F.b.d.hldgs Regulatory News (FBH)

FBD HOLDINGS PLC

24 August 2015

FBD HOLDINGS PLC

Summary

FBD Holdings plc ("FBD" or the "Group") today announces significant reserve strengthening and a focussed business strategy concentrating on its farming and agri book as well as a single brand consumer model. In order to replenish capital in its core insurance business, FBD Holdings has agreed to divest its stake in FBD Property and Leisure (subject to shareholder approval) and, following completion of the transaction, intends to invest the proceeds as equity in FBD Insurance.

Ahead of the implementation of the Solvency II regime in January 2016, FBD has taken a number of additional steps to strengthen its capital position, and will further improve its capital buffers. These include agreed changes to the staff pension scheme, as well as exploring options for raising regulatory capital in the debt capital markets.

The previously signalled claims uncertainty in Ireland has continued and deteriorated further. The existing business strategy has not delivered profitable growth and, given the significant losses reported today, the Group has reviewed its strategic direction. The Group has decided on a strategy that will focus on those things it does best, servicing the insurance needs of FBD's agricultural and small business customers and a single brand consumer strategy for motorists and home owners. FBD will reduce expenses in line with this simplified strategy.

FBD will continue to deliver the rating and pricing actions necessary to achieve profitability.

The Group has recently reached agreement with its staff with regard to the future of its defined benefit pension scheme. The changes which include closing the scheme to future accrual, severing the link with final salary, ceasing the advance funding for discretionary pension increases and de-risking the invested assets will significantly reduce the Solvency II capital charges that the scheme attracts. These changes, which are subject to Trustee approval, are expected to be effective from 30 September 2015.

Our new strategic direction will:

· Simplify FBD - we will be concentrating on servicing our core customers, with a clear ambition of returning the Group to profits by the end of 2016;

· De-risk our underwriting strategy; and

· Focus our time and resources in the consumer market on one brand only.

The following actions will be, or have been, taken:

· Prior year claims reserves strengthened by €88 million;

· Cost saving target of €7 million; representing 2% of COR; to be identified and implemented in 2015/Q1 2016;

· Our capital position is strengthened through:

o Reforming our retirement benefit arrangements with the closure to future accrual of the defined benefit pension scheme;

o Disposal of the property & leisure joint venture (subject to shareholder approval) with the proceeds earmarked for investment as equity into FBD Insurance;

· Exploration of options for raising regulatory capital in the debt capital markets.

Commenting on these results: Interim Chief Executive Officer Fiona Muldoon said:

"This is a difficult day for FBD, our shareholders and our staff. These results reflect very serious increased claims costs in our industry. We are taking decisive action now to de-risk our strategy and return to profitability by the end of 2016. FBD has a great customer base and the relationships, infrastructure and claims paying strength to meet our customers' needs into the future. I am confident that the steps outlined today will put FBD on the path to profitability."

FBD HOLDINGS PLC

24 August 2015

FBD HOLDINGS PLC

Half Yearly Report

For the Six Months Ended 30 June 2015

Commenting on these results: Interim Chief Executive Officer Fiona Muldoon said:

"This is a difficult day for FBD, our shareholders and our staff. These results reflect very serious increased claims costs in our industry. We are taking decisive action now to de-risk our strategy and return to profitability by the end of 2016. FBD has a great customer base and the relationships, infrastructure and claims paying strength to meet our customers' needs into the future. I am confident that the steps outlined today will put FBD on the path to profitability."

* The Group's net asset value has benefited by €32m following a change in accounting policy in how the Group provides for its share of the Motor Insurance Bureau of Ireland "MIBI" outstanding claims. This change in accounting policy follows a change in accounting standards applicable to the Group's principal subsidiary, FBD Insurance plc. Previously FBD Insurance plc provided for its market share of the total outstanding claims of MIBI. Under new accounting standards applicable to FBD Insurance plc from 1 January 2015, it may only provide for its share of the following years MIBI levy. This increased the net asset value per share by 92c and both operating and diluted earnings per share by 2c.

A presentation will be made to analysts at 8.30 a.m. today, a copy of which will be available on our Group website, www.fbdgroup.com from that time.

About FBD Holdings plc ("FBD")

The Group was established in the 1960s and is one of Ireland's largest property and casualty insurers looking after the insurance needs of farmers, private individuals and business owners.

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:

FBD HOLDINGS PLC

Half Yearly Report

For the Six Months Ended 30 June 2015

INTERIM MANAGEMENT REPORT

OVERVIEW

FBD has strengthened prior year reserves by €88m. The adverse case reserve development experienced in the first half of 2015 has been worse than any previous periods. The Group believe this is driven by a structural change in the claims environment arising from changes in the legal, legislative and judicial framework over the past 18 months. This case reserve development has led FBD to fundamentally re-examine its approach to technical claims provisioning in order to take account of these inflationary claims pressures.

FBD has not experienced any material changes in claim payments at this point as claims can take considerable time to settle. However, due to the challenges in the claims settlement environment, the Group has increased the reserves set aside in order to cover these projected increases in claim payments. The increase in reserves is a combination of an increase in FBD's expected view of future claims payments and an additional provision to protect against the current uncertainties in the claims environment.

Even after the significant remedial pricing action taken to date, there remains an exceptionally difficult trading environment for the Group and the wider insurance market. FBD operates in an increasingly congested and dysfunctional market which has made underwriting losses for the last three years with a market combined operating ratio ("COR") of 109% in 2012 and 2013, worsening to 111% in 2014. Against this backdrop the confluence of low investment returns and claims inflation exacerbates the profitability challenges faced by the Group and the wider market. FBD is taking decisive and immediate action to focus only on those areas where it has significant expertise and market advantage.

Underwriting actions already taken:

• Underlining its objective to prioritise profitability over market share growth, the Group has increased rates by an average 8% in the past twelve months, while policy volumes have decreased by 8.3% in the same period.

• Since the second half of 2013, the Group has taken significant rating action on its car insurance book, with rate increases of 21% implemented in the past twelve months alone. The Group has also introduced stricter underwriting and acceptance criteria. Car insurance volumes have reduced by 21% in the past twelve months.

• The Group has taken significant underwriting and rating action on its business insurance book, with rate increases of over 20% implemented since the start of 2014 and the non-renewal of poor performing business.

Given the magnitude of these reported losses and the on-going difficult claims environment, further rating and underwriting action is required by both FBD and the wider market in order to restore profitability. FBD is committed to this and is exiting any areas where this cannot be achieved. FBD's core business model remains sound. It has a loyal customer base and the relationships, infrastructure and claims paying strength to continue to meet its customers' needs into the future.

Underwriting

Premium Income

FBD is prioritising profitability over volume growth, and while policy volumes have declined by 9.6% in the first half of 2015, this has been offset by average rate increases of 8.6% and an increase in insurable values and upselling of 1%. The net result is that gross written premium levels remained stable at €184.8m. FBD maintains its focus on the insurance needs of its farm and direct business customers. This delivered growth in premium from these customers during the period. Net earned premium was €154.4m, an increase of 4% on 2014 and reflects the earning through of the rate increases implemented throughout 2014 and in 2015 to date.

Claims

Net claims incurred increased to €215.8m (2014: €117.2m). The current year claims charge was €127.8m representing a current year loss ratio of 82.8%. Reserves are set aside for future claims payments. Reserves have two major components: claims estimates and a margin for uncertainty. The strengthening of both prior year claims estimates and an increase in the margin for uncertainty has amounted to €88m, resulting in a total loss ratio of 139.8% for the half year.

Adverse claims development

The adverse claims development pattern, which was first evident in the second half of 2014, has been significantly more pronounced in the first half of 2015. The adverse development arises mainly in liability and motor bodily injury claims, and primarily relates to outstanding claims from accident years 2011 onwards. It arises across all the Group's distribution channels.

It is driven by the following:

• Structural Changes in the Claims Environment

There have been a number of significant changes in the claims environment over the past 18 months. These include a structural change in the judiciary from the introduction of the Court of Appeal in 2014. In 2014 there was also a change in Court jurisdiction limits, the introduction of the recovery benefits assistance scheme and a ruling on the discount rate used in award settlements. In 2015 the Group has seen the proposed introduction of periodic payment orders (PPO's).

• Shift in Settlement Approach

There appears to be a shift in the settlement approach of claimants' solicitors. This may be driven by the uncertainty created by the structural changes already mentioned. This shift in settlement approach has led to a slowdown in the settlement of claims which makes the estimation of technical claims provisions more difficult but will almost certainly lead to higher claims costs ultimately.

The combination of the above factors suggests significant claims inflation is underway. This change in our claims environment has led FBD to increase prior year reserves by €88m. While the Group has yet to experience this level of claims inflation in its payments, the average cost of outstanding claims has now been increased significantly. In the past, the run-off pattern on FBD's book of outstanding claims estimates had been stable. The change in run-off pattern evidenced in the past twelve months has meant that a full review of the methodologies and assumptions used in calculating the actuarial best estimate of technical provisions was necessary. The methodologies and assumptions used in estimating the expected value of reserves have been changed to allow for the additional extra inflation that the Group now expect to see. This change will have the most impact on recent accident years with a lower impact on claims from older years. In addition to increasing the actuarial best estimate reserves, FBD has decided to strengthen the margin for uncertainty set aside in excess of the best estimate reserves. This allows for additional prudence in the event that the claims environment deteriorates further again. In addition, the revised methodologies have been applied to the current year loss assumptions and have the effect of increasing the current year loss ratio by 5.6%. Further rating action will now be required to recover this.

Weather, Claims Frequency and Large claims

There were no severe weather events in the first half of 2015 and claims frequency has stabilised. Large claims (claims greater than €1m) are in line with historic norms.

Expenses

Net expenses increased by 1.7% to €42.1m (2014: €41.4m), while net earned premium increased by 4%. The Group's expense ratio reduced to 27.2% from 27.8%.

General

FBD's current year combined operating ratio for the first half of 2015 was 110% compared to 107% in the first half of 2014. The longer-term investment return was €14.7m (2014: €14.6m). The operating loss before taxation for the Group's underwriting operation amounted to €88.7m (2014: €4.5m).

Investment return

Euro area interest rates reached an all-time low in the first half of 2015 as the European Central Bank embarked on a quantitative easing programme. FBD's actual investment return for 2015 was 1.2% or €5.4m (2014: €12.4m). The sell-off in fixed income in the second quarter reduced returns in the first half. The outlook for investment income remains challenging, as world-wide monetary policy keeps interest rates low.

Financial Services

The Group's financial services operations include premium instalment services and life, pension and investment broking (FBD Financial Solutions) less holding company costs. These generated a solid performance in a tough environment, delivering an operating profit of €1.2m (2014: €1.7m).

Loss before taxation

Group operating loss before taxation was €87.6m (2014 profit of €6.1m). Operating loss is calculated with reference to a longer term rate of investment return. Actual investment return was €9.3m (2014: €2.2m) lower than longer term rate of investment return, reflecting historically low interest rate levels.

Property and Leisure Joint Venture

The Group's share of profit from the property and leisure joint venture was €0.5m, an improvement of €0.4m on 2014. This business is seasonal and the first half is historically slower than the second. Trading performance continues to improve in 2015, driven by growth in occupancy and yield in both Ireland and Spain. The agreement with Taylor Wimpey plc on development land at La Cala Resort in Spain is ahead of plan. 50% of 60 apartments in the first JV being built by Taylor Wimpey in La Cala have sold in the eight months since launch. The Spanish market is showing solid improvement. The joint venture has entered a new JV with Taylor Wimpey at La Cala for 103 additional mixed units.

Earnings per share

Operating loss per share based on longer-term investment return amounted to 221 cent per ordinary share, compared to a profit of 16 cent per ordinary share in the first half of 2014. The diluted earnings per share was 244 cent (2014: 10 cent) per ordinary share.

STATEMENT OF FINANCIAL POSITION

Capital Position

The half year results have seriously impacted the Group's capital position. Ordinary shareholders' funds stand at €177.5m (December 2014: €270.6m restated). Net assets per ordinary share are 512 cent, compared to 786 cent per share (restated) at December 2014. The reduction in shareholders' funds is mainly attributable to the losses in the period of €84.4m, the payment of the final 2014 dividend of €11.8m offset by a decrease in the liability for the Group's retirement benefit obligations of €3.0m after taxation.

The Group's net asset value has benefited by €32m following a change in accounting policy in how the Group provides for its share of the Motor Insurance Bureau of Ireland "MIBI" outstanding claims. This change in accounting policy follows a change in accounting standards applicable to the Group's principal subsidiary, FBD Insurance plc. Previously FBD Insurance plc provided for its market share of the total outstanding claims of MIBI. Under new accounting standards applicable to FBD Insurance plc from 1 January 2015, it may only provide for its share of the following year's MIBI levy. This increased the net asset value per share by 93c.

Solvency

FBD Insurance had a solvency level of 38.4% of net premium earned at 30 June 2015, which represents 197% (2014: 366%) of the Solvency I minimum solvency margin, and a reserving ratio of 270% (2014: 240%).

Investment Allocation

This table shows the assets of the Group.

Investment Background:

The introduction of quantitative easing by the ECB presents challenging investment yield conditions and continuing low interest rates for the Euro area. The divergence in monetary policy between Europe and the US brings market volatility. This divergence when coupled with uneven global growth and elevated geopolitical risks warrants a cautious strategy that minimises volatility in our investment portfolio.

FBD's Investment Allocation

The Group believes it is appropriate at this time to maintain its tactical lower-risk asset allocation and holds 91% of its underwriting assets in cash and short dated bonds at 30 June 2015. This tactical position creates flexibility as conditions change and as investment opportunities present. The interest rate environment and the introduction of Solvency II in 2016 provides an opportunity to optimize our strategic asset allocation and reposition the portfolio to deliver sustainable returns over the medium term. The Group expects to do this over the coming months.

Dividends

As indicated in the interim management statement on 14 May 2015, the Board has decided that no interim dividend will be paid. Given the current results, the Board has also decided that no final dividend will be paid for 2015.

OUTLOOK

Economic indicators point to an improved outlook for Ireland. This will be positive for FBD in the medium term. The Irish insurance market continued to grow in the first half of 2015, as insurers increased rates following the market losses and the increased level of frequency experienced as the economy improves.

Despite this, industry profitability continues to be challenging, and the Group believes that the industry will continue to be loss making for 2015 and 2016, as the market has not increased rates sufficiently to compensate for the significant deterioration in the claims environment.

The first six months of 2015 have been very difficult for the Group. Despite taking the necessary steps to maintain reserving strength, uncertainty surrounding the claims environment remains. The trading environment for FBD and the insurance market generally will remain difficult for the remainder of 2015 and into 2016. The Group's sole focus is on returning the business to profitability.

FBD has a proud track record of profitable business. It has unrivalled relationships with its core customer groups in rural Ireland. FBD will focus its resources primarily on this book of business, ensuring we meet the insurance needs of farmers and direct business customers. FBD will also implement a consumer strategy for motorists and home owners that focusses solely on a single brand. This will deliver sustainable efficiencies and better returns. FBD's business model remains sound, and it has the customers, infrastructure and underwriting experience to return to profitability. 

In line with the above refocus, the Group intends to reduce costs over the coming months. A review of operating expenses will commence immediately. We will target approximately €7m in savings annually, improving our run-rate expense ratio by approximately 2%.

FBD has a 40 year track record of delivering superior returns to shareholders. The nature of insurance is inherently cyclical. Although 2015 has been a very challenging year to date and market conditions remain difficult, the Board is confident that FBD is taking the necessary steps to refocus so that in the future it can again deliver strong returns for investors.

PRINCIPAL RISKS AND UNCERTAINTIES

Under the Transparency (Directive 2004/109/EC) Regulations 2007 the Group is required to give a description of the principal risks and uncertainties it faces.

The Board considers that the risks and uncertainties disclosed in the Annual Report for the year ended 31 December 2014 continue to reflect the principal risks and uncertainties of the Group over the remainder of the financial year. In the 2014 Annual Report, risk was categorised as general insurance risk, capital management risk, operational risk, liquidity risk, market risk, credit risk, concentration risk and macro-economic risk.

Further information on these risks is included in pages 111 to 119 of the 2014 Annual Report, which quantifies the sensitivity of parameters such as loss ratio, equity and property values and exchange and interest rates. A key risk that was described on page 111 of the 2014 Annual Report was the risk to the level of awards and inflation on settling claims. This risk has become more pronounced in the first half of 2015 and significant uncertainty remains. The other risks and uncertainties have not altered and movement in the parameters described above may be experienced in future periods.

The Group has a risk management policy which provides a systematic, effective and efficient way for managing risk in the organisation and ensures it is consistent with the overall business strategy and the risk appetite of the Group.

Risk appetite is a measure of the amount and type of risks the Group is willing to accept or not accept over a defined period of time in the pursuit of its objectives. The Group's risk appetite seeks to encourage measured and appropriate risk taking to ensure that risks are aligned to business strategy and objectives.

The risk appetite in the Group's underwriting subsidiary is driven by an overarching desire to protect its solvency at all times. Through the proactive management of risk, it ensures that it does not have or will not take on an individual risk or combination of risks that could threaten its solvency. This ensures that it has, and will have at all times, sufficient capital to pay its policyholders and all other creditors in full as liabilities fall due.

RELATED PARTY TRANSACTIONS

There were no related party transactions in the half year that have materially affected the financial position or performance of the Group.

AUDIT REVIEW

This half yearly financial report has not been audited or reviewed by the auditors of the Group.

FBD HOLDINGS PLC

Condensed Consolidated Income Statement

For the half year ended 30 June 2015

Restated

FBD HOLDINGS PLC

Condensed Consolidated Statement of Comprehensive Income

For the half year ended 30 June 2015

FBD HOLDINGS PLC

Pro Forma Reconciliation of Consolidated Operating Profit to PROFIT after TaxATION

For the half year ended 30 June 2015

FBD HOLDINGS PLC

Condensed Consolidated Statement of Financial Position

At 30 June 2015

FBD HOLDINGS PLC

Condensed Consolidated Statement of Financial Position (continued)

At 30 June 2015

FBD HOLDINGS PLC

Condensed Consolidated Statement of Cash Flows

For the half year ended 30 June 2015

Restated

FBD HOLDINGS PLC

Condensed Consolidated Statement of Changes in Equity (UNAUDITED)

For the half year ended 30 June 2015

FBD HOLDINGS PLC

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

For the half year ended 30 June 2015

Note 1 Statutory information

The half yearly financial information is considered non-statutory financial statements for the purposes of the Companies Act 2014 and in compliance with section 340(4) of that Act we state that:

• the financial information for the half year to 30 June 2015 has been prepared to meet our obligation to do so under the listing rules of the main securities market of the Irish Stock Exchange and S.I. No. 277 of 2007;

• the financial information for the half year to 30 June 2015 does not constitute the statutory financial statements of the company;

• the statutory financial statements for the financial year ended 31 December 2014 have been annexed to the annual return and delivered to the Registrar;

• the statutory auditors of the company have made a report under section 193 Companies Act 1990; and

• the matters referred to in the statutory auditors' report were unqualified, and did not include a reference to any matters to which the statutory auditors drew attention by way of emphasis without qualifying the report.

This half yearly financial report has not been audited or reviewed by the auditors of the Group.

* The results for the year ended 31 December 2014 were audited prior to the change in accounting policy described innote 2.

Note 2 - Accounting policies

Basis of preparation

The annual financial statements of FBD Holdings plc are prepared in accordance with International Financial Reporting Standards ("IFRSs") as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with IAS 34 'Interim Financial Reporting', as adopted by the European Union.

Going concern

The Directors are satisfied that the Group has sufficient resources to continue in operation for the foreseeable future, a period of not less than twelve months from the date of this report. Accordingly, they continue to adopt the going concern basis in preparing the financial statements.

Consistency of accounting policy

The accounting policies and methods of computation used by the Group to prepare the interim financial statements for the six month period ended 30 June 2015 are the same as those used to prepare the Group Annual Report for the year ended 31 December 2014 except as described below.

The following new and revised Standards and Interpretations have been adopted in these financial statements in the current period:

Amendments to IAS 19: Defined Benefit Plans: Employee Contributions

Annual improvements to IFRSs 2010-2012 Cycle - various standards

Annual improvements to IFRSs 2011-2013 Cycle - various standards

The adoption of these standards has not had any significant impact on the amounts reported in this interim report.

The Group has changed its accounting policy relating to its treatment of the provision relating to the Motor Insurer's Bureau of Ireland, the impact of which is described as follows.

FBD HOLDINGS PLC

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

For the half year ended 30 June 2015

Change in accounting policy

The Group's subsidiaries are adopting FRS 102/103 (new Irish GAAP) effective from 1 January 2015 and have restated 2014 comparatives. One of the main impacts of the change to new Irish GAAP in accounting standards for the Group's principal regulated subsidiary, FBD Insurance plc, is the treatment of the Motor Insurers' Bureau of Ireland "MIBI" provision. Previously, FBD Insurance plc, calculated this provision based on the estimated current market share of the Irish motor insurance market and the current outstanding claims of MIBI.

Under new Irish GAAP and revised market convention, insurance companies writing motor business will provide for their share of the MIBI levy for the following year only, based on their estimated market share in the current year at the balance sheet date. Therefore this change in measurement basis has also been reflected in the Group financial statements. The provision for MIBI levy has been disclosed separately as "other provisions" on the balance sheet.

This change in accounting policy has resulted in the following adjustments to the opening reserves in the Consolidated Statement of Financial Position at 1 January 2014:

This change in accounting policy has resulted in the following adjustments to the December 2014 comparatives within the Group financial statements:

FBD HOLDINGS PLC

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

For the half year ended 30 June 2015

This change in accounting policy has also resulted in the following adjustments to the June 2014 comparatives within the Group financial statements: