Quarterly Report March 2024

NN Group, through Nationale Nederlanden, is the largest life insurer in the Netherlands. It accounts for about half of capital generation (the profit measure for insurers). In addition, NN owns both a pan-European and Japanese life insurer, a mortgage/savings bank, and, after Achmea, is the largest in the Dutch non-life market. The insurer was founded in 1845 and was part of ING Group between 1991 and 2014, after which it received its own stock exchange listing.

The core of the life business is estimating people's chances of survival. Most life insurance policies pay out when customers die - think, for example, term life insurance for mortgage repayment. The opposite situation is pension insurance or annuities where the customer is assured of a fixed benefit for as long as they live. Investment insurance policies (such as guaranteed deposit or minimum guaranteed value at death) also fall under the life business. Here, until about 20 years ago, not everything went well in terms of transparency towards customers. This 'usury policy affair' was definitively settled by NN earlier this year for 360 million euros.

Today, life insurance policies are not selling as well in the Netherlands as they did 20 to 30 years ago. This is partly due to lower interest rates and the elimination of tax benefits. Meanwhile, existing policies (which do run for a long time, by the way) expire one by one. Investors therefore see it as a shrinking business. In addition, a life insurer's balance sheet and results are difficult to understand. The combination of shrinkage and complexity causes many investors to abandon the industry.

Because of that lack of popularity and, among other things, a badly fallen investor day in 2022, the share price landed around €32 last summer, which was the moment for the AEF to buy NN Group shares. At that price, the dividend yield over 2023 was 10% - still excluding share buybacks. So NN was very attractively valued. Moreover, according to our calculations, NN also had more equity sitting in the (Solvency II) capital buffer than other Dutch insurers.

A major plus in NN Group's investment case is that the shrinking portfolio makes earnings reasonably predictable. The return on equity is mediocre, but as the (moderately profitable) life portfolio shrinks, more and more capital is freed up which the company can pay out to shareholders unhindered. Currently, NN Group's book value is over 15 billion euros, while its market capitalization is 11 billion euros. In theory, the winding down of the activities already provides a 40% return, in addition to the return on the shrinking life portfolio. Also based on other valuation methods, the current valuation is attractive because many of the growing activities are valued higher by investors.

Money that does not end up in the pockets of shareholders reinvests NN in activities that yield better returns than the Dutch life insurer, such as the European life insurer, the Dutch non-life insurer and the pension business. With, among others, the premium pension institution (PPI) BeFrank, NN Group has a 40% share of the new Dutch pension market through employers. This is still a relatively small market, but scale works favourably and the invested assets of EUR 30 billion are growing rapidly every year. Three factors contribute to this: new contributions from existing members, new employers switching to a PPI, and investment returns on the portfolios.

The AEF has been investing in NN Group since mid-2023. Since the first purchase of NN shares, the return including dividends is 28%. Despite the increased share price, we still find NN's current valuation very attractive. Shareholders see an annual 10% return at the current share price through a robust dividend and share buyback program.