A.M. Best Ups Outlook on Aegon Unit – Analyst Blog

A.M. Best Co. has affirmed the financial strength rating and issuer credit rating of Transamerica Life Canada (“TLC”), an indirect, wholly-owned subsidiary of Aegon NV (AEG), with positive outlook revisions.

 

A.M. Best Co. affirmed the financial strength rating of “B++” (Good) and upgraded the outlook to “positive” from “stable”. The rating agency also affirmed the issuer credit rating of “bbb+” and upgraded the outlook to “positive” from “negative”.

 

Transamerica boasts of a solid market share in its core business lines, multi-channel distribution platform, reduced risk profile and adequate capitalization that are reflected in the positive rating.

 

Transamerica’s strong reserve charges associated with segregated fund guarantee payments and changes in actuarial assumptions in 2009 helped it to post a net income of C$87.2 million in 2009 after incurring huge losses in 2007 and 2008.

 

The company has also been prudent enough to maintain the necessary level of liquidity to finance substantial segregated funds maturing in the first quarter of 2010. Moreover, Transamerica’s comprehensive hedging strategies are also augmenting its risk management practices. The agency’s rating actions and outlook revisions take into account these key positives.

 

Transamerica’s risk profile underwent an improvement with a change in management, which implemented static put hedging programs and smaller dynamic residual programs for its internally and externally managed segregated fund portfolios.

 

With the implementation of two macro hedge programs in 2009, TLC currently hedges over 90% of its equity risk exposure. On top of it, TLC withdrew product offerings that had aggressive features and fully reflected the cost of risk mitigation in its pricing. TLC’s segregated fund guarantees in excess of $1 billion matured in the first quarter of 2010.

 

However, due to the remaining equity basis risk on the hedged business, TLC’s profitability will remain susceptible to equity market performance. It incurred a net loss of C$35 million for the first quarter of 2010 due mostly to losses associated with the aforementioned segregated fund maturities. A.M. Best thus expects the volatile stock market to pressure Transamerica’s earnings for the remainder of 2010.

 

In a separate announcement, on Tuesday, Aegon declared the appointment of Sarah Russell as the new chief executive officer of AEGON Asset Management. The appointment will be effective August 1, 2010. AEGON Asset Management was officially launched in 2009 and groups together asset management businesses in North America, Europe and Asia.

 

Aegon’s strategic priorities of reallocating capital toward businesses with higher growth and return prospects, to improve growth and returns from existing businesses and reduce financial market risk remain on track. Aegon is also focused on reducing costs in the unit’s life and pension operation by 25% by 2011 and improving return on capital from 2.7% in 2009 to 8%−10% by 2014, and generating cash flows of GBP600 million to GBP650 million between 2010 and 2014.

 

Aegon has been considering significant actions to perk up growth and returns from its global businesses since June 2008. As part of these measures, Aegon, over the past two years, made forays in the growth markets of Brazil and India, and sold its life insurance operations in Taiwan.