The board of insurer FBD Holdings plc this week concluded its independent investigation into internal allegations made against chief executive Fiona Muldoon.

In a statement released to the stock exchange on Monday, it noted that “the allegations have not been upheld”. She will continue in her role as chief executive “to develop the business of FBD for the benefit of customers, shareholders and staff with the full confidence and support of the chairman and the board”, according to the statement. This brings an end to a six-week investigation commissioned by the board, chaired by Liam Herlihy, which notified the stock exchange at the end of June.

Muldoon, who also sits on the board of Bank of Ireland, was appointed CEO of FBD almost three years ago. She is credited for returning the insurer to profitability. The group reported a pre-tax profit of €50m last year and subsequently declared to pay a dividend after almost three years. That profit and growth momentum has continued into 2018 where, despite a €6m hit from Storm Emma, the insurer saw its profits from insurance rise almost 70% to €19m in the first half of the year.

The former central bank official is one of the highest paid executives in the sector and received a pay package of €1m last year which included bonuses of €472,000.

Focus shifts to Fairfax

The conclusion of the internal investigation comes as a welcome relief to shareholders. It had put the company under an unwelcome shadow over the past six weeks and distracted from the development of the business.

The focus now shifts to the convertible bond and the intentions of the Canadian investment firm Fairfax, which gave a €70m lifeline to the insurer in 2015 after FBD racked up a €96m loss in the first half of the year.

The bond is convertible into equity, at a strike price of €8.50 a share, from September onwards. Fairfax has until March 2019 to exercise this option which would see it take a 19% stake in FBD.

Over the last 12 months, shares in FBD have performed strongly and are up 30% and currently trading at around €10.90. This would see the financial giant owned by Prem Watsa (which invested in Bank of Ireland) make a €40m return from its investment.

Right now speculation is mounting about Fairfax’s intentions and whether the firm is a buyer or a seller. While the investment firm has a track record of converting stakes held in insurance companies into much larger footholds and positioning for a full takeover move, it is unclear whether Fairfax has ambitions to take a larger foothold in FBD.

One suggestion is that KBC could be interested in taking a share in FBD after the German-based bank pledged its commitment to the Irish market last year. Walter Bogaerts, former KBC executive has been a director of FBD since 2016. It would be a real turn of fate for KBC which sold its 22% stake in 2005. FBD subsequently bought half this stake (or 11% of the shares) in a share buyback at the time for more than €80m. Fairfax’s 19% shareholding today would be valued at around €70m and therefore would seem like a good deal for KBC.

Shareholding changes

But the current events now raise the question as to what its largest shareholder, Farmer Business Developments plc, chaired by Padraig Walsh, will do should Fairfax convert and choose to sell its shareholding. Farmer Business Developments plc which currently owns a 24.6% share in the insurer, will see its ownership diluted to around 20%. With a market capitalisation of around €378m, it means Farmer Business Developments’ share is currently valued at almost €93m. It is set to receive a €2m dividend this year from the insurer.

Even though, FBD Holdings plc has successfully executed a significant turnaround in its business and is growing profitably, Farmer Business Developments could make a bid along with FBD to buy the Fairfax stake.

The charitable organisation FBD Trust, which is chaired by Michael Berkery, owns a 9% share of FBD and will see this also diluted.

If the wider FBD family (Farmer Business Developments and FBD Trust) were interested in securing the Fairfax shareholding, it would see them hold close to 50% of the shares. However, it may not need to extend to this volume as the plc itself could buy back some of the shares, similar to when KBC exited.

While shareholders in Farmers Business Developments may support such a move, the challenge will be to raise the finance to increase its shareholding in the insurer. It does have a strong balance sheet with total shareholder funds of €223m (its investment in FBD plc accounts for 40% of this).

It would seem unlikely that Fairfax would hold on to a minority stake in a small insurer that is solely focused on a relatively small home market. Should Fairfax decide to not remain involved with FBD, it will want to maximise its return from its investment. Given the rising profits, once they can be sustained, it would seem attractive to many suitors and could come at a premium to today’s price.