Solid Försäkringsaktiebolag (SFAB ST)
A growing niche insurer at a reasonable price
Key Data
Name: Solid Försäkringsaktiebolag (SFAB)
Sector: Insurance
Share Price: 69.5 SEK
Dividend: 4.5 SEK
Market Cap: 1 292 954 KSEK
Areas of Operation: Sweden, other Nordics and Europe
Business:
Solid Försäkring (“Solid Försäkring” or “Solid”) is one of the leading niche insurance companies in the Nordic region in non-life insurance and sells insurance in the Product, Personal Safety and Assistance segments. The target group consists of private individuals but our insurance policies are primarily sold via our partners, such as retail chains, banks, credit institutions, travel agents and car dealerships that offer Solid Försäkring’s non-life insurance for the products and services they sell.
This is a niche insurer with a diversified and low value at risk range of offers, which are primarily sold via partners, affiliated agents or independent insurance brokers. Only a small minority of the insurance is sold directly, and that is primarily accounted for by renewals.
The partners are primarily credit institutions, banks, retail chains, travel agents and car dealerships, who have exclusivity contracts with Solid when it comes to the sale of insurance products.
Sweden accounts for 60% of the company’s gross premiums, with Denmark, Norway and Finland comprising an additional 30%. The rest of Europe accounts for less than 10% of the business.
The company has 3 main segments:
Personal safety
Personal safety is the largest segment with around 40% of the business. This segment includes income insurance, payment protection insurance and accident insurance.
These policies are essentially exclusively distributed through partners such as banks and credit institutions.
Product
Within the product segment the company offers all-risk coverage insurance and elimination of deductibles for a wide range of product categories, both as individual insurance and as group insurance. This is primarily bicycle and consumer electronics insurance, but also includes things like garden tools, glasses, watches and jewelry. This is 30% of the business.
These policies are primarily sold through retail chains together with the item being insured.
Assistance
This is roadside assistance insurance associated with vehicle warranties, along side travel insurance and deductible assistance for tax deductible expenses.
The vehicle related insurance is sold through dealerships, with the travel related insurance being sold primarily through travel agents and some direct to consumer.
Important Notes
Background
The company went public in 2021, and their prospectus gives a fairly detailed account of their history and the reasons for them being spun-off by Resurs Holding (also a publicly traded company).
This was essentially a small branch of a much larger company that was being ignored by the general market, and which was not benefiting from being part of a holding company.
By distributing the shares to the holding company’s existing shareholders, the hope has been to put additional focus on the company, and enable greater freedom to focus on Solid’s core business.
They seem fairly shareholder focused with their management teams contact details freely available, and both Swedish and English versions of annual reports, news releases, etc…
They have 2 major shareholders, inherited from their parent company spin-off, and neither of them seem to be selling their position.
Nonetheless they still seem under the radar with supposedly only a single small Nordic investment bank following them. I tried looking up their research on the business, but I can’t find anything public, so I doubt anyone is seriously looking into the company.
Growth
This is a small niche insurer that is growing reasonably well through both organic growth and acquisitions of similar businesses.
For example in 2023 they acquired the Norwegian Car Protect AS, an insurance intermediary of car warranties with a lot of experience in the Norwegian market. This is effectively a bolt-on acquisition that fits well with their existing Swedish assistance business.
Despite 2024 just starting they bought another car warranty business, this time in Sweden.
Generally speaking they tend to acquire 2 of these types of bolt-on acquisitions per year, which combined with their organic growth provides a good growth trajectory.
Their recent growth has caused some issues though, so they are spending some cash building up their IT infrastructure to enable them to service all these new policies.
Shareholder Returns
The company started out with 20 million outstanding shares, and over the past 2 years they’ve reduced it to 18.6 million.
Additionally the company has a very clear dividend policy where they seek to pay out 50% of their net income on a yearly basis, which makes it fairly simple to project investor cash returns going forward.
Overall they’ve returned 144 million SEK since they became public, which is a little over the 50% payout ratio they aim at.
This is a common dividend policy for European insurers.
Assets
From 2022 to 2023 the company increased its exposure to unrated debtors from 280 million SEK to 618 million SEK, around a 340 million SEK increase.
This large increase means that substantially all increases in investment assets went to these unrated securities, and that even some capital that was invested in rated securities (notably all AAA, AA- and A+ rated bonds) was re-allocated to these unrated securities.
In total, the unrated portion of the company's investment portfolio went from 38% to 63% of the bond portfolio.
I’ve reached out to the CEO, CFO and the head of Investor relations about this issue, and this was their reply:
Thank you for your email. I will try to give you some additional information regarding the asset management but as you understand I can not give you any specific information that are not known in the market.
Solid has an Investment committee consisting of three external advisors, CEO and CFO, reporting to the board on a regular basis. The work of the Investment committee and the way the asset management is carried out is determined by the investment policy stating risk appetites/tolerances, limitations regarding investments types, counterparties, markets we are allowed to invest in etc. The policy is approved by the board at least on a yearly basis and our risk control function ensures that investments and all the procedures related to this are made in accordance with the policy. Any incorrections are reported directly to the board.
The bond portfolio consists for the most part of bonds with relatively short maturities, 1-5 years, variable interest and mainly well known Swedish issuers.
This isn’t a very satisfying answer, and I would state that the quality of the assets owned by the company is a potential risk.
There are a lot of open questions here, namely:
What are these Swedish issuers?
Are there any governance issues regarding these bonds? ie: Do we have to worry that Solids management is giving their friends a good deal with Solid’s shareholders money?
Is it just the bonds that are unrated, or are the issuers unrated?
Why are the premiums over the Swedish risk free rate so low?
etc…
The Swedish market is fairly deep so I’m struggling to understand this, and the answers I’ve got from management weren’t very illuminating.
This is the main risk that I see with the business, and there’s no real way to reduce it without deeper access to the company’s financials.
Key Indicators:
Revenue Growth CAGR: 5%
Net Margin: 10%
Return on Assets: 6%
Return on Operating Capital: 8%
Return on Equity: 12%
Debt to Assets: 47%
Book Value per Share: 50.95 SEK
Claims Ratio: 24%
Expense Ratio: 64%
Combined Ratio: 88%
Cyclicality: Cyclical
Expected State: Growth
Current Valuation:
Price to Earnings: 7.8
Price to Book: 1.4
Price to Tangible Book: 1.4
Price to Revenue: 1.2
Shade Research Valuation:
Assumptions:
Discount Rate: 10.2%
Nominal Revenue Growth: 5.8%
Terminal Growth: 3%
Expected Price to Earnings: 9
In my Discounted Cash Flow Model I assumed that revenues would increase at a nominal rate of 5.8%, which is 70% of the company’s sustainable growth rate, and in line with its historical performance.
The model ends in 2030, at which point I expect to sell my position at a multiple that is slightly above the current multiple, but below the industry norm.
I’m also accounting for a 50% dividend payout ratio, as per the company dividend policy, and a 20% buyback ratio which is lower than what the company has done in the past year.
As the price for the buybacks and the terminal value, I assume a simple average of the expected PE ratio (9 a slight increase over the current), and the current Price to Book, price to tangible net asset value and price to sales.
I discount all cash flows at a 10.2% rate. This accounts for a 4% risk free rate from the Swedish policy rate plus a 4.72% Swedish equity risk premium as reported by Damodaran.
We use these inputs and a Beta of 0.81 to calculate a CAPM discount rate of 7.82%, which we increase by 30% in order to get a margin of safety.
Results
Given my assumptions I estimate a net present value of an investment in Solid to be worth a net present value of 11.7 SEK, or a 17% premium.
The Present value of the company shares is expected to be around 81 SEK.
Since the net present value of this investment is positive I will Buy the company for my portfolio.
The way I see it the company is trading at similar multiples to the industry, while growing at rates above industry. Even if growth stalls, I’ll still be getting a decent deal in line with the insurance market.
If the company gets noticed in the next couple of years it may be re-rated to a multiple that is more in line with its growth prospects. If no such catalyst appears, I’ll still get a decent return from growing dividends and buybacks at below fair value levels.
Edit:
This post was originally written a couple of months ago when the company was trading at 68.5 SEK. Unfortunately as I was writing this post, the stock kept going up and I was unable to open a position. As of today i still don’t have an open position, and sadly i missed out on this return. Oh well.