Fitch Affirms Aegon's IDR at 'A'; Outlook Stable
At the same time, Fitch has upgraded three of Aegon's subordinated debt instruments by one notch. The upgrades reflect Fitch's updated insurance notching criteria published on 14 July 2015 after an initial exposure draft of proposed criteria on 12 May 2015. The updated notching criteria appear in Section VI of the insurance master criteria report Insurance Rating Methodology. No other ratings are affected by the changes to Fitch's notching criteria.
Fitch has also withdrawn Transamerica Capital II and III Trust Preferred securities at 'BBB', Commonwealth General Corporation senior debt and medium-term notes at 'A-' and Monumental Global Funding Ltd. senior secured notes at 'AA-'. The ratings have been withdrawn for commercial reasons.
A full list of ratings is at the end of this commentary.
KEY RATING DRIVERS
The affirmation of Aegon's ratings reflects the group's very strong capital position as measured by Fitch's capital metrics. Its Prism Factor-Based Model Score was "very strong" at year end 2014 and commensurate with the rating. Aegon holds significant cash balances at the holding company level, which it could use to support its operations if needed.
Aegon's financial leverage ratio (FLR), as calculated by Fitch, was around 29% at 31 December 2014, and its fixed-charge cover (based on pre-tax underlying earnings) was around 6.5x in 2014. Both metrics are outside Fitch's guidelines for the rating; debt leverage is expected to remain within a range of 26 to 30%, while coverage should improve as Aegon implements its strategy to enhance operating efficiency and profitability.
Aegon's total financing and commitments (TFC) ratio remains high compared with those of its similarly rated peers, indicating greater financial markets activity. The main drivers of Aegon's high TFC ratio are XXX and AXXX funding, securitisations to finance Aegon's mortgage portfolios in the Netherlands, securities lending, repurchase agreements and hybrids. However, Fitch views Aegon's exposure to institutional funding as well-managed.
Fitch expects net income to remain volatile as it can be negatively impacted by losses on economic hedging, which is reported as a loss under IFRS. Aegon's earnings are under pressure because of pricing competition and low interest rates in its main markets. Underlying pre-tax earnings declined in 2014, and despite Fitch's expectations that operating earnings will rise gradually as Aegon improves operating efficiency and profitability, negative mortality charges in 3Q14 and 1Q15 suggest that the delivery of steady earnings will be challenging.
Aegon's credit-related investment losses have declined, with impairments falling since peaking in 2008. Fitch expects Aegon to continue its shift to a higher quality credit portfolio with a reduction in the allocation to relatively risky structured assets.
The ratings continue to be underpinned by 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 continuing focus on cost control.
Fitch views Aegon Americas, as the main operating subsidiaries in Aegon, as "Core" to the Aegon group (Aegon) and, as such, they have an IFS rating of 'AA-'.
Three subordinated notes (NLG250m perpetual cumulative bonds, NLG300m perpetual cumulative subordinated bonds and NLG450m perpetual cumulative subordinated bonds) have been upgraded by one notch to reflect their subordination level and non-performance risk, based on Fitch's updated notching criteria. These notes are rated two notches below Aegon's Long-term IDR.
Fitch has made a 'Poor' baseline recovery assumption for these notes, reflecting their level of subordination, which results in the ratings being notched down one notch from the IDR. The agency assesses these notes' non-performance risk as 'Minimal', because of the absence of mandatory interest deferral triggers. This results in zero additional notching for non-performance risk.
RATING SENSITIVITIES
The ratings are likely to be downgraded if Aegon's return on equity (based on net underlying earnings) fails to improve from the current level of around 7%; fixed-charge cover does not remain above 6x; financial leverage does not remain below 30%; or the Prism Factor-Based Model Score falls below "very strong".
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.
FULL LIST OF RATING ACTIONS
Aegon N.V.:
Long-term IDR affirmed at 'A'; Outlook Stable
Senior unsecured debt affirmed at 'A-'
Short-term IDR and commercial paper programme affirmed at 'F1'
NLG250m 4.156%, callable 06/2025 (NL0000120004) upgraded to 'BBB+' from 'BBB'
NLG300m 5.185%, callable 10/2018 (NL0000121416) upgraded to 'BBB+' from 'BBB'
NLG450m 4.26%, callable 03/2021 (NL0000120889) upgraded to 'BBB+' from 'BBB'
USD500m 6.5%, callable 12/2010 (NL0000062420) affirmed at 'BBB'
USD250m floating rate, callable 12/2010 (NL0000062438) affirmed at 'BBB'
EUR200m 6%, callable 07/2011 (NL0000168466) affirmed at 'BBB'
EUR700m 4% callable 04/2024 (XS1061711575) affirmed at 'BBB'
EUR950m floating rate, callable 07/2014 (NL0000116150) affirmed at 'BBB'
USD500m floating rate, callable 07/2014 (NL0000116168) affirmed at 'BBB'
USD1,000m 6.375%, callable 06/2015 (NL0000021541) affirmed at 'BBB'
USD525m 8%, callable 08/2017 (US007924608) affirmed at 'BBB'
Scottish Equitable Plc
IFS rating affirmed at 'AA-'; Outlook Stable
The following Aegon North American life insurance subsidiary companies' Long-term IFS ratings have been affirmed at 'AA-' with Stable Outlooks:
Transamerica Advisors Life Insurance Company
Stonebridge Life Insurance Company
Transamerica Financial Life Insurance Company
Transamerica Life Insurance Company
Transamerica Life International (Bermuda) Ltd.
Transamerica Premier Life Insurance Company
The following Aegon subsidiary companies' Short-term IFS ratings have been affirmed at 'F1+':
Transamerica Life Insurance Company
Transamerica Premier Life Insurance Company
The following Aegon subsidiary companies' secured notes programme and outstanding issues have been affirmed at 'AA-':
Monumental Global Funding Ltd.; Withdrawn
Transamerica Capital II:
Trust Preferred 7.65% due 12/1/2026, affirmed at 'BBB'; Withdrawn
Transamerica Capital III:
Trust Preferred 7.625% due 11/15/2037, affirmed at 'BBB'; Withdrawn
Aegon Funding Company LLC:
Senior debt affirmed at 'A-'
Commonwealth General Corporation:
Senior debt and medium-term notes affirmed at 'A-'; Withdrawn.
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