EUR 850.00 For Business Accounts Only

Morningstar | Aegon: Renaissance From Past Mistakes Coupled With Better Visibility Driving our Upward FVE Revision

We are raising our fair value estimate for Aegon to EUR 6.70 from EUR 6.20 , lowering our uncertainty to high from very high, and maintaining our no-moat and stable moat trend ratings.

We think Aegon has been viewed by the market for some time as the perennial value-destructive case, and at first glance, you couldn’t get a stronger mix of off-putting factors. Capital has been an issue, and so has management’s communication about repaying state aid with a bookbuild capital raise. Following this, Solvency II implementation was a disaster zone. Aegon did have a tougher set of operating conditions, but that just did not make up for the miscommunication, changes of direction, low ratios, and suspension of sub-dividends. To add fuel to the fire, there has been a controlling stakeholder and remuneration objectives have been poorly structured.

To combat these issues, there has been a drastic round of restructuring, but this has left the analyst community wondering about Aegon’s direction and purpose, where strategy and earnings have been hard to assess.

However, we think these issues are coming to an end. Capital looks much stronger, and we think it is well within Aegon’s power to reach a 26% gross financial leverage ratio next year. We also think that recent Solvency postings show that the business is much better positioned in risk-based sensitivities. All core subs are well above their range, now operating in the 1.9 times bracket minimum that we think is a key level that makes Aegon comparable with other European insurance companies. This is then bolstered by holding capital to reach a nice and steady 215%.

The controlling stakeholder has given up ground, and we have seen the entrance and position-building of long-term investors Dodge & Cox. We think it is no coincidence that management remuneration structures have changed considerably for the better, including objectives relating to control environment and strategy, since Dodge & Cox first showed its face. On top of this, we do see a strategy behind divestments and acquisitions, and we think it’s a decent one. Aegon is focusing on building scale in its core markets for savings, and then working on conversion. Earnings visibility is also becoming cleaner. While we think some of these items will persist, such as underperformance of alternative investments, we also think actuarial assumption and model updates are looking like they have normalised. For the U.S. retirement business, we think the market is ineffectively focusing on withdrawals, and there is evidence these are uncommonly elevated.

For more on our outlook for Aegon, please see our newly published Select presentation, "Aegon Is Considered a Value Trap and Bad Communication Obscures Its Strategy."