Beware of the vikings... and fast growing insurance

Part of the Portfolio since 01/2015... (lucky shot)

(gone under 03/2015)

Vardia was a Norwegian insurance start-up, founded in 2009 and sold as a fast-growing Nordic challenger – a fresh, digital-ish disruptor signing up retail and small-business policyholders across Norway, Sweden and Denmark. It bought up two smaller insurers and listed on the Oslo Stock Exchange in April 2014 at NOK 30 a share. For a while the growth numbers were dazzling. The accounting underneath them was the problem.

The trick was a respectable-sounding accounting choice with a fatal long tail: Vardia capitalised its customer-acquisition costs. The money it spent winning new policies – commissions, the sales force – was booked not as an expense hitting the profit-and-loss account, but as an asset on the balance sheet, to be spread over the expected life of the customer. (Insurers call it deferred acquisition costs; the devil lives in how much you defer.) In a fast-growing book, this flatters reported profits beautifully: you grow, you spend to grow, and you record the spending as something valuable you own rather than money you burned.

It is the same disease that recurs throughout this museum under different names: treating the cost of growth as proof of growth. It works right up until an auditor or a regulator asks the rude question – is that really an asset, or is it just last quarter’s marketing budget wearing a disguise?

For the 2014 accounts, Vardia’s auditor asked exactly that. The fourth-quarter results were postponed twice, trading in the shares was halted, and when the numbers finally arrived on 2 March 2015 they showed that a new reading of the rules on internal sales costs and commissions had knocked some NOK 272 million off the result. A dazzling growth story became a quarterly net loss of NOK 219 million – and, worse, an insurer that no longer met its capital requirements, the regulatory buffer an insurer must hold to be allowed to keep its promises. The share fell by more than half in a single day.

What followed was the brutal arithmetic of rescue. A guaranteed emergency share issue of NOK 275 million was launched in the spring of 2015. It was not the last: in October 2015 another issue was placed at NOK 1.23 a share – about four per cent of the listing price eighteen months earlier, and a near-total dilution that washed the original shareholders out to sea. In 2016 the Swedish portfolio was sold to Gjensidige for SEK 200 million.

The company limped on, later under the name Insr Insurance Group, before transferring its remaining insurance portfolio to a run-off specialist and, in March 2022, handing back its insurance licence. Its shareholders voted to apply for delisting from Oslo. The Vikings, in the end, sailed home with empty boats.

The museum keeps Vardia as a clean, almost laboratory specimen of aggressive accounting in a regulated industry. Insurance is the one business where the accounting is the product – a promise to pay later, capitalised today. Get the accounting wrong, in your own favour, and you are not running an insurer; you are running a countdown.

Museum note: our holding period was about two months, which by Vardia standards counts as long-term investing.

Further reading

• Placera – Free fall in Vardia (2015)
• Realtid – Vardia announcement delayed (2015)
• Dagens Næringsliv – Vardia tops up its cash after losses (2015)
• Realtid – Oslo listing in the bag (2014)
• Insr Insurance Group – Fourth quarter 2021 results: wind down according to plan (2022)
• Wikipedia – Vardia Insurance Group
• Wikipedia – Deferred acquisition costs