GCR affirms Old Mutual Insurance Company (Private) Limited’s rating of A+(ZW); Outlook Stable.
Johannesburg, 16 May 2018– Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Old Mutual Insurance Company (Private) Limited of A+(ZW), with the outlook accorded as Stable. The rating is valid until May 2019.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to Old Mutual Insurance Company (Private) Limited (“OMICO”) based on the following key criteria:
OMICO’s risk adjusted capitalisation registered at very healthy levels over the review period, supported by well contained debtors and significant capital growth catering for the quantum of insurance risks and increased market exposure. The adjusted international solvency margin equated to an atypically higher 110% at FY17 (FY16: 74%; review period average: 75%), on the back of material unrealized investment income. This notwithstanding, GCR expects risk adjusted capitalisation to register at very strong levels over the rating horizon, supported by robust internal capital generation and well contained dividend distributions. Furthermore, maximum net deductibles per risk and event are limited to conservative levels relative to capital, while the reinsurance panel reflects an intermediate aggregate level of credit strength.
Earnings capacity is viewed to be robust, supported by very strong underwriting profitability and improved investment returns in FY17. In this respect, the five year aggregated underwriting margin equated to 16% (FY17: 12%; FY16: 18%), while the investment yield registered at 32% in FY17 (FY16: 8%; review period average: 14%). GCR views the insurer’s demonstrated track record of underwriting performance as indicative of strong earnings capacity going forward. Reserving sufficiency is positively impacted by the certification of reserve levels by a qualified external actuary.
Key liquidity metrics moderated from very strong levels recorded historically, following asset portfolio rebalancing aimed at value preservation given the uncertainty surrounding liquid assets. In this respect, cash coverage of net technical provisions equated to a lower 0.9x at FY17 (FY16: 1.5x; review period average: 1.6x), while average monthly claims coverage registered at a lower 7 months (FY16: 14 months). Liquidity metrics are likely to remain within a similar range over the outlook horizon, underpinned by the envisaged asset allocation.
The insurer’s business profile is strong, supported by very strong competitive positioning and fairly well diversified earnings. OMICO remained the market leader, with an estimated market share of approximately 17% of total short term industry gross premiums in FY17 (FY16: 17%). The insurer’s competitive position is likely to remain very strong, supported by strong brand recognition, cross-selling of products across the group as well as introduction of new and innovative products.
GCR views country risk factors to be elevated, and a systematic rating consideration applicable to insurers. Operational challenges are likely to persist over the rating horizon, albeit with positive changes in the socio-political outlook and macroeconomic fundamentals possible over the medium term, should the political situation stabilise.
GCR views the insurer to have high strategic importance to the group, given the brand alignment. This view is further substantiated by OMICO’s demonstrated track record of achieving profitable growth in line with group objectives. As such, OMICO is viewed to benefit from potential extraordinary support from the Old Mutual group. Hence, the insurer’s standalone credit profile benefits from implicit group support.
An upgrade is considered unlikely, given that the insurer’s rating pierces the national scale ceiling applicable to entities operating within the Zimbabwean insurance industry. Accordingly, upward movement of the rating may follow an assessment of country and industry risk factors. Conversely, downward rating pressure may arise from a persistent deterioration in underwriting performance, coupled with a weakening in the liquidity profile below expectations.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (post US dollarisation May 2009)|
|Claims paying ability: A-(ZW)|
|Last rating (May 2017)|
|Claims paying ability: A+(ZW)|
|Primary Analyst||Secondary Analyst|
|Yvonne Mujuru||Sylvia Mhlanga|
|Sector Head: Insurance Ratings||Credit Analyst|
|(011) 784 – 1771||(011) 784 – 1771|
|Senior Credit Analyst|
|(011) 784 – 1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated May 2018
RM Insurance Company (Private) Limited rating reports, 2009-2014
Old Mutual Insurance Company (Private) Limited rating reports, 2015-2017
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/RATING-SCALES-DEFINITIONS. 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.
Old Mutual Insurance Company (Private) 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 Old Mutual Insurance Company (Private) Limited with no contestation of the rating.
The information received from Old Mutual Insurance Company (Private) Limited and other reliable third parties to accord the credit rating included:
- The audited annual financial statements to 31 December 2017
- Four years of comparative audited numbers
- Unaudited interim results to 31 March 2018
- Budgeted financial statements for 2018
- 2018 reinsurance cover notes
- 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.
|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.|
|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.|
|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.|
|Distribution Channel||The method utilised by the insurance company to sell its products to policyholders.|
|Enterprise Risk Management||ERM refers to an integrated or holistic approach to managing risk across an organisation, using clearly articulated frameworks and processes controlled from board level.|
|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 (“ISR”)||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.|
|Intermediary||A third party in the sale and administration of insurance products.|
|Interest||Money paid for the use of money.|
|Investment Portfolio||A collection of investments held by an individual investor or financial institution.|
|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.|
|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”)||National Scale credit ratings express risk in relative rank order, which is to say they are ordinal measures of credit risk and are not predictive of a specific frequency of default or loss.|
|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|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Risk Management||Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.|
|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.|
|Subordinated Debt||Debt that in the event of a default is repaid only after senior obligations have been repaid. It is higher risk than senior debt.|
|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.|
|Underwriting Margin||Measures efficiency of underwriting and expense management processes.|
For a more detailed glossary of terms, please click here
TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY
GCR affirms Old Mutual Insurance Company (Private) Limited’s rating of A+(ZW); Outlook Stable.