The Reserve Bank’s head of financial stability and deputy governor, Geoff Bascand, has sprung to its defence after stunning investors with regulatory action against NZX-listed insurer CBL.
The company’s shares were suspended on February 8 after it finally revealed an RBNZ investigation into its solvency and a need to raise capital but on February 23 the central bank suddenly sought interim liquidation of CBL Insurance in NZ, triggering a domino effect through the group.
Documents subsequently disclosed to the court revealed the RBNZ had been seriously concerned about CBL since at least last June but its actions were kept secret by confidentiality orders issued under its governing legislation.
Mr Bascand says although it had ordered an investigation of CBL last July, saying it had “reasonable grounds to conclude CBL may not be carrying on its business in a prudent manner,” disclosure at that stage would have been premature.
“You need to have candid, free and frank discussions with entities,” he says.
“You want them to be able to trust that, if they share something that’s provisional and uncertain, that they can do that with a regulator.”
The law had a presumption toward confidentiality, he says.
“To make public announcements early puts real grave risk of damaging the company, its reputation and its value.”
The RBNZ’s engagement with CBL would have continued in the background had the company not forced the issue by paying out $55 million in breach of explicit RBNZ orders, Mr Bascand says.
“It was the breach of directions that tipped this thing over.
“The investigation could still have been handled and dealt with through more standard discussions without necessarily a liquidation proceeding if it had not moved to pay out overseas parties.”
Of that $55m, $42m was paid to Danish insurer Alpha Insurance, in which CBL is understood to have a small shareholding as well as sharing insurance on policies written by CBL subsidiaries in France.
The other $13m was paid out in a series of transactions to a single related entity, Mr Bascand says.
Documents disclosed to the court show the RBNZ ordered CBL on February 12 not to pay more than $1m to Alpha or any related company, after being alerted to proposed transactions at 8.56pm the previous day, a Sunday.
Although CBL began to acknowledge its need for more capital, it did not ask the RBNZ for permission to release confidentiality orders until early February, Mr Bascand says.
“The first time CBL asked us to relax the confidentiality restriction was when it was contemplating a capital raise and we lifted the confidentiality order immediately. It didn’t ask at any stage prior to that.
“We said ‘yes of course we wouldn’t expect you to engage with investors without disclosing we have an investigation’, so we were quite supportive of that.”
Mr Bascand acknowledges under the law the RBNZ could have allowed CBL to disclose its orders as early as last July.
“It is possible,” he says. “But those statements you can read as consistent with the presumption that normal business is done confidentially.”
It was up to CBL to meet its disclosure requirements, he says.
“We don’t have a duty to the investor. We have duties to conduct our business with regulated institutions.
“[CBL] didn’t tell us it was feeling impeded by that in any way. I guess this will be all part of the [Financial Markets Authority] review – they will review whether disclosure was appropriate.”
Asked if the RBNZ was concerned about the sharemarket’s ignorance of mounting concerns over CBL’s solvency, Mr Bascand says the regulator was hamstrung by the time taken to produce the investigation report – the draft did not arrive until February 17 and the final report had only just been completed.
“We were sitting waiting for the investigation report. It was frustrating the report was taking longer than we would have wished.
“We were trying to avoid circumstances getting worse, hence some of those directions that placed limits on the business’s ability to pay away money.
“Meanwhile, all the way through this, the company was disagreeing with our view and didn’t accept our perspective reserving needed to be increased until the start of February.”
The crisis has almost certainly decimated the value of CBL – from a market capitalisation of $747m before a trading halt was imposed on February 2 its value could be as little as zero.
Does the RBNZ think the months of secrecy have contributed to the damage? Not at all, Mr Bascand says.
“The value of the company relates to the value of the underlying business and the way it’s managed. I think our actions have been all directed at trying to support the best management of this business. Right at the end, unfortunately, we felt that it was not been managed appropriately and had to take severe action to limit the damage to the business.
“If there were underlying valuation issues they would have been there at any stage. They’re not caused by us and the investigation. They’re there in relation to its premiums and claims. So no, I wouldn’t accept we’ve damaged the business. I would say we’ve done everything we can to try and preserve it.”
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