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Fitch Affirms Aegon's IFS Ratings at 'A+'; Outlooks Stable
March 2, 2017 / 2:43 PM / 7 months ago

Fitch Affirms Aegon's IFS Ratings at 'A+'; Outlooks Stable

(The following statement was released by the rating agency) LONDON/NEW YORK, March 02 (Fitch) Fitch Ratings has affirmed Aegon's primary North American life insurance subsidiaries' (referred here as Aegon Americas) and Edinburgh-based Scottish Equitable Plc's Insurer Financial Strength (IFS) Ratings at 'A+' and Aegon N.V's (Aegon) Long-Term Issuer Default Rating (IDR) at 'A-'. The Outlooks are Stable. Fitch has simultaneously withdrawn the ratings of Transamerica Life International (Bermuda) Ltd. (TLIB) for commercial reasons. Accordingly, Fitch will no longer provide ratings or analytical coverage for TLIB. A full list of ratings is available at the end of this commentary. KEY RATING DRIVERS Aegon's ratings continue to reflect the group's diversification by product range, distribution channel and geography. Moreover, Aegon has a strong franchise and scale in its main markets - the US, the Netherlands and the UK - with top 10 positions in most of its chosen market segments. Fitch also views favourably Aegon's capital-light, digitally focused strategy, with the group having already made significant progress in this regard in the Netherlands and UK. Aegon's profitability, driven by pressure from pricing competition and low interest rates in the main markets, is a key rating weakness. Aegon's net income return on equity (ROE) of 2% in 2016 was below levels compatible with the ratings and more in line with the 'BBB' rating category. Net income stabilised in 2H16, supported by a rise in bond yields, an improvement in fair value adjustments and a reduction in one-off charges. Fitch expects net underlying earnings growth to remain weak in 2017 (2016: EUR1.5 billion, 2015: EUR1.5 billion). Aegon is shifting its business mix from high-margin (but capital-intensive) spread-based business to lower-margin, capital-light fee-based business. While we view this strategy positively from a rating standpoint, it results in a compression of margins for the group. The effect of margin compression on earnings is partly offset by Aegon's expense savings programme, with further group run-rate savings of EUR240 million planned by end-2018. Aegon's Fitch-calculated financial leverage ratio (FLR) was 29% as at end-2016 (2015: 27%), a level that Fitch views as commensurate with the 'A' rating category. The increase follows the group's issue of EUR500 million senior notes in December 2016. Proceeds from the issue will be used to repay EUR500 million senior notes maturing in July 2017, which will reduce the FLR. We expect FLR to remain within 26%-30% in 2017. RATING SENSITIVITIES The ratings will be upgraded if Aegon's net underlying ROE (2016: 7%) improves to above 8% for a sustained period, with fixed-charge cover based on underlying earnings before tax remaining above 6x. Aegon's ratings could also be upgraded on a sustained improvement in the FLR to below 25% with the Prism Factor-Based Model capital remaining at least "very strong". The ratings will be downgraded if, over a sustained period, FLR rises above 30% or if the Prism Factor-Based Model score falls to below the "very strong" category. The ratings could also be downgraded if net underlying ROE falls to below 4%, or if the group incurs significant one-off charges. FULL LIST OF RATING ACTIONS Aegon N.V.: Long-Term IDR affirmed at 'A-'; Outlook Stable Senior unsecured debt affirmed at 'BBB+' Short-Term IDR and commercial paper programme affirmed at 'F2' Perpetual cumulative subordinated bonds affirmed at 'BBB' Dated subordinated bonds affirmed at 'BBB-' Scottish Equitable Plc Long-Term IFS Rating affirmed at 'A+'; Outlook Stable The following Aegon North American life insurance subsidiary companies' Long-Term IFS Ratings have been affirmed at 'A+' with Stable Outlooks: Transamerica Advisors Life Insurance Company Transamerica Financial Life Insurance Company Transamerica Life Insurance Company Transamerica Premier Life Insurance Company Transamerica Life International (Bermuda) Ltd Long-Term IFS rating affirmed and withdrawn at 'A+'; Outlook Stable The following Aegon subsidiary companies' Short-Term IFS Ratings have been affirmed at 'F1': Transamerica Life Insurance Company Transamerica Premier Life Insurance Company Aegon Funding Company LLC: Senior debt affirmed at 'BBB+' Subordinated debt programme affirmed at 'BBB-' Contact: Primary Analysts Willem Loots (all entities except US subsidiaries) Senior Director +44 20 3530 1808 Fitch Ratings Limited 30 North Colonnade London E14 5GN Jamie Tucker, CPA (US subsidiaries) Associate Director +1 212 612 7856 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analysts Harish Gohil (all entities except US subsidiaries) Managing Director +44 20 3530 1257 Julie Burke, CPA, CFA (US subsidiaries) Managing Director +1 312 368 3158 Committee Chairperson Chris Waterman Managing Director +44 20 3530 1168 Media Relations: Athos Larkou, London, Tel: +44 203 530 1549, Email: athos.larkou@fitchratings.com. 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