Deloitte Consulting Ltd, the judicial manager (JM) of CLICO?International Life Insurance Ltd. (CIL) – represented by Oliver Jordan and Patrick Toppin – has been tightlipped about its efforts to find a resolution to the debacle. No reports have been filed in the courts recently but, in correspondence sent to the Government and obtained by the SUNDAY?SUN, Deloitte has outlined a possible resolution. An edited version of the memo is reproduced below:
Current status
In October 2011, the JM presented the results of the consultations with policyholders, regulators and governments to the court. Based on the concerns expressed by policyholders and regulators, and the absence of funding confirmation from regional governments, the JM proposed that steps be taken to identify an investor for CIL.
This investor would have to demonstrate the management and financial capacity necessary to provide confidence to policyholders and regulators on the viability of the new company.
In December 2011, the court provided its sanction for the JM to pursue the identification of an investor for CIL.
After undertaking an extensive search process within the Caribbean region and internationally, the JM has received two non-binding offers for the traditional business (individual and group life, pensions and annuities). However, the non-binding offers received for CIL’s traditional business policyholder liabilities are conditional uponthe transfer of sufficient assets of an appropriate nature (that is, assets which are eligible for acceptance by the various insurance statutory funds in each jurisdiction) as part of the purchase transaction.
There is no investor interest in CIL’s Executive Flexible Premium Annuities (EFPA) product as currently structured. However, both the investors have confirmed their willingness to accept the EFPAs as a part of a purchase transaction if they are converted into long-term annuities (and are also backed by sufficient and appropriate assets).
Challenges to achieving a successful sale of CIL’s traditional business in Barbados and Eastern Caribbean islands
1) The requirement by the investors for assets that are eligible for inclusion in the statutory fund presents a significant challenge to the sale process, as a substantial majority of CIL’s assets (and those of its parent company CLICO Holdings Barbados Ltd., CHBL) are real estate or real estate-backed assets. Such assets are limited to 20 per cent in the various statutory funds which are required for insurance companies in the region.
A mechanism would have to be developed to “convert” CIL and CHBL’s real estate assets into qualifying assets for inclusion in the statutory funds.
2) The majority of CIL’s (and CHBL’s) assets are located in Barbados
(71 per cent) and St Lucia (18 per cent). However, to facilitate the sale of the traditional business located in the other jurisdictions where the company does not hold significant assets (Antigua, Anguilla, Montserrat, St Vincent, Grenada and Dominica), then eligible assets would have to be transferred to these jurisdictions. Therefore, a mechanism would have to be developed which transfers part of the asset value within Barbados and St Lucia to the other jurisdictions.
3) The difficulty in attracting investor interest in CIL’s EFPA portfolio may delay a possible sale of the traditional business. Based on legal opinions received by the JM, the EFPA policies are insurance products and are therefore eligible to be covered by the statutory funds in each jurisdiction. Therefore without a simultaneous resolution or the EFPA portfolio, any transfer of assets in support of the sale of the traditional business, in excess of the proportionate share of the total liabilities, may be subject to legal challenges and associated delays.
4) In addition, over 50 per cent of the policies in St Lucia are EFPA policies which are currently 70 per cent covered by the statutory fund in that country. Therefore any solution that fails to address the EFPAs may result in St Lucia developing an independent solution and excluding its assets from a regional solution. The impact of this would be significant as total assets in St Lucia are approximately $93 million.
JM recommendations to overcome challenges noted above
The JM is currently fine-tuning an approach that would facilitate the transfer of CIL’s traditional insurance business to a third party investor and the restructuring of its EFPA portfolio. This would be achieved by floating a bond and using the proceeds to acquire qualifying assets that would be transferred to a buyer of CIL’s traditional business as well as to fund the partial payment and restructuring of the EFPA portfolio.
The bond would be issued by a special purpose vehicle (SPV) that would be established to hold the assets of CIL and that of its parent company,
CHBL. The following is an outline of the steps required:
• A trust is established for the benefit of all CIL policyholders and governed by a board of trustees appointed by regional governments.
• The SPV would be managed by the judicial manager on behalf
of bondholders/shareholders.
• CIL then obtains approval from its regulators in each jurisdiction
to transfer ownership of its assets in each statutory fund to the SPV. This approval would be conditional upon the replacement of these assets in the respective statutory funds with an equivalent amount of qualifying assets from the proceeds of a bond to be issued by the SPV.
• All assets owned by CIL’s parent company CLICO Holdings (CHBL)
would then be transferred to the SPV.
• The SPV issues a series of multicurrency zero-coupon bonds (Bds$, EC$ and US$) in 3, 5, 7, 10, 12 and 15-year tranches (or as required)
to allow for recovery in the real estate values of the underlying assets.
• Based on [a] preliminary market read from an investment bank engaged by the JM, the attractiveness and hence success of the SPV’s bond issue will be highly dependent on a credit enhancement being provided by the Governments of Barbados and Trinidad and Tobago.
• This credit enhancement can take the form of a guarantee or an equity call. The estimated amount of the credit enhancement for the SPV’s bond to be successful is Bds$150 million from Barbados and EC$300 million from the EC islands/Trinidad.
• The equity call would require a government to invest in shares of SPV in the event the proceeds from sale of CIL’s assets are insufficient to meet bond payments as they come due.
• Those governments not in a financial position to provide
the credit enhancement could support this solution by committing their state agencies to invest directly into
the bond issue. For example, the national insurance schemes in the EC could be asked to invest in the bond.
• Alternatively, consideration couldbe given to allow commercial banks operating in the EC islands and holding surplus EC$ in the ECCB [Eastern Caribbean Central Bank] to invest in the bond. Approval would be required to allow these investments to count as part of the banks’ secondary reserves. Upon issuance of the bond, the proceeds would be transferred to the trust to facilitate the sale of CIL’s traditional business and to provide funds for settlement/restructure of its EFPAs portfolio.
• The impact of this sale of the traditional business is that all individual and group life, pensions and annuities policyholders would as of the date of closure become new policyholders of the investor insurance company.
The impact of the settlement/restructure of the EFPA portfolio would be as follows:
• Each individual EFPA policyholder in Barbados and the EC islands would receive a cash payment of up to Bds$25 000 against their outstanding balance (all policyholders with balances of $25 000 or below would therefore be fully refunded).
• Individual EFPA policyholders in Barbados and the EC islands with principal and accrued interest above Bds$25 000 would receive: $25 000 in cash; 60 per cent of the principal balance above $25 000 is converted into an annuity (with term to be established based on the profile of the EFPA policyholder). The trust will provide eligible assets to back the annuities created for the former EFPA holders. This will facilitate the sale of these annuities to an insurance company, and 40 per cent of principal balance above $25 000 and all accrued interest converted into non-cumulative preferred shares of the SPV.
• Corporate EFPA policyholders in Barbados and the EC islands would receive the following: 50 per cent of the principal balance converted into an annuity (term to be established); and 50 per cent of the principal balance and all accrued interest converted into common shares in the SPV.
• Government EFPA policyholders in the EC islands would receive the following: the principal balance and all accrued interest converted into common shares in the SPV.
The above approach will result in all of CIL’s policyholders benefiting from the assets in CIL and its parent company. It also recognizes that given current market conditions, to fully liquidate the real holdings of CIL and its parent would result in significant losses for policyholders.
Interim distribution
It is recognized that implementation of this approach will require extensive consultations and approvals prior to issuance of the bond. The JM will, in addition to the above, explore the possibility of immediate sale of any CIL or CHBL assets that are presently saleable. The proceeds of these sales would be used to provide an interim distribution to individual EFPA policyholders in Barbados and the EC islands on an equitable basis.
An alternative is for the SPV to secure a loan from a commercial bank and the proceeds used to fund this interim distribution. The loan would be paid at the time the proceeds from the bond issue are received.
Next steps
1) Obtain agreement from the Government of Barbados for this proposed approach and to provide the credit enhancement necessary for a successful bond issue.
2) Obtain agreement from the governments of the EC islands for this proposed approach and to provide necessary support to facilitate.
3) Engage with the government of Trinidad and Tobago to support the bond issue by provision of a credit enhancement on behalf of regional governments.
4) Obtain support from the Barbados Financial Services Commission and all EC insurance regulators.
5) Obtain support from the judicial managers appointed in St Lucia and St Kitts.
6) Issue communication to all CIL policyholders in Barbados and EC islands.
7) Upon confirmation of government and regulatory approval, prepare final report for approval by the courts in each jurisdiction.
8) Implementation of interim distribution to EFPA policyholders, sale of CIL’s traditional business and settlement/restructure of CIL’s EFPA portfolio.
