Nürnberger Beteiligungs — FY20 earnings up despite low interest rates

NBG’s overall revenues (including insurance premiums, investment income, and fee and commission income) remained stable at €4.6bn in FY20, which was mostly a function of slightly higher gross premiums booked and improved new premiums, offset by lower investment income in the period. NBG’s gross premiums booked increased 2.2% y-o-y to €3.59bn in FY20 (in line with NBG’s guidance of a slight increase), supported by dynamic growth in the health insurance and P&C segments (up 10.7% and 3.5% y-o-y, respectively). The life insurance segment saw lower momentum in the period (+1.0% y-o-y), affected by limited direct contact with customers due to social distancing measures (in Q220 in particular) and the lower interest environment limiting the attractiveness of traditional life insurance products. NBG’s premiums earned increased by 1.9% year-on-year.

We note that the company outperformed the wider German insurance market in 2020 in all three market segments with respect to growth in gross premiums. According to the GDV, the German market saw a 1.2% growth in gross premiums booked in FY20 (to c €220bn), posting a 0.4% y-o-y reduction in the life segment and an increase in the P&C and health insurance segments of 2.1% and 3.8% y-o-y, respectively.

NBG’s new premiums rose 6.2% y-o-y to €629.4m in FY20 (vs NBG’s forecast of a slight y-o-y increase). The most notable contribution came from the life insurance segment (up 6.5% to €482.2m), although P&C and health insurance also saw healthy growth in the period (up 4.3% y-o-y to €133.4m and 16% y-o-y to €13.8m, respectively). Management highlights that new business was supported, among other things, by the solid tech infrastructure of NBG’s salesforce after it completed a major IT infrastructure project in FY20. We discuss other drivers for new premiums in more detail below. Net commission income (largely attributable to NBG’s banking services segment) reached €56m in FY20, up 10.6% y-o-y.

It is noteworthy that investment income from traditional insurance products was up 7.9% y-o-y to €782.4m, assisted mostly by higher current income (€665.0m in FY20 vs €569.9m in FY19) from equities and other non-interest bearing investments, which included a larger distribution from a special fund. NBG’s gross aggregate reserve for conventional insurance rose by a notable €751.2m (€556.7m in FY19), including a €219.8m addition to the ZZR (€145.9m in FY19), triggered by a further reduction in market interest rates. In parallel, reserves related to NBG’s unit-linked business were down to €68.5m (compared to a €1,519.7m increase in FY19), corresponding to a change in the value of related investment held in the unit-linked products.

Operating expenses declined to €558.7m from €582.9m a year earlier, primarily resulting from lower acquisition costs (€413.1m in FY20 versus €444.7m in FY19) amid reduced commission expense in the life insurance segment. Pre-tax profit reached €92.3m in FY20 vs €81.3m a year earlier (or €103.4m when adjusted for a negative extraordinary result of €22.1m in FY19 related to restructuring measures) and net income (ex-minorities) increased to €77.4m from €67.4m in FY19, in line with management guidance for a y-o-y increase. In the period, the company booked €21.1m positive effects from 1) the consolidation of Nürnberger Asset Management (which should also contribute to NBG’s earnings going forward) and 2) one-off gains from the disposal of stakes in associates. Management has proposed a dividend of €3.3/share, unchanged versus FY19.

NBG maintains a good balance sheet position. In October 2020, Fitch reaffirmed its A+ rating for NBG’s subsidiaries (ie NÜRNBERGER Lebensversicherung, NÜRNBERGER Allgemeine Versicherung and NÜRNBERGER Krankenversicherung) and NBG’s issuer default rating of A. The outlook for all ratings is stable. NBG’s liquid resources (ie bank balances, cheques and cash in hand) stood at €497.4m at end-FY20 versus €600.6m at end-H120 and €415.3m at end-FY20.

In the life insurance segment, gross premiums were broadly stable at €2,502m (versus €2,478m in FY19), while new premiums increased by 6.5% y-o-y to €482.2m. The latter were driven by 18.7% y-o-y growth in the single premium business, which more than offset a 15.0% y-o-y drop in regular premium products. Segmental net profit was down 8.6% y-o-y to €37.2m, although still ahead of company guidance of €31.0m.

NBG’s P&C segment saw healthy growth in gross premiums booked and new premiums (up 3.5% and 4.3% y-o-y, respectively). New business benefited from strong demand for property, liability, and accident insurance (new premiums up 18.8% y-o-y), which more than offset a decline in vehicle insurance (down 4.2% y-o-y). While premiums earned grew 3.6% y-o-y to c €617.9m, claims expenses were also higher (up 3.6% y-o-y to c €360.0m) as a lower volume of claims expenses from accident and vehicle insurance due to lockdowns did not compensate for increased claims linked to company closures, event cancellations and business interruptions. Consequently, the combined ratio increased to 94.9% from 91.0% a year earlier and segmental net profit was down 27.9% to €18.6m, visibly below company guidance of a slight y-o-y rise.

The health insurance segment remained unaffected by the COVID-19 pandemic, posting a 24.0% y-o-y growth in net profit to €6.2m in FY20. New premiums in this segment (up c 16% y-o-y to €13.8m in FY20) continue to benefit from strong demand for full and supplementary insurance products. Net profit in the banking segment declined to €6.1m in FY20 from €6.8m in FY19, affected by higher operating expenses and lower interest income, which was only partly offset by improved fee and commission income.

GDV expects that gross premiums in the German insurance market will rise 2% y-o-y in 2021, with life insurance up 2% y-o-y, P&C up 1.5% y-o-y and health insurance up 5% y-o-y. Growth in life insurance should be assisted by including some catch-up effects from 2020, for example in pension products. P&C insurance may be negatively affected by the impact of reduced mobility on car insurance, as well as uncertainty among industrial companies, while GDV expects positive effects from private property insurance.

At group level, management expects stable gross premiums booked in FY21, assisted by significant growth in new premiums. That said, NBG guides to a slight decline in net income in FY21, largely due to higher additions to the equalisation reserve in the P&C segment. The latter will reduce the P&C insurance segment’s net profit to c €14m (vs €18.6m in FY20) despite higher gross premiums booked and new premiums in this segment, as expected by the management.

In the life insurance segment, management guides to significantly higher new premiums and stable gross premiums booked in FY21, as well as an unchanged segment result, mostly because of a reduction in net investment income and a continued increase in ZZR. Management acknowledges that net investment income in FY20 was achieved in favourable capital market conditions and is not assuming that the capital market environment in FY21 will be similarly supportive. At the same time, net investment income will be negatively affected by low interest rates, according to management. NBG’s strategic focus in this segment is on 1) income protection products in response to the persistent low interest rate environment; 2) the unit-linked offering in the private pension segment; and 3) ongoing digitalisation of the IT infrastructure, which should help the company transform from a ‘risk taker’ to a ‘health partner’ for its clients.

In the health insurance segment, both gross premiums booked and new premiums should grow significantly, with the latter continuing to be driven by supplementary and corporate health insurance products, according to management. NBG expects net profit in this segment will rise to c €7m in FY21 from €6.2 in FY20. Finally, management forecasts that the banking segment will achieve a similar profit to FY20 as better results in its asset management business and a slight growth in fee and commission income are unlikely to compensate for lower interest income in the period.

NBG’s shares are trading at a FY20 P/E ratio of 11.4x, which represents a 14.3% discount to its peer group median, while its FY21e P/E ratio of 11.5x is 13.3% above the peer group average. However, we note that Refinitiv consensus on NBG are based on the estimates of one analyst, which was last updated in September 2020. Management has proposed a dividend of €3.30/share for FY20 (unchanged y-o-y), which implies a 4.3% yield compared with a 5.1% median yield for its peers.