Johannesburg, 14 May 2020 – GCR Ratings (“GCR”) has affirmed Coface South Africa Insurance Company Limited’s (“Coface ZA”) national scale financial strength rating of AA(ZA), with a Negative Outlook. At the same time, GCR has withdrawn Coface ZA’s rating for commercial reasons. Accordingly, GCR will no longer provide coverage on the insurer.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|Coface ZA||Financial strength||National||AA(ZA)/WD(ZA)||Negative Outlook/WD|
Coface ZA’s national scale financial strength rating balances the insurer’s strong balance sheet profile and upliftment from strong implicit support from its majority parent, Compagnie Francaise d’Assurance pour le commerce Exterieur (“Coface SA”) and the broader Coface Group, with a focused business model that reflects low scale and inherent premium concentration, compounded by earnings weakness. The Negative outlook reflects potential for increased downside risk to earnings given the adverse impact of COVID-19, resulting in challenging competitive and economic conditions, which in turn could reduce capitalisation metrics from the very strong historical levels.
Coface ZA’s capitalisation is assessed to be very strong, with high risk adjusted capitalisation counterbalancing a limited capital base in absolute terms. The insurer’s Solvency Capital Requirement (“SCR”) coverage has registered comfortably above 3x over the past three years, although the surplus is likely to reduce in the wake of expected earnings compression in the face of the COVID-19 pandemic. Coface ZA has maintained strong liquidity, with stressed investment coverage of net technical liabilities of close to 2x over the past two years. Furthermore, an explicit guarantee from a group subsidiary is viewed to be an additional source of liquidity under a stressed scenario.
Notwithstanding the above, GCR’s view of Coface ZA’s overall financial profile is moderated by weak earnings, with a fairly well contained net loss ratio having been offset by reduced premium volumes, due to a selective underwriting approach. In this respect, the five year average underwriting margin equated to -12% in FY19, while return on net earned premiums registered at 3%. GCR further notes the downside risk to earnings associated with the adverse economic impact of COVID-19 on claims frequency and premium volumes, which are expected to stem from higher levels of buyer distress.
Coface ZA reflects an intermediate competitive position, with low premium scale offset by the insurer’s franchise strength within the South African trade credit space, as well as strategic benefits in the form of established systems and underwriting capabilities. GCR’s view of the insurer’s overall business profile nevertheless takes into account concentration to trade credit, which is inherently exposed to volatility through potential for high severity claims experience and the linkage with the domestic credit cycle.
Coface ZA’s rating derives upliftment from strong implied parental support, given very strong levels of integration and strategic alignment, as well as explicit and implicit financial support.
The Negative outlook reflects potential for earnings to weaken further over the outlook horizon, as underlying buyers face increasing financial distress in the wake of the COVID-19 lockdown and poor economic outlook. This is likely to increase claims frequency in the trade credit environment, while also limiting scope for premium development and associated cost efficiencies. In turn, Coface ZA’s capitalisation metrics are expected to moderate from the very strong levels reflected during the review period, although still likely to compare favourably with the industry average under a stressed scenario.
|Primary analyst||Susan Hawthorne||Senior Insurance Analyst|
|Johannesburg, ZA||SusanH@GCRratings.com||+27 11 784 1771|
|Committee chair||Godfrey Chingono||Deputy Sector Head: Insurance Ratings|
|Johannesburg, ZA||GodfreyC@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, May 2020|
|Rating class||Review||Rating scale||Rating class||Outlook/Watch||Date|
|Financial strength*||Initial||National||AAA(ZA)||Stable Outlook||August 2006|
|Last||National||AA(ZA)||Stable Outlook||September 2019|
*Formerly claims paying ability.
Risk Score Summary
|Risk score||Coface ZA|
|Country risk score||7.50|
|Sector risk score||8.75|
|Management and governance||0.00|
|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.|
|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.|
|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.|
|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.|
|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.|
Salient Points of Accorded Rating
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 the 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 Coface South Africa Insurance Company Limited. 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.
Coface South Africa Insurance Company Limited participated in the rating process via telephone conference, 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 Coface South Africa Insurance Company Limited and other reliable third parties to accord the credit rating included:
- Unaudited management accounts to 31 December 2019;
- Four years of comparative audited financial statements to 31 December;
- Quarterly statutory quantitative return at 31 December 2019;
- Other relevant documents