EUR 850.00 For Business Accounts Only

Morningstar | NN's 1Q a Bit of a Mixed Bag, but Market Still Way Too Pessimistic

NN Group reported first-quarter operating profit of EUR 470 million, which is a little bit ahead of our estimates for the full year. There are some one-offs in here and the results are a bit of a mixed bag, but overall, we still think the market is way too pessimistic. We are maintaining our EUR 48 fair value estimate and no-moat rating.

Running through the results, we think Netherlands Life looked fairly decent. The improvement in the investment margin was quite a surprise, at EUR 242 million on a 9-basis-point improvement to 90 basis points on reserves profitability. Both of these are quite pleasing, particularly given the negative sentiment surrounding the outlook for this indicator. The net production on the provision for which the business makes this spread income came down to negative 180 basis points. It's still clearly in the red, but the deposits of 440 basis points are encouraging versus around 170 basis points, which we have seen in periods prior. However, withdrawals still need addressing and we think that's what the market is focusing on. Withdrawals on these for risk of NN Group provision were negative 610 basis points; we expect that to come down over the next two to three years.

Fee and premium-based revenue remained under pressure, though this is something we have factored into our estimates, as well as a small ongoing contraction in the technical margin, which is essentially the biometric risk underwriting part of the life business. The net production on the risk of policyholders provisions in Netherlands Life was admittedly disappointing. While deposits were again higher at 780 basis points, withdrawals were elevated at 11.7%, bringing net production to negative 390 basis points. This is unusually elevated. However, there is ongoing restructuring within NN Investment Partners that boils down to looking deeper at strategies, client service, and efficiency. We still think this line of business can achieve net additions to this provision of over 200 basis points in the medium to long term.

The second Netherlands division, nonlife, was equally mixed. Results here continued to be messy but to a lesser degree. The operating result of EUR 29 million for the period was light against what we think are normalised earnings for the business, but it is a lot better than the negative EUR 30 million the business posted in the comparable period. The problem in this division is consistency, though there are signs that management is addressing this. We think EUR 40 million-45 million per quarter would be a much better target for management to be reaching near term. These results in Netherlands nonlife seem to be a continuation of what we have seen in the fourth quarter.

Premium growth has been strong in some lines such as disability and accident, fire, and motor. We do think this is typically a higher-premium period where renewals come due. Aside from that, these premium numbers still looked upbeat.

The second takeaway that we liked in these Netherlands nonlife figures was the lack of an operating loss across all lines of business. This is something that has been rare in the unit. And finally, motor maybe returning to profit.

Combined ratios admittedly weren't great across the division at 97.9% for the whole unit; the main saving grace is a continued focus on expense reduction. Loss rates look to us a little elevated, but the property and casualty segment that houses motor does look to be showing signs of more consistent underwriting profitability. Higher individual claims have driven a higher loss rate in accident and disability.

At a group level, solvency still looked decent, in our opinion; our internal benchmark is something above 200 and this result came in at 213. Operating return on equity was up to 9.9%, free cash flow was EUR 185 million, and we think the business is likely to raise its expense saving target of EUR 400 million by year-end 2020. This quarter pencilled EUR 20 million to EUR 310 million to date, so we think by the end of 2019 there will be room for more in 2020. The one-off mainly came from the life division of EUR 65 million from an indirect stake in former ING Life Korea. This is elevated. On a recurring note, we are also seeing a reduction in special items on lower costs for restructuring. New sales in terms of APE across the group have been highly impressive.