- 1 - FORM 20-F (Mark One) REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 OR [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 Commission file number 0-14071 AEGON N.V. - -------------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) Not applicable - -------------------------------------------------------------------------------- (Translation of Registrant's name into English) The Netherlands - -------------------------------------------------------------------------------- (Jurisdiction of incorporation or organization) AEGONplein 50, 2591 TV The Hague, The Netherlands - -------------------------------------------------------------------------------- (Address of principal executive offices) Securities registered or to be registered pursuant to Section 12 (b) of the Act. Title of each class Name of each exchange on which registered Common shares, EUR 0.12 per share New York Stock Exchange --------------------------------- ----------------------- Number of common shares outstanding: 1,422,253,234 ----------------------------------------------------------------------------- Securities registered or to be registered pursuant to Section 12 (g) of the Act. Not applicable - -------------------------------------------------------------------------------- (Title of Class) Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. Not applicable - -------------------------------------------------------------------------------- (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirement for the past 90 days. [X] YES [ ] NO --- ---- Indicate by check mark which financial statement item the registrant has elected to follow. Item 17 [ ] Item 18 [X] --- ---
-2- TABLE OF CONTENTS <TABLE> <CAPTION> Page ---- <S> <C> <C> Item 1 Identity of Directors, Senior Management and Advisors 3 Item 2 Offer Statistics and Expected Timetable 3 Item 3 Key Information 3 Item 4 Information on the Company 9 Item 5 Operating and Financial Review and Prospects 37 Item 6 Directors, Senior Management and Employees 60 Item 7 Major Shareholders and Related Party Transactions 63 Item 8 Financial Information 64 Item 9 The Offer and Listing 65 Item 10 Additional Information 66 Item 11 Quantitative and Qualitative Disclosure about Market Risk 70 Item 12 Description of Securities other than Equity Securities 72 Item 13 Defaults, Dividend Arrearages and Delinquencies 72 Item 14 Material Modifications to the Rights of Security Holders and Use of Proceeds 72 Item 15 Reserved for future use 72 Item 16 Reserved for future use 72 Item 17 Financial Statements 72 Item 18 Financial Statements 73 Item 19 Financial Statements and Exhibits 73 Signatures 166 </TABLE> Forward-looking information This report contains and incorporates by reference forward-looking statements that are based on current expectations, estimates, forecasts and projections about the industries in which we operate, management's beliefs and assumptions made by management. Such statements include, in particular, statements about our plans, strategies and prospects. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," variations of such words and similar expressions are intended to identify such forward- looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in these forward-looking statements. Except as required under the Federal securities laws and the rules and regulations of the Securities and Exchange Commission, we do not have any intention or obligation to update publicly any forward-looking statements after they are made, whether as a result of new information, future events or otherwise. Some of the important factors that could cause actual outcomes and results to differ materially from forward-looking statements we make may include factors described under "Risk Factors" described in our filings with the SEC and the following factors: . changes in general economic conditions, particularly in the U.S., The Netherlands and the United Kingdom; . changes in performance of financial markets, including emerging markets; the frequency and severity of insured loss events; . changes affecting mortality and morbidity levels and trends; . changes affecting interest rate levels; . changes affecting currency exchange rates, including the euro/U.S. dollar and euro/pound sterling exchange rates; . increasing levels of competition in the U.S., The Netherlands, the United Kingdom and emerging markets; . changes in laws and regulations; . regulatory changes relating to insurance industries; . acts of God, acts of terrorism and acts of war; . changes in policies of central banks and/or foreign governments; and general competitive factors, in each case on a global, regional and/or national basis.
-3- Item 1. Identity of Directors, Senior Management and Advisors Not applicable Item 2. Offer Statistics and Expected Timetable Not applicable Item 3. Key Information Selected financial data - ----------------------- The selected financial data for the years 1997 through 2001 set forth below are derived from previously published financial information of the Company. The data should be read in conjunction with, and are qualified in their entirety by reference to, such financial statements, including the notes thereto. All per share amounts have been calculated based on the weighted average number of common shares outstanding after giving effect to all stock dividends and stock-splits through December 31, 2001. <TABLE> <CAPTION> Years ended December 31, ----------------------------------------------------- 2001 2000 1999 1998 1997 ----------------------------------------------------- (in million EUR, except per share amounts and ratios) <S> <C> <C> <C> <C> <C> Consolidated income statement information: amounts based upon Dutch accounting principles (a) Premium income 21,578 20,771 14,980 11,550 9,532 Investment income 9,933 9,612 6,690 5,003 4,001 Total revenues (b,c) 31,895 30,707 22,374 17,179 14,207 Income before tax 3,243 2,839 2,181 1,634 1,287 Net income (c) 2,397 2,066 1,570 1,247 1,001 Net income per common share (d) Net income 1.76 1.57 1.28 1.08 0.90 Net income, fully diluted 1.75 1.55 1.26 1.06 0.88 amounts based upon US GAAP (e) Premium income 10,214 7,509 5,784 4,928 4,506 Investment income 11,001 12,576 7,013 5,656 4,762 Total revenues (b,c) 21,599 20,457 13,501 11,210 9,943 Income before tax 1,199 3,254 1,950 1,928 1,826 Net income 632 2,588 1,601 1,471 1,518 Net income per common share (d) Basic 0.46 1.97 1.31 1.28 1.36 Diluted 0.46 1.94 1.29 1.25 1.33 Consolidated balance sheet information: amounts based upon Dutch accounting principles (a) Total assets 264,061 244,216 228,808 131,196 123,762 Technical provisions 220,523 206,097 190,145 102,959 95,447 Long-term liabilities (including current portion) 7,855 6,528 5,735 3,891 5,434 Capital and reserves 15,292 12,844 13,543 7,934 8,227 </TABLE>
-4- <TABLE> <CAPTION> Years ended December 31, ----------------------------------------------------- 2001 2000 1999 1998 1997 ----------------------------------------------------- (in million EUR, except per share amounts and ratios) <S> <C> <C> <C> <C> <C> amounts based upon US GAAP (e) Total assets 299,603 281,580 262,694 138,083 130,705 Technical provisions 240,297 225,602 206,007 108,355 100,822 Long-term liabilities (including current portion) 12,197 15,749 14,770 3,804 5,338 Trust pass-through securities (TRUPS) and monthly income preferred stock (MIPS) 584 553 512 87 96 Shareholders' equity 20,669 18,965 17,050 9,612 9,764 Other: Life insurance in force 1,248,452 1,163,443 972,560 300,466 292,604 Investment income for the account of policyholders (b) (9,515) (3,495) 13,533 8,466 6,523 Annuity deposits, including GIC/funding agreements (b) 26,381 25,506 17,445 6,723 4,679 Combined underwriting- expense ratio (f) 100% 102% 104% 104% 103% Share capital (in million EUR) 224 215 216 185 193 Number of common shares: (numbers in thousands) Balance at January 1 1,350,524 668,426 583,180 289,863 265,234 Stock split -- 668,426 -- 289,863 -- Issuance of shares 55,000 -- 82,546 -- 22,264 Stock dividend 16,484 13,194 2,319 2,195 1,624 Exercise of options 245 478 381 1,259 741 Balance at December 31 1,422,253 1,350,524 668,426 583,180 289,863 </TABLE> (a) The consolidated financial statements of the Company were prepared in accordance with generally accepted Dutch accounting principles (Dutch accounting principles), which differ in certain respects from accounting principles generally accepted in the United States (US GAAP). See Note (e) below. (b) Excluded from the income statements prepared in accordance with Dutch accounting principles are receipts related to investment type annuity products and investment income for the account of policyholders. In addition, Universal Life type deposits are excluded from premium revenue in the income statements prepared in accordance with US GAAP. (c) Foreign currency items in the consolidated income statements have been converted at the weighted average annual rates. (d) Per share data have been computed in conformity with US GAAP requirements. Such data are calculated based on the weighted average number of Common Shares outstanding after giving effect to all stock dividends and stock-splits through December 31, 2001. Diluted per share data give effect to all dilutive securities. (e) See Note 5 to the consolidated financial statements for information concerning the differences between Dutch Accounting Principles and US GAAP. (f) The Combined Underwriting-Expense Ratio refers to general insurance and is the sum of the ratio of losses and loss adjustment expenses incurred to net premiums earned and the ratio of policy acquisition costs and other underwriting expenses to net premiums written. The investment income of general insurance is not taken into account when calculating the ratio. This ratio has been computed on a basis similar to that used in reporting to insurance regulatory authorities in the United States and is consistent with US GAAP.
-5- Dividend - -------- The Company has declared interim and final dividends for the years 1997 through 2001 in the amounts set forth in the table below. The amounts have been translated into dollars per Common Share based on the Midpoint Rate (the rate settled each working day at 14:15 hours by the Dutch Central Bank) on each of the respective payment dates for interim and final dividends. EUR per Common share/1/ Translated into Year USD per Common share Interim Final Total Interim Final Total ------------------------- ----------------------- 1997 0.16 0.26 0.42 0.17 0.29 0.46 1998 0.21 0.30 0.51 0.23 0.31 0.54 1999 0.25 0.35 0.60 0.27 0.31 0.58 2000 0.30 0.44 0.74 0.27 0.39 0.66 2001 0.37 0.46/2/ 0.83 0.33 NA NA /1/ Paid, at each shareholder's option, in cash or in stock. /2/ Proposed. Upon approval of the annual accounts at the Annual General Meeting of Shareholders on April 18, 2002, which contain the profit appropriation, a dividend for the year 2001 of EUR 0.83 per common share of EUR 0.12 par value will be paid, which after taking into account the EUR 0.37 interim dividend, leads to a final dividend of EUR 0.46 per common share. It is proposed that the final dividend will be made available entirely in cash or entirely in stock to be paid out of the paid-in surplus or, if so requested, out of the 2001 net income. The value of the final dividend in shares will be approximately equal to that of the final dividend in cash. In order to take full advantage of the prevailing market price of AEGON N.V. common shares within the indication provided, the number of dividend coupons that gives entitlement to a new common share of EUR 0.12 will be determined on May 6, 2002, after 5:30 p.m., based upon the average share price (quotation Euronext Amsterdam) in the four trading days from April 30 up to and including May 6, 2002. Exchange rates - -------------- On January 1, 1999, the Dutch guilder became a component of the euro. The exchange rate at which the Guilder has been irrevocably fixed against the euro is EUR 1 = NLG 2.20371. Fluctuations in the exchange rate between the euro and the dollar will affect the dollar equivalent of the euro price of the Common Shares traded on Euronext Amsterdam and, as a result, are likely to affect the market price of the Common Shares in the United States. Such fluctuations will also affect any dollar amounts received by holders of Common Shares on conversion of any cash dividends paid in euros on the Common Shares. As at March 15, 2002 the USD exchange rate/1/ amounts to EUR 1 = USD 0.8823 The high and low exchange rates/1/ for each of the last six months through February 2001 are: <TABLE> <CAPTION> Sept. 2001 Oct. 2001 Nov. 2001 Dec. 2001 Jan. 2002 Febr. 2002 <S> <C> <C> <C> <C> <C> <C> High (USD per EUR) 0.9310 0.9181 0.9044 0.9044 0.9031 0.8778 Low (USD per EUR) 0.8868 0.8893 0.8870 0.8773 0.8594 0.8613 </TABLE> The average USD exchange rates/1/ (USD per EUR), calculated by using the average of the exchange rates on the last day of each month during the year, for each of the 5 years in the period ended December 31, 2001 are 0.8909, 0.9207, 1.0588, 1.1116 and 1.252 respectively. /1/ The USD exchange rates are the noon buying rates in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York.
-6- RISK FACTORS - ------------ As an international life insurance company, AEGON is exposed to currency fluctuations, to changes in the fair value of its investments, the impact of interest rate changes and changes in mortality and longevity. In the normal course of business, AEGON employs established policies and procedures to manage its exposures to changes in interest rates and fluctuations in the value of currencies using a variety of financial instruments. AEGON also closely monitors its exposure to non-financial market risks including mortality, counterparty, reinsurance and IT (information technology) risks. AEGON uses common derivative financial instruments such as interest rate swaps, options, futures and foreign exchange contracts to hedge its exposures related to both investments and borrowings. AEGON does not hold or issue derivative instruments for speculative trading purposes. The local investment departments of the AEGON Group units are responsible for managing their investment portfolios. Their investment policies are guided by sound Asset and Liability Management principles. The risk factors are described in more detail below. Interest rate volatility may adversely affect AEGON's profitability - ------------------------------------------------------------------- In periods of increasing interest rates, policy loans and surrenders and withdrawals may tend to increase as policyholders seek investments with higher perceived returns. This process may result in cash outflows requiring that AEGON sell invested assets at a time when the prices of those assets are adversely affected by the increase in market interest rates, which may result in realized investment losses. Regardless of whether we realize an investment loss, these cash payments would result in a decrease in total invested assets and a decrease in net income. Premature withdrawals may also cause us to accelerate amortization of policy acquisition costs, which would also reduce our net income. Conversely, during periods of declining interest rates, life insurance and annuity products may be relatively more attrative to consumers, resulting in increased premium payments on products with flexible premium features, and a higher percentage of insurance policies remaining in force from year to year. During such a period, investment earnings may be lower because the interest earnings on fixed income investments likely will have declined in parallel with market interest rates. In addition, mortgages and bonds in the investment portfolio will be more likely to be repaid or redeemed as borrowers seek to borrow at lower interest rates, and AEGON may be required to reinvest the proceeds in securities bearing lower interest rates. Accordingly during periods of declining interest rates, profitability may suffer as a result of a decrease in the spread between interest rates credited to policyholders and returns on the investment portfolio. The profitability of spread based business depends in large part upon the ability to manage interest rate spreads, and the credit and other risks inherent in the investment portfolio. AEGON may not be able to successfully manage interest rate spreads or the potential negative impact on those risks. A decline in the securities markets may adversely affect sales of savings and - ----------------------------------------------------------------------------- investment products and assets under management - ----------------------------------------------- Fluctuations in the securities markets and other economic factors may adversely affect sales of our separate account unit linked products, pension products, variable annuities, variable life insurance, and mutual funds. In particular, a protracted or steep decline in the stock or bond markets may significantly reduce the popularity of these products. The level of volatility in the markets in which we invest and the overall investment returns earned in those markets also affect profitability. In particular, assets, earnings and the ability to generate new sales in recent years have increased due to significant growth in the retirement oriented investment market and very strong stock market appreciation, coupled with solid bond market appreciation spurred by declining interest rates. These economic and market trends will continue, and if they do not, our net income, revenues and assets may decline significantly.
-7- Differences between actual claims experience and underwriting and reserving - --------------------------------------------------------------------------- assumptions may require liabilities to be increased - --------------------------------------------------- Our earnings significantly depend upon the extent to which our actual claims experience is consistent with the assumptions we use in setting the prices for products and establishing the liabilities for obligations for technical provisions and claims. To the extent that our actual claims experience is less favorable than the underlying assumptions used in establishing such liabilities, we may be required to increase our liabilities. In addition, certain costs related to the sale of new policies and the purchase of polices already in force have been recorded as assets in 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 accurate, the amortization of these costs could be accelerated and may even require write-offs due to unrecoverability. This could have a material adverse effect on our business, results of operations and financial condition. Fluctuations in currency exchange rates may affect AEGON's operating results - ---------------------------------------------------------------------------- As an international life insurance company AEGON is subject to currency risk. Equity held in subsidiaries is kept in local currencies to the extent shareholder's equity is required to satisfy regulatory and self imposed capital requirements. The remainder of AEGON's capital base (capital securities and subordinated senior debt) is held in various currencies relative to the book value of AEGON's activities in those currencies to minimize any impact on its debt/equity ratios. Currency risk in the investment portfolios is managed using asset/liability matching principles. In 2000 AEGON discontinued hedging the income streams from the main non-Dutch units and as a result earnings may fluctuate due to currency translation. A downgrade in ratings may increase policy surrenders and withdrawals, adversely - -------------------------------------------------------------------------------- affect relationships with distributors and negatively impact sales - ------------------------------------------------------------------- Claims paying ability and financial strength ratings are a factor in establishing the competitive position of insurers. A rating downgrade (or the potential for such a downgrade) of AEGON or any of its insurance subsidiaries could, among other things, materially increase the number of policy surrenders and withdrawals by policyholders of cash values from their policies, adversely affect relationships with broker-dealers, banks, agents, wholesalers and other distributors of products and services, negatively impact new sales, adversely affect its ability to compete and thereby have a material adverse effect on our business, results of operations and financial condition. Changes in government regulations in the countries in which AEGON operates may - ------------------------------------------------------------------------------ affect profitability - -------------------- AEGON's insurance business is subject to comprehensive regulation and supervision in all countries in which it operates. The primary purpose of such regulation is to protect policyholders, not stockholders. Future laws and regulations, or the interpretation thereof, may materially adversely affect our business, results of operations and financial condition. Litigation and regulatory investigations may adversely affect our business, - --------------------------------------------------------------------------- results of operations and financial condition - --------------------------------------------- AEGON faces significant risks of litigation and regulatory investigations and actions in connection with its activities as an insurer, employer, investment advisor, investor and taxpayer. Lawsuits, including class actions and regulatory actions may be difficult to assess or quantify, may seek recovery of very large and/or indeterminate amounts, including punitive and treble damages, and their existence and magnitude may remain unknown for substantial periods of time. A substantial legal liability or a significant regulatory action could have a material adverse effect on business, results of operations and financial condition. Defaults in our fixed maturity and mortgage loan portfolios may adversely affect - -------------------------------------------------------------------------------- profitability - ------------- AEGON is subject to the risk that the issuers of fixed maturity securities and mortgage loan borrowers may default on principal and interest payments with respect to securities we hold, particularly if a major economic downturn occurs. Further significant terrorist actions could have a major impact on various industries such as the airlines and travel business. An increase in defaults on these securities could have a material adverse effect on our business, results of operations and financial condition.
-8- Liquidity risk of certain investment assets - ------------------------------------------- Our investments in privately placed securities, mortgage loans, real estate, including real estate joint ventures and other limited partnership interests are relatively illiquid. If we require significant amounts of cash on short notice in excess of our normal cash requirements, we may have difficulty selling these investments at attractive prices, in a timely manner, or both. Derivatives may not be honored by counterparties - ------------------------------------------------ We use derivative instruments to hedge market risk. Our derivative strategies employ a variety of instruments including financial futures, foreign exchange forwards, foreign currency swaps, interest rate swaps, interest rate caps and options. A failure by a counterparty to honor the terms of its derivatives contracts with us could have a material adverse effect on our business, results of operations and financial condition. The payment of dividends to shareholders and payments on indebtedness of AEGON - ------------------------------------------------------------------------------ NV may be affected by limitations on subsidiaries regarding the payment of - -------------------------------------------------------------------------- dividends - --------- AEGON's ability to pay dividends to stockholders, make payments on debt obligations and pay certain operating expenses is dependent upon the receipt of dividends from its subsidiaries. Certain of these subsidiaries have regulatory restrictions which can limit the payment of dividends. Tax law changes adverse to the sale and ownership of insurance products - ----------------------------------------------------------------------- Insurance products enjoy certain tax advantages, particularly in the U.S., which permit the tax-deferred accumulation of earnings on the premiums paid by the holders of annuities and life insurance products. Taxes, if any, are payable on the accumulated tax-deferred earnings when earnings are actually paid. The US Congress has, from time to time, considered possible legislation that would eliminate the deferral of taxation on the accretion of value within certain annuities and life insurance products. Competitive factors may adversely affect market share - ----------------------------------------------------- Competition in AEGON business segments is based on service, product features, price, commission structure, financial strength, claims paying ability ratings and name recognition. AEGON faces intense competition from a large number of other insurers, as well as non-insurance financial services companies, such as banks, broker-dealers and asset managers, for individual customers, employer and other group customers and agents and other distributors of insurance and investment products. The recent consolidation in the global financial service industry has also enhanced the competitive position of some of AEGON's competitors by broadening the range of their products and services, and increasing their distribution channels and their access to capital. In addition, development of alternative distribution channels for certain types of insurance and securities products, including through the internet, may result in increasing competition as well as pressure on margins for certain types of products. These competitive pressures could result in increased pricing pressures on a number of AEGON's products and services, particularly as competitors seek to win market share, and may harm AEGON's ability to maintain or increase AEGON's profitability. AEGON may be unable to retain personnel who are key to its business - ------------------------------------------------------------------- As a global financial services enterprise with a decentralized management structure, AEGON relies, to a considerable extent, on the quality of local management in the various countries in which it operates. The success of AEGON's operations is dependent, among other things, on its ability to attract and retain highly qualified professional personnel. Competition for key personnel in most countries in which AEGON operates is intense. AEGON's ability to attract and retain key personnel, in particular senior officers, experienced portfolio managers, mutual fund managers and sales executives, is dependent on a number of factors, including prevailing market conditions and compensation packages offered by companies competing for the same talent, which, may offer compensation packages that include considerable equity based incentives through stock option or similar programs.
-9- Judgement of US courts may not be enforceable against AEGON - ----------------------------------------------------------- Judgements of U.S. courts, including those predicated on the civil liability provisions of the Federal securities laws of the United States, may not be enforceable in Dutch courts. As a result, AEGON's shareholders who obtain a judgement against AEGON in the United States may not be able to require AEGON to pay the amount of the judgement. Reinsurers to whom the Company has ceded risk may fail to meet their obligations - -------------------------------------------------------------------------------- pursuant to the treaties - ------------------------ AEGON insurance subsidiaries cede premiums to other insurers under various agreements that cover individual risks, group risks or defined blocks of business, on a coinsurance, yearly renewable term, excess or catastrophe excess basis. These reinsurance agreements spread the risk and minimize the effect of losses. The amount of each risk retained depends on its evaluation of the specific risk, subject, in certain circumstances, to maximum limits based on characteristics of coverages. Under the terms of the reinsurance agreements, the reinsurer agrees to reimburse for the ceded amount in the event the claim is paid. However, AEGON insurance subsidiaries remain liable to their policyholders with respect to ceded insurance if any reinsurer fails to meet the obligations assumed by it. To limit this risk reinsurance treaties are primarily entered into with only well-capitalized, highly rated reinsurers. Where deemed appropriate additional protection is arranged through letters of credit or trust arrangements. Item 4. Information on the Company Introduction AEGON NV, domiciled in The Netherlands, is a limited liability stock corporation organized under Dutch law and formed in 1983 through the merger of AGO and ENNIA, both of which were successors to insurance companies founded in the 1800's. The headquarters are located at AEGONplein 50, PO Box 202, 2501 CE The Hague, The Netherlands, telephone +31 70 344 3210, internet www.aegon.com. Since its foundation AEGON NV, through its member companies collectively referred to herein as AEGON, the Company or Group, has emerged as an international insurer with major operations in the USA, The Netherlands, the United Kingdom and Canada and Mexico until year end 2001. The Group is also present in: Hungary, Spain, Belgium, Germany, Hong Kong, Italy, Luxembourg, the Philippines and Taiwan, and has representative offices in China and India. With roots dating back 150 years, the AEGON Group has extensive experience in the insurance industry. Crucial differences exist in local markets and for this reason AEGON emphasizes a decentralized organization structure. The operating companies, with knowledgeable and highly experienced local management and employees, market their own, unique products using a variety of distribution channels. Approximately 90% of AEGON's core business is life insurance, pension and related savings and investment products. The Group is also active in accident and health insurance, property and casualty insurance and limited banking activities. Consistent with a policy of spreading risks to achieve reliable performance, AEGON seeks to maintain a good balance of business within the Group, both geographically and among product groups. Business Segment information - ---------------------------- See Note 3 'Segment information' in the financial statements included in Item 18 for information on our Business segments. The business activities of the principal subsidiaries are more fully described within the country sections which follow. The Americas coordinates management activities in the United States and Canada through five groups within the subsidiary companies to serve consumers and institutional clients with specialized insurance and retirement and savings products (references to AEGON USA hereafter refer to these collective groups). Utilizing a multi-channel distribution system, products are offered through agents, financial institutions, brokers and direct marketing, as well as through business partners. The acquisition of the direct marketing services of JC Penney in 2001 established AEGON in a leading position in this market. The Transamerica acquisition in July of 1999 made AEGON one of the largest life insurance companies in the US and expanded the product portfolio by adding a life reinsurance business and a Canadian life insurance company. The acquisition of the Providian life
-10- insurance business in 1997 added the country's leading traditional and synthetic guaranteed investment contract (GIC) provider, and expanded market size in home service life insurance sales and direct-marketed life and supplemental health insurance product sales. AEGON The Netherlands operates through independent intermediaries and other distribution channels. Its Dutch business units each serve their own market within the insurance field. One business unit is active in the German market. Focus on cost control and productivity, enhanced customer data bases, product offerings and distribution methods led to increased premium income and net profits. AEGON is also present in Belgium. AEGON UK, through its subsidiary Scottish Equitable plc, in the United Kingdom, is a leading provider of pension and personal investment products, distributed via Independent Financial Advisors. AEGON Asset Management UK provides asset management services and institutional and retail asset management products. Scottish Equitable International, a Luxembourg-based subsidiary, provides international investment products primarily for the UK market but also for the offshore market. The Guardian acquisition in 1999 broadened AEGON UK's product range and distribution, generating economies of scale and adding a leading provider of protection products. With the acquisition of HS Administrative Services in 2000, AEGON UK acquired a leading provider of third-party pension administration services for large blue chip corporate clients. AB-AEGON in Hungary offers an expanded line of life and non-life products under both the AB brand and AEGON brand. It also provides administration and investment management services to pension funds. Distribution is accomplished via independent agents, brokers and its own sales force. AEGON Spain markets individual and business customers life and non-life products through three distinctive profit centers: life insurance, general insurance and health insurance. The products are sold through a network of tied and career agents. AEGON has established experimental greenfield activities in Taiwan (1994) and the Philippines (1996) as well as representative offices opened in New Delhi, India in 1997 and in Beijing, China in 1998. Collectively, these provide the Group with useful insight and experience in serving key Asian cultures, while respecting its decentralized organizational structure and focus on profitable growth. Transamerica has operated a branch in Hong Kong for more than 50 years. The branch focuses on universal life products and sells its products through independent brokers. All tables included in this section contain financial information derived from the Company's consolidated financial statements and are presented on the basis of Dutch Accounting Principles (DAP). All note references refer to notes to the consolidated financial statements.
-11- The tables below show the distribution of the Company's revenues, including investment income, and income before tax (losses) by lines of business. Reinsurance assumed has been included; reinsurance ceded has not been deducted. Revenues - -------- (EUR in millions) Years ended December 31, --------------------------------------------- 2001 2000 1999 ------------- ------------ ------------- EUR % EUR % EUR % Life insurance Premiums 18,281 58 17,983 58 12,802 57 Investment income 9,339 29 9,182 30 6,308 28 ------ --- ------ --- ------ --- 27,620 87 27,165 88 19,110 85 Accident & Health insurance Premiums 2,558 8 2,067 7 1,453 6 Investment income 419 1 263 1 195 1 ------ --- ------ --- ------ --- 2,977 9 2,330 8 1,648 7 General insurance Premiums 739 3 721 2 725 3 Investment income 82 0 89 1 97 1 ------ --- ------ --- ------ --- 821 3 810 3 822 4 Banking activities 384 1 324 1 704/1/ 3 Other activities 93 0 78 0 90 1 ------ --- ------ --- ------ --- Revenues 31,895 100 30,707 100 22,374 100 Income before tax - ----------------- (EUR in millions) Years ended December 31, --------------------------------------------- 2001 2000 1999 ------------- ------------ ------------- EUR % EUR % EUR % Life insurance 3,319 102 3,003 106 2,126 97 Accident & Health insurance 209 7 172 6 144 7 General insurance 67 2 60 2 (2) 0 Banking activities 45 1 47 2 1551 7 Interest charges & Other (397) (12) (443) (16) (242) (11) ----- --- ----- --- ----- --- Total 3,243 100 2,839 100 2,181 100 /1/ Include Labouchere
-12- The following table shows the geographical distribution of AEGON's revenues. For all premium income amounts below, reinsurance assumed has been included and reinsurance ceded has not been deducted. Geographical distribution of revenues - ------------------------------------- (EUR in millions) Years ended December 31, --------------------------------------------- 2001 2000 1999 ------------- ------------ ------------- EUR % EUR % EUR % Americas Life insurance Premium income 7,750 7,413 4,263 Investment income 7,691 7,522 4,756 ------ ------ ------ 15,441 48 14,935 49 9,019 40 Accident & Health insurance Premium income 2,337 1,865 1,264 Investment income 386 230 163 ------ ------ ------ 2,723 9 2,095 7 1,427 7 General insurance Premium income 11 5 4 Investment income 1 2 1 ------ ------ ------ 12 7 5 * ------ -- ------ ------ -- Sub-total 18,176 57 17,037 56 10,451 47 The Netherlands Life insurance Premium income 3,637 3,323 3,012 Investment income 1,406 1,418 1,362 ------- ------ ----- 5,043 16 4,741 15 4,374 20 Accident & Health insurance Premium income 146 129 118 Investment income 29 31 30 ------- ------ ----- 175 1 160 1 148 1 General insurance Premium income 422 408 402 Investment income 49 53 55 ------- ------ ----- 471 1 461 2 457 2 Banking activities 384 1 324 1 704 3 ------ -- ------ ------ -- Sub-total 6,073 19 5,686 19 5,683 26
-13- Geographical distribution of revenues (cont'd) - ---------------------------------------------- (EUR in millions) Years ended December 31, ---------------------------------------------- 2001 2000 1999 ------------- ------------ ------------- EUR % EUR % EUR % United Kingdom Life insurance Premium income 6,388 6,738 5,142 Investment income 129 145 99 ------ ------ ------ Sub-total 6,517 21 6,883 22 5,241 23 Other countries Life insurance Premium income 506 509 385 Investment income 113 97 91 ------ ------ ------ 619 2 606 2 476 2 Accident & Health insurance Premium income 75 73 71 Investment income 4 2 2 ------ ------ ------ 79 * 75 * 73 * General insurance Premium income 306 308 319 Investment income 32 34 41 ------ ------ ------ 338 1 342 1 360 2 ------ --- ------ --- ------ --- Sub-total 1,036 3 1,023 3 909 4 Other activities Investment income 93 * 78 * 90 * ------ --- ------ --- ------ --- Total 31,895 100 30,707 100 22,374 100 * Less than 1%.
-14- STRATEGY AEGON's growth flows from a consistent, clear strategy with four key elements: Commitment to Core Business - --------------------------- Insurance, with a strong emphasis on life and pension insurance and related savings and investment products. AEGON focuses on the financial protection and asset accumulation needs of its clients. Decentralized Organization - -------------------------- Multi-domestic and multi-branded approach, giving a high degree of autonomy to the management of the individual business units, encouraging entrepreneurial spirit and action. AEGON requires local management to run local businesses. Emphasis on Profitability - ------------------------- Target earnings per share growth of at least 10% per annum; the minimum return on investment is set at 12% or more after tax on the pricing of new business and at a long-term average of 11% or more after tax for acquisitions. Divestment of non-core activities and underperformers, and disciplined expense management are key to the achievement of these objectives. International Expansion - ----------------------- AEGON supplements its autonomous growth with selective acquisitions. Acquisitions are preferred in countries where AEGON already has a presence in order to build scale and enhance distribution. AEGON limits its annual investment in greenfield and start-up operations to 3% of net income. AEGON's strategy and structures, successful in good times, proved their worth under decidedly less favorable circumstances last year in an adverse environment characterized by weak economic growth and a negative investment climate worldwide. Though not immune to these influences, we delivered a 16% increase in net earnings and a 12% rise in net earnings per share, so ensuring a nineteenth consecutive year of earnings growth. Commitment to the core business, together with a decentralized approach giving a high degree of autonomy to country and business units, is matched by unyielding emphasis on profitability and capital strength. AEGON supplements autonomous growth with selective acquisitions that meet strict performance criteria and methodically divests underperforming or non-core assets. The drive to create better futures - for customers, for shareholders, for the company, and for all those working for it - lies at the heart of AEGON management philosophy. For shareholders, the target is above-average growth in earnings per share through disciplined adherence to a clear strategy. Consistency and reliability in earnings forecasting is a particular source of pride. Investor and Group communications was strengthened and broadened through expanded web-based distribution of information, including the publication of all Group press releases, the possibility to view press and analyst meetings real time and the opportunity to download various presentations. Recently independent research into 200 large European companies showed that 50% of private investors use the company's website to satisfy their information need. For customers, the AEGON commitment to providing value means that both individuals and groups should be able to fulfill their needs for protection, savings, pensions or investments at the desired level of cost and service. Multiple brands and distribution channels ensure every customer has access to the most appropriate products delivered in the most convenient manner. Intermediaries and agents also benefit from the AEGON value commitment, which supports them in serving their clients with the aid of robust administrative systems, low cost products and training to improve market insight. AEGON supports these and other partners by generating ideas that offer real mutual benefit and clarity. For AEGON staff, the chance to thrive in an organization committed to excellence and professionalism is clearly valued, as is a stock option program covering virtually all associates in its core lines. Through a range of informal and formal programs, including the company's own inner circles, AEGON University and international
-15- (management) conferences, managers and key staff come together to share ideas and learn from each other. As personal relationships develop, so do business dealings across divisional borders. AEGON is a dynamic and driving group of companies that actively rewards value creation and product innovation. Business units develop new products and service initiatives, maintaining close contact with customers, partners, intermediaries and distributors, to respond to their needs. As retirement planning and life insurance are by definition long-term activities, the AEGON emphasis on value includes the assurance that whatever structural changes markets may experience, customers benefit from products offering maximum flexibility and reliability. AEGON's commitment is to offer innovative, flexible, and high quality products that are backed by a Group with an reputation for quality, reliability, and performance. This continuing growth and outperformance is attributable to AEGON's disciplined focus on life and pension products, its financial strength and its decentralized organization's ability to adapt and innovate. Now one of the world's largest life insurance groups measured by premium income, and one of the top five insurers by market capitalization, AEGON is reaping the rewards of its clear strategy, successful entrepreneurial approach and cohesive, empowering culture. With 85% of premium income now derived from life and pension products, AEGON has built its success in countries and markets its knows well, where our local companies enjoy or are on their way to achieving top five positions based on their ability to attract and satisfy customers. In our chosen markets, companies in the AEGON Group are increasingly identified as the life and pension providers of choice, providing a solid base on which to build our future. 2001 also underlined the strengths of a highly distinctive group culture. Sharing expertise and information on core products and markets, AEGON professionals showed the benefits of cohesion within their decentralized environment. For a people-based business such as ours, intangibles such as the AEGON culture and values - above all our commitment to respectful entrepreneurship - are tangible elements of our Group. AEGON's commitment to the 'three Ps' - people, planet, profit - was confirmed by our inclusion in the Dow Jones Sustainability Index of listed companies. The Index is used as a benchmark for financial products based on the concept of corporate sustainability. The initiative for a multi disciplinary research program on sustainable corporate performance to analyze and quantify the implications of sustainability, underscores the importance that we place on being an exemplary corporation. Product line overview: GENERAL ACCOUNT On general account life products, AEGON carries the investment risk and earns a spread (difference between investment performance and crediting rates to customers) and/or realizes mortality results. Traditional life - ---------------- Comprises permanent and term life insurance. Permanent life insurance provides life-long financial protection. Most permanent policies have a cash value feature with minimum rate guarantee that accumulates tax-deferred, over the life of the policy and can be used to help fund financial goals particularly in retirement. Whole life insurance is a common form and premiums remain constant over the life of the policy. Universal life insurance is a flexible premium, adjustable benefit contract that allows the customer to pay premiums at any time, in virtually any amount, subject to a minimum and a maximum. The interest rate at which the cash value accumulates adjusts periodically. Term insurance covers the insured for a specific period of time. The policy pays death benefits only if the insured dies during the term. Policies can usually be renewed upon expiration and premiums normally increase upon renewal. This category also includes life insurance sold as part of defined benefit pension plans, endowment policies and post-retirement annuity products. Bank- or company-owned life insurance (BOLI/COLI) funds the costs of employee benefits, usually with key employees of the company as the insured persons.
-16- Earnings contribution: 47% Customers: individuals, pension funds, companies, banks Distribution: (independent) agents, brokers, direct response, worksite marketing, financial institutions Marketed in: United States, Netherlands, United Kingdom, Canada, Hungary, Spain, Taiwan Fixed annuities - --------------- Annuities allow the client to save for the future on a tax-deferred basis and allow payout options that meet the client's need for income upon maturity. This can be in the form of a lump sum, income for life or income for a period of time. A fixed annuity is a contract upon which the client is guaranteed a fixed minimum payout. Payments can either start immediately or be deferred to start later. Should the insured die prior to annuitizing the policy, the beneficiary receives the accumulated cash value death benefit. Fixed annuities have a specified rate of interest that can be reset periodically. Earnings contribution: 11% Customers: individuals Distribution: financial institutions, (independent) agents, brokers Marketed in: United States, Canada GICs and funding agreements - --------------------------- These are contracts issued to tax-qualified investors, guaranteeing a rate of return on assets for a fixed period and payment of principal and accumulated interest at the end of the period (usually between three and five years). GICs are sometimes used to fund the fixed-income plan in defined contribution plans, e.g. 401(k) plans. Funding agreements are issued to non-tax qualified clients. These are usually perpetual with no stated final maturity and liquidity option. The contract is terminated at the notification of the client; notice provisions range from three months to 13 months in advance of the payout date. Earnings contribution: 7% Customers: Tax qualified: pension funds, financial institutions; Non-tax qualified: money market funds, municipalities, oversees investors, individuals Distribution: brokers, direct, (independent) agents Marketed in: United States, internationally from the USA ACCOUNT OF POLICYHOLDERS On account of policyholder products the policyholders carry the investment risk. AEGON earns management and administration fees and mortality results. Life for account of policyholders - --------------------------------- Represents several forms of life insurance and pension products whereby death benefits and cash values vary with the performance of a portfolio of investments. Premiums can be allocated among a variety of investments that offer different degrees of risk and reward including stocks, bonds, combinations of both, or investment products that guarantee interest and principal. Includes variable universal life (North America), tontine plans (the Netherlands) and unit-linked life insurance (Europe). Earnings contribution: 19% Customers: individuals Distribution: (independent) agents, marketing organizations, financial institutions, worksite marketing, franchise organizations Marketed in: United States, Netherlands, United Kingdom, Canada, Spain, Hungary Variable annuities - ------------------ Annuities allow the client to save for the future on a tax-deferred basis and allow payout options that meet the client's need for income upon maturity. This can be in the form of a lump sum, income for life or income for a period of time.
-17- Premiums paid on variable annuity contracts are invested in funds offered by the insurance company, including bond and stock funds. Selection of funds is dependent upon client's chosen level of risk. Account value reflects the performance of the funds. This category includes segregated funds (Canada). Earnings contribution: 4% Customers: individuals Distribution: (independent) agents, marketing organizations, brokers, financial institutions Marketed in: United States, Canada Fee business - ------------ Includes products that generate fee income for AEGON by providing management, administrative or risk services related to off balance sheet assets (i.e. equity or bond funds, third-party managed assets and collective investment trusts). Much of this income is generated by synthetic GICs which differ from traditional GICs in that the client owns the assets. The contract defines a crediting rate based on a formula that is inclusive of portfolio gains and losses. The crediting rate is reset regularly and based on an analysis of the assets; the AEGON issuing company guarantees that it will not fall below 0% for a specific period of time. Earnings contribution: 3% Customers: individuals, pension funds, asset managers Distribution: (independent) agents, marketing organizations, financial institutions Marketed in: United States, Netherlands, United Kingdom, Hungary Banking - ------- Includes savings accounts and investment contracts (i.e. security lease products). Both products generate investment spread income for AEGON. Savings accounts offer attractive interest rate whilst retaining flexibility. Security lease products provide a convenient combination of monthly interest payments on a loan and a final payout based on the performance of the investments. This category also includes investment products, which offer index-linked returns and generate fee income. Earnings contribution: 1% Customers: individuals Distribution: direct marketing, (independent) agents, supermarkets, franchise organizations Marketed in: Netherlands Accident and health insurance - ----------------------------- Limited forms of health insurance, including disability insurance and accidental health, are offered. AEGON offers no major medical coverage. Supplemental health insurance normally pays a specified amount for a covered occurrence, or a deductible or coinsurance amount not paid by primary coverage. Long-term care insurance protects the insured's income and retirement savings from the costs of long-term nursing home or home health care. Earnings contribution: 6% Customers: individuals, companies Distribution: (independent) agents, brokers Marketed in: United States, Netherlands, Spain, Hungary General insurance - ----------------- Limited forms of general insurance offered in selected markets, i.e. automobile insurance, liability insurance, household insurance and fire protection. Earnings contribution: 2% Customers: individuals, companies Distribution: (independent) agents, brokers Marketed in: Netherlands, Hungary, Spain
-18- AMERICAS Under the heading Americas, the Company's US, Canadian and Mexican activities until end of 2001 are reported. In North America, AEGON's life insurance operations are managed by AEGON USA. Business operations are conducted through life insurance subsidiaries of AEGON USA, Inc., Commomwealth General and Transamerica Corporation. Products are offered through several primary life insurance subsidiaries, with licenses in all states of the United States, the District of Columbia, Puerto Rico, the Virgin Islands, Guam and Canada. Operationally, the U.S. subsidiary companies are organized into five operating Groups with the AEGON USA companies: Agency, Alternative Markets, Financial Markets, Institutional Products and Services and Pensions. The group structure enables AEGON USA to more easily look across the organization to reduce redundancies, identify business synergies, pursue cross-selling opportunities and improve operating efficiencies. Coordinated support services provide expertise in systems technology, investment management, regulatory compliance, and various corporate functions to complement the divisional operations. The Agency Group, which includes The Monumental Division, the Equity Group, the Individual Division, and Transamerica Insurance and Investment Group, sells life insurance, savings and asset accumulation products through employee and independent agents, as well as third-party marketing organizations. AEGON Financial Partners is the operations arm of the Agency Group formed to improve operating efficiency. The Alternative Markets Group provides customers with a variety of means to access insurance products either by product or distribution channel. AEGON Direct Marketing Services sells life insurance and supplemental health insurance products to consumers through direct channels, such as telemarketing, direct mail and internet. The Long-Term Care division markets long-term care products, including home health care, through insurance agents and brokers as well as through financial institutions, associations and sponsored groups. The Worksite Marketing division offers employers a one-stop source for life insurance, accident and supplemental health insurance products for their employees. It also delivers value-added services such as Section 125 administration and multiple carrier billing capabilities. The Financial Markets Group sells tax-deferred and variable annuities and life insurance through financial institutions, broker/dealers, financial planners and wirehouses. Transamerica Financial Institutions business unit partners with large banks while Transamerica Capital, Inc. sells through the brokerage channel. Transamerica Investment Management, LLC sells equity based investment funds. The Institutional Products and Services Group consists of the AEGON Institutional Markets Division and Transamerica Reinsurance. AEGON Institutional Markets Division serves the institutional retirement and savings marketplace by offering a broad range of guaranteed savings and investment products, including GICs and funding agreements. Transamerica Reinsurance offers life, annuity and accident and health reinsurance products to leading financial institutions in North America, Latin America and the Asia-Pacific region. It also markets value-added services, such as product consulting and capital management solutions. The Pension Group is composed of Diversified Investment Advisors, and Retirement Services. Diversified Investment Advisors is an investment advisory firm serving the mid-sized retirement plans of companies, state and local governments and not-for-profit organizations. Retirement Services is an investment advisory firm providing retirement plans to smaller employee groups. The divisions of the Pension Group remain committed to helping individual and institutional clients save and invest wisely to achieve their retirement goals. The Pension Group is solidly positioned to take advantage of consumers increasing responsibility for personal retirement planning. In the corporate pension area, the use of web based information and online customer service transactions has become a key competitive strength.
-19- AEGON Canada, through its primary subsidiary Transamerica Life Canada, sells and administers life insurance and segregated investment funds. In 2000 AEGON Canada acquired and successfully integrated NN Life Insurance Company establishing it as a leading insurer in Canada for both life and segregated investment fund products. This also strengthened its distribution network of some 18,000 sales people, boosting volumes and margins simultaneously. In 2001 it expanded its distribution capabilities further through the acquisition of Money Concepts Ltd., a financial planning franchise with 97 offices and 348 franchisees. The product portfolio was also expanded in 2001 with the launch of a new universal life product suit and the introduction of a "best of breed" segregated fund offering. The non-insurance operations of Transamerica consist of commercial lending, intermodal leasing, and real estate information services. Transamerica Finance Corporation, a wholly owned subsidiary of Transamerica Corporation, includes Transamerica's commercial lending, intermodal leasing, and real estate information services and is a separate SEC registrant as a result of its publicly held debt securities. The commercial lending business makes commercial loans through three operations: distribution finance, business credit, and equipment financial services. It has branch lending offices in the United States, Mexico, Canada, Europe and Asia. The intermodal leasing operation provides service, rental and term operating leases through an extensive worldwide network of office, third party depots and other facilities in 52 countries and offers a wide variety of equipment used in international and domestic commerce around the world. The real estate information services operation provides real estate tax services, flood hazard certification services, and other real estate information services throughout the United States. Transamerica's other non-insurance operations also include certain real estate and investments. AEGON's Mexico joint ventures, Seguros Banamex AEGON and AFORE Banamex AEGON, came to a close in 2001 following Citigroup's acquisition of parent company Grupo Financiero Banamex (Banacci). At year-end 2001, AEGON agreed to the sale of its 48% partnership interests for USD 1.24 billion, plus USD 40 million in dividends on the companies' 2001 profits. For AEGON the venture was a positive experience. The company was an early entrant in the underserved Mexican insurance market in 1995, and together with Banacci became a leading provider of insurance and retirement savings products. Expanding its product portfolio and distribution penetration through targeted acquisitions continues to be an integral part of AEGON USA's long-term strategy. Building on competitive products, strong distribution and talented people, the operations that have joined AEGON USA through acquisitions remain very successful additions that continue to deliver strong performance and foster new growth opportunities. In 2001 the AEGON USA companies took a major step to extend expertise in direct marketing and database management with the acquisition of JC Penney's direct marketing insurance operations. The integration of the JC Penney activities with the AEGON USA direct marketing unit has established a leading position for AEGON in this market. Direct marketing is well suited to the life and supplementary insurance products that are offered through a targeted marketing approach. The combination of AEGON USA and Transamerica in 1999 was an aggregation of strengths. The addition of Transamerica's US life reinsurance and Canadian insurance operations represented an immediate leadership position in exciting new markets for AEGON USA. The acquisition also significantly strengthened US agent penetration of higher income customer segments and enhanced scale in the fixed annuity, long-term care, worksite marketing, 401(k) pension and structured settlements businesses. The Transamerica acquisition not only brought breadth and depth to distribution, enhanced product offerings, and brand recognition, but also offered cost reduction opportunities to AEGON USA and contributed valuable expertise, extensive market knowledge and successful business practices.
-20- The 1997 acquisition of Providian's life operations added the country's leading traditional and synthetic GIC provider, AEGON Institutional Markets Division, to the AEGON USA family. It also propelled AEGON USA to top market positions in home service life insurance sales and direct-marketed life and supplemental health insurance product sales. AEGON USA entered the pension market in 1993 with the purchase of Mutual of New York's group pension operation. Now called Diversified Investment Advisors, this business continues to distinguish itself among competitors with its unique `manager of managers' approach which places pension funds with leading institutional money managers that are typically unavailable to individual investors. Currently a leading provider of variable universal life insurance in the United States, Western Reserve Life, the primary operating company of AEGON USA's Equity Group, was acquired in 1991. Life insurance - -------------- AEGON's subsidiaries offer a variety of group and individual, nonparticipating life insurance products. Various underwriting requirements must be met before the issuance of a policy depending upon the size of the policy and age of the insured. The maximum retention limit on any one life is generally USD 500,000 with certain companies retaining up to USD 2,000,000. Products include whole life, universal life, variable life, variable universal life, term life, fixed and variable annuity, guaranteed investment contracts, funding agreements, accidental death and dismemberment and premium waiver disability insurance. Whole life policies provide options for level, flexible or modified (providing for higher first year payments) premiums, with various rider coverages including deferred annuity riders. Universal life products have either a flexible or single premium option. Both whole life and universal life products build cash values which are paid to the policyholder upon surrender. Term life policies are predominantly ordinary term policies, mortgage insurance and credit life insurance and provide no cash value. Mortgage and credit life insurance provides for payment of a mortgage or consumer loan in the event of the death of the borrower. Mortgage insurance is offered through financial institutions, primarily banks and credit unions. Credit life insurance is offered through credit unions, banks and automobile dealerships. Fixed annuity products offered include deferred or immediate annuities, which may be purchased on either a flexible or single premium basis. Deferred annuities are offered at a fixed interest rate on either a fixed or indexed basis. In addition, flexible premium deferred annuities are offered on a variable contract basis. Variable annuities and variable universal life products have several investment options and are maintained in a separate account. The investment risk on variable products is retained by policyholders and the company earns a return from investment management fees and mortality and expense charges. A multi-bucket pass-through product is also offered in the general account of the insurance subsidiaries. A broad array of financial products, including floating and fixed rate GICs and Trust GICs (synthetic GICs) are offered. The Trust GIC product, an off-balance sheet fee-based product, permits the plan sponsor to own and manage the investment assets related to these contracts while receiving a guarantee to provide benefit responsiveness in the event that qualified plan benefit requests exceed plan cash flows. Funding agreements are issued to non-qualified institutional investors both in domestic and international markets. The Company utilizes structures linked to either Medium Term Notes or Commercial Paper. Under these programs, the proceeds of each note series issuance are used to purchase a funding agreement from the Company, which is used to secure that particular series of notes. The payment terms of any particular series of notes match the payment terms of the funding agreement that secures that series. Claims for principal and interest under these agreements are afforded equal priority to claims of life insurance and annuity policyholders under insolvency provisions of the applicable U.S. State Insurance Laws.
-21- In addition, the Company provides investment products and administrative services for various types of pension arrangements. The retirement plan markets served include Corporate Defined Contribution plans (401-k), Not-for-Profit organizations qualifying for tax qualified annuities under section 403 (b) of the US Internal Revenue Code, and asset allocation services for Defined Benefit and Defined Contribution plans. In Canada, the Company offers a product which provides a 10 year maturity guarantee on the funds invested in segregated investment funds of the company. AEGON USA subsidiaries market and administer the IDEX family of mutual funds, which invests primarily in common stocks. The funds are sold by NASD licensed registered representatives. Accident and Health insurance - ----------------------------- As the health care industry began to undergo fundamental changes and restructuring a few years ago, AEGON USA made a strategic decision to concentrate its health insurance presence in the supplemental and specialized markets. In early 1996, AEGON USA completed the sale of the Insurance Center, a division in its Agency Group which administered small group health plans. This resulted in the transfer of the divisions administrative facility including its 700 employees located in the Dallas-Fort Worth area. The existing business and earnings, pursuant to that sale agreement, stayed with certain AEGON USA insurance companies for five years. In 2001 the business has began to be assumed by a UICI, Inc. insurance company, as regulatory approvals are received. The same percentage of profit sharing on the block of business will remain in effect until December 31, 2002. The business will be considered sold once the assumption by UICI occurs and the company is no longer contingently liable for the business. This action reflected management's strategic decision to move away from primary health coverages and to concentrate health operations in the supplemental coverage sector. Market forces have continued to alter the way primary health care coverage is delivered in the United States and is marked by a continuing shift toward managed care with health care providers assuming more of the risk. AEGON USA has chosen not to compete in this changing and highly competitive market which is facing continued pressure on profit margins and a complicated regulatory environment. Supplemental group health coverages are offered through financial institutions, affinity groups and auto dealers. Direct response marketing techniques are used to distribute products through endorsed relationships with banks, credit unions, mortgage lending institutions and associations. Catastrophic illness coverages are sold to individuals through agency groups. Cancer treatment, heart disease and intensive care policies are sold to individuals through payroll deduction and provide specified daily amounts for the period the patient is hospitalized or receiving outpatient treatment. Individual and group coverage include: income payment during hospitalization periods, scheduled benefits for specific hospital/surgical expenses and cancer treatments, hospice care, deductible and co-payment amounts not covered by other health insurance and Medicare supplement products. Also included in the supplemental health coverage, is long-term care insurance. Long-term care policies offered include nursing home coverage, home health care, assisted living and adult day-care services. Long-term care products are sold individually by brokers and captive agents, and they are also marketed to large groups such as major associations, professional organizations, and employers. The passage of the Health Insurance Portability and Accountability Act by the US Congress in August 1996, a bill which includes long-term care insurance incentives, provided an additional boost to product credibility and perceived customer need.
-22- Reinsurance - ----------- The Transamerica life companies assume life insurance from several external direct writing companies on both an automatic and case by case basis. Transamerica Reinsurance is a leading provider of reinsurance and consulting services for companies underwriting life, annuity and accident & health business. It maintains reinsurance treaties with approximately 500 ceding companies in the United States, Latin America and Asia-Pacific. The reinsurance business developed is closely related to the underlying form of insurance (life, annuity, A&H) and the specific risks covered by such types of policies, including mortality, morbidity, persistence, longevity, investment and expense. In addition to reinsurance capacity, Transamerica Reinsurance provides the following value added services: product development, third party administration and a case underwriting facility. Transamerica Reinsurance writes reinsurance directly with its ceding companies rather than through brokers. This direct relationship produces an expense advantage and a more complete understanding of risks. It also contributes to more favorable underwriting results and deeper, longer-lasting client relationships. In today's highly competitive reinsurance environment, Transamerica Reinsurance distinguishes itself through a consultative, value-added services strategy. Based in Charlotte (North Carolina) Transamerica Reinsurance has offices in Addison (Texas), Stamford (Connecticut), and Taipei, Taiwan. The company opened a liaison office in Seoul, Korea in 2000 and in Santiago, Chile in 2001. Also established in 2001 was a web based distribution capability for private label business needs and an Irish reinsurance facility. An offshore affiliate, Transamerica International Re, is located in Bermuda. THE NETHERLANDS Life insurance - -------------- For more than twenty years, AEGON has offered a variety of interest sharing life insurance products in The Netherlands which have become the predominant form in which new group and individual insurance policies are written. Since 1990 AEGON has offered a variety of excess interest profit sharing products which includes profit sharing based upon the performance of the underlying investment funds. These products account for an increasing part of the new individual insurances. AEGON's group policies insure pension benefits provided by a wide range of businesses and institutions. Under Dutch law, all employers who offer private pension plans must provide for the operation of such plans by an independent third party, such as an insurance company. Since most employers offer private pension plans, there is a relatively stable demand for such group policies in The Netherlands. AEGON's group policies are generally tailor-made to the individual employer's needs with respect to conditions for eligibility for benefits, level and type of benefits provided and premiums payable. Tailor-made policies are principally marketed to businesses and institutions having 200 to 5,000 employees. In addition, AEGON offers a variety of standardized group policies which provide specified levels of benefits and are marketed principally to businesses and institutions having fewer than 200 employees. All of the group policies currently offered are interest sharing and provide yields which are based on the average return on an assumed portfolio of Dutch government bonds. The investments in fixed maturities generally have the same characteristics as the assumed portfolio with higher yields than the risk free rate of the assumed portfolio and only marginal additional risk. The yields on group policies can be reflected in reductions of premiums due under the group contracts or cash payments. In other cases, the premiums received are placed in segregated investment funds of which the employer is the beneficial owner and receives almost the full amount of the interest sharing income. Also a part of the outstanding group policies are participating. Premiums on group policies are generally paid in level annual installments, often in connection with non-recurring premiums for prior service benefits.
-23- Apart from group life, AEGON also insures retirement benefits on an individual basis. These policies generally combine endowment and term life. The face value at maturity at the pension date or at premature death is used to purchase a fixed annuity for the insured and/or beneficiary. The level premium policies have a face value which generally ranges between EUR 100,000 and EUR 275,000. They are either participating or interest sharing. All policies provide a guaranteed minimum return. In addition, the face value of such policies increases annually to reflect additional interest which predominantly is based on the average return on an assumed portfolio of Dutch government bonds. In the case of policies which include profit sharing based on the return of investment funds, the degree of guarantee of this profit sharing depends on the specific funds in which the policyholder participated - subject to the choice of the policyholder. AEGON's individual endowment policies are generally designed to maximize the advantages of saving through life insurance and are often connected with tax incentives provided under Dutch law. AEGON offers level premium endowment policies which provide for lump sum payments after a fixed term or at death and generally range between EUR 25,000 and EUR 100,000 in face amount. AEGON and other life insurance institutions which offer mortgage financing typically advise the borrower to obtain such insurance and, as a result, sales of level premium endowment policies are dependent to some extent on the level of activity in the Dutch housing market. Level premium endowment policies are also offered separately from mortgages. All of the level premium endowment policies are either participating or interest sharing. These policies have guarantees similar to those described in the previous paragraphs. If the term of such policies exceeds fifteen years, as is typical, the excess of the cash value over the premiums paid, up to a certain ceiling, is non-taxable to the insured. AEGON also offers single premium endowment policies which are purchased primarily as individual retirement plans and which are marketed as supplements to government-sponsored retirement programs. The policies are typically payable at age 60 to 65 or premature death and provide that the amount payable at that time will be used to purchase a fixed annuity for the insured and/or beneficiary. Single premium endowment policies are predominantly interest sharing and may also be participating. The interest sharing feature of such policies is based on, and generally close to, the average return on an assumed portfolio of Dutch government bonds. Single premium endowment policies that are interest sharing are in general sold at a calculated discount. Under Dutch law, premiums on such single premium endowment policies are tax-deductible by the insured up to an annual indexed maximum amount. Furthermore, conventional life recurring premium and single premium annuities are tax-deductible to higher amounts for individuals who, by reason of their employments, do not build up a satisfactory pension. In addition to its endowment policies AEGON markets term and whole life insurance with fixed face values. The average face amount of a term life policy is EUR 50,000 and premium payments are generally made in level annual installments. The average face amount of whole life policies is EUR 2,500. Such policies, which are principally used for burial expenses, are decreasing in importance to the Company's business. Two of AEGON's subsidiaries also receive fees for administering savings deposit life insurance plans in which participants surviving after a fixed term from the commencement of the plan participate in the value of the savings deposits and accrued interest at that time. Only a minimum return is guaranteed. Under a term insurance policy which must be purchased by participants in each plan, either the total amount of a participant's contribution (with interest) or a predetermined amount is paid on death. Sales of individual life policies are generally limited to persons under 60 years of age, although policies may be written for persons above that age. For policies exceeding EUR 140,000 in value, medical information (including an HIV-test) from a physician is required before the policy is issued. For policies of lesser sums, medical information is supplied by the insured. Van Nierop Assuradeuren, an authorized agent, has a leading position in the Dutch market for universal life products.
-24- MoneyMaxx - --------- Over the past fifteen years, Spaarbeleg has achieved explosive growth in the Netherlands, based on offering simple savings and unit-linked insurance products to the mass market, using low cost distribution options. In the last few years AEGON The Netherlands has developed an international version, MoneyMaxx, utilizing 'virtual' business technology as well as more conventional distribution methods. Through close cooperation between AEGON The Netherlands and other AEGON country units, local versions of MoneyMaxx have also been rolled out in six countries outside the Netherlands: Germany, Belgium, Spain, Hungary, Italy and the United States (GoalTender). In each of these markets, the basic MoneyMaxx concept has undergone careful adaptation to local market conditions. Accident & health insurance - --------------------------- AEGON The Netherlands offers health insurance through close cooperation with the Dutch health insurer ONVZ. The Company also offers additional health care insurance which supplements the minimum benefits that are available to employees under Dutch law and disability coverages which provide income benefits in case of disability. With the exception of the supplementary health coverage and disability coverages where physical examinations are required, the Company does not generally require information on physical condition other than information supplied by the insured. General insurance - ----------------- In The Netherlands a number of business units offer general insurance products. AEGON Personal Lines markets products and services for the individual customer, both in the life and non-life segment. AEGON Non-life Commercial Lines markets products to clients in the commercial market. The product range includes fire, motor, liability and agriculture insurance. The units work very closely with professional independent intermediaries to ensure proper support through both product development and service. The NOWM unit was sold in 1999, because this specialized industrial risk insurer did not fit into our core business. Banking activities - ------------------ In keeping with its strategic focus on core insurance, pensions and savings activities, AEGON realigned its Dutch banking interests in 1998. AEGON Bank (formerly known as Spaarbeleg Bank), a wholly owned `branchless bank' subsidiary, remains the chief banking unit, offering long-term savings plans and security leasing products through direct marketing, independent intermediaries and a franchised sales force. Securities leasing products enable the customer to build a stock portfolio through installment purchasing. On August 3, 2000, AEGON completed the sale of its banking subsidiary Labouchere to Banque Internationale a Luxembourg, a member of the Dexia Group. A number of business units of AEGON The Netherlands have developed banking and investment products for both private and corporate markets. In order to support and accelerate these activities, AEGON Bank has been established to accommodate product development, administration, reporting and risk management processes and to facilitate multi-currency and multi-lingual options. AEGON Bank enables the business units to focus on marketing, sales and client services from a central platform. The business units retain the benefits of a decentralized operation, while working closely with their customers in all their different market segments. AH Geldzaken, the collaboration of Albert Heijn and AEGON The Netherlands, with more than 200,000 customers, also uses the infrastructure of AEGON Bank. The most recent example - introduced in the beginning of 2002 is an investment product developed by AEGON Pensioen en Advies, which provides the opportunity for employees of large group pension contracts to invest their pension premiums in a number of AEGON funds according to their own preference.
-25- UNITED KINGDOM Life insurance - -------------- The UK is the third largest financial services market in the world, behind the US and Japan. Well developed and sophisticated, the market stands to benefit from the strong underlying demand for pensions, long term investment products and protection products. This market strength is fueled by Government incentives to savings and favorable demographics. The UK is a highly dynamic market, both in terms of competitive structure and product mix. In recent years regulatory developments have, however, made the market more difficult for all providers. On the one hand, there has been a strong trend towards fuller disclosure which has substantially increased both price competition and the cost of compliance. On the other hand, allegations of mis-selling and highly publicised actions against a number of major companies have shaken the confidence of insurers and consumers alike. On the distribution side, new entrants such as retailers and mutual fund providers have begun to vie with traditional insurers for a slice of the financial services market, including pensions. On the product side, changing consumer needs have led to the emergence and rapid growth of a host of new special purpose investment products and the waning of some traditional stalwarts, such as endowment mortgages and defined benefit corporate pension plans. In addition, there has also been significant consolidation of financial services companies indicating that scale is a key ingredient for future success. For Scottish Equitable plc, which joined the AEGON NV group in 1994 and at that time was a very focused pensions specialist, this level of change has brought with it exciting new growth opportunities. On 1 January 1999, a new holding company, AEGON UK plc, was formed to reflect the wider range of business activities undertaken in the UK although all are based on the life insurance and long term savings sectors. Initially consisting of three operating businesses, the AEGON UK Group had expanded to six business units by end 2001. These are : . Scottish Equitable - insured pension, investment and group protection products for the corporate and personal investment markets via Independent Financial Advisors in the UK. . AEGON Asset Management - asset management services and development of third-party investment management activities and retail mutual funds. . Scottish Equitable International Holdings - developing offshore financial services products to be marketed in to the UK and in to other European territories. . AEGON UK Services - providing quality administration services and support to various group companies. . HS Administrative Services - specialising in the third party administration of large scale corporate pension schemes. . AEGON Individual Protection - focusing on developing the group's presence in the fast growing market for individual protection products. Having previously increased its presence by building on its asset management and offshore capabilities, this recent further expansion in the sphere of activities undertaken by the AEGON UK Group has been achieved by a combination of organic growth (AEGON Individual Protection) and acquisition ( Guardian in 1999 and HSA in 2000). Providing pension products and services, distributed through IFAs, continues to be the cornerstone of AEGON UK's business, via Scottish Equitable. In the fast-changing and increasingly complex UK pensions market, the IFA has proved to be an excellent and highly competitive distribution channel. By providing consumers with convenient value-added guidance through a thicket of competing product options, IFAs have collectively continued to gain market share, even as the growing burden of automation, compliance and pricing transparency have led to a consolidation in their numbers. Scottish Equitable has contributed to the success of its IFA partners by providing attractive new products, superior investment performance and client servicing support.
-26- Across Europe and the United States, public officials are evaluating the future of state sponsored social security programs; in the UK this has led to the Government seeking the assistance of the private sector pension industry. It introduced Stakeholder Pensions in April 2001 to encourage private provision including a requirement for every company with 5 or more employees to make a plan available to their staff. This has led to increased activity in the group insured pensions market, particularly benefiting both the main market players, including Scottish Equitable, and the Independent Financial Advisor (IFA) channel. In January 2002, the industry regulator announced proposals to liberalize the regulations governing distribution of financial services in the UK. This includes the creation of a new type of distributor, able to offer products from a selected range of suppliers, without needing to meet the overheads associated with covering the entire market, as IFAs must do. This gives an opportunity for Scottish Equitable to cement its existing strong relationships with those IFAs who decide to move to this new status. It also gives AEGON UK opportunities to enter into relationships with those distributors, such as banks, who have traditionally only sold a single company's products. Organizational scale and breadth of product range are emerging as critical factors in securing business from UK. IFAs, which remain a key audience for the AEGON UK Group, want to meet the diverse needs of their customers by placing business with financially strong providers. Margin pressures, regulatory changes and changing consumer buying patterns have resulted in fewer providers being able to meet the requirements necessary to be a major provider of products to the IFA sector. Organic growth and acquisition, along with the backing of the AEGON NV Group, has allowed the AEGON UK Group to build on the strong position of Scottish Equitable in the IFA pensions market and add new business lines with good profit potential. This strategy ensures that the AEGON UK will remain as one of the major providers to the intermediary sector and will continue to increase its presence in the UK life insurance and long term savings markets. OTHER COUNTRIES Hungary - ------- Since joining the Group in 1992, AB-AEGON has systematically transformed itself from a state-owned bureaucracy to a market-driven organization. This process has affected every employee and every aspect of AB-AEGON's operations. Over the past several years, the company's management and compensation systems have been completely overhauled; its extensive national branch network streamlined, re-equipped and reoriented from administration to sales and service; regional processing centers replaced by a central state-of-the-art IT system; sales agents retrained and moved off the payroll and onto a commission basis; the product line modernized and refocused on life, pensions and household coverages. As a result of these actions, AB-AEGON has revitalized its culture and business base while retaining market leadership and excellent profitability. In 1998, AB-AEGON adopted a highly market oriented structure, with three operating business units and two investment units specializing respectively in securities and real estate, all backed up by a lean headquarters staff. To increase the profitability and customer orientation of AB-AEGON the next step was to use more significantly the modern communication and distribution solutions (call centers, internet, etc). As a result of these developments AB-AEGON could further improve the cost and sales efficiency. With the installation of a new management team and a significant reduction in headquarters staff, the latest steps in AB-AEGON's transformation from state-owned monopoly to competitive, profit-oriented market leader were achieved in 1999. The new team will spearhead a renewed drive for profitable growth based on a more productive and market-responsive organization. This will be supported by the utilization of new low cost distribution channels, such as the internet and bancassurance, to supplement the more personalized services of the growing agent network. In 1999 AB-AEGON developed a secure internet site for the sale of a specially designed unit-linked product, in response to the demands of a younger customer segment. The unit-linked product adapted for the internet is simple and user friendly.
-27- In 2001 the sales capacity increased significantly, reaching the highest growth in the core (regular life premium) market, due to the improving sales production of the alternative and new sales channels. Parallel with the high sales growth AB AEGON could further strengthen its most profitable position in the Hungarian market. With AEGON Hungary AEGON has a solid base for expansion in Eastern Europe, as these new European economies develop. Spain - ----- AEGON Spain, headquartered in Madrid, offers individual and business customers specialized life and non-life products through three distinct profit centers: life insurance, health insurance and general insurance. The products are sold through a network of tied and career agents while AEGON Spain is also using the concept of affinity centers with specific products specially designed for their groups of customers. AEGON Spain has grown its life insurance premium business over the past years. By marketing unit-linked variable life products to younger professionals through multiple distribution channels, it has made significant inroads into a market traditionally dominated by the banks. AEGON Spain identified an opportunity to enter this market by offering attractive, branded fee-based products through purpose built channels such as financial institutions, dedicated life agents and the internet. Drawing on the experience of its sister units in the US, the UK and the Netherlands, AEGON Spain has led the industry in introducing new universal life products backed by a wide and growing range of investment options. This leadership position should continue, as the division rolls out new life and investment products specially designed for particular distribution channels: career and general agents, financial institutions, affinity groups, e-commerce and MoneyMaxx. Covadonga, the life insurer acquired at the end of 1999, has been successfully integrated in 2000. Having strengthened its central data processing systems to provide improved measurement and control, AEGON Spain's general insurance division is devolving more responsibilities to profitable agents, branches and regional headquarters. The objective of these decentralization moves is to lower costs and to sustain service levels in a difficult, volatile market climate. In 1999 the health unit reorganized its commercial management and administrative systems to increase responsiveness. A centralized health division back office separate from the general insurance activities and based on a new administrative system has been realized. Other units - ----------- In September 1995 AEGON The Netherlands established a satellite of its Spaarbeleg unit in Belgium to offer savings and life insurance products through direct marketing and a franchised sales force. AEGON Lebensversicherungs-AG, located in Dusseldorf, is a venture in Germany, exclusively selling a unit linked product named MoneyMaxx. This product, modeled from a product for the Dutch market and marketed there by Spaarbeleg, is sold through direct marketing and advisors. AEGON Taiwan, based in Taipei, offers a full range of individual life and health insurance products for middle and upper income markets through a growing network of tied and independent agents. AEGON's Taiwan branch began operations in 1994 and its premiums have since seen marked growth. During 2001 AEGON Taiwan life insurance completed the integration of Transamerica's local activities and acquired AXA's Taiwan life operations in a synergy-driven deal that expands the client base as well as the agency force and paves the way for significant future growth. For the merged business, named AEGON Life Insurance (Taiwan), a new structure was created and the company moved to a new head office. AEGON Philippines received a life insurance license in November 1996. The office was set up in 1997 as a greenfield operation.
-28- AEGON opened a representative office in New Delhi, India in 1997 and in Beijing, China in 1998. India's new government has passed the IRDA bill, allowing foreign ownership up to 26% in new companies. AEGON is well advanced in talks with potential local partners to establish a life insurance joint venture in India. AEGON's representative office in Beijing was joined by Transamerica offices in Beijing, Shanghai and Tianjing. In China AEGON was awarded a license during 2001 and is negotiating with a local partner as a prelude to opening up operations in a leading city within this highly promising new market. During 2001 AEGON laid the groundwork for the introduction of MoneyMaxx activities in Japan, which are expected to begin operations in 2002. Following Transamerica Reinsurance's major commitment to serve the Asia Pacific life reinsurance markets, the company started preparations to increase its presence in the Asia Pacific life reinsurance market with the aim to establish a new liaison office in Tokyo, Japan. The office was opened early 2002. The reinsurer already had operations in Taipei, Taiwan, Seoul, Korea and Hong Kong, China. Reinsurance Ceded - ----- AEGON The Netherlands has concentrated its reinsurance ceded business with a relatively small number of international firms of recognized standing. Such non-life reinsurance is generally ceded on an excess of loss basis. AEGON also cedes reinsurance on its life insurance policies. AEGON Group companies outside The Netherlands, cede reinsurance on a company by company basis. AEGON remains contingently liable with respect to the amounts ceded if the reinsurer fails to meet the obligations it assumed. The credit and health operations in the United States cede a large portion of their business. Assumed - ------- The Transamerica life companies have solicited life reinsurance from other companies for many years. Reinsurance is written on a facultative basis or an automatic treaty basis. Facultative reinsurance is individually underwritten by the reinsurer for each policy to be reinsured. Factors taken into account in underwriting facultative reinsurance are medical history, impairments, employment, hobbies and financial information. An automatic reinsurance treaty provides that risks will be ceded on specified blocks of business where the underlying policies meet the ceding company's underwriting criteria. In contrast to facultative reinsurance, the reinsurer does not approve each individual risk. Automatic reinsurance treaties generally provide that the reinsurer will be liable for a portion of the risk associated with specified policies written by the ceding company. Factors considered in underwriting automatic reinsurance are the product's underwriting, pricing, distribution and optionality, as well as the ceding company's retention and financial strength. Technical Provisions: AEGON maintains a provision for life, accident & health and general insurance policy liabilities. In the case of life insurance, the provision includes the amounts that are estimated to be required to meet future policy obligations and is calculated according to the assumptions made at the time the gross premiums were calculated as to future investment yield, mortality rates applicable to the population as a whole and morbidity. Yearly the total of applied assumptions is tested against recent data. If these tests reveal a negative outcome, the provision is recalculated according to the actual data or an extra technical provision will be added. Policy acquisition costs are costs that directly or indirectly are related to the conclusion of insurance contracts. Part of the acquisition costs is deferred and deducted from the technical provision life insurance. Deferred policy acquisition costs are accounted for under the caption Technical provisions.
-29- Deferred policy acquisition costs of insurance contracts with fixed premiums are generally amortized over periods not to exceed the premium paying periods or the contract periods. For flexible insurance contracts and investment type contracts the amortization is generally in proportion to emerging gross profits. Interest rate rebates are premium discounts provided on the basis of the difference between interest rates assumed in the premium structure and the current market interest rate. The capitalized portion of interest rate rebates is accounted for under the caption Technical provisions. Interest rate rebates granted are capitalized and amortized over the period of the contracts concerned in proportion to anticipated investment income. The technical provisions for general and accident & health insurance consist partly of the unearned portion of premiums received and a provision for unexpired risks. Furthermore, when necessary, this item also includes a special provision to compensate for the increasing age of persons insured under health and personal accident policies. The deferred policy acquisition costs include renewal commission paid related to unearned premiums, amortized over the related premium period, and first year commission on health insurance policies, amortized over the contract period. Both for accident and health insurance and for general insurance a reserve for claims reported but not settled at year-end and an IBNR (Incurred But Not Reported) provision is determined, partly based on estimation procedures utilizing statistical data of prior experiences and for the large unsettled claims on an item by item basis. The Company's ability to predict the size of claims under certain types of general insurance policies is enhanced by the absence of any provision for punitive damages under Dutch law and by various provisions of Dutch law which restrict damages for pain and suffering. Nonetheless, the estimation of the provision for insurance applicable to general insurance is a more difficult process than with respect to life and accident & health insurance, and the above-described statistical projection techniques are subject to more subjective considerations and a greater degree of managerial judgement. The methods for determining estimates for reported losses and claims incurred but not yet reported and establishing the resulting provision are continually reviewed and updated and adjustments resulting therefrom are reflected in income currently. The Company's periodic re-estimation of the provision for insurance includes implicit consideration and reevaluation of the effects of inflation. Investments: AEGON's United States subsidiaries are subject to regulation under the laws of the states in which they are domiciled. Each state's law prescribes the nature, quality and percentage of various types of investments that may be made by the subsidiaries. Such laws generally permit investments in qualified state, municipal and federal government obligations, corporate debt, preferred and common stock, real estate and real estate mortgages for less than the value of the mortgaged property. Regulation of insurance companies in The Netherlands, which is based on the third EU directive, requires proper matching of investments and technical provisions. Investments that serve as coverage for the technical provision can only be made in bonds, loans including mortgages, shares and real estate. Certain limitations exist for the amount that can be invested in unsecured loans, unquoted stock and single investments in real estate, a loan or debtor. Government supervision of insurance companies in the United Kingdom, Hungary and Spain is comparable to regulations in The Netherlands. The key investment strategy for traditional insurance-linked portfolios is Asset Liability Management (ALM), whereby high quality investment assets are matched in an optimal way to the corresponding insurance liability, taking into account currency, yield and maturity characteristics. Investment-grade fixed income securities are the
-30- main vehicle for ALM and all of AEGON's investment centers are highly skilled and experienced in these investments. However, the fastest growing portion of AEGON's investment portfolio is money managed for the account of third parties, where the client's performance objectives frequently call for higher risk, higher return investment strategies. The different country units have all responded to this trend by increasing their ability to help clients make the right asset allocation decisions and broadening the range of investment options offered.The ALM process is designed to monitor product and asset characteristics. The strategy represents an appropriate matching of assets and liabilities taking into account asset and liability risk, maturity and liquidity risk, as well as asset diversification and quality considerations on the one hand and the policyholders' guaranteed or reasonably expected excess interest sharing on the other hand. Each country unit approaches the ALM process in it's own way, depending upon the structure and characteristics of it's financial markets and depending upon the profiles of the liability portfolios. The AEGON USA companies manage their ALM process through the work of several committees. These committees review strategies, define risk measures, define and review ALM studies, examine risk hedging techniques, including the use of derivatives, and analyze the potential use of new asset classes. Cash flow testing analysis is performed using computer simulations which model assets and liabilities under stochastically projected interest rate scenarios and commonly used stress-test interest rate scenarios. Based on the results of these computer simulations, the investment portfolio has been structured with a view to maintaining a desired investment spread between the yield on the portfolio assets and the rate credited on the policy liabilities. Interest rate scenario testing is a continual process and the analysis of the expected values and variability for three critical risk measures (cash flows, present value of profits and interest rate spreads) forms the foundation for modifying investment strategies, adjusting asset duration and mix, and exploring hedging opportunities. On the liability side the company has some offsetting risks: some liabilities perform better in rising rate environments while others perform well in a falling rate environment. On the asset side, hedging instruments are continuously studied to determine if their cost is commensurate to the risk reduction they offer. The Netherlands investment division manages an extensive ALM program for its business units. Most liabilities in the Dutch market are nominal and long-term. Based on their characteristics a long-term liability driven benchmark is derived. This fixed income representation leads to a scenario and optimalization analysis with the introduction of the various asset classes. An efficient frontier of optimal asset allocations representing different risk-return profiles is the result. Given the scenario results the individual business units then choose a strategic asset allocation which serves as the input and benchmark for the investment process. Portfolio managers are allowed to deviate from the strategic composition based on their short and medium term investment outlook. Risk based restrictions are in place to control the composition of the actual investment portfolio as compared to the strategic portfolio. All stipulations and benchmarks are formalized in a client contract between the business unit and the investment department. An extensive measurement and reporting system is in place for both portfolio returns and risks. Scottish Equitable of the United Kingdom maintains an ALM Committee. The committee is chaired by the Appointed Actuary and includes members of the finance, actuarial and investment teams. The committee's responsibility is to ensure assets and policyholder liabilities are appropriately matched and tactical investments decisions are made to improve matching. Actions arising from the Committee are independently monitored after an appropriate period of time has elapsed, to ensure they have been carried out. The ALM Committee reports to the Investment Committee of the Board, which meets quarterly. The Actuarial Department monitors the nature of the Company's liabilities and this information is provided to the ALM Committee. It is the responsibility of the ALM Committee to monitor and report monthly on the appropriateness of assets with regard to these liabilities. The ALM Committee meets monthly and considers matching and investment policy. A policy of close matching applies to the non-profit business, which splits into two components, linked and non-linked. The matching policy relating to linked assets involves daily monitoring and adjustments of the asset units to match liability units. It is the purpose of the ALM Committee to propose, implement and monitor an appropriate investment strategy for non-linked investments, subject to control by the Investment Committee of
-31- the Board. The ALM Committee has available to it appropriate information derived from investment accounts, financial accounts and actuarial departments to allow it to fulfill its purpose. The investment strategy has due regard to the relevant sections of the Insurance Companies Act, Regulations and Financial Services Authority Guidance Notes. Within the With Profits business the intended investment policy is tested for the impact on the financial health and strength of the business. Exposure to specific categories of assets is monitored and approved at the monthly ALM Committee meeting e.g. it may reduce equity exposure outside normal guidelines because of solvency constraints. In view of the growing importance to AEGON of asset management activities, the Group is continuing to explore how best to encourage coordination among the various investment centers and build a clearer identity for AEGON Asset Management. Among the prospective benefits being sought: creation of a powerful brand offering high quality global investment management based on a successful track record, local research and sizable market presence; critical mass and significant economies of scale; elimination of overlaps and filling in of gaps; an asset management growth platform established at a reasonable cost and sharing the culture of the AEGON country units. Marketing: The AEGON USA companies market their insurance products through five groups: Agency, Alternative Markets, Financial Markets, Institutional Products and Services and Pensions. Divisions within each group focus on a specific product or market and are accountable for sales distribution, product development and performance. Whole life and universal life insurance, variable universal life, association group and annuity products are primarily sold through independent sales representatives and career agents. Marketing methods include television and print media as well as direct mail and telephone solicitation. Fixed and variable annuities are distributed primarily through financial institutions. Career agents through association groups sell supplemental health products and employer sponsored payroll deduction. Credit insurance coverage is sold through financial institutions and automobile dealerships. Pension products, such as GICs, are sold through a small sales force, bank trustees, municipal GIC brokers, GIC fund managers, brokers and direct marketing. Individual pension products are marketed through financial planners, stock brokerage firms, independent agents, pension consultants, savings and loan associations, banks and other financial institutions and direct mail programs. Funding agreements are sold to institutional investors through medium-term note programs and a commercial paper program. AEGON The Netherlands markets its insurance products predominantly through independent brokers, agents and banking institutions which are compensated on a commission basis. AEGON's marketing staff is principally responsible for providing technical and marketing expertise and for maintaining a close working relationship with the professional intermediaries who sell its products. To a lesser extent products are also sold using direct marketing techniques as well as through a network of tied agents. AEGON's life and pension products in the United Kingdom are distributed predominantly through IFAs. In Hungary, Spain and Portugal predominantly local tied agents market its products. The traditional model of insurance was built around a limited product range and strongly centralized administration. As consumers have become increasingly knowledgeable and demanding, AEGON's ability toprovide informed advice and responsive service tailored to each individual client's situation proved an essential ingredient in its success. Customers in different regions or economic strata require different products and prefer different distribution channels. AEGON's decentralized organization is built to satisfy all these needs. The decentralized organization must also deliver economies of scale to win market share as lowest cost producer. Therefore, to optimize efficiency and control costs, all of AEGON's country units are looking for opportunities to localize the front-office where agent or other intermediary interaction takes place with the
-32- customer, yet standardize and concentrate policy and back-office systems where IT, communications, internal reporting, regulatory compliance and other management support functions are overseen. This approach affords efficiency, quality and cost effectiveness in a customer-responsive, decentralized organization. Furthering cooperation within the decentralized organizational structure is a growing willingness to share information, expertise and resources in pursuit of common objectives; an outgrowth of the developing web of personal relationships developed whenever AEGON professionals gather to reinforce a culture of cohesiveness and shared values. Besides exchanging ideas and information, this internal cooperation is increasingly important as a driver of new business. With the continuous development of new products, services and distribution models, and with the steady strengthening of relationships within the AEGON organization, the outlook is for further cooperation based on shared objectives and natural synergies. Throughout the Group customer service and effectiveness of sales staff were reviewed and initiatives were made to improve effectiveness, based on the principle that customers must be able to fulfill their demands quickly and easily and at the appropriate cost levels. This meant that AEGON companies in some cases partnered with distribution channels that have made the decision to outsource their administrative activities or, in other cases, drew on available resources or were taken in-house such as various call center facilities. In addition to this, new web-based information serviced the Group's customers. Both more efficient administration and a skilful application of outsourcing have cut error rates and response times. For most of the past decade, positive 'Baby Boomer' demographics coincided with a prolonged rise in global equity markets, prompting record numbers of consumers to favor variable products, where the investment risk remains with the client, as opposed to traditional fixed insurance products. With its close focus on the customer, AEGON kept abreast of this trend to become one of the leading variable life providers in all of its markets. However, AEGON always recognized that no single product type could satisfy demand or be suitable for all economic conditions. So while adding new variable products to their range, AEGON companies also offered traditional term, whole and universal life products to those clients more interested in protection than investment. And in a year of economic downturn, when the mood of financial markets swung sharply so that performance became less of a priority than capital preservation, the AEGON product strategy again proved its worth. For years, variable products have been favored, last year sales of traditional products moved ahead well as customers became more risk averse. Backed by a diversity of distribution channels, AEGON's broad product mix ensured that virtually all operating units were competitively positioned to exploit this shift in sales towards lower risk products. AEGON's balanced product mix remains a key advantage in changing market conditions. In the Americas, sales of fixed annuities, guaranteed investment contracts (GICs) and funding agreement deposits hit record levels. New annualized premium declined 16%. In the UK AEGON Asset Management UK added a range of fixed income investment capabilities, garnering several industry awards and new mandates that justify the ambitions in this area. Likewise in the Netherlands, AEGON saw a growth in market share for savings products, while sales of pension products also benefited strongly. Traditional insurance products regained leadership in 2001, in sharp contrast to the trend of recent years that has increasingly favored variable universal life and variable annuities. The shift back in the direction of traditional policies reflected the needs of consumers seeking to lower risk while meeting their capital preservation needs. The AEGON USA companies saw a near 50% upturn in fixed annuity deposits and synthetic GIC production nearly doubled. The story was repeated in the Netherlands, where gross savings deposits rose 21%. Even the UK, where equity investments have traditionally dominated, there was a shift toward products with a lower risk element - a trend that AEGON Asset Management UK was able to anticipate.
-33- AEGON USA's Enterprise Client Initiative is an ambitious program to create an integrated, company-wide database to provide a comprehensive overview of each client's relationships with all AEGON entities. This is a strategic priority aimed at integrating technology and delivery channels to provide customer services when and where it is most convenient. Building a common customer database enables AEGON USA to organize the vast amount of information it has on its customers, access it more efficiently and use it to improve service in all customer transactions. The project, which includes important privacy and security safeguards, is an important step in AEGON USA's ability to deliver services seamlessly to 15.5 million customers across multiple platforms. Supermarkets have for many years experimented with savings stamps, in-store banks and various financial services. But now AEGON The Netherlands has teamed up with Albert Heijn, Holland's leading food retailer and the flagship of global food retailer Royal Ahold, to take this practice to a new level. As specialized equal partners, the two companies have developed a flexible, economical in-store system that allows customers to accumulate cash savings conveniently and privately at the checkout counter using the customer's loyalty card. In its first year, the system has attracted more than 200,000 savers, and additional easy to use banking and investment products are scheduled to be introduced through this highly innovative format. A Dutch business magazine ranked the Albert Heijn Spaarrekening as 'product of the year', rare praise for a financial product. AEGON UK has been a key respondent in the ongoing dialogue with government over proposals to restructure the UK retirement savings market both at group and individual level through the introduction of stakeholders pensions. While active debate continues over how best to distribute these mass-market pension and savings products, Scottish Equitable - the largest company within AEGON UK - has focused on helping its independent financial advisor partners to serve the corporate stakeholders market, taking advantage of a need for quality advice. In addition, AEGON UK will position its operations to succeed ahead of regulatory and other industry changes and will deliver technology-based solutions to improve efficiency and accessibility. Within the AEGON structure, each company determines how to harness or leverage the power of technology to help create a better future for its customers. Thus, the multitude of new technologies and the opportunities these create are exploited in different ways across the organization. Yet, all the AEGON companies recognize the unifying power of technology to bring down costs, to support more effective distribution and to improve quality and customer service. Technology plays a key role in harmonizing production platforms and aligning administrative systems to complete the integration process, as instanced in the USA by the Cedar Rapids processing facility and in the UK by the involvement of Guardian in AEGON UK's common operating environment project. New technology may also be installed on a stand-alone basis to cut costs or increase effectiveness. In recent years, for example, many units have equipped their sales teams with powerful application programs on their laptop computers, allowing them to access marketing and administrative information anywhere and any time. Similarly, telecommuting has been encouraged by a number of AEGON units to retain key employees and control costs. In 2001 AEGON made significant progress leveraging technology to improve distribution and customer service and bring down cost. Centralized technology services give AEGON USA a tremendous competitive advantage. Successfully integrating AEGON USA's data center with Transamerica's, for example, allows it to reduce its annual expenses by more than USD 34 million. Ultimately, this results in lower unit costs, increased flexibility and improved service delivery. Likewise, AEGON UK's center in Lytham St Annes is engaged in initiatives to build multi-brand production platforms and databases. In the Netherlands, the centralized production platform was outsourced and this set-up further improved AEGON The Netherlands cost/revenue ratio. Another important result of this approach was the cutting of policy issuance time and a decline in error rates. The approach adopted by AEGON business units to the internet and web-based services proved to be the correct course in 2001. All units use the internet in a variety of ways, from providing customers with convenient, online account information to facilitating the sales and policy issue process.
-34- Group pension plans are changing rapidly. Participants are increasingly directing the investments and demanding real-time information and financial modeling, now vital components of any offering. Across AEGON, the pension units have adopted internet information delivery and web-based solutions for plan members and sales personnel. In the UK, Scottish Equitable's 'SmartScheme' serves intermediaries, plan sponsors and individual participants. Group plan members in the Netherlands used Pensioen Kompas, a similar on-line information resource which is supported by AEGON The Netherlands' Financieel Compleet advisors, allowing franchisees who call on individual members of group plans insured by AEGON to offer personalized financial planning advice and supplementary services. In the US, participants have access to Retiretek(R), an interactive, on-line investment modeling and retirement planning tool that can help participants develop a customized asset allocation strategy. Competition: In general, the insurance industry competes on the basis of the price of the products offered, the terms of the products, the capacity of the products to meet the specific needs of the insured and the quality of service rendered to the insured. The life insurance industry, particularly in the United States, has experienced increased competition from other financial service institutions which offer pension plan management and alternative investments for individuals. The Financial Services Modernization Act was passed in November 1999 and repeals the Glass-Steagall Act of 1933 and expands the Bank Holding Company Act of 1956. This new act allows cross-ownership by banks, securities firms and insurance companies. As a result, it is likely that there will be business combinations among banks, securities firms and insurance companies. However, there are a number of unresolved regulatory issues associated with the authority of banks and other financial institutions to compete directly with the Company in the sale of life insurance products, including interest-sensitive products. The existing legal barriers between Dutch insurers and banks were removed in 1990 to allow both to diversify their financial products into each other's markets. Several banks and insurers have merged. Also see the Operating and Financial review in Item 5 for a discussion of the effect of competition on AEGON's business. Regulation: AEGON's United States insurance subsidiaries are subject to regulation and supervision in the states in which they transact business. Supervisory agencies in the various states have broad powers to grant or revoke licenses to transact business, regulate trade and marketing practices, license agents, approve policy forms and certain premium rates, set reserve requirements, determine the form and content of required financial reports, examine the companies and prescribe the type and amount of investments permitted. Insurance companies are subject to a mandatory audit every three to five years by the regulatory authorities and every year by the independent auditors. The US Congress passed legislation that reduces and potentially eliminates the estate tax which could have an impact on insurance products and sales in the US. Scrutiny is placed on the insurance industry from a marketing, compliance and regulatory view. Tightened standards have caused the industry to reevaluate past practices as substantial liability has been incurred by insurance companies based upon their past sales and marketing practices. AEGON has been and continues to be focused on these compliance issues. The National Association of Insurance Commissioners (NAIC) adopted, in December of 1992, a "Risk Based Capital for Life and/or Health Insurers Model Act" (the "Model Act") which was designed to identify inadequately capitalized life and health insurers. Should an insurer's Adjusted Capital, based upon statutory accounting principles, fall below certain prescribed levels (defined in terms of its Risk Based Capital), the Model Act provides for various actions. The Adjusted Capital levels of the Company's United States insurance subsidiaries currently exceed all of the regulatory action levels as defined by the NAIC's Model Act.
-35- The Gramm-Leach-Bliley Act (the "Act"), which was passed into law in November 1999, permits financial services companies, such as banks, insurers and securities firms, to affiliate. The Act, however, restricts the ability of these financial services companies in the United States to use and share consumer and customers' nonpublic personal information with non-affiliated third parties. Specifically, financial services companies must disclose their privacy policies to customers and permit these individuals to prohibit disclosure of their nonpublic personal information to third parties. Exceptions to such restrictions on the use and disclosure of information do exist, however, for certain marketing activities and business functions such as servicing and underwriting of products. States are required to implement the Act's provisions with respect to insurers and are also permitted to impose stricter privacy standards. These privacy standards are in addition to existing privacy laws to which insurers are subject. Insurance holding company statutes and regulations of each insurer's domiciliary state in the United States require periodic disclosure concerning the ultimate controlling person (i.e., the corporation or individual which controls the domiciled insurer in each state). Such statutes also impose various limitations on investments in affiliates and may require prior approval of the payment of certain dividends by the registered insurer to the Company or several of its affiliates. AEGON is subject, by virtue of its ownership of insurance companies, to certain of these statutes and regulations. Since the Company's primary source of income is dividends from its insurance company subsidiaries, the Company's ability to meet its obligations and pay dividends to its shareholders may be affected by any such required approval. Insurance companies in The Netherlands are supervised by the Pensioen- en Verzekeringskamer, the regulatory body for insurance companies (the "Board") under the mandate of the "Wet toezicht verzekeringsbedrijf 1993" (Insurance Industry Supervision Act). The Company files with the Board its annual report and, under this Act, the Company's life and general insurance subsidiaries in The Netherlands are required to file detailed annual reports. Such reports are audited by the Company's independent auditors and include balance sheets, profit and loss statements and actuarial statements. The annual reports are prepared in accordance with accounting principles which are based on the "net level premium method", combined with the deferral of a part of the acquisition costs. Insurance companies are initially licensed by the Board and then monitored closely through the annual filings. In addition, the Board may require an insurer and/or its ultimate holding company to submit any other information the Board requests and may conduct an audit at any time. Under the Insurance Industry Supervision Act, general insurance companies are required to maintain shareholders' equity equal to not less than 18% of gross premiums written in the previous year, subject to other possible limitations. Life insurance companies are required to maintain equity of approximately 5% of general account technical provisions and, in case of no interest guarantee, of approximately 1% of technical provisions with investments for the account of policyholders. As of December 31, 2001, the capital and reserves of AEGON Levensverzekering substantially exceeded the minimum solvency requirement. Even when the net deferred policy acquisition cost was subtracted from capital and reserves, these were still 2 times the minimum standard requirement. Banking activities in The Netherlands are supervised by De Nederlandsche Bank N.V. (The Dutch Central Bank) under the mandate of the "Wet toezicht kredietwezen 1992" (Credit Industry Supervision Act). The Company's banking subsidiary AEGON Bank (formerly Spaarbeleg Bank) is in compliance in all material respects with applicable banking regulations and capitalization requirements. The bank files with The Dutch Central Bank its monthly and annual reports. The annual report is audited by independent auditors.
-36- As a group of companies in The Netherlands may be engaged in both insurance and banking, albeit that direct mergers are not permitted, The Dutch Central Bank and the "Board", in consultation with the Ministry of Finance and with representatives of the banking and insurance industry, have entered into a protocol for the purpose of jointly regulating groups with interests in banks and insurance companies (the "Protocol"). The Protocol became effective on January 1, 1990 and was lastly amended in January 1997. In a group of companies consisting of at least one bank and one insurance company (a "Mixed Group"), the banks continue to be regulated by De Nederlandsche Bank and the insurers continue to be regulated by the Board. AEGON, as the holding company of a Mixed Group in which banking and insurance operations account for a considerable proportion of total operations (a "Mixed Financial Group"), which group is primarily engaged in insurance, must furnish financial information to the Board twice a year, including information as to (1) equity of the banks, (2) the solvency margins of the insurance companies, (3) capital, reserves, and subordinated loans of the other subsidiary companies and (4) information as to the solvency of the group on a consolidated basis, and shall state the investments, loans, and comparable undertakings (except for insurance agreements) provided to group companies by a bank or insurance company of the group. The Dutch Central Bank and the Board meet periodically to monitor holding companies of a Mixed Financial Group and will contact one another when a reporting institution encounters difficulties. Regulation of insurance companies in the United Kingdom is carried out by the Financial Services Authority (FSA) under Insurance Companies Act 1982. UK Insurance Companies have to supply financial information to the FSA for supervisory purposes, in the form of annual returns, within 6 months of the company's financial year-end. The content of these returns is defined by legislation and includes, for example, detailed analysis of solvency, assets, liabilities and a detailed actuarial valuation report prepared by the Appointed Actuary. The Appointed Actuary is normally an employee of the company but appointment is approved by FSA. The returns are filed at the official Companies Registry and are therefore available for inspection to the general public. Copies are available on demand to policyholders and shareholders. The returns are subject to audit by external independent auditors. In addition the returns and, in particular, the annual valuation report of the appointed actuary, are subject to scrutiny by the Government Actuary's Department who advise the FSA on Actuarial matters concerning Insurance Companies. The FSA examine the returns and, in conjunction with the Government Actuary's Department, may raise queries with the company. The FSA has wide-ranging power to intervene if a company fails to comply with its legal obligations and can order it to cease writing new business. The returns are of course a retrospective picture of the company; The Appointed Actuary also has a statutory duty to ensure that he is satisfied with the financial position of the company at all times, if not, he must advise the Board of Directors and the FSA. Solvency margins are imposed by law on both life and non life insurers. The solvency margins required by the Insurance Companies Act 1982, and elaborated in statutory regulations are monitored by the FSA, and vary with the type of company, the classes of cover and certain other factors. On January 1, 1995, new requirements and regulations were introduced in the United Kingdom covering the disclosure of sales expenses and commission at the point of sale. The Company has not been subject to any significant regulatory proceedings involving its operations in the countries in which it operates and is in compliance in all material respects with all regulatory requirements applicable to it. Since the Company is a holding company, the rights of the Company to participate in any distribution of assets of any subsidiary upon its liquidation, or in the case of its United States subsidiaries, in reorganization or other similar proceedings (and thus the ability of holders of Common Shares to benefit indirectly from such distribution) are subject to regulatory actions and the prior claims of creditors of that subsidiary. Claims on the Company's subsidiaries by creditors may include claims of policyholders, holders of indebtedness and claims of creditors in the ordinary course of business. Such claims may increase or decrease and additional claims may be incurred in the future.
-37- Description of Property: In the United States, the Company owns predominantly all of the buildings which are used in the normal course of its business, primarily as offices for the Company and its subsidiaries. Its principal offices are located in Baltimore, Maryland, Cedar Rapids, Iowa, St Petersburg, Florida and Los Angeles, California. Other principal offices owned are located in Budapest, Hungary and Madrid, Spain. In The Netherlands and the United Kingdom the Company does not own its headquarters and principal offices but these are rented. The Company believes that its properties are suitable and adequate to meet the requirements of its businesses. Item 5. Operating and Financial Review and Prospects Introduction - ------------ As an international life insurance company, AEGON is exposed to currency fluctuations, to changes in mortality and longevity and to changes in the market value of its investments, credit risk and the impact of interest rate changes. The risk management framework AEGON applies is designed in line with the sources of income and the business processes of the Group. AEGON's decentralized organization emphasizes the autonomy of the local units. Each country unit applies strict risk management policies and procedures in the normal course of business. In addition, there are risks arising from the local businesses that potentially impact the AEGON Group as a whole. These risks are monitored at Group level in close cooperation with the various country units. Additionally, sensitivity analyses are performed to assess variability of various parameters. AEGON's disclosure practices and DAP accounting standards have been developed in accordance with generally accepted accounting principles over many years with due consideration of the needs of our stakeholders, including the various regulators and research analysts. In recent years, substantive supplemental information has been added to AEGON's annual and quarterly accounts, including new production and capital allocation information which supplements the expanded segment analysis of life insurance earnings by country unit and provides greater transparency of AEGON's results. AEGON remains committed to providing useful disclosure to its stakeholders, including future requirements which may be promulgated within the Dutch civil code and adoption of International Accounting Standards (IAS) currently targeted for 2005. AEGON distinguishes between three major risk categories: underwriting risks, investment risks and operational risks. At the country unit level, risk management is an integral part of the business processes. Within each category AEGON monitors the key factors that impact earnings and the financial position. The critical accounting policies related to those major risks are discussed in the following sections. In general, underwriting risks and investment risks are risks that AEGON actively assumes. These risks are inherent to the business and are regarded as primary risks. Operational risks are risks that arise in business processes and are viewed as secondary risks. AEGON's policy is to minimize the financial impact of operational risks. All AEGON Group units report on these three major risk categories. Currency risk - ------------- Currency risk is managed based on AEGON's currency risk policies. For investments, these policies are based on asset and liability matching principles. Equity held in subsidiaries is kept in local currencies to the extent shareholders' equity is required to satisfy regulatory and self-imposed capital requirements. However, this may affect the level of AEGON's shareholders' equity. The remainder of AEGON's capital base (capital securities, subordinated and senior debt) is held in various currencies relative to the book value of AEGON's activities in those currencies. As a result, AEGON's debt-to-total-capital ratio is not materially affected by currency volatility. AEGON does have a translation risk on earnings generated by its various country units. AEGON does not hedge its income streams. As a result, earnings may fluctuate due to currency translation risk.
-38- Underwriting risks - ------------------ Actuarial assumptions and their sensitivities underlie the calculation of technical provisions, which are based upon generally accepted reserve valuation standards. In the normal course of business, assumptions regarding mortality, longevity, investment returns, lapses and other relevant parameters are reviewed annually and updated when appropriate. The AEGON Group is exposed to mortality and longevity risk in its products. Annually AEGON performs sensitivity analyses, which quantify the effect of mortality and longevity developments on the portfolios and technical provisions. If life expectancy would increase by one year, compared to AEGON's existing reserving basis, the positive effect on the technical provisions would be less than 0.5%. This implies that the AEGON Group has a well-balanced portfolio in terms of mortality and longevity. Therefore, changes to mortality and longevity developments are not a current concern relative to the strong reserving basis. AEGON uses assumptions regarding future investment yields for pricing and the assessment of profitability of both general account and separate account products. For both type of products assumed yields are intentionally prudent. Periodically, AEGON assesses the impact of fluctuations of investment yields on pricing and profitability. The long-term yields in all country units continue to be higher than the currently assumed yield in product pricing. For products where AEGON offers explicit return guarantees to its clients, product pricing reflects these guarantees and the assets are managed consistently with those pricing assumptions, while the technical provisions are set prudently with a sufficient margin for adverse deviation. AEGON defers and amortizes a part of its acquisition costs. These costs are related to the sale of insurance products. Deferred policy acquisition costs (DPAC) are carried in the balance sheet as a negative reserve, within technical provisions. This DPAC reserve is established and maintained using similar underlying assumptions as applied to technical provisions. Every year AEGON tests, by product line, the recoverability of DPAC from the future profits and future premium loadings that are forecasted to emerge from in-force contracts. AEGON's appointed actuaries in the various countries prepare this analysis and its auditors review the DPAC valuation as part of their regular audit procedures. Because this analysis is performed on a regular annual basis, with the amortization schedule adjusted as appropriate (sometimes referred to as `unlocking'), significant one-time adjustments have not occurred. Included in AEGON's DPAC reserve is a substantial amount of Value of Business Acquired (VOBA) resulting from acquisitions, which in its nature is the same as DPAC and is subject to the same recoverability testing. At year-end 2001, this amounted to approximately EUR 7.2 billion. Investment risk - --------------- AEGON country units are responsible for the management of their own investment portfolios. The asset and liability management policies employed in the units specify the level of risk and exposure that can be taken with respect to changes in interest rates, equity markets, counterparty credit and exchange rates. Interest rate risk - ------------------ The general account fixed income portfolios of AEGON USA and AEGON The Netherlands account for 98% of the total general account fixed income portfolio of the AEGON Group. AEGON USA and AEGON The Netherlands are the only country units that actively manage their duration mismatch. Presently, the other country units target the duration of the assets to be equal to the duration of the liabilities. The maximum allowed duration mismatch between assets and liabilities is a deviation of plus or minus one year. The combined market value weighted duration mismatch of AEGON USA and AEGON The Netherlands was 0.21 years at 31 December 2001. Credit risk - ----------- AEGON is exposed to counterparty credit risk through exposure in corporate bonds, mortgages, over-the-counter derivatives and reinsurance contracts. Country units apply specific guidelines for the acceptable level of credit risk and consequent default provisions. Most of the credit risk taken by the AEGON Group resides with AEGON USA. AEGON USA applies exposure limits, contingent upon the respective counterparty's credit rating. Exposures include derivatives exposures as well. The exposure limits are as follows:
-39- Rating category Exposure limit on single name % of general account assets (in USD million) AAA or AA 620 0.64% A 465 0.48% BBB 310 0.32% BB 155 0.16% B 93 0.16% CCC 31 0.03% The counterparty ratings used for assessing counterparty exposure within AEGON USA are internal ratings, based on both published ratings by rating agencies and in-house analysis. In general, the internal ratings tend to be in line with the ratings issued by the rating agencies. If an exposure exceeds the stated limits as a result of a downgrade, positions have to be in line with the new limit within a specified period of time, which varies with the asset quality of the security. In all cases, exceptions to the aforementioned can only be made after explicit approval in advance from senior management. 97% of all general account securities rated BB or lower (below investment grade) are held within AEGON USA. Under certain circumstances, AEGON takes credit exposure through credit derivatives. The total underlying amount of these credit derivatives is very small relative to the entire portfolio and amounted to around EUR 100 million at 31 December 2001 for the AEGON Group. At group level, the aggregated exposure to financial institutions is monitored. For that purpose AEGON aggregates exposures from various country units and instruments to assess overall credit risk with respect to counterparties. AEGON establishes provisions for credit risk in the normal course of business. Additions to the provision are expensed and reflect the current long-term expectations for defaults. Losses on impaired assets are then charged to the provision. The adequacy of the provision is reviewed based upon the underlying portfolio of assets and the current economic environment. Based upon this review any excess or shortfall is charged to earnings. AEGON added EUR 804 million to its default provisions during the year, leaving a balance at year-end of EUR 489 million. Derivatives AEGON uses derivative financial instruments such as interest rate swaps, options, credit derivatives, futures and foreign exchange contracts to manage its exposures related to investments and borrowings. AEGON does not hold or issue derivative instruments for speculative trading purposes. During 2001, AEGON established a subsidiary, which will act as external counterparty for all over-the-counter derivative transactions executed by AEGON Group units in future periods. This subsidiary enables centralized monitoring and netting of exposures with derivatives counterparties. During 2002, country units that trade OTC derivatives will transfer their existing derivatives positions to AEGON Derivatives NV. AEGON engages only in medium and long-term OTC derivatives contracts if the rating of the counterparty is at least double-A. Equity market risk The general account equity portfolios of AEGON USA and AEGON The Netherlands account for 97% of the total general account equity portfolio of the AEGON Group. AEGON The Netherlands holds the largest investment in equities, both in absolute terms and expressed as a percentage of total general account investments of the country units. Details are given in the table below. AEGON's shareholders' equity is directly exposed to movements in the equity markets. AEGON's accounting policy of deferring and amortizing capital gains on equity and real estate investments in the general account portfolio makes net income less sensitive to the effects of volatile equity markets than it would otherwise be. However, as the allocation of investments held for account of policyholders is for over 62% in equity securities, net income is sensitive to the fees earned on these assets.
-40- In EUR million % of equity % of countries % of total As per 31 December Size investment general account general account Americas 3,945 47.3% 3.6% 3.0% The Netherlands 4,156 49.9% 23.5% 3.2% United Kingdom 147 1.8% 10.0% 0.1% Other countries 88 1.0% 5.7% 0.1% Total 8,336 100.0% -- 6.4% Operational risk Most operational risks are very specific to the local business, which makes aggregation at group level difficult. To assess the financial impact of the operational risks, AEGON translates these into their potential financial consequences. In some cases, AEGON buys insurance coverage as means of protection against operational risks. Where relevant, these coverages extend to the AEGON Group as a whole. All country units have business continuity programs and policies for Information Security in place. Recent developments: 11 September The direct effects of the 11 September attacks on AEGON were limited. Claims on life insurance policies following the attacks in New York and Washington were lower than originally estimated and the effect on earnings is confirmed at EUR 34 million (USD 30 million) net of reinsurance. The secondary effects, most notably the price changes in equity markets following the events, also had a negative impact on AEGON, both on its general account equity investments and on the fee income derived from unit-linked and variable products. Even though the financial markets were closed in the US for several days, AEGON's liquidity position was not substantially affected during the aftermath of the terrorist attacks. AEGON's balance sheet liquidity is strongly supported by available committed credit lines. In the period shortly after 11 September, AEGON maintained excellent liquidity without accessing liquidity under these committed facilities. Notwithstanding our many successes to date, a host of challenges await AEGON's management team, notably in the form of margin pressures, increased regulatory burdens, risk management related issues, but also new opportunities. Maintaining and managing a high quality investment portfolio is more difficult in today's volatile economic environment - as evidenced by the unexpected collapse of Enron, a highly rated company ranking among the ten largest US companies. Despite our high quality investment grade bond portfolio at AEGON USA, we are not immune from the market-wide increase in corporate default losses. Greater coordination of asset management operations and information sharing has become a higher priority in this volatile investment climate. Due to continual regulatory changes impacting many facets of our business, the cost of compliance remains an ongoing issue. Policyholder information requirements, litigation liability and the gradual emergence of new accounting standards for the European market all make increasing demands on time and company budgets. New Dutch legislation has been proposed which would require changes in our revaluation reserve and corporate governance. In addition, introduction of the euro, though faultlessly implemented and no doubt a positive development over the long term, has proved costly in the short term. A more structural problem is the generalized decline in margins due to increased competition affecting the financial services industry. To cope with this, resourceful marketing, disciplined cost control and continuing to stay alert to underperforming activities, will all remain priorities in 2002. In regional terms, AEGON USA's priority for 2002 is to streamline its activities, to increase efficiency and lower costs, while keeping alert to potential acquisitions. AEGON Canada will develop broker/dealer networks and expand distribution capabilities. AEGON The Netherlands will concentrate on continued product development and innovation. AEGON UK's main challenge is full integration of its new IT system and reducing expenses. AEGON Hungary will focus on extending its sales channels and retaining sales leadership. AEGON Spain's efforts will aim at building scale, especially in life insurance. In Asia, AEGON Taiwan expects to move into profit while the greenfield China operation will work to launch commercial activities.
-41- Results of operations 2001 compared to 2000 - --------------------- Net income per share increased 12% to EUR 1.76 reflecting the 16% increase in net income and the additional 55 million shares issued to acquire JC Penney's direct marketing insurance operations. Net income from AEGON's major country units, the Americas, the Netherlands and the UK increased in local currency 15%, 7%, and 3% respectively. Total gross margin increased 13% while commissions and expenses increased 12%. Due to increased bond default activity in the United States, an amount of EUR 631 million (USD 565 million) was added to the default provisions while impairments totaling EUR 608 million (USD 545 million) were charged against these provisions. The default provision balance at year-end was EUR 338 million (USD 298 million) for the USA investment portfolio. Net income of EUR 31 million from the divested Labouchere operations was included in 2000 results. In previous years AEGON has put a cap of 7% after tax on the indirect return which has been removed in 2001 to bring the application of this method in line with current general practice. The effect on net income growth of the JC Penney's direct marketing insurance operations acquisition, the removal of the cap on indirect return and currency translation amounts to 4%, 3% and 2% respectively. On net income per share, the effect is 2% each. Net income increased 16% to EUR 2,397 million for 2001. The earnings comparison with the prior year has been positively influenced by the additional EUR 132 million of income before tax from the acquired JC Penney's direct marketing insurance operations and the EUR 343 million of income before tax (EUR 294 million after tax) from the sale of our joint ventures in Mexico. Earnings were adversely influenced by higher additions to the provisions for default losses, as well as the influence of depressed equity markets on sales, account balances and fees. For following analysis also refer to Note 3 Segment information of notes to the consolidated financial statements. Standardized new life production increased 2% for the year, including 17% and 16% increases in the Netherlands and UK, respectively. Increased group life market share in the Netherlands and higher group personal pension sales in the UK contributed to this growth. The Americas' new life production was 13% lower due to expected lower term life and institutional single premium sales. The USA, however, reversed this trend and produced a 16% increase in standardized life production in the fourth quarter. Lower traditional life results include EUR 28 million (USD 25 million) of acquired JC Penney's direct marketing insurance operations' earnings and an addition to the default provision of EUR 174 million for 2001 compared to EUR 19 million for 2000. Total 11 September WTC claims were EUR 34 million (USD 30 million), net of reinsurance. Life for account of policyholders results reflect higher recurring premium revenues and an increase in in-force business. Earnings also benefited from the positive development of the equity market in the fourth quarter. Improved cost efficiency in the Netherlands also contributed to the earnings increase, while in the UK a contribution to the earnings increase arose through higher surrender charges as individuals reassessed their options for taking retirement income. Lower fixed annuity results include an addition to the default provision of EUR 256 million for 2001 compared to EUR 30 million for 2000. The higher addition to the default provision more than offset higher account balance earnings. Deposits almost doubled in the fourth quarter as a result of strong production in the banking channel benefiting from the continued shift to fixed products. Higher GIC and funding agreement results include an addition to the default provision of EUR 178 million for 2001 compared to EUR 32 million for 2000. The higher addition to the default provision was more than offset by income from higher balances and from increased investment spreads. Lower variable annuity results are due to lower account balances which reduces fee income and increases amortization of acquisition costs. Variable annuity deposits decreased 28% but were up 12% in the fourth quarter in the United States reflecting strong production from new partnerships with financial institutions. In
-42- Canada segregated fund deposits continued to lag last year's sales substantially as a result of the depressed equity markets and changes in product design due to regulatory requirements. Lower income before tax on fee business reflects lower fees on account balances. Higher accident and health results include EUR 104 million of acquired JC Penney's direct marketing insurance operations' earnings and an addition to the default provision of EUR 23 million. There was no addition to the default provision in 2000. Higher income before tax on general insurance is due to favorable claims levels. Lower income before tax from banking activities is due to depressed equity market performance, lower interest spreads and additional risk provisions. The shift in consumer preference away from equity linked products continues to drive substantial increases in savings deposits at the expense of investment contract sales. Reduced Interest charges and Other are due to the inclusion of EUR 40 million of profit from run-off UK general insurance as well as lower interest rates on debt allocated to insurance activities. Corporation tax expense decreased to 28% from 29% in the prior year. Higher rates in the Netherlands and United Kingdom were more than offset by a low rate on the gain from the sale of the Mexican operations. The increase in Transamerica Finance Corporation (TFC) net income is due to inclusion of results for 12 months in 2001 and six months in 2000. Additionally, a lower allocation of interest on debt more than offset the lower net income from operations. TFCs lower operating income is due in part to a lower asset base due to asset sales, lower production of new receivables and increased credit losses. During 2001 EUR 723 million, including EUR 72 million from removal of the cap, was recognized as indirect return in the Group's income before tax. This compares with EUR 595 million for the prior year. The revaluation account balance as of 31 December 2001 was EUR 4,640 million, including realized gains of EUR 3,901 million and unrealized gains of EUR 739 million. The macro-economic factors driving the life and pension markets we serve - demographic trends, changes in traditional social security systems and a reaffirmation of the value of insurance protection - continued to create opportunities in 2001, throughout the Group. The shift by customers toward more risk-averse fixed return instruments and away from unit-linked products was especially noteworthy. AEGON's well-balanced product portfolio and flexible, responsive marketing enabled it to adjust to and profit from these changes. Similarly, balance and flexibility should allow us to benefit from the underlying growth in life and pension demand, particularly with a return to better economic times. Americas - -------- AEGON Americas maintained its balance and forward momentum in an unsettled market climate. Its group-wide focus on profitable growth, coupled with the acquisition of the JC Penney direct marketing insurance operations and the gain on the sale of the Mexico joint ventures, led to double-digit net income growth. Consistent performance and income was achieved despite a weak economy, declining equity markets and consumer uncertainty over the repeal of an important estate tax change. The AEGON Group was deeply saddened by the tragic events of 11 September, but we are thankful not to have lost any of our employees. AEGON USA acted swiftly and responsibly, taking care to verify the safety of its employees and working to ensure continuity of service throughout the market interruption. Financially, AEGON weathered the effects better than many of its peers, due to the fact that the company does not offer property and casualty products and insurance and investment losses were moderate. The pre-tax amount reported for all insurance claims, net of reinsurance, was EUR 34 million (USD 30 million), with the majority of claims attributable to reinsurance losses. During the following days and weeks, AEGON USA pulled together to respond to the tragedies in a number of ways, including participating in industry-wide initiatives to assist victims and beneficiaries, reviewing business continuity procedures and strengthening policies protecting workplace security. Despite these testing circumstances, AEGON USA showed its true resilience thanks to its balanced product offerings and diverse channels of distribution. In 2001 demographic trends continued to drive strong growth in
-43- the insurance, savings and pension markets, spurred by additional demand for protection products following the events in the fall. After successfully integrating several major acquisitions in recent years, AEGON USA's decentralized operating structure has allowed it to effectively manage the complexity that can often accompany size. Key to its success has been creating an infrastructure that gives distinct business groups the autonomy to fully capitalize on market opportunities and customer needs. To this end, AEGON USA made progress in 2001 expanding its channels of distribution, improving services to customers, and capitalizing on internal synergies. In 2002 AEGON USA will take additional steps to improve its flexibility for growth by streamlining operations and leveraging scale. Overall, AEGON's multi-branded, multi-channel distribution strategy proved well-suited to the volatile environment. Activities were reorganized into five groups last year: Agency; Alternative Markets; Financial Markets; Institutional Products and Services and Pension. Agency Group: Offering a broad range of insurance and investment products through independent agents, financial advisors, marketing companies and registered representatives, the Agency Group and its four divisions continued to be major contributors to revenues. Each channel serves distinct market segments, from home service to high net worth individuals. Products offered through professional agents and intermediaries remains the Agency Group's dominant method of delivery. Monumental achieved steady growth and excellent profitability in 2001, reaffirming its role as one of the leaders in the home service market. Known for its operational efficiency, Monumental is now extending this same discipline to the field, where agents are strengthening their sales skills and overall consistency of service. Strong recruiting and sales efforts in 2001 contributed to solid growth for the Individual Division. The year saw substantial production in its bank and corporate-owned life insurance markets. Transamerica Insurance & Investments Group continues to be a strong contributor to the Agency Group's performance. Sales were positive, and two new variable universal life products were added to its slate of product offerings in 2001. The Equity Group, suffering its first downturn in variable life sales in over a decade because of the market decline, focused on helping their clientele understand the long term aspects of their investment options and position their investment strategies to meet their personal financial goals. With markets stabilizing and additional attention directed to marketing priorities in 2002, variable product sales should rebound modestly provided there are no major market disruptions. Alternative Markets Group: This group is led by AEGON Direct Marketing Services (ADMS), which markets life insurance and supplemental products to consumers through direct channels. The acquisition of JC Penney's direct marketing insurance operations in June 2001 has made AEGON USA the largest direct marketing organization of life and supplemental insurance in the United States, with USD 2.3 billion in revenues and 15.5 million customers. Customers who might not be reached through AEGON USA's other channels - such as the underserved middle market or customers who prefer to buy direct - can purchase ADMS's comprehensive product portfolio via direct mail, point of service, the internet, telemarketing or direct response advertising. Products are marketed through the endorsement of sponsoring organizations, such as financial institutions, associations, credit unions or car dealers, as well as directly to consumers. The Worksite Marketing division enjoyed more of the growth initiated in 2000 with its re-branding as Transamerica Worksite Marketing. This unit offers employees a wide variety of voluntary programs to supplement existing benefits offered through employers. Financial Markets Group: The Financial Markets Group enjoyed a record year in 2001. Partnerships with large banks through its Transamerica Financial Institutions business unit benefited from conservative investors' flight to more guaranteed fixed interest rate annuities. Investor concerns over the equity market also contributed to record sales of structured settlement annuities during the year. Transamerica Capital also bucked the industry's weak equity
-44- sales trend in the brokerage channel through strong wholesaling efforts, quality products and a highly recognizable brand. Finally, Transamerica Investment Management realized record sales of its equity funds. Institutional Products and Services Group: AEGON Institutional Markets enjoyed another year of solid growth, with product balances increasing by 24 % over 2000. This business, which provides a range of guaranteed savings and investment products to institutional retirement and savings clients, continued to expand an already diversified product and market base by more than doubling balances in its Euro and Global medium term note program, as well as adding USD 6.5 billion in fee-based synthetic GICs sold to retirement plans. Transamerica Reinsurance maintained its strong position in life reinsurance, though this division bore the brunt of the company's direct losses from 11 September. The year's extraordinary circumstances demonstrated Transamerica Reinsurance's resilience. The company quickly adapted standard claims processing procedures to meet exceptional client needs created by the tragic events. In 2001 Transamerica Reinsurance focused on growth and profitability through product innovation, developing new markets and disciplined risk analysis. During the year Transamerica Reinsurance advanced a number of initiatives to position it for growth, including web-based distribution capability for private label business needs, and an Irish reinsurance facility. Transamerica Reinsurance continued its thoughtful international expansion efforts, opening offices in Santiago, Chile and building its presence in the Asia-Pacific region. Pension Group: Both Diversified Investment Advisors, serving medium and large pension sponsors, and Transamerica Retirement Services, serving the smaller corporate market, achieved good results despite the challenges of the volatile equity markets and an unsettled climate. Both are well-positioned to take advantage of the long-term, sustainable growth opportunities in the retirement market. Diversified, for example, is one of the few organizations of its kind making the necessary investment in technology to address the growth that lies ahead. This allows Diversified to partner with many other distribution channels that have made the decision to outsource their pension activities. New web-based information platforms for personalized advice, including Retiretek(R), were welcomed by agents, intermediaries and pension plan holders alike. AEGON USA Investment Management: AEGON USA Investment Management is responsible for managing over 96% of AEGON USA's USD 94.9 billion of invested assets. Bonds constitute the great majority of invested assets. Commercial mortgage loans, alternative investments, and equities comprise the balance. Despite the high quality investment grade bond portfolio held in the US, an expected level of credit losses is anticipated and priced for in all products. Due to the current poor credit cycle, EUR 631 million (USD 565 million) was added to default provisions during 2001, while impairments totaling EUR 608 million (USD 545 million) were charged against these provisions. However, AEGON USA ended the year with less than 0.5% non-performing assets as a percent of total assets. Moreover, the portfolio achieved a total return of 7.96%, which exceeded comparable benchmarks. In 2002 AEGON USA will continue to pursue operational synergies across its companies. All units will be working to identify new markets and opportunities to achieve budgeted sales growth in a challenging economic environment. Priorities are to increase sales revenues through more focused support to the distribution channels, while leveraging size and scale to improve operating efficiency and service. Continued emphasis on refining `asset liability management practices' will strengthen risk selection. Mexico: AEGON's highly successful joint insurance and pension fund management ventures with Seguros Banamex AEGON and Afore Banamex AEGON came to a close in 2001 following Citigroup's acquisition of parent company Grupo Financiero Banamex (Banacci). At year-end 2001, AEGON agreed to the sale of its 48% partnership interests for USD 1.24 billion, plus USD 40 million in dividends on the companies' 2001 profits. For AEGON the venture was a positive experience.
-45- AEGON Canada: Transamerica Life Canada, AEGON Canada's key operating subsidiary, succeeded in maintaining a leadership position in the sales of life insurance and segregated fund products. Through 18,000 independent distributors, representing the largest independent network for the distribution of life and savings products, Transamerica Life Canada performed well and aggressively pursued growth in a challenging marketplace. Product innovation formed the cornerstone of growth in 2001, with the launch of a new universal life product and the introduction of a 'best-of-breed' segregated fund offering. AEGON Canada fulfilled its growth mandate throughout 2001 with the acquisition of Money Concepts (Canada) Ltd., a financial planning franchisee with 97 offices and 348 franchisees, to expand its distribution capabilities. November 2001 heralded the successful launch of AEGON Dealer Services Canada Inc, a broker/dealer network to bolster the expanded distribution capability of AEGON products and services for distributors across all AEGON Canada businesses. On the investment side, AEGON Canada transformed the investment division of Transamerica Life Canada into AEGON Capital Management Inc, an investment management company positioned to compete in the Canadian marketplace for pension funds, third-party mandates and high net-worth clients. Throughout 2002, AEGON Canada will position itself as a wealth management and protection provider and continue to expand distribution capabilities. Customer service will continue to be enhanced through improvements in back office functionality. Sustained focus will be on leveraging core competencies: development of the distributor network and enhancing distribution capabilities; product innovation; investment management expertise; development of quality insurance and investment solutions; and delivery of cost-effective administration. The Netherlands - --------------- The strongest performers were the group pension units, of which Pensioen en Advies, a traditional flagship division, has undergone extensive reorganization and revitalization. As a result of significant improvements in competitiveness and customer service, AEGON The Netherlands is experiencing strong growth and renewals by plan sponsors. More efficient administration and a skillful use of outsourcing have cut error rates and response times, while a broad portfolio of supplementary financial and investment products and the close support that corporate pension customers receive from Financieel Compleet's worksite marketing specialists, have all contributed to revenue growth. On-line information and communications tools such as Pensioen Kompas also help group plan members and agents to receive on-the-spot-advice. Facing increasing regulatory and technological burdens, large plan sponsors and industry organizations that have traditionally self-insured and managed their pensions in-house, are now looking to AEGON The Netherlands to deliver bundled or unbundled packages, supported with individual attention for their employees. These packages, backed by IT resources, are increasingly helping to provide self-directed solutions for group plan members. The individual insurance market, served by AEGON Personal Lines, AEGON Nabestaandenzorg, Spaarbeleg, AXENT/AEGON and Van Nierop, continued to adjust to recent tax reforms. Emphasis has shifted from the more traditional life insurance products to sophisticated products, leading to a series of new product introductions. Among the more successful new offerings were a unit linked mortgage/life product, AEGON Beleggingshypotheek, ToekomstPlan, RenteRetourVliegwiel and long-term investment contracts, which allow customers to acquire a stock portfolio through installment purchasing. Consumers of AEGON Personal Lines products widely demand advice from independent intermediaries. During the first two quarters of the year activity was somewhat depressed as both customers and agents adjusted to the changes in the tax laws. AEGON The Netherlands cooperated closely to educate agents and intermediaries about newly-introduced products designed to create better futures for customers, within the new taxation framework. As a consequence of the new tax legislation, insurers and intermediaries also had to amend existing policies, a major operation for AEGON The Netherlands that was concluded within a relatively short period. An important innovation was the expanded
-46- contribution of Adfis, an internal consultancy providing sophisticated tax and legal advice to distribution partners and high net worth individuals. The sales force of NVG was merged into AXENT/AEGON. AEGON Nabestaandenzorg is the new unit into which the funeral insurance portfolios of AEGON Personal Lines, NVG and AXENT/AEGON will be merged. Non-life lines, such as the motor portfolio, again produced good profit growth, as the focus on loss prevention and careful risk acceptance continued to pay off. Such strong profit growth is exceptional for this market. The satellite activities in Germany and Belgium, which both use direct marketing to offer simple variable insurance and savings products under the MoneyMaxx name, had contrasting results. While MoneyMaxx Germany increased its sales sharply and reinforced its position as one of the top five firms in its segment, MoneyMaxx Belgium is re-evaluating its direct marketing strategy. Preparations for the introduction of the euro were skillfully managed and completed well before the end of the year. This substantial and complex project not only aimed to safeguard business continuity but also to strengthen relationships with independent intermediaries across the country, providing expertise and support. Smooth introduction of the euro within the company was achieved thanks to the dedication of all those involved in the implementation project. The growing appeal of saving was reflected in a 24% increase of entrusted savings at Spaarbeleg Bank that provides customers with a convenient savings system. Another asset-accumulating success was the innovative collaboration with Albert Heijn, the Netherlands' leading supermarket chain. Products such as MoneyMaxx are ideally suited to web-based distribution and marketing. AEGON The Netherlands resources help establish and develop MoneyMaxx activities in a number of countries. The cost/revenue ratio again improved in 2001, thanks to the streamlining of the back office system, outsourcing and integration of IT and internet into the business activities of all business units. To help improve efficiency and reduce costs, AEGON The Netherlands business units make increasing use of centralized back-office support for IT, administration and policy issuance. AEGON Asset Management The Netherlands: In the asset management field AEGON The Netherlands was, like all other investment institutions, affected by depressed equity markets. But its relative performance was strong and AEGON Asset Management The Netherlands continued to increase the volume of internal and third party funds under management. It entered the retail investment market with the launch of six mutual funds. The proven track record of its fixed income department over the years has increasingly become a marketing point with institutions. AEGON The Netherlands will continue to consolidate common activities on production platforms to achieve cost leadership and improved customer service. IT and on-line services will be standardized and utilized to extend and develop the agent network. Domestically, the product line will be expanded with emphasis on savings, specialized insurance and pension products. United Kingdom - -------------- AEGON UK performed well in challenging markets. Although there was a decline in asset gathering and though margins were under pressure, profitability remained good. In 2001, a year of market uncertainty in which the number of major players again declined, the strong reputation of AEGON UK's largest company - Scottish Equitable - with Independent Financial Advisors (IFAs) bore fruit. With a flight to quality stimulated by some well-publicized insurance failures, and with the stakeholder pensions program off to an uncertain start, Scottish Equitable emerged as just one of a handful of providers in the UK corporate pensions market perceived as offering top quality products and services, a reliable commitment to its business partners and superior financial strength. Scottish Equitable's commitment to being at the forefront of industry developments was reinforced when it was one of the first five companies to have succeeded in
-47- achieving accreditation under the Association of British Insurers 'Raising Standards' initiative - an industry initiative aimed at increasing consumer confidence by addressing the industry's poor image. As Britain enters a period of regulatory change, AEGON UK contributed actively to the ongoing debate about the future shape of the pensions and investment industry. Scottish Equitable continued to focus on IFAs as its preferred distribution channel for investment and protection sales. Despite a slow start and tight controls on charges, the stakeholder pensions initiative provided a strong stimulus for the group pensions market. Group risk or employee benefits emerged as an important activity following the integration of the Guardian Employee Benefits business and re-branding under the Scottish Equitable banner. Parallel to the group protection activities, AEGON Individual Protection - selling individual lines - was formed in the beginning of 2001 and achieved early success, with results more than doubling the sales forecast. The objective is to build a top five positioning in this GBP 1 billion a year market segment. Following the full integration of Guardian, AEGON UK began a process of increased utilization of the low cost administrative capabilities of Lytham St Annes, renaming the unit AEGON UK Services. The complementary business HS Administrative Services, acquired in 2000, is one of the largest third party pension scheme administrators, and opens the door to many new business opportunities for AEGON UK. Scottish Equitable International, the unit responsible for marketing overseas products to UK customers, experienced a difficult year due to the slowdown in single premium investment products. AEGON Asset Management UK: Under government encouragement, defined benefit plan sponsors began to reduce the traditionally high exposure to equities in favor of more risk-averse assets with higher yields. A surge in pension fund demand for corporate bonds has been fuelled by fears of a slowdown, impending regulation and demographic shifts. AEGON Asset Management UK won the Fixed Interest Manager of the Year award from a prestigious trade publication. This enhanced its established reputation as a manager of balanced investment mandates. Over 65 professional portfolio managers oversee GBP 33 billion in assets for a variety of institutions and individual investors, a five-fold increase since 1994. As the regulatory debate concerning pension and regulatory reform moves into higher gear with new proposals to liberalize the way pensions, investments and savings plans are sold in Britain, AEGON UK will continue to work with partners to ensure a healthy industry. the company will continu to growt and fully integrate the IT-systems to improve efficiency and industry accessibility of services and reduce expenses. As customers and advisors seek out strong, well-capitalized providers in anticipation of these changes, AEGON UK will seek to take full advantage of growth opportunities. Finally, continued focus on cost control during a period of further growth will enhance our cost competitiveness. Hungary: In 2001 AEGON Hungary established itself as one of the country's top sellers of new life policies and delivered good profits growth with the help of its stable, high-quality sales force. As a result of extensive investment and reorganization, AEGON Hungary has now consolidated a dominant market position in both the life and non-life sector. In the life sector production rose as the rationale for private pensions continued to gain wider acceptance despite some backtracking on pension reform by the Government. The majority of life sales came through the Composite sales channel, focusing on the mass market. With variable products selling strongly, AEGON Hungary launched a number of innovative products including a fast-growing endowment-type mortgage. AEGON Hungary is already the country's largest institutional investor and is, in partnership with a leading Austrian bank, playing an innovative role in local mortgage financing with the provision of tied insurance products. AEGON Hungary is well placed to expand market share in private sector group pensions once there is greater clarity in reforms to the social security system. In the meantime, it
-48- continues to acquire group pension customers including the 7,000-person group pension plan of a major European industrial group. In the non-life sector, AEGON Hungary retained its market leading position in household insurance, and continued to scale back the motor portfolio to improve returns. Market share in the corporate non-life sector was maintained at nearly 50%. During 2001, AEGON Hungary took a number of steps to boost profitability, including de-emphasizing low-margin single premium life and unprofitable general insurance segments. Notwithstanding substantial flood loss claims in 2001, AEGON Hungary now enjoys a dominant share of insurance industry profits in Hungary. To improve customer service and leverage the high morale and effectiveness of sales staff, the call center was taken in-house after extensive staff retraining. For the coming year AEGON Hungary will continue to emphasize profitability while retaining sales leadership. One third of sales are expected to come through new distribution channels, while technology including internet access will be renewed and updated. AEGON Hungary continues to investigate growth opportunities elsewhere in the region. Spain: AEGON Spain's life insurance results declined due to a turbulent year caused by a shifting of assets away from falling equities, results in general and health were good in 2001. All three units continued to focus on portfolio quality, more targeted sales and greater process efficiency. National market coverage was extended using the multi-channel strategy and by focusing on the quality of agent relationships. As in other markets, unit-linked sales slowed sharply as consumers sought more traditional savings and investment products. This caused a dramatic fall-off in single premium sales volumes, especially through banks, which used the falling stock market to encourage clients to select other investment and savings alternatives. To offset this volume loss, AEGON Spain is emphasizing a targeted sales approach focused on generating recurring premium sales from three market segments: highly-educated urban professionals, owners and employees of small to medium enterprises and on the increasingly prosperous and relatively underserved rural sector.Non-life activities exceeded the previous year's gains, because of revamped property and casualty insurance. Vigorous efforts to improve the motor insurance portfolio's quality bore fruit, thanks to process efficiencies and upgraded IT systems. There is greater accountability of agents when writing policies and evaluating risks, while they enjoy much greater branch support. As a result, there was once again improved handling of routine functions at head office using powerful IT support. The health sector yielded good returns, benefiting from cross-selling by general insurance agents. Problems with the state-funded national health program did not, however, make matters easier for the private sector. For this sector to enjoy really rapid growth, tax laws will need to be changed, or compulsory health cover phased out. During its first full year, MoneyMaxx Spain grew with around 1,000 new contracts per month. AEGON Spain will focus on educating consumers and growing life insurance sales. Significant energy will again be devoted to improving process efficiency through training and better customer risk profiling for agents. AEGON Spain will continue to support agents and financial advisors as they respond to customer needs for greater flexibility and performance. Taiwan: AEGON Taiwan, the Group's first `greenfield' operation in Asia, enjoyed a productive year, increasing scale through organic growth and acquisition, while achieving industry-leading agent productivity. The productivity of AEGON sales agents was well above the national average, thanks to training and strong back-office support. Operations in Taiwan are growing quickly and expected to move into profit in 2002. AEGON Taiwan's priorities for 2002 are to expand the agency force and build up the broker distribution channel, which is expected to provide strong growth. New rules also permit the launch of variable products in
-49- the coming year. The prime objective is to become one of the top three foreign insurers. AEGON Taiwan continues to review acquisition opportunities and will also provide support for developing activities in China. China: Plans to tap the huge potential of mainland China's market received a welcome boost last 25th September, when AEGON received an operating license from Chinese government authorities. Subsequently, AEGON is negotiating with a local joint venture partner as a prelude to opening up operations in a leading city within this highly promising new market. AEGON believes China's huge potential can best be realized by mobilizing the resources within the entire Group to create a distinctive offer and build significant market share in what is expected to become a competitive environment. Unconsolidated group companies - ------------------------------ Transamerica Finance Corporation is a non-core operation. Management has spent the last year concentrating the business on market segments where there is a clear competency and strategic advantage in terms of market position. Nearly a dozen smaller businesses representing approximately 15% of total assets have been sold or liquidated. The operations are now clearly directed towards three key segments: commercial finance, leasing activities and real estate information services. During 2001 the operating results were negatively affected by the exiting business lines, the slowing economy and the events of 11 September. Yet, the remaining clearly focused businesses are expected to profit from fundamental improvements and developments. Certain effects of US GAAP - -------------------------- Net income based upon US GAAP accounting principles was EUR 632 million for 2001 compared to EUR 2,588 million for 2000. The decline is mainly caused by realized gains and losses on real estate and shares. In the reconciliation there was a positive effect of EUR 999 million in 2000 compared to a negative effect of EUR 1,160 million in 2001. Included in these numbers is the reversal of the indirect return as well. The US GAAP earnings for 2001 are EUR 1,765 million lower than those based upon Dutch accounting principles. The most significant differences between earnings based upon Dutch accounting principles and US GAAP accounting principles include: EUR (1,160) million of realized losses on real estate and shares; EUR (496) million of goodwill amortization; and EUR (343) gain on sale of Mexico joint ventures not recognized for US GAAP until 2002. A more complete reconciliation with explanations of the differences between the accounting policies can be found in Note 5 to the consolidated financial statements. Investments - ----------- AEGON's general account investment assets increased 16% to EUR 131 billion (USD 115 billion) during 2001 and now represent 43% of total investments. This part of AEGON's investment portfolio represents assets accumulated related to products on which AEGON carries the investment risk and earns a spread. In the Americas and the Netherlands, the increase in fixed income securities is for the largest part the result of increased new production. The general account portfolios in the Netherlands and the Americas which comprise 98% of total general account investments, performed well compared to their relevant benchmarks. The investment portfolio was slightly re-balanced from equities towards fixed income during the year, partly driven by lower equity markets. At the end of 2001, 92% of the general account portfolio was invested in fixed income securities and 8% in equity securities. The quality of the fixed income portfolio was stable partly as a result of write-downs following increased default activity in the US fixed income portfolios. There were no major adjustments to the credit profile or the diversity of the total portfolio. Investments for the account of policyholders, which include unit linked products and separate accounts, decreased by EUR 1 billion to EUR 113 billion and represent 37% of total investments. On these assets the investment risk is borne by the policyholders, and the assets generate largely fee income for AEGON. The gradual shift from investments in fixed income securities to equity securities in this category continued during 2001. The largest part (62%) of the investments for the account of policyholders remains allocated to equities.
-50- The investment portfolio for banking activities increased in 2001 from EUR 5.5 billion to EUR 7.0 billion at year-end, as a result of strong production of savings products in the Netherlands. Off-balance sheet investments, on which AEGON also earns fees, increased strongly to EUR 54 billion, representing 18% of the total investment portfolio. This category includes assets, which are related to third party managed assets, mutual funds and synthetic GICs. Growth in this investment category was mainly driven by the strong growth of synthetic GIC-sales in the US. Notwithstanding the effects of corporate bankruptcies, increased volatility, and a general decline in credit quality during the year, AEGON's investment approach continues to be geared towards generating stable long-term returns. This applies to all asset categories managed by AEGON: investments for the account of policyholders, investments linked to AEGON's long term product liabilities, and increasingly, assets managed for third parties. By focusing on high quality fixed income assets, AEGON worked hard to mitigate the worst effects of the negative investment climate last year. The balanced product portfolio is mirrored by AEGON's balanced approach to portfolio investment. Investment strategy is geared toward long term and relatively stable returns based on careful matching of assets and liabilities. Nearly half the EUR 251 billion in investments shown on AEGON's balance sheet is self-directed by the clients, making use of a wide variety of available investment options according to individual risk-reward profiles. EUR 131 billion is managed by AEGON for its general account, largely by means of a high quality fixed income portfolio. The portfolio for general account felt the effects of the highly volatile economic environment of 2001, characterized by unexpected corporate failures and rapid depreciation of credit ratings, resulting in EUR 608 million (USD 545 million) charges against the provision for asset impairments in AEGON USA. Measured over the longer term, AEGON's credit quality experience remains good, with an average of just 20-30 basis points of default exposure. 2000 compared to 1999 - --------------------- Net income for the year 2000 totaled EUR 2,066 million, an increase of 32% over 1999. Earnings per share rose 23% to a new record of EUR 1.57. Excluding the effects of acquisitions, divestitures and currency exchange rate movements, net income per share increased 12%. Higher average currency exchange rates to the euro (especially the US dollar and the British pound) had a positive effect of 10%. The remaining positive effect of 1% stems from acquisitions and divestitures. The main factors behind the continued earnings growth were the strong internal growth in all major business units and the successful integration of acquired businesses (Transamerica in the US, Guardian in the UK, NN Life in Canada and Covadonga in Spain). Results from Transamerica's insurance activities and Guardian have been included for the full twelve months of 2000 and for just over five and for six months respectively in 1999. Life insurance and pension results rose 41% to EUR 3,003 million in 2000, comprising 90% of the Group's income before tax, excluding interest and other charges. Starting with the full year results of 2000, AEGON provides a further segmentation of life insurance and pension earnings, which are commented on in the country unit results which follow. In general, all life and pension product segments were positively influenced by the inclusion of the acquired activities as well as the currency effect. In comparing the earnings increase in the fourth quarter of 2000 with the increase in the same period of the previous year, it should be taken into account that in the fourth quarter of 1999 a relatively large proportion of Transamerica earnings, as well as six months Guardian earnings, were included in AEGON's results. Accident & health insurance results increased 19% to EUR 172 million due to improved results in the Netherlands and a positive currency influence, offset somewhat by lower results in US dollars in the USA. General insurance results increased from a EUR 2 million loss in 1999 to a EUR 60 million profit in 2000. Results in Spain recovered from 1999, whereas the results in the Netherlands deteriorated due to several large claims. Income before tax from banking activities declined as a result of the sale of Bank Labouchere. Results from continuing banking activities increased to EUR 47 million.
-51- Interest charges on US dollar and pound sterling denominated debt rose as a result of the increased currency exchange rate of the US dollar and the pound sterling against the euro and due to the accounting changes related to the Transamerica non-insurance businesses. Total revenues rose to EUR 30.7 billion (USD 28.4 billion), an increase of 37% (11% autonomous). Total premium income grew 39% (13% autonomous) to EUR 20.8 billion (USD 19.2 billion), with the majority of the difference accounted for by currency exchange differences. Overall new life insurance premium production increased 42% on a standardized basis. Gross deposits increased 38% totaling EUR 29,034 million. The overall increase in gross margin was 29%, while commissions and expenses increased 27%. Fixed annuity deposits grew 36% to EUR 5.0 billion (USD 4.6 billion) and variable annuity deposits increased 90% to EUR 9.0 billion (USD 8.3 billion), largely driven by increased production from AEGON USA's autonomous operations. GIC and funding agreement deposits rose 27% to EUR 11.5 billion (USD 10.7 billion). Investment income increased by 44% (6% autonomous). Americas - -------- The American operations of AEGON, which include the AEGON USA and Transamerica companies in the United States and Canada, and AEGON's partnership with Banamex in Mexico, provide life and health insurance, pension and investment, life reinsurance and other related financial products and services. Net income increased 33% - in US dollar terms - to USD 1,237 million in the full year. Income before tax rose 32% to USD 1,870 million. Gross margin showed a 29% increase, while commissions and expenses increased 28%. Earnings from the Transamerica insurance activities have been included since July 21 of 1999 and many of these activities have been merged into the AEGON USA structure. The transition of corporate wide systems was completed in the second half of 2000. No separate figures are available for the Transamerica insurance activities as the integration is largely completed. Expense reductions realized from the integration totaled USD 145 million in 2000, and the expected total annual savings are expected to reach USD 200 million after all consolidation activities are completed and the benefits realized for a full year. Life insurance income before tax increased 36% to USD 1,743 million (1999: USD 1,285 million). All life segments were positively influenced by the acquired Transamerica insurance activities. Income before tax from traditional life totaled USD 853 million (up 39%), while income from fixed annuities was USD 426 million, up 19%. Income before tax from GICs and funding agreements amounted to USD 165 million, which was up 18%. Life for the account of policyholders contributed USD 95 million (up 76%), while variable annuities produced USD 130 million (up 124%). Fee business increased to USD 74 million (up 25%). Traditional life results include positive development of single premium institutional balances (BOLI), fixed universal life balances, policy reserves and favorable investment spreads. Fixed annuity and GIC results also reflect favorable investment spreads as well as higher account balances. Variable life and annuities reflect higher average account balances during the year. Fee income reflects higher average mutual fund balances during the year. All life segments have benefited from improved expense margins. Life insurance premium income (excluding annuity and GIC deposits) increased 51% to USD 6,846 million (1999: USD 4,521 million). The increase was in large part due to the inclusion of Transamerica premium income, an increase in Bank Owned Life Insurance (BOLI) production and of variable universal life premium. New life insurance premium production totaled USD 1,167 million on a standardized basis, up 66%. Gross annuity and GIC deposits totaled USD 23,555 million, up 27%, of which fixed annuities amounted to USD 4,592 million, up 19% and variable annuities contributed USD 8,299 million, up 65%. GIC deposits and funding agreements totaled USD 10,664 million, which was an increase of 11%. Accident & health insurance income before tax totaled USD 124 million (1999: USD 131 million) reflecting the run-off of some discontinued product lines. Accident & health insurance premium income totaled USD 1,722 million (1999: USD 1,341 million). AEGON USA's organic growth accelerated broadly last year in the wake of the acquisition of Transamerica in mid-1999, while net income grew by 33%.
-52- With twelve divisions serving a broad range of specialized market segments and providing a healthy mix of stability and growth, AEGON USA group of operating companies are leading life insurers in one of the world's largest markets. Integration of Transamerica was a major focus in the year under review with the integration process now nearly complete; the acquisition is more than meeting synergy and growth expectations. Three new business units were established within AEGON USA's decentralized structure, while the balance of Transamerica's activities were merged into five existing AEGON business units: Transamerica corporate functions performed in San Francisco and Los Angeles were consolidated in Cedar Rapids, yielding important savings. The Transamerica data center in Los Angeles was fully integrated into AEGON's Cedar Rapids facility, while Transamerica Investment Management and AEGON USA Investment Management reallocated investment responsibilities to optimize the performance of the investment portfolio. A number of non-core activities acquired with Transamerica were disposed of in the course of the year, realizing aggregate proceeds of over USD 1 billion. After a review of available options, it was decided to retain certain non-insurance activities, principally distribution and inventory finance, real estate tax services and container leasing, conducted by Transamerica Finance Corporation . Agency Group: The four divisions of the Agency Group offer a broad range of insurance and investment products, primarily through over 100,000 insurance and investment professionals: independent insurance agents, financial advisors, career agents, marketing companies and registered representatives who typically develop long-term relationships with end consumers by providing value-added financial planning advice, products and services. Variable life and variable annuities were the Group's growth stars last year: AEGON USA is now one of the leading providers of these flexible, investment-linked products, which continue to find great favor with consumers as a savings and retirement tool. Specialized products such as Bank- and Corporate-Owned Life Insurance (BOLI/COLI) also achieved extraordinary growth, driven by focused marketing and the quality of AEGON's financial ratings. Traditional life and fixed annuities' sales grew at a more moderate pace, but were important contributors to profits. Collectively, the Agency Group boosted its income contribution and accounted for 44% of AEGON USA's pre-tax income last year. Alternative Markets Group: Specializing either by product type (long-term care, reinsurance) or by distribution channel (financial institutions, direct sales, internet, worksite marketing, securities brokers), the five divisions of the Alternative Markets Group increased their profit contribution in 2000, accounting for 41% of AEGON USA's total. The Alternative Markets Group's flagship, the Financial Markets Division (FMD), further broadened its role with many of the largest financial institutions in the United States as a supplier of high quality retirement, asset accumulation and wealth transfer products and services. Reflecting the rapid growth of variable annuity sales through these channels, the FMD business mix has evolved from almost total reliance on traditional fixed products four years ago to a balanced mix of fixed and variable products in 2000. Special Markets Group is one of the largest direct marketers of life and supplemental health insurance products in the United States. With the recently announced acquisition of J.C. Penney's Direct Marketing Services, Special Markets Group will become the largest direct marketing organization. Transamerica Reinsurance expertise in risk management, financial management and business consulting provides a strong platform for growth in the reinsurance market. Pension Group: Providing innovative savings and investment products to institutional clients, along with retirement plans for small to large employer groups, the Pension Group's three business units all continue to grow at a rapid pace, lifting their profit contribution, which now represents 15% of the AEGON USA's total. Particularly in the corporate pension area, the use of web-based information and on-line customer service transactions has become a key competitive strength. Award-winning user-friendly participant account access and state-of-the-art financial planning tools have been successfully introduced to over 10,000 corporate customers, representing some one million individual participants. In the institutional market, a close working relationship with major clients and a growing array of new product designs for specific institutional market niches enabled AEGON USA's small team of specialists to generate over USD 16.6 billion in wholesale production last year.
-53- Canada: Pretax income of AEGON's activities in Canada amounted to USD 76 million in 2000, including the result of the NN Life acquisition. With the acquisition and integration of NN Life last year, Transamerica Canada quickly and decisively established itself as the Canadian leader with a 17% share of the sale of individual life insurance and segregated asset funds. Capitalizing on its heightened profile in the wake of the acquisition announcement and on the excellent performance ratings of its revitalized investment management activities, Transamerica Canada strengthened its distribution network of some 18,000 sales people, boosting volumes and margins simultaneously. The key task in the coming year will be to further diversify the product offering and develop a multi-brand strategy while relying on Transamerica Canada's position as an efficient, low cost producer. Transamerica Canada will further develop its leading positions in the life, pensions and investment sectors in the wake of the NN Life acquisition last year. Mexico: The pre-tax results for Seguros Banamex AEGON (SBA) and Afore Banamex AEGON (Afore) in Mexico further increased to USD 63 million (up 31%), reflecting the continued positive development of these businesses. SBA's earnings were positively influenced by a continued favorable claims experience. Seguros Banamex AEGON and Afore Banamex AEGON, the joint ventures with Banamex, Mexico's leading bank, in the bancassurance and pension fund management markets respectively, continued their progress. They now rank nationally 6th in life insurance, 4th in pensions and 2nd in asset size of the pension fund management business. Together, they have made Mexico AEGON's fifth largest national market in terms of profit contribution. Growth benefited from strong underlying demand for pension and life insurance products and from consolidation in the Mexican banking sector. The continuing improvement in the sales skills of the banking branch network has increased both the quality and level of business. In the current year, expansion of the personal insurance product offering should further reinforce the productivity and leverage the effectiveness of the branch network. North of the border, the two partners are cooperating on VITAmerica, a pilot project targeted at serving the insurance and investment needs of the fast growing and increasingly affluent Hispanic population in the United States. The Netherlands - --------------- Excluding the earnings contribution from Labouchere, net income rose 11%, while income before tax rose 14% to EUR 840 million. Excluding Labouchere gross margin increased 9%, while commissions and expenses increased by 1%. Higher investment income in the pensions business and an increase in profitability within the life insurance business units contributed to the rise in income before tax. Income before tax from life insurance rose 12% to EUR 727 million. Traditional life was responsible for EUR 577 million, an increase of 12%, while life for the account of policyholders amounted to EUR 150 million, up 12%. Anticipating changes in the tax laws consumers purchased more life insurance, opting more often for single premium products instead of recurring premium policies. Expecting this shift to occur, AEGON The Netherlands concentrated its efforts on expanding its market position in the single premium product segment. This movement towards a preponderance of single premium products and investment contracts is reflected in the 16% overall decrease in new life insurance premium production, on a standardized basis, which totaled EUR 301 million. Conversely, investment contract sales increased 102%, totaling EUR 938 million. AEGON Bank earnings growth was driven by continued strong spread performance at Spaarbeleg Bank and high sales of security lease products at Spaarbeleg Bank and Personal Lines. Non-life insurance income before tax increased 12% to EUR 66 million, despite several large claims, amongst which claims resulting from the explosion of a fireworks factory in Enschede. The increase can be attributed to the 70% higher results from accident & health insurance, totaling EUR 34 million.
-54- Working closely with its key distribution partners, AEGON The Netherlands continued to grow revenues and profits in its highly competitive market by developing attractive new products and keeping tight control on costs. Changes in Dutch tax and pension legislation boosted single premium production life and spurred further demand for investment-linked products among Dutch consumers. The retail business units focusing on this segment were quick to respond. Variable universal life and similar unit-linked products now account for fully 60% of AEGON Personal Lines' new production, with single premium products replacing traditional recurring premium policies. Sales of security leasing products grew substantially at AEGON Personal Lines and the products were labeled for Nederlandse VerzekeringsGroep and AXENT/AEGON. Securities leasing products enable the consumer to build a stock portfolio through installment purchasing. Spaarbeleg, providing mass-market investment products, has been notably successful in cross-selling more sophisticated products to traditional savers. It fielded a new 'paper-free' savings product via the internet, while also introducing a hugely successful securities leasing product. All business units have now integrated the internet into their business activities, with some thirty websites launched to date. The growing volumes of individual business oriented towards equity investment has led AEGON The Netherlands' Investment unit to significantly strengthen its organization. Professional asset management has become increasingly important. AEGON The Netherlands has therefore restructured the existing competence center into a business unit with its own profit responsibility. This unit will be strongly expanded and will concentrate on both the internal and external market for third party money. Thus, the unit will be able to continue to add value to internal and external portfolios by capitalizing effectively on AEGON's disciplined approach in equity and fixed income investments and the company's structured tactical asset allocation decision making. The Group life and pension business units serving many of the Netherland's leading corporations as well as a host of small and medium-sized enterprises also grew successfully last year, gaining market share. Working closely with AEGON's corporate pension clients were the worksite marketing specialists from Financieel Compleet, who sell value-adding products and services for individual plan participants developed by other business units that supplement group pension programs. Financieel Compleet's popular, cost-effective individual products and its face-to-face advice have become important supports for AEGON marketing to potential group clients, as well as generating a stream of profitable on-going supplementary business. Non-life insurance activities remained profitable, notwithstanding the Enschede disaster, emphasizing loss prevention programs and maintaining a disciplined underwriting and pricing policy. Personal insurance is getting more and more emphasis, object insurance less. AEGON The Netherlands' support for its key distribution partners, the professional intermediaries, takes the form not only of training and technical assistance but occasionally even more direct involvement: AEGON The Netherlands has financed the Kamerbeek Meeus Groep, a large professional intermediary, while many of Financieel Compleet's worksite marketing specialists are insurance professionals now working as AEGON franchisee. A particularly innovative joint venture has been established by AEGON with Albert Heijn, the Netherlands' leading supermarket chain, to distribute easy to use products through its store network. Cost control and productivity drives last year included the outsourcing of certain EDP functions, expanding the use of shared production platforms to support multiple brands, and growing reliance on money-saving technologies such as the internet and call centers. These and similar initiatives enabled AEGON The Netherlands to continue to improve its cost/revenue ratio, for the fifteenth consecutive year. MoneyMaxx, the international version of Spaarbeleg administered by AEGON The Netherlands, continued its roll-out and is now active in six countries outside the Netherlands, including the US. The activities in Germany and Belgium continued to achieve growth in the production of their unit-linked products. In the autumn of 2000 MoneyMaxx Italy was started. United Kingdom - -------------- AEGON UK net income, including full year earnings from the acquired Guardian businesses, increased by 38% in pounds sterling to GBP 160 million. Income before tax rose 40% to GBP 219 million. Overall gross margin increased by 22%, while commissions and expenses rose 7%.
-55- Traditional life contributed GBP 31 million (down 6%) while life for the account of policyholders totaled GBP 180 million, which was an increase of 44%. Fee business contributed GBP 8 million. The decrease in traditional life insurance income is in line with expectations and flows with the shift in consumer preference for more flexible products with investments for the account of policyholders. The growth of the in-force block plus market value increases resulted in higher fund management and asset related charges compared to 1999. Assets under management amounted to GBP 34 billion at December 31. The increase in total premium income amounted to 21%. New premium production of GBP 538 million, measured on a standardized basis, including Guardian, increased by 21%. AEGON UK outperformed its market and reinforced its position as a key provider of life, pension and investment products and services for the corporate and personal markets. Net profits rose 38%, while new business volumes increased by 21%. The Guardian activities acquired in 1999 were successfully integrated during the course of the year, yielding greater than anticipated economies and an important impetus to growth. By rounding out Scottish Equitable's traditional strengths in pensions and investments with well-designed employee benefit and individual protection products, the Guardian acquisition has reinforced Scottish Equitable's strategy of making itself the preferred choice for Independent Financial Advisors (IFAs), who remain the UK's largest and fastest growing distribution channel for life assurance, pension and investment products. The strategy to gain a presence in markets complementary to existing strong market positions was also behind the acquisition in 2000 of HS Administrative Services, a leading provider of third-party pension administrative services for large blue chip corporate clients. The success of this strategy can be seen in Scottish Equitable's strong positioning in the emerging competition for stakeholder pensions. Fostered by new fiscal legislation and enjoying broader bipartisan political support than many previous government initiatives, stakeholder pensions are designed to encourage pension savings by lower and lower middle income wage-earners not currently covered by conventional private pension schemes. The run-up to the introduction of stakeholder pensions has also stimulated the general pensions market as companies are reassessing their existing programs in light of the new legislation. Scottish Equitable is well placed to take advantage of the resulting business opportunities. Scottish Equitable's substantial investment in recent years in state-of-the-art information systems and electronic customer service capabilities, such as its 'SmartScheme' web-based service for IFAs, plan sponsors and individual participants in its existing portfolio of group pension plans, has given it the capacity and cost structure needed to operate profitably in stakeholder pensions. Together with its IFA partners, it will aggressively target this potentially huge growth area, while continuing to benefit from the buoyancy of the general pensions market. The Personal Investment products and services of Scottish Equitable and Scottish Equitable International have continued to show rapid growth and now account for over 25% of total premiums within the AEGON UK group of companies. AEGON Asset Management UK enjoyed successful growth in its second year as an autonomous business unit: assets under management totaled GBP 34 billion at year-end, including over a billion pounds in third-party mandates. AEGON Asset Management UK's recognized expertise in both bond and equity investment, and its growing array of specialized equity mutual funds, provide effective asset management support to AEGON UK's other business units, and also provide the basis for pursuing additional third-party business. Other countries - --------------- Total net income from the activities in other countries amounted to EUR 48 million (1999: EUR 11 million loss). Total life insurance income before tax from Other countries totaled EUR 28 million. Life insurance premium income increased 32% to EUR 509 million. Standardized new life insurance premium production was EUR 126 million, up 9%.
-56- Hungary - ------- AEGON Hungary's net income for 2000 increased 10% and totaled EUR 44 million (1999: EUR 40 million). The insurance operations in Hungary continued their earnings growth as new premium production surged in excess of the overall market growth rate and persistency improved, reflecting the improvement in sales quality and customer service, strong cost control, a successful annuity redemption campaign and favorable claim experiences. In a generally favorable economic climate, AEGON Hungary continued to achieve strong organic growth in sales and earnings as well as assets under management. Despite the continued run-off of the old state insurance portfolio and lukewarm political support for expanding the new private pension system, AEGON Hungary's sales of modern AEGON branded life insurance and pension products rose by over 50% during the year, as increasing affluence and the spread of private sector employee benefit plans, particularly among foreign investors, underpinned both individual and group demand. Like their counterparts elsewhere, Hungarian consumers increasingly demand a combination of life insurance-investment products, as reflected in the fourfold increase in single premium product sales. While creating exciting new sales opportunities, this shift is putting pressure on margins and increasing the need for flexible, customer-responsive marketing and service. Accordingly, management worked to further flatten the organization and streamline the reporting structure, encourage individual salesmanship and productivity and eliminate organizational inefficiencies and overlaps. As a result, activities are increasingly grouped around and focused on specific market segments. Equally important, costs remained well under control and are set for further reductions in the coming year. In the non-life sector, AB-AEGON retained its dominant position in household insurance, increasing its market share to over 50%, while scaling back its motor insurance portfolio to improve returns. Profitability remains good. Although internet is not yet a commonly used channel in the Hungarian market, further internet initiatives were taken in 2000 by launching another unit-linked product, which made a promising start. In the spring of 2000, MoneyMaxx Hungary was introduced with a simple, high yield unit-linked product. Spain - ----- AEGON Spain's net income rose to EUR 13 million (1999: EUR 51 million loss). The life insurance operations in Spain are being supported by the growth in the life insurance market and the acquisition of Covadonga. Several organizational actions, such as cleaning of the portfolio and rate increases, resulted in an increase of income before tax from non-life insurance activities to EUR 8 million (1999: EUR 55 million loss). Continued strong gains in the life sector, coupled with effective redress measures in the motor insurance business, enabled AEGON Spain to post a solid return to profitability in the year under review. The growth in life insurance activities was strong as revenues increased 23%. From a negligible base, life now accounts for nearly 50% of AEGON Spain's revenues and is expected to represent some two thirds of the total within the next three years. Powering the growth in life is the increasing popularity of unit-linked products with a strong investment element, a product sector where AEGON Spain is particularly well positioned. Also, the effectiveness of a multi-channel distribution strategy relying on agents, direct sales, partnerships with financial institutions and growing use of the internet achieve national market coverage. This country unit also profited from a keen eye on external growth opportunities, including the successful integration of Covadonga, a life insurer acquired late in 1999, as well as bancassurance opportunities. Strong forward momentum - the formation of a new sales team specializing in serving Spain's fast-changing group pension sector and the successful roll-out of MoneyMaxx in the Spanish market - all bode well for continuing progress in the life sector. Non-life activities benefited from the easing of the crisis in motor insurance resulting in a somewhat more acceptable price level; AEGON Spain's vigorous efforts to help its agents identify and eliminate bad risks and fraudulent claims, while attracting preferred risks, have sanitized the motor insurance portfolio and restored profitability with only a minor dip in overall premium volume. Household and other general insurance also
-57- benefited from the improved agent relationship. Health insurance grew in line with the market and yielded good returns. The MoneyMaxx activities continued to grow according to plan: both the response to the intensive marketing campaign and the number of new clients. Asia - ---- AEGON Taiwan almost tripled its size in terms of both premium income and assets, thanks to continued strong organic growth in life insurance sales and integration of Transamerica's Taiwanese operation. Its growing scale and the high productivity of its career agents, coupled with AEGON's financial support, established a sound platform for further growth in Taiwan's consolidating insurance market. The AEGON and Transamerica branches are being converted into a subsidiary. This is expected to be achieved in the middle of 2001. The enlarged operation will concentrate on autonomous growth, with priorities on expanding the existing sales network and adding new distribution channels, while in the meantime actively pursuing acquisition opportunities. Unconsolidated group companies - ------------------------------ The non-insurance operations acquired with the Transamerica acquisition include lending, leasing and real estate services. Following the accounting change effected as per June 30, net earnings of USD 27 million (EUR 29 million) from these activities have been included in AEGON's 2000 results. Based on Dutch Accounting Principles, total net income for the full year 2000 amounted to USD 141 million compared to USD 189 million for the same period of 1999 (of which USD 92 million from July 21 to December 31, 1999). The earnings decline is primarily due to strategic divestitures, higher interest cost and increased credit losses, which were partially offset by an increase in income from the lending business. Revenues increased 4% to USD 2,135 million. The increase was mainly attributable to higher lending revenues from larger net finance receivables outstanding. During the fourth quarter, the assets of the domestic products leasing division and certain retail finance receivables were sold resulting in a small book profit. Certain effects of US GAAP - -------------------------- Net income for 2000 based on US GAAP was EUR 2,588 million compared to EUR 1,601 million in 1999. An analysis of the difference between Dutch and US GAAP is provided in Note 5 to the consolidated financial statements. LIQUIDITY AND CAPITAL RESOURCES Liquidity in the insurance industry generally refers to the ability of a company to meet all of its cash requirements with funds provided from normal cash flow from operations. AEGON's net cash provided by operating activities, calculated in accordance with International Accounting Standard 7, for the three years ended 2001 amounted to EUR 0.7, 3.0 and 21.6 billion respectively. Net cash used in investing activities was EUR 10.0, 6.8 and 24.1 billion respectively, while net cash provided by financing activities amounted to EUR 9.4, 3.5 and 2.3 billion for these years. Cash flows from operations have been sufficient to fund normal operating needs. Due to continuous positive cash flows, AEGON has never encountered difficulties in arranging desired short term borrowings. AEGON anticipates that cash flow will continue to be sufficient to service its fixed and other obligations as they become due. When capital market circumstances are attractive, AEGON periodically borrows short term funds to invest in anticipation of premium receipts expected in the near future from interest-sharing policies in order to fix a positive spread between the yield earned on the investment and the interest to be paid on the related policies.
-58- The Company's long-term liabilities increased from EUR 4,025 million at year-end 2000 to EUR 5,084 million at year-end 2001. Subordinated loans decreased to EUR 670 million at year-end 2001 from EUR 683 million at year-end 2000 and capital securities and trust pass-through securities increased to EUR 2,101 million at year-end 2001 from EUR 1,820 million at year-end 2000. During 2001, the largest effects on AEGON's capital base were the issue of new shares to fund the acquisition of the insurance activities of JC Penney (EUR 1.7 billion) and the negative revaluation (balance of realized and unrealized results) of AEGON's equity and real estate investments for general account (EUR 1.5 billion). Other negative effects include goodwill charged to shareholders' equity (EUR 286 million), cash settlement of stock option plans (EUR 71 million) and the redemption of convertible subordinated loans (EUR 68 million). Positive effects on shareholders' equity include retained earnings (EUR 1.3 billion), currency exchange rate differences (EUR 386 million) and the return on capital upon the sale of AEGON's joint ventures in Mexico to Citigroup (EUR 602 million). To facilitate the debt funding related to the Transamerica acquisition, AEGON founded AEGON Funding Corp. during 1999 and AEGON Funding Corp. II in 2000. Funding raised by these entities enjoys a full and unconditional guarantee from AEGON NV. AEGON Funding Corp raises funds through a USD 4.5 billion Global Commercial Paper program. In addition, AEGON Funding Corp. II issued EUR 350 million of 4.75% Bonds due in 2005. AEGON NV accessed the perpetual debt market in the Netherlands by increasing its EUR 450 million 6.875% Perpetual Subordinated Cumulative Bonds to EUR 700 million principal amount. With regard to other funding activities operational funding requirements were slightly higher in 2001 compared to prior years as a result of the funding provided to Transamerica Finance Corp. (TFC). AEGON agreed to provide the long-term funding of the Transamerica non-insurance businesses internally, and to guarantee outstanding amounts under TFC's commercial paper program. AEGON has further employed its access to the capital markets through private placements issued under its USD 3 billion Euro Medium Term Notes Program. Additionally, a USD 2 billion Euro Commercial Paper Program facilitates access to international and domestic money markets when required. At December 31, 2001 AEGON NV has issued EUR 1,888 million under the Medium Term Note program (see Note 4.4.6 to the consolidated financial statements) and nil under the Commercial Paper program. AEGON maintains back-up credit facilities for outstanding debt under its Commercial Paper programs. Its committed facilities negotiated with banks of excellent standing and credit quality exceed USD 3.2 billion. In addition, AEGON enjoys an extensive amount of additional credit lines, while TFC has access to USD 4.5 billion of committed facilities. During the days immediately following 11 September 2001 AEGON maintained excellent access to liquidity through its outstanding name in worldwide money markets. AEGON's capital base reflects the capital employed in its core activities. The composition of the capital base was relatively stable during 2001 despite the marked decrease in worldwide equity markets. As a percentage of total capital, equity remained at 69%. AEGON will continue to target shareholders' equity to be at least 70% of total capital base, while limiting the portion of subordinated and senior debt to 25% of total capital. The remaining part - between 5% and 15% - - consists of capital securities. Additionally, AEGON applies capital adequacy measures for its operating units, which are aimed at maintaining strong capitalization. These self-imposed standards substantially exceed those of regulatory bodies in the various countries. AEGON remains committed to a strategy, which assures continued financial strength. In addition to strong credit ratings, this is reflected in the excellent insurance financial strength ratings assigned by both Standard & Poor's and Moody's to the operating units in the United States, the Netherlands, and the United Kingdom.
-59- Ratings: Standard & Poor's Moody's Credit ratings Commercial paper A-1+ P-1 Senior debt AA- Aa3 Subordinated debt A+ A1 Insurance financial strength AEGON USA AA+ Aa3/1/ AEGON The Netherlands AA+ Scottisch Equitable AA+ Aa2 /1/ Outlook positive Contractual Obligations and Commitments: <TABLE> <CAPTION> Contractual Cash Obligation In million EUR Payments Due by Period Total Amounts Less than 1 year 1-3 years 4-5 years After 5 years <S> <C> <C> <C> <C> <C> Notes payable 227 57 170 Operating leases 338 43 72 64 159 Long-term debt 7,855 1,517 1,745 1,342 3,251 Total contractual obligations 8,420 1,617 1,987 1,406 3,410 </TABLE> AEGON has an obligation at the end of 2002 to Mutual of New York related to the acquisition of Diversified Investment Advisors. In addition to the notes payable in the table a formula based purchase payment will be paid in early 2003. Other Commercial Commitments <TABLE> <CAPTION> Amount of commitment, expiration per period Total Amounts Less than 1 year 1-3 years 4-5 years After 5 years <S> <C> <C> <C> <C> <C> Standby letters of credit 1,513 927 106 170 310 Other commercial commitments 748 54 694 Total commercial commitments 2,261 981 106 170 1,004 </TABLE> Other commercial commitments include standby commitments to limited partnerships of EUR 694 million and private placement commitments of EUR 54 million. Synthetic Guaranteed Investment Contracts have been issued on EUR 32 billion off-balance sheet assets and provide benefit responsiveness, which may take the form of annuities, in the event that qualified plan benefit requests exceed plan cash flows. Funding requirements to date have been minimal and are not disclosed in the above table since management does not anticipate any future funding requirements that would have a material effect on reported financial results. Certain insurance and investment products have minimum guarantees for which adequate provision has been made in the technical reserves. AEGON has also guaranteed certain credit lines of Transamerica Finance Corporation with no borrowings outstanding at December 31, 2001. An AEGON subsidiary has formed a special purpose entity (SPV) for the issuance of asset backed commercial paper rated A-1+/P-1. The current program has a USD 2 billion cap (EUR 547 million outstanding at December 31, 2001) and is supported by funding agreements with a 5 day put option, a USD 500 million liquidity facility backstop, and a limitation that no more than USD 500 million of commercial paper can mature in any continuous 5 business day period.
-60- Subsequent events: The Supervisory Board of AEGON N.V. has the intention to appoint Mr. Kees J. Storm as a member of the Supervisory Board on 1 July 2002. The Supervisory Board has the intention to appoint Mr. Johan G. van der Werf, 49, as a member of the Executive Board of AEGON N.V. as from 18 April 2002. Mr. Van der Werf has been a member of the board of AEGON The Netherlands since 1992. Mr. Van der Werf has worked in the insurance industry since 1981, where he started as a District Sales Manager at AGO and fulfilled positions at Spaarbeleg, AEGON Life Commercial Lines and AEGON Personal Lines. The portfolio assignment from 18 April 2002 within the Executive Board will be as follows: Don J. Shepard Chairman of the Executive Board AEGON UK Paul van de Geijn AEGON USA, AEGON Hungary and AEGON Spain Jos B.M. Streppel Chief Financial Officer Johan G. van der Werf AEGON The Netherlands and MoneyMaxx AEGON USA, Inc. has named Patrick S. Baird President and Chief Executive Officer of AEGON USA and a member of the AEGON USA Board of Directors, effective April 19, 2002. Mr. Baird, 48, who currently serves as Executive Vice President and Chief Operating Officer of AEGON USA, Inc., has been with AEGON for over twenty years and held the positions of Director of Tax and Chief Financial Officer before assuming his current position. Item 6. Directors, Senior Management and Employees The Company is managed by an Executive Board, whose members are employed by AEGON N.V. The activities of the Executive Board are subject to the general supervision of the Supervisory Board which appoints the members of the Executive Board. Members of the Executive Board are appointed for an indefinite period and generally retire in the year they reach the age of 62. Certain transactions affecting AEGON as a whole, such as the issuance or cancellation of shares, application for listing on a stock exchange, major acquisitions, major capital expenditures and all matters concerning substantial changes in employee relations require the approval of the Supervisory Board. The Supervisory Board appoints its own members. The Executive Board, the General Meeting of Shareholders, and the Central Works Council may recommend candidates. The latter two also have a right to object to candidates proposed for appointment by the Supervisory Board. No employee of AEGON is eligible for appointment to the Supervisory Board. Members of the Supervisory Board are appointed for a maximum term of four years and may be re-appointed. However, members are required to retire in the year in which they reach the age of 70. Set forth below is certain information concerning the members of the Executive and Supervisory Boards of the Company. Executive Board - --------------- Kees Storm, 59, started his career at one of AEGON's predecessors in 1978 as member of the Executive Board. After the merger of AGO and ENNIA he was responsible for the insurance activities of AEGON USA, The Netherlands and Europe (excluding The Netherlands). In May 1993 he became Chairman of the Executive Board of AEGON N.V. He will retire on 1 July 2002 and as from 18 April 2002 Don Shepard will take over as a chairman of the Executive Board of AEGON N.V.
-61- Paul van de Geijn, 55, started his career at one of AEGON's predecessors in 1971 at the legal department. In 1984 he became Vice-president and in 1986 CEO of AEGON The Netherlands. In 1992 he joined the Executive Board of AEGON N.V. Don Shepard, 55, began his career with Life Investors in 1970. Serving in various management and executive functions with Life Investors, he became Executive Vice President and Chief Operating Officer in 1985, a position he held until AEGON consolidated its other US operations with Life Investors to form AEGON USA in 1989. He became a member of the Executive Board in 1992 and currently he is also Chairman, President and CEO of AEGON Americas. As per 18 April 2002 he will become the new chairman of AEGON N.V. Jos Streppel, 52, started his career in 1973 at one of AEGON's predecessors in several treasury and investment positions. In 1986 he became CFO and in 1987 he joined the Executive Board of FGH Bank. In 1991 he became CEO and Chairman of Labouchere and in 1995 also of FGH Bank. In 1998 he became Chief Financial Officer of AEGON N.V. Since May 2000 Streppel has been a member of the Executive Board of AEGON N.V. As per December 31, 2001 members of the Executive Board held an aggregate number of 764,073 shares in the company and 2,955,000 options on AEGON shares (see Note 2.7.). Supervisory Board - ----------------- D.G. Eustace, 65, British nationality, is chairman of Smith & Nephew plc (London, UK) and former Vice-Chairman of Royal Philips Electronics. He was appointed in 1997; his current term will end in 2005. He is also a member of the Supervisory Board of four Dutch companies, among which Royal Dutch Airlines (KLM) and Royal KPN. He is also the Chairman of the Audit Committee. O.J. Olcay, 65, American nationality, is vice-chairman and managing director of Fischer, Francis, Trees & Watts, Inc. (New York, USA). He was appointed in 1993; his current term will end in 2004. He is Chairman of FFTW Funds Inc. in New York, FFTW Funds Selection in Luxembourg and FFTW Funds in Dublin. Mr. Olcay is also a member of the Nominating Committee. Mrs. K.M.H. Peijs, 57, Dutch nationality, is a member of the European Parliament. She was appointed in 1992; her current term expires in 2004. She is also a Supervisory Board member of among others Royal Vendex KBB and DaimlerChrysler Nederland. Mrs. Peijs is a member of the Nominating Committee. G.A. Posthumus, 69, Dutch nationality, is a member of the Council of State in the Netherlands. He was appointed in 1997; his term expires in 2003. He is also a former member of the Executive Board of the I.M.F. Mr. Posthumus is also a member of the Audit Committee. Mrs. T. Rembe, 65, American nationality, is a partner of Pillsbury Winthrop LLP (San Francisco, USA). She was appointed in 2000; her current term will end in 2004. She is a member of the Board of Directors of Potlach Corporation (USA) and SBC Communications (USA). H. de Ruiter, 68, vice-chairman and Dutch nationality, is a retired managing director of Royal Dutch Petroleum Company and group managing director of Royal Dutch/Shell Group of Companies. He was appointed in 1993; his current term will end in 2004. He is a member of the Supervisory Boards of six Dutch companies, among which Royal Dutch Petroleum Company, Royal Ahold and Royal Vopak and a Board member of Corus Group. He is also a member of the Executive Committee of Vereniging AEGON and of Trust offices on behalf of some Dutch companies. He is also a member of, respectively, the Audit, Compensation and Nominating Committees. W.F.C. Stevens, 64, Dutch nationality, is a senior partner of Baker & McKenzie. He was appointed in 1997; his current term will end in 2005. He is a member of the Supervisory Boards of seven Dutch companies, among which NIB Capital and TBI Holdings, aside from some Board memberships which are exercised in relation to his principal occupation. Further he is a senator in the Dutch Parliament.
-62- M. Tabaksblat, 64, chairman and Dutch nationality, is chairman of Reed Elsevier PLC and a retired chairman and CEO of Unilever. He was appointed in 1990; his current term expires in 2005. He is also chairman of the Supervisory Board of TNT Post Group and a member of the Advisory Board of Ernst & Young, and of the International Advisory Boards of Salomon Smith Barney (USA) and of Renault Nissan. Furthermore he is a member of the Executive Committee of Vereniging AEGON. Moreover, he is the chairman of the Compensation and the Nominating Committee and a member of the Audit Committee. F.J. de Wit, 62, Dutch nationality, is a former chairman of the Executive Board of Koninklijke KNP BT. He was appointed in 1990; his current term will end in 2004. He is also a member of the Supervisory Boards of Oce and PontEecen. He is also a member of the Compensation Committee. Ownership of AEGON N.V. shares: The aggregate amount of AEGON N.V. common shares held by the Supervisory Board members was 20,581 as per December 31, 2001. Members of the Supervisory Board do not hold options on AEGON N.V. shares. Supervisory Board Committees: Without prejudice to its own responsibilities, the Supervisory Board relies upon Committees to deal more extensively with specific matters. Each Committee has four members, drawn from the Supervisory Board. The Audit Committee, active since 1983, held four meetings in 2001. All --------------- Executive Board members, the directors of the Group Finance and the Corporate Actuarial departments and E&Y, AEGON's external auditor, also attended these meetings. Discussions in 2001 were dominated by subjects on the Committee's permanent agenda: quarterly results, annual accounts and the auditing of the results and annual accounts by E&Y's accounting principles; internal control systems; actuarial analyses; AEGON's "Funding Plan" and "Currency Exposure" and the Group Wide Risk Report. The Committee also discussed E&Y's independence and its fees, in order to be able to advise on the reappointment of E&Y as AEGON's external auditor. The Audit Committee subsequently advised the Supervisory Board on its findings. The chairman and the vice-chairman of the Supervisory Board and Messrs. Eustace and Peters served as members of the Audit Committee. Following Mr. Peters retirement on 3 May 2001, Mr. Posthumus was appointed as a member. In accordance with the Audit Committee Charter, all members are highly experienced and competent in financial and accounting matters. The Compensation Committee, active since 1989, held three meetings in 2001, also ---------------------- attended by the Executive Board's chairman. Discussions concentrated on the structure of the remuneration of the Executive Board members and the granting of stock options to the Executive Board members. The Supervisory Board's chairman and vice-chairman and Mr. De Wit are members of this Committee, as was Sir Michael Jenkins until his resignation on 1 December 2001. He was succeeded by Mrs. Rembe. The Nominating Committee, active since 1993, held two meetings, attended also by -------------------- the Executive Board's chairman. The Committee discussed the composition of the Executive Board following Mr. Storm's retirement. The Supervisory Board's chairman and vice-chairman and Mrs. Peijs and Mr. Olcay are members of this Committee. In 2002, the Supervisory Board will establish a fourth body, the Strategy -------- Committee. The purpose of this Committee is to review the major features of the - --------- strategy proposed by the Executive Board and to prepare presentations of the strategy to the Supervisory Board, to suggest options and alternative avenues, and to consider material aspects relating to implementation of the agreed strategy. This Committee will meet at least once a year, well before the full Supervisory Board discusses AEGON's strategy. This Committee shall consist of four members. the Supervisory Board chairman and vice-chairman, Mr. Olcay and Mr. De Wit.
-63- Compensation of Directors and Officers: See Note 2.7 to the consolidated statements. Employees and Labor Relations: At the end of 2001, AEGON had 25,663 employees. Approximately 61% are employed in America, 12% in The Netherlands, 18% in the United Kingdom and 9% in Other countries. All of the Company's employees in The Netherlands, other than senior management, are covered by collective labor agreements which are generally renegotiated annually on an industry wide basis. In The Netherlands, employment agreements are generally collectively negotiated by all companies within a particular industry and then individual companies enter into employment agreements with their employees based on the relevant collective agreement. Since its founding, AEGON has participated in collective negotiations in the insurance industry and has based its employment agreements with its employees on the relevant collective agreement. The collective agreements are generally for one year duration. The Company has experienced no significant strike, work stoppage or labor dispute in recent years. Under Dutch law, the Central Works Council of the undertakings of AEGON in The Netherlands, whose members are elected by the employees, has certain defined powers, including the right to make non-binding recommendations for appointments to the Company's Supervisory Board and the right to enter objections against proposals for appointments to the Supervisory Board. The average number of employees per geographical area was: 2001 2000 1999 Americas 16,007 14,987 12,857 The Netherlands 3,073 3,059 3,786 United Kingdom 4,574 4,404 3,255 Other countries 2,136 1,927 2,172 ------ ------ ------ 25,790 24,377 22,070 Of which agent-employees 4,298 4,112 4,647 Item 7. Major Shareholders and Related Party Transactions At balance sheet date AEGON N.V. had one shareholder holding an interest of more than 5%. That major shareholder is the Dutch association "Vereniging AEGON", an independent shareholder of AEGON N.V. Vereniging AEGON is the continuation of the former mutual insurer AGO. In 1978 AGO demutualized and Vereniging AGO became the only shareholder of AGO Holding N.V., which was the holding company of its insurance operations. In 1983 AGO Holding N.V. and Ennia N.V. merged into AEGON N.V. Vereniging AGO initially received approximately 49% of the common shares (which shareholding was reduced gradually to 40%) and all of the preferred shares in AEGON N.V., giving it voting majority in AEGON N.V. and changed its name to Vereniging AEGON. The objective of the Vereniging is the balanced representation of the interests of AEGON N.V. and all of its stakeholders, i.e. shareholders, AEGON group companies, insured parties, employees and other relations of the said companies. In accordance with the stipulations of the 1983 Merger Agreement the Vereniging has a majority vote at the general meeting of shareholders of AEGON N.V. This is achieved by holding a minority interest in common shares and holding all issued preferred shares in AEGON N.V. As of December 31, 2001 this voting right stood at 52% (2000: 53%) and the Vereniging held 37% (2000: 37%) of the common shares in AEGON N.V. in
-64- circulation. The holding of common shares is intended to be increased gradually to approximately 40% while the holding of preferred shares will be reduced simultaneously. <TABLE> <CAPTION> Number of Percent Number of Percent shares owned of class shares owned of class ------------ -------- ------------ -------- Number of shares Preferred Common <S> <C> <C> <C> <C> As of January 1, 2001 440,000,000 499,658,001 Stock dividends received 6,324,785 Purchase price of EUR 32.04 per share 11,288,800 ----------- ----------- As of December 31, 2001 440,000,000 100 517,271,586 37 </TABLE> As of December 31, 2001 the General Meeting of Members of the Vereniging consisted of 21 elected members. Seventeen of these are not an employee or former employee of AEGON N.V or one of its group companies, nor a (former) member of the Supervisory Board or the Executive Board of AEGON N.V. They hold the majority of the voting rights. Of the four other members two are elected from among the members of the Supervisory Board and two are elected from among the members of the Executive Board of AEGON N.V. The Vereniging has an Executive Committee consisting of eight members, half of whom, including the chairman and the vice-chairman, are not, nor have been associated with the AEGON Group; the other half consists of the four above mentioned members who hold a position within AEGON N.V. When a vote in the Executive Committee results in a tie, the General Meeting of Members has the deciding vote. On June 29, 2001 AEGON NV entered into a Total Return Swap (TRS) with Vereniging AEGON in order to hedge the stock option plan for 2001. The TRS gives AEGON NV effectively the right to the capital gains on 11,288,800 AEGON NV shares at the termination date and to the dividends on these shares during the contract period. The capital gains are calculated based on an exercise price of EUR 32.04. Any losses compared to the exercise price will be paid by AEGON NV to Vereniging AEGON upon termination. AEGON NV in return will pay interest to Vereniging AEGON on a quarterly basis over the (remaining) amount outstanding under the TRS. The interest rate is equal to the 3 month EURIBOR plus a spread. The TRS ends on March 12, 2006 but may be terminated earlier, either partly or entirely, at the option of AEGON NV. The total return swap is carried at fair value with changes in fair value reported in equity. Interest of Management in Certain Transactions: None Item 8. Financial Information See Item 18. Legal Proceedings Some of the Company's subsidiaries and affiliates are parties to litigation in the ordinary course of their business, including litigation where compensatory or punitive damages are sought. The Company believes that resolution of these suits will have no material impact on the Company.
-65- Dividend policy: AEGON has declared interim and final dividends annually. Each year a final dividend has been paid (around May) upon approval of the annual accounts at the Annual General Meeting of shareholders. Interim dividends have been paid (around August) after the release of the six months results. The payout ratio of 47% has been unchanged from 1995. Usually the dividends have been made available in cash or in stock at the option of the shareholder. The value of the stock alternative may differ slightly from the value of the cash option. Under normal circumstances the interim dividend is equal to 50% of the total dividend of the preceding year. Dividends are based on net income per share. Item 9. The Offer and Listing Since the merger of AGO and Ennia in November 1983, the principal market for AEGON's Common Shares has been Euronext Amsterdam. The Company's Common Shares are also listed on the New York Stock Exchange (NYSE) and the Frankfurt, London, Tokyo and Zurich stock exchanges. The table below sets forth, for the calendar periods indicated, the high and low closing prices of AEGON's Common Shares on Euronext Amsterdam as reported by the "Officiele Prijscourant", the official daily newspaper of the association of brokers and securities dealers in The Netherlands and the high and low sales prices on the New York Stock Exchange. Share prices have been adjusted for all stock splits through December 31, 2001. Amsterdam New York Exchanges (EUR) Stock Exchange (USD) --------------- -------------------- High Low High Low 1997 20.49 12.35 22.47 15.35 1998 53.12 20.84 62.88 22.28 1999 55.47 34.75 65.00 36.07 2000 48.30 33.57 49.12 32.12 2001 44.06 23.04 41.56 21.00 2000 first quarter 48.23 33.58 49.13 32.13 second quarter 44.37 36.42 42.56 34.50 third quarter 45.65 36.36 41.25 33.06 fourth quarter 48.30 42.75 42.88 35.81 2001 first quarter 44.06 30.24 41.56 27.33 second quarter 38.27 31.22 34.08 26.60 third quarter 35.26 23.04 31.65 21.00 fourth quarter 31.40 26.52 28.25 24.61 September 2001 33.19 23.04 30.20 21.00 October 2001 31.07 26.52 28.25 24.61 November 2001 31.40 28.08 28.01 25.35 December 2001 31.05 28.59 28.01 25.35 January 2002 30.40 27.00 27.04 23.50 February 2002 26.42 23.88 23.00 20.86 Trading on Euronext Amsterdam has been in euros since January 4, 1999. Prior year figures have been translated at a rate of EUR 1 = NLG 2.20371.
-66- AEGON's common shares (1,422 million outstanding at December 31, 2001) are held by shareholders worldwide in bearer and registered form. In The Netherlands 525 million shares are in registered form (of which 415 million shares are held by Vereniging AEGON). In the United States 131 million shares are "Shares of New York Registry" (New York shares). Based on information that has been collected from custodians and registers, AEGON estimates that American shareholders in total hold approximately 284 million AEGON shares (New York shares and bearer shares) at December 31, 2001. Bearer shares and registered shares may be exchanged on a one for one basis. On Euronext Amsterdam only bearer shares may be traded and on the New York Stock Exchange only New York shares may be traded. Item 10. Additional Information Memorandum and Articles of Association The Company is registered under number 27076669 in the Commercial Register of the Chamber of Commerce and Industries for Haaglanden, The Hague, The Netherlands. The company's objects-clause is described in article 3 of its articles of association as follows: Objects and Purposes -------------------- (1) The objectives of the Company are to incorporate, acquire and alienate shares and interests in, to finance and grant security for commitments of, to enter into general business relationships with and to manage and grant services to legal entities and other entities, in particular those involved in the insurance business, as well as to conduct any other activity which might further advance these objectives. These objectives shall be construed as broadly as possible. (2) In achieving the aforesaid objectives due regard shall be taken, within the scope of sound business operations, to provide fair safeguards for the interests of all the parties directly or indirectly involved in the Company. Certain Duties and Powers of Directors -------------------------------------- There are no provision in AEGON's s articles of association or charter and bylaws with respect to: (a) a director's power to vote on a proposal, arrangement or contract in which the director is materially interested (in case of conflicting interests, the law provide that AEGON should be represented by the Supervisory Board); (b) the directors' power, in the absence of an independent quorum, to vote compensation to themselves or any members of their body; (c) borrowing powers exercisable by the directors and how such borrowing powers can be varied; (d) retirement or non-retirement of executive directors under an age limit requirement (the Supervisory Board Directors should retire at the age of 70 years); and (e) number of shares, if any, required for director's qualification. Description of AEGON's Capital Stock ------------------------------------ The company has 2 types of shares: (i) Ordinary shares, (ii) Preferred shares. Both types have the following common characteristics: (a) All shares have dividend rights except for those shares (if any) held by the company as treasury stock. Dividends, which have not been claimed within 5 years, shall lapse to the company; (b) Each outstanding share is entitled to one vote except for shares held by the company as treasury stock. There are no upward restrictions. Directors are not appointed by shareholders;
-67- (c) All shares have the right to share in the company's net profits. Net profits is the amount of profits after contributions if any to a surplus fund; (d) All shares have the right to share in any surplus in the event of liquidation after settlement of all debts; (e) The general meeting of shareholders may resolve on a decrease of the outstanding capital either by (i) repurchase of shares by the company followed by cancellation or (ii) by a decrease of the nominal share value. On a proposal of the executive board the general meeting of shareholders may also resolve on repayment, in whole or in part, of the paid in capital on the preferred shares. (f) There are no sinking fund provisions; (g) The shares are issued fully paid up so no liability to further capital calls is involved; (h) There are no provision discriminating against any existing or prospective holder of such securities as a result of such shareholder owning a substantial number of shares. The differences between ordinary and preferred shares are: (1) The ordinary shares are listed; the preferred shares are non-listed. (2) Dividends on preferred shares are restricted to a fixed rate at a certain percentage as set by the European Central Bank for basic refinancing transactions increased by 1.75%. No additional dividend is paid on the preferred shares and the remaining profit is available for distribution to the holder of ordinary shares. (3) Any credit balance after settlement of all debts will first be allocated (as far as possible) to repayment of the paid in capital on the preferred stock. Actions necessary to change the rights of the holders of the stock ------------------------------------------------------------------ In order to change the right of holders of stock the Articles of Association have to be amended to that respect. The General Meeting of Shareholders (Annual General Meeting or Extraordinary General Meeting) may only pass a resolution for an amendment of the articles upon a proposal of the Executive Board, which is approved by the Supervisory Board. The resolution should be taken by a majority vote in a meeting with a quorum of at least 50% of the outstanding shares present or represented. The actual change of the text of the articles will be executed by a civil law notary upon certification of no objections by the Minister of Justice. Conditions under which meetings are held ---------------------------------------- Annual General Meetings and Extraordinary General Meetings of Shareholders shall be convened for holders of shares to bearer by an announcement in a Dutch daily news paper and in the official list of the Amsterdam stock exchange Euronext. At least 15-days' notice shall be given, excluding the day of the notice and the day of the meeting. The notice in the newspaper shall contain a summary agenda and indicate the place where the full agenda can be obtained. To registered holders the agenda will be sent to their address or their broker. In the other countries where the AEGON N.V. stock is listed publication shall take place in accordance with local requirements. For admittance to the meeting holders of bearer shares must produce evidence of their share holding as per a record date set by the Executive Board upon convening the meeting. Holders of registered shares must notify the company of their intention to attend the meeting. Limitation on the rights to own securities ------------------------------------------ There are no such limitations in the Articles of Association nor in compulsory law.
-68- Provisions that would have the effect of delaying a change of control --------------------------------------------------------------------- There are no such provisions in the Articles of Association. Threshold above which shareholder ownership must be disclosed ------------------------------------------------------------- There are no such by-law provisions. Material difference between Dutch Law and US law with respect to the items -------------------------------------------------------------------------- above. ----- Dutch Company law is significantly different from US law in the following areas: The Dutch type of Articles of Association (or Articles of Incorporation) does not only include the Anglo-Saxon concept of Articles of Incorporation but also the concept of "by-laws". AEGON N.V., like other large Dutch public companies, has a two-tier governance system. This typically involves a management or executive board and a supervisory board. The executive board is the executive body. Its members are employed by the company. The supervisory board has supervising and advising functions only and its members are outsiders and cannot be employed by the company. The supervisory board has as its duties to supervise the administration by the executive board and the general course of business of the Company and the enterprise associated with it and to assist the executive board with advice. Members of the executive board are not appointed by the General Meeting of Shareholders but by the supervisory board. Other powers of a supervisory board are adoption of the annual accounts as prepared by management for presentation and approval by shareholders and prior approval of certain important resolutions of the executive board. The members of the supervisory board are appointed by the supervisory board itself. The General Meeting of Shareholders however, the executive board and the employee works council may recommend persons for vacancies in the supervisory board. Moreover the General Meeting and the works council can raise objections to an intended appointment. The compensation paid to the executive board members is fixed by the supervisory board; the compensation for the supervisory board is fixed by the general meeting of shareholders. Dutch law requires public disclosure to a supervising government agency and the company involved with respect to the ownership of listed shares when the following thresholds are passed: 5%, 10%, 25%, 50% and 66 2/3%. Special conditions governing changes in the capital --------------------------------------------------- There are no more stringent conditions than required by law. Documents on Display AEGON files annual reports with and furnishes other information to the Securities and Exchange Commission. You may read and copy any document filed with or furnished to the SEC by AEGON at the SEC's public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. AEGON's SEC filings are also available to the public through the SEC's web site at www.sec.gov. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room in Washington D.C. and in other locations. As allowed by the SEC, this Annual Report on Form 20-F does not contain all the information you can find in this Annual Report on Form 20-F or the exhibits to the this Annual Report on Form 20-F. The SEC allows AEGON to "incorporate by reference" information into this Annual Report on Form 20-F, which means that: incorporated documents are considered part of this Annual Report on Form 20-F; AEGON can disclose important information to you by referring you to those documents; These documents contain important information about the AEGON Group and our financial condition. You may obtain copies of these documents in the manner described above. You may also request a copy of these documents (excluding exhibits) at no cost by contacting us as follows:
-69- Investor Relations Investor Relations AEGON N.V. AEGON USA, Inc. P.O. Box 202 1111 North Charles Street 2501 CE The Hague Baltimore, MD 21201 The Netherlands USA Tel: 011-31-70-344-8305 Tel: 1-410-576-4577 Fax: 011-31-70-383-2773 Fax:1-410-347-8685 E-mail: groupir@aegon.nl E-mail: ir@aegonusa.com Material Contracts There are no such contracts. Exchange Controls There are no legislative or other legal provisions currently in force in The Netherlands or arising under the Company's Articles of Incorporation restricting remittances to holders of securities of the Company not resident in The Netherlands. Cash dividends payable in euros on Common Shares of the Company may be officially transferred from The Netherlands and converted into any other convertible currency. There are no limitations, either by the laws of The Netherlands or in the Company's Articles of Incorporation, on the right of non-residents of The Netherlands to hold or vote the Company's Common Shares. Taxation The Netherlands impose a withholding tax on dividends of 25%. The withholding tax does not apply to stock dividends which are payable out of the for tax purposes recognized paid-in surplus of the Company. If a holder is resident in a country other than The Netherlands and if a treaty for the avoidance of double taxation with respect to taxes on income is in effect between The Netherlands and such country, and the holder is the beneficial owner of the dividends and a qualifying resident for purposes of the treaty, the holder will, depending on the terms of the particular treaty, qualify for full or partial relief or for a refund (in whole or in part) of the Dutch dividend withholding tax. Residents of the United States that qualify for, and comply with the procedures for claiming benefits under the income tax convention between The Netherlands and the United States (NL/US income tax treaty), generally are eligible for a reduction of up to 15% of the Dutch withholding tax on dividend income. The NL/US income tax treaty provides a complete exemption for dividends receiving by exempt pension trusts and exempt organizations, as defined therein. A holder of the common shares will qualify for benefits under the NL/US income tax treaty (subject to compliance with the procedures for claiming benefits) if the holder: . is the beneficial owner of the common shares and the dividends paid on those common shares; . is resident in the United States; . is not also resident in another jurisdicition; . does not hold the common shares in connection with the conduct of business in The Netherlands; and
-70- . is an individual, an exempt pension trust or exempt organization (as defined in the NL/US income tax treaty), an estate or trust whose income is subject to U.S: taxation as the income of a resident, either in its hands or in the hands of its beneficiaries, or a corporation that is not subject to the treaty's limitation of benefits provision. Dividend distributions on the common shares and capital gains realized upon the disposal of the common shares for a holder that is not resident nor deemed to be resident in The Netherlands for Dutch tax purposes (and, in the case of an individual holder, has not opted to be taxed as a resident of The Netherlands) are not taxable in The Netherlands, provided that: . the holder does not have an enterprise or an interest in an enterprise that is carried on through a permanent establishment or a permanent representative in The Netherlands to which the common shares are attributable; . the holder is not entitled to share in the profits of an enterprise that is effectively managed in The Netherlands, other than by way of securities or through an employment contract, and to which enterprise the common shares are attributable; and . with respect to an individual holder, the dividend distributions or capital gains do not qualify as income from miscellaneous activities in The Netherlands within the meaning of Section 3.4 of the Income Tax Act 2001, which include the performance of activities in The Netherlands with respect to the common shares that exceed "regular, active portfolio management" (normaal, actief vermogensbeheer). No gift or inheritance taxes will arise in The Netherlands in respect of an acquisition of the common shares by way of gift by, or as a result of the death of, an individual holder who is neither resident nor deemed to be a resident of The Netherlands, unless: . the individual holder at the time of the gift has, or at the time of his or her death had, an interest in a Dutch enterprise to which the common shares are or were attributable; . the common shares are or were attributable to the assets of an enterprise that is effectively managed in The Netherlands and the donor is, or the deceased was, entitled, other than by way of securities or through an employment contract, to a share in the profits of that enterprise at the time of the gift or, as applicable, at the time of his or her death; or . in the case of a gift of the common shares by an individual who at the date of the gift was neither resident nor deemed to be resident in The Netherlands, such individual dies within 180 days after the date of the gift, if at the time of his or her death such individual was a resident or deemed to be a resident of The Netherlands. Item 11. Quantitative and Qualitative Disclosure about Market Risk Also see Item 5. Sensitivity Analysis - -------------------- The sensitivity analysis on forecasted 2002 net income and shareholders' equity - - presented in the table below - is performed for each risk category independently. It should be noted however, that the results presented below are derived from static analyses that are performed without taking into account correlation between factors, assuming unchanged conditions for all other assets and liabilities and no management actions taken. Also it should be noted that the effects presented only relate to 2002 forecasted net earnings and shareholders' equity; no conclusions should be drawn for subsequent years.
-71- The sensitivity analysis shows the effect of movements in the exchange rates of AEGON's most important currencies relative to the euro on forecasted net income and shareholders' equity. The table shows that a decrease of 15% in non-euro currency rates would result in a negative impact on net income of around 11% and on shareholders' equity of approximately 13.5%, mainly as a result of currency translation. Conversely, an increase of 15% in these exchange rates would result in a positive impact on net income of 11% and on shareholders' equity of 13.5%. Movements of other currency exchange rates do not have a material impact on net income and shareholders' equity. AEGON's accounting policy of deferring and amortizing capital gains on equity and real estate investments in the general account portfolio makes our net income less sensitive to the effects of volatile equity markets than it would otherwise be. However, as the allocation of investments held for account of policyholders is for over 62% in equity securities, net income will become more sensitive to the fees related to these assets. The sensitivity analysis shows that net income would be approximately 4.5% lower and shareholders' equity approximately 8% lower after a decrease of 15% in equity and real estate markets. Conversely, an increase of 15% in these markets would result in a positive impact on net income of 4.5% and on shareholders' equity of 8%. AEGON is not directly exposed to commodity markets. For US GAAP purposes, net income is more volatile as equity and real estate gains are recognized when realized. A meaningful US GAAP net income sensitivity is not practicable, as changes in the market may not coincide with the timing of the realization. In line with the balance AEGON has between its books of interest sensitive and interest insensitive businesses and the relatively low duration mismatch of the AEGON Group, the sensitivity analysis shows that the potential effect of interest rate changes on forecasted 2002 net income is minimal. A simultaneous decrease of worldwide interest rates of 1 % from the current levels would have a positive effect on earnings of approximately 0.5%. Conversely, an increase of worldwide interest rates of 1% would have a 0.5% negative influence on earnings. As a consequence of the insurance and savings features in our products, the AEGON Group is exposed to mortality and longevity risk. On a regular basis we perform sensitivity analysis, which quantify the effect of mortality and longevity developments on our portfolios and technical provisions. If life expectancy would increase by one year, compared to our existing reserving basis, the positive effect on the technical provisions would be less than 0.5%. This implies that the AEGON Group has a well-balanced portfolio, in terms of mortality and longevity. Therefore, changes to mortality and longevity developments are not a current concern relative to our strong reserving basis. Sensitivity analysis: On forecasted 2002 earnings and shareholders' equity/1/ <TABLE> <CAPTION> Effects on Movement of markets Effects on net income shareholders' equity - -------------------------------------------------------------------------------------------------------------- <S> <C> <C> Interest rate markets/2/ Parallel yield curve shift up of 100 basis points between 0.0% and (1.0)% -- Parallel yield curve shift down of 100 basis points between 0.0% and 1.0% -- Currency markets/3/ Increase versus the euro of 15% between 10.5% and 11.5% between 13.0% and 14.0% Decrease versus the euro of 15% between (10.5)% and (11.5)% between (13.0)% and (14.0)% Equity and real estate markets/4/ Increase of equity and real estate markets of 15% between 4.0% and 5.0% between 7.5% and 8.5% Decrease of equity and real estate markets of 15% between (4.0)% and (5.0)% between (7.0)% and (8.5)% </TABLE>
-72- On technical reserves Effects on technical reserves - -------------------------------------------------------------------------------- Longevity Increase in average life expectancy of one year less than (0.5)% /1/ Basic assumptions: no correlation between markets and risks; unchanged conditions for all other assets and liabilities; no management actions taken; all changes are relative to forecasts for 2002. /2/ The effect of interest rate movements is reflected as the effect of a one-time parallel shift up or down of all relevant yield curves on 1 January 2002. /3/ The effect of currency movements is reflected as a one-time shift in value of the US dollar, Canadian dollar and the UK pound up or down on 1 January 2002. Movements of other currencies have a negligible influence on both net income and shareholders' equity. /4/ The effect of movements in equity and real estate markets is reflected as a one-time increase or decrease of worldwide equity and real estate markets on 1 January 2002. Item 12. Description of Securities other than Equity Securities Not applicable Item 13. Defaults, Dividend Arrearages and Delinquencies None Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds None Item 15. Reserved for future use Not applicable Item 16. Reserved for future use Not applicable Item 17. Financial Statements Not applicable
-73- Item 18. Financial Statements Note 5 to the consolidated financial statements includes a discussion of net income and shareholders' equity based upon accounting principles generally accepted in the United States. Item 19. Financial Statements and Exhibits <TABLE> <CAPTION> (a) Index of financial statements: Page ---- <S> <C> Report of independent auditors 74 Consolidated Balance Sheets 75 Consolidated Income Statements 78 Consolidated Cash Flow Statements 81 Notes to the Consolidated Financial Statements 82 List of Schedules: I Summary of investments - other than investments in related parties 159 III Supplementary insurance information 160 IV Reinsurance 161 V Valuation and qualifying accounts 162 (b) Index of Exhibits: 8.1 List of Group companies 163 12.1 Ratio of earnings to fixed charges 164 23.1 Consent of independent auditors with respect to consolidated financial statements and schedules of AEGON N.V. 165 </TABLE> The Company agrees to furnish to the Securities and Exchange Commission upon request copies of instruments with respect to long-term debt of the Company and its consolidated subsidiaries.
-74- REPORT OF INDEPENDENT AUDITORS We have audited the accompanying consolidated balance sheets of AEGON N.V. as of December 31, 2001 and 2000, and the related consolidated income statements and cash flow statements for each of the three years in the period ended December 31, 2001. Our audits also included the financial statement schedules listed in the Index at Item 19 (a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with auditing standards generally accepted in The Netherlands and the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of AEGON N.V. at December 31, 2001 and 2000 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in The Netherlands. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. As described in Notes 5 and 6 of Notes to the Consolidated Financial Statements, the Company's policy is to prepare its financial statements in accordance with accounting principles generally accepted in The Netherlands (Dutch Accounting Principles). Accounting principles generally accepted in The Netherlands vary in certain material respects from accounting principles generally accepted in the United States. An explanation of these differences, insofar as the determination of net income and shareholders equity, expressed in euros, is concerned, is presented in Note 5 of Notes to the Consolidated Financial Statements. Ernst & Young Accountants The Hague, The Netherlands March 7, 2002
-75- Consolidated Balance Sheets at December 31 (after profit appropriation) In accordance with Dutch Accounting Principles Amounts in million EUR Note 2001 2000 number Investments Real estate 1.1. 2,326 2,116 Group companies and participations 1.2. 3,280 2,300 Other financial investments 1.3. 135,809 117,294 Deposits with ceding undertakings 1.4. 30 27 ------- ------- 141,445 121,737 Investments for the account of policyholders 1.5. 113,272 114,286 Receivables Receivables out of direct insurance 1.6. 1,714 2,597 Receivables out of reinsurance 462 352 Other receivables 1.7. 4,152 2,590 ------- ------- 6,328 5,539 Other assets Equipment 1.8. 358 254 Liquid assets 1.9. 868 725 Other assets 67 61 ------- ------- 1,293 1,040 Prepayments and accrued income Accrued interest and rent 1,573 1,421 Other prepayments and accrued income 150 193 ------- ------- 1,723 1,614 ------- ------- Total assets 264,061 244,216 See Notes to the Consolidated Financial Statements
-76- Amounts in million EUR Note 2001 2000 number Capital and reserves 1.10. 15,292 12,844 Capital securities 1.11. 2,101 1,820 Subordinated (convertible) loans 1.12. 670 683 ------- ------- Equity and subordinated loans 18,063 15,347 Technical provisions 1.13. Life insurance 106,175 93,073 Unearned premiums and unexpired risks 775 715 Claims outstanding 2,398 2,407 Profit sharing and rebates 285 219 Other technical provisions 712 750 ------- ------- Gross 110,345 97,164 Reinsurers' share (3,094) (5,353) ------- ------- 107,251 91,811 Technical provisions with investments for the account of policyholders 1.14. Gross 113,639 114,637 Reinsurers' share (367) (351) ------- ------- 113,272 114,286 Provisions 1.15. 2,917 2,748 Long-term liabilities 1.16. 5,084 4,025 Deposits withheld from reinsurers 29 0 Current liabilities Payables out of direct insurance 3,110 4,353 Payables out of reinsurance 176 164 Amounts owed to credit institutions 3,235 2,047 Entrusted savings accounts and deposits 6,456 5,199 Other payables 1.17. 3,466 3,583 ------- ------- 16,443 15,346 Accruals and deferred income 1.18. 1,002 653 ------- ------- Total liabilities 264,061 244,216 See Notes to the Consolidated Financial Statements
-77- Summarized Consolidated Income Statements In accordance with Dutch Accounting Principles Amounts in million EUR <TABLE> <CAPTION> Note 2001 2000 1999 number <S> <C> <C> <C> <C> Revenues Gross premiums 21,578 20,771 14,980 Investment income 2.3. 9,933 9,612 6,690 Income from banking activities 2.4. 384 324 704 ------ ------ ------ Total revenues 31,895 30,707 22,374 Benefits and expenses Premiums to reinsurers 1,859 1,819 1,206 Benefits to policyholders 11,916 13,135 7,636 Change in technical provisions 2.5. 8,815 7,513 6,336 Profit sharing and rebates 2.6. 248 370 932 Commissions and expenses 2.7. 4,574 4,100 3,219 Interest charges 862 796 759 Miscellaneous income and expenditure 2.9. 378 135 105 ------ ------ ------ Total benefits and expenses 28,652 27,868 20,193 ------ ------ ------ Income before tax 3,243 2,839 2,181 Corporation tax 2.11. (918) (833) (611) Net income unconsolidated group companies 2.12. 72 60 0 ------ ------ ------ Net income 2,397 2,066 1,570 Net income per share - basic 1.76 1.57 1.28 Net income per share - diluted 1.75 1.55 1.26 </TABLE> See Notes to the Consolidated Financial Statements
-78- Consolidated Income Statements In accordance with Dutch Accounting Principles Amounts in million EUR <TABLE> <CAPTION> Technical Account Life Insurance Note 2001 2000 1999 number <S> <C> <C> <C> <C> Premiums for own account Gross premiums 18,281 17,983 12,802 Premiums to reinsurers (1,257) (1,210) (847) ------- ------- ------- 2.1. 17,024 16,773 11,955 Investment income 2.3. 9,339 9,182 6,308 Investment income for the account of policyholders (9,515) (3,495) 13,533 Benefits and surrenders own account Benefits to policyholders Gross (11,218) (12,521) (7,114) Reinsurers' share 883 758 605 ------- ------- ------- (10,335) (11,763) (6,509) Change in other technical provisions own account Provision for life insurance Gross 94 (4,466) (19,914) Reinsurers' share 889 662 284 ------- ------- ------- 983 (3,804) (19,630) Other technical provisions (39) (37) (34) ------- ------- ------- 944 (3,841) (19,664) Profit sharing and rebates 2.6. (248) (370) (932) Operating expenses 2.7. (3,233) (3,058) (2,248) Investment charges 2.8. (242) (296) (223) Other technical charges own account 2.9. (415) (129) (94) ------- ------- ------- 3,319 3,003 2,126 Investment income allocated to the non-technical account 2.10. (1,011) (940) (718) ------- ------- ------- Result technical account life 2,308 2,063 1,408 </TABLE> See Notes to the Consolidated Financial Statements
-79- Technical Account Non-Life Insurance Amounts in million EUR <TABLE> <CAPTION> Note 2001 2000 1999 number <S> <C> <C> <C> <C> Premiums earned for own account Gross premiums 3,297 2,788 2,178 Premiums to reinsurers (602) (609) (359) ------ ------ ------ 2,695 2,179 1,819 Change in technical provision unearned premiums and unexpired risks Gross (546) (198) (145) Reinsurers' share 198 (20) (33) ------ ------ ------ (348) (218) (178) ------ ------ ------ 2,347 1,961 1,641 Investment income 2.3. 501 352 292 Claims for own account Claims incurred Gross (1,945) (1,853) (1,408) Reinsurers' share 364 481 281 ------ ------ ------ (1,581) (1,372) (1,127) Change in provision for claims Gross 238 (171) (27) Reinsurers' share (134) 212 0 ------ ------ ------ 104 41 (27) ------ ------ ------ (1,477) (1,331) (1,154) Operating expenses 2.7. (1,053) (738) (615) Investment charges 2.8. (6) (9) (20) Other technical charges own account 2.9. (36) (3) (2) ------ ------ ------ 276 232 142 Investment income allocated to the non-technical account 2.10. (27) (27) (51) ------ ------ ------ Result technical account non-life 2.2. 249 205 91 </TABLE>
-80- Non-Technical Account Amounts in million EUR <TABLE> <CAPTION> Note 2001 2000 1999 number <S> <C> <C> <C> <C> Result technical account life insurance 2,308 2,063 1,408 Result technical account non-life insurance 249 205 91 Investment income 2.3. 93 78 90 Income from banking activities 2.4. 384 324 704 Allocated investment income transferred from technical accounts 2.10. 1,038 967 769 Operating expenses banking activities and other expenses 2.7. (96) (85) (211) Investment charges 2.8. (806) (710) (661) Miscellaneous income and expenditure 2.9. 73 (3) (9) ----- ----- ----- Income before tax 3,243 2,839 2,181 Corporation tax 2.11. (918) (833) (611) Net income unconsolidated group companies 2.12. 72 60 0 ----- ----- ----- Net income 2,397 2,066 1,570 </TABLE> See Notes to the Consolidated Financial Statements
-81- Consolidated Cash Flow Statements In accordance with Dutch Accounting Principles <TABLE> <CAPTION> Amounts in million EUR 2001 2000 1999 <S> <C> <C> <C> Cash flow from operating activities Net income 2,397 2,066 1,570 Increase technical provisions net of reinsurance (1,264) 3,253 20,775 Change in provisions (488) 348 215 Amortization of policy acquisition costs 1,422 1,284 885 Amortization of interest rate rebates 102 118 115 Depreciation of equipment 79 61 54 Change in current liabilities 734 (763) 2,284 Change in entrusted funds 1,257 (95) 253 Deferred policy acquisition costs (2,558) (2,393) (1,480) Interest rate rebates granted (94) (61) (17) Change in receivables (904) (796) (3,043) ------- ------- ------- 683 3,022 21,611 Cash flow from investing activities Invested and acquired Real estate and shares (3,980) (7,072) (2,153) Shares of group companies and subsidiaries (1,673) (979) (4,900) Other investments (89,966) (53,671) (38,912) Equipment (194) (159) (101) Disposed and redeemed Real estate and shares 3,335 7,955 2,974 Shares of group companies and subsidiaries 1,166 1,374 126 Other investments 78,254 49,413 37,753 Equipment 11 5 9 Indirect return real estate and shares (723) (595) (394) Change in investments for account of policyholders 4,123 (2,757) (18,451) Other (335) (323) (50) ------- ------- ------- (9,982) (6,809) (24,099) Cash flow from financing activities Change in subordinated and other long-term loans 1,107 588 660 Repurchased and sold own shares (21) (423) (315) Issuance of common shares 1,685 0 681 Issuance of preferred shares 0 0 12 Withdrawal of preferred shares 0 (15) 0 Change in deposits withheld from reinsurers 29 0 0 Options exercised 3 7 5 Settlement stock options (71) (200) (47) Cash settlement subordinated convertible loan (68) (24) (69) Dividend paid (544) (298) (487) Annuity, GIC and funding agreement deposits 26,381 25,506 17,445 Annuity, GIC and funding agreement repayments (19,059) (21,593) (15,558) ------- ------- ------- 9,442 3,548 2,327 Change in liquid assets 143 (239) (161) </TABLE>
-82- The cash flow statement has been set up according to the indirect method and also complies with International Accounting Standard No. 7. Only those changes affecting liquid assets have been taken into account. The effects of revaluation and currency exchange rate differences have therefore not been included. The impact of currency exchange rate differences on liquid assets denominated in foreign currencies is not material. Notes to the Consolidated Financial Statements Introduction These financial statements have been drawn up in accordance with the rules for financial statements of insurance companies in The Netherlands, embodied in Section 15 of Title 9, Book 2 of the Dutch Civil Code. A summarized consolidated income statement has been added to the required formats for balance sheet and profit and loss account in order to present a comprehensible view of the results of the AEGON Group. AEGON's accounting policies are in accordance with generally accepted accounting principles in the Netherlands and comply with the financial reporting requirements included in Title 9, Book 2 of the Dutch Civil Code. Since the introduction of the indirect return method by AEGON in 1995, the method became an accepted accounting policy in the insurance industry in the Netherlands. In 1997 AEGON has put a cap of 7% after tax on the indirect return. As announced in the annual report 2000, to bring the application of this method in line with current general practice, the cap on indirect return has been removed in 2001. The positive impact on 2001 pretax earnings amounted to EUR 72 million. For detailed information re the capital gains on real estate and shares refer to Note 4.4.5. On January 10, 2001, AEGON The Netherlands and Albert Heijn (part of the Royal Ahold Group) launched their co-operation under the name AH Geldzaken, offering an innovative savings product through the Albert Heijn supermarkets. On March 8, 2001, AEGON announced the acquisition of J.C. Penney's direct marketing insurance operations in the United States. As part of the agreement, J.C. Penney and AEGON entered into a 15 year strategic marketing alliance designed to offer an expanded range of financial and membership services products to J.C. Penney customers. The transaction was effective as of June 18, 2001. AEGON Life Insurance (Taiwan) Inc. in Taiwan and AXA National Mutual in Taiwan reached an agreement on the acquisition by AEGON of AXA's Taiwanese life insurance activities on October 10, 2001. The acquisition was completed at the end of 2001. A review of the impact on AEGON and its operations from the tragic events on September 11, 2001, in New York, Washington D.C. and Pennsylvania revealed that none of the operations were directly impacted by these events. Total claims cost in life insurance and life reinsurance amounted to EUR 33.5 million (USD 30 million) net of reinsurance, with an after tax earnings impact of EUR 22.4 million (USD 20 million). These results have been fully recognized in the 2001 financial statements. On January 18, 2002 AEGON announced the sale of its partnership interests in Seguros Banamex AEGON and Afore Banamex AEGON in Mexico to Citigroup's Grupo Financiero Banamex for an amount of EUR 1.41 billion (USD 1.24 billion). In addition, AEGON will receive EUR 44.7 million (USD 40 million) as dividend on the 2001 profits of the joint venture companies. The transaction was effective as of December 31, 2001 as parties had concluded negotiations and reached a basic agreement in principle by then. The consideration included a net book gain of EUR 896 million (USD 0.8 billion). This gain consists of EUR 602 million (USD 0.5 billion) of return on invested capital, which was charged to shareholders' equity as goodwill in earlier years. As a result, this EUR 602 million has been credited to shareholders' equity. The remaining EUR 343 million (USD 0.3 billion) represents a capital gain, which has been accounted for in the profit and loss account (EUR 294 million after tax).
-83- Consolidation principles In the consolidated financial statements of AEGON N.V. all group companies have been included, except for some group companies for which the aggregate financial effect is relatively insignificant and for companies which are not intended to be held for a long-term ownership. Also group companies of which consolidation would not result in a fair view of the group because of dissimilar activities have not been consolidated. The financial statements of these latter companies have been added separately in the notes. Their results have been included in the income statements on a separate line. Participations in joint ventures have been consolidated proportionally. Due to their insignificance the minority interests are included under other current liabilities. A list of names and locations of the most important group companies is given in Exhibit 8.1. With regard to the income statements of AEGON N.V., article 402, Book 2 of the Dutch Civil Code has been applied. Capital base Amounts in million EUR 2001 % 2000 % Shareholders' equity 15,292 69.4 12,844 69.1 Capital securities 2,101 9.5 1,820 9.8 Subordinated (convertible) debt 670 3.0 683 3.7 Senior debt related to insurance activities 3,982 18.1 3,245 17.4 ------ ----- ------ ----- Total capital base 22,045 100.0 18,592 100.0 AEGON's capital base reflects the capital employed in its insurance activities. AEGON manages the capital base to contain at least 70% shareholders' equity, between 5% and 15% capital securities, and a maximum of 25% subordinated and senior debt. Risk analysis As an international life insurance group, AEGON is exposed to currency fluctuations, to changes in mortality and longevity and to changes in the value of its investments, credit risk and the impact of interest rate changes. For information about risks and sensitivity of the group for movements in the interest rate markets, the currency markets and the equity and real estate markets, and their effects on net income and shareholders equity, refer to Item 5 and 11. Commitments and contingencies (Note 1.19) include comprehensive descriptions about derivatives used by AEGON. In the normal course of business, AEGON employs established policies and procedures to manage its exposures to changes in interest rates and fluctuations in the value of currencies using a variety of financial instruments. The credit risk on financial instruments is controlled by detailed internal guidelines for the acceptable level of credit risk, including exposure limits depending upon the respective counterparty credit rating and by regular monitoring thereof. In addition, the aggregated exposure to financial institutions is monitored at group level. Asset default provisions exist resulting from structural risk analysis based on counterparty credit rating, experience and topical developments. Technical provisions are reviewed regularly to detect adverse deviation from the underlying assumptions. If these tests reveal a negative outcome, the provision is adjusted according to the actual data. Deferred policy acquisition costs are tested annually to assess their recoverability from future premium loadings or expected gross profits. If necessary, adjustments to the amortization schedule are applied. Foreign currency Assets and liabilities denominated in foreign currencies are converted at the year-end exchange rates after consideration of transfer risks, where necessary.
-84- Income statement items in foreign currencies are converted at the average currency exchange rates for the reporting period. Currency exchange rate differences resulting from using year-end exchange rates as well as average exchange rates are charged or credited directly to shareholders' equity under the caption currency exchange rate differences. Currency exchange rate differences from not hedging shareholders' equity of subsidiaries not accounted for in euro, including results and related costs from the hedging transactions on those subsidiaries, are also charged or credited to shareholders' equity under the caption currency exchange rate differences. All other currency exchange rate differences are included in the income statements. The most important closing rates are: 2001 2000 US Dollar (USD) 0.88130 0.93050 Swiss Franc (CHF) 1.48290 1.52320 Pound Sterling (GBP) 0.60850 0.62410 Canadian Dollar (CAD) 1.40770 1.39650 Japanese Yen (JPY) 115.33000 106.92000 Hungarian Forint (HUF) 246.33000 264.94000 1. NOTES TO THE CONSOLIDATED BALANCE SHEETS Amounts in million EUR Accounting principles - --------------------- Where not otherwise stated, balance sheet items are carried at face value. If necessary a provision for bad and doubtful debts is deducted. Default provisions on fixed income investments are determined based on exposure limits, counterparty credit ratings and securities expected to have a higher probability of default relative to the market in which they trade. Credit risk on mortgages is monitored by assessing delay of payment classification combined with a related level of provision. Other asset provisions are formed as soon as any credit risk emerges. Assets and liabilities from banking activities and gains and losses on these activities are accounted for in accordance with the rules for banks. 2001 2000 1.1. Real estate Real estate for own use 375 293 Other real estate 1,951 1,823 ----- ----- 2,326 2,116 Real estate is shown at market value, being the selling-value under normal market circumstances. Each property is revalued at least once in every 5 year period. Valuation is for a large part based on external appraisal. In 2001 98% of the portfolio has been revalued. 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. The participation in AMVEST Vastgoed is accounted for under this caption. Purchase price of the portfolio amounts to EUR 1,832 million (2000: EUR 1,724 million).
-85- 2001 2000 1.2. Group companies and participations Shares in group companies 1,332 1,603 Loans to group companies 1,877 629 Other participations 71 64 Loans to other participations 0 4 ----- ----- 3,280 2,300 Interests in companies in which AEGON is able to influence operating policy, as well as group companies which are not consolidated because of their relative financial insignificance, are accounted for by inclusion of AEGON's proportion of the equity and the net income of the companies. Loans to group companies and participations are valued at face value. Interests in short term holdings are valued at cost less provisions where necessary. Dividends declared are included in the consolidated income statements. The Transamerica non-insurance businesses (Transamerica Finance Corporation) are accounted for under shares in group companies at net asset value. These group companies have not been consolidated because of their dissimilarity in operations. Consolidated financial statements have been included in Note 2.12. 1.3. Other financial investments Shares 8,336 8,666 Bonds and other fixed rate securities 73,660 61,240 Loans guaranteed by mortgages 20,537 18,244 Other loans 26,831 23,980 Deposits with credit institutions 1,553 1,215 Other financial investments 4,892 3,949 ------- ------- 135,809 117,294 Shares 8,336 8,666 Shares and convertible debentures reported under this caption are valued at their quoted price or, if unquoted, at estimated market value. Unrealized and realized gains and losses on shares 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. When optional dividend is taken up in shares, an amount equal to the cash dividend is credited to income. The participation in AEGON Aandelenfonds N.V. is also accounted for under this caption. Purchase price of the portfolio amounts to EUR 7,984 million (2000: EUR 7,653 million). Bonds and other fixed rate securities 73,660 61,240 Bonds are shown at amortized cost 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. The other fixed rate securities include preferred shares and money market investments. Preferred shares are valued at amortized cost; money market investments are valued at cost. Realized gains and losses from transactions within the bonds and private placements portfolios are deferred and released to the income statements in annual installments over the estimated average remaining maturity term of the investments sold.
-86- 2001 2000 Redemption value of the bonds 74,516 64,066 Deferred purchase differences (5,713) (6,887) ------- ------- Amortization value bonds 68,803 57,179 Other fixed rate securities 4,857 4,061 ------- ------- 73,660 61,240 Market value of these investments amounts to EUR 74,581 million (2000: EUR 61,191 million). For a proper understanding it should be noted that this market value is not part of the matching of these investments with the related insurance liabilities, which are not stated at market value either. The provision for doubtful debts for these investments amounts to EUR 276 million (2000: EUR 110 million). Loans guaranteed by mortgages 20,537 18,244 Loans guaranteed by mortgages are valued at redemption value. Discounts granted are deferred and amortized to income over the contractual period of interest fixation. Market value of the portfolio amounts to EUR 21,179 million (2000: EUR 18,791 million). As no market exists for these investments, market value is calculated based on current interest rate, maturity and risk assumptions. For a proper understanding it should be noted that this market value is not part of the matching of these investments with the related insurance liabilities, which are not stated at market value either. The provision for doubtful debts for these investments amounts to EUR 53 million (2000: EUR 184 million). Other loans 26,831 23,980 Private placements are shown at amortized cost 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. Realized gains and losses from transactions within the private placements and bond portfolios valued at amortized cost are deferred and released to the income statements in annual installments over the estimated average remaining term to maturity of the investments sold. Redemption value 27,524 24,147 Deferred purchase differences (693) (167) ------ ------ Amortization value 26,831 23,980 Market value of the portfolio amounts to EUR 26,843 million (2000: EUR 23,916 million). As no market exists for these investments, market value is calculated based on current interest rates, term to maturity and risk assumptions. For a proper understanding it should be noted that this market value is not part of the matching of these investments with the related insurance liabilities, which are not stated at market value either. The provision for doubtful debts for these investments amounts to EUR 75 million (2000: EUR 74 million). Deposits with credit institutions 1,553 1,215 This item relates to amounts that can be called up after a certain period of time, the period exceeding one year. Market value of the deposits is equated with book value.
-87- 2001 2000 Other financial investments Policy loans 1,838 1,700 Receivables out of share lease agreements and others 3,054 2,249 ----- ----- 4,892 3,949 Market value of policy loans is set equal to book value. The market value of receivables out of share lease agreements and others amounts to EUR 3,131 million (2000: EUR 2,281 million). The provision for doubtful debts amounts to EUR 34 million (2000: EUR 34 million). 1.4. Deposits with ceding undertakings 30 27 Debentures related to reinsurance contracts that are not at free disposal. Market value amounts to EUR 30 million (2000: EUR 27 million). Changes in investments <TABLE> <CAPTION> Currency exchange rate Balance Balance at Disposed differences at January 1 and Revalu- and other December 2001 Acquired redeemed ations changes/1/ 31, 2001 <S> <C> <C> <C> <C> <C> <C> Real estate 2,116 139 (98) 71 98 2,326 Group companies and participations 2,300 1,387 (564) 157 3,280 Shares 8,666 3,841 (3,237) (1,122) 188 8,336 Bonds and other fixed rate securities 61,240 69,410 (62,232) 5,242 73,660 Loans guaranteed by mortgages 18,244 4,035 (2,488) 746 20,537 Other loans 23,980 14,751 (12,782) 882 26,831 Deposits with credit institutions 1,215 304 (10) 44 1,553 Other financial investments 3,949 1,463 (742) 222 4,892 Deposits with ceding undertakings 27 3 0 0 30 ------- ------ ------- ------ ----- ------- Total 121,737 95,333 (82,153) (1,051) 7,579 141,445 Balances and changes of 2000 112,989 61,527 (58,135) (33) 5,389 121,737 </TABLE> /1/ Mainly caused by acquisitions. 1.5. Investments for the account of policyholders Investments for the account of policyholders and insurance-linked savings deposits are investments of which the investment risk is borne by the policyholders. They are valued at market value. Separate investments for group life contracts with full profit sharing are valued according to the principles of the related contracts. Total return of these investments is accounted for in the technical account life insurance on a separate line.
-88- 2001 2000 Balance at January 1 114,286 108,276 Acquired 47,728 28,565 Disposed and redeemed (40,866) (22,390) Currency exchange rate differences and other changes (7,876) (165) ------- ------- Balance at December 31 113,272 114,286 1.6. Receivables out of direct insurance Policyholders 1,519 1,956 Agents 195 641 ----- ----- Total receivables out of direct insurance 1,714 2,597 The provision for doubtful debts for these receivables amounts to EUR 42 million (2000: EUR 47 million). 1.7. Other receivables Investment receivables 81 109 Sale partnership interests Mexico 828 -- Other receivables 3,243 2,481 ----- ----- Total other receivables 4,152 2,590 Other receivables include items for an amount of EUR 1,386 million maturing within one year. The remaining items have terms maturing beyond one year. The provision for doubtful debts for these receivables amounts to EUR 9 million (2000: EUR 15 million). 1.8. Equipment Equipment is shown at original cost less depreciation over the estimated useful life. Office Data furniture processing & other Total systems equipment equipment Total cost of equipment 446 Accumulated depreciation (192) ---- Balance at January 1, 2001 139 115 254 Investments 159 35 194 Depreciation (46) (33) (79) Disposals and other changes (5) (6) (11) --- --- ---- Balance at December 31, 2001 247 111 358 Accumulated depreciation 272 ---- Total cost of equipment 630 The increase of investments in data processing systems results from major long-term information technology projects in several country units.
-89- 2001 2000 1.9. Liquid assets Cash on hand and balances with banks 357 352 Short term investments 511 373 ---- ---- Total liquid assets 868 725 Liquid assets are at free disposal. 1.10. Capital and reserves For the notes to the share capital, reserves and stock options refer to Note 4.4.4. 1.11. Capital securities Perpetual cumulative subordinated loans 1,517 1,267 Trust Pass-through Securities 584 553 ----- ----- 2,101 1,820 Perpetual cumulative subordinated loans This item comprises the following loans: Year/1/ Interest rate 8%, coupon date June 8 2005 114 114 Interest rate 7 7/8%, coupon date September 29 2005 114 114 Interest rate 7 3/4%, coupon date December 15 2005 136 136 Interest rate 7 1/8%, coupon date March 4 2011 203 203 Interest rate 7 5/8%, coupon date July 10 2008 114 114 Interest rate 7 1/4%, coupon date October 14 2008 136 136 Interest rate 6 7/8%, coupon date December 20 2005 700 450 ----- ----- Total perpetual cumulative subordinated loans 1,517 1,267 /1/ Year of first call. The coupons for the EUR 114 million 8% bonds are set at 8% until June 8, 2005. The coupons for the EUR 203 million 7 1/8% bonds are set at 7 1/8% until March 4, 2011, while the EUR 136 million 7 1/4% bonds are set at 7 1/4% until October 14, 2008. On these dates, and after every consecutive period of ten years, the coupons will be reset at the then prevailing yield of 9-10 years Dutch government bonds plus a surcharge of 0.85%. The coupons of the other four loans are fixed. The loans have the same subordination provisions as dated subordinated debt. In addition, the conditions of the loans contain certain provisions for interest deferral and for the availability of principal amounts to meet losses. Although the loans have no stated maturity, AEGON has the right to call the loans for redemption at par for the first time on the coupon date in the years as specified above. Thereafter AEGON has the right to call the loans for redemption at par every consecutive ten year period on the coupon date, with the exception of the 6 7/8% bond. This bond is callable every year on the coupon date after the initial call date in 2005. The market value of these loans amounts to EUR 1,584 million (2000: EUR 1,356 million). Trust Pass-through Securities This item comprises the following loans <TABLE> <S> <C> <C> <C> USD 100 mln 7 4/5% Capital Trust Pass-through Securities 1996/2026 113 107 USD 225 mln 7 13/20% Capital Trust Pass-through Securities 1996/2026 255 242 USD 190 mln 7 5/8% Capital Trust Pass-through Securities 1997/2037 216 204 --- --- 584 553 </TABLE>
-90- Capital Trust Pass-through Securities (TRUPS) are securities through which the holders participate in a trust. The assets of these trusts consist of junior subordinated deferrable interest debentures of Transamerica Corp. The trusts have been included in the consolidated financial statements. The TRUPS carry certain provisions with regard to deferral of distributions. The TRUPS have maturity terms of 30 to 40 years with a fixed coupon. Earlier redemption is possible for the USD 100 million 7 4/5% Capital Trust Pass-through Securities on or after December 1, 2006. The market value of these loans amounts to EUR 634 million (2000: EUR 658 million). <TABLE> <CAPTION> Remaining terms over 2001 2000 1-3 years 4-5 years 5 years Total Total <S> <C> <C> <C> <C> <C> 1.12. Subordinated (convertible) loans Subordinated loans 296 340 34 670 667 Subordinated convertible loan -- -- -- -- 16 --- --- -- --- --- Total subordinated loans 296 340 34 670 683 </TABLE> These loans are subordinated to all other liabilities and borrowings. The interest rates vary from 6.42% to 8.25%. The market value of these loans amounts to EUR 739 million (2000: EUR 796 million). <TABLE> <CAPTION> Exchange rate Balance Increase fluctua- Balance at charged to tions and at January 1, the income other December 2001 statement changes 31, 2001 <S> <C> <C> <C> <C> 1.13. Technical provisions Life insurance: Life insurance 49,128 1,635 2,596 53,359 Annuities 30,782 1,662 5,726/1/ 38,170 GICs and funding agreements 22,310 1,224 4,409/2/ 27,943 ------- ----- ------ ------- 102,220 4,521 12,731 119,472 Deferred policy acquisition costs (13,459) (15,264) Unamortized interest rate rebates (432) (424) ------- ------- Subtotal life insurance 88,329 103,784 Non-life insurance: Unearned premiums and unexpired risks 1,244 348 168 1,760 Deferred policy acquisition costs (545) (1,202) ------- ------- 699 558 Claims outstanding 1,814 (104) 202 1,912 ------- ------- Subtotal non-life insurance 2,513 2,470 Profit sharing and rebates 219 285 Other 750 39 (77) 712 ------- ----- ------- Total 91,811 4,804 107,251 </TABLE>
-91- /1/ Of which the balance of deposits and withdrawals is EUR 3,086 million. /2/ Of which the balance of deposits and withdrawals is EUR 2,978 million. Life insurance The provision for life insurance is calculated using assumptions for future mortality, investment performance, lapses and expenses over the lifetime of the contracts. These long term assumptions are based on best estimates of future experience at policy issue. The estimates include a margin for adverse deviation. Regularly the assumptions are tested against actual experience. If these tests reveal a negative outcome, the provision is adjusted according to the actual data. Future costs of processing benefits are included in the provision. This provision also includes the provision for unearned premiums and unexpired risks as well as the provision for claims outstanding, both as far as related to the life insurance business. The technical provision for life reinsurance assumed is included in this provision as well. The average interest rate used is 5.33% (2000: 5.39%). Taking into account the capitalized interest rate rebates, the average interest rate used is 5.57% (2000: 5.67%). Provisions for annuities are for annuity contracts sold in the United States. Annuities are typically single premium insurance products where the paid-in amounts accumulate with interest credits, or equity growth, less applicable loads or fees. The funds grow on a tax deferred basis and have significant long-term savings characteristics. The benefit reserves are equal to the full accumulated contract values. The provision for GICs and funding agreements is the amount due for these products which are sold in the United States. Both Guaranteed Investment Contracts (GICs) and Funding Agreements (FAs) are issued on a fixed or floating rate basis and provide protection of principal and a guaranteed rate of interest. GICs are primarily sold to tax qualified retirement plans. FAs are typically sold to other, non-tax qualified institutional investors. FAs are also issued to certain trusts or special purpose entities, which in turn issue medium term notes or commercial paper secured by these FAs to institutional investors. The benefit reserves of GICs and funding agreements are equal to the full accumulated contract values. 2001 2000 Deferred policy acquisition costs Balance at January 1 13,459 10,992 Deferred during the year 2,256 2,232 Amortization charged to the income statement (1,203) (1,143) Other changes /1/ 752 1,378 ------ ------ Balance at December 31 15,264 13,459 /1/ Mainly caused by acquisitions and currency exchange rate differences. Policy acquisition costs are costs that are directly or indirectly related to the sale of insurance contracts. Part of the acquisition costs are deferred and deducted from the technical provision life insurance. Policy acquisition costs are deferred to the extent that these costs are recoverable from future expense loadings in the premiums or expected gross profits, depending on the nature of the contract. The assumptions underlying the calculation of expected gross profits are determined from best estimates as to future experience. These estimates are based on, but not limited to: an economic perspective in terms of long-term bonds and equity returns; mortality, disability and lapse assumptions; maintenance expenses; and future expected inflation rates. Every year the deferred policy acquisition costs are tested to assess the recoverability from future premium loadings or future gross profits, by country unit and product line. If necessary, adjustments to the amortization schedule are applied. Included in AEGON's deferred acquisition costs is a substantial amount of value of business acquired (VOBA) resulting from acquisitions, which in its nature is the same as deferred acquisition costs and subject to the same recoverability testing.
-92- Deferred policy acquisition costs related to insurance contracts with fixed premiums are amortized over periods not to exceed the premium-paying periods or the contract periods. For flexible insurance contracts and investment type contracts the amortization is generally in proportion to emerging gross profits. 2001 2000 Unamortized interest rate rebates Balance at January 1 432 486 Rebates granted during the year 94 61 Amortization charged to the income statement (102) (118) Other changes 0 3 ---- ---- Balance at December 31 424 432 Interest rate rebates granted are amortized over the period of the contracts concerned in yearly increasing amounts. The provision for pension regarding own employees amounts to EUR 1,459 million (2000: EUR 1,450 million). Non-life insurance Unearned premiums represent the unearned part of premiums received for both property and casualty insurance as for accident and health insurance. The provision for unexpired risks includes a provision to compensate for the increasing age of persons insured under health and personal accident policies. Deferred policy acquisition costs Balance at January 1 545 472 Deferred during the year 302 161 Amortization charged to the income statement (219) (141) Other changes /1/ 574 53 ----- ---- Balance at December 31 1,202 545 /1/ Mainly caused by acquisitions. Policy acquisition costs are costs that are directly or indirectly related to the conclusion or renewal of insurance contracts. The deferred policy acquisition costs are deducted from the technical provision for unearned premiums and include both renewal commission paid related to unearned premiums, amortized over the related premium period, and first year commission on health insurance policies, amortized over the contract period.
-93- 2001 2000 Claims outstanding Balance at January 1 2,407 1,794 Less reinsurance recoverables (593) (259) ------ ------ Net balance 1,814 1,535 Incurred related to: - - current year 1,422 1,600 - - prior years 120 33 ------ ------ Total incurred 1,542 1,633 Paid related to: - - current year (902) (669) - - prior years (599) (690) ------ ------ Total paid (1,501) (1,359) Other changes 57 5 Net balance at December 31: - - current year 520 931 - - prior years 1,392 883 ------ ------ 1,912 1,814 Plus reinsurance recoverables 486 593 ------ ------ Balance at December 31 2,398 2,407 The provision for claims outstanding relates to claims incurred in the current and previous years, still unsettled at year-end. Calculation takes place either on an item by item basis or on the basis of statistical information, taking into account claims incurred but not yet reported. In calculating the provision, the future costs of processing claims are considered. A different method is applied to marine, aviation and transport insurance. The calculation is based on the 'underwriting years system' with premiums deferred and claims combined in a fund. Profit sharing and rebates This provision consists of the amounts earmarked for insured or beneficiaries, as far as their accounts have not yet been credited. Other technical provisions This consists mainly of insurance deposits under Dutch group life contracts, which are designated for improvement of retirement benefits under such contracts. Maturity is undetermined. Interest credited to such deposits is linked with the average yield on long-term Dutch government bonds. Reinsurance amount ceded The following amounts on account of reinsurance ceded have been deducted from the technical provisions: Life insurance 2,391 4,744 Unearned premiums and unexpired risks 217 16 Claims outstanding 486 593 ----- ----- 3,094 5,353
-94- <TABLE> <CAPTION> Decrease Exchange rate Balance at credited to fluctuations Balance at January 1, the income and other December 2001 statement changes 31, 2001 <S> <C> <C> <C> <C> 1.14. Technical provisions with investments for the account of policyholders Provisions gross 114,637 113,639 Ceded to reinsurers (351) (367) ------- ------- Provisions for insurance of which the policyholder bears the investment risk and for insurance-linked savings deposits 114,286 (5,504) 4,490 113,272 </TABLE> This provision includes unit-linked insurance contracts, separate investment funds Group Life, insurance-linked savings deposits and the liabilities of AEGON UK with profit funds (EUR 26,838 million). The amount of EUR 5,504 million credited to the income statement is the total of premium receipt and benefits of EUR 4,011 million and the investment income for the account of policyholders amounting to EUR (9,515) million. Also the liabilities of the acquired pension business of Diversified Investment Advisors (USA) are recognized under this heading to the extent that the contractholder bears the economic risk. The provisions are generally shown at book value of the related investments. As some products have a minimum guaranteed benefit amount at maturity, a provision for this benefit is accumulated during the term of the related portfolio. The provision has been included in the technical provisions life insurance. 2001 2000 1.15. Provisions Provisions for taxation 2,917 2,748 The provisions for taxation are of a long-term nature. This caption includes both deferred taxation as well as other long-term tax liabilities. The deferred taxation is calculated on the basis of the difference between book value and valuation for tax purposes of the appropriate assets and liabilities. Deferred tax assets are recognized to the extent that it is probable that future taxable profits will be available. 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. Nominal value of these tax amounts is EUR 3,518 million.
-95- <TABLE> <CAPTION> 2001 2000 <S> <C> <C> As at December 31, the provisions for taxation consist of: Deferred tax liabilities relating to: Investments 525 1,260 Deferred policy acquisition costs 3,447 3,572 Other 1,305 669 ----- ----- 5,277 5,501 Deferred tax assets relating to: Technical provisions 1,880 2,665 Operating losses carried forward 296 0 Other 184 88 ----- ----- 2,360 2,753 ----- ----- 2,917 2,748 Total tax losses carried forward 1,054 813 Tax losses carried forward not recognized within deferred tax assets 174 813 ----- ----- Tax losses carried forward recognized within deferred tax assets 880 0 Average tax rate 33.6% -- Deferred tax assets relating to operating losses carried forward 296 -- </TABLE> <TABLE> <CAPTION> Remaining terms less than over 2001 2000 1 year 1-3 years 4-5 years 5 years Total Total <S> <C> <C> <C> <C> <C> <C> 1.16. Long-term liabilities Capital market: Borrowings 1,517 2,121 216 654 4,508 3,561 Other: Miscellaneous long-term liabilities 81 131 52 312 576 464 ----- ----- --- --- ----- ----- Total long-term liabilities 1,598 2,252 268 966 5,084 4,025 Senior debt related to insurance activities assigned to the capital base 3,982 3,245 ----- ----- Long-term liabilities mainly relating to the financing of Transamerica Finance Corporation and to the run-off debt financing for FGH Bank 1,102 780 </TABLE> The repayment periods of borrowings vary from in excess of one year up to a maximum of 29 years. The coupons vary from 0.093% to 10.0% per annum. Borrowings include debenture loans for EUR 1,568 million. The market value of total long-term liabilities amounts to EUR 4,781 million (2000: EUR 4,013 million).
-96- 2001 2000 1.17. Other payables Investment payables 137 300 Taxes and social security 63 283 Dividend 634 583 Other 2,632 2,417 ----- ----- Total other payables 3,466 3,583 1.18. Accruals and deferred income Accrued interest 506 453 Deferred gains and losses on fixed rate investments 496 200 ----- ----- Total accruals and deferred income 1,002 653 1.19. Commitments and contingencies Investments contracted - ---------------------- Real estate (8) (25) Mortgage loans 276 535 Bonds and registered debentures: Purchase 1,007 1,683 Sale 624 1,083 Private placements 55 218 Other: Purchase 694 678 Sale 0 0 Derivatives - ----------- AEGON uses common derivative financial instruments such as interest rate swaps, options, futures and foreign exchange contracts to hedge its exposures related to investments, liabilities and borrowings. Options and futures contracts are included in the balance sheet at fair value or at the amounts received for written options. 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 and debt. AEGON does not hold or issue derivative instruments for speculative trading purposes. Interest rate contracts, which include swaps, swaptions, caps, floors and forward rate agreements are used to alter interest rate types in order to match assets and liabilities. The contracts are designated individually or in groups to specific liabilities at the inception of the contracts. Under interest rate swaps, the company agrees with other parties to exchange, at specific intervals, the difference between fixed rate and floating rate interest amounts calculated by reference to an agreed notional amount without an exchange of the underlying principal amount. The differential to be paid or received is recognized as an adjustment to interest expense. Swaptions entitle the company to receive settlement payments from other parties on specified expiration dates, contingent on future interest rates. The amount of such settlement payments, if any, is determined by the present value of the difference between the fixed rate on a market rate swap and the strike price multiplied by the notional amount. Premiums paid for swaptions are deferred and amortized to interest expense on a straight-line basis over the term of the contract.
-97- Interest rate cap and floor agreements are contracts with a counterparty which require the payment of a premium for the right to receive payments for the difference between the cap and floor interest rate and a market interest rate on specified future dates based on an underlying principle balance (notional amount) to hedge against rising and falling interest rates. Premiums paid for purchased interest rate cap or floor agreements are capitalized and amortized to interest expense over the term of the contract. Forward rate agreements are commitments to purchase or sell a financial instrument at a future date for a specific price and are used to hedge short-term interest movements, in particular, for future investments or short-term borrowings. Forward rate agreements settle in cash at a specific future date based on the differential between agreed interest rates applied to a notional amount. Payments or receipts are recognized as interest income or interest charge at the moment of cash settlement. Cross currency swaps are used to manage the company's exposure to foreign exchange rate fluctuations of both assets and liabilities. Cross currency swap agreements are contracts to exchange the currencies of two different countries at the same rate of exchange at specified future dates. AEGON uses cross currency swaps to allow investments, product offerings and borrowings to be made in foreign currencies, gaining access to additional markets and sources of funding while eliminating foreign exchange risk. Cross currency swaps are recognized in the balance sheet under long-term liabilities and in the income statement in investment income, benefits to policyholders or miscellaneous income and expenditure - currency exchange rate differences. The amount recognized represents the currency exchange difference on the notional amount at period-end rates. An equity swap is a contract whereby the performance of an equity instrument is exchanged for an interest flow. Equity swaps are valued at market value with changes going through the income statement. Options are contracts that give the option purchaser the right, but not the obligation, to buy or sell, within a specified period of time, a financial instrument at a specified price. Purchased options are carried at market, while options sold are carried at the premium received. Unrealized gains (losses) on options are recognized in equity or current liabilities. Futures contracts are carried at fair value and require daily cash settlement. Changes in the fair value of interest rate futures that qualify as hedges are deferred and recognized as an adjustment of the hedged item, while changes in the fair value of equity futures are recognized in income. The company's exposure to credit risk is the risk of loss from a counterparty failing to perform according to the terms of the contract. The company continually monitors its position and the credit ratings of the counterparties to these derivative instruments. To limit exposure associated with counterparty nonperformance on interest rate and cross currency swap contracts, the company enters into master netting agreements with its counterparties. The company believes the risk of incurring losses due to nonperformance by its counterparties is low due to their high credit quality. The credit exposure of interest rate and cross currency swap contracts is represented by the fair value of contracts. Interest rate swap, cap, and floor agreements are subject to replacement cost risk, which is the possibility that future changes in market prices may make the instruments less valuable. The following table represents aggregate notional amounts of derivatives. The amounts listed for interest rate contracts will not be exchanged by parties and, thus, do not reflect an exposure of the company to market movements. The amounts listed for cross currency contracts will be exchanged at amounts calculated on the bases of the notional amounts and the terms of the derivatives, which related to interest rates, exchange rates, or financial or other indexes.
-98- <TABLE> <CAPTION> Notional Fair Book Notional Fair Book amounts value value amounts value value 2001 2001 2001 2000 2000 2000 <S> <C> <C> <C> <C> <C> <C> Interest rate contracts Interest rate swaps 35,419 (265) 0 31,058 (150) 0 Swaptions 2,583 93 90 8,780 107 0 Caps/floors 1,507 20 7 1,501 16 0 Forward rate agreements 724 1 0 800 (12) 0 Other derivative contracts Cross currency swaps 10,220 (604) (694) 6,546 (476) (446) Foreign exchange contracts 671 (26) (25) 1,766 26 26 Equity swaps 478 (14) (17) 70 2 2 Over-the counter options 177 77 76 407 47 47 Exchange traded options/futures 5,225 (47) (41) 8,158 3 3 2001 2000 Collateral and guarantees given to third parties Bonds and registered debentures 855 739 Private placements 1 35 Ceded and securitized mortgage loans 2,173 2,283 Letters of credit 1,513 1,284 </TABLE> These function mainly as collateral granted by AEGON subsidiaries abroad, to meet legal requirements. This item also includes collateral guarantees given by subsidiaries under reciprocal insurance contracts and guarantees on interest rate risk at early redemption of ceded and securitized mortgage loans. Off balance sheet assets - ------------------------ As part of its core operations, AEGON concludes transactions and has relationships with institutional and retail customers for a variety of financial services. The return for these services is a fee related to the asset value, to the investment performance or to the risk exposure of the contract. The services include: . management of investments for institutional investors and of mutual funds in the retail business; . offering of synthetic GICs which guarantee to plan sponsors benefit responsiveness, whether or not in the form of annuities, in the event that qualified plan benefit requests exceed plan cash flows. The plan sponsor agrees to reimburse for such benefit payments with interest. For all services the related assets are owned by the customers and therefore they do not appear on the balance sheet of AEGON. Total assets involved in these operations amount to EUR 54 billion (USD 47 billion), (2000: EUR 45 billion). Obligations regarding acquisitions - ---------------------------------- AEGON's obligations related to the acquisition of Diversified Investment Advisors from the Mutual of New York, consist of payments relating to the assets and liabilities for a remaining period of one year. AEGON will then purchase the remaining business in force based on a formula described in the agreement.
-99- 2. NOTES TO THE CONSOLIDATED INCOME STATEMENTS Amounts in million EUR Determination of results The principles for the determination of results are described in the notes to the balance sheets. 2.1. Analysis of premiums life insurance 2001 <TABLE> <CAPTION> Investments for the Life insurance account of policyholders ---------------------------------- ---------------------------------- Gross Reinsurance Own account Gross Reinsurance Own account <S> <C> <C> <C> <C> <C> <C> Incoming reinsurance 1,357 (258) 1,099 194 (5) 189 Recurring: Individual - - without profit sharing 2,933 (536) 2,397 2,287 (33) 2,254 - - with profit sharing 304 (2) 302 250 (1) 249 ----- ------ ----- ------ ---- ------ Total 3,237 (538) 2,699 2,537 (34) 2,503 Group - - without profit sharing 659 (127) 532 885 (8) 877 - - with profit sharing 280 (4) 276 604 (9) 595 ----- ------ ----- ------ ---- ------ Total 939 (131) 808 1,489 (17) 1,472 Total recurring 4,176 (669) 3,507 4,026 (51) 3,975 Single: Individual - - without profit sharing 1,277 (108) 1,169 3,560 (46) 3,514 - - with profit sharing 158 158 956 (67) 889 ----- ------ ----- ------ ---- ------ Total 1,435 (108) 1,327 4,516 (113) 4,403 Group - - without profit sharing 133 133 961 961 - - with profit sharing 597 (3) 594 886 (50) 836 ----- ------ ----- ------ ---- ------ Total 730 (3) 727 1,847 (50) 1,797 Total single 2,165 (111) 2,054 6,363 (163) 6,200 ----- ------ ----- ------ ---- ------ Total premiums 7,698 (1,038) 6,660 10,583 (219) 10,364 Grand total 18,281 (1,257) 17,024 </TABLE>
-100- <TABLE> <CAPTION> 2000 Investments for the Life insurance account of policyholders ---------------------------------- ---------------------------------- Gross Reinsurance Own account Gross Reinsurance Own account <S> <C> <C> <C> <C> <C> <C> Incoming reinsurance 1,226 (247) 979 186 (1) 185 Recurring: Individual - - without profit sharing 2,615 (507) 2,108 2,187 (13) 2,174 - - with profit sharing 373 (15) 358 203 (1) 202 ----- ---- ----- ------ ---- ------ Total 2,988 (522) 2,466 2,390 (14) 2,376 Group - - without profit sharing 421 (92) 329 756 (32) 724 - - with profit sharing 318 (6) 312 651 (8) 643 ----- ---- ----- ------ ---- ------ Total 739 (98) 641 1,407 (40) 1,367 Total recurring 3,727 (620) 3,107 3,797 (54) 3,743 Single: Individual - - without profit sharing 1,586 (86) 1,500 3,851 (103) 3,748 - - with profit sharing 162 0 162 1,253 (58) 1,195 ----- ---- ----- ------ ---- ------ Total 1,748 (86) 1,662 5,104 (161) 4,943 Group - - without profit sharing 94 0 94 1,017 0 1,017 - - with profit sharing 382 (3) 379 702 (38) 664 ----- ---- ----- ------ ---- ------ Total 476 (3) 473 1,719 (38) 1,681 Total single 2,224 (89) 2,135 6,823 (199) 6,624 ----- ---- ----- ------ ---- ------ Total premiums 7,177 (956) 6,221 10,806 (254) 10,552 Grand total 17,983 (1,210) 16,773 </TABLE>
-101- 1999 <TABLE> <CAPTION> Life insurance Investments for the account of policyholders ---------------------------------- ---------------------------------- Gross Reinsurance Own account Gross Reinsurance Own account <S> <C> <C> <C> <C> <C> <C> Incoming reinsurance 482 (191) 291 224 (4) 220 Recurring: Individual - - without profit sharing 1,873 (82) 1,791 1,265 (7) 1,258 - - with profit sharing 329 (5) 324 195 (1) 194 ------ ---- ------ ------ ---- ------ Total 2,202 (87) 2,115 1,460 (8) 1,452 Group - - without profit sharing 869 (324) 545 554 (6) 548 - - with profit sharing 328 (21) 307 517 (9) 508 ------ ---- ------ ------ ---- ------ Total 1,197 (345) 852 1,071 (15) 1,056 Total recurring 3,399 (432) 2,967 2,531 (23) 2,508 Single: Individual - - without profit sharing 842 (38) 804 2,524 (1) 2,523 - - with profit sharing 130 -- 130 1,128 (102) 1,026 ------ ---- ------ ------ ---- ------ Total 972 (38) 934 3,652 (103) 3,549 Group - - without profit sharing 63 0 63 663 0 663 - - with profit sharing 283 (2) 281 533 (54) 479 ------ ---- ------ ------ ---- ------ Total 346 (2) 344 1,196 (54) 1,142 Total single 1,318 (40) 1,278 4,848 (157) 4,691 ------ ---- ------ ------ ---- ------ Total premiums 5,199 (663) 4,536 7,603 (184) 7,419 Grand total 12,802 (847) 11,955 </TABLE>
-102- 2.2. Analysis of technical results non-life insurance <TABLE> <CAPTION> Marine, Legal transport Accident liability Other and General Other & health motor motor aviation Fire liability branches Total <S> <C> <C> <C> <C> <C> <C> <C> <C> 2001 Gross premiums 2,558 179 158 36 287 55 24 3,297 Gross premiums earned 2,019 178 158 36 282 55 23 2,751 Gross claims incurred (1,200) (149) (117) (25) (179) (33) (4) (1,707) Gross operating expenses (988) (45) (41) (9) (98) (22) (7) (1,210) Balance of reinsurance ceded (4) 1 2 (1) (11) 0 (4) (17) ------ ---- ---- --- ---- --- -- ------ (173) (15) 2 1 (6) 0 8 (183) Investment income 419 27 19 3 22 10 1 501 Investment charges (6) 0 0 0 (1) 1 0 (6) Balance of other items (31) (1) (2) 0 (2) 0 0 (36) Investment income allocated to the non-technical account (15) (4) (1) (2) (5) 0 0 (27) ------ ---- ---- --- ---- --- -- ------ Result technical account non-life 194 7 18 2 8 11 9 249 2000 Gross premiums 2,067 180 157 38 268 65 13 2,788 Gross premiums earned 1,869 184 155 38 266 65 13 2,590 Gross claims incurred (1,512) (167) (110) (32) (168) (33) (2) (2,024) Gross operating expenses (636) (52) (44) (10) (96) (23) (5) (866) Balance of reinsurance ceded 201 0 0 4 (6) (6) (1) 192 ------ ---- ---- --- ---- --- -- ------ (78) (35) 1 0 (4) 3 5 (108) Investment income 263 29 18 4 23 13 2 352 Investment charges (9) 0 0 0 0 0 0 (9) Balance of other items (4) 0 0 0 0 0 1 (3) Investment income allocated to the non-technical account (15) (5) (2) (1) (3) (1) 0 (27) ------ ---- ---- --- ---- --- -- ------ Result technical account non-life 157 (11) 17 3 16 15 8 205 1999 Gross premiums 1,453 191 153 39 265 65 12 2,178 Gross premiums earned 1,321 189 148 39 261 63 12 2,033 Gross claims incurred (888) (184) (127) (24) (173) (37) (2) (1,435) Gross operating expenses (477) (59) (39) (10) (94) (23) (7) (709) Balance of reinsurance ceded 4 (1) (1) (2) (10) (5) (2) (17) ------ ---- ---- --- ---- --- -- ------ (40) (55) (19) 3 (16) (2) 1 (128) Investment income 195 35 17 4 28 11 2 292 Investment charges (11) (3) (1) (1) (2) (1) (1) (20) Balance of other items 0 (1) (1) 0 0 0 0 (2) Investment income allocated to the non-technical account (37) (6) (2) (2) (2) (1) (1) (51) ------ ---- ---- --- ---- --- -- ------ Result technical account non-life 107 (30) (6) 4 8 7 1 91 </TABLE>
-103- <TABLE> <CAPTION> Marine, Legal transport Accident liability Other and General Other & health motor motor aviation Fire liability branches Total <S> <C> <C> <C> <C> <C> <C> <C> <C> Combined ratios in percentages 2001 Americas 99 -- -- -- 77 -- -- 99 The Netherlands 94 114 95 99 106 92 64 100 Other countries 94 103 105 67 98 127 -- 99 Total 99 109 98 99 102 99 64 100 2000 Americas 101 -- -- -- 33 -- -- 101 The Netherlands 96 126 90 98 110 110 49 104 Other countries 97 116 111 371 93 61 -- 102 Total 101 121 99 101 102 94 49 102 1999 Americas 98 -- -- -- 31 -- -- 98 The Netherlands 100 121 90 94 98 108 69 101 Other countries 101 138 140 97 118 101 -- 123 Total 99 129 112 94 106 105 69 104 </TABLE> The combined ratio is the sum of the ratio of net incurred claims to net premiums earned and the ratio of net commissions and expenses to premiums own account. Although a ratio over 100% suggests a loss, the ratio does not include investment income. With the inclusion of investment income in the calculation, all of AEGON's major product lines were profitable.
-104- 2.3. Investment income Non- Life Non-life technical Total 2001 Income from participations 18 0 60 78 Group companies: Income from other investments Real estate/1/ 122 2 2 126 Shares 176 6 0 182 Bonds and other fixed rate securities 4,394 297 0 4,691 Loans guaranteed by mortgages 1,338 4 0 1,342 Other loans 1,818 11 31 1,860 Deposits with credit institutions 11 4 0 15 Other financial investments 157 1 0 158 Interest on liquid assets and other 607 151 0 758 Indirect income real estate and shares 698 25 0 723 ----- --- -- ----- Total 9,339 501 93 9,933 2000 Income from participations 15 0 37 52 Group companies: Income from other investments Real estate/1/ 115 2 2 119 Shares 159 7 0 166 Bonds and other fixed rate securities 4,242 216 0 4,458 Loans guaranteed by mortgages 1,301 4 0 1,305 Other loans 1,741 21 39 1,801 Deposits with credit institutions 9 6 0 15 Other financial investments 176 2 0 178 Interest on liquid assets and other 847 76 0 923 Indirect income real estate and shares 577 18 0 595 ----- --- -- ----- Total 9,182 352 78 9,612 1999 Income from participations 14 2 40 56 Group companies: Income from other investments Real estate/1/ 144 3 1 148 Shares 121 6 0 127 Bonds and other fixed rate securities 2,973 173 0 3,146 Loans guaranteed by mortgages 969 3 0 972 Other loans 1,085 23 49 1,157 Deposits with credit institutions 49 11 0 60 Other financial investments 117 4 0 121 Interest on liquid assets and other 460 49 0 509 Indirect income real estate and shares 376 18 0 394 ----- --- -- ----- Total 6,308 292 90 6,690 /1/ Of which allocated internal rent for real estate in own use an amount of EUR 17 million (2000: EUR 17 million and 1999: EUR 14 million), based on market conditions.
-105- In the income statement the structural total return on investments in real estate and shares is recognized. This 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 direct income. 2001 2000 1999 2.4. Income from banking activities Participations 0 0 1 Bonds and other fixed rate securities 49 63 95 Loans guaranteed by mortgage 36 33 28 Other loans 83 95 86 Other investments and liquid assets 216 133 438 Commissions 0 0 56 ------ ----- ------- Total 384 324 704 2.5. Change in technical provisions Technical provisions 4,804 4,749 3,531 Technical provisions with investments for the account of policyholders (5,504) (731) 16,338 ------ ----- ------- (700) 4,018 19,869 Investment income for the account of policyholders 9,515 3,495 (13,533) ------ ----- ------- Change in technical provisions 8,815 7,513 6,336 2.6. Profit sharing and rebates Amortization of interest rate rebates 102 118 115 Surplus interest bonuses 40 48 56 Profit appropriated to policyholders 106 204 761 ------ ----- ------- Total 248 370 932 Granted interest rate rebates amount to EUR 94 million (2001: EUR 61 million and 1999: EUR 17 million), almost entirely relating to the Dutch companies.
-106- <TABLE> <CAPTION> 2.7. Operating expenses Non- Life Non-life technical Total <S> <C> <C> <C> <C> 2001 Acquisition costs 2,590 561 3,151 Deferred policy acquisition costs (2,256) (302) (2,558) Amortization of deferred policy acquisition costs 1,203 219 1,422 ------ ----- --- ------ 1,537 478 2,015 Administrative expenses 2,001 732 2,733 Commissions and profit sharing from reinsurers (305) (157) (462) Banking and other activities 96 96 ------ ----- --- ------ Total operating expenses 3,233 1,053 96 4,382 Investment expenses 192 ------ Commissions and expenses 4,574 2000 Acquisition costs 2,548 538 -- 3,086 Deferred policy acquisition costs (2,232) (161) -- (2,393) Amortization of deferred policy acquisition costs 1,143 141 -- 1,284 ------ ----- --- ------ 1,459 518 -- 1,977 Administrative expenses 1,934 348 -- 2,282 Commissions and profit sharing from reinsurers (335) (128) -- (463) Banking and other activities -- -- 85 85 ------ ----- --- ------ Total operating expenses 3,058 738 85 3,881 Investment expenses 219 ------ Commissions and expenses 4,100 1999 Acquisition costs 1,685 435 -- 2,120 Deferred policy acquisition costs (1,363) (117) -- (1,480) Amortization of deferred policy acquisition costs 774 111 -- 885 ------ ----- --- ------ 1,096 429 -- 1,525 Administrative expenses 1,357 280 -- 1,637 Commissions and profit sharing from reinsurers (205) (94) -- (299) Banking and other activities -- -- 211 211 ------ ----- --- ------ Total operating expenses 2,248 615 211 3,074 Investment expenses 145 ------ Commissions and expenses 3,219 </TABLE>
-107- Technical and non-technical accounts include the following: 2001 2000 1999 Salaries 1,167 1,066 730 Pension premiums (111) (82) (22) Other social security charges 189 173 134 Other expenses 1,223 1,167 1,080 ------ ------ ------ Total expenses 2,468 2,324 1,922 Commissions 3,704 3,348 2,191 Deferred policy acquisition costs (2,558) (2,393) (1,480) Amortization of deferred policy acquisition costs 1,422 1,284 885 Commissions and profit sharing from reinsurers (462) (463) (299) ------ ------ ------ Commissions and expenses 4,574 4,100 3,219 Expenses include allocated housing expenses from real estate in own use for an amount of EUR 17 million (2000: EUR 17 million and 1999: EUR 14 million), based on market conditions. Claims processing costs are included in benefits and surrenders and claims for own account; investment expenses are included in investment charges. AEGON has non-contributory defined benefit plans and defined contribution plans covering substantially all AEGON employees. In a number of countries retirement benefits are insured with our life insurance companies based on the usual actuarial formulas. In the other countries the provisions for pension obligations are vested in separate legal entities, primarily consisting of defined benefit pension plan trusts, not forming part of AEGON. In The Netherlands employees participate in a defined benefit scheme based on average salary and for the amount exceeding a certain level employees may opt for a defined contribution scheme. Indexation of vested rights are fully funded yearly and immediately charged to the income statements. In the United States and in the United Kingdom benefits are based on past and future service, taking into account future salary and benefit levels as well as estimated inflation in future years. Regular improvements of benefits are allocated to future service years. In the United States, the present overfunding of the pension plans and the related interest benefit on pension plan assets cause pension expense to be credit. In the other countries pension costs are fully charged to the income statements in the years in which they occur. The average number of employees was 25,790 of which 4,298 agent-employees (2000: 24,377 of which 4,112 agent-employees and 1999: 22,070 of which 4,647 agent-employees). The specification per geographical area is as follows: 2001 2000 1999 Americas 16,007 14,987 12,857 The Netherlands 3,073 3,059 3,786 United Kingdom 4,574 4,404 3,255 Other Countries 2,136 1,927 2,172 ------ ------ ------ 25,790 24,377 22,070
-108- Remuneration of active and retired members of the Executive Board (in thousands of EUR) <TABLE> <CAPTION> Performance related Total Total Salary payments/1/ Pension 2001 2000 <S> <C> <C> <C> <C> <C> P. van de Geijn 475 457 47 979 940 D.J. Shepard 1,117 1,321 313 2,751 3,030 K.J. Storm 642 616 64 1,322 1,268 J.B.M. Streppel (as of May 4, 2000) 475 305 47 827 359 ----- ----- ----- ----- ----- Total active members 2,709 2,699 471 5,879 5,597 H.B. van Wijk (up to May 4, 2000) 188 188 1,093 ----- ----- ----- ----- ----- Total 2,709 2,887 471 6,067 6,690 </TABLE> /1/ Under an annual bonus scheme of EUR 24,463 per member per percent point increase in the preceding year earnings per share over the rate of inflation, with a maximum of that year's salary. Remuneration of active and retired members of the Supervisory Board In euros 2001 2000 M. Tabaksblat 56,722 41,619 H. de Ruiter 45,378 36,302 D.G. Eustace 45,378 29,496 Sir Michael Jenkins -- 27,227 O.J. Olcay 34,034 27,227 J.F.M. Peters -- 31,765 K.M.H. Peijs 34,034 27,227 G.A. Posthumus 39,705 27,227 T. Rembe (as of May 4, 2000) 34,034 17,837 W.F.C. Stevens 34,034 27,227 F.J. de Wit 34,034 27,227 ------- ------- Total for active members 357,353 320,381 Sir Michael Jenkins 34,034 -- J.F.M. Peters (up to May 3, 2001) 15,808 -- G. van Schaik (up to May 4, 2000) -- 15,824 ------- ------- Total 407,195 336,205
-109- <TABLE> <CAPTION> Stock options and interests in the company of active members Stock options Stock options Shares held Balance at Exercise Exercise Market Balance at Exercise in the company January, 1 price Granted price Exercised Date price December, 31 price December, 31 EUR EUR EUR EUR <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> P. van de Geijn 200,000 17.36 0 -- -- 200,000 17.36 200,000 29.02 0 -- -- 200,000 29.02 200,000 46.95 0 -- -- 200,000 46.95 200,000 34.50 0 -- -- 200,000 34.50 100,000 34.84 0 -- -- 100,000 34.84 226,722 D.J. Shepard 200,000 17.36 0 -- -- 200,000 17.36 200,000 29.02 0 -- -- 200,000 29.02 200,000 46.95 0 -- -- 200,000 46.95 200,000 34.50 0 -- -- 200,000 34.50 100,000 34.84 0 -- -- 100,000 34.84 276,170 K.J. Storm 200,000 17.36 0 -- -- 200,000 17.36 200,000 29.02 0 -- -- 200,000 29.02 200,000 46.95 0 -- -- 200,000 46.95 200,000 34.50 0 -- -- 200,000 34.50 100,000 34.84 0 -- -- 100,000 34.84 261,181 J.B.M. Streppel 50,000 17.36 25,000 04-10 34.98 25,000 17.36 50,000 29.02 0 -- -- 50,000 29.02 40,000 46.95 0 -- -- 40,000 46.95 40,000 34.50 0 -- -- 40,000 34.50 100,000 34.84 0 -- -- 100,000 34.84 -- </TABLE> The criteria for the number of options offered to the members of the Executive Board are as follows: 1. Comparison of the AEGON share price with a peer group of nine Financials (AIG, Allianz, AXA, Generali, Prudential, Zurich, ABN Amro, Fortis, ING). The comparison is based on a moving average over the last three years. 2. When AEGON finishes in the top three each person receives the maximum of 200,000 options, in the bottom three 50,000 per person and in the middle four 100,000 per person. 3. If there is no increase in earnings per share, no options will be offered. At the balance sheet date, J.B.M. Streppel had a 5% mortgage loan of EUR 680,700. According to the contract no redemptions were received on this loan in 2001. The aggregate amount of AEGON N.V. common shares held by the Supervisory Board members was 20,581 as per December 31, 2001. Members of the Supervisory Board do not hold options on AEGON N.V. shares.
-110- <TABLE> <CAPTION> 2.8. Investment charges Non- Life Non-life technical Total <S> <C> <C> <C> <C> 2001 Investment expenses and interest charges 242 6 806 1,054 2000 Investment expenses and interest charges 296 9 710 1,015 1999 Investment expenses and interest charges 223 20 661 904 2.9. Miscellaneous income and expenditure 2001 Addition to provision for doubtful debts 766 32 6 804 Currency exchange rate differences 1 0 (18) (17) Book gain on sale partnership interests in Mexico (343) -- -- (343) Other income and expenditure (9) 4 (61) (66) ---- -- --- ----- Total 415 36 (73) 378 2000 Addition to provision for doubtful debts 132 3 7 142 Currency exchange rate differences 1 (1) 10 10 Other income and expenditure (4) 1 (14) (17) ---- -- --- ----- Total 129 3 3 135 1999 Addition to provision for doubtful debts 83 7 10 100 Currency exchange rate differences 2 1 10 13 Other income and expenditure 9 (6) (11) (8) ---- -- --- ----- Total 94 2 9 105 </TABLE> 2.10. Investment income allocated to the non-technical account Investment income from shareholders' equity does not form part of the technical results. The amounts transferred to the non-technical account include direct yield on allocated investments or are based on the average direct yield of the investment portfolio. 2.11. Corporation tax The tax burden for AEGON as a group is made up of the direct and future taxes payable on profits of the units operating in the various countries. The effective tax rates of these units reflect tax benefits available in the local environment and could therefore be below nominal rates. The tax burden in The Netherlands reflects the benefit of special tax rules for which the company and its subsidiaries qualify, including an equalization reserve and tax exempt investment in subsidized housing and certain participations.
-111- 2001 2000 1999 Breakdown: Taxes currently due 709 469 324 Taxes deferred due to temporary differences 209 364 287 --- --- --- Total 918 833 611 The following is a reconciliation of the statutory tax on income with the actual tax expense: Statutory tax rate 1,109 969 748 Increases (decreases) in taxes resulting from: Dividend income exclusions and credits (286) (109) (41) Depreciation of equipment and real estate (3) (3) (19) Valuation of technical provisions 2 0 (6) Other, net 96 (24) (71) ----- ---- --- Actual tax expense 918 833 611 2.12. Net income unconsolidated group companies Labouchere Because of the sale at March 31, 2000, this subsidiary was deconsolidated for reason of comparability. The net profit for the first quarter 2000 amounting to EUR 31 million has been recognized under unconsolidated group companies Transamerica non insurance businesses Since their acquisition, AEGON has been accounting for the non insurance businesses of Transamerica (Transamerica Finance Corporation) as participations and has recorded them at cost. Following a change in accounting, resulting from the decision to retain and continue to develop these businesses as operating units of the group, these businesses are carried at net asset value in the balance sheet as of June 30, 2000. From July 21, 1999 up to the first six months of 2000 dividends declared were included in earnings for an amount that offset the funding cost. Effective July 1, 2000, net income of the non insurance businesses has been included in consolidated earnings. The non-insurance businesses of Transamerica include lending, leasing and real estate information services. The lending business makes commercial loans through three operations: distribution finance, business credit and equipment financial services. Leasing is comprised of the company's marine container and European trailer operations. Real estate information provides tax and flood hazard services primarily to mortgage originators and servicers. Due to their dissimilarity in operations in relation to the operations of AEGON, these group companies have not been consolidated. Following are the consolidated balance sheets, consolidated income statements and notes thereto of Transamerica Finance Corporation, established in Delaware and operating from Chicago, Illinois, USA. Valuation and determination of results are based on Dutch accounting principles.
-112- Consolidated balance sheets at December 31 of Transamerica Finance Corporation <TABLE> <CAPTION> 2001 2000 <S> <C> <C> Cash 64 51 Finance receivables 7,865 8,916 Equipment 129 186 Other assets 3,186 4,529 ------ ------ Total 11,244 13,682 Long-term borrowings 4,926 5,956 Short-term borrowings 3,182 4,248 Other liabilities 1,053 1,146 Accruals and deferred income 348 331 Provisions for deferred taxation 462 443 Shareholders' equity 1,273 1,558 ------ ------ Total 11,244 13,682 Consolidated income statements of Transamerica Finance Corporation Finance charges 919 1,134 Leasing revenues 489 683 Real estate information 283 286 Other revenues 261 209 ------ ------ Total revenues 1,952 2,312 Interest and debt expense 470 660 Salaries and other employee expenses 365 384 Depreciation on equipment held for lease 246 307 Addition to the provision for doubtful accounts 155 149 Miscellaneous income and expenditure 590 589 ------ ------ Total expenses 1,826 2,089 Income before tax 126 223 Corporation tax (1) (70) ------ ------ Net income from operations 125 153 The low corporation tax in 2001 has been caused by the reversal of state tax liabilities that were no longer needed Income reported by AEGON: Dividend declared through June 30, 2000 -- 82 Net income reported from July 1, 2000 125 66 Funding costs on the related raised debt (53) (119) ------ ------ Net income reported by AEGON 72 29 </TABLE>
-113- Notes to the consolidated balance sheets Where not otherwise stated, balance sheet items are carried at face value. If necessary a provision for bad and doubtful debts has been deducted. Cash All cash is at free disposal <TABLE> <CAPTION> 2001 2000 <S> <C> <C> Finance receivables The contractual maturity is: Within three months 2,063 2,520 Between three months and one year 1,743 1,871 Between one and five years 3,144 3,574 Over five years 915 951 ----- ----- Total 7,865 8,916 This item includes receivables from lending and leasing activities after deduction of unearned finance charges. Equipment Balance at January 1 186 191 Investments 65 27 Depreciation (26) (33) Disposals and other changes (106) (15) Currency rate differences 10 16 ----- ----- Balance at December 31 129 186 Accumulated depreciation 80 48 Total cost of equipment 209 234 Equipment is shown at cost less depreciation over the estimated useful life. Other assets Equipment held for lease 2,025 2,174 Assets held for sale 399 1,346 Other 762 1,009 ----- ----- Total 3,186 4,529 Equipment held for lease is shown at cost less depreciation over the estimated useful life. Assets held for sale consists primarily of consumer mortgage and retail finance receivables Long-term borrowings The contractual maturity is: Within three months 505 521 Between three months and one year 1,804 2,070 Between one and five years 2,254 3,025 Over five years 363 340 ------ ------ Total 4,926 5,956 </TABLE>
-114- 2001 2000 Short-term borrowings Commercial Paper 2,967 4,132 Banks 111 116 AEGON 104 -- ----- ------ Total 3,182 4,248 Other liabilities Creditors 529 875 Taxes 21 31 Other liabilities 503 240 ----- ------ Total 1,053 1,146 Shareholders' equity Capital 17 16 Reserves 1,256 1,542 ----- ------ Total 1,273 1,558 Reserves Balance at January 1 1,542 3,219 Net income 72 29 Capital (redemptions)/contributions (265) 322 Dividends paid (122) (272) Goodwill -- (2,059) Currency exchange rate differences 47 270 Other changes (18) 33 ------ ------ Balance at December 31 1,256 1,542 Commitments and contingencies The business credit unit of the commercial lending operation provides revolving lines of credit, letters of credit and standby letters of credit. At December 31 borrowers' unused credit available under such arrangements totaled EUR 2,340 million. Off balance sheet The company has entered into arrangements in which it securitized and services inventory floorplan, equipment finance and leasing, insurance premium finance receivables and residential mortgage as well as small business administration loans. Securitized assets at December 31 totaled EUR 3,083 million.
-115- Notes to the consolidated income statements 2001 2000 Breakdown of net income from operations by segment Commercial lending 87 139 Leasing (12) 8 Real estate information services 42 24 Other 8 (18) ---- --- Net income from operations 125 153 Salaries and other employee costs Salaries 319 306 Pension expenses (6) (4) Social security charges 15 18 Other employee costs 37 64 ---- --- Total 365 384
-116- 3. SEGMENT INFORMATION Revenues and production 2001 2000 1999 Revenues Life general account single premium 2,165 2,224 1,318 Life general account recurring premium 5,533 4,953 3,881 Life policyholders account single premium 6,363 6,823 4,848 Life policyholders account recurring premium 4,220 3,983 2,755 - ------------------------------------------------------------------------------- Total life insurance gross premiums 18,281 17,983 12,802 Accident and health insurance premium 2,558 2,067 1,453 General insurance premium 739 721 725 - ------------------------------------------------------------------------------- Total gross premiums 21,578 20,771 14,980 Investment income insurance activities /1/ 9,840 9,534 6,600 Income from banking activities 384 324 704 - ------------------------------------------------------------------------------- Total revenues business units 31,802 30,629 22,284 Income from other activities 93 78 90 - ------------------------------------------------------------------------------- Total revenues 31,895 30,707 22,374 Revenues by product segment Life insurance 27,620 27,165 19,110 Accident & health insurance 2,977 2,330 1,648 General insurance 821 810 822 Banking activities 384 324 704 Other activities 93 78 90 - ------------------------------------------------------------------------------- Total revenues 31,895 30,707 22,374 Investment income for the account of policyholders (9,515) (3,495) 13,533 Standardized new premium production-life insurance Single 8,337 8,565 5,748 Recurring annualized 1,783 1,717 1,237 Total recurring plus 1/10 single 2,617 2,574 1,812 Deposits Fixed annuities 7,545 4,972 3,645 GICs and funding agreements 12,198 11,547 9,062 Variable annuities 6,638 8,987 4,738 Total 26,381 25,506 17,445 Savings deposits 4,262 3,528 3,661 Total production on balance sheet 30,643 29,034 21,106 Investment contracts 816 938 465 Off balance sheet production Synthetic GICs 13,077 6,379 4,888 Mutual funds/Collective Trusts and other managed assets 8,520 9,410 4,599 Total production off balance sheet 21,597 15,789 9,487 /1/ Of which indirect income on real estate and shares 723 595 394
-117- Americas 2001 2000 1999 Income by product segment Traditional life 884 924 580 Fixed annuities 358 461 338 GICs and funding agreements 215 179 132 Life for account policyholders 104 103 51 Variable annuities 120 141 55 Fee business 83 80 56 Book profit Mexico 343 -- -- ------ ------ ------ Life insurance 2,107 1,888 1,212 Accident & health insurance 164 134 123 General insurance 1 3 2 ------ ------ ------ Total insurance 2,272 2,025 1,337 of which general account 1,965 1,701 1,175 of which policyholders account /1 / 307 324 162 ------ ------ ------ Income before tax 2,272 2,025 1,337 Corporation tax (677) (686) (463 ------ ------ ------ Net income 1,595 1,339 874 Revenues Life general account single premium 1,170 1,427 671 Life general account recurring premium 4,667 4,190 3,032 Life policyholders account single premium 1,118 1,073 457 Life policyholders account recurring premium 795 723 103 ------ ------ ------ Total life insurance gross premiums 7,750 7,413 4,263 Accident and health insurance 2,337 1,865 1,264 General insurance 11 5 4 ------ ------ ------ Total gross premiums 10,098 9,283 5,531 Investment income insurance activities 8,078 7,754 4,920 ------ ------ ------ Total revenues 18,176 17,037 10,451 Investment income for the account of policyholders (5,951) (3,981) 7,216
-118- Americas (continued) 2001 2000 1999 Gross margin, commissions and expenses Gross margin 5,664 5,016 3,376 Commissions and expenses 3,392 2,991 2,039 Standardized new premium production life insurance Single 2,149 2,129 990 Recurring annualized 887 1,050 566 Total recurring plus 1/10 single 1,102 1,263 665 Deposits Fixed annuities 7,545 4,972 3,645 GICs and funding agreements 12,198 11,547 9,062 Variable annuities 6,638 8,987 4,738 Total production on balance sheet 26,381 25,506 17,445 Off balance sheet production Synthetic GICs 13,077 6,379 4,888 Mutual funds/Collective Trusts and other managed assets 7,148 8,040 3,843 Total production off balance sheet 20,225 14,419 8,731 /1/ Includes also variable annuities and fees.
-119- The Netherlands 2001 2000 1999/2/ Income by product segment Traditional life 614 577 513 Life for account policyholders 192 150 134 ----- ----- ------ Life insurance 806 727 647 Accident & health insurance 36 34 20 General insurance 37 32 39 ----- ----- ------ Total insurance 879 793 706 of which general account 687 643 572 of which policyholders account 192 150 134 Banking activities /1/ 45 47 155 ----- ----- ------ Income before tax 924 840 861 Corporation tax (228) (187) (189) ----- ----- ------ Net income 696 653 672 Revenues Life general account single premium 768 553 456 Life general account recurring premium 569 602 692 Life policyholders account single premium 814 739 535 Life policyholders account recurring premium 1,486 1,429 1,329 ----- ----- ------ Total life insurance gross premiums 3,637 3,323 3,012 Accident and health insurance 146 129 118 General insurance 422 408 402 ----- ----- ------ Total gross premiums 4,205 3,860 3,532 Investment income insurance activities 1,484 1,502 1,447 Income from banking activities 384 324 704 ----- ----- ------ Total revenues 6,073 5,686 5,683 Investment income for the account of policyholders (155) 333 2,478 Gross margin, commissions and expenses Gross margin 1,479 1,374 1,525 Commissions and expenses 555 534 664
-120- The Netherlands (continued) 2001 2000 1999 Standardized new premium production life insurance Single 1,625 1,292 948 Recurring annualized 188 172 263 Total recurring plus 1/10 single 351 301 358 Deposits Savings deposits 4,262 3,528 3,661 Total production on balance sheet 4,262 3,528 3,661 Investment contracts 816 938 465 Off balance sheet production Mutual funds/Collective Trusts and other managed assets 868 354 250 Total production off balance sheet 868 354 250 /1/ Includes income on off balance sheet type products /2/ Includes Labouchere consolidated
-121- United Kingdom 2001 2000 1999 Income by product segment Traditional life 22 52 50 Life for account policyholders 346 295 190 Fee business 4 13 (3) ------ ------ ------ Life insurance 372 360 237 of which general account 22 52 50 of which policyholders account /1/ 350 308 187 ------ ------ ------ Income before tax 372 360 237 Corporation tax (107) (98) (60) ------ ------ ------ Net income 265 262 177 Revenues Life general account single premium 181 160 157 Life general account recurring premium 79 16 34 Life policyholders account single premium 4,361 4,859 3,713 Life policyholders account recurring premium 1,767 1,703 1,238 ------ ------ ------ Total gross premiums 6,388 6,738 5,142 Investment income insurance activities 129 145 99 ------ ------ ------ Total revenues 6,517 6,883 5,241 Investment income for the account of policyholders (3,325) 181 3,783 Gross margin, commissions and expenses Gross margin 728 689 521 Commissions and expenses 356 329 284 Standardized new premium production-life insurance Single 4,447 4,896 3,645 Recurring annualized 583 394 308 Total recurring plus 1/10 single 1,028 884 673 Off balance sheet production Mutual funds/Collective Trusts and other managed assets 442 952 446 Total production off balance sheet 442 952 446 /1/ Includes also fee income
-122- Other countries <TABLE> <CAPTION> Hungary Spain Other countries 2001 2000 1999 2001 2000 1999 2001 2000 1999 <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Income by product segment Traditional life 35 30 34 9 8 4 (7) (10) (5) Life for account of policyholders (6) (4) (3) (8) (3) (5) 4 2 5 Fee business 7 5 0 -- -- -- -- -- -- --- --- --- --- --- --- --- --- -- Life insurance 36 31 31 1 5 (1) (3) (8) 0 Accident & health insurance 0 0 1 9 4 0 0 0 0 General insurance 24 21 12 6 4 (55) (1) 0 0 --- --- --- --- --- --- --- --- -- Total insurance 60 52 44 16 13 (56) (4) (8) 0 of which general account 59 51 47 24 16 (51) (8) (10) (5) of which policyholders account /1/ 1 1 (3) (8) (3) (5) 4 2 5 Income before tax 60 52 44 16 13 (56) (4) (8) 0 Corporation tax (10) (8) (4) (1) 0 5 0 (1) 0 --- --- --- --- --- --- --- --- -- Net income 50 44 40 15 13 (51) (4) (9) 0 Revenues Life general account single premium 0 4 0 43 76 18 3 4 16 Life general account recurring premium 77 82 86 52 38 33 89 25 4 Life policyholders account single premium 10 34 10 45 97 118 15 21 15 Life policyholders account recurring premium 36 18 6 38 38 36 98 72 43 --- --- --- --- --- --- --- --- -- Total life insurance gross premiums 123 138 102 178 249 205 205 122 78 Accident and health insurance 1 1 1 74 72 70 0 0 0 General insurance 84 84 88 221 218 231 1 6 0 --- --- --- --- --- --- --- --- -- Total gross premiums 208 223 191 473 539 506 206 128 78 Investment income insurance activities 76 77 91 54 46 37 19 10 6 --- --- --- --- --- --- --- --- -- Total revenues 284 300 282 527 585 543 225 138 84 Investment income for the account of policyholders 4 2 3 (36) (26) 23 (52) (4) 30 Gross margin, commissions and expenses Gross margin 131 126 120 117 109 43 57 34 25 Commissions and expenses 71 74 76 101 96 99 61 42 25 Standardized new premium production life insurance Single 10 38 11 89 184 136 17 26 18 Recurring annualized 22 18 13 35 46 32 68 37 55 Total recurring plus 1/10 single 23 22 14 44 64 45 70 40 57 Off balance sheet production Mutual funds/Collective Trusts and other managed assets 62 64 60 -- -- -- -- -- -- </TABLE> /1/ Includes also fee income
-123- Investments, assets, liabilities geographically <TABLE> <CAPTION> The United Other As at December 31, 2001 Americas Netherlands Kingdom countries Total <S> <C> <C> <C> <C> <C> Investments Fixed income 105,195 12,102 1,323 1,401 120,021 Equities & real estate 4,732 5,599 147 155 10,633 Total general account 109,927 17,701 1,470 1,556 130,654 - -------------------------------------------------------------------------------------- Fixed income 13,879 6,024 23,022 354 43,279 Equities & real estate 30,044 12,014 27,739 196 69,993 Total account policyholders 43,923 18,038 50,761 550 113,272 - -------------------------------------------------------------------------------------- Total insurance activities 153,850 35,739 52,231 2,106 243,926 Banking activities -- 7,047 -- -- 7,047 Off balance sheet assets 50,982 1,319 1,336 247 53,884 - -------------------------------------------------------------------------------------- Total business units 204,832 44,105 53,567 2,353 304,857 Other investments 464 - -------------------------------------------------------------------------------------- Total investments 305,321 Assets business units 159,180 44,834 52,976 2,400 259,390 Other assets 4,671 Total assets on balance sheet 264,061 Capital in units 15,795 3,654 2,910 374 22,733 Total capital base 22,045 Other net liabilities 688 Total 22,733 As at December 31, 2000 Investments Fixed income 87,807 12,045 1,253 1,103 102,208 Equities & real estate 3,911 6,543 150 150 10,754 Total general account 91,718 18,588 1,403 1,253 112,962 - -------------------------------------------------------------------------------------- Fixed income 17,096 7,103 23,028 306 47,533 Equities & real estate 28,509 9,425 28,612 207 66,753 Total account policyholders 45,605 16,528 51,640 513 114,286 - -------------------------------------------------------------------------------------- Total insurance activities 137,323 35,116 53,043 1,766 227,248 Banking activities -- 5,490 -- -- 5,490 Off balance sheet assets 41,916 1,004 1,607 154 44,681 - -------------------------------------------------------------------------------------- Total business units 179,239 41,610 54,650 1,920 277,419 Other investments 985 Total investments 278,404 Assets business units 142,511 42,937 53,594 2,051 241,093 Other assets 3,123 Total assets on balance sheet 244,216 Capital in units 12,873 4,172 2,402 409 19,856 Total capital base 18,592 Other net liabilities 1,264 Total 19,856 </TABLE>
-124- Face value and total sums insured <TABLE> <CAPTION> Year 2001 The United Other Life Insurance Americas Netherlands Kingdom Hungary Spain countries Total <S> <C> <C> <C> <C> <C> <C> <C> New insurance written Individual 70,158 2,324 6,587 150 240 754 80,213 Group 15,574 7,453 2,452 148 120 48 25,795 - ------------------------------------------------------------------------------------------------------------ Total 2001 85,732 9,777 9,039 298 360 802 106,008 Total 2000 130,245 12,233 7,399 266 546 459 151,148 Net increase Individual 81,640 152 935 13 58 1,654 84,452 Group (4,419) 3,511 1,301 64 52 48 557 - ------------------------------------------------------------------------------------------------------------ Total 2001 77,221 3,663 2,236 77 110 1,702 85,009 Total 2000 184,289 7,830 (2,380) (111) 963 292 190,883 Total sums insured at year-end Individual 949,297 48,802 77,192 1,371 2,265 3,002 1,081,929 Group 75,532 69,008 20,880 220 835 48 166,523 - ------------------------------------------------------------------------------------------------------------ Total 2001 1,024,829 117,810 98,072 1,591 3,100 3,050 1,248,452 Total 2000 947,608 114,147 95,836 1,514 2,990 1,348 1,163,443 </TABLE> Fixed income investments general account <TABLE> <CAPTION> The United Other % of December 31, 2001 Americas Netherlands Kingdom countries Total total <S> <C> <C> <C> <C> <C> <C> Treasuries/Agencies 4,964 14 370 766 6,114 5 High Quality (AAA/AA) 30,326 5,053 480 338 36,197 30 Investment grade (A/BBB) 47,492 1,286 468 209 49,455 41 High yield (BB+ or less) 5,516 173 0 6 5,695 5 Mortgages 14,305 5,238 0 10 19,553 16 Others 2,592 338 5 72 3,007 3 ------- ------ ----- ----- ------- --- Total 105,195 12,102 1,323 1,401 120,021 100 December 31, 2000 Treasuries/Agencies 5,539 -- 426 630 6,595 7 High Quality (AAA/AA) 21,294 5,848 423 276 27,841 27 Investment grade (A/BBB) 41,405 990 399 115 42,909 42 High yield (BB+ or less) 4,643 41 0 10 4,694 5 Mortgages 12,565 5,062 0 5 17,632 17 Others 2,361 104 5 67 2,537 2 ------- ------ ----- ----- ------- --- Total 87,807 12,045 1,253 1,103 102,208 100 </TABLE>
-125- 4. PARENT COMPANY 4.1. Balance Sheets of AEGON N.V. at December 31 (after profit appropriation) Amounts in million EUR Note 2001 2000 number Investments Group companies Shares in group companies 4.4.1. 11,850 11,251 Loans to group companies 4.4.2. 6,490 3,392 Other loans 4.4.3. 435 524 ------ ------ 18,775 15,167 Receivables Receivables from group companies 2,844 2,753 ------ ------ 2,844 2,753 Other assets Liquid assets 42 24 Other assets 26 36 ------ ------ 68 60 Prepayments and accrued income Accrued interest and rent 177 61 ------ ------ 177 61 ------ ------ Total assets 21,864 18,041 Capital and reserves Share capital 4.4.4. 224 215 Tax-free paid-in surplus 4.4.5. 5,074 3,395 Revaluation account 4.4.5. 4,640 6,177 Other surplus fund 4.4.5. 5,354 3,057 ------ ------ 15,292 12,844 Perpetual cumulative subordinated loans 1,517 1,267 Subordinated (convertible) loans 670 683 Provisions 197 167 Long-term liabilities 4.4.6. 1,888 1,146 Current liabilities Amounts owed to credit institutions 1,297 1,225 Other payables 893 600 ------ ------ 2,190 1,825 Accruals and deferred income 110 109 ------ ------ Total liabilities 21,864 18,041
-126- 4.2. Income Statements of AEGON N.V. and the Appropriation of Profit 2001 2000 1999 Net income group companies 2,337 2,053 1,513 Other income 60 13 57 ------ ------ ------ Net income 2,397 2,066 1,570 Appropriation of profit: Dividend on preferred shares 3 3 3 Dividend on common shares 1,142 973 794 Retained earnings 1,252 1,090 773 ------ ------ ------ 2,397 2,066 1,570 4.3. Cash Flow Statements of AEGON NV Cash flow from operations Net income 2,397 2,066 1,570 Equity in earnings of group companies (2,337) (2,053) (1,513) Change in provisions 30 (221) 25 Change in current liabilities 315 247 (646) Change in receivables (106) 1 20 Other items 152 280 (24) ------ ------ ------ 451 320 (568) Cash flow from investing activities Investments in group companies -- (1,396) (139) Dividends from group companies 360 1,753 942 Amounts due to group companies (91) (418) (99) Change in loans to group companies (2,893) (593) (631) Change in other loans 89 150 203 Divestitures of group companies -- 847 -- ------ ------ ------ (2,535) 343 276 Cash flow from financing activities Issuance of common shares 1,685 -- 681 Issuance of preferred shares -- -- 12 Withdrawal of preferred shares -- (15) -- Change in long-term liabilities 979 81 382 Options exercised 3 7 5 Repurchased own shares (21) (423) (315) Dividend paid (544) (298) (487) ------ ------ ------ 2,102 (648) 278 ------ ------ ------ Change in liquid assets 18 15 (14)
-127- 4.4. Notes to the Balance Sheets of AEGON N.V. Accounting principles Unless otherwise stated, balance sheet items are valued in accordance with the accounting principles described in the Notes to the Consolidated Balance Sheets. <TABLE> <CAPTION> 2001 2000 <S> <C> <C> 4.4.1. Shares in group companies Balance at January 1 11,251 12,620 Capital contribution and acquisitions 0 1,396 Divestitures 0 (847) Net income for the financial year 2,337 2,053 Dividend distributed (360) (1,753) Cash settlement subordinated convertible loan 0 (24) Goodwill (277) (2,254) Revaluations (1,101) 60 ------ ------ Balance at December 31 11,850 11,251 The group companies are stated at their net asset value. 4.4.2. Loans to group companies Balance at January 1 3,392 2,774 Additional loans 4,117 649 Repayments or payments received (1,224) (56) Other changes 205 25 ------ ------ Balance at December 31 6,490 3,392 4.4.3. Other loans Balance at January 1 524 674 Repayments or payments received (89) (150) ------ ------ Balance at December 31 435 524 </TABLE> <TABLE> <CAPTION> Common Preferred shares shares Total <S> <C> <C> <C> 4.4.4. Share capital Authorized 312 168 480 Unissued 141 115 256 --- --- --- Issued and outstanding, including repurchased own shares 171 53 224 </TABLE> Vereniging AEGON, based in The Hague, holds all the issued preferred shares. On June 29, 2001 AEGON NV entered into a Total Return Swap (TRS) with Vereniging AEGON in order to hedge the stock option plan for 2001. The TRS gives AEGON NV effectively the right to the capital gains on 11,288,800 AEGON NV shares at the termination date and to the dividends on these shares during the contract period. The capital gains are calculated based on an exercise price of EUR 32.04. Any losses compared to the exercise price will be paid by AEGON NV to Vereniging AEGON upon termination. AEGON NV in return will pay interest to Vereniging AEGON on a quarterly basis over the (remaining) amount outstanding under the TRS. The interest rate is equal to the 3 month EURIBOR plus a spread. The TRS ends on March 12, 2006 but may be terminated earlier, either partly or entirely, at the option of AEGON NV. The total return swap is carried at fair value with changes in fair value reported in equity.
-128- 2001 2000 Number of common shares Balance at January 1 1,350,523,905 668,426,144 Stock split -- 668,426,144 Issuance of shares 55,000,000 -- Stock dividend 16,484,329 13,194,117 Exercise of options 245,000 477,500 ------------- ------------- Balance at December 31 1,422,253,234 1,350,523,905 The weighted average number of EUR 0.12 common shares over 2001 was 1,357,349,252 (2000: 1,315,381,814). The repurchased own shares, although included in the issued and outstanding number of shares, are eliminated in the calculation of the weighted average number of shares. Stock options Senior executives of AEGON companies as well as other AEGON employees have received AEGON stock options or stock appreciation rights in 2001. In previous years similar possibilities were offered. The options have been granted at an exercise price equal to the market price of the shares at the date of the grant. The options granted in 2001 can only be exercised three years after being granted and then during a period of two years, as was the case in the 1997, the 1998, the 1999 and 2000 stock option plans. Stock options plans can only be established after the prior consent of the Annual General Meeting. If, subsequently, the Executive Board decides to implement stock option plans, that decision has to be approved by the Supervisory Board. Options granted in earlier years can generally be exercised during a period of five years. Options granted pursuant to the purchase agreement with Providian have various expiration dates. The options granted to senior executives of former Providian business units fully vest in three years and the exercise period is up to ten years, ending at the latest in August 2008. In compliance with regulations stock options cannot be exercised in black-out periods. The following tables set forth the changes in the years 1999, 2000 and 2001 as well as the breakdown of the options outstanding. Number of Weighted average options/1/ exercise price in euros/1/ Balance at January 1, 1999 31,474,752 19.23 Issued 8,925,300 46.95 Exercised (2,769,578) 7.74 Lapsed (274,846) 21.17 ---------- Balance at December 31, 1999 37,355,628 26.25 Issued 10,609,700 34.50 Exercised (5,891,026) 12.74 Lapsed (148,018) 21.75 ---------- Balance at December 31, 2000 41,926,284 30.22 Issued 11,288,800 34.84 Exercised (3,920,532) 23.13 Lapsed (25,374) 49.54 ---------- Balance at December 31, 2001 49,269,178 32.69 /1/ Adjusted for the 2:1 stock split in May 2000 and including stock appreciation rights.
-129- <TABLE> <CAPTION> Outstanding Original January 1 December 31 Exercise price Stock options number/1/ 2001/1/ 2001/1/ in euros/1/ Exercise period/3/ <S> <C> <C> <C> <C> <C> 1995 10,169,500 217,500 -- 6.80 until January 1, 2002 1996 9,886,700 2,485,500 138,000 9.79 until January 1, 2003 1997 9,479,500 6,848,000 6,059,500 17.36 until November 1, 2002 Providian 7,204,384 1,324,684 1,216,278 24.51/2/ until August 6, 2008 1998 11,518,000 11,516,000 11,032,000 29.02 until March 23, 2003 1999/4/ 8,925,300 8,924,900 8,924,900 46.95 until March 6, 2004 2000/4/ 10,609,700 10,609,700 10,609,700 34.50 until March 14, 2005 2001/4/ 11,288,800 11,288,800 34.84 until March 13, 2006 ---------- ---------- ---------- 79,081,884 41,926,284 49,269,178 </TABLE> /1/ Adjusted for the stock splits in 1995, 1998 and 2000 as appropriate. /2/ Weighted average exercise price of the outstanding options in USD calculated at the closing rate. /3/ As of the 1995 series the exercise period for a small part of the options is 74 months. /4/ Including stock appreciation rights, which do not entitle to buy AEGON shares but provide the same financial benefits. Stock options exercisable as of December 31, 2001 amount to 18,445,778 (2000: 10,760,566 and 1999: 6,996,094) and their weighted average exercise price amounts to EUR 24.75 (2000: EUR 13.45 and 1999: EUR 9.02). The fair value of the stock options granted during the year amounts to EUR 83 million (2000: EUR 74 million and 1999: EUR 67 million). This value was estimated using the binomial option pricing model, taking into account that the options granted can not be exercised within the first three years. The breakdown of the stock options and stock appreciation rights granted in 2001 is as follows: Executive Board 400,000, other senior executives 3,824,700, other employees 7,064,100 (2000: 640,000, 4,125,300 and 5,844,400 respectively, recalculated for the split in May 2000). <TABLE> <CAPTION> Paid-in Revaluation Other Total Total surplus account surplus fund 2001 2000 <S> <C> <C> <C> <C> <C> 4.4.5. Surplus funds Balance at January 1, 3,395 6,177 3,057 12,629 13,327 Net income 2,397 2,397 2,066 Issuance of new shares 1,677 1,677 0 Repurchased and sold own shares (21) (21) (423) Exercised options 3 3 7 Stock dividend (1) (1) (2) (1) Dividend interim and final (1,145) (1,145) (976) Optional dividend 2001/2000 550 550 555 Revaluation group companies (1,537) 436 (1,101) 60 Currency exchange rate differences (50) (50) (105) Cash settlement subordinated convertible loan (68) (68) (24) Goodwill (286) (286) (2,254) Sale Mexico 602 602 -- Settlement stock option plans (71) (71) (200) Other movements (46) (46) 597 ----- ------ ------ ------ ------ Balance at December 31, 5,074 4,640 5,354 15,068 12,629 </TABLE>
-130- The minimum of the revaluation account for the consolidated investments as required by law amounts to EUR 739 million (2000: EUR 1,214 million). The legal reserve for currency differences on foreign subsidiaries refers to accumulated translation differences amounting to EUR 1,653 million (2000: EUR 1,217 million) and is included in the other surplus fund. 2001 2000 Consolidated revaluation account real estate and shares Balance of revaluations at January 1 6,177 6,682 Unrealized gains and losses on real estate and shares (1,051) (33) Unrealized gains and losses in previous years on real estate and shares sold in the reporting year 517 (2,604) Realized gains and losses on real estate and shares (507) 2,612 Transfer to the income statements of indirect income on real estate and shares (723) (595) Changes in the provision for deferred taxation 306 71 Other changes (79) 44 ------ ------ Balance at December 31 4,640 6,177 Unrealized gains and losses on investments are due to changes in stock exchange quotations and reappraisal of real estate of all activities. The indirect income is released from these revaluations if and as far as the balance is positive. Moreover, the minimum reserve as required by law should be maintained. This reserve consists of the unrealized difference between the bookvalue and the cost price of real estate and shares. In relation to this, as at December 31, 2001, an amount of EUR 3,901 million after tax is presently available for release from the revaluations whereas the remainder is only available after realization. Other surplus fund By virtue of acquisition in accordance with article 98, paragraph 5 of Book 2 of the Dutch Civil Code, per balance sheet date AEGON kept 30,923,080 own common shares with a face value of EUR 0.12 each. The shares have been purchased to hedge stock option rights granted to executives and employees. Movements in the numbers of shares were as follows: Balance at January 1 31,407,080 Purchase: 32 transactions, average price EUR 35.31 11,288,800 Sale: 105 transactions, average price EUR 32.10 (11,772,800) ----------- Balance at December 31 30,923,080 The purchase and sales values of the related shares have been deducted from respectively added to the other surplus fund. Goodwill is the difference between acquisition price and net asset value, based on AEGON accounting principles. The calculated amount is charged to shareholders' equity in the year of acquisition. The book gain is the part of the consideration from the sale of the Mexican joint ventures to Banacci (Citigroup) that relates to the return on invested capital which was charged to shareholders' equity as goodwill in earlier years.
-131- 2001 2000 4.4.6. Long-term liabilities Remaining terms 1-3 years 1,458 495 Remaining terms 4-5 years -- 333 Remaining terms more than 5 years 430 318 ----- ----- Total long-term liabilities 1,888 1,146 Redemptions due in 2002/2001 719 357 Redemptions are included in long-term liabilities. The repayment periods of borrowings vary from in excess of one year up to a maximum of 29 years. The interest rates vary from 0.093% to 9.875% per annum. The market value of the long-term liabilities amounts to EUR 1,911 million (2000: EUR 1,202 million). Commitments and contingencies AEGON N.V. has guaranteed and is severally liable for the following: Due and punctual payment of payables by AEGON Funding Corp. and AEGON Funding Corp. II with respect to bonds, notes issued and Commercial Paper Programs. Due and punctual payment of payables by Transamerica Finance Corp. with respect to notes issued in connection with Transamerica Finance Corp.'s Commercial Paper Program. FGH BANK N.V., for the sake of a. all unsubordinated and non-privileged creditors, to whom FGH BANK owes from deeds prior to February 27, 1987, and from all loans contracted by FGH BANK after February 27, 1987, up to March 30, 1998; b. those whom FGH BANK guaranteed or assumed several liability prior to February 27, 1987. The sales agreement with Hypo-Vereinsbank includes recourse against that bank for liabilities emerging from above guarantees. The Hague, March 7, 2002 Supervisory Board Executive Board M. Tabaksblad K.J. Storm H. de Ruiter P. van de Geijn D.G. Eustace D.J. Shepard O.J. Olcay J.B.M. Streppel K.M.H. Peijs G.A. Posthumus T. Rembe W.F.C. Stevens F.J. de Wit
-132- 5. EXPLANATION OF DIFFERENCES BETWEEN DUTCH ACCOUNTING PRINCIPLES AND ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES The consolidated financial statements of AEGON N.V. have been prepared in accordance with Dutch Accounting Principles. Dutch Accounting Principles differ in certain respects from accounting principles generally accepted in the United States ("US GAAP"). 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. The description of the Dutch Accounting Principle is shown first followed by a description of US GAAP. DESCRIPTION OF DIFFERENCES IN ACCOUNTING PRINCIPLES Real estate - ----------- Real estate is shown at market value, being the selling-value under normal market circumstances. Each property is revalued at least once in every 5 year period. Valuation is for a large part based on external appraisal. 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 are reported in the income statement. Debt securities - --------------- Bonds and private placements are shown at amortized cost 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. If necessary a provision for bad and doubtful debts is deducted. Debt securities also include preferred shares and money market investments. Preferred shares are valued at amortized cost; money market investments are valued at cost. Realized gains and losses from transactions within the bonds and private placements portfolios 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 debt securities are to be classified in three categories and accounted for as follows: . 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; . 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 fair value, with unrealized gains and losses included in earnings; . debt securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale securities and reported at fair 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. 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 through a charge to current year's earnings. The investment portfolio contains structured investments, which are not readily marketable. The carrying values of these investments are based on cash flow projections and, as such, these values are subject to change. If actual cash flows are less than projected, losses would be realized; increases in cash flows would be recognized over future periods. Realized investment gains or losses are determined on an identified cost basis.
-133- Deferred policy acquisition costs and value of business acquired - ---------------------------------------------------------------- Policy acquisition costs are costs that are directly or indirectly related to the sale of insurance contracts. Part of the acquisition costs are deferred and deducted from the technical provision life insurance. Policy acquisition costs are deferred to the extent that these costs are recoverable from future expense loadings in the premiums or expected gross profits, depending on the nature of the contract. The assumptions underlying the calculation of expected gross profits are determined from best estimates as to future experience. These estimates are based on, but not limited to: an economic perspective in terms of long-term bonds and equity returns; mortality, disability and lapse assumptions; maintenance expenses; and future expected inflation rates. Every year the deferred policy acquisition costs are tested to assess the recoverability from future premium loadings or future gross profits, by country unit and product line. If necessary, adjustments to the amortization schedule are applied. Included in AEGON's deferred acquisition costs is a substantial amount of value of business acquired (VOBA) resulting from acquisitions, which in its nature is the same as deferred acquisition costs and subject to the same recoverability testing. Deferred policy acquisition costs related to insurance contracts with fixed premiums are amortized over periods not to exceed the premium-paying periods or the contract periods. For flexible insurance contracts and investment type contracts the amortization is generally in proportion to emerging gross profits. Under US GAAP costs that vary with and are directly related to the acquisition of insurance contracts are deferred and amortized. In accordance with FAS 115, deferred policy acquisition costs should be adjusted to reflect changes that would have been necessary if unrealized investment gains or losses related debt securities had been realized. The effect on US GAAP equity is EUR (602) million (2000: EUR 9 million). Goodwill - -------- Goodwill is the difference between acquisition price and net asset value, based on AEGON accounting principles. The calculated amount is charged to shareholders' equity in the year of acquisition. Under US GAAP goodwill is capitalized and amortized over the expected periods to be benefited with adjustments for impairment. For US GAAP accounting purposes goodwill is amortized over various periods, not exceeding 20 years. Goodwill is tested for impairment based on undiscounted cash flows. Effective 2002 goodwill will no longer be amortized, but tested for impairment annually. Technical provisions - -------------------- The provision for life insurance is calculated using assumptions for future mortality, investment performance, lapses and expenses over the lifetime of the contracts. These long term assumptions are based on best estimates of future experience at policy issue. The estimates include a margin for adverse deviation. Regularly the assumptions are tested against actual experience. If these tests reveal a negative outcome, the provision is adjusted according to the actual data. Future costs of processing benefits are included in the provision. This provision also includes the provision for unearned premiums and unexpired risks as well as the provision for claims outstanding, both as far as related to the life insurance business. The technical provision for life reinsurance assumed is included in this provision as well. Provisions for annuities are for annuity contracts sold in the United States. Annuities are typically single premium insurance products where the paid-in amounts accumulate with interest credits, or equity growth, less applicable loads or fees. The funds grow on a tax deferred basis and have significant long-term savings characteristics. The benefit reserves are equal to the full accumulated contract values. The provision for GICs and funding agreements is the amount due for these products which are sold in the United States. Both Guaranteed Investment Contracts (GICs) and Funding Agreements (FAs) are issued on a fixed or floating rate basis and provide protection of principal and a guaranteed rate of interest. GICs are primarily sold to tax qualified retirement plans. FAs are typically sold to other, non-tax qualified institutional investors. FAs are also issued to certain trusts or special purpose entities, which in turn issue medium term notes or commercial paper secured by these FAs to institutional investors. The benefit reserves of GICs and funding agreements are equal to the full accumulated contract values. Under US GAAP the technical provisions for traditional life insurance contracts are computed using the net level 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
-134- technical provisions are equal to the policyholder account balances at balance sheet date. Also the technical provisions should include the part of the change in value of the debt securities that must be allocated to policyholders based on FAS 115. The effect on US GAAP equity is EUR (222) million (2000: EUR (207) million). In addition, to the extent that the contract contains an embedded derivative as defined by US GAAP, the contract is bifurcated and the derivative is market to fair value with changes recognized in the income statement. Shareholder dividends - --------------------- Dividends proposed but not yet approved are deducted from shareholders' equity and recognized as current liabilities. Under US GAAP, proposed dividends cannot be deducted from shareholders' equity until they become irrevocable. Deferred taxation - ----------------- The 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 liabilities. In the calculation discounted tax rates ranging from 0% to nominal rates are used. US GAAP requires an asset and liability approach for financial accounting and reporting for income taxes. A deferred tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences between the carrying amounts of assets and liabilities for financial statement purposes and the amounts used for income tax purposes and for carry forwards. 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. Realized gains on real estate and shares - ---------------------------------------- Realized and unrealized gains and losses on real estate and shares are recognized in the revaluation account, taking into account the related (deferred) taxes. In the income statement the structural total return on investments in real estate and shares is recognized. The total return includes the realized direct income (rent 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 the balance of this account is positive. Moreover, the minimum reserve as required by law should be maintained. This reserve consists of the unrealized difference between the book value and the cost price of real estate and shares. Under US GAAP realized gains and losses on sales of real estate and shares are recorded in the earnings of the period in which the sales occurred. Gains and losses, both realized and unrealized, on shares classified as trading are included in net income. Impairments in value of shares deemed to be other than temporary are reported as a component of realized gains and losses. Realized gains on debt securities - --------------------------------- Realized gains and losses from transactions within the bonds and private placements portfolios 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 the earnings of the period in which the sales occurred. Gains and losses, both realized and unrealized, on bonds and private placements classified as trading are included in net income.
-135- Derivatives - ----------- AEGON uses common derivative financial instruments such as interest rate swaps, options, futures and foreign exchange contracts to hedge its exposures related to investments, liabilities and borrowings. Options and futures contracts are included in the balance sheet at fair value or at the amounts received for written options. 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 and debt. AEGON does not hold or issue derivative instruments for speculative trading purposes. US GAAP requires that all derivatives, including embedded derivatives, are recognized as either assets or liabilities in the balance sheet and be measured at fair value. Derivatives that are not hedges 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 until the hedged item is recognized in income. The ineffective portion of a derivative's change in fair value will be immediately recognized in income. US GAAP accounting for derivatives was changed by AEGON as of January 1, 2001. See Note 6.17 to the consolidated financial statements for a further description of the US GAAP accounting rules for derivatives and the rules in effect prior to 2001. Balance of other items - ---------------------- Certain items are recorded differently or in different periods on the two bases of accounting. The balance of other items includes the effect of the sale of Mexico (EUR 896 million in capital and reserves and EUR 343 million in earnings) which under US GAAP will be accounted for in 2002. In 2000 the result of the sale of Labouchere and of other divestitures has been included in the balance of other items. Included in the balance of other items are also the effects of the stock appreciation rights and of the total return swap with Vereniging AEGON, which effects under US GAAP are included in the income statement and for DAP are not recognized or reflected in shareholders' equity. The 2000 figures have been reclassified because of a change in the presentation of the debt securities adjustment (FAS 115) on a gross basis instead of on a net basis, and the disclosure of the deferred policy acquisition costs adjustment as a separate line item in the reconciliation.
-136- RECONCILIATION OF SHAREHOLDERS' EQUITY AND NET INCOME BASED ON DUTCH ACCOUNTING PRINCIPLES TO US GAAP <TABLE> <CAPTION> (In million EUR) Shareholders' equity Net income 2001 2000 2001 2000 1999 <S> <C> <C> <C> <C> <C> Amounts determined in accordance with Dutch Accounting Principles 15,292 12,844 2,397 2,066 1,570 Adjustments for: Real estate (847) (742) (61) (59) (41) Debt securities 933 (113) -- -- -- Deferred policy acquisition costs 536 918 (141) (46) 54 Goodwill 5,918 5,880 (496) (433) (183) Technical provisions 153 223 45 12 (33) Shareholder dividends 634 583 -- -- -- Realized gains and (losses) on real estate and shares -- -- (1,160) 999 408 Realized gains and (losses) on debt securities 189 (78) 276 (348) (261) Derivatives (377) -- (236) -- -- Deferred taxation (601) (635) 44 (10) 44 Deferred taxation on US GAAP adjustments (333) (117) 374 165 218 Balance of other items (828) 202 (410) 242 (175) ------ ------ ------ ----- ----- Amounts determined in accordance with US GAAP 20,669 18,965 632 2,588 1,601 Other comprehensive income, net of tax: Foreign currency translation adjustments 701 659 1,342 Unrealized gains and (losses) on available for sale securities during period (621) 212 (114) Reclassification adjustment for (gains) and losses included in net income 377 (821) (401) Cumulative effect of accounting change of adopting FAS 133 49 -- -- ------ ----- ----- Comprehensive income in accordance with US GAAP 1,138 2,638 2,428 </TABLE> In 2001 major differences between amounts on Dutch accounting principles and those on US GAAP compared to the amounts of 2000 are explained as follows: Realized and unrealized gains and losses by their nature can show large fluctuations. The balance of other items includes the effect of the sale of Mexico (EUR 896 million in capital and reserves and EUR 343 million in earnings) which under US GAAP will be recognized in 2002. In 2000 the result of the sale of Labouchere and of other divestitures has been included in the balance of other items. 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.
-137- Dutch Accounting Principles/US GAAP The following is a summary of classification differences between Dutch Accounting Principles and US GAAP, which have no effect on reported Net Income or Shareholders' Equity. The description of the Dutch Accounting Principle is shown first followed by a description of US GAAP. Earnings of affiliates; Classified as investment income and other income; Classified as a specific item in the income statement net of appropriate income tax. Deferred acquisition costs; Classified as a reduction of technical provisions; Classified as an asset. Premiums collected on Universal Life-type contracts; Classified as revenues; Accounted for as deposit in the technical provisions. Premiums to reinsurers; Classified as a separate expense item; Reflected as a reduction of premium revenues. Change in unearned premiums; Reflected as a change in the technical provisions; Reflected as a change in revenues. Owned and occupied real estate; Reflected as investment; Reflected as property and equipment. Reinsurance recoverable; Recorded as an offset to the claim liabilities; Classified as an asset. Real estate rentals, owner occupied property; Included as offsetting rental income and rental expense; Transactions eliminated. Liquid assets; Includes liquid assets with a maturity of one year or less at the date of acquisition. AEGON estimates that approximately 85% of its liquid assets at year-end 2001 have a maturity of three months or less; Includes liquid assets with a maturity of three months or less at the date of acquisition.
-138- Joint ventures; Accounted for using proportionate consolidation, reflecting the share in ownership; Recorded as an equity investment using the equity method. Unconsolidated holdings; Includes businesses with dissimilar operations; Such businesses are consolidated if more than 50% ownership of the equity. Closed block of business; Reported in detail in the income statement; Reported on a net basis in the income statement.
-139- 6. ADDITIONAL INFORMATION The following information represents additional disclosures required by US GAAP reporting rules. The information has been prepared following Dutch Accounting Principles unless it specifically states that it is based upon US GAAP. All amounts are in million EUR, except per share data. 6.1. Earnings per share FASB Statement No. 128 "Earnings Per Share", (EPS), requires dual presentation of basic EPS and diluted EPS for entities with complex capital structures. Basic EPS excludes dilution and is computed by dividing income available to common shareholders, which is after deduction of dividends on the preferred shares, by the weighted average number of common shares (EUR 0.12 par value) outstanding. Diluted EPS is computed based on the weighted average number of common shares outstanding during the year, plus dilutive potential common shares considered outstanding during the year (treasury stock method). The weighted average number of common shares have been adjusted retroactively for all periods presented, to reflect stock dividends and the two for one stock-split in 2000. <TABLE> <CAPTION> 2001 2000 1999 <S> <C> <C> <C> Net income per share, based on US GAAP (in EUR) Basic 0.46 1.97 1.31 Diluted 0.46 1.94 1.29 </TABLE> Per share amounts for net income were calculated using (1) an earnings per common share basic calculation and (2) an earnings per common share-assuming dilution calculation. A reconciliation of the factors used in the two calculations and between the Dutch and US accounting basis is as follows: <TABLE> <S> <C> <C> <C> Numerator: Dutch accounting principles: Net income 2,397 2,066 1,570 Less: dividends on preferred shares (3) (2) (2) Net income used in basic calculation 2,394 2,064 1,568 Plus: interest on convertible debt 0 1 2 Net income used in diluted calculation 2,394 2,065 1,570 US GAAP: Net income on Dutch accounting principles used in basic calculation 2,394 2,064 1,568 US adjustments to net income (1,765) 522 31 Net income on US GAAP used in basic calculation 629 2,586 1,599 Net income on Dutch accounting principles used in diluted calculation 2,394 2,065 1,570 US adjustments to net income (1,765) 522 31 Net income on US GAAP used in diluted calculation 629 2,587 1,601 Denominator: (number of shares, in millions) Weighted average shares, as used in basic calculation 1,357.3 1,315.4 1,225.4 Shares to cover conversion of convertible debt 1.5 3.3 4.6 Addition for stock options outstanding during the year 5.8 13.0 15.8 Weighted average shares, as used in diluted calculation 1,364.6 1,331.7 1,245.8 </TABLE>
-140- 6.2. Pension plans and other post retirement benefits Pension expense (benefit), based on the requirements of FAS 87, was EUR (98) in 2001, EUR (118) in 2000 and EUR (48) in 1999 (EUR (111), EUR (82) and EUR (22) million for DAP). <TABLE> <CAPTION> 2001 2000 1999 <S> <C> <C> <C> Net periodic expense consisted of the following: Service cost for benefits earned during the year 93 95 75 Interest cost on projected benefit obligation 214 189 124 Expected return on plan assets (413) (383) (230) Amortization of transition asset (4) (4) (3) Amortization of unrecognized prior service costs 16 2 0 Amortization of unrecognized gain (4) (17) (14) -------- -------- ------- Net pension expense (benefit) (98) (118) (48) Assumptions used in the accounting for United States plans were: Discount rate 7.25% 7.5% 7.75% Rates of increase in compensation levels 5.50% 5.5% 5.5% Expected long-term rate of return on assets 9.0% 9.0% 9.0% Assumptions used in the accounting for non-United States plans were: Discount rate 5.5-6.0% 5.5-6.0% 6.0% Rates of increase in compensation levels 2.25-2.5% 2.5-2.75% 2.0-3.0% Expected long-term rate of return on assets 6.5-8.0% 6.5-8.0% 6.0-8.0% </TABLE> The reconciliation of the beginning and ending balances of the projected benefit obligation and the fair value of the plan assets is as follows: <TABLE> <CAPTION> 2001 2000 1999 <S> <C> <C> <C> Projected benefit obligation at beginning of year 3,164 2,485 1,492 Service costs 94 95 75 Interest costs 214 189 124 Amendments 0 125 2 Actuarial (gain)/loss 63 366 (103) Acquisition/(sale) of businesses (28) 0 871 Benefits paid (185) (197) (112) Currency exchange rate differences 105 101 136 ----- ----- ----- Projected benefit obligation at end of year 3,427 3,164 2,485 Fair value of plan assets at beginning of year 4,554 4,178 1,978 Actual return on plan assets (349) 265 66 Contribution 52 22 16 Benefits paid (185) (197) (112) Acquisition/(sale) of businesses (51) 105 2,044 Currency exchange rate differences 167 181 186 ----- ----- ----- Fair value of plan assets at end of year 4,188 4,554 4,178 </TABLE>
-141- 2001 2000 1999 Funded status 761 1,390 1,693 Unrecognized prior service cost 173 187 6 Unrecognized net actuarial (gain)/loss 1,005 98 (239) Unrecognized transition (asset) (19) (23) (24) ----- ----- ----- Prepaid benefit cost 1,920 1,652 1,436 As of January 1, 2001, the pension plan in The Netherlands has been amended, reducing the retirement age by 3 years to 62 or 61. AEGON provides, primarily in the US and The Netherlands, health care benefits to retired employees, which are predominantly unfunded. Net periodic expense consisted of the following: Service cost for benefits earned during the year 3 4 2 Interest cost on projected benefit obligation 14 14 10 Expected return on plan assets (1) 0 0 Amortization of transition asset 2 2 2 Amortization of unrecognized prior service costs 0 1 0 Amortization of unrecognized gain (1) (1) 0 -- -- -- Net expense 17 20 14 The reconciliation of the beginning and ending balances of the benefit obligation and the fair value of the plan assets is as follows: Projected benefit obligation at beginning of year 210 198 114 Service costs 3 4 2 Interest costs 15 14 10 Amendments (6) 0 6 Actuarial gain (11) (4) (4) Acquisition/sale of businesses 3 0 65 Benefits paid (14) (14) (10) Other 6 -- -- Currency exchange rate differences 9 12 (15) ---- ---- ---- Projected benefit obligation at end of year 215 210 198 Fair value of plan assets at beginning of year 18 0 0 Actual return on plan assets 1 0 0 Contribution 17 32 10 Benefits paid (14) (14) (10) ---- ---- ---- Fair value of plan assets at end of year 22 18 0 Funded status (191) (194) (198) Unrecognized prior service cost 6 4 7 Unrecognized net actuarial (gain)/loss (11) 6 5 Unrecognized transition (asset)/liability 2 4 6 ---- ---- ---- (Accrued) benefit cost (194) (180) (180)
-142- An increase of 1% in the health care costs would have resulted in an additional accumulated projected benefit obligation of EUR 10 million (EUR 18 million in 2000 and 17 million in 1999) and an increase in service costs and interest cost of EUR 1 million (EUR 1 million in both 2000 and 1999). A decrease of 1% in the health care costs would have resulted in a lower accumulated projected benefit obligation of EUR 9 million (EUR 15 million in both 2000 and 1999) and a decrease in service costs and interest cost of EUR 1 million (EUR 1 million in both 2000 and 1999). 6.3. Investments The carrying value and fair value of bonds and private placements are as follows: Carrying Unrealized Fair value gains (losses) value Fixed maturities at December 31, 2001 US Government 2,504 54 (15) 2,543 Dutch Government 2,889 338 (165) 3,062 Foreign Government 4,341 193 (90) 4,444 Mortgage backed securities 26,885 395 (383) 26,897 Other bonds and private placements 63,872 2,539 (1,933) 64,478 ------- ----- ------ ------- Total 100,491 3,519 (2,586) 101,424 Fixed maturities at December 31, 2000 US Government 2,965 75 (37) 3,003 Dutch Government 3,614 160 (34) 3,740 Foreign Government 4,382 120 (48) 4,454 Mortgage backed securities 23,300 319 (317) 23,302 Other bonds and private placements 50,959 1,406 (1,757) 50,608 ------- ----- ------ ------- Total 85,220 2,080 (2,193) 85,107 The carrying value and fair value of bonds and private placements by contractual maturity at December 31, 2001 are as follows: Carrying Fair value value Due in one year or less 9,104 9,136 Due after one year through five years 31,861 32,413 Due after five years through ten years 29,672 30,015 Due after ten years 29,854 29,860 ------- ------- 100,491 101,424 Cost Unrealized Fair price gains (losses) value Equity securities at December 31, 2001 7,984 972 (620) 8,336 2000 7,653 1,657 (644) 8,666
-143- Proceeds, gross gains and gross losses from sales of available for sale securities for the three years ended December 2001 were: 2001 2000 1999 Proceeds 78,251 51,595 37,243 Gross gains 1,130 2,275 1,386 Gross losses (1,179) (1,303) (810) Gross gains and losses are determined as the difference between proceeds and (average) cost price, before taking into account the tax effect. At December 31, 2001 the Company's impaired mortgage loans amounted to EUR 52 million. A specific valuation allowance of EUR 6 million was established to reduce the carrying value of the mortgage loans to the present value of expected future cash flows for these loans. Investment income related to impaired mortgage loans is recognized when received. Interest foregone on these loans was not material for 2001. 6.4. Fair value of financial instruments FASB Statement No. 107, "Disclosures about Fair Value of Financial Instruments", requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. Statement 107 defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. Statement 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The following table reflects the disclosure of fair values and carrying amounts of assets and liabilities as provided for in SFAS 107 and SFAS 119. All assets and liabilities are held for other than trading purposes. <TABLE> <CAPTION> December 31, 2001 December 31, 2000 ------------------- ------------------- Carrying Fair Carrying Fair amount value amount value <S> <C> <C> <C> <C> Real estate 2,326 2,326 2,116 2,116 Shares 8,336 8,336 8,666 8,666 Bonds and private placements 100,491 101,424 85,220 85,107 Loans guaranteed by mortgage 20,537 21,179 18,244 18,791 Investments for the account of policyholders 113,272 113,272 114,286 114,286 Cash and short term investments 868 868 725 725 Current liabilities and accruals and deferred income 17,445 17,445 15,999 15,999 Capital securities 2,101 2,218 1,820 2,014 Subordinated loans 670 739 683 796 Long-term liabilities 5,084 4,781 4,025 4,013 Investment contract liabilities 66,241 63,057 53,624 52,528 </TABLE>
-144- December 31, 2001 December 31, 2000 ----------------- ----------------- Carrying Fair Carrying Fair amount value amount value Interest rate contracts Interest rate swaps 0 (265) 0 (150) Swaptions 90 93 0 107 Caps/floors 7 20 0 16 Forward rate agreements 0 1 0 (12) Other derivative contracts Cross currency swaps (694) (604) (446) (476) Foreign exchange contracts (25) (26) 26 26 Equity swaps (17) (14) 2 2 Over-the counter options 76 77 47 47 Exchange traded options/futures (41) (47) 3 3 The following methods and assumptions were used by the company in estimating its fair value disclosures for financial instruments: Real estate Real estate is reported in the balance sheet at appraisal value based on fair value when leased. At least 20% of property is revalued annually, so that each unit is revalued once in every 5-year period. New property is valued at construction cost including interest during the construction period, or at purchase price. Shares The fair values for shares are based on quoted market prices or, if unquoted, at estimated fair value and are recognized in the balance sheet. Bonds and Private placements Fair values for fixed maturity securities are based on quoted market prices, where available. For fixed maturities not actively traded, fair values are estimated by discounting expected future cash flows using a current market rate applicable to the yield, credit quality and maturity of the investment. Loans guaranteed by mortgage The fair value for loans guaranteed by mortgage is estimated using discounted cash flow analyses, using interest rates currently being offered for similar loans to borrowers with similar credit ratings. Loans with similar characteristics are aggregated for purposes of the calculations. Investments for the account of policyholders Investments for the account of policyholders and insurance-linked savings deposits are generally valued at fair value. Cash and Short term investments The carrying amounts reported in the balance sheet for these instruments approximate their fair values. Current liabilities and accruals and deferred income The carrying amounts of the Company's current liabilities and accruals and deferred income approximate their fair value.
-145- Long-term liabilities and subordinated loans The fair value of the Company's long-term liabilities and subordinated loans is based on quoted market prices, where available, or is estimated using discounted cash flow analyses, based on the Company's current borrowing rates for similar types of borrowing arrangements. Investment contract liabilities (included in technical provisions) Fair values for the company's liabilities under investment-type insurance contracts are estimated using discounted cash flow calculations, based on interest rates currently being offered for similar contracts with maturities consistent with those remaining for the contracts being valued. Derivatives The fair value of the derivatives generally reflects the estimated amounts that the Company would receive or pay to terminate the contracts on reporting date. Market quotes are available for many derivatives; for those products without readily available market quotes generally accepted valuation models are used to estimate fair value. 6.5. Taxes Income before tax derived from The Netherlands and foreign sources is as follows: 2001 2000 1999 The Netherlands 924 840 861 Foreign 2,716 2,442 1,562 Interest charges and other (397) (443) (242) ----- ----- ----- Total 3,243 2,839 2,181 Amounts paid in cash in 2001 for income taxes were EUR 930 million (2000: EUR 227 million and 1999: EUR 461 million). 6.6. Debt. The following table lists AEGON's long-term liabilities, subordinated loans and capital securities at December 31, 2001 as presented in the consolidated balance sheet.
-146- <TABLE> <CAPTION> Period Coupon date Book value 2001 2000 <S> <C> <C> <C> <C> Long-term liabilities EUR 102 mln 8 3/4% Eurobonds 1991/01 December 16 -- 90 USD 100 mln 9 3/8% Domestic Debentures (Transamerica Corp.) 1996/08 March/Sept 1 114 107 USD 200 mln 6 3/4% Domestic Debentures (Transamerica Corp.) 1996/06 May/Nov 15 227 215 USD 200 mln 6 1/4% Eurobonds 1997/01 October 1 -- 215 CHF 150 mln 3 1/4% Bonds 1997/04 June 24 101 98 DEM 150 mln 2 1/2% Eurobonds 1998/03 February 24 77 77 USD 500 mln 7% Eurobonds (AEGON Funding Corp.) 1999/04 September 10 567 537 USD 450 mln 6 3/4% Eurobonds (AEGON Funding Corp.) 1999/02 November 15 511 484 CHF 300 mln 3 1/8% Eurobonds 1999/04 September 27 202 197 GBP 250 mln 6 1/8% Eurobonds 1999/31 December 15 411 401 USD 250 mln 7 3/8% Eurobonds (AEGON Funding Corp.) 2000/05 July 25 284 269 EUR 350 mln 4 3/4% Eurobonds (AEGON Funding Corp. II) 2001/05 February 28 350 -- CHF 150 mln MTN floating 2001/04 Quarterly 101 -- EUR 100 mln MTN floating 2001/03 Quarterly 100 -- USD 367 mln MTN floating 2001/02 Quarterly 416 -- USD 90 mln MTN floating 2001/03 Quarterly 102 -- Other /1/ 1,521 1,335 ----- ----- 5,084 4,025 Subordinated loans EUR 227 mln Floating Rate / Fixed Rate subordinated Eurobonds 1992/04 September 15 159 160 EUR 125 mln 6 1/2% subordinated Eurobonds 1993/03 September 15 98 102 USD 400 mln 8% subordinated Notes 1994/06 Feb/Aug 15 300 285 USD 600 mln 4 3/4% subordinated convertible Eurobonds 1994/04 November 1 -- 16 Other subordinated loans 113 120 ----- ----- Capital Securities 670 683 Perpetual cumulative subordinated loans Year/2/ EUR 114 mln 8% 2005 June 8 114 114 EUR 114 mln 7 7/8% 2005 September 29 114 114 EUR 136 mln 7 3/4% 2005 December 15 136 136 EUR 203 mln 7 1/8% 2011 March 4 203 203 EUR 114 mln 7 5/8% 2008 July 10 114 114 EUR 136 mln 7 1/4% 2008 October 14 136 136 EUR 700 mln 6 7/8% 2005 December 20 700 450 ----- ----- 1,517 1,267 Trust Pass-through Securities USD 100 mln 7 4/5% (Transamerica Corp.) 1996/26 Jun/Dec 1 113 107 USD 225 mln 7 13/20% (Transamerica Corp.) 1996/26 Jun/Dec 1 255 242 USD 190 mln 7 5/8% (Transamerica Corp.) 1997/37 May/Nov 15 216 204 ----- ----- 584 553 ----- ----- Total long-term liabilities, subordinated loans and capital securities 7,855 6,528 </TABLE> /1/ of which EUR 378 million relate to AEGON N.V. (2000: EUR 68 million). /2/ Year of first call
-147- In the years 2002 through 2006 the following amounts are due: EUR 1,517 million in 2002, EUR 449 million in 2003, EUR 1,296 million in 2004, EUR 787 in 2005 and EUR 555 million in 2006. (Excludes miscellaneous long-term liabilities EUR 576 million). Amounts paid in cash in 2001 for interest were EUR 809 million (2000: EUR 794 million and 1999: EUR 852 million). 6.7. Restrictions, commitments and contingencies AEGON is subject to legal restrictions on the amount of dividends it can pay to its shareholders. Under Dutch law dividends can only be paid up to an amount equal to the excess of the Company's reserves over the sum of paid-up capital and reserves required by law (see Note 4.4.5). At December 31, 2001, AEGON NV's restricted net assets amounted to EUR 2.4 billion and the net amount of capital and surplus available for dividends was EUR 12.7 billion. However, certain of the Company's subsidiaries, principally insurance companies, are subject to restrictions on the amount of funds they may transfer in the form of cash dividends or otherwise to their shareholders. Insurance subsidiaries in the United States are subject to prior approval by statutory authorities for certain payments of dividends to the Company, which exceed specified limitations. The insurance subsidiaries are also subject to risk based capital standards, established by the National Association of Insurance Commissioners, which prescribe required capital levels and may restrict the amount of dividends which can be paid. Under the Insurance Industry Supervision Act 1993 in The Netherlands, life insurance companies are required to maintain an equity of approximately 5% of general account technical provisions and, in case of no interest guarantee, of approximately 1% of technical provisions with investments for the account of policyholders. Management does not believe such restrictions on the Company's subsidiaries will affect its ability to pay dividends in the future. The Company and its subsidiaries are parties to a number of legal proceedings incidental to its business. It is management's opinion, after consultation with legal counsel, that damages arising from such litigation will not be material to either the financial position or the results of operations of the Company. Pursuant to the 1983 merger agreement the Company is obligated to permit the Association to acquire preferred shares in such amounts as are necessary to maintain a majority voting interest in the Company in the event of any future issuance of either common or preferred shares. 6.8. Business segment information Pursuant to Financial Accounting Standard No. 131 `Disclosures about segments of an enterprise and related information' (FAS 131) business segments are defined on the same basis that the company is managed. AEGON has the following reportable geographic segments: Americas, The Netherlands, United Kingdom and Other countries, which include Hungary, Spain and other units. Crucial differences exist in local markets and for this reason AEGON emphasizes a decentralized organization structure. The operating companies, with knowledgeable and highly experienced local management and employees, market their own, unique products using tailored distribution channels. Approximately 90% of AEGON's core business is life insurance, pension and related savings and investment products. The Group is also active in accident and health insurance, property and casualty insurance and limited banking activities. AEGON evaluates performance and allocates resources based on income before interest charges and taxes, based on Dutch accounting principles. The accounting policies of the reportable segments are the same as those used for the consolidated financial statements. Intersegment revenue and expenditures for additions to long-lived assets are not significant. For more information on reportable segments see Note 3 Segment information.
-148- 2001 2000 1999 ---- ---- ---- Revenues: Americas 18,176 17,037 10,451 The Netherlands 6,073 5,686 5,683 United Kingdom 6,517 6,883 5,241 Other Countries 1,036 1,023 909 Other 93 78 90 ------- ------- ------- 31,895 30,707 22,374 Income before tax: Americas 2,272 2,025 1,337 The Netherlands 924 840 861 United Kingdom 372 360 237 Other Countries 72 57 (12) Interest charges and other (397) (443) (242) ------- ------- ------- 3,243 2,839 2,181 Identifiable assets Americas 163,205 144,729 131,261 The Netherlands 45,676 43,802 43,417 United Kingdom 53,008 53,631 52,304 Other Countries 2,172 2,054 1,826 ------- ------- ------- 264,061 244,216 228,808 The tables below show the Company's revenues, income before tax and identifiable assets by line of business. Revenues: Life insurance 27,620 27,165 19,110 Non-life insurance 3,798 3,140 2,470 Banking activities 384 324 704 Other non-insurance activities 93 78 90 ------- ------- ------- 31,895 30,707 22,374 Income before tax: Life insurance 3,319 3,003 2,126 Non-life insurance 276 232 142 Banking activities 45 47 155 Interest charges and Other (397) (443) (242) ------- ------- ------- 3,243 2,839 2,181 Identifiable Assets: Insurance 255,045 237,414 218,182 Banking activities 7,417 5,760 5,787 Other non-insurance activities 1,599 1,042 4,839 ------- ------- ------- 264,061 244,216 228,808
-149- 6.9. Revenue recognition Traditional individual life and health insurance products include those products with fixed and guaranteed premiums and benefits, and consist principally of whole life and term life insurance policies. Premiums from these products are recognized as premium revenue when due. Immediate annuities with life contingencies include products with fixed and guaranteed annuity considerations and benefits, and consist principally of group and individual single premium annuities with life contingencies. Annuity considerations from these products are recognized as revenue when due. Group life and health insurance premiums are generally recorded as premium revenue over the term of the coverage. Some group contracts allow for premiums to be adjusted to reflect emerging experience. Such adjusted premiums are recognized in the period that the related experience emerges. Fees for contracts providing claim processing or other administrative services are recorded over the period the service is provided. Related policy benefits and expenses for individual and group life, annuity and health insurance products are associated with earned premiums and result in the recognition of profits over the expected lives of the policies and contracts. Universal life-type policies are insurance contracts with terms that are not fixed and guaranteed. Amounts received as payments for such contracts are reported as premium revenues under Dutch accounting principles when received. For US GAAP revenues for universal life-type insurance contracts consist of policy charges for the cost of insurance, policy initiation and administration, surrender charges and other fees that have been assessed against policy account values. Policy benefits and claims that are charged to expense include interest credited to contracts and benefit claims incurred in the period in excess of related policy account balances. Investment contracts do not subject the Company to risks arising from policyholder mortality or morbidity, and consist primarily of Guaranteed Investment Contracts ("GICs"), funding agreements and certain deferred annuities. Amounts received as payments for investment contracts are established as investment contract liability balances and are not reported as premium revenues. Revenues for investment contracts consist of investment income and policy administration charges. Investment contract benefits that are charged to expense include benefit claims incurred in the period in excess of related investment contract liability balances and interest credited to investment contract liability balances. Benefits and expenses are associated with earned premiums so as to result in recognition of profits over the life of the contracts. This association is accomplished by means of the technical provision and the deferral and amortization of acquisition costs. Acquisition costs consist principally of commissions, premium taxes and certain variable policy issuance, underwriting and agency expenses. Deferred policy acquisition costs of insurance contracts with fixed premiums are generally amortized over periods not to exceed the premium paying periods or the contract periods. For flexible insurance contracts and investment type contracts the amortization is generally in proportion to emerging gross profits. Premium Deficiency The Company evaluates its health care and insurance contracts to determine if it is probable that a loss will be incurred. A premium deficiency loss is recognized when it is probable that expected future claims, including maintenance costs, will exceed existing reserves plus anticipated future premiums and reinsurance recoveries on existing contracts. Anticipated investment income is considered in the calculation of premium deficiency losses for short-duration contracts. For purposes of determining premium deficiency losses, contracts are grouped in a manner consistent with the Company's method of acquiring, servicing and measuring the profitability of such contracts.
-150- General insurance premiums are recognized on a monthly pro rata basis over the terms of the policies. Acquisition costs, consisting of commissions, premium taxes and other costs that vary with and are primarily related to the production of business are deferred by major product groups and amortized over the terms of the policies. Deferred policy acquisition costs are reviewed to determine that they do not exceed recoverable amounts, after allowing for anticipated investment income. 6.10. Capital and reserves Set forth below are changes in capital and reserves for the past three years. 2001 2000 1999 Preferred Shares Balance at January 1 53 65 52 Issued -- 4 13 Repurchased -- (16) -- --- --- --- Balance at December 31 53 53 65 Vereniging AEGON holds all the issued preferred shares. From the net profit first of all a preferred dividend will be paid out, based on the official rate of disbursement. Dividends were 4.75% in all years. Apart from this no additional dividend is to be paid on the preferred shares. 2001 2000 1999 Common Shares Balance at January 1 162 151 133 Change in par value -- 9 -- Issuance of shares 7 -- 18 Stock dividend 2 2 0 Exercised options 0 0 0 --- --- --- Balance at December 31 171 162 151
-151- <TABLE> <CAPTION> Paid-in Revaluation Other surplus account surplus fund Total <S> <C> <C> <C> <C> Surplus funds Balance at January 1, 1999 2,119 4,501 1,129 7,749 Net income 1,570 1,570 Issuance of new shares 1,273 4,776 6,049 Repurchased own shares (315) (315) Exercised options 5 5 Stock dividend 0 0 Dividends paid (797) (797) Optional dividend 1999/1998 194 194 Revaluation group companies 1,080 851 1,931 Currency exchange rate differences 200 200 Cash settlement subordinated convertible loan (69) (69) Goodwill (3,133) (3,133) Settlement stock option plan (47) (47) Other movements 1,101 (1,111) (10) ----- ------ ------ ------ Balance at December 31, 1999 3,397 6,682 3,248 13,327 Net income 2,066 2,066 Repurchased own shares (423) (423) Exercised options 7 7 Stock dividend (1) (1) Dividends paid (976) (976) Optional dividend 2000/1999 555 555 Revaluation group companies (505) 565 60 Currency exchange rate differences (105) (105) Cash settlement subordinated convertible loan (24) (24) Goodwill (2,254) (2,254) Settlement stock option plan (200) (200) Other movements (8) 605 597 ----- ------ ------ ------ Balance at December 31, 2000 3,395 6,177 3,057 12,629 Net income 2,397 2,397 Issuance of new shares 1,677 1,677 Repurchased own shares (21) (21) Exercised options 3 3 Stock dividend (1) (1) (2) Dividends paid (1,145) (1,145) Optional dividend 2001/2000 550 550 Revaluation group companies (1,537) 436 (1,101) Currency exchange rate differences (50) (50) Cash settlement subordinated convertible loan (68) (68) Goodwill (286) (286) Sale Mexico 602 602 Settlement stock option plan (71) (71) Other movements (46) (46) ----- ------ ------ ------ Balance at December 31, 2001 5,074 4,640 5,354 15,068 </TABLE>
-152- 6.11. Comprehensive income in accordance with US GAAP The related tax effects allocated to each component of Other comprehensive income are as follows: <TABLE> <CAPTION> (In million EUR) 2001 2000 1999 <S> <C> <C> <C> Foreign currency translation adjustment pretax 701 659 1,342 tax 0 0 0 net of tax 701 659 1,342 Unrealized gains (losses) during period pretax (752) 384 (465) tax 131 (172) 351 net of tax (621) 212 (114) Less: reclassification adjustment pretax 460 (969) (457) tax (83) 148 56 net of tax 377 (821) (401) Cumulative effect of adopting FAS 133 pretax 76 -- -- tax (27) -- -- net of tax 49 -- -- ---- ---- ----- Other comprehensive income (loss) 506 50 827 </TABLE> Accumulated other comprehensive income consists of: <TABLE> <CAPTION> December 31, December 31, December 31, 2001 2000 1999 <S> <C> <C> <C> Accumulated foreign currency adjustment 2,466 1,765 1,106 Unrealized gains (losses) 345 730 1,623 Cumulative effect of adopting FAS 133 49 -- -- ----- ----- ----- Total 2,860 2,495 2,729 </TABLE> 6.12. New accounting standards In July 2000, the FASB's Emerging Issues Task Force (EITF) issued a consensus on Issue 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets". The Company adopted the consensus as of January 1, 2001. Issue 99-20 prescribes the procedures for recording interest income and measuring impairment on retained and beneficial interests. The consensus primarily affects certain high-yield investments contained in structured securities. Adoption of the consensus required the Company to adjust the carrying amount of these investments downward by EUR 23 million net of tax upon adoption. In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 140 replaces SFAS No. 125 with the same title. It revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of SFAS No. 125's provisions without reconsideration. SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishment of liabilities occurring after March 31, 2001 and for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. The impact on the Company's financial position or results of operations of adopting SFAS No. 140 was not significant.
-153- In June 2001, the FASB issued SFAS No. 141, "Business Combinations". SFAS No. 141 eliminates the pooling-of-interests method of accounting for business combinations and requires that all business combinations be accounted for under the purchase method. The purchase method of accounting requires that net assets acquired that constitute a business be recorded at their fair value with any excess cost over the amounts assigned to net assets acquired recorded as goodwill. SFAS No. 141 also requires that certain intangible assets acquired in a business combination be recognized apart from goodwill. The provisions of SFAS No. 141 apply to all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method of accounting for those transactions is prohibited. Adoption of SFAS No. 141 will not have a material impact on the Company's financial condition or results of operations. In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets". Under current accounting guidance, goodwill resulting from a business combination is amortized against income over its estimated useful life. Under SFAS No. 142, goodwill is no longer amortized as an expense but instead is reviewed and tested for impairment under a fair value approach. The Company currently evaluates goodwill for impairment by comparing the entity level unamortized balance of goodwill to projected undiscounted cash flows, which does not result in an indicated impairment. Goodwill will 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. Goodwill must be tested for impairment in the year of adoption with an initial test to determine potential impairment, to be performed within six months of adoption. If the initial test indicates potential goodwill impairment, then a more detailed analysis to determine the extent of the impairment must be completed within twelve months of adoption. SFAS No. 142 also requires that the useful lives of previously recognized intangible assets other than goodwill be reassessed and the remaining amortization periods adjusted accordingly. All of the provisions of SFAS No. 142 will be applied beginning January 1, 2002 to all goodwill and other intangible assets, regardless of when those assets were initially recognized. Adoption of SFAS No. 142 will result in the elimination of goodwill amortization. Application of the non-amortization provisions of the new standard is expected to result in an increase in US GAAP net income of EUR 496 million (EUR 0.37 per share). Management has not yet determined the exact amount of goodwill impairment under these new standards, but believes the non-cash transition charge to US GAAP net income will be approximately EUR 1.3 billion (EUR 0.96 per share). The estimated non-cash impairment charge relates primarily to the Transamerica non-insurance business. There is no impact to the Company's net income or financial condition on a Dutch accounting basis since goodwill has not been established as an asset but has been charged off to equity at the time an acquisition is made. In August 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 establishes an accounting model for long-lived assets to be disposed of by sale that applies to all long-lived assets, including discontinued operations. SFAS No. 144 requires that those long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. The provisions of Statement 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001. Adoption of SFAS No. 144 will not have a material impact on the Company's financial condition or results of operations 6.13. Stock-based compensation SFAS No. 123, "Accounting for Stock-Based Compensation", provides guidance on accounting and reporting for the cost of stock-based compensation. Compensation costs related to stock options are permitted to be recorded under the intrinsic value method provided certain fair value information is disclosed. AEGON has elected to follow the intrinsic value method of Accounting Principles Board Opinion No. 25, "Accounting for Stock issued to Employees" (APB 25) and related interpretations in accounting for its stock options for purposes of the reconciliation of net income from DAP to US GAAP. Under APB 25, because the exercise price of AEGON's stock options equals the market price of the underlying stock at the date of the grant, no compensation cost is recognized at the grant date. However, subsequent cash settlements of stock options have resulted in compensation costs of EUR 0, EUR 0 and EUR 47 million, respectively, for the three years ended December 31, 2001 recognized in net income based on US GAAP, of which EUR 0, EUR 0 and EUR 21 million for the three years ended December 31, 2001, respectively, relate to options granted after December 15, 1994.
-154- Had compensation costs for AEGON's stock options granted in 2001, 2000 and 1999 been determined based on the fair value of the options at the grant dates consistent with the method of FAS 123, pro forma net income and earnings per share, adjusted for stock splits, based on US GAAP would have been: 2001 2000 1999 Net income based on US GAAP as reported 632 2,588 1,601 pro forma 565 2,529 1,563 Basic earnings per share (in EUR) as reported 0.46 1.97 1.31 pro forma 0.41 1.92 1.28 Diluted earnings per share (in EUR) as reported 0.46 1.94 1.29 pro forma 0.41 1.90 1.26 The fair value of the stock options at the date of grant was estimated using the binomial option pricing model with the following assumptions for the three years ended December 31, 2001: risk-free interest rates of 4.2%, 4.9% and 3.5%, expected dividend growth rate of 10% for each year, expected lives of 4.2 years for 2001, 2000 and 1999, and expected volatility of 38%, 38% and 26%, respectively. The calculation takes into account that the options granted cannot be exercised within the first three years. 2001 2000 1999 Fair value of options /1/ granted during the year 67 59 59 /1/ excluding stock appreciation rights in 2001, 2000 and 1999, for which the expenses have been included in net income based on US GAAP. 6.14. Use of estimates The preparation of financial statements of insurance companies requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Such estimates and assumptions could change in the future as more information becomes known, which could impact the amounts reported and disclosed herein. Significant estimates and assumptions are utilized in the calculation of deferred policy acquisition costs, value of business acquired, technical provisions and accruals, valuation allowances on investments and deferred taxes. It is reasonably possible that actual experience could differ from the estimates and assumptions utilized. 6.15. Foreign currency translation Assets and liabilities are converted at year-end rates. Income statement items are converted at the average currency rates for the reported period. The financial statements are not comparable to the financial statements of other companies that report in euros that restated their prior periods from currencies other than the Dutch guilder. 6.16. AEGON UK's With Profit Funds The assets and liabilities of the with-profits funds of Scottish Equitable and Guardian are included in AEGON's historical Dutch accounting basis balance sheet at fair value in the line items, "Investments for the account of policyholders" and "Technical provisions with investment risk for the account of policyholders." The assets and liabilities are equal in amount since the with-profit funds are held for the sole benefit of the participating policyholders. In respect of Guardian there is a 10% profit participation in those surpluses distributed to
-155- policyholders. The fair value adjustment for investment assets is recorded through the income statement in investment income for the account of policyholders in the technical account life insurance with an offsetting amount recorded in benefits paid and provided. The income statement activity of the with-profits funds is reported in each of the applicable line items in AEGON's historical Dutch accounting basis income statement with no net income effect for Scottish Equitable PLC. For US GAAP purposes the with-profits fund is treated similar to a closed block of business. A closed block of business is established for the benefit of a class of policyholders and is designed to give them reasonable assurance after a reorganization that assets will be available to maintain the benefits under their policies. The Scottish Equitable with-profits fund was established as part of the regulatory requirement to allow AEGON to acquire an interest in the non-participating business of Scottish Equitable. The with-profits fund is treated as a closed block of business since at the time Scottish Equitable PLC was formed the participating policies were allocated specific assets and the business was segregated within Scottish Equitable PLC. The participating policyholders are entitled to receive 100% of the financial performance of this segregated with-profits fund. The Guardian with-profit fund is treated similarly, with the exception of a profit share to the shareholders of 10%. Under the terms of the agreement Scottish Equitable PLC remains obligated to the participating policyholders of Scottish Equitable PLC for the guaranteed benefits under their policies should their be a financial short-fall in the with-profits fund. Pursuant to US GAAP the investment assets are classified as available for sale and accordingly are carried at fair value. Because the with-profits funds are maintained for the sole benefit of the participating policyholders, the fair value adjustment is recorded directly to the policyholder liability account. In addition, for US GAAP reporting rules, the income statement activity would be reported on a net basis as a single line item. Under this arrangement the policyholders receive all of the benefits from the with-profit fund and to the extent there is any excess earnings a policyholder dividend liability is established such that the net income result is zero. Summarized financial information on a Dutch accounting basis for the with-profits funds as of and for the year ended December 31, 2001, is as follows (amounts in EUR millions): Assets: Property 133 Fixed maturities at fair value 16,177 Equity securities at fair value 9,674 Other assets 1,270 Total assets 27,254 Liabilities: Technical provisions 25,034 Other liabilities 2,220 Total Liabilities 27,254 Revenues and expenses: Gross premiums 1,512 Investment income (367) Revenue 1,145 Benefits paid and provided 1,716 Change in Technical Provisions (571) Benefits and expenses 1,145 Net income 0
-156- 6.17 Derivatives In June 1998, the Financial Accounting Standards Board (the FASB) issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133), subsequently amended by SFAS No. 137 and SFAS No. 138. AEGON adopted the new Statement effective January 1, 2001 for purposes of its reconciliation from DAP to US GAAP. The Statement requires all derivatives, including those derivatives embedded in other contracts, to be recognized as either assets or liabilities on the balance sheet at their fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a recognized asset or liability or of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. The Company uses derivative financial instruments, including financial futures contracts, interest rate swaps, currency swaps, options and forward contracts, as a means of hedging exposure to interest rate, equity price change and foreign currency risk. The Company's financial instruments and insurance products are reviewed to determine whether a derivative may be "embedded" in such instruments or products. The Company assesses whether the economic characteristics of the embedded derivative are clearly and closely related to the remaining component of the financial instrument or insurance product (that is, the host contract). If it is determined that the embedded derivative is not clearly and closely related to the host contract and that a separate instrument with the same terms would qualify as a derivative, the embedded derivative is separated from the host contract and carried at fair value. To qualify as a hedge, the hedge relationship is designated and formally documented at inception detailing the particular risk management objective and strategy for the hedge which includes the item and risk that is being hedged, the derivative that is being used, as well as how effectiveness is being assessed. A derivative has to be highly effective in accomplishing the objective of offsetting either changes in fair value or cash flows for the risk being hedged. For fair value hedges, changes in the fair value of derivatives are reflected in net income, together with changes in the fair value of the related hedged item attributable to the hedged risk. The Company's fair value hedges primarily include hedges of assets or liabilities at fixed rates. During 2001 the amount of hedge ineffectiveness that was recognized in net income was EUR (27) million for fair value hedges. For cash flow hedges, the accounting treatment depends on the effectiveness of the hedge. To the extent these derivatives are effective in offsetting the variability of the hedged cash flows, changes in the derivatives' fair value will not be included in current net income but is reported in comprehensive income. These changes in fair value will be included in net income of future periods when net income is also affected by the variability of the hedged cash flows. An immaterial amount of cash flow hedges have been designated as hedges pursuant to FAS 133. Derivatives that are either hedging instruments that are not designated or do not qualify as hedges under the new rules are carried at fair value with changes in value reflected in net income. The effectiveness of hedging relationships is evaluated on a retrospective basis using quantitative measures of correlation. If a hedge relationship is found to be ineffective, it no longer qualifies as a hedge and any excess gains or losses attributable to such ineffectiveness as well as subsequent changes in fair value are recognized in net income. For those hedge relationships that are terminated, hedge designations removed, or forecasted transactions that are no longer expected to occur, the hedge accounting treatment described in the previous paragraphs will no longer apply. For fair value hedges, any changes to the hedged item remain as part of the basis of the asset and are ultimately reflected as an element of the yield. For cash flow hedges, any changes in fair value of the end-user derivative remain in accumulated comprehensive income and are included in net income of future periods when net income is also affected by the variability of the hedged cash flow. If the hedged relationship was discontinued because a forecasted transaction will not occur when scheduled, any changes in fair value of the
-157- derivative is immediately reflected in net income. During 2001 the impact from terminated or discontinued hedging transactions was immaterial. Derivatives embedded in products and other investments, which are not clearly and closely related to the underlying host contract, have been bifurcated and valued separately. Certain embedded derivatives in insurance products required the development of models in order to calculate fair value. An adjustment to re-establish deferred acquisition cost was made, where appropriate. As a result of adopting FAS 133, AEGON recorded in its net income for 2001, based on US GAAP, a cumulative effect of an accounting change adjustment loss of EUR 54 million and a gain of EUR 49 million in comprehensive income for the same period. A one-time opportunity to reclassify available for sale investments to trading is allowed without tainting the remaining securities in the available for sale portfolio. The Company has elected to take this opportunity to reclass approximately EUR 1.6 billion of available for sale investments to trading as of January 1, 2001. The total return swap with Vereniging AEGON will be carried at fair value as an asset or liability with the change in fair value reported in net income. Prior to January 1, 2001, the Company also used interest rate swap contracts and foreign exchange contracts for hedging purposes. For interest rate swaps, the net amount paid or received and net amounts accrued through the end of the accounting period were included in interest expense. Unrealized gains or losses on interest rate swap contracts were not recognized in income. Gains or losses on contracts terminated early were deferred and amortized to income over the remaining average life of the terminated contracts. 6.18. GICs and Funding agreements GIC's and Funding Agreements are sold to Institutional customers through 401(k) plans, defined benefit plans, public employee plans, municipal reinvestment bond issuers, money market mutual funds, and Medium Term Note investors. GICS are generally issued to tax-qualified retirement plans while funding agreements are issued to non-qualified institutional investors both in domestic and international markets. The Company utilizes consolidated special purpose entities linked to either Medium Term Notes or Commercial Paper for the issuance of funding agreements. Under these programs, the proceeds of each note series issuance are used to purchase a funding agreement from the Company, which is used to secure that particular series of notes. The payment terms of any particular series of notes match the payment terms of the funding agreement that secures that series. Claims for principal and interest under these agreements are afforded equal priority to claims of life insurance and annuity policyholders under insolvency provisions of the applicable U.S. State Insurance Laws. The account balances at December 31, 2001 of EUR 27,943 million consist of fixed rate, fixed maturity contracts (45%), floating rate, indeterminate maturity contracts (28%), floating rate, fixed maturity contracts (20%), and market-indexed, fixed maturity contracts (7%). Most fixed rate contracts are converted to floating rate via swap agreements. Credited interest on floating rate contracts reset mostly on a monthly basis on various indices. Indeterminate maturity contracts allow the customer to withdraw funds with advance notice periods ranging from three to thirteen months without a withdrawal penalty. Of these contracts 62% have notice periods in the range of twelve to thirteen months. Market-indexed contracts provide a return based on the market performance of a designated index, such as the S&P500. Futures or swap contracts are used to hedge the market risk and effectively convert the contract to a floating rate liability. As of December 31, 2001, estimated contractual maturities were as follows: 2002: EUR 5,529 million; 2003: EUR 4,092 million; 2004: EUR 2,569 million; 2005: EUR 2,202 million; 2006: EUR 2,165 million; and thereafter: EUR 3,423 million. In addition Commercial Paper of EUR 547 million and funding agreements with put provisions of EUR 7,416 million are outstanding.
-158- 6.19. Separate accounts (included in Technical provisions with investments for the account of policyholders) Separate accounts assets and liabilities generally represent funds maintained to meet specific investment objectives of policyholders who bear the investment risk. Investment income and investment gains and losses generally accrue directly to such policyholders. The assets of each account are legally segregated and are not subject to claims that arise out of any other business of the Company. These assets and liabilities are carried at market value. Deposits, net investment income and realized capital gains and losses on separate accounts assets are reflected on the consolidated income statement offset by a technical provision for policyholders which bear the investment risk under Dutch Accounting Principles. These items are not reported in the income statement pursuant to US GAAP Accounting Principles. The Company receives investment management fees from the proprietary mutual funds used as investment options for variable annuities and variable life insurance. The Company receives mortality and expense risk fees from the separate accounts. The fees charged to policyholders are included in revenue from fee business and recognized over the period earned pursuant to US GAAP.
-159- SCHEDULE I SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES December 31, 2001 ----------------------------------------- Cost/1/ Fair value Book value ------- ---------- ---------- (In million EUR) Shares 7,984 8,336 8,336 Bonds: Dutch government 954 952 931 US government 2,432 2,531 2,494 Foreign government 3,518 3,635 3,539 Mortgage backed securities 18,021 18,167 18,021 Other 48,996 49,296 48,675 ------- ------ ------- Sub-total 73,921 74,581 73,660 Private placements: Dutch government 2,153 2,110 1,959 U.S. government 6 12 10 Foreign government 628 809 801 Mortgage backed securities 8,864 8,731 8,864 Other 15,157 15,181 15,197 ------- ------ ------- Sub-total 26,808 26,843 26,831 Deposits with credit institutions 1,553 1,553 Loans guaranteed by mortgage/2/ 20,637 20,537 Real estate 1,832 2,326 Other 4,996 4,922 ------- ------- Grand total 137,731 138,165 /1/ Cost is defined as original cost for shares and amortized cost for bonds and private placements, less allowances for doubtful debts. /2/ Includes real estate acquired in satisfaction of debt amounting to EUR 58 million at cost and book value.
-160- SCHEDULE III SUPPLEMENTARY INSURANCE INFORMATION <TABLE> <CAPTION> Column A Column B Column C Column D Column E Column F Column G Column H Segment deferred future unearned other premium net benefits, policy policy premiums policy revenue investment claims, acquisi- benefits claims income losses tion cost and benefits <S> <C> <C> <C> <C> <C> <C> <C> (In million EUR) 2001 Life insurance 15,264 233,317 NA NA 18,281 9,339 18,906 Non-life insurance/1/ 1,202 NA 1,760 1,912 3,297 501 1,825 2000 Life insurance 13,459 217,043 NA NA 17,983 9,182 19,099 Non-life insurance/1/ 545 NA 1,244 1,814 2,788 352 1,549 1999 Life insurance 10,992 199,102 NA NA 12,802 6,308 12,640 Non-life insurance/1/ 472 NA 972 1,535 2,178 292 1,332 <CAPTION> Column I Column J Column K amortization other premiums of operating written deferred expenses policy acquisition costs <S> <C> <C> <C> (In million EUR) 2001 Life insurance 1,203 2,030 18,281 Non-life insurance/1/ 219 834 3,297 2000 Life insurance 1,143 1,915 17,983 Non-life insurance/1/ 141 597 2,788 1999 Life insurance 774 1,474 12,802 Non-life insurance/1/ 111 504 2,178 </TABLE> /1/ Includes Accident and Health insurance
-161- SCHEDULE IV REINSURANCE <TABLE> <CAPTION> Column A Column B Column C Column D Column E Column F Gross Ceded to Assumed Net Percentage amount other from amount of amount companies other assumed companies to net <S> <C> <C> <C> <C> <C> Life insurance in force (In million EUR) 2001 831,263 490,191 417,189 758,261 55.0% 2000 781,347 481,238 382,096 682,205 56.0% 1999/1/ 630,408 389,648 342,152 582,912 58.7% </TABLE> /1/ Assumed from other companies has been restated to reflect the TA Reinsurance business.
-162- SCHEDULE V VALUATION AND QUALIFYING ACCOUNTS (In million EUR) Years ended December 31, ------------------------ 2001 2000 1999 ---- ---- ---- Balance January 1 464 432 377 Addition charged to earnings 804 142 100 Amounts written off and other changes (779) (110) (45) ---- ---- --- Balance December 31 489 464 432 The provisions can be analyzed as follows: December 31, ------------------------ 2001 2000 1999 ---- ---- ---- Bonds and other fixed rate securities 276 110 137 Loans guaranteed by mortgages 53 184 166 Other loans 75 74 67 Other financial investments 34 34 32 Receivables 51 62 30 ---- ---- --- Total 489 464 432
-166- SIGNATURES The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf. AEGON N.V. s/b/ J.B.M. Streppel J.B.M. Streppel Member of the Executive Board. Date: March 27, 2002