«Table Of Contents Rationale Outlook Base-Case Scenario Company Description Business Risk Profile Financial Risk Profile Other Assessments Factors ...»
Primary Credit Analyst:
Mark Button, London (44) 20-7176-7045; firstname.lastname@example.org
Patrick C Wong, New York (1) 212-438-1936; 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 MARCH 5, 2015 1 1387618 | 300000817 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
• Very strong competitive position, largely reflecting its position in the U.S.
• Operates in stable major insurance markets with generally low industry and country risks.
Financial Risk Profile: Very Strong
• Very strong capital levels, which we believe will continue.
• Low direct exposure to unhedged equities, but fairly high exposure to credit risk.
• Strong financial flexibility, with proven access to capital markets and relatively limited capital needs.
• Strong enterprise risk management.
• Satisfactory management and governance.
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 operating primarily in the U.S.
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 in the U.S.
or if the group suffered significant investment-related losses;
• Operating performance weakened relative to peers, prompting a lowering of our competitive position assessment to strong; or
• Our view of the company's financial flexibility deteriorated--for example, if we expected fixed-charge coverage ratios to fall materially below 4x, or financial leverage to rise materially above 30%.
Upside scenario Based on current information, we consider ratings upside over the next two years as unlikely. However, we could
raise the rating if:
• We believed that Aegon's capital adequacy was in the 'AAA' range (extremely strong), and likely to remain at that level in the 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 could occur if we saw a significant improvement in its operating performance and a more-diversified business risk profile.
Base-Case Scenario Macroeconomic Assumptions
• 10-year Treasury yields in the U.S. rising to 2.5% in 2015 and 3.3% in 2016.
• The average level of the S&P 500 equity index being 9% higher in 2015, and a further 6% higher in 2016.
• The U.S. corporate trailing-12-month speculative-grade default rate will likely increase to 2.5% by Dec. 2015 from 1.6% in Dec. 2014, and 2.2% in Dec. 2013.
• U.S. GDP growth of 3.3% in 2015, and 2.9% in 2016.
• An average $/€ rate of 1.15 in 2015 and 2016 (versus 1.33 in 2014).
• Netherlands GDP growth improving gradually to 1.0% in 2015, and 1.3% in 2016.
• U.K. GDP growth averaging 2.6% over 2015-2016.
• Group capital adequacy to remain at least very strong.
• Earnings to benefit from the stronger dollar in 2015 supporting 10%-15% growth in underlying earnings to about €2.1 billon, with low-single-digit underlying earnings growth in 2016.
• Leverage remaining stable at around 30%.
• Fixed charge cover remaining above 6x.
F - forecast. * 2015 net income forecast includes assumption of €0.8bn loss on sale of Transamerica Life Canada. § 2013 restated to include impact of accounting changes. † based on post-tax underlying earnings.
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 a growing asset management operation. In 2014, Aegon wrote gross premiums of €19,864 million, of which €16,896 million was life insurance, €2,316 million was accident and health insurance, and €653 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 shareholder is Vereniging Aegon, which owned approximately 14% of Aegon's common shares as of Dec. 31,
2014. Vereniging Aegon is an association that safeguards the interests of the company and its stakeholders.
Aegon's balance sheet consisted of assets totaling €425 billion as of Dec. 31, 2014. Revenue generating investments (i.e. including off balance sheet investments managed for third parties) were €558 billion at year-end 2014.
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.
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 of industry and country risk.
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 the strength of its market position in the U.S. Its competitive position is also supported by its geographic diversity, both across the U.S. and internationally. It has a strong competitive position in The Netherlands but a weaker presence in the U.K. In addition, we take a positive view of the strength of Aegon's two primary brands, namely the Transamerica brand used in the U.S., and the Aegon brand globally.
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 geographic 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 are somewhat below those of some GMI peers. To some extent, this reflects Aegon's focus on shifting its business mix to a lower risk--and lower margin—-fee-based business, from the spread business. While we expect sales volume growth to somewhat support margins through the benefit of economies of scale, a number of external factors are likely to present headwinds to margin expansion. In particular, the low interest rate environment in Aegon's key markets, regulatory and product changes in the U.K., and the reduced appetite for higher yielding assets in the Netherlands, are expected, in our view, to result in the 2015 margins below the 1.3% achieved in 2014.
Similarly, return on equity (ROE) has been somewhat behind peers at 8.1% in 2014, down from 8.3% in 2013. To some extent, this is because Aegon retains very strong capital adequacy, but it also reflects profitability that is fundamentally weaker than some of its peers. Aegon's profitability is constrained by the drag on returns from de-risked run-off businesses (about 90 basis points (bps) impact on ROE), low interest rates, and some low-return legacy portfolios, particularly in the U.K. (4.2% ROE in the U.K. in 2014, which represents about 15% of group capital employed). We
expect ROE to improve to around 9% in 2015 and 2016, owing to our assumptions of the non-recurrence of one-off charges in 2014 and greater capital efficiency of the business as the shift from spread to fee business continues.
* Reinsurance utilization increased in 2011 because the sale of Transamerica Re to SCOR comes through as a reinsurance arrangement.
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 business lines. These provide a diversified earnings profile, with a well-balanced mix of individual life insurance, variable 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, demonstrating that Aegon USA does not rely too heavily on any one single line of business.
For example, Aegon has seen a 20% increase in sales of variable annuities (VAs) in 2014, following a 58% increase in 2013, with new business margins materially higher than 2012. 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 become more competitive in this product line again, and for Aegon's sales growth to moderate to more sustainable levels. 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 N.V., Aegon has a strong competitive position in the Dutch life and pensions market, particularly in the group pension and mortgage segments. Savings and investment products are 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 insurance operations core to the group, and the bank highly strategic, according to our group rating methodology.
We consider the key long-term strength of Aegon's Dutch business to be group pensions. By gross premium income, Aegon Leven is the largest life company in The Netherlands. It has a market share of about 21%, 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 30%.
Group pension new sales increased over 30% in 2014 owing to Aegon writing the largest ever Dutch pension buyout deal in the third quarter. Historic low interest rates in The Netherlands following the announcement of quantitative easing by the European Central Bank is likely to reduce sales in 2015, as the cost of buyout solutions weigh on demand. 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.
Mortgage production has been a key part of Aegon's strategy over recent years, as a lack of supply from the banks supported higher margins. We do not see this as sustainable, given the material allocation to mortgages on its balance sheet. The recent move to originate mortgages for third parties rather than its own account is evidence of its evolving strategy in this area.
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 weigh on our overall group assessment.
In our view, Aegon's U.K. business has historically been largely dependent on the payment of commissions to secure business. Now that regulatory changes (the Retail Distribution Review) have banned commissions 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 current low yields, we expect the group to maintain its very strong capital and earnings.