Bail-in fears spur FBD's €150m move to bonds
Insurer FBD switched over €150m of its investments to corporate bonds over the past year because of the low returns offered by banks and the fear that new bail-in rules could see it lose its money.
FBD chief executive Fiona Muldoon told the Irish Independent that the extremely low returns offered on term deposits by banks, coupled with fears that new bail-in rules introduced this year by the European Union could expose bank bondholders and depositors to bailing out a failed lender, meant it has shifted investments away from banks.
The new bail-in mechanism is designed to prevent taxpayers being liable for bailing out collapsed lenders. It leaves bank bondholders and customers with more than €100,000 on deposit at risk of footing the bill.
At the end of June 2016, Ireland's only stock market-listed insurer held €491m in corporate bonds, and €100m in government bonds. The bonds are euro-denominated.
At the same time last year, FBD held a total of €341m in corporate and government bonds.
Its deposits with banks went from €451m to €305m in that period.
FBD, as with other insurers, invests policy money that is held to cover claims. Its annualised total investment return at the end of June was 1.9pc, which was a strong performance given the current interest rate environment.
FBD said that it escaped recent market volatility precipitated by June's Brexit vote because it had changed its investment strategy last year.
"There was a time in the middle of the crisis when banks were offering very attractive term deposit rates and we would have put a lot of money on for years at quasi-bond type returns for very low risk," said Ms Muldoon.
"As they mature, and as the bank bail-in rules come into play, it's no longer the case that for corporate investors that depositing at a bank is risk free," she added.
"To be honest, the return is abysmal now. We've gone back to a more typical investment portfolio for an insurance company."
"You have to be paid for the risk you take," she added. "You might entertain the bail-in risk if you were being properly paid. But if you've a bank trying to charge you for leaving your money with them, you're not inclined to take any risk at all."
FBD made a €3.1m loss in the first half of the year.