Rating action
Johannesburg, 23 July 2020 – GCR Ratings (“GCR”) has affirmed Telesure Investment Holdings (Pty) Limited’s (“TIH” or “the group”) national scale long term issuer rating of AA(ZA), Stable Outlook. At the same time, GCR has affirmed Auto and General Insurance Company Limited’s (“Auto and General”) national scale financial strength rating of AA-(ZA) with a Stable Outlook.
| Rated Entity / Issue | Rating class | Rating scale | Rating | Outlook/Watch |
| Telesure Investment Holdings (Pty) Limited | Long term issuer | National | AA(ZA) | Stable Outlook |
| Auto and General Insurance Company Limited | Financial strength | National | AA-(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 of May 2020. Click here to access the link. On the 4th of 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.
Rating rationale
The ratings were affirmed and maintained on Stable Outlook, supported by the group’s very strong financial profile, with capitalisation and liquidity expected to remain at rating appropriate levels, despite the moderation in earnings over the past two years.
TIH reflects very strong liquidity, with stressed investment coverage of technical liabilities and operational expenses equating to around 3.1x and 9 months respectively at 1H F20, after applying additional stresses for potential interest rate pressures. This is a function of the group’s highly conservative investment portfolio, with the vast majority of investment assets comprising cash and short term deposits. GCR expects liquidity to be sustained at similar levels, supported by the consistency in investment allocations, with stressed coverage of net technical liabilities expected to be maintained at around 3x over the outlook horizon.
Overall risk adjusted capitalisation is assessed to be sound, with Auto and General and 1Life Insurance (RF) Limited (“1Life”) reflecting Solvency Capital Requirement (“SCR”) coverage of 2.95x and 1.6x at 3Q F20. Furthermore, the quality of capital is viewed to have improved, following the recent transfer of related party loans outside of TIH, while management aims to maintain SCR coverage comfortably above a minimum target of 1.35x through conservative dividend distributions.
Earnings have moderated over the past two years, as a result of increasing lapse experience in 1Life, and higher quota share cessions of profitable short term business. This is reflected in a reduction in net return on revenue to about 14% in 11M F20 from 17% in 1H F20 and 23% in FY19. We expect earnings to remain at lower levels over the next twelve months, due to growth pressures associated with the poor economic outlook, but with claims experience still expected to be competitive and well contained.
The group reflects an intermediate competitive position, balancing the short term businesses’ moderately strong market share with very limited relative scale in 1Life. Similarly, premium diversification is assessed to be intermediate. The group’s short term premiums are concentrated towards the property and motor lines of business (in line with its strategic objectives), while the life business is considered to complement overall premium diversification. The assessment took into account the group’s geographic concentration, given that all business is derived from South Africa.
GCR views Auto and General to be an essential entity within the TIH group, being the largest short term premium contributor, with a sound history of performance and high level of assimilation. As a result, the rating of Auto and General is derived by considering the strengths and weaknesses of the broader group. TIH’s long term issuer rating reflects GCR’s view that policyholder obligations are senior to those of senior unsecured creditors
Outlook statement
The Stable Outlook reflects expectations that the insurer will sustain its very strong financial profile, with group SCR cover expected to register above 1.5x and stressed investment coverage of technical liabilities at around 3x. Net profitability is likely to continue to trend around levels reflected in 11M F20, with downward pressure associated with a normalisation in claims frequency post hard lockdown and pressurised business volumes expected to be somewhat cushioned by fee income and realised investment returns. The business profile is expected to remain similar, as the group continues to benefit from a differentiated short term product offering and strong franchise, and there is potential for a strengthening in competitive positioning associated with strategic initiatives targeting new distribution channels and product innovation.
Positive rating movement could follow a strengthening in competitive positioning or stabilisation in earnings to levels that are closer to the prior three-year history. Negative rating action is likely to follow if earnings weaken below expected levels, especially if this adversely impacts on liquidity or risk adjusted capitalisation. We could lower the ratings if SCR coverage trends closer to the minimum target of 1.35x, or if net technical reserve coverage reduces below 2.5x.
Analytical contacts
| Primary analyst | Susan Hawthorne | Senior Analyst: Insurance Ratings |
| Johannesburg, ZA | SusanH@GCRratings.com | +27 11 784 1771 |
| Committee chair | Matthew Pirnie | Group Head of Ratings |
| Johannesburg, ZA | MatthewP@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 |
Ratings history
Telesure Investment Holdings (Pty) Limited
| Rating class | Review | Rating scale | Rating | Outlook/Watch | Date |
| Long term issuer | Initial / last | National | AA(ZA) | Stable Outlook | December 2019 |
Auto and General Insurance Company Limited
| Rating class | Review | Rating scale | Rating | Outlook/Watch | Date |
| Financial strength | Initial / last | National | AA-(ZA) | Stable Outlook | December 2019 |
Risk score summary
| Rating components and factors | Risk scores |
| Operating environment | 15.00 |
| Country risk score | 7.00 |
| Sector risk score | 8.00 |
| Business profile | (0.25) |
| Competitive position | 0.00 |
| Premium diversification | (0.25) |
| Management and governance | 0.00 |
| Financial profile | 2.50 |
| Earnings | 0.50 |
| Capitalisation | 0.50 |
| Liquidity | 1.50 |
| Comparative profile | 0.00 |
| Group support | 0.00 |
| Government support | 0.00 |
| Peer analysis | 0.00 |
| Total Score | 17.25 |
Glossary
| 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. |
| 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. |
| 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. |
| Rating Horizon | The rating outlook period |
| 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. |
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 ratings are based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings are an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit ratings have been disclosed to the rated party. The ratings were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings. 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 ratings included:
- Audited financial statements to 30 June 2019
- Four years of comparative audited financial statements to 30 June
- Quantitative statutory returns for 1Life and Auto & General as at 31 December 2019 and 31 March 2020
- Unaudited group management accounts to 31 December 2019 and 31 May 2020
- Other related documents.
