OREANDA-NEWS. Fitch Ratings has downgraded Aegon N. V's (Aegon) Long-term Issuer Default Rating (IDR) to 'A-' from 'A', and 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 to 'A+' from 'AA-'. The rating Outlooks are Stable.

The downgrade reflects Aegon's continued weak profitability, which is under pressure from pricing competition and low interest rates in its main markets. Underlying earnings declined 4% in 1H16 to EUR897m (1H15:EUR937m), driven by a 15% decline in Aegon Americas. Aegon's return on equity (ROE) based on net underlying earnings was around 6% at end-15, and net income return on equity was 2% at end-15, still only commensurate with the 'BBB' rating category, affected by a significant one-off charge and negative fair value changes.

The downgrade also considers our weak outlook for run rate pre-tax operating earnings growth in 2016 and 2017. 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. Earnings growth will be further subdued if the current low interest rate environment persists.

A full list of ratings is available at the end of this commentary.


Fitch views favourably Aegon's progress in executing a capital light, digitally focused strategy, in the Netherlands and UK. In particular, Fitch believes that Aegon's recent corporate activity in the UK, which includes the disposal of most of its UK annuity book and acquisition of investment businesses significantly accelerates the achievement of these objectives. However, we expect it to take some time for resulting business volumes to translate to significant bottom line profit growth, mainly because of margin compression.

Aegon's rating continues to reflect its diversification by product range, distribution channel and geography. Moreover, it 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.

The group's capital position is supportive of its ratings, with Fitch assessing overall capital & leverage at the 'AA-' level. Aegon's score in Fitch's Prism Factor-Based Model was "very strong" at end-2015 and is supportive of the rating. The group's Solvency 2 margin was resilient at 158% at end-June 2016 (end-2015: 160%), although it is sensitive to changes to interest rates and credit spreads, in particular in The Netherlands and US.

Aegon's Fitch-calculated financial leverage ratio (FLR) was around 26% as at end-2015 (2014: 29%), a level that Fitch considers commensurate with the 'A' rating category. We expect debt leverage to remain within the 26%-30% range in 2016, despite the book loss resulting from the disposal of Aegon's annuity business in the UK.

Aegon's total financing and commitments (TFC) ratio (end-15: 1.2x) remains high compared with those of its similarly rated peers, indicating greater reliance on financing activities. The main drivers of Aegon's high TFC ratio are US Regulation XXX and AXXX funding, securitisations to finance its mortgage portfolios in the Netherlands, securities lending, repurchase agreements and hybrids.

Aegon's fixed-charge cover (FCC) based on underlying earnings before tax improved to 7x in 2015 (2014: 6x), which is commensurate with Fitch's 7x median guideline for the 'A' rating category. Fitch expects the ratio to remain above 5x in 2016, but to gradually improve thereafter as Aegon raises its operating efficiency, and total interest expenses remain broadly stable.

We consider liquidity risk to be low, evidenced by the group's liquid assets/policyholder liabilities ratio remaining near 100% (98% at end 2015). Moreover, Aegon maintains significant cash at the holding company level (end-June 2016: EUR1.1bn), which provides ready financial flexibility and liquidity.

Fitch views Aegon Americas and Scottish Equitable Plc as the main operating subsidiaries in Aegon, and "Core" to the Aegon group and, as such, they have an IFS rating of 'A+'.


The ratings will be upgraded if Aegon's net underlying ROE improves to above 8% for a sustained period, with FCC-based on underlying earnings before tax remaining above 6x. Aegon's ratings could also be upgraded if there is 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 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.


Aegon N. V.:

Long-term IDR downgraded to 'A-' from 'A'; Outlook Stable

Senior unsecured debt downgraded to 'BBB+' from 'A-'

Short-term IDR and commercial paper programme downgraded to 'F2' from 'F1'

Perpetual cumulative subordinated bonds downgraded to 'BBB' from 'BBB+'

Dated subordinated bonds downgraded to 'BBB-' from 'BBB'

Scottish Equitable Plc

Long-term IFS rating downgraded to 'A+' from 'AA-'; Outlook Stable

The following Aegon North American life insurance subsidiary companies' Long-term IFS ratings have been downgraded to 'A+' from 'AA-' and Outlooks Stable:

Transamerica Advisors 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 downgraded to 'F1' from 'F1+':

Transamerica Life Insurance Company

Transamerica Premier Life Insurance Company

Aegon Funding Company LLC:

Senior debt downgraded to 'BBB+' from 'A-'

Subordinated debt programme downgraded to 'BBB-' from 'BBB'