FBD is to resume paying a dividend for 2017, following significant improvement in the financial performance of the insurer. The board of FBD is proposing to pay a dividend of 24c/share for the 2017 financial year. This is the first time that FBD has paid a dividend in three years and this reflects the company’s confidence and that it has returned to profitable growth.

The stock market reacted positively, with shares closing up 15% at €12 on Tuesday. This is the highest level the shares have traded at since March 2015. They are now up 50% in the past year.

The insurer made a net profit before tax of €50m in 2017, compared with €11m in 2016. Gross written premiums increased 3% to €372m. This increase was mainly driven by farm, business and private motor products of €11.6m, offset by a €0.9m reduction in broker business.

New business volumes grew 12% largely in commercial, private motor and farm. Net claims incurred amounted to €203m – down from €228m in 2016.

The combined operating ratio, which is the measure of profitability in the sector, improved from 99% in 2016 to 86% last year. Anything under 100% means the company is making money.

Fiona Muldoon, FBD CEO, said: “After three years of hard work and corrective action, my colleagues and I have delivered a strong underwriting profit for the year.”

She added that FBD’s target return on equity is a full 12 months ahead of schedule. She also said FBD has displayed “exceptional resilience” and is “now well positioned to build on our loyal customer base”. The company said Storm Ophelia cost the insurer €5.4m net of reinsurance. It received almost 2,200 claims, with an approximate cost of €10-11m.

Company strategy

When FBD was set up 50 years ago as an insurance company focused on the needs of farmers, few expected it to grow into an insurance company that could make an annual profit of €300m. As it turned out, it couldn’t. But those farmer shareholders who scraped up the requested £50 note in the depressed late 1960s remained loyal to the insurer.

In the past, FBD’s strategy of expansion, particularly away from its core, didn’t deliver. As it targeted price sensitive urban motor consumers, which had a different claims profile to its core rural and farming customer base, high investment returns insulated it against any weak operational performance. But the party stopped as investment returns fell off, coupled with a long trail of claims that couldn’t be stemmed overnight.

And if that wasn’t enough, FBD’s weakened balance sheet was not going to be sufficient to meet tougher EU solvency rules.

Thankfully the loyalty of its founding fathers, Farmer Business Developments (FBD co-op), came to the rescue and bought the balance of the hotels business, injecting FBD with a necessary €48.5m in cash.

But it needed more. With a rights issue unlikely to succeed, it eventually secured an injection of €70m in the form of a bond from Canadian investment firm Fairfax.

This was to be the final piece in a series of key measures, which also included overhauling the governance structure, bringing in a completely new management team, including a new CEO, closing the defined benefit pension scheme, scrapping the NoNonsense Insurance brand and cutting costs to give FBD a chance to survive.

One thing that has survived is its network of 33 branches. FBD remains committed to these and sees them as a key to its differentiation in the market.

Many may say FBD’s return to profitability has been on the back of rising premiums. While this is a factor of the insurance market in Ireland, it reflects a larger structural problem that exists in the market.

With a strengthened board of directors with international and relevant financial experience, FBD is a changed entity. It has de-risked its business, increasing the number of actuaries, improved pricing and underwriting actions

FBD also has a clear vision of how it can be profitable, while also carefully learning from mistakes of the past. Today, FBD is a better business, with a clear strategy, a single streamlined board, a single brand and a refocus on its farming root customers.

Fairfax set to take 20% stake in FBD

In 2015, FBD received a €70m capital injection in the form of a convertible bond from Canadian investment fund Fairfax, which is owned by Prem Watsa. FBD pays an interest rate of 7% on this investment.

Fairfax has the option from September 2018 to convert this bond into shares if the stock trades at €8.50 or over for a period. If Fairfax exercises the option, it would see it owning around 20% of FBD Holdings. Farmer Business Developments (FBD Co-op), which currently owns 24% of the insurer, will see its shareholding diluted to less than 20% (19.9%).

The Fairfax business model involves investing in and buying businesses where it sees upside growth potential. It already owns a string of insurers. In the last few years it acquired UK insurer Brit and New York-listed insurer Allied World. It has also recently taken a stake in a large insurer in Greece, as well as upping its stake in the largest insurance company in India.

Prem Watsa’s Fairfax was one of the investors that helped rescue Bank of Ireland from State control when it took a 6% stake in the bank in 2011. The Canadian billionaire has since offloaded most of his shareholding – making him a tidy €560m from the investment.