Johannesburg, 31 May 2017 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to International Commercial & Engineering Seguros of BBB+(MZ), with the rating outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to International Commercial & Engineering Seguros (“ICE”) based on the following key criteria:
ICE is a start-up insurer, operating in the Mozambican short term insurance sector since May 2015. The initial business plan centred on writing high value fire and engineering risks that were expected to be generated through increased activity in the oil and gas industry. This was anticipated to provide a high-growth revenue stream which, coupled with a low-frequency loss experience and high commission recovery structure, would sustain a high margin business model. However, the unexpectedly constrained local economic environment over the past two years has hampered the attainment of initial financial projections.
In response, ICE has partially adapted its short term strategy, seeking to capture existing market risks as a means of supplementing revenue flow, while an additional USD1m was injected into the business in 1H F16 to cover expenses. Furthermore, ICE’s competitive position strengthened in FY16, with the insurer’s market share increasing to 5% (FY15: 0.7%) on a GWP basis (albeit remaining limited in terms of NWP, given the high degree of reinsurance utilised in the operating model). GCR views the insurer to be positioned to gain further market share over the medium term, given increased market acceptance, translating into business being captured from competitors.
Although initial projections have been revised to cater for delays in achieving operational traction, management continue to view medium term prospects as allowing for the realisation of broad financial and operational targets. In this regard, GCR continues to factor in expectations for management’s technical skill, market knowledge and demonstrated success in driving start-ups to capture potential medium term growth, while navigating short term market uncertainty. Nevertheless, persistent budget shortfalls, and ongoing economic headwinds, will continue to represent the primary source of rating sensitivity over the short term.
Liquidity is viewed to be strong, supported by a very conservative investment strategy, with all investment funds being placed in cash and equivalents. Following the USD1m capital injection, the cash balance rose by 80% to USD1.8m at FY16. Accordingly, liquidity metrics registered at sound levels, with cash coverage of average monthly claims and net technical provisions amounting to a high 60 months and 1.2x respectively (FY15: 48 months and 2.4x respectively). Over the medium term, liquidity metrics are expected to trend within a strong to moderately strong range, as potential investments into higher risk assets (a function of regulatory prescribed asset requirements) may serve to dilute the cash portfolio, and soften liquidity ratios. GCR further notes the potential for liquidity exposure to constrained cash flow generation (a function of continued operational and earnings challenges).
Earnings capacity is limited, with the lack of premium volume scale inhibiting profit potential. In this regard, large fixed operating costs (FY16: USD1.1m; relative to a net risk base of USD1m), resulted in a net underwriting loss of USD0.5m in FY16. The foreign exchange translation gains currently supporting net profitability (and consequently capitalisation) are not viewed to be a stable contributor to medium term profit potential. With minimal investment income returns, premium generation in line with management’s projections represents a key determinant of the earnings assessment, with any potential underperformance likely to impact negatively on credit strength going forward.
Capitalisation is considered to be intermediate, with the low value of capital (in absolute terms) exposing the capital base to budget shortfall risks. The USD1m capital injection received in FY16, supported risk adjusted capital at intermediate levels, providing some capital relief from depressed earnings. In this regard, the international solvency margin lowered to 98% in FY16 (FY15: 298%). Going forward, capitalisation will remain sensitive to the attainment of short-medium term growth and profit projections, with any potential shortfalls in revenue likely to lead to a moderation of capital strength.
Reinsurance protection is considered integral in the context of ICE’s business strategy. In this regard, the moderate credit strength displayed by most reinsurance counterparties serves to somewhat alleviate capital risk. However, the treaty net deductible per risk is considered moderately elevated relative to FY16 capital (at 6.3%).
Upward rating movement could arise from sustained earnings performance in line with projections, leading to sound capital generation and maintenance of strong liquidity, and/or risk adjusted capitalisation. Furthermore, a strengthening in the insurer’s business profile (by way of increased market share and enhanced earnings diversification) may lead to positive rating movement. The rating is sensitive to potential shortfalls (relative to expectations) in the net risk base, which may constrain profit potential and limit capital build.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (April 2015)|
|Claims paying ability: BBB+(MZ)|
|Last rating (May 2016)|
|Claims paying ability: BBB+(MZ)|
|Sector Head: Insurance Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2016
Criteria for Rating Newly Established and Start-up Insurance Companies, updated July 2016
ICE rating reports, 2015-2016
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. 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; and c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
International Commercial & Engineering Seguros 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 International Commercial & Engineering Seguros with no contestation of the rating.
The information received from International Commercial & Engineering Seguros and other reliable third parties to accord the credit rating included:
- The audited financial statements to 31 December 2016
- Two years of comparative audited financial statements to 31 December
- Full year budgeted financial statements to 31 December 2017
- Unaudited interim results to 30 April 2017
- Other relevant 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
|Assets||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|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 Base||The issued capital of a company, plus reserves and retained profits.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|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.|
|Coverage||The scope of the protection provided under a contract of insurance.|
|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.|
|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.|
|Experience||A term used to describe the relationship, usually expressed as a percent or ratio, of premiums to claims for a plan, coverage, or benefits for a stated time period.|
|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.|
|International Solvency Margin||Measures the ability to cover current year’s written premiums using shareholder’s funds.|
|Investment Income||The income generated by a company’s portfolio of investments.|
|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.|
|Loss||The happening of the event for which insurance pays.|
|Market Risk||Volatility in the value of a security/asset due to movements in share prices, interest rates, currencies, commodities or wider economic factors.|
|Net Profit||Trading/operating profits after deducting the expenses detailed in the profit and loss account such as interest, tax, depreciation, auditors’ fees and directors’ fees.|
|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 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. The reinsured may be referred to as the Original or Primary Insurer, or Direct Writing Company, or the Ceding Company.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|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.|
|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 detailed glossary of terms please click here
GCR affirms International Commercial & Engineering Seguros’s rating of BBB+(MZ); Outlook Stable.