NNGPF - NN Group: Should You Buy This 6.9% Yielder?

Summary

• NN Group is a Dutch insurance company focused on the Life segment in the Netherlands.
• It has a relatively stable business model and a strong capitalization, allowing it to provide an attractive shareholder remuneration policy.
• It offers a sustainable and high-dividend yield, plus a cheap valuation.

NN Group ( NNGPF ) is an insurance company largely exposed to mature markets, which means its investment case relies heavily on its attractive capital return policy that is quite attractive for long-term income-oriented investors.

Company Overview

NN Group is a Dutch insurance and asset management company, with operations in 11 countries, even though its most important regions are the Netherlands and Japan. It has about 18 million customers, and operates under several brands, including Nationale Nederlanden. Its current market value is about $12.5 billion, and NN trades in the U.S. on the over-the-counter market.

NN Group was part of the Dutch banking group ING Groep ( ING ), but separated itself through an IPO in 2014, as part of the bank’s restructuring program following its government bailout after the global financial crisis. Since then, NN Group performed a relatively large merger with Delta Lloyd in 2017, enhancing its position in its insurance domestic market.

NN Group’s current business is divided across insurance (life and non-life), and banking. While its core business is the Life segment, it also offers complementary products in non-life insurance, plus some banking products (mainly mortgages and savings). Nevertheless, the life segment represents the largest segment in the company, while other business units have much smaller weight.

Taking into account this business profile, NN Group’s closest competitors are other European insurance companies with significant Life activities, such as AXA ( AXAHY ), Aegon ( AEG ), a geas ( AGESY ) or ASR Nederland ( ASRRF ).

Regarding its investment portfolio, it amounted to some €152 billion at the end of June 2022, which represented about 68% of total assets. Not surprisingly, the vast majority of its investments are in low risk asset classes, namely fixed income and mortgages, while its exposure to equities is quite low (3% of investment portfolio).

NN Group’s business strategy has been to actively allocate its capital, performing several acquisitions in recent months, plus some divestments as well of businesses that were not a good fit for the overall group. The most significant one was the sale of NN Investment Partners (asset management) to Goldman Sachs ( GS ) for €1.7 billion, which was completed back in April 2022, as NN Group considered that this unit was not contributing to long-term growth. Going forward, its strategy should remain focused on achieving good levels of profitability across its segments, and performing acquisitions if there is a clear strategic rationale, which also makes sense from a financial perspective.

Financial Overview

Regarding its financial performance , NN Group has delivered a relatively stable performance over the past few years, which can be considered a positive outcome considering the headwinds from the low interest rate environment until 2022 and strong competition in the insurance market.

In 2021, NN Group’s total revenue was close to $19 billion (+6.1% YoY), while its net premiums written were €12.8 billion (+2.4% YoY). Its operating result improved to more than €2 billion, due to gains in Netherlands non-life and Insurance Europe, while its net income amounted to €3.27 billion due to non-operating gains. This led to a return on equity (ROE) of 9.4%, which is not particularly impressive within the insurance sector.

As the company only reports financial figures twice per year, its most recent earnings are regarding the first half of 2022, while NN is expected to report its annual results during the next month.

In H1 2022 , NN Group maintained a sound operating performance, with the value of new business increasing by 5% YoY to €254 million, but its operating profit declined by 12% YoY to €983 million. Due to gains from the sale of its asset management unit, its net income was above €2 billion (+42% YoY), of which more than €1 billion was due to results in divestments.

Its cash at the holding company increased to almost €2.5 billion, due to its organic capital generation and process from divestments, of which NN Group used some part to perform smaller acquisitions, return capital to shareholders and reduce debt.

Regarding its capitalization, NN Group has a solid position given that its Solvency ratio has been consistently above 200%, being slightly above the average capital ratio of the European insurance sector. This excess capital position is not expected to change much in the foreseeable future, as the company has a disciplined capital allocation policy and is not likely to pursue large acquisitions in the coming years, thus a strong solvency ratio should continue to be one of NN Group’s long-term commitments.

Capital Returns

Supported by a strong balance sheet and good organic cash flow generation, NN Group has delivered an attractive shareholder remuneration policy in recent years, both through dividends and share buybacks. Its dividend has increased at 7% per year, over the past three years, while its last interim dividend increased by 7.5% compared to the previous year. Its total dividend related to 2012 earnings is expected to be about €2.71 per share, which represents an increase of almost 9% from the previous year.

This means that, at its current share price, NN Group offers a forward dividend yield of about 6.9%, which is quite attractive for income investors. Moreover, its dividend payout ratio has been quite conservative, as the company targets an annual distribution of about 40% of its earnings. This means that NN Group’s high-dividend yield is sustainable and is not an indication of a potential dividend cut in the future, being one of the main positive factors of its investment case.

Beyond a high-dividend yield, NN Group also has used cash proceeds from its NN Investment Partners sale to increase share buybacks , enhancing its total shareholder remuneration policy. On top of its regular €250 million share buyback, NN Group decided to perform an additional €750 million repurchase program, increasing total share buybacks to €1 billion. This represents some 8.6% of its current market value, which means that NN Group is aggressively returning excess capital to shareholders.

Going forward, NN Group intends to gradually increase its annual dividend and perform regular share buybacks of at least €250 million per year, thus an attractive shareholder remuneration policy seems to be one of the company’s most important long-term commitments.

Conclusion

NN Group is an insurance company with a relatively stable business profile, with significant exposure to mature insurance markets plus some growth opportunities. This means that its overall growth prospects aren’t impressive over the medium to long term, making its investment case highly related to its capital return policy.

Indeed, NN Group offers a high and sustainable dividend yield, being quite attractive for long-term investors. Furthermore, its current valuation is quite depressed, given that it is trading at 0.6x book value and 7x forward earnings, thus it offers a good combination of yield and value right now.

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