FBD’s eye-popping profit upgrade marred by claims of greed

As corporate turnarounds go, none has been as spectacular on the Irish stock market in the past five years as that of insurer FBD Holdings.

The company's shares have jumped about 80 per cent since Fiona Muldoon took over as chief executive in the midst of a crisis for the company and the wider Irish general insurance industry in 2015. The group would post a record €85.5 million pretax loss that year, following a series of profit warnings.

FBD put out an alert of another kind on Thursday, saying its 2019 figures were set to be “significantly ahead of expectations”, with pretax profits of least €100 million. That’s double the amount for 2018.

It was driven by the fact that the insurer was able to release money previously set aside to cover claims, bask in what it called “exceptionally benign weather” throughout the year, and as its investment pot delivered better-than-expected returns.

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Analysts reckon that the group is preparing – based on clues in the trading update – to pay a dividend of €1 per share, resulting in an eye-watering payout yield of 10 per cent. By comparison, the wider Irish stock market is yielding less than 2 per cent and investors looking to put money into the Government’s benchmark 10-year bonds, for example, face negative yields.

With Muldoon, a former top Central Bank regulator, planning to step down this year, an announcement like this would ordinarily be a mic-drop moment – guaranteeing a slew of business awards and State board position offers.

‘Untold damage’

Instead, the Alliance for Insurance Reform, a lobby group for businesses that have seen insurance premiums spiral in recent times, was quick to call out FBD’s profits as an example of “the untrammelled greed” of insurance companies and lawyers “causing untold damage to whole sectors of Irish society”.

"This trading update from FBD only confirms what report after report have already confirmed – that motorists, small businesses and voluntary groups are being ripped off by insurers and lawyers," said Peter Boland, one of the organisation's directors.

Sinn Féin TD Pearse Doherty, meanwhile, took a moment out from door-to-door campaigning ahead of the general election to rage against FBD's "staggering" profits as businesses, motorists and farmers are "being fleeced" by the industry. "Time to end the insurance rip-off," he signed off.

It follows on from the Central Bank publishing its first comprehensive motor insurance report in December, which showed that between 2009 and 2018 the average premium rose by 42 per cent to €706, while the average cost of claims per policy declined by 2.5 per cent to €426 .

Behind the two headline-grabbing Central Bank data points and the latest example of so-called insurance super profits is an industry that has been shockingly incapable of pricing risk.

Insurance is a cyclical game but few countries have the peaks and troughs that we see in Ireland.

Quinn Insurance’s spectacular implosion in 2010, after leading industry premiums downwards to a dangerously low level, resulted in its administrators calling on the Insurance Compensation Fund for €1.13 billion to meet claims and a 2 per cent levy being introduced in 2012 on non-life policies.

RSA Insurance Ireland ended up relying on its UK parent for a €500 million bailout between 2013 and 2016.

One of Muldoon's first tasks in 2015 at FBD, which was traditionally at the more conservative end of the spectrum, was to secure a €70 million rescue investment for the business from Canadian group Fairfax Financial.

Restructuring

Her restructuring plan involved the sale of property investments, scaling back on the use of insurance brokers, the closure of the company’s defined-benefit pension plan to future accrual, and – like the rest of the industry – a series of premium increases.

Motor premiums soared by about 70 per cent over three years to late 2016, as insurers desperately sought to return to writing business at a profit, according to Central Statistics Office data. They've overshot, as FBD's figures indicate.

And while motor premiums have subsequently fallen back by more than 25 per cent, employer liability and public liability coverage costs have soared, putting massive pressure on many businesses around the country.

There are stories every other week of threats to whole sectors – from creches to cafes – facing closure due to coverage hikes or some niche insurer pulling out of the market.

It’s clear that mainstream insurers are seeking to claw back overall losses between 2013 and 2016 and are using motor profits to cross-subsidise loss-making employer and public liability lines.

Reserves

Much of FBD’s profits in recent years have been down to the company being able to free up tens of millions of euro of reserves that had previously been set aside to cover expected claims costs. In fairness, the industry went through a particularly uncertain period in assessing payout costs as court awards spiralled and regulators put pressure on the sector to shore up their finances.

Benign weather and reserve releases will almost certainly lead to pressure for overall premium reductions across general insurers.

But that mustn’t take away from the wider reforms that are needed to make the Irish industry less volatile.

Fianna Fáil’s election campaign pledge to increase penalties for fraudulent claims and Fine Gael’s commitment to extend the transparency of the claims database to cover public and employer liability insurance, as well as making perjury a statutory offence, will help at the margins.

But in a country where whiplash awards are more than four times the level in the UK, the new Judicial Council, which met for the first time on Friday, must move quickly to produce new guidelines on personal injury awards – and help stamp out the boom-to-bust nature of Ireland's insurance industry.