Johannesburg, 25 July 2017– Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to FBC Insurance Company Limited (formerly Eagle Insurance Company Limited) at A-(ZW), with the outlook accorded as Stable. The rating is valid until July 2018.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to FBC Insurance Company Limited (“FBC Insurance”) based on the following key criteria:
FBC Insurance’s earnings capacity measured within a strong range, supported by robust underwriting profitability. In this regard, the insurer’s underwriting margin equated to 15% over the review period (FY16: 11%), supported by a competitive loss ratio. Going forward, underwriting margins may moderate (BGT17: 9%) on the back of the normalisation of the accident loss ratio (FY16: 68%; FY15: 59%), with the aggregate loss ratio budgeted to increase to 50% in FY17 (FY16: 45%). This notwithstanding, earnings capacity is likely to remain within a strong range, reflecting moderate gains from operational efficiencies.
Sound and consistent capital generation from operations supported risk adjusted capitalisation within a strong range. This was further supported by moderate underwriting risk and very limited market exposure over the review period. Going forward, underwriting risk is expected to increase, driven by higher retention on select products. Accordingly, the international solvency margin may reduce to 62% at FY17 (FY16: 79%). In this respect, risk adjusted capitalisation could reduce to a moderately strong level, albeit remaining rating adequate.
FBC Insurance’s rating receives support from sound liquidity, with very strong liquidity metrics moderated by elevated banking counterparty concentration. Liquidity metrics have been sustained at very high levels on the back of strong cash generation from operations and a conservative investment strategy, which limits exposure to high risk financial assets. Accordingly, cash covered technical liabilities and average monthly claims by a high 2.5x (FY15: 2.5x) and 14 months (FY15: 15 months) at FY16 respectively. While exposure to listed equities is budgeted to increase in FY17, the insurer’s high cash buffers are expected to preserve liquidity strength within a very strong range over the rating horizon. Note is taken of elevated banking counterparty concentration, with 93% of cash and equivalents held with group subsidiaries, further raising concerns over the related party nature of transactions.
The insurer’s moderately strong business profile is projected to solidify over the rating horizon, following the change to a composite licence, supported by the brand alignment, in FY17. The addition of the life and health portfolio is expected to further diversify the earnings stream, with market share (FY16: 9%) projected to register an uptick over the rating horizon. This, combined with an increase in retention and an enhanced product offering, has potential to improve the business profile over the medium term.
Material counterparties on the reinsurance program evidence moderate aggregate credit strength, with maximum exposure per risk and event averaging at a conservative 1% of capital over the past two years.
GCR views country risk factors to be elevated, and a systemic rating consideration applicable to insurers’ national scale ratings. Operational challenges are likely to persist given the uncertain socio-political outlook, severe liquidity strain, reduction in banking sector stability, elevated level of sovereign risk and weak macroeconomic fundamentals.
The rating currently matches the national scale ceiling applicable to entities operating within the Zimbabwean insurance industry. As a result, upward movement of the rating may follow an assessment of country and industry risk factors. Conversely, downward rating pressure may arise from deterioration in key credit protection measures, a sustained weakening in earnings capacity and/or the adoption of a more aggressive investment strategy. Should the economic or socio-political outlook deteriorate further, the rating ceiling of the insurance sector may be reviewed.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (August 2012)|
|Claims paying ability: A-(ZW)|
|Last rating (July 2016)|
|Claims paying ability: A-(ZW)|
|Primary Analyst||Committee Chairperson|
|Godfrey Chingono||Yvonne Mujuru|
|Credit Analyst||Sector Head: Insurance Ratings|
|(011) 784 – 1771||(011) 784 – 1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2016
Eagle Insurance Company Limited rating reports, 2012-2016
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/RATING-SCALES-DEFINITIONS. 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 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.
FBC Insurance Company 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 FBC Insurance Company Limited with no contestation of the rating.
The information received from FBC Insurance Company Limited and other reliable third parties to accord the credit rating included:
- The audited annual financial statements to 31 December 2016
- 4 years of comparative audited numbers
- Unaudited interim results to 31 March 2017
- Budgeted financial statements for 2017
- 2017 reinsurance cover notes
- Other related documents.
The rating above was solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the rating.
|Capacity||The largest amount of insurance available from a company. In a broader sense, it can refer to the largest amount of insurance available in the marketplace.|
|Capital||The sum of money that is invested to generate proceeds.|
|Capitalisation||The provision of capital for a company, or the conversion of income or assets into capital.|
|Capital Adequacy||A measure of the adequacy of an entity’s capital resources in relation to its risks.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Claim||A request for payment of a loss, which may come under the terms of an insurance contract.|
|Credit Rating||An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.|
|Distribution Channel||The method utilised by the insurance company to sell its products to policyholders.|
|Enterprise Risk Management||ERM refers to an integrated or holistic approach to managing risk across an organisation, using clearly articulated frameworks and processes controlled from board level.|
|Exposure||Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For an insurer, its exposure may also relate to the risk related to policies issued.|
|International Scale Rating (“ISR”)||International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.|
|Intermediary||A third party in the sale and administration of insurance products.|
|Interest||Money paid for the use of money.|
|Investment Portfolio||A collection of investments held by an individual investor or financial institution.|
|Liquidity||The speed at which assets can be converted to cash. The ability of an insurer to convert its assets into cash to pay claims if necessary. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.|
|Market Risk||Volatility in the value of a security/asset due to movements in share prices, interest rates, currencies, commodities or wider economic factors.|
|National Scale Rating (“NSR”)||National Scale credit ratings express risk in relative rank order, which is to say they are ordinal measures of credit risk and are not predictive of a specific frequency of default or loss.|
|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.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Rating Horizon||The rating outlook period|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Risk Management||Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.|
|Short Term||Current; ordinarily less than one year.|
|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.|
|Subordinated Debt||Debt that in the event of a default is repaid only after senior obligations have been repaid. It is higher risk than senior debt.|
|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.|
|Underwriting Margin||Measures efficiency of underwriting and expense management processes.|
For a more detailed glossary of terms, please click here
GCR affirms FBC Insurance Company Limited’s rating at A-(ZW); Outlook Stable.