FBD Holdings Plc, which insures over 90,000 Irish farmers, delivered its first increase in gross written premiums (GWP) since 2010, up 2% to €351.2m. Despite the increase, the group reported a profit before tax of €51.5m last year, down €800,000 on 2012.

Although policy volume had increased 2.6%, the average rate was marginally lower. However, the second half of the year showed some improvement.

Operating profits were down significantly from €65.4m to €52.7m. This impacted negatively on operating EPS, which was down from 170c in 2012 to 136c this year. The insurer attributes the combined cost of severe weather and a number of large accident and liability claims ahead of norm for the poorer performance.

FBD continued to attract customers, with its market share increasing to its highest point ever of 13.4% in a market that declined by an estimated 4% last year.

Prudent management

The net average cost of accident and liability claims over €1m for the last nine years is €9m per year. The significant rise in claims in 2013 to approximately €20 million was attributed to only 11 claims.

Net claims incurred rose by c.5% to €201m, increasing the loss ratio from 63.8% to 67.9%. Reinsurance has also historically kept FBD’s share of the cost of major weather events below its ‘natural’ market share.

As with all insurers in recent years, investment returns no longer significantly subsidise the underwriting operation. FBD combined operating ratio (COR) was 94.1% despite the large claims experience – below 100% leaves a profit. Group chief executive Andrew Langford said the average for the industry in 2013 was 109%.

Balance sheet metrics strengthened further, with solvency rising to 78.1% compared to 73.8% in the previous results. Return on equity was 17.3%. Net asset value per share increased 14% to 823c.

FBD’s prudent asset allocation policy differs from the industry norm where typically an insurer would hold 90% of its assets in bonds, according to Langford. FBD is positioned to benefit from rising bond yields as it has a low allocation of bonds (corporate 17% and government 16%), thus protecting shareholders and customers from risk of rising yields. With returns on bonds low, the proportion of cash and deposits held by FBD at year end was 53% – mainly held in 15-16 banks. Although the group holds more government bonds at year end, these are typically shorter term bonds. The rate of return on this ‘safe’ book during 2013 was 3.6%. The group further diversified its assets in 2013 and at year-end held 3% or €24m in unit trusts – a form of collective investment constituted under a trust deed.

Shares in FBD have performed exceptionally well over the last number of years, up almost 50% in 52 weeks. Share price is up 4% YTD. However since the announcement of the results shares are down about 4%.

The group announced a total dividend of 49c, up 16% on 2012. FBD is committed to a progressive dividend policy with the latest dividend being a further step towards the 40-50% operating payout ratio target.

Storm Darwin

While FBD budgets for catastrophic weather events, the persistent bad weather will lead to an increase in claims. It’s been over 15 years since the last major wind storm. FBD estimates that Storm Darwin has cost the industry €130m and has affected almost 6,000 of FBD’s farmer customers.

Langford said the company will pay out in the region of €30-40m – significantly higher than its market share due to a higher level of penetration in the affected areas. He also said that wind damage affects rural farms greater than urban households. He continues that 80% of the payout for the storm will be to farmers. Net of reinsurance, FBD estimates the cost to be in the region of €5-10m. This is likely to impact on the 2014 results.

He said FBD’s cost base has been relatively flat even though it continues to invest in the business, adding further customer service and increased technology.

The group expects to outperform the market in 2014 and is guiding full-year 2014 operating EPS of 120c to 130c subject to no exceptional events arising.

Future growth

On future growth, Langford sees the business continuing to focus on its core agri sector. This is evident with more farmer customers than any time in history, continuing to invest in resources and people in this area.

It will drive the broker business as it has a small market share of this sector. Late last year, it launched Clan Insurance to access customers who choose to buy through brokers. It has recently appointed a head of consumer products and the company has invested almost €20m in technology over the last two years.

Langford was clear to point out that “agriculture is not just a segment of FBD, it is part of its DNA”. It will continue to deal face to face with farmers, understanding the business and continue to be customer led.

Financial services

With FBD Financial Solutions being one of the largest retail brokers in the country, the market continues to challenge the life, pension and investment broking business. The division made an operating profit of €6.4m, up from €5.6m in 2012, contributing 12.1% to group operating profit.

Farm and business direct

Farm and business direct performed strongly with more customers and more policies per customer, leading to more farming customers than any time in history. Business insurances written directly continued to reduce.

Consumer

Significant progress was made in the online segment with the two brands – FBD.ie and No Nonsense.ie – with premium income up 36.6% on 2012 levels. Repositioning of the brands aimed at drivers under 30 also helped deliver growth.

Brokers

In 2011 the group sold its brokers division for €8.5m. FBD conducts 9% of its business through brokers. Last year business written was up 30% while 14% of overall new business was attributed to brokers. With 70% of all small and medium business insurance conducted through brokers, this is an area FBD wants to grow, but Langford insisted it would be at a steady level.

Joint ventures

During the year, remaining units in the LaCala development in Spain were sold. Trading performance improved slightly with growth in occupancy and rates in Ireland. The group’s share of the JVs profits was €1.3m, a significant improvement on the €1.7m loss of 2012.

COMMENT

FBD, established over 40 years ago, has grown organically at a sustainable and profitable level over that time. With its prudent management, strong track record and low penetration of the broker market, opportunity awaits for the 100% Irish focused insurer. The recent economic downturn, which has seen less traffic and fewer accident claims, has ironically helped the company boost its profits. However, expected growth in the economy for 2014 will lead to increased activity on our roads and businesses which may increase claims. This will impact on financial performance over 2014 and 2015 as rates struggle to creep up because of the fragmented Irish industry with a large number of players (seven control 80%) coupled with market contraction making for very aggressive pricing policies. The group expects to outperform the market in 2014.