Announcements

GCR reaffirms Absa Insurance’s AAA(ZA) rating

The national scale claims paying ability rating accorded to Absa Insurance Company Limited (“Absa Insurance”) has been affirmed at AAA(ZA) (triple A), “Stable” outlook.

Absa Insurance is wholly owned by Absa Group, one of the largest banking institutions in South Africa. Absa Group is in turn a subsidiary of Barclays Bank Plc (UK). The group’s underlying client base provides Absa Insurance with a sizeable captive revenue stream, augmented by an extensive distribution force and strong franchise value. Furthermore, the banking arm’s penetration of the commercial (particularly agricultural) market allows for diversification in terms of product line and risk exposure. This notwithstanding continued reliance on the growth of the mortgage book constrains premium development.

Absa Insurance has displayed a well-controlled capital management strategy throughout the review period, supported by an internal risk-based model that has been in place for a number of years. The international solvency margin is not forecast to reduce below 45%, which is supportive of the insurer’s current rating as per GCR’s solvency framework. The conservative investment strategy limits capital exposure to market volatility, while underpinning sound liquidity metrics. Capitalisation levels are further supported by the low levels of risk retained for the insurer’s net account, with all reinsurance counterparties displaying high credit quality.

The competitive management expense ratio relative to the industry continues to support profitability, with improved efficiencies remaining a key focus of management in the medium term. This is supported by the containment of the loss ratio, although inherent cyclicality and rate pressures in certain lines remain a challenge. The insurer displays a high degree of concentration to Homeowner’s Comprehensive business, although note is taken of the favourable loss ratios exhibited by this book throughout the review period (supported by strong risk-based pricing models). Penetration of commercial segments has resulted in notable profit margin compression, with the insurer’s adjustment to the new underlying risk mix viewed as an important short to medium term objective.

Downward pressure on Absa Insurance’s rating could occur if a weakening were evidenced pertaining to the financial strength of the parent companies, the level of implied support from the parental structure, or Absa Insurance’s strategic positioning within the group structure. Furthermore, on stand-alone basis, downward rating pressure would emanate from a substantial and sustainable weakening in solvency and liquidity metrics to levels outside of the GCR’s model’s parameters for the current band.

Marc Chadwick

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