Announcements

GCR affirms Credit Guarantee Insurance Corporation of Africa Ltd’s rating of AA(ZA); Outlook S

Johannesburg, 01 Jul 2015 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Credit Guarantee Insurance Corporation of Africa Limited of 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 business profile reflects very strong competitive positioning, with the insurer remaining the market leader (with the average market share equating to 70%) over the review period.

The insurer’s risk adjusted capitalisation under interim statutory solvency has been measured at strong levels, with CAR coverage equating to 1.7x at FYE14 (FYE13: 2.0x). GCR expects the insurer to remain sufficiently capitalised relative to expected Solvency Assessment and Management (“SAM”) parameters, supported by the capital management strategy (facilitated in part by the flexibility offered by large institutional shareholders) and the insurer’s target CAR coverage ranging between 1.2x and 1.3x.

CGIC has registered very strong profitability over the review period, with an average net underwriting margin equating to 28%. Very strong profitability has been supported by active portfolio management and conservative underwriting disciplines. In this regard, GCR views CGIC’s through-the-cycle profitability to be indicative of sustained earnings capacity going forward. Cognisance is, however, taken of the elevated margin volatility due to the inherent linkages to high variability in the broader credit cycle. In this regard, CGIC’s business profile exhibits high product risk emanating from the monoline focus on trade credit insurance and the long tail nature of the portfolio.

Liquidity metrics have remained at sound levels over the review period. Cash covered net technical liabilities by 1.1x at FYE14 (FYE13: 1.4x), and claims cash coverage equated to 14 months (FY13: 24 months). The asset liability matching policy stipulates a minimum technical provision coverage level of 1x, indicating that liquidity will be preserved at strong levels over the rating horizon. Inclusive of collective money market investments, which offer additional support, liquidity metrics strengthen further. In this regard, the insurer’s asset quality is viewed to have strengthened to a moderately strong level, owing to the increased contribution of lower risk financial assets to the investment mix. As such, cash and equivalents represented 49% of investments, collective money market investment schemes represented a higher 22%, with the balance in listed equities (29%). The latter, while reduced, continues to present a moderate degree of risk to capital.

The rating benefits from the largest shareholders’ strong credit profiles, supported by a degree of strategic integration and reinsurance support. In this regard, reinsurance programmes are placed with highly rated counterparties, with major shareholders providing secondary capacity and solvency relief under expected SAM parameters. Furthermore, the maximum net retention per risk is viewed to be limited to a relatively conservative level.

An improvement in the earnings profile (by way of geographic diversification), supported by maintenance of underwriting profitability at strong levels, and strengthening in risk adjusted capitalisation, could support upward rating movement over the medium term. Conversely, the rating may be downgraded if risk adjusted capitalisation deteriorates substantially, and/or liquidity metrics weaken beyond expectations. Furthermore, sustained net underwriting losses, and/or significant deterioration in the competitive positioning, could result in negative rating action.

NATIONAL SCALE RATINGS HISTORY    
     
Initial rating (November 2000)    
Claims paying ability: A+(ZA)    
Outlook: Stable    
     
Last rating (July 2014)    
Claims paying ability: AA(ZA)    
Outlook: Stable    

ANALYTICAL CONTACTS

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

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Insurance Companies, updated July 2014

CGIC rating reports, 2000 – 2014

RSA Short Term Insurance Bulletins 2001-2014

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.

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:

  • Audited financial results as per 31 Dec 2014
  • Unaudited interim results of as at 30 Apr 2015
  • Four years of comparative audited numbers
  • Budgeted financial statements for 2015
  • The current year reinsurance cover notes
  • Statutory returns as per 31 Dec 2014 and as at 31 Mar 2015
  • Capital management policy
  • Asset liability matching policy, 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

Assets The items on the balance sheet of the insurer which show the book value of property owned. Under regulations, not all property or other resources may be admitted in the statement of the insurer. This gives rise to the term ‘non-admitted assets.’
Balance Sheet An accounting term which refers to a listing of the assets, liabilities, and surplus of a company or individual as of a specific date.
Capacity The largest amount of insurance or reinsurance available from a company. In a broader sense, it can refer to the largest amount of insurance or reinsurance available in the marketplace.
Claim A request for payment of a loss, which may come under the terms of an insurance contract.
Commission A certain percentage of premiums produced that is received or paid out as compensation by an insurer to agents and brokers.
Insurer The party to the insurance contract whom promises to pay losses or benefits. Also, any corporation engaged primarily in the business of furnishing insurance to the public.
Interest Money paid for the use of money.
Liquidity The ability of an insurer to convert its assets into cash to pay claims if necessary.
Loss Ratio The ratio of claims to premiums. It may be calculated in several different ways, using paid premiums or earned premiums, and using paid claims with or without changes in claim reserves and with or without changes in active life reserves.
Policy The legal document issued by the company to the policyholder, which outlines the conditions and terms of the insurance also called the policy contract or the contract.
Premium The price of insurance protection for a specified risk for a specified period of time.
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.
Reserve An amount representing actual or potential liabilities kept by an insurer to cover debts to policyholders.
Retention The net amount of risk the ceding company keeps for its own account
Risk Uncertainty as to the outcome of an event when two or more possibilities exist.
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.
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.
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ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK:HTTP://GCRRATINGS.COM. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT WWW.GCRRATINGS.COM/RATING_INFORMATION. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR's CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THIS SITE.

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