Risk and capital management  Capital and liquidity management 88 Capital and liquidity management Liquidity and capital resources Improving risk profile Guiding principles Capital requirements and leverage Capital adequacy Governance Total capitalization Capital management Strategic importance Total financial leverage In line with its risk tolerance, the goal of Aegon’s capital and  liquidity management is to promote stable and strong capital  adequacy levels for its businesses on various capital metrics to  ensure that the company is able to meet its obligations. Risk tolerance is an important element in Aegon’s Enterprise  Risk Management Framework, and focuses on financial strength,  continuity, steering of the risk balance and desired risk culture.  The core aim is to establish the organization’s tolerance for risk  to assist management in carrying out Aegon’s strategy within the  Group’s available resources. Aegon continues to take measures to improve its risk-return  profile and lower overall capital requirements. These measures  include, for instance, the continued run-off of Aegon’s spread- based institutional business in the United States, the strategic  growth in fee-based earnings and extensive asset-liability  management and hedging programs. Examples of these  programs include hedging the interest rate and equity risk from  guarantees in the Netherlands and hedging the capital position  in the Americas against adverse equity and fixed income market  swings. Aegon’s goal for all units is to maintain a strong financial  position in order to sustain losses from adverse business and  market conditions. The company’s overall capital management  strategy is based on capital adequacy, capital quality and capital  leverage.  Aegon follows a number of guiding principles, which determine  its approach to capital and liquidity management: Capital adequacy is managed at the company, country and  operating unit level, as well as at the level of individual legal  entities within the organization. As a matter of policy, Aegon  maintains the capitalization of its operating companies based on  whichever of the following is the most stringent: Aegon’s Insurance Group Directive ratio was 212% at December  31, 2013, down from 228% at the end of 2012, driven mainly by  the switch to the swap curve for regulatory solvency calculations  in the Netherlands and the negative impact of IAS 19. Taken together, Aegon believes these guiding principles  strengthen the company’s ability to withstand adverse market  conditions, enhance its financial flexibility and serve the  long-term interests of both the company and its stakeholders. Aegon’s Corporate Treasury department manages and  coordinates capital and liquidity management strategies and  processes. The department acts under direction of the Group  Risk & Capital Committee. Aegon’s approach towards capital management plays an  important role in supporting the execution of Aegon’s strategic  priorities. These priorities include the shift of capital to those  markets that offer higher growth and return prospects, and  the shift from spread business to fee business. In addition, the  company is improving its risk profile by further reducing total  financial leverage. Disciplined risk and capital management  support Aegon’s aim to pay a sustainable dividend to its  shareholders. Aegon’s total capitalization consists of the following  components: Consistent with the guiding principles of its capital and liquidity  management, Aegon NV monitors and manages to several  financial flexibility related metrics, including: ■ To promote strong capital adequacy in Aegon’s businesses  and operating units;  ■ To manage and allocate capital efficiently to maximize  returns and support the strategy; ■ To maintain an efficient capital structure with an emphasis on  optimizing Aegon’s cost of capital;  ■ To ensure sufficient liquidity by enforcing stringent liquidity  risk policies for both business units and the holding;  ■ To maintain continued access to international money and  capital markets on competitive terms.  ■ Regulatory capital requirements; ■ Rating agency AA capital requirements for rated entities; ■ Any additional, self-imposed internal requirements. ■ Shareholders’ equity excluding revaluation reserves and the  remeasurement of defined benefit plans; ■ Non-controlling interests and share options not yet exercised; ■ Total financial leverage. ■ Various rating agency leverage metrics; ■ Gross financial leverage ratio;  ■ Fixed charge coverage.  Annual Report 2013