Johannesburg, 23 December 2016 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Botswana Insurance Company Limited of AA-(BW), with the outlook accorded as Stable. Furthermore, Global Credit Ratings has affirmed the international scale claims paying ability rating assigned to Botswana Insurance Company Limited of BBB-, with the outlook accorded as Stable. The ratings are valid until November 2017.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Botswana Insurance Company Limited (“BIC”) based on the following key criteria:
BIC’s rating receives substantial support from very strong capitalisation. In this respect, the insurer’s capital adequacy is viewed to be very strong, reflecting a sizeable capital base, coupled with a comparatively low risk retention model. This has supported the international solvency margin at very high levels (FYE15: 164%; FYE14: 163%). Similarly, market risks are well contained, supporting risk adjusted capitalisation at very strong levels, which are expected to be sustained over the rating horizon. Note is, however, taken of the potential for high dividend requirements at shareholder level to reduce capital buffers over the medium term.
BIC receives further rating support from a very strong market position in the short term industry. The company held a market share of 21% in FY15 (FY14: 22%), underpinned by strong brand recognition and well entrenched relationships with clients. While competitive pressures remain, brand elevation (through the shareholdings of Sanlam and Botswana Insurance Holdings Limited) is expected to increase business retention and premium development in retail and specialised lines. In this respect, competitive positioning is expected to be maintained at very strong levels.
Earnings capacity is viewed to be moderately strong. BIC recorded an average underwriting margin of 7% over the past two years (compared to 18% averaged over the prior four years), with the margin expected to range between 4% and 7% over the rating horizon. Margins, while remaining moderately strong, have undergone compression due to an increasing loss ratio (largely a function of soft rates and portfolio churn in motor and property portfolios respectively) and, to a lesser degree, a rising expense ratio. Similar pressures are expected to persist over the outlook horizon. Reinsurance arrangements are placed with well rated entities, with the maximum exposure per risk and event equating to 0.4% of FYE15 capital.
BIC is expected to reflect intermediate liquidity over the rating horizon (lowering from previously moderately strong levels), representing a relative rating weakness. Coverage of net technical provisions by cash and tradable assets reduced to 1.2x over the past two years, versus 1.4x averaged prior to that. Going forward, the metric is likely to measure around 1x, as continued sizeable dividend payments and a reduction in operational cash flow generation limit the build-up of liquid assets. Note is taken of the potential for liquidity to weaken below expectations (should operating cash flows fall short of budget), and as such liquidity management represents a key rating consideration over the rating horizon.
BIC’s revenue mix is viewed to offer the insurer a fair degree of earnings diversification. Earnings are spread almost equally across three key lines, which display sound gross premium scale. Product risk is expected to improve reflecting favourable offsetting movements in property and motor portfolios, coupled with the addition of diverse retail risks, which facilitate higher premium retention. In this respect, earnings diversification could improve over the medium term.
BIC’s international scale rating is constrained by Botswana’s sovereign rating of A-, given that the insurer’s assets are locally domiciled, and the majority of its revenue is locally derived.
The national scale rating currently matches the national scale ceiling applicable to entities operating within the Botswana short term insurance industry. Downward rating pressure could emanate from a reduction in liquidity metrics, sustained weakening in profitability and a material reduction in capitalisation.
|NATIONAL SCALE RATINGS HISTORY||INTERNATIONAL SCALE RATINGS HISTORY|
|Initial rating (December 2009)||Initial rating (November 2013)|
|Claims paying ability: A+BW)||Claims paying ability: BBB-|
|Outlook: Stable||Outlook: Stable|
|Last rating (November 2015)||Last rating (November 2015)|
|Claims paying ability: AA-(BW)||Claims paying ability: BBB-|
|Outlook: Stable||Outlook: Stable|
|Sector Head: Insurance Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2016
Botswana Insurance Company Limited rating reports, 2009-2015
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 ratings were based solely on the merits of the rated entity, security or financial instrument being rated; c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
Botswana 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 ratings have been disclosed to Botswana Insurance Company Limited with no contestation of the rating.
The information received from Botswana Insurance Company Limited and other reliable third parties to accord the credit rating included:
- The audited annual financial statements to December 2015
- 4 years of comparative audited numbers
- Unaudited year to date results to 31 October 2016
- Budgeted financial statements to December 2016
- Statutory Annual Return to 31 December 2015
- 2016 reinsurance cover notes
- Other related documents.
The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.
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 affirms Botswana Insurance Company Limited’s rating of AA-(BW); Outlook Stable.