How now to reinstall confidence in the market post the $747 mill CBL collapse?

The CBL story has continued to provide plenty of headlines over the last couple of months, largely propelled by the release of the RBNZ independent review. Adding to the media coverage has also been articles and paid advertising in major newspapers about CBL Corporation boss Peter Harris telling shareholders to ask more questions of RBNZ and saying that CBL was not to blame.

CBL dual listed on the NZX and ASX on 13 Oct 2015 where it raised $125 million from retail investors alone. It had a capital value of $747 million just before its trading was halted on 8 Feb 2018 and is now said to be worth nothing.

There are many paths that could be followed in this story, but this narrative will focus on two areas; 1) the timeline of key events that lead to the demise of CBL Corporation and 2) what needs to be done now to rebuild confidence in the NZ market.

The main characters in this plot are the CBL Corporation, CBL subsidiaries, Elite and Alpha (ceding companies), the Appointed Actuaries, the Reserve Bank of New Zealand, overseas regulators, Shareholders and the FMA.

As they say, let us start at the very beginning.

1973

CBL began as a New Zealand-based insurer of builders’ warranty business.

1996

CBL was bought out by Alistair Hutchison and Peter Harris. Harris was appointed Managing Director in 2017.

1997

CBL created a new strategic direction which focused on niche markets. 

2010

The strategic direction of CBL led to expansion overseas to find niche markets and, in particular, 10-year construction contracts in France.

The Insurance Act of 2010 also came into law promoting both the maintenance of a sound and efficient sector, and public confidence in the insurance sector. The Reserve Bank of New Zealand was appointed an administrator of the Act in September 2010; the Prudential regulator of the insurance sector – can issuers pay their claims. The FMA was appointed the conduct regulator – are issuers treating customers fairly.

2012

The parent company CBL Corporation was established and would later dual list on the NZX and ASX.

2013

CBL Insurance Limited (CBLI) was granted a full insurance licence on 4 September 2013. At this time, the RBNZ had concerns around under-reserving by CBL raised through a KPMG report they commissioned as part of the licencing process. Whilst there was concern from RBNZ, it was decided that these concerns could be resolved at a later date. RBNZ followed up on these concerns in 2014. The decision to provide CBLI with a licence in 2013 was confirmed as a sound decision in the recent 2019 independent review.

At the time of licensing, CBL had much of its insurance business coming from overseas via ceding companies, the majority from France. Its gross written premiums in 2013 were $165m with less that $2m in New Zealand.

2014

The RBNZ, from July 2014 onwards, attempted on many occasions to resolve the concern they had around CBLs under-reserving which had been identified by RBNZs internal Actuary. When RBNZ approached CBL they came up against a strong belief within CBL of their clear strategy and supporting information from the Appointed Actuary who was a sole practitioner. The RBNZ also had many priorities at the time with one being the Canterbury earthquakes.

A new Appointed Actuary commenced with CBL from the firm PwC to help resolve the under-reserving concerns raised by RBNZ. This was believed to be at the time a positive step forward.

RBNZ still had concerns and continued to engage CBL, but stronger engagement did not occur until 2017.

2015

CBL Corp Ltd listed on NZX and ASX on 13 October 2015 raising $125mil from retail investors alone.

2017

In mid-2017, the Gibraltar Regulator raised concerns around the reserves of CBL’s issuer Elite (Gibraltar-based) and engaged PwC UK to undertake an actuarial review which confirmed Elite was under-reserved and that CBL would most likely be also. 

On 5 Jul 2017, Elite went into solvent run-off, where it was closed to new business and let its liabilities reduce over time. 

RBNZ issued CBL with a notice that it must increase its minimum solvency from 100% to 170%. RBNZ quickly followed this with another notice that appointed investigators McGrathNicol and Finity & Milliman to investigate CBL’s French construction insurance business.

CBLI’s liabilities as at 30 June 2017 were estimated by the investigators to be understated by $289 million.  On this basis, CBLI was clearly balance sheet insolvent, as well as being a long way below regulatory minimum solvency standard.

CBL’s internal actuary also raised for the first time, the need to significantly increase reserve levels.

2018

In February 2018, CBL advised the RBNZ that their solvency ratio was below 100% which was significantly below that of the requested 170% - the requested increase in reserves showed a solvency rating of 29% from the Appointed Actuary. CBL Insurance was put into interim liquidation and CBL Corporation was put under voluntary administration and then in November 2018, went into full liquidation.

2019

On 2 July, the RBNZ independent review into its actions surrounding CBL was released. The report identifies two key issues that led to the collapse of CBL:

• CBL had most of its insurance overseas and rapidly grew its market share by undercutting market rates. It could undercut rates because it worked around the strict requirements of European regulators for higher reserves by having European based insurers sell contracts and then reinsure them (cede) through to CBL Insurance at 80% to 90% of the total value.  Given that CBL was regulated in New Zealand, it made obtaining a clear picture challenging for regulators.
• RBNZ did have concerns over CBL reserving levels, but did not push hard enough to get the information they needed.

What happens next?

The RBNZ’s independent review provided 28 recommendations that the RBNZ accepts and will implement to improve the Prudential regulation of the insurance sector. Whilst this is all too late for investors, this should indeed build confidence in regulation of the sector moving forward.

However, what about the confidence of investors in listed companies and how they behave? Retail investors alone lost $206 million when CBL collapsed.  As said in my opening, CBL dual listed on 13 Oct 2015, raised $125 million from retail investors alone, had a capital value of $747 million in Jan 2018, went into voluntary administration in Feb 2018, liquidation in Nov 2018 and is now said to be worth nothing. Should nothing more be done to address shareholders concerns around how CBL operated?

NZSA since March 2018, has many times called for the FMA to use its powers under section 34 of the Financial Markets Authority Act and step into the shoes of investors to file legal action on their behalf. 

I appreciate that there may not be many avenues to recover money owed and that shareholders are at the end of the ‘breadline’, but there is the matter of principle involved. All regulatory organisations in the NZ financial markets should be wanting investors to have confidence, this includes the FMA, RBNZ, Treasury and MBIE. Indeed, their vision is to promote and facilitate the development of fair, efficient and transparent financial markets.

Again, NZSA call for the FMA to step in under section 34. There may not be much money left over, but this is an important case for the NZ financial markets and confidence must be rebuilt.