Johannesburg, 05 July 2018 — Global Credit Ratings has today downgraded the national scale claims paying ability rating assigned to Saham Assurances Angola Seguros, S.A. to A-(AO) from A(AO), with the outlook accorded as Stable. The rating is valid until June 2019.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to Saham Assurances Angola Seguros, S.A. (“Saham Angola”) based on the following key criteria:
The rating has been downgraded on the back of sustained weakening in earnings capacity relative to the strong performance recorded at the start of the review period, offsetting an improvement in risk adjusted capitalisation. GCR further notes the potential for persistent earnings pressure to gradually impact on capitalisation.
Earning capacity remained under pressure, with the two-year underwriting margin equating to -11% (FY17: -4%), compared to the prior three-year cycle margin of 9%. Moderately weak underwriting performance over the last two years was largely due to an increase in the net incurred loss ratio, coupled with higher operating expenses. In GCR’s view, earnings pressure may persist, with the net incurred loss ratio remaining higher (ranging between 35% and 40%), compared to the very low claims ratio registered historically (29%). This is likely to be exacerbated by high operating expenses, with the expense ratio forecast to remain above 60% (FY17: 66%; FY16: 76%).
The insurer’s risk adjusted capital adequacy rebounded to a moderately strong level, after registering at a moderately weak level over the last two years. This was largely due to an increase in the capital base, following a capital injection of AOA2.5bn in FY18, catering for an increased quantum of credit risk exposure (stemming from a rise in related-party receivables). Accordingly, the international solvency margin is budgeted to register at a higher 75% by FY18 (FY17: 42%). Risk adjusted capitalisation may remain at similar levels, albeit exposed to persistent and volatile earnings pressure. GCR also notes the high capital exposure to maximum net deductibles per event, which equated to 12% of capital at FY17. Nonetheless, this is partially mitigated by the strong aggregated credit quality of the reinsurance panel.
Liquidity metrics have remained at strong levels over the review period. In this respect, cash coverage of net technical liabilities registered at a high 4.5x at FY17 (FY16: 4.3x), while claims cash coverage equated to 79 months (FY16: 86 months). GCR expects liquidity metrics to remain within a strong range over the rating horizon, supported by somewhat conservative asset allocation. Cognisance is however taken of the currency risk stemming from dollar denominated exposures, in light of limited foreign currency holdings and the current operating environment challenges.
Saham Angola’s business profile is viewed to be moderately strong, underpinned by healthy competitive positioning and fairly diversified earnings. In this respect, the insurer is one of the leading players in the domestic market, with an estimated market share ranging between 15%- 20% of total industry gross premiums over the review period. The business mix is spread across four lines of business, albeit characterized by the presence of high-value multi-national risks, which result in a certain degree of volatility in the premium composition. Entrenched market relationships, strong brand recognition, products development and innovative marketing initiatives are expected to support the insurer’s competitive positioning over the rating horizon, while management expects to focus on enhanced earnings diversification over the medium term.
Reserving has been measured at high levels over the review period and is expected to be sustained over the rating horizon. Reserving is supported by a fairly sophisticated framework, derived from a fully integrated underwriting system and external technical support.
The rating may be upgraded if earnings capacity was sustainably restored to moderately strong ranges, while risk adjusted capitalisation and liquidity registered at strong levels. Conversely, a downgrade could result from risk adjusted capital adequacy weakening below expectations. Furthermore, a material deterioration in earnings capacity could result in negative rating action.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (August 2007)|
|Claims paying ability: BBB+(AO)|
|Last rating (July 2017)|
|Claims paying ability: A(AO)|
|Primary Analyst||Secondary Analyst|
|Yvonne Mujuru||Fleur NGASSA|
|Sector Head: Insurance Ratings||Junior Credit Analyst|
|(011) 784-1771||(011) 784-1771|
|Senior Credit Analyst|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated May 2018
Saham Angola rating reports and announcements, 2016-2017
GA Angola Seguros, S.A rating reports, 2007-2015
RATING LIMITATIONS AND DISCLAIMERS
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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.
Saham Assurances Angola Seguros, S.A. participated in the rating process via face-to-face management meetings, teleconferences and/or 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 Saham Assurances Angola Seguros, S.A. with no contestation of the rating.
The information received from Saham Assurances Angola Seguros, S.A. and other reliable third parties to accord the credit rating included:
- The audited annual financial statements to 31 December 2017
- Four years of comparative numbers
- Budgeted financial statements for 2018
- 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.
|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 detailed glossary of terms, please click here
GCR downgrades Saham Assurances Angola Seguros, S.A’s rating to A-(AO); Stable Outlook.