Aegon announces the divestment of its life reinsurance business, Transamerica Reinsurance, to SCOR, a global reinsurance company.
The divestment will result in a total after-tax consideration of USD 1.4 billion, consisting of cash proceeds of USD 0.9 billion with a further USD 0.5 billion in capital released. Aegon expects to upstream USD 1.1 billion to the holding company to support the repurchase of the remaining core capital securities issued to the Dutch State. Aegon has committed to repurchasing these securities by the end of June 2011.
Statement of CEO Alex Wynaendts
“We are pleased to have successfully concluded our discussions with SCOR on the divestment of our life reinsurance business. This transaction is consistent with our focus on Aegon’s core business and supports our aim to complete repayment to the Dutch State by the end of June. We are grateful for the continued dedication of the management and employees of Transamerica Reinsurance since announcing our intentions and are pleased to have identified a good home for this highly regarded business.”
Under the agreement, Aegon will divest its global life reinsurance activities with the exception of select blocks of business that are to be retained by Aegon. The retained businesses with a book value of USD 0.4 billion comprise mainly variable annuity guarantee business. The transaction, which consists of a number of reinsurance agreements, is subject to final approval of the relevant regulatory authorities and is expected to close in the summer of this year.
Benefits of the transaction
With this transaction Aegon makes further progress on a number of important strategic objectives. The company sharpens its focus on its core business of life insurance, pensions and asset management, while improving its risk-return profile, and reducing reinsurance reserve financing related to the divested life reinsurance business by approximately 50%. At the same time, the transaction supports Aegon’s aim to achieve a broader geographical balance in its capital allocation. The divestiture also supports Aegon’s key priority of repurchasing the core capital securities issued to the Dutch State.
Structure of the transaction
The divestment of the Transamerica Reinsurance business (TARe) will consist of a number of reinsurance agreements between various statutory entities and SCOR companies for the US domestic business. In addition, SCOR will acquire Transamerica International Reinsurance Ireland (TIRI) and will take over the operational assets and systems of TARe. Various Aegon companies have reinsured business to TIRI. Before the sale of TIRI, the business ceded from other Aegon divisions to TIRI will be recaptured by Aegon’s US statutory entities.
Aegon will maintain approximately half of the collateral requirements needed for reinsurance reserve financing. This obligation provides reserve credit security and will run-off over 15 years. SCOR will be assuming the remaining collateral requirements. While greatly reducing Aegon’s collateral funding obligations, the transaction will entail contingent exposure to SCOR. SCOR is a strong counterparty, rated A2/A by Moody’s and Standard & Poor’s, both with positive outlooks. For additional security certain amounts of collateral are placed in trusts.
The transaction will be accounted for as a reinsurance transaction between Aegon and SCOR. As a result, the divestment will have no meaningful impact on shareholders’ equity. Earnings on the business retained as well as amortization of prepaid cost of reinsurance will be reflected in the run-off businesses line in Aegon’s segment reporting. The reinsurance business being retained by Aegon, which is comprised primarily of the variable annuity guarantee business, is substantially hedged for financial market risks and produces normalized results which are negligible.
The transaction will result in an amortization of prepaid cost of reinsurance of approximately USD 40 million before tax per annum initially related to the business ceded. These costs are expected to trend down as the contracts mature. Transamerica Reinsurance realized underlying earnings before tax of USD 105 million in 2010.
The transaction is subject to various regulatory approvals in the United States and Ireland and is expected to close this summer.
|Transaction highlights of the divested life reinsurance business|
|Total consideration||USD 1.4 billion|
|Gross written premiums 2010||USD 2.2 billion|
|Net underlying earnings 2010||USD 102 million|
|Net income 2010||USD 102 million|
|IFRS book value 2010||USD 1.7 billion|
|Reinsurance reserve financing||Financing obligation reduced by approximately 50%.
The remainder will gradually reduce as reinsurance contracts mature.
|Prepaid cost of reinsurance before tax||USD ~0.6 billion|
|Amortization period||15 years|
|Annual amortization expense before tax||USD ~40 million|