Aegon: The Turnaround Is In Full Swing

Summary

• CEO Lard Friese took over in early 2020 as the pandemic hit capital markets.
• In December 2020, Mr. Friese unveiled a new turnaround strategy through 2023, focused on corporate simplification, cost cutting, and higher free cash flow generation.
• The latest annual and quarterly results suggest the turnaround is in full swing.
• The 2022 outlook appears good and the targets for 2023 remain in place.
• The turnaround strategy should improve operating metrics, reduce the valuation gap versus peers, and drive returns.

Mirko Kuzmanovic/iStock Editorial via Getty Images

Introduction

Aegon (NYSE:AEG) is a Dutch-based multinational company with many insurance and asset management divisions. The corporation is best known for its Transamerica brand in the United States; in Europe, the organization’s main markets are the United Kingdom and the Netherlands. Aegon also operates outside of these three core markets, including in Spain, Portugal, China, and Brazil.

For full disclosure, here at Contra the Heard Investment Newsletter, we have owned Aegon for the better part of a decade. Our average purchase price is $6.04, which means we are currently underwater on the name, and have been much of the time it has been in our portfolio. Though Aegon issues a dividend while we wait, the stock has been a persistent disappointment. At times we have compared the company to a sprawling octopus, with numerous confusing and complex operations around the globe. Moreover, the prior CEO regularly bought and sold divisions in many countries, further fogging clear evaluations.

We are, however, cautiously optimistic on Aegon’s prospects now, with a relatively new CEO at the helm, a game plan to simplify the business, and clear time-bound targets for free cash flows, expense reductions, and leverage.

New CEO And Turnaround Strategy

In late 2019, Aegon announced that Lard Friese would replace long serving CEO Alex Wynaendts. Mr. Friese is an industry vet, having spent 10 years at Aegon between 1993 and 2003. He then moved onto ING Groep N.V. (ING) and eventually became the CEO at NN Group (OTCPK:NNGPF and OTCPK:NNGRY), another Netherlands-based insurance company with a global footprint. Long story short, he is an experienced hand with an impressive record.

Unfortunately for Mr. Friese, he took Aegon’s reins in March 2020, just as the pandemic sent capital markets into freefall and plunged the economy into recession. In the months that followed, Aegon’s business took a hit, and European regulators urged financials to suspend dividends and buybacks until late 2020. Aegon complied as its shares cratered to the lowest point since the 2009 Financial Crisis.

During 2020, he started cutting costs, deleveraging the balance sheet, and streamlining operations. The company sold its iconic Transamerica Pyramid building in San Francisco for USD $650 million, sold Stonebridge (a UK-based accident insurance provider) for £60 million, and sold its Eastern European business for €830 million. Aegon also closed its traditional distribution network in India, moving to a digital model. Cumulatively, these actions helped Aegon keep its all-important Solvency II ratio flat in 2020 versus 2019. Additionally, the excess capital buffer fell only slightly from €1.2 billion to €1.15 billion year-over-year.

Aegon: December 2020 Investor Day Presentation.

Once the economic situation had stabilized, Mr. Friese unveiled his vision for Aegon’s future in late 2020. Between 2021 and 2023, he aims to reduce leverage from €6.6 billion to a range between €5.0 and €5.5 billion, cut expenses by €400 million, and generate cumulative free cash flows between €1.4 billion and €1.6 billion. He wants to grow revenues, improve margins, and expand the dividend from €0.06 in 2020 to around €0.25 by 2023 too.

To accomplish these goals, he will focus Aegon on its three core markets of the US, UK, and Netherlands, as well as targeting three growth markets (China, Brazil, and Spain/Portugal). He also plans to consolidate the organization’s asset management divisions onto a single platform. Within the three core markets, his goal is to reallocate capital to higher margin opportunities, which will grow the bottom line and free up funds to pursue new business.

While any company can set ambitious goals and throw grand ideas around, few firms include timelines and numerical targets as has been done here. These milestones are important because they will allow investors to more accurately assess how well the enterprise is doing.

Latest Quarterly Results And Outlook

Aegon published its latest quarterly and full year results in early February. These numbers suggest the turnaround is in full swing. Aegon has met or exceeded its 2021 targets for expense savings, capital generation, free cash flow generation, leverage reductions, and dividend payouts. The Solvency II ratio improved from 196% to 211%, the corporation made progress growing its asset management division, and it continues to simplify its footprint.

Aegon: Q4 2021 Corporate Presentation

Going forward, the 2022 guidance looks good. Management expects additional expense savings, free cash flow in the €550 to €600 million range, and further leverage reductions. Longer term, the company’s 2023 targets remain intact.

If Aegon can meet or exceed its 2023 targets, profitability and debt metrics should improve, which may close the valuation gap between itself and peers. This should drive the stock higher and reward shareholders in the process. The table below compares Aegon to American and Dutch peers on a variety of metrics:

Table: amalgamated by author using Seeking Alpha data.

As the table suggests, Aegon has the worst net margins, returns on equity, and debt metrics versus competitors. Moreover, and unsurprisingly, it also has some of the lowest valuations on a variety of metrics – including the price to book ratio, which is an important yardstick for insurance companies. Mr. Friese appears to understand the roots of Aegon’s underperformance, and his turnaround strategy seems poised to address this.

Conclusion

Aegon’s stock price and strategic direction have been listless for the better part of a decade. In late 2020, the then new CEO, Lard Friese, announced a turnaround strategy to simplify operations, reduce leverage and expenses, and grow free cash flow. Fast forward a year, and his vision is in full swing, suggesting his ambitions are feasible going forward. In 2022, the corporation’s outlook looks strong, and the turnaround’s longer-term 2023 targets remain in place. Successfully executing on this strategy should reduce the profitability gap and valuation gap between Aegon and its peers. In turn, this should drive the shares higher and reward owners in the years ahead.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of AEG either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The opinions expressed – imperfect and often subject to change – are not intended nor should be taken as advice or guidance. The information enclosed in this article is deemed to be accurate and reliable, but is not guaranteed by the author.