ALIZY - Aegon: Limited Exposure To Credit Suisse's AT1 (Rating Upgrade)

2023-03-29 16:00:47 ET

Summary

• Aegon N.V. has a €3 million exposure to CS's AT1 bonds.
• The company has sufficient liquidity in hands and is well above the regulatory capital requirements. So, this is a negligible impact.
• Core dividend yield, ASR deal, and Cash at Holding make Aegon N.V. a clear buy.

After our recent deep-dive into the EU banking environment, today we are analyzing Aegon N.V. ( AEG ). Why?

It's not just banks that have exposure to Credit Suisse Group AG's (CS) Additional tier 1 bonds (which were devalued to zero for the UBS merger), but also insurance companies. As a reminder, the FINMA (Switzerland's financial markets regulator) provided more information explaining the complete write-down of AT1 bonds issued by Credit Suisse following the bank's bailout. In the note , we report that " the AT1 instruments issued contractually provide a zero value if a triggering event occurs, in particular, if extraordinary support is granted by the State. " Therefore, since Credit Suisse was granted liquidity with a federal guarantee, these contractual conditions were met. In the note, the Swiss authority specified that the Tier 2 bonds will not be written down.

Well, looking at our insurance coverage, only three companies have exposure to Credit Suisse AT1s: Aegon with €3 million, Zurich Insurance Group AG (ZURVY) with $2 million, and Allianz SE (ALIZF) with €1 million. UK life insurers have almost no exposure to bank AT1s, as these bonds are not eligible. Despite this, since early March, the STOXX 600 Insurance Index is down by almost 9%.

In detail, Aegon was heavily penalized, losing almost 25% of its entire market cap. Aside from the €3 million exposure of CS's At1s, our favorite Dutch player has only €20 million of total exposure to bank AT1s.

At the aggregate level, AT1 investments are " almost " non-investable assets because the risk/reward profile is very low, given the high capital requirement. European insurance companies are not overexposed to Credit Suisse's total bank debt and its negligible in terms of Credit Suisse's At1 instruments. In addition, we should emphasize how the EU insurance regulator ((EIOPA)) set a very strict regulatory framework within the sector.

Why are we still seeing capital upside potential in Aegon?

1. As already mentioned in our Q4 update , the company's solvency II ratio requirements are above the regulator standards in all areas. In detail, the UK, the U.S., and the Netherlands reached 169%, 428%, and 210% respectively. This provides a key margin of safety (in the case of the likely three million CS's write-off);
2. Important to note is that the company's cash holding increased by €200 million from €1.4 billion to €1.6 billion. This was due to higher core capital generation;
3. Thanks to Aegon's latest operation (merge with ASR), the company will receive €2.5 billion in cash. €700 million will be used for deleveraging purposes and this will enhance the company's financial solidity;
4. The company announced a DPS of €0.30 (yield of 7.6%) and coupled with the €1.8 billion ASR deal, Aegon might return an additional yield of 23%;
5. With a 30% estimated return this year, and a solid company with guidance of at least " €1.0 billion in the operating capital generation, " we decide to confirm our buy rating with a target price for Aegon N.V. of €5.7 and $6.1 per share.

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