On December 10, 2010, I sent a list of 12 questions on the Clico issue to a high government official through an intermediary, my colleague Andy Johnson, who now serves the people in his role as the chief executive of Government Information Service Ltd. Up to 9 am on Wednesday, a little over two months after the list was sent, and despite Johnson's best efforts, none of the questions have been answered. This from an administration that claims to be about transparency and openness and which boasts about the promptness with which it answers questions on the Parliamentary order paper. (Clearly, parliamentarians are more important than journalists, I guess). The most important question in the list of 12 was a query about the size of Clico's statutory fund. Like all other insurance companies, Clico, which collapsed in January 2009, was required to maintain a statutory fund. In our current system, the purpose of an insurance company's statutory fund is to ensure the protection of policyholders in the event that the insurer gets into financial trouble and has to be wound up or liquidated.
In its 2007 annual report, Clico outlined the purpose of the statutory fund: "Every company registered under the Insurance Act of 1980 to carry on long-term business (life insurance, pensions or annuities) is required to establish and maintain a statutory fund in respect of that business."The company is required to place in trust in Trinidad and Tobago, assets equal to its liabilities and contingency reserves with respect to Trinidad and Tobago policyholders established by the balance sheet of the company at the end of its financial year." What this means is that for every dollar of long-term insurance business–and there is no doubt that this includes the Executive Flexible Premium Annuity (EFPA)–that Clico sold in T&T, it was required to have a dollar in assets that would be available to policyholders if Clico got into financial trouble. The facts are that in January 2009 Clico got into financial trouble and, according to government officials at that time, the company had developed a $5.1 billion hole in its statutory fund.
In other words, Clico's liabilities to its 225,000 policyholders (including holders of the EFPAs) exceeded the assets in its statutory fund by the sum of $5.1 billion.
In May 2009, Central Bank Governor Ewart Williams and former Finance Minister Karen Tesheira visited New York to make a presentation to the rating agencies (Moody's and Standard & Poors) on the country's financial situation. Slide 46 of that presentation, which I downloaded from the Central Bank's Web site, reveals that for the 2008 financial year (unaudited), Clico had $16.7 billion in policyholder liabilities and $11.6 billion assets in its statutory fund. That Central Bank slide also reveals that Clico's total assets in 2008 were estimated at $24.899 billion and its total liabilities were $21.741 billion. The Credit Suisse/Milliman accounts, which as at November 30, 2009 indicate that Clico's assets amounted to $20.4 billion and its liabilities $22.7 billion. But, that $2.3 billion balance sheet deficit would have been largely eliminated as a result of the appreciation of asset values between November 2009 and January 2011. The previous PNM administration sought to "cure" the $5.1 billion statutory fund deficit by injecting funding support to the tune of $5.1 billion in to Clico in exchange for common and preference shares.
From March to September 2009, Clico received $1.9 billion in cash and the repayment of loans and repos outstanding and in February 2010, three bonds totalling $3.1 billion with maturities of 17, 19 and 21 years were injected into Clico.
Those bonds, which have been accounted for as preference shares on Clico's balance sheet, were NOT zero-coupon bonds and pay interest rates of 6.6 per cent, 6.7 per cent and 6.8 per cent twice a year. By my rough calculation, that means that Clico will collect at least $207 million in interest from these bonds until at least 2027. But that's a side issue. The main issue is that the previous administration's plan included the reimbursement of the Government for its funding support for Clico by the sale of CL Financial assets. By way of the Memorandum of Understanding, signed on January 30, 2009, CL Financial agreed "to take steps to correct the financial condition of CIB, Clico and BA" by selling all of its shareholding in Republic Bank, Methanol Holdings (Trinidad) Limited, Caribbean Money Market Brokers and by "selling all or any of their other assets as may be required to achieve the said correction."
According to the MoU: "The proceeds of the sale of assets...will be applied to satisfy the Statutory Fund requirements for Clico and BA under the Insurance Act, 1980 and the balancing of the third-party assets and liabilities portfolio of CIB." Just as another aside, CL Financial's 52.3 per cent of Republic Bank was worth $6.82 billion on Tuesday and Clico's 56.4 per cent of Methanol Holdings is worth at least US$2 billion. The plan that was agreed to by former Clico chairman Lawrence Duprey and the former administration, if implemented now, would result in all of the Clico policyholders and its other creditors (including most importantly the Government) being repaid within two years without too much of a haircut. And if there is to be a 15 per cent haircut, there is no reason why all the parties (the policyholders, the other creditors and the Government) should not all agree to have similar coiffure. It is extremely noteworthy that the previous administration did not implement its own plan on this issue.
One of the real problems of any sober inquiry into this issue is that nobody, outside of a small clique of Government and Central Bank officials, knows what is the current value of the assets in the Clico statutory fund or even what percentage of the Republic Bank and Methanol Holdings shares repose in the fund. And those officials are not talking...at least not to me. In a related issue, in a paper presented at the 16th annual conference of the Caribbean Actuarial Association in 2006, Marcia Tam-Marks identified the shortcomings in the statutory fund approach that is currently used by the Central Bank, which has regulated insurance companies in this country since 2004. Among the shortcomings identified by this independent consulting actuary is that the assessment of adequacy of the insurance company's assets is neither continuous nor prospective but made at one point in time. She also identified the fact that the current approach to regulating insurance companies means that there is no requirement that assets be adequate on an ongoing basis. The time lag in reviewing the annual reports of insurance companies means that "both assets and liabilities will have changed in value" by the time the regulators get around to checking.
She also argued that among the other shortcomings of the current statutory fund approach are:
�2 Requirements inadequate to address risks inherent in current investment vehicles;
�2 No requirement that statutory fund assets be appropriate to the nature of its liabilities;
�2 May promote a narrow, mechanistic approach to investment, rather than a strategic, prudent approach;
�2 Compliance assessed retrospectively and there is a risk that assets might be moved out of the trust between reporting dates without the prior knowledge or approval of the Central Bank.
Readers should note that this paper was presented in December 2006 more than two years before the Clico crisis. Readers should also note that Ms Tam-Marks refers in her paper to a draft policy proposal document for amending the Insurance Act of 1980 was circulated to the local insurance industry for its review and comment industry in January 2006.