Many an insurance company fancies itself as being both an insurer (that is, a risk manager) and an investment manager of sorts. The main reason for this tendency is that they use the pre-paid portion of insurance premiums (both short-term and long-term) to invest. In some aggressive cases, they price their products very competitively and hope to fill the underwriting gap (loss) by delivering high investment returns. For this strategy to work, the public must have a high level of confidence in the firm; this would tend to ensure a steady increase in annual premium income. Needless to say, their investments must perform at above-average levels on a consistent basis; a tall task even in the best of times! A more recent and less risky development is insurer's tendency to sponsor and manage a variety of collective investment schemes; even if these mutual fund products produce mediocre results, the sponsors, which are often subsidiaries, are usually assured of a steady stream of fee income.
Declining premiums and higher costs
One noticeable feature of Clico's accounts is the continuous decline in net premium revenues over the period 2009 to 2011. Starting at a level of $789.1 million back in 2009, Clico's net premium income contracted to $339.7 million in 2010 and, in 2011, further declined to $277.3 million. It was quite possible that this downward trend continued into 2012. If that proves to be true, one might reasonably conclude that Clico's days as an insurance company are numbered. More likely than not, these declines parallel the public's loss of confidence in its ability to provide traditional insurance protection. Or, more precisely, its perceived lack of ability to honour claims when they become due. Having acquired a particular level of premium, the onus is now on the company to pay benefits and claims on a timely basis, control its acquisition costs for new insurance contracts and, to the extent possible, ensure that the value of the insurance contracts are guarded and maintained at acceptable levels. How did Clico deliver in each of these areas?
In 2009, with the possible exception of claims and benefit payments, Clico scored poorly in the two other areas. For that year, claims and benefits of $338.4 million amounted to 42.9 per cent of the net premiums written of $789.1 million. Acquisition costs for new business consumed $147.6 million; this would probably have included high "runoff" commissions for the EFPA products. Meanwhile, there was a negative adjustment of $581.1 million to the value of insurance contracts. These changes resulted in an underwriting loss of $278.1 million. In 2010, we see some significant changes. Its net premium income contracted to $339.7 million, reflecting a 57 per cent reduction from the previous year. Also declining was acquisition costs, which closed at $18 million. The value of insurance contracts showed a positive change, contributing $136.6 million to the underwriting results. Despite lower premium income, benefits and claims rose dramatically to $405.9 million. This figure exceeded its premium income by $66.2 million. Based almost entirely on the positive swing in the value of its insurance contracts, Clico managed to report an underwriting profit of $52.3 million for 2010. In 2011, we observe what might be the start of a trend, which is, declining premium revenue and increasing claims and benefits.
Premiums declined by $62.4 million to close at $277.3 million. After allowing for small amounts of premiums ceded, total premiums for longterm contracts fell by $65.9 million while those for short-term contracts increased marginally by $3.9 million. Claims and benefits reached $393.2 million, exceeding current premiums by $115.9 million. Acquisition costs fell to $12.6 million and seemed to be in line with lower levels of business. The biggest change, however, was due to negative adjustment in the value of insurance contracts; this item consumed $708.9 million and precipitated an underwriting loss of $837.4 million. Unless the trend of lower premiums and higher claims was reversed in 2012, Clico's traditional insurance business seems doomed to die a natural death.
Investment performance
On the investment side, Clico seems to have done much better in the more recent past. Investment income rose from $368 million in 2009 to $872.7 million in 2010 and a more robust $1.21 billion in 2011. Going back a bit, in 2008, the year when its accounts were substantially restated, it incurred a $6.1 billion impairment loss; this figure represented a significant portion of the $9.51 billion loss recorded for that year. In the transition year 2009, the company suffered a further impairment charge of $3.12 billion. Primarily on that basis, it incurred a loss on its investment activities of $2.7 billion. In 2010, the high level of investment income ($872.7 million) was more than sufficient to offset impairment charges of $469.6 million. Of its total investment income, $571.5 million was due to dividend income while $204.6 million was interest on government securities. Also contributing to a better result was net gains on fair value assets through profit and loss of $73.7 million. For that year, investment activities recorded a profit of $503.9 million. In 2011, dividend income rose strongly to reach $977.8 million while interest from government securities fell marginally to $198 million. For the entire year, investment income rose to $1.21 billion. Helping the 2011 result was a write-back of $434.6 million on previously impaired items. Also, fair value gains through profit and loss contributed a further $91.5 million. In total, investing activities produced a profit of $1.73 billion for 2011.
Other expenses and net (2011) result
For 2011 operating expenses showed a positive balance of $179.1 million. This compares with a negative figure of $1.07 billion for 2010. The main change was in the movements in investment contracts, particularly EFPA acceptances. Following the announcement of a settlement plan for EFPA policyholders in the 2010/2011 budget, exchanges began in 2011. Consequently, movements in investment contracts changed from a negative figure of $927.3 million in 2010 to a positive $429.4 million in 2011. In 2012, as exchanges continued, another positive figure should be recorded. For 2011, the net figure from insurance, investing and operating activities amounted to a profit of $1.07 billion. After deducting $352.5 million in finance costs, the pre-tax profit came in at $720 million. After allocating $18 million to taxes, the net profit was $701.9 million. This compares favourably with a loss of $910.9 million recorded for 2010.
Changes in financial position
The company has seen some significant changes to assets, equity and liabilities. Total assets increased from $17.4 billion as at year end 2010 to $19.7 billion as at December 2011. Bank balances and short-term deposits grew to $448.9 million from 2010's $259.6 million. Of this total, cash at bank represented $160 million. Both investments in associates and subsidiaries registered strong increases. The major contributor to the increase in the value of its associated companies was the improvement in Republic Bank Ltd, which rose from $3.95 billion as at the end of 2010 to $5 billion as at year-end 2011. The total value of its investments in associates advanced from the 2010 level of $4.83 billion to $5.81 billion as at December 2011. Meanwhile, the increases in the values of both Methanol Holdings Trinidad and Methanol Holdings International contributed $775 million to the improvement in the values of its subsidiary companies. The total values of all its subsidiaries increased to $6.54 billion from the 2010 figure of $5.56 billion. The company's negative equity position improved from a negative $9.8 billion as at year-end 2010 to a negative $7.3 billion at the end of 2011. Helping this change was the 2011 profit of almost $702 million. However, a larger contribution was due to the improvements in valuation reserves by a strong $1.8 billion; this item moved to $8.4 billion from 2010's $6.6 billion. Borrowings declined to less than $1 million from the 2010 figure of $407 million. This was due to its repayments to Unit Trust Corporation (US$19 million), First Citizens bank (US$32 million) and First Citizens Investment Services Ltd (US$13 million). On the other hand, insurance contact liabilities increased to $6.1 billion from $5.4 billion as at the end of 2010. The difference of $0.7 million negatively impacted its underwriting results, as stated earlier.
Subsequent developments and the future
Over the last 18 months or so much has happened that has positively impacted on the accounts of Clico. As at the end of 2012, it was stated that 90 per cent of policyholders have accepted the government's offer with respect to the EFPA/GAAP/GAP policies. In addition, acceptances of 87 per cent of the total value of the CSI Series 6 portfolio were done as at the same date. Two significant assets were sold before the end of 2012. Campari bought out Lascelles de Mercado. Clico's ownership of 2,494,310 shares in LdM would have generated some profit; also, Clico owned US$40 million in notes and had charges over Lascelles shares through its subsidiary CL Distillers. When the Campari sale was completed in December 2012, these notes and charges were repaid in full. In October 2012, 40 million shares in Republic Bank Limited were sold to Clico Investment Trust for which settlement in the form of Government Bonds was received. Given the low prices at which Clico would have acquired RBL's shares many years ago, this transaction would also have generated a huge profit. The sale by CL World Brands of its subsidiary Burns Stewart in April 2013 coupled with the impending sale of Hine Cognac would add additional profit to Clico's investing activities. Given that the end of July 2013 would see the expiration of the government's current agreement with CL Financial/Clico, one might expect to see a flurry of activity on divestments and/or reorganisations within the group. Despite all these positive and headline-catching developments on the investment side, one needs to look at the core insurance business to make a judgement as to the company's future. Will premium income continue to fall? Will claims and benefits continue to increase? If the answers to both these questions are "yes", then Clico (or its likely successor, Atrius) has the huge task of rebuilding confidence and attracting new business. If Workers Bank, Trinidad Co-operative Bank and National Commercial Bank could re-emerge as the very profitable First Citizens bank, perhaps a similar evolution is possible from the remnants of Clico?