Investor protection

What is AEGON’s financial strength?

Although we’re not rated by Standard & Poor’s, we’re part of the AEGON Group one of the largest insurance groups in the world. AEGON maintains strong capital position with excess capital over AA capital adequacy requirements of EUR 3.7 billion (as at 31 December 2009). You can find more details on AEGON’s robust financial strength and strong risk management approach on www.aegon.com

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Is AEGON covered by a regulator?

Yes – we’re authorised by the Financial Regulator in Ireland and subject to limited regulation by the Financial Services Authority for the conduct of UK business.

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What legislation applies to the way AEGON is run?

European Life Directives apply as we’re based in Ireland.

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Is there regulation and legislation to stop companies getting into trouble?

Yes there are three provisions. We must:

1. report our financial position on a quarterly basis
2. meet European Union solvency requirements meaning we have, at any given time, at least €3.2m over our liabilities
3. account for policyholder’s money separately from our own

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Is policyholders’ money treated differently from the company’s money?

Yes, policyholders’ money is accounted for separately from our own. If we were to be wound up, policyholders have priority on our assets.

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Do AEGON undertake due diligence on an asset?

No. But due to the nature of offshore bonds, a vast array of holdings can be held as underlying assets and your financial adviser will have recommended or selected an asset that is appropriate to you. However, in accepting an asset, we’ll consider the Irish admissibility asset rules and the UK highly personalised rules.

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Is there any protection in the way the company organises itself?

Yes, we use external custodians to look after most of our assets. Most of the assets are held by Citibank on our behalf. These assets are held in nominee accounts which may give further reassurance. Citibank is one of the biggest banks in the world.

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Are AEGON policyholders covered by any compensation scheme?

There is no Irish based compensation scheme but if a policyholder was UK habitually resident at the time they took out the policy, they would be covered by the UK Financial Services Compensation scheme (FSCS).

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What protection do you get from the FSCS?

If we (as an insurer in the European Economic Area) became unable to meet our liabilities, a policyholder who was habitually UK resident at the time of sale would generally be covered for 90% of the value of the whole claim, without limit. Please note some categories of investors are excluded.

For more information about the exclusions and the FSCS go to www.fscs.org.uk/what-we-cover

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Are trustees covered by the FSCS?

Trustees of estate planning type trusts are covered by the FSCS if they are UK based. Trustees of pension schemes are covered providing it is not a pension scheme of a large company.

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What happens if the provider of an underlying investment becomes worthless?

The FSCS applies when an insurance company that’s a member of the scheme can’t meet its liabilities. If an underlying investment becomes worthless there are no liabilities and so there’s no claim against the insurance company, which means that the FSCS wouldn’t apply. As such, this risk is borne by the policyholder.

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If an underlying investment becomes worthless, can AEGON claim against any compensation scheme?

No. We can’t claim against the ‘collective investments scheme compensation scheme’ in the UK. In general, there may be other compensation schemes depending upon the asset class and jurisdiction of the provider but we’re unlikely to be able to claim. Even if it did, we’re likely to be treated as one investor so would only be able to claim small amounts.

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Is there any other type of protection if an underlying provider is no longer trading?

This will depend on how that underlying company is organised and so we can’t comment specifically. In general though, if a collective provider is no longer trading, the unit holder’s assets may be kept in a nominee account. In that case the underlying investment may still have a value, even though the provider has ceased trading. This value will still be included in the value of our policy.

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How do AEGON’s guaranteed products, AEGON Secure Lifetime Income and 5 for Life, affect the policyholder protection position for other policyholders?

Assets linked to different classes of policy can’t be ring-fenced from one another. This means that liabilities to AEGON Secure Lifetime Income and 5 for Life planholders could affect the amount available to policyholders with offshore bonds. However, there are measures in place to ensure that the guarantees don’t compromise our financial strength.

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Are AEGON Secure Lifetime Income and 5 for Life covered by the FSCS scheme?

Yes, but we don’t currently believe the fact there is an income guarantee would be taken into account. It would be purely based on the remaining capital value.

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What actions are you taking to manage the risk associated with these modern guarantees?

These guarantees are valuable, which is why they have an explicit charge. We use this charge to operate our comprehensive risk management programme, to ensure we’re able to meet the guarantees. The important elements of risk management are:

Product development

Our guaranteed products have some risk mitigation features, such as higher guarantee charges for funds with higher equity contents. This means there’s less risk from our business mix being different from what we expect. In addition, this is fairer for all our customers, as you pay a charge consistent with the level of the guarantee and therefore the risk we are taking on.

Price setting

Our guarantee charges are set with reference to the price the capital markets set for the risk we are taking on. This ensures that we are charging enough to be able to afford to offset this risk through the capital markets. We monitor this price on a constant basis. Unlike with typical unit-linked products it’s not meaningful to simply compare guarantee charges when comparing value. Higher guarantee charges generally mean one of two things - more comprehensive guarantees, or less aggressive long-term assumptions about market conditions or policyholder behaviour.

Hedging

Hedging is the process by which we reduce our exposure to movements in market conditions. We do this by using the guarantee charges to go to the capital markets to buy assets to help offset the risks we have taken on.

Whilst the process to calculate the correct amount of hedge assets to purchase is a complex one, requiring significant expertise and experience, the hedge assets are tried and tested and have been traded in the market for many years. We rebalance these hedge assets on a daily basis, or more frequently if necessary. We also produce a daily report, which allows us to assess the performance of the hedge assets at a high level of detail. To do this we leverage the expertise and experience of our colleagues in the USA, where we have a long track record in successfully managing hedging programs.

Risk based capital

While hedging will remove the majority of risks associated with these guarantees, we’ll be left with other risks, such as policyholder experience being different from expected. However, we hold sufficient capital to remain solvent in extreme conditions.

Review experience

We constantly review our assumptions underlying our pricing, hedging and capital position. This ensures that we stay on top of changes in the markets and we can align our assumptions with our policyholder experience to date.

Robust governance

We have strong governance procedures surrounding our product development, pricing, hedging and capital position.

Product diversification

When an individual invests their money, it’s important to have a diversified portfolio of assets. In the same way, it’s important for an insurance company to have a diversified portfolio of product risks. We have a wide range of product risks, and in fact, some of these product risks naturally offset each other. For example, our annuity business versus some protection business on mortality trends, or guaranteed versus unitised business where policyholders cancel or stop their investment.

The only circumstance in which the guarantee wouldn’t apply would be if AEGON Ireland plc failed. In this unlikely event, the benefits from AEGON Secure Lifetime Income and 5 for Life may be affected.

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