PA moves on Constantia Insurance

The Prudential Authority (PA) has succeeded in its High Court application to have Constantia Insurance Company Limited (CICL) placed under provisional curatorship. In a media released issued 1 August 2022, the authority confirmed that it had gone to court late last week to intervene in the non-life insurance business of Constantia Risk and Insurance Holdings. Constantia also has two life insurance subsidiaries which are not affected by the authority’s application.

No-nonsense approach to capitalisation

Although it took the market somewhat by surprise, there has been a long-standing concern over CICL’s capitalisation. According to the PA it first became concerned about the non-life insurance division’s capital levels in June 2019. Per the PA’s media release announcing the intervention: “CICL had failed to maintain its business in a financially sound condition by holding eligible own funds that are at least equal to the minimum capital requirement or solvency capital requirement, as prescribed, whichever is the greater”. The PA also said it had participated in “numerous engagements with CICL” between June 2019 and 2022 “in an effort to gradually implement measures to return the insurer to financial soundness”. 

Conduit Capital, which is the JSE-listed owner of the Constantia business, issued an immediate response to the curatorship in which it committed to working with the PA to expedite the recapitalisation of CICL, and more importantly, confirmed that CICL remained a going concern. “Constantia is cash flow positive, has significant cash reserves and generates underwriting profits in all of its major lines,” wrote Conduit. They also reiterated that they had “been actively working to recapitalise the Constantia business [and] that discussions were at an advanced stage and expected to be concluded imminently”. Given the background, there are two questions one might ask… 

Two questions around regulatory approach

First, why would the PA wait until moments before an alleged recapitalisation deal is announced to take drastic action? Surely allowing another three months on top of a three-year ‘wait-and-see’ period would make more sense than pushing for curatorship and risk the potential partners backing out of any deal. Conduit says the move was unnecessary, writing that the PA pushed ahead with the decision “despite the positive [recent] performance of the business and the status of the imminent transaction”. In its media release responding to the curatorship decision, Conduit hints at the authority’s motivation, writing that “the PA has indicated its intention to support the recapitalisation and sees the appointment of the provisional curator as the means through which it can best support and expedite the conclusion of the process”. 

The second question: since capital is such a critical component of an insurer’s sustainability, why allow any business to trade for 36-months in contravention of the legislated capital minimums? This may be the tougher of the two questions to answer. Apparently, in its various interactions with CICL, the PA gave the non-life insurer until June 2022 to restore its solvency issues by clearing specific ‘hurdles’ for its long- and short-term capital. Under the long-term capital heading, the PA wanted CICL to identify a strategic partner to restore the financial soundness position… As for short-term capital, the PA demanded “improved due diligence initiatives and the cancellation of unprofitable lines of business”. It seems the business had achieved the short-term hurdle through positive underwriting results and positive liquidity over the past two financial years; but the talks to recapitalise the business had not yet ‘delivered’ a suitable investor. 

Wielding its regulatory powers

As the 30 June 2022 deadline loomed, the PA used the powers granted it under section 54(1)(a) of the Insurance Act, read with section 5(1) of the Financial Institutions (Protection of Funds) Act 28 of 2001, to approach the High Court for a curatorship decision, which was granted with effect from 26 July 2022. Readers should again note that this provisional curatorship, which is set for review on 6 December of this year, only applies to Constantia’s non-life insurance license. “The life insurance companies are not under curatorship and should not be affected by the curatorship process,” noted the PA. 

Conduit’s executive feels the PA acted hastily. Peter Todd, the interim CEO of Conduit Capital, said: “We believe the decision by the PA was premature given the strong performance of the business over the past two years and given how close we are to concluding the recapitalisation of Constantia; we have received an offer from a new investor and are well advanced with a second investor, so the decision of the PA has come as a surprise”. According to Conduit, CICL has seen a remarkable improvement in its operating performance since 2020, with gross premiums trending higher and the company achieving operating profitability. 

Sufficient resources to meet claims

“The improved operating performance and increase in cash reserves means the business has sufficient resources to meet all current and future claims obligations; there is no reason for policyholders or partners to be concerned,” said Todd. Conduit Capital has also pledged to work with the joint regulatory authorities to ensure the protection of its policyholders and to bring a suitable investor on board. They have promised to “continue to operate the business as usual in the best interests of policyholders, and work closely with the interim curator to expedite the recapitalisation process”. 

We conclude this market news with comment from the PA, which labelled the curatorship as “the most suitable and most effective mechanism to facilitate the orderly management of CICL back to a position of financial soundness”. The authority concluded its announcement by assuring the public “that the South African insurance sector [overall] remained safe, sound and adequately capitalised”. 

Writer’s thoughts:
It seems there are few absolutes when dealing with matters of prudential regulation. The grey area in the Constantia Insurance Company Limited matter seems to how to balance operational profitability with capital solvency margins… Our question to FAnews readers: What do you think about this decision; and how does it affect you / your business? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.