Sunday, November 20th, 2005

Introduction:

Today, Business Page begins a review of the annual report and the audited financial statements of Guyflag Insurance Company Inc for the year ended June 30, 2004, one of the more recent additions in the insurance scene. To the extent possible, the nation has been riveted to news that the company has become embroiled in a financial and potentially devastating criminal claim on a non-existent policy on the Sacred Heart Church on Main Street that was gutted by fire on December 24, 2004. The issue forced the under-resourced Office of the Commissioner of Insurance (OCI) to order the company to stop the writing of new policies and perhaps predictably the company has gone to court on the matter. The latest development in this saga has been the arrest of Dr Fred Sukhdeo, described as a key figure in the matter but not listed as a director in the 2004 annual report of the company.

The arrest came after a wide cross-section of the nation expressed concerns about the slow reaction of the authorities including not only the OCI but the police and the Director of Public Prose-cutions. A search of the records of the Registrar of Companies suggests that the company has been in breach of its obligations to file annual returns, including accounts with the Office of the Registrar, giving the public access to critical information on an entity which loosely describes itself as a financial institution and boasts of its 'patrioticness.' In fact, financial institutions have to be licensed by the Bank of Guyana under the Financial Institutions Act, while insurance companies are regulated under the Insurance Act.

The court and the marketplace:

The company has challenged the ruling by the OCI and understandably is questioning whether 'new policies' extends to the renewal of existing policies. It must be the right of every citizen whether individual or corporate to approach the courts, but the courts must recognise that some matters require practically immediate adjudication and do not fit comfortably within its normal timetable. The market would certainly have made its own decision on the wisdom of taking out new policies with the company, but existing policyholders are in a dilemma - should they seek to fill their insurance needs from other companies or risk their claims not being settled promptly because of cash flow difficulties arising from the loss of new business.

In fact, I do not believe that the public's perception and interest and indeed that of the company are best served by litigation, and what the company needs urgently to do, is to clear its name in the court of public opinion and the marketplace. The directors will well recall that Andersen, Enron's auditors and up till then one of the Top Five accounting firms collapsed in the marketplace even though it was subsequently cleared in the courts. This is not to suggest that clearing its name will be easy for this company, since the matter in which it is implicated is arguably as serious an offence as an insurance company - to which the sacred principle of uberrimae fidei (utmost good faith) should apply - can commit.

Omissions:

The financial statements have received a clean report from its auditor L A Atherly and Company, but there is no indication whether the accounts have complied with the Insurance Act under which the company falls. Indeed, despite an assertion to that effect it does not appear that the financial statements are fully compliant with the Companies Act 1991 and with International Accounting Standards adopted by the Institute of Chartered Accountants of Guyana - another regulator that has failed to meet the standards expected of a self-regulated professional body.

Let us look at some of the omissions of items which require disclosure: no revenue account has been presented for each class of insurance; no separate income statements are presented for short and long-term general insurance business; the requirement that 20% of the net premium income or $5M, whichever is the higher (20% net premium income is in fact $14.6M), does not appear to have been met and no reason or waiver is indicated.

The list of accounting issues which have not been complied with is even longer and includes particulars of directors' shareholdings and emoluments; the name of the ultimate parent company; auditors' remuneration; basis of conversion of foreign currency; the date when the financial statements were issued and the body which gave that authorisation; statement of changes in equity; accounting policies on premium income, exchange differences, investment properties and investments; comparative information; asset maturity; information about the nature and extent of financial instruments and foreign currency risk management policy.

Increasing the risk:

The CEO reported that the company has been tapping in to the diaspora which makes any deficiencies in governance and in disclosures even more critical. Indeed, it is important for the integrity and credibility of Guyana that the overseas marketing and activities of this and other Guyana entities be examined for compliance with the laws. And where, one may ask, is the Insurance Association of Guyana in the midst of this most dangerous challenge facing the industry in the very year in which the Guyana and Trinidad Insurance Co Ltd (GTM) celebrates its 125th anniversary? Who is prepared to demonstrate the courage, character and intellect to prevent the further erosion of standards in the country?

Despite all the months of press interest in this matter, no one approached the OCI for information on this company to which any member of the public is entitled on the payment of a reasonable fee. And it was only following my request that the Minister of Finance appeared to realise that the fixing of the fee for a copy fell under his official mandate and set the fee at G$100 per page!

The role of the regulator:

The OCI, like other regulators, acts as a trustee of the public interest. Given the public interest in this matter, the Registrar, the Commissioner of Insurance or perhaps more importantly the Minister ought to have taken steps to have an inspector appointed to carry out an investigation unrelated to the criminal investigation, since the conduct of a company goes well beyond activities that have criminal implications, without prejudice to the right of the Commissioner to appoint a Special Prosecutor to be responsible for prosecuting any violations of the act. Once again, the Minister of Finance who holds statutory responsibility for insurance, demonstrates a timidity about acting in critical matters coming within his portfolio, and the time must surely be coming when his continuation in that office has to be evaluated.

Memories of Globe Trust :

With the failure of Globe Trust still rankling as a regulatory failure, and thousands of ordinary Guyanese losing their hard-earned savings, we simply cannot allow a similar debacle when the law gives the Minister and the regulator the responsibility and the mechanisms to be more forceful and proactive.

The annual report does not indicate who the Chairman of the company is, but the most senior person appears to be the CEO, Mr Joshua Safeek. The financial statements, however, are signed neither by him nor by Dr Sukhdeo, but rather by Mr Anthony Soares, President/Director and Mr Alvin Yassin, Secretary/ Director.

In his report, the CEO describes the financial performance for 2004 as excellent. He indicates that the company divested all subsidiaries, although there is no indication of gains/losses or the entity to which these were divested, while the 2003 statements did not include any consolidated statements as required by law. Since its incorporation in 1997, the company has grown significantly and now has presence in the following areas: New Amsterdam, Georgetown, Leguan, Esse-quibo, Linden and Rosignol.

According to the CEO, the company restructured its entire operations in 2004 to become more customer focused, and he noted that growth in the company's net profit from $26M to $35M was largely as a result of growth across client segments, geographic regions and risk specialities.

Next week we turn our focus to the actual numbers.