Johannesburg, 29 July 2021 – GCR Ratings (“GCR”) has affirmed Bryte Insurance Company Limited’s (“Bryte Insurance”) national scale financial strength rating of A(ZA), with the Outlook revised to Stable from Negative.
|Rated entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|Bryte Insurance Company Limited||Financial strength||National||A(ZA)||Stable Outlook|
Bryte Insurance’s rating balances moderately strong risk adjusted capitalisation and liquidity with a limited business profile and weak earnings history. The Outlook has been revised to Stable from Negative, reflecting our expectations of improved cross cycle earnings from FY21 and a strengthening trend in risk adjusted capitalisation.
COVID-19 related claims exerted significant strain on underwriting and net profitability in FY20, with the underwriting margin registering at -11% and the net margin at -2% (FY19: -3% and 3%). Earnings performance has nevertheless improved in 1H F21 following strong growth in the corporate property and specialist portfolios, with enhanced scale efficiencies offsetting higher than expected claims experience. As a result, we expect the normalised cross cycle underwriting margin to range between -2% and +2%, after building in some stress for potentially higher attritional claims and slower growth in 2H F21. Return on net revenue is expected to be between 3% and 7% depending on investment market performance, aligning with the pre COVID-19 three-year average.
Weak earnings caused risk adjusted capitalisation to reduce in line with expectations, with Solvency Capital Requirement (“SCR”) coverage dropping to the lower end of the targeted band, equating to 1.2x at FY20 (FY19: 1.4x). However, improved earnings supported a strengthening in SCR cover to 1.3x at 5M F21, and we expect a further incremental increase over the next six months on the back of positive net earnings and reduced reinsurance counterparty risk charges associated with COVID-19 related reserving. SCR coverage is therefore likely to increase and be maintained at around 1.4x over the next 12 to 18 months.
Liquidity metrics were maintained at moderately strong levels, with coverage of net technical liabilities and operational expenses registering at an unchanged 1.6x and 9 months at FY20 respectively. Going forward, we expect liquidity to be maintained within a similar range given consistency in investment allocations, although the assessment is sensitive to near term dilution after settlement of large contingent business interruption (“CBI”) claims provisions in 2H F21.
Bryte Insurance’s competitive position is viewed to be intermediate, with a market share of 3% and relative market share of around 2.4x, while premiums are fairly diversified across lines of business. However, the overall assessment of the business profile considers geographic concentration to South Africa and poor earnings history, with the size and composition of the portfolio not contributing to a commensurate level of underwriting performance and stability.
GCR expects net earnings to continue to register at improved levels, supporting SCR coverage within the mid to upper end of the target range and liquidity coverage above 1.5x. The business profile is expected to remain credit negative, although the assessment could improve over the longer term on the back of continued strong growth and a sustained track record of more competitive earnings.
Upward rating movement could follow over the longer term if a positive underwriting performance track record can be demonstrated, supporting a strengthening in risk adjusted capitalisation and liquidity. In contrast, the rating is sensitive to a weakening in earnings stemming from higher than expected CBI claims estimates or attritional loss experience, especially if this dilutes risk adjusted capitalisation below current levels. Furthermore, a weakening in liquidity could result in the rating being downgraded.
|Primary analyst||Susan Hawthorne||Senior Analyst: Insurance Ratings|
|Johannesburg, ZA||SusanH@GCRratings.com||+27 11 784 1771|
|Committee chair||Tichaona Nyakudya||Senior Analyst : Insurance Ratings|
|Johannesburg, ZA||TichaonaN@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, July 2021|
|GCR Insurance Sector Risk Scores, April 2021|
Bryte Insurance Company Limited
|Rating class||Review||Rating scale||Rating||Outlook/Watch||Date|
|Financial strength||Initial*||National||AA(ZA)||Stable Outlook||July 2001|
|Last||National||A(ZA)||Negative Outlook||July 2020|
*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 RATINGS
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 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 2020;
- Four years of comparative audited financial statements to 31 December;
- Budgeted financial statements to 31 December 2021;
- Unaudited management accounts to 30 June 2021;
- Other relevant documents