Standard & Poor’s Ratings Services has lowered its long-term counterparty credit and financial strength ratings on Toronto-based Transamerica Life Canada. The ratings were removed from CreditWatch Negative, where they were placed Jan. 30, and the outlook is stable.
The rating agency explains that the downgrade follows its review of the company’s decision to strengthen its policy reserves following a review of the company’s dynamic lapse and roll-over assumptions on segregated funds, the impact of low interest rates when discounting reserves, adjustments made for bulk reinsurance treaties, expense provisions, and tax assumptions. “The impact of these restatements represented a loss of about eight quarters of earnings for the company,” it says.
Although, S&P also points out that a portion of the reserve increase is allocated to provisions for adverse deviation, so, “some of the reserve strengthening could … materialize as future earnings if the actuarial base case scenario emerges.”
“While we consider this reserve adjustment to be material, the impact of the reserve strengthening was softened by the $100 million capital infusion made by the parent, AEGON N.V., during the second half of
2005, and the company’s regulatory capital ratios remain appropriate for the current ratings,” said Standard & Poor’s credit analyst Donald Chu.
The insurer financial strength rating on the firm reflects the strength of the company’s existing franchise in its two core businesses (individual life insurance and segregated funds), the past and expected future operating performance of the life insurance operations, excellent liquidity, and strong asset quality and capital position, S&P explains. “TLC’s competitive advantages include its low unit cost infrastructure and strong underwriting discipline, which have resulted in favorable mortality experience,” it says.
“The ratings also reflect the relatively high amount of legacy segregated fund risk that the company took on relative to its peer group, which has necessitated a significant infusion of capital from its parent to support its regulatory capital requirements,” S&P adds.
Standard & Poor’s also notes that it expects that TLC will rebuild its Tier I capital ratio by year-end 2006. And, it noted that, the overall ratings on TLC continue to reflect the strategic importance of the insurer to the AEGON group of companies. On a stand-alone basis, the ratings on TLC would be lower.
The stable outlook reflects Standard & Poor’s view that management continues to make progress in addressing the company’s legacy segregated fund risk and the associated concentration and volatility of this business line. The current rating takes into consideration a medium level of volatility in the Canadian and global equity markets, and the company’s regulatory capital ratios.
“It remains our expectation that TLC will achieve a Standard & Poor’s Canadian capital adequacy ratio of 130% or higher, a positive net income even with any future reserve strengthening, and will continue to take steps to mitigate its higher-than-average segregated fund risk,” S&P concludes.