FBD Holdings plc (EG7) Earnings Call Transcript & Summary

Good morning, everybody. We will kick off, and welcome to the FBD Holdings plc Full Year Results Call for 2019. I am Fiona Muldoon, the Chief Executive Officer, and I am here with John O'Grady, our Chief Financial Officer. I will take you through our presentation and just if you would like to turn to Page 3. Here are the highlights of our full year results are we have a full year profit of EUR 112 million before tax. It is an unusually strong year for the company. We have strong underlying profitability and we are very happy with the outturn. Our combined operating ratio is 72.3%. This represents a current share combined operating ratio of 84% and some EUR 40 million in prior year reserve releases, and that compares to the year-ago reserve releases of EUR 29 million and the year ago combined operating ratio of 90%. Last year of 2018, of course, did include storm Emma as well and there is remarkably little weather in the 2019 results. Our book value now stands at EUR 10.68 and our return on equity for the year is a very strong 30% and a very strong capital position also of 192% after the dividend of per EUR 1 per share. And our premium has come down by about EUR 1.5 million. We see strong competition in all customer segments, new entrants in the farm segment, both SME and consumer also strongly contested. We have had some pricing pressures as a result of that. We are -- satisfactory retention of existing customers and our new business levels are up 13%. Development since we last talked, I suppose, we have improved the Farm Multi-Peril product set and we have increased Public Liability up to EUR 6.5 million and new environmental pollution cover, both offered as standard, which is a first for Ireland and represents the best products available in the Irish market for our farmers. We have a new small business product. We're having ongoing good success with shops, pubs and restaurants, that is a very important sector and customer segment for us, the SME sector. And we believe we're first, we're not certain, but we believe we are first in the market with an end-to-end digital journey for motor customers. That means that you can take a picture of your new claims discount and upload it and sign on your phone. So you can go the whole way through without any paper or indeed any human interaction. And that the last piece is the mailing out of the physical disk, which is required by law. So we believe we're the first to get there, but we stand to be corrected. And our partnership with An Post, which we have talked about before, that is performing well for us. We still see it as a key avenue for our growth. And we've added a new partnership with a broker called TaxiFair, whereby we will be covering Irish taxi drivers as well, who are also in a very competitive market. So I mean, a very strong year. A few things coming together like [ process ]. So an exceptionally quiet year for weather, a rebound in the investment market and strong prior year claims development. But important to remember that the main driver is the strong underlying profitability of the book. And probably what is different is that everything came together in 2019 in terms of the 3 other ratios mentioned on that page. So I will pass you over to John, who will take you through the P&L in a bit more detail.

Thanks, Fiona. So just bring you on to Slide 6. So the full year results and a bit more of the key stats here. So what I would call out here is the current year combined operating ratio, 84.1%. And we have some breakdown of that in a second in terms of how that is broken down compared to the overall number of 72.3%. With earnings per share of EUR 2.81 against EUR 1.22 in the previous year. And the return on equity, 30%, which is twice that of the 15% in 2018. We do break out the loss ratio and the expense ratio. As you can see there, the expense ratio has gone up by 1% from 24.9% to 25.9%. We believe that's still very competitive. The reason -- the main reason really for the increase, we've seen some salary inflation, and also in terms of some extra commission costs, which the new Post Insurance partnership. But still a very competitive number. The total investment return, a very big rebound here, 2.7%, and all asset classes contributing to that. 1.7% is coming through the income statement reflecting the risk asset portfolio doing very well. And the other comprehensive income, representing a 1% improvement, a 1% return, and that's reflective of the decrease in bond yield, both sovereign and corporates that occurred during 2019. Just a bit more color on the income statement. What this slide shows is the net claims incurred, down EUR 34 million compared to the previous year, so a very big drop. Prior year development, the increase in that over '18 is part of that, but also the absence of any significant weather and very good underwriting performance overall. The other features here, you can see the investment income very strong compared to a very low EUR 2.5 million in 2018. And other features to note today, the finance costs, substantially down. That's on our new EUR 50 million bonds, not new now, but taken in late 2018. And that's EUR 50 million at 5% coupon, where previously we had the convertible bond, which was EUR 70 million at 7%. So that's helping the P&L. And what we don't have this year, if you remember, we had an exceptional loss in 2018 on the purchase and cancellation of the convertible debt and that obviously doesn't recur. So then analyzing the combined operating ratio. So if I look at the bottom and work upwards, so we report 72.3% compared to 81.2% for 2018. We've had 11.8 percentage points really of the prior year reserve release and that relates in the previous year. And that gets us to a current share of 84.1. This year, we haven't had the cat event. The Storm Emma wasn't -- didn't recur. And we've had very little attrition on weather as well. So it's not just a big event. It's just the smaller stuff for each and hasn't happened to any greater extent either. So things have been very benign. So as we've said earlier, we've had prior year claims reserve releases of EUR 40 million. And what this slide tends to show is a sort of movement in the net loss ratio for the various accident years from 2015 onwards. And it shows what they were initially called at and then how they have developed over the period since then. And the real message here around this is our dash. And we've seen some improvement in 2014 and prior, with significant improvement in 2016, in particular, and also 2017 and 2018. What's actually quite notable is that 2015 now, the -- that accident year, we're calling it today as almost an identical number, the part that was called at initially in 2015, so it went up a bit, but have come back down to where it initially was. '16 has proven to be an exceptionally good year, more profitable than we previously expected. And this is the first year as both following the recovery actions that were taken, very significant improvements. We're seeing initially, I'm not sure whether we felt they were sustainable or not, but they've turned out to be sustainable. And that's been pretty good. In '17 and '18, what we have seen is, of course, better large claims experience than we would have anticipated. So that's both in terms of the frequency of, and to some extent, the cost as well. So while we would normally reserve our average experience, it hasn't materialized in those years. And the other factor, I think, is that we are seeing a very important -- very good claim settlement activity and good results coming through and a more benign environment, I think, of course. The investment return, as we said, a strong 2.7%, between the income statement and OCI. And we did add some new risk classes during the year, risk asset classes around emerging market equity, senior private debt and infrastructure at a very strong equity performance in there. And the bond in government -- government bond portfolios -- corporate and government bond portfolios, they're low risk, but we are challenged obviously by prevailing interest rate conditions with a very strong mark-to-market return on those. And the allocation then, I'd say the main feature here is that we've seen an uptick in risk assets, both the equities and -- well, when you add the equities and investment property, you get 12%. It was 10% last year. We were targeting to try to get to 15%, but we do that when the opportunity from a market perspective. So overall, the risk assets went up by EUR 22 million for new money going in and also we had some market gains as well. So they are the key features of the results. And I'll just hand over now to Fiona.

So I suppose in terms of where are we going from here, I am -- probably I'll stick to this, of hearing us talk about injury claims inflation. It does appear that injury claims inflation has broadly stabilized. I think we look at the green bars there, you can see that 11%, 10%, and then in the last 2 years, 1% and 2%. So that's all capped injury claims. They capped injury for EUR 250,000 for trying to smooth out very large claims that would otherwise disrupt weather [indiscernible] asset standard actuarial view with the world. Underneath, however, we are still seeing the cost of litigated injury claims continue to rise. But after several years of inflation, I think the green bars are the ones to concentrate on. We believe that we have some stabilization after several years in a row of inflation. So property claims, however, continue to be strongly inflationary and that's driven largely by full employment, costs of replacement and equipment and such, but injury claims always doing for us, giving the tail underneath far longer than on property claims. So as regards to the rest, special damages, legal costs, medical costs, costs going to court, all remain high, so they've stabilized at a higher level. And I suppose, if -- for interest in lowering -- if we're interested in lowering the cost of insurance, things stabilize at a new normal high level, which is across in the period, still have happened, but prior costs come down, you would need these costs -- these injury claims costs to come down first. So we think that insurance costs -- or insurance premium are broadly going to stabilize away. We have some downward price pressure, but -- and we will continue to advocate for reform. We have seen some good outcomes in the course of the deal that will influence behavior in the lower court. The outgoing government did commence the judicial bill. So we will wait and see what happens there with the recommendation to the court for injury claims award. And we will continue to control what we can control ourselves by getting better at contesting and detecting suspected fraudulent cases ourselves. And we did do some work on strengthening our technological capability, and our claims propensity modeling has improved during the year, and that has reaped some benefits as well. It is slow progress. So I suppose, in the 3 -- maybe nearly 3.5 years since the report was produced for our motor insurance reform and there has been more -- there has been some progress. There is certainly increased disclosure to the customer. And there is some evidence of stabilization in the award. But ultimately, we're still at more than 4x the U.K. awards. Negligent standards remain unreasonably high for SMEs, in particular, and a reduction in the level of awards, particularly for soft tissue injuries. I don't think we would have nearly as much difficulty with some of the more serious injury award levels that we would have with soft tissue injuries and the quantum of injuries -- quantum of awards that are paid out for those injuries. And so ultimately then, all of our profit has translated. The Board has decided on the back of strong profits in 2019 to double the dividend to EUR 1. That is a payout ratio. You'll recall that our policy is based on the payout ratio. So it's to pay out a percentage of our profits. So payouts, sometimes they're good and to pay our debt, sometimes are less good. So things are good this year, and the payout will be 35%, which represents the doubling of the dividend from EUR 0.50 to EUR 1. It is an exceptional ROE. I don't think it's necessarily repeatable, I would say. A few of the boxes have come along together, as things tend to in life, and it is an excellent profit of EUR 112 million. Most importantly, for insurance people, it is underpinned by a very strong current year underwriting and results of 84%. And we continue to aim to be the Irish insurer of choice. We believe that's delivering for our shareholders. And where we go from here is to maintain our underwriting discipline and continue to improve our risk selection and probably to expand our risk appetite at the edges to develop opportunities to safely grow our footprint. And that's what you're seeing come true in, say, the partnership with TaxiFair in some of the cover that we now offer online promotions. And also to continue to deliver customer-centric products and services. The strength of the customer relationships still very much underpinned by the 34 branches and by the day-to-day interaction of our staff with those customers in the bank. And in terms of guidance, my least favorite slide of all. So we don't guide on individual line items. That said, premium growth, as far as I would see it, will come from new customer numbers rather than from anywhere else. So that means new customer numbers while maintaining discipline and -- in insurance, that is much easier said than done. The continuing low interest rate environment continues to challenge investment returns. That should argue for underwriting discipline from our competitors. We can't control our competitors, but it certainly will argue for underwriting discipline as far as we are concerned. And it's something you're used to seeing. Current year combined operating ratio is in the low 90s, absent exceptional weather. And a reminder that we do not aim to predict prior year developments, either positive or negative. We leave that to your own devices. And so happy to take any questions.

[Operator Instructions]

[indiscernible] just a couple of questions, if you don't mind. Just -- I mean, you mentioned a while, it was obviously a very favorable in '19. It's been tricky enough start in terms of 2020. So just wondering if there's anything that needs to be called out there, particularly around floods in the Midlands and stuff like that. Secondly, given the revenue backdrop. And again, even the investment income side, is there much more that can be done around the cost base in terms of tackling that? And then finally, maybe just in terms of all the various issues around reform. And if that is delivered, I suppose, is there a kind of a tipping point or an issuer by sort of clearly reserving, historically, then we could see further reserve releases possible or does that come before you get kind of more challenged in terms of revenue environment because clearly, premiums would start to come down? So how do you think about that over the next filing, in terms of that reform, if it was true?

Okay. So I'll let John comment as well, but I want to just say a few things [indiscernible] him comment before, actually, I think then -- but I'll let him -- he probably have something to say about reserves, in particular. On the flood. So the first thing to say about floods is they have occurred in recently partly occupied rural areas. And that's a very -- it's very difficult for those people that are living in those areas because as far as it goes for us, we have less than 500 policies within 200 meters to the [indiscernible]. So we have, so far, received 11 claims, 7 of them are for flood in cars. So people who continue to pass [indiscernible] even though traces on sediments [indiscernible]. That's the sort of a situation here. And we have 2 that are livestock-related, and then only 2 that are properties. So despite -- it's very difficult for farmers. There's a lot of fields flooded. But actual damage at the moment, reasonably limited. So in terms of doing better on cost, I actually think our cost ratio is very good and compares very well to our competitors. We know that we are the only people who have a direct sales force. So to bring in a 34-branch network and a direct sales force at 25.9% is much better than our competitors who would be paying fairly significant commission to brokers who would sell the product for them. And then running a centralized operation for [indiscernible]. I don't think we run a wildly excessive cost, but there is -- we can always do better. I'm sure John has loads of ideas. But it is, I think, going to be marginal. In terms of reform, I suppose, I've said already about what's needed. I think it's important to remember that -- and I would have spoken about this in the past, the capital ratio operates as a job, right? So our claims reserve was at a high watermark level and the capital ratio goes against that. We have paid down our case reserves significantly to, I suppose, a new normal. And I think what you're seeing in terms of some of the releases is that the quantum of those releases is probably affected by the fact that we were at a high watermark. But I also have put this slide up here that this is the history over the last 5 years of reserve releases, some of the best estimate, not -- the best technical reserves are combination of margin for uncertainty and the best estimates. So you can see that there is a very significant release this year, there was a significant release last year as well. And I think John's chart is also interesting in that regard -- oh, sorry. Go back. Where is it? Here. It's the start. Here. It's coming, it's coming, it's coming. So -- and this shows you that the purple one is our initial pick for '19. The green one was our initial pick for '18. So it does show you, I think that we are prudent in our reserving approach. So while there has been a high watermark in our reserve releases, I believe. But I don't know, as I sit here, they actually -- I believe that the cause of this paying down of reserves were at a lower level of reserves, so almost EUR 100 million lower than we were at the end of '15. But I do believe we have been consistently prudent now over some considerable time in our reserve and approaches. So you may -- we don't guide after that, but I believe we are prudent, not inappropriate. You want to add [indiscernible]?

Yes -- no. I think I agree with all of that. I think the other factor on the reserves side is that there's a lot of significant re-underwriting of the focus that took place in '15 and '16, and there are material improvements that you noted out, which -- and or that you need to be recognized, which is prudent, I mean, not to recognize them as we see them going through over a longer period of time and these things. And that did happen, and that's why '16 is so better. And I think the other issue really is the large claims feature is, to some extent, random, in that you really get years or that experience is worse than what we initially predicted. That hasn't been the case. Now some of that, you could say is down to better underwriting, some of it is certainly around them. So I think on the other point, I mean, the cost base, I think we could always do more. And I think what we want to do in looking at our cost base is to become more efficient and create capacity to enable us to grow the business. And so -- and certainly, we can do more with processes, we can eliminate paper, we can eliminate manual activity that goes on. But the whole objective for that is to create capacity to enable us to sell more. And that would be -- that's our primary objective for that. On the weather, again, just to -- I mean, we've had no -- some of them are failure, some of them better or anything like that. So it's been not in your best care.

Yes?

Stephen Lyons from Davy. Just a few questions from me, please. Just firstly, on the investment portfolio. Is it possible to break out what contribution through the P&L actually came from the risk cost exposure? And previously, you used to break out equities and other risks in greater detail. I mean, one proportion of that EUR 111 million now is equities. And then just on growth initiatives. So I think your statement is pretty clear this morning showing that the modest decline in gross written premium wasn't for lack of trying, and you can see all the initiatives outlined. So maybe if you could detail some of those successes in greater detail there and the outlook for additional initiatives or partnerships to the extent you can.

Sure. Do you want to go first? And then I'll add some [indiscernible].