Announcements Insurance Rating Alerts

GCR affirms Cell Insurance Company Limited’s national scale financial strength rating of BBB+(ZW); Outlook Stable

Rating Action

Johannesburg, 20 December 2019 – GCR Ratings (“GCR”) has affirmed Cell Insurance Company Limited’s (“Cell”) national scale financial strength (formerly claims paying ability) rating of BBB+(ZW), with a Stable Outlook.

Rated Entity / Issue Rating class Rating scale Rating Outlook/Watch
Cell Insurance Company Limited Financial strength National BBB+(ZW) Stable Outlook

GCR announced that it had released new criteria for rating insurance companies in May 2019. Consequently, the rating for Cell was placed ‘Under Criteria Observation’. GCR finalised the review for Cell under the released Criteria for Rating Insurance Companies, May 2019. As a result, the rating for Cell has been reviewed in line with the new methodology and subsequently removed from ‘Under Criteria Observation’.

Rating Rationale

Cell’s national scale financial strength rating reflects the insurer’s strong liquidity and adequate capitalisation, which are partially diluted by a comparatively weak business profile.

Liquidity is viewed to be strong, underpinned by a relatively sizeable investment portfolio and conservative asset allocation. Accordingly, stressed financial asset coverage of net technical liabilities and operational requirements equated to 3.2x and 16 months respectively at FY18. GCR expects liquidity strength to be preserved within the current range, albeit with asset allocation likely to shift to value preserving assets, given uncertainties in the operating environment. Furthermore, the financial profile is supported by adequate risk adjusted capitalisation, albeit note is taken of the comparatively low capital base and the reduction thereof post year-end as a result of the ongoing local currency devaluation.

Earnings is viewed to be intermediate, impeded by repeated underwriting deficits, coupled with volatility, over the review period. While underwriting profitability rebounded in FY17 (13%; five year average: -15%), it was not sustained in FY18 (-2%) as the loss ratio reverted to historical levels (FY18: 59% vs. FY17: 34%) on the back of higher motor claims (albeit systematic) due to increased imported spares costs. Going forward, management’s ability to achieve and sustain underwriting profitability in line with growth targets represents a key rating consideration over the outlook horizon.

The insurer reflects an intermediate market position with a market share of 7.9% in FY18, supported by its market leading position in insuring mining risks. Furthermore, the specialised nature of its business model and captive revenue from shareholders with critical mass in the power industry provides revenue stability, which underpins market share resilience. This notwithstanding, the insurer’s business profile is moderated by limited premium diversification. In this regard, one line of business contributes materially to net premiums, exacerbated by inherent policyholder concentration. The single largest and top five policyholders accounted for 37% and 80% of gross premiums respectively in FY18.

Outlook Statement

The Stable Outlook reflects expectations that the financial profile will continue to be supported by strong liquidity and adequate capitalisation, while the business profile is not expected to change materially over the outlook horizon.

Rating Triggers

Positive rating movement could develop from a sustained improvement in earnings while maintaining risk adjusted capitalisation and liquidity at current levels. Conversely, downward rating action could follow a weakening in earnings below expectations, and/or a sustained deterioration in risk adjusted capitalisation.

Analytical Contacts

Primary analyst Godfrey Chingono Deputy Sector Head: Insurance Ratings
Johannesburg, ZA GodfreyC@GCRratings.com +27 11 784 1771
Secondary analyst Siyuan Lu Associate Analyst
Johannesburg, ZA SiyuanL@GCRratings.com +27 11 784 1771
Committee chair Yvonne Mujuru Sector Head: Insurance Ratings
Johannesburg, ZA YMujuru@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
Jurisdictional supplement for Criteria
GCR Ratings Scales, Symbols & Definitions, May 2019
GCR Country Risk Scores, June 2019
GCR Insurance Sector Risk Scores, December 2019

Ratings History

Rating class Review Rating scale Rating Outlook/Watch Date
Claims paying ability Initial National BBB+(ZW) Stable February 2019
Last National BBB+(ZW) Stable February 2019

Risk Score Summary

Risk scores Cell Insurance Company Limited
Operating environment 3.25
Country risk score 0.00
Sector risk score 3.25
Business profile (0.75)
Competitive position 0.25
Premium diversification (1.00)
Management and governance 0.00
Financial profile 1.00
Earnings (0.75)
Capitalisation 0.25
Liquidity 1.50
Comparative profile 0.00
Group support 0.00
Government support 0.00
Peer analysis 0.00
Total Score 3.50

Glossary

Capitalisation The provision of capital for a company, or the conversion of income or assets into capital.
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.
Premium The price of insurance protection for a specified risk for a specified period of time.
Rating Horizon The rating outlook period
Rating Outlook See GCR Rating Scales, Symbols and Definitions.
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.
Retention The net amount of risk the ceding company keeps for its own account.
Risk The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.
Technical Liabilities The sum of Net UPR and Net OCR IBNR.
Underwriting Margin Measures efficiency of underwriting and expense management processes.
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.

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 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.

The credit rating has been disclosed to Cell Insurance Company Limited. 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.

Cell Insurance Company Limited participated in the rating process via face-to-face 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 Cell Insurance Company Limited and other reliable third parties to accord the credit rating included:

  • The audited financial results up to 31 December 2018
  • Four years of comparative audited numbers to 31 December
  • Unaudited interim results up to 31 July 2019
  • Budgeted financial statements to 31 December 2019
  • Other related documents.


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