Johannesburg, 23 July 2018 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Credit Guarantee Insurance Corporation of 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 Credit Guarantee Insurance Corporation of Africa Limited (“CGIC”) based on the following key criteria:
CGIC’s capitalisation remained sound, underpinned by healthy review period profit accumulation sustaining a sizeable capital base. On a risk adjusted basis, the insurer’s Solvency Capital Requirement (“SCR”) registered slightly above the regulatory minimum, albeit below the internal target level. Nevertheless, the insurer is in the process of diversifying cash investments across counterparties, the finalisation of which is likely to see SCR align with the internal target range of between 1x and 1.3x. The management of risk adjusted capitalisation within the target range is expected to underpin sound forward looking capitalisation. Furthermore, the insurer is viewed to possess healthy internal capital generative capacity to accommodate growth objectives.
Liquidity metrics rebounded to strong levels in FY17, following a dip in the previous year due to unexpected working capital absorptions related to timing of receivable payments. In this respect, cash coverage of net technical provisions registered at a strong 1.1x at FY17 (FY16: 0.8x), which was in line with historical levels. The investment portfolio is largely comprised of liquid and tradable securities, providing additional liquidity support. With no major changes expected to the investment strategy, liquidity is likely to remain strong over the rating horizon.
Through the cycle earnings capacity is viewed to be strong, supported by a healthy five year average underwriting margin of 12%. A key source of underwriting profitability is the very well contained cost structure that is viewed to provide margin flexibility during periods of claims volatility. Continued premium growth is expected to sustain cost efficiencies going forward which, in conjunction with investment returns, is likely to uphold earnings generative capacity over the medium term. Furthermore, the reinsurance panel reflects an aggregate strong credit profile, while the maximum net retention per risk is viewed to be limited to a moderately conservative level.
Amidst constrained economic activity and increased competition, the insurer continues to achieve reasonable top line growth in line with group objectives. This has allowed CGIC to cement its dominant position in the trade credit sector, while maintaining premium diversification across relevant market segments. The insurer’s entrenched market position and strong brand value is expected to sustain a strong business profile over the rating horizon.
GCR views the insurer’s stand-alone credit profile to derive upliftment from implied shareholder support, underpinned by CGIC’s success in achieving group objectives and increased integration in terms of capital and risk management frameworks and reinsurance arrangements.
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 CGIC’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, negative rating action may result on the back of a change in the strategic importance to the shareholders.
| NATIONAL SCALE RATINGS HISTORY |
| Initial rating (November 2000) |
| Claims paying ability: A+(ZA) |
| Outlook: Stable |
| Last rating (June 2017) |
| Claims paying ability: AA+(ZA) |
| Outlook: Stable |
ANALYTICAL CONTACTS
| Primary Analyst | |
| Vinay Nagar | |
| Senior Credit Analyst | |
| (011) 784 – 1771 | |
| vinay@globalratings.net |
| Committee Chairperson |
| Yvonne Mujuru |
| Sector Head: Insurance Ratings |
| (011) 784 – 1771 |
| ymujuru@globalratings.net |
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated May 2018
RSA Short Term Insurance Bulletins, 2001-2017
CGIC rating reports, 2000-2017
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/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, and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
Credit Guarantee Insurance Corporation of 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 Credit Guarantee Insurance Corporation of Africa Limited with no contestation of the rating.
The information received from Credit Guarantee Insurance Corporation of Africa Limited and other reliable third parties to accord the credit rating included:
- The 2017 audited annual financial statements Four years of comparative audited numbers
- Unaudited management accounts to 31 May 2018
- Budgeted financial statements for 2018
- 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 Base | The issued capital of a company, plus reserves and retained profits. |
| 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. |
| Coverage | The scope of the protection provided under a contract of insurance. |
| 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. |
| Experience | A term used to describe the relationship, usually expressed as a percent or ratio, of premiums to claims for a plan, coverage, or benefits for a stated time period. |
| 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. |
| Loss | The happening of the event for which insurance pays. |
| Net Retention | The amount of insurance that a ceding company keeps for its own account and does not reinsure. |
| 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 |
| 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. The reinsured may be referred to as the Original or Primary Insurer, or Direct Writing Company, or the Ceding Company. |
| Retention | The net amount of risk the ceding company keeps for its own account. |
| 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. |
| Securities | Various instruments used in the capital market to raise funds. |
| Shareholder | An individual, entity or financial institution that holds shares or stock in an organisation or company. |
| 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. |
| Upgrade | The assignment of a higher credit rating to an insurer by a credit rating agency. Opposite of downgrade. |
| Working Capital | Working capital usually refers to the resources that a company uses to finance day-to-day operations. Changes in working capital are assessed to explain movements in debt and cash balances. |
For a more detailed glossary of terms, please click here
GCR affirms Credit Guarantee Insurance Corporation of Africa Limited’s rating at AA+(ZA); Outlook Stable.
