Aegon (AEG, Financial) Naamloze vennootschap (N.V.), the $12 billion Netherlands-based diversified insurance company, reported a (-)6% year-over-year revenue decline to 13.36 billion euros ($15.73 billion) and profits of 529 million euros (4% margin) compared to losses of (-)415 million euros a year earlier (1).
Aegon recognized (-)13.6% lower benefits, claims and expenses that helped it improve its profitability in the period despite a disappointing revenue performance.
“Aegon’s second-quarter results are strong and reflect the continued positive momentum in our businesses and financial markets as well as the benefit from expense savings. I’m pleased that management actions are having the desired effect, particularly the marked improvement in the profitability of our U.S. business. This improvement, together with the book gain related to the divestment of the majority of our U.S. runoff business and related derivative positions, supports net income of 529 million euros for the quarter.
“Today, we are also announcing a range of measures that significantly increase our solvency ratio, including a capital injection of 1 billion euros in Aegon the Netherlands and agreement with our regulator on a number of outstanding solvency-related topics. These measures, together with the recently announced strategic divestments, increase our financial flexibility, strengthen our capital position and improve the outlook for capital generation – all of which give us confidence in our ability to return 2.1 billion euros to shareholders over the period 2016 to 2018.” – Alex Wynaendts, CEO
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Valuations
Aegon is undervalued compared to peers. According to GuruFocus data, the company had a trailing price-earnings (P/E) ratio of 7 times vs. the industry median of 12.5 times, a price-book (P/B) ratio of 0.43 times vs. 1.3 times and a price-sales (P/S) ratio of 0.2 times vs. 1.1 times.
The company also had a 5.11% dividend yield with 37% payout ratio.
Average revenue and earnings-per-share estimates indicated forward multiples of 0.46 times and 8.1 times.
Total returns
Despite reaching its one-year highs, Aegon still underperformed the broader Standard & Poor's 500 index having had 9.2% total returns vs. the index’s 11.68%.
Aegon N.V.
Aegon N.V.’s history dates back over 170 years. The company was formed in 1983 through the merger of AGO and Ennia, both of which were successors to insurance companies founded in the 1800s.
Aegon is an international life insurance, pensions and asset management group. Its listed holding company, Aegon N.V., is a public limited liability company with its corporate seat and head office in the Netherlands.
Aegon has several holding companies (2). Aegon’s main operating units are separate legal entities that operate under the laws of their respective countries.
Aegon exists to help people achieve a lifetime of financial security. It uses a multibrand, multichannel distribution approach to meet its customers’ needs and fosters an entrepreneurial spirit within its businesses, encouraging the development of innovative products and services.
Aegon has the following operating segments: the Americas, which includes the U.S., Mexico and Brazil; the Netherlands; the United Kingdom; Central and Eastern Europe; Spain and Portugal; Asia and Aegon Asset Management. The separate operating segments of the Netherlands, the United Kingdom, Central and Eastern Europe and Spain and Portugal may be referred together as "Europe," but Europe is not an operating segment.
In 2016, Aegon generated 50.8% of its revenue in Europe, 42.4% in Americas, 31.6% in United Kingdom, 16% in the Netherlands and other countries.
Americas
Americas covers business units in the U.S., Brazil and Mexico, including any of the units’ activities located outside these countries.
Exact revenue figures were not derived from recent company filings. Nonetheless, the Americas segment delivered profits of 693 million euros in the recent first half compared to 296 million euros in the year prior.
In addition, the Americas segment experienced total net outflows of 2.92 billion euros compared to 4.94 billion euros inflows a year earlier. The Americas business also had a return on capital ratio of 7.4% in the period, which was 130 basis points compared to the year earlier period.
Europe
In the first half, the Europe segment reported €265 million in profits compared to (-)€407 million in losses a year earlier.
In addition, total net deposits in the Europe segment increased by €2.68 billion compared to €890 million a year earlier with return on capital ratio of 7.7% – 150 basis points higher than last year period.
Asia
Asia covers businesses operating in Hong Kong, Singapore, China, Japan, India and Indonesia including any of the units’ activities located outside these countries.
In the first half, Aegon’s Asia business recorded (-)5 million euros in losses compared to (-)10 million euros losses last year.
Further, the segment experienced total net deposits of 92 million euros compared to 155 million euros a year earlier with return on capital ratio of (-)0.9%.
Asset management
Aegon’s asset management reported a (-)6.8% revenue decline year over year to 286 million euros in the first half and a profit margin of 17.1% compared to 18.2% in the same period last year.
In the past two years, asset management is the most profitable segment in Aegon’s several business lines.
Sales and profits
In the past three years, Aegon registered 3.16% revenue growth average, (-)23.6% profit decline average and 1.2% profit margin average.
Cash, debt and book value
As of June, Aegon had 12.88 billion euros in cash and cash equivalents and 15.6 billion euros in debt with a debt-equity ratio of 0.65 times compared to 0.5 times in the year prior (1). Overall debt increased by 2.8 billion euros while equity has fallen (-)1.6 billion euros year over year.
Goodwill appeared to be negligible with Aegon’s 404.6 billion euros assets while book value declined (-)6.1% year over year to 24.2 billion euros.
Cash flow
In the first half, Aegon’s cash flow from operations rose to 2.83 billion euros year over year (1). Capital expenditures were 25 million euros leaving Aegon with 2.8 billion euros in free cash flow compared to (-)180 million euros outflows a year earlier. No payments to shareholders were provided in the period while the company took in 94 million euros in financing activities.
The cash flow summary
In the past three years, Aegon allocated 314 million euros in capital expenditures, reduced overall debt by 850 million euros (net any issuances and other financing activities), generated 8.04 billion euros in free cash flow and provided 1.69 billion euros in dividends and share repurchases at average free cash flow payout ratio of 25.9%.
Conclusion
Aegon's operations certainly have a lot of moving parts. Meanwhile, exact revenue and profit figures in each segments were not obtained in its recent official company filings making it more difficult dissecting its business parts. Nonetheless, the company does seem to have some business improvements in the first half when compared to a year earlier, especially when using return on capital figures provided by the company itself.
Aegon also has a cash rich balance sheet with an acceptable leverage at 0.65 times debt-equity ratio along with a strong free cash flow generation and a conservative payout (dividends and share repurchases) ratio at 25.9%.
Average analysts have a hold recommendation with a target price of $6.04 a share vs. $5.74 at the time of writing. At one-year high, Aegon could still have some more room to go up. Reviewing recent operations also indicated some improvement in its global operations.
Low valuations accompanied by current objective findings, Aegon is a hold.
Notes
- Morningstar data.
- Company filings
The shares of these legal entities are directly or indirectly held by three intermediate holding companies incorporated under Dutch law: Aegon Europe Holding B.V., the holding company for all European activities; Aegon International B.V., which serves as a holding company for the Aegon Group companies of all non-European countries; and Aegon Asset Management Holding B.V., the holding company for a number of its asset management entities.
Disclosure: I do not have shares in any of the companies mentioned.
