PROTCT - Protector Forsikring

[alwaysinvert]

Capital markets day today for those interested: http://webtv.hegnar.no/presentation.php?webcastId=38040377

[compounding]

Now that the counting underwriting profits has been sanctioned by the church of St. Warren, maybe some more people could be interested in this company. It is still my largest holding.

 

The biggest story of the last year is actually in my opinion an investment in their equity portfolio which has been a huge home run. The company is called Norwegian Finans Holding and trades OTC in Norway. You might want to check out their reports - it is probably the most profitable financial company I have ever seen. I have attached the latest annual report and earnings presentation.

 

NewbieD,

 

What's your basis for your assumption about PROTCT still being invested at the same level in Norwegian Finans Holding?

 

I realize I'm replying to a 5 month old post here, but if you are still wondering about this, you can track Protectors ownership in NOFI in the quarterly results presentations (of NOFI), as long as Protector is one of the top 20 shareholders.

[John Hjorth]

Thanks compounding for help and advice here.

[alwaysinvert]

Attached a new analyst report on Protector for the masochists who enjoy those. It's pretty long, I havent read through all of it yet. It was mentioned or referred to by the CEO at some point during the capital markets day.

Protector_Initiating_Coverage_August2016.pdf

[John Hjorth]

This post is based on the 2016Q3 reporting from Protector Forsikring.

 

It seems the company has got it wrong with regard to pricing in relation to entrance/penetration to the Danish insurance market. They will eventually get that right going forward.

 

I like this insurance company a lot. It has grown on me over time. I bought it in the February '16 downturn. As far as I know, this is the only Scandinavian insurance company that is working with its float Berkshire-style [excluding Sampo beeing invested in Nordea].

 

Insurance operations still seem quite effiicient, and the whole business is still growing at a steady clip.

 

I would like to see the company taking some money off the table with regard to the investment in Bank Norwegian [what a sucker] and lock in some of the profits on that investment, and go somewhere else with the proceeds.

 

For me a small position, but I intend to buy more in 2017, if it does not run up too much along the way.

 

Edit:

 

Thanks for the attachment from August, alwaysinvert.  -I don't consider myself a masochist, however I enjoyed the read!

[alwaysinvert]

The Denmark issue is a bit troubling. As Sverre said, modeling these things are not that easy and the pricing has obviously been off. If the incentives are bad, their intentions don't really matter if they don't change the incentives (lex Wells Fargo), so I hope they are cognizant of that. Topdanmark, who have historically been good capital allocators, shrunk 8% in workers' comp last year. This of course does not make Protector's strategy with a way lower expense ratio automatically stupid, but it should probably be an indication that there is no huge profitability to capture in the sector.

 

That said, I was linked this interview from April and in it Sverre discusses how they handled the earlier problems in change of ownership. I think he allayed fears that they aren't profit focused enough in it.

 

http://www.hegnar.no/TV/video/22fe0f2c-00080348-c88ed389

 

(in Norwegian, sorry)

[Picasso]

Slightly off topic, but I always read "foreskin protector" when this thread pops up.  Carry on.

[mateo999]

Can someone who knows the company walk me through how they value this stock?  By buying shares, does one need to essentially bet that these guys will earn 5-6% annually in investment returns with 75-80% in fixed income?  And if that is the case, is that faith warranted?  Their entire equity performance YTD is all NOFI  (confirmed by Sverre on the Q3 call and triangulated with my back of the envelope math).  I also don't know if I fundamentally agree with their investment mentality: "buy the best, price is secondary".

 

I can get over a company who's earnings are a bit depressed because it's growing in somewhat newer markets for them and they're learning as they go.  But there's something about Sverre that rubs me the wrong way.  I think it's his [over]confidence.  Maybe you need that when you purport to be the "challenger".  But will that be the company's undoing?  As I read more about the company, I sort of sense there's a mindset of: "Gee, taking risks others weren't willing to take has lead to great success in the past.  Thus we should and will always take risks others aren't willing to."

 

I want to like this more than I do.  I'm looking for reasons to own it.  So please, someone convince me!

[alwaysinvert]

The story is in the expense ratio and the idea is that they are that low due to using only brokers, having no legacy systems or personnel issues and an amenable culture. If you think the expense ratio edge is sustainable then they can probably keep growing quite easily with more aggressive pricing and still make underwriting profits as CR in the Nordics now is I think below 90% across the sector and has been that profitable for 15 years or so. There is also no indication that the oligpoly competitors are that interested in defending market shares.

 

Also, if you believe the low costs are replicable to some or even the full extent in the UK, then the potential is even bigger there as it is a far larger market obviously, but also because the British insurers are much less cost effective than the Scandinavian. That's basically the bull case laid out. If you also believe they have proved themselves good stock pickers, then you can add that too. The evidence is scant there, I think, despite NOFI, but one thing you can say in favor of that is that I don't think any of the competitors are even trying to pick stocks actively, so at least they are alone in that niche among insurance companies here.

[mateo999]

The story is in the expense ratio and the idea is that they are that low due to using only brokers, having no legacy systems or personnel issues and an amenable culture. If you think the expense ratio edge is sustainable then they can probably keep growing quite easily with more aggressive pricing and still make underwriting profits as CR in the Nordics now is I think below 90% across the sector and has been that profitable for 15 years or so. There is also no indication that the oligpoly competitors are that interested in defending market shares.

 

Also, if you believe the low costs are replicable to some or even the full extent in the UK, then the potential is even bigger there as it is a far larger market obviously, but also because the British insurers are much less cost effective than the Scandinavian. That's basically the bull case laid out. If you also believe they have proved themselves good stock pickers, then you can add that too. The evidence is scant there, I think, despite NOFI, but one thing you can say in favor of that is that I don't think any of the competitors are even trying to pick stocks actively, so at least they are alone in that niche among insurance companies here.

 

Thank you, alwaysinvert.  So do you just have a simple mental model which sounds something like: "Protector trades at ~2.6x book which is cheap given my belief that they'll be able to earn 20%+ ROEs for my investment horizon"?

[alwaysinvert]

The story is in the expense ratio and the idea is that they are that low due to using only brokers, having no legacy systems or personnel issues and an amenable culture. If you think the expense ratio edge is sustainable then they can probably keep growing quite easily with more aggressive pricing and still make underwriting profits as CR in the Nordics now is I think below 90% across the sector and has been that profitable for 15 years or so. There is also no indication that the oligpoly competitors are that interested in defending market shares.

 

Also, if you believe the low costs are replicable to some or even the full extent in the UK, then the potential is even bigger there as it is a far larger market obviously, but also because the British insurers are much less cost effective than the Scandinavian. That's basically the bull case laid out. If you also believe they have proved themselves good stock pickers, then you can add that too. The evidence is scant there, I think, despite NOFI, but one thing you can say in favor of that is that I don't think any of the competitors are even trying to pick stocks actively, so at least they are alone in that niche among insurance companies here.

 

Thank you, alwaysinvert.  So do you just have a simple mental model which sounds something like: "Protector trades at ~2.6x book which is cheap given my belief that they'll be able to earn 20%+ ROEs for my investment horizon"?

 

I don't find p/b a very useful metric for thinking about the value of the company. If the cost advantage is sustainable then p/b doesn't make anymore sense as a proxy for value of the company than it would have for Geico in the past decades. It will then be worth many multiples of book.

 

I just use a three-pronged approach. What are the likely normalized investment returns (portfolio size as of 9/30: 7.5b)? What is the likely CR going forward (92% according to Sverre)? And finally, what sort of growth can you expect? I find that I can use pretty moderate assumptions to defend the market price and if the future reflects the history in terms of underwriting profitability and GWP growth then the stock is a great bargain at the moment (as long as investment returns are at least mediocre).

 

Some of the potential issues I see are fat tails in some of their niches, an eventual tightening of the price competition in the region and a perhaps too expansionistic bent. The first issue I think is to some extent mitigated by looking at how accurate their reserving has been historically, the second one is at least dampened by increasing geographical diversification and on the third one I think they have earned the benefit of the doubt for the time being.

[John Hjorth]

mateo,

 

Thanks for your posts in this topic. It's always good with some constructive & sceptical critism of what has been alreay posted about an investment idea in this forum. - Thanks for that!

 

Personally, I haven't bought more of the company since my last post in this topic.

 

Personally, I "have a problem" with the stock portfolio held by  PROTCT [insurance float invested in  stocks].

 

It's about beeing invested in NAS.OS and at the same time beeing invested in NOFI.OS.

 

Those stocks are correlated, despite one stock beeing an airline, the other a CF business, not just NAS.OS owning about 20 perecent of NOFI.OS.

It's about the reward program of NAS.OS and  NOFI.OS are closely related with regard to that.

 

- - - o 0 o - - -

 

If you read the prospectus of NOFI.OS carefully, it's nowhere near to pass the "Can you kill it"  test: Link here.

 

I have already posted in some Berkshire topic about my perception of NAS.NO.

[NewbieD]

Not updated enough to have an opinion on PROTCT valuation. I've held NOFI before in my portfolio, could do it again. Back of the envelope I still think NOFI looks pretty cheap.

 

Unless you make PROTCT a huge position (say 30+%) the correlation NOFI-NAS itself isn't that important IMO. Potentially risky yes, but they didn't grow as they have without risking much on high probability bets..

 

I work as an analyst/underwriter in a competitor in nordic property insurance and PROTCT pricing is agressive as has been noted, seemingly more so than the cost difference. Wouldn't be surprised if their uw-result have been lower than can be expected going forward. Their underwriting approach is not as structured as some of their bigger comps, more based on gut feel and using their low cost ratio to underbid the behemoths with high cost ratios. Agree with alwaysinvert that there is room for more stealing in this way.

 

In summary, they are gamblers, skilled gamblers so far.

[John Hjorth]

Not updated enough to have an opinion on PROTCT valuation. I've held NOFI before in my portfolio, could do it again. Back of the envelope I still think NOFI looks pretty cheap.

 

Unless you make PROTCT a huge position (say 30+%) the correlation NOFI-NAS itself isn't that important IMO. Potentially risky yes, but they didn't grow as they have without risking much on high probability bets..

 

I work as an analyst/underwriter in a competitor in nordic property insurance and PROTCT pricing is agressive as has been noted, seemingly more so than the cost difference. Wouldn't be surprised if their uw-result have been lower than can be expected going forward. Their underwriting approach is not as structured as some of their bigger comps, more based on gut feel and using their low cost ratio to underbid the behemoths with high cost ratios. Agree with alwaysinvert that there is room for more stealing in this way.

 

In summary, they are gamblers, skilled gamblers so far.

 

Thank you for sharing your insights, NewbieD,

 

So in short, it's Norwegian, so it's "crazy", in the meaning here, that to me just about everything Norwegian is in its own leage. The concept of "headwind" [in Norwegian : "motvind"] seems to be foreign to many Norwegian citizen, or at least not part of their active  vocabulary, and the expression "a rainy day" only makes sense to people living in Bergen, where it rains a lot. Same with the concept of margin of safety.

 

Prices on everything up there are crazy: Real estate, wages and salaries, taxis, food - you name it.

 

Personally, I think this certain attitude of the Norwegian people is closely related to their oil money and wealth.

 

When they found oil in the sea west to the Norwegian coast, they decided that the Norwegian state should always hold 2/3 of Statoil, and they put a separate corporation tax of 50 percent points extra on Statoil only, that separate extra tax on Statoil profit going into a separate cigar box.

 

That cigar box as now grown to : NOK 7 544 283 926 256. [The figure is not moving today, because all markets are closed today saturday]. Link.

 

Norwegian population : 5 303 707. Link.

 

So every newborn Norwegian baby has a net worth of [excluding value of birthday gifts here]:

 

[NOK 7 544 283 926 256 * [1/[5 303 707 + 1]] = NOK 1,422,455.15. [Meaning born as millionaire [in NOK, that is]].

[LightWhale]

Trying to add PROTCT to my watchlist on google finance but cannot find it there. Anyone knows if google finance does not list Norwegian stocks? John?

[John Hjorth]

I can't get it to work on Google Finance, either, LightWhale,

 

The company does not pop up at all while using the search feature. I tried the largest Norwegian company of all, too - Statoil -, but I'm not sure how to interpret the search result, the search result is many tickers, and when I click on some of them, the graphs look weird to me, compared to what I get from my broker.

[compounding]

Try Yahoo Finance or Bloomberg.

[LightWhale]

Thanks to both for checking. Since my stock follow-ups are all organised in google finance portfolios, using Bloomberg/Yahoo does not solve my problem.

[zhengmit]

Some observations:

 

If Protector can expand the size of its market into UK and Austria successfully, current valuation is worth buying under normal CR and investment return assumption.

 

However, I would like to understand more about their underwriting culture and how they price the risk.  If somebody knows anybody who works at Protector could comment, that would be great.  Their competitors all publish Pillar III report which will tell you how much reserve they are holding for each risk.  Protector CEO always belittle their competitors and claim they are reserving just right, which is consistent with prior comment about aggressive.  How can outsiders judge if they are reserving just right?  For example, how much reserve is holding against workers' comp?  Danmark and Norway have different policy duration (8 years vs. 6 years).  Without these info (they don't publish Pillar III), it is only worth talking to someone who has worked there as an underwriter to understand more.  UK fire didn't help in this regard.  One could argue this is just an one off but no 2Q conference call just raises eyebrow.

 

Good thread and thanks for all the info.

[LightWhale]

If Protector can expand the size of its market into UK and Austria successfully, current valuation is worth buying under normal CR and investment return assumption.

 

Just to get a sense of scale - Scandinavia has ~25m people and ~1T of GDP. UK alone has a population of 65m and a GDP of ~2.6T. 

[alwaysinvert]

Some observations:

 

If Protector can expand the size of its market into UK and Austria successfully, current valuation is worth buying under normal CR and investment return assumption.

 

However, I would like to understand more about their underwriting culture and how they price the risk.  If somebody knows anybody who works at Protector could comment, that would be great.  Their competitors all publish Pillar III report which will tell you how much reserve they are holding for each risk.  Protector CEO always belittle their competitors and claim they are reserving just right, which is consistent with prior comment about aggressive.  How can outsiders judge if they are reserving just right?  For example, how much reserve is holding against workers' comp?  Danmark and Norway have different policy duration (8 years vs. 6 years).  Without these info (they don't publish Pillar III), it is only worth talking to someone who has worked there as an underwriter to understand more.  UK fire didn't help in this regard.  One could argue this is just an one off but no 2Q conference call just raises eyebrow.

 

Good thread and thanks for all the info.

 

Austria?

 

They don't do conference calls. They do analyst meetings that are webcast. Here is Q2: http://webcast.seria.no/client/mobile/?id=58374010

 

CMD from a month ago: http://www.hegnar.no/TV/kvartalspresentasjon/64106743

[John Hjorth]

Thank you, alwaysinvert,

 

The post by zhengmit got me somehow paralyzed, to say the least,

 

Personally, I haven't been adding to this position since my last post in this topic - small position for me, still.

 

Also, personally, I put a lot of weight into what fellow board members post on here, based on industry insight. [i'm specifically referring to the last posts by NewbieD in this topic.]

 

- - - o 0 o - - -

 

A belated welcome to CoBF, zhengmit! [ : - ) ] - Please keep your posts coming!

[NewbieD]

I talked with some of the people in my company evaluating competitors regarding PROTCTs expense ratio - Their belief is that PROTCT calculates this ex broker commissions. I.e. if a client to PROTCTs brokers pay 100, the broker takes 10 and PROTCT receives 90. They then have internal costs of 8 for this policy and 90 as income. They will state 8/90 as their expense ratio. In other listed insurers in Scandinavia the brokered part of our business count 10+8 as the cost. We will also have a slightly larger denominator (100 instead of 90). Still if this is correct is a huge factor in explaining PROTCTs lower expense ratio. It would mean their cost advantage vs competitors brokered arms is not that great as it might appear. 

 

 

 

 

[zhengmit]

alwaysinvest - thanks for the 2Q17 conference call link.  Where did you get it?  I just went to its IR page, and still can't find it.

 

Regarding expense ratio: I think the calculation is the same.  In Nordic, brokers get commission from clients directly (unlike elsewhere).  The calculation to include broker commission into expense ratio is the U.S. way of doing calculation (since insurance companies get premium and have to pay broker commission from premium collected, this is not the way that how Nordic insurance/broker work).  In Nordics, everybody is using the same methodology and they are all under reporting expense ratio (claim handling is in loss ratio not in expense ratio for example).  For Protector, you have to remember they have 3 businesses and 2 of them don't have much expense attached: change of ownership (don't pay commission to distribute products) and municipal business (open bidding so no commission).  You have to look at apple to apple comparison.  Protector is still the lowest cost provider but not as big as people think.

[alwaysinvert]

alwaysinvest - thanks for the 2Q17 conference call link.  Where did you get it?  I just went to its IR page, and still can't find it.

 

I just googled it and clicked the top result (hegnar.no hosts the livestreaming of many quarterly presentations: http://www.hegnar.no/TV/kvartalspresentasjoner), but you can use oslobors.no and search for the tickers or company names to get all relevant filings for Norwegian companies. There you will find links to the webcasts both before and after. You can watch the webcasts live and type in your questions in the chatbox and they will answer them, which is pretty neat.