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Rating Action:

Moody's affirms AEGON N.V.’s A3 senior unsecured debt rating; outlook stable

01 November 2019


London , November 1, 2019 – Moody's Investors Service (Moody's) has today affirmed AEGON N.V.'s ("Aegon" or "Group") A3 long-term issuer and senior unsecured debt ratings, Baa1(hyb) subordinate and junior subordinate debt ratings, and Baa3(hyb) preferred stock non-cumulative rating. At the same time, Moody's affirmed the A1 insurance financial strength ratings (IFSRs) of Transamerica Life Insurance Company (TLIC), Transamerica Premier Life Insurance Company (TPLIC) and Transamerica Financial Life Insurance Company (TFLIC) (collectively Aegon USA). The outlooks remain stable for all entities.

A list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

AEGON N.V.

The affirmation of AEGON N.V.'s ratings reflects: (i) the aggregate credit strength of its various operating companies, in particular its main US operations (A1 IFSR affirmed); (ii) good and gradually improved geographic diversification which Moody's expects to be maintained; and (iii) reduced financial leverage. Less positively, the Group's profitability and earnings coverage remains relatively weak with significant net income volatility exhibited in recent years.

Aegon's A3 senior unsecured debt rating is two notches below the IFSR of its US operations. This narrower notching reflects Aegon's geographic diversification between its main markets: the US (52% of the Group's underlying earnings before tax at H1 19), the Netherlands (30%), the UK (6%) and a growing global asset management business (5%). The Group's reliance on the US business, which at YE17 represented 60% of underlying earnings, has reduced although this has been partially driven by relatively lower US earnings. A further element in considering narrower notching is that Aegon benefits from regulatory supervision at a group-wide level under Solvency II.

Going forward, Moody's said that it expects the Group's good level of geographic diversification, both in terms of earnings and cash-flows, to be maintained, benefiting from continued improvement in its European insurance and asset management businesses. In the UK, Moody's expects Aegon's leading retail platform business to continue to grow its earnings as the synergies from acquisitions gradually materialize, although these will partly be offset by pressures on margins. Aegon's shift towards capital-light products will also enable the Group to extract most of the UK generated earnings as dividends.

The rating action also reflects Moody's expectation that the Group's adjusted financial leverage will remain below 30%. At H1 19, adjusted financial and total leverage, on a Moody's basis and including the assets backing the Group's Dutch defined benefit plan, is estimated to have reduced to around 27% (YE18: 31.2%) and 33% (39.9%) respectively. This has been principally driven by a reduction in the Group's Federal Home Loan Bank (FHLB) borrowings and the full repayment of operating debt with recourse.

With regard to capitalization, the Group's consolidated Solvency II ratio at H1 19 was robust at 197%, which is at the top end of Aegon's target range of 150-200%, albeit reduced from 211% at YE18. This reduction was driven by adverse development in the Solvency II ratio for the Dutch operation, which declined significantly to 152% (YE18: 181%) as a result of spread-widening on mortgage-related credit. This level is below the bottom-end of the Dutch business target range (155-215%), and hence the suspension of its remittance to Aegon. Overall, the Group's solvency ratio's sensitivity to financial market movements has generally increased although, benefiting from a good and improved level of normalized capital generation, Moody's expects solvency to remain adequate in case of financial stress.

More negatively, the Group's profitability and earnings coverage has been weak in the last five years (with a five year average return on capital and earnings coverage of only 2.1% and 3.2x). In 2018 Aegon reported a 68% decline in net income which is symptomatic of the net income volatility it has displayed over the last five years, with wide differences between its net underlying earnings and bottom line results. In 2018 this difference was driven by the Group's dominant US business which faced downward pressure on growing profitably due to adverse claims experience, lower earnings from retirement plans business and volatility from the variable annuity (VA) block that is sensitive to changes in equity markets and interest rates as well as hedging risks. More positively, Aegon's net underlying earnings have gradually improved over the last few years, although declined slightly at H1 19 to €833 million (H1 18: €863 million).

Going forward, Moody's expects Aegon to continue to exhibit some volatility in its net income results. The Group's Dutch business net income is now more sensitive to credit spread movements, although the business, which has averaged c.€550 million of underlying earnings before tax between 2014 and 2018, is expected to remain a solid contributor to the Group's underlying earnings. The US business has continued pressure on long-term care margins, and net income volatility, given the company's sizable VA blocks, among other liabilities, subject to interest rate and equity market sensitivity, as well as hedging and other risks.

AEGON USA

The affirmation of Aegon USA's ratings is based on its well established positions in the US life insurance and asset accumulation businesses including individual and employee workplace markets. The rating also reflects the company's utilization of diversified distribution channels, its diversified earnings that benefit from economies of scale, and a stable capital position. Aegon USA continues to make progress to increase profitability and leverage its market positions, grow its individual and workplace businesses in its core markets while investing in programs to improve its back office operations (i.e. an administrative services agreement with Tata Consultancy Services Limited (A3 stable) and LTCG Holdings Corp. (LTCG)) and exit or de-emphasize non-core, and/or underperforming businesses (i.e. institutional life insurance and payout annuities).

These strengths are partially mitigated by lower than expected profitability for its rating level, a business profile with a concentration on the liability side of a legacy portfolio of long-term care (LTC) business and variable annuities (VA) with guaranteed benefits, and the company's level premium term life ("XXX") and no-lapse universal life insurance ("AXXX") business that was written before the introduction of principle based reserving extensively use captives, which weaken the quality of reserves, asset quality, and regulatory capital on a consolidated basis. While Aegon USA has lowered the risk profile of its VA, LTC and AXXX businesses by concentrating new sales in de-risked products, and its substantial hedging strategies, it still has material exposure to earnings, capital management and asset liability management challenges associated with these inforce blocks with long-term guarantees.

OUTLOOK

The stable outlook on Aegon's ratings reflects Moody's expectation that the US business will maintain its leading position in the US life insurance and asset accumulation markets together with strong business line and distribution diversification, and make further progress in increasing profitability and improving the quality of capital. Furthermore, Moody's expects the Group's capitalization to remain robust, adjusted financial leverage to remain below 30%, and for Aegon to maintain a good level of geographic diversification.

WHAT COULD MOVE THE RATING UP/DOWN

AEGON N.V.

The following factors could lead to an upgrade of Aegon: 1) Improvement in the credit profile of the US insurance operations, as evidenced by an upgrade of their insurance financial strength ratings; 2) adjusted financial leverage consistently below 25% and earnings coverage consistently above 8x.

Conversely, the following factors could lead to a downgrade: 1) Weakening of the credit profile of Aegon USA, as evidenced by a downgrade of its ratings; 2) consistent reduction in underlying earnings and/or significant net income volatility; 3) adjusted financial leverage consistently above 30% and earnings coverage consistently below 4x; 4) reduced geographic diversification (i.e. increased reliance on the US business) that would lead to a reduction in the notching differential between the IFSR of Aegon USA's entities and the senior unsecured debt rating of Aegon.

WHAT COULD MOVE THE RATING UP/DOWN

AEGON N.V.'s PERPETUAL RESTRICTED TIER 1 CONTINGENT CONVERTIBLE NOTES

The key drivers of the notes' Baa3(hyb) rating are the level of the Group's Solvency II ratio and the A1 IFSR of Aegon's US operations.

Positive rating action on the notes could occur if the Group would target and consistently report a Solvency II ratio above 200% and/or if the A1 IFSR of Aegon's US operations is upgraded.

Conversely, negative rating action on the notes could occur if the Group's Solvency II ratio is consistently below 165% and/or if the A1 IFSR of Aegon's US operations is downgraded.

WHAT COULD MOVE THE RATING UP/DOWN

AEGON USA

The following factors, together, could lead to an upgrade of Aegon USA: return on statutory capital (ROC) of the US operations consistently above 8% with a sustained reduction in volatility; materially less reliance on reinsurance captives from current levels in the US (as measured by total reserve credit and modco reserves); consolidated total leverage at Aegon group below 25% and earnings coverage consistently above 8x.

Conversely, the following factors could result in a downgrade of Aegon USA's ratings: return on statutory capital (ROC) of the US operations consistently below 4%; combined NAIC RBC ratio of less than 350% (CAL), after adjustment for intercompany loans and reinsurance captives; consolidated group financial leverage at Aegon group sustainably above 30% and earnings coverage consistently below 4x.

SUMMARY PROFILE OF AFFECTED GROUP

AEGON N.V. is the Netherlands-based holding company of the Aegon insurance group which primarily offers life insurance and pension products with its main operations based in the US. The group, which is present in over 20 other countries worldwide, also has significant and well-established operations in the Netherlands and the UK. For 2018, the group reported premium income of €19.3 billion and total equity of €22.9 billion.

LIST OF AFFECTED RATINGS

Issuer: AEGON N.V.

Affirmations:

....Long-term Issuer Rating, affirmed A3

....Senior Unsecured Regular Bond/Debenture, affirmed A3

....Senior Unsecured MTN Program, affirmed (P)A3

....Subordinate Regular Bond/Debenture, affirmed Baa1(hyb)

....Subordinate MTN Program, affirmed (P)Baa1

....Junior Subordinate Regular Bond/Debenture, affirmed Baa1(hyb)

....Preferred Stock Non-cumulative, affirmed Baa3(hyb)

....Commercial Paper, affirmed P-2

..Outlook Action:

....Outlook remains Stable

Issuer: AEGON Funding Company LLC

Affirmations:

....Backed Senior Unsecured Regular Bond/Debenture, affirmed A3

....Backed Senior Unsecured MTN Program, affirmed (P)A3

....Backed Subordinate Regular Bond/Debenture, affirmed Baa1(hyb)

....Backed Commercial Paper, affirmed P-2

..Outlook Action:

....Outlook remains Stable

Issuer: Commonwealth General Corporation

Affirmations:

....Backed Senior Unsecured Regular Bond/Debenture, affirmed A3

..Outlook Action:

....Outlook remains Stable

Issuer: Transamerica Financial Life Insurance Company

Affirmation:

....Insurance Financial Strength Rating, affirmed A1

..Outlook Action:

....Outlook remains Stable

Issuer: Transamerica Life Insurance Company

Affirmations:

....Insurance Financial Strength Rating, affirmed A1

....Short-term Insurance Financial Strength Rating, affirmed P-1

..Outlook Action:

....Outlook remains Stable

Issuer: Transamerica Premier Life Insurance Company

Affirmation:

....Insurance Financial Strength Rating, affirmed A1

..Outlook Action:

....Outlook remains Stable

Issuer: Monumental Global Funding Limited

Affirmations:

....Backed Senior Secured Regular Bond/Debenture, affirmed A1

....Backed Senior Secured MTN Program, affirmed (P)A1

..Outlook Action:

....Outlook remains Stable

Issuer: Transamerica Capital II

Affirmation:

....Backed Preferred Stock, affirmed Baa2(hyb)

..Outlook Action:

....Outlook remains Stable

Issuer: Transamerica Capital III

....Backed Preferred Stock, affirmed Baa2(hyb)

..Outlook Action:

....Outlook remains Stable

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Life Insurers published in May 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

The below contact information is provided for information purposes only. Please see the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead rating analyst and the Moody's legal entity that has issued the ratings.

The person who approved AEGON N.V., AEGON Funding Company LLC and Commonwealth General Corporation credit ratings is Antonello Aquino, Associate Managing Director, Financial Institutions Group, JOURNALISTS: 44 20 7772 5456, Client Service: 44 20 7772 5454. The person who approved Transamerica Financial Life Insurance Company, Transamerica Life Insurance Company, Transamerica Premier Life Insurance Company, Monumental Global Funding Limited, Transamerica Capital II and Transamerica Capital III credit ratings is Scott Robinson, CFA, Associate Managing Director, Financial Institutions Group, JOURNALISTS: 1 212 553 0376, Client Service: 1 212 553 1653.

The relevant office for each credit rating is identified in "Debt/deal box" on the Ratings tab in the Debt/Deal List section of each issuer/entity page of the website.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Dominic Simpson
VP-Sr Credit Officer
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London
United Kingdom
JOURNALISTS : 44 20 7772 5456
Client Service : 44 20 7772 5454

Antonello Aquino
Associate Managing Director
Financial Institutions Group
JOURNALISTS : 44 20 7772 5456
Client Service : 44 20 7772 5454

Releasing Office :
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London, E14 5FA
United Kingdom
JOURNALISTS : 44 20 7772 5456
Client Service : 44 20 7772 5454

© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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