Seán Quinn, his proxies and supporters have tried in the past week-and-a-half to depict the Financial Regulator's actions as a misconceived and overzealous attack on an otherwise sound, well-managed and profitable insurance company. For example, a statement last Wednesday put out by Quinn Group's public relations representatives, WHPR, protested that both Quinn Insurance and the wider group had "ample liquidity" and were making "cash profits" this year.
But the regulator's affidavit is not chiefly concerned with these matters. Instead, the case for putting QIL into administration rests on three broad claims: 1) the business is being run without making adequate provision for debts; 2) the business is being managed in such a way as to jeopardise the material interests of policy-holders; 3) the company was not complying with financial regulations.
At the heart of these matters is the approach to risk adopted by QIL and its main shareholder, Seán Quinn, which appears to have left the business with unacceptable solvency margins and technical reserves, according to the regulator.
"There are three types of risk for an insurance company: what you underwrite, what you reserve and investment risk," said Paul Carty, president of the Irish Brokers Association and head of private and commercial business at Willis. "There is not a rule of thumb or industry benchmark for insurance risk – each area has its own dynamic."
Quinn's competitors have complained privately that QIL underwrites risky clients at uneconomic levels such that those clients are not properly insured.
"They write business at Alice in Wonderland prices," one industry source said. "When we price something, first we look at the 'insanity price' – the lowest possible price at which we could write the business and still cover the risk – and Quinn goes below that," the source said.
QIL, however, maintains that it runs a more efficient, low-cost business than other insurers and can afford to price lower due to the way it handles claims.
But there is a concentration risk on the general insurance side, too, in that QIL largely insures firms from the very same sectors represented in Quinn Group's other businesses: property, hotels and pubs, and commercial property. This has a parallel in the areas where the insurance company invests its premiums.
Quinn has always maintained a higher-risk asset base than other large insurance companies in Ireland. Safe and highly-rated government securities make up roughly half the assets of Quinn competitors RSA, Axa, Aviva and Allianz. By contrast, Quinn Insurance more than doubled its property exposure between 2006 and 2007 to €574m – more than a quarter of its total reported 2007 assets of €2bn – at a time when property prices began plunging from record highs.
As of December 2008, the last date for which public records are available, more than €500m of QIL's €1.8bn in assets were invested in property. Other large insurers with similar exposures held proportionately tiny amounts in property, preferring safe and more liquid investments.
"The asset mix has to be right to meet claims as and when they fall due," said Peter Oakes, director of regulatory consultancy Compliance Ireland. "This is obviously related to what the regulator has done. There is a liquidity risk here if they can't liquidate assets when they need them. It's a big deal."
This relates to the regulator's long-standing concerns about the viability of Quinn Insurance, as shown in repeated attempts to get the company to map a path to financial recovery. Within a month of Seán Quinn and QIL paying a record fine to the regulator, in October 2008, for unauthorised inter-company loans to cover personal investment losses, the company admitted it could not meet its obligations under a financial recovery plan, agreed only in May 2008 due to deteriorating economic conditions which at the time were affecting property and share values. This problem persisted into last month when the regulator had to tell Quinn yet again that its projected investment returns on assets were "very optimistic" and that therefore its profit forecasts were "unrealistic".
This pattern of unsupported optimism was also evident in Seán Quinn's own share trading, through which he built up an enormous and unsustainable stake in Anglo Irish Bank through contracts for difference (CFDs) – financial instruments that expose investors not only to gains and losses in a stock, but to leverage. Using CFDs to build up a stake of nearly 30% in Anglo, Quinn ultimately lost billions. In addition, he is known to have lost hundreds of millions on construction firm McInerney.
"To use CFDs in conjunction with the 'buy and hope to God it goes up' strategy is a recipe for disaster and shows no understanding of the product and the financial markets," said Paul Sommerville, head of private clients at spread betting firm Delta Index. "To concentrate investment in one bank which specialises in lending money to yourself and your friends in construction is crazy and any financial adviser with six months' training could tell you that."
If Seán Quinn's one-way bet on banking and property affected only his personal fortune, it would be a mere sideshow. But because it has implicated one of the largest insurance companies in Ireland through intracompany borrowings and security guarantees involving QIL subsidiaries, the future of the entire Quinn Group could be at stake.
Quinn and those speaking on his behalf have said repeatedly in the past 10 days that QIL can trade its way out of difficulties, yet as the regulator's affidavit shows, the company – not to mention Seán Quinn himself – has repeatedly traded into difficulty, such that the watchdog finally felt there was no choice but to appoint administrators.
The case against Quinn Insurance
Tomorrow the Financial Regulator is seeking High Court confirmation of its decision to appoint administrators to Quinn Insurance Limited (QIL). Here is what the regulator is arguing:
* QIL failed to disclose guarantees secured on up to eight of its subsidiaries, which negatively affected the company's solvency.
* These guarantees reduced the value of QIL's assets by €448m, effectively bringing its solvency margin and ratio to zero.
* Going back to May 2008, QIL repeatedly overestimated its ability to trade its way out of difficulty.
* QIL's regulatory solvency has been inadequate for nearly two years .
* QIL's plans for financial recovery were consistently rejected by the regulator as inadequate.