In the coming weeks, the question will be answered as to what fate befalls two important Dutch asset managers: both NN Investment Partners and Actiam are awaiting the Salomon judgment of their mothers, being NN Group and Athora. While NN is still vaguely talking about “a review of strategic options”, at Athora it is only a question of to whom the daughter will be given. These cases raise wider questions about the future of asset managers held by insurance firms, reports Investment Officer Luxembourg’s Dutch-language sister publication Fondsnieuws.nl.
It was Monday 26 April, 7.08am, that the bomb fell from the cloudy sky. It fell in the backyard of NN Group, that is, on the pavement where the asset management branch - the subsidiary NN Investment Partners - has its offices. The bomb came in the form of a press release, entitled NN Group announces review of strategic options for NN Investment Partners.
The press release states that NN Group is reassessing all the strategic options for its asset management arm, being a merger, a joint venture or a (partial) divestment.
Activist shareholder puts pressure on
We are now about 10 weeks further on. The Netherlands is getting ready for the holiday season, but at NN Group’s headquarters in The Hague, work is continuing. Analysts assume that the parent company will announce to whom it will sell the asset management business on or before the half-year update on 12 August.
The pressure has been put on by Elliott Management. The activist American shareholder, who owns about 3 percent of the shares in NN, gave the management of the group a scolding: there is talk of a “persistent undervaluation” and “that NN leaves its investors in the dark” - see attachment.
Hardly anything is published about the strategic considerations that are made in the boardroom of the listed NN Group. A snippet of it was caught by Reuters. The British press agency recently stated that a few parties have come forward as potential buyers. Specifically, the names of European players UBS, DWS and possibly Prudential were mentioned, as well as the American company Nuveen.
Other strategic options in the picture
Earlier, other insurers, such as the German Allianz and the Italian Assicurazioni Generali and The Royal London Group, had already dropped out, according to Reuters. The news agency stated that Generali would have been prepared for a takeover bid of EUR 1.5 billion for NN IP, which has more than EUR 300 billion under management.
NN Group thought that offer was too low. If this is true, then NN is not prepared to make a divestment if it returns less than that amount, and other ‘strategic options’ come into play, as announced in the press release of 26 April.
NN IP recorded its “best year ever” in 2020, with inflows of EUR 13 billion. A number of new institutional mandates have been won, but sources in the market say that this inflow took place at low fees. Some even doubt whether NN IP is currently posting a solid net profit. But analysts from trading platform IG contradict this and come to a different view. They state that NN IP is making a stable annual profit of, on average, around €110 million per year.
Possible sale price: 1.65 billion
IG analysts take into account a sale price of around 1.65 billion euros. That is roughly 15 times its profit. IG states that this price consists mainly of goodwill. If that is correct, then from the perspective of NN’s Solvency II ratio, it is very good. This ratio shows how much capital an insurer holds in relation to the risk it runs on its liabilities.
The regulators require European ‘healthy’ insurers to hold at least 120 to 130 percent of capital. NN Group is way above that with a ratio of around 200 percent. With a sale of NN IP, NN Group can increase its Solvency II ratio by an estimated 10 per cent, according to the IG.
But if the Solvency II ratio is already so high, why would NN Group sell its asset management arm? Anonymous sources consulted by Fondsnieuws provide two explanations. First, NN Group’s arithmetic experts will calculate whether an estimated revenue stream of €110 million is sufficient from a return-on-investment perspective. And more importantly: will this revenue stream be sustainable?
There is growing doubt about this in the market. NN IP manages a considerable part of the insurance money of NN, but the asset manager does that (mainly) with active strategies, while the trend is that large asset owners arrange the core of their client portfolios mainly with cheap passive strategies that NN IP does not have. This trend towards passive strategies is one of the explanations for the consolidation in the sector. In other words, the divestment of NN IP could be an opportunity for the insurer to make substantial cost savings.
Capital optimisation highly needed
Another consideration in the Salomon judgment by NN Group is imposed by Elliott Management. The activist shareholder thinks NN is a great company with a “historically stable cash flow” and ‘the ability to successfully manage risk’. But because of poor communication, NN has been trading below its intrinsic value for years.
Elliott stated last June that the NN share could rise 80 percent. This would require capital optimisation. Elliott wrote that ‘“the large collection of disparate independent business units of NN Group is ripe for rationalisation”. Specifically, he mentioned an optimisation of Insurance Europe and NN Japan, which could free up more than EUR 2.5 billion in capital. In Elliott’s examples of capital optimisation, NN IP is explicitly not mentioned.
By selling business units, NN Group could raise its Solvency II ratio and initiate a share buyback or pay out a higher dividend; the latter was suspended by regulators last year due to the pandemic, which was met with much displeasure among European insurers.
News partly already in the price graphs
Whatever decision NN Group makes, it is certain that some business units will be sold. Time will tell, but it seems doubtful whether the asset management business is still seen as a strategic asset by NN - given the ongoing negotiation game with potential buyers, that no longer seems to be the case.
Meanwhile, the group is already deploying its comfortable capital buffers. Recently, NN announced it would take over MetLife’s Polish and Greek operations and merge them with NN’s existing operations in those countries. They paid EUR 584 million for this strategic acquisition. It will cost NN a few percentage points of its Solvency II ratio. NN expects a return of more than 10 percent on that investment.
Analysts estimate that a sale of business units will give the following calculation: a 5 percent increase in the Solvency II ratio will give a 2 percent increase in the share price of NN Group. But if the graphs are not deceiving, part of the surprise would already have been incorporated in the share price.
Why Athora put Actiam on sale
In mid-March, it was announced that Athora (formerly Vivat) was exploring strategic options for the sale of its asset management subsidiary Actiam. Athora bought Vivat in 2019, together with NN Group. In doing so, Athora got hold of Vivat’s life insurance business and the claims branch went to NN. Actiam also joined Athora, a specialist insurance and reinsurance group, behind which there are private equity parties. Actiam posted a loss of EUR 5 million in 2020. This was better than the loss of €7 million in 2019. Assets under management fell from €63.8 billion to €58.1 billion. Actiam stopped as fiduciary manager of Vivat, because it was barely breaking even. For Athora, the discontinuation of this internal task was acceptable, because the owner of the Vivat group was in favour of a more dynamic asset allocation. In this way, the investor believes it can achieve higher returns and therefore better investment products. Actiam was put on hold - and now the sale seems to be a fact. There is a lot of interest in Actiam, especially because of its extensive knowledge and expertise in the field of sustainable investing.