Aegon N.V.

Moat: 2/5

Understandability: 4/5

Balance Sheet Health: 3/5

Aegon is a multinational life insurance company, offering insurance, pensions, and investment products. While it has a long history, it operates in a competitive industry with various risks and challenges.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Aegon is an integrated, diversified, international financial services group, offering investment, protection, and retirement solutions.

Revenues & Products:

Aegon’s revenue streams are varied, reflecting its diverse offerings, and can be segmented as follows:

Premiums: Revenue from the sale of life insurance, pensions, and savings products. These are recurring and predictable sources of income.
Fees and Commissions: Income from asset management, administration, and other services. These streams are more dependent on market conditions and customer activity.
Investment Income: Gains from the investment of premiums and company assets. This is more volatile than premiums and commission-based revenue.
Other Income: Smaller sources of revenue, including gains on sale of assets and income from joint ventures.

Aegon’s primary products and services include:

Life insurance: Traditional life insurance policies that provide a payout upon the death of the insured.
Pensions: Retirement savings plans and annuities, including defined-benefit and defined-contribution plans.
Savings products: Products that help customers save for future goals.
Asset management: Investment management services for institutional and retail clients, including funds, mandates and partnerships with other asset management firms.

Industry Trends and Competition:

The insurance industry is becoming more competitive due to digital transformation, changing regulations, and new market entrants that provide comparable products through multiple delivery methods.
Low interest rates and macroeconomic instability, as seen in 2022, can make it difficult to grow operating profit or margins, and negatively impact the company’s capital ratios.
There is a trend toward more customer-centric and digital distribution models, requiring investments in new technology and systems.
ESG and sustainability are becoming increasingly important factors, influencing both company strategy and investor decisions and may lead to additional operating costs.

What Makes Aegon Different?

Aegon has a global presence and operates in both developed and emerging markets, allowing it to diversify risks and leverage growth opportunities.
It has a diversified range of product offerings across the insurance, pensions, and asset management sectors.
Aegon has also been building out its digital platform to stay relevant for a younger demographic and is exploring innovative tech based investment options.

Financial Analysis

ROIC and Profitability:

Aegon’s returns on invested capital (ROIC) are difficult to pin down definitively from the annual reports, however, the information that was provided indicates a fairly low ROIC for the company. This can be attributed to increased expenses, impairments, and decreasing operating income.
The company’s operating profit has been volatile, declining significantly in recent years but is forecasted to slowly improve in the next few years.
The increase of operating expenses has hampered the company’s earnings and may be related to restructuring costs, inflation and one-off expenses.

Debt and Leverage:

Aegon has debt and debt equivalents of around 3.8 trillion EUR. It has low debt compared to equity, and overall total debt to enterprise ratio of 0.142%. This implies that Aegon has strong financial solvency, but a lower interest coverage ratio.
The debt level has increased from 1.1 to 1.9 due to issuance of a 5% EUR 800 million bond.
The company is expected to make a debt repayment of 3.7 million EUR in 2024 and additional capital return to shareholders.

Cash Flow & Capital Management:

The company has a large net cash balance. However the free cash flows have been decreasing in recent years.
Aegon is committed to returning capital to shareholders and is currently making buybacks.
Aegon’s free cash flow is highly volatile and it depends on the performance of its investments.
Management aims to pay dividends on a stable schedule that matches the risk profile of their business.

Moat Assessment: 2 / 5

Aegon’s economic moat is weak due to its core operations falling into a highly competitive and rapidly commodifying industry. Here’s a detailed look:

Intangible Assets (2/5): Aegon possesses some well-known brands in specific markets, but these do not confer a broad pricing advantage over other insurance and investment firms. Also they may be considered as low relevance compared to competitors in developed markets with strong brand loyalty in their domestic regions. While the company operates with various international regulatory approvals, these do not create any strong moats.
Switching Costs (1/5): Switching costs for the customer base are very low in these products. Insurance and investment products are highly interchangeable, which means customer loyalty tends to be fickle. Aegon customers often do switch to their competitors when they offer the same product or service at a cheaper rate.
Network Effect (1/5): Network effects have little to no relevance in insurance and asset management businesses.
Cost Advantages (3/5): Aegon has certain scale advantages due to its operations in both developed and developing countries. But, in the long run cost advantages on pricing are not sustainable. There is no particular advantage from economies of scale or from proprietary technology to deliver the service better or at a lower cost. It has shown that these types of moat do not lead to reliable profitability.

In conclusion, the lack of a powerful and durable advantage suggests a low moat rating. Although Aegon operates in relatively regulated industries, its business is not one where it can generate significant abnormal profits.

Major Risks

Aegon faces several key risks that could negatively impact its performance and erode any potential moat they possess:

Industry Risks:

Increased competition: New market entrants and evolving financial technologies could challenge Aegon’s market share and customer loyalty.
Changing consumer preferences: Shifting preferences towards more digitally-focused, personalized, and transparent services would require significant investment from Aegon.
Economic instability: Economic downturns can increase defaults and reduce demand for its products and services.

Company-Specific Risks:

Investment performance: Its investment performance and fluctuations in the market can affect revenue and profitability, as gains from these investments form a part of its revenue structure.
Legacy business: Aegon still carries a legacy book of guaranteed-return annuities. These are a liability on its balance sheets, and they are exposed to interest rate volatility. In a low-rate environment, these legacy products can lower earnings.
Reorganization costs: The restructuring of the company involves high costs and could possibly mean that some of the planned operational efficiency is not achievable within the intended timelines.
Capital structure: Maintaining an optimal capital structure, which varies with the different regions it does business in, requires careful management of risk and profitability.

Other Risks:

Regulatory changes: New regulations and accounting standards will require additional investments for compliance purposes. Regulatory changes in taxation may also affect financial performance.
Global economic instability: Global economic instability, such as the war in Ukraine, may affect profits and cash flows. Also, other global events can affect economic and consumer confidence, further harming financial performance and reducing customer confidence.

Business Resilience

Aegon has proven its resilience through various periods of adversity. Specifically the company’s ability to maintain profitability in the US even under regulatory pressures.

Also, the transformation that Aegon is undergoing, with the restructuring of its portfolio, and a focus on new lines of business will help the company become more resilient to negative external factors.

Understandability: 4 / 5

Aegon’s business is somewhat complex, given its global operations and the diverse mix of products and services. Here’s a breakdown:

Fairly Complex Products: While its main businesses are based on insurance and asset management, these are themselves complex.
Numerous Revenue Streams: Aegon has multiple streams of income, namely premiums, commissions, and investment income, which need to be analyzed. However, once the sources and its nature are understood the task becomes easier.
International Footprint: With operations in different countries, the company has to be analyzed across different regulatory regimes and economic situations.
Financial Complexity: Insurance companies are financially complex, and require an investor to have knowledge about debt and liability management, tax structures, and balance sheet analysis.
Transparency: Despite being complex, most aspects are transparent, and investors can fairly understand how the company makes its money.

On this basis, an investor could reasonably understand Aegon’s basic operations, but full comprehension would require an above-average level of financial knowledge and a degree of understanding of the insurance industry.

Balance Sheet Health: 3 / 5

While Aegon has a solid balance sheet, there are a few caveats:

Reasonable Debt to Enterprise Ratio: The company has a fairly healthy total debt-to-equity ratio.
Volatility in Cash Flow: Aegon’s cash flows are highly dependent on market conditions, its investment performance and is not stable.
Pension liabilities: Aegon also has some large pension liabilities that make the balance sheet complex. There is an attempt by management to reduce such liabilities in the long term.
Regulatory and Credit Risks: Due to being in a heavily regulated industry, there are inherent credit risks.

Considering these factors, Aegon’s balance sheet shows some areas of strength, but also some major vulnerabilities, therefore it is rated a 3 out of 5.

Recent Concerns and Management’s Response

Aegon’s recent earnings calls and reports have acknowledged the challenges of low interest rates, increased expenses, and a slowdown in their financial performance. Here’s how the management is addressing the issues:

Strategic transformation: Aegon has embarked on a new transformation process to improve their operating performance and increase its focus on high growth segments. The company is aiming to reduce its expenses and increase its returns on capital in the future.
Active Capital Management: The company is also actively managing its capital to create value for shareholders. This includes steps like increased debt repayments, asset optimization, share repurchases, and new investments.
Commitment to profitability and growth: Even with some adverse events the company is maintaining its commitment to grow its high-performing areas and increase profitability over time.
Improved cost controls: Management has shown their intentions on cutting costs, which will hopefully offset some of the issues the company is facing.

Management has noted that they are expecting things to improve from 2024 onwards. They are projecting consistent earnings and revenue growth.