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INFORMATION BASED ON U.S. ACCOUNTING PRINCIPLES
The consolidated financial statements of AEGON N.V. have been prepared in accordance with Dutch accounting principles which differ in certain respects from those generally accepted in the United States (US GAAP). The following information is a summary of the effect on AEGON’s shareholders’ equity and net income of the application of US GAAP, which is included in further detail in the Form 20-F report filed with the Securities and Exchange Commission. The Form 20-F report is available on request, free of charge, and can also be retrieved from the EDGAR database of the SEC at www.sec.gov and via www.aegon.com.
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| Amounts in EUR millions |
2003 |
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Shareholders’
equity
December 31,
2002 |
|
2003 |
|
20021 |
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Net income
20011 |
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| Amounts in accordance with Dutch accounting principles |
14,132 |
|
14,231 |
|
1,793 |
|
1,547 |
|
2,397 |
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Adjustments for:
Real estate |
(817 |
) |
(804 |
) |
(33 |
) |
(48 |
) |
(61 |
) |
| Bonds and private placements — valuation |
3,824 |
|
3,411 |
|
— |
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— |
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— |
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— realized gains and (losses) |
|
1,132 |
|
245 |
|
893 |
|
8 |
|
276 |
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| Deferred policy acquisition costs |
(1,983 |
) |
(1,421 |
) |
(251 |
) |
(557 |
) |
(141 |
) |
| Goodwill |
(2,959 |
) |
(3,372 |
) |
(219 |
) |
(670 |
) |
(496 |
) |
| Technical provisions |
160 |
|
422 |
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(109 |
) |
402 |
|
45 |
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Realized gains and (losses) on shares and real estate including
reversal of indirect return) |
— |
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— |
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(756 |
) |
(2,251 |
) |
(1,160 |
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| Derivatives |
(239 |
) |
(750 |
) |
90 |
|
32 |
|
(152 |
) |
| Deferred taxation |
(670 |
) |
(651 |
) |
(33 |
|
(30 |
) |
44 |
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| Deferred taxation on US GAAP adjustments |
(671 |
) |
(489 |
) |
(72 |
) |
205 |
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344 |
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| Balance of other items |
9 |
|
(120 |
) |
228 |
|
329 |
|
(410 |
) |
| AMOUNTS DETERMINED IN ACCORDANCE WITH US GAAP |
17,836 |
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17,554 |
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| Income before cumulative effect of accounting changes |
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1,531 |
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(1,033 |
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686 |
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Cumulative effect of adopting FAS 133 (derivatives), net of tax
of EUR 30 million |
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— |
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— |
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(54 |
) |
| Cumulative effect of adopting FAS 142 (goodwill) |
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— |
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(1,295 |
) |
— |
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NET INCOME IN ACCORDANCE WITH US GAAP
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1,531 |
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(2,328 |
) |
632 |
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Other comprehensive income, net of tax:
Foreign currency translation adjustments |
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(2,384 |
) |
(2,749 |
) |
690 |
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Unrealized gains and (losses) on available for sale securities
during the period |
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1,249 |
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(673 |
) |
(907 |
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Reclassification adjustment for (gains) and losses included in
net income |
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7 |
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1,193 |
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377 |
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| Cumulative effect of accounting change of adopting FAS 133 |
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— |
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— |
49 |
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| COMPREHENSIVE INCOME IN ACCORDANCE WITH US GAAP |
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403 |
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(4,557 |
) |
841 |
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| 1 |
Reflects restatement of certain US GAAP information.
AEGON identified certain changes required to be made to figures presented in accordance with US GAAP for the years ended December 31, 2002, and December 31, 2001.
US GAAP net income over 2002 decreased by EUR 98 million, US GAAP comprehensive income for 2002 was EUR 155 million lower and, for 2001 was EUR 297 million lower.
None of the changes affected any income or balance sheet figures presented in accordance with Dutch accounting principles. |
In 2003 major differences between amounts on Dutch accounting principles and those on US GAAP compared to the amounts of prior years are explained as follows:
Net income of EUR 1,531 million was reported for 2003 based on US GAAP, compared to a net loss of EUR 2,328 million for 2002.
Capital losses on shares and real estate realized on a US GAAP basis totaled EUR 125 million (including EUR 352 million ’other-thantemporary impairment’ write downs in 2003 compared to an amount of EUR 1,057 million in 2002) compared to indirect income of EUR 631 million under Dutch accounting principles. Capital gains (losses) on shares and real estate are recognized when they are realized pursuant to US GAAP while the indirect income methodology is applied under Dutch accounting principles.
Capital gains and losses on bonds and private placements realized, less the amortization charge of deferred gains and losses, totaled EUR 893 million for the year ended December 31, 2003 (2002: EUR 8 million). Under Dutch accounting principles gains and losses are deferred and amortized to the income statement over future periods. Under US GAAP these gains and losses, together with the annual amortization charge, are reported in the income statement when they are realized.
Goodwill impairment charges are recorded on a US GAAP basis while goodwill is charged to equity on a Dutch accounting basis at the time of acquisition. The required annual goodwill impairment test under SFAS 142 was performed in the fourth quarter of 2003 and resulted in an additional goodwill impairment charge of EUR 219 million, mainly in the Transamerica non-insurance reporting unit (2002: EUR 1,965 million). This impairment charge was reported as a 2003 US GAAP operating expense.
The following is a summary of differences between Dutch accounting principles and US GAAP which have an impact on reported shareholders’ equity or net income.
REAL ESTATE
Under Dutch accounting principles real estate is shown at market value, which is the selling-value under normal market circumstances. New property is valued at construction cost including interest during the construction period, or at purchase price. Unrealized and realized gains and losses on real estate investments as well as results, expenses and currency exchange rate differences from hedging transactions are recognized in the revaluation account, taking into account the related (deferred) taxes.
Under US GAAP real estate is carried at historical cost less accumulated depreciation and is adjusted for any impairment in value. Depreciation is provided over the estimated economic life of the property. Realized gains or losses and all other operating income and expenses are reported in the income statement.
The adjustment shown in the reconciliation in the shareholders’ equity column represents the reduction from market value to the historical cost less depreciation.
The adjustment shown in the reconciliation in the net income column represents the annual depreciation charge. The differences in results on disposals arising from the difference in book value between Dutch accounting principles and US GAAP are shown in the line realized gains and losses on shares and real estate, as is the reversal of the indirect income.
BONDS AND PRIVATE PLACEMENTS - VALUATION
Under Dutch accounting principles bonds and private placements are shown at amortized cost less provisions for uncollectable amounts, representing the cash value at the balance sheet date of future interest and principal repayment components based on the effective interest rate on the date of acquisition.
Under US GAAP debt securities are classified in three categories and accounted for as follows:
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debt securities that the company has the intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost; |
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debt securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at market value, with unrealized gains and losses included in earnings; |
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debt securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale securities and reported at market value, with unrealized gains and losses reported in shareholders’ equity. |
AEGON has classified the vast majority of its debt securities as available-for-sale securities and the remainder as trading securities. Under US GAAP, when evidence indicates there is a decline in a debt security’s value, which is other than temporary, the security is written down to fair value and the difference is charged to that year’s earnings.
The adjustment shown in the reconciliation in the shareholders’ equity column represents the difference between the amortized cost basis less write-downs for uncollectable amounts and the market value.
BONDS AND PRIVATE PLACEMENTS - REALIZED GAINS AND LOSSES
Under Dutch accounting principles realized gains and losses from transactions within the bonds and private placements portfolios, unless a loss is considered a default loss, are deferred and released to the income statements in annual installments over the estimated average remaining maturity term of the investments sold.
Under US GAAP realized gains and losses on sales of bonds and private placements are recorded in earnings in the period the sales occurred. Gains and losses, both realized and unrealized, on bonds and private placements classified as trading are included in net income.
The adjustment shown in the reconciliation in the shareholders’ equity column represents the reclassification of the deferred results on the sale of bonds from liabilities to shareholders’ equity.
The adjustment shown in the reconciliation in the net income column represents the difference between the release of the deferred results on a Dutch accounting principles basis and the realized results on a US GAAP basis.
DEFERRED POLICY ACQUISITION COSTS AND VALUE OF BUSINESS ACQUIRED
Under Dutch accounting principles, policy acquisition costs, which are costs that are directly or indirectly related to the acquisition of new or renewal insurance contracts, are deferred to the extent that they are recoverable from future expense charges in the premiums or from expected gross profits, depending on the nature of the contract. Acquisition costs are also deferred for certain non-insurance investment type products related to 401(k) plans in the United States. Deferred policy acquisition costs (DPAC) are amortized over the life of the underlying contracts, which are periods not to exceed the premium-paying periods for fixed premium products (traditional life and fixed universal life) and for flexible premium insurance contracts and investment type contracts in proportion to the emergence of estimated gross profits.
For fixed premium products in all countries, the DPAC are tested at least annually by country unit and product line to assess the recoverability. The amount not recoverable is recognized as an expense in the income statement in the period of determination. In the United States and Canada, the DPAC on flexible premium products, including fixed and variable annuities, variable universal life and unitlinked contracts, are amortized at a constant rate based on the present value of the estimated gross profit amounts expected to be realized over the life of the policies. If appropriate, the assumptions included in the determination of estimated gross profits are adjusted. A significant assumption related to estimated gross profits on variable annuities and life insurance products is the annual longterm net growth rate of the underlying assets. The reconsideration of assumptions may affect the original DPAC amortization schedule, referred to as DPAC unlocking. The difference between the original DPAC amortization schedule and the revised schedule, which is based upon actual gross profits earned to date and revised estimates of future gross profits, is recognized in the income statement as an expense or a benefit. In the Netherlands, the United Kingdom and Other Countries the impact of equity market movements on estimated gross profits on flexible premium products is covered by the yearly or, if appropriate, quarterly recoverability testing; a negative outcome is charged to the income statement in the period of determination. If appropriate, the assumptions included in the determination of estimated gross profits are adjusted for future periods.
For fixed premium products, the accounting is the same under US GAAP as under Dutch accounting principles in all countries. For flexible premium products sold in the United States and Canada, the accounting under US GAAP is the same as under Dutch accounting principles. For flexible premium products sold in the Netherlands, the United Kingdom and Other Countries an unlocking adjustment is made using a revised DPAC amortization schedule based on actual gross profits earned to date and revised estimates of future gross profits. In recent years this unlocking adjustment has resulted in an additional amortization expense. Acquisition costs related to noninsurance investment type products related to 401(k) plans in the United States are expensed as incurred, as opposed to being deferred and amortized in accordance with Dutch accounting principles.
The adjustment in the reconciliation in the shareholders’ equity column and the adjustment in the reconciliation in the net income column include the effect of unlocking for DPAC on flexible premium products in the United Kingdom and the difference in accounting for acquisition costs related to non-insurance investment type products related to 401(k) plans in the United States. Also included, in accordance with practice subsequent to the issuance of SFAS 1 15, is the adjustment of DPAC to reflect the change in amortization that would have been necessary if unrealized investment gains or losses related to debt securities had been realized. The effect on US GAAP equity related to SFAS 1 15 is EUR (1,421) million (2002: EUR (1,027) million).
GOODWILL
Under Dutch accounting principles goodwill is charged to shareholders’ equity in the year of acquisition.
Under US GAAP goodwill is capitalized and prior to January 1, 2002, goodwill was amortized over the expected periods to be benefited with adjustments for impairment, if necessary. For US GAAP accounting purposes goodwill was amortized over various periods, not exceeding 20 years for years prior to 2002. Goodwill was tested for impairment based on undiscounted cash flows.
Pursuant to the adoption of SFAS 142, ’Goodwill and Other Intangible Assets’ as of January 1, 2002, goodwill is reviewed and tested for impairment under a fair value approach. Goodwill must be tested for impairment at least annually, or more frequently as a result of an event or change in circumstances that would indicate an impairment may be necessary. Impairment testing requires the determination of the fair value for each of the identified reporting units. The reporting units identified for AEGON based upon the SFAS 142 rules include: AEGON USA, AEGON Canada, AEGON The Netherlands, AEGON UK insurance companies and AEGON UK distribution companies, Other Countries and Transamerica non-insurance businesses. The fair value of the insurance operations is determined using valuation techniques consistent with market appraisals for insurance companies, a discounted cash flow model requiring assumptions as to a discount rate, the value of existing business and expectations with respect to future growth rates and term. For the Transamerica non-insurance operations, fair value was determined using a discounted cash flow analysis. The valuation utilized the best available information, including assumptions and projections considered reasonable and supportable by management. The assumptions used in the determination of fair value involve significant judgements and estimates. The discount rates used are believed to represent market discount rates, which would be used to value businesses of similar size and nature.
The goodwill write-down in 2002 primarily reflects impairments for Transamerica non-insurance operations amounting to EUR 1,234 million and for AEGON USA insurance operations.
TECHNICAL PROVISIONS
The provision for life insurance represents the present value of future benefits to be paid to or on behalf of policyholders and related expenses less the present value of future net premiums. The provision is calculated using actuarial methods that include assumptions such as estimates of premiums, mortality, investment performance, lapses, surrenders and expenses. These assumptions are initially based on best estimates of future experience at policy inception date, in some instances taking into account a margin for the risk of adverse deviation. The assumptions used are regularly reviewed, compared to actual experience and, if necessary, depending on the type of products, updated.
For products that have guaranteed benefits over the lifetime of the policy or at maturity, the premiums also include loadings for the expected cost of the guarantee. The pricing of the guarantee is based on assumptions for future investment performance, including reinvestment assumptions.
The provision for life insurance also comprises the provision for unexpired risks as well as the provision for claims outstanding. In case the premium-paying period is shorter than the lifetime of the policy, a provision for future expenses is set up to cover any estimated future expenses after the premium-paying period. Future costs in connection with benefit payments are also provided for. In various countries products are sold that contain minimum guarantees. For these products the regular technical provision is recognized under technical provisions with investments for account of policyholders. The technical provision life insurance includes provisions for guaranteed minimum benefits related to contracts where the policyholder otherwise bears the investment risk. In the United States, a common feature in variable annuities is a guaranteed minimum death benefit (GMDB). This means that when the insured dies, the beneficiaries receive either the account balance or the guaranteed amount, whichever is higher. The latter is calculated using the total deposits made by the contract holder, less any withdrawals and sometimes includes a roll-up or step-up feature thereby increasing the guarantee with interest or with increases in the account value, respectively. The provision for life insurance includes a provision in connection with the guarantees issued. A cap and a floor for this provision is calculated using stochastic prospective methods (probability weighted calculation using multiple future scenarios) and current assumptions. Within the cap and floor corridor, the accrual method based on pricing assumptions with valuation interest less actual claims incurred is followed. Outside the cap and floor corridor, a surplus or shortfall of the provision will cause an extra charge or credit to the income statement.
In Canada, the variable annuity products sold are known as segregated funds. The provisions for the minimum guarantees on segregated funds are established consistent with the method described for the minimum guarantees on the variable annuity contracts sold in the United States.
In the Netherlands, Fundplan policies have a guaranteed return of 3% or 4% at maturity or upon the death of the insured if premium paid for a consecutive period of ten years is invested in the Mix Fund and/or the Fixed Income Fund. For this guaranteed return a provision is established based on stochastic modelling. The provision is developed applying the accrual method based on pricing assumptions less actual claims incurred. A corridor for the provision is determined regularly based on stochastic modelling methods. If the provisions develop outside the corridor, a charge or credit to the income statement is recorded. Minimum interest guarantees on group pension contracts in the Netherlands are given for nominal benefits, based on the 3% or 4% actuarial interest, after retirement of the employees. Due to the nature of the product, these guarantees have a long-term horizon of about 30 to 60 years. The provision is developed applying the accrual method based on pricing assumptions less actual deductions. Provisions for fixed annuities, guaranteed investment contracts (GICs) and funding agreements (FAs) are equal to the accumulated contract balance.
Under US GAAP the technical provisions for traditional life insurance contracts are computed using the net level premium method with investment yields, mortality, lapses and expenses based on historical assumptions, and include a provision for adverse deviation. For universal life contracts and investment type contracts (annuities) the technical provisions are equal to the policyholder account balances at the balance sheet date. The technical provision in the United Kingdom is reduced to equal the contract holder balance. The technical provision for fixed annuities, GICs and FAs is the same as under Dutch accounting principles. Also US GAAP technical provisions include the part of the change in value of the debt securities that must be allocated to policyholders based on the effects of the application of SFAS 1 15. The SFAS 1 15 effect on US GAAP equity is EUR (300) million (2002: EUR (348) million).
In addition, to the extent that the contract contains an embedded derivative as defined by US GAAP, the contract is unbundled and the derivative is marked to fair value with changes recognized in the income statement. This adjustment is included in the derivative line in the reconciliation.
REALIZED GAINS AND LOSSES ON SHARES AND REAL ESTATE
Realized and unrealized gains and losses on shares and real estate, under Dutch accounting principles, are recognized in the revaluation account, taking into account the related (deferred) taxes. In the income statement the structural total return on investments in shares and real estate is recognized. The total return includes the realized direct income (rents and dividends) of the reporting period and an amount of indirect income. The total return is calculated by determining the average of the total return yield over the last 30 years and multiplying this average yield by the average value of these investments over the last 7 years, adjusted for investment purchases and sales.
The indirect income from these investments is then calculated as the difference between the total return and the realized direct income. The indirect income is released from the revaluation account, if and as far as each of the individual balances for shares and real estate are positive.
Under US GAAP realized gains and losses on sales of shares and real estate are recorded in earnings in the period in which the sales occurred. Gains and losses, both realized and unrealized, on shares classified as trading are included in net income. For non-trading shares, unrealized gains and losses are reported as a component of comprehensive income. Impairments in value of shares deemed to be other than temporary are reported as a component of realized gains and losses. Real estate impairment is recognized as a realized loss in the income statement.
Realized and unrealized gains and losses by their nature can show large fluctuations. Included in realized gains and losses on shares and real estate for US GAAP purposes are EUR 273 million (2002: EUR 1,057 and 2001: EUR 36 million) impairment losses due to an other than temporary decline in market value, and the reversal of the indirect return of EUR 631 million (2002: EUR 758 million and 2001: EUR 723 million).
DERIVATIVES
AEGON uses common derivative financial instruments such as swaps, options, futures and cross-currency derivatives to hedge its exposures related to investments, liabilities and borrowings. In general, under Dutch accounting principles the accounting treatment of derivatives mirrors the accounting treatment of the underlying financial instrument. In the balance sheet, the book values of the derivatives are recognized under the captions of the related underlying financial instrument. Foreign currency amounts are converted at the year-end exchange rates. Realized and unrealized results on derivative financial instruments are recognized in the same period and likewise as the results of the related investments, liabilities and debt.
US GAAP requires that all derivatives, including embedded derivatives, be recognized as either assets or liabilities in the balance sheet and be measured at fair value. Derivatives that do not qualify for hedge accounting treatment under US GAAP must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through income or recognized in other comprehensive income and amortized to income when the hedged transaction impacts income. Any portion of a derivative’s change in fair value determined to be ineffective at offsetting the hedged risk will be immediately recognized in income.
An EUR 5 million loss on the total return swaps with Vereniging AEGON was included in 2003 net income in the line derivatives.
DEFERRED TAXATION
Under Dutch accounting principles deferred taxation is calculated on the basis of the difference between book value and valuation for tax purposes of the appropriate assets and liabilities. The provision is equal to the discounted value of the future tax amounts. In the calculation discounted tax rates ranging from 0% to nominal rates are used, taking into account the estimated term to maturity of the related differences.
US GAAP requires an asset and liability approach for financial accounting and reporting for income taxes. Deferred tax assets and liabilities are measured using those enacted tax rates expected to apply to taxable income in the periods in which the deferred tax asset or liability is expected to be realized or settled and such tax rates are not discounted. Deferred tax assets are reduced, if necessary, by a valuation allowance to reflect the fact that (part of) the assets are not expected to be realized.
BALANCE OF OTHER ITEMS
Certain items are recorded differently or in different periods on the two bases of accounting.
Comprehensive income is the change in shareholders’ equity during the year from transactions and other events and circumstances from non-owner sources. It includes all changes in shareholders’ equity during the year except those resulting from investments by owners and distributions to owners.
A PDF of the Quarterly Results is available to download here.
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