Announcements Insurance Rating Alerts

GCR affirms CGIC’s national scale financial strength rating of AA+(ZA); Outlook Stable

Rating Action

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’.

Rating Rationale

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.

Outlook Statement

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.

Rating Triggers

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.

Analytical Contacts

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

Ratings History

CGIC

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

Risk score
Operating environment 16.25
Country risk score 7.50
Sector risk score 8.75
Business profile (1.25)
Competitive position (0.25)
Premium diversification (1.00)
Management and governance 0.00
Financial profile 2.00
Earnings 0.75
Capitalisation 0.25
Liquidity 1.00
Comparative profile 1.00
Group support 1.00
Peer analysis 0.00
Total Score 18.00

Glossary

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.
image_pdfPDF View


ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK:HTTP://GCRRATINGS.COM. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT WWW.GCRRATINGS.COM/RATING_INFORMATION. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR's CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THIS SITE.

CREDIT RATINGS ISSUED AND RESEARCH PUBLICATIONS PUBLISHED BY GCR, ARE GCR’S OPINIONS, AS AT THE DATE OF ISSUE OR PUBLICATION THEREOF, OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. GCR DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL AND/OR FINANCIAL OBLIGATIONS AS THEY BECOME DUE. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: FRAUD, MARKET LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND GCR’S OPINIONS INCLUDED IN GCR’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS AND GCR’S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND GCR’S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL OR HOLD PARTICULAR SECURITIES. NEITHER GCR’S CREDIT RATINGS, NOR ITS PUBLICATIONS, COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. GCR ISSUES ITS CREDIT RATINGS AND PUBLISHES GCR’S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING OR SALE.

Copyright © 2021 GCR INFORMATION PUBLISHED BY GCR MAY NOT BE COPIED OR OTHERWISE REPRODUCED OR DISCLOSED, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT GCR’S PRIOR WRITTEN CONSENT. Credit ratings are solicited by, or on behalf of, the issuer of the instrument in respect of which the rating is issued, and GCR is compensated for the provision of these ratings. Information sources used to prepare the ratings are set out in each credit rating report and/or rating notification and include the following: parties involved in the ratings and public information. All information used to prepare the ratings is obtained by GCR from sources reasonably believed by it to be accurate and reliable. Although GCR will at all times use its best efforts and practices to ensure that the information it relies on is accurate at the time, GCR does not provide any warranty in respect of, nor is it otherwise responsible for, the accurateness of such information.GCR adopts all reasonable measures to ensure that the information it uses in assigning a credit rating is of sufficient quality and that such information is obtained from sources that GCR, acting reasonably, considers to be reliable, including, when appropriate, independent third-party sources. However, GCR cannot in every instance independently verify or validate information received in the rating process. Under no circumstances shall GCR have any liability to any person or entity for (a) any loss or damage suffered by such person or entity caused by, resulting from, or relating to, any error made by GCR, whether negligently (including gross negligence) or otherwise, or other circumstance or contingency outside the control of GCR or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits) suffered by such person or entity, as a result of the use of or inability to use any such information. The ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained in each credit rating report and/or rating notification are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. Each user of the information contained in each credit rating report and/or rating notification must make its own study and evaluation of each security it may consider purchasing, holding or selling. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY GCR IN ANY FORM OR MANNER WHATSOEVER.