Johannesburg, 23 November 2017 – Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Swan General Ltd of AA-(MU), with the outlook accorded as Stable. Furthermore, Global Credit Ratings has affirmed the international scale claims paying ability rating assigned to Swan General Ltd at BBB, with the outlook accorded as Stable. The ratings are valid until September 2018.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to Swan General Ltd (“Swan General”) based on the following key criteria:
Swan General’s rating reflects the insurer’s very strong capitalisation and competitive position, which have both been recorded at very high levels historically, and are projected to be sustained at elevated levels going forward. While earnings capacity, a historical rating strength, has come under pressure over the past two years, the insurer has projected an improved profit trajectory for FY17. Furthermore, adjusted liquidity metrics (which incorporate certain tradeable securities) are expected to remain at moderately strong levels over the short term. Nevertheless, the potential for sustained weakened earnings capacity may impact negatively on the entity’s credit profile going forward.
The insurer reflects very strong risk adjusted capitalisation, supported by a sizeable capital base catering for insurance risk and elevated market risk exposure. GCR expects capitalisation to remain very strong over the rating horizon, supporting the insurer’s medium term growth strategy. This view is premised on the insurer continuing to register strong internal capital generation, while maintaining a relatively stable risk exposure mix, and well contained dividend distributions.
Swan General is a market leader in the short term domestic arena, underpinned by the insurer’s strong brand and well-established presence in core portfolios and market segments. In this regard, the insurer’s share of short term insurance industry premiums equated to 30% in FY16 (FY15: 28%). GCR expects the insurer to continue to defend its competitive position, despite increasingly competitive dynamics.
The insurer’s earnings capacity has come under pressure over the past two years, underpinned by underwriting margin compression. As such, the two year underwriting margin equated to 2% (FY16: 0%; FY15: 5%), compared to the prior two year margin of 12%. Healthy investment income has served to partially offset this earnings pressure. Management envisages an improved underwriting margin in FY17, supporting higher overall net profitability. As such, GCR views the development of earnings capacity over the rating horizon as a key rating determinant, noting the potential for sustained earnings weakness to negatively impact the insurer’s credit rating.
Liquidity is viewed to be moderately strong, with a significant proportion of tradeable listed equities providing material liquidity relief, while additional group facilities augment cash flow requirements. Listed equities are highly diversified, with 55% thereof (FY16: MUR625m) held in offshore securities (which can be liquidated within 72 hours). Adjusted cash coverage of net technical provisions, inclusive of offshore assets, equates to a moderately strong 0.9x (FY15: 1.0x), while the claims cash cover ratio registers at 12 months (FY15: 18 months). Liquidity is also managed from a group perspective, with sizeable cash and equivalents (FY16: MUR11bn) held by the insurer’s subsidiary, Swan Life Ltd (“Swan Life”). As an ongoing cash management tool, Swan General is able to obtain a loan from Swan Life to augment short term liquidity requirements. GCR expects liquidity to remain at moderately strong levels over the short term, supported by the large quantum of financial assets, operational cash flow generation, and ongoing group liquidity support.
The international scale rating incorporates the impact of Mauritius’ sovereign rating of BBB+.
The ratings may be upgraded if the insurer’s liquidity metrics strengthen, while maintaining risk adjusted capitalisation and earnings capacity within strong ranges. However, failure to sustain moderately strong adjusted liquidity levels may result in possible negative rating pressure. Downward rating pressure may emanate from a further weakening in liquidity profile and/or sustained deterioration in earnings capacity.
|NATIONAL SCALE RATINGS HISTORY||INTERNATIONAL SCALE RATINGS HISTORY|
|Initial rating (November 2013)||Initial rating (November 2013)|
|Claims paying ability: AA-(MU)||Claims paying ability: BBB|
|Outlook: Stable||Outlook: Stable|
|Last rating (September 2016)||Last rating (September 2016)|
|Claims paying ability: AA-(MU)||Claims paying ability: BBB|
|Outlook: Stable||Outlook: Stable|
|Primary Analyst||Secondary Analyst|
|Marc Chadwick||Nyasha Chikwengo|
|Sector Head: Insurance Ratings||Credit Analyst|
|(011) 784-1771||(011) 784-1771|
|Sector Head: Insurance Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2017
|Swan Insurance Company Ltd rating reports, 2013-2014|
|Swan General rating reports, 2015-2016|
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 ratings were influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
Swan General Ltd 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 ratings have been disclosed to Swan General Ltd with no contestation of the rating.
The information received from Swan General Ltd and other reliable third parties to accord the credit ratings included:
- The audited financial results as at 31 December 2016
- Unaudited interim results to 30 September 2017
- Budgeted financial statements for 2017
- The current year reinsurance cover notes
- Annual statutory returns to 31 December 2016
- Other relevant company specific information
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.
|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.|
|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
GCR affirms Swan General Ltd’s rating of AA-(MU); Outlook Stable.