Johannesburg, 13 November 2017 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to The Standard Insurance Co., Inc of A(PH), with the rating outlook accorded as Stable. Furthermore, Global Credit Ratings has affirmed the international scale claims paying ability rating assigned to The Standard Insurance Co., Inc of BB, with the outlook accorded as Stable. The ratings are valid until October 2018.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to The Standard Insurance Co., Inc (“Standard Insurance”) based on the following key criteria:
Standard Insurance’s capitalisation was maintained at a very strong level, with the large capital base and low underwriting and market exposures giving rise to very high levels of risk adjusted capitalisation. Sound earnings generation (with full profit retention), coupled with successive capital injections between FY14 and FY15 (cumulatively amounting to PHP390m), sustained healthy capital build over the review period, with capital growing at a four year compound annual rate of 13.6%. Accordingly, the international solvency margin equated to a very high 149% in FY16 (FY15: 143%), with very strong capitalisation expected to persist over the rating horizon.
Liquidity remained strong, underpinned by the insurer’s conservative investment strategy which entails a high asset allocation to liquid funds. Accordingly, liquidity metrics continued to trend within a strong range, with cash coverage of average monthly claims and net technical liabilities equating to 24 months and 1x respectively at FY16 (FY15: 19 months and 0.9x respectively). Going forward, stable asset allocation and sound cash flow generation potential are expected to retain liquidity at similarly healthy levels.
Earnings capacity is viewed to be sound, with the insurer exhibiting a consistent trend of underwriting profit attainment and a high degree of performance stability across the review period. This has been supported by a competitive loss experience, derived on the back of advanced risk modelling, multi-phase claims management, and established service provider relationships. Over the last two years, the claims ratio has ticked up relative to historical levels (FY16: 38%; five year average: 30%), although the impact was partly mitigated by improved cost efficiencies (FY16 total expense ratio: 52%; five year average: 58%), with the insurer able to preserve sound underwriting margins (FY16: 10%; FY15: 15%; five year average: 12%). With the rising claims trend expected to continue, a degree of earnings moderation is envisaged over the short term, with the underwriting margin budgeted to lower to 4% in FY17. However, over the medium term, the feed through of increased salvage recoveries (which forms part of claims management) in the motor portfolio may see the underwriting margin revert back to historically sound levels, potentially sustaining strong earnings.
Standard Insurance reflects a strong business profile, underpinned by its relatively stable and established market presence within the short term insurance industry (FY16 market share of total GWP: 4.5%). This has been supported by Standard Insurance’s market leadership position in the motor business, with the insurer’s extensive branch network and large pool of contracted car dealerships driving sound premium generation in this class. However, the strategic motor focus has given rise to a high degree of product concentration, with motor constituting 80% of total GWP in FY16. Despite limited earnings diversification, the very high policy count of motor business, coupled with the low associated product risk, as well as management’s historical track record in sustaining motor profitability, is viewed to facilitate high earnings quality.
Reinsurance counterparty strength is considered robust, given that placements pertain exclusively to participants reflecting high international credit ratings. The per risk net deductible on motor is moderately high relative to capital (4% at FY16), with the overwhelming majority of associated motor risks carried at significantly lower sum insured values (largely mitigating the potential for negative financial impact stemming from a high frequency of unrelated accidents).
The international scale rating is impacted by the insurer’s exposure to the Philippines’ sovereign rating, given that the insurer’s assets are locally domiciled, and revenue is locally derived.
Upward rating movement over the medium term may derive from a strengthened level of earnings, coupled with the maintenance of very strong risk adjusted capitalisation and strong liquidity. Downward rating pressure could emanate from a decline in key liquidity metrics, sustained operating cash flow pressures, a protracted weakening in risk adjusted capitalisation, as well as a prolonged negative underwriting trajectory.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (October 2013)|
|Claims paying ability: A-(PH)|
|Last rating (December 2016)|
|Claims paying ability: A(PH)|
|INTERNATIONAL SCALE RATINGS HISTORY|
|Initial rating (October 2013)|
|Claims paying ability: B+|
|Last rating (December 2016)|
|Claims paying ability: BB|
|Sector Head: Insurance Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 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. 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; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The Standard Insurance Co., Inc participated in the rating process via 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 The Standard Insurance Co., Inc with no contestation of the ratings.
The information received from The Standard Insurance Co., Inc and other reliable third parties to accord the credit ratings included:
- The audited financial statements to 31 December 2016
- Four years of comparative audited financial statements
- Full year budgeted financial statements to 31 December 2017
- Unaudited interim results to 30 June 2017
- Other relevant documents
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.
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.|
|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.|
|Capital Base||The issued capital of a company, plus reserves and retained profits.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Cession||Amount of the insurance ceded to a reinsurer by the original insuring company (cedant) in a reinsurance transaction.|
|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.|
|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.|
|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.|
|Deductible||The portion of an insured loss to be borne by the insured before he is entitled to recovery from the insurer.|
|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.|
|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.|
|Liquid Assets||Assets, generally of a short term, that can be converted into cash.|
|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 Profit||Trading/operating profits after deducting the expenses detailed in the profit and loss account such as interest, tax, depreciation, auditors’ fees and directors’ fees.|
|Operating Expense Ratio||Measures the proportion of operating expenses in net premiums earned.|
|Outstanding Claims Reserve||A technical reserve of an insurance company established to provide for the future liability for claims which have occurred and have been reported but which have not yet been settled.|
|Policy||The legal document issued by the company to the policyholder, which outlines the conditions and terms of the insurance.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Rating Horizon||The rating outlook period|
|Reserve||(1) An amount representing actual or potential liabilities kept by an insurer to cover debts to policyholders. (2) An amount allocated for a special purpose. Note that a reserve is usually a liability and not an extra fund. On occasion a reserve may be an asset, such as a reserve for taxes not yet due.|
|Retrocession||The transaction whereby a reinsurer cedes to another reinsurer all or part of the reinsurance it has previously assumed.|
|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.|
|Underwriting Margin||Measures efficiency of underwriting and expense management processes.|
For a detailed glossary of terms please click here
GCR affirms The Standard Insurance Co., Inc’s rating of A(PH); Outlook Stable.