CBL — what went wrong at one-time market darling?
Until six weeks ago, financial risk insurer CBL Corporation would have been seen as a roaring New Zealand success story.
It debuted on the New Zealand sharemarket in October 2015 at $1.73 and its share price rose to more than $3 in a couple of years. Managing director Peter Harris was named EY Entrepreneur of the Year in 2017.
But the first outward signs of something going wrong appeared in early February when the company went on a trading halt, announced it was having to strengthen the reserves for its French construction business by $100 million, and had made a $44m write-off, resulting in a likely after tax loss of between $75m to $85m.
It talked about a capital raising and said more details would follow. Two days later came revelations that the Reserve Bank — New Zealand’s regulator for the insurance industry — had been reviewing the adequacy of its reserves for the French construction business and had imposed a direction as far back as July 2017 on its minimum solvency followed by a further direction in November to consult it on any non-business-as-usual transactions over $5m.
Shareholders were told this was the first time the company could talk about it because of strict confidentiality orders imposed by the Reserve Bank.
A day later, on February 8, the NZX suspended trading on the stock on concerns about whether shareholders had received full disclosure of what was going on at the firm even though CBL said it was not in breach of disclosure rules.
By mid February, CBL announced it would exit its French construction insurance business. A week later the Reserve Bank stepped in applying to the High Court at Auckland to place CBL Insurance, a subsidiary of the corporation, into interim liquidation — a move it says was triggered after the company paid $55m to overseas companies, breaching the central bank’s orders.
The parent company then called in voluntary administrators to prevent other regulators from taking action.
Matt Goodson, managing director at Salt Funds Management, said the problems appeared to stem from the company writing long-term insurance cover and not having sufficient reserves in place should their assumptions be wrong. But he said there may be other issues as well which had yet to come to light.
“Clearly we are still operating off partial information about what happened and why.
“I think there is going to be some very serious questions to be asked about what was said and when.”
Goodson says he chose not to invest in CBL from the start because he could not see how a New Zealandbased company could have a competitive advantage writing builders insurance in France and this was a significant part of its insurance business.
The company also faced long-term liabilities for builder’s warranties which Goodson said meant they were on the hook for 10 years, with that length of time making it vulnerable to changes in assumptions.
In a joint statement the Financial Markets Authority and the NZX yesterday said they were concerned CBL may have been in breach of various obligations, including its continuous disclosure obligations.
“The FMA and NZX will be working very closely with the Reserve Bank to assess the information available to us. The FMA has also requested further information as appropriate from overseas regulators.”
But in an email Harris said there was a wider story to be told about how CBL got to where it is and where it might be heading. “The facts will show some mistakes we have made, and the cause and effect of those, and just where we are and why, along with our plan for dealing with these issues.
He said those facts would also raise serious questions over certain regulators and their abilities and lack of leadership within the international sector.
But he said he could not talk about issues further at the moment due to statutory and disclosure obligations.
Of the $55m paid by CBLI, Harris said it involved a number of transactions, all of which were business as usual and therefore not subject to the Reserve Bank’s conditions.
“All of the transactions you are referring to were all BAU [business as usual] payments, and not one of them caused one euro of diminution in the net assets of CBL — quite the opposite.”
Harris said the company was a large exporter of financial services, which derived 98 per cent of its business from its overseas markets.
“Over 500 of its 550 employees are based overseas. CBL derives premiums, and pays claims, commissions, and overhead expenses every day. CBL Insurance expensed $330 million in claims last year — a very large part of which was paid offshore.”