6-K
Table of Contents

Securities and Exchange Commission

Washington, D.C. 20549

 

 

Form 6-K

 

 

Report of Foreign Issuer

Pursuant to Rule 13a-16 or 15d/16

of the Securities Exchange Act of 1934

August 2018

 

AEGON N.V.

 

Aegonplein 50

2591 TV THE HAGUE

The Netherlands


Table of Contents

Aegon’s condensed consolidated interim financial statements 1H 2018, dated August 15, 2018, are included as appendix and incorporated herein by reference.

 

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

   

AEGON N.V.

 

   

 

   

 

(Registrant)

Date: August 16, 2018     By  

/s/ J.H.P.M. van Rossum

      J.H.P.M. van Rossum
      Executive Vice President and Head of Corporate Financial Center


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LOGO   Unaudited


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Condensed Consolidated Interim Financial Statements  

First half year 2018  

 

 

 

1   

 

 

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Condensed consolidated income statement

     2  

Condensed consolidated statement of comprehensive income

     3  

Condensed consolidated statement of financial position

     4  

Condensed consolidated statement of changes in equity

     5  

Condensed consolidated cash flow statement

     6  

Notes to the Condensed consolidated interim financial statements

     7  

 

Unaudited

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2

 

 

 

Condensed consolidated income statement

 

EUR millions    Notes      First half
2018
  

First half

2017

   

Premium income

     4        9,929       11,479 

Investment income

     5        3,510       3,866 

Fee and commission income

        1,312       1,252 

Other revenues

                  

Total revenues

        14,752       16,602 

Income from reinsurance ceded

     6        1,700       2,745 

Results from financial transactions

     7        948       9,332 

Other income

     8             327 

Total income

        17,401       29,006 
   

Benefits and expenses

     9        16,484       27,596 

Impairment charges / (reversals)

     10        19       10 

Interest charges and related fees

        231       205 

Other charges

     11        103      

Total charges

        16,837       27,815 
   

Share in profit / (loss) of joint ventures

        99       73 

Share in profit / (loss) of associates

                  

Income / (loss) before tax

        665       1,268 

Income tax (expense) / benefit

              (174)      (362)

Net income / (loss)

              491       907 
   

Net income / (loss) attributable to:

          

Owners of Aegon N.V.

        491       907 

Non-controlling interests

                  
   

Earnings per share (EUR per share)

     18          

Basic earnings per common share

        0.21       0.41 

Basic earnings per common share B

        0.01       0.01 

Diluted earnings per common share

        0.21       0.41 

Diluted earnings per common share B

              0.01       0.01 

 

LOGO   Unaudited


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Condensed Consolidated Interim Financial Statements  

First half year 2018  

 

 

 

3   

 

 

Condensed consolidated statement of comprehensive income

 

               
EUR millions    First half
2018
       First half
2017
   

Net income / (loss)

     491         907 
   

Other comprehensive income:

         

Items that will not be reclassified to profit or loss:

         

Changes in revaluation reserve real estate held for own use

     (10)       

Remeasurements of defined benefit plans

     205         282 

Income tax relating to items that will not be reclassified

     (40)        (69)
   

Items that may be reclassified subsequently to profit or loss:

         

Gains / (losses) on revaluation of available-for-sale investments

     (1,057)        1,563 

Gains / (losses) transferred to the income statement on disposal and impairment of available-for-sale investments

     42         (1,123)

Changes in cash flow hedging reserve

     (159)        (755)

Movement in foreign currency translation and net foreign investment hedging reserve

     368         (1,297)

Equity movements of joint ventures

            (6)

Equity movements of associates

     (5)        (2)

Disposal of group assets

     36        

Income tax relating to items that may be reclassified

     225         175 

Other

     (4)       

Total other comprehensive income / (loss) for the period

     (393)        (1,228)

Total comprehensive income / (loss)

     98         (322)
   

Total comprehensive income / (loss) attributable to:

         

Owners of Aegon N.V.

     99         (321)

Non-controlling interests

     (1)        (1)

 

Unaudited

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Condensed consolidated statement of financial position                          
                Jun. 30,
2018
       Dec. 31,
2017
EUR millions    Notes                    
   

Assets

              

Cash and cash equivalents

          9,585         10,768 

Assets held for sale

     26                  5,249 

Investments

     12           138,105         137,172 

Investments for account of policyholders

     13           193,211         194,063 

Derivatives

     14           6,144         5,912 

Investments in joint ventures

          1,673         1,712 

Investments in associates

          303         308 

Reinsurance assets

          19,885         19,202 

Deferred expenses

     16           10,743         10,135 

Other assets and receivables

          7,599         10,137 

Intangible assets

     17           1,643         1,633 

Total assets

          388,891         396,291 
   

Equity and liabilities

              

Shareholders’ equity

          20,469         20,573 

Other equity instruments

     19           3,310         3,794 

Issued capital and reserves attributable to owners of Aegon N.V.

          23,779         24,366 

Non-controlling interests

                19         20 

Group equity

          23,798         24,386 
   

Subordinated borrowings

     20           1,335         764 

Trust pass-through securities

          131         133 

Insurance contracts

     21           112,815         110,818 

Insurance contracts for account of policyholders

     22           124,135         122,168 

Investment contracts

     23           17,490         16,943 

Investment contracts for account of policyholders

     24           71,745         74,434 

Derivatives

     14           6,122         7,130 

Borrowings

     25           13,421         13,635 

Liabilities held for sale

     26                  5,003 

Other liabilities

                17,898         20,878 
   

Total liabilities

               

 

365,092 

 

 

 

    

371,904 

 

Total equity and liabilities

                388,891         396,291 

 

LOGO   Unaudited


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Condensed Consolidated Interim Financial Statements  

First half year 2018  

 

 

 

5   

 

 

Condensed consolidated statement of changes in equity

 

EUR millions   

Share capital
1

 

    Retained
earnings
    Revaluation
reserves
    Remeasurement
of defined benefit
plans
    Other
reserves
    Other equity
instruments
    Issued
capital and
reserves 2
    Non-
controlling
interests
    Total
       

Six months ended June 30, 2018

                        
       

At beginning of year

     8,053       9,659       4,920       (1,669     (390     3,794       24,366       20     24,386   
       

Net income / (loss) recognized in the income statement

           491                               491           491   
       

Other comprehensive income:

                        

Items that will not be reclassified to profit or loss:

                        

Changes in revaluation reserve real estate held for own use

                 (10                       (10         (10)  

Remeasurements of defined benefit plans

                       205                   205           205   

Income tax relating to items that will not be reclassified

                 2       (42                 (40         (40)  
       

Items that may be reclassified subsequently to profit or loss:

                        

Gains / (losses) on revaluation of available-for-sale investments

                 (1,057                       (1,057         (1,057)  

Gains / (losses) transferred to income statement on disposal and impairment of available-for-sale investments

                 42                         42           42   

Changes in cash flow hedging reserve

                 (159                       (159         (159)  

Movement in foreign currency translation and net foreign investment hedging reserves

                 53       (17     332             368           368   

Equity movements of joint ventures

                             6             6           6   

Equity movements of associates

                             (5           (5         (5)  

Disposal of group assets

                             36             36           36   

Income tax relating to items that may be reclassified

                 246             (20           225           225   

Other

           (3                             (3     (1   (4)  

Total other comprehensive income

 

           (3     (883     146       349             (392     (1   (393)  

Total comprehensive income / (loss) for 2018

           487       (883     146       349             99       (1   98   
       

Issuance and purchase of (treasury) shares

           137                               137           137   

Other equity instruments redeemed

           2                         (471     (468         (468)  

Dividends paid on common shares

     (119     (167                             (286         (286)  

Coupons on non-cumulative subordinated notes

           (11                             (11         (11)  

Coupons on perpetual securities

           (46                             (46         (46)  
       

Incentive plans

                                   (13     (12         (12)  

At end of period

     7,934       10,062       4,037       (1,523     (42     3,310       23,779       19     23,798   
       

Six months ended June 30, 2017

                        
       

At beginning of year

     8,193       7,812       5,381       (1,820     1,347       3,797       24,710       23     24,734   
       

Net income / (loss) recognized in the income statement

           907                               907           907   
       

Other comprehensive income:

                        

Items that will not be reclassified to profit or loss:

                        

Changes in revaluation reserve real estate held for own use

                 1                         1           1   

Remeasurements of defined benefit plans

                       282                   282           282   

Income tax relating to items that will not be reclassified

                       (69                 (69         (69)  
       

Items that may be reclassified subsequently to profit or loss:

                        

Gains / (losses) on revaluation of available-for-sale investments

                 1,563                         1,563           1,563   

Gains / (losses) transferred to income statement on disposal and impairment of available-for-sale investments

                 (1,123                       (1,123         (1,123)  

Changes in cash flow hedging reserve

                 (755                       (755         (755)  

Movement in foreign currency translation and net foreign investment hedging reserves

                 (250     61       (1,108           (1,297         (1,297)  

Equity movements of joint ventures

                             (6           (6         (6)  

Equity movements of associates

                             (2           (2         (2)  

Income tax relating to items that may be reclassified

                 128             47             175           175   

Other

           5                               5       (1   5   

Total other comprehensive income

 

           5       (437     274       (1,070           (1,228     (1   (1,228)  

Total comprehensive income / (loss) for 2017

           912       (437     274       (1,070           (321     (1   (322)  
       

Issuance and purchase of (treasury) shares

           142                               142           142   

Dividends paid on common shares

     (122     (143                             (265         (265)  

Coupons on non-cumulative subordinated notes

           (15                             (15         (15)  

Coupons on perpetual securities

           (49                             (49         (49)  

Incentive plans

           4                         (19     (15         (15)  

At end of period

     8,071       8,663       4,944       (1,546     278       3,779       24,188       23     24,211   

1 For a breakdown of share capital please refer to note 18.    

2 Issued capital and reserves attributable to owners of Aegon N.V.    

 

Unaudited

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Condensed consolidated cash flow statement

 

               
EUR millions    First half
2018
     First half
2017
 
   

Cash flow from operating activities

     (973)        728   
   

Purchases and disposals of intangible assets

     (16)        (4)  

Purchases and disposals of equipment and other assets

     (14)        (36)  

Purchases and disposals of businesses and subsidiaries

     12         (1,021)  

Purchases, disposals and dividends joint ventures and associates

     (70)        (4)  

Cash flow from investing activities

     (89)        (1,066)  
   

Issuance of treasury shares

             

Dividends paid

     (167)        (143)  

Issuances, repurchases and coupons of perpetuals

     (62)        (65)  

Issuances, repurchases and coupons of non-cumulative subordinated notes

     (285)        (19)  

Issuances and repayments of borrowings

     106         2,231   

Cash flow from financing activities

     (407)        2,005   
   

Net increase / (decrease) in cash and cash equivalents

     (1,469)        1,668   

Net cash and cash equivalents at January 1

     11,026         11,347   

Effects of changes in foreign exchange rates

     28         (138)  

Net cash and cash equivalents at end of period

     9,585         12,876   

    

                 
   

Cash and cash equivalents

     9,585         12,880   

Bank overdrafts classified as other liabilities

            (4)  

Net cash and cash equivalents

     9,585         12,876   

 

LOGO   Unaudited


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Condensed Consolidated Interim Financial Statements  

First half year 2018  

 

 

 

7   

 

 

Notes to the Condensed consolidated interim financial statements

Amounts in EUR millions, unless otherwise stated

Aegon N.V., incorporated and domiciled in the Netherlands, is a public limited liability company organized under Dutch law and recorded in the Commercial Register of The Hague under number 27076669 and with its registered address at Aegonplein 50, 2591 TV, The Hague, the Netherlands. Aegon N.V. serves as the holding company for the Aegon Group and has listings of its common shares in Amsterdam and New York.

Aegon N.V. (or ‘the Company’) and its subsidiaries (‘Aegon’ or ‘the Group’) have life insurance and pensions operations in more than 20 countries in the Americas, Europe and Asia and are also active in savings and asset management operations, accident and health insurance, general insurance and -to a limited extent- banking operations. Headquarters are located in The Hague, the Netherlands. The Group employs almost 26,000 people worldwide.

1. Basis of presentation

The condensed consolidated interim financial statements as at, and for the six months period ended, June 30, 2018 (first half 2018), have been prepared in accordance with IAS 34 ‘Interim Financial Reporting’, as adopted by the European Union (hereafter ‘IFRS-EU’). They do not include all of the information required for a full set of financial statements prepared in accordance with IFRS-EU and should therefore be read together with the 2017 consolidated financial statements of Aegon N.V. as included in Aegon’s Annual Report for 2017. Aegon’s Annual Report for 2017 is available on its website (aegon.com).

The condensed consolidated interim financial statements have been prepared in accordance with the historical cost convention as modified by the revaluation of investment properties and those financial instruments (including derivatives) and financial liabilities that have been measured at fair value. Certain amounts in prior periods may have been reclassified to conform to the current year presentation. These reclassifications had no effect on net income, shareholders’ equity or earnings per share. The condensed consolidated interim financial statements as at, and for the six-month period ended June 30, 2018, were approved by the Supervisory Board on August 15, 2018.

The condensed consolidated interim financial statements are presented in euro (EUR) and all values are rounded to the nearest million unless otherwise stated. The consequence is that the rounded amounts may not add up to the rounded total in all cases.

The published figures in these condensed consolidated interim financial statements are unaudited.

 

Unaudited

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2. Significant accounting policies

All accounting policies and methods of computation applied in the condensed consolidated interim financial statements are the same as those applied in the 2017 consolidated financial statements.

New IFRS accounting standards effective

The following standards, interpretations, amendments to standards and interpretations became effective in 2018 and have been endorsed by the European Union:

 

 

IFRS 15 Revenue from Contracts with Customers, including Clarifications to IFRS 15 as issued in 2016;

 

 

IFRS 2 Clarifications of Classification and measurement of Share Based Payments Transactions;

 

 

IAS 40 Investment property, amendments regarding the transfer of property;

 

 

IFRIC 22 Foreign currency transactions and advance consideration; and

 

 

Annual improvements 2014-2016 Cycle.

None of these revised standards and interpretations are significantly impacting the financial position or the condensed consolidated interim financial statements.

For a complete overview of IFRS standards, published before January 1, 2018, that will be applied in future years, and were not early adopted by the Group, please refer to Aegon’s Annual Report for 2017.

Future adoption of IFRS accounting standards

In May 2017, the IASB has issued IFRS 17 Insurance Contracts. IFRS 17 will be mandatorily effective for annual reporting periods beginning on or after January 1, 2021. It aims to provide a more consistent accounting model for insurance contracts among entities issuing insurance contracts globally. The endorsement process of the European Union of the new standard has started in 2017. A final endorsement decision is not expected to be made in 2018.

Application of IFRS 9 is required for annual periods beginning on or after January 1, 2018. However, the IASB issued an amendment to IFRS 4 Insurance Contracts (the predecessor standard to IFRS 17) that provides for a qualifying insurer a temporary exemption that permits, but does not require, the insurer to apply IAS 39 Financial Instruments: Recognition and Measurement rather than IFRS 9 for annual periods beginning before January 1, 2021 (i.e. a temporary exemption of IFRS 9). This amendment was endorsed by the European Union in November 2017. As Aegon meets the requirements for the temporary exemption, it chose not to implement IFRS 9 until January 1, 2021.

IFRS 17, together with IFRS 9 Financial Instruments, will fundamentally change the accounting in IFRS financial statements of insurance companies. Aegon has started its implementation project on both standards. Aegon expects the impact of these standards to be significant.

In January 2016, the IASB issued IFRS 16 Leases. This Standard was endorsed by the European Union in October 2017. IFRS 16 will be mandatorily effective for annual reporting periods beginning on or after January 1, 2019. Aegon is evaluating the impact that adoption of this Standard is expected to have on the Group’s financial statements.

Taxes

Taxes on income for the six-month period ended June 30, 2018, are calculated using the tax rate that is estimated to be applicable to total annual earnings.

 

LOGO   Unaudited


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Condensed Consolidated Interim Financial Statements  

First half year 2018  

 

 

 

9   

 

 

Judgments and critical accounting estimates

Preparing the condensed consolidated interim financial statements requires management to make judgments, estimates and assumptions, including the likelihood, timing or amount of future transactions or events, that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from the estimates made.

In preparing the condensed consolidated interim financial statements, significant judgments made by management in applying the Group’s accounting policies and the key sources of estimating uncertainty were not significantly different than those that were applied to the consolidated financial statements as at, and for the year ended, December 31, 2017.

Exchange rates

Assets and liabilities of foreign operations are translated to the presentation currency at the closing rates on the reporting date. Income, expenses and capital transactions (such as dividends) are translated at average exchange rates or at the prevailing rates on the transaction date, if more appropriate. The following exchange rates (most important rates) are applied for the condensed consolidated interim financial statements:

Closing exchange rates

         
                    USD   GBP
         

June 30, 2018

    1         EUR         1.1676       0.8843    
         

December 31, 2017

    1         EUR         1.2008   0.8877    

 

Weighted average exchange rates

 
         
                    USD   GBP
         

Six months ended June 30, 2018

    1         EUR         1.2113   0.8794
         

Six months ended June 30, 2017

    1         EUR         1.0822   0.8596

 

Unaudited

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3. Segment information

3.1. Income statement

 

EUR millions    Americas      The
Netherlands
     United
Kingdom
     Central &
Eastern
Europe
     Spain &
Portugal
     Europe      Asia      Asset
Management
     Holding and
other
activities
     Eliminations      Segment
total
    

 

Joint
ventures and
associates
eliminations

     Consolidated

Six months ended June 30, 2018

                                        
       

Underlying earnings before tax geographically

     602        318        69        41        7        435        31        83        (88      -        1,064        26      1,090 

Fair value items

     (75      81        (4      -        -        76        (2      -        (3      -        (3      (51    (54)

Realized gains / (losses) on investments

     (124      39        21        2        -        61        (9      2        3        -        (67      (2    (69)

Impairment charges

     (17      (4      -        (1      -        (4      -        -        (5      -        (26      -      (26)

Impairment reversals

     21        4        -        1        -        5        -        -        -        -        26        -      26 

Other income / (charges)

     (87      27        (182      (6      (19      (179      (5      (1      (21      -        (294      1      (294)

Run-off businesses

     (7      -        -        -        -        -        -        -        -        -        (7      -      (7)

Income / (loss) before tax

     313        466        (97      38        (12      395        15        83        (113      -        692        (27    665 

Income tax (expense) / benefit

     (74      (98      -        (5      (4      (106      (14      (27      21        -        (201      27      (174)

Net income / (loss)

     239        368        (97      33        (16      288        1        55        (92      -        491        -      491 

Inter-segment underlying earnings

     (28      (52      (44      (7      (2      (104      (2      98        37                
       

Revenues

                                        

Life insurance gross premiums

     3,392        902        3,900        205        116        5,124        440        -        4        (3      8,956        (313    8,644 

Accident and health insurance

     810        152        15        1        94        262        50        -        -        -        1,123        (24    1,099 

Property & casualty insurance

     -        70        -        116        56        243        -        -        1        (1      243        (56    187 

Total gross premiums

     4,202        1,125        3,915        322        267        5,629        490        -        5        (4      10,322        (393    9,929 

Investment income

     1,494        1,109        765        24        18        1,915        128        3        135        (136      3,539        (29    3,510 

Fee and commission income

     951        98        105        24        7        234        30        326        -        (102      1,440        (128    1,312 

Other revenues

     2        -        -        -        -        -        1        1        2        -        5        (4   

Total revenues

     6,650        2,332        4,785        370        292        7,779        649        330        141        (242      15,307        (554    14,752 

Inter-segment revenues

     -        1        -        -        -        1        -        102        139                                  
                                      
EUR millions    Americas      The
Netherlands
     United
Kingdom
     Central &
Eastern
Europe
     Spain &
Portugal
     Europe
     Asia      Asset
Management
     Holding and
other
activities
     Eliminations      Segment
total
    

 

Joint
ventures and
associates
eliminations

     Consolidated

Six months ended June 30, 2017

                                        
       

Underlying earnings before tax geographically

     653        273        68        36        6        383        23        69        (88      1        1,041        25      1,067 

Fair value items

     (53      (202      (48      -        -        (250      -        -        30        -        (273      (47    (320)

Realized gains / (losses) on investments

     29        147        6        2        -        156        (1      2        -        -        187        (3    183 

Impairment charges

     (11      (2      -        (3      -        (4      -        -        (2      -        (18      -      (18)
       

Impairment reversals

     12        7        -        -        -        7        -        -        -        -        19        -      19 

Other income / (charges)

     226        (8      80        -        -        72        -        (1      -        -        297        -      297 

Run-off businesses

     41        -        -        -        -        -        -        -        -        -        41        -      41 

Income / (loss) before tax

     897        215        107        36        6        363        22        71        (60      1        1,294        (25    1,268 

Income tax (expense) / benefit

     (257      (45      (44      (5      (4      (98      (26      (22      15        -        (387      25      (362)

Net income / (loss)

     641        170        63        31        2        265        (4      49        (45      1        907        -      907 

Inter-segment underlying earnings

     (36      (59      (47      (6      (1      (113      (2      114        37                
       

Revenues

                                        

Life insurance gross premiums

     3,832        1,052        4,474        203        105        5,835        552        -        4        (5      10,217        (327    9,890 

Accident and health insurance

     1,122        140        16        1        83        240        55        -        -        -        1,417        (15    1,402 

Property & casualty insurance

     -        77        -        110        49        237        -        -        1        (1      237        (49    187 

Total gross premiums

     4,954        1,270        4,490        314        237        6,312        607        -        4        (5      11,871        (392    11,479 

Investment income

     1,810        1,117        796        24        18        1,955        125        2        156        (154      3,893        (28    3,866 

Fee and commission income

     802        175        122        20        7        324        30        300        -        (118      1,336        (84    1,252 

Other revenues

     2        -        -        -        3        3        -        -        2        -        8        (2   

Total revenues

     7,567        2,561        5,409        357        266        8,593        762        301        162        (277      17,108        (506    16,602 

Inter-segment revenues

     -        -        -        -        -        -        2        118        157                                  

3.2. Performance measure

3.2.1. Measurement of performance measure

Aegon’s segment information is prepared by consolidating on a proportionate basis Aegon’s joint ventures and associated companies.

Performance measure

A non-IFRS performance measure of reporting segments utilized by the Company is underlying earnings before tax. Underlying earnings before tax reflects Aegon’s profit from underlying business operations and excludes components that relate to accounting mismatches that are dependent on market volatility, updates to best estimate actuarial and economic assumptions and model updates or events that are considered outside the normal course of business.

Aegon believes that its non-IFRS performance measure, underlying earnings before tax, provides meaningful supplemental information about the underlying results of Aegon’s business, including insight into the financial measures that Aegon’s senior management uses in managing the business. Among other things, Aegon’s senior management is compensated based in part on Aegon’s results against targets using underlying earnings before tax. While many other insurers in Aegon’s peer group present substantially similar performance measures, the performance measures presented in this document may nevertheless differ from the performance measures presented by other insurers. There is no standardized meaning to these measures under IFRS or any other recognized set of accounting standards.

 

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Condensed Consolidated Interim Financial Statements  

First half year 2018  

 

 

 

11   

 

 

The reconciliation from underlying earnings before tax to income before tax, being the most comparable IFRS measure, is presented in the tables in this note.

The items that are excluded from underlying earnings before tax as described further below are: fair value items, realized gain or losses on investments, impairment charges/reversals, other income or charges, run-off businesses and share in earnings of joint ventures and associates.

Fair value items

Fair value items include the over- or underperformance of investments and guarantees held at fair value for which management’s best estimate investment return is included in underlying earnings before tax.

In addition, hedge ineffectiveness on hedge transactions, fair value changes on economic hedges without natural offset in earnings and for which no hedge accounting is applied and fair value movements on real estate are included under fair value items.

Certain assets held by Aegon in the Americas and the Netherlands are carried at fair value and managed on a total return basis, with no offsetting changes in the valuation of related liabilities. These include assets such as investments in consumer loans, hedge funds, private equities, real estate (limited partnerships), convertible bonds and structured products. Underlying earnings before tax exclude any over- or underperformance compared to management’s best estimate investment return on assets. Based on current holdings and asset returns, management’s best estimate investment return on an annual basis is 3-10%, depending on asset class, including cash income and market value changes. The expected earnings from these asset classes are net of deferred policy acquisition costs (DPAC) where applicable.

In addition, certain products offered by Aegon Americas contain guarantees and are reported on a fair value basis, including the total return annuities and guarantees on variable annuities. The earnings on these products are impacted by movements in equity markets and risk-free interest rates. Short-term developments in the financial markets may therefore cause volatility in earnings. Included in underlying earnings before tax is a long-term expected return on these products and excluded is any over- or underperformance compared to management’s expected return.

The fair value movements of certain guarantees and the fair value change of derivatives that hedge certain risks on these guarantees of Aegon the Netherlands and Japan are excluded from underlying earnings before tax, and the long-term expected return for these guarantees is set at zero. In addition, fair value items include market related results on our loyalty bonus reserves in the United Kingdom. The value of these reserves are directly related to policyholder investments which value is directly impacted by movements in equity and bond markets.

Holding and other activities include certain issued bonds that are held at fair value through profit or loss (FVTPL). The interest rate risk on these bonds is hedged using swaps. The fair value movement resulting from changes in Aegon’s credit spread used in the valuation of these bonds are excluded from underlying earnings before tax and reported under fair value items.

Realized gains or losses on investments

Includes realized gains and losses on available-for-sale investments, mortgage loans and other loan portfolios.

 

Unaudited

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Impairment charges/reversals

Impairment charges include impairments on available-for-sale debt securities, shares including the effect of deferred policyholder acquisition costs, mortgage loans and other loan portfolios at amortized cost, joint ventures and associates. Impairment reversals include reversals on available-for-sale debt securities. For Aegon the Netherlands, the expected impairments on alternative assets classes (e.g. illiquid investments – including consumer loans and catastrophe bonds – and residential real estate) are allocated to underlying earnings in order to present management’s best estimate investment return in underlying earnings. Deviations from the expected impairments are presented as part of impairment charges / (reversals) in non-underlying earnings.

Other income or charges

Other income or charges includes: a) items which cannot be directly allocated to a specific line of business; b) the impact of actuarial and economic assumption and model updates used to support calculations of our liabilities for insurance and investment contracts sold to policyholders and related assets; and c) items that are outside the normal course of business, including restructuring charges. In the condensed consolidated interim financial statements, these restructuring charges are included in operating expenses. Actuarial assumption and model updates are recorded in Claims and Benefits in the IFRS income statement.

Run-off businesses

Includes results of business units where management in earlier years has decided to exit the market and to run-off the existing block of business. This line only includes results related to the run-off of the institutional spread-based business, structured settlements blocks of business, the life reinsurance business and the bank-owned and corporate-owned life insurance (BOLI/COLI) business in the United States. Aegon has other blocks of business for which sales have been discontinued and of which the earnings are included in underlying earnings before tax.

Share in earnings of joint ventures and associates

Earnings from Aegon’s joint ventures in the Netherlands, Mexico, Spain, Portugal, China and Japan and Aegon’s associates in India, Brazil, the Netherlands, United Kingdom, Mexico and France are reported on an underlying earnings before tax basis.

3.2.2. Change in measurement of performance measure

Aegon has changed the measurement of underlying earnings before tax for its real estate investments portfolio held by Aegon the Netherlands. Previously, direct returns on these investments were reported as part of underlying earnings before tax and the fair value movements were reported as part of Fair value items. From January 1, 2018, fair value items include the over- or underperformance for the real estate investments of Aegon the Netherlands, for which ‘management’s best estimate’ is included in underlying earnings before tax. In addition, Aegon the Netherlands started to record its management’s best estimate investment return on consumer loan investments (net of expected impairments) in underlying earnings before tax, where previously the gross returns were recorded in underlying earnings before tax and the impairments in the impairment line. All other alternative investments are reported similarly with ‘management’s best estimate investment return’ being included in underlying earnings before tax and the over- or underperformance in Fair value items.

For segment reporting purposes, the impact of this change in measurement on full year 2017 was an increase in consolidated underlying earnings before tax of EUR 37 million and a decrease in fair value items of EUR 61 million and a decrease in impairment charges of EUR 24 million. For the first half of 2017, the impact was an increase of EUR 19 million of underlying earnings, a decrease of EUR 29 million of fair value items and a decrease of EUR 10 million of impairment charges. There is no impact on net income in any of the reporting periods. Comparative numbers have been restated in Aegon’s segment reporting note. The presentation of the items in the IFRS income statement remains unchanged and continue to be part of the line ‘Investment income’.

 

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Condensed Consolidated Interim Financial Statements  

First half year 2018  

 

 

 

13   

 

 

3.3. Investments

Amounts included in the tables on investments are presented on an IFRS basis, which means that investments in joint ventures and associates are not consolidated on a proportionate basis. Instead, these investments are included on a single line using the equity method of accounting.

 

                                                                                     EUR millions  
   
June 30, 2018    Americas      The
Netherlands
     United
Kingdom
     Central &
Eastern
Europe
     Spain &
Portugal
     Europe      Asia      Asset
Management
     Holdings
and other
activities
     Eliminations     Total  

Investments

                                 

Shares

     577        1,161        4        66        11        1,241        7        3        126        -       1,955  

Debt securities

     52,784        21,922        1,515        672        670        24,780        5,418        10        3        -       82,995  

Loans

     9,279        31,618        -        264        46        31,927        15        -        13        -       41,235  

Other financial assets

     8,735        27        414        5        -        447        56        156        13        -       9,406  

Investments in real estate

     612        1,884        -        4        15        1,902        -        -        -        -       2,514  

Investments general account

     71,986        56,612        1,933        1,011        742        60,298        5,497        169        155        -       138,105  

Shares

     -        9,001        15,578        206        14        24,800        -        -        -        (6     24,794  

Debt securities

     2,081        12,120        7,663        185        8        19,976        -        -        -        -       22,058  

Unconsolidated investment funds

     100,642        847        34,248        779        84        35,958        108        -        -        -       136,708  

Other financial assets

     301        4,067        4,630        9        1        8,707        -        -        -        -       9,007  

Investments in real estate

     -        -        644        -        -        644        -        -        -        -       644  

Investments for account of policyholders

     103,024        26,036        62,763        1,181        106        90,085        108        -        -        (6     193,211  
   

Investments on balance sheet

     175,010        82,648        64,696        2,191        848        150,383        5,605        169        155        (6     331,317  

Off balance sheet investments third parties

     214,825        1,735        116,586        5,193        533        124,047        2,765        152,441        -        (852     493,226  

Total revenue generating investments

     389,835        84,383        181,282        7,385        1,380        274,430        8,370        152,610        155        (858     824,543  

Investments

                                 

Available-for-sale

     57,472        20,323        1,867        731        681        23,601        5,460        149        20        -       86,702  

Loans

     9,279        31,618        -        264        46        31,927        15        -        13        -       41,235  

Financial assets at fair value through profit or loss

     107,647        28,824        62,185        1,193        106        92,308        130        20        122        (6     200,221  

Investments in real estate

     612        1,884        644        4        15        2,546        -        -        -        -       3,158  

Total investments on balance sheet

     175,010        82,648        64,696        2,191        848        150,383        5,605        169        155        (6     331,317  
   

Investments in joint ventures

     3        917        -        -        483        1,400        142        127        1        -       1,673  

Investments in associates

     69        76        8        6        -        90        11        124        8        -       303  

Other assets

     35,571        13,248        3,057        344        190        16,826        2,553        375        29,914        (29,651     55,599  

Consolidated total assets

     210,653        96,889        67,760        2,541        1,520        168,699        8,312        795        30,078        (29,657     388,891  

 

                                                                                    

 

EUR millions

 
December 31, 2017    Americas      The
Netherlands
     United
Kingdom
     Central &
Eastern
Europe
     Spain &
Portugal
     Europe      Asia      Asset
Management
     Holdings
and other
activities
     Eliminations     Total  

Investments

                                 

Shares

     567        859        5        54        5        924        1        2        57        -       1,551  

Debt securities

     54,535        21,411        1,779        712        646        24,548        5,252        9        -        -       84,344  

Loans

     8,831        30,557        -        275        54        30,886        6        -        13        -       39,736  

Other financial assets

     8,904        21        228        10        -        259        67        146        20        -       9,395  

Investments in real estate

     633        1,495        -        4        15        1,513        -        -        -        -       2,147  

Investments general account

     73,469        54,343        2,011        1,055        720        58,130        5,326        157        91        -       137,172  

Shares

     -        9,262        15,856        244        14        25,376        -        -        -        (6     25,370  

Debt securities

     3,116        13,370        8,125        216        9        21,720        -        -        -        -       24,836  

Unconsolidated investment funds

     99,426        276        33,476        873        81        34,706        -        -        -        -       134,132  

Other financial assets

     422        3,788        4,850        11        1        8,650        -        -        -        -       9,072  

Investments in real estate

     -        -        655        -        -        655        -        -        -        -       655  

Investments for account of policyholders

     102,964        26,697        62,961        1,343        105        91,105        -        -        -        (6     194,063  
   

Investments on balance sheet

     176,434        81,040        64,972        2,398        825        149,235        5,326        157        91        (6     331,236  

Off balance sheet investments third parties

     212,736        1,759        114,906        5,709        528        122,902        2,718        143,923        -        (981     481,297  

Total revenue generating investments

     389,170        82,799        179,878        8,107        1,353        272,137        8,043        144,079        91        (987     812,533  

Investments

                                 

Available-for-sale

     59,459        19,841        2,007        756        651        23,256        5,299        137        20        -       88,170  

Loans

     8,831        30,557        -        275        54        30,886        6        -        13        -       39,736  

Financial assets at fair value through profit or loss

     107,511        29,147        62,310        1,363        105        92,925        21        20        57        (6     200,528  

Investments in real estate

     633        1,495        655        4        15        2,168        -        -        -        -       2,801  

Total investments on balance sheet

     176,434        81,040        64,972        2,398        825        149,235        5,326        157        91        (6     331,236  
   

Investments in joint ventures

     6        1,008        -        -        480        1,488        118        99        1        -       1,712  

Investments in associates

     77        74        7        6        -        88        14        122        8        -       308  

Other assets

     35,728        15,221        8,352        383        189        24,131        2,347        242        29,836        (29,263     63,034  

Consolidated total assets

     212,245        97,343        73,331        2,787        1,494        174,941        7,805        620        29,936        (29,270     396,291  

 

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4. Premium income and premiums paid to reinsurers

 

                

EUR millions

    
First half
2018
 
 
   First half 2017
   

Premium income

       

Life insurance

     8,644        9,890  

Non-life insurance

     1,285        1,590  

Total premium income

     9,929        11,479  

Accident and health insurance

     1,099        1,402  

Property & casualty insurance

     187        187  

Non-life Insurance premium income

     1,285        1,590  
   

Premiums paid to reinsurers 1

       

Life insurance

     1,293        1,813  

Non-life insurance

     75        120  

Total premiums paid to reinsurers

     1,369        1,933  

Accident and health insurance

     70        114  

Property & casualty insurance

     5        6  

Non-life Insurance paid to reinsurers

     75        120  

1 Premiums paid to reinsurers are recorded within Benefits and expenses in the income statement - refer to note 9 - Benefits and expenses.    

Premium income has decreased in the first half of 2018 mainly driven by a reduction of upgraded Life insurance policies to the retirement platform in the UK, which represents EUR 1,771 million (First half 2017: EUR 2,193 million) of the total premium income Life insurance. In addition, there is an additional negative impact from foreign exchange rates translation adjustments and product exits in Non-life insurance.

The decrease of EUR 0.5 billion in Premium paid to reinsurers Life compared to first half 2017 is mainly driven by the divestment of the pay-out annuity and BOLI/COLI businesses in the Americas and annuity portfolio in the United Kingdom, in 2017. In addition, the balance is affected by currency translation adjustments.

5. Investment income

 

                

EUR millions

    
First half
2018
 
 
   First half 2017
   

Interest income

     2,799        3,148  

Dividend income

     643        650  

Rental income

     68        68  

Total investment income

     3,510        3,866  
   

Investment income related to general account

     2,523        2,828  

Investment income for account of policyholders

     987        1,037  
   

Total

     3,510        3,866  

The decrease in investment income for the first half of 2018, mainly relates to a decrease in interest income driven by investment markets in the US and also specifically by the unfavorable currency translation effect.

6. Income from reinsurance ceded

The income from reinsurance ceded decreased by EUR 1,045 million for the first half of 2018 compared to the first half of 2017. This is mainly the result of the reinsurance transactions related to the pay out annuity business and BOLI/COLI in the US and the annuity business in the UK which occurred in 2017.

 

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Condensed Consolidated Interim Financial Statements  

First half year 2018  

 

 

 

15   

 

 

7. Results from financial transactions

 

                

EUR millions

    
First half
2018
 
 
   First half 2017
   

Net fair value change of general account financial investments at FVTPL other than derivatives

     (12)      84 

Realized gains /(losses) on financial investments

     (70)      220 

Gains /(losses) on investments in real estate

     118       50 

Net fair value change of derivatives

     106       (1,296)

Net fair value change on for account of policyholder financial assets at FVTPL

     752       10,267 

Net fair value change on investments in real estate for account of policyholders

     11       15 

Net foreign currency gains /(losses)

     26       (7)

Net fair value change on borrowings and other financial liabilities

     17      

Realized gains /(losses) on repurchased debt

          (1)

Total

     948       9,332 

The decrease in results from financial transactions is driven by the lower net fair value change on for account of policyholder financial assets at FVTPL for the first half of 2018 compared to the first half of 2017. The decrease is mainly driven by equity markets and interest rate movements. Net fair value change on for accounts of policyholder financial assets at FVTPL is offset by amounts in the Claims and benefits line reported in note 9 Benefits and expenses.

8. Other income

Other income in the first half of 2017 mainly related to a book gain of EUR 231 million (USD 250 million) related to the divestment of the payout annuity business and the Bank Owned Life Insurance / Corporate Owned Life Insurance business (BOLI/COLI) in the US. Furthermore, a release of an expense reserve of EUR 82 million (GBP 71 million) was recorded that was embedded in the liabilities for insurance contracts following the completion of the Part VII transfer of the annuities business to Rothesay Life. An insurance business transfer scheme under Part VII of the United Kingdom Financial Services and Markets Act 2000 allows an insurer to transfer policies as at a fixed time and date to another insurer, along with related contracts with other parties (including reinsurance).

9. Benefits and expenses

 

                

EUR millions

    
First half
2018
 
 
  

First half 2017

   

Claims and benefits

     14,665      

25,845 

Employee expenses

     1,049      

1,159 

Administration expenses

     688      

719 

Deferred expenses

     (417)     

(521)

Amortization charges

     500      

395 

Total

     16,484      

27,596 

The following table provides an analysis of “claims and benefits”:

 

                

EUR millions

    
First half
2018
 
 
   First half 2017
   

Benefits and claims paid life

     9,974       11,723 

Benefits and claims paid non-life

     846       1,000 

Change in valuation of liabilities for insurance contracts

     3,517       10,798 

Change in valuation of liabilities for investment contracts

     (2,262)      (976)

Other

     (8)      (23)

Policyholder claims and benefits

     12,066       22,523 

Premium paid to reinsurers

     1,369       1,933 

Profit sharing and rebates

     11       12 

Commissions

     1,219       1,377 

Total

     14,665       25,845 

 

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The lines “change in valuation of liabilities for insurance contracts” and “change in valuation of liabilities for investment contracts” reflect changes in technical provisions resulting from net fair value changes on for account of policyholder financial assets at FVTPL included in Results from financial transactions (note 7) of EUR 752 million for the first half of 2018 (First half 2017: EUR 10,267 million). In addition, the line “change in valuation of liabilities for insurance contracts” includes an increase of technical provisions for life insurance contracts of EUR 793 million (First half 2017: decrease of EUR 355 million).

10. Impairment charges/(reversals)

 

                

EUR millions

    
First half
2018
 
 
   First half 2017
   

Impairment charges / (reversals) comprise:

       

Impairment charges on financial assets, excluding receivables

     30       28 

Impairment reversals on financial assets, excluding receivables

     (26)      (19)

Impairment charges / (reversals) on non-financial assets and receivables

     16      

Total

     19       10 
   

Impairment charges on financial assets, excluding receivables, from:

       

Shares

         

Debt securities and money market instruments

          11 

Loans

     20       14 

Investments in associates

         

Total

     30       28 
   

Impairment reversals on financial assets, excluding receivables, from:

       

Debt securities and money market instruments

     (19)      (11)

Loans

     (6)      (7)

Other

     (1)      (1)

Total

     (26)      (19)

Impairment charges/(reversals) on non-financial assets and receivables increased to EUR 16 million in the first half of 2018 (First half 2017: EUR 1 million) due to updated valuations on various real estate properties in the Americas.

11. Other charges

Other charges of EUR 103 million mainly relate to the loss of EUR 93 million (GBP 82 million) from the divestment of Aegon Ireland Plc For more details on the divestment of Aegon Ireland Plc. refer to note 29 Acquisitions/divestments.

12. Investments

 

               
EUR millions    Jun. 30, 2018                  Dec. 31, 2017
     

Available-for-sale (AFS)

   86,702      88,170  

Loans

   41,235      39,736  

Financial assets at fair value through profit or loss (FVTPL)

  

7,653   

 

7,119  

Financial assets, for general account, excluding derivatives

   135,591      135,026  

Investments in real estate

  

2,514   

 

2,147  

Total investments for general account, excluding derivatives

   138,105      137,172  

 

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Condensed Consolidated Interim Financial Statements  

First half year 2018  

 

 

 

17   

 

 

Financial assets, for general account, excluding derivatives

 

                               
EUR millions    AFS        FVTPL        Loans        Total    
   

Shares

     517          1,438          -          1,955    

Debt securities

     79,069          3,926          -          82,995    

Money market and other short-term investments

     6,152          308          -          6,460    

Mortgages loans

     -          -          35,091          35,091    

Private loans

     -          -          3,870          3,870    

Deposits with financial institutions

     -          -          149          149    

Policy loans

     -          -          1,932          1,932    

Other

     964          1,982          192          3,138    

June 30, 2018

     86,702          7,653          41,235          135,591    
   
      AFS        FVTPL        Loans        Total    
   

Shares

     490          1,062          -          1,551    

Debt securities

     80,200          4,144          -          84,344    

Money market and other short-term investments

     6,690          119          -          6,809    

Mortgages loans

     -          -          33,930          33,930    

Private loans

     -          -          3,642          3,642    

Deposits with financial institutions

     -          -          139          139    

Policy loans

     -          -          1,897          1,897    

Other

     791          1,795          127          2,713    

December 31, 2017

     88,170          7,119          39,736          135,026    

13. Investments for account of policyholders

 

                  
EUR millions    Jun. 30, 2018                    Dec. 31, 2017  
     

Shares

     24,794          25,370    

Debt securities

     22,058          24,836    

Money market and short-term investments

     2,074          2,340    

Deposits with financial institutions

     2,980          2,946    

Unconsolidated investment funds

     136,708          134,132    

Other

     3,953          3,786    

Total investments for account of policyholders at fair value through profit or loss, excluding derivatives

     192,568          193,409    

Investment in real estate

     644          655    

Total investments for account of policyholders

     193,211          194,063    

14. Derivatives

The movements in fair value of derivatives on both the asset and liability side of the condensed consolidated statement of financial position mainly result from changes in interest rates and other market movements during the period, as well as purchases, disposals and maturities.

 

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15. Fair value

The following tables provide an analysis of financial instruments recorded at fair value on a recurring basis by level of the fair value hierarchy:

 

 

Fair value hierarchy

 

                               
   
EUR millions    Level I      Level II      Level III      Total  
     

As at June 30, 2018

               

 

  Financial assets carried at fair value

               

  Available-for-sale investments

               

 Shares

     77          162          278          517    

 Debt securities

     25,310          52,359          1,400          79,069    

 Money markets and other short-term instruments

     1,522          4,630          -          6,152    

 Other investments at fair value

     -          365          598          964    

  Total Available-for-sale investments

     26,909          57,517          2,276          86,702    

 

  Fair value through profit or loss

               

 Shares

     228          247          963          1,438    

 Debt securities

     1,854          2,068          4          3,926    

 Money markets and other short-term instruments

     17          291          -          308    

 Other investments at fair value

     1          636          1,345          1,982    

 Investments for account of policyholders 1

     114,567          76,238          1,762          192,568    

 Derivatives

     31          6,054          59          6,144    

  Total Fair value through profit or loss

     116,698          85,534          4,133          206,365    

  Total financial assets at fair value

     143,607          143,051          6,410          293,068    

 

  Financial liabilities carried at fair value

               

 Investment contracts for account of policyholders 2

     -          36,359          203          36,562    

 Borrowings 3

     -          532          -          532    

 Derivatives

     97          4,570          1,455          6,122    

  Total financial liabilities at fair value

     97          41,461          1,658          43,216    
     
As at December 31, 2017                

 

  Financial assets carried at fair value

               
  Available-for-sale investments                
 Shares      51          151          288          490    
     
 Debt securities      26,338          52,415          1,447          80,200    
 Money markets and other short-term instruments      1,664          5,026          -          6,690    
 Other investments at fair value      -          208          583          791    
  Total Available-for-sale investments      28,053          57,800          2,318          88,170    

 

  Fair value through profit or loss

               

 Shares

     226          232          604          1,062    

 Debt securities

     1,964          2,175          4          4,144    

 Money markets and other short-term instruments

     17          102          -          119    

 Other investments at fair value

     1          539          1,255          1,795    

 Investments for account of policyholders 1

     115,323          76,302          1,784          193,409    

 Derivatives

     68          5,787          57          5,912    
  Total Fair value through profit or loss      117,599          85,137          3,705          206,440    
  Total financial assets at fair value      145,652          142,937          6,022          294,610    

 

  Financial liabilities carried at fair value

               
 Investment contracts for account of policyholders 2      -          36,950          219          37,169    
 Borrowings 3      -          536          -          536    

 Derivatives

     34          5,251          1,845          7,130    
  Total financial liabilities at fair value      34          42,738          2,064          44,835    

1 The investments for account of policyholders included in the table above represents only those investments carried at fair value through profit or loss.

2 The investment contracts for account of policyholders included in the table above represents only those investment contracts carried at fair value.

3 Total borrowings on the statement of financial position contain borrowings carried at amortized cost that are not included in the above schedule.

 

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Condensed Consolidated Interim Financial Statements  

First half year 2018  

 

 

 

19   

 

 

Significant transfers between Level I, Level II and Level III

Aegon’s policy is to record transfers of assets and liabilities between Level I, Level II and Level III at their fair values as of the beginning of each reporting period.

The table below shows transfers between Level I and II for financial assets and financial liabilities recorded at fair value on a recurring basis during the six month period ended June 30, 2018.

 

 

Fair value transfers

                           
EUR millions   

First half      

2018      

    

Full Year      

2017      

     

Transfers

Level I to

 Level II

   

Transfers

Level II to

 Level I

    

Transfers
Level I to

 Level II 

   

Transfers
Level II to

 Level I 

Financial assets carried at fair value

  Available-for-sale investments

             

Shares

                  1     1  

Debt securities

                  12     -  

Money markets and other short-term instruments

                  -     1,664  

Total

                  13     1,666  

 

Fair value through profit or loss

             

Shares

                  124     19  

Investments for account of policyholders

           (5)        12     30  

Total

           (5)        136     49  

Total financial assets at fair value

           (4)        149     1,714  

 

Financial liabilities carried at fair value

             

Investment contracts for account of policyholders

                  1     -   

Total financial liabilities at fair value

                  1     -   

Transfers are identified based on transaction volume and frequency, which are indicative of an active market.

 

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Movements in Level III financial instruments measured at fair value

The following table summarizes the change of all assets and liabilities measured at estimated fair value on a recurring basis using significant unobservable inputs (‘Level III’), including realized and unrealized gains (losses) of all assets and liabilities and unrealized gains (losses) of all assets and liabilities still held at the end of the respective period.

 

 

Roll forward of Level III financial instruments

 

 

EUR millions    January 1,
2018
     Total gains /
losses in
income
statement 1
    Total gains /
losses in OCI 2
    Purchases      Sales      Settlements      Net exchange
differences
     Reclassification      Transfers from
Level I and
Level II
     Transfers to
Level I and
Level II
     Transfers to
disposal
groups
     June 30, 2018     

 

Total unrealized gains
and losses for the period
recorded in the P&L for
instruments  held at
June 30, 2018 ³

 

Financial assets carried at fair value

  available-for-sale investments

                                      

Shares

     288        13        (2)              (36)                                                  278         

Debt securities

     1,447        24        17        305         (46)        (247)        32                26         (160)               1,400         

Other investments at fair value

     583        (65     12        65         (9)        (7)        17                                     598         
       2,318        (27     27        377         (90)        (255)        55                26         (160)               2,276         
   

Fair value through profit or loss

                                      

Shares

     604        50              321         (50)                      35                              963        51   

Debt securities

     4                                                                            4         

Other investments at fair value

     1,255        42              138         (131)               37                63         (59)               1,345        44   

Investments for account of policyholders

     1,784        25              138         (251)                      56                              1,762        31   

Derivatives

     57        79                     (78)                                                  59        82   
       3,705        195              597         (509)               45         92         67         (59)               4,133        208   
   

Financial liabilities carried at fair value

                                      

Investment contracts for account of policyholders

     219        (5                  (13)                                                  203         

Derivatives

     1,845        (396                                (2)                                    1,455        (407)  
       2,064        (402                  (4)                                                  1,658        (405)  

    

                                                                                                                  
EUR millions    January 1,
2017
     Total gains /
losses in
income
statement 1
    Total gains /
losses in OCI 2
    Purchases      Sales      Settlements      Net exchange
differences
     Reclassification      Transfers from
Level I and
Level II
     Transfers to
Level I and
Level II
     Transfers to
disposal
groups
     December 31,
2017
    

 

Total unrealized gains
and losses for the period
recorded in the P&L for
instruments  held at
December 31, 2017 ³

 

Financial assets carried at fair value

  available-for-sale investments

                                      

Shares

     393        54        (46     68         (112)        (35)        (34)                                    288         

Debt securities

     1,966        39        (2     678         (149)        (890)        (186)               203         (211)               1,447         

Other investments at fair value

     754        (112     (109     194         (48)        (9)        (87)                                    583         
       3,112        (19     (158     939         (309)        (935)        (307)               205         (211)               2,318         
   

Fair value through profit or loss

                                      

Shares

     50        (11           583         (18)                                                  604        (11)  

Debt securities

     6                                         (1)                                    4         

Other investments at fair value

     1,257        23              378         (350)               (162)               341         (233)               1,255        20   

Investments for account of policyholders

     1,726        11              671         (622)               (27)               32         (8)               1,784        30   
                                        
                                        

Derivatives

     108        (33                                (2)        (16)                             57        (21)  
       3,146        (10           1,633         (989)               (191)        (16)        374         (241)               3,705        19   
   

Financial liabilities carried at fair value

                                      

Investment contracts for account of policyholders

     176                    60         (21)               (12)               10         (2)               219        (2)  

Derivatives

     2,467        (828                  300                (75)        10                       (30)        1,845        (745)  
       2,643        (821           60         279                (87)        10         10         (2)        (30)        2,064        (747)  

1 Includes impairments and movements related to fair value hedges. Gains and losses are recorded in the line item results from financial transactions of the income statement.

2 Total gains and losses are recorded in line items Gains/ (losses) on revaluation of available-for-sale investments and (Gains)/ losses transferred to

the income statement on disposal and impairment of available-for-sale investment of the statement of other comprehensive income.

3 Total gains / (losses) for the period during which the financial instrument was in Level III.

During the first six months of 2018, Aegon transferred certain financial instruments from Level I and II to Level III of the fair value hierarchy. The reason for the change in level was that the market liquidity for these securities decreased, which led to a change in market observability of prices. Prior to transfer, the fair value for the Level II securities was determined using observable market transactions or corroborated broker quotes respectively for the same or similar instruments. The amount of assets and liabilities transferred to Level III was EUR 93 million (FY 2017: EUR 588 million). Since the transfer, all such assets have been valued using valuation models incorporating significant non market-observable inputs or uncorroborated broker quotes.

Similarly, during the first six months of 2018, Aegon transferred EUR 219 million (FY 2017: EUR 454 million) of financial instruments from Level III to other levels of the fair value hierarchy. The change in level was mainly the result of a return of activity in the market for these securities and that for these securities the fair value could be determined using observable market transactions or corroborated broker quotes for the same or similar instruments.

 

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Condensed Consolidated Interim Financial Statements  

First half year 2018  

 

 

 

21   

 

 

The following table presents information about the significant unobservable inputs used for recurring fair value measurements for certain Level III financial instruments.

 

 

Overview of significant unobservable inputs

 

EUR millions    Valuation technique 1   

 

Carrying amount
June 30, 2018

    Significant unobservable input 2          Range (weighted average)

 Financial assets carried at fair value available-for-sale investments

            

 Shares

   Net asset value 4      235       n.a.     n.a. 
     Other        43       n.a.     n.a. 
            278             

 

 Debt securities

            
     Broker quote        1,062       n.a.     n.a. 
     Discounted cash flow        19       Credit spread     3.45% 
     Other        319       n.a.     n.a. 
            1,400             

 

 Other investments at fair value

            

Tax credit investments

   Discounted cash flow        533       Discount rate     6.0%

Investment funds

   Net asset value 4      37       n.a.     n.a. 

Other

   Other        28       n.a.     n.a. 

 June 30, 2018

          598             
                        

 

 Fair value through profit or loss

            

 Shares

   Other        963       n.a.     n.a. 

 Debt securities

   Other        4       n.a.     n.a. 
            967             

 

 Other investments at fair value

            

Investment funds

   Net asset value 4      1,330       n.a.     n.a. 

Other

   Other        15       n.a.     n.a. 
            1,345             

 

 Derivatives

            

 

Longevity swap

  

 

Discounted cash flow  

  

 

 

 

46  

 

 

 

 

Mortality 

  

 

n.a. 

Other

   Other        11       n.a.     n.a. 

 June 30, 2018

          57             

 Total financial assets at fair value 3

          4,645             

 

 Financial liabilities carried at fair value

            

 Derivatives

            

Embedded derivatives in insurance contracts

   Discounted cash flow        1,442       Own Credit spread    0.25% - 0.35% (0.25%)

Longevity swap

   Discounted cash flow        5       Mortality    n.a. 

Other

   Other        8       n.a.    n.a. 

 Total financial liabilities at fair value

          1,455             

 

1 

Other in the table above (column Valuation technique) includes investments for which the fair value is uncorroborated and no broker quote is received.

2 

Not applicable (n.a.) has been included when no significant unobservable assumption has been identified.

3 

Investments for account of policyholders are excluded from the table above and from the disclosure regarding reasonably possible alternative assumptions. Policyholder assets, and their returns, belong to policyholders and do not impact Aegon’s net income or equity. The effect on total assets is offset by the effect on total liabilities. Derivatives exclude derivatives for account of policyholders amounting to EUR 2 million.

4 

Net asset value is considered the best approximation to the fair value of these financial instruments.

The description of Aegon’s methods of determining fair value is included in the consolidated financial statements for 2017. For reference purposes, the valuation techniques included in the table above are described in more detail on the following pages.

Shares

When available, Aegon uses quoted market prices in active markets to determine the fair value of its investments in shares. Fair values for unquoted shares are estimated using observations of the price/earnings or price/cash flow ratios of quoted companies considered comparable to the companies being valued. Valuations are adjusted to account for company-specific issues and the lack of liquidity inherent in an unquoted investment. Adjustments for illiquidity are generally based on available market evidence. In addition, a variety of other factors are reviewed by management, including, but not limited to, current operating performance, changes in market outlook and the third-party financing environment.

 

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Available-for-sale shares include shares in a Federal Home Loan Bank (FHLB) for an amount of EUR 206 million (December 31, 2017: EUR 204 million) that are measured at par and which are reported as part of Net asset value in the column Valuation technique. FHLB has implicit financial support from the United States government. The redemption value of the shares is fixed at par and they can only be redeemed by the FHLB.

Debt securities

Aegon’s portfolio of debt securities can be subdivided in Residential mortgage-backed securities (RMBS), Commercial mortgage-backed securities (CMBS), Asset-backed securities (ABS), Corporate bonds and Government debt. Below relevant details in the valuation methodology for these specific types of debt securities are described.

Valuations of RMBS, CMBS and ABS are monitored and reviewed on a monthly basis. Valuations per asset type are based on a pricing hierarchy which uses a waterfall approach that starts with market prices from indices and follows with third-party pricing services or brokers. The pricing hierarchy is dependent on the possibilities of corroboration of the market prices. If no market prices are available, Aegon uses internal models to determine fair value. Significant inputs included in the internal models are generally determined based on relative value analyses, which incorporate comparisons to instruments with similar collateral and risk profiles. Market standard models may be used to model the specific collateral composition and cash flow structure of each transaction.

Valuations of corporate bonds are monitored and reviewed on a monthly basis. The pricing hierarchy is dependent on the possibility of corroboration of market prices when available. If no market prices are available, valuations are determined by a discounted cash flow methodology using an internally calculated yield. The yield is comprised of a credit spread over a given benchmark. In all cases, the benchmark is an observable input. The credit spread contains both observable and unobservable inputs. Aegon starts by taking an observable credit spread from a similar bond of the given issuer, and then adjusts this spread based on unobservable inputs. These unobservable inputs may include subordination, liquidity and maturity differences. The weighted average credit spread used in valuation of corporate bonds has increased to 3.5% (December 31, 2017: 2.6%).

If available, Aegon uses quoted market prices in active markets to determine the fair value of its Government debt investments. If Aegon cannot make use of quoted market prices, market prices from indices or quotes from third-party pricing services or brokers are used.

Tax credit investments

The fair value of tax credit investments is determined by using a discounted cash flow valuation technique. This valuation technique takes into consideration projections of future capital contributions and distributions, as well as future tax credits and the tax benefits of future operating losses. The present value of these cash flows is calculated by applying a discount rate. In general, the discount rate is determined based on the cash outflows for the investments and the cash inflows from the tax credits/tax benefits (and the timing of those cash flows). These inputs are unobservable in the market place. The discount rate used in valuation of tax credit investments increased to 6.0% (December 31, 2017: 5.8%).

Investment funds

Investment funds include real estate funds, private equity funds and hedge funds. The fair values of investments held in non-quoted investment funds are determined by management after taking into consideration information provided by the fund managers. Aegon reviews the valuations each month and performs analytical procedures and trending analyses to ensure the fair values are appropriate.

Derivatives

Where quoted market prices are not available, other valuation techniques, such as option pricing or stochastic modeling, are applied. The valuation techniques incorporate all factors that a typical market participant would consider and are based on observable market data when available. Models are validated before they are used and calibrated to ensure that outputs reflect actual experience and comparable market prices.

 

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Condensed Consolidated Interim Financial Statements  

First half year 2018  

 

 

 

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Fair values for exchange-traded derivatives, principally futures and certain options, are based on quoted market prices in active markets. Fair values for over-the-counter (“OTC”) derivatives represent amounts estimated to be received from or paid to a third party in settlement of these instruments. These derivatives are valued using pricing models based on the net present value of estimated future cash flows, directly observed prices from exchange-traded derivatives, other OTC trades, or external pricing services. Most valuations are derived from swap and volatility matrices, which are constructed for applicable indices and currencies using current market data from many industry standard sources. Option pricing is based on industry standard valuation models and current market levels, where applicable. The pricing of complex or illiquid instruments is based on internal models or an independent third party. For long-dated illiquid contracts, extrapolation methods are applied to observed market data in order to estimate inputs and assumptions that are not directly observable. To value OTC derivatives, management uses observed market information, other trades in the market and dealer prices.

Some OTC derivatives are so-called longevity derivatives. The payout of longevity derivatives is linked to publicly available mortality tables. The derivatives are measured using the present value of the best estimate of expected payouts of the derivative plus a risk margin. The best estimate of expected payouts is determined using best estimate of mortality developments. Aegon determined the risk margin by stressing the best estimate mortality developments to quantify the risk and applying a cost-of-capital methodology. The most significant unobservable input for these derivatives is the (projected) mortality development.

Aegon normally mitigates counterparty credit risk in derivative contracts by entering into collateral agreements where practical and in ISDA (International Swaps and Derivatives Association) master netting agreements for each of the Group’s legal entities to facilitate Aegon’s right to offset credit risk exposure. Changes in the fair value of derivatives attributable to changes in counterparty credit risk were not significant.

Embedded derivatives in insurance contracts including guarantees

All bifurcated guarantees for minimum benefits in insurance and investment contracts are carried at fair value. These guarantees include guaranteed minimum withdrawal benefits (GMWB) in the United States, United Kingdom and Japan which are offered on some variable annuity products and are also assumed from a ceding company; minimum investment return guarantees on insurance products offered in the Netherlands, including group pension and traditional products; variable annuities sold in Europe and Japan.

Since the price of these guarantees is not quoted in any market, the fair values of these guarantees are based on discounted cash flows calculated as the present value of future expected payments to policyholders less the present value of assessed rider fees attributable to the guarantees. Given the complexity and long-term nature of these guarantees which are unlike instruments available in financial markets, their fair values are determined by using stochastic models under a variety of market return scenarios. A variety of factors are considered including credit spread, expected market rates of return, equity and interest rate volatility, correlations of market returns, discount rates and actuarial assumptions. The most significant unobservable factor is discount rate. The credit spread used in the valuations of embedded derivatives in insurance contracts increased to 0.3% (December 31, 2017: 0.2%).

The expected returns are based on risk-free rates. Aegon added a premium to reflect the credit spread as required. The credit spread is set by using the credit default swap (CDS) spreads of a reference portfolio of life insurance companies (including Aegon), adjusted to reflect the subordination of senior debt holders at the holding company level to the position of policyholders at the operating company level (who have priority in payments to other creditors). Aegon’s assumptions are set by region to reflect differences in the valuation of the guarantee embedded in the insurance contracts.

Since many of the assumptions are unobservable and are considered to be significant inputs to the liability valuation, the liability included in future policy benefits has been reflected within Level III of the fair value hierarchy.

 

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Effect of reasonably possible alternative assumptions

The effect of changes in unobservable inputs on fair value measurement were not significantly different than those that were applied to the consolidated financial statements as at and for the year ended December 31, 2017.

Fair value information about financial instruments not measured at fair value

The following table presents the carrying values and estimated fair values of financial assets and liabilities, excluding financial instruments which are carried at fair value on a recurring basis.

 

 

Fair value information about financial instruments not measured at fair value

 

 
EUR millions   

 

Carrying amount
June 30, 2018

   

 

        Total estimated fair value
June 30, 2018

   

 

Carrying amount
            December 31, 2017

   

 

        Total estimated fair value
December 31, 2017

 

Assets

            

Mortgage loans - held at amortized cost

     35,091        39,066        33,930        38,076   

Private loans - held at amortized cost

     3,870        4,450        3,642        4,181   

Other loans - held at amortized cost

     2,273        2,273        2,164        2,164   
     

Liabilities

            

Subordinated borrowings - held at amortized cost

     1,335        1,434        764        953   

Trust pass-through securities - held at amortized cost

     131        131        133        137   

Borrowings - held at amortized cost

     12,889        13,263        13,099        13,499   

Investment contracts - held at amortized cost

     17,246        17,447        16,665        17,031   

Financial instruments for which carrying value approximates fair value

Certain financial instruments that are not carried at fair value are carried at amounts that approximate fair value, due to their short-term nature and generally negligible credit risk. These instruments include cash and cash equivalents, short-term receivables and accrued interest receivable, short-term liabilities, and accrued liabilities. These instruments are not included in the table above.

16. Deferred expenses

 

                  
EUR millions    Jun. 30, 2018                        Dec.  31, 2017
     

Deferred policy acquisition costs (DPAC) for insurance contracts and investment contracts with discretionary participation features

     10,293       9,688 

Deferred cost of reinsurance

     28       41 

Deferred transaction costs for investment management services

     422      

406 

Total deferred expenses

     10,743       10,135 

Deferred expenses are predominantly impacted by regular amortizations, adjustments for differences between projections versus realization of deferral schemes and changes in foreign exchange rates.

17. Intangible assets

 

                  
EUR millions    Jun. 30, 2018                        Dec.  31, 2017
     

Goodwill

     296       293 

VOBA

     1,160       1,153 

Future servicing rights

     94       99 

Software

     59       51 

Other

     33      

36 

Total intangible assets

     1,643       1,633 

 

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Condensed Consolidated Interim Financial Statements  

First half year 2018  

 

 

 

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18. Share capital

 

                
EUR millions    Jun. 30, 2018                        Dec.  31, 2017
     

Share capital - par value

     322       322 

Share premium

     7,612      

7,731 

Total share capital

     7,934       8,053 
     

Share capital - par value