Announcements

GCR affirms Constantia Insurance Company Limited’s rating at A-(ZA); Outlook Stable.

Johannesburg, 15 Feb 2017 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Constantia Insurance Company Limited at A-(ZA), with the outlook accorded as Stable.

SUMMARY RATING RATIONALE

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

Constantia’s risk adjusted capital adequacy is expected to register within a strong range over the rating horizon, underpinned by the capital management strategy in place. In this respect, the insurer expects to maintain a capital adequacy requirement (“CAR”) cover under interim measures above the minimum requirement (FY16: 2.7x; FY15: 2.2x). Shareholders have committed to inject additional funds to meet regulatory capital requirements, and support strong growth targets, offering the insurer a certain degree of financial flexibility. In this regard, an additional R100m was injected in January 2017 (FY16: R30m).

Key liquidity measures remained at very strong levels. In this respect, cash coverage of net technical liabilities equated to 3.8x at FY16 (FY15: 3.7x), while the claims cash cover ratio registered at 20 months (FY15: 27 months). Going forward, GCR expects liquidity metrics to be maintained at strong levels, supported by the floors set by management in conjunction with the objectives outlined in the investment strategy.

Earnings capacity evidenced volatility over the review period, largely as a function of certain products giving rise to loss ratio variability (which GCR expects to persist over the rating horizon). Furthermore, the insurer’s shifting strategic focus introduces further execution risks, and earnings pressure over the short term (largely as a function of higher operating costs to support business growth initiatives). This notwithstanding, the demonstrated attainment of key growth and diversification efforts may gradually support underwriting profitability, and GCR’s view of medium term earnings capacity.

Exposure to listed equities is expected to increase to about 70% of capital by FY17 (FY16: 52%), representing an intermediate level of capital risk. Nevertheless, strong risk adjusted capital adequacy contributes to GCR’s view that the insurer is positioned to absorb a degree of potential exogenous shocks emanating from capital markets. Furthermore, reinsurance arrangements are placed with highly rated counterparties, while the highest net retentions per risk and event are limited to levels viewed to be conservative relative to capital.

Management is in the process of shifting its business model, with increased focus on strategic engagement and relationship building with key partners, while pursuing new lines of business. In this respect, the insurer aims to mitigate earnings volatility, while reducing revenue risk inherent in the business model (two key partners accounted for 60% of gross premiums in FY16). 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.

Upward movement of the rating may follow a strengthening in the insurer’s business profile and demonstrated improvement in sustainable earnings capacity. This would need to be supported by capitalisation and liquidity remaining within strong ranges. Conversely, a downgrade could result from a persistent deterioration in the underwriting result, coupled with risk adjusted capital adequacy contracting below expectations. Furthermore, a significant increase in revenue concentration and/or the loss of one or more profitable portfolios, and the non-replacement thereof impeding diversification efforts, could lead to negative ratings pressure.

NATIONAL SCALE RATINGS HISTORY    
     
Initial rating (March 2006)    
Claims paying ability: A-(ZA)    
Outlook: Stable    
     
Last rating (June 2016)    
Claims paying ability: A-(ZA)    
Outlook: Stable

   

ANALYTICAL CONTACTS

Primary Analyst    
Yvonne Mujuru    
Senior Credit Analyst    
(011) 784-1771    
ymujuru@globalratings.net    
     
Committee Chairperson    
Marc Chadwick    
Sector Head: Insurance Ratings    
(011) 784-1771    
chadwick@globalratings.net    

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Short Term Insurance Companies, updated July 2016.

Constantia rating reports, 2006- 2016.

RSA Short Term Insurance Bulletins, 2001-2016.

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.

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 more detailed glossary of term, please click here

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 with no contestation of the rating.

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

• The audited annual financial statements to 30 June 2016,

• Four years of audited comparative numbers,

• Management accounts to 31 December 2016,

• Full year detailed budget financial statements for 2017,

• The ST returns for 2016,

• The current year reinsurance summary cover notes, and

• Other related documents.

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

GCR affirms Constantia Insurance Company Limited’s rating at A-(ZA); Outlook Stable.

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