Johannesburg, 21st November 2019 – GCR Ratings (“GCR”) has affirmed Credit Guarantee Insurance Corporation of Africa Limited’s (“CGIC”) national scale financial strength (formerly claims paying ability) rating of AA+(ZA), Stable Outlook.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|Credit Guarantee Insurance Corporation of Africa 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 CGIC was placed ‘Under Criteria Observation’. GCR finalised the review for CGIC under the released Criteria for Rating Insurance Companies, May 2019. As a result, the rating has been reviewed in line with the new methodology and subsequently removed from ‘Under Criteria Observation’.
CGIC’s national scale financial strength rating is underpinned by strong liquidity, coupled with sound earnings and capitalisation. These strengths are somewhat offset by limited premium diversification given the mono-line business model and single country premium concentration. The overall business profile factors in the insurer’s market leading position in trade credit insurance and specialised business model, where CGIC is able to defend and grow its market share in a sustainable manner despite challenging economic conditions, while noting moderate market share within the context of the broader South African short term insurance industry. Furthermore, the rating also benefits from implied group support from its majority parent, Old Mutual Insure Limited, and the broader Old Mutual Limited Group.
The low risk investment portfolio underpins a strong liquidity profile. The investment portfolio is largely comprised of cash and equivalents (FY18: R527m, R1.5bn including highly liquid money market investments), while stressed asset coverage of policyholder liabilities registered at a healthy 2.2x at FY18. The investment strategy is unlikely to change going forward, and should cash generative capacity remain solid, liquidity is expected to be sustained at strong levels over the rating horizon.
Earnings have been well managed, with sound cumulative net profitability recorded over the review period (five year average return on revenue: 14.4%). Despite ongoing economic strain, the insurer’s underwriting margins have been largely positive, with cost efficiencies absorbing recent elevation in the claims ratio (three year average: 79% vs prior three year average: 66%). Nonetheless, the high interlinkage with economic conditions and sectoral cycles induces a degree of underwriting performance volatility, tempering the earnings assessment somewhat. Going forward, underwriting margins are expected to be constrained, as low growth and persistent economic pressures are likely to see the claims ratio remain at elevated levels, while ongoing cost efficiencies (albeit to a lesser extent) may continue to provide some earnings support.
Capitalisation is viewed to be sound, with Solvency Capital Requirement (“SCR”) coverage managed within a stable range. Risk adjusted capitalisation strengthened in FY18 on the back of an asset reallocation exercise that resulted in a higher proportion of investments being held in cash and equivalent securities. The insurer’s demonstrated record of sound earnings generation is expected to support continued capital build, while the expected management of SCR at the upper end of the insurer’s target range is likely to support medium term capitalisation strength.
CGIC’s overall competitive positioning is viewed to be moderate. The insurer is the leading provider of trade credit insurance in the South African market, and its entrenched position, coupled with revenue scale, has supported sound through the cycle earnings, which is favourably viewed relative to peers. Furthermore, the insurer is viewed to be well positioned to withstand competitive pressures and sustain healthy profit margins, with its specialised business model (including systems and technical expertise) viewed to be difficult to successfully replicate. These strengths are, however, offset by a moderate overall market share, with the single product focus limiting premium scale in the context of the South African short term insurance industry. The insurer is expected to remain the market leader in trade credit insurance, although strategic de-risking is likely to see subdued premium growth going forward.
Premium diversification is constrained by the mono-line trade credit offering and geographic concentration to the challenging South African economy. This is, however, partially offset by fairly diversified sector exposures, as the insurer is able to leverage off its market leading position to generate meaningful business from multiple sectors of the market, while also noting more granular exposure to underlying buyers.
The insurer’s stand-alone credit profile derives upliftment from implied shareholder support, underpinned by CGIC’s success in achieving group objectives and increased integration in terms of capital and risk management frameworks and reinsurance arrangements.
The Stable Outlook reflects expectations for sustained strength in CGIC’s credit profile, supported by strong liquidity and well managed earnings and capitalisation, and a stable business profile.
Upward movement of the stand-alone credit profile is unlikely over the medium term, in light of prevailing operating and economic environment pressures, which could negatively impact earnings and capitalisation (given the sensitivities to the credit cycle). Conversely, a prolonged deterioration in earnings capacity resulting in risk adjusted capital tracking below expectations may result in negative rating action. Furthermore, negative rating action may result from a change in the strategic importance to the shareholders.
|Primary analyst||Vinay Nagar||Senior Insurance Analyst|
|Johannesburg, ZA||Vinay@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, 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||November 2000|
|Last||National||AA+(ZA)||Stable Outlook||July 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 Credit Guarantee Insurance Corporation of Africa 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.
Credit Guarantee Insurance Corporation of Africa 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 Credit Guarantee Insurance Corporation of Africa 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 31 October 2019; and
- Other relevant documents.