Reserve strengthening charges and an excess management fee issue in 2007, have led to the downgrading of Transamerica Life Canada’s (Transamerica) by ratings agencies.
A.M. Best announced the downgrade of Transamerica’s financial strength from A (Excellent) to A- (Excellent) and the issuer credit rating has been downgraded from A+ to A-. Meanwhile, the outlook for the insurer’s ratings have been revised to negative from stable, A.M. Best announced in a press release issued in mid April. This followed the downgrading of Transamerica’s long-term counterparty credit and financial strength ratings from A- to BBB by Standard & Poor’s (S&P) about one month earlier. S&P’s ratings outlook is stable.
Transamerica recorded a net loss of $307 million at the end of 2007. This loss is mainly attributable to the $308 million incurred to strengthen reserves, said A.M. Best. This is the third straight year of major reserve charges for the insurer following $317 million in 2005 and $183 million in 2006. This reserve strengthening has resulted from changes in Transamerica’s actuarial assumptions and calculation methods.
In addition to the reserve strengthening, Transamerica also recorded a $100 million charge to cover an excess segregated fund management fee issue, reported A.M. Best.
“The rating actions reflect the negative impact these charges had on operating earnings, which exceeded A.M. Best’s expectations for 2007,” said the ratings agency.
The Insurance Journal’s request for an interview with Paul Reaburn, president and CEO of AEGON Canada, to comment on the downgrading and other issues, was declined. AEGON is Transamerica’s parent company.
A.M. Best added that while the reserve strengthening has improved the company’s balance sheet, it remains “cautious regarding the future performance of Transamerica’s segregated funds portfolio given the net amount at risk and the maturity of nearly half the block between 2009 and 2011.” The agency noted, however, that the company uses hedging to mitigate the majority of the segregated fund business equity risk.
Also on the positive side, A.M. Best pointed to Transamerica’s “solid market position in its core business lines, multi-channel distribution platform, favourable investment and mortality experience and adequate capitalization.”
One concerned financial advisor who had heard about the ratings downgrade contacted The Insurance Journal to ask about Transamerica’s solvency. Darian Hala, a financial analyst with A.M. Best said that despite the downgrades, Transamerica has no issues with respect to solvency. “Their regulatory capital ratio actually increased.”
The agency noted that an important factor in its Transamerica ratings is the financial strength and support of parent company, the AEGON Group that has provided its Canadian operation with more than $400 million since 2000. “A.M. Best believes that the continuing reserving issues at Transamerica may compel management to reallocate capital to AEGON’s stable, more profitable businesses. The current ratings incorporate A.M. Best’s prospective view that Transamerica is less strategic than AEGON’s other insurance subsidiaries.” However, the agency said it believes that AEGON is still likely to support Transamerica in the near to medium term.
Meanwhile, S&P stated in its press release that “While Standard & Poor’s considers Transamerica to be a non-strategically important subsidiary to the group given its historical challenges, and believes that nonstrategic books may eventually be closed or sold, the ratings do benefit from the capital and management support provided by the group over the years.”
Asked whether he believes, that Transamerica is likely to be sold, Mr. Hala of A.M. Best said he could not comment on the parent company’s intentions since ratings agencies are considered insiders.
In early May, AEGON Canada and Industrial Alliance announced that they had entered an agreement for IA to acquire 100% of National Financial Corporation (NFC), the parent company of Aegon Dealer Services Canada, Money Concepts (Canada) and National Financial Insurance Agency. NFC and its subsidiaries have $2.8 billion in assets under administration and more than 350 advisors in 65 branches across Canada.
Aegon Dealer Services and Money Concepts offer a wide range of mutual funds and financial services to a retail clientele across Canada. National Financial Insurance Agency is a managing general agency that provides insurance services to Money Concepts advisors.
In the press release announcing this sale, Mr. Reaburn is quoted as stating, “The sale of this distribution business allows AEGON Canada to focus on our core business, which is the manufacturing of individual life insurance and annuity products.” The transaction, subject to regulatory approval, is expected to close by June 30, 2008.
Mr. Hala of A.M. Best says that this sale is not likely to lead to another downgrade of Transamerica. “Money Concepts provided access to the financial planning/dealership segment, somewhat outside of their core life and annuity products. I would characterize it as a ratings neutral event as of now.” However, while the sale is not likely to lead to a downgrade, he did underline that A.M. Best does have “Transamerica on a negative outlook due to the continued weakness seen with their operating performance.”