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%. 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. $^{1}$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 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 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 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 LIMIT AAA 800 AA 800 A 600 BBB 400 BB 175 B 100 CCC 35 AEGON AEGON AEGON OTHER AMERICAS THE NETHERLANDS UK COUNTRIES TOTAL (in USD) (in EUR) (in GBP) (in EUR) (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 GROUP ANNUAL REPORT 2003 37 Table 7 Table 8 EQUITY RELATED EXPOSURE IN GENERAL ACCOUNT ASSETS (in millions) AEGON GROUP-WIDE WEIGHTED COUNTERPARTY EXPOSURE LIMIT (in EUR millions)