It has been a baptism of fire for the straight-talking Fiona Muldoon since she took over the reins of FBD last October. The task of stabilising the insurer was helped by her securing a €70m cash injection from Canadian investment fund Fairfax and she is now on a mission of turning around the insurer. This won’t be easy in a sector that has completely commoditised its product offering over the last few years as everyone chased market share, says Muldoon.

Despite recording a €3.5m pre-tax loss for the first six months this year, Muldoon is up front on the numbers. She says: “While it is not where we want to be, the numbers have stabilised and any turnaround takes time.”

She reaffirms that the business will make a small profit in the last quarter this year and is forecasting a single-digit million full-year loss for 2016 and a single-digit million full-year profit for 2017. It will not be until 2018, once the full effect of increased premiums and risk selection kicks in, that the business will be back to making double-digit million profits, according to Muldoon.

The former financial regulator is determined to turn the company around by using factors within her control. She has already strengthened the capital position, scrapped the No Nonsense brand, divested the company’s stake in the hotels and property business, overhauled the legacy staff pension scheme, halved the business it writes through brokers and shaved €3m to date off running costs, mainly through a voluntary redundancy scheme.

But industry headwinds will be a challenge outside her control. The claims environment continues to be uncertain, with significant volatility in award levels, high legal costs and continued inflationary pressure driving up the cost of claims.

Muldoon has repeatedly said she is committed to serving FBD’s core Irish farmer customer base. But for farmers, the affordability of insurance is becoming an issue.

She believes that while rate increases will help to turn around the insurer, risk selection will be more important to drive financial performance. In the past, she says, FBD selected business with a risk level greater than it would like.

Stable book

FBD had a stable book based on its core farming customers. However, when it started to grow, expanding its broker business, it assumed this channel would behave similarly. It did not, and the company was pricing and selecting as if it would.

The broker business had grown to a level where it accounted for 10% of the business. Since this time last year, it has halved its broker business.

Muldoon says the focus is to build on the direct relationship with customers through the group’s extensive branch network. “We will strengthen the branch network by offering more products and get our people back out on farms.”

FBD is unique, with 33 branches around the country. Despite this, Muldoon says FBD does not have a high-cost structure. “Our costs are the lowest in the industry, and are two points lower than our nearest competitor,” according to Muldoon. She credits the branch network, as brokers must also receive a commission. She confirms that no office will be closed once it pays for itself.

But will it be farmers carrying the can, helping return FBD to profitability by paying higher premiums?

“What farmers are paying today is to cover the cost of claims today and it is not to bolster reserves or pay for prior claims,” says Muldoon.

Rate increases

On average, FBD has increased its rates by 10% so far this year, and they are up 27% since 2014. But while motor rates are up almost 19% this year, its farm insurance product has increased only around 5% on average, according to Muldoon.

FBD is not alone in increasing rates. According to the Central Statistics Office, the cost of motor insurance in Ireland has increased 35% over the past 12 months. She said there is no escaping that the cost of claims has risen and there needs to be structural reform in the sector. She adds that FBD also needs to be profitable to have stability.

Muldoon said FBD postponed further increases of its farm insurance this year due to the challenging environment faced by farmers. Farmer loyalty has served FBD well over the years, and we cannot push rates at a time when farmers are under pressure.”

On the future, she says: “FBD is now once again focused on its core farming business and we can expand from there once stabilised. In reality, nobody thinks they will have a claim when buying insurance. But where an accident happens, FBD simply has better cover.”

Board and dividends

While paying dividends is a board decision, Muldoon says a dividend is highly unlikely until the company is back making a profit. This means this decision may not be until April 2018 at the earliest and all going to plan.

The board is going through restructuring also, where effectively two boards (FBD Holdings and FBD Insurance) will become one. Over the year the board has been overhauled, with strengthened financial and insurance expertise around the table. It is understood that when the current chair, Michael Berkery, steps down next April, the chair will be filled by a member who currently sits on the board.

FBD also has a long-standing agreement with IFA where it invites the president to sit on the board. The board and CEO would like to see that situation continue as they believe it is important to have farmer leadership at board level, with knowledge of issues on Irish agriculture.

Comment

Even though FBD has reduced its losses from the €96m recorded in the first six months last year, it still recorded a loss of €1.6m from its core underwriting business this year. Despite the losses, Muldoon remains confident that FBD is on track to return to profit. This remains to be seen, as the nature of insurance is that storms and accidents happen and when they do, claims must be paid.

For example, in 2014, when Storm Darwin rocked the country, FBD was one of the worst hit due to its large rural and farmer customer base. It paid out €44m in claims which cost the insurer almost €12m net of reinsurance.

Industry problems

This is sector with some real problems. Insurers are going bust in a market that is struggling. The reality is that a single large event could wipe out a single year’s profits. Therefore, FBD needs to return to profit levels it enjoyed four or five years ago and it may take industry regulation to help it get there.

In an era of low investment returns, it will come down to further increases in the price of insurance paid by customers of FBD to allow FBD to fully restore profitability for its shareholders. This may be a bitter pill for farmers to swallow. Because over the last two years as they have seen the cost of their insurance rise it has been coupled to a 50% fall in the value of their investment. But with a more streamlined business under the leadership of Muldoon, the share price rout may be over.