Friday 18 October 2019

FBD faces battle for control after shares soar

Fiona Muldoon, FBD. Photo: Arthur Carron/Collins
Fiona Muldoon, FBD. Photo: Arthur Carron/Collins

Dan White

The recovery in the FBD share price means that the €70m bond issued to Fairfax in 2015 is now virtually certain to be converted into a near-20pc shareholding in September 2018, diluting the existing shareholders and triggering a battle for control of the only remaining Irish-owned insurer.

FBD had good news for its shareholders but bad news for its customers at last week's AGM, with outgoing chairman Michael Berkery telling shareholders that the "hardening" of insurance rates had continued into 2017 - ie premiums are still rising, and that profits would continue to rise this year.

Berkery said that FBD had seen a "steady improvement" in its combined operating ratio (claims costs and expenses as a percentage of premium income) towards its target of "mid to high nineties". With annual premium income of €308m, every 1pc improvement in its combined operating ratio is worth over €3m to the FBD bottom line. Davy Stockbrokers analyst Emer Lang is predicting 2017 pre-tax profits of €15.9m at FBD, up from €11.4m in 2016.

The return to profitability at FBD, which lost €85m in 2015, has led to a strong recovery in the share price, which has risen by 30pc to €8.50 over the past 12 months.

Following the huge losses recorded in 2015 FBD bolstered its balance sheet by issuing a €70m bond to Canadian investor Prem Watsa's Fairfax Financial. Not alone does the bond pay a hefty 7pc coupon or interest rate, it is convertible into FBD shares at any time from September 2018 if the FBD share price rises to €8.50 or above.

Converting the bond would give Fairfax 8.23m shares, equivalent to a 19.2pc stake in FBD while at the same time reducing the combined Farm Business Development/FBD Trust shareholding from 33.2pc to 26.8pc.

The likely reduction in the founders' shareholding comes as former IFA chief executive Michael Berkery, who had been FBD chairman for 21 years, steps down and is replaced by former Glanbia chairman Liam Herlihy.

At the current share price FBD has a market value of just €286m, rising to €365m if, or more likely when, the Fairfax bond is converted. It is now the only remaining Irish-owned insurance company in a market dominated by large foreign-owned companies - Aviva, the largest general insurer in the Irish market, has a capitalisation of £21.6bn (€25.4bn).

While the likely conversion of the Fairfax bond and possibility of a battle for control of FBD is good news for shareholders, chief executive Fiona Muldoon says it is too early to expect any reduction in customer premiums. "While we are seeing some signs of a reduction in the rate of increase of the cost of claims there is no question of reduction in premiums yet," she said. She also warned that the claims environment remains "difficult" with employers' and public liability, and motor remaining a cause of particular concern.

However, there are some indications that the extremely rapid increases in insurance premiums - the CSO calculates that motor insurance premiums rose by a cumulative 52pc in the three years to March 2017 and home insurance premiums by 22pc - may be easing. Motor insurance premiums rose by just 0.7pc in the 12 months to March 2017. Davy's Lang reckons that average premiums at FBD will rise by about 2pc in 2017 and that the number of policies on its books will remain broadly unchanged.

There are also signs that very high Irish insurance premiums are enticing overseas players back into the market, with insurance brokers reporting that London insurance market Lloyd's has been very aggressive in quoting for new business from medium-sized companies.

Cutting insurance premiums for consumers will take government action, Muldoon believes.

"The government published a very fine report [the Report on the Cost of Motor Insurance in January]. Now it needs to implement it," she said.

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