$10B and counting

That’s the level of debt Colonial Life Insurance Company (Clico) was drowning in, according to Central Bank Governor Ewart Williams even as he pleaded with policy holders not to withdraw their funds.

“It appears to be much worse than we envisaged,” Williams said as he gave reporters an insight into Clico’s tangled web spun by its parent company, CL Financial, which basically cuts the legs off the insurance company.

Citing Clico’s unaudited accounts that showed surpluses in the statutory fund in 2004, 2005 and 2006 but which shifted to a deficit of about $600 million in 2007, Williams said it was still not clear where the money went.

“That is what we are trying to find out. What happened to funds if there is hole on the statutory funds?” he said during a press conference at Central Bank, Independence Square called to give an update into the Memorandum of Understanding signed between Government and CL on January 30 to keep the conglomerates’ business units afloat.

As a regulator, Williams said Central Bank needed to first untangle Clico’s complex financial web if it had to continue recommending financial support. In an effort to keep the company solvent, Government has approved a first tranche “in excess of one billion dollars” to Clico and British American Insurance Company (BAIC), Williams said. Under the MOU, both Clico and BAIC have been placed under the control of the Central Bank as part of the bailout deal with CL Financial which sought Government’s help when it ran into a cash flow problem. The assets of CIB and CMMB have also been placed under the management of State-owned bank, First Citizens. The Central Bank plans to announce next week a new board for BAIC.

Asked about BAIC and its financial position, Carl Hiralal, Inspector of Financial Institutions, said the liability there amounted to about one billion. Williams said for 2008, the company’s statutory fund deficit had ballooned to $5.1 billion and said that if this holds true “one interpretation would be that the premium income collected in 2008 and which should have been directed to the fund was otherwise utilised.”

A $600 million deficit with a deposit base of $12 billion does not warrant closure, he said when asked if Central Bank could have closed the insurance company.

Clico’s misfortunes got worse when methanol and real estate prices tanked and the company had trouble getting funds to meet its premiums allocated not only in the statutory fund but to other parts of the company as well. He said because of the complexity of the transaction it took a while to determine Clico’s assets in the statutory fund.

The bulk of Clico’s resources was diverted to other sources of financing, Williams said that when Central Bank assumed regulatory control of the company in 2004 Clico had a strong balance sheet showing surpluses.

The ground on which Clico stood got even shakier because at the end of January 2009, Clico had policies maturing to the tune of $650 million as well as the monthly $40 million payment for pension and annuities, said Williams noting that by this time the company found itself in a vulnerable position. Added to this hole is that its bank balance stood at a modest $15 million and it was also dealing with a sizable bank overdraft. In addition, Clico’s deposits in Clico Investment Bank (CIB) and securities issued by CL Financial as part of the insurance company’s statutory fund assets appear to be of little value, said the Governor .

“If we exclude these from the statutory fund the notional deficit rises to $10 billion on a policy liability base of $16.7 billion,” Williams told reporters, stating that Government could meet the deficit by selling CL assets, including its 55 percent shareholding worth about TT$8 billion and its shares in Methanol Trinidad Holdings Limited (MTHL) which are being held in the statutory fund. The Central Bank has also found that the CL business model, Clico was a major source of cash which was used to finance other investments made by other entities in the group.

What happened is that Clico ended up as guarantor for many of the group’s assets most of which were heavily pledged, said Williams, noting that this however limits the potential proceeds from asset sales.

On the $10 billion statutory deficit, Williams said how this emerged was still very unclear but it points to a range of “complex financial arrangements which have ended up as Clico either as direct debtor or guarantor.”

Asked if Clico’s hole could get worse, Williams would only say that Clico’s audited accounts were not due until June this year.

Both Clico and CIB were of an “overly aggressive” and “risky” business model, Williams said and pointed out that in an operation as complex as Clico over 80 percent of its transactions were with inter-related parties. KPMG Williams said, has been hired by the Government to disentangle the whole range of complicated transactions, review Clico’s non-policy holder liabilities and the extent to which the company’s assets have been pledged.

Yesterday, in an effort to give credence to its efforts to protect the claims of creditors and policy holders, the Central Bank moved to take full control of Clico and BAIC. To give legality to its actions, to continue to conduct an examination of Clico’s financial affairs, and provide a legal basis to continue to provide funding, Williams said the bank had invoked Section 44D and 44E of the Central Bank Act Chapter 79:02.