AEGON: Why not do a share buy-back?

Aegon (2,85 EUR, 3,33%) reported a decent set of 2Q11 earnings, with strong solvency after full repayment of the Dutch state aid and an AA-rating that has been confirmed by S&P with stable outlook. The closing of the TransAmerica Re and Guardian sale would free up € 900m of capital which Aegon can use at discretion. Buying back shares at over 70% discount to IFRS book value would in our view be the most sensible thing to do.

S&P confirmed Aegon’s AA-rating and raised the outlook to stable from negative. Aegon has a € 2.3bn buffer above AA-required capital o/w € 1.0bn at the Holding, which covers 1.5 times annual holding costs (Aegon’s own internal target).RBC solvency in the US (375%) and IGD solvency (c. 200%) do not require piling up more cash nor does Solvency II which has been postponed with one year. The closing of the TransAmerica Re sale would release € 600m of capital and the sale of Guardian wouldadd another € 300m.

A € 600m share buy-back would not jeopardize Aegon’s solvency or outlook, nor would it conflict with Aegon’s internal Holding cost coverage target. It would however create shareholders value since Aegon’s share price currently quotes at a 70% discount to IFRS book value per share (c. € 9 per share). It would also be EPS enhancing for slightly over 10% which would provide an offset for any EPS earnings growth Aegon may loose upon a further decline in USD/EUR.
Aegon’s exposure to peripheral countries at 30 June shows a quite manageable amount of € 867m (fair value), o/w € 745m was invested in Spain.

Our View:
Aegon’s investment case is based on valuation, growth prospects and the company resuming dividend payments now that the Dutch state has been fully repaid. Strong solvency and operating cash flows exceeding € 250m per quarter are also supporting our investment case and this despite expected further losses for customer redress in the UK, longevity in the Netherlands and the TransAmerica Re losses ($ 40m per annum) kicking in as from 3Q11 onwards. A share buy-back would in our view be EPS growth and valuation enhancing.

Conclusion:
We are upgrading Aegon from Accumulate to BUY with an unchanged target at € 7.0.