Aegon’s total embedded value at the end of 2009 amounted to EUR 17.8 billion, a decrease of just 4% compared with last year, as a result mainly of a higher market value of Aegon’s outstanding debt. However, as a result of an increase in the number of the company’s outstanding shares, total embedded value per common share declined 15% to EUR 9.65.
The figures reflect a positive performance from Aegon’s existing in-force business, partly as a result of cost savings measures, as well as the company’s continued focus on writing profitable new business. Embedded value for 2009 includes new business worth approximately EUR 0.8 billion.
Embedded value is a key measure of an insurance company’s underlying worth, and embedded value life insurance (EVLI) helps put a value on future profits expected from existing insurance contracts. Aegon believes that, along with other publicly disclosed financial data, embedded value provides valuable additional information for analysts and investors.
Embedded value for Aegon’s life insurance business increased to EUR 23.3 billion, benefiting from significant new business and a positive performance from the company’s in-force book. These gains were partly offset by changes in economic assumptions, variance in long-term investment returns, and negative currency impact, primarily the result of a weaker US dollar against the euro.
At the end of 2009, the free surplus on life insurance business had risen to EUR 2.4 billion, due mainly to a significant increase in earnings from Aegon’s existing life insurance book to EUR 3.1 billion. Operating margins on embedded value declined slightly from 6.8% to 5.8%, driven by negative persistency developments and adverse spread experience on institutional products in the Americas, which were partly offset by positive developments in the Netherlands.
The table below shows Aegon’s embedded value figures for 2009. For the purposes of consistency, these are presented according to Aegon’s 2009 reporting format, which was changed earlier this year. For comparison with Aegon’s 2010 reporting format, please refer to addendum 2 of the embedded value 2009 report, which is available at www.Aegon.com.
Calculating embedded value Aegon has long used embedded value as a management tool for its life insurance operations. The company believes that embedded value, in conjunction with other publicly disclosed financial data, provides valuable additional information for analysts and investors.
Embedded value life insurance (EVLI) represents the contributed capital invested in Aegon’s life operations, available surplus or adjusted net worth (ANW), and the value of in-force life business (ViF). The latter equals the present value of expected future profits arising from the existing book of life insurance business, including new business sold in the reporting period, less the cost of capital. Future new business that is sold after the valuation date is not reflected in this value, although certain assumptions such as unit costs reflect a going concern basis.
Total embedded value (TEV) is the sum of the embedded value life insurance and the value of the other activities and holding activities.
Value of new business (VNB) is the present value of the future distributable earnings on the block of business sold in the latest reporting year. Value of new business is calculated using beginning of year economic assumptions and assumptions outside of management control, and beginning of quarter operating assumptions.