Global Credit Ratings has accorded the above credit rating(s) on Mutual & Federal Insurance Company Limited based on the following key criteria:
M&F’s competitive position remains supportive of the rating, as the second largest insurer in the market. Strong market presence is expected to be sustained going forward, supported by substantial underwriting capacity and an expansive distribution network. The insurer’s rating profile benefits from the support framework, with credit strength deriving from the 100% ownership by ultimate shareholder Old Mutual Plc. The latter reflects an international scale foreign currency rating of BBB, holding a strong competitive position within its market, and a market capitalisation in excess of R140bn.
M&F’s rating takes into account the insurer’s capital management strategy. In this regard, note is taken of current strong capitalisation, as well as planned initiatives aimed at maintaining capital adequacy at current statistical levels via the introduction of various mechanisms. As such, capitalisation is forecast to remain at an adequate level in terms of GCR’s requirement for the current rating, and is supportive of the company’s expansionary business plans. Capitalisation is supported by limited investment risk exposure. Furthermore, with a sizeable 69% of the investment portfolio invested in cash and equivalents, M&F reflects sound liquidity metrics. No change to the investment strategy is expected in the short to medium term.
Profitability has registered at comparatively subdued levels relative to competitors, while also recording a higher level of volatility. As such, earnings capacity represents a relative weakness to the current rating. Underwriting profitability is projected to remain pressured in the near term, although efficiency gains are expected to alleviate profit strain in the medium term, supported by synergies at group level. Furthermore, the revised asset mix limits the profit feed from the investment account going forward (having historically represented in excess of 80% of before tax profits). This heightens the weighting of the underwriting account as a profit contributor going forward. The evolving competitive environment continues to pressure market share, suppress rates and threaten quality blocks of risk. This is primarily attributable to the increasing prominence of direct players and more flexible companies that can adapt quickly to market developments.
Upward movement on the rating or outlook could develop should the insurer achieve a strengthening in its business profile and competitiveness relative to immediate peers in particular, coupled with strong underwriting profitability over a sustained period, and an increased level of operational diversification. A downgrade may arise if the insurer were to report a loss in market share over a sustained period, with resultant losses in scale efficiencies driving operating losses over a protracted period. Furthermore, negative action may follow a softening in key liquidity and solvency metrics to levels outside of parameters commensurate with the existing rating.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (Sep/2000)|
|Claims paying ability: AAA(ZA)|
|Last rating (Aug/2012)|
|Claims paying ability: AA+(ZA)|
|Regional Sector Head: Insurance|
|+27 11 784 1771|
|Sector Head: Financial Institution Ratings|
|+27 11 784 1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
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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.
Mutual & Federal Insurance 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/s has been disclosed to Mutual & Federal Insurance Company Limited with no contestation of the rating.
The information received from Mutual & Federal Insurance Company Limited and other reliable third parties to accord the credit rating included the 2012 audited annual financial statements (plus four years of comparative numbers), latest internal and/or external report to management, full year budgeted financial statements, unaudited management accounts to June 2013, the current year reinsurance cover notes, debtors provisioning policy document, ERM processes/framework (including catastrophe management framework), reserving methodologies, and capital management documentation.
The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.