Johannesburg, 01 February 2017 — Global Credit Ratings has today accorded Export Credit Insurance and Guarantee Company (Botswana) (Pty) Limited a national scale claims paying ability rating of BBB+(BW), with the outlook accorded as Stable. The rating is valid until December 2017.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to Export Credit Insurance and Guarantee Company (Botswana) (Pty) Limited (“BECI”) based on the following key criteria:
BECI’s risk adjusted capitalisation is assessed to be very strong, supported by the limited underwriting risk base and contained market risk relative to the quantum of capital. The international solvency margin measured at a high 249% at FYE16 (FYE15: 215%), and is budgeted at 179% at FYE17. Risk adjusted capitalisation is expected to be maintained within a very strong range over the medium term, albeit potentially evidencing increasing sensitivity to compression over the longer term in the event of sustained earnings limitations.
The insurer’s liquidity metrics have been sustained at very strong levels, supported by the conservative investment strategy and sizeable cash holdings relative to balance sheet liabilities and operational cash flow requirements. Cash covered average monthly claims by 98 months (FYE15: 66 months). Similarly, cash cover of technical provisions was recorded at a high 8x at FYE16 (FYE15: 10x). GCR expects liquidity metrics to be maintained at strong levels over the outlook horizon, although a softening could materialise over the medium to longer term should operational cash flow strain persist.
Earnings capacity has weakened over the review period, with investment and fee-based income increasingly deviating from elevated underwriting losses (a function of constrained net premium volumes and the high operating costs associated with risk management and advisory services provided to clients). Accordingly, the five year average return on net revenue measured at a very low 0.1%, and is expected to deteriorate further over the rating horizon given the escalating underwriting losses envisaged (BGT17: BWP10m). As such, the ability of the company to successfully execute the expansionary strategy is likely to be a key medium term rating consideration.
BECI’s limited competitive position is a function of the insurer’s developmental mandate as the sole credit insurer in Botswana, and curtailed near term growth prospects in its traditional guarantee and domestic credit business. Furthermore, product concentration is viewed to be high and increasing, with these two classes of business contributing 44% and 40% of gross premiums respectively, on a continuing basis. In this regard, note is taken of the inherent product risk associated with these exposures (given that performance is closely correlated with the domestic credit cycle), although the insurer’s track record of technical profitability is indicative of its capacity to manage this risk.
Reinsurance counterparties on the majority of the programme reflect very strong credit profiles, with mid to weak reinsurers taking follow shares. Risk retention is nevertheless elevated, with the highest net retention equating to about 11% of FYE16 capital, albeit with overall risk exposure managed down by risk management practices in place.
BECI’s rating receives upliftment from the shareholding of the Botswana Development Corporation Limited (“BDC”), which itself is wholly owned by the Botswana Government. The insurer has a mandate to support credit enhancement, and according to management, has managed to write risks at an average return on equity that is adequate to the shareholder, in the context of the social dividend derived from BECI’s operations (which reduces required financial returns).
Upward rating movement could develop if the insurer sustainably writes profitable products that positively impact on product concentration and earnings capacity. Conversely, the rating could be downgraded if the insurer exhibits a sustained reduction in earnings capacity, which erodes liquidity and capitalisation.
|NATIONAL SCALE RATINGS HISTORY|
|Initial/ last rating (December 2016)|
|Claims paying ability: BBB+(BW)|
|Sector Head: Insurance Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2016
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; and c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
Export Credit Insurance and Guarantee Company (Botswana) (Pty) 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 Export Credit Insurance and Guarantee Company (Botswana) (Pty) Limited with no contestation of the rating.
The information received from Export Credit Insurance and Guarantee Company (Botswana) (Pty) Limited and other reliable third parties to accord the credit rating included:
- The audited annual financial statements to 30 June 2016
- Four years of comparative audited numbers
- Unaudited year to date results to 31 August 2016
- Budgeted financial statements to 30 June 2017
- Statutory Annual Return to 31 December 2016
- 2017 reinsurance cover notes
- Statutory annual returns to 30 June 2016
- Other related documents.
The rating above were 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
|Assets||The items on the balance sheet of the insurer which show the book value of property owned. Under regulations, not all property or other resources may be admitted in the statement of the insurer. This gives rise to the term ‘non-admitted assets.’|
|Balance Sheet||An accounting term which refers to a listing of the assets, liabilities, and surplus of a company or individual as of a specific date.|
|Capacity||The largest amount of insurance or reinsurance available from a company. In a broader sense, it can refer to the largest amount of insurance or reinsurance available in the marketplace.|
|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 to agents and brokers.|
|Insurer||The party to the insurance contract whom promises to pay losses or benefits. Also, any corporation engaged primarily in the business of furnishing insurance to the public.|
|Interest||Money paid for the use of money.|
|Liquidity||The ability of an insurer to convert its assets into cash to pay claims if necessary.|
|Loss Ratio||The ratio of claims to premiums. It may be calculated in several different ways, using paid premiums or earned premiums, and using paid claims with or without changes in claim reserves and with or without changes in active life reserves.|
|Policy||The legal document issued by the company to the policyholder, which outlines the conditions and terms of the insurance also called the policy contract or the contract.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|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.|
|Reserve||An amount representing actual or potential liabilities kept by an insurer to cover debts to policyholders.|
|Retention||The net amount of risk the ceding company keeps for its own account|
|Risk||Uncertainty as to the outcome of an event when two or more possibilities exist.|
|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.|
For a detailed glossary of terms please click here
GCR accords Export Credit Insurance and Guarantee Company (Botswana) (Pty) Limited a rating of BBB+(BW); Outlook Stable.