Standard & Poor’s Ratings Services has revised its outlook on AEGON N.V. and its operating subsidiaries to stable from negative, and has affirmed the ‘AA-‘ long-term counterparty credit and insurer financial strength ratings on AEGON’s core subsidiaries and the ‘A-/A-2’ counterparty credit ratings on AEGON.
S&P said its actions follow the “completion on Aug. 10, 2011, of the sale of AEGON’s life reinsurance division, Transamerica Reinsurance (TARe), to SCOR SE (local currency A/Positive/A-1).” The successful completion of the sale led S&P to consider that “capital adequacy and debt leverage” remain consistent with its expectations, “following the temporary pressure on AEGON’s balance sheet caused by the repayment to the Dutch State in June 2011.
“The repayment has also resulted, as we understand, in the removal of behavioral constraints linked to its EC-agreed restructuring plan, improving our view of AEGON’s financial flexibility.”
The revised outlook reflects S&P’s view that “the progress made by AEGON to reduce risk, strengthen risk management, and improve its risk profile. ” S&P said it believes “the company’s balance sheet will be more resilient to stress than in the past as a result of these factors.
“The ratings on core operating entities of AEGON reflect what we see as their very strong, well-diversified competitive position; very strong capital adequacy; and strong enterprise risk management (ERM).”
As offsetting factors S&P noted the “difficult industry wide operating environment in AEGON’s core markets, their exposure to investment risk, and pressure on financial flexibility.”
S&P described AEGON’s ERM as “strong,” indicating that it “reflects our view of the significant progress made by the group in developing its risk management framework and embedding it in the business. We understand that AEGON has lowered equity, credit, and interest rate risks over recent years, although the latter two remain key sensitivities.
“The stable outlook on AEGON and its core subsidiaries reflects our expectation that AEGON will maintain the strength of its balance sheet and the business and financial profile of its key U.S. operations,” S&P added.
The rating agency posited the following possibilities for the future of its ratings on AEGON:
We could lower the ratings based on our criteria in particular if, all other things being equal:
• The stand-alone credit profile of AEGON USA ceases to be consistent with the rating;
• Capital adequacy falls below ‘AA’ (very strong) levels, which could result from further falls in long-term interest rates or investment-related losses in excess of €1 billion;
• Fixed-charge cover ratios fall below 3x;
• Financial leverage is not reduced to below 25 percent by year-end 2012; or
• Net cash flows to the holding company fall below €1 billion.
Based on current information, we see no upside potential for the ratings on the core operating companies over the next two years. Although we consider it currently unlikely, a positive rating action on the holding company could result from a combination of:
• Non-U.S. businesses contributing to growth in net cash flows to the holding company leading to a more balanced cash flow profile; and
• Sustainable fixed-charge cover ratios above 5x.
Source: Standard & Poor’s
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