PROTCT - Protector Forsikring

[zhengmit]

Alwaysinvest - thanks, good to know that :)

[alwaysinvert]

Lots of drama related to this stock now. A bad claims quarter Q2 following a bad Q1. Earnings and growth guidance was lowered and the stock got slaughtered. The company responded by buying back 5.1% of its shares in a reverse book building procedure. After that there has been insider buys and the largest shareholder has increased their stake.

[bjakes00]

Are there any board members here that can talk to the overall competitive situation in the Nordic insurance industry at the moment? Are PROTCT the only ones that have reported two bad quarters or is this an industry wide dynamic at the moment with undisciplined premium writing and a higher than usual claims environment?

 

 

[alwaysinvert]

Are there any board members here that can talk to the overall competitive situation in the Nordic insurance industry at the moment? Are PROTCT the only ones that have reported two bad quarters or is this an industry wide dynamic at the moment with undisciplined premium writing and a higher than usual claims environment?

 

Motor insurance in Norway has had very high claims in the first half, some of which was related to an unusually harsh winter. Many actors, including Gjensidige, Insr and Protector, have also talked about unsustainable pricing in the area and signalled significant price increases. We'll see what comes of it in the next year.

 

[bjakes00]

Thanks alwaysinvert. It seems to me, if you can believe that unusually harsh winters are now not the norm and the local industry can start instilling some discipline, that this could be a good time to get into PROTCT if you have a longer time horizon. Trading at roughly 1.9x BV provides a decent entry point in my mind, given the long runway and cost advantaged position (how cost advantaged seems up for debate but it appears that there is some advantage to be had).

 

What are your thoughts?

[John Hjorth]

I actually had a fellow board member get in touch with me privately a couple of days ago, asking for my overall opinion on Protector. Here is an extract of what I replied about it an hour ago:

 

... And I like it. It's the only insurance company in Europe I have been able to find, that allocate a part of their float to stocks, like BRK, MKL, FFH & Y do. They appear to be quite agressive in all the insurance lines, in which they are active. "Agressive" for my part here not used as a colour for lack of underwriting discipline.

 

The company has been hit by all sorts of bad happenings, and things that has not worked out as expected lately. Fire in that particular residential tower all over the media in the UK last year [now solved & settled], problems with underwriting in Denmark [The Denmark COO got fired], lack of growth in Denmark & UK compared to expectations.

 

I bought a tiny position in November 2015 and added more near the market buttom in February 2016. Still a small position for me, in total.

 

I think Sverre Bjerkeli is a good CEO, if you listen to him. He sounds like a real tough boss to me. He has skin in the game too.

 

I think the company will do fine going forward, despite the challenges right now. The runway for this company appears to be quite long, and the ambitions are in place. Personally, I have to spend more time on it in the near future to decide if to buy more. If, it's now, where stock is in the tank, not in one year.

 

The stock portfolio also has to have some appeal to us. My major concern back in 2016 was a large position in the holding company of Bank Norwegian [pure play consumer finance], which is now sold.

 

- - - o 0 o - - -

 

In short: Growth is almost never even near linear on a logaritmic scale.

[bjakes00]

Thanks John Hjorth - awesome stuff and I have similar views!

 

I think the scary part for me is the "Aggressive", which you qualified as not used as a colour for lack of underwriting discipline.

 

How can we ascertain with some sense of certainty that they are actually going to be disciplined going forward? Growth is great but not without discipline as we all know.

[John Hjorth]

...I think the scary part for me is the "Aggressive", which you qualified as not used as a colour for lack of underwriting discipline. ...

 

That question certainly qualify, for the reason that my prasing of what I had on my mind came out really dumb here, bjakes00! What I was trying to express [<- : - D] is that Protector appears to have an advantage to competitors on the cost to income ratio.

[bjakes00]

Got it. It still makes me ponder whether a cost advantage is worth anything if one can't run the business in a disciplined manor.

 

How do you figure out whether there is discipline ex ante without actually being in the business?

[John Hjorth]

Just to "go full circle" - at least partly - we have topics here on CoBF about two of the investments in the Protector stock portfolio:

 

NIL B.STO - Nilörngruppen AB, ser. B - Topic starter: flesh.

WINE.L - Majestic Wine Plc - Topic starter: bjakes00.

[John Hjorth]

Got it. It still makes me ponder whether a cost advantage is worth anything if one can't run the business in a disciplined manor.

 

How do you figure out whether there is discipline ex ante without actually being in the business?

 

Analysis, bjakes00. A lot of it. Analysis by country & region, analysis by business line, and so on. It's well documented in the annual reports for prior years, when new activities, countries & regions and business lines has been started up. It has not "just" been trial and error method while expanding the business.

[alwaysinvert]

How can we ascertain with some sense of certainty that they are actually going to be disciplined going forward? Growth is great but not without discipline as we all know.

 

I think you can take some solace in the fact that it is specific niches that are performing poorly - there is no sign of bad underwriting in Sweden for example, despite that being where most of the recent big growth has happened. So issues of over-aggressiveness, if they exist, don't seem to manifest across the board, which is a good sign.

 

In the end, insurance is a bit of a black box and a large part of it comes down to trusting the underwriter. I think Sverre is very good from following him and the company for over 5 years. But I could certainly be wrong on that and it's hard to convince other people of it. Recent results are certainly no help.

 

However, if profitability issues are of a sustained nature then the company probably made a very poor decision in the recent large buyback. That would be an inexplicable action if they really thought matters were worse than what they have communicated. So, the bear case that's left is them being very wrong/incompetent, but honestly so. And after following the company for a long time, that also seems highly unlikely to me.

[John Hjorth]

"Skjeggkre" generates million loss for Protector Forsikring.

 

Skjeggkre is an insect [Ctenolepisma longicaudata] that first time was discovered in Norway back in 2013, spreading fast in the years after.

 

Warning af insurance loss of NOK 146 M in 2018Q3. Expected combined ratio for 2018Q3 [isolated] 118.

[Spekulatius]

"Skjeggkre" generates million loss for Protector Forsikring.

 

Skjeggkre is an insect [Ctenolepisma longicaudata] that first time was discovered in Norway back in 2013, spreading fast in the years after.

 

Warning af insurance loss of NOK 146 M in 2018Q3. Expected combined ratio for 2018Q3 [isolated] 118.

 

These are silverfish. Pretty common in Europe and the US. Expensive buggers for Protector apparently.

[John Hjorth]

One accident rarely comes alone. PROTCT.OL got hammered today ~22 percent.

[Jurgis]

"Skjeggkre" generates million loss for Protector Forsikring.

 

Skjeggkre is an insect [Ctenolepisma longicaudata] that first time was discovered in Norway back in 2013, spreading fast in the years after.

 

Warning af insurance loss of NOK 146 M in 2018Q3. Expected combined ratio for 2018Q3 [isolated] 118.

 

These are silverfish. Pretty common in Europe and the US. Expensive buggers for Protector apparently.

 

LOL, let's accuse Norvegians of being snowflakes.  8)

 

From the article (Google translate):

 

- Is it a pest?

 

- Basically, they do not harm animals, people or building materials. The case law states that the animals give property or housing a form of minus value because it is uncomfortable to have them in the home, says Merete Christensen Bernau.

 

- But are they the pests?

 

- You can probably go into the definitions of what pests are and not. The point is that they do not harm themselves, she says.

 

I've had (and may still have) ants, spiders, centipedes, silverfish, pantry moths, mosquitoes, flies in my house(s)/apartment(s).

By this definition, I should have bankrupted Berkshire by now due to my emotional distress.  8)

 

It's a circle of life. Deal with it. 8)

[compounding]

Pretty good interview with CIO Dag Marius Nereng:

 

http://www.northstarinvestor.com/protector-forsikring/

[alwaysinvert]

There's been some development with regards to the silverfish, CR for 2018 is expected to come in at 107%: https://newsweb.oslobors.no/message/465259

 

Quite a rough year underwriting wise, on top of a few relatively weak years. The company is evaluating exiting the COI segment and it seems like their main competitor in the segment is just waiting them out - a tough spot to be in. 

 

On a more positive note they scored their largest customer ever the other day: https://newsweb.oslobors.no/message/465352

 

I have attached a recent report on the company from Pareto Bank. It's pretty good, I recommend looking through it for anyone who wants to gain an understanding of the bull case.

protct-pareto.pdf

[John Hjorth]

 

From the Berkshire - Munger 50th Anniversary Letter [here, with a little twist, with regard to interpretation]:

 

I believe that versions of the Berkshire system should be tried more often elsewhere and that the worst attributes of bureaucracy should much more often be treated like the cancers they so much resemble. A good example of bureaucracy fixing was created by George Marshall when he helped win World War II by getting from Congress the right to ignore seniority in choosing generals.

 

I bought a tiny PROTCT position near the market bottom in February 2016, knowingly it was not even near cheap at that point. About 25 percent lower now including dividends, and absolutely no sight of recovery in the horizon right now.

 

Share buyback programme, short time after the sh!te hit the fan, instead of building capital. Raising subordinated loan capital in 2017 to have the regulatory capital for continued growth in business volume, instead of focusing on continued growth in insurance earnings [, which is not equal to business volume].

 

And now the company want to exit its roots. [seems like it's because the company doesn't have a firm grip on it.]. Please give me a break. What is this?

 

- - - o 0 o - - -

 

Now next question [to alwaysinvert & compounding] : Say, Sverre called you both to manage the money of PROTCT invested in stocks, in cooperation, with the explicit assumption that what you would be working with is float? -In short, would you do what PROTCT is doing now? [ And, to me that's quite evident right now, that you would do it materially different, without even knowing if any of you would even consider to be stuffed into a suit, shirt & tie every day, with fixed minimum working hours in Oslo, to relentlessly deliver, based on the assumptions].

[compounding]

I don't have any problem with the buyback, in fact I view it as a positive development. I only wish they would cancel the shares and not hold them in treasury, which makes me a bit nervous to be honest. This might be an overreaction from my side, since others don't seem bothered by it, but it is what it is.

 

The subordinated debt was cheap capital that they raised at a time when they had room for it in the capital structure and the markets were interested in those securities, so I don't see any problem there either. Of course, the profitability has been an issue overall since then, but I highly doubt that the plan was to grow volumes at 107% CR just for the sake of growing volumes. After all, it is an exercise in probability to write insurance, and sometimes you have both bad luck and a competitive environment at the same time.

 

I would be supportive of the company's decision to exit the Change of Ownership segment, were they to decide to go down that route. This is a business that brings with it some negative externalities due to the fact that they are often going up against regular joes in court to settle claims. This means that you should expect the insurance to be profitable, and to be coherent in your requirements, more profitable than other types of more non-controversial insurance like auto. If it's not profitable, there are negative externalities, the underlying demand is tied to housing (which is arguably at a very high level in the Nordics), the competitors seem to want to battle it out—why would you want to be in it? In order to honor a commitment you made to enter it a decade ago?

 

Maybe I'm missing some nuance in your question, but I am totally fine with how Protector is investing its AUM. They are conservative on the bond side (short duration and high credit quality) and the equities are invested in a concentrated manner in relatively illiquid European securities that are not too cyclical in nature. I wouldn't necessarily pick the same securities, although I have had some overlap with Protector over the years, but I think their overall strategy for stock picking is pretty good. The one thing I think you could reasonably object to is that they have too much turnover in the portfolio, even though they parade their low turnover. Another point I could disagree with is the relatively low equity share at the moment—Nereng is emphasising that stock markets are close to ATHs like that is conclusive proof that they are expensive—I would personally not use that approach, but I would rather they be on the conservative side than other way around.

 

So overall I am happy with how they do things. I wouldn't do it exactly the same way myself, which is to be expected, and there is, quite obviously, no certainty that my way of looking at things is better in those areas in which we are not in full agreement.

[alwaysinvert]

I'd add that the buyback was done before they were alerted to the problems with silverfish. I would have some questions about the method by which they executed the buyback, but the timeline of it was just sheer bad luck.