Johannesburg, 17 June 2016 — Global Credit Ratings has today upgraded the national scale claims paying ability rating assigned to ACE Insurance Limited to AA(ZA) from AA-(ZA), with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to ACE Insurance Limited (“ACE SA”) based on the following key criteria:
The rating upgrade reflects the insurer’s strengthened business profile, stemming from enhanced levels of earnings traction in key target lines. In this respect, solid progress has been made in diversifying the earnings stream into strategic niche products, in which the insurer is viewed to benefit materially from technical infrastructure and input available from Chubb group (the collective consisting of Chubb Limited and its core operating companies, referred to hereon as the “group”). As a result, GCR views ACE SA as very well positioned to sustain excellent medium term earnings capacity in line with strategic targets. According to management, diversification efforts are expected to continue, with focus on increasing the net premium weighting of financial lines, liability and accident & health.
The average gross underwriting margin equated to a strong 20% over the review period, supported by strict underwriting disciplines that leverage off group global capabilities and expertise, which GCR views to have been applied well within the local market. Furthermore, GCR positively views the insurer’s strength in active portfolio management, having demonstrated the capacity to enhance earnings in core lines, while actively remedying and shedding non-performing portfolios.
ACE SA’s strong risk adjusted capitalisation remained very strong, with interim statutory CAR coverage in excess of 3x at FYE15. The insurer’s minimum SCR cover under expected Solvency Assessment and Management (“SAM”) parameters equates to 1.28x. As such, GCR expects the insurer to remain sufficiently capitalised under expected SAM parameters, supported by the capital management strategy in place.
Liquidity metrics remained very strong, underpinned by sound cash generation and a very conservative asset allocation. In this regard, cash coverage of both net technical liabilities and claims measured at very strong levels. GCR expects liquidity metrics to remain at strong levels, supported by the insurer’s conservative investment strategy, which also mitigates capital risk in the event of market volatility.
The insurer receives reinsurance support from the group, with the majority of cessions placed with the group (94% of cessions in FY15). The main group entity displays a strong international rating. In GCR’s view, the level of reinsurance support provides ACE SA with significant capacity relative to the size of its balance sheet, while demonstrating a strong level of integration of the insurer into the group’s international structure. Additionally, ACE SA has a letter of credit to meet reinsurance obligations.
The rating derives upliftment from implicit group support. Furthermore, the implied financial support provided by Chubb INA Holdings Inc. (“CIH”), by way of a letter of comfort, and demonstrated capital support by Chubb INA Holdings Limited (“CIIH”), are viewed positively.
Improvements in the insurer’s business profile and strategic support continue to reflect the largest potential for upward rating movement. Conversely, the rating may be downgraded if ACE SA registers a substantial reduction in capitalisation and/or liquidity metrics. Furthermore, if the letter of credit provided is withdrawn and/or amended, or if the strategic importance of the insurer to the group weakens, a negative rating action may result.
| NATIONAL SCALE RATINGS HISTORY | ||
| Initial rating (August 2006) | ||
| Claims paying ability: A+(ZA) | ||
| Outlook: Stable | ||
| Last rating (June 2015) | ||
| Claims paying ability: AA-(ZA) | ||
| Outlook: Stable |
ANALYTICAL CONTACTS
| Primary Analyst | ||
| Yvonne Masiku | ||
| Senior Credit Analyst | ||
| (011) 784-1771 | ||
| ymasiku@globalratings.net | ||
| Committee Chairperson | ||
| Marc Chadwick | ||
| Sector Head: Insurance Ratings | ||
| (011) 784-1771 | ||
| chadwick@globalratings.net |
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2015.
ACE SA rating reports, 2006- 2015.
RSA Short Term Insurance Bulletins, 2001-2015.
RATING LIMITATIONS AND DISCLAIMERS
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| Accounting | A process of recording, summarising, and allocating all items of income and expense of the company and analysing, verifying and reporting the results. |
| 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. |
| Capital Base | The issued capital of a company, plus reserves and retained profits. |
| 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. |
| 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. |
| 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. |
| Interest | Money paid for the use of money. |
| Liquidity | The speed at which assets can be converted to cash. |
| 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. |
| 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”) | 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. |
| 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). |
| 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. |
| Securities | Various instruments used in the capital market to raise funds. |
| 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 more detailed glossary of terms/acronyms used as per GCR insurance glossary, 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.
ACE Insurance 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 ACE Insurance Limited with no contestation of the rating.
The information received from ACE Insurance Limited and other reliable third parties to accord the credit rating included:
• The audited annual financial statements to 31 December 2015,
• Four years of audited comparative numbers, • Management accounts to 31 March 2016,
• Full year detailed budget financial statements for 2016,
• The ST returns for 2015 and 1Q F16,
• The current year reinsurance summary cover notes, and
• 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.
GCR upgrades ACE Insurance Limited’s rating to AA(ZA); Outlook Stable.
