The rating action follows a reduction in the South African country and insurance sector risk assessments.

The South African country risk score was lowered to 7.0 from 7.5 previously, in a market alert released on the 27 May 2020. Click here to access the link. On 4th June 2020, the South African Insurance sector risk score was also lowered to 8.0 from 8.75 previously. Click here to access link.

Combined, the above country and sector risk scores comprise the operating environment score, which is a key input into GCR’s ratings.

Rating rationale

Chubb SA’s national scale financial strength rating was affirmed with a Stable Outlook, supported by the insurer’s very strong financial profile, which is expected to be sustained despite a level of downside risk associated with the poor economic climate. The insurer’s low market share continues to limit the assessment of the business profile, while presence

in certain higher risk regional markets results in enhanced geographic diversification but a slight downward moderation in the operating environment assessment. The rating derives uplift from implied parental support from Chubb INA International Holdings Limited (“the group”), evidenced by strong operational and technical support, coupled with brand alignment.

Chubb SA’s risk-adjusted capitalisation registered within a strong range over the review period supported by limited exposures to insurance and market risk, coupled with strong internal capital generation. As such, the regulatory Solvency Capital Requirement (“SCR”) coverage registered at a higher 2.2x at FY19 (FY18: 1.7x). Going forward, risk-adjusted

capitalisation is expected to be maintained at a rating appropriate level supported by net earnings and contained dividend distributions, with sufficient tolerance to withstand a level of earnings compression associated with the challenging operating environment.

Liquidity has been maintained at strong levels, supported by conservative asset allocation with the investments being placed in liquid assets. As such, coverage of net technical liabilities by stressed cash assets has been maintained around 2x over the review period while operational cash coverage equated to a very high 53 months at FY19 (FY18: 49 months). The liquidity assessment incorporates a slight downward adjustment to cater for a potential moderation resulting from lower investment income, although liquidity is expected to register within a strong range.

Earnings have been sound over the review period supported by a competitive loss ratio and high commission recoveries attributed to the favourable reinsurance structure. In this regard, the five-year average underwriting margin equated to 16% (FY19: 20%; FY18: 23%). Earnings are further supported by investment income amounting to ZAR22m in FY19 (FY18:

ZAR22.5m) and return on revenue registering at 29% (FY18: 33%). Going forward, cognisance is taken of uncertainties arising from the COVID-19 pandemic that could lead to a moderation in investment income. On the other hand, the insurer’s earnings are expected to be supported by high reinsurance protection against a potential increase in claims, sustaining underwriting profitability at a strengthened level.

The insurer’s limited business profile impacts the rating negatively. The low market position has been unchanged over the review period, reflected by a market share and relative market share of around 0.4% and 0.4x respectively, attributed to the insurer’s focus on niche pockets of property and speciality products and selective underwriting. This notwithstanding, the insurer’s business mix is well-diversified with three lines of business contributing materially to revenue and enhanced by a level of geographic diversification. The business profile is likely to remain largely unchanged consistent with the insurer’s strict underwriting.

Outlook statement

GCR expects cross cycle earnings to remain sound, while, risk-adjusted capitalisation and liquidity are viewed to reflect sufficient buffers to withstand a level of moderation over the outlook horizon, after factoring in base case stresses associated with the poor economic outlook. The business profile is expected to remain stable, with the insurer expected

to show a level of resilience to industry volume pressures given its target market and continued rates hardening across key portfolios.

Rating triggers

The rating may be upgraded on an improvement in market position while maintaining strong risk-adjusted capitalisation and liquidity. Conversely, we could lower the rating if investment coverage of technical liabilities reduces below 2x or SCR coverage below 1.75x. Furthermore, negative rating action could follow if earnings register below expectations over a sustained period.