Profile: Mark Laidlaw, CFO of insurance giant Aegon

Not many people will necessarily be familiar with Aegon, the life insurer. A
Dutch conglomerate, its UK arm, which trades under the better-known brand of
Scottish Equitable, is nonetheless the ninth largest company in Scotland, as
measured by a combination of sales and profits by the magazine Scottish Business
Insider.

Aegon UK manages some $40bn (£23bn) in assets, generating £4bn of revenues
last year and £150m in profits. Its parent company, Aegon NV, is the 13th
largest insurer in the world, valued at $21bn. Despite all this, Aegon retains a
certain anonymity.

The striking thing about the business, and something that springs out when
you talk to CFO Mark Laidlaw, is the degree of reporting changes insurers like
Aegon have had to face.

The company was among the first to move to IFRS. ‘We took a view at Aegon
that we would go out early and restated all of 2004 in April 2005,’ Laidlaw
says. ‘We believe in complete transparency for the analysts.’

The first phase, he adds, has ‘affected a reasonable proportion of our
business’.
He warns that IFRS will be an even bigger issue in 2008 and 2009, but seems
breezily unconcerned by the issue.

Wasn’t the accounting for derivatives bit even a little bit difficult?
Apparently not. As Laidlaw tells it, there is no problem ‘as long as your data
is good and solid from your asset management guys’. And as far as Aegon is
concerned, the data is good, he says.

On top of IFRS, there are also regulatory concerns, solvency measures.
‘We’ve got Solvency II for life companies coming up. IAS and Solvency II will
start coming together,’ he says. But he doesn’t sound overly concerned. ‘We’ve
got to monitor both of those areas. It’s just looking at your company and
asking: “What’s the economic risk? What guarantees do we have and when do these
become exposed?”.’

Solvency IIwill see the FSA moving to something called realistic solvency,
effectively in advance of European regulators. All of these changes have created
extra work for the actuaries at Aegon.

‘For the actuarial function a huge amount of work has gone into building the
models, systems and processes that allow us to build these documents for the
FSA,’ he
says. ‘It is essentially the start of moving towards an economic basis for how a
life company looks.’

So how much does all this cost? ‘It’s very heavy in the resources you put
into it,’ he explains. ‘We were working on IFRS as well as normal reporting last
year. In terms of the actuarial work, 30% to40% of our actuarial function has
been devoted to calculating Solvency II over the last 18 months. Is it
expensive? It’s an opportunity cost.’

And there are benefits, he adds in the carefree fashion that seems to run
through his character. ‘It does give you a much better understanding of what
risks you are running in the business. You can think: “Let’s kick off
programmes. Let’s work on risk mitigation. Let’s work on what risks we’re
running. Can we control them? Do we benefit from selling different types of
contracts?” We like to use this as a management tool as opposed to a tick-box
mentality.’

As if Laidlaw didn’t have enough on his plate, the Aegon group also has US
GAAP, embedded value reporting and the small matter of Sarbanes-Oxley to contend
with.
So after compiling all the numbers, presented them in different ways to
different people and met all the reporting criteria around the globe, how does
Laidlaw think the business looks? Are things going well?

He is very upbeat. ‘We are in a great position,’ he enthuses. ‘We have a
really dominant position in pensions and we’re now diversifying into traditional
products.’
Last month the company announced a push into the annuities market and aims to be
a top five player by 2007. At the time, Otto Thoresen, Aegon’s UK CEO, outlined
the rationale behind the move.

‘Annuities are an area where life companies have a natural competitive
advantage over other players in the long-term savings market,’ he explained.
‘The market is currently dominated by just a few companies and we see
significant opportunities for growth. As people live longer, there will be
greater demand for the regular income stream an annuity provides, as part of an
overall retirement investment plan.’

Laidlaw explains that, in general, the company feels the need to refocus on
its customers.

‘We’re returning to a view of what the customer wants,’ he says. ‘On
investment products, that means customers will probably want some kind of
guarantee ­ something that says I’m not going to lose my money but gives me some
upside as well.

‘Life assurers are in a unique position to push those products. That’s what
differentiates us from investment management companies. We’re looking at areas
where insurance companies can add something. We can take on protection business
because we can take on the volatility of risk.’

As far as other aspects of the business are concerned, Aegon is in a ‘period
of consolidation’, he says. The company does not foresee buying any more
independent financial advisers, for instance. ‘We have five different IFAs which
we are bringing together as one company.’

All fine on that front, then. One wonders whether anything bothers Laidlaw.
What about SIPPs, undoubtedly a sexy topic for life assurers at the moment. At
the time of the pre-Budget report, Gordon Brown took it upon himself to perform
an astonishing u-turn and exclude residential property from the schemes as
previously planned.

‘SIPPs are one of our offerings but not fundamental. We thought it was a
reasonable thing for the chancellor to do to prevent a mis-selling scandal,’
Laidlaw says, seeming to have little interest in the row.

His reluctance to join in the row is a shame, especially as Scottish rival
Standard Life played such a prominent role in the fuss made over SIPPs. Standard
Life recently said it had overestimated the potential impact of the change, in
order to determine whether or not the Treasury was serious. Quite apart from
imagining what would happen if tax advisers did the same, it seems an odd way to
go about lobbying, does it not? Laidlaw, however, refuses to be drawn on the
issue.

Of course, the other big event this year in the life industry, and in
Scottish business as a whole, is Standard Life’s flotation. What’s the mood in
the market?

‘We believe the process is going well,’ he says. ‘There’s generally little
worry in the Scottish market about Standard Life changing its status. It’s a big
employer. But it seems to be doing the right things that it needs to do. We were
a mutual and one of the first in the UK to demutualise. It’s the process that
takes a long time to bed down.’ In particular, the level of disclosure is the
real challenge, Laidlaw says.

‘There are reporting cultural changes. You have to report four times a year.
The level of disclosure is so much higher.’

The Scottish financial industry is itself a remarkable phenomenon. If you
look at the largest Scottish companies, they are mostly financial institutions.
Not only is Royal Bank of Scotland based in Edinburgh (its headquarters are
unmissable on the way from the airport into town), Scottish Widows and Standard
Life are also there, making up a hefty concentration of financial expertise.

Indeed, Standard Life alone generates some 9% of the GDP of Edinburgh and the
Lothians, according to a recent survey. But the financial concentration may be
more notable to outsiders. Laidlaw seems nonplussed when I draw attention to the
figure and ask if it is a close-knit community.

‘It is very close-knit,’ he says. ‘There is a certain amount of fighting for
talent. And on the very technical areas we still have quite a lot of discussion
with life companies. But the banks are really our competitors. We want to
measure ourselves against the best in financial services.’

Life industry can survive Turner’s kiss of death

One burning question for the life industry is, what will happen to its
revenues as a result of the ongoing Pensions Commission review into the UK
pension system?

The Turner report, published in November, proposed a national pensions
savings scheme, which some have suggested would effectively nationalise the
pension industry and could damage life companies’ business. Isn’t that a bit
worrying for Aegon?

‘The thing about Turner is that it’s a commission,’ Laidlaw says, dishing out
a strong warning against anybody counting their chickens. He points out that
Turner’s
recommendations have not yet turned into final decisions.

‘The challenge for the life industry is to come back with proposals,’ he
adds.
As with many things, Laidlaw sees the bright side in everything.

‘It does nationalise savings if it comes to fruition,’ he concedes, ‘but it’s
not a soup-to-nuts solution. It doesn’t provide you with everything you are
going to need. It doesn’t allow nearly enough savings for those in the
high-net-worth sector. Much more saving will be required on top of that.’ He
adds that it will ‘expand the market’.
So shouldn’t there bemore incentive to save, through the tax system, too?
‘That’s an interesting area,’ Laidlaw says. ‘The whole area of life, pensions
and tax is obviously being looked at a lot. Tax credits to encourage savings
would be something. Anything that can be done to help saving is good.’

But he is adamant that the focus shouldn’t just be on individuals. ‘We
believe that at the heart of pension saving has to be the employer. Anything to
encourage them has to be good.’