CBL expects credit downgrade as it seeks to raise capital

Peter Harris, managing director of financial risk insurer CBL Corporation. Photo / File

CBL Corp is expecting a credit rating downgrade as it seeks to raise cash to deal with a mandated increase to its reserves from the Reserve Bank of New Zealand and Central Bank of Ireland.

The announcement comes after CBL's statement on Monday that it planned to raise capital after posting a full-year loss of between $75 million and $85m that reflected an increase in future claims reserve and write-off of receivables for its French construction insurance business.

Today, CBL said it expects a downgrade to its A- financial strength rating and issuer credit rating from ratings agency A.M. Best, "which will be announced once notice has been received". It would update the market soon on its proposed capital raising. Its stock is halted from trading.

In the Monday statement, the company said the reserves adjustment came after its originating insurer, Elite Insurance Co, went into what is known as "solvent run-off" in July 2017.

It said that the RBNZ had commissioned an independent report into the adequacy of its reserving for the French construction insurance business.

Today, CBL said the directions and discussions it has had with RBNZ have been occurring under strict confidentiality orders prohibiting it from making any announcement to the market, but those orders have now been lifted, so it gave more detail.

RBNZ's review was triggered by the concerns raised by the Gibraltar regulator about Elite Insurance's reserves, and a report commissioned by its regulator, CBL said.

The Reserve Bank issued a direction on July 27, 2017, setting CBL Insurance's minimum solvency at 170 per cent, by reference to the actual solvency that CBL Insurance reported at that time.

On November 22, 2017, it made directions to CBL Insurance, CBL Corp and its subsidiaries, requiring them to consult on any non-business as usual (BAU) transactions greater than $5m.

Ireland's central bank has started a similar process in respect of CBL Insurance Europe (CBLIE), its subsidiary which is a regulated insurer in Ireland, given the exposure that CBLIE has to CBL Insurance as a major reinsurer to CBLIE.

The Irish central bank has issued a "number of directions and conditions on CBLIE intended to strengthen its capital base, reserves, and reinsurance security, and has asked CBLIE to commission an independent skilled persons report into CBL's French construction business", CBL said.

"CBL Insurance has been supported in its position by its independent actuary, PwC NZ," the company said.

"However, with a view to putting these matters behind it with RBNZ and other regulators, and to allow the business to move forward CBL is looking to increase its capital (and therefore its solvency margins)."

The company's shares are currently in a trading halt, which began on Monday morning. At the time, NZX regulation said the halt would stay in place until an announcement about CBL's capital raising expectations, anticipated on or before Thursday, and the halt will be lifted by no later than market open on Friday. They last traded at $3.17, down 15 per cent in the past 12 months.