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Friday 18 January 2019

More progress needed on motor insurance claims and counterclaims

Ardagh boss Paul Coulson rings the bell at the New York Stock Exchange to mark its IPO in March. He has built the firm into a global player and has now put together an extraordinary deal with payment-in-kind notes. Photo: AP
Ardagh boss Paul Coulson rings the bell at the New York Stock Exchange to mark its IPO in March. He has built the firm into a global player and has now put together an extraordinary deal with payment-in-kind notes. Photo: AP
Richard Curran

Richard Curran

A year on from the publication of the report by the Cost of Insurance Working Group, and motor premium rises do seem to be easing. So job well done? Not quite. Motor insurance premiums have been easing off since the heat really came on the insurance industry, from media pressure, to political spotlight, to EU competition raids.

And as former head of the Motor Insurance Advisory Board Dorothea Dowling pointed out during the week, we are still none the wiser in understanding why insurance premiums went up by 70pc in the previous three years.

The industry pointed to rising cost of claims, among other things. Yet, Dowling punched another hole in that argument by questioning statements from the industry about claims and comparing it with independently verifiable figures.

However, the insurance industry group, Insurance Ireland hit back the next day with its CEO Kevin Thompson refuting Dowling's use of the figures.

The working group report included a raft of recommendations. Many have not been implemented so far. But there is a new commission and commitments to make more claims data available.

One of the important measures was the introduction of a central claims database. There have been two submissions on claims data ahead of the introduction of the National Claims Database, which will centralise the reporting of insurance claims and will give the Government and the industry more information on the biggest factors behind premium price increases.

The information available from these early submissions shows the high cost of insurance payouts in Ireland but it still isn't clear why premiums rose so much over three years on the back of what the industry said were increases in these claim costs.

It depends on who you believe.

Insurance Ireland has welcomed the arrival of the new Personal Injuries Commission chaired by former High Court President Nicholas Kearns. Kearns said during the week there had been a delay in receiving information from the insurance industry on cases settled away from the Personal Injuries Assessment Board. He went on to say the delay would mean the commission's next report would be more likely to appear in May or June, as opposed to the planned publication at the end of March, as a result.

Perhaps the best way to understand whether insurers were over-egging the increases or not is to look at their profitability. But here, too, insurance is not that simple. The working group report found that claims paid gross in 2015 are up 2.8pc from 2014, while "claims incurred" have increased by 19pc to €1.29bn.

Dowling pointed out that "claims incurred" means what insurers have estimated they might have to pay out in the future. Surely there is scope here for a whole range of assumptions which will impact on reported profit in any year. Does insurance just come down to guesswork in the end?

Insurance Ireland says the claims paid figure refers only to settled claims and insurers are obliged to set aside amounts of money relative to the amount of claims they are notified of, but have not yet settled.

It maintains this is the best figure to understand the progression of claim costs.

We may have to wait a few years to see how much is actually paid out on the higher claims notified to insurers during that period of premium hikes. In the meantime, the row continues amid claim and counter-claim over the figures.

Insurance Ireland says transparency is not an issue as insurers have opened up their books to provide data five times in 24 months. That may be true but why didn't it happen before now, never mind Kearns' comments about delays in receiving information.

Progress is being made on insurance industry transparency and reform, but more needs to be done.

Its up, up and away for Dublin apartment developments

Housing minister Eoghan Murphy looks poised to change height restrictions on apartment buildings in parts of Dublin City. It would be a positive move and would make sense especially in a market of supply shortages, rising prices and high demand.

It would also be a real bonus for developers. But any change will come too late for the Cairn Homes luxury apartment development at 6 Hanover Quay in Dublin docks.

Cairn is pressing ahead with completion of the project of 122 apartments. Cairn managing director Michael Stanley said in an interview last week that he would like to see height restrictions lifted and suggested that apartment buildings going to nine stories instead of six could cut the cost of apartments by 20pc. He disclosed that apartments at 6 Hanover Quay will be priced at more than €600,000, but he was, understandably, not willing to say just yet what the price would be. According to Stanley, the Hanover site cost €20m to acquire (€163,000 per unit) and the building cost €40m to build (€327,000 per unit). That is a total cost of €60m or €490,000 per apartment.

If the construction cost per unit dropped by 20pc it would come down to €261,000 per apartment leaving an average cost of €424,000 per apartment. But Cairn could build 183 apartments with an extra three floors. The big question is where would the purchase price to the buyer fall? The housing market is so buoyant right now, Cairn could probably sell another 60 or so apartments on that site without having to drop the price substantially.

However, these more attractive numbers for the developers should encourage more of them to press ahead and start building more apartments, which should in time lower the price.

Raising apartment heights in parts of Dublin is one of the easier solutions to alleviating the housing crisis and it should have been done before now.

Coulson 'Piks' a €100m winner

Size matters when it comes to the glass and metal container industry. Paul Coulson has built up Ardagh into a major global player with multibillion euro revenues. That scale and the current state of the bond market, has allowed him to put together an extraordinary deal. Ardagh raised $350m (€291m} in five-year payment-in-kind notes (Piks). The deal will see shareholders pocket the proceeds. Coulson will receive around €100m.

What is extraordinary is that the notes are issued by the holding company of the group, ARD Holdings, so they are not secured on operating group assets and therefore do not affect the debt ratio of the main operations. The business has been reducing group debt but it still stands at over €6bn.

The notes will pay out 8.75pc per year over five years, but interest payments are all suspended until the end of the period. So basically, Ardagh will pay back the money plus around €127m in interest in five years' time in order to distribute €291m to shareholders today.

The notes were oversubscribed as investors wanted to pile in. The scale of the Ardagh juggernaut allows it to do this, as the repayment of these notes with interest in five years can be achieved in a number of different ways, from dividends to the parent, to a refinancing or the sale of an asset.

That question will be for five years down the road. In the meantime, it's a happy new year for Coulson and Co.

Sunday Indo Business

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