Low rating, but industry uncertainties persist

Nürnberger Beteiligungs 20 September 2017 Update
Download PDF

Nürnberger Beteiligungs

Low rating, but industry uncertainties persist

Insurance

Scale research report - Update

20 September 2017

Price

€65.48

Market cap

€754m

Share price graph

Share details

Code

NBG6

Listing

Deutsche Börse Scale

Shares in issue

11.52m

Last reported net debt as at 30 June 2017

€2.39m

Business description

Nürnberger Beteiligungs-AG (NBG) is the parent company of a group of insurers and financial service companies. It is one of Germany’s oldest life insurers, and currently has 5.7m contracts, €3.3bn in gross premium income and €27.6bn in AUM. In 2016, NBG sharpened its image to be seen as a “clear, easy and solid” insurer.

Bull

New client-focused management structure.

Well-established brand name, solid historical performance; focus on top 10 strategy.

New organisational structure paves way for premium income growth and cost reductions.

Bear

Low interest environment deters savers.

Regulatory uncertainty.

Early days for restructuring process.

Analyst

Adrian Phillips

+44 (0)20 3077 5700

Nürnberger’s results this year are riding out the challenging environment; net income rose 63% to €42m and guidance for the full year was upped from €40m to €60m. Against this, the dominant life insurance business faces limited medium-term visibility. At 1.02x conservative HGB book value per share and a dividend yield of 4.6%, the rating is undemanding.

Reasonable result in tough environment

The first half results for 2017 show Nürnberger Beteiligungs confronting a difficult environment, above all in its core life insurance business. Conditions have made their mark notably at the top line, but profitability is holding up reasonably well under the circumstances. Overall total revenue fell by 5.5% to €2.12bn. This was attributable to both a weaker insurance business and lower investment income. Total gross premiums written dropped by 2.3% to €1.7bn and new and additional premiums fell to €233.5m, down 16.9% on the €281.1m recorded in the first half of 2016. This was entirely due to the life segment; the other segments recorded modest progress. Gross investment income dropped by 17.9% to €392m in a difficult investment environment.

Life insurance hit by low interest rates and regulatory uncertainty

The group’s worst performing segment was its core life insurance operation. Here new premiums written fell very sharply: 22.9% to €175.8m from €228.1m, as low interest rates combined with regulatory uncertainty to weaken demand. This fed through to a 4.2% drop in total gross premiums from €1.25bn to €1.20bn. The reform of life insurance law continues to put pressure on margins throughout the industry, unsettling demand trends.

Profit guidance increased

The company has given guidance for full year net profit of €60m, slightly ahead of the €58m reported for 2016. This compares with a forecast of €55m net profit for 2017 given in the 2016 report and accounts. The implicit forecast for the second half of some €18m in net profits looks undemanding. Even with the more modest net profit forecast in the 2016 annual report, the company affirmed that its capacity to distribute a dividend was assured.

Historic financials

Year
end

Revenue
(€m)

PBT
(€m)

EPS
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/13 IFRS

4,713

111.1

6.21

3.00

10.5

4.6

12/14 IFRS

4,963

134.9

9.44

3.00

6.9

4.6

12/15 HGB

4,658

85.4

4.11

3.00

15.9

4.6

12/16 HGB

4,256

88.1

5.03

3.00

13.0

4.6

Source: Nürnberger Beteiligungs filings. Note: HGB = German GAAP. Company changed from IFRS to HGB in 2016.

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.

Well-equipped in testing times

The first half results for 2017 show Nürnberger Beteiligungs confronting a difficult environment, above all in its core life insurance business. Low interest rates and continuing regulatory uncertainty are the chief adverse factors it must confront. Conditions have made their mark, notably at the top line, but profitability is holding up reasonably well under the circumstances. Result from ordinary activities rose 15% to €58.7m in part due to non-recurrence of difficult underwriting conditions in property and casualty. The outlook for the full year is still encouraging and, indeed, appears to have improved, although it is unclear whether this reflects any kind of secular improvement.

Life insurance hit by low interest rates and regulatory uncertainty

The group’s worst performing segment was its core life insurance operation. Here, new premiums written fell very sharply: 22.9% to €175.8m from €228.1m, as low interest rates combined with regulatory uncertainty to weaken demand. The most striking fall was one of 32.5% in single premium business but this arose because Nuernberger was unwilling to compete aggressively in what is very low margin business. The decline was much more contained in the regular premium business, where the total was down only 3.0%. This fed through to a 4.2% drop in total gross premiums to €1.20bn from €1.25bn.

The German life insurance market is still being affected by the new regulatory environment ushered in by the Lebensversicherungs-Reformgesetz (LVRG) in 2014, which aimed to reform the market in favour of consumers. A recent study by Willis Towers Watson, the international insurance broker and advisory firm gives an indication of the scale of this. There is no direct read-across to Nürnberger Beteiligungs’s results, but the data show clearly the extent to which the LVRG has pressurised margins in the industry. The reform was designed to bring down the costs of taking out insurance and this has fed through to the rates of commission paid for selling life insurance policies under new sales guidelines. Compared to the results of a similar study undertaken two years ago, rates have fallen across the board. Average commissions among insurance brokers, which are of particular relevance to Nürnberger Beteiligungs, dropped from an average of 39.4% in 2015 to 32.1% in 2017; a fall of 7.3 per thousand (a tenth of 1%) Insurance brokers were the category most affected, with exclusive agents dropping 1.5 per thousand and multi-company agents down 5.5 per thousand.

Non-life progresses gently

Nürnberger Beteiligungs’s other insurance segments showed more normal developments in far more benign market environments, but this was not sufficient to compensate for the life insurance results.

Health insurance saw new business continuing to progress with a 12.5% rise to €5.4m. Here, progress in supplementary products more than counterbalanced softness in comprehensive insurance. Foreign travel health insurance was a bright spot with the number of contracts growing 9.3% to 239,215 policies. Gross premiums written progressed by 5.3% to €108.2m.

Growth was more modest at the property and casualty operations, but solid nonetheless. Total new and additional premiums were up by 8.5% at €52.3m, with increases in both non-motor (+5.2% at €24.2m) and motor (+11.5% to €28.1m). Total gross premiums written were up 1.4% at €392.9m, although here there was a small difference in the trends in the component segments with non-motor up 3.0% at €239.1m and motor down 1.0% at €153.8m, perhaps reflecting the unwinding of guarantee-related business in the course of 2016.

Contrasting trends in current profitability

The tough investment environment can be read in the fall in gross group investment income by 17.8% to €392.3m. The drop in gains realised from €118.0m to €108.2m was almost matched by the fall in losses realised from €14.9m to €1.0m. The net investment result dropped by 18.8% to €343.8m.

Profitability in the two main parts of the business showed the same trends as business levels. The actuarial (underwriting) result in life and health insurance dropped 21.5% to €14.2m influenced by lower investment income. By contrast, there was a sharp improvement in the actuarial (underwriting) result at property and casualty, which was up 150% at €18.0m. Property and casualty benefited from the non-recurrence of high levels of natural hazard and large claims in the comparable period of 2016. This brought a sharp improvement in the combined ratio to 92.1% from 95.1%.

In both life and non-life underlying trends were magnified by the non-recurrence of €11.3m in restructuring costs, which were split roughly evenly between life and non-life. The 15% increase in results from ordinary activities to €58.7m rose to a gain of 48% at the pre-tax level. After tax, the gain improved further to 63% to €41.7m.

Some of the structural measures initiated in 2016 are starting to bear fruit. The total number of field staff dropped by 12% to 731. The shift towards digital business could be traced in the fact that all motor insurance policies are now available online. Others will follow.

Profit guidance increased

The company has given guidance for full year net profit of €60m, slightly ahead of the €58m reported for 2016. This compares with a forecast of €55m net profit for 2017 given in the 2016 report and accounts. At that point the expected decline was attributed in particular to non-recurrence of the boost to profits from the reduction in the interest rate assumption for old-age pension liabilities. It may be noted that the first half net profits of €42m implies a forecast for the second half of some €18m in net profits looks undemanding, although Nürnberger did not give details of assumptions or specific influences likely to bear on the outturn. It would seem that the company is following a conservative approach on this score.

Even with the more modest net profit result forecast in the 2016 annual report and accounts, the company affirmed that its capacity to distribute a dividend was assured. It may be assumed that this will hold good under the new forecast, with positive implications for the status of Nürnberger Beteiligungs’ shares as an income play.

The shrinkage in business volumes and modest growth in shareholders’ equity (+0.4%) in the first half suggest that the already healthy solvency ratio of 263% reported in the 2016 filings will have improved.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt and Sydney. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Any Information, data, analysis and opinions contained in this report do not constitute investment advice by Deutsche Börse AG or the Frankfurter Wertpapierbörse. Any investment decision should be solely based on a securities offering document or another document containing all information required to make such an investment decision, including risk factors.

Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Deutsche Börse AG and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided 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. Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Share this with friends and colleagues