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

FBD HOLDINGS PLC

12 August 2016

FBD HOLDINGS PLC

Half Yearly Report

For the six months ended 30 June 2016

KEY HIGHLIGHTS

· Gross Written Premium of €181m down 2%, largely driven by a reduction in broker business

· Improved risk selection and price adequacy is driving a lower current year loss ratio

· No further prior year loss development

· Combined Operating Ratio ("COR") of 101%

· €3.7m loss before tax in first half of 2016

· Strong further progress with our turnaround setting FBD firmly on track for full year profitability in 2017:

o Senior management appointments, including new Chief Financial Officer and Chief Commercial Officer

o Insurance and Holdings Boards streamlined for greater oversight and control

o A number of new Board appointments

o Strong focus on Irish farm and small business sectors with a complementary single brand consumer strategy

o Further pricing and underwriting actions taken

o Launch of new IT policy administration system in June and further roll-out well underway

· Gross written premium down €4m with a €10m reduction in business written through brokers

· Average premium rate increases of 11%, offset by an 7% decline in policy volume from direct operations

· COR of 101% compared to a reported 167% for the same period last year

· Net loss before tax of €3.7m from continued and discontinued operations

· Annualised total investment return of 1.9%

· Capital levels within target range of 110%-130% of Solvency Capital Requirement ("SCR")

Fiona Muldoon, Group Chief Executive, said:

"These results demonstrate that we are returning the business to profitability. There is increasing stability in our reserves with no further prior year development recorded since the strengthening that occurred one year ago. As expected, there was a net loss of €3.7m in the first half of 2016. We are firmly on track to deliver full year profitability in 2017. We remain focussed on our customer base in the Irish farm and small business sectors, backed up by a single brand consumer strategy. We will continue to serve that market in difficult trading circumstances.

We believe that structural reforms are necessary to tackle injury claims inflation and address the impact claims costs are having on the affordability of insurance for farmers, businesses and other consumers. The re-pricing of certain risk classes will need to continue for a further period to allow FBD to fully restore profitability for its shareholders. While FBD notes the various government and industry initiatives underway to identify the cause of claims and cost inflation, we believe there must be substantial reform to tackle these issues. In the absence of such reform we believe Irish insurance customers will bear the cost of much higher premiums than those seen in other countries."

A presentation will be made to analysts at 9am 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 33 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

Strong progress has been made in the first half of 2016, The turnaround strategy puts the Group on track to restore profitability in 2017. The claims environment continues to be difficult and the re-pricing of certain risk classes will need to continue for a further period. The uncertainty in the claims environment requires a robust response from all stakeholders in the insurance market. FBD notes the various government and industry initiatives that are being undertaken to get to the root cause of claims and cost inflation. FBD continues to implement all necessary steps under its control to return the business to profitability.

The Group recorded a loss before tax from continuing and discontinued operations of €3.7m to June 2016 (2015: €96.4m).

UNDERWRITING

Premium income

The Group continues to focus on its core farm and small business customers, along with a single brand consumer strategy. It continues to reduce its exposure to business written through brokers.

Overall, gross written premium has declined by €4.0m to €180.8m (2015: €184.8m), with increased premium from direct operations of €6.3m (+3.9%) offset by a €10.3m (-47.4%) reduction in business written through brokers. Excluding broker business, average rates across the book are up 10.6%, while policy volume has declined by 6.7%. However, certain classes of insurance have seen more substantial increases year on year (Motor +18.7%). The Group began to raise rates in 2014 and the cumulative effect of increases across all classes of business since that date is 27%.

Claims

Net claims incurred amounted to €114.8m (2015: €215.8m). This includes €5.0m (2015: €4.6m) relating to the Group's MIBI levy obligation. In 2016 the movement on prior year reserves was negligible.

The comparable claims incurred figure for 2015 includes a charge of €88m for strengthening prior year claims reserves and increasing the margin for uncertainty.

Claims Environment

The claims environment continues to be challenging, with significant uncertainty still evident. There is significant volatility in relation to award levels and continued inflationary pressure on the cost of claims.

However, a number of unexpectedly large High Court awards were reduced by the Court of Appeal in the period. While these were not FBD cases, it is hoped they will contribute to the stabilisation of the claims settlement environment. The Court of Appeal has set out principles and guidelines to assess damages to ensure they are proportionate to the injuries, and the existing cap on general damages of €450,000. Recent High Court judgments have referenced these guidelines, indicating a more moderate view on award levels is being adopted by some judges.

There still remain a number of factors that are increasing the cost of claims. These include the following:

Increase in Court Awards

The change in Circuit Court jurisdiction from €38k to €60k has heightened claimants' expectations and had a negative retrospective impact on existing claims.

Legal Costs

Despite the enactment of the Legal Services Regulation Act the Office of the Legal Cost Adjudicator is not yet established and there is still no publication of the adjudication of assessment of legal costs. As a result, the process of agreeing plantiffs' legal costs following settlements is very protracted and contentious, leading to higher costs for both sides.

Collapse of Setanta Insurance

The Supreme Court has recently granted leave to appeal the MIBI/Setanta decision of the Court of Appeal regarding responsibility for the settlement of claims arising out of the failed insurer, and this is likely to be heard towards the end of the year. FBD notes the Departments of Finance and Transport's initiatives to tackle the cost of claims and provide clarity around who pays when an insurer collapses. FBD believes that the Insurance Compensation Fund is the correct vehicle for the payment of claims as a result of the insolvency of an insurer. Transferring any liability onto the MIBI will only serve to increase the cost of premiums for all policyholders and to increase the solvency requirements of insurers, (which is also ultimately passed on to insurance customers). The recent failure of Enterprise, which was regulated in Gibraltar, underpins the urgent need to address this issue.

Uncertainties in the Claims Environment

There are still a number of uncertainties prevalent in the claims environment, most notably the updating of the book of quantum by the Injuries Board and the expected introduction of periodic payment orders (PPOs). We believe structural reform in the claims environment is required to tackle injury claims inflation and address the impact claims costs are having on the affordability of insurance. In the absence of reform , all insurance customers will continue to pay higher premiums.

Potential Reforms to Reduce the Cost of Claims

A less confrontational approach to personal injury litigation is required, for example court-appointed experts (rather than competing experts appointed by both sides) would lower costs. Equally mediation and pre-action protocols could be used to speed up cases with lower costs and an earlier resolution for both parties.

Measures need to be taken to introduce a more effective and objective method of assessing claims, particularly whiplash, and benchmarking their value against other countries.

The Injuries Board legislation needs to be reformed to strengthen the Boards powers to compel co-operation and ensure that claimants receive their compensation faster and without unnecessary litigation and cost.

A strong internal vigilance is continuously required to identify and deal with claims fraud and exaggeration. FBD is committed to improving its processes in this regard.

Claims Settlement

The pace of claims settlement, which had slowed significantly from 2014 into 2015, has increased somewhat in the past nine months, though it remains below historic norms. In contrast to the first half of 2015, settlement activity for medium size claims has increased, following the removal of the uncertainty around the discount rate applying to catastrophic injury awards.

Weather, Claims Frequency and Large Claims

Weather in the first half of 2016 was relatively benign and there were no events of note.

Motor injury frequency continued to decline as the underwriting and risk selection actions taken by the Group come into effect.

Large claims (greater than €1.0m) were higher than historic averages in the first half of 2016. The net cost of such claims for 2016 was €6.4m (2015: €4.0m).

Expenses

The Group's expense ratio was 25.5% (2015: 27.3%). Net expenses reduced by €3.3m to €38.8m (2015: €42.1m) as the benefit of the voluntary redundancy programme launched in the second half of 2015 starts to emerge.

The rollout of the Group's new policy administration system commenced at the end of June 2016. Depreciation of the system will commence in the second half of 2016, and will be approximately €3.0m in the second half of 2016 (€6.0m in a full year).

General

FBD's combined operating ratio was 101.0%, leading to an underwriting loss of €1.6m (2015: €103.5m).

Investment Return

FBD's total investment return for the first six months of 2016 was an annualised 1.92% (2015: 1.1%), with 0.06% (2015: 1.2%) recognised in the income statement and 1.86% (2015: -0.1%) recognised in the statement of other comprehensive income. The decision by the citizens of the UK to leave the EU led to a sharp increase in volatility in June. FBD's low risk allocation protected its investment assets from this volatility. In the first half the portfolio saw strong returns as it benefited from the decision in 2015 to increase the allocation to corporate bonds.

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 a profit of €0.5m (before restructuring charges) (2015: €1.1m).

In 2015 the Group carried out a review of FBD Financial Solutions and concluded that there was further opportunity for FBD in the life and pensions area. However, the Group identified a need to transform the operating model to generate greater long term value. Earlier this year FBD Financial Solutions entered into a preferred provider arrangement with New Ireland, one of Ireland's largest life companies. This arrangement enables FBD to provide a customer focussed life and pensions advisory service to customers, reduce expenses and make the business more profitable. The life and pensions transformation project is on target and is expected to generate a profit from 2017 onwards. 

On 23 May 2016 FBD divested its 70% shareholding in Passage East Ferry Company for a total consideration of €2.7m, realising a profit on disposal of €1.9m. The Passage East Ferry Company was a non-core asset, and the proceeds realised will be used for general corporate purposes.

Loss per share

The diluted loss per share was 9 cent per ordinary share, compared to a loss of 243 cent per ordinary share in 2015.

STATEMENT OF FINANCIAL POSITION

Capital position

Ordinary shareholders' funds at 30 June 2016 amounted to €210.5m (December 2015: €215.9m) The reduction in shareholders' funds is mainly attributable to the following:

· Losses in the period of €3.1m

· The increase in the defined benefit pension scheme obligation of €10.8m after tax driven mainly by a 1% reduction in the discount rate, recognised in the statement of other comprehensive income. The action taken by the Group in 2015 to restructure and de-risk its defined benefit scheme limited the impact of the decrease in the discount rate. Prior to the restructuring of the scheme, the impact of a 1% reduction in the discount rate would have been significantly more material

· Mark to market gains on the Group's Available for Sale investments of €8.0m after tax recognised in the statement of other comprehensive income

· Share based payments of €0.4m.

Net assets per ordinary share are 607 cent, compared to 623 cent per share at December 2015.

Solvency

Solvency II became effective from 1 January 2016. The Group's economic capital is within its target range of 110-130% of SCR.

Investment Allocation

This table shows the assets of the Group.

Investment Background

ECB led quantitative easing continues to drive yields and investment returns lower. The uncertainty created by "Brexit" and rising political risk globally exacerbates the low rate dynamics prevalent in investment markets. The continuing low interest rates in the Eurozone present challenging conditions to generating positive returns over the medium term. These structural issues, in tandem with high valuations for risk assets underpins our low allocation to such assets. Uncertainty about the outlook for global growth and elevated political risks, justifies our cautious strategy.

FBD's Investment Allocation

During the first half FBD further increased its allocation to corporate bonds and reduced exposure to term deposits.

OUTLOOK

From an economic perspective, the recent "Brexit" decision introduces business and trading uncertainty for all indigenous Irish businesses, including FBD and our core customers in farming and other small businesses. While the ultimate outcome of this historic vote is difficult to quantify at this stage, it may have negative effects for business and business confidence in Ireland, particularly in the medium term. FBD is Irish and conducts all its business in Ireland, with Irish consumers and Irish businesses. FBD will not therefore be directly materially affected in the near term by currency exposures or trade flows.

Despite rate hardening, industry profitability continues to be challenging, and the Group believes that the industry may continue to be loss making for 2016.

The Group will continue to simplify its strategy. FBD will dedicate its resources primarily to its direct farm, small business and consumer customers, and will concentrate on those markets where it has developed a significant competitive advantage.

The Group is committed to taking whatever action is required to return the business to profitability. The Group intends to maintain underwriting discipline and to deliver sustainable shareholder value through growth in book value.

The Group believes substantial reform is necessary to tackle claims inflation and the cost of claims for the benefit of all insurance users. In the absence of reform these costs are passed onto insurance customers through higher premiums.

The Group continues to target a sub-100% combined operating ratio by Q4 2016 (excluding catastrophic weather events), and a full year's underwriting profitability in 2017.

FBD HOLDINGS PLC

Condensed Consolidated Income Statement

For the half year ended 30 June 2016

FBD HOLDINGS PLC

Condensed Consolidated Statement of Comprehensive Income

For the half year ended 30 June 2016

FBD HOLDINGS PLC

Condensed Consolidated Statement of Financial Position

At 30 June 2016

FBD HOLDINGS PLC

Condensed Consolidated Statement of Financial Position (continued)

At 30 June 2016

FBD HOLDINGS PLC

Condensed Consolidated Statement of Cash Flows

For the half year ended 30 June 2016

FBD HOLDINGS PLC

Condensed Consolidated Statement of Changes in Equity (UNAUDITED)

For the half year ended 30 June 2016

FBD HOLDINGS PLC

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

For the half year ended 30 June 2016

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 2016 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 2016 does not constitute the statutory financial statements of the company;

• the statutory financial statements for the financial year ended 31 December 2015 have been annexed to the annual return and delivered to the Registrar;

• the statutory auditors of the company have made a report under section 391 Companies Act 2014; 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 but has been reviewed by the auditors of the Company.

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 a period of not less than twelve months from the date of this report. Accordingly, they continue to adopt the going concern basis of accounting in preparing the condensed 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 2016 are the same as those used to prepare the Group Annual Report for the year ended 31 December 2015 except as described below.

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

· Annual Improvements 2012-2014 Cycle

· Clarification of Acceptable Methods of Depreciation & Amortisation (Amendments to IAS 16 and IAS 41)

· Disclosure Initiative (Amendments to IAS 1)

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

Critical accounting estimates and judgements in applying accounting policies.

The critical accounting estimates and judgements used by the Group in applying accounting policies are the same as those used to prepare the Group Annual Financial Statements for the year ended 31 December 2015. While there have been some changes in estimates of amounts in the current financial period these changes do not have a significant impact on the results for the period.

FBD HOLDINGS PLC

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

For the half year ended 30 June 2016

Risks and uncertainties

The principa risks and uncertainties faced by the Group are outlined on pages 21-23 of the Group's Annual Financial Statements for the year ended 31 December 2015 and remain unchanged.

Reclassification

The comparative information for discontinued operations has been reclassified to result for the period from discontinued operations within the condensed consolidated income statement.

Note 3 - Segmental information

(a) Operating segments

The principal activities of the Group are underwriting of general insurance business and financial services. For management purposes, the Group is organised in two operating segments - underwriting and financial services. These two segments are the basis upon which information is reported to the chief operating decision maker, the Group Chief Executive, for the purpose of resource allocation and assessment of segmental performance. Discrete financial information is prepared and reviewed on a regular basis for these two segments.

The following is an analysis of the Group's revenue and results from continuing operations by reportable segments:

FBD HOLDINGS PLC

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

For the half year ended 30 June 2016

The accounting policies of the reportable segments are the same as the Group accounting policies. Segment profit represents the profit earned by each segment. Central administration costs and Directors' salaries are allocated based on actual activity. Restructuring costs and income taxation are direct costs of each segment. Segment profit is the measure reported to the chief operating decision maker, the Group Chief Executive, for the purposes of resource allocation and assessment of segmental reporting. There has been no material change to the assets by reportable segment from the disclosure in the 2015 Annual Report.

(b) Geographical segments

The Group's operations are located in Ireland.

 Note 4 - Underwriting result

The Group's half yearly results are not subject to any significant impact arising from the seasonality of operations.

FBD HOLDINGS PLC

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

For the half year ended 30 June 2016

Note 5 - Discontinued operations

On 23 May 2016 the Group disposed of its 70% interest in the Passage East Ferry Company Limited. Total consideration received for the disposal of the 70% interest was €2,662,800. A profit on disposal of €1,914,000 has been recorded during the half year ended 30 June 2016. In addition a loss of €263,000 for the period up to the date of disposal, including €79,000 attributable to non-controlling interests, has been recorded in the half year ended 30 June 2016.

On 24 August 2015, the Group announced it had entered a conditional agreement for the divestment of its stake in its joint venture, FBD Property Leisure Ltd, through a sale of the Group's entire shareholding to Farm Business Developments plc, the other shareholder in FBD Property & Leisure Ltd, and the redemption of all of its loan notes in FBD Property & Leisure Ltd. The sale was approved by shareholders on 23 October 2015. Total consideration received for the sale of the joint venture was €48,500,000. Full details of the loss on disposal and the Group's share of the joint ventures profit up to date of disposal are available in Note 7 (d) of the Group Annual Report for the year ended 31 December 2015.

Note 6 - Dividends

FBD HOLDINGS PLC

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

For the half year ended 30 June 2016

Note 7 - Ordinary share capital