Scottish Equitable PLC

Primary Credit Analyst: Ali Karakuyu, London (44) 20-7176-7301; ali.karakuyu@spglobal.com Secondary Contact: Marc-Philippe Juilliard, Paris +(33) 1-4075-2510; m-philippe.juilliard@spglobal.com Table Of Contents Rationale Outlook Base-Case Scenario Company Description Business Risk Profile Financial Risk Profile Other Assessments Support Accounting Considerations Related Criteria And Research WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 1, 2016 1

SACP* Assessments SACP* Support Ratings Anchor bbb+ + Modifiers 0 = bbb+ + 3 = Financial Strength Rating Business Risk Satisfactory ERM and Management 0 Liquidity 0 Group Support 3 A+/Negative/-- Financial Risk Moderately Strong Holistic Analysis 0 Sovereign Risk 0 Gov't Support 0 *Stand-alone credit profile. See Ratings Detail for a complete list of rated entities and ratings covered by this report. Rationale Business Risk Profile: Satisfactory Significant risks remain for U.K. life insurer Scottish Equitable PLC (SEPLC) regarding the execution of its strategy to adapt to recent regulatory changes. We consider the U.K. life insurance sector to have low industry and country risk, supported by its strong institutional framework and strong track record in asset-liability management. In our view, SEPLC's longstanding history in the U.K. market and well-established relationships with intermediaries support its adequate competitive position. However, earnings remain a weakness relative to peers. Financial Risk Profile: Moderately Strong We assess SEPLC as having strong capital and earnings, supported by its capital-light strategy--seen, for example, in the sale of its U.K. annuity business. The execution of its strategic transformation in the face of significant regulatory change has the potential to add volatility to capital and earnings. A sizable pension scheme exposure also weighs on our risk position assessment. Other Factors We consider SEPLC to be strategically important to the Aegon group, and therefore our rating on SEPLC benefits from three notches of uplift for group support. We assess SEPLC's enterprise risk management as strong. Our view of management and governance is supported by management's experience and clearly communicated risk tolerances. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 1, 2016 2

Outlook: Negative The negative outlook reflects our view of the continued risks and uncertainties regarding SEPLC's ability to execute its strategy and deliver results that support its importance to Aegon. Downside scenario Over the next 12 months, we could lower the rating by two notches if we revise our view of SEPLC's group status to moderately strategic. For example, this could occur if SEPLC does not deliver performance improvements consistent with its current group status. In particular, we could lower the ratings if: We consider that its new business margins (mostly generated by the platform business) are unlikely to reach positive levels by year-end 2017. Cash generation is unlikely to support sustainable dividend payments to Aegon by 2017; or Although unlikely, capital adequacy declines to levels significantly below the 'A' level of confidence according to our capital model. Upside scenario An upgrade would be dependent on a change in group status to core. We do not consider such a revision of group status to be likely in the next two years. Base-Case Scenario Macroeconomic Assumptions We expect U.K. real GDP growth of 2% in 2016 and 2.2% in 2017. The U.K. 10-year government bond yield to drop to 1.6% in 2016 before increasing to 2.0% in 2017. Company-Specific Assumptions Negative new business margins of the platform business to break-even by mid-2017 and generate modest profit in second-half 2017. Return on capital in the 2%-5% range. Asset growth on the platform will offset outflows from legacy products. Our view of capital and earnings will remain at least strong. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 1, 2016 3

Key Metrics 2017F 2016F 2015 2014* Net income (mil. ) 56 46 251 176 Return on shareholders' equity (%) 5 2-5 10.4 6.7 *Amount have been restated for a voluntary change in accounting policy. F--Forecast. Company Description SEPLC is the main operating company of the Aegon U.K. group. Aegon N.V. owns Scottish Equitable Holdings Ltd., which in turn owns SEPLC. The wider Aegon U.K. group also includes independent financial advisor (IFA) network Origen. On May 3, 2016 Aegon announced its acquisition of BlackRock's U.K. defined contribution platform and administration business ( 12 billion of assets). This is in line with the group's strategy to focus on growing its platform business. At the same time, it sold most of its annuity book. SEPLC mostly sells unit-linked pensions business, together with some protection. On Dec. 31, 2015, SEPLC's accounts indicate that it had total assets of 62 billion ( 64 billion at year-end 2014). Technical provisions comprise mostly unit-linked reserves. Business Risk Profile: Satisfactory Insurance industry and country risk: Low, supported by strong institutional framework and low asset-liability mismatch SEPLC is exposed to the U.K. life insurance market, which we assess as being low risk. This reflects our view of the U.K.'s very low country risk and intermediate industry risk, and is supported by our positive opinion of the institutional framework and the sector's strong track record of minimizing asset-liability mismatches. We consider that the sector is highly competitive, but that it nevertheless maintains moderate levels of profitability. Table 1 Scottish Equitable PLC Industry And Country Risk Insurance sector IICRA Business mix (%) U.K. life Low Risk 100 IICRA--Insurance industry and country risk assesment. Competitive position: Adequate, based on increased risks and uncertainties in transforming to a capital-light, fee-based business in a highly competitive market SEPLC is a well-established player. It has a long history, is well-known among the intermediary community, and has a market share consistently in the top 10 (according to ABI statistics). WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 1, 2016 4

Table 2 Scottish Equitable PLC Competitive Position --Year ended Dec. 31-- (Mil. ) 2015 2014 2013 2012 2011 Gross premium written 4,100 3,917 5,547 4,900 5,516 Change in gross premium written (%) 4.7 (29.4) 13.2 (11.2) (11.2) Net premium written 3,756 3,573 5,206 4,563 5,226 Change in net premium written (%) 5.1 (31.4) 14.1 (12.7) (12.9) Total assets under management 58,512 59,830 57,267 55,372 52,154 Growth in assets under management (%) (2.2) 4.5 3.4 6.2 (0.7) Reinsurance utilization (%) 8.4 8.8 6.1 6.9 5.3 However, regulatory changes in the U.K. life market--including the banning of commissions on investment products and the pension reforms--have dented SEPLC's results and competitive position. SEPLC's strategic response to the new operating environment is to focus on developing and marketing its platform offering to sustain its market position. In our view, these developments, if successfully implemented, would support SEPLC's competitive position and enable the company to generate stronger returns. However, we think that the execution of this strategy in a highly competitive market comes with significant risks and uncertainties. Currently, there are more than 30 other platform providers. In addition, SEPLC's business is focused on the highly competitive pensions business. This concentrated business model also weakens our view of its competitive position. SEPLC's margins on its new business are negative, mostly due to lack of scale of its platform business. This somewhat reflects factors that do not weigh on our view of SEPLC's competitive position. For example, the unit-linked pensions business has lower margins than annuities (albeit profit generated by this will reduce materially following the above-mentioned sale) and protection because of the risk profile of annuity and differences in the ratio of new business profit to the present value of new business premiums for protection. However, platform margins have been negative since 2013, and overall margins turned negative in 2014-2015. In our view, the prospect of near-term improvement of new business profitability for the platform is still uncertain. That said, the BlackRock acquisition and the continuing upgrade of its old unit-linked business to the platform, together with the growing number of members joining via automatic enrolment, should improve efficiencies for SEPLC. Our assumption that these improvements will occur is an important supporting factor for the rating. In terms of brand and profitability, we still consider that SEPLC lags behind higher-rated peers, particularly post the sale of its annuity business. We consider that uncertainties remain around the development of persistency rates as SEPLC completes the transfer of assets onto its platform and as the auto-enrolled-schemes market develops. Finally, although SEPLC has launched a new direct-to-consumer proposition, we expect that distribution will remain biased toward IFAs over at least the next two years. We do not consider that providers have much control over the IFA channel. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 1, 2016 5

Financial Risk Profile: Moderately Strong Capital and earnings: Likely to remain strong We anticipate that SEPLC will maintain its strong capital and earnings, particularly following the sale of its annuity business. The latter has reduced the asset and liability capital requirements significantly. Our view of the company's risk-based capital takes into account the reliance on weaker capital components and the uncertainty around the level of capital return to its parent. That said, we recognize the company is committed to maintaining solid coverage under the Solvency 2 capital regime (147% at the end of 2015, post balance sheet adjustments in Q1 2016) and therefore do not expect aggressive levels of capital return to its parent. We expect earnings to be affected by the ongoing costs of platform-related expenses and asset de-risking; however, we anticipate they will improve progressively over the rating horizon as the platform expands and margins improve. We recognize that underlying earnings (excluding the impact of one-offs and short-term fluctuations due to assumption changes) are likely to drop in 2016 because of the sale of the annuity book. Historically, it contributed positively to bottom-line earnings. Hence, for 2016 we forecast that underlying earnings are likely to reduce significantly to about 40 million compared with 2015 (when underlying earnings before tax stood 92 million as reported by Aegon group). This is likely to translate to return on equity (ROE) of between 2%-5%. We expect the company to improve its earnings over by 2017 to above 50 million (ROE close to 5%) as it increases the scale of its platform business by (i) transfering its old unit-linked business onto the platform, and (ii) attracting new U.K. pensions and savings business. In particular, we expect the loss-making platform business to break-even by June 2017 and post good earnings from second-half 2017. While we note the BlackRock acquisition ( 12 billion assets under management), potential earnings from this will likely be small. We expect this acquisition to have minimal impact on SEPLC's financial risk profile given its capital-light nature. Table 3 Scottish Equitable PLC Capital --Year ended Dec. 31-- (Mil. ) 2015 2014* 2013 2012 2011 Shareholder equity 2,522 2,288 2,993 4,014 3,431 Change in shareholder equity (%) 10 (24) (25) 17 10 Shareholders' funds excluding revaluation reserves 2,515 2,264 2,440 3,162 2,996 *Amount have been restated for a voluntary change in accounting policy Table 4 Scottish Equitable PLC Earnings --Year ended Dec. 31-- (Mil. ) 2015 2014* 2013 2012 2011 Total revenues 5,803 5,626 7,332 6,478 7,220 Net income 251 176 108 171 (35) Return on shareholders' equity (reported) (%) 10.4 6.7 3.1 4.6 (1.1) WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 1, 2016 6

Table 4 Scottish Equitable PLC Earnings (cont.) --Year ended Dec. 31-- (Mil. ) 2015 2014* 2013 2012 2011 Life: Prebonus pretax earnings/total assets (%) 0.6 0.4 0.3 0.4 - *Amount have been restated for a voluntary change in accounting policy Risk position: Moderate, reflecting risks and uncertainties related to the transformation of the business model The execution of SEPLC's strategic transformation in the face of significant regulatory change has the potential to add volatility to capital and earnings. SEPLC's material pension scheme exposure also weighs on its risk position as it could contribute to volatility despite recent de-risking. However, our view of its risk position is supported by material reductions in risk in the with-profits fund, reducing the company's exposure to interest rate and market risk. Furthermore, the annuity sale has de-risked SEPL's balance sheet. Table 5 Scottish Equitable PLC Risk Position --Year ended Dec. 31-- (Mil. ) 2015 2014 2013 2012 2011 Total invested assets 58,512 59,830 57,267 55,372 52,154 Net investment income 1,642 1,652 1,725 1,890 1,676 Net investment yield (%) 2.8 2.8 3.1 3.5 3.2 Net investment yield including investment gains/(losses) (%) 3.0 9.1* 10.3 8.2 0.7 Investment portfolio composition, including unit-linked (%) Cash and short-term investments 4.9 5.4 5.8 5.4 3.7 Bonds 31.4 33.2 32.0 34.8 34.6 Equity investments 22.0 21.6 22.3 21.7 41.6 Real estate 1.3 1.4 1.4 1.5 1.8 Loans 0.2 0.2 0.4 1.2 1.4 Investments in affiliates 0.0 0.0 0.0 0.0 0.6 Other investments 40.3 38.2 38.0 35.4 16.3 *Amount have been restated for a voluntary change in accounting policy Financial flexibility: Adequate, part of the Aegon group Under our criteria, we would not typically consider a strategically important subsidiary's financial flexibility as any better than adequate. We already capture the benefits of being part of Aegon in our group support framework. On a stand-alone basis, financial flexibility is supported by the lack of debt on the balance sheet. Other Assessments Enterprise risk management: Strong, in line with Aegon group We view SEPLC as integrated into the Aegon group with regard to enterprise risk management (ERM). We assess the WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 1, 2016 7

group, and therefore SEPLC, as having strong ERM, reflecting our positive view of the risk-management culture, risk controls, and strategic risk management of this complex organization. We view the risk management culture as positive. Scottish Equitable operates a clear risk governance structure using a three-lines-of-defence framework. Scottish Equitable's Supervisory Board is ultimately responsible for approving the U.K.'s risk strategy. Risk exposure monitoring and risk appetite, however, is more in line with the adaptations of the local regulatory framework. The capital triggers and bottom-up escalation requirements, as a function of the buffer above the regulatory requirement position, are clearly defined. We assess risk controls as positive. Financial risks are actively managed using derivatives and several other management actions, particularly vis-à-vis the profits fund. ALM initiatives are regularly considered so as to control market risk exposures. Policyholder behaviour risk now ranks higher than longevity risk given reduced annuity volumes compared to previous years. Insurance risks in general are mitigated using reinsurance, and net risks retained are reviewed regularly and monitored against group-approved limits. We view the risk model as neutral for the rating. The risk framework predominantly relies on the locally approved risk-based regulatory model, which is under a strong governance framework. The choice of the group's economic framework depends on the decision-making circumstance and suitability. Management and Governance: Satisfactory, reflecting progress made so far in transforming the business, although risks exist around strategy execution and delivery Strategic positioning. SEPLC's strategy involves transforming the business from one that relies on commission to one that depends on adding value. The management team's original targets included an ROE of 8% by 2015 and 600 million of operational cash generation over 2010-2015, which we consider to have been overly ambitious. While we still view planned earnings improvements as ambitious, successful cost reductions and early signs of success in the platform indicate to us that earnings are likely to improve. Recent signs that the platform is gaining traction give us some confidence in the platform strategy's chances of success. Organizational effectiveness. The company's management team recognizes the significant strategic difficulties that SEPLC faces and has taken steps to restructure and realign the business to address these challenges. We consider that the team's success in cutting costs has materially improved SEPLC's prospects by supporting the recent improvements in earnings. This gives us confidence that the management team will reduce costs further. There appears to be significant depth and breadth in the leadership team, with no evidence of key-man risk. Aegon group has shown signs that it is willing to move people across the group, which we think helps avoid key-man risk. Financial management. We have a fairly positive view of SEPLC's financial management; we think SEPLC's risk appetite statements are detailed and comprehensive, and that it has a reasonably low appetite for financial risk. We have observed this in recent years; for example, partially hedging equity risk from the fees arising from unit-linked business; reducing risk in its with-profits fund; or more recently de-risking its portfolio in line with Solvency II-related constraints as evidenced by the sale of most of its U.K. annuity book. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 1, 2016 8

Liquidity: Exceptional We regard SEPLC's liquidity as exceptional, owing to the strength of available liquidity sources. We have no concerns regarding refinancing risk and we consider the group capable of managing unexpectedly large claims or an increase in life insurance policy lapses. Support Group support: Strategic importance to Aegon is under pressure as the business transforms We view SEPLC as strategically important to Aegon. This reflects SEPLC's focus on products and markets that are important to Aegon's long-term strategy, the material size of its business within the group, and the capital injections in 2013. Before 2013, Aegon N.V. and SEPLC had a contingent capital arrangement (CCA) that would have made 200 million available to SEPLC if needed. Aegon N.V. has opted to eliminate this arrangement and replace it with a direct capital injection of 200 million. We view this decision as supportive of SEPLC's group status. Furthermore, the group injected 300 million in 2013 to reflect a change in the way that regulatory capital calculations were viewed. However, we see significant pressure building on our assessment of the group status related to the risks and uncertainties around the ongoing strategic transformation. The U.K.'s cash generation and market-consistent value of new business margins has also continued to lag behind those of the rest of the group. The group previously stated that Aegon's U.K. business had a target of 8% ROE by 2015. We consider that SEPLC will need time to reach this target. Factors contributing to this include the drag on returns from legacy business and expenses relating to restructuring and regulatory change. SEPLC's stand-alone credit profile is 'bbb+'. Accounting Considerations The accounts for SEPLC are prepared under International Financial Reporting Standards. Local regulations mean that the regulator does not recognize the free assets in the closed with-profits fund when calculating regulatory solvency. S&P Global Ratings' capital model recognizes that capital in the with-profits fund is available to meet the risks in the fund. Related Criteria And Research Related Criteria Group Rating Methodology, Nov. 19, 2013 Insurers: Rating Methodology, May 7, 2013 Enterprise Risk Management, May 7, 2013 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 1, 2016 9

Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012 Refined Methodology And Assumptions For Analyzing Insurer Capital Adequacy Using The Risk-Based Insurance Capital Model, June 7, 2010 Use Of CreditWatch And Outlooks, Sept. 14, 2009 Related Research Scottish Equitable Ratings Unaffected By Majority Sale Of U.K. Annuity Portfolio, April 11, 2016 Aegon Group, May 12, 2016 Ratings Detail (As Of June 1, 2016) Operating Company Covered By This Report Scottish Equitable PLC Financial Strength Rating Local Currency Counterparty Credit Rating Local Currency Domicile A+/Negative/-- A+/Negative/-- United Kingdom *Unless otherwise noted, all ratings in this report are global scale ratings. Standard & Poor's credit ratings on the global scale are comparable across countries. Standard & Poor's credit ratings on a national scale are relative to obligors or obligations within that specific country. Issue and debt ratings could include debt guaranteed by another entity, and rated debt that an entity guarantees. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 1, 2016 10

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