FBD has released an interim management statement for the third quarter of the financial year forecasting an operating loss of zero to 10 cents per share for 2014.

This is a dramatic turnaround for FBD, which had started the year in a positive position with an EPS guidance between 120 and 130 cents.

This is the second profit warning issued by FBD in six months and highlights the continuing downward trend since 2012. In 2012, the group made a €65m operating profit. The following year, operating profit had fallen to €52.7m. At the time, the company blamed adverse weather in 2013 and a small number of very large accident and liability claims.

On announcing the 2013 result, FBD said it expected a 20% decrease in operating profit for 2014, indicating a figure in the region of €41-€45m. The lower forecast was attributed to growth in the Irish economy which would lead to increased activity on the roads and a higher number of claims.

First profit warning

In June this year, FBD revised this earnings guidance to 70-80 cents per share (€24-€27m operating profit) to take account of the combined impact of the increase in claims frequency and the weather-related claims.

This week’s surprising announcement, where the group is now projecting at best to break even or at worst to record an operating loss of €3.5m, will come as a blow to shareholders. Shareholders will be wondering where the profit forecast of €50m has disappeared.

There have been a number of factors contributing to the decline in earnings forecast. The first impact on profitability was in the first quarter of the year as storms, including Darwin, had a cost net of reinsurance of €10m.

The second contributing factor was an increase in large claims costs (over €1m net of reinsurance) due to a small number of very large accident and liability claims. These claims cost €7m more than expected in the four months to October.

The third factor was that, in the last four months, prior year medium-sized injury claims (€0.2-€1m net of reinsurance) have developed due to new information. This related to accidents that occurred in 2011 and 2012. The combined cost of these claims and maintenance of the reserve level resulted in a charge of €13m on the P+L. FBD has also allocated a €10m cushion to allow for further volatility and unexpected events until the end of the year.

The board of FBD has reiterated its commitment to a progressive dividend policy, which remains unchanged. At interim stage, the board increased the dividend by 8%.

This week’s announcement is a further blow to FBD shareholders who have seen the value of their investment decrease by almost one-third since the start of the year.

The group’s financial position remains robust and has more than adequate funds set aside to pay out claims.

This demonstrates how unpredictable and cyclical the insurance market can be. While FBD is taking the financial impact of this development right now, it must be questioned whether this trend is systemic and will recur in future periods.

Because the board has reiterated its dividend policy, it would appear that it is confident in the business model and is prioritising long-term financial strength over short-term profitability.