FBD HOLDINGS PLC

1 August 2019         

FBD HOLDINGS PLC

Half yearly Report

For the Six Months ended 30 June 2019

KEY HIGHLIGHTS

·    Gross Written Premium (GWP) €190m compared to €192m in 2018

·    Profit before tax of €39m

·  Disciplined underwriting in the face of strong competition delivered excellent Combined Operating Ratio ("COR") of 82.5%; driven by solid current year profitability, exceptionally benign winter weather and prior year reserve release of €9m. 

·    Investment income was €9m for the period (€1m in 2018) as a result of the recent market rally

·    Continued progress in developing our business offering to all customers

o  New business policy count growth increased 5% year on year

o  New Farm product launched - environmental (pollution) cover is a first in Irish market

o  New advertising media campaign launched in April

o  An Post Insurance partnership progressing well

·    GWP of €190m: (2018: €192m). Retention remains healthy with increased new business in Commercial and Private Motor

·    Underwriting profit of €29.2m, €10.3m higher than 2018 (€18.9m) as a result of disciplined underwriting and benign weather

·    Net profit before tax of €38.7m, compared to €18.4m in 2018

·    2019 COR of 82.5% versus 88.6% in 2018. This includes prior year reserve release of €8.8m (2018: €6.0m)

·    Positive investment income of €8.6m and a €14.0m gain in Mark to Market (MTM) compared to losses in second half of 2018 emphasising the volatility of returns and the need for continued underwriting discipline

·    Expense ratio of 26.1% is 0.8% percentage points higher year on year predominately due to increased marketing and salary costs

·    Strong growth in Net Asset Value per share to 896 cent from 800 cent in 2018.

Commenting on these results Fiona Muldoon, Group Chief Executive, said:

"I am pleased to announce these strong 2019 half year results reflecting our excellent underwriting discipline, an exceptionally benign winter, some prior year reserve releases and supplemented by strong investment returns in the period.

Our premium levels are down marginally due to strong competition and modest rate decreases. FBD seeks to grow our business in the face of strong competition but we are also committed to underwriting discipline and to writing the risks we know and understand.

Our litigation claims costs continue to increase. The average cost of court awards, particularly for soft tissue injuries, remains too high. Despite some judicial progress in limiting court awards we have seen no meaningful progress on structural reform and Irish businesses continue to be held to impossible standards in personal injury cases.

We are committed to developing our business offering and we recently launched our new Farm product. It offers additional cover for pollution risks as well as extending public liability protection.  We will launch a flexible new small business product soon that will suit many family owned businesses. FBD aims to be the Irish insurer of choice in a crowded and competitive market.

These strong results position us well to support our core farming customer base amid the challenges posed by Brexit to the Irish economy." 

A presentation will be made to analysts at 9.00am today, a copy of which will be available on our Group website www.fbdgroup.com.

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 half year results for 2019 demonstrate solid underlying profitability and also benefit from the performance of investment markets, benign weather and prior year reserve releases. The profit before tax was €38.7m. We paid a dividend of €17.7m in May in respect of 2018 results.

Premium growth has not materialised as we operate in an increasingly competitive environment despite new business growth and high retention levels. We continue to focus on underwriting discipline and writing risks we know and understand.

The Group reported profit before tax of €38.7m (2018: €18.4m) including an underwriting profit of €29.2m (2018: €18.9m) and a gross written premium decrease of 1% to €189.7m (2018: €192.0m).

UNDERWRITING

Premium income

Gross written premium decreased €2.3m to €189.7m (2018: €192.0m). There were premium reductions in all channels with the exception of the broker channel which increased marginally.

New business volumes increased by 5% on the first half of 2018. Retention remains satisfactory as we leverage our loyal customer relationships and quality products.    

Reinsurance

The same reinsurance programme is in place in 2019 as 2018. This programme limits our exposure to adverse weather events. We have also achieved some modest reductions in reinsurance rates compared to 2018 reflecting the strong underwriting result improvement in more recent years.

Claims

Net claims incurred reduced by €10.4m to €94.3m (2018: €104.7) primarily due to benign weather in 2019 and prior year reserve releases of €8.8m compared to €6.0m in 2018. Positive prior year reserve releases are coming from accident years 2014 to 2018 while some stability has led to improved settlements.

The average frequency of claims has reduced because of the absence of a major storm and better underwriting of risk. Increased labour costs continue to drive increases in the cost of property claims.

The Motor Insurers Bureau of Ireland (MIBI) and Motor Insurers Insolvency Compensation Fund (MIICF) levies were €6.2m (2018: €2.1m). The 2018 figure is net of an over-accrual of €1.8m in 2017 due to the later than anticipated introduction of the MIICF levy.

Claims Environment

Limited progress has been made on reform of the claims environment. There continues to be a very high level of compensation paid for soft tissue injuries in Irish courts.  

FBD has contributed to a public and political debate advocating for claims reform in order to reduce the cost of insurance. FBD has submitted data for inclusion in the National Claims Information Database and for various government reports. FBD has assisted with the first stage of the Motor Third Party Liability (MTPL) insurance database and is in the process of implementing amended non-life renewal regulations which will provide additional information to customers on renewal of their insurance policies. While improving customer transparency none of these initiatives address the underlying issue of personal injury (and in particular, soft tissue) award levels.

However FBD notes certain progress on awards to date which we expect to have some limited impact on the cost of claims including:

·    The Court of Appeal overturned a number of cases citing the Byrne v Ardenhealth Company ruling. This case requires the exercising of reasonable care by individuals for their own personal safety and should assist businesses who are being held to unreasonably high standards in personal injury cases

·    The PIAB (Amendment) Act enacted in April attempts to address the non-co-operation of claimants and their legal representatives including failure to attend medical examinations, failure to cooperate with experts etc. Claimants can now incur penalties in respect of legal costs but only at the judge's discretion

·    The Civil Liability & Courts Act has been amended to reduce the timeframe of notification of a claim to a defendant from 2 months to 1 month. This will assist claims defence

·    A second amendment to the Civil Liability & Courts Act currently in the Oireachtas if passed would allow a claim to be dismissed if a claimant's affidavit is false or misleading. The claimant could also be referred to the DPP at the judge's discretion 

·    A section of the Judicial Council Bill was passed that will enable the establishment of a Personal Injuries Guidelines Committee to provide guidelines on soft tissue injuries. If this happens and if the guidelines are followed by judiciary we believe we would see award levels fall.

However further action is outstanding on other issues:

·    Use the new Bill to provide and implement guidelines to address the level of soft tissue injury awards

·    Reform the legal system to speed up litigation and reduce costs

·    Enshrine pre-action protocol in legislation to fast-track rejected Injuries Board awards through a more simplified litigation process

·    Establish a fully functioning integrated insurance fraud database to detect patterns of fraud

·    Make gross exaggeration an offence

·    Establish and resource a Garda fraud investigation unit.

In addition and on the other hand it should be noted that the Consumer Contracts Bill, currently before the Oireachtas, proposes a number of changes which will make it more difficult for insurers to repudiate exaggerated claims and consequently risks increasing the cost of claims further.

Weather, Claims Frequency and Large Claims

No weather events of note occurred in the period. 2019 weather to date has been benign compared to the major snow - Storm Emma in March 2018.

There was a modest reduction in Motor injury frequency in H1 2019. Employer's Liability claims frequency is being monitored closely as the upward trend continues driven largely by economic activity.

The average number of large casualty claims has been redefined as greater than €250k. At 30 June 2019 the number of such claims is in line with the average number reported in the previous 7 years. The average estimated cost after 6 months is lower than the average cost at the same period in the previous 7 years. It should be noted that the number and size of large claims can vary greatly from year to year and the cost of an individual large claim can vary significantly over the lifetime to settlement.

Expenses

The Group's expense ratio was 26.1% (2018: 25.3%). Other underwriting expenses were €43.7m, an increase of €1.8m. The increase is driven mainly by increased marketing spend in a highly competitive environment and increased salary costs.

GENERAL

FBD's Combined Operating Ratio ("COR") was 82.5% (2018: €88.6%) generating an underwriting profit of €29.2m (2018: €18.9m).

Investment Return

FBD's total annualised investment return for the first six months of 2019 was 4.3% (2018: -0.4%). Annualised investment income is 1.6% (2018: 0.3%) and annualised MTM 2.7% (2018: -0.7%) in Other Comprehensive Income (OCI). This reflects the rally in investment markets in early 2019 following losses in Q4 2018.  The positive MTM is driven by credit spreads narrowing on the corporate bond portfolio and reducing interest rates as lower-for-longer accommodative monetary policy is implemented by the ECB. Risk assets delivered positive returns partly as a result of geo-political stabilisation particularly between the US and China.

A large decrease in the discount rate has not impacted the pension surplus significantly as the assets and liabilities are reasonably well matched. This is a positive result of the structural changes made to the pension scheme in 2015 and 2016.

Financial Services

The Group's financial services operations returned a profit before tax of €2.1m for the period (2018: €1.4m). Revenue increased by €0.2m while costs decreased from €3.2m to €2.7m as a result of lower legal expenses in FBD Holdings plc.

Profit per share

The diluted profit per share was 95 cent per ordinary share, compared to 44 cent per ordinary share in 2018. 

Dividend

The shareholders approved the final dividend proposed by the Board for 2018 at the Annual General Meeting on 10 May 2019 and a dividend of €17.7m was paid on 17 May 2019 in respect of 2018 results.

The Group dividend policy targets an annual pay-out range of 20% to 50% of full year profits when appropriate given the inherent cyclicality of all insurance businesses.

STATEMENT OF FINANCIAL POSITION

Capital position

Ordinary shareholders' funds at 30 June 2019 amounted to €311.7m (December 2018: €283.5m). The increase in shareholders' funds is driven by the following:

·    Profit after tax for the half year of €33.8m

·    Mark to market gains on Available for Sale investments of €12.3m after tax

·    €17.7m reduction due to the dividend and an increase of €1.2m due to share based payment

·    A decrease in the defined benefit pension scheme surplus of €1.4m

Net assets per ordinary share are 896 cent, compared to 818 cent per share at 31 December 2018.

Investment Allocation

The Group has a conservative investment policy that ensures that its technical reserves are matched by cash and fixed interest securities of similar nature and duration. FBD has increased its allocation to Risk Assets modestly over the first 6 months of 2019 in line with the company's Strategic Asset Allocation and increases in shareholders' funds.

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

Solvency

The audited Solvency Capital Ratio (SCR) of 165% at 31 December 2018 as reported in the Solvency and Financial Condition Report.  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 18-24 of the Group's Annual Financial Statements for the year ended 31 December 2018 and remain unchanged for the next six months.

OUTLOOK

The half year results for 2019 are strong driven by disciplined underwriting, a rebound in investment markets, a good winter and prior year reserve releases. Despite new business growth, overall premium levels are down modestly reflecting a difficult competitive environment including aggressive competition and sustained price pressure.

The Group has a clear strategy that will deliver sustainable growth in book value through a customer centred approach, underwriting discipline and careful risk selection. The combined operating ratio of 82.5% reflects that underwriting discipline. 

The claims environment continues to moderate although inflation is still present. We continue to call for substantive reform in the level of personal injury awards and a rebalancing of personal responsibility vis à vis the impossible standards small businesses are held to in injury cases. FBD continues to tackle fraud and exaggerated claims to help but soft-tissue injury awards must come down for real progress to be made.  

Brexit uncertainty continues and we view a hard Brexit as negative for Ireland's farm and agri industry particularly and rural Ireland generally. Our business is planning for some limited operational impacts that may arise to support the continuing needs of our customers.

The Group targets a COR in the low 90's (absent exceptional weather) and a low double-digit return on equity (ROE) through the cycle. Given the strong performance in the first six months of this year underpinned by a number of one-offs and assuming a more normalised second half, the Group expects that the full year 2019 ROE will be mid to high teens.

FBD HOLDINGS PLC

Condensed Consolidated Income Statement

For the half year ended 30 June 2019

FBD HOLDINGS PLC

Condensed Consolidated Income Statement

For the half year ended 30 June 2019

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

² Diluted earnings per share reflects the potential conversion of the convertible debt and share based payments.

³ Diluted earnings per share reflects the potential conversion of the convertible debt up until the date of purchase and cancellation of the convertible debt and the potential vesting of the share based payments.

FBD HOLDINGS PLC

Condensed Consolidated Statement of Comprehensive Income

For the half year ended 30 June 2019

FBD HOLDINGS PLC

Condensed Consolidated Statement of Financial Position

At 30 June 2019

FBD HOLDINGS PLC

Condensed Consolidated Statement of Financial Position (continued)

At 30 June 2019

FBD HOLDINGS PLC

Condensed Consolidated Statement of Cash Flows

For the half year ended 30 June 2019