Johannesburg, 1st July 2021 – GCR Ratings (“GCR”) has affirmed Credit Guarantee Insurance Corporation of Africa Limited’s (“CGIC”) national scale financial strength rating of AA(ZA); with the Outlook revised to Stable, from Negative.
|Rated entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|Credit Guarantee Insurance Corporation of Africa Limited||Financial strength||National||AA(ZA)||Stable Outlook|
The rating anchors on a sound financial profile, partially offset by a comparatively weaker business position. This is complemented by implied support from the majority shareholder; Old Mutual Limited, reflected by a high level of integration into the group’s business model. The Stable Outlook reflects our view that the uncertain impact of recurring Covid-19 waves on the financial profile is balanced by express solvency support from Old Mutual Insure, combined with the insurer’s fairly quick stabilisation of the business after the more severe initial lockdown. We, therefore, consider downside risks to the current rating to be limited in the absence of similar lockdown measures.
CGIC’s earnings are assessed within an intermediate range, despite a slight moderation registered in FY20 emanating from the COVID-19 lockdown restrictions resulting in a spike in claims. In this respect, the insurer registered an unfavourable claims experience coupled with a slight increase in operating expenses, with the operating expense ratio registering at 16% (FY19: 13%), while the loss ratio equated to 96% (FY19: 77%), mainly protected by conservative deductibles on the reinsurance program. As such, the insurer’s underwriting margin equated to -12% (FY19: 6%: prior five-year average: 9%). Net profitability was supported by investment income providing a cushion to the underwriting deficit as well as exchange gains. In this regard, investment income amounted to R98m (FY19: R95m) with after-tax profit closing the year at R1m (FY19: R102m), against our expectations of significant negative earnings following material claims recoveries. Going forward, earnings are expected to remain within a sound range should the current stability in the economic environment be maintained.
The insurer’s risk adjusted capitalisation was maintained within a strong range supported by consistency in risk exposures within acceptable ranges. In this regard, the statutory solvency level for CGIC registered at 1.4x at 4MFY21(FY20: 1.2x). The statutory solvency is likely to be sustained above 1.3x over the rating outlook in line with management’s internal capital target, given potential for capital growth over the near term.
CGIC’s liquidity profile remains within a strong range, supported by conservative asset allocation. Accordingly, cash and stressed financial assets coverage of net technical liabilities was maintained at 2.1x, while coverage of operational cost requirements registered at 26 months (FY19: 23 months), recovering well from significant strain after the lifting of the lockdown in 2H F20. Liquidity metrics are expected to remain within a strong range over the rating horizon, with the liquidity ratio likely to be constrained should there be a spike in claims and a more severe than anticipated disruption of the value chain going forward.
The rating takes into account the insurer’s comparatively weaker business profile in the context of the overall short term insurance industry, albeit with a leading position in the credit insurance market supporting the factor assessment. Accordingly, the insurer accounted for stable weighted market and relative market shares of 0.8% and 0.7x in FY20, respectively, reflecting the limited contribution of the credit insurance market to the overall short term insurance industry. Premium diversification is constrained by the mono-line trade credit offering and geographic concentration to the domestic market. This is, however, partially offset by fairly diversified sector exposures, as the insurer is able to leverage off its market leading position to generate meaningful business from multiple sectors of the market, while also noting more granular exposure to underlying buyers. Cognisance is taken of the insurer’s selective underwriting strategy, and the ability of the insurer to maintain their market position is a key rating consideration.
The rating’s outlook captures potential for earnings and liquidity to moderate slightly albeit remaining rating adequate. Risk adjusted capitalisation is likely to be maintained at the current level with the SCR coverage ratio likely to trend above 1.3x, while the downside is protected by explicit capital support from Old Mutual Insure. On the other hand, the business profile is likely to remain limited over the outlook horizon owing to limited geographic and net premium diversification.
An upward rating movement may follow a sustained improvement in underwriting profitability and liquidity while capitalisation is maintained within a strong range. Downward rating movement may arise from earnings strain translating into a weakening of the liquidity profile beyond expected levels.
|Primary analyst||Linda Matavire||Analyst: Insurance Ratings|
|Johannesburg, ZA||LindaM@GCRratings.com||+27 11 784 1771|
|Committee chair||Matthew Pirnie||Group Head of Ratings|
|Johannesburg, ZA||MatthewP@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, June 2021|
|GCR Insurance Sector Risk Scores, April 2021|
Credit Guarantee Insurance Corporation of Africa Limited
|Rating class||Review||Rating scale||Rating||Outlook/Watch||Date|
|Claims paying ability||Initial||National||A+(ZA)||Stable Outlook||November 2000|
|Financial strength||Last||National||AA(ZA)||Negative Outlook||July 2020|
Risk score summary
|Rating components and factors||Risk score|
|Country risk score||7.00|
|Sector risk score||8.00|
|Management and governance||0.00|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|Rating Horizon||The rating outlook period|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|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.|
|Securities||Various instruments used in the capital market to raise funds.|
|Security||One of various instruments used in the capital market to raise funds.|
|Senior||A security that has a higher repayment priority than junior securities.|
|Short Term||Current; ordinarily less than one year.|
|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.|
SALIENT POINTS OF ACCORDED RATINGS
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 is based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such rating is an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit rating has been disclosed to the rated entity. The rating was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating. The rated entity participated in the rating process via face-to-face 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 the entity and other reliable third parties to accord the credit rating included:
- Audited financial results as at 31 December 2020;
- Four years of comparative audited financial statements to 31 December
- Full year budgeted financial statements for 2021;
- Unaudited interim results to 31 March 2021;
- Reinsurance cover for 2021; and
- Other relevant documents.