I have invited you here today to provide you with details on the activities which are being undertaken by the Government, through FINSAC, to further strengthen the financial sector. As you are aware, we are currently in the rehabilitation phase of the financial sector restructuring programme.  As I indicated in a previous statement, our rehabilitative strategy would involve the merging of several FINSAC intervened institutions. 

An in-depth diagnostic review of the entire sector confirms that a merger strategy is the way forward and fundamental changes must be made throughout the sector.  This will ensure that whatever corrective measures we implement are sustainable over the long term.

You will recall that a few weeks ago, I indicated that the commercial banks currently under FINSAC's control - namely, Eagle, Citizens/Horizon, Workers and Island Victoria Bank - would be merged.  The first step toward achieving this objective was the formation of a holding company, Union Bank, charged with overseeing the merger.  The total assets of Union Bank amount to $35.8bn, which will make it the third largest commercial bank in the country.

TransAmerican Financial Services has been engaged to manage Union Bank.  The management team which the company brings consists of a group of six individuals with wide-ranging skills in the rehabilitation of troubled financial entities.  A brief summary of their background and qualifications is included in the handouts. I am pleased to introduce the Chief Executive Officer and Chief Financial Officer of the institution who are here with me today.

Mr. Don Kennedy, Chief Executive Officer, has over 30 years experience in

banking and more recently, has been engaged in rehabilitating troubled financial institutions in the United States.  Earlier he served as a Director, Office of Asset Management at the Resolution Trust Corporation.

Mr. James Nehmer - Chief Financial officer, has 12 years experience as an

auditor and accountant, in addition to six years with the Resolution Trust  

Corporation.

I wish today to announce that I have appointed a number of highly qualified professionals to form the core of the Board of Union Bank.  They will serve simultaneously as Directors of the institutions to be merged.

Mr. Dennis Morrison, Q.C., has agreed to serve as Chairman and in the interim will chair the Board of the four entities.  Mr. Morrison has a record of outstanding public service and I am sure that he will render distinguished service in this new capacity.  He will relinquish his membership on the Board of the Bank of Jamaica in order to take up this assignment.

In addition, the other members of the new Board will be as follows:

          Mr. Maurice Clarke      -    banker

          Mr. Las Perry           -    trade unionist

          Dr. Neil McGill         -    medical practitioner

          Ms Deika Morrison       -    engineer

          Mr. Don Kennedy         -    managing director

INSURANCE

As you are aware, FINSAC has provided financial assistance to a number of insurance companies.

Studies of these companies revealed the following characteristics:

• over-investment in real estate;

• overall returns on assets are extremely low;

• high surrender rates due to deposit-like nature of products;

• guaranteed rates of return on interest-sensitive products between 12%-24%;

• high levels of commissions for new business; 

• little or no incentives for renewal business; 

• high level of general expenses which are significantly above international industry norm;

• highly leveraged operations;

• difficulty in meeting solvency requirements.

It is important here to give a little background to the problems in the life insurance industry.  These problems stem mainly from the introduction in the late 1980's of new insurance products - which not only provided the policyholder with life insurance coverage but also with the opportunity to invest.  These new products, popularly known as investment policies, allowed insurance companies to basically take in deposits, in the guise of insurance premiums.  A small amount of the premium would go toward life insurance while the rest would be used mainly to invest in real estate, stocks, bonds and securities.  Many of the policyholders, who in reality were primarily investors, would receive a variable return on their investment monthly, and if they left their investment untouched for three years, would not have to pay tax on the return.

There are two basic types of investment policies - equity-linked and interest-sensitive policies.  Equity-linked policies are those which pay a return based on the performance of certain pooled investment funds, while interest-sensitive policies pay a return determined periodically by the insurance company.  Just as banks are required to keep capital reserves to meet withdrawal demands, insurance companies which sell investment policies should keep funds available to pay out policyholders if they choose to surrender their policies.  In many instances, though, this was not the case, as insurance companies often had policyholders' money tied up in long-term investments and poorly performing funds.  As a result, these companies have faced liquidity problems when trying to meet withdrawal demands.

The Government has taken the decision that the time is now right to refocus the industry to its core business and to direct the companies away from the products that contribute to the liquidity and viability problems in the industry. This decision is based on the outcome of the diagnostic review of the sector; and is in response to a communication from the Board of Directors of Jamaica Mutual Life.  The Directors indicated that the company cannot continue operations in its current form and therefore, needs to explore the possibility of merging with other insurers in order to move forward.

Consequently, the Government has decided to treat with the Insurance Industry by adopting a similar approach to that used in dealing with the banks. The objectives are twofold: (1) to restructure existing institutions and to return them to their core business of selling life insurance policies; (ii) to improve the profitability of the industry by creating strong, properly capitalized and viable firms.

The name of Crown Eagle Insurance will be changed to Independent Life, which will be used as a platform for merging the traditional life and equity-linked portfolios for Crown Eagle Life, Mutual Life and Dyoll Life, whose portfolio was acquired by FINSAC today. Independent Life will also assume responsibility for the management of pension funds currently under the management of these entities. In the interim Mr Curtis Bray, a FINSAC Insurance Consultant, will oversee the integration of these portfolios.

The "interest-sensitive" policies which were a major contributing factor to the problems of the sector will be separated into their insurance and investment components.  Independent Life will then reissue a new insurance policy for the life insurance component. The investment component will be transferred to a new company to be formed.  Policyholders who hold claims for the remaining investment component will be compensated at a rate to be determined.  As of now holders of interest-sensitive policies will not be able to surrender them but will have this portion paid out after the transfer has been effected and the payment schedule has been determined.

We have obtained an injunction restraining the companies from issuing any new interest sensitive policies or making any payments in relation to existing interest sensitive policies. In order to facilitate the arrangements set out above , we have applied to the Courts for the appointment of a Judicial Manager to deal with these policies.  The Judicial Manager will be located at FINSAC and will have a small pool of resources to deal with emergency needs of investors that may arise within the twenty-one days of the stay. These resources will be provided by FINSAC. Traditional and equity-linked policyholders should continue to transact business as usual at their respective institutions.  At the same time, interest-sensitive policyholders will continue to be covered under the life insurance component of their policies.

Special arrangements which will be put in place to deal with the queries of clients of the institutions, will appear in the media within the next few days.

CONCLUSION

Union Bank and Independent Life will give previously insolvent institutions an opportunity to become viable.  With the rationalization of companies in the financial sector, both the banking and insurance industry will become more stable and efficient and will provide more value to their customers and stakeholders.

Of course, both Union Bank and Independent Life have only been established to oversee the merged entities during this challenging transition Period.  It must be clearly understood that FINSAC's involvement in these two institutions is to be temporary and that these institutions will be divested as soon as it is feasible to do so. 

I wish to assure policyholders and clients of the named institutions that these actions simply represent a continuation of the Govemment's commitment to the public to protect their deposits, their insurance policies and their pension funds.