Aegon NV is considering buying longevity reinsurance and tapping private equity to unlock capital from its Dutch life insurance business.
Aegon, along with its first-half earnings, said its Netherlands unit's Solvency II ratio slipped below the 155% low point of its target range. The company said this was driven by market movements, including a widening of mortgage spreads, which reduced the value of Aegon's mortgage portfolio on the asset side, and spread tightening in the bond market, which created a mismatch that increased the value of its insurance liabilities.
Private equity interest
Alex Wynaendts, Aegon's outgoing CEO, told analysts on a conference call that the company would take action to bring the ratio, which stood at 152% at quarter-end, back "into at least the middle of the target range" to ensure the Netherlands unit could continue paying dividends up to the group. He said the company was considering "a number of actions" to hit that goal.
Buying longevity reinsurance for the Dutch life book was "an action we hope to take before the end of the year," he added.
The pending sale of Dutch insurer Vivat's life business to private equity-backed reinsurer Athora Holding Ltd., and other private equity interest in buying Vivat, marked the entry of that type of investor into the Dutch life market. Wynaendts said this is creating "a new environment" and offered "much more optionality around the back book," potentially suggesting that Aegon could sell all or part of its closed Dutch life business to private equity.
Executives on the call did not specify on whether or how much of the Dutch back book would be sold to private equity. But, noting the private equity interest in long-duration Dutch life liabilities, Aegon CFO Matt Rider said the company would "look at all options" to "unlock capital."
Some of those options "could ultimately have strategic consequences for the structure of the group," he said, and Aegon will take time to think about how best to optimize the capital structure of the Netherlands unit.
However, Rider stressed that the company would not wait for new CEO Lard Friese, formerly CEO of rival insurer NN Group NV, to take over in May 2020 before deciding what to do.
"We would not sit on our hands and wait to take action," he said.
News of the Netherlands unit's missed Solvency II ratio target came amid a tough first half for Aegon. While group net income was up 26% to €618 million, underlying earnings before tax were down 5% to €1.01 billion thanks to falls in the U.S. and the asset management business in particular. Return on equity fell to 9.6% from 10.1%, putting it below the company's 10% target.
Aegon's share price was down 6.67% to €3.50 as at 2:48 p.m. European time.