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

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

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 Financial Reporting - Accounting – values assigned to assets and liabilities - Provisioning Weak Management Controls - Internal controls - Investment strategy - Unfocused business strategy - Uncontrolled expenses - Inappropriate incentives

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

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

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 Normal Business1 Early Warning2 Significant Concern3 Viability at Risk 4 5Closure or Wind-up Level of concern Supervisory powers Low High

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

Rating the Risk De-licensing Improved condition – reduced concern Licensing Increased risk – increased concern – increased effort

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

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

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