Investing In Insurance

Jul. 8.14 | About: AEGON NV (AEG)

Readers of July’s edition of our free monthly newsletter noted that there are three stocks we are currently interested in purchasing. Clearly there are dozens of companies we would be interested in investing in… at the right price, but the shares of these three are each selling near levels we find attractive.

What made this particular grouping of "perspective stocks" interesting is that two of the three companies are in the insurance industry. We seem to be spending a lot of time looking at stocks in the insurance industry. We recently purchased a "cigar butt stock" called Endurance Specialty Holdings (NYSE:ENH). Now it appears we have found another cigar butt purchase in Aegon NV (NYSE:AEG). Yahoo Finance's profile for Aegon reads as follows:

"Aegon N.V. provides life insurance, pension, and asset management products and services. It offers various life and protection products, including traditional and universal life, as well as endowment, term, employer, and whole life insurance products; and supplemental health, accidental death and dismemberment, critical illness, cancer treatment, credit/disability, income protection, and long term care insurance. The company also provides individual savings and retirement products, such as fixed and variable annuity products, and retail mutual funds; mortgages, saving deposits, and annuity products; employer solutions and pensions comprising individual and group pensions, as well as 401(k)-type plans and stable value solutions sponsored by or obtained through an employer; and general insurance products consisting of automotive, liability, disability, household insurance, and fire protection. Aegon N.V. markets its products directly, as well as through various sales and distribution channels, including independent and career agents, registered representatives, independent marketing organizations, banks, broker-dealers, benefit consulting firms, wirehouses, affinity groups, institutional partners, third party administrators, independent managing general agencies, financial planners, and the Internet. It operates in the United States, Canada, Brazil, and Mexico; the Netherlands, the United Kingdom, the Czech Republic, Hungary, Poland, Romania, Slovakia, Turkey, Spain, and France; and Asia. The company is headquartered in The Hague, the Netherlands."

American consumers will be most familiar with Aegon's US subsidiary TransAmerica Corporation, which it acquired in 1999. Soccer fans will also recognize Aegon's name because of the club teams it sponsors in Europe. Several things caught my eye with this particular investment. They include:

  • The company has $6 billion more dollars of cash than debt
  • Shares currently sell at 59% of book value
  • There is a 3.4% dividend that appears to be well covered with the current 51% dividend payout
  • The company has exposure to under-insured developing markets like Brazil and Mexico
  • The company was profitable last year

There are some things that don't thrill us about Aegon as well. The majority of its business revenues come from western Europe and the US. This is disappointing because they are both slow growth markets. Additionally, I'm always wary of companies that are willing to pay out dividends in the form of stock. Unfortunately, Aegon allows shareholders to elect how they would like their dividends to be paid. I'm always a little wary when a company's management prefers to pay for things in stock rather than cash, because it suggests they think the company's stock is overvalued. As a final concern, Aegon's stock price has risen 25% over the past year. I know it shouldn't bother me, but...

Given Aegon's low return on equity (averaging about 4%) and low net margins (averaging about 3%), it is unlikely to be a long-term holding. It is however an undervalued stock, relative to the broader indices. More exciting, the company has a solid financial position, and the slightest managerial improvement should result in a dramatic improvement in profits. In summary, Aegon is selling at a discount because it is a marginally run business with a ton of potential. Given its financial position, I'm willing to bet management will unlock value for shareholders.

Disclosure: I will purchase shares of AEG this week. This analysis is for informational purposes only and should not be considered a recommendation to buy, sell, or hold any equities. I am not a financial professional. The information above is provided by Yahoo Finance and Aegon's corporate website.