Dealing with Troubled Companies

1. Dealing with Troubled Companies Part 1 The Supervisory Process The World Bank Distance Learning Seminar April 18 & 19, 2002

2. Gathering information Getting Started … But where? Company financial and non-financial returns Buried in Data and Confused? Market intelligence Industry trends Supervisor Structure and discipline is required. Economic indicators

3. The Supervisory Process Supervision involves repetitive effort • Oversight • Collecting information • Analysis • Examination • Reporting • Follow-up • Setting goals • Monitoring performance against expectation Place these steps in a structured supervisory process.

4. Some Causes of Financial Troubles • Poor Risk Management • Claims control • Inadequate Pricing • Poor underwriting • Non performing loans • Reinsurance • Weak Management Controls • Internal controls • Investment strategy • Unfocused business strategy • Uncontrolled expenses • Inappropriate incentives • Weak Financial Reporting • Accounting – values assigned to assets and liabilities • Provisioning

5. Basic Requirements for Success • Political support • Legal authority • Information gathering • Inspection • Setting expectations • Sanctions • Skills and experience • Fairness and consistency

6. Data and Information Industry Trends Board Minutes Supervisory Power On Site Inspection Early Warning Indicators Internal Audit Reports Financial Analysis Legal Authority Political Support Financial Statements Management Reports Contingency planning Examination Report Sanctions Remedial Action Progress Reports Management Response

7. Supervisory efficiency • Focus resources on the areas of greatest need • Cross sector reviews • Feedback to the industry • Anticipate new threats

8. Rating Companies • Resource needs assessment • Trend identification • Systemic risk assessment • Consistency • Communication • Contingency planning Supports Requires

9. Stages of Intervention Low 1 Normal Business 2 Early Warning Supervisory powers Level of concern 3 Significant Concern Viability at Risk High 4 5 Closure or Wind-up

10. Troubled Companies • Similar supervisory process for all companies • The greater the concern, the greater the effort • The greater the concern, the greater the remedy • The greater the concern, the greater the sanction • The longer the issue lingers, the greater the sanction BUT

11. Rating the Risk Licensing Increased risk – increased concern – increased effort 2 3 4 1 Improved condition – reduced concern De-licensing

12. Dealing with Troubled Companies Part 2 Stages of Intervention Supervisory Issues and Challenges The World Bank Distance Learning Seminar

13. Stages of Intervention Decision Points 2 2 3 1 1 1 1 1 1 2 2 3 3 4 4 5 5

14. Supervisory Processes Pay attention to: • Focus on weaknesses • Errors versus intentional practices • Insider information • Malingering problems • Willingness to face the issues

15. Communication of the Issues • Inform the appropriate people • Define the issue • Define the indicator of improvement • The timeline for improved performance • Consequence of inaction or ineffective action • To the company • The need for contingency planning

16. Managing the Reaction News What you can expect You just do not understand this company. Denial You have reached the wrong conclusion. We’ll get our own expert. Anger We need more time. Bargaining We are getting the best help that money can buy. Depression Stages toward Acceptance and Action We’ll try anything. Acceptance We have a plan. Action

17. Stages of Intervention • Structured process • Disclosure and communication • Understanding action / reaction • No surprises • Managing reactions

18. Summary • A structured process • Act promptly • Fair and even handed • Allow the company to manage its affairs • Documentation • Monitoring and follow-up • Anticipate negative responses • Respect the need for confidentiality Plan for the worst – but – hope for the best