Announcements Insurance Rating Alerts

GCR revises Coface ZA’s national scale financial strength rating to AA(ZA); Outlook Stable

Rating Action

Johannesburg, 30th September 2019 – GCR Ratings (“GCR”) has revised Coface South Africa Insurance Company Limited’s (“Coface ZA”) national scale financial strength (formerly claims paying ability) rating to AA(ZA) from AA+(ZA), Stable Outlook.

Rated Entity / Issue Rating class Rating scale Rating Outlook/Watch
Coface ZA Financial strength National AA(ZA) Stable Outlook

GCR announced that it had released new criteria for rating insurance companies in May 2019. Consequently, the rating for Coface ZA was placed ‘Under Criteria Observation’. GCR finalised the review for Coface ZA under the released Criteria for Rating Insurance Companies, May 2019. As a result, the rating for Coface ZA has been revised in line with the new methodology and subsequently removed from ‘Under Criteria Observation’.

Rating Rationale

Coface ZA’s national scale financial strength rating balances the insurer’s strong balance sheet profile with limited premium scale, inherently high premium concentration and earnings weakness under challenging competitive and economic conditions. The insurer’s rating derives upliftment from strong implicit support from its majority parent, Compagnie Francaise d’Assurance pour le commerce Exterieur (“Coface SA”) and the broader Coface Group.

Coface ZA’s capitalisation is assessed to be strong, with very high risk adjusted capitalisation counterbalancing a limited capital base in absolute terms. The insurer’s Solvency Capital Requirement (“SCR”) coverage has registered comfortably above 3x over the past two years, and is expected to remain very high over the outlook horizon, supported by contained underwriting and investment risk. Similarly Coface ZA has maintained very strong liquidity, with stressed investment coverage of net technical liabilities of close to 2x. Liquidity is expected to be sustained at strong levels given consistent asset allocation. Furthermore, an explicit guarantee from a group subsidiary is viewed to be an additional source of available liquidity under a stressed scenario.

Notwithstanding the above, GCR’s view of Coface ZA’s overall financial profile is partly offset by weak aggregate earnings, which could represent an area of rating sensitivity. In this respect, the five year average underwriting margin equated to -10% in FY18, with the corresponding return on net earned premiums registering at 4%. In this regard, the ability of the insurer to benefit from a recent change in competitive dynamics is likely to be a key earnings driver going forward.

Coface ZA reflects an intermediate competitive position, with low premium scale offset by the insurer’s franchise strength within the South African trade credit space, as well as strategic benefits in the form of established systems and underwriting capabilities. GCR’s view of the insurer’s overall business profile nevertheless takes into account high concentration to trade credit, which is inherently exposed to volatility through potential for high severity claims experience and the linkage with the domestic credit cycle.

Coface ZA’s rating derives upliftment from strong implied parental support, given very strong levels of integration and strategic alignment, as well as explicit and implicit financial support.

Outlook Statement

The Stable Outlook reflects expectations that Coface ZA’s solvency and liquidity will be maintained at strong to very strong levels, while the business profile will remain similar over the outlook horizon.

Rating Triggers

Upward rating movement could follow a sustained turnaround in earnings, supported by enhanced scale efficiencies. In contrast, downward rating pressure may arise from a persistent reduction in capitalisation or liquidity.

Analytical Contacts

Primary analyst Susan Hawthorne Senior Insurance Analyst
Johannesburg, ZA SusanH@GCRratings.com +27 11 784 1771
Committee chair Yvonne Mujuru Sector Head: Insurance Ratings
Johannesburg, ZA YMujuru@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, June 2019
GCR Insurance Sector Risk Scores, July 2019

Ratings History

Coface ZA

Rating class Review Rating scale Rating class Outlook/Watch Date
Claims paying ability Initial National AAA(ZA) Stable Outlook August 2006
Last National AA+(ZA) Stable Outlook June 2018

Risk Score Summary

Risk score Coface ZA
Operating environment 16.25
Country risk score 7.50
Sector risk score 8.75
Business profile -3.00
Competitive position -0.75
Premium diversification -2.25
Management and governance 0.00
Financial profile 2.00
Earnings -1.00
Capitalisation 2.00
Liquidity 1.00
Comparative profile 2.00
Group support 2.00
Peer analysis 0.00
Total Score 17.25

Glossary

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.
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.
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.
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.
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 more detailed glossary of terms, please click here

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 was based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit rating has been disclosed to Coface South Africa Insurance Company Limited. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.

Coface South Africa Insurance Company Limited participated in the rating process via telephone conference, 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 Bankmed and other reliable third parties to accord the credit rating included:

  • Audited financial statements to 31 December 2018;
  • Four years of comparative audited financial statements to 31 December;
  • Full year budgeted financial statements to 31 December 2019;
  • Unaudited management accounts to 30 June 2019;
  • Annual statutory returns to 31 December 2018;
  • Other relevant documents


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