Announcements Insurance Rating Alerts

GCR downgrades GA Seguros Mozambican financial strength rating to BBB+(MZ) on sustained weakening in capitalisation; Outlook Negative

Rating action

Johannesburg, 18th June 2020 – GCR Ratings (“GCR”) has downgraded Global Alliance Seguros S.A.’s (“GA Seguros”) national scale financial strength rating to BBB+(MZ) from A-(MZ), with the Outlook accorded as Negative.

Rated Entity / Issue Rating class Rating scale Rating Outlook/Watch
Global Alliance Seguros S.A. Financial strength National BBB+(MZ) Negative Outlook

Rating rationale

GA Seguros’ rating downgrade follows a sustained deterioration in risk adjusted capitalisation emanating from weak earnings generation. Over the review period, the insurer’s capital base deteriorated significantly without concomitant reduction in aggregate risk exposures. The downgrade also takes into account GCR’s view of a moderation in support from the parent company, Absa Financial Services Africa Holdings which has not provided capital or turnaround strategic support to the entity in the face of persistent challenges.

Risk adjusted capitalisation continued to weaken driven in large by poor earnings generation which resulted in substantial capital erosion over the review period. In this respect, the capital base weakened by 47% to MZN431m at FY19 while aggregate risk exposures remained elevated, with GCR capital adequacy ratio (“CAR”) declining to 1.1x (FY18: 1.4x; FY15: 2.1x). In the absence of additional capital support and/or a sustained turnaround in operating profitability, risk adjusted capital adequacy is likely to moderate further over the outlook horizon.

The rating factors the insurer’s access to operational and technical support from the parent company, a wholly owned subsidiary of Absa Group Limited. However, in light of persistent weakness in both earnings and capitalisation, GCR views the absence of capital assistance as well as lack of a sustainable turnaround strategy as a show of diminished support levels.

GA Seguros earnings performance remained weak, registering persistent underwriting deficits over the entire review period. Poor underwriting performance is largely a function of elevated operating costs and claims experience relative to historical levels. Consequently, the underwriting margin equated to a review period high of -32% in FY19, driven by additional workmen compensation reserves and cyclone-induced claims. Notwithstanding portfolio remediation efforts instigated by management since FY17, absent the abovesaid once-off items, claims experience remained elevated, while operating cost pressure largely stemming from very high group shared costs persisted, limiting underwriting profit headroom. Poor underwriting results consequentially impacted on bottom line performance, with realised investment (which also contracted due to a reduction in interest rates and invested funds) and other income being insufficient to curtail the occurrence a net loss of MZN28m in FY19.

The insurer’s liquidity profile saw a temporary moderation attributable to the application of funds in settling cyclone induced claims. This was further compounded by an increase in net technical liabilities arising from additional reserves related to workmen compensation obligations. In this respect, cash and stressed assets coverage of net technical liabilities reduced to 1.2x at FY19 (FY18: 1.6x), while coverage of operational requirements also moderated to 14 months (FY18: 18 months). Given that the majority of cyclone related claims were reinsured, GCR expects some receipt of some of these claims from participating counterparties. While potential exist for the liquidity ratio to fully recover to FY18 levels over the rating horizon, GCR will continue to monitor the impact of persistent earnings weakness and the uncertainty posed by the COVID-19 pandemic on the entity’s ability to sustain liquidity at rating adequate levels.

The business profile is considered to be neutral to the rating, with the underwriter’s competitive strength in the local market serving to offset a negative assessment on premium diversification. In this respect, GA Seguros continued to operate in the top tier local insurance market, occupying the fifth position in FY19 despite persistently shedding market share over the review period (FY19: 10%; FY17: 12%; FY15: 27%). Although the premium base continues to reflect a good spread at both gross and net levels, the benefits of such premium diversity are yet to filter through to the entity’s performance given the losses reported, particularly at underwriting level.

Outlook statement

The Negative Outlook reflects GCR’s expectations of continued strain on risk adjusted capitalisation and earnings which may be exacerbated by uncertainty posed by the COVID-19 pandemic. Accordingly, GCR’s CAR is anticipated to measure around 1.0x, while the liquidity ratio may recover to around 1.5x over the next 12 months. Nevertheless, the assessment of competitive position is likely to be maintained at currently levels, despite a possible slight moderation in market share at the close of the review year.

Rating triggers

Reversion to Stable Outlook may follow a persistent improvement in earnings and risk adjusted capitalisation. This will have to be supported by sustained competitive strength and a sound liquidity profile. Conversely, downward rating pressure may arise should earnings weakness persist, adversely impacting on risk adjusted capitalisation and liquidity.

Analytical contacts

Primary analyst Tichaona Nyakudya Senior Analyst: Insurance
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, May 2020
GCR Insurance Sector Risk Scores, June 2020

Global Alliance Seguros S.A.

Rating class Review Rating scale Rating class Outlook/Watch Date
Claims paying ability Initial National BBB+(MZ) Stable November 2002
Financial strength Last National A-(MZ) Stable July 2019

Risk score summary

Rating Components & Factors Risk scores
Operating environment 3.00
Country risk score 1.00
Sector risk score 2.00
Business profile 0.00
Competitive position 0.50
Premium diversification (0.50)
Management and governance 0.00
Financial profile (0.50)
Earnings (1.00)
Capitalisation 0.00
Liquidity 0.50
Comparative profile 0.50
Group support 0.50
Government support 0.00
Peer analysis 0.00
Total Score 3.00

Glossary

Premium The price of insurance protection for a specified risk for a specified period of time.
Provision The amount set aside or deducted from operating income to cover expected or identified loan losses.
Rating Horizon The rating outlook period
Rating Outlook See GCR Rating Scales, Symbols and Definitions.
Reinsurance The practice whereby one party, called the Reinsurer, in consideration of a premium paid to him agrees to indemnify another party, called the Reinsured, for part or all of the liability assumed by the latter party under a policy or policies of insurance, which it has issued. The reinsured may be referred to as the Original or Primary Insurer, or Direct Writing Company, or the Ceding Company.
Retention The net amount of risk the ceding company keeps for its own account.
Risk The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.
Securities Various instruments used in the capital market to raise funds.
Security One of various instruments used in the capital market to raise funds.
Senior A security that has a higher repayment priority than junior securities.
Short Term Current; ordinarily less than one year.
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.

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 rating is based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such rating is an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit rating has been disclosed to the rated party. The rating was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating. 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 entity and other reliable third parties to accord the credit rating included:

  • Audited financial results as at 31 December 2019;
  • Four years of comparative audited financial statements to 31 December;
  • Unaudited interim results to March 2020;
  • Full year budgeted financial statements for 2020;
  • Reinsurance cover for 2020; and
  • Other relevant documents.
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