A.M. Best Affirms Ratings of Aegon N.V.’s U.S. Subsidiaries
February 12, 2015 by Best's News Service
Oldwick – A.M. Best has affirmed the financial strength rating (FSR) of A+ (Superior) and the issuer credit ratings (ICR) of “aa-” of the U.S. life/health subsidiaries of Aegon N.V. (Aegon) (Netherlands) [NYSE: AEG]. Aegon’s U.S. life/health companies are collectively referred to as Aegon USA Group (Aegon USA). Concurrently, A.M. Best has affirmed the FSR of A (Excellent) and the ICR of “a” of Transamerica Casualty Insurance Company (Transamerica Casualty) (Columbus, OH), the property/casualty member of Aegon USA. The outlook for all ratings is stable. (See below for a detailed listing of the companies and ratings.)
The rating affirmations of Aegon USA reflect the strong business profile, adequate risk-adjusted capitalization, strong enterprise risk management and an underlying trend of statutory and IFRS profitability. The ratings also reflect A.M. Best’s assessment of the financial strength and support of Aegon, the parent. Partially offsetting these strengths is the increasing focus on sales of variable annuities and universal life insurance with secondary guarantees, products that in A.M. Best’s view have unfavorable risk characteristics from a product creditworthiness standpoint, as well as the equity market sensitivity of its earnings and significant reliance on captive reinsurance.
Aegon USA’s business profile remains strong, with competitive market positions in the U.S. life and annuity arena. The group’s market positions are supported by a large and diversified distribution system. Aegon USA’s earnings profile is one of the more diversified in the industry. Product lines that contribute to overall earnings include traditional life, variable life, variable annuities, mutual funds, pensions and accident and health insurance. Risk-adjusted capitalization, as defined by Best’s Capital Adequacy Ratio (BCAR), is sufficient to support its current business and insurance risks. Additionally, as a result of favorable equity markets and management actions, the risk profile of the company’s legacy blocks of variable annuities with living benefits has improved. A.M. Best also notes that while there has been some volatility of late, Aegon USA continues to maintain an underlying trend of profitability on a statutory and IFRS basis. Lastly, Aegon USA receives rating enhancement in consideration of Aegon’s financial strength, overall creditworthiness and the strategic and financial importance of the U.S. operations to Aegon.
A.M. Best views negatively Aegon USA’s increasing focus on the sales of products that have unfavorable risk characteristics, as well as the equity market sensitivity of its earnings and significant reliance on captive reinsurance. The company has made a strategic shift to focus on selling fee-based products, especially variable annuities, and has de-emphasized spread-based products, especially fixed annuities. In a relatively stable capital market environment, the required capital on variable annuities is generally less than that required for the fixed annuity/spread-based products. However, A.M. Best views variable annuities with living benefit riders as displaying some of the highest risk characteristics, as well as being vulnerable to tail risks, which could lead to an increase in required capital. In addition, the organization’s increasing exposure to variable annuities exposes its earnings to volatility and while the additional equity hedging will serve to reduce volatility, Aegon USA’s earnings remain somewhat correlated to capital market performance. A.M. Best also notes that Aegon has relied heavily on captive reinsurance to finance reserves generated from term life and universal life insurance with secondary guarantees. Financing provided to these captives include, but are not limited to, surplus notes, letters of credit and parental guarantees.
The rating actions on Transamerica Casualty acknowledge its ongoing profitability, its role and strategic importance as a member of Aegon USA, the explicit reinsurance support provided by Transamerica Life Insurance Company (Cedar Rapids, IA) and the benefits of receiving implied support if necessary in the future. In addition, the ratings recognize Transamerica Casualty’s strong capitalization, benefits it gains from relationships with affiliates and management’s knowledge and expertise in the travel insurance market. The outlook reflects the continuation of operating profitability, expected favorable earnings opportunities, established business partnerships, and a commitment to maintain a level of capitalization that is supportive of its ratings. A.M. Best believes Transamerica Casualty is well positioned at its current rating level.
A.M. Best believes that a positive rating action for Aegon USA is unlikely over the near term. Factors that could result in a negative rating action include a significant and sustained decline in consolidated risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), net operating performance that does not meet A.M. Best’s expectations, a decline in the creditworthiness of Aegon, or a change in A.M. Best’s view of the strategic importance of Aegon USA to Aegon.
The FSR of A+ (Superior) and the ICRs of “aa-” have been affirmed for the following members of Aegon USA Group:
• Transamerica Life Insurance Company
• Transamerica Financial Life Insurance Company
• Transamerica Premier Life Insurance Company
• Stonebridge Life Insurance Company
• Transamerica Advisors Life Insurance Company
The FSR of A (Excellent) and the ICR of “a” have been affirmed for Transamerica Casualty Insurance Company.
The following debt ratings have been affirmed and subsequently withdrawn at the company’s request:
Monumental Global Funding Limited—”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
The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.
Key insurance criteria reports utilized:
• A.M. Best’s Liquidity Model for U.S. Life Insurers
• Risk Management and the Rating Process for Insurance Companies
• Understanding BCAR for U.S. and Canadian Life/Health Insurers
• Evaluating U.S. Surplus Notes
• Rating Members of Insurance Groups
• A.M. Best’s Perspective on Operating Leverage
• Rating Funding Agreement-Backed Securities
• Understanding BCAR for Property/Casualty Insurers
This press release relates to rating(s) that have been published on A.M. Best’s website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please visit A.M. Best’s Ratings & Criteria Center.
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