Announcements Insurance Rating Alerts

GCR downgrades Radiant’s national scale financial strength rating to BB+(RW) from BBB(RW) on sustained financial profile weakness; Outlook Negative

Rating action

Johannesburg, 20 August 2021 – GCR Ratings (“GCR”) has downgraded Radiant Insurance Company Limited’s (“Radiant”) national scale financial strength rating to BB+(RW) from BBB(RW), with the Outlook accorded as Negative.

Rated entity / issue Rating class Rating scale Rating Outlook/Watch
Radiant Insurance Company Limited Financial strength National BB+(RW) Negative Outlook

Rating rationale

The downgrade of Radiant’s national scale financial strength rating reflects the insurer’s weakened financial profile as negotiation to reverse the increase in the minimum wage, remains uncertain. This is used as the basis for bodily injuries’ compensations and caused a moderation in earnings relative to historical levels, while increasing exposure to investment properties has further constrained the capitalisation assessment.

Capitalisation represents a key rating weakness, notably limited by increasing exposure to investment properties, which accounted for 119% of capital, while reinsurance receivables registered at 64% of capital at FY20. In this respect, the GCR capital adequacy ratio (“CAR”) remained depressed at around 1.0x, despite the insurer’s divestment of some equity investments. Subsequently, statutory solvency and the capital base recovered to 83% and above USD5m respectively as at June 2021, as a result of property revaluations gains. However, continued high exposure to investments in properties is likely to continue restraining risk adjusted capitalisation, with recovery to compliant levels still dependent upon the good execution of initiated corrective measures.

Liquidity was also constrained by the shift to a more risky investment stance, with high-risk investments accounting for a higher 50% of the portfolio at FY20 (FY19: 43%). Meanwhile, reinsurance receivables remained elevated at FRW2.9bn, which depressed liquidity potential despite management efforts to increase receivables’ collections. Therefore, operational cash coverage was relatively stagnant at 6 months, with cash and stressed financial assets coverage of net technical liabilities of 1.0x benefitting from claims reserves releases in the review year. Going forward, liquidity is expected to remain within a similarly low range given additional allocations to investment properties and relatively slow progress in receivables collections.

Earnings remained within an intermediate range, with the underwriting deficit reducing to -10% in FY20 (FY19: -32%), partially offsetting losses registered in FY19. Earnings improvement in the review year was driven by a reduction in claim reserves levels, which deflated the net claims ratio to 73% (FY19: 96%). Given uncertainty surrounding negotiation to reverse the minimum wage, the net claims ratio is expected to remain elevated relative to historical levels, although the impact on profitability is likely to be mitigated by regular increases in motor rates. As such, the earnings assessment is expected be within an intermediate range over the medium term, with potential for a full recovery in profitability, should the improved risk pricing be well executed.

The business profile remained moderately strong, evidenced by a stable market share of around 16% of the private insurance market. Accordingly, Radiant maintained its top tier position in the private insurance sector, supported by a solid stream of direct business, coupled with an extensive network of tied agents and strategic partnerships including the government. Going forward, management’s focus on risk pricing and retail business is likely to support the competitive position within the current range, although the overall business profile assessment is impacted by premium concentration to motor and accident lines of business.

Outlook Statement

The Negative Outlook reflects potential for ongoing constraints on capitalisation, as property exposure and persisting high reinsurance receivables continue compressing the factor assessment within weak ranges. These factors are further likely to limit the liquidity ratio to around 1.0x, despite potential for a sustained earnings recovery.

Rating triggers

Further negative rating action could be taken if plans to improve capitalisation do not materialise as a result of persistent weakness in asset quality, among other factors. The rating could revert to Stable if risk adjusted capitalisation improves in line with targeted levels. Furthermore, sustained strengthening in earnings and/or improved receivables collections, which positively impact on risk adjusted capitalisation and liquidity assessments could be positively viewed.

Analytical contacts

Primary analyst Fleur Ngassa Analyst: Insurance Ratings
Johannesburg, ZA MarlaineN@GCRratings.com +27 11 784 1771
Committee chair Susan Hawthorne Senior Analyst: Insurance Ratings
Johannesburg, ZA SusanH@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, August 2021
GCR Insurance Sector Risk Scores, April 2021

Rating history

Radiant Insurance Company Limited

Rating class Review Rating scale Rating Outlook/Watch Date
Claims paying ability Initial National A-(RW) Stable Outlook September 2018
Financial strength Last National BBB(RW) Negative Outlook August 2020

Risk score summary

Rating components & factors Risk scores
Operating environment 6.75
Country risk score 3.50
Sector risk score 3.25
Business profile 0.25
Competitive position 0.75
Premium diversification (0.50)
Management and governance 0.00
Financial profile (1.25)
Earnings (0.25)
Capitalisation 0.00
Liquidity (1.00)
Comparative profile 0.00
Group support 0.00
Government support 0.00
Peer analysis 0.00
Total score 5.75

Glossary

Premium The price of insurance protection for a specified risk for a specified period of time.
Pricing A process of determining the price of a debt security.
Private An issuance of securities without market participation, however, with a select few investors. Placed on a private basis and not in the open market.
Property Movable or immovable asset.
Rating Outlook See GCR Rating Scales, Symbols and Definitions.
Receivables Any outstanding debts, current or not, due to be paid to a company in cash.
Recovery The action or process of regaining possession or control of something lost. To recoup losses.
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.
Reserve (1) An amount representing actual or potential liabilities kept by an insurer to cover debts to policyholders. (2) An amount allocated for a special purpose. Note that a reserve is usually a liability and not an extra fund. On occasion a reserve may be an asset, such as a reserve for taxes not yet due.
Reserves A portion of funds allocated for an eventuality.
Risk The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.
Shareholder An individual, entity or financial institution that holds shares or stock in an organisation or company.
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.
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 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 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.

Subsequent to an appeal by the rated entity, the national scale financial strength rating was revised as reflected in the announcement. The credit rating has been disclosed to the rated entity. 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 rated entity and other reliable third parties to accord the credit rating included:

  • Draft financial statements as at 31 December 2020;
  • Four years of comparative audited financial statements to 31 December
  • Full year budgeted financial statements for 2021;
  • Unaudited management accounts to 30 June 2021; and
  • Other relevant documents.


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