Fitch Affirms Aegon's IDR at 'A'; Outlook Negative

Fri Feb 21, 2014 12:20pm EST

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(The following statement was released by the rating agency) LONDON/CHICAGO, February 21 (Fitch) Fitch Ratings has affirmed Aegon N.V.'s (Aegon) Long-term Issuer Default Rating (IDR) at 'A' and senior unsecured debt rating 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. Fitch has also affirmed and simultaneously withdrawn Transamerica Corporation's Long-term IDR at 'A' with a Negative Outlook. The rating is no longer considered by Fitch to be relevant to the agency's coverage. A full list of rating actions is provided at the end of this comment. KEY RATING DRIVERS The rating actions are in response to two events - Aegon's announcement of a change to its accounting policies for deferred policy acquisition costs and longevity reserves and the publication of the group's Q413 results. The new accounting methodologies will decrease shareholders' equity by up to EUR2.5bn. 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 only include costs that are directly attributable to the acquisition or renewal of insurance contracts. To offset the negative impact on financial leverage stemming from the implementation of the new methodologies, Aegon will call and not refinance USD550m junior capital securities effective 15 March 2014. Fitch views the change to Aegon's accounting policies as negative from a rating perspective as shareholders' funds will decrease in 2014 leading to lower financial flexibility and higher financial leverage. Fitch however notes that the new methodology for accounting deferred acquisition costs follows a change to the deferral policy and not a worsening of assumptions. In addition, the total amount of outstanding debt is being reduced and is expected to decline further in 2014; fixed-charge coverage is also expected to improve as the amount of interest expenses reduce. Group IGD ratio declined to 212% in 2013 from 228% in 2012, a level which nonetheless remains strong and in line with 'AA' rating category. The call of eligible capital instruments would only reduce IGD by 6%. Financial leverage as calculated by Fitch (FLR) improved to 31% in 2013 from 32% in 2012. However, FLR is a pro-forma 33% as at 31 December 2013 when the negative impact of the accounting changes is included. This more than offsets the positive impact of the call of junior capital securities. This level continues to be materially outside Fitch's median guidelines for the rating level. However, Aegon plans to reduce the absolute amount of debt on its balance sheet. This, in combination with retained earnings boosting capital, should further reduce financial leverage. Fitch expects FLR to stand at around 30% at end-2014. In addition, fixed-charge cover (around 5x at end-2013) is expected to improve as Aegon repays debt, which Fitch views positively. The affirmation also reflects Aegon's improved underlying earnings in 2013. Net income was lower than in 2012 but this was due to losses on economic hedging which is reported as a loss under IFRS principles. However, impairment charges fell to EUR121m from EUR176m in 2012. The ratings continue to be underpinned by the significant amount of cash held at the holding company level as well as Aegon's strong franchise and 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. The ratings also reflect Aegon's measured risk appetite and its focus on cost control. RATING SENSITIVITIES Factors that could lead to a downgrade include a final Prism Factor-Based Model Score that is not consistent with the current rating. The ratings could also be downgraded if financial leverage 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. An upgrade is unlikely in the near term, given the pressure on Aegon's earnings and its high financial leverage. The Outlook could be revised to Stable if financial leverage is expected to decline and fall below 30% when calculated with 2014 financials; fixed-charge cover improves to above 5x; capital remains strong on all metrics; and underlying earnings generated by the fee-based business continue to improve. 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% (NL0000062420) USD250m floating rate (NL0000062438) NLG450m 4.26% (NL0000120889) EUR200m 6% (NL0000168466) USD550m 6.875% (NL0000686368) USD1,050m 7.25% (NL0006056814) EUR950m floating rate (NL0000116150) USD500m floating rate (NL0000116168) NLG250m 4.156% (NL0000120004) USD1,000m 6.375% (NL0000021541) NLG300m 5.185% (NL0000121416) USD525m 8% (US0079246080) 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' secured notes programme and outstanding issues have been affirmed at 'AA-': Monumental Global Funding Ltd. Transamerica Corporation: Long-term IDR affirmed at 'A'; Outlook Negative; Withdrawn 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-' Commonwealth General Corporation's senior debt and medium-term notes affirmed at 'A-' Contact: Primary Analyst Federico Faccio Senior Director +44 (0) 20 3530 1394 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst David Prowse Senior Director +44 (0) 20 3530 1250 Primary Analyst - U. S. subsidiaries R. Andrew Davidson, CFA Senior Director +1 312 368 3144 Fitch, Inc. 70 W. Madison Chicago, IL 60602 Secondary Analyst - U. S. subsidiaries Doug L. Meyer, CFA Managing Director +1 312 368 2061 Committee Chairperson Chris Waterman Managing Director +44 (0) 20 3530 1168 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com; Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com. Additional information is available on www.fitchratings.com. Applicable criteria, 'Insurance Rating Methodology' dated 13 November 2013, are available at www.fitchratings.com. Applicable Criteria and Related Research: Insurance Rating Methodology -- Amended here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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