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Capital strength in focus as AEGON diversifies dividend stream

AEGON NV's focus on strengthening its capital position is paying dividends — something its Dutch business is expected to resume doing in the literal sense.

The Dutch insurer's CEO and CFO on Aug. 10 reconfirmed a commitment to return €2.1 billion to shareholders between 2016 and 2018, after announcing a host of measures to strengthen the overall capital position, including a €1 billion injection into the Dutch business. The company noted that it received a €365 million regular interim dividend from the U.S. business and a €176 million special dividend from Asia, "strong cash flows" that provide AEGON with "the financial flexibility to inject capital into its Dutch business."

A revision to the way in which the capitalization of AEGON's U.S. business is reflected increased the group solvency ratio by 15 percentage points in the second quarter, and the company also reached agreement with the Dutch central bank on how to interpret the loss-absorbing capacity of deferred taxes. The change to the U.S. methodology was agreed with the Dutch central bank and "better reflects the capital strength of our U.S. business," CFO Matt Rider told analysts during a second-quarter earnings call.

Sales of businesses and capital generation across the group increased AEGON's solvency ratio by another 13 percentage points to 185% at the end of June, within the insurer's enhanced target range of 150% to 200%.

"We look at all our businesses, and if they don't fit our strategical objectives we will take action, and also when we see that we're unable to achieve scale," CEO Alexander Wynaendts said, after the group announced the sale of its Irish business along with its second-quarter results. The transaction is expected to close in the first quarter of 2018.

As well as divesting underperforming units such as the Irish one and Unirobe Meeùs Groep BV, which AEGON Nederland NV agreed to sell to Aon Plc subsidiary Aon Groep Nederland BV on Aug. 8, AEGON also announced steps to resolve long-standing concerns about the capital position of its Dutch business. These include the UMG sale and a €1 billion capital injection into the business,

The measures will raise the Dutch division's solvency ratio to a pro forma 175% as of June 30, up from the reported 144%, and enable it to pay a 2017 dividend to the group of €100 million. AEGON raised the target solvency ratio for the business to between 150% and 190% from 130% to 150%, which it said would enable the division to absorb market volatility.

"We felt that it was important that they start resume paying dividends and act like a normal insurance company, taking normal risks, paying normal dividends," Rider said. "This is part of a hygiene factor, frankly."

'Well-balanced' dividend contributions

The group's underlying earnings increased year over year for the fourth consecutive quarter, with second-quarter net underlying earnings of €390 million compared to €312 million in the year-ago period. Underlying pretax earnings rose 23% on a yearly basis to €535 million from €435 million, beating consensus by 8%, according to a RaboResearch note released Aug. 10.

As AEGON's second-quarter unaudited net income came in at €529 million, compared to a loss of €385 million a year earlier, the group announced an interim dividend of 13 cents per share, level with the interim and final payouts for 2016.

"In the remainder of the year, we expect to receive another 1.3 billion in regular dividends and proceeds from recently announced divestments," Rider told analysts. "This is more than sufficient to also cover our group dividend."

Asked by an analyst whether it was "efficient for shareholders" to have most of the dividend stream provided in U.S. dollars by AEGON's strong U.S. unit, Wynaendts said: "Going forward, there will be much better balance from where we are going to get our dividends. The Netherlands will be paying a dividend going forward; the U.K. has paid a dividend; Asia [has, too].

"So, the balance actually has improved, and what is important for us is to have a company that is well balanced but also to recognize that the U.S. is ... the largest market in the world, and we are very pleased with the very strong presence we have in the U.S. and the fact that we perform very well."

The Americas division contributed €341 million to the group's €535 million in underlying pretax earnings.

AEGON also announced that it would issue €500 million of one-year senior debt in the third quarter, enabling it to complete the Dutch business capital boost by Sept. 30. Rider said this was "to pre-fund some of the cash flows coming into the holding later this year. This will temporarily increase our leverage ratio, but we still expect to remain within our target range of 26% to 30%."