FBD plunges 17% as it issues profit warning

Insurance group FBD is forecasting an operating loss for 2014 on the back of a claims environment that has become “far more challenging than expected”.

In an interim mangement statement released this morning, the group said that its profitability has been impacted by severe weather, an increase in frequency associated with economic growth, poor large claims experience and adverse development of prior year injury claims.

“However, the growth in economic activity will have a very positive effect on FBD in the medium term, particularly given the group’s track record of outperforming the market. While the adverse events have had a short term impact on profitability in 2014 and part of 2015, FBD has taken appropriate rating and underwriting actions to date, and continues to monitor trends to ensure that risks are adequately priced”.

Despite a growth in the overall insurance market inthe first nine months of the year, the first since 2003 as the industry began to benefit from recent growth in economic activity and hardening car insurance rates, a challenging claims environment hit FBD in the third quarter of this year.

While gross premium written was up 4.1 per cent in the year to October, the insurer reported a high level of personal accident claims in Q3, which cost € 7m more than expected in the four months to October. In addition, FBD was also affected by accidents that occurred in 2011 and 2012 due to factors such as the deterioration in claimants’ medical conditions or an increase in the probability of liability.

FBD said there is no evidence to suggest that this will recur infuture periods, but it has updated its reserving and rating models and taken a charge to current year earnings to ensure that a consistent level of prudence is maintained in claims reserves.

The combined cost of the adverse development and maintenance of the reserve level results in a charge of € 13m.

With respect to the group’s financial services businesses, FBD said that they are performing “broadly in line with expectation”.

“The trading performance of the property and leisure joint venture is ahead of 2013, with strong operating results, particularly in Ireland”.

Looking ahead, FBD said it is “well positioned to outperform the market and deliver strong returns for shareholders”and it reiterated its dividend policy. However, the insurer noted that “given the unprecedented volatility in claims costs in recent months, the group is reducing the forecast result for the final quarter of the year by € 10m”.

As a result, FBD has now cuts its forecast for full year 2014 and is predicting operating loss per share of zero to ten cent, excluding any exceptional events that may arise.

Responding to the announcement Davy Stockbrokers said that, “given this unprecedented level of claims volatility and a complete lack of visibility” it is revising its rating of the stock from ‘neutral’ to ’underperform’.