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Aegon makes sweeping changes to supercharge solvency ratio

Published in: Risk management, Capital, Financial results, Regulation, Solvency II, RBC Worldwide, Accounting - tax, Investment risk - strategy, Pensions, UK, Rest of Europe

Companies: Aegon

Aegon has divested businesses, injected capital and negotiated with its regulator in a bid to raise the solvency of its group - and in particular its Dutch subsidiary. 

In the three months to 30 June, the group Solvency II ratio rose from 157% to 185%, while the ratio for the Aegon NL business soared by almost 40 percentage points (pp) from 144% to roughly 175% on a pro forma basis.

Earlier this week, Aegon announced the sale of its Dutch financial advisory business UMG. Today (10 August) it revealed the sale of Aegon Ireland, a provider of unit-linked guarantee and offshore bond products predominantly in the UK, to AGER Bermuda Holding – the holding company of the European operations of Athene Holding – for roughly $210m.

But these divestments had minor effects on solvency compared with other actions taken by management during the quarter.

Dutch capital injection

Aegon NL’s solvency ratio benefitted by 6pp from the UMG sale, but received a 25pp boost through a €1bn ($1.2bn) capital injection from the group that will be complete by the end of the third quarter. This is being part-funded by the issue of €500m one-year senior notes. 

“Risk profile enhancements” added 5-10pp during the quarter. This included de-risking actions such as selling €1bn of mostly BBB-rated corporate bonds, and internal model improvements including amending the credit risk shock for non-safe haven sovereigns.

Aegon also finally reached agreement with the Dutch regulator over how much contribution to solvency that insurers can assume from the loss absorbing capacity of deferred taxes (LAC DT).

Different regulators in the EU have assumed different levels of benefit from LAC DT and it has been a particular issue for Dutch firms. This has been settled at 75% for the second quarter; this is unchanged from previous guidance, but will be reviewed each quarter.

Aegon’s chief financial officer Matt Rider said the higher capital ratio will allow Aegon NL to make investments “to capture opportunities we see in the Dutch market, an important one being the market-wide shift from defined-benefit to defined-contribution pensions.”

As part of that strategy, Aegon NL will maximise the value of its back-book by optimising the risk-return profile.

To achieve this, Aegon will invest €3-4bn in illiquid assets over the next two years, which is expected to improve capital generation by €50m once fully completed. The sale of the corporate bonds is linked to this move.

Aegon also set a new capital policy for the NL business, which is now targeting a 150-190% solvency range, up from 130-150%.

Group ratio benefits from US RBC factor

At the group level, Aegon also negotiated with the regulator on the solvency conversion methodology for its US business, bringing it more into line with guidance from the European Insurance and Occupational Pensions Authority.

The methodology change involves dropping the conversion factor to 150% from 250% and reducing own funds by 100% of the US risk-based capital requirement to reflect transferability restrictions. This resulted in a 15pp boost to the group solvency ratio. The methodology will be reviewed annually.

The sale of Aegon Ireland added approximately 2pp to group solvency ratio while UMG added 2.5pp, on top of to two transactions announced previously: the Part VII transfer to Rothesay Life (+2pp) and the divestment of the US run-off business (+5pp).

The group also raised its capital policy and is targeting 150-200%, up from 140-170% previously.

Aegon is pledging to return €2.1bn to shareholders over 2016-18.

Among the drags on capital generation is the impact of the change in the Solvency II ultimate forward rate (UFR). This is set to drop by 15 basis points to 4.05% in 2018 and will mean the business generates €150m less capital. The move to illiquid investments will also produce a capital strain of roughly €100m.

Christopher Cundy