Aegon has long used embedded value as a management tool for its life insurance operations.
Aegon’s management believes that embedded value, in conjunction with other publicly disclosed financial information, can provide valuable additional information for analysts & investors to assess a reasonable range of values inherent in the business. The disclosure includes sensitivity analyses reflecting certain risks and drivers of the realization of embedded value.
Embedded value life insurance is an estimate of the economic value of a company’s existing life insurance business and is to a large extent actuarially determined. The embedded value of a life insurance company includes its invested capital plus the present value of future profits minus the cost of holding the required capital. Embedded value life insurance should not be viewed as a substitute for Aegon’s primary financial statements.
The embedded value (EV) as reported today demonstrates both solid performance of the in-force book, as well as continued successful focus on profitable new business. EV reflects growth across all country units, although growth was more than offset by currency effects.
The embedded value life insurance (EVLI) was down slightly at EUR 25.9 billion. The EVLI benefited from the increased value of new business of EUR 0.9 billion, the performance of the in-force book of EUR 1.4 billion, a change in economic assumptions of EUR 0.9 billion, offset by negative currency translation effects of EUR 2.0 billion and lower than expected investment returns of EUR 1.2 billion. Net capital movements out of the life operations reduced EVLI by EUR 2.0 billion.
Total embedded value up on constant currency
At year-end 2007, the total embedded value (TEV) amounted to EUR 21.7 billion, a decrease of 3% compared to 2006, but up by 4% on constant currency. Adjusted for the value of Aegon preferred shares, the total embedded value per common share amounted to EUR 13.44, an increase of 2%.
Jos Streppel, CFO and member of the Executive Board, said: “Aegon performed solidly on an operating basis both on the in force book as on new business and the decrease in embedded value is mainly the result of a weaker US dollar and British pound. The share buy back that Aegon completed successfully in 2007 has increased the embedded value per share."
During 2007, as part of a share buy back program of EUR 1 billion Aegon bought back 74,569,902 of common shares. This represents 4.6% of Aegon’s issued and outstanding common shares and 4.0% of Aegon’s total issued and outstanding share capital. Both the share buyback and the weakening of currencies, in particular the US dollar and British pound, had a negative impact on TEV. On a constant currency basis, TEV would have increased 4%. Allowing for the share buyback, on a constant currency basis, TEV was up 8%.
The table provides a summary of Aegon’s key 2007 embedded value figures. These should be read in conjunction with the detailed information on embedded value life insurance and total embedded value (see related documents).