Shares in FBD soar 12pc on Fairfax bond deal
Shares in insurance firm FBD soared as much as 12pc yesterday, a day after it confirmed that it has secured €70m in backing from Canada's Fairfax Financial.
FBD has been on the hunt for capital to bolster its reserves for the past number of weeks, after it struggled to cope with bigger claims and low investment returns that have damaged its solvency buffer.
FBD's net claims soared to €215.8m in the first half of 2015, from €117.2m in the first half of 2014. Last month, FBD also said that it had set aside an additional €88m to cope with an expected increase in the amount paid out in claims.
The company, whose interim chief executive, Fiona Muldoon, is former head of banking and insurance supervision at the Central Bank, aimed to raise funds before the year end. New European Union insurance business solvency rules - known as Solvency II - come into force on January 1.
FBD - which also operates the nononsense.ie motor and home insurance brand - said last month that its existing business strategy "has not delivered profitable growth" and that it will refocus on its core customer base - farmers and small businesses. It's also ditching its nonsense.ie brand.
The firm confirmed on Wednesday that Fairfax, founded by chief executive and chairman Prem Watsa, is investing in FBD via a convertible bond.
Fairfax can convert the bond to equity in FBD after three years and up to 10 years after its issue, at a price per share of €8.50. That's a 37pc premium to the closing price on September 15. Its shares touched €7.55 yesterday.
The bond can automatically convert to equity if the conversion price is exceeded during a 180-day trading period during the conversion period.
Goodbody Stockbrokers said that converting the bond would give Fairfax, a former investor in Bank of Ireland, about a 19pc stake in FBD.
"We anticipate this lower coupon could add circa 11pc to net income in 2018 relative to the straight debt deal, but post conversion as much as circa 23pc," said Goodbody analyst Eamonn Hughes.
FBD has also sold its 50pc stake in its leisure business for €48.5m. It sold it to Farmers Business Development, which owns almost 29pc of FBD.
The bond issue is likely to cement Fiona Muldoon's ascendency to the formal chief executive role at FBD.
She was hired as chief financial officer in March. She took on the interim chief executive role when incumbent Andrew Langford resigned during the summer.
Irish insurers will have to set aside significantly more reserves to cover car-crash, workplace injuries and other claims as compensation payouts surge, according to the industry's regulator.
The Central Bank will tell insurers the results of a review of claims payouts within weeks, according to Sylvia Cronin, the institution's insurance director. The average High Court personal injury award soared 34pc last year, according to the courts service.
"A number of companies would be a lot more optimistic than others in their approach to reserving," Ms Cronin said. "On average, they will have to increase reserves." (Additional reporting: Bloomberg)