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## 49 Capital and solvency 

Aegon’s total capitalization reflects the capital employed in insurance activities and consists of shareholders’ capital and total gross financial leverage. Aegon aims to bring total gross financial leverage below 30% of total capitalization as measured by the gross financial leverage ratio. The gross financial leverage ratio is calculated by dividing the total gross financial leverage by the total capitalization. At December 31, 2013 the gross financial leverage ratio was 30.1%. 

Additionally, Aegon manages capital adequacy at the level of its country units and their operating companies. The goal is to ensure that Aegon companies maintain their financial strength. Aegon maintains its companies’ capital adequacy levels at which ever is the higher of local regulatory requirements and the relevant local Standard & Poor’s requirements for very strong capitalization, and any additionally self-imposed economic requirements. 

The following table shows the composition of the total capitalization and the calculation of the gross financial leverage ratio: 

<img src='content_image/225450.jpg'>

Other equity instruments that are denominated in foreign currencies are, for purpose of calculating the capital base, revalued to the period-end exchange rate. 2 

Non-controlling interests are disclosed in the statement of financial position. 3 

Senior debt for financial leverage calculation also contains swaps and other senior debt for an amount of EUR 33 million (2012: EUR 18 million). 

Aegon N.V. is subject to certain financial covenants in some of its financial agreements (such as issued debentures, credit facilities and ISDA agreements). Under these financial covenants, an event of default may occur if and when any financial indebtedness of any member of the Group is not paid when due, or not paid within any applicable grace period. The financial agreements may also include a cross default provision which may be triggered if and when any financial indebtedness of any member of the Group is declared to be or otherwise becomes due and payable prior to its specified maturity as a result of an event of default. 

All financial agreements are closely monitored periodically to assess the likelihood of a breach of any financial covenant and the likelihood thereof in the near future. On the basis of this assessment, a breach of any such covenant has not occurred. 

Insurance, reinsurance, investment management and banking companies are required to maintain a minimum solvency margin based on applicable local regulations. For managing Aegon’s capital, the life insurance and life reinsurance regulations in the EU and the United States are of main importance. Aegon’s Insurance Group Directive ratio (IGD ratio) was 212% at the end of 2013 (2012: 228%). 

The calculation of the IGD ratio is based on Solvency I capital requirements for entities within the EU (Pillar 1 for Aegon UK), and local regulatory solvency measurements for non-EU entities. Specifically, required capital for the life insurance companies in the US is calculated as two times the upper end of the Company Action Level range (200%) as applied by the National Association of Insurance Commissioners in the US. The calculation of the IGD ratio excludes the available and required capital of the UK With Profits fund. 

