Quinn Insurance Report May 2013

QUINN INSURANCE LIMITED

Report on the Administration of Quinn Insurance Limited

MAY 2013

Quinn Insurance Limited Page 2

Table of Contents

THE GUARANTEES AND THE REGULATORS DECISION ................................................................................................. 3

THE FINANCIAL REGULATORS DECISION OF MARCH 2010 ............................................................................................. 3

THE MOORE STEPHENS REPORT ..................................................................................................................................... 5

PWC CORRESPONDENCE WITH FINANCIAL REGULATOR POST ADMINISTRATION ......................................................... 8

THE SALES PROCESS AND THE QUINN RESTRUCTURING ............................................................................................10

THE LIBERTY - ANGLO DEAL .......................................................................................................................................... 10

THE QUINN FAMILY PROPOSAL THE DETAILS ............................................................................................................. 12

DISCUSSIONS ANGLO POST ADMINISTRATION ............................................................................................................. 14

ARGUMENTS AGAINST THE QUINN FAMILY PROPOSAL ............................................................................................... 16

ANGLOS QUINN RESTRUCTURING PROPOSAL ............................................................................................................. 18

QILS RESERVES ..........................................................................................................................................................22

CENTRAL BANK IRISH INSURANCE STATISTICAL REVIEW 2009; .................................................................................... 22

THE EMB REPORT 2010; ................................................................................................................................................ 23

GRANT THORNTONS RESERVE ESTIMATES; ................................................................................................................. 25

QILS MANAGEMENT REPORTS (THE MIS STATS) .......................................................................................................... 27

GRANT THORNTON MISMANAGEMENT OF QIL .........................................................................................................29

FINANCIAL MISMANAGEMENT ..................................................................................................................................... 29

OPERATIONAL MISMANAGEMENT ............................................................................................................................... 31

OTHER INFORMATION ...............................................................................................................................................33

THE MICHAEL NOONAN INTERVIEW OF 14TH

APRIL 2011 ...........................................................................................35

QUESTIONS TO BE ANSWERED REGARDING QUINN INSURANCE ...............................................................................37

Abbreviations: Quinn Insurance Limited (QIL), Liberty Mutual (Liberty), Anglo Irish Bank (Anglo), The

Irish Financial Regulator (the Regulator), Insurance Compensation Fund (ICF)


THE GUARANTEES AND THE REGULATORS DECISION

Mr. Matthew Elderfield was appointed as Irish Financial Regulator in October 2009. He took up that position

in January 2010. Previously, Mr Elderfield had been Chief Executive of the Bermuda Monetary Authority;

prior to that he had spent eight years with the UK Financial Services Authority (the FSA).

During his time with the FSA, Mr Elderfield was responsible for Retail Banking. That role specifically

included responsibility for Northern Rock in the months before its collapse; poor oversight was seen as one

factor in the collapse of that bank. Northern Rock sought liquidity support from the UK Government in

September 2007 - two months after Mr Elderfield had resigned.

THE FINANCIAL REGULATORS DECISION OF MARCH 2010

In order to assess the validity, or otherwise, of the Regulators action in making an ex parte application to the

Irish High Court on 30th March 2010, to have QIL placed into Administration, only three months after his

appointment, it is important to understand the nature and history of the contingent guarantees upon which

the Regulator claims his application was grounded.

In December 2009, FTI Consulting (FTI), a UK financial consultancy firm was appointed by the Quinn

Groups funders, a consortium of banks and bondholders (the Lenders), to arrange the refinancing of the

Groups 1.27bn debt, the first tranche of which was due to mature in October 2010.The appointment of FTI

was entirely consistent with standard practice in any such financing arrangement.

Following FTIs due diligence process, which resulted in a positive assessment of the businesses involved,

they requested that the guarantees, granted by certain QIL subsidiaries in favour of the Lenders, should be

continued under the proposed refinancing scheme, as per the original agreement in 2005. The QIL

subsidiaries in question held approximately 448m worth of income generating property assets; those assets

- mainly properties - together with the companys liquid resources (cash and liquid investments bonds and

shares) made up the reserves of QIL. This request caused confusion at board level within Quinn Group, as

the Directors were not aware and had never approved the granting of such QIL subsidiary Guarantees

On investigation, it transpired that Quinn Groups legal advisors, A&L Goodbody, had included the QIL

subsidiaries in the original financing package in 2005, and even though those assets had not formed any

part of the financing prospectus agreed with the Lenders. Unwittingly, the guarantees, including those over

these specific subsidiaries, were subsequently executed by the Groups directors, in error. Clearly,

Goodbodys should never have included these assets in the guarantee package, and the directors should

never have signed them.

PwCs view of the existence of these guarantees was that they did not have any impact on the solvency

position of QIL throughout 2005 to 2008, a position that they have continued to maintain to the present day.

Nevertheless, in March 2010, while the refinancing process was still on-going, it was decided by the Quinn

Group to bring the existence of the guarantees to attention of the Regulator even though the Quinn Group

Directors did not consider them to be valid.

At that time, QIL had liquid assets (cash, bonds and equities) of 1.1bn, as well as ownership of the

subsidiary companies, which held income-generating assets and were valued at 448m. This meant that if

the cash reserves fell, the assets could be converted into cash to pay claims, and that QIL had assets in

excess of 1.548bn to meet its claims.

The Regulator was advised of the existence of the guarantees on 24th March 2010. At that time, PwC and

Quinn Group believed that the guarantees (even though they were signed in error) had been disclosed and

treated correctly in the audited accounts of QIL, from 2005 onwards. Mr Elderfield, however, adopted a

conflicting stance, and over the course of the following four-day period, decided that the opinion held by


PwC, the auditors of the companies for the previous five years, was incorrect. The Regulator essentially

decided over this four-day period that the subsidiary companies, worth 448m, were, in fact, worthless to

QIL, because of the existence of the contingent guarantees. The basis of his interpretation, or the

professional advice, if any, that he relied upon to justify this stance, has never been disclosed.

There was never any risk of the guarantees been relied upon, and this was confirmed to the Regulator by not

only the Quinn Group, but also by the Lenders representatives, who travelled to Dublin during that four-day

period to assure him that they would not be calling on the guarantees and that they were willing to release

their guarantees (of which they too were unaware), but would need some time (up to two months) to

undertake the legal process of relinquishing the relevant guarantees. However, that was not acceptable to

Mr Elderfield, who demanded written confirmation of the release of the guarantees from the Lenders within

24 hours. Such a deadline was extreme to say the least in the prevailing circumstances: the bondholders,

who were multinational banks, could not have complied within such a timeframe, given that they would have

had to receive both Board and Credit Committee approval to do so that was unrealistic in such a short

timeframe, but they were prepared to do it, if given adequate time.

The Regulator's interpretation of these guarantees resulted in QILs having an apparent substantial shortfall

in its solvency requirement. It was on this basis that Mr. Elderfield sought to have QIL placed into

administration, with catastrophic consequences, not only for QIL, but also for the wider Quinn Group and

ultimately for the insurance industry and its customers.

At that time, there was a significant amount of legal uncertainty surrounding the existence and enforceability

of the guarantees. The Quinn familys unwavering contention is that the contingent guarantees did not affect

the solvency of QIL. This is not only the Quinn familys view; it is the opinion of PwC, the auditors of the

company for the previous five years, and also the opinion of Moore Stephens LLP, a London based

accountancy firm commissioned by Quinn Group to undertake an independent investigation of the matter.

In short, Moore Stephens LLP concluded that the Regulator was incorrect, and that the guarantees, even if

they had been properly and legally in place (which they were not), did not affect the solvency of QIL. It took

them, a leading accountancy firm, months to prepare this detailed report on this issue, however Mr Elderfield

was able to categorically decide the opposite in four working days.

The Regulator's flawed interpretation of these guarantees is fundamental to what has occurred in QIL since

the appointment of the administrators. It is also fundamental to what has happened to the Quinn Group.

Since then, as Quinn Groups problems were finally precipitated by the appointment of the Administrators to

QIL. Ultimately, that decision is the primary reason that the 1.6bn levy is now required.


THE MOORE STEPHENS REPORT

Moore Stephens LLP is one of the worlds largest accounting and consulting networks, with 301 independent

offices operating in over 100 countries. After QIL was placed into Administration, executives of Quinn Group

commissioned Moore Stephens LLP to review the regulatory and statutory returns of QIL and to assess the

impact of the subsidiary Guarantees on QILs solvency, on a rigorous and impartial basis.

The Moore Stephens Report categorically stated that the existence of the Guarantees did not have a

negative impact on QILs solvency; that is absolutely contrary to Mr Elderfields contention and his reasoning

behind placing QIL into Administration1.

Unfortunately, that Report was obtained too late, to save QIL. The Quinn Group consented to the

appointment of the Joint Administrators, on the basis that the issues could and would be resolved, with the

company then being taken out of administration. However, shortly afterwards, the Quinn family effectively

lost control of the Quinn Group board to a nominee of the Lenders, Mr Murdoch McKillop of THM

Consultants. Had the Quinn family had the benefit of this professional report immediately after the

Administration, they certainly would have vigorously contested the ex parte application.

Moore Stephens LLP were asked to respond to a number of issues and questions, as follows:

(i) State (your) view of the impact of the existence of the guarantees in calculating the Solvency

ratios of QIL as a matter of proper account

At paragraph 8.2.23 of their report they conclude that:

Under FRS 12 a liability in respect of a guarantee should only be recognised if it is considered more

likely than not that it will crystallise. Therefore QILs solvency is only impacted if it is considered more

likely than not that the Guarantees will crystallise and result in a payment by the QIL Guarantors.

The mere existence of the Guarantees does not impact QILs solvency.

And at paragraph 8.2.34, they added:

The impact on QILs solvency requirements is driven by the treatment of the Guarantees within the

audited financial statements of QIL and the QIL Guarantors. On the assumption that the probability

of the Guarantees giving rise to economic outflow was less than 50% then the audited financial

statements of QIL and the QIL Guarantors for each of the years ended 31 December 2005, 2006,

2007, 2008 did not need to recognise a liability in respect of the Guarantees.

Regarding QILs 2009 returns, the report states that the calculation would be more difficult to assess

as an Event of Default had occurred. Moore Stephens LLP stated that the Event of Default that

had occurred was the Regulators decision to place QIL into Administration, not the existence

of Guarantees.

At paragraph 8.2.28, they make the comment:

An Event of Default has occurred because QIL was placed into administration on 30 March 2010

upon petition by the Financial Regulator.

Notwithstanding the fact that the Regulator had triggered an Event of Default with the Groups

Lenders, the report goes further, and states that an Event of Default does not automatically result in

a contingent liability, At paragraph 8.2.28, they state

To determine whether this (Event of Default) impacts QILs solvency requirement it is necessary to

assess the liability that would be required in the QIL Guarantors financial statements. This requires a

1 Moore Stephens Report. The Quinn Group, Accountants Report, dated 19th January 2011, Moore Stephens LLP


detailed assessment of the financial position of each of the 35 Guarantor companies within the

Quinn Group

It is clear that no such assessments were conducted by Matthew Elderfield or any of his staff.

The Moore Stephens Report (an independent report) could not be clearer. Even after the Event of Default

was triggered by the Regulator, in order to assess the potential impact on the solvency position of QIL, if

any, a detailed assessment of 35 Group subsidiaries would be required. It is important to note that Mr

Elderfield acted within four working days of being notified of the existence of the Guarantees.

In the affidavit presented to the High Court, the Regulator stated: First, the guarantees granted by certain of

the Insurers subsidiaries have the effect of reducing the Insurers assets, on the basis of calculations

provided by Allen & Overy, by approximately 448m. On the basis of currently available information the

Financial Regulator is not in a position to verify the true extent of the impairment of the Insurers assets by

reason of the guarantees: The fact that the guarantees have been in place and undisclosed for a significant

period of time is a matter of gravest concern. The emergence of the information at this time calls into

serious question the administrative and account procedures and internal control mechanisms of the Insurer

This statement is in stark contrast to the professional opinion of PwC and Moore Stephens LLP, yet three

years after the appointment of the Administrators, and having been given the Moore Stephens Report, Mr

Elderfield has still failed to produce the legal and/or professional advice upon which he relied at the time. In

the absence of the necessary disclosure, how can the public be satisfied in relation to the basis and the

professionalism with which Mr. Elderfield acted in this case?

What would have happened if the Guarantees were called in?

In order to assess how obscenely rash Mr Elderfields decision was, it is also important to understand what

would have happened if the Lenders had called in the subsidiary Guarantees, even though they expressly

stated to Mr Elderfield, that they would release them, if given time.

The guarantees were contingent guarantees, they were not share pledges. This meant that they could only

be called upon in very select circumstances, and upon the breach of agreement or covenants, with the

Groups Lenders.

In the event that the Group had breached its covenants, and the Lenders had, as a consequence, called in

the Guarantees, that would still not necessarily have impacted on the solvency of QIL. As referred to in the

Moore Stephens Report, a financial assessment of the Groups finances would have been required to assess

what impact, if any, the guarantees had on QILs solvency.

The Guarantees ranked pari-pasu with other agreements which meant that all other creditors ranked

alongside the Lenders in event of a call. Therefore, all the creditors would have had an equal right with the

Lenders to claim. In such a situation, it is likely that Court intervention would have been required. That would

have meant that a High Court Judge would have had to decide between the Lenders and the policyholders of

QIL, who had an equal right to claim as the Lenders. It is extremely likely that, in any such event,

policyholders would have been deemed preferential creditors, thereby eliminating any potential call by the

Lenders, even if they had been successful in establishing that the Guarantees were properly in place, which

is disputed by the Quinn family. This would however have been a matter for the Courts, if the event had

arisen.

Therefore, the only way in which the Guarantees could have had an impact on the solvency of QIL was in

the extremely unlikely scenario where ALL of the following would have happened:

There had been a breach of convents at Group level; that did not occur until after the Regulator placed

QIL into administration;


The guarantees were deemed to be correctly in place, which the Quinn Group board believed they were

not;

The Lenders were successful in making a call on the subsidiaries, overturning a likely injunction by the

boards of the companies and their owner, QIL and Quinn Group;

A High Court Judge deemed that the Lenders ranked ahead of the other creditors; namely the

policyholders.

Even if this process had been followed through, the subsidiaries would then have had an automatic right to

counter-claim against the Quinn Group for any loss incurred and to balance any losses throughout the

Group. Therefore, when the 1.27bn was spread evenly across all the Quinn Group subsidiaries, the

amount claimable from the QIL subsidiaries could only have been a portion of the 448m not all of it. The

Regulator deemed this whole amount to be inadmissible, in his calculations of the solvency position. That

was the full value of the subsidiaries at that time and the Regulator accepted that number as the level of the

impact on QILs solvency. It was clearly a completely false analysis and Mr. Elderfield and/or his staff erred

seriously in this matter.


PWC CORRESPONDENCE WITH FINANCIAL REGULATOR POST ADMINISTRATION

Correspondence between PwC and the Regulator, after the Administration was in line with the Moore

Stephens LLP Report, in that PwC believed that the Guarantees did not impact on the solvency of QIL. In

two reports to the Regulator, PwC maintained their view that their accountancy treatment of the guarantees,

and their audit opinions were appropriate.

(i) PwC Report to the Financial Regulator, 21 June 20102

In that report page 2, paragraph 1, the following comment is included:

PwC is of the view that its audit opinions in respect of the years 2005, 2006, 2007 and 2008 were

appropriate.

They go on at Page 10 to claim:

PwC was aware that PwC UK undertook audit work each year on covenant compliance as part of its

assessment of the going concern status of Quinn Group. As this work had been successfully

completed in each year, PwC had no reason to believe that the existence of cross company

guarantees of any type would have any financial impact.

(ii) PwC Response dated 26 July 20103 to the Financial Regulators letter dated 5 July 2010.

In Paragraph 1.4 (b) the audit firm confirms whether PWC agrees that, in accordance with the

valuation Rules contained in Annex III of the Regulations, the assets of the relevant subsidiaries

should have been excluded for valuation purposes. They state:

In respect of the years ended 31 December 2005-2008 (inclusive) PwC is not aware why an

adjustment is requested to the valuation of the net assets of the relevant subsidiaries recorded in

Forms 6 at those dates to which the respective forms where drawn up. On the basis of the

information currently available to it, PwC does not agree that the application of the valuation rules

contained in Annex III of the European Communities *Non-Life Insurance) Framework Regulations

1994 would require the assets of the relevant subsidiaries to have been excluded from QILs

calculation of assets admissible as representing technical reserves as at 31 December 2005-2008

(inclusive).

In a separate Report on the 29th October 2010 to the Regulator, PwC go further. They state that the

Regulator instructed QIL (the Administrators of QIL) to write the assets down to zero thus insuring there

was a solvency deficit4.

This matter arose when PwC submitted a Regulatory return on the 18th June 2010 and the Regulator sought

further information on what gave rise to the report. PwC responded stating:

On 24 May 2010, PwC received a copy of QILs monthly return to the Financial Regulator for the

period ended 30 April 2010. The Valuation of the net assets of the subsidiary companies which had

provided guarantees in respect of the liabilities of Quinn Group Limited was written down to zero in

the return. On enquiry, PwC was informed that the net assets had been written down to zero in the

return for the period ended 31 March 2010 on the instruction of the Financial Regulator, and that

the joint administrators of QIL had required that the 30 April 2010 return also be completed in

accordance with the instruction. As at 24 May 2010, the joint administrators had not, however,

prepared a formal assessment of whether a liability was required to be recorded in respect of the

2 PwC Report Quinn Insurance Limited, report to the Financial Regulator, 21 June 2010 3 PwC Report Quinn Insurance Limited, report to the Financial Regulator, 26 July 2010 4 PwC Report Quinn Insurance Limited, report to the Central Bank of Ireland, 19 October 2010


guarantees, taking account of all the relevant facts and circumstances, which PwC required for

purposes of complying with its responsibilities under Section 35(1).

On 14 June 2010, PwC received correspondence from QIL which stated it is currently our view that

the existence of the guarantees has a material impact on QILs ability to ensure full value for its

investment in subsidiaries. In this context we anticipate that from both an accounting and regulatory

perspective that it would be prudent to account for a complete impairment of the investment leading

to a nil net book value of the investments as recorded in the books of QIL.

Therefore, on the 18th June 2010, two and half months after the Administration, PwC filed a return writing

down the subsidiary assets to nil. The basis of the nil valuation was an instruction from the Regulator to

QILs Administrators. On the 24th May 2010, PwC noted that the Administrators failed to prepare an

assessment on whether a liability was required in respect of the guarantees, three weeks later PwC

received an instruction from the Administrators in line with the Regulators instruction to write-down

the assets to nil.


THE SALES PROCESS AND THE QUINN RESTRUCTURING

The Irish public deserves to be made aware of how the sale of QIL was negotiated and of the implications for

both the Irish Exchequer and those who currently pay insurance premia and will be doing so for many years

to come. This deal was accepted by Irelands Department of Finance and its Minister of Finance. It is a

travesty, imposed on the Irish people, by those whose job it was to protect those people.

THE LIBERTY - ANGLO DEAL

The following table provides a summary of the final deal agreed between Anglo/IBRC and Liberty Insurance

for QIL

Shareholding Required Capital Source of Capital Economic Benefit

51% 102m Liberty Mutual Liberty

49% 98m The Reserves of QIL 24.5% to the ICF 24.5% to Anglo

In order for the Anglo/Liberty deal to go ahead, 365m was removed from QILs reserves; these were funds

and assets that were previously held by QIL to meet claims. Having been removed, they had to be

replenished by the ICF, but they should never have been removed from QIL reserves and the ICF should

never have had to pick up the tab for this totally unjustified action. The following is a break-down of that

365m:

98m was Capital taken from QILs reserves for Anglos 49% shareholding;

80m was Cash paid to the Quinn Group as part of the deal to release the guarantees

120m was a Loan note given to the Quinn Group as part of the deal to release the guarantees

67m was an intra-company loan written-off as part of the deal between Anglo and the Quinn

Group

TOTAL 365m5

That deal had a number of implications, which have serious ramifications for Irish policy-holders; those

aspects have never been explained to the Irish people, by either the parties involved or the media. The

following are some of the more crucial aspects, if one wishes to understand the Anglo/Liberty Deal:

1. The only new injection of capital into the business was the 102m from Liberty; that represented

only 6.3% of what Irish insurance policy holders, through the ICF, have been asked to fund;

2. Anglo has utilised 98m from the Reserves of QIL to fund their shareholding in the new entity, they

invested none of their own money. No other bidder was given the option to access the ICF or the

Reserves of QIL to fund their shareholding;

3. In April 2011, Anglo/IBRC valued their stake in QIL at 400m. That was a very telling statement in

that it indicates Anglo/IBRC, a state body, was at that time fully aware that Libertys stake was worth

more than 400m, even though they had acquired it for 102m6. In an interview with Ian Kehoe of

the Sunday Business Post, on the 12th August 2012, Michael McAteer, accepted that Liberty have

got a very good deal and could quadruple their investment, as the following exchange indicates:

Ian Kehoe: Liberty seem to have got a great deal here. The suggestion is that it could quadruple its

investment in a few years. Could the Administrators not have extracted a better deal for the sale of

the business?

5 Quinn Group, Financial Restructuring Summary Overview, 19th April 2011 6 Anglo Irish Bank, Presentation on Quinn Group by Anglo Irish Bank Corporation Ltd, to the All-Party Cross-Border Elected Representatives Group, 9th May 2011


MMcA: If they quadruple their investment, the Insurance Compensation Fund quadruples

its investment too. We have an indirect 25% shareholding, 25 per cent in the company we will benefit

too.7

Comment: The reality is that the ICF (through Irish policy-holders) is being asked to put in 1.6bn

compared to Libertys 102m (i.e. the Irish taxpayer pays 15.69 times as much as Liberty, while

Liberty gets 51% of the shares and the Irish taxpayer gets 49%). If Liberty quadruples its investment

they will make 408m, while the ICF will get a return of 196m (50% of Anglos 49% shareholding) or

a 12.2% return compared to Libertys 400% return. However, any potential return to ICF is highly

dependable on when Liberty buyout Anglos 49% shareholding, to date there has been no return.

Due to the sudden liquidation of Anglo in February 2013, the buyout of Anglos shareholding is more

than likely going to be this year, leaving the ICF with little chance of making a return and also leaving

the Quinn family being blamed for what was outrageously bad negotiating on the part of Anglo and

Department of Finance.

4. As part of the deal, the company was split into two, with Liberty / Anglo taking the Republic of Ireland

business, and the UK business being placed into an effective run-off. Liberty and the Administrators

will in turn receive a payment from the UK business at the expense of the ICF, to run down the UK

book. By winding down the UK business, Liberty/Anglo has no export business, whereas Liberty

Insurance has a standalone operation in the UK.

5. Liberty was given complete control over the Joint Venture. . As a result, there is no incentive for

Liberty to grow the business until Anglos 49% shareholding is bought out, thus ensuring that a low

price is paid, if anything is ever paid for Anglos shareholding.

6. Anglo and Liberty have competing objectives in the Joint Venture. Anglo is purportedly seeking debt

recovery over the medium term, 2-3 years. Liberty is seeking to restructure the business, build up a

presence in Ireland and eventually grow in the long term at least five years, plus. This is borne out

by the fact that Liberty is continuing to shrink the business, with a further 425 redundancies in

November 2012. Furthermore, Liberty are still to make a profit.

7. The deal effectively ensured that the Quinn family would litigate against Anglo over Market Abuse

Regulations and breaches of Section 60 of the Companies Act to challenge the validity of the 2.3bn

advanced by Anglo for share support. This could potentially lead to a significant compensation claim

against the State and open the door for other investors and hedge funds who were defrauded by

Anglo to take civil action.

8. The deal provided that the Quinn Group received a total return of 267m (200m cash and loan note

+ 67m loan write off). This directly impacts the Reserves of QIL and in turn the ICF. If the Quinn

Groups Lenders believed the Guarantees were legally valid why would they take a 50% haircut? It

suited the Joint Administrators and the Government to pay off the guarantees, in an attempt to justify

placing QIL into Administration.

9. Anglo nominee Richard Woodhouse was appointed to the board of QIL. Mr Woodhouse has no

insurance industry experience and has since left Anglo.

10. The deal promised to secure all jobs in QIL. At that time, QIL had already lost 900 jobs through

redundancy, not to mention many others who voluntarily left the Company and were not replaced.

Within 12 months of the Court sanctioning the deed of transfer from QIL to Liberty, which effectively

transferred all the staff to Liberty, they announced a further 425 redundancies, despite prior

assurances to the contrary.

7 The Daily Business Post Inside the Quinn Clean-up, 12 August 2012;


THE QUINN FAMILY PROPOSAL THE DETAILS

After QIL was placed into Administration the former owners of QIL, the Quinn family presented an alternative

proposal for the future of QIL. Its main components were as follows:

1. New independent board would be appointed, no member of the Quinn family was on the proposed

board;

2. 100% of the economic benefit of QIL would be retained for the benefit of Anglo;

3. Very conservatively estimated profits were projected going forward; the estimates from 2010 to 2013

were based on the Joint Administrators forecasts in the Information Memorandum prepared for the

sale of QIL. For the subsequent years, the forecasts were reviewed by Anglos advisors, Deutsche

Bank, as well as the Quinn familys advisors, BDO8. The proposal forecast that, by 2017, QIL would

be generating profits of circa 192m, which is more than 30% less than what QIL achieved at its

peak - between 2006 to 2008 QILs annual Profits After Tax averaged 232m;

4. The proposal was conservative on many fronts, with the following represented the main ones:

a. It anticipated no return from the Quinn Group Manufacturing businesses;

b. It used the depressed current market values when valuing the international property portfolio

in seven years time, and;

c. The proposal also included an option of developing the international property portfolio using

the rental income they generated to achieve an enhanced rent roll and greater market value

in seven years, thus leading to maximum debt recovery;

5. The capital injection required varied depending on the structure, the deal was originally considered

to require between 450m to 650m, this was assuming the guarantees were valid. It transpires that

the deal between Anglo/Liberty only required 102m of new capital; however it dissipated the QIL

reserves (and the ICF) by 365m. A similar deal between Anglo and QIL could have been done for

102m or as per the alternative proposal submitted to Administrators for a cost of 250m that would

have maintained both the UK and Irish business9, that plan would have facilitated the repayment of

2.8bn to the Irish exchequer, plus any fresh capital introduced and there would have been no call

on the ICF;

6. The proposal was part of the overall debt restructuring between Quinn and Anglo, it was the only

way the 2.8bn would have been repaid and not disputed in Court. The proposal would have made

all available revenue streams from all Quinn assets and businesses (QIL, International Property

Portfolio and the Quinn Group) used to pay down debt within agreed parameters;

7. As well as promising to repay the 2.8bn of debt, the proposal included a number of additional

benefits for the taxpayer:

o All jobs in QIL and the Group would be retained, as well an additional 1,000 created over a

three-year period. This compares to the voluntary redundancy programmes since offered in

both QIL and the Quinn Group. These redundancy programmes have already had a direct

impact on the state through statuary redundancy payments, additional social welfare

payments and lack of income tax and universal social charge contributions;

o QIL and the Quinn Groups Irish operations would have generated circa 850m in tax

revenue over that seven-year period.

8 The Quinn family proposal, 19th January 2011; 9 The Quinn family alternative proposal, Conditional offer to the purchase the shares of Quinn Insurance Limited , 5th April 2011


These targets with their massive benefits to the Irish taxpayer and the Irish economy compare very

favourably with what has already happened, is happening and is likely to happen, under the structures and

decisions of the current managers and funders.


DISCUSSIONS ANGLO POST ADMINISTRATION

After QIL was placed into Administration, representatives for the Quinn family (Kevin Lunney, Dara OReilly

and David Mackey), along with an advisor from BDO, met with Anglo executives Richard Woodhouse and

John Bowe, among others, on a regular basis, sometimes as often as two or three times per week, between

April and December 2010. During the course of these meetings, the Quinn representatives and Anglo jointly

developed a plan to recapitalise QIL, and, in turn, ensure that all of the value in the Company went to Anglo

in order to pay down the disputed and undisputed Quinn family debt.

The QIL proposal formed part of a wider plan submitted to the Anglo Board by BDO on behalf of the Quinn

Group on the 30th August 2010, which dealt comprehensively with the entire Quinn debt repayment over

seven years. The Quinn representatives were informed by Mr Woodhouse and Mr Bowe of Anglo,

subsequent to that submission, that this proposal had been reviewed by the Anglo Board and was broadly

acceptable to them. All concerned continued to concentrate on the remaining due diligence effort in order to

make the necessary final submission to the joint administrators in December 2010.

In September 2010, Mr Woodhouse confirmed to David Mackey that the proposal was moving forward and

that they were very hopeful that it would be acceptable to the Joint Administrators as it represented the most

effective return for the taxpayer and the best opportunity to retain jobs. At the end of that meeting, Mr

Woodhouse stated that, later on in the process, Anglo would require the support and influence of the Quinn

Group to assist in ensuring that all Government agencies supported the proposal.

Throughout this period, the Quinn Group representatives met with and had numerous conference calls with

Deutsche Bank and Towers Watson (Anglos advisors), where the financials of the proposal were developed

and they understood the business and its profit model. The projections up to 2013 were those included in

the Information Memorandum prepared by MacQuarrie Capital. Subsequently, Quinn Group used a very

conservative annual increase in turnover to 2017 which was in line with the projections produced by

Deutsche Bank.

The representatives of Quinn Group and Mr Woodhouse discussed in some detail the make-up of the

proposed new independent Board for QIL. At some considerable cost, Anglo even appointed a recruitment

agent to headhunt the proposed senior level management team and the proposed Chairman. The

representatives of Quinn Group met with the leading candidate for the role of Chairman, who was also met

by the recruitment consultant in relation to the position on a number of occasions. He was very interested in

taking the role, if offered it. The Quinn Group representatives were also advised that the Chairman and/or

the CEO of Anglo met with a number of potential candidates as part of the recruitment process.

The plan envisaged that QIL remained whole and would have been able to maintain and grow its domestic

and export markets in order to maximise value for Anglo and ultimately, the Irish taxpayer.

Until the first week in December 2010, Anglo had assured the Quinn representatives that they were working

on the same basis as their preliminary bid. In other words, they would work with the Quinn representatives

to secure the Companys future. This assurance went so far as to refute press speculation which named

Liberty in a potential joint bid. In fact, on the 7th December 2010, Anglo explained to the Quinn

representatives that they had not received the necessary sign off from the National Treasury Management

Agency or the Department of Finance but were still very comfortable that they would be able to put forward a

letter to the Joint Administrators that would give them additional time to get the necessary sign off from the

National Treasury Management Agency.

The Quinn representatives had been led to believe that the overall plan had the support of the Government

and, if the business case stood up, it would be approved. It had been confirmed by Anglo on numerous

occasions that the business case did, in fact, stack up in its own right, disregarding the significant

employment, social and related positive considerations that the plan represented in the local Cavan /

Fermanagh area.


Totally out of the blue, on Thursday 9th December, the Quinn representatives were informed by Anglo that

they were submitting a joint bid with an unnamed third party.

On the 13th December 2010, representatives of the Quinn shareholders met senior officials of Anglo. At this

meeting, Anglo confirmed that they had submitted a joint proposal regarding the acquisition of QIL to the

Joint Administrators and that this proposal involved an unnamed third party. At the time the Quinn

representatives firmly believed that the unnamed third party was the US based insurer Liberty something

which we all know now was indeed the case.

At that meeting, despite the previous intensive discussions over the preceding eight months, Anglo told the

Quinn representatives that they would have no more involvement in their proposal, and no coherent reasons

were given for the change of approach. Anglo also stated that they had concluded that it would no longer be

possible for the Quinn family to repay all of the debt due to Anglo under the overall repayment plan. Since

this had been a core objective from the start, Anglo had unilaterally ensured, by their last minute u-turn, that

any future dealings with the Quinn family would be non-consensual and that there would be no further

negotiations and they stated that they were treating all future discussions on this basis. At that meeting, the

Anglo representatives would not give the Quinn representatives any details of the proposals for Sean Quinn

or the Quinn family.

On the 17th December 2010, representatives of the Quinn Group met with the Secretary General of the

Department of Finance and had a two hour meeting with him, at which they made a detailed presentation in

respect of QIL and the Quinn Group. They demonstrated how the Anglo debt would be repaid over a seven

year period, even leaving a surplus over debt of circa 231m. The proposal also highlighted the two

theoretical alternatives that had been modelled, in which a third party would take an initial 25% or 50%

economic interest respectively in QIL, followed by a complete buyout in seven years time.

The alternatives considered, all demonstrated that the return to the taxpayer would only be a fraction of that

which would be available under the Quinn family proposal, namely 537m under 25% third party

shareholding and 335m under 50% third party shareholding, compared to 2,031m under 100% Quinn

family ownership. At the conclusion of the meeting, the Secretary General advised that he would study the

proposal in detail himself and also get it examined in detail by persons with the necessary expertise to do so.

No response whatsoever was ever received from the Secretary General.

On the 5th January 2011, the Quinn Group representatives met with Michael Noonan TD (now Minister

Noonan), went through the Quinn proposal in detail, and compared the alternatives. At the end of the

meeting Mr Noonan said he would review the proposal himself, in detail and have it examined. No response

was ever received.

Likewise on the 25th January 2011, the Quinn Group representatives met with the Chief Executive of the

NTMA. During this meeting, a detailed submission was made in relation to QIL and the Quinn Group, it was

clearly demonstrated that the 2.8bn could be repaid, with no call on the ICF.

The Quinn proposal was clearly the only option that maximised debt recovery and protected jobs, it was best

proposal for all interested parties.


ARGUMENTS AGAINST THE QUINN FAMILY PROPOSAL

The arguments below were advanced against the Quinn Family proposal; they are set out with the

responses of the Quinn Family and their advisors, who had been involved in the negotiations, before they

were aborted by Anglo and the Department.

(1) The Financial Regulator Would Not Accept Any Proposal That Involved Sean Quinn Snr, as

He Had Previously Been Sanctioned. Reference Alan Dukes letter 4

th May 2011 to the cross border political representatives. It had become clear

that the Financial Regulator would not approve any project in which Sean Quinn would be involved.10

Comment This is a red herring. Mr Quinn would have had no involvement in the Quinn proposal whatsoever,

and this was clearly highlighted in the familys proposal. Furthermore, Mr Quinn has not been involved in

QIL since he stood down and was sanctioned by the Regulator in 2008.

The proposal sought to appoint a completely independent board of Directors, and all proposed Directors

would require the approval of the Regulator. No member of the Quinn family was on the proposed board.

The reference by Alan Dukes to the Regulators not approving any proposal with Sean Quinn involved,

shows both a complete lack of understanding of the Quinn proposal and also the level of control exerted over

the sales process by the Regulator. This raises serious questions about the supposed independence of the

sales process. The Administrators are Court appointed, and their role was to report to the Court, not to the

Regulator.

From the Regulators point of view, the Quinn proposal would have ensured that QIL was fully recapitalised

and a new independent board appointed.

In December 2010, Mr Michael McAteer was recorded during a conference call with senior management and

members of the employee committees. During this call, Mr McAteer stated that the Quinn family would never

be involved in the running of QIL again, he states that he had advised the participants on the call of that 6

months ago, which predated the commencement of the sales process. This calls into the question the whole

independence and bona fides of the sales and administration process11

. The following are extracts of the

recording:

9.26 Declan: Sorry then, if the Quinn and Anglo relationship has broken down altogether, is that Quinn out of it

altogether per say?

9.32 Michael McAteer: He was never in it. Thats what I told you that months ago. He has not been in the process for the past six months. I told you that, I told this call over six months ago but certain people wouldnt believe me. 9.40 Attendee: No, but if he was involved with Anglo, you would believe there was something. 9.44 Michael McAteer: No, I told you six months ago he was gone. And again, after Derek speaking metaphorically about putting out a fire, Michael adds the following contribution: 15.11 Michael McAteer: Part of what the fire is Derek, I know its not, I know its not this committees function or job but all I can say is that for your, you know, lemme, let me, let me be as categoric even though Declan has asked the question again. The Quinn family are gone. They will never have an involvement whatsoever in this

10 Letter from Anglo Irish Bank Chairman Mr Alan Dukes to TD Caoimhghin OCaolian, 4th May 2011 11 Michael McAteer, Conference Call Recording, December 2010;


insurance company ever ever ever again. Now Ive been saying it for months but, but you know, I know theyve been at various games in the background to try and manipulate things. That is the facts of the matter. We cant put that in an email. But people are coming and theyre, and theyre asking you questions and you can wonder where maybe they, you know, what, what, what games, what games been played. That is the game they played. I cant be, I cant put it in writing, but thats what whats going on.

(2) The Quinn Proposal Required Anglo to Lend a Further 750m. Comment: This is not true. The proposal could have been implemented with an investment of 250m

depending on the structure. The current deal between Anglo and Liberty required Liberty to invest only

102m of fresh capital while the ICF is required to fund 1.6bn.

The funds required to recapitalise QIL could also have come from another financial institution. But it made sense for the funds to come from Anglo as it would have ensured that they had full security and were part of a wider restructuring plan. Furthermore, any new funds introduced would have been given a payment preference

Even if the deal did require the amount of 750m, this is still less than half of the funds required under the

plan ultimately implemented by Anglo, which impacts the ICF to the tune of 1.6bn. Furthermore, the deal

ensured that there was no conceivable way for the family to repay the 2.8bn, thus ensuring the write-off of

well over 2bn in loans.

(3) The Quinn Proposal Would Not Work. Comment: The repayment plan sought to have all revenue streams and assets from the Quinn family

focusing on the repayment of debt, including any new capital introduced. The proposal was conservatively

estimated and Anglo had, during the 8 month discussion period, agreed with the proposed repayment plan.

At the end of the seven year period Anglo would have access to the:

- International Property Portfolio: including seven years rental income as well the capital value of the assets, which should significantly appreciate in value. The proposal used the market values at that time, which were depressed.

- QIL: 100% of all profits over a seven year period, then an option to either sell the company or issue an IPO. Admiral Insurance in the UK has a similar business model to QIL, and has a P/E ratio of 14.5. Even using a discounted P/E of 10, QIL would have a forecasted valuation of 1.7bn after the 7 years. (average forecasted PBT for three years x 10)

- Quinn Group: Any equity within the Group after seven years would have been available to

Anglo.

The family and their advisors, BDO, firmly believe if given the opportunity, the proposal would have succeeded. The proposal implemented by Anglo bears no comparison, as their proposal ensured that there would be 1.6bn call on the fund and well over 2bn of loan losses, crystallising a 3.0bn to 3.6bn loss immediately and leaving the bank completely open to litigation.


ANGLOS QUINN RESTRUCTURING PROPOSAL

The Anglo/Liberty deal was part of a wider restructuring and takeover of Quinn Group and QIL by Anglo

announced on the 14th April 2011. This action by Anglo is subject to High Court proceedings issued by the

Quinn family. The family allege that the security obtained and enforced by the Bank is illegal, as it was in

breach of S60 of the Companies Act and the EU Market Abuse Directive (2003/6/EC). Furthermore, they

allege that the funds advanced by the Bank were used to support the Banks own shares, when they knew its

published accounts where misleading.

Anglo was informed of the familys stance several times by Quinn Group executives and familys legal

advisers prior to any enforcement action, the most recent such warning was given by a letter from the

familys solicitors, Eversheds on 7th March 2011

12.

It is common knowledge that Sean Quinn Senior had acquired a 25% Contracts for Difference (CfD)

position in Anglo throughout 2007. When Mr Quinn informed the Bank of the CfD position, in September

2007, the Chairman and CEO of Anglo assured him that the Bank was in a very good position, that it was

heading for record profits and that it was well positioned for growth over the next number of years

Apparently, they asked Mr. Quinn not to dispose of shares. Significantly, although 2.34bn was advanced by

Anglo to support their shares between that September meeting and July 2008, it was not until December

2008 that Anglo sought to execute the Share Pledges that ultimately enabled them to take over the Quinn

Group. Later still, in September 2009, having apparently realised that there were significant issues with the

legality of these loans, Anglos legal advisors contacted the Quinns local family solicitor, asking him to give

the family retrospective legal advice. Naturally, since the relevant transactions had long since taken place,

he refused.

In September 2007, the Quinn family had 445m of legitimate borrowings from Anglo that had been used to

acquire certain properties, that did not include the disputed properties in Russia, India or the Ukraine. From

September 2007 until July 2008, Anglo advanced a further 2.34bn to Quinn companies to maintain the CfD

position, as the Banks share price continued to decline. In July 2008, the bank advanced funds to the Quinn

family and 10 other customers of the bank (known as the Maple 10) to close out the CfD position and acquire

the shares outright. It is notable that it was only in December 2008 several months after the final money was

advanced and after the Chairman and CEO of Anglo had resigned, that the Bank obtained security over the

Quinn familys shares. The family allege that this security is tainted with illegality, on the basis for which the

monies was lent.

In a judgement delivered by Mr Justice Charleton on 29th February 2011

13, when ruling on preliminary issues

relating to the Quinn familys proceedings to set aside the security, Justice Charleton said that if the funds have

been advanced as alleged, he stated:

Since the decision of the House of Lords in Trevor v Whitworth (1887) 12 App Cas 409, it has been

clear that a company must not finance the purchase of its own shares. In some circumstances, the

courts will not lend their aid to the enforcement of an illegal contract

Justice Charleton goes on to state that the banks action to appoint the Share Receiver compounded the illegality,

he claimed that:

Anglo do not now seek to avoid a share sale but rather to compound an alleged wrong by continuing and

following through on the appointment of a share receiver in respect of debts incurred through illegality

Not only was the bank aware that the security was illegal, but the Department of Finance was put on notice

in January 2009, by their own legal advisors Arthur Cox, that the Bank had advanced funds to meet margin

calls.

12 Eversheds Letter to McCann Fitzgerald, 7th March 2011 13 J Charelton Judgement, Record No. 2011/4336P, 29 February 2011


Furthermore, the Bank and the Department of Finance were fully aware that the ODCE was investigating

Anglo at this time for breaches of S60 of the Companies Act. Three former executives of Anglo have since

been charged with criminal offences over these same breaches. This alone is an extraordinary stance for

the IBRC to maintain, on one hand the DPP has charged three former Directors for breach of S60 of the

Companies Act, believing the loans to be illegal, and on the other hand they are trying to rely upon the loans

and its underlying security, in their claims against the Quinn family. This seems like some form of

orchestrated conspiracy, which appears reminiscent of totalitarian regimes of the past.

Incredibly, despite all of this, Anglo went ahead and relied upon the disputed security in appointing a Share

Receiver over the Quinn familys companies on the 14th April 2011. The Quinn family issued proceedings

within a month seeking to challenge that action. Due to the variety of challenges brought by Anglo, and the

pending criminal proceedings against former executives of the Bank, the Quinn familys case is unlikely to be

heard until 2015. That is unjust, since justice delayed is justice denied.

SUMMARY OF ANGLOS PLAN

Anglos restructuring actions on the 14th April 2011 focused entirely on three areas, as follows:

the Quinn Group (i.e. the manufacturing businesses);

QIL; and

the International Property Portfolio.

Anglo forecast that their strategy would recoup 1.070bn from these sources14

. Their proposal however, was

fundamentally flawed, misleading and untrue - Anglo knew that prior to its adoption and implementation of

the plan.

The proposal was presented to political representatives on the 19th May 2011. Furthermore, on the 20

th April

2011, Alan Dukes told journalists that the bank expected to recover less than half of the 2.8bn purportedly

owned by Quinn companies15

. The following table indicates what they expected to realise:

ASSET ESTIMATED RECOVERY

The Quinn Group (Manufacturing businesses) 270m

QIL 200m*

The Property Portfolio 600m

TOTAL 1,070m

*Anglos 49% stake valued at 400m, 200m for Anglo & 200m for the ICF

The following paragraphs provide some insights into the performances and likely values of the three

categories of asset quantified in the foregoing table.

1) The Quinn Group 2)

The Quinn Group was previously a very successful group of businesses, employing almost 7,000 people. It

generated profits of over 1.4bn between 2005 and 2008, on turnover of 7.3bn16

, as the following table

quantifies:

Trading Summary

Year End 31 Dec 05 m




Gross Sales 1328 1640 2116 2264

Underlying Profit* 224 285 442 453 Underlying profit represents profit before tax, loan provision, foreign exchange and investment gains/(losses)

14 Anglo Irish Bank, Presentation on Quinn Group by Anglo Irish Bank Corporation Ltd, to the All-Party Cross-Border Elected Representatives Group, 9th May 2011 15 Irishliquidations.ie, Anglo could recover up to half of Quinn debt, 29th April 2011, 16 Quinn Group Limited, Annual report and consolidated financial statements for the year end 31st December 2008. Page 2


When QIL, a subsidiary of the Quinn Group, was placed into Administration, the Quinn Group was effectively

insolvent. The Lenders to the Quinn Group (a consortium of banks and bondholders, which did not include

Anglo) were owed 1.27bn. As the Lenders had contingent, contractual guarantees, rather than Share

Security, that meant that if the Group defaulted on its obligations, the Lenders could seek to enforce their

loans through the Courts and the Group could seek Examinership. This would not have suited the Lenders.

Consequently, Anglo, relying on their very questionable share security, agreed a deal with the Lenders.

From the details of the restructuring, it appears that the Lenders had clearly worked Anglo and obtained an

extremely generous deal. In summary, Anglo agreed with the banks and bondholders that:

the annual interest payment due to the Lenders should increase from 30m to over 90;

That the Lenders would take no write down whatsoever on their debt. Instead the debt was split, with

37% been held on the manufacturing businesses and 63% assigned to the Holding company accruing

interest at 8.55% p.a.;

The Lenders would be paid 200m from the reserves of QIL for the release of the cross guarantees,

despite the clear legal uncertainty surrounding the validity of same. Furthermore, QIL would write off a

67m loan due from a Quinn Group company, both of these transactions resulted in a direct hit to

the ICF;

Anglo gave the Lenders 75% of the equity and voting rights of the Quinn Group. This in itself was an

incredible concession, because, firstly, Anglo enforced knowingly questionable security, only to give

away full control, as well as 75% of any potential recovery, to the Lenders, for absolutely nothing in

return.

As part of this restructuring, Anglo, in the guise of the Minister for Finance, Michael Noonan, and the

Department of Finance, stated that they would recover 270m from the Quinn Group on the 14th

April 2011,

when they knew full well that they had no chance of recovering a single cent.

The current CEO of the Quinn Group, Mr Paul OBrien, released a media statement on the 6th November

2011, stating:

The beneficial owners of the Manufacturing Group are a number of Banks and Bondholders; IBRC

have a minority shareholding in the Group on which they have little or no prospect of ever getting a

return.17

.

Therefore, seven months after Anglo appointed a Share Receiver to recover 270m from the Quinn Group,

the Group, under the Lenders control, and facilitated by Anglo, were stating that Anglo will not recover a

single cent. Anglos recovery prospects were clear for all to see on the 14th April 2011, however that went

completely unreported.

The Quinn family believe that Anglo sought to effectively give the Group away to its Lenders, in order to

wrest control of the Group from the family. This would ensure that the family would have no access to the

Quinn companies records, files, staff or financial resources, which would greatly assist the family in

progressing litigation against the bank.

This is further evident from the move by Anglos appointed Share Receiver to remove from the Quinn Group

all the Directors and executives who were familiar with the CfD transactions. In effect, Anglo perpetrated a

cover-up and used its media contacts to disguise what it was doing and the evil underlying its behaviour.

Interestingly, as part of the restructuring agreement between Anglo and the Quinn Group Lenders, Anglo

sought a condition that the Quinn Group would agree to release known and unknown claims against

Anglo18

.

17 Paul OBrien, Quinn Group, Statement Business Disruption 5th November 2012 18 Quinn Group, Financial Restructuring Summary Overview, 19th April 2011


2. Quinn Insurance Limited

The main issues related to this component of the restructuring are detailed throughout this document.

Clearly, Anglo never had any realistic prospect of recovering the amount indicated in the table above, the

information they provided to the Minister at the time of the restructuring was totally misleading.

3. International Property Portfolio

The fight over the international property has been well aired in the Courts. Currently, Anglo has absolute

control over Quinn property assets in five countries, pending the outcome of the Quinn familys main

proceedings. Those are assets to which the Bank lent some money too.

In relation to the remaining disputed assets, which Anglo loaned no money towards, Anglo has agreed a deal

with A1, or the Alpha Group, a Russian conglomerate, to recover the assets on their behalf. Should A1 be

successful, they will retain 40% of the recovery proceeds, plus their costs. By any standards, that is an

extraordinary situation, where Anglo has failed to prove that the alleged security is legally sound, yet is

agreeing to give away 40% of the value of the foreign assets. In addition, they are spending huge sums of

money on legal and professional fees.

Even if the family had not tried to protect their rights in relation to part of the property group, the banks

takeover was always going to lead to substantial losses, when compared to the familys proposal. The family

had sought to work constructively with the bank to ensure there would be no call on the ICF and that all of

the 2.8bn would be paid. The banks best deal was to ensure that there was 1.6bn call on the fund, as

well as over 2bn of loan losses, crystallising a 3.0bn to 3.6bn loss immediately and leaving the bank

completely open to litigation. This approach makes absolutely no sense. It bears all the hallmarks of

megalomania on the part of some small group, who believes themselves, to be above normal commercial

and legal processes, something unprecedented in Irish commercial business.


QILs RESERVES

The level of reserves/provisions calculated by QIL. in respect of potential future claims by insured persons

has been a major bone of contention throughout the process since the appointment of the administrators to

that business. This section deals with the issues relating to this aspect of what has happened in recent

years.

CENTRAL BANK IRISH INSURANCE STATISTICAL REVIEW 2009;

Each year the Irish Central Bank (formerly the Irish Financial Regulator) produce a statistical review of the

insurance sector. This report is based on the statuary returns filed by the different insurers.

The Central Bank Insurance Statistical Review for 2009, at Table A, page 1319

, compares the reserves for

the home regulated motor insurers (Insurers whose head office is based in the Republic of Ireland). In 2009,

these figures prove that QIL had average reserves of 1.8 times the industry average for motor claims, by far

the highest of any insurer. Unfortunately, neither the Regulator nor the FSA produce similar statistics for

Commercial business. The following is an extract from that Table.

Allianz plc

Aviva

Insurance

(Europe)

AXA

Insurance

Chartis

Insurance

Ireland

FBD

Insurance

Irish

Public

Bodies

Quinn

Insurance

RSA

Insurance

Ireland

Zurich

Insurance

No. of Claims Outstanding 10,634 12,058 16,905 6,331 8,678 870 17,282 9,658 8,894

Gross Estimated Liability for Outstanding

Reported Claims at End of Year ('000's

Euro)

45,917 129,178 117,835 11,596 68,680 3,824 238,845 41,177 75,033

Gross Estimated Liability of Outstanding

IBNR at End of Year ('000's Euro)27,197 18,341 12,693 5,118 5,485 3,174 36,341 1,261 15,577

Gross Estimated Liability Total for all

Outstanding Claims at End of Year ('000's

Euro)

73,114 147,519 130,528 16,714 74,165 6,998 275,186 42,438 90,610

Average Liability per claim 6.88 12.23 7.72 2.64 8.55 8.04 15.92 4.39 10.19

Industry Average incl. QIL 9.39 Industry Average excl. QIL 8.83

Ratio of QIL Reserves to Industry Avg 1.70 Ratio of QIL Reserves to Industry Avg 1.80

*Extract from 'Central Bank Insurance Statistical Review, 2009, Page 13, Table A.'

Table A/ Extract of Data from 2009 Statutory Insurance Annual Returns in the Motor Claims Settlement Analysis Forms in respect of 2009

Accident Year (Form 8) - (Monetary Values are expressed in 000s)

19 Central Bank Insurance Statistical Review 2009, Page 13, Motor Insurance Advisory Board [MIAB] Recommendations, Table A, Extract data from 2009 Statutory Insurance Annual Returns in Motor Claims Settlement Analysis in respect of 2009 Accident Year [Form 8].


THE EMB REPORT 2010;

EMB are a UK-based actuarial firm. The EMB report was requested by the Administrators on 30th June 2010

for the year ended December 2009. The Report was signed off on the 1st November 2010

20.

In order to prepare QILs accounts for year-end 2009, the former management team had already obtained an

independent actuarial estimate from Milliman an actuarial consultancy firm (based in the UK and Ireland) to

assess QILs claims liabilities. Prior to the appointment of the Administrators, PwC and Milliman had been

working on finalising the accounts for year-end December 2009. QIL had made a loss for 2009, largely

attributable to a decrease in the valuation of property assets, rather than a deficiency or an underestimation

of claim reserves.

When considering the EMB Report, it is important to note that

EMB would not have been familiar with the QIL model, it differs significantly from its competitors in

both the UK and Ireland;

The Administrators were not in a position to brief or dispute EMB on their findings, as the

Administrators themselves were completely unfamiliar with QILs business model;

The Report was commissioned while the Company was in Administration, consequently EMB would

be prudent in taking this into consideration when estimating the development of claims.

When the Quinn Group executives met with Richard Woodhouse of Anglo after the Report was released, he

advised them that, according to their experts Tower Watson, the EMB report was barking mad.

For the most recent actuarial reviews, Grant Thornton have reverted back to using Milliman. Considering

Grant Thornton are accusing QIL of previously under reserving for claims, its hypocritical and surprising that

they are using the same actuaries as QIL did in 2009.

Despite the negatives in the Report, it does however show that contrary to the Regulators

assertions, with the exception of Professional Indemnity Insurance, the UK and NI Commercial book

were extremely profitable.

After QIL was placed into Administration, the UK business was completely shut-down, only for the Motor

book to be re-opened on a reduced scale months later. The profitable UK Commercial business, including

some of QILs historically most profitable lines (according to EMB) was never re-opened.

According to the EMB Report, the Commercial lines of business contributed 16.8m of underwriting profit in

2009, and 128.5m over the previous 5 years. These profits exclude any potential investment gain on

premium income, which would have been significant considering the premium income of these lines was

90.2m in 2009, and 434.2m over the previous 5 years. Not only was QIL missing out on substantial profits

by not writing these lines, but the Company was continuing to incur costs for its Commercial book, for

example, QIL still employed a full commercial sales and underwriting team with no work to do, once the

commercial business was terminated.

The following extracts from the EMB report provide evidence of the performance of the QIL UK Commercial

book, while under Quinn management. (Note: For a full understanding of the ratios reported, the reader

should do a comparison with other insurers in that year; that will demonstrate the solid performance of QIL.)

20 EMB Report, Quinn Insurance Limited (under administration) Actuarial Review as at 30th June 2010, 1st November 2010


Extracts from the EMB Report, 01 November 2010Property Damage UK (B-27) 2005 2006 2007 2008 2009 2005 - 2009

Earned Premium 2,807 5,880 9,260 13,066 15,115 46,128

Ultimate Claims Cost 1,480 2,658 8,995 7,432 7,877 28,442

Ultimate Loss Ratio 52.7% 45.2% 97.1% 56.9% 52.1% 61.7%

Employers Liability UK (B-23) 2005 2006 2007 2008 2009 2005 - 2009

Earned Premium 24,492 31,890 33,640 36,369 32,240 158,631



Public/Product Liability UK (B-24) 2005 2006 2007 2008 2009 2005 - 2009

Earned Premium 11,894 19,845 22,763 25,133 22,725 102,360



Property Damage NI (B-53) 2005 2006 2007 2008 2009 2005 - 2009

Earned Premium 4,191 4,594 4,594 5,442 4,895 23,716



Employers Liability NI (B-49) 2005 2006 2007 2008 2009 2005 - 2009

Earned Premium 14,047 13,763 12,524 10,661 8,530 59,525



Public/Product Liability NI (B-50) 2005 2006 2007 2008 2009 2005 - 2009

Earned Premium 9,472 9,962 9,423 8,285 6,682 43,824




GRANT THORNTONS RESERVE ESTIMATES;

Throughout 2010, after QIL was placed into Administration, the Administrators regularly informed the Court

that QIL was a very profitable business and did not require any funds from the ICF. In September 2011, as

the business was been transferred to Liberty/Anglo, the Administrators requested 775m from the ICF. They

suggested that they had uncovered a hole in the companys reserves and that they required funding to meet

claims, however little detail or a credible explanation was provided, even to this day.

Then incredibly in July 2012, almost a year after the sale to Liberty/Anglo was complete, the Administrators

informed the Court that they required an additional 875m from the ICF, bringing the total amount requested

to 1.6bn, more than doubling the previous estimate.

This was a staggering request and telling that it was made some 28 months after the Administrators had

been appointed. This request did not receive any form of real scrutiny, despite its magnitude, by either the

authorities or the media.

The request did however prompt Minister Noonan to claim he was misled by the Administrators in

correspondence between his Department and the Administrators the evidence suggests that Minister

Noonan was regularly misled on these issues. Yet no real enquiry was conducted by his Department. The

Administrators were given access to 1.6bn from the ICF and the Department of Finance has not conducted

any real enquiry into why QIL required such a level of support.

Furthermore, Quinn representatives had presented the Administrators, the late Minister Lenihan, the Central

Bank and the Department of Finance with a copy of the professional opinion from Moore Stephens LLP

which stated that the Guarantees did not impact QILs solvency prior to the Administration. This should have

caused alarm bells to start ringing in the Department of Finance, and should have alerted them to the fact

that the Administration process had been flawed from the outset.

A copy of Grant Thorntons tenth report filed in the High Court in July 2012 has come into limited circulation

its contents are truly staggering21

. The increase of 875m or 112.9% required from the ICF is broken down

as follows:

REQUIREMENT Ms NOTES Original Funding Requirements

775 Purported shortfall prior to July 2012

Increase in claims provisions

208 Purported increase in provision/reserves for claims

Adverse Deviation Provision

300 As per the Administrators report to the Court, this called 'safety net' for the Administrators, it is not assigned to anything in particular, just provided for in the accounts of QIL.

Reserve for sterling hedge

215

In the Administrators report to the Court it states: "we (the administrators) have been unable to implement a hedging instrument to protect against adverse sterling fluctuations, in the absence of a hedging strategy we have based our reserves on a conservative Euro/Sterling exchange rate of .70" and "A contingency reserve of 215m against currency fluctuations as it is not possible to put a hedging strategy in place" (21). This reserve is due to the Administrators failure to hedge against currency exchange risks. The provision is grossly overestimated, on the basis that the provision assumes a sterling rate at .7 to the euro, while the current rate is .84.

21 Grant Thornton, Quinn Insurance Limited (Under Administration), Tenth Report of the Joint Administrators, 30 July 2012.


Reduction in asset values and miscellaneous adjustments

152 This requirement is due to the write down of asset values, including the write off of the share capital provided to Anglo for funding their shareholding, this was originally taken from QILs reserves.

TOTAL 1,650

Source: Grant Thornton, Quinn Insurance Limited (Under Administration), Tenth Report of the Joint Administrators, 30

July 2012 (21).

From this report and the annual accounts of QIL signed off by the Administrators of QIL over the past

number of years, circa 1,362m of this proposed ICF funding is down to the mismanagement of both the

company and the sales process. This can be clearly demonstrated by the table below.

REQUIREMENT Ms NOTES Payment to the QIL bondholders

200.0 Payment to secure the release of contingent guarantees, which have yet to be determined to be valid

Write off loans due from other Quinn companies

87.1 QIL loan write offs, 67m due from Barlo Financial Services Limited, 9.36 due from Mantlin Limited and 10.7m due from Quinn Group.

QIL's Reserves for Anglo's Shareholding

98.0 Funds taken form QIL's reserves to fund Anglo's 49% shareholding

Reduction in asset values and miscellaneous adjustments

152.0 as per table above

Adverse Deviation Reserve 300.0 as per table above

Failure to Hedge the Sterling 208.0 as per table above

Redundancy 9.9 Redundancy payments for 2010. (figures likely to increase when the Redundancy payments in 2011, 2012 and 2013 are taken into account)

Administration Costs 18.3 6.8m in 2010 and 11.5m in 2011 (this will increase when the costs for 2012 & beyond are included)

Loss Recognised on the sale of business

10.4 Assets in excess of liabilities transferred to Liberty, plus carrying value adjustments, as per QILs accounts.

Losses in 2010 & 2011 278.0 Libertys reported losses of 160m in 2010 and 118m in 2011

TOTAL 1,361.7

This table does not include losses for either 2012 or 2013. The Administrators had informed the Court the

business they wrote in 2010 and 2011, was profitable, this has been proven to be false, by the accounts filed

by Liberty, which recorded a loss for both years. Therefore, upon their appointment the Administrators wrote

unprofitable business, exacerbating the call on the ICF.


QILs MANAGEMENT REPORTS (THE MIS STATS)

Arising out of the data produced in a number of reports produced by Grant Thornton, in their role as

Administrators to QIL, a number of issues arise. The following are among the main ones, but they are not

the only ones.

(i) Grant Thorntons Allegation That QIL was Not Settling Old Claims

On the 13th March 2009, there were 57 open claims for the loss years 1996 to 2001, 43.9% of these claims

were closed within one year, leaving just 32 open on the 13th March 2010.

22 23

Pre Administration, only 6% of the claims were over 4 years old (claims prior to 2006), this has increased

under the Administrators to 8.6% in 2011 (claims prior to 2007), and to 15.2% in 2011 (claims prior to 2008).

Conclusion: Claims were being settled by the previous management much faster than they are under

the administrators management.

YearNo Open

Claims

Open

Claims 2009% Closed Year

No Open

Claims

Open

Claims 2010% Closed Year

No Open

Claims

Open

Claims 2011% Closed

1996-2001 32 57 43.9% 1996-2002 33 63 47.6% 1996-2003 46 79 41.8%

2002 31 54 42.6% 2003 46 85 45.9% 2004 62 94 34.0%

2003 85 128 33.6% 2004 94 176 46.6% 2005 139 221 37.1%

2004 176 320 45.0% 2005 221 417 47.0% 2006 314 465 32.5%

2005 417 666 37.4% 2006 465 859 45.9% 2007 637 1,121 43.2%

2006 859 1,404 38.8% 2007 1,121 2,012 44.3% 2008 1,441 2,392 39.8%

2007 2,012 3,175 36.6% 2008 2,392 4,213 43.2% 2009 2,550 4,318 40.9%

2008 4,213 8,549 50.7% 2009 4,318 11,710 63.1% 2010 3,914 9,847 60.3%

2009 11,710 6,293 2010 9,847 8,616 2011 5,069 4,534

2010 8,616 - 2011 4,534 2012 3,162

Total 28,151 20,646 Total 23,071 28,151 Total 17,334 23,071

Table A.

13 March 2010 - Pre Administration

Table B.

12 March 2011 - One Year Post Administration

Table C.

10 March 2012 - Two Years Post Adminisration

2010 2011 2012

Source: Table A. MIS Stats 13 March 2010, Table B. MIS Stats 12 March 2011, Table C. MIS Stats 13 March 2012

(ii) Grant Thorntons Allegation That QIL was Historically Unprofitable

Table A. March 2010 - Loss Ratios Table B. March 2011 - Loss Ratios

2010Developed

Claims CostLoss Ratio

Open

Claims2011

Developed

Claims Cost

Loss

Ratio

Open

Claims

1996-2002 458,661,318 73.98% 63 1996-2002 462,979,150 74.68% 33

Source: Table A. MIS Stats 13 March 2010 [22], Table B. MIS Stats 12 March 2011 [23]

Review of historic claims from 1996 to 2002

Pre-Administration, QIL had 63 open claims for the loss years between 1996 and 2002 and a loss ratio for

this period of 73.98% (Premium income less developed claim costs).

Between March 2010 and March 2011 (during Administration) QIL settled 30 of these claims, the Loss Ratio

for the years between 1996 and 2002, increased by only 0.70% to 74.68%, with 33 claims left to settle

Furthermore, the increase of 0.7% also includes any reserve increases on the 33 outstanding open claims.

(Note. The statute of limitations is six years for commercial claims).

22 Quinn Insurance Limited, MIS Stats 13th March 2010; 23 Quinn Insurance Limited, MIS Stats 12th March 2011;


The Premium income during these years would have been 620m (i.e. Developed claim cost 2011 by the

Loss Ratio, 463m x 74.68% = 620m). Therefore, the Underwriting profit during this period was 157m

(Premium income less developed claims cost 620m - 463)

On that basis, in order for QIL to have made underwriting losses during these years, each of the 33 1996

2002 claims still open at March 2011 would have had to settle for an average of 4.8m per claim above the

reserve on the claim. Based on historical settlement statistics, even during the period of Administration, there

should have been 27 of these 33 claims settled within the past two years. These claims would have settled in

line with the reserves, but even if they didnt there is no doubt they wouldnt require anywhere near the

4.8m per claim. Note that the 30 claims settled between March 2010 and March 2011 settled for an

average of 144k each (Developed Claim Cost in 2011 - Developed claim cost in 2010, divided by the 30

claims settled).

Review of historic claims from 2004 and 2008

Similarly, in order for QIL to make an underwriting loss for the period 2004 to 2008, the 2,593 claims would

have had to settle for an average of 317k above the March 2011 reserve assigned to the claim. There

should be approximately 1,800 of these claims settled within the past two years. These claims should have

settled in line with the reserves, without using any of the additional 317k per claim..

Table A. March 2012 - Loss Ratios

2012Developed Claims

CostLoss Ratio Open Claims

1996-2003 608,058,192 65.45% 46

2004-2008 2,482,286,052 75.09% 2,593

Source: Table A. MIS Stats, 12 March 2012 [24]

Summary

2004-2008 Premuim Income [2.48bn / 75.09%] 3,305,747,839

2004 - 2008 Developed Claims Cost 2,482,286,052

2004-2008 Underwriting Profit [3.3bn - 2.48bn] 823,461,787

Conclusion: The Grant Thornton allegation in this respect is, therefore arrant nonsense, and can

easily be disproved by simple arithmetical analysis.


GRANT THORNTON MISMANAGEMENT OF QIL

In an interview with the Irish Times on 25th February 2011, Michael McAteer admitted he knew nothing about

insurance when he, along with Paul McCann, were appointed Joint Administrators of QIL. Over the course

of the Administration process there have been numerous costly instances of outright mismanagement. The

following are some

Documents

Quinn Insurance Report May 2013