Johannesburg, 28 June 2018 — Global Credit Ratings has today downgraded the national scale claims paying ability rating assigned to First Assurance Company Limited to A-(KE) from A(KE), with the outlook accorded as Stable. The rating is valid until June 2019.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to First Assurance Company Limited (“First Assurance” or “the insurer”) based on the following key criteria:
The downgrade reflects a sustained deterioration in underwriting performance over the last two years, having been impacted by a spike in the loss ratio in FY16, and more recently the loss of scale efficiencies subsequent to an ongoing portfolio remediation exercise. Consequently, the underwriting margin continued to trend within a negative range, averaging -16% over the last two years (FY17: -11%), compared to historically strong margins recorded at the start of the review period. Earnings capacity is expected to remain weak over the outlook horizon, with a turnaround in underwriting performance likely over the medium term.
Risk adjusted capitalisation continued to measure within a strong range, underpinned by limited exposure to insurance risk. In this respect, the international solvency margin rose to 114% at FY17 (FY16: 102%). While risk adjusted capitalization is likely to remain strong through the insurer’s current suppressed earnings cycle, medium term maintenance of solvency strength will be dependent on a reversion to sound internal capital generation. Maximum deductibles are set at very conservative levels, registering below 1% of FY17 capital, while reinsurance counterparties demonstrate a strong level of aggregate credit strength.
Liquidity is assessed at a strong level, with the reduction in cash and equivalents counterbalanced by a decrease in claims and technical provisions. Consequently, cash coverage of average monthly claims equated to a higher 19 months at FY17 (FY16: 14 months), while cash covered net technical liabilities by 0.9x (FY16: 1.0x). Looking ahead, liquidity strength is likely to be sustained at a similar level over the rating horizon.
Asset quality moderated to an intermediate level on the back of heightened risk exposure to capital. In this regard, high risk assets (mainly comprising investment property) constituted a higher 76% of capital (FY16: 66%). Notwithstanding management’s plan to dispose investment property and invest proceeds in liquid securities, asset quality is likely to remain within an intermediate range over the rating horizon given the time lag associated with liquidating these investments.
The insurer’s business profile is considered intermediate, underpinned by average competitive positioning, partially offsetting diversified earnings. Following substantial premium volume losses during the year, First Assurance’s market share in the short term industry lowered to 2.4% (FY16: 3.2%), while four major lines of business accounted for 79% of GWP in FY17 (FY16: 81%). In GCR’s view, the insurer’s business profile is likely to remain within an intermediate range, given increasing competitive dynamics.
The rating may benefit from a persistent improvement in earnings capacity, with capitalisation and liquidity also being maintained at strong levels. Conversely, negative rating action may follow a material reduction in risk adjusted capitalisation and/or liquidity. Moreover, a further reduction in earnings capacity may lead to negative rating pressure.
| NATIONAL SCALE RATINGS HISTORY |
| Initial rating (September 2010) |
| Claims paying ability: BBB+(KE) |
| Outlook: Stable |
| Last rating (June 2017) |
| Claims paying ability: A(KE) |
| Outlook: Negative |
ANALYTICAL CONTACTS
| Primary Analyst |
| Tichaona Nyakudya |
| Credit Analyst |
| (011) 784 – 1771 |
| tichaonan@globalratings.net |
| Committee Chairperson |
| Yvonne Mujuru |
| Sector Head: Insurance Ratings |
| (011) 784 – 1771 |
| ymujuru@globalratings.net |
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated May 2018
Criteria for Rating Long Term Insurance Companies, updated May 2018
First Assurance Company Limited rating reports, 2010-2017
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/RATING-SCALES-DEFINITIONS. 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 process 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.
First Assurance 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, and contested by First Assurance Company Limited, with no change to the rating decision.
The information received from First Assurance Company Limited and other reliable third parties to accord the credit rating included:
- The audited annual financial statements to 31 December 2017
- 4 years of comparative financial statements to 31 December
- Budgeted financial statements to 31 December 2018
- Financial condition reports at 31 December 2018
- Reinsurance cover notes for 2018
- 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.
| Accident | An unplanned event, unexpected and undesigned, which occurs suddenly and at a definite place. |
| Accounting | A process of recording, summarising, and allocating all items of income and expense of the company and analysing, verifying and reporting the results. |
| Agency | An insurance sales office which is directed by an agent, manager, independent agent, or company manager. |
| 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. |
| Budget | Financial plan that serves as an estimate of future cost, revenues or both. |
| 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. |
| Captive Insurance Company | A company owned solely or in large part by one or more non- insurance entities for the primary purpose of providing insurance coverage to the owner or owners. |
| Cash | Funds that can be readily spent or used to meet current obligations. |
| Catastrophe | An event, which causes a loss of extraordinary magnitude. |
| Claim | A request for payment of a loss, which may come under the terms of an insurance contract. |
| Commission | A certain percentage of premiums produced that is received or paid out as compensation by an insurer. |
| Contract | An agreement by which an insurer agrees, for a consideration, to provide benefits, reimburse losses or provide services for an insured. A ‘policy’ is the written statement of the terms of the 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. |
| 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. |
| 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. |
| Equity | Equity is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit. |
| Experience | A term used to describe the relationship, usually expressed as a percent or ratio, of premiums to claims for a plan, coverage, or benefits for a stated time period. |
| 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. |
| Facultative | Facultative reinsurance means reinsurance of individual risks by offer and acceptance wherein the reinsurer retains the “faculty” to accept or reject each risk offered. |
| Financial Flexibility | The company’s ability to access additional sources of capital funding. |
| Financial Statements | Presentation of financial data including balance sheets, income statements and statements of cash flow, or any supporting statement that is intended to communicate an entity’s financial position at a point in time. |
| Income Statement | A summary of all the expenditure and income of a company over a set period. |
| 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. |
| Interest | Money paid for the use of money. |
| Interest Rate | The charge or the return on an asset or debt expressed as a percentage of the price or size of the asset or debt. It is usually expressed on an annual basis. |
| Investment Income | The income generated by a company’s portfolio of investments. |
| Investment Portfolio | A collection of investments held by an individual investor or financial institution. |
| 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. |
| 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 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. |
| Net Retention | The amount of insurance that a ceding company keeps for its own account and does not reinsure. |
| Operational Risk | The risk of loss resulting from inadequate or failed internal processes, people or systems or from external events. This includes legal risk, but excludes strategic risk and reputational risk. |
| Personal Lines | Types of insurance, such as auto or home insurance, for individuals or families rather than for businesses or organisations. |
| 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. |
| Pool | An organisation of insurers or reinsurers through which particular types of risk are underwritten and premiums, losses and expenses are shared in agreed-upon amounts. |
| Preference Share | Preference or preferred shares entitle a holder to a first claim on any dividend paid by the company before payment is made on ordinary shares. Such dividends are normally linked to an interest rate and not determined by company profits. Preference shares are normally repayable at par value in the event of liquidation. They do not usually carry voting or pre-emptive rights. Preference shares can be redeemable or perpetual. |
| Premium | The price of insurance protection for a specified risk for a specified period of time. |
| Rating Horizon | The rating outlook period |
| Reinstatement | The resumption of coverage under a policy, which has lapsed. |
| 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. |
For a detailed glossary of terms, please click here.
GCR downgrades First Assurance Company Limited’s rating to A-(KE); Outlook Stable.
