Here is a link to the full RBNZ report [click here]
We have sliced our comments on the review into four sections:
We have sliced our comments on the review into four sections:
It is vital to recognise that the Review is focused 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, its court files and interviews with Bank staff. The published document contains 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 (in that conclusions are drawn about CBL) and the capacity of the reviewers to acquire a rounded and fully-informed perspective on all the matters mentioned in the Review. We acknowledge that drafts, once written, were given for short periods 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 Review cannot be read as a full or definitive report, or as truly 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. 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.
Below is our summary of key points from the Review, what it says and what it does not say.
In the commercial world, these types of errors and omissions might be legally actionable; but the Reserve Bank is effectively immune from prosecution or civil suit. Even so, the Review paints a picture of an organisation that has failed its mandate as the regulator of the NZ insurance industry.
What the Review Found
Gaps and Shortfalls in the Review
Other interesting points
The Review makes a number of claims against CBL without substantiation or evidence – an indication of the limited scope of the review, underlining that it should not be seen as a comprehensive or independent analysis.
|The Review Claims||We say|
|That the High Court liquidation judgment outlines “alleged irregular activity” where directors “acted dishonestly” in their dealings with the Bank||This is simply wrong. The High Court did not make any finding of dishonesty against the directors. Further, the Bank’s liquidation application was ultimately unopposed, meaning the High Court did not hear from the directors and other parties, or consider the evidence filed in opposition. None of the Bank’s allegations or the evidence were tested or argued, and the directors have had no opportunity to defend them. The directors completely reject any allegations of impropriety or wrongdoing.
|That CBL representatives were “difficult” in dealings with the RBNZ about capital adequacy and solvency||CBL has a history of compliance with RBNZ directions. It always complied with the Bank’s directions and timelines, even when these seemed unreasonably short.
Several CBL representatives had dealings with the RBNZ. They found its culture was based on an assumption that it was always correct. CBL’s policy was to remain respectful and professional in response.
The key difficulty was that RBNZ was never prepared to have open dialogue or debate on matters, or to be asked for the basis of a particular statement or view. RBNZ saw any questioning as a sign of lack of prudential management.
|That correspondence from the RBNZ might not have been shared with the CBL Board
|All RBNZ correspondence sent or received by CBL was immediately copied to every member of the Board as an important matter of company policy.|
|That CBL appeared not to really understand the nature of the business that it was involved in – long tail insurance, with substantial back-ending of claim liabilities
|CBL had been doing business for many years, forging a record of profitable growth and strong business relationships in a demanding financial services segment. It had built an impeccable reputation with companies and individuals who are still prepared to do business with its principals. That record, over that period of time, suggests ample understanding and commercial capability. CBL also had a strong governance regime. Its governance structure and processes were set out in successive annual reports – extensive extracts from the last of these to be published, for the 2016 financial year, are republished on this website.|
|That the group was insolvent for several years… albeit with some acknowledgement that solvency and capital adequacy are matters of opinion||There is no evidence of this, and it would be a breach of actuarial best practice to go back and ‘back-solve’ solvency or reserving.
The assertion of insolvency was not balanced by acknowledgement that the Elite transaction, at a value affirming the reserves held by CBL for the French construction insurance business, has essentially disproven the allegation of insolvency; nor that at the sharp end of the sequence of events CBL was ready to execute a recapitalisation plan.
Could/should the company have been saved?
Yes. There was no reason for liquidation to be the only option – especially given the catastrophic impact on shareholders, policyholders and other stakeholders. Even if it was found to need additional reserves, there was no commercial impediment to this need being met.
Was CBL capable of raising capital to satisfy the RBNZ’s demands?
Yes it was for the following reasons:
It had two highly regarded investment houses and two internally capable advisers willing to support a $180m capital raise.
Were the RBNZ’s concerns relating to under-reserving of capital realistic?
No, for the following reasons:
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 Review fails to address this although the information was public prior to the Review’s publication.
Was CBL still able to be saved after 23 February 2018, 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 later the RBNZ and McGrathNicol did all they could to ensure that any restructuring plan failed.
Former 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 and all policy holders (including New Zealand policyholders) paid IN FULL, along with an 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 CBL Corporation banks, which stood to receive surpluses under the proposal thereby reducing CBL Corporation debt. RBNZ was 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 liquidation hearing set down for 12 November 2018 the CBLI directors found that RBNZ had been “lobbying” the regulators of Elite and Alpha to put pressure on them 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 has used as an excuse for the interim liquidation) if Alpha changed sides and supported the RBNZ.
Consequently, both creditors did not oppose the RBNZ application for liquidation, 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.
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 CBL Corporation DOCA proposal for banks and creditors as an alternative to CBL Corporation being liquidated. This would allow them to table a five-point restructuring plan to repay 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 did not engage constructively.
In the end Mr Harris and Mr Hutchison were unable to obtain the agreement of CBL Corporation’s bankers to the terms of the proposed new DOCA; and as a consequence they decided not to oppose an application for the liquidation of CBL Corporation, which was then put into liquidation on May 13 2019.