Fitch Ratings has affirmed Aegon N.V.’s (Aegon) Long-term Issuer Default Rating (IDR) at ‘A’ and senior unsecured debt at ‘A-‘. Fitch has also affirmed Aegon’s primary North American life insurance subsidiaries (Aegon Americas) Insurer Financial Strength (IFS) ratings at ‘AA-‘. The Outlooks on Aegon’s Long-term IDR and the IFS ratings of its primary North American life insurance subsidiaries are Negative. A full list of rating actions is at the end of this comment.
KEY RATING DRIVERS
The affirmations reflect Aegon’s continued capital strength and the significant cash held at the holding company level. Aegon’s ratings continue to reflect the diversification of both its products and distribution, particularly in US retail markets, its measured risk appetite and its focus on cost control.
Offsetting this, earnings remain under pressure in Aegon’s main markets, although Fitch expects profitability to gradually improve as Aegon continues to move to less volatile fee-based business and executes its strategy to focus on core operations, scale back non-core operations and improve operating efficiency.
The Negative Outlook reflects Aegon’s high financial leverage as calculated by Fitch (33% at 31 December 2012) and low fixed-charge cover (around 5x in 2012), which remain materially outside stated guidelines for the rating level. The ratings are likely to be downgraded if financial leverage does not improve to below 30% and fixed-charge cover to above 5x. However, Fitch understands that Aegon will retire USD750m of senior notes in 2013. This, in combination with retained earnings boosting capital, should drive financial leverage down.
Aegon’s credit-related investment losses have declined, with impairments falling consistently since peaking in 2008. Aegon’s unrealised losses on structured credit products also shrank significantly in 2012 as market conditions improved but Aegon remains exposed to financial and credit market conditions through its holdings of US residential mortgage-backed securities and commercial mortgage-related investments.
However, Fitch expects Aegon to continue its shift to a higher-quality credit portfolio with a reduction in the allocation to relatively risky structured assets such as ABS and RMBS.
RATING SENSITIVITIES
Factors that could lead to a downgrade include financial leverage not declining in 2013 and remaining above 30% when calculated with 2014 financials; fixed-charge cover not improving to above 5x; large credit-related investment losses (realised or unrealised); a material decline in operating profitability; or significant earnings or capital volatility from Aegon’s US variable annuity portfolio if, for example, Aegon’s hedging becomes insufficient or underperforms.
The rating actions are as follows:
Aegon N.V.
Long-term IDR: affirmed at ‘A’; Outlook Negative
Senior unsecured debt: affirmed at ‘A-‘
Short-term IDR and commercial paper programme: affirmed at ‘F1’
The following Aegon N.V. perpetual capital securities are affirmed at ‘BBB’:
USD500m 6.5%, callable 12/2010 (NL0000062420)
USD250m floating rate, callable 12/2010 (NL0000062438)
NLG450m 4.26%, callable 03/2021 (NL0000120889)
EUR200m 6%, callable 07/2011 (NL0000168466)
USD550m 6.875%, callable 09/2011 (NL0000686368)
USD1,050m 7.25%, callable 12/2012 (NL0006056814)
EUR950m floating rate, callable 07/2014 (NL0000116150)
USD500m floating rate, callable 07/2014 (NL0000116168)
NLG250m 4.156%, callable 06/2015 (NL0000120004)
USD1,000m 6.375%, callable 06/2015 (NL0000021541)
NLG300m 5.185%, callable 10/2018 (NL0000121416)
USD525m 8%, callable 08/2017 (US007924608)
The following Aegon North American life insurance subsidiary companies’ Long-term IFS ratings have been affirmed at ‘AA-‘. The Outlooks of all the companies are Negative:
Transamerica Advisors Life Insurance Company
Transamerica Advisors Life Insurance Company of New York
Monumental Life Insurance Company
Stonebridge Life Insurance Company
Transamerica Financial Life Insurance Company
Transamerica Life Canada
Transamerica Life Insurance Company
Transamerica Life International (Bermuda) Ltd.
Western Reserve Life Assurance Co. of Ohio
The following Aegon subsidiary companies’ Short-term IFS ratings have been affirmed at ‘F1+’:
Monumental Life Insurance Company
Transamerica Life Insurance Company
The following Aegon subsidiary companies’ Short-term IFS ratings have been affirmed at ‘F1+’ and simultaneously withdrawn as the rating is no longer considered by Fitch to be relevant to the agency’s coverage:
Transamerica Financial Life Insurance Company
The following Aegon subsidiary companies’ secured notes programme and outstanding issues have been affirmed at ‘AA-‘:
Monumental Global Funding III
Monumental Global Funding II
Monumental Global Funding Ltd.
Transamerica Corporation:
Long-term IDR affirmed at ‘A’; Outlook Negative
Transamerica Capital II:
Trust Preferred 7.65% due 12/1/2026, affirmed at ‘BBB’
Transamerica Capital III:
Trust Preferred 7.625% due 11/15/2037, affirmed at ‘BBB’
Aegon Funding Company LLC:
Senior debt: affirmed at ‘A-‘
The following Aegon subsidiary company’s senior debt and medium term notes have been affirmed at ‘A-‘:
Commonwealth General Corporation
