Dear Editor,
In his contribution, Mr. Tromp describes the challenges that the new CBCS president must face. We argue that the CBCS under the leadership of Mr. Tromp should have intervened when an obvious dubious transaction by the shareholder was forced.
Mr. Tromp argues that the entity involved (Ennia) was financially healthy in 2018 according to CBCS. At that time, CBCS decided to intervene. This conclusion is formally correct according to the annual accounts of the entity. However, the latest annual report that was published relates to the book year 2016 and the annual reports for years 2017, 2018 and 2019 have not been published within the 6-month year-end deadline. Later it became public, however, that Ennia was not healthy at all.
CBCS published a press statement in 2018 revealing that the private shareholder of Ennia had concluded a suspicious transaction by selling one of his properties to Ennia for a substantial price. This transaction was not in the interest of Ennia’s policy holders for many reasons:
The valuation of such a property is very uncertain:
No recent transactions of similar properties have taken place, making it hard to derive a reliable market value;
The piece of land is located in a single location on a single island and therefore its valuation is very susceptible to changes in local circumstances;
It is unclear whether the piece of land could be sold in individual pieces over time, which would reduce the risk of an unfavourable auction price at one point in time.
In this case it appeared that the market value of the property ($49.7mln) is negligible as compared to the book value ($430.7mln). Was this transaction forced by the shareholder of Ennia only to pursue his own interests, at the cost of the policy holders?
A substantial exposure in one single object within an investment portfolio is contrary to the principle of risk diversification. The property does not generate annual income, whereas the insurer needs 3-4 per cent per annum in order to increase its provisions to pay future benefits to policyholders.
This investment lacks duration matching with the liabilities of the insurer, hence making the insurer vulnerable to changes (decreases) in interest rates.
We conclude that CBCS under the supervision of Mr. Tromp failed by not voiding this transaction.
We suggest that when Mr. Tromp really believes the piece of land is worth the book value, he “puts his money where his mouth is” and buys a piece of this land for the accompanying book value.
Servaas Houben and Ronald Ketellapper
