Johannesburg, 31 Oct 2016 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Société Nationale d’Assurances et de Réassurances of A(BF), with the outlook accorded as Positive. The rating is valid until October 2017.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to Société Nationale d’Assurances et de Réassurances (“Sonar”) based on the following key criteria:
Sonar’s positive outlook reflects strengthened liquidity and asset quality, which, coupled with a sustained strengthening in earnings capacity, may facilitate upward rating movement over the rating horizon. In this respect, liquidity metrics registered at stronger levels over the last two years, with cash coverage of net technical liabilities and the claims cash cover ratio averaging 0.9x and 40 months. In GCR’s view, the insurer has potential for sustained liquidity strength over the rating horizon, underpinned by scope for higher cash generation from operations, and management’s commitment to maintaining an increased weighting in liquid assets.
Asset quality is viewed to have improved over the last two years to a moderate level, partially owing to an increase in liquid assets, as well as improvements in aged premium debtors (following the implementation of new premium credit regulations). Financial assets, while representing a lower proportion of investments, continue to generate material returns, with potential to sustain the observed trend over the rating horizon.
Moderately strong risk adjusted capitalisation is largely a function of a relatively well contained quantum of insurance risks, partially offsetting elevated market exposures. In this respect, the international solvency margin increased to 95% at FYE15 (FYE14: 89%), and is expected to persist at moderately strong levels over the rating horizon. Despite relatively sound net profitability, the insurer’s capital growth remained subdued, given high average dividend pay-outs. Management expects to develop a formalised dividend policy, aimed at gradually building capital reserves to XOF12bn over the medium term (FYE15: XOF5.7bn). GCR views such a development as highly supportive of stronger risk adjusted capitalisation over the medium term.
Earnings capacity is largely a function of the insurer’s sizeable investment portfolio, offsetting weak underwriting profitability. In this respect, the insurer’s five year aggregate operating margin equated to 17% (five year underwriting margin: -5%). Furthermore, the ROaE has measured at a strong 18% over the comparative period. Management expects the underwriting margin to strengthen materially to 13% in FY16, underpinned by increased participation on more profitable business, and a lower total expense ratio. In GCR’s view, underwriting performance could improve, albeit registering within a more moderate range over the rating horizon.
Sonar is the largest player in the short term market, with a market share of industry gross premiums of 28% in FY15 (FY14: 30%). The insurer’s strong competitive position is underpinned by high brand recognition and well entrenched client facing relations. As such, GCR expects the insurer’s competitive position to support the rating, despite a potential reduction in market share stemming from increasing competitive pressures, together with management’s increased risk selection criteria.
The reinsurance programme structure introduces a moderate degree of counterparty concentration and credit risk. Cognisance is, however, taken of the moderate credit quality of the underlying reinsurers in the Globus Re reinsurance programme and the fact that the former retains no risk for its own account.
The rating could be upgraded if the insurer demonstrates a sustainable turnaround in underwriting profitability, coupled with sustained strength in liquidity and capitalisation. Conversely, downward rating pressure could develop from a material deterioration in earnings, asset quality and capitalisation.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (October 2009)|
|Claims paying ability: A(BF)|
|Initial rating (October 2015)|
|Claims paying ability: A(BF)|
|Primary Analyst||Committee Chairperson|
|Godfrey Chingono||Marc Chadwick|
|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
Sonar rating reports, 2009-2015
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.
Société Nationale d’Assurances et de Réassurances 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 Société Nationale d’Assurances et de Réassurances with no contestation of the rating.
The information received from Société Nationale d’Assurances et de Réassurances and other reliable third parties to accord the credit rating included:
- Audited financial statements to 31 December 2015
- Four years of comparative numbers
- Unaudited interim results to 30 June 2016
- Budgeted financial statements for 2016
- 2016 reinsurance cover notes
- Statutory returns to 31 December 2015
- Industry comparative data, and
- Other related 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.
|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 terms please click here