AEG - Aegon Q3: Transamerica Is Delivering With Solid Return Prospects

2023-11-17 17:48:42 ET

Summary

• Aegon's Q3 financial results show continued commercial momentum in the US and solid operating capital generation.
• The company's Transamerica brand delivered superior growth.
• Aegon's attractive capital return remuneration includes a share buyback program and a tasty dividend per share, offering a potential yield of 24.6% in the next two years.

Aegon just released its Q3 financial results (NYSE: AEG ), and our favorite Dutch insurer (once again) delivered a robust set of numbers. After the Netherlands operation sale, Aegon's " transformation " plan continued to surprise the market. Starting with th e CEO's words : “ For the third quarter in a row, we saw continued commercial momentum in the US and strong overall operating capital generation, which benefited from exceptional items ."

Thanks to its Transamerica brand, which focuses on life insurance, investments, and retirement solutions, the company has simplified and optimized its corporate structure by selling Eastern and Central European businesses while focusing on the U.S. area. Looking at the numbers, Transamerica’s assets continued to deliver superior growth.

Q3 Results and Our Take

1. In H1, Aegon's operating capital generation reached €620 million, accelerating in Q2 (€328 million); this positive trajectory was also performed in Q3. In numbers, the company delivered €354 million in the quarter with a plus 16% compared to Q2 2022. This was supported by revenue growth and improved underwriting variances. Operating capital generation was also up 12% above the company-compiled consensus ;
2. Here at th e Lab, following Aegon Capital Markets Day in June, we maintained a bullish view on the company's attractive capital return rem uneration. As a reminder, in early July, Aegon started its €1.5 billion program, and looking at the numbers, the company bought back €473 million shares, completing 45% of the total buyback. Subject to regulatory approvals, the company intends to cancel up to 330 million shares. According to Reuters and cross-checking estimates on Ychart , Aeong's outstanding shares are approximately 1.92 billion; therefore, the company's EPS could increase by 17%. Even accounting for the remaining €1.027 billion buybacks, the company cash at holding exceeds our internal estimates and is above the company's guidance set between €1 and €1.5 billion. In addition, Aegon confirmed its €0.4 dividend per share in 2025. This represents a yield of 8% at the current market price.
3. Driven by the a.s.r. transaction proceeds and FCF generation, the cash capital at holding increased to €2.9 billion. Depending on the speed of the buyback, it is hard to estimate the year-end cash at Holding. In our numbers, we forecast €3/€1.6/€1.75 billion in 2023/2024/2025. For this reason, we believe there is an upside to increasing shareholders' remuneration and, more importantly, Transamerica’s assets results eliminate a risk. In detail, the company showed progress in sales growth in the US, and Transamerica is reaching its full potential (Fig 2), fully offsetting the company's disposals. Individual Solutions generated new life top-line sales of $118 million with an increase of 10%, while the world financial group grew by 17% with almost 70,000 licensed agents. Workplace Solutions doubled its written sales with retirement plans at $1.8 billion. With the US results and a normalized capital generation, Aegon will be able to prevent a 100% payout on its capital generation. This was a hostile take from Wall Street, and we believe post Q3 results, analysts should re-price the company accordingly;
4. For the above reason, Aegon forecasted operating capital generation (OCG) to be around €1.2 billion compared with a prior target of €1 billion. The Dutch insurer previously expected to achieve the €1.2 billion threshold in 2025;
5. Following the Q2 results and post a.s.r. disposal, we were estimating a quarterly OCG of at least €280 million. We are now more in line with the upgraded guidance. Therefore, we decided to leave unchanged our EPS and target price. In the 2024/2025, we project operating capital generation at €1.19 and €1.25 billion with an FCF of €795 and €846 million. In addition, we might have another upside given the fact that Aegon will receive dividends from a.s.r. Thanks to its 30% holding in the company, which will

   be accounted for in group FCF. Our estimates already included a DPS of €2.8 (in line with last year).

Source: Aegon Q3 results presentation - Fig 1

Fig 2

Conclusion and Valuation

Aegon reiterated its 2025 objectives (Fig 3); however, we know it is already exceeding its internal expectations. Share repurchase is still in progress with a buyback yield of 10%, including a DPS of €0.33/€0.4 in 2024 and 2025; this equates to a cumulative yield of approximately 14.6%. Combining dividend and buyback yield puts the Dutch Insurer on track to return 24.6% in shareholders' remuneration over the next two years. Here at the Lab, we positively view the OCG development in the US, and on conservative estimates (we were already above Wall Street numbers), we valued Aegon at an earning per share of €0.8 in 2024. With a P/E of 8x, we leave our buy rating target price unchanged at €5.7 and $6.1 in ADR. Therefore, we have a 14% potential capital upside appreciation and a 24.6% cumulative yield.

Fig 3

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