A pricey low risk investment

Transcription

1 A pricey low risk investment Gjensidige 2Q15 Preview Recommendation: NEUTRAL Target NOK Prepared by Analyst: Geir Kristiansen, Fondsfinans AS, tel: , This report was prepared by an analyst engaged by Fondsfinans AS, the Norwegian affiliate of Fondsfinans Inc., who is not registered as a research analyst with FINRA or subject to FINRA rules governing research. This report is not a product of Fondsfinans Inc. See page 18 of this report for Important Disclosure Information. 1

2 Strong underwriting result expected in 2Q15 2Q15 PREVIEW REPORTING DATE 14 JULY We expect Gjensidige to report a strong underwriting result while the financial result will be hurt by weak financial markets. Our pretax profit estimate is NOK 1,229m vs a not quite updated consensus from Bloomberg of NOK 1,312m. We keep our NOK 122 target price and reiterate Neutral Strong underwriting result - No large claims have hit the headlines in 2Q15 - Combined ratio 84%; positively affected by run-off gains (3%) - Underwriting result expected at NOK 807m vs consensus at NOK 791m Weak contribution from investment portfolio - Relatively low-risk investments portfolio, steps taken to reduce risk further in the quarter - Investment return expected at 0.64% despite weak a financial market - We expect a minor negative contribution from the oil service related Private Equity portfolio Fully priced given our assumptions and company s guidance - Sustainable RoE of 15%, equal to Gjensidige s long-term target - Long-term combined ratio of 90%, company s guidance is 90-93% - We have cut dividend forecast for 2016 from NOK 6.4 to NOK 5.0 due to negative finding in tax case 2

3 Segmental estimates ESTIMATES NOKm E 2016E 2017E 4Q14 1Q15 2Q15E 3Q15E 4Q15E 1Q16E 2Q16E 3Q16E 4Q16E Private Norw ay 1,624 1,565 1,523 1, Commercial Norw ay 1, Other Nordic Baltic Corporate centre Underw riting result general insurance 2,862 2,600 2,465 2, Pension and savings Online retail banking Investments 2,427 1,802 2,216 2, Amortisation and impairment Other items Pre tax profit 5,400 4,582 4,883 4,862 1, ,229 1,205 1,161 1,066 1,354 1,336 1,128 Tax expense -1,210-1,070-2,157-1, , Tax % 22% 23% 44% 23% 17% 24% 23% 23% 23% 120% 23% 23% 23% Net profit 4,190 3,513 2,726 3, ,042 1, EPS Source: Gjensidige, Fondsfinans research 3

4 GJENSIDIGE - 2Q15 PREVIEW Higher underwriting estimates, lower net financials CHANGES IN ESTIMATES Changes in estimates Old Old New New Change Change 2015E 2016E 2015E 2016E 2015E 2016E NOKm General Insurance Private 1,495 1,461 1,565 1,523 5% 4% General Insurance Commercial % -7% General Insurance Nordic % -1% General Insurance Baltics % 3% Costs related to ow ner % 0% Underw riting result 2,484 2,486 2,600 2,465 5% -1% Pension and Savings % 0% Retail Bank % 0% Financial result ,291 1,802 2,216-19% -3% Amortisation and impairment % 0% Other items % 0% Pretax profit 4,881 4,980 4,582 4,883-6% -2% Tax ,157-1,070-2,157-6% 86% Net profit ,823 3,513 2,726-6% -29% Key figures Earned premiums gen. Ins. (NO ,025 21,657-2% -3% Claims ratio 73.8 % 74.3 % 71.7 % 72.3 % -2.1 % -2.0 % Cost ratio 14.6 % 15.0 % 15.5 % 16.3 % 0.9 % 1.3 % Combined ratio 88.4 % 89.3 % 87.3 % 88.6 % -1.1 % -0.7 % EPS % -28% Dividend % -22% We increase 2015 underwriting forecast - Above consensus = NOK 2,425m - Strong 2Q expected - Still risk for flooding during summer Lower financial result - Higher long-term interest rates - Increased high-yield spreads in 2Q15 - Weak stock market in 2Q15 Preliminary negative finding in tax case - Solvency II related dissolution of reserves - Approx. NOK 1bn in tax effect in We cut dividend in Possible 2015 will be affected instead 4

5 Nordic insurance priced at premium VALUATION UPDASTED Peer group valuation consensus estimates Company Share Price P/E 14E P/E 15E P/E 16E P/B 14E P/B 15E P/B 16EYield 14E, % Yield 15E, % Yield 16E, % ROE 2014E ROE 2015E ROE 2016E Gjensidige Tryg Topdanmark Amlin AXA RSA Insurance Zurich Insurance Admiral Group Average Median P/B vs RoE 2015E Admiral Higher RoEs in the Nordic region give higher valuations - Consolidated markets in the Nordic region - Loyal customers due to low commoditization - Lower cost ratios due to 80% direct distribution vs 30% in EU AXA Source: Bloomberg 5

6 General Insurance Main profit contributor GENERAL INSURANCE General Insurance P&L General insurance total E 2016E 2017E 1Q15 2Q15E Earned premiums, net 20,257 21,025 21,657 22,318 5,199 5,104 Grow th yoy % 7.8 % 3.8 % 3.0 % 3.1 % 6.3 % 1.8 % Claims incurred -14,227-15,076-15,657-16,414-3,933-3,487 Claims ratio 70.2 % 71.7 % 72.3 % 73.5 % 75.7% 68.3% Corporate centre Operating expenses -3,168-3,269-3,536-3, Cost ratio 15.64% 15.55% 16.33% 15.80% 14.8 % 15.9 % Underwriting result 2,862 2,680 2,465 2, Grow th yoy % 33% -6% -8% -4% 42% -15% Combined ratio % 85.9 % 87.3 % 88.6 % 89.3 % 90% 84.2% Source: Gjensidige, Fondsfinans research Gjensidige s targets toward 2018: Becoming the most customer oriented general insurer in the Nordic region Cost ratio: 15% Combined ratio: 90-93% - Assuming normal level of large claims - Lower than normal in 2014, higher in Assuming zero run-off gains - Av gains since 2008; about 2% - Av. gains since 2000: about 1% - Run-off gains in the medium term - 1% point change in combined ratio changes EPS by 4% 6

7 Private Norway Strong profitability GENERAL INSURANCE Private Norway P&L Private Norway E 2016E 2017E 1Q15 2Q15E Net earned premiums 8,124 8,198 8,280 8,363 1,957 2,040 Grow th yoy % 2.4 % 0.9 % 1.0 % 1.0 % 1.2 % 0.5 % Claims incurred -5,469-5,588-5,690-5,831-1,406-1,316 Claims ratio 67% 68% 69% 70% 71.8 % 64.5 % Operating expenses -1,032-1,046-1,067-1, Cost Grow th 0% 1% 2% 2% 0% 2% Cost ratio 12.7 % 12.8 % 12.9 % 13.0 % 12.7 % 12.7 % Underwriting resultat 1,624 1,565 1,523 1, Grow th yoy % 24% -4% -3% -5% 9% -1% Combined ratio 80% 81% 82% 83% 85% 77% Focus on defending market leader status - Market share 24% - Gjensidige Foundation s customer dividend model is attractive both for private and corporate customers; in 2013 and 2014 approx. NOK 2bn distributed to general insurance customers, see page 29 Effective distribution model helps sustain a low, albeit increasing combined ratio in our forecast horizon Low rank in Finansportalen.no - Auto 6 of 7 - Residential 6 of 6 - Accident 6 of 10 - Travel 5 of 12 Source: Gjensidige, Fondsfinans research 7

8 Commercial Norway The market leader must lead GENERAL INSURANCE Commercial Norway P&L Commercial Norway E 2016E 2017E 1Q15 2Q15E Net earned premiums 7,216 7,001 7,149 7,292 1,737 1,717 Grow th yoy % 2.8 % -3.0 % 2.1 % 2.0 % 4.5 % 1.5 % Claims incurred -5,227-5,214-5,389-5,606-1,371-1,237 Claims ratio 72% 74% 75% 77% 79.0 % 72.0 % Operating expenses Grow th 1% -1% 3% 3% 8% 7% Cost ratio 11% 12% 12% 12% 12% 12% Underwriting resultat 1, Grow th yoy % 17% -16% -5% -11% -14% -26% Combined ratio % 84% 86% 87% 89% 91% 84% Underwriting discipline - Utilize market leader position (28% market share) - Increase premiums to ensure good profitability when needed - Improve competitiveness in attractive segments Strong cost control We expect combined ratio < 90% Source: Gjensidige, Fondsfinans research 8

9 Nordic Growing market shares GENERAL INSURANCE Nordic P&L Nordic E 2016E 2017E 1Q15 2Q15E Net earned premiums 4,394 5,018 5,350 5,750 1,259 1,222 Grow th yoy % 32.1 % 14.2 % 6.6 % 7.5 % 25% 17% Claims incurred -3,154-3,578-3,902-4, Claims ratio 72% 71% 73% 74% 71.1% 69.0% Operating expenses Grow th 29% 14% 7% 7% 115% 18% Cost ratio 17% 17% 17% 17% 16% 17% Underwriting resultat Grow th yoy % 49% 19% -8% -8% 89% 7% Combined ratio % 88% 88% 90% 91% 87% 86% Challenger - 7% market share in Denmark - 2% market share in Sweden Strong growth - Driven by increased market share - Increasing economies of scale 9 Source: Gjensidige, Fondsfinans research

10 The Baltic Entering restructuring phase GENERAL INSURANCE Other regions P&L Baltic E 2016E 2017E 1Q15 2Q15E Net earned premiums Grow th yoy % 2.4 % 31.2 % 27.9 % 4.0 % -7.6 % -5.0 % Claims incurred Claims ratio 72% 77% 77% 76% 77% 73% Operating expenses Grow th 9% 51% 34% -1% 9% 12% Cost ratio 28% 32% 34% 32% 32% 31% Underwriting resultat Grow th yoy % -98% nmf. 43% -19% 76% -170% Combined ratio % 100% 109% 110% 108% 109% 104% Acquisition PZU Lietuva (Lithuania) - Increase market share to 13% (7%) - Needs to be restructured - Drag on profit until 2018 Competitive market Growth in the Baltic region may be affected by the crisis in Russia Source: Gjensidige, Fondsfinans research 10

11 Pensions and Savings Focus on fund management PENSIONS AND SAVINGS Pensions and Savings - P&L NOKm E 2016E 2017E 1Q15 2Q15 Earned premiums 904 1,262 1,478 1,672 1, Grow th yoy % 33% 40% 17% 13% 9% 19% 18% Claims incurred ,126-1,320-1,491-1, Claims ratio 86% 89% 89% 89% 89% 88% 88% Operating expenses Cost Grow th 33% -1% 23% 2% 2% 18% 21% Underwriting result Grow th yoy % 84% -22% 44% -27% -26% -15% -15% Management income Net financial income Other income Other expenses Pre tax profit Grow th yoy % 173% -13% 95% 33% 21% -2% 15% Defined contribution products only - Fee based/no guaranteed return - Growing market - Low risk/low capital requirement Fourth largest player with NOK 30bn under management Support 15% RoE target AuM 27,138 33,655 41,467 49,279 57,091 34,168 36,121 Grow th yoy % 25% 24% 23% 19% 16% 25% 17% Source: Gjensidige, Fondsfinans research 11

12 Retail banking Cost-effective business model BANKING Retail banking P&L NOKm E 2016E 2017E 1Q15 2Q15 NII NII margin, annualized % 2.63% 2.37% 2.37% 2.27% 2.16% 2.45% 2.30% Net financial income ao Operating expenses Loss on loans Loss percentage 0.32% 0.20% 0.29% 0.39% 0.39% 0.26% 0.28% Pre tax profit Gross lending IB 17,324 24,194 27,547 30,852 33,320 27,547 29,302 Additions 6,870 3,353 3,306 2,468 1,999 1, Gross lending UB 24,194 27,547 30,852 33,320 35,319 29,302 29,747 Lending growth 40% 14% 12% 8% 6% 19% 16% Deposits IB 11,581 12,953 16,703 18,540 19,838 16,703 16,696 Additions 1,372 3,750 1,837 1,298 1, ,803 Deposits UB 12,953 16,703 18,540 19,838 21,028 16,696 18,499 Deposit growth 12% 29% 11% 7% 6% 7% 12% Deposits to loans ratio % 54% 61% 60% 60% 60% 57% 62% 17% 15% C/I 62% 58% 53% 50% 49% 51% 49% Cross-selling to general insurance retail customers - Not traditional bancassurance - 46% of bank customers are insurance customers Cost-effective - Multi-channel distribution - Scalable model Supports 15% RoE target Source: Gjensidige, Fondsfinans research 12

13 Investments Average performer, defensive portfolio INVESTMENTS Investment portfolio Hedge funds 4 % Real estate 11 % Other 3 % Bonds held to maturity 32 % Equities 7 % Money market 17 % Current and other bonds 26 % Gjensidige s 5-year average investment return of 4.0% represents the median compared to Nordic peers 0.9% return in 1Q15 - Write-down of oil service related P/E portfolio Return per asset class E 2016E 2017E Equities 7.3 % 4.2 % 9.4 % 10.7 % 6.0 % 6.0 % Associated 9.2 % 9.7 % Money market 2.6 % 1.8 % 2.2 % 1.3 % 1.6 % 2.0 % Current bonds 5.6 % 1.4 % 1.4 % 0.3 % 2.0 % 2.1 % Bonds held to maturity 5.0 % 4.9 % 4.5 % 4.1 % 3.9 % 3.7 % Real estate 4.7 % 5.8 % 9.4 % 6.3 % 6.2 % 6.0 % Hedge fund and other 17.9 % 20.8 % 14.9 % 0.0 % 11.8 % 11.8 % Total 5.5 % 4.4 % 4.1 % 3.2 % 3.7 % 3.8 % We expect 0.6% return in 2Q15 - Weak bond market - Flat stock market Source: Gjensidige, Protector Forsikring, Fondsfinans research 13

14 A pricey low risk investment SUMMARY Key numbers NOKm E 2016E 2017E 1Q15 2Q15E Private Norw ay 1,624 1,565 1,523 1, Commercial Norw ay 1, Other Underw riting result 2,862 2,600 2,465 2, Combined ratio 85.9 % 87.3 % 88.6 % 89.3 % 90.5 % 84.2 % Pension and savings Online retail banking Investments 2,427 1,802 2,216 2, Other Pre tax profit 5,400 4,582 4,883 4, ,229 Tax 1,210 1,070 2,157 1, Net profit 4,190 3,513 2,726 3, EPS DPS P/E Dividend yield % 7.9 % 4.9 % 3.9 % 4.8 % ROE 17.5 % 16.1 % 12.3 % 15.5 % P/B Gjensidige is a safe haven when falling oil price creates waves in the Norwegian stock market In 2015 underwriting results in general insurance are expected to be a larger contributor to profit than returns from the relatively low-risk investment portfolio A low cost multi-channel distribution model is in our view a key success factor for Gjensidige We base our NOK 122 target price on a sustainable RoE of 15% Source: Gjensidige, Fondsfinans research 14

15 Balance sheet ESTIMATES NOKm E 2016E 2017E ASSETS Intangibles 1,508 2,581 3,576 3,391 3,700 3,943 3,943 3,943 3,943 Investments in associates 3,783 4,276 4,533 5,036 4, Investment in properties 5,510 5,900 5,248 4,627 4,644 6,104 6,401 6,840 7,286 Other 1,445 2, Non-current assets 12,246 14,969 13,874 13,311 13,660 10,769 11,066 11,506 11,951 Shares, bonds and similar 23,291 23,209 24,316 24,532 28,641 31,719 33,761 34,814 35,983 Bonds held to maturity 15,816 14,498 11,693 9,264 5,211 2,956 3,210 3,277 3,347 Loans and other receivables 13,350 19,538 24,457 32,397 42,692 46,970 50,275 52,743 54,742 Receivables related to operations/reinsurance 3,436 3,927 3,791 4,113 4,291 4,630 4,630 4,630 4,630 Cash and cash equivalents 3,104 2,890 3,513 2,332 2,729 2,404 1, ,816 Other 3,627 5,076 6,902 8,260 11,722 14,535 14,535 14,535 14,535 Financial assets 62,623 69,138 74,673 80,896 95, , , , ,053 TOTAL ASSETS 74,869 84,107 88,547 94, , , , , ,004 EQUITY AND LIABILITIES Share capital 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 Other equity 21,005 22,138 22,283 24,618 25,288 20,657 21,077 21,296 25,054 Equity 22,005 23,138 23,283 25,618 26,288 21,657 22,077 22,296 26,054 Provision for unearned premiums 7,672 9,078 9,531 10,142 11,049 11,945 12,383 12,760 13,158 Claims provision 25,857 28,339 29,962 29,562 31,750 32,927 34,135 35,175 36,272 Pension liabilities Other Provision for liabilities 34,517 38,380 40,746 40,112 43,213 45,878 47,524 48,941 50,436 Deposits from and liabilites to customers 6,550 9,120 9,776 11,580 14,938 16,703 18,540 19,838 21,028 Interest bearing liabilities 4,916 5,255 5,263 5,356 9,772 9,543 10,330 11,181 12,103 Other 6,881 8,213 9,477 11,541 14,736 20,201 20,108 20,156 20,383 Financial liabilites 18,347 22,588 24,517 28,477 39,446 46,447 48,978 51,175 53,515 Source: Gjensidige, Fondsfinans research 15 TOTAL LIABILITES AND EQUITY 74,869 84,107 88,547 94, , , , , ,004

16 We rate Gjensidige LOW risk RISK ASSESSMENT Catastrophes, including natural disasters and terrorist-related events, may cause Gjensidige to incur substantial losses. The risk is reduced through reinsurance and the Natural Perils Pool in Norway Gjensidige derives a significant portion of its income from financial assets. Fluctuations in the fixed income, equity and the property markets may have significant adverse effect on results and financial position The EU has introduced a new regime governing solvency margins and provisions for insurance companies, the effect of which is still uncertain. The main political risk factor currently is, however, introduction of higher national requirements than EU s minimum 16

17 Share information Share data Share data Sector Financials Bloomberg GJF NO Risk rating Low Outstanding shares mill 500 Market cap Free float 38 % Average volume 574 High/low 52w 140/102 Weight OSEBX 3.1 % Rel. Perf 3/6/12-6/-4/-2 Abs. Perf. 3/6/12-5/1/0 Shareholders Name Shares (mill.) % Gjensidigestiftelsen 311m 62.2 % Folketrygdfondet 24m 4.8 % Deutche Bank 20m 3.9 % BlackRock 7m 1.3 % Danske Bank 6m 1.2 % Thornburg Investment Mgt 5m 1.0 % State Street Corp. 5m 1.0 % Safe Investment Company 5m 0.9 % DNB 4m 0.8 % UBS 4m 0.7 % Other 111m 22.2 % Total 500m % The Gjensidige Foundation is a protection against unfriendly takeovers Its share of ordinary dividends is distributed to policyholders in Gjensidige (15% of premiums in 2014) Source: Bloomberg, Oslo Børs VPS, Fondsfinans research 17

18 Definitions of ratings Buy Low risk: with a potential of min 5%. Medium risk: with a potential of min 10%. High risk: with a potential of min 20%. Neutral Low risk: -5% to +5%. Medium risk: -10% to +10%. High risk: -20% to +20%. Sell Low risk: min -5%. Medium risk: min -10%. High risk: min -20%. Risk ratings are based on price volatility, fundamental criteria and perceived risk. Ratings are: Low (L), Medium (M) and High (H). Target: Our valuation as of today. Time frame of target: Target is what we value the share as of today. Recommendation distribution as of : Companies in each recommendation category that have been investment banking clients over the past 12 months: Recommendation No Percent Recommendation No Percent Buy % Buy 1 3 % Neutral % Neutral 1 10 % Sell % Sell 0 0 % Total % Total 2 Our intention is to issue preview and update research on a quarterly basis. Our investment recommendation is elaborated in accordance with The Norwegian Securities Dealers Associations standards. This report has not been sent to the company for correction of any factual errors. Fondsfinans is organized with Chinese walls between the Corporate Department and the Research/Broking Department. In addition, Fondsfinans has internal instructions and guidelines for handling sensitive information. The analyst receives compensation that is impacted by overall firm profitability, including investment banking activities. Fondsfinans is under supervision of The Financial Supervisory Authority of Norway. The recommendation has not been changed from NEUTRAL. The previous recommendation was issued Ownership per in Gjensidige ASA: Analyst (including his/her closely related persons or companies): 0, corresponding to 0% of the company share capital Employees (including their respective closely related persons or companies): , corresponding to 0% of the company share capital Group Fondsfinans (including the holdings of its Chairman, his spouse and their closely related companies, Erik Must AS and its 100% controlled subsidiaries):. 3198, corresponding to 0% of the company share capital Fondsfinans may hold shares in Gjensidige ASA as a result of daily trading/market making. Information on such holdings is not given when of non-significant value. Fondsfinans does not act as market maker in Gjensidige ASA. Fondsfinans has not acted as corporate adviser, lead manager in IPO etc. during the past 12 months. 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