Johannesburg, 29th July 2021 – GCR Ratings (“GCR”) has simultaneously affirmed Telesure Investment Holdings (Pty) Limited’s (“TIH” or “the group”) national scale long term issuer rating of AA(ZA) and Auto & General Insurance Company Limited’s (“Auto and General”) national scale financial strength rating of AA-(ZA). Both ratings were kept on 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 ratings balance the group’s very strong financial profile and intermediate business position, with the former largely underpinned by balance sheet strength, while the latter reflects moderate levels of competitiveness and premium diversification.
With the support from healthy operational cash generation, coupled with the maintenance of a large, low risk asset portfolio, the group’s liquidity profile was sustained at a strengthened level. In this respect, cash and stressed financial assets covered net technical liabilities and operational cost requirements by 3x and 7 months at FY20 (FY19: 3.1x and 9 months), respectively. Liquidity strength is anticipated to be maintained going forward given that no material changes are expected in the asset allocation mix over the rating horizon.
Risk adjusted capitalisation moderated on the back of review year changes in the treatment of various exposures, asset reallocations, along with declaration of a significant dividend in specie (R2.5bn) to the parent company, the latter effectively transferring an equivalent loan receivable from a related party. Despite the moderation, risk adjusted capitalisation remains moderately strong considering that the preceding assessment was modelled around the lower limit of the targeted Solvency Capital Requirement (“SCR”) cover range of 1.35x, while observing capital quality concerns associated with the recoverability of the then loan receivable. Furthermore, all regulated subsidiaries under the group remain well capitalised. Over the next 12 months, risk adjusted capitalisation is likely to be sustained at rating sufficient levels, with the SCR cover projected to measure above 1.35x.
Despite sustaining a competitive loss ratio (FY20: 36%), the group’s earnings profile continued to deteriorate on the back of emergent sluggish premium growth trend in the face of mounting operational cost pressures. Barring review year contributions made to the Covid 19 relief fund (R270m), which is viewed to be non-recurring, operating expenses (finance charges included) grew 6% to R3.7bn, while total income generated from core insurance and investment operations closed the year at R5.3bn, representing 3% growth over the previous year balance. Resultantly, TIH’s normalised operating profit before tax lowered to R104m (FY19: R334m), translating to an operating margin of 2% (FY19: 6%; prior three-year average: 8%), with the return on revenue correspondingly reducing to 15% in FY20 (FY19: 23%). Looking ahead, premium growth prospects remain challenged, limiting scale efficiency realisation and operating profitability headroom. In the absence of sustainable cost-cutting initiatives, the group’s earnings profile may continue to moderate, negatively impacting its credit profile.
The business profile is considered intermediate, reflecting fringe positions assumed by insurance subsidiaries within the group in their respective market segments, along with moderate levels of premium diversification. In this respect, the group’s GWP weighted market and relative market share metrics were approximated at 1.2% and 0.9x at FY20, respectively. However, TIH evidenced sound levels of revenue scale, with the GWP base closing at R8.2bn in FY20 (FY19: R8.0bn). Despite demonstrating elevated concentration to the motor line, constituting 64% of GWP in FY20, property and individual life risks are considered material revenue diversifiers, each separately contributing more than 10% of GWP. Furthermore, the net risk base reflects enhanced premium spread across key lines of business, largely due to substantial utilisation of reinsurance protection in the core portfolio, along with very high risk retention on all life product offerings. Moreover, the market segment mix exhibits a considerable skew towards personal lines, constituting c. 88% of gross written premiums in FY20, adding notable diversification to the group’s revenue stream. Accordingly, the policyholder mix is considered extremely granular, with the top five policyholders collectively constituting less than 1% of GWP. Nevertheless, the group’s business is entirely sourced locally, limiting upside to the overall premium diversification assessment.
GCR views Auto and General to be an essential entity within the TIH group, being the largest premium contributor (FY20: 37%), 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.
The Stable Outlook reflects expectations of sustained financial profile strength, with the group’s SCR cover expected to register above 1.35x, while stressed investments coverage of technical liabilities may continue to measure around 3x. The Outlook further incorporates potential earnings moderation in view of current year muted premium growth projection of 0,4%, along with prospects of continued elevation in the operating cost base. The business profile is expected to remain largely unchanged considering the aforesaid expected future growth challenges.
The ratings could be upgraded following a sustained strengthening in competitive position and/or earnings. Conversely, negative rating action may follow should earnings weaken below expectations, especially if this adversely impacts liquidity or risk adjusted capitalisation. Furthermore, the ratings are sensitive to management and governance matters, in particular related party transactions and connected costs with potentially negative influence on the financial health of the group.
|Primary analyst||Tichaona Nyakudya||Senior Analyst: Insurance Ratings|
|Johannesburg, ZA||TichaonaN@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, July 2021|
|GCR Insurance Sector Risk Scores, July 2021|
Telesure Investment Holdings (Pty) Limited
|Rating class||Review||Rating scale||Rating||Outlook/Watch||Date|
|Long term issuer||Initial||National||AA(ZA)||Stable Outlook||December 2019|
|Last||AA(ZA)||Stable Outlook||July 2020|
Auto and General Insurance Company Limited
|Rating class||Review||Rating scale||Rating||Outlook/Watch||Date|
|Financial strength||Initial||National||AA-(ZA)||Stable Outlook||December 2019|
|Last||AA-(ZA)||Stable Outlook||July 2020|
*Formerly claims paying ability.
Risk score summary
|Rating factors and components||Risk score|
|Country risk score||7.00|
|Sector risk score||8.00|
|Management and governance||0.00|
|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.|
|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.|
|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 entity. 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:
- TIH, 1 Life and Auto & General audited financial statements to 30 June 2020;
- Four years of comparative audited financial statements to 30 June;
- TIH financial forecasts to 30 June 2023;
- Quantitative statutory returns as at 30 June 2020;
- Unaudited management accounts to 31 March 2021;
- Current year reinsurance cover notes;
- Other related documents.