AM Best downgrades Aegon US subsidiaries outlook to 'negative'

Ratings agency AM Best has revised the outlooks to negative from stable and affirmed the Financial Strength Rating (FSR) of A+ (Superior) and Long-Term Issuer Credit Ratings (Long-Term ICR) of “aa-” of the US life/health subsidiaries of Netherland-based insurance group Aegon.

The negative outlooks reflect a deterioration in the agency’s view of the credit profile of the ultimate holding company Aegon and its ability to sustain its current rating fundamentals over the medium term given the challenging operating environment for life insurers.

At the same time, the agency has affirmed the FSR (financial strength rating) of A (Excellent) and the Long-Term ICR (issuer credit rating) of “a” of Transamerica Casualty Insurance Company, the property/casualty member of Aegon USA. The outlook of this Credit Rating is stable.

The rating affirmations of Aegon USA reflect its strong business profile, adequate risk-adjusted capitalisation, well-developed enterprise risk management framework and an underlying trend of favourable statutory and IFRS profitability, although with some volatility given the asset and liability composition.

Partially offsetting these strengths is the continued increasing focus on sales of variable annuities, which the agency says has higher risk characteristics from a product creditworthiness standpoint.

AM Best also noted that the equity market sensitivity of the group’s earnings and its significant reliance on captive reinsurance is a drag on the quality of the group’s statutory capital.

According to the agency, Aegon USA’s business profile continues to remain strong, with competitive market positions in the US life and annuity arenas. The group’s market positions are supported by a large and diversified distribution system. Product lines that contribute to the company’s earnings diversification include traditional life, variable life, variable annuities, mutual funds, pensions and accident and health insurance. Risk-adjusted capitalisation, as measured by Best’s Capital Adequacy Ratio, is considered sufficient to support its current business and insurance risks. While volatility does exist in the operating profile of Aegon USA, the US entities continue to maintain an underlying trend of profitability on both a statutory and IFRS basis.

AM Best noted that the company has made a strategic shift to focus on selling products such as variable annuities, mutual funds and 401(k)s and has de-emphasized spread-based products, particularly fixed annuities. In a relatively stable capital market environment, the required capital on variable annuities is generally less than that required for the fixed annuity/spread-based products. However, AM Best views variable annuities with living benefit riders as displaying some of the highest risk characteristics, as well as being vulnerable to tail risks, which could lead to an increase in required capital. In addition, the organisation’s increasing exposure to variable annuities exposes its earnings to volatility, and while hedged, Aegon USA’s earnings remain somewhat correlated to capital market performance.

The agency also noted that Aegon USA has relied heavily on captive reinsurance to finance reserves generated from term life and universal life insurance with secondary guarantees. Financing provided to these captives include, but are not limited to, surplus notes, letters of credit and parental guarantees.

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