42 Business overview  Results of operations – Americas Aegon USA Reinsurance ceded Aegon Canada computer simulations, which model assets and liabilities under  projected interest rate scenarios and commonly used stress-test  interest rate scenarios. Based on the results of these simulations,  an investment portfolio is constructed to best match the cash  flow and interest sensitivity of the underlying liabilities while  trying to maximize the spread between the yield on the portfolio  assets and the rate credited on the policy liabilities. Interest rate  scenario testing is a continual process and the analysis of the  expected values and variability for four critical risk measures  (capital charges, cash flows, present value of profits, and interest  rate spreads) forms the foundation for modifying investment  strategies, adjusting asset duration and mix, and exploring  hedging opportunities. On the liability side, Aegon USA has some  offsetting risks, whereby some liabilities perform better in rising  interest rate environments while others tend to perform well in  falling interest rate environments. The amount of offset may  vary depending on the absolute level of interest rates and the  magnitude and timing of interest rate changes, but it generally  provides some level of diversification. On the asset side, hedging  instruments are continuously studied to determine whether their  cost is commensurate to the risk reduction they offer. These reinsurance contracts are designed to diversify Aegon  USA’s overall risk and limit the maximum loss on risks that  exceed policy retention levels. The maximum retention limits  vary by product and class of risk, but generally fluctuate between  USD 3,000 and USD 10 million per life insured. Aegon USA remains contingently liable with respect to the  amounts ceded should the reinsurance company not be able to  meet its obligations. To minimize its exposure to such defaults,  Aegon USA regularly monitors the creditworthiness of its  reinsurers, and where appropriate, arranges additional protection  through letters of credit or trust agreements. For certain  agreements, funds are withheld for investment by the ceding  company. Aegon USA has experienced no material reinsurance  recoverability problems in recent years.  Aegon USA reinsures part of its life insurance exposure with  third-party reinsurers under quota share (traditional indemnity)  reinsurance treaties, and excess-of-loss contracts. Aegon USA’s  reinsurance strategy is consistent with typical industry practice. The Aegon USA insurance companies also enter into contracts  with company-affiliated reinsurers, both within the United States  and overseas. These contracts have been excluded from the  company’s consolidated financial statements. In the normal course of business, Transamerica Life  Canada reinsures part of its mortality and morbidity risk with  third-party reinsurers that are registered with Canada’s Office of  the Superintendent of Financial Institutions. The maximum life  insurance exposure retained is CAD 1.25 million per life insured. Aegon USA reinsures part of its life insurance exposure with  third party reinsurers under both quota share (traditional  indemnity) reinsurance treaties, and excess-of-loss contracts.  Aegon USA’s reinsurance strategy is consistent with typical  industry practice.  Ceding reinsurance does not remove Aegon´s liability as the  primary insurer. Aegon could incur losses should reinsurance  companies not be able to meet their obligations. To minimize its  exposure to the risk of such defaults, the creditworthiness of  Aegon’s reinsurers is monitored regularly.  Annual Report 2013