The documents disclose that $29.4 million in interest payments on a secret $302.4 million Home Mortgage Bank loan to Clico for the Lascelles de Mercado transaction was dressed up as “an amount receivable” from parent company CL Financial. Additionally, the company had “significant off balance sheet exposures” to connected companies totalling $2 billion, according to Central Bank estimates.
In a Central Bank letter dated December 9, 2009, the Insurance and Pensions manager of the Financial Institutions Supervision Department Sharon Braithwaite wrote Clico to confirm the minutes of a meeting held with the department’s officials and officers of Clico on November 25, 2008.
“Clico stated that they have been writing reinsurance business for approximately 18 months,” Braithwaite said. “The business, valued at approximately US$5-6 million, is written in India and is handled by a broker, American Assurance Underwriters Group LLC (AAUG), which is based in Miami.”
“Clico further advised that AAUG sources the business directly in India and reinsurance is ceded to Clico. Clico has an arrangement to retrocede the business to a division of AAUG and receieves a commission on the retrocession,” Braithwaite said. “In effect Clico is fronting the business.”
However, she noted that all premiums were held in an account to pay any claims. But this reinsurance business was not approved by the Central Bank.
“Clico also indicated that they were previously of the opinion that the transaction of reinsurance business did not need the approval of the Central Bank. However they were made aware that this is no longer the case and have now approached the Central Bank for approval,” Braithwaite said.
In relation to the $302.4 million HMB loan, the terms of which expressly included that it be kept confidential, the accounting for the interest on the one-year loan, at a rate of 9.75 percent, was not reflected in the Clico accounts as an expense.
“The Central Bank expressed concern with the accounting treatment of interest expense in respect of a loan in the amount of $302 million from the HMB in the September 2008 Quarterly Returns,” Braithwaite noted. “Clico remitted the proceeds of the loan to its parent company, CL Financial Limited for the purpose of financing a business acquisition (Lascelles de Mercado).”
“The interest expense on the loan to Clico was not reported as an expense in the profit and loss statement but was recorded as an amount receivable from CL Financial Limited. This accounting treatment effectively understated the actual interest expense for the period.”
Another document, a note dated February 12, 2009, submitted by the Inspector of Financial Institutions Carl Hiralal to Central Bank Governor Ewart Williams and advising Central Bank intervention, noted off balance sheet exposures at Clico.
“Clico has significant off balance sheet exposures to connected companies totalling $2 billion,” Hiralal said. “This exposure is made up primarily of a $1.5 billion guarantee on behalf of Capri Limited (a CL Financial Company) and $0.45 billion in loan guarantees for the parent company CL Financial. Capri Limited is involved in real estate developments in Miami, Florida, an area that has experienced a fall in real estate demand and market prices.”
He noted Clico’s long history of breaking insurance laws.
“Clico has a documented history of not respecting the obligations imposed on insurance companies by the Insurance Act,” he said. “The company has over the years committed several breaches of the Insurance Act many of which continue as at the date of this report.”
The breaches included: issuing insurance policies without approval of the Central Bank (violating Section 119 of the Act); writing insurance business outside of Trinidad and Tobago without the approval of the Central Bank (violation of Section 12(1) (c) of the Act) and failing to submit all information requested by the Central Bank over this business; appointment of directors without notification (breaches of Section 20, 21, and 23 of the Act).
In relation to the latter breach, the Central Bank noted that, “although this breach was subsequently addressed, the company’s behaviour demonstrated the scant regard it has for the requirements of the Insurance Act.”
In another note of the same date in relation to CL Financial subsidiary British American Insurance, Hiralal noted accounting policies which understated policyholders’ liabilities.
“The liability reported in the statutory filings was inadequate given the level of the credited interest guarantees and the yield earned on the assets available at December 31, 2006. The reserves stated in the 2007 statutory accounts was not adjusted for the inadequacies in the actuarial methodology and it is projected that this understatement of the reserves is expected to worsen in 2008.”
BA, too, had little regard for the law, according to the Central Bank.
“BA has demonstrated scant regard for the requirements of the Insurance Act regarding the maintenance of the statutory fund as required under Section 37 of the Insurance Act,” Hiralal said. This, he said, was “despite the Central Bank’s request of the last three years to remedy same.” An onsite examination by the Central Bank between February and April 2008 revealed that the company breached Section 119 of the Act by issuing an insurance product that was not approved by the Central Bank. CIB also adopted, in the view of Hiralal, an “inappropriate business model and poor risk management.”
“BA has poor governance practice,” he said. He noted that only two board meetings were held in 2008 and that one executive director who served as chairman was suspended in September 2008, yet continued to draw “remuneration as chairman”.