Aegon Annual Report 2012

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42 Business overview Overview AmericasAsset liability managementThe Aegon USA insurance companies are primarily subjectto regulation under the laws of the states in which they aredomiciled. Each state’s laws prescribe the nature, quality, andpercentage of various types of investments that may be madeby the companies. Such laws generally permit investments ingovernment bonds, corporate debt, preferred and common stock,real estate, and mortgage loans. Limits are generally placed onother classes of investments.The key investment strategy for traditional insurance-linkedportfolios is asset liability management, whereby predominatelyhigh-quality investment assets are matched in an optimalway to the corresponding insurance liability. This strategytakes into account currency, yield and maturity characteristics.Asset diversification and quality considerations are also takeninto account, along with considerations of the policyholders’guaranteed or reasonably expected excess interest sharing.Investment-grade fixed income securities are the main vehiclefor asset liability management, and Aegon USA’s investmentpersonnel are highly skilled and experienced in theseinvestments.The Aegon USA companies manage their asset liability matchingthrough the work of several committees. These committeesreview strategies, define risk measures, define and review assetliability management studies, examine risk-hedging techniques,including the use of derivatives, and analyze the potential useof new asset classes. Cash flow testing analysis is performedusing computer simulations, which model assets and liabilitiesunder projected interest rate scenarios and commonly usedstress-test interest rate scenarios. Based on the results of thesesimulations an investment portfolio is constructed to best matchthe cash flow and interest sensitivity of the underlying liabilitieswhile trying to maximize the spread between the yield on theportfolio assets and the rate credited on the policy liabilities.Interest rate scenario testing is a continual process and theanalysis of the expected values and variability for four critical riskmeasures (capital charges, cash flows, present value of profits,and interest rate spreads) forms the foundation for modifyinginvestment strategies, adjusting asset duration and mix, andexploring hedging opportunities. On the liability side, Aegon USAhas some offsetting risks, some liabilities perform better in risinginterest rate environments while others tend to perform wellin falling interest rate environments. The amount of offset canvary depending on the absolute level of interest rates and themagnitude and timing of interest rate changes, but it generallyprovides some level of diversification. On the asset side, hedginginstruments are continuously studied to determine whether theircost is commensurate to the risk reduction they offer.Reinsurance cededCeding reinsurance does not remove Aegon’s liability as theprimary insurer. Aegon could incur losses should reinsurancecompanies not be able to meet their obligations. To minimize itsexposure to the risk of such defaults, the creditworthiness of itsreinsurers is monitored regularly.Aegon USAAegon USA reinsures part of its life insurance exposure withthird-party reinsurers under traditional indemnity, quota sharereinsurance treaties, as well as excess-of-loss contracts. AegonUSA’s reinsurance strategy is in line with typical industry practice.These reinsurance contracts are designed to diversify AegonUSA’s overall risk and limit the maximum loss on risks thatexceed policy retention levels. The maximum retention limitsvary by product and class of risk, but generally fluctuate betweenUSD 3,000 and USD 10 million per life insured.Aegon USA remains contingently liable with respect to theamounts ceded should the reinsurance company not be able tomeet its obligations. To minimize its exposure to such defaults,Aegon USA regularly monitors the creditworthiness of itsreinsurers, and where appropriate, arranges additional protectionthrough letters of credit or trust agreements. For certainagreements, funds are withheld for investment by the cedingcompany. Aegon USA has experienced no material reinsurancerecoverability problems in recent years.The Aegon USA insurance companies also enter into contractswith company-affiliated reinsurers, both within the United Statesand overseas. These contracts have been excluded from thecompany’s consolidated financial statements.Aegon CanadaIn the normal course of business, Transamerica Life Canadareinsures part of its mortality and morbidity risk with thirdpartyreinsurers that are registered with Canada’s Office ofthe Superintendent of Financial Institutions. The maximum lifeinsurance exposure retained is CAD 1.25 million per life insured.
Annual Report 201243Results 2012 the NetherlandsAmounts in EUR millions 2012 2011 %Net underlying earnings 253 238 6%Tax on underlying earnings 62 60 3%Underlying earnings before tax by product segmentLife & Savings 262 185 42%Pensions 66 98 (33%)Non-life (29) 6 -Distribution 16 8 100%Share in underlying earnings before tax of associates - 1 -Underlying earnings before tax 315 298 6%Net fair value items 164 156 5%Gains / (losses) on investments 138 269 (49%)Impairment charges (29) (15) (93%)Other income / (charges) (279) (164) (70%)Income before tax 309 544 (43%)Income tax (18) (125) 86%Net income 291 419 (31%)Life insurance gross premiums 3,004 3,213 (7%)Accident and health insurance premiums 220 216 2%General insurance premiums 475 452 5%Total gross premiums 3,699 3,881 (5%)Investment income 2,212 2,192 1%Fees and commission income 329 329 -Total revenues 6,240 6,402 (3%)Commissions and expenses 1,046 1,122 (7%)of which operating expenses 756 823 (8%)New life salesAmounts in EUR millions 2012 2011 %Life & Savings 46 81 (43%)Pensions 200 173 16%Total recurring plus 1/10 single 246 254 (3%)Amounts in EUR million 2012 2011 %New premium production accident and health insurance 21 27 (22%)New premium production general insurance 30 27 11%Gross deposits (on and off balance) 2012 2011 %Life & Savings 1,484 1,968 (25%)Pensions - 80 -Total gross deposits 1,484 2,048 (28%)
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336HeadquarterAegon N.V.Aegonplein
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www.aegon.com
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Aegon Annual Report 2012

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