Johannesburg, 07 February 2017 — Global Credit Ratings has today downgraded the national scale claims paying ability rating assigned to Zurich Insurance Company South Africa Limited to A+(ZA), with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to Zurich Insurance Company South Africa Limited (“Zurich SA”) based on the following key criteria:
The downgrade reflects GCR‘s view of parental support moderation following the recent change in ownership from Zurich Insurance Group Limited (“ZIG”) to Fairfax Financial Holdings Limited (“Fairfax”). The rating of Zurich SA has historically been enhanced by the implied support from its previous ultimate holding company. This enhancement considered the shared brand, substantial reinsurance support and a degree of strategic alignment in terms of the group’s multinational corporate strategy. In light of the recent change in ownership, GCR views the credit enhancement derived from parental support to have moderated. In this regard, the degree of strategic alignment with Fairfax is viewed to be more limited, given the absence of a shared brand and policyholder base, and the decentralised business model employed by Fairfax. Positively, implied support stems from the fact that Fairfax has indicated its objective to hold Zurich SA over the long term. Furthermore, the shareholder maintains a sum of USD1bn in unencumbered assets to be used in the event that any of its subsidiaries are under financial stress or failing to meet regulatory requirements.
In terms of Zurich SA’s stand-alone credit profile, profitability represents a key rating weakness, with the insurer having registered underwriting deficits throughout the review period (cumulatively: R1.5bn). Following implementation of key strategic initiatives, the company plans to return to underwriting profitability (excluding any integration costs) by FY17. The operating expense ratio excluding any integration costs is forecast to average 16% from FY17 to FY19. This compares to the preceding three year average of 22%. The reduction is expected to be achieved by the reduced group associated costs, whilst planned updates to systems will be undertaken at a significantly lower cost than under ZIG. Going forward, the ability of the insurer to successfully implement systems and bed down operations, resulting in a higher degree of consistency in underwriting profitability, remains a key rating consideration.
Capitalisation is viewed to be moderately strong. Management has maintained largely the same internal target bands used whilst under ZIG, with risk adjusted solvency expected to be maintained at moderately strong levels over the rating horizon. This is premised on well managed growth and ongoing curtailment of net profit leakage.
Zurich SA’s investment portfolio remains heavily weighted towards cash and interest bearing securities. Accordingly, the insurer’s key liquidity measures have been maintained at strong levels. The investment composition is not expected to change materially over the medium term, supporting GCR’s expectation of sustained sound liquidity levels.
Note is taken of the weakening in the insurer’s competitive profile over the duration of the review period, which serves as a relative constraint to the rating. The high quality of existing reinsurance counterparties and moderate risk and event retention levels contribute positively towards Zurich SA’s financial profile.
Upward rating action could be realised over the medium term should the insurer demonstrate a sustained strengthening in earnings capacity. Conversely, the rating may be downgraded should earnings fall below expectations and/or in the event of a reduction in capitalisation.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (July 2001)|
|Claims paying ability: AA(ZA)|
|Last rating (July 2016)|
|Claims paying ability: AA-(ZA)|
|Outlook: Rating Watch|
|Primary Analyst||Secondary Analyst|
|Marc Chadwick||Munyaradzi Mushure|
|Sector Head: Insurance Ratings||Junior Credit Analyst|
|(011) 784-1771||(011) 784-1771|
|Senior Credit Analyst|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2016
Zurich SA rating reports, 2001 – 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.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|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.|
|Credit Rating Agency||An entity that provides credit rating services.|
|Creditworthiness||An assessment of a debtor’s ability to meet debt obligations.|
|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.|
|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.|
|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.|
|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.|
|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).|
|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.|
|Retention||The net amount of risk the ceding company keeps for its own account.|
|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.|
|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.|
|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.|
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; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
Zurich Insurance Company South Africa 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 Zurich Insurance Company South Africa Limited with no contestation of the rating.
The information received from Zurich Insurance Company South Africa Limited and other reliable third parties to accord the credit rating included:
- Management accounts to 31 December 2016
- Four years of comparative audited financial statements to 31 December
- Budgeted financial statements (2017-2019)
- Qualitative and quantitative statutory returns to December 2015
- Other relevant company specific 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.
GCR downgrades Zurich Insurance Company South Africa Limited’s rating to A+(ZA); Outlook Stable.