Aegon may trace its roots back to 1844, but chairman of the executive board Kees Storm, thankfully skips nearly 150 years of history, when bringing you up to date on the insurance group’s recent performance.
Post 1983 is the start of modern times for the Dutch insurer in his view, when the mutual AGO and the stock company ENNia merged. Then it was a provincial composite, 50% life and pensions and 50% non-life, and from this platform, it decided to carve out its future, based on where it saw markets going.
“We saw fantastic growth opportunities in the pensions business for many years. And that’s as true now as then, with a 10% pa growth in these markets forseeably,” he says. “I would be disappointed if it’s only 10%!”
The company decided to focus on this, without jettisoning the non-life business, but letting the pensions side grow faster. And how – 91% of group revenues emanates currently from life and pensions.
“In 1983, we thought the small Dutch market was saturated – fortuitously it wasn’t, but that made us look for expansion internationally. In particular, we felt the US was where we could grow by acquisition.”
Besides the internationaliation and focus strands to strategy, Storm adds these other key words ‘decentralisation’ and ‘profit-oriented’. “These have been the strategy for the past decade and longer. And it has worked for us as we have had uninterrupted profit growth for 19 years in a row.”
The first step was to the US, followed by Hungary in 1992 and in 1993, the first tranche of Scottish Equitable in the UK came Aegon’s way. “In order of profitability and size, first is the US, second Netherlands, third UK, fourth is Canada, then Hungary and Spain.” Now it has just achieved a licence for China for life and pension business and will move into operation there later this year after the announcement of its joint venture partner. “But we have a sizeable Taiwan operation too, which will help us there.”
Is there a European life and pensions market as such? “The answer is ‘yes’ and ‘no!’” says Storm. “Taking the ‘no’ first. As long as there are local governments in Europe, one tax law will never be harmonised and that is personal income tax, which drives many products. So the liability side of our business will be organised country by country.
“But the asset side of the business is not just a European market, it is a world market,” he maintains. The asset side of balance sheets will dramatically change with the euro. “People are now investing into sectors rather than countries. Eventually the group could have one asset management organisation, but it would be based in different places. Clients want to be serviced close to their manufacturers. So if they want to discuss issues and you are referred to outside your own country, you don’t feel as comfortable. Instead, you will go to a nearby provider, even if thy are part of a global operation.”
The ensuing consolidation in insurance asset management will be at country level first as the business will need to be much more concentrated than today, because of the pressures on margins requiring the low expense levels that only size can bring, he says. “But there will also be a flight to quality.”
Then there could be cross border movement, but he wonders what form will these take. “What will be interesting to see, when the insurance business in Germany shakes out, if there will be any cross-border mergers, so far that has not happened. Acquisitions are feasible, but that does not help the cost base.”
He is convinced of the role insurance will play as governments come out of providing pensions. “They can no longer deliver their promises to their people and have to fund more of their obligations. Governments will have to turn to insurance companies to help them build up pension provision.”
Aegon would like to team up with local players to use their expertise of the local systems, markets and distribution – as this is the name of the game for the future. “This is something we are looking at – the whole development is just getting going in Germany and in France and Italy it has not yet started.” Continental Europe outside the traditional haunts is going to be an exciting growth area.
When people predict the demise of life assurance, Storm just shrugs saying that while traditional life assurance may have vanished, and points out that 70% of the products the company sells didn’t exist 10 years go. “There is constant renewal of our product offerings.” So depolaristion in the UK, could provide the group with opportunities to sell through new distribution channels, with some companies disappearing as manufacturers and becoming distributors. “The UK is the champion in changing the rules all the time.”
He believes insurance has lost the stigma of being a high cost distributor. “The cost of delivery has been brought down dramatically. Our expense ratio in the Netherlands, excluding commissions, used to be 16% and it is now lower that 5% of premium income.” Aegon is more efficient than some of the others, but it is only the efficient ones that will survive. “We are now in competition with many other distribution channels and you have to have a low expense ratio.”
But he adds, the insurance business will always appear cumbersome, because customers will always need advice. “People don’t wake up one morning saying they are about to buy their pension through the internet today.” The more knowledgeable the client, the more need there is to give them good advice, he adds.
On European pensions issues, Storm believes ‘portability’ to be the biggest question now, particularly for the cross border movement of workforces, though this has not happened on any large scale so far, due to language and cultural differences. But it is the tax aspects that have been the stumbling block, not the insurance and pensions industry.
Storm is an accountant by background though he has been in insurance for the past 25 years or so, and for the last nine years has been chief executive of Aegon. At the end of 2001, he gave his views publicly on the move towards international accounting standards for the insurance business. Commenting then on the Boots pension fund move from equities, he said such moves were not in the best interest of pension fund members and insurance policyholders, given the outperformance of equities over bonds “over many, many years”.
He fears that introducing the new international standards as a ‘big bang’ in 2005 will send the wrong signal to policyholders, shareholders and other stakeholders and see a withdrawal by financial institutions from the equity markets, as well as increasing the cost of capital. But he welcomes ‘fair accounting principles’ being brought in gradually and in a controlled way say initially by notes to the accounts.
In July, having reached the retirement age of 60, he relinquishes the reins of the chairmanship of the executive board to Don Shepherd, but joins the group’s supervisory board then. He leaves Aegon ranking fifth by market capitalisation in the world table of insurers and seventh in terms of assets. Quite a legacy.