Starting with the second quarter of 2007, Aegon will change the accounting principles it uses to value guarantees on certain products in the Netherlands. This change will ensure Aegon's financial statements better reflect the economic matching of its assets and liabilities.
Jos Streppel, CFO of Aegon, said: "We believe that this change in accounting principles will increase the transparency of our financial results. It should enhance the ability of investors, analysts and other interested parties to judge the economic performance of our businesses. The change is also a helpful interim step toward the same fair value approach we are seeing with both IFRS II and Solvency II."
Change in accounting principles relating to the Dutch guarantees and a change in reporting format
Certain insurance products offered by Aegon The Netherlands, including group pension contracts and traditional products, contain minimum interest rate guarantees. In the second half of 2006, Aegon The Netherlands initiated a program to hedge its interest rate risks in connection with these guarantees. Implementation of this program was completed by the end of 2006.
Derivative instruments used to hedge these interest rate risks are carried at fair value. Any changes in the fair value are recognized in Aegon's quarterly income statements. Starting with the second quarter of 2007, Aegon The Netherlands will also value the guarantees related to these group pension contracts and traditional products at fair value. Similarly, changes in the fair value of these guarantees will be reflected in Aegon's quarterly income statement.
By applying fair value accounting to both the guarantees and the related derivatives, Aegon's results will provide a better reflection of the performance of Aegon The Netherlands' businesses.
The change in accounting principles applies to Aegon The Netherlands only and will not impact other country units. Aegon decided on this change following new guidance from the Dutch Central Bank on the valuation of guarantees.
The audited and officially reported results for 2005 and 2006 remain unchanged. For comparison purposes, Aegon is presenting its quarterly results for both 2005 and 2006 as if the new accounting policy had been in force. Differences between results as officially reported and these adjusted figures are primarily the result of fluctuations in interest rates over the past two years. With the hedge program in place from the beginning of 2007, Aegon expects differences between movements in the fair value of guarantees, on one hand, and related derivatives, on the other, will be substantially reduced going forward. Any differences that do emerge will be reported as gains and losses on investments.
The negative impact of the change in accounting principles on Aegon's shareholders' equity as of January 1, 2007, amounts to EUR 532 million, while net income for the first quarter of this year shows an increase of EUR 222 million compared with the originally published figure.
In addition, again for purposes of comparison, Aegon is providing pro forma quarterly operating earnings for 2005 and 2006. These pro forma figures assume hedges and guarantees had no effect on operating earnings in 2005 and 2006. These figures exclude the effect of any movements in the fair value of guarantees as would have been the case had Aegon The Netherlands' hedge program been in place for those two years.
Starting with the second quarter of 2007, Aegon will also include its share of net results from associates in its operating earnings. Previously, results from associate companies were reported separately from operating earnings.
Table 1 provides a reconciliation from operating earnings as previously reported to pro forma net operating earnings. The 2005 and 2006 pro forma data are useful supplemental information when comparing actual performance in 2007. Table 2 will provide a reconciliation between adjusted operating earnings before tax and adjusted net income.
Shift in investment portfolio affecting non-operating earnings
In addition to the accounting change, Aegon The Netherlands at the end of the second quarter replaced a derivatives program it had implemented in order to lengthen the duration of its investment portfolio with long-dated bonds. The duration of the asset portfolio has not changed as a result of this transaction. Any unrealized changes in the valuation of these bonds will be reflected in shareholders' equity in accordance with the Group's existing accounting principles and not as part of non-operating earnings, as had been the case with the derivatives. Consequently, second quarter 2007 non-operating earnings will be the last that reflect changes in the fair value of these derivatives.
Additional information - underlying operating earnings
Aegon is also providing additional information on the expected long-term performance of certain investment classes in the Netherlands and in the Americas, as well as certain products containing guarantees carried at fair value by Aegon USA and Aegon Canada. This additional information appears as underlying operating earnings in table 6 (see appendix on the right), which gives historical data for 2005 and 2006.
In the appendix, Aegon provides more details by lines of business and by geographical area.