Fitch affirms GuarantCo at IFS at ‘AA-’ and National IFS at ‘AAA(idn)’; Outlooks Stable

Fitch Ratings has affirmed GuarantCo Ltd.'s Insurer Financial Strength (IFS) Rating at 'AA-'. Simultaneously, Fitch Ratings Indonesia has affirmed the National IFS at 'AAA(idn)'. The Outlooks are Stable.

The affirmation reflects Fitch’s expectation of ongoing financial support from GuarantCo’s shareholders, as well as the company’s very strong risk adjusted capitalisation, and weak profitability.

The ‘AAA(idn)’ National IFS Ratings denote the highest rating assigned within the National Ratings scale for that country or monetary union. The rating is assigned to the policyholder obligations of the insurance entities with the lowest credit risk relative to all other obligations or issuers in the same country, across all industries and obligation types.

Key Rating Drivers

Ownership Positive for Rating: Fitch applies a three-notch uplift to GuarantCo Ltd.’s standalone credit quality based on the propensity and ability of its equity contributors, in particular the UK government through the Foreign, Commonwealth & Development Office (FCDO), to provide financial support. Our view of the main stakeholders’ commitment to maintain GuarantCo’s financial strength is backed by formal support agreements, such as a GBP130 million callable capital facility from the FCDO, along with expected paid-in equity contributions.

Very Strong Capitalisation: GuarantCo’s capitalisation is ‘Very Strong’ based on a net par/capital ratio of 1.5x at end-2024 (2023: 1.4x) for a ‘Very High Risk’ guarantee portfolio. The net par/capital ratio was little changed in 2024 as capital injections from Private Infrastructure Development Group Trust member countries (USD22.7 million) largely offset guarantee portfolio growth. Fitch views strong shareholder backing as essential for GuarantCo’s capital strength as it has limited ability to generate capital internally. Fitch expects the par/capital ratio to increase moderately due to business growth.

‘Very High Risk’ Portfolio: The guarantee portfolio mainly consists of non-investment grade exposures in the ‘BB’/’B’ categories. GuarantCo has expertise in debt restructuring, but recovery amounts and timing are highly uncertain in case of guarantee calls, so Fitch views expected loss severity as high. The guarantee portfolio is well diversified by geography and industry sector, but single name exposure remains somewhat high.

Weak Profitability: GuarantCo achieved 2% ROE in 2024 (2023:1.7%), the strongest in the past five years, supported by recoveries on non-performing loan receivables (funded exposures) and favourable investment yields. However, underwriting performance (which excludes investment income, investment revaluations and other items) remained negative, primarily due to high operating expenses, resulting in a Fitch-calculated combined ratio of 138% (2023: 138%).

Fitch believes GuarantCo’s profitability outlook primarily depends on the investment result, amount and timing of loss recoveries, and development of credit loss provisions. Fitch believes GuarantCo had significant recovery potential at end-2024.

Risk Transfers Support Capacity Management: GuarantCo does not extensively use external risk mitigation, but recently entered into various agreements to manage concentration risks (counter-guarantee from the Swedish International Development Cooperating Agency, Canopius reinsurance). Fitch expects the proportion of external risk mitigation to increase in 2025 and 2026 as GuarantCo’s business continues to grow.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

IFS Rating

• Negative rating action on the UK’s Long-Term IDR.
• A reduction in shareholders’ propensity and ability to support, possibly because of a change in government priorities.
• Net par/capital exceeding 2.2x, assuming a ‘Very High Risk’ portfolio.

National IFS Rating

• A multi-notch downgrade of GuarantCo’s IFS rating

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

IFS Rating

• Positive rating action on the UK’s Long-Term IDR

National IFS Rating

• GuarantCo’s National IFS Rating is already at the highest possible level and cannot be upgraded.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of ‘3’, unless otherwise disclosed in this section. A score of ‘3’ means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch’s ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch’s ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.