Insurance Aegon N.V. and Subsidiaries Full Rating Report Key Rating Drivers

Insurance
Life Insurers / Netherlands
Aegon N.V. and Subsidiaries
Full Rating Report
Ratings
Key Rating Drivers
Aegon N.V.
Long-Term Foreign-Currency IDR
Short-Term Foreign-Currency IDR
A
F1
Senior Unsecured Notes
Subordinated Notes
Commercial Paper
A−
BBB
F1
Rated Operating Entitiesa
Insurer Financial Strength Ratings
a
AA−
See additional ratings on page 15
Sovereign Risk
Long-Term Foreign-Currency IDR
Long-Term Local-Currency IDR
AAA
AAA
Outlooks
Long-Term Foreign-Currency IDR
Insurer Financial Strength Ratings
Sovereign Long-Term
Foreign-Currency IDR
Sovereign Long-Term
Local-Currency IDR
Stable
Stable
Stable
Stable
Financial Data
Aegon N.V. and Subsidiaries
31 Dec
13
31 Dec
12
353.6
24,991
19,939
849
364.9
28,519
19,049
1,582
Total assets (EURbn)
Group equity (EURm)
Premium income (EURm)
Net income (EURm)
Note: 2012 restated. Source: Aegon annual report
2013.
Related Research
AEGON Americas (September 2014)
Strong Franchise: Aegon is a large multinational insurer with a wide range of products and
distribution channels. It is a leading player in its main markets – the US, the Netherlands and
the UK – with top-10 positions in most of its chosen market segments.
Very Strong Capital Position: Fitch views Aegon’s consolidated group capital position as very
strong, as measured by all solvency metrics, and commensurate with the rating level. Aegon
holds significant cash balances at the holding company level, which it could use to support its
operations if needed.
Earnings Under Pressure but Recovering: Aegon’s earnings are under pressure because of
pricing competition and low interest rates in its main markets. However, Fitch Ratings expects
earnings to rise gradually as Aegon improves operating efficiency and profitability, particularly
through reducing operating costs. Earnings should benefit from favourable trends in product
mix, lower expenses and a continuing decline in credit impairments. Underlying-pre-tax
earnings increased by 8% both in 2013 and 1H14.
High Leverage, Low Coverage: Aegon’s financial leverage, as calculated by Fitch, was
around 30% at 30 June 2014, and its fixed-charge cover was around 6x in 2013. Both metrics
are outside stated guidelines for this rating level but are expected to improve as Aegon
deleverages its balance sheet.
Credit Risk Easing: Since 2008, Aegon has shifted its balance sheet towards variable
annuities (VAs) and moved away from fixed-annuity business and institutional spread-based
business. Fitch views this shift positively from a credit perspective.
Improving Credit Portfolio Quality: Aegon remains exposed to financial and credit market
conditions. 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. Aegon’s credit-related
investment losses have declined, with impairments falling consistently since peaking in 2008.
VAs Carry Guarantee Risk: Aegon has a large and growing book of variable-annuity (VA)
business (end-2013: USD59bn). VAs include embedded options and guarantees, which give
rise to risks that are complex, long-tailed, and difficult to price, hedge and reserve for, in Fitch’s
opinion. However, Fitch views Aegon’s total amount of risk as a percentage of equity as
manageable, particularly in light of the group’s capital strength and its hedging programme to
mitigate financial market risks on VA business.
2013 Outlook: U.S. Life Insurance
(December 2013)
Accounting Changes Ratings-Negative: Aegon's accounting changes for deferred policy
acquisition costs and longevity reserves in February 2014 are ratings-negative as shareholders'
funds will decrease in 2014 leading to lower financial flexibility and higher financial leverage.
The expected disposal of the Canadian business in 1Q15 is neutral to the ratings.
UK Life Insurance Dashboard 1H14
(August 2014)
Rating Sensitivities
North America Life Insurers’ Financial
Leverage and Debt-Servicing Capacity
(March 2014)
Dutch Insurance Dashboard 2014
(May 2014)
Analysts
Federico Faccio
+44 20 3530 1394
[email protected]
Harish Gohil
+44 20 3530 1257
[email protected]
www.fitchratings.com
Upgrade Unlikely: An upgrade is unlikely in the near term, given the pressure on Aegon's
earnings and its high financial leverage. However, Aegon’s ratings could be upgraded if there is
a permanent improvement in the FLR to below 20% and interest coverage to above 10x with
capital remaining very strong.
Deterioration in Capital/Financial Leverage: The ratings could be downgraded if, over a
sustained period, financial leverage does not remain below 30%, fixed-charge cover does not
remain above 5x or the Prism factor-based capital model score falls below “very strong”.
12 November 2014
Insurance
Market Position and Size/Scale
Market Position and Diverse Product Mix Support Ratings



Established multinational company
Strong market positions
Broad-based products and distribution
Established Multinational Company
Aegon is an international life insurance, pension and asset management company that does
business in more than 25 countries in the Americas, Europe and Asia, employing 27,000
people.
Strong Market Positions
Aegon has top-10 positions in most of its chosen market segments. This helps it to compete
effectively by providing scale and brand recognition.
Broad-Based Products and Distribution
Aegon offers a wide range of life insurance products, including term, universal life, annuities
(fixed, variable and indexed), whole life, accident and supplementary health insurance. It also
offers pensions and related savings. Aegon uses multiple distribution channels, including
independent brokerage distributors and agency channels.
Figure 1
Ratings Range Based on Market Position and Size/Scale
IFS Rating
Debt
Large market position and size/scale
AAA
AA
AA
A
A
BBB
BBB
BB
<BBB
<BB
Medium market position and size/scale
Small market position and size/scale
Source: Fitch
Related Criteria
Insurance Rating Methodology
(September 2014)
Aegon N.V. and Subsidiaries
November 2014
2
Insurance
Ownership is Neutral to the Rating
Corporate Governance and
Management
 Corporate governance and
management are adequate and
neutral to the rating. The majority of
the supervisory board are
independent under the terms of the
Dutch Corporate Governance Code.
 PricewaterhouseCoopers is Aegon’s
auditor.
Aegon has an international shareholder base, with the majority in the US and Europe (including
the UK). Around 85% of Aegon’s shares are held by institutional investors such as investment
and pension funds. The remaining 15% are in the hands of individual investors. Aegon’s
common shares are listed on two stock exchanges: Amsterdam and New York.
Aegon’s largest single shareholder is Vereniging Aegon, an association whose role is to ensure
the continuity of the company and to protect the interests of its stakeholders. At end-2013,
Vereniging Aegon had 14% of the normal voting rights (as it has additional voting rights from
holding all of Aegon’s common B shares).
In February 2013, Aegon and Vereniging Aegon reached an agreement to exchange Aegon’s
preferred shares for cash and common shares.
Figure 2
Simplified Organisational Chart
Aegon N .V.
( Holding)
Aegon International BV
( Holding)
Americas Holding &
Operating Companies
Aegon Netherlands
NV
Netherlands Holding &
Operating Companies
Aegon Europe Holding
B.V.
Other European Holding &
Operating Companies
Source : Aegon
Disposal of the Canadian Business Neutral to Aegon Ratings
Fitch does not view the expected disposal of Transamerica Life Canada in 1Q15 as material to
Aegon’s ratings. Aegon’s financial leverage should remain largely unaffected by the transaction.
Proceeds are expected to be used to redeem USD500m of debt maturing in 2015. However,
this positive rating factor will be offset by the reduction in shareholders’ funds as Aegon will
report a realised loss of approximately EUR800m on the transaction.
Aegon N.V. and Subsidiaries
November 2014
3
Insurance
Industry Profile and Operating Environment
Strong Capital Offset by High Leverage, Subdued Profitability
Sovereign and Country-Related
Constraints
 Fitch rates the sovereign obligations
of the Netherlands and the US at
‘AAA’ and the UK at ‘AA+’, all with
Stable Outlooks. The Country
Ceilings are all ‘AAA’. Therefore, the
ratings of Dutch, US and UK
insurance organisations are not
directly constrained by sovereign or
macroeconomic risks.
A majority of Dutch, UK and US life insurers in Fitch’s rated universe have Insurer Financial
Strength (IFS) ratings in the ‘AA’ or ‘A’ categories. Key risks that the industry faces include:
macroeconomic uncertainty, investment risks linked to fixed-income and equity holdings,
prolonged low interest rates, price competition and regulatory changes. The implementation of
Solvency II, the new risk-based regulatory regime for European insurers from 2016, threatens
disruption to the industry in the short term.
The industry withstood the 2008-2009 financial crisis reasonably well, with capital largely
rebounding as a result of earnings retention, investment gains and de-risking of balance sheets.
For the European insurance industry, this capital strength offsets relatively high financial
leverage and low interest coverage for rating levels, reflecting significant use of hybrid debt
financing.
Near-term expectations are for subdued profitability as yields on invested assets remain low
and hedging costs high. Most insurers are undertaking cost-cutting to bolster profitability. This
is a key profit-driver for Dutch insurers.
Figure 3
Ratings Range Based on Industry Profile/Operating Environment
IFS Rating
Debt
Life insurance
AAA
AA
AA
A
A
BBB
BBB
BB
<BBB
<BB
Source: Fitch
In the US life insurance market, balance sheets reflect strong liquidity, reasonable financial
leverage and good asset quality. Earnings have largely returned to pre-crisis levels despite
ongoing pressure from low interest rates and increased hedging costs. The industry’s
profitability has benefited in recent years from a rebound in the equity markets, which has led to
improved asset-based fee income. Improved capital market conditions and enhanced hedging
strategies have reduced the risk associated with the industry's large VA exposure. However,
industry earnings and capital remain exposed to uncertain policyholder behaviour in an
unexpected, albeit plausible, severe stress scenario.
Aegon N.V. and Subsidiaries
November 2014
4
Insurance
Peer Analysis
In Line With Peers
Fitch views Aegon’s market positions and retail franchise as comparable with those of other
large ‘AA’ rated life insurance groups, and cites its diversity of earnings in the US, its
underwriting discipline and its risk management as distinguishing factors in peer comparisons.
Aegon’s capital is strong for its rating level but this is offset by relatively high financial leverage,
a common theme for European insurers, reflecting significant use of hybrid debt financing.
Aegon’s earnings are more sensitive to investment market conditions than those of ‘AA’ rated
peers and, as for other life insurers, are under pressure from pricing competition and a lack of
economic growth in its main markets.
Figure 4
Peer Comparison – 2013
Company
IFS rating of primary
operating entities
Aegon
Allianz
NN Group
AXA
Generali
Prudential Plc
AA−/Stable
AA/Stable
NRa
AA−/Stable
A−/Stable
AA/Stable
Assets (EURbn)
354
711
146
739
445
383
Total equity IFRS profit Return on Return on
(EURm)
(EURm) assetsb (%) equityc (%)
19,966
849
0.6
3.8
52,849
6,344
1.8
12.0
14,295
10
0.1
0.0
55,314
4,482
0.9
8.1
21,405
1,914
0.9
8.9
11,581
1,615
0.5
13
IGD solvency ratio
Financial
(end-2013) (%) leveraged (%)
212
182
252
221
141
280
33
20
25
24
35
21
Note: Foreign exchange reference rate GBP=1.2EUR as at 31 December 2013
a
LT IDR withdrawn at A-/Stable on 23 September 2014
b
Group operating income/average 2012-2013 total assets
c
Group net income/average 2012-2013 total equity
d
Fitch-calculated; Aegon: calculated based on restated accounts
Source: Companies, Fitch
Aegon N.V. and Subsidiaries
November 2014
5
Insurance
Figure 5
Capitalisation and Leverage
Shareholders’ equity (EURbn)
Total financing and commitments (TFC) (x)
Financial leverage (%)
Regulatory capital ratio (%)
2009
2010
2011
2012
2013 Fitch’s expectation
14.2
1.2
34
204
18.7
1.8
31
198
21.0
1.7
34
195
24.7
1.4
34
228
20.0 Fitch expects Aegon’s capitalisation
1.3 to be stable in the near term, and
30a debt levels to decrease marginally.
212
a
33 calculated based on restated accounts
Source: Aegon, Fitch
Very Strong Capitalisation, High Financial Leverage





‘Very strong’ Prism score
High TFC ratio
High financial leverage, but plans to reduce
Accounting changes reduce equity
Solvency II a risk
‘Very Strong’ Prism Score
From a Prism factor-based capital model (Prism FBM) perspective, Aegon scored ‘very strong’
based on year-end 2013 results. The Prism FBM score is a ratio of total available capital (TAC)
divided by target capital (TC) at various stress levels, with the Prism score itself being equal to
the highest category where TAC exceeds TC.
From a TC perspective, the risk associated with the assets backing Aegon’s life business is the
biggest driver of TC.
Fitch’s TAC gives some credit for value of in-force business (VIF) and subordinated debt,
whereas Fitch Core Capital (FCC) which is restricted to “very high quality” capital does not. If
companies have a significant VIF or subordinated debt, the ratio of FCC/TAC will be lower,
indicating a weaker quality of capital. Aegon has a below average ratio among insurers rated
by Fitch. This reflects Aegon’s significant hybrid debt and VIF, which is common for life
insurers.
Fitch’s TAC measure is used to calculate the Prism score. However, Fitch believes there can
be value in looking at the FCC, as this indicates the coverage of TC by “very high quality”
capital. Non-life companies tend to have higher quality capital as they typically have shorter-tail
liabilities and may need to monetise capital more quickly.
Aegon aims to manage capital above the level commensurate with a ‘AA’ rating. The group’s
capital position is also very strong on a regulatory basis – consistently stronger than that of
most of its peers.
High TFC Ratio
Aegon’s total financing and commitments (TFC) ratio is high compared with those of its large
US stock and European company peers. The main drivers of Aegon’s high TFC ratio are XXX
and AXXX funding, securitisations to finance Aegon’s mortgage portfolios in the Netherlands,
security lending, repurchase agreements and hybrids. Fitch believes Aegon’s exposures to
institutional funding are well managed.
High Financial Leverage, But Plans to Reduce
Aegon’s financial leverage ratio (FLR) as calculated by Fitch (around 30% at 30 June 2014) is
materially outside stated guidelines for the rating level. However, EUR500m senior debt will be
retired in December 2014 and Fitch understands that Aegon plans to manage gross financial
leverage within a 26%-30% range.
Aegon N.V. and Subsidiaries
November 2014
6
Insurance
During 1H14, Aegon undertook some capital management initiatives, which included calling,
instead of refinancing, USD550m of junior capital securities in March 2014 to offset the
negative impact on financial leverage from the implementation of new accounting
methodologies. The company also redeemed USD1,050m of hybrid debt in June 2014 and
replaced these securities with EUR700m of subordinated debt financed at a lower interest rate.
These actions improved financial leverage and fixed charge cover.
Accounting Changes Reduce Equity
Aegon announced in February 2014 a change to its accounting policies for deferred policy
acquisition costs and longevity reserves. This will lead to a decrease in shareholders' equity by
up to EUR2.5bn.
In its accounting, Aegon will now base its longevity reserves in the Netherlands on prospective
mortality tables instead of observed mortality tables, and deferred policy acquisition costs will
include only those costs that are directly attributable to the acquisition or renewal of insurance
contracts.
These changes are simply accounting changes; they are not the result of a change in Aegon’s
actual or expected longevity experience or acquisition costs. However, Fitch views the changes
as negative from a rating perspective because the resulting decrease in shareholders' funds
will increase Aegon’s financial leverage and reduce its financial flexibility.
Solvency II a Risk
Solvency II, the new regulatory regime for European insurers being phased in from 2016, could
result in a significant increase in capital requirements for Aegon’s US operations if the US does
not attain equivalence recognition from the EU, which might threaten the continuing ownership
of the operations by a European parent. However, Fitch believes that the US will ultimately be
deemed equivalent and that Solvency II will not lead to materially higher capital requirements
for the US operations.
Aegon N.V. and Subsidiaries
November 2014
7
Insurance
Figure 6
Debt Service Capabilities and Financial Flexibility
2009
2010
2011
2012
3.9
5.2
4.4
5.3
Fixed-charge coverage ratio (x)
2013 Fitch’s expectation
6.1 In the near term, Fitch expects the coverage ratio gradually
to improve as Aegon repays debt and implements its
strategy to improve operating efficiency and profitability.
Source: Aegon , Fitch
Holding Company Liquidity
 Fitch views Aegon N.V.’s liquidity
profile as strong.
 Aegon N.V. has access to
international capital markets under a
USD6bn debt issuance programme
and to US markets under a separate
US shelf registration.
 It also has access to domestic and
international money markets through
its USD4.5bn commercial paper
programme (EUR135m outstanding
at end-2013).
 Aegon N.V. has a EUR2bn
syndicated revolving credit facility
maturing in 2019 and a back-up
facility for USD2bn (USD1.5bn in
2015, USD0.5bn in 2017). In
addition, it maintains various shorterdated bilateral back-up facilities.
 Aegon N.V. had not drawn any
amounts under any of its liquidity
back-up facilities as at 31 December
2013.
Financial Flexibility Strong; Fixed-Charge Cover Weak



Financial flexibility strong
Significant cash at holding company
Fixed-charge cover weak for rating level, but improving
Financial Flexibility Strong
Fitch believes that Aegon has strong financial flexibility, benefiting in particular from its
relationship with its major shareholder, Vereniging Aegon. Aegon has a proven track record of
access to capital markets, including issuance of EUR700m subordinated notes in April 2014.
The group also benefits from positive cash generation from its main business units.
Significant Cash at Holding Company
Aegon holds significant cash at the holding company level (end-1H14: EUR1.7bn), which
provides extra financial flexibility and liquidity.
Fixed-Charge Cover Weak for Rating Level, But Improving
Aegon’s fixed-charge cover is weak for the rating level, at 6.1x in 2013. This was better than
5.3x in 2012 and 4.4x in 2013 but well below Fitch’s 12x guideline for the rating category.
However, Fitch expects the ratio to gradually improve as interest expenses reduce and Aegon
improves operating efficiency and profitability.
Figure 7
Debt Maturity Profile
Year
2014
2015-2019
> 2020
Perpetuals
(EURm)
517a
960
4,094b
3,463b
a
Senior notes. Aegon announced this senior
issuance will be retired and not refinanced
b
Including the effects of capital
management actions in 1H14
Source: Aegon
Aegon N.V. and Subsidiaries
November 2014
8
Insurance
Figure 8
Financial Performance and Earnings
(EURm)
2009
2010
2011
2012
2013 Fitch’s expectation
Net income
Underlying pre-tax earnings
Return on assets (%)
Return on equity (%)
Premium growth above/below market growth (%)
204
1,185
0.4
1.4
-3.3
1,760
1,972
0.6
9.4
-6.2
872
1,522
0.5
4.1
7.1
1,571
1,787
0.5
6.4
2.4
849
1,945
0.6
4.3
6.3
Fitch expects Aegon’s operating profit to
gradually improve as the company executes its
strategy to focus on core operations, scale back
non-core operations and improve operating
efficiency.
Source: Aegon, Fitch
Weak but Improving Underlying Earnings




Volatile net income
Weak but recovering operating earnings
Better earnings quality
Growth in line with market
Volatile Net Income
Net income decreased by 46% in 2013 but this was due to losses on economic hedging and
long-term economic assumption changes, which is reported as a loss under IFRS principles. A
12% rise in equity markets in a quarter would have a negative fair value impact on IFRS
earnings of around USD140m, according to Aegon’s sensitivity disclosures in 2Q14.
This sensitivity follows the accounting mismatch between hedges and liabilities and would not
constitute an economic loss. However, the negative impact could somewhat impair Aegon’s
financial flexibility, as it would reduce the company’s net profit.
Weak but Recovering Operating Earnings
Profitability is weak for the rating level, with an operating return on assets of 0.6% in 2013
compared with Fitch’s guideline median of 1.1% for the ‘AA’ rating category.
Fitch expects that Aegon’s earnings will remain under pressure, with lower investment portfolio
yields but growing assets under management as the sale of reinsurance operations and the
run-off of US institutional spread business and fixed annuities has been more than offset by
growth in other areas.
However, Fitch expects that Aegon’s ongoing execution of its strategy focused on core
operations and improved operating efficiency will improve its profitability. Earnings should
benefit from favourable trends in product mix, lower expenses and a continuing decline in credit
impairments.
Underlying pre-tax earnings increased 8% in 2013 and continued to develop favourably in
1H14 (+8%).
Better Earnings Quality
Aegon is increasing the proportion of earnings generated by fee-based business such as VA
and pension business, and withdrawing or de-emphasising certain spread-based businesses.
Fitch believes this will improve the quality and consistency of Aegon’s earnings, particularly by
reducing the sensitivity of earnings to investment markets.
Growth in Line With Market
Fitch’s analysis shows that Aegon’s life asset growth in its main markets (US, UK, the
Netherlands) is in line with the market.
Fitch views cautiously from a ratings perspective growth rates that are greater than the market
or peers, especially during periods of competitive pricing pressures.
Aegon N.V. and Subsidiaries
November 2014
9
Insurance
Figure 9
Investment and Asset Risk
(%)
Risky assets to equity
Unaffiliated shares/equity
Non investment-grade bonds/equity
Investments in affiliates/equity
2009
2010
2011
2012
84
17
61
6
60
14
42
4
45
9
33
4
63
8
45
10
2013 Fitch’s expectation
67 Fitch expects Aegon’s investment risk to
10 decline marginally in the medium term.
47
10
Source: Aegon, Fitch
Investment Risks and Impairments Declining



Realised and unrealised losses declining
Risky asset ratio in line with ratings
VAs carry significant guarantee risk
Realised and Unrealised Losses Declining
Aegon’s credit-related investment losses have declined, with impairments falling consistently
since peaking in 2008 (2009: EUR1.2bn; 2010: EUR0.5bn; 2011: EUR0.4bn; 2012: EUR0.2bn;
2013: EUR0.1bn).
Aegon’s unrealised losses on structured credit products shrank in 2013 as market conditions
improved. Gross unrealised losses on RMBS, CMBS and ABS reduced to EUR408m (2012:
766m; 2011: EUR1,484m).
Aegon remains exposed to financial and credit market conditions. 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. New inflows are likely to be invested
in investment-grade corporate bonds.
Risky Asset Ratio in Line With Ratings
Aegon’s risky asset ratio has improved significantly since 2008 and is in line with the ratings.
Aegon Americas’ risky asset ratio has
declined moderately over the last three
years in line with Fitch’s expectations, to
96% of total adjusted capital (TAC), but it
still exceeded the industry average of 87%
at end-2013. The company reduced its
above-average exposure to bonds below
investment grade (BIGs) to 56% in 2013.
Aegon Americas’ current investment
strategy favours high-grade bonds, such as
US treasuries, agencies and investmentgrade corporate bonds.
Moderate credit risk remains in exposure to
certain RMBS and commercial mortgagerelated investments.
Aegon N.V. and Subsidiaries
November 2014
Figure 10
Credit Rating of General Accounts
Investments
Total: EUR147bn at FY13
Assets NR
29%
CCC or
lower
1%
B
BB
1%
2%
Sovereign
14%
AAA
7%
AA
9%
BBB
16%
A
21%
Source: Aegon
10
Insurance
VAs Carry Significant Guarantee Risk
As a top-10 seller of VAs, Aegon has significant exposure to VA benefit guarantees (total
reserves USD59bn at end-2013). VAs include guarantees on investment performance, and
several US companies suffered large losses on their VA business in 2008-2009. More than
55% of Aegon’s US exposure contains a combination of guaranteed minimum living benefits
(GMLB) and guaranteed minimum death benefits (GMDB); 30% contain GMDB only and 5%
contain guaranteed minimum income benefit (GMIB) only.
Aegon’s VA gross deposits in 2013 grew rapidly, totalling USD8.5bn following product repricing through the year to reflect continued low interest rates and consequent higher hedging
costs.
At end-1H14, the net amounts at risk (the maximum benefit amount payable in excess of the
account value) on Aegon’s VA business were as shown in Figure 11. (VA contracts may offer
more than one type of guarantee, so the amounts listed are not mutually exclusive.)
Figure 11
Variable Annuity Business
Benefit type (EURm)
Guaranteed minimum withdrawal benefit (GMWB)
Guaranteed minimum death benefit (GMDB)
Guaranteed minimum income benefit (GMIB)
Account value
22,352
40,789
6,088
Net amount at risk
292
1,487
421
Source: Aegon
The aggregate net amount at risk of EUR2.2bn equates to 9% of Aegon’s equity. However, of
this, the amount that is subject to policyholder options (GMWB and GMIB) is only EUR713m, or
2.9% of Aegon’s equity.
Fitch views this exposure as manageable, particularly in light of Aegon’s capital strength and its
hedging programme to mitigate financial market risks on VA business. This includes full deltahedging on the GMIB business – a commitment made by Aegon in connection with its receipt
of support from the Dutch state in 2008.
Fitch views Aegon Americas’ economic hedging of capital market-related risks associated with
its USD59bn (end-2013) VA reserves to have been reasonably effective over the two years.
The company’s hedging is focused on the protection of capital. Fitch believes Aegon Americas’
unhedged exposures to be manageable in the context of the group’s broader capital resources.
Fair value results of hedging with an accounting match may exhibit quarterly volatility, but tend
to even out over time.
Aegon N.V. and Subsidiaries
November 2014
11
Insurance
Figure 12
Asset/Liability and Liquidity Management
Liquid assets to policyholder liabilities (%)
2009
2010
2011
2012
2013 Fitch’s expectation
99.5
102.5
105.1
108.2
106.5 Fitch expects Aegon’s liquid assets/policyholder
liabilities ratio to remain above 100% in the near term.
Source: Aegon , Fitch
Solid Asset/Liability Liquidity Management




Asset and liabilities well matched
Less spread-based business, more fee-based business
Low liquidity risk
Strong liquidity management
Assets and Liabilities Well Matched
Aegon has significant exposure to the global financial markets. This is typical of a large
multinational life insurance company. Fitch considers Aegon’s asset portfolio to be well
diversified and views the group’s asset-liability matching and modelling techniques such as
duration matching, hedging and stochastic projection as appropriate for the complexity of the
business written.
Less Spread-Based Business, More Fee-Based Business
Aegon has significant exposure to US investment markets, especially through its “individual
savings and retirement” and “employer solutions and pensions” divisions. Aegon is reducing
this exposure by running down its spread-related business and increasing its focus on feerelated business.
Aegon has a 30%-35% target for fee-based earnings as a percentage of underlying earnings
by 2015 (1H14: 35%; 2013: 33%). Fitch views this target as achievable.
Low Liquidity Risk
Aegon’s liquid assets/policyholder liabilities ratio is higher than 100%, which indicates a strong
liquidity position. It has strong cash generation and maintains significant cash at the holding
company level (end-2013: EUR2.2bn), which provides extra financial flexibility and liquidity.
Aegon has allocated EUR500m to repay its senior debt due in December 2014. This amount
should be covered by the dividends remitted by subsidiaries through the year.
Strong Liquidity Management
Aegon regularly stress-tests its liquidity position to ensure that available liquidity would meet
requirements for at least two years under extreme scenarios, covering prolonged frozen capital
markets, an immediate and permanent rise in interest rates, and policyholders withdrawing
liabilities at the earliest conceivable date.
Aegon N.V. and Subsidiaries
November 2014
12
Insurance
Reinsurance and Risk Management
Sophisticated Risk Management


Risk management in line with peers
Limited use of reinsurance
Risk Management in Line with Peers
In Fitch’s view, Aegon’s risk management processes and controls are strong and sophisticated,
at least in line with those of peers, and commensurate with the rating level.
Limited Use of Reinsurance
Aegon retains most of the insurance risk that it writes, taking the view that it is pricing profitably
and should retain the profits. The group’s scale and diversification mean that it does not need
significant reinsurance to avoid undue concentration of risk. Total reinsured reserves amount to
less than 5% of total liabilities, with counterparty credit ratings typically ‘A−’ or higher.
Aegon N.V. and Subsidiaries
November 2014
13
Insurance
Appendix: Other Ratings Considerations
Below is a summary of additional ratings considerations of a “technical” nature that are part of
Fitch’s ratings criteria.
Group IFS Rating Approach
The entities listed in Figure 13 are considered “Core” entities under Fitch’s insurance group
rating methodology. The operating entities share the same IFS rating based on Fitch’s
evaluation of the strength of the group as a whole.
Figure 13
Complete Ratings List
Entity
Aegon N.V.
Aegon N.V. debt issues
Commercial paper
Subordinated debt
USD500m 6.5%, callable 12/2014 (NL0000062420)
USD250m floating rate, callable 12/2014 (NL0000062438)
EUR200m 6%, callable 07/2014 (NL0000168466)
EUR700m 4% callable 04/2024 (XS1061711575)
EUR950m floating rate, callable 07/2014 (NL0000116150)
USD500m floating rate, callable 07/2014 (NL0000116168)
USD1,000m 6.375%, callable 06/2015 (NL0000021541)
USD525m 8%, callable 08/2017 (US007924608)
NLG250m 4.156%, callable 06/2015 (NL0000120004)
NLG300m 5.185%, callable 10/2018 (NL0000121416)
NLG450m 4.26%, callable 03/2021 (NL0000120889)
Aegon Funding Company, LLC
Scottish Equitable Plc
Transamerica Advisors Life Insurance Company
Stonebridge Life Insurance Company
Transamerica Life International (Bermuda) Ltd.
Transamerica Premier Life Insurance Company
Transamerica Financial Life Insurance Company
Transamerica Life Insurance Company
Monumental Global Funding Ltd.
Senior secured
Transamerica Capital II
Trust preferred 7.65% due 12/1/2026
Transamerica Capital III
Trust preferred 7.625% due 11/15/2037
Commonwealth General Corporation
Rating type
LT IDR
ST IDR
Senior
Rating
A/Stable
F1
A−
Short term
F1
Long term
Long term
Long term
Long term
Long term
Long term
Long term
Long term
Long term
Long term
Long term
Senior
IFS
IFS
IFS
IFS
IFS
ST IFS
IFS
IFS
ST IFS
BBB
BBB
BBB
BBB
BBB
BBB
BBB
BBB
BBB
BBB
BBB
A−
AA−/Stable
AA−/Stable
AA−/Stable
AA−/Stable
AA−/Stable
F1+
AA−/Stable
AA−/Stable
F1+
Long term
AA−
Long term
BBB
Long term
Senior
BBB
A−
Source: Fitch
Notching
The key operating environments for Aegon are the US, the Netherlands and the UK, which
Fitch regards as “Strong” regulatory environments, due to priority of policyholder claims and a
strong capital regime.
Aegon N.V. and Subsidiaries
November 2014
14
Insurance
Notching Summary
Holding Company
Standard notching was used in establishing the holding company IDR at one notch below the
implied/actual IDRs of the core operating companies.
IFS Ratings
For Aegon’s operating companies, a “Good” baseline recovery assumption was applied to the
IFS ratings and standard notching was used based on the existence of policyholder priority.
The IFS ratings of the operating companies are therefore one notch higher than the implied or
actual IDRs.
Debt
The rating of the senior unsecured debt reflects a baseline assumption of “Below Average”.
This means the notes are rated one notch below the IDR of Aegon.
Hybrids
For the rated subordinated debt issues, a baseline recovery assumption of “Poor” was used. In
addition, all of the issues are regarded as having “Material” loss absorption features (such as
ability to defer coupons). Based on the combination of these two characteristics, standard
notching was applied, placing these hybrids three notches below the Long-Term IDR of
Aegon N.V.
Short-Term Ratings
The holding company’s Short-Term Issuer Default Rating is ‘F1’, which is standard when the
Long-Term IDR is ‘A’.
The Short-Term IFS ratings of Transamerica Premier Life Insurance Company and
Transamerica Life Insurance Company are ‘F1+’, which is standard when the IFS rating is
‘AA−’.
Hybrids – Equity/Debt Treatment
Figure 14
Hybrids Treatment
Hybrid
Amount
Aegon N.V.
NL0000062420
NL0000062438
NL0000168466
XS1061711575
NL0000116150
NL0000116168
NL0000021541
US007924608
NL0000120004
NL0000121416
NL0000120889
USD500m
USD250m
EUR200m
EUR700m
EUR950m
USD500m
USD1,000m
USD525m
NLG250m
NLG300m
NLG450m
CAR Fitch (%)
CAR reg. override (%)
FLR debt (%)
0
0
0
0
0
0
0
0
0
0
0
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
CAR  capitalisation ratio; FLR  financial leverage ratio
For CAR, % tells portion of hybrid value included as available capital, both before (Fitch %) and after the regulatory
override
For FLR, % tells portion of hybrid value included as debt in numerator of leverage ratio
Source: Fitch
Exceptions to Criteria/Ratings Limitations
None.
Aegon N.V. and Subsidiaries
November 2014
15
Insurance
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Fitch has been compensated for the provision of the ratings.
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Aegon N.V. and Subsidiaries
November 2014
16