GCR affirms Credit Guarantee Insurance Corporation of Africa Limited’s rating at AA+(ZA); Outlook Stable.

26 Jun 2017 In Rating Notifications

GCR affirms Credit Guarantee Insurance Corporation of Africa Limited’s rating at AA+(ZA); Outlook Stable.

GCR affirms Credit Guarantee Insurance Corporation of Africa Limited’s rating at AA+(ZA); Outlook Stable.

Johannesburg, 26 June 2017—Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Credit Guarantee Insurance Corporation of Africa Limited at 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:

CGIC’s risk adjusted capitalisation under interim statutory solvency remained at a strong level, with capital adequacy requirement coverage equating to 1.6x at FY16 (FY15: 1.8x; FY14: 1.7x). 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 incoming Solvency Assessment and Management (“SAM”) parameters, supported by the capital management strategy (facilitated in part by the potential flexibility offered by the shareholder) and a projected minimum solvency capital requirement (“SCR”) coverage target of 1.3x.

Key liquidity measures remained at strong levels. In this respect, cash coverage of net technical liabilities registered at 1.0x at April 2017 (FY16: 0.8x; FY15: 1.1x), while the annualised claims cash cover ratio equated to 17 months (FY16: 8 months; FY15: 16 months). Additional liquidity support is available from money market investments, which are highly liquid. As such, GCR expects liquidity metrics to remain within strong ranges over the outlook horizon, supported by management’s balanced asset allocation and sound operating cash flow generation.

The insurer’s through the cycle earnings capacity is viewed to be strong, supported by active portfolio management and conservative underwriting disciplines. In this respect, the five year underwriting margin equated to 16%. As such, 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. In this regard, the insurer’s gross incurred loss ratio equated to a higher 76% in FY16 (FY15: 54%; five year gross incurred loss ratio: 61%).

The 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 and buyer risks. Competitive dynamics are likely to continue to increase, on the back of increased participation by an additional player within the trade credit and guarantee space. Nevertheless, management expects to continue to defend its market share, while sustainably growing the business. This view is premised on the insurer’s strong brand, balance sheet strength, strong shareholding and well entrenched client relationships.

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.

CGIC’s shareholding structure changed in April 2017, with Atradius Participations Holdings B.V. acquiring a 25% equity stake. The balance of the shares are held by Old Mutual Insure Limited (“Old Mutual Insure”), formerly Mutual & Federal Insurance Company Limited (“M&F”). GCR views the insurer’s stand-alone credit profile as deriving upliftment from implied shareholder support, underpinned by CGIC’s success in achieving group objectives and increased integration in terms of capital and risk management frameworks and reinsurance arrangements.

Upward movement of the stand-alone credit profile is deemed unlikely, in light of prevailing operating and economic environment pressures, which may have a significant bearing on the mono-line credit insurer’s loss experience (given the sensitivities to the credit cycle). Nonetheless, the rating may be upgraded if CGIC’s strategic status within the group strengthens. Conversely, a prolonged deterioration in earnings capacity resulting in significant capital erosion (in the absence of additional cash and solvency support from the group) may result in negative rating action. Furthermore, negative rating action may result on the back of 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)
Outlook: Stable
 
Last rating (June 2016)
Claims paying ability: AA+(ZA)
Outlook: Stable

ANALYTICAL CONTACTS

Primary Analyst  
Yvonne Mujuru  
Sector Head: Insurance Ratings  
(011) 784 - 1771  
.(JavaScript must be enabled to view this email address)  

 

Committee Chairperson

Marc Chadwick
Sector Head: Insurance Ratings
(011) 784 - 1771
.(JavaScript must be enabled to view this email address)

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Short Term Insurance Companies, updated July 2016

RSA Short Term Insurance Bulletins, 2001-2016

CGIC rating reports, 2000-2016

 

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/RATING-SCALES-DEFINITIONS. 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.

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 2016 audited annual financial statements 4 years of comparative audited numbers
  • Unaudited management accounts to 30 April 2017
  • Budgeted financial statements for 2017
  • The current year reinsurance summary
  • 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.

 

 

 

 

GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY
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.
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.
Distribution Channel The method utilised by the insurance company to sell its products to policyholders.
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.
International Scale Rating (“ISR”) International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.
Intermediary A third party in the sale and administration of insurance products.
Interest Money paid for the use of money.
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.
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
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.
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.
Statutory Required by or having to do with law or statute.
Subordinated Debt Debt that in the event of a default is repaid only after senior obligations have been repaid. It is higher risk than senior debt.
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

 

 

 

 

 

 

 

ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK:HTTP://GLOBALRATINGS.NET/UNDERSTANDINGRATINGS. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT WWW.GLOBALRATINGS.NET/RATINGSINFORMATION. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE UNDERSTANDING RATINGS SECTION OF THIS SITE.

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