Insurance. Aegon Americas. And North American Subsidiaries of Aegon N.V. Full Rating Report. Life Insurers/North America. Key Rating Drivers

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1 Aegon Americas And North American Subsidiaries of Aegon N.V. Full Rating Report Life Insurers/North America Ratings Security Class Rating Long-Term Issuer Default Rating (IDR) A Senior Unsecured A Short Term IDR and CP F1 Insurer Financial Strength AA Note: See additional ratings on page 14. Rating Outlook Negative Financial Data (USD Mil.) 12/31/12 Total Adjusted Capital 8,748 Surplus Notes Outstanding 460 Statutory Net Income 1,902 Operating Return on Total Adjusted Capital (%) 27.4 Risk-Based Capital (%) 496 Note: U.S. statutory data. For U.S.- domiciled subsidiaries of AEGON US Corp. and Transamerica Corp. Source: SNL Financial, Fitch. Related Research Fitch Affirms AEGON s Ratings; Outlook Negative (May 2013) 2013 Outlook: U.S. Life Insurance (December 2012) Fitch Affirms AEGON s Ratings; Outlook Negative (September 2012) AEGON Americas and North American Subsidiaries of AEGON N.V. (July 2012) Analysts Primary Analyst Andrew Davidson (U.S.) andrew.davidson@fitchratings.com Federico Faccio (EMEA) federico.faccio@fitchratings.com Secondary Analyst Doug Meyer (U.S.) doug.meyer@fitchratings.com David Prowse (EMEA) david.prowse@fitchratings.com Key Rating Drivers Adequate Capital Position: Fitch Ratings views Aegon Americas consolidated group capital position as being adequate on a risk-adjusted basis. Statutory capital increased 6.4% in 2012 to USD8.7 billion. Hedging of variable annuity risks and product and asset derisking has reduced capital volatility. Upstream dividends to Aegon N.V. are a significant source of cash for holding company expenses. Credit Risk Improving: Aegon Americas investment portfolio has been shifting to a higher quality asset mix, and credit impairments continue to decline. Forecasts for future impairments are within Fitch s expectations and are seen as manageable. Unrealized losses continue in structured security holdings in challenged investment classes such as housing and real estate. Profitability Improved, Below Ratings Expectations: Aegon Americas operating performance has improved, but remains below rating expectations. Fitch favorably views 2012 results and ongoing execution that focuses on core operations and improved operating efficiency. In particular, Aegon Americas reduced operating costs and is increasing fee-based earnings on variable annuity (VA) and pension operations to increase overall earnings. U.S. Operations Are Core: Fitch considers Aegon N.V. s rated U.S. entities as core due in part to Aegon Americas scale, operating performance and market position in chosen markets. In addition, the track record of mutual support in terms of capital contributions, upstream dividends, intercompany reinsurance support and capital market transactions support the core status, despite the sale or runoff of several of Aegon Americas business lines in 2010 and Solvency II Potentially Significant: Solvency II could substantially increase capital requirement of European insurers that have U.S. insurance operations. While various details are still being sorted out, failure to reach a decision on this matter could cause Aegon N.V., as well as other European parents, to reconsider their commitment to the U.S. insurance market in the face of increased capital requirements. Macroeconomic Headwinds: Continued economic turbulence, including low interest rates, financial market volatility, and a faltering in the economic recovery, will likely constrain Aegon Americas earnings growth over the near term. Fitch would also expect a severe, unexpected economic scenario to put pressure on earnings and capital. Rating Sensitivities Downgrade Triggers: Factors that could trigger a downgrade include a material decline in capital metrics with RBC below 350% for the combined insurance operations of A U.S.; an insurance group directive (IGD) ratio below 170% at parent, Aegon N.V.; any increase in financial leverage from current levels; or any decrease in interest coverage ratios from current levels. Upgrade Triggers: Fitch believes that a ratings upgrade for Aegon is unlikely in the near term.

2 Market Position and Size/Scale Large Multinational Diverse Product Portfolio Established multinational company. Broad-based products and distribution. Strong market positions. Established Multinational Company Aegon N.V. is an international life insurance, retirement savings and asset management company that does business in more than 20 markets in the Americas, Europe and Asia. Aegon companies employ more than 24,000 people and serve some 40 million customers across the globe. Broad-Based Products and Distribution Aegon Americas offers a wide range of life insurance products, including term, universal life, whole life and mortgage/creditor life. The company also offers pension and related savings programs such as fixed, variable and indexed annuities and mutual funds. The company utilizes multiple distribution channels for life product offerings, including independent brokerage distributors and agency channels with career agents. Strong Market Positions Aegon s U.S. businesses boast a top-tier market position in individual term, universal life and equity index universal life, individual whole life and variable life. For the most part, Aegon N.V. has the top 15 market position or better for its products in its chosen geographic regions. This strong market position helps the company to compete effectively by providing scale and brand recognition. Ratings Range Based on Market Position and Size/Scale IFS Rating Category AAA AA A BBB <BBB Senior Debt Rating Category Large Market Position and Size/Scale Medium Market Position and Size/Scale Small Market Position and Size/Scale AA A BBB BB <BB Aegon Americas 2

3 Simplified Organizational Chart (As of March 31, 2013) Vereniging Aegon a Aegon N.V. Aegon Canada Holding BV Transamerica Life Canada Aegon International BV DE DE Transamerica Corporation DE Aegon U.S. Holding Corporation Aegon Ireland Holding BV Transamerica Life International (Bermuda) Ltd. IA Aegon USA, LLC Transamerica Financial Life Insurance Company NAIC# Western Reserve Life Assurance Co. of Ohio NACI# Transamerica Advisors Life Insurance Company NAIC# NY OH AR Transamerica International Re (Bermuda) Ltd. Aegon Funding Company LLC DE Transamerica International Holdings, Inc. IA Transamerica Life Insurance Company NAIC# Transamerica Life (Bermuda) Ltd VT Commonwealth General Corporation Stonebridge Life Insurance Company NAIC# IA Monumental Life Insurance Company NAIC# Transamerica Advisors Life Insurance Company of New York NAIC# NY Stonebridge Casualty Insurance Company Represents entities rated by Fitch. Governance and Management AEGON N.V. s corporate governance and management are adequate and neutral to the rating. The majority of the board of directors is independent, as defined by the New York Stock Exchange. AEGON N.V. reports results under IFRS and its U.S. insurance subsidiaries report results under statutory accounting principles permitted or prescribed by their respective states of domicile. Ernst & Young LLC is AEGON N.V. s auditor. The audit opinion for 2012 was unqualified. AEGON N.V. employs a holding company structure with some insurance subsidiary stacking. Additionally, AEGON N.V. uses specialpurpose reinsurance captives to finance some life insurance reserves. a Owns 14.7% of Aegon N.V. Source: Aegon Group, U.S. operations, and Fitch Ratings. Ownership Is Neutral to Rating Ownership Structure Aegon N.V. s U.S.-based operations comprise seven separate U.S. life insurance companies, led by Transamerica Life Insurance Company. Ultimate ownership is by parent, Aegon N.V., while direct ownership of the U.S. operating companies is by holding company, Transamerica Corporation. Aegon Americas could be rated as much as one notch lower than its current level, absent a continued commitment from the parent. The ratings reflect Aegon Americas position as a core operation of Aegon N.V., which serves as the ultimate source of support for Aegon Americas capitalization levels. Aegon N.V. has provided significant capital to the U.S. operations through the years. Aegon Americas is the largest operating division in terms of revenue-producing assets and earnings and is likely to remain so for the foreseeable future. As such, Aegon Americas has a material effect on the Aegon group s performance and ratings. Fitch notes that the potential adoption of new European Union (EU) capital requirements (Solvency II) may result in a significant increase in capital requirements for Aegon s U.S. operations. However, Fitch believes the U.S. will ultimately achieve regulatory equivalence Aegon Americas 3

4 Sovereign- and Country- Related Constraints Fitch rates the local currency sovereign obligations of the United States of America at AAA with a Negative Outlook, and the country ceiling is similarly AAA. The local currency sovereign rating expresses the maximum limit for local currency ratings of most, but not all, issuers in a given country. At current levels, the ratings of U.S. insurance organizations and other corporate issuers are not likely to be constrained by sovereign or macroeconomic risks. recognition from the EU, which will allow Aegon N.V. to utilize NAIC risk-based capital as the key capital adequacy measure for its U.S. subsidiaries. Aegon N.V. is a Netherlands-based holding company that was founded in 1983 with the merger of two Dutch companies. The company s core business is insurance with a primary focus on three core markets: life insurance, pensions and asset management. Industry Profile and Operating Environment U.S. Life Industry Has Strong Balance Sheet Fundamentals A majority of U.S. life insurers in Fitch s rated universe have Insurer Financial Strength (IFS) ratings in the AA and A categories. Key industry risk factors include fixed-income and equity investment risks, macroeconomic uncertainty, low interest rates and intense price competition, as well as regulatory and accounting uncertainty. The industry withstood the financial crisis reasonably well, with capital largely rebounding due to earnings, investment gains and capital raises. Balance sheets reflect very strong liquidity, reasonable financial leverage, and improved asset quality. Improved earnings continue to lag precrisis levels due to low interest rates and increased hedging costs. The industry s large in-force book of VA business will continue to be a drag on profitability over the near term and could cause a material hit to industry earnings and capital in an unexpected, but still plausible, severe stress scenario. Ratings Range Based on Industry Profile/Operating Environment IFS Rating Category AAA AA A BBB <BBB Senior Debt Rating Category Life Insurance AA A BBB BB <BB Annuities Accident and Health Composite Aegon Americas 4

5 Peer Analysis Aegon Americas Results Are Volatile Versus Peers Rated AA Fitch views Aegon Americas market positions and retail franchise as generally comparable with the other AA life insurance group peers. Aegon Americas profitability recovered in 2012 to approximate peer levels, but exhibited greater volatility during the rebound from the financial crisis due in part to elevated investment losses and variable annuity guarantees. Aegon Americas balance sheet metrics are favorable in terms of operating leverage and capital. Fitch views diversity of earnings within the U.S. and market discipline as distinguishing factors in peer comparisons. Financial leverage at parent, Aegon N.V., is considered very high for the rating. Peer Comparison Table (As of Dec. 31, 2012) Insurer Financial Strength Risk-Based Capital (%) TAC (USD Mil.) Assets/ TAC (x) General Account Liabilities/ TAC (x) Risky Assets/ TAC (%) Financial Leverage Ratio Five-Year Avg. Pretax Return on Total Assets Post- Dividend (%) Five-Year Avg. Op. Return on TAC (%) AEGON U.S. Operating Companies AA 496 8, MetLife AA , Lincoln Financial A , Principal Financial AA 415 4, TAC Total adjusted capital. Op. Operating. Note: U.S. statutory accounting. Financial leverage ratios are for parent holding company. Profitability measures are for Source: Fitch Ratings, SNL Financial. Aegon Americas 5

6 Capitalization and Leverage (USD Mil.) Fitch s Expectations Total Adjusted Capital (TAC) 9,369 9,580 9,156 8,223 U.S. consolidated RBC will decline 8,748 but remain well above 400% in Risk-Based Capital (%) TAC is expected to increase Asset Leverage moderately in Note: U.S. statutory data. Data represents consolidated domestic life insurance operations only including Transamerica Bermuda. Excludes restatements. Source: Fitch, SNL Financial. Solid Operating Company Capitalization U.S. statutory capital is adequate. Maintaining risk-adjusted capital. Affiliated reinsurance used in capital management. Aegon s TFC is above average. Solid statutory dividend capacity. U.S. Statutory Capital Is Adequate Fitch views the U.S. targeted and actual capital position as adequate. Capital has remained at solid levels through the use of reinsurance transactions, the increased levels of statutory operating earnings and selective capital contributions. The U.S. operation has been generally self-funding in capital needed to invest back into the business and support growth. The exception to this was in 2002 and 2008, when Aegon N.V. supported Aegon Americas with capital contributions totaling approximately USD3.0 billion over that period. Some of the funding in 2008 was support for Aegon from the Dutch government. Aegon N.V. has been flexible in its dividend requirements in support of the process to get capital to the proper legal organizations in Aegon Americas to support growth. Organizational changes to simplify the legal structure continue. Maintaining Risk-Adjusted Capital Consolidated NAIC RBC increased to 496% at year-end 2012 from 444% at year-end 2011, driven by solid contributions from operating earnings and declines in required capital due to reduced risky assets. Aegon Americas experienced higher than expected volatility in statutory capital during the challenging period of , driven mainly by volatile equity and credit markets. Aegon Americas took several steps to reduce statutory capital requirements including exiting the life reinsurance business, de-emphasizing spread-based businesses and increased hedging of the company s VA business. Aegon Americas has a large VA portfolio with guaranteed benefits. The capital position has strengthened and become less volatile as a result of the company s increased hedging and derisking of living benefit guarantees on new business. Affiliated Reinsurance Used in Capital Management Aegon Americas makes significant use of reinsurance from third-party insurers, as well as from affiliated companies as a capital management tool. Aegon Americas has an outsized single counterparty exposure to Scor Re after the completion of the sale of Transamerica Re in 2011 through assumption reinsurance of its large life reinsurance book. Fitch views this risk as manageable based on the A+ IFS rating of Scor Re. Aegon Americas 6

7 TFC is a nonrisk-based leverage measure that expands on the traditional debt-to-equity ratio to include all forms of debt, including match-funded and operational debt, as well as debt supporting long-term capital needs and liquidity and working capital needs. The measure is intended to flag those companies that have an above-average reliance on the capital markets for funding. During periods of market disruptions and lost access to capital markets funding, such operational and off-balance sheet commitments can become a direct source of vulnerability to an organization. Aegon s TFC Is Above Average Aegon N.V. s total financing commitment (TFC) ratio at 1.7x is high compared with the average life insurance company and above many large U.S. stock- and foreign-owned peers. The main drivers of the elevated ratio are the company s use of XXX and AXXX funding, security lending and hybrids. Fitch believes Aegon s exposures to institutional-type funding are well managed. Solid Statutory Dividend Capacity Aegon Americas operations are an important and consistent source of funding for Aegon and contributed significantly toward the repayment of the Dutch government s support in The combined operating companies of Aegon Americas paid upstream dividends totaling USD1.2 billion in 2012 and Statutory dividend capacity without prior regulatory approval increased to approximately USD1.8 billion for Aegon Americas 7

8 Financial Performance and Earnings (%) Fitch s Expectations Pretax Gain from Operations (USD Mil.) Net Income (USD Mil.) , ,681 1,447 ( 189) 210 Expect Pretax IFRS underlying earnings to 2,412 increase 5% in 2013 and 6.5% thru Run rate IFRS return on capital is expected to 1,902 remain in 5% 7% range. Pretax Return on Total Assets Post-Dividend (0.10) Run-rate statutory net income is expected to be 1.33 in the $800 million $1,200 million range with Operating Return on Total Adjusted Capital (1.2) some volatility driven by VA reserving and 27.4 hedging. Asset Growth (4.0) 2.4 Note: Statutory accounting for AEGON Americas combined U.S. operating companies including Transamerica Life (Bermuda) LTD, Bermuda. Source: AEGON, Fitch Ratings, SNL Financial. Earnings Are Recovering, but Remain Below Rating Expectations Recovering operating earnings and capitalization. Product mix changes to improve quality of earnings. Reducing capital markets exposure in earnings Segment Underlying Earning Before Tax AEGON Americas Canad a and Latin Emplo Canada and Ameri yer Latin America ca Employer Soluti 3% 3% Solutions ons and and Pensions 22% ons 22% Retail Mutual Retail Funds Mutua 1% l Funds 1% Variable Annuities le Annuit 21% ies 21% Source: Company. Run- Runoff Businesses esses <1% Life 0% and Protec Life and tion Protection 38% 38% Fixed Fixed Annuities ies 15% 15% Recovering Operating Earnings and Capitalization Fitch expects Aegon Americas 2013 results to be similar to the prior year, which were challenged by the economic environment and strong competition. IFRS operating profitability is expected to remain in the midsingle-digit range for Key drivers will be lower investment portfolio yields and lower assets under management (due to the sale of reinsurance operations, the runoff of institutional spread businesses and fixed annuities). Offsetting this pressure should be favorable trends in product margins and lower expenses. While IFRS underlying earnings declined 9% in 2012, Aegon Americas 2012 net income increased 41% to USD1.3 billion, driven by strong growth in pensions, VA and index universal life, offset by higher expenses. Additional positives factors include the low impairment-related losses, higher investment gains and more favorable fair value items. Statutory profitability increased significantly to more normalized levels in 2012 compared with the prior year that was affected by the sale of Transamerica Re in the third quarter of AEGON Americas Profitability (USD Mil.) Total Revenues 19,450 17,534 18,229 17,247 16,973 Underlying Earnings 1,573 1,132 1,893 1,862 1,695 Change in Fair Value Items (2,434) (123) (32) (655) (98) Operating Income Before Tax (861) 1,009 1,861 1,197 1,597 Net Gains/(Losses) on Investments (97) Impairment Charges (1,138) (1,337) (506) (352) (151) Other Income (Charges) 5 (4) (404) (49) (37) Net Income Available to Common (2,022) 697 1, ,316 % Pretax Return on Assets (0.37) Note: International financial reporting (IFRS). Includes runoff operations data excludes Asian operations. Source: AEGON N.V., Fitch Ratings. Product Mix Changes to Improve Quality of Earnings Sources of underlying earnings exhibit good diversification. Aegon Americas market consistent value of new business (MCVNB) increased 34% in 2012 to EUR228 from EUR170, as underperforming products are repriced or withdrawn. The company expects MCVNB to migrate Aegon Americas 8

9 toward the individual savings and retirement segment, as well as the pensions segment. The deposit business accounted for 48% of MCVNB in Reducing Capital Markets Exposure in Earnings Aegon N.V. continues to execute its plan to restructure its U.S. operations. Aegon N.V. s strategic focus on core operations and improved operating efficiency will reduce the capital market sensitivity of earnings to a degree. In particular, Aegon N.V. plans to maintain profitability by reducing operating costs, increasing fee-based earnings on VA and pension operations, and withdrawing or de-emphasizing certain spreadbased businesses. IFRS Net Income and Operating Income AEGON Americas 2,000 1,600 1, (USD Mil.) Operating Income Before Tax Net Income Available to Common Source: Company, Fitch. Aegon Americas 9

10 Investment and Asset Risk Fitch s Expectations General account invested assets growth will be Cash and Invested Assets (USD Mil.) Below-Investment-Grade Bonds/TAC (%) 114, , , , , muted by the runoff of institutional asset businesses and fixed annuities and is expected to decline moderately in Risky Assets Ratio (%) Below investment-grade bonds will decline as a percentage of invested assets. Investment Yield (%) Investment yields will continue to be pressured by low interest rate levels. TAC Total adjusted capital. Source: Fitch Ratings, SNL Financial. Investment Risks and Impairments Declining Investment losses elevated, but declining. Risky asset ratio above average, but manageable. Unrealized losses in risky exposures. Investment Losses Elevated, but Declining Aegon Americas credit-related investment losses have declined significantly in 2012 to manageable levels, but remain exposed to a weakening economy. Exposure to structured securities and below investment-grade (BIG) bonds has driven significant credit-related losses since the economic crisis. The shift to a higher credit quality profile is expected to result in a favorable trend of declining impairments. Realized Gains/(Losses) and Impairments (IFRS) AEGON Americas 1, Realized Gains (Losses on Investments) Impairments (USD Mil.) Risky Asset Ratio Above Average, but Manageable Aegon Americas risky asset ratio improved in 2012, driven by reduced exposure to noninvestment-grade bonds, and was modestly above U.S. peers. Fitch expects modest improvement in 2013, reflecting Aegon Americas investment strategy, Aegon Americas risky assets ratio has declined moderately over the last three years to 107% of total adjusted capital (TAC), but it still exceeds the industry average of 87% at year-end Greater exposure to BIGs at 66%, compared with the industry average of 44%, accounted for the above-average result. Aegon Americas current investment strategy favors high-grade bonds, such as U.S. Treasurys, agencies and investment-grade corporate bonds, versus BIGs and structured securities. (500) (1,000) (1,500) Credit risk remains moderately above average, mainly due to exposure in certain residential mortgage-backed securities (RMBS) and commercial mortgage-related investments. The trend in improving credit quality is expected to continue with a decline in the allocation to structured assets, such as asset-backed securities (ABS) and RMBS. Source: Company, Fitch. Unrealized Losses in Risky Exposures Gross unrealized losses declined to USD485 million at year-end 2012 from USD966 million the prior year in residential MBS and housing-related ABS. Most challenged sectors include floating-rate RMBS and housing-related ABS. Holdings of bonds with potential exposure to the euro crisis including tier II financial sector bonds are at manageable levels, and exposure to sovereign debt is moderate. Aegon Americas corporate and structured securities bond portfolio (USD68.5 billion at year-end 2012) had a net unrealized gain of more than USD6.0 billion at year-end 2012 versus USD3.2 billion at Dec. 31, Aegon Americas 10

11 Asset/Liability and Liquidity Management Fitch s Expectations Liquidity Ratio (%) Fitch does not anticipate any material deviations in Operating Cash Flow Coverage (x) Total Adjusted Liabilities and Deposits (USD Mil.) 170, , , , ,951 Source: Fitch Ratings, SNL Financial. AEGON s solid asset/liability liquidity management in the near term. Solid Asset/Liability and Liquidity Management Managing down large capital markets product exposure. VA guarantee risk is reasonably managed. Regulation XXX and AXXX financing tools. Managing Down Large Capital Markets Product Exposure Aegon Americas has significant exposure to the volatile U.S. capital markets, especially through its Individual Savings and Retirement and Employer Solutions and Pensions divisions, which accounted for 59% of 2012 IFRS underlying earnings before tax. The company has taken steps to maintain profitability and reduce volatility, including the repricing of VA guarantees, the emphasis of fee-related mutual funds and the runoff of spread-related businesses. VA Guarantee Risk Is Reasonably Managed Aegon Americas has significant exposure to guarantees as a top 10 seller of VAs. More than 50% of its U.S. exposure contains a combination of guaranteed minimum living benefits (GMLB) and guaranteed minimum death benefits (GMDB); 33% contain GMDB only and 4% contain guaranteed minimum income benefit (GMIB) only. Fitch views Aegon Americas economic hedging program of capital marketrelated risks associated with its USD48 billion in VA reserves at year-end 2012 in the U.S. to be reasonably sound and effective. Unhedged exposures are believed to be manageable within tolerance levels and the context of the company s broader capital resources. Aegon s variable annuities gross deposits in 2012 were similar to the prior year, totaling USD5.3 billion, despite product repricing throughout the year to reflect the continued low interest rate environment and subsequent higher hedging costs. Regulation XXX and AXXX Financing Tools Adjusted Liabilities and Deposits AEGON Americas (% of Total) Life Reserves Source: SNL, Fitch Accident and Health Annuities and Pension Deposits Aegon Americas utilized a variety of programs to fund redundant XXX and AXXX reserves and improve risk-adjusted capital. Regulation XXX and AXXX reserves have been financed and managed using a variety of programs on a global basis. These include onshore and offshore reinsurance through captives, direct debt issuance, long-term (20 30 years) LOCs, one 30-year private structured credit transaction and a wrapped securitization. Other surplus-enhancing Other Separate Accounts Aegon Americas 11

12 transactions include a USD900 million embedded value LOC facility of traditional life business for Monumental Life Insurance Company in Aegon Americas 12

13 Appendix A: Additional Financial Exhibits VA Guarantee Benefits AEGON Americas GMLB only 4% No guarantees 10% GMDB and GMLB 53% GMDB only 33% GMLB Guarantee minimum living benefit. GMDB Guaranteed minimum death benefit. GMIB Guaranteed mimimum income benefit. Source: Company. Outstanding U.S. Debt (USD Mil., As of Dec. 31, 2012) Description Maturity Amount Commonwealth General Corporation Medium-Term Notes Medium-Term Notes Medium-Term Notes Medium-Term Notes Medium-Term Notes Total 71 Transamerica Corporation Trust Pass-Through Securities Trust Pass-Through Securities Total 133 AEGON Funding Corp. Senior Notes Total Guaranteed by AEGON N.V. 703 Source: AEGON Americas, Fitch Ratings. Aegon Americas 13

14 Appendix B: Other Ratings Considerations Below is summary of additional ratings considerations of a technical nature that are also part of Fitch s ratings criteria. Complete Ratings List Issuer Security Class Rating Transamerica Life Insurance Co. IFS AA Short-Term IFS F1+ Transamerica Financial Life Ins. Co IFS AA Monumental Life Insurance Co. IFS AA Short-Term IFS F1+ Transamerica Advisors Life Ins. Co. IFS AA Transamerica Advisors Life Ins. Co of New York IFS AA Stonebridge Life Insurance Co. IFS AA Transamerica Life Canada IFS AA Western Reserve Life Assurance Co. of Ohio IFS AA Transamerica Life International (Bermuda) Ltd. IFS AA Monumental Global Funding II Senior Secured Debt AA Monumental Global Funding III Senior Secured Debt AA Monumental Global Funding Ltd Senior Secured Debt AA Transamerica Corporation Issuer Default Rating A Transamerica Capital II Trust Preferred BBB Transamerica Capital III Trust Preferred BBB Commonwealth General Corp. Senior Debt A Transamerica Finance Corp. Senior Debt A AEGON Funding Company LLC Senior Unsecured Debt A Commercial Paper F1 IFS Insurer Financial Strength. Source: Fitch Ratings. Group IFS Rating Approach All of the rated insurers listed in the table above are considered to be core subsidiaries, and thus Fitch applied a group rating methodology, rating each entity based on a combined group assessment. U.S. Operations Are Core Fitch considers Aegon s rated U.S. entities as core due, in part, to Aegon Americas scale, operating performance, and market position in Aegon s chosen markets. In addition, the track record of mutual support in terms of capital contributions, upstream dividends, intercompany reinsurance support, and capital market transactions maintains the core status. Affiliates Transamerica Life International (Bermuda) Ltd. Transamerica Life International (Bermuda) Ltd. (TLIB), a direct subsidiary of Aegon Ireland Holding B.V., is part of Aegon Americas for public reporting purposes. TLIB has operated as an offshore carrier since 1999 and expanded its offerings in the private placement life insurance market in late TLIB s insurance product solutions are aimed at the unique needs of the high net worth market, and it has developed distribution relationships with global private banks, insurance brokers and investment management firms. Aegon Americas 14

15 In Fitch s view, TLIB shares the status of core with other U.S.-rated entities per Fitch s master criteria report, Insurance Rating Methodology. TLIB s risk management, governance, systems, controls and processes are aligned with those of Aegon Americas. Transamerica Life Canada Transamerica Life Canada (TLC) is also part of Aegon Americas for public reporting purposes and reports to the U.S. management team. Fitch considers TLC to be a core entity. TLC is a low-cost operation, holding solid market positions in term insurance, (variable) universal life and segregated funds. However, Fitch notes the company has a narrow scope and smaller base in Canada, where the three largest companies represent two-thirds or more of the market. Notching Summary Holding Company Standard notching was applied between the implied insurance operating company and holding company Issuer Default Ratings (IDRs). No adjustments were made for leverage, coverage, or diversification of holding company cash flows. IFS Ratings A baseline recovery assumption of Good applies to the Insurer Financial Strength (IFS) rating, and standard notching was used based on the existence of policyholder priority. Debt A baseline recovery assumption of Below Average for a holding company issuer was used, which is standard notching. Hybrids A baseline recovery assumption of Poor for a holding company issuer was used, which is standard notching. A loss absorption is considered Material. Notching The U.S., U.K. and Netherlands are strong regulatory environments with restrictions on payments from the regulated insurance entities to holding companies and priority-afforded policyholder obligations. Short-Term Ratings The short-term Issuer Default Rating (IDR) was notched using standard long-term and shortterm ratings equivalencies, per Fitch criteria. Bank backup meets Fitch s liquidity guidelines. Hybrids Treatment Hybrids Equity/Debt Treatment Hybrid Amount (USD Mil.) CAR Fitch % CAR Reg. Override % FLR Debt % Transamerica Capital II Transamerica Capital III CAR Capitalization ratio. FLR Financial leverage ratio. N.A. Not applicable. Note: CAR % shows portion of hybrid value included as available capital, both before Fitch and the regulatory override. For FRL, % shows portion of hybrid value included as debt in numerator of leverage ratio. Exceptions to Criteria/Ratings Limitations None. Aegon Americas 15

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