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Lard laugh

15 August 2019 By Christopher Thompson

Aegon investors won’t look the other way. Even after a 7% rise in the interim dividend, shares in the Hague-based insurer fell by the same amount on Thursday after a decline in its solvency position. Incoming CEO Lard Friese must make capital stability at the Netherlands division his first port of call.

Shareholders fear they could be heading back to the bad old days in 2016 when Aegon’s Solvency II ratio seesawed due to difficult markets and a misjudged hedging position. True, outgoing CEO Alex Wynaendts has been busy de-risking Aegon’s balance sheet since then – the group’s ratio has risen from 158% of minimum requirements three years ago to 197% today, at the upper end of the company’s target range.

That’s still below the 210% sported by Dutch rival NN Group, where Friese is arriving from, but healthy enough. What’s spooked investors is the fact that the solvency ratio at the key Netherland’s business fell below management’s 155% threshold. That means the Dutch bit didn’t remit any dividends to the group.

Predictably, Aegon blamed interest rates. Across the industry, ultra-depressed rates mean discount rates are low and liabilities are correspondingly high. Aegon additionally suffers from a concentration of Dutch mortgages whose values are hit to a greater extent than rivals that choose to invest more in government bonds.

Assuming it sticks with mortgages, Aegon could shift its asset mix by offloading consumer or infrastructure loans in the Netherlands. Decreasing comparatively illiquid assets would lead to more capital, but also lower returns. Investors expect Aegon to balance this trade-off – and first half results indicate they haven’t yet learned how.

That presents an opportunity for incoming Friese to add some padding to otherwise respectable numbers. Aegon made a decent 9.6% annualised return on equity, a shade under its 10% target. And surplus cash of 1.6 billion euros at the group level meant it could afford to raise interim payouts despite the Netherlands miss. Aegon’s 35% share price drop over the past year is roughly double that of NN, and Refinitiv data suggests it trades under 40% of expected book value, compared to 90% for peers. If Friese can bolster Netherlands solvency, that underperformance could end.


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