GCR downgrades Constantia Insurance Company Limited’s rating to A-(ZA); Outlook Negative.

29 Mar 2019 In Rating Notifications

GCR downgrades Constantia Insurance Company Limited’s rating to A-(ZA); Outlook Negative.

Johannesburg, 29 March 2019—Global Credit Ratings has today downgraded the national scale claims paying ability rating assigned to Constantia Insurance Company Limited to A-(ZA) from A(ZA), with the outlook accorded as Negative.

SUMMARY RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit rating to Constantia Insurance Company Limited (“Constantia”) based on the following key factors:

The rating has been downgraded based on the moderation in risk adjusted capitalisation. The Negative outlook reflects the potential for ongoing earnings strain and increased market volatility to negatively impact the insurer’s credit profile (with previously high loss absorption capacity viewed to have diminished).

Constantia’s large capital base (1H FY19: R933m) is diluted by high asset risk, stemming from strategic long term equity investments with high counterparty concentration. In this respect, the insurer’s Solvency Capital Requirements (“SCR”) coverage registered at a lower 1.3x (FY18: 1.8x). The balance sheet structure induces a high degree of volatility in year on year earnings, which creates uncertainty in maintaining sound risk adjusted capital over the medium term (barring no additional capital restructuring exercises). As such, the potential for risk adjusted capitalisation to fluctuate within a broad range over the medium term undermines forward looking capitalisation strength, and is viewed to be credit negative.

Constantia’s underwriting performance remained very poor over the last three years, with three consecutive losses. This was largely due to certain products giving rise to elevated loss ratios and materially higher operating costs to support business growth initiatives, which are likely to persist over the outlook horizon. While unrealised movements cushioned net profitability in FY18, GCR notes the increased volatility in earnings capacity stemming from the balance sheet structure, which detracts from medium term earnings quality. In GCR’s view, sustained weakened capacity, in light of the poor earnings quality, may impact negatively on the entity’s credit profile going forward.

Liquidity remains sound, with cash coverage of net technical liabilities and average monthly claims registering at 1.5x and 14 months at FY18 respectively. Strong liquidity metrics were upheld by the R100m part cash injection in FY18, which increased the cash balance to R228m (FY17: R117m). However, with over half of the capital injection taking the form of risk assets (which are viewed to be strategic in nature and have a long term time horizon), persistent cash flow strain may erode cash balances and moderate liquidity metrics going forward.

Management shifted the business model, with increased focus on strategic engagement and relationship building with key partners, while diversifying the premium base. In this respect, the insurer expects to gradually mitigate earnings volatility, while reducing revenue risk inherent in the business model (two key partners accounted for 49% of gross premiums in FY18). As such, the ability of the insurer to successfully align incentives and performance objectives across key partners, while bedding down operations, may gradually strengthen the insurer’s business profile over the medium term. Reinsurance arrangements are placed with highly rated counterparties. Furthermore, the highest net retentions per risk and event are limited to levels viewed to be conservative relative to capital.

Negative rating action could result from potential ongoing earnings risk, inclusive of execution risk given the onboarding of new portfolios and attaining targeted scale efficiencies. Furthermore, capital exposure from concentration to a single counterparty could result in a downgrade. Conversely, a reversion to a stable outlook may stem from a stabilisation of earnings capacity while maintaining risk adjusted capitalisation at or above existing targets.

NATIONAL SCALE RATINGS HISTORY    
     
Initial rating (March 2006)    
Claims paying ability: A-(ZA)    
Outlook: Stable    
     
Last rating (February 2018)    
Claims paying ability: A(ZA)    
Outlook: Stable    

 

ANALYTICAL CONTACTS

Primary Analyst   Committee Chairperson
Vinay Nagar   Godfrey Chingono
Senior Credit Analyst   Deputy Sector Head: Insurance Ratings
(011) 784-1771   (011) 784-1771
.(JavaScript must be enabled to view this email address)   .(JavaScript must be enabled to view this email address)

 

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Short Term Insurance Companies, updated May 2018.

RSA Short Term Insurance Bulletins, 2001-2018.

Constantia rating reports, 2006-2018.

 

RATING LIMITATIONS AND DISCLAIMERS

ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: http://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK:  http://GLOBALRATINGS.NET/RATINGS-INFO. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT http://GLOBALRATINGS.NET.

 

SALIENT FEATURES OF ACCORDED RATINGS

GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.

Constantia Insurance Company Limited participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.

The credit rating has been disclosed to Constantia Insurance Company Limited.

The information received from Constantia Insurance Company Limited and other reliable third parties to accord the credit rating included:

  • The audited financial results up to 30 June 2018
  • Four years of comparative audited numbers
  • Unaudited interim results up to 28 February 2019
  • Budgeted financial statements for 2019
  • The current year reinsurance summary
  • Statutory returns to 30 June 2018, and
  • Other related documents.

The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.

 

 

 

 

 

 

GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY
Capacity The largest amount of insurance available from a company. In a broader sense, it can refer to the largest amount of insurance available in the marketplace.
Capital The sum of money that is invested to generate proceeds.
Capitalisation The provision of capital for a company, or the conversion of income or assets into capital.
Capital Adequacy A measure of the adequacy of an entity’s capital resources in relation to its risks.
Cash Funds that can be readily spent or used to meet current obligations.
Claim A request for payment of a loss, which may come under the terms of an insurance contract.
Credit Rating An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.
Distribution Channel The method utilised by the insurance company to sell its products to policyholders.
Enterprise Risk Management ERM refers to an integrated or holistic approach to managing risk across an organisation, using clearly articulated frameworks and processes controlled from board level.
Exposure Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For an insurer, its exposure may also relate to the risk related to policies issued.
International Scale Rating (“ISR”) International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.
Intermediary A third party in the sale and administration of insurance products.
Interest Money paid for the use of money.
Investment Portfolio A collection of investments held by an individual investor or financial institution.
Liquidity The speed at which assets can be converted to cash. The ability of an insurer to convert its assets into cash to pay claims if necessary. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.
Market Risk Volatility in the value of a security/asset due to movements in share prices, interest rates, currencies, commodities or wider economic factors.
National Scale Rating (“NSR”) National Scale credit ratings express risk in relative rank order, which is to say they are ordinal measures of credit risk and are not predictive of a specific frequency of default or loss.
Policyholder The person in actual possession of an insurance policy.
Portfolio All of the insurer’s in-force policies and outstanding losses, with respect to described segments of its business.
Premium The price of insurance protection for a specified risk for a specified period of time.
Rating Horizon The rating outlook period
Risk The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.
Risk Management Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.
Short Term Current; ordinarily less than one year.
Solvency With regard to insurers, having sufficient assets (capital, surplus, reserves) and being able to satisfy financial requirements (investments, annual reports, examinations) to be eligible to transact insurance business and meet liabilities.
Statutory Required by or having to do with law or statute.
Subordinated Debt Debt that in the event of a default is repaid only after senior obligations have been repaid. It is higher risk than senior debt.
Underwriting The process of selecting risks and classifying them according to their degrees of insurability so that the appropriate rates may be assigned. The process also includes rejection of those risks that do not qualify.
Underwriting Margin Measures efficiency of underwriting and expense management processes.

For a detailed glossary of terms, please click here

 

 

 

 

 

 

 

 

ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK:HTTP://GLOBALRATINGS.NET/UNDERSTANDINGRATINGS. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT WWW.GLOBALRATINGS.NET/RATINGSINFORMATION. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE UNDERSTANDING RATINGS SECTION OF THIS SITE.

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