Johannesburg, 04 August 2020 – GCR Ratings (“GCR”) has downgraded Radiant Insurance Company Limited’s (“Radiant”) national scale financial strength rating to BBB(RW) from A-(RW), with the Outlook accorded as Negative.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|Radiant Insurance Company Limited||Financial strength||National||BBB(RW)||Negative Outlook|
The downgrade of Radiant’s national scale financial strength rating follows significant deterioration of the insurer’s financial profile, due to the application of new minimum wage for accident compensation of RWF90,000 instituted by the Supreme Court in 2016 (from the RWF30,000 previously applied). While the decision was being negotiated, the protracted nature triggered an increase of RWF3.8bn in Incurred But not Reported reserves (“IBNR”). The reserve movement caused a sizeable net loss, which though non-recurring and systematic in nature, significantly reduced capitalisation and liquidity metrics during the review year. This was compounded by increased exposure to investment properties, with planned incremental investments over the medium term likely to further strain the financial profile. The rating partially factors in potential for a negotiated settlement, with the Negative Outlook reflecting diminishing chances of a favourable outcome with the passage of time and additional financial profile strain expected from the investment property development.
Despite a steep underwriting loss of RWF3.2bn at FY19 (FY18: 204m loss) due to the RWF3.8bn increase in the IBNR reserve, earnings were maintained within an intermediate range considering the once-off and systematic nature of the reserve movement. This notwithstanding, GCR sees potential for a slight moderation in normalised earnings during the construction period of the property project, negating the recent strong performance in investment income (FY19: RWF950m; FY18: RWF753m). In addition, the ongoing exposure to reinsurance receivables which increased by 18% to RWF2.3bn net of payables is viewed to compound earnings risks. In this respect, the insurer’s ability to de-risk the balance sheet, counterbalancing negative market dynamics will represent a key rating consideration over the medium to long term.
The insurer’s capitalisation moderated significantly reflecting a re-allocation of RWF3.8bn from capital to reserves and a surge in investment property exposure to 100% of capital and 35% of the investment portfolio at FY19 (FY18: 26% and 15% of capital and investments respectively). In this respect, Radiant’s statutory solvency registered significantly below compliant levels. Similarly, liquidity weakened below a prudent range, with cash and stressed financial assets coverage of net technical reserves and operational cash coverage reducing to 0.8x and 6 months respectively at FY19 (FY18: 1.2x and 10 months). The current assessment of capitalisation and liquidity factors is premised on the possibility of a negotiated settlement on the minimum wage, which could materially improve capitalisation and liquidity metrics, albeit with continued exposure to reinsurance receivables and ongoing property projects likely to either reduce such potential recovery or further erode financial profile strength in the absence of a favourable outcome.
The business profile remained moderately strong, underpinned by a 16% share of the private insurance market, partially offset by premium concentration to motor and accident lines of business. Accordingly, Radiant defended its top tier position in the private insurance sector amidst increasing competitive dynamics and mergers, supported by an extensive network of tied agents, reinforcing control over a solid stream of direct business. Going forward, strategic partnership with government to underwrite agriculture insurance will boost growth in premiums, which is likely to sustain the business profile within similar levels.
The Negative Outlook reflects expectations of a further deterioration in financial profile, driven by earnings pressures which will adversely impact capitalisation and liquidity, while negating business profile strength. GCR expects the loss ratio to be higher based on applicable minimum wage for accident compensation, which coupled with persistent high reinsurance receivables will increase earnings risks in the absence of corrective pricing and/or a reversal of the Supreme Court decision. This, in addition to ongoing investments in properties, will exert further downward pressure on capitalisation and liquidity assessments below current levels.
The rating could revert to Stable if a negotiated settlement on the Supreme Court decision is reached in line with expectations and could be upgraded if the decision is reversed or the negotiated settlement on the benchmark minimum wage is close to the previous level, which will translate into a material recovery in earnings, capitalisation and liquidity.
|Primary analyst||Fleur Ngassa||Analyst: Insurance|
|Johannesburg, ZA||MarlaineN@GCRratings.com||+27 11 784 1771|
|Committee chair||Godfrey Chingono||Deputy Sector Head: Insurance|
|Johannesburg, ZA||GodfreyC@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, July 2020|
Radiant Insurance Company Limited
|Rating class||Review||Rating scale||Rating||Outlook/Watch||Date|
|Claims paying ability||Initial||National||A-(RW)||Stable||September 2018|
|Financial strength||Last||National||A-(RW)||Stable||November 2019|
Risk score summary
|Rating components & factors||Risk scores|
|Country risk score||3.75|
|Sector risk score||3.25|
|Management and governance||0.00|
|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 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 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 2019;
- Four years of comparative audited financial statements to 31 December
- Full year budgeted financial statements for 2020;
- Unaudited management accounts to 31 March 2020;
- Reinsurance cover notes for 2020; and
- Other relevant documents.