Growing the Value Capital & Risk Management

Transcription

1 Growing the Value Capital & Risk Management Jos Streppel Member of the Executive Board and CFO AEGON N.V. Tom Grondin CRO AEGON N.V. A&I Conference November 2007

2 Key Messages AEGON is well prepared for Solvency II Solvency II will make it easier for AEGON to manage it s business the right way Risk management is integrated throughout the organization and entrenched in the way we do business AEGON s risks are well diversified Solvency II will make it easier for AEGON to manage it s business the right way 2 A&I Conference November 2007

3 Solvency II Framework Directive AEGON endorses the main elements of the European proposal as basis for the most advanced and modern solvency regime worldwide A brief summary of the key aspects of the draft directive are: Market consistent valuation of assets and liabilities Capital adequacy assessed based on stresses of the underlying valuation Solvency Capital Requirement (SCR) based on 99.5% Value-at-Risk (VaR) Minimum Capital Requirement (MCR) representing a threshold for required regulatory action Reflection of diversification effects and risk mitigation techniques. Allowance of internal models (when approved) Reflecting of recent developments in insurance activities, globalization, risk management, financial methods and reporting Including a true group supervision through group support which is not supplemental to solo supervision as current situation 3 A&I Conference November 2007

4 Framework of Solvency II A stronger industry Capital requirement Risk management processes and supervisory tools Supervisory reporting and public disclosures 4 A&I Conference November 2007

5 Key Elements of Solvency II To maximize effectiveness, all pieces to advanced solvency and supervision must be in place Market consistent framework Credit for Diversification Group level supervision Recognition of risk mitigation Internal models encouraged Public disclosure 5 A&I Conference November 2007

6 Key Elements of Solvency II (cont d) Market consistent framework A market consistent view of assets and liabilities Full economic based risk assessment Recognition of risk mitigation Full and proper recognition of risk mitigation methods Derivatives, reinsurance (internal and external) Alignment of incentives 6 A&I Conference November 2007

7 Key Elements of Solvency II (cont d) Credit for Diversification One of the key foundations of insurance Discourage risk concentration Reflection of mobility of capital Internal models encouraged Customized to insurer risk and business profile Encourage best risk management practices 7 A&I Conference November 2007

8 Key Elements of Solvency II (cont d) Group level supervision Centralized internal model approval Recognition of risk mitigation diversification between units Cooperation between group and local supervisors Public disclosure Consistent and transparent disclosure Should increase familiarity and understanding of the insurance industry 8 A&I Conference November 2007

9 The Link Between Solvency II and IFRS 4 Phase II In parallel to the Solvency II project, the IASB and the insurance industry are working on the valuation of technical liabilities for accounting in the context of IFRS 4 phase II To enhance transparency, to avoid duplication of work and costs and to reach both Solvency II and Financial Reporting objectives, the two approaches should be consistent Therefore, the market consistent valuation basis for the policyholder liability is similar It is crucial for the industry that financial reporting and supervisory frameworks reflect economic reality 9 A&I Conference November 2007

10 IFRS and Solvency II a Coherent Framework Accounting view Solvency view Market value of assets Equity Deferred profit* Risk margin Capital Market value margin Available capital for solvency purposes Best Estimate Liability Best Estimate Liability MVL (market consistent) * * Market value of liabilities includes, for non-hedgeable risks, the best estimate liability plus the market value margin (with a cost of capital as a proxy) 10 A&I Conference November 2007

11 Enterprise Risk Management To be effective, all pieces to the Enterprise Risk Management puzzle must be complete Risk Governance & Tolerance Risk limits ALM and Insurance risk Risk & Compliance Reporting Economic Framework Operational Risk Framework 11 A&I Conference November 2007

12 Risk Management Organization It is important that risk management in the Operating Units be part of the local management team Risk management must also be integrated across the group to ensure best risk management practices are utilized and a consistent ERM framework is adhered to To achieve both objectives, functional lines between Group Risk and Operating Unit Risk Management Operating Unit Risk function Directly responsible to Operating Unit Product development support Product pricing ALM Underwriting Operational risk management Operating unit risk policy development Functionally responsible to Group Risk Economic Framework Pricing methodology Risk measurement methodology Underwriting standards ORM framework Risk and compliance reporting Escalation of risk issues 12 A&I Conference November 2007

13 Risk Management Organization Management Board Group Risk and Capital Committee US Corporate Group Risk Americas CRO Europe CRO Asia CRO Operating Unit Risk US division CROs EU CU CROs Asia CU CROs 13 A&I Conference November 2007

14 Economic Framework Why Are We Doing It? Reason 1 Better help us manage our risk and capital Reason 2 In time, will result in lower capital requirements Reason 3 Overall, will improve our competitive position Reason 4 Anticipated external developments will requiring it 14 A&I Conference November 2007

15 Economic Framework What Needs To Be Done? Market consistent pricing (market consistent VNB) Process and content audit (balance sheet, capital model, attribution) Economic Required Capital Market Value Balance Sheet 15 A&I Conference November 2007

16 Economic Framework What s the Timing? Transition to Market Consistent Pricing Performance measurement MCEV disclosure IFRS Phase II & Solvency II Implementation Using it 16 A&I Conference November 2007

17 Risk Classification Economic Required Capital Investment & Counterparty Risk Mismatch Risk Operational Risk Underwriting Risk IR2 Equity MR2 Interest Rate OR2 Legal / UR2 Morbidity IR3 Alternative Volatility Compliance UR3 Persistency Investment MR3 Currency OR3 Fraud UR4 Property IR4 Counterparty OR4 Administration Casualty IR5 Equity OR5 Staff Volatility OR6 Physical Assets OR7 Systems OR8 Tax 17 A&I Conference November 2007

18 AEGON NV Economic Required Capital Pre-diversified Economic Capital Diversified Economic Capital Operational 9% Credit Property Casualty 13% 1% Persistency 10% Equity 15% Currency 2% Property Casualty 0% Operational Persistency 4% Mortality & 1% Credit Morbidity 19% 8% Mortality & Morbidity 17% Currency 2% Interest Rate 29% Alternative Investment 4% Interest Rate 41% Alternative Investment 3% Equity 22% Breakdown of risks by major risk type (no diversification) Breakdown of risks by pre-diversification (full diversification) 18 A&I Conference November 2007

19 Diversification Benefits Country Unit Levels Pre-geographic diversification effect by country unit 100% Measured reduction in 80% required capital at country 60% unit level only 40% 20% 33% 33% 39% 35% 27% 49% 46% 25% 20% 0% Group US NL UK CA SP HU TW CH Marginal diversification benefits by country units 100% 80% 60% 40% 42% 36% 57% 50% 46% 81% 68% 43% 39% Measures the net impact on required capital if 1 $ of risk is added to a country unit pro rata 20% 0% Group US NL UK CA SP HU TW CH 19 A&I Conference November 2007

20 Summary AEGON supports the Solvency II draft directive We are well prepared for the convergence toward market consistent financial reporting and solvency systems AEGON has a strong integrated approach to risk management Our Economic Framework implementation is on track AEGON s risks are well diversified 20 A&I Conference November 2007

21 AEGON Investor Relations P.O. Box CB The Hague The Netherlands p : f : e : gca-ir@aegon.com

22 Cautionary Note regarding forward-looking Statements Cautionary note regarding forward-looking statements The statements contained in this presentation that are not historical facts are forward-looking statements as defined in the US Private Securities Litigation Reform Act of The following are words that identify such forward-looking statements: believe, estimate, target, intend, may, expect, anticipate, predict, project, counting on, plan, continue, want, forecast, should, would, is confident, will, and similar expressions as they relate to our company. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. We undertake no obligation to publicly update or revise any forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which merely reflect company expectations at the time of writing. Actual results may differ materially from expectations conveyed in forwardlooking statements due to changes caused by various risks and uncertainties. Such risks and uncertainties include but are not limited to the following: Changes in general economic conditions, particularly in the United States, the Netherlands and the United Kingdom; Changes in the performance of financial markets, including emerging markets, such as with regard to: - The frequency and severity of defaults by issuers in our fixed income investment portfolios; and - The effects of corporate bankruptcies and/or accounting restatements on the financial markets and the resulting decline in the value of equity and debt securities we hold; The frequency and severity of insured loss events; Changes affecting mortality, morbidity and other factors that may impact the profitability of our insurance products; Changes affecting interest rate levels and continuing low or rapidly changing interest rate levels; Changes affecting currency exchange rates, in particular the EUR/USD and EUR/GBP exchange rates; Increasing levels of competition in the United States, the Netherlands, the United Kingdom and emerging markets; Changes in laws and regulations, particularly those affecting our operations, the products we sell, and the attractiveness of certain products to our consumers; Regulatory changes relating to the insurance industry in the jurisdictions in which we operate; Acts of God, acts of terrorism, acts of war and pandemics; Changes in the policies of central banks and/or governments; Litigation or regulatory action that could require us to pay significant damages or change the way we do business; Customer responsiveness to both new products and distribution channels; Competitive, legal, regulatory, or tax changes that affect the distribution cost of or demand for our products; Our failure to achieve anticipated levels of earnings or operational efficiencies as well as other cost saving initiatives; and The impact our adoption of the International Financial Reporting Standards may have on our reported financial results and financial condition. Cautionary note regarding Regulation G (non-gaap measure) This presentation includes non-gaap financial measures: net operating earnings, operating earnings before tax, value of new business and embedded value. Value of new business and embedded value are not based on IFRS, which are used to prepare and report AEGON s financial statements and should not be viewed as a substitute for IFRS financial measures. AEGON believes the non-gaap measures shown herein, together with GAAP information, provides a meaningful measure for the investment community to evaluate AEGON s business relative to the businesses of our peers. 22 A&I Conference November 2007