Vardia Insurance Group - Update and PNL forecast Q4

As I told you in my last post, I'm back with an investment in Vardia Insurance Group. This time smaller then last time though (10 000 shares). 

So why didn't I stick with my investment in Vardia and sold it when the accounting problems were announced and why did I go into it again?

The question is from my perspective simple to answer; When the accounting problems were announced all information I based my former investment in Vardia on were wiped out, since I couldn't trust the information the company had been giving to the market. In other words, no body which invested in Vardia during the time when the accounting problems were announced until last week when Price Waterhouse Coopers (PWC) did their external diligence on Vardia's bookings knew if they could trust the information from the company and were just gambling. Exactly the same way as going to the Casino and bet on black or red on the roulette table.
-This is the only reason why I didn't keep my shares in Vardia and sold them just after the announcement.

Now on the other hand, PWC made the diligence and no discrepancies were found, the information Vardia has communicated is solid and the case is from my perspective better than ever at this valuations.  

We have seen some positive revaluation of the stock since the PWC announcement were made, around 15% in the time of writing (1.65 NOK per share). I would have expect some more revaluation upwards after the announcement, probably that will come as soon as Pareto Securities (PAS) stops the heavily selling in the stock. Although I'm happy as long the price stays low since its a good opportunity to buy more shares. 

Vardia's GWP would at the moment be around 1550M NOK and at a valuation at 1.65 NOK per share we are talking about a GWP ratio on 0.44 x GWP which is an absurdly low valuation and is probably lower then what the liquidation value would be in a worst case scenario. This statement is also backed by what Vardia's peers has been acquired for in the past, how much the customer base has been worth (Aktia 0.61 x GWP, Moderna Försökringar 1.0 x GWP, NEMI Forsikring 1.0 x GWP). 

PNL Forecast Q4 

If we were looking at the past quarter for Vardia (Q3), the numbers were not perfect, there were somethings which could have been better. Total loss for Q3 were -56M NOK (Q2: -43M NOK) but were impacted by some factors. New management, whichs normally takes non-recurring costs to get clean sheets the first quarter (Q3: -27.5M NOK). The claims ratio were high 97% due to some larger claims which were utilized during the quarter. The operational costs reductions from the new organizational structure were only in place since the 10th August, only the last half got the positive cost impact from the new structure.
If we now look at the forecast for Q4, I expect we will see around the same cost reductions as we have seen from Q2 to Q3 (if you exclude the non-recurring costs) which is a 33% cost reduction. Together with that cost reduction I also think we will have a better claims ratio then Q3 gave us (Q3: 97%), which I think will be around the trailing average the last 12 months, 81% claims ratio. When applying this together with my calculations we should end up with a forecasted loss on around 6-8M NOK and then in Q1 start to show profit. This loss is good and will keep Vardia above the solvency margin until they start to show profit.
Maximum loss in Q4 without being in violations with the solvency requirements are -17M NOK, which is an important number to have in mind for the upcoming report.


As you probably could read, the case in Vardia is tempting and I would say the risk for loosing money at this valuation is small.

Happy new year!

-Eighth Wonder Investing

Full disclosure: Long Vardia Insurance Group

This should not be taken as a financial or any kind of advise and all the numbers on this blog could be incorrectly. I am not taking any responsibility for individuals using this information.

What did go wrong in Vardia and The portfolio status

Vardia Insurance has been on my mind for a long time, lost 50K SEK (approx. 5400 euros) in one day.
Rough day? Yes, was a used Rolex Submariner which went away over a night..

Mad? No, could only blame myself..

Before writing what did go wrong maybe it's better to say how the days went when Vardia went through Armageddon and until now.

26th February 2015, Vardia is trade stopped from request from the company and postponing the announcement of the fourth quarter earnings.

26th Feb - 4th March, a lot of speculations is going around on blogs, newspapers, forum etc. I have a really bad feeling but couldn't imagine what were to come.

3rd March 2015, due to an accounting principle which has to do with booking of sales costs makes Vardia show a loss at 219 million NOK (approx. 25 million EUR). The stock is dropping 50 percent in the opening. 

4th March, I'm liquidating my whole portfolio, including Vardia and is back to zero from my gains in Protector. 

4th March - until June 2015, my trust for the stock market is zero, lost money on Tesco on accounting principles and now this in Vardia. Have still saved a lot of money during the months, but mentally I'm not ready to go into the stock market again. 

Thinking about other investments, properties etc. but know that the stock market is where you should be to make the real money with as little risk as possible.

Deciding to take some vacation from work and really rest, get my mind together and continue the thinking. Going to Hawaii for two weeks on my saved money, to start over when I come back with a new strategy (will come back to that in a later post, but shortly a mix of index funds with stocks). 

Over to what really went wrong in Vardia and in my analysis;

As stated above, Vardias accountants had a different view on how to accrual costs, sales costs. Accordingly to Vardia they were not allowed to do accrual the sales costs anymore and had to back-calculate everything and take it as a cost, 219 million NOK was gone over a night. 

They launched a new shares issue on 275 million NOK and with an interim loan to meet the solvency requirements in Norway. This together with massive cost reductions would make them profitable..Already here I knew these money will not be enough to make them profitable. Cost reductions take at least 3-6 months before you see any impact, it's not like you stop paying your employees the next day.

Last thing I read was that they will now do a management buy out (MBO) of the sales organization to bridge until they are profitable for 30 million NOK (?). Maybe that will be enough, didn't pay that much attention but it seems it's only good for management and not for the shareholders. 

What did go wrong in my analysis? Mostly a lack of time and limited knowledge in insurance accounting. In other words, I could only blame myself..

Portfolio status today;

50 000 SEK (buy price) in Avanza Zero (bought the last month)

10 000 SEK (buy price) in DNB global index

6282 SEK per share (buy price) - 3 shares of Chipotle Mexican Grill (CMG)

745 SEK per share (buy price) - 16 shares of MasterCard (MA)

430 SEK per share (buy price) - 36 shares of Starbucks (SBUX)

Hopefully I will be posting some more now, when I'm back on my trip to financial independence! 

Will update the portfolio and trades and also get back with a post on my new strategy.

Best regards,
EWI

This should not be taken as advise as always and all the numbers on this blog could be wrong and I am not taking responsibility for anyone who uses this information.

Vardia Insurance Cooking The Books?

Vardia Insurance were expected to announce their Q4 today, but instead they gave the market the message that the financials for Q4 will be announced tomorrow. On the top of this they also halted the trading in the stock until the release of the results.

Vardia's comment today were this:

The postponement is due to new information received from the Company's auditor regarding accounting principles. Vardia has after consultation with Oslo Børs decided to suspend the trading of the stock until the results are published.

In addition to the comment  Aleksander Nordahl IR-responsible at Vardia stated during the day that this were the case, with the vague explanation:

We have received new information from the accountants and has in discussions with Oslo stock exchange suspended the trading in the stock.

So what could all this mean? It's at least not positive for The reputation thats for sure. Experience say me that is use to be bad when stocks getting halted due to accounting troubles, but who knows (still hasn't forgot the cold shower from Tesco). 

I have actually been speculating the whole day on what a valid reason could be for the postponement and the halted trading and came up with these four options which I see are the most likely ones:

• Formalia. Could be some sort of error in the way of presenting the numbers which led to no signature from the accounting firm which validates it. Things that speaks for this is that the message came as a lightning from the sky and that they only postponed it one day. I am still concluding that this is the dream scenario and consider this the most unlikely one.

• Tax issues. Speaking for it; have been on the wall before. Still doesn't see this scenario is very likely either, one day postponing is way to less for a tax problem. Worst case scenario there will be a new issue of the stock.

• Assets. The assets are not what they should be. Could be due to different things, most likely some issue regarding the acquisitions Vardia made in the past. Worst case scenario huge new issue which fails and bankruptcy. 

• Income/Costs/Reserves. Miscalculus in some way of the cost of goods sold, revenues or that the reservations for the Insurance business has been to low. Worst case scenario here will be a new issue of the stock. This option is the most likely from my point of view.

On the other hand we still have the sales (which should be correct) and the GWP which is backing up the case.
Whatever happens tomorrow the stock will most likely open down and that could open opportunities for more purchases. Tomorrow will be an interesting day!

Remember that this is only speculations and hopefully transparent facts will be announced tomorrow.

Best regards,
Eighth Wonder Investing



Full disclosure: I am heavily invested in Vardia Insurance Group with 3200 shares.

Marvelous Company, Marvelous Numbers - Protector Q4 2015

As probably no one has missed by now in the blog world, Protector's Q4 report was astonishing and the stock market received it with open arms. Protector is now up 10.11% since the announcement of the report.
The best announcements in the report from my side were that Sweden and Denmark are now showing profit and that is under extreme growth. Sweden is growing GWP by 121%, Denmark with 89% and Protector overall with 28% to 2375M NOK (1861).

Here are some more candy from the report,

• Protector forecast higher profit 2015 and with 18% growth.
• Protector increases the dividend from 1.75 NOK to 2 NOK. 14.28% increase!
• Combined net ratio down to 84.5% from 86.7% last year.
• Investment portfolio know has a value of 4 958M NOK up from 3 999M NOK last year.
• Profit per share grew from 3.47 NOK to 4.63 NOK.

New target price for Protector are 68 NOK, this comes from that I think they will make around 5.785 NOK per share. Which means a profit growth on 25% and a future P/E 11.75, should be doable for the great company Protector!

Besides Protector's marvelous announcements I have increased my share in Vardia Insurance at the price 27.9 NOK with 1400 shares. Total numbers of shares in Vardia are now 3200 shares and a total market value of 102 486 SEK. I will continue to grow my shares in Vardia since that it the most udnervalued company at the moment.

Best regards,

Eighth Wonder Investing

Vardia Insurance - January Sales

Vardia Insurance continue and continue to deliver good growth and over my forecast sales also the month of January.
As I said in on of my previous posts: What Could We Expect From Vardia In Sales 2015 my forecast were 89.3M NOK and sales came in today at 92.6M NOK compared to 79.5M NOK last year. Which is completly magnificent!

The first month of sales could also be a good guidance for the next month sales if we just apply it on the assumed working days there will be in February 2015, which is 18 days.
18 days gives us a sales forecast on 119M NOK for February, which sounds a bit high for me but I am confident that Vardia will make over 110M NOK in February, which will be a new record in sales for a month.

Except the sales figures CEO Ivar S. Williksen also said today that Denmark's sales figures are growing as expected and that they also have increased significantly the commercial business in Sweden, and along with our in-house sales forces of agents and brokers they have the goal to be the best selling Nordic insurance in 2015. Impressive!!

On top of the sales figures Vardia has also got a really interesting customer, the Swedish Police Association which has over 20 000 members and are now leaving Moderna Forsakringar for Vardia Insurance Group. more info could be find here: new alliance for Vardia (only swedish).

I am actually surprised that the share price weren't heading north today after this numbers, but I guess as long as DNB Markets are pouring insane amounts of Vardia shares on the market I do think it will be hard for the share price to get higher. Although nothing to complain about since I could be in need of some more Vardia shares at this price.

As said before 2015 will be the year for Vardia Insurance group!

Best regards,

Eighth Wonder Investing



Note: I will increase my share in Vardia in the upcoming days, weeks, months, years.

Full disclosure: Long Vardia Insurance Group (VARDIA)
Disclaimer: All text on this blog is not any form of investment advice, this is only for personal use.

Summary of January

Time for the summary of the first month in 2015. 

Must say that it has been a great month, a lot of action, but great.

Let's start with the first thing, I actually sold (it doesn’t happen often) Tesco this month.  I haven’t been very impressed about how they have been performing over the time I owned the stock, declining sales almost quarter after quarter and accounting troubles etc. After the last increase of the share price I decided that it’s time for me and Tesco to say good bye to each other for this time at a share price in SEK after costs of 85.490 SEK (TSCDY, OTC).

In other words the portfolio at the moment are only consisting of 3 companies, Protector Forsikring, Vardia Insurance and Hennes & Mauritz. I must admit that for me a portfolio consisting only of 3 companies are way to focused. The target is to own a portfolio consisting of 5-8 companies, but as you probably noticed its hard to find wonderful companies at a fair price when S&P 500 are doing new highs every week.

Next buy will be Vardia Insurance if their sales numbers for January are in line with my forecast.

Achievements January 2015

• The portfolio had a great performance the last month and are up to today had an increase of 12.12% this year with a total value at 239 703 SEK (approx. 26 330 EUR). 
• In terms of savings was 12 000 SEK transferred to the portfolio for future stock purchases.
• New ATH (all time high) for the portfolio.
• Amortized my student debt with the total amount of 1893 SEK, not much but still in line with the goals.

Improvements for February

• Save more money, still wasting money on things I don't need.
• Do more analysis of companies.

Transactions updated with the sell of Tesco.

Transactions:

2015/01/27 – SELL Tesco – 487 share +41 638 SEK

2014/12/30 - Dividend Tesco +165.3 SEK

2014/12/17 - BUY Vardia Insurance Group - 1000 shares - 26 911 SEK
2014/12/17 - BUY Protector Forsikring - 720 shares - 24 820 SEK
2014/12/16 - Dividend MCD +521.34 SEK
2014/12/09 - SELL MCD +54 810 SEK
2014/10/08 - BUY Vardia Insurance Group - 800 shares - 23 647 SEK
2014/07/16 - Dividend Tesco +1728.49 SEK
2014/07/08 - BUY Protector -720 shares -30 983 SEK
2014/06/17 - Dividend MCD +430.4 SEK
2014/05/17 - Dividend H&M +1662.5 SEK
2014/03/19 - Dividend MCD +411.12 SEK
2013/12/17 - Dividend MCD +425.57 SEK
2013/01/07 - Dividend Tesco +712.98 SEK
2012/05/10 - Dividend H&M +1662.5 SEK
2011/12/12 - BUY H&M - 175 shares - 37 376.6 SEK

Best regards,

Eighth Wonder Investing

What Could We Expect From Vardia in Sales 2015?

In recent time have I seen several discussions regarding Vardia sales numbers on different blogs and almost fierce comments from some readers in the commentfields. Therefore I want to highlight this post to really focus on the Sales and try to give a fair estimate on where we would end up after 2015.

Before we start I want to highlight the big Q everyone has:

Q: What if the big insurance companies just lower the price and compete Vardia out of the market?

A: Vardia's business model is to provide low risk customers with insurance products. Since low risk customer will do less insurance claims then high risk customers, Vardia could offer the product to a lower price. In other words Vardia says that, why should you share a risk with high risk customers when you are a low risk customer?

This is the main reason why Vardia will be a winner in the end, and this business model is not done by the big insurance companies today. Of course to this you could add several things in Vardias advantage like more efficient IT, lean organisation etc. but it's still the core business model that will make Vardia successful. 

Now over to the numbers,

To make this forecast as correct as possible I will investigate how 2014 sales number were per annual, monthly and daily basis. Then adjust a modest annual sales growth on below market expectations on 15% (For Vardia this is modest). 

How was sales on annual and monthly basis 2014?

-Total sales of 1044.3 million NOK 2014.

-Average per month 87 million NOK.

How was sales on daily basis 2014 and how will it be 2015?

Public holidays 2014 which fell on a weekday (Could have 1 day wrong here on some country) :

Denmark: 11 days

Sweden; 15 days

Norway: 12 days

We take an average here and say 13 days in general.

Weekends (Saturday and Sunday) 2014: 104 days

Holiday (I assume everyone has 5 weeks); 35 days

Number of days per year:  365 days

How many effective working days do we end up with per year now?

365 - 13 - 104 - 35 = 188 days

If we assume 15% sales growth next year we end up at 1200.6 million NOK, divide that per effective working day, we have sales per day at: 6.38 million NOK.

How will sales be per month 2015?
After analyzing local holidays and normal vacation patterns I did this assumptions for effective working days per month for 2015:

January: 14 Days
February: 18 Days

March: 18 Days

April: 17 Days
May: 17 Days
June: 12 Days
July: 9 Days
August: 13 Days
September: 19 Days
October: 19 Days
November: 19 Days
December: 14 Days

If we now apply the assumed average sales per day on effective working days for 2015 we end up with a sales per month like this:

So next year, annual sales forecast on 1200.5 million NOK and GWP forecast on 56-60 NOK per share. 2015 will be a great year for Vardia Insurance!!

Sincerely,
Eighth Wonder Investing

Note: Vardia offer products to everyone, but high risk customers gets a high premium.
Full disclosure: Long Vardia Insurance Group (VARDIA)
Disclaimer: All text on this blog is not a form of investment advice, this is only for personal use and I disclaim myself  for misspelling or wrong calculus.

Portfolio and Transactions - New page on the blog

Decided that its time to be more transparent in my portfolio and to track the transactions, just because of two reasons, first that it will be a nice thing for me to have during this journey and secondly that I hope it will inspire someone to start the same adventure as I will do.

Below you could see how the report will look like, yes I know very simple. The report will be updated monthly with the consisting portfolio and the done transactions during the period.

Best Regards,
Eighth Wonder Investing


Latest update: 18012015

I am at the moment invested in 4 companies. My portfolio and the changes will be updated once a month. All values in the portfolio summary will be denoted in SEK, total value of portfolio and changes will be denoted in SEK and EUR.

Portfolio today:

Transactions:

2014/12/30 - Dividend Tesco +165.3 SEK

2014/12/17 - BUY Vardia Insurance Group - 1000 shares - 26 911 SEK
2014/12/17 - BUY Protector Forsikring - 720 shares - 24 820 SEK
2014/12/16 - Dividend MCD +521.34 SEK
2014/12/09 - SELL MCD +54 810 SEK
2014/10/08 - BUY Vardia Insurance Group - 800 shares - 23 647 SEK
2014/07/16 - Dividend Tesco +1728.49 SEK
2014/07/08 - BUY Protector -720 shares -30 983 SEK
2014/06/17 - Dividend MCD +430.4 SEK
2014/05/17 - Dividend H&M +1662.5 SEK
2014/03/19 - Dividend MCD +411.12 SEK
2013/12/17 - Dividend MCD +425.57 SEK
2013/01/07 - Dividend Tesco +712.98 SEK
2012/05/10 - Dividend H&M +1662.5 SEK
2011/12/12 - BUY H&M - 175 shares - 37 376.6 SEK

Vardia Insurance - December Sales

Finally the sales for Vardia Insurance arrived, lets have a look at them.

As expected the total sales were lower in December than in November, 79M NOK versus 105M NOK, due to the Christmas holiday. 79M NOK is an OK number but not more than that would I say, my forecast were slightly higher as could be seen here:December Sales Forecast

Let's do the calculation to see how the sales actually were adjusted to working days.
I assume Vardia's employees only are on duty working days, which is 5 days a week. As far as I could find none of the countries Vardia is operating in had local holidays in November, which is Norway, Sweden and Denmark.

Let's start,

November
20 full working days. Which is below average, normal month has 21 working days.

December
If we consider local holidays in December we sum up to 18 full working days. Local holidays for all the countries are as you probably know, Christmas Eve, Christmas day, Boxing day, New Years Eve. In other words, but how people are actually only taking the local holidays off during Christmas?

Not so many people I would say..  So the real question we should ask us are if sales people at Vardia took additional vacation during Christmas? Most likely.. 

For me this question is impossible to answer, but I could assume from my experience from family and friends that a normal person has around 6 days vacation during Christmas which means that December had 15 full working days. As I said above November consisted on 20 full working days and the outcome of November were 105M NOK in sales.
December consisted of 75% of the working days of November (15/20). If we after that multiply that 75% with the sales of November to see the sales numbers of November applied on the same working days as December, we get:

105M NOK x 75% =  78.75M NOK

Assume then a modest growth on 1%:

78.75M x 101% = 79.53M NOK

In other words we missed target with approximately 800K NOK which is almost nothing but its not a magnificent month for Vardia. Although my view on Vardia is still the same, the company should at least be valued as 1.0 x GWP, which should be around 36 NOK per share now. On the other hand as longer the price stays low as more shares I could come over.

Important to highlight is that 1.0 x GWP are a very modest valuation and with the sales growth we seen in the last year for Vardia an even higher valuation wouldnt have surprised me at all. 

Sincerely,

Eighth Wonder Investing

Bi-weekly Roundup and Forecast December Sales Vardia

Its time to start with Bi-weekly roundups to keep track on my last two weeks and see that I am on the right track to make my goals for 2015. This post will also include some thought for the sales figures that Vardia Insurance is announcing tomorrow.

Lets start with the financials for the first 11 days of this year.

The salary for December was really good due to a bonus, ended up at a salary income at 3215 euros. It has been some bad consumption during these days, would like to highlight some of them.

• Bought designer plates and forks for 750 SEK (approx. 78 euros).
• 113 Euros are spent on alcoholic beverages.
• 48 Euros spent on taxi trips.

As you see always room for improvment, on the other hand if you deduct these expenses the month has been really good I must say, at the moment 2169 Euros are left when all invoices are paid. The forecast is to have 2000 euros left when the new salary are dropping in on the account the 28th January.

The portfolio is up 2.08% for 2015 which is great but I would have preferred to see falling share prices instead. Just by the simple reason that I know I will be a net buyer of stocks in at least 7-8 years from now on. The portfolio still consists of the same companies, allocation in brackets. 

• Hennes & Mauritz (28.1%)
• Protector Forsikring (29.3 %)
• Vardia Insurance (24.5%)
• Tesco (18.01%)

The company which will get my next purchase is Vardia Insurance. Vardia is the stock with the best intrinsic value. Target price is 1.0 x GWP (Gross written premiums) are now at the moment around 35 NOK, and forecast for 2015 are 50-55 NOK in GWP. Will continue to buy the stocks until we have a valuation on 1.0 x GWP and if nothing happens in terms of falling sales for example.

Forcast December Sales Vardia

I assume 16 full working days in December (normal month consists of 21 days). Which is 23% less working days from a normal month. I apply a growth on 1% and then deduct the loss in working days, after the calculus we assume that the sales will be around 80.295 million NOK in December, will be really interesting to see were we end up tomorrow.

Over and out,

EWI 

  

November Sales Vardia Insurance Group and the portfolio

Sales Vardia - November

Vardia is still going strong, even if its under my forecast. Sales figures from November are up 67% to 104.7 million NOK compared to 62.8 million NOK last year in November. At the moment we have 3 months in a row that Vardia deliver over 100 million NOK in sales, which is impressive.

My forecast for this month were 115-120 million NOK in sales.
The things that are affecting the numbers and are a bit concerning:

• Denmark are still not up to speed, only contributed with 4.8 million NOK. I expected Denmark to contribute with around 15-20 million.
• Second month in a row with declining sales, could be due to local holidays & number of days in the month. Important to look after this in the upcoming months.
• Sales from Norway dropped an certain amount this month compared to the next. Dont really now why, could be seasonal patterns. Important to look after in the upcoming months.

Still my forecast on Vardia is positive, I think a share price at the moment should be around 40 NOK and in the future should be valued after 1.0 x GWP. I expect the GWP for 2015 to be around 55-60 NOK, which should imply the same share price. Last week I doubled up my position in Vardia.

Portfolio today:

Hennes & Mauritz - 28.11% of the portfolio - Bought at 213.58 SEK

Protector Forsikring -28.8% of the portfolio - Bought at 38.75 SEK

Vardia Insurance - 24.9% of the portfolio - Bought at 28.09 SEK

Tesco (TSCDY) -16.22% of the portfolio - Bought at 102.75 SEK 

Cash - 1.8 % of the portfolio - Will try to grow this to be around 10-15% of the portfolio.

As you see I have sold McDonalds after their last sales numbers. I received 4.7% profit due to the currency. I will present an analysis on McDonalds as I promised you guys (its almost done).

Merry Christmas and Happy New Years!

/EWI

October sales Vardia Insurance Group

Vardia Insurance Group presented strong sales figures for October this week, 11th November. The total new sales in Sweden, Norway and Denmark in October were 106.4 million NOK (66.4 million NOK) which is an increase of 60.2% from October 2013. Norway contributed with 59.4 million NOK, Sweden with 43.3 million NOK and Denmark with 3.6 million NOK.

For me personally it's a bit under my estimation since I expected total sales for fiscal year 2014 to be 1112 million NOK. I really thought sales for October should have been around 113-117 million NOK with Denmark contributing with atleast 9-10 million NOK to the sales. It's no panic yet about the numbers for my forecast, but it would have been nice to be on the right side. To get my sales forecast of 1112 million NOK Vardia has to close business of 252 million NOK in the two upcoming months, which I think  could be hard because of christmas holidays.

Since Denmark was a disappointment I really hope they are steeping up now for the last two months of the year. If they do I am sure Vardia will show profit for at least some month this year and the concern about the cash problem will go away and we could see a more normal valuation for Vardia.

Here are the actual sales for 2014 up to October (rounded),

I also bought some more companies, Mc Donalds (MCD) and Protector Forsikring (PROTCT). Mc Donalds for a price of 95.3 USD per share and Protector for a price of 36.2 NOK per share. More info and analysis will come in the upcoming weeks.


Over and out,

EWI

Vardia Insurance Group

Vardia Insurance Group - The journey starts

I am sorry for the low activity on the blog, last week have been really rough at work and I promise it will be better in the future. Finally this week my journey to financial independence starts with my first invested money in an insurance company, exciting. Vardia Insurance Group is my first inwestment and it happened on the 16th Oktober 2014 to a price of 24.6 NOK (2.492 EUR). It have been a bumpy ride so far, down to 22.5 NOK directly after I bought it and now its up to 27.8 NOK. An massive development on 13%, but in matter of fact the ups and downs now doesn't matter for me the importance is where we are in 4-7 years.

This post will consist of my first analysis of Vardia Insurance Group and also the points that made me buy Vardia Insurance Group.

   

Introduction - Vardia Insurance Group (VARDIA)
Vardia Insurance is a Norwegian insurance company which operates in three countries, Norway, Sweden and Denmark, headquartered in Oslo, Norway. The stock is trading on the Oslo Stock Exchange under the ticker OSE:VARDIA. Main products for Vardia are to insure causalty and property for private customers and small medium enterprises. Vardia distributes its products mainly through sales centers, which is spread around the countries they are operating in. At the moment Vardia has over 440 employees and has more than 100 000 customers. Fiscal year 2013 had the Vardia revenues on 720 million NOK and gross premium income on 520 million NOK, which was a 330% growth from the previous year. The company has never been showing profit and has until now been financed by issuing new shares. Vardia went public in the beginning of 2014 and that was the time they made their last and biggest new share issuing, which gave the company 175 million NOK. The management has communicated that this will probably be the last time investors has to put in money, because from Q4 2014 the cash-flow will be positive (This will also me make or break for my investment, not a month in Q4 with positive  .

  

Customers, industry and route to market
Vardia customers are spread geographically with Norway on 49%, Sweden on 49% and Denmark on 2%. Denmark has just started and September 2014 was their first real fair month in terms of business, thats the reason why Denmark has such low percentage of the customers. These numbers also goes with the premium income with Norway and Sweden is shared equally and Denmark stands for a small portion.

How does the insurance market in general do in Sweden, Norway and Denmark?
I could start to say that the nordic insurance market are a profitable industry, which means that the industry as an whole has an combined ratio below 100%. Combined ratio in short, combined ratio are the amount of premium collected from the insurers minus the claims paid out to insurers. A combined ratio above 100% may nevertheless say that the company are loosing money because it could still remain profitable due the return on the assets (investments). At the moment the combined ratio for Sweden, Norway and Denmark are approximately on 90%, which is a really good number. During the 1990:s the combined ratios for the Nordic countries were much higher, Sweden for example had a number over 100% until 2003. As you probably understand is the Nordic insurance industry in a really good time, and I can't see anything that would change this during the next 3-5 years.

Market share, both Sweden and Norway has almost an oligopoly on their insurance market with four big players dominating the market. In Sweden the big players are, Länsförsäkringar,IF, Trygg Hansa and Folksam, these companies stand approximately for 80% of the market. In Norway the four biggest players has 75% of the market, IF, Gjensidige, Sparebank1 and Tryg. The difference between the Swedish and the Norwegian market are actually only one thing and thats the growth. Norway has at the moment an higher growth then Sweden (the Swedish market are very stable), approximately 6-8% annually, versus the Swedish on 3-4% (estimations on the biggest companies, couldn't find any data). The problem or opportunity to have an industry that is growing a lot is that you will have a lot of new companies enter the market, (could be both good and bad), and this is also what is happening on the Norwegian market, a lot of new small insurance companies are starting to enter the market.
In Denmark we have a different market, the four biggest companies are only having 60% of the market, Tryg, Topdanmark, Codan and Alm. Brand. The Danish insurance industry is having a growth on around 1-3% which should be seen as low, on average the danish market has an combined ratio are below 100%.

Which market that will be best for Vardia is hard to say, but I think Denmark should have the highest potential, because of all the small players. Always harder to break an "Oligopol" than a normal market.. On the other hand Sweden and Norway are the ones performing right now, so we will see what the future looks like.

Route to market

Vardias route to market is mostly direct to the private sector and SMB (small medium businesses) customers under the name Vardia, but they also have business through re-sellers and partners which sell Vardias insurance products under their own name (and re-selling). 
A small part of the sales are over the internet, dont remember the number exactly but I read it some weeks ago and it was around 1-2%.

Management
Vardias management should be seen as strong, everyone has an great experience from the insurance industry and haven't been involved in any scandals (at least cant I find it). At the moment the management in Vardia owns 28% of the company, which should be seen as big stake and also the commitment from the management to the shareholders.
CEO Ivar S Williksen has over 25 years of experience from the industry and from different management positions at other companies, mostly from Gjensidige were he worked for 13 years. I am confident on the management part.

Numbers and forecasts
Now over to the most interesting part, the numbers. Will start with the sales,

Sales
Since Vardia still not are making any profit on the bottom line because of their aggressive expansion, for me as an investor one of the key metrics are the sales history and an estimation about how I think the sales will develop over the upcoming 7 years.

So how has the sales been the last 15 months? Very very good! Since July last year the sales has almost jumped up 3 times, which is insane for me. The best part of the story is that Denmark is not up and running yet, which I think has the same potential as Norway, which means we will still have an increase in sales for a long time ahead. I do not think Vardia will be able to keep up this sales growth although but I think we could expect annual growth of approximately 30-40%.

Lets play with the sales numbers in Excel for my investment horizon of 7 years. I assume and am confident that Denmark will be up and running for 100% within 11 months and that Sweden and Norway will be growing in a more moderate speed (20%, haha). With these conservative estimations I will use an sales growth annually for the upcoming 7 years on 30%. Let also assume this year ends at 1112 million NOK and by 2021 should the sales be around 7000 Million NOK, which could be seen below.

But how much will turn up on the last row? If we take a conservative number and say that we will have a gross written premium percentage on 85% (GWP), which means GWP in total will be around 5930 million NOK 2021. Now is it pretty easy to estimate a value on the company with just apply the market valuations we have today in the nordic insurance industry. The valuation in the industry now is spread between 1.7 - 3.1  x GWP is equal to the enterprise value, if we apply this on Vardia for my estimation on the GWP for the year 2021 we will end up at a value between 10 081 - 18 384 million NOK. If we take the most conservative valuation 10 081 million NOK Vardia will have a share price on 312 NOK /share (number of shares: 32 241 988), this is an return on 1168% from my purchase price. I think this numbers really show the potential for Vardia in the upcoming years, even when I deduct my margin safety on 30%, which I have for high risk companies, Vardia is still heavily under priced. The only thing that actually could make me sell this company are that its not showing profit and positive cash flow before end of february 2015. Will be really interesting to follow this young insurance company. Below a box with key metrics from the valuation.

Take care and have a nice evening, 

Eighth Wonder Investing

Disclaimer: EWI (Me) takes no responsibility for losses on shares based on the information on this blog. I am not a financial professional and should be treated just as a normal person without any knowledge. Any information from this website could be wrong or misspelled and should be treated as wrong. Neither is this site or author responsible for any losses based on information from this site, please do your own due-diligence and consult with a certified professional financial consultant before investing.