NN Group NN (Euronext Amsterdam)
January 21, 2015 - 9:27am EST by
ladera838
2015 2016
Price: 24.00 EPS 2.20 2.50
Shares Out. (in M): 350 P/E 11 10
Market Cap (in $M): 8,400 P/FCF 0 0
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT 0 0

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  • Insurance
  • Discount to Tangible Book
  • Underfollowed
  • Overhang of Shares
  • Solvency II
  • Litigation

Description

I am recommending NN Group as a long; in my opinion, it has an enormous margin of safety. After I lay out my case, I hope insurance experts on the VIC site can add additional color.

NN Group is a large company that trades at an attractive valuation because it is not well known (listed only in mid-2014 in Europe). NN Group is an insurance and investment management company with a strong, predominantly European presence in more than 18 countries. With around 12,000 employees the group offers retirement services, insurance, investments and banking to more than 15 million customers. NN Group includes Nationale-Nederlanden, ING Insurance Europe, ING Investment Management and ING Life Japan, and is listed on Euronext Amsterdam (ticker: NN).

BACKGROUND

As part of a government rescue in the financial crisis, ING Groep (ING) agreed to exit several business lines, including NN Group by the end of 2015. NN Group was listed in early July 2014, with ING selling 88.6 million shares at an offering price of EUR 20 per share, and reducing its ownership in NN Group to 68.1%.

NN Group was sold by a price-insensitive parent at a very cheap valuation at an inopportune time (summer in Europe and July 4 weekend in the US), and the stock price has remained in a narrow range ever since. One reason for the suppressed stock price may be the divestment timetable “Under the EC Restructuring Plan, ING Groep is required to divest more than 50% of its shareholding in the Company before 31 December 2015 and the remaining interest before 31 December 2016.” (p30 of IPO Prospectus)

Information on the company is available at: https://www.nn-group.com/Investors.htm

Here are some numbers:

BALANCE SHEET

 

30 Sep

in EUR million

2014

 

 

Cash and cash equivalents

5,529

Financial assets at fair value through profit or loss

47,862

Trading assets

607

Investments for risk of policyholders

41,298

Non-trading derivatives

5,450

Designated as at fair value through profit or loss

506

Available-for-sale investments

69,249

Debt securities

63,295

Equity securities

5,954

Loans

28,965

Reinsurance contracts

267

Investments in associates

1,602

Real estate investments

1,022

Property and equipment

145

Intangible assets

360

Deferred acquisition costs

1,431

Other assets

3,626

Total assets excluding assets held for sale

160,059

Assets held for sale

128

Total assets

160,186



Subordinated loans

2,299

Debt securities in issue

0

Senior debt

400

Other borrowed funds

4,419

Insurance and investment contracts:

119,118

life insurance provisions

73,281

non-life insurance provisions

3,670

provision for risk of policyholders

41,393

other

773

Customer deposits and other funds on deposit

6,597

Financial liabilities at fair value through profit or loss:

2,529

Non-trading derivatives

2,529

Other liabilities

5,421

Total liabilities excluding liabilities held for sale

140,783

Liabilities held for sale

3

Total liabilities

140,786



Shareholders' equity

18,344

Minority interests

70

Undated Subordinated notes

986

Total equity

19,400



Shareholders' equity per share in EUR

52.41

Shares outstanding in the market (in million)

350.0



At the current price of EUR 24, NN Group trades at 46% of book and 60% of tangible book (conservatively excluding 100% of Intangible assets, Deferred acquisition costs and Other assets).



INCOME STATEMENT

In EUR million

3Q2014

2Q2014

1Q2014

4Q2013

3Q2013

2Q2013

1Q2013

 

 

 

 

 

 

 

 

Operating result

 

 

 

 

 

 

 

Netherlands Life

152

153

153

192

175

204

138

Netherlands Non-life

32

39

22

12

28

42

-3

Insurance Europe

45

44

45

48

57

53

42

Japan Life

37

24

66

15

34

30

83

Investment Management

41

38

39

28

31

41

31

Other

-33

-42

-31

-73

-89

-97

-115

Operating result ongoing business

274

257

295

220

235

274

175

Non-operating items ongoing business

123

10

-28

-117

-56

-71

15

of which gains/losses and impairments

9

-51

10

29

16

-9

61

of which revaluations

38

84

-0

15

-1

1

-12

of which market & other impacts

76

-24

-37

-161

-71

-63

-34

Japan Closed Block VA

89

79

-36

-423

106

-97

162

Insurance Other

-

-

-

-4

-4

-5

-5

Special items before tax

-32

-25

-572

-29

-56

-12

-29

Result on divestments

4

-0

56

48

7

-9

37

Result before tax from continuing operations

458

320

-284

-304

232

80

356

Taxation

86

68

-83

-138

82

32

78

Net result from continuing operations

371

252

-201

-166

150

48

278

Net result from discontinued operations

-3

-1

-12

17

-752

-55

811

Minority interests

14

-1

2

8

51

-47

-3

Net result

354

252

-215

-157

-652

39

1,092

Shares outstanding in the market (in million)

350.0

350.0

 

 

 

 

 

Net result per share in EUR 2)

1.01

0.72

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjustments:

 

 

 

 

 

 

 

Operating result ongoing business

274

 

 

 

 

 

 

Pro forma taxes

52

 

 

 

 

 

 

Net income

222

 

 

 

 

 

 

EPS

0.64

 

 

 

 

 

 

Annualized

2.54

 

 

 

 

 

 



At the current price of EUR 24, NN Group trades at under 10x EPS based on annualizing the 3Q14 results from ongoing businesses.

NN Group is on a cost-cutting drive, having reduced Administrative expenses by EUR 144 million from 2013 to 2014 and planning additional cuts of EUR 64 million by 2016.

The company has put three business units (Netherlands individual life insurance business, part of its individual pension business and some Japanese business) into run-off mode, which have EUR 3.7 billion of capital currently backing them. According to one major brokerage firm, NN Group should be able to generate EUR 4.1B (EUR 12 per share) of operating free cash flow over the next five years, which will be largely available for shareholder distributions.

For 2H14 (payable in 1H15), the company has said that it expects to pay a dividend of EUR 0.50 per share, implying a EUR 1 per share 2015 dividend payable in 2016. “For future years, 2015 and beyond, the Company intends to pay an ordinary dividend annually in line with the Company’s medium to long term financial performance and envisages an ordinary dividend pay-out ratio of 40-50% of the net operating result from ongoing business.” (p24 of IPO Prospectus)

One major brokerage firm estimates EPS of EUR 2.20 in 2015, with EPS in subsequent years of EUR 2.50, EUR 2.70 and EUR 2.80.

The company has stated its intention to return excess capital to shareholders. “… capital generated in excess of the Company’s capital ambition (which may change over time), is expected to be returned to Shareholders unless it can be used for any other appropriate corporate purpose, including investments in value creating corporate opportunities.

As to the form in which excess capital may be distributed to Shareholders, the Company is committed to do so in a form which is most appropriate and efficient for Shareholders at that specific point in time, such as special dividends or share buy backs.” (p24 IPO Prospectus)

MAJOR RISKS:

The company faces potential legal liability related to historical unit-linked mis-selling in the Netherlands, which appears to be in the order of magnitude of EUR 365 million.

Additional insurance-related capital requirements may be put in place in early 2016, but it is expected that the company will remain in a position of having excess capital.

A weakening Euro would translate into a lower stock price in USD.

 

NOTE: I MAY BUY OR SELL SHARES OF NN GROUP WITHOUT ANY FURTHER COMMENT.

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

The market will become more familiar with the company over time and the payments of dividends in mid-2014 should shine more light on the attractiveness of the stock.

4Q2014 earnings will be reported on 2/11/15, along with the declaration of the 2H2014 dividend of Euro 0.50.

 

The completion over time of the sale of shares owned by ING Groep should remove the ceiling on the stock price.

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