Why I’m Long Gjensidige – The Norwegian Insurer

Gjensidige, for non-native speakers an unpronounceable name, is a quality Norwegian insurer. I’ve been long since the IPO in 2010, and below I briefly bring forward some arguments why I still own the stock (and why intend keeping it).

Historical performance – boring  is good:

Gjensidige has delivered significant alpha since the IPO in late 2010: CAGR of 18%.

Gjensidige share performance and three year rolling CAGR. Left axis is share price (non-logarithmic), right axis is 3-year rolling CAGR. Source: Yahoo!finance and my own calculations.

What are the reasons for Gjensidige’s outperformance?

  • Gjensidige is headquartered in Oslo, Norway, and is the biggest Norwegian insurance company. Market share is 25%. (If has 25%, Tryg 19% and Fremtind 13%). In Sweden, Denmark and the Baltics Gjensidige has a smaller market share: 2, 7 and 8%.
  • A long history of successful underwriting: roots can be traced back to 1816.
  • The Nordic insurance market is dominated by just a few players, making the market close to an “oligopoly”.
  • Perhaps unknown to many investors, the Nordic region has better or at least the same return as US markets over the last 50 years. It’s a good place to invest your money.
  • The customers are the biggest owners. The customer-governed Gjensidige Foundation owns about 62%, and passes dividends further as customer dividend to the insurance customers in Norway.  On average this has resulted in 10-15% discount for the customers.
  • The market has natural entry barriers from insurers outside the region due to the very low operating costs. Gjensidige has a cost/expense ratio of 15%, much lower than any insurer outside the Nordics (except Admiral plc).
  • The brand is very important in the Nordics. Customers are loyal, unlike the outside markets. Their logo (the watchman) is iconic. Retention rate is 88% for private customers and 92% for business as of 1H2020. Scores for both customers and employees are high.
  • Recession proof: Gjensidige was not listed during the GFC in 2008/09 but operational performance was little affected. The same goes for 1H 2020 during Covid-19. Insurance is one of the last things people stop paying.
  • It’s a dividend stock, there is not much growth. 80% of the earnings are expected to be paid out. No buybacks.
  • Solvency margin estimated at 283% if no dividend is paid for 2019, while estimated at 221% if the dividend is paid as planned. Thus a solid balance sheet.
  • 1h 2020 showed record underwriting profits and 11.1% return on equity.

Investment portfolio:

An important part of the insurance operations is the “float”, ie how they manage the return on future liabilities. Gjensidige is not aiming for spectacular investment returns and has thus little in equities and real estate (mostly located in Oslo and the surrounding area).

As of 30th of June 2020 the composition of the portfolio looked like this:

  • Money markets: 8%
  • Bonds: 64%
  • Convertible bonds: 2%
  • Other bonds: 10%
  • High yield bonds: 2%
  • PE funds: 2%
  • Property: 8%
  • Equities: 3%
  • Other: 2%

The investment portfolio has returned these numbers in percent:

2013 4.3
2014 4.3
2015 2.6
2016 3.9
2017 3.7
2018 1.5
2019 4.1

Investment return in 1H 2020 was 1.9%.

Return on equity (ROE):

Insurers are mostly valued on earnings and return on equity. Gjensidige has a pretty impressive average return on equity:

Historical return on equity for Gjensidige. Source: Annual reports.

The return for 1H 2020 was 11.1%, on par to above 20% for second year in a row.

Earnings:

Gjensidige is not a growth stock. However, the earnings have gradually climbed since the IPO, but in the long-term I believe the growth will be like inflation and perhaps a tad more. The market is mature, and expansion is mainly in the Baltics.

Gjensidige historical earnings per share. Source: Annual reports.

The dividend:

Gjensidige aims to pay out 80% of the earnings as dividends. The dividend for 2019 (7.25 NOK)  is currently put on hold and planned paid later. The historical payments look like this:

Gjesidige historical dividend per share. Blue bar is ordinary dividend, red is additional dividend. Source: Annual reports.

Combined ratio:

The main reason for the operational excellence is of course due to low costs and low loss ratios. All the big insurance underwriters in the Nordics have very low combined ratios, thus operating  very profitably:

The combined ratios for Gjensidige, If and Tryg. Source: Annual reports.

The combined ratios between Gjensidige’s segments look like this:

Combined Combined Combined Combined Cost Cost Cost Cost
ratio ratio ratio ratio ratio ratio ratio ratio
2016 2017 2018 2019 2016 2017 2018 2019
Private 73.5 74.2 77.9 77.2 12.6 12.8 12.6 13.1
Commercial 77.5 77.6 79.6 78.8 11.5 11.5 11.5 10.1
Denmark 91.1 91.1 87.9 14.4 14.4 14.5
Sweden 97.1 95 94.6 16.5 16.5 19.3
Baltic 109.6 100.7 93.7 94.6 31 32.2 31 29.9

The Baltic region has a high cost ratio but offers huge potential if costs continue falling.

Valuation:

Since the IPO much of the gains have come from a steady increase in P/B ratio:

Gjensidige price to book and dividend yield. Blue line (left axis) is dividend yield, and pink line (right axis) is price to book. Source: Annual reports.

Insurance companies are often valued at P/B. The better ROE, the higher the premium to book. The P/B ratio has increased from 1.5 at the IPO to 3.5 today. Assuming a future ROE of 20%, you are investing at 5.71% ROE (20 divided by 3.5). This is why it’s always preferable to invest in companies that can redeploy earnings. Unfortunately, Gjensidige has no way of redeploying all of its profits.

The P/E ratio looks like this:

Gjensidige historical P/E ratios. Source: Annual reports.

Negatives:

By investing in Gjensidige you can’t expect much growth as this is a very mature and competitive market. Another potential negative factor could be a sudden rise in inflation. Price growth has been benign for 40 years, but central bankers might start a “race to the bottom” with competing easing and money printing. Inflation means assets need to be replaced at higher prices than the premiums received. Because insurance usually involves paying out claims many years after writing the insurance, inflation needs to be addressed. Any sudden increase could be detrimental. However, I consider this scenario as rather slim.

Perhaps needless to say, the opposite, very low interest rates, means lower profits from the investment portfolio.

Conclusion:

The historical performance of 18% annually is unlikely to continue unless the multiple expansion continues (if P/B was still at 1.5 the CAGR would be just 9%).

Gjensidige is an “income” stock as growth is slow. That does not mean it’s a bad investment. Considering the “oligopoly” market and the operational excellence I believe the stock is priced fairly at today’s prices.

What kind of returns can we expect? By using the late John Bogle’s very simple formula of calculating future returns, we can play with some numbers:

3.8% (current ordinary dividend yield) + 1% (annual bonus dividend yield) + 4% (earnings growth) – 0% (multiple expansion) = 8.8%.

Obviously this will not set the world on fire, but in today’s zero interest environment this looks pretty good to me considering the “safe” business model.

 

Disclosure: I am long Gjensidige. I am not a financial advisor. Please do your own due diligence and investment research or consult a financial professional. All articles are my opinion – they are not suggestions to buy or sell any securities.  

(This article was published on the 4h of August 2020.)

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