EUR 850.00 For Business Accounts Only

Morningstar | Aegon's Still Too Cheap

Aegon’s strategic framework continues to centre on simplification and growth. We maintain our EUR 6.70 fair value estimate and no-moat rating. What initially attracted us is a very cheap valuation, but that isn’t really enough to warrant investment. However, when we map out a reasonable path to earnings, we find Aegon too cheap to ignore, though admittedly, it is still probably one of the lowest-quality names in our European insurance coverage and in the whole of the European insurance space. Within our valuation, we are much less interested in cost savings and much more interested in retirement product conversions and retention; this is particularly pertinent to the U.S.

The market ascribes a 4.5% average return on equity to this business over the next five years, which we have backed out of the current valuation. We basically think this is a bear-case scenario with continuing high outflows and withdrawals and not factoring what we think now are better management incentives and control over the actuarial model and assumption environment. Our base-case return on equity averages 6.0%, in line with the business' average profitability over the past 13 years.

Management has exited the Czech Republic, Ireland, and Slovakia, sold the noncore businesses of UMG and its U.K. annuity book, reduced required capital by $1.3 billion through BOLI/COLI and Transamerica Reinsurance sales, and expanded its accumulation footprint in the United States and United Kingdom through Mercer, Cofunds, and BlackRock defined contribution acquisitions. There are also some legal mergers of various businesses taking place in the Netherlands. Complexity, or the ability of the business to think clearly with a targeted and well-packaged business shape in mind, has historically been a problem for Aegon, in our opinion. However, we continue to believe that management is making inroads into addressing this.

There is some business rationalizing going on in Asia with a capital-efficiency program, but ultimately this unit is superfluous, as is Portugal and Spain, and we think Aegon would do well to divest these. Central and Eastern Europe is a little closer to home, and while underlying earnings here are still slim, we think the business has a better chance of gaining traction than in its other peripheral markets.