Johannesburg, 21 June 2018 — Global Credit Ratings has today downgraded the national scale claims paying ability rating assigned to Global Alliance Seguros, S.A. to A(MZ) from AA-(MZ), with the rating outlook accorded as Negative. The rating is valid until June 2019.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to Global Alliance Seguros, S.A. (“GA Seguros”) based on the following key criteria:
The downgrade followed a sustained weakening in market share and earnings capacity. In this respect, the premium base contracted for a third consecutive year, with a particularly significant reduction in FY17, resulting in loss of scale efficiencies. Consequently, the insurer’s market share (for both short and long term business), equated to a lower 13% in FY17 (FY16: 22%), compared to 31% in FY14. As such, GA Seguros’s ranking dropped to fifth place in FY17, compared to its market leadership position in FY16. GCR expects volume and earnings pressure to persist over the rating horizon (given the challenging operating environment, in line with increased competitive dynamics).
Furthermore, earnings capacity remained within a very weak range over the last two years, compared to strong levels recorded at the start of the review period. This was largely due to deep underwriting deficits recorded over the last two years, offsetting sound investment income. Sustained weakening in underwriting profitability was spurred by a sizeable once off reserve adjustment in FY16, and loss of scale efficiencies in FY17 following a 37% reduction in premium volume. Consequently, the recent two year average underwriting margin equated to -28% in FY17, compared to the prior three year cycle metric of 12%. In light of the challenging operating environment, the insurer is likely to experience continued earnings strain over the rating horizon. Looking ahead, GCR views the extent to which this results in a further weakening in the insurer’s credit profile as a key rating consideration. The negative outlook reflects the likelihood for further negative rating action should GA Seguros’s credit profile continue to be impacted by the above-mentioned factors, which could potentially result in a further moderation in risk adjusted capitalisation.
Risk adjusted capitalisation reduced to a moderately strong range in FY17 from the strong levels reflected previously. This was largely due to the contraction in the capital base to MZN532m at FY17 (FY16: MZN787m), impacted by substantial losses incurred during the year, although partially offset by the reduction in insurance risk, coupled with very limited exposure to credit sensitivities. In the absence of additional solvency support, risk adjusted capital adequacy may moderate further over the outlook horizon on the back of sustained poor operating performance.
Liquidity is assessed at strong levels, underpinned by a sizable investment portfolio, with a large quantum of assets placed in liquid instruments (FY17: 84%). Accordingly, cash coverage of average monthly claims and technical provisions equated to a higher 25 months and 1.7x at FY17 (FY16: 15 months and 1.5x) respectively. Liquidity metrics are expected to trend within a similar level over the rating horizon.
GA Seguros’ rating is supported by implicit shareholder support from the Absa group. In this regard, GA Seguros is provided with operational and technical support, as well as additional avenues for growth by having access to the group’s large client base.
Negative rating action will likely follow further weakness in earnings capacity, risk adjusted capitalisation and market share. Conversely, the rating may benefit from a sustained improvement in earnings capacity, risk adjusted capitalisation and market share. This will have to be supported by continued strength in other credit protection metrics.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (November 2002)|
|Claims paying ability: BBB+(MZ)|
|Last rating (July 2017)|
|Claims paying ability: AA-(MZ)|
|Sector Head: Insurance Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated May 2018
Criteria for Rating Long Term Insurance Companies, updated May 2018
GA Seguros rating reports, 2002-2017
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. 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 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.
Global Alliance Seguros, S.A. 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 Global Alliance Seguros, S.A., with no change to the rating decision.
The information received from Global Alliance Seguros, S.A. and other reliable third parties to accord the credit rating included:
- The audited financial statements to 31 December 2017
- Four years of comparative audited financial statements to 31 December
- Full year budgeted financial statements to 31 December 2018
- Unaudited interim results to 30 April 2018
- Other relevant 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.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY
|Accident||An unplanned event, unexpected and undesigned, which occurs suddenly and at a definite place.|
|Accounting||A process of recording, summarising, and allocating all items of income and expense of the company and analysing, verifying and reporting the results.|
|Agency||An insurance sales office which is directed by an agent, manager, independent agent, or company manager.|
|Assets||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|Balance Sheet||Also known as a Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.|
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|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.|
|Captive Insurance Company||A company owned solely or in large part by one or more non- insurance entities for the primary purpose of providing insurance coverage to the owner or owners.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Catastrophe||An event, which causes a loss of extraordinary magnitude.|
|Claim||A request for payment of a loss, which may come under the terms of an insurance contract.|
|Commission||A certain percentage of premiums produced that is received or paid out as compensation by an insurer.|
|Contract||An agreement by which an insurer agrees, for a consideration, to provide benefits, reimburse losses or provide services for an insured. A ‘policy’ is the written statement of the terms of the 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.|
|Debt||An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.|
|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.|
|Dividend||The portion of a company’s after-tax earnings that is distributed to shareholders.|
|Equity||Equity is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.|
|Experience||A term used to describe the relationship, usually expressed as a percent or ratio, of premiums to claims for a plan, coverage, or benefits for a stated time period.|
|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.|
|Facultative||Facultative reinsurance means reinsurance of individual risks by offer and acceptance wherein the reinsurer retains the “faculty” to accept or reject each risk offered.|
|Financial Flexibility||The company’s ability to access additional sources of capital funding.|
|Financial Statements||Presentation of financial data including balance sheets, income statements and statements of cash flow, or any supporting statement that is intended to communicate an entity’s financial position at a point in time.|
|Income Statement||A summary of all the expenditure and income of a company over a set period.|
|International Scale Rating LC||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.|
|Interest||Money paid for the use of money.|
|Interest Rate||The charge or the return on an asset or debt expressed as a percentage of the price or size of the asset or debt. It is usually expressed on an annual basis.|
|Investment Income||The income generated by a company’s portfolio of investments.|
|Investment Portfolio||A collection of investments held by an individual investor or financial institution.|
|Liabilities||All financial claims, debts or potential losses incurred by an individual or an organisation.|
|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.|
|Loss||The happening of the event for which insurance pays.|
|Market Risk||Volatility in the value of a security/asset due to movements in share prices, interest rates, currencies, commodities or wider economic factors.|
|Net Profit||Trading/operating profits after deducting the expenses detailed in the profit and loss account such as interest, tax, depreciation, auditors’ fees and directors’ fees.|
|Net Retention||The amount of insurance that a ceding company keeps for its own account and does not reinsure.|
|Operational Risk||The risk of loss resulting from inadequate or failed internal processes, people or systems or from external events. This includes legal risk, but excludes strategic risk and reputational risk.|
|Personal Lines||Types of insurance, such as auto or home insurance, for individuals or families rather than for businesses or organisations.|
|Policy||The legal document issued by the company to the policyholder, which outlines the conditions and terms of the insurance.|
|Policyholder||The person in actual possession of an insurance policy.|
|Pool||An organisation of insurers or reinsurers through which particular types of risk are underwritten and premiums, losses and expenses are shared in agreed-upon amounts.|
|Preference Share||Preference or preferred shares entitle a holder to a first claim on any dividend paid by the company before payment is made on ordinary shares. Such dividends are normally linked to an interest rate and not determined by company profits. Preference shares are normally repayable at par value in the event of liquidation. They do not usually carry voting or pre-emptive rights. Preference shares can be redeemable or perpetual.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Rating Horizon||The rating outlook period|
|Reinstatement||The resumption of coverage under a policy, which has lapsed.|
|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.|
For a detailed glossary of terms please click here
GCR downgrades Global Alliance Seguros, S.A.’s rating to A(MZ); Outlook Negative.