«Table Of Contents Rationale Outlook Base-Case Scenario Company Description Business Risk Profile Financial Risk Profile Other Assessments Factors ...»
Primary Credit Analyst:
Sanjay Joshi, London (44) 20-7176-7087; firstname.lastname@example.org
Mark Button, London (44) 20-7176-7045; email@example.com
Table Of Contents
Business Risk Profile
Financial Risk Profile
Factors Specific To The Holding Company
Related Criteria And Research WWW.STANDARDANDPOORS.COM/RATINGSDIRECT DECEMBER 5, 2013 1 1224333 | 300354558 Aegon Group SACP* Assessments SACP* Support Ratings Financial Strength Rating + = + = Anchor aa- Modifiers 0 aa- 0 AA-/Stable/-- Business Risk ERM and Group 0 0 0 Liquidity Management Support Very Strong Holding Company Rating Financial Risk Holistic Sovereign Gov't 0 0 0 A-/Stable/A-2 Analysis Risk Support Very Strong *Stand-alone credit profile.
See Ratings Detail for a complete list of rated entities and ratings covered by this report.
Rationale Business Risk Profile: Very Strong
• We consider the competitive position of the Aegon group to be very strong, largely reflecting its position in the U.S.
• Aegon largely operates in stable major insurance markets, which we do not consider to have elevated industry or country risks.
Financial Risk Profile: Very Strong
• Aegon has a well-established policy of maintaining very strong capital levels, which we believe will continue.
• Aegon has fairly low direct exposure to unhedged equities, but fairly high exposure to credit risk.
• Financial flexibility is strong, with proven access to capital markets and relatively limited capital needs.
• We consider enterprise risk management to be strong.
• We view management and governance as satisfactory. This largely reflects Aegon's well-constructed financial policies and low appetite for unhedged direct exposure to equities.
Factors Specific to the Holding Company
• Aegon N.V.'s rating is three notches below the rating on the core operating entities, consistent with other companies mostly operating in the US.
Outlook: Stable The stable outlook on Aegon N.V. and its core subsidiaries reflects our expectation that the group will maintain the strength of its balance sheet and the business and financial profiles of its key U.S. operations.
We could lower the ratings if:
• Capital adequacy fell below 'AA' (very strong) levels, owing to long-term interest rates falling further or the group suffering significant investment-related losses;
• Operating performance weakened relative to peers, prompting us to lower our competitive position assessment to strong; or
• Our view of financial flexibility deteriorated--for example, if we expected fixed-charge coverage ratios to be materially below 4x, or financial leverage to be materially above 30%.
Upside scenario Based on current information, we consider a ratings upgrade over the next two years unlikely. However, an
upgrade could occur if:
• We believed that Aegon's capitalization was in the 'AAA' range (extremely strong), and likely to remain at that level in future, without an overly negative reaction from the capital markets about the potentially reduced dividend-paying capacity; or
• We revised our view of Aegon's competitive position to extremely strong. This would likely require an improvement in operating performance and a more-diversified business risk profile.
Base-Case Scenario Macroeconomic Assumptions
• Interest rates remaining fairly steady between now and the end of 2015, and the U.S. federal funds rate gradually increasing to 0.4% from 0.1%.
• 10-year bond yields gradually increasing as the markets anticipate the effect of quantitative easing tapering in the U.S.
• The S&P 500 equities index growing by 18% in 2013 and at an annualized rate of 6.8% from year-end 2013 to year-end 2015.
• U.S. GDP growth of 1.7% in 2013, rising to 3.1% in 2015.
• Netherlands GDP growth improving gradually to 0.5% in 2014 and 1.3% in 2015.
• U.K. GDP growth of close to 2% in 2014 and 2015.
• Group capital adequacy to remain at least very strong.
• Earnings to grow steadily over 2013-2015, resulting in underlying earnings in the range €1.8 billion-€2.1 billion.
• Leverage gradually reducing over 2013-2015, and staying within Aegon's target range of 26%-30%.
• Fixed charge cover improving substantially to above 5.5x, largely because of reductions in leverage.
F--Forecast, based on Standard & Poor's base-case scenario.
Company Description Aegon is one of the 15 largest insurance companies in the world. Its operations are dominated by life insurance, with a small amount of non-life business and an asset management operation. In 2012, Aegon wrote gross premiums of €19,526 million, of which €16,666 million was life insurance, €2,241 million was accident and health insurance, and €619 million was general insurance.
Aegon operates mainly in the U.S., the Netherlands--where it is headquartered--and the U.K. It also has a number of smaller operations across Asia and Europe, which form part of what Aegon calls "New Markets."
Aegon's common shares are mostly held by institutional shareholders such as pension or investment funds. The largest is Vereniging Aegon, which owned approximately 14% of Aegon's common shares as of June 1, 2013. Vereniging Aegon is an association that safeguards the interests of the company and its stakeholders.
Aegon's balance sheet consisted of assets totaling €356.7 billion as of June 30, 2013.
Business Risk Profile: Very Strong We regard Aegon's business risk profile as very strong, reflecting our assessment of the group's industry and country risk as low and its competitive position as very strong.
Insurance industry and country risk: Low risk in both U.S. and U.K. life insurance markets On balance, we think that Aegon is exposed to low industry and country risk; it is mostly exposed to developed life insurance markets in the U.S., The Netherlands, and the U.K.
We consider the U.S. life insurance market to have low industry and country risk because of stable economic growth prospects, moderate product risk, and the strong availability of fixed-income instruments to match life and annuity
liabilities. In the U.S., the current discussions around the tapering of quantitative easing are particularly relevant to our analysis of Aegon, since this possibility could encourage long-term bond yields to increase, in our view.
We assess the U.K. life insurance market as low risk, factoring in our positive opinion of the institutional framework and the market's strong track record of minimizing asset-liability mismatches. A particular issue for Aegon is that we consider the market to be highly competitive; nevertheless, we believe that profitability will generally remain moderate across the market.
Industry risks for Aegon's Dutch life business are higher because of significant product risks and uncertain market growth prospects.
Aegon is exposed to some markets that have higher industry and country risks within the "New Markets" segment, but we do not currently view these as material to our assessment.
Competitive position: Very strong, largely owing to its position in the U.S.
We consider that the Aegon group has a very strong competitive position, mainly reflecting its position in the U.S. Its competitive position is also supported by its geographic diversity; it has a strong competitive position in The Netherlands and a weaker presence in the U.K. In addition, we take a positive view of the strength of Aegon's brand, especially the Transamerica brand in the U.S.
We consider Aegon to be one of the more geographically diversified companies among all rated insurers, but as one of the global top 15 primary insurers--the so-called global multiline insurers (GMIs)--its geographical diversity does not stand out.
We consider operating performance a relative weakness in our assessment of Aegon's competitive position. Aegon's value of new business (VNB) margins tend to be somewhat below those of some GMI peers. While we expect sales volume growth to somewhat support margins through the benefit of economies of scale, we still expect VNB margins to lag behind those of more profitable peers. To some extent, this reflects Aegon's sales of low-margin deposit business, which also has a low risk profile.
Similarly, return on equity has been somewhat behind peers at 6.3% for the first half of 2013 and 7.4% for 2012. To some extent, this is because Aegon retains very strong capital adequacy, but it also reflects profitability that is fundamentally somewhat weaker than some of its peers. Aegon's profitability is constrained by the drag on returns from derisked run-off businesses, the low interest rates, and some low-return legacy portfolios, particularly in the U.K.
Table 1 Aegon Competitive Position (cont.) *Increased in 2011 because the sale of Transamerica Re to SCOR comes through as a reinsurance arrangement.
Aegon USA. Aegon USA has a very strong competitive position supported by the widely recognized Transamerica brand that Aegon now uses for all U.S. businesses. Aegon USA also enjoys low-cost operations with economies of scale and very strong distribution capabilities across diverse lines of business. These provide for a diversified earnings profile, with a well-balanced mix of individual life insurance, annuities, and retirement plans.
Aegon USA is a strong competitor in each of its selected markets. Some of the company's largest markets are very competitive and characterized by a high degree of commoditization. Aegon hasn't been compelled to follow the sometimes aggressive pricing of its competitors in any particular segment, reflecting that Aegon USA does not rely too heavily on any single line of business.
For example, Aegon has seen a 54% increase in sales of variable annuities (VAs) in the first half of 2013, accompanied by an improvement in VNB margins. This reflects the retrenchment from the market of some major players and higher prices that generally better reflect VA product risks. We think that at some point over the next two-to-three years, we are likely to see those players start to become more competitive in this product line again, and Aegon's sales of VA products falling back. Aegon's competitive position in this segment has been strengthened by the partnership with leading brokerage firm Edward Jones, which we think will support sales volumes in the future.
Aegon The Netherlands. Through Aegon Levensverzekering, Aegon has a strong competitive position in the Dutch life and pensions market, particularly in the group pension and mortgage segments. Asset management is another element of Aegon's business in The Netherlands. It offers non-life and accident and health insurance through Aegon Schadeverzekering and savings accounts through Aegon Bank, primarily to ensure that it can provide a full suite of services through its various distribution channels.
We consider the key long-term strength of Aegon's Dutch business to be group pensions. By gross premium income, Aegon is No. 2 in The Netherlands in life insurance with a market share of about 17%, based on consolidated 2013 data from the regulator. This is largely because of Aegon's strength in the group pensions sector, where its market share is around 25%.
Group pensions have fueled strong growth in premium volumes in the first half of 2013. We believe that this area is likely to see further competition over the ratings horizon, making this sort of growth unsustainable, in our view.
Nonetheless, we regard Aegon's position as a leading group pensions provider in the Netherlands as sustainable, given the strength of its positioning and brand.
The company is currently conducting a tactical shift toward mortgage business. Mortgages currently constitute a material part of the Dutch business, whether measured by sales, premiums, or earnings. We do not view this as a core strength of Aegon's business model, but rather a tactical move reflecting the relative weakness of the banking sector, which has made mortgages a more profitable business for Aegon.
Aegon U.K. We view Aegon's competitive position in the U.K. as less strong than in its other markets, although it is not weak enough to drag down our overall group assessment.
In our view, Aegon's U.K. business has historically been largely dependent on the payment of commission to secure
business. Now that regulatory changes (the Retail Distribution Review) have banned commission on new investment products, the company is undergoing a transformation to focus on a platform-based proposition which, if successfully executed, will leave it better placed to compete in the future.
Financial Risk Profile: Very Strong We regard Aegon's financial risk profile as very strong overall. Despite low yields, we expect the group to maintain its very strong capital and earnings.
Capital and earnings: Capitalization consistently maintained at the 'AA' level Aegon has demonstrated its commitment and ability to maintain 'AA' levels of capital adequacy, even through the financial crisis and the subsequent low yields. We anticipate that Aegon's capital position will remain exposed to market movements and low interest rates, despite the group's significant actions to reduce risk. However, we expect the group to act to ensure that its capital position remains at least consistent with 'AA' levels of capital adequacy.