Best Affirms Aegon’s U.S. and Canadian Subs Ratings; Outlook Stable

April 10, 2013

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

Best has also affirmed the debt ratings of “aa-” on 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, as well as the FSR of ‘A’ (Excellent) and ICR of “a” of Stonebridge Casualty Insurance Company, the property/casualty member of Aegon USA.

In addition Best has affirmed the FSR of ‘A-‘ (Excellent) and ICR of “a-” of Transamerica Life Canada (TLC), based in Toronto, Ontario, a wholly owned subsidiary of Aegon and the FSR of ‘A’ (Excellent) and ICR of “a” of Canadian Premier Life Insurance Company (CPL), a subsidiary of TLC. The outlook for all ratings is stable.

The rating affirmations of Aegon USA reflect its “favorable earnings performance and risk-adjusted capitalization during 2012,” Best explained. “International Financial Reporting Standards (IFRS) earnings for Aegon Americas (which includes its U.S., Canadian and Latin American operations) were $1.3 billion for year-end 2012.

“Aegon USA recorded U.S. statutory net income of $1.8 billion for year-end 2012. The group’s risk-adjusted capitalization remained strong as its year-end 2012 regulatory capital ratio improved slightly over the previous year and is significantly higher than historical levels.”

Best also pointed out that “Aegon USA’s stand-alone credit profile considers its strong market position in a number of U.S. life and annuity market segments, a large multi-channel distribution platform, its diversified sources of earnings and a strong positive cash flow.

“The organization also benefits from meaningful economies of scale, strong brand name recognition and effective asset/liability and liquidity management. Aegon USA’s ratings also recognize Best’s assessment of the financial strength and support of 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.”

Best’s report also noted that Aegon USA “has taken various initiatives to de-risk its balance sheet and improve its risk profile. The quality of its investment portfolio has been 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) remains in 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.

“Furthermore, the group has executed several fixed annuity coinsurance transactions, which has released capital and has reduced its spread-based liabilities. Aegon USA also has reduced its exposure to equity market risk by increasing the size of the macro hedge covering its variable annuity business.”

However, Best also said that, despite Aegon USA’s improved risk profile, there exists a “possibility of additional material credit losses within its general account investment portfolio. Although IFRS asset impairments have continued to decline over recent years, with $151 million reported in 2012 versus $349 million in 2011, additional realized losses and impairments are likely to occur in 2013, given Aegon USA’s sizable structured asset portfolio and exposure to direct commercial real estate.

“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. While the additional equity hedging will serve to reduce volatility, Aegon USA’s earnings remain somewhat correlated to capital market performance.”

Best said the ratings of TLC “recognize the enhanced scope of its overall business profile through market positions maintained in its core business lines, its multi-channel distribution platform, reduced risk profile, profitable operations and adequate capitalization. Moreover, the ratings consider the financial flexibility TLC enjoys as an indirect subsidiary of Aegon as evidenced by the significant historical financial support afforded it over the last several years.”

Best added that it “views positively TLC’s enhanced risk management practices, including more comprehensive hedging strategies, its decision to exit portions of its segregated funds product offerings for new business and a return to profitability in 2012. As a result, the stand-alone ratings of TLC and CPL receive rating enhancement in consideration of Aegon’s overall creditworthiness and the strategic and financial importance of the Canadian life operations to Aegon.”

The rating actions on Stonebridge Casualty acknowledge its “sustained profitability, its role and strategic importance as a member of Aegon USA, the explicit reinsurance support provided by Stonebridge Life Insurance Company (Rutland, VT), as well as the benefits of receiving implied support (if necessary) in the future,” Best explained.

“In addition, the ratings recognize Stonebridge Casualty’s excellent capitalization, the synergies it gains from affiliates in the United States as well as management’s knowledge, specialty niche expertise and established market position in the travel insurance market. The outlook reflects the continuation of operating profitability, expected revenue and profits to be gained from newly established business partnerships as well as a commitment to maintain a level of capitalization that is supportive of its ratings.”

In conclusion Best said it “believes Aegon USA, TLC and CPL are well positioned at their current rating levels for the foreseeable future.

“Factors that could result in negative rating actions for these entities include a significant and sustained decline in their consolidated risk-adjusted capitalization as measured by Best’s Capital Adequacy Ratio (BCAR) model, net operating performances that do not meet Best’s expectations or a decline in the creditworthiness of Aegon, which could constrain its future financial support for these entities.”

Best summarized the companies affected by the rating actions as follows:
The FSR of ‘A+’ (Superior) and ICRs of “aa-” have been affirmed for the following members 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 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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