Fairfax to reap €40m on €70m loan to FBD
FAIRFAX – the Canadian financial giant founded by billionaire Prem Watsa – is in line for a near €40m return on a €70m loan to insurer FBD in 2015.
It is effectively sitting on a more than €23m paper share profit, on top of the more than €10m in interest the Irish firm has paid to Fairfax since then.
All told, Fairfax is set for a €40m return on its FBD investment by next year.
FBD secured the €70m, 10year convertible bond to shore up its capital solvency in 2015. The initial 12pc interest rate was later reduced to 7pc.
The bond includes an agreement that will see Fairfax entitled to eventually take a 19.1pc stake in the Irish company by converting the bond to equity.
The bond can be converted at any time from next September, and must be converted to shares in FBD by March next year if the shares have been trading above €8.50 for 180 days prior to that.
The insurer’s CEO, Fiona Muldoon, said she expects Fairfax to continue accepting interest on its bond for as long as possible before the bond converts to equity.
Shares in the stock market-listed insurer soared almost 9pc yesterday to €11.35 after it issued a strong set of 2017 financial results and reinstated a dividend.
If FBD’s shares were trading at that level this time next year and the bond converts at €8.50 per share as agreed, then Fairfax will have made an instant €23.4m paper profit.
At that stage, it would also have received at least another €5m in interest from FBD on the bond.
When the €8.50 conversion price was set in 2015, it was at a 37pc premium to the FBD share price at the time.
Prem Watsa – dubbed Canada’s Warren Buffet – has already profited from Ireland’s financial crisis.
Fairfax made a €566m gain from a 9.3pc stake in Bank of Ireland that it took in 2011 as part of a plan hatched by the bank to save it and prevent it falling into State ownership.
Ms Muldoon said she expects the Fairfax bond to convert to equity in March next year.
“They’ll own 19.1pc and it will have been an astute financial investment,” Ms Muldoon told the Irish Independent.
“Where they take it from there is for them. They’ve proven themselves to be astute investors with us and with others and I’m sure they will continue to prove themselves.
“When you need money, you need money, so I can’t complain,” said Ms Muldoon of the deal struck with Fairfax in 2015 when FBD was losing money.
FBD reported yesterday that it made a pre-tax profit of €49.7m in 2017, compared to €11.4m in 2016.
Its combined operating ratio – a key measure for insurers – was 86pc at the end of the year compared to 99pc in 2016. Any figure below 100pc means an insurer is underwriting profitably.
Its gross written premiums edged 3pc higher to €372m and FBD said that it retained customers and had a strong performance in new business from farm, small business and consumer lines.
FBD has begun efforts to raise its profile in Dublin, and opened an office on the city’s northside last year.
It will also open an office in the southside.
Ms Muldoon said the level of awards inflation stood at 9pc last year, which was a moderation compared to the previous two years.
The company also paid out a net €5.4m in claims related to Storm Ophelia in October.
‘They’ll own 19.1pc and it will have been an astute investment’