Johannesburg, 2 June 2016 — 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 Negative.
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:
The negative outlook reflects the potential for adverse economic conditions to impact negatively on the growth prospects of ICE. In this regard, the soft economic conditions witnessed in 2015 may be compounded by recent developments, giving rise to substantial economic risks, and potential prolonged postponements in mega project investments. In turn, such developments may serve to constrain ICE’s prospective premium volumes, resulting in limited profit potential.
Notwithstanding the aforementioned external considerations, GCR has identified an array of qualitative strengths within the business structure. Amongst others, this includes the utilisation of a sophisticated, field-tested IT platform (allowing for integration of underwriting, claims processing and capital management), and group technical support (covering reinsurance, financial and administrative disciplines). Furthermore, the insurer benefits from a highly experienced management team, which boasts a demonstrated track record of successfully driving start-up insurance ventures across Africa.
The insurer employs a very conservative investment strategy, with investments held exclusively in cash instruments. Accordingly, claims cash coverage and cash coverage of technical reserves amounted to a strong 48 months and 2.4x in FY15 respectively. Furthermore, the investment allocation serves to contain market risk in terms of risk based capitalisation at a very low level. This is supportive of strong liquidity metrics over the rating horizon.
Capitalisation is viewed to be adequate. In this regard, capital reduced to a constrained USD0.9m at FYE15, although this is expected to rise to USD1.7m by 1H F16 following an additional USD1m capital injection commitment from existing shareholders. Over the medium term, capital will be managed in line with minimum statutory solvency requirements, and is expected to remain limited relative to risk based requirements. Accordingly, GCR expects to retain a view of adequate capitalisation over the rating horizon, taking note of the commitment by shareholders to provide further capital support if needed (to meet statutory solvency requirements).
Reinsurance protection is considered integral in the context of ICE’s business strategy. In this regard, the high level of 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 FYE15 capital (at 10.9%).
The insurer’s current and short term earnings capacity is viewed to be limited. The high utilisation of reinsurance, coupled with low levels of GWP attainment, has served to marginalise the net premium base. Subsequently, the insurer was unable to cover its operating costs, reporting an underwriting loss of USD1.7m in FY15 (BY15: USD1.2m loss). Further operational strain is envisaged in FY16, given the revised operational outlook. Medium term profit potential hinges on management’s strategic execution, coupled with the favourability of the operating environment.
The successful execution of the business strategy is viewed as a key consideration, with particular emphasis to be placed on the bedding down of operational structures, the demonstrated ability to attain medium term revenue milestones and the development of an earnings generation track record. Further, a protracted upward management of key solvency metrics would be required for upward rating movement. Negative short term rating action may follow the materialisation of limited growth prospects constraining profit potential. Over the medium term, further negative rating sensitivity may stem from the potential for sustained limited/negative profit trends to hinder continuing capital support (owing to the suppression of investment attractiveness).
| NATIONAL SCALE RATINGS HISTORY |
| Initial/last rating (April 2015) |
| Claims paying ability: BBB+(MZ) |
| Outlook: Stable |
ANALYTICAL CONTACTS
| Primary Analyst |
| Vinay Nagar |
| Credit Analyst |
| (011) 784-1771 |
| vinay@globalratings.net |
| Committee Chairperson |
| Marc Chadwick |
| Sector Head: Insurance Ratings |
| (011) 784-1771 |
| chadwick@globalratings.net |
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2015
Criteria for rating Newly Established and Start-up Insurance Companies, updated July 2015
ICE rating report, 2015
RATING LIMITATIONS AND DISCLAIMERS
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GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY
| Benefits | Financial reimbursement and other services provided to insureds by insurers under the terms of an insurance contract. |
| 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. |
| 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. |
| 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. |
| Execution Risk | The risk that a company’s business plans will not be successful when they are put into action. |
| 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. |
| 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. |
| 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. |
| 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 | (1) An amount representing actual or potential liabilities kept by an insurer to cover debts to policyholders. (2) An amount allocated for a special purpose. Note that a reserve is usually a liability and not an extra fund. On occasion a reserve may be an asset, such as a reserve for taxes not yet due. |
| Risk | The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives. |
| Shareholder | An individual, entity or financial institution that holds shares or stock in an organisation or company. |
| 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. |
| 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 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.
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:
- Audited financial results to 31 December 2015
- Detailed financial projections for the next three years to 2018
- Unaudited interim results to 30 April 2016
- Other related documents
The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the rating.
GCR affirms International Commercial & Engineering Seguros’s rating of BBB+(MZ); Outlook Negative.
