Deal will cost policy holders dearly unless the group returns to profitability

Future of ailing insurer now has much healthier outlook, 13 months after administrators arrived

THE LAST thing the taxpayer needs is another cash call to cover losses at a struggling financial services company as the upfront bill for the banks reaches €70 billion.

But losses at Quinn Insurance Limited (QIL), the largest Irish-owned insurer, mean all holders of general insurance policies such as motor and household cover will have to dig deep to help meet these losses.

The €706 million loss for 2009 and a €160 million loss for the first three months of 2010 will result in a €600 million call on the State’s Insurance Compensation Fund. Given that there is just €30 million in this fund, the losses are likely to lead to a levy on all non-life insurance policies in the State – possibly as high as 2 per cent.

QIL’s joint administrators, Michael McAteer and Paul McCann, of insolvency accountants at Grant Thornton in Dublin, said the first call on the fund, amounting to €180 million, will be made later this year.

The Central Bank whose concerns over the financial health of the company led to the High Court’s appointment of the administrators in March 2010 has said the need to access the fund was “not unexpected in light of the serious and persistent solvency problems at QIL which led to its administration”.

A review of the fund will be carried by the Central Bank over the coming weeks, after which it will make a recommendation to the Minister for Finance Michael Noonan on how the fund will need to be replenished. The Central Bank stressed that it worked closely with the administrators to limit the call on the fund.

A mitigating factor is the structure of the sale of the profitable parts of the beleaguered Cavan insurer, which is being taken over in a joint bid by State-owned Anglo Irish Bank and the Boston-based insurer Liberty Mutual.

QIL, which will remain in administration, will receive 25 per cent of any profits generated by Liberty Mutual Direct Insurance Company, the new company which is 51 per cent owned by Liberty and 49 per cent by Anglo and QIL. This will reduce the call on the fund and in turn general insurance policyholders across the industry.

If a deal had not taken place, the call on the fund would be substantially higher, the administrators said.

Anglo will try to pay off some of the Quinn family’s €2.88 billion in debts at the bank by taking the other 25 per cent share of the profits in that half of future spoils. The remaining 50 per cent of profits will go to Liberty.

The losses recorded in the 15 months to March 31st, 2010 – the date the joint administrators were appointed – have arisen primarily as a result of QIL’s disastrous foray in the UK market and particularly the loss-making professional indemnity insurance policies covering solicitors.

The UK insurance market has endured a torrid time over the financial crisis as increased claims and a higher incidence of fraud has led to spiralling losses for leanly priced companies. There is a higher incidence of claims in a recession and of legal actions against solicitors in a property downturn.

QIL had developed a solidly profitable business in Ireland by keeping costs down through the early settlement of claims and low overheads, but the company could not replicate this model successfully in the much larger UK market.

In a defensive statement earlier this week founder Seán Quinn, said the administrators had caused “enormous damage” to one of Ireland’s most successful companies in just 13 months.

In fact, as the losses show, the damage was done in the run-up to the administration. The trouble with insurance is that with the cost of badly priced policies, the losses take time to register. About 92 per cent of losses on an insurance policy are incurred in their first year and they reduce gradually over time, though the so-called “long tail” risk remains for some time. The administrators raised prices on policies to stop the rot.

Anglo and Liberty Mutual, run by Armagh-born Ted Kelly, will take over a business with a balance sheet of €911 million. The State, indirectly through Anglo, will add its shareholding in the State’s largest domestic general insurer to its direct ownership of the State’s largest health insurer, VHI.

The new company will maintain the existing 1,570 jobs in the Republic and Northern Ireland, at the head office in Cavan and the other offices in Enniskillen and Blanchardstown. The insurer’s office in Manchester is to close on May 27th.

The new company will be run exclusively by Liberty Mutual, and the administrators and Anglo will have no day-to-day role.

The business is being bolstered by about €500 million in reserves. The release of guarantees provided by QIL subsidiaries to banks and bondholders owed €1.28 billion by the insurer’s former parent company, Quinn Group, will free up €264 million of cash and assets for the new company. The discovery of these guarantees led to the Central Bank’s administration action.

The lifting of these guarantees could only have taken place with the restructuring of the Quinn Group earlier this month under which Anglo and group’s banks and bondholders took control of the business from Seán Quinn.

Quinn Healthcare, which was formerly the Bupa business, is not part of the Anglo-Liberty deal and will be sold separately. The proceeds from that sale will be used to pay down part of the debt owing by the group to its lenders. This was one of many conditions behind the restructuring of the group.

QIL is advancing €98 million to the new insurance company, while Liberty Mutual is providing €102 million. The €98 million will be repaid first.

As for QIL’s remaining UK business, it will remain under the control of the joint administrators who will continue writing profitable UK motor policies until the end of 2012.

Until then, the new insurer can at any point buy those policies. Under the terms of the deal, LMDI will manage the UK business for the administrators.

Some 13 months since the administration began, the jobs and future of a troubled insurer have a far healthier outlook, though without any involvement of Seán Quinn.

Yesterday’s deal confirms his loss of what was originally the most profitable part of his empire.