On December 18th 2017, the Barbados Today published an article headlined, “Another CLICO: IMF Concerned About Poor Supervision of Sagicor.” The story was based on a leaked, confidential draft IMF report done for the Financial Services Commission (FSC) of Barbados, which regulates and supervises insurance companies in Barbados.
According to the Barbados Today article, the IMF report painted a frightening picture of the impact “the failure or near failure” of Sagicor, the Caribbean’s most dominant insurance company, could have on Barbados and the rest of the Caribbean. The premise of the newspaper article was should Sagicor fail, the financial fallout suffered by policyholders and the region would be worse than CLICO’s.
Of course, here in Trinidad and Tobago, ground zero of the CLICO collapse, we are all too familiar with the devastation caused when the regional giant insurance company collapsed in January 2009.
As the former Governor of the Central Bank of Trinidad & Tobago, I have broad and deep knowledge of both CLICO and Sagicor. Under my watch, the Central Bank had developed the CLICO Resolution Plan and created the Systemically Important Financial Institution (SIFI) framework, which deemed Sagicor Trinidad a SIFI.
It’s in this context that I have been receiving several calls from regional regulators as well as from Sagicor policyholders and investors over the past month, all worried about the credibility and findings of the draft IMF report. I have not seen the IMF’s confidential report, and I am presenting my views based solely on the contents of the newspaper article published in the Barbados Today.
At the outset, let me say without doubt, Sagicor is not another CLICO and the IMF made a serious error in its analysis of this matter. The IMF’s analysis of the similarities between Sagicor and CLICO is fundamentally flawed and demonstrated an alarming ignorance of the stark differences in the business models pursued by these two insurance companies.
The draft IMF report, according to the Barbados Today, states: Sagicor’s “group structure, business philosophy and operations are in many ways similar to those of the CLICO Group, another Caribbean financial conglomerate which failed ten years ago, and resulted in substantial losses.”
It is true that both insurance companies are of systemic relevance based on their sheer size. Sagicor’s assets are equivalent to about half of the GDP of Barbados; CLICO, prior to its collapse, had assets equivalent to over one-tenth of Trinidad and Tobago’s GDP. However, size is the only factor these two companies have in common. There is absolutely no comparison between the group structure, business philosophy and operations of Sagicor and CLICO.
In terms of group structure, Sagicor’s website www.sagicor.com states, the Sagicor Financial Group is a holding company publicly listed on the stock exchanges of Barbados, Trinidad and Tobago and London, with about 36 thousand shareholders. It operates in 21 countries in the Caribbean, the United States and Latin America, and is subject to the regulatory requirements of these jurisdictions.
Moreover, because Sagicor is listed on the London Stock Exchange, its audited financial statements are subject to another layer of independent oversight. This make Sagicor one of the most highly and actively regulated financial institution in the Caribbean region.
CLICO, on the other hand, as is common knowledge, is the subsidiary of CL Financial, a holding company privately owned by less than 500 shareholders and operating in at least 28 countries through a complex and opaque structure, making its supervision difficult. Based on the testimony of the former Inspector of Financial Institutions of the Central Bank of Trinidad & Tobago during the Sir Anthony Colman Commission of Enquiry into the collapse of CLICO, on many occasions, CLICO would overtly challenge the findings of its regulator, the Central Bank. Since January 2009, CLICO has been under direct control of the Central Bank.
In terms of Sagicor’s business philosophy and objective, which is stated on its website, the company wants to create a leading global financial services group with its primary activity being insurance. It has expanded its footprint mainly through growing its customer and product base internationally and in the Caribbean, funding this expansion through a mix of retained earnings and borrowings on the international capital market.
As the Sir Anthony Colman Commission of Enquiry into the collapse of CLICO made clear, CL Financial’s primary focus was also to build a global conglomerate but this was accomplished through the acquisition of assets (mainly over-priced) using funds borrowed from CLICO which sold attractively priced deposit-like annuity products and channeled them to over-leveraged sister companies and real estate investments. CL Financial effectively operated like a hedge fund with minimum capital, high debt and very weak internal controls.
In contrast, Sagicor has consistently demonstrated financial strength and prudence. One key measure of capital strength is the Canadian Minimum Continuing Capital and Surplus Requirements (MCCSR), which Sagicor has voluntarily adopted since 1991 in the absence of uniform capital standards for the Caribbean. At the end of September 2017, Sagicor’s MCCSR ratio was 304%, more than twice the minimum recommended ratio for life insurance companies.
In June 2016, Sagicor re-domiciled its holding company, Sagicor Financial Corporation, to Bermuda. According to the Barbados Today article, the IMF report found that “home supervision for Sagicor was unclear, and made even murkier by the fact the company has not disclosed the type of operations it envisions to establish in Bermuda”.
Again, this statement displays a bewildering lack of ignorance on the part of the IMF team. Even a cursory review of Sagicor’s annual reports and investor briefings, easily available on its website, would reveal the reasons behind Sagicor’s redomiciliation of its headquarters from Barbados to Bermuda.
This redomiciliation was the first phase of a three-part process to immunize the Sagicor Group from the deteriorating creditworthiness of Barbados and to protect the credit rating of the Group. The second phase is to incorporate a reinsurance company in Bermuda, while the third is to reorganize the corporate structure of it main operating entities so that they become subsidiaries of Sagicor Financial Corporation Limited.
Over the past few years, Standard & Poor’s has been successively downgrading Barbados’ sovereign credit rating from investment grade to sub-investment grade, or junk status, and these downgrades have spilled over onto Sagicor. While economic conditions were worsening in Barbados, Sagicor was becoming more diversified across country, lines of business and customer segment but this improvement was not reflected in upgrades to its own credit rating which was capped at two notches above that of its country of domicile, Barbados.
The shift to Bermuda, which has a stronger and more stable credit rating, means Barbados will no longer be the reference sovereign rating for Sagicor. This move has already begun to yield benefits for Sagicor. In December 2016, S&P upgraded Sagicor two notches higher than that of Barbados, while in March 2017, S&P further downgraded Barbados to just two notches away from selective default.
Bermuda is a respected and successful global reinsurance market, the third largest in the world after London and New York. It’s home to a number of insurance company head offices, as well as subsidiaries of global insurance and reinsurance companies. Bermuda’s single financial services regulator, the Bermuda Monetary Authority, has a risk-based insurance regulatory system which is equivalent to that of the United States and the United Kingdom.
The most critical point of all which dispels any murkiness about Sagicor’s move to Bermuda and shines a light of (enhanced) transparency on Sagicor’s operations is this: Bermuda’s regulatory structure allows for group-wide insurance supervision, unlike that of the FSC, which according to the IMF report, is not in a position to conduct group-wide supervision and whose solo supervision is weak.
The main objectives of Bermuda’s group supervision are to protect policyholders, to ensure at least one supervisor has an overall view of the insurance group and its associated risks, and to address any supervisory gaps, the risk of contagion and the impact of unregulated entities within a group. Currently, the Bermuda Monetary Authority is the Group Supervisor for 20 insurance groups.
This reputation of Bermuda as an exceptionally well-regulated jurisdiction is not unknown to the IMF, especially its staff in the monetary and capital markets department who have been part of periodic Fund assessments of Bermuda’s financial sector supervision and regulation and who have co-authored several working papers with officials from the Bermuda Monetary Authority.
The IMF has made mistakes in the past and though it is never one to rush to apologize or concede it has acted unfairly to a country (as in the Fund’s belated admission that it had failed to realise the damage austerity could do to Greece), it has tarnished the international reputation and brand of a stable and healthy regional insurance company. Both the IMF and FSC must clear the air on this report as they have shaken the faith of many policyholders based on the calls I’ve been getting.
Perhaps the IMF is too far removed from the human impact of the failure of CLICO, but they need to understand, the psychological damage from this failure left many people in the Caribbean afraid to trust those companies in the financial services sector. The effects from this report can have lasting consequences and while Sagicor has moved to defend itself and its name, the IMF and the FSC must come forward as well and meaningfully repair the damage they have done.
In conclusion, let me repeat… Sagicor is not another CLICO.
Rather than commending Sagicor for taking a proactive approach to group-wide supervision of its financial activities, the IMF has sought to denigrate the company on the basis of assertions that are not supported by the facts. This sort of recklessness cannot be condoned.
Of course, the elephant in the room is: who benefited from the leak of this dangerously flawed IMF report?
(Disclosure: Jwala Rambarran is the former Governor of the Central Bank of Trinidad and Tobago, the financial regulator for CLICO and Sagicor Trinidad. He is a policyholder with Sagicor Trinidad, holds shares in Sagicor Financial Corporation, and his brother is a senior executive with the Sagicor Group. He also was the Chief Economist for Caribbean Money Market Brokers (CMMB), a former subsidiary of CL Financial).