Johannesburg, 24 October 2017 — 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 maintained on Rating watch. The rating is valid until March 2018.
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:
The rating of SIC has been maintained on A-(GH), reflecting continued rating support derived from the insurer’s high market share and strong liquidity. However, capitalisation, having historically represented a material rating strength, lowered in FY16, and is expected to reduce further in FY17. This weakening trend is a function of limitations in retained earnings, coupled with growth in underwriting risk volumes. As a result, this moderation in capital strength is expected to place negative ratings pressure on the insurer’s credit profile over the rating horizon. Furthermore, the Rating watch reflects the sustained risk of the pending litigation and possible settlement of a material credit guarantee claim, along with other recurring credit guarantee claims and lawsuits, representing significant earnings risk.
SIC’s rating is negatively impacted by weak earnings, given consistent underwriting deficits registered over the review period. The sustained weak underwriting performance is in sharp contrast to the anticipated turnaround from FY15 onwards, being a function of large and recurring credit guarantee claims (increasing claims volatility) and an elevated operating cost structure. Consequently, the insurer recorded a strained review period average underwriting margin of -25% (FY16: -32%). In GCR’s view, underwriting profit weakness is expected to continue going forward, underpinned by a potentially volatile claims experience, along with limited scope for scale efficiencies over the rating horizon.
SIC still maintains a leading position in the Ghanaian short term insurance industry, despite persistently shedding market share since FY05. In this respect, the insurer’s market share was estimated at 15% at FY16 (FY15: 17%; FY12: 23%), with market shares of the two closest competitors estimated at 13% and 12% at FY16 (FY15: 12% and 9%), respectively. Management plans to address the loss of market share through various initiatives. In GCR’s view, however, the insurer’s market position could continue to be impacted by increasing competitive dynamics and the perceived loss of the insurer’s brand identity.
The insurer’s risk adjusted capitalisation is viewed to be strong, albeit exposed to increasing insurance and counterparty risk (associated with strategic and other high risk investments). Consequently, the international solvency margin registered at a lower 86% at FY16 (FY15: 119%) while the statutory solvency measured at a lower 132% (FY15: 162%), which was below the minimum regulatory requirement of 150%. In GCR’s view, there is high potential for a further moderation in risk adjusted capitalisation, given the anticipated increase in the volume of the risk base. Furthermore, the insurer’s internal capital generating capacity is expected to remain limited, underpinned by poor underwriting performance and more recently, a significant dividend extraction (of GHS4.2m).
SIC’s liquidity remained within a very strong range, supported by a material reduction in technical provisions and the moderation in claims experience FY16. As such, the claims cash cover and cash coverage of net technical liabilities equated to a higher 24 months and 1.6x at FY16 (FY15: 13 months and 1.2x), respectively. Liquidity is likely to remain within a very strong range over the medium term, although evidencing sensitivity to weakened operational cash flow generation and reserving fluctuations.
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 a further deterioration in operating profitability and sustained weakening in capital adequacy and/or liquidity to levels that are not deemed to be rating appropriate. Conversely, an upward movement of the rating or outlook is unlikely in the absence of a sustained turnaround in operating profitability.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (September 2009)|
|Claims paying ability: AA(GH)|
|Last rating (March 2017)|
|Claims paying ability: A-(GH)|
|Rating watch: Yes|
|Primary Analyst||Secondary analyst|
|Marc Chadwick||Tichaona Nyakudya|
|Sector Head: Insurance Ratings||Credit Analyst|
|(011) 784 – 1771||(011) 784 – 1771|
|Sector Head: Insurance Ratings|
|(011) 784 – 1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2017
SIC rating reports, 2009-2016
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.
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 2016
- Four years of comparative numbers
- Unaudited interim results to 30 June 2017
- Budgeted financial statements for 2017
- 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
|Assets||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|Balance Sheet||Also known as a Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.|
|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.|
|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.|
|Dividend||The portion of a company’s after-tax earnings that is distributed to shareholders.|
|Execution Risk||The risk that a company’s business plans will not be successful when they are put into action.|
|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.|
|Liabilities||All financial claims, debts or potential losses incurred by an individual or an organisation.|
|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.|
|Operating Margin||Measures the efficiency of profit generation from investments and underwriting.|
|Policy||The legal document issued by the company to the policyholder, which outlines the conditions and terms of the insurance.|
|Policyholder||The person in actual possession of an insurance policy.|
|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||An amount representing actual or potential liabilities kept by an insurer to cover debts to policyholders.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Yield||Percentage return on an investment or security, usually calculated at an annual rate.|
For a detailed glossary of terms, please click here
GCR affirms SIC Insurance Company Limited’s rating of A-(GH); Rating watch.