Johannesburg, 01 July 2016 — 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 capital base decreased to R80m at FYE15 (FYE14: R91m), on the back of an R11m retained loss. A further retained loss in FY16 would result in further capital erosion. In the absence of capital injections from the group, this would likely result in a shortfall relative to expected Solvency Assessment and Management (“SAM”) requirements. In order to remedy such a shortfall, management is actively engaged with Compagnie Francaise d’Assurance pour le commerce Exterieur (“Coface SA”, “the group”), with a view to, when needed, restoring capital to a level above the local minimum requirement, in line with the group’s explicit commitment and the company’s on-going capital management targets.
Liquidity metrics have measured at strong levels throughout the review period. Cash covered net technical liabilities by a stable 1.9x at FYE15 (FYE14: 1.9x; FYE13: 2.5x). Similarly, the claims cash cover ratio equated to a strong 43 months (FYE14: 52 months). Going forward, management expects to diversify the investment portfolio to include corporate bonds, treasury bills, and money market instruments. In GCR’s view, liquidity metrics are likely 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 inherent linkages to high variability in the broader credit cycle and relatively high 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 GCR’s view, in light of prevailing economic conditions, the insurer is likely to experience continued earnings strain over the rating horizon, which may result in Coface ZA requiring additional 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 contraction in market share to about 13% of gross premiums based on GCR’s estimate of the sample group in FY15 (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 regain market share, supported by well-established broker relationships and strong brand recognition.
Coface ZA’s earnings profile evidences a moderate level of diversification. In this regard, a specialised focus in certain sectors (such as mineral products and electronics) has served to partially offset high exposures to currently challenging sectors such as metals, agriculture and transport. 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.
The stand-alone rating may be upgraded if the insurer’s business profile improves materially (by way of increased market penetration and enhanced exposure diversification), while all other credit protection metrics are maintained within strong and very strong ranges. Furthermore, a strengthening in Coface ZA’s strategic status within the group may lead to positive rating movement. Conversely, a pronounced deterioration in liquidity and capitalisation metrics (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 a negative revision to the rating of Coface SA, 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)|
|Last rating (June 2015)|
|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 July 2015.
Coface ZA rating reports, 2006- 2015.
RSA Short Term Insurance Bulletins, 2001-2015.
RATING LIMITATIONS AND DISCLAIMERS
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|Accounting||A process of recording, summarising, and allocating all items of income and expense of the company and analysing, verifying and reporting the results.|
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|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.|
|Capital Base||The issued capital of a company, plus reserves and retained profits.|
|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.|
|Credit Rating Agency||An entity that provides credit rating services.|
|Creditworthiness||An assessment of a debtor’s ability to meet debt obligations.|
|Diversification||Spreading risk by constructing a portfolio that contains different investments, whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.|
|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.|
|Interest||Money paid for the use of money.|
|Liquidity||The speed at which assets can be converted to cash.|
|Liquidity Risk||The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.|
|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”)||The national scale provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.|
|Policy||The legal document issued by the company to the policyholder, which outlines the conditions and terms of the insurance.|
|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|
|Rating Outlook||A rating outlook indicates the potential direction of a rated entity’s rating over the medium term, typically one to two years. An outlook may be defined as: ‘Stable’ (nothing to suggest that the rating will change), ‘Positive’ (the rating symbol may be raised), ‘Negative’ (the rating symbol may be lowered) or ‘Evolving’ (the rating symbol may be raised or lowered).|
|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.|
|Securities||Various instruments used in the capital market to raise funds.|
|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.|
For a more detailed glossary of terms/acronyms used as per GCR’s insurance glossary, please click here
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 2015,
• Four years of audited comparative numbers,
• Management accounts to 30 April 2016,
• Full year detailed budget statements for 2016,
• Quantitative and qualitative statutory returns to 31 December 2015,
• The current year reinsurance summary 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.
GCR affirms Coface South Africa Insurance Company Limited’s rating at AA+(ZA); Outlook Stable.