Announcements Insurance Rating Alerts

GCR revises Fidelity Shield Insurance Company Limited’s national scale financial strength rating to BBB-(KE), on criteria change; Stable Outlook

Rating Action

Johannesburg, 6 November 2019 – GCR Ratings (“GCR”) has revised Fidelity Shield Insurance Company Limited’s (“Fidelity Shield”) national scale financial strength (formerly claims paying ability) rating to BBB-(KE) from BBB(KE), with the Outlook accorded as Stable.

Rated Entity / Issue

Rating class

Rating scale

Rating

Outlook/Watch

Fidelity Shield Insurance Company Limited

Financial strength

National

BBB-(KE)

Stable Outlook

GCR announced that it had released new criteria for rating insurance companies in May 2019. Consequently, the rating for Fidelity Shield was placed ‘Under Criteria Observation’. GCR finalised the review for Fidelity Shield under the released Criteria for Rating Insurance Companies, May 2019. As a result, the rating for Fidelity Shield has been reviewed in line with the new methodology and subsequently removed from ‘Under Criteria Observation’.

Rating Rationale

The national scale financial strength rating for Fidelity Shield reflects moderately strong capitalisation, which is diluted by intermediate earnings, relatively low liquidity and a limited business profile.

Fidelity Shield’s capitalisation is moderately strong, supported by a sizeable capital base catering for the quantum of insurance and credit exposure. Note is, however, taken of the elevated market risk stemming from a high investment property weighting. In this regard, property accounted for a high 103% of capital at FY18 (FY17: 118%). This notwithstanding, GCR expects risk adjusted capital adequacy to remain within a moderately strong range over the outlook horizon, underpinned by well contained insurance risks.

Earnings moderated over the last three years, stemming from a reduction in investment income, together with weak underwriting profitability. In this respect, net income after tax amounted to KES57m in FY18 (FY17: KES17m), compared to KES150m in FY14. Accordingly, ROE equated to a low 5% in FY18 (FY17: 2%; FY14: 16%), while the three year underwriting margin equated to -6% (FY18: -2%; FY17: -9%). GCR expects earnings to remain within a similar range over the outlook horizon, with limited scope for substantially improved earnings. Reinsurance risk is viewed to be neutral, given the moderately strong credit quality of counterparties, and conservative maximum net deductibles per risk and event relative to capital.

Key liquidity metrics have been volatile and trended within a relatively weak range over the review period. This was largely due to inconsistent operational cash flows, leading to fluctuating cash balances. In this regard, operational cash coverage equated to 6.8 months (FY17: 6.3 months), while stressed financial assets covered net technical provision by 1x (FY17: 0.9x). Liquidity metrics may improve, going forward, on the back of the envisaged asset rebalancing with generated funds placed in government securities.

Fidelity Shield’s business profile is limited, given low competitive position and low premium diversification. The insurer’s share of total short term insurance industry premiums equated to 1.8% in FY18 (FY17: 1.9%). Furthermore, earnings are heavily reliant on one line of business (motor), representing a high 63% of gross premiums in FY18, with all premiums sourced domestically. Similarly, the risk base is heavily skewed towards motor, which accounted for more than 75% of net premiums. In GCR’s view, this implies a relatively high degree of profit risk, particularly given the challenges associated with this class.

Outlook Statement

The Stable Outlook reflects expectations of moderately strong capitalisation, partially diluting compressed earnings, given the challenging operating environment characterized by rates pressure.

Rating Triggers

Positive rating action may follow a sustainable turnaround in earnings and/or an improvement in liquidity. Conversely, downward rating pressure may stem from negative exposure to high risk assets resulting in solvency dilution.

Analytical Contacts

Primary analyst

Yvonne Mujuru

Sector Head: Insurance Ratings

Johannesburg, ZA

YMujuru@GCRratings.com

+27 11 784 1771

     

Secondary analyst

Siyuan Lu

Associate Analyst

Johannesburg, ZA

SiyuanL@GCRratings.com

+27 11 784 1771

     

Committee chair

Godfrey Chingono

Deputy Sector Head: Insurance Rating

Johannesburg, ZA

GodfreyC@GCRratings.com

+27 11 784 1771

Related Criteria and Research

Criteria for the GCR Ratings Framework, May 2019

Criteria for Rating Insurance Companies, May 2019

GCR Ratings Scales, Symbols & Definitions, May 2019

GCR Country Risk Scores, June 2019

GCR Insurance Sector Risk Scores, November 2019

Ratings History

Rating class

Review

Rating scale

Rating

Outlook/Watch

Date

Claims paying ability

Initial

National

BBB+(KE)

Stable

October 2013

Last

National

BBB(KE)

Negative

October 2018

Risk Score Summary

Risk scores

Fidelity Shield Insurance Company Limited

 

Operating environment

9.25

Country risk score

4.50

Sector risk score

4.75

   

Business profile

(2.00)

Competitive position

(1.25)

Premium diversification

(0.75)

Management and governance

0.00

 

Financial profile

0.25

Earnings

(0.50)

Capitalisation

1.50

Liquidity

(0.75)

   

Comparative profile

0.00

Group support

0.00

Peer analysis

0.00

   

Total Score

7.50

Glossary

Premium

The price of insurance protection for a specified risk for a specified period of time.

Rating Horizon

The rating outlook period

Rating Outlook

See GCR Rating Scales, Symbols and Definitions.

Release

An agreement between the creditor and debtor, in terms of which the creditor release the debtor from its obligations.

Risk

The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.

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.

Technical Liabilities

The sum of Net UPR and Net OCR IBNR.

Underwriting Margin

Measures efficiency of underwriting and expense management processes.

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.

Premium

The price of insurance protection for a specified risk for a specified period of time.

Rating Horizon

The rating outlook period

Rating Outlook

See GCR Rating Scales, Symbols and Definitions.

Release

An agreement between the creditor and debtor, in terms of which the creditor release the debtor from its obligations.

Risk

The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.

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.

Technical Liabilities

The sum of Net UPR and Net OCR IBNR.

Underwriting Margin

Measures efficiency of underwriting and expense management processes.

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.

SALIENT POINTS OF ACCORDED RATING

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; and c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit rating has been disclosed to Fidelity Shield Insurance Company Limited. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.

Fidelity Shield Insurance Company Limited participated in the rating process via face-to-face management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from Fidelity Shield Insurance Company Limited and other reliable third parties to accord the credit rating included:

  • The audited financial results up to 31 December 2018
  • Four years of comparative audited numbers to 31 December
  • Unaudited interim results up to 30 June 2019
  • Budgeted financial statements to 31 December 2019
  • Other related documents.


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