Johannesburg, 5 Nov 2015 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Fidelity Shield Insurance Company Limited of BBB+(KE); with the outlook accorded as Negative. The rating is valid until October 2016
SUMMARY RATING RATIONALE
Global Credit Ratings (““GCR””) has accorded the above credit rating to Fidelity Shield Insurance Company Limited (““Fidelity Shield””) based on the following key criteria:
The rating outlook has been revised to Negative, owing to a notable weakening in key liquidity metrics for the YTD FY15. This follows cash outlays pertaining to the purchase of illiquid assets in the investment portfolio, together with subdued cash flow generation of late. The latter may see liquidity constraints persist going forward, with the remainder of the investment portfolio providing limited liquidity relief.
Overall, Fidelity Shield displays a high risk investment appetite, with financial assets exposed to market risk representing 129% of YTD15 capital (FY14: 87%). Market risk is projected to remain elevated over the rating horizon following the recent additional property investments.
Support to the rating is provided by the insurer’’s strong risk-adjusted capital adequacy levels, underpinned by relatively contained insurance risks, offsetting elevated market risk exposure. In light of strong premium growth expectations, stringent profit and capital exposure management is required to maintain risk-adjusted solvency at rating-consistent levels going forward.
The insurer has historically displayed a weak underwriting trend, thus earnings capacity remains reliant on investment inflows. While the insurer’’s underwriting performance improved in FY14, on-going potential for profit suppression is noted given the underperformance for the YTD September. The potential for the insurer to derive increased volumes of rental income related to the recent property purchase may, positively, provide some relief to earnings going forward.
The company’’s limited competitive position currently serves as a rating weakness. The successful scaling up of operations through proactive measurers recently implemented is likely to positively contribute to the company’’s market profile over the medium term.
With the motor portfolio accounting for 71% of the risk base, this implies a relative degree of profit risk, particularly given the challenges associated with this class (albeit well managed by the insurer to date).
Negative rating action could follow a sustained weak liquidity profile, coupled with suppressed cash generation capacity. Conversely, positive movement on the rating could develop with a sustained improvement in underwriting performance, reflecting an upward trend of earnings capacity over the medium term. Further, reduced asset risk exposure and enhanced liquidity metrics would be positively viewed.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (October 2013)|
|Claims paying ability: BBB+(KE)|
|Last rating (October 2014)|
|Claims paying ability: BBB+(KE)|
|Senior Credit Analyst|
|Sector Head: Insurance Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2015
Fidelity Shield rating reports, 2013-2014
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.
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.
Fidelity Shield 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 Fidelity Shield Insurance Company Limited with no contestation of the rating.
The information received from Fidelity Shield Insurance Company Limited and other reliable third parties to accord the credit rating included:
- Audited financial results as at 31 December 2014
- 4 years of comparative numbers
- Unaudited interim results as at 30 September 2015
- Budgeted financial statements for 2015
- Financial Condition Report 2014
- The current year reinsurance cover notes
- Other non-public statistical information
The rating above was 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.|
GCR affirms Fidelity Shield Insurance Company Limited’s rating of BBB+(KE); Outlook Negative.