Johannesburg, 22 December 2020 – GCR Ratings (“GCR”) has affirmed Société Nationale d’Assurances et de Réassurances’ (“SONAR IARD”) national scale financial strength rating of A+(BF), with the Outlook accorded as Negative.
|Rated Entity||Rating class||Rating scale||Rating||Outlook / Watch|
|Société Nationale d’Assurances et de Réassurances||Financial strength||National||A+(BF)||Negative Outlook|
The rating of SONAR IARD has been placed on Negative Outlook due to a weakening financial profile over the past two years, compared to the peak registered in FY17. The moderation is essentially a function of increasing claims pressures, driving a higher operational cost structure which limits both earnings and liquidity at subdued levels. In this respect, a sustained negative trend in financial profile metrics over the medium term, especially in the midst of accrued economic challenges due to COVID-19 pandemic, is likely to result in negative rating action, despite support from a sound business profile.
Earnings represent a key rating weakness, driven by the loss ratio, which increased to 60% in FY19 (FY18: 50%), despite the implementation of strict underwriting policies. This countered management efforts to contain operating costs, while increasing earnings dependence on relatively stable investment income. As such, underwriting losses deepened to 10% (FY18: 4% loss; five-year average: 3% loss), with return on revenue limited to 11% (FY18: 12%; five-year average: 18%). Going forward, earnings are likely to remain subdued by underwriting pressures, further depressed by economic challenges weighing down on investment income.
Liquidity is also credit negative, restrained by a higher operational cost structure, as well as the insurer’s relatively aggressive asset allocation, tilted towards high-risk investments that accounted for a higher 60% of the investment portfolio (FY18: 49%). In this respect, cash and stressed financial assets coverage of net technical liabilities equated to 1.1x, while the operational cash coverage was at 20 months. Liquidity metrics could remain compressed within a moderately weak range over the medium term, due to an aggressive asset allocation strategy alongside expected earnings strain.
The business profile however remained a key rating strength of SONAR IARD, with the entity retaining the market leader position despite intensifying competitive dynamics. As such, gross premiums registered a 10% growth in FY19, underpinning a strong but declining market share of 20% (FY18: 20%; review period average: 24%) and relative market share of 1.6x. Nevertheless, the factor assessment was limited by premium concentration on motor and accident lines of business, with the strategic focus on product development and retail business likely to support policy granularity and business growth over the long term.
Risk adjusted capitalisation also supports the rating at a GCR capital adequacy ratio (“CAR”) of 1.3x in FY19 (FY18: 1.2x), although under pressure from dividend payments and earnings moderation. The dividend payout ratio increased to 50% over the past two-year, compared to 30% over the prior three years, limiting prospects for internal capital generation. In GCR’s view, risk adjusted capitalisation could however remain within similar range, if the current earnings strain is well managed over the medium term.
The Negative Outlook captures the expectation that earnings are likely to remain subdued by persisting underwriting pressures, while cash and stressed financial assets coverage of net technical liabilities may be further limited around 1.1x by an asset allocation tilted toward non-cash investments. Despite an offsetting moderately strong business profile, the resulting financial profile could measure below a rating adequate range.
Sustained earnings weakness and/or cash and stressed financial assets coverage of net technical liability trending around 1.1x will trigger negative rating action. A rating upgrade is unlikely over the medium term, however, a sustainable turnaround in underwriting profitability and liquidity could be positively viewed.
|Primary analyst||Fleur Ngassa||Analyst: Insurance Ratings|
|Johannesburg, ZA||MarlaineN@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, November 2020|
|GCR Insurance Sector Risk Scores, July 2020|
Société Nationale d’Assurances et de Réassurances
|Rating class||Review||Rating scale||Rating class||Outlook/Watch||Date|
|Claims paying ability||Initial||National||A(BF)||Stable||October 2009|
|Financial strength||Last||National||A+(BF)||Stable||September 2020|
Risk score summary
|Rating components & factors||Risk scores|
|Country risk score||3.00|
|Sector risk score||3.00|
|Management and governance||0.00|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|Release||An agreement between the creditor and debtor, in terms of which the creditor release the debtor from its obligations.|
|Reserve||(1) An amount representing actual or potential liabilities kept by an insurer to cover debts to policyholders. (2) An amount allocated for a special purpose. Note that a reserve is usually a liability and not an extra fund. On occasion a reserve may be an asset, such as a reserve for taxes not yet due.|
|Reserves||A portion of funds allocated for an eventuality.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|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.|
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 rating is based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such rating is an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit rating has been disclosed to the rated entity. The rating was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating. 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 entity and other reliable third parties to accord the credit rating included:
- Audited financial results as at 31 December 2019;
- Four years of comparative audited financial statements to 31 December;
- Unaudited interim results to June 2020;
- Full year budgeted financial statements for 2020;
- Reinsurance cover notes for 2020; and
- Other relevant documents.