March 1, 2024 - AEG
Aegon's Bermuda Gambit: A Tax Haven or a Hedge Against European Regulation?
Aegon's recent redomiciliation to Bermuda has been widely interpreted as a move to a more favorable tax environment. While this is undoubtedly a factor, a closer reading of the Q3 2023 earnings call transcript reveals a more nuanced strategic play, one that may have slipped under the radar of most analysts.
Aegon's CEO, Lard Friese, explicitly states that the move is driven by the regulatory vacuum created after the divestment of their Dutch business to a.s.r. This divestment stripped the Dutch Central Bank (DNB) of its legal basis to regulate Aegon as a group, opening the door for a potential regulatory shift to the Spanish regulator, a scenario that neither Aegon nor the Spanish regulator deemed appropriate.
Bermuda, then, emerges not just as a tax haven, but as a strategic escape hatch from the potential complexities and mismatches of being a predominantly non-European company governed by European regulations, specifically Solvency II.
This move suggests a fundamental shift in Aegon's strategic thinking. By extricating themselves from the European regulatory framework, they gain a significant degree of freedom in managing their capital and structuring their business. This could have profound implications for their long-term growth strategy, particularly in their focus areas of U.S. strategic assets and growth markets.
Potential Benefits and Risks of the "Bermuda Gambit"
| Benefits | Risks |
|---|---|
| Increased Capital Flexibility: Operating under a Bermudan regulatory framework potentially allows Aegon to adopt more flexible capital management practices. This could translate into higher dividend payouts, more aggressive share buybacks, or even strategic acquisitions. | Regulatory Uncertainty: While Bermuda is a well-established insurance hub, transitioning to a new regulatory framework inevitably involves uncertainties. Navigating these uncertainties will require a deft hand from Aegon's management. |
| Enhanced Competitiveness: Freed from the constraints of Solvency II, Aegon could potentially offer more competitive products, particularly in the U.S. market, where they are striving to become a leading middle-market player. | Reputational Risk: Moving to a jurisdiction often associated with tax avoidance could invite reputational scrutiny, particularly from European stakeholders. Aegon will need to be proactive in managing these perceptions. |
| Strategic Acquisitions: The flexibility afforded by the Bermudan regulatory environment may allow Aegon to pursue acquisitions that would have been more challenging under Solvency II. |
Aegon's Q3 2023 Results: Highlights and Insights
Aegon's commitment to growing their U.S. business is evident in their Q3 results. Their strategic assets, particularly Individual Solutions (driven by WFG) and Workplace Solutions, are showing strong commercial momentum. Their commitment to agent recruitment at WFG (targeting 90,000 agents by 2025 and 110,000 by 2027) indicates ambitious growth plans.
Their strategy of focusing on the mid-market in Workplace Solutions appears to be paying off, with written sales more than doubling in Q3 2023 compared to the prior year. This focus on smaller plans, coupled with an increase in ancillary product sales, is driving profitability in this segment.
Despite the challenging macroeconomic environment impacting their U.K. Retail and Asset Management businesses, Aegon is actively adjusting. They are investing in technology upgrades for their U.K. platform, aiming to enhance user experience and competitiveness.
In Asset Management, they are streamlining their product offering, focusing on higher-margin strategies (alternative fixed income, responsible investing, and real assets), and implementing cost-saving measures to enhance efficiency and profitability.
The asset management partnership with a.s.r. is already yielding positive results, adding €16.2 billion in assets under management and an anticipated annualized revenue uplift of around €20 million.
Operating Capital Generation: A Look Ahead
A key indicator of Aegon's confidence in their strategy is their increased guidance for full-year 2023 operating capital generation (OCG) to around €1.2 billion, exceeding their prior guidance of over €1 billion. They are projecting OCG of around €1.1 billion for 2024, aligning with their Capital Markets Day guidance.
While this robust OCG is partially driven by positive operational variances and experience variances in the U.S. and other units, Aegon maintains that their long-term projections use management's best estimate assumptions, suggesting that the €1.1 billion guidance for 2024 represents a realistic baseline.
Chart: Aegon's Projected Operating Capital Generation (OCG)
Interestingly, while earnings on in-force are expected to grow due to the strong performance of their U.S. strategic assets, Aegon anticipates higher new business strain in 2024, indicating a willingness to invest for future growth, potentially fueled by the increased capital flexibility afforded by their move to Bermuda.
Conclusion: A Bold Move with Uncertain Outcomes
Aegon's Bermuda move could well be a turning point. It's a bold bet on their ability to operate with greater freedom and agility in a global market, prioritizing their focus areas while adapting to the changing dynamics of their European businesses.
The success of this gamble will hinge on their execution, their ability to navigate the uncertainties of a new regulatory environment, and their effectiveness in managing the potential reputational risks associated with a tax haven domicile.
"Fun Fact: Bermuda, despite its small size (only 21 square miles), is a global reinsurance hub, hosting some of the world's largest reinsurance companies. This concentration of expertise in risk management could prove invaluable to Aegon as they navigate a new regulatory landscape."
