Bears Circle Delta Lloyd as Einhorn Loses in 75% Stock Slump

  • Dutch Insurer was second-most shorted on Amsterdam index
  • Fubon alleges company is liable for losses on the stock

Delta Lloyd NV closed at a record low on Friday amid concern the Dutch insurer, which plans to raise as much as 1 billion euros ($1.1 billion) in a rights offer to bolster capital, will still struggle to generate cash and pay dividends.

Investors including money manager David Einhorn of Greenlight Capital LLC, have seen the stock drop 75 percent this year and RBC Capital Markets analyst Gordon Aitken says it could fall further. Hedge funds are betting he’s right, making the company the second-most shorted on Amsterdam’s AEX Index.

“The ongoing cash generation and dividend yield do not justify the current share price,” London-based Aitken said in a note on Thursday.

Delta Lloyd has been under pressure to reassure investors as the European Union introduces stricter capital requirements for insurers in January under rules known as Solvency II. It surprised the market last month by opting for a standard model for calculating risk after its internal model led to a “highly unstable Solvency II figure,” CEO Hans Van der Noordaa said Nov. 30. It also suspended its final dividend.

Investor Letter

Shareholder Fubon Financial Holding Co. Ltd. wrote to the company indicating it believes Delta Lloyd is liable for the losses on its investment, the insurer said in a statement Friday. Delta Lloyd rejects all liability and considers the allegation without merit, the company said.

The insurer will focus “on new business that contributes to capital generation,” Martijn Donders, a spokesman for Delta Lloyd, said in an earlier e-mail. “Our growth in recent years has been above industry average and we also expect to benefit in the future from the strength of our operational and commercial organization and our distribution power.”

He declined to comment on the short interest in the stock. The stock closed at an all-time low of 4.48 euros in Amsterdam trading, valuing the company at about 1 billion euros.

A spokesman for David Einhorn declined to comment.

Short Bets

Hedge funds profiting from the insurer’s slump include Capital Fund Management SA and PDT Partners LLC, according to data compiled by Bloomberg. Capital Fund Management declined to comment and PDT did not reply to requests for comment. Investors short companies by selling borrowed stock and seek to profit by buying it back later at a lower price.

Among buyers of the stock, Standard Life Plc’s investment unit indirectly held 3.3 percent of the company as of Dec. 8, the company said in a filing on Friday.

Short interest in Delta Lloyd climbed to 8.3 percent of shares outstanding on Dec. 9, from 0.5 percent at the start of the year, according to Markit Ltd. data. Only steelmaker ArcelorMittal has more outstanding short interest among companies on the AEX.

Delta Lloyd’s management has struggled to deliver on promises made last year to optimize the insurer’s business model and investment allocation under Solvency II, according to Edmond Christou, an analyst at Bloomberg Intelligence.

“More of these actions need to be delivered,” Christou said. “Concerns remain about its ability to sustain cash generation going forward, actions to efficiently manage its run off book of defined benefit pensions and the release of higher locked-in capital.”

Senior executives at Delta Lloyd have departed. Emiel Roozen and Jean Frijns resigned as chief financial officer and supervisory board chairman respectively after a court in August upheld a central-bank decision fining the insurer for making trades in 2012 based on confidential information.

“Post the rights issue, Delta Lloyd’s quality of capital will still be lower compared to its Benelux peers,” Albert Ploegh, an analyst at ING Groep NV wrote Dec. 4, when he downgraded the stock to hold from buy. “Financial flexibility will remain too limited to offset unexpected negative headwinds.”

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