FBD Holdings released FY 2013 results this morning with the operating EPS declining by 20% (y-o-y) to 136c (in line with our forecast) as claims were adversely impacted by the year-end weather conditions. The group’s net asset value (NAV) rose by 14.1% to €8.23 (equates to 17% RoE) while the final dividend increased by 11% to 33.25c (implies FY div growth of 16% to 49c and pay-out ratio of 36%). Capital remained strong, with the solvency ratio rising to 78.1% of NEP (2012: 73.8%) and the reserving ratio increasing by 3% to 235%. FBD’s share of the Irish non-life insurance market increased by an additional 80bps in 2013 to 13.4%. <p>
<b>Underwriting business:</b>FBD’s gross written premiums rose by 2% in 2013 to €351m (policy volumes +2.6%, offset by rate declines of 0.6%), despite overall market contraction of 4%-5%. The group notes some early signs of industry rate increases in Q4 2013, particularly in car insurance. Net claims increased by 4.9% (y-o-y) in 2013 to €201m, driving the loss ratio to 67.9% (from 63.8% in 2012). Exceptional weather events and large claims equated to 18.7% of NEP (compared to seven year average of 16.7%) though the underlying attritional loss ratio improved to 49.2% (2012: 50.7%). The group’s expense ratio rose to 26.2% (2012: 25.5%) with the overall combined ratio increasing to 94.1% (2012: 89.4%) resulting in an underwriting profit of €17.6m. Inclusive of €29.4m investment returns, profits from the underwriting business declined to €46m (2012: €59.7m).<p>
<b>Non-underwriting:</b> Operating profits in the financial business rose to €6.4m (2012: €5.6m) while the group’s property and leisure JV generated profits of €1.3m, partially reflecting revaluations (compares to a loss of €1.7m in 2012).<p>
<b>Outlook:</b> While FBD’s exposure to the catastrophic weather events last month is capped through reinsurance, the inclement weather conditions since the start of the year are set to adversely impact the group’s claims in 2014. In addition, we understand that the sharp rebound in the Irish economy was underestimated by the insurance industry, with activity related claims rising at a faster pace than premium re-pricing. Though this time lag effect should correct over coming months. We estimate that the combined impact of the weather losses and higher activity claims are likely to reduce current year profits by c. €8.5m (25c per share), with FBD now guiding towards an operating EPS in FY 2014 of 120c to 130c (compares to our current forecast of 148c and consensus at 150c).
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<b>Our view:</b> While there were no surprises in the 2013 results, we expect consensus numbers for the current year to be revised downwards by c. 15% to reflect higher losses. However we remain bullish on FBD’s medium term prospects and do not envisage any material changes to our 2015 and 2016 forecasts (operating EPS of 152c and 164c respectively). Given the group’s low cost industry advantage and high earnings capacity (18% RoE target), we continue to believe that FBD is one of the best equity plays on the recovering Irish economic story. We reiterate our BUY recommendation.
<p><h5>Ciaran Callaghan</h5>
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