Brian Gaynor: CBL's woes leave questions to be answered

Chairman Sir John Wells rings the bell as CBL lists in 2015. Photo / Jason Oxenham

CBL Corporation's voluntary administration is another blow to the NZX.

It raises numerous questions about the oversight of our listed companies by regulators, directors, investment bankers, brokers and analysts.

The first point to note is that the insurance sector is regulated by the Reserve Bank of New Zealand (RBNZ) with the principal aims of:

• Promoting the maintenance of a sound and efficient insurance sector

• Promoting public confidence in the insurance sector

Deputy Reserve Bank governor Geoff Bascand remarked in a speech this week that public disclosure is a cornerstone of the Reserve Bank's approach to prudential regulation and supervision.

Unfortunately, the central bank hasn't fully complied with its public disclosure objectives as far as CBL is concerned.

A High Court affidavit released on Thursday revealed that on July 27 last year, the Reserve Bank directed CBL Insurance - which is 100 per cent owned by CBL Corporation - to raise its solvency ratio to 170 per cent. This compared with its solvency ratio of 189 per cent at the end of December 2016 and Tower Insurance's 236 per cent solvency ratio at the end of September 2017.

CBL Insurance, which generates 61 per cent of its gross written premium in France, represents approximately two-thirds of the NZX listed company's business.

The affidavit by the Reserve Bank's head of supervision went on to state: "In the meantime, the bank's own internal review concluded in August 2017, based on information available at the time, that CBL Insurance had significantly under-reserved its French business to such an extent that its adjusted capital for solvency purposes (i.e. excluding inadmissible components) was most likely to be less than zero, and that there was a material likelihood that the wider CBL group had insufficient resources to meet the shortfall. There was also uncertainty about the CBL group's ability to raise sufficient further capital".

The regulator is also concerned that CBL Insurance has made payments of $55m to overseas companies in breach of its directions.

It is extraordinary that the Reserve Bank didn't reveal that CBL's French business was significantly under-reserved, or require CBL Corporation to release this information, in view of Bascand's comments that public disclosure is a cornerstone of its prudential regulation and supervision.

The central bank's non-disclosure had a huge impact on investors, as just over 47 million CBL shares were traded on the NZX and ASX between the end of August 2017 and February 2nd, the day before the company's shares were suspended.

CBL is a major embarrassment to the Reserve Bank because the Auckland based insurance company's problems have attracted considerable media attention in Europe, particularly in Ireland.

This begs the question: does our central bank have the resources and expertise to regulate an insurance company that generates 61 per cent of its premium income in France and just over 1 per cent in New Zealand?

Why does the Reserve Bank talk about the importance of public disclosure when it allows sharemarket trading to continue when investors are unaware of material information that would have a major impact on a company's share price?

The next issue is CBL's board of directors, which has comprised chairman Sir John Wells, managing director Peter Harris and four non-executive directors - Alistair Hutchison, Tony Hannon, Ian March and Paul Donaldson - since listing.

Donaldson has insurance experience but the other four non-executive directors have predominantly investment banking and financial services backgrounds.

The IPO offer document revealed that Hannon had been a director or former director of seven companies "which became subject to insolvency events" and Hutchison was bankrupt in the late 1980s but was discharged in 1993.

But one piece of evidence that this columnist believes points to a weak board is that managing director Harris, who owned 22.8 per cent of CBL, was paid $2.6m for the company's December 2016 year.

Harris also received dividends of $4.4m during this period.

Harris' $2.6m remuneration compares with .95m and $1.04m paid to the chief executives of Delegat and Briscoe, the two companies slightly larger than CBL in terms of sharemarket values before the latter company's shares stopped trading.

The chief executives of NZ Refining and Tourism Holdings, both of which were slightly smaller than CBL in terms of sharemarket values, received $1.43m and .96m respectively.

Meanwhile, CBL chairman Sir John Wells received $296,000 while the chairs of similar sized companies usually receive annual fees between $100,000 and $170,000.

Harris' remuneration indicates, in this columnist's view, that board oversight of CBL left a lot to be desired and the Reserve Bank shares this view.

In the recent High Court affidavit, the regulator's head of prudential supervision wrote: "The directors' decision to pay away such a significant amount of CBL Insurance's cash ($55m to offshore parties) in contravention of directions from the Reserve Bank means that CBL Insurance's assets are and remain in serious risk of further dissipation if the directors remain in control of those assets."

The High Court approved the appointment of McGrathNichol as interim liquidators of CBL Insurance.

Next there is the role and obligations of IPO lead managers.

This role is usually split into two. The investment bank undertakes due diligence of the company's operations, financial structure, profit forecasts, management capabilities, business plans and legal issues etc. while the other member of the lead manager team is usually a stockbroker. The latter is mainly responsible for distribution.

UBS New Zealand was the investment banker to the CBL float in September 2015, as well as the Wynyard Group IPO in June 2014 and the Intueri Education IPO in April 2014.

Forsyth Barr was the other lead manager on the CBL and Wynyard offerings while Macquarie Securities was joint lead manager on the Intueri IPO.

IPOs are risky but this columnist asks: how extensive was the UBS, Forsyth Barr and Macquarie Securities due diligence on these three unsuccessful companies? What due diligence was carried out on CBL's French and other European insurance operations? Did either of the lead managers visit France to assess CBL's business and the risks associated with the company's activities in that country?

Lead managers to the CBL, Wynyard and Intueri IPOs received almost $20m in fees, and investors are entitled to expect extensive pre-IPO scrutiny by these parties before they are encouraged to invest.

Finally, there is the role of broker analysts after a company lists, a subject that casts this columnist's mind back several decades to when he was a broker's analyst.

One of the abiding memories of the time is being confronted by a senior partner with the comments, "Boy, you never write a negative report about one of our clients, you always write positive reports about company clients we have brought to market through an IPO or have raised capital for".

Admittedly, times have changed with a requirement introduced to have a Chinese wall between broker analysts and investment bankers.

However, analysts still have a remarkable propensity to publish positive reports about companies their organisations have brought to the market. These glowing reports are often written by analysts who have limited sector experience.

For example, insurance is a risky business with many of the revenue and expense items in a company's accounts determined by actuarially based assumptions that can change. How many of the analysts covering CBL had actuarial expertise, consulted experienced actuaries or visited the company's French operations?

As far as this columnist is concerned, the clear answer to all the issues raised in this column is that the regulatory, board, investment banking and broker analysts' oversight of CBL has been extremely weak.

New Zealand investors deserve much better than this.

• Brian Gaynor is an executive director of Milford Asset Management.