Troubled Irish Insurers Seek Solvency II Support From Bond Investors, Buffett

By | August 28, 2015

Investors hunting for yield after a global financial rout might well take a detour to the headquarters of a tiny insurance company hidden away along a highway in west Dublin.

Just as world markets cratered on August 24, troubled Irish insurance company FBD Holdings plc said it was weighing the sale as much as 100 million euros [$110.7 million] of subordinated bonds to bolster capital before new solvency rules come into place in January. The company may have to pay a coupon of about 10 percent as investor appetite for risky assets wanes, according to analysts at Merrion Capital and Cantor Fitzgerald LP.

“It will be an expensive issue,” said Raymond Tam, an analyst at CreditSights in London. “It should be able to meet the interest payments so it’s a good way to solve the solvency position. There’s a question over the appetite for investors to take such a small issue.”

FBD is the latest insurer to turn to junior bond markets to meet tougher solvency rules. Insurers in Europe issued $35.5 billion of subordinated debt instruments last year and about another $12 billion in the first half of 2015, according to analysts at Bloomberg Intelligence. Last month, Irish state-owned health insurer Vhi Insurance DAC said Warren Buffett’s Berkshire Hathaway Inc. granted it a subordinated loan.

Government Bonds

For investors, yields on such debt can be attractive compared with those linked to sovereign debt. The yield on Ireland’s 10-year bonds has plunged to 1.35 percent from 14.2 percent in July 2011, as the country exited an international bailout and European Central Bank President Mario Draghi’s quantitative easing program came into play.

An FBD subordinated bond may have to carry an interest rate of about 9 percent, according to Fiona Hayes, an analyst in Dublin with Cantor Fitzgerald.

That would be the second-highest coupon for a subordinated bond issued by a European insurance company so far this year, according to data compiled by Bloomberg. Only securities sold by CIS General Insurance Ltd., a UK firm owned by Co-operative Group Ltd., carry a higher interest rate, the data show.

FBD may have to pay an interest rate somewhere between the “high single digits and low double-digits,” Liam Dunne, a bond trader at Merrion Capital in Dublin, said by e-mail. That reflects the problems facing the Irish insurance industry in general and FBD in particular, he said.

Farming Cover

FBD, based in an industrial estate on one of the main roads leading out of Dublin, started by selling insurance to farmers across Ireland about 40 years ago.

The company is being hit by increasing claims after it expanded to offer products such as motor insurance to urban clients. This week, Fiona Muldoon, who was appointed interim chief executive officer last month, said in common with rivals, the company hadn’t charged enough for its policies.

With FBD shares tumbling, Muldoon said the company is weighing a bond sale of between 50 million euros and 100 million euros before the end of the year. Under the impending rules, European insurers can count subordinated debt as part of its own capital buffers against potential losses.

Muldoon joined FBD this year, replacing Finance Director Cathal O’Caoimh in March, before succeeding Andrew Langford as CEO last month. O’Caoimh has been appointed interim finance director, the company said.

For companies like FBD, the advantage of selling bonds is that they can sidestep selling shares, which would immediately hit existing investors. The downside for the company is a hefty interest rate, which may rise still further if investors continue to shy away from risky assets.

Insurers’ subordinated bonds have fallen 5.4 percent since the end of February, according to data from Bank of America Merrill Lynch. Debts sold by European governments with the highest credit rating and investment-grade corporate bonds have fallen by less than 2.4 percent for the same period, the data show.

Buffett’s Loan

Last month, Berkshire Hathaway gave Vhi a 90 million-euro subordinated loan, pushing the company’s total capital reserves to more than 540 million euros [$597.6 million]. The company declined to give financial details of the reinsurance or subordinated debt agreements, citing commercial sensitivity.

“There are more investors interested in this kind of product, providing capital to insurance companies,” said Oliver Tattan, who runs Dublin-based Insurance Regulatory Capital, which invests in insurers’ subordinated debt.

–With assistance from Joe Brennan in Dublin and Noah Buhayar in Seattle.


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