Announcements

GCR affirms Coface South Africa Insurance Company Limited’s rating at AA+(ZA); Outlook Stable.

Johannesburg, 23 June 2017 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Coface South Africa Insurance Company Limited at AA+(ZA), with the outlook accorded as Stable.

SUMMARY RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit rating to Coface South Africa Insurance Company Limited (“Coface ZA”) based on the following key criteria:

Coface ZA’s risk adjusted capitalisation under interim statutory solvency strengthened, with capital adequacy requirement coverage equating to a stronger 2.4x at FY16 (FY15: 1.2x; FY14: 1.2x). This was largely a function of a reduction in the risk base, in tandem with a restoration in the capital balance (FY16: R88m; FY15: R80m). In GCR’s view, capital commitments made by the group afford the insurer a degree of financial flexibility. As such, GCR expects the insurer to remain sufficiently capitalised relative to expected Solvency Assessment and Management (“SAM”) requirements, supported by the capital management strategy in place, with a projected minimum solvency capital requirement (“SCR”) coverage ranging between 1.2x and 1.5x.

Liquidity metrics measured at strong levels over the review period, with cash covering net technical liabilities by a relatively stable 1.8x at FY16 (FY15: 1.9x). Similarly, the claims cash cover ratio equated to a very strong 90 months (FY15: 45 months). GCR expects key liquidity measures to remain within a strong range, supported by a preservation of the insurer’s prudent investment philosophy.

Reinsurance arrangements are placed internally with the group, with the high degree of reinsurance support underpinning underwriting capacity. This is accompanied by the integrated relationship with the group providing Coface ZA with technical expertise and operational platforms. Furthermore, the insurer benefits from business from key multinational clients sourced through the group.

GCR views Coface ZA’s cross cycle earnings capacity to be moderately strong, albeit exposed to substantial volatility given the inherent linkages to high variability in the broader credit cycle and a relatively elevated cost base. In terms of the former, GCR factors in atypical loss ratio variations from the mean (in either direction), given the cyclicality inherent in the credit product. In light of prevailing economic conditions, the insurer may experience continued earnings pressure over the outlook horizon, which may result in Coface ZA requiring solvency support. As such, the implicit and explicit capital support from the group represents a key rating consideration in supporting credit strength through adverse operating scenarios.

The insurer is one of the major players in the trade credit insurance market, albeit evidencing a further contraction in market share to about 10% of gross premiums based on GCR’s estimate of the sample group in FY16 (FY15: 13%; FY14: 15%). The reduction in the gross premium base was largely a function of the insurer adopting a stricter underwriting strategy. Competitive dynamics are also expected to continue to increase, on the back of increased participation by an additional player within the trade credit space. The insurer expects to remain a major player over the rating horizon, supported by strong broker relationships and strong brand recognition.

Coface ZA’s earnings profile evidences a moderate level of diversification. In this respect, a specialised focus in certain sectors served to partially offset high exposures to challenged sectors such as metals and construction. This notwithstanding, given the latter’s prominence within the premium mix, earnings exposure to volatility-prone sectors is expected to persist over the rating horizon.

The rating derives upliftment from the strong implicit support from Coface SA. This view is supported by high levels of strategic, branding and operational alignment, success in supporting group objectives, and comparability of capital and risk management frameworks.

Upward movement of the stand-alone credit profile is deemed unlikely, in light of prevailing operating and economic environment pressures, which may have a significant bearing on the mono-line credit insurer’s loss experience (given the sensitivities to the credit cycle). Nonetheless, the rating may be upgraded if Coface ZA’s strategic status within the group strengthens. Conversely, a prolonged deterioration in earnings capacity resulting in significant capital erosion (in the absence of additional cash and solvency support from the group) may result in negative rating action. Furthermore, a downgrade may occur on the back of an amendment (adversely impacting the insurer) and/or withdrawal of the guarantee or change in the strategic importance of Coface ZA within the group.

NATIONAL SCALE RATINGS HISTORY    
     
Initial rating (August 2006)    
Claims paying ability: AAA(ZA)    
Outlook: Stable    
     
Last rating (June 2016)    
Claims paying ability: AA+(ZA)    
Outlook: Stable    

ANALYTICAL CONTACTS

Primary Analyst    
Yvonne Mujuru    
Sector Head: Insurance Ratings    
(011) 784-1771    
ymujuru@globalratings.net    
     
Committee Chairperson    
Marc Chadwick    
Sector Head: Insurance Ratings    
(011) 784-1771    
chadwick@globalratings.net    

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Short Term Insurance Companies, updated July 2016.

Coface ZA rating reports, 2006- 2016.

RSA Short Term Insurance Bulletins, 2001-2016.

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. 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.

Coface South Africa Insurance Company 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 Coface South Africa Insurance Company Limited with no contestation of the rating.

The information received from Coface South Africa Insurance Company Limited and other reliable third parties to accord the credit rating included:

• The audited annual financial statements to 31 December 2016,

• Four years of audited comparative numbers,

• Unaudited management accounts to 30 April 2017,

• Full year detailed budget income statement for 2017,

• Statutory returns to 31 December 2016,

• The current year reinsurance cover notes, 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.

GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY

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 Coface South Africa Insurance Company Limited’s rating at AA+(ZA); Outlook Stable.

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