Yesterday the US authorities extended the TARP programme to cover certain life insurance companies.
Meanwhile, in the Caribbean, leaders chose last week to establish a fund to provide as yet undefined “liquidity” assistance to the ailing if not terminal giant regional conglomerate (US$16bn of assets) CL Financial and its subsidiaries - which include large life insurance operations.
Of the modest US$80m earmarked for this exercise US$50m are old monies diverted from an existing petroleum subsidy fund put together in 2004 by Trinidad and Tobago. It may well be safe to assume this sum will end up protecting the interests of Trinidadian taxpayers.
Given this realpolitik one CL financial subsidiary, the Barbados-based US$500m (by assets) life insurer Clico International Life, may not see material benefit from the fund. In breach of regulatory reserve requirements, the firm requires capital having been caught out by an aggressive underwriting strategy, too much leverage, falling asset markets and illiquid holdings. Salt in the wounds, it also bought bond-based but derivative-powered “guaranteed return” structured investment products from Deutsche Bank which carry redemption penalties if cashed early. This further hurt its liquidity position.
Which is why, as much of the rest of the CL Financial insurance operations in the eastern Caribbean fall apart, it is in talks brokered by the Government of Barbados to sell up to a competitor. That single suitor is a Bermudan firm of identical gross asset value – Bermuda Fire & Marine (BF&M) – whose capacity to finance an acquisition that will double its size whilst maintaining a prudently structured balance sheet is surely questionable.
Understandably in a small island with rising unemployment and where nearly half of all households have policies with the firm the survival of Clico has become a hot political issue. If BF&M choose to cherry pick – and who would blame them in the current economic context - there will be a rump of operations left over for the local social safety net and taxpayers to deal with. Worse, BF&M could simply walk away.
So it would make sense for the government to hedge by encouraging multiple bids rather than halting the brokering effort at a single potential buyer as they have done. And there is a cheap and elegant method of so acting which might even have a place in the current US context: a sovereign guarantee underwriting against further falls in value the bulk of the riskiest and most illiquid company assets.
The broad template might be this: 90% of said assets are covered with the first 10% of any deterioration to be eaten by the new owners. Falls below that 10% that are covered by the two parties in the same 90:10 proportion. In exchange for this guarantee the government takes preferred shares convertible into up to 15% (say) of the ordinary share base upon re-capitalisation - which is set up on best terms for the taxpayer by the existence of the guarantee itself.
Bar the recapitalisation piece, this was an idea tried by at least one US bank last year with partial success. Except that the absence of new capital hamstrung the initiative. But carried through in its entirety this approach permits taxpayers – for zero cash outlay – to:
- Cap the potential future portfolio losses of Clico thus making the investment more attractive to more buyers
- Reassure policyholders with a specific sovereign indemnity thus stemming withdrawal pressure
- Safeguard local jobs by reinforcing the ongoing commercial solvency of Clico
- Receive collateral for his guarantee rather than the higher tax bill that might be associated with the likely soft loans of the new "liquidity" fund
- Secure a nationally strategic stake in and entitlement to the future profits of a recovered business
There are no resources in the Caribbean to do a US-scale TARP or similar. And having but one option in the sale to a private buyer of Clico’s life operations is a needless risk. The net for potential suitors can and ought, with a little imagination, to be cast wider.