Delta Lloyd initial IPO prospectus (link)
David Einhorn´s Greenlight Capital holds a position in DL. In a speech at the Ira Sohn conferance, Einhorn talked about his DL thesis (read transcript at insidermonkey.com):
“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.”
“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.”
“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.”
“Glossary” – Key tersm and definitions in the Delta Lloyd 2010 Annual Report
“Delta Lloyd: kapitaal blijft jaren schaars” – Interview with chairman Niek Hoek in Topman, issue 01 2010 (Dutch)
Het eigen vermogen is 3,7 miljard, de beurswaarde 2,8 miljard – u bent ondergewaardeerd.
“De markt bepaalt haar eigen waardering. Het zichtbare eigen vermogen is conservatief geschat 3,7 miljard. En de ‘embedded value’, de toekomstige winst uit levensverzekeringen, is conservatief geschat 4,3 miljard. Meer analisten zeggen dat er sprake is van onderwaardering. Het verschil met concurrenten is dat onze embedded value risicovrij is gemaakt. Veel levenmaatschappijen doen dat niet, ook partijen op de Nederlandse markt, omdat dat er niet zo lekker uitziet.”
Waarom ziet dat er niet zo lekker uit?
“Iedereen zit op European embedded value, wij niet. Nieuwe regels gaan naar market-consistent embedded value. Datzijn strengere normen die inhouden dat alle verwachtingen over inkomsten op aandelen, obligaties enzovoorts risicovrij worden gemaakt. De nieuwe regels gaan er niet van uit dat je op aandelen meer rendement maakt dan op obligaties van de Nederlandse staat.”
“Fair Value van Verzekeringen en Economisch Kapitaal” – Arnout Van Messem, 2002 (Dutch)
“Economic capital voor verzekeraars” – Rene Doff, MAB, 2005 (Dutch)
“Vooruitblik – Actuele actuariële ontwikkelingen” by Ernst & Young, 2008 (Dutch)