Johannesburg, 4 October 2016 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to SIC Insurance Company Limited of A-(GH), with the rating outlook maintained on Rating watch. The rating is valid until March 2017.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to SIC Insurance Company Limited (“SIC”) based on the following key criteria:
SIC’s rating and outlook remain dependent upon the resolution of the pending court case pertaining to the ultimate settlement of a potential significant guarantee claim. Should the guarantee holder succeed in defending the claim, this could adversely impact on SIC’s capital adequacy levels in the absence of shareholder support. Accordingly, any indication of potential capital strain could result in a further downgrade of the insurer’s rating, with the severity depending on the value of the ultimate legal obligation.
Assuming the aforementioned dispute is settled in favour of SIC, the A-(GH) rating would be underpinned by strong competitive positioning and sound capitalisation and liquidity.
Accordingly, SIC’s competitive positioning remains strong. The insurer holds a market leading position in the short term insurance industry, benefiting from substantial underwriting capacity relative to competitors. Accordingly, the insurer is well placed to defend its strong market position over the rating horizon, although the differential could narrow over the medium term.
Capitalisation is viewed to be very strong, supported by the large quantum of shareholders capital relative to peers (FYE15: USD21m). Accordingly, the international solvency margin registered at a very high 119% at FYE15 (FYE14: 111%), with well contained underwriting and market risk contributing to very strong risk based capital adequacy. Capitalisation is expected to remain at very strong levels, with the international solvency margin budgeted at 93% in FY16.
Liquidity was maintained at a strong level, with the cash coverage of average monthly claims and net technical provisions amounting to 13 months and 2.5x respectively at FYE15, after adjusting outstanding reserves for sizeable reinsurance receivables pertaining to flood related claims provisions (FYE14: 13 months and 2.3x). Given that no material change to the investment portfolio is envisaged, liquidity is expected to be maintained at a strong level over the medium term.
Earnings capacity is considered to be limited, with the consistently high operating expense ratio (review period average: 70%) contributing to four consecutive underwriting deficits (cumulatively amounting to GHC69m). More recently, the sizeable bad debts write offs and materialisation of significant credit guarantee and flood related claims in FY14 and FY15 respectively, have seen a further deterioration in the insurer’s underwriting profitability (two year average underwriting margin: -29%). Going forward, improved cost efficiencies, coupled with the expected normalisation in the loss ratio (BY16: 31%), provides scope for potential improvement in underwriting profitability.
Per risk and event net deductibles are limited to moderately conservative levels relative to capital. However, given that these are USD denominated, the insurer is exposed to elevated foreign currency risk, particularly in view of ongoing depreciation of the GHS and the absence of foreign currency cash holdings.
In line with most competitors, SIC’s claims provisioning is well below levels displayed in other African insurance markets. As such, potentially insufficient reserving represents a key risk to the insurer’s credit strength.
Upward movement of the rating or outlook is unlikely in the absence of a sustained turnaround in operating profitability. The rating has been placed on Rating Watch pending the outcome of disputes relating to the aforementioned large guarantee claim. Other factors that could lead to negative action include either 1) a further deterioration in operating profitability; 2) a weakening in capital adequacy and/or liquidity to levels that are not deemed to be rating appropriate.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (September 2009)|
|Claims paying ability: AA(GH)|
|Last rating (February 2016)|
|Claims paying ability: A-(GH)|
|Outlook: Rating watch|
|Senior Credit Analyst|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2016
SIC rating reports, 2009-2015
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.
SIC 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 has been disclosed to SIC Insurance Company Limited with no contestation of the rating.
The information received from SIC Insurance Company Limited and other reliable third parties to accord the credit rating included:
- Audited financial results to 31 December 2015
- Four years of comparative numbers
- Unaudited interim results to 30 June 2016
- Budgeted financial statements for 2016
- 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
|Bad Debt||Amounts in arrears, i.e. overdue, and often classified as defaulted or written-off.|
|Benefits||Financial reimbursement and other services provided to insureds by insurers under the terms of an insurance contract.|
|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.|
|Coverage||The scope of the protection provided under a contract of insurance.|
|Debt||An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.|
|Downgrade||The assignment of a lower credit rating to an insurer by a credit rating agency. Opposite of upgrade.|
|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 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.|
|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 Retention||The amount of insurance that a ceding company keeps for its own account and does not reinsure.|
|Portfolio||All of the insurer’s in-force policies and outstanding losses, with respect to described segments of its business.|
|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.|
|Retained Earnings||Earnings not paid out as dividends by a company. Retained earnings are typically reinvested back into the business and are an important component of shareholders’ equity.|
|Retention||The net amount of risk the ceding company keeps for its own account.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|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 SIC Insurance Company Limited’s rating of A-(GH); Outlook Rating watch.