Johannesburg, 3 August 2017 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Global Alliance Seguros, S.A. of AA-(MZ), with the rating outlook accorded as Stable. The rating is valid until June 2018.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to Global Alliance Seguros, S.A. (“GA Seguros”) based on the following key criteria:
GA Seguros reflects a very strong business profile, which is expected to be maintained over the medium term. Notwithstanding the moderation in market share over the past two years (FY16: 22%; FY15: 27%; FY14: 31%), GA Seguros remains a leading player in the short term insurance arena, supported by strong branding, and a high level of client support and broker acceptance.
Earnings capacity, having previously represented a primary rating strength, weakened materially over the past two years, with the insurer expected to endure continued margin suppression over the outlook horizon. Weaker earnings capacity was largely due to a deterioration in underwriting profitability, with the insurer reporting a highly negative underwriting margin of 21% (FY15: -0.4%; prior four year average: 13%). This was largely a function of sizeable once off reserve adjustments causing the claims ratio to spike to a high 84% in FY16 (FY15: 65%). This was compounded by a low growth environment, underpinned by stagnating economic activity. Further growth strain is likely to see underwriting results remain constricted in FY17. Positively, claims normalisation may provide some profit relief for the year, with the net result forecast to improve to MZN74m (FY16: -MZN22m). A reversion to increased underwriting profit stability could be attained from FY18 onwards (albeit that the elevated margins reported pre-FY15 are unlikely to return over the short term), should improved economic conditions facilitate increased uptake of higher value risks (supporting a lower expense ratio).
Capital strength was upheld, despite the weakening in earnings. In this regard, GA Seguros has built up a large capital buffer over the review period, which is viewed to cater for the current depressed earnings cycle. The slight erosion of capital in FY16 was offset by a lower quantum of underwriting exposure, leaving risk adjusted capitalisation unchanged at a strong level. Although limited capital build is projected over the short term, strong risk adjusted capitalisation is expected to be maintained amidst ongoing scaling down of the net risk base, with the international solvency margin budgeted at a higher 78% for FY17 (FY16: 70%).
Liquidity is viewed to be strong, supported by a sizeable investment portfolio (FY16: MZN1.5bn) that is largely weighted towards cash and equivalents (FY16: 83%). The reserving exercise undertaken in FY16 saw a slight reduction in key liquidity metrics, with cash coverage of technical provisions lowering to 1.6x (FY15: 2.3x). This notwithstanding, liquidity metrics are expected to remain at strong levels over the medium term, underpinned by a consistent investment strategy and normalising claims experience. Furthermore, the reinsurance program reflects a strong level of counterparty strength, while the maximum net retentions per risk and event on XOL cover was limited to a low 2.3% of FY16 capital.
GA Seguros’ rating is supported by implicit shareholder support from the Absa group. In this regard, GA Seguros is provided with operational and technical support, as well as an additional avenue for growth by having access to the group’s large client base. Furthermore, the group has demonstrated its continued financial support over the review period.
The rating currently matches the national scale ceiling applicable to entities operating within the Mozambique insurance industry. As a result, upward movement of the rating may follow an assessment of country and industry risk factors. A deterioration in key rating factors, such as a significant and protracted loss in market share, accompanied by deterioration in underwriting performance, impinging on key credit protection measures, may trigger a negative rating action.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (November 2002)|
|Claims paying ability: BBB+(MZ)|
|Last rating (July 2016)|
|Claims paying ability: AA-(MZ)|
|Sector Head: Insurance Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2016
Criteria for Rating Long Term Insurance Companies, updated July 2016
GA Seguros rating reports, 2002-2016
RATING LIMITATIONS AND DISCLAIMERS
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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; and c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
Global Alliance Seguros, S.A. 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 Global Alliance Seguros, S.A. with no contestation of the rating.
The information received from Global Alliance Seguros, S.A. and other reliable third parties to accord the credit rating included:
- The audited financial statements to 31 December 2016
- Four years of comparative audited financial statements to 31 December
- Full year budgeted financial statements to 31 December 2017
- Unaudited interim results to 30 April 2017
- 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
|Broker||One who represents an insured in the solicitation, negotiation or procurement of contracts of insurance, and who may render services incidental to those functions. By law the broker may also be an agent of the insurer for certain purposes such as delivery of the policy or collection of the premium.|
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|Capacity||The largest amount of insurance available from a company. In a broader sense, it can refer to the largest amount of insurance available in the marketplace.|
|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.|
|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.|
|Coverage||The scope of the protection provided under a contract of insurance.|
|Experience||A term used to describe the relationship, usually expressed as a percent or ratio, of premiums to claims for a plan, coverage, or benefits for a stated time period.|
|Exposure||Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For an insurer, its exposure may also relate to the risk related to policies issued.|
|Forecast||A calculation or estimate of future financial events.|
|Industry Risk||The risk that defaults will arise in an industry because of factors specifically affecting that industry.|
|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 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.|
|Loss||The happening of the event for which insurance pays.|
|Net Retention||The amount of insurance that a ceding company keeps for its own account and does not reinsure.|
|Portfolio||All of the insurer’s in-force policies and outstanding losses, with respect to described segments of its business.|
|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||(1) An amount representing actual or potential liabilities kept by an insurer to cover debts to policyholders. (2) An amount allocated for a special purpose. Note that a reserve is usually a liability and not an extra fund. On occasion a reserve may be an asset, such as a reserve for taxes not yet due.|
|Retention||The net amount of risk the ceding company keeps for its own account.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Shareholder||An individual, entity or financial institution that holds shares or stock in an organisation or company.|
|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.|
|Underwriting Result||The profit or loss that an insurer derives from providing insurance or reinsurance coverage, exclusive of investment income and other income.|
For a detailed glossary of terms please click here
GCR affirms Global Alliance Seguros, S.A.’s rating of AA-(MZ); Outlook Stable.