Conduit Capital’s share price plummeted on Monday after its subsidiary, Constantia Insurance, was placed under provisional curatorship by the high court — a decision it argues is premature given that it is in talks with investors about a possible capital injection.
Shares in the group slumped as much as 51% before trimming losses marginally to end at 18c by the JSE’s close — 49% lower than the previous close.
Joburg-headquartered Conduit Capital said discussions with potential investors were at an advanced stage and might soon be concluded — an event that may inject new cash into the business and enable the recapitalisation of Constantia Insurance. The order to place Constantia Insurance under provisional curatorship was granted only in relation to the company’s short-term insurance licence.
Conduit Capital’s life insurance businesses — Constantia Life and Health Assurance Company and Constantia Life — should not be affected by the curatorship process.
That is probably why Conduit Capital argues that the broader Constantia group has “significant” cash reserves though it has pledged to work with the Prudential Authority (PA), the regulator of financial services firms, to recapitalise its short-term insurance unit.
“We believe the decision by the PA was premature ... given how close we are to concluding the recapitalisation of Constantia,” said Peter Todd, the interim CEO of Conduit Capital.
“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.”
‘Best interests’
The PA, a division of the Reserve Bank, said on Monday it had applied to the high court on July 26 by way of an ex parte application to place Constantia Insurance under curatorship. The order was granted with effect from that date, with Ashish Desai of Deloitte being provisionally appointed as curator.
An application made on an ex parte basis can result in legal orders being made without waiting for a response from the opposing side and is the same as the one the PA made against 3Sixty Life, the embattled underwriter ultimately owned by the investment arm of the National Union of Metalworkers of SA.
“The PA is of the view the curatorship of Constantia Insurance is in the best interests of its policyholders, due to the insurer’s failure to maintain the minimum capital requirement and the solvency capital requirement, as prescribed in the Insurance Act,” the regulator said.
“The PA will work in conjunction with the Financial Sector Conduct Authority (FSCA) ... to ensure Constantia Insurance policyholders are properly protected during this process.
“With the appointment of the curator, the board of directors and management of Constantia Insurance are relieved of their powers.”
The PA said it first became aware in June 2019 that Constantia Insurance 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.
At the time, Constantia Insurance told the PA the failure was due to year-end audit adjustments, the effect of a significant asset writedown and market fluctuations that negatively influenced its investment portfolio.
The PA said it had had “numerous engagements” with Constantia Insurance since then in an effort to help the company return to a financially sound position. The regulator gave the firm until June 2022 to restore its solvency issues and though it was able to introduce short-term recapitalisation measures, which included the cancellation of unprofitable business lines, its longer-term recapitalisation plan, which involved taking on an equity partner, failed.
“Constantia Insurance engaged with various potential strategic partners to recapitalise the business, but unfortunately failed to secure a suitable investor to restore the business to financial soundness by the deadline of June 30 2022, as prescribed by the PA,” the regulator said.
Turnaround
Conduit Capital announced on June 21 that a potential deal between it and Mmuso Capital, which was acting on behalf of a group of investors under the banner Mmuso Consortium, had collapsed.
The deal would have resulted in a R500m capital injection in exchange for the right to subscribe for redeemable convertible preference shares.
The failed deal was part of a broader turnaround strategy for Constantia Insurance that started when the insurance subsidiary’s management team was replaced in February 2020.
On July 22, Conduit Capital announced that its then CEO, Sean Riskowitz, had resigned. He was replaced on an interim basis by Todd, who was named CEO of Constantia in February 2020 as part of the senior management changes that took effect at the time.
Constantia Insurance’s provisional curator will be required to prepare a report for the high court detailing the overall financial soundness of the company and will also have to provide the PA with a weekly progress report.
The high court has set a return date of December 6 for Constantia Insurance or other interested parties to show cause why the provisional curatorship order should not be made final.
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