Johannesburg, 12 Nov 2015 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Cannon Assurance Limited of BBB+(KE), with the outlook accorded as Negative. The rating is valid until September 2016.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to Cannon Assurance Limited (“Cannon”) based on the following key criteria:
The Negative Outlook reflects GCR’s view of weakened capitalisation, with capital reducing to KES723m in FY14 (FY13: KES1.4bn), on the back of a dividend in kind of KES781m. As such, the international solvency margin more than halved to 83% in FY14, and is budgeted to lower further to 68% in FY15 (following an increase in the net premium base). Furthermore, Cannon has recorded negative underwriting margins over the past two years (FY14: -9%, FY13: -16%), with a further underwriting deficit budgeted for FY15 (albeit improved at -1%). As such, earnings capacity is viewed to be limited, with low premium scale impeding sufficient cost headroom for sustained operating profitability. In this respect, the insurer’s profit margins continue to lag peers, although comfort is derived from the good technical margin and improved loss ratio registered in FY14.
Note is taken of the successful conclusion of the majority share buy-out by prominent South African insurance group MMI Holdings (“MMI”) in February 2015, which may enhance Cannon’s business profile going forward. This may serve to alleviate the insurer’s currently constrained financial scale and competitive position. However, this remains subject to the operationalisation of strategic objectives and the realisation of group synergies. The recent split of the short term and long term business into separate licensed entities may allow for dedicated deployment of strategies going forward. However, GCR views this to be contingent upon strong risk-based balance sheet management.
Liquidity metrics remain intermediate to subdued, with coverage of net average claims at 12 months and coverage of net technical liabilities at 0.4x in FY14. Strengthened operational cash flow generation will be needed in order for key liquidity metrics to strengthen on a sustained basis going forward. Cognisance is taken of the very high reserving ratios displayed by the insurer relative to industry norms, which serve to depress liquidity metrics somewhat. Notably, the disposal of the investment properties through the dividend in kind resulted in the transaction not giving rise to a corresponding cash inflow. Accordingly, while the insurer’s asset profile stands to benefit from the reduction in market risk going forward, asset risk remains elevated at present, with financial assets continuing to exceed 100% of FYE14 capital. Management has communicated an intention to address such issues in FY16, albeit key targets and mechanisms in order to do so remain unresolved.
Net deductibles per risk and event are contained at low levels relative to capital, whilst most reinsurance counterparties are generally of a sound credit quality. The ratio of the net OCR and IBNR relative to NWP measured at a very high 111% in FY14 (FY13: 123%). The metric is elevated relative to peer and industry averages. The adequacy of provisions is verified by the company’s auditors and a consulting actuary at year-end.
Cannon’s rating has been placed on negative outlook, owing to the combined impact of reduced capitalisation and profitability, coupled with sustained liquidity limitations. The rating may be downgraded should the insurer’s weakened profit trend persist, coupled with the absence of a strengthening in risk adjusted credit protection metrics. The rating outlook may be revised to stable, or the rating may strengthen, should key capitalisation, liquidity and earnings capacity metrics evidence improvements that are likely to be sustained over the medium term. Cannon’s rating also potentially stands to benefit from the incorporation of MMI into the shareholding structure over the short to medium term.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (June 2009)|
|Claims paying ability: BBB+(KE)|
|Last rating (June 2014)|
|Claims paying ability: BBB+(KE)|
|Primary Analyst||Committee Chairperson|
|Marc Chadwick||Yvonne Masiku|
|Sector Head: Insurance Ratings||Senior Credit Analyst|
|(011) 784-1771||(011) 784-1771|
|Junior Credit Analyst|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurers, updated July 2015
Criteria for Rating Long Term Insurers, updated July 2015
Cannon rating reports, 2009-2014
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.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY
|Actuarial||Having to do with insurance mathematics.|
|Assets||The items on the balance sheet of the insurer which show the book value of property owned.|
|Assurance||Terminology used to describe life insurance.|
|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.|
|Bond||A certificate issued by a government or corporation as evidence of a debt.|
|Capacity||The largest amount of insurance or reinsurance available from a company.|
|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.|
|Coverage||The scope of the protection provided under a contract of insurance.|
|Insurance||A formal social device for reducing risk by transferring the risks of several individual entities to an insurer.|
|Insured||A person or organisation covered by an insurance policy, including the “named insured” and any other parties for whom protection is provided under the policy terms.|
|Insurer||The party to the insurance contract whom promises to pay losses or benefits.|
|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||The happening of the event for which insurance pays.|
|Long term (“LT”)||Not current; ordinarily more than one year.|
|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.|
|Policyholder||The person in actual possession of an insurance policy.|
|Portfolio||All of the insurer’s in-force policies and outstanding losses, with respect to described segments of its business. Also, the total securities owned by an insurer.|
|Provision||A part (clause, sentence, paragraph, etc.) of an insurance contract that describes or explains a feature, benefit, condition, requirement, etc. of the insurance protection afforded by the contract.|
|Rate||The pricing factor upon which the insurance buyer’s premium is based.|
|Rating||The statistical process by which insurers determine risks and pricing for the basic classes of insurance.|
|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.|
|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.|
|Securities||Evidences of a debt or of ownership, such as stocks, bonds, and checks.|
|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.|
|Surplus||The excess of assets over liabilities.|
|Valuation||Estimation of the value of an item, usually by appraisal.|
For a detailed glossary please click here
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
Cannon Assurance Limited participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit rating has been disclosed to Cannon Assurance Limited with no contestation of the rating.
The information received from Cannon Assurance Limited and other reliable third parties to accord the credit rating included;
- Audited financial results of Company as at 31 December 2014
- Four years prior audited financial statements
- Unaudited interim results as per 30 April 2015
- Budgeted 2015
- Actuarial report 2014
- Insurance Liability Valuation 2014
- Financial Condition Report 2014
- The current year reinsurance/retrocession cover notes
- Other non-public statistical information
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.
GCR affirms Cannon Assurance Limited’s rating of BBB+(KE); Outlook Negative.