FBD Holdings plc (EG7) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to today's AGM 2020 Conference Call. And I would like to hand the conference over to your first speaker today, Mr. Liam Herlihy. Please go ahead, sir.

Thanks. Good morning, everybody, and I declare FBD Annual General Meeting open. At the very outset, I would just say you are all very welcome to our 32nd Annual General Meeting of the company. I think it's important maybe to say it's very stark, but I conceal hope that you, your families, your friends, your neighbors are settling well in these challenging times. I would like to say thanks to all of you for your understanding of the need to have a restricted meeting under the circumstances and I would say that thanks to your cooperation for submitting your votes remotely. FBD as a group feel that it is imperative that we play a role in trying to prevent its communication transmission and reducing unnecessary travel up and down the country for this period and given the considerations and the challenges they pose, we believe it was inappropriate to have a large gathering of our AGM today. Having said that, I sincerely hope that the whole issue will have abated in the near future, and I look forward to meeting you once again in 2021 at our Annual General Meeting. Today, I have a few introductions to make. Paul D'Alton and I would like to welcome you and our shareholders and our professional advisers here today. The members of the FBD Board are present. We have a number of our executive management team attending today in person. They are Paul D'Alton, our interim Group financial -- our interim Group Chief Executive; John O'Grady, our Group Chief Financial Officer; Derek Hall, our Chief -- Group Chief Risk Officer and Company Secretary; and John Cahalan, Chief Commercial Officer. The notice convening the meeting has been circulated to all shareholders, and I just want to acknowledge for good order that a quorum for the meeting is present. In relation to performance, and I fully recognize that our results relate to 2019. As you are aware, we had planned to have our AGM in May, which would mean that our results would have been more pertinent not to date. But nevertheless, I can tell you what happened in 2019, we reported a group profit before tax of EUR 112 million and our net asset value, which is our book value per share, grew to EUR 0.1068 cents per share. Today, our solvency capital ratio continues to be very strong, and that stands at 186%. On behalf of the group, on behalf of Board, I want to say, I'm very grateful for all that has been accomplished and specifically I want to thank all of Horizon FTD staff, whether they be in Bluebell or [ though ] branches or Mullingar, or wherever they may be throughout the country, for their contribution and success during last year, but in particular, for the year we're in right now. While we're speaking of 2019, it is important that I acknowledge the enormous commitment of our management and our loyal staff to ensure that every single customer was set with a timely matter during the recent pandemic. It is important that I acknowledge that the business performed remarkably well, but the performance of our executive key man management has been absolutely extraordinary. On behalf of all of us, I want to acknowledge that. In relation to our Board of Directors, we've had a few changes in 2019. I'm delighted to welcome 2 new independent nonexecutive directors, Richard Pike and Sylvia Cronin, that both bring a wealth of business experience to the Group. Since that appointment at the back end of 2019, they have made a very significant contribution, and I look forward to their continuing making that significant contribution to the Group. Fiona Muldoon, our recently retired Chief Executive Officer, left her position as Executive Director and CEO on April of this year. I would like to extend the warmest gratitude to Fiona for her hard work and effective contribution to the group over the last 5 years. She has been elemental in the transformation and development that has taken place in the group. Her relentless focus on the business and its customers has been remarkable. As I've said before, and it's important to restate to gain, shareholders and the community alike have benefited from our tireless efforts, and we all wish her the very best for the future. Paul D'Alton was appointed as interim Chief Executive Officer. Paul is a chartered accountant by profession. He has extensive experience in senior leadership roles in both the general insurance and banking sectors. He is no stranger to FBD have been served as Interim Chief Financial Officer a number of years ago and in the previous life, he has been Chief Financial Officer of Bank Ireland. Joe Healy, the recently retired President of the Irish Farmers' Association, will not be putting himself forward for reelection at today's Annual Genital Meeting and will retire as a nonexecutive director at the conclusion of today's meeting. Joe is the immediate past President of IFA. He has been succeeded by Tim Cullinan from North Tipperary. And I just want to say that that in relation to Joe's term, as his term has ended, he has made a very significant contribution to FBD over his 4 years as a director. On behalf of all of us, I want to wish Joe, his wife, Maggie, and his girls the very best in the future. In relation to our sponsorship, you are aware that FBD have a [ very important ] partnership in relation to the 2020 Summer Olympic Games, which have been postponed due to the COVID-19 pandemic. So it's important to state that FBD remains committed to its team Ireland sponsorship and we look forward to continuing our support for team Ireland into 2021. As always, as a leading business, FBD must always be at the cutting-edge and at the forefront of innovation. Innovation is key for FBD, and we have brought many new ideas successfully to light during last year and again this year. Our farm uplift product contains quite a few new firsts for farmers, including public liability limits and offering environmental pollution cover as standard. There was also a new small business product, the improvement in motor pricing on renewal and O'Malley's motor car, our friends and family discount scheme, and claims fraud propensity modeling. Our newest innovation is already licensed last November and improves the digital current tuning survey while our customers sign the proposed documents there and then online. And I'm proud to say that, that is the type of innovation and development work that will keep FBD in constant contact to the fore with customers. We continue to be market leaders for our customers, and we certainly will keep this going for 2020 and beyond. As you are all aware, FBD started in rural Ireland, now more than 51 years ago, and is committed to working with and supporting local communities. FBD has been committed to ensuring farms, businesses, and the wider communities feel real economic and social benefits as a result of our business activities. FBD is responsible. It's a responsible member for our community, we have high standards for ourselves and insist that all of our business activities are conducted lawfully and ethically. That is something that we are proud of, but it's only that we should be doing anywhere. In supporting Irish communities, FBD displayed commitment to partnerships with local communities. We provide insurance cover in the sectors that are crucial to the economic and social fabric of the many the communities we serve in, particularly in rural Ireland. As a farmer, I find farming is a unique way of life and a great place to live to grow and raise a family. However, by its very nature, it is and can be a hazardous occupation. The high number of farm accidents annually is a cause for great concern to us. FBD supports many initiatives, which make the farm a safer place for all. In addition, we have dedicated employees who work directly with farms and the businesses, which includes markets in particular, to improve safety standards and safety awareness in the workplace. As an organization that works to protect and safeguard our customers' futures, we're also working to improve the sustainable business practices. FBD actively measures, manages and mitigates our carbon footprint and aims to minimize our environmental impact. Adapting smart business practices has an important role to play in our business and it's something our whole organization plays a part in. Company-wide initiatives raise awareness amongst employees and our customers and our centered effective and relevant activities can contribute to a healthier planet. Our sustainability project includes a commitment to using less paper, printing less and be more efficient in our energy usage. In relation to claims, which is something that will all go from the right premiums, unfortunately, claims are a part of that as well. FBD welcomes the progress made in improving the claims environment, such as the establishment of a personal injuries guidelines committee, charged with providing guidelines of soft tissue injuries. We await the findings of this committee in the belief that it has the potential to drive real changes from the judiciary. It is also welcomed that courts are showing an increased willingness to recognize that individuals have some responsibility for their own personal safety. In the meantime, the level of compensation remains too high and without reform, Irish farmers, businesses and consumers will continue to bear the cost of significantly higher premiums than those we see in other countries. In relation to the dividend, I just want to outline that earlier this year, the proposed dividend of EUR [ 100 ] per share was detailed in our 2019 annual report. That will not be brought forward for approval at our AGM today as a result of statements issued in April as the European Insurance and Occupational Pensions Authority, oftentimes known in short as EIOPA. Hedging the suspension of all discretionary dividends distributions, recognizing the heightened uncertainty as a result of COVID-19 pandemic and the importance of maintaining capital in the business at this particular time. So I want to assure you is that the Board will keep the timing and amount of distribution of capital to shareholders on their continuing review. I would like to thank the Board for their continued support and hard work throughout the year. In an uncertain world, I'm confident that whatever challenges lay ahead, FBD is strong and will continue to prosper as a business. It has an incredibly committed management team, and that is the single most important thing for all of us. Finally, as always, I want to say thanks to our customers for their continued support, loyalty, trust and confidence. For those U.S. customers who would offer the business and as a constant, we are strongly positioned for the future. In keeping with what I would regard always customer practice, we've arranged and I have arranged with the interim Group Chief Executive, Paul D'Alton; the Group Chief Financial Officer, John O'Grady; and our Chief Commercial Officer, John Cahalan, to make a short presentation to you and in addition to that, Paul will outline what was shared with the stock market earlier this morning. Before that, I would like to share some positive news with you. I would like to refer to the announcement made earlier today, and that was that Tomás O’Midheach will join the Board as Chief Executive Officer in February 2021 and that is on the back of a very extensive search process and with the approval of the Central Bank of Ireland. Tomás is highly regarded in the financial community and has considerable knowledge of the Irish financial services landscape. We look forward to Tomás' arrival and working with him. So with that, I will hand you over to Paul, please.

Thank you, Chairman. As the Chairman has said, at 7:00 a.m. today, we released our half year results to the end of June 2020 to the stock exchange. And I'd just like now to take you through some of the major features of those results. There was a half year loss of EUR 9 million before tax. Within this, there was an underwriting loss of EUR 5 million, that was after putting aside a provision of EUR 30 million in relation to COVID-19. So if you allow for that EUR 30 million provision, the underlying underwriting performance is actually very satisfactory indeed. There is a small negative return of 1% on investments, which in the turbulent circumstances of the first half year, we regard to a quite commendable satisfactory performance. We have issued rebates to customers of EUR 11 million to date. And the cost of this has been somewhat offset by lower claims frequency in quarter 2. We have a combined operating ratio of 103%. But if you allow for the provision for business interruption costs, which you mentioned before, you have an underlying combined operation ratio of closer to 90%, which is, again, much more satisfactory. As the Chairman outlined, we have a strong solvency position, with a capital ratio of 186%. Our gross written premium of EUR 176 million is down just 1% on last year, when the 11 million customer rebates are taken into account. I think in the current economic times, when there's an economic downturn and quite a number of businesses in various types of difficulty, we believe to be within 1% of last year is a commendable performance. Our customer numbers have increased by 6,500. We are showing improved retention of our existing customers and new business levels are up 15%. We also have some business developments, which have contributed to growth in the business, and we believe will be a good contributor to growth going forward. We introduced a new commercial motor product in April. Our plans to broaden our partnership with Bank of Ireland in the personal lines area are advancing. The partnership with -- on Post is performing very well, and our [ taxi ] for our partnership is in place and getting going. We have, while all of this is going on, handled the impact of COVID-19. Our staff has performed very well and arrangements to work remotely were very successful, has involved a huge amount of collaboration and positive attitude on the part of all concerned. And among the customer support measures, there are the EUR 11 million in rebates, to which I have referred, and the farm relief services support, in conjunction with the IFA, and no admin or cancellation fees have applied to motor or home. The investment return, as I said, of just 1% negative has been very satisfactory ad we have maintained the credit quality of our corporate bond portfolio at an average of A- minus. I suppose we can't fail to mention the COVID-19 situation, we have included the provision of EUR 30 million, which I've indicated on the ground of that prudence. We are launching carefully the FCA test case in the U.K. and will analyze carefully the result of that and what it means for ourselves and our customers. The provision is based on a probability assessment of a number of different scenarios, which we believe to be good practices. We have our own test case coming up in October, and we believe it's very desirable in relation to this matter to bring certainty to all concerned, and we believe our test case will greatly contribute to that. Having given you some of the sort of cold financial facts that explain our performance for the half year, we have a number of quite exciting initiatives to grow the business. And I'll ask John Cahalan, our Chief Commercial Officer, to expand on the Fort for you.

Thanks very much, Paul. So just some key highlights for the first half of 2020, and we've seen a strong digital performance. So our online sales have done very well, with new business sales, up 22% year-on-year, driven in the main by very strong quote performance of 17% and for the first half of 2020 compared to the first half of '19. Web sales as an overall percentage of our total sales, has increased by 5%. So we're continuing to see more people who want to trade online, and we'll continue to invest in that channel as we move forward into the second half of 2020 and into '21. On the back of that, as Paul and the Chairman has alluded to, we've seen strong policy growth. Our base growth numbers have increased by 6,500 customers. So we're delighted to see that, in the main, driven by 2 things: one, our increase in new business policies by 15%, which predominantly is private motor and a 1.3% improvement in our overall retention rate, supported by all our sales staff across the country in the branch network and in motor car. We have seen, due to the competitive environment we're operating in, and the economic environment that Covid-19 brings to us, an overall 3.4% reduction in our average premium. Our Post insurance business continues to perform well and, hopefully, by year-end, we have in excess of 19,000 policies in force. As a sales network, we -- I think we've adapted very well to the new normal in the COVID-19 environment and great thanks has to go to all those right across the country and in FBD Health, who have managed to service our customers in a difficult environment and have demonstrated great flexibility. From a marketing perspective, it's positive to see that our brand awareness has improved. We were fifth. We're now third. And that really is on the back of a strong marketing campaign with the Irish Olympic team, which we have extended into 2021 and also our presence in our digital channels. From a -- looking forward into 2021, we have -- we're going to broaden our partnership relationship with Bank of Ireland. We've become part of a panel that will underwrite home at the end of quarter 1 '21, followed by motor later in the year. We've also extended our partnership with Team Ireland due to postponement of the Olympics, and that will go right into 2021. So we're delighted with that. Also, there's some innovation. We now have promo codes. And we have promo codes on car. We've now extended that into farm, and we have a new business offer shortly going for our farm, new business account as we move forward into August, which will be positive, I'm sure. And we have a new van product that we launched back in April. So I think, in all, the first half of the year has been a very good performance from sales networks, given the environment we're operating in. Thank you.

We invited some questions to be submitted in the advance of the meeting, and we'll take some time to address those questions.

Thank you, Chairman. So our first question is from Adrian Crosby. Thanks for your question, Adrian. Adrian's question is, can it be written into insurance contracts that, in the case of pandemic, certain insurances do not apply? John, I might ask you to answer that?

Thanks, David. So our position there is that FBD team keeps supporting reviews and its terms and conditions under constant review.

Okay. Thank you, John. We received a number of questions from Colin Moore. Thanks for all your questions, Colin. So we'll go through them here now. First question from Colin is, can we please break out our recent precautionary reserve of EUR 22 million for business interruption claims? Does this only cover legal and related expenses the company expects to incur or also cover the expected discounted value of potential claims or settlements?

Okay. So the reserve for business interruption claims, which has an increase to EUR 30 million this morning half year results, represents the best estimate of the payout for business interruption can. It includes an estimate for claims payments as well as legal expenses that will be incurred. Please refer to this morning's RNS for further details how the reserve is calculated.

Thank you, John. A second question from Colin. If we ultimately pay out or settle any business interruption claims, do we believe that we will be covered by our reinsurers? If not, would FBD initiate legal action to enforce a flame against our reinsurers?

So FBD is taking a test case scheduled in the commercial court for October to have the issues surrounding business interruption liability resolved as quickly as possible to achieve clarity and minimize costs for all parties. And this includes achieving charity and minimizing costs for our reinsurance counterparties.

Thank you, John. And third question from Colin. Will we consider share buybacks instead of the original proposed dividend if and when the EIOPA suspension is revoked, noting the current share price, which trades at a substantial discount to NAV per share, a tender offer, for example, will enhance NAV per share and return cash to shareholders in a tax-efficient manner.

So at the current time, we are not considering a share buyback. Under our capital management policy, we will continue to explore ways of maximizing capital efficiency. This includes examining ways in which excess capital can be returned to shareholders in the form of dividends or share buybacks.

So a related question from Colin then, have we conducted scenario analysis of the current operating environment, the potential impact of business interruption claims to determine whether further return of capital, for example, via tender offer, is prudent and possible, presuming regulatory approval, to take advantage of the current share price and further enhance NAV?