Johannesburg, 02 June 2017 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to CIC General Insurance Limited of A(KE), with the outlook accorded as Negative. The rating is valid until May 2018.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to CIC General Insurance Limited (“CIC General”) based on the following key criteria:
The negative outlook reflects CIC General’s earnings capacity weakening to an intermediate level, from moderately strong levels historically. In this respect, earnings capacity may remain at weakened levels over the rating horizon, underpinned by potentially elevated operating expenses adversely impacting on underwriting profitability. While the underwriting margin measured at an atypical -9% in FY16 (FY15: 1%), lowering the review period average margin to 1.2% (compared to 8% over the previous three year cycle), management aims to improve underwriting performance through strengthened cost controls and an improved claims ratio, given excess of loss cover on the medical book. This could be further supported by a generally conservative maximum deductible of 0.1% of net earned premiums in FY16. Accordingly, management’s ability to manage earnings in line with expectations, taking into account high growth targets and execution risks attached to improved earnings in competitive portfolios, represents a key rating consideration.
CIC General’s competitive positioning is viewed to be moderately strong, albeit evidencing a reduction from previous years. In this respect, the insurer’s share of short term industry gross premiums equated to 6.9% in FY16 (FY15: 7.1%; FY14: 9.5%). Market positon is supported by an established brand and a widening distribution footprint, as well as improved underwriting capabilities. As such, GCR expects market share to remain within a moderately strong range, with potential to register an uptick, underpinned by management’s revenue targets.
The insurer’s liquidity remained at moderately strong levels, with cash coverage of average monthly claims and technical liabilities measuring at 12 months (FY15: 9 months) and 0.8x (FY15: 0.8x) respectively at FY16. GCR expects liquidity to remain within a moderately strong range over the rating horizon. Note is taken of balance sheet risk stemming from elevated banking counterparty concentration to related parties.
Risk adjusted capitalisation measured within a moderately strong range, which is expected to be sustained in FY17. This is supported by relatively well contained market and credit risks, albeit with potential for insurance risk to increase going forward. Accordingly, the international solvency margin measured at 54% at FY16 (FY15: 63%), with GCR expecting the international solvency margin to register around the 50% mark over the rating horizon.
CIC General displays a somewhat diversified business mix, with two lines of business accounting for 71% of GWP in FY16 (FY15: 69%; FY14: 78%). Similarly, the risk base evidences concentration to the core classes of business, albeit offset by limited product risk, due to the granular nature of predominant risks.
Positive rating action is unlikely in the near term. However, management’s ability to sustainably achieve profitability in line with targets may result in the rating reverting to a “Stable” outlook. Negative rating action could follow realised or potential underachievement of set earnings targets over the medium term and/or dilution of liquidity and solvency strength, given very strong growth targets.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (May 2013)|
|Claims paying ability: A(KE)|
|Last rating (May 2016)|
|Claims paying ability: A(KE)|
|Primary Analyst||Committee Chairperson|
|Godfrey Chingono||Marc Chadwick|
|Credit Analyst||Sector Head: Insurance Ratings|
|(011) 784 – 1771||(011) 784 – 1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2016
CIC General Insurance Limited’s rating reports, 2013-2016
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/RATING-SCALES-DEFINITIONS. 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.
CIC General Insurance 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 CIC General Insurance Limited with no contestation of the rating.
The information received from CIC General Insurance Limited and other reliable third parties to accord the credit rating included:
- The 2016 audited annual financial statements 4 years of comparative audited numbers
- Unaudited interim results to 31 March 2017
- Budgeted financial statements for 2017
- 2017 reinsurance cover notes
- Actuarial valuation statement for 2016
- Financial Condition Report for 2016
- 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.|
For a more detailed glossary of terms, please click here
GCR affirms CIC General Insurance Limited’s rating at A(KE); Outlook Negative.