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 The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. Aegon N.V. and Subsidiaries November 2014 16
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