Aegon’s (AEG) strategic framework continues to center on simplification and growth. What initially attracted us is a very cheap valuation, but that isn’t really enough to warrant investment. However, when we map out a reasonable path to earnings, we find Aegon too cheap to ignore, though admittedly, it is still probably one of the lowest-quality names in our European insurance coverage and in the whole of the European insurance space. Within our valuation, we are much less interested in cost savings and much more interested in retirement product conversions and retention; this is particularly pertinent to the United States.
The market ascribes a 4.5% average return on equity to this business over the next five years, which we have backed out of the current valuation. We basically think this is a bear-case scenario with continuing high outflows and withdrawals and not factoring what we think now are better management incentives and control over the actuarial model and assumption environment. Our base-case return on equity averages 6.0%, in line with the business’ average profitability over the past 13 years.
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Henry Heathfield does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.