Announcements

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

Johannesburg, 17 June 2016 — 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:

The insurer’s interim statutory CAR coverage equated to a higher 2.2x at FYE15 (FYE14: 1.5x). Capitalisation was supported by sound profitability, with cumulative profits amounting to R72m over the review period. Furthermore, the insurer has a moderate degree of financial flexibility due to funds available from shareholders to meet regulatory capital requirements, as well as to support growth targets. As such, GCR expects the insurer to remain sufficiently capitalised relative to expected Solvency Assessment and Management (“SAM”) parameters, supported by the capital management strategy in place.

Cash and cash equivalents remained high at R161m as at 10M F16 (FYE15: R228m; FYE14: R30m), following the disposal of fixed interest bearing securities, with the funds mainly placed in liquid assets and listed shares. Going forward, GCR expects liquidity metrics to be maintained within a strong range, supported by the floors set by management in conjunction with the objectives outlined in the investment strategy. The remainder of the portfolio comprises listed shares, investment property, loans and investments in subsidiaries, together representing 64% of capital as at 10M F16 (FYE15: 46%), which may imply some capital risk.

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.

The insurer’s strategy shifted, with an increased focus on scale and diversification. In this regard, the insurer plans to maintain existing specialist portfolios, while pursuing more commoditised lines such as private motor and heavy commercial vehicles, as well as diversifying into new lines of business and products. GCR positively views the progress that management has made in terms of attaining set targets. Going forward, the ability of the insurer to successfully bed down operations, resulting in a higher degree of consistency in growth of medium term revenue and earnings, remains a key rating consideration.

The underwriting margin equated to 0.6% in FY15 (FY14: 1%), largely due to elevated operating expenses stemming from the large underwriting management agency (“UMA”) profit commission structure pay-outs, offsetting the insurer’s competitive loss ratios. Going forward, management expects the aggregate underwriting margin to improve to around 5%, supported by increased diversification and scale, in line with the revised strategic objectives. The successful attainment of strategic objectives could potentially strengthen the insurer’s medium term earnings capacity.

Increased dependence of the two largest UMAs reflects a heightened degree of revenue risk, and an operational risk to be managed within the UMA framework. According to management, entrenched relationships with key UMA personnel partially mitigate this risk. Furthermore, the insurer expects to gradually reduce this risk through the attainment of medium term growth and earnings diversification.

A strengthening in the insurer’s business profile (by way of increased scale efficiencies and enhanced revenue diversification), and demonstrated underwriting profitability, could support upward rating movement. This would need to be supported by capitalisation and liquidity remaining within a strong range. 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 (May 2015)    
Claims paying ability: A-(ZA)    
Outlook: Stable    

ANALYTICAL CONTACTS

Primary Analyst    
Yvonne Masiku    
Senior Credit Analyst    
(011) 784-1771    
ymasiku@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 2015.

Constantia rating reports, 2006- 2015.

RSA Short Term Insurance Bulletins, 2001-2015.

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

Accounting A process of recording, summarising, and allocating all items of income and expense of the company and analysing, verifying and reporting the results.
Budget Financial plan that serves as an estimate of future cost, revenues or both.
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.
Capital Base The issued capital of a company, plus reserves and retained profits.
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.
Credit Rating Agency An entity that provides credit rating services.
Creditworthiness An assessment of a debtor’s ability to meet debt obligations.
Diversification Spreading risk by constructing a portfolio that contains different investments, whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.
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.
Interest Money paid for the use of money.
Liquidity The speed at which assets can be converted to cash.
Liquidity Risk The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.
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”) The national scale provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.
Policy The legal document issued by the company to the policyholder, which outlines the conditions and terms of the insurance.
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
Rating Outlook A rating outlook indicates the potential direction of a rated entity’s rating over the medium term, typically one to two years. An outlook may be defined as: ‘Stable’ (nothing to suggest that the rating will change), ‘Positive’ (the rating symbol may be raised), ‘Negative’ (the rating symbol may be lowered) or ‘Evolving’ (the rating symbol may be raised or lowered).
Reinsurance The practice whereby one party, called the Reinsurer, in consideration of a premium paid to him agrees to indemnify another party, called the Reinsured, for part or all of the liability assumed by the latter party under a policy or policies of insurance, which it has issued.
Securities Various instruments used in the capital market to raise funds.
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.

For a more detailed glossary of terms/acronyms used as per GCR insurance glossary, 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 2015,

• Four years of audited comparative numbers, • Management accounts to 30 April 2016,

• Full year detailed budget financial statements for 2016,

• The ST returns for 2015,

• 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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