Constantia Insurance goes into final liquidation

The High Court in Johannesburg has placed Constantia Insurance Company Limited (CICL) in final liquidation after granting the urgent application brought by the Prudential Authority (PA) and the short-term insurer’s curator at the end of last month.

The liquidation order was granted on 14 September.

The High Court placed CICL under provisional curatorship on 26 July following an ex parte application brought by the PA, because CICL failed to meet the solvency capital requirement (SCR) and minimum capital requirement (MCR) prescribed by the Insurance Act.

Read: Constantia’s policyholders with claims will have to join the queue of creditors if the insurer is liquidated

Ashish Desai of Deloitte & Touche was appointed as the provisional curator.

In its liquidation application, the PA said it and Desai were in agreement that:

• CICL was in a “markedly worse financial position” than what was reported by CICL when the curatorship order was granted.
• CICL does not have, and is unlikely to have, sufficient cash flow to enable it to conduct business until the return date of the curatorship order, which is 6 December.
• It was not viable for CICL to continue trading in circumstances where it was factually and commercially insolvent and does not meet the financial soundness requirements of the Companies Act and the Insurance Act.
• There was no reasonable probability that the continuation of the provisional curatorship would enable CICL to pay its debts or meet its obligations, or become a viable concern, or meet the financial soundness requirements of the Insurance Act.
• It is in the best interest of CICL’s policyholders and creditors that the short-term insurer is wound up.

The Master of the High Court will appoint a liquidator, who will provide instructions to CICL’s creditors, including policyholders with active claims, as to the next steps in the process.

Things were worse than the PA thought

The PA’s liquidation application provides additional information about CICL’s finances being in a worse-than-reported position.

According to the application, the SCR and MCR figures presented by QED Actuaries & Consultants as at 30 June “differed significantly” from those that had been represented by CICL to the PA on 11 July. “It was the incorrect figures of 11 July 2022 which the Authority relied upon when it decided to bring the curatorship application in respect of CICL.”

In a statement, the PA said the significant deterioration in CICL’s financial position was mainly a result of the non-renewal of its solvency quota share reinsurance treaty for the financial year starting on 1 July. The solvency quota share was a reinsurance programme aimed at reducing the regulatory capital requirements of CICL.

In its application, the PA said the non-renewal of the reinsurance programme meant that, regardless of whether CICL had previously correctly accounted for the solvency relief of this programme, CICL would not benefit from any similar capital relief going forward, and this would significantly deteriorate the solvency ratio as at 30 June.

The PA’s statement said: “It must be emphasised that the solvency position reported as at 11 July 2022 included the solvency quota share reinsurance treaty being portrayed as if the treaty were effective, and CICL took capital relief on its statutory capital position.”

No hope of rescue

The significant deterioration in CICL’s financial position made it difficult for the curator and his team to convince potential investors to commit to recapitalising CICL, as envisaged when the application for curatorship was made, the statement said. “The required capital to ensure the continued existence of the business drastically increased.”

The PA’s liquidation application said it had been appropriate for CICL to continue doing business under the control of the provisional curator when “a real potential for funding existed”. A capital injection could potentially still have generated the financial stability that would have salvaged the business to the benefit of and in the best interests of all policyholders and other stakeholders, it said.

“At this stage, however, in the light of the revised analyses of CICL’s financial position, there is no realistic expectation of viable and adequate funding becoming available in a timely manner. It is consequently no longer viable, in the applicants’ view, for CICL to continue with its business operations.”

The PA and the provisional curator submitted, considering CICL’s parlous financial position and the need to protect policyholders and creditors, that little purpose would be served in seeking a provisional liquidation order before obtaining a final winding-up order.

The Authority said CICL will, possibly as early as September or October, have no further cash to operate its business, and this will impede if not make it impossible for the provisional curator to fulfil his role.