Announcements

GCR upgrades Centriq Insurance Company Limited’s rating to AA-(ZA); Outlook Stable

Johannesburg, 29 June 2015 — Global Credit Ratings has today upgraded the national scale claims paying ability rating assigned to Centriq Insurance Company Limited to AA-(ZA); with the outlook accorded as Stable.

SUMMARY RATING RATIONALE

Global Credit Ratings has accorded the above credit rating to Centriq Insurance Company Limited based on the following key criteria:

Centriq’s rating is supported by the insurer’s strong standalone credit profile, coupled with support derived from the Santam group. In this regard, GCR considers Centriq to be strategically important to the Santam group, given the parent’s strategic focus on growing market share in the specialist lines segment, as well as its material participation on the reinsurance programme. This is reinforced by the risk management oversight provided by the shareholder, with group Enterprise Risk Management policies having become entrenched in the company’s management and reporting functions.

Risk adjusted capitalisation is expected to be maintained at adequate levels, and is complemented by the additional financial flexibility afforded by the Santam draw down facility. Furthermore, the successful containment of the cells’ solvency shortfalls over the past two years enhances the insurer’s credit strength and is favourably viewed from a rating perspective. The insurer has maintained a low risk balance sheet, while consolidated liquidity levels are expected to remain sound, underpinned by the company’s conservative investment policy.

Centriq continues to hold a material share of the cell captive market, with competitive positioning supported by development of systems and processes. Furthermore, the specialised nature of the business model is relatively difficult to replicate from start up. On a statutory basis, Centriq’s average underwriting margin compares favourably with key competitors and the average for typical insurers. Furthermore, GCR expects the insurer to continue to achieve robust net profitability, given the large portion of fee based earnings.

Note is, however, taken of the uncertainty surrounding the ultimate treatment of ring fencing and asset recognition under SAM. Furthermore, possible regulatory changes could impact on the company’s strategic direction and ultimate profitability. The rating also considers the inherent exposure to volume volatility in the cell captive environment, given the portfolio nature of the arrangements and attrition associated with maturing books of business.

A rating upgrade could be supported by a) a strengthening in competitive positioning that is supported by growth into profitable business lines over the medium term, and b) enhanced risk adjusted capitalisation levels. In contrast, a sustained weakening in operating performance that leads to erosion of promoter solvency, with a simultaneous reduction in shareholder capital support, could result in negative rating action. This could also be triggered by a weakening in asset quality or liquidity levels.

NATIONAL SCALE RATINGS HISTORY    
     
Initial rating (March 2006)    
Claims paying ability: A(ZA)    
Outlook: Stable    
     
Last rating (June 2014)    
Claims paying ability: A+(ZA)    
Outlook: Stable    

ANALYTICAL CONTACTS

Primary Analyst   Committee Chairperson
Susan Hawthorne   Marc Chadwick
Analyst   Sector head: Insurance Ratings
(011) 784-1771   (011) 784-1771
susanh@globalratings.net   chadwick@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Insurance Companies, updated July 2014

Criteria for Rating Cell Captive Insurers, updated July 2014

RATING LIMITATIONS AND DISCLAIMERS

ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.

GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY

Audited Financial Statements Financial statements that bear the report of independent auditors (attesting to the financial statements’ fairness and compliance with generally accepted accounting principles).
Balance Sheet Also known as a Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.
Budget Financial plan that serves as an estimate of future cost, revenues or both.
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.
Credit Rating Agency An entity that provides credit rating services.
Enterprise Risk Management ERM refers to an integrated or holistic approach to managing risk across an organisation, using clearly articulated frameworks and processes controlled from board level.
Exposure Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For an insurer, its exposure may also relate to the risk related to policies issued.
Financial Flexibility The company’s ability to access additional sources of capital funding.
Financial Statements Presentation of financial data including balance sheets, income statements and statements of cash flow, or any supporting statement that is intended to communicate an entity’s financial position at a point in time.
Income Statement A summary of all the expenditure and income of a company over a set period.
Interest Money paid for the use of money.
Liabilities All financial claims, debts or potential losses incurred by an individual or an organisation.
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.
Liquidity Risk The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.
Loss The happening of the event for which insurance pays.
National Scale Rating The national scale provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.
Net Profit Trading/operating profits after deducting the expenses detailed in the profit and loss account such as interest, tax, depreciation, auditors’ fees and directors’ fees.
Operating Profit Profits from a company’s ordinary revenue-producing activities, calculated before taxes and interest costs.
Policy The legal document issued by the company to the policyholder, which outlines the conditions and terms of the insurance.
Policyholder The person in actual possession of an insurance policy.
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.
Risk The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.
Risk Management Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.
Securities Various instruments used in the capital market to raise funds.
Shareholder An individual, entity or financial institution that holds shares or stock in an organisation or company.
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.
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.
Upgrade The assignment of a higher credit rating to an insurer by a credit rating agency. Opposite of downgrade.

SALIENT FEATURES OF ACCORDED RATINGS

GCR affirms that a.) no part of the rating 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; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.

Centriq Insurance Company Limited participated in the rating process via face-to-face management meetings and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.

The credit rating has been disclosed to Centriq Insurance Company Limited with no contestation of the rating.

The information received from Centriq Insurance Company Limited and other reliable third parties to accord the credit rating included audited financial statements to December 2014 (plus four years of comparative numbers), unaudited year to date results to 30 April 2015, budgeted income statement and balance sheet to December 2015, full year statutory returns to December 2014, a summary of the current reinsurance programme and other relevant company specific information.

The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.

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