Announcements

GCR accords Selecta Insurance & Reinsurance Company Limited an initial rating of BBB-(RU); Outlook S

Johannesburg, 16 November 2016 — Global Credit Ratings has today accorded an initial national scale claims paying ability rating to Selecta Insurance & Reinsurance Company Limited of BBB-(RU), with the outlook accorded as Stable. Furthermore, Global Credit Ratings has accorded an initial international scale claims paying ability rating of BB-, with the outlook accorded as Stable. The ratings are valid until June 2017.

SUMMARY RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit ratings to Selecta Insurance & Reinsurance Company Limited (“Selecta”) based on the following key criteria:

Selecta is a recently established insurer domiciled in Russia, having begun operations in its current form in July 2014. The insurer has a specialist underwriting strategy largely focused on the energy sector, with the management team and key personnel having previous experience in underwriting core products at large established insurance companies. Selecta’s participation on such risks is facilitated through the assumption of small reinsurance inward follow lines on small to medium sized accounts.

Selecta’s earnings capacity is viewed to be potentially volatile and limited, representing a rating constraint. Earnings are viewed to be exposed to potential volatility stemming from loss ratio fluctuations. In this regard, the insurer’s net loss ratio spiked to 102% in 1H F16 (versus management’s medium term forecast loss ratio range of 55% to 65%), following unexpectedly high loss reserving requirements. Accordingly, the insurer is likely to reflect a sizeable underwriting loss at FYE16 (1H F16: RUB292m loss). Furthermore, the absence of scale efficiencies (a function of the start-up nature of the business) limits prospective margin headroom over the rating horizon, with GCR factoring in the potential for continued underwriting losses going forward. Management expects medium term scale benefits to facilitate an underwriting surplus by FY18.

Capitalisation is expected to be recorded within a moderately strong to strong range over the rating horizon, albeit containing scope for volatility. In terms of the latter, Selecta’s capital base decreased by 33% to RUB649m at 1H F16 (FYE15: RUB974m), following the large retained loss. The corresponding international solvency margin equated to 105% (FYE15: 308%) which, while still high, notably lags the insurer’s year-end targeted margin (166%). Going forward, GCR expects the international solvency margin to be sustained at or above a strong level (factoring in the insurer’s high premium growth targets). However, exposure to volatile capital development trends may translate into solvency margin fluctuations below current projections. Selecta is compliant with local regulatory solvency requirements.

Selecta exhibits an intermediate liquidity profile. Cash coverage of technical provisions stood at 0.6x at 1H F16 (FYE15: 1.6 months), while cash coverage of average monthly claims stood at 15 months (FYE15: 32 months). Potential for restricted cash flows are viewed as a risk, however, in line with factors impacting on earnings volatility. Accordingly, the maintenance of liquidity metrics at or above the current intermediate levels, coupled with the development of a stable cash generation track record, represent a key rating consideration going forward. Banking counterparty strength is viewed to be sound, with 65% of cash assets held in banks carrying minimum national scale ratings of A(RU).

Selecta’s recent entry into the sizeable Russian insurance industry gives rise to an inherently limited market position that is likely to persist over the rating horizon. In this respect, the insurer’s GWP of RUB453m at FY15 translated into minimal premium market share. Accordingly, GCR expects competitive position to remain restricted over the medium term.

Selecta’s specialised underwriting focus gives rise to a high weighting in products exposed to potentially high severity losses. As such, in conjunction with volume limitations through the start-up phase, earnings diversification is expected to remain fairly limited over the rating horizon. Geographic diversification represents a key focus for the insurer, as management aims to target participation on small to medium sized risks available in this arena.

Selecta’s treaty program is led by Partner Re, with 80% of the participating companies reflecting minimum ratings of A on an international scale. The maximum net retention on the XoL treaty is viewed to be moderately contained amounting to EUR300,000 (RUB23m), equivalent to 2% of FYE15 capital. Maximum treaty capacity amounts to EUR20m/RUB1.5bn, for property and engineering risks.

Upward movement of the ratings over the medium term may arise from a material strengthening in earnings capacity, capitalisation and liquidity. Conversely, further deterioration in liquidity and/or weakening in solvency may lead to negative rating action.

NATIONAL SCALE RATINGS HISTORY   INTERNATIONAL SCALE RATINGS HISTORY
     
Initial/last rating (November 2016)   Initial/last rating (November 2016)
Claims paying ability: BBB-(RU)   Claims paying ability: BB-
Outlook: Stable   Outlook: Stable
     

ANALYTICAL CONTACTS

Primary Analyst   Secondary Analyst
Marc Chadwick   Catherine Zimba
Sector Head: Insurance   Credit Analyst
(011) 784-1771   (011) 784-1771
chadwick@globalratings.net   catherinez@globalratings.net
     
Committee Chairperson    
Susan Hawthorne    
Senior Credit Analyst    
(011) 784-1771    
susanh@globalratings.net    

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Short Term Insurance Companies, updated July 2016

Criteria for Rating Newly Established and Start-Up Insurance Companies, updated July 2016

RATING LIMITATIONS AND DISCLAIMERS

ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.

SALIENT FEATURES OF ACCORDED RATINGS

GCR affirms that a.) no part of the ratings were influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

Selecta Insurance & Reinsurance Company Limited participated in the rating process via teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.

The credit ratings have been disclosed to Selecta Insurance & Reinsurance Company Limited with no contestation of the ratings.

The information received from Selecta Insurance & Reinsurance Company Limited and other reliable third parties to accord the credit ratings included:

  • The audited annual financial statements to 31 December 2015 and 2014 Unaudited interim results as per 30 June 2016
  • Budgeted financial statements for 2016
  • 2016 reinsurance cover notes
  • Other related documents.

The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.


GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY

Assets The items on the balance sheet of the insurer which show the book value of property owned. Under regulations, not all property or other resources may be admitted in the statement of the insurer. This gives rise to the term ‘non-admitted assets.’
Balance Sheet An accounting term which refers to a listing of the assets, liabilities, and surplus of a company or individual as of a specific date.
Capacity The largest amount of insurance or reinsurance available from a company. In a broader sense, it can refer to the largest amount of insurance or reinsurance available in the marketplace.
Claim A request for payment of a loss, which may come under the terms of an insurance contract.
Commission A certain percentage of premiums produced that is received or paid out as compensation by an insurer to agents and brokers.
Insurer The party to the insurance contract whom promises to pay losses or benefits. Also, any corporation engaged primarily in the business of furnishing insurance to the public.
Interest Money paid for the use of money.
Liquidity The ability of an insurer to convert its assets into cash to pay claims if necessary.
Loss Ratio The ratio of claims to premiums. It may be calculated in several different ways, using paid premiums or earned premiums, and using paid claims with or without changes in claim reserves and with or without changes in active life reserves.
Policy The legal document issued by the company to the policyholder, which outlines the conditions and terms of the insurance also called the policy contract or the contract.
Premium The price of insurance protection for a specified risk for a specified period of time.
Reinsurance The practice whereby one party, called the Reinsurer, in consideration of a premium paid to him agrees to indemnify another party, called the Reinsured, for part or all of the liability assumed by the latter party under a policy or policies of insurance, which it has issued. The reinsured may be referred to as the Original or Primary Insurer, or Direct Writing Company, or the Ceding Company.
Reserve An amount representing actual or potential liabilities kept by an insurer to cover debts to policyholders.
Retention The net amount of risk the ceding company keeps for its own account
Risk Uncertainty as to the outcome of an event when two or more possibilities exist.
Solvency With regard to insurers, having sufficient assets (capital, surplus, reserves) and being able to satisfy financial requirements (investments, annual reports, examinations) to be eligible to transact insurance business and meet liabilities.
Statutory Required by or having to do with law or statute.
Underwriting The process of selecting risks and classifying them according to their degrees of insurability so that the appropriate rates may be assigned. The process also includes rejection of those risks that do not qualify.

For a detailed glossary of terms please click here

GCR accords Selecta Insurance & Reinsurance Company Limited an initial rating of BBB-(RU); Outlook Stable.

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