Johannesburg, 07 February 2019 — Global Credit Ratings has assigned an initial national scale claims paying ability rating to Cell Insurance Company Limited of BBB+(ZW), with the outlook accorded as Stable. The rating is valid until December 2019.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to Cell Insurance Company Limited (“Cell”) based on the following key criteria:
Robust risk adjusted capitalisation is considered a key rating input, as reflected by the international solvency margin of 151% at FY17 (FY16: 131%; FY15: 39%). This has been supported by capital injections over the past three years, coupled with well contained credit and market risk exposures. Given efforts to safeguard capital through enhanced earnings generation, combined with existing buffers, risk adjusted capitalisation is expected to trend within a very strong range over the rating horizon.
Cell’s competitive positioning is intermediate, with the insurer accounting for 7% of the short term insurance industry gross premiums in FY17. Cell is the 6th largest insurer in the market, supported by its market leading position in insuring mining sector risks. Furthermore, the specialised nature of its business model and captive revenue from shareholders with critical mass in the power industry provides revenue stability, which underpins market share resilience. Going forward, the insurer’s competitive positioning may improve to a moderately strong level, should premium growth accelerate in line with medium term strategic objectives.
Earnings capacity is viewed to be intermediate, subdued by protracted underwriting deficits over the historical period. However, cognisance is taken of the improvement in the underwriting margin in FY17 (13%; five year average: -18%), which could be sustained by an increase in the net commission income ratio (10M F18: 16%; FY17: 6%). Further earnings support is expected to arise from very conservative maximum deductibles per risk and event on the reinsurance program, thus limiting the net impact of high severity losses dominating the book. In this regard, management’s ability to sustain the turnaround in underwriting performance represents a key rating consideration over the rating horizon.
Liquidity is viewed to be strong, with the majority of invested funds held in liquid investments. Accordingly, cash and equivalents covered net technical provisions by 4.7x at FY17 (FY16: 3.8x), while claims cash coverage equated to 76 months (FY16: 37 months). Liquidity metrics are likely to remain within a strong range, supported by ample headroom and the possible improvement in operational cash flows over the outlook horizon.
Earnings diversification is intermediate, with a well spread business mix offset by inherent client concentration. The business mix is fairly diverse, with three lines of business contributing in excess of 10% to total GWP in FY17. However, few shareholders and select big clients account for the majority of the business, albeit with risk to revenue mitigated by their systematic importance. Given these structural limitations, earnings diversification is expected to remain within an intermediate range over the outlook horizon.
GCR views country risk factors to be elevated, and a systemic rating consideration applicable to insurers. Operational challenges are likely to persist over the rating horizon, given the uncertain socio-political outlook, severe liquidity constraints, reduction in banking sector stability and weak macroeconomic fundamentals.
Positive rating movement could develop from a sustained improvement in earnings capacity while maintaining strong credit protection metrics. Conversely, downward rating action could follow a weakening in earnings relative to expectations, while sustained deterioration in liquidity and capitalisation could also lead to negative rating action.
|NATIONAL SCALE RATINGS HISTORY|
|Initial / last rating (February 2019)|
|Claims paying ability: BBB+(ZW)|
|Primary Analyst||Secondary Analyst|
|Godfrey Chingono||Siyuan Lu|
|Senior Credit Analyst||Junior Credit Analyst|
|(011) 784-1771||(011) 784-1771|
|Senior Credit Analyst|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated May 2018.
Criteria for Rating Cell Captive Insurance Companies, updated May 2018.
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.
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.
Cell 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 Cell Insurance Company Limited.
The information received from Cell Insurance Company Limited and other reliable third parties to accord the credit rating included:
- The audited annual financial statements to 31 December 2017
- Four years of comparative audited numbers
- The most recent year to date management accounts to 31 October 2018
- Full year detailed budget financial statements for 2018
- The current year reinsurance summary cover notes
- Statutory returns for the period ended 30 June 2018 and
- Other related documents.
The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.
|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.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Claim||A request for payment of a loss, which may come under the terms of an insurance contract.|
|Commission||A certain percentage of premiums produced that is received or paid out as compensation by an insurer.|
|Conditions||Provisions inserted in an insurance contract that qualify or place limitations on the insurer’s promise to perform.|
|Country Risk||The range of risks emerging from the political, legal, economic and social conditions of a country that have adverse consequences affecting investors and creditors with exposure to the country, and may also include negative effects on financial institutions and borrowers in the country.|
|Coverage||The scope of the protection provided under a contract of insurance.|
|Deductible||The portion of an insured loss to be borne by the insured before he is entitled to recovery from the insurer.|
|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.|
|International Solvency Margin||Measures the ability to cover current year’s written premiums using shareholder’s funds.|
|Interest||Money paid for the use of money.|
|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.|
|Loss||The happening of the event for which insurance pays.|
|Market Risk||Volatility in the value of a security/asset due to movements in share prices, interest rates, currencies, commodities or wider economic factors.|
|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. The reinsured may be referred to as the Original or Primary Insurer, or Direct Writing Company, or the Ceding Company.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Shareholder||An individual, entity or financial institution that holds shares or stock in an organisation or company.|
|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.|
|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 BBB+(ZW) to Cell Insurance Company Limited; Outlook Stable.