A.M. Best Revises Outlooks to Negative for Aegon N.V.’s U.S. Subsidiaries
May 8, 2017 by Best's News Service
Oldwick – A.M. Best has revised the outlooks to negative from stable and affirmed the Financial Strength Rating (FSR) of A+ (Superior) and Long-Term Issuer Credit Ratings (Long-Term 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 Long-Term ICR of “a” of Transamerica Casualty Insurance Company (Transamerica Casualty) (Columbus, OH), the property/casualty member of Aegon USA. The outlook of this Credit Rating (rating) is stable.
The negative outlooks reflect a deterioration in A.M. Best’s view of the credit profile of the ultimate holding company, Aegon, and its ability to sustain its current rating fundamentals over the medium term given the challenging operating environment for life insurers.
The rating affirmations of Aegon USA reflect its strong business profile, adequate risk-adjusted capitalization, well-developed enterprise risk management framework and an underlying trend of favorable statutory and IFRS profitability, although with some volatility given the asset and liability composition. The ratings also reflect A.M. Best’s continued expectation of financial support from Aegon. Partially offsetting these strengths is the continued increasing focus on sales of variable annuities, which in A.M. Best’s view have higher risk characteristics from a product creditworthiness standpoint. A.M. Best also notes the equity market sensitivity of the group’s earnings and its significant reliance on captive reinsurance, which is a significant drag on the quality of the group’s statutory capital.
Aegon USA’s business profile continues to remain strong, with competitive market positions in the U.S. life and annuity arenas. The group’s market positions are supported by a large and diversified distribution system. Product lines that contribute to the company’s earnings diversification include traditional life, variable life, variable annuities, mutual funds, pensions and accident and health insurance. Risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio, is considered sufficient to support its current business and insurance risks. While volatility does exist in the operating profile of Aegon USA, the U.S. entities continue to maintain an underlying trend of profitability on both a statutory and IFRS basis.
A.M. Best notes that the company has made a strategic shift to focus on selling products such as variable annuities, mutual funds and 401(k)s and has de-emphasized spread-based products, particularly 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 hedged, Aegon USA’s earnings remain somewhat correlated to capital market performance. A.M. Best also notes that Aegon USA 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, ability to produce favorable investment yields, and role and strategic importance as a member of Aegon USA. Furthermore, Transamerica Casualty receives explicit reinsurance support provided by Transamerica Life Insurance Company and the benefits of receiving implied support if necessary in the future. In addition, the ratings recognize Transamerica Casualty’s strong capitalization, the benefits it gains from relationships with affiliates and management’s knowledge and expertise in the travel insurance market. Partially offsetting these positive factors are the company’s elevated underwriting leverage and product concentration in a competitive market. The stable 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.
The outlooks have been revised to negative from stable and the FSR of A+ (Superior) and the Long-Term ICRs of “aa-” affirmed for the following members of Aegon USA Group:
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- Transamerica Life Insurance Company
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- Transamerica Financial Life Insurance Company
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- Transamerica Premier Life Insurance Company
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- Transamerica Advisors Life Insurance Company
The FSR of A (Excellent) and the Long-Term ICR of “a” have been affirmed with stable outlooks for Transamerica Casualty Insurance Company.
This press release relates to Credit Ratings 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 see A.M. Best’s Recent Rating Activity web page. For additional information regarding the use and limitations of Credit Rating opinions, please view Understanding Best’s Credit Ratings.
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BN-NJ-5-5-2017 1536 ET #
