FBD Holdings Plc- Welcome back to Ireland !!!

Disclaimer: This is not investment advise. Please do your own research !!!

Background:

FBD is a local Irish Insurance company that I first wrote about in early 2015 when the stock look cheap. Luckily I didn’t invest back then as 7 months later FBD got already in trouble mainly due to under reserving plus another few skeletons in the closet. A month later, Prem Watsa came to the rescue with a slightly unusual deal structure.

What caught my eye now again (thanks to a friend mentioning the stock) is the relatively weak share price combined with super strong 2019 results and no bounce back from the Covid-19 crisis levels:

FBD HOLDINGS PLC_quote_chart

The stock is pretty much back where it was in late 2015 but Profits increased more than 100% in 2019 and ROE was around 30% which is exceptional for a “normal” insurance company. It needs to be noted that parts of the profit were reserve releases and higher than usual investment returns.

Recap: The Prem Watsa deal

Just to recap: In September 2015, Prem Watsa saved FBD by extending a 70 mn loan to FBD with a coupon of 11,66%. This was replaced by a 70 mn EUR mandatory convertible bond with 8.23 mn shares that convert if the share price exceeds 8,50 EUR. 2015 ended for FBD with a loss of around 75 mn EUR and a new CEO. 2016, FBD managed already to post a small profit before showing super solid results both in 2017 and 2018.

In 2018, FBD bought back the bond for a total consideration of 86 mn EUR (incl. interest). Instead they issued a 50 mn “Normal” hybrid debt at a rate of 5% which looks like a better deal. As mentioned above, 2019 was an exception.

So what is negative?

As always, I try to shoot a few holes into an investment before considering it more seriously.

 

Positives:

  • The company is really cheap. I trades at around 6,5x times normalized earnings which for a P&C insurance company is very cheap (see below)
  • The turn-around CEO “cleaned up the ship” by strengthening reserves, cleaning up the pension plan, disposing of strange assets etc.
  • Now very strong Solvency position with potential excess capital (increase from 126% incl. the Watsa deal in 2016 to 192% in 2019 ex Watsa convertible).
  • Irish “champion” as a certain “Brand moat” as many Irish consumers prefer Ireland domiciled insurers
  • As a P&C pure play the business is to a certain extent counter cyclical (less motor claims)
  • Their background (farmers) seems to implicate higher “affinity” of clients to their insurer than competitors

The CEO issue

On paper, the CEO Muldoon has done everything right. However in 2018 some internal accusations surfaced mostly from the chief of HR. The board of FBD started an official investigation in 2018, but she was cleared shortly thereafter. I am not sure if that has something to do with her decision to leave FBD. The appointment of an interim CEO however shows that the whole episode was not a carefully planned one.

Quick and dirty valuation:

AT 6,75 EUR per share, the company is valued ~240 mn EUR. Shareholders Equity at the end of 2019 was 372 mn EUR or 10,60 EUR per share with little intangibles.

A P&C insurance company as FBD can be modelled quite easily assuming a “over the cycle Combined ratio (Cost and claims as % of Net premium) and normalized Investment income.

At a 90% combined ratio and a 1% return on investments, my normalized earnings would be around 1.05 EUR/share, a very conservative case would be a 95% Combined Ratio and 0,5% investment return which would result in 0,53 EUR/share.

I would add the proposed dividend as “excess capital” to the valuation. Either it gets paid out this year or it remains as excess on the balance sheet and will then be released over subsequent periods.

Assuming a “fair” PE of 12, my price target in the optimistic case would be around 13,60 EUR per share, in the conservative one 7,28 EUR. My “expected” case would be somewhere in between, maybe around book value for simplicity reasons. A quick reminder: Book value is not a good proxy for the value of a financial firm unless returns on equity are sufficient, which in this case is given.

Why is the stock cheap then ?

I can only speculate, but the pretty abrupt exit of the successful turn-around CEO plus the intervention of the regulator might have prevented a bounce back as so many other stocks have experienced. For my personal risk appetite, I can live with these risks compared to the potential upside.

Summary:

A lot has happened since I looked at FBD 5 years ago. Other than back then, I think despite some risks (CEO, regulator), the stock is now a “good value” with a very good risk/return relationship. With regard to Covid-19 I would not say that they benefit but the business model is clearly less sensitive than most other businesses.

I therefore established a 4,5% position for the portfolio at 6,75 EUR/Per share. I hope to see a total return (incl. dividends) of around 50% within 12-18 months.

Desclaimer & Health warning: This is not investment advice. The stock discussed is illiquid.

 

 

 

 

 

 

22 comments

  • GNP-GlobalNosePicking

    Seems tide does not go back for FBD.

    Until clarity emerges in relation to Business Interruption Insurance we expect a period of uncertainty for FBD.

    https://www.fbdgroup.com/investor-relations/2020-half-year-results-statement/

    • Not sure why you post this now, the half year numbers came out on July 31st. Personally, I think it was smart for FBD to show a loss. If they would have shown a huge profit,it would have been much harder for them to get a fair settlement of the open Covid-19 cases.

      The underlying numbers were quite good in my opinion. But yes, there are a lot of stocks that look much more sexy than FBD. You should look at them maybe instead.

  • They provide insurance to a lot of bars and restaurants which covers pandemics and have refused to pay out on this, claiming the damage to their business is due to the govt shutdown, not the pandemic directly. A number of larger operators have taken them to court. I don’t have a view on whether they might win or not, but if they lose they will be paying out potentially 100s of millions, hence the discount…. and even if they win I think the brand has taken a huge beating for their behaviour

    • Thanks for the comment. With regard to “paying out 100s of millions”: From where do you have this “estimate” ? Is this a bottom up calculation and can you share they underlying assumptions ? Or is this a number you just took out of thin air ?

    • Well, according to this article from the Irish Times, they have 1300 pub clients, from which 700 have made claims for business interruption.
      https://www.irishtimes.com/business/financial-services/fbd-s-22m-covid-19-standoff-with-pubs-clouds-ceo-search-1.4289512
      The general business conditions have a cap of 15.000 Euro per case, but it seems to be different for old pub contracts, where the losses for one year are covered. I think that will be (much) more … and afaik pubs are still closed. But not 100s of millions. If it is an arithmetic mean of 100.000€ for the whole year, it would be 70 M€.
      So far, they have made 22 M€ provisions for that.

      I also think that 0,5-1% from investment might be even to high. A rated corporate bonds yield with only 0.35% in the Euro area to date.

      At around 5.24 Euro, there is also a very long-term support-line in the chart that has been tested a few times.

      • Thanks for the comment. A few remarks:

        – Not sure where your 22 mn come from. All reports and presentation say that they have expensed 30 mn of potential claims per 30.6. 2020 (https://www.fbdgroup.com/media/fbdgroup/responsive/files/HalfYearlyReport2020_presentation.pdf)
        – 900 claims were made
        – the final claim will be after reinsurance where we don’t know how much the share of the reinsurer is. This is from the half year report:
        “In arriving at the business interruption best estimate of €30m, FBD have assessed all available and up to date
        information which may impact on ultimate costs. The estimated cost of a number of different scenarios have
        been modelled including the degree of application of reinsurance cover. .”
        – they have 10% “Risk assets” (Equity, property etc). If we assume a normalized return of around 5% for this bucket, that would be 0,5% for the whole portfolio plus the return of the 0,35% for the high rated portfolio. So I feel quite comfortable with my estimate.

        So far the case didn’t work out. The market cap has lost ~100 mn EUR since the beginning of Covid-19 which I think is much more than this one time loss. But we will see. If the shareprice would really go down to 5,24 EUR, I would increase the position to a “full” position.

        • Yes, in the H1 presentation it is €30m. I somehow overlooked that or mixed up the numbers. In the “trading statement” from 24th June they also had written of €22m: https://www.londonstockexchange.com/news-article/FBH/trading-statement/14590166
          Today was an unusal high trading volume on the Dublin stock exchance and my order was filled at around 6 Euro per share. Astonishingly, the closing price today was even higher than the opening” The reason was probably that today, the UK high court backed business interruption policyholders against other insurance companies. I found that on the following website about the FBD stock (see “latest news” – of course I did not read the 162 pages long adjudication): https://fbdplc.com/index.html

        • Hiscox gained ~20% following that announcement. So it seems to be better than expected for insurers.

        • Thanks for this hint. The ruling should be anyway only applicable to the UK, where FBD is not active.
          It seems, that I was lucky yesterday, as the order book was empty before.

  • I forgot to mention in the post that I financed the purchase mostly from the sale of the remeining Electrica and Vostok New Venture shares.

  • Thank you for this post. I had forgotten about them since their disaster some years ago. Looking again I see on the LSE that the b/o spread is 580c-730c which seems a bit on the high side. I assume they hardly trade in London but only in Dublin where the spread is presumably smaller. However my broker wll no doubt trade in London so having to make 20% before you start to get a profdit puts me off rather. I hope you trade where there is a smaller spread and can do well with them.

    Regards,

    Trevor Morris

  • Insurance is a sector highly targeted by politicians in Ireland as shown by the cancelled dividends. This leads to uncertainty in the short term (are insurers going to honor business claims not theoretically covered by the contracts? are they going to give rebates) and in the long term (Sinn Fein getting stronger)? On top of that, Ireland has a strong claim culture leading to frequent and disproportionate awards in court.

  • Not sure about that. I had some “fremde Spesen” of around 2bps but Sbroker doesn’t tell me what it is.

    • That is the irish stamp duty reserve tax of 1%(!), if you bought in Dublin.

      • No, I didn’t pay any stamp duty via Sbroker. I chekced 3 times….

        • Seems a great deal. Well done Mmi00007! And also smart to avoid the 1% stamp duty. 🙂

        • I didn’t do anything to avoid it. I think they might have changed it.

        • ?!
          It is interesting that you can trade in Dublin with Sbroker, because they have much more international stock exchanges than most other brokers, even Interactive Brokers(!), and are also much cheaper than e.g. Consors (50 Euro per partial execution, and you have to pay stamp duty ;-))…

        • Yes, I actually started to use Sbroker because Consors charged so much for UK shares. I used DAB before which was much cheaper but that got merged into Consors.

        • GNP-GlobalNosePicking

          Trading in EI carries Irish Stamp Duty of 1%, I guess you were lucky to get a trade in Euronext , away of abusive stamp duty.

          When interest rates are so low (1-2%), a 1% stamp duty (2% for i/o) is an absolute rip-off. The same I say when FundMgrs charge 1-2% annual fee (most of the), when avg.returns are 3-6%: they get always the upside and no downside, while you get the full exposure. Asymetry is toxic !!!

  • Interesting idea and good write up.
    What is the stamp duty when buying Irish shares these days? I bought Hibernia shares a couple of years and paid a fortune in taxes upfront.

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