On an application of the Financial Regulator on 30 March 2010 to the High Court an order appointing myself and Mr. Paul McCann as joint provisional administrators to Quinn Insurance was made. A further order on 15 April 2010 for the formal administration of the company was made, and this was not contested by the company.
Separate to the appointment of provisional administrators, on 30 March the regulator also directed the company to cease writing all lines of business in the United Kingdom. As officers of the court we have reported, and continue to report, to the President of the High Court on matters arising in this assignment. To date, we have lodged over ten reports with the court which have kept the president informed as developments occurred. We also appeared in person earlier this year and answered questions the president wished to put to us. The court also oversees and approves the fees and costs associated with the administration.
The administrators share the dismay of all Irish citizens that the current estimate of deficit in the insurance compensation fund has risen to €1.65 billion. It is important to point out that while it took approximately 18 months from the date of our appointment to uncover the €1.65 billion deficit level, this deficit always existed and neither the actions or lack of actions by administrators have contributed to this number. Furthermore, the nature of insurance claims means that while we are comfortable with the adequacy of the provisioning now in QIL, the final deficit number will only be known with certainty when the last claim is settled, a process which will take a number of years to complete.
I will now set out some of the background information which I hope will assist this committee but in particular I will deal with the financial position of QIL upon our appointment, subsidiary companies, the under-provisioning of reserves, and the sale to Liberty Insurance.
On the financial and operating position upon appointment, when we were appointed the task as set out in the relevant legislation was to put in place a plan to return the business of the company to a sound commercial and financial footing. Prior to our appointment, discussions had been ongoing between the board of QIL and the company's auditors, PwC, with regard to finalising the audit of the financial statements for the year ended 31 December 2009. The draft unaudited financial statements for that year indicated a loss of approximately €47 million. However, the auditors actuarial review of the provision for claims suggested an under-provision of €68 million by the company, thereby indicating a maximum loss for the year of €115 million.
These draft 2009 accounts presented a picture suggesting the company, while loss-making in 2008 and 2009, had been historically profitable. Figures indicated there was a surplus of assets over liabilities of €338 million before the 2009 loss was posted. This is if one ignores the impact of the guarantee issue, which I will detail. This surplus was after the Quinn family and connected parties had extracted approximately over €200 million by way of gifts in the previous two years. However, it subsequently materialised that these draft accounts and the historical audit accounts did not reflect accurately the true financial position of the company, for the reasons we will highlight today.
We concluded quickly the sale of the business was the most effective solution and we moved to achieve this through fundamentally restructuring QIL. This required the following actions: the recommencement of certain lines of business in the United Kingdom with substantial price increases; a significant redundancy programme; and the adjustment of the cost base of the company. As part of our oversight during this period, we unearthed significant operational issues, in particular, inadequate file reserving practices, and poor underwriting and pricing controls. As a result, we carried out a comprehensive review of these claims and underwriting departments, which resulted in a fundamental change to the claims controls and estimation practices and significant improvements in underwriting controls and pricing policy, particularly in respect of UK business and, to a lesser extent, Irish business.
With regard to subsidiary companies and guarantees given, at the time of our appointment, QIL had over 20 subsidiary companies, which held assets such as hotels in Sofia, Krakow and Cambridge, a wind farm in Derrylin, a landfill site outside Newry and a number of commercial properties located in Ireland and the United Kingdom. At the time in question, these assets had a net value of approximately €450 million, which was consolidated into QIL's balance sheet and which formed part of the solvency assets of QIL. While there was no legal impediment prohibiting these asset types from forming the asset base within an insurance company, it would be fair to state this asset type would not typically be held by insurance companies.
Unlike QIL, which was a regulated entity, these companies were not regulated. An issue had arisen approximately seven days prior to our appointment when the board of QIL became aware of the existence of guarantees which had been given by a number of directors of subsidiary companies in 2005 and 2006 as security to loans provided by banks and bonds that funded the wider Quinn Group. As soon as the board of QIL became aware of the existence of these guarantees, it notified the Central Bank. These guarantees were for a total of €1.3 billion. Had these guarantees been called upon, the effect would have been to reduce the net assets of the insurance company by approximately €450 million. The discovery of these guarantees by the regulator was a factor in deciding to appoint administrators to QIL.
While there is some doubt over the validity of these guarantees, due to how they were executed, legal opinion was obtained by the joint administrators which confirmed that, notwithstanding that proper board meetings had not been convened to approve the signing of the guarantees, it would be difficult to prove their invalidity and that, therefore, they were enforceable by the banks and bonds. Following a significant amount of work and negotiation, the banks and bonds agreed to a payment of €200 million in full and final settlement, thereby generating a saving for the Irish taxpayer of €225 million.
With regard to the under-provision of reserves, it should be noted the company engaged a third-party actuarial provider, Milliman, to calculate the claims reserves for 2009 and preceding years. The company did not have any in-house actuaries. One of the key points upon our appointment was to use the services of Grant Thornton in London to provide assistance in that regard. During the pitch process for the sale mandate of Quinn Insurance, it was identified to us that we should complete insurance-reserve due diligence. In this regard, we appointed an actuarial firm called EMB to complete the exercise. This commenced in July and, by late August, EMB gave us its initial findings, which indicated under-reserving to the tune of €400 million. The company continued its work and finally, on 5 November, this position was confirmed to us. We then re-engaged the services of both Milliman and PwC to complete the 2009 accounts. Eventually, the two companies moved to the EMB estimates.
During mid-2010, we continued to notice an ongoing trend indicating an increase in case reserves. We requested a full and detailed review of claims departments to ensure adequate case provision. The various file reviews added approximately €230 million to claims reserves. Prior to our appointment, there was reluctance to reserve large cases adequately. These findings resulted in our reporting to the court in October that the deficit had increased from an original €600 million to €738 million. That increased again to €775 million in December 2011. We decided to appoint a new auditor, Deloitte, for the year ending 31 December 2010. As part of the exercise, the auditor recommended that we make a new provision called an adverse-deviation provision of €300 million for unknown claims that could occur. In addition, we provided a further €250 million in regard to the fact that all our claims were then in sterling and that we are reliant on the ICF in euro to fund those claims.
A further adjustment of €278 million was required on the case reserves in regard to prior-year adjustment. It is important to note that over 90% of these actual reserve movements were in respect of policies incepted prior to the appointment of the administrators and that they had the effect of eliminating substantially all the profits that QIL made in the previous five years prior to our appointment. Some significant loss areas included professional indemnity insurance, in respect of which premiums of €93 million were earned, and projected claims to date of over €333 million. It is important to note that all these loss areas featured before the incurring of operating expenses and the costs of running the business.
We have now carried out a review of prior-year reserve movements. It indicates that, in the accident year 2006, the reserves were underestimated to the tune of €215 million. In the accident year 2007, the figure was €168 million. In 2008, it was €299 million and, in 2009, it was €264 million. This indicates that a total of €936 million in claims had been under-reserved prior to our appointment.
With regard to the sale to Liberty Insurance, in June 2010, having concluded an extensive selection process, we appointed Macquarie Bank to advise on the sale of the insurance company. Initially, 91 parties expressed interest in acquiring QIL. By the time of the deadline for submitting formal expressions of interest, this had reduced to eight. In November and December, following access to the data room, this number reduced to only a handful. By late 2010, it became apparent to us that there was a real possibility that no sale would occur, which would result in the loss of over 1,500 jobs and an even greater call on the ICF.
Following extensive negotiations in the intervening period, we managed to secure a purchaser for the Irish business. In 2011, Liberty was selected as the preferred bidder. This is because it was a new entrant that would ensure the preservation of the maximum number of jobs. It was willing to take over the Republic of Ireland reserves, which would derisk the exposure to the ICF, and there was to be a goodwill payment of €88 million. It also gave us a solution for the remaining UK claims, a solution to the guarantee issue, which attracted a saving of €225 million. It allowed QIL to take indirectly a 25% stake in the new enterprise and it allowed IBRC a further direct stake of 25% meaning that, should the company be successful, the Irish State would benefit.
While the proposal was extremely complex, we announced the sale on 14 April. A significant number of operational issues still had to be addressed. As is normal in such cases, the agreement contained a number of material adverse conditions, MAC clauses, which, if breached, could have allowed Liberty to terminate the agreement. By the time we were in a position to complete the sale in October 2011, both macro and micro-conditions had deteriorated which put the whole deal in jeopardy and led to a renegotiation of the terms of the deal.
A significant attraction of the Liberty deal was the fact that it ensured that the joint administrators had a robust solution for the run off the UK claims book which remained with QIL in a going-concern environment through the execution of a transaction service agreement. We are confident, based on third-party expert advice, that the run off the UK book in this fashion will ultimately result in significant savings for the ICF.
We remain convinced that the deal involving Liberty Insurance represented the best deal available for all stakeholders, including the over 1,500 employees of the companies and the Irish taxpayer through the funding of the ICF. We are confident we now have appropriate controls and procedures in place to ensure the remaining business of QIL is managed in as efficient and cost-effective a manner as possible. This includes the appointment of a full-time executive team, including a new CEO with extensive experience in the insurance industry, to oversee the operation of the TSA and particularly the settlement of claims. In conjunction with the Department of Finance, we have availed of the expertise of Mr. Ciarán Breen in the State Claims Agency. He sits on our claims advisory committee, which has been set up to guide and advise the joint administrators and QIL management on future claims strategy policy.
