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    September 24

  • 04:17 PM

Caught in US meltdown

MARVA COSSY,

Added 17 October 2010

inthepublicinterest

The recent contagion caused by the collapse of CL Financial Group, which owns CLICO, has sent shock waves across the Caribbean, with policyholders in Barbados among the hardest hit. With this comprehensive series of articles, The Nation seeks to set the situation in context. When the housing bubble burst in the United States, wrecking companies and throwing people out of work and their homes, Caribbean people would scarcely have imagined that one of the firms caught in the meltdown was a regional one. But through its real estate investments, CL Financial Limited of Trinidad and Tobago, a regional conglomerate, was directly part of the United States housing calamity that has resulted in a worldwide economic recession. Consequently, like the United States, the Caribbean is attempting to salvage the savings, investments and jobs of individuals, and at a macro level, “mitigate any impact on . . . public finances [as well as] protect the financial system and investor confidence”. CL Financial, whose assets were put at US$14 billion in 2006, holds investments in insurance, banking and finance, real estate, energy, manufacturing, agriculture, forestry, services and communications. Through its subsidiaries CLICO and British American Insurance Company Limited (BAICO), the conglomerate is an integral part of the financial sector in almost every Caribbean Community (CARICOM) country. Therefore, when on January 30, 2009, Trinidad’s regulators intervened in CL Financial’s operations citing shortfalls in the assets of its banking and insurance operations, CARICOM countries knew that another major financial problem was heading their way. Eastern Caribbean exposure The liabilities of BAICO branches in the Eastern Caribbean have been estimated at EC$1.05 billion, including EC$842.4 million worth of annuities or investment contracts. Looking at the two companies  CLICO and BAICO, St Vincent’s Prime Minister Ralph Gonzalves said that the Eastern Caribbean’s exposure to them was about EC$1.6 billion, while the International Monetary Fund (IMF) described that exposure as ranging as high as 17 per cent of the Eastern Caribbean’s combined gross domestic product (GDP). The IMF noted though that “the extent of the subsidiaries’ financial distress varies across the region, with ECCU [Eastern Caribbean Currency Union] countries particularly vulnerable as funding gaps in that area account for larger shares of GDP”. Dominica and St Lucia present good examples of the differences across the region. Dominica’s total exposure is estimated at EC$194 million or 19.4 per cent of its GDP. In contrast, St Lucia’s exposure to BAICO is relatively small, 0.3 per cent of GDP. Information on the status of CLICO, according to the IMF, is more limited but St Lucia’s exposure amounts to about 5.6 per cent of GDP. That country, though, has pledged assets from CLICO amounting to 50 per cent of liabilities and 70 per cent of deposit-like instruments. For Dominica, the exposure was broken down as EC$60.7 million worth of annuities/investment contracts; life policies valued at EC$6.4 million and general insurance of EC$0.2 million. For Eastern Caribbean countries, the CLICO/BAICO crisis further complicates their economic problems, including previous and ongoing high external debt burden, and difficulties associated with a worldwide recession. Antigua and Barbuda has added problems in its financial sector associated with the demise of its largest private company, the Stanford Group, which was highlighted by a run on the group’s bank. In the developing circumstances, the ECCU countries decided that it was imperative to adopt “a proactive and collective approach to the challenge”, and as a first step each government requested the high courts to appoint judicial managers (JMs) to conduct a financial review of the companies’ operation. Eight JMs from the firm KPMG were appointed, one in each jurisdiction with a BAICO branch. Dominica was the exception since its law does not speak to the appointment of a JM. By October 2009, the JMs had concluded that BAICO was insolvent. They reported that as of June 30, 2009, BAICO had a deficit of EC$775 million, which was likely to increase in light of uncertainty over the value of some BAICO intra-group assets, including a loan note due from CL Financial and its US Property investments. They said that if BAICO was liquidated, policyholders would get ten cents on their dollar. New company Instead, the JMs recommended that a new company be set up to take over its operations in the ECCU. Finding strategic investors for this new entity has been an issue of much debate, but what was certain from the start is that ECCU governments would have to provide an injection of capital. Conscious of the fiscal constraints facing the countries, it was suggested that the governments try to limit the cost by revising terms in some of the company’s contracts, including lowering interest rates, extending tenors and converting some liabilities into equity. A wider regional response is being developed for the troubles emanating from the CL Financial debacle. Discussions have been extended to include the government ministers of Trinidad and Barbados, as well as heads of institutions such as the Central Bank of Barbados, Eastern Caribbean Central Bank, the CARICOM secretariat, Insurance Regulators of the ECCU and OECS secretariat. They have agreed to establish a liquidity fund to be financed by member states of the ECCU, Barbados and Trinidad and Tobago, as well as the financial sector within the ECCU. The money which will used in relation to BAICO would be made up of US$50 million from the Trinidad government which will come from its Petroleum Fund; US$5 million from Barbados; and US$10 million from government in the ECCU. Regional and international organisations were expected to contribute US$15 million. CLICO Life sold Barbados agreed to sell CLICO Life (Barbados) and the Insurance Corporation of Barbados was named as the purchaser. The CLICO/BAICO crisis underlines the need for stronger monitoring and regulation of the non-bank financial sector. Governments in the ECCU are therefore getting ready to strengthen their laws so as to facilitate a regional integrated regulatory and supervisory framework for non-bank financial institutions. As to individuals, the aggregate figures cannot paint clearly enough the suffering and pain which average folks are enduring as they try to deal with the possible loss of a high percentage of their investments. Their experience highlights the importance of investment diversification, or in more regular parlance the reason for not putting all your eggs in one basket. The JMs also add that individuals too can learn from the process the importance of understanding the nature of their investments and the attached risks. DISCLOSURE: The Nation Group is the holder of annuity policies in CLICO International Life Insurance Limited. Further, it is a matter of public record that Colonial Life Insurance Co. (Trinidad) is a shareholder in NATION parent company One Caribbean Media Limited (OCM). This disclosure is made in the interest of transparency. THE NATION wishes to assure its readers that the above will in no way inhibit its commitment to the time-honoured principles of journalistic integrity.

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