Business Strategy & Outlook
Swiss Re has a history of overly aggressive expansion and typically too much leverage. The first example of this can be seen in the acquisition of General Electric Insurance Solutions in the earlier part of the new millennium. This was financed through a combination of debt and share issuance, a historic and largest Swiss Re acquisition in that period. Furthermore, Swiss Re continued down a path of building out its reinsurance securitization offering, structuring pools of credit, mortality and natural catastrophe risk. This did not work out well because the Swiss Re increased correlation and dependence and when financial markets fell so did the value of these securities. Swiss Re’s leverage position and problems with its securitization program led the business to complete a capital raise and take on Berkshire as a preferential terms’ investor. This investment built on a previously established relationship where Berkshire reinsured substantially all of Swiss Re’s yearly renewable-term United States mortality book, another area where Swiss Re had run into difficulties.
The latest round has been aggressive expansion for commercial insurance and this came back to bite the business. What is a business that is still overleveraged and one where the levels of debt do need to be addressed? However, from an operational perspective one can see a company that is focusing on building a cleaner and more traditional reinsurance business, one that focuses on underwriting and shifts away from reliance on investment returns to fund unprofitable long-tailed lines of underwriting. One can see a turnaround in corporate solutions starting to come to fruition and the nascent stronger move into more specialist lines of business and find the management team to be a lot more disciplined. However, one would like to see the business reign in its buybacks and concentrate more on building out the long-term profitability of this business.
Financial Strengths
Swiss Re does not have a particularly strong balance sheet. It would help the business immensely if management chose to pay down more debt. Swiss Re has around $11.2 billion of debt. The majority of this is long term, and the most substantial portions don’t mature for a few years. The shape of the debt isn’t well balanced, with the vast majority issued as subordinated. This means there are some pockets of very high interest rates and this is reflected in the broader group’s interest. Swiss Re pays an annual dividend that it intends to grow annually in line with long-term earnings growth and maintain the prior year’s dividend as a minimum level. The business also actions buybacks, though given the macro uncertainty it would be prudent if the business held off over the next few years from doing this.
Bulls Say
- Swiss Re looks to be on the cusp of producing consistent results in the long term under the performing commercial insurance division.
- The quality of Swiss Re’s investment portfolio is high.
- Swiss Re pays a good dividend.
Company Description
Swiss Re was established in 1863 in Zurich. Since then, the business appears to have cycled through quite a few strategies. Namely in the early part of the millennium Swiss Re took on an investment banker who eventually led the business. Over the next 10 years CEO Jacques Aigrain built Swiss Re’s financial solutions into a powerhouse and helped the company complete its first securitization, finalized in 2005 for credit reinsurance. This division became a leader for Swiss Re but then disaster struck during the global financial crisis. Swiss Re mothballed this unit and approved a CHF 5 billion capital raise. Now the business concentrates more fundamentally on property and casualty, life and health reinsurance. Swiss Re also has a good commercial insurance offering named corporate solutions.
(Source: Morningstar)
DISCLAIMER for General Advice: (This document is for general advice only).
This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.
The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.
The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.
Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.
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Business Strategy & Outlook
Roper acquires software companies with large amounts of deferred revenue. Large quantities of deferred revenue exist because many software businesses receive cash far in advance of when services are rendered. Roper uses this cash to invest in businesses at incrementally higher rates of return. Its targets have large bases of recurring revenue in oligopolistic, niche markets with small total addressable markets. That revenue base is protected by strong switching costs that frequently post customer retention rates greater than 95%. Roper’s businesses typically don’t own their own infrastructure, which further contributes to its asset-light business model. From 2003 through today, Roper’s net working capital as a percentage of sales has dropped from 18% to negative 13%. Skeptics point out three criticisms: Roper purchases businesses that have little strategic rationale with one another; it is starving its businesses for capital; and the business model carries a lot of execution risk since the company will eventually run out of targets to purchase. All three of these criticisms miss the mark. First, purchasing unrelated businesses is an advantage. While competitors frequently purchase targets to either eliminate competition or buy distribution, Roper screens all opportunities based on how each business will add to long-term cash returns, a key reason is the stock has beat the returns of the S&P 500 by about 2 times since 2003. Second, Roper’s businesses don’t require capital to continue growing. The maintenance capital expenditures are less than 1% of sales. Even so, free cash flow conversion consistently hovers well over 100%. Finally, capital allocation has been integrally tied to Roper’s culture since the early 2000s. The firm also does not try to extract aggressive synergy targets from acquisitions, choosing instead to focus on opportunity cost. Private equity also provides Roper with a continuous revolving door of potential investment opportunities. Following portfolio changes, one can still believe Roper is poised to continuously compounded cash for many years, and it can anticipate mid teens EPS growth through the cycle.
Financial Strengths
Roper is in strong financial health, and it is adequately capitalized to meet its ongoing service obligations. As a result, one can derive a low risk of default in the model’s credit risk assessment, which is slightly better than the moderate risk the rating agencies assign to Roper’s bonds. One reason one is more confident is Roper’s free cash flow conversion, which historically hovers well over 100% of earnings (including 125% in 2020, on an adjusted basis). While the firm does take on leverage when acquiring a target, management has indicated it is absolutely committed to maintaining an investment-grade rating. At an investor conference in early 2019, CEO Neil Hunn indicated his belief that Roper could do a $3 billion-$3.5 billion deal and “easily be inside of investment-grade.” Since that time, Roper has spent over $6 billion in acquisitions and has still managed to maintain its investment-grade credit rating. As of the end of 2021, the firm’s net debt/adjusted EBITDA was about 3.4 times. While one normally doesn’t like EBITDA metrics when assessing a firm’s financial health, one can point out that Roper converts about 82% of its adjusted EBITDA into free cash flow. The firm’s interest coverage (EBIT/interest), moreover, stands at 8.5 times. Unlike other multi-industry conglomerates, the firm has no pension plan. Given that one doesn’t believe Roper requires any restricted cash to operate its businesses, one can add back 100% of Roper’s cash to the net debt calculation, which is also unusual in multi-industry coverage.
Bulls Say
- Roper’s total returns have doubled the returns of the S&P 500 over the past 15 years.
- Roper’s culture is greater than one person, and former CEO Jellison’s framework is safe in the hands of the current CEO and CFO.
- The winning formula of using cash from a recurring revenue base to acquire cash-rich businesses at reasonable valuations shows no signs of slowing down, with expected future earnings growing at similar to historical rates as the firm ups its acquisition spending.
Company Description
Roper is a diversified technology company that operates through three segments: application software; network software and systems; and technology enabled products. The firm’s culture emphasizes acquiring asset-light, cash-generative businesses. Roper then reinvests this excess cash in businesses that yield incrementally higher rates of return. While the businesses are managed in a decentralized manner, Roper does not passively manage its portfolio. Instead, Roper manages its businesses through the Socratic method and empowers decision-makers through group executive coaching. Roper has now rotated a clear majority of its business from legacy industrial products into technology software in mature, niche markets with large quantities of deferred revenue.
(Source: Morningstar)
DISCLAIMER for General Advice: (This document is for general advice only).
This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.
The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.
The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.
Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.
Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents. Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.
The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.