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 sold as a fast-growing Nordic challenger – a fresh, digital-ish disruptor signing up policyholders across Norway, Sweden and Denmark. It listed on the Oslo Stock Exchange in 2014 to applause, and 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, marketing – 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 future life of the customer. 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?

In late 2014 and into 2015, Norway’s authorities and Vardia’s auditors asked exactly that. A restatement followed that turned the flattering profits into substantial losses and gutted the company’s solvency margin – the regulatory capital an insurer must hold to be allowed to keep its promises. Overnight, the growth darling was a solvency problem.

What followed was the brutal arithmetic of rescue. Vardia launched an emergency rights issue priced at NOK 1.00, issuing hundreds of millions of new shares – a near-total dilution that washed existing shareholders out to sea. The share, which had listed in the twenties of kroner, was now a one-krone survival ticket. The company limped on, renamed INSR Insurance Group, and INSR itself was eventually wound down and run off around 2021.

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.