Johannesburg, 31 July 2015 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Hannover Reinsurance Africa Limited of AAA(ZA), with the outlook accorded as Stable. Furthermore, Global Credit Ratings has affirmed the international scale claims paying ability rating assigned to Hannover Reinsurance Africa Limited of A-, with the outlook accorded as Negative.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Hannover Reinsurance Africa Limited (“Hannover Re Africa”) based on the following key criteria:
The ratings are supported by Hannover Re Africa’s strategic importance to Hannover Rück SE (“Hannover Rück”, “Hannover Re group”). This is premised on strong operational integration, including branding, mandates, and strategic targets, together with the substantial cumulative profits transferred over the review period. Cognisance is also taken of the technical and retrocession support from the Hannover Re group, as well as capital injections at the underlying subsidiary level. Furthermore, the integration of the reinsurer’s Enterprise Risk Management (“ERM”) framework with that of the broader group implies a high degree of alignment with the group’s risk appetite and control parameters.
Hannover Re Africa’s competitive positioning is viewed as a key rating strength. The reinsurer is a top tier player in the South African reinsurance market, with a strong brand, high degree of technical expertise and favourable market reputation. The captive nature of a large portion of business assists in limiting risk to revenue generation and enhances the ability of the reinsurer to see through to the underlying risks.
The company’s business model provides it with access to a large component of niche business, which together with participation in specialist risks in the open market, assists in containing the impact of margin pressure in the commoditised space. Notwithstanding the atypically high claims experience in FY14 (attributed to an isolated source of agency business and large single property loss), the anticipated normalisation in loss experience points to an ongoing stable result over the underwriting cycle. However, in line with the experience in the insurance market, reinsurance trading conditions remain challenging. Note is taken of continued competitive pressure in the South African reinsurance market, which is viewed as an attractive diversification opportunity to multinational reinsurers and local primary players. Furthermore, the transition towards Solvency Assessment and Management is likely to see some migration towards highly rated international reinsurers, with South African reinsurers’ standalone international ratings being limited by the sovereign ceiling.
Hannover Re Africa has maintained sufficient capital adequacy levels, with risk adjusted capitalisation expected to remain sound over the rating horizon. GCR’s view of capital strength is further supported by the R275m unconditional line of credit from the parent, which enhances financial flexibility. The conservative investment composition is expected to continue to underpin strong liquidity metrics and a low degree of balance sheet risk, supported by a robust and formalised asset liability matching policy. Furthermore, a reduction in risk appetite and the associated net retention level contributes positively to GCR’s view of the company’s standalone credit profile.
Both the national and international scale ratings are at their respective rating ceilings. Negative action could arise as a result of a sustained weakening in the reinsurer’s business profile and associated technical profitability, which reduces the degree of strategic alignment and associated implied support from Hannover Rück. The negative outlook accorded to the international rating considers a potential downgrade of South Africa’s sovereign rating in the near term, which would lower the ceiling applicable to Hannover Re Africa’s international scale rating.
|NATIONAL SCALE RATINGS HISTORY||INTERNATIONAL SCALE RATINGS HISTORY|
|Initial rating (November 2007)||Initial rating (November 2007)|
|Claims paying ability: AA+(ZA)||Claims paying ability: A-|
|Outlook: Stable||Outlook: Stable|
|Last rating (July 2014)||Last rating (July 2014)|
|Claims paying ability: AAA(ZA)||Claims paying ability: A-|
|Outlook: Stable||Outlook: Negative|
|Primary Analyst||Committee Chairperson|
|Susan Hawthorne||Marc Chadwick|
|Analyst||Sector Head: Insurance Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Insurance Companies, updated July 2014
Hannover Re Africa rating reports, 2007-2014
RATING LIMITATIONS AND DISCLAIMERS
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GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY
|Balance Sheet||Also known as a Statement of Financial Position. 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.|
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|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.|
|Cession||Amount of the insurance ceded to a reinsurer by the original insuring company (cedant) in a reinsurance transaction.|
|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.|
|Credit Rating Agency||An entity that provides credit rating services.|
|Debt||An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.|
|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.|
|Downgrade||The assignment of a lower credit rating to an insurer by a credit rating agency. Opposite of upgrade.|
|Enterprise Risk Management||ERM refers to an integrated or holistic approach to managing risk across an organisation, using clearly articulated frameworks and processes controlled from board level.|
|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.|
|Financial Flexibility||The company’s ability to access additional sources of capital funding.|
|Financial Statements||Presentation of financial data including balance sheets, income statements and statements of cash flow, or any supporting statement that is intended to communicate an entity’s financial position at a point in time.|
|Income Statement||A summary of all the expenditure and income of a company over a set period.|
|International Scale Rating||ISRs relate to either foreign currency or local currency commitments, assessing the capacity of an issuer to meet these commitments using a globally applicable (and therefore internationally comparable) scale.|
|Interest||Money paid for the use of money.|
|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.|
|Liquidity Risk||The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.|
|Loss||The happening of the event for which insurance pays.|
|National Scale Rating||The national scale provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.|
|Net Retention||The amount of insurance that a ceding company keeps for its own account and does not reinsure.|
|Policy||The legal document issued by the company to the policyholder, which outlines the conditions and terms of the insurance.|
|Policyholder||The person in actual possession of an insurance policy.|
|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|
|Rating Outlook||A rating outlook indicates the potential direction of a rated entity’s rating over the medium term, typically one to two years. An outlook may be defined as: ‘Stable’ (nothing to suggest that the rating will change), ‘Positive’ (the rating symbol may be raised), ‘Negative’ (the rating symbol may be lowered) or ‘Evolving’ (the rating symbol may be raised or lowered).|
|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.|
|Retention||The net amount of risk the ceding company keeps for its own account.|
|Retrocession||The transaction whereby a reinsurer cedes to another reinsurer all or part of the reinsurance it has previously assumed.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Risk Management||Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.|
|Securities||Various instruments used in the capital market to raise funds.|
|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.|
|Statutory||Required by or having to do with law or statute.|
|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.|
|Upgrade||The assignment of a higher credit rating to an insurer by a credit rating agency. Opposite of downgrade.|
For a detailed glossary of terms please click here
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.
Hannover Reinsurance Africa 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 Hannover Reinsurance Africa Limited with no contestation of the rating.
The information received from Hannover Reinsurance Africa Limited and other reliable third parties to accord the credit ratings included:
- Audited financial results to 31 December 2014
- Four prior years of comparative audited financial results
- Unaudited results to 31 March 2015
- Budgeted financial statements to 31 December 2015
- Statutory returns to 31 December 2014 and 31 March 2015
- The current year retrocession cover notes and/or programme summary
- Other relevant company specific information
The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.