Johannesburg, 31 March 2022 – GCR Ratings (“GCR”) has affirmed Assurances Réassurances Omnibranches’ (“ARO”) national scale financial strength rating of AA(MG); Outlook Stable.
|Rated entity / issue||Rating class||Rating scale||Rating||Outlook/Watch|
|Assurances Réassurances Omnibranches||Financial strength||National||AA(MG)||Stable Outlook|
The rating for ARO reflects the entity’s resilient earnings, which supports the financial profile within a strong range. This is well supplemented by an entrenched market position, despite the underwriter’s intermediate levels of premium diversification, along with ongoing changes in management and disruption from the COVID-19 pandemic.
Review year operating and net profit strongly rebounded to MGA10bn and MGA10.9bn respectively (FY19: MGA3.9bn and MGA6.6bn), underpinned by a 27% reduction in net claims payments following the implementation of a portfolio cleaning exercise and strict underwriting policies. Resultantly, total outgo reduced by 17% to MGA69.5bn (FY19: MGA84bn). This, coupled with a strong 74% growth in investment income, was more than enough to mitigate the impact on profitability of a further 31% compression in the net earned premium base. Although the momentum in investment income may not be sustained, ARO is likely to maintain a leaner operating cost structure, driven by claims containment measures that have been implemented. Therefore, healthy cross-cycle earnings are expected to persist, with operating margin and net return on revenue metrics likely to stabilise around 13% and 16% respectively over the rating outlook.
ARO’s risk adjusted capitalisation remains very strong, supported by a healthy internal capital generation and retention. In this respect, capital grew by 4% in FY20 to MGA283.6bn, which is viewed to be large enough to cater for various risk exposures within the structure. This is evidenced by a GCR Capital Adequacy Ratio (“CAR”) consistently above 2.5x, while the statutory solvency ratio was maintained well above minimum regulatory levels at 10.2x (FY19: 10.7x). However, note is taken that capitalisation and liquidity assessments are sensitive to elevated exposures to risky assets, such as real estate and equity investments which account for at least 50% of the insurer’s investment portfolio. The cash and stress financial assets coverage of net technical liabilities is notably limited around 1.0x, despite a sizeable investment portfolio of MGA507.3bn (FY19: MGA468.5bn). Going forward, very strong capitalisation and moderate liquidity levels are expected, supported by the earning potential of the entity.
The business profile is viewed to be credit positive, as the insurer controls a very strong 58% of the local market gross premiums, despite intensifying competition and the implementation of a portfolio cleaning exercise. However, ARO’s business mix remains characterised by concentrations, notably to property risks (representing 38% and 71% of gross and net written premiums respectively in FY20) and to policyholders (with the largest accounting for 30% of gross premiums in the review year). While management is undertaking marketing initiatives aimed at stimulating ARO’s retail customer base, we also expect a positive longer-term impact from the new insurance law on the entity’s business profile.
The management and governance assessment took into account the continuous turnover of key employees within the company, partly due to the execution of its succession plan. In GCR’s opinion, this restructuring negatively impacted management information systems and transparency, exacerbated by the disruptions of Covid -19. Given the persisting nature of these challenges, the underwriter’s ability to efficiently bed down the planned restructuring exercise and deliver on targets is a key rating consideration over the medium term.
The Stable Outlook reflects expectations that healthy earnings will be maintained, supporting the entity’s capitalisation and liquidity within the current range, although these factors exhibit a high sensitivity to asset quality. In the meantime, ARO’s business profile is likely to remain relatively similar.
Upward rating action may follow a material strengthening in liquidity. This should be supported by an improved management and governance assessment. Conversely, negative rating pressure may stem from a worsening in asset quality, which materially impacts on liquidity and risk adjusted capitalisation. Persisting challenges in management and governance could also trigger negative rating action.
|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, January 2022|
|Criteria for Rating Insurance Companies, May 2019|
|GCR Ratings Scales, Symbols & Definitions, May 2019|
|GCR Country Risk Scores, December 2021|
|GCR Insurance Sector Risk Scores, December 2021|
Assurances Réassurances Omnibranches
|Rating class||Review||Rating scale||Rating||Outlook/Watch||Date|
|Claims paying ability||Initial||National||AA(MG)||Stable||July 2006|
|Financial strength||Last||National||AA(MG)||Stable||February 2022|
Risk score summary
|Rating components and factors||Risk scores|
|Country risk score||2.25|
|Sector risk score||2.00|
|Management and governance||(0.25)|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|Rating Horizon||The rating outlook period|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|Recovery||The action or process of regaining possession or control of something lost. To recoup losses.|
|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.|
|Securities||Various instruments used in the capital market to raise funds.|
|Security||One of various instruments used in the capital market to raise funds.|
|Senior||A security that has a higher repayment priority than junior securities.|
|Spread||The interest rate that is paid in addition to the reference rate for debt securities.|
|Statutory||Required by or having to do with law or statute.|
|Valuation||An assessment of the property value, with the value being compared to similar properties in the area.|
SALIENT POINTS OF ACCORDED RATING
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 written correspondence. Furthermore, the quality of information received was considered fairly adequate and has been independently verified where possible.
The information received from the entities and other reliable third parties to accord the credit rating included:
- Audited financial results as at 31 December 2020;
- Four years of comparative audited financial statements to 31 December
- Annual returns for 2020;
- Reinsurance cover notes for 2021; and
- Other relevant documents.