CAPE TOWN – Adri Senekal de Wet, in discussion with financial analyst Corrie Kruger, writes that while South Africa is still reeling from the shocks of the VBS Bank heist and the demise of BEE investment company Vele Investments, there is more bad news to come. 

Senekal de Wet: Corrie, you are an independent analyst and one of South Africa's well-known stockbrokers on the JSE. By now our readers are well aware of what went wrong at VBS, but what is the impact of this scandal on the financial services industry?

Kruger: This is the tip of the iceberg. In addition to Lion of Africa there was also Nzalo Insurance with which we deal below. What followed last week was the announcement by Brimstone, which owns Lion of Africa Insurance Company, that it had decided to voluntarily and systematically wind down operations of Lion with immediate effect. The statement read: “In the past few years, Lion has experienced a lack of profitability and a tough operating climate in its chosen markets, which combined with an onerous regulatory environment and increased solvency requirements contributed to this decision.”

Senekal de Wet sent further questions to Insure, relating specifically to two of the 30 insurance companies from which premiums were withheld. The questions are quoted below, together with Insure's response:

Could you confirm if Lion of Africa and Nzalo Insurance are two of the companies from whom premiums have been withheld? 

Kruger: Insure Group Managers collected premiums on behalf of both these insurance companies, and as such the August premiums due to them have been retained. As to the extent to which the retention of these premiums may have contributed to the recent events surrounding these entities, it would be speculative to assume that this has been a factor in the decision of Lion of Africa to “voluntarily and systematically wind down its business”. In this respect, I refer you to the letter issued by Lion of Africa in this regard. (Attached)  In terms of Nzalo Insurance Company, I would like to refer you to the press statement issued by the South African Reserve Bank on 13 November, stating that: “Nzalo experienced increasing financial soundness challenges from the first quarter of 2018. Following the South African Reserve Bank placing VBS Mutual Bank into curatorship, Nzalo's financial soundness position was significantly impacted due to intragroup transactions with VBS.”

Adri, notwithstanding the above explanation, it may perhaps be the classic example of the last straw that broke the camel's back. But unfortunately it was not just one camel. According to Quora, a group of camels is referred to as a caravan, flock, train or herd. No wonder to most of us this feels like a train smash.

Senekal de Wet: How will the decision by Brimstone to close Lion of Africa affect Brimstone’s profitability?

Kruger: Brimstone stated that the decision to place Lion into run-off is regrettable, and said “its value to Brimstone comprises less than 1 percent of Brimstone’s gross asset value and has therefore no significant financial or other impact on Brimstone”. Reality is that this 1 percent amounts to a write-off to the amount of approximately R400 million. The net Intrinsic Value of Lion of Africa Insurance was recently (September 30) stated by Brimstone as R178 987 000.

The write-off in their books would probably be less as there was a capital gains tax provision in respect of this company. I am concerned about the little management control Brimstone has over the companies in its portfolio, and the limited short-term exit strategy that it has.

Senekal de Wet: What other companies in the Brimstone stable are you referring to?

Kruger: There are a number of other investments that complete the portfolio:

  • Oceana, of which they hold 17 percent shares at a net intrinsic value of R1 402 288 000.
  • Sea Harvest, interest of 50.6 percent shares at a net intrinsic value of R1 932 565 000.
  • Life Health Care, interest of 3.4 percent shares at a net intrinsic value of R967 141 000.
  • Equities, interest of 7.7 percent shares at a net intrinsic value of R235 917 000.
  • Grindrod, interest of 7.7 percent shares at a net intrinsic value of R52 678 000.
  • Phuthuma Nathi, 7 percent of shares at a net intrinsic value of R533 514 000.
  • Stadio Milpark, 5.3 percent of shares at a net intrinsic value of R216 439 000.
  • Long4Life, 3.4 percent of shares at a net intrinsic value of R145 498 000. 

Senekal de Wet: I recall that Lion of Africa received a positive rating by Global Credit Ratings not so long ago?

Kruger: I am also disturbed by this. 

In May last year the following press release stated: “Over the past few months, Lion of Africa Insurance Company Limited (Lion) embarked on a journey to improve its credit rating. This was the first time in recent years that GCR had conducted a rating for Lion. 

“Lion was advised by several stakeholders to utilise GCR, in order to give stakeholders a sense of Lion's claims paying ability. On May 17, 2017, Standard & Poor's (S&P) also revised its outlook to stable (from negative) and maintained the previous rating. 

"The rating and outlook issued by GCR is as a result of the strategic turnaround implemented during the previous 18 months, which includes the exiting of the corporate and personal lines businesses, effective implementation of the RAG (risk appetite grid), as well as enhancing the underwriting skills and pricing capabilities. 

"In addition, the focus on strengthening the balance sheet and resultant improvement in our solvency gives comfort that Lion covers its claims."

Bongani Madikiza, chief executive of Lion of Africa, told the staff: “We also need to ensure that we remain focused on maintaining this momentum to grow Lion, specifically on growing our business at the required pace, managing our claims efficiently and managing costs effectively. 

“Interesting is that S&P is subsequently withdrawing the rating services at Lion's request as it is not financially prudent to spend money on two rating agencies.”

Investors should by then have smelt a rat.

Senekal de Wet: Is there a link between VBS and Lion of Africa?

Kruger: At the time of going to print we were unable to establish if Lion of Africa had exposure to the municipalities affected by the VBS heist. If that is the case, these and other insurance companies may face claims relating to public liability and fidelity guarantees. There is definitely systemic risk associated with the financial systems and the co-dependence of the financial services industry participants. Winding down the company will not help to stem the flow of potential claims at municipalities.

Senekal de Wet: What other insurance companies are you referring to?

Kruger: The Reserve Bank issued a statement last week Tuesday saying that Nzalo Insurance Services Ltd was now under provisional curatorship. Nzalo is a registered short-term insurer and a financial services provider. Nzalo was registered with the then-Financial Services Board as a short-term insurer in November 2016. Nzalo is an unlisted public company, wholly owned by Bophelo Insurance Group (Pty) Limited. 

Following the South African Reserve Bank placing VBS Mutual Bank (VBS) into curatorship, Nzalo’s financial soundness position was significantly impacted due to intra-group transactions with VBS. The Reserve Bank stated: “The curator will prepare a report to the High Court of South Africa that will include details of the financial soundness, assets, liabilities, minimum capital requirement and the solvency capital requirement of Nzalo, as well as the status of any business conducted by Nzalo and associated companies, any irregularities committed by Nzalo, and steps to be taken to safeguard the interests of its policyholders.”  

Senekal de Wet: Can we connect the dots?

Kruger: It is clear that in addition to contagion there may also have been deliberate collusion to create certain outcomes. The next few weeks will reveal to what extent the Hawks and the NPA can prove the extent to which transactions were deliberately structured to harm third parties. Not every person or entity that was involved was an innocent bystander in the normal course of business. Sars, for instance, must be in the process of opening a few new files.

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