Cat XL
Shizuka Minamoto
Aegon: Dutch comfort
Investors buy insurers for dividends. So when Hague-based Aegon slashed its interim payout by 60 per cent on Thursday, the stock was pummelled. After a drop of 14 per cent, the share price has fallen back to November 1991 levels.
Some sort of cut was predictable. Heading into the reporting season, Aegon’s 11 per cent 2020 dividend yield was much higher than its peers. The average for European life insurers was 7 per cent, says UBS. But new boss Lard Friese, who moved from Dutch peer NN Group just three months ago, took tougher action than many expected.
Its key US subsidiary — which last year generated more than half of the group’s cash flow — has suffered badly from the pandemic. While just €34m of first-half life claims could be directly pinned on Covid-19, death certificates do not give the full picture. Higher claims and lower interest rates pushed down first-half underlying pre-tax earnings by 31 per cent. Aegon also took charges of more than €1bn, as a result of gloomier assumptions on interest rates, mortality rates and ill-health.
The caution is justified. Historically, many of the group’s problems stemmed from rosy expectations of robust returns on corporate bonds and optimistic projections about health improvements. As a company that has to reinvest €5bn every year, every 100 basis-points decline in interest rates cuts pre-tax earnings by about €50m. Repeated disappointments over new treatments for Alzheimer’s also justify paring back anticipated benefits to its long-term care business.
Shareholders will hope that adopting more conservative assumptions will put an end to unwelcome surprises. Aegon’s history of volatile earnings is one reason its shares are valued at just 4.6 times earnings. But much depends on the new dividend policy, which like the rest of the strategy will not be revealed until December. Weary investors can only hope that the bad news is out in the open. With a new boss in charge, there was little incentive to soften the blow.
Investors buy insurers for dividends. So when Hague-based Aegon slashed its interim payout by 60 per cent on Thursday, the stock was pummelled. After a drop of 14 per cent, the share price has fallen back to November 1991 levels.
Some sort of cut was predictable. Heading into the reporting season, Aegon’s 11 per cent 2020 dividend yield was much higher than its peers. The average for European life insurers was 7 per cent, says UBS. But new boss Lard Friese, who moved from Dutch peer NN Group just three months ago, took tougher action than many expected.
Its key US subsidiary — which last year generated more than half of the group’s cash flow — has suffered badly from the pandemic. While just €34m of first-half life claims could be directly pinned on Covid-19, death certificates do not give the full picture. Higher claims and lower interest rates pushed down first-half underlying pre-tax earnings by 31 per cent. Aegon also took charges of more than €1bn, as a result of gloomier assumptions on interest rates, mortality rates and ill-health.
The caution is justified. Historically, many of the group’s problems stemmed from rosy expectations of robust returns on corporate bonds and optimistic projections about health improvements. As a company that has to reinvest €5bn every year, every 100 basis-points decline in interest rates cuts pre-tax earnings by about €50m. Repeated disappointments over new treatments for Alzheimer’s also justify paring back anticipated benefits to its long-term care business.
Shareholders will hope that adopting more conservative assumptions will put an end to unwelcome surprises. Aegon’s history of volatile earnings is one reason its shares are valued at just 4.6 times earnings. But much depends on the new dividend policy, which like the rest of the strategy will not be revealed until December. Weary investors can only hope that the bad news is out in the open. With a new boss in charge, there was little incentive to soften the blow.
