Johannesburg, 14 July 2020 – GCR Ratings (“GCR”) has affirmed Bryte Insurance Company Limited’s (“Bryte Insurance”) national scale financial strength rating of A(ZA), with a Negative Outlook.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|Bryte Insurance Company Limited||Financial strength||National||AZA)||Negative Outlook|
The rating action follows a reduction in the South African country and insurance sector risk assessments.
The South African country risk score was lowered to 7.0 from 7.5 previously, in a market alert released on the 27th May 2020. Click here to access the link. On 4th June 2020, the South African Insurance sector risk score was also lowered to 8.0 from 8.75 previously. Click here to access link.
Combined, the above country and sector risk scores comprise the operating environment score, which is a key input into GCR’s ratings.
Bryte Insurance’s national scale financial strength rating is supported by moderately strong risk adjusted capitalisation and liquidity, although these measures are susceptible to persistent earnings pressure in core operations. The business profile is viewed to be limited given the weak earnings history delivered by the insurance portfolio. The Negative Outlook reflects potential for lower than expected earnings performance, compounded by COVID-19 pandemic risks, to further moderate the risk adjusted capitalisation assessment going forward.
Bryte Insurance has reflected a weak earnings history, although restructuring and portfolio corrective actions have seen improved attritional loss experience. In this regard, the three year average underwriting margin equated to -3% versus an average of -11% in FY15 and FY16, while the corresponding return on NEP registered at 6% compared to an average break even result previously. Near term earnings are, however, expected to be adversely impacted by the COVID-19 pandemic, given downside risks associated with elevated claims and pressure on premium volumes, as well as the lower interest rate environment. As a result, the rating is sensitive to a weakening in earnings beyond the base case stress scenario.
The reduction in net earnings saw risk adjusted capitalisation lower at FY19, with Solvency Capital Requirement (“SCR”) coverage equating to 1.41x from 1.55x at FY18, and was further impacted by fair value losses in 1Q F20. Possible investment market corrections are expected to be countered by underwriting pressures in 2H F20, potentially resulting in SCR coverage remaining at lower levels, although likely to be near the bottom of management’s target band of 1.2x to 1.4x after factoring in COVID-19 pandemic related base case stresses. Liquidity is moderately strong, with stressed financial asset coverage of net technical liabilities and operational expenses equating to 1.6x and 9 months at FY19 (FY18: 1.8x and 9 months). High operational cash flow generation in 1H F20, together with the current cash retention strategy, are expected to sustain liquidity at or above FY19 levels, despite potential high cash outflows later in the year.
Bryte Insurance’s competitive position is intermediate, with a market share of 3% and relative market share of around 2.5x, while premiums are fairly diversified across lines of business. However, the overall assessment of the business profile considers geographic concentration to South Africa and the poor earnings history, with the size and composition of the portfolio not contributing to a commensurate level of underwriting performance and stability.
GCR sees high uncertainty regarding the development of earnings in 2H F20, particularly considering developments in terms of potential business interruption claims, economic and investment market performance. The Negative Outlook therefore considers potential for earnings to be weaker than the base case scenario, which would have an adverse knock on effect, particularly on risk adjusted capitalisation. The rating is, therefore, likely to be downgraded if SCR cover reduces below 1.25x or if normalised earnings are weaker than expected.
The Outlook could revert to Stable if GCR sees potential for normalisation of earnings within an expected range and a high likelihood of risk adjusted capitalisation being maintained above 1.25x over the medium term. Positive rating action could follow over the longer term if a positive earnings trend can be established, while maintaining current balance sheet metrics. The rating would likely be downgraded if capitalisation and/or liquidity deteriorate below expectations.
|Primary analyst||Susan Hawthorne||Senior Insurance Analyst|
|Johannesburg, ZA||SusanH@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, May 2019|
|Criteria for Rating Insurance Companies, May 2019|
|GCR Ratings Scales, Symbols & Definitions, May 2019|
|GCR Country Risk Scores, May 2020|
|GCR Insurance Sector Risk Scores, June 2020|
Bryte Insurance Company Liimited
|Rating class||Review||Rating scale||Rating class||Outlook/Watch||Date|
|Financial strength||Initial*||National||AA(ZA)||Stable Outlook||July 2001|
|Last||National||A(ZA)||Stable Outlook||October 2019|
*Formerly claims paying ability.
Risk Score Summary
|Rating Components & Factors||Risk score|
|Country risk score||7.00|
|Sector risk score||8.00|
|Management and governance||0.00|
|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.|
|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.|
|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.|
|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.|
|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.|
|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.|
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 party. 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 virtual management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The information received from the rated entity and other reliable third parties to accord the credit rating included:
- Audited annual financial statements to 31 December 2019;
- Four years of comparative audited financial statements to 31 December;
- Unaudited management accounts to 31 March 2020;
- Annual and Quarterly quantitative statutory returns at 31 December 2019 and 31 March 2020; and
- Other relevant documents