Jordan Giancoli of Kerrisdale Capital: Long on Dongbu

Jordan Giancoli of Kerrisdale Capital: Long on Dongbu

Jordan Giancoli of Kerrisdale Capital, InvestPitch presentation produced by sumzero and Institutional Investor on the long case for Dongbu Insurance Co., Ltd. (KRX:005830).

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Investment Thesis

Dongbu Insurance Co., Ltd. (KRX:005830) Insurance is South Korea’s second-largest non-life insurer. The business has been profitable for twenty consecutive years and has compounded book value at an annualized rate of 16% since 2005. Dongbu has a trailing return on equity of roughly 17% and trades at just 1.2x Price/Book Value and 8.2x 2013E P/E. These valuation multiples are too cheap for a well-run insurer that has a long track record of growing book value in a conservative manner. Dongbu has a competitive advantage over its peers due to the lowest expense ratio in the industry. Dongbu also boasts KRW 18trn ($16.9bn) of investable assets (Dongbu’s ‘float’), a figure that would make many U.S. insurers envious. Even with a return on assets of just 2.5%, Dongbu’s massive float allows it to earn double-digit RoEs from its investment income alone.

Dongbu Insurance Co., Ltd. (KRX:005830) has three business lines: auto, long-term (healthcare), and general. The economics of the auto insurance business would be familiar to any U.S. investor except for one key difference: Korea has a fixed-price regime. Politicians will sometimes cut rates to score points with voters, as they did in April 2012, and this has a direct impact felt across the industry. Insurers will continue to write policies since auto insurance provides a hook to incent customers to buy other products, such as supplemental life and casualty insurance.

But regulators can only push so far. Dongbu Insurance Co., Ltd. (KRX:005830)’s weaker competitors have seen their risk-based capital ratios fall as a result, and it seems only a matter of time before regulators reverse course. Dongbu also markets supplemental healthcare products, which South Koreans use to complement their state-funded care. This business is generally break-even but provides Dongbu with much of its float volume. Lastly, Dongbu maintains a small property & casualty book with the property side of the book largely in run-off mode.

H/T Curry Goat

Jordan Giancoli of Kerrisdale Capital: Long on Dongbu

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