Early Target Achievement And AI Adoption Will Improve Future Prospects

Key Takeaways

• Strong commercial momentum in Europe and Non-life segments, along with sustainability investments, enhances NN Group's growth, revenue, and earnings prospects.
  
• Management's strategic actions on capital return, reinsurance, and AI implementation bolster shareholder value, net margins, and customer satisfaction.
  
• Market and regulatory changes pose headwinds for NN Group, impacting revenue and earnings across pension, Japan, Belgium, and banking operations.

Catalysts

A financial services company, provides life and non-life insurance products in the Netherlands and internationally.

• NN Group has demonstrated strong commercial momentum, particularly in Europe and the Non-life segment, with Insurance Europe outperforming through profitable protection sales and pension growth. This is expected to bolster operating capital generation over time, impacting revenue and earnings positively.
  
• The company has reached its 2025 capital generation target a year ahead of schedule and increased investments in climate solutions to €12.8 billion by the end of 2024. This strategic focus on sustainability and early target achievement enhances market confidence in NN Group’s future growth, likely improving earnings and free cash flow.
  
• NN Group has a sustainable capital return policy, with plans for dividend growth amplified by share buybacks. This commitment to capital return is expected to drive shareholder value through increased earnings per share (EPS).
  
• Management’s actions, such as beneficial reinsurance deals and resolving uncertainties around the unit-linked portfolio, have strengthened the balance sheet and enhanced the quality of capital. These improvements are anticipated to support future net margins and earnings stability.
  
• The implementation of artificial intelligence tools within NN Group aims to improve customer experience, leading to higher customer satisfaction and potential growth in the company’s relational net promoter score. This strategic initiative is expected to drive future revenue growth and efficiency, potentially improving net margins.

NN Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming NN Group's revenue will grow by 29.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 22.0% today to 12.7% in 3 years time.
• Analysts expect earnings to reach €1.9 billion (and earnings per share of €7.48) by about March 2028, up from €1.5 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.3x on those 2028 earnings, down from 8.6x today. This future PE is lower than the current PE for the GB Insurance industry at 9.7x.
• Analysts expect the number of shares outstanding to decline by 1.24% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.09%, as per the Simply Wall St company report.

NN Group Future Earnings Per Share Growth

Risks

• Market and regulatory changes are presenting material headwinds, which could adversely impact NN Group's revenue and earnings if management actions fail to offset them effectively.
  
• The pension buyout market's dependency on market pricing discipline and potential delays from pension fund timelines could affect expected revenue streams from this avenue.
  
• Japan's business improvement order impacts sales in the short-term Corporate Life market, affecting NN's ability to generate revenue and meet medium-term sales targets in this crucial market.
  
• The solvency and capital position of Belgium's operations experienced challenges due to a capital injection requirement and the impact of strategy changes with ING, which can impact the profitability and net margins from this segment.
  
• NN Bank's non-interest margin has begun to normalize, resulting in a potential reduction in earnings from banking operations that could pressure overall operating capital generation in the future.

Valuation

• The analysts have a consensus price target of €51.572 for NN Group 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 €58.0, and the most bearish reporting a price target of just €42.95.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €15.1 billion, earnings will come to €1.9 billion, and it would be trading on a PE ratio of 8.3x, assuming you use a discount rate of 6.1%.
  
• Given the current share price of €48.78, the analyst price target of €51.57 is 5.4% 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.