Johannesburg, 28 Feb 2018 — Global Credit Ratings has today upgraded the national scale claims paying ability rating assigned to Constantia Insurance Company Limited to A(ZA) from 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 rating has been upgraded on the back of substantially improved capitalisation following material capital injections from existing shareholders to both support strong growth targets, while offsetting very poor earnings performance. In this respect, capital amounted to R944m at 1H FY18 (FY17: R232m; FY16: R215m). Accordingly, risk adjusted capitalisation improved materially, with capital adequacy requirement coverage under interim measures equating to a very high 5.9x (FY17: 2.2x; FY16: 2.7x). While asset risk exposure increased, with listed equities representing a higher 90% of capital at 1H FY18 (FY17: 76%; FY16 52%), very strong capitalisation contributes to GCR’s view that the insurer is positioned to absorb a degree of potential exogenous shocks emanating from capital markets. Furthermore, demonstrated capital support from shareholders offer the insurer a certain degree of financial flexibility, which is expected to support strong credit protection metrics over the medium term. The highest net retentions per risk and event are limited to levels viewed to be conservative relative to capital, while reinsurance arrangements are placed with highly rated counterparties.
The insurer’s cash and equivalents increased to R284m at 1H FY18 (FY17: R117m; FY16: R149m), on the back of a portion of the additional capital being placed in liquid assets. As such, key liquidity metrics registered within a very strong range, with cash coverage of net technical liabilities equating to 1.9x (FY17: 1.2x; FY16: 3.7x), and average monthly claims coverage registering at 10 months (FY17: 7 months; FY16: 20 months). Liquidity metrics are likely to continue to register within a strong range, supported by the floors set by management.
Earnings performance was very poor over the last two years, with two consecutive net losses. This was largely due to certain products giving rise to elevated loss ratios and higher operating costs to support business growth initiatives, which GCR expects to persist over the outlook horizon. Nonetheless, very strong capitalisation is viewed to allow for the absorption of earnings pressure and volatility over the rating horizon.
Management increased focus on strategic engagement and relationship building with key partners, while pursuing new lines of business. 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 63% of gross premiums in FY17). 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.
A sustainable improvement in earnings capacity and/or strengthening in the insurer’s business profile could support upward rating movement. This would need to be supported by capitalisation and liquidity metrics registering within very strong ranges. Conversely, a downgrade could result from earnings pressure adversely impacting on credit protection metrics. Furthermore, a material reduction in risk adjusted capitalisation and/or the loss of one or more profitable portfolios, with 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)|
|Last rating (February 2017)|
|Claims paying ability: A-(ZA)|
|Primary Analyst||Committee Chairperson|
|Yvonne Mujuru||Susan Hawthorne|
|Sector Head: Insurance Ratings||Senior Credit Analyst|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2017.
RSA Short Term Insurance Bulletins, 2001-2017.
Constantia rating reports, 2006-2017.
RATING LIMITATIONS AND DISCLAIMERS
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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 financial results up to 30 June 2017
- Four years of comparative audited numbers
- Unaudited interim results up to 31 December 2017
- Budgeted financial statements for 2018
- The current year reinsurance summary
- Statutory returns to 30 June 2017, 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.
|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
GCR upgrades Constantia Insurance Company Limited’s rating to A(ZA); Outlook Stable.