Johannesburg, 30 June 2016 — Global Credit Ratings has today upgraded the national scale claims paying ability rating assigned to Credit Guarantee Insurance Corporation of Africa Limited to AA+(ZA) from AA(ZA), with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to Credit Guarantee Insurance Corporation of Africa Limited (“CGIC”) based on the following key criteria:
The rating upgrade reflects the change in shareholding structure which was finalised in 2016. In this respect, Mutual & Federal Insurance Company Limited became the sole shareholder (having previously owned 52.5%). As such, GCR views the insurer’s stand-alone credit profile as deriving increased upliftment from implied shareholder support. This view is supported by CGIC’s increased contribution to group profit and diversification objectives, and increased integration in terms of capital and risk management frameworks and reinsurance arrangements.
Risk adjusted capitalisation under interim statutory solvency remained at a strong level, with CAR coverage equating to 1.8x at FYE15 (FYE14: 1.7x; FYE13: 2.0x). Strong capitalisation has been underpinned by the insurer’s sizeable capital base catering for the quantum of insurance and market exposure risks. As such, GCR expects the insurer to remain sufficiently capitalised relative to expected Solvency Assessment and Management (“SAM”) parameters, supported by the capital management strategy (facilitated in part by the flexibility offered by the shareholder) and the insurer’s minimum solvency capital requirement (“SCR”) coverage target of 1.25x.
Liquidity metrics remained at strong levels over the review period. Cash covered net technical liabilities by 1.1x at FYE15, while claims cash coverage equated to 16 months (FY14: 14 months). The asset liability matching policy stipulates a minimum technical provision coverage level of 1x, indicating that liquidity will be preserved at strong levels over the rating horizon. Inclusive of collective money market investments, which offer additional support, liquidity metrics strengthen further.
The insurer’s earnings capacity remained very strong, both on a gross and a net basis. Very strong profitability has been supported by active portfolio management and conservative underwriting disciplines. In this regard, GCR views CGIC’s through-the-cycle profitability to be indicative of sustained earnings capacity going forward. Cognisance is, however, taken of the elevated margin volatility due to the inherent linkages to high variability in the broader credit cycle.
The insurer’s business profile is strong, underpinned by CGIC’s dominant position in the trade credit space (with a market share ranging between 70% and 75% over the review period), as well as a high level of diversification across industries as well as buyer risks. Competitive dynamics are also expected to continue to increase, on the back of increased participation by an additional player within the trade credit space. Nevertheless, management expects to continue to defend its market share, while sustainably growing the business.
The reinsurance panel reflects an aggregate strong credit profile, while the maximum net retention per risk is viewed to be limited to a moderately conservative level.
The insurer’s stand-alone credit rating may be upgraded following a substantial strengthening in risk adjusted capitalisation, while all other credit protection metrics remain within strong ranges. Conversely, the rating may be downgraded if risk adjusted capital adequacy deteriorates substantially, and/or liquidity metrics weaken beyond expectations. Furthermore, sustained net underwriting losses, and/or a material weakening in the competitive positioning, could result in negative rating action. Negative rating action may also result on the back of a material negative revision to the rating of the group or a change in the strategic importance of the insurer within the group.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (November 2000)|
|Claims paying ability: A+(ZA)|
|Last rating (June 2015)|
|Claims paying ability: AA(ZA)|
|Senior Credit Analyst|
|Sector Head: Insurance Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2015.
CGIC rating reports, 2000- 2015.
RSA Short Term Insurance Bulletins, 2001-2015.
RATING LIMITATIONS AND DISCLAIMERS
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|Accounting||A process of recording, summarising, and allocating all items of income and expense of the company and analysing, verifying and reporting the results.|
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|Capacity||The largest amount of insurance available from a company. In a broader sense, it can refer to the largest amount of insurance available in the marketplace.|
|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.|
|Capital Adequacy||A measure of the adequacy of an entity’s capital resources in relation to its risks.|
|Capital Base||The issued capital of a company, plus reserves and retained profits.|
|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.|
|Creditworthiness||An assessment of a debtor’s ability to meet debt obligations.|
|Diversification||Spreading risk by constructing a portfolio that contains different investments, whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.|
|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.|
|Interest||Money paid for the use of money.|
|Liquidity||The speed at which assets can be converted to cash.|
|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.|
|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”)||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.|
|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.|
|Portfolio||All of the insurer’s in-force policies and outstanding losses, with respect to described segments of its business.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Rating Horizon||The rating outlook period|
|Rating Outlook||A rating outlook indicates the potential direction of a rated entity’s rating over the medium term, typically one to two years. An outlook may be defined as: ‘Stable’ (nothing to suggest that the rating will change), ‘Positive’ (the rating symbol may be raised), ‘Negative’ (the rating symbol may be lowered) or ‘Evolving’ (the rating symbol may be raised or lowered).|
|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.|
|Securities||Various instruments used in the capital market to raise funds.|
|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.|
For a more detailed glossary of terms/acronyms used as per GCR’s insurance glossary, please click here
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.
Credit Guarantee Insurance Corporation of Africa Limited participated in the rating process via face-to-face management meetings, teleconferences 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 Credit Guarantee Insurance Corporation of Africa Limited with no contestation of the rating.
The information received from Credit Guarantee Insurance Corporation of Africa Limited and other reliable third parties to accord the credit rating included:
• The audited annual financial statements to 31 December 2015,
• Four years of audited comparative numbers, • Management accounts to 31 March 2016,
• Full year detailed budget income statements for 2016,
• Qualitative and quantitative statutory returns to 31 December 2015,
• The current year reinsurance summary cover notes, and
• Other related documents.
The rating above was solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the rating.
GCR upgrades Credit Guarantee Insurance Corporation of Africa Limited’s rating to AA+(ZA); Outlook Stable.