Analyst Note| Henry Heathfield, CFA |
We are upgrading our capital allocation rating for Aegon to Standard from Poor. We maintain our fair value estimate and no-moat rating. Over the years, Aegon developed into a sprawling mess of a business that seemed to carry no defining strategy. The business had many fingers in many pies and didn’t seem to focus its efforts on doing or achieving one thing well through which it could establish a high-class reputation and franchise. While we think Aegon is still very far from achieving this, we believe that the recent capital allocation decisions taken by management have been good ones. Primarily, Aegon has focused on divesting noncore businesses as well as capital-intensive product lines that carry volatile earnings. While the overall strength of Aegon’s balance sheet isn’t topnotch, and distributions have been fair if not a little bit on the heavy side, given the operating circumstances, we fully support management’s decision to relocate capital from financial to strategic and growth assets. In our understanding, Aegon is set to focus more fully on accumulation business as well as asset administration in both the United States and the United Kingdom, where the company may be able to effect cross-sell protection opportunities. While this asset accumulation and administration model is not a particularly high-margin one, it can present captive asset dynamics, and customers who take up protection products will certainly more than offset those lower accumulation margins.