Introduction
Nationale Nederlanden or NN Group – as it will be called after its
IPO –is currently in the top 3 of largest insurers in The Netherlands.
It is a
Dutch, but internationally oriented insurance company, active in 17 European
countries and Japan, which focuses on the target areas:
- retirement services;
- life insurances;
- general indemnity insurances;
- investment management;
- banking (i.e. mortgages and savings).
Together with the Dutch banks ‘Postbank’ and ‘NMB
Bank’, Nationale Nederlanden formed the corner stone of the Dutch bank/insurer ING
Group NV, which was established in 1991.
In 2008, the ING Group was struck very hard by the
credit crisis, as a consequence of fierce financial/economic headwinds, reinforced by the
circumstance that the bank/insurer had an unweighed capital ratio of only 1.27% at the time. This left no leeway to endure any financial shock at all.
The nearly unprecedented and dangerous leverage was the direct consequence of a radical
stock buy-back program, which had been performed by ING Group in the years
before 2008 and of which the enormous risks had been overseen by the Dutch national bank DNB.
During roughly the same period, the ING branch ‘ING Direct USA’ had
hoarded €24 billion in Alt-A (i.e. less than prime quality) loans, due to US regulations, which forced the bank/insurer to invest savings and deposits from Americans within their domestic market.
These so-called Alt-A Residential Mortgage Backed Securities (RMBS) became
utterly illiquid (i.e. impossible to sell) overnight, after the implosion of
the market for non-prime (‘prime’ as in ‘most reliable’) securitized mortgage
loans; this implosion was both cause for and effect of Lehman Brothers’ demise in 2008.
These nearly fatal side-effects of the credit crisis forced
the Dutch state to hand out a €10 bln emergency loan to ING Group, in
combination with the takeover of this very package of €24 bln in Alt-A loans from ING
Direct USA.
Although the European Commission recognized the need for the Dutch
State to keep ING Group NV afloat (as it was ‘too big to fail’), the bank/insurer was
nevertheless punished fiercely for this state support.
ING was not allowed
to:
- perform strategic acquisitions and mergers;
- hand out favourable interest rates at savers and borrowers
- aim at price-leadership within the domestic market
Besides these measures, the EC ordered a split up within
the company. The consequences of this split-up were that (a.o.) the bank parts (ING Bank)
had to be separated from the insurance parts (Nationale-Nederlanden) and that overseas parts of the company had to be sold to third parties. The
forthcoming IPO of NN Group in 2014 is the direct result of these EC measures.
Although you could justifiably call this initial stock
offering of NN Group a ‘shotgun IPO’, the insurance company itself is very mature and experienced, financially healthy and it has already been quite independent during the last five years.
During the past few years ING Group NV and (now) NN
Group have been involved in the full split-up process of both companies, which included the split up of the group management, the (joint) human resources, the whole consolidated bookkeeping within the group and
especially the vast (joint) ICT and accountancy infrastructure. Today, this long and complicated process is (nearly)
finished. In my opinion, there is nothing anymore which could stop the self-dependancing of NN Group.
For the near future, I see one considerable risk for this soon independent insurance company: the 'Woekerpolis’ (i.e. Usurious Profit Policies) affair which still lingers on in The Netherlands.
This affair – handling about insurance policies, which charged such high expenses to the owners, that it was nearly impossible to achieve the goals for which the insurance policy had been deployed – has sent shockwaves through the Dutch Insurance
industry during the last decade. Even today, the affair is still far from being ‘a wrap’.
Hence, there is a considerable risk that new damage
claims will emerge during the next decade. Even a kind of class action by harmed customers could take place in the coming years,
which could hit the NN Group full on the chin.
Nevertheless, in my opinion there is no reason to
believe that NN Group is much more involved in this Woekerpolis affair than
other insurance companies in The Netherlands, other than for its sheer size and
large number of clients.
In my opinion, this affair is a substantial, but
nevertheless containable risk.
Balance Sheet, Profits & Losses and Cash Flow (available here)
 |
| Balance sheet (2013) of NN Group Data courtesy of : NN Group / ING Group NV Click to enlarge |
The first thing that strikes one about the 2013 balance
sheet of NN Group, is the strongly decreased size of it (-/- €195 billion between 2012 and 2013).
At the Asset side of the balance sheet, this unwinding
is (a.o.) caused by the sale of ING USA (-/- €78 bln) and the strongly reduced
exposure to Sovereign bonds ( -/- €6 bln), Corporate bonds (-/- €37 bln) and
Financial Institution bonds (-/- €5 bln), as well as the nearly nullified
exposure to RMBS (-/- €11 bln) and the nullification of the assets held for
sale (-/- €60 bln).
The enclosure of the Japanese operation (life insurances) within the NN Group added €16 billion to the financial assets.
At the Liabilities side of the balance sheet,
the strong reduction in equity (-/- €12 bln), the strongly dimished number of
insurance and investment contracts (-/- €112 bln) and the diminished number of
liabilities held for sale (-/- €55 bln) all stand out.
It becomes clear from this balance sheet and the accompanying explanation that the company has abolished a lot of its past
assets and that it is only half the size today, in comparison with 2012.
In my opinion, there is a limited chance for strong autonomous, risk-free
growth in the near future.
Both the company and its current holding ING Group seem to have learned their lessons from the past developments at the sovereign (Greece) and
corporate bond markets, as well as the market for Residential Mortgage Backed
Securities and they have strongly diminished their exposure to these investments.
The company has, however, good chances for autonomous growth in the
still small East-European markets, Greece and Turkey. Especially in the latter, the
average amount of income spent on insurances is still very, very small (see the
paragraph Operational Environment), which leaves room for improvement of which NN Group could profit.
The markets in the Western European countries are more
mature, however, and in 2014 the spendings per capita on insurances are probably back at
the level of 2011, which was almost equal to the pre-crisis level [unfortunately, the data coming from the OECD on insurances per capita, which I used for my statistics, is not more recent than 2011 - EL]. This diminishes the chances for substantial autonomous growth in
these West-European countries and Japan.
All in all, NN Group has a healthy leverage of about
10% currently and I expect that this will remain about the same in years to come.
At this very moment, ING has already sold a package of €150 mln in stock and €1.125 bln in subordinated bonds
to three Asian investors (see the following press
release), The latter are sold with the purpose of future conversion to common NN Group stock.
In the forthcoming IPO, NN Group’s intentions are to deploy
25% of the
existing shares in possession of ING Group, as the first of four / five packages.
Their aim is to receive approximately €2 billion for this first package. This
would bring the intended value for NN Group to €8 billion + the €1.275 billion, which have already been sold in shares (€150 mln) and
subordinated, convertible bonds (€1.125 bln).
 |
| Profits and Losses overview (2013) of NN Group Data courtesy of : NN Group / ING Group NV Click to enlarge |
When we look at the profits and losses table, we notice
that NN Group made hardly any profit in 2013. Besides that, the company only paid dividend in 2013,
while skipping dividend in 2012 and 2011.
In the Beursonline.nl article behind the last mentioned link, you can
read (using Google Translate) that the NN Group stock is intended to be a
dividend stock and not a growth stock.
If this is indeed true, the chances for higher future
profits and larger dividend payments in the future will remain reduced.
In that case, a P/E ratio of 1: 7 – 11 (based upon the past profits in 2012 and 2011) is quite high, in my opinion, taking into account that the future success of the stock depends on
the stable payment of dividends in the future.
With virtually no profit made in 2013, the latter does not look
to good, especially when we take into consideration that the ‘Woekerpolis
affair’ could still lead to future damage claims and (consequently) losses.
 |
| Cash Flow overview (2013) of NN Group Data courtesy of : NN Group / ING Group NV Click to enlarge |
Worrisome in this year's cash flow position of NN Group is the
substantial negative cash flow of €8 billion, coming from the operational
activities in 2013.
At the other hand, the investment activities have
yielded a positive cash flow of €8 billion in 2013, probably due to the very
favourable circumstances at the international stock exchanges.
However, this is
also a risk: when the circumstances at the stock exchanges deteriorate (for
instance due to the coming end of QE III, this would definitely have a negative influence
on the investment results of NN Group)
Corporate Strategy (Mission, Strategy and
Market Developments )
ING
Mission:
To
set the standard in helping our customers manage their financial future. ING
aims to deliver financial products and services in the way our customers want
them: with exemplary service, convenience and at competitive prices.
ING's
strategy:
ING
Group's strategic priorities up to 2013 have been: strenghening our financial
position, restructuring, repaying the remaining state aid and building both
stronger and sustainable banking and insurance / investment management
businesses (IM)
NN
Group's focus is on service to customers, generating capital, growing
profitability and improving efficiency. Its strategy is about offering
appealing and easy to understand products and services, multi-access
distribution and efficient and effective operations in the 18 countries in
which it is active.
The aforementioned mission and strategy of ING and NN
Group are sound, but not very ambitious for the future. Consequently, this seems not to be a stock that you put
in your portfolio, in order to “hit ‘em and quit ‘em”. As stated before, the
success of this stock for your 'buy and hold strategy' depends on the steady
payments of dividends in the future.
In my opinion, this remains a bit of a longshot:
investors get seldomly rich from financial stocks and I guess that the NN Group
stock will not be an exception, based upon the intended yields of €8 billion, coming from this IPO and future stock sales between now and the end of 2016.
Agreement with European Commission:
In
November, ING and the Dutch State reached an agreement with the European
Commission on a revised timeline for the divestment of the European and
Japanese businesses. Under this revised agreement, it was announced that Japan
Life would be included in the base case IPO.
As
such, the timeline to divest more than 50% of Japan Life has effectively been
extended by two years to year-end 2015. This is the agreed timeline to divest
more than 50% of ING's European insurance and investment management businesses.
Also as part of the revised EC agreement, ING will accelerate the time to
complete the 100% divestment of its insurance and investment management
activities in Europe and Japan by two years, to year-end 2016.
If I understand this agreement right, this statement confirms
the agreement that NN Group will a. become the majority owner of Japan Life before
the end of 2015 and b. become fully independent from ING Group before the end
of 2016.
Operational Environment
As I stated earlier, the chances for strong autonomous
growth of NN Group in the near future are generally limited, although some of
their operational markets offer better chances than others:
 |
| Expenditure per capita on insurances in the countries where NN Group is active Data courtesy of : the OECD database Click to enlarge |
 |
| The percentage of the net income spent on insurances in the countries where NN Group is active Data courtesy of : the OECD database Click to enlarge |
- The
markets in especially Turkey, Greece and the former Eastern
Block countries offer good chances for solid growth, after the credit crisis has
finished. The spendings on insurances, as well as the average percentage of net
income spent on insurances are both quite low in these countries.
- In 2011 (unfortunately, there was no more recent data available),
the spendings on insurances in the Western European countries and Japan had almost
returned to pre-crisis levels. However, it was in 2011 that the euro-crisis
seriously kicked in in the western European countries. In my opinion, this must
have had influence on the general spendings on insurances in these countries.
Nevertheless, as today the Euro-crisis seems almost finished in the Western European countries, I guess that the average spendings on insurances are back at 2011 levels in these countries. This will mean that there is little room for extra growth in these mature countries, as an average spending of 15% of net income on insurances seems about the maximum percentage achievable.
In practice, this will probably mean that the chances
for general growth in especially the Western European countries will be dim. Market share
must be gained at the expense of competitive insurance companies. This will put
pressure on prices and yields.
A sound strategy for NN Group would be to increase its
visibility in the Eastern European countries, Greece and Turkey, as the biggest
chances for autonomous growth are there.
Tomorrow, the second part of this analysis will be printed
No comments:
Post a Comment