FY19 earnings ahead of guidance

Nürnberger Beteiligungs 6 April 2020 Update
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Nürnberger Beteiligungs

FY19 earnings ahead of guidance

Insurance

Scale research report - Update

6 April 2020

Price

€64.5

Market cap

€743m

Share price graph

Share details

Code

NBG6

Listing

Deutsche Börse Scale

Shares in issue

11.52m

Liquid resources at end-December 2019

€415.3m

Business description

Nürnberger Beteiligungs is the parent company of a group of insurers and financial service companies. It is one of Germany’s oldest insurers, operating since 1884. It offers life, health and property and casualty insurance, with strongest demand for unit-linked life, disability and pension insurance and standard pension insurance.

Bull

Strong finances and conservative reporting.

Well-established brand name and solid historical performance.

Stable annual dividend payments.

Bear

Low interest rate environment.

Regulatory uncertainty.

Highly competitive industry.

Analyst

Milosz Papst

+44 (0)20 3077 5700

Nürnberger Beteiligungs (NBG) continues to operate in a challenging interest rate environment limiting its net investment income and translating into higher additions to the Zinszusatzreserve (ZZR) despite the regulatory changes to its calculation introduced some time ago. Nevertheless, it was able to post solid results in FY19, with net profit ahead of management expectations. Consequently, management proposed a 10% increase in the dividend to €3.3 per share. Uncertainty around the impact of the coronavirus outbreak on the economy limits future earnings visibility.

Solid FY19 results assisted by new premiums growth

NBG reported net income, excluding minorities, of €67.4m, which is visibly ahead of management guidance of €55m. This was assisted by better than expected earnings in the P&C and banking services divisions, as well as a slightly higher result in life insurance. New premiums at group level grew by a healthy 6.8% y-o-y to €592.4m, assisted in particular by life and P&C insurance. Consequently, gross premiums booked went up by 1.1% y-o-y to €3.52bn. At the same time, NBG’s combined ratio improved to 91.0% from 91.4% in FY18. We also note the lower effective tax rate of 15.4% compared to 37.5% in FY18.

FY20 outlook marred by COVID-19

In NBG’s annual report, management highlighted that it expects gross premiums booked to slightly increase at group level in FY20, with life insurance remaining stable while P&C and health insurance post visible growth in gross premiums. It anticipates a slight increase in new premiums this year. Overall, management expects a clear increase in net income, assisted by earnings outside its core operating segments, attributable to valuation reserves and the launch of Nürnberger Asset Management at the start of 2020. However, we note that the above guidance assumed limited changes in interest rates, as well as positive capital markets development on average and a lack of meaningful defaults. The current turbulent environment amid the COVID-19 outbreak means these conditions may not be met throughout 2020.

Valuation: Proposed dividend increase

Based on Nürnberger’s reported net income in FY19, its shares trade at a c 54.9% premium to its peers. We note that management has proposed a dividend of €3.3 per share (up 10% y-o-y), which currently implies a yield of 5.1%.

Historical financials

Year
end

Revenue
(€m)

PBT
(€m)

EPS
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/16

4,189

88.1

5.0

3.0

12.9

4.7

12/17

4,387

147.3

8.1

3.0

8.0

4.7

12/18

4,404

97.3

5.1

3.0

12.6

4.7

12/19

4,567

81.3

5.9

3.3

11.0

5.1

Source: NBG accounts

Edison Investment Research provides qualitative research coverage on companies in the Deutsche Börse Scale segment in accordance with section 36 subsection 3 of the General Terms and Conditions of Deutsche Börse AG for the Regulated Unofficial Market (Freiverkehr) on Frankfurter Wertpapierbörse (as of 1 March 2017). Two to three research reports will be produced per year. Research reports do not contain Edison analyst financial forecasts.

FY19 results: Solid new premiums across segments

NBG posted 1.1% y-o-y growth in gross premiums booked to €3.52bn, primarily supported by Property and Casualty (P&C) and health insurance, which posted visible 3.1% and 4.0% y-o-y increases, respectively. Meanwhile, gross premiums in life insurance remained broadly flat at €2.48bn. Growth across all segments was broadly in line with management guidance. In the wider German insurance market, gross premiums booked went up by 6.7% y-o-y to €216bn (according to the German Insurance Association (GDV)), driven by life insurance, which was up 11.3% y-o-y largely due to strong single premium business (up 37.1% y-o-y). NBG’s growth rate in life insurance was below market due to lower exposure to the single premium business. At the same time, GDV estimates growth in P&C and health insurance premiums at 3.2% and 2.3%, respectively (ie at comparable growth rates to NBG). According to GDV’s forecast published in January, growth in gross premiums booked in 2020 should reach 1.5–2.0%.

NBG’s new premiums reached €592.4m and were up 6.8% y-o-y, driven by life insurance (up 5.2% yoy to €452.6m) and P&C insurance (up c 12% to €127.9m), with a minor contribution from health insurance (up 13.3% to €11.9m). Net commission income (largely attributable to NBG’s banking services segment) stood at €51m, 7.3% higher compared to FY18. At the same time, the company’s gross investment income increased by 14.0% y-o-y to €1,001m in FY19. Consequently, NBG’s total revenue was €4.57bn in FY19 (3.7% ahead of previous year).

Having said that, we note that net investment income in the traditional insurance business decreased slightly by c 1% to €725.4m. This was largely a function of lower current income (down 8% y-o-y to €569.9m), with the decline attributable to a range of different asset classes, including equities, fund investments and other non-interest bearing investments; promissory notes and loans; registered bonds; as well as private equity and infrastructure.

In NBG’s life insurance business (which made up c 70% of the insurer’s gross premiums), despite the changes in the calculation introduced earlier (see our previous update note for details), ZZR increased by €145.9m compared to only €61.3m in FY18 on the back of further interest rate declines in the market (as measured for instance by the average yields on 10-year German government bonds, which in FY19 moved into negative territory). The increase in technical reserves associated with unit-linked products had a negative impact of €1,520m in FY19 (as distributions are not at a fixed pre-set level, but dependent on performance of the underlying investment portfolio in the insurance product). That said, these are by definition accompanied by an opposite move in unrealised profits/losses from unit-linked insurance investments recognised by NBG, which in FY19 amounted to €1,391.5m. On top of this, net realised investment income related to unit-linked products stood at €170.8m in FY19 (vs €6.1m in FY18).

NBG’s claims expenses were up 7.8% y-o-y to €2.5bn and increased primarily in life insurance (up c 9.0%). Although operating expenses grew by 4.3% y-o-y to €582.9m in FY19, this was largely associated with higher acquisition costs (up 4.6% to €444.7m) on the back of growth in new business. Meanwhile, administrative expenses remained broadly stable in FY19 (€213.6m vs €212.7m in FY18). The company has also recognised an extraordinary result amounting to a negative €22.1m in conjunction with some restructuring measures (no details were disclosed at this stage). All the above led to net income at €68.8m (including minorities) or €67.4m (excluding minorities), up 13.1% and 14.7% y-o-y, respectively. This is visibly ahead of management guidance of €55m, a function of the life insurance result, which was slightly ahead of expectations, as well as the P&C and banking services segments being significantly above expectations. We also note the lower effective tax rate of 15.4% vs 37.5% in FY18.

Exhibit 1: FY19 results highlights

€m unless otherwise stated

FY19

FY18

Change y-o-y

Gross premiums booked

3,515.3

3,478.1

1.1%

Premiums earned

3,251.5

3,216.9

1.1%

Net result on premium refunds

(240.0)

(354.9)

-32.4%

Investment income

896.2

736.4

21.7%

Unrealised profits/losses from unit-linked insurance investments

1,391.5

(1,050.4)

N/M

Other net technical income/(expense)

(28.1)

(24.4)

14.9%

Claims expenses

(2,469.6)

(2,290.9)

7.8%

Change in other technical provisions

(2,074.6)

448.5

N/M

Operating expenses

(582.9)

(558.9)

4.3%

Change in equalisation and other reserves

(20.1)

(15.7)

27.7%

Other net (non-technical) income/(expense)

(20.1)

(11.3)

77.8%

Goodwill amortization

(0.6)

(0.6)

0.0%

Extraordinary result

(22.1)

2.6

N/M

Pre-tax profit

81.3

97.3

-16.4%

Income and other taxes

(12.5)

(36.4)

-65.7%

effective tax rate

15.4%

37.5%

-2,210 bp

Net income (incl. minorities)

68.8

60.8

13.1%

Minorities

(1.4)

(2.0)

-33.8%

Net income (ex-minorities)

67.4

58.8

14.7%

Source: NBG accounts

Segment analysis

As highlighted above, gross premiums in life insurance remained stable in FY19 at €2,477m (vs €2,475m in FY18), while new premiums went up by 5.2% y-o-y to €452.6m, ahead of management expectations of a slight increase in FY19. New premiums in the single premium business improved by 5.1% y-o-y, while business based on regular premium payments rose by 5.4% y-o-y. Investment income was (as expected) visibly below last year due to continued interest rate declines in the market. The underwriting business remained largely unchanged compared to the previous year. Consequently, segment profit reached €40.7m (vs €44.0m in FY18), which is somewhat above management guidance of €38.0m.

P&C insurance benefited from good momentum in new premiums, which increased by c 12% to €127.9m. This was driven in particular by the vehicle insurance business (with new premiums of €74.5m). Together with the inward reinsurance of the business of NBG’s associate Bene Assicurazioni, this resulted in a 3.1% y-o-y increase in gross premiums booked. This was despite some business disposal in legal protection insurance. NBG’s combined ratio reached 91.0% (improving slightly from 91.4% in FY18) and, overall, the underwriting business in FY19 was ahead of management expectations. As a result, the segment’s result amounted to €25.8m (FY18: €23.9m) compared to company guidance of €15m.

New premiums in health insurance rose to €11.9m from €10.5m in FY18 (management expected a slight reduction), assisted by both full and supplementary insurance products. Gross premiums increased by a solid 4.0% to €228.3m in FY19. Consequently, the segment’s result was up to €5.0m from €4.5m last year. In the context of the current lockdown triggered by the COVID-19 outbreak, we note that since January 2019, NBG has been co-operating with TeleClinic to allow the company’s customers to seek medical advice and obtain prescriptions through a mobile application, PC or telephone from any location and also outside the standard opening hours of a medical facility.

Commission income in the banking services segment increased to €42.6m from €40.0m in FY18, and at the same time net investment income (mostly interest income) went up to €6.3m from €5.8m in FY18. This was driven by growth in customer loans and assets under control. This led to a segment result of €6.8m in FY19 compared to €4.1m last year.

Valuation

There are no Refinitiv consensus estimates for NBG and management has not yet quantified its earnings expectations for 2020. Consequently, we have made a peer comparison based on FY19 net income. NBG is trading at a 54.9% premium on FY19 P/E vs its peers. Management proposed paying an annual dividend of €3.3 per share from 2019 earnings, up from €3 per share in the previous year. This implies a 5.1% yield and compares with 8.0% for its peers.

Exhibit 2: Peer group comparison

Market cap (lcy m)

Share price (lcy)

P/E (x)

Dividend yield (%)

2019

2020e

2019

2020e

UNIQA Insurance Group

€2,089

6.76

8.9

9.6

7.8

8.3

Helvetia Holding

CHF3,881

78.05

7.4

7.9

6.1

6.6

Baloise Holding

CHF6,056

124.10

8.3

9.6

4.8

5.4

Ageas

€7,026

35.42

7.0

7.4

6.2

7.4

Swiss Life Holding

CHF10,267

305.60

8.4

7.9

5.4

7.0

NN Group

€7,830

22.79

5.8

5.9

9.5

10.1

CNP Assurances

€5,541

8.07

4.1

4.0

11.0

12.1

AXA

€33,766

13.96

5.4

5.1

9.6

10.7

Allianz

€62,292

149.32

7.9

7.9

6.4

6.7

Talanx

€7,341

29.04

8.0

7.8

5.0

5.5

Peer group average

7.1

7.3

7.2

8.0

Nürnberger Beteiligungs

€743

64.50

11.0

N/A

4.7

5.1*

Premium/(discount)

54.9%

N/A

(35.4%)

(35.9%)

Source: Refinitiv consensus at 6 April 2020. Note: *Yield calculated based on dividend payment from 2019 earnings.


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Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

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This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

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Schumannstrasse 34b

60325 Frankfurt

Germany

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United Kingdom

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