DL.as - Delta Lloyd

[Sportgamma]

I have had a position in Delta Lloyd for some time now. Its trading at around half of book with the controlling shareholder (Aviva) currently in the process of divesting. Last week Aviva completed the sale of 21% of the outstanding shares and now holds 19%, which it will hold for a minimum of six months.

 

It´s one of the best insurers in the Netherlands and did not receive any government support during the crisis.

 

http://sportgamma.net/2011/06/30/profile-delta-lloyd-group-dl-as/

 

http://uk.finance.yahoo.com/news/aviva-plc-aviva-completes-sale-105500829.html

 

http://online.barrons.com/article/SB50001424053111903431804577508933252453286.html?mod=googlenews_barrons

 

 

 

 

[Sportgamma]

Aviva has sold the remaining 19% of its stake in Delta Lloyd.

 

http://www.bloomberg.com/news/2013-01-08/aviva-selling-its-575-million-delta-lloyd-stake-in-offering-1-.html?cmpid=yhoo

 

 

[Hielko]

Surprising little interest in this name on this board considering how big the AIG thread is.

[Edward]

I'm curious about 2 things after I saw the balance sheet:

 

1. Balance sheet leverage seems to be 1:20 vs 1:5 for AIG. It seems a lot more levered but about as profitable as AIG is.

 

2. What are the investments on the balance sheet composed of exactly? Sovereign bonds denominated in euros?

[Sportgamma]

I'm curious about 2 things after I saw the balance sheet:

 

1. Balance sheet leverage seems to be 1:20 vs 1:5 for AIG. It seems a lot more levered but about as profitable as AIG is.

 

2. What are the investments on the balance sheet composed of exactly? Sovereign bonds denominated in euros?

 

DL uses different accounting standars than other European insurers and they mark everything to market. Therefore, a low interest environment hits the equity value directly because of higher insurance provisions. According to their investor day presentation (http://www.deltalloydgroep.com/en/investor-relations/other-publications/investor-day/) "on more traditional accounting assumptions, 50% increase in Delta Lloyds shareholders' funds from € 2.5bn to € 3.7bn." 83% of the equity is tangible.

 

Page 24-28 in the Investor Day Presentation explains this more thoroughly. 

 

One way to brake up the assets:

 

The life insurance investment portfolio (excluding Germany):

Fixed Income (discounted on a collaterized AAA curve): €23B

Mortgages and property: €6B

Equity: €3B

Universal Life assets: €13B

Total life portfolio: €45B

 

Other assets €34B

Inc. banking & asset management, P&C insurance, German Life (for sale)

 

Here is a rather outdated break-up of the FI portfolio from:

Germany 3,188

Austria 1,530

Netherlands 1,508

France 1,328

Italy 986

Rabobank 726

Finland 642

EIB 638

Group Securitisations 619

Belgium 521

Total top ten 11,686

 

Total exposure to PIIGS government bonds in fair value went from €3,880M in 2009 to 319 in 3Q2011.

 

[Edward]

Thanks for the break-down.

 

Did you consider that the European banking system is about 4 times more levered than the US system, plus a lot of countries have problems to balance their budgets?

 

I could easily imagine some sort of default or devaluation in the core of the Eurozone, not to speak of the PIIGS. Why is that not a worry when investing in a highly levered financial institution in Europe?

 

When comparing with AIG, I see:

 

1. About the same long term P/E valuation (based on around 10% ROE).

 

2. 4 times more leverage.

 

3. A life centric company vs more elementary insurance in AIG.

 

4. A very unstable and massively levered system in Europe, with no steps yet taken to address the issues (unlike in the US).

 

Is there something I'm missing? Because it looks like a lot more risk for probably the same potential reward.

[writser]

Surprising little interest in this name on this board considering how big the AIG thread is.

 

holds for most other insurers.

[giofranchi]

Sportgamma,

generally I don’t like life insurance. And it seems they are quite concentrated on life insurance. Anyway, I always want to know about management: who are they? You know what I am looking for! ;)

Thank you,

 

PS

I tend to agree with Edward as far as highly levered european financial institutions are concerned.

 

giofranchi

[Sportgamma]

Sportgamma,

generally I don’t like life insurance. And it seems they are quite concentrated on life insurance. Anyway, I always want to know about management: who are they? You know what I am looking for! ;)

Thank you,

 

PS

I tend to agree with Edward as far as highly levered european financial institutions are concerned.

 

giofranchi

 

 

The company is run by Nick Hoek who came over from Shell if I remember correctly. He seems pretty focused on cutting costs and streamlining operations. I´m particularly impressed with Alex Otto, the chief investment officer. He/they uses a fundamental approach in combination with dynamic hedging. But I have to disappoint you Gio, with the fact that its not an O-O company...

 

However your partner Einhorn likes this one very much and has said that it´s one of the better run insurance operations in Europe (so you might actually be an indirect shareholder after all...). All in all, they seem prudent, honest and well aware in their risk management.

 

The main reason that I´m not that pessimistic regarding this highly levered european financial institution (which I think isn´t as leveraged as it looks like on the balance sheet) is the fact that they were the only major Dutch financial services group that did not require a bail out from the state during the financial crises. So they survived the ultimate real life stress test in flying colours. Another reason is that I prefer an insurer (long term assets, long term liabilities) over a bank (long term assets, short term liabilities). Read also: http://sportgamma.net/2012/01/06/605/

 

When comparing AIG to Delta Lloyd one has to take into account that their accounting might differ profoundly.

 

[Sportgamma]

David Einhorn at the Ira Sohn of 2011:

 

"Let’s move onto a long idea, Delta Lloyd, which is the name of a Dutch insurer and should not be confused with delta of Lloyd, which Investopedia defines as the difference between the golden CEO’s pay, and what the Fed thinks he should be paid.

 

The basics of Delta Lloyd is a Dutch financial services company listed in Amsterdam and operating mainly in the Netherlands and Belgium. The Bloomberg ticker is DLNA. It has 167M shares outstanding and trades at 70% book value, 6x earnings, and has a 6% dividend yield. Delta Lloyd reports embedded value, which is essentially the discounted value of the existing book of business. At 32 € per share, it means the shares essentially trade at half the runoff value of the company assuming it writes no new business.

 

Delta Lloyd has over 40B€ of its own risk assets and manages over 70B€ funds in total. It’s primarily a life and pensions business, with about 30% of operating earners coming from the property casualty insurance asset management in banking.

 

While S&P only rates the group single pay, its insurance entities hold on average 2.3 times the amount of capital required by the regulator at the subsidiary level and 40% more than Delta Lloyd’s own minimum target. Delta Lloyd has only 15% net to equity versus peers typically having 2-3 times as much. Delta Lloyd’s strong capital position and focus on the long-term pension business enables it to take a bit more investment risk than others.

 

Unlike many other life insurance companies, Delta Lloyd shareholders, rather than policy holders, get to keep any excess investment profits beyond the explicit policy holder liabilities. This is entirely appropriate given the 20-year duration of the liabilities. In practice, this means that Delta Lloyd invests about 80% of its assets in traditional fixed income and 20% of its assets in real estate and equities.

 

During the recent downturn, Delta Lloyd did a superior job at managing risk, and it was the only major Dutch financial services group that did not require a bail out from the state. Delta Lloyd employs good risk management practices that is a book of defensive equities of 4% dividend yield and low double-digit multiple of earnings. The fixed-income portfolio has minimum exposure to southern Europe or Ireland- they avoided trouble in the European periphery well before others realized the risk.

 

In 2010, Delta Lloyd out-performed its investment expectations by 120 basis points. It might not sound like much, but that generated over 1 year of additional earnings, which totaled 3.75€ per share, giving the stock value today a PE of less than 5.

 

We don’t need to assume that started out performance going forward in order to like the shares. We assume a little less than a 5.5% return for Delta Lloyd to earn 2.55 this year. Every 1% move in its equity portfolio adds .20€ per share to earnings. Delta Lloyd manages the downside risk in routine purchases of out of the money puts.

 

I think that the main reason the shares were available at probably less than half what they are worth is that Aviva, the former parent still owns 43% of the company and everyone knows it’s a seller. We along with our investment banker called Aviva earlier this year and expressed an interest in buying all the remaining stock. We were surprised when instead they announced an accelerated book build and sold 25M shares to Goldman and  Morgan Stanley at more than a 12% discount to the market.

 

They still hold 43% of the company which continues to be in overhang. The stock seems to be poorly placed as the stock now trades below the placement price. Aviva didn’t return our investment bankers’ follow up calls, so we don’t know why they prefer to sell stock so sloppily and at such a discount. Delta Lloyd has a solid management team and is well positioned. I believe the stock is quite attractive and overly discounts the overhang, which we would love to help eliminate. We remain interested in buying or helping Aviva place the remaining stake, and would pay at least the current market price to do so."

 

http://articles.businessinsider.com/2011-06-02/wall_street/29987964_1_fund-holdings-dutch-insurer-macro/2

 

 

 

 

[giofranchi]

However your partner Einhorn likes this one very much and has said that it´s one of the better run insurance operations in Europe (so you might actually be an indirect shareholder after all...). All in all, they seem prudent, honest and well aware in their risk management.

 

Yes! I knew that: I remember him saying that Delta Lloyd was the only stock he knew of that could double and still be cheap!  ;)

 

The main reason that I´m not that pessimistic regarding this highly levered european financial institution (which I think isn´t as leveraged as it looks like on the balance sheet) is the fact that they were the only major Dutch financial services group that did not require a bail out from the state during the financial crises. So they survived the ultimate real life stress test in flying colours. Another reason is that I prefer an insurer (long term assets, long term liabilities) over a bank (long term assets, short term liabilities). Read also: http://sportgamma.net/2012/01/06/605/

 

I know and I agree with you! My comment was just on the general state of the financial industry in Europe today. Certainly Delta Lloyd might be much more robust than average!

 

Thank you!

 

giofranchi