OREANDA-NEWS. April 13, 2016. Fitch Ratings says that the ratings of Aegon N.V (Aegon) and its core subsidiaries are not affected by the announced divestment of part of Aegon's UK annuity book to Rothesay Life.

Aegon announced the sale of two thirds (GBP6bn) of its UK annuity portfolio to Rothesay Life initially via a reinsurance contract, which will be followed by a "Part VII transfer" of the business to Rothesay Life. The transaction is in line with Aegon's strategy in the UK to focus on its investment platform rather than capital-intensive annuities, and will improve the ability of Aegon's UK operations to upstream dividends to the holding company.

The transaction is credit-neutral to Aegon's ratings as it marginally improves Aegon's score under Fitch's Prism factor-based capital model (Prism), but reduces diversification as well as the company's operational cash flow generation and underlying earnings expected in 2016. Aegon's score in Prism was "very strong" at end-2014, which we expect to have continued in 2015, and is commensurate with the ratings.

The reinsurance transaction will improve Aegon's UK's Solvency II ratio by around 15pp to 155% and ultimately to 165% when the Part VII transfer will be completed as capital is freed up via reduction in longevity and credit risk.

The UK annuity market has become less attractive for insurers since the ending of compulsory annuitisation in 2015 and the introduction of higher regulatory capital charges under Solvency II at the start of 2016, although transitional arrangements reduce the Solvency II impact on pre-2016 business.

Aegon is rated Long-term Issuer Default Rating (IDR) 'A' and Aegon's primary North American life insurance subsidiaries and Edinburgh-based Scottish Equitable Plc are rated Insurer Financial Strength (IFS) 'AA-'. The Outlooks on the IDRs and IFS rating are Negative. The Outlooks reflect pressure on profitability from pricing competition and low interest rates in Aegon's main markets. Despite management's efforts, profitability has not improved significantly and has been volatile in recent years. Fitch's expectations of the group's run rate profitability over the next two to three years will be key for the ratings.