2. REVISION LITERARIA
2.2 ORIGEN Y DISTRIBUCIÓN
AEGON’s earnings depend significantly on the extent to which actual claims experience is consistent with the assumptions used in setting prices for products and establishing technical liabilities and liabilities for claims. To the extent that actual claims experience is less favorable than the underlying assumptions used in establishing such liabilities, income would be reduced. Furthermore, if these higher claims were part of a permanent trend, AEGON may be required to increase liabilities, which could also reduce income. In addition, certain acquisition costs related to the sale of new policies and the purchase of policies already in force have been recorded as assets on the balance sheet and are being amortized into income over time. If the assumptions relating to the future profitability of these policies (such as future claims, investment income and expenses) are not realized, the amortization of these costs could be accelerated and may even require write offs due to unrecoverability. This could have a materially adverse effect on AEGON’s business, results of operations and financial condition.
Table 16
Financial liabilities relating to insurance and investment contracts 1
In EUR million
< 1 yr amount
1 < 5 yrs amount
5 < 10 yrs amount
> 10 yrs amount 2007
Insurance contracts 6,646 19,714 17,270 113,191
Insurance contracts for account of policyholders 5,717 27,889 19,269 76,141
Investment contracts 11,590 18,149 5,332 10,249
Investment contracts for account of policyholders 4,789 19,434 21,729 86,430
2006
Insurance contracts 7,696 21,898 16,941 110,155
Insurance contracts for account of policyholders 5,183 21,592 19,979 75,414
Investment contracts 14,069 15,538 5,837 9,775
Investment contracts for account of policyholders 4,214 19,290 21,940 83,098
1 The projected cash benefi t payments are based on management’s best estimates of the expected gross benefi ts and expenses partially offset by the expected gross premiums, fees and charges relating to the existing business in force. Estimated cash benefi t payments are based on mortality, morbidity and lapse assumptions comparable with AEGON’s historical experience, modifi ed for recent observed trends.
Actual payment obligations may differ if experience varies from these assumptions. The cash benefi t payments are presented on an undiscounted basis and are before deduction of tax and before reinsurance. The liability amount in AEGON’s consolidated fi nancial statements refl ects the discounting for interest as well as adjustments for the timing of other factors as described above. As a result, the sum of the cash benefi t payments shown for all years in the table exceeds the corresponding liability amounts included in notes 18, 19 and 21.
Sources of underwriting risk include policy lapses and policy claims such as mortality, morbidity and expenses. In general, AEGON is at risk if policy lapses increase as sometimes the Group is unable to fully recover up-front expenses in selling a product despite the presence of commission recoveries or surrender charges and fees. For mortality and morbidity risk, AEGON sells certain types of policies that are at risk if mortality or morbidity increases, such as term life insurance and accident insurance, and sells certain types of policies that are at risk if mortality decreases (longevity risk) such as annuity products.
AEGON is also at risk if expenses are higher than assumed by management.
AEGON monitors and manages its underwriting risk by underwriting risk type. Attribution analysis is performed on earnings and reserve movements in order to understand the source of any material variation in actual results from what was expected. AEGON’s units also perform experience studies for underwriting risk assumptions, comparing the Group’s experience to industry experience as well as combining AEGON’s experience and industry experience based on the depth of the history of each source to the Groups’s underwriting assumptions. Where products have
flexibele policy charges AEGON uses these analyses as the basis for modifying these charges, with a view to maintain a balance between policyholder and shareholder interests.
AEGON also has the ability to reduce expense levels over time, thus mitigating unfavorable expense variation.
Sensitivity analysis of net income and shareholders’ equity to various underwriting risks is shown in table 17. The sensitivities represent an increase or decrease of mortality and morbidity rates over 2007. Increases in mortality rates lead to an increase in the level of benefits and claims. The impact on net income and equity of sales transactions of investments required to meet the higher cash outflow are reflected in the sensitivities.
A shock in mortality or morbidity rates will generally not lead to a change in the assumptions underlying the measurement of the insurance liabilities as management will recognize that the shock is temporary.
Life insurers are also exposed to longevity risk. In practice, however, this longevity risk can be mitigated, for example by adjusting premium rates or through reinsurance transactions.
REPORT OF THE EXECUTIVE BOARD RISK MANAGEMENT
Table 17
Sensitivity analysis of net income and shareholders’ equity to changes in various underwriting risks
Estimated approximate effect on 2007 2006
In EUR million Equity Net income Equity Net income
20% increase in lapse rates (95) (95) (91) (91)
20% decrease in lapse rates 95 95 82 82
10% increase in mortality rates (93) (93) (88) (88)
10% decrease in mortality rates 90 90 88 88
10% increase in morbidity rates (70) (70) (61) (61)
10% decrease in morbidity rates 68 68 61 61
Table 18
Credit risk concentrations - shares
In EUR million Americas
The Netherlands
United Kingdom
Other countries
Total 2007 1
Communication 45 – – 17 62
Consumer cyclical 4 1 – – 5
Consumer non-cyclical 21 2 – 11 34
Financials 697 292 7 25 1,091
Funds 771 1,637 57 27 2,492
Industries – 33 – 36 69
Resources – 3 – – 3
Services cyclical – 1 – – 1
Services non-cyclical – 1 – – 1
Technology 23 1 – – 24
Transport 2 – – 9 11
Other 51 1 – 57 109
Total 1,614 1,972 64 182 3,902
Past due and/or impaired 7 24 2 – 33
TOTAL 1,621 1,996 66 182 3,935
Credit risk concentrations - shares
In EUR million Americas
The Netherlands
United Kingdom
Other countries
Total 2006 1
Communication 56 38 – 11 105
Consumer cyclical 94 102 – 2 198
Consumer non-cyclical 29 309 – – 338
Financials 1,035 1,531 – 5 2,571
Funds 682 1,302 71 21 2,076
Industries 20 351 – 5 376
Resources – 227 – – 227
Services cyclical – 202 – – 202
Services non-cyclical – 374 – – 374
Technology 75 156 – – 231
Transport 2 38 – – 40
Other 123 129 – 62 314
Total 2,116 4,759 71 106 7,052
Past due and/or impaired 18 673 2 – 693
TOTAL 2,134 5,432 73 106 7,745
1 Includes investments of Holding and other activities.
REPORT OF THE EXECUTIVE BOARD RISK MANAGEMENT
Table 19
Credit risk concentrations –
bonds and money market investments
In EUR million Americas
The Netherlands
United Kingdom
Other countries
Total 2007 1
Asset backed securities (ABSs) - Aircraft 81 – – – 81
ABSs – Collateralized Bond Obligations (CBOs) 780 – – 5 785
ABSs – Housing related 2,840 – 64 47 2,951
ABSs – Credit cards 2,627 5 – 4 2,636
ABSs – Other 2,660 120 216 – 2,996
Residential mortgage backed securities 5,039 – – 52 5,091
Commercial mortgage backed securities 4,544 710 103 – 5,357
Financial 19,426 3,315 2,822 812 26,377
Industrial 23,528 1,018 1,497 515 26,560
Utility 5,675 126 256 99 6,156
Sovereign exposure 5,043 12,865 637 2,473 21,036
Total 72,243 18,159 5,595 4,007 100,026
Past due and/or impaired 227 66 – – 293
TOTAL 72,470 18,225 5,595 4,007 100,319
1 Includes investments of Holding and other activities.
Credit risk concentrations –
bonds and money market investments
In EUR million Americas
The Netherlands
United Kingdom
Other countries
Total 2006 1
Asset backed securities (ABSs) - Aircraft 138 – – – 138
ABSs – Collateralized Bond Obligations (CBOs) 854 – – 31 885
ABSs – Housing related 3,314 14 69 13 3,410
ABSs – Credit cards 2,558 – – – 2,558
ABSs – Other 3,022 – 167 42 3,231
Residential mortgage backed securities 5,273 – 56 58 5,387
Commercial mortgage backed securities 4,663 889 12 – 5,564
Financial 20,870 2,759 2,380 783 26,795
Industrial 25,920 1,232 1,137 431 28,721
Utility 6,013 306 154 194 6,667
Sovereign exposure 6,006 9,601 359 2,277 18,261
Total 78,631 14,801 4,334 3,829 101,617
Past due and/or impaired 352 10 – – 362
TOTAL 78,983 14,811 4,334 3,829 101,979
1 Includes investments of Holding and other activities.
Table 20
Credit risk concentrations - mortgages
In EUR million Americas
The Netherlands
United Kingdom
Other countries
Total 2007 1
Agricultural 516 33 – – 549
Apartment 1,914 706 – – 2,620
Industrial 2,086 – – – 2,086
Offi ce 4,336 25 – – 4,361
Retail 2,118 1 – 79 2,198
Other commercial 86 14 – 1 101
Residential 449 5,258 – – 5,707
Total 11,505 6,037 – 80 17,622
Past due and/or impaired 3 200 – 28 231
TOTAL 11,508 6,237 – 108 17,853
1 Includes investments of Holding and other activities.
Credit risk concentrations - mortgages
In EUR million Americas
The Netherlands
United Kingdom
Other countries
Total 2006 1
Agricultural 440 37 – – 477
Apartment 2,003 413 – – 2,416
Industrial 2,334 – – – 2,334
Offi ce 4,058 28 – – 4,086
Retail 2,346 1 – 2 2,349
Other commercial 486 17 – 2 505
Residential 105 3,663 – – 3,768
Total 11,772 4,159 – 4 15,935
Past due and/or impaired 43 193 – – 236
TOTAL 11,815 4,352 – 4 16,171
1 Includes investments of Holding and other activities.
REPORT OF THE EXECUTIVE BOARD RISK MANAGEMENT