ECIC IR 2023

Integrated Report 2023

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Management of Financial Capital

Capital management framework The Board ensures that the quantity and quality of capital maintained is adequate and, at a minimum, will meet applicable regulatory capital requirements. The Corporation also monitors economic capital as an internal view of required capital as part of its risk appetite. The capital philosophy is to use available capital optimally to fulfil the Corporation’s mandate and increase its capital base to expand its business underwriting capacity. The Own Risk and Solvency Assessment (ORSA) serves as the Corporation’s capital management plan that considers the projected available and required capital over a five-year period. The plan is updated annually and describes any planned capital raising initiatives and how capital is deployed and managed within the organisation. Improving the capital position The Corporation can maintain or increase available capital by either building retained earnings, requesting further capital from the shareholder, or reducing the business exposure to decrease liabilities and capital requirements.

Risk Appetite concerning capital management

The Corporation applies sound underwriting practices and responsible investment principles to remain financially sustainable on a stand-alone and ongoing basis. The risk philosophy and strategy are underpinned by: • acceptable levels of risk exposure • the right people and resources to fulfil its mandate and service its customers • well-managed portfolio distribution and quality that precludes excessive concentration risk to the Corporation • an investment strategy that limits portfolio volatility to within allocated capital and preserves capital for ‘real return’ in its investment portfolio, as measured on a rolling three-year basis These principles drive risk capacity, risk appetite and tolerance. Risk capacity is set by capital available to absorb potential losses from accepted risks and tested to ensure a post-loss event with sufficient capital to cover the remaining exposure equivalent to 110% Economic Capital (EC). The Corporation considers own funds tiering to allow the quality of available capital to absorb losses. Risk appetite is set as the amount of risk the Corporation is willing to accept within its risk capacity, with a concomitant willingness to use capital to fund catastrophic losses to remain solvent within risk appetite thresholds. The business needs to rebuild solvency to mitigate loss and since its shareholder has no appetite to inject additional capital, it must always be able to recover organically. Taking this into consideration, the Corporation needs to maintain own funds (available capital) above an absolute minimum to meet its obligations and continue operating after a catastrophic loss. Within this context, the Corporation has appetite for a net loss that could reduce the economic capital cover ratio to 110%. Currently, the Corporation portfolio can support exposures up to 10 times equity, which is in line with international ECA practice.

Table 7: Mechanisms and strategies to maintain or increase available capital

Mechanism Strategies Build retained earnings

• Improve profitability • Limit dividends • Additional shareholder capital in line with the ECIC Act, 78 of 1957 (as amended)

Increase share capital

Downsize exposure • Reinsure existing

insurance exposures 1

Retained earnings can be accumulated by increasing profitability through examining the elements that contribute to profit, such as pricing and operational expenditure or limiting dividend payments. Any need to increase shareholder capital will be in line with the ECIC Act. Reduced exposure, for example through reinsurance, reduces capital requirements and improves the solvency ratio.

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