Best Affirms AEGON USA Group’s Ratings

April 28, 2011

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A+’ (Superior) and issuer credit ratings (ICR) of “aa-” of the life/health subsidiaries of Netherlands-based AEGON N.V.’s U.S. operations. AEGON’s U.S. life/health companies are collectively referred to as AEGON USA Group

Best also affirmed the debt ratings of “aa-” of the outstanding notes issued under the funding agreement-backed securities (FABS) programs sponsored by Monumental Life Insurance Company of Cedar Rapids, Iowa, a member of AEGON USA. The outlook for all ratings is stable.

The affirmation of AEGON USA’s ratings reflects its “favorable earnings performance and risk-adjusted capitalization during 2010,” said Best. “For year-end 2010, AEGON USA recorded U.S. statutory net income of $918 million compared to $865 million for year-end 2009. International Financial Reporting Standards (IFRS) earnings for AEGON Americas (which includes the United States, Canada and Latin America operations) were $1.5 billion for year-end 2010 compared to $697 million for year-end 2009.”

Best added that in the future it “expects IFRS earnings to be more consistent with 2009 results due to lower realized gains and fewer tax-related benefits. The group’s risk-adjusted capitalization remained strong as its year-end 2010 regulatory capital ratio improved slightly over the previous year and is significantly higher than historical levels.

“AEGON USA’s stand-alone credit profile considers the group’s strong market position in a number of U.S. life and annuity market segments, a large multi-channel distribution platform, diversified sources of earnings and a strong positive cash flow.

“The group also benefits from meaningful economies of scale, strong brand recognition and effective asset/liability and liquidity management. AEGON USA’s ratings also recognize Best’s assessment of the financial strength and support of the parent, AEGON. As a result, the stand-alone ratings of AEGON USA receive rating enhancement in consideration of AEGON’s overall creditworthiness and the strategic and financial importance of the U.S. operations to AEGON.”

In addition Best pointed out that the group has “taken various initiatives to de-risk its balance sheet and improve its risk profile. The quality of the investment portfolio was upgraded by reducing hedge fund holdings and increasing positions in treasuries and other short-term investments. The institutional spread-based business (primarily guaranteed interest contracts, funding agreements and funding agreement-backed securities) was placed into run off to reduce exposure to credit risk, lower required capital and shift to a more balanced mix of business between spread and fee-based products. The group also reduced its exposure to equity market risk by increasing the size of its macro hedge covering its variable annuity business.”

However, Best also noted that in spite of this improved risk profile, there is a “possibility of additional material credit losses within the group’s general account investment portfolio. Pre-tax IFRS asset impairments totaled $506 million in 2010, and additional realized losses and impairments are likely to occur in 2011, given AEGON USA’s sizable structured asset portfolio and exposure to direct commercial real estate.

“While the run rate on credit impairments has declined significantly since 2009, AEGON USA continued to report a material gross unrealized loss position within its fixed income portfolio on an IFRS basis as of December 31, 2010. In addition, the group’s substantial variable annuity portfolio exposes its earnings to volatility, as declines in the capital markets would translate to lower fee income and higher required reserves on secondary guarantees. Although the additional equity hedging will serve to reduce volatility, the group’s earnings remain somewhat correlated to capital market performance.”

Concerning AEGON’s deal with SCOR SE to divest its life reinsurance business, Transamerica Reinsurance, Best noted that the removal of the Transamerica Re’s earnings would “result in a contraction of AEGON USA’s operating profile. Best said, however, that it views the divesture positively as it lowers required capital, reduces the need to arrange redundant reserve (XXX/AXXX) financing and allows senior management to focus on the group’s core businesses of life insurance and asset accumulation.”

Best summarized the entities affected by the ratings announcement as follows:
The FSR of A+ (Superior) and ICRs of “aa-” have been affirmed for the following subsidiaries of AEGON USA Group:
* Transamerica Life Insurance Company
* Transamerica Financial Life Insurance Company
* Western Reserve Life Assurance Co. of Ohio
* Monumental Life Insurance Company
* Stonebridge Life Insurance Company
* Transamerica Advisors Life Insurance Company
* Transamerica Advisors Life Insurance Company of New York

The FSR of A (Excellent) and ICR of “a” has been affirmed for Canadian Premier Life Insurance Company, a subsidiary of AEGON N.V.

The following debt ratings have been affirmed:
Monumental Global Funding Limited—”aa-” program rating
— “aa-” on all outstanding notes issued under the program
Monumental Global Funding II—”aa-” program rating
— “aa-” on all outstanding notes issued under the program
Monumental Global Funding III—”aa-” program rating
— “aa-” on all outstanding notes issued under the program

Source: A.M. Best

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