Press Release: S&PGR Afrms GIC Re South Africa At ‘BB+/zaA+’; Outlook Stable
The following is a press release from Standard & Poor's: -- GIC Re South Africa has reinforced its capital adequacy at a high level following a shareholder capital injection in the second half of 2016, and its financial profile remains at less than adequate, reflecting the small relative absolute capital base and moderate risk position. -- We factor into our assessment our view of GIC Re South Africa's vulnerable business risk profile due to its operational focus on Sub-Saharan Africa, small size of the portfolio, and losses recorded in fiscal year ended March 31, 2016. -- The company benefits from its strategic importance to its parent, General Insurance Corp. of India. -- We are affirming our 'BB+' and 'zaA+' ratings on GIC Re South Africa. -- The outlook is stable, reflecting our expectation that the reinsurer's extremely strong capital adequacy will not deteriorate and that earnings will improve. JOHANNESBURG (S&P Global Ratings) July 7, 2016--S&P Global Ratings today affirmed it's 'BB+' long-term financial strength and counterparty credit ratings on South Africa-based composite reinsurer GIC Re South Africa Ltd. (GIC Re SA). The outlook is stable. At the same time, we affirmed our 'zaA+' South African national scale rating on the company. The affirmation follows GIC Re SA's receipt of a capital injection from shareholders to support the company's strong premium growth projected over the medium term. As a result, GIC Re SA enjoys a strengthened capital base. We assess GIC Re SA's financial risk profile as less than adequate, reflecting lower-adequate capital and earnings, a moderate risk position, and adequate financial flexibility. On the back of the underwriting losses recorded, shareholder's equity declined to South African rand (ZAR) 80 million at fiscal year ended March 31, 2016. After that date, parent General Insurance Corp. of India (GIC Re India) has committed to injecting ZAR130 million to support rapid net premium growth of between 10%-25% projected over the coming three years. Post the capital injection, we expect GIC Re SA will maintain this high level of capitalization and extremely strong capital adequacy, as the overall underwriting performance improves and the underwriting portfolio gains scale. We consider the company's risk position to be moderate, reflecting some investment portfolio and financial institutions concentrations, as well as the possibility of additional sources of capital and earnings volatility owing to the company's small size. Our assessment of financial flexibility is adequate. The company is entirely dependent on GIC Re India, which we understand is highly supportive of its subsidiary. We have observed this support in capital injections and the significant retrocession agreement between parent and subsidiary. We consider GIC Re SA's business risk profile to be vulnerable, incorporating the high industry risk the company faces writing business in Sub-Saharan Africa and the company's less-than-adequate competitive position. The insurer continues to pursue an organic growth strategy within key regions by servicing existing business and expanding its portfolio. The company's South African business currently comprises approximately 27% of gross premium and includes a small life book of business that is in run-off. Outside South Africa, the reinsurer's core markets include Kenya and Nigeria, and it has a presence in 18 other African countries. We continue to view GIC Re SA's competitive position as less than adequate. Although our assessment remains unchanged, our view is reinforced by the significant underwriting losses recorded in the past year. The reinsurer's performance is weaker than peer group averages in the region, and deviates noticeably from projections. Still, we expect that underwriting performance will improve in the fiscal year ending March 31, 2017, and again in fiscal 2018 as the book gains scale and the company either reprices or terminates loss-making portfolios. Our overall assessment is constrained by the company's small size in terms of total assets and gross premiums. We regard GIC Re SA's enterprise risk management (ERM), management and corporate governance practices, and liquidity as neutral factors for the rating. We note the company's improvements to its ERM framework, and we continue to expect further enhancements to risk controls and overall risk culture as the company matures. GIC Re SA has a small management team, which we consider appropriate for the overall size of the operation. We do not anticipate any changes to the overall strategic direction of the subsidiary, following its formation in 2014. We consider GIC Re SA's liquidity to be exceptional, supported by a conservative investment portfolio as well as the absence of debt issues or confidence-sensitive liabilities. We incorporate one notch of support in the long-term rating to reflect GIC Re SA's strategic importance to its parent. The stable outlook reflects our expectation that GIC Re SA's extremely strong capital adequacy will not deteriorate and that earnings will improve. Despite the robust premium expansion within Sub-Saharan African business, we expect an improvement to the underwriting performance and that the combined ratio will move toward the 95%-100% range over the medium term. A positive rating action is unlikely over the next two years, but we could raise the rating on GIC Re SA if our view of the parent's financial strength were to improve. We could lower the ratings if we viewed GIC Re SA as less strategically important to the group. RELATED CRITERIA AND RESEARCH Related Criteria -- General Criteria: S&P Global Ratings' National And Regional Scale Mapping Tables - June 01, 2016 -- General Criteria: National And Regional Scale Credit Ratings - September 22, 2014 -- General Criteria: Group Rating Methodology - November 19, 2013 -- Criteria - Insurance - General: Enterprise Risk Management - May 07, 2013 -- Criteria - Insurance - General: Insurers: Rating Methodology - May 07, 2013 -- General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers - November 13, 2012 -- Criteria - Insurance - General: Refined Methodology And Assumptions For Analyzing Insurer Capital Adequacy Using The Risk-Based Insurance Capital Model - June 07, 2010 -- General Criteria: Use Of CreditWatch And Outlooks - September 14, 2009 REGULATORY DISCLOSURES -- Primary credit analyst: Trevor Barsdorf, Rating Analyst -- Rating committee chairperson: David Laxton -- Date initial rating assigned: July 20, 2015 -- Date of previous review: Dec. 9, 2015 Disclaimers This rating has been determined by a rating committee based solely on the committee's independent evaluation of the credit risks and merits of the issuer or issue being rated in accordance with S&P Global Ratings published criteria and no part of this rating was influenced by any other business activities of S&P Global Ratings. This credit rating is solicited. The rated entity did participate in the credit rating process. S&P Global Ratings did have access to the accounts, financial records and other relevant internal, non-public documents of the rated entity or a related third party. S&P Global Ratings has used information from sources believed to be reliable but does not guarantee the accuracy, adequacy, or completeness of any information used. GLOSSARY -- Anchor: The starting point for rating an insurer, based on S&P Global Ratings' assessments of the business and financial risk profiles. -- Business risk profile (BRP: Assesses the risk inherent in the insurer's operations and therefore the potential sustainable return to be derived from those operations. -- Capital and earnings: Measure of an insurer's ability to absorb losses. -- Collateral posting risk: Assessment of an insurer's exposure to collateral posting requirements in the event of rating downgrades or other triggers, relative to liquid assets. -- Combined ratio: The ratio of the sum of loss expense, loss adjustment expense, and operating expenses divided by premiums earned. -- Competitive position: An assessment based on an insurer's operating performance, branding, market position, diversification and control over its distribution channels. -- Date initial rating assigned: The date S&P Global Ratings assigned the long-term foreign currency issuer credit rating on the entity. -- Date of previous review: The date S&P Global Ratings last reviewed the credit rating on the entity. -- Earnings before interest and taxation (EBIT): Profit before tax and interest expenses. -- EBITDA: The sum of EBIT and depreciation on tangible fixed assets plus amortization of intangible assets except for deferred acquisition costs and value of business acquired. -- Economic capital available: ECA is a broader, more economic view of owner (shareholders, or policyholders in the case of mutual) capital with a longer-term view on crystallizing value. -- Employee benefits obligations: Employee postemployment defined-benefit obligations (including pension and retiree health care benefits) in terms of both liability and asset risks. -- Enterprise risk management (ERM): Our assessment of ERM examines whether insurers execute risk management practices in a manner that effectively limits future losses. -- Financial flexibility: The balance between an insurer's sources and uses of external capital and liquidity over the current and next two years. -- Financial leverage ratio: Total financial obligations over the sum of economic capital available, debt, and hybrids. -- Financial leverage: The financial leverage subfactor addresses the degree of an insurer's indebtedness relative to its total capitalization. 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Press Release: S&PGR Afrms GIC Re South Africa At -2-
financial obligations over the sum of ECA (economic capital available), debt, and hybrids. -- Financial risk profile (FRP): The consequence of decisions that management makes in the context of its business risk profile and its risk tolerances. -- Financial strength rating (FSR): A forward-looking opinion about the financial security characteristics of an insurer with respect to its ability to pay under its insurance policies and contracts, in accordance with their terms. -- Fixed-charge coverage: Addresses an insurer's ability to service interest on financial obligations out of EBITDA. -- Foreign exchange risk exposure: Assesses currency mismatches between assets and liabilities (including equity). The criteria define a significant mismatch as more than about 10% of total insurer's liabilities. -- Headroom for covenants: Assesses the risk to an insurer's liquidity of not complying with covenants and rating triggers on its third-party financial obligations, including reinsurance and insurance contracts. -- High-risk assets: Volatile or illiquid assets. -- Insurance Industry And Country Risk Assessment (IICRA): Addresses the risks typically faced by insurers operating in specific industries and countries, and is generally determined at a country or regional level. -- Intangibles: The sum of goodwill, intangible assets, deferred acquisition costs (DAC), value of in-force, value of business acquired, and deferred tax assets. -- Issuer credit rating (ICR): A forward-looking opinion about an obligor's overall creditworthiness, focusing on its capacity and willingness to meet its financial obligations in full and as they come due. -- Operating return on embedded value: Post-tax operating profit divided by the average of embedded value at period-end and a year before. -- Prebonus pretax earnings: The sum of EBITDA and policyholder dividends. -- Return on assets (ROA): Indicates to us how efficiently management uses its assets to generate earnings by comparing EBIT to the two-year average of total assets adjusted. Total assets adjusted is total assets minus reinsurance assets. -- Return on revenue (ROR): Total revenue is used to capture net premiums from underwriting activities as well as investment income and fees generated as a result of those underwriting activities. Where total revenue is not reported, it is the sum of the net premiums earned, net investment income, and other income. -- Risk position: Assesses material risks not incorporated in the capital and earnings analysis and specific risks that could affect the volatility of an insurer's TAC. -- Return on equity (ROE): Measures the return available to stockholders. Calculated as reported net income divided by the year-end average of reported stockholders' equity for the past two years. -- Stand-alone credit profile (SACP): S&P Global Ratings' opinion of an insurer's creditworthiness, in the absence of extraordinary intervention from its parent, affiliate, or related government. -- Total adjusted capital (TAC): S&P Global Ratings' measure of the capital an insurer has available to meet capital requirements. Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.globalcreditportal.com and at spcapitaliq.com. 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