Johannesburg, 23 Dec 2016,– Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Renasa 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 Renasa Insurance Company Limited (“Renasa”) based on the following key criteria:
Renasa’s risk adjusted capitalisation measured at an intermediate level, which is expected to be sustained over the rating horizon, supporting the rating. In this respect, the international solvency margin equated to 45% at FYE16 (FYE15: 37%). Similarly, the insurer’s interim statutory capital adequacy ratio (“CAR”) registered at a higher 1.4x (FYE15: 1.1x), in line with management’s target range of between 1.3x and 1.5x. The reversion of capitalisation metrics to levels aligned with historical norms was supported by the purchase of additional reinsurance, and to a lesser degree by additional capital (R6m) and retained profits (R5m). Going forward, capitalisation is expected to be sustained at an intermediate level, with the insurer actively engaged in capital management.
Liquidity remains very strong, and represents a key rating strength. In this respect, cash coverage of net technical liabilities equated to 5.2x at FYE16 (FYE15: 4.4x), while claims cash coverage registered at a stable 13 months. GCR expects the insurer’s liquidity metrics to remain within a very strong range over the rating horizon, supported by the continued adoption of a conservative investment strategy.
Renasa’s reinsurance structure facilitates the insurer’s business model, offering high levels of capacity, coupled with profit support. Counterparty credit risk arising from high reinsurance cessions is mitigated by a strong reinsurance panel and conservative risk and event retention levels, representing a rating strength.
Earnings capacity is viewed to be intermediate, given the thin (albeit relatively stable) underwriting margins and modest investment income. The five year underwriting margin equated to a thin -0.2% (FY16: 1%; FY15: -1%). Similarly, the ROaE averaged 6% over the review period. In GCR’s view, the ability of the insurer to successfully improve and sustain stronger profitability metrics represents a key rating consideration over the short term.
The insurer’s business profile is intermediate, underpinned by its modest competitive position. In this respect, the insurer’s share of short term total industry gross premiums registered at 1% in FY16. This is partly offset by the insurer’s fairly well spread earnings profile and relatively low product risk. Going forward, GCR expects the insurer’s market share to remain stable, in view of management’s relatively controlled growth plan.
Upward movement of the rating or outlook could develop on the back of a sustained improvement in profitability, notable strengthening in risk adjusted capitalisation and an enhanced business profile. Negative rating actions may occur if Renasa were to fail to manage its risk adjusted capital adequacy at a level commensurate with its current rating or from sustained poor underwriting performance.
| NATIONAL SCALE RATINGS HISTORY | ||
| Initial rating (September 2006) | ||
| Claims paying ability: BBB+(ZA) | ||
| Outlook: Stable | ||
| Last rating (December 2015) | ||
| Claims paying ability: A-(ZA) | ||
| Outlook: Stable |
ANALYTICAL CONTACTS
| Primary Analyst | Secondary Analyst | |
| Marc Chadwick | Zwivhuya Mukosi | |
| Sector Head: Insurance Ratings | Junior Credit Analyst | |
| (011) 784-1771 | (011) 784-1771 | |
| chadwick@globalratings.net | zwivhuyam@globalratings.net | |
| Committee Chairperson | ||
| Susan Hawthorne | ||
| Senior Credit Analyst | ||
| (011) 784-1771 | ||
| susanh@globalratings.net |
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2016
Renasa rating reports, 2006-2015
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; 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.
Renasa 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 Renasa Insurance Company Limited with no contestation of the rating.
The information received from Renasa Insurance Company Limited and other reliable third parties to accord the credit rating included:
- Audited financial results as at 30 June 2016
- 4 years of comparative numbers
- Unaudited year to date results as at 30 September 2016
- Budgeted financial statements for 2017
- The 2016 reinsurance cover notes
- Statutory returns for financial year 2016
- Other non-public statistical 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
| 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. |
| Capital Adequacy | A measure of the adequacy of an entity’s capital resources in relation to its risks. |
| 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. |
| 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. |
| Distribution Channel | The method utilised by the insurance company to sell its products to policyholders. |
| 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. |
| 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. |
| International Scale Rating (“ISR”) | 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. |
| Intermediary | A third party in the sale and administration of insurance products. |
| Interest | Money paid for the use of money. |
| 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. |
| Market Risk | Volatility in the value of a security/asset due to movements in share prices, interest rates, currencies, commodities or wider economic factors. |
| National Scale Rating (“NSR”) | National Scale credit ratings express risk in relative rank order, which is to say they are ordinal measures of credit risk and are not predictive of a specific frequency of default or loss. |
| 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 |
| 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. |
| 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. |
| Statutory | Required by or having to do with law or statute. |
| Subordinated Debt | Debt that in the event of a default is repaid only after senior obligations have been repaid. It is higher risk than senior debt. |
| 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 term please click here
GCR affirms Renasa Insurance Company Limited’s rating of A-(ZA); Outlook Stable.
