CAP exec: We’re not bankrupt

The controversial pre-need firm College Assurance Plan (CAP) is not bankrupt, its president and chief executive officer Enrique Sobrepeña told the Senate yesterday.

Sobrepeña told a joint hearing of the Senate committees on trade and commerce and on banks and financial institutions that CAP retained its earnings of P7 billion in 2003, contrary to claims made by the Securities and Exchange Commission (SEC).

He said, however, that CAP still has to pay off P28 million worth of obligations to college students holding educational plans.

"CAP is not insolvent. In fact, CAP retained earnings of P7 billion in 2003 and not a loss, as being claimed by those who want us out of the picture," Sobrepeña said.

The Senate inquiry was prompted by a privileged speech made last week by Sen. Sergio Osmeña III, who alleged that the pre-need company was already bankrupt and should not be allowed to continue funding plans or collecting on existing ones.

Sobrepeña said CAP’s supposed "insolvency" was due to an "erroneous" formula adopted by the SEC of including CAP’s predicted actuarial reserve liability (ARL) as an actual liability in its financial statement.

The ARL represents how much money a plan holder will be given at a certain time. In 2002, the SEC adopted a rule that the ARL be included in the financial statements of pre-need companies, Sobrepeña said.

He explained that including the predicted ARL as an actual liability in a financial statement is applicable only to life insurance companies since thousands of their plan holders could die at the same time in a catastrophe, such as occurred during the tsunamis that struck several Asian countries last December.

In such an incident, death benefit payments for deceased plan holders have to be available immediately, Sobrepeña said.

"In pre-need plans like CAP, however, no such catastrophe can ever happen. The beneficiaries of traditional educational plans will never go to college at the same time. In pre-need plans, benefit claim payments can be anticipated long before they occur," he said.

SEC Chairwoman Fe Barin testified at the Senate hearing that for the past five months she has occupied her post, CAP has been suffering from "capital deficiency or impaired capital, trust fund deficiency and right now, suffering from (an) acute liquidity problem."

Sen. Manuel Roxas II, who chairs the committee on trade and commerce, said CAP has a capital deficiency of P5 billion to P20 billion, a trust fund deficiency of P17 billion and a liquidity problem.

Sobrepeña said CAP still has P8.7 billion in trust funds, as certified by different banks and that the money is available whenever it is needed.

He said reports of insolvency, as well as SEC’s decision not to renew its dealership license since last year, prevents CAP from generating income.

"This aggravates the liquidity problem. The lack of a dealer’s license has caused tremendous strain in our cash flow since credit lines with the banks could not be tapped, collections are down and investors (have) a wait-and-see attitude," Sobrepeña said.

The SEC suspended CAP’s dealership license on Aug. 13, 2004 and he said this has "affected the lives of 33,000 sales associates and their dependents all over the country. But the fact is, we have sufficient funds in our bags."

Sobrepeña said CAP has forged a memorandum of agreement with the First American Investment, Ltd., which will loan the pre-need company $300 million as capital. He said the SEC approved the agreement last Wednesday and the American firm has 40 days to come up with the money.

Under the deal, CAP’s assets — including Metro Rail Transit bonds worth P3 billion — will be used to back the loan. The Philippine Veterans Bank, the designated trustee bank for this transaction, will issue asset safekeeping receipts for the MRT bonds. These receipts, in turn, will serve as the collateral for the loan.

CAP has had problems meeting its obligations to plan holders on time after the SEC ordered it to stop selling pre-need plans to the public.

CAP officials, however, said the company only needs $80 million to address its liquidity problems. They also said that once the loan is completed, CAP can negotiate with a Canadian firm for another loan, this time amounting to $100 million.

Sobrepeña said this will ease the solvency problems being experienced by CAP, which is in the process of liquidating its "proper assets" to meet the demand of plan holders.

"It is really saddening that CAP’s core product, which was designed to fight inflation and save the family from having to worry about their children’s college education, was stopped by the SEC based on a questionable method of valuing future liabilities," he said.