Financial results of Credit Guarantee Insurance
Charles Nortje, CEO, CGIC.
Credit Guarantee Insurance Corporation (CGIC) today announced its results for the 2014 financial year. Charles Nortje, CEO comments, “For the first time in the company’s history, our gross premium income exceeded the R1 billion mark, which represents 13% growth year-on-year substantially outpacing our prior year revenue performance and evidencing strong underlying demand for trade credit insurance.”
The company’s underwriting profit was R71 million and the no/low claims bonuses paid to policyholders amounted to R120 million. This was achieved despite net claims after salvages of R528 million (2013: R347 million), representing a 52% increase in the cost of claims. The return on equity for the year was 17%. Under the expiring solvency rules, CGIC was 177% solvent in 2014, with assets totalling R2 billion.
The 2014 financial year could be described as “a tale of two halves”. After a difficult first half, particularly the March quarter where the company faced high levels of claims, underwriting profitability was restored and strong trading momentum sustained through to year-end. Management actions to restore profitability, helped by a return to more normal levels of adverse events reported, combined to deliver a meaningful profit for the full year.
During the year one of the largest losses to hit the international trade credit insurance market was the insolvency due to fraud of Danish company, O W Bunker. This caught the market by surprise and gave rise to losses of several hundred million US dollars. “Although fortunately our direct exposure was limited, it does show the vulnerability of the trade credit insurance sector to the sudden collapse of companies, often brought about through internal fraud or poor corporate governance with very few warning signals,” continues Nortje. “Such a collapse by a buyer on which we carry underwriting risk is more detrimental than a gradual deterioration in credit quality, to which we are traditionally able to downscale our exposure if we have adequate warning.” The most notable examples of similar events in South Africa was the insolvency of the First Strut Group in 2013, followed in 2014 by Alert Steel, Duro Pressings and Ellerines.
Nortje remarks, “Improving our sales capacity in all the major regions was a key focus during the year under review, with the sales budget being significantly exceeded. Demand for our products and services tend to increase in difficult economic times.”
“Key to our strategy is to diversify our geographic footprint outside South Africa and contribute to the Africa growth story. We have identified five priority countries based on their relevance to our client base, proximity and our degree of familiarity with numerous buyers operating in those territories,” says Nortje.
“Labour relations turbulence (notably AMCU and NUMSA strikes, with discontent in the public sector looming) in conjunction with infrastructure constraints such as electricity supply, high resource input costs and poorly functioning municipalities, made economic growth come to a near standstill during 2014. Leading indicators, including the RMB/BER index and the Kagiso PMI persistently tracked below 50, in line with contraction in business confidence. We have unfortunately also noted the increasing incidence of fraud, poor governance and ethical breaches as a contributing factor to business failure.
“Against this background many of our policyholders experienced tough trading conditions in 2014, especially in the key industries of steel, construction, manufacturing and retail. The high level of claims the company faced, especially in the first six months, emanated mainly from distressed businesses in these sectors.”
Two issues under the spotlight are changing credit risk exposures, both at country and individual company level, given the sharp decline in the oil price, and Eskom load shedding. The commercial and political risk landscape is being closely monitored, especially in Russia, Angola and Nigeria. The exposure of domestic business to power shortages is mixed, with some companies actually benefiting but other SMEs may be pushed over the edge. SEIFSA estimates that steel production could suffer up to a 23% production decline. This is not good news for a sector which has been under siege for some time. Poor retail sales still signal a cautious consumer, but we expect some pickup as the effects of reduced inflation and a lower fuel price continue to filter through. We are seeing some early signals of recovery in the steel industry, with policyholders expecting a slightly better year in 2015.
Nortje notes however that there is always the potential for a ‘black swan’ event to severely disrupt world trade. There are always the “unknown unknowns” which may be lurking in the wings.
“The company has a robust capital shield, strong institutional shareholders, committed and engaged management and staff, and an appropriate level of secure reinsurance. This is the best possible defence against the current uncertain environment, and we are well positioned for opportunity,” concludes Nortje.
