Johannesburg, 11 July 2017 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to First Assurance Company Limited of A(KE), with the outlook accorded as Negative. The rating is valid until June 2018.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to First Assurance Company Limited (“First Assurance”) based on the following key criteria:
First Assurance’s rating has been placed on negative outlook, owing to earnings registering well below original expectations, with continued profit weakness budgeted to persist going forward. Profitability, having registered within a moderately strong aggregated range in previous review years, weakened substantially in FY16. In this regard, the insurer’s underwriting margin equated to a poor -19% in FY16 (BGT16: 4%), having averaged 4% between FY12 and FY15. The reduction in profitability was spurred in large by a spike in the loss ratios for motor and workmen’s compensation, while a sustained high medical loss ratio continued to suppress margin headroom. Management has budgeted for a further large underwriting deficit in FY17, owing in large to cost pressures, as well as the reducing scale efficiencies. Furthermore, GCR notes the potential for continued elevation in the loss ratio (which management has budgeted to lower substantially to 69% in FY17) to further pressure the underwriting result downward. Consequently, management’s control over earnings capacity represents a primary consideration over the rating horizon.
The insurer’s capitalisation continued to measure at a strong level in FY16. Over the review period, capitalisation grew by a 19% compound annual growth rate, supported by sound retained income and a capital injection in FY15. The international solvency margin equated to a higher 102% at FY16 (FY15: 99 %), underpinned by a reduction in the premium retention rate to 55% at FY16 (FY15: 62%). GCR expects risk adjusted capitalisation to be maintained within a strong level over the rating horizon, supported in part by a lower premium risk base.
Liquidity metrics measured at a moderately strong level. Cash coverage of net technical liabilities registered at a solid 0.9x at FY16 (FY15: 1.0.x), while claims cash coverage equated to 14 months (FY15: 17 months). Liquidity metrics are expected to remain within a relatively strong range over the rating horizon, supported by the insurer’s conservative investment portfolio.
GCR views First Assurance’s competitive position to be moderately strong, with a market share of 3.2% in FY16 (FY15: 3.4%). First Assurance’s business mix is fairly well diversified, with four major classes of business contributing 81% of GWP in FY16.
Negative rating action is likely to follow sustained weakness in earnings capacity. In contrast, improved profit stability may see a reversion to a Stable outlook, with capitalisation and liquidity also being sustained at rating-adequate levels.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (September 2010)|
|Claims paying ability: BBB+(KE)|
|Last rating (June 2016)|
|Claims paying ability: A(KE)|
|Primary Analyst||Secondary analyst|
|Marc Chadwick||Tichaona Nyakudya|
|Sector Head: Insurance Ratings||Credit Analyst|
|(011) 784 – 1771||(011) 784 – 1771|
|Senior Credit Analyst|
|(011) 784 – 1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2016
Criteria for Rating Long Term Insurance Companies, updated July 2016
First Assurance Company Limited rating reports, 2010-2016
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.
First Assurance 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 First Assurance Company Limited with no contestation of the rating.
The information received from First Assurance 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 financial statements to 31 December
- Budgeted financial statements to 31 December 2017
- Financial Condition Report at 31 December 2016
- 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.
|Assets||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|Balance Sheet||Also known as a Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.|
|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.|
|Deductible||The portion of an insured loss to be borne by the insured before he is entitled to recovery from the insurer.|
|Diversification||Spreading risk by constructing a portfolio that contains different investments, whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.|
|Dividend||The portion of a company’s after-tax earnings that is distributed to shareholders.|
|Execution Risk||The risk that a company’s business plans will not be successful when they are put into action.|
|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 LC||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.|
|Liabilities||All financial claims, debts or potential losses incurred by an individual or an organisation.|
|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.|
|Operating Margin||Measures the efficiency of profit generation from investments and underwriting.|
|Policy||The legal document issued by the company to the policyholder, which outlines the conditions and terms of the insurance.|
|Policyholder||The person in actual possession of an insurance policy.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Rating Horizon||The rating outlook period|
|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.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Yield||Percentage return on an investment or security, usually calculated at an annual rate.|
For a detailed glossary of terms, please click here
GCR affirms First Assurance Company Limited’s rating at A(KE); Outlook Negative.