Johannesburg, 20 February 2019– Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Assurances Réassurances Omnibranches of AA-(MG), with the outlook accorded as Stable. The rating is valid until November 2019.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to Assurances Réassurances Omnibranches (“ARO”) based on the following key factors:
ARO sustained a very strong competitive position over the review period, with the insurer having successfully defended its long-standing pole position in the domestic short-term and long-term insurance market, controlling a combined market share of 62% in FY17 (FY16: 63%). Looking ahead, GCR views ARO’s entrenched brand recognition, an extensive distribution network, and well-established relationships with clients as key factors underpinning the assessment of competitive position within a very strong range over the rating outlook.
Risk adjusted capitalisation remains robust, supported by the maintenance of a large capital base, which serves to offset elevated market exposure. Accordingly, the insurer consistently exceeded the regulatory capital requirement throughout the review period, with the statutory capital adequacy ratio (“CAR”) equating to 8.9x at FY17, (prior three-year average: 8.6x). Robust risk adjusted capitalisation metrics are likely to be sustained over the rating outlook, supported by a large capital base. Furthermore, treaty net deductibles per risk and event remain well contained relative to capital (largest exposure: 0.6% of FY17 capital), while material reinsurance partners evidence a strong level of counterparty strength.
Relative to the early years of the review period, ARO’s earnings capacity strengthened significantly to a moderately strong range over the last three years. This is largely a function of a higher earned premium base, along with relatively contained claims, supporting enhanced underwriting profitability. Resultantly, the underwriting margin averaged 18% over the last three years compared to an average of 1% recorded between FY13 and FY14. Going forward, GCR views the sustenance of a favourable claims pattern, coupled with the attainment of premium volume growth targets as key factors underpinning a possible strengthening in earnings capacity.
Liquidity metrics are considered sound, underpinned by a large liquid asset base, and are expected to measure within a similar range going forward. Accordingly, cash coverage of average monthly claims equated to a higher 55 months at FY17 (FY16: 46 months), while, cash coverage of net technical liabilities is deemed adequate, at a stable 0.5x at FY17, given the inclusion of long-term policyholders’ liabilities in technical provisions. Nevertheless, the quality of the insurer’s liquidity is adversely impacted by significant exposure to unrated institutions, even though some major counterparties are either linked to rated parents or have parent companies located in jurisdictions with high sovereign ratings.
The business mix remains skewed towards fire & property risks at gross level, although material premiums from other key portfolios served to diversify the revenue stream. Nevertheless, the net risk base is viewed to be well diversified, with four lines of business contributing significantly to total NWP in both FY16 and FY17.
Asset quality is considered intermediate, reflecting considerable exposure to market risk given that asset allocation remains skewed towards illiquid assets, including unlisted investments and a sizeable property portfolio. In response to potential risks posed by the insurer’s exposure to a limited local investment universe, management indicated that foreign currency premium receipts are invested in foreign private bonds and equity instruments. Asset quality is likely to remain intermediate over the rating horizon given management’s commitment to maintain the current asset allocation policy. Nevertheless, the insurer’s sizable capital base caters for a degree of potential volatility that could arise from exposure to high risk assets.
GCR views ARO’s stand-alone credit profile as deriving upliftment from the Malagasy government, given that it controls the majority of the insurer’s shareholding (73% at FY17).
ARO’s rating currently matches the national scale ceiling applicable to entities operating within the Madagascar short term insurance industry. As a result, upward movement of the rating may follow an assessment of country and industry risk factors. Conversely, downward rating pressure could emanate from sustained compression in profitability, a protracted decline in key solvency and credit protection metrics, and/or significant loss of market share.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (July 2006)|
|Claims paying ability: AA(MG)|
|Last rating (January 2018)|
|Claims paying ability: AA-(MG)|
|Primary Analyst||Committee Chairperson|
|Tichaona Nyakudya||Yvonne Mujuru|
|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 May 2018
Criteria for Rating Long Term Insurance Companies, updated May 2018
Assurances Réassurances Omnibranches rating reports, 2006-2018
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/RATING-SCALES-DEFINITIONS. 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.
Assurances Réassurances Omnibranches participated in the rating process via teleconference management meetings and/or 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 Assurances Réassurances Omnibranches.
The information received from Assurances Réassurances Omnibranches and other reliable third parties to accord the credit rating included:
- The audited annual financial statements to December 2017
- Four years of comparative audited financial statements
- Unaudited year to date results to 30 June 2018
- Budgeted financial statements to December 2018
- 2018 reinsurance cover notes
- 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.
|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.|
|Capital Adequacy||A measure of the adequacy of an entity’s capital resources in relation to its risks.|
|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.|
|Credit Rating||An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.|
|Distribution Channel||The method utilised by the insurance company to sell its products to policyholders.|
|Enterprise Risk Management||ERM refers to an integrated or holistic approach to managing risk across an organisation, using clearly articulated frameworks and processes controlled from board level.|
|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 Scale Rating (“ISR”)||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.|
|Intermediary||A third party in the sale and administration of insurance products.|
|Interest||Money paid for the use of money.|
|Investment Portfolio||A collection of investments held by an individual investor or financial institution.|
|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.|
|Market Risk||Volatility in the value of a security/asset due to movements in share prices, interest rates, currencies, commodities or wider economic factors.|
|National Scale Rating (“NSR”)||National Scale credit ratings express risk in relative rank order, which is to say they are ordinal measures of credit risk and are not predictive of a specific frequency of default or loss.|
|Policyholder||The person in actual possession of an insurance policy.|
|Portfolio||All of the insurer’s in-force policies and outstanding losses, with respect to described segments of its business.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Rating Horizon||The rating outlook period|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Risk Management||Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.|
|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.|
|Subordinated Debt||Debt that in the event of a default is repaid only after senior obligations have been repaid. It is higher risk than senior debt.|
|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 more detailed glossary of terms, please click here.
GCR affirms Assurances Réassurances Omnibranches’ rating of AA-(MG); Outlook Stable.