Johannesburg, 28 February 2017 — 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 Stable.
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 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 49% 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.
Genric’s earnings capacity is assessed to be intermediate, with the relatively 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. Earnings generation is supported by conservative net retentions relative to capital, with the reinsurance programme reflecting a strong aggregate counterparty credit profile.
Combined high risk assets represented 71% of the FY16 capital balance (FY15: 84%), 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 quality is expected to strengthen further over the short to medium term, although the largely insurance focused subsidiary base implies a degree of systemic risk.
The rating is sensitive to fluctuations in capitalisation. In this regard, the pronounced increase in the risk base diluted nominal and risk adjusted capitalisation to moderately strong levels at FY16, compared to the strong levels reflected previously. Accordingly, the insurer’s ability to manage capital sufficiency through the expansionary phase will be a key rating consideration over the outlook horizon.
Key liquidity metrics are viewed to be strong, although growth in business volumes saw these moderate from the very strong levels displayed historically. Cash coverage of average monthly claims reduced to 7 months from a review period average of 13 months, while coverage of net technical liabilities decreased to 1.3x at FYE16 (review period average: 2.3x). Liquidity measures are expected to be maintained within a fairly strong range over the rating horizon, although may be impacted should anticipated growth not translate into a similar level of cash flow generation.
A substantial improvement in market penetration, including the successful bedding down and profitable growth of new portfolios, coupled with enhanced underwriting profitability in existing business, may allow for upward rating movement over the medium term. This must be accompanied by maintenance of sufficient levels of risk adjusted capitalisation and liquidity. In contrast, the rating is highly sensitive to a further reduction in liquidity and/or capitalisation metrics, stemming from either a shortfall in profitability and cash flow generation relative to expectations, or greater than expected growth strain.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (May 2015)|
|Claims paying ability: A-(ZA)|
|Last rating (March 2016)|
|Claims paying ability: A-(ZA)|
|Primary Analyst||Committee Chairperson|
|Susan Hawthorne||Marc Chadwick|
|Senior Credit Analyst||Sector Head: Insurance Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2016
Genric rating report, 2016
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:
- The latest audited financial statements to 30 June 2016
- Four years of comparative audited financial statements to 30 June
- Full year budgeted financial statements to 30 June 2017
- Unaudited year to date management accounts to December 2016
- Quantitative statutory return to 30 June 2016
- A summary of the 2016/2017 reinsurance programme
- Other relevant 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||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|Balance Sheet||A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.|
|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.|
|Capital Adequacy||A measure of the adequacy of an entity’s capital resources in relation to its risks.|
|Capital Base||The issued capital of a company, plus reserves and retained profits.|
|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.|
|Conditions||Provisions inserted in an insurance contract that qualify or place limitations on the insurer’s promise to perform.|
|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.|
|Income Statement||A summary of all the expenditure and income of a company over a set period.|
|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.|
|Investment Income||The income generated by a company’s portfolio of investments.|
|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.|
|Net Retention||The amount of insurance that a ceding company keeps for its own account and does not reinsure.|
|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.|
|Shareholder||An individual, entity or financial institution that holds shares or stock in an organisation or company.|
|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 detailed glossary of terms please click here
GCR affirms Genric Insurance Company Limited’s rating of A-(ZA); Outlook Stable