Johannesburg, 21 February 2019 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Genric Insurance Company Limited of A-(ZA), with the outlook accorded as Negative.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to Genric Insurance Company Limited (“Genric”) based on the following key factors:
The rating was affirmed at A-(ZA) given the improvement in the quality of Genric’s portfolio following the cancellation of high claiming books of business. In this respect, the reduction in the net premium base has supported an increase in risk adjusted capitalisation and liquidity metrics post year end. Note is, however, taken of the accompanying decrease in scale, which together with a higher expense base, may continue to pressure earnings over the short to medium term. Accordingly, the rating has been placed on Negative outlook, reflecting potential for downward rating action if earnings capacity remains below historical levels.
In this respect, Genric’s earnings weakened in FY18, with a deep underwriting loss resulting in a small net loss for the year. This compares to the thin but relatively stable prior four year average underwriting margin of 1% and corresponding return on NEP of 11%. Following the improvement in loss experience to date, earnings are expected to strengthen relative to FY18, although potentially remaining below historical levels due to reduced scale efficiencies.
The decrease in underwriting risk and growth in eligible own funds have resulted in a gradual strengthening in risk adjusted capitalisation, with SCR cover registering small successive increases between FY18 and 1H F19. This could nevertheless be diluted in the event of a shortfall in earnings projections, noting the underwriting loss posted for the year to date. The reinsurance programme is placed with a range of reinsurers that reflect sound aggregate credit strength, and limits net deductibles to conservative levels relative to FY18 capital.
Following the moderation in FY16, liquidity metrics stabilised at sound levels compared to the very strong levels posted at the start of the review period. In this respect, cash coverage of net technical liabilities and average monthly claims registered at 1.5x and 9 months respectively at FY18 (FY17: 1.5x and 7 months). Given the reduction in claims experience and higher cash balance, liquidity measures strengthened to 20 months (annualised) and 2.2x at 1H F19, and are expected to be supported by continued cash flow generation and a conservative investment strategy.
Combined high risk assets represented 47% of the FY18 capital balance (FY17: 55%), implying a moderately conservative level of asset risk. Given the profit pass through from subsidiaries (in the form of dividends) and the fact that Genric does not plan to make large strategic investments over the rating horizon, asset risk is expected to remain contained going forward.
Genric’s market share remains very limited, at less than 1% of industry revenue. The overall business profile nevertheless considers the fair level of earnings diversification and an improvement in the quality of the portfolio following corrective underwriting measures.
The rating may be downgraded in the event of an underperformance in earnings capacity relative to expectations. Conversely, the rating outlook may revert to Stable if the insurer demonstrates a sustained recovery in earnings and strengthening in capitalisation, while maintaining strong liquidity levels.
NATIONAL SCALE RATINGS HISTORY
|Initial rating (May 2015)|
|Claims paying ability: A-(ZA)|
|Last rating (January 2018)|
|Claims paying ability: A-(ZA)|
|Primary Analyst||Committee Chairperson|
|Susan Hawthorne||Vinay Nagar|
|Senior Credit Analyst||Senior Credit Analyst|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated May 2018
South Africa Short Term Insurance Bulletins, 2001 – 2017
Genric rating reports, 2015 – 2018
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.
Genric Insurance Company 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 ratings have been disclosed to Genric Insurance Company Limited.
The information received from Genric Insurance Company Limited and other reliable third parties to accord the credit ratings included:
- The latest audited financial statements to 30 June 2018
- Four years of comparative audited financial statements to 30 June
- Budgeted financial results to 30 June 2019
- Year to date management accounts to 31 December 2018 and 31 January 2019
- Quantitative statutory returns to 30 June 2018
- The current year reinsurance programme summary
- Other relevant documents
The ratings above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY
|Assets||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|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.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|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.|
|Deductible||The portion of an insured loss to be borne by the insured before he is entitled to recovery from the insurer.|
|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.|
|Dividend||The portion of a company’s after-tax earnings that is distributed to shareholders.|
|Liabilities||All financial claims, debts or potential losses incurred by an individual or an organisation.|
|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 Loss||The amount of loss sustained by an insurer after giving effect to all applicable reinsurance, salvage, and subrogation recoveries.|
|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.|
|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.|
For a more detailed glossary of terms please click here
GCR affirms Genric Insurance Company Limited’s rating of A-(ZA); Outlook Negative