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OTHER RISKS Products AEGON may face claims from customers and adverse negative publicity if its products result in losses or fail to result in expected gains, regardless of the suitability of products for customers or the adequacy of the disclosure provided to customers by AEGON or its intermediaries. New products that are less well understood and that have less of a historical performance track record are more likely to be the subject of such claims. Any such claims could have a materially adverse effect on AEGON’s results of operations, corporate reputation and financial condition. Tax changes 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 certain limits. Taxes on this ’inside build-up’ of earnings may not be payable at all and, if payable generally are due only when earnings are actually paid. The US 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. The possibility of a permanent repeal of the estate tax continues to be discussed. This could have an impact on insurance products and sales in the United States. Changes to tax laws in the Netherlands at the end of 2005, meanwhile, have reduced the attractiveness of early retirement plans but tax advantages have been granted from January 1, 2006 for savings products known as Levensloop (Life Cycle). Any changes in United States or Dutch tax law affecting similar products could have a materially adverse effect on AEGON’s business, results of operations and financial condition. General economic conditions AEGON’s results of operations and financial condition may be materially affected from time to time by general economic conditions, such as levels of employment, consumer lending or inflation in the countries in which AEGON operates. Ratings A downgrade in AEGON’s ratings may increase policy surrenders and withdrawals, adversely affect relationships with distributors and negatively affect the Group’s results. 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) of AEGON or any of its rated insurance subsidiaries may, among other things, materially increase the number of policy surrenders and withdrawals by policyholders of cash values from their policies. The outcome of this may be cash payments requiring the sale of invested assets, including illiquid assets, at a price that may result in realized investment losses. Such cash payments to policyholders would result in a decrease in total invested assets as well as a decrease in net income. Among other things, early withdrawals may also cause AEGON to accelerate amortization of policy acquisition costs, reducing net income. In addition, a downgrade may adversely affect relationships with broker-dealers, banks, agents, wholesalers and other distributors of AEGON’s products and services. This may negatively impact new sales and adversely affect the Group’s ability to compete. This would have a materially adverse effect on AEGON’s business, results of operations and financial condition. The current Fitch, Moody’s and Standard & Poor’s (S&P) insurance financial strength ratings and ratings outlook of the Group’s primary life insurance companies in AEGON’s major country units are shown in the following table.
Negative changes in credit ratings may also increase AEGON’s cost of funding. During 2007, S&P maintained the credit ratings of AEGON N.V. at A+ with a stable outlook. Moody’s Investor Service maintained the senior debt rating of AEGON N.V. at A2, with a stable outlook. Fitch Ratings maintained its AA- ratings for AEGON N.V.’s senior debt. On June 22, 2007, Moody’s Investors Service withdrew the A1 insurance financial strength rating (stable outlook) of AEGON Scottish Equitable for business reasons. Information technology While systems and processes are designed to support complex transactions and to avoid systems failure, fraud, information security failures, processing errors and breaches of regulation, any failure could lead to a materially adverse effect on AEGON’s results of operations and corporate reputation. In addition, AEGON must commit significant resources to maintaining and enhancing the Group’s existing systems in order to keep pace with industry standards and customer preferences. If AEGON fails to keep up-to-date information systems, it may not be able to rely on accurate information for product pricing, risk management and underwriting decisions. Catastrophic events AEGON’s operating results and financial position may be adversely affected by volatile natural and man-made disasters such as hurricanes, windstorms, earthquakes, terrorism, riots, fires and explosions. Over the past several years, changing weather patterns and climatic conditions have added to the unpredictability and frequency of natural disasters in certain parts of the world and created additional uncertainty as to future trends and exposure. Generally, AEGON seeks to reduce its exposure to these events through individual risk selection, monitoring risk accumulation and purchasing reinsurance. However, such events could lead to considerable financial loss to AEGON’s business. Furthermore, natural disasters, terrorism and fires could disrupt AEGON’s operations and result in significant loss of property, key personnel and information about clients and about itself. If AEGON’s business continuity plans have not included effective contingencies for such events they could adversely affect AEGON’s business, results of operations, corporate reputation and financial condition for a substantial period of time. Government regulations AEGON is subject to comprehensive regulation and supervision in all countries in which the Group operates. The primary purpose of such regulation is to protect policyholders, not holders of securities. Changes in existing insurance laws and regulations may affect the way in which AEGON conducts business and the products it offers. Changes in pension and employee benefit regulation, social security regulation, financial services regulation, taxation and the regulation of securities products and transactions may adversely affect AEGON’s ability to sell new policies or 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. The US Sarbanes Oxley Act of 2002 (SOX) and rules subsequently implemented by the Security Exchange Commission and the New York Stock Exchange, require changes to some of AEGON’s reporting and corporate governance practices, including the requirement that AEGON issue a report on internal controls over financial reporting, beginning for the year ending December 31, 2006 onwards. If AEGON is unable to maintain or achieve compliance with SOX, there may be a materially adverse impact on AEGON’s business. Litigation AEGON faces significant risks of litigation and regulatory investigations and actions in connection with activities as an insurer, securities issuer, employer, investment advisor, investor and taxpayer. In recent years, the insurance industry has increasingly been the subject of litigation, investigation and regulatory activity by various governmental and enforcement authorities concerning common industry practices such as the disclosure of contingent commissions and the accounting treatment of finite reinsurance or other non-traditional insurance products. AEGON cannot predict at this time the effect this current trend towards litigation and investigation will have on the insurance industry or its business. Lawsuits, including class actions and regulatory actions, may be difficult to assess or quantify and may seek recovery of very large and/or indeterminate amounts, including punitive and treble damages. The existence of such lawsuits and magnitude may remain unknown for substantial periods of time. A substantial legal liability or a significant regulatory action could have a materially adverse effect on AEGON’s business, results of operations and financial condition. Default of a major market participant The failure of a major market participant could disrupt securities markets or clearance and settlement systems in AEGON’s markets, which could, in turn, cause market declines or volatility. Such a failure could lead to a chain of defaults that could adversely affect the Group. In addition, such a failure could impact future product sales as a potential result of reduced confidence in the insurance industry. Judgements of courts in the United States The United States and the Netherlands do not currently have a treaty providing for the reciprocal recognition and enforcement of judgements (other than arbitration awards) in civil and commercial matters. Judgements of US courts, including those predicated on the civil liability provisions of the federal securities laws of the United States, may not be enforceable in Dutch courts. Therefore, AEGON’s shareholders who obtain a judgement against AEGON in the United States may not be able to require the company to pay the amount of the judgement unless a competent court in the Netherlands gives binding effect to the judgement. It may, however, be possible for a US investor to bring an original action in a Dutch court to enforce liabilities against AEGON, its affiliates, directors, officers or any expert named therein who reside outside the United States, based upon the US federal securities laws. |
