Johannesburg, 14th November 2019 – GCR Ratings (“GCR”) has affirmed Centriq Insurance Company Limited’s (“Centriq”) national scale financial strength (formerly claims paying ability) rating of AA-(ZA), Stable Outlook.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|Centriq Insurance Company Limited||Financial strength||National||AA-(ZA)||Stable Outlook|
GCR announced that it had released new criteria for rating insurance companies in May 2019. Consequently, the rating for Centriq was placed ‘Under Criteria Observation’. GCR finalised the review for Centriq under the released Criteria for Rating Insurance Companies, May 2019. As a result, the rating for Centriq has been reviewed in line with the new methodology and subsequently removed from ‘Under Criteria Observation’.
Centriq’s national scale financial strength rating reflects a high level of stability within its credit profile, driven by sound and consistent earnings and well managed capitalisation and liquidity. Furthermore, the business profile is viewed to be moderate, with an entrenched market position and speciality business model providing revenue consistency, although the moderate market share and premium concentration to South Africa does weigh down the business profile somewhat. The insurer is expected to sustain a high level of credit strength over the medium term, underpinned by a consistent business model, supportive of ongoing rating factor strength.
Earnings are viewed to be strong, with a high level of bottom line stability evidenced over the review period (five year average ROaE: 21.5%). This is supported by a business model that benefits from diverse income streams, noting the fairly stable nature of fee based income which serves to moderate through the cycle earnings volatility. The insurer is expected to sustain a strong ROaE margin going forward, supported by stable and well managed fee based income.
Capitalisation is viewed to be well managed and neutral to the rating. In this regard, Centriq’s capital assessment takes cognisance of the idiosyncratic features that impacts its risk adjusted capitalisation. This relates to the regulatory treatment of excess capital at cell level, where capital is not viewed to be fungible between cells. As such, Solvency Capital Requirement (“SCR”) coverage is likely to register at around 1.1x, with GCR viewing risk adjusted capitalisation to be well managed, at both the cell and promotor level, also noting financial flexibility provided from the parent. This, coupled with continued dividend payments (which will limit excess capital build at promotor level), is expected to support intermediate medium term capital strength.
Moderately strong liquidity is supported by strong operational cash flow generation capacity and a fairly low risk investment portfolio, with the insurer reporting consistently sound liquidity metrics. The investment strategy is not expected to change going forward. This, combined with persistently strong earnings potential is expected to uphold moderately liquidity over the rating horizon.
Based on the insurer’s market share and revenue scale and stability, competitive positioning is viewed to be moderate. Market share has been supported by sound premium growth over the past four years, albeit large mining rehabilitation business has resulted in atypically high growth in recent years (FY18: GWP growth of 45%; FY17: 16%; prior three year Compound Annual Growth Rate: 4%). Overall, competitive positioning is likely to be sustained at moderate levels, as revenue generation is expected to be supported by Centriq’s entrenched position within the cell captive market, coupled with sound growth potential across three business divisions (Underwriting Management Agency, Risk Finance and Affinity). Furthermore, the specialised business model is fairly difficult to replicate providing added support to the insurer’s competitive positioning strength. However, the assessment is tempered by ongoing regulatory uncertainty in the cell captive space, and any changes in this regard could have a material impact on the insurer’s operations going forward, and will continue to be monitored.
The premium base is somewhat diversified, with established revenue streams from three business lines and moderately low product risk being offset by limited geographic exposure. Premium diversification is expected to remain somewhat diversified as the business mix is likely to remain unchanged, while limited exposure to other geographic regions is likely to constrain premium diversification over the medium term.
Centriq’s rating derives upliftment from parental support, given its strategic importance to the wider Santam group and risk management oversight from the parent.
The Stable Outlook reflects expected stability within Centriq’s credit profile, in view of strong and consistent earnings and well managed capitalisation and liquidity.
The rating could be upgraded should there be a strengthening in risk adjusted capitalisation, liquidity and overall business profile. Conversely, material deterioration in earnings that would negatively impact capitalisation and liquidity could result in negative rating action.
|Primary analyst||Vinay Nagar||Senior Insurance Analyst|
|Johannesburg, ZA||Vinay@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|
|GCR Ratings Scales, Symbols & Definitions, May 2019|
|GCR Country Risk Scores, June 2019|
|GCR Insurance Sector Risk Scores, November 2019|
|Rating class||Review||Rating scale||Rating||Outlook/Watch||Date|
|Claims paying ability||Initial||National||A(ZA)||Stable Outlook||March 2006|
|Last||National||AA-(ZA)||Stable Outlook||June 2018|
Risk Score Summary
|Country risk score||7.50|
|Sector risk score||8.75|
|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.|
|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.|
|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 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 Centriq 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.
Centriq Insurance Company Limited participated in the rating process via telephone conference, 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 Centriq Insurance Company Limited and other reliable third parties to accord the credit rating included:
- Audited financial statements to 31 December 2018;
- Four years of comparative audited financial statements to 31 December;
- Full year budgeted financial statements to 31 December 2019;
- Unaudited management accounts to 30 September 2019; and
- Other relevant documents.