BofA Turns Bearish On Aegon, Cites Potential Long-Term Care Squeeze, Dividend Limitations

Shares of the Dutch company Aegon N.V. (ADR) AEG have outperformed American and European peers since the start of 2018, but Bank of America Merrill Lynch sees two risks in the stock that led to a downgrade Friday. 

The Analyst

BofA's Michael van Wegen downgraded Aegon from Neutral to Underperform with a price target lowered from $5.90 to $5.40.

The Thesis

Since the start of 2018, Aegon's stock outperformed peers by 5-10 percent, which implies the P/E discount to the sector has now been reduced to 20 percent, van Wegen said in the downgrade note. The stock's price offers a 5.1-percent dividend yield, which is short of the 5.3-percent industry average.

Aegon faces two notable risks, the analyst said:

• Aegon's long-term care insurance business is the sixth-largest in the market, but the relatively old age of its policyholders implies minimal flexibility to increase premiums at a time when the company's premiums and reserves per policy are "relatively low," van Wegen said. The company could face a potential reserve deficiency of $1 billion to $3.6 billion, which translates to 50-173 percent of risk-based capital.
• Aegon's quality of capital will likely impact its ability to increase its dividend payout, the analyst said. 

Price Action

Aegon shares were down 3.34 percent at the time of publication Friday afternoon.

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