THE FORENSIC AUDIT REPORT, sections of which were published in THE NATION, suggests that parent company CLICO Holdings (Barbados) Limited has taken advantage of CLICO International Life Insurance Ltd (CIL) by taking a substantial part of its funds. Is this really true? Why do I ask?
It is known that CLICO sold investment products which carried high rates of interest, the Executive Flexible Premium Annuities (EFPAs). Having received funds from the sale of these products, what investment options did the life insurance company have? It could purchase bonds but it would be hard-pressed to find bonds offering more attractive interest rates so that it could profit.
It seems that CLICO International Life embarked on the acquisition of distressed assets (Sam Lord’s Castle, which was in insolvency; Villa Nova, which was in receivership; Todds Estates; and Rayside Construction, which was financially challenged) to generate long-term returns that would exceed the rates of return it offered on its EFPAs.
But here is the problem. CLICO International Life would have to treat the interest on its EFPA products as an expense in its annual income statement, but the distressed assets it intended to purchase would not generate returns for another seven to ten years.
If the life insurance company carried those assets on its books, it would be making losses each year until the assets were sold seven to ten years in the future.
Short-term profitability
So the life insurance company discovers a way of acquiring the assets for long-term profit without sacrificing short-term profitability. It lends money to the holding company to acquire the assets and it charges the holding company interest on these loans.
The audit report said that CIL charged interest on its loans to the holding company at rates between nine and 11 per cent. If there were losses on these assets, it was borne by the holding company.
The report also said losses on the AT&T investment were picked up by the holding company and when assets were sold at profit, the money was paid to the life insurance company ($50.9 million from the sale of Caribbean Commercial Bank was paid to CIL).
This would explain why the life insurance company picked up the expenses of the holding company; the holding company was clearly the vehicle through which the life insurance company made significant investments.
One may argue that these assets are risky and a life insurance company should hold bonds. But how many billions of dollars have been written off Greek and other European government bonds?
How many millions off St Kitts government bonds?
Professor Frank Alleyne has argued that National Insurance Scheme funds should not be invested solely in Government bonds, but should also be invested in significant developmental projects. The 2008 global financial meltdown has taught us that no investment is without risk.
In the Caribbean, particularly in small geographic spaces, “soil don’t spoil”.
• Dr Jon Ashcroft is a retired financial analyst.
