(AEG) Aegon NV Reviews Strategic Measures To Dispose Of Units

On Tuesday, Aegon NV (AEG) stated that it will consider options to dispose its US-based life reinsurance unit Transamerica Re and restructure its business in the UK, as it intends to realign and enhance focus in its core businesses.

The proposed sale of Transamerica will help Aegon shed its investment risk in its U.S. variable annuity business, while shifting its focus to fee-based products from spread-based products and expanding the pensions business. In addition, it will help reallocate capital to growth markets and seek opportunities in Central and Eastern Europe, Asia and Latin America.

Since its acquisition in 1999, Transamerica has been credited with helping Aegon become a leading life reinsurer in the United States and internationally. However, Aegon believes that Transamerica cannot support Aegon’s core activities over the longer period of time. Consequently, Aegon is seeking a suitable buyer for the unit.

Aegon believes that US-based competitors such as Reinsurance Group of America Inc. (RGA), Berkshire Hathaway Inc.‘s (BRK-A) reinsurance unit General Re, and Germany’s Hannover Re could be the possible acquirers of the unit, as life reinsurance is a very specialized business and economies of scale hold importance.

In the past year, many such deals occurred in the reinsurance industry, such as PartnerRe Ltd.‘s (PRE) buyout of smaller rival Paris Re for $2 billion and Warren Buffett’s Berkshire Hathaway adding a 3% stake in Germany’s Munich Re.

On the other hand, in the UK, the markets have not been generating satisfactory returns for two years. Consequently, Aegon planned to sell its UK arm entirely. However, Aegon considered restructuring instead of disposal of its unit to maintain its presence in the market.

Accordingly, Aegon is carrying out significant measures to reduce costs in the unit’s life and pension operation by 25% by 2011 through improving the return on capital from 2.7% in 2009 to between 8% and 10% by 2014, and generating cash flow of GBP 600 million to GBP 650 million between 2010 and 2014.

The measures include plans to enhance its focus in the At Retirement and Workplace Savings markets, as these are prospective markets for growth in the future. In contrast, Aegon will depart from the bulk annuities market in the UK, as this business is not profitable enough. However, the company is looking forward to further investing in the UK personal private pensions market.

Aegon has been considering significant actions to perk up the growth and returns from its businesses globally since June 2008. In the past two years, as part of these measures, Aegon stepped into the growth markets of Brazil and India and has sold its life insurance operations in Taiwan, freeing up €5 billion.

Besides Aegon, other financial services groups such as Prudential plc (PRU) and Metlife Inc. (MET) have sold their insurance wings in Taiwan. Also, American International Group Inc. (AIG) is expected to sell its Taiwan unit by October 2010.

On the whole, we believe that following Aegon’s sale of its unit and strategic realignment, the company should make an effort to repay the remaining €2 billion ($2.5 billion) bailout fund it received from the Dutch government at the peak of the financial crisis in 2008. However, this requires the final consent of the European Commission, the outcome and timing of which are not known.

Zacks Investment Research

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