FBD's managers recognise their own limitations

Business Opinion: The decision by insurer FBD to give its shareholders back yet more of their money has had the predictable effect, writes John McManus.

The shares jumped €2 last week to over €40 after the low-key announcement of plans to return another €177 million of surplus capital.

While the money is no doubt welcome, shareholders should perhaps stop to consider the corollary of the distribution, which is the seeming inability of the company management to find a productive use for the money.

It is interesting to note that on the same day that FBD management quietly ran up the white flag on the ideas front, Seán Quinn unveiled plans for yet another assault on the Irish insurance market, in which FBD prides itself as being the biggest Irish-owned player.

Quinn marked the formal completion of his takeover of Bupa Ireland last Tuesday by making it clear that the latest addition to his insurance operation has big plans. So big in fact, that the workforce will more than double to 800 over the next four years. Few details were divulged, but the decision to rebrand the business Quinn Healthcare is indicative of ambitions beyond the narrow confines of health insurance.

There are plenty of others who see the Irish insurance industry as offering no shortage of opportunities. Cavan-based builder P Elliott & Company is reported to be considering following Quinn into the insurance business and has hired some of Quinn's former executives. Two other former Quinn Direct executives are also reported to have set up a liability insurance business. ...

To be fair to FBD, it was at some pains to point out that the capital being returned to shareholders is only what is left after the needs of its own "ambitious" expansion plans are met. A calculation by Anna Lalor of Goodbody Stockbrokers published in the brokers' morning note last Wednesday takes a stab at scoping out the aforementioned ambitions.

Lalor calculates that FBD has around €210-€220 million in surplus capital, which would leave around €25 million in the tank to support expansion after returning capital and meeting the ongoing requirements of the business.

This, argues Lalor, would support growth of 11 per cent - or more specifically, an increase in gross written premiums of that amount - next year over and above the 4-5 per cent growth already assumed by most analysts.

This compares to an increase in gross written premiums of 4.5 per cent last year and thus probably does deserve the tag ambitious. Particularly so, when you consider the rather bearish stance taken by the group on the outlook for premium growth in its preliminary results statement.

But this does not diminish the fact that FBD's management seem unable to find opportunities in a market that their peers clearly believe offers real growth potential. Equally, they seem unwilling or unable to expand outside of their core business.

A number of points should be made in FBD's management's defence, the main one being that a publicly quoted business is a different beast to a private company. Seán Quinn can - and indeed some would say does - take risks with his own money that a plc might not consider prudent. FBD for example, does not target young drivers.

Supporters of the company also argue that its conservative ethos is attractive in so far as it indicates both long-term thinking and a refreshing reluctance to squander shareholder capital in risky deals. Indeed, this should come as no surprise, given the company's origins as an insurance business set up to serve the farming community by the farming community.

In many ways, FBD's management deserve to be commended for what in many ways is taking the hard decision and recognising their own limitations. But things rarely work that way and once the warm glow of the capital repayment has faded, they will presumably come under scrutiny from those who think they could do a better job.

By deciding to return as much of the group's surplus cash as they can, management have headed off this threat to a certain extent. Without the cash pile, the scope for some sort of big strategic move is reduced. And analysts such as Goodbody's Lalor would argue that the current management have done a good job of controlling the cost base, again providing a good defence against any unwelcome advances.

But perhaps the best defence remains the 24.4 per cent stake held in the business by the Farmers' Business Development plc, the vehicle through which the original farmer shareholders invested.

Its board reads like a who's who of Irish farming and it performs much the same role in FBD as the co-ops do in the listed food groups. It also stands to pocket some €43 million as a result of the capital repayment.

One suspects that without the support of a shareholder like Farmers' Business Development, few management teams would have countenanced coming back after 18 months to say they have no idea how to take the business forward.

And the question for anyone looking at FBD must be how solid is that support going to be in the future as the original shares in Farmers' Business Development pass through to the third generation and more and more farmers quit the business.