Company Announcements

FBD HOLDINGS PLC

5 August 2022      

FBD HOLDINGS PLC

Half yearly Report

For the Six Months ended 30 June 2022

KEY HIGHLIGHTS

·    Profit Before Tax of €19m compared to €22m in 2021.

·    GWP of €193m increased by 3.3% on prior year (excluding impact of Covid-19 related rebates) and policy count increased by 3.1%.

·    Retention levels of existing business are at their highest level in 5 years.

·    Average premium is flat across the portfolio with Private Motor down 8%.

·    Strong underwriting performance with Combined Operating Ratio of 79% including reserve releases of €19m.

·    Negative investment returns through the Income Statement of -€15m and through Other Comprehensive Income of -€64m due to significant interest rate rises and associated market volatility.

·    Our capital position remains strong with a Solvency Capital Ratio of 209% (unaudited) compared to 213% at 31 December 2021. Losses on the investment portfolio have been largely mitigated by underwriting profits, higher discounting of claims liabilities and a reduction in the Solvency Capital Requirement.

·    Return on Equity of 8%.

·    The Covid-19 Business Interruption best estimate reduced by €1m to €43m net of reinsurance since year-end 2021.

·    Silver accreditation achieved from Investors in Diversity Ireland as we continue our D&I journey.

·    Winner of the European Sponsorship Award for Best Sport Sponsorship (< €1m) for Team Ireland.

·    Gross Written Premium (GWP) €193m (2021: €181m) increased by 3.3% excluding €5m of pandemic related premium rebates in 2021. Written policy count increased by 3.1%.

·    Underwriting profit of €35m (2021: profit of €13m), equating to a COR of 79% (2021: 92%), due to positive claims frequency and severity trends, benign weather and reserve releases of €19m.

·    A difficult start to the year for both equity and fixed income investments has resulted in a loss through the Income Statement of -€15m (2021: €10m). Significant interest rate increases and spread widening has reduced bond valuations and led to negative mark to market (MTM) returns of -€64m (2021:      -€5m) through Other Comprehensive Income (OCI).

·    Expense ratio of 26.9% (2021: 25.7%), the increase primarily reflects increased staff costs and a higher inflationary environment in 2022.    

·    Net Asset Value per share 1,129 cent has reduced from 1,338 cent at the end of 2021 as investment losses and the dividend payment made in May have reduced net assets.

Commenting on these results Tomás Ó'Midheach, Group Chief Executive, said:

"I am pleased to report a profit for the first half of 2022. Our focus has been on driving value for our stakeholders and we have made positive progress against this. This is despite the difficult economic backdrop as investment volatility impacts our results. Investment markets had an exceptionally challenging first six months to the year, the increase in inflation and resultant higher interest rates is impacting our returns and reducing the valuation of the FBD bond portfolio. Spreads have also widened which increased bond yields further. A positive side to this is the higher reinvestment yields that will now be available to us in the future.

The Personal Injury Guidelines appear to be having the desired effect of lowering costs for minor injury claims justifying the premium reductions given to our customers. We await the outcome of the remaining challenges to the Guidelines and their application by the courts. 

A further hearing is scheduled in our Business Interruption test case in November 2022 to determine the quantification of partial losses in respect of the bar counter and the treatment of Government subsidies.

Our strategic focus on our customers continues as we consider new propositions for loyal customers and to improve our customer experience supported by technology. Research continues to show that customers are loyal for many reasons including our excellent claims experience and value led propositions. We really appreciate the loyalty of our customers and want to continue to deliver increased value for those who stay with us and encourage new customers to switch for value and service.

FBD's success is dependent on our people including our Claims, Local Offices and Mullingar Service Centre employees who continue to provide incredible personal service to our customers, supported by Head Office. In many cases hybrid working has become a feature of our lives and I would like to thank all our employees who continue to put our customers at the heart of what we do.

The economic conditions in general are challenging as our customers and all businesses face higher inflation impacting purchasing power and more subdued growth rates. Inflation is feeding into the cost of settlement of Motor Damage and Property claims. Market risk will remain high for the foreseeable future, although we expect to benefit from higher yields on bond reinvestment.

It is testament to the great work of our people that customer policy numbers are increasing as we build on our strong customer base and drive more value from the business. There are opportunities and challenges ahead as we tackle increasing inflation and a more challenging economic environment. I am thankful for a supportive Board and strong Executive Management Team with the requisite skills and ambition to deliver on our strategic goals on behalf of all our stakeholders including our employees and customers." 

A presentation will be available on our Group website www.fbdgroup.com from 9.00 am today.

About FBD Holdings plc ("FBD")

FBD is one of Ireland's largest property and casualty insurers, looking after the insurance needs of farmers, consumers and business owners.  Established in the 1960s by farmers for farmers, FBD has built on those roots in agriculture to become a leading general insurer serving the needs of its direct agricultural, small business and consumer customers throughout Ireland. It has a network of 34 branches nationwide. 

Forward Looking Statements

Some statements in this announcement are forward-looking.  They represent expectations for the Group's business, and involve risks and uncertainties.  These forward-looking statements are based on current expectations and projections about future events.  The Group believes that current expectations and assumptions with respect to these forward-looking statements are reasonable.  However, because they involve known and unknown risks, uncertainties and other factors, which are in some cases beyond the Group's control, actual results or performance may differ materially from those expressed or implied by such forward-looking statements.

The following details relate to FBD's ordinary shares of €0.60 each which are publicly traded:

OVERVIEW

The Group reported a profit before tax of €18.9m (2021 profit: €22.0m), supported by a strong underwriting performance due to positive claims frequency and severity trends, reserve releases of €19.4m and benign weather, offset by negative investment returns of €15.2m.

The Group reported an underwriting profit of €34.5m (2021 profit: €13.0m) and GWP of €192.6m (2021: €181.4m) which is 3% higher than prior year when the pandemic related premium rebates are excluded.

A Business Interruption hearing in the test case is scheduled for November 2022 to determine the quantification of partial losses in respect of the bar counter and the treatment of Government subsidies. The net best estimate in respect of Business Interruption reduced by €1m to €43m since year-end 2021. 

UNDERWRITING

Premium income

Gross written premium (excluding rebates) was 3.3% higher than 2021 levels as written policy count increased by 3.1% with average premiums remaining relatively flat. GWP was €192.6m (2021: €181.4m). Commercial customers' Covid-19 related rebates of €4.8m were deducted from 2021 premium and reflected reduced risk exposure while businesses were closed. Retention rates for customers marginally increased despite competitive market challenges, reaching another five year high.   

Average premium remained relatively flat across the portfolio. Private Motor average premium reduced by 8.1% and Commercial Motor reduced by 3.3% reflecting the expected reduction in claims costs as a result of the new Personal Injury Guidelines and an improvement in underlying claims experience. Commercial Business average premium increased 6.2% and Farm average premium increased by 2.2% as a result of increases in property elements as sums insured increased due to inflation in construction costs, offset by the expected reduction in claims costs as a result of the new Personal Injury Guidelines. Commercial customers increased their liability cover as trading conditions improved following the pandemic and this positively impacted average premium. Average Tractor premium increased by 5.0% due to a higher proportion of newer tractors and the increasing value of existing tractors. The increase in Home average premium was contained at 2.4% despite increasing sums insured due to inflation. 

Reinsurance

The reinsurance programme for 2022 was successfully renegotiated with a similar structure to the expiring programme. The negotiation of the 2022 renewal reflects market rate increases that incorporate recent global events and overall we saw an increase in reinsurance rates of 7%.

Claims

Net claims incurred (Figure includes net claims and benefits plus movements in Other provisions lines) reduced by €21.9m to €85.6m (2021: €107.5m) with the main changes relating to reserve releases of €19.4m (2021: €7.2m) and no requirement for a consequential payments provision in 2022 (2021: €13.4m).

Claims volumes overall increased 5% year on year and injury notifications increased in line with this. Motor damage notifications increased in 2022 by 29% as traffic volumes have returned to pre-Covid levels, more policyholders have taken out comprehensive cover and inflation on parts and labour is increasing the cost of repair which we believe is encouraging more people to claim as opposed to paying for the repair outside of their insurance. Excluding Business Interruption claims, Property damage claims notifications are in line with the 2021 experience.

The average cost of injury claims settlements continues to be slightly lower than that experienced pre-Covid. This is due to a change in the mix of settled cases which has been affected by a backlog of cases in the courts system and the slowdown in settlements related to the ongoing legal challenges to the introduction of the Personal Injury Guidelines. Claims being settled under the new guidelines are approximately 40% lower in value when compared to the previous Book of Quantum. We have reflected the impact of this in premium reductions. However, the level of acceptance of Personal Injuries Assessment Board (PIAB) awards continues to be significantly lower than the acceptance rate prior to the introduction of the guidelines. This means that more claims may now go through the courts system which would have an adverse impact of increasing compensation and legal costs. It has yet to be seen what impact the new guidelines will have on claims settled after the PIAB process has been completed and with the current legal challenges it may take a number of years for the full effect of the new guidelines to be known.

The average cost of property claims increased by 17% due to a change in mix and inflation, with further inflation expected on domestic building costs. Motor damage claims costs continue to experience high inflation with an increase of 12% in the last 12 months as costs of parts, paint and average labour hours per repair increase.

Movement in other provisions reduced by €13.3m to €5.2m (2021: €18.5m), the reduction primarily relates to the additional provision required in 2021 of €13.4m for FSPO consequential payments. The main elements of the Other Provision is the Motor Insurers Bureau of Ireland (MIBI) levy and the Motor Insurers Insolvency Compensation Fund (MIICF) contribution.

Industry Environment

Two separate court challenges to the Personal Injury Guidelines have been dismissed. The Judge dismissed the challenge in the case of Bridget Delaney v PIAB on all grounds. In the second challenge the Judge indicated there is no express term in the guidelines themselves that requires a written explanation of the rationale of arriving at a PIAB decision. There are still a number of challenges over the constitutionality of the laws underpinning the guidelines that are due before the courts. Whatever the outcome they are likely to be appealed due to the novelty of the constitutional issues involved. We continue to experience a build-up of older, higher value injury claims as a result of slowdowns although backlogs in the courts are reducing in 2022.

The recommendations from the public consultation on the personal injury discount rate in the Republic of Ireland which started in June 2020 are still not available and the outcome of the review will now need to consider the higher interest rate environment that exists.

Final regulations in respect of Differential Pricing were issued in March 2022 with material changes from the original consultation paper including an extension of the definition of customers in scope. All planned changes for compliance with price walking elements were delivered in time for the 1st July deadline. Work is ongoing to finalise auto-renewals elements and finalise the pricing practice review process. We are actively monitoring the impact of the changes on our portfolio.

FBD continues to review all contracts of insurance to ensure we have the wording enhancements and clarity of coverage required following the enactment of the Consumer Insurance Contracts Act 2019.

IFRS 17 is the new insurance accounting standard that will come into effect from 1 January 2023. IFRS 17 provides consistent principles for all aspects of accounting for insurance contracts. It aims to enable investors, analysts and others to meaningfully compare companies, insurance contracts and industries while increasing transparency. IFRS 17 will significantly impact the measurement and presentation of insurance financial statements. FBD will disclose the transitional impact of IFRS 17 in the year-end 2022 financial statements.

A number of legislative changes impacting insurance are expected to be enacted shortly:

·    The next phase of the Motor Third Party Liability project (MTPL) will require sharing of additional data on insured vehicles and drivers with Regulatory Authorities.

·    The Road Traffic Act (RTA) legislation is to be extended to better regulate the use of scramblers/quads and e-bike/e-scooters and introduce legislation to require sharing of additional data on insured vehicles and drivers with Regulatory Authorities through MTPL.

·    The Motor Insurance Directive (MID) primarily deals with the scope of compulsory insurance broadening the potential scenarios where RTA cover will apply.

·    Amendment to Occupiers Liability Act 1995 broadens the circumstances in which an occupier may be relieved of liability.

·    The Insurance (Miscellaneous Provisions) Bill aims is to give effect to a number of measures in primary legislation and amend existing legislation to address certain insurance-related issues.

·    A new provision for disclosure of information under the Consumer Contracts of Insurance Act (CICA) introduces a requirement on Insurers/Consumers to exchange expert reports that either support or prejudice the validity of a claim within 60 days.

Weather, Claims Frequency and Large Claims

No significant weather events of note occurred in the first six months of 2022.

2020 and 2021 saw a significant reduction in frequency of injury claims due to lockdowns arising from Covid-19. Injury claims frequency continues to remain below pre Covid-19 levels as a large part of the countries workforce continue to work from home for at least part of the week.

Large injury claims, defined as a value greater than €250k, notified to date in 2022 are slightly higher than the average of previous pre-Covid years.

Expenses

The Group's expense ratio was 26.9% (2021: 25.7%). Other underwriting expenses were €44.3m which is higher than the previous year reflecting the inflationary environment in relation to employee costs, utility costs and IT expenditure.

GENERAL

FBD's Combined Operating Ratio ("COR") was 79.0% (2021: 92.0%) generating an underwriting profit of €34.5m (2021: profit of €13.0m).

Investment Return

FBD's actual investment return for the first six months of 2022 was -6.6% (2021: 0.45%). -1.3% (2021: 0.9%) is recognised in the Consolidated Income Statement and -5.3% (2021: -0.45%) in the Consolidated Statement of Other Comprehensive Income (OCI).  Bond valuations were significantly impacted by the rising interest rate environment in the first six months of 2022 which led to the large negative movement through the OCI.  Interest rates rose as central banks tried to control the rate of inflation which has risen to multi decade highs in many developed market countries. This has been exacerbated by the energy crisis, particularly impacting Europe, which was caused by the Russian invasion of Ukraine. 

The last three months also saw corporate bond spreads widen as the outlook for the global economy deteriorated and fears of recession grew. This has contributed to the negative OCI figure for the bond portfolios and also to negative returns through the Income Statement for those risk assets which have a spread risk component e.g. high yield bonds and emerging market debt.  Equity markets fared little better as the outlook for global growth deteriorated and effects of inflation and rising rates took its toll.  Both US and European market benchmarks were down roughly 20% putting them in bear market territory.  FBD's equity fund which tracks a world index was down by roughly the same percentage and its sustainable equity fund underperformed due to its lack of exposure to the energy sector (the one sector to outperform in the year to date).  FBD had very minor exposure, c. €1m, to Russian securities through its Emerging Market funds prior to the invasion of Ukraine which has now been largely written down to zero. 

Financial Services

The Group's financial services operations returned a profit before tax of €0.9m for the period (2021: loss of €0.1m). Revenue increased by €0.8m reflecting improved direct debit income and an increase in Life and Pensions commission reported relative to 2021. FBD Holding Company costs reduced by €0.1m to €3.1m.

Profit per share

The diluted profit per share was 46 cent per ordinary share, compared to a profit of 53 cent per ordinary share in 2021. 

STATEMENT OF FINANCIAL POSITION

Capital position

Ordinary shareholders' funds at 30 June 2022 amounted to €401.8m (December 2021: €472.4m). The decrease in shareholders' funds is driven by the following:

·    Profit after tax for the half year of €16.5m;

·    An increase of €1.2m due to share based payments;

·    An increase in the defined benefit pension scheme surplus of €3.4m after tax;

·    Dividend payments of €35.9m; and

·    Mark to market losses on Available for Sale investments of €55.8m after tax.

Net asset value per ordinary share is 1,129 cent, compared to 1,338 cent per share at 31 December 2021.

Investment Allocation

The Group has a conservative investment strategy that ensures that its technical reserves are matched by cash and fixed interest securities of similar nature and duration. Maintaining a well matched position has allowed FBD to mitigate the impact of interest rate rises on its solvency position as lower liabilities (due to discounting at a higher interest rate) offset reduced bond valuations.  The Company invested an additional €25m cash in corporate bonds and other risk assets in the first six months of the year.  The average credit quality of the corporate bond portfolio has remained at A- and has seen a reduction in allocation to BBB rated bonds (43% vs 47% at 31 December 2021). 

The allocation of the Group's investment assets is as follows:

Solvency

The half year Solvency Capital Ratio (SCR) is 209% (unaudited). The audited Solvency Capital Ratio (SCR) at 31 December 2021 was 213%. FBD holds fixed income assets which are well matched to its liabilities and this has mitigated the impact on the Solvency Capital Ratio from lower investment valuations. Claims liabilities reduced as they are discounted under Solvency II at risk free rates, which are now higher and offset the reduction in bond valuations. The underwriting profit and reduced market risk charge also positively impacted the SCR. The Group is committed to maintaining a strong solvency position.

RISKS AND UNCERTAINTIES

The principal risks and uncertainties faced by the Group are outlined on pages 18 to 25 of the Group's Annual Report for the year ended 31 December 2021 and continue to apply to the six month period ended 30 June 2022. In the recent period most developed economies, including Ireland, are experiencing higher inflation than was previously evident. This is impacting operational costs, the cost of Motor Damage and Property claims and has the potential to impact the cost of injury claims. In addition there has been increased volatility in investment markets which has resulted in negative returns and has increased market risk.

The claims environment has been experiencing delays in the settlement of claims due to continuing court backlogs albeit reducing, and the reluctance of claimants to settle claims until the Personal Injury Guidelines challenges have been heard. As a result a higher degree of uncertainty still exists in the environment as the claims payment patterns and average settlement costs from the pandemic years are a less reliable future indicator and must be carefully considered by the Actuarial function when arriving at claims projections.

The Russian invasion of Ukraine has had no direct impact on the business of the Group other than the minor exposure to Russian securities noted in the Investment return above. The knock on impact on energy costs is driving increased general inflation. Supply chain issues in respect of materials and labour shortages particularly in respect of Construction and the Motor industry are impacting claims costs and will increase settlements costs in future years and may have a knock on impact to injury claims in the near future as pressure mounts on salary inflation.

Legal costs in respect of the High Court and Circuit Court have significantly increased in the last twelve months. The increase is in respect of the proportion of cases settled with plaintiff costs in higher bands and we will be watching this trend closely.

FBD model forward looking projections of key financial metrics on a periodic basis based on an assessment of the likely operating environment over the next number of years. The projections reflect changes of which we are aware and other uncertainties that may impact future business plans and includes assumptions on the potential impact on revenue, expenses, claims frequency, claims severity, investment market movements and in turn solvency. The output of the modelling demonstrates that the Group is likely to be profitable and remain in a strong capital position. However, the situation can change and unforeseen challenges and events could occur. The solvency of the Group remains solid and is currently at 209% (31 December 2021: 213%).

The next Business Interruption hearing is scheduled for November 2022. The two macro issues remaining are the quantification of partial closure losses in respect of the bar counter and whether FBD is correct in deducting Government subsidies from claims settlements.

Potential future adverse events are assessed when the Group is considering the margin for uncertainty which is a provision held as an amount over the best estimate of claims liabilities net of expected reinsurance recoveries.

Rising inflation in developed markets has led to increasing risk free interest rates.  A risk remains as to how high inflation will go and to the policy response in order to control it.  Future financial market movements and their impact on balance sheet valuations, pension surplus and investment income are unknown and market risk is expected to remain high for the foreseeable future.

The Group's Investment Policy, which defines investment limits and rules and ensures there is an optimum allocation of investments, is being continuously monitored. Regular review of the Group's reinsurers' credit ratings, term deposits and outstanding debtor balances is in place. All of the Group's reinsurers have a credit rating of A- or better. All of the Group's fixed term deposits are with financial institutions which have a minimum A- rating. Customer defaults are at pre-pandemic levels and support is provided to customers when required. 

The Group continues to manage liquidity risk through ongoing monitoring of forecast and actual cash flows and currently holds a higher allocation to short-term cash and corporate bonds in order to meet future expected claims. The Group's cash flow projections from its financial assets are well matched to the cash flow projections of its liabilities and it maintains a minimum amount available on term deposit at all times. The Group's asset allocation is outlined on page 7.

As employment reaches the highest level in the history of the state, attracting and retaining a talented workforce is an on-going challenge for all businesses. FBD continue to support employee engagement through flexible working, wellbeing initiatives and continuous development opportunities to differentiate ourselves in the recruitment and retention of our employees.

OUTLOOK

The economic outlook in 2022 and beyond is now more challenging given the headwinds of higher inflation resulting in higher interest rates and more moderate growth rates.

The early indications are the Personal Injury Guidelines have reduced awards justifying the reduced premiums charged to customers. Challenges to the Personal Injury Guidelines have so far been dismissed although a number of challenges have yet to be heard in court and along with the concern around the adoption of the guidelines by the Judiciary with the full impact being unclear. PIAB acceptance rates and claims going through the system have reduced as claimants await the outcome of the challenges.

Differential pricing requirements are in place since 1 July 2022, although it will take time to see the full effects of the changes on pricing in the market as the insurance industry adapts, creating potential opportunities and challenges.

Insurance companies have struggled over the last decade to generate meaningful income on their bond portfolios and the increase in interest rates means that the income projections on the bond portfolio have increased for the years ahead. 

Sustainability is brought into more focus as we continue our journey of integration into the business. Our Governance is in place and we are working towards target setting and metric development as we consider the multiple reporting and disclosure requirements. It will take time to fully embed and some elements will be easier to integrate than others. FBD always has a strong Social focus supporting employee engagement, the communities we work and live in and Diversity and Inclusion. The Environmental metrics and disclosures are less developed as we assess exactly what our targets should be and how we aim to achieve them.

There are always new challenges to face as a business and higher inflation with the knock on impact on interest rates affects the business, our customers and our employees. FBD provides value to our customers through excellent customer service and products providing the basis for growth. We continue to evolve our offerings while keeping the customer at the heart of what we do with the support of our dedicated employees. 

FBD HOLDINGS PLC

CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

Condensed Consolidated Income Statement

For the half year ended 30 June 2022

FBD HOLDINGS PLC

CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

Condensed Consolidated Income Statement

For the half year ended 30 June 2022

¹ Diluted earnings per share reflects the potential vesting of share based payments.

FBD HOLDINGS PLC

CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

Condensed Consolidated Statement of Comprehensive Income

For the half year ended 30 June 2022

FBD HOLDINGS PLC

CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

Condensed Consolidated Statement of Financial Position

At 30 June 2022

FBD HOLDINGS PLC

CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

Condensed Consolidated Statement of Financial Position (continued)

At 30 June 2022

FBD HOLDINGS PLC

CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

Condensed Consolidated Statement of Cash Flows

For the half year ended 30 June 2022