ASRRF - ASR Nederland: The 7.5% Dividend From This Insurance Company Should Be Safe

2023-03-22 11:30:00 ET

Summary

• ASR Nederland is a relatively large Dutch insurance company with a healthy solvency ratio.
• The 222% solvency ratio will decrease upon completing the acquisition of Aegon Nederland.
• I don't expect the company to run into any issues, as its capital position should remain strong.
• As sovereign debt yields have been decreasing since year-end 2022, I wouldn't be surprised to see a small unrealized gain on a QoQ basis in the investment portfolio.

Introduction

It goes without saying that the financial sector is being plagued by the bank failures in the USA and Europe (both for different reasons) and there is a general lack of trust in the system. Insurance companies are also dealing with the fallout as the majority of its 'float' consists of bonds and insurance companies are also dealing with decreasing market values as they also have to apply the mark-to-market procedure to value their bonds. However, insurance companies have three distinct elements that are working in its favor.

First of all, a 'run on the bank' is impossible because, well, they aren't banks. Some insurance companies do have a banking division, but this traditionally is a small piece of the corporate structure.

Secondly, there is no reason for insurance companies to sell the bonds ahead of the maturity date, notwithstanding the fact they are classified as securities available for sale. In very specific cases, an insurance company may see the need to increase its liquidity levels, but in general, there won't be a very sudden massive cash crunch.

And finally, the investment portfolio generally matches the anticipated materialization of the liabilities. And - this is also important - higher market interest rates don't only mean the value of the bond portfolio decreases; it also means the current value of the anticipated liabilities will decrease as well, so a 10B EUR unrealized loss on a bond portfolio should not lead to a 10B EUR decrease in the equity value of an insurance company.

Last week, I argued a slightly bullish case for Dutch insurance company NN Group ( NNGPF ) which you can read here . I argued that the interest rates on the government bonds had decreased since the end of 2022 and that - barring sudden trading activity in the portfolio - the insurance group may actually post an unrealized gain on its portfolio of securities available for sale in the first quarter.

In this article, I will have a closer look at the investment portfolio of ASR Nederland ( ARNNY ) ( ASRRF ), another large Dutch insurance company. The majority of the company's activities are in the 'life' segment, which represents approximately 60% of the operating profit.

I would strongly suggest using the company's main listing on Euronext Amsterdam to trade in its securities. The average daily volume in Amsterdam is almost 600,000 shares . The ticker symbol is ASRNL.

You can find the documents I will be referring to here .

A look at the insurance company's investment portfolio and risks

In this article, I will mainly look at the investment portfolio of ASR. But before diving into the specifics, it's perhaps important to understand the key elements of ASRNL. In FY 2022, the company generated a net income of 733M EUR while the operating result per share was approximately 5.37 EUR (up from 5.29 EUR per share). The solvency ratio as of the end of 2022 was a very impressive 222% thanks to a 600M EUR contribution from a capital raise which was completed in 2022.

So from a solvency perspective, ASR Nederland is in good shape. As you can see in the image above, the insurance company generated about 18 basis points of capital through the course of its normal business activities, and the net capital distributions took off only 12% of this capital generation. The 600M EUR capital raise really sealed the deal there. ASR Nederland is planning to merge with Aegon Nederland ( AEG ) and this transaction will only be closed in the second half of this year.

Let's have a look at the balance sheet now. We see the total amount of equity on the balance sheet came in at 6.73B EUR, of which approximately 5.27B EUR was attributable to the common shareholders. That is only 641M EUR lower than as of the end of 2021 despite seeing an 8B EUR decrease in its investment portfolio.

Meanwhile, we also see the liabilities arising from insurance contracts also decreased by approximately 8B EUR, which generally confirms one of my focus points I mentioned in the introduction: due to the specific accounting rules related to insurance contracts, an increasing interest rate also reduces the liabilities on the balance sheet.

The comprehensive income statement provides a little bit more clarity. We see below, the insurance company recorded a 2.38B EUR unrealized loss on its investment portfolio. But we also see the higher market interest rate results in a net unrealized gain of 887M EUR on the liabilities, which means the net impact was 'just' 1.5B EUR. That's still sizeable, but in combination with the 733M EUR in earnings, the net fallout remained limited to less than 800M EUR (of course before taking dividends into consideration). Given the total balance sheet size of 75B EUR as of the end of 2021, this rather moderate impact on the balance sheet total and equity value in 2022 is pretty good.

As you can see below, ASR's investment portfolio is well spread out, with owned real estate and mortgages representing almost 40% of the total investment. About 53% consists of government and corporate bonds.

The mortgage debt is not an issue. About 23% of the total mortgage book is insured by the Dutch state (NHG = government guarantee) while an additional 46% of the mortgages has an LTV ratio below 65%. This means that about 69% of the mortgages are either insured or have a low LTV ratio.

The government bond portfolio consists of about 9.6B EUR. As you can see below, the largest exposure is to the Dutch government debt which represents about 26% of the loan book, followed by Germany and France (if we exclude the Supranational investments).

I already explained this in my article on NN Group, but yields on sovereign debt have actually gone down since the end of last year. The image below shows the real active decrease in the sovereign debt yield of the Netherlands (blue), Germany (black), and France (green). This should have a positive impact on the value of the bonds in the investment portfolio.

Investment thesis

The main unknown factor at this point is that we don't know how ASR's trading desk has dealt with the nervosity in the financial markets. If it maintained its bond portfolio, we will very likely see an increase in the unrealized gains (or lower unrealized losses, depending on the category). This won't show up on the normal income statement but will be included in the comprehensive income statement and will be visible in the equity value on the balance sheet.

The current solvency ratio is excellent and, as the image below shows, even harsh economic shocks including sudden interest rate swings will likely still result in a Solvency II ratio of in excess of 200% as of the end of Q1.

ASR has promised to continue to pay a dividend as long as its solvency ratio exceeds 140%, while above 160% it allows itself to be a bit more 'entrepreneurial'. A solvency ratio exceeding 175% paves the way for additional shareholder distributions and/or share repurchases, although I'd rather see ASR not getting ahead of itself. The share buyback plan has been suspended until the Aegon transaction closes. That transaction will have a negative impact on the Solvency Ratio, but from Y3 on, the 4.9B EUR acquisition will result in almost 200M EUR in annual synergy benefits.

I didn't have a position in ASR Nederland anymore, but I have started to accumulate a long position again.

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