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INTERVENTION & REHABILITATION - INSURANCE

The Insurance Intervention & Rehabilitation department is responsible for the restructuring, monitoring and rehabilitation of FINSAC–intervened insurance companies. The companies are Crown Eagle Life Insurance Company Limited (Crown Eagle), Dyoll Life Limited (Dyoll Life), the Jamaica Mutual Life Assurance Society (Mutual Life), Island Life Insurance Company Limited (Island Life), and Life of Jamaica Limited (LOJ). 

FINSAC originally intervened in the insurance sector in fiscal year 1997/1998 through the purchase of common and preferred shares and/or issuance of subordinated loans in all five insurance companies. In 1998/1999 it became evident that further intervention would need to take place in Crown Eagle, Dyoll Life and Mutual Life. These companies were coming under increasing liquidity pressure from policyholders encashing their interest-sensitive policies.

CROWN EAGLE, DYOLL LIFE and MUTUAL LIFE

Interest-sensitive policies:
Lump-sum interest-sensitive policies are characterised by minimal life insurance coverage and a large investment premium. Primarily investment vehicles, they were usually funded by a single lump-sum deposit. The interest paid on these policies was unrelated to the performance of any asset held by the insurance company.

The link to insurance came through a small amount of the deposit going into insurance coverage. In many cases the actuarial valuation of the insurance component was worth less than 1% of the investment component. For example, in the case of Mutual Life, out of a total lump-sum portfolio liability of approximately $2,145 million only $1.5 million or .07% represented the liability of the insurance coverage for its 6,513 lump-sum policyholders.

In more than 90% of lump-sum interest-sensitive policies, the policyholder’s life was insured for $60,000 or less compared to average coverage of approximately $250,000 in the savings-type interest-sensitive policies.In February 1999, a Judicial Manager, Glenford McLeish, chartered accountant and FINSAC employee, was appointed by the Supreme Court to take responsibility for these policies.

The appointment of the Judicial Manager allowed a court injunction, originally granted in December 1998, to be lifted. The injunction had prevented any activity from taking place with these types of policies. The lifting of the injunction created a more stable framework for the development and speedy implementation of a solution to the problem posed by these policies. The Judicial Manager’s role was to examine the interest-sensitive portfolios of the companies, determine the best way of solving 

the problem and to report his findings and recommendations to the Court.On Thursday, April 29, 1999, the Judicial Manager filed a report with the Supreme Court regarding the lump-sum, interest-sensitive policies, following which the Court ruled that the FINSAC–pioneered scheme to pay out lump-sum, interest sensitive policies of Crown Eagle, Mutual Life and Dyoll Life was the best deal possible for policyholders, and congratulated the Judicial Manager and the FINSAC insurance team on the fine quality of the report submitted to the Court for approval. 

A copy of the report was filed with the Superintendent of Insurance, and another was made available for public scrutiny. Once this Court Order was received, the decision of the Court was binding on all persons.

The details of the scheme that FINSAC entered into with the Bank of Nova Scotia Jamaica Limited (BNS) and Scotiabank Jamaica Trust & Merchant Bank Limited (Scotia Trust) for the divestment of the interest-sensitive policies are set out below:

• The liability for paying out proceeds of lump-sum type interest-sensitive policies was assumed by BNS and Scotia Trust, which received in return Local Registered Stock of sufficient value to back the liability represented by these policies. Policyholders would receive a savings account at BNS for their investment portion - up to a $200,000 maximum.

• Policyholders with amounts over $200,000 would be given a transferable Certificate of Participation issued by Scotia Trust, for the amounts over $200,000. 

• This Certificate in turn would be backed by a five-year term instrument issued by the Government of Jamaica with Scotia Trust as trustees. Interest is payable semi–annually to these policyholders, but no withdrawal of principal is permitted during the five years.

• Policyholders over 65 years old as at March 31, 1999 receive interest monthly. This scheme gave approximately 75% of interest-sensitive policyholders immediate access to all of their funds. 

After implementation of this scheme, FINSAC secured the agreement of at least one financial institution to negotiate the Certificates of Participation issued by Scotia Trust, thus allowing holders of these instruments the option of obtaining immediately a discounted cash value for their Certificates.

In June 1999, the final tranche of Bank of Nova Scotia transfers was completed. Some policies were not transferred, however, due to some policyholders’ decision not to sign the agreements transferring these policies. The insurance portion and cash values up to $200,000 will now be assumed by Guardian Life Limited, the Jamaican subsidiary formed to assume the insurance portfolio acquired by Guardian Holdings Limited. Cash values in excess of $200,000 will be assumed by Union Bank, with certificates similar to the BNS issue being given to the policyholders.

Traditional policies and pension funds:
At the same time as the negotiations were taking place with BNS, FINSAC offered the remaining Dyoll Life, Mutual Life and Crown Eagle portfolios for sale. These consisted of traditional life policies and pension funds. Offers for purchase were received from eight companies: Barbados Mutual Life Assurance Society, Blue Cross of Jamaica, Colonial Life Insurance Company (Trinidad) Ltd., First Life Insurance Company Ltd., Guardian Holdings Ltd., Life of Barbados Ltd., Maritime Life (Caribbean) Ltd., and Prime Life Assurance Company Ltd. Subsequently, Life of Barbados Ltd. and Barbados Mutual Life Assurance Society decided to bid for the portfolios as a joint venture.

Following acceptance of the Memoranda of Understanding by FINSAC, bidders were informed of the bid process, the related requirements and the deadlines governing the process. They could submit bids for all or part of the portfolios and could make their bids contingent on a successful tender for other segments of the business. This approach allowed FINSAC to award the portfolios to one company or a combination of companies.Bidders were not allowed to tender for the portfolio of just one of the failed companies, given a policy decision to combine like portfolios across the three companies and offer only the lines of business for sale.

Final bids were awarded points based on how well they measured up against a set of previously established criteria, with bidders with the highest points standing emerging as the winners.

Valuation:
An important aspect of the process was the actuarial valuation of the portfolios.The valuation was conducted in three stages: group business - health and life; the pension business and the individual life business. At the end of each actuarial evaluation, a report was sent to the bidders and they were required to submit a bid for that particular portfolio. 

The valuation was based on the policy and experience data provided by the three insurance companies as at December 31, 1998.The first challenge of the valuation process was that there was no standard accounting or actuarial practice governing the insurance industry. However, the decision was taken to use the Policy Premium Method (PPM) for the valuation, and the related Minimum Continuing Capital and Surplus Requirements (MCCSR) to ascertain the required capital for the portfolio and to evaluate the financial strength of the bidding companies.

The decision to use this methodology was based primarily on two factors:1. these methods were likely requirements of the upcoming Insurance Act; and2. some companies already used these methods in Jamaica and Barbados.

FINSAC’s technical personnel evaluated the offers received as well as the financial state of the bidding companies in order to determine whether they were capable of financing the acquisition of the portfolios without suffering financial damage in the process. Another major criterion was “fit and proper” considerations for management and directors.

Based on this analysis, FINSAC made recommendations to Cabinet, which were accepted, and on May 19, 1999, it was announced that Guardian Holdings Limited of Trinidad had won the bid for the individual life and pension portfolios, and that First Life Insurance Company Limited of Jamaica had won the bid for the group life and health portfolios. The total price was $1.3 billion (US$32.5 million).

In order to shorten the transfer process, an application was successfully made to the Supreme Court for the Judicial Manager to be appointed over this portion of the business for all three companies. At a final hearing on July 29, 1999 the Supreme Court approved the Agreements for Sale, and ordered the transfer of business. First Life and Guardian Life assumed management of the portfolios on August 1, 1999. The pace at which this divestment took place was unprecedented.

LIFE OF JAMAICA TRANSACTION:
In June 1999, FINSAC acquired real estate and other assets from the Investment Funds of Life of Jamaica (LOJ). The properties acquired were the Citizens Bank headquarters at 17 Dominica Drive and certain floors of the Towers at 25 Dominica Drive. Also as part of the transaction, FINSAC further consolidated its ownership of Citizens Bank (now Union Bank) by acquiring a block of Citizens Bank shares held by the funds. The total price of the transaction was $658 million.

The properties, which were owned by the pooled investment pension fund and the segregated policyholder funds, were sold as a part of the exercise to realign the portfolios managed by LOJ. The objective of the realignment was to provide liquidity to the funds and to reduce the levels of internal (inter-fund) debt.

ISLAND LIFE TRANSACTION:
In August 1999, after several months of extensive discussions between the parties, the Barbados Mutual Life Assurance Society, Island Life Insurance Company and FINSAC signed a Letter of Intent 

under which both Barbados Mutual and FINSAC would inject additional capital into Island Life. As a result of this injection, Barbados Mutual acquired a 64% interest in Island Life, while FINSAC maintained its approximately 26% stake. Other shareholders retained a 10% stake in the company. A Shareholders’ Meeting was held on November 25, 1999, where the transaction was approved. 

Details of the transaction are set out below:

• Island Life would increase its issued share capital to $622,122,448 from $231,918,336 by issuing new, ordinary and preference shares; 

• Barbados Mutual would inject $260 million in capital and would be issued 46,080,000 ordinary shares representing 64% of the issued ordinary share capital of Island Life;

• FINSAC would inject approximately $340 million in capital and would be issued 16,124,082 additional ordinary shares, to keep its stake in the company at 26%. It will also receive 84,721,000 perpetual non-cumulative preference shares, yielding a dividend rate of 12.5%;

• FINSAC would assist Island Life in restructuring its asset base by acquiring the Island Life Centre from the company at book value, which is assessed to be $430 million, based on a valuation done in October 1998; and 

• FINSAC would pay for this by transferring real estate worth approximately $150 million to Island Life, and by issuing $200 million in FINSAC notes, with the remainder of the purchase price being met by the transfer of negotiable Government of Jamaica securities from FINSAC to Island Life.

What is emerging from the rehabilitation and divestment strategy is a stronger and more profitable insurance industry. Over 500,000 policyholders with insurance coverage of over $341 billion have been protected under FINSAC’s efforts to resolve the problems. The insurance sector is now well placed to meet the needs of its customers and face the challenges of the future.

IADB PROJECT
Throughout fiscal 1999/2000, Insurance Regulatory Reform has continued to be a major work stream through a two-year special project jointly funded by FINSAC and the Washington-based Inter-American Development Bank (IADB).This project has been specifically geared towards the management of FINSAC’s investment in the insurance sector, the updating and strengthening of Jamaica’s Insurance Act and Regulations, the evaluation of the management of private pension funds in Jamaica, together with other reforms. The project team is led by FINSAC’s General Manager, Insurance Intervention & Rehabilitation. The team works closely with the Office of the Superintendent of Insurance (OSI) to ensure training and support for the OSI in the new methodologies.

The following deliverables have been successfully completed:

• Performance benchmarks (Early Warning Ratios) established for FINSAC-intervened insurance companies;

• Monthly reporting forms for life and general insurance companies were formulated, showing key data indicating the companies’ overall financial health. All FINSAC-intervened insurance companies now use these reporting forms; and

• Report on all life and general insurance companies, showing the trends in the predictive ratios over a nine year period.

• In December 1998, working with analysts from the OSI, the project team completed a joint FINSAC/OSI examination of Island Life, using many of these newly-developed benchmarks and analyses. An examination of Life of Jamaica began on June 28, 1999. These were the first examinations of life insurance companies in Jamaica. The examination report on Life of Jamaica was presented to the Board of Life of Jamaica in January 2000. The examinations focussed on the accuracy of accounting records, the suitability and consistency of accounting policies and procedures, solvency of the company, and the verification that statutory requirements were in compliance. Being the first on-site examinations, a complete review of all books maintained by the company was done. 

• New organisational charts for the OSI were completed, with many job descriptions finalised, including educational, skills and abilities requirements. The structure includes pension supervision and job descriptions have been developed for the necessary positions.

• Staffing structure and budget for the OSI as a statutory body were established for submission to the Ministry of Finance.

• Prototypes for an automated insurance industry financial analysis programme were prepared.

• First drafts of new Investment Guidelines for insurance companies and a new Insurance Act were prepared for circulation in the industry.

• Drafts of the proposed new Insurance Act were sent out for comments from all stakeholders and Caribbean legal experts.

• The Examination Manual and procedures were finalised.

• Draft Accounting Standards for general and life insurance companies were developed in conjunction with the Institute of Chartered Accountants of Jamaica, and issued to the industry as exposure drafts.

• New solvency standards were developed for life and general insurance companies. The Minimum Assets Test for general insurance companies was submitted to the Jamaica Association of General Insurance Companies (JAGIC) for comment. The Minimum Assets Test is initially set at 100% of Required Assets for Test Purposes, and will vary in accordance with the Office of the Superintendent of Insurance’s regulations from time to time. The Minimum Continuing Capital and Surplus Requirement (MCCSR) for life insurance companies was also circulated to the industry for comment.

• An initial review of a private pension system in Jamaica by a pension regulatory expert was arranged. Recommendations were submitted as comments to the Committee for Pension Reform.

The IADB project is scheduled for completion in July 2000. Once the Draft Act and Regulations are with the Ministry of Finance & Planning, the Attorney General’s Office and the Office of the Chief Parliamentary Counsel will control the formulation of a bill and the timing of the introduction of the Act into law. 

The IADB project plan contemplates the transfer of certain project staff to the Office of the Superintendent of Insurance. This is, however, contingent on Government’s finalisation of its proposals for the re-structuring of the Office of the Superintendent of Insurance.

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