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Submitted by TRAINED ECONOMIST

Head of the Barbados Association of Corporate Shareholders/Nation
Head of the Barbados Association of Corporate Shareholders/Nation

The STARCOM Network news program of 7.30 AM, Tuesday February 10 2009, carried comments attributed to Mr. Doug Skeete, where Mr. Skeete suggested that the financial challenges of the CL Financial group could affect subsidiaries outside of Trinidad and Tobago, if the government of Trinidad and Tobago is unable to put the affected institutions in Trinidad in a sound footing.  On reading the Memorandum of Understanding (MOU) between the Central Bank of Trinidad and Tobago and the CL Financial Group Ltd., the affected institutions in Trinidad and Tobago appear to be CLICO Investment Bank (CIB), Caribbean Money Market Brokers (CMMB) and CLICO Insurance Trinidad and Tobago.

The MOU between the Trinidad and Tobago Central Bank and the CL Financial group states, “The Central Bank of Trinidad and Tobago will assume control of CIB under the provisions of Section 44D of the Central Bank Act.”  “The third party liabilities and assets (to meet these liabilities) of CIB will be transferred to First Citizens Bank Limited.” The Central Bank will provide short term liquidity as needed to ensure that these liabilities are serviced.”  “Following the execution of these transactions, CIB’s banking license will be revoked.”  Given that CIB will cease to exist it is unclear to me what Mr. Skeete means by “putting CIB on a sound footing?  Given that the Central Bank of Trinidad and Tobago has made provisions for meeting any outstanding liabilities of CIB, it is again unclear to me how the assets of CL Financial Group subsidiaries outside of the Trinidad and Tobago (including Barbados) would be affected by a need to meet the liabilities of CLICO Investment Bank. I am sure I am missing something and Mr. Skeete can explain.

The MOU between the Trinidad and Tobago Central Bank and the CL Financial group states, “The third party liabilities and assets (to meet these liabilities) of CMMB will be transferred to First Citizens Bank Limited.” The Central Bank will provide short term liquidity as needed to ensure that these liabilities are serviced.” Again, in light of the terms of the MOU, it is unclear to me what exactly Mr. Skeete means by “putting CMMB on a sound footing?  It seems clear to me that CMMB will be operated as a subsidiary of First Citizens Bank (the state owned bank in Trinidad and Tobago).  It is again unclear to me how the assets of CL Financial Group subsidiaries outside of the Trinidad and Tobago (including Barbados) would be affected by a need to meet the liabilities of CMMB given that it will now be owned by First Citizens Bank.  I am sure I am missing something and Mr. Skeete can explain.

The MOU between the Trinidad and Tobago Central Bank and the CL Financial group states, “Clico Trinidad and Tobago has a sizeable Statutory Fund deficit.”  “CL Financial has agreed to divest additional assets to help fund this deficit.”  “The Government has committed to provide any additional funding that is needed by Clico Trinidad and Tobago.” “Government funding will be provided in exchange for collateral and an equity stake in Clico Trinidad and Tobago.  “It will act as a catalyst for implementing a change in the current business model and corporate governance structure of Clico Trinidad and Tobago.” ‘The intention will be to return Clico Trinidad and Tobago to its original moorings.” The assets to be divested were also spelt out in the MOU. The MOU states, “Specifically, CL Financial will divest itself of all, of its 55% holding of Republic Bank Limited and shares in Methanol Trinidad Holdings.” Is this what Mr. Skeete means by “putting Clico Insurance Limited on a sound footing?  It is again unclear to me how the assets of CL Financial Group subsidiaries outside of the Trinidad and Tobago would be affected by a need to meet the liabilities of CLICO Trinidad and Tobago given the commitments given by the government of Trinidad and Tobago, and the value of the assets the CL Financial Group has agreed to divest.  I am sure I am missing something and Mr. Skeete can explain.

Mr. Skeete was also quoted as saying, “if the affected companies in Trinidad and Tobago are not put on a “sound footing, then the subsidiaries may be affected by a need to liquidate the assets to meet liabilities.”  Since, hearing the comment I have searched in vain to find an example of where a struggling financial institution actually ended up in bankruptcy.  In the vast majority of cases a struggling firm is acquired by a stronger rival and its assets and liabilities are assumed by the new owners.  Why this worst of worst case scenarios would be presented as some plausible or likely outcome is a bit beyond me. I am sure I am missing something and Mr. Skeete can explain.

Unless, Mr. Skeete can provide some more information, it seems to me that the actions of the Central Bank of Trinidad and Tobago have served to contain the impact of crisis to entities in Trinidad and Tobago.

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  1. David Avatar
    David

    @TE

    Memory seems to suggest that insurance companies are allowed to invest pension funds outside of Barbados. Unable to pinpoint it in the act to determine quantum.

  2. RA Avatar
    RA

    @TE

    I respect your views and it’s a pleasure to have this sort of exchange.

    I agree that Clico Intl Life (held by the Clico Holdings (Bds) umbrella) will be safe. But not because the enterprise is sound or the victim of unforeseeable circumstances. Public intervention and/or political priority will protect policy holders in the event that it cannot stand by itself.

    But that is in itself an ex post issue and solution in one, I suggest, that mistakenly excuses from examination the operational management of Clico Intl Life and CL Financial. Which may, by the way, have been exemplary. Or not.

    The suggestion that arguing this is akin to shouting fire in a crowded building is a tricky one to reply to. Reasoned argument that the life insurance arm is in tights should not suffer this, partisan some would say, accusation. Moreover, it seems to me media coverage has been frequently sympathetic, if also unburdened by the facts of the accounts and economic outlook, to Clico Holdings (Bds). That’s an observation with no implied political suggestion or resentment.

    Yet this is a crisis in which a little more openness and airing of the 2008 accounting position would facilitate a comprehensive and accepted public solution which is otherwise being moulded in some obscurity whilst at the same time generating great political heat but less light.

    Re: Taxpayers on the line. I refer to Barbados and the CB release covering:

    “1. The Central Bank proposes tomorrow to deposit up to $10 million with Clico Mortgage & Finance Corporation (CMFC)

    2. The Central Bank has also opened a facility in the event that CMFC needs to access liquidity support

    3. The Bank, with the endorsement of the Ministry of Finance, also proposes to provide interbank guarantees, which cover lending by other banks to CMFC, if necessary.”

    I thank you for pointing out that the $10m is secured against a charge on the mortgage portfolio. I see this no where in the release itself nor any details as to the charge structure. Possibly an example of incomplete information (or even your place of employ).

    Perhaps you have more info on the way the tax payer is covered should the interbank guarantees be called upon by lenders potentially losing their loans to CMFC?

    Re: Intl comparison to Clico intl Life. I have to say that there are not many different ways to run a life insurance operation whatever nation the HQ sits in. They basically face three key tasks: managing expense ratios; checking from time to time that clients are suddenly living to be 150; and optimising investment returns. So I do think international comparisons are valid.

    On managing the investment portfolio you state:

    “A look at the Clico balance sheet does not suggest any exposure to the toxic assets that affected the balance sheets of many international insurance companies. Clico barbados also seems to have only modets [sic] exposure to international stock and bond markets.”

    Were you a regulator I would joke some agency capture syndrome is present in this statement (see prior CEO / CFO joke). The immediate reply is that the accounts do not suggest any lack of exposure to toxic investments either.

    The latest Clico Intl Life accounts – an ancient 13 months old – in note 7, generic as they are, raise questions. There is over $300m in debt securities (>30% of all assets) of which more than $230m is in investment grade (IG) paper. I would not call that “modest” given the balance sheet’s leverage, and I think pointing to local, or even regional, assets is disingenuous given that these also are stressed – particularly property and construction related activities.

    Now, IG paper covers a lot of ground: US treasuries and agencies, emerging market debt, mortgage debt, credit, high yield and so on. It is not possible to say from the detail Clico provide what is held – and the returns from these different flavours of debt last year run between +8% to –20%.

    There is another interesting aspect: nearly $170m of this portfolio has its principal “guaranteed” by Deutsche Bank. It is a shame this note is not expanded for what it is referring to are ‘structure investment products’ (SIPs) hawked by all the big investment banks where – generally – derivitives and early redemption penalties are involved. SIPs are quite different beasts to the underlying debt description provided by the accounts. The “guarantee” extends as far as the issuer can reach (there is no public protection), the liquidity is poor and the pricing (as a result) unreliable. They are customised vehicles and not the same as a direct holding in the underlying investments. The mere fact that derivitives are involved ought to concern policy holders greatly. Are you convinced, 100%, that these are products Mr Parris and Mr Thornhill fully appreciate? They may do but I’d not be entirely certain.

    You mention the distinction between operating and financial leverage. I think the points I referred to in this thread cover both. Operationally it would surprise me if net income is not hit by lower premium income as caution prevails amongst clients and new potential clients. Life insurers are, traditionally, cash machines and an erosion of this feature would have large ramifications for both the subsidiary and CL Financial. In terms of financial leverage clearly a company levered 15 times is in mortal danger if its investments, in David’s words, head south.

    There is little point finding comfort in AM Best’s methodology if the accounts are 13 months old. However, were Clico Intl Life directly rated by Best, Moody’s, S&P, Fitch or whoever, it is simply not credible to believe they would not be on negative review. Which does not mean they would be downgraded, by the way.

    This touches a broader point: there is recorded accounting data (out of date in this case); and there is assessing outlook. On the latter, as I said before, regulatory forbearance is in play – ie the hope that assets held for the long term at fair value but below market value will recover. That’s fine if regulators see no mismatch in maturities. But I find that position to be one that bears little scrutiny. This might change with the latest accounts but until then the suspicion that it is less liquidity and more insolvency has every right to be given the attention it deserves.

    Re: Friedman. Again, very interesting point but there is a clear distinction in his views/writings between deposit insurance and government intervention beyond that, a distinction you recognise. I suggest that the CB in Barbados is on the “beyond that” path. Invoking Friedman in support of that can only be successfully argued if one accepts these are exceptional times – as he did in regards to US intervention in the 1930s. Yet, as I argued above, all with a vested interest in a favourable outcome to the Clico saga suggest everything is hunky dory and why won’t the wicked, naughty, rumour mongerers just be nice and remain seated at their desks in the burning (or not) building.

    Finally, who is against deposit insurance (except possibly where it distorts market incentives as in, for example, periods of high inflation)? But equally, who thinks it right the taxpayer should socialise the losses of a private enterprise that has enjoyed private profits for over a decade and keep it in business?

  3. RA Avatar
    RA

    typo alert above: “checking from time to time that clients are suddenly living to be 150” should read

    “checking from time to time that clients are not suddenly living to be 150”

  4. Trained Economist Avatar
    Trained Economist

    RA you need to post more often.

  5. RA Avatar
    RA

    Ditto, TE.

    One reason I refrain is to be found on today’s front page of the Advocate “Hands off Clico”. This is mainly a simple call to propoganda and “patriotism” over transparency and letting people inform themselves instead of relying soley on “experts” or “insiders” who often have a very obvious conflict of interest.

    The worrying part is that the paper is itself guilty (in this example) of many of its blunderbuss accusations aimed at dissenters: counterargument is the work of the “mischievous”, ” uninformed” or that old reliable stand-by “those with a political agenda”. Really? Does no one on the other side of the argument have a valid point?

    At the best of times it is difficult to prevent prejudice colouring argument. When a small fourth estate succumbs to the urge it becomes more so. And righting that tendency is frequently an exercise in futility as one side of the debate consistently shows itself impervious to logic.

    Yet many people, and I suspect without (I hope) presumption you may be one such, are able to take on all sources and agendas and triangulate to something near the true position.

    Radical idea, but we (for example) don’t have to agree to appreciate and respect the different perspectives in order to find a way forward. I still believe Bajan pragmatism trumps Bajan political affiliation.

    Hopefully, away from the PR and headlines, that spirit is making some ground.

  6. J Avatar
    J

    No sophisticated argument needed.

    Right now any of us had $10 million of our own hard owned money would we put it into CLICO Trinidad?

    Would be put it into CLICO Barbados?

    David ask those easy questions and take a vote man. Ask your readers to vote yes or no to question one and yes or no to question two.

  7. RA Avatar
    RA

    Or:

    “Would you keep it safe in your pocket?”

  8. Brutus Avatar
    Brutus

    RA, thank you for raising the level of discussion and for providing food for additional thought. Thanks to TE as well.

    RA, perhaps you could have a look at the most recent published results of Sagicor and give us your thoughts as to how it compares with Clico, for the items you have highlighted above.

  9. RA Avatar
    RA

    @Brutus,

    Thank you, too.

    Cursory views below. And I underline that all this is merely my judgement.

    Sagicor is as exposed to the macro economic context as Clico Intl Life (as distinct from the Barbadian holding company Clico Holdings of which it is the largest element by far). But in very broad terms the key differentials are:

    a) Sagicor has less than half the balance sheet leverage of Clico Intl Life. This implies over twice the capacity for shock absorption (eg asset impairment). This is by far the most important difference.

    b) Less than half Sagicor’s premium income is pure life insurance. Property & casualty (P&C) and health insurance represent big revenue chunks. And this same quality of diversity is also to be found in its investment income streams. Where it has sporty increases in revenue year over year (P&C) it’s explained by an acquisition, not aggresive underwriting.

    c) There is also room to argue that its public structure forces it to make clearer and more complete disclosures in its accounts – it reports quarterly with a narrative for the numbers.

    d) Sagicor touts a rating agency assessment. Given that producing such an assessment is serious donkey work this is v useful for investors, policy holders and regulators. The company appears to take its image as a prudent manager seriously and I would suggest a balanced read of its reports indicates this is not simple lip service and/or marketing (no, I own no Sagicor shares). That’s not to say Clico do not. Merely that, for policy holder comfort, the Sagicor corporate structure is friendlier and more reassuring.

    e) The Sagicor corporate structure is simpler to understand and walk through vs the CL Holdings conglomerate umbrella. The latter does not readily lend itself to analysis and, as a result, can frequently produce more questions than answers.

    f) Sagicor is not a source of financing for a broader expansionary goal into unrelated businesses as is Clico Intl Life. It is The Business and has no materially conflicting calls on its cash nor management time and expertise.

  10. JC Avatar
    JC

    Dont understand all but I got the gist of what you are saying.

    Thank you RA!

  11. Straight talk Avatar
    Straight talk

    Invaluable interpretation RA.

    For the skae of us all stick around as your type of analysis will be sorely needed by we laymen, to blow away the smoke and expose the mirrors.

    Welcome aboard.

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  13. Don Avatar
    Don

    RA & TE

    Just discovered (stumbled on) this blog

    As a long distance observer (Toronto), I do appreciate your insightful commentary.

  14. dhow Avatar
    dhow

    It is to my understanding that in the latter part of 2008, Sagicor and some of it’s sister companies lost several millions on the US stock market?

    And what about the central bank’s DEPOSIT (not injection) into CMFC? And why would the “most widely read paper” print its “mistake” over and over again when the governor of the central bank CLEARLY states no injecton was given??

    And lets be realistic….what can 10 million dollars do for a company who’s asset base is 1.4 billion???

    And more so…why is it CLICO (Barbados) “bailout” (which is not the case) is so widely publisied and not the millions lost by Sagicor??

    Shouldn’t investors and policyholders be alarmed at this…then again thats a mutual affair…

    However, since all the interest is on CLICO (Barbados)…..how comes its other affiliates on the island aren’t being bombarded?

    CMMB….British American…Republic Bank owned BNB….why??

    Also…OMC…CLICO has shares in that entity…shouldn’t Barbadian investors fear?? I mean if i go by what Douglas Skeete is saying…then Nation should watch its back seeing they could be taken over by the Trinidadian government.

    Just to let you know i’m a BLP supporter, however, my party is wayout of line. We were the ones who sold BNB to CLICO and enjoyed the benefits of the increase share price. Former Prime Minister Owen Arthur praised CLICO for the last 14 years….spoke well about the company and its chairman Mr. Leroy Parris….called him FRIEND on national television for all the efforts the company has and is doing for the barbadian community. Then to come back 1 year after losing the PMs chair to question the very same company that has been giving…giving…giving…over and over and over.

    Look at the names in this picture and connect the dots….the “correct” timing of this bailout….after key government officals in Trinidad knew about what was happening. Let’s deal with facts…not hear-say or like my friend a couple comments up….balance sheets…

  15. RA Avatar
    RA

    @dhow,

    Fine points on the politics.

    But distasteful and hypocritical though you may label the opposition’s use of the issue their interest may well overlap with the separate interests of 38,000 policy holders. Sincerely, I think it is a mistake to shoot the messengers because they are seeking political power (amongst, to be fair, other things) and, as a consequence, dismiss the message as invalid. This is a financial issue first, not a political one (though the margin between the two is narrowing).

    On that count I regret that my “balance sheets” have been perceived as so sterile as to be of only secondary (if that, it seems) value. I think they did cover your questions on CB intervention and the problem of smiling happily at a large, in 2007 money, asset base when the company is levered 15 times. But that’s the beauty of free will – and, it should not be any other way. I do hope you are correct, truly.

    Re: Sagicor, is not, like Clico Intl Life, directly and inextricably linked to a regional systemic threat to the financial system. Above that “fact” (hopefully we can agree it) Clico Intl Life also finds itself in the unfortunate position of having taken on such a quantity of financial leverage that, now the economy is tanking, it is in difficulties (my judgement, not “fact”). It is hard to raise money from asset sales when there are few buyers.

    Those Sagicor losses you mention, by the way, are not unique to them. Those types of market losses have hurt all life and general insurers. The difference is that we know about the impact on Sagicor because it must publish quarterly. We don’t know about Clico Intl Life or its immediate parent Clico Holdings because they are private and do not. But to imagine Sagicor and Clico Intl Life have not both lost in the same way on financial markets is to accredit the latter’s management with near magical powers of prescience. Which might be the case, of course.

    Re the other entities, well, that’s a good point. I don’t know why the media hasn’t analysed them in detail. Maybe it’s for the same reasons they haven’t analysed Clico Intl Life in detail either. But at least in that they have been even-handed. I did (albeit at a top level) and I saw none as either (or both) a threat or over extended. Under threat, perhaps, but not a potential source.

    A small personal note. Finance is my job. Were I to place more weight on propanganda (anyone’s) than data and outlook I would be likely to lose my own money. I get it wrong like everyone does sometimes. But it is amazing how often the answers are in the data – and equally amazing, in my professional experience, is the price of negligence, complacency or under weighting the numbers. I say that in this context, dhow, with no force and no intent to dismiss anyone’s views. Only regret.

  16. Wuh? Avatar
    Wuh?

    Reading Owen Arthur’s comments in today’s Nation confirms my view that a full Commission of Inquiry needs to be held into this matter.

    Simple fact: Owen Arthur knew (according to him) that there were certain deficiencies in Clico’s operations. Why then did he continue without doing anything? Because he got $75,000.00 from Clico in 2003 and $50,000.00 in cash in 2008! Neither of which he declared…

    This is possibly two criminal acts…

    It needs to be investigated, Mr. PM.

  17. Dennis Johnson Avatar
    Dennis Johnson

    @dhow:
    “the single largest shareholder” is not the same as “the majority shareholder”. CLICO held the largest block of OCM shares [now in the hands of the Govt. of T&T]
    The majority shares in OCM remain in various hands, including members of staff.

    Dennis Johnson

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