Form 6-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

Form 6-K

 

 

Report of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16

of the Securities Exchange Act of 1934

FOR THE SIX MONTHS ENDED JUNE 30, 2014

Commission File Number             

 

 

Aegon N.V.

(Translation of registrant’s name into English)

 

 

Aegonplein 50

P.O. Box 85

2501 CB The Hague

the Netherlands

(Address of principal executive offices)

 

 

Indicate by check mark whether the registrant files or will file annual reports under cover of

Form 20-F or Form 40-F.

x  Form 20-F                ¨  Form 40-F

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by

Regulation S-T Rule 101(b)(1):             

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by

Regulation S-T Rule 101(b)(7):             

 

 

 


Table of Contents

The financial statements, notes thereto and Operating and Financial Review and Prospects of Aegon N.V. listed below are attached hereto as Exhibit 99.1. Such financial statements and discussion and analysis are incorporated by reference herein and in Aegon’s Registration Statements under the Securities Act of 1933 on Form F-3 (Nos 333-197169, 333-178225, 333-178224, 333-174878, 333-155858, 333-155857, and 333-150786) and on Form S-8 (Nos 333-196156, 333-183176, 333-157843, 333-151984, 333-151983, 333-150774, 333-144175, 333-144174, 333-138210, 333-132841, 333-132839, and 333-129662).

Item 1: Interim Financial Statements

Condensed consolidated income statement for the six months ended June 30, 2014 and June 30, 2013

Condensed consolidated statement of comprehensive income for the six months ended June 30, 2014 and June 30, 2013

Condensed consolidated statement of financial position at June 30, 2014 and December 31, 2013

Condensed consolidated statement of changes in equity for the six months ended June 30, 2014 and June 30, 2013

Condensed consolidated cash flow statement for the six months ended June 30, 2014 and June 30, 2013

Notes to the condensed consolidated interim financial statements

Item 2: Operating and financial review and prospects

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Aegon N.V.

(Registrant)
Date: August 14, 2014

 /s/ J.H.P.M. van Rossum

J.H.P.M. van Rossum
Executive Vice President
Corporate Controller

 

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Exhibit 99.1

Index

 

     Page Number  

Item 1: Condensed Consolidated Interim Financial Statements

  

Condensed consolidated income statement

     3   

Condensed consolidated statement of comprehensive income

     4   

Condensed consolidated statement of financial position

     5   

Condensed consolidated statement of changes in equity

     6   

Condensed consolidated cash flow statement

     7   

Notes to the condensed consolidated interim financial statements

     8   

Item 2: Operating and financial review and prospects

     31   

 

 

 

 

 

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Condensed consolidated income statement  
                       

EUR millions

    Notes        YTD 2014        YTD 2013   
   

Premium income

    4        9,625        11,214   

Investment income

    5        4,088        4,061   

Fee and commission income

      953        967   

Other revenues

            3        4   

Total revenues

      14,669        16,246   

Income from reinsurance ceded

      1,443        1,364   

Results from financial transactions

    6        6,397        5,416   

Other income

            12        196   

Total income

      22,520        23,222   
   

Benefits and expenses

    7        21,708        22,183   

Impairment charges / (reversals)

    8        16        74   

Interest charges and related fees

      182        186   

Other charges

            6        117   

Total charges

      21,912        22,560   
   

Share in net result of joint ventures

      20        (3

Share in net result of associates

            16        14   

Income before tax

      644        673   

Income tax (expense) / benefit

            (122     (100

Net income

            522        573   
   

Net income attributable to:

       

Equity holders of Aegon N.V.

      522        572   

Non-controlling interests

            -        1   
   

Earnings per share (EUR per share)

    14         

Basic earnings per common share

      0.21        0.21   

Basic earnings per common share B

      0.01        0.01   

Diluted earnings per common share

      0.21        0.21   

Diluted earnings per common share B

            0.01        0.01   

Amounts for 2013 have been restated for the voluntary changes in accounting policies for deferred policy acquisition costs and longevity reserving. Refer to note 2.1 for details about these changes.

 

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Condensed consolidated statement of comprehensive income

 

 
EUR millions   YTD 2014     YTD 2013  
   

Net income

    522        573   
   

Other comprehensive income:

     

Items that will not be reclassified to profit or loss:

     

Changes in revaluation reserve real estate held for own use

    (2     1   

Remeasurements of defined benefit plans

    (443     289   

Income tax relating to items that will not be reclassified

    125        (109
   

Items that may be reclassified subsequently to profit or loss:

     

Gains / (losses) on revaluation of available-for-sale investments

    3,312        (2,920

(Gains) / losses transferred to the income statement on disposal and impairment of available-for-sale investments

    (319     (157

Changes in cash flow hedging reserve

    380        (311

Movement in foreign currency translation and net foreign investment hedging reserve

    173        19   

Equity movements of joint ventures

    12        (6

Equity movements of associates

    6        7   

Income tax relating to items that may be reclassified

    (988     992   

Other

    (5     (3

Other comprehensive income for the period

    2,252        (2,198

Total comprehensive income

    2,774        (1,625
   

Total comprehensive income attributable to:

     

Equity holders of Aegon N.V.

    2,775        (1,623

Non-controlling interests

    (1     (2

Amounts for 2013 have been restated for the voluntary changes in accounting policies for deferred policy acquisition costs and longevity reserving. Refer to note 2.1 for details about these changes.

 

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Condensed consolidated statement of financial position

 

 
            Jun. 30,
2014
    Dec. 31,
2013
 

EUR millions

    Notes                   
   

Assets

       

Intangible assets

      2,128        2,272   

Investments

    9        142,127        135,533   

Investments for account of policyholders

    10        174,590        165,032   

Derivatives

    11        19,937        13,531   

Investments in joint ventures

      1,429        1,426   

Investments in associates

      501        470   

Reinsurance assets

      9,760        10,344   

Deferred expenses

    13        9,931        10,006   

Other assets and receivables

      7,614        7,555   

Cash and cash equivalents

            7,850        5,691   

Total assets

      375,868        351,860   
   

Equity and liabilities

       

Shareholders’ equity

      20,204        17,694   

Other equity instruments

    15        3,811        5,015   

Issued capital and reserves attributable to equity holders of Aegon N.V.

      24,015        22,709   

Non-controlling interests

            9        10   

Group equity

      24,024        22,719   
   

Trust pass-through securities

      125        135   

Subordinated borrowings

    16        739        44   

Insurance contracts

      104,614        101,769   

Insurance contracts for account of policyholders

      90,957        84,311   

Investment contracts

      13,934        14,545   

Investment contracts for account of policyholders

      85,917        82,608   

Derivatives

    11        17,532        11,838   

Borrowings

    17        13,441        12,020   

Other liabilities

            24,584        21,871   

Total liabilities

 

            351,844        329,141   

Total equity and liabilities

            375,868        351,860   

Amounts for 2013 have been restated for the voluntary changes in accounting policies for deferred policy acquisition costs and longevity reserving. Refer to note 2.1 for details about these changes.

 

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Condensed consolidated statement of changes in equity

 

 
EUR millions   Share
capital 1
    Retained
earnings
    Revaluation
reserves
    Remeasurement
of defined
benefit plans
    Other
reserves
    Other equity
instruments
    Issued
capital and
reserves 2
    Non-
controlling
interests
    Total  
       

Six months ended June 30, 2014

                       
       

At beginning of year

    8,701        8,455        3,023        (706     (1,778     5,015        22,709        10        22,719   
       

Net income recognized in the income statement

    -        522        -        -        -        -        522        -        522   
       

Other comprehensive income:

                       

Items that will not be reclassified to profit or loss:

                       

Changes in revaluation reserve real estate held for own use

    -        -        (2     -        -        -        (2     -        (2

Remeasurements of defined benefit plans

    -        -        -        (443     -        -        (443     -        (443

Income tax relating to items that will not be reclassified

    -        -        1        125        -        -        125        -        125   
       

Items that may be reclassified subsequently to profit or loss:

                       

Gains / (losses) on revaluation of available-for-sale investments

    -        -        3,312        -        -        -        3,312        -        3,312   

(Gains) / losses transferred to income statement on disposal and impairment of available-for-sale investments

    -        -        (319     -        -        -        (319     -        (319

Changes in cash flow hedging reserve

    -        -        380        -        -        -        380        -        380   

Movement in foreign currency translation and net foreign investment hedging reserves

    -        -        -        (10     183        -        173        -        173   

Equity movements of joint ventures

    -        -        -        -        12        -        12        -        12   

Equity movements of associates

    -        -        -        -        6        -        6        -        6   

Income tax relating to items that may be reclassified

    -        -        (985     -        (3     -        (988     -        (988

Other

    -        (4     -        -        -        -        (4     (1     (5

Total other comprehensive income

    -        (4     2,387        (328     198        -        2,253        (1     2,252   

Total comprehensive income/ (loss) for 2014

    -        518        2,387        (328     198        -        2,775        (1     2,774   
       

Issuance and purchase of treasury shares

    -        (65     -        -        -        -        (65     -        (65

Other equity instruments redeemed

    -        15        -        -        -        (1,184     (1,169     -        (1,169

Dividends paid on common shares

    -        (138     -        -        -        -        (138     -        (138

Coupons on non-cumulative subordinated notes

    -        (11     -        -        -        -        (11     -        (11

Coupons on perpetual securities

    -        (72     -        -        -        -        (72     -        (72

Share options and incentive plans

    -        7        -        -        -        (20     (13     -        (13

At end of period

    8,701        8,709        5,410        (1,034     (1,581     3,811        24,015        9        24,024   
       

Six months ended June 30, 2013

                       
       

At beginning of year (as previously stated)

    9,099        10,407        6,073        (1,085     (1,045     5,018        28,467        13        28,480   
       

Changes in accounting policies relating to deferred policy acquisition costs

    -        (1,472     43        -        (58     -        (1,487     -        (1,487

Changes in accounting policies relating to policy longevity methodology

    -        (925     -        -        -        -        (925     -        (925
       

At beginning of year, restated

    9,099        8,010        6,116        (1,085     (1,103     5,018        26,055        13        26,068   
       

Net income recognized in the income statement

    -        572        -        -        -        -        572        1        573   
       

Other comprehensive income:

                       

Items that will not be reclassified to profit or loss:

                       

Changes in revaluation reserve real estate held for own use

    -        -        1        -        -        -        1        -        1   

Remeasurements of defined benefit plans

    -        -        -        289        -        -        289        -        289   

Income tax relating to items that will not be reclassified

    -        -        -        (109     -        -        (109     -        (109
       

Items that may be reclassified subsequently to profit or loss:

                       

Gains / (losses) on revaluation of available-for-sale investments

    -        -        (2,920     -        -        -        (2,920     -        (2,920

(Gains) / losses transferred to income statement on disposal and impairment of available-for-sale investments

    -        -        (157     -        -        -        (157     -        (157

Changes in cash flow hedging reserve

    -        -        (311     -        -        -        (311     -        (311

Movement in foreign currency translation and net foreign investment hedging reserves

    -        -        -        2        17        -        19        -        19   

Equity movements of joint ventures

    -        -        -        -        (6     -        (6     -        (6

Equity movements of associates

    -        -        -        -        7        -        7        -        7   

Income tax relating to items that may be reclassified

    -        -        1,018        -        (26     -        992        -        992   

Transfer from / to other headings

    -        (1     1        -        -        -        -        -        -   

Other

    -        -        -        -        -        -        -        (3     (3

Total other comprehensive income

    -        (1     (2,368     182        (8     -        (2,195     (3     (2,198

Total comprehensive income / (loss) for 2013

    -        571        (2,368     182        (8     -        (1,623     (2     (1,625
       

Shares issued

    2        -        -        -        -        -        2        -        2   

Issuance and purchase of treasury shares

    -        31        -        -        -        -        31        -        31   

Dividends paid on common shares

    -        (113     -        -        -        -        (113     -        (113

Preferred dividend

    -        (83     -        -        -        -        (83     -        (83

Coupons on non-cumulative subordinated notes

    -        (9     -        -        -        -        (9     -        (9

Coupons on perpetual securities

    -        (60     -        -        -        -        (60     -        (60

Share options and incentive plans

    -        27        -        -        -        (28     (1     -        (1

Repurchased and sold own shares

    (400     (1     -        -        -        -        (401     -        (401

At end of period

    8,701        8,373        3,748        (903     (1,111     4,990        23,798        11        23,809   

 

1 For a breakdown of share capital please refer to note 14.
2 Issued capital and reserves attributable to equity holders of Aegon N.V.

Amounts for 2013 have been restated for the voluntary changes in accounting policies for deferred policy acquisition costs and longevity reserving. Refer to note 2.1 for details about these changes.

 

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Condensed consolidated cash flow statement

 

 
EUR millions   Q2 2014     Q2 2013  
   

Cash flow from operating activities

    1,555        (732
   

Purchases and disposals of intangible assets

    (18     (16

Purchases and disposals of equipment and other assets

    (27     (26

Purchases, disposals and dividends of subsidiaries, associates and joint ventures

    27        151   

Cash flow from investing activities

    (18     109   
   

Issuance and purchase of treasury shares

    (38     33   

Dividends paid

    (138     (196

Repurchased and sold own shares

    -        (401

Issuances, repurchases and coupons of perpetuals

    (1,265     (80

Issuances, repurchases and coupons of non-cumulative subordinated notes

    (15     (12

Issuances and repayments of borrowings

    1,788        (255

Cash flow from financing activities

    331        (911
   

Net increase / (decrease) in cash and cash equivalents

    1,868        (1,534

Net cash and cash equivalents at January 1

    5,652        9,497   

Effects of changes in foreign exchange rates

    34        (17

Net cash and cash equivalents at end of period

    7,554        7,946   

Cash and cash equivalents

    7,850        8,069   

Bank overdrafts

    (296     (123

Net cash and cash equivalents

    7,554        7,946   

 

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Notes to the Condensed Consolidated Interim Financial Statements of Aegon N.V. (unaudited)

In million EUR, unless otherwise stated

Aegon N.V., incorporated and domiciled in the Netherlands, is a public limited liability company organized under Dutch law and recorded in the Commercial Register of The Hague under number 27076669 and with its registered address at Aegonplein 50, 2591 TV, The Hague, the Netherlands. Aegon N.V. serves as the holding company for the Aegon Group and has listings of its common shares in Amsterdam and New York.

Aegon N.V. (or “the company”) and its consolidated subsidiaries (“Aegon” or “the Group”) have life insurance and pensions operations in over twenty countries in the Americas, Europe and Asia and are also active in savings and asset management operations, accident and health insurance, general insurance and to a limited extent banking operations. Its headquarters are located in The Hague, the Netherlands. The Group employs nearly 28,000 people worldwide.

1. Basis of presentation

The condensed consolidated interim financial statements as at, and for the six months ended, June 30, 2014, have been prepared in accordance with IAS 34 “Interim Financial Reporting”, as issued by the International Accounting Standards Board (hereafter “IFRS”). They do not include all of the information required for a full set of financial statements prepared in accordance with IFRS and should therefore be read together with the 2013 consolidated financial statements of Aegon N.V. as included in Aegon’s Annual Report on Form 20-F for 2013 and together with Aegon’s 2013 Supplemental Annual Report on Form 6-K which reflects the impact of the voluntary changes in accounting policies that were made by Aegon effective January 1, 2014. The disclosures provided in note 2.1 and 2.2 of this report also disclose the impact of these voluntary changes in accounting policies. Aegon’s Annual Report on Form 20-F for 2013 is available on its website (aegon.com).

The condensed consolidated interim 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. Certain amounts in prior periods 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 condensed consolidated interim financial statements as at, and for the six months ended, June 30, 2014, were approved by the Executive Board on August 13, 2014.

The condensed consolidated interim financial statements are presented in euro and all values are rounded to the nearest million unless otherwise stated. The consequence is that the rounded amounts may not add up to the rounded total in all cases.

The published figures in these condensed consolidated interim financial statements are unaudited.

Other than for SEC reporting, Aegon prepares its Condensed Consolidated Interim Financial Statements under International Financial Reporting Standards as adopted by the European Union, including the decisions Aegon made with regard to the options available under International Financial Reporting Standards as adopted by the EU (IFRS-EU). IFRS-EU differs from IFRS in respect of certain paragraphs in IAS 39 ‘Financial Instruments: Recognition and Measurement’ regarding hedge accounting for portfolio hedges of interest rate risk. Under IFRS-EU, Aegon applies fair value hedge accounting for portfolio hedges of interest rate risk (fair value macro hedges) in accordance with the EU ‘carve out’

 

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version of IAS 39. Under IFRS, hedge accounting for fair value macro hedges cannot be applied to mortgage loans and ineffectiveness arises whenever the revised estimate of the amount of cash flows in scheduled time buckets is either more or less than the original designated amount of that bucket.

This information is prepared by reversing the hedge accounting impacts that are applied under the EU ‘carve out’ version of IAS 39. Financial information under IFRS accordingly does not take account of the possibility that had Aegon applied IFRS as its primary accounting framework it might have applied alternative hedge strategies where those alternative hedge strategies could have qualified for IFRS compliant hedge accounting. These decisions could have resulted in different shareholders’ equity and net income amounts compared to those indicated in this Condensed Consolidated Interim Financial Statements on Form 6-K.

A reconciliation between IFRS and IFRS-EU is included in the table below:

 

     Shareholders’ Equity     Net income six month ended  
EUR millions   30 June 2014     30 June 2013     30 June 2014     30 June 2013  

In accordance with IFRS

    20,204        18,808        522        573   

Adjustment of EU ‘IAS 39’ carve out

    120        (70     275        (145

Tax effect of the adjustment

    -        -        (62     36   

Effect of the adjustment after tax

    120        (70     213        (109

In accordance with IFRS-EU

    20,325        18,738        735        464   

2. Significant accounting policies

All accounting policies and methods of computation applied in the condensed consolidated interim financial statements are the same as those applied in the 2013 consolidated financial statements, except for the newly applied accounting policies as described in note 2.1 and 2.2.

New IFRS accounting standards effective

The following standards, interpretations, amendments to standards and interpretations became effective in 2014:

 

t   IFRS 10 Consolidated Financial Statements – Amendment Investment Entities;
t   IAS 36 Impairment of Assets – Recoverable Amounts Disclosures for Non-Financial Assets; and
t   IAS 39 – Novation of Derivatives and Continuation of Hedge Accounting.

None of these new or revised standards and interpretations had a significant effect on the condensed consolidated interim financial statements for the period ended June 30, 2014.

For a complete overview of IFRS standards, published before January 1, 2014, that will be applied in future years, but were not early adopted by the Group, please refer to Aegon’s Annual Report on Form 20-F for 2013.

Taxes

Taxes on income for the six months interim period, ending June 30, 2014, are accrued using the tax rate that would be applicable to expected total annual earnings.

Judgments and critical accounting estimates

Preparing the Condensed Consolidated Interim Financial Statements requires management to make judgments, estimates and assumptions, including the likelihood, timing or amount of future transactions or events, that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from the estimates made.

 

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In preparing the Condensed Consolidated Interim Financial Statements, significant judgments made by management in applying the Group’s accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements as at and for the year ended December 31, 2013.

Exchange rates

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. The following exchange rates are applied for the condensed consolidated interim financial statements:

Closing exchange rates

                         USD         GBP   

June 30, 2014

     1         EUR         1.3692         0.8008   

December 31, 2013

     1         EUR         1.3780         0.8320   

Weighted average exchange rates

                         USD         GBP   

Six months ended June 30, 2014

     1         EUR         1.3704         0.8212   

Six months ended June 30, 2013

     1         EUR         1.3124         0.8502   

Aegon Funding Company LLC

Aegon Funding Company LLC (AFC) is an indirect wholly owned subsidiary of Aegon that was established as a financing vehicle to raise funds for the US subsidiaries of Aegon. AFC has been fully consolidated in the financial statements of Aegon under IFRS. If AFC issues debt securities, Aegon will fully and unconditionally guarantee the due and punctual payment of the principal, any premium and any interest on those debt securities when and as these payments become due and payable, whether at maturity, upon redemption or declaration of acceleration, or otherwise. The guarantees of senior debt securities will constitute an unsecured, unsubordinated obligation of Aegon and will rank equally with all other unsecured and unsubordinated obligations of Aegon. The guarantees of subordinated debt securities will constitute an unsecured obligation of Aegon and will be subordinated in right of payment to all senior indebtedness of Aegon.

2.1 Voluntary changes in accounting policies

Aegon adopted voluntary changes in accounting policies, effective January 1, 2014, which are applied retrospectively for all periods presented in this document, both in the main schedules and the associated footnotes. Changes to these policies relate to deferred policy acquisition costs and how Aegon accounts for longevity trends in the Netherlands. In the paragraphs below, details are provided for these changes in accounting policies.

Deferred policy acquisition costs

Aegon adopted a single group-wide accounting policy for deferred policy acquisition costs as of January 1, 2014. Upon initial adoption of IFRS, entities were permitted to continue existing accounting policies for insurance contracts even though such policies were often non-uniform between countries. Through adoption of a uniform, group-wide accounting policy, Aegon eliminates this lack of uniformity for the deferral of policy acquisition costs thereby providing the users of the financial statements with more meaningful information.

 

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IFRS 4 neither prohibits nor requires the deferral of policy acquisition costs, nor does it prescribe what acquisition costs are deferrable. Thus, in developing the new policy, Aegon considered and sought alignment with the proposed description of deferrable policy acquisition costs within the IFRS Insurance Contracts Phase II exposure draft (Exposure Draft). In the absence of detailed guidance in the Exposure Draft, Aegon also considered the recently adopted guidance in U.S. GAAP (ASU 2010-26 “Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts”), if not conflicting with IFRS 4 or the Exposure Draft. IFRS currently differs from US GAAP by not limiting the deferral to expenses from successful efforts only and in the detail of how that principle is applied. Under the new accounting policy, deferred policy acquisition costs include costs that are directly attributable to the acquisition or renewal of insurance contracts. The previous accounting policy was based on a broader definition of costs that could be deferred.

Details of the impact of applying this voluntary change to previous periods are provided in the tables presented in note 2.2.

Longevity reserving

As of January 1, 2014, Aegon amended its policy to determine the insurance contract liability of Aegon the Netherlands to account for longevity risk assumed by Aegon. This change will provide more current information about the financial effects of changes in life expectancy of the insured population. The change will also increase alignment with market pricing of longevity risk. It will supply users of the financial statements with more relevant decision making information on the insurance contract liability and will improve transparency on the longevity risks assumed by Aegon.

Mortality tables will be updated annually based on the prospective tables taking into account longevity trends. The new methodology will take into account the contractual cash flows related to the longevity risk assumed. Previously the methodology applied by Aegon the Netherlands considered realized mortalities based on retrospective mortality tables.

Details of the impact of applying this voluntary change to previous periods are provided in the tables presented in note 2.2.

 

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2.2 Impact of voluntary changes in accounting policies

 

Impact of voluntary changes in accounting policies on consolidated income statement

 

 
     YTD 2013
(previously
reported)
    Change in accounting policy     YTD 2013
(restated)
 
   
            Deferred policy
acquisition costs
    Longevity
reserving
        
EUR millions                            
   

Benefits and expenses

    22,200        36        (53     22,183   
   

Income tax (expense) / benefit

    (100     11        (11     (100
   

Net effect

            (25     42           
   

Earnings per share (EUR per share)

         

Basic earnings per common share

    0.20        -        0.01        0.21   

Basic earnings per common share B

    0.01        -        -        0.01   

Diluted earnings per common share

    0.20        -        0.01        0.21   

Diluted earnings per common share B

    0.01        -        -        0.01   
   

Earnings per common share calculation

         

Net income attributable to equity holders of Aegon N.V.

    555        (25     42        572   

Preferred dividend

    (83     -        -        (83

Coupons on other equity instruments

    (69     -        -        (69

Earnings attributable to common shareholders

    403        (25     42        420   
   

Weighted average number of common shares outstanding (in million)

    1,978        -        -        1,978   

Weighted average number of common shares B outstanding (in million)

    150        -        -        150   

 

Impact of voluntary changes in accounting policies on condensed consolidated statement of
comprehensive income

 

 
     YTD 2013
(previously
reported)
    Change in accounting policy     YTD 2013
(restated)
 
   
            Deferred policy
acquisition costs
    Longevity
reserving
        
EUR millions                            
   

Net income

    556        (25     42        573   
   

Gains / (losses) on revaluation of available-for-sale investments

    (2,890     (30     -        (2,920

Movement in foreign currency translation and net foreign investment hedging reserves

    (29     48        -        19   

Income tax relating to items that may be reclassified

    981        11        -        992   

Net effect other comprehensive income for the period

            29        -           

Net effect comprehensive income

            4        42           
   

Total comprehensive income attributable to:

         

Equity holders of Aegon N.V.

    (1,669     4        42        (1,623

Non-controlling interests

    (2     -        -        (2

 

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Impact of changes in accounting policies on the consolidated statement of financial position

 

 
    

December 31,

2013 1)

    Change in accounting policy     Reclassification 2)     December
31, 2013
(restated)
 
   
           Deferred policy
acquisition costs
    Longevity
reserving
             

EUR millions

                                       
   

Assets

           

Intangible assets

    2,246        26        -        -        2,272   

Investments in joint ventures

    1,427        (1     -        -        1,426   

Reinsurance assets

    10,345        (2     -        -        10,344   

Deferred tax assets

    37        2        -        125        164   

Deferred expenses

    12,040        (2,035     -        -        10,006   
   

Equity and liabilities

           

Shareholders’ equity

    20,059        (1,533     (832     -        17,694   
   

Insurance contracts

    100,642        54        1,073        -        101,769   

Deferred tax liabilities

    2,304        (531     (241     125        1,657   

 

1 As reported in Aegon’s Annual Report on Form 20-F dated March 19, 2014.
2 As a result of the voluntary accounting changes the balance of the Dutch tax group as at December 31, 2013 changed from a deferred tax liability to a deferred tax asset.

 

Impact of voluntary changes in accounting policies on consolidated statement of changes in equity

 

 
    

December 31,

2013 1)

    Change in accounting policy     December
31, 2013
(restated)
 
   
           Deferred policy
acquisition costs
    Longevity
reserving
       

EUR millions

                               
   

Share capital

    8,701        -        -        8,701   

Retained earnings

    10,843        (1,557     (832     8,455   

Revaluation reserves

    2,998        26        -        3,023   

Remeasurement of defined benefit plans

    (706     -        -        (706

Other reserves

    (1,777     (1     -        (1,778

Shareholders’ equity

    20,059        (1,533     (832     17,694   

 

1 As reported in Aegon’s Annual Report on Form 20-F dated March 19, 2014.

 

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3. Segment information

3.1 Income statement

 

EUR millions   Americas    

The

Netherlands

   

United

Kingdom

   

New

Markets

    Holding and
other
activities
    Eliminations    

Segment

Total

   

Joint

ventures and

associates

eliminations

    Consolidated  

Six months ended June 30, 2014

                   
     

Underlying earnings before tax geographically

    633        259        58        123        (63     1        1,012        (8     1,004   

Fair value items

    (167     (443     (16     8        (36     -        (654     5        (649

Realized gains / (losses) on investments

    60        131        113        4        -        -        308        (1     306   

Impairment charges

    (12     (9     -        (24     -        -        (45     -        (45

Impairment reversals

    31        4        -        -        -        -        35        -        35   

Other income / (charges)

    (8     (8     (2     (1     (1     -        (20     (1     (21

Run-off businesses

    13        -        -        -        -        -        13        -        13   

Income before tax

    550        (65     154        109        (101     1        649        (5     644   

Income tax (expense) / benefit

    (115     26        (36     (32     29        -        (127     5        (122

Net income

    435        (38     118        77        (71     1        522        -        522   

Inter-segment underlying earnings

    (83     (29     (28     130        10             
     

Revenues

                   

Life insurance gross premiums

    3,026        2,039        2,391        859        1        (36     8,280        (173     8,107   

Accident and health insurance

    871        170        29        90        2        (2     1,160        (9     1,151   

General insurance

    -        290        -        114        -        -        404        (38     367   

Total gross premiums

    3,897        2,498        2,420        1,064        3        (38     9,844        (220     9,625   

Investment income

    1,601        1,320        1,072        113        158        (156     4,108        (20     4,088   

Fee and commission income

    641        158        20        290        -        (113     995        (42     953   

Other revenues

    1        -        -        1        2        -        4        (1     3   

Total revenues

    6,140        3,976        3,512        1,468        163        (308     14,952        (283     14,669   

Inter-segment revenues

    8        -        -        141        159                                   

 

EUR millions   Americas    

The

Netherlands

   

United

Kingdom

   

New

Markets

   

Holding and

other

activities

    Eliminations    

Segment

Total

   

Joint

ventures and

associates

eliminations

    Consolidated  

Six months ended June 30, 2013

                   
     

Underlying earnings before tax geographically

    648        216        45        109        (72     (1     945        (24     921   

Fair value items

    (388     36        (3     (11     (54     -        (420     28        (392

Realized gains / (losses) on investments

    75        86        29        3        -        -        193        (1     192   

Impairment charges

    (56     (22     (16     (6     -        -        (100     -        (100

Impairment reversals

    25        -        -        -        -        -        25        -        25   

Other income / (charges)

    (6     (27     (46     102        -        -        23        (1     22   

Run-off businesses

    5        -        -        -        -        -        5        -        5   

Income before tax

    303        289        9        197        (126     (1     671        2        673   

Income tax (expense) / benefit

    (43     (57     1        (28     29        -        (98     (2     (100

Net income

    260        232        10        169        (97     (1     573        -        573   

Inter-segment underlying earnings

    (89     (28     (29     131        15             
     

Revenues

                   

Life insurance gross premiums

    3,091        2,631        3,546        719        1        (38     9,950        (245     9,705   

Accident and health insurance

    896        172        -        95        4        (4     1,163        (8     1,155   

General insurance

    -        278        -        82        -        -        360        (6     354   

Total gross premiums

    3,987        3,081        3,546        896        5        (42     11,473        (259     11,214   

Investment income

    1,696        1,097        1,182        125        171        (172     4,099        (38     4,061   

Fee and commission income

    628        163        56        275        -        (121     1,001        (34     967   

Other revenues

    3        -        -        1        2        -        6        (2     4   

Total revenues

    6,314        4,341        4,784        1,297        178        (335     16,579        (333     16,246   

Inter-segment revenues

    10        -        1        149        175                                   

Non-IFRS measures

For segment reporting purposes the following non-IFRS financial measures are included: underlying earnings before tax, income tax and income before tax. These non-IFRS measures are calculated by consolidating on a proportionate basis Aegon’s joint ventures and associated companies. Aegon believes that its non-IFRS measures provide meaningful information about the underlying results of Aegon’s business, including insight into the financial measures that Aegon’s senior management uses in managing the business.

Among other things, Aegon’s senior management is compensated based in part on Aegon’s results against targets using the non-IFRS measures presented here. While many 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

 

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no standardized meaning to these measures under IFRS or any other recognized set of accounting standards. Readers are cautioned to consider carefully the different ways in which Aegon and its peers present similar information before comparing them.

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 policies alternatives that companies may select in presenting their results (i.e. companies can use different local GAAPs to measure the insurance contract liability) and that can make the comparability from period to period difficult.

The reconciliation from underlying earnings before tax to income before tax, being the most comparable IFRS measure, is presented in the tables in this note.

Underlying earnings

Underlying earnings reflect our profit from underlying business operations and exclude components that relate to accounting mismatches that are dependent on market volatility or relate to events that are considered outside the normal course of business. Below we describe items that are excluded from underlying earnings.

Fair value items

Fair value items include the over- or underperformance of investments and guarantees held at fair value for which the expected long-term return is included in underlying earnings. Changes to these long-term return assumptions are also included in the fair value items.

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.

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.

 

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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, and 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 (“FVTPL”). 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.

Realized gains or losses on investments

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

Impairment charges/reversals

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

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 reported under this heading.

Other charges include restructuring charges that are considered other charges for segment reporting purposes because they are outside the normal course of business. In the condensed consolidated interim financial statements, these charges are included in operating expenses.

Run-off businesses

Includes underlying 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, structured settlements blocks of business, Bank-Owned and Corporate-Owned Life Insurance (BOLI/COLI) business, and the sale of the life reinsurance business in the United States. Aegon has other blocks of business for which sales have been discontinued and of which the earnings are included in underlying earnings.

Share in earnings of joint ventures and associates

Earnings from Aegon’s joint ventures in Spain, China and Japan and Aegon’s associates in India, Brazil and Mexico are reported on an underlying earnings basis.

 

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3.2 Investments geographically

Amounts included in the tables on investments geographically are presented on an IFRS-basis.

 

                                  amounts in million EUR (unless otherwise stated)  

Americas

USD

    United
Kingdom
GBP
     June 30, 2014   Americas     The
Netherlands
    United
Kingdom
    New
Markets
    Holding &
other
activities
    Eliminations     Total
EUR
 
         Investments                  
  2,122        97       Shares     1,550        270        121        25        67        (1     2,031   
  81,357        9,036       Debt securities     59,419        20,867        11,284        3,373        -        -        94,943   
  10,940        -       Loans     7,990        25,983        -        487        10        -        34,471   
  11,327        352       Other financial assets     8,273        320        440        36        105        -        9,173   
  972        -       Investments in real estate     710        798        -        2        -        -        1,510   
  106,717        9,485       Investments general account     77,941        48,237        11,844        3,923        181        (1     142,127   
  1,779        12,683       Shares     1,300        9,070        15,838        361        -        (10     26,559   
  6,426        9,262       Debt securities     4,694        17,959        11,566        278        -        -        34,497   
  101,280        22,087       Unconsolidated investment funds     73,970        -        27,581        6,056        -        -        107,608   
  381        3,368       Other financial assets     278        393        4,206        14        -        -        4,892   
  -        828       Investments in real estate     -        -        1,035        -        -        -        1,035   
  109,867        48,229       Investments for account of policyholders     80,242        27,422        60,226        6,710        -        (10     174,590   
       
  216,584        57,714       Investments on balance sheet     158,183        75,660        72,071        10,633        181        (11     316,717   
  167,588        331       Off balance sheet investments third parties     122,398        920        414        62,813        -        -        186,545   
  384,172        58,046       Total revenue generating investments     280,582        76,579        72,485        73,446        181        (11     503,262   
       
         Investments                  
  88,400        9,340       Available-for-sale     64,564        20,792        11,663        3,391        10        -        100,419   
  10,940        -       Loans     7,990        25,983        -        487        10        -        34,471   
  116,272        47,546       Financial assets at fair value through profit or loss     84,919        28,086        59,373        6,754        162        (11     179,284   
  972        828       Investments in real estate     710        798        1,035        2        -        -        2,544   
  216,584        57,714       Total investments on balance sheet     158,183        75,660        72,071        10,633        181        (11     316,717   
       
  13        -       Investments in joint ventures     10        788        -        631        -        -        1,429   
  121        17       Investments in associates     88        19        21        371        2        -        501   
  30,078        4,150       Other assets     21,967        25,124        5,182        3,006        34,430        32,489        57,220   
  246,796        61,881       Consolidated total assets     180,249        101,590        77,274        14,641        34,734        (32,621     375,868   
                                                                              
                              amounts in million EUR (unless otherwise stated)  

Americas

USD

    United
Kingdom
GBP
     December 31, 2013   Americas     The
Netherlands
    United
Kingdom
    New
Markets
    Holding &
other
activities
    Eliminations     Total
EUR
 
         Investments                  
  2,007        46       Shares     1,456        447        55        45        36        (2     2,036   
  78,719        8,719       Debt securities     57,125        19,095        10,479        2,812        -        -        89,511   
  11,289        1       Loans     8,192        24,832        1        508        -        -        33,533   
  11,418        173       Other financial assets     8,286        293        208        30        103        -        8,920   
  993        -       Investments in real estate     721        810        -        1        -        -        1,532   
  104,425        8,938       Investments general account     75,780        45,478        10,743        3,396        139        (2     135,533   
  1,804        12,792       Shares     1,309        8,450        15,375        297        -        (8     25,423   
  6,675        9,643       Debt securities     4,844        16,791        11,590        307        -        -        33,531   
  94,950        21,776       Unconsolidated investment funds     68,905        -        26,173        5,744        -        -        100,822   
  230        3,062       Other financial assets     167        405        3,680        9        -        -        4,261   
  -        828       Investments in real estate     -        -        996        -        -        -        996   
  103,659        48,101       Investments for account of policyholders     75,224        25,646        57,813        6,357        -        (8     165,032   
       
  208,084        57,039       Investments on balance sheet     151,004        71,123        68,556        9,754        139        (10     300,566   
  155,179        239       Off balance sheet investments third parties     112,611        994        287        60,951        -        -        174,843   
  363,262        57,277       Total revenue generating investments     263,616        72,117        68,843        70,705        139        (10     475,409   
       
         Investments                  
  86,347        8,892       Available-for-sale     62,661        19,452        10,687        2,827        8        -        95,635   
  11,289        1       Loans     8,192        24,832        1        508        -        -        33,533   
  109,455        47,318       Financial assets at fair value through profit or loss     79,430        26,029        56,872        6,418        131        (10     168,870   
  993        828       Investments in real estate     721        810        996        1        -        -        2,528   
  208,084        57,039       Total investments on balance sheet     151,004        71,123        68,556        9,754        139        (10     300,566   
       
  -        -       Investments in joint ventures     -        819        -        607        0        -        1,426   
  112        16       Investments in associates     81        19        20        350        1        -        470   
  31,112        4,227       Other assets     22,577        17,036        5,080        2,936        29,962        (28,196     49,399   
  239,307        61,282       Consolidated total assets     173,663        88,997        73,656        13,647        30,102        (28,206     351,860   

 

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4. Premium income and premium to reinsurers

 

     
                

EUR millions

    YTD 2014        YTD 2013   
   

Gross

     

Life

    8,107        9,705   

Non-life

    1,518        1,509   

Total

    9,625        11,214   
   

Reinsurance

     

Life

    1,319        1,365   

Non-life

    152        182   

Total

    1,471        1,547   

5. Investment income

 

     
                

EUR millions

    YTD 2014        YTD 2013   
   

Interest income

    3,379        3,396   

Dividend income

    642        606   

Rental income

    67        59   

Total investment income

    4,088        4,061   
   

Investment income related to general account

    2,801        2,797   

Investment income for account of policyholders

    1,287        1,264   

Total

    4,088        4,061   

6. Results from financial transactions

 

     
                

EUR millions

    YTD 2014        YTD 2013   
   

Net fair value change of general account financial investments at FVTPL other than derivatives

    161        123   

Realized gains and (losses) on financial investments

    307        188   

Gains and (losses) on investments in real estate

    (14     (26

Net fair value change of derivatives

    60        (334

Net fair value change on for account of policyholder financial assets at FVTPL

    5,867        5,462   

Net fair value change on investments in real estate for account of policyholders

    28        (33

Net foreign currency gains and (losses)

    (12     4   

Net fair value change on borrowings and other financial liabilities

    (4     33   

Realized gains and (losses) on repurchased debt

    3        (1

Total

    6,397        5,416   

Net fair value change on for accounts of policyholder financial assets at FVTPL is offset by amounts in the Claims and benefits line reported in note 7 - Benefits and expenses.

 

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7. Benefits and expenses

 

     
                

EUR millions

    YTD 2014        YTD 2013   
   

Claims and benefits

    20,338        20,747   

Employee expenses

    982        1,040   

Administration expenses

    552        520   

Deferred expenses

    (656     (658

Amortization charges

    493        534   

Total

    21,708        22,183   

Claims and benefits includes claims and benefits in excess of account value for products for which deposit accounting is applied and the change in valuation of liabilities for insurance and investment contracts. In addition, commissions and expenses and premium paid to reinsurers are included. Claims and benefits fluctuates mainly as a result of changes in technical provisions resulting from fair value changes on for account of policyholder financial assets included in Results from financial transactions (note 6).

8. Impairment charges/(reversals)

 

     
                

EUR millions

    YTD 2014        YTD 2013   
   

Impairment charges / (reversals) comprise:

     

Impairment charges on financial assets, excluding receivables 1

    49        103   

Impairment reversals on financial assets, excluding receivables 1

    (35     (25

Impairment charges / (reversals) on non-financial assets and receivables

    1        (4

Total

    16        74   
   

Impairment charges on financial assets, excluding receivables, from:

     

Shares

    3        -   

Debt securities and money market instruments

    12        63   

Loans

    35        40   

Total

    49        103   
   

Impairment reversals on financial assets, excluding receivables, from:

     

Debt securities and money market instruments

    (29     (22

Loans

    (5     (3

Total

    (35     (25

1 Impairment charges / (reversals) on financial assets, excluding receivables, are excluded from underlying earnings before tax for segment reporting (refer to note 3).

9. Investments

 

     
                

EUR millions

    Jun. 30, 2014        Dec. 31, 2013   
   

Available-for-sale (AFS)

    100,419        95,635   

Loans

    34,471        33,533   

Financial assets at fair value through profit or loss (FVTPL)

    5,728        4,833   

Financial assets, excluding derivatives

    140,617        134,001   

Investments in real estate

    1,510        1,532   

Total investments for general account, excluding derivatives

    142,127        135,533   

 

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Total financial assets, excluding derivatives

 

                               
     AFS     FVTPL     Loans     Total  
   

Shares

    672        1,359        -        2,031   

Debt securities

    93,073        1,870        -        94,943   

Money market and other short-term investments

    5,504        729        -        6,233   

Mortgages loans

    -        -        30,381        30,381   

Private loans

    -        -        1,806        1,806   

Deposits with financial institutions

    -        -        229        229   

Policy loans

    -        -        1,911        1,911   

Other

    1,170        1,770        143        3,083   

June 30, 2014

    100,419        5,728        34,471        140,617   
   
      AFS        FVTPL        Loans        Total   
   

Shares

    787        1,250        -        2,036   

Debt securities

    88,162        1,350        -        89,511   

Money market and other short-term investments

    5,524        449        -        5,974   

Mortgages loans

    -        -        29,369        29,369   

Private loans

    -        -        1,783        1,783   

Deposits with financial institutions

    -        -        292        292   

Policy loans

    -        -        1,955        1,955   

Other

    1,163        1,784        135        3,082   

December 31, 2013

    95,635        4,833        33,533        134,001   

10. Investments for account of policyholders

 

     
                

EUR millions

    Jun. 30, 2014        Dec. 31, 2013   

Shares

    26,559        25,423   

Debt securities

    34,497        33,531   

Money market and short-term investments

    959        850   

Deposits with financial institutions

    3,522        3,006   

Unconsolidated investment funds

    107,608        100,822   

Other

    410        404   

Total investments for account of policyholders at fair value through profit or loss, excluding derivatives

    173,556        164,037   

Investment in real estate

    1,035        996   

Total investments for account of policyholders

    174,590        165,032   

11. Derivatives

The movements in derivative balances mainly result from changes in interest rates and other market movements during the period.

 

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12. Fair value

The table below provides an analysis of financial instruments recorded at fair value on a recurring basis by level of the fair value hierarchy:

 

Fair value hierarchy

                               
EUR millions   Level I     Level II     Level III     Total  

As at June 30, 2014

         
   

Financial assets carried at fair value

         

Available-for-sale investments

         

Shares

    121        280        271        672   

Debt securities

    22,808        66,965        3,299        93,073   

Money markets and other short-term instruments

    -        5,504        -        5,504   

Other investments at fair value

    27        318        824        1,170   

Total Available-for-sale investments

    22,956        73,068        4,395        100,419   
   

Fair value through profit or loss

         

Shares

    1,153        207        -        1,359   

Debt securities

    94        1,745        30        1,870   

Money markets and other short-term instruments

    95        634        -        729   

Other investments at fair value

    1        575        1,195        1,770   

Investments for account of policyholders 1

    102,852        68,757        1,947        173,556   

Derivatives

    12        19,626        299        19,937   

Total Fair value through profit or loss

    104,207        91,544        3,471        199,221   

Total financial assets at fair value

    127,163        164,611        7,865        299,639   
   

Financial liabilities carried at fair value

         

Investment contracts for account of policyholders 2

    13,528        21,004        117        34,649   

Borrowings 3

    509        515        -        1,024   

Derivatives

    31        15,588        1,913        17,532   

Total financial liabilities at fair value

    14,068        37,107        2,030        53,205   
   

As at December 31, 2013

         
   

Financial assets carried at fair value

         

Available-for-sale investments

         

Shares

    202        262        322        787   

Debt securities

    20,815        64,184        3,162        88,162   

Money markets and other short-term instruments

    -        5,524        -        5,524   

Other investments at fair value

    25        312        826        1,163   

Total Available-for-sale investments

    21,043        70,282        4,310        95,635   
   

Fair value through profit or loss

         

Shares

    1,120        130        -        1,250   

Debt securities

    64        1,268        17        1,350   

Money markets and other short-term instruments

    95        354        -        449   

Other investments at fair value

    -        567        1,217        1,784   

Investments for account of policyholders 1

    99,040        63,008        1,989        164,037   

Derivatives

    69        13,134        328        13,531   

Total Fair value through profit or loss

    100,388        78,461        3,552        182,401   

Total financial assets at fair value

    121,431        148,744        7,862        278,036   
   

Financial liabilities carried at fair value

         

Investment contracts for account of policyholders 2

    12,872        19,641        114        32,628   

Borrowings 3

    517        500        -        1,017   

Derivatives

    24        10,383        1,431        11,838   

Total financial liabilities at fair value

    13,413        30,524        1,545        45,482   

 

1  The investments for account of policyholders included in the table above represents those investments carried at fair value through profit or loss.
2  The investment contracts for account of policyholders included in the table above represents those investment contracts carried at fair value.
3  Total borrowings on the statement of financial position contain borrowings carried at amortized cost that are not included in the above schedule.

 

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Significant transfers between Level I, Level II and Level III

Aegon’s policy is to record transfers of assets and liabilities between Level I, Level II and Level III at their fair values as of the beginning of each reporting period.

The table below shows transfers between Level I and II for financial assets and financial liabilities recorded at fair value on a recurring basis during the six-month period ended June 30, 2014.

 

Fair value transfers                            
EUR millions   YTD 2014     Full Year 2013  
     Transfers
Level I to
Level II
    Transfers
Level II
to Level I
    Transfers
Level I to
Level II
    Transfers
Level II to
Level I
 

Financial assets carried at fair value available-for-sale investments

         

Shares

    -        -        -        1   

Debt securities

    -        43        1        209   

Total

    -        43        2        210   
     

Fair value through profit or loss

         

Investments for account of policyholders

    -        1        -        263   

Total

    -        1        -        263   

Total financial assets at fair value

    -        43        2        473   

Transfers are identified based on transaction volume and frequency, which are indicative of an active market.

Movements in Level III financial instruments measured at fair value

The following table summarizes the change of all assets and liabilities measured at estimated fair value on a recurring basis using significant unobservable inputs (Level III), including realized and unrealized gains (losses) of all assets and liabilities and unrealized gains (losses) of all assets and liabilities still held at the end of the respective period.

 

Roll forward of Level III financial instruments                                                   
     January 1,
2014
    Total gains /
losses in
income
statement 1
    Total gains /
losses in OCI 2
    Purchases     Sales     Settlements     Net exchange
differences
    Reclass-
ification
    Transfers from
Level I and
Level II
    Transfers to
Level I and
Level II
    June 30,
2014
    Total unrealized
gains and losses
for the period
recorded in the
P&L for
instruments
held at
June 30, 2014 ³
 

Financial assets carried
at fair value
available-for-sale investments

                         

Shares

    322        36        (14     29        (101     -        1        -        -        (1     271        -   

Debt securities

    3,162        13        79        665        (157     (95     12        -        123        (503     3,299        -   

Other investments at fair value

    826        (51     (12     72        (29     (4     5        -        17        -        824        -   
      4,310        (2     53        765        (287     (99     18        -        140        (503     4,395        -   
   

Fair value through profit or loss

                         

Debt securities

    17        1        -        20        -        (9     -        -        -        -        30        2   

Other investments at fair value

    1,217        49        -        16        (145     -        8        -        64        (14     1,195        49   

Investments for
account of policyholders

    1,989        45        -        224        (258     -        9        -        98        (161     1,947        42   

Derivatives

    328        (62     -        -        (14     -        4        44        -        -        299        (79
      3,552        33        -        261        (417     (9     20        44        162        (175     3,471        14   
   

Financial liabilities carried
at fair value

                         

Investment contracts for account of policyholders

    114        2        -        -        -        -        1        -        -        -        117        2   

Derivatives

    1,431        421        -        -        16        -        1        44        -        -        1,913        412   
      1,545        423        -        -        16        -        2        44        -        -        2,030        414   

1 Includes impairments and movements related to fair value hedges. Gains and losses are recorded in the line item results from financial transactions of the income statement.

2 Total gains and losses are recorded in line items Gains/ (losses) on revaluation of available-for-sale investments and (Gains)/ losses transferred to the income statement on disposal and impairment of available-for-sale investment of the statement of other comprehensive income.

3 Total gains / (losses) for the period during which the financial instrument was in Level III.

During the first six months of 2014, Aegon transferred certain financial instruments from Level II to Level III of the fair value hierarchy. The reason for the change in level was that the market liquidity for these securities decreased, which led to a change in market observability of prices. Prior to transfer, the fair value for the Level II securities was determined using observable market transactions or corroborated broker quotes respectively for the same or similar instruments. The amount of assets and

 

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liabilities transferred to Level III was EUR 302 million (full year 2013: EUR 785 million). Since the transfer, all such assets have been valued using valuation models incorporating significant non market-observable inputs or uncorroborated broker quotes.

Similarly, during the first six months of 2014, Aegon transferred certain financial instruments from Level III to other levels of the fair value hierarchy. The change in level was mainly the result of a return of activity in the market for these securities and that for these securities the fair value could be determined using observable market transactions or corroborated broker quotes for the same or similar instruments. Transfers from Level III amounted to EUR 678 million (full year 2013: EUR 756 million).

The table below presents information about the significant unobservable inputs used for recurring fair value measurements for certain Level III financial instruments.

 

Overview of significant unobservable inputs          
EUR millions   Carrying
amount June
30, 2014
        Valuation technique 1       Significant unobservable
input 2
      Range (weighted average)

Financial assets carried at fair value available-for-sale investments

         

Shares

    127      Broker quote   n.a.   n.a.
      144      Other   n.a.   n.a.
      271               
   

Debt securities

         
   
      2,681      Broker quote   n.a.   n.a.
      130      Discounted cash flow   Discount rate   3% - 8% (6.93%)
      199      Discounted cash flow   Credit spread   0.8% - 3.4% (2.44%)
      291      Other   n.a.   n.a.
      3,299               

Other investments at fair value

         

Tax credit investments

    673      Discounted cash flow   Discount rate   8.6%

Investment funds

    99      Net asset value   n.a.   n.a.

Other

    52      Other   n.a.   n.a.
      824               

June 30, 2014

    4,395               
   

Fair value through profit or loss

         

Debt securities

    30      Other   n.a.   n.a.
      30               
   

Other investments at fair value

         

Investment funds

    1,165      Net asset value   n.a.   n.a.

Other

    30      Other   n.a.   n.a.
      1,195               
   

Derivatives 3

         

Longevity swap

    108      Discounted cash flow   Mortality   n.a.

Other

    120      Other   n.a.   n.a.
      228               

June 30, 2014

    1,453               
   

Total financial assets at fair value 3

    5,848               
   

Financial liabilities carried at fair value

         

Derivatives

         

Embedded derivatives in insurance contracts

    1,745      Discounted cash flow   Credit spread   0.3% - 0.4% (0.34%)

Other

    169      Other   n.a.   n.a.

Total financial liabilities at fair value

    1,913               
1  Other in the table above (column Valuation technique) includes investments for which the fair value is uncorroborated and no broker quote is received.
2  Not applicable (n.a.) has been included when no significant unobservable assumption has been identified and used.
3  Investments for account of policyholders are excluded from the table above and from the disclosure regarding reasonably possible alternative assumptions. 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. Derivatives exclude derivatives for account of policyholders amounting to EUR 71 million.

The description of Aegon’s methods of determining fair value is included in Aegon’s Annual Report on Form 20-F 2013. For reference purposes, the valuation techniques included in the table above are described in more detail on the following pages.

 

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Shares

When available, Aegon uses quoted market prices in active markets to determine the fair value of its investments in 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. Adjustments for illiquidity 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.

Available-for-sale shares include shares in a Federal Home Loan Bank (“FHLB”) for an amount of EUR 95 million (December 31, 2013: EUR 94 million) that are measured at par, which are reported as part of Other. A FHLB has implicit financial support from the United States government. The redemption value of the shares is fixed at par and they can only be redeemed by the FHLB.

Debt securities

Debt securities are comprised of residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS), asset-backed securities (ABS), corporate bonds and sovereign debt. Details on the fair value measurement for these specific types of debt securities are provided below.

Valuations of RMBS, CMBS and ABS are monitored and reviewed on a monthly basis. Valuations per asset type are based on a pricing hierarchy which uses a waterfall approach that starts with market prices from indices and follows with third-party pricing services or brokers. The pricing hierarchy is dependent on the possibilities of corroboration of the market prices. If no market prices are available, Aegon uses internal models to determine fair value. Significant inputs included in the internal models are generally determined based on relative value analyses, which incorporate comparisons to instruments with similar collateral and risk profiles. Market standard models may be used to model the specific collateral composition and cash flow structure of each transaction. The most significant unobservable input is liquidity premium which is embedded in the discount rate. The weighted average liquidity premium used in valuation of ABS has increased to 6.93% (December 31, 2013: 6.62%). Broker quoted debt securities include ABS for an amount of EUR 2,261 million (December 31, 2013: EUR 2,030 million).

Valuations of corporate bonds are monitored and reviewed on a monthly basis. The pricing hierarchy is dependent on the possibility of corroboration of market prices when available. If no market prices are available, valuations are determined by a discounted cash flow methodology using an internally calculated yield. The yield is comprised of a credit spread over a given benchmark. In all cases, the benchmark is an observable input. The credit spread contains both observable and unobservable inputs. Aegon starts by taking an observable credit spread from a similar bond of the given issuer, and then adjusts this spread based on unobservable inputs. These unobservable inputs may include subordination, liquidity and maturity differences. The weighted average credit spread used in valuation of corporate bonds has increased to 2.44% (December 31, 2013: 2.33%).

When available, Aegon uses quoted market prices in active markets to determine the fair value of its sovereign debt investments. When Aegon cannot make use of quoted market prices, market prices from indices or quotes from third-party pricing services or brokers are used.

 

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Tax credit investments

The fair value of tax credit investments is determined by using a discounted cash flow valuation technique. This valuation technique takes into consideration projections of future capital contributions and distributions, as well as future tax credits and the tax benefits of future operating losses. The present value of these cash flows is calculated by applying a discount rate. In general, the discount rate is determined based on the cash outflows for the investments and the cash inflows from the tax credits/tax benefits (and the timing of those cash flows). These inputs are unobservable in the market place. The discount rate used in valuation of tax credit investments has increased to 8.6% (December 31, 2013: 8.2%).

Investment funds

Investment funds include real estate funds, private equity funds and hedge funds. The fair values of investments held in non-quoted investment 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.

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”) derivatives 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.

Some OTC derivatives are so-called longevity derivatives. The payout of longevity derivatives is linked to publicly available mortality tables. The derivatives are measured using the present value of the best estimate of expected payouts of the derivative plus a risk margin. The best estimate of expected payouts is determined using best estimate of mortality developments. Aegon determined the risk margin by stressing the best estimate mortality developments to quantify the risk and applying a cost-of-capital methodology. The most significant unobservable input for these derivatives is the (projected) mortality development.

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. Changes in the fair value of derivatives attributable to changes in counterparty credit risk were not significant.

 

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Embedded derivatives in insurance contracts including guarantees

All bifurcated 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, United Kingdom and Japan which are offered on some variable annuity products and are also assumed from a ceding company; minimum investment return guarantees at end dates that are offered on UL products sold in the Netherlands; and guaranteed minimum accumulation benefits on segregated funds sold in Canada.

Since the price of these guarantees is not quoted in any market, 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 credit spread, expected market rates of return, equity and interest rate volatility, correlations of market returns, discount rates and actuarial assumptions. The most significant unobservable factor is credit spread. The credit spread used in the valuations of embedded derivatives in insurance contracts decreased to 0.34% (December 31, 2013: 0.47%).

The expected returns are based on risk-free rates. Aegon added 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). Aegon’s assumptions are set by region to reflect differences in the valuation of the guarantee embedded in the insurance contracts.

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.

Effect of reasonably possible alternative assumptions

The effect of changes in unobservable inputs on fair value measurement as reported in Aegon’s Annual Report on Form 20-F 2013 has not changed significantly as per June 30, 2014.

 

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Fair value information about financial instruments not measured at fair value

The following table presents the carrying values and estimated fair values of financial assets and liabilities, excluding financial instruments which are carried at fair value on a recurring basis.

 

Fair value information about financial instruments not measured at fair value

 

 
EUR millions   Carrying
amount
June
30, 2014
    Total
estimated fair
value June
30, 2014
    Carrying
amount
December
31, 2013
    Total
estimated fair
value
December
31, 2013
 
     

Assets

           

Mortgage loans - held at amortized cost

    30,532        35,899        29,245        32,869   

Private loans - held at amortized cost

    1,806        2,031        1,783        1,888   

Other loans - held at amortized cost

    2,283        2,283        2,381        2,381   
     

Liabilities

           

Trust pass-through securities - held at amortized cost

    125        125        135        122   

Subordinated borrowings - held at amortized cost

    739        807        44        73   

Borrowings – held at amortized cost

    12,417        12,758        11,003        11,291   

Investment contracts - held at amortized cost

    13,522        13,862        14,079        14,387   

Financial instruments for which carrying value approximates fair value

Certain financial instruments that are not carried at fair value are carried at amounts that approximate fair value, due to their short-term nature and generally negligible credit risk. These instruments include cash and cash equivalents, short-term receivables and accrued interest receivable, short-term liabilities, and accrued liabilities. These instruments are not included in the table above.

13. Deferred expenses

 

     
                

EUR millions

    Jun. 30, 2014        Dec. 31, 2013   
     

DPAC for insurance contracts and investment contracts with discretionary participation features

    9,161        9,229   

Deferred cost of reinsurance

    404        421   

Deferred transaction costs for investment management services

    365        356   

Total deferred expenses

    9,931        10,006   

14. Share capital

 

     
                

EUR millions

    Jun. 30, 2014        Dec. 31, 2013   
     

Share capital - par value

    327        325   

Share premium

    8,374        8,375   

Total share capital

    8,701        8,701   
     

Share capital - par value

       

Balance at January 1

    325        319   

Issuance

    -        84   

Withdrawal

    -        (82

Share dividend

    2        5   

Balance

    327        325   
     

Share premium

       

Balance at January 1

    8,375        8,780   

Withdrawal

    -        (400

Share dividend

    (2     (5

Balance

    8,374        8,375   

 

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Basic and diluted earnings per share

 

     
                

EUR millions

    YTD 2014        YTD 2013   
   

Earnings per share (EUR per share)

     

Basic earnings per common share

    0.21        0.21   

Basic earnings per common share B

    0.01        0.01   

Diluted earnings per common share

    0.21        0.21   

Diluted earnings per common share B

    0.01        0.01   
   

Earnings per share calculation

     

Net income attributable to equity holders of Aegon N.V.

    522        572   

Preferred dividend

    -        (83

Coupons on other equity instruments

    (83     (69

Earnings attributable to common shares and common shares B

    438        420   
   

Earnings attributable to common shareholders

    435        419   

Earnings attributable to common shareholders B

    3        1   
   

Weighted average number of common shares outstanding (in million)

    2,092        1,978   

Weighted average number of common shares B outstanding (in million)

    579        150   

Diluted earnings per share is calculated by adjusting the average number of shares outstanding for share options. During the six months ended June 30, 2014, and during 2013, the average share price did not exceed the exercise price of these options. As a result, diluted earnings per share do not differ from basic earnings per share.

Dividend

The Annual General Meeting of Shareholders on May 21, 2014, approved a final dividend over 2013 payable in either cash or stock related to the second half of 2013, paid in the first half of 2014. The cash dividend amounted to EUR 0.11 per common share, the stock dividend amounted to one new Aegon common share for every 59 common shares held. The stock dividend and cash dividend are approximately equal in value. Dividend paid on common shares B amounted to 1/40th of the dividend paid on common shares. Approximately 40% of shareholders elected to receive the stock dividend. The remaining 60% opted for cash dividend. To neutralize the dilutive effect of the 2013 final dividend paid in shares, Aegon executed a program to repurchase 14,488,648 common shares. Between June 20, 2014, and July 17, 2014, these common shares were repurchased at an average price of EUR 6.4300 per share.

At June 30, 2014, Aegon had repurchased 5,969,584 common shares at an average price of EUR 6.4474. The liability for the repurchase of the remaining 8,519,064 shares, valued at the closing share price of EUR 6.3740 at June 30, 2014, amounted to EUR 54 million.

15. Other equity instruments

On June 15, 2014, Aegon redeemed junior perpetual capital securities with a coupon of 7.25% issued in 2007. The junior perpetual capital securities were originally issued at par with a carrying value of EUR 745 million. The principal amount of USD 1,050 million (EUR 774 million) was repaid with accrued interest. The cumulative foreign currency result at redemption was recorded directly in retained earnings.

On March 15, 2014, Aegon redeemed junior perpetual capital securities with a coupon of 6.875% issued in 2006. The junior perpetual capital securities were originally issued at par with a carrying value

 

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of EUR 438 million. The principal amount of USD 550 million (EUR 396 million) was repaid with accrued interest. The cumulative foreign currency result at redemption was recorded directly in retained earnings.

16. Subordinated borrowings

On April 25, 2014, Aegon issued EUR 700 million of subordinated notes, first callable on April 25, 2024 and maturing on April 25, 2044. The coupon is fixed at 4% until the first call date and floating thereafter.

17. Borrowings

 

     
                
EUR millions   Jun. 30, 2014     Dec. 31, 2013  
     

Debentures and other loans

    12,983        11,830   

Commercial paper

    150        135   

Short-term deposits

    12        16   

Bank overdrafts

    296        39   

Total borrowings

    13,441        12,020   

Debentures and other loans

Included in Debentures and other loans is EUR 1,024 million relating to borrowings measured at fair value (2013: EUR 1,017 million).

On March 13, 2014, Aegon executed a transaction under the Dutch SAECURE program to sell Class A mortgage backed securities (RMBS) amounting to EUR 1.4 billion. “SAECURE 14 NHG” consists of 2 tranches:

t   EUR 343 million of class A1 notes with an expected weighted average life of 2 years and priced with a coupon of three month Euribor plus 0.40%; and
t   EUR 1,024 million of class A2 notes with an expected weighted average life of 5 years and priced with a coupon of three month Euribor plus 0.72%.

Commercial paper, Short-term deposits and Bank overdrafts vary with the normal course of business.

18. Commitments and contingencies

In June, 2013, the Dutch Supreme Court denied Aegon’s appeal from a ruling of the Court of Appeal with respect to a specific Aegon unit-linked product, the “KoersPlan” product. As a result of the Dutch Supreme Court’s denial of appeal, Aegon compensated the approximately 35,000 holders of KoersPlan products who were plaintiffs in the litigation. Aegon has issued, sold or advised on approximately 600,000 KoersPlan products. In June 2014, Aegon announced that it would also compensate holders of KoersPlan-products that were not plaintiffs in the litigation. The compensation equals the excess, if any, of the premium actually charged by Aegon over the amount of premium charged by Aegon for stand-alone death benefit coverage for a comparable risk over the same period. The costs of this product improvement will be covered by existing provisions.

In March 2014, consumer interest group Vereniging Woekerpolis.nl filed a new claim against Aegon in court. The claim relates to a range of unit-linked products of Aegon, challenging a variety of elements of these products on multiple legal grounds. At this time it is not practicable for Aegon to quantify a range or maximum liability, if any.

 

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Optas

Aegon and BPVH – a foundation representing Dutch harbor workers and employers – have reached an agreement on removing restrictions on the capital of the harbor workers’ former pension fund Optas. This agreement, announced on April 14, 2014, ends a dispute that began when the Optas pension fund was transformed into an insurance company that was subsequently acquired by Aegon in 2007.

In August Aegon expects to, jointly with BPVH, file a request with the Dutch court to remove the restriction on the capital of Optas. Upon the court granting this request, Aegon will make a payment of EUR 80 million to BPVH, as well as offering harbor workers more favorable pension terms. In addition, over the coming years Aegon will contribute up to EUR 20 million to help mitigate the effect of an announced reduction in the tax-free pension allowance in the Netherlands.

No amounts in respect of this agreement have been recognized in these condensed consolidated interim financial statements because the outcome of the request to the court to remove the restriction is uncertain.

There have been no other material changes in contingent assets and liabilities as reported in the 2013 consolidated financial statements of Aegon.

19. Acquisitions / Divestments

There were no significant acquisitions or divestments during the six months ended June 30, 2014.

20. Events after the balance sheet date

On July 30, 2014, Aegon signed a new 25-year agreement to distribute both protection and general insurance products through Banco Santander’s approximately 600 branches in Portugal. Under the terms of the agreement, Aegon will acquire a 51% stake in Banco Santander’s Portuguese insurance activities. The transaction is subject to regulatory approval and expected to close in the fourth quarter of 2014.

 

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ITEM 2: OPERATING AND FINANCIAL REVIEW AND PROSPECTS

2.1 Introduction

Aegon is committed to providing information on key factors that drive its business and affect its financial condition, results and value. Aegon’s disclosure practices have been developed over many years with due consideration of the needs and requirements of its stakeholders, including regulators, investors and research analysts. Aegon has substantive supplemental information in its annual and quarterly accounts to provide transparency of its financial results. Aegon has provided insight into its critical accounting policies and the methodologies Aegon applies to manage its risks. For a discussion of critical accounting policies see “Application of Critical Accounting Policies – IFRS Accounting Policies”. For a discussion of Aegon’s risk management methodologies see Item 11, “Quantitative and Qualitative Disclosures About Market Risk” as included in the Cross reference table Form 20-F in Aegon’s 2013 Annual Report on Form 20-F filed with the SEC on March 21, 2014, and Aegon’s 2013 Supplemental Annual Report on Form 6-K filed with the SEC on April 17, 2014 which reflects the impact of the voluntary changes in accounting policies effective January 1, 2014.

2.2 Application of Critical Accounting Policies - IFRS Accounting Policies

The Operating and Financial Review and Prospects are based upon Aegon’s consolidated financial statements, which have been prepared in accordance with IFRS as issued by the International Accounting Standards Board (IFRS). 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.

i Valuation of assets and liabilities arising from life insurance contracts

The liability for life insurance contracts with guaranteed or fixed account terms is generally based on current assumptions or on the assumptions established at inception of the contract. All contracts are subject to liability adequacy testing which reflects management’s current estimates of future cash flows (including investment returns). 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 not passing the liability adequacy test, the entire deficiency is recognized in the income statement. To the extent that the deficiency 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.

 

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Actuarial assumptions

The main assumptions used in measuring deferred policy acquisition cost (DPAC), value of business acquired (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 prescribed by the local regulator, market observable 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. 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.

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. For policies with account value guarantees based on equity market movements, a dynamic lapse assumption is utilized to reflect policyholder behavior based on whether the guarantee is in the money. 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.

For the first half of 2014, Aegon kept its long-term equity market return assumption for the estimated gross profits on variable life and variable annuity products in the Americas at 8% (December 31, 2013: 8%). On a quarterly basis, the estimated gross profits are updated for the difference between the estimated equity market return and the actual market return.

In the third quarter of 2013, to reflect the low interest rate environment, Aegon lowered its long-term assumption for 10-year US Treasury yields by 50 basis points to 4.25% and extended the uniform

 

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grading period from 5 years to 10 years. Aegon also changed its assumption for US separate account bond fund returns to 4% over the next 10 years and 6% thereafter, from its previous assumptions of 4% over the next 5 years and 6% thereafter. In addition, Aegon changed its long-term equity market assumed returns for the estimated gross profit in variable life and variable annuity products in the Americas from 9% to 8%. In total, these assumption changes led to a negative impact on earnings of EUR 405 million in 2013. Both the assumptions for the bond fund and that for the long-term equity market are gross assumptions from which asset management and policy fees are deducted to determine the policyholder return. The 90-day Treasury yield is 0.04% at June 30, 2014, and is assumed to remain level for the next two years followed by an eight-year grade to 2.5%. On a quarterly basis, the estimated gross profits are updated for the difference between the estimated equity market return and the actual return.

A 1% decrease in the expected long-term equity growth rate with regards to Aegon’s variable annuities and variable life insurance products in the United States and Canada would result in a decrease in DPAC and VOBA balances and reserve strengthening of approximately EUR 176 million (December 31, 2013: 169 million). The DPAC and VOBA balances for these products in the United States and Canada amounted to EUR 2.2 billion at June 30, 2014 (December 31, 2013: EUR 2.3 billion).

For the fixed annuities and fixed universal life insurance products, the estimated gross profits (“EGP”) calculations include a net interest rate margin, which Aegon assumes will remain practically stable under any reasonably likely interest-rate scenario.

Applying a reasonably possible increase to the mortality assumption based on the Company’s experience, which varies by block of business, would reduce net income by approximately EUR 81 million at June 30, 2014 (December 31, 2013: EUR 105 million). In addition the Company is, as part of its upcoming annual assumption review, supplementing own experience with the results of recent old age industry studies. The outcome of the update may have an adverse impact on the Company’s third quarter earnings and is not included in the above mentioned sensitivity. A relative 20% increase in the lapse rate assumption would increase net income by approximately EUR 39 million at June 30, 2014 (December 31, 2013: EUR 18 million).

Any reasonably possible change in the other assumptions Aegon uses to determine EGP margins (i.e. maintenance expenses, inflation and disability) would reduce net income by EUR 35 million at June 30, 2014 (per assumption change) (December 31, 2013: EUR 37 million).

DPAC

The movements in DPAC including deferred cost of reinsurance over the first six months of 2014 compared to the first six months of 2013 can be summarized and compared as follows:

 

 In million EUR    Six months ended June 30  
     2014     2013  

 At January 1

     9,650        9,222   

 Costs deferred during the year

     639        637   

 Amortization through income statement

     (422     (431

 Shadow accounting adjustments

     (430     342   

 Net exchange differences

     134        (91

 Other

     (5     (2

 At June 30

     9,566        9,677   

 

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DPAC per strategic business unit is as follows per June 30, 2014 and December 31, 2013:

 

 In million EUR    Americas      The
Netherlands
     United
    Kingdom
     New Markets      Total  

 Life

     4,519         57         123         500                 5,199   

 Individual savings and retirement products

     1,373         -         -         38         1,411   

 Pensions

     -         70         2,198         -         2,269   

 Run-off business

     636         -         -         -         636   

 Non-life

 

     -         -         51         -         51   

 At June 30, 2014

 

     6,528         127         2,372         538         9,566   

 Life

     4,639         67         120         495         5,322   

 Individual savings and retirement products

     1,403         -         -         37         1,440   

 Pensions

     -         74         2,136         -         2,210   

 Run-off business

 

    

 

679

 

  

 

    

 

-

 

  

 

    

 

-

 

  

 

    

 

-

 

  

 

    

 

679

 

  

 

 At December 31, 2013

 

     6,721         141         2,256         532         9,650   

VOBA

The movement in VOBA over the first six months of 2014 compared to the first six months of 2013 can be summarized and compared as follows:

 

 In million EUR             
     2014     2013  

 At January 1

     1,768                1,798   

 Additions

     1        3   

 Acquisitions through business combinations

     -          2   

 Amortization / depreciation through income statement

     (52     (65

 Shadow accounting adjustments

     (115     129   

 Net exchange differences

 

     21        (14

 At June 30

 

     1,622        1,852   

 

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VOBA per strategic business unit is as follows per June 30, 2014 and December 31, 2013:

 

 Amounts in EUR millions                                          
     Americas      The
  Netherlands
     United
        Kingdom
       New markets     

Holdings and

other activities

             Total 2014  

 Life

     998         -         -         11         -         1,009   

 Individual savings and retirement products

     158         -         -         -         -         158   

 Pensions

     11         34         371         -         -         415   

 Distribution

     -         18         -         -         -         18   

 Run off businesses

 

     22         -         -         -         -         22   

 At June 30, 2014

     1,189         52         371         11         -         1,622   
     Americas      The
Netherlands
     United
Kingdom
     New markets     

Holdings and

other activities

     Total 2013  

 Life

     1,131         1         -         12         -         1,144   

 Individual savings and retirement products

     157         -         -         -         -