Value Investors Club / NN Group (NN (Euronext Amsterdam))

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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			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 (in $M):	0	TEV/EBIT	0	0