In a new-year message to his staff, Seán Quinn said his insurance company had a "robust" year, making record profits. Going on to list the achievements of his Quinn Group, Quinn spoke of his "renewed excitement" for the year to come. What wasn't disclosed in the lengthy message was that, behind the scenes, he was locked in talks with the Financial Regulator to shore up the finances of the insurance company.

For well over a year, the regulator was in exhaustive discussions with Quinn Insurance to boost its solvency ratios – the reserves insurers must keep to pay out on policyholders' claims. The regulator has been concerned about the health of Quinn Insurance and wanted the company to come up with a business plan that would improve its position.

Those talks came to a sudden end late last month when Quinn Insurance chairman Jim Quigley said guarantees over Quinn Insurance's assets were given to cover the liabilities of other parts of Quinn Group. The guarantees reduced the company's assets by €448m.

That was enough for the regulator to step in and dash to the High Court last week to secure approval for the appointment of provisional administrators from Grant Thornton to run the company. If confirmed as administrators by the court later this month, they are expected to sell the insurance business.

The regulator has been keeping a close watch since 2008 when it slapped a fine on the insurance company of €3.2m and on Quinn personally of €200,000 for making unauthorised loans of €288m to Quinn family companies.

According to an affidavit submitted to the High Court by the regulator last week, which has been seen by the Sunday Tribune, it was concerned that if Quinn Insurance were to "continue as at present, there might not be sufficient funds to meet claims", that it had "failed to make adequate provisions for its debts" and that there were also concerns about the way it was being managed.

In late December 2008, Quinn agreed to pump €70m into the company, the affidavit states. According to the regulator, an insurer must have a solvency margin of 150% and a solvency ratio of 40%. Even after the injection, Quinn fell short of this.

To improve the solvency position, in April last year the company agreed to limit its gross written premium (GWP) to €972m for that year with €610m of this being generated in Ireland and the balance in the UK. That would help bring the solvency ratio to 40% by the year end, while it also hoped to make a profit from underwriting motor insurance in Britain that would improve the situation further. At a June presentation to the regulator it said GWP for the year would still be about €972m but that premiums generated by its UK business would be higher at €380m.

The affidavit says that, early last December, the company again met with the Financial Regulator to update it on its progress. The company wouldn't be able to meet the 150% margin; GWP had exceeded €972m; the motor underwriting in the UK hadn't made a profit; and its solicitors' indemnity insurance book was performing poorly. By the year end, GWP was €1.05bn and it sustained a net underwriting loss in the UK of €44.4m. The solvency margin and ratio, after initially improving, declined. The figures had to be revised down by the company because of a €75m drop in the value of its property portfolio and by adding €15m to its reserves.

The concern at the Financial Regulator deepened on Christmas Eve when it was told that Quinn Group required a waiver from its banks to avoid breaching its debt covenants. In January, the regulator told Quinn Insurance that it should get a contingency plan in place in case Quinn Group collapsed. In a phone call on 11 March, Quinn Insurance chief executive Colm Morgan was told by the regulator it was "exceptionally disappointed" with the recovery plan and that its forecasts for investment returns were "very optimistic" and the profit forecasts "were unrealistic".

A few days later Quigley said the company would increase its premium prices in the UK in a bid to stem the losses there. However the regulator insisted that this would merely slow premium income growth. The regulator also pointed out its concerns about the company's equity and property exposures.

On 24 March, Quigley and Morgan told the regulator that there were guarantees on the insurance company to cover the debts of other Quinn Group entities. It initially held off seeking the appointment of administrators, in a bid to give the company another opportunity to propose a solution, but when it became apparent that there was no prospect of the guarantees being released, it was left with no other choice but to rush to the courts, the affidavit says.

'Aggressive and unnecessary'

Quinn Group said in a statement last week that the regulator's appointment of provisional administrators was "aggressive and unnecessary", that the company was able to "meet all of their payment obligations".

"These guarantees are entirely lawful, do not breach any insurance regulations, and were fully disclosed in the statutory accounts of the relevant companies," it said, adding that the guarantees had been given back in 2005.

"It is extraordinary that the regulator was unwilling to give the necessary time to work through those concerns, rather than taking precipitate action which damages the interests of all stake-holders, including the state," it said. Quinn Group says "cash profits" in the first quarter of the year were about €50m and it expects to make about €20m a month in profit for the rest of the 2010.

"We will be setting out our concerns in a full hearing of the High Court on 12 April," the regulator said a statement.

Quinn has always maintained a higher risk asset base than other large insurance companies in Ireland. The likes of Zurich, Axa, Aviva and Allianz all put roughly half their available assets into government bonds.

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. Quinn also reduced its investments in shares over the same period from €600m to €175m. However, it was unclear whether that drop was due to losses on declining share prices or liquidated positions.

Quinn's competitors have long complained about a lack of transparency in the company's reserves and feared they would not have the capacity to clean up the mess if the company became insolvent or faced a large-scale financial crisis. According to industry sources, its accounts do not provide enough detail to determine whether the business is sufficiently provisioned and "what belongs to which part of the business".

This transparency issue came to a head in July 2008 when Quinn pulled out of coverage by Moody's after the credit ratings agency revised its outlook on the insurer to stable from positive and withdrew its Baa2 rating. At the time, Quinn said the change was immaterial as the company had no publicly-traded debt in issue. However, the company does have about €1.2bn in privately-placed debt to a syndication of creditors led by Barclays.

Insurance industry sources said Quinn's apparent solvency problems could further damage the reputation of Ireland as a place to do business. They also expressed concern that customers still regarded Seán Quinn as a great Irish success story, despite his occasionally disastrous investment history, regulatory breaches between companies in the Quinn Group, and ongoing solvency problems in Quinn Insurance.

"Customers who have been getting unrealistic quotes for years will now be facing the reality of the cost of insurance instead of Alice in Wonderland prices," one source said.