Johannesburg, 29 June 2018 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Chubb Insurance South Africa Limited at AA(ZA), with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to Chubb Insurance South Africa Limited (“Chubb SA”) based on the following key criteria:
Chubb SA has sustained very strong risk adjusted capitalisation, with Solvency Capital Requirement (“SCR”) coverage tracking comfortably above industry norms. Continued profit generation, coupled with limited risk retention and a highly conservative investment strategy underpins very high capital adequacy metrics. Accordingly, the insurer is viewed to be well capitalised with high loss absorption capacity capable of sustaining medium term capital strength.
The insurer’s pure cash strategy (inclusive of government bonds) supports a very strong liquidity profile. With investment income not viewed as a core income generator, the insurer opted for a low risk investment strategy that has seen very high liquidity metrics sustained throughout the review period. In this regard, coverage of monthly claims and net technical provisions registered at a respective 56 months and 2.2x at FY17 (five year average: 50 months and 2.3x respectively). Continued investment conservatism, coupled with strong operational cash flow generative capacity is expected to uphold very strong liquidity over the medium term.
Sound earnings capacity is supported by a very competitive cost structure. In this regard, the operational model benefits from strong commission recoveries, which serves to offset some of the cost pressures inherent with a limited NEP scale. While the insurer has evidenced a degree of claims volatility over the review period, over the past three years there has been some bottom line stability, with ROaE averaging 15% (FY17: 15%). As such, the business model is viewed to be capable of absorbing potential claims fluctuations while sustaining positive NPAT, supporting sound forward looking earnings capacity.
The business profile is supported by the insurer’s penetration into strategic niche market segments where it leverages off group underwriting expertise. Furthermore, revenue is fairly well diversified across three core lines, although a deliberate strategy to exit certain liability products has moderated the extent of prior year product diversification. Accordingly, the ability of the insurer to replace lost business and continue to diversify the premium base will represent a rating consideration going forward.
The insurer formulates its reinsurance strategy in conjunction with its parent company, with a high degree of reinsurance support underpinning underwriting capacity. The majority of cessions are placed within the group (96% of cessions in FY17), with the main group entity evidencing a strong international rating. In GCR’s view, the level of reinsurance support provides Chubb SA with significant capacity relative to the size of its balance sheet, while demonstrating a strong level of integration of the insurer into the group’s international structure. Additionally, Chubb SA has a letter of credit to meet reinsurance obligations.
The rating derives upliftment from implicit group support given the high levels of strategic, branding and operational alignment. Furthermore, the implied financial support provided by Chubb INA Holdings Inc. (“CIH”), by way of a letter of comfort, and demonstrated capital support by Chubb INA International Holdings Limited (“CIIH”), are viewed positively.
The maintenance of exceptional risk adjusted and liquidity strength, coupled with sustained earnings improvement could result upward rating movement. Conversely, sustained weakening in earnings that could result in material deterioration in risk adjusted capitalisation and/or liquidity may result in negative rating action. Furthermore, downward rating pressure may also arise if the strategic importance of the insurer to the group diminishes.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (August 2006)|
|Claims paying ability: A+(ZA)|
|Last rating (June 2017)|
|Claims paying ability: AA(ZA)|
|Senior Credit Analyst|
|Sector Head: Insurance Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated May 2018
Chubb SA rating report, 2016-2017
ACE Insurance Limited rating reports, 2006- 2015
RSA Short Term Insurance Bulletins, 2001-2017
RATING LIMITATIONS AND DISCLAIMERS
ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating 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; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
Chubb Insurance South Africa Limited participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit rating has been disclosed to Chubb Insurance South Africa Limited with no contestation of the rating.
The information received from Chubb Insurance South Africa Limited and other reliable third parties to accord the credit rating included:
- The audited annual financial statements to 31 December 2017
- Four years of audited comparative numbers
- Management accounts to 31 March 2018
- Full year detailed budget financial statements for 2018
- The statutory returns for 2017
- The current year reinsurance summary, and
- Other related documents.
The rating above was solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the rating.
|Capacity||The largest amount of insurance available from a company. In a broader sense, it can refer to the largest amount of insurance available in the marketplace.|
|Capital||The sum of money that is invested to generate proceeds.|
|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.|
|Distribution Channel||The method utilised by the insurance company to sell its products to policyholders.|
|Enterprise Risk Management||ERM refers to an integrated or holistic approach to managing risk across an organisation, using clearly articulated frameworks and processes controlled from board level.|
|Exposure||Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For an insurer, its exposure may also relate to the risk related to policies issued.|
|International Scale Rating (“ISR”)||International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.|
|Intermediary||A third party in the sale and administration of insurance products.|
|Interest||Money paid for the use of money.|
|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.|
|Policyholder||The person in actual possession of an insurance policy.|
|Portfolio||All of the insurer’s in-force policies and outstanding losses, with respect to described segments of its business.|
|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.|
|Risk Management||Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.|
|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.|
|Statutory||Required by or having to do with law or statute.|
|Subordinated Debt||Debt that in the event of a default is repaid only after senior obligations have been repaid. It is higher risk than senior debt.|
|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.|
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GCR affirms Chubb Insurance South Africa Limited’s rating at AA(ZA); Outlook Stable.