Too many fingers in too many pies, reduces Aegon’s focus

Business Strategy and Outlook

Aegon has had its share of problems over the last 13 years, averaging close to 4.4% return on equity over this period. That is well below the 11% cost of capital experts’ assign to the business. These struggles have stretched across capital, solvency, governance, management, and recurring nonrecurring items. Additionally, communication with the investment community was not good. However, it is seen, recent results show a change of direction in terms of strategy.

Under the new leadership Aegon is focusing on four things to make it a materially better company. First, strengthening the balance sheet; management has already started this. Second, creating a more disciplined management culture with the move to quarterly from semi-annual reporting. This is another change which is welcomed. The charges investors saw in the first half of 2020 already show greater accountability. Third, improving efficiency, and fourth, increasing strategic focus, which is likely to be closely aligned. Management has spoken at length about Aegon’s geographical breadth and this is something which is emphasized to investors that is seen to be managerial distraction. Too many fingers in too many pies reduces Aegon’s focus. The United States and Netherlands have long been key to this business. Discussions on Portugal and Spain and the distribution partnership with Banco Santander lead us to believe these markets will remain core, though it remains preference to see an exit.

Financial Strength

Aegon management is on a debt drive and analysts really like this. Traditionally, Aegon has not been a highly leveraged business, steering into the financial crisis with a debt/asset ratio of well under 2%. During this period, Aegon delivered quite reliable earnings. As the global financial crisis ensued and Aegon took on EUR 3.0 billion of debt from the Dutch government, the company’s woes were exacerbated during the succeeding sovereign debt crisis; management drove a further deterioration of the balance sheet with an aggressive pursuit of joint ventures in Spain. Debt consequently increased to 3.5% of assets and was only marginally tempered until another round of poor transactions when management decided to acquire Mercer’s defined-contribution record-keeping business and a partial acquisition of La Banque Postale asset management. Balance sheet quality was further degraded with the purchase of BlackRock’s defined contribution platform and Cofunds a year later. Debt/assets reached a high of 3.6% of assets and interest payments on this debt reached 35% of earnings before interest. This served as a catalyst for mounting pressure from Dodge & Cox, Aegon’s long-term shareholder. Actions have eminently improved the shape of Aegon’s balance sheet and as at year-end 2021 Aegon reported a 2.6% debt/asset ratio.

Bulls Say’s

Aegon has shed peripheral businesses in Central and Eastern Europe.
Debt repayment has been impressive.
The new management team appears to be laying-out a strategy for the business.

Company Profile

Aegon is a Netherlands-headquartered insurance company with core operations that stretch across the U.S., Netherlands, and United Kingdom. The business also holds peripheral ventures in Spain, Portugal, Brazil, and China.

(Source: MorningStar)

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