A.M. Best Revises Aegon's Ratings - Analyst Blog

On June 29, A.M. Best Co. upgraded the financial strength rating (FSR) and issuer credit ratings (ICR) of the life and health subsidiaries of US operations of AEGON NV (AEG), referred to as Aegon USA, as well as the debt ratings of the outstanding notes issued. The outlook remains stable for the FSR, while it was revised for the ICRs and debt ratings to stable from negative.
 
Outstanding Notes
 
A.M. Best has upgraded the debt ratings to “aa-" from “a+" of the outstanding notes issued under the funding agreement-backed securities (FABS) programs sponsored by Monumental Life Insurance Company, a member of Aegon USA.
 
The following debt ratings have been upgraded:
 
    •    Monumental Global Funding Limited
    •    Monumental Global Funding II
    •    Monumental Global Funding III
 
Aegon USA
 
The rating agency also upgraded the FSR to A+ ( Superior ) from A (Excellent) and ICR to “aa-" from “a+" for the following life and health members companies of Aegon USA :
 
    •    Transamerica Life Insurance Company
    •    Transamerica Financial Life Insurance Company
    •    Western Reserve Life Assurance Co. of Ohio
    •    Monumental Life Insurance Company
    •    Stonebridge Life Insurance Company
    •    Merrill Lynch Life Insurance Company
    •    ML Life Insurance Company of New York
 
In addition, the FSR was upgraded to A (Excellent) from A- (Excellent) and the ICR to “a" from “a-" for Canadian Premier Life Insurance Company, an Aegon member company.
 
The rating actions indicate Aegon’s strength and support to its subsidiaries. Besides, Aegon USA has a strong market position and economies of scale, a wide distribution network and diversified earnings mix, significant operating cash flow, strong brand name and an effective asset-liability management capability.
 
A.M. Best remains impressed with Aegon USA, in view of the initiatives taken in 2009 to derisk its balance sheet and improve its risk profile by reducing its exposure to the equity markets and hedging its variable annuity business. In addition, the investment portfolio was improved by increasing holdings in Treasuries and other short-term investments.
 
A.M. Best also notes that the earnings of Aegon USA are correlated to the performance of the equity markets. Further, it also has a substantial variable annuity portfolio, whose earnings are exposed to volatility. The declines in the equity markets result in lower fee income and higher required reserves on secondary guarantees.
 
Besides, A.M. Best remains concerned on the likelihood of material credit losses within the group’s general account investment portfolio. Aegon USA states that pre-tax International Financial Reporting Standards (IFRS) asset impairments exceeded $1.3 billion in 2009, and additional realized losses and impairments are expected to incur in 2010, given the current economic environment and Aegon USA’s sizable structured asset portfolio.
 
While the run rate on credit impairments declined in fourth quarter 2009 and first quarter 2010 relative to the rest of 2009, Aegon continued to post a gross unrealized loss position of more than $5 billion on an IFRS basis as of March 31, 2010.
 
In addition to Aegon, A.M. Best has also assigned and revised FSR and ICR ratings and debt ratings and revised the outlook for the companies such as Lincoln National Corporation (LNC), HSBC Holdings plc (HBC) and ProAssurance Corporation (PRA).