AEGON NV. Semi-Annual Update. CREDIT OPINION 4 July Update. Summary Rating Rationale. Credit Profile of Significant Subsidiaries Aegon USA

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1 CREDIT OPINION AEGON NV Semi-Annual Update Update Summary Rating Rationale RATINGS AEGON N.V. Domicile Netherlands Long Term Rating Type LT Issuer Rating Outlook Negative Please see the ratings section at the end of this report for more information. The ratings and outlook shown reflect information as of the publication date. Contacts Benjamin Serra VP-Sr Credit Officer Nicolò Squercina Associate Analyst Giovanni Meloni Analyst Antonello Aquino Associate Managing Director Aegon N.V. (senior debt rated ) is the Netherlands-based holding company of the Aegon insurance group. Aegon primarily offers life insurance and pension products and its main operations are based in the US, comprising three primary insurance entities which all carry an A1 Insurance Financial Strength Rating ( IFSR ). The group has also significant and well established operations in the Netherlands (Aegon Levensverzekering N.V.). Aegon's third largest operation is located in the UK (Aegon UK) and the group is present in over 20 other countries worldwide. The G-20 Financial Stability Board (FSB) has designated Aegon as one of the nine global systemically important insurers. Aegon N.V.'s senior debt rating is two notches lower than the A1 IFSR of the US operating companies. This notching is one notch narrower than Moody s standard practice, which reflects the geographical diversity of the group as well as the aggregate credit strength of its various operating companies. However the group's somewhat dependence on earnings from the US operations and predominant focus on life and retirement business compares less favourably to more diversified groups with a similar notching level. In addition, reliance on the US is increasing as the group decided to sell its UK annuity portfolio in Q Following this decision, we changed our outlook on Aegon N.V. to negative to reflect the reduced geographic diversification and the uncertainty around Aegon s ability to replace the lost earnings in the UK. Credit Profile of Significant Subsidiaries Aegon USA Moody's A1 IFSR (stable outlook) of three operating life insurance companies in the Aegon USA Life Group (Aegon USA - i.e., Transamerica Life Insurance Company, Transamerica Premier Life Insurance Company and Transamerica Financial Life Insurance Company) is based on the group's leading position in the U.S. life insurance and asset accumulation markets, strong business line and distribution diversification, and generally good earnings capacity from its core, non-variable business lines. The group's sales - largely variable annuities (VAs) and group pensions - and revenues have continued to grow in recent years with the US economy and equity markets, but also as a result of the company's distribution capabilities and the launch of new products. The company's acquisition in 2015 of the defined contribution pension recordkeeping business of Mercer HR Services, LLC (Mercer; not rated by Moody's) should provide needed scale for its pension administration business, as well as the potential for additional Mercer-driven sales. Aegon USA remains the largest, most important operation in terms of global assets, revenue and income of Aegon N.V..

2 Aegon USA's strengths are mitigated by the risks of the company's liability profile, in terms of level premium term life (XXX), no lapse universal life insurance (AXXX UL), and annuity businesses (fixed, indexed, and particularly variable (VAs)) - a primary focus of recent sales growth, along with pension sales, which have a low risk profile. Annuities and no-lapse UL are interest sensitive, while VAs, although de-risked, expose the company to equity market and hedging risks, and greater earnings, reserves, and capital volatility. The term and UL products (stopped selling UL in Q1 2015) additionally engender the extensive use of structured transactions at onshore captives, which weaken the quality of reserves, asset quality, and regulatory capital on a consolidated basis. In June, Aegon reinsured two blocks of run-off businesses of approximately USD14 billion of insurance liabilities, supporting Aegon s strategy in the US to focus on more fee-based businesses. In 2016, Aegon reported net income of USD618 million for its US segment which favourably compares to a net loss of USD261 million in 2015, which was predominantly driven by the sale of Canada that was completed in July 2015 and assumption changes (notably related to lapse assumptions for long-term care policies and unit expense assumptions in fixed annuities). AEGON USA s pre-tax operating earnings remained stable at USD1.4 billion in 2016, as lower contribution from the variable annuities business was broadly offset by expense reductions and other movements in claims experience. Earnings from Variable Annuities continued to decline as a result of the reduction of closed block variable annuity balances and declining margins due to lower interest rates as well as adverse claims experience. Aegon USA has initiated a five part plan to improve results, which consists in (1) remediating underperforming blocks, (2) reducing costs, (3) rationalizing its locations in the U.S., (4) overhauling businesses and product offerings, and (5) disposing of non-core assets. Aegon The Netherlands Aegon Levensverzekering N.V. enjoys a strong brand recognition and one of the leading positions in the Dutch life insurance market. The company is particularly strong in group pensions. In addition, Aegon benefits from a diversified and relatively highly controlled distribution network relative to Dutch peers. However, the Dutch market remains highly competitive and the company has been focusing on improving customer service while reducing costs. In 2016, underlying earnings before tax amounted to EUR534 million and remained broadly stable compared to the same period in New business sales declined by 10% in 2016 due to lower contribution from large pension contracts, albeit pensions sales continued to represent around two thirds of total life and pensions sales. However, gross deposits continued to record strong growth, reaching EUR6.7 billion in 2016(2015: EUR5.1 billion), reflecting the growth of Aegon's online bank, named Knab, launched in The insurer undertook pro-active hedging on equity and interest-rate risk more than 10 years ago and consequently the earnings' sensitivity to changes in interest rates and equity markets is low compared to many Dutch peers. Nevertheless investment guarantees embedded in many of the products continue to leave the company's profitability somewhat exposed to adverse market movements in times of sharp market volatility and of low interest rates. Aegon UK Aegon is present in the UK life and pensions market and has become the leader in the UK platform segment, following the acquisition of BlackRock s UK defined contribution business and more importantly the acquisition of Cofunds, which significantly increased the scale of Aegon s platform business to over GBP100 billion of assets from around GBP9 billion as of Q Pensions are the largest business in terms of sales. The company has been rationalising its business lines by pulling out of the annuities business and focusing on selected business lines (At Retirement and Workplace savings), as well as progressively migrating its business to its own pension administration and investment platform. In Q2 2016, Aegon announced the sale of two thirds of its UK annuity book to Rothesay Life and the sale of its remaining part to Legal & General. Moody's estimates that Aegon's UK annuity portfolio generated underlying earnings before tax of between EUR40 million and EUR50 million per year, which represented between 2% and 3% of the group's earnings, but between 30% and 40% of the earnings generated in the UK. Therefore, the sale of the annuity portfolio meaningfully reduced the contribution of the UK to the group. This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history. 2

3 More positively, over time, a successful integration of Cofunds could largely offset Aegon s loss of earnings from the disposal of its UK annuity book. In 2016 underlying earnings before tax amounted to GBP48 million, up from a loss of GBP20 in 2015, mainly reflecting lower deferred acquisition costs (DAC), which we will be a recurring feature, following a change in method to account for DAC announced in Q and implemented retrospectively. However, in Moody's opinion, the stand-alone fundamentals of Aegon UK remain pressurised in terms of profitability. Going forward, Aegon s UK profitability will largely depend on the level of assets under administration that it retains on its platform and the fees it charges its customers amid continued negative pressure on margins in the competitive UK platform market. More positively, scale is a major profitability driver in the platform business and Aegon expects the acquisition of Cofunds to significantly improve Aegon s UK net earnings. Credit Strengths Strongly focused strategy on wealth accumulation, life insurance and pension products Diversified business portfolio, with top tier positions in the US, in the Netherlands and in the UK platform segment Broad product offering and strong customer service capabilities Good liquidity and ALM management Credit Challenges To maintain its competitive position and improve profitability, particularly in the UK, and to a lower extent in the Netherlands, following the shift in focus in new business Potential decline in VA and Individual Retirement Annuity (IRA) sales in the US Relatively high total leverage and more broadly relatively high reliance on structured transactions such as the use of captives in the US and the funding of mortgages through RMBS in the Netherlands Rating Outlook The outlook is negative, reflecting the reduction in Aegon's geographic diversification that resulted from the sale of its UK annuity portfolio and the related loss of earnings, as well as some uncertainty over the use of capital surplus generated by the sale. What to watch for: Evolution of the group's geographic diversification, and notably Aegon's ability to successfully integrate its recent acquisitions in the UK in order to improve its platform-based earnings to offset the lost UK earnings Underlying profitability in the US Capital management, notably potential return of capital surplus generated by the sale of the UK annuity portfolio to shareholders or by the recent disposal of run-off businesses in the US What Could Change the Rating - UP Senior debt ratings could be upgraded in the event of: Improvement in the credit profile of the US insurance operations, as evidenced by an upgrade of their insurance financial strength ratings Consolidated total leverage below 30% and earnings coverage consistently above 8x What Could Change the Rating - DOWN Senior debt ratings could be downgraded in the event of: 3

4 Continued 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 debt rating of Aegon N.V. Weakening of the credit profile of Aegon USA, as evidenced by a downgrade of its ratings Weakening in the credit profile of the Dutch operations Consolidated group financial leverage above 40% and earnings coverage consistently below 4x Key Indicators Exhibit 1 AEGON N.V.[1][2] As Report ed (Euro Millions) Total Assets 425, , , , ,884 24,734 26,493 28,129 22,626 28,519 1, ,327 43,883 45,012 42,739 Total Shareholders' Equity Net income (loss) attributable to common shareholders' Total Revenue ,214 (662) 34,869 Moody's Adjust ed Rat ios Goodwill & Intangibles % Shareholders' Equity 58.0% 52.4% 47.4% 61.5% 55.8% Financial Leverage 36.2% 28.2% 27.4% 31.1% 30.4% Total Leverage 43.8% 37.5% 37.4% 44.1% 45.3% 2.3x -0.8x 3.6x 2.5x 3.8x Earnings Coverage (1 yr.) Cash Flow Coverage (1 yr.) [1] Information based on IFRS financial statements as of Fiscal YE December 31 [2] Certain items may have been relabeled and/or reclassified for global consistency Source: Company Reports, Moody's Investors Service Capital Structure and Liquidity Aegon's consolidated shareholders' equity reduced to EUR24.7 billion in 2016 (2015: EUR26.5 billion) as a result of a DAC write off related to the UK business as well as other accounting changes. At the same time, total capital increased to EUR38.7 billion (2015: EUR34.3 billion), driven by additional debt issued in As of 31 December 2016, EUR11.5 billion of debt was outstanding, of which EUR1.5 billion (13%) was recourse operational debt, EUR5.4 billion (46%) was senior debt or commercial paper and EUR4.7 billion (40%) was subordinated debt. As of year-end 2016, Aegon also had EUR6.4 billion of outstanding non-recourse debt (e.g., funding of mortgages through RMBS) that we include neither in financial debt, nor in operational debt in our calculations. The majority of the group's borrowings is traditionally either directly attributable to or guaranteed by Aegon N.V., but since 2016, senior debt includes EUR2.8 billion of borrowings to the Federal Home Loan Bank (FHLB), issued by some Aegon s subsidiaries in the US. Moody's views Aegon N.V.'s financial flexibility in line with a single A score. In 2016 financial leverage (excluding operational debts) materially increased to around 36% (2015: 28%), after several years of decline and of deleveraging actions, as a result of additional borrowings and the decline in shareholders equity in 2016.Additional debt notably includes EUR2.8 billion of borrowings to the FHLB that Aegon uses primarily to purchase long-term assets and increase the duration of its assets in its US life subsidiaries. New debt issued in 2016 also includes EUR500 million of senior debt issued to refinance debt maturing in Nonetheless, in our financial leverage ratio, financial debt includes pension deficit which amounted to EUR4.5 billion at year-end 2016, while Aegon holds some assets backing these pension liabilities; if we take into consideration these assets, pension deficit significantly improves and financial leverage decreases by around 5 percentage points. Total leverage, which includes recourse operational debt and does not incorporate equity credit for hybrid securities has increased to around 44% in 2016 (2015: 38%), mostly explained by the increase in financial leverage. However, the group has repaid part of 4

5 its outstanding recourse debt, which reduced to EUR1.5 billion in 2016 compared to EUR2.1 billion in The difference between the total leverage and the financial leverage now mostly reflects the use of structured transactions to reduce new business strain and optimize capital in its US operations. Aegon's financial flexibility remains nonetheless constrained by a relatively low earnings coverage (around 2x on a 5-year average basis), mostly driven by a weak profitability. Liquidity Profile Moody's Prime-2 rating of Aegon N.V. and Aegon Funding Company LLC USD4.5 billion commercial paper programs are based on the group's current ratings (long-term senior debt ), and the availability of alternative sources of liquidity to assist the repayment of outstanding obligations. Aegon N.V. guarantees any notes issued under the program by its subsidiary Aegon Funding Company. Total drawings under Aegon N.V.'s programs were EUR128 million as of 31 December At the same time, the amount of liquid assets at the holding Aegon N.V. (i.e., cash and equivalents) were EUR879 million at year-end 2016 (excluding collateral received from counterparties and liquidity managed on behalf of affiliated investment funds) and the group held a total balance of EUR1.5 billion in excess cash as of year-end 2016 in the centrally managed holding companies, with net dividends upstreamed from the units (EUR1.1 billion) and senior debt issuance (EUR0.5 billion) covering holding expenses (EUR0.3 billion),capital returns to shareholders (EUR0.9 billion), and capital injections to units (EUR0.2 billion). Aegon is targeting to maintain a cash buffer at the holding between EUR1.0 and EUR1.5 billion. The main drivers of the evolution of holding excess cash in the coming months will be dividends from subsidiaries (including a potential upstream of capital resulting from the sale of the UK annuity portfolio), holding expenses, capital returns to shareholders and potential capital injection in subsidiaries. Aegon indicated that it was committed to improve the solvency position of its Dutch life insurance operation, which had a Solvency II ratio of 120% at year-end Aegon will also benefit from the capital surplus generated by the divestment of US portfolios (transaction expected to close in the summer of 2017, and capital upstream will be subject to regulatory approvals). Aegon's liquidity profile has been enhanced in recent years by the continued issue of perpetual capital securities to refinance maturing and callable debt. In Moody's view, these issues have reduced the level of refinancing risk in the Aegon group. Aegon already issued EUR500 million of debt in 2016 to finance the repayment of EUR500 million of senior debt maturing in July in 2017; and on aggregate, around EUR1 billion of debts are maturing between 2017 and The company has improved capital fungibility across the group and the net cash flows to the holding; nevertheless the holding company's flexibility remains somewhat constrained as earnings at operating companies remain pressurised. In addition, Aegon maintains a number of banking relationships in the form of bilateral and syndicated committed credit facilities. The main arrangements include a EUR2 billion syndicated revolving credit facility maturing in 2019 and a USD2.6 billion LOC facility maturing in No drawdowns had been made on this syndicated revolving credit facility as of 31 December Ratings Exhibit 2 Category AEGON N.V. Rating Outlook Senior Unsecured Senior Unsecured MTN Commercial Paper LT Issuer Rating Subordinate Junior Subordinate Moody's Rating NEG (P) P-2 Baa1 (hyb) Baa1 (hyb) AEGON FUNDING COMPANY LLC Rating Outlook BACKED Senior Unsecured BACKED Commercial Paper NEG P-2 Source: Moody's Investors Service 5

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