Announcements Insurance Rating Alerts

GCR revises the Outlook on GA Seguros’ Mozambican financial strength rating of BBB+(MZ) to Stable, from Negative, following an improvement in capitalisation

Rating action

Johannesburg, 20th May 2021 – GCR Ratings (“GCR”) has affirmed Global Alliance Seguros S.A.’s (“GA Seguros”) national scale financial strength rating of BBB+(MZ), with the Outlook revised to Stable, from Negative.

Rated entity / issue Rating class Rating scale Rating Outlook/Watch
Global Alliance Seguros S.A. Financial strength National BBB+(MZ) Stable Outlook

Rating rationale

GA Seguros’ rating affirmation and Outlook reversion to Stable, from Negative, is underpinned by improved capitalisation following a material increase in internally generated capital and a capital injection in FY20. While the latter demonstrates parental support from Absa Financial Services Africa Holdings, these funds partially compensated for capital erosion over the past four years, facilitating compliance with minimum capital requirement of MZN295m to be achieved by July 2021. Consequently, the insurer’s financial profile strengthened within the intermediate range, somewhat balancing pressures on the business profile stemming from persistent loss of market share.

An improvement in risk adjusted capitalisation represents a key risk mitigant, after a capital injection of MZN38m, while further benefitting from net profits recorded in the review year. Consequently, total capital grew by 29% to USD9m in FY20, partially recovering for capital eroded since FY17, but enough to comply with regulatory requirements. This supported an increase in the GCR capital adequacy ratio (“CAR”) into the strong range, at 1.8x (FY19: 1.1x), albeit the factor assessment remains limited by the absence of strong capital management and uncertainty over the persistence of the foreign exchange gains driving review year net profits, leaving capital exposed to volatile earnings. Therefore, the GCR CAR is expected to trend around 1.5x, balanced by relatively low levels of aggregate risk exposures.

The liquidity profile remained credit positive, supported by strong operating cash inflows, notably underpinned by reinsurance recoveries related to cyclone driven claims of FY19. Furthermore, GA Seguros maintained a very conservative asset allocation, with almost the entire investment portfolio placed in low-risk assets. Accordingly, the cash and stressed financial assets coverage of net technical liabilities rebounded to 1.5x (FY19: 1.2x), along with the operational cash coverage, measuring at a higher 20 months (FY19: 14 months). Going forward, liquidity is likely to measure within the same range, supported by a very conservative asset allocation, albeit susceptible to occurrences of catastrophic events.

GA Seguros earnings performance is still assessed weak, constrained by persistent underwriting deficits averaging -25% over the review period, which compressed average return on revenue to -0.2% despite support from sound and relatively stable investment income. Note is taken of lower net incurred loss ratio (FY20: 58%; FY19; 62%) and net commission ratio (FY20: 6%; FY19: 9%) driven by reinsurance recoveries, while operating costs also reduced in the midst of movement restrictions to contain the COVID-19 pandemic. Nevertheless, the operating cost structure of the insurer remains elevated and inefficient to turnaround underwriting performance, with review year net profits heavily supported by foreign exchange gains. Going forward, GCR expects similar dynamics to persist, with underwriting losses restraining progression in net profitability.

The business profile is neutral to the rating, with the insurer maintaining a strong market position and good premium spread across at least three lines of business and policyholders’ net accounts. Nevertheless, GCR notes that gross premiums growth continues to lag behind industry growth and management targets, which translated in lower market share and relative market share of 8% and 1.7x respectively (FY19: 10% and 2.1x). Going forward, premium growth is likely to remain subdued below the market average, factoring in negative market dynamics such as price-based competition in major lines of business. Therefore, despite efforts to stimulate product uptake and increase customer retention, the insurer’s market position may slide into a mid-tier range over the medium term, which may result in a reduction of the factor assessment.

The rating factors support from the parent company, Absa Financial Services Africa Holdings, a wholly owned subsidiary of Absa Group Limited. This has been historically demonstrated through operational integration, access to group technical resources, and recently reinforced through the capital injection.

Outlook statement

The Stable Outlook reflects GCR’s expectations that capitalisation and liquidity strengths will remain sufficient to offset pressures on the business profile. Accordingly, the GCR CAR is anticipated to measure around 1.5x, while the liquidity ratio may stabilise around 1.5x over the medium term, albeit sensitive to earnings volatility.

Rating triggers

Positive rating action may follow sustained improvements in core earnings, stabilising risk adjusted capitalisation at current levels. This will have to be supported by sustained competitive strength and a sound liquidity profile. Conversely, downward rating pressure may arise from earnings weakness, adversely impacting on risk adjusted capitalisation and liquidity. Furthermore, sustained deterioration in the entity’s competitive position below expectations may also result in negative rating action.

Analytical contacts

Primary analyst Fleur Ngassa Analyst: Insurance Ratings
Johannesburg, ZA MarlaineN@GCRratings.com +27 11 784 1771
Committee chair Godfrey Chingono Deputy Sector Head: Insurance Ratings
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, March 2021
GCR Insurance Sector Risk Scores, April 2021

Global Alliance Seguros S.A.

Rating class Review Rating scale Rating Outlook/Watch Date
Claims paying ability Initial National BBB+(MZ) Stable November 2002
Financial strength Last National BBB+(MZ) Negative June 2020

Risk score summary

Rating components & factors Risk scores
Operating environment 3.00
Country risk score 1.00
Sector risk score 2.00
Business profile 0.00
Competitive position 0.50
Premium diversification (0.50)
Management and governance 0.00
Financial profile 0.00
Earnings (1.00)
Capitalisation 0.50
Liquidity 0.50
Comparative profile 0.50
Group support 0.50
Government support 0.00
Peer analysis 0.00
Total score 3.50

Glossary

Premium The price of insurance protection for a specified risk for a specified period of time.
Provision The amount set aside or deducted from operating income to cover expected or identified loan losses.
Rating Horizon The rating outlook period
Rating Outlook See GCR Rating Scales, Symbols and Definitions.
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.
Retention The net amount of risk the ceding company keeps for its own account.
Risk The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.
Securities Various instruments used in the capital market to raise funds.
Security One of various instruments used in the capital market to raise funds.
Senior A security that has a higher repayment priority than junior securities.
Short Term Current; ordinarily less than one year.
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 party. 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 entity and other reliable third parties to accord the credit rating included:

  • Audited financial results as at 31 December 2020;
  • Four years of comparative audited financial statements to 31 December;
  • Unaudited interim results to February 2021;
  • Full year budgeted financial statements for 2021; and
  • Other relevant documents.
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