The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Top BAF Financial executives had “no knowledge” of internal battles at the National Insurance Board (NIB) over whether it should fully take-up their parent company’s $10 million preference share issue.

Algernon Cargill, NIB’s director, alleged in a Supreme Court affidavit filed last week that management had recommended NIB “not participate” in the private placement by BAB Holdings, the entity that owns 100 per cent of BAF Financial, the life insurance and financial services provider.

Yet he claimed that this was overturned by NIB chairman, Greg Moss, and his Board sidekick, Patrick Davis, via the Investments Committee, creating another issue in the power struggle between themselves and the director.

And, while there was “no direct evidence” to back up such assertions, Mr Cargill alleged that Mr Moss told the NIB Investments Committe that Prime Minister Perry Christie and several Cabinet Ministers were pushing for it to purchase the full $10 million offered by BAB Holdings. Two of the ministers named vehemently denied to Tribune Business that they had any involve ment in deliberations over the BAB Holdings offer, one describing such suggestions as “a complete fabrication”.

The NIB director added that the investment opportunity was ultimately declined by the Ministry of Finance on October 1, 2012, following a letter he wrote outlining the affair and management’s concerns.

Giving his version of events, Mr Cargill alleged that Messrs Moss and Davis, through NIB’s Investments Committee, “overturned management’s recommendation and directed management to seek ministerial approval for the full $10 million offering”.

This, he claimed, occurred after Phaedra Mackey-Knowles, NIB’s deputy director and vice-president of investments, compiled a report citing several reasons why the Bahamas’ social security system should not participate in the BAB Holdings private placement.

Mr Cargill said these reasons included the fact that the BAB Holdings preference share issue “fell outside” NIB’s Investment Policy guidelines, since the company was not listed on the Bahamas International Securities Exchange (BISX) and the offer was a private placement.

Other factors were that “the investment was high risk, the investment’s size exceeded the company’s net worth”, and the perpetual nature of the preference shares being offered.

Mrs Mackey-Knowles’s September 24, 2012, report to Mr Cargill described the BAB Holdings offer as carrying an interest coupon of 6.75 per cent (Bahamian PRIME plus 2 per cent), payable semi-annually.

The $10 million offer was designed “to strengthen the company’s capital base; invest in the development of the company’s products and offering; increase the company’s infrastructure and reduce the debt related to the company’s acquisition”.

BAB Holdings, the report said, intended to use $3.75 million of the proceeds to pay down bank debt taken on when BAB Holdings’ principals, Chester Cooper and attorney John Wilson, acquired BAF Financial (then British American Insurance Company) via a management-led buyout in 2007.

Of the remainder, some $3 million would be used to “extinguish” more debt in the form of a “note payable”, leaving $3.05 million in capital for expansion and $200,000 to cover offering costs.

BAB Holdings preference shares, Mrs Mackey-Knowles said, were perpetual in nature, although the company had the option to redeem them after five years.

Describing BAB Holdings and its primary asset, BAF Financial, as “relatively stable”, she nevertheless wrote: “The offering of $10 million exceeds the company’s net worth of $9.8 million and its total common shareholders equity of $2 million.

“The company does not trade on BISX, and falls outside the parameters of NIB’s Investment Policies and Guidelines of investing in private placements and perpetual offerings.”

As a result, she concluded that NIB management “is not recommending this investment”.

Yet this was not the approach taken by Messrs Moss and Davis. Mr Cargill alleged that at the September 28, 2012, NIB Investments Committee meeting, Mr Moss told himself, Lolitta Rolle and the members that he had spoken to both Khaalis Rolle, minister of state for investments, and Ryan Pinder, minister of financial services, “and that they wanted this investment to be approved by NIB”.

Mr Moss, the director further alleged, “understands” that Mr Pinder had spoken to his Cabinet colleague, Michael Halkitis, minister of state for finance, who also wanted NIB to approve the BAB Holdings investment. And the NIB chairman was also said to have alleged that Mr Halkitis had spoken to the Prime Minister on the issue, with Mr Christie also backing the investment.

Acknowledging that “there was no direct evidence” to back Mr Moss’s assertions on the Ministerial conversations, Mr Cargill alleged: “Mr Moss insisted that these comments be minuted in the Investments Committee and the Board of Directors’ minutes.”

Mr Rolle also denied this version of events when contacted by Tribune Business, telling this newspaper that he and his ministerial colleagues had no involvement in the BAB Holdings deliberations. As did Mr Pinder.

Denying that Ministerial pressure was brought to bear, Mr Rolle said: “I know nothing of that claim. That has no basis in fact. That’s not true. I don’t operate that way. I’ve guarded my reputation, my conduct, and always made sure that whatever I do, particularly professionally, can stand up to any test.”

While Mr Halkitis could not be reached for comment, Mr Pinder told Tribune Business: “I have no idea of even the investment you are talking about. I have had no conversations with Gregory Moss about any investments to do with NIB; it has nothing to do with my portfolio...

“I have never approached Greg Moss about NIB investing in anything, let alone BAF Financial. It’s a complete fabrication; I don’t know anything about it. I am a man of the utmost integrity, and I don’t know what you are talking about.”

Meanwhile, Mr Cooper, BAF Financial’s president and chief executive, told Tribune Business that he was “not privy” to any of NIB’s internal processes relating to his company’s investment proposal.

And he added that he was also unaware of an October 1, 2012, note from the Ministry of Finance’s acting financial secretary, Ehurd Cunningham, recommending that the BAB Holdings issue was not suitable for NIB or any government agency.

Expressing unhappiness that BAB Holdings and BAF Financial had been dragged into the NIB battle, Mr Cooper confirmed to Tribune Business that the $10 million private placement was still active and had not closed.

“The only thing I can say is that whilst we did make a private placement offer of $10 million, and we did introduce the offer to NIB, we haven’t been a part of any internal discussions at NIB, and we haven’t got any feedback on it,” he said.

“As far as we know, we’re waiting to hear from them as to whether they will participate or not.... We did make a private offering. We have gotten some investors. It’s not complete, because we’re waiting to hear from certain pension investors we approached, NIB being one of them.”

Emphasising that the $10 million private placement was “entirely a business transaction”, Mr Cooper added: “I’m not aware of the internal machinations of NIB. I don’t know anything else about what may or may not be happening.’

From the BAB Holdings/BAF Financial perspective, it is unfortunate that they have been dragged into the NIB controversy. Financial data contained in the NIB report showed BAB’s net comprehensive income to be $1.396 million for its 2011 financial year, up by 1.7 per cent from the previous year’s $1.373 million.

Net premium income for 2011 rose by 1.4 per cent to $19.043 million, compared to $18.779 million the year before, while investment income was down 3.6 per cent at $5.933 million.

On the balance sheet side, BAB Holdings’ cash fell by 33.5 per cent year-over-year, dropping to $1.623 million from $2.44 million in 2010. Loans and receivables rose 3.5 per cent to $47.104 million, compared to $45.493 million in 2010, while total assets jumped 6.6 per cent to breach the $100 million mark. They rose year-over-year from $98.889 million to $105.4 million.

Reserves for future policyholder benefits were down 4 per cent at $33.667 million, while BAB Holdings (BAF Financial’s) pension and annuity deposits were ahead 14.6 per cent at $49.054 million, compared to $42.801 million in 2010.

BAB Holdings pegged total return on equity at 15.2 per cent, with an average return on assets of 3.54 per cent.

In a September 28, 2012, letter to Elizabeth Keju, acting permanent secretary at the Ministry of Labour and National Insurance, Mr Cargill suggested that the 6.75 per cent interest coupon being offered by BAB Holdings “was too low, given the inherent risks”.

Mr Cargill said that notwithstanding management’s advice, NIB’s Investments Committee had the previous day “sought to mitigate these risks by adding the following additional conditions prior to passing a resolution to approve the investment of 100 per cent of the $10 million offering”.

The Investments Committee, in return for the $10 million investment, wanted NIB itself to have the option after five years to either redeem the BAB Holdings preference shares or convert them to an equity stake. Another condition was that NIB obtain a Board seat, and that the investment have ministerial approval.

“The Investment Committee also advised that in the event these conditions can be met, that NIB should participate in the full offering of $10 million, as it was considered that in the event the entire subscription was not completed, that the company’s overall financial position would not be strengthened, and the best position was for NIB to participate at 100 per cent,” Mr Cargill noted.

An NIB Board of Directors meeting, held on September 27, 2012, agreed to adopt the Investments Committee resolution with the added condition that BAB Holdings increase the interest coupon by one percentage point - taking it to 7.75 per cent, or Prime plus 3 per cent as opposed to ‘plus 2 per cent’.

The Ministry of Finance, via acting financial secretary Ehurd Cunningham, replied on October 1, 2012, to say that the BAB Holdings issue should not be invested in.

The dates on the Ministry of Finance reply are somewhat odd, as the letter to Mr Cargill is dated July 20, 2012, even though the contents refer to the NIB director’s September 28 letter - dated some two months later. And Mr Cunningham also refers to a September 14, 2012, memorandum from Mr Cargill, although this has not been filed with the Supreme Court.

Writing perhaps from the perspective of a risk-averse financial secretary, as opposed to a financial analyst, Mr Cunningham said that after reviewing the documents: “I am to advise that this offer is not one which should be taken up by the Government via any of its agencies.