76 Business overview  Results of operations – Asia insurance liabilities, Aegon-CNOOC usually purchases corporate  bonds, government bonds, bank deposits, debt projects, or other  fixed income assets to match this liability. Operating funds  are invested in the bond fund, money-market fund and bond  repurchase markets to achieve higher investment returns. The respective Risk & Capital Committees of Aegon-CNOOC meet  every quarter to manage and monitor asset and liability matching,  using the result of stress-test scenarios based on the Economic  Capital Model, liquidity tests, and duration mismatch tests. Aegon Religare has a board-level Investment Committee  and a board-level Risk Management & Capital Committee  (RMC). Additionally, there is a management-level Risk &  Capital Committee (RCC). A regular review of risk and capital  requirements is conducted by the committee members of the  RCC and RMC. Asset liability management (ALM) became critical  to the business in 2012 as the business mix changed and sales  of traditional products increased. Monthly reviews are performed  to ensure appropriate ALM for the closed block of business under  traditional products; at the end of each quarter the ALM report is  tabled at the RCC meeting. Aegon Sony Life reinsures (cedes) 100% of its guarantees  on variable annuities to SARe. SARe has a comprehensive  hedging program in place that covers the major risk dimensions.  Execution of this hedging program is outsourced to Aegon USA  Investment Management LLC. Comprehensive risk management  procedures have been defined to ensure implementation of  appropriate risk management activities in accordance with  Aegon’s Risk Management Policy. In reinsuring minimum variable annuity guarantees, SARe accepts  certain market and policyholder behavior risks. SARe covers  payments under the guarantees to the extent that benefits  to the policyholder exceed the variable annuity account value.  The market risks are managed through the use of capital-market  hedging techniques. The hedging program includes futures contracts, foreign currency  forwards and interest rate swaps. Futures contracts are traded  on market indices such as TOPIX, S&P 500, FTSE 100, and  EuroStoxx 50. Not all equity indices are traded in Japanese Yen  (SARe’s functional currency): currency exposure is hedged with  foreign currency forwards. The hedging program requires regular  determination of risk exposures, and regular market monitoring  and trading. The program requires substantial cash reserves  to cover potential losses on hedging instruments, transaction  costs and other charges, all of which are supported by the  shareholders as necessary. The hedge strategy is not expected  Reinsurance arrangements are regulated by the IRDA. Aegon  Religare has reinsurance treaties with Munich Re, Swiss Re and  RGA Re to share mortality and morbidity risks through surplus-  and quota-share arrangements on a risk-premium basis. Aegon-CNOOC shares its morbidity and mortality risk with  international and national reinsurers. The mortality risk of  individual products is shared through a surplus reinsurance  structure. Most of the individual morbidity risks are taken by  General Re and Munich Re in quota share. The group products are  mainly reinsured by Hannover Re. Aegon-CNOOC has also  modified co-reinsurance with Hannover Re to improve its solvency  ratio in addition to morbidity and mortality risk transfer. Aegon- CNOOC reviews the reinsurance structure regularly and adjusts it  based on the claim experience and its risk acceptance capability. The TLB assets are currently managed by Aegon USA Investment  Management in the United States in a pool of assets backing  similar liabilities. Asset Liability Management is performed as  part of asset portfolio management. The ADAMS assets are managed by Aegon USA Investment  Management in the United States in a pool of assets backing  similar liabilities. Asset Liability Management is performed as  part of asset portfolio management. Policyholder behavior risks are managed through a combination  of product design, pricing techniques, hedge construction and  rebalancing to reflect emerging experience, and are reflected  in the reinsurance premium that is charged by SARe to  Aegon Sony Life. In addition to these pricing and hedging risk  mitigation techniques, for certain products capital contains  a provision for adverse deviation. As such, increases in capital  due to unexpected deviations in policyholder behavior or an  unfavorable basis error are cushioned by applying an assumption  for hedge effectiveness in capital (and reflected in pricing). This  assumption is lower than is expected to be realized based on  results from a ten-year back-test of Aegon Sony Life's hedge  strategy (the back-test is from June 1999 to June 2009). SARe’s  Risk & Capital Committee meets on a quarterly basis. to eliminate all of the volatility from guarantee value changes.  The hedge objective is to minimize economic volatility, which is  expected to be reduced by approximately 70%-80%. The hedge  will not fund all changes in capital, as a strategy to minimize  capital volatility is different to its strategy to minimize economic  or income volatility. Asia - ADAMS Hong Kong and Singapore - TLB  Reinsurance ceded China - Aegon-CNOOC India - Aegon Religare India - Aegon Religare Japan - Aegon Sony Life and SARe Annual Report 2013