By: Danny Smerz, AIM Student at Marquette University
Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.
Summary:
•Aegon N.V. ADR (NYSE:AEG-US) Aegon N.V. is a holding company and is broken up into insurance, pensions, and asset management services. The company was founded in 1844, currently employs 26,543 individuals and is based in The Hague, the Netherlands.
• Mike Holliday-Williams will replace Adrian Grace as CEO on October 1st.
•.AM Best has downgraded the Financial Strength Rating (FSR) as well as the Long-Term Credit Ratings.
• Management has reconfigured the company into three distinct categories: Manage for Value, Drive for Growth, and Scale up for the Future. They hope to leverage cross-border synergies and realize operational efficiencies through this new model.
•Aegon announced an agreement to sell its 50% stake in the variable annuity joint venture in Japan for proceeds of €130 million.
• AEG’s stock price has dropped 37.9% over the past 12 months.
Key points:
Aegon N.V. has greatly underperformed the market over the past 5 years and their current initiatives demonstrate an attempt to correct the downward trajectory that they are on. The first half of 2019 brought widening mortgage spreads (171 bps) which led to a decrease in the value of Aegon’s mortgage portfolio. While the company has seen an increase of 26% in their Net Income since 1H 2018, the €618 million fell short of expectations by about €200 million.
Specifically, within the company’s U.S. Retirement Plans and Variable Annuities segment, earnings were down €75 million due to lower average balances and increased expenses (U.S. consists of 52% of EBIT). The biggest segment impact was on their accident & health insurance sales which were down 45% to €117 million. This is attributed to management’s decision last year to discontinue certain product lines and lower voluntary benefits sales in the U.S. Companywide, net deposits were down €2.7 billion off of €65 billion in gross deposits.
The management has worked to increase their Solvency Ratio to nearly 200% showing some promising signs. Additionally, the company has divested various heavy required capital areas, including sales of Transamerica Reinsurance; U.S. bank-owned life insurance, or BOLI, and corporate-owned life insurance, which has led to more of an asset-light balance sheet and focus on their core business. While these signs are encouraging, AEG’s outlook is still dismal at best.
What has the stock done lately?
Aegon N.V. has seen sales drop 9.57% over the past year while net income has dropped 69.92%. Operating Income has seen a 5 year operating income CAGR of -26.20%.
Past Year Performance:
AEG is down 37.9% on the year and 14.2% over the past 6 months. The P/B is currently at 0.43x which is near its 10 year low and lags the industry average of 1.13x which implies the company is trading at a discount. However, company fundamentals will need to change in order for this relative valuation to be of substance.
Source: FactSet
My Takeaway:
The restructuring of AEG and the soon to be new “CEO” are steps in the right direction, however it may be too late for this 175 year old company. Nearly all performance and financial metrics for the company have slid over the past 5 years especially in the U.S. AEG has lagged due to poor financial management and increased competition as underwriting is fairly homogenous in its structure. However, AEG trades at a discount to its peers which means a potentially large upside if the current outlook changes.
Source: FactSet
