Vienna Insurance Group – New Holding

Vienna Insurance Group – VIE:VIG
Share Price – €18.40
Market cap – £2.354bn

Introduction

Over the last few weeks I’ve spent quite a lot of time looking for investment opportunities in the insurance sector. Having missed the boat on British insurers like RSA, Aviva, and others whose share prices were hammered in the aftermath of Brexit (and subsequently have now recovered), I had too look abroad for value. In the end, I found what looks to be an interesting prospect in Austria of all places.

Vienna Insurance Group is an amalgamation of various insurance that were acquired or spun out of other financial entities in the past two decades. Since floating on the Vienna Stock Exchange in 1992, it has grown substantially and now has subsidiaries operating across most of central Europe. What initially attracted me to VIG (as it shall be known for the rest of this article) was the 15% discount to tangible book value. Given that most other insurers that I have come across (even Italian/Spanish insurers) traded between 1.2x and 3x tangible book, I was expecting serious problems at VIG. While I saw some issues, I was pleasantly surprised they were perhaps not as bad as the share price decline had suggested.

Stock Decline

The first issue that VIG faces is a macro one, specifically around the low interest rate environment in which it operates. Near zero rates of interest have compressed investment income received from float. I don’t know what will happen with rates, but seemingly the trend is towards a tightening of monetary policy. When and how quickly this happens, I have no idea, but insurers will be a beneficiary of a reversion to a normalised investing environment.

The next issues are operational ones. The good news is that I think these issues have already been accounted for and charges have been taken. The 2015 annual report contained the first of what looked to be some kitchen sinking of bad news by the new CEO in the form of a €250M impairment of an IT system and the Romanian business. The interim then announced a €500M hit to the investment portfolio as non-profit housing investments were written down due to an accounting change. Perhaps there is more bad news to come, I will certainly be keeping a close eye on the the situation.

Reversion To Mean

Below is a table listing the combined ratio and earnings for VIG for the last 14 years (as far back as I could get accounts). As you can see, VIG has a decent history of underwriting profitably and generating decent earnings (albeit disappointing low growing earnings which aren’t helped by the current rate environment).

vig_overview

In light of management guidance pegging 2016 earnings at a more normalised €2.34 per share after tax, I am going to take a small position in VIG as a recovery play. “016 first half earnings are already on track to meet the target, so unless a catastrophe befalls VIG in the final 6 months of the year, the earnings target should be met. At a reasonable 12x valuation, that should give us a stock price of just over €28 which would be an exit position and provide an excellent return if the situation plays out as expected.

Risks

  • While I would be comfortable with established markets like Austria, Hungary, and Slovakia; I would be apprehensive about VIG and their exposure to emerging markets like Romania, Ukraine, and Serbia. When you have so many subsidiaries, who often operate with a high degree of autonomy, there is potential for one of these operations to go rogue and end up imploding. This outcome is possible, but I think the probability is low given VIG’s excellent track record, which is backed up in a report written by S&P.

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