Counterparty default risk reflects possible losses due to unexpected default or deterioration in the credit standing of counterparties and debtors. Counterparty default risk affects several types of assets:

• mortgages

• savings-linked mortgage loans

• derivatives

• reinsurance

• receivables

• cash and deposits

• expected credit loss

Assets that are in scope of spread risk are, by definition, not in scope of counterparty default risk and vice versa. The Solvency II regime makes a distinction between two types of exposures:

• Type 1: These counterparties generally have a rating (reinsurance, derivatives, current account balances, deposits with ceding companies and issued guarantee (letter of credit). The exposures are not diversified.

• Type 2: These counterparties are normally unrated (receivables from intermediaries and policyholders, mortgages with private individuals or SMEs). The exposures are generally diversified.

The total capital requirement for counterparty risk is an aggregation of the capital requirement for type 1 exposure and the capital requirement for type 2 exposure by taking 75% correlation.

In 2023 the Solvency II SF Counterparty default has increased with € 79 million. The main reason for this increase is the acquisition of Aegon NL which lead to an increase of Type 1 risk of € 86 million.

7.8.4.1 Mortgages

Mortgages are granted for the account and risk of third parties and for a.s.r.’s own account. The a.s.r. portfolio consists only of Dutch mortgages with a limited counterparty default risk. The fair value of a.s.r.’s mortgage portfolio was € 9,975 million at year-end 2023 (2022: € 9,534 million). The increase in 2023 (€ 441 million) was almost entirely the result of the acquisition of Aegon NL. Please note that only the mortgages of former Aegon non-life are in scope of Counterparty default risk. The mortgage portfolios of both Aegon life and Aegon spaarkas are in scope of Solvency II IM spread risk.

The Loan-to-Value ratio is based on the value of the mortgage according to Solvency II principals with respect to the a.s.r. calculated collateral. The percentage of mortgages which are in arrears for over three months has increased from 0.03% in December 2022 to 0.04% in December 2023.

7.8.4.2 Savings-linked mortgage loans

The counterparty default risk of the savings-linked mortgage loans ('Spaarlossen') depends on the counterparty. For 11% of the portfolio, the counterparties are Special Purpose Vehicles. The risk is limited due to the robust quality of the mortgages in the Special Purpose Vehicles in combination with the tranching. a.s.r. has a cession-retrocession agreement with the counterparty for 86% of the portfolio, for which the risk is limited. Effectively, a.s.r. recognises the underlying receivable from the counterparty (or in the case of insolvency of the counterparty the mortgage loans transfers as collateral), mitigating the counterparty default risk of the savings-linked mortgage loans.

On September 1, 2021 DNB issued the Q&A and Good Practices document on the treatment of saving mortgages and in December, the Dutch Association of Insurers shared its additional guidance on this subject. These documents provide further requirements and guidelines on the valuation, risk calculations and balance sheet classification. Saving deposits without collateral agreement are considered in the SCR Spread Risk Module. The saving deposits with collateral are treated in the Counterparty Risk Module. Furthermore the collaterised deposits are split in two: a) the outstanding part and corresponding interest are considered in the SCR Counterparty risk type 2 (zero risk); b) the future premiums and corresponding interest are treated as the uncollaterised derivative contract of SCR Counterparty Risk Type 1.

7.8.4.3 Derivatives

Over the Counter (OTC) derivatives are primarily used by a.s.r. to manage the interest-rate risks incorporated into the insurance liabilities. Interest-rate derivatives are traded with a well-diversified and qualitative dealer panel with whom there is an established International Swaps and Derivatives Association (ISDA) contract and a Credit Support Annex (CSA) in place. These CSAs include specific agreements on the exchange of collateral limiting market and counterparty risk. The outstanding value of the interest rate derivative positions is matched by collateral received from eligible counterparties, minimising the net counterparty default risk.

7.8.4.4 Reinsurance

a.s.r. collaborates with reinsurers for fire and catastrophe risk. When entering into reinsurance contracts for fire and catastrophe, a.s.r. requires the counterparty to be rated at least single A. With respect to long-tail business and other sectors, the minimum permitted rating is single A.

The table below shows the exposure to reinsurers per rating. The total exposure to reinsurers at year-end 2023 was € -90 million (2022: € 309 million). The negative exposure in 2023 was entirely the result of the exposure of Aegon NL (€ -445 million) and the exposure of other entities (€ 355 million). The table below does not include Aegon NL.

7.8.4.5 Receivables

The receivables with a counterparty default risk amounted to € 2,404 million at year-end 2023. This mainly consits of insurance and intermediaries receivables (€ 229 million), reinsurance receivables (€ 31 million), health insurance fund (€ 159 million) and other (non-insurance) receivables (€ 1,985 million).

7.8.4.6 Cash and cash equivalents

The current accounts on the balance sheet amounted € 4,303 million in 2023 (2022: € 1,756 million). The increase in 2023 (€ 2,548 million) was almost entirely the result of the acquisition of Aegon NL.

a.s.r. has no deposits in scope of counterparty default risk.

7.8.4.7 Expected credit loss

The recognition and measurement of impairments is forward-looking, and apply to all financial assets measured at amortised cost and at FVOCI. Initially, a provision is required for credit losses expected within the next 12 months. This is referred to as ‘Stage 1’. If there is a significant increase in credit risk between the moment of origination and the reporting date, but the exposure is not in default, the exposure is in ‘Stage 2’. If the exposure is in default, this is referred to as ‘Stage 3’. For both ‘Stage 2’ and ‘Stage 3’, a provision is required for expected credit losses over the remaining lifetime of the financial asset.

Expected credit loss measurement

The impairment requirements outline a ‘three-stage’ model for impairment based on changes in credit quality since initial recognition as summarised below:

1. A financial instrument that is not credit-impaired on initial recognition is classified into ‘Stage 1’ and has its credit risk continuously monitored by a.s.r.:
   a) If a significant increase in credit risk (‘SICR’) since initial recognition is identified, the financial instrument is moved to ‘Stage 2’ but is not yet deemed to be credit impaired.
   b) If the financial instrument is credit-impaired, the financial instrument is then moved to ‘Stage 3’.

2. Financial instruments in Stage 1 have their ECL measured at a 12-month expected credit losses that result from default events possible within the next 12 months.

3. Financial instruments in Stages 2 or 3 have their ECL measured based on expected credit losses on a lifetime basis.

ECL is measured on either a 12-month basis (Stage 1) or lifetime basis (Stages 2/3) depending on whether a significant increase in credit risk has occurred since initial recognition or whether an asset is considered to be credit-impaired.

Expected credit losses are the discounted product of the Probability of Default (PD), Exposure at Default (EAD), and Loss Given Default (LGD), defined as follows:

• PD represents the likelihood of a borrower defaulting on its financial obligation, either over the next 12 months (12-month PD), or over the remaining lifetime (lifetime PD) of the obligation;

• EAD is based on the amounts a.s.r. expects to be owed at the time of default, over the next 12 months (12-month EAD) or over the remaining lifetime (lifetime EAD);

• LGD represents a.s.r.’s expectation of the extent of the loss on a defaulted exposure. LGD varies by type of counterparty, type and seniority of the claim, and availability of collateral or other credit support. LGD is expressed as a percentage loss per unit of exposure at the time of default (EAD). LGD is calculated on a 12-month or lifetime basis, where the 12-month LGD is the percentage of loss expected to be made if the default occurs in the next 12 months, and the lifetime LGD is the percentage of loss expected to be made if the default occurs over the remaining expected lifetime of the loan.

A pervasive concept in measuring ECL is that it should consider forward-looking information. a.s.r. has performed historical analyses to identify the key economic variables impacting credit risk and expected credit losses for each portfolio. Expert judgment was also applied in this process.

a.s.r. employs separate models to calculate ECL on the following asset classes:

• Mortgage loans;

• Consumer loans;

• SME loans; and

• Debt securities.

Debt securities are covered by a single model because these portfolios are all managed in a similar fashion. Asset classes not covered by the ECL calculations are considered either to have immaterial credit risk or to be short-term in nature. Given the need to adapt the models to the different portfolio characteristics, all ECL models use different key judgments and assumptions.

The following tables show the changes in the loss allowance between the beginning and end of the year due to these factors (excluding Other financial assets at amortised cost):

The total of undiscounted ECL at initial recognition for purchased or originated credit-impaired financial assets recognised during 2023 amounts to € 0 million.

The following tables further specify the changes in gross carrying amounts to help explain their significance for the changes in the loss allowance for the same portfolios as discussed above. The gross carrying amounts in these tables are the clean values, thus excluding the accrued interest.