Announcements Insurance Rating Alerts

GCR affirms ICE’s Mozambican financial strength rating of A-(MZ); Outlook Stable

Rating action

Johannesburg, 3 June 2020 – GCR Ratings (“GCR”) has affirmed International Commercial & Engineering ICE Seguros, SA’s (“ICE”) national scale financial strength rating of A-(MZ); Outlook Stable.

Rated Entity / Issue Rating class Rating scale Rating Outlook
International Commercial & Engineering ICE Seguros, SA Financial strength National A-(MZ) Stable

Rating rationale

ICE’s rating is underpinned by a solid financial profile, with very strong levels of capitalisation and liquidity offsetting moderately adequate, albeit volatile earnings. The rating is further supported by a sound market position, although this is partly diluted by very low levels of premium retention, thus limiting market share on a net basis. Contrariwise, the insurer’s premium base is considered to be credit negative, reflecting elevated levels of single product and policyholder concentration.

Risk adjusted capitalisation is assessed within a very strong range, supported by a capital base which is more than sufficient to cater for aggregate risk exposures. Considering the insurer’s extensive use of reinsurance protection, underwriting risks are well contained, while the maintenance of a very liquid asset portfolio serves to limit exposure to market sensitivities. Accordingly, the GCR CAR coverage trended well above 2x across the past four years and is expected to measure within the same range over the outlook horizon.

With the support from a conservatively invested asset portfolio, the insurer continued to evidence a very strong liquidity profile. Consequently, the liquidity ratio equated to 6.6x at FY19, while cash and stressed financial assets covered operational cash requirements by 61 months. Looking ahead, the observance of a prudent asset allocation stance and the maintenance of significant surplus funds over policyholders’ obligations will likely see liquidity strength being sustained over the rating horizon.

Earnings are assessed within a moderately weak range, characterised by volatile underwriting and net margins. Volatility in performance is a function of very low premium retention, in some instances, with earned premiums insufficient to cover operating costs. Following an increase in premium retention to 10% in FY19 (FY18: 2.5%), along with a staff rationalisation exercise, the underwriting account registered a surplus of MZN16m (FY18: MZN75m deficit: FY17: MZN10m surplus). Profitability at net level reflected a similar trajectory, with the return on revenue equating to 26% (FY18: -37%; FY17: 12%). In the absence of an improvement in profitable risk retention, and consistency in commission income, ICE’s earnings are likely to remain moderately weak, with volatility presenting some downside risks.

Despite operating in the top tier of the Mozambique short term insurance market and being the third largest player with a gross market share of 12.9% in FY19, ICE’s market position is considered very limited on a net basis. Given the insurer’s high revenue dependence on reinsurance through fronting significant high value risks, GCR views the business model to be susceptible to changes in third party risk appetite. Furthermore, the premium base reflects moderate diversification, typified by elevated levels of single product and policyholder concentration. In this respect, the primary portfolio accounted for 66% of GWP in FY19, while the largest policyholder constituted 38% of the gross premium base.

Outlook statement

The Stable Outlook reflects the insurer’s ability to withstand the adverse impact of weak earnings on its capital and liquidity positions over the rating horizon. In this regard, risk adjusted capitalisation is likely to remain within very strong ranges, with the GCR CAR coverage trending above the 2x over the next 12 months. Liquidity strength is expected to be preserved with the liquidity ratio and operational cash overage projected to measure above 3x and 50 months over the corresponding period. Nevertheless, the business profile may remain constrained by very low levels of premium retention, along with the potential for continued exposure to policyholder concentration.

Rating triggers

Positive rating action could result from a sustained improvement in earnings, coupled with the maintenance of strong liquidity and risk adjusted capitalisation. Moreover, an improvement in the business profile (supported by increased revenue scale and stability) may lead to positive rating movement. Conversely, downward rating action could result from a protracted reduction in risk adjusted capitalisation and liquidity.

Analytical contacts

Primary analyst Tichaona Nyakudya Senior Analyst: Insurance
Johannesburg, ZA TichaonaN@GCRratings.com +27 11 784 1771
Committee chair Matthew Pirnie Group Head of Ratings
Johannesburg, ZA MatthewP@GCRratings.com +27 11 784 1771

Related criteria and research

Criteria for the GCR Ratings Framework, May 2019
Criteria for Rating Insurance Companies, May 2019
GCR Ratings Scales, Symbols & Definitions, May 2019
GCR Country Risk Scores, May 2020
GCR Insurance Sector Risk Scores, May 2020

International Commercial & Engineering ICE Seguros, SA

Rating class Review Rating scale Rating Outlook Date
Claims paying ability Initial BBB+(MZ) National Stable April 2015
Financial strength Last A- MZ) National Stable July 2019

Risk score summary

Rating factors and sub-factors Risk score
Operating environment 3.00
Country risk score 1.00
Sector risk score 2.00
Business profile (1.00)
Competitive position 0.25
Premium diversification (1.25)
Management and governance 0.00
Financial profile 2.50
Earnings (1.50)
Capitalisation 2.00
Liquidity 2.00
Comparative profile 0.00
Group support 0.00
Government support 0.00
Peer analysis 0.00
Total Score 4.50

Glossary

Premium The price of insurance protection for a specified risk for a specified period of time.
Provision The amount set aside or deducted from operating income to cover expected or identified loan losses.
Rating Horizon The rating outlook period
Rating Outlook See GCR Rating Scales, Symbols and Definitions.
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.
Retention The net amount of risk the ceding company keeps for its own account.
Risk The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.
Securities Various instruments used in the capital market to raise funds.
Security One of various instruments used in the capital market to raise funds.
Senior A security that has a higher repayment priority than junior securities.
Short Term Current; ordinarily less than one year.
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.

SALIENT POINTS OF ACCORDED RATINGS

GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the rating is based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such rating is an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit rating has been disclosed to the rated party. The rating was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating. The rated entity participated in the rating process via face-to-face management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.

The information received from the entity and other reliable third parties to accord the credit rating included:

  • Audited financial results as at 31 December 2019;
  • Four years of comparative audited financial statements to 31 December
  • Full year budgeted financial statements for 2019;
  • Management accounts as at 31 March 2020
  • Reinsurance cover for 2020; and
  • Other relevant documents.


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