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Fitch Affirms Aegon at IDR 'A'; Outlook Negative
October 21, 2013 / 3:19 PM / 4 years ago

Fitch Affirms Aegon at IDR 'A'; Outlook Negative

(The following statement was released by the rating agency) LONDON/CHICAGO, October 21 (Fitch) 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 provided at the end of this comment. KEY RATING DRIVERS The affirmations reflect Aegon's continued capital strength - with a significant amount of cash held at the holding company level - and higher underlying earnings in H113. Aegon's ratings continue to reflect its 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. Offsetting this is moderate operating profitability, with earnings remaining under pressure in Aegon's main markets. However, Fitch expects profitability to gradually improve as Aegon continues to move to the less volatile fee-based business and focuses on core operations, scales back non-core operations and improves operating efficiency. In addition, Aegon has significant exposure to variable annuities with minimum benefit guarantees and above-average credit risk in the US. The Negative Outlook reflects Aegon's high financial leverage as calculated by Fitch (32% at 30 June 2013) and low fixed-charge cover (around 5x), 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, Aegon plans to reduce the absolute amount of debt on its balance sheet. This, in combination with retained earnings boosting capital, should drive financial leverage down. Aegon is exposed to the low interest rate environment but has hedged its capital position against interest rates volatility in The Netherlands. In addition, Aegon has EUR23bn invested in mortgages on its Dutch balance sheet. This is a common feature of Dutch insurers. The DNB (which regulates financial institutions) estimates that around 25% of mortgages are in negative equity due to a fall in house prices. However, this has not been accompanied by significant asset quality deterioration for Aegon, because more than 50% of its Dutch mortgage portfolio is guaranteed by the Dutch government and also because Aegon has adopted strict underwriting policies. Aegon's credit-related investment losses have declined, with impairments falling consistently since peaking in 2008. Credit impairments have been low through the first six months of 2013 at only USD40m on an IFRS basis and are expected to remain low for the rest of the year. However, Aegon remains exposed to financial and credit market conditions through its holdings of US residential mortgage-backed securities and commercial mortgage-related investments. Fitch expects Aegon to continue its shift to a higher-quality credit portfolio with a reduction in the allocation to more 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 the expectation following 2013 results that it will remain 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 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-' 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 Harish Gohil Managing Director +44 (0) 20 3530 1257 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 11 January 2013, are available at www.fitchratings.com. Applicable Criteria and Related Research: Insurance Rating Methodology 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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