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Irish insurance group FBD today reported a pre-tax loss of €7.9m in H1 2010, compared with a loss of €21.8m a year earlier, despite what it called the worst weather conditions experienced in the country for many years. FBD said its underwriting loss improving from €8.3m to €7.8m, despite €12m of claims linked to severe weather. FBD's results were also hit by writedowns of €17.7m in the value of assets, mainly hotels. A 10% higher interim dividend of 10.5 cent will be paid.

Commenting on the results, Andrew Langford, Group Chief Executive, said: "Despite some of the worst weather conditions experienced in this country for many years, FBD delivered a strong first half operating performance.  The response of staff and service providers in helping thousands of our customers get things back to normal was exceptional and further emphasises FBD's commitment to excellent service and value for money.

After eight years of contraction, market revenue is likely to remain static or show a slight increase in 2010.  FBD is well positioned to maximise the opportunities for profitable growth as they arise.

FBD's solvency levels rose further from 50% in June 2009 to 55% after incurring €50m in weather related claims, gross of reinsurance.  This further demonstrates FBD's financial strength".

Results detail

Goodbody's Ken Darmody commented: "FBD’s H110 operating EPS of 29.6 cent was in line with expectations. Gross Written Premium (GWP) of €183m was marginally ahead of both last year (€181m) and our forecast (€182m) which is a welcome stabilisation after 3 years of declines. We expect further detail of GWP (rates, mix and volumes) in the presentation at 10.30am this morning. The loss ratio of 83.2% was in line with expectations and included 8.1 percentage points or €12m relating to the well publicised “big freeze” earlier in the year. The loss ratio excluding extreme weather has stabilised at 75.1% with good claims management and the pick-up in recessionary claims abates. Costs too were in line at €33m, although the cost ratio has drifted to 22 percentage points from our forecast of 21% as a result of lower net earned premiums. Finally, within the underwriting section, the long term investment return of €17.5m, while down on last year, was better than anticipated.

There are signs of stabilisation in the non-underwriting operations as the decline in profit reduces and profits of €1.9m are ahead of our €1.4m anticipated figure. The Financial Services & FBD Brokers segments performed in line with H109, with a €2.7m contribution. Hotel & Golf Assets show a net loss of €0.8m in the seasonally weaker H1, however, it is worth noting that excluding depreciation they are not a drain on cash resources and including the disposal of 24 La Cala units, the division has added in excess of €8m in positive cashflow to the group. Valuation impairments of €17.7m are above our expectation of €10m for the full year and mainly relate to the Irish Hotels (€12m).

Since December 2007, 45% of the value of the Irish hotels assets has been written down.

Management continues to guide FY10 earnings in a range of 95 – 100 cent. This range captures the €12m in extreme claims that have caused earnings to have an unusual H1/H2 split (30% / 70%) and there appears to be no reason to believe that this will not be the case and we note the 5% increase in the dividend. We continue to believe that the extreme property claims in Q409 and Q110 encourage all participants in the market to behave with discipline in an attempt to control the Combined Operating Ratio which has remained above 100% for too many periods. Signs of this are evident in the CSO data and is one of the reasons leading to GWP turning positive. The next kicker required for upgrades is increasing volumes, though this remains a macro issue. With a forecasted NAV of €6, FBD is trading on 1.15x P/B with a normalised return on equity of 22%. This looks cheap by any standards and looking at the implied multiples in the recent attempted M&A in the sector, valuation risks appear to be to the upside."

“You’ve got to look at Europe not as one economy, you’ve go to look at it as a two-track economy…so if we look at Germany and Scandinavia and economies that are highly correlated with Germany…that is one area of clear strength, the weakness is clearly in the States,” Bob Parker, senior advisor at Credit Suisse told CNBC, adding that the dismal housing data from the U.S. is clearly weighing on the markets.

German GDP data show consumer spending beginning to awaken: Davy economist, Aidan Corcoran, comments  -- "The detailed German Q2 GDP data released yesterday (August 24th) confirmed the flash estimate of 2.2% seasonally adjusted quarter-on-quarter growth, the fastest since reunification. The strong figure for investment shows the recovery to be on firm ground, but weakening global demand means that Europe's largest economy will be hard pressed to match this pace in Q3.

The GDP figure followed robust contributions from capital formation and foreign trade. Capital formation in machinery and equipment rose 4.4%, but from an exceptionally weak base. Construction also posted a healthy 5.2% increase. Exports grew by an impressive 8.2% over the first quarter, with the weaker euro adding to Germany's already significant competitive advantage.

The euro may show little sign of moving against German and euro-zone exporters, but global consumer demand is a different story. News from the US was bad again yesterday, with existing home sales falling 27% from June to July (twice the forecast fall of 13%). This is payback for the tax incentive earlier in the year, which shifted housing demand forward by several months, but also reflects the weak labour market conditions. Sales are bound to rise in the coming months as the effect of the incentive wears off, but the increase is likely to be meagre.

With little potential for increased global demand, it may be some consolation that German consumption surprised slightly to the upside. The quarterly increase of 0.6% is a lot more modest than the growth in exports or capital investment but provides some hope that domestic demand will help to sustain the recovery in Europe."

“The bulk of German domestic data is coming from investment, which comes from exports,” Peter Dixon from Commerzbank Securities, told CNBC that the strength of external data is the main factor driving the German economy:

Economic View: Banking costs to blame as S&P downgrades Ireland again; Goodbody chief economist, Dermot O’Leary, comments  -- "With bond yield spreads on Irish government debt rising to peak levels over German bunds yesterday, last night’s credit ratings downgrade for the sovereign (from AA to AA-) is very much a case of 'after the horse has bolted.' However, the reasons cited and the fact that S&P has kept Ireland on negative watch are the more disappointing elements of the news. S&P cites the “rising budgetary cost of supporting the Irish financial sector” as the reason behind the downgrade.

Unlike the official statistics that are provided to the EU, S&P take debt associated with NAMA into account when calculating government debt. It estimates that the total cost to the government of providing support to the banking system will come to €90bn (58% of GDP). Breaking this down, it estimates that about half of this is due to NAMA-related debt and the other half due to banking sector recapitalisation. Does this figure make sense? While it is indeed true that the payments to the banks in return for loans heading to NAMA represent an increased government liability, it is worth noting S&P’s original assessment of the agency in June 2009, when it said that 'NAMA’s ability to minimise the cost to the government of its financial operations will depend on the prices it pays for the assets and their future performance.'

Since that time, while the quality of the loans moving across to NAMA has reduced, the haircut has also been substantially higher than initially suspected. Its estimate of banking recapitalisation costs (€45bn-€50bn) also looks high in our view. The cost of Anglo is currently put at c.€25bn and Irish Nationwide has been estimated at c.€3bn. Adding in €7bn to AIB and Bank of Ireland brings the cost to €35bn. At this time it looks to us to be an extreme take on the overall banking costs.

This is not to say that the overall banking costs are indeed large. As we stated last week at the time of the Irish bond auction, uncertainty around the final cost and the future of Anglo Irish Bank seems to us to be the main issue which had led to the most recent deterioration in spreads on Irish government debt. While government policy has been to continue to recapitalise the bank without negotiation with bond holders (due to the bank guarantee), sovereign downgrades have occurred despite this policy. Perhaps this latest downgrade will trigger the government into making a final decision on the issue either way once the European Commission returns with its assessment on the bank’s business plan in September."

Most of the concern rests in the US, and it’s not only in the US but state-by-state, Tim Linacre, CEO of Panmure Gordon, told CNBC after Irish group CRH issued a profit warning Tuesday: