Last week, I received an interesting letter from someone who gave her name as Alesha Phelps:
With reference to your article in yesterday's Business Guardian titled Are we close to 'down the road'?, I would like to offer a few suggestions. The article does not differentiate between the liabilities on the books of CLF (CL Financial) and the liabilities on the books of Clico. In my mind, Clico is its own stand-alone entity whose liabilities cannot be co-mingled with that of its affiliated companies.
Clico operates in a regulated environment and is an entity that is governed by the Insurance Act. Within that act, the rights and returns accrued to policyholders should be clearly defined and separate. The assets via the statutory fund should be allocated to Clico's policyholders' liabilities first and foremost.
In that regard, according to Clico's 2012 Annual Report, the methanol shares are owned by Clico itself (not CLF) and do form part of the assets in the statutory fund. If this is still the case, the proceeds from the sale of those shares upon realisation are legally required to settle the policyholders' liability first, and other creditors second.
If there are any surplus funds left over, then those should be allocated to Clico's shareholders (ie, CLF, with 51 per cent, and the Government, with 49 per cent). Admittedly, the Government is now the largest policyholder of Clico, having assumed the rights of all individuals who accepted the payout offer, and thereby is among those with first claim to Clico's assets, up to the value of those policies.
In the case of a sale of Clico's portfolio, the Central Bank in its role as the regulator would have first rights to these assets to fairly and adequately assign to policyholders. This is because you cannot sell the liabilities of an insurance company to a third party without transferring assets (of a suitable class) so as to satisfy statutory requirements of the purchaser. No insurance company would buy Clico if that is the case.
Also, it must be justified that the value realised upon the sale of Methanol Holdings (Trinidad) Ltd is at the fairest value that can most likely fill any deficits in Clico's statutory fund. If it can't, then, ideally, it should not be sold until the best value can be realised. In summary, the main point is that the liabilities of Clico should be clearly separate and dealt with in accordance with the laws under the act. It should not be commingled with the liabilities of CLF.
As far as Ms Phelps is concerned, the methanol shares are owned by Clico itself (which is true) and do form part of the assets in the statutory fund (which, as far as I am aware, is not true). And if the methanol assets do not form part of the statutory fund, no case can or should be made that the proceeds of the sale of the methanol shares "are legally required to settle the policyholders' liability first, and other creditors second."
It is not true that all of Clico's methanol shares form part of the assets in its statutory fund because not all of the shares are admissible to be held in the statutory fund.
That's because the Second Schedule of the Insurance Act (1982) (which outlines the assets in which the statutory fund of an insurance company may be invested) states at Section 5: "The total accepted value of the statutory fund assets of any company invested in ordinary shares shall not at any time exceed 50 per cent of the accepted value of the total of such assets in T&T of the company."
Section 9 of the Second Schedule states: "A company shall not purchase more than 30 per cent of the ordinary shares of any corporation."
In addition, on April 21, 2008, Inspector of Financial Institutions Carl Hiralal wrote to a circular letter to all insurance companies on the application of the Insurance (Admissible Assets and Valuation of Assets) Regulations.
This letter stated: "The Central Bank of T&T has noted that in the past, insurance companies have not duly applied the Insurance (Admissible Assets and Valuation of Assets) Regulations to the valuation of assets in their statutory accounts.
"These regulations, made under Section 214 (k) of the Insurance Act, govern the valuation of assets of all insurance companies.
"Accordingly, in the preparation of every account, balance sheet, abstract, statement and return required to be prepared under the act (collectively referred to as statutory accounts) insurance companies shall apply these regulations for the purpose of determining the value of their assets."
Hiralal's letter caused panic among local insurance companies, particularly Clico and British American, which had for years flouted the requirements of admissibility. The letter, in my view, started the leak which led to the bursting of the Clico bubble on January 30, 2009.
But that's another story.
What do the Insurance (Admissible Assets and Valuation of Assets) Regulations say?
Section 13 of the regulations states: "The value of any unquoted share, which is neither an equity share nor a share in a dependent of the insurance company, shall be the amount which would reasonably be paid by way of consideration for an immediate transfer of that share."
According to Section 15 of that act: "Insurance company assets of any of the descriptions specified in the schedule shall be taken into account only to the extent of the percentages as specified in the schedule, of the total assets or net premium, as the case may be, of the insurance company."
The schedule of the admissible assets regulations provides the following assets to be taken into account to a specified extent:
Debts from a non-financial firm–2.5 per cent
Debts from an unincorporated body–two per cent
Quoted shares in any one connected company–five per cent
Unquoted shares in any connected company–2.5 per cent
Computer equipment, including software–five per cent
Strictly speaking, therefore, the percentage of the methanol shares, which are unquoted and of a connected company, that are admissible to Clico's statutory fund is 2.5 per cent.
The balance of Clico's methanol shares, equal to about 54 per cent of those shares, are considered to be held outside of the statutory fund.
It seems to me, therefore, that the claim of the policyholders of Clico to the methanol shares would be limited to the amount of shares that are properly admissible to the statutory fund.
And that is accepting the point made by Ms Phelps that most of those policyholders would have specifically surrendered their rights to the policies when they accepted, in good faith and without duress, the offer of zero-coupon bonds and units in the Clico Investment Fund.
All of the proceeds of the sale of Methanol Holdings (Trinidad) Ltd and Methanol Holdings (International) Ltd must properly go to repay the $20 billion of taxpayers' funds that was used to bailout CL Financial.
I maintain my position–articulated in five columns in July and August last year–that the fair and equitable disposition of the CL Financial assets would entail, firstly, that taxpayers are repaid in full and only if there is value left in the CL Financial assets, should the group's shareholders receive anything.
Why should the shareholders of a failed company receive value before the representatives of the entity that bailed them out (which would be the taxpayers of the Republic of T&T)?