Gjensidige: An Unpronounceable Name For A Highly Profitable Company

| About: Gjensidige Forsikring (GJNSF)

Summary

Gjensidige is a Norwegian insurer which operates in the Nordic and Baltic regions.

The Norwegian company is well-managed and has strong operating performance.

Even if the insurer is currently slightly overvalued, a dividend seeker could invest in this company which increases its dividend year after year.

FY 2016 results will be shared the 9th of February 2017 and should be better than 2015's which were already strong.

Notes for the readers

Gjensidige Forsikring (OTC:GJNSF) is primarily traded on the Oslo Stock Exchange under the ticker GJF:NO. I will be referring to the Norwegian symbol for the article. Note: Amounts are in NOK unless mentioned otherwise. NOK-USD 0.1201678. Price of 1 NOK in USD as of January 27, 2017. Furthermore, most of the figures are based on the annual reports of Gjensidige and of its main competitors.

Corporate Profile: Time passes - Gjensidige endures

History of the group

Gjensidige's Logo: The Watchman one of the most recognised logos in Norway

Source: Gjensidige Forsikring ASA A/S' investor presentation

The origins of Gjensidige go back to the 19th century. Gjensidige was created by the merger of local mutual fire insurers. Before 1920, as many as 260 mutual Norwegian fire insurers had been established all over the country. Most are part of Gjensidige Forsikring today. In 1922, the insurance company Samtrygd (mutual insurance association) was founded as a reinsurance company for the mutual fire insurers. In 1974, Samtrygd merged with the motor insurance company Norsk Bilforsikring Gjensidige (NBG). The same year, a collaboration with the life insurance company Gjensidige Liv was entered into. Gjensidige became the joint brand name. In 1993, Forenede Forsikring was acquired by Gjensidige. In 2003, the insurer entered into a collaboration agreement with the bank DNB (OTCPK:DNBHF) and became its third biggest shareholder. Two years later, the agreement was terminated and the shares were sold. In 2007, the Gjensidige Foundation was established and became the main shareholder of the insurer. Three years later, Gjensidige Forsikring ASA was listed on the Oslo Stock Exchange.

Gjensidige in 2015

With 2015 revenues of NOK15.2 billion, Gjensidige is a European insurer focused on its domestic market and is the largest P&C insurer in Norway.

Gjensidige groups its operations into three main business segments:

  • General insurance which posted NOK 21billion in revenues last year. The group's main contributor markets in this segment are Norway (where the insurer has a leading position in both commercial and private areas), Sweden (with a 1.6% market share), Denmark (with a 6.4% market share) and Baltics (with a 12.5% market share). The General insurance activity is split into two segments: The Personal segment which sells policies for individual households and the Commercial Segment which offers policies for SMEs, agricultural and industrial businesses.
  • Retail Bank with total 2015 revenues of NOK 0.8 billion. Gjensidige Bank is a pure internet bank and offers mortgages, car financing, unsecured lending, savings, credit cards and day-today banking services.
  • Pension & Savings, which generated NOK 0.2 billion in revenues in 2015. Gjensidige is mainly active in Norway with a 9.2% market share.

All the other group subsidiaries, holdings and service companies are directly or indirectly owned by the group's holding company, Gjensidige Forsikring ASA A/S.

Source: Gjensidige Forsikring ASA A/S' investor presentation

The main shareholder of the group is The Gjensidige Foundation, which held 62.2% stake in 2016.

No Shareholder Share (%)
1 Gjensidigestiftelsen 62.2
2 Folketrygdfondet 4.5
3 Deutsche Bank (NYSE:DB) 4.2
4 Danske Bank (OTC:DNSKF) 2.9
5 Caisse de Depot et Placement du Quebec 2.7
6 BlackRock (NYSE:BLK) 1.6
7 State Street Corporation (NYSE:STT) 0.8
8 DNB 0.8
9 Vanguard Group 0.7
10 Safe Investment Company 0.7
11 William Blair & Company 0.6
12 Storebrand (OTCPK:SREDF) 0.6
13 Thornburg Investment Mgt 0.6
14 Fidelity Worldwide Investment 0.5
15 KLP 0.5
16 JPMorgan Chase & Co (NYSE:JPM) 0.5
17 BNP Paribas Group (OTCQX:BNPQF) 0.4
18 Genossenschaftliche FinanzGruppe Volksbanken Raiffeisenbanken 0.4
19 Nordea (OTC:NRDEF) 0.4
20 Statoil Pensjonskasse (NYSE:STO) 0.4
Total of Top 20 Shareholders 86.0

Source: Gjensidige Forsikring ASA A/S' investor presentation

Competitive Position: A Well-Diversified Nordic Insurer

Source: Gjensidige Forsikring ASA A/S' annual reports

With NOK 21.3 billion of earned premiums in 2015, non-life insurance segment is the core business of the Norwegian insurer and represents 92% of its total profit before taxes. Gjensidige Forsikring ASA A/S is a market leader in Norway and has a strong position in the Nordic/ Baltic region. Its main competitors in its domestic market are If, a subsidiary of the Finnish insurer Sampo (OTCPK:SAXPF), Tryg (OTC:TGVSF) and SpareBank1 (OTC:SRMGF). It is also important to note that Norway is consolidated market since the 5 largest insurers represent 75% of the Norwegian non-life market share. It's also the case for the other Nordic markets (82% in Sweden, 91% in Finland, 62% in Denmark and 74% in the Baltic countries). In Denmark and in Baltic states, Gjensidige is No.5 with respectively 6.4% and 12.5% of market share. Its main competitors are Topdanmark (OTCPK:TPDKY), Tryg, Coldan and Alm Brand in Denmark, while Baltic market is largely dominated by PZU (OTC:PZAKY) with around 25% of market share. The Norwegian insurer increased its presence in the Baltics by acquiring in 2015 PZU's Lithuanian subsidiary, doubling its size in the region. In Sweden, Gjenesidige is a second-tier player in a market which is largely dominated by Länsförsäkringar, If, Trygg and Folksam (63.4% of the market)

Pension and Savings is a growth area for Gjensidige in Norway. From 2011 to 2015, the earned premiums increased by 169% to NOK 1.4 billion. In 2015, the profit before taxes amounted to NOK 84 million while it was only 15 million 5 years ago. For the first nine months of 2016, the earned premiums increased by 6.8% and the profit before taxes increased by 58.8% to NOK 96.7 million. Hence we could expect Gjensidige to deliver better results in 2016 than in 2015. In our view, the profit on Pension and Savings would reach NOK 130 million, mainly driven by the commercial development initiated by the Norwegian insurer, the positive impact of the financial income and the improvement of the operating margin (around 25%). However, it is also important to note that the Norwegian market of Pension and Savings are dominated by four players, three of which are bankers:

  • DNB
  • Sparebank1
  • Nordea

The fourth big player is the market leader of Pension and Savings in Norway with more than 30% of market share.

Source: Gjensidige Forsikring ASA A/S' 2015 annual report

Gjensidige's competitors could decide to counterattack and increase commercial gestures, lower price or attack Gjensidige on its other markets. A potential of growth exists for the Norwegian insurer but each investor should be aware that it is not a price-maker in the market of Pension & Savings and could be affected by a price decrease environment.

Retail Bank is the third segment of Gjendisidge's operations and is also a growth area. Gjensidige Bank is a pure internet bank which shall contribute to sales of a wide range of products to general insurance customers in Norway. The bank offers mortgages, car financing, unsecured lending, savings, credit cards and day-today banking services. Distribution is mostly online, and customer service may be reached on the phone, via chat and at Gjensidige's financial offices. Car financing is also distributed through car dealers. Gjensidige's priority was and still is to focus on its policyholders. Hence Group's general insurance customers consisted 77 per cent of the total lending volume in the bank. The deposits and lending in 2015 were respectively NOK 19.5 billion and NOK 36.8 billion.

Source: Gjensidige Forsikring ASA A/S' 2015 annual report

From 2011 to 2015, the profit before taxes increased by 355% to NOK 304 million, mainly driven by the commercial development initiated 5 years ago, the cost/income ratio reduction and the increase of the commission income. Regarding the results of the first nine months of 2016 (NOK 334 million profit before taxes or a 51% YoY increase), we could expect Gjensidige to deliver a NOK 450 million profit before taxes for FY2016.

Operating Performance: A Strong P&C Performance In Its Core Markets And An Improvement of The Profitability of Its Bank & Saving Segments

Source: Gjensidige Forsikring ASA A/S' annual reports

From 2011, the Norwegian insurer never delivers a combined ratio above 100%. It's mainly due to a strong cost steering which is one of the reasons of the strong profitability of the P&C Nordic insurers (most of the Nordic insurers target a 15% expense ratio while the Western European insurers deliver a 30% cost ratio). As Gjensidige has leading position in its core market, the insurer has successfully maintained a lower combined ratio on both private and commercial segments. The combined ratios in Baltics and Nordics are higher than its core market for the following reasons:

  • In Nordics (i.e. other Nordic countries than Norway), the insurer does not hold a leading position and should compete with larger players. Hence it is more difficult to increase the price without deteriorating its market position. Furthermore, the cost ratio is higher in Nordics than in Norway (15% vs. 12%).
  • In Baltics, the claims situation is erratic. The Norwegian insurer has been impacted by large losses in the past.
  • In Baltics, Gjensidige remains a small player even after acquiring PZU's Lithuanian activity. As the Norwegian is in a growing trend, the company should accept to pay more commissions to write more premiums and also should invest in IT systems. Compared to the Norwegian market, the cost ratio is higher by around 15 percentage point.

Regarding the underwriting results of the first nine months of 2016 (NOK 3.0 billion or a 17% YoY increase) we could expect the Norwegian insurer to deliver an underwriting result of around NOK 3.6 billion and a FY 2016 combined ratio of around 85% (in Q3 2016, the claims situation deteriorated by 7 percentage point compared to Q3 2015). Furthermore, we could expect Baltics segment to remain unprofitable with a FY 2016 combined ratio of around 115%. Moreover, the FY 2016 combined ratio of Nordics should be higher than last year's and reach at least 91%.

In Pension & Savings division, the results are constantly increasing from 2011. The RoE increases over the years and the increase of the earned premium did not deteriorate the margin of this segment. In 2015, the operating margin was 19.37% (5.43% in 2014) and has continued to improve in 2016 (24.35% in Q1-Q3 2016). In our view, we could expect Pension & Savings division to remain a profitable growing segment and to reach a FY 2016 profit before taxes of around NOK 130 million.

As for Pension & Savings division, Bank is a constant growing segment which improves its profitability year after year. As Gjensidige Bank distributes mainly on internet, its costs are lower than a traditional bank. In 2015, the RoE before taxes was 13.8% (13.2% in 2014) and cost/income ratio improves significantly from the last five years (from 65.7% to 49.5%). For the nine first months of 2016, the cost/income ratio decreased to 42.9% (or a 6.6 percentage point decrease on a YoY basis) and the annualized RoE after taxes increased by 2.7 percentage point to 12.8%.

Stock Repurchase Program and Dividend: A Capital Discipline Which Supports Dividend Growth Over Time

As the main of the European companies, Gjensidige is not interested in repurchasing its own shares. However, the number of shares is stable over the time (500 million of outstanding shares). As the company is not interested in repurchasing its own shares, it is completely focused on increasing the dividend payout and has tried to increase the dividend payout amount year after year. From 2011, the dividend increased by 40% following the same dividend policy (high and stable dividends, a pay-out over time at least 70% of profit after tax, the determination of the size of the dividend takes into account capital requirements). Furthermore, Gjensidige has also paid out excess capital above the targeted capitalization. In November 2016, the insurer paid an exceptional dividend of NOK 4.0 per share. In our view, the company will follow the same policy than it did in the past and will continue to increase its paid dividend without deterioration in its financial situation.

The Major Risks Facing Gjensidige

Some events could impact Gjensidige's profitability either permanently or temporarily. Every long investor who would like to invest in the Norwegian international insurer should be aware of these major risks.

1) A Deterioration of the P&C profitability

Even if the company delivers every year a combined ratio lower than 100%, the decline of the premiums could impact negatively the combined ratio. If the expenses remain at the same level, the combined ratio will increase mechanically, deteriorating the profitability of the P&C activities.

2) Increase in Bank Regulation

The Bank represents an increasing part of Gjensidige's profit. Any change on the regulatory rules (e.g., Basel III capital requirements) could impact the profit of the Norwegian company.

Stock Valuation: A Profitable but Slightly Overvalued Company

To assess the intrinsic value of Gjensidige, we used an approach based on the following valuation methods:

  • Historical Ratios: P/E, Price/Sales and Price/Book.
  • Valuation Multiple: EV/EBITDA, P/E and Price/Book. As a peer review, we have chosen the following companies: Sampo, Storebrand (OTCPK:SREDF), Topdanmark, Vienna Insurance Group (OTCPK:VNRFY) and Tryg A/S
  • DCF Valuation: We decided to model six scenarios:

1. Based on EPS - Three scenarios (Best, Base and Worst):

  • Best: 9% annual growth for the next fifteen years. In this scenario, we consider that the insurer maintains its very strong operating performance level in P&C and continues its successful development in both Savings and Bank segments. The terminal growth rate is 2%.
  • Base: A 7% annual growth for the next fifteen years. The combined ratio is below 100% and the Pension & Savings division continues growing while the Bank segment faces external competition from traditional bank companies. The terminal growth rate is 1%.
  • Worst: A 5% annual growth for the next fifteen years. The terminal growth rate is 0%. In this scenario, we consider that the profitability in both P&C and Pension divisions deteriorates but maintains high compared to the Western European peers.

2. Based on DPS - Three scenarios (Best, Base and Worst):

  • Best: 8% annual growth with a starting point at NOK 6.85 per share.
  • Base: 6% annual growth with a starting point at NOK 6.85 per share.
  • Worst: 4% annual growth with a starting point at NOK 6.85 per share.

Regarding the current market price, the stock seems to be overvalued by 13%. However, it is important to note that the DCF model is very sensitive to the assumptions made concerning the annual growth and discount rate. If we would decide to take more optimistic assumptions, the intrinsic value would increase accordingly. In our view, the current intrinsic price range is NOK 122 - NOK 135.

Conclusion

Slightly overvalued at the moment, Gjensidige remains very well positioned in its domestic market. Strong FY 2016 results could boost the stock price of the Norwegian insurer. If Mr. Market would react differently, it could be a good time to invest in Gjensidige.

Notes for the readers: Interested in other analyses mainly focused on both insurance sector and service sector (mainly the industry "Home Furnishing Stores")? Please do not hesitate to follow me. Thank you for your support.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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