value and opportunity

Topdanmark – The Danish Cannibal

Topdanmark, a local Danish Insurance company has been on my extended “to do” list for a long time for 2 reasons: It is the second most profitable European insurance company after Admiral (based on ROE) and  as Charlie Munger would call it a “true Cannibal”.

Those are some selected numbers from Topdanmark over the last 18 years:

	PE	EPS	Shares out	change no shares	ROE
30.12.1999	6,0	-0,42	388,1		-4,4%
29.12.2000	5,3	2,99	349,0	-10,1%	26,2%
28.12.2001	14,2	1,38	292,3	-16,2%	10,8%
30.12.2002	30,1	0,68	268,9	-8,0%	5,9%
30.12.2003	7,9	4,02	245,2	-8,8%	32,7%
30.12.2004	11,7	3,67	227,3	-7,3%	25,3%
30.12.2005	9,0	6,05	207,0	-8,9%	36,4%
29.12.2006	10,3	9,09	200,6	-3,1%	44,8%
28.12.2007	9,8	7,50	184,5	-8,0%	34,6%
30.12.2008	9,1	-1,21	155,9	-15,5%	-6,0%
30.12.2009	7,6	9,22	169,1	8,4%	41,2%
30.12.2010	9,6	7,72	170,9	1,1%	26,9%
30.12.2011	12,0	7,44	148,3	-13,2%	22,4%
28.12.2012	8,5	14,21	137,5	-7,3%	36,7%
30.12.2013	11,4	12,50	125,0	-9,1%	27,8%
30.12.2014	13,9	14,44	115,0	-8,0%	30,2%
30.12.2015	16,8	11,70	105,0	-8,7%	23,9%
30.12.2016	10,7	16,80	95,0	-9,5%	32,9%
avg					24,9%

So share count went down from 388 mn shares to 95 mn by the end of 2016 and most likely to around 86 mn after the annual shareholder meeting last year, so an overall reduction of around -78%.

Despite having never paid a dividend in those 18 years, the stock gained a whopping 1.300% or around 15,7% p.a. compared to -1,59% p.a. for the European insurance sector in the same time period.

Interestingly enough, overall net income didn’t improve that much over the period. 2016 total net income for instance was at the same level as 2006 but due to the significantly reduced share count, EPS grow significantly.

Simple strategy

Topdanmark’s explicit strategy is simple:

They want to be a local Danish player, keep costs down and return any capital which they don’t need to shareholders via share buy back. So despite any spectacular growth, this strategy has worked very well for shareholders so far and led to far superior returns compared to most growing but unprofitable European insurance companies. Clearly a “best in class” for capital allocation in my opinion.

One remark: Most of the Nordic insurance companies have really nice combined ratios and are quite profitable. It looks like that they don’t hurt each other too much.

The Sampo situation

Sampo, the Finland based insurance group has been a Topdanmark shareholder for some time. According to Bloomberg they held ~31.6 mn shares since beginning of 2011.

If we compare this to the table above, those 30 mn shares have been around 20% in 2011. But with Topdanmark buying back more and more shares and Sampo not selling, the percentage increased every year until Sampo had to make a mandatory offer for all shares in September 2016 for DKK 183 per share.

Interestingly Sampo said that they do not plan to take over the full company and they therefore didn’t offer any premium. Still, the received more than 8 mn shares and are owning now 41%.

For the upcoming general shareholder meeting next Tuesday, Sampo however made a pretty strange request:

Sampo has announced that it will propose that the authority of the Board of Directors to buy-back own shares be revoked at Topdanmark’s AGM on 4 April 2017. Sampo’s proposal should be viewed in the context of Sampo’s announcement in its Interim Report for Q1-Q3 2016 that Sampo intends to propose discontinuation of Topdanmark’s share buy-back programme, at the AGM on 4 April 2017 and a switch to earnings distribution by means of payment of dividend.

So instead of sitting and waiting and gaining control of Topdanmark via further share repurchases, Sampo actually wants Topdanmark to switch to dividend payments.

I am not 100% sure why Sampo is doing this. As an insurance company, they clearly want to show a nice “book yield” on investments and with Topdanmark suddenly paying 6-7% dividend, they could clearly improve this formal KPI.

For any tax paying minority shareholder however, this is clearly not value adding in the long run.

I also don’t think that SAMPO is “stupid” money, I consider them rather as one of the smarter Insurance players in Europe. It seems to be that for the time being they don’t want to have to consolidate Topdanmark into their accounts. This could have something to do with their Solvency II ratio. It could also be that they won it in their life insurance segment and really need the yield to cover the guarantees.

Sampo’s Solvency II ratio is not great at 154 %. I am not sure how they currently account for the 1 bn EUR stake in Topdanmark but I guess it would negatively affect their SII position if the would consolidate the stake.

Is Topdanmark still an interesting investment ?

With a trailing P/E of 10, Topdanmark doesn’t look expensive, however the 2017 result has been guided to be significantly lower than that. It is also clear that Sampo sooner or later will make a move on Topdanmark.

On the other hand, I think the most interesting point will be to see if and how the Topdanmark stock price will react to a change to a dividend stock next week, which seems to be quite likely. This is one of the rare examples where a stock might go from one extreme (Cannibal) to the other (Full distribution). Of course we do not know what is already priced in.

For investors whose income is taxed, this is a clear negative. On the other hand, yield starved investors will find this more attractive.,

From my point of view, Topdanmark clearly has become less attractive. The “special” aspect will be most likely gone and speculating on a Sampo bid is maybe also not so interesting for the time being.

However  Zopdanmark is also a good example that a consequent Cannibal strategy can lead to spectacular results for shareholders even if underlying growth is unspectacular.