to various credit loss scenarios.

AEGON operates a Credit Name Limit Policy under which limits are placed on the aggregate exposure that it has to any one counterparty. Limits are placed on the exposure at both group level and individual country units. The limits also vary by a rating system, which is a composite of the main rating agencies (S&P, Moody’s and Fitch) and AEGON’s internal rating of the counterparty. If an exposure exceeds the stated limit, then the exposure must be reduced to the limit for the country unit and rating category as soon as possible. Exceptions to these limits can only be made after explicit approval from AEGON’s Group Risk and Capital Committee (GRCC). The policy is reviewed regularly.

At December 31, 2010, there were two violations of the Credit Name Limit Policy at the group level, both of which have received exemption from GRCC.

Under the Credit Name Limit Policy, AEGON’s largest credit exposures are to JPMorgan, ING, Barclays, Rabobank and Bank of America. AEGON had large investments in sovereign backed assets, the largest being in the UK, Germany, The Netherlands, France and the USA, but AAA rated sovereign assets are excluded from the policy.

AEGON Group level long-term counterparty exposure limits at the end of 2010 are as follows:

Credit rating In EUR million	Group Limit
AAA	900
AA	900
A	600
BBB	400
BB	200
B	125
CCC or lower	50

Credit rating 

The ratings distribution of general account portfolios of AEGON’s major country units, excluding reinsurance assets, are presented in the table that follows, organized by rating category and split by assets that are valued at fair value and assets that are valued at amortized cost. Disclosure of ratings follows a hierarchy of S&P, Moody’s, Fitch, internal and National Association of Insurance Commissioners (NAIC).

Credit rating general account investments excluding reinsurance assets	Americas		The Netherlands		United Kingdom		New Markets		Total 20101
	Amort cost	Fair value	Amort cost	Fair value	Amort cost	Fair value	Amort cost	Fair value	Amort cost	Fair value
Sovereign exposure	–	4,554	92	9,339	–	1,635	–	56	92	15,584
AAA	666	13,893	289	2,633	–	355	–	186	955	17,361
AA	3,597	8,818	466	1,650	–	1,435	33	559	4,096	12,459
A	3,388	25,707	304	3,416	–	3,812	50	624	3,742	33,562
BBB	726	19,602	50	1,149	–	1,717	39	511	815	22,979
BB	396	2,576	38	228	–	162	33	16	467	2,982
B	7	1,284	11	50	–	27	6	4	24	1,365
CCC or lower	25	673	–	22	–	–	–	3	25	698
Assets not rated	2,180	4,075	14,126	5,137	9	61	478	83	16,793	9,585
Total	10,985	81,182	15,376	23,624	9	9,204	639	2,042	27,009	116,575
Past due and / or impaired assets	427	1,309	254	343	–	56	153	–	834	1,708
At December 31	11,412	82,491	15,630	23,967	9	9,260	792	2,042	27,843	118,283
Includes investments of Holding and other activities.

Credit rating general account investments excluding reinsurance assets	Americas		The Netherlands		United Kingdom		New Markets		Total 20091
	Amort cost	Fair value	Amort cost	Fair value	Amort cost	Fair value	Amort cost	Fair value	Amort cost	Fair value
Sovereign exposure	–	4,719	240	8,851	–	610	–	291	240	15,519
AAA	742	14,937	276	3,674	–	349	–	151	1,018	19,733
AA	3,587	6,032	405	2,649	–	1,055	8	201	4,000	9,934
A	3,858	20,578	390	3,058	–	3,756	49	595	4,297	27,987
BBB	918	18,370	1	1,392	–	1,785	211	744	1,130	22,291
BB	234	2,769	37	471	–	183	21	12	292	3,435
B	104	1,168	14	200	–	24	10	3	128	1,395
CCC or lower	56	947	2	62	–	24	–	8	58	1,041
Assets not rated	2,066	3,944	11,365	3,707	11	53	241	44	13,683	8,005
Total	11,565	73,464	12,730	24,064	11	7,839	540	2,049	24,846	109,340
Past due and / or impaired assets	413	715	245	286	–	67	135	5	793	1,073
At December 31	11,978	74,179	12,975	24,350	11	7,906	675	2,054	25,639	110,413
Includes investments of Holding and other activities.

The following table shows the credit quality of the gross balance sheet positions for general account reinsurance assets specifically:

	Carrying value 2010	Carrying value 2009
AAA	10	214
AA	3,565	3,455
A	1,282	638
Below A	16	156
Not rated	616	490
At December 31	5,489	4,953

Credit risk concentration 

The tables that follow present specific credit risk concentration information for general account financial assets.

Credit risk concentrations – debt securities and money market investments	Americas	The  Netherlands	United  Kingdom	New Markets	Total   20101	Of which past due and / or impaired assets
ABSs – Collateralized Bond Obligations (CBOs)	692	754	–	–	1,446	43
ABSs – Housing related	1,457	–	433	185	2,075	254
ABSs – Credit cards	2,123	134	–	–	2,257	–
ABSs – Other	1,983	178	897	19	3,077	78
Residential mortgage backed securities	4,129	1,362	–	1	5,492	703
Commercial mortgage backed securities	6,725	3	371	2	7,101	6
Financial - Banking	5,872	3,312	1,421	350	11,244	76
Financial - Other	14,762	375	1,163	125	16,429	42
Industrial	27,240	1,995	2,092	197	31,524	57
Utility	5,856	360	1,092	115	7,423	11
Sovereign exposure	6,749	10,032	1,729	1,086	19,596	1
At December 31	77,588	18,505	9,198	2,080	107,664	1,271
Includes investments of Holding and other activities.

Credit risk concentrations – mortgages	Americas	The  Netherlands	United  Kingdom	New Markets	Total   20101	Of which past due and / or impaired assets
Agricultural	387	–	–	–	387	87
Apartment	1,640	–	–	–	1,640	67
Industrial	1,500	–	–	–	1,500	106
Office	3,398	37	–	–	3,435	63
Retail	1,907	25	–	–	1,932	78
Other commercial	373	7	–	–	380	24
Residential	60	14,076	–	371	14,507	399
At December 31	9,265	14,145	–	371	23,781	824
Includes investments of Holding and other activities.

Credit risk concentrations – debt securities and money market investments	Americas	The  Netherlands	United  Kingdom	New Markets	Total   20091	Of which past due and / or impaired assets
ABSs – Collateralized Bond Obligations (CBOs)	595	655	–	–	1,250	28
ABSs – Housing related	1,341	–	219	60	1,620	85
ABSs – Credit cards	2,615	374	–	–	2,989	–
ABSs – Other	2,075	237	793	–	3,105	15
Residential mortgage backed securities	3,581	1,641	15	2	5,239	236
Commercial mortgage backed securities	5,514	22	314	125	5,975	9
Financial - Banking	5,679	3,668	1,491	411	11,871	93
Financial - Other	12,078	455	1,077	103	13,713	93
Industrial	24,324	2,077	2,161	184	28,746	117
Utility	5,259	387	1,100	74	6,820	9
Sovereign exposure	6,515	10,868	682	1,090	20,203	4
At December 31	69,576	20,384	7,852	2,049	101,531	689
Includes investments of Holding and other activities.

Credit risk concentrations – mortgages	Americas	The  Netherlands	United  Kingdom	New Markets	Total   20091	Of which past due and / or impaired assets
Agricultural	498	25	–	–	523	136
Apartment	1,731	–	–	–	1,731	55
Industrial	1,789	–	–	–	1,789	89
Office	3,728	48	–	–	3,776	93
Retail	1,756	19	–	–	1,775	34
Other commercial	402	33	–	–	435	6
Residential	65	11,157	–	274	11,496	371
At December 31	9,969	11,282	–	274	21,525	784
Includes investments of Holding and other activities.

The fair value of AEGON Americas commercial mortgage portfolio as per December 31, 2010 amounts to EUR 9,317 million (2009: EUR 9,338 million). The loan to value (LTV) amounts to about 66% (2009: 65%). 2.68% (2009: 2.48%) of the portfolio is in delinquency (defined as 60 days in arrears). In 2010 we recognized impairments of EUR 67 million on this portfolio. AEGON foreclosed upon, or recovered EUR 169 million of real state. The impairments associated with these loans amounted to EUR 13 million.

The fair value of AEGON The Netherlands mortgage portfolio as per December 31, 2010 amounts to EUR 14,668 million (2009: EUR 11,476 million). The LTV amounts to about 93% (2009: 95%). A significant part of the portfolio (52%; 2009: 51%) is government guaranteed. 0.8% (2009: 1.0%) of the portfolio is in delinquency (defined as 60 days in arrears). There were no significant impairments during 2009 and 2010. Historical defaults of the portfolio have been between 2 and 9 basis points per year.

Included in the debt securities and money market investments are EUR 139 million of assets that have been classified as held-to-maturity and are therefore carried at amortized cost (2009: EUR 70 million). Of the EUR 139 million assets held-to-maturity, EUR 29 million are government bonds (2009: EUR 11 million) and EUR 110 million is corporate exposure (2009: EUR 59 million).

Additional information on credit concentration in certain sectors

Government bond investments

Included in AEGON’s sovereign investments are exposures to central governments of the European peripheral countries of Portugal, Italy, Ireland, Greece and Spain. The table below provides the amortized cost and fair value of our exposure to central government of these countries.

	Amortized cost 2010	Fair value 2010	Amortized cost 2009	Fair value 2009
Portugal	33	32	56	58
Italy	114	112	138	143
Ireland	37	32	135	138
Greece	58	45	94	92
Spain	1,008	904	1,769	1,784
At December 31	1,250	1,125	2,192	2,215

AEGON Americas Exposure 1	2010	2009
ABSs – Housing related	1,457	1,341
Residential mortgage backed securities (RMBS)	4,129	3,581
Commercial mortgage backed securities (CMBS)	6,725	5,514
Exposures include past due and impaired assets.

The fair values of these instruments were determined as follows:

	Level II	Level III	Total   2010	Level II	Level III	Total 2009
ABSs – Housing related	1,294	163	1,457	1,125	216	1,341
RMBS	3,430	699	4,129	2,429	1,152	3,581
CMBS	6,575	150	6,725	5,350	164	5,514

Housing related ABS

AEGON Americas holds EUR 1,457 million (2009: EUR 1,341 million) of Housing related ABS securities of which AEGON USA holds EUR 1,448 million (2009: EUR 1,319 million). The unrealized loss on the AEGON USA Housing related ABS securities amounts to EUR 312 million (2009: EUR 629 million). Housing related ABS securities are secured by pools of residential mortgage loans primarily those which are categorized as subprime. The unrealized loss is primarily due to decreased liquidity and increased credit spreads in the market combined with significant increases in expected losses on loans within the underlying pools. Expected losses within the underlying pools are generally higher than original expectations, primarily in certain later-vintage adjustable rate mortgage loan pools, which has led to some rating downgrades in these securities.

ABS – Subprime mortgage exposure

AEGON USA does not currently invest in or originate whole loan residential mortgages. AEGON USA categorizes asset backed securities issued by a securitization trust as having subprime mortgage exposure when the average credit score of the underlying mortgage borrowers in a securitization trust is below FICO score 660 at issuance. AEGON USA also categorizes asset backed securities issued by a securitization trust with second lien mortgages as subprime mortgage exposure, even though a significant percentage of second lien mortgage borrowers may not necessarily have credit scores below FICO score 660 at issuance. As of December 31, 2010, the amortized cost of investments backed by subprime mortgage loans was EUR 1,610 million (2009: EUR 1,805 million) and the market value was EUR 1,302 million (2009: EUR 1,202 million).

The following table provides the amortized costs of the ABS subprime mortgage exposure by quality and vintage. Disclosure of ratings follows a hierarchy of S&P, Moody’s, Fitch, internal and NAIC.

	Amortized cost by quality and vintage
	AAA	AA	A	BBB	< BBB	Total	Of which insured
Pre-2005	283	33	12	6	31	365	60
2005	91	33	20	–	3	147	–
2006	14	–	–	7	51	72	11
2007	27	100	–	2	63	192	100
2008	–	18	–	–	–	18	18
Total subprime mortgages - Fixed rate	415	184	32	15	148	794	189
Pre-2005	17	4	–	1	40	62	31
2005	54	38	–	20	13	125	–
2006	7	45	–	3	72	127	11
2007	4	17	–	6	99	126	20
2008	–	15	–	–	–	15	15
Total subprime mortgages - Floating rate	82	119	–	30	224	455	77
Pre-2005	41	4	7	24	10	86	42
2005	–	–	–	25	10	35	35
2006	–	1	10	–	60	71	71
2007	–	4	–	–	165	169	169
Total second lien mortgages1	41	9	17	49	245	361	317
At December 31, 2010	538	312	49	94	617	1,610	583
Second lien collateral primarily composed of loans to prime and Alt-A borrowers.

Comparative information on subprime ABS mortgage exposure by quality and vintage - 2009 figures:

	Amortized cost by Quality and Vintage
	AAA	AA	A	BBB	< BBB	Total	Of which insured
Pre-2005	314	36	9	–	42	401	82
2005	118	8	19	–	3	148	–
2006	15	–	–	7	69	91	17
2007	124	–	–	2	85	211	96
2008	17	–	–	–	–	17	17
Total subprime mortgages - Fixed rate	588	44	28	9	199	868	212
Pre-2005	17	19	2	13	17	68	30
2005	60	40	–	19	13	132	–
2006	11	46	–	3	87	147	–
2007	14	15	–	–	126	155	17
2008	16	–	–	–	–	16	16
Total subprime mortgages - Floating rate	118	120	2	35	243	518	63
Pre-2005	51	8	8	27	8	102	47
2005	–	–	–	27	13	40	40
2006	–	4	9	8	51	72	72
2007	6	–	–	–	199	205	204
Total second lien mortgages 1	57	12	17	62	271	419	363
At December 31, 2009	763	176	47	106	713	1,805	638
Second lien collateral primarily composed of loans to prime and Alt-A borrowers.

Additionally, AEGON USA has exposure to ABS collateralized by manufactured housing loans. The market value of these securities is EUR 125 million (2009: EUR 122 million) with an amortized cost balance of EUR 132 million (2009: EUR 135 million). All but three positions have vintages of 2003 or prior. These amounts are not included in AEGON’s subprime mortgage exposure tables above.

Where credit events may be impacting the unrealized losses, cash flows are modelled using effective interest rates. AEGON did not consider those securities to be impaired. Refer to note 3 for details on the pricing process.

Residential mortgage backed securities

AEGON USA holds EUR 4,121 million (2009: EUR 3,572 million) of RMBS. RMBS are securitizations of underlying pools of non-commercial mortgages on real estate. The underlying residential mortgages have varying credit ratings and are pooled together and sold in tranches. The Group’s RMBS mainly includes government sponsored enterprise (GSE) guaranteed passthroughs, whole loan passthroughs, Alt-A MBS and negative amortization MBS.

All RMBS securities are monitored and reviewed on a monthly basis with detailed modeling completed on each portfolio quarterly. Model output is generated under base and several stress-case scenarios. RMBS asset specialists utilize modeling software to perform a loan-by-loan, bottom-up approach to modeling. Models incorporate external loan-level analytics to identify the riskiest securities. The results from the models are then closely analyzed by the asset specialist to determine whether or not a principal or interest loss is expected to occur. Positions are impaired to fair value where loss events have taken place (or are projected to take place on structured securities) that would affect future cash flows. The tables below summarize the credit quality of these securities based on a hierarchy of S&P, Moody's, Fitch, internal and NAIC of the RMBS portfolio.

The unrealized loss on RMBS is EUR 457 million which relates to positions of AEGON USA. The pace of deterioration continued in early 2009, but began to stabilize in late 2009 and continued to stabilize in 2010. Even with the stabilization, fundamentals in RMBS securities continue to be weak which impacts the magnitude of the unrealized loss. Delinquencies and severities in property liquidations remain at an elevated level. Prepayments remain at historically low levels. Due to the weak fundamental situation, reduced liquidity, and the requirement for higher yields due to market uncertainty, credit spreads remain elevated across the asset class. In addition, a high percentage of the RMBS portfolio is comprised of floating rate securities, which has resulted in higher unrealized losses relative to fixed rate securities but not necessarily in higher default losses.

	AAA	AA	A	BBB		Total amortized cost	Total fair value
GSE guaranteed	1,859	–	–	–	–	1,859	1,884
Prime Jumbo	122	22	120	13	177	454	418
Alt-A	71	12	–	27	619	729	701
Negative amortization floaters	171	49	43	66	865	1,194	821
Reverse mortgage floaters	103	–	–	239	–	342	297
At December 31, 2010	2,326	83	163	345	1,661	4,578	4,121
Of which insured	–	–	–	1	10	11	11

	SSNR 1	SNR 2	MEZZ 3	SSUP 4	Total amortized cost	Total fair value
GSE guaranteed	–	1,859	–	–	1,859	1,884
Prime Jumbo	196	230	19	9	454	418
Alt-A	493	233	2	1	729	701
Negative amortization floaters	1,140	24	7	23	1,194	821
Reverse mortgage floaters	–	342	–	–	342	297
At December 31, 2010	1,829	2,688	28	33	4,578	4,121
Of which insured	–	1	–	10	11	11
SSNR – super senior SNR – senior MEZZ – mezzanine SSUP – senior support

	AAA	AA	A	BBB		Total amortized cost	Total fair value
GSE guaranteed	1,464	–	–	–	–	1,464	1,487
Prime Jumbo	281	16	10	6	203	516	404
Alt-A	151	12	17	–	682	862	667
Negative amortization floaters	283	44	62	91	882	1,362	722
Reverse mortgage floaters	350	–	–	–	–	350	292
At December 31, 2009	2,529	72	89	97	1,767	4,554	3,572
Of which insured	–	–	13	1	30	44	8

	SSNR 1	SNR 2	MEZZ 3	SSUP 4	Total amortized cost	Total fair value
GSE guaranteed	–	1,464	–	–	1,464	1,487
Prime Jumbo	222	256	21	17	516	404
Alt-A	586	272	3	1	862	667
Negative amortization floaters	1,273	26	7	56	1,362	722
Reverse mortgage floaters	–	350	–	–	350	292
At December 31, 2009	2,081	2,368	31	74	4,554	3,572
Of which insured	–	1	–	43	44	8
SSNR – super senior SNR – senior MEZZ – mezzanine SSUP – senior support

Alt-A Mortgage Exposure

AEGON USA’s RMBS exposure includes exposure to securitized home equity loans (Alt-A positions). This portfolio totals

EUR 701 million at December 31, 2010 (2009: EUR 667 million). Net unrealized losses amount to EUR 28 million at December 31, 2010 (2009: EUR 195 million). Alt-A loans are made to borrowers whose qualifying mortgage characteristics do not meet the standard underwriting criteria established by the GSEs. The typical Alt-A borrower has a credit score high enough to obtain an ’A‘ standing, which is especially important since the score must compensate for the lack of other necessary documentation related to borrower income and / or assets.

AEGON’s investments in Alt-A mortgages are in the form of mortgage backed securities. AEGON's Alt-A investments are primarily backed by loans with fixed interest rates for the entire term of the loan. The tables below summarize the credit quality of the underlying loans backing the securities and the vintage year.

	2010		2009
Rating	Amortized cost	%	Amortized cost	%
AAA	71	9.7%	151	17.5%
AA	12	1.7%	12	1.4%
A	–	–	17	2.0%
BBB	27	3.7%	–	–
<BBB	619	84.9%	682	79.1%
At December 31	729	100.0%	862	100.0%

	2010		2009
Vintage	Amortized cost	%	Amortized cost	%
Prior 2005	76	10.4%	69	8.0%
2005	108	14.8%	131	15.2%
2006	163	22.4%	187	21.7%
2007	265	36.4%	324	37.6%
2008	117	16.0%	151	17.5%
At December 31	729	100.0%	862	100.0%

Negative Amortization (option ARMs) Mortgage Exposure

As part of AEGON USA’s RMBS Exposure, AEGON USA holds EUR 821 million of Negative Amortization Floaters (2009: EUR 722 million), net unrealized losses on this portfolio amount to EUR 373 million at December 31, 2010 (2009: EUR 640 million). Negative Amortization Floaters (also known as option ARMs) are loans whereby the payment made by the borrower is less than the accrued interest due and the difference is added to the loan balance. When the accrued balance of the loan reaches the negative amortization limit (typically 110% to 125% of the original loan amount), the loan recalibrates to a fully amortizing level and a new minimum payment amount is determined. The homeowner’s new minimum payment amount can be significantly higher than the original minimum payment amount. The timing of when these loans reach their negative amortization cap will vary, and is a function of the accrual rate on each loan, the minimum payment rate on each loan and the negative amortization limit itself. Typically, these loans are estimated to reach their negative amortization limit between three and five years from the date of origination.

AEGON’s exposure to Negative Amortization Floaters is primarily to super-senior securities. The following table provides the market values of the Negative Amortization (Option ARMs) exposure by rating and by vintage.

	2010		2009
Rating	Amortized cost	%	Amortized cost	%
AAA	171	14.3%	283	20.8%
AA	49	4.1%	44	3.2%
A	43	3.6%	62	4.6%
BBB	66	5.5%	91	6.7%
<BBB	865	72.5%	882	64.7%
At December 31	1,194	100.0%	1,362	100.0%

	2010		2009
Vintage	Amortized cost	%	Amortized cost	%
Prior 2005	33	2.8%	37	2.7%
2005	381	31.9%	427	31.4%
2006	466	39.0%	538	39.5%
2007	289	24.2%	319	23.4%
2008	25	2.1%	41	3.0%
At December 31	1,194	100.0%	1,362	100.0%

Commercial mortgage backed securities

AEGON USA holds EUR 6,700 million (2009: EUR 5,482 million) of CMBS. The unrealized loss on CMBS is EUR 56 million (2009: EUR 878 million). The underlying mortgages have varying risk characteristics and are pooled together and sold in different rated tranches. The Group’s CMBS include conduit, large loan, single borrower, commercial real estate collateral debt obligations (CRE CDOs), government agency, and franchise loan receivable trusts.

The total gross unrealized loss on CMBS of AEGON USA is EUR 305 million, and the total net unrealized loss on CMBS of AEGON USA is EUR 56 million. Over the past 24 months, the commercial real estate market experienced a deterioration in property level fundamentals, which has led to an increase in CMBS loan-level delinquencies. The introduction of the 20% and 30% credit enhanced classes within the 2005-2008 vintage deals provide some offset to these negative fundamentals. Despite advancements in the availability of financing for commercial real estate, as evidenced by the gradual reopening of the CMBS markets, the lending market remains limited as lenders continue to be more conservative with underwriting standards. Moreover, property transactions have increased but still remain low relative to historical standards. While liquidity has improved within the CMBS market, a broad re-pricing of risk has kept credit spreads across the subordinate CMBS tranches at wide levels.

CMBS exposure by quality	AAA	AA	A	BBB	< BBB	Total amortized cost	Total fair value
CMBS	5,068	637	583	152	169	6,609	6,618
CMBS and CRE CDOs	30	20	35	15	47	147	82
At December 31, 2010	5,098	657	618	167	216	6,756	6,700
CMBS	4,520	681	477	306	219	6,203	5,418
CMBS and CRE CDOs	72	48	13	24	–	157	64
At December 31, 2009	4,592	729	490	330	219	6,360	5,482

AEGON USA ABS - Non housing Exposure

AEGON USA holds EUR 4,715 million (2009: EUR 5,216 million) of non-housing related ABS, net unrealized losses on this portfolio amount to EUR 204 million at December 31, 2010 (2009: EUR 496 million). These are securitizations of underlying pools of credit cards receivables, auto financing loans, small business loans, bank loans and other receivables. The underlying assets have varying credit ratings and are pooled together and sold in tranches. See the table below for the breakdown of the non housing ABS exposure of AEGON USA.

	AAA	AA	A	BBB	< BBB	Total amortized cost	Total fair value
Credit cards	1,145	97	249	504	10	2,005	2,044
Autos	395	77	–	–	93	565	574
Small business loans	180	120	14	62	60	436	335
CDOs backed by ABS, Corp. Bonds, Bank loans	314	377	16	19	40	766	691
Other ABS	508	156	170	76	237	1,147	1,071
At December 31, 2010	2,542	827	449	661	440	4,919	4,715
Credit cards	1,227	382	355	609	14	2,587	2,548
Autos	304	87	106	41	188	726	725
Small business loans	414	9	11	31	–	465	322
CDOs backed by ABS, Corp. Bonds, Bank loans	413	208	42	19	37	719	596
Other ABS	551	124	299	187	54	1,215	1,025
At December 31, 2009	2,909	810	813	887	293	5,712	5,216

The fair values of AEGON USA’s ABS- non housing instruments were determined as follows:

			2010
	Level II	Level III	Total
ABSs – non housing	3,324	1,391	4,715

			2009
	Level II	Level III	Total
ABSs – non housing	3,948	1,268	5,216

Small business loans

The unrealized loss in the small business loan ABS portfolio is a function of decreased liquidity and increased spreads as new issuance within this sector has come to a halt. Additionally, delinquencies and losses in the collateral pools within AEGON’s small business loan securitizations have increased since 2007, as a result of the overall economic slowdown which has resulted in decreased sales and profits at small businesses nationwide. Banks and finance companies have also scaled back their lending to small businesses.

AEGON’s small business loan ABS portfolio is concentrated in senior note classes (99% of par value). In addition to credit enhancement provided by the excess spread, reserve account, and over-collateralization, AEGON’s positions are also supported by subordinated note classes. AEGON’s small business loan ABS portfolio is also primarily secured by commercial real estate (99% of par value), with the original LTV of the underlying loans typically ranging between 60-70%.

ABS - CDOs

ABS-CDOs are primarily secured by pools of corporate bonds and leveraged bank loans. The unrealized loss is a function of decreased liquidity and increased credit spreads in the market for structured finance and monoline guaranteed securities. Where there have been rating downgrades to below investment grade, the individual bonds have been modeled using the current collateral pool and capital structure.

Other ABS

ABS-other includes debt issued by securitization trusts collateralized by various other assets including student loans, timeshare loans, franchise loans and other asset categories. The unrealized losses are a function of decreased liquidity and increased credit spreads in the market. Over 98% of the securities in an unrealized loss in this section are rated investment grade. Where ratings have declined to below investment grade, the individual bonds have been modeled to determine if cash flow models indicate a credit event will impact future cash flows and resulting impairments have been taken.

Financial

Financial – Banking

AEGON holds EUR 11,244 million (2009: EUR 11,871 million) of bonds issued by banks. The net unrealized loss on these bonds amount to EUR 386 million (2009: EUR 799 million). The capital bases of banks and other financial firms have been strained as they are forced to retain assets on their balance sheets that had previously been securitized and to write down certain mortgage-related and corporate credit-related assets. Financial companies within AEGON’s financial sector are generally high in credit quality, and as a whole represent a large portion of the corporate debt market. The financial sector has seen a large impact to valuations from the broader market volatility given it is a focal point of the current concerns. Governments across the world have attempted to stabilize market liquidity and investor confidence via extraordinary measures, including providing substantial support to banks and insurance companies.

Exposure to capital securities in the banking sector

The value of AEGON’s investments in deeply subordinated securities in the financial services sector may be significantly impacted if the issuers of such securities exercise the option to defer payment of optional coupons or dividends, are forced to accept government support or intervention, or grant majority equity stakes to their respective governments. These securities are broadly referred to as capital securities which can be categorized as Trust Preferred, Hybrid, Tier 1 or Upper Tier 2.

The ‘Trust Preferred’ category is comprised of capital securities issued by U.S.-based financial services entities where the capital securities typically have an original maturity of 30 years (callable after 10 years) and generally have common structural features, including a cumulative coupon in the event of deferral. The ‘Hybrid’ category is comprised of capital securities issued by financial services entities which typically have an original maturity of more than 30 years and may be perpetual. In addition, Hybrids have other features that may not be consistent across issues such as a cumulative or non-cumulative coupon, capital replacement and an alternative payment mechanism, and could also be subordinate to the traditional Trust Preferred in the Group’s capital structure. Capital securities categorized as ‘Tier 1’ are issued by non-US banks and are perpetual with a non-cumulative deferrable coupon. Capital securities categorized as ‘Upper Tier 2’ are also issued by non-US banks but these positions are generally perpetual where the deferrable coupon is cumulative.

The follow table highlights AEGON’s credit risk to capital securities within the banking sector:

	Americas	The  Netherlands	United  Kingdom	New Markets	Total cost price	Total fair value
Hybrid	183	–	38	1	222	196
Trust Preferred	566	–	50	–	616	495
Tier 1	480	195	490	48	1,213	1,038
Upper Tier 2	673	63	136	7	879	718
At December 31, 2010	1,902	258	714	56	2,930	2,447
Hybrid	228	–	31	1	260	205
Trust Preferred	575	–	41	–	616	462
Tier 1	729	255	600	90	1,674	1,328
Upper Tier 2	667	67	248	7	989	759
At December 31, 2009	2,199	322	920	98	3,539	2,754

Financial Other

The unrealized losses in the brokerage, insurance and other finance sub-sector primarily reflect general spread widening on financial services companies (due to broad housing, mortgage market, equity market and economic issues plus increased liquidity and capital markets concerns).

Monoline exposure

About EUR 1.4 billion of the bonds in AEGON USA’s portfolio are insured by monoline insurers (2009: EUR 1.7 billion), of which EUR 427 million of bonds (2009: EUR 381 million) in the EUR 1.3 billion subprime portfolio (2009: EUR 1.2 billion). Expected claims against the monolines amount to EUR 122 million (2009: EUR 160 million), although an insolvency by one of the monolines could create significant market price volatility for the affected holdings.

The following table breaks down bonds in AEGON USA’s portfolio that are insured by monoline insurers. The disclosure by rating follows a hierarchy of S&P, Moody’s, Fitch, internal and NAIC.

	2010		2009
Bonds insured by monoline insurers	Cost price	Fair value	Cost price	Fair value
AAA	116	114	439	343
AA	354	301	51	45
<AA	912	741	1,171	829
At December 31	1,382	1,156	1,661	1,217

The rating that is provided by the rating agencies on these guaranteed bonds is the higher of the guarantor’s rating or the rating of the underlying bond itself.

Of the EUR 1,382 million (2009: EUR 1,661 million) indirect exposure on the monoline insurers, 35% relates to MBIA,

24% to AMBAC, 10% to FGIC and 15% to FSA (2009: 35% related to MBIA, 29% to AMBAC, 9% to FGIC and 14% to FSA). Of the remaining 16% (2009: 13%), no individual monoline insurer represents more than 10% of the total wrapped portfolio.

In addition to its indirect exposure via wrapped bonds, AEGON USA also has direct exposure of EUR 8 million (2009: EUR 38 million) via holdings in monoline insurers and derivative counterparty exposure where monoline insurers are AEGON’s counterparty. Of AEGON’s direct exposure 100% relates to MBIA (2009: 36% related to XL, 25% to MBIA, 39% to AMBAC).

Past due and impaired assets

The tables that follow provide information on past due and individually impaired financial assets for the whole AEGON Group. An asset is past due when a counterparty has failed to make a payment when contractually due. Assets are impaired when an impairment loss has been charged to the income statement relating to this asset. After the impairment loss is reversed in subsequent periods, the asset is no longer considered to be impaired. When the terms and conditions of financial assets have been renegotiated, the terms and conditions of the new agreement apply in determining whether the financial assets are past due. There were renegotiated assets of EUR 13 million that would have been past due or impaired if they had not been renegotiated in the reporting year (2009: EUR 13 million). At December 31, 2010 EUR 377 million (2009: EUR 165 million) collateral and other credit enhancements are held related to financial assets that were past due or individually impaired.

AEGON's policy is to pursue realization of the collateral in an orderly manner as and when liquidity permits. AEGON generally does not use the non-cash collateral for its own operations.

	2010				2009
Past due but not impaired assets	0-6 months	6-12 months	> 1 year	Total	0-6 months	6-12 months	> 1 year	Total
Debt securities - carried at fair value	73	57	15	145	19	–	1	20
Mortgage loans	120	50	19	189	77	11	77	165
Other loans	1	–	1	2	–	–	–	–
Accrued Interest	–	–	1	1	2	–	–	2
At December 31	194	107	36	337	98	11	78	187

Impaired financial assets	Carrying amount 2010	Carrying amount 2009
Shares	402	344
Debt securities – carried at fair value	1,126	669
Mortgage loans	635	619
Other loans	7	8
Other financial assets – carried at fair value	36	41
At December 31	2,206	1,681

Equity, real estate and non-fixed income exposure

Fluctuations in the equity, real estate and capital markets have affected AEGON’s profitability, capital position and sales of equity related products in the past and may continue to do so. Exposure to equity, real estate and capital markets exists in both assets and liabilities. Asset exposure exists through direct equity investment, where AEGON bears all or most of the volatility in returns and investment performance risk. Equity  market exposure is also present in insurance and investment contracts for account of policyholders where funds are invested in equities, such as variable annuities, unit-linked products and mutual funds. Although most of the risk remains with the policyholder, lower investment returns can reduce the asset management fee earned by AEGON on the asset balance in these products. In addition, some of this business has minimum return or accumulation guarantees. AEGON also operates an Investment and Counterparty Policy that limits the Group’s overall counterparty risk exposure.

The general account equity, real estate and other non-fixed-income portfolio of AEGON is as follows:

 

Equity, real estate and non-fixed income exposure	Americas	The Netherlands	United Kingdom	New Markets	Holding and other activities	Total 2010
Equity funds	844	419	–	59	–	1,322
Common shares1	370	335	62	12	(3)	776
Preferred shares	105	14	–	–	–	119
Investments in real estate	729	2,055	–	–	–	2,784
Hedge funds	617	127	–	–	–	744
Other alternative investments	1,458	–	–	–	–	1,458
Other financial assets	522	90	–	6	–	618
At December 31	4,645	3,040	62	77	(3)	7,821
Common shares in Holdings and other activities reflect the elimination of treasury shares in the general account.

Equity, real estate and non-fixed income exposure	Americas	The Netherlands	United Kingdom	New Markets	Holding and other activities	Total 2009
Equity funds	854	288	–	46	–	1,188
Common shares 1	367	282	54	3	(3)	703
Preferred shares	112	14	–	–	–	126
Investments in real estate	496	2,084	–	–	–	2,580
Hedge funds	528	77	–	–	–	605
Other alternative investments	1,372	–	–	–	–	1,372
Other financial assets	488	40	–	4	–	532
At December 31	4,217	2,785	54	53	(3)	7,106
Common shares in Holdings and other activities reflect the elimination of treasury shares in the general account.

The tables that follow present specific market risk concentration information for general account shares.

Market risk concentrations – shares	Americas	The Netherlands	United Kingdom	New Markets	Total 20101	Of which impaired assets
Communication	40	–	–	–	40	–
Consumer cyclical	4	17	–	–	21	6
Consumer non-cyclical	3	58	–	–	61	25
Financials	1,160	203	7	13	1,380	134
Funds	–	502	55	57	614	148
Industries	37	43	–	2	82	18
Resources	–	49	–	–	49	15
Services cyclical	–	16	–	–	16	8
Services non-cyclical	–	14	–	–	14	6
Technology	7	33	–	–	40	13
Transport	1	–	–	–	1	–
Other	48	10	–	–	58	29
AT DECEMBER 31	1,300	945	62	72	2,376	402
Includes investments of Holding and other activities.

Market risk concentrations - shares	Americas	The Netherlands	United Kingdom	NewMarkets	Total 20091	Of which impaired assets
Communication	32	–	–	–	32	–
Consumer cyclical	3	12	–	–	15	4
Consumer non-cyclical	4	42	–	–	46	24
Financials	1,248	105	7	30	1,387	131
Funds	–	362	47	19	428	117
Industries	15	52	–	3	70	19
Resources	–	34	–	–	34	10
Services cyclical	–	15	–	–	15	8
Services non-cyclical	–	12	–	–	12	5
Technology	8	28	–	–	36	11
Transport	1	–	–	–	1	1
Other	19	–	–	1	20	14
At December 31	1,330	662	54	53	2,096	344
Includes investments of Holding and other activities.

The table that follows sets forth the closing levels of certain major indices at the end of the last five years.

Year-end	2010	2009	2008	2007	2006
S&P 500	1,258	1,115	903	1,468	1,418
Nasdaq	2,653	2,269	1,577	2,652	2,415
FTSE 100	5,900	5,413	4,434	6,457	6,221
AEX	355	335	247	516	495

The sensitivity analysis of net income and shareholders’ equity to changes in equity prices is presented in the table below. The sensitivity of shareholders’ equity and net income to changes in equity markets reflects changes in the market value of AEGON’s portfolio, changes in DPAC amortization, contributions to pension plans for AEGON’s employees and the strengthening of the guaranteed minimum benefits, when applicable. The results of equity sensitivity tests are non-linear. The main reason for this is due to equity options sold to clients that are embedded in some of these products and that more severe scenarios could cause accelerated DPAC amortization and guaranteed minimum benefits provisioning, while moderate scenarios may not. Changes in sensitivities between 2009 and 2010 arise mainly as a result of additional equity hedges during 2010 which reduces the impact of market movements. Also, the guarantees contracts that expose AEGON to equity risk are less in the money decreasing the sensitivity on DPAC amortization. The equity sensitivities related to the guarantees are non linear because of the impact of guarantees and DPAC amortization.

Sensitivity analysis of net income and shareholders’ equity to equity markets Immediate change of	Estimated approximate effectson net income	Estimated approximate effects on shareholders’ equity
2010
Equity increase 10%	55	127
Equity decrease 10%	(100)	(156)
Equity increase 20%	90	232
Equity decrease 20%	(214)	(331)
2009
Equity increase 10%	93	150
Equity decrease 10%	(92)	(147)
Equity increase 20%	175	287
Equity decrease 20%	(201)	(304)

Liquidity risk

Liquidity risk is inherent in much of AEGON’s business. Each asset purchased and liability sold has its own liquidity characteristics. 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 significant amounts of cash on short notice in excess of normal cash requirements and existing credit facilities, it may have difficulty selling these investments at attractive prices or in a timely manner.

AEGON operates a Liquidity Risk Policy under which country units are obliged to maintain sufficient levels of highly liquid assets to meet cash demands by policyholders and account holders over the next two years. Potential cash demands are assessed under a stress scenario including spikes in disintermediation risk due to rising interest rates and concerns over AEGON’s financial strength due to multiple downgrades of the Group’s credit rating. At the same time, the liquidity of assets other than cash and government issues is assumed to be severely impaired for an extended period of time. All units and AEGON Group must maintain enough liquidity in order to meet all cash needs under this extreme scenario.

AEGON holds EUR 29,922 million of general account investments in cash, money market products and sovereign bonds that are readily saleable or redeemable on demand (2009: EUR 28,389 million). The Group expects to meet its obligations, even in a stressed liquidity event, from operating cash flows and the proceeds of maturing assets as well as these highly liquid assets. Further, the Group has access to back up credit facilities, as described in note 23, amounting to EUR 2,563 million which were unused at the end of the reporting period (2009: EUR 2,412 million).

The maturity analysis below shows the remaining contractual maturities of each category of financial liabilities (including coupon interest). When the counterparty has a choice of when an amount is paid, the liability is included on the basis of the earliest date on which it can be required to be paid. Financial liabilities that can be required to be paid on demand without any delay are reported in the category ‘On demand’. If there is a notice period, it has been assumed that notice is given immediately and the repayment has been presented at the earliest date after the end of the notice period. When the amount payable is not fixed, the amount reported is determined by reference to the conditions existing at the reporting date. For example, when the amount payable varies with changes in an index, the amount disclosed may be based on the level of the index at the reporting date.

Maturity analysis – gross undiscounted contractual cash flows (for non-derivatives)	On  demand	< 1 yr amount	1 < 5 yrs amount	5 < 10 yrs amount	> 10 yrs amount	Total amount
2010
Trust pass-through securities	–	8	34	44	204	290
Borrowings1	39	1,371	4,494	1,512	4,044	11,460
Investment contracts2	9,717	2,901	8,624	820	1,659	23,721
Investment contracts for account of policyholders2	16,516	5,717	–	–	–	22,233
Other financial liabilities	7,918	6,011	1,097	974	–	16,000
2009
Trust pass-through securities	–	8	32	40	197	277
Borrowings1	–	2,267	3,149	933	3,641	9,990
Investment contracts2	9,451	5,466	11,205	1,374	2,369	29,865
Investment contracts for account of policyholders2	12,791	7,592	–	–	–	20,383
Other financial liabilities	5,123	4,589	152	1,489	491	11,844
Borrowings include debentures and other loans, short term deposits, bank overdrafts and commercial paper; refer to note 23 for more details. Excluding investment contracts with discretionary participating features.

AEGON’s liquidity management is based on expected claims and benefit payments rather than on the contractual maturities. The projected cash benefit payments in the table below are based on management’s best estimates of the expected gross benefits and expenses, partially offset by the expected gross premiums, fees and charges relating to the existing business in force. Estimated cash benefit payments are based on mortality, morbidity and lapse assumptions comparable with AEGON’s historical experience, modified for recently observed trends. Actual payment obligations may differ if experience varies from these assumptions. The cash benefit payments are presented on an undiscounted basis and are before deduction of tax and before reinsurance.

Financial liabilities relating to insurance and investment contracts1	On demand	< 1 yr amount	1 < 5 yrs amount	5 < 10 yrs amount	> 10 yrs amount	Total amount
2010
Insurance contracts	–	6,171	27,874	22,716	132,102	188,863
Insurance contracts for account of policyholders	–	5,617	23,853	21,096	72,824	123,390
Investment contracts	–	5,571	13,580	2,180	5,669	27,000
Investment contracts for account of policyholders	90	5,778	20,447	19,837	83,020	129,172
2009
Insurance contracts	–	6,169	24,766	20,165	124,647	175,747
Insurance contracts for account of policyholders	–	5,490	21,821	17,945	70,682	115,938
Investment contracts	–	8,140	15,425	2,350	5,916	31,831
Investment contracts for account of policyholders	77	3,698	16,464	19,853	79,368	119,460
The projected cash benefit payments are based on management’s best estimates of the expected gross benefits and expenses partially offset by the expected gross premiums, fees and charges relating to the existing business in force. Estimated cash benefit payments are based on mortality, morbidity and lapse assumptions comparable with AEGON’s historical experience, modified for recent observed trends. Actual payment obligations may differ if experience varies from these assumptions. The cash benefit payments are presented on an undiscounted basis and are before deduction of tax and before reinsurance. The liability amount in the consolidated financial statement reflects the discounting for interest as well as adjustments for the timing of other factors as described above. As a result, the sum of the cash benefit payments shown for all years in the table exceeds the corresponding liability amounts included in notes 19, 20 and 22.

The following table details the Group’s liquidity analysis for its derivative financial instruments, based on the undiscounted contractual net cash inflows and outflows on derivative instruments that settle on a net basis, and the undiscounted gross inflows and outflows on those derivatives that require gross settlement.

Maturity analysis (derivatives1)(Contractual cash flows) 2010	On demand	< 1 yr amount	1 < 5 yrs amount	5 < 10 yrs amount	> 10 yrs amount	Total amount
Gross settled
Cash inflows	–	18,348	14,658	16,355	36,753	86,114
Cash outflows	–	(18,298)	(14,859)	(16,871)	(37,040)	(87,068)
Net settled
Cash inflows	–	450	1,252	1,610	5,999	9,311
Cash outflows	–	(645)	(1,280)	(1,475)	(5,102)	(8,502)

Maturity analysis (derivatives1)(Contractual cash flows) 2009	On demand	< 1 yr amount	1 < 5 yrs amount	5 < 10 yrs amount	> 10 yrs amount	Total amount
Gross settled
Cash inflows	–	15,805	20,208	18,926	38,119	93,058
Cash outflows	–	(15,906)	(20,791)	(20,035)	(38,933)	(95,665)
Net settled
Cash inflows	–	545	1,640	1,633	5,750	9,568
Cash outflows	–	(625)	(1,731)	(1,697)	(4,970)	(9,023)
Financial derivatives include all derivatives regardless whether they have a positive or a negative value. It does not include bifurcated embedded derivatives. These are presented together with the host contract. For interest rate derivatives only cash flows related to the pay leg are taken into account for determining the gross undiscounted cash flows.

Underwriting risk

AEGON’s earnings depend significantly upon the extent to which actual claims experience differs from the assumptions used in setting the prices for products and establishing the technical liabilities and liabilities for claims. To the extent that actual claims experience is less favorable than the underlying assumptions used in establishing such liabilities, income would be reduced. Furthermore, if these higher claims were part of a permanent trend, AEGON may be required to increase liabilities, which could reduce income. In addition, certain acquisition costs related to the sale of new policies and the purchase of policies already in force have been recorded as assets on the balance sheet and are being amortized into income over time. If the assumptions relating to the future profitability of these policies (such as future claims, investment income and expenses) are not realized, the amortization of these costs could be accelerated and may even require write offs due to unrecoverability. This could have a materially adverse effect on AEGON’s business, results of operations and financial condition.

Sources of underwriting risk include policy lapses and policy claims (such as mortality and morbidity). In general, AEGON is at risk if policy lapses increase as sometimes AEGON is unable to fully recover up front expenses in selling a product despite the presence of commission recoveries or surrender charges and fees. For mortality and morbidity risk, AEGON sells certain types of policies that are at risk if mortality or morbidity increases, such as term life insurance and accident insurance, and sells certain types of policies that are at risk if mortality decreases (longevity risk) such as annuity products. AEGON is also at risk if expenses are higher than assumed by management.

AEGON monitors and manages its underwriting risk by underwriting risk type. Attribution analysis is performed on earnings and reserve movements in order to understand the source of any material variation in actual results from what was expected. AEGON’s units also perform experience studies for underwriting risk assumptions, comparing AEGON’s experience to industry experience as well as combining AEGON’s experience and industry experience based on the depth of the history of each source to AEGON’s underwriting assumptions. Where policy charges are flexible in products, AEGON uses these analyses as the basis for modifying these charges, with a view to maintain a balance between policyholder and shareholder interests. AEGON also has the ability to reduce expense levels over time, thus mitigating unfavorable expense variation.

Sensitivity analysis of net income and shareholders’ equity to various underwriting risks is shown in the table that follows. The sensitivities represent an increase or decrease of mortality and morbidity rates over best estimate. Increases in mortality rates lead to an increase in the level of benefits and claims. The impact on net income and shareholders’ equity of sales transactions of investments required to meet the higher cash outflow is reflected in the sensitivities.

Sensitivity analysis of net income and shareholders’ equity to changes in various underwriting risks Estimated approximate effect	2010		2009
	On shareholders’ equity	On net income	On shareholders’ equity	On net income
20% increase in lapse rates	(47)	(46)	(30)	(29)
20% decrease in lapse rates	46	44	26	25
10% increase in mortality rates	(90)	(90)	(102)	(102)
10% decrease in mortality rates	92	91	104	103
10% increase in morbidity rates	(75)	(75)	(67)	(67)
10% decrease in morbidity rates	74	74	66	66

A change in actual experience with mortality or morbidity rates may not lead to a change in the assumptions underlying the measurement of the insurance liabilities as management may recognize that the change is temporary. Life insurers are also exposed to longevity risk. Increased life expectation above our assumed life expectation at the time of underwriting negatively impacts our results. Refer to note 2.19 for a discussion on how longevity assumptions are accounted for.

On March 1, 2011 the European Court of Justice (ECJ) delivered a judgment in the Test Achats case which relates to the ability of an insurance company to use gender as a rating factor when pricing risk. The ECJ has ruled that using gender as a rating factor when pricing risk is invalid. However, the ECJ has granted a transitional period for relief for implementation. The effect of this is that, as from December 21, 2012, it will be unlawful to use gender-related factors for determining premiums and benefits under insurance policies. Currently AEGON uses gender as a risk factor pricing for both general and life insurance policies. AEGON will consider the impact the judgment of the ECJ on its insurance business.

Other risks

As required under European Union state aid rules, the Dutch State notified the European Commission of the issuance by AEGON in December 2008 of EUR 3 billion of non-voting convertible core capital securities to Vereniging AEGON, which was funded by the Dutch State. The European Commission determined that the aid provided by the Dutch State was compatible with the common market, raised no objection to the aid and authorized the aid as emergency intervention in response to the financial crisis. In July 2010, the Dutch State submitted a final viability plan regarding AEGON’s status as a fundamentally sound institution to the European Commission. The European Commission approved the plan on August 17, 2010. As part of the process to conclude the European Commission’s final review of the plan, AEGON agreed with the Dutch Ministry of Finance to amend the terms and conditions of full repurchase of the then-remaining EUR 2 billion of convertible core capital securities. The conditions, which assume a full repurchase no later than June 30, 2011, impose certain requirements on AEGON and its future actions. For example, AEGON may not pay dividends on common shares, and may not pursue acquisitions, except for certain investments in bancassurance partnerships in Spain, provided that AEGON does not increase its overall market share in the Spanish market. In addition, AEGON may not pursue a top-three price leadership position in its residential mortgage and internet savings businesses in the Netherlands. AEGON also agreed to request Standard & Poor’s to no longer publish its insurance financial strength rating on AEGON Levensverzekering N.V. in the Netherlands and to explore the sale or exit of certain businesses. These requirements may have a material adverse effect on AEGON’s business, results of operations and financial condition.

Under the terms and conditions agreed with the Ministry of Finance, AEGON is required to seek approval from the Dutch Central Bank before being permitted to repurchase the remaining core capital securities. In determining whether to approve a request for repurchase, the Dutch Central Bank considers certain criteria including the adequacy of AEGON’s excess capital. There is no limit on the duration of such consultations or certainty as to the outcome of such consultations. If AEGON is unable to meet its interest obligations or is unsuccessful in repurchasing the capital, AEGON may be required to convert the convertible core capital securities into its ordinary shares, which may result in both the ability of the Dutch State to exert influence in its capacity as a large holder of AEGON’s ordinary shares and a significant dilution to existing shareholders. If full repurchase of the convertible core capital securities is not achieved before June 30, 2011, AEGON may face revised and / or additional conditions to repurchase and / or other operational restrictions, which could have a material adverse effect on AEGON’s business, results of operations and financial condition.

NOTE 5 Segment information

Income statement – Underlying earnings	Americas	The Netherlands	United Kingdom	New Markets	Holding and other activities	Elimi- nations	Total	Associates elimi-nations	Total IFRS based
2010
Underlying earnings before tax	1,598	385	72	200	(283)	–	1,972	(9)	1,963
Fair value items	(24)	361	(9)	(10)	(97)	–	221	–	221
Realized gains / (losses) on investments	380	155	14	13	96	–	658	(2)	656
Impairment charges	(464)	(17)	(39)	(22)	–	–	(542)	–	(542)
Impairment reversals	81	6	3	–	–	–	90	–	90
Other income / (charges)	(306)	38	48	(56)	(34)	1	(309)	–	(309)
Run-off businesses	(165)	–	–	–	–	–	(165)	–	(165)
Income / (loss) before tax	1,100	928	89	125	(318)	1	1,925	(11)	1,914
Income tax (expense) / benefit	31	(217)	(5)	(34)	60	–	(165)	11	(154)
Net income / (loss)	1,131	711	84	91	(258)	1	1,760	–	1,760
Inter-segment underlying earnings	(154)	(51)	(67)	248	24
Revenues
2010
Life insurance gross premiums	6,877	3,185	7,425	1,306	–	–	18,793	(427)	18,366
Accident and health insurance	1,850	201	–	72	–	–	2,123	(2)	2,121
General insurance	–	451	–	159	–	–	610	–	610
Total gross premiums	8,727	3,837	7,425	1,537	–	–	21,526	(429)	21,097
Investment income	4,073	2,161	2,340	234	305	(279)	8,834	(72)	8,762
Fee and commission income	998	348	164	479	–	(245)	1,744	–	1,744
Other revenues	1	–	–	4	1	–	6	(1)	5
Total revenues	13,799	6,346	9,929	2,254	306	(524)	32,110	(502)	31,608
Inter-segment revenues	–	1	3	246	274

Income statement – Underlying earnings	Americas	The Netherlands	United Kingdom	New Markets	Holding and other activities	Elimi- nations	Total	Associates elimi- nations	Total IFRS based
2009
Underlying earnings before tax	817	398	52	170	(252)	–	1,185	(12)	1,173
Fair value items	(87)	(374)	28	3	(114)	–	(544)	–	(544)
Realized gains / (losses) on investments	63	351	79	5	20	–	518	(1)	517
Impairment charges	(1,065)	(132)	(184)	(27)	(5)	–	(1,413)	3	(1,410)
Impairment reversals	115	21	–	–	–	–	136	–	136
Other income / (charges)	(3)	–	67	(387)	–	–	(323)	–	(323)
Run-off businesses	(13)	–	–	–	–	–	(13)	–	(13)
Income / (loss) before tax	(173)	264	42	(236)	(351)	–	(454)	(10)	(464)
Income tax (expense) / benefit	669	(23)	(33)	(53)	98	–	658	10	668
Net income / (loss)	496	241	9	(289)	(253)	–	204	–	204
Inter-segment underlying earnings	(19)	(11)	3	(5)	32
Revenues
2009
Life insurance gross premiums	5,961	3,066	7,014	1,284	–	–	17,325	(423)	16,902
Accident and health insurance	1,689	206	–	68	–	–	1,963	–	1,963
General insurance	–	457	–	151	–	–	608	–	608
Total gross premiums	7,650	3,729	7,014	1,503	–	–	19,896	(423)	19,473
Investment income	3,913	2,211	2,296	283	86	(42)	8,747	(66)	8,681
Fee and commission income	896	383	174	140	–	–	1,593	–	1,593
Other revenues	2	–	–	2	1	–	5	(1)	4
Total revenues	12,461	6,323	9,484	1,928	87	(42)	30,241	(490)	29,751
Inter-segment revenues	1	2	2	–	37

Income statement – Underlying earnings	Americas	The Netherlands	United Kingdom	New Markets	Holding and other activities	Elimi- nations	Total	Associates elimi- nations	Total IFRS based
2008
Underlying earnings before tax	723	378	148	101	(130)	18	1,238	(15)	1,223
Fair value items	(1,748)	(193)	(22)	(24)	342	–	(1,645)	–	(1,645)
Realized gains / (losses) on investments	17	48	1	(5)	–	–	61	–	61
Impairment charges	(812)	(138)	(23)	(76)	(34)	–	(1,083)	9	(1,074)
Impairment reversals	36	–	–	–	–	–	36	–	36
Other income / (charges)	4	–	(17)	1	(1)	1	(12)	–	(12)
Run-off businesses	350	–	–	–	–	–	350	–	350
Income / (loss) before tax	(1,430)	95	87	(3)	177	19	(1,055)	(6)	(1,061)
Income tax (expense) / benefit	51	(1)	18	(31)	(64)	–	(27)	6	(21)
Net income / (loss)	(1,379)	94	105	(34)	113	19	(1,082)	–	(1,082)
Inter-segment underlying earnings	(69)	(35)	2	(6)	108
Revenues
2008
Life insurance gross premiums	5,975	3,204	9,017	1,880	–	–	20,076	(277)	19,799
Accident and health insurance	1,713	210	–	71	–	–	1,994	–	1,994
General insurance	–	458	–	158	–	–	616	–	616
Total gross premiums	7,688	3,872	9,017	2,109	–	–	22,686	(277)	22,409
Investment income	4,681	2,387	2,438	425	218	(120)	10,029	(64)	9,965
Fee and commission income	938	416	220	129	–	–	1,703	–	1,703
Other revenues	2	–	–	3	–	–	5	–	5
Total revenues	13,309	6,675	11,675	2,666	218	(120)	34,423	(341)	34,082
Inter-segment revenues	4	–	2	–	114

The Group uses underlying earnings before tax in its segment reporting as an important indicator of its financial performance. The reconciliation of this measure to the income before tax is shown below. AEGON believes that underlying earnings before tax, together with the other information included in this report, provides a meaningful measure for the investing public to evaluate AEGON’s business relative to the businesses of its peers.

	Note	2010	2009	2008
Underlying earnings before tax		1,963	1,173	1,223
Fair value items		369	(460)	(1,619)
Realized gains and (losses) on financial investments	34	564	475	99
Gains and (losses) on investments in real estate	34	135	(179)	(48)
Fair value changes on economic hedges for which no hedge accounting is applied	34	(119)	152	(46)
Ineffective portion of hedge transactions for which hedge accounting is applied	34	(1)	(41)	50
Realized gains and (losses) on repurchased debt	34	18	11	–
DPAC / VOBA offset	38	(27)	78	14
Impairment (charges) / reversals	39	(694)	(1,331)	(1,072)
Other income / (charges)	35, 36, 38, 40, 41	(129)	(329)	(12)
Run-off businesses		(165)	(13)	350
Income / (loss) before tax		1,914	(464)	(1,061)

 

Other selected income statement items	Americas	The Netherlands	United Kingdom	New Markets	Holding and other activities	Total
2010
Amortization of deferred expenses, VOBA and future servicing rights	1,061	99	250	100	–	1,510
Depreciation	41	18	12	15	2	88
Impairment charges / (reversals) on financial assets, excluding receivables	456	11	36	22	–	525
Impairment charges / (reversals) on non-financial assets and receivables	161	(2)	1	16	–	176
2009
Amortization of deferred expenses, VOBA and future servicing rights	1,118	125	232	94	–	1,569
Depreciation	39	23	14	13	1	90
Impairment charges / (reversals) on financial assets, excluding receivables	1,005	111	183	23	5	1,327
Impairment charges / (reversals) on non-financial assets and receivables	22	15	1	–	–	38
2008
Amortization of deferred expenses, VOBA and future servicing rights	999	133	241	184	–	1,557
Depreciation	38	17	14	14	1	84
Impairment charges / (reversals) on financial assets, excluding receivables	815	138	22	70	34	1,079
Impairment charges / (reversals) on non-financial assets and receivables	38	–	–	3	–	41

Number of employees	Americas	The Netherlands	United Kingdom	New Markets	Holding and other activities	Total
2010
Employees – excluding agents	11,358	4,652	4,056	4,026	316	24,408
Agent employees	1,600	470	82	914	–	3,066
Total	12,958	5,122	4,138	4,940	316	27,474
2009
Employees – excluding agents	12,714	4,852	4,759	2,498	267	25,090
Agent employees	1,480	658	92	1,062	–	3,292
Total	14,194	5,510	4,851	3,560	267	28,382
2008
Employees – excluding agents	13,431	5,226	5,068	3,000	254	26,979
Agent employees	1,641	945	121	1,739	–	4,446
Total	15,072	6,171	5,189	4,739	254	31,425

Summarized assets and liabilities per segment	Americas	The Netherlands	United Kingdom	New Markets	Holding and other activities	Elimi- nations	Total
2010
ASSETS
VOBA and future servicing rights	2,589	135	752	189	–	–	3,665
Investments general account	93,645	37,173	9,269	2,811	293	(3)	143,188
Investments for account of policyholders	59,353	23,058	57,693	6,138	–	(5)	146,237
Investments in associates	85	59	9	576	4	–	733
Deferred expenses	7,806	296	3,327	292	–	–	11,721
Other assets	9,936	11,195	2,211	1,222	30,824	(28,629)	26,759
Total assets	173,414	71,916	73,261	11,228	31,121	(28,637)	332,303
LIABILITIES
Insurance contracts general account	68,476	20,992	9,026	2,012	–	–	100,506
Insurance contracts for account of policyholders	42,792	23,413	8,594	2,851	–	–	77,650
Investment contracts general account	16,420	5,986	679	152	–	–	23,237
Investment contracts for account of policyholders	16,573	–	49,642	3,312	–	–	69,527
Other liabilities	13,180	17,445	2,449	1,044	7,694	(3,854)	37,958
Total liabilities	157,441	67,836	70,390	9,371	7,694	(3,854)	308,878

Summarized assets and liabilities per segment	Americas	The Netherlands	United Kingdom	New Markets	Holding and other activities	Elimi- nations	Total
2009
ASSETS
VOBA and future servicing rights	2,741	155	757	203	–	–	3,856
Investments general account	85,770	36,144	7,917	2,706	1,671	(3)	134,205
Investments for account of policyholders	49,920	21,749	48,826	5,355	–	(5)	125,845
Investments in associates	72	53	8	560	4	(1)	696
Deferred expenses	7,495	432	3,057	244	–	–	11,228
Other assets	9,579	7,589	2,646	899	30,088	(27,997)	22,804
Total assets	155,577	66,122	63,211	9,967	31,763	(28,006)	298,634
LIABILITIES
Insurance contracts general account	62,575	20,833	8,422	1,960	–	–	93,790
Insurance contracts for account of policyholders	37,092	22,318	7,924	2,426	–	–	69,760
Investment contracts general account	20,939	6,237	614	142	–	–	27,932
Investment contracts for account of policyholders	12,882	2	41,593	2,944	–	–	57,421
Other liabilities	9,876	13,188	2,213	717	12,880	(8,026)	30,848
Total liabilities	143,364	62,578	60,766	8,189	12,880	(8,026)	279,751

Investments	Americas	The Netherlands	United Kingdom	New Markets	Holding and other activities	Elimi- nations	Total
2010
Shares	1,300	945	62	72	–	(3)	2,376
Bonds	67,121	18,504	9,198	2,041	–	–	96,864
Loans	11,412	15,629	9	653	–	–	27,703
Other financial assets	13,083	40	–	45	293	–	13,461
Investments in real estate	729	2,055	–	–	–	–	2,784
Investments general account	93,645	37,173	9,269	2,811	293	(3)	143,188
Shares	–	8,087	29,589	3,139	–	(5)	40,810
Bonds	–	14,435	15,768	223	–	–	30,426
Separate accounts and investment funds	59,353	–	7,427	1,309	–	–	68,089
Other financial assets	–	536	3,775	1,467	–	–	5,778
Investments in real estate	–	–	1,134	–	–	–	1,134
Investments for account of policyholders	59,353	23,058	57,693	6,138	–	(5)	146,237
Investments on balance sheet	152,998	60,231	66,962	8,949	293	(8)	289,425
Off balance sheet investments third parties	86,287	12,353	–	25,126	–	–	123,766
Total revenue generating investments	239,285	72,584	66,962	34,075	293	(8)	413,191
Investments
Available-for-sale	76,929	19,261	9,177	1,879	4	–	107,250
Loans	11,412	15,629	9	653	–	–	27,703
Held-to-maturity	–	–	–	139	–	–	139
Financial assets at fair value through profit or loss	63,928	23,286	56,642	6,278	289	(8)	150,415
Investments in real estate	729	2,055	1,134	–	–	–	3,918
Total investments on balance sheet	152,998	60,231	66,962	8,949	293	(8)	289,425
Investments in associates	85	59	9	576	4	–	733
Other assets	20,331	11,626	6,290	1,703	30,824	(28,629)	42,145
Consolidated total assets	173,414	71,916	73,261	11,228	31,121	(28,637)	332,303

Investments	Americas	The Netherlands	United Kingdom	New Markets	Holding and other activities	Elimi- nations	Total
2009
Shares	1,331	661	53	54	–	(3)	2,096
Bonds	60,182	20,384	7,852	2,001	1,049	–	91,468
Loans	11,978	12,975	11	604	–	–	25,568
Other financial assets	11,783	40	–	48	622	–	12,493
Investments in real estate	496	2,084	–	–	–	–	2,580
Investments general account	85,770	36,144	7,916	2,707	1,671	(3)	134,205
Shares	–	7,184	24,669	2,750	–	(5)	34,598
Bonds	–	13,777	14,314	212	–	–	28,303
Separate accounts and investment funds	49,920	–	4,772	1,117	–	–	55,809
Other financial assets	–	788	4,023	1,276	–	–	6,087
Investments in real estate	–	–	1,048	–	–	–	1,048
Investments for account of policyholders	49,920	21,749	48,826	5,355	–	(5)	125,845
Investments on balance sheet	135,690	57,893	56,742	8,062	1,671	(8)	260,050
Off balance sheet investments third parties	77,715	12,968	3,116	8,983	–	–	102,782
Total revenue generating investments	213,405	70,861	59,858	17,045	1,671	(8)	362,832
Investments
Available-for-sale	69,211	20,944	7,819	1,888	1,049	–	100,911
Loans	11,978	12,975	11	604	–	–	25,568
Held-to-maturity	–	–	–	70	–	–	70
Financial assets at fair value through profit or loss	54,005	21,890	47,864	5,500	622	(8)	129,873
Investments in real estate	496	2,084	1,048	–	–	–	3,628
Total investments on balance sheet	135,690	57,893	56,742	8,062	1,671	(8)	260,050
Investments in associates	72	53	8	560	4	(1)	696
Other assets	19,815	8,176	6,460	1,346	30,088	(27,997)	37,888
Consolidated total assets	155,577	66,122	63,210	9,968	31,763	(28,006)	298,634

NOTE 45 Guarantees in insurance contracts

For financial reporting purposes AEGON distinguishes between the following types of minimum guarantees:

• Financial guarantees: these guarantees are treated as bifurcated embedded derivatives, valued at fair value and presented as derivatives (refer to note note 2.10 and note 3).
• Total return annuities: these guarantees are not bifurcated from their host contracts because they are valued at fair value and presented as part of insurance contracts (refer to note 2.19).
• Life contingent guarantees in the United States: these guarantees are not bifurcated from their host contracts, valued in accordance with insurance accounting (ASC 944, Financial Services - Insurance) and presented together with insurance liabilities (refer to note 2.19 and note 3); and
• Life contingent guarantees in the Netherlands: these guarantees are not bifurcated from their host contracts, valued at fair value and presented together with the underlying insurance contracts (refer to note 2.19 and note 3).

In addition to the guarantees mentioned above AEGON has traditional life insurance contracts that include minimum guarantees that are not valued explicitly; however, the adequacy of all insurance liabilities, net of VOBA and DPAC, are assessed periodically (refer to note 2.19).

a. Financial guarantees

In the United States and the United Kingdom, a guaranteed minimum withdrawal benefit (GMWB) is offered directly on some variable annuity products AEGON issues and is also assumed from a ceding company. Variable annuities allow a customer to provide for the future on a tax-deferred basis and to participate in equity or bond market performance. Variable annuities allow a customer to select payout options designed to help meet the customer’s need for income upon maturity, including lump sum payment or income for life or for a period of time. This benefit guarantees that a policyholder can withdraw a certain percentage of the account value, starting at a certain age or duration, for either a fixed period or during the life of the policyholder.

In Canada, variable products sold are known as ’Segregated funds‘. Segregated funds are similar to variable annuities, except that they include a capital protection guarantee for mortality and maturity benefits (guaranteed minimum accumulation benefits). The initial guarantee period is ten years. The ten-year period may be reset at the contractholder’s option for certain products to lock-in market gains. The reset feature cannot be exercised in the final decade of the contract and for many products can only be exercised a limited number of times per year. The management expense ratio charged to the funds is not guaranteed and can be increased by management decision. In addition, AEGON Canada recently introduced a contract with a minimum guaranteed withdrawal benefit. The contract provides capital protection for longevity risk in the form of a guaranteed minimum annuity payment.

In The Netherlands, individual variable unit-linked products have a minimum benefit guarantee if premiums are invested in certain funds. The sum insured at maturity or upon the death of the beneficiary has a minimum guaranteed return (in the range of 3% to 4%) if the premium has been paid for a consecutive period of at least ten years and is invested in a mixed fund and / or fixed income funds. No guarantees are given for equity investments only. The management expense ratio charged to the funds is not guaranteed and can be increased at management’s discretion.

The following table provides information on the liabilities for financial guarantees for minimum benefits:

					2010					2009
	United States1	Canada1	The Nether- lands 2	New Markets	Total 3	United States1	Canada1	The Nether- lands 2	New Markets	Total 3
At January 1	92	685	757	1	1,535	350	1,028	1,156	23	2,557
Incurred guarantee benefits	(39)	(95)	74	4	(56)	(250)	(216)	(399)	(22)	(887)
Paid guarantee benefits	–	(623)	–	–	(623)	–	(235)	–	–	(235)
Net exchange differences	7	78	–	–	85	(8)	108	–	–	100
At December 31	60	45	831	5	941	92	685	757	1	1,535
Account value	8,803	2,161	7,751	245	18,960	5,974	2,448	6,934	741	16,097
Net amount at risk4	282	93	967	8	1,350	457	684	1,016	1	2,158
Guaranteed minimum accumulation and withdrawal benefits. Fund plan and unit-linked guarantees. Balances are included in the derivatives liabilities on the face of the balance sheet; refer to note 9. The net amount at risk represents the difference between the maximum amount payable under the guarantees and the account value.

In addition, AEGON reinsures the elective guaranteed minimum withdrawal benefit rider issued with a ceding company’s variable annuity contracts. The rider is essentially a return of premium guarantee, which is payable over a period of at least fourteen years from the date that the policyholder elects to start withdrawals. At contract inception, the guaranteed remaining balance is equal to the premium payment. The periodic withdrawal is paid by the ceding company until the account value is insufficient to cover additional withdrawals. Once the account value is exhausted, AEGON pays the periodic withdrawals until the guaranteed remaining balance is exhausted. At December 31, 2010, the reinsured account value was EUR 4.2 billion (2009: EUR 4.5 billion) and the guaranteed remaining balance was EUR 3.5 billion (2009: EUR 4.0 billion).

The reinsurance contract is accounted for as a derivative and is carried in AEGON’s balance sheet at fair value. At December 31, 2010, the contract had a value of EUR 71 million (2009: EUR 90 million). AEGON entered into a derivative program to mitigate the overall exposure to equity market and interest rate risks associated with the reinsurance contract. This program involves selling S&P 500 futures contracts to mitigate the effect of equity market movement on the reinsurance contract and the purchase of over-the-counter interest rate swaps to mitigate the effect of movements in interest rates on the reinsurance contracts.

b. Total return annuities

Total Return Annuity (TRA) is an annuity product in the United States which provides customers with a pass-through of the total return on an underlying portfolio of investment securities (typically a mix of corporate and convertible bonds) subject to a cumulative minimum guarantee. Both the assets and liabilities are carried at fair value, however, due to the minimum guarantee not all of the changes in the market value of the asset will be offset in the valuation of the liability. This product exists in both the fixed annuity and life reinsurance lines of business and in both cases represents closed blocks. The reinsurance contract is in the form of modified coinsurance, so only the liability for the minimum guarantee is recorded on our books.

Product balances as of December 31, 2010 were EUR 572 million in fixed annuities (2009: EUR 657 million) and EUR 137 million in life reinsurance (2009: EUR 149 million).

c. Life contingent guarantees in the United States

Certain variable insurance contracts in the United States also provide guaranteed minimum death benefits (GMDB) and guaranteed minimum income benefits (GMIB). Under a GMDB, the beneficiaries receive the greater of the account balance or the guaranteed amount upon the death of the insured. The net amount at risk for GMDB contracts is defined as the current GMBD in excess of the capital account balance at the balance sheet date.

The GMIB feature provides for minimum payments if the contractholder elects to convert to an immediate payout annuity. The guaranteed amount is calculated using the total deposits made by the contractholder, less any withdrawals and sometimes includes a roll-up or step-up feature that increases the value of the guarantee with interest or with increases in the account value.

The additional liability for guaranteed minimum benefits that are not bifurcated are determined (based on ASC 944) each period by estimating the expected value of benefits in excess of the projected account balance and recognizing the excess over the accumulation period based on total expected assessments. The estimates are reviewed regularly and any resulting adjustment to the additional liability is recognized in the income statement. The benefits used in calculating the liabilities are based on the average benefits payable over a range of stochastic scenarios. Where applicable, the calculation of the liability incorporates a percentage of the potential annuitizations that may be elected by the contractholder.

The following table provides information on the liabilities for guarantees that are included in the valuation of the host contracts.

			2010			2009
	GMDB1	GMIB2	Total4	GMDB1	GMIB2	Total4
At January 1	334	543	877	409	434	843
Incurred guarantee benefits	34	(6)	28	266	160	426
Paid guarantee benefits	(103)	(37)	(140)	(329)	(33)	(362)
Net exchange differences	27	43	70	(12)	(18)	(30)
At December 31	292	543	835	334	543	877
	GMDB1	GMIB 2	Total 3	GMDB1	GMIB 2	Total 3
Account value	28,846	6,926		24,289	6,369
Net amount at risk 5	3,054	561		4,055	577
Average attained age of contractholders	66	66		66	66
Guaranteed minimum death benefit in the United States. Guaranteed minimum income benefit in the United States. Note that the variable annuity contracts with guarantees may offer more than one type of guarantee in each contract; therefore, the amounts listed are not mutually exclusive. Balances are included in the insurance liabilities on the face of the balance sheet; refer to note 19. The net amount at risk is defined as the present value of the minimum guaranteed annuity payments available to the contract holder determined in accordance with the terms of the contract in excess of the current account balance.

d. Life contingent guarantees in the Netherlands

The group pension contracts offered by AEGON The Netherlands include large group contracts that have an individually determined asset investment strategy underlying the pension contract. The guarantee given is that the profit sharing is the minimum of 0% or the realized return (on an amortized cost basis), both adjusted for technical interest rates ranging from 3% to 4%. If there is a negative profit sharing, the 0% minimum is effective, but the loss in any given year is carried forward to be offset against any future surpluses. In general, a guarantee is given for the life of the underlying employees so that their pension benefit is guaranteed. Large group contracts also share technical results (mortality risk and disability risk). The contract period is typically five years and the premiums are fixed over this period. Separate account guaranteed group contracts provide a guarantee on the benefits paid.

The traditional life and pension products offered by AEGON The Netherlands include various products that accumulate a cash value. Premiums are paid by customers at inception or over the term of the contract. The accumulation products pay benefits on the policy maturity date, subject to survival of the insured. In addition, most policies also pay death benefits if the insured dies during the term of the contract. The death benefits may be stipulated in the policy or depend on the gross premiums paid to date. Premiums and amounts insured are established at inception of the contract. The amount insured can be increased as a result of profit sharing, if provided for under the terms and conditions of the product. Minimum interest guarantees exist for all generations of accumulation products written, except for universal life type products for which premiums are invested solely in equity funds. Older generations contain a 4% guarantee; in recent years the guarantee has decreased to 3%.

These guarantees are valued at fair value and are included as part of insurance liabilities with the underlying host insurance contracts in note 19.

The following table provides information on the liabilities for guarantees that are included in the valuation of the host contracts.  

	2010	2009
	GMB 1,2	GMB 1,2
At January 1	1,145	2,410
Incurred guarantee benefits	511	(1,265)
At December 31	1,656	1,145
Account value	13,448	12,929
Net amount at risk 3	1,853	1,658
Guaranteed minimum benefit in the Netherlands. Balances are included in the insurance liabilities on the face of the balance sheet; refer to note 19. The net amount at risk represents the difference between the maximum amount payable under the guarantees and the account value.

Fair value measurement of guarantees in insurance contracts

The fair values of guarantees mentioned above (with the exception of life contingent guarantees in the United States) are calculated as the present value of future expected payments to policyholders less the present value of assessed rider fees attributable to the guarantees. Given the long-term nature of these guarantees, their fair values are determined by using complex valuation techniques. Because of the dynamic and complex nature of these cash flows, AEGON uses stochastic techniques under a variety of market return scenarios. A variety of factors are considered, including expected market rates of return, equity and interest rate volatility, credit risk, correlations of market returns, discount rates and actuarial assumptions.

Since the price of these guarantees is not quoted in any market, the fair value of these guarantees is computed using valuation models which use observable market data supplemented with the Group’s assumptions on developments in future interest rates, volatility in equity prices and other risks inherent in financial markets. All the assumptions used as part of this valuation model are calibrated against actual historical developments observed in the markets. Since many of the assumptions are unobservable and are considered to be significant inputs to the liability valuation, the liability has been reflected within Level III of the fair value hierarchy. Refer to note 3 for more details on AEGON’s fair value hierarchy.

The expected returns are based on risk-free rates. AEGON adds a premium to reflect the credit spread as required. The credit spread is set by using the credit default swap (CDS) spreads of a reference portfolio of life insurance companies (including AEGON), adjusted to reflect the subordination of senior debt holders at the holding company level to the position of policyholders at the operating company level (who have priority in payments to other creditors). Because CDS spreads for United States life insurers differed significantly from those for European life insurers, AEGON’s assumptions reflect these differences in the valuation. If the credit spreads were 20 basis points higher or lower respectively, and holding all other variables constant in the valuation model, 2010 income before tax would have been EUR 158 million and EUR 173 million higher or lower respectively (2009: EUR 136 million and EUR 145 million higher or lower).

For equity volatility, AEGON uses a term structure assumption with market-based implied volatility inputs for the first five years and a long-term forward rate assumption of 25% thereafter. The volume of observable option trading from which volatilities are derived generally declines as the contracts’ term increases, therefore, the volatility curve grades from implied volatilities for five years to the ultimate rate. The resulting volatility assumption in year 20 for the S&P 500 index (expressed as a spot rate) was 24.8% at December 31, 2010 and 25.3% at December 31, 2009. Correlations of market returns across underlying indices are based on historical market returns and their inter-relationships over a number of years preceding the valuation date. Assumptions regarding policyholder behavior, such as lapses, included in the models are derived in the same way as the assumptions used to measure insurance liabilities.

Had AEGON used a long-term equity implied volatility assumption that was 5 volatility points higher or lower, the impact on income before tax would have been a decrease of EUR 144 million or an increase of EUR 127 million, respectively, in 2010 IFRS income before tax (2009: EUR 155 million decrease and EUR 136 million increase).

These assumptions are reviewed at each valuation date, and updated based on historical experience and observable market data, including market transactions such as acquisitions and reinsurance transactions.

AEGON utilizes different risk management strategies to mitigate the financial impact of the valuation of these guarantees on the results, including asset and liability management and derivative hedging strategies to hedge certain aspects of the market risks embedded in these guarantees. Guarantees valued at fair value contributed a net gain before tax of EUR 356 million (2009: loss of EUR 76 million) to earnings. This net gain is attributable to a decrease in the total guarantee reserves of EUR 109 million (2009: decrease of EUR 2,505 million). The main drivers of this decrease are EUR 360 million related to an increase in equity markets (2009: EUR 911 million), EUR 80 million related to decreases in equity volatilities (2009: EUR 344 million) and EUR 227 million related to movements in the spread of credit risk (2009: EUR 187 million loss) offset by EUR 1,328 million related to decreases in risk free rates (2009: EUR 1,434 million gain). Hedges related to these guarantee reserves contributed fair value gains of EUR 894 million to income before tax (2009: losses of EUR 2,581 million).

NOTE 46 Capital and solvency

AEGON’s capital base reflects the capital employed in insurance activities and consists of shareholders’ equity, convertible core capital securities, perpetual capital securities and dated subordinated debt and senior debt. AEGON targets its capital base to comprise at least 70% core capital (excluding the revaluation reserves), and targets 25% perpetual capital securities (consisting of junior perpetual capital securities and perpetual cumulative subordinated bonds) and 5% dated subordinated and senior debt related to insurance activities.

Additionally, AEGON manages capital adequacy at the level of its country units and their operating companies. The goal is to ensure that AEGON companies maintain their financial strength. AEGON maintains its companies’ capital adequacy levels at whichever is the higher of local regulatory requirements and the relevant local Standard & Poor’s requirements for very strong capitalization, and any additionally self-imposed economic requirements.

Core capital, which consists of shareholders’ equity, excluding revaluation reserve, and the convertible core capital securities that were issued in 2008 (see below), was EUR 18,710 million at December 31, 2010 compared to EUR 14,164 million at December 31, 2009. Shareholders’ equity increased by EUR 5,046 million due to the change in the revaluation reserve of EUR 2,667 million, net income attributable to equity holders of AEGON N.V. of EUR 1,759 million and a number of other effects, including preferred dividend paid (EUR 90 million).

Group equity consists of core capital plus Other equity instruments (see note 17) such as the junior perpetual capital securities and the perpetual cumulative subordinated bonds as well as other equity reserves. Group equity was EUR 23,425 million at December 31, 2010, compared to EUR 18,883 million at December 31, 2009.

The table that follows reconciles total shareholders’ equity to the total capital base:

	2010	2009
Total shareholders’ equity	17,210	12,164
Convertible core capital securities	1,500	2,000
Junior perpetual capital securities	4,192	4,192
Perpetual cumulative subordinated bonds	453	453
Share options not yet exercised	59	64
Minority interest	11	10
Trust pass-through securities	143	130
Borrowings	8,518	7,485
Borrowings not related to capital funding of insurance activities	(7,331)	(6,527)
Total Capital Base	24,755	19,971
Currency revaluation perpetual capital securities1	(160)	(369)
Reverse revaluation reserve	(958)	1,709
Total Capital Base excluding revaluation reserve	23,637	21,311
Capital securities that are denominated in foreign currencies are, for purpose of calculating the capital base, revalued to the period-end exchange rate.

Borrowings not related to capital funding of insurance activities consists of operational funding including US regulation XXX and guideline AXXX redundant reserves. In the ordinary course of business, AEGON N.V. may at times have borrowings, which are offset by cash and cash equivalents available for future capital management activities, such as funding capital contributions in its subsidiaries, redemption of borrowings or payment of dividends to its shareholders.

The total capital base is a non-IFRS measure, as IFRS does not permit separate presentation of borrowings based on the deployment of the proceeds.

AEGON N.V. is subject to certain financial covenants in some of its financial agreements (such as issued debentures, credit facilities and ISDA agreements). Under these financial covenants, an event of default may occur if and when any financial indebtedness of any member of the Group is not paid when due, or not paid within any applicable grace period. The financial agreements may also include a cross default provision which may be triggered if and when any financial indebtedness of any member of the Group is declared to be or otherwise becomes due and payable prior to its specified maturity as a result of an event of default.

All financial agreements are closely monitored periodically to asses the likelihood of a breach of any financial covenant and the likelihood thereof in the near future. On the basis of this assessment, a breach of any such covenant has not occurred.

Insurance, reinsurance, investment management and banking companies are required to maintain a minimum solvency margin based on applicable local regulations. For managing AEGON’s capital, the life insurance and life reinsurance regulations in the European Union (EU) and the United States are of main importance. AEGON’s Insurance Group Directive ratio (IGD ratio) was 198%. The calculation of the IGD ratio is based on Solvency I capital requirements for entities within the EU (Pillar 1 for AEGON UK), and local regulatory solvency measurements for non-EU entities. Specifically, required capital for the life insurance companies in the US is calculated as two times the upper end of the Company Action Level range (200%) as applied by the National Association of Insurance Commissioners in the US. The calculation of the IGD ratio excludes the available and required capital of the UK With-profit funds. In the UK solvency surplus calculation the local regulator only allows the available capital number of the With-profit funds included in overall local available capital to be equal to the amount of With-profit funds’ required capital.

In the United States, regulation of the insurance business is principally at the state level. State insurance regulators and the National Association of Insurance Commissioners have adopted risk-based capital (RBC) requirements for insurance companies. RBC calculations measure the ratio of a company’s statutory capital, which is measured on a prudent regulatory accounting basis, to a minimum capital amount determined by the RBC formula. The RBC formula measures exposures to investment risk, insurance risk, market risk, and general business risk. Life reinsurance is treated as life insurance. The most pertinent RBC measure is the company action level (CAL) RBC. This is the highest regulatory intervention level and is the level at which a Company has to submit a plan to its state regulators. The CAL is 200% of the authorized control level (ACL), the level at which regulators are permitted to seize control of the Company. At the end of 2010, the combined risk based capital ratio of AEGON’s life insurance subsidiaries in the United States was approximately 412% of the CAL RBC.

For the insurance and reinsurance undertakings of AEGON in the EU, the European Solvency I directives are applicable, as implemented in the relevant member states. Solvency I allows member states to require solvency standards, exceeding the minimum requirements set by the Solvency I directives. For life insurance companies, the Solvency I capital requirement is by and large the sum of 4% of insurance and investment liabilities for general account and 1% of insurance and investment liabilities for account policyholders if no guaranteed investment returns are given. At the end of 2010, AEGON The Netherlands consolidated solvency capital ratio based on IFRS was approximately 200%.

The Financial Services Authority (FSA) regulates insurance companies in the United Kingdom under the Financial Services and Markets Act 2000 and sets minimum solvency standards. Companies must manage their solvency positions according to the most stringent of the published Solvency I measure (Pillar 1) and a privately submitted economic capital measure (Pillar 2). For AEGON UK, the published measure continues to be the most stringent requirement. At the end of 2010, AEGON UK’s aggregate Pillar 1 capital ratio was approximately 152% (excluding With-profit funds). In the local solvency surplus calculation for regulatory filings, the local regulator (FSA) only allows the available capital number of the With-profits funds included in overall available capital to be equal to the amount of With-profits funds’ required capital.

AEGON N.V. is subject to legal restrictions on the amount of dividends it can pay to its shareholders. Under Dutch law, the amount that is available to pay dividends consists of total shareholders’ equity less the issued and outstanding capital and less the reserves required by law. The revaluation account and legal reserves, foreign currency translation reserve and other, cannot be freely distributed. In case of negative balances for individual reserves legally to be retained, no distributions can be made out of retained earnings to the level of these negative amounts. Total distributable reserves under Dutch law amount to EUR 7,271 million at December 31, 2010 (2009: EUR 7,623 million).

In addition, AEGON’s subsidiaries, principally insurance companies, are subject to restrictions on the amounts of funds they may transfer in the form of cash dividends or otherwise to their parent companies. There can be no assurance that these restrictions will not limit or restrict AEGON in its ability to pay dividends in the future.

OPTAS N.V., an indirect subsidiary of AEGON N.V., holds statutory reserves of EUR 895 million (2009: EUR 861 million) which are restricted. Included in AEGON N.V.’s legal reserves is an amount of EUR 355 million (2009: EUR 321 million) related to OPTAS N.V. which represents the increase in statutory reserves since the acquisition of OPTAS N.V. by AEGON.

NOTE 47 Summary of total financial assets and financial liabilities at fair value through profit or loss

The table that follows summarizes the carrying amounts of financial assets and financial liabilities that are classified as at fair value through profit or loss, with appropriate distinction between those financial assets and financial liabilities held for trading and those that, upon initial recognition, were designated as at fair value through profit or loss.

		2010		2009
	Trading	Designated	Trading	Designated
Investments for general account	302	5,010	624	4,452
Investments for account of policyholders	–	145,103	–	124,797
Derivatives with positive values not designated as hedges	5,231	–	4,103	–
Total financial assets at fair value through profit or loss	5,533	150,113	4,727	129,249
Investment contracts for account of policyholders	–	25,603	–	20,477
Derivatives with negative values not designated as hedges	4,789	–	4,618	–
Borrowings	–	987	–	959
Total financial liabilities at fair value through profit or loss	4,789	26,590	4,618	21,436

Investments for general account

The Group manages certain portfolios on a total return basis which have been designated at fair value through profit or loss. This includes portfolios of investments in limited partnerships and limited liability companies (primarily hedge funds) for which the performance is assessed internally on a total return basis. In addition, some investments that include an embedded derivative that would otherwise have required bifurcation, such as convertible instruments, preferred shares and credit linked notes, have been designated at fair value through profit or loss.

Investments 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 at fair value through profit or loss. The Group elected to designate these investments for account of policyholders at fair value through profit or loss, a classification of financial 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 reflected in net income (accounting mismatch).

Investments for account of policyholders

Investments held for account of policyholders comprise assets that are linked to various insurance and investment contracts for which the financial risks are borne by the customer. Under the Group’s accounting policies, these insurance and investment liabilities are measured at the fair value of the linked assets with changes in the fair value recognized in the income statement. To avoid an accounting mismatch, the linked assets have been designated as at fair value through profit or loss.

In addition, the investment for account of policyholders include with profit assets, where an insurer manages these assets together with related liabilities on a fair value basis in accordance with a documented policy of asset and liability management. In accordance with Group’s accounting policies, these assets have been designated as at fair value through profit or loss.

Investment contracts for account of policyholders

With the exception of the financial liabilities with discretionary participating features that are not subject to the classification and measurement requirements for financial instruments, all investment contracts for account of policyholders that are carried at fair value or at the fair value of the linked assets are included in the table above.

Derivatives

With the exception of derivatives designated as a hedging instrument, all derivatives held for general account and held for account of policyholders are included in the table above.

Borrowings

Borrowings designated as at fair value through profit or loss includes financial instruments that are managed on a fair value basis together with related financial assets and financial derivatives.

Gains and losses recognized in the income statement on financial assets and financial liabilities classified as at fair value through profit or loss can be summarized as follows:

		2010		2009
	Trading	Designated	Trading	Designated
Net gains and losses	691	14,119	(89)	14,807

No loans and receivables were designated at fair value through profit or loss.

Changes in the fair value of investment contracts for account of policyholders designated at fair value through profit and loss were not attributable to changes in AEGON’s credit spread. There are also no differences between the carrying amounts of these financial liabilities and the contractual amounts payable at maturity (net of surrender penalties).

Note 48 Commitments and contingencies 

Investments contracted

In the normal course of business, the Group has committed itself through purchase and sale transactions of investments, mostly to be executed in the course of 2011. The amounts represent the future outflow and inflow, respectively, of cash related to these investment transactions that are not reflected in the consolidated balance sheet.

		2010		2009
	Purchase	Sale	Purchase	Sale
Real estate	–	(6)	–	(3)
Mortgage loans	244	–	327	–
Private loans	19	–	36	–
Other	559	–	807	–

Mortgage loans commitments represent undrawn mortgage loan facility provided and outstanding proposals on mortgages. Other commitments include future purchases of interests in investment funds and limited partnerships.

Other commitments and contingencies 

 

	2010	2009
Guarantees	547	443
Standby letters of credit	122	109
Share of contingent liabilities incurred in relation to interests in joint ventures	75	717
Other guarantees	4	3
Other commitments and contingent liabilities	26	27

Guarantees include those given on account of asset management commitments and guarantees associated with the sale of investments in low-income housing tax credit partnerships in the United States. Standby letters of credit amounts reflected above, are the liquidity commitment notional amounts. In addition to the guarantees shown in the table, guarantees have been given for fulfillment of contractual obligations such as investment mandates related to investment funds.

AEGON N.V. has entered into a net worth maintenance agreement with its indirect subsidiary AEGON Financial Assurance Ireland Limited (AFA), pursuant to which AEGON N.V. will cause AFA to have a tangible net worth of at least 3% of its total liabilities under financial guaranty policies which it issues up to a maximum of EUR 3 billion.

A group company entered into a net worth maintenance agreement with AEGON’s subsidiary Transamerica Life International (Bermuda) Ltd, ensuring the company is adequately capitalized and has sufficient cash for its operations.

AEGON N.V. has guaranteed and is severally liable for the following:

• Due and punctual payment of payables due under letter of credit agreements applied for by AEGON N.V. as co-applicant with its subsidiary companies Transamerica Corporation, AEGON USA, LLC and Commonwealth General Corporation. At December 31, 2010, the letter of credit arrangements amounted to EUR 3,489 million (2009: EUR 3,492 million); as at that date no amounts had been drawn, or were due under these facilities.
• Due and punctual payment of payables by the consolidated group companies Transamerica Corporation, AEGON Funding Company LLC, Commonwealth General Corporation and Transamerica Finance Corp. with respect to bonds, capital trust pass-through securities and notes issued under commercial paper programs (EUR 620 million; 2009: EUR 668 million), as well as payables with respect to certain derivative transactions of Transamerica Corporation (nominal amount EUR 2,094 million; 2009: EUR 1,870 million).
• Due and punctual payment of any amounts owed to third parties by the consolidated group company AEGON Derivatives N.V. in connection with derivative transactions. AEGON Derivatives N.V. only enters into derivative transactions with counterparties with which ISDA master netting agreements including collateral support annex agreements have been agreed; net (credit) exposure on derivative transactions with these counterparties was therefore limited as at December 31, 2010.

 

AEGON is involved in litigation in the ordinary course of business, including litigation where compensatory or punitive damages and mass or class relief are sought. In particular, certain current and former customers, and groups representing customers, have initiated litigation and certain groups are encouraging others to bring lawsuits in respect of certain products. The products involved in the Netherlands include securities leasing products and unit-linked products (so called ‘beleggingsverzekeringen’ including the KoersPlan product). AEGON has established litigation policies to deal with the claims defending when the claim is without merit and seeking to settle in certain circumstances. This and any other litigation AEGON has been involved in over the last twelve months have not had any significant effects on the financial position or profitability of AEGON N.V. or the Group. However, there can be no assurances that AEGON will be able to resolve existing litigation in the manner it expects or that existing or future litigation will not result in unexpected liability.

In addition, in recent years, the insurance industry has increasingly been the subject of litigation, investigations, regulatory activity and challenges by various governmental and enforcement authorities and policyholder advocate groups concerning certain practices. AEGON subsidiaries have received inquiries from local authorities and policyholder advocate groups in various jurisdictions including the United States, the United Kingdom and the Netherlands. In the normal course of business, reviews of processes and procedures are undertaken to ensure that customers have been treated fairly, and to respond to matters raised by policyholders and their representatives. In 2010, AEGON UK received a fine of EUR 3.3 million from the FSA due to systems and controls failings, some of which have led to customer detriment. AEGON does not believe that material liabilities will arise from such reviews, however there is a risk that the Group is not able to resolve such matters in the manner that it expects. In certain instances, AEGON subsidiaries modified business practices in response to such inquiries or the findings thereof. Certain AEGON subsidiaries have been informed that the regulators may seek fines or other monetary penalties or changes in the way AEGON conducts its business.

			2010			2009
Future lease payments	Not later than 1 year	1 - 5 years	Later than 5 years	Not later than 1 year	1 - 5 years	Later than 5 years
Finance lease obligations	2	8	1	1	1	–
Operating lease obligations	80	208	350	86	239	351
Operating lease rights	55	130	77	43	98	57

The operating lease obligations relate mainly to office space leased from third parties. The total of future minimum sublease payments expected to be received on non-cancelable subleases is EUR 11 million.

The operating lease rights relate to non-cancelable commercial property leases.

Note 49 Securities lending and repurchase activities and assets accepted and pledged as collateral

Securities lending and repurchase activities

The following table reflects the carrying amount of non-cash financial assets that have been transferred to another party under security lending and repurchase activities where the counterparty has the right to sell or repledge.

Financial assets for general account	2010	2009
Available-for-sale	10,465	6,600
Financial assets at fair value through profit or loss	89	51
Total	10,554	6,651
Financial assets for account of policyholders	5,679	3,592

AEGON retains substantially all risks and rewards of the transferred assets, this includes credit risk, settlement risk, country risk and market risk. The assets are transferred in return for cash collateral or other financial assets.

The carrying amount of non-cash financial assets that have been transferred to another party under security lending and repurchase activities where the counterparty does not have the right to sell or repledge amount to EUR 172 million (2009: EUR 57 million).

Assets accepted

AEGON receives collateral related to securities lending and reverse repurchase activities. Non-cash collateral is not recognized in the balance sheet.

Cash collateral is recorded on the balance sheet as an asset and an offsetting liability is established for the same amount as AEGON is obligated to return this amount upon termination of the lending arrangement. Cash collateral is usually invested in pre-designated high quality investments. The sum of cash and non-cash collateral is typically greater than the market value of the related securities loaned.

The following table analyses the fair value of the assets received in relation to securities lending and (reverse) repurchase activities:

	2010	2009
Cash collateral on securities lending	4,993	1,170
Cash received on repurchase agreements	5,076	4,867
Non-cash collateral	5,862	2,817
Total	15,931	8,854
Non-cash collateral that can be sold or repledged in the absence of default	4,154	1,797
Non-cash collateral that has been sold or transferred	–	–

In addition, AEGON can receive collateral related to derivative transactions that it enters into. The credit support agreement will normally dictate the threshold over which collateral needs to be pledged by AEGON or its counterparty. Transactions requiring AEGON or its counterparty to post collateral are typically the result of over-the-counter derivative trades, comprised mostly of interest rate swaps, currency swaps and credit swaps.

The above items are conducted under terms that are usual and customary to standard derivative, and securities lending activities, as well as requirements determined by exchanges where the bank acts as intermediary.

Assets pledged

AEGON pledges assets that are on its balance sheet in securities borrowing transactions, in repurchase transactions, and against long-term borrowings. In addition, in order to trade derivatives on the various exchanges, AEGON posts margin as collateral.

These transactions are conducted under terms that are usual and customary to standard long-term borrowing, derivative and securities borrowing activities, as well as requirements determined by exchanges where the bank acts as intermediary.

AEGON has pledged EUR 7,092 million (2009: EUR 9,532 million) financial assets as collateral for general account liabilities and contingent liabilities. None (2009: none) of the financial assets pledged can be sold or repledged by the counterparty.

EUR 459 million of the financial assets and other assets were pledged as collateral for liabilities and contingent liabilities for account of policyholders in 2010 (2009: EUR 235 million).

Non-cash financial assets that are borrowed or purchased under agreement to resell are not recognized in the balance sheet.

To the extent that cash collateral is paid, a receivable is recognized for the corresponding amount. If other non-cash financial assets are given as collateral, these are not derecognized.

AEGON has pledged EUR 940 million (2009: EUR 420 million) cash collateral on securities borrowed and derivative transactions and EUR 923 million (2009: EUR 9 million) on reverse repurchase agreements, refer to note 13.2.

As part of AEGON’s mortgage funding program EUR 1.8 billion have been given as security for notes issued (refer to note 23).

Note 50 Business combinations

Acquisitions

2010

There have been no acquisitions during 2010.

2009

In June 2009, AEGON acquired a 50% stake in BT-AEGON (Romania), a pension fund management company earlier run as a 50%-50% joint venture with Banca Transilvania. The total purchase price amounted to EUR 11 million. Acquired assets included EUR 1 million cash positions. Goodwill of EUR 3 million was recognized. Since the acquisition date, the company has attributed EUR 0 million to net income. If the acquisition had been as of January 1, 2009, contribution to net income and total revenues would amount to EUR 0.3 million and EUR 0.6 million respectively. Goodwill of EUR 3 million reflects the future new business and synergies with existing business.

In May 2009, AEGON completed the acquisition of a 50% (non-controlling) interest in Mongeral SA Seguros e Previdência (Brazil). The total consideration paid amounted to EUR 44 million. An additional earn-out payment of EUR 11 million will be payable if certain targets are met in the future.

2008

In December 2008, AEGON acquired an additional 40% stake in the Spanish Caja Cantabria Vida y Pensiones, of which already 10% was acquired in 2007. As a result, AEGON holds a 50% stake as of December 31, 2008. The total purchase price amounted to EUR 27 million for the 40% stake. Acquired assets included EUR 2 million cash positions. Goodwill of EUR 63 million was recognized. Since the acquisition date, the company has attributed EUR 0 million to net income in 2008. If the acquisition had been as of January 1, 2008, contribution to net income and total revenues would amount to EUR 0 million and EUR 12 million respectively.

In October 2008, AEGON acquired a 50% stake in Caixa Terrassa Vida y Pensiones, a Spanish life insurance, pension and health company. The total purchase price amounted to EUR 186 million. Acquired assets included EUR 11 million cash positions. Goodwill of EUR 167 million was recognized. Since the acquisition date, the company has attributed EUR 0 million to net income in 2008. If the acquisition had been as of January 1, 2008, contribution to net income and total revenues would amount to EUR 4 million and EUR 109 million respectively.

In July 2008, AEGON finalized the acquisition of 100% of the shares of the Turkish life insurance and pension company Ankara Emeklilik Anonim ˛Sirketi. The total purchase price amounted to EUR 34 million. Since the acquisition date, the company has attributed EUR (3) million (loss) to net income in 2008. If the acquisition had been as of January 1, 2008, contribution to net income and total revenues would amount to respectively EUR (7) million (loss) and EUR 11 million. As a result of the acquisition, assets and liabilities were recognized for EUR 54 million and EUR 20 million respectively, including a cash position of EUR 5 million. Goodwill of EUR 30 million reflects the future new business and synergies with existing business.

In June 2008, AEGON acquired 100% of the shares of the Polish pension fund company PTE Skarbiec-Emerytura SA. The total purchase price amounted to EUR 139 million. Since the acquisition date, the company has attributed EUR 1 million to net income in 2008. If the acquisition had been as of January 1, 2008, contribution to net income and total revenues would amount to respectively EUR 4 million and EUR 14 million. As a result of the acquisition, assets and liabilities were recognized for EUR 156 million and EUR 17 million respectively, including a cash position of EUR 4 million. Goodwill of EUR 39 million reflects the future new business and potential synergies with existing business.

In June 2008, AEGON completed the acquisition of 100% of the shares of Heller-Saldo 2000 Pension Fund Management Co., UNIQA Investment Service Co. and UNIQA Financial Service Co. in Hungary for a total purchase price of EUR 21 million. The companies merged subsequently. Since the acquisition date, the company has attributed EUR 1 million to net income in 2008. If the acquisition had been as of January 1, 2008, contribution to net income and total revenues would amount to respectively EUR 2 million and EUR 4 million. As a result of the acquisition, assets and liabilities were recognized for EUR 24 million and EUR 3 million respectively, including a cash position of EUR 1 million. Goodwill of EUR 6 million reflects the future new business and potential synergies with existing business.

In April 2008, AEGON acquired a 49% stake in Industrial Fund Management Co., Ltd, a Chinese mutual fund manager. The company is renamed AEGON Industrial Fund Management Co. The total purchase consideration amounted EUR 22 million. As a result of the acquisition, assets and liabilities were recognized for EUR 28 million and EUR 6 million respectively, including EUR 6 million of goodwill and EUR 15 million cash and cash equivalents. The company is accounted for as a joint venture.

Disposals

2010

On April 1, 2010, AEGON completed the sale of its funeral insurance business in the Netherlands to Dutch investment firm Egeria for EUR 212 million. The actual proceeds from the sale amounted to EUR 162 million, the remainder was upstreamed as a dividend prior to the sale. The value of the assets and liabilities sold amounted to EUR 1,084 million and EUR 933 million respectively. The assets included an amount of EUR 320 million of cash. Included in the gain are unrealized gains in an amount of EUR 22 million, reflecting revaluation reserves which were recycled through the income statement. In 2009, AEGON’s funeral insurance business generated EUR 70 million in gross written premiums.

2009

On August 31, 2009 AEGON completed the sale of its Taiwanese life insurance business to Zhongwie Company Ltd, announced on April 22, 2009 for an amount of EUR 11 million. The result on the disposal presented under other charges (note 41) was a loss of EUR 385 million.

NOTE 51 Group companies

Subsidiaries

The principal subsidiaries of the parent company AEGON N.V. are listed by geographical segment. All are wholly owned, directly or indirectly, unless stated otherwise, and are involved in insurance or reinsurance business, asset management or services related to these activities. The voting power in these subsidiaries held by AEGON is equal to the shareholdings.

Americas

• AEGON USA, LLC, Cedar Rapids, Iowa (United States)
• Transamerica Advisors Life Insurance Company, Little Rock, Arkansas (United States)
• Transamerica Advisors Life Insurance Company of New York, New York, New York (United States)
• Monumental Life Insurance Company, Cedar Rapids, Iowa (United States)
• Stonebridge Casualty Insurance Company, Columbus, Ohio (United States)
• Stonebridge Life Insurance Company, Rutland, Vermont (United States)
• Transamerica Financial Life Insurance Company, Inc., Purchase, New York (United States)
• Transamerica Life Insurance Company, Cedar Rapids, Iowa (United States)
• Western Reserve Life Assurance Co. of Ohio, Columbus, Ohio (United States)
• Transamerica Life Canada, Toronto, Ontario (Canada)

The Netherlands

• AEGON Bank N.V., Utrecht
• AEGON Levensverzekering N.V., The Hague
• AEGON Schadeverzekering N.V., The Hague
• OPTAS Pensioenen N.V., Rotterdam

United Kingdom

• Guardian Assurance plc, Lytham St Annes
• Scottish Equitable plc, Edinburgh
• Origen Financial Services Ltd., London
• Positive Solutions (Financial Services) Ltd., Newcastle

New Markets

• AEGON España S.A., Madrid (Spain) (99.98%)
• AEGON Magyarország Általános Biztosító Zrt., Budapest (Hungary)
• AEGON Towarzystwo Ubezpiecze´n na ´Zycie Spółka Akcyjna., Warsaw (Poland)
• AEGON Asset Management Company, Mumbai (India) (75%)

 

The legally required list of participations as set forth in articles 379 and 414 of Book 2 of the Dutch Civil Code has been registered with the Trade Register in The Hague. AEGON N.V. has issued a statement of liability as meant in article 403 of Book 2 of the Dutch Civil Code for its subsidiary Company AEGON Derivatives N.V.

Joint ventures

The principal joint ventures are listed by geographical segment.

The Netherlands

• AMVEST Vastgoed B.V., Utrecht (50%), property management and development

New Markets

• AEGON-CNOOC Life Insurance Company Ltd, Shanghai (China), life insurance company (50%)
• CAN Vida y Pensiones, Sociedad Anónima de Seguros, Pamplona (Spain), life insurance and pension company (50%)
• Caixa Terrassa Vida y Pensiones, Sociedad Anónima de Seguros, Terrassa (Spain) life and accident insurance and pension company (50%)
• AEGON Sony Life Insurance Cy, Tokyo (Japan), life insurance company (50%)

 

Summarized financial information of joint ventures for 2010 accounted for using proportionate consolidation:

	Current assets	Long-term assets	Current liabilities	Long-term liabilities	Income	Expenses
AMVEST	80	1,126	12	815	39	60
AEGON-CNOOC	56	248	13	262	109	120
AEGON Sony Life Insurance	4	104	3	53	3	17
Caja Badajoz Vida y Pensiones	5	160	27	138	61	58
CAN Vida y Pensiones	20	625	59	586	213	201
Caja Cantabria Vida y Pensiones	5	108	1	112	27	25
Caixa Terrassa Vida y Pensiones	19	669	17	671	147	140
AEGON Industrial Fund Management	21	34	10	1	39	20
Total	210	3,074	142	2,638	638	641

Summarized financial information of joint ventures for 2009 accounted for using proportionate consolidation:

	Current assets	Long-term assets	Current liabilities	Long-term liabilities	Income	Expenses
AMVEST	75	1,115	10	584	53	42
AEGON-CNOOC	36	171	11	179	96	111
AEGON Sony Life Insurance	4	55	1	3	–	10
Caja Badajoz Vida y Pensiones	4	123	10	112	53	51
CAN Vida y Pensiones	23	611	6	543	204	193
Caja Cantabria Vida y Pensiones	4	88	–	64	17	16
Caixa Terrassa Vida y Pensiones	17	726	28	549	100	96
AEGON Industrial Fund Management	18	23	7	1	33	16
Total	181	2,912	73	2,035	556	535

Investments in associates

The principal investments in associates are listed by geographical segment.

The Netherlands

• N.V. Levensverzekering-Maatschappij ‘De Hoop’, The Hague (33.3%)

United Kingdom

• Tenet Group Limited, Leeds (22%)

New Markets

• CAM AEGON Holding Financiero, Alicante (Spain) (49.99%)
• La Mondiale Participations S.A., Lille (France) (35%)
• Seguros Argos, S.A. de C.V., Mexico City (Mexico) (49%)
• Afore Argos, S.A. de C.V., Mexico City (Mexico) (49%)
• AEGON Religare Life Insurance Company, Mumbai (India) (26%)
• Mongeral, S.A. Seguros e Previdencia, Rio de Janeiro (Brazil) (50%)

 

AEGON owns a 57% limited partnership interest in Prisma Capital Partners LP (‘Prisma LP’) which serves as an investment manager for certain of AEGON’s hedge fund investments as well as for other third parties, and Prisma is paid management fees for these services. The remaining 42% limited partnership interest is owned by unrelated entities made up of various employees and individuals. Prisma GP LLC is the general partner with a 1% interest and is responsible for day-to-day activities. A management board with seven voting members (three appointed by AEGON, three appointed by Prisma GP LLC and one independent member appointed collectively by the other six voting members) must approve certain actions, including restructuring transactions, hiring senior management and the annual operating budget. As a result, notwithstanding AEGON’s 57% economic interest, the Company can not exercise voting control since AEGON only appoints three out of the seven board members, AEGON cannot remove the majority of the management board members and AEGON does not have other arrangements, contractual or otherwise, that would give AEGON more than half of the voting power of Prisma LP.

Refer to note 10 for further details on investments in associates.

NOTE 52 Related party transactions

Related party transactions include, among others, transactions between AEGON N.V. and Vereniging AEGON.

As of December 1, 2010, and on a date no later than June 30, 2011, AEGON has the right to repurchase part or all of the securities at a purchase price equal to EUR 6.00 per security and no interest will be payable. After June 30, 2011 AEGON may at any time repurchase the remaining securities at EUR 6.00 per security, plus interest. Alternatively, and as from December 1, 2011, AEGON may choose to convert these securities into common shares on a one-for-one basis. In this situation, the Dutch government may opt for repurchase in cash (at the original issue price of EUR 4.00).

On August 30, 2010, AEGON repurchased 125 million of the convertible core capital securities. The total payment to the Dutch government on August 30, 2010 amounted to EUR 563 million and included a premium for repurchase amounting to EUR 52 million and accrued interest from May 25, 2010 of EUR 11 million. This repurchase was in line with AEGON’s agreement with Vereniging AEGON and Vereniging AEGON’s agreement with the Dutch government as amended in August 2010.

In August 2010, the European Commission approved the capital support provided to AEGON by the Dutch State through Vereniging AEGON . The Commission gave its approval for the state support, but imposed a number of behavioral constraints on the Company, which will remain in place until the support is fully repaid. To secure the European Commission’s approval, AEGON committed itself not to pay any dividend to common shareholders until the convertible core capital securities have been fully repurchased. Dividend payment on preference shares will remain possible. Vereniging AEGON will use income from the non-voting securities to service the loan from the Dutch government.

On December 1, 2008, AEGON secured EUR 3 billion of convertible core capital securities from the Vereniging AEGON. On November 30, 2009, AEGON redeemed EUR 1 billion in principal amount of those convertible core capital securities for EUR 1.15 billion and an amount of EUR 1 billion of the senior loan provided by the Dutch State through Vereniging AEGON was repaid. The total payment to the Dutch government amounted to EUR 1.15 billion. Under the terms of AEGON’s agreement with Vereniging AEGON and Vereniging AEGON’s agreement with the Dutch government, the premium for repurchase amounted to EUR 108 million based on the volume weighted average share price of AEGON shares of EUR 4.8315 during the five trading days from November 23 until November 27. The amount repurchased includes accrued interest from May 22, 2009 of EUR 44 million. Refer to note 16 for for disclosure about the convertible core capital securities.

On October 1, 2009, Vereniging AEGON exercised its option rights to purchase in aggregate 33,860,000 class B preferred shares at par value to correct dilution caused by AEGON’s EUR 1 billion equity issue as completed in August 2009.

AEGON provides reinsurance, asset management and administrative services for employee benefit plans relating to pension and other post-employment benefits of AEGON employees. Certain post-employment insurance benefits are provided to employees in the form of insurance policies issued by affiliated insurance subsidiaries.

In the Netherlands, AEGON employees may make use of financing and insurance facilities for prices which are equivalent to the price available for agents. The benefit for AEGON employees is equivalent to the margin made by agents.

The Management Board, which assists the Executive Board in pursuing AEGON’s strategic goals, is formed by members of the Executive Board, and the CEO’s of AEGON USA, AEGON The Netherlands, AEGON UK and AEGON Central & Eastern Europe. The total remuneration for the members of the Management Board over 2010 was EUR 9.9 million (2009: EUR 9.3 million), consisting of EUR 5.7 million (2009: EUR 4.3 million) salary and other short term benefits, EUR 1.7 million (2009: EUR 0.6 million) cash performance payments, EUR 1.2 million (2009: EUR 4.0 million) pension premiums, EUR 1.3 million (2009: EUR 0.3 million) other long-term benefits. No share-based incentives were paid in 2010 (2009: EUR 0.1 million).

Additional information on the remuneration and share-based compensation of members of the Executive Board and the Supervisory Board is disclosed in the sections below.

Remuneration of active and retired members of the Executive Board  Amounts in EUR thousands	Short-term periodic benefits		Performance related
	Salary	Other1	Cash2	Shares3	Pension  premiums4	Total
2010
Alexander R. Wynaendts	9565	80	–	–	547	1,583
Jan J. Nooitgedagt	7045	56	–	–	182	942
Total	1,660	136	–	–	729	2,525
2009
Alexander R. Wynaendts	950	57	–	27	565	1,599
Jan J. Nooitgedagt	5256	36	–	–	134	695
Joseph B.M. Streppel	2547	20	–	33	103	410
Donald J. Shepard	–	22	–	63	–	85
Total	1,729	135	–	123	802	2,789
2008
Alexander R. Wynaendts	865	50	301	175	420	1,811
Joseph B.M. Streppel	763	52	238	207	195	1,455
Donald J. Shepard	2448	1,157	3,161	396	115	5,073
Total	1,872	1,259	3,700	778	730	8,399
Other periodic benefits are additional remuneration elements, including non-monetary benefits, social security contributions and tax expenses related to the company car, borne by the Group. For Mr. Shepard, the Group had also borne expenses and non-monetary benefits which were provided in his employment agreement with AEGON. These benefits included compensation to the extent that the total actual annual taxation on his total income exceeded the taxation if he were only subject to U.S. taxes, personal life insurance and tax planning. 2008 Performance related cash benefits are in respect of 2007 STI plans under the Remuneration Policy for Executive Board members, approved by the shareholders in April 2007. In addition to the STI plan, Mr. Shepard was entitled to individual short-term incentive compensation equal to 0.1% of the net income of AEGON N.V. according to the adopted accounts. The amount included in the table for 2008 is based on net income over 2007 as reported in the 2007 IFRS financial statements. The LTI Plan 2006 matured in 2009 and the shares and option rights vested for 75%. In accordance with the terms of the 2006 LTI plan, the Executive Board received shares in April 2009. The number of shares for each member was: Mr. Wynaendts 8,827; Mr. Streppel 10,432 and, Mr. Shepard 19,660. These have been converted using the share price of EUR 3.18 at April 27, 2009. In accordance with the terms of the 2005 LTI plan, the Executive Board received shares in April 2008. The number of shares for each member was: Mr. Shepard 38,542; Mr. Streppel 20,169; and Mr. Wynaendts 17,066. These have been converted using the share price of EUR 10.275 at April 22, 2008. Mr. Wynaendts’ pension benefits consists of a pension plan based on 70% of his final base salary, providing he completes 37 years of service, and an additional pension contribution equal to 28% of his base salary. This reflects the terms of Mr. Wynaendts’ appointment as Chairman of the Executive Board on April 23, 2008. For Mr. Nooitgedagt, the defined benefit contribution equals 25% of his base salary. Pension premiums include a provision for post employment health care, 0.5% of base salary. Base salary was adjusted in 2010 in line with the general increase for all Dutch employees based on the collective labor agreement. Mr. Nooitgedagt was appointed as CFO and Member of AEGON’s Executive Board in April 2009. Mr. Streppel retired as CFO and Member of AEGON’s Executive Board in April 2009. Mr. Shepard retired as CEO and Chairman of AEGON’s Executive Board in April 2008.

The table below show the number of conditional shares and options based on LTI plans.

Total overview of conditional shares	Reference period	Number of shares per January 1, 2010	Number of shares in 20103	Number of shares vested in 2010	Number of shares expired/ forfeited in 2010	Number of shares per December 31, 2010	Vesting
Alexander R. Wynaendts	2007	18,506	–	–	–	18,5061	2012/2016
	2009–2011	147,2962	–	–	–	147,296	2012
	2010–2012	–	104,515	–	–	104,515	2013
Jan J. Nooitgedagt	2009–2011	96,6632	–	–	–	96,663	2012
	2010–2012	–	76,891	–	–	76,891	2013
Joseph B.M. Streppel	2007	16,278	–	–	–	16,2781	2012/2013
Donald J. Shepard	2007	50,092	–	50,092	–	–	–
During the vesting period, dividend payments on these shares are deposited in blocked savings accounts on behalf of the executive members. For active members of the Executive Board 50% of the shares will vest in 2012 and 50% will vest in 2016. For retired members the shares will vest two years after retirement. The conditions of the long term 2009-2011 plan were finalised in 2010. The conditional shares will vest in 2012 subject to targets over 2009-2011 being met. Number of shares reflect a target performance. These shares will vest in 2013 subject to targets over 2010-2012 being met. The maximum performance would result in 130,644 shares for Mr. Wynaendts and 96,114 shares for Mr. Nooitgedagt.

Share options and share appreciation rights and interests in AEGON N.V. held by active members of the Executive Board
	Year	Number of rights / options per January 1, 2010	Number of rights / options vested in 2010	Number of rights / options exercised in 2010	Number of rights / options expired / forfeited in 2010	Number of rights /options per Dec. 31, 2010	Number of exer- cisable rights / options	Exercise price EUR	Shares held in AEGON at Dec. 31, 2010
Alexander R. Wynaendts	2003	50,0001	–	–	50,000	–	–	6.30
	2004	50,000	–	–	–	50,000	50,000	10.56
	2005	34,132	–	–	–	34,132	34,132	9.91
	2006	50,842	–	–	–	50,842	50,842	14.55	44,210
Jan J. Nooitgedagt		–	–			–	–	–	–
The share appreciation rights were granted before becoming a member of the Executive Board.

For each of the members of the Executive Board, the shares held in AEGON as shown in the above table do not exceed 1% of total outstanding share capital at the balance sheet date.

At the balance sheet date, Mr. Wynaendts had mortgage loans with AEGON totalling to EUR 1,485,292, with interest rates of 4.1%, 4.3%, 4.4% and 5.4%. These loans were made in AEGON’s ordinary course of business, pursuant to a widely available employee benefit program on terms comparable to other AEGON employees in the Netherlands and were approved in advance by the Supervisory Board. In accordance with the terms of the mortgage loans, no principal repayments were received on the loans in 2010.

Remuneration of active and retired members of the Supervisory Board  In EUR	2010	2009	2008
Robert J. Routs (as of April 23, 2008)	98,435	70,942	40,673
Irving W. Bailey, II	95,750	82,185	85,203
Antony Burgmans	78,000	69,000	63,000
Arthur W.H. Docters van Leeuwen (as of April 22, 2009)	84,000	72,000	7,000
Shemaya Levy	100,250	76,750	72,000
Karla M.H. Peijs	75,000	60,000	50,417
Kornelis J. Storm	79,250	54,692	45,942
Ben van der Veer (as of October 1, 2008)	91,096	63,000	18,000
Dirk P.M. Verbeek (as of April 23, 2008)	88,000	66,258	33,481
Leo M. van Wijk	71,096	54,500	51,185
Total for active members	860,877	669,327	466,901
René Dahan (up to April 23, 2008)	–	–	18,900
O. John Olcay (up to April 23, 2008)	–	–	22,054
Toni Rembe (up to April 23, 2008)	–	–	18,137
Willem F.C. Stevens (up to April 22, 2009)	–	20,762	73,000
Dudley G. Eustace (up to April 29, 2010)	37,815	80,750	77,000
Cecelia Kempler (up to February 15, 2011)	93,500	75,315	45,673
Total	992,192	846,154	721,665

AEGON’s Supervisory Board members are entitled to the following: (1) A base fee for membership of the Supervisory Board itself. No attendance fees are paid to members for the attendance of the seven regular Supervisory Board meetings; (2) An attendance fee of EUR 3,000 for each Supervisory Board meeting, attended in person or by video- or telephone conference, other than one of the seven regular Supervisory Board meetings; (3) A committee fee for members on each of the Supervisory Board’s Committees.; (4) An attendance fee for each Committee meeting attended in person or through video- and telephone conferencing facilities.

In 2008 an amount of EUR 7,000 was paid to Mr. Docters van Leeuwen, prior to his formal appointment as a member of the Supervisory Board on April 22, 2009, as compensation for attending Board meetings.

Not included in the table above is a premium for state health insurance paid on behalf of Dutch Supervisory Board members.

Common shares held by Supervisory Board members  Shares held in AEGON at December 31	2010	2009	2008
Irving W. Bailey, II	29,759	29,759	29,759
Cecelia Kempler (up to February 15, 2011)	11,559	11,559	15,968
Karla M.H. Peijs	1,400	1,400	1,400
Kornelis J. Storm	226,479	226,479	226,479
Ben van der Veer (as of October 1, 2008)	1,407	1,407	1,407
Dirk P.M. Verbeek (as of April 23, 2008)	982	982	n.a.
Total	271,586	271,586	275,013

Shares held by Supervisory Board members are only disclosed for the period they have been part of the Supervisory Board.

NOTE 53 Events after the balance sheet date

On March 1, 2011 AEGON completed the sale of 173,604,912 new common shares of AEGON N.V. with a nominal value of EUR 0.12. The shares were sold at a price of EUR 5.20 per share. The proceeds of EUR 903 million were used to fund part of the repurchase the convertible core capital securities described below.

The new shares have been listed on Euronext Amsterdam, the principal market for AEGON’s common shares.

On March 15, 2011, Vereniging AEGON exercised its option rights to purchase 41,042,000 class B preferred shares at par value in order to avoid dilution of its voting rights following the issuance of 10% new common shares completed on March 1, 2011.

On March 15, 2011, AEGON repurchased EUR 750 million in principal amount of convertible core capital securities from the Dutch state. The total payment to the Dutch state amounted to EUR 1.125 billion of which EUR 750 million related to the repurchase of 187.5 million convertible core capital securities and EUR 375 million related to the premium attached to this repurchase.

 

The Hague, March 23, 2011

 

Supervisory Board

Robert J. Routs

Irving W. Bailey, II

Antony Burgmans

Arthur W.H. Docters van Leeuwen

Shemaya Levy

Karla M.H. Peijs

Kornelis J. Storm

Ben van der Veer

Dirk P.M. Verbeek

Leo M. van Wijk

 

Executive Board

Alexander R. Wynaendts

Jan J. Nooitgedagt

 

signed by A.F.J. van Overmeire