After our last comps analysis between Aegon and NN Group, we decided to follow up on our preferred Dutch insurance. At that time, Aegon (NYSE:NYSE:AEG) was discounting the EIOPA decision to suspend its dividend payment. We were thinking that its implied stock price was overly negative and we were forecasting an early return on the dividend payment. Being patient always pays off. Since then, the return is over 100%.
Why are we still positive about our preferred Dutch insurance group?
In the Aegon FY call, the company set upside targets versus Wall Street analyst consensus estimates. Aegon indicated a €200m excess capital thanks to its subsidiaries, in our internal forecast this implied a cumulative FCF that could be over €2.0bn until 2023. The company was also suggesting some disposal to deleverage. Indeed, Aegon completed the sale of its Hungarian businesses. The gross proceeds were €620m and we should note that this disposal was highly welcomed by the investor community. Hungarian sale finalisation has allowed the Dutch insurance to announce a debt tender offer and the announcement of a €300m share repurchase plan to be completed over 2022.
Another positive note to mention is the reinsurance transaction with Wilton Re. This will help Aegon to have a better margin of safety on US mortality. Despite a negative effect on the RBC ratio, Aegon will be protected by higher mortality volatility and avoid peak mortality risks.
Before moving forward with its Q1 results, we would update that the company does not have relevant financial exposure in Russia/Belarus. In accordance with the authorities, Aegon will stop its activities and future investments in Russia and Belarus. In a separate press release, the company declared that it ” has EUR 27 million of general account investments in Russia, based on the book value as per March 3, 2022. Aegon does not have any investments in Belarus”. Immaterial exposure to include in our forecast numbers.
Compared to the Q1, operating results were up by 7% to €463m mainly due to lower claims in the United States, a positive contribution from growth initiatives, and higher fee income thanks to equity markets.
Going to the bottom line, net income was also up by 7% reaching €412m. This was favored by the €372m book gain of Aegon’s businesses in Hungary. Concerning the capital ratios of the three main business units, we can clearly note that they are above regulatory requirements. The solvency II ratio for the group stood at 210%. This reflects the proceeds from the sale of Aegon’s businesses in Hungary and also the debt repayment and its share repurchase plan of €300 m.
Important to note is that Aegon is entering into discussions with third parties to explore further options for reinsurance of parts of the US variable annuity portfolio. Aegon had a solid cash capital position of €1,817m, ahead of the top end of its €500 – €1,500m target. The completion of this transaction and the strong cash generation will allow for additional returns and be upfront on the deleveraging target. With a FCF yield higher than 10%, and a P/E 2023 of 7x, we see again a good entry point for Aegon. The company trades also at a discount on price to book value compared to its peers, we derive a target price of €5.7 per share and continue with our buy rating.
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