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Thursday, 5 June 2014

Why you should (not) buy stock in the NN Group: my analysis with respect to the IPO of this ‘subsidiary-turning-independent’ of Dutch bank/insurer ING Group... Pt II

This is the second part of my analysis concerning NN Group NV, the insurance subsidiary of the Dutch, multinational bank / insurer ING Group NV.

Today, the official news was published that NN Group is indeed aiming at an IPO at the Dutch Euronext stock exchange, within two months from now. 

With a targeted value of €2 billion in proceeds, it would become the largest Dutch IPO in many years.

Recent activities and achievements of NN Group

In this paragraph I will show the most important news messages with respect to NN Group of the last three months:

ING Group completes EUR 1.125 billion pre-IPO investment into NN Group  

ING has completed the issuance of EUR 1.125 billion in subordinated notes that will, in line with the completion of the planned IPO of NN Group, be exchanged into NN Group shares.
The transaction represents an important investment into NN Group ahead of the intended IPO of ING's European and Japanese insurance and investment management activities.

As announced on 30 April 2014, ING has secured investments totalling EUR 1.275 billion into NN Group ahead of its intended IPO by agreeing to sell EUR 150 million in NN Group shares at the IPO to RRJ Capital, Temasek, and SeaTown Holdings International, three Asia-based investors, and to issue to these investors EUR 1.125 billion subordinated notes that will over time be mandatorily exchanged into NN Group shares.

NN Group considers selling investment agency Parcom, according to De Financiele Telegraaf, last Tuesday.

The German branch of Parcom has already become independent in March 2013 and during the last weeks steps have been made to turn Parcom France into an independent company too.

ING subsidiary NN has quoted for €1 billion in subordinated bonds at the Euronext Amsterdam stock exchange. With the quotation of the bonds, the company stated ‘that it made a good start' with respect to a future IPO for NN Group

Issues concerning the company in the recent past

In this paragraph, I will show the most important issues that NN Group is facing at this very moment.

The Investment Insurances files – aka the Usurious Profit Policies affair – are not a direct threat for the stability of the Dutch financial system. This became clear from a report by the Financial Stability Committee.

Presumably, the potential losses of the current and future trials, with respect to this affair, have not been estimated at such a high level that they pose a serious threat to the stability of the whole industry.

That is good news for ING subsidiary NN Group, which will be quoted at the Euronext Amsterdam stock exchange before the summer of 2014. 

The insurer stated in its annual report that some parts of the million investment policies which it sold, could be challenged in current and future trials, with the risk that some trials could be actually won by the plaintiffs. 

This could have substantial financial and reputational consequences for NN Group. The traditional earnings model of Dutch life insurance companies is already under fierce pressure, as a consequence of the low interest rates and the fact that hardly any individual policies are sold at this moment, due to the Usurious Profit Policies affair.

The court in Rotterdam turned the request from Nationale Nederlanden down, to postpone a trial, concerning the Usurious Profits Policies affair. 

The insurance company had requested to suspend this trial case, as the company is waiting for a verdict from the European Court of Justice.

Strengths and Opportunities

NN Group is a reputed and respectable insurance company of almost two centuries old, which has been part of the large and strong bank / insurance group ING Group NV.

Although ING has been forced by the European Commission to turn this large insurance subsidiary into an independent company, there will remain a strong connection (i.e. ‘family ties’) between these companies in years to come. in business as well as emotion. 

I presume that he sales channels in the bank branches of ING will probably keep NN Group at their retinas in the coming years, when customers ask for insurance products and advice upon mortgages.

Besides that, reporters from Het Financieel Dagblad stated that the newly acquired independence and especially the vanishing of the European Commission’s magnifying glass, could help the insurance company in taking a little bit more risk, which will undoubtedly improve results:

After being cut loose from ‘parent’ ING, insurance company NN Group will get the possibility to increase profits. During the last few years, the insurance company has been restricted strongly in its ability to take risks, due to the awkward situation of parent company ING. This led to an extremely cautious investment policy. 

Shares and corporate bonds were sold, as rock-solid sovereign bonds from countries with an ironclad rating, were prefered by the executive management of the group. 

This cautious policy, in combination with the low interest rate had a price: poor yields on the invested capital, especially at the life insurance companies of NN Group. 

NN Group can afford to take a little bit more risk, when the company stands at its own two feet again. By exchanging the sovereigns for slightly more risky shares and corporate bonds, the insurer can relatively easily spur the results.

Besides that, I consider it a smart move that NN Group does not focus on growth at any price, but rather tries to lure investors with stable dividends in the future.

When it comes to actual growth possibilities for NN Group, I see very good chances at NN Group’s home markets in Eastern Europe, Greece and Turkey. 

The statistical data in part 1 of this analysis showed that the income spent on insurances in these countries, is much lower than in the Western European markets and Japan. 

In other words, there will be ample room for growth of NN Group, when prosperity and personal wealth will improve in these countries. Life insurances can be a definite growth portfolio in these countries.

I am less optimistic about domestic market The Netherlands and other West-European markets of NN Group. 

Apart from the fact that the insurance market is a quite saturated market with strong competition in these countries (IMHO), the growth rates of insurances have probably almost returned to pre-crisis levels in 2014. This means in practice that the insurance market will rather be a substitution market than a growth market, in these very important home markets.

However, the reputation of NN Group will always keep the company firmly in the top three in The Netherlands, I presume. I expect on top of that, that NN Group’s pension plans and mortgages will remain stable cash cows in years to come.

Weaknesses and Threats

There is no denying that the Usurious Profit Policies affair casts its shadows ahead on the future results of NN Group. 

When the various trials would indeed lead to the adjudication of substantial / large damage claims, this will have an immediate effect on the stock rates of NN Group. This could effectively turn NN Group into a bleeder.

Further, it is clear that the recent, extremely cautious investment policies – with ING Group at the helm – have negatively influenced the profitability and the quality of the investments of NN Group. You could say that ‘being too safe won’t earn you the big bucks’. 

This is emphasized by the negative cash flows on operations in 2013 and by the fact that NN Group made a very low profit in 2013. Dividend payments from NN Group took only place once during the last three years: in 2013.

That is why I am not certain that NN Group will indeed become the dividend share that ING Group is currently promising. 

Besides that, taking more risk could also lead to losses, especially as the current, extremely favourable situation at the international stock exchanges will not last forever, in my humble opinion.

Unfortunately, the market for life insurances is still in a deep coma in The Netherlands and it might take many years and perhaps decades, before this market will return to levels of before the Usurious Profit Policies affair.

My advice

When you are in favour of a longterm buy-and-hold strategy, with a stable portfolio and focus on dividend payments, then NN Group could be a good stock to have in your portfolio. 

However, this depends strongly on the IPO sales price per share and the outcome of the current and future trials, concerning the Usurious Profits Policies affair, in which NN Group is involved.

If the P/E ratio after the IPO will remain within or under the 8 – 10 range (based on the 2012/2011 profits), the stock could be a good investment indeed. However, when the stock will be sold more expensive, I would personally wait a while.  

Traders and investors with a short investment span could better skip this share, in my humble opinion.

Disclaimer: This analysis is solely written with the purpose of information supply.

I don’t have any financial or business strings attached to this company. As I am not an investor myself, I don’t have any financial purposes with this advice, except for supplying people with free and interesting information.

People are free to follow up my advices or not. However, I can’t accept any responsibility for the investment decisions that people make, based upon the advices mentioned in this article.


  1. The market conditions are not always same, there are chances of profit too.

  2. Of course there are. People should make their own decisions, based on the information that they can get.

    Besides that, I see good chances for NN Group in the South-European markets, as the percentage of income spent on insurances is still very low there. And if NN Group indeed proves to be a stable dividend fund, it could be a good deal.