Mind the gap
Aegon has a habit of making the boring business of life insurance unpredictable. The Dutch insurer’s shares fell by as much as 8% after it disappointed its investors with lower-than-expected profit and capital in the second half of 2019. Low interest rates are one problem. Aegon’s ability to muck up its modelling is more worrying. Incoming Chief Executive Lard Friese faces a tough turnaround.
Departing CEO Alex Wynaendts blamed a “challenging environment” for yet another set of lacklustre results. He has form. Back in August, Wynaendts disappointed the market when Aegon’s Dutch business reported a lower-than-expected capital ratio, because of the effect of low long-term bond yields, which depress discount rates and crank up future liabilities, and its exposure to illiquid residential mortgages. This time, the problem was in the United States, where profit was 7% below analysts’ forecasts, again thanks to low interest rates.
Aegon also seems to be pretty good at messing up the things that are in its control, like forecasting. It took a 56 million euro charge on its Dutch annuities book after changing assumptions over how low rates would affect the business’s profitability. It also had to change its tax assumptions. Modelling gaffes were one of the reasons why Aegon’s solvency ratio, as measured under European Union rules, was only 201% in 2019, 10 percentage points below the level analysts had forecast.
Aegon reckons it has the solution, by shifting its U.S. business away from guaranteeing a fixed retirement income to individuals towards managing mutual funds and other retirement products for company pension schemes, which chews up less capital, is more profitable and hopefully more predictable. It has already made the switch in the United Kingdom. These services can deliver around 50 basis points of profit margin, compared to the 8 basis points Aegon currently makes.
Still, managing other people’s money is a competitive business, forcing Aegon to compete with large asset managers and insurers. It also requires investment in things like technology, analysts at KBW reckon. Aegon shares are valued at just below 6 times forward earnings, according to Refinitiv, a more than 30% discount to peers. Friese, who takes over from Wynaendts in April, will face a long struggle to close the credibility gap.