Announcements Insurance Rating Alerts

GCR affirms Constantia and Conduit’s financial Strength and long Term Issuer ratings of BB(ZA) and B(ZA), respectively, Negative Watch

Rating Action

Johannesburg, 17 July 2020 – GCR Ratings (“GCR”) has affirmed Constantia Insurance Company Limited’s (“Constantia”) national scale financial strength rating of BB(ZA), with the rating maintained on Negative Watch. Furthermore, GCR has affirmed Conduit Capital Limited’s (“Conduit”) national scale long term and short-term issuer credit ratings of B(ZA)/B(ZA), with the ratings maintained on Negative Watch and Rating Watch respectively. At the same time, the international scale long term issuer rating for Conduit has been affirmed at CCC+ and maintained on Negative Watch.

Rated Entity / Issue Rating class Rating scale Rating Outlook/Watch
Constantia Insurance Company Limited Financial strength National BB(ZA) Negative Watch
Conduit Capital Limited Long term issuer National B(ZA) Negative Watch
Short term issuer National B(ZA) Rating Watch
Long term issuer International CCC+ Negative Watch

The rating action follows a reduction in the South African Country and Insurance sector risk assessments.

The South African country risk score was lowered to 7.0 from 7.5 previously, in a market alert released on the 27th of May 2020. Click here to access the link. On the 4th of June 2020, the South African insurance sector risk score was also lowered to 8.0 from 8.75 previously. Click here to access link.

Combined, the above country and sector risk scores comprise the operating environment score, which is a key input into GCR’s ratings.

Rating rationale

The ratings were affirmed and maintained on Negative Watch, with GCR having applied stresses to the assessment to cater for continued weaknesses in the financial profile, which could be compounded by heightened country and sector risks associated with the weak economic environment.

The ratings reflect weakness in earnings following successive years of underwriting deficits at Constantia, with FY19 and 1H F20 having been further impacted by large fair value losses on listed equity investments. Weak earnings in turn adversely impacted liquidity and capitalisation, with cash holdings lowering to R116m at 1H F20 (FY19: R195m) and the insurance entities’ Solvency Capital Requirement (“SCR”) coverage ratios remaining below 1x. GCR nevertheless notes the turnaround strategy that has been implemented, as well as initiatives that are underway to address capitalisation and liquidity weaknesses, including the expected recapitalisation of Constantia through a corporate transaction that is expected to be finalised in the near term. However, the ratings have been maintained on Negative Watch to reflect potential for negative rating action if these initiatives do not materialise as and when expected.

Constantia’s underwriting performance has been impacted by a very high operating expense ratio, which offset improvements in the net loss ratio and led to persistent deep underwriting losses (continuing in 1H F20). The insurer started to implement portfolio remedial action in 2Q F20, which together with material cost cutting is expected to stabilise underwriting performance and cash generation. The extent to which this addresses earnings volatility is expected to be a key medium term rating consideration.

The large net losses led to a weakening in Constantia’s risk adjusted capitalisation metrics, with SCR coverage remaining below the minimum regulatory requirement. GCR has factored in the planned recapitalisation in the coming months (with SCR expected to improve to above 1.5x). However, we expect the associated exposure to property and the elevated equity market risk to impact on capital quality.

Operational cash flow strain led to weak liquidity levels, noting the limited tradability of the majority of the investment portfolio. GCR expects this to be partly addressed by proceeds from the sale of equities and improved operational cash flow.

Constantia’s intermediate market share and premium diversification are viewed to be partly offset by a level of revenue volatility (after the aggressive growth reported in earlier review years), the portfolio’s poor earnings and geographic concentration to South Africa. The ratings are restrained by the high related party exposures.

Outlook statement

The corporate transactions that are underway are expected to enhance premium scale in the insurance operations, which together with portfolio corrective actions are expected to improve underwriting profitability over the next six to twelve months. However, this would need to be demonstrated over the medium term in order to be factored into the ratings, and earnings are also still likely to be exposed to equity market volatility. The ratings are, therefore, very sensitive to ongoing capitalisation and liquidity pressure in the absence of a sustained turnaround in operating performance. The Negative Watch reflects the potential for negative rating actions if the planned initiatives to address earnings, capitalisation and liquidity are not executed in line with expectations over the short term.

Rating triggers

Negative rating action is likely to follow if earnings and/or operational cash flow pressures persist, or if capitalisation does not improve in line with expectations. We may also lower the ratings if the group or company is acquired in majority by an entity with lower creditworthiness. The national scale ratings could improve following a sustained turnaround in earnings that underpins a strengthening in the financial profile, but this would only be likely over the longer term. Positive rating action on the international scale long term issuer rating is not expected over the outlook horizon, given our assessment of the level of debt subordination to policyholder liabilities.

Analytical contacts

Primary analyst Susan Hawthorne Senior Analyst
Johannesburg, ZA SusanH@GCRratings.com +27 11 784 1771
Committee chair Matthew Pirnie Group Head of Ratings
Johannesburg, ZA MatthewP@GCRratings.com +27 11 784 1771

Related Criteria and Research

Criteria for the GCR Ratings Framework, May 2019
Criteria for Rating Insurance Companies, May 2019
GCR Ratings Scales, Symbols & Definitions, May 2019
GCR Country Risk Scores, May 2020
GCR Insurance Sector Risk Scores, July 2020

Ratings history

Constantia Insurance Company Limited

Rating class Review Rating scale Rating Outlook/Watch Date
Claims paying ability Initial National A-(ZA) Stable March 2006
Financial strength Last BB(ZA) Negative Watch March 2020

Conduit Capital Limited

Rating class Review Rating scale Rating Outlook/Watch Date
Long term Issuer Initial National BBB(ZA) Stable May 2017
Short term Issuer A3(ZA)
Long term Issuer International B+ Negative
Long term Issuer Last National B(ZA) Negative Watch March 2020
Short term Issuer B(ZA) Rating Watch
Long term Issuer International CCC+ Negative Watch

Risk score summary

Rating Components & Factors Risk scores
Operating environment 15.00
Country risk score 7.00
Sector risk score 8.00
Business profile (3.50)
Competitive position (1.25)
Premium diversification (1.25)
Management and governance (1.00)
Financial profile (3.00)
Earnings (2.00)
Capitalisation 1.00
Liquidity (2.00)
Comparative profile 0.00
Group support 0.00
Peer analysis 0.00
Total Score 8.50

Glossary

Capitalisation The provision of capital for a company, or the conversion of income or assets into capital.
Cash Funds that can be readily spent or used to meet current obligations.
Equity Investment An instrument that signifies an ownership position of shares of stock in a company that is either listed or traded on a stock exchange (also known as a counter) or are unlisted.
Equity Equity is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.
Fair Value The fair value of a security, an asset or a company is the rational view of its worth. It may be different from cost or market value.
Issuer Ratings See GCR Rating Scales, Symbols and Definitions.
Issuer The party indebted or the person making repayments for its borrowings.
Liquidity The speed at which assets can be converted to cash. 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.
Rating Outlook See GCR Rating Scales, Symbols and Definitions.
Rating Watch See GCR Rating Scales, Symbols and Definitions.
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.

SALIENT POINTS OF ACCORDED RATINGS

GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the ratings are based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings are an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit ratings have been disclosed to the rated party. The ratings were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings. The rated entity participated in the rating process via virtual management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.

The information received from the rated entity and other reliable third parties to accord the credit ratings included:

  • Group and company audited financial results as at 30 June 2019;
  • Four years of comparative group and company audited financial statements to 30 June;
  • Unaudited management accounts for Constantia to 31 December 2019;
  • Condensed reviewed results for Conduit to 31 December 2019; and
  • Other relevant documents.
image_pdfPDF View


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://GCRRATINGS.COM. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT WWW.GCRRATINGS.COM/RATING_INFORMATION. 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 THIS SITE.

CREDIT RATINGS ISSUED AND RESEARCH PUBLICATIONS PUBLISHED BY GCR, ARE GCR’S OPINIONS, AS AT THE DATE OF ISSUE OR PUBLICATION THEREOF, OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. GCR DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL AND/OR FINANCIAL OBLIGATIONS AS THEY BECOME DUE. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: FRAUD, MARKET LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND GCR’S OPINIONS INCLUDED IN GCR’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS AND GCR’S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND GCR’S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL OR HOLD PARTICULAR SECURITIES. NEITHER GCR’S CREDIT RATINGS, NOR ITS PUBLICATIONS, COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. GCR ISSUES ITS CREDIT RATINGS AND PUBLISHES GCR’S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING OR SALE.

Copyright © 2021 GCR INFORMATION PUBLISHED BY GCR MAY NOT BE COPIED OR OTHERWISE REPRODUCED OR DISCLOSED, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT GCR’S PRIOR WRITTEN CONSENT. Credit ratings are solicited by, or on behalf of, the issuer of the instrument in respect of which the rating is issued, and GCR is compensated for the provision of these ratings. Information sources used to prepare the ratings are set out in each credit rating report and/or rating notification and include the following: parties involved in the ratings and public information. All information used to prepare the ratings is obtained by GCR from sources reasonably believed by it to be accurate and reliable. Although GCR will at all times use its best efforts and practices to ensure that the information it relies on is accurate at the time, GCR does not provide any warranty in respect of, nor is it otherwise responsible for, the accurateness of such information.GCR adopts all reasonable measures to ensure that the information it uses in assigning a credit rating is of sufficient quality and that such information is obtained from sources that GCR, acting reasonably, considers to be reliable, including, when appropriate, independent third-party sources. However, GCR cannot in every instance independently verify or validate information received in the rating process. Under no circumstances shall GCR have any liability to any person or entity for (a) any loss or damage suffered by such person or entity caused by, resulting from, or relating to, any error made by GCR, whether negligently (including gross negligence) or otherwise, or other circumstance or contingency outside the control of GCR or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits) suffered by such person or entity, as a result of the use of or inability to use any such information. The ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained in each credit rating report and/or rating notification are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. Each user of the information contained in each credit rating report and/or rating notification must make its own study and evaluation of each security it may consider purchasing, holding or selling. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY GCR IN ANY FORM OR MANNER WHATSOEVER.