Tuesday, June 26, 2012

SEC Official Warns Insurers about VA Benefit Exchanges

Nash says switch must be in best interests of contract holders
June 26, 2012 4:26 pm ET
An official with the Securities and Exchange Commission called upon life insurers to protect their legacy variable annuity clients — and to make sure that swapped benefits are suitable.
“When a company discontinues the sale of a contract, one option is to orphan the contract, allowing investments to dwindle,” said Susan Nash, associate director for disclosure and insurance product regulation at the SEC. “I urge you to focus on the long-term interests of your existing contract owners, as well as the reputation of your company.”
She spoke Tuesday morning at the Insured Retirement Institute's Government, Legal and Regulatory Conference.
Ms. Nash also commented on a new practice among life insurers with large books of legacy variable annuity business: the offer to clients to drop accumulated living or death benefits in exchange for an incentive, such as an increase in account value.
“In some cases, incentives may be offered to contract holders when they relinquish contracts that have living benefits,” Ms. Nash said. “These exchanges may raise questions of suitability.”
She added that “there is often an easily identified class of investors for whom the switch would not be advantageous,” namely those who could expect to use their living-benefit features.
“I encourage you to closely scrutinize these exchange transactions from the investors' viewpoint what exactly is being given up,” Ms. Nash said.
Ms. Nash also called for clear disclosure to clients and advisers on variable annuity contracts. Such disclosure should “provide information to contract purchaser that helps them make informed purchase decisions,” as well as “provide information to existing contract owners to help them understand how their investment has performed and changed,” she said.
The SEC is also boosting its staff, searching for an expert on derivatives to advise the department on “novel and complex investment products, including novel variable product designs,” Ms. Nash said.
The agency recently bolstered its expertise on exchange-traded funds in January when it brought in Barry Pershkow as senior special counsel in its investment management division.

Monday, June 4, 2012

A.M. Best Affirms Ratings of AEGON N.V.’s U.S. Operations, Upgrades Ratings of Transamerica Life Canada

I came across this article on Business Wire concerning Aegon, the parent company of Transamerica.  I thought it would be of interest to clients who are invested with me, as well as anyone who might be looking for an Advisor to help them with their investments.  There is nothing like a 3rd party endorsement of the company through which you place your business.

OLDWICK, N.J.--()--A.M. Best Co. has affirmed the financial strength rating (FSR) of A+ (Superior) and issuer credit ratings (ICR) of “aa-” 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 Group (AEGON USA). In addition, A.M. Best has affirmed the debt ratings of “aa-” of the outstanding notes issued under the funding agreement-backed securities (FABS) programs sponsored byMonumental Life Insurance Company (Cedar Rapids, IA), a member of AEGON USA. The outlook for all the above ratings is stable.

A.M. Best also has upgraded the FSR to A- (Excellent) from B++ (Good) and ICR to “a-” from “bbb+” of Transamerica Life Canada (TLC) (Toronto, Ontario), an indirect, wholly owned subsidiary of AEGON. The outlook for both ratings has been revised to stable from positive.
Additionally, A.M. Best has affirmed the FSR of A (Excellent) and ICR of “a” of Canadian Premier Life Insurance Company (CPL), a subsidiary of AEGON N.V. The outlook for these ratings is stable. (See below for a detailed listing of the companies and ratings.)
The affirmation of AEGON USA’s ratings reflects its favorable earnings performance and risk-adjusted capitalization during 2011. International Financial Reporting Standards (IFRS) earnings for AEGON Americas (which includes its domestic, Canadian and Latin American operations) were $933 million for year-end 2011. Although AEGON USA recorded a 2011 U.S. statutory net loss of 2.5 billion as a result of unique statutory accounting requirements for reinsurance transactions, which dictate that recapture losses are recognized through income, surplus was not negatively impacted as reinsurance treaty gains are re-classed to surplus. The group’s risk-adjusted capitalization remained strong as its year-end 2011 regulatory capital ratio improved slightly over the previous year and is significantly higher than historical levels.
AEGON USA’s stand-alone credit profile considers its 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 a strong positive cash flow. The organization also benefits from meaningful economies of scale, strong brand name recognition and effective asset/liability and liquidity management. AEGON USA’s ratings also recognize A.M. Best’s assessment of the financial strength and support of AEGON. As a result, the stand-alone ratings of AEGON USA receive rating enhancement in consideration of AEGON’s overall creditworthiness and the strategic and financial importance of the U.S. operations to AEGON.
A.M. Best notes that the group has taken various initiatives 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) remains in run off to reduce exposure to credit risk, lower required capital and shift to a more balanced mix of business between spread and fee-based products. AEGON USA also reduced its exposure to equity market risk by increasing the size of the macro hedge covering its variable annuity business.
Despite this improved risk profile, A.M. Best notes the possibility of additional material credit losses within the organization’s general account investment portfolio. Although pre-tax IFRS asset impairments declined to $352 million in 2011 from $506 million in 2010, additional realized losses and impairments are likely to occur in 2012, given AEGON USA’s sizable structured asset portfolio and exposure to direct commercial real estate. In addition, the group’s substantial variable annuity portfolio exposes its earnings to volatility, as declines in the capital markets would translate to lower fee income and higher required reserves on secondary guarantees. While the additional equity hedging will serve to reduce volatility, AEGON USA’s earnings remain somewhat correlated to capital market performance.
In August 2011, AEGON closed the divestment of its life reinsurance business, Transamerica Reinsurance (TARe), to SCOR SE, a global reinsurance company. Although A.M. Best notes that the removal of the TARe earnings has resulted in a contraction of AEGON USA’s operating profile, A.M Best views positively the divestiture as it lowers the organization’s required capital, reduces the need to arrange redundant reserve (XXX/AXXX) financing and allows senior management to focus on its core businesses of life insurance and asset accumulation.
The ratings of TLC reflect the enhanced scope of its overall business profile through market positions maintained in its core business lines, its multi-channel distribution platform, reduced risk profile and adequate capitalization. In addition, A.M. Best views positively TLC’s enhanced risk management practices, including more comprehensive hedging strategies and its decision to exit portions of its segregated funds product offerings for new business. A.M. Best also notes that while TLC recorded a significant 2011 net loss on a Canadian IFRS basis, the company did produce a small net gain on a Universal IFRS basis, which is how TLC’s performance is measured by AEGON. The ratings also consider the significant historical financial support (including the 2011 CAD 200 million capital contribution) TLC received from AEGON. As a result, the stand-alone ratings of TLC receive rating enhancement in consideration of AEGON’s overall creditworthiness and the strategic and financial importance of the Canadian life operations to AEGON.
A.M. Best believes AEGON USA, TLC and CPL are well positioned at their current rating levels for the foreseeable future.
Factors that could result in negative rating actions for these entities include a significant and sustained decline in their consolidated risk-adjusted capitalizations as measured by Best’s Capital Adequacy Ratio (BCAR) model, net operating performances that do not meet A.M. Best’s expectations or a decline in the creditworthiness of AEGON, which could constrain its future financial support for these entities.
The FSR of A+ (Superior) and ICRs of “aa-” have been affirmed for the following members of AEGON USA Group:
  • Transamerica Life Insurance Company
  • Transamerica Financial Life Insurance Company
  • Western Reserve Life Assurance Co. of Ohio
  • Monumental Life Insurance Company
  • Stonebridge Life Insurance Company
  • Transamerica Advisors Life Insurance Company
  • Transamerica Advisors Life Insurance Company of New York
The following debt ratings have been affirmed:
Monumental Global Funding Limited— “aa-” program rating
-- “aa-” on all outstanding notes issued under the program
Monumental Global Funding II—”aa-” program rating
-- “aa-” on all outstanding notes issued under the program
Monumental Global Funding III—”aa-” program rating
-- “aa-” on all outstanding notes issued under the program
The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Key criteria utilized includes: “Rating Members of Insurance Groups.” Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.
Founded in 1899, A.M. Best Company is the world’s oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.
Copyright © 2012 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.


A.M. Best Co.
Robert Adams
Senior Financial Analyst
908-439-2200, ext. 5225
William Pargeans
Assistant Vice President
908-439-2200, ext. 5359
Rachelle Morrow
Senior Manager, Public Relations
908-439-2200, ext. 5378
Jim Peavy
Assistant Vice President, Public Relations
908-439-2200, ext. 5644

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