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‘Insurance Cut’

15 August 2019 by jbchevrel

At the risk of disappointing my readers, this isn’t about the Fed. AEGON sub cash fell up to 2c today. The main reason is that the insurance company’s Solvency II ratios fell aggressively due to ‘adverse market impacts’. AEGON 5.625 PERP c29 fell 2c indeed, its biggest drop since it was issued in last March. 4% T2 44 c24 fell 1c. The initial reaction of the market was thus very bearish although no big reaction in CDS space: snr CDS 5y +2 sub CDS 5y +4 while the stock was down -8%. AEGON’s Solvency II ratio in the NL fell to 152% from 181%, below the minimum >155% target. At a group level, Solvency II ratio came 197%, -14%but still closer to the high end of the [150%-200%] target range. Reasons for the drop include a tougher regulatory approach to capital requirements for illiquid assets, spreads tightening in bond markets and wider credit spreads on Dutch mortgages. On the latter, it is worth noting that mortgage spreads have kept widening since the end of the reporting period. Fair value losses amounted to c€400m. That included in the Netherlands c€460m, especially due to c€1.4B “strengthening of insurance provisions as result of shortfall in Liability Adequacy Test driven by credit spread movements”. Moreover, AEGON suffered FV losses in UK (c€75m) mainly due to equity hedges due to rising equity markets. Those were (only very) partially compensated by fair value gains of c€160m in the US. On top of that, at the second order, AEGON’s UK platform saw c€2.8B net outflows so far this year. This follows issues in 2018, lasting for several months. The extra cost to compensate clients on top of that was anecdotal (£3m). The interim dividend was raised 7% despite all that, funded by an extraordinary £100m dividend from the UK. At a group level, underlying PBT fell -5%y, ROE fell to 9.6% from 10.2%. Later on, the session was characterised by a tighter wider tighter move, mainly due to ECB’s Rehn. The Finnish GC member shook the market, commenting in an interview that the ECB should ‘over-deliver’ in September. This caused an immediate rally in CDS, stocks. In rates space, that pushed Bund yield below -70bp and September ECB OIS at -17bp. So now, even a 20bp cut is barely over-delivering... At the close, we are tighter in 5y CDS (snr -1 sub -4) and the stock is still down -8%. That stock drop is the steepest on an intraday basis since June 2016. The perps confirmed their loss, down about 2c on the euro.