AEGON USA Group - · PDF fileThe stable outlook on the AEGON USA group of companies is ......

AEGON USA GroupPrimary Credit Analyst:Robert A Hafner, New York (1) 212-438-7216; [email protected]

Secondary Contacts:Sanjay Joshi, London (44) 20 7176 7087; [email protected] H Chu, Toronto (1) 416-507-2506; [email protected]

Table Of Contents

Major Rating Factors

Rationale

Outlook

Competitive Position: Diverse Lines Of Business With Scale And Strong

Distribution Capabilities

Management And Corporate Strategy: A Wide Array Of Product And

Distribution Capabilities That Meets A Variety Of Needs

Enterprise Risk Management: Strong

Accounting

Operating Performance: Diverse Sources Of Earnings That Are Subject To

Market-Related Volatility

Investments And Liquidity: A Well-Diversified And Highly Liquid

Portfolio With Some Exposure To Stressed Asset Classes

Capitalization: Derisking And Dividend Limitations Help Maintain

Capital Adequacy

Financial Flexibility: Strong

Related Criteria And Research

January 30, 2012

www.standardandpoors.com/ratingsdirect 1

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AEGON USA Group

Major Rating Factors

Strengths:

• Very strong, diversified competitive position in the U.S. life insurance,

annuity, and pension markets

• Very strong capital adequacy and liquidity

• Strong enterprise risk management

• Relationship with AEGON N.V. that enhances financial flexibility

Operating Companies Covered ByThis Report

Financial Strength Rating

Local Currency

AA-/Stable/A-1+

Weaknesses:

• Operating earnings volatility resulting from market-sensitive product guarantees and diminished earnings

stemming from tightening spreads

• Exposure to investment risk

Rationale

Standard & Poor's Ratings Services' insurer financial strength ratings on the AEGON USA group of companies

primarily reflect the group's very strong competitive position, capital adequacy, and liquidity. The group has

established very strong distribution capabilities across multiple channels that enable it to execute its strategy of

meeting a wide variety of protection, savings, and retirement needs in the U.S. market. The firm has leveraged its

widely recognized Transamerica brand and economies of scale to become a top 10 producer of individual life

insurance sales and a top 10 seller of variable annuities.

The group's capital adequacy and liquidity remain very strong, owing to management's aggressive actions to derisk

the balance sheet and limit dividends to the holding company. The significant actions include the placement of the

institutional guaranteed spread and bank-owned life insurance and corporate-owned life insurance (BOLI/COLI)

businesses into runoff, hedging the previously unhedged equity exposure of the variable annuity guaranteed

minimum income benefit (GMIB) back-book, and a higher allocation of investments to cash and short-term

positions, while reducing holdings of hedge funds.

In third-quarter 2011, AEGON N.V. completed the divestment of the Transamerica Reinsurance (Transamerica Re)

division, its global life reinsurance business. AEGON USA returned the capital released from the sale to AEGON

N.V. to help complete AEGON N.V.'s repayment of convertible core capital securities issued during the financial

crisis. Following these actions, declines in equity markets and interest rates adversely affected AEGON USA's

stand-alone capital adequacy. Under our forecasts, we estimate a capital deficiency in the U.S. business approaching

$1 billion as of year-end 2011, compared with being roughly consistent with 'AA' capital adequacy at year-end

2010. However, under our forecasts, we expect the consolidated AEGON N.V. capital model position will be

consistent with 'AA' capital adequacy at year-end 2011. In addition to the firm's ongoing derisking, which will

reduce capital requirements, we expect significant dividends from the U.S. operations in 2012, limited only by the

group's intent to restore AEGON USA's stand-alone capital adequacy to levels that support the 'AA' confidence

level targets.

Standard & Poors | RatingsDirect on the Global Credit Portal | January 30, 2012 2

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Operating earnings have been volatile, declining significantly from their peak in 2007, mainly due to the negative

affects of equity market declines and interest spread compression. Underlying earnings before tax declined

marginally to $1.380 billion in the first nine months of 2011, compared with $1.434 billion for the first nine

months of 2010. The decline reflected the sale of Transamerica Re and the reclassification of BOLI/COLI to run-off

businesses, as well as the reduced fixed annuity earnings that resulted from the low interest rate conditions and the

curtailment of new sales. We expect the underlying earnings before tax to exceed $1.8 billion in 2011 and 2012.

We believe that AEGON USA's credit losses will continue to moderate. However, further economic weakness could

lead to elevated credit losses. The asset classes at risk include holdings of nonagency residential mortgage-backed

securities (RMBS), commercial mortgage-backed securities (CMBS), and commercial mortgage loans. We believe

that the greatest risk is in the $1.253 billion (at amortized cost) portfolio backed by negative amortization collateral,

which was showing a $359 million of gross unrealized losses as of Sept. 30, 2011.

Outlook

The stable outlook on the AEGON USA group of companies is aligned with the stable outlook on AEGON N.V.

and its subsidiaries. The stable outlook on AEGON N.V. and its core subsidiaries reflects our expectation that

AEGON N.V. will maintain the strength of its balance sheet and the business and financial profile of its key U.S.

operations.

All other things being equal, we could lower the ratings based on our criteria if:

• AEGON USA's stand-alone credit profile ceases to be consistent with the ratings;

• The consolidated capital adequacy falls below 'AA' (very strong) levels, which could result from further declines

in long-term interest rates or investment-related losses in excess of €1 billion;

• The fixed-charge cover ratio is less than 3x;

• The financial leverage ratio is not less than 25% by year-end 2012; or

• The net cash flows to the holding company fall below €1 billion.

We expect that AEGON USA's capital adequacy under our capital model will be restored to the 'AA' level in 2012

in order to support the company's stand-alone credit profile. Under our forecasts, capital adequacy in the U.S. will

be $1 billion deficient at the 'AA' level as of year-end 2011, compared with being roughly consistent with the 'AA'

level as of year-end 2010.

Based on current information, we see no upside potential for the ratings on the core operating companies over the

next two years. Although we consider it currently unlikely, a positive rating action on the holding company,

AEGON N.V, could result from a combination of:

• The non-U.S. businesses contributing to growth in net cash flows to the holding company, leading to a more

balanced cash flow profile; and

• Sustainable fixed-charge cover ratio sustained at more than 5x.


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Competitive Position: Diverse Lines Of Business With Scale And StrongDistribution Capabilities

AEGON USA has a very strong competitive position supported by the widely recognized Transamerica brand,

low-cost operations with economies of scale, and very strong distribution capabilities across diverse lines of

business. These lines of business provide for a diversified earnings profile, with a well-balanced mix of individual life

insurance, annuities, and retirement plans.

Table 1

AEGON USA Group/Selected Statistics

--Year ended Dec. 31--

2010 2009 2008 2007 2006

Capital adequacy ratio (%) A A N.A. N.A. 116.16

Liquidity ratio (%) 447.56 393.80 N.A. 267.94 251.98

Total assets (including separate accounts) (mil. $) 187,722.68 179,951.80 179,638.22 158,271.26 139,560.65

Total premiums and considerations (mil. $) 15,893.88 15,707.96 16,037.25 16,548.80 13,966.43

Pretax income (mil. $) 1,170.53 2,846.75 (1,005.80) 1,151.80 698.52

Total adjusted capital (including asset valuation reserve) (mil. $) 9,279.13 9,684.51 9,461.10 6,095.66 6,116.68

N.A.--Not applicable.

Table 2

AEGON USA Group/Competitive Position


2010 2009 2008 2007 2006

Total revenue (mil. $) 22,365.12 26,556.29 20,009.02 26,081.32 23,769.61

Total premiums and considerations (mil. $) 15,893.88 15,707.96 16,037.25 16,548.80 13,966.43

Premium revenue increase (%) 1.18 (2.05) (3.09) 18.49 (1.74)

Deposits (mil. $) 839.85 1,594.63 10,701.04 12,565.42 10,246.81

Total premiums, considerations, and deposits (mil. $) 16,733.73 17,302.59 26,738.28 29,114.22 24,213.25

Premiums, consideration, and deposit revenue increase (%) (3.29) (35.29) (8.16) 20.24 70.35

Net first-year premiums (mil. $) 4,365.23 8,416.58 9,594.37 3,793.02 3,283.08

Net first-year increase (%) (48.14) (12.28) 152.95 15.53 (28.05)

Net single premiums (mil. $) 574.12 338.93 603.61 3,626.73 2,516.55

Net single increase (%) 69.39 (43.85) (83.36) 44.11 63.97

Separate accounts assets (mil. $) 80,530.94 71,178.88 59,910.13 80,121.65 61,291.04

Increase in separate accounts assets (%) 13.14 18.81 (25.23) 30.72 14.01

Major lines (mil. $)

Individual life 2,121.29 2,838.50 3,459.20 3,358.07 3,093.33

Individual annuities 3,953.14 4,610.02 3,858.95 4,464.23 3,526.88

Group life (114.27) 339.81 405.94 429.07 408.42

Group annuities 8,192.34 6,207.75 6,540.04 6,507.72 5,261.46

Group accident and health 942.76 950.30 898.24 907.65 913.32

Individual accident and health 725.44 704.80 825.79 795.10 709.41

Aggregate of all other 73.19 56.79 49.08 86.96 53.61


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Table 2

AEGON USA Group/Competitive Position (cont.)

Deposits (mil. $) 839.85 1,594.63 10,701.04 12,565.42 10,246.81

AEGON USA is a strong competitor in each of its selected markets. But it hasn't been compelled to follow the

sometimes irrational pricing of its competitors in any particular segment because the group does not rely too heavily

on any single line of business.

Some of the company's largest markets are very competitive and characterized by a high degree of commoditization.

These include universal life insurance and annuities. The company's breadth of distribution outlets is a key element

in maintaining its competitive position, but individual life insurance and annuity sales will be somewhat susceptible

to competitor activity in terms of pricing and product features.

Life and protection

AEGON USA distributes life insurance, accident, and health products through an exceptionally diverse array of

channels, targeting specific market segments. These include:

• The Brokerage Group, which targets the upper-middle and affluent markets;

• World Financial Group, which targets the middle-income market;

• Monumental Group, which targets the middle-income market primarily through a career agency sales force and

First Command, an independent marketing organization that mainly serves the military market; and

• AEGON Direct Marketing Services, which is a direct marketer of life, supplemental health, and specialty

insurance products that develops and executes cobranded marketing.

Further, the group's accident and health (A&H) offerings are mainly distributed by affinity partners and include

accident, critical illness, cancer treatment, hospital indemnity, and short-term disability policies. The group's long

term care insurance is distributed via independent brokerage and other AEGON USA companies.

AEGON USA offers universal, term, whole, and variable life insurance and is consistently among the top 10

producers of new life insurance sales in the U.S. and the top five producers of universal life insurance sales. While

retail new life sales increased by 11% in 2010, sales declined by 12% for the first nine months of 2011 to $352

million, compared with the same period in 2010.

Individual savings and retirement

Transamerica Capital Inc., an affiliated broker-dealer, distributes individual annuities and mutual funds through

wirehouses, regional broker-dealers, independent financial planners, and banks using company-owned and external

wholesalers. In conjunction with the Dec. 28, 2007, acquisition of Merrill Lynch Life Insurance Co. and ML Life

Insurance Co. of New York, AEGON N.V. entered into a strategic alliance with Merrill Lynch, bolstering its

distribution in the variable annuities business. AEGON N.V. has chosen to deemphasize the sale of fixed annuities

as part of its strategy to shift capital and source of earnings to fee-based businesses from spread-based businesses.

Variable annuity deposits increased by 40% to $3.9 billion through September 2011, compared with the same

period in 2010. As of Sept. 30, 2011, the variable and fixed annuity account balances were $39.9 billion and $24.0

billion, respectively.

Employer solutions and pensions

AEGON USA offers pension plans, pension-related products and services, life and supplemental insurance products

through employers. Diversified Investment Advisors targets the mid- to large-plan market ($10 million-$2 billion),


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AEGON USA Group

while Transamerica Retirement Services targets the small-plan market. Diversified Investment Advisors uses an open

architecture platform that supports mutual funds, variable annuities, and collective trusts. Transamerica Retirement

Services offers fully bundled and partially bundled retirement solutions, predominantly supported by group variable

annuities. In addition, AEGON Stable Value Solutions provides synthetic guaranteed investment contracts (GICs),

primarily to tax-qualified institutional entities such as 401(k) plans and other retirement plans. Transamerica

Worksite Marketing offers voluntary payroll deduction, and life and supplemental health insurance.

Pension sales increased 10% to $9.3 billion through September 2011, compared with a 21% increase to $10.1

billion during 2010. The total retirement plans account balances for the nine months ended September 2011 were

$75.1 billion, while the balances as of year-end 2010 were $73.6 billion. Through September 2011, stable value

deposits more than tripled to $5.8 billion from $1.5 billion, and total account balances were $60.2 billion.

Prospective

We expect that AEGON USA, through its diverse distribution channels, will generate retail life sales that are in line

or slightly above the industry's growth rates. While we also expect mid- to high-single-digit growth in the firm's

variable annuity deposits, we also believe that its production will depend on equity market performance, as well as

its competitors' pricing actions and product features. AEGON USA will likely maintain strong momentum in

retirement plan sales.

Management And Corporate Strategy: A Wide Array Of Product And DistributionCapabilities That Meets A Variety Of Needs

AEGON USA has a broad strategy of meeting life-cycle needs by providing protection, savings, and retirement

income products. The group has a wide variety of product and distribution capabilities to meet these needs,

including life and A&H products, individual annuities, and retirement plans. The group is well positioned to meet

the needs of the aging U.S population, which is enjoying greater longevity but less-certain employer- and

government-provided retirement income. Three strategic priorities guide AEGON N.V.'s global group strategy:

reallocate capital to businesses with higher growth and return prospects, improve growth and returns from existing

businesses, and "optimize one AEGON" by increasing efficiency and making better use of the company's global

resources.

As a result of strategic reviews, AEGON N.V. has chosen to rebalance capital across geographies, winding-down or

deemphasizing certain U.S. businesses. In June 2011, AEGON N.V. repaid in full the capital the Netherlands (the

Dutch State) had provided in 2008 during the peak of the financial crisis. Further, in August 2011, AEGON

completed the divestment of Transamerica Re, with the objective of retaining its focus on Transamerica's life,

pension, and asset management segments.

Operational management

AEGON USA executes its strategy through operating units focused on key markets, supported by shared corporate

functions. The major business segments include life and protection, individual savings and retirement, and employer

solutions and pensions. The shared services include risk management, finance, legal, technology, and human

resources.


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AEGON USA Group

Financial management

AEGON N.V.'s management is committed to maintaining both consolidated capital and AEGON USA's capital

consistent with the 'AA' rating requirements, very strong liquidity, and disciplined asset/liability management

(ALM). The declining equity markets during 2008 created large net amounts at risk for guaranteed minimum death

benefit (GMDB) riders and older GMIB riders. Management responded with significant initiatives to preserve

capital, including derisking the investment portfolio, winding down the institutional spread business, hedging the

equity exposure in the back book of GMIB riders, and reducing dividends to the parent holding company. AEGON

USA now hedges 100% of the equity exposure from its back-book of GMIB variable annuity guarantees, which was

achieved well in advance of its year-end 2012 target.

Enterprise Risk Management: Strong

We revised our assessment of AEGON N.V.'s enterprise risk management (ERM) framework to "strong" in 2010,

reflecting the significant advances the group had made in developing its framework and the fact that those changes

were being embedded in the firm's business. The financial crisis, together with the aid the firm received from the

Dutch State, has accelerated the advancement of certain aspects of AEGON N.V.'s ERM framework. The capital

from the Dutch State provided significant flexibility for AEGON during a period of heightened risk and uncertainty.

The aid also enabled the group to pursue the strategy it had developed using its ERM framework, thus facilitating

more effective risk management than was previously the case.

We assess AEGON N.V.'s ERM as "strong." AEGON N.V. is a large and geographically diversified group that is

exposed to risks across geographies. Therefore, ERM is of high importance to the ratings on the group. AEGON

N.V.'s risk profile is still dominated by market risk, despite the company taking significant derisking measures.

AEGON is actively managing its risk profile to reduce its exposure to interest rate and equity risks and to increase

diversification across the group by increasing insurance risk exposures. However, as a result of effecting these

derisking actions, AEGON N.V. faces the potential risk of locking into currently unfavorable economic and

financial positions. AEGON N.V. has strong risk controls for the majority of its risks, reflecting the strong risk

culture at the group as well as at the operating unit level.

We assess AEGON N.V.'s risk management culture as "strong." The group operates a decentralised risk

management structure, with local controls being the responsibility of the local operating company. The group risk

and capital committee's (GRCC's) responsibility is to provide independent oversight for the group's operations.

AEGON N.V.'s group chief risk officer (CRO) reports to the group's chief financial officer, and this structure is

repeated in most subsidiaries. There is also a reporting line between local CROs and the group through the regional

CROs. Consistency is achieved throughout the group via risk policies, regular risk meetings, and the risk committee

structure. The GRCC covers all risk types as well as the management of the overall capital position, and it reports to

the group's executive board.

The group revised its risk appetite in line with its economic framework, and this was translated into risk limits. The

risk reporting highlights risk exposures but does not always compare these to the risk limits. We assess AEGON

N.V.'s emerging risk process as "adequate." AEGON is a member of the CRO Forum's working group. We assess

the firm's risk models as "adequate," and their development of an integrated internal model remains in progress.

We assess AEGON N.V.'s strategic risk management as "strong." AEGON N.V. has sufficiently embedded

economic balance sheet modeling into its key business processes, including risk management, pricing, performance


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AEGON USA Group

measurement, incentives, and corporate strategy.

Accounting

AEGON prepares its financial statements in accordance with International Financial Reporting Standards. For

external reporting, AEGON USA is included in the AEGON Americas segment, which also includes Transamerica

Life Canada and the Latin American operations. AEGON USA accounts for the vast majority of assets and earnings

in the segment. In addition to its U.S.-domiciled insurance companies, the segment also includes Transamerica

International Re (Bermuda) Ltd., and Transamerica Life International (Bermuda) Ltd., which reinsure business that

the U.S. affiliates issue.

The U.S.-domiciled life insurers file statutory statements in their respective states of domicile. In recent years,

AEGON USA recaptured business from international subsidiaries, which it then ceded to domestic reinsurance

entities. Under statutory accounting rules, the recaptures resulted in losses that AEGON USA reported in earnings,

while the subsequent ceding of the business produced offsetting gains that the group must report directly in surplus.

Standard & Poor's uses its financial product company (FPC) methodology to assess the specific credit, financial

market, and operational risk characteristics of certain spread-based products, including the medium-term note

programs, GICs, and municipal investment contracts. The FPC model's purpose is to determine the appropriate

amount of capital required to cover expected losses based on a statistical level of confidence that is commensurate

with the rating on the company.

Operating Performance: Diverse Sources Of Earnings That Are Subject ToMarket-Related Volatility

AEGON USA enjoys balanced sources of earnings from interest spreads, mortality and morbidity margins, and

fee-based products. However, the overall results have been subject to market-related volatility. The life, A&H, fixed

annuity, and pension businesses remain strong and stable sources of earnings, offset by the more volatile results

from the market-sensitive businesses--particularly variable annuities, which produced losses in 2008 and 2009.

The underlying pretax earnings declined 4% to $1.380 billion in the first nine months of 2011, compared with the

same period in 2010. The underlying pretax earnings for full-year 2010 were $2.1 billion, an 84% increase over

full-year 2009. The earnings in 2010 reflected the improvement in the financial markets and the strong business

growth in the retirement products and pensions segments. The lower earnings in 2011 reflected the sale of

Transamerica Re, the reclassification of BOLI/COLI to run-off businesses, and the reduced fixed annuity earnings

due to the low interest rate conditions and the curtailment of new sales. Earnings are expected track to meet

expectations of $1.8 billion in 2011. In 2012, we expect that AEGON USA's underlying earnings before tax will be

in the $1.8 billion to $2.0 billion range.

Table 3

AEGON USA Group/Summary Operating Statistics


2010 2009 2008 2007 2006

Pretax income (mil. $) 1,170.53 2,846.75 (1,005.80) 1,151.80 698.52

Net income (mil. $) 942.78 865.32 (602.72) 1,120.02 606.36


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Table 3

AEGON USA Group/Summary Operating Statistics (cont.)

Return on revenue (%) 5.23 10.72 (5.03) 4.42 2.94

Return on assets (%) 0.64 1.58 (0.60) 0.77 0.51

Table 4

AEGON USA Group/Operating Statistics


2010 2009 2008 2007 2006

General expenses (mil. $) 1,383.90 1,306.70 1,338.97 1,339.50 1,240.51

General expense ratio (%) 7.38 6.20 4.16 4.14 4.52

Expense ratio (%) 15.26 10.95 14.10 10.55 12.57

Unit expenses (mil. $, in whole dollars) 39.78 36.76 41.99 43.92 40.79

General expenses as a percentage of total assets (mil. $) 0.74 0.73 0.75 0.85 0.89

Commission ratio (%) 19.92 12.98 12.85 13.97 14.30

Lapse ratio (ordinary only) (%) 7.08 9.08 8.53 6.56 7.10

Mortality ratio (%) 128.26 93.33 108.63 107.31 125.13

Investment spread (%) 1.99 2.06 3.57 4.40 4.04

Accident and health (%)

Loss ratio 64.56 62.06 65.42 69.51 76.20

Expense ratio 32.69 33.37 34.07 33.20 34.30

Combined ratio 97.24 95.42 99.49 102.71 110.50

Investments And Liquidity: A Well-Diversified And Highly Liquid Portfolio WithSome Exposure To Stressed Asset Classes

AEGON USA's investment policies promote diversification among asset classes at the legal entity, business unit, and

country unit levels. The group has established name limits across asset classes to control concentration risks, and

this has resulted in a very well-diversified portfolio. Portfolio management teams, comprising division risk, asset

liability, and portfolio managers have establish liability-driven benchmarks that consider the ALM needs of the

products being supported. The benchmarks have resulted in asset allocation strategies that are well integrated with

company's product and cash flow needs.

Table 5

AEGON USA Group/Investment Statistics


2010 2009 2008 2007 2006

Net investment income (mil. $) 4,624.34 4,934.84 5,989.52 6,400.33 6,226.73

Total invested assets (mil. $) 102,118.23 103,593.35 114,016.43 78,665.22 75,565.85

Net realized capital gains (mil. $) (185.66) (1,219.20) 245.15 395.62 228.09

High-risk assets to total invested assets (%) 11.09 12.33 12.20 17.76 20.63

Net investment yield (%) 4.50 4.54 6.22 8.30 8.19

Five-year realized capital gains to invested assets (%) 0.25 0.24 0.32 0.29 0.16


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Table 5

AEGON USA Group/Investment Statistics (cont.)

Portfolio composition (%)

Cash, cash equivalents, and short-term investments 3.47 8.12 6.06 3.97 2.78

Bonds 63.83 63.15 60.47 86.60 95.19

Mortgage-backed securities 8.46 8.33 9.21 15.92 14.49

Mortgages 11.19 12.75 13.53 20.67 19.84

Policy loans 2.56 2.57 2.38 3.42 2.16

Stocks 1.31 1.28 3.68 4.69 6.39

Real estate 0.19 0.20 0.21 0.30 0.32

Other 8.99 3.60 4.47 (35.58) (41.18)

As of Sept. 30, 2011, the $122.6 billion AEGON Americas portfolio consisted of corporate bonds (45%); cash,

short-term assets, treasuries, and agencies (20%); mortgage loans (9%); CMBS (7%); RMBS (6%); nonhousing

related asset-backed securities (ABS; 4%); emerging markets debt (2%); and all other (7%). AEGON Americas has

very small allocations to riskier asset classes: as of Sept 30, 2011, AEGON Americas' general account investments

included high-yield corporate bonds (2.6%), equity and hedge fund investments (1.8%), and private equity and real

estate (2.4%).

The portfolio's overall quality is high. However, exposures to underperforming asset classes such as commercial

mortgage loans and CMBS, RMBS and housing-related ABS, and capital securities of financial institutions could

result in elevated losses. The refinancing risk remains high for commercial whole loans and CMBS collateral. During

the nine months ended Sept. 30, 2011, gross unrealized losses declined as follows:

• To $943 million from $1.25 billion in the $7.7 billion (amortized cost) RMBS and ABS housing-related portfolio,

• To $223 million from $281 million in the $4.4 billion (amortized cost) nonhousing-related ABS portfolio, and

• To $443 million from $521 million in the $9.3 billion U.S. holdings of CMBS (including collateralized debt

obligations backed by commercial real estate loans and CMBS).

Liquidity

AEGON N.V. has successfully managed the significant liquidity needs associated with the planned runoff of its

institutional spread-based business in the U.S. AEGON Americas has a highly liquid investment portfolio, with cash,

treasuries, and agencies of $24.6 billion as of Sept. 30, 2011, serving as a very strong liquidity buffer. The Standard

& Poor's liquidity ratio is an extremely strong 447%.

Table 6

AEGON USA Group/Liquidity And Reserves Statistics


2010 2009 2008 2007 2006

Allocation of reserves (mil. $)

Individual life 32.30 30.44 23.50 14.37 13.17

Group life 2.50 3.06 2.76 1.74 0.96

Individual annuities 26.35 26.31 28.92 20.71 22.70

Group annuities (including guaranteed investment contracts) 25.97 27.98 31.96 29.59 29.39

Accident and health 6.85 6.23 5.40 4.73 4.10


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AEGON USA Group

Table 6

AEGON USA Group/Liquidity And Reserves Statistics (cont.)

Other 6.03 5.97 7.45 28.86 29.67

Liquidity ratio (%) 447.56 393.80 N.A. 267.94 251.98

N.A.--Not applicable.

Capitalization: Derisking And Dividend Limitations Help Maintain CapitalAdequacy

AEGON USA's very strong capital adequacy supports its U.S. operations. Based on our models, capital adequacy

was slightly redundant at the 'AA' confidence level as of year-end 2010. However, we estimate that capital adequacy

was deficient at the 'AA' confidence level by as much as $1 billion as of year-end 2011. Though AEGON USA

continues to derisk the balance sheet and to carefully manage dividends to the holding company, the adverse equity

and interest rate movements in the last few months of 2011 resulted in increased risk and decreased capital

adequacy within the firm's U.S. operations. Capital redundancies elsewhere within AEGON N.V.'s global

operations continue to ensure that consolidated capital adequacy remains redundant at the 'AA' confidence level

expected for the ratings.

AEGON N.V. remains strongly committed to restoring its key U.S. operation's stand-alone capital adequacy to 'AA'

confidence levels during 2012. Since the financial crisis, the group has demonstrated its commitment through its

significant derisking initiatives in 2008 and 2009, as well as its curtailing of dividends to the parent holding

company. In addition, AEGON also implemented a macro hedge to mitigate the impact of market volatility on

reserve and capital requirements for variable annuity guarantees, wound down its institutional spread business to

reduced its exposure to credit and interest rate risk, and reduced its investments in hedge funds, which incur a

relatively high capital charge. We expect that the group will achieve this goal in 2012, partly by ongoing derisking

that will reduce capital requirements, as well as with strong underlying earnings. We also expect significant

dividends from the U.S. operations in 2012, limited only by the group's intent to restore AEGON USA's capital

adequacy to levels that support its 'AA' confidence level targets.

During 2010 and 2011, AEGON USA paid significant dividends to the holding company in order to facilitate

repayment of the Dutch State aid it received during the financial crisis. These dividends were partially funded by the

sale of Transamerica Re in 2011. In addition to ongoing derisking that will reduce capital requirements, we expect

significant dividends from the U.S. operations in 2012 limited only by the group's intent to restore AEGON USA's

stand-alone capital adequacy to levels that support its 'AA' confidence level targets.

Table 7

AEGON USA Group/Capitalization Statistics


2010 2009 2008 2007 2006

Total assets (mil. $) 187,722.7 179,951.8 179,638.2 158,271.3 139,560.6

General account assets (mil. $) 107,191.7 108,772.9 119,728.1 81,431.4 78,909.5

Total liabilities excluding separate accounts (excluding asset valuation reserve) (mil. $) 98,013.1 99,179.4 110,348.1 108,433.2 108,574.0

Total adjusted capital (including asset valuation reserve) (mil. $) 9,279.1 9,684.5 9,461.1 6,095.7 6,116.7

Unrealized capital gains (mil. $) 201.9 (724.6) (257.8) 767.7 857.2

Capital adequacy ratio (%) A A N.A. N.A. 116.2


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AEGON USA Group

Table 7

AEGON USA Group/Capitalization Statistics (cont.)

Company action level to NAIC risk-based capital ratio (%) 398.4 394.5 414.0 172.5 194.3

High-risk assets to total adjusted capital ratio (%) 122.0 131.9 147.0 229.2 254.9

Surplus from operating earnings after dividends (%) 152.8 132.7 95.5 (292.0) (259.6)

Stockholder dividends/net income (mil. $) 223.0 179.0 157.3 103.4 90.5

Net premiums to gross premiums (%) 73.4 68.7 64.8 72.7 69.1

Net reserves to gross reserves (%)* 74.8 79.5 78.3 129.4 133.3

Stockholders' dividends (mil. $) 2,307.0 553.7 1,088.4 2,115.8 473.9

Stockholders' dividends to net operating income (%) 204.4 26.6 (97.1) 292.1 125.3

*Includes annuity and fund deposits. N.A.--Not applicable.

Financial Flexibility: Strong

AEGON USA derives its strong financial flexibility from a track record of statutory earnings and organic capital

generation, its demonstrated ability to finance regulations XXX and AG38 (AXXX) reserve requirements through a

variety of means, and its parent, AEGON N.V.

Our assessment of AEGON's financial flexibility improved after it repaid its debt to the Dutch State. Although the

constraints linked to its European Commission (EC)-agreed restructuring plan have been lifted, AEGON's

commitments to the EC relating to the structure of its balance sheet will persist through year-end 2012.

In our view, financial flexibility remains an area of relative weakness in AEGON N.V's rating profile, reflecting its

ongoing EC commitments; its relatively low fixed-charge cover ratios, which we believe are sustainable in the 3x-5x

range, compared with the 5x-7x achieved before 2008; and its limited capacity for additional debt and equity issues.

Partially mitigating these constraints are the company's limited need for capital, which is likely to be restricted to

funding the €1 billion senior bond that matures in April 2012. We assume that the absolute amount of leverage on

AEGON N.V.'s balance sheet will not increase over the next two years and its fixed-charge cover will remain at

approximately 4x in both 2011 and 2012.

Related Criteria And Research

• Use Of CreditWatch And Outlooks, Sept. 14, 2009

• Holding Company Analysis, June 11, 2009

• Group Methodology, April 22, 2009

• Interactive Ratings Methodology, April 22, 2009

• Hybrid Capital Handbook: September 2008 Edition, Sept. 15, 2008

Ratings Detail (As Of January 30, 2012)

Operating Companies Covered By This Report

Monumental Life Insurance Co.


Local Currency AA-/Stable/A-1+

Counterparty Credit Rating



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AEGON USA Group

Ratings Detail (As Of January 30, 2012) (cont.)

Stonebridge Life Insurance Co.


Local Currency AA-/Stable/--

Issuer Credit Rating


Transamerica Advisors Life Insurance Co.





Senior Unsecured (2 Issues) AA-

Transamerica Advisors Life Insurance Co. of NY





Senior Unsecured (1 Issue) AA-

Transamerica Financial Life Insurance Co.





Transamerica International Re (Bermuda) Ltd.





Transamerica Life (Bermuda) Ltd.



Transamerica Life Insurance Co.





Western Reserve Life Assurance Co. of Ohio





Related Entities

AEGON N.V.

Issuer Credit Rating A-/Stable/A-2


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AEGON USA Group

Ratings Detail (As Of January 30, 2012) (cont.)

Commercial Paper

Local Currency A-2

Junior Subordinated (9 Issues) BBB

Senior Unsecured (9 Issues) A-

Subordinated (1 Issue) A-

Domicile Iowa

*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.


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AEGON USA Group

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