Capital management and solvency

12 Months Ended

Dec. 31, 2021

Text block [abstract]

Capital management and solvency

43 Capital management and solvency

Strategic importance

Aegon’s approach towards capital management plays a vital role in supporting the execution of its strategy. The key capital management priority is to ensure adequate capitalization to cover Aegon’s obligations towards its policyholders and debtholders while providing sustainable dividends to shareholders. This priority is accomplished by allocating capital to products that offer high growth and return prospects.

Management of capital

Disciplined risk and capital management support Aegon’s decisions in deploying the capital that is generated in the Company’s businesses and that is provided for by investors. Aegon balances the funding of new business growth with the funding required to ensure that its obligations towards policyholders and debtholders are always adequately met, and providing for a sustainable dividend to shareholders.

Aegon’s goal for both its operating units and for the Aegon group as a whole is to maintain a strong financial position and to be able to sustain losses from extreme business and market conditions. Aegon’s Enterprise Risk Management (ERM) framework ensures that the Aegon Group and its operating companies are adequately capitalized and that obligations towards policyholders are always adequately met. Embedded in this larger framework is Aegon’s capital management policy, which is based on adequate capitalization of the operating units, Cash Capital at Holding and leverage.

Aegon manages capital in the operating units to their respective operating levels, sufficient to absorb moderate shocks and pay sustainable remittances to the Group, and above their minimum dividend payment levels. Cash Capital at Holding is maintained within an operating range of EUR 0.5 – 1.5 billion and covers holding expenses, near-term dividends, and contingencies, such as potential recapitalization of units. Furthermore, Aegon aims to reduce its gross financial leverage from the current level of EUR 5.9 billion to the range of EUR 5.0 – 5.5 billion by 2023. This reduction of leverage will strengthen the balance sheet, reduce Aegon’s risk profile and therefore make Aegon more resilient.

The frequent monitoring of actual and forecasted capitalization levels of its underlying businesses is an important element in Aegon’s capital framework in order to actively steer and manage towards maintaining adequate capitalization levels. Group operating capital generation contributed favorably and more than offset dividend payments.

Capital ratios of Aegon’s main operating units

	December 31, 20211)		December 31, 2020
US RBC ratio		426%		432%
NL Life Solvency II ratio		186%		159%
Scottish Equitable Plc (UK) Solvency II ratio		167%		156%

1  The Solvency II ratios are estimates and are not final until filed with the respective supervisory authority.

The estimated RBC ratio in the United States decreased from 432% on December 31, 2020, to 426% on December 31, 2021, and remained above the operating level of 400%. The RBC ratio was positively impacted by higher equity markets and by private equity revaluations. One-time impacts were negative overall, driven by updates to regulatory factors that determine required capital, and in part by the impact of actions taken to reduce mortality risk. There was a partial offset from capital release from the lump-sum buy-out program for variable annuities. Operating capital generation contributed favorably, despite being impacted by adverse mortality as a result of the COVID-19 pandemic, but was more than offset by dividend payments to the intermediate holding company.

The estimated Solvency II ratio of NL Life increased from 159% on December 31, 2020, to 186% on December 31, 2021, which is above the operating level of 150%. The increase includes benefits from management actions and model updates. The main management action was the longevity transaction as announced on December 15, 2021, which significantly reduced required capital. Market impacts had a slight negative impact, mainly due to higher interest rates. This is a reflection of the fact that Aegon hedges on an economic basis. Operating capital generation had a positive impact, which more than offset remittances to Group.

The estimated Solvency II ratio for Scottish Equitable Plc increased from 156% on December 31, 2020, to 167% on December 31, 2021, and remained above the operating level of 150%. The increase was primarily driven by management actions to reduce the equity risk in the own pension plan. Furthermore, a forthcoming change in the corporate income tax rate led to a reduction in required capital, contributing favorably. In addition, strong operating capital generation had a positive impact. These positive impacts more than offset the impact of dividend payments to the intermediate holding company.

The ability of Aegon’s operating units, principally insurance companies, to pay remittances to the holding company is constrained by the requirement for these operating units to remain adequately capitalized to the levels set by local insurance regulations and governed by local insurance supervisory authorities. Based on the capitalization level of the operating units, local insurance supervisors are able to restrict and/or prohibit the transfer of remittances to the holding company. In addition, the ability of operating units to pay remittances to the holding company can be constrained by the requirement for these operating units to hold sufficient shareholders’ equity as determined by law. The capitalization level and shareholders’ equity of the operating units can be impacted by various

factors (e.g. general economic conditions, capital market risks, underwriting risk factors, changes in government regulations, and legal and arbitrational proceedings). To mitigate the impact of such factors on the ability of operating units to transfer funds, Aegon establishes an operating level of capital in each of the units, 150% SCR for Solvency II units and 400% RBC CAL in the US, which includes additional capital in excess of regulatory capital requirements. Aegon manages capital in the units to this operating level over-the-cycle.

Cash Capital at Holding

Cash Capital at Holding increased from EUR 1.1 billion on December 31, 2020 to EUR 1.3 billion on December 31, 2021, driven by free cash flows from the operating units. These free cash flows were used to reduce leverage and pay dividends to Aegon’s shareholders and to support operating units through capital injections. Proceeds from divestments also contributed to Cash Capital at Holding, notably Transamerica’s portfolio of fintech and insurtech companies and Stonebridge in the United Kingdom.

Aegon Group Solvency Ratio

To calculate its Group Solvency Ratio, Aegon applies a combination of the Group consolidation methods available under Solvency II: the Accounting Consolidation (AC) and Deduction & Aggregation (D&A) based methods. Solvency II capital requirements are mainly used for the European Economic Area (EEA)-based insurance and reinsurance entities, applying the AC method. Local requirements are used for insurance and reinsurance entities in (provisionally) equivalent third-country jurisdictions. Aegon’s UK insurance subsidiaries have been included in the Group Solvency II calculation in accordance with Solvency II standards, including Aegon’s approved Partial Internal Model. For more details, reference is made to the section “Regulation and Supervision”.

The Group Solvency II ratio is calculated as the ratio between the Eligible Own Funds and the Solvency Capital Requirement (SCR). The Eligible Own Funds equal to the Available Own Funds after applying any Own Funds eligibility restrictions.

The Group SCR is calculated based on Solvency II Partial Internal Model (PIM), which includes the SCR of AC entities, the D&A entities and the Other Financial Sector entities (including Aegon Bank). The SCR amount (or 100% Solvency II ratio) reflects a level of Eligible Own Funds that enables insurance and reinsurance entities to absorb significant losses (1-in-200 year events) and gives reasonable assurance to policyholders and beneficiaries that payments will be made as they fall due. On December 31, 2021, Aegon’s estimated capital position was:

	December 31, 20211)		December 31, 2020
Group Own Funds		19,431		18,582
Group SCR		9,226		9,473
Group Solvency II ratio		211%		196%

1  The Solvency II ratios are estimates and are not final until filed with the respective supervisory authority.

Aegon Group Eligible Own Funds amounted to EUR 19,431 million on December 31, 2021 (2020: EUR 18,582 million). The increase of EUR 849 million in Own Funds since December 31, 2020, was mostly driven by the positive impact from expected return on in-force business and market impacts. The positive impact was partly offset by claims experience in the Americas due to COVID-19, and the negative impact on Own Funds resulting from management actions.

Aegon’s Group PIM SCR amounted to EUR 9,226 million on December 31, 2021 (2020: EUR 9,473 million). The SCR decreased by EUR 247 million since December 31, 2020. This decrease was mainly the result from the release of required capital of in force business, partially offset by the need to setup SCR for new business, the impact from management actions - notably the reinsurance of longevity risk announced in December 2021 for NL Life - and model and assumption changes including the increased LAC-DT factor for NL Life from 45% to 65%. There were partial offsets from market impacts and a lower benefit of group diversification. As a result of the above changes in Eligible Own Funds and PIM SCR, the Group Solvency II ratio increased by 15%-points to 211% in 2021.

Minimum regulatory requirements

Insurance laws and regulations in local regulatory jurisdictions often contain minimum regulatory capital requirements. For insurance companies in the European Union, Solvency II formally defines a lower capital requirement, being the Minimum Capital Requirement (MCR). An irreparable breach of the MCR would lead to a withdrawal of the Company’s insurance license. Similarly, for the US insurance entities the withdrawal of the insurance license is triggered by a breach of the 100% Authorized Control Level (ACL), which is set at 50% of the Company Action Level (CAL).

With the introduction of Solvency II for EEA countries, Aegon views the higher capital requirement, 100% of the SCR, as the level around which EU supervisors will formally require management to provide regulatory recovery plans. For the US insurance entities this is viewed at 100% CAL.

During 2021, the Aegon Group and the regulated entities within the Aegon Group that are subject to regulatory capital requirements on a solo-level continued to comply with the solvency requirements.

Capital quality

Aegon’s capital consists of 3 Tiers as an indication of its quality, with Tier 1 capital ranking the highest. The Available Own Funds is an estimate, has not been filed with the regulator and is subject to supervisory review. It is to be noted that the Group Own Funds do not include any contingent liability potentially arising from unit-linked products sold, issued or advised on by Aegon in the Netherlands in the past as the potential liability cannot be reliably quantified at this point.

The below table provides the composition of Aegon’s Available Own Funds across Tiers:

			2021				2020
Available Own Funds	Available             Own Funds		Percentage   total		Available             Own Funds		Percentage   total
Tier 1 (Unrestricted Tier 1 + Restricted Tier 1)		16,409		84%		15,542		84%
Unrestricted Tier 1		14,044		72%		12,972		70%
Restricted Tier 1		2,364		12%		2,571		14%
Junior Perpetual Capital Securities		1,391		7%		1,563		8%
Perpetual Cumulative Securities		459		2%		475		3%
Perpetual Contingent Convertible Securities		515		3%		532		3%
Tier 2		2,348		12%		2,340		13%
Subordinated notes issued by AFC		832		4%		818		4%
Subordinated liabilities Aegon NV		767		4%		754		4%
Grandfathered subordinated notes		750		4%		768		4%
Tier 3		675		3%		700		4%
Total Available Own Funds		19,431				18,582

On December 31, 2021, Tier 1 capital amounted to EUR 16,409 million (2020: EUR 15,542), which includes EUR 2,364 million (2020: EUR 2,571 million ) restricted Tier 1 capital. Restricted Tier 1 capital consists of Aegon’s junior perpetual capital securities (2021: EUR 1,391 million, 2020: EUR 1,563 million), perpetual cumulative subordinated bonds (2021: EUR 459 million; 2020: EUR 475 million), and perpetual contingent convertible security (2021: EUR 515 million; 2020: EUR 532 million). Both junior perpetual capital securities and perpetual cumulative subordinated bonds are grandfathered. The reduction in junior perpetual capital securities is driven by the redemption in September 2021 of USD 250 million floating rate perpetual capital securities with a minimum coupon of 4% issued in 2005. Perpetual contingent convertible securities are Solvency II compliant liabilities which were issued in 2019. Restricted Tier 1 capital is subject to eligibility restrictions to qualify as Eligible Own Funds.

On December 31, 2021, Tier 2 capital amounted to EUR 2,348 million (2020: 2,340 million). This consists of the subordinated notes issued by Aegon Funding Company LLC (AFC) in 2019 (2021: EUR 832 million; 2020: EUR 818 million), the Solvency II compliant subordinated liabilities that were issued during 2018 (2021: EUR 767 million; 2020: EUR 754 million), and grandfathered subordinated notes (2021: EUR 750 million; 2020: EUR 768 million). Tier 2 capital is subject to eligibility restrictions to qualify as Eligible Own Funds.

The grandfathered restricted Tier 1 and Tier 2 capital instruments are grandfathered such that they are considered as capital under the Solvency II framework until December 31, 2025. For the terms and conditions of these grandfathered instruments refer to note 31 Other equity instruments and note 32 Subordinated borrowings.

It is to be noted that the difference between the amounts mentioned above for junior perpetual capital securities and perpetual cumulative subordinated bonds, and those in note 31 Other equity instruments and note 32 Subordinated borrowings, stem from valuation differences between Solvency II (market value) and IFRS rules (refer to related accounting policies in note 2, paragraphs

2.17 and 2.18).

Tier 3 capital as of December 31, 2021 is comprised of deferred tax assets balances related to Solvency II entities.

IFRS equity compares to Solvency II Own Funds as follows:

	2021			2020
IFRS Shareholders’ Equity		23,813			22,018
IFRS adjustments for Other Equity instruments and non controlling interests		2,559			2,644
IFRS Group Equity		26,372			24,661
Solvency II revaluations & reclassifications		(9,096	)		(8,621	)
Transferability restrictions1)		(1,772	)		(1,766	)
Excess of Assets over Liabilities		15,504			14,274
Availability adjustments		4,020			4,416
Fungibility adjustments		(93	)		(108	)
Available Own Funds		19,431			18,582

1  This includes the transferability restriction related to the RBC CAL conversion methodology.

The Solvency II revaluations and reclassification of EUR 9,096 million negative (2020: EUR 8,621 million negative) mainly stem from the difference in valuation and presentation between IFRS and Solvency II frameworks. The Solvency II revaluations and reclassification can be grouped into four categories:

◆ Items that are not recognized under Solvency II. The most relevant examples of this category for Aegon include Goodwill, deferred policy acquisition costs (DPAC) and other intangible assets (EUR 2,263 million negative, 2020: EUR 1,989 million negative);

◆ Items that have a different valuation treatment between IFRS and Solvency II. Solvency II is a market consistent framework hence all assets and liabilities are to be presented at fair value while IFRS also includes other valuation treatments in addition to fair value. The most relevant examples of this category for Aegon Group include loans and mortgages, reinsurance recoverables, and technical provisions. The revaluation difference stemming from this category amounted to EUR 3,666 million positive (2020: EUR 3,676 million positive) compared to the IFRS Statement of Financial Position;

◆ The Net Asset Value of subsidiaries that are included under the D&A method (on provisional equivalence or Standard Formula basis) in the Group Solvency II results. The revaluation difference stemming from this category amounted to EUR 7,331 million negative (2020: EUR 6,942 million negative) compared to the IFRS Statement of Financial Position;

◆ Reclassification of subordinated liabilities of EUR 3,168 million negative (2020: EUR 3,366 negative).

The transferability restrictions reflect the restrictions on Tier 1 unrestricted Own Funds as a consequence of the RBC CAL conversion methodology as described above.

The availability adjustments are changes to the availability of Own Funds of Aegon Group in accordance with Solvency II requirements. Examples include the adjustments for subordinated liabilities, ring-fenced fund, treasury shares and foreseeable dividend.

Finally, the fungibility restrictions limit the availability of Own Funds on Aegon Group level as prescribed by Supervisory Authorities. These limitations refer to charitable trusts in the Americas for which the local Supervisory Authority could limit the upstream of capital to the Group and therefore are excluded for Solvency II purposes.

Capital leverage

Aegon’s total capitalization reflects the capital employed in the business units and consists of shareholders’ capital and total gross financial leverage. Aegon assesses its gross financial leverage position based on various leverage metrics, including the gross financial leverage ratio, which is calculated by dividing total financial leverage by total capitalization. Aegon defines total financial leverage as debt or debt-like funding issued for general corporate purposes and for capitalizing Aegon’s business units. Total financial leverage includes hybrid instruments, in addition to both subordinated and senior debt. Aegon’s total capitalization comprises the following components:

◆ Shareholders’ equity excluding revaluation reserves based on IFRS as adopted by the EU;

◆ Non-controlling interests and Long Term Incentive Plans not yet vested; and

◆ Total financial leverage.

The following table shows the composition of Aegon’s total capitalization, the calculation of the gross financial leverage ratio and its fixed charge coverage:

	Note		2021			2020
Total shareholders’ equity - based on IFRS as adopted by the EU		30		24,282			22,815
Non-controlling interests and Long Term Incentive Plans not yet vested		31, SOFP2)		253			126
Revaluation reserves		30		(6,442	)		(7,480	)
Adjusted shareholders’ equity				18,093			15,461
Perpetual contingent convertible securities		31		500			500
Junior perpetual capital securities		31		1,352			1,564
Perpetual cumulative subordinated bonds		31		454			454
Fixed floating subordinated notes		32		1,396			1,345
Fixed subordinated notes		32		798			740
Trust pass-through securities		33		126			126
Currency revaluation other equity instruments1)				16			(1	)
Hybrid leverage				4,642			4,728
Senior debt3)		37		1,290			1,241
Senior leverage				1,290			1,241
Total gross financial leverage				5,932			5,969
Total capitalization				24,008			21,430
Gross financial leverage ratio				24.7%			27.9%
Fixed Charge Coverage				9.3 x			8.3 x

1  Other equity instruments that are denominated in foreign currencies are, for purpose of calculating hybrid leverage, revalued to the period-end exchange rate.

2  Non-controlling interests are disclosed in the statement of financial position.

3  Senior debt for the gross financial leverage calculation also contains swaps for an amount of EUR (2) million (2020: EUR 0 million).

Aegon N.V. is subject to legal restrictions with regard to the amount of dividends it can pay to its shareholders. Under Dutch law, the amount that is available to pay dividends consists of total shareholders’ equity less the issued and outstanding capital and the reserves required by law. The legal reserves in respect of the foreign currency translation reserve (FCTR), group companies and the revaluation reserves, cannot be freely distributed. In case of negative balances for individual reserves legally to be retained, no distributions can be made out of retained earnings to the level of these negative amounts. Total distributable items under Dutch law amounted to EUR 14,093 million as at December 31, 2021 (2020: EUR 12,797 million). The following table shows the composition of the total distributable items:

Distributable items	2021			2020
Equity attributable to shareholders based on IFRS as adopted by the EU		24,282			22,815
Non-distributable items:
Share capital		(321	)		(320	)
Legal reserves1)		(9,868	)		(9,697	)
At December 31		14,093			12,797

1  The legal reserves in respect of the foreign currency translation reserve (FCTR), group companies and the positive revaluations in the revaluation reserves, cannot be freely distributed.

Besides the distributable items under Dutch law, a second restriction on the possibility to distribute dividends stems from Solvency II (Dutch Supervision act).

Distributable reserves	2021		2020
Reserves available for financial surpervision purposes		19,431		18,582
Solvency requirement under the Financial Supervision Act		9,226		9,473
Total distributable reserves on the basis of solvency requirements		10,205		9,109

The freely distributable reserves is the minimum of distributable items under Dutch law and the freely distributable capital on the basis of solvency requirements and amounted to EUR 10,205 million as at December 31, 2021 (2020: EUR 9,109 million).