Storms, in general, are not good for insurers. The dark clouds gathering over nononsense.ie parent FBD Holdings look most ominous. As Fiona Muldoon, the group interim chief executive, prepares to reveal interim figures this week, the market is braced for at least heavy losses — and at worst a call for fresh capital.
Muldoon, a former central banker, is at FBD only a relative wet week, having joined as finance director in January. She stepped up to the top job after the surprise departure of Andrew Langford as chief executive last month, and is expected to deliver a gloomy forecast.
The central issue facing FBD, and indeed the entire Irish general insurance market, is the rising level of reserves it must set aside to meet future claims. A landmark case involving the HSE has set the industry into a tizzy. In December the courts decreed that payouts on large personal injury claims needed to be significantly higher to provide care for claimants over several years.
Not unlike annuity rates and pensions, the industry was using too high a discount rate to estimate the lump sum needed to provide financially for claimants. The courts decreed that the rate be reduced from 3% to 1% to reflect lower investment returns.
For 20-year-olds needing care for the rest of their lives, this seemingly small tweak in the discount leads to an increase of 60% in the cost of the claim to the insurer. The judgment is under appeal, yet for insurers the implications are serious. The other cold front is Solvency II, new international rules on capital adequacy. This is not just a tweak; it is an overhaul. Talks with the Central Bank of Ireland are ongoing, and the new rules are not due to come into force until January. Few people should have a better insight into the regime than Muldoon, a former head of insurance supervision on Dame Street.
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If all this were not bad enough, the market has been further softened up with reports of substantial cost overruns on an IT project and expenses relating to the closing of a defined benefit pension scheme. Both will add to losses and erode reserves.
It has been speculated that FBD may need to hike its capital reserves by €100m. The sale of its interests in a hotel and golf resort company to joint venture partner Farmer Business Developments, a farmer-owned company which also happens to own 25.5% of FBD Holdings, could raise close to €50m.
There has been talk of issuing a subordinated bond or fresh shares, or both, to fill any gap. A bond, similar to the recent Berkshire Hathaway investment in VHI, will have to be serviced, crimping profits. A rights issue or placing will dilute shareholders.
There is a hint of irony to talk of a capital shortfall. Few companies returned more capital to shareholders in recent years. Langford’s crusade was to achieve a dividend payout of up to 50% of operating earnings, based on the belief that it would grow market share ahead of the competition.
At the end of last year FBD’s reserves were more than 343% of the required statutory minimum under the old solvency rules. In March the company said that it had enough reserves at the end of last year to meet Solvency II.
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The board bullishly increased the dividend last year despite reporting losses and “heightened uncertainty around claims”. If FBD fails to meet the new solvency standard, this uncovered dividend will look like an exercise in hubris, or worse.
Langford’s abrupt departure — suddenly, after 19 years, it should be said — needs clarification, particularly as he is being retained as a consultant. There will be investor focus around the disposal of the company’s share in the leisure joint venture and any price guidance.
The expectation is Muldoon will put all the bad news out there in her first set of results. Time to batten down the hatches.
Success story in the Bag
“The Pixar of preschool TV” is how Canadian media company 9 Story described Brown Bag, the Irish animation business it purchased last week. Acquirers always talk up deals, yet in this case the pride is justified.
Founded by Cathal Gaffney and Darragh O’Connell, Brown Bag is one of the top players in its field, producing children’s series such as Doc McStuffins and Octonauts. It had revenues of €18m in 2013, employed 150 people and made profits of €1.6m. It operates in 2D and computer-generated imagery, hence the Pixar reference.
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In recent years Brown Bag signalled its intentions to move away from being a production house to an originator of content, controlling its own intellectual property and all that entails, from royalties to merchandise deals. Rewards for those who control content can be enormous. Peppa Pig, a cartoon character created by three British animators, generated retail sales of $1bn last year.
Aside from cuddly toys, good preschool television — and Brown Bag produces some of the best — has an extraordinarily long shelf life, and that timeless quality can be extremely lucrative.
In 2013 Gaffney and O’Connell hired Neil Court, one of the industry’s leading figures, as a consultant to advise on a strategy to develop its own content. Court joined the board of the company last year. As lead investor in 9 Story, he has now bought the company.
The unavoidable conclusion is that Court clearly likes what he sees in the Brown Bag development pipeline.
Perversely, animation is the poor relation of the film industry here. The state fawns over big-budget US film and television drama productions, whose makers decamp to Co Wicklow for two months, gobble up tens of millions in tax breaks and then scoot off back to California.
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Brown Bag creates permanent jobs — it will add another 50 in the wake of this deal. It is a real business, making real money, and is looking to create a real, lasting legacy. World class.
Jewel loses its sparkle
International bidders queuing up to secure Project Jewel, the assets of Joe O’Reilly’s Chartered Land, are conducting curious due diligence. The prized asset is Dundrum Town Centre, mecca for the Ugg-booted masses of south Dublin. Yet the portfolio includes Dublin Central, properties assembled by O’Reilly for a large development north of the Liffey.
A complicating factor for bidders is the propensity of members of Dublin city council to propose that swathes of Dublin Central be deemed “protected structure status” due to their connection to the 1916 Rising. Key here is the Save No 16 Moore Street Group and its rival Save No 16 Moore Street Committee/1916 Relatives Group.
Was it Brendan Behan who said the first item on any nationalist grouping was the split? What should the Kuwait Investment Authority, Hines et al make of it all?