FBD to meet EU standards with €70m Fairfax loan

A €70 million loan from Prem Watsa’s Fairfax will help troubled insurer FBD meet tough new solvency standards that the EU intends to impose on underwriters next year.

Canadian multinational Fairfax Financial Holdings will lend €70 million to FBD through a 10-year bond that the lender has the right to convert into a 19 per cent stake in the Irish company.

The move comes just weeks after FBD announced that it lost €96.4 million in the first six months of the year as claims against its policies rose and returns on its investments fell.

Fairfax’s loan will help ensure FBD exceeds new standards from the EU designed to ensure insurance companies have enough capital to meet claims. The directive, known as Solvency II, is due to come into force next January.

Approval

It is understood the company believes the sale of its property and leisure joint venture for €48.5 million and the closure of its defined-benefit pension scheme will bring it into line with Solvency II.

However, sources say that the Fairfax bond will ensure that it has enough capital to exceed the solvency directive's standards. Fairfax, led by founder, Mr Watsa – dubbed Canada's Warren Buffet – invested in Bank of Ireland following the 2008 financial crash, but sold part of its holding earlier this year.

The Canadian group, whose 2014 earnings topped €1 billion, focuses on property and casualty insurance and is thought to be investing in FBD for the longer term.

The Irish company will issue the 10-year convertible bond to Fairfax once it gets approval from shareholders at an EGM. Goodbody Corporate Finance advised it on the deal.

The bond will have an interest rate of 7 per cent a year. Fairfax will have the right to convert the bond to FBD shares at €8.50 each, a 37 per cent premium over FBD’s close on the Dublin market on September 15th.

Convert bond to shares

If it takes up this option, it will get around 19 per cent of the insurer. Fairfax can convert the bond into shares from year three of the loan or it can happen automatically if FBD’s equities trade at more than than the conversion price for 180 days.

The company last traded around the €8.50 mark at the end of July. For most of that month, the shares were more than €9. However, their value collapsed when it announced its interims last month, which were its worst in 40 years.

Their price jumped by 8.87 per cent to €6.75 following yesterday's announcement. Interim chief executive, Fiona Muldoon, said the news was a "significant vote of confidence" in the company.

Mr Watsa said the investment underlines Fairfax’s belief in the strength of the Republic’s economic recovery and in FBD’s core franchise in farming and small business.

After its interims, FBD said it would row back on its business to focus on that franchise, and ditch its “no-nonsense” brand designed to attract non-life business from younger consumers.