Announcements Insurance Rating Alerts

GCR affirms Genric Insurance Company Limited’s national scale financial strength rating of A-(ZA); Outlook Stable

Rating action

Johannesburg, 23 July 2020 – GCR Ratings (“GCR”) has affirmed Genric Insurance Company Limited’s (“Genric”) national scale financial strength rating of A-(ZA), with a Stable Outlook.

Rated Entity / Issue Rating class Rating scale Rating Outlook/Watch
Genric Insurance Company Limited Financial strength National A-(ZA) Stable Outlook

Rating rationale

Genric’s national scale financial strength rating was affirmed with a Stable Outlook, reflecting its sound risk adjusted capitalisation and strengthened liquidity, as well as execution of the turnaround strategy that resulted in enhanced cross cycle earnings expectations. This is nevertheless offset by the insurer’s very low market share, although premium diversification is viewed to be healthy.

Following portfolio remediation measures implemented in recent years, the net incurred loss ratio has reduced below 50% (FY20 forecast: 46%) from more than 60% previously, reflecting the improved quality of business. Furthermore, operating expenses have been better contained, with the total expense ratio forecast to lower to around 46% in FY20 and register at a similar level in FY21. As a result, the insurer’s underwriting margin is projected to increase to 8% in FY20 (FY19: 1%), before dipping slightly to 6% in FY21 after accounting for higher claims frequency post hard lockdown. GCR expects improved underwriting profitability to be sustained by a competitive loss ratio, with the cross cycle underwriting margin projected to trend in the low to middle single digits after applying some additional stresses to cater for the poor economic outlook. Similarly, net return on revenue has been stable at around 11% over the past two years, with potential for a reduction on the back of lower interest rates having been factored into GCR’s forward looking assumptions. In this respect, the ability of the insurer to sustain earnings at strengthened levels through the challenging outlook horizon is expected to be a key input into the assessment going forward.

Risk adjusted capitalisation has increased on the back of internal capital generation, and after adjusting for the shareholder loan, is expected to be maintained at rating appropriate levels. In this regard, we expect Solvency Capital Requirement (“SCR”) coverage to track above management’s target of 1.4x, supported by retained earnings. Similarly, liquidity has been maintained at strengthened levels, underpinned by operational cash flow generation. Stressed financial assets coverage of net technical liabilities has registered above 2x over the past two years, and coverage of operational expenses measured at around 10 months. Given the conservative investment strategy, liquidity is expected to continue to register at healthy levels over the outlook horizon, even if additional stresses are applied for lower than expected operational performance.

Genric reflects a very low market share, which is expected to remain well below 1% over the short to medium term, given the corrective underwriting and portfolio management. The overall assessment of the business profile considers a healthy level of diversification by line of business, although this is offset by geographic concentration to South Africa.

Outlook statement

The Stable Outlook considers expectations that cross cycle earnings will remain at strengthened levels after factoring in base case stresses, in turn supporting internal capital and cash flow generation. We expect that SCR coverage will be managed above 1.4x and stressed financial assets coverage of technical liabilities to be between 1.8x and 2.2x. The insurer’s competitive position is likely to remain very low but stable over the outlook horizon, given market wide growth constraints, but with potential for an increase over the longer term as new business gains momentum.

Rating triggers

Positive rating action could follow if earnings continue to register at strengthened levels and liquidity and capitalisation are maintained within the currently healthy ranges. The rating would likely be downgraded if SCR coverage reduces below 1.4x or coverage of net technical provisions falls below 1.75x.

Analytical contacts

Primary analyst Susan Hawthorne Senior Analyst: Insurance Ratings
Johannesburg, ZA SusanH@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, May 2020
GCR Insurance Sector Risk Scores, July 2020

Ratings history

Genric Insurance Company Limited

Rating class Review Rating scale Rating class Outlook/Watch Date
Financial strength Initial* National A-(ZA) Stable Outlook May 2015
Last National A-(ZA) Stable Outlook December 2019

*Formerly claims paying ability.

Risk score summary

Rating components & factors Risk scores
Operating environment 15.00
Country risk score 7.00
Sector risk score 8.00
Business profile (3.00)
Competitive position (2.50)
Premium diversification (0.50)
Management and governance 0.00
Financial profile 0.50
Earnings (0.25)
Capitalisation 0.25
Liquidity 0.50
Comparative profile 0.00
Group support 0.00
Government support 0.00
Peer analysis 0.00
Total score 12.50

Glossary

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.
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 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 virtual 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 rated entity and other reliable third parties to accord the credit rating included:

  • Audited annual financial statements to 30 June 2019;
  • Four years of comparative audited financial statements to 30 June;
  • Forecast to 30 June 2020 and budget to 30 June 2021;
  • Unaudited management accounts to 31 May 2020;
  • Quarterly quantitative statutory return at 31 March 2020;
  • Other relevant documents
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