Fund manager who held major CBL stake contrasts RBNZ's 'very public discourse' around bank capital requirements with its caution about speaking out about an under-capitalised insurer

Fund manager who held major CBL stake contrasts RBNZ's 'very public discourse' around bank capital requirements with its caution about speaking out about an under-capitalised insurer

A fund manager that had a $55 million stake in CBL Corporation says the share market should’ve been informed of the solvency issues the company was grappling with before its collapse.

Harbour Asset Management, in the months leading up to February 2018 when CBL Corporation went into voluntary administration, upped its stake in the company to 7.32%.

Unbeknownst to the market at the time, the Reserve Bank (RBNZ) had since mid-2017 been probing the affairs of CBL Corporation’s subsidiary, CBL Insurance. It directed the company to maintain a higher solvency ratio, forbid it from making certain transactions without the regulator’s permission, and appointed McGrathNichol to investigate its reserves.

Independent reviewers of the RBNZ’s handling of the CBL Insurance case on Wednesday reported the RBNZ acted appropriately keeping its investigation confidential.

The report writers, John Trowbridge and Mary Scholtens, said: “Matters were at a fact-finding stage.

“The Bank had serious concerns that warranted action, but it had not yet gathered the relevant information, tested it with CBL, and arrived at a sufficiently informed position.

“Obviously public disclosure of the fact of an investigation or initial concerns that have not yet been tested would be highly damaging to the reputation of CBL and to the value of its parent.”

Harbour’s managing director, Andrew Bascand, recognised there was a “fine balance between public confidence and transparency”.

Yet he said: “In hindsight, we would’ve preferred a higher level of disclosure and transparency.”

He pointed to the “very public discourse” currently underway around the RBNZ considering requiring banks to hold more regulatory capital.

“That clearly has a material impact on the valuation and the behaviour of the banks - very clearly,” Bascand said.

“Now imagine if all that was happening behind closed doors. That’s how I would correlate these disclosures.”

Fallout from the RBNZ’s failures around the time CBL listed

Trowbridge and Scholtens went further to say: “We do not consider there was any earlier occasion [before 2017] when it would have been appropriate for the Bank to make public disclosures.”

However their report revealed that from the time the RBNZ issued CBL Insurance with a licence in 2013, until it began a set of investigations in 2017 (prompted by concerns raised by a Gibraltar regulator), it was worried about the company’s reserving.

The issue, which is the real crux of the situation, was that CBL Insurance and the RBNZ clashed heads over the state of the company’s finances, but the RBNZ never had the resource and capability to get to the bottom of the matter and take stronger action.

So, while Trowbridge and Scholtens recognised the RBNZ couldn’t publicise its concerns without having certainty, they also noted how it failed to attain certainty - particularly in the lead up to CBL Corporation floating on the stock exchange in 2015.

They said the RBNZ should’ve deterred CBL Corporation from going ahead with its initial public offering (IPO) until its concerns were resolved.

They held this view despite CBL Corporation saying in a product disclosure statement issued at the time, that the RBNZ had queried CBL Insurance’s appointed actuary over capital levels and the company increasing its reserves.  

Bascand believed the RBNZ could’ve recommended some form of risk disclosure be included in the company’s accounts at this time. He also noted how in 2016 AM Best upgraded its credit rating.  

Legal action a possibility further down the track

“Were there risks around more disclosure? Yes there were, because it could’ve damaged the confidence of policyholders and investors in CBL,” Bascand said.

“But the problem is, when do you turn the gas off when you’re boiling a frog? As soon as the temperature gets too high, you’ve got to stop these things otherwise you risk there being misinformed participants in capital markets, which is where we ended up.”

Bascand said market participants were measured and CBL Corporation, the RBNZ, the Financial Markets Authority (FMA) and/or NZX could’ve made disclosures along the way without completely scaring investors off.

Indeed, the report noted that in August 2017 CBL Corporation’s share price fell 30% after it issued a statement disclosing the fact a Gibraltar regulator had concerns about the reserves of a company it provided reinsurance for.

A week later the share price rose 10%, off the back of CBL Corporation issuing another statement promoting the company’s prospects and giving an explanation for the claims reserving adjustment.

Nonetheless, Trowbridge and Scholtens noted how "onerous" the law was when it came to confidentiality, pointing out how RBNZ staff could be imprisoned for up to three months’ and/or a fined up to $200,000 if they breached their obligations.

Bascand said there was still a lot of water to go under the bridge before he would consider taking legal action over the CBL saga.

He was particularly interested to see where the FMA lands with its investigation, which pays closer attention to market disclosures and should consider whether the FMA could’ve used its powers (under section 34 of the FMA Act) to act on behalf of shareholders.

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RBNZ is still very timid in my view.

You have to empathise with the guys at Harbour and other investors; they thought/assumed that the RBNZ were prudently supervising and were relying on the NZX disclosure regime. Unfortunately there are clearly things RBNZ missed or didn’t act harshly or strictly enough upon and the RBNZ don’t feel that the NZX requirements apply to them. Meanwhile we all await the criminal charges that should be brought against those involved in some of the activities on the CBL side.

That's some grand comment made at the end.
There are a lot of questions to be answered here. My first one is why has the RBNZs appointed liquidator sold the books of business they said CBL were under reserved on for what they were reserved for?
Doesn't that negate all the RBNZs "thoughts" that they were under reserved?
If you buy a house for $1m then the bank tell you your house is now only worth $100,000 and you miss a mortgage payment so they sieze it but someone pays $1m for it..... What was it worth? What the bank thinks or what the market paid for it?
And why has the RBNZ and the liquidators tried to hide the fact they have sold it for the amount it was reserved for?
If these are facts then the company was reserved correctly. Criminal? Maybe by the RBNZ.

Hi Stephen, happy to review specific evidence that CBL's assets have been sold for the full book value claimed by the owners which proves that the business should not have been liquidated...

I have no empathy with the Harbour guys at all. It reminds me of the professional investors who cried 'foul' when the rating agencies got the processes wrong on CDOs.

It was their analysis that led them to that investment.... does make you wonder what good the Harbour guys saw in it when it was actually custard.

Like big and small investors they relied on the disclosures made by management... it’s evident there were substantial holes in what was being shared with investors... hence the final part of my original comment.

LOL - Bascand versus Bascand