Revealed: Behind the scenes of troubled insurer Qudos’ collapse

house of cards

Danish unrated insurer Qudos plunged into liquidation yesterday, amid owner New Nordic’s lawsuit alleging that former owners Echelon “fraudulently reported” vital information prior to the 2017 sale of the insurer.

Qudos’ owners New Nordic Advisors acquired the unrated Danish insurer from Canada-based Echelon Financial Holdings in March 2017. Since then it has gone on to allege it has found “evidence of substantive breaches” by officers of Qudos and Echelon and with the transaction.

In October it ceased to underwrite new business and as of yesterday the Danish unrated broker became the second this year to plunge into liquidation, following hot on the heels of Alpha.

As of June 2018, Qudos controlled DKK 452m (£53.6m) of gross written premiums, across motor, health, latent defect insurance and other categories of business.

A majority, DKK 335.9m (£39.8m), of its premiums were written across the EU, in addition to in Denmark, DKK 100m (£11.8m), and a small amount, DKK 9.6m (£1.1m), in other countries.

In the UK, motor broker Adrian Flux is understood to have brokered policies underwritten by Qudos, as have Big Warranties, Building and Land, and Trent Services.

Adrian Flux and Trent Services declined to comment when contacted by Post, while Big Warranties and Building and Land did not respond to requests for comment.

Legal action

Owner New Nordic is seeking at least €25m to €35m (£22m to £31m) from Echelon and former officers of Qudos, under Danish law.

It had intended to embark on a major restructure of Qudos post-purchase, intending to “create a lean Scandinavian focused financial services-oriented distribution platform”, according to a September statement on its website.

Qudos was bought in a “distressed state”, the statement suggests. New Nordic injected capital and oversaw 50% of its legacy business being put into run-off. It also made significant operational and technological infrastructure changes and appointed a new management team, according to the statement.

However, since taking over Qudos’ latest owners believe they have uncovered evidence that they were duped into the purchase. The statement continued: “Throughout this process New Nordic has, and continues to, uncover proliferating evidence of substantive breaches relating to the transaction and obligations of various officers of both Qudos and Echelon. These breaches relate to, among other things, accounting, governance and reserving practices.”

New Nordic claimed to have carried out a “full-scale forensic investigation” and to have discovered fresh evidence of misdeeds since it took over the unrated insurer, which include critical information being mis-reported for the purpose of inflating its solvency ratio.

The statement continued: “Paramount to the case is the evidence gathered through a full-scale forensic investigation pointing to key information being not only withheld, but also fraudulently reported prior to the transaction to artificially inflate, among other things, the solvency ratio of Qudos. The nature of the misrepresentation and fraudulent behaviour ensured that the agreement was based on a false premise”

“As a result of these acts, New Nordic has incurred a multitude of costs both tangible and intangible. These costs have been borne by New Nordic in order to recapitalise the company and address the deficits knowingly concealed by Echelon and former officers during the transaction process,” it added.

Echelon has vowed to “vigorously defend” against the claim, which it pegs at €45.8m (£40.5m).

It denied the allegations in a press release, which said: “The Company continues to deny all allegations made against it by NNAL and states that there is no merit to NNAL’s claim for €45.8 million in damages. The Company believes that the litigation is an attempt by NNAL to access funds from the Company by means of a settlement to inject into NNAL’s financially distressed insurance operations.”

The failed transformation

As part of New Nordic’s transformation plan for Qudos, the insurer cancelled the agency of a number of brokers as it looked to exit unprofitable areas of business in 2017. It ceased to underwrite new business for the UK motor market in 2017. This was “a business segment that previously was a large part of the overall business but also the main problem that resulted in losses,” according to its 2017 solvency report.

It also cancelled other non-profitable binders, going from 31 in 2016 to just 12 by the end of 2017.

Throughout the year, New Nordic made two capital injections into Qudos, of DKK 22.5m (£2.7m) and DKK 44.7m (£5.3m), while boosting its reserves.

Although its continued business saw a profit after tax of DKK 5m, this was offset by discontinued business making a loss of DKK 111m (£13.1m), which Qudos attributed to under-reserving in 2016 and contractual commitments relating to cancelled business with former agents.

While an improvement on 2016, when it made a loss of DKK 136m (£16.1m), Qudos’ loss of DKK 90m (£10.7m) for the year was deemed “unsatisfactory but necessary to prepare the company for the future.”

However, problems persisted through the first half of 2018, when its combined operating ratio shot up to 108.9%. The troubled Danish insurer made a loss of DKK 42m (£5m) before tax for the first half of this year, keeping it squarely in the red.

Legal action between New Nordic, Echelon and former Qudos officers is ongoing. The full extent of the impact of the unrated insurers’ liquidation remains to be seen.

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