Preview Q3 Protector Forsikring ASA – Base case Target price unchanged (200) - Buy

There are 3 things you should look for in Q3: volume, combined ratio and running yield in bond portfolio. In this preview I will also look at the three analysts covering Protector In Q2 “I was better” but it was beginner’s luck – let us wait for October 27th and see whether I am lucky again. If you have not read Ulrik Zürcher’s fresh new analysis of Protector, you should – it is a beautiful piece of work.

My base case assumptions (leading to share price 200) are volume growth 11-12%, CR 90%, and bond return 4%, but as you can see I’m a lot more optimistic on Q3 than base case (meaning bull case getting closer).

I’m a bit late with my Gorden Growth model and will not deliver on it before Q4 has been released. In the meantime – read my previous “one pager” and compare my base case assumptions to the Q3 reality.

Volume (GPW): Let’s make it short. It’s not that difficult – there will be 17.5% growth in a relatively small quarter driven by price increases, low churn, new business in UK and another quarter with market share growing in Scandinavia (although on a lower level than in Q2). The risk is on the upside, but Vegard from Pareto could be closer.

Combined Ratio: This one is more difficult to estimate since there have been significant changes the last 3 years both in the market and in Protector. Price increases (higher than claims inflation), portfolio clean up, segment changes (more “public sector” and “small commercial risks”), covid-19, large loss volatility, reserve changes, long tail business sold to reinsurance, reduced costs “the real way”, claims inflation and an increased relative share of business in the UK. Most of these factors are in Protector’s favor but not all of them. In total we are looking at a reduced risk in Protector’s portfolio and an underlying improvement. My estimate in Q3 is 83% with the risk on the downside (meaning better). Consensus is wrong and strangely enough close to each other - how boring 😊

Bond yield and return: The big question is how running yield develops and how long the interest rates will stay high(er). No doubt there has been a positive development the last three months where 1; central banks 2; Nibor/Sibor/Libor/Euribor and 3; spreads all are moving very, very fast. My running yield estimate now is above 5.0% up from 3.9% in Q2. Wow – it’s dramatically positive. Question to ask; “What is Protector’s cost of risk in present portfolio?”. This area is not properly discussed in any analysis now. My “cost of risk” assumption today on Protector’s portfolio is maximum 30-40 bp. You should probably see an analyst upgrade on bond return after Q3. The only company in the Nordic benefitting more from this bond hike Is probably Storebrand (Buy).

Summary and Question; You don’t have to be close to my Q3 estimate to buy Protector at a 2023 multiple which is far, far away from peers despite growing faster every year (21% CAGR last 10 years and 15% or more in 2022). If I’m wrong your dividend yield next year will be 9% (share price 115), you can live with that – can’t you?

Disclaimer: I’m a significant shareholder so you cannot trust me (or perhaps you can?).

Sverre Bjerkeli,

Analyst trainee, Hvaler Invest AS

Lillestrøm October 8th 2022