Announcements Insurance Rating Alerts

GCR affirms Constantia Insurance at A-(ZA), downgrades Conduit to BBB-(ZA), and places ratings on Rating Watch Negative.

Rating Action

Johannesburg, 4 October 2019 – GCR has affirmed Constantia Insurance Company Limited’s (“Constantia”) national scale financial strength (formerly claims paying ability) rating of A-(ZA), and placed the rating on Rating Watch Negative. Furthermore, GCR has downgraded Conduit Capital Limited’s (“Conduit”) Long term national scale Issuer rating to
BBB-(ZA), from BBB(ZA), while the Short Term national scale Issuer rating has been affirmed at A3(ZA), with both ratings placed on Rating Watch Negative. Lastly, GCR has revised the Long Term international scale Issuer rating to B (on Criteria change), from B+, with a Stable Outlook.

Rated Entity / Issue Rating class Rating scale Rating Outlook/Watch
Constantia Insurance Company Limited Financial strength National A-(ZA) Rating Watch Negative
Conduit Capital Limited Long term Issuer National BBB-(ZA) Rating Watch Negative
Short term Issuer National A3(ZA) Rating Watch Negative
Long term Issuer International B Stable

GCR announced that it had released new criteria for rating insurance companies in May 2019. Consequently, the ratings for Constantia and Conduit were placed ‘Under Criteria Observation’. GCR has finalised the review under the Criteria for Rating Insurance Companies, May 2019. As a result, the ratings have been reviewed in line with the new methodology, and subsequently removed from ‘Under Criteria Observation’.

Rating Rationale

The ratings of Constantia and Conduit are based on the strengths and weaknesses of the wider Conduit group. Constantia is the core operating entity of the group, contributing approximately 97% of revenue to the group, while Conduit is a non-operating holding company. Constantia’s rating reflects potential for underwriting margins to remain supressed over the next 12 months, compounded by high exposure to market risk volatility. Risk adjusted capital is adequate, although likely to trend within a lower range than initially expected, while being exposed to continued elevated variability. The rating for Conduit incorporates structural subordination to Constantia. As such, the downgrade on Conduit’s Long term national scale Issuer rating reflects persistent negative operating cash flows limiting the potential for dividend upstreaming, and the absence of directly held financial assets.

Adequate capitalisation is supported by the large capital base (1H FY19: R1.4bn) underpinning strong GCR risk adjusted CAR. This is partially offset by high asset risk, stemming from strategic long term equity investments with high counterparty concentration. Furthermore, the balance sheet structure induces a high degree of volatility in internal capital generation, causing high variability in risk adjusted capital metrics. The potential for risk adjusted capitalisation to fluctuate within a broad range over the medium term undermines forward looking capitalisation strength, as further asset transfers have been required to support regulatory risk adjusted capital above minimum levels of late (noting further dilution of capital quality underpinning Constantia’s balance sheet). This level of ongoing capital support is, nevertheless, moderately positive, while GCR notes the potential for further capital injections over the short to medium term to support balance sheet strength.

Earnings is viewed to be weak, underpinned by highly negative and volatile underwriting margins over the past three years. 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. GCR also notes high market volatility from the investment portfolio resulting in inconsistent fair value movements, which further dampens earnings quality. This may negatively impact risk adjusted capitalisation going forward, also noting potential volatility in regulatory risk adjusted capital metrics.

The group exhibits strong liquidity in terms of stressed asset coverage of technical liabilities, representing a key rating strength. However, persistent cash flow strain limits cash build, and in the absence of further cash injections, this may dilute the current cash base and moderate liquidity metrics going forward.

The group’s business profile negatively impacts the rating, with Constantia’s intermediate competitive positioning in the short term insurance sector offset by portfolio churn and negative operating margins. In this regard, Constantia embarked on an aggressive growth strategy in FY17, which has caused a degree of revenue volatility, while also displaying some portfolio turnover within the underwriting managing agencies (“UMAs”). This has been accompanied by highly negative underwriting margins over the past three years (including FY19), as higher loss ratios were compounded by higher operating costs. In GCR’s view, material weakness in earnings potential is viewed to offset competitive positioning. Constantia reflects mild product diversification, supported by two core lines of business (with somewhat niche characteristics therein) exhibiting a degree of contained product risk, albeit noting revenue concentration to two UMAs and limited geographic diversification.

Furthermore, management and governance considerations compound business profile concerns, with GCR taking a negative view on the nature of the capital structure within the group. In this regard, long term strategic objectives of key shareholders (in terms of an underlying investment strategy) are viewed to limit management’s short to medium term operating flexibility. Should these constraints not be carefully managed, it could materially limit management’s ability to address liquidity erosion and solvency pressure within the core entity over the rating horizon.

Conduit’s ratings reflect structural considerations and subordination of liabilities to those of Constantia. Furthermore, the prior transfer of the vast majority of Conduit’s remaining assets to Constantia (to remedy solvency shortfalls), coupled with the group’s weak earnings and limited potential for upstreaming of cash flows, have weakened the credit characteristics of the holding company. This has resulted in the downgrade of Conduit’s Long term national scale Issuer rating.

Outlook Statement

The Rating Watch Negative reflects the potential for earnings to remain highly supressed, and in the absence of material improvement, likely to negatively impact capitalisation and liquidity strength below levels commensurate with the current ratings. Nonetheless, there is potential for these negative pressures to be counteracted by impending capitalisation initiatives.

Rating Triggers

The outlook on the national scale ratings may be revised to stable on the back of material sustained earnings improvement, which would support cash flow generation capacity and the maintenance of capitalisation strength.

Analytical Contacts

Primary analyst Vinay Nagar Senior Credit Analyst: Insurance Ratings
Johannesburg, ZA Vinay@GCRratings.com +27 11 784 1771
Committee chair Godfrey Chingono Deputy Sector Head: Insurance Ratings
Johannesburg, ZA GodfreyC@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, June 2019
GCR Insurance Sector Risk Scores, July 2019

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
Last A-(ZA) Negative March 2019

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 BBB(ZA) Stable May 2018
Short term Issuer A3
Long term Issuer International B+ Stable

Risk Score Summary

Risk score
Operating environment 16.25
Country risk score 7.50
Sector risk score 8.75
Business Profile -3.00
Competitive position -1.25
Premium diversification -1.25
Management and governance -0.50
Financial profile -0.25
Earnings -1.75
Capitalisation 0.25
Liquidity 1.25
Comparative profile 0.00
Group support 0.00
Peer analysis 0.00
Total Score 13.00

Glossary

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.
Shareholder An individual, entity or financial institution that holds shares or stock in an organisation or company.
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.
Subordination The prioritising of the payment of interest and principal payments to tranches (senior, junior etc. Senior tranches are paid before junior tranches.
Technical Liabilities The sum of Net UPR and Net OCR IBNR.
Turnover The total value of goods or services sold by a company in a given period. Also known as revenue or sales. Turnover can also refer to the total volume of trades in a market during a given period.
Underwriting Margin Measures efficiency of underwriting and expense management processes.
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.
Upstream A term referring to the exploration and extraction of a commodity, in contrast with the downstream manufacturing and processing.
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.
Shareholder An individual, entity or financial institution that holds shares or stock in an organisation or company.
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.
Subordination The prioritising of the payment of interest and principal payments to tranches (senior, junior etc. Senior tranches are paid before junior tranches.
Technical Liabilities The sum of Net UPR and Net OCR IBNR.
Turnover The total value of goods or services sold by a company in a given period. Also known as revenue or sales. Turnover can also refer to the total volume of trades in a market during a given period.
Underwriting Margin Measures efficiency of underwriting and expense management processes.
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.
Upstream A term referring to the exploration and extraction of a commodity, in contrast with the downstream manufacturing and processing.

For a detailed glossary of terms utilized in this announcement please click here

SALIENT POINTS OF ACCORDED RATING

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 were based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit ratings have been disclosed to Constantia Insurance Company Limited and Conduit Capital Limited. The ratings above were solicited by, or on behalf of, the rated entities, and therefore, GCR has been compensated for the provision of the ratings.

Constantia Insurance Company Limited and Conduit Capital Limited participated in the rating process via face-to-face 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 Constantia Insurance Company Limited, Conduit Capital Limited and other reliable third parties to accord the credit ratings included:

  • The audited financial results to 30 June 2018
  • Four years of comparative audited numbers
  • Unaudited interim results up to 30 June 2019
  • Budgeted financial statements for 2019
  • Other related documents.


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 2019 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.