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The Review

The Report

Here is a link to the full RBNZ report [click here]

We have sliced the review into four sections:

  • What the review is not

  • What the review says about the RBNZ – what the bank got wrong

  • What the review says about CBL

  • Key questions

 

1. WHAT THE REVIEW IS NOT!

In understanding the Review, it is vital to recognise that it is focused entirely on the role of the Bank in the relevant events While it also comments on aspects of CBL’s governance and operations, this is only for context as far as the terms of reference are concerned. In any case, we take issue with a number of comments made about CBL [see below under sections three and four].

It is also important to understand the sourcing of information and perspectives used in coming to the conclusions set out in the Review. The Review is built on documents and communications sourced from the Bank and interviews with Bank [staff]. The published document contains mistakes, errors and RBNZ suppositions, and includes an acknowledgment that the authors did not interview ‘external parties.’ We can confirm that no directors or officers of CBL were interviewed.

The lack of CBL’s perspective, information or knowledge in the drafting of the Review presents obvious issues as to both natural justice (inasmuch as conclusions are drawn about CBL) and also the capacity of the authors to acquire a rounded and fully-informed perspective on all the matters mentioned in the report. We acknowledge that drafts of the Review, once written, were given for a very short period to individuals associated with CBL for comment; but limited rights of commentary after the Review had already been drafted could never amount to an adequate substitute for the sort of early and equal participation that would normally be expected. As a consequence of the approach taken, the report cannot be read as a full or definitive report or independent on matters relevant to CBL and its liquidation by the Bank.

We think it is regrettable that the opportunity was not taken for a more complete review of the relevant circumstances and decisions, including input from CBL, its directors and advisers, as well as from the Bank. WE THEREFORE STRONGLY DISAGREE WITH ANY SUGGESTION THAT THE REVIEW PROVIDES AN INDEPENDENT ASSESSMENT OF THE EVENTS THAT LED TO A $750M COMPANY BEING PUT INTO LIQUIDATION.

2. WHAT THE REVIEW SAYS ABOUT THE RBNZ – WHAT IT DIDN’T SAY

The following is our summary of the Review and what it says and what is does not say. In the commercial world, and in light of the financial losses that have occurred based on the Bank’s decision-making process, such admissions of wrongdoing would be legally actionable. But the Bank is immune from prosecution. However, as the regulator of the NZ Insurance Industry this still paint a picture of an organisation that has failed its mandate.

The key finding of the Review into CBL was that the RBNZ failed in its duty as an Insurance regulator:

  1. It failed to manage commercial risk over a four-year period
  2. Its actions lacked transparency in its dealings with CBL

What the Review failed to address

Did the RBNZ make the right decision in putting CBL Insurance into Interim Liquidation?

What the Review Found            Shortfalls in the Review

●      The RBNZ failed in its duty as a regulator

●      It suspected there were issues with CBL as far back as 2012 but did nothing

●      Even after receiving a business report on CBL in 2013 by KPMG, which raised some initial questions of under-reserving, it still did nothing, and no communication with CBL

●      Then in December 2013 the RBNZ in an internal actuarial report suggested “a potential serious solvency issue for CBL…” still nothing, and no communication with CBL

●      In June 2014 the Appointed Actuary drew attention to risks of low solvency margins and rapid expansion to which the Bank “appears to have paid no direct attention to…”

●      In 2015 the RBNZ allowed CBL to IPO even though it had serious doubts – its approach was “less than prudent” …it should have “persevered as strenuously as possible to resolve its doubts, “but the RBNZ considered it had no mandate to look after the interests of investors

●      In 2016 when approached by the regulator Gibraltar FSC with concerns about CBL, the RBNZ should have but did not engage with either the GFSC or CBL

●      In fact, the RBNZ failed to use its position to interact with fellow international regulators in spite of 99% of CBL’s business being offshore

●      It was only in June 2017 that the RBNZ acted after an associated entity Elite Insurance was considered to be severely under-reserved

●      When the RBNZ did finally take action, the Reviewer considered it was right to put CBLI into interim liquidation – actuarial reports post this action (delivered in March 2018) determined from a historical point of view that it was likely CBL had been insolvent since 2012.

●      The Reviewer said the RBNZ did have statutory powers to take action, but it did not use them

●      Excuses provided for the failure of RBNZ to action include:

o   A reliance on “internal legal advice

o   A lack of experience and resources

o   It only had a “small team” and was “operating a new regime”

o   The Canterbury Earthquakes were happening at the same time

o   It did not know how to manage the AA

o   There was potential (using inuendo from RBNZ lawyer statements in court that could not be defended) about misleading information by the CBL CEO and the board

o   NZ was only a small part of the business – less than one percent – so it was a low priority

o   Failure to engage with international peers was explained away by the bank needing to be “cautious as it had limited established relationship with Gibralter FSC…”

●      Failure in communications. In spite of the perceived risks the RBNZ seemed to rely on written communications rather than face to face interaction with the Board, senior management, the AA etc

●      If the RBNZ had acted earlier (between 2014-2016) the Reviewer said the “scope and complexity of the CBL liquidation would have been much reduced compared to the position in 2018.”

Postscript

●      There is no mention that the underlying cause of the entire dispute over French construction insurance reserving was finally resolved as early as April 2018 when Elite tabled an offer to acquire the reserve liabilities for a sum equal to the sum CBLI had reserved them at – and as recommended by PwC and it peer reviewers. This proved in essence that RBNZ and McGrathNicol were wrong, and CBLI was right. Small solace to the NZ policyholders, investors holding $750m of now worthless shares, and 540 employees trying to explain to their families what had just happened through the failings of a distracted, inexpert and uncommercial regulator in New Zealand.

 

 ●      The Review relied only on evidence supplied by the RBNZ and interviews with RBNZ employees – so at best it is a one-sided account of what happened, and not independent

●      The Review is critical of the CBL CEO, the CBL Board, the Appointed Actuary (PwC NZ), and AM Best (“that should have looked more closely at CBL given its international resources…”) yet none were allowed to defend allegations of wrong doing or provide meaningful/any input into the Review

●      The Review fails to provide balance given the ‘strained’ relationship between the RBNZ and CBL and the RBNZ and the AA – only one side of the argument gets heard. For example:

o   The RBNZ did not share (kept secret) its “internal analysis” dated August 2017 with CBL that was used in the liquidation application on 23 February 2018. In the Review this was described as a 90-page report, but has never been shown to outsiders

o   CBLI therefore had no opportunity to react

o   Such lack of openness from a regulator indicates a dysfunctional process

●      The Review only explores issues with CBLI around its French business and chooses to ignore the other parts of this business and also the strength of the wider CBL group

o   The French business was about 50% of CBLI’S revenue and about 40% of its profits CHECK

o   All of CBLI’s other business was lower volume, more profitable and short-tail

o   CBL had cash reserves in excess of $500m

●      There is no discussion in the Review about whether CBLI could be saved, or the alternatives to liquidation,

o   There is no mention of the announcement by CBL’s decision to sell SFS that was announced to the market in [February 2018] and that Goldman Sachs had been appointed to act to find a buyer for the business that had a provisional value of €90m (NZ$155m).

●      There was no analysis of the financial strength and history of the group to raise capital

o   CBL was listed on both the NZX and ASX, had strong investor support and could have raised capital

o   First NZ Capital had been mandated to carry this out

●      There is no discussion on the fallout of placing CBLI into Interim Liquidation

o   Particularly with regards to policyholders whose interests the RBNZ statutorily mandated to protect

●      The Review shows bias in a number of areas:

o   It is apologetic for the RBNZ saying things like it was “under resourced”.

o   There was no criticism of the fact it took 8 months to get reports from Finity and Milliman and kept its “internal analysis” secret from CBL

o   The failure to address difficulties in operating a public company for an extended period in what was effectively a financial straight-jacket

o   Inconsistencies with interactions with CBL – the RBNZ Deputy Governor committing to working with CBL to find a solution whilst other parts of the bank were actively seeking liquidation

o   The focusing on one aspect of the 2013 KMPG report when the report was mandated to report on prudential management

 

o   The finding of no “premeditation” when the clear and determined set of actions from July 2017 to put CBL into liquidation was not noted by the reviewer’s report

●      Other Inconsistencies

o   Much weight was given to PWC UK analysis of Elite Insurance however there was considerable scepticism about PWC NZ which was the AA for CBL

o   Why did the reviewer conclude that RBNZ should have worked closer with its international peers given that Elite’s issue triggered the RBNZ into action – but failed to acknowledge that Elite (who faced “sever under-reserving”) was later allowed to trade out of its under-reserving issue

o   Why did the RBNZ seek the appointment of an interim liquidator in February 2018 before it actually had the final reports from Finity, Milliman and the AA? The final reports came back in March 2018.

o   The different way that the Gibraltar FSC is working with Elite Insurance and its expert owner Armour Re is in stark contrast to the one adopted by RBNZ and its liquidator McGrathNicol.

o

Did the RBNZ make the right decision in putting CBL Insurance into Interim Liquidation?

 

 

What the Review Found                             Shortfalls in the Review

 

●      The RBNZ failed in its duty as a regulator

●      It suspected there were issues with CBL as far back as 2012 but did nothing

●      Even after receiving a business report on CBL in 2013 by KPMG, which raised some initial questions of under-reserving, it still did nothing, and no communication with CBL

●      Then in December 2013 the RBNZ in an internal actuarial report suggested “a potential serious solvency issue for CBL…” still nothing, and no communication with CBL

●      In June 2014 the Appointed Actuary drew attention to risks of low solvency margins and rapid expansion to which the Bank “appears to have paid no direct attention to…”

●      In 2015 the RBNZ allowed CBL to IPO even though it had serious doubts – its approach was “less than prudent” …it should have “persevered as strenuously as possible to resolve its doubts, “but the RBNZ considered it had no mandate to look after the interests of investors

●      In 2016 when approached by the regulator Gibraltar FSC with concerns about CBL, the RBNZ should have but did not engage with either the GFSC or CBL

●      In fact, the RBNZ failed to use its position to interact with fellow international regulators in spite of 99% of CBL’s business being offshore

●      It was only in June 2017 that the RBNZ acted after an associated entity Elite Insurance was considered to be severely under-reserved

●      When the RBNZ did finally take action, the Reviewer considered it was right to put CBLI into interim liquidation – actuarial reports post this action (delivered in March 2018) determined from a historical point of view that it was likely CBL had been insolvent since 2012.

●      The Reviewer said the RBNZ did have statutory powers to take action, but it did not use them

●      Excuses provided for the failure of RBNZ to action include:

o   A reliance on “internal legal advice

o   A lack of experience and resources

o   It only had a “small team” and was “operating a new regime”

o   The Canterbury Earthquakes were happening at the same time

o   It did not know how to manage the AA

o   There was potential (using inuendo from RBNZ lawyer statements in court that could not be defended) about misleading information by the CBL CEO and the board

o   NZ was only a small part of the business – less than one percent – so it was a low priority

o   Failure to engage with international peers was explained away by the bank needing to be “cautious as it had limited established relationship with Gibralter FSC…”

●      Failure in communications. In spite of the perceived risks the RBNZ seemed to rely on written communications rather than face to face interaction with the Board, senior management, the AA etc

●      If the RBNZ had acted earlier (between 2014-2016) the Reviewer said the “scope and complexity of the CBL liquidation would have been much reduced compared to the position in 2018.”

Postscript

●      There is no mention that the underlying cause of the entire dispute over French construction insurance reserving was finally resolved as early as April 2018 when Elite tabled an offer to acquire the reserve liabilities for a sum equal to the sum CBLI had reserved them at – and as recommended by PwC and it peer reviewers. This proved in essence that RBNZ and McGrathNicol were wrong, and CBLI was right. Small solace to the NZ policyholders, investors holding $750m of now worthless shares, and 540 employees trying to explain to their families what had just happened through the failings of a distracted, inexpert and uncommercial regulator in New Zealand.

 

 ●      The Review relied only on evidence supplied by the RBNZ and interviews with RBNZ employees – so at best it is a one-sided account of what happened, and not independent

●      The Review is critical of the CBL CEO, the CBL Board, the Appointed Actuary (PwC NZ), and AM Best (“that should have looked more closely at CBL given its international resources…”) yet none were allowed to defend allegations of wrong doing or provide meaningful/any input into the Review

●      The Review fails to provide balance given the ‘strained’ relationship between the RBNZ and CBL and the RBNZ and the AA – only one side of the argument gets heard. For example:

o   The RBNZ did not share (kept secret) its “internal analysis” dated August 2017 with CBL that was used in the liquidation application on 23 February 2018. In the Review this was described as a 90-page report, but has never been shown to outsiders

o   CBLI therefore had no opportunity to react

o   Such lack of openness from a regulator indicates a dysfunctional process

●      The Review only explores issues with CBLI around its French business and chooses to ignore the other parts of this business and also the strength of the wider CBL group

o   The French business was about 50% of CBLI’S revenue and about 40% of its profits CHECK

o   All of CBLI’s other business was lower volume, more profitable and short-tail

o   CBL had cash reserves in excess of $500m

●      There is no discussion in the Review about whether CBLI could be saved, or the alternatives to liquidation,

o   There is no mention of the announcement by CBL’s decision to sell SFS that was announced to the market in [February 2018] and that Goldman Sachs had been appointed to act to find a buyer for the business that had a provisional value of €90m (NZ$155m).

●      There was no analysis of the financial strength and history of the group to raise capital

o   CBL was listed on both the NZX and ASX, had strong investor support and could have raised capital

o   First NZ Capital had been mandated to carry this out

●      There is no discussion on the fallout of placing CBLI into Interim Liquidation

o   Particularly with regards to policyholders whose interests the RBNZ statutorily mandated to protect

●      The Review shows bias in a number of areas:

o   It is apologetic for the RBNZ saying things like it was “under resourced”.

o   There was no criticism of the fact it took 8 months to get reports from Finity and Milliman and kept its “internal analysis” secret from CBL

o   The failure to address difficulties in operating a public company for an extended period in what was effectively a financial straight-jacket

o   Inconsistencies with interactions with CBL – the RBNZ Deputy Governor committing to working with CBL to find a solution whilst other parts of the bank were actively seeking liquidation

o   The focusing on one aspect of the 2013 KMPG report when the report was mandated to report on prudential management

 

o   The finding of no “premeditation” when the clear and determined set of actions from July 2017 to put CBL into liquidation was not noted by the reviewer’s report

●      Other Inconsistencies

o   Much weight was given to PWC UK analysis of Elite Insurance however there was considerable scepticism about PWC NZ which was the AA for CBL

o   Why did the reviewer conclude that RBNZ should have worked closer with its international peers given that Elite’s issue triggered the RBNZ into action – but failed to acknowledge that Elite (who faced “sever under-reserving”) was later allowed to trade out of its under-reserving issue

o   Why did the RBNZ seek the appointment of an interim liquidator in February 2018 before it actually had the final reports from Finity, Milliman and the AA? The final reports came back in March 2018.

o   The different way that the Gibraltar FSC is working with Elite Insurance and its expert owner Armour Re is in stark contrast to the one adopted by RBNZ and its liquidator McGrathNicol.

o
●  

 

 

 

 

  • The bank should have responded differently once CBL declared in October 2014 that it did not agree with the view of the bank’s internal actuary on CBL’s solvency.
  • The approach by the bank of seeking some kind of confirmation of the internal AA advice, had the effect of putting the onus on the bank to disprove CBL’s position. This was an unsatisfactory situation for the bank.
  • The banks cautious approach to investigating CBL more closely when suspecting under reserving by the company in 2015 was less than prudent by the bank.
  • Regarding the IPO – The Bank gave the appearance to CBL of treating its concerns as resolved because it nominated no further concerns to CBL at the time that we have discerned beyond the wording of the PDS restatement.
  • The bank did not thoroughly pursue internally its doubts, did not articulate and pursue its concerns with CBL sufficiently and did not consult, as it could have, with home regulators in France and other European countries or external experts in until 2017.
  • CBL was not being regulated in France and was not part of the established market, it is an oversight that the bank did not follow-up assiduously after licensing by consulting with either the French regulator or alternatively an independent expert in the market.
  • The bank concluded on the basis of its internal legal advice that even if it imposed an independent investigation on CBL, the bank could not use the results to circumvent the advice of the AA on matters where the solvency standard gave the appointed actuary the authority and responsibility to make that determination. There is no record of this opinion or conclusion been conveyed to CBL or it’s appointed actuaries or why the bank eventually took a completely different view .
  • With the new appointed actuary in 2014 the bank could well have been more forceful. It could have done more and in our view should have done more to see that the new AA was obliged to seek and consider additional information. Notably if the bank had acted in 2014 to increase CBL’s minimum solvency that would in turn have obliged the CBL board to take urgent and immediate remedial action. In summary the bank was lenient with CBL for almost a year from mid 2014 to the mid 2015 because it had doubts about solvency but gave the insurer the benefit of the doubt and did not challenge AA.
  • Regarding the bank’s response to enquiries from the Gibraltar FSC in October 2016 it seems the bank was not fully open in this communication. Correspondence suggests that the bank was so circumspect that it passed on very little information and advice beyond input it had received from CBL. In our view the bank should have engaged openly and more actively with the Gibraltar FSC with its participation in the International Association of insurance supervisors and an existing set of protocols that can give protection to both regulators and licensed companies, it had every opportunity to do so.
  • Notwithstanding all that had transpired in the previous three years, along with continuing concerns or reserves, recoveries, Capital management and issues signalled by the Gibraltar FSC with a core ceding company, the bank continued to be lenient with CBL.
  • In our view of the bank could and should have asked for more information, especially given the repeated qualifications on data quality, the apparent lack of meaningful international consultation and reserving risks that were of concern to the bank.
  • It can be argued that the bank should have been questioning in full the content of each FCR, given CBL’s supervisory status as a high risk insurer. The bank should have raised a set of pertinent questions each year and should have insisted that the AA respond to the questions to the satisfaction of the bank.
  • Risk management- The CBL input to the bank and the bank’s response seem to indicate a preoccupation on both sides with form, without the bank examining or knowing how much substance was behind the documentation.
  • The concession that CBL followed up on the bank’s issues re risk management.
  • There are several features of the events from 2013 to 2017 that indicates or characterise the supervisory approach of the bank during that period. They are by our assessment:
    • A cautious approach to invoking the banks powers under the Act and the solvency standard, for example- in the pre-licensing period (to 2013) the bank identified and agreed internally on concerns or weaknesses with CBL and determined that they were to be followed up after licensing. After licensing, the bank can be seen to have exhibited a mixture of timidity or great caution on the one hand and leniency or a lack of commitment on the other hand to getting to the bottom of each of the terms of concern and acting on them.
    • The bank displayed limited scrutiny of and circumspection around experts reports at senior level, for example-the 2013 KPMG report contained warning signals and the 2013 FCR contains several recommendations for the appointed actuary that were also warning signals that were not followed up by the bank. In our view this is because the 2013 KPMG report was a solid endorsement of the questions it was asked to report on, and not what it is now trying to be characterised.
    • The bank displayed in the CBL case a propensity to rely on written documentation and procedures within CBL with limited willingness to engage actively with directors and executives to follow through on the substance behind the documentation. It demonstrated a very poor ability to communicate on an equal and open basis. While it is essentially a supervisory matter, it seems to indicate a reliance by bank supervisory staff on the regulatory structure with insufficient dialogue and hands-on assessment of the insurer operations. We say insufficient because active dialogue and understanding of insurer operations is fundamental to a supervisory assessment of an insurers risk management framework and outcomes.
    • Correspondence and interactions with CBL that were not firm enough for the bank as supervisor to disturb the insurer or to install a fear of forced curtailment of business, for example 1) correspondence and interaction on the governance review that took place in 2014 the bank expressed concerns but CBL may have interpreted the message as a clean bill of health. Why not? CBL was not a crystal ball gazer. 2) Dialogue and negotiations over solvency at the time of the IPO in 2015 left the claims reserving problem unresolved and 3) correspondence and interactions from June to August 2016 on the Prudential consultation meeting that took place in June and follow up that concluded with a “good intentions” letter from the company in August.
    • Limited sensitivity to the dangers and risks in the CBL business model – the risks are now said by the bank to be evident on licensing in 2013-the bank have major resource constraints and other priorities, especially the Canterbury earthquakes, that Ltd its ability to dedicate the right resources to see CBL; and the Limited familiarity of bank personnel with prudential supervision of insurance generally and with the risks of long tail business, strong growth and offshore business may have limited the depth of the attention to CBL’s Affairs and understanding of the risks that were present (although the internal actuary was alive to these issues). It is clear that the bank’s supervisory culture was not well enough developed to respond in a way that many senior insurance supervisors from other Prudential regimes would have seen as imperative.
    • Lack of awareness that regulators in other jurisdictions may have been relevant and helpful, along with the absence of engagement by either CBL or the bank of any experts from outside New Zealand. There was a strong case for the bank to look beyond New Zealand in 2015 but it did not do so: the case was made when, after the new AA from PWC was appointed in 2015 and was encouraged to draw on relevant international expertise, he did not record doing so in his FCR and LVR Beyond dismissing as an helpful some limited information on the French DO and DL portfolios. Only now is it suggested that the bank might have had information from these markets to share with CBL, but did not do so.
    • A willingness to take strong and decisive action.
  • In summary we find a supervisory culture that before 2017 was less decisive and less anxious about information and advice about CBL than it might have been. Advice and assistance was not sought by CBL or the bank from offshore experts or regulators.
  • There was also a lack of confidence by the bank to take firm action earlier than June 2017. The reasons appear to be a combination of the limited experience within the bank at the time of insurance prudential supervision overall as well as the novelty of and unfamiliarity with the type of business activities in which CBL was engaging.
  • At no time was the “internal analysis” in August 2017 as it is described in Mr Fiennes’s liquidation application dated 23 Feb 2018, (but described as a 90-page report in the Review) ever made available or referred to with CBL. Why not if it was so important, – the CBLI directors could have immediately acted on it and required a full report on it from its own actuaries. This secretive and lack of open communication is indicative but does not reflect well at all on regulatory open and fair transparency.
  • .

 

  1. WHAT THE REVIEW SAYS ABOUT CBL [WHETHER TO BE KEPT LIKE THIS]

The reviewer makes a number of claims against CBL but fails to substantiate them or provide evidence that supports what are essentially blanket statements. This demonstrates the limited scope of the review and that it should not be seen as a comprehensive or independent analysis of what happened.

They say We say
The assertion that the decision to place CBLI in interim liquidation was sparked by the company’s ‘serious breach … of Bank directions regarding corporate transactions’ … The single incident that this reference can relate to is mischaracterised by the description given in the report. The facts tell a different story – in summary: [Then provide a bulleted summary]

 
Reference to ‘alleged irregular activity’… again, without any substantiation or justification – hopefully, to be removed in the final draft, but needing a response if it isn’t removed.

 

 1.     It is outside the scope of this Review, but cynically included. The Reviewers and the RBNZ know very well that none of these allegations have ever been put to the directors, have never been challenged or defended, nor has any outcome or ruling been made. They are simply statements made in the sanctity of court by the RBNZ lawyer, without any pre-warning to the directors, and made AFTER the directors had agreed to withdraw from the court liquidation proceedings.
The statement that CBL representatives were ‘difficult’ in dealings with the Bank about capital adequacy and solvency. [Could we include our comment that CBL has a history of compliance with Bank directions, and list those instances? Would need to be in conjunction with the response to the first point in this section.] CBL ALWAYS complied with RBNZ’s sometimes unreasonable timelines (sometimes within hours) for things, and complied with directions. Different CBL representatives had their own dealings wih the Bank. Despite the Bank’s god-like and always being right culture, the dealings were always respectful and professional. The one difficulty was that RBNZ was never prepared to have open dialogue or debate on matters, or to be asked on what basis it was making a certain statement. RBNZ saw any questioning of it as insolence, and a sign of a lack of prudential management.

 
Yet A more general point… limiting though the terms of reference were, they did not prevent the authors arriving at conclusions about CBL, its conduct, its governance culture, capital adequacy, solvency, etc. [No doubt this is unavoidable in considering the Bank’s performance as regulator, but it does raise the issue of natural justice in the fact that these conclusions are then woven into the report without there having been any opportunity for effective and substantial challenge by individuals associated with CBL. ]

 
The statement that if the first pillar of the RBNZ regulatory approach — self-discipline — had been effective some of the issues arising in the CBL case should not have arisen.

 

 What evidence does it give for this?
The statement that CBL appeared not to really understand the nature of the business that it was involved in – long tail, substantial back-ending – a cheap shot.

 

 CBL had been doing its business for 18 years. It had built an impeccable reputation with companies who are still prepared to do business with its principals. CBL’s shareholder and NZ policyholders have been badly let down by McGrathNicol and the RBNZ who has shown no leadership in this matter whatsoever.
References to poor quality data [maybe another cheap shot, but note that it is tied at one point to the Finity report.] This was totally left up to PwC, and verified and audited by Deloitte.
While there is some acknowledgement that solvency and capital adequacy are matters of opinion, the authors are happy to conclude that the group was insolvent for several years. [There is no evidence of this whatsoever. And it is a breach of Actuarial best practice standards that you can go back and back-solve solvency or reserving. is is never balanced by acknowledgement that, at the sharp end of the sequence of events, CBL was ready to execute a recapitalisation plan. A good illustration of the limitations placed on the report by the terms of reference, it being limited to issues in regard to the Bank’s performance.]

 
   
   

 

 

[Notes ADDRESS above where relevant

  • We note the judgement of the High Court following the interim liquidation in 2018. The judgement outlines alleged irregular activity with the CEO and some cases other executive directors acted dishonestly in their dealings with the bank there by misleading the bank on certain matters that had a material bearing on CBL’s solvency from time to time. In particular the executive directors were alleged to have provided some misleading information to the bank and failed to disclose some material relevant information. There is no evidence of this whatsoever. ALH and PAH would LOVE to have those allegations put to us and challenged or defended. Not only no evidence, but not even heard, because (see above) we reluctantly had to agree to withdraw from even being in court in withdrawing from opposing the Liquidation.
  • Why the bank did not address their concerns in 2013 of under reserving having commissioned the KPMG report to review this matter and allowed CBL its license? Because the 2013 KPMG report was not commissioned for this reason.
  • CBL being steadfast in its view that the French business was profitable (independent external actuary, board implemented every recommendation every 6 months). Yes, we proved this, but it was not as profitable as CBLI has been booking it and reserving for future claim.
  • The Bank had no evidence that its efforts in 2014 to encourage CBL and the AA to draw on international experience were taken up. Does that mean that it did not happen? CBL introduced Peter Davies to a French expert – Mr Didier Boizot (I think that was his last name but I can get his CV), and offered to fly Peter up to France. Where exactly was the “international experience information”? – all French insurers kept their figures very close.
  • Why the bank did not engage with the board/ chairman? Don’t know. All RBNZ correspondence sent or received by CBL was immediately copied to every member of the board. That was an important matter of company policy  
  • No action after the Gibraltar FSC in Oct 2016 to address concerns.]]

 

 

  1. ANSWERS TO KEY QUESTIONS

Could/Should the company have been saved – the report says the Bank acted ‘properly within its powers’ in putting CBLI in to interim liquidation and then full liquidation; but does not discuss whether it was right to do so in the broader perspective – ie. Was it actually necessary? Was a better outcome possible? This is obviously outside the terms of reference. However, we argue that, even within these narrow terms, the report should have considered whether the Bank got the right outcome.

 

Was CBL capable of raising capital to satisfy the RBNZ’s demands?

Yes it was for the following reasons:

  • CBL was a publicly listed company with its shares trading on both the NZ and Australian stock exchanges
  • CBL had successfully raised cash at the time of its IPO and then subsequently
  • It was highly regarded in the investment community – evidenced by its share price trading at record highs, and all share issues heavily over-subscribed
  • It had two highly regarded investment houses in Goldman Sachs and First NZ Capital willing to support a $180m capital raise.

There is no discussion in the RBNZ report that addresses this key issue – why a profitable and well established and regarded company was not allowed to the opportunity to find a solution. In fact, and more critically, why the RBNZ would not sign off on the capital raise. Probably because it did not want CBL to succeed.

 

Were the RBNZ’s concerns relating to under-reserving of capital realistic?

No for the following reasons:

  • A buyer was quickly found for CBL’s French insurance business – the liability which was at the centre of concerns over under-reserving. Over the past 15 months, McGrathNicol and RBNZ have been arguing that the CBLI French construction liability estimates for the next 10 to 12 years were still substantially under-reserved, with both relentlessly focussed on putting CBLI into liquidation
  • The price agreed by the acquirer of the French liabilities Elite Insurance (the largest creditor of CBLI) was at the same value recommended by CBL’s auditors PWC and adopted by CBLI in its balance sheet

 

This is a critical example of the market speaking. It supports CBL’s numbers and puts a line through any other expert theoretical estimates of future liabilities, including estimates that McGrathNicol and the RBNZ chose to rely on in pushing for liquidation. The report fails to address this although the information is public prior to the publication of the report.

 

Was CBL able to be saved post February 23 when the RBNZ initiated liquidation proceedings of CBLI?

Yes, probably, but the damage done by filing an application for liquidation in an industry which is built on trust added to McGrathNicol’s torching of value in the opening weeks almost put paid to CBLI. And once again the RBNZ and McGrathNicol did all they could to ensure that any restructuring plan failed.

 

First attempt

CBLI directors Alistair Hutchison and Peter Harris backed a CBLI Deed of Company Arrangement (DOCA) alternative to liquidation for CBLI by arranging for the investment of $20m and additional securities into the DOCA proposal. The proposal would have seen all creditors, all policy holders (including New Zealand policyholders) paid IN FULL, along with reaching agreement with two large European creditors (Elite Insurance and Alpha Insurance) to acquire CBLI-reinsured European liabilities including the long-term French construction liabilities.

The CBLI DOCA proposal guaranteed a solvent outcome for CBLI and was supported by the proposed CBLI Administrator, KordaMentha, and CBLC banks, which stood to receive expected surpluses under the proposal, thereby reducing CBLC debt. RBNZ were opposed to the DOCA alternative to liquidation, regardless of the losses to CBLI residual creditors and policyholders, which could be as much as 50c in the dollar.

The two major creditors, Elite Insurance and Alpha Insurance, had since April 2018 supported CBLI Directors in opposing RBNZ but in the few weeks leading up to the hearing set down for 12 November, the CBLI directors found that RBNZ had been “lobbying” the regulators of Elite and Alpha to put pressure on Elite and Alpha to switch sides and support the RBNZ in its liquidation application instead. It was also discovered that RBNZ had even offered Alpha retention of the €25m payment made to it by CBLI on 16 February 2018 (the payment the RBNZ tried to blame the whole interim liquidation on) if Alpha changed sides and supported the RBNZ.

Consequently, both creditors agreed to support the RBNZ, which led to KordaMentha also withdrawing its opposition.

The CBLI directors reluctantly decided to withdraw their opposition to CBLI liquidation and CBLI was therefore placed into liquidation without a contested hearing held.

Second attempt:                                                                                                                                                     The CBLI directors then turned their attention to working with the CBLI liquidator to get NZ policyholders paid in full, to ensure adequate compensation for employees, to optimise the financial outcome to residual creditors and to move on to structuring a CBLC DOCA proposal for banks and creditors as an alternative to CBLC liquidation. This would allow them to table a proposal for CBLC shareholders to get a business back and to build value into CBLC shares.

This involved a five-point restructuring plan to replay NZ policyholders and provide a viable business for shareholders with the aim of restoring value to their shares over time. Again McGrathNicol and the RBNZ stood in the way – after 15 months of effectively being in control there had been no material money repaid to the banks from asset sales.

 

In the end Mssrs Harris and Hutchison were unable to obtain the agreement of the company’s bankers to the terms of a proposed new DOCA; and as a consequence, they decided not to oppose an application for the liquidation of CBLC. CBLC was put into liquidation on May 13 2019.