Announcements

GCR affirms Infiniti Insurance Limited’s rating of A-(ZA); Outlook Stable.

Johannesburg, 30 Oct 2015 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Infiniti Insurance Limited of A-(ZA), with the outlook accorded as Stable.

SUMMARY RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit rating to Infiniti Insurance Limited (“Infiniti”) based on the following key criteria:

The insurer reflects moderately strong risk adjusted capitalisation, underpinned by internal capital generation supporting relatively elevated market risk exposures. The insurer’s interim statutory CAR cover equated to 2.1x at FYE15 (FYE14: 2.3x), while the international solvency margin equated to 68% (FYE14: 67%). Management expects SCR coverage to range between 1.4x and 1.6x under expected Solvency Assessment and Management (“SAM”) parameters. As such, GCR expects the insurer to remain sufficiently capitalised, in light of the anticipated growth trajectory, supported by the capital management strategy in place.

Infiniti’s earnings capacity is a function of its sizeable investment portfolio (FYE15: R806m), which generates a large quantum of investment income in absolute terms. In this respect, the insurer registered thin (albeit fairly consistent) underwriting margins over the last five years, largely due to the elevated cost structure being impacted by profit sharing arrangements with key partners. Nevertheless, large investment returns have translated into solid returns on revenue over the bulk of the review period. This trend is expected to persist going forward, although high market risk exposure gives rise to potential profit volatility.

The sizeable investment portfolio, consisting largely of tradable securities, coupled with the investment mandate, allows for cash draw down from the portfolio. This is viewed to offer Infiniti a high level of liquidity support. Liquidity metrics on a pure cash basis remained constrained relative to the peer group, given the insurer’s medium term investment philosophy.

The investment portfolio is substantially exposed to domestic and foreign equities, representing a combined 129% of capital at FYE15 (FYE14: 126%). This introduces a considerable level of capital risk in the event of capital market shocks. In partial mitigation of this risk, the non-cash investment portfolio is actively managed by Foord Asset Management (“FAM”) in line with a specific mandate targeting capital preservation, with the tactical asset allocation strategy taking into account prevailing market conditions and volatility. Moderately strong risk adjusted capitalisation also contributes to GCR’s view that the insurer is positioned to absorb a degree of potential exogenous shocks emanating from capital markets.

Infiniti’s business profile is moderate, with the specialist focus contributing towards growth, despite a relatively limited competitive position. The business model centres on supporting established and diversified specialised underwriting management agencies (“UMAs), books of business from independent brokers and branches in specialized areas. The strategy is expected to enhance market share over the medium term. The ability of the insurer to maintain operational continuity, while maintaining through-the-cycle profitability, in the event of a loss of a significant partner, remains a key rating consideration over the medium term. Cognisance is taken of enhanced earnings diversification, with contribution from other key partners increasing materially since the start of the rating exercise.

The reinsurance programmes are led by reinsurance counterparties with strong credit profiles, while maximum net deductibles are limited to levels considered to be conservative relative to the capital base.

The rating may be upgraded if the insurer evidenced an enhanced business profile (by way of increased market share), supported by a sustained strengthening in underwriting profitability and a material de-risking of the investment portfolio (resulting in improvements in the liquidity profile). This would need to be supported by risk adjusted capital adequacy remaining at appropriate levels. Conversely, downward rating movement may arise if the insurer’s risk adjusted capitalisation weakened materially, and/or liquidity metrics deteriorated below expectations. Furthermore, a weakening in the operating performance on a sustained basis or pronounced equity market losses impacting on capital, in the absence of additional capital injections, could result in negative rating movements.

NATIONAL SCALE RATINGS HISTORY    
     
Initial rating (December 2010)    
Claims paying ability: A-(ZA)    
Outlook: Stable    
     
Last rating (October 2014)    
Claims paying ability: A-(ZA)    
Outlook: Stable    

ANALYTICAL CONTACTS

Primary Analyst   Committee Chairperson
Yvonne Masiku   Marc Chadwick
Senior Credit Analyst   Sector Head: Insurance Ratings
(011) 784-1771   (011) 784-1771
ymasiku@globalratings.net   chadwick@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Short Term Insurance Companies, updated July 2015

RSA Short Term Insurance Bulletins, 2001-2014

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; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.

Infiniti Insurance 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 Infiniti Insurance Limited with no contestation of the rating.

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

  • Audited financial results to 31 March 2015
  • Four years of comparative audited numbers
  • Unaudited interim results to 30 June 2015
  • Budgeted financial statements for 2016
  • The current year reinsurance cover notes
  • Statutory returns to 31 March 2015 and 30 June 2015, and
  • 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.

GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY

Accounting A process of recording, summarising, and allocating all items of income and expense of the company and analysing, verifying and reporting the results.
Budget Financial plan that serves as an estimate of future cost, revenues or both.
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.
Capital Base The issued capital of a company, plus reserves and retained profits.
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.
Credit Rating Agency An entity that provides credit rating services.
Creditworthiness An assessment of a debtor’s ability to meet debt obligations.
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.
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.
Interest Money paid for the use of money.
Liquidity The speed at which assets can be converted to cash.
Liquidity Risk The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.
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”) The national scale provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.
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.
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
Rating Outlook A rating outlook indicates the potential direction of a rated entity’s rating over the medium term, typically one to two years. An outlook may be defined as: ‘Stable’ (nothing to suggest that the rating will change), ‘Positive’ (the rating symbol may be raised), ‘Negative’ (the rating symbol may be lowered) or ‘Evolving’ (the rating symbol may be raised or lowered).
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.
Securities Various instruments used in the capital market to raise funds.
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.

For a more detailed glossary of terms/acronyms used as per GCR insurance glossary, please click here

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