FBD HOLDINGS PLC

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

For the half year ended 30 June 2023

Note 1     Statutory information

 

The half yearly financial information is considered non-statutory financial statements for the purposes of the Companies Act 2014 and in compliance with section 340(4) of that Act we state that:

 

·      the financial information for the half year to 30 June 2023 does not constitute the statutory financial statements of the Company;

·      the statutory financial statements for the financial year ended 31 December 2022 have been annexed to the annual return and delivered to the Registrar;

·      the statutory auditors of the Company have made a report under section 391 Companies Act 2014 in respect of the statutory financial statements for year ended 31 December 2022; and

·      the matters referred to in the statutory auditors' report were unqualified, and did not include a reference to any matters to which the statutory auditors drew attention by way of emphasis without qualifying the report.

PricewaterhouseCoopers, Chartered Accountants and Statutory Audit Firm, have performed an interim review in accordance with International Standard on Review Engagements (Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' ("ISRE (Ireland) 2410") issued for use in Ireland' on the interim financial information for the period ended 30 June 2023. As part of this review they also reviewed the IFRS 17 and IFRS 9 transition impacts on the comparative information.

 

Note 2     Going concern

 

The Directors have, at the time of approving the interim financial statements, a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future being a period of not less than 12 months from the date of this report.

 

In making this assessment the Directors considered up to date solvency, liquidity and profitability projections for the Group. The basis of this assessment was the latest quarterly forecast for 2023 and projections for 2024 which reflect the latest assumptions used by the business. The economic environment may impact on premiums including exposures, new business and retention levels. Expense assumptions can change depending on the level of premiums as discretionary spend and resources are adjusted and inflationary pressures are taken into account.

 

A number of scenario projections were also run as part of the Own Risk Solvency Assessment (ORSA) process, including a number of more extreme stress events, and in all scenarios the Group's capital ratio remained in excess of the Solvency Capital Requirement and in compliance with liquidity policies.

 

The Directors considered the liquidity requirements of the business to ensure it is projected to have cash resources available to pay claims and other expenditures as they fall due. The business is expected to have adequate cash resources available to support business requirements. In addition the Group has a highly liquid investment portfolio with over 50% of the portfolio invested in corporate and sovereign bonds with a minimum A- rating. In the worst case scenario run the Group's Capital Ratio remained in excess of the Solvency Capital Requirement and in compliance with liquidity policies.

 

Note 3     Summary of significant accounting policies

 

Basis of preparation

The annual financial statements of FBD Holdings plc are prepared in accordance with International Financial Reporting Standards ("IFRSs") as adopted by the European Union.  The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with IAS 34 'Interim Financial Reporting', as adopted by the European Union.

 

On the basis of the projections for the Group, the Directors are satisfied that there are no material uncertainties which cast significant doubt on the ability of the Group or Company to continue as a going concern over the period of assessment being not less than 12 months from the date of this report. Therefore the Directors continue to adopt the going concern basis of accounting in preparing the financial statements.

 

Consistency of accounting policies

The below accounting policies have been updated for the application of IFRS 17 and IFRS 9 (see note 4). Apart from the updated accounting policies included hereafter to address IFRS 17 and IFRS 9, the methods of computation used by the Group to prepare the interim financial statements for the six month period ended 30 June 2023 are the same as those used to prepare the Group Annual Report for the year ended 31 December 2022 (reference Note 3 of FBD Holdings plc Annual Report 2022). Other than the adoption of IFRS 17 and IFRS 9 there are no other impacts from the adoption of other standards and amendments.

 

FBD HOLDINGS PLC

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

For the half year ended 30 June 2023

 

Note 3     Summary of significant accounting policies (continued)

        

E)     Insurance contracts

 

I.      Definition and classification

The Group issues insurance contracts in the normal course of business, under which it accepts significant insurance risk from its policyholders. As a general guideline, the Group determines whether it has significant insurance risk by comparing benefits payable after an insured event with benefits payable if the insured event did not occur. Insurance contracts can also transfer financial risk. The Group issues non-life insurance to individuals and businesses. Non-life insurance products offered include Motor, Property, Liability and Personal Accident which are segmented into Motor and Non-Motor for reporting. These products offer protection of policyholder's assets and indemnification of other parties that have suffered damage as a result of an insured event occurring.

 

In the normal course of business, the Group uses reinsurance to mitigate its risk exposures. A reinsurance contract transfers significant risk if it transfers substantially all the insurance risk resulting from the insured portion of the underlying insurance contracts, even if it does not expose the reinsurer to the possibility of a significant loss.

 

II.     Insurance and reinsurance contracts accounting treatment

Separating components from insurance and reinsurance contract

Before the Group accounts for an insurance contract based on the guidance of IFRS 17, it assesses whether the contract contains distinct components which must be accounted for under another IFRS instead of under IFRS 17. After separating any distinct components, the Group applies IFRS 17 to all remaining components of the insurance contract. Currently, engineering inspection risk, which is not material, is the only non-insurance component which forms part of any insurance contracts that requires unbundling.

 

Level of aggregation/Unit of account

The Group manages insurance contracts issued by product lines within an operating segment, where each product line includes contracts that are subject to similar risks. All insurance contracts within a product line represent a portfolio of contracts. Each portfolio is further disaggregated into groups of contracts that are issued within a calendar year (annual cohorts) and are (i) contracts that are onerous at initial recognition; (ii) contracts that at initial recognition have no significant possibility of becoming onerous subsequently; or (iii) a group of remaining contracts. These groups represent the level of aggregation at which insurance contracts are initially recognised and measured.

 

The profitability of groups of contracts is assessed by actuarial valuation models that take into consideration existing and new business. FBD assumes that no contracts in the portfolio are onerous at initial recognition unless facts and circumstances indicate otherwise. By the nature of the insurance risks covered by the Group, all of the contracts issued have a maximum claim pay-out potential that is greater than the premium received. On this basis there are currently no contracts grouped into 'no significant possibility of becoming onerous'.

 

Recognition, modification and de-recognition
The Group recognises groups of insurance contracts it issues from the earliest of the following:

·      the beginning of the coverage period of the group of contracts;

·      the date when the first payment from a policyholder in the group is due or when the first payment is received if there is no due date; and

·      when the Group determines that a group of contracts becomes onerous.

 

Only contracts that meet the recognition criteria by the end of the reporting period are included in the groups. When contracts meet the recognition criteria in the groups after the reporting date, they are added to the groups in the reporting period in which they meet the recognition criteria, subject to the annual cohorts' restriction. Composition of the groups is not reassessed in subsequent periods.

 

The Group derecognises insurance contracts when:

·      the rights and obligations relating to the contract are extinguished (i.e. discharged, cancelled or expired)

                or

·      the contract is modified such that the modification results in a change in the measurement model or the applicable standard for measuring a component of the contract, substantially changes the contract boundary, or requires the

FBD HOLDINGS PLC

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

For the half year ended 30 June 2023

 

Note 3     Summary of significant accounting policies (continued)

      

       E)     Insurance contracts (continued)

 

II.     Insurance and reinsurance contracts accounting treatment (continued)

Recognition, modification and de-recognition (continued)

modified contract to be included in a different group. In such cases, the Group derecognises the initial contract and recognises the modified contract as a new contract.

When a modification is not treated as a derecognition, the Group recognises amounts paid or received for the modification with the contract as an adjustment to the relevant liability for remaining coverage (LRC).

 

Contract boundary

The Group includes in the measurement of a group of insurance contracts all the future cash flows within the boundary of each contract in the group. Cash flows are within the boundary of an insurance contract if they arise from substantive rights and obligations that exist during the reporting period in which the Group can compel the policyholder to pay the premiums, or in which the Group has a substantive obligation to provide the policyholder with insurance contract services. A substantive obligation to provide insurance contract services ends when the Group has the practical ability to reassess the risks of the particular policyholder and, as a result, can set a price or level of benefits that fully reflects those risks.

 

Cash flows outside the insurance contracts boundary relate to future insurance contracts and are recognised when those contracts meet the recognition criteria.

 

Initial and subsequent measurement - groups of contracts measured under the PAA

The Group applies the premium allocation approach (PAA) to all the insurance contracts that it issues and reinsurance contracts that it holds. The PAA is an optional simplified measurement model in IFRS 17 that is available for insurance and reinsurance contracts that meet the eligibility criteria.

 

The Group is eligible to apply the PAA because the following criteria are met at initial recognition:

·      insurance contracts and losses-occurring reinsurance contracts: The coverage period of each contract in the group is one year or less.

·      risk-attaching reinsurance contracts: The Group reasonably expects that the resulting measurement of the asset for remaining coverage would not differ materially from the measurement that would be produced applying the general measurement model (GMM).

 

The estimates of future cash flows:

·      are based on a probability weighted mean of the full range of possible outcomes;

·      are determined from the perspective of the Group, provided the estimates are consistent with observable market prices for market variables; and

·      reflect conditions existing at the measurement date.

 

The ultimate cost of outstanding claims is estimated by using a range of standard actuarial claims projection techniques, such as, but not limited to, Chain Ladder, Bornheutter-Ferguson, Initial Expected Loss Ratio and frequency-severity methods.

 

The main assumption underlying these techniques is that a group's past claims development experience can be used to project future claims development and hence ultimate claims costs. These methods extrapolate the development of paid and incurred losses, average costs per claim (including claims handling costs), and claim numbers based on the observed development of earlier years and expected loss ratios. Historical claims development is mainly analysed by accident years, but can also be further analysed by significant business lines and claim types. Large claims are separately addressed, separately projected in order to reflect their future development. Explicit assumptions are made regarding future rates of claims inflation or loss ratios. Additional qualitative judgement is used to assess the extent to which past trends may not apply in future, (e.g., to reflect one-off occurrences, changes in external or market factors such as public attitudes to claiming, economic conditions, levels of claims inflation, judicial decisions and legislation, as well as internal factors such as portfolio mix, policy features and claims handling procedures) in order to arrive at the estimated ultimate cost of claims that present the probability weighted expected value outcome from the range of possible outcomes, taking account of all the uncertainties involved.

 

In its claims incurred assessments, the Group uses internal and market data. Internal data is derived mostly from the Group's claims reports. This information is used to develop scenarios related to the latency of claims that are used for the projections of the ultimate number of claims.

FBD HOLDINGS PLC

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

For the half year ended 30 June 2023

 

Note 3     Summary of significant accounting policies (continued)

 

       E)     Insurance contracts (continued)

 

II.     Insurance and reinsurance contracts accounting treatment (continued)

Initial and subsequent measurement - groups of contracts measured under the PAA (continued)

Some of the insurance contracts that have been written in the property line of business permit the Group to sell property acquired in settling a claim. The Group also has the right to pursue third parties for payment of some or all costs. Estimates of salvage recoveries and subrogation reimbursements are considered as an allowance in the measurement of ultimate claims costs.

 

Other key circumstances affecting the reliability of assumptions include delays in settlement and inflation rates.

 

An explicit risk adjustment for non-financial risk is estimated separately from the other estimates. For contracts measured under the PAA, unless the contracts are onerous, the explicit risk adjustment for non-financial risk is only estimated for the measurement of the liability for incurred claims (LIC).

 

The risk adjustment for non-financial risk is applied to the present value of the estimated future cash flows and reflects the compensation the Group requires for bearing the uncertainty about the amount and timing of the cash flows from non-financial risk as the Group fulfils insurance contracts. The Group does not disaggregate the change in risk adjustment for non-financial risk between a financial and non-financial portion and includes the entire change as part of the insurance service result. Methods and assumptions used to determine the risk adjustment for non-financial risk are discussed in accounting policy U.

 

The Group does not adjust the LRC for insurance contracts issued and the remaining coverage for reinsurance contracts held for the effect of the time value of money as insurance premiums are due within the coverage period of contracts, which is one year or less. The estimates of future cash flows related to incurred claims are adjusted using the current discount rates to reflect the time value of money and the financial risks related to those cash flows, to the extent not included in the estimates of cash flows. The discount rates reflect the characteristics of the cash flows arising from the groups of insurance contracts, including timing, currency and liquidity characteristics of the insurance contracts. The determination of the discount rate that reflects the characteristics of the cash flows and liquidity characteristics of the insurance contracts requires significant judgement and estimation.

 

The Group estimates certain fulfilment cash flows (FCF) at the portfolio level or higher and then allocates such estimates to groups of contracts.

 

Insurance acquisition cash flows

The Group includes the following acquisition cash flows within the insurance contract boundary that arise from selling, underwriting and starting a group of insurance contracts and that are:

·      costs directly attributable to individual contracts and groups of contracts; and

·      costs directly attributable to the portfolio of insurance contracts to which the group belongs, which are allocated on a reasonable and consistent basis to measure the group of insurance contracts.

For all groups, insurance acquisition cash flows will be allocated to related groups of insurance contracts and amortised over the coverage period of the related group.

 

Cash flows that are not directly attributable to a portfolio of insurance contracts, such as some product development and training costs, are recognised in non-attributable expenses as incurred.

 

Initial measurement

The carrying amount of a group of insurance contracts issued at the end of each reporting period is the sum of:

·      the LRC; and

·      the LIC, comprising the FCF related to past service allocated to the group at the reporting date.

 

For insurance contracts issued, on initial recognition, the Group measures the LRC at the amount of premiums received, less any acquisition cash flows paid and any amounts arising from the derecognition of the prepaid acquisition cash flows asset.

 

The Group estimates the LIC as the FCF related to incurred claims.

 

Where facts and circumstances indicate that contracts are onerous at initial recognition, the Group performs additional analysis to determine if a net outflow is expected from the contract. Such onerous contracts are separately grouped from other contracts

 FBD HOLDINGS PLC

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

For the half year ended 30 June 2023

 

Note 3     Summary of significant accounting policies (continued)

 

       E)     Insurance contracts (continued)

 

II.     Insurance and reinsurance contracts accounting treatment (continued)

Initial and subsequent measurement - groups of contracts measured under the PAA (continued)

and the Group recognises a loss in the income statement for the net outflow, resulting in the carrying amount of the liability for the group being equal to the FCF. A loss component is established by the Group for the LRC for such onerous groups depicting the losses recognised and included in the LRC.

 

Subsequent measurement

For insurance contracts issued, at each of the subsequent reporting dates, the LRC is:

·      increased for premiums received in the period;

·      decreased for insurance acquisition cash flows paid in the period;

·      decreased for the amounts recognised as insurance revenue for the services provided in the period; and

·      increased for the amortisation of insurance acquisition cash flows in the period recognised as insurance service expenses.

The FCF relating to incurred claims, therefore the LIC, is updated by the Group for current assumptions at the end of every reporting period, using the current estimates of the amount, timing and uncertainty of future cash flows and of discount rates.

 

If a group of contracts becomes onerous, the Group increases the carrying amount of the LRC to the amounts of the FCF determined under the GMM with the amount of such an increase recognised in insurance service expenses. Subsequently, the Group amortises the amount of the loss component within the LRC by decreasing insurance service expenses. The loss component amortisation is based on the passage of time over the remaining coverage period of contracts within an onerous group. If facts and circumstances indicate that the expected profitability of the onerous group during the remaining coverage has changed, then the Group remeasures the FCF by applying the GMM and reflects changes in the FCF by adjusting the loss component as required until the loss component is reduced to zero.

 

Reinsurance contracts held

Reinsurance contracts held are measured on the same basis as insurance contracts, except:

·      They are adapted to reflect the features of reinsurance contracts that differ from insurance contracts;

·      That references to onerous contracts refer to contracts on which there is a net gain on initial recognition. For some groups of reinsurance contracts held, a group can comprise a single contract. By the nature of the Group's reinsurance treaties currently in effect, there are no reinsurance contracts held that are a net gain on initial recognition nor that are deemed as having no significant risk of being a gain.

·      The Group recognises a group of reinsurance contracts held it has entered into from the earlier of the following:

o  the beginning of the coverage period of the group of reinsurance contracts held. (However, the Group delays the recognition of a group of reinsurance contracts held that provide proportionate coverage until the date any underlying insurance contract is initially recognised, if that date is later than the beginning of the coverage period of the group of reinsurance contracts held); and

o  the date the Group recognises an onerous group of underlying insurance contracts if the Group entered into the related reinsurance contract held in the group of reinsurance contracts held at or before that date.

·      The risk adjustment represents the amount of risk being transferred by the Group to the reinsurer.

·      That cash flows are within the contract boundary if they arise from substantive rights and obligations of the Group that exist during the reporting period in which the Group is compelled to pay amounts to the reinsurer or in which the Group has a substantive right to receive services from the reinsurer.

·      The excess of loss reinsurance contracts held provides coverage for claims incurred during an accident year.

·      All cash flows arising from claims incurred and expected to be incurred in the accident year are included in the measurement of the reinsurance contracts held. Some of these contracts may include reinstatement reinsurance premiums, which are guaranteed per the contractual arrangements and are thus within the respective reinsurance contracts' boundaries.

·      In the measurement of reinsurance contracts held, the probability weighted estimates of the present value of future cash flows include the potential credit losses and other disputes of the reinsurer to reflect the non-performance risk of the reinsurer.

·      On initial recognition, the Group measures the remaining coverage at the amount of ceding premiums paid. The carrying amount of a group of reinsurance contracts held at the end of each reporting period is the sum of:

o  the remaining coverage; and

o  the incurred claims, comprising the FCF related to past service allocated to the group at the reporting date.

 

FBD HOLDINGS PLC

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

For the half year ended 30 June 2023

 

Note 3     Summary of significant accounting policies (continued)

      

       E)     Insurance contracts (continued)

 

II.     Insurance and reinsurance contracts accounting treatment (continued)

Reinsurance contracts held (continued)

·      Instead of at initial recognition, where the Group recognises a loss on initial recognition of an onerous group of underlying insurance contracts or when further onerous underlying insurance contracts are added to a group, the Group establishes a loss-recovery component of the asset for remaining coverage for a group of reinsurance contracts held depicting the recovery of losses. The loss-recovery component adjusts the carrying amount of the asset for remaining coverage.

·      At each of the subsequent reporting dates, the remaining coverage is:

o  increased for ceding premiums paid in the period; and

o  decreased for the amounts of ceding premiums recognised as reinsurance expenses for the services received in the period.

·      Instead of a loss component, the loss-recovery component adjusts the carrying amount of the asset for remaining coverage. Where a loss-recovery component has been established, the Group subsequently reduces the loss recovery component to zero in line with reductions in the onerous group of underlying insurance contracts in order to reflect that the loss-recovery component shall not exceed the portion of the carrying amount of the loss component of the onerous group of underlying insurance contracts that the entity expects to recover from the group of reinsurance contracts held.

Methods used and judgements applied in determining the IFRS 17 transition amounts

The Group has been able to apply the fully retrospective approach with the exception of using the modified retrospective approach for the choice of initial recognition yield curves for underwriting years 2015 and prior.

 

To the extent that the Group did not have reasonable and supportable information to determine discount rates applicable on the date of initial recognition of the group of contracts, the Group estimated the discount rates using an observable yield curve.

 

III.    Amounts recognised in comprehensive income

Insurance revenue

The insurance revenue for the period is the amount of expected premium receipts allocated to the period. The Group allocates the expected premium receipts to each period of insurance contract services on the basis of the passage of time. But if the expected pattern of release of risk during the coverage period differs significantly from the passage of time, then the allocation is made on the basis of the expected timing of incurred insurance service expenses.

 

The Group changes the basis of allocation between the two methods above as necessary, if facts and circumstances change. The change is accounted for prospectively as a change in accounting estimate.

 

For the periods presented, all revenue has been recognised on the basis of the passage of time.

 

Insurance service expenses

Insurance service expenses include the following:

·      incurred claims and benefits excluding investment components;

·      other incurred insurance acquisition expenses;

·      amortisation of insurance acquisition cash flows;

·      changes that relate to past service (i.e. changes in the FCF relating to the LIC); and

·      changes that relate to future service (i.e. losses/reversals of onerous groups of contracts from changes in the loss components).

For the contracts measured under the PAA, amortisation of insurance acquisition cash flows is based on the passage of time.

 

Net income /(expense) from reinsurance contracts held

The Group presents separately on the face of the income statement, the amounts expected to be recovered from reinsurers and the reinsurance expense. Re-instatement premiums contingent on claims on the underlying contracts are treated as part of the claims that are expected to be reimbursed under the reinsurance contracts held. Ceding commissions that are not contingent on claims of the underlying contracts issued reduce ceding premiums and are accounted for as part of reinsurance expenses.

 

FBD HOLDINGS PLC

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

For the half year ended 30 June 2023

 

Note 3     Summary of significant accounting policies (continued)

 

     E)     Insurance contracts (continued)

II.     Insurance and reinsurance contracts accounting treatment (continued)

Finance income/ (expense) from insurance contracts issued

Insurance finance income or expense comprise the change in the carrying amount of the group of insurance contracts arising from:

·      interest accreted on the LIC; and

·      the effect of changes in interest rates and other financial assumptions.

The Group disaggregates insurance finance income or expenses on insurance contracts issued between the income statement and the statement of comprehensive income. The impact of changes in market interest rates on the value of the insurance contract liabilities are reflected in the OCI in order to minimise accounting mismatches between the accounting for financial assets and insurance assets and liabilities. The Group's financial assets backing the insurance portfolios are predominantly measured at fair value through other comprehensive income (FVOCI).

      

   K)     Financial instruments

a)     Recognition, classification and measurement

Financial assets and financial liabilities are recognised in the Statement of Financial Position when, and only when, the Group becomes party to the contractual provisions of the instrument.

 

The Group classifies its financial assets, subsequent to initial recognition, at either:

·      amortised cost;

·      fair value through other comprehensive income (FVOCI); or

·      fair value through profit and loss (FVTPL).

The Group determines the appropriate classification based on:

(i)    the business model for managing the financial assets: how the Group manages its financial assets in order to generate cash flows-either by collecting contractual cash flows, selling the asset or both; and

(ii)   the contractual cash flow characteristics of the financial asset: the Solely Payments of Principal and Interest (SPPI) test - whether the contractual terms of the financial asset give rise to, on specified dates, cash flows that are solely payments of principal and interest.

A financial asset is measured at amortised cost if both the following conditions are met:

(i)    the financial asset is held within a business model whose objective is to hold the financial asset in order to collect contractual cash flows; and

(ii)   the contractual terms of the financial asset gives rise on specific dates to cash flows that are SPPI on the principal amount outstanding.

A financial asset is measured at FVOCI if both the following conditions are met:

(i)    the financial asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and

(ii)   the contractual terms of the financial asset gives rise on specific dates to cash flows that are SPPI on the principal amount outstanding.

A financial asset is measured at fair value though profit and loss (FVTPL), unless it is measured using either of the above two methods - amortised cost or FVOCI.

Investments at FVOCI

FVOCI investments relate to quoted debt securities. These investments pass the SPPI test and are classified as FVOCI as they are held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets. They are recognised on a trade date basis at fair value, and are subsequently revalued at each reporting date to fair value, with gains and losses being included directly in the Statement of Comprehensive Income until the investment is disposed of or determined to be impaired, at which time the cumulative gain or loss previously recognised in the Statement of Comprehensive Income, is included in the Income Statement for the year.

 

 

FBD HOLDINGS PLC

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

For the half year ended 30 June 2023

 

Note 3     Summary of significant accounting policies (continued)

 

 K)     Financial instruments (continued)

a)     Recognition, classification and measurement (continued)

Interest revenue using the effective interest method and foreign exchange gains and losses on the financial asset are recognised in the Income Statement.

 

The effective interest method is a method of calculating the amortised cost of a debt instrument and of allocating interest income over the relevant period.  The effective interest rate is the rate that exactly discounts estimated future cash receipts through the expected life of the debt instrument, or, where appropriate, a shorter period, to the net carrying amount at initial recognition.

 

The Expected Credit Loss (ECL) on debt instruments measured at FVOCI does not reduce the carrying amount of the asset in the statement of financial position, which remains at fair value. Instead an amount equal to the allowance that would arise if the assets were measured at amortised cost is recognised in OCI with a corresponding charge to provision for credit losses in the income statement.

Investments at FVTPL

Investments at FVTPL are stated at fair value and include quoted shares, collective investment schemes and unquoted investments. These investments are classified as FVTPL as they do not pass the SPPI test. They are recognised on a trade date basis at fair value and are revalued at subsequent reporting dates at fair value, with gains and losses being included in the

Income Statement in the period in which they arise. Any dividend or interest earned on FVTPL investments is also recognised in the Income Statement.

 

Loans

Loans are recognised on a trade date basis at fair value plus transaction costs and are subsequently measured at amortised cost using the effective interest rate method. When it is not possible to estimate reliably the cash flows or the expected life of a loan, the projected cash flows over the full term of the loan are used to determine fair value.

Other receivables

Amounts arising out of direct insurance operations and other debtors are measured at initial recognition at fair value and are subsequently measured at amortised cost, after recognising a loss allowance for ECLs (note K (c)).

Deposits with banks

Term deposits with banks comprise cash held for the purpose of investment. Demand deposits with banks are held for operating purposes and included in cash and cash equivalents. Deposits with banks and cash and cash equivalents are valued at amortised cost.

Subordinated debt

Subordinated debt issued by the Group comprise callable dated deferrable subordinated notes. The subordinated debt is measured at amortised cost using the effective interest rate method. Interest and amortisation relating to the financial liability is recognised in the Income Statement.

b)     Derecognition

The Group derecognises a financial asset only when the contractual rights to the cash flows of the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of the ownership of the asset to another entity.  If the Group neither transfers nor retains substantially all the risk and rewards of ownership and continues to control the transferred asset, the Group recognises its retained interest in the asset and an associated liability to the extent of its continuing involvement in the financial asset. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognise the financial asset.

 

The Group derecognises financial liabilities when, and only when, the Group's obligations are discharged, cancelled or they expire.

 

 

 

 

 

 

FBD HOLDINGS PLC

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

For the half year ended 30 June 2023

 

Note 3     Summary of significant accounting policies (continued)

 

 K)     Financial instruments (continued)

 

c)     Impairment of financial instruments

The Group recognises loss allowances for ECLs at each balance sheet date for the following financial instruments that are not measured at FVTPL;

·      financial assets at FVOCI

·    financial assets at amortised cost

Financial assets at FVOCI

The Group categorises financial instruments classified as FVOCI into the following categories at each reporting date.

 

Stage 1: 12-month expected credit losses (not credit-impaired)

These are financial instruments where there has not been a significant increase in credit risk since initial recognition. An impairment loss allowance equal to the 12-month ECL is recognised, which is the portion of the lifetime ECL resulting from default events that are possible within the next 12 months.

 

Stage 2: Lifetime expected credit losses (not credit-impaired)

These are financial instruments where there has been a significant increase in credit risk since initial recognition but which are not credit-impaired. The Group assesses whether the risk of default over the remaining expected life of the financial instrument is significantly higher than had been anticipated at initial recognition, the credit risk is always considered as significantly increased if any contractual payments are more than 30 days past due. An impairment loss allowance equal to the lifetime ECL is recognised, being the ECL resulting from all possible default events over the expected life of the financial instrument.

 

Stage 3: Lifetime expected credit losses (credit-impaired)

These are financial instruments which are credit-impaired at the reporting date but were not credit-impaired at initial recognition. If the financial instrument is more than 90 days past due or if there is other evidence of financial distress (for example, a legal bankruptcy or default), the instrument is classified as credit-impaired (stage 3) which means the impairment loss has to reflect the lifetime ECL as in stage 2. The interest, for Stage 3 assets, is calculated by applying the effective interest rate (EIR) to their carrying value, if the asset is no longer credit-impaired, the calculation of interest income reverts to the gross basis.

 

Financial assets at amortised cost

The Group calculates a loss allowance for financial assets at amortised cost. The Group considers the best reasonable and supportable information when considering ECLs for 'Loans' and 'Other receivables'. The Group calculates ECL on loans at initial recognition by considering the consequences and probabilities of possible defaults only for the next 12 months (stage 1). It continues to apply this method until a significant increase in credit risk has occurred, at which point the loss allowance is measured based on lifetime ECLs (stage 2) or where significant increase in credit risk has occurred and the asset is credit-impaired (stage 3). For 'Other receivables' the Group uses the simplified approach, and therefore does not track the changes in credit risk, but instead recognise a loss allowance based on lifetime ECLs at each reporting date. Impairment loss allowances for ECL on financial assets at amortised cost are presented as a reduction in the gross carrying amount in the Statement of Financial Position.

 

The measurement of impairment losses under IFRS 9 across relevant financial assets requires judgement, in particular, for the estimation of the amount and timing of future cash flows when determining impairment losses and the assessment of a significant increase in credit risk. These estimates are driven by the outcome of modelled ECL scenarios and the relevant inputs used.

 

 

 

 

 

 

 

 

 

 

 

 

FBD HOLDINGS PLC

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

For the half year ended 30 June 2023

 

Note 3     Summary of significant accounting policies (continued)

 

N)     Taxation

 

Income tax expense or credit represents the sum of income tax currently payable and deferred income tax. Income tax currently payable is based on taxable profit for the year. Taxable profit differs from profit before tax as reported in the Consolidated Income Statement because it excludes items of income or expense that are taxable or deductible in other years and further excludes items that are not taxable or deductible. The Group's liability for income tax is calculated using rates that have been enacted or substantively enacted at the reporting date. Income tax is recognised in the Income Statement except to the extent that it relates to items recognised directly in equity.

Deferred income tax is provided, using the liability method, on all differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is expected to be realised or the liability to be settled.

 

Accounting adjustments to opening reserves as a result of the adoption of IFRS 9 and IFRS 17 (i.e. the retrospective effect of adopting the accounting standard recognised in opening reserves) will be brought into account as a transitional adjustment and spread over 5 years for tax purposes.

 

Deferred tax assets are recognised for all deductible differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and the carry forward of unused tax credits and unused tax losses can be utilised. The carrying amount of deferred income tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit would be available to allow all or part of the deferred income tax asset to be utilised.

 

T)     Other financial services income

 

Other financial services income previously comprised interest on instalment premiums which is now included with Insurance revenue and no longer presented separately on the face of the Consolidated Income Statement.

    

U)     Critical accounting estimates and judgements in applying accounting policies

 

In the application of the Group's accounting policies, the Directors are required to make judgements, estimates and assumptions about the carrying amount of assets and liabilities that are not readily apparent from other sources. The key judgements and the key sources of estimation uncertainty that have the most significant effect on the amounts recognised in the interim financial statements are detailed below. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. The estimates and underlying assumptions are reviewed on an ongoing basis and actual results may differ from these estimates.

 

Estimates of future cash flows to fulfil insurance/reinsurance contracts

The Group estimates insurance liabilities in relation to claims incurred. In estimating future cash flows, the Group incorporate, in an unbiased way, all reasonable and supporting information that is available without undue cost or effort at the reporting date. This information includes both internal information and external historical data about claims and other experience, updated to reflect current expectations of future events.

 

Uncertainty in the estimation of future claims and benefit payments arises primarily from the severity and frequency of claims and uncertainties regarding future inflation rates leading to claims and claims-handling expenses growth. As a result of the uncertainties noted, the Group sets provisions at a margin above the best estimate known as the risk adjustment.

 

Assumptions used to develop estimates about future cash flows are reassessed at each reporting date and adjusted where required.

 

Methods used to measure the LIC

The Group estimates insurance liabilities and reinsurance assets in relation to claims incurred on a risk basis. Estimates are performed on an accident year basis with further allocation to annual cohorts of portfolios based on available data.  Judgement is involved in assessing the most appropriate technique to estimate insurance liabilities for the claims incurred. In certain instances, different techniques or a combination of techniques have been selected for individual accident years or groups of accident years within the same type of contracts.

 

 

 

FBD HOLDINGS PLC

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

For the half year ended 30 June 2023

 

Note 3     Summary of significant accounting policies (continued)

 

U)     Critical accounting estimates and judgements in applying accounting policies (continued)

 

Methods used to measure the LIC (continued)

The ultimate cost of outstanding claims is estimated by using a range of standard actuarial claims projection techniques, such as, but not limited to, Chain Ladder, Bornheutter-Ferguson, Initial Expected Loss Ratio and frequency-severity methods.

 

The liabilities for incurred claims represent the cost of claims outstanding. Actuarial techniques, based on statistical analysis of past experience, are used to calculate the estimated cost of claims outstanding at the period end.

 

The estimation of outstanding claim also includes factors such as the potential for inflation and the potential impact of the Personal Injuries Guidelines. Provisions for more recent claims make use of techniques that incorporate expected loss ratios and average claims costs (adjusted for inflation) and frequency methods. The average claims cost and frequency methods are particularly relevant when calculating the ultimate cost of the current accident year.

 

FBD have now received the final judgement in relation to the Covid-19 Business Interruption test case. This has provided more certainty on the measurement of losses and FBD have issued communications to all affected policyholders in order make the final settlement of their claims.

 

FBD has received information from more than 700 policyholders in order to assess the claims and has been making interim payments based on these assessments. This data has provided reasonable certainty in respect to a number of assumptions underlying the best estimate of Covid-19 Business Interruption losses and will continue to improve as FBD proceed to final settlements.

 

The calculations are particularly sensitive to the estimation of the ultimate cost of claims for the particular classes of business and the estimation of future claims handling costs. Actual claims experience may differ from the assumptions on which the actuarial best estimate is based and the cost of settling individual claims may exceed that assumed.

 

The actual amount recovered from reinsurers is sensitive to the same uncertainties as the underlying claims. To the extent that the underlying claim settles at a lower or higher amount than that assumed this will have a direct influence on the associated reinsurance asset.

 

To minimise default exposure, the group's policy is that all reinsurers should have a credit rating of A- or better or have provided alternative satisfactory security.

 

Discount rates

The Group is required to discount future cash flows related to incurred claims as the weighted time to settlement is greater than one year from the date claim occurred.

 

The Group determines the risk-free discount rate using a bottom-up approach. Under this approach, the discount rate is determined as the risk-free yield curve adjusted for differences in liquidity characteristics between the financial assets used to derive the risk free yield and the relevant liability cash flows (known as an illiquidity premium).

 

The Group uses the Euro denominated EIOPA prescribed rates under Solvency II as the risk-free yield. The EIOPA EUR spot rates are derived from market observable EUR swap rates for durations one to twenty years.

 

The illiquidity premium is determined by reference to observable market rates.

The yield curves used to discount the estimates of future cash flows are as follows:

	Currency	1 year	3 years	5 years	10 years	15 years	20 years
30 June 2022	EUR	1.5%	2.2%	2.4%	2.8%	3.0%	2.9%
31 Dec 2022	EUR	3.3%	3.3%	3.2%	3.2%	3.1%	2.9%
30 June 2023	EUR	4.1%	3.6%	3.3%	3.0%	2.9%	2.8%

 

 

 

 

 

 

 

FBD HOLDINGS PLC

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

For the half year ended 30 June 2023

 

Note 3     Summary of significant accounting policies (continued)

 

U)     Critical accounting estimates and judgements in applying accounting policies (continued)

 

Methods used to measure the risk adjustment for non-financial risk

The risk adjustment for non-financial risk is the compensation that is required for bearing the uncertainty about the amount and timing of cash flows that arises from non-financial risk as the insurance contract is fulfilled. As the risk adjustment represents compensation for uncertainty, estimates are made on the degree of diversification benefits and expected favourable and unfavourable outcomes in a way that reflects the Group's degree of risk aversion. The Group estimates an adjustment for non-financial risk separately from all other estimates.

 

The risk adjustment is calculated at the entity level and then allocated down to each group of contracts in accordance with their risk profiles. A confidence level approach is used to derive the overall risk adjustment for non-financial risk. The Group aim to target a risk adjustment within a range between the 75^th and 80^th percentiles. At year-end 2022, the risk adjustment was at the 80^th percentile, and remained at the 80^th percentile to date.

 

As the Group is using the PAA method, a risk adjustment is only required for the LIC and not the LRC (unless there is an onerous group).

 

To determine the risk adjustment for non-financial risk for reinsurance contracts, the Group will apply these techniques both gross and net of reinsurance and derive the amount of risk transferred to the reinsurer as the difference between the two results.

The methods and assumptions used to determine the risk adjustment for non-financial risk were not changed in 2023.

 

Uncertainties in impairment testing

The Group has carried out impairment testing on tangible and intangible assets. The recoverable amount of an asset is the higher of its value in use or its fair value less costs to sell. In the case of the Property, Plant and Equipment (excluding Owner Occupied Property which is held at revalued amount), policy administration system, Intangible Assets and Right of Use Assets there is no reliable estimate of the price at which an orderly transaction to sell the assets would take place and there are no direct cash-flows expected from the individual assets. These assets are an integral part of the FBD General Insurance business, therefore, the smallest group of assets that can be classified as a cash generating unit is the FBD General Insurance business.

 

The Value in Use cash flow projections are based on the quarterly forecast for 2023 approved by the Board in May 2023 and the five year strategic projections approved by the Board in quarter four 2022. The 2028 and 2029 figures are extrapolated assuming the performance in 2028 and 2029 are in line with 2027.  The time period of six years used in the cash flow projections is less than the weighted average remaining useful life of the assets in the FBD General Insurance business being assessed. This projection and plan refresh represent management's best estimate of future underwriting profits and fee income for FBD.

 

General Insurance business projections factors in both past experience as well as expected future outcomes relative to market data and the strategy adopted by the Board. The underlying assumptions of these forecasts include average premium, number of policies written, claims frequency, claims severity, weather experience, commission rates, fee income charges and expenses. The average growth rate used for 2023 is 6%, for 2024 is 7%, followed by a 3% growth rate for 2025-2027. The growth rate is assumed to be flat for later years. Future cash flows are discounted using an estimated weighted average cost of capital (WACC) of 10.3% which is considered a reasonable estimate following the recent increase in risk free rates.

 

Sensitivity analysis was performed on the projections to allow for possible variations in the amount of the future cash flows and potential discount rate changes. The sensitivities include climate change scenarios, delayed benefits from the Judicial Council Guidelines, additional inflation in claims settlements, reduced growth rates and positive impacts of new initiatives.

 

The level of headroom has remained in line with year-end 2022, and in all scenarios run, the value in use of the cash generating unit exceeded the carrying value of the assets, demonstrating that no reasonably possible change in key assumptions would result in an impairment of the assets. The largest reduction in the level of headroom was from a climate change scenario.

 

 

 

FBD HOLDINGS PLC

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

For the half year ended 30 June 2023

 

Note 4     First time adoption of new accounting standards

 

The following new standards have been adopted by the Group during the period ended 30 June 2023:

• IFRS 9 'Financial Instruments'; and

• IFRS 17 'Insurance Contracts'.

 

 The Group's accounting policies have been updated for the application of IFRS 9 and IFRS 17 from 1 January 2023 and are detailed within note 3. The impact on transition can be summarised, as follows:

 

IFRS 9 'Financial Instruments'

IFRS 9 'Financial Instruments' has been issued to replace IAS 39 'Financial Instruments: Recognition and Measurement'.

 

IFRS 9 replaced IAS 39 Financial Instruments: Recognition and Measurement for annual periods beginning on or after 1 January 2018. However, the Group elected, under the amendments to IFRS 4, to apply the temporary exemption from IFRS 9, thereby deferring the initial application date of IFRS 9 to align with the initial application of IFRS 17.

 

Financial assets within the scope of IFRS 9 are required to be classified as being measured, subsequent to initial recognition, at amortised cost (AC), fair value through other comprehensive income (FVOCI) or fair value through profit or loss (FVTPL). The assessment of how an asset should be classified is dependent on both the overall objective of the business model within which the asset is held and whether the contractual terms of the financial asset give rise to, on specified dates, cash flows that are solely payments of principal and interest (SPPI). IFRS 9 introduces a new forward-looking impairment model based on expected credit losses (ECL) rather than incurred losses. The accounting for financial liabilities will remain largely consistent with that applied under IAS 39, except for recognition of changes in own credit risk in other comprehensive income for certain liabilities designated at fair value through profit or loss.

 

The consolidated statements for the comparative periods presented have been updated using the classification overlay approach with the amendment to the transition requirements in IFRS 17 issued by the IASB at the end of 2021. Differences arising from the adoption of IFRS 9 were recognised in retained earnings as of 1 January 2022.

               

To reflect the differences between IFRS 9 and IAS 39, IFRS 7 Financial Instruments: Disclosures was also amended. The Group has applied the amended disclosure requirements of IFRS 7, together with IFRS 9, for the year beginning 1 January 2023.