Johannesburg, 05 Oct 2015 — Global Credit Ratings has today downgraded the national scale claims paying ability rating assigned to SIC Insurance Company Limited to A-(GH). In addition the rating has been placed on ‘Rating Watch’. The rating expires on the 29th February 2016.
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:
SIC’s rating has been placed on Rating Watch, taking cognisance of the uncertainty relating to the ultimate settlement of a potentially significant guarantee claim. Should the guarantee holder succeed in defending this claim, this could adversely impact on SIC’s capital adequacy levels in the absence of shareholder support. Accordingly, any indication of potential capital strain could result in a further downgrade of the insurer’s rating, with the severity depending on the value of the ultimate legal obligation.
The rating downgrade follows the persistent underwriting losses posted over the past three years (and continuing into 1H FY15), which have resulted in a substantial deterioration in SIC’s earnings capacity (taking into consideration the insurer’s expectations that, subsequent to the large write-downs in FY13 and FY12, substantial improvements in performance would materialise). The ongoing pressure associated with other credit guarantee claims that materialised in FY14 and 1H FY15 is a source of concern, and GCR will, therefore, continue to monitor the financial performance and balance sheet strength of the company throughout the rating horizon. Furthermore, GCR has assessed the extent of government support for SIC to have weakened, given the downgrade to the sovereign rating.
Should the aforementioned dispute be settled in favour of SIC, the A-(GH) rating would be underpinned by strong competitive positioning, sound capital adequacy and enhanced liquidity levels. The following rating factors assume that the insurer has met all of its obligations under the above mentioned guarantee (following the payment made in 1H FY15) and that no further deterioration in claims experience arises from guarantees that were written outside of the board mandate.
SIC holds substantial underwriting capacity relative to competitors. Accordingly, the company is the market leader in the short term insurance industry, although the differential could narrow over the medium term (potentially exacerbated by reputational issues).
Solvency remains strong on a nominal and risk adjusted basis. However, the ability to leverage off capital strength to support volume growth and associated efficiencies will be key to achieving earnings stability and longer term capital preservation. The improvement in liquidity has contributed towards enhanced balance sheet strength, which is expected to be sustained over the short to medium term. Furthermore, note is taken of the adoption of a more formalised investment allocation approach, which should assist in managing liquidity and asset risk going forward.
Per risk and event net deductibles are limited to moderately conservative levels relative to capital. However, given that these are USD denominated, the insurer is exposed to elevated foreign currency risk, particularly in view of ongoing depreciation of the GHS and the absence of foreign currency cash holdings.
In line with most competitors, SIC’s claims provisioning is well below levels displayed in other African insurance markets. As such, potentially insufficient reserving represents a key risk to the insurer’s credit strength. Furthermore, the industry remains susceptible to ongoing economic constraints, which may continue to pressure growth and the ability to re-rate underperforming portfolios of business.
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 1) a further deterioration in operating profitability; 2) a weakening in capital adequacy and/or liquidity to levels that are not deemed to be rating appropriate. Upward movement of the rating or outlook is unlikely in the absence of a sustained turnaround in operating profitability.
|NATIONAL SCALE RATINGS HISTORY||ANALYTICAL CONTACTS|
|Initial rating (September 2009)||Primary Analyst|
|Claims paying ability: AA(GH)||Susan Hawthorne|
|Outlook: Negative||Senior Credit Analyst|
|Last rating (August 2014)||email@example.com|
|Claims paying ability: A+(GH)|
|Outlook: Stable||Committee Chairperson|
|Sector Head: Insurance Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2015
SIC Insurance Company Limited rating reports, 2009 – 2014
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.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY
|Audited Financial Statements||Financial statements that bear the report of independent auditors (attesting to the financial statements’ fairness and compliance with generally accepted accounting principles).|
|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.|
|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.|
|Credit Rating Agency||An entity that provides credit rating services.|
|Creditworthiness||An assessment of a debtor’s ability to meet debt obligations.|
|Currency Risk||The potential for losses arising from adverse movements in exchange rates.|
|Debt||An obligation to repay a sum of money.|
|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.|
|Exchange Rate||The value of one country’s currency expressed in terms of another.|
|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.|
|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.|
|Interest||Money paid for the use of money.|
|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.|
|Liquidity Risk||The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.|
|Loss||The happening of the event for which insurance pays.|
|National Scale Rating||The national scale provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.|
|Operating Profit||Profits from a company’s ordinary revenue-producing activities, calculated before taxes and interest costs.|
|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.|
|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|
|Rating Outlook||A rating outlook indicates the potential direction of a rated entity’s rating over the medium term, typically one to two years. An outlook may be defined as: ‘Stable’ (nothing to suggest that the rating will change), ‘Positive’ (the rating symbol may be raised), ‘Negative’ (the rating symbol may be lowered) or ‘Evolving’ (the rating symbol may be raised or lowered).|
|Rating Watch||Indicates that a rating is under review for possible change in the short term and the movement may be either positive or negative.|
|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.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Securities||Various instruments used in the capital market to raise funds.|
|Shareholder||An individual, entity or financial institution that holds shares or stock in an organisation or company.|
|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.|
|Upgrade||The assignment of a higher credit rating to an insurer by a credit rating agency. Opposite of downgrade.|
For a detailed glossary of terms please click here
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.
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 statements to 31 December 2014
- Four prior years of audited financial statements to 31 December
- Unaudited management accounts to 30 June 2015
- Budgeted financial statements to December 2015
- The current year reinsurance cover notes
- Other relevant 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 ratings.