|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|Chubb Insurance South Africa Limited||Financial strength||National||AA(ZA)||Stable Outlook|
The rating action follows a reduction in the South African country and insurance sector risk assessments.
The South African country risk score was lowered to 7.0 from 7.5 previously, in a market alert released on the 27th May 2020. Click here to access the link. On 4th June 2020, the South African Insurance sector risk score was also lowered to 8.0 from 8.75 previously. Click here to access link.
Combined, the above country and sector risk scores comprise the operating environment score, which is a key input into GCR’s ratings.
Chubb SA’s national scale financial strength rating was affirmed with a Stable Outlook, supported by the insurer’s very strong financial profile, which is expected to be sustained despite a level of downside risk associated with the poor economic climate. The insurer’s low market share continues to limit the assessment of the business profile, while presence in certain higher risk regional markets results in enhanced geographic diversification but a slight downward moderation in the operating environment assessment. The rating derives uplift from implied parental support from Chubb INA International Holdings Limited (“the group”), evidenced by strong operational and technical support, coupled with brand alignment.
Chubb SA’s risk adjusted capitalisation registered within a strong range over the review period supported by limited exposures to insurance and market risk, coupled with strong internal capital generation. As such, the regulatory Solvency Capital Requirement (“SCR”) coverage registered at a higher 2.2x at FY19 (FY18: 1.7x). Going forward, risk adjusted capitalisation is expected to be maintained at a rating appropriate level supported by net earnings and contained dividend distributions, with sufficient tolerance to withstand a level of earnings compression associated with the challenging operating environment.
Liquidity has been maintained at strong levels, supported by conservative asset allocation with the investments being placed in liquid assets. As such, coverage of net technical liabilities by stressed cash assets has been maintained around 2x over the review period while operational cash coverage equated to a very high 53 months at FY19 (FY18: 49 months). The liquidity assessment incorporates a slight downward adjustment to cater for a potential moderation resulting from lower investment income, although liquidity is expected to register within a strong range.
Earnings have been sound over the review period supported by a competitive loss ratio and high commission recoveries attributed to the favourable reinsurance structure. In this regard, the five-year average underwriting margin equated to 16% (FY19: 20%; FY18: 23%). Earnings are further supported by investment income amounting to ZAR22m in FY19 (FY18: ZAR22.5m), and return on revenue registering at 29% (FY18: 33%). Going forward, cognisance is taken of uncertainties arising from the COVID-19 pandemic that could lead to a moderation in investment income. On the other hand, the insurer’s earnings are expected to be supported by high reinsurance protection against a potential increase in claims, sustaining underwriting profitability at a strengthened level.
The insurer’s limited business profile impacts the rating negatively. The low market position has been unchanged over the review period, reflected by a market share and relative market share of around 0.4% and 0.4x respectively, attributed to the insurer’s focus on niche pockets of property and speciality products and selective underwriting. This notwithstanding, the insurer’s business mix is well diversified with three lines of business contributing materially to revenue and enhanced by a level of geographic diversification. The business profile is likely to remain largely unchanged consistent with the insurer’s strict underwriting.
GCR expects cross cycle earnings to remain sound, while, risk adjusted capitalisation and liquidity are viewed to reflect sufficient buffers to withstand a level of moderation over the outlook horizon, after factoring in base case stresses associated with the poor economic outlook. The business profile is expected to remain stable, with the insurer expected to show a level of resilience to industry volume pressures given its target market and continued rates hardening across key portfolios.
The rating may be upgraded on an improvement in market position while maintaining strong risk adjusted capitalisation and liquidity. Conversely, we could lower the rating if investment coverage of technical liabilities reduces below 2x or SCR coverage below 1.75x. Furthermore, negative rating action could follow if earnings register below expectations over a sustained period.
|Primary analyst||Susan Hawthorne||Senior Analyst: Insurance Ratings|
|Johannesburg, ZA||SusanH@GCRratings.com||+27 11 784 1771|
|Secondary analyst||Linda Matavire||Analyst: Insurance Ratings|
|Johannesburg, ZA||LindaM@GCRratings.com||+27 11 784 1771|
|Committee chair||Matthew Pirnie||Group Head of Ratings|
|Johannesburg, ZA||MatthewP@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, May 2020|
|GCR Insurance Sector Risk Scores, July 2020|
Chubb Insurance South Africa Limited
|Rating class||Review||Rating scale||Rating class||Outlook/Watch||Date|
|Claims paying ability||Initial||National||A+(ZA)||Stable Outlook||August 2006|
|Financial Strength||Last||National||AA(ZA)||Stable Outlook||November 2019|
Risk score summary
|Rating Components and Factors||Risk score|
|Country risk score||6.75|
|Sector risk score||7.75|
|Management and governance||0.00|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Primary Market||The part of the capital markets that deals with the issuance of new securities.|
|Property||Movable or immovable asset.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|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.|
|Release||An agreement between the creditor and debtor, in terms of which the creditor release the debtor from its obligations.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Securities||Various instruments used in the capital market to raise funds.|
|Security||One of various instruments used in the capital market to raise funds.|
|Senior||A security that has a higher repayment priority than junior securities.|
|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.|
|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.|
|Upgrade||The rating has been raised on its specific scale.|
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 was based solely on the merits of 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 the rated entity. 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. 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 financial results as at 31 December 2019;
- Four years of comparative audited financial statements to 31 December
- Full year budgeted financial statements for 2020;
- Unaudited interim results to 30 June 2020;
- Reinsurance cover notes for 2020; and
- Other relevant documents.