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Aegon Continues Restructuring to Repay Dutch Government, Considers Selling U.S. Reinsurance Business

Source: Dow Jones

Posted on 22 Jun 2010

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Netherlands-based life insurance and pensions giant Aegon NV said Tuesday that it is considering a sale of its non-core U.S. reinsurance business and that it will further revamp its activities in the U.K., as it seeks to raise cash to repay the Dutch government.

Aegon said it is studying the sale of Transamerica Reinsurance, the U.S.'s third-largest reinsurer, with a book value of EUR1.6 billion. It said the unit has "a limited strategic fit" with its core business and that it is looking for a "suitable buyer." Transamerica Re is just a portion of Aegon's Transamerica Life Insurance operation in the U.S.

Aegon, which presented its plans at an investor day in London, also announced a restructuring at its struggling U.K. operations, a move that will save it some GBP80 million, or 25%, of its annual costs by end-2011.

The announcement follows a U.K. media report over the weekend that Aegon would sell the business, a move that some analysts said was doubtful but which nevertheless gave Aegon shares a boost in past days.

The restructuring involves exiting the bulk-annuities market in the U.K. to focus more on building a strong position in private pensions, Aegon said.

The strategic update, which also included a sharper focus on emerging markets, illustrates that Aegon continues to focus on bolstering its capital buffer as it seeks to shield itself from market volatility and as it has to put aside extra money to repay EUR2 billion to the Dutch state.

Aegon got a EUR3 billion capital injection at the height of the financial crisis, of which one-third was repaid in December through selling new stock. "Repaying the Dutch state remains top-priority," Chief Executive Officer Alex Wynaendts said.

Analysts welcomed the new measures, saying they will help the company to repay the government as soon as possible.

"We think this is the best way to accelerate repayment...which we regard as one of the main potential catalysts for the stock," Nomura analyst Nick Holmes said in a note to investors. Holmes has a buy rating on the stock.

Citi analyst William Elderkin said Aegon's plans are "supportive of our core investment thesis, that Aegon should be able to redeem its remaining EUR2 billion Dutch government capital from internal resources."

On this basis, Elderkin said the stock's 30% discount to its U.S. life peers should close over time. He kept his buy rating.

At 1255 GMT, Aegon shares were down 3% at EUR4.95, partly on profit-taking following last week's rally, analysts said, and underperforming the AEX market in Amsterdam, which was down 0.8%. In an interview with Dow Jones Newswires, CEO Wynaendts said the cost cuts in the U.K. will require "significant" cuts among staff numbers, but added that it was too early to give any numbers. "But it's fair to say there will be a significant impact on employees if you want to reduce costs by 25%," he said, adding that the cuts would be seen "across the board" and not just the bulk-annuity and individual pensions businesses it is scaling down.

Aegon's U.K. website says there are around 4,450 staff in Britain.

Despite the exit from some businesses, Wynaendts said Aegon is also looking at expanding its non-life business.

"We think there is benefit in some of our markets to expand the non-life business...In a lot of these markets, there is a close connection between life and non-life in terms of distribution, so the agent and distribution channel is the same one. That's the case for Holland, Central Eastern Europe and Hungary," he said.

He also said it will take a while before the company looks at potential acquisitions.

"Our focus is on getting approval [for receiving state aid] from the European Commission, then we'd have to pay the EUR2 billion [to the Dutch government] before we start doing acquisitions," he said.