Pension Reform And Aegon Integration Will Support Stronger Long Term Earnings Profile

Catalysts

About ASR Nederland

ASR Nederland is a Dutch insurance and asset management group offering life, non life, pension and fee based services supported by its own investment platform.

What are the underlying business or industry changes driving this perspective?

• Completion of the Aegon NL integration, including decommissioning more than 200 legacy systems and realizing EUR 215 million of cost synergies by 2026, should structurally lower the expense base and support higher net margins and operating earnings.
• Regulatory pension reform in the Netherlands and a still early stage buyout market, where ASR has already captured around 40 percent of executed deals, provide a long runway to deploy capital at returns above 12 percent, supporting growth in operating capital generation and earnings.
• Growing demand for defined contribution pensions, annuities and decumulation solutions, reinforced by maturing DC assets and demographic aging, is driving sustained inflows and long duration liabilities that can underpin recurring investment margin and revenue.
• Expansion in fee based and services activities, such as the full acquisition of HumanTotalCare and the scaling of in house real estate management, deepens ASR’s role in the employability and retirement value chain, broadening capital light revenue streams and stabilizing earnings.
• Disciplined underwriting in Non life with a value over volume focus, supported by cost leadership and relatively stable bulk claims in Dutch P&C and disability, should help defend a combined ratio around the low end of the 92 to 94 percent range, sustaining profitability and operating capital generation.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming ASR Nederland's revenue will decrease by 13.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.4% today to 11.7% in 3 years time.
• Analysts expect earnings to reach €1.2 billion (and earnings per share of €6.52) by about December 2028, up from €1.0 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 12.4x on those 2028 earnings, up from 11.6x today. This future PE is greater than the current PE for the GB Insurance industry at 11.6x.
• Analysts expect the number of shares outstanding to decline by 1.16% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.77%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The company is currently benefiting from unusually benign weather and very stable bulk claims in P&C, but a reversion to more normal or adverse catastrophe and claims experience would erode the combined ratio away from the low 90s and compress operating capital generation, putting pressure on net margins and earnings growth.
• A s.r. is aggressively expanding in long dated pension buyouts and annuity business. Any mispricing of longevity risk, inability to execute planned longevity reinsurance or deterioration in illiquid asset returns on mortgages and real estate could reduce the attractive greater than 12 percent IRRs being targeted, weakening future OCC, solvency and earnings.
• The strategy relies heavily on Dutch pension reform, ongoing inflows into DC and annuity products and a still nascent buyout market. Any regulatory change, political pushback or slowdown in the pension transition could shrink the addressable market and materially reduce projected revenue growth and capital generation.
• The integration of Aegon NL is complex and involves decommissioning 220 legacy systems while delivering EUR 215 million plus of cost synergies. Execution missteps, IT delays or cultural strain on employees could limit expense savings and cause higher than anticipated operational costs, reducing net margins and earnings.
• Management is signaling continued capital deployment into buyouts, possible M&A and balance sheet rerisking. If future asset markets turn less favorable, spreads tighten further or real estate values reverse, the expected uplift from investment margin and capital efficient growth could disappoint, weighing on revenue from investment income and on overall earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of €62.96 for ASR Nederland based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €74.0, and the most bearish reporting a price target of just €52.5.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be €10.6 billion, earnings will come to €1.2 billion, and it would be trading on a PE ratio of 12.4x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of €58.56, the analyst price target of €62.96 is 7.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.