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 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.