Johannesburg, 18 July 2017 — Global Credit Ratings has today upgraded the national scale claims paying ability rating assigned to FM Re Property & Casualty (Private) Limited to BBB+(ZW) from BBB(ZW), with the outlook accorded as Stable. The rating is valid until May 2018.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to FM Re Property & Casualty (Private) Limited (“FM Re”) based on the following key criteria:
The rating upgrade reflects FM Re’s strengthened capitalisation, which is expected to be sustained over the rating horizon. In this respect, the international solvency margin equated to a higher 66% at FY16 (FY15: 54%; review period average: 52%). This has been facilitated largely by continued capital build (with cumulative retained profits summing to USD4.1m over the review period), together with the consolidation of the short term and long term businesses resulting in additional capital, while being aided in part by the reduction in the quantum of insurance risk exposure in FY16. The solvency margin is budgeted to remain elevated in FY17 (64%).
The reinsurer’s key liquidity metrics are viewed to be sound, with banking counterparties that reflect a comparatively strong aggregated credit profile. In this regard, cash coverage of net technical liabilities equated to 0.9x, while the claims cash cover ratio registered at 9 months. This trend is expected to persist going forward, supported by conservative asset allocation and sound operational cash flow generation.
FM Re reflects moderately strong earnings capacity, supported by positive underwriting margins evidenced throughout the review period. In this regard, the reinsurer’s aggregated underwriting margin equated to 4% over the review period (FY16: 2%). Management expects the underwriting margin to equate to a higher 6% in FY17, supported by enhanced scale efficiencies. As such, earnings capacity is likely to be supported by sound underwriting results over the rating horizon. Material reinsurance counterparties evidence an intermediate aggregate level of counterparty strength, while the net deductible per risk and event is viewed to be set at a conservative level.
FM Re reflects a strong competitive position, underpinned by a comparatively high share of short term reinsurance industry gross premiums (FY16: 19%). In this regard, the reinsurer is the second largest player in the local short term reinsurance market. The reinsurer’s market position is supported by entrenched relationships with a number of top tier cedants in the domestic industry.
GCR views country risk factors to be elevated, and a systemic rating consideration applicable to reinsurers’ national scale ratings. Operational challenges are likely to persist given the uncertain socio-political outlook, severe liquidity strain, reduction in banking sector stability, elevated level of sovereign risk and weak macroeconomic fundamentals. While the country has no sovereign rating, it has previously defaulted on payments to international financial institutions.
In light of the recent rating action taken, an upgrade of the rating is considered unlikely over the medium term. Conversely, negative rating sensitivities pertain primarily to reductions in earnings capacity, capitalisation and liquidity and/or a weakening in aggregated banking counterparty strength. Should the economic or socio-political outlook deteriorate further, the rating ceiling of the insurance sector may be reviewed.
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NATIONAL SCALE RATINGS HISTORY |
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| Initial rating (May 2009) | ||
| Claims paying ability: BBB+(ZW) | ||
| Outlook: Evolving | ||
| Last rating (July 2016) | ||
| Claims paying ability: BBB(ZW) | ||
| Outlook: Stable |
ANALYTICAL CONTACTS
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2016
FM Re Property & Casualty (Private) Limited rating reports, 2009-2016
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.
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.
FM Re Property & Casualty (Private) 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 FM Re Property & Casualty (Private) Limited with no contestation of the rating.
The information received from FM Re Property & Casualty (Private) Limited and other reliable third parties to accord the credit rating included:
- The 2016 audited annual financial statements 4 years of comparative audited numbers
- Unaudited interim results to 30 April 2017
- Budgeted financial statements for 2017
- 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.
| 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. |
| 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. |
| Distribution Channel | The method utilised by the insurance company to sell its products to policyholders. |
| Enterprise Risk Management | ERM refers to an integrated or holistic approach to managing risk across an organisation, using clearly articulated frameworks and processes controlled from board level. |
| 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. |
| International Scale Rating (“ISR”) | 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. |
| Intermediary | A third party in the sale and administration of insurance products. |
| 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. |
| 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”) | National Scale credit ratings express risk in relative rank order, which is to say they are ordinal measures of credit risk and are not predictive of a specific frequency of default or loss. |
| 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 |
| Risk | The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives. |
| Risk Management | Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy. |
| 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. |
| Subordinated Debt | Debt that in the event of a default is repaid only after senior obligations have been repaid. It is higher risk than senior debt. |
| 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. |
| Underwriting Margin | Measures efficiency of underwriting and expense management processes. |
For a detailed glossary of terms utilised please click here
GCR upgrades FM Re Property & Casualty (Private) Limited’s rating to BBB+(ZW); Outlook Stable.
