Anglo could be left with tab for Quinn's €3bn losses

 

ANALYSIS:With the State-owned bank at the back of the creditors’ queue, Ireland’s biggest insurer might yet be nationalised, writes SIMON CARSWELL

THE ROOT cause of Seán Quinn’s debt problems and the difficulties at Quinn Insurance stem from the decision of the businessman and his family to take a highly leveraged position in Anglo Irish Bank.

It was a disastrous investment which together with some other share investments have cost the Quinn family losses of €3 billion. Quinn has only reluctantly – and on an entirely unsatisfactory drip-feed basis – released details of the impact of that investment and how owning an indirect stake of more than a quarter of the State’s third largest bank has undermined one of Ireland’s largest insurers.

Yesterday brought a little more disclosure from Quinn – a statement from his overall business, the Quinn Group, said that “due primarily to equity losses of circa €3 billion outside of the Quinn Group, the Quinn family owe Anglo Irish Bank €2.8 billion”.

In other words, the bank in which the family lost most of the €3 billion in equity investments gave loans to cover those losses. This confirmed what had been suspected for a considerable time.

The fate of Quinn Insurance – and ultimately the wider Quinn Group as the insurance firm is its most profitable division – looks like it will be decided at a crucial High Court hearing next Monday.

The insurer, which owns Quinn Direct and has about one million customers, has broken rules laid down by the Financial Regulator which dictate how much insurance companies must hold in their reserve to meet potential liabilities covering their policyholders.

The regulator will seek to confirm the appointment of joint provisional administrators – installed by the court last week – at next Monday’s High Court hearing. That is unless State-owned Anglo Irish Bank can convince the regulator that the bank’s alternative proposal is a better way to go. The reason for the bank’s attempt to find an alternative solution is simple – if the administration of Quinn Insurance is confirmed, then the company will most likely be sold to another insurer at what will be a reduced price and then the bank will have to write off some or most of the €2.8 billion in loans owing by the Quinn family.

The difficulty for the Quinn Group and its 5,500 employees is that the reality is only now dawning on the group’s founder that the business is in severe financial difficulty when it appears to be too late to find a solution for his beleaguered Quinn Insurance.

The regulator told the court last week that it had “grave concerns” in respect of “the financial position of the insurer, the manner in which it has been, and continues to be, managed and its inability to comply with supervisory regulations in a material respect – namely the obligation to maintain an adequate solvency margin”.

Ever since Quinn Insurance was fined €3.25 million – and Quinn €200,000 – by the regulator in October 2008 over loans to help fill the hole left by his Anglo losses, the regulator has had concerns about the solvency of the insurer as it fell below the thresholds for how much it must hold in reserve.

The regulator’s most recent court action was prompted by the discovery that subsidiaries of the insurer had provided guarantees totalling €1.2 billion to lenders to the wider Quinn Group – bondholders and banks led by UK lender Barclays – which reduced the insurer’s assets by €448 million and put it into the red on the crucial solvency margins.

Yesterday, the group said these guarantees “can, given appropriate time, be withdrawn” with no impact on the group’s borrowings and that the only requirement to rectify the solvency issue was an injection of €100 million to reach the regulator’s solvency margin.

The group said the insurer’s solvency was affected by “investment losses” of more than €220 million over the last two years – but did not disclose how these arose.

Quinn has repeatedly said that the insurer is profitable. The group said yesterday that it had surplus cash of €70 million, had almost €1 billion in cash reserves, and generated cash profits of €47 million in the first three months of this year, making €18 million in profits last month alone. All this is well and good, but the financial hole at Quinn Insurance is only part of the problem. Trust has broken down between the regulator and Quinn. The company has, since October 2008, been a repeat offender when it comes to holding proper reserves in a company that is the largest Irish-owned insurer covering the lives, cars, homes, businesses and liabilities of one million customers.

The regulator is also unhappy with how the company is being managed – a problem that will only be solved if the profitable insurance firm is taken out of the management of the wider Quinn Group and sold to another party.

This could prove disastrous for the State given that Anglo is at the back of the queue – behind the other banks and bondholders who are owed €1.2 billion by the Quinn Group – on its €2.8 billion in loans when it comes to being repaid.

Quinn and his group has warned that Quinn Insurance is key to the repayment of the loans owing to the State-owned bank. Anglo is working an alternative solution – to stop the administration – that would undoubtedly be hard for the bank to sell to an incredulous public who have already seen €12.3 billion of taxpayers’ cash pledged to the bank to keep it afloat with the prospect of a further €10 billion injection.

Among the proposals being considered by the bank is that it would take control of the Quinn Group, restructure the business and get Quinn Insurance’s house in order. This would involve the propped-up bank propping up the insurer in the short term to retain the value of the business before selling it on at a better price and recovering the State more money. This option would also require Quinn accepting that he no longer has any ownership in the group he founded 37 years ago.

Minister for Finance Brian Lenihan, the bank’s shareholder, has charged Anglo’s new management team with devising the best commercial solution that will lead to the best financial outcome for the State. As mad as it may seem, this could involve the State taking control of Quinn’s group and the largest Irish-owned insurer.

This could also appease the politicians who have been lobbying desperately to save the 5,500 jobs at the wider Quinn Group, including some 2,500 jobs at the insurer. However, Financial Regulator Matthew Elderfield has already taken the nuclear option by turning to the High Court and administration. This is the first public flexing of his muscles following years of lax regulation and a banking meltdown that has crippled the State. A compromise will prove very difficult to reach before next Monday’s crunch court hearing.

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