GENERAL
AEGON is exposed to a variety of risks. Some risks are related to the international nature of AEGON’s business, such as currency translation risk. Other risks include insurance related risks, such as changes in mortality and morbidity. However, the largest exposure is to changes in financial markets (i.e. interest rate, credit and equity market risks) that affect the value of the investments and technical provisions (including deferred policy acquisition costs – DPAC).
Over the past several years, AEGON has been strengthening its global risk management framework. Capital management is a central function in the AEGON Group. AEGON continues to closely align its capital management with its risk management. This effort continued in 2003 and allows for a more proactive and coordinated approach to risk and capital management. Other benefits include the determination and sharing of best risk management practices and improved consistency in risk reporting group-wide.
AEGON’s financial risk management, part of the global risk management framework, is based on asset liability management (ALM) processes and models. These processes and models are in place in each country unit and are not only used to manage risk in each unit, but also for the group. AEGON takes inventory of its risk position across all risk categories. It also measures the sensitivity of net income and shareholders’ equity to stochastic and deterministic scenarios. AEGON’s management uses the insight gained through these ‘what if?’ scenarios to manage the group’s risk exposure and capital position. The models, scenarios and assumptions used are reviewed and, if necessary, updated each year.
Results of AEGON’s sensitivity analyses are presented throughout this section to show the estimated sensitivity of net income and shareholders’ equity to various scenarios in 2004. These scenario results do not consider the actions that might be taken to mitigate losses inherent in AEGON’s risk management processes. As financial markets fluctuate, these actions may involve selling investments, changing investment portfolio allocation and adjusting interest rates or bonuses credited to policyholders. Also, the results do not take into account correlation between factors and assume unchanged conditions for all other assets and liabilities. Results of the analyses also cannot be extrapolated for wider variations since effects do not tend to be linear. No risk management process can clearly predict future results.
CURRENCY EXCHANGE RATE RISK
As an international group, AEGON is subject to currency risk. Equity held in subsidiaries is kept in local currencies to the extent that shareholders’ equity is required to satisfy regulatory and self-imposed capital requirements. Because of this, currency exchange rate fluctuations may affect the level of AEGON’s shareholders’ equity as a result of translation into euro. AEGON holds the remainder of its capital base (capital securities, subordinated and senior debt) in various currencies in amounts AEGON targets to correspond to the book value of its country units. This balancing mitigates currency translation impacts to equity and leverage ratios. Currency risk in the investment portfolios is managed using asset liability matching principles. In 2000, AEGON discontinued hedging the income streams from the main non-Dutch units and, as a result, earnings may fluctuate due to currency translation. As AEGON has significant business segments in the Americas and the United Kingdom, the principal sources of exposure from currency fluctuations are from the differences between US dollar and euro and between UK pound and euro. AEGON may experience significant changes in net income and shareholders’ equity because of these fluctuations.
The 5-year historical income before tax and shareholders’ equity held by AEGON are shown in the table below.
Table 1
 |
|
|
|
|
|
|
Income before tax
(in millions) |
1999 |
|
2000 |
2001 |
2002 |
2003 |
AEGON Americas
(in USD) |
1,418 |
|
1,870 |
2,034 |
1,142 |
1,740 |
AEGON The Netherlands
(in EUR) |
861 |
|
840 |
924 |
659 |
771 |
| AEGON UK (in GBP) |
156 |
|
219 |
231 |
146 |
130 |
| Other Countries (in EUR) |
(12 |
) |
57 |
72 |
64 |
79 |
|
|
|
|
|
Capital in units
(in millions) |
2000 |
2001 |
2002 |
2003 |
AEGON Americas
(in USD) |
11,978 |
13,920 |
16,518 |
17,725 |
AEGON The Netherlands
(in EUR) |
4,172 |
3,654 |
2,605 |
2,865 |
| AEGON UK (in GBP) |
1,499 |
1,771 |
2,028 |
2,173 |
| Other Countries (in EUR) |
409 |
374 |
399 |
481 |
The exchange rates for US dollar and UK pound per euro for each of the last five year-ends are set forth in the table below.
Table 2
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|
|
|
|
|
| Closing rates |
1999 |
2000 |
2001 |
2002 |
2003 |
| USD |
1.00 |
0.93 |
0.88 |
1.05 |
1.26 |
| GBP |
0.62 |
0.62 |
0.61 |
0.65 |
0.70 |
The sensitivity analysis in table 3 shows the effect on net income and shareholders’ equity of movements in the exchange rates of AEGON’s most important currencies relative to the euro.
INTEREST RATE RISK
AEGON bears interest rate risk in many of its products. In cases where cash flows are highly predictable, investing in assets that closely match the liabilities can mitigate this risk – a method that AEGON employs. However, in some products, liability cash flows are less predictable. The uncertainty arises from policyholder actions that can be affected by the level of interest rates.
In periods of rapidly increasing interest rates, policy loans, surrenders and withdrawals may increase and usually do. Premiums in flexible premium policies may decrease as policyholders seek investments with higher perceived returns. This activity may result in cash payments requiring the selling of invested assets at a time when the prices of those assets are adversely affected by the increase in market interest rates, which may result in realized investment losses. These cash payments to policyholders result in a decrease in total invested assets and a decrease in net income. Among other things, early withdrawals may also cause AEGON to accelerate amortization of policy acquisition costs, reducing net income.
During periods of sustained low interest rates, life insurance and annuity products may be relatively more attractive to consumers, resulting in increased premium payments on products with flexible premium features and a higher percentage of insurance policies remaining in force from year to year. During such a period, investment earnings may be lower because the interest earnings on new fixed income investments will likely have declined with the market interest rates. In addition, mortgages and redeemable bonds in the investment portfolio are more likely to be repaid as borrowers seek to borrow at lower interest rates and AEGON may be required to reinvest the proceeds in securities bearing lower interest rates. Also, in a period of low interest rates, AEGON may not be able to credit rates on policies at the low levels that would preserve margins as a result of minimum guaranteed crediting rates provided on policies. Accordingly, during periods of sustained low interest rates, net income may decline as a result of a decrease in the spread between either the interest rates credited to policyholders or the rates assumed in reserves and returns on the investment portfolio.
The general account fixed income portfolios of AEGON USA and AEGON The Netherlands accounted for 96% of the total general account fixed income portfolio of the AEGON Group at December 31, 2003. AEGON USA and AEGON The Netherlands manage their duration mismatch on the basis of their expectations for the future level of interest rates. Presently, the other country units target the duration of their assets to equal approximately the duration of their liabilities. In addition to point in time duration measurement, deterministic and stochastic scenarios are used to measure and manage interest rate risk. In these models, policyholder behavior changes are anticipated. These models are used by all country units and aggregated at group level.
For AEGON USA’s businesses, the average duration of assets is approximately 4.5 years. This relatively low duration, as compared to the long-term nature of most AEGON USA’s businesses, is driven by the asset and liability management process applied to the institutional markets business in the United States (guaranteed investment contracts and funding agreements). Both the assets and the liabilities for this business are managed on a floating rate basis, with extensive use of interest rate swaps. As a result, these assets and liabilities, which represent a little over a quarter of the total general account assets and liabilities of AEGON USA, have an effective duration of close to three months. The maximum allowed duration mismatch between the assets and liabilities of AEGON USA and AEGON The Netherlands is plus or minus one year. For AEGON The Netherlands, the average duration of assets is approximately 4.7 years. The combined market value weighted duration mismatch of AEGON USA and AEGON The Netherlands was around minus 1.0 years at December 31, 2003. Table 4 on the next page shows each of the last five year-end interest rates for the period from 1999 through 2003.
Table 3
SENSITIVITY ANALYSIS OF NET INCOME AND SHAREHOLDERS’ EQUITY TO CURRENCY EXCHANGE RATE MARKETS 1,2
|
|
|
| Movement of markets |
Effects on net income |
Effects on
shareholders' equity |
| Increase versus the euro |
increase between |
increase between |
| of USD, GBP and other currencies of 15% |
12.5% and 13.5% |
15% and 16% |
| Decrease versus the euro |
decrease between |
decrease between |
| of USD, GBP and other currencies of 15% |
12.5% and 13.5% |
15% and 16% |
| 1 |
Basic assumptions: no correlation between markets and risks; unchanged conditions for all other assets and liabilities; limited management actions taken. All percentage changes are relative to net income and shareholders’ equity. Effects do not tend to be linear and therefore cannot be extrapolated for larger increases or decreases. |
| 2 |
The effect of currency exchange rate movements is reflected as a one-time shift up or down in the value of the US dollar, the UK pound and other currencies on January 1, 2004. |
Table 4
|
|
|
|
|
|
| Closing rates |
1999 |
2000 |
2001 |
2002 |
2003 |
| 3 month US Libor |
6.00% |
6.40% |
1.88% |
1.38% |
1.15% |
| 3 month Euribor |
3.34% |
4.86% |
3.29% |
2.87% |
2.12% |
| 10-year US Treasury |
6.43% |
5.10% |
5.04% |
3.82% |
4.25% |
10-year Dutch
government |
5.47% |
4.99% |
5.11% |
4.23% |
4.29% |
The sensitivity analysis in table 5 shows an estimate of the effect on net income of movements in the interest rates.
The main driver for the asymmetric effects of an immediate change of interest rates up or down by 1% or 2% is the interest rate risk of AEGON USA. It is estimated that an immediate increase of 1% or 2% will have a negative effect on earnings mainly as a result of a sudden rise in lapse rates on fixed annuities. A sudden decrease of 1% or 2% will cause an overall positive effect as a result of lower lapse rates but is partially offset by a compression of spreads. It is estimated that a gradual increase of interest rates would have a substantially more benign effect on earnings.
The sensitivities have a similar impact on shareholders’ equity. Accordingly, during periods of sustained low interest rates, net income may decline as a result of a decrease in the spread between either the interest rates credited to policyholders or the rates assumed in reserves and returns on the investment portfolios.
CREDIT RISK
As premiums and deposits are received, these funds are invested to pay for future policyholder obligations. For most products (typically general account products), AEGON bears the risk for investment performance – return of principal and interest. AEGON is exposed to credit risk on its general account fixed income portfolio (bonds, mortgages and private placements), over-the-counter derivatives and reinsurance contracts. Some issuers have defaulted on their financial obligations for various reasons, including bankruptcy, lack of liquidity, downturns in the economy, downturns in real estate values, operational failure and fraud. In the past, poor economic and investment climates in AEGON’s major markets resulted in significant investment impairments on AEGON’s investment assets due to defaults and overall declines in the securities markets. Although credit default rates declined in 2003, excessive defaults, or other reductions in the value of these securities and loans, could have a material adverse effect on AEGON’s business, results of operations and financial condition.
The company actively manages its credit risk exposure by individual counterparty, sector and asset class. AEGON also employs deterministic and stochastic credit risk modeling in order to assess AEGON’s credit risk profile and associated earnings and capital implications due to various credit loss scenarios.
The general account fixed income portfolios of AEGON’s major country units are presented in table 6 by rating category. The fixed income portfolio of AEGON The Netherlands is of high average credit quality. More than 80% of the portfolio is invested in treasuries and AAA/AA-rated securities while of the remainder (excluding mortgages) around 6% is BBB-rated and less than 1% is below investment grade or not rated. With respect to the portion of AEGON The Netherlands’ fixed income portfolio composed of residential mortgages, the actual default experience is low, at an annual rate of approximately 0.02%.
Table 5
SENSITIVITY ANALYSIS OF NET INCOME TO INTEREST RATES 1,2
|
|
| Parallel movement of yield curve |
Approximate effects on net income |
| Shift up 100 basis points |
EUR (35) million |
| Shift up 200 basis points |
EUR (125) million |
| Shift down 100 basis points |
EUR 45 million |
| Shift down 200 basis points |
EUR 35 million |
| Shift down 100 basis points of long-term fixed income DPAC assumptions |
EUR (25) million |
| 1 |
Basic assumptions: no correlation between markets and risks; unchanged conditions for all other assets and liabilities; limited management actions taken; changes are relative to net income. Effects do not tend to be linear and therefore cannot be extrapolated for larger increases or decreases. |
| 2 |
The effect of interest rate movements is reflected as the effect of a one-time parallel shift up or down of all relevant yield curves on January 1, 2004. |
Table 6
GENERAL ACCOUNT FIXED INCOME
(in millions)
|
|
|
|
|
|
| Rating category |
AEGON
AMERICAS
(in USD) |
AEGON
THE NETHERLANDS
(in EUR) |
AEGON
UK
(in GBP) |
OTHER
COUNTRIES
(in EUR) |
TOTAL
(in EUR) |
| Treasuries/agencies |
6,387 |
5,067 |
224 |
1,080 |
11,522 |
| High quality (AAA) |
16,128 |
566 |
209 |
104 |
13,737 |
| High quality (AA) |
7,837 |
319 |
183 |
247 |
7,031 |
| Investment grade (A) |
30,061 |
867 |
596 |
357 |
25,871 |
| Investment grade (BBB) |
29,106 |
472 |
103 |
7 |
23,670 |
| High yield (BB and lower) |
7,421 |
62 |
0 |
2 |
5,940 |
| Mortgages |
14,036 |
4,675 |
0 |
7 |
15,795 |
| Other |
2,420 |
302 |
1 |
42 |
2,261 |
| Total investments fixed income |
113,396 |
12,330 |
1,316 |
1,846 |
105,827 |
Country units apply specific guidelines for the acceptable level of credit risk and provide for default losses. AEGON monitors its aggregate exposure to credit counterparties at group level. For this purpose, AEGON aggregates exposures from its country units to assess overall credit risk. To manage its credit risk, AEGON has a single credit counterparty limit policy that is applied to all forms of credit risk. Each form of credit exposure will be factored depending on the form of credit risk in order to arrive at a risk-weighted credit exposure. These risk-weighted credit exposures must be within AEGON’s risk-weighted credit exposure limits, which are shown in the table below.
Table 7
AEGON GROUP-WIDE WEIGHTED COUNTERPARTY EXPOSURE LIMIT 1
(in EUR millions)
|
|
| |
LIMIT |
| AAA |
800 |
| AA |
800 |
| A |
600 |
| BBB |
400 |
| BB |
175 |
| B |
100 |
| CCC |
35 |
| 1 |
The fixed income issuer rating is used when applying the risk-weighted credit counterparty limit exposure policy. |
If an exposure exceeds the stated limit as a result of a downgrade, the exposure must be readjusted as soon as practical to the limit for that rating category. The limits vary with the asset quality of the security. In all cases, exceptions to these limits can only be made after explicit approval in advance from AEGON senior management.
AEGON establishes provisions for credit risk in the ordinary course of business. AEGON added EUR 431 million to its default provisions during 2003, while EUR 464 million was charged for defaults. Other movements, mainly due to currency fluctuations, had a negative impact of EUR 43 million on the provision, leaving a balance at year-end of EUR 260 million (2002: EUR 336 million).
EQUITY MARKET RISK
Fluctuations in the equity and real estate markets
have adversely affected and may continue to adversely affect AEGON’s
profitability, capital position and sales of equity related products.
Exposure to equity markets exists in both assets and liabilities.
Asset exposure exists through direct equity investments, where AEGON
bears all or most of the volatility in returns and investment performance
risk. Significant terrorist actions, as well as general economic conditions,
have led to and may continue to result in significant decreases in
the value of AEGON’s equity investments. Liability exposure is present
in equity-linked products whereby policyholder funds are invested
in equities at the discretion of the policyholder, where most of the
risk remains with the policyholder. Examples of these products include
variable annuities, variable universal life products, unit-linked
products and mutual funds. AEGON typically earns a fee on the asset
balance in these products and therefore has a risk related to the
investment performance. In addition, some of this business has minimum
return or accumulation guarantees, which are often life contingent
or contingent upon policyholder persistency.
AEGON is at risk if equity market returns do not exceed these guarantee
levels and may need to set up additional reserves to fund these future
guaranteed benefits. AEGON is also at risk if returns are not sufficient
to allow amortization of deferred policyholder acquisition costs.
It is possible under certain circumstances that AEGON would need to
accelerate amortization of DPAC and to establish additional provisions
for minimum guaranteed benefits, which would reduce net income and
shareholders’ equity. Volatile or poor market conditions may also
significantly reduce the popularity of some of AEGON’s savings and
investment products, which could lead to lower sales and net income.
Table 8
EQUITY RELATED EXPOSURE IN GENERAL ACCOUNT ASSETS
(in millions)
|
|
|
|
|
|
| |
AEGON
AMERICAS
(in USD) |
AEGON
THE
NETHERLANDS
(in EUR) |
AEGON
UK
(in GBP) |
OTHER
COUNTRIES
(in EUR) |
TOTAL
(in EUR) |
ASSETS
Equity securities |
3,107 |
3,891 |
76 |
81 |
6,540 |
| Real estate |
724 |
1,611 |
0 |
60 |
2,244 |
| TOTAL |
3,831 |
5,502 |
76 |
141 |
8,784 |
AEGON’s general account equity holdings are
shown in table 8 above.
The general account equity and real estate portfolios of AEGON USA and AEGON The Netherlands accounted for 97% of the general account equity and real estate portfolio of the AEGON Group of EUR 8,784 million at December 31, 2003. Of AEGON’s country units, AEGON The Netherlands holds the largest amount of investments classified as equities, both in absolute terms and expressed as a percentage of total general account investments. The largest part of the equity portfolio of AEGON The Netherlands consists of a diversified portfolio of global equities and 5% equity holdings in Dutch companies, which include non-redeemable preferred shares.
The table below sets forth the year-end closing levels of certain major equity market indices.
Table 9
|
|
|
|
|
|
| Year-end |
1999 |
2000 |
2001 |
2002 |
2003 |
| S&P 500 |
1,469 |
1,320 |
1,148 |
880 |
1,112 |
| Nasdaq |
4,069 |
2,471 |
1,950 |
1,336 |
2,003 |
| FTSE 100 |
6,930 |
6,222 |
5,217 |
3,940 |
4,477 |
| AEX |
671 |
638 |
507 |
323 |
338 |
AEGON’s shareholders’ equity is directly exposed to movements in the equity markets. Beginning in 2004, AEGON will discontinue the indirect income method and instead recognize in income realized gains and losses on equities and real estate, which may lead to increased sensitivity of net income to movements in equity markets. In addition, net income is sensitive to the fees earned on equity investments held for account of policyholders as well as the amortization of deferred policy acquisition costs and provisioning for minimum product guarantees.
Sensitivity analysis of net income and shareholders’ equity to equity and real estate markets is presented in table 10.
The sensitivity of shareholders’ equity and net income to changes in equity and real estate markets reflects changes in the market value of AEGON’s portfolio, changes in DPAC amortization, contributions to pension plans for AEGON employees, no effect from realized gains or losses and the strengthening of the guaranteed minimum benefits, when applicable. The main reason for the non-linearity of results is that more severe scenarios can cause accelerated DPAC amortization and guaranteed minimum benefits provisioning, while moderate scenarios may not.
DERIVATIVES RISK
AEGON is exposed to currency fluctuations, changes in the fair value of its investments, the impact of interest rate and credit spread changes and changes in mortality and longevity. AEGON uses common financial derivative instruments such as interest rate swaps, options, futures and forward contracts to hedge some of the exposures related to both investments backing insurance products and company borrowings. AEGON may not be able to manage the risks associated with this activity successfully through the use of derivatives. In addition, a counterparty may fail to honor the terms of its derivatives contracts. Both scenarios could have a material adverse effect on AEGON’s business, results of operations and financial condition. The notional amount of AEGON’s derivative use can be found on page 104 and following.
Generally, derivatives are used for hedging purposes, however, credit default swaps are used for purposes of selectively increasing credit exposures. Credit default swaps are used in combination with high quality low risk assets to synthetically replicate corporate credit exposures in constructing investment portfolios. Credit default swaps are also sold on a limited basis to generate fee income. Derivative use is managed by requiring a written hedge or derivative program policy. All traded derivatives must be under one of these policies. The financial implications of derivatives are modeled along with all other financial instruments – whether interest rate, credit or equity risk modeling.
Table 10
SENSITIVITY ANALYSIS OF NET INCOME AND SHAREHOLDERS’ EQUITY TO EQUITY AND REAL ESTATE MARKETS1,2
|
|
|
| Movement of markets |
Approximate effects on
net income |
Approximate effects on
shareholders’ equity |
| Increase of equity and real estate markets of 10% |
EUR 70 million |
EUR 455 million |
| Decrease of equity and real estate markets of 10% |
EUR (55) million |
EUR (470) million |
| Decrease of equity and real estate markets of 20% |
EUR (270) million |
EUR (965) million |
| Shift down 100 basis points of long-term equity DPAC assumptions |
EUR (65) million |
|
| 1 |
Basic assumptions: no correlation between markets and risks; unchanged conditions for all other assets and liabilities; limited management actions taken. All changes are relative to net income and shareholders’ equity. Effects do not tend to be linear and therefore cannot be extrapolated for larger increases or decreases. The approximate effects on shareholders’ equity excludes the effects on net income, which is presented above separately. |
| 2 |
The effect of movements in equity and real estate markets is reflected as a one-time increase or decrease of worldwide equity and real estate markets on January 1, 2004. |
LIQUIDITY RISK
Liquidity risk is inherent in much of AEGON’s business. Each asset purchased and liability sold has liquidity characteristics that are unique. Some liabilities are surrenderable, while some assets have low liquidity such as privately placed loans, mortgages loans, real estate, and limited partnership interests. If AEGON requires significant amounts of cash on short notice in excess of normal cash requirements, AEGON may have difficulty selling these investments at attractive prices, in a timely manner, or both.
AEGON closely monitors and manages its liquidity position. AEGON employs a ‘source and use’ liquidity modeling technique that measures the degree of excess liquidity at various time frames over worsening catastrophic scenarios. Liability liquidity or cash needs are estimated over these catastrophic or ‘run on the bank’ scenarios throughout AEGON.
Cash generation is then estimated over these same scenarios with the stipulation that a close to fair price is received on asset sales (that is, AEGON can not flood the market). The objective is for AEGON’s cash sources to exceed cash needs over all scenarios and time frames. Asset portfolios are constructed so that each country unit is self-supporting from a liquidity perspective. Future premiums, surplus assets, back-up liquidity lines and other contingent cash sources and management action are not utilized in the liquidity testing. This analysis is completed at each business unit, country unit and group level.
UNDERWRITING RISK
AEGON’s earnings depend significantly upon the extent to which actual claims experience is consistent with the assumptions AEGON uses in setting the prices for products and establishing the technical provisions and liabilities for claims. To the extent that actual claims experience is less favorable than the underlying assumptions used in establishing such liabilities, net income would be reduced. Furthermore, if these higher claims were part of a trend, AEGON may be required to increase liabilities and this would further reduce net income. In addition, certain acquisition costs related to the sale of new policies and the purchase of policies already in force have been recorded on the balance sheet and are being amortized into income over time. If the assumptions relating to the future profitability of these policies (such as future claims, investment income and expenses) are not realized, the amortization of these costs could be accelerated and may even require write-offs due to unrecoverability. This could have a material adverse effect on AEGON’s business, results of operations and financial condition.
Underwriting risk is first managed through the product pricing process where margins for adverse deviation and profit on expected claims are priced in. AEGON monitors claim trends and its own experience relative to expectations through experience studies. In addition, claims risk is diversified and managed through exclusions, exposure limits, such as through retention and cover limits through reinsurance. Of AEGON’s business containing mortality risk, AEGON has a significantly greater proportion of business in those products paying death benefits (life insurance) versus those making payment contingent on survivorship (life annuities). Therefore worsening mortality trends are a greater risk for AEGON compared to mortality improvement trends.
OTHER RISKS
RATINGS
Claims paying ability and financial strength ratings are factors in establishing the competitive position of insurers. A rating downgrade (or the potential for such a downgrade) could, among other things, materially increase the number of policy surrenders and withdrawals by policyholders, adversely affecting relationships with broker-dealers, banks, agents, wholesalers and other distributors of AEGON’s products and services. In addition, a downgrade may negatively impact new sales and adversely affect AEGON’s ability to compete and thereby have a material adverse effect on AEGON’s business, results of operations and financial condition.
The current financial strength ratings for AEGON USA’s insurance companies are AA (very strong) with Standard & Poor’s and Aa3 (excellent) with Moody’s. Both agencies have a stable outlook on the ratings of AEGON USA companies. Negative changes in credit ratings may increase AEGON’s cost of funding. On April 8, 2003, Standard and Poor’s lowered its counterparty credit rating on AEGON’s senior debt from AA– to A+, with a stable outlook. During 2003, Moody’s maintained its rating on AEGON’s senior unsecured debt at A2 with a negative outlook.
GOVERNMENT REGULATION
AEGON’s insurance business is subject to comprehensive regulation and supervision in all countries in which AEGON operates. The primary purpose of such regulation is to protect policyholders, not holders of AEGON’s securities. Changes in existing insurance laws and regulations may affect the way in which AEGON conducts its business and the products AEGON may offer. For example, AEGON expects sales in the United States to be affected by the new amendments to the Federal Trade Commission Telemarketing Sales Rule, as approximately 17% of AEGON USA new health insurance sales in 2002 were generated by telemarketing in the United States. The amendments to the rule, the majority of which went into effect on March 31, 2003, prevent telemarketers from targeting potential customers who have elected to be included in a national ’do not call’ list. Moreover, some states also have statewide ’do not call’ lists. In addition, changes in pension and employee benefit regulation, social security regulation, financial services regulation, taxation and the regulation of securities products and transactions, may also adversely affect AEGON’s ability to sell new policies or its claims exposure on existing policies. Additionally, the insurance laws or regulations adopted or amended from time to time may be more restrictive or may result in higher costs than current requirements.
AEGON’s ability to make payments on debt obligations and pay certain operating expenses may depend upon the receipt of dividends from subsidiaries. Certain of these subsidiaries have regulatory restrictions, which can limit the payment of dividends.
Insurance products enjoy certain tax advantages, particularly in the United States and the Netherlands, which permit the tax-deferred accumulation of earnings on the premiums paid by the holders of annuities and life insurance products under certain conditions and within limits. Taxes, if any, are payable on accumulated tax-deferred earnings when earnings are actually paid. The United States Congress has, from time to time, considered possible legislation that would eliminate the deferral of taxation on the accretion of value within certain annuities and life insurance products. In addition, the US Congress passed legislation in 2001 that provided for reductions in the estate tax and the possibility of permanent repeal of the estate tax continues to be discussed, which could have an impact on insurance products and sales in the United States. Recent changes in tax laws in the Netherlands have reduced the attractiveness of certain of AEGON’s individual life products. The current administration in the Netherlands has indicated that it is contemplating further changes in law that would eliminate the tax advantages of certain of AEGON’s products, including group savings products. Any changes in United States or Dutch tax law affecting products could have a material adverse effect on AEGON's business, results of operations and financial condition.
LITIGATION
AEGON faces significant risks of litigation and regulatory investigations and actions in connection with AEGON’s activities as an insurer, securities issuer, employer, investment advisor, investor and taxpayer. Lawsuits, including class actions and regulatory actions, may be difficult to assess or quantify, may seek recovery of very large and/or indeterminate amounts, including punitive and treble damages, and their existence and magnitude may remain unknown for substantial periods of time. A substantial legal liability or a significant regulatory action could have a material adverse effect on AEGON’s business, results of operations and financial condition.
CHANGES IN ACCOUNTING PRINCIPLES
AEGON’s financial statements are prepared and presented in accordance with Dutch accounting principles. Any change in these accounting principles, such as the discontinuation of the indirect income method as of January 1, 2004, and the conversion to IFRS in 2005, may have a material impact on AEGON’s reported results, financial condition and shareholders’ equity.
The Hague, March 11, 2004
The Executive Board
|
