S&P cuts Swiss Life

Standard & Poor's lowered the ratings of Swiss Life and subsidiaries, including the mandatory convertible of Swiss Life Cayman Finance Ltd. to BBB- from BBB, and the ratings remain on negative watch.

The downgrades reflect concerns about the new management's ability to resolve persistent profitability problems in line with previously set targets, following further deterioration in Swiss Life's domestic book of business in 2002.

Additional negative factors are continued, though reduced, exposure to capital market risks and constrained financial flexibility, S&P said.

Capitalization, although satisfactory for the current rating level, is below S&P's previous expectations, as the recent capital increase was more than offset by the 2002 yearend loss of CHF1.7 billion ($1.2 billion). Risk-based capital adequacy, however, has benefited from significantly reduced equity exposure and is estimated to be consistent with the current rating level.

Despite this, Swiss Life remains exposed to capital market risks (including interest rate volatility) both in terms of its earnings and capital profile, although to a lesser extent than in the past. Furthermore, capital adequacy includes significant soft capital components such as deferred acquisition costs and hybrid capital. Prospective financial flexibility is significantly constrained in light of the group's recent capital increase and given that Swiss Life has already exhausted Standard & Poor's tolerance limit for hybrid capital.

The ongoing watch reflects ongoing concerns that the persisting difficult operating environment and the sector's onerous guarantees continue to offset the beneficial impact of the group's restructuring program, thereby having a further adverse effect on Swiss Life's financial profile.

S&P cuts Aegon to A

Standard & Poor's lowered the ratings of Aegon NV, including the 4.75% convertible notes due 2004 to A from A+, because of a view that future absolute earnings will be less strong over the short to medium term based on higher credit provisioning, tighter credit spreads and reduced fee income.

The outlook is stable.

In 2002, Aegon raised more than €2 billion in capital to compensate for credit losses, strengthen reserving and accelerated amortization of deferred acquisition costs to protect emerging profits. The risk profile is low given the strong focus on life and pensions business at more than 80% of group revenues.

Management is viewed as a very positive influence on the rating. Aegon has a strong culture based on a clear strategy and common standards for capital and target returns. This results in well-capitalized operations, which price new business to achieve at least an 11% return on investment.

Combined with reducing costs, operating performance has consistently outpaced returns from other large European insurers.

Capital adequacy remains very strong and the quality of capital - via reduced financial leverage, reduced investment leverage and more prudent deferred acquisition cost assumptions - is expected to continue improving. Fixed-charge coverage should be maintained above 5x going forward, S&P said.

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