South Africa’s Prudential Authority (PA) has successfully applied to the High Court to have a local non-life insurer, Constantia Insurance Company Limited (CICL), placed under provisional curatorship. The authority had gone to court to intervene in the non-life insurance subsidiary of Constantia Risk and Insurance Holdings (Constantia), which also operates two life insurance subsidiaries. The life subsidiaries were not affected by the action.
The PA’s decision followed longstanding concerns about CICL’s statutory capital. The authority said: “CICL has 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 decision to approach the courts was not taken hastily, and there were numerous engagements between the authority and CICL dating back to June 2019, when the authority first became aware of the matter.
Even so, the timing of the decision has been questioned. 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 in the past two years and given how close we are to concluding the recapitalisation of CICL; 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”.
Mr Todd also noted that improvements in the non-life insurer’s operating performance (and increases in its cash reserves) left the business with sufficient resources to meet all of its current and future claims obligations. “There is no reason for policyholders or partners to be concerned,” he said.
In its response to the curatorship, Conduit Capital, the JSE-listed owner of the Constantia business, reiterated that it was working with the PA to expedite the recapitalisation of CICL. It also assured policyholders and shareholders that CICL was a going concern.
“Constantia is cashflow positive, has significant cash reserves and generates underwriting profits in all of its major lines; we have been actively working to recapitalise the business. Discussions are at an advanced stage and expected to be concluded imminently,” it wrote.
Conduit Capital also pledged to work with the joint regulatory authorities, the PA and Financial Sector Conduct Authority (FSCA), to ensure the protection of policyholders and to bring a suitable investor on board. They 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”.
Readers may be justified in asking whether the provisional curatorship route has done more harm than good. The curatorship not only fuels perceptions among policyholders and potential policyholders of the non-life insurer’s ability to meet its ongoing obligations but could force potential investors to rethink their investment into the firm. In other words, the regulatory steps taken to force recapitalisation not only threaten a two-year-long operational turnaround but could chase away the very capital being sought to address the regulatory issue.
This might be a case of the regulator being stuck between the proverbial ‘rock and a hard place’. Historically, it has been criticised for failure to take swift action when evidence of non-compliance is found. In this matter, the PA says it had given a clear and specific deadline of 30 June 2022 for Conduit Capital to address its capital shortcomings, allowing a reasonable 36-month period for remediation.
As the deadline neared, its choice was to step in to make the business comply, or ‘kick the can down the road’ and allow the insurer to continue to trade despite not meeting its capital requirements. The question then becomes: for how many more months shall we, the regulator, allow this non-compliant business to trade?
As it turns out, the PA chose the prudent route, labelling the provisional curatorship application as “the most suitable and most effective mechanism to facilitate the orderly management of CICL back to a position of financial soundness”.
Without firm confirmation of fresh capital, 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 the curatorship decision. The provisional curatorship will be reviewed on 6 December 2022.