Johannesburg, 16 November 2017 — Global Credit Ratings has today assigned an initial national scale claims paying ability rating to Auto and General Insurance Company Limited of A+(ZA), with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to Auto and General Insurance Company Limited (“A&G”) based on the following key criteria:
The rating considers A&G’s sound level of risk adjusted capitalisation, underpinned by limited underwriting risk and conservative asset allocation. GCR expects risk based capital strength to be sustained over the rating horizon, given the capital management strategy in place and the use of an entrenched internal economic capital model.
Furthermore, liquidity metrics have been maintained at very strong levels, and represent a key rating strength. Cash coverage of net technical liabilities equated to 2.1x at FY17 (FY16: 1.8x), while coverage of average monthly claims registered at 13 months (FY16: 11 months). GCR expects liquidity to remain very strong, given the insurer’s large investment portfolio and conservative asset allocation strategy.
A&G evidences a strong level of earnings capacity. The underwriting margin has averaged a healthy 7% over the review period (FY17: 7%), with key underwriting ratios evidencing a high level of stability. Earnings strength is further supported by a large fee based income component and sustainable stream of realised investment income. In this respect, adjusting for non-recurring fair value movements between FY15 and FY17, the five year average return on net earned premiums registered at a strong 11% (BY18: 12%). GCR expects A&G’s earning capacity to continue to register at a strong level over the rating horizon, supported by underwriting stability and a large realised income component.
The highest net deductibles under excess of loss (“XoL”) treaties correspond to conservative percentages of capital, at less than 1% at FY17. The large concentration to an unrated reinsurer constrains the aggregate credit strength of the reinsurance panel, although note is taken of the security covenants in place in terms of the reinsurance agreement.
A&G’s business profile is assessed to be moderately strong. The insurer has a market share of 3% overall, and occupies a top tier position in the motor line of business (ranking in fifth place). Despite high concentration towards the motor class, the granular nature of the underlying risk exposures implies an inherently well diversified revenue base and provides for a level of earnings stability.
Positive rating action may follow a sustained strengthening in earnings capacity and/or competitive positioning. Conversely, negative rating movement could follow a weakening in liquidity or capitalisation metrics.
|NATIONAL SCALE RATINGS HISTORY|
|Initial / last rating (November 2017)|
|Claims paying ability: A+(ZA)|
|Primary Analyst||Committee Chairperson|
|Susan Hawthorne||Yvonne Mujuru|
|Senior Credit Analyst||Sector Head: Insurance Ratings|
|(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, 2001-2016.
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.
Auto and General 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 Auto and General Insurance Company Limited with no contestation of the rating.
The information received from Auto and General Insurance Company Limited and other reliable third parties to accord the credit rating included:
- Final unsigned financial results to 30 June 2017
- Four years of comparative financial statements to 30 June
- Budgeted financial statements to June 2018
- The current year reinsurance programme summary
- Other relevant company specific information
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.
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.|
|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.|
|Deductible||The portion of an insured loss to be borne by the insured before he is entitled to recovery from the insurer.|
|Earned Premium||That part of the premium applicable to the expired part of the policy period.|
|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.|
|Fair Value||The fair value of a security, an asset or a company is the rational view of its worth. It may be different from cost or market value.|
|International Scale Rating LC||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.|
|Investment Income||The income generated by a company’s portfolio of investments.|
|Investment Portfolio||A collection of investments held by an individual investor or financial institution.|
|Liabilities||All financial claims, debts or potential losses incurred by an individual or an organisation.|
|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.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Rating Horizon||The rating outlook period|
|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.|
|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 accords an initial rating of A+(ZA) to Auto and General Insurance Company Limited; Outlook Stable.