Tags: Aegon | manage | risk | AEG

Insurer Aegon Seeks to Better Manage Risk

By    |   Thursday, 16 February 2012 08:28 AM

Aegon (AEG), the Netherlands’ second-largest insurer, seeks to better manage its risk after a disastrous performance during the recent financial crisis.

While the company is domiciled in the Netherlands, 70 percent of its pre-tax earnings come from the United States, where its Transamerica unit is based.

Life insurance accounts for more than half of Aegon’s pre-tax earnings. Individual savings and retirement products and corporate pensions are the two other biggest units.

In 2008, the company needed a 3 billion euro ($3.98 billion) bailout from the Dutch government. The stock market plunge ravaged Aegon’s balance sheet, resulting in a 30 percent hole in shareholder equity by the end of 2008, according to Morningstar.

The insurer finished paying back the bailout in 2011. Over the past two years, Aegon has adopted measures to better protect its balance sheet from volatile financial markets. For example, it has created hedges to guard its U.S. variable annuity assets in the case of stock market drops.

Some of the variable annuity products offer policyholders the chance for stock market returns but guarantee a minimum payout, even if the stock market plummets. That creates the risk that Aegon must hedge.

Fee fishing

More broadly, the insurer is shifting its emphasis to fee-based products from spread-based products. The spread-based products are troublesome because as the bonds owned by Aegon mature it must re-invest the proceeds at miniscule interest rates, thanks to central bank easing.

The company also is shifting capital to emerging markets, such as Turkey and China.

Standard & Poor’s analyst Tony Silverman has a hold rating on Aegon shares. “Aegon's restructuring is being achieved with what we view as broadly level underlying profitability and enhanced capital strength,” he writes.

Aegon shares produced an annualized total return of negative 4.2 percent over the past three years.

The company’s profit plunged 91 percent in the third quarter to 60 million euros ($79.7 million) from a year earlier. Revenue gained 2 percent to 1.6 billion euros.

Aegon next reports earnings Feb. 17.

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Thursday, 16 February 2012 08:28 AM
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