Johannesburg, 05 June 2018 — Global Credit Ratings has today downgraded the national scale claims paying ability rating assigned to CIC General Insurance Limited to A-(KE) from A(KE) with the outlook accorded as Stable. The rating is valid until May 2019.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to CIC General Insurance Limited (“CIC General”) based on the following key criteria:
The downgrade follows sustained weakening in earnings capacity, together with a reduction in risk adjusted capital adequacy, which are expected to persist over the outlook horizon. In this respect, CIC General’s earnings capacity moderated to an intermediate level, from moderately strong levels historically. This was underpinned by elevated operating expenses impacting adversely on underwriting profitability. In this regard, the underwriting margin averaged -8% over the past two years compared to 3% over the prior three year cycle, and is expected to persist at similar levels over the outlook horizon.
Furthermore, risk adjusted capitalisation moderated to an intermediate level over the last two years from strong levels previously. This was largely due to increased insurance, credit and market risk exposures. In this respect, the adjusted international solvency margin equated to 36% at FY17 (FY16: 47%; FY15: 59%). While credit risk is expected to reduce on the back of stricter debt management practices, GCR expects capital adequacy to remain at a similar level over the outlook horizon, given strong growth targets envisaged in the absence of concomitant capital build. Maximum net deductibles are limited to conservative levels relative to capital, while the reinsurance panel reflects a moderately strong aggregated credit profile.
The liquidity profile generally registered within an intermediate range over the review period, given moderately strong metrics and an intermediate level of banking counterparty strength. In this respect, coverage of net technical liabilities averaged 0.8x, while the claims cash cover ratio averaged 10 months. Cognisance is taken of the moderately high concentration to a single financial institution, albeit this is partially mitigated by the strong credit quality of the bank. In GCR’s view, the insurer’s liquidity profile is likely to remain at a similar level over the outlook horizon, underpinned by the asset allocation envisaged.
CIC General’s business profile is viewed to be moderately strong, supported by strong competitive positioning and fairly well diversified earnings (although the portfolio evidences heavy reliance on medical and motor). The insurer’s share of short term industry gross premiums equated to a higher 8.1% in FY17 (FY16: 6.9 %; FY15: 7.1%). Market position is supported by an established brand and a widening distribution footprint. As such, GCR expects the business profile to remain within a moderately strong range over the rating horizon.
The rating may be upgraded should the insurer’s earnings capacity sustainably strengthen. This would need to be supported by enhanced risk adjusted capitalisation and sustained liquidity metrics. Conversely, the rating may be downgraded if capitalisation and/or liquidity deteriorate significantly.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (May 2013)|
|Claims paying ability: A(KE)|
|Last rating (May 2017)|
|Claims paying ability: A(KE)|
|Primary Analyst||Secondary Analyst|
|Yvonne Mujuru||Sylvia Mhlanga|
|Sector Head: Insurance Ratings||Credit Analyst|
|(011) 784 – 1771||(011) 784 – 1771|
|Senior Credit Analyst|
|(011) 784 – 1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated May 2018
CIC General’s rating reports, 2013-2017
RATING LIMITATIONS AND DISCLAIMERS
ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO/RATING-SCALES-DEFINITIONS. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.
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.
CIC General Insurance 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, and contested by, CIC General Insurance Limited with no change to the rating decision.
The information received from CIC General Insurance Limited and other reliable third parties to accord the credit rating included:
- The 2017 audited annual financial statements Four years of comparative audited numbers
- Unaudited interim results to 31 March 2018
- Budgeted financial statements for 2018
- 2018 reinsurance cover notes
- Actuarial valuation statement for 2017
- Financial Condition Report for 2017
- 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.
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 more detailed glossary of terms, please click here
GCR downgrades CIC General Insurance Limited’s rating to A-(KE); Outlook Stable.