Insurance firm FBD takes battering

Shares in FBD took another battering , compounding the insurer’s woes after a second profit warning in five months. This is in line with the principle that it’s better to offload stock after a second such warning for fear of a third, just in case. FBD has said there would be no change to its progressive dividend policy, but investors who stick with the firm now face an operating loss per share of up to 10 cent for 2014 and further dent in profitability in 2015.

FBD’s credibility is in question. While the Irish insurance market has expanded this year for the first time since 2003, the firm has had a wretched time of it. Even though FBD believes the uptick in economic activity will have a “very positive” medium-term impact on its business, it is clearly struggling. Insurance is inherently cyclical, with any number of risks, yet surprises should be avoided.

Just like in the first warning in June, the latest is claims-related. But the reasons are different, thereby broadening the range of problems weighing down on profits. That is a concern.

June’s warning followed a €12 million rise in motor claims and €4 million for adverse weather. Added to that is a further €13 million for an unanticipated rise in cases from 2011 and 2012 due to a worsening in claimants’ medical conditions and an increase in the probability of liability.

Then there is another €7 million for large claims in the past four months.

FBD reduced its final quarter profit forecast by another €10 million. That’s a total of €30 million this time out, so the combined hit from the two warnings comes in about €46 million.

The shares closed last evening at €11.25, down more than 4.5 per cent one day after a drop exceeding 18 per cent. FBD insists there is no reason to believe the problem with prior-year claims is systemic or that the spike in costs will recur, but it’s never good when claims already accounted for rear their costly head again.

Not the best of times for the Bluebell-based firm, though there is something of a cloud over the sector at large. Liberty incurred a loss last year, Setanta went bust and RSA had spectacular troubles with its previous management.