Johannesburg, 26 October 2018 — 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 2019.
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 factors:
Fidelity Shield’s rating has been affirmed at BBB(KE), based on strong risk adjusted capitalisation, which is partially offset by volatile liquidity metrics and limited business profile. The negative outlook reflects the potential for sustained weakened earnings capacity, together with statutory solvency remaining below minimum requirements, to negatively impact the entity’s credit profile going forward.
Internal capital generation continued on a downward trend over the review period underpinned by weak underwriting profitability, and more recently, a reduction in investment returns. In this respect, net income after tax amounted to a lower KES17m in FY17 (FY16: KES61m), compared to KES115m in FY13. Accordingly, the ROE equated to a lower 2% in FY17 (FY16: 6%; FY13: 13%). Sustained weakening in earnings capacity is likely to result in negative rating pressure.
Fidelity Shield’s risk adjusted capitalisation moderated in FY17, albeit remaining within a strong range. This was a result of increased market and insurance risk. Accordingly, the international solvency margin lowered to 70% in FY17 (FY16: 89%; review period average: 87%) further hampered by limited capital growth. Going forward, risk adjusted capitalisation may moderate further, given the limited scope for improved earnings generation. Furthermore, maximum net deductibles per risk and event are limited to conservative levels relative to capital, while the reinsurance panel reflects a strong level of aggregated credit strength.
Nevertheless, the insurer’s risk based capital adequacy requirement (“CAR”) coverage on a statutory basis improved at FY17, albeit remaining below the prescribed minimum of 100%. Management plans to meet the required minimum by 2018, through improving debtor collection as well as disposing two properties. The inability of the insurer to meet minimum regulatory requirements may impact negatively on the entity’s credit profile going forward, should this result in regulatory action.
Key liquidity metrics have been volatile and trended within a weak range over the review period. This was largely due to inconsistent operational cash flows, leading to fluctuating cash balances. In this regard, cash coverage of monthly claims and net technical liabilities (inclusive of government bonds) equated to 10 months and 0.5x at FY17 (FY16: 7 months and 0.3x) respectively. Liquidity metrics may improve, going forward, on the back of the envisaged asset rebalancing which may result in increased cash balances.
Asset quality is considered to be moderately weak, given the high weighting of illiquid assets in the investment portfolio. In this respect, high risk assets represented 132% of FY17 capital (FY16: 126%). This is further compounded by the moderately elevated exposure to aged debtors representing 16% of FY17 capital (FY16: 28%). Fidelity Shield has however managed to dispose two residential properties worth KES103m in 2018 and plan to improve debtor management which may support enhanced asset quality going forward.
Fidelity Shield’s limited competitive position currently serves as a rating weakness. In this respect, the insurer’s share of total short term insurance industry premiums equated to 1.9% in FY17. Furthermore, earnings are heavily reliant on one line of business (motor), representing 57% of gross premiums in FY17. Similarly, the risk base is heavily skewed towards motor, which accounted for more than 76% of net premiums. In GCR’s view, this implies a relatively high degree of profit risk, particularly given the challenges associated with this class.
Negative rating action may follow a weakening in earnings, relative to expectations, resulting in dilution of international solvency. Furthermore registering of statutory solvency below minimum requirements, resulting in regulatory action, could lead to downward rating pressure. Conversely, the rating may be upgraded if liquidity metrics strengthen materially and/or if earnings capacity evidences a sustained improvement. This would need to be supported by risk adjusted capitalisation measuring at adequate levels.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (October 2013)|
|Claims paying ability: BBB+(KE)|
|Last rating (October 2017)|
|Claims paying ability: BBB(KE)|
|Sector Head: Insurance Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated May 2018
Fidelity Shield rating reports, 2013-2017
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.
The information received from Fidelity Shield Insurance Company Limited and other reliable third parties to accord the credit rating included:
- The audited financial results as at 31 December 2017
- Unaudited interim results to 30 September 2018
- Budgeted financial statements for 2018
- Financial Condition Report 2017
- The current year reinsurance cover notes
- Other relevant company specific information
The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.
TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY
|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.|
|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 Fidelity Shield Insurance Company Limited’s rating of BBB(KE); Outlook Negative.