|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|Renasa Insurance Company Limited||Financial strength||National||A-(ZA)||Stable Outlook|
The rating action follows a reduction in the South African country and insurance sector risk assessments.
The South African country risk score was lowered to 7.0 from 7.5 previously, in a market alert released on the 27th May 2020. Click here to access the link. On 4th June 2020, the South African Insurance sector risk score was also lowered to 8.0 from 8.75 previously. Click here to access link.
Combined, the above country and sector risk scores comprise the operating environment score, which is a key input into GCR’s ratings.
Renasa’s national scale financial strength rating affirmation balances the insurer’s very strong liquidity metrics and adequate capitalisation, partially diluted by intermediate earnings, and the offsetting impact of a comparatively limited business profile. The Stable Outlook factors in the insurer’s limited exposure to high risk accounts in the wake of the COVID-19 pandemic and expectations for the maintenance of similar credit strength over the rating horizon.
Liquidity has been maintained within a strong range supported by internal cash generation and conservative asset allocation. In this regard, coverage of net technical liabilities by stressed financial assets tracked the review trend at around 5x, while operational cash coverage registered at 11 months at 10M F20 (FY19: 12 months; FY18: 18 months). Going forward, liquidity is expected to remain within a strong range.
Renasa’s risk adjusted capitalisation was assessed within an intermediate range, supported by sound internal capital generation and limited insurance and market risk exposures. As such, the regulatory Solvency Capital Requirement (“SCR”) coverage equated to 1.2x at 10M F20, measuring within the internal target band. Going forward, risk adjusted capitalisation is expected to remain intermediate, with potential moderation of the SCR coverage from the impact of the COVID-19 pandemic likely to be within a rating adequate range.
Earnings are viewed to be intermediate, characterised by thin and volatile underwriting margins due to the predominant motor book that is susceptible to high claiming trends. The gross underwriting margin registered at -0.4% in 10M F20 (FY19: -0.1%). Going forward, note is taken of uncertainties arising out of the COVID-19 pandemic, which could result in pressure on claims and scale efficiencies albeit noting limited exposure to claims directly associated with the pandemic.
Renasa’s market position has been maintained at an intermediate level with market share and relative market share registering at 1.5% and 1.2x in FY19 (FY18: 1.1% and 0.9x) respectively, albeit limited on a net basis due to high reinsurance utilisation. In this regard, the insurer’s net premium retention level equated to 11% in FY19 (review period average: 11%), bearing negatively on scale efficiencies. GCR continues to see execution risk in terms of managing underwriting profitability and growth appetite, representing a key rating consideration over the medium term. The business mix is limited with two lines of business contributing materially to revenue and the premium base being skewed towards the motor book.
GCR expects earnings to remain suppressed, exerting some pressure on risk adjusted capitalisation, although the factor’s assessment is expected to remain within a rating adequate range. Liquidity is expected to remain strong, evidencing sufficient buffers to withstand a level of moderation over the outlook horizon. The business profile is unlikely to change materially over the medium term, although the maintenance of above average quality growth could form a positive factor consideration over the medium term.
The rating may be upgraded on sustained improvement in earnings while maintaining adequate risk adjusted capitalisation and strong liquidity. Conversely, we could lower the rating if earnings pressure persists, negatively impacting risk adjusted capitalisation to levels below expectations.
|Primary analyst||Godfrey Chingono||Deputy Sector Head: Insurance Ratings|
|Johannesburg, ZA||GodfreyC@GCRratings.com||+27 11 784 1771|
|Secondary analyst||Linda Matavire||Analyst: Insurance Ratings|
|Johannesburg, ZA||LindaM@GCRratings.com||+27 11 784 1771|
|Committee chair||Susan Hawthorne||Senior Analyst: Insurance Ratings|
|Johannesburg, ZA||SusanH@GCRratings.com||+27 11 784 1771|
Related criteria and research
|Criteria for the GCR Ratings Framework, May 2019|
|Criteria for Rating Insurance Companies, May 2019|
|GCR Ratings Scales, Symbols & Definitions, May 2019|
|GCR Country Risk Scores, May 2020|
|GCR Insurance Sector Risk Scores, July 2020|
Renasa Insurance Company Limited
|Rating class||Review||Rating scale||Rating class||Outlook/Watch||Date|
|Claims paying ability||Initial||National||BBB+(ZA)||Stable Outlook||September 2006|
|Financial Strength||Last||National||A-(ZA)||Stable Outlook||November 2019|
Risk score summary
|Rating Components and Factors||Risk score|
|Country risk score||7.00|
|Sector risk score||8.00|
|Management and governance||0.00|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|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.|
|Release||An agreement between the creditor and debtor, in terms of which the creditor release the debtor from its obligations.|
|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.|
|Securities||Various instruments used in the capital market to raise funds.|
|Securitisation||A process of repackaging portfolios of cash-flow producing financial instruments into securities for sale to third parties.|
|Security||One of various instruments used in the capital market to raise funds.|
|Senior||A security that has a higher repayment priority than junior securities.|
|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.|
|Structured Finance||A method of raising funds in the capital markets. A Structured Finance transaction is established to accomplish certain funding objectives whist reducing risk.|
|Technical Liabilities||The sum of Net UPR and Net OCR IBNR.|
|Underwriting Margin||Measures efficiency of underwriting and expense management processes.|
|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 rating has been raised on its specific scale.|
SALIENT POINTS OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating process 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.
The credit rating has been disclosed to the rated entity. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating. The rated entity participated in the rating process via virtual management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The information received from the rated entity and other reliable third parties to accord the credit rating included:
- Audited financial results as at 30 June 2019;
- Four years of comparative audited financial statements to 30 June
- Full year budgeted financial statements for 2020;
- Unaudited interim results to 30 April 2020;
- Reinsurance cover notes for 2020; and
- Other relevant documents.