Printed June 24, 2016 www.ambest.com Page 1 of 46 A TRANSAMERICA LIFE INSURANCE COMPANY A+ TRANSAMERICA PREMIER LIFE INSURANCE COMPANY A+ TRANSAMERICA FINANCIAL LIFE INSURANCE COMPANY A+ TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY A+ TRANSAMERICA CASUALTY INSURANCE COMPANY A A+
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A
TRANSAMERICA LIFE INSURANCE COMPANY A+
TRANSAMERICA PREMIER LIFE INSURANCE COMPANY A+
TRANSAMERICA FINANCIAL LIFE INSURANCE COMPANY A+
TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY A+
TRANSAMERICA CASUALTY INSURANCE COMPANY A
A+
Ultimate Parent: Aegon N.V.
TRANSAMERICA LIFE INSURANCE COMPANY4333 Edgewood Road N.E.
RECENT DEVELOPMENTSEffective October 1, 2015, Stonebridge Life Insurance Company merged
with and into Transamerica Life Insurance Company.
RATING RATIONALE
Rating Rationale: The published ratings of the Aegon USA companiesreflect that they are integral to Aegon’s strategy, fully integrated into thegroup’s operations, a material part of the business profile, significantcontributors to earnings and have received explicit financial support whenneeded.
Transamerica Life Insurance Company (TLIC) sells individualnon-participating whole life, endowment and term contracts, structuredsettlements and pension products, as well as a broad line of single fixed andflexible premium annuity products. In addition, TLIC offers group life,universal life, credit life and individual and specialty health coverages. Thecompany is licensed in 49 states and the District of Columbia, Guam, PuertoRico and US Virgin Islands. Sales of the company’s products are primarilythrough a network of agents, brokers and financial institutions.
The following text is derived from A.M. Best’s Credit Report on AegonUSA Group (AMB# 069707).
The ratings of the life insurance companies of Aegon USA reflect the strongbusiness profile, adequate risk-adjusted capitalization, strong enterprise riskmanagement, and an underlying trend of statutory and IFRS profitability. Theratings also reflect A.M. Best’s assessment of the financial strength andsupport of the parent, Aegon N.V. (Aegon). Partially offsetting these strengthsis the increasing focus on sales of products that have unfavorable riskcharacteristics from a product creditworthiness standpoint, as well as theequity market sensitivity of its earnings and significant reliance on captivereinsurance.
Aegon USA’s business profile is viewed as strong by A.M. Best, withcompetitive market positions in the U.S. life and annuity arenas. The group’smarket positions are supported by a large and diversified distribution systemthat is made up of both independent and career agents, financial institutions,
wirehouses and direct response channels. Aegon USA enjoys the efficienciesand competitive advantages of meaningful economies of scale, which havecontributed favorably to its historical financial performance. Aegon USA’searnings profile is one of the more diversified in the industry. Product linesthat contribute to overall earnings include traditional life, variable life,variable annuities, mutual funds, pensions and accident and health insurance.Additional rating consideration includes A.M. Best’s assessment of thefinancial strength and support of the parent, Aegon. As a result, Aegon USAreceives rating enhancement in consideration of Aegon’s overallcreditworthiness and the strategic and financial importance of the U.S.operations to Aegon.
Several years ago the company pursued a strategic shift to focus on sellingfee-based products, especially variable annuities (VAs), and hasde-emphasized sales of its spread-based products, especially fixed annuities.In a stable equity market, the required capital on VAs is generally less than forfixed annuities and other spread-based products. However, from a productcreditworthiness perspective, A.M. Best views VAs with living benefits asdisplaying some of the highest risk characteristics and being vulnerable to tailrisks, which could lead to an increase in the required capital to support thissegment. The institutional spread-based business (primarily guaranteedinterest contracts, funding agreements and funding agreement-backedsecurities) remains in run-off to reduce exposure to credit risk, lower requiredcapital and to shift to a more balanced mix of business between spread- andfee-based products. The group has executed several fixed annuity coinsurancetransactions, which have released capital and reduced its spread-basedliabilities. A.M. Best also notes that over recent years, Aegon USA has cometo rely heavily on captive reinsurance to fund reserves generated by term lifeand universal life insurance with secondary guarantees. Aegon USA has alsoreduced its exposure to equity market risk by increasing the size of its macroequity hedge covering its variable annuity business. However, while theadditional equity hedging will serve to reduce volatility in some financialmetrics, the group’s earnings via fee income remain somewhat correlated toequity market performance.
While A.M. Best believes that a positive rating action for Aegon USA isunlikely over the near term, factors that could result in a positive rating actioninclude a material improvement in A.M. Best’s view of the credit profile ofAegon. Factors that could result in a negative rating action include asignificant and sustained decline in consolidated risk-adjusted capitalizationas measured by Best’s Capital Adequacy Ratio (BCAR) model, net operatingperformance that does not meet A.M. Best’s expectations, a decline in A.M.Best’s view of Aegon’s credit profile, or a change in A.M. Best’s view of thestrategic importance of Aegon USA to Aegon.
(*) Within several financial tables of this report, this company is compared against the GroupAnnuity Composite.
(*) Data reflected within all tables of this report has been compiled from the company-filedstatutory statement.
Note: Net premiums written include annuity and other fund deposits.
BUSINESS PROFILEThe following text is derived from A.M. Best’s Credit Report on Aegon
USA Group (AMB# 069707).
Aegon USA is one of the leading life insurance organizations in the U.S.with more than twenty million customers and provides a wide range of lifeinsurance, pensions, long-term savings and investment products. Aegon USAwas founded 1989 when Aegon N.V. (Aegon) decided to bring all of itsoperating companies in the U.S. under a single financial services holdingcompany. Business is conducted through five primary insurance subsidiariesand includes Transamerica Life Insurance Company, Transamerica FinancialLife Insurance Company, Transamerica Advisors Life Insurance Company,Transamerica Premier Life Insurance Company, and Transamerica CasualtyInsurance Company. The Aegon USA group of companies is fully integratedand share senior and investment management along with support services.
Aegon USA uses a variety of distribution channels, each of which conductsbusiness through one or more of the Aegon USA life insurance companies.The channels are both owned and non-owned and include career agents as wellas financial planners, banks, brokers and independent consultants. It is alsoprominent in the home service market and in the direct marketing of life andsupplemental accidental death and dismemberment (AD&D) insurance.Through 2015, the Aegon USA companies were divisionally organized intotwo primary business divisions: Life & Protection (L&P) and Investments &Retirement (I&R).
The Life & Protection (L&P) division included the Agency Group sellingindividual life and supplemental health products to the middle income market.Also included in the L&P division were the Brokerage Group, TransamericaEmployee Benefits, Long Term Care and the Affinity Group. The BrokerageGroup marketed life insurance in the retail high net worth market throughindependent general agents and contract producers. The Affinity Groupspecialized in marketing life insurance and supplemental health insuranceproducts to consumers through direct channels such as telemarketing, directmail, television advertising and the Internet. This group also marketed creditlife, mortgage life and other life insurance and supplemental health products.Transamerica Long Term Care offered products and services aimed at meetingthe long-term care insurance needs of its customers. Policies were sold
through independent brokerage and at the worksite to individuals and groups.Through Transamerica Employee Benefits, L&P offered voluntary payrolldeduction life and supplemental health insurance to employees at their placeof work which are designed to supplement employees’existing benefit plans.
The Investment & Retirement (I&R) division offered a wide range ofsavings and retirement products, including mutual funds, investment advice aswell as fixed and variable annuities. Transamerica Capital Management(TCM) is the underwriting and wholesaling broker/dealer for variableannuities and mutual funds. TCM builds relationships with independentfinancial professionals, agents affiliated with regional broker/dealers or majorwirehouse firms and representatives through a large bank network. TCMserves these distribution channels through company-owned and externalwholesalers. In 2007, Aegon USA acquired Merrill Lynch Life InsuranceCompany and ML Life Insurance Company of New York (renamedTransamerica Advisors Life Insurance Company and Transamerica AdvisorsLife Insurance Company of New York. Transamerica Advisors Life InsuranceCompany of New York was later merged with and into Transamerica FinancialLife Insurance Company, effective 7/1/14) as part of a strategic distributionrelationship with Merrill Lynch with respect to variable annuities. Theacquisition of the Merrill Lynch insurance companies served to place AegonUSA in the top ten of variable annuity sellers in the wirehouse andbroker/dealer channels. In late 2009, I&R reduced its sales of fixed annuitiesin response to lower market interest rates and lower investment returnsavailable in the environment. Similar market conditions have continued overrecent years and restricted sales of fixed annuities. As a result, I&Rde-emphasized the sale of fixed annuities and executed several large fixedannuity coinsurance transactions in recent years.
Incorporated within the I&R division was the former Employer Solutionsand Pensions (ES&P) division. This business included full-service retirementplan investments and services in addition to guaranteed savings andinvestment products directed at various segments of the pension industry. Thegroup sold a full range of products and services to small and mid-sizecorporate, non-profit and government sponsored plans through brokers,agents, consultants, third-party administrators and accounting firms. Effective12/31/2015, Aegon USA acquired the defined contribution administrationbook of business of Mercer HR Services, LLC. The transaction propelled thecompany to a top ten defined contribution record-keeper based on planparticipants and assets, adding 917,000 and $71 billion, respectively.Transamerica Retirement Solutions (TRS) served mid-sized to largecompanies and small to mid-sized companies across the U.S. TRS offered anumber of specialized services, including innovative plan design, a wide arrayof investment choices, extensive education programs and online investmenteducation. In addition, ES&P provided synthetic guaranteed investmentcontracts primarily to various retirement plans. ES&P was also a leadingprovider of single premium group annuities (Terminal Funding), which areused by companies to decrease the liability of the defined benefit plans.BOLI/COLI products were distributed through a select number of nichebrokers (including an affiliate, Clark Consulting, which was sold inSeptember 2015); however, in December 2010, ES&P discontinued new salesin the executive non-qualified benefits market and related BOLI/COLIbusiness.
The former Institutional Markets Division offered institutional spreadproducts such as traditional fixed rate guarantee investment contracts (GICs),
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funding agreements (FAs), FA-backed notes as well as fee-based productssuch as synthetic GICs. In 2009, Aegon announced its plan to run-off itsinstitutional spread based business to reduce capital requirements and creditrisk. The institutional line of business also included structured producttransactions, such as credit default swaps, synthetic collateralized debtobligations, affordable housing tax credit guarantees and hedge fund principalprotection. Going forward, Aegon USA will only continue to offer affordablehousing tax credit guarantees.
Beginning in 2016, Aegon USA has restructured into a functionallyorganized business centered around the Transamerica brand. As a result, thecompany has eliminated its previous divisional alignment and created aunified organization that is functionally aligned (i.e. distribution, operations,finance, etc.). As a result of its recently implemented reorganization in theU.S., there has been a delayering of management via the elimination ofredundant processes and a restructuring of its U.S. distribution footprint.
TOTAL PREMIUM COMPOSITION & GROWTH ANALYSISReinsurance
Territory: The company is licensed in the District of Columbia, Guam, PuertoRico, U.S. Virgin Islands, AL, AK, AZ, AR, CA, CO, CT, DE, FL, GA, HI, ID,IL, IN, IA, KS, KY, LA, ME, MD, MA, MI, MN, MS, MO, MT, NE, NV, NH,NJ, NM, NC, ND, OH, OK, OR, PA, RI, SC, SD, TN, TX, UT, VT, VA, WA,WV, WI and WY.
Total 18,132,858 18,992,408 18,329,037 13,942,303 13,761,069
RISK MANAGEMENTThe following text is derived from A.M. Best’s Credit Report on Aegon
USA Group (AMB# 069707).
Aegon USA has a fully integrated enterprise risk management (ERM)structure/program in place to assess current and emerging risk, as well governfuture decisions. The company’s risk management framework is representedacross all levels of the organization. This ensures a coherent and integratedapproach to risk management throughout the company. Within this program,objectives and risk tolerances are set and roles and responsibilities are clearlydefined across all levels of the organization. Aegon USA’s ERM program isoverseen by a governance structure that has three basic layers: A SupervisoryBoard Risk Committee, the Executive Board and an ERM & Group Risk &Capital Committee. A.M. Best views Aegon USA’s ERM capabilities to bestrong for its size and business profile.
Country Risk: Aegon USA has a limited amount of country risk exposure asthe company’s operations are based in the U.S. However, Aegon Americas —which includes all of the North American and Latin American operations ofAegon — has a modest amount of country risk exposure with its life insuranceoperations in Canada (through Canadian Premier Life and Transamerica LifeCanada (sold in July 2015)) and Latin America with Mexico and Brazil. In2006, Aegon acquired a 49% interest in Seguros Argos, a Mexican lifeinsurance company. As part of the joint venture, Aegon and Seguros Argos setup a jointly owned pension fund company, Afore Argos. In 2009, Aegonacquired a 50% interest in Mongeral S.A. Seguros e Previdencia, Brazil’s 6thlargest independent life insurer. The U.S. and Canada are considered “Tier 1"by A.M. Best’s Country Risk Group with Mexico and Brazil both considered”Tier 3".
OPERATING PERFORMANCEThe following text is derived from A.M. Best’s Credit Report on Aegon
USA Group (AMB# 069707).
Operating Results: Aegon USA Group has one of the more diversifiedearnings profiles in the industry with earnings being generated from lifeinsurance products and increasingly from fee-based income from variable and
investment-type products. Aegon USA Group reported a pre-tax statutoryoperating gain of approximately $0.6 billion in 2015 as compared to a 2014pre-tax statutory operating gain of approximately $1.0 billion. 2015’s resultswere impacted by a decline in top-line growth compared to 2014’s strongtop-line growth which was the strongest in recent history. Higher underwritinglosses along with lower investment income drove the year-over-year change.Adverse claims experience and the impact on recurring earnings of theactuarial assumption changes and model updates implemented over the pastyear and a half were the primary drivers behind the decline in pre-tax earnings.
Aegon Americas segment (which is largely made up of Aegon USA, butalso includes operations in Canada (sold in July 2015) and Mexico) hasrecorded 2015 IFRS underlying earnings before tax of approximately $1.3billion compared with $1.5 billion in 2014 and approximately $1.7 billion2013. 2015 earnings were marginally lower compared to the previous year.
A.M. Best expects that Aegon USA Group will continue to maintain anunderlying trend of profitability on both a Statutory and IFRS basis. However,margins may be challenged by the low interest rate environment.
(*) Pre-Tax Invest Total Return quarterly calculation based on more limited quarterly data - seeCalculation Specifications.
BALANCE SHEET STRENGTHThe following text is derived from A.M. Best’s Credit Report on Aegon
USA Group (AMB# 069707).
Capitalization: Aegon USA’s overall risk-based capitalization is adequate tosupport its current insurance and investment risks. A.M. Best believes thatAegon USA has good statutory earnings capacity to support its capitalposition going forward. A.M. Best also notes that over recent years, AegonUSA has come to rely heavily on captive reinsurance to fund its reservesassociated with term life insurance and universal life with secondaryguarantees. Financing provided to these captives include, but are not limitedto, surplus notes, letters of credit and parental guarantees. As part of ourassessment of a rating unit’s balance sheet strength, A.M. Best considers notonly the capital adequacy ratios, but also the quality of capital supporting suchratios. A.M. Best believes that the quality of capital for an operating companythat has ceded XXX and/or AXXX reserves to a domestic or offshore captiveas not as strong as for an operating company with similar risk-adjusted capitalratios that self-funds its XXX and AXXX reserves.
Finally, Aegon USA has received capital contributions in the past from itsultimate parent, Aegon N.V. Given that Aegon USA is such an integral part ofAegon N.V., A.M. Best believes that they would likely provide additionalcapital if needed in the future. A.M. Best views the capital profile to be amaterial supporting factor to the rating of the group.
Current BCAR: 217
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CAPITAL GENERATION ANALYSIS ($000)——————Source of Surplus Growth——————
Pre-Tax Net Realized UnrealizedAdjusted Capital Income Capital
Loss Reserves: While loss reserving practices has not been a material concernfrom a ratings perspective, Aegon USA’s reserve profile changing as thecompany focuses on selling fee-based products, especially variable annuitieswith living benefit riders, while de-emphasizing spread-based products,especially tradition fixed annuities. An additional aspect of this shift is thatmortality reserves also are playing a less dominant role than in the past.
Some positive trends as it relates to the improved risk profile of thecompany’s legacy block of variable annuities with living benefit riders arenoted. Management actions, such as buyouts of variable annuities that are inthe money, has caused the related net amount at risk, before hedging andreinsurance, as a percent of account value and surplus to decline significantlyover the past several years.
The following text is derived from A.M. Best’s Credit Report on AegonUSA Group (AMB# 069707).
Liquidity: Aegon USA has adequate cash and liquid assets to protect againstadverse liquidity scenarios. The company manages so that liquidityrequirements could be met in stress scenarios which factor in a combination ofevents over monthly horizon points over an extended period of time. Liquidityimpacts due to rating downgrades are also factored into the company’s stresstesting. The company manages liquidity so that a positive cash balance can bemaintained during the first 6 months of a modeled scenario with illiquid assetsales not allowed during this period. The company also forecasts liquidity tobe positive over a two year period. Aegon USA’s liquidity is also supported by$1.1 billion in available syndicated borrowings for emergency use only. TheGroup also has available to them the ability to access the FHLB as well asother normal operating lines of credit outside of emergency use funding.Liquidity is considered adequate and supports the level business complexity inwhich the company operates in.
LIQUIDITY ANALYSIS———————————Company———————————
Operating Non-Inv Delnq &Cash Quick Current Grade Bonds Foreclsd
Year Flow ($000) Liquidity Liquidity to Capital Mtg to Capital2011 -75,008 45.1 90.3 70.7 0.12012 298,887 49.1 91.2 60.8 0.12013 -79,671 45.1 86.0 54.5 …2014 2,083,357 48.4 82.2 37.2 0.32015 -1,470,829 43.8 80.6 35.5 0.5
Ten Lns Invest Quick CurrentYear & RE to Cap to Capital Liquidity Liquidity2011 115.0 49.1 38.7 74.12012 91.8 46.1 38.3 73.32013 102.6 57.3 37.8 71.82014 83.8 51.3 36.6 70.42015 88.6 68.5 34.9 69.3
The following text is derived from A.M. Best’s Credit Report on AegonUSA Group (AMB# 069707).
Investments: Aegon USA employs an Asset Liability Management focusedinvestment strategy utilizing fixed income securities for a majority of itsinvested general account assets. However, a small portion of the investmentsare managed on a total return basis utilizing hedge funds for the most part.Almost the entire investment portfolio is managed in-house by Aegon AssetManagement.
As of year-end 2015, bonds represent 69.3% of Aegon USA’s investmentportfolio and 93.8% are of investment grade quality. Common stock accountsfor about 2.7% of the portfolio, of which a large portion is affiliated. Directcommercial mortgage loans comprise approximately 10% of invested assetsand are backed principally by office, retail, industrial and apartmentproperties. The commercial loan portfolio is performing well, with the vastmajority of loans in good standing. Aegon USA’s exposure to alternativeassets, which consists of investments in higher risk and less liquid assets, suchas hedge funds, private equity, mezzanine debt and real estate. A.M. Best notesthat the alternative asset exposure is less than 5% of the investment portfolio.
Over recent years, Aegon has taken steps to improve the risk profile of itsinvestment portfolio with below investment grade (BIG) bonds and what A.M.Best deems as high risk assets playing less of a role. BIGs as a percent ofcapital declined to about 38% as of year-end 2015, similar to year-end 2014,from the highs of over 70% in 2013.
2015 2014 2013 2012 2011Real Estate (000) 131,514 100,655 106,908 112,161 125,933Property Occupied by Co 71.7 85.6 86.3 89.1 78.6Property Held for Inc 6.2 8.0 6.2 7.2 16.3Property Held for Sale 22.1 6.4 7.5 3.7 5.1
Investments - Other Invested Assets: Aegon uses derivatives, such as swaps,options, futures and forward contracts to hedge some of the exposures relatedto both investments backing insurance products and company borrowings.A.M. Best notes as a positive Aegon’s use of equity futures contracts to hedgeliability risk with the equity sensitive products, such as variable annuities.While this strategy may help mitigate some of the tail risk associated withthese liabilities, there is still the presence of policyholder behavior risk, whichcannot be hedged. As a result, there is the possibility of hedge breakage in astressed market environment.
INVESTMENTS - OTHER INVESTED ASSETS2015 2014 2013 2012 2011
HISTORYDate Incorporated: 04/19/1961 Date Commenced: 03/19/1962
Domicile: IA
Originally incorporated as American Public Life Insurance Company, Inc.,the company was renamed NN Investors Life Insurance Company, Inc. in1968. In early 1991, as part of the assumption of essentially all the assets,liabilities and operations of Pacific Fidelity Life Insurance Company andNational Old Line Insurance Company, the company was renamed PFL LifeInsurance Company. During 2001, the present title was adopted.
Mergers: Investors Fidelity Life Insurance Company, Alabama, 1982;Investors Life of Florida Insurance Company, 1986; Transamerica AssuranceCompany, Missouri, 2004; Transamerica Life Insurance & Annuity Company,North Carolina, 2005; Transamerica Occidental Life Insurance Company,Iowa, 2008; Life Investors Insurance Company of America, Iowa, 2008.
Reinsurances: United Group Insurance Company, Texas, 1983.
MANAGEMENT
Officers: Chairman of the Board, Mark W. Mullin; President, Blake S.Bostwick; Chief Investment Officer, Joel L. Coleman; Senior Vice President,Treasurer and Chief Financial Officer, C. Michiel van Katwijk; Senior VicePresident and Chief Risk Officer, Todd Fuhs (Corporate); Senior VicePresident, Secretary and General Counsel, Jay Orlandi.
Directors: Blake S. Bostwick, Mark W. Mullin, Jay Orlandi, David Schulz, C.Michiel van Katwijk.
REGULATORYAn examination of the financial condition is being made as of December
31, 2014, by the insurance department of Iowa. The 2015 annual independentaudit of the company was conducted by PricewaterhouseCoopers LLP. Theannual statement of actuarial opinion is provided by Donald Krouse.
Reserve basis: (Current ordinary business): 1980 CSO 3%, 4%, and 4 1/2%;CRVM and Net Level valuation. (Current annuity business): 5.50%. 6.25%,6.75%; 83a, 6.35% immediate.
REINSURANCEMaximum net retention on any one life is $500,000 for ordinary life
business and $500,000 for group life contracts.
FINANCIAL INFORMATIONBALANCE SHEET ($000) - YE 2015
Assets LiabilitiesTotal bonds 34,097,070 +Net policy reserves 34,873,702Total preferred stocks 106,264 Policy claims 601,632Total common stocks 2,087,667 Accounts payable 1,057,984Mortgage loans 5,363,099 Deposit type contracts 2,738,140Real estate 131,514 Interest maint reserve 967,414Contract loans 649,738 Comm taxes expenses 237,870Cash & short-term inv 2,260,958 Asset val reserve 740,321Derivatives 1,157,993 Funds held reinsurance 2,977,378Securities-colltrl assts 2,760,922 Funds held coinsur 1,237,394Other invested assets 2,653,261 Payable for securities lending 2,760,922Prems and consids due 139,516 Other liabilities 372,544Accrued invest income 474,170Other assets 2,025,054 Tot liab w/o sep accts 48,565,302
Separate account bus 72,012,055Tot assets w/o sep accts 53,907,227
Separate account bus 72,128,772 Total liabilities 120,577,357Common stock 6,762Preferred stock 1,597Treas stock preferred -58,000Surplus notes 150,000Paid in & contrib surpl 3,102,701Unassigned surplus 2,253,290Other surplus 2,292
Assets 126,035,999 Total 126,035,999
+Analysis of reserves; Life $14,354,681; annuities $14,745,474; supplementary contractswith life contingencies $414,505; accidental death benefits $7,176; disability active lives$11,201; disability disabled lives $43,866; miscellaneous reserves $472,755; accident & health$4,824,046.
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SUMMARY OF OPERATIONS ($000)Premiums: Death benefits 1,376,211Ordinary life 926,154 Matured endowments 10Individual annuities 5,870,210 Annuity benefits 1,163,511Credit life 20,565 Coup endow/similar ben 18Group life 139,990 Surrender benefits 9,667,641Group annuities 7,048,152 Acc & health benefits 427,224Acc & health group 524,406 Int on policy funds 44,541Acc & health credit 28,450 Supplementary contracts 75,522Acc & health other 219,074 Incr life reserves -1,455,241Total premiums 14,777,001 Incr a & h reserves 304,113
Supplementary contracts 32,015 Res adj reins assumed -228,984Net investment income 2,323,782 Commissions 1,242,518Amort interest maint res 93,679 Comm exp reins assumed 81,625Net gain from sep acct 0 Interest expenses 9,000Comm & exp reins ceded 581,925 Insur taxes lic & fees 127,045Res adj on reins ceded -193,428 General ins expenses 907,695Reinsurance income 310 Net transf to sep acct 5,151,857Other income 1,456,352 Other expenses -1,163Mgt and/or service fee 6,697 Misc operating expense 2
Other disbursements 119,776
Total 19,078,332 Total 19,012,921
Gain from operations before FIT & div to policyholders....................................... 65,411
Dividends to policyholders: life......................................................................... 5,894
Gains from operations after dividends to policyholders........................................ 59,517
Federal income taxes incurred........................................................................... -32,278
Net gain from operations after FIT and dividends................................................ 91,795
CASH FLOW ANALYSIS ($000)
Funds Provided Funds AppliedGross cash from oper 18,883,209 Benefits paid 12,619,288Long-term bond proceeds 13,571,823 Comm, taxes, expenses 2,260,757Other invest proceeds 1,713,108 Transfer to sep account 5,214,382Other cash provided 888,446 Long-term bonds acquired 11,977,145Decr cash & short-term 915,403 Other cash applied 3,900,417
RECENT DEVELOPMENTSEffective July 31, 2014, the company changed its name from Monumental
Life Insurance Company to Transamerica Premier Life Insurance Company.Effective October 1, 2014, Western Reserve Life Assurance Co. of Ohio
merged with and into Transamerica Premier Life Insurance Company.
RATING RATIONALE
Rating Rationale: The published ratings of the Aegon USA companiesreflect that they are integral to Aegon’s strategy, fully integrated into thegroup’s operations, a material part of the business profile, significantcontributors to earnings and have received explicit financial support whenneeded.
Transamerica Premier Life Insurance Company sells a full line of insuranceproducts, including individual, credit, and group coverages under life, annuityand accident and health policies as well as various investment products. Thecompany is licensed in 49 states, the District of Columbia, Guam and PuertoRico. Sales of the company’s products are primarily through agents, brokers,financial institutions and direct response methods.
The following text is derived from A.M. Best’s Credit Report on AegonUSA Group (AMB# 069707).
The ratings of the life insurance companies of Aegon USA reflect the strongbusiness profile, adequate risk-adjusted capitalization, strong enterprise riskmanagement, and an underlying trend of statutory and IFRS profitability. Theratings also reflect A.M. Best’s assessment of the financial strength andsupport of the parent, Aegon N.V. (Aegon). Partially offsetting these strengthsis the increasing focus on sales of products that have unfavorable riskcharacteristics from a product creditworthiness standpoint, as well as theequity market sensitivity of its earnings and significant reliance on captivereinsurance.
Aegon USA’s business profile is viewed as strong by A.M. Best, withcompetitive market positions in the U.S. life and annuity arenas. The group’smarket positions are supported by a large and diversified distribution system
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that is made up of both independent and career agents, financial institutions,wirehouses and direct response channels. Aegon USA enjoys the efficienciesand competitive advantages of meaningful economies of scale, which havecontributed favorably to its historical financial performance. Aegon USA’searnings profile is one of the more diversified in the industry. Product linesthat contribute to overall earnings include traditional life, variable life,variable annuities, mutual funds, pensions and accident and health insurance.Additional rating consideration includes A.M. Best’s assessment of thefinancial strength and support of the parent, Aegon. As a result, Aegon USAreceives rating enhancement in consideration of Aegon’s overallcreditworthiness and the strategic and financial importance of the U.S.operations to Aegon.
Several years ago the company pursued a strategic shift to focus on sellingfee-based products, especially variable annuities (VAs), and hasde-emphasized sales of its spread-based products, especially fixed annuities.In a stable equity market, the required capital on VAs is generally less than forfixed annuities and other spread-based products. However, from a productcreditworthiness perspective, A.M. Best views VAs with living benefits asdisplaying some of the highest risk characteristics and being vulnerable to tailrisks, which could lead to an increase in the required capital to support thissegment. The institutional spread-based business (primarily guaranteedinterest contracts, funding agreements and funding agreement-backedsecurities) remains in run-off to reduce exposure to credit risk, lower requiredcapital and to shift to a more balanced mix of business between spread- andfee-based products. The group has executed several fixed annuity coinsurancetransactions, which have released capital and reduced its spread-basedliabilities. A.M. Best also notes that over recent years, Aegon USA has cometo rely heavily on captive reinsurance to fund reserves generated by term lifeand universal life insurance with secondary guarantees. Aegon USA has alsoreduced its exposure to equity market risk by increasing the size of its macroequity hedge covering its variable annuity business. However, while theadditional equity hedging will serve to reduce volatility in some financialmetrics, the group’s earnings via fee income remain somewhat correlated toequity market performance.
While A.M. Best believes that a positive rating action for Aegon USA isunlikely over the near term, factors that could result in a positive rating actioninclude a material improvement in A.M. Best’s view of the credit profile ofAegon. Factors that could result in a negative rating action include asignificant and sustained decline in consolidated risk-adjusted capitalizationas measured by Best’s Capital Adequacy Ratio (BCAR) model, net operatingperformance that does not meet A.M. Best’s expectations, a decline in A.M.Best’s view of Aegon’s credit profile, or a change in A.M. Best’s view of thestrategic importance of Aegon USA to Aegon.
(*) Within several financial tables of this report, this company is compared against theMultiple Lines Composite.
(*) Data reflected within all tables of this report has been compiled from the company-filedstatutory statement.
BUSINESS PROFILEThe following text is derived from A.M. Best’s Credit Report on Aegon
USA Group (AMB# 069707).
Aegon USA is one of the leading life insurance organizations in the U.S.with more than twenty million customers and provides a wide range of lifeinsurance, pensions, long-term savings and investment products. Aegon USAwas founded 1989 when Aegon N.V. (Aegon) decided to bring all of itsoperating companies in the U.S. under a single financial services holdingcompany. Business is conducted through five primary insurance subsidiariesand includes Transamerica Life Insurance Company, Transamerica FinancialLife Insurance Company, Transamerica Advisors Life Insurance Company,Transamerica Premier Life Insurance Company, and Transamerica CasualtyInsurance Company. The Aegon USA group of companies is fully integratedand share senior and investment management along with support services.
Aegon USA uses a variety of distribution channels, each of which conductsbusiness through one or more of the Aegon USA life insurance companies.The channels are both owned and non-owned and include career agents as wellas financial planners, banks, brokers and independent consultants. It is alsoprominent in the home service market and in the direct marketing of life andsupplemental accidental death and dismemberment (AD&D) insurance.Through 2015, the Aegon USA companies were divisionally organized intotwo primary business divisions: Life & Protection (L&P) and Investments &Retirement (I&R).
The Life & Protection (L&P) division included the Agency Group sellingindividual life and supplemental health products to the middle income market.Also included in the L&P division were the Brokerage Group, TransamericaEmployee Benefits, Long Term Care and the Affinity Group. The BrokerageGroup marketed life insurance in the retail high net worth market throughindependent general agents and contract producers. The Affinity Groupspecialized in marketing life insurance and supplemental health insuranceproducts to consumers through direct channels such as telemarketing, directmail, television advertising and the Internet. This group also marketed creditlife, mortgage life and other life insurance and supplemental health products.Transamerica Long Term Care offered products and services aimed at meetingthe long-term care insurance needs of its customers. Policies were soldthrough independent brokerage and at the worksite to individuals and groups.
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Through Transamerica Employee Benefits, L&P offered voluntary payrolldeduction life and supplemental health insurance to employees at their placeof work which are designed to supplement employees’existing benefit plans.
The Investment & Retirement (I&R) division offered a wide range ofsavings and retirement products, including mutual funds, investment advice aswell as fixed and variable annuities. Transamerica Capital Management(TCM) is the underwriting and wholesaling broker/dealer for variableannuities and mutual funds. TCM builds relationships with independentfinancial professionals, agents affiliated with regional broker/dealers or majorwirehouse firms and representatives through a large bank network. TCMserves these distribution channels through company-owned and externalwholesalers. In 2007, Aegon USA acquired Merrill Lynch Life InsuranceCompany and ML Life Insurance Company of New York (renamedTransamerica Advisors Life Insurance Company and Transamerica AdvisorsLife Insurance Company of New York. Transamerica Advisors Life InsuranceCompany of New York was later merged with and into Transamerica FinancialLife Insurance Company, effective 7/1/14) as part of a strategic distributionrelationship with Merrill Lynch with respect to variable annuities. Theacquisition of the Merrill Lynch insurance companies served to place AegonUSA in the top ten of variable annuity sellers in the wirehouse andbroker/dealer channels. In late 2009, I&R reduced its sales of fixed annuitiesin response to lower market interest rates and lower investment returnsavailable in the environment. Similar market conditions have continued overrecent years and restricted sales of fixed annuities. As a result, I&Rde-emphasized the sale of fixed annuities and executed several large fixedannuity coinsurance transactions in recent years.
Incorporated within the I&R division was the former Employer Solutionsand Pensions (ES&P) division. This business included full-service retirementplan investments and services in addition to guaranteed savings andinvestment products directed at various segments of the pension industry. Thegroup sold a full range of products and services to small and mid-sizecorporate, non-profit and government sponsored plans through brokers,agents, consultants, third-party administrators and accounting firms. Effective12/31/2015, Aegon USA acquired the defined contribution administrationbook of business of Mercer HR Services, LLC. The transaction propelled thecompany to a top ten defined contribution record-keeper based on planparticipants and assets, adding 917,000 and $71 billion, respectively.Transamerica Retirement Solutions (TRS) served mid-sized to largecompanies and small to mid-sized companies across the U.S. TRS offered anumber of specialized services, including innovative plan design, a wide arrayof investment choices, extensive education programs and online investmenteducation. In addition, ES&P provided synthetic guaranteed investmentcontracts primarily to various retirement plans. ES&P was also a leadingprovider of single premium group annuities (Terminal Funding), which areused by companies to decrease the liability of the defined benefit plans.BOLI/COLI products were distributed through a select number of nichebrokers (including an affiliate, Clark Consulting, which was sold inSeptember 2015); however, in December 2010, ES&P discontinued new salesin the executive non-qualified benefits market and related BOLI/COLIbusiness.
The former Institutional Markets Division offered institutional spreadproducts such as traditional fixed rate guarantee investment contracts (GICs),
funding agreements (FAs), FA-backed notes as well as fee-based productssuch as synthetic GICs. In 2009, Aegon announced its plan to run-off itsinstitutional spread based business to reduce capital requirements and creditrisk. The institutional line of business also included structured producttransactions, such as credit default swaps, synthetic collateralized debtobligations, affordable housing tax credit guarantees and hedge fund principalprotection. Going forward, Aegon USA will only continue to offer affordablehousing tax credit guarantees.
Beginning in 2016, Aegon USA has restructured into a functionallyorganized business centered around the Transamerica brand. As a result, thecompany has eliminated its previous divisional alignment and created aunified organization that is functionally aligned (i.e. distribution, operations,finance, etc.). As a result of its recently implemented reorganization in theU.S., there has been a delayering of management via the elimination ofredundant processes and a restructuring of its U.S. distribution footprint.
TOTAL PREMIUM COMPOSITION & GROWTH ANALYSISReinsurance
Territory: The company is licensed in the District of Columbia, Guam, PuertoRico, AL, AK, AZ, AR, CA, CO, CT, DE, FL, GA, HI, ID, IL, IN, IA, KS, KY,LA, ME, MD, MA, MI, MN, MS, MO, MT, NE, NV, NH, NJ, NM, NC, ND,OH, OK, OR, PA, RI, SC, SD, TN, TX, UT, VT, VA, WA, WV, WI and WY.The company is also licensed on United States military installations in foreigncountries.
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Total 3,174,594 2,874,688 2,682,089 2,529,524 2,456,626
RISK MANAGEMENTThe following text is derived from A.M. Best’s Credit Report on Aegon
USA Group (AMB# 069707).
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Aegon USA has a fully integrated enterprise risk management (ERM)structure/program in place to assess current and emerging risk, as well governfuture decisions. The company’s risk management framework is representedacross all levels of the organization. This ensures a coherent and integratedapproach to risk management throughout the company. Within this program,objectives and risk tolerances are set and roles and responsibilities are clearlydefined across all levels of the organization. Aegon USA’s ERM program isoverseen by a governance structure that has three basic layers: A SupervisoryBoard Risk Committee, the Executive Board and an ERM & Group Risk &Capital Committee. A.M. Best views Aegon USA’s ERM capabilities to bestrong for its size and business profile.
Country Risk: Aegon USA has a limited amount of country risk exposure asthe company’s operations are based in the U.S. However, Aegon Americas —which includes all of the North American and Latin American operations ofAegon — has a modest amount of country risk exposure with its life insuranceoperations in Canada (through Canadian Premier Life and Transamerica LifeCanada (sold in July 2015)) and Latin America with Mexico and Brazil. In2006, Aegon acquired a 49% interest in Seguros Argos, a Mexican lifeinsurance company. As part of the joint venture, Aegon and Seguros Argos setup a jointly owned pension fund company, Afore Argos. In 2009, Aegonacquired a 50% interest in Mongeral S.A. Seguros e Previdencia, Brazil’s 6thlargest independent life insurer. The U.S. and Canada are considered “Tier 1"by A.M. Best’s Country Risk Group with Mexico and Brazil both considered”Tier 3".
OPERATING PERFORMANCEThe following text is derived from A.M. Best’s Credit Report on Aegon
USA Group (AMB# 069707).
Operating Results: Aegon USA Group has one of the more diversifiedearnings profiles in the industry with earnings being generated from lifeinsurance products and increasingly from fee-based income from variable andinvestment-type products. Aegon USA Group reported a pre-tax statutoryoperating gain of approximately $0.6 billion in 2015 as compared to a 2014pre-tax statutory operating gain of approximately $1.0 billion. 2015’s resultswere impacted by a decline in top-line growth compared to 2014’s strongtop-line growth which was the strongest in recent history. Higher underwritinglosses along with lower investment income drove the year-over-year change.Adverse claims experience and the impact on recurring earnings of theactuarial assumption changes and model updates implemented over the pastyear and a half were the primary drivers behind the decline in pre-tax earnings.
Aegon Americas segment (which is largely made up of Aegon USA, butalso includes operations in Canada (sold in July 2015) and Mexico) hasrecorded 2015 IFRS underlying earnings before tax of approximately $1.3billion compared with $1.5 billion in 2014 and approximately $1.7 billion2013. 2015 earnings were marginally lower compared to the previous year.
A.M. Best expects that Aegon USA Group will continue to maintain anunderlying trend of profitability on both a Statutory and IFRS basis. However,margins may be challenged by the low interest rate environment.
(*) Pre-Tax Invest Total Return quarterly calculation based on more limited quarterly data - seeCalculation Specifications.
BALANCE SHEET STRENGTHThe following text is derived from A.M. Best’s Credit Report on Aegon
USA Group (AMB# 069707).
Capitalization: Aegon USA’s overall risk-based capitalization is adequate tosupport its current insurance and investment risks. A.M. Best believes that
Aegon USA has good statutory earnings capacity to support its capitalposition going forward. A.M. Best also notes that over recent years, AegonUSA has come to rely heavily on captive reinsurance to fund its reservesassociated with term life insurance and universal life with secondaryguarantees. Financing provided to these captives include, but are not limitedto, surplus notes, letters of credit and parental guarantees. As part of ourassessment of a rating unit’s balance sheet strength, A.M. Best considers notonly the capital adequacy ratios, but also the quality of capital supporting suchratios. A.M. Best believes that the quality of capital for an operating companythat has ceded XXX and/or AXXX reserves to a domestic or offshore captiveas not as strong as for an operating company with similar risk-adjusted capitalratios that self-funds its XXX and AXXX reserves.
Finally, Aegon USA has received capital contributions in the past from itsultimate parent, Aegon N.V. Given that Aegon USA is such an integral part ofAegon N.V., A.M. Best believes that they would likely provide additionalcapital if needed in the future. A.M. Best views the capital profile to be amaterial supporting factor to the rating of the group.
Current BCAR: 217
CAPITAL GENERATION ANALYSIS ($000)——————Source of Surplus Growth——————
Pre-Tax Net Realized UnrealizedAdjusted Capital Income Capital
Loss Reserves: While loss reserving practices has not been a material concernfrom a ratings perspective, Aegon USA’s reserve profile changing as thecompany focuses on selling fee-based products, especially variable annuitieswith living benefit riders, while de-emphasizing spread-based products,especially tradition fixed annuities. An additional aspect of this shift is thatmortality reserves also are playing a less dominant role than in the past.
Some positive trends as it relates to the improved risk profile of thecompany’s legacy block of variable annuities with living benefit riders arenoted. Management actions, such as buyouts of variable annuities that are inthe money, has caused the related net amount at risk, before hedging andreinsurance, as a percent of account value and surplus to decline significantlyover the past several years.
The following text is derived from A.M. Best’s Credit Report on AegonUSA Group (AMB# 069707).
Liquidity: Aegon USA has adequate cash and liquid assets to protect againstadverse liquidity scenarios. The company manages so that liquidityrequirements could be met in stress scenarios which factor in a combination ofevents over monthly horizon points over an extended period of time. Liquidityimpacts due to rating downgrades are also factored into the company’s stresstesting. The company manages liquidity so that a positive cash balance can bemaintained during the first 6 months of a modeled scenario with illiquid asset
sales not allowed during this period. The company also forecasts liquidity tobe positive over a two year period. Aegon USA’s liquidity is also supported by$1.1 billion in available syndicated borrowings for emergency use only. TheGroup also has available to them the ability to access the FHLB as well asother normal operating lines of credit outside of emergency use funding.Liquidity is considered adequate and supports the level business complexity inwhich the company operates in.
LIQUIDITY ANALYSIS———————————Company———————————
Operating Non-Inv Delnq &Cash Quick Current Grade Bonds Foreclsd
Year Flow ($000) Liquidity Liquidity to Capital Mtg to Capital2011 799,464 42.9 110.1 100.7 0.62012 23,196 45.1 107.7 91.7 0.52013 436,424 43.7 104.2 67.8 0.52014 962,648 45.8 105.2 48.9 0.32015 141,940 46.1 103.7 53.0 0.2
Ten Lns Invest Quick CurrentYear & RE to Cap to Capital Liquidity Liquidity2011 153.7 59.7 44.2 81.72012 146.6 48.7 44.5 82.72013 112.7 37.1 43.5 82.32014 96.0 30.9 42.4 81.02015 107.7 40.3 42.8 80.5
The following text is derived from A.M. Best’s Credit Report on AegonUSA Group (AMB# 069707).
Investments: Aegon USA employs an Asset Liability Management focusedinvestment strategy utilizing fixed income securities for a majority of itsinvested general account assets. However, a small portion of the investmentsare managed on a total return basis utilizing hedge funds for the most part.Almost the entire investment portfolio is managed in-house by Aegon AssetManagement.
As of year-end 2015, bonds represent 69.3% of Aegon USA’s investmentportfolio and 93.8% are of investment grade quality. Common stock accountsfor about 2.7% of the portfolio, of which a large portion is affiliated. Directcommercial mortgage loans comprise approximately 10% of invested assetsand are backed principally by office, retail, industrial and apartmentproperties. The commercial loan portfolio is performing well, with the vastmajority of loans in good standing. Aegon USA’s exposure to alternativeassets, which consists of investments in higher risk and less liquid assets, suchas hedge funds, private equity, mezzanine debt and real estate. A.M. Best notesthat the alternative asset exposure is less than 5% of the investment portfolio.
Over recent years, Aegon has taken steps to improve the risk profile of itsinvestment portfolio with below investment grade (BIG) bonds and what A.M.Best deems as high risk assets playing less of a role. BIGs as a percent ofcapital declined to about 38% as of year-end 2015, similar to year-end 2014,from the highs of over 70% in 2013.
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2015 2014 2013 2012 2011Real Estate (000) 227,312 38,795 40,926 40,412 43,447Property Occupied by Co 11.3 68.9 66.9 87.1 82.9Property Held for Inc 84.1 0.9 0.9 1.0 1.0Property Held for Sale 4.5 30.2 32.2 11.9 16.1
Investments - Other Invested Assets: Aegon uses derivatives, such as swaps,options, futures and forward contracts to hedge some of the exposures relatedto both investments backing insurance products and company borrowings.A.M. Best notes as a positive Aegon’s use of equity futures contracts to hedgeliability risk with the equity sensitive products, such as variable annuities.While this strategy may help mitigate some of the tail risk associated withthese liabilities, there is still the presence of policyholder behavior risk, whichcannot be hedged. As a result, there is the possibility of hedge breakage in astressed market environment.
INVESTMENTS - OTHER INVESTED ASSETS2015 2014 2013 2012 2011
HISTORYDate Incorporated: 03/05/1858 Date Commenced: 05/22/1860
Domicile: IA
Originally incorporated as a mutual company under the title MarylandMutual Life and Fire Insurance Company, the title was changed in 1870 toMutual Life Insurance Company of Baltimore. In 1928, the company wasconverted to the stock basis. During 1935 the title was changed toMonumental Life Insurance Company. The company redomesticated fromMaryland to Iowa during 2007. During 2014, the present title was adopted.
Mergers: Capital Security Life Insurance Company, North Carolina, 1998;Commonwealth Life Insurance Company, Kentucky, 1998; Peoples SecurityLife Insurance Company, North Carolina, 1998; Pension Life InsuranceCompany of America, New Jersey, 2004; Peoples Benefit Life InsuranceCompany, Iowa, 2007; Western Reserve Life Assurance Company of Ohio,2014.
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MANAGEMENT
Officers: Chairman of the Board, President and Chief Executive Officer,Blake S. Bostwick; Chief Investment Officer, Joel L. Coleman; Senior VicePresident and Chief Risk Officer, Todd Fuhs; Senior Vice President, Secretaryand General Counsel, Jay Orlandi; Senior Vice President, Treasurer and ChiefFinancial Officer, C. Michiel van Katwijk.
Directors: Blake Bostwick, Mark W. Mullin, Jay Orlandi, David Schulz, C.Michiel van Katwijk.
REGULATORYAn examination of the financial condition is being made as of July 31, 2014,
by the insurance departments of Iowa, Maryland, Ohio and Vermont. The 2015annual independent audit of the company was conducted byPricewaterhouseCoopers LLP. The annual statement of actuarial opinion isprovided by Donald Krouse.
Reserve basis: (Current ordinary business): 1980 CSO 4%, 4 1/2% and 5%;CRVM and Net Level valuation. (Current annuity business): 5.50% and 5.75%CARVM deferred; 83a 6%, 6.25% and 6.50% CARVM immediate; A20006.5% both, 5.50% and 5.75% deferred; Greater of AV or CARVM.
FINANCIAL INFORMATIONBALANCE SHEET ($000) - YE 2015
Assets LiabilitiesTotal bonds 14,471,372 +Net policy reserves 12,266,718Total preferred stocks 6,428 Policy claims 266,664Total common stocks 112,138 Deposit type contracts 639,671Mortgage loans 1,687,756 Interest maint reserve 283,137Real estate 227,312 Comm taxes expenses 95,890Contract loans 925,179 Asset val reserve 270,586Cash & short-term inv 883,173 Funds held reinsurance 4,020,770Other invested assets 647,640 Other liabilities 978,153Prems and consids due 194,807Accrued invest income 185,526 Tot liab w/o sep accts 18,821,589Other assets 988,235 Separate account bus 21,319,849
Tot assets w/o sep accts 20,329,567 Total liabilities 40,141,438Separate account bus 21,319,849 Common stock 10,137
+Analysis of reserves; Life $7,421,482; annuities $3,363,955; supplementary contracts withlife contingencies $224,473; accidental death benefits $18,691; disability active lives $22,208;disability disabled lives $115,049; miscellaneous reserves $123,075; accident & health$977,785.
SUMMARY OF OPERATIONS ($000)Premiums: Death benefits 284,437Ordinary life 1,143,837 Matured endowments 8,491Individual annuities 661,488 Annuity benefits 344,697Credit life 7,127 Surrender benefits 1,110,799Group life 43,599 Acc & health benefits 732,800Group annuities 116,647 Int on policy funds 23,763Acc & health group 592,722 Supplementary contracts 43,194Acc & health credit 4,291 Incr life reserves 60,841Acc & health other 526,003 Incr a & h reserves 90,920Industrial 10 Res adj reins assumed 13,925Total premiums 3,095,725 Commissions 716,320
Supplementary contracts 22,453 Comm exp reins assumed 112,474Net investment income 840,834 Interest expenses 9,600Amort interest maint res 24,669 Insur taxes lic & fees 54,384Comm & exp reins ceded 162,538 General ins expenses 331,106Res adj on reins ceded -397,377 Net transf to sep acct -228,324Reinsurance income 329 Other expenses -141Other income 367,924 Misc operating expense 76Mgt and/or service fee 3,979 Other disbursements 205,469
Total 4,121,072 Total 3,914,830
Gain from operations before FIT & div to policyholders....................................... 206,242
Dividends to policyholders: life......................................................................... 1,134
Gains from operations after dividends to policyholders........................................ 205,108
Federal income taxes incurred........................................................................... -29,748
Net gain from operations after FIT and dividends................................................ 234,856
RECENT DEVELOPMENTSEffective July 1, 2014, Transamerica Advisors Life Insurance Company of
New York was merged with and into Transamerica Financial Life InsuranceCompany.
RATING RATIONALE
Rating Rationale: The published ratings of the Aegon USA companiesreflect that they are integral to Aegon’s strategy, fully integrated into thegroup’s operations, a material part of the business profile, significantcontributors to earnings and have received explicit financial support whenneeded.
Transamerica Financial Life Insurance Company primarily sells fixed andvariable pension and annuity products, group life coverages, life insurance,investment contracts and structured settlements. The company is licensed in50 states and the District of Columbia. Sales of the company’s products areprimarily through brokers.
The following text is derived from A.M. Best’s Credit Report on AegonUSA Group (AMB# 069707).
The ratings of the life insurance companies of Aegon USA reflect the strongbusiness profile, adequate risk-adjusted capitalization, strong enterprise riskmanagement, and an underlying trend of statutory and IFRS profitability. Theratings also reflect A.M. Best’s assessment of the financial strength andsupport of the parent, Aegon N.V. (Aegon). Partially offsetting these strengthsis the increasing focus on sales of products that have unfavorable riskcharacteristics from a product creditworthiness standpoint, as well as theequity market sensitivity of its earnings and significant reliance on captivereinsurance.
Aegon USA’s business profile is viewed as strong by A.M. Best, withcompetitive market positions in the U.S. life and annuity arenas. The group’smarket positions are supported by a large and diversified distribution system
that is made up of both independent and career agents, financial institutions,wirehouses and direct response channels. Aegon USA enjoys the efficienciesand competitive advantages of meaningful economies of scale, which havecontributed favorably to its historical financial performance. Aegon USA’searnings profile is one of the more diversified in the industry. Product linesthat contribute to overall earnings include traditional life, variable life,variable annuities, mutual funds, pensions and accident and health insurance.Additional rating consideration includes A.M. Best’s assessment of thefinancial strength and support of the parent, Aegon. As a result, Aegon USAreceives rating enhancement in consideration of Aegon’s overallcreditworthiness and the strategic and financial importance of the U.S.operations to Aegon.
Several years ago the company pursued a strategic shift to focus on sellingfee-based products, especially variable annuities (VAs), and hasde-emphasized sales of its spread-based products, especially fixed annuities.In a stable equity market, the required capital on VAs is generally less than forfixed annuities and other spread-based products. However, from a productcreditworthiness perspective, A.M. Best views VAs with living benefits asdisplaying some of the highest risk characteristics and being vulnerable to tailrisks, which could lead to an increase in the required capital to support thissegment. The institutional spread-based business (primarily guaranteedinterest contracts, funding agreements and funding agreement-backedsecurities) remains in run-off to reduce exposure to credit risk, lower requiredcapital and to shift to a more balanced mix of business between spread- andfee-based products. The group has executed several fixed annuity coinsurancetransactions, which have released capital and reduced its spread-basedliabilities. A.M. Best also notes that over recent years, Aegon USA has cometo rely heavily on captive reinsurance to fund reserves generated by term lifeand universal life insurance with secondary guarantees. Aegon USA has alsoreduced its exposure to equity market risk by increasing the size of its macroequity hedge covering its variable annuity business. However, while theadditional equity hedging will serve to reduce volatility in some financialmetrics, the group’s earnings via fee income remain somewhat correlated toequity market performance.
While A.M. Best believes that a positive rating action for Aegon USA isunlikely over the near term, factors that could result in a positive rating actioninclude a material improvement in A.M. Best’s view of the credit profile ofAegon. Factors that could result in a negative rating action include asignificant and sustained decline in consolidated risk-adjusted capitalizationas measured by Best’s Capital Adequacy Ratio (BCAR) model, net operatingperformance that does not meet A.M. Best’s expectations, a decline in A.M.Best’s view of Aegon’s credit profile, or a change in A.M. Best’s view of thestrategic importance of Aegon USA to Aegon.
(*) Within several financial tables of this report, this company is compared against the GroupAnnuity Composite.
(*) Data reflected within all tables of this report has been compiled from the company-filedstatutory statement.
BUSINESS PROFILEThe following text is derived from A.M. Best’s Credit Report on Aegon
USA Group (AMB# 069707).
Aegon USA is one of the leading life insurance organizations in the U.S.with more than twenty million customers and provides a wide range of lifeinsurance, pensions, long-term savings and investment products. Aegon USAwas founded 1989 when Aegon N.V. (Aegon) decided to bring all of itsoperating companies in the U.S. under a single financial services holdingcompany. Business is conducted through five primary insurance subsidiariesand includes Transamerica Life Insurance Company, Transamerica FinancialLife Insurance Company, Transamerica Advisors Life Insurance Company,Transamerica Premier Life Insurance Company, and Transamerica CasualtyInsurance Company. The Aegon USA group of companies is fully integratedand share senior and investment management along with support services.
Aegon USA uses a variety of distribution channels, each of which conductsbusiness through one or more of the Aegon USA life insurance companies.The channels are both owned and non-owned and include career agents as wellas financial planners, banks, brokers and independent consultants. It is alsoprominent in the home service market and in the direct marketing of life andsupplemental accidental death and dismemberment (AD&D) insurance.Through 2015, the Aegon USA companies were divisionally organized intotwo primary business divisions: Life & Protection (L&P) and Investments &Retirement (I&R).
The Life & Protection (L&P) division included the Agency Group sellingindividual life and supplemental health products to the middle income market.Also included in the L&P division were the Brokerage Group, TransamericaEmployee Benefits, Long Term Care and the Affinity Group. The BrokerageGroup marketed life insurance in the retail high net worth market throughindependent general agents and contract producers. The Affinity Groupspecialized in marketing life insurance and supplemental health insuranceproducts to consumers through direct channels such as telemarketing, directmail, television advertising and the Internet. This group also marketed creditlife, mortgage life and other life insurance and supplemental health products.Transamerica Long Term Care offered products and services aimed at meetingthe long-term care insurance needs of its customers. Policies were soldthrough independent brokerage and at the worksite to individuals and groups.
Through Transamerica Employee Benefits, L&P offered voluntary payrolldeduction life and supplemental health insurance to employees at their placeof work which are designed to supplement employees’existing benefit plans.
The Investment & Retirement (I&R) division offered a wide range ofsavings and retirement products, including mutual funds, investment advice aswell as fixed and variable annuities. Transamerica Capital Management(TCM) is the underwriting and wholesaling broker/dealer for variableannuities and mutual funds. TCM builds relationships with independentfinancial professionals, agents affiliated with regional broker/dealers or majorwirehouse firms and representatives through a large bank network. TCMserves these distribution channels through company-owned and externalwholesalers. In 2007, Aegon USA acquired Merrill Lynch Life InsuranceCompany and ML Life Insurance Company of New York (renamedTransamerica Advisors Life Insurance Company and Transamerica AdvisorsLife Insurance Company of New York. Transamerica Advisors Life InsuranceCompany of New York was later merged with and into Transamerica FinancialLife Insurance Company, effective 7/1/14) as part of a strategic distributionrelationship with Merrill Lynch with respect to variable annuities. Theacquisition of the Merrill Lynch insurance companies served to place AegonUSA in the top ten of variable annuity sellers in the wirehouse andbroker/dealer channels. In late 2009, I&R reduced its sales of fixed annuitiesin response to lower market interest rates and lower investment returnsavailable in the environment. Similar market conditions have continued overrecent years and restricted sales of fixed annuities. As a result, I&Rde-emphasized the sale of fixed annuities and executed several large fixedannuity coinsurance transactions in recent years.
Incorporated within the I&R division was the former Employer Solutionsand Pensions (ES&P) division. This business included full-service retirementplan investments and services in addition to guaranteed savings andinvestment products directed at various segments of the pension industry. Thegroup sold a full range of products and services to small and mid-sizecorporate, non-profit and government sponsored plans through brokers,agents, consultants, third-party administrators and accounting firms. Effective12/31/2015, Aegon USA acquired the defined contribution administrationbook of business of Mercer HR Services, LLC. The transaction propelled thecompany to a top ten defined contribution record-keeper based on planparticipants and assets, adding 917,000 and $71 billion, respectively.Transamerica Retirement Solutions (TRS) served mid-sized to largecompanies and small to mid-sized companies across the U.S. TRS offered anumber of specialized services, including innovative plan design, a wide arrayof investment choices, extensive education programs and online investmenteducation. In addition, ES&P provided synthetic guaranteed investmentcontracts primarily to various retirement plans. ES&P was also a leadingprovider of single premium group annuities (Terminal Funding), which areused by companies to decrease the liability of the defined benefit plans.BOLI/COLI products were distributed through a select number of nichebrokers (including an affiliate, Clark Consulting, which was sold inSeptember 2015); however, in December 2010, ES&P discontinued new salesin the executive non-qualified benefits market and related BOLI/COLIbusiness.
The former Institutional Markets Division offered institutional spreadproducts such as traditional fixed rate guarantee investment contracts (GICs),
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funding agreements (FAs), FA-backed notes as well as fee-based productssuch as synthetic GICs. In 2009, Aegon announced its plan to run-off itsinstitutional spread based business to reduce capital requirements and creditrisk. The institutional line of business also included structured producttransactions, such as credit default swaps, synthetic collateralized debtobligations, affordable housing tax credit guarantees and hedge fund principalprotection. Going forward, Aegon USA will only continue to offer affordablehousing tax credit guarantees.
Beginning in 2016, Aegon USA has restructured into a functionallyorganized business centered around the Transamerica brand. As a result, thecompany has eliminated its previous divisional alignment and created aunified organization that is functionally aligned (i.e. distribution, operations,finance, etc.). As a result of its recently implemented reorganization in theU.S., there has been a delayering of management via the elimination ofredundant processes and a restructuring of its U.S. distribution footprint.
TOTAL PREMIUM COMPOSITION & GROWTH ANALYSISReinsurance
Total 5,810,385 5,445,470 5,262,140 4,953,071 4,947,397
RISK MANAGEMENTThe following text is derived from A.M. Best’s Credit Report on Aegon
USA Group (AMB# 069707).
Aegon USA has a fully integrated enterprise risk management (ERM)structure/program in place to assess current and emerging risk, as well governfuture decisions. The company’s risk management framework is representedacross all levels of the organization. This ensures a coherent and integratedapproach to risk management throughout the company. Within this program,objectives and risk tolerances are set and roles and responsibilities are clearlydefined across all levels of the organization. Aegon USA’s ERM program isoverseen by a governance structure that has three basic layers: A SupervisoryBoard Risk Committee, the Executive Board and an ERM & Group Risk &Capital Committee. A.M. Best views Aegon USA’s ERM capabilities to bestrong for its size and business profile.
Country Risk: Aegon USA has a limited amount of country risk exposure asthe company’s operations are based in the U.S. However, Aegon Americas —which includes all of the North American and Latin American operations ofAegon — has a modest amount of country risk exposure with its life insuranceoperations in Canada (through Canadian Premier Life and Transamerica LifeCanada (sold in July 2015)) and Latin America with Mexico and Brazil. In2006, Aegon acquired a 49% interest in Seguros Argos, a Mexican lifeinsurance company. As part of the joint venture, Aegon and Seguros Argos setup a jointly owned pension fund company, Afore Argos. In 2009, Aegonacquired a 50% interest in Mongeral S.A. Seguros e Previdencia, Brazil’s 6thlargest independent life insurer. The U.S. and Canada are considered “Tier 1"by A.M. Best’s Country Risk Group with Mexico and Brazil both considered”Tier 3".
OPERATING PERFORMANCEThe following text is derived from A.M. Best’s Credit Report on Aegon
USA Group (AMB# 069707).
Operating Results: Aegon USA Group has one of the more diversifiedearnings profiles in the industry with earnings being generated from lifeinsurance products and increasingly from fee-based income from variable and
investment-type products. Aegon USA Group reported a pre-tax statutoryoperating gain of approximately $0.6 billion in 2015 as compared to a 2014pre-tax statutory operating gain of approximately $1.0 billion. 2015’s resultswere impacted by a decline in top-line growth compared to 2014’s strongtop-line growth which was the strongest in recent history. Higher underwritinglosses along with lower investment income drove the year-over-year change.Adverse claims experience and the impact on recurring earnings of theactuarial assumption changes and model updates implemented over the pastyear and a half were the primary drivers behind the decline in pre-tax earnings.
Aegon Americas segment (which is largely made up of Aegon USA, butalso includes operations in Canada (sold in July 2015) and Mexico) hasrecorded 2015 IFRS underlying earnings before tax of approximately $1.3billion compared with $1.5 billion in 2014 and approximately $1.7 billion2013. 2015 earnings were marginally lower compared to the previous year.
A.M. Best expects that Aegon USA Group will continue to maintain anunderlying trend of profitability on both a Statutory and IFRS basis. However,margins may be challenged by the low interest rate environment.
(*) Pre-Tax Invest Total Return quarterly calculation based on more limited quarterly data - seeCalculation Specifications.
BALANCE SHEET STRENGTHThe following text is derived from A.M. Best’s Credit Report on Aegon
USA Group (AMB# 069707).
Capitalization: Aegon USA’s overall risk-based capitalization is adequate tosupport its current insurance and investment risks. A.M. Best believes thatAegon USA has good statutory earnings capacity to support its capitalposition going forward. A.M. Best also notes that over recent years, AegonUSA has come to rely heavily on captive reinsurance to fund its reservesassociated with term life insurance and universal life with secondaryguarantees. Financing provided to these captives include, but are not limitedto, surplus notes, letters of credit and parental guarantees. As part of ourassessment of a rating unit’s balance sheet strength, A.M. Best considers notonly the capital adequacy ratios, but also the quality of capital supporting suchratios. A.M. Best believes that the quality of capital for an operating companythat has ceded XXX and/or AXXX reserves to a domestic or offshore captiveas not as strong as for an operating company with similar risk-adjusted capitalratios that self-funds its XXX and AXXX reserves.
Finally, Aegon USA has received capital contributions in the past from itsultimate parent, Aegon N.V. Given that Aegon USA is such an integral part ofAegon N.V., A.M. Best believes that they would likely provide additionalcapital if needed in the future. A.M. Best views the capital profile to be amaterial supporting factor to the rating of the group.
Current BCAR: 217
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CAPITAL GENERATION ANALYSIS ($000)——————Source of Surplus Growth——————
Pre-Tax Net Realized UnrealizedAdjusted Capital Income Capital
Loss Reserves: While loss reserving practices has not been a material concernfrom a ratings perspective, Aegon USA’s reserve profile changing as thecompany focuses on selling fee-based products, especially variable annuitieswith living benefit riders, while de-emphasizing spread-based products,especially tradition fixed annuities. An additional aspect of this shift is thatmortality reserves also are playing a less dominant role than in the past.
Some positive trends as it relates to the improved risk profile of thecompany’s legacy block of variable annuities with living benefit riders arenoted. Management actions, such as buyouts of variable annuities that are inthe money, has caused the related net amount at risk, before hedging andreinsurance, as a percent of account value and surplus to decline significantlyover the past several years.
The following text is derived from A.M. Best’s Credit Report on AegonUSA Group (AMB# 069707).
Liquidity: Aegon USA has adequate cash and liquid assets to protect againstadverse liquidity scenarios. The company manages so that liquidityrequirements could be met in stress scenarios which factor in a combination ofevents over monthly horizon points over an extended period of time. Liquidityimpacts due to rating downgrades are also factored into the company’s stresstesting. The company manages liquidity so that a positive cash balance can bemaintained during the first 6 months of a modeled scenario with illiquid assetsales not allowed during this period. The company also forecasts liquidity tobe positive over a two year period. Aegon USA’s liquidity is also supported by$1.1 billion in available syndicated borrowings for emergency use only. TheGroup also has available to them the ability to access the FHLB as well asother normal operating lines of credit outside of emergency use funding.Liquidity is considered adequate and supports the level business complexity inwhich the company operates in.
LIQUIDITY ANALYSIS———————————Company———————————
Operating Non-Inv Delnq &Cash Quick Current Grade Bonds Foreclsd
Year Flow ($000) Liquidity Liquidity to Capital Mtg to Capital2011 -74,209 57.1 90.7 49.4 …2012 -69,892 60.8 94.4 41.1 …2013 -162,003 54.9 95.7 37.5 …2014 -163,267 51.8 92.4 45.7 …2015 19,635 47.6 88.6 42.3 …
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Ten Lns Invest Quick CurrentYear & RE to Cap to Capital Liquidity Liquidity2011 73.3 6.9 38.7 74.12012 52.7 8.7 38.3 73.32013 47.4 6.8 37.8 71.82014 68.3 2.4 36.6 70.42015 74.0 25.6 34.9 69.3
The following text is derived from A.M. Best’s Credit Report on AegonUSA Group (AMB# 069707).
Investments: Aegon USA employs an Asset Liability Management focusedinvestment strategy utilizing fixed income securities for a majority of itsinvested general account assets. However, a small portion of the investmentsare managed on a total return basis utilizing hedge funds for the most part.Almost the entire investment portfolio is managed in-house by Aegon AssetManagement.
As of year-end 2015, bonds represent 69.3% of Aegon USA’s investmentportfolio and 93.8% are of investment grade quality. Common stock accountsfor about 2.7% of the portfolio, of which a large portion is affiliated. Directcommercial mortgage loans comprise approximately 10% of invested assetsand are backed principally by office, retail, industrial and apartmentproperties. The commercial loan portfolio is performing well, with the vastmajority of loans in good standing. Aegon USA’s exposure to alternativeassets, which consists of investments in higher risk and less liquid assets, suchas hedge funds, private equity, mezzanine debt and real estate. A.M. Best notesthat the alternative asset exposure is less than 5% of the investment portfolio.
Over recent years, Aegon has taken steps to improve the risk profile of itsinvestment portfolio with below investment grade (BIG) bonds and what A.M.Best deems as high risk assets playing less of a role. BIGs as a percent ofcapital declined to about 38% as of year-end 2015, similar to year-end 2014,from the highs of over 70% in 2013.
Investments - Other Invested Assets: Aegon uses derivatives, such as swaps,options, futures and forward contracts to hedge some of the exposures relatedto both investments backing insurance products and company borrowings.A.M. Best notes as a positive Aegon’s use of equity futures contracts to hedgeliability risk with the equity sensitive products, such as variable annuities.While this strategy may help mitigate some of the tail risk associated withthese liabilities, there is still the presence of policyholder behavior risk, whichcannot be hedged. As a result, there is the possibility of hedge breakage in astressed market environment.
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INVESTMENTS - OTHER INVESTED ASSETS2015 2014 2013 2012 2011
HISTORYDate Incorporated: 10/03/1947 Date Commenced: 10/17/1947
Domicile: NY
Originally incorporated as Zurich Life Insurance Company, in 1982 thename was changed to Dreyfus Life Insurance Company. During 1993, thename was changed to AUSA Life Insurance Company, Inc., and, in 2003, thepresent title was adopted. During 2014, Transamerica Advisors Life InsuranceCompany of New York was merged with and into Transamerica Financial LifeInsurance Company.
Mergers: International Life Investors Insurance Company, New York, 1996;First Providian Life and Health Insurance Company, New York, 1998;Transamerica Life Insurance Company of New York, New York, 2003;Transamerica Advisors Life Insurance Company of New York, New York,2014.
MANAGEMENT
Officers: Chairman of the Board and President, Blake S. Bostwick; ChiefInvestment Officer, Joel L. Coleman; Senior Vice President and Chief RiskOfficer, Todd Fuhs; Senior Vice President, Secretary and General Counsel,Jay Orlandi; Senior Vice President and Treasurer, C. Michiel van Katwijk.
Directors: Blake S. Bostwick, William Brown, Jr., Mark W. Mullin, JayOrlandi, Peter P. Post, Richard M. Schapiro, David Schulz, C. Michiel vanKatwijk.
REGULATORYAn examination of the financial condition is being made as of December
31, 2014, by the insurance department of New York. The 2015 annualindependent audit of the company was conducted by PricewaterhouseCoopersLLP. The annual statement of actuarial opinion is provided by Donald Krouse.
+Analysis of reserves; Life $1,038,983; annuities $5,775,613; supplementary contracts withlife contingencies $28,814; accidental death benefits $939; disability active lives $499;disability disabled lives $2,670; miscellaneous reserves $45,046; accident & health $152,756.
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SUMMARY OF OPERATIONS ($000)Premiums: Death benefits 76,149Ordinary life 139,108 Matured endowments 31Individual annuities 627,014 Annuity benefits 127,894Credit life 4,275 Surrender benefits 5,009,782Group life 14,892 Acc & health benefits 74,781Group annuities 4,897,030 Int on policy funds 4,121Acc & health group 66,948 Supplementary contracts 5,805Acc & health credit 5,397 Incr life reserves -214,624Acc & health other 52,889 Incr a & h reserves 15,812Total premiums 5,807,554 Res adj reins assumed -5,049
Supplementary contracts 5,440 Commissions 144,414Net investment income 401,084 Comm exp reins assumed 41,392Amort interest maint res 14,464 Interest expenses 9,375Net gain from sep acct 2 Insur taxes lic & fees 13,337Comm & exp reins ceded 76,294 General ins expenses 148,223Res adj on reins ceded -5,049 Net transf to sep acct 783,118Other income 220,910 Other expenses 100Mgt and/or service fee 60,121 Misc operating expense 832
Total 6,580,820 Total 6,235,495
Gain from operations before FIT & div to policyholders....................................... 345,325
Federal income taxes incurred........................................................................... 54,965
Net gain from operations after federal income taxes............................................. 290,360
CASH FLOW ANALYSIS ($000)
Funds Provided Funds AppliedGross cash from oper 6,533,444 Benefits paid 5,288,477Long-term bond proceeds 2,273,822 Comm, taxes, expenses 352,330Other invest proceeds 309,940 Transfer to sep account 806,817
Rating Rationale: The published ratings of the Aegon USA companiesreflect that they are integral to Aegon’s strategy, fully integrated into thegroup’s operations, a material part of the business profile, significantcontributors to earnings and have received explicit financial support whenneeded.
Transamerica Advisors Life Insurance Company has sold non-participatingannuity products, including variable annuities, modified guaranteed annuitiesand immediate annuities. The company’s annuity products were sold bylicensed agents of Merrill Lynch Life Agency, Inc. (MLLA), pursuant to ageneral agency agreement by and between the company and MLLA.
The following text is derived from A.M. Best’s Credit Report on AegonUSA Group (AMB# 069707).
The ratings of the life insurance companies of Aegon USA reflect the strongbusiness profile, adequate risk-adjusted capitalization, strong enterprise riskmanagement, and an underlying trend of statutory and IFRS profitability. Theratings also reflect A.M. Best’s assessment of the financial strength andsupport of the parent, Aegon N.V. (Aegon). Partially offsetting these strengthsis the increasing focus on sales of products that have unfavorable riskcharacteristics from a product creditworthiness standpoint, as well as theequity market sensitivity of its earnings and significant reliance on captivereinsurance.
Aegon USA’s business profile is viewed as strong by A.M. Best, withcompetitive market positions in the U.S. life and annuity arenas. The group’smarket positions are supported by a large and diversified distribution systemthat is made up of both independent and career agents, financial institutions,wirehouses and direct response channels. Aegon USA enjoys the efficienciesand competitive advantages of meaningful economies of scale, which havecontributed favorably to its historical financial performance. Aegon USA’searnings profile is one of the more diversified in the industry. Product lines
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that contribute to overall earnings include traditional life, variable life,variable annuities, mutual funds, pensions and accident and health insurance.Additional rating consideration includes A.M. Best’s assessment of thefinancial strength and support of the parent, Aegon. As a result, Aegon USAreceives rating enhancement in consideration of Aegon’s overallcreditworthiness and the strategic and financial importance of the U.S.operations to Aegon.
Several years ago the company pursued a strategic shift to focus on sellingfee-based products, especially variable annuities (VAs), and hasde-emphasized sales of its spread-based products, especially fixed annuities.In a stable equity market, the required capital on VAs is generally less than forfixed annuities and other spread-based products. However, from a productcreditworthiness perspective, A.M. Best views VAs with living benefits asdisplaying some of the highest risk characteristics and being vulnerable to tailrisks, which could lead to an increase in the required capital to support thissegment. The institutional spread-based business (primarily guaranteedinterest contracts, funding agreements and funding agreement-backedsecurities) remains in run-off to reduce exposure to credit risk, lower requiredcapital and to shift to a more balanced mix of business between spread- andfee-based products. The group has executed several fixed annuity coinsurancetransactions, which have released capital and reduced its spread-basedliabilities. A.M. Best also notes that over recent years, Aegon USA has cometo rely heavily on captive reinsurance to fund reserves generated by term lifeand universal life insurance with secondary guarantees. Aegon USA has alsoreduced its exposure to equity market risk by increasing the size of its macroequity hedge covering its variable annuity business. However, while theadditional equity hedging will serve to reduce volatility in some financialmetrics, the group’s earnings via fee income remain somewhat correlated toequity market performance.
While A.M. Best believes that a positive rating action for Aegon USA isunlikely over the near term, factors that could result in a positive rating actioninclude a material improvement in A.M. Best’s view of the credit profile ofAegon. Factors that could result in a negative rating action include asignificant and sustained decline in consolidated risk-adjusted capitalizationas measured by Best’s Capital Adequacy Ratio (BCAR) model, net operatingperformance that does not meet A.M. Best’s expectations, a decline in A.M.Best’s view of Aegon’s credit profile, or a change in A.M. Best’s view of thestrategic importance of Aegon USA to Aegon.
(*) Within several financial tables of this report, this company is compared against theIndividual Life Composite.
(*) Data reflected within all tables of this report has been compiled from the company-filedstatutory statement.
BUSINESS PROFILEOn December 28, 2007, Merrill Lynch Life Insurance Company and its
affiliate, ML Life Insurance Company of New York (since renamedTransamerica Advisors Life Insurance Company and Transamerica AdvisorsLife Insurance Company of New York), were acquired by AEGON USA, Inc.for $1.12 billion and $130 million, respectively. Transamerica Advisors LifeInsurance Company is licensed to sell life insurance and annuity contracts inall states except New York, as well as the District of Columbia, Guam and theU.S. Virgin Islands. Life insurance and annuity products sold in New Yorkwere marketed exclusively through Transamerica Advisors Life InsuranceCompany of New York until 2014, when the company was merged with andinto Transamerica Financial Life Insurance Company. The companiesprimarily market variable annuities and distribute their products exclusivelythrough Merrill Lynch’s network of over 15,000 financial advisors.
The following text is derived from A.M. Best’s Credit Report on AegonUSA Group (AMB# 069707).
Aegon USA is one of the leading life insurance organizations in the U.S.with more than twenty million customers and provides a wide range of lifeinsurance, pensions, long-term savings and investment products. Aegon USAwas founded 1989 when Aegon N.V. (Aegon) decided to bring all of itsoperating companies in the U.S. under a single financial services holdingcompany. Business is conducted through five primary insurance subsidiariesand includes Transamerica Life Insurance Company, Transamerica FinancialLife Insurance Company, Transamerica Advisors Life Insurance Company,Transamerica Premier Life Insurance Company, and Transamerica CasualtyInsurance Company. The Aegon USA group of companies is fully integratedand share senior and investment management along with support services.
Aegon USA uses a variety of distribution channels, each of which conductsbusiness through one or more of the Aegon USA life insurance companies.The channels are both owned and non-owned and include career agents as wellas financial planners, banks, brokers and independent consultants. It is alsoprominent in the home service market and in the direct marketing of life andsupplemental accidental death and dismemberment (AD&D) insurance.Through 2015, the Aegon USA companies were divisionally organized into
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two primary business divisions: Life & Protection (L&P) and Investments &Retirement (I&R).
The Life & Protection (L&P) division included the Agency Group sellingindividual life and supplemental health products to the middle income market.Also included in the L&P division were the Brokerage Group, TransamericaEmployee Benefits, Long Term Care and the Affinity Group. The BrokerageGroup marketed life insurance in the retail high net worth market throughindependent general agents and contract producers. The Affinity Groupspecialized in marketing life insurance and supplemental health insuranceproducts to consumers through direct channels such as telemarketing, directmail, television advertising and the Internet. This group also marketed creditlife, mortgage life and other life insurance and supplemental health products.Transamerica Long Term Care offered products and services aimed at meetingthe long-term care insurance needs of its customers. Policies were soldthrough independent brokerage and at the worksite to individuals and groups.Through Transamerica Employee Benefits, L&P offered voluntary payrolldeduction life and supplemental health insurance to employees at their placeof work which are designed to supplement employees’existing benefit plans.
The Investment & Retirement (I&R) division offered a wide range ofsavings and retirement products, including mutual funds, investment advice aswell as fixed and variable annuities. Transamerica Capital Management(TCM) is the underwriting and wholesaling broker/dealer for variableannuities and mutual funds. TCM builds relationships with independentfinancial professionals, agents affiliated with regional broker/dealers or majorwirehouse firms and representatives through a large bank network. TCMserves these distribution channels through company-owned and externalwholesalers. In 2007, Aegon USA acquired Merrill Lynch Life InsuranceCompany and ML Life Insurance Company of New York (renamedTransamerica Advisors Life Insurance Company and Transamerica AdvisorsLife Insurance Company of New York. Transamerica Advisors Life InsuranceCompany of New York was later merged with and into Transamerica FinancialLife Insurance Company, effective 7/1/14) as part of a strategic distributionrelationship with Merrill Lynch with respect to variable annuities. Theacquisition of the Merrill Lynch insurance companies served to place AegonUSA in the top ten of variable annuity sellers in the wirehouse andbroker/dealer channels. In late 2009, I&R reduced its sales of fixed annuitiesin response to lower market interest rates and lower investment returnsavailable in the environment. Similar market conditions have continued overrecent years and restricted sales of fixed annuities. As a result, I&Rde-emphasized the sale of fixed annuities and executed several large fixedannuity coinsurance transactions in recent years.
Incorporated within the I&R division was the former Employer Solutionsand Pensions (ES&P) division. This business included full-service retirementplan investments and services in addition to guaranteed savings andinvestment products directed at various segments of the pension industry. Thegroup sold a full range of products and services to small and mid-sizecorporate, non-profit and government sponsored plans through brokers,agents, consultants, third-party administrators and accounting firms. Effective12/31/2015, Aegon USA acquired the defined contribution administrationbook of business of Mercer HR Services, LLC. The transaction propelled thecompany to a top ten defined contribution record-keeper based on planparticipants and assets, adding 917,000 and $71 billion, respectively.
Transamerica Retirement Solutions (TRS) served mid-sized to largecompanies and small to mid-sized companies across the U.S. TRS offered anumber of specialized services, including innovative plan design, a wide arrayof investment choices, extensive education programs and online investmenteducation. In addition, ES&P provided synthetic guaranteed investmentcontracts primarily to various retirement plans. ES&P was also a leadingprovider of single premium group annuities (Terminal Funding), which areused by companies to decrease the liability of the defined benefit plans.BOLI/COLI products were distributed through a select number of nichebrokers (including an affiliate, Clark Consulting, which was sold inSeptember 2015); however, in December 2010, ES&P discontinued new salesin the executive non-qualified benefits market and related BOLI/COLIbusiness.
The former Institutional Markets Division offered institutional spreadproducts such as traditional fixed rate guarantee investment contracts (GICs),funding agreements (FAs), FA-backed notes as well as fee-based productssuch as synthetic GICs. In 2009, Aegon announced its plan to run-off itsinstitutional spread based business to reduce capital requirements and creditrisk. The institutional line of business also included structured producttransactions, such as credit default swaps, synthetic collateralized debtobligations, affordable housing tax credit guarantees and hedge fund principalprotection. Going forward, Aegon USA will only continue to offer affordablehousing tax credit guarantees.
Beginning in 2016, Aegon USA has restructured into a functionallyorganized business centered around the Transamerica brand. As a result, thecompany has eliminated its previous divisional alignment and created aunified organization that is functionally aligned (i.e. distribution, operations,finance, etc.). As a result of its recently implemented reorganization in theU.S., there has been a delayering of management via the elimination ofredundant processes and a restructuring of its U.S. distribution footprint.
TOTAL PREMIUM COMPOSITION & GROWTH ANALYSISReinsurance
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Territory: The company is licensed in the District of Columbia, Guam, U.S.Virgin Islands, AL, AK, AZ, AR, CA, CO, CT, DE, FL, GA, HI, ID, IL, IN, IA,KS, KY, LA, ME, MD, MA, MI, MN, MS, MO, MT, NE, NV, NH, NJ, NM,NC, ND, OH, OK, OR, PA, RI, SC, SD, TN, TX, UT, VT, VA, WA, WV, WIand WY.
2015 BY-LINE BUSINESS ($000)
——DPW——Reinsurance
—Prem Assumed—Product Line ($000) (%) ($000) (%)Ordinary life 10,008 64.4 … …Individual annuities 5,544 35.6 … …
Total 15,552 100.0 … …Reinsurance
——Prem Ceded—— ——NPW——Product Line ($000) (%) ($000) (%)Ordinary life 1,605 36.4 8,402 75.4Individual annuities 2,805 63.6 2,739 24.6
RISK MANAGEMENTThe following text is derived from A.M. Best’s Credit Report on Aegon
USA Group (AMB# 069707).
Aegon USA has a fully integrated enterprise risk management (ERM)structure/program in place to assess current and emerging risk, as well governfuture decisions. The company’s risk management framework is representedacross all levels of the organization. This ensures a coherent and integratedapproach to risk management throughout the company. Within this program,objectives and risk tolerances are set and roles and responsibilities are clearlydefined across all levels of the organization. Aegon USA’s ERM program isoverseen by a governance structure that has three basic layers: A SupervisoryBoard Risk Committee, the Executive Board and an ERM & Group Risk &Capital Committee. A.M. Best views Aegon USA’s ERM capabilities to bestrong for its size and business profile.
Country Risk: Aegon USA has a limited amount of country risk exposure asthe company’s operations are based in the U.S. However, Aegon Americas —which includes all of the North American and Latin American operations ofAegon — has a modest amount of country risk exposure with its life insuranceoperations in Canada (through Canadian Premier Life and Transamerica LifeCanada (sold in July 2015)) and Latin America with Mexico and Brazil. In2006, Aegon acquired a 49% interest in Seguros Argos, a Mexican lifeinsurance company. As part of the joint venture, Aegon and Seguros Argos setup a jointly owned pension fund company, Afore Argos. In 2009, Aegonacquired a 50% interest in Mongeral S.A. Seguros e Previdencia, Brazil’s 6thlargest independent life insurer. The U.S. and Canada are considered “Tier 1"by A.M. Best’s Country Risk Group with Mexico and Brazil both considered”Tier 3".
OPERATING PERFORMANCEThe following text is derived from A.M. Best’s Credit Report on Aegon
USA Group (AMB# 069707).
Operating Results: Aegon USA Group has one of the more diversifiedearnings profiles in the industry with earnings being generated from lifeinsurance products and increasingly from fee-based income from variable and
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investment-type products. Aegon USA Group reported a pre-tax statutoryoperating gain of approximately $0.6 billion in 2015 as compared to a 2014pre-tax statutory operating gain of approximately $1.0 billion. 2015’s resultswere impacted by a decline in top-line growth compared to 2014’s strongtop-line growth which was the strongest in recent history. Higher underwritinglosses along with lower investment income drove the year-over-year change.Adverse claims experience and the impact on recurring earnings of theactuarial assumption changes and model updates implemented over the pastyear and a half were the primary drivers behind the decline in pre-tax earnings.
Aegon Americas segment (which is largely made up of Aegon USA, butalso includes operations in Canada (sold in July 2015) and Mexico) hasrecorded 2015 IFRS underlying earnings before tax of approximately $1.3billion compared with $1.5 billion in 2014 and approximately $1.7 billion2013. 2015 earnings were marginally lower compared to the previous year.
A.M. Best expects that Aegon USA Group will continue to maintain anunderlying trend of profitability on both a Statutory and IFRS basis. However,margins may be challenged by the low interest rate environment.
(*) Pre-Tax Invest Total Return quarterly calculation based on more limited quarterly data - seeCalculation Specifications.
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BALANCE SHEET STRENGTHThe following text is derived from A.M. Best’s Credit Report on Aegon
USA Group (AMB# 069707).
Capitalization: Aegon USA’s overall risk-based capitalization is adequate tosupport its current insurance and investment risks. A.M. Best believes thatAegon USA has good statutory earnings capacity to support its capitalposition going forward. A.M. Best also notes that over recent years, AegonUSA has come to rely heavily on captive reinsurance to fund its reservesassociated with term life insurance and universal life with secondaryguarantees. Financing provided to these captives include, but are not limitedto, surplus notes, letters of credit and parental guarantees. As part of ourassessment of a rating unit’s balance sheet strength, A.M. Best considers notonly the capital adequacy ratios, but also the quality of capital supporting suchratios. A.M. Best believes that the quality of capital for an operating companythat has ceded XXX and/or AXXX reserves to a domestic or offshore captiveas not as strong as for an operating company with similar risk-adjusted capitalratios that self-funds its XXX and AXXX reserves.
Finally, Aegon USA has received capital contributions in the past from itsultimate parent, Aegon N.V. Given that Aegon USA is such an integral part ofAegon N.V., A.M. Best believes that they would likely provide additionalcapital if needed in the future. A.M. Best views the capital profile to be amaterial supporting factor to the rating of the group.
Current BCAR: 217
CAPITAL GENERATION ANALYSIS ($000)——————Source of Surplus Growth——————
Pre-Tax Net Realized UnrealizedAdjusted Capital Income Capital
Loss Reserves: While loss reserving practices has not been a material concernfrom a ratings perspective, Aegon USA’s reserve profile changing as thecompany focuses on selling fee-based products, especially variable annuitieswith living benefit riders, while de-emphasizing spread-based products,especially tradition fixed annuities. An additional aspect of this shift is thatmortality reserves also are playing a less dominant role than in the past.
Some positive trends as it relates to the improved risk profile of thecompany’s legacy block of variable annuities with living benefit riders arenoted. Management actions, such as buyouts of variable annuities that are inthe money, has caused the related net amount at risk, before hedging andreinsurance, as a percent of account value and surplus to decline significantlyover the past several years.
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The following text is derived from A.M. Best’s Credit Report on AegonUSA Group (AMB# 069707).
Liquidity: Aegon USA has adequate cash and liquid assets to protect againstadverse liquidity scenarios. The company manages so that liquidityrequirements could be met in stress scenarios which factor in a combination ofevents over monthly horizon points over an extended period of time. Liquidityimpacts due to rating downgrades are also factored into the company’s stresstesting. The company manages liquidity so that a positive cash balance can bemaintained during the first 6 months of a modeled scenario with illiquid assetsales not allowed during this period. The company also forecasts liquidity tobe positive over a two year period. Aegon USA’s liquidity is also supported by$1.1 billion in available syndicated borrowings for emergency use only. TheGroup also has available to them the ability to access the FHLB as well asother normal operating lines of credit outside of emergency use funding.Liquidity is considered adequate and supports the level business complexity inwhich the company operates in.
LIQUIDITY ANALYSIS———————————Company———————————
Operating Non-Inv Delnq &Cash Quick Current Grade Bonds Foreclsd
Year Flow ($000) Liquidity Liquidity to Capital Mtg to Capital2011 65,415 50.8 70.5 10.5 …2012 43,036 55.7 78.7 7.5 …2013 80,397 59.6 84.6 4.0 …2014 272,464 56.7 86.8 5.8 …2015 135,754 58.4 83.1 9.0 …
Ten Lns Invest Quick CurrentYear & RE to Cap to Capital Liquidity Liquidity2011 9.9 … 49.7 83.52012 6.5 … 47.6 82.32013 5.0 … 46.1 81.52014 6.3 … 45.1 80.72015 10.7 3.1 44.7 80.3
The following text is derived from A.M. Best’s Credit Report on AegonUSA Group (AMB# 069707).
Investments: Aegon USA employs an Asset Liability Management focusedinvestment strategy utilizing fixed income securities for a majority of itsinvested general account assets. However, a small portion of the investmentsare managed on a total return basis utilizing hedge funds for the most part.Almost the entire investment portfolio is managed in-house by Aegon AssetManagement.
As of year-end 2015, bonds represent 69.3% of Aegon USA’s investmentportfolio and 93.8% are of investment grade quality. Common stock accountsfor about 2.7% of the portfolio, of which a large portion is affiliated. Directcommercial mortgage loans comprise approximately 10% of invested assetsand are backed principally by office, retail, industrial and apartmentproperties. The commercial loan portfolio is performing well, with the vast
majority of loans in good standing. Aegon USA’s exposure to alternativeassets, which consists of investments in higher risk and less liquid assets, suchas hedge funds, private equity, mezzanine debt and real estate. A.M. Best notesthat the alternative asset exposure is less than 5% of the investment portfolio.
Over recent years, Aegon has taken steps to improve the risk profile of itsinvestment portfolio with below investment grade (BIG) bonds and what A.M.Best deems as high risk assets playing less of a role. BIGs as a percent ofcapital declined to about 38% as of year-end 2015, similar to year-end 2014,from the highs of over 70% in 2013.
Investments - Other Invested Assets: Aegon uses derivatives, such as swaps,options, futures and forward contracts to hedge some of the exposures relatedto both investments backing insurance products and company borrowings.A.M. Best notes as a positive Aegon’s use of equity futures contracts to hedgeliability risk with the equity sensitive products, such as variable annuities.While this strategy may help mitigate some of the tail risk associated withthese liabilities, there is still the presence of policyholder behavior risk, whichcannot be hedged. As a result, there is the possibility of hedge breakage in astressed market environment.
INVESTMENTS - OTHER INVESTED ASSETS2015 2014 2013 2012 2011
HISTORYDate Incorporated: 01/27/1986 Date Commenced: 12/23/1986
Domicile: AR
Originally incorporated in Washington, the company redomesticated toArkansas in 1991 just prior to merging with Tandem Insurance Group, Inc.Prior to 1988, activities of Merrill Lynch Life had involved the sale of anominal volume of ordinary life insurance, but beginning in 1989, substantialgrowth in net premium income resulted from a new corporate emphasis on thesale of single premium deferred annuities and modified guaranteed annuities.During 1990, MLLIC assumption reinsured all of Family Life InsuranceCompany’s (its former parent and a then indirect wholly owned subsidiary ofML & Co.) life insurance and annuity business which had been marketedthrough the ML & Co. retail distribution network. This transaction occurred inanticipation of the June 1991 sale of Family Life and its traditional mortgageprotection business to Financial Industries Corporation. During October 1991,MLLIC and Tandem Insurance Group, Inc., merged, with the former being thesurviving entity. These transactions, combined with the assumption of a largeblock of ML & Co. sold variable life insurance business from Monarch Life,contributed significantly to the growth in company assets from 1989 to 1991.The general account asset base has experienced declines since 1991 resultingfrom a significant part of MLLIC’s general account annuity contracts reaching
the end of their initial interest rate guarantee periods. MLLIC has offset thisdecline by conversion of a large portion of this business into its modifiedguaranteed annuity and variable annuity products. During the first quarter of2003 MLLIC discontinued manufacturing and selling single premiumvariable life insurance products. In 2010, the present title was adopted.
Mergers: Tandem Insurance Group, Inc., Illinois, 1991.
MANAGEMENT
Officers: President, Blake S. Bostwick; Chief Investment Officer, Joel L.Coleman; Senior Vice President and Chief Risk Officer, Todd Fuhs; SeniorVice President, Secretary and General Counsel, Jay Orlandi; Vice President,Treasurer and Chief Financial Officer, David W. Hopewell.
Directors: Blake S. Bostwick, Mark W. Mullin, Jay Orlandi, David Schulz,Katherine A. Schulze, C. Michiel van Katwijk.
REGULATORYAn examination of the financial condition is being made as of December
31, 2014, by the insurance department of Arkansas. The 2015 annualindependent audit of the company was conducted by PricewaterhouseCoopersLLP. The annual statement of actuarial opinion is provided by Donald Krouse.
REINSURANCEThe maximum net retention on any one life is $500,000 for ordinary and
variable life business.
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FINANCIAL INFORMATIONBALANCE SHEET ($000) - YE 2015
Assets LiabilitiesTotal bonds 1,505,652 +Net policy reserves 1,606,726Total preferred stocks 7,411 Policy claims 30,156Mortgage loans 86,057 Deposit type contracts 70,346Contract loans 661,466 Interest maint reserve 4,411Cash & short-term inv 111,851 Comm taxes expenses 37,999Securities-colltrl assts 194,463 Asset val reserve 17,111Other invested assets 63,489 Payable for securities lending 194,463Prems and consids due 55 Other liabilities 8,216Accrued invest income 35,972Other assets 93,264 Tot liab w/o sep accts 1,969,428
Separate account bus 5,992,871Tot assets w/o sep accts 2,759,680
Separate account bus 5,992,871 Total liabilities 7,962,299Common stock 2,500Paid in & contrib surpl 314,698Unassigned surplus 473,055
Assets 8,752,551 Total 8,752,551
+Analysis of reserves; Life $1,072,635; annuities $402,438; supplementary contracts withlife contingencies $127,351; disability active lives $5; disability disabled lives $21;miscellaneous reserves $4,277.
SUMMARY OF OPERATIONS ($000)Premiums: Death benefits 162,472Ordinary life 8,402 Annuity benefits 148,167Individual annuities 2,739 Surrender benefits 533,890Total premiums 11,142 Int on policy funds 4,948
Supplementary contracts 17,404 Supplementary contracts 23,127Net investment income 98,353 Incr life reserves 54,729Amort interest maint res 2,190 Commissions 30,443Comm & exp reins ceded 1 Insur taxes lic & fees -66Other income 171,073 General ins expenses 12,985
Net transf to sep acct -665,890Misc operating expense 16
Total 300,162 Total 304,822
Gain from operations before FIT & div to policyholders....................................... -4,659
Federal income taxes incurred........................................................................... -25,851
Net gain from operations after federal income taxes............................................. 21,192
CASH FLOW ANALYSIS ($000)
Funds Provided Funds AppliedGross cash from oper 303,037 Benefits paid 866,358Transf from sep account 674,385 Comm, taxes, expenses 43,802Long-term bond proceeds 290,043 Return of cap & surp 100,000Other cash provided 173,699 Long-term bonds acquired 177,390
Best’s Financial Strength Rating: A Outlook: StableBest’s Financial Size Category: VIII
RATING RATIONALE
Rating Rationale: The ratings reflect Transamerica Casualty InsuranceCompany’s solid risk-adjusted capitalization, sustained profitability, its role,strategic importance and synergies gained as a member of Aegon N.V.’s U.S.operations. The ratings also recognize management’s knowledge, specialtyniche expertise, and the company’s established market position as one of theleading providers of travel insurance. Offsetting factors include the company’svariable underwriting performance, elevated underwriting leverage, and anexpense ratio disadvantage driven by high commissions. Historically, thecompany has at times terminated unprofitable lines of business and has takenadvantage of growth opportunities in other lines. The recent shifts in premiumare primarily attributed to the addition and loss of producers in the core travelinsurance book. The outlooks reflect A.M. Best’s expectation of continuedprofitability and the commitment by Aegon to maintain a level ofcapitalization for Transamerica that remains supportive of the ratings.
Factors that could lead to a positive rating action would be improvement inunderwriting and overall profitability, strengthened risk-adjusted capital from
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improved retained earnings, and becoming more strongly affiliated with, orgaining more importance to, the parent.
Negative rating action could occur if risk-adjusted capital or operatingperformance falls markedly short of management’s expectations, there is asignificant increase in competition that erodes market conditions, or a changein the business profile of the company leads to adverse financial results.Because of the partial enhancement from the relationship with AEGON N.V.,changes in the rating or outlook of the parent company may impact the publicratings of Transamerica Casualty. Also, any change in the implicit or explicitsupport provided by the parent also will be a factor in the published ratings.
FIVE-YEAR RATING HISTORY
DateBest’sFSR Date
Best’sFSR
04/15/16 A 04/09/13 A02/11/15 A 06/19/12 A12/12/13 A 06/16/11 A-
(*) Within several financial tables of this report, this company is compared against theCommercial Property Composite.
(*) Data reflected within all tables of this report has been compiled from the company-filedstatutory statement.
BUSINESS PROFILE
Transamerica Casualty Insurance Company (Transamerica) is anOhio-domiciled property and casualty company licensed in 50 states and theDistrict of Columbia. It is directly owned by Aegon USA, LLC, which in turnis ultimately owned by Aegon N.V., a publicly held international insuranceorganization that provides life and health insurance, pension-related products,and financial service products through its affiliates in The Netherlands, theUnited States and in other parts of the world. Transamerica does not have any
employees, and is party to a cost-sharing agreement among the Aegon USA,LLC, companies, which are fully integrated and share senior and investmentmanagement, as well as support services.
Transamerica primarily writes travel insurance (inland marine). Travelinsurance provides coverage for trip interruption, cancellation, delay, baggagedamage and medical assistance excess of the insured’s primary insurance. Themajority of the travel premium is produced by managing general agents(MGAs) that have authority to underwrite and administer policies, and tosettle claims. The company also provides both credit unemployment and creditdisability insurance marketed through credit card issuers, and throughoperations of Stonebridge Life Insurance Company, an affiliate. In addition,Transamerica writes Guaranteed Auto Protection (GAP) coverage (credit).GAP provides reimbursement to an individual insured in the event that theremaining amount of an outstanding auto loan exceeds the funds paid by autoinsurance in the event of a total loss. In 2009, the company ended its sales ofcredit products in the auto dealer market. A small number of producerscontinue to sell the GAP product through banks and credit unions utilizing aTPA. In 2012, Transamerica entered into the vehicle service contract businesssold through credit unions where product administration is performed by aTPA having extensive experience with this product.
On October 1, 2009, the company issued a catastrophic asset loss contract toan affiliate, Transamerica Premier Life Insurance Company, which is reportedas financial guaranty insurance. This policy covers realized losses in excess ofdefined limits on a portfolio of investment securities matched to reserve levelsof a closed in-force block of business. The policy covers realized losses inexcess of 1.5% of aggregate book value over a one-year period or 2% of theaggregate book value over a two-year period. The policy ends when no assetsremain in the referenced portfolio.
In 2004, Transamerica entered into an assumption reinsurance agreementwith a former affiliate, Monumental General Casualty Insurance Company(Monumental General). The transaction resulted in Transamerica assuming allin-force travel, GAP, and workers’ compensation policies from MonumentalGeneral, along with all of the assets, liabilities, and supporting capital relatedto those policies.
In 2014, Transamerica entered into a Loss Portfolio Transfer agreementwith White Shoals Reinsurance Ltd. The transaction resulted in the transfer ofall run-off asbestos and environmental claims assumed through the 2003merger with CORPA Reinsruance Company.
Aegon USA’s ERM program has evolved via a flattening of risk structure;moving strategic business units (SBUs) from a risk compliance culture to arisk management culture. The organization considers each SBU as a liabilityexpert and is engaging each Chief Risk Officer (CRO) globally as it movesoperational risk from Internal Audit to the CROs. The Group Risk and CapitalCommittee (GRCC) provides independent oversight of the group’s operations.The GRCC covers all risk types, including credit and market risk, pricing andunderwriting risk, operational risk, corporate risk as well as the managementof the overall capital position, and reports to the group’s executive board.
OPERATING PERFORMANCE
Operating Results: Positive operating results have been generated over thelast decade, as demonstrated by net income in nine out of the last ten years.Despite these favorable results, performance ratios, namely the return onrevenue and combined ratio, trail the commercial property industry compositeon both a five-year and ten-year basis. While the company’s loss ratiooutperforms the industry composite, the expense ratio is significantly higherdriven by the elevated commission expense. Variability in these measures arecaused by fluctuating premium volume, poor performance in the travel line,drag from legacy business and volatility in expenses other than commissionexpenses.
Underwriting results have been historically volatile, as evidenced bysignificant year-to-year underwriting losses or profits over recent periods.Underwriting losses in certain years are partially due to increased tripcancellation claim frequency as a result of weather related activity.Unfavorable loss ratios during older years in the GAP business were due toinadequate pricing. Corrective action was taken to enhance pricing, leading toimproved loss experience on the GAP line of business. Underwriting gains inthe years prior to 2009 were positively impacted by a delayed earning patternof GAP premium over the policy term despite lower sales. An underwritingloss in 2009 primarily resulted from the sharp decline in premium volume.More recent underwriting gains have been recorded as travel premium has
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substantially increased. Net income was reduced in 2013, following a ten-yearhigh in 2012, due to higher claims activity in certain lines and the expecteddecline in travel production. Underwriting results for 2014 adn 2015 returnedto profitability as strong growth in premium levels exceeded claim weatherrelated claim activity in the travel business.
Investment performance, as measured by the five-year net investment yieldand total return on invested assets, outperforms the industry composite. This isdue in part to Transamerica’s portfolio mix, which is comprised mainly ofhigh-yield bonds, cash equivalents and short-term investments. Overallinvestment results are favorably influenced by the benefits derived from thecompany’s affiliation with Aegon USA, which integrates the investmentmanagement of all its member companies. Additionally, premium on GAPproducts have an extended earn-in period, allowing for investmentopportunities with longer duration periods and higher return rates.
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BALANCE SHEET STRENGTH
Capitalization: As measured by Best’s Capital Adequacy Ratio (BCAR),Transamerica maintains risk-adjusted capitalization supportive of its currentratings. Recent variability in premium levels primarily attributed to the coretravel insurance book has led to volatility in risk-adjusted capital. Over the lastten years, policyholders’ surplus levels have been impacted by capitalcontributions and operating earnings. Surplus position is net of dividends andreturn of capital payments to the parent. The most recent transactions totaled$25 million in 2015. Surplus strengthening in 2013, 2014, and 2015 is creditedto retained earnings, net contributions and other surplus gains. The ultimateparent, Aegon N.V., has committed to maintain capitalization at Transamericathat remains supportive of its business risks, which have varied historically.This was exhibited by annual capital contributions to the company earlier inthe decade.
The company maintains low loss reserve leverage driven by the short-termnature of the core book of travel business. This benefit is offset by highpremium leverage, as the company retains a higher percentage of its business.The credit risk associated with any third-party reinsurance is largely mitigatedby its use of collateral.
Current BCAR: 194.8
CAPITAL GENERATION ANALYSIS ($000)————————Source of Surplus Growth————————
Pre-tax Realized UnrealizedOperating Capital Income Capital
2011 26,857 86.0 85.1 XX 3.1 XX XX -0.1 XX2012 25,447 87.1 81.5 XX 0.1 XX XX 0.1 XX2013 27,616 99.8 80.2 13.2 1.9 1.6 16.6 1.5 0.52014 29,114 100.0 80.9 15.5 1.2 1.2 16.7 0.2 0.62015 24,388 100.0 78.1 11.3 -0.7 0.7 19.8 0.9 0.9
Liquidity: The company’s current liquidity ratio exceeds the industrycomposite while the quick liquidity measure trails the composite. Thedisparity is a product of distribution of the investment portfolio and theamount of funds held against reinsurance recoverable amounts. Theinvestment portfolio remains quite liquid as an adequate level of cashequivalents and other short-term investments is maintained to match thepattern of payouts from travel policy claims. Additionally, as a member of theAegon USA group of companies, Transamerica has access to cash viashort-term intercompany loans as well as $1.5 billion in committed bank linesthrough Aegon N.V.
The company was incorporated on November 15, 1957, under the laws ofOhio and began business on April 15, 1958. Operations were conducted underthe title Educator & Executive Insurers, Inc., until January 1, 1976, when thename was changed to J.C. Penney Casualty Insurance Company. The nameStonebridge Casualty Insurance Company was adopted on April 1, 2002.Ultimate ownership of the company was transferred to Aegon N.V. through itsacquisition of J.C. Penney Direct Marketing Services in June of 2001. CorpaReinsurance Company was merged with and into Stonebridge effectiveDecember 31, 2003. On July 31, 2014, the name was changed to TransamericaCasualty Insurance Company.
Paid-up capital of $8,724,386 consists of 396,563 shares of $22 par valuecommon stock. There are 500,645 authorized common shares. All outstandingshares are owned by Aegon USA, LLC. Prior to June 30, 2006, all outstandingshares were owned by Aegon USA (60.5%) and Aegon U.S. Corporation(39.5%), both holding companies domiciled in the state of Iowa.
MANAGEMENT
The administration of the company’s affairs is under the direction of thepresident, Blake S. Bostwick. Transamerica is party to a common cost
allocation service arrangement between Aegon USA, LLC companies.Various affiliated companies perform specified administrative functions inconnection with the operation of Transamerica, in consideration ofreimbursement of actual costs of services rendered. Aegon USA InvestmentManagement, LLC acts as the company’s discretionary investment managerunder an investment management agreement.
Officers: President, Blake S. Bostwick; Senior Vice President and ChiefFinancial Officer, C. Michiel van Katwijk; Senior Vice President and GeneralCounsel, Jay Orlandi.
Directors: Todd M. Bergen, Blake S. Bostwick, Mark W. Mullin, Jay Orlandi,David Schultz, Katherine A. Schulze, C. Michiel van Katwijk.
REGULATORY
An examination of the financial condition is being made as of December31, 2014, by the insurance departments of Arkansas, Iowa, New York, Ohioand Vermont. The 2015 annual independent audit of the company wasconducted by PricewaterhouseCoopers LLP. The annual statement of actuarialopinion is provided by Ann M. Conway, FCAS, MAAA, Towers Watson.
REINSURANCE
Historically, catastrophe losses in excess of $2.5 million up to $10.0 millionper occurrence are reinsured to an affiliate, Stonebridge Life InsuranceCompany, subject to an annual limit of two times the per occurrence limits.This coverage was terminated in 2014. Most workers’ compensation, GAP,and vehicle service contract exposures are 100% reinsured by quota shareagreements with various reinsurers.
Net underwriting income 9,250 Undrw cash flow ............ 10,870Net investment income.... 10,632 Investment income.......... 10,795
Other income/expense ... -384 Other income/expense ... 307
Pre-tax oper income ... 19,497Pre-tax cash operations
21,971Realized capital gains...... -68Income taxes incurred ..... 6,547 Income taxes pd (recov)... 8,613
Net income................ 12,883 Net oper cash flow...... 13,358
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Why is this Best’s® Rating Report important to you?
A Best’s Rating Report from the A.M. Best Company showcases theopinion from the leading provider of insurer ratings of a company’sfinancial strength and ability to meet its obligations to policyholders,as well as its relative credit risk.
The A.M. Best Company is the oldest, most experienced ratingagency in the world and has been reporting on the financial conditionof the insurance companies since 1899.
A Best’s Financial Strength Rating is an independent opinion of aninsurer’s financial strength and ability to meet its ongoing insurancepolicy and contract obligations.
The Financial Strength Rating opinion addresses the relative abilityof an insurer to meet its ongoing insurance policy and contractobligations. The rating is not assigned to specific insurance policiesor contracts and does not address any other risk, including, but notlimited to, an insurer’s claims-payment policies or procedures; theability of the insurer to dispute or deny claims payment on grounds ofmisrepresentation or fraud; or any specific liability contractuallyborne by the policy or contract holder. The rating is not arecommendation to purchase, hold or terminate any insurance
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