AM Best has affirmed the Financial Strength Rating (FSR) of A (Excellent) and Long-Term Issuer Credit Ratings (Long-Term ICR) of “a+” of the U.S. life/health subsidiaries of Aegon N.V. (Aegon) (Netherlands) [NYSE: AEG]. Aegon’s U.S. life/health companies are referred to collectively as Aegon USA Group (Aegon USA). The outlook of these Credit Ratings (ratings) is stable. (See below for a detailed list of these companies.)
The ratings reflect Aegon USA’s balance sheet strength, which AM Best categorizes as very strong, as well as its adequate operating performance, favorable business profile and appropriate enterprise risk management.
AM Best’s expectation is for the Aegon USA group to maintain a very strong balance sheet strength assessment with the strongest level of risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR). Some concerns remain with recent moderate volatility and continued pressure on the Aegon USA’s operating performance, which is supported by its underwriting and investment capabilities. The overall business profile remains favorable with having a longer-term strategic focus of building a less capital-intensive book of business. Aegon USA continues to remain strategically important to its parent, Aegon.
The quality of capital is diminished by the historical reliance on special purpose captives used to support unfunded redundant reserves generated from term life and universal life insurance with secondary guarantees, although lately the company has been making an effort to reduce the overall exposure. Aegon USA has additional access to liquidity as a member of the Federal Home Loan Banks, which together with its access to capital markets provides Aegon USA with substantial financial flexibility. While the asset allocation within Aegon USA’s investment portfolio is typical for the U.S. life industry, there is some continued exposure to higher risk assets.
Aegon USA’s operating performance for the first half of 2020 was mostly affected by one-time impacts from interest rate and mortality assumption changes from unfavorable experience, along with lower fee revenue from declining equity markets that was offset by stable gross deposits on most business lines. The adequate operating performance reflects Aegon USA’s continued profitability with good margins on new business. While there is some continued volatility in Aegon USA’s operating performance, the U.S. entities maintain an underlying trend of profitability on a statutory and IFRS basis, but Aegon’s financial targets have been withdrawn due to an uncertain macroeconomic outlook. AM Best notes that Aegon USA’s overall top-line growth has also been inconsistent, with direct premium declining in three of the past four years, even though ordinary life insurance premiums have continued to grow modestly in the same period. Additionally, Aegon USA’s returns on equity have declined and now are lower than industry averages, with some volatility.
Aegon USA’s diverse product lines contribute to the company’s earnings, including traditional life, variable life, variable annuities, mutual funds, pensions, and accident and health insurance. There has been an increasingly challenging market environment for employee benefits in the United States. AM Best also 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. AM Best also notes that the company has made a strategic shift to focus on de-emphasizing spread-based products, particularly fixed annuities. Although Aegon USA’s portfolio includes some products viewed as less creditworthy by AM Best, Aegon USA enjoys good diversification geographically and by product type. Aegon USA’s business profile continues to remain favorable, with competitive market positions in the U.S. life and annuity arenas, supported by a large and diversified distribution system and an integrated worksite strategy that leverages the group’s broad market presence.
The FSR of A (Excellent) and the Long-Term ICRs of “a+” have been affirmed with a stable outlook for the following members of the Aegon USA Group:
- Transamerica Life Insurance Company
- Transamerica Financial Life Insurance Company
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