EUR 850.00 For Business Accounts Only

Morningstar | Best Idea NN: Expect Better Earnings From Motor, Income Protection, Net Production on Provisions

Shares of no-moat Nationale-Nederlanden trade at a 30% discount to our fair value estimate, and we think the market is mispricing the overall value of the business. First is the turnaround story in P&C, with rate increases in a firming economy. Second, the recovery in disability and accident margins as Dutch bankruptcies decline. Last, within life outflows are overstated by non-recurring flows, in our opinion.

Within the non-life business, we think there are two categories of lines of business that possess a story. First, the main area within non-life is the a turnaround of property and casualty, and more specifically, motor insurance. The issue here for us has been the rising cost of average claims, and we think that has been driven primarily by bodily injury annuities that have in turn been driven by a lowering of the discount rate used to value them. We think discussions around rising claims because of increased iPhone usage as well as higher traffic numbers on consequent higher congestion are largely unfounded. We rule these out because they both point to frequency, rather than severity, and from the evidence we have looked at, the problems within the Dutch motor market have been of severity and not frequency. Following from this, we think there has also been an inability of the market to put through rate increases because of a broader softening of the Dutch economy, but that the regulator has warned insurers about this and they have subsequently been forced to put through rate, though this has corresponded with a firming of economic conditions. But because NN have been late to the rate party, we think there is a little bit more rate left for it to do.

Second, within non-life, we think there is a disability and accident story. The vast majority of disability and accident claims come from income protection, and we think the past softer Dutch economy has led to higher claims. But we think this claims environment is strongly tied to Dutch bankruptcies, and we have seen these come off its highs. We think as these numbers continue to drop we will continue to see an improvement in the Dutch disability and accident claims environment, though we would like investors to note that we think improvement in disability and accident claims shows through on an even more delayed basis.

Within the Netherlands Life division we think current outflows look overly elevated for two main reasons. First, we think there are some internal transfers going on between provisions for risk of policyholders and general account provisions, and these are making the consolidated Netherlands Life provision look noisy. We think these are coming to a close and should fall to zero within the next two years. We also think that the transaction with Delta Lloyd has led to some withdrawals as pension trustees have a right to change pension provider on a change of ownership. But we think these are starting to drop. Last, we also think there has been some pressure on the provision from the management changes occurring at NN Investment Partners, but overall we think the net production within the Netherlands Life provision is looking a lot more healthy.