Announcements Insurance Rating Alerts

GCR lowers Swan General’s international scale financial strength rating to BB, due to high economic headwinds; Outlook Stable

Rating action

Ebene, 31 March 2021 – GCR Ratings (“GCR”) has downgraded Swan General Ltd’s (“Swan General”) international scale financial strength rating to BB, from BB+, with the Outlook accorded as Stable. Simultaneously, the national scale financial strength rating has been affirmed at A+(MU), with the Outlook maintained on Stable.

Rated Entity / Issue

Rating class

Rating scale

Rating

Outlook/Watch

Swan General Ltd

Financial Strength

International

BB

Stable Outlook

National

A+(MU)

Stable Outlook

Rating rationale

Swan General’s international scale financial strength rating has been downgraded due to the high Covid-19 pandemic impact on Mauritius, the primary market. This reflects high concentration of the Mauritian economy to the tourism industry, which was severely impacted by Covid-19 pandemic restrictions. Nonetheless, the transmission of risks to the insurance sector is viewed to be less proportionate, resulting in the affirmation of the national scale rating. Overall, the ratings of Swan General reflect the strengths and weaknesses of the group, including the 82% owned Swan Life Ltd and smaller subsidiaries in Mauritius and Zambia.

The operating environment has faced significant headwinds in the past 12 months. Despite regionally comparatively strong GDP per capita and strong institutional characteristics, high dependency on tourism increased the vulnerability of Mauritius’s fiscal and external positions in 2020, with a full recovery to pre-pandemic levels expected only after 2022. However, the insurance sector was less impacted resulting in fairly stable company specific credit characteristics.

Swan General maintained a dominant market position with general and life businesses commanding review year market shares of 31% and 52% respectively. On a combined basis, the group accounted for 41% of industry gross premiums and a relative market share of close to 10x. We expect the group’s market position to remain strong over the outlook period, reflecting high appetite for acquisitions in scalable market segments, backed by market consistent organic growth. Furthermore, the group’s entrenched brand and long-standing relationships provide viable avenues for diversified income streams. As such, premiums are well diversified product-wise, with well spread life products balanced by strong participation on motor and accident lines. Geographic concentration to Mauritius is credit negative, albeit noting efforts to increase presence in other markets.

Earnings are a neutral rating input. Swan General’s operating margin averaged 4.6% over the past three years, exhibiting a stable trend. The modest operating margins are due to high claims incurred relative to total income, averaging above 75% over the corresponding period. This reflects elevated benefit payments on the life business and claims pressure from motor and health segments on the general business. Furthermore, investment income provides limited uplift to total income due to low yields in primary and offshore markets (although favourable relative to valuation assumptions), as well as high susceptibility to equity markets volatility. Going forward, we expect earnings capacity to be maintained within the same range, given constant repricing to prevent new business strain; thus, maintaining positive value of new business.

Risk adjusted capitalisation is supported within a moderately strong range by a favourable investment experience and the release of discretionary margins on non-profit policies, resulting in the accumulation of a sizeable surplus of MUR9bn at FY19. Taking the surplus into account, the group’s GCR capital adequacy ratio measured at c.150%, catering for high market risk carried on domestic and offshore equity investments. Regulatory capital adequacy ratios for both the short-term and long-term businesses were maintained above 200%, against a targeted minimum of 150%, with the latter evidencing significant capital redundancy that could cushion solvency metrics over the medium term.

Liquidity is assessed within a moderately strong range, thanks to healthy surplus balances. In this respect, the liquidity ratio measured above 1.5x, while operational cash coverage measured well above the prudent 12 months. Asset liability matching is somewhat constrained by the high portfolio weighting of equities (52% of the investment portfolio at FY19) and the prevalence of guarantees on a significant proportion of products. In this respect, the current balancing tactic of tilting new investments towards USD bonds could positively impact liquidity over the medium to long term if successfully implemented.

Outlook statement

The Stable Outlook reflects the insurer’s consistent business profile and range-bound earnings. While earnings, as well as capitalisation and liquidity, could benefit from better asset liability matching, we believe the dilution of equity exposures is likely to be realised over the medium to long term.

Rating triggers

Positive rating movement on the national scale could develop from a sustained improvement in the assessment of capitalisation and stronger liquidity metrics, while maintaining a similar business profile. Conversely, downward rating action on the national scale could follow a sustained deterioration in earnings and liquidity below expectations. The international scale rating is sensitive to a downward re-assessment of country risk.

Analytical contacts

Primary analyst

Godfrey Chingono

Deputy Sector Head: Insurance Ratings

Johannesburg, ZA

GodfreyC@GCRratings.com

+27 11 784 1771

     

Committee chair

Matthew Pirnie

Group Head of Ratings

Johannesburg, ZA

MatthewP@GCRratings.com

+27 11 784 1771

Registered Mauritius Office

Level 6, GFin Tower, 42 Hotel Street, Cybercity, Ebene, Mauritius, 72201

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, March 2021

GCR Insurance Sector Risk Scores, February 2021

Ratings history

Swan General Ltd

Rating class

Review

Rating scale

Rating

Outlook/Watch

Date

Claims paying ability

Initial

International

BBB

Stable Outlook

November 2013

National

AA-(MU)

Stable Outlook

November 2013

Financial strength

Last

International

BB+

Stable Outlook

December 2019

National

A+(MU)

Stable Outlook

December 2019

Risk score summary

Rating components and factors

Risk score

 

 

Operating environment

14.25

Country risk score

8.50

Sector risk score

5.75

   

Business profile

1.25

Competitive position

1.50

Premium diversification

(0.25)

Management and governance

0.00

 

 

Financial profile

1.25

Earnings

0.25

Capitalisation

0.50

Liquidity

0.50

   

Comparative profile

0.00

Group support

0.00

Peer analysis

0.00

   

Total score

16.75

Glossary

Assets

A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.

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.

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.

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.

Distribution Channel

The method utilised by the insurance company to sell its products to policyholders.

Gearing

Gearing (or leverage) refers to the extent to which a company is funded by debt and can be calculated by dividing its debt by shareholders’ funds or by EBITDA.

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.

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.

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.

Shareholder

An individual, entity or financial institution that holds shares or stock in an organisation or company.

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.

Technical Liabilities

The sum of Net UPR and Net OCR IBNR.

Underwriting Margin

Measures efficiency of underwriting and expense management processes.

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 ratings were 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 ratings have been disclosed to the rated entity. The ratings above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings. The rated entity participated in the rating process via written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from Swan General Ltd and other reliable third parties to accord the credit ratings included:

  • The audited company and group financial statements to 31 December 2019;
  • Four years of comparative company and group audited financial statements to 31 December;
  • Unaudited Swan General and Swan Life Ltd interim results to 30 September 2020;
  • Swan General and Swan Life Ltd actuarial reports to 31 December 2019;
  • Budgeted Swan General company financial statements to 31 December 2020;
  • Other related documents.
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