Investors see insurance as dull and complicated and best left to experts. That creates a shortage of buyers for some quality stocks. NN is a classic case, Elliott reckons, and its shares should be double the current price. The company just needs to get investors to stop seeing it as a mysterious black box. To Elliott, it’s a reliable dividend machine which, run more aggressively, could pay out even more cash to shareholders.
The activist tried to influence new CEO David Knibbe behind the scenes in the run up to this week’s strategy day. That evidently didn’t work so Elliott started a campaign, calling on NN to cut costs and shift some of its government bond portfolio into riskier but higher-yielding corporate bonds to boost annual cash flow. That would justify setting a target for 7 billion euros ($8 billion) of free cash flow over the next five years.
The fund also wanted Knibbe to release capital by hedging out more of the company’s exposure to longevity — policyholders living longer — and by selling assets. It wanted a 3 billion-euro target for that, some one-third of the market capitalization.
In true insurance style, NN’s rebuttal is oblique. Knibbe’s pledge has set a goal for organic capital generation, most of which will turn into free cash flow, for 2023. That will be achieved partly by moving into riskier investments, as Elliott requested. The number, 1.5 billion euros, is consistent with Elliott’s five-year cumulative target. A shame then that NN couldn’t just make the commitment Elliott sought.
Meanwhile, Elliott wants NN to say it will pay out 80% of its free cash flow in dividends. NN is pledging to raise the dividend each year in line with its business performance without committing to a particular payout ratio. Again, the two sides aren’t so far apart.
The real differences are on the one-off capital releases. NN says it’s open to doing more longevity transactions, and to jettisoning units that don’t earn their cost of capital. But again, there’s no commitment to releasing a specific amount of capital this way. Its position is defensible: Insurers need to be careful with anything that weakens solvency as regulators can be capricious. What seems like excess capital one day can be essential the next.
Even so, there’s enough common ground here that it’s odd that Elliott’s engagement didn’t culminate in a joint announcement this week, SAP-style. NN has now played into Elliott’s hands by being conservative on its targets and vague on precisely what might trigger a capital return. Between them, Elliott and the company have pushed out over 200 pages of slide presentations in the last month. The way to pull in new investors here is clarity and simplification, and this battle is hardly helping. No wonder the shares have gone nowhere.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.
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