Capital and liquidity management

report of the executive board

AEGON conducts its capital and liquidity management processes at various levels within the organization, coordinated for the Group by Group Treasury, under the remit of the Group Risk and Capital Committee.

The main goals of AEGON’s capital and liquidity management are to manage capital efficiently across the Group in order to maximize returns, facilitate access to money and capital markets at competitive prices to minimize the cost of capital. At the same time, capital and liquidity management aims to ensure high standards of liquidity during periods of severely impaired financial markets and to manage capital adequacy to competitive standards within leverage tolerances consistent with strong capitalization.

Capital adequacy

AEGON manages capital adequacy at the level of its country units and their operating companies. AEGON seeks to support its internal capital adequacy levels at whichever is the higher of local regulatory requirements, the relevant local Standard & Poor’s requirements for very strong capitalization or internally imposed (economic) requirements. During 2007, the capital adequacy of AEGON’s operating units continued to be very strong. All of AEGON’s units were capitalized within these tolerances. In the United States, AEGON held approximately 336% of the minimum capital required by the National Association of Insurance Commissioners at December 31, 2007.

Capital base AND LEVERAGE TOLERANCES

AEGON applies leverage tolerances to its capital base.
The capital base reflects the capital employed in core activities and consists of shareholders’ equity (excluding revaluation reserve), capital securities, dated subordinated debt and senior debt. AEGON targets its capital base to comprise at least 70% shareholders’ equity, 25% capital securities and a maximum of 5% dated subordinated and senior debt. At December 31, 2007, AEGON’s capital base was within these prescribed tolerances. Shareholders’ equity capital represented 71.5% of its total capital base, while perpetual capital securities comprised 21.7% of its total capital base. Senior and dated subordinated debt accounted for the remaining 6.8%. As part of its overall capital management strategy, AEGON successfully completed a EUR 1 billion share repurchase program in November 2007. The program has enabled AEGON to manage its capital base more efficiently without limiting AEGON’s organic growth potential or its ability to carry out value-enhancing add-on acquisitions. During 2007, the ratio of shareholders’ equity to total capital decreased, while capital leverage increased, mainly as a result of more efficient capital management. In September 2007, AEGON N.V. successfully issued USD 1,050 million of junior perpetual capital securities to further improve the quality of its capital base and reduce refinancing risk.

Shareholders’ equity

Shareholders’ equity was EUR 15,151 million at December 31, 2007, compared to EUR 18,605 million at December 31, 2006 ¹. Net income of EUR 2,551 million was offset mainly by a decrease in the revaluation reserve of EUR 2,164 million, a decrease due to foreign currency movements of EUR 1,445 million (largely due to a lower US dollar), the EUR 1 billion share repurchase program, dividend payments, repurchased shares issued as stock dividends and coupon payments on perpetual capital securities.

1. 2006 information has been adjusted to reflect the retrospective application of the change in accounting principles relating to guarantees in the Netherlands, the change in definition of operating earnings to include our share in the net results of associates and a new line of business format. Refer to Note 2 in the financial statement for more information.

Debt funding and liquidity

AEGON’s funding strategy continues to be based on assuring excellent access to international capital markets, while minimizing the cost of capital. As part of this strategy, AEGON aims to offer institutionally targeted debt securities and to maintain excellent access to retail investors, as witnessed by the successful issuance of junior perpetual capital securities during recent years. AEGON’s focus on the fixed income investor base continues to be supported by an active investor relations program to keep investors well informed on AEGON’s strategy and results.

AEGON’s liquidity management strategy is aimed at maintaining sufficient liquidity to ensure that the company can meet its payment obligations as they fall due. This is achieved by dispersing day-to-day funding requirements, maintaining a broad base of funding sources and maintaining a well-diversified portfolio of highly liquid assets. Liquidity is managed at both Group and business and country unit level.

Most of AEGON’s debt is issued by the parent company, AEGON N.V. In addition, a limited number of other AEGON companies whose securities are guaranteed by AEGON N.V. have issued debt securities. AEGON N.V. has regular access to the capital markets under its USD 6 billion Euro Medium Term Notes Program. Access to the US markets is facilitated by a separate US shelf registration. AEGON N.V.’s and AEGON Funding Corp.’s (guaranteed by AEGON N.V.) combined USD 4.5 billion Euro and US Commercial Paper Program provide access to domestic and international money markets. AEGON maintains back-up credit facilities to support outstanding amounts under its commercial paper programs.

The principal arrangement is a USD 5 billion syndicated facility including a USD 3 billion back-up facility maturing in 2011 and extendable until 2013. This arrangement also includes a USD 2 billion multicurrency revolving letter of credit facility maturing in 2014, extendable until 2017. In addition, AEGON maintains USD 375 million of shorter dated bilateral back-up facilities. At December 31, 2007, AEGON N.V. had no amounts outstanding under its commercial paper programs.

Internal sources of liquidity include distributions from operating subsidiaries. During 2007, distributions from units exceeded interest expense, other holding company expenses and dividend payments. Internal distributions may be subject to (local) regulatory requirements. Excess liquidity is invested in highly liquid, short-term assets in accordance with internal risk management policies.

The duration profile of AEGON’s capital leverage is managed in line with the duration of surplus assets related to investments in its subsidiaries, subject to liquidity needs, capital and other requirements. Of AEGON’s total capital leverage at December 31, 2007, approximately EUR 500 million matures within three years and EUR 5.7 billion is perpetual or matures after five years. AEGON considers its working capital, backed by the external funding programs and facilities, to be amply sufficient for the Group’s present requirements.

Operational leverage is not part of the capital base. At December 31, 2007, operational leverage was EUR 3.6 billion (2006: EUR 2.3 billion). Operational debt primarily relates to mortgage warehousing and the funding of US regulation XXX and Guideline AXXX redundant reserves. In 2007, AEGON completed three innovative capital management transactions, including a private value of inforce (ViF) securitization of GBP 92 million by AEGON UK, a 30-year USD 550 million Regulation XXX securitization and a private, 30-year USD 1.5 billion AXXX financing transaction with an initial size of USD 300 million. AEGON will continue to explore further opportunities for insurance-linked securitizations and other innovative capital market transactions as part of the Group‘s ongoing commitment to manage capital and reserve needs both efficiently and actively.