Insurance companies are intriguing! Maybe it’s my inner value investor, but I suspect it’s really the mathematician in me… They’re like giant Rube Goldberg contraptions – it’s fascinating to contemplate the interaction & logic that dictates the inner workings of the machine. Trouble is, you’re never quite sure it won’t blow up in your face! Investment portfolios can be full of land mines, and debt can fatally exacerbate risk. Underwriting risk may present the most dangerous risk. A company can write far too much insurance, at far too low a price, and nobody might be any the wiser for years to come…
The first line of defence is industry & government regulation. As I highlighted here, the regulators have generally done a better job (than, for example, bank regulators!). But good investors need to be self-reliant - S&P and Moody’s reminded us of that! Your choice of company can lower risk substantially. Focus on those with i) low(er) risk/plain vanilla investment portfolios, ii) low/zero levels of debt, iii) consistent & profitable underwriting records, and iv) less exposure to tail risk & the tyranny of discount rates (go for property & casualty (P&C) insurers, not life or re-insurers!). Of course, lower risk might just equate with boring – we’d like something more exceptional…
At this point (um, damn title!), you’d probably have expected me to home in on an insurance company CEO and/or CIO who’s an exceptional investor: Berkshire Hathaway (BRK/A:US), Fairfax Financial (FFH:CN), and Greenlight Capital Re (GLRE:US) are classic examples, and all look attractive from a value perspective. But there’s a much less flashy/newsworthy way to run an insurance company: Exceptional underwriting.
Which is exactly what FBD Holdings (FBD:ID, FBH:LN) delivers, while offering a longer & arguably better track record than those feted companies.
Let’s begin with a proper introduction: FBD was founded in the ’60s by a group of Irish farmers, and is now one of Ireland’s largest P&C insurers, with a loyal client base of farmers, individuals & small business owners. It’s the only Irish owned company left in the sector, since Liberty Mutual bought control of Quinn Insurance. The company experienced a changing of the guard in 2008, with Andrew Langford appointed CEO (now a 16 yr company veteran, despite the youthful…
