7.8.4Counterparty default risk

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 cash equivalents

  • 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.

Counterparty default risk - required capital
31 December 202431 December 2023
Type 1159190
Type 2234136
Diversification (negative)-24-20
Total369305

In 2024 the Solvency II SF Counterparty default has increased with 64 million. The counterparty risk type 1 is lower compared to previous year, mainly due to the decreased cash position. The counterparty risk type 2 was higher per year-end 2024, mainly due to the increase of the mortgage portfolio.

7.8.4.1Mortgages

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 in scope of Counterparty default risk was 11,846 million at year-end 2024 (2023: 10,285 million1).

Please note that the mortgages of both Aegon life and Aegon spaarkas are in scope of Solvency II IM spread risk.

Composition mortgage portfolio

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 remained stable at 0.04% in 2024 (2023: 0.04%).

7.8.4.2Savings-linked mortgage loans

The counterparty default risk of the savings-linked mortgage loans ('Spaarlossen') depends on the counterparty. For 9% 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 88% 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.

Composition savings-linked mortgage loans portfolio

7.8.4.3Derivatives

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. In addition, a sizeable part of the interest-rate swap portfolio (and virtually all new interest rate swaps) are centrally cleared, which significantly reduces counterparty default risk.

7.8.4.4Reinsurance

a.s.r. collaborates with reinsurers. When entering into reinsurance contracts 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 shows the exposure to reinsurers which are in scope of counterparty default risk. The total exposure to reinsurers at year-end 2024 was 340 million (2023: 355 million). Counterparty default risk is immaterial for Aegon life’s reinsurance exposure and therefore not in scope of the Composition table.

Composition reinsurance counterparties by rating
31 December 202431 December 2023
AAA0%0%
AA87%87%
A11%10%
NR2%0%
Total100%100%

7.8.4.5Receivables

The receivables with a counterparty default risk amounted to 2,317 million at year-end 2024. This mainly consists of insurance and intermediaries receivables (232 million), reinsurance receivables (21 million) and other (non-insurance) receivables (2,064 million).

7.8.4.6Cash and cash equivalents

The current accounts in scope of counterparty default risk amounted 2,494 million in 2024 (2023: 4,303 million), this excludes commercial papers.

Composition cash accounts by rating
31 December 202431 December 2023
AAA40773
AA176514
A2,2783,017
Lower than A00
Total2,4944,303

7.8.4.7Expected 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):

Changes in loss allowance of government and corporate bonds measured at FVOCI
2024Stage 1
(12-month ECL)
Stage 2
(Lifetime ECL)
Stage 3
(Lifetime ECL)
Total
At 1 January1--1
Changes in the composition of the group-1---1
Loss allowance at 31 December----
2023Stage 1
(12-month ECL)
Stage 2
(Lifetime ECL)
Stage 3
(Lifetime ECL)
Total
At 1 January----
Changes in the composition of the group1--1
Loss allowance at 31 December1--1
Changes in loss allowance of mortgage loans measured at amortised cost
2024Stage 1
(12-month ECL)
Stage 2
(Lifetime ECL)
Stage 3
(Lifetime ECL)
Total
At 1 January11-3
Changes in the composition of the group-1-1--2
Loss allowance at 31 December----
2023Stage 1
(12-month ECL)
Stage 2
(Lifetime ECL)
Stage 3
(Lifetime ECL)
Total
At 1 January----
Stage transfers--1--1
Changes in models/risk parameters--1--
Changes in the composition of the group13-4
Loss allowance at 31 December11-3
Changes in loss allowance private loans measured at amortised cost
2024Stage 1
(12-month ECL)
Stage 2
(Lifetime ECL)
Stage 3
(Lifetime ECL)
Purchased or Originated Credit-ImpairedTotal
At 1 January212-5
Changes in the composition of the group-2-1-2--5
Loss allowance at 31 December-----
2023Stage 1
(12-month ECL)
Stage 2
(Lifetime ECL)
Stage 3
(Lifetime ECL)
Purchased or Originated Credit-ImpairedTotal
At 1 January-----
Stage transfers-431--
Net remeasurement of loss allowance112-3
Repayments-1-1-1--3
Changes in models/risk parameters-1-11--1
Changes in the composition of the group6---6
Other changes---1--1
Loss allowance at 31 December212-5

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.

Changes in gross carrying amounts of government and corporate bonds measured at FVOCI
2024Stage 1
(12-month ECL)
Stage 2
(Lifetime ECL)
Stage 3
(Lifetime ECL)
Total
At 1 January874--874
Changes in the composition of the group-874---874
Gross carrying amount at 31 December----
2023Stage 1
(12-month ECL)
Stage 2
(Lifetime ECL)
Stage 3
(Lifetime ECL)
Total
At 1 January----
Repayments-70---70
Disposals-45---45
Changes in the composition of the group970--970
Other changes18--18
Gross carrying amount at 31 December874--874
Changes in gross carrying amounts of mortgage loans measured at amortised cost
2024Stage 1
(12-month ECL)
Stage 2
(Lifetime ECL)
Stage 3
(Lifetime ECL)
Total
At 1 January14,1214141814,552
Stage transfers34-34--
Purchases and originations4082-410
Repayments-322-7-1-330
Changes in the composition of the group-11,730-320-13-12,063
Other changes55--55
Gross carrying amount at 31 December2,5665542,624
2023Stage 1
(12-month ECL)
Stage 2
(Lifetime ECL)
Stage 3
(Lifetime ECL)
Total
At 1 January----
Stage transfers506-5104-
Purchases and originations96414-979
Repayments-538-48-1-586
Changes in the composition of the group12,7639571413,734
Other changes425--425
Gross carrying amount at 31 December14,1214141814,552
Changes in gross carrying amounts of private loans measured at amortised cost
2024Stage 1
(12-month ECL)
Stage 2
(Lifetime ECL)
Stage 3
(Lifetime ECL)
Purchased or Originated Credit-ImpairedTotal
At 1 January1641563188
Repayments-1----1
Changes in the composition of the group-155-15-6-3-179
Gross carrying amount at 31 December9---9
2023Stage 1
(12-month ECL)
Stage 2
(Lifetime ECL)
Stage 3
(Lifetime ECL)
Purchased or Originated Credit-ImpairedTotal
At 1 January-----
Stage transfers-33294--
Purchases and originations5---5
Repayments-42-143-7-60
Changes in the composition of the group236--10246
Other changes-1--1--2
Gross carrying amount at 31 December1641563188
  • 1The 2023 figure is adjusted compared to the 2023 report (9,975 million) for participations in Aegon mortgages (impact +310 million).