Friday 28 October 2016

FBD at a loss over risky business

Published 09/08/2015 | 02:30

Fiona Muldoon, the interim CEO at FBD insurers
Fiona Muldoon, the interim CEO at FBD insurers

It's always a bad omen when a company brands its annual report 'Seeing through the storm'.

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The report in question, published last February by troubled underwriter FBD, was a 132-page distress signal alerting the market to the fact that the listed Irish insurer was, in nautical terms, up the creek.

If the markets had not already been spooked by FBD's two profit warnings in the space of just 18 months, the company's outlook for 2015 left shareholders feeling even more queasy.

To make matters worse, FBD's embattled CEO Andrew Langford jumped ship last week after seven years at the helm, leaving investors feeling stranded and scrambling around in search of a paddle.

While industry experts saw Langford's departure as inevitable, the timing of the move still caught the market by surprise - with FBD only days away from publishing its half-year results on August 25.

Insiders fear the timing of his exit, with immediate effect, suggests there may be more bad news ahead for shareholders.

FBD has been trapped in the middle of a perfect storm for some time.

The insurer, along with its industry peers, is battling higher claims costs, lower investment returns and intense competition.

FBD saw its claims environment "deteriorate significantly and at a speed which exceeded expectations" last year.

A triple whammy of weather-related claims from Storm Darwin, an increase in large and medium-sized injury claims, and a spike in motor insurance claims hammered profitability.

The Central Bank even waded in by expressing concern that the Irish non-life insurance sector could become too reliant on investment income to support profits, with motor, property and liability insurance all under pressure.

It is against this ominous backdrop that FBD's group finance director and former Central Bank director Fiona Muldoon has been appointed as interim CEO pending the appointment of a permanent successor.

It will be Muldoon's job to steer the firm through the treacherous squalls and reefs ahead as she struggles to steady the ship.

This will be no small task.

In the space of six months, FBD has lost its chief financial officer Cathal O'Caoimh, who retired in January, and now with Langford's departure, its chief executive.

The company's share price has plummeted from a high of €19.30 in January 2014 to €6.79 this week, leaving investors, many of whom are farmers, nursing heavy losses from the share collapse.

The 40-year-old insurance firm has been haemorrhaging cash for 18 months, yo-yoing from a pre-tax profit of €51.4m in 2013 to a pre-tax loss of €4.5m in 2014.

More worryingly, FBD's capital reserves have been eroded by what insiders describe as "an aggressive dividend policy". As a result, the firm may be forced to look at refinancing to meet stricter solvency requirements that kick-in in January 2016 under new EU-wide rules for insurers.

FBD Holdings had hoped it would be able to boost its capital reserves by selling its stake in a joint-venture company which owns and operates a portfolio of four Irish hotels and two Spanish resorts.

But that plan has run into trouble with the Regulator, and a dispute over valuations has still to be resolved. The joint venture was valued at €45m on the firm's balance sheet.

It's not all bad, however. Muldoon will also have an opportunity to build on the successes that Langford achieved over the course of his seven-year tenure.

Analysts and insiders agree that Langford delivered growth for FBD and deserves praise for diversifying the firm from being a niche insurer for the agriculture sector to having 500,000 customers today.

Under Langford, FBD rebranded and repositioned itself in the market. It gradually increased market share in the past few years, helped by its No Nonsense brand and online targeting of non-farming and urban consumers.

But winning market share came at a cost. More policies mean more payouts.

FBD incurred net claims worth €261m last year, up almost 30pc year-on-year. Storm damage-related claims from February last year alone cost it €15.2m with 9,000 of its customers directly affected by Storm Darwin.

It was a "freakish" set of circumstances in a notoriously cyclical industry but it led to a massive reversal of fortunes for Langford and his team.

This weekend analysts pointed to a "degree of uncertainty" around a number of issues relating to FBD's business. Of particular concern is the belief that increased market share was achieved by the acquisition of high-risk motor business from its rivals who were only too happy to offload the risk from their balance sheets.

As Ireland's only publicly listed insurer, FBD is exposed and vulnerable. Undoubtedly it is a takeover target.

However, a "complicating factor" in any takeover bid could be FBD's shareholding structure, warned Davy analyst Emer Lang.

A 'farmers bloc' comprising of Farmer Business Developments plc and FBD Trust Company Limited own approximately 33pc of FBD shares between them.

This shareholding bloc stems from the insurer's days as a co-op when it was set-up to support the agricultural industry in 1969.

FBD still underwrites about 80pc of the farm insurance market.

While the idea of putting the insurer back into the hands of farmers might hold populist appeal, it's unlikely the farming industry will have the appetite to stump up the cash. But they could bring their influence to bear by pressuring the board to unravel Langford's strategy of diversifying FBD away from its core market, the agricultural sector.

A more likely takeover bid will come from one of Europe's insurance giants, regardless of the fact that the Irish market is less appealing now than it was a decade ago.

The Irish insurance market, which was valued at €2.6bn last year, has suffered a 40pc decline from a peak of €4.2bn in 2003.

FBD, with a 13.7pc share, is one of eight key players in a fragmented Irish market. Its main rivals are Aviva at 18pc, RSA at 14pc, Allianz at 12pc, Axa at 12pc, Zurich at 10pc, Lloyds at 8pc and Liberty-Quinn at 5pc.

FBD is no stranger to takeover bids, however. In 2008, FBD rebuffed a €1.3bn approach from the Netherlands' biggest insurer Eureko when FBD's shares were then trading at a vertiginous €30.50.

How times have changed.

Zurich Insurance, another possible suitor, already controls 10pc of the Irish market.

This weekend it is homing in on a takeover deal for London-based RSA (which controls 14pc of the Irish market).

A deal would result in the combined entity controlling 25pc of the Irish market, making it the biggest player.

Zurich - Europe's third largest insurer - has at least €3bn in spare cash to spend on deals, so it could gobble up FBD easily with its €266m capitalisation if it wanted to further consolidate its presence in Ireland.

A takeover bid by Liberty-Quinn could be another option, says David Holohan, head of research at Merrion Capital.

"Liberty-Quinn is one of the smaller players in the market. Its market share has gone from low-teens to mid-single digits.

"So for them it would potentially appeal to their new owners, given that it would give them such a foothold in the agricultural market, which is a steady market with a lot of loyalty. It would make sense as a quick way to get market share, rather than having to go through discounts, which has historically been the way to gain market share. This would be quite a significant portfolio of loyal customers."

But before any insurance giants run a rule over FBD's balance sheet, FBD shareholders are likely to feel more short-term pain before there is any uplift.

Holohan predicts the FBD board will want to package as much potential bad news as possible for its next set of results on August 25 in a bid to make a clean sweep.

"It wouldn't surprise me if they had to provide a negative update again. But hopefully, if they do have to do that, it will be such that they would 'kitchen sink' it and put as much bad news out there as possible, and then the follow-on updates would appear more positive," he said.

So, it looks like FBD's risk management skills are about to be tested like never before.

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