This Resilient Market Leader Should Trygger Interest Among Dividend Seekers

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About: Tryg AS (TGVSF), Includes: GJNSF, GJNSY, SAXPF, SAXPY, TGVSY, TPDKY
by: The CrickAnt
Summary

Tryg A/S is the leader of the Danish non-life insurance market, with a 17.8% market share. Furthermore, the company has a strong presence in Sweden and Norway.

With Alka’s acquisition which has been recently approved and the agreement with Danske Bank Tryg, A/S will continue being a resilient market leader in Denmark.

Benefiting from excellent underwriting expertise, high barriers to entry and with a very shareholder-friendly policy, Tryg should trigger interest among dividend seekers.

However, they should keep in mind that they will pay a premium to acquire this quality dividend stock at the current price.

Executive Summary

In November 2018, the local authorities approved the Alka acquisition by Tryg A/S (OTC:TGVSF)(OTC:TGVSY). Furthermore, the agreement with Danske Bank (OTCPK:DNSKF) was extended. In the meantime, the company reported a technical result of DKK 2.2 billion for the first nine months of 2018. In spite of deterioration in the loss ratio, the Danish company was able to maintain high underwriting standards, by keeping a low expense ratio. Nonetheless, adversely affected by the poor investment return, the insurer will certainly not outperform 2017 in terms of results.

Hopefully, thanks to a prudent capital redistribution policy, the dividend and its growth over the cycle are not in danger. With the Alka acquisition, Tryg will continue to be one of the insurance leaders in the Nordic market. Because of a leading position in the Nordic countries, high underwriting standards resulting in an excellent combined ratio over the years, and a prudent dividend policy, the stock could interest some investors who would like to invest in a European company paying a quarterly dividend.

A Resilient Leader In The Nordic Countries

Tryg’s history goes back to the 18th century. With a 17.8% market share in Denmark, Tryg is the market leader benefiting from a strong brand position. Furthermore, the company maintains a strong presence in the other Nordic countries, with a 3.2% market share in Sweden and a 13.3% market in Norway.

Source: Investors’ Presentation

On the LoB side, the portfolio remains well diversified, even if the motor business, suffering currently from a claims inflation, represented around 30% of the total portfolio in 2017. Nonetheless, like many Scandinavian insurers, Tryg A/S succeeded to maintain high underwriting standards over the past years, thanks to a strict monitoring of the operating costs. Hence, the expense ratio was 13.9% in Q3 2018, in line with the 14% target for 2020.

Source: Investors’ Presentation

From 2013 to 2017, the expense ratio dropped to 14.0%, primarily thanks to efficiency initiatives to reduce overall costs.

Source: Q3 2018 Tryg’s Presentation

Furthermore, the increase in the FTEs, driven by portfolio acquisitions, observed since 2016 did not impact the expense ratio adversely.

Source: Q3 2018 Tryg’s Presentation

Hence the cost increase related to the employee number growth was offset by productivity efforts and efficiency initiatives launched by the company. Thanks to all the projects and initiatives implemented by the company over the years, the insurer succeeded to make dropping the combined ratio.

Source: Q3 2018 Tryg’s Presentation

From 2000 to 2017, the combined ratio dropped by more than 20 percentage points. In 2002, the combined ratio was 107%, meaning that the insurance portfolio was significantly unprofitable. The company decided to launch several measures to reprice the portfolio. From 2002 to 2004, DKK 1.2 billion of price increases was implemented resulting in a drop in the combined ratio of 13 percentage points. After that, each time it was needed (i.e., when the situation deteriorated), the company launched new tariff initiatives or cut the expenses to maintain a total combined ratio in the range of 83% and 90%.

For the first nine months of 2018, the company continued to make the necessary efforts to keep a robust operating performance. With an 84.1% year-to-date combined ratio, the underwriting margins were excellent, even if they deteriorated slightly compared to the same period one year ago.

Source: Q3 2018 Tryg’s Report

A Strong Operating Performance Everywhere

In its domestic market, Tryg benefits from high entry barriers and a strong brand position. Even if the underwriting margins are lower in Sweden and Norway, the company remains highly profitable in both countries. From 2013 to 2017, the company succeeded to improve its margins in Sweden by 3.1 percentage points.

Source: Q3 2018 Tryg’s Presentation

Yes, there were some difficulties in 2014 and 2016 in Sweden; nonetheless, the efforts made by the company paid off. The expense ratio was reduced by 0.7 percentage point from 2013 to 2017.

Source: Q3 2018 Tryg’s Presentation

Furthermore, the Swedish branch, from some years, started to focus on the most profitable businesses, like the pet insurance market.

In 2018, the results improved slightly for the first nine months of the year, with a year-to-date combined ratio of 85% and a portfolio growth in local currencies.

Source: Q3 2018 Tryg’s Report

The Norwegian and Danish businesses performed well over the years. Reported under the private, commercial and corporate segments, the aggregated Norwegian and Danish segments recorded a robust combined ratio over the cycle.

The private business reported an average combined ratio of around 84% from 2013 to 2017, benefiting from a continuously improved expense ratio.

Source: Q3 2018 Tryg’s Presentation

In 2018, the personal segment continued to perform well with a Q3 combined ratio of 79.6%. In spite of higher weather-related claims, the year-to-date combined ratio was stable, benefiting from the growth in the premiums and the higher level of the delivered run-off.

Source: Q3 2018 Tryg’s Report

The growth in the premiums was partially due to the positive effects of the FDM acquisition, which had reinforced the leading position of Tryg in the Danish private market.

The commercial and the corporate business areas remain incredibly profitable as well and contribute actively to the excellent operating performance of the group.

From 2013 to 2017, the average combined ratio of the commercial segment was around 83%, in spite of the decline in the premiums and the deterioration in the expense ratio.

Source: Q3 2018 Tryg’s Presentation

The trend in 2018 continued to be slightly negative, with a year-to-date combined ratio which worsened by 0.7 percentage point to 82.3%, in spite of the initiatives launched to reduce the cost of sales.

Source: Q3 2018 Tryg’s Report

Unfortunately, at the corporate segment, the trend was negative for the first nine months 2018 as well. Adversely impacted by a fire claim of DKK 130 million during the third quarter, the year-to-date technical result dropped to DKK 290 million.

Source: Q3 2018 Tryg’s Report

Nonetheless, the underwriting margins remained higher, compared to other European insurers. Over the last five years, the average combined ratio was around 90% and benefited from a low expense ratio.

Source: Q3 2018 Tryg’s Presentation

Hence, on a long-term horizon, Tryg is well-armed to face competition from other Nordic insurers and an unexpected increase in the claims development. Furthermore, the Alka acquisition will help Tryg to maintain its leading position in Denmark.

Alka has shown a strong financial track record, with a reported technical result of around DKK 330 million each year since 2013.

Source: Investors’ Presentation

In spite of the charges resulting in the Alka acquisition, Tryg estimates that the technical result in 2020 will be around DKK 3.3 billion, representing a combined ratio below 86%.

Source: Investors’ Presentation

Furthermore, delivering a high double-digit RoE over the years remain an achievable target according to Tryg.

Source: Investors’ Presentation

Undoubtedly, Tryg A/S is a resilient leader at the regional level. Even if the 2018 results will be adversely affected by the off-charges resulting in the Alka acquisition and by the poor investment return, the strong underwriting performance is intact and has been maintained over the quarters and years. The high underwriting margins observed in its domestic market and abroad are mainly related to the efforts made by the company to cut the expenses, maintain an excellent brand position, integrate new portfolios and be present in profitable businesses.

No Extraordinary Dividend In 2018 But A Shareholder-Friendly Capital Distribution Policy

One of the specificities of the company is that the insurer pays a quarterly dividend, which is rare for a European company. The Q3 2018 declared dividend was DKK 1.65 per share, or a 3% increase compared to Q3 2017.

Since 2016, Tryg A/S has stopped to buy back its shares and started to pay an extraordinary dividend; furthermore, the dividend has increased each year from 2013, the capital distribution of the company being a shareholder-friendly one.

Source: Q3 2018 Tryg’s Report

As announced previously, no extraordinary dividend will be paid, following the DKK 4 billion raised in December 2017 to fund the Alka acquisition. Nonetheless, the company remains focused on increasing the dividend year after year without harming its solvency and financial positions.

In my opinion, the capital distribution policy of the Danish insurer is sustainable and shareholder-friendly.

Takeaways

Why should the investors invest in Tryg A/S? For many reasons, in my view. First of all, the company is present in a market with high barriers to entry. The Nordic insurance market is well concentrated with large leading players, like Sampo (OTCPK:SAXPF)(OTCPK:SAXPY) in Finland, Sweden, and Finland, Topdanmark (OTCPK:TPDKY) in Denmark and Gjensidige (OTC:GJNSF)(OTCPK:GJNSY) in Norway and Denmark.

Source: Investors’ Presentation

The second reason is that the reserving policy of the company is prudent and focused on delivering a positive run-off. When Tryg’s claims adjusters estimate claims amount, they take conservative assumptions.

Source: Investors’ Presentation

Actuaries assess ultimate claims based on conservative assumptions as well. This conservative philosophy results in a favorable prior year claim development. In Q3 2018, the run-off was favorable in all segments.

Source: Investors’ Presentation

Over the years, the net run-off was positive and affected the combined ratio positively by offsetting any potential unexpected claims development or large claims.

Source: Investors’ Presentation

In my opinion, an excellent insurance company is a firm which estimates its claims carefully and records a positive run-off each year accordingly. Tryg is one of these companies.

The third reason is Tryg is a shareholder-friendly company. Considering itself as a dividend stock, Tryg A/S delivers at least a yearly 6% return to its shareholders.

Source: Investors’ Presentation

Furthermore, the dividend was never endangered by an aggressive dividend distribution. The decision not to pay an extraordinary dividend for the 2018 exercise, because Alka’s acquisition has proven that Tryg is aware of what it is possible to do for rewarding its shareholders and what is not. A long-term dividend-oriented investor, looking for a sector or geographical diversification for his/her portfolio, will be more than happy to own Tryg’s shares.

Nevertheless, is it the right moment to purchase shares of the Danish insurer? In my opinion, the company remains expensive, regarding the current P/B and P/E metrics. Eventually, some investors will be less focused on the market valuation than I am and will purchase a bunch of Tryg’s stocks. For sure, they will not make a mistake by doing that. However, they should keep in mind that they will pay a premium to acquire this quality dividend stock.

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Disclosure: I am/we are long GJNSF, GJNSY.

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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