Sunday 17 December 2017

Quinn Insurance now difficult to value

Forget the reports of 40 suitors queuing up to buy Quinn Insurance because when the process gets properly serious the buyers will be whittled down to a shortlist of four to five.

But valuing the business is going to be the most inexact of sciences for this small group. Quinn Insurance lost money in 2009 and 2008, and it's not entirely clear what kind of outturn is likely in 2010. A €10m redundancy charge will have to be included in the 2010 numbers, making things more difficult, and a loss of some kind is likely despite the surgery performed by the administrators.

If a loss is registered for 2010, Quinn Insurance is going into the sales process on the back of three years of losses -- albeit they occurred during the greatest financial crisis since the Great Depression.

Before the credit crunch, the company could manage earnings of €245m or an average of €266m if taken over a five-year time horizon. Clearly those kinds of profits are gone forever -- they were possible because the Irish insurance industry in that period was in something of a 'sweet spot' in terms of profits.

Quinn Insurance itself also bolstered its profits with an aggressive investment performance and pricing strategy, both of which are no longer sustainable.

This is a pity because, these days, profitable insurance companies trade on good multiples. Allianz and Axa are trading at 6.5 and 9.2 times their respective profits. At the lower end, this would have left pre-crisis Quinn Insurance worth something like an eye-watering €1.5bn.

Unfortunately for Quinn, there isn't much earning potential available in Irish insurance these days -- FBD for instance lost €35m in 2009.

With premium income dropping across the industry, investment income recovering but still volatile, property assets needing to be written down, and claims going up due to the recession, valuations for Irish insurance companies are only going one way -- down.

All these arguments are likely to feature in the bids submitted by interested parties. Ultimately, the price will be decided on the basis of whether Quinn Insurance can ever get back to its pre-crash business model, and that seems highly unlikely. Still, the surgery done by the administrators will at least provide evidence to buyers that the new business model, however modest, is a sustainable one.

Irish Independent

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