Announcements Insurance Rating Alerts

GCR assigns long term issuer rating of AA(ZA) to Telesure Investment Holdings and financial strength rating of AA-(ZA) to Auto and General.

Rating Action

Johannesburg, 2 December 2019 – GCR Ratings (“GCR”) has assigned Telesure Investment Holdings (Pty) Limited (“TIH”) a national scale long term issuer rating of AA(ZA), Stable Outlook. At the same time, GCR has assigned TIH’s 100% owned subsidiary, Auto and General Insurance Company Limited (“Auto and General”), a national scale financial strength rating of AA-(ZA), 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

Rating Rationale

TIH’s rating balances the group’s very strong financial profile with an intermediate business profile. The long term issuer rating reflects GCR’s view that policyholder obligations are senior to those of senior unsecured creditors. Auto and General’s rating is derived from GCR’s assessment of the credit profile of TIH, given Auto and General’s importance within the group.

TIH reflects very strong liquidity based on GCR’s analysis of stressed financial asset coverage of net technical liabilities and operational cash flow requirements. The group has maintained a low risk investment approach, which together with sound operational cash flow generation, is expected to sustain liquidity at very strong levels over the outlook horizon.

Risk adjusted capitalisation is very strong and is expected to be managed at strong levels going forward, with the group and its underlying insurance subsidiaries targeting a comfortable buffer over regulatory capital requirements. GCR’s assessment of the group’s capitalisation was nevertheless moderated by a comparatively high component of related party loans issued by TIH, which are non-interest bearing.

GCR’s earnings assessment considered the recent reduction in the short term businesses’ underwriting profitability, with the underwriting margin expected to trend between 3% and 4% over the short to medium term. This followed an increase in reinsurance quota share cessions, which resulted in reduced profit participation and net premium scale. This is expected to be outweighed by strong profitability in the life business and a fairly large portion of fee income, with the group return on revenue projected to register above 10% after normalising for the impact of reserve releases (largely relating to a change in economic assumptions in FY19).

TIH is viewed to reflect an intermediate competitive position, balancing the low share of long term insurance premiums with the short term businesses’ moderately strong market share. In this regard, the group is expected to continue benefitting from a differentiated short term product offering and strong franchise, contributing to sound revenue scale and stability.

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.

Outlook Statement

The Stable Outlook reflects the expectation that TIH will maintain its very strong financial profile, while the business profile is not expected to change over the outlook horizon.

Rating Triggers

Positive rating action could follow a strengthening in the group’s market share and/or earnings, while maintaining very strong liquidity and strong capitalisation. Negative rating action could take place if liquidity or earnings metrics trend below expectations over a prolonged period.

Analytical Contacts

Primary analyst Susan Hawthorne Senior Analyst
Johannesburg, ZA Susanh@GCRratings.com +27 11 784 1771
Committee chair Godfrey Chingono Deputy Sector Head: Insurance Ratings
Johannesburg, ZA Godfreyc@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, June 2019
GCR Insurance Sector Risk Scores, November 2019

Ratings History

Rated Entity Rating class Review Rating scale Rating Outlook/Watch Date
Telesure Investment Holdings (Pty) Limited Long term issuer Initial/last National AA(ZA) Stable Outlook November 2019
Auto and General Insurance Company limited Financial strength Initial/last National AA-(ZA) Stable Outlook November 2019

Risk Score Summary

Risk scores Telesure Investment Holdings (Pty) Limited
Operating environment 16.25
Country risk score 7.50
Sector risk score 8.75
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 18.50

Glossary

Assets A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.
Capital The sum of money that is invested to generate proceeds.
Capital Adequacy A measure of the adequacy of an entity’s capital resources in relation to its risks.
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.
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.
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).
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.
Underwriting Margin Measures efficiency of underwriting and expense management processes.

SALIENT POINTS OF ACCORDED RATING

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 Telesure Investment Holdings (Pty) Limited. 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.

Telesure Investment Holdings (Pty) Limited participated in the rating process via face-to-face 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 Telesure Investment Holdings (Pty) Limited and other reliable third parties to accord the credit rating included:

  • Unsigned draft financial statements to 30 June 2019
  • Four years of comparative audited financial statements to 30 June
  • Short term insurance budgeted financial summary to 30 June 2020
  • A summary of the current reinsurance programme
  • Other related documents.
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