2023-10-12 23:32:37 ET
Summary
- Sampo, a Finnish insurance business, has seen a 15% decrease in value in less than 4 months.
- The company has shifted its focus to pure-play insurance after divesting its stake in Nordea.
- Sampo has a strong combined ratio and stable performance in the Nordic market, making it an attractive investment option at the right price. My PT is €35/share.
- That makes it a "HOLD".
Dear readers/followers,
Sampo ( SAXPF ) ( SAXPY ) is a quality Finnish insurance business that I have been successfully investing in for years. By successfully, I mean that I have bought it at a good valuation, and then sold it when it became too expensive. In my latest article, I changed my stance for Sampo to a firm "HOLD". This proved to be the right choice because since that article, we're down almost 15% in less than 4 months. (Source: Sampo Article)
As such, this is an update of a thesis on a quality insurance business. After divesting its stake in Nordea ( NRBAY ), that's what remains for Sampo - it's pure-play insurance, with activity in multi-line and high exposure to P/C and Life both (in different sectors/subsidiaries, but moving to a P/C structure when de-merging its Mandatum operations), but like many insurance companies, working and focusing a lot on its P/C sectors.
Sampo is a very solid business with an upside. It's essentially a multi-line insurer, and you know that I love insurance companies, given my investments in sector leaders and undervalued companies in both Europe and America. However, for the past year and more, I've focused on other insurance companies than Sampo.
In this article, I'll show you whether it's time to once again focus on Sampo and establish a position here.
Sampo - At the right price, this becomes a home run.
My stance on Sampo has shifted over the years. From being one of the better-combined bank/insurance stocks with a very solid upside and fundamentals, a divestment of Nordea and a reduction of the core dividend have turned this into a different sort of business and investment. It's safer, as such, but it's also less attractive from an income standpoint. I don't believe the market has yet fully appreciated or normalized how different this will look in the next few years.
After the payout of Nordea shares, which we can see in the company's earnings here, the focus of Sampo has changed to straight insurance. Overall, I do not mind this focus change. I even think it's great because the pure-play insurance business here has some of the best names in all of Scandinavia.
I want to remind you at this point of some industry trends. Most insurance companies in NA and Europe on the continent consider a sub-92% combined ratio ( the sum of incurred losses and expenses and then dividing them by the earned premium, meaning lower is better ) to be good.
Sampo manages 80-85%. This is an order of magnitude better than most of its peers, and those trends are set in stone historically, not some volatile trend that's expected to bounce back up. Combined ratio being one of the most important KPI's for an insurance business because anything above 100% means that there is no profit, this is what you want to be looking at.
For instance, an insurer with a 101% combined ratio means that it's paying out 1% more money in claims and other expenses/losses/dividends than it is making from its income.
2Q23 is the latest set of company results we have to look at. This was a good quarter. Why?
For the first half-year of 2023, the company saw strong premium growth in Nordics and the UK, which represent the company's operating geographies. This was even on the basis of FX adjustment, along with some excellent margin development.
On the fundamental side, the Nordic market seems as stable as it has ever been. Price increases applied to the UK market saw results in growth in that market, and the company is very comfortably within its range for overall targets.
Profit growth and results, were all up or solid enough/flat for a YoY comparison when adjusted for the recently adopted IFRS 9.
Some of those combined ratio trends are the envy of every insurance company out there, I would say. There was a degree of weather/climate claims in the IF segment that drove the combined ratio up somewhat, but it's still at a level that on a global basis compares extremely favorably.
Key developments include continued high rates of retention in both Commercial and industrial sectors despite significant rate action and price hikes. UK motor prices are up as well, enabling strong growth in hastings, and home policies are up 35% as well. The consumer side of the operations is seeing good price development as well, with a 9% group-wide premium growth, and 5-6% rate increases in Nordic P/C, affected by a 4-5% claims inflation in the Nordics.
However, Sampo and IF showcase its market-leading position with a 90% retention rate. Despite higher prices, people are not switching their insurance providers - not to any major degree, at the very least. I myself have most of my P/C at IF, and I'm very content with both the feedback and my experiences when I've lodged a claim with regard to one of my policies.
The company reported very good underwriting profits, showcasing Sampo's ability to mitigate claims inflation with price hikes and strong retention, thanks to high service quality.
It's worth noting for 2Q23 that there were some significant industrial claims due to weather and other effects. The company's industrial portfolio has shifted towards the overall property sector in the industrial segment. This has resulted in an overall decline in the industrial frequency loss ratio - down 17% since 2018, and only slightly up since 2021. 2Q23 were actually some of the largest claims in IF's history, and it speaks to the diversification of the company as well as its quality and profitability that this, on a company-wide basis, is not really noticeable.
The overall picture that I want to convey for IF's 1H23 is that the company performed extremely well despite some of the largest claims in the company's history and an overall inflated (in terms of claims) market. Sampo is benefitting from pricing trends and switching trends in the UK, where UK customers specifically seem to be "shopping around" for their insurance providers.
These trends are a net benefit to Sampo, and Hastings - and their collaborative efforts in this segment are beginning to show fruit.
A word on Mandatum (L/H). The company's post-demerger Solvency two is calculated at around 225%, with an EBIT of €80M stand-alone, up from €34M stand-alone EBIT. The company is in the process of being listed on the NASDAQ Helsinki.
I do not consider Mandatum to be interesting for investment here. The company's exposure and the overall Nordic/Baltic L/H is something where I would prefer other European P/C or multi-line insurers, but it's an interesting company to keep an eye on, especially if fundamentals improve on a high level.
Moving onto valuation, because that is the core here.
Sampo's valuation is attractive at this point after a 15% drop.
The issue I had with Sampo in my last article was the valuation. This is, quite unfortunately, still the case. In my last article, I made a case for a sub-€38/share price for Sampo. The current share price comes to €37.5, which theoretically would be a "BUY" with a very limited upside.
You could view Sampo this way, and the company's 6.95% yield may even be enticing enough for you to consider this a valid play.
I'm going to lower my price target for Sampo slightly to account for the higher risk-free rates and the higher returns available, easily, on the market today. A slight cut, but a definite cut. The company is expected at this point to generate around €2.2/share in adjusted EPS for this fiscal, which would mark a 10% decline from the 2022 results. This makes perfect sense in context after the Mandatum listing and removal from the company.
However, this means that based on a growth rate of 5% beyond 2023, the upside at a 14-16x P/E is just around the high single digits or low double digits.
My own minimum investment RoR is 15%.
There is no question to me as to the safety here. Sampo is insurance with an A rating and very low overall debt with high fundamentals. However I see a very high likelihood of the company actually underperforming for the next few years in light of this macro environment. By underperformance, I mean the company essentially holding the €35-€40 pattern that it has held for over a year here.
I don't see many positive catalysts for Sampo that would drive the share price to €44 or above. Any improvement in the UK will be in relation to claims inflation, which is not over yet - and any decline in any sector, as we've seen this half-year, will likely prevent significant upside.
In short, I'd be very careful about going into Sampo at anything above €35/share. That's a €3/share lowering of my PT, and the yield at €35/share would be above 7%.
That's where I consider this company an appealing "BUY".
Here is my thesis for Sampo as it stands today.
Thesis
- Sampo is one of the better insurance companies in all of Europe. Together with Allianz, Munich Re, and AXA, I consider them the 4 prime investments in multi-line and reinsurance. Whenever one of them is cheap, that is a time to "BUY" the company for me.
- Sampo, at this particular time, is not a cheap company per se. Trading at 16x P/E, both on a European and International comparison, it's an expensive insurance company for what it offers, despite its superb management and A-rated credit safety as well as very low leverage and over €20B worth of market cap.
- I would currently view Sampo as a "HOLD" here. Once the company hits below €35/share, I would consider it a "BUY" again. This is a lowering of my overall PT
Remember, I'm all about : 1. Buying undervalued - even if that undervaluation is slight, and not mind-numbingly massive - companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime.
2. If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.
3. If the company doesn't go into overvaluation, but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows.
4. I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.
Here are my criteria and how the company fulfills them (italicized).
- This company is overall qualitative.
- This company is fundamentally safe/conservative & well-run.
- This company pays a well-covered dividend.
- This company is currently cheap.
- This company has a realistic upside based on earnings growth or multiple expansion/reversion.
Because it is neither cheap nor has a solid upside potential, I view this as not being an interesting or valid investment at this time based on my goals. I give the company a "HOLD".
For further details see:
Sampo: Quality Insurance With Limited Upside Potential