Insurer FBD’s decision last year to reduce cash holdings in its investment portfolio and increase riskier assets will boost profits but may limit the possibility of the group returning excess capital on its balance sheet to investors, a Davy report has suggested.
FBD said in February as it reported full-year results that it had reduced its negative-yielding deposits and cash holdings from €230 million – or 22 per cent of its entire €1.05 billion investment pot – in 2017 to €146 million in 2018. It increased its exposure to government and corporate bonds and what it termed “other risk assets”.
Davy estimates that a progressive move towards more risky assets will help the portfolio move from a 0.2 per cent return last year to 0.81 per cent in 2019 and 1 per cent next year. While this will underpin profits at FBD as its gross written premiums rise in line with economic growth, the insurer will have to set aside €15.1 million of additional capital this year and €10.5 million in 2020 against these assets, according to the analysts, including Jack O’Halloran.
“The increased allocation to risk assets, while positive for expected returns, does impact solvency forecasts negatively due to the heightened capital charges associated with holding more risky assets in the investment book,” they said.
Still, Davy sees FBD’s solvency ratio – a gauge of an insurer’s ability to withstand shock losses – rising to 166 per cent in 2021, compared to the company’s target range of between 120 and 140 per cent.
However, the analysts said it remains unclear about how comfortable the company would be about facilitating a return of surplus capital to shareholders, “particularly given its growth aspirations”.
The Irish insurer said in February it plans to more than double its dividend on last year's earnings to 50 cent per share after reporting strong results. The company also moved last October, on the back of a rebound in profitability over the past two years, to buy back and cancel a €70 million bond that Canadian financial firm Fairfax had acquired in 2015 to shore up its finances when it was losing money.
The Davy analysts lowered their price target for FBD’s stock to €12 from €12.60, while reiterating their outperform rating, which is the equivalent of a buy recommendation. The shares traded up 0.9 per cent to €9.14 in early trading on Thursday.
