RISK MANAGEMENT AND RISK FACTORS CREDIT RISK Table 4 Table 6 AEGON GROUP ANNUAL REPORT 2003 36 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 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. 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 As premiums and deposits are received, these funds are invested to pay for future policyholder obligations. For most $^{1}$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. 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% 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 GENERAL ACCOUNT FIXED INCOME (in millions) AEGON AEGON AEGON OTHER AMERICAS THE NETHERLANDS UK COUNTRIES TOTAL Rating category (in USD) (in EUR) (in GBP) (in EUR) (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 Table 5 SENSITIVITY ANALYSIS OF NET INCOME TO INTEREST RATES 1,2