REVIEW OF OPERATIONS INCOME BEFORE TAX  in USD million 0 500 1,000 1,500 2,000 2,500 Life Accident & health General 01 02 03 INCOME BEFORE TAX  LIFE INSURANCE  in USD million 2,000 1,600 1,200 800 400 0 -400 -800 Traditional Fixed annuities GICs & funding  agreements Account policyholders Variable annuities Fee business Book profit Mexico 01 02 03 from the improved credit environment and partially offset the earnings decline. GICs and funding agreements account balances increased 5% to USD 27 billion and reflect higher sales of international funding agreements. Life for account of policyholders income before tax decreased 23% to USD 82 million. Higher lapses and slightly higher mortality resulted in accelerated DPAC amortization. Income before tax in AEGON’s variable annuity line of business increased from a loss of USD 437 million in 2002 to a positive amount of USD 71 million in 2003 and account balances increased 30% to USD 42 billion since December 31, 2002.  The 2002 variable annuity results were negatively impacted by USD 602 million of accelerated DPAC amortization and strengthening of the GMB provision that occurred as a result of the continued decline in the equity markets. The improvement in 2003 was slightly offset by accelerated DPAC amortization, due to higher lapses (USD 35 million). AEGON maintained its long-term equity growth assumptions at 9% in the United States and 9.5% in Canada. Due to strong equity market growth during 2003, the short-term equity return assumptions, used in the reversion to the mean methodology, were lowered. In the United States, forward-looking equity return assumption from December 31, 2003, is 7.5% (before fees) for five years followed by 9% for the long term and is related to account balances of USD 30.6 billion. In Canada, the comparable assumption is 10.75% for five years, followed by 9.5% for the long term, which reflects the relatively weak recent performance of the Canadian segregated fund returns compared to average US-based returns. The comparable 2002 assumptions for the United States were 12% for five years and 9% for the long term and for Canada 12.5% for five years and 9.5% for the long term. Account balances in Canada are USD 2.9 billion. These assumptions were used in determining reserves for guaranteed benefits on variable annuities in addition to DPAC amortization for both variable annuity and life for account of policyholders product lines. Fee business reported a loss before tax of USD 19 million compared to an income of USD 5 million in 2002. The loss was a result of higher expenses, due to increased vesting in a long- term formula-based deferred compensation plan, which reflects growth in assets under management. Strong synthetic GIC and mutual fund sales, along with favorable equity market performance had a positive earnings impact. Revenues of USD 16,792 million increased 2% compared to 2002. Life insurance gross premiums of USD 6,964 million increased 2%, accident and health insurance premiums of  USD 2,508 million increased 2%, investment income of  USD 6,354 million slightly increased compared to last year, while fees and commissions of USD 966 million increased 16%. Life general account single premiums of USD 916 million decreased 3% in 2003, reflecting the negative effect of discontinuing new sales of structured settlement products in July 2003, offset by strong growth in remaining general account sales. The growth in remaining general account sales resulted primarily from higher production in the agency and bank channels. Life for account of policyholders single premiums of  USD 522 million were down 34%, primarily due to the low sales of bank-owned life insurance (BOLI) and corporate-owned life insurance (COLI) business in 2003. These sales usually occur in larger amounts and contract sales are not as regular as other life products. In the continuing current low interest rate environment product pricing has been under pressure, which contributed to the declining sales. Life for account of policyholders recurring premiums of USD 779 million were up 23%, largely driven by renewal premiums of BOLI/COLI cases and also higher fees due to increases in account balances. Net income of USD 1,239 million increased 35% compared to 2002. The effective tax rate increased from 20% in 2002 to 29% in 2003. The 2003 tax rate, though higher than 2002, reflected the release of the USD 85 million valuation allowance for loss carryforwards, partially offset by the establishment of an additional provision. In 2002, the tax expense reflected a reduction of the deferred tax liability of USD 219 million for a change in estimate as additional information and refinements of prior year deferred tax liability became available during 2002. This was partially offset in 2002 by the establishment of an additional provision of USD 129 million, including a valuation allowance of USD 85 million for loss carryforwards. Accident and health income before tax increased 13% to USD 263 million, primarily due to improved claim experience and more effective expense containment. Rate increases in certain health products improved overall profitability. NET INCOME REVENUES AEGON GROUP ANNUAL REPORT 2003 24