A. Estimates and assumptions

The preparation of the financial statements requires a.s.r. to make estimates, assumptions and judgements in applying accounting policies that have an effect on the reported amounts in the financial statements. These relate primarily to the following:

• The fair value and impairments of unlisted financial instruments (see accounting policy B and E);

• The estimated useful life, residual value and fair value of property, plant and equipment, investment property, and intangible assets (see accounting policy C, D and O);

• The measurement of insurance contract liabilities and liabilities arising from direct participating insurance contracts (see chapter 7.5.13.3);

• Actuarial assumptions used for measuring employee benefit obligations (see chapter 7.5.15);

• When forming provisions, the required estimate of existing obligations arising from past events (see chapter 7.5.16);

• The recoverable amount of impaired assets (see accounting policy B and E );

• The fair value used to determine the net asset value in acquisitions (see chapter 7.4.5).

The estimates and assumptions are based on management’s best knowledge of current facts, actions and events. The actual outcomes may ultimately differ from the results reported earlier on the basis of estimates and assumptions. A detailed explanation of the estimates and assumptions are given in the relevant notes to the consolidated financial statements.

As from the date of the Aegon NL business combination, harmonisation of assumptions and methods between Aegon NL and a.s.r. has started or is planned. The harmonisation is expected to continue the coming years. The future expected synergies as a result of the Aegon NL business combination are expected to be included in future changes to the expense assumption once they are locked-in through the progress of the integration.

B. Fair value of assets and liabilities

The fair value is the price that a.s.r. would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants on the transaction date or reporting date in the principal market for the asset or liability, or in the most advantageous market for the asset or liability and assuming the highest and best use for non-financial assets. Where possible, a.s.r. determines the fair value of assets and liabilities on the basis of quoted prices in an active market. In the absence of an active market for a financial instrument, the fair value is determined using valuation techniques. Although valuation techniques are based on observable market data where possible, results are affected by the assumptions used, such as discount rates and estimates of future cash flows. In the unlikely event that the fair value of a financial instrument cannot be measured, it is carried at cost.

Fair value hierarchy

The following three hierarchical levels are used to determine the fair value of financial instruments and non-financial instruments when accounting for assets and liabilities at fair value and disclosing the comparative fair value of assets and liabilities:

Level 1. Fair value based on quoted prices in an active market

Level 1 includes assets and liabilities whose value is determined by quoted (unadjusted) prices in the primary active market for identical assets or liabilities.

A financial instrument is quoted in an active market if:

• Quoted prices are readily and regularly available (from an exchange, dealer, broker, sector organisation, third party pricing service, or a regulatory body); and

• These prices represent actual and regularly occurring transactions on an arm’s length basis.

Financial instruments in this category primarily consist of bonds and equities listed in active markets. Cash and cash equivalents, reverse repurchase agreements and cash collateral received are also included as level 1.

Level 2. Fair value based on observable market data

Determining fair value on the basis of Level 2 involves the use of valuation techniques that use inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is derived from prices of identical or similar assets and liabilities). These observable inputs are obtained from a broker or third party pricing service and include:

• Quoted prices in active markets for similar (not identical) assets or liabilities;

• Quoted prices for identical or similar assets or liabilities in inactive markets;

• Input variables other than quoted prices observable for the asset or liability. These include interest rates and yield curves observable at commonly quoted intervals, volatility, loss ratio, credit risks and default percentages.

This category primarily includes:

1. Financial instruments: unlisted fixed-interest preference shares and interest rate contracts;

2. Financial instruments: loans (excluding mortgage loans, reverse repurchase agreements and cash collateral received);

3. Other financial assets and liabilities.¹

I. Financial instruments: unlisted fixed-interest preference shares and interest rate contracts

This category includes unlisted fixed-interest preference shares and interest rate contracts. The valuation techniques for financial instruments use present value calculations and in the case of derivatives, include forward pricing and swap models. The observable market data contains yield curves based on company ratings and characteristics of the unlisted fixed-interest preference shares.

II. Financial instruments: Loans (excluding mortgage loans, reverse repurchase agreements and cash collateral received)

The fair value of the loans is based on the discounted cash flow method. It is obtained by calculating the present value based on expected future cash flows and assuming an interest rate curve used in the market that includes an additional spread based on the risk profile of the counterparty.

III. Other financial assets and liabilities

For other financial assets and liabilities where the fair value is disclosed these fair values are based on observable market inputs, primarily being the price paid to acquire the asset or received to assume the liability on initial recognition, assuming that the transactions have taken place on an arm’s length basis. Valuation techniques using present value calculations are applied using current interest rates where the payment terms are longer than one year.

Level 3. Fair value not based on observable market data

The fair value of the level 3 assets and liabilities are determined in whole or in part using a valuation technique based on assumptions that are not supported by prices from observable current market transactions in the same instrument and for which any significant inputs are not based on available observable market data. The financial assets and liabilities in this category are assessed individually.

Valuation techniques are used to the extent that observable inputs are not available. The basic principle of fair value measurement is still to determine a fair, arm’s length price. Unobservable inputs therefore reflect management’s own assumptions about the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk). These inputs are generally based on the available observable data (adjusted for factors that contribute towards the value of the asset) and own source information.

This category primarily includes:

1. Financial instruments: private equity investments (or private equity partners) and equity funds third parties directly investing in real estate;

2. Financial instruments: mortgage loans and mortgage equity funds;

3. Investment property, real estate equity funds associates, rural property contracts, buildings for own use and plant (e.g. wind farms);

4. Financial instruments: asset-backed securities.

I. Financial instruments: private equity investments and real estate equity funds third parties

The main non-observable market input for private equity investments and equity funds third parties directly investing in real estate is the net asset value of the investment as published by the private equity company (or partner) and real estate equity funds respectively.

II. Financial instruments: mortgage loans and mortgage equity funds

The fair value of the mortgage loan portfolio is based on the discounted cash flow method. It is obtained by calculating the present value based on expected future cash flows and assuming an interest rate curve used in the market that includes an additional spread based on the risk profile of the counterparty.

The valuation method used to determine the fair value of the mortgage loan portfolio derives the spread from consumer rates and includes assumptions for originating cost and risks. The method of determining the fair value of the mortgage equity funds is similar to that of mortgage loans.

III. Investment property, real estate equity funds associates, rural property contracts, buildings for own use and plant

The following categories of investment properties, buildings for own use and plant is recognised and methods of calculating fair value are distinguished:

• Residential – based on reference transaction and discounted cash flow method;

• Retail – based on reference transaction and income capitalisation method;

• Rural – based on reference transaction and discounted cash flow method;

• Offices – based on reference transaction and discounted cash flow method (including buildings for own use);

• Other investment property – based on reference transaction and discounted cash flow method;

• Property under development – based on both discounted cash flow and income capitalisation method;

• Plant - based on reference transaction and discounted cash flow method.

The following valuation methods are available for the calculation of fair value by the external professional appraisers for investment property, including real estate equity funds associates, rural property contracts, buildings for own use and plant:

Reference transactions

Independent professional appraisers use transactions in comparable properties and plant as a reference for determining the fair value of the property and plant. The reference transactions of comparable objects are generally based on observable data consisting of the land register ‘Kadaster’ and the rural land price monitor as published by the Dutch government ‘grondprijsmonitor’ in an active property market and in some instances accompanied by own use information.

The external professional appraisers valuate the property or plant using the reference transaction in combination with the following valuation methods to ensure the appropriate valuation of the property:

• Discounted cash flow method;

• Income capitalisation method (property only).

Discounted cash flow method

Under the discounted cash flow method, fair value is estimated using assumptions regarding the benefits and liabilities of ownership over the asset’s life including an exit or terminal value. This method involves the projection of a series of cash flows on the investment property or plant dependent on the duration of the lease contracts.

A market-derived discount rate is applied to these projected cash flow series in order to establish the present value of the cash flows associated with the asset. The exit yield is normally determined separately, and differs from the discount rate.

The duration of the cash flows and the specific timing of inflows and outflows are determined by events such as rent reviews, lease renewal and related re-letting, redevelopment, or refurbishment. The appropriate duration is typically driven by market behaviour, which depends on the class of investment property. Periodic cash flow is typically estimated as gross rental income less vacancy (apart from the rural category), non-recoverable expenses, collection losses, lease incentives, maintenance costs, agent and commission costs and other operating and management expenses. The series of periodic net operating income, along with an estimate of the terminal value anticipated at the end of the projection period, is then discounted.

For the categories residential, offices and other in applying the discounted cash flow method, the significant inputs are the discount rate and market rental value. These inputs are verified with the following market observable data (that are adjusted to reflect the state and condition, location, development potential etc. of the specific property):

• Market rent per square meter for renewals and their respective re-letting rates;

• Reviewed rent per square meter;

• Investment transactions of comparable objects;

• 10 Year Dutch Government Bond Yield (%) as published by the DNB.

When applying the discounted cash flow method for rural valuations, the significant inputs are the discount rate and market lease values. These inputs are verified with the following market observable data (that are adjusted to reflect the state and condition, location, development potential etc. of the specific property):

• Market value per acre per region in accordance with the ‘rural land price monitor’;

• 10 Year Dutch Government Bond Yield (%) as published by the DNB.

Income capitalisation method

Under the income capitalisation method, a property’s fair value is estimated based on the normalised net operating income generated by the property, which is divided by the capitalisation rate (the investor’s rate of return). The difference between gross and net rental income includes the same expense categories as those for the discounted cash flow method with the exception that certain expenses are not measured over time, but included on the basis of a time weighted average, such as the average lease-up costs. Under the income capitalisation method, rents above or below the market rent are capitalised separately.

The significant inputs for retail valuations are the reversionary yield and the market or reviewed rental value. These inputs are generally verified with the following observable data (that are adjusted to reflect the state and condition, location, development potential etc. of the specific property):

• Market rent per square meter for renewals;

• Reviewed rent per square meter (based on the rent reviews performed in accordance with Section 303, Book 7 of the Dutch Civil Code).

The fair value of investment properties and buildings for own use, are appraised annually. Valuations are conducted by independent professional appraisers who hold recognised and relevant professional qualifications and have recent experience in the location and category of the property being valued. Market value property valuations were prepared in accordance with the Royal Institution of Chartered Surveyors (RICS) Valuation Standards, 7th Edition (the ‘Red Book’). a.s.r. provides adequate information to the professional appraisers, in order to conduct a comprehensive valuation. The professional appraisers are changed or rotated at least once every three years.

IV. Financial instruments: asset-backed securities

The fair value of the asset-backed securities is based on quotes published by an independent data vendor.

Transfers between levels

The hierarchical level per individual instrument, or group of instruments, is reassessed at every reporting period. If the instrument, or group of instruments, no longer complies with the criteria of the level in question, it is transferred to the hierarchical level that does meet the criteria. A transfer can for instance be when the market becomes less liquid or when quoted market prices for the instrument are no longer available.

C. Intangible assets

Intangible assets are carried at cost, less any accumulated amortisation and impairment losses. The residual value and the estimated useful life of intangible assets are assessed on each balance sheet date and adjusted where applicable.

Goodwill

Acquisitions by a.s.r. are accounted for using the acquisition method. Goodwill represents the excess of the cost of an acquisition over the fair value of a.s.r.’s share of the net identifiable assets and liabilities and contingent liabilities of the acquired company at acquisition date. If there is no excess (purchase gain), the carrying amount is directly recognised through the income statement. At the acquisition date, goodwill is allocated to the cash-generating units (CGUs) that are expected to benefit from the business combination.

Goodwill has an indefinite useful life and is not amortised. a.s.r. performs an impairment test annually, or more frequently if events or circumstances warrant so, to ascertain whether goodwill has been subject to impairment. As part of this, the carrying amount of the cash-generating unit to which the goodwill has been allocated is compared with its recoverable amount. The recoverable amount is the higher of a CGU’s fair value less costs to sell and value in use. The carrying value is determined as the net asset value including goodwill. The methodologies applied to arrive at the best estimate of the recoverable amount involves two steps.

In the first step of the impairment test, the best estimate of the recoverable amount of the CGU to which goodwill is allocated is determined separately based on Price to Earnings or Price to EBITDA ratios (fair value less cost to sell model). The ratio(s) used per CGU depends on the characteristics of the entity in question. The main assumptions in this valuation are the multiples for the aforementioned ratios. These are developed internally but are either derived from or corroborated against market information that is related to observable transactions in the market for comparable businesses.

If the outcome of the first step indicates that the difference between the recoverable amount and the carrying value may not be sufficient to support the amount of goodwill allocated to the CGU, step two is performed. In step two an additional analysis is performed in order to determine a recoverable amount in a manner that better addresses the specific characteristics of the relevant CGU.

The additional analysis is based on internal value-in-use models, wherein managements assumptions in relation to cash flow projections for budget periods up to and including five years are used and, if deemed justified, expanded to a longer period given the nature of the insurance activities. Other assumptions, such as the (pre-tax) discount rate and the steady state growth rate, are determined on the advice of an independent external party and are based on a Capital Asset Pricing Model (CAPM). This methodology is based on a risk-free rate plus a risk premium. Operating assumptions are best estimate assumptions and based on historical data where available. Economic assumptions are based on observable market data and projections of future trends.

If the recoverable amount is lower than its carrying amount, the difference is directly charged to the income statement as an impairment loss.

In the event of impairment, a.s.r. first reduces the carrying amount of the goodwill allocated to the CGU. After that, the carrying amount of the other assets included in the unit is reduced pro rata to the carrying amount of all the assets in the unit.

D. Investment property

Investment property is property held to earn rent or for capital appreciation or both. Property interests held under operating leases are classified and accounted for as investment property. In some cases, a.s.r. is the owner-occupier of investment properties. If owner-occupied properties cannot be sold separately, they are treated as investment property only if a.s.r. holds an insignificant portion for use in the supply of services or for administrative purposes. Property held for own uses (owner-occupied) is recognised within property, plant and equipment.

Investment property is primarily recognised using the fair value model. After initial recognition, a.s.r. remeasures all of its investment property (see accounting policy B) whereby any gain or loss arising from a change in the fair value of the specific investment property is recognised in the income statement under fair value gains and losses.

Residential property is generally let for an indefinite period. Other investment property is let for defined periods under leases that cannot be terminated early. Some contracts contain renewal options. Rentals are accounted for as investment income in the period to which they relate.

If there is a change in the designation of property, it can lead to:

• Reclassification from property, plant and equipment to investment property: at the end of the period of owner-occupation or at inception of an operating lease with a third party; or

• Reclassification from investment property to property, plant and equipment: at the commencement of owner-occupation or at the start of developments initiated with a view to selling the property to a third party.

The following categories of investment property are recognised by a.s.r. based primarily on the techniques used in determining the fair value of the investment property:

• Retail;

• Residential;

• Rural;

• Offices;

• Other (consisting primarily of parking);

• Investment property under development.

Property under development for future use as investment property is recognised as investment property. The valuation of investment property takes (expected) vacancies into account.

Borrowing costs directly attributable to the acquisition or development of an asset are capitalised and are part of the cost of that asset. Borrowing costs are capitalised when the following conditions are met:

• Expenditures for the asset and borrowing costs are incurred; and

• Activities are undertaken that are necessary to prepare an asset for its intended use.

Borrowing costs are no longer capitalised when the asset is ready for use or sale. If the development of assets is interrupted for a longer period, capitalisation of borrowing costs is suspended. If the construction is completed in stages and each part of an asset can be used separately, the borrowing costs for each part that reaches completion are no longer capitalised.

E. Financial assets and financial liabilities

a.s.r. has chosen to restate the comparative figures for financial assets and liabilities in line with IFRS 9 and the classification overlay approach in accordance with the amendment to IFRS 17 Insurance Contracts: Initial Application of IFRS 17 and IFRS 9 – Comparative Information. This option results in more useful comparative information.

Recognition and initial measurement

a.s.r. recognises deposits and loans and borrowings on the date on which they originate. All other financial instruments are recognised at the transaction date, which is the date on which a.s.r. becomes party to the contractual stipulations of the instrument.

Financial assets or financial liabilities are initially measured at fair value plus, for a financial asset or financial liability not measured at FVTPL, transaction costs that are directly attributable to its acquisition or issue.

Classification and subsequent measurement

When a.s.r. becomes party to a financial asset contract, the related assets are classified into one of the following categories:

• Amortised cost;

• Financial assets at fair value through other comprehensive income (FVOCI); or

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

The classification of the financial assets is determined at initial recognition. The classification and measurement of certain financial assets (debt instruments) is based on a.s.r.’s business models in which a financial asset is managed, and its contractual cash flow characteristics. For detailed information on the fair value of the financial assets see accounting policy B.

Financial assets at amortised cost

A financial asset (debt instrument) can be measured at amortised cost if it meets both of the following conditions and is not designated as FVTPL:

• It is held within a business model whose objective is to hold assets to collect contractual cash flows; and

• Its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. This is known as the SPPI test.

Debt instruments at amortised cost include mortgage loans and private loans held by Aegon Bank N.V. (Knab) and Aegon Hypotheken B.V. (Aegon hypotheken).

Financial assets that are designated as hedged items are measured in accordance with the requirements for hedge accounting.

Financial assets at FVOCI

Financial assets at FVOCI can be divided into debt instruments and equity instruments.

A debt instrument can be measured at FVOCI if it meets both the following conditions and is not designated as at FVTPL:

• It is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and

• Its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

Debt instruments at FVOCI are measured at fair value. Unrealised fair value gains and losses are recognised in other comprehensive income, and are subsequently reclassified to profit or loss when realised. Interest income is recognised in profit or loss using the effective interest rate. Debt instruments at FVOCI are subject to the impairment requirements.

a.s.r. has only classified the bonds portfolio held by Knab and Aegon hypotheken at FVOCI.

Equity instruments are measured at FVOCI if they are not held for trading and are not designated as at FVTPL. There is no subsequent recycling of fair value gains and losses to profit or loss following the derecognition of the investment if elected to measure the equity investments as FVOCI.

a.s.r. classifies its equity instruments at FVOCI to reduce volatility in the income statement.

Financial assets at FVTPL

All financial assets not classified as measured at amortised cost or FVOCI, as described above, are measured at FVTPL.

Financial assets at FVTPL include:

• Derivatives that do not qualify for hedge accounting;

• Financial assets that are managed and whose performance is evaluated on a fair value basis, such as:

  • Debt instruments for which a.s.r. has identified the business model Other;

  • Investments related to direct participating contracts;

  • Financial assets held for trading;

• Associates for which a.s.r. elects to measure at FVTPL under IFRS 9.

Hedge accounting (see also risk management section in chapter 7.8)

To qualify for hedge accounting, the hedge relationship is designated and formally documented at inception, detailing the particular risk management objective and strategy for the hedge (which includes the item and risk that is being hedged), the derivative that is being used and how hedge effectiveness is being assessed. A derivative has to be effective in accomplishing the objective of offsetting either changes in fair value or cash flows for the risk being hedged. The effectiveness of the hedging relationship is evaluated on a prospective and retrospective basis using qualitative and quantitative measures of correlation. A hedging relationship is considered effective if the results of the hedging instrument are within a ratio of 80% to 125% of the results of the hedged item. a.s.r. has elected to continue to apply the hedge accounting requirements of IAS 39 for macro fair value hedges (EU ‘carve out’) on adoption of IFRS 9.

As part of its asset liability management, a.s.r. enters into economic hedges to limit its risk exposure at Knab and Aegon hypotheken. These transactions are assessed to determine whether hedge accounting can and should be applied. a.s.r. currently applies hedge accounting for fair value hedges.

Fair value hedges

a.s.r. applies fair value hedge accounting to portfolio hedges of interest rate risk (fair value macro hedging) under the EU ‘carve out’ of EU-IFRS. The EU ‘carve out’ macro hedging enables a group of derivatives (or proportions thereof) to be viewed in combination and jointly designated as the hedging instrument and removes some of the limitations in fair value hedge accounting. Under the EU ‘carve out’, ineffectiveness in fair value hedge accounting only arises when the revised projection of the amount of cash flows in scheduled time buckets falls below the designated amount of that bucket. a.s.r. applies fair value hedge accounting for portfolio hedges of interest rate risk (macro hedging) under the EU ‘carve out’ to mortgage loans. Changes in the fair value of the derivatives are recognised in the income statement, together with the fair value adjustment on the mortgage loans (hedged items) insofar as attributable to interest rate risk (the hedged risk). If the hedge relationship no longer meets the criteria for hedge accounting, the cumulative adjustment of the hedged item is, in the case of interest bearing instruments, amortised through the income statement over the remaining term of the original hedge or recognised directly when the hedged item is derecognised.

Knab and Aegon hypotheken hold portfolios of long-term fixed rate mortgages and therefore are exposed to changes in fair value due to movements in market interest rates. Knab and Aegon hypotheken manage this risk exposure by entering into pay fixed/receive floating interest rate swaps.

Only the interest rate risk element is hedged and therefore other risks, such as credit risk, are managed but not hedged by Knab and Aegon hypotheken. This hedging strategy is applied to the portion of exposure that is not naturally offset against matching positions held by Knab and Aegon hypotheken. Changes in fair value of the long-term fixed rate mortgages arising from changes in interest rate are usually the largest component of the overall change in fair value. This strategy is designated as a fair value hedge and its effectiveness is assessed by comparing changes in the fair value of the loans attributable to changes in the benchmark rate of interest with changes in the fair value of the interest rate swaps.

Knab and Aegon hypotheken establish the hedging ratio by matching the notional of the derivatives with the principal of the portfolio being hedged. Possible sources of ineffectiveness are as follows:

• Differences between the expected and actual volume of prepayments, as Knab and Aegon hypotheken hedge to the expected repayment date taking into account expected prepayments based on past experience;

• Difference in the discounting between the hedged item and the hedging instrument, as cash collateralised interest rate swaps are discounted using Overnight Indexed Swaps (OIS) discount curves, which are not applied to the fixed rate mortgages;

• Hedging derivatives with a non-zero fair value at the date of initial designation as a hedging instrument; and

• Counterparty credit risk which impacts the fair value of uncollateralised interest rate swaps but not the hedged items.

Knab and Aegon hypotheken manage the interest rate risk arising from fixed rate mortgages by entering into interest rate swaps on a monthly basis. The exposure from these portfolios frequently changes due to new loans originated, contractual repayments and early prepayments made by customers in each period. As a result, Knab and Aegon hypotheken adopt a dynamic hedging strategy (sometime referred to as a ‘macro’ or ‘portfolio’ hedge) to hedge the exposure profile by closing and entering into new swap agreements at each month-end. Knab and Aegon hypotheken use the portfolio fair value hedge of interest rate risk to recognise fair value changes related to changes in interest rate risk in the mortgage portfolio, and therefore reduce the profit or loss volatility that would  otherwise arise from changes in fair value of the interest rate swaps alone.

Accrued interest

In line with Solvency II reporting a.s.r. accounts for debt instruments at their “dirty” fair value, thus including any related accrued interest.

Business model assessment

The business model is determined at a level that reflects how groups of financial assets are managed together to achieve a particular business objective. a.s.r.’s business models refer to how a.s.r. manages its financial assets in order to generate cash flows.

a.s.r. identifies the business model Hold to Collect for the mortgage loans and private loans held by Knab and Aegon hypotheken and for its other financial assets, and identifies the business model Held to Collect & Sell for the bonds portfolio held by Knab. All other debt instruments are mandatorily designated as at FVTPL (business model Other).

Assessment whether contractual cash flows are solely payments of principal and interest (SPPI)

For the purpose of this assessment, principal is defined as the fair value of the financial asset on initial recognition. However, the principal may change over time – e.g. if there are repayments of principal.

Interest is defined as consideration for the time value of money, for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks (e.g. liquidity risk) and costs (e.g. administrative costs), as well as a profit margin that is consistent with a basic lending arrangement. Financial assets with embedded derivatives are considered in their entirety when determining whether their cash flows are SPPI.

a.s.r. assesses the SPPI for the loans and bonds portfolio held by Knab and Aegon hypotheken and for its other financial assets. All other debt instruments are mandatorily designated as at FVTPL (business model Other).

Subsequent measurement and gains and losses

Financial assets at amortised cost

Financial assets at amortised cost are measured at amortised cost using the effective interest method. Interest income, foreign exchange gains and losses and impairment are recognised in profit or loss. Any gain or loss on derecognition is also recognised in profit or loss.

Financial assets at FVOCI

Equity investments at FVOCI are measured at fair value. All fair value gains and losses are recorded in OCI, without recycling to profit or loss. Dividends from such investments continue to be recognised in profit or loss as Investment income when a.s.r.’s right to receive payments is established. Impairment requirements are not applicable to equity investments measured as FVOCI.

Financial assets at FVTPL

Financial assets at FVTPL are measured at fair value. Net gains and losses, including any interest or dividend income and foreign exchange gains and losses, are recognised in profit or loss. Impairment requirements are not applicable to financial assets measured at FVTPL.

See accounting policy V3.

Financial liabilities

Classification

a.s.r. classifies its liabilities into one of the following categories:

• financial liabilities at FVTPL (derivatives); or

• financial liabilities at amortised cost (all other financial liabilities).

Subsequent measurement and gains and losses

Financial liabilities at FVTPL

Financial liabilities at FVTPL are measured at fair value. Net gains and losses, including any interest expenses and foreign exchange gains and losses, are recognised in profit or loss.

Financial liabilities at amortised cost

Financial liabilities at amortised cost are measured at amortised cost using the effective interest method. Interest expenses, foreign exchange gains and losses are recognised in profit or loss. Any gain or loss on derecognition is also recognised in profit or loss.

Accrued interest

In line with Solvency II reporting a.s.r. accounts for financial liabilities at their “dirty” fair value, thus including any related accrued interest.

Interest on financial liabilities

Interest expenses are calculated by applying the effective interest rate to the amortised cost of the liability. When calculating the effective interest rate, a.s.r. estimates future cash flows considering all contractual terms of the liability.

Derivatives including embedded derivatives

Derivatives within the insurance entities are primarily used by a.s.r. for hedging interest rate and exchange rate risks, for hedging future transactions and the exposure to market risks.

These derivatives are classified as held-for-trading. Derivatives are measured at fair value with changes in fair value recognised in profit or loss. Derivatives may be embedded in another contractual arrangement (a host contract).

For contracts where the host contract is a financial asset in the scope of IFRS 9, the hybrid financial instrument as a whole is assessed for classification and the embedded derivative is not separated from the host contract.

A derivative embedded in a host insurance or reinsurance contract is not accounted for separately from the host contract if the embedded derivate itself meets the definition of an insurance or reinsurance contract.

For other contracts, a.s.r. accounts for an embedded derivative separately from the host contract when:

• the hybrid contract is not measured at FVTPL;

• the terms of the embedded derivative would have met the definition of a derivative if they were contained in a separate contract; and

• the economic characteristics and risks of the embedded derivative are not closely related to those of the host contract.

Impairments in the P&L

a.s.r. recognises loss allowances for ECL on debt instruments measured at amortised cost or FVOCI. a.s.r. uses the low credit risk simplification for investment grade debt instruments and recognises a lifetime ECL for other financial assets using the simplified approach. Lifetime ECL are the ECL that result from all possible default events over the expected life of a financial instrument.

ECLs are a probability-weighted estimate of credit losses. Credit losses are measured as the present value of all cash shortfalls (i.e. the difference between the cash flows due to a.s.r. in accordance with the contract and the cash flows that a.s.r. expects to receive). The maximum period considered when estimating ECLs is the maximum contractual period over which a.s.r. is exposed to credit risk.

Write-off

The gross carrying amount of a financial asset is written off (either partially or in full) to the extent that there is no realistic prospect of recovery. This is generally the case when a.s.r. determines that the borrower does not have assets or resources of income that could generate sufficient cash flows to repay the amounts subject to the write-off. However, financial assets that are written off could still be subject to enforcement activities in order to comply with a.s.r.’s procedures for recovery of amounts due. Should amounts be recovered these are then recognised when the payment has been received.

Derecognition and contract modification

Financial assets

a.s.r. derecognises a financial asset when the contractual rights to the cash flows from the financial asset expire, or it transfers the rights to receive the contractual cash flows in a transaction in which substantially all of the risks and rewards of ownership of the financial asset are transferred or in which a.s.r. neither transfers nor retains substantially all of the risks and rewards of ownership and it does not retain control of the financial asset.

On derecognition of a financial asset, the difference between the carrying amount at the date of derecognition and the consideration received (including any new asset obtained less any new liability assumed) is recognised in the income statement, unless the financial asset is an equity instrument and is measured at fair value through other comprehensive income. For these instruments any revaluation amount is transferred within equity from unrealised gains and losses to retained earnings.

a.s.r. enters into transactions whereby it transfers assets recognised in its balance sheet, but retains either all or substantially all of the risks and rewards of the transferred assets. In these cases, the transferred assets are not derecognised. Examples of such transactions are repurchase agreements, securities lending and reverse repurchase agreements. The asset recognised for cash collateral paid on reverse repurchase agreements is presented under investments. The liability recognised for cash collateral received on repurchase agreements is presented under the line item due to banks.

In transactions in which a.s.r. neither retains nor transfers substantially all of the risks and rewards of ownership of a financial asset and it retains control over the asset, a.s.r. continues to recognise the asset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of the transferred asset.

If the terms of a financial asset are modified, then a.s.r. evaluates whether the cash flows of the modified asset are substantially different. If the cash flows are substantially different, then the contractual rights to cash flows from the original financial asset are deemed to have expired. In this case, the original financial asset is derecognised and a new financial asset is recognised at fair value.

If a financial asset measured at amortised cost is modified but not substantially, then the financial asset is not derecognised. If the asset has not been derecognised, then a.s.r. recalculates the gross carrying amount of the financial asset by discounting the modified contractual cash flows at the original effective interest rate and recognises the resulting adjustment to the gross carrying amount as a modification gain or loss in profit or loss. If such a modification is carried out because of financial difficulties of the borrower, then the gain or loss is presented together with impairment losses; in other cases, it is presented as interest revenue.

Financial liabilities

a.s.r. generally derecognises a financial liability when its contractual obligations expire or are discharged or cancelled. a.s.r. also derecognises a financial liability when its terms are modified and the cash flows of the modified liability are substantially different (i.e. the net present value of the of the cash flows under the new terms discounted at the original effective interest rate is at least 10% different from the discounted present value of the remaining cash flows of the original debt instrument), in which case a new financial liability based on the modified terms is recognised at fair value.

On derecognition of a financial liability, the difference between the carrying amount extinguished and the consideration paid (including any non-cash assets transferred or liabilities assumed) is recognised in profit or loss.

If a financial liability measured at amortised cost is not substantially modified, then it is not derecognised. For such financial liabilities, a.s.r. recalculates the amortised cost of the financial liability by discounting the modified contractual cash flows at the original effective interest rate and recognises any resulting adjustment to the amortised cost as a modification gain or loss in ‘other finance expenses’ in profit or loss. Any costs and fees incurred adjust the carrying amount of the liability and are amortised over the remaining term of the modified liability.

F1. Insurance contracts

Classification

Insurance contracts issued by a.s.r. are contracts that transfer significant insurance risks, and in some cases also financial risk, from the policyholder to a.s.r. Contracts measured using the GMM or PAA are classified on the balance sheet as insurance contract liabilities and contracts measured using the VFA are classified as liabilities arising from direct participating insurance contracts.

a.s.r. offers non-life insurance contracts and life insurance contracts as shown in the table below.

Insurance contract liabilities

Non-life insurance contracts

Non-life insurance contracts are contracts that provide cover that is not related to the life or death of insured persons. These insurance contracts are primarily classified into the following categories: Disability, Health, P&C (motor, fire and liability).

Life insurance contracts

The segment Life includes: annuities, term insurance policies, savings contracts and funeral insurance contracts. In addition to non-participating life insurance contracts, the insurance portfolio also includes:

• Individual and group participating contracts;

• Individual contracts with discretionary participation features;

• Group contracts with segregated pools with returns based on investment guarantees.

Life insurance contracts with participation features are included within the Life segment. Under these contracts, policyholders are assigned, in addition to their entitlement to a guaranteed element, an entitlement to potentially significant additional benefits whose amount or timing is contractually at the discretion of a.s.r. These additional benefits are based on the performance of a specified pool of investments held by a.s.r. or on the issuer’s operational result.

Liabilities arising from direct participating insurance contracts.

a.s.r. classifies an insurance contract as a direct participating contract for which at inception the following criteria are met:

• the contractual terms specify that the policyholder participates in a share of a clearly identified pool of underlying items;

• a.s.r. expects to pay the policyholder an amount equal to a substantial share of the fair value returns on the underlying items; and

• a.s.r. expects a substantial proportion of any change in the amounts to be paid to the policy holder to vary with the change in the fair value of the underlying items.

Life insurance contracts with direct participating features are included within the Life segment and mainly concern unit-linked contracts and group pension contracts, with policyholders bearing the investment risk. An investment unit is a share in an investment fund that a.s.r. acquires on behalf of the policyholders using net premiums paid by the policyholders. The cash flow upon maturity of the contract is equal to the value of the investment units of the fund in question.

Contracts that meet the requirements of a direct participating contract are measured using the variable fee approach.

Separating components

Currently a.s.r. does not separate any components from its insurance contracts.

Non-distinct investment components are identified for products where under all circumstances a payment will be made to the policyholder. These are generally recognised for GMM as the surrender value of the funeral insurance and as the savings account related to the mortgage savings insurance. For VFA policies the non-distinct investment component is the investment fund value and if applicable determined gross or net of surrender charges depending on product type.

Level of aggregation

Insurance contracts are aggregated into groups for measurement purposes. a.s.r. identifies portfolios of insurance contracts comprising contracts subject to similar risks and managed together. Each portfolio is then divided into cohorts of contracts issued within a maximum of one year and divided into two groups based on the profitability buckets for:

• any contracts that are onerous on initial recognition; and

• any remaining contracts in the portfolio.

The profitability bucket for contracts that have no significant possibility of becoming onerous subsequently is currently not used by a.s.r.

Similar risks managed together are generally based on the homogeneous risk groups similar to those used in Solvency II at inception, more or less granularity is applied where applicable. Contracts within a portfolio that would fall into different groups only because law or regulation specifically constraints a.s.r.’s practical ability to set a different price or level of benefits for policyholders with different characteristics are included in the same group. This applies to contracts issued in Europe that are required by EU regulation to be priced on a gender-neutral basis.

The resulting groups represent the level at which the recognition and measurement accounting policies are applied. The groups are established on initial recognition and their composition is not subsequently reassessed.

Whether a contract is onerous or not is a policy (test) which is set per business. Part of this policy will be pricing and thresholds and forward looking metrics available within a.s.r. The test is performed based on the contracts which are issued in any specific calendar year and are grouped according to the similar risks managed together criteria as described above. The test is generally performed on a set of contracts using reasonable and supportable information, considering that the outcome would be the same had the individual policy assessment been performed.

Recognition

a.s.r. recognises a group of insurance contracts issued from the earliest of:

• the beginning of the coverage period of the group of contracts. The coverage period is the period during which a.s.r. provides services (insurance services, investment-return services or investment-related services) in respect of all premiums within the boundary of the insurance contract;

• the date when the first payment from a policyholder in the group becomes due. If there is no contractual due date, then it is considered to be the date when the first payment is received from the policyholder; or

• the date when facts and circumstances indicate that the contract is onerous.

Insurance contracts acquired in a (portfolio) transfer or a business combination are recognised on the date of acquisition.

When the contract is recognised, it is added to an existing group of contracts or, if the contract does not qualify for inclusion in an existing group, it forms a new group to which future contracts can be added. Groups of contracts are established on initial recognition and their composition is not revised once all contracts have been added to the group.

Contract boundaries

The measurement of a group of contracts includes all of the future cash flows within the boundary of each contract in the group. Cash flows are within the boundary of a contract if they arise from substantive rights and obligations that exist during the reporting period under which a.s.r. can compel the policyholder to pay premiums or has a substantive obligation to provide services.

A substantive obligation to provide services ends when:

• a.s.r. has the practical ability to reassess the risks of the particular policyholder and can set a price or level of benefits that fully reflects those reassessed risks; or

• a.s.r. has the practical ability to reassess the risks of the portfolio that contains the contract and can set a price or level of benefits that fully reflects the risks of that portfolio; and the pricing of the premiums for coverage up to the reassessment date does not consider risks that relate to periods after the reassessment date.

For individual contracts with discretionary features the contract boundary is defined so that cash flows are within the contract boundary if they result from a substantive obligation of a.s.r. to deliver cash at a present or future date.

The contract boundary is reassessed at each reporting period and more frequently if and when product characteristics and/or conditions fundamentally change and, therefore, may change over time.

Measurement

a.s.r. uses the following measurement models:

• the general measurement model (GMM);

• the variable fee approach (VFA) for contracts with a direct participating feature; and

• the premium allocation approach (PAA) which is a simplified version of the GMM and is used mainly for short-duration contracts.

Measurement – contracts measured under the GMM

Initial measurement

On initial recognition, a.s.r. measures a group of insurance contracts as the total of:

• the fulfilment cash flows, which comprise estimates of future cash flows, adjusted to reflect the time value of money and the associated financial risk and the risk adjustment for non-financial risk (RA); and

• the CSM.

The measurement of the fulfilment cash flows of a group of insurance contracts does not reflect non-performance risk of a.s.r. It is the net present value of the projected cash flows of benefits and expenses, less the net present value of premiums, adjusted for the risk adjustment. These cash flows are estimated using realistic, “best estimate”, assumptions in relation to mortality, longevity, disability, lapse rate, expense and inflation. The best estimate assumptions regarding mortality and longevity include recent trend assumptions for life expectancy in the Netherlands, as provided by the Dutch Actuarial Association. The best estimate includes the intrinsic value and the time value of options and guarantees (TVOG: Time Value of Financial Options and Guarantees) and is calculated using stochastic techniques.

Where applicable, the direct or discretionary participating features of the insurance contracts, such as profit sharing, and any guaranteed benefits at maturity are considered in the future cash flows. The cash flows are discounted using the base curve being the Solvency II curve (including the VA), published by EIOPA excluding the UFR of 3,45% in 2023 (2022: 3.45%). a.s.r. uses an UFR of 3,40% in 2023 (2022: 3.45%) for the construction of the curve from the first smoothing point (FSP).

Insurance pre-acquisition cash flows that a.s.r. pays before the related group of contracts is recognised (i.e. for renewals of insurance contracts or insurance contracts recognised in the following period), are presented as an asset under the insurance contract liabilities. When the group of contracts is recognised, these cash flows are included by way of expected acquisition cash flows in the measurement of the group and the previously recognised asset is transferred and included as part of expected acquisition cash flows initially recognised in the insurance liability. The insurance pre-acquisition cash flow asset is reassessed for a possible impairment trigger at each reporting date.

The risk adjustment for a group of insurance contracts is the compensation required for bearing uncertainty about the amount and timing of the cash flows that arises from non-financial risk.

a.s.r. disaggregates changes in the risk adjustment for non-financial risk between the insurance service result and insurance finance income or expenses. See chapter 7.5.13.3.

The CSM of a group of insurance contracts represents the unearned profit that a.s.r. will recognise as it provides service under those contracts. On initial recognition of a group of insurance contracts, if the total fulfilment cash flows allocated to the contract, any previously recognised insurance acquisition cash flows and any cash flows arising from the contract at the date of initial recognition is a net inflow, then the group is not onerous. In this case, the CSM is measured as the equal and opposite amount of the net inflow, which results in no income or expenses arising on initial recognition.

For groups of contracts acquired, the consideration received for the contracts is included in the fulfilment cash flows as a proxy for the premiums received at the date of acquisition. For business combinations see accounting policy I.

If the total of the fulfilment cash flows is a net outflow, then the group is onerous. In this case, the net outflow is recognised as a loss in the income statement, or as an adjustment to goodwill or a gain on a bargain purchase if the contracts are acquired in a business combination. A loss component is created as part of the insurance liabilities to depict any losses recognised in the income statement, which determines the amounts that are subsequently presented in the income statement as reversals of losses on onerous groups.

Subsequent measurement

The carrying amount of a group of insurance contract liabilities at each reporting date is the sum of the liability for remaining coverage and the liability for incurred claims. The liability for remaining coverage comprises:

• the fulfilment cash flows that relate to services that will be provided under the contracts in future periods including the risk adjustment; and

• any remaining CSM at that date.

The liability for incurred claims comprises the fulfilment cash flows for incurred claims and attributable expenses that have not yet been paid, including claims that have been incurred but not yet reported, and the handling of the payments to policyholders. For the contracts in the Non-life segment this concerns all future payments related to the incurred claim (the LIC option), whereas for contracts in the Life segment this concerns the amounts payable for the period (LRC option).

The fulfilment cash flows of groups of insurance contracts are measured at the reporting date using current estimates of future cash flows, current discount rates and current estimates of the risk adjustment for non-financial risk. Changes in fulfilment cash flows are recognised as follows:

• Changes relating to future services are adjusted against the CSM (or recognised in the insurance service result in profit or loss if the group is onerous);

• Changes relating to current or past services are recognised in the insurance service result in the income statement;

• Effects of the time value of money, financial risk and changes therein on estimated future cash flows and risk adjustment for non-financial risk are recognised as insurance finance income or expenses.

The CSM of each group of contracts is subsequently calculated at each reporting date.

The carrying amount of the CSM at the end of each reporting period is the carrying amount at the start of the reporting period, adjusted for:

• The CSM of any new contracts that are added to the group in the period;

• Interest accreted on the carrying amount of the CSM during the period, measured at the discount rates on nominal cash flows that do not vary based on the returns on any underlying items determined on initial recognition;

• Changes in fulfilment cash flows that relate to future services, except to the extent that:

  • Any increases in the fulfilment cash flows exceed the carrying amount of the CSM, in which case the excess is recognised as a loss in the income statement and creates a loss component; or

  • Any decreases in the fulfilment cash flows are allocated to the loss component, reversing losses previously recognised in profit or loss; and

• The amount recognised as insurance contract revenue due to the services provided in the period.

Changes in fulfilment cash flows that relate to future services comprise:

• Experience adjustments arising from premiums received in the period that relate to future services and related cash flows, measured at the discount rates determined on initial recognition and non-distinct investment components;

• Changes in estimates of the present value of future cash flows in the liability for remaining coverage, measured at the discount rates determined on initial recognition, except for those that relate to the effects of the time value of money, financial risk and changes therein; and

• Changes in the risk adjustment for non-financial risk that relate to future services.

CSM is recognised as revenue following the services provided. This is generally on a straight-line basis over the expected coverage period (taking into account contract terms and lapse assumptions) on an individual insurance contract basis.

Changes in discretionary cash flows are regarded as relating to future services and accordingly adjust the CSM. a.s.r. allocates the CSM to each period based on the passage of time as the service (insurance services and investment-return services) is deemed to be delivered equally over the coverage period.

To determine whether changes in cash flows are deemed to be changes in discretionary cash flows, a.s.r. exercises judgement in specifying at inception what is regarded as their commitment under the contract. How a.s.r. specifies its commitment under the contract will determine how much of the changes in expected future cash flows will be reflected immediately in profit or loss or will adjust CSM.

Measurement – contracts measured under the VFA

The VFA measurement model is used for direct participating contracts. This measurement model is identical to the GMM at initial recognition, however, subsequent measurement differs from the GMM.

Direct participating insurance contracts are contracts under which a.s.r.’s obligation to the policyholder is the net of:

• The obligation to pay the policyholder an amount equal to the fair value of the underlying items; and

• A variable fee in exchange for future services provided by the contracts, being a.s.r.’s share of the fair value of the underlying items less fulfilment cash flows that do not vary based on the returns on underlying items. a.s.r. provides investment-related services under these contracts by promising an investment return based on underlying items, in addition to insurance coverage.

When measuring a group of direct participating contracts, a.s.r. adjusts the fulfilment cash flows for the whole of the changes in the obligation to pay policyholders an amount equal to the fair value of the underlying items. These changes do not relate to future services and are recognised in the income statement. a.s.r. then adjusts any CSM for changes in the a.s.r.’s share of the fair value of the underlying items, which relates to future services, as explained below.

Subsequent measurement

The carrying amount of the CSM at the end of each reporting period is the carrying amount at the start of the reporting period, adjusted for:

• The CSM of any new contracts that are added to the group in the period;

• a.s.r.’s share of the change in the fair value of the underlying items and changes in fulfilment cash flows that relate to future services, except to the extent that:

  • a.s.r. has chosen to exclude from the CSM changes in the effect of financial risk on its share of the underlying items;

  • a.s.r.’s share of a decrease in the fair value of the underlying items, or an increase in the fulfilment cash flows that relate to future services, exceeds the carrying amount of the CSM, giving rise to a loss in the income statement (included in insurance service expenses) and creating a loss component; or

  • a.s.r.’s share of an increase in the fair value of the underlying items, or a decrease in the fulfilment cash flows that relate to future services, is allocated to the loss component, reversing losses previously recognised in the income statement (included in insurance service expenses); and

• The amount recognised as insurance contract revenue because of the services provided in the period.

Changes in fulfilment cash flows that relate to future services include the changes relating to future services specified above for contracts with direct participation features (measured at current discount rates) , the effect of the time value of money and financial risks and the risk mitigation option where applicable.

CSM is recognised as insurance contract revenue following the services provided. This is generally on a straight-line basis over the expected coverage period (taking into account contract terms and lapse assumptions) on an individual insurance contract basis.

a.s.r. allocates the CSM to each period based on the passage of time as the investment-related services provided in relation to the investment component and the insurance services provided in relation to the insurance component are deemed to be delivered equally over the coverage period.

Risk mitigation

a.s.r. has chosen to apply the risk mitigation option to certain VFA contracts, thereby not recognising a change in the CSM to reflect some or all of the changes in the effect of the time value of money and financial risk (that would normally adjust the CSM) on:

• The amount of a.s.r.’s share of the underlying items if a.s.r. mitigates the effect of financial risk on that amount using derivatives or reinsurance contracts held; and

• The fulfilment cash flows if a.s.r. mitigates the effect of financial risk on those fulfilment cash flows using derivatives, non-derivative financial instruments measured at FVTPL, or reinsurance contracts held.

If a.s.r. mitigates the effect of financial risk using derivatives or non-derivative financial instruments measured at FVTPL, it shall include insurance finance income or expenses for the period arising from the application of the risk mitigation in profit or loss.

If a.s.r. mitigates the effect of financial risk using reinsurance contracts held, it shall apply the same accounting policy for the presentation of insurance finance income or expenses arising from the application of the risk mitigation as a.s.r. applies to other reinsurance contracts held. a.s.r. does not currently use reinsurance as a hedge instrument dedicated to financial risks.

Measurement – contracts measured under the PAA

The PAA simplifies the measurement of groups of contracts when:

• the coverage period of each contract in the group of contracts is one year or less; or

• a.s.r. expects that the resulting measurement would not differ materially from the result of applying the GMM.

Initial measurement

On initial recognition of each group of contracts, the carrying amount of the liability for remaining coverage is measured at the premiums received on initial recognition. Insurance acquisition cash flows are recognised as expenses when they are incurred making use of the option under IFRS 17. The risk adjustment is an implicit part of the valuation of the related liability.

Subsequent measurement.

Subsequently, the carrying amount of the liability for remaining coverage is increased by any premiums received and decreased by the amount recognised as insurance contract revenue for coverage provided. This is recognised over the coverage period based on the passage of time.

If at any time during the coverage period, facts and circumstances indicate that a group of contracts is onerous, then a.s.r. recognises a loss in the income statement and increases the liability for remaining coverage to the extent that the current estimates of the fulfilment cash flows that relate to remaining coverage (including the risk adjustment for non-financial risk) exceed the carrying amount of the liability for remaining coverage.

a.s.r. recognises the liability for incurred claims of a group of insurance contracts at the amount of the fulfilment cash flows relating to incurred claims, including a risk adjustment for non-financial risk. The fulfilment cash flows are discounted at current rates.

Derecognition and contract modification

a.s.r. derecognises a contract when it is extinguished – i.e. when the specified obligations in the contract expire or are discharged or cancelled.

a.s.r. also derecognises a contract if its terms are modified in a way that would have changed the accounting for the contract significantly had the new terms always existed, in which case a new contract based on the modified terms is recognised. If a contract modification does not result in derecognition, then a.s.r. treats the changes in cash flows caused by the modifications as changes in estimates of fulfilment cash flows.

On the derecognition of a contract from within a group of contracts:

• The fulfilment cash flows allocated to the group are adjusted to eliminate the present value of the future cash flows and risk adjustment for non-financial risk relating to the rights and obligations that have been derecognised from the group; and

• The CSM of the group is adjusted for the change in fulfilment cash flows.

If a contract is derecognised because its terms are substantially modified, then the CSM is also adjusted for the premium that would have been charged had a.s.r. entered into a contract with the new contract’s terms at the date of modification, less any additional premium charged for the modification. The new contract recognised is measured assuming that, at the date of modification, the issuer received the premium that it would have charged less any additional premium charged for the modification.

F2. Reinsurance contracts

Classification

Contracts held by a.s.r. under which it transfers significant insurance risk related to insurance contracts are classified as reinsurance contracts. a.s.r. does not issue reinsurance contracts.

Separating components and Level of aggregation

The accounting principles for the separation of components do not differ from those for insurance contracts. For the determination of the level of aggregation for reinsurance contracts the accounting principles are the same with the exception that a reinsurance contract cannot be classified as onerous.

Recognition

a.s.r. recognises a group of reinsurance contracts held that do not provide proportionate coverage at the earlier of (i) the beginning of the coverage period of the group of reinsurance contracts held; and (ii) the date a.s.r. recognises an onerous group of underlying contracts if a.s.r. entered into the related reinsurance contract held at or before that date.

Contract boundaries

The measurement of a group of reinsurance contracts held includes all of the future cash flows within the boundary of each contract in the group. Cash flows are within the boundary of a contract if they arise from substantive rights and obligations that exist during the reporting period under which a.s.r. has a right to receive services from the reinsurer and is compelled to pay premiums.

Measurement – contracts under the PAA

a.s.r. uses the PAA as the default measurement approach for reinsurance contracts with a coverage period of one year or less, but the business line has the option to choose the GMM.

To measure a group of reinsurance contracts a.s.r. applies the same accounting policies for the related insurance contracts, adapted where necessary to reflect the features of reinsurance contracts held that differ from those of the insurance contracts.

Measurement – contracts under the GMM

a.s.r. applies the same accounting policies for insurance contracts to measure a group of reinsurance contracts, with the following modifications.

The carrying amount of a group of reinsurance contracts at each reporting date is the sum of the remaining coverage component and the incurred claims component. The remaining coverage component comprises:

• The fulfilment cash flows that relate to services that will be received under the contracts in future periods including the risk adjustment; and

• Any remaining CSM at that date.

a.s.r. measures the estimates of the present value of future cash flows using assumptions that are consistent with those used to measure the estimates of the present value of future cash flows for the underlying insurance contracts.

Loss-recovery component

a.s.r. determines a loss-recovery component of the asset for remaining coverage of a group of reinsurance contracts held when a.s.r. recognises a recovery of a loss on initial recognition of an onerous group of underlying contracts as well as for subsequent measurement of the recovery of losses. This loss-recovery component is accounted for in a manner consistent with the loss component of the group of underlying insurance contracts issued. As such, as cedant, a.s.r. determines the resulting amount of the loss-recovery at initial recognition to be recognised in profit or loss by multiplying:

• The loss recognised on the group of underlying insurance contracts; and

• The percentage of claims on underlying contracts a.s.r. expects to recover from the group of reinsurance contracts held.

After a.s.r. has established a loss-recovery component, it shall adjust it to reflect changes in the loss component of the underlying contracts. Therefore, the balance of loss-recovery component needs to be tracked along the fulfilment of the reinsurance group and run off to zero at the end of the reinsurance coverage period or earlier when the loss component on the underlying group(s) has been fully reversed. The carrying amount of the loss recovery component shall not exceed the portion of the carrying amount of the loss component of the underlying insurance contracts that a.s.r. expects to recover from the group of reinsurance contracts held.

The risk adjustment for non-financial risk is the amount of the risk transferred by a.s.r. to the reinsurer.

On initial recognition, the CSM of a group of reinsurance contracts represents a net cost or net gain on purchasing reinsurance. It is measured as the equal and opposite amount of the total of the fulfilment cash flows, any derecognised assets for cash flows occurring before the recognition of the group and any cash flows arising at that date, and taking into account any recognised loss recovery component, if applicable. However, if any net cost on purchasing reinsurance coverage relates to insured events that occurred before the purchase of the group, then a.s.r. recognises the cost immediately in the income statement as an expense.

The carrying amount of the CSM at the end of each reporting period is the carrying amount at the start of the reporting period, adjusted for:

• The CSM of any new contracts that are added to the group in the period;

• Interest accreted on the carrying amount of the CSM during the period, measured at the discount rates on nominal cash flows that do not vary based on the returns on any underlying items determined on initial recognition;

• Changes in fulfilment cash flows that relate to future services, unless the change results from a change in fulfilment cash flows allocated to a group of onerous underlying insurance contracts, in which case the change is recognised in the income statement;

• The amount recognised in the income statement because of the services received in the period.

CSM is recognised in profit or loss following the services provided.

Non-performance risk

Changes in the fulfilment cash flows related to the risk of non-performance do not adjust the CSM, therefore a.s.r. recognises them in profit or loss. This requires that the fulfilment cash flows must be adjusted to include the effect of any non-performance risk, or credit risk, by the reinsurer.

Reinsurance contracts cannot be onerous.

G. Employee benefits

Pension obligations

a.s.r. has with effect 2021, defined contribution (DC) plans for all its employees, including employees that are employed by entities that operate in the Distribution and Service segment. For these DC plans, a.s.r. pays contributions to privately administered pension insurance plans with ASR Levensverzekering N.V. (a.s.r. life) on a contractual basis. a.s.r. life recognises these contracts as insurance contracts. They are accounted for in accordance with liabilities arising from insurance contracts (accounting policy F1).

With regards to the DC plans, Aegon employees had a DC plan with Aegon Cappital as of 2020, and as of 1 October 2023 this DC plan became non-contributory, as they entered the a.s.r. DC plan.

a.s.r. has no further payment obligations to the employees once the contributions have been paid. The contributions are recognised as operating expenses in the income statement during the period the services are rendered. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in future payments is available.

In addition, a number of defined benefit (DB) plans for own employees exist, which ended at the end of 2019 (Aegon NL DB) and 2020 (a.s.r. DB), and were left non-contributory. The defined benefit obligation continues to exist. The plans are schemes under which employees are awarded pension benefits upon retirement, usually dependent on one or more factors, such as years of service and compensation. The defined benefit obligation is calculated at each reporting date by independent actuaries.

The liability in respect of DB plans is the present value of the defined benefit obligation at the balance sheet date, less the fair value of the plan assets where the pension plans are insured by third parties.

a.s.r. life and Aegon life administers most of the post-employment benefit plans and holds the investments that are intended to cover the employee benefit obligation. These investments do not qualify as plan assets in the consolidated financial statements under IFRS.

Pension obligations are calculated using the projected unit credit method. Inherent to this method is the application of actuarial assumptions for discount rates, future salary increases and bonuses, mortality rates and consumer price indices. The assumptions are updated and checked at each reporting date, based on available market data. The assumptions and reports were reviewed by Risk Management.

Actuarial assumptions may differ from actual results due to changes in market conditions, economic trends, mortality trends and other assumptions. Any change in these assumptions can have a significant impact on the defined benefit obligation and future pension costs.

Changes in the expected actuarial assumptions and differences with the actual actuarial outcomes are recognised in the actuarial gains and losses included in other comprehensive income (component of total equity).

When employee benefit plans are modified and when no further obligations exist, a gain or loss, resulting from the changes are recognised directly in the income statement. Consistent with the calculation of a gain or loss on a plan amendment, a.s.r. will use updated actuarial assumptions to determine the current service cost and net interest for the remainder of the annual reporting period upon the time of such amendment. The effect of the asset ceiling, if applicable, is disregarded when calculating the gain or loss on any settlement of the plan.

The financing cost related to employee benefits is recognised in interest expense. The current service costs are included in operating expenses.

Other long-term employee benefits

Plans that offer benefits for long-service (leave), but do not qualify as a post-employment benefit plan, such as jubilee benefits, are measured at present value using the projected unit credit method and changes are recognised directly in the income statement.

Other post-retirements obligations

a.s.r. offers post-employment benefit plans, such as arrangement for mortgage loans at a discount (fixed amount, reference date December 2017). The entitlement to these benefits is usually conditional on the employee remaining in service up to retirement age and the completion of a minimum service period. The expected costs of these benefits are accrued over the period of employment using an accounting methodology that is similar to that for DB plans.

Vacation entitlements

A liability is formed for the vacation days which have not been taken at year-end.

H. Acquisitions (Business combinations)

Business acquisitions are accounted for according to the acquisition method, with the cost of the acquisitions being allocated to the fair value of the acquired identifiable assets, liabilities and contingent liabilities.

The goodwill is determined as the difference between the cost of the acquisition and a.s.r.’s interest in the fair value of the acquired identifiable assets, liabilities and contingent liabilities at the acquisition date. Additionally for insurance contracts acquired that are onerous at the transaction date, the difference between the fair value and the fulfilment cash flows is also part of the goodwill.

Any change, in the fair value of acquired assets and liabilities at the acquisition date, determined within one year after acquisition, is recognised as an adjustment charged to goodwill in case of a preliminary valuation. Adjustments that occur after a period of one year are recognised in the income statement. Adjustments to the purchase price that are contingent on future events, and to the extent that these are not already included in the purchase price, are included in the purchase price of the acquisition at the time the adjustment is likely and can be measured reliably.

Where applicable in the notes to the financial statements the acquisitions are recognised in the changes in the composition of the group.

• ¹Not measured at fair value on the balance sheet and for which the fair value is disclosed.