Announcements Insurance Rating Alerts

GCR simultaneously affirms TIH’s long-term issuer rating of AA(ZA) and Auto & General’s financial strength rating of AA-(ZA), Outlook on both ratings maintained as Stable

Rating action

Johannesburg, 15 December 2021 – GCR Ratings (“GCR”) has simultaneously affirmed Telesure Investment Holdings (Pty) Limited’s (“TIH” or “the group”) national scale long term issuer rating of AA(ZA) and Auto and General Insurance Company Limited’s (“Auto & General”) national scale financial strength rating of AA-(ZA). Both ratings were kept on Stable Outlook.

Rated entity / issue Rating class Rating scale Rating Outlook/Watch
Telesure Investment Holdings (Pty) Limited Long term issuer National AA(ZA) Stable Outlook
Auto and General Insurance Company Limited Financial strength National AA-(ZA) Stable Outlook

Rating rationale

The ratings balance the group’s very strong financial profile and intermediate business position. Financial profile strength is anchored by very strong liquidity and sound risk adjusted capitalisation, while the business position reflects moderate levels of competitiveness and premium diversification.

Liquidity remains very strong, positively influencing the ratings despite the observance of a significant increase in net technical provisions, surpassing growth in invested assets in FY21. In this respect, the group’s cash coverage of net technical liabilities moderated to 2.5x (FY20: 3x), reflecting liquidity absorption due to rising claims pressure. Nevertheless, coverage of operational expenses remained relatively unchanged, equating to 7.1 months (FY20: 7.5 months). Looking ahead, sustained claims pressure without corresponding growth in funded assets may see a further moderation in liquidity coverage.

Risk adjusted capitalisation continued to measure within a moderately sound range, underpinned by the maintenance of capital buffers sufficient to absorb aggregate risk exposures. In this respect, the group’s capital base equated to R3.8bn at FY21 (FY20: R3.6bn), largely driven by fair value gains on investments, while exposure to insurance and market risk remain contained due to substantial utilisation of reinsurance protection and conservative asset allocation. Furthermore, all regulated subsidiaries under the group remain well capitalised. From a statutory standpoint, the group’s Solvency Capital Requirement (“SCR”) cover continued to measure above 1.35x at FY21, and is likely to be sustained at rating sufficient levels over the outlook period.

Cross-cycle earnings continued to deteriorate largely attributable to persistent premium growth moderation against the backdrop of an elevated operating cost structure, and more recently rising claims pressure. In this respect, normalised operating costs remained relatively high at R3.7bn in FY21(FY20: R3.6bn). This was further exacerbated by a spike in net claims incurred to R1.5bn (FY20: R1.0bn), ascribable to a review year increase in claims frequency and Covid 19 reserve, with the associated combined loss ratio for both life and non-life business peaking at 55.6% (FY20: 35.6%). Consequently, the group’s operating performance sustained a downward trajectory over the past four years, with the operating margin slipping into the negative territory, equating to -5.6% (FY20: 2.0%; FY19: 6.5%). Note is taken of the group’s normalised operating margin of -10.5% after adjusting for once-off fair value gains on investments. Nevertheless, the group continues to receive income from other ancillary and related services, offsetting operating performance pressure though insufficient to counteract the observed slump in normalised bottom-line performance, with the return on revenue reducing to a break-even level (FY20: 15.3%; FY19: 22.9%). Looking ahead, earnings are likely to remain pressured over the rating outlook, reflecting potential extension to the observed premium growth trend and comparatively high operating cost base, although management is confident of benefiting positively from expenses that partly drove the latter.

The business profile is considered intermediate, reflecting moderate levels of competitiveness and premium diversification. In this respect, the group’s respective GWP weighted market and relative market share (in the context of both life and non-life insurance industries) remained relatively stable at around 1.1% and 0.8x (FY20: 1.2% and 0.9x). Despite demonstrating low market share metrics, TIH’s gross premiums base is deemed to be sound on a global scale, equating to c. USD582m at the close of FY21. Premiums are well spread across five insurance business units, while the group’s product mix reflects some degree of concentration to the motor line, accounting for 62% of GWP in FY21, although this is partially mitigated by exposure to property (16%) and individual life (11%) risks. Furthermore, participation in funeral and accident business which is sizeable in absolute terms, offers the group additional diversification benefits. The net risk base evidences enhanced premium spread across key lines of business, largely due to substantial utilisation of reinsurance protection in the core motor portfolio, balancing full risk retention on all life product offerings. Moreover, the market segment mix exhibits a considerable skew towards personal lines (non-intermediated business), constituting c. 87% of gross written premiums (life and non-life included) in FY21, adding notable diversification to the group’s policyholder profile. Nevertheless, the group’s business is entirely sourced locally, limiting upside to the overall premium diversification assessment.

GCR views Auto & General to be an essential entity within the TIH group, being the largest premium contributor at a stable 37% in FY21, with a sound history of performance and high level of assimilation. As a result, the rating of Auto & General is derived by considering the strengths and weaknesses of the broader group. TIH’s long term issuer rating reflects GCR’s view that policyholder obligations are senior to those of senior unsecured creditors.

Outlook statement

The Stable Outlook reflects expectations of sustained financial profile strength, with the group’s SCR cover expected to register above 1.35x, while stressed investments coverage of technical liabilities may continue to measure around 2x. The Outlook further incorporates potential earnings moderation in view of developing claims pressure along with a comparatively high operating cost base, although management is confident of benefiting positively from expenses that partly drove the latter. The business profile is expected to remain largely unchanged.

Rating triggers

The ratings could be upgraded following a sustained and material strengthening in competitive position and/or earnings. Conversely, negative rating action may follow should earnings weaken below expectations, especially if this continues to adversely impact liquidity. Furthermore, the ratings are sensitive to management and governance matters, in particular related party transactions and connected costs with potentially negative influence on the financial health of the group.

Analytical contacts

Primary analyst Tichaona Nyakudya Senior Analyst: Insurance Ratings
Johannesburg, ZA TichaonaN@GCRratings.com +27 11 784 1771
Committee chair Matthew Pirnie Group Head of Ratings
Johannesburg, ZA MatthewP@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, December 2021
GCR Insurance Sector Risk Scores, September 2021

Ratings history

Telesure Investment Holdings (Pty) Limited

Rating class Review Rating scale Rating Outlook/Watch Date
Long term issuer Initial National AA(ZA) Stable Outlook December 2019
Last AA(ZA) Stable Outlook July 2020

Auto and General Insurance Company Limited

Rating class Review Rating scale Rating Outlook/Watch Date
Financial strength Initial* National AA-(ZA) Stable Outlook December 2019
Last AA-(ZA) Stable Outlook July 2020

*Formerly claims paying ability.

Risk score summary

Rating factors and components Risk score
Operating environment 15.00
Country risk score 7.00
Sector risk score 8.00
Business profile (0.25)
Competitive position 0.00
Premium diversification (0.25)
Management and governance 0.00
Financial profile 2.50
Earnings 0.00
Capitalisation 1.00
Liquidity 1.50
Comparative profile 0.00
Group support 0.00
Government support 0.00
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.
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.

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 are based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings are 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 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 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 rated entity and other reliable third parties to accord the credit ratings included:

  • TIH and Auto & General audited financial statements to 30 June 2021;
  • Four years of comparative audited financial statements to 30 June;
  • TIH full year budgeted financial statements to 30 June 2022;
  • Quantitative statutory returns as at 30 June 2020;
  • Unaudited management accounts to 30 September 2021;
  • Current year reinsurance cover notes;
  • Other related documents.


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