Ivan settlement criticised

A special report of Auditor General Dan Duguay released yesterday concerning the Cayman Islands Government’s Hurricane Ivan property insurance settlement with Cayman General Insurance concluded the government did not get good value for money.

Dan Duguay

Auditor General Dan Duguay. Photo: File

The government received CI$50 million plus 24 per cent of the issued shares of CGI in settlement of its damage claim. That claim was originally estimated at CI$108 million and was subsequently reduced after negotiation to CI$70 million.

The Auditor General criticised the Government for not following through on preparing a detailed compilation of damaged assets after the initial claim was estimated.

‘In my opinion, this decision to not finalise an initial claim by the Government against CGI was not in keeping with good business practice,’ the Auditor General stated in the report. ‘Without a solid evaluation of how much damage it had sustained to its property, it was impossible for the Government to make sound business decisions on what, if any, concessions should have [been] made on its claims.’

In responding to the report, Financial Secretary Kenneth Jefferson – who signed the settlement on behalf of the Government – said a pragmatic approach was taken with respect to quantifying the damage claim.

‘…Whilst it may have been desirable to have established this figure, it was to a large extent academic, because it would have been far higher than the [CGI] would have been able to pay,’ he stated.

The Auditor General’s report stated CGI had reported that the total of its initial adjuster’s estimate with regard to Hurricane Ivan exceeded its assets and reinsurance by about $85 million. Cayman National Corporation, CGI’s parent company at the time, was only able to assist in recapitalisation to a maximum of $40 million, so CGI determined that a negotiated settlement with its largest claimant – the Cayman Islands Government – was necessary.

The actual total value of the property claim will always be unclear because there is no evidence to support any figure, Mr. Duguay stated.

‘However, it is my opinion that the value for the property claim would have been somewhere between the initial adjuster’s estimate [of $108 million] and the agreed value [of $70 million].’

Using the two extremes, however, and then subtracting the part of the settlement that was paid in cash, the Auditor General concluded that the Government paid between $20 million and $58 million for 240,000 shares in CGI.

‘This meant that the cost of the Government’s shareholding in CGI was between $83.33 and $241.66 per share,’ the report stated.

By comparison, the Auditor General pointed out that Sagicor subsequently bought 510,000 shares for $8 million.

‘This meant that this company paid $15.69 per share, which is between five and 15 times less per share than what the Government secured with CGI,’ the report stated.

CGI officials strongly disagree with considering the $20 million to $58 million not paid on initial claim estimate as a purchase price for the shares government acquired, the report points out.

‘…CGI officials stated that the acquisition of the shares was a last minute addition to the [final settlement] agreement and that the intention was not to sell the shares for that consideration,’ the Auditor General stated.

Regardless, Mr. Duguay felt that the Government received less than it could have in the settlement and therefore did not get value for money in the transaction.

‘[The Government] gave up its rights to considerable additional consideration – between $20 [million] and $58 million – and received in return shares that were worth less than $3 million in the fall of 2005.’

The Auditor General’s Office used a variety of data to arrive at the value of shares, including looking at financial records of CGI for the accounting years ending in 2002 through 2005.

Mr. Duguay also criticised the fact that most of the settlement negotiations had taken place privately and no formal minutes were taken.

‘In my opinion, this lack of documentation for a negotiation of this magnitude was extremely unfortunate,’ he stated in the report, noting that it was clear from the onset of negotiations that Government would be asked to make substantial concessions on the property claims.

‘To not have kept clear records of the actions that led up to these concessions seems to flout the fundamentals of accountability and transparency that should have accompanied this transaction.’

In the report, the Auditor General suggested several ways the Government could have negotiated a better deal, including accepting preference shares over common shares, which give shareholders preference in the case of bankruptcy and which accumulate dividends regardless of whether the board of directors declares a common dividend or not.

Mr. Duguay also suggested the Government could have secured any shortfall between a settlement amount and what CGI could pay in cash with a long-term loan at a reasonable interest rate.

In responding to some of the other points in the report, Financial Secretary Jefferson stated that the government had a desire to settle quickly, rather than going through a process which could have taken up to three years.

‘The Government clearly took the view that in an environment in which its infrastructure needed to be repaired and rebuild after the hurricane, it was impractical to delay this vital rebuild and repair process by 18 to 36 months,’ he stated.

Mr. Jefferson also said there were other important reasons the settlement deal was made.

‘Foremost amongst Government’s considerations was the fact that if the Government did not reach a settlement figure that [CGI] could pay, there was a real risk of the company failing and, even more importantly, there would be a loss of confidence in the banking entity with the CNC Group and that, in turn, would have catastrophic results for the Cayman Islands’ economy,’ Mr. Jefferson stated.

‘The Government’s acceptance of a $50 million settlement was done in the national interest of the Cayman Islands.’