AEG - NN Group: Attractive Capital Return

Summary

• Despite the Asset Management disposal, NN delivered a strong operating capital generation.
• Buyback left unchanged, but higher DPS (+12%).
• Solid holding company cash, so we confirm our buy rating.

In early January, we decided to continue publishing our comps analysis between NN Group NV ( OTCPK:NNGPF , NNGRY ) and Aegon (NYSE: AEG ); however, this time with a preference for the former company. Our publication was titled Capital Generation Will Alleviate Requirement Concerns and was based on the following 1) an expected lower Solvency II requirements which will be compensated by higher cash flow generation, 2) a preference for higher dividend per share (and tactical acquisitions) over buyback, 3) an interesting valuation entry point.

Looking at the press release, we couldn't be more right. Last time, we also emphasized how NN's CMD disappointed the sell-side community on share repurchase expectations. Equity research analysts were forecasting a €500/€550 million buyback, and in November, the company announced and today confirmed a €250 million buyback target (Fig 3). Regarding the numbers, despite the Asset Management disposal, NN Group delivered a higher operating capital generation that reached €812 million compared to the €804 million recorded last's year same period. This was due to a higher contribution from its insurance division, as well as from the Netherlands' life segment. On an aggregate level, the company's OCG was up by 8.0% to €1.71 billion (Fig 1).

Here at the Lab, we were forecasting lower Solvency II requirements, and again, even if this is a negative point, we are not surprised, and it was already taken into consideration in our internal estimates. NN Group Solvency II ratio stood at 197% versus 213% at last year-end (and 196% in HY 2022), this negative evolution was supported by OCG development but totally offset by dividend payment (this is a seasonal adjustment) and market impacts (Fig 2). Last time, we said: our readers know that we prefer a dividend per share increase versus a buyback - and today, NN Group announce a final dividend of €1.79 per share, and currently, the total DPS is set at €2.79 (up by 12% - Fig 3). This is in line with Mare Evidence Lab's thesis, and we positively welcome this trajectory (7% DPS growth in the last three years vs a plus 12% just recorded).

(Fig 1)

(Fig 2)

(Fig 3)

Conclusion and Valuation

NN Group confirmed its financial target previously disclosed on November CMD. The company's cash position is flat at €2.08 billion on a yearly basis and provides a margin of safety on Solvency II ratio requirements. With the full year OCG, NN exceeded its €1.5 billion target by more than €200 million and is in line with management indication which forecast an OCG increase to €1.8 billion by 2025. We very well anticipated NN development, and so we are not adjusting our valuation number. We then confirmed our buy rating at €58.5 (and $31 in ADR) per share, based on a Holding cash at 11.7% and a capital return of 11.9% (including dividend and current buyback).

You could also check our latest publication on Aegon: Positive Q4 Results, Confirm Buy

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