(Bloomberg) — Aegon NV fell the most in more than two years in Amsterdam trading after earnings missed analysts’ estimates on a revision to life expectancy models related mostly to people in the U.S. 85 and older.
The stock slid 6.1 percent to 6.10 euros today, the biggest drop since June 1, 2012. The shares were the worst performers in the 32-company Bloomberg Europe 500 Insurance Index.
Aegon, the owner of U.S. insurer Transamerica Corp., had net income attributable to shareholders of 52 million euros ($65 million), down from 236 million euros a year earlier, The Hague- based company said in a statement today. Earnings missed the 161 million-euro average estimate of four analysts surveyed by Bloomberg.
Aegon said changes to actuarial assumptions and updates of its models led to 299 million euros in charges to strengthen reserves in the U.S. Emerging experience supplemented by industry studies led to the revisions, mainly relating to those 85 and older, Chief Executive Officer Alex Wynaendts told analysts today. The insurance industry has limited experience with that group, he said.
The impact on underlying pretax earnings was 221 million euros, compared with 178 million euros foreseen by three analysts surveyed by Bloomberg. Each year in the third quarter the company reviews its assumptions on how long people live, which form the basis for estimates on future payout obligations on life insurance policies and retirement products.
The revisions will reduce pretax earnings by 20 million euros a quarter on a recurring basis, Aegon said.
“I am clearly disappointed by the outcome,” Wynaendts said. “We will be looking at all options available to mitigate this impact as much as possible.”
The quarterly earnings cut amounts to about 3 percent to 3.5 percent of underlying profit, said Cor Kluis, a Rabobank Groep analyst.
“We have to negatively revise our earnings going forward for this,” he said.
Net income also included a 296 million-euro loss on fair- value items, including derivatives and also reflecting revisions in assumptions regarding interest rates and equity returns. That compared with a loss of 457 million euros in the third quarter of 2013.
Return on equity, a measure of profitability, fell to 5 percent in the third quarter from 8.8 percent in the second. Excluding changes in the assumptions and the model, it would have been 8.5 percent, the company said. Aegon is cutting costs and reviewing under-performing operations to boost returns to 10 percent to 12 percent by next year. It announced last month it reached a deal to sell its Canadian operations to Wilton Re. The proceeds will be used to reduce debt and should help boost return on equity by 40 basis points, it said. A basis point is one-hundredth of a percentage point.
Sales rose 38 percent to 2.33 billion euros as gross deposits increased to 15.2 billion euros and new life sales advanced by 34 percent.
“It’s obviously a quarter that’s been impacted by these one-offs,” Chief Financial Officer Darryl Button said in a telephone interview. “If you remove the one-offs, underlying earnings were 512 million euros, so the rest of the quarter was actually pretty good. Sales and top line was outstanding.”