Announcements

GCR affirms Genric Insurance Company Limited’s rating of A-(ZA); Outlook Negative

Johannesburg, 31 January 2018 — 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 criteria:

The rating affirmation considers the insurer’s progress in executing the expansion strategy to date, with the premium base having expanded by a compound annual growth rate of 50% over the review period (while maintaining a thin but reasonably stable aggregate underwriting margin). This has been accompanied by an enhanced level of earnings diversification, supporting a strengthening in the insurer’s business profile. However, strong growth in the risk base has resulted in successive dilutions in capitalisation, which GCR views to have placed negative pressure on the insurer’s credit profile. Accordingly, the rating has been placed on Negative outlook, reflecting potential for downward rating action should the insurer fail to manage capital sufficiency through the expansionary phase.

In this respect, the international solvency margin registered at a review period low of 39% at FY17 (FY16: 52%), and may remain suppressed in light of the anticipated growth trajectory. Furthermore, Interim Solvency Capital Requirement coverage reduced to 1.2x at FY17 (FY16: 1.4x), compared to more than 2x between FY13 and FY15. The reinsurance programme reflects a sound counterparty credit profile and limits net deductibles to conservative levels against capital.

Liquidity metrics are viewed to be sound, although have moderated from the very strong levels reflected prior to FY16. Cash coverage of net technical liabilities and average monthly claims registered at 1.5x and 7 months respectively at FY17 (FY16: 1.3x and 7 months), and are expected to remain at similar levels over the outlook horizon, supported by strong internal cash flow generation and a conservative investment approach.

Genric’s earnings capacity is assessed to be intermediate, with the thin aggregate underwriting margin having been supplemented by realised investment income. Going forward, the potential for higher dividend flows from subsidiaries (as the underlying businesses mature), together with further attainment of scale efficiencies, could contribute towards an enhanced level of earnings strength over the medium term.

Combined high risk assets represented 55% of the FY17 capital balance (FY16: 71%), implying a 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 conservative over the short to medium term, although the largely insurance focused subsidiary base implies a degree of systemic risk.

Genric’s market share remains very limited, at less than 1% of industry revenue. The overall business profile is nevertheless viewed to have benefited from enhanced earnings diversification.

Negative rating action is likely to be taken if capitalisation metrics remain pressured over the outlook horizon. Furthermore, the rating is sensitive to a weakening in liquidity and/or profitability. In contrast, a substantial improvement in market penetration, coupled with enhanced underwriting profitability, may allow for upward rating movement over the medium term. This would need to be accompanied by sufficient liquidity and enhanced capitalisation.

NATIONAL SCALE RATINGS HISTORY

   
Initial rating (May 2015)    
Claims paying ability: A-(ZA)    
Outlook: Stable    
     
Last rating (February 2017)    
Claims paying ability: A-(ZA)    
Outlook: Stable    

ANALYTICAL CONTACTS

Primary Analyst   Committee Chairperson
Susan Hawthorne   Yvonne Mujuru
Senior Credit Analyst   Sector Head: Insurance Ratings
(011) 784-1771   (011) 784-1771
susanh@globalratings.net   ymujuru@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Short Term Insurance Companies, updated July 2017

RSA Short Term Insurance Bulletins, 2001-2017

Genric rating reports, 2015 – 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. 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 rating has been disclosed to Genric Insurance Company Limited with no contestation of the rating.

The information received from Genric Insurance Company Limited and other reliable third parties to accord the credit rating included:

  • Audited annual financial statements to 30 June 2017
  • Four years of comparative audited financial statements to 30 June
  • Budgeted financial results to 30 June 2018
  • Statutory returns to 30 June 2017
  • The current year reinsurance programme summary
  • Other relevant company specific information

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 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.
Coverage The scope of the protection provided under a contract of insurance.
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.
International Scale Rating LC International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.
International Solvency Margin Measures the ability to cover current year’s written premiums using shareholder’s funds.
Investment Income The income generated by a company’s portfolio of investments.
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.
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
Risk The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.
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.
Systemic Risk The risk inherent to the entire market or an entire market segment.
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

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