THE CENTRAL Bank has handed down its third largest ever fine to Alico, the former Irish division of AIG, over the same type of business that forced the US to bail out the troubled insurer at the peak of the global financial crisis.
Alico Life International, now owned by US group MetLife, was fined €3.2 million for breaching Irish insurance and European life assurance regulations.
The fine relates to securities lending where the firm entered an agreement in February 2007 to lend securities held within the company’s portfolio to borrowers through an investment agent.
The firm failed to seek the approval of its investment committee prior to entering the agreement, which was in breach of internal asset-management policy.
From April 2007 to July 2009, the firm loaned securities worth about €500 million of life assurance fund’s assets that supported unit-linked policies, representing about a quarter of those assets in each of the years 2007 and 2008.
The board of the firm was not made aware of these investments until April 2008, by which time “significant unrealised losses” had been incurred on the securities.
The Central Bank found the lending fees paid by the borrowers did not go to the life-assurance business fund but were paid to the insurance company itself.
About €138 million of collateral provided by borrowers was invested by the agent in mortgage-backed securities, on which the firm made losses of €42 million.
AIG bailed out the Irish firm with €50 million in capital, without which the company would have been insolvent in 2008.
The US Federal Reserve bailed out AIG in September 2008 with a loan of $85 billion over an exposure to huge investment losses linked to US subprime mortgages.
The Irish firm was fined for failing to enter into the life assurance fund’s accounts details of receipts to and from the fund. The firm failed to record correctly assets of the fund and liabilities of the life assurer for 2007.
The company was also fined because some of its administrative procedures and internal controls were “not sound or adequate”. It also failed to deposit annual regulatory returns within six months of the end of the firm’s 2007 and 2008 financial years.
The breaches were uncovered during a Central Bank inspection in 2009, which led to an investigation by its enforcement division.
The new management of the firm co-operated with the inquiry.
Only the Central Bank’s fines of Combined Insurance Company of Europe (€3.35 million in December 2011) and Quinn Insurance (€3.25 million in October 2008) exceed the fine on Alico.
The size of the penalty reflected the seriousness of the breaches of regulations that are designed to safeguard life assurance policyholders, the Central Bank said.
“It is for this reason that there are strict rules in place to ensure that policyholder assets are clearly identifiable from other assets of a life assurance company,” said the director of enforcement at the Central Bank, Peter Oakes.
