A.M. Best Upgrades Ratings of AEGON N.V.’s U.S. Operations; Revises Outlook to Stable

A.M. Best Co. has upgraded the financial strength rating (FSR) to A+ (Superior) from A (Excellent) and issuer credit ratings (ICR) to “aa-” from “a+” of the life/health subsidiaries of AEGON N.V.’s (AEGON) (Netherlands) [NYSE: AEG] U.S. operations. AEGON’s U.S. life/health companies are collectively referred to as AEGON USA. In addition, A.M. Best has upgraded the debt ratings to “aa-” from “a+” of the outstanding notes issued under funding agreement-backed securities (FABS) programs sponsored by Monumental Life Insurance Company (Cedar Rapids, IA), a member of AEGON USA. The outlook for the FSR is stable. The outlook for the ICRs and debt ratings has been revised to stable from negative. (See below for a detailed listing of the companies and ratings.)

The rating actions reflect A.M. Best’s assessment of the financial strength and support of the parent, AEGON. A.M. Best recently began an interactive relationship with the parent that has allowed for a comprehensive evaluation of AEGON’s balance sheet strength, operating performance and business profile. With this interactive analysis, the stand-alone ratings of AEGON USA now reflect rating enhancement in consideration of AEGON’s overall creditworthiness and the strategic and financial importance of the U.S. operations to AEGON.

AEGON USA’s stand-alone credit profile considers the group’s strong market position in a number of U.S. life and annuity market segments, a large multi-channel distribution platform, diversified sources of earnings and strong positive cash flow. The group also benefits from meaningful economies of scale, strong brand recognition and effective asset/liability and liquidity management.

AEGON USA’s earnings mix is one of the more diversified in the industry. Product lines that contribute to overall earnings include traditional life, fixed annuities, variable life, variable annuities, mutual funds, pensions, accident and health and reinsurance. A.M. Best notes that the group undertook various initiatives during 2009 to de-risk its balance sheet and improve its risk profile. The quality of the investment portfolio was upgraded by reducing hedge fund holdings and increasing positions in Treasuries and other short-term investments. The institutional spread-based business (primarily guaranteed interest contracts, funding agreements and funding agreement-backed securities) was placed into run off to reduce exposure to credit risk and lower required capital. The group also reduced its exposure to equity market risk with additional hedging of its variable annuity business.

Despite this improved risk profile, A.M. Best notes the likelihood of additional, material credit losses within the group’s general account investment portfolio. Pre-tax International Financial Reporting Standards (IFRS) asset impairments totaled over USD 1.3 billion in 2009, and additional realized losses and impairments are likely to occur in 2010, given the current economic environment and AEGON USA’s sizable structured asset portfolio. While the run rate on credit impairments declined in fourth quarter 2009 and first quarter 2010 relative to the rest of 2009, AEGON continued to report a gross unrealized loss position within its fixed income portfolio of more than $5 billion on an IFRS basis as of March 31, 2010.

AEGON USA’s investments in non-agency mortgage-backed securities, asset-backed securities and commercial mortgage-backed securities (CMBS) totaled approximately USD 26 billion at March 31, 2010 (IFRS amortized cost basis). This exposure (of which 86% is rated investment grade with approximately two-thirds being rated AAA), coupled with direct commercial mortgage loans exceeding USD 14 billion, represents roughly 33% of general account assets. Additionally, the remaining exposure to alternative assets (hedge funds, private equity, mezzanine debt) represents additional risk to the investment portfolio.

The group’s substantial variable annuity portfolio exposes its earnings to volatility, as declines in the equity markets would translate to lower fee income and higher required reserves on secondary guarantees. Although the additional equity hedging will serve to reduce volatility, the group’s earnings remain somewhat correlated to equity market performance.

The FSR has been upgraded to A+ (Superior) from A (Excellent) and the ICRs to “aa-” from “a+” for the following life/health members companies of AEGON USA:

-- Transamerica Life Insurance Company

-- Transamerica Financial Life Insurance Company

-- Western Reserve Life Assurance Co. of Ohio

-- Monumental Life Insurance Company

-- Stonebridge Life Insurance Company

-- Merrill Lynch Life Insurance Company

-- ML Life Insurance Company of New York

The FSR has been upgraded to A (Excellent) from A- (Excellent) and the ICR to “a” from “a-” for Canadian Premier Life Insurance Company, a member company of AEGON N.V.

The following debt ratings have been upgraded:

Monumental Global Funding Limited— to “aa-” from “a+” program rating

-- to “aa-” from “a+” on all outstanding notes issued under the program

Monumental Global Funding II— to “aa-” from “a+” program rating

-- to “aa-” from “a+” on all outstanding notes issued under the program

Monumental Global Funding III— to “aa-” from “a+” program rating

-- to “aa-” from “a+” on all outstanding notes issued under the program

For Best’s Credit Ratings, an overview of the rating process and rating methodologies, please visit http://www.ambest.com/ratings.

The principal methodologies used in determining these ratings, including any additional methodologies and factors that may have been considered, can be found at http://www.ambest.com/ratings/methodology.