Johannesburg, 01 Nov 2016 — Global Credit Ratings has today downgraded the national scale claims paying ability rating assigned to Fidelity Shield Insurance Company Limited to BBB(KE) from BBB+(KE), with the outlook accorded as Stable. The rating is valid until October 2017.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to Fidelity Shield Insurance Company Limited (“Fidelity Shield”) based on the following key criteria:
The downgrade follows a sustained weakening in key liquidity metrics. In this respect, claims cash coverage and cash coverage of net technical liabilities remained low at 5 months and 0.2x respectively as at August 2016 (FYE15: 6 months and 0.3x). The weak liquidity position stems from cash outlays pertaining to the purchase of illiquid assets in the investment portfolio, together with constrained cash flow generation of late. The latter may see liquidity constraints persist, should management’s plans to dispose of non-strategic property investments (with funds to be placed in liquid assets) not materialise, with the remainder of the investment portfolio providing limited liquidity relief.
Fidelity Shield reflects strong levels of risk adjusted capitalisation, underpinned by relatively contained insurance risks, offsetting elevated market risk exposure. Accordingly, the international solvency margin measured at 81% at FYE15 (FYE14: 96%). Growth containment is likely to support strong risk adjusted capitalisation over the rating horizon.
Fidelity Shield’s earnings capacity is largely a function of healthy investment returns, offsetting weak underwriting profitability. This trend is likely to persist over the rating horizon, albeit that the high level of market risk exposure implies a level of potential profit volatility. Overall, the insurer’s five year aggregated operating margin equated to 13% (five year aggregate underwriting margin: -8%). Similarly, Fidelity shield recorded sound returns on equity (five year average: 12%). The potential for the insurer to derive increased volumes of rental income related to the recent property purchase may provide some relief to earnings going forward.
The insurer displays a high risk investment appetite, with financial assets exposed to market risk representing 129% of FYE15 capital (FYE14: 87%). Market risk is projected to remain elevated over the rating horizon following the recent additional property investments.
Fidelity Shield’s limited competitive position currently serves as a rating weakness (market share 1.6% in FY15). The successful scaling up of operations through proactive measurers recently implemented may positively contribute to the company’s market profile over the medium term.
With motor accounting for 71% of the risk base, this implies a relative degree of profit risk, particularly given the challenges associated with this class. The panel of reinsurers reflect moderately strong level of aggregate credit strength, with the maximum net deductibles per risk and event limited to conservative levels relative to capital.
The rating may be upgraded if liquidity metrics strengthen and/or earning capacity evidences a sustained improvement. This should be supported with risk-adjusted capital adequacy remaining at strong levels. Conversely, negative rating action could follow sustained weak liquidity metrics and/or a reduction in capitalisation.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (October 2013)|
|Claims paying ability: BBB+(KE)|
|Last rating (October 2015)|
|Claims paying ability: BBB+(KE)|
|Primary Analyst||Secondary Analyst|
|Yvonne Masiku||Munyaradzi Mushure|
|Senior Credit Analyst||Junior 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 2016
Fidelity Shield rating reports, 2013-2015
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; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
Fidelity Shield 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 Fidelity Shield Insurance Company Limited with no contestation of the rating.
The information received from Fidelity Shield Insurance Company Limited and other reliable third parties to accord the credit rating included:
- Audited financial results as at 31 December 2015
- Four years of comparative numbers
- Unaudited interim results as at 31 August 2016
- Budgeted financial statements for 2016
- The current year reinsurance cover notes
- Other non-public statistical information
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
|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
GCR downgrades Fidelity Shield Insurance Company Limited’s rating to BBB(KE); Outlook Stable.