Hungarian taxpayers will buy into two insurance companies at a high price

Bacground in a nutshell

On 29 November 2020 Dutch insurance group Aegon agreed to sell its insurance, pension and asset management business in Hungary, Poland, Romania and Turkey for EUR 830 million, i.e. a multiple of 2.6 times the book value, to Vienna Insurance Group AG (VIG). The Hungarian operation accounted for about two-thirds of the revenues of the interests in the package and an even larger share of its profits.

On 7 April, 2021, the Ministry of the Interior vetoed the transaction without justification on the basis of a recent law, which was met with shock by Dutch diplomats and was declared a violation of EU law by the European Commission on 20 January, 2022. Under a Memorandum of Understanding signed on 23 December 2021, the sale will not be blocked, but the Hungarian state will acquire a 45% minority stake in VIG's existing (Union) and new (Aegon) interests in Hungary.

Gist of the recent announcement

According to the announcement on the websites of VIG and Aegon, the Hungarian state will acquire a 45% minority stake in Aegon and Union insurers for 350 million euros, or around HUF 125 billion. The stakes will be held through a Hungarian holding company (VIG Magyarország Befektetési Zrt.) and two Dutch holding companies (Aegon Hungary Holding B.V. and Aegon Hungary Holding II B.V.), which will later merge.

There is no word yet on what Aegon Biztosító (Aegon Insurer) would be renamed (VIG has been planning the rebranding for a year) or whether the two insurers would merge, but as their combined market share is around 19%, VIG will overtake Allianz to become the insurance market leader in Hungary and obtain new know-how in asset management. The Hungarian state will buy the 45% stake from VIG, as Aegon says it is working with VIG to close the EUR 830 million transaction announced in 2020 (it is subject to local regulatory approvals).

Costly or cheap?

In terms of profit generation capacity, Aegon and Union achieved an average profit after tax of HUF 13.5 billion and HUF 2.1 billion respectively between 2018 and 2020, while Portfolio estimates that this year this could be HUF 14.5 billion and HUF 2.6 billion (including the income from asset management activities, which is reflected in Aegon's profit).

Based on this, 45% of the two insurers' profit this year could be around HUF 7.7 billion. The Hungarian state seems to be buying rather expensively, with a forward P/E of 16.2, as eight regional insurers have a median P/E of 10.0, and only NN has a P/E above that. (This valuation, of course, does not include any potential growth opportunities, which are not known.)

As for the equity capital, which is less frequently watched closely in insurance companies, Aegon had HUF 42.3 billion and Union HUF 18.3 billion in equity at the end of 2020, while Portfolio estimates that by the end of this year this could increase to HUF 51.9 billion and HUF 19.3 billion, respectively. This also suggests that the Hungarian state is buying rather expensively, at a forward P/BV of 3.9, as eight regional insurers have a median P/BV of 0.9, and there is no such high valuation based on book value among the large regional insurers. (This valuation does not even include potential growth opportunities, which are not known.)

Taking into account the more relevant, and at the same time more flattering, current profit generating capacity, the fair value of the combined 45% stake would have been around HUF 77 billion based on the median valuation of the regional insurers.

In other words, the HUF 125 billion price tag probably put a wider smile on VIG's face than on the Hungarian state's, but this does not take into account the potential growth opportunities that may be created by the state's tailwind.

What does the state want with the two insurers?

We have heard only speculation and rumours about this from the market, as the direct participants in the transaction have not yet made any statements. According to market opinions

• the Hungarian state's objective in buying insurance has not been well defined, and in recent months it has been more about avoiding losing face,
• as the controlling rights are expected to remain with VIG, the state may be more of a financial investor in the first instance, but as seen above, the payback period may be long based on current results,
• as a professional investor, the objectives of the state are not yet clear, but in the long term they may go beyond the two insurance companies: there is also a vague idea that the state may be aiming to strengthen the pension savings or health insurance market, and finally
• some argue that the acquisition of minority stakes in Aegon and Union is only a stepping stone for the future involvement of the state in the insurance market, so that the acquisition of new insurers or the creation of a large state/pro-government insurance group could be envisaged in the future, with the strong opening of pro-government banks as distribution channels.

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