Quinn crisis may be start of wider problems
Could the current difficulties at Sean Quinn's insurance group mark the opening of a 'second front' in the financial crisis, as insurers come under the pressure of plummeting profits, asks Roisin Burke
Published 04/04/2010 | 05:00
FIRST billions more were committed to the collapsed banking sector, then Quinn Insurance was dragged kicking and screaming into administration -- it's been quite a week.
This time last year another serious upset in the insurance industry hit when billions were wiped off the value of Aviva as its share price crumbled. The stock price dropped by a third on March 5, 2009, when the international insurer insisted on paying out a dividend despite concerns about its capital strength.
Share price recovered, capital fears abated and sales began to rise at Aviva weeks later, but the wobble reflected wider concerns about the sector. Major European insurance stocks had already fallen by about 60 per cent that year and Aviva's shares were down 62 per cent in the year.
The wariness of the markets towards insurance stocks may have been heightened by the disastrous near collapse of AIG the previous September. The US government was forced to bail out the insurance giant to tune of $182bn (€135bn).
The merest suggestion that the insurance sector might start to wobble, any shadow of a 'second front' to the financial crisis is unnerving.
Former chairman Sean Quinn is bullish about Quinn Insurance's financial shape, and he'll get his chance to fight his corner on its viability at the High Court on Monday, April 12.
Two insurance companies went into administration last December when the regulator had concerns about their financial position and abilities to meet claims. ESG Reinsurance Ireland and its subsidiary, Accent Europe Insurance Company, aren't household names -- they are offshoots of a Bermuda-based reinsurance company and were in the process of running down their book of Irish business here anyway, but the administration measure underlines that the regulator is watching things carefully.
It has been a rough couple of years in the insurance business, no question. Globally Aviva plunged into a loss of £885m (€997m) in 2008 due to falls of asset values. Drastic cost-cutting followed and it recovered to take £1.3bn (€1.5bn) profits in 2009. Its Irish business saw profits fall by €12m last year.
Quinn Insurance is the second biggest player here. Its assets have depreciated by €448m. It emerged this week that its liabilities exceed assets by more than €200m -- and its solvency cushion has been wiped out, counsel for the regulator told the High Court.
Profits at Quinn Insurance fell by €100m in 2008, a 55 per cent drop to under €86m, then turmoil on the markets eliminated €150m of its investment portfolio. Its British business of 400,000 subscribers is unprofitable, according to the regulator.
Operating profits at FBD more than halved from €65m in 2008 to €28m in 2009.
State-backed VHI has been losing money and haemorrhaging subscribers at a rate of knots.
Allianz Ireland's profits dived by 74 per cent in the third quarter of last year, down €19m year-on-year. Allianz executive Damien O'Neill said then that the Irish general insurance market was "not profitable".
Industry insiders feel that the life side of the business faces a potentially massive shake-out. Life-insurance sales collapsed by almost 40 per cent last year. The double whammy of lapsed subscriptions for policies and eroded revenue from commercial property rental, in which life companies are big investors, has hit hard. This could be the worst hit sector and one that the regulators should monitor closely.
The 'weather events' of the winter will set insurers back €550m, a bigger payout than the last 10 years put together. Between that and the global economic 'chassis', the industry isn't expecting 2010 to be a bumper year. "Challenging" is about the most positive adjective being used.
However, although it can't be ruled out, an industry-wide collapse -- similar to that of the banking sector -- seems less likely.
At the top of the week, just before the Quinn incident, Financial Regulator Matthew Elderfield told a large insurance conference at the RDS that too many parallels between the banking and insurance industries shouldn't be drawn.
"I am cautious about over-learning the lessons of the banking crisis for the insurance industry," he said. "Insurance companies are inherently different from banks and, while there have been some notable exceptions, many insurance companies have weathered the financial crisis in relatively better position than their banking counterparts."
One of these "notable exceptions" seems to be Quinn Insurance, judging by Wednesday's move to put it into administration.
Insurance companies have had far more exposure to the horrors of the financial markets than might be imagined.
Signing people up for motor and health insurance policies wasn't actually that much of a money spinner for insurance companies in recent years, and some industry experts say underwriting subscriptions was actually a loss-maker.
"The actual insurance book was making a loss in many cases," said Dr Martin Mullins of University of Limerick's Kemmy Business School, "but insurers were able to be less disciplined on the underwriting side of the business and invest cash on the markets."
Claims were hugely expensive for insurers in Ireland until the Personal Injuries Assessment Board was set up and roads were improved. "In some cases, insurance companies were paying out more than they were getting in," says Dr Mullins.
Margins on policies were also tightening: from 2003, premiums came down by about three per cent each year.
Regulator data for 2008 shows that Quinn Insurance was a heavier investor in shares than its peers, and where others favoured investing in super-safe government bonds, Quinn didn't have any.
There is a hugely different attitude to playing the markets now, an industry source said. Quinn competitor FBD has moved investments "in a big way, about 88 per cent" into government gilts, and mostly German government gilts "about the most solid ones there are". There is no doubt most of the others will have done the same and hopefully Quinn Insurance did too.
Meanwhile, the regulator will be cracking the whip to make sure insurance players are shoring up their reserves, and European regulations coming down the track will be demanding more rigour too.
Much as everyone -- Mr Quinn, the regulator, the administrators -- is proclaiming that it's business as usual at Quinn Insurance, no one knows for sure what will happen next. The 20 supposed expressions of interest in buying all or part of the insurer indicate a good excuse for a nose at the books as much as anything else.
On the news of the administration, FBD's share price rose almost six per cent, the jump believed to be driven by the potential for a market share grab by the former farmer's insurer.
"I'm not so sure the Irish health insurance market is that attractive to outsiders at the moment," said Dr Mullins, referring to Quinn's 23 per cent share of that market, bought from Bupa when it exited Ireland. "The situation regarding risk equalisation is undecided and might put off some potential buyers."
If worried Quinn customers decide to jump ship in droves, its attractiveness could be reduced. "Then it depends what you would actually be buying," another source says, "how many policy holders are there, how many might leave."
Recently, punters are far more switch-happy with their insurance policies. "There's been a big sea change of customers switching between providers," observed Brian Turner, a lecturer in insurance studies at University College Cork. A massive 80,000 people switched insurers last year -- more than in the last decade combined -- while switching between plans at the same firm has also risen.