Aegon N.V. has become the latest financial services giant to change its strategy in the United States.
Based in The Hague, in the Netherlands, Aegon has the equivalent of about $442 billion in assets.
The company is best known in the United States as the parent of Transamerica, a company that has been a major player in the U.S. life insurance annuity, long-term care insurance (LTCI) and worksite benefits markets.
- A link to the Aegon Capital Markets Day presentation is available here.
- An article about Prudential PLC’s realignment strategy is available here.
Aegon acquired Transamerica in 1999, when it was based in San Francisco, and when a typical high-grade U.S. corporate bond yielded about 7.5%.
Today, a typical high-quality U.S. corporate bond is yielding only about 3%, and is only about 2 percentage points more than 10-year Treasury bonds.
The low bond yields and the low “spread” between corporate bond rates and Treasury bond rates, mean that life insurers have a hard time using high-quality investments to generate the kinds of investment yields that traditionally have helped support many types policies.
These include LTCI policies, disability insurance policies, life insurance guarantees, annuity guarantees, and other types of products with benefits that typically go out far in the future, or that are designed to pay streams of benefits that are designed to last for several years.
Companies like MetLife Inc., AXA S.A., Prudential PLC and American International Group Inc. have started or completed major transformations in recent years, in part because of concerns about low interest rates.
Aegon gave signs that change was coming when in June Lard Friese, Aegon’s new CEO, hired Duncan Russell to be its chief transformation officer.
The company sent out another signal when, on Oct. 29, it announced that it had completed the sale of its iconic Pyramid building complex in San Francisco for $650 million.
Aegon executives then spelled out what kinds of changes are ahead for the U.S. operations last week, during a Capital Markets Day web meeting.
Here’s a look at four things company executives said about the U.S. operations during the web meeting.
1. It is separating the businesses in its core markets, including the United States, into two categories: financial assets and strategic assets.
Aegon is assuming that strategic asset businesses have a greater potential for an attractive return on capital, and it’s trying to expand those businesses.
It sees the financial assets businesses as being capital-intensive with relatively low returns on the amount of capital employed. The company is closing the blocks of insurance policies and annuity contracts in those businesses to new sales.
2. Aegon has classified some of the high-profile products that Transamerica has been selling as strategic asset products.
The list of products in the strategic assets category includes:
- Individual life insurance policies.
- Individual investment products.
- Worksite solutions products, including small retirement plans.
- Accumulation variable annuities, without significant exposure to crediting rate guarantees.
3. Aegon has classified other high-profile products that Transamerica has been selling as financial asset products.
The list of products in the financial asset categories includes:
- Stand-alone individual LTCI.
- Variable annuities with significant, interest-rate-sensitive living benefit riders and death benefit riders.
- Fixed annuities.
4. Transamerica may do more with the financial asset product blocks than simply ending sales of new insurance policies and annuity contracts.
“We are reviewing the potential to implement a dynamic hedging strategy for variable annuities with income and death benefit riders,” the company says in a summary of its Capital Markets Day presentation.
“Subsequently, we will consider a broad range of options for this block of business. Furthermore, we will take actions to reduce the interest rate sensitivity of our U.S. business through asset-liability management and other management actions,” it states.
— Read MetLife May End Up Looking More Like Af)lac and Unum, on ThinkAdvisor.