Aegon NV, the Dutch owner of U.S. insurer Transamerica Corp., said more steps are needed to meet a 2015 profitability target as interest rates remain low.
Aegon fell as much as 2.2 percent in Amsterdam trading after saying it’s on a path toward a return on equity, a measure of profitability, of 8 percent to 10 percent, assuming current reinvestment yields until 2015. That’s less than its 10 percent to 12 percent goal.
The insurer, which is sticking with its ROE target, will seek “further operating efficiencies” and review “low return businesses” to meet the goal, Chief Financial Officer Darryl Button said in a presentation to investors today.
Aegon plans to reduce borrowings by 1.1 billion euros ($1.5 billion) through debt redemptions in 2013 and 2014, The Hague-based company said today. Senior debt redemptions of 583 million euros in 2013 and 500 million euros in 2014 will add about 25 million euros to underlying pretax earnings a year, Aegon said.
The shares fell 2.1 percent to 5.15 euros by 1:28 p.m. in Amsterdam, paring this year’s gain to 7.2 percent. The 28-company Bloomberg Europe 500 Insurance Index advanced 10 percent in 2013.
Low interest rates put pressure on investment income at life insurers, which hold bonds to help back obligations on policies. Aegon’s targets, originally set in 2011, are based on an assumption the yield on 10-year U.S. Treasuries will rise to 4.75 percent in coming years. The notes currently yield 2.18 percent, and rates will probably remain low for at least the next 12 to 18 months, Button said.
“We still think rates will rise in the future, the question is when,” Button said. “We are going to take a hard look at our assumptions in the third quarter and we will update them at that time.”
“The lower return on equity for 2015, while understandable, is slightly negative,” said Cor Kluis, an analyst at Rabobank International in the Dutch city of Utrecht. “To reach their ambition, they could increase cost-cutting measures and focus on products that require less capital. And hope for interest rates to rise.”
Profitability was also held back by a transaction to exchange all preferred shares for 400 million euros in cash, completed last month.
Aegon said it plans to buy back shares to eliminate dilution from stock dividends, according to today’s statement. That announcement “somewhat offset” the negative effect of the lower return on equity, Rabobank’s Kluis said.
Since 2009, Aegon has reduced operating expenses by 8 percent. It will continue to cut costs, in its Dutch and U.K. units in particular, Chief Executive Officer Alex Wynaendts told investors today.