Johannesburg, 25 April 2018 — Global Credit Ratings has today upgraded the national scale claims paying ability rating assigned to International Commercial & Engineering (ICE) Seguros to A-(MZ) from BBB+(MZ), with the rating outlook accorded as Stable. The rating is valid until April 2019.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to International Commercial & Engineering (ICE) Seguros (“ICE”) based on the following key criteria:
The rating upgrade reflects a strengthening in ICE’s risk adjusted capitalisation following the USD6.1m capital injection in December 2017. Furthermore, asset quality measured within a very strong range subsequent to the placement of a large portion of capital injection proceeds in liquid instruments. The assessment of these rating factors is expected to be sustained over the outlook horizon.
Supported by the recent capital injection, coupled with modest exposure to insurance and market risks, ICE’s risk adjusted capitalisation is assessed at very strong levels. In this regard, and against the backdrop of a very limited risk base, the adjusted international solvency margin rose to an excess of 500% at FY17 (FY16: 84%). Looking ahead, risk adjusted capitalisation is projected to remain within a very strong range over the rating horizon, supported by a very strong capital base, and limited exposure to insurance and market risks. GCR, however, notes the potential for a moderation in the risk adjusted capitalisation over the medium term given the insurer’s exposure to potential profit volatility.
Liquidity measured at strong levels, supported by a very conservative asset allocation, along with enhanced cash flow generation. Furthermore, the placement of a large portion of the FY17 capital injection proceeds in short term instruments saw cash and equivalents strengthening materially to USD12.7m (FY16: USD1.8m). As a proportion of the total investment portfolio, liquid assets constituted 98% in FY17 (FY16: 100%), with the balance placed in unlisted equity. In this respect, cash coverage of average monthly claims and net technical provisions equated to a review period peak of 301 months and 11.2x (FY16: 60 months and 1.2x) respectively. Liquidity metrics are expected to trend within a similar range over the rating horizon, notwithstanding a probable moderation over the medium term as the insurer seeks to comply with regulatory asset allocations by assuming more risk in the investment portfolio.
The business profile improved following ICE’s recent advances on the competitive position ladder. Accordingly, the insurer was the third largest player in the short term business, with a market share of 12.9% in FY17 (FY16: 5.4%) in GWP terms (albeit remaining limited in NWP terms, given the high degree of reinsurance utilised in the operating model). This was largely attributable to the acquisition of a single, large value policy during FY17, more than offsetting the reduction in premium volume subsequent to the discontinuation of the motor and workmen’s compensation portfolios. Nevertheless, the sustainability of the recent market share gain remains highly sensitive to the continued renewal of the mega policy. Furthermore, the product mix is heavily biased towards fire on a gross basis and concentrated around motor on a net basis, with the fire line constituting a higher 75% of the gross premium base, while the motor portfolio accounted for a greater 47% of the net premium base in FY17 (FY16: 49% and 44% respectively).
Despite the recent turnaround in underwriting profitability (FY17: USD0.1m profit, FY16: USD0.5m deficit), earnings capacity continued to trend within an intermediate range, with the pursuit of a very conservative premium retention strategy in the core fire portfolio constraining the attainment of scale efficiencies. The reversal in the underwriting account was largely attributed to reserve releases (USD0.4m) along with higher commission recoveries. GCR positively considers the recent underwriting performance progression in light of the entity’s start-up phase, notwithstanding the overarching view that such performance should be derived from sustainable sources. High commission recoveries are expected to sustain earnings capacity over the rating horizon, while the realisation of scale efficiencies (given the prospect for growth in the NEP base due to increased capital) is viewed as a source of potential earnings strength over the medium term.
Reinsurance protection is considered integral in the context of ICE’s business strategy. In this regard, the moderate credit strength displayed by most reinsurance counterparties serves to somewhat alleviate capital risk. Furthermore, growth in the capital base (due to a capital injection) in FY17 saw a moderation in the maximum XoL net retention as a percentage of capital to 2.8% (FY16: 6.3%).
Positive rating action could result from a sustained improvement in earnings capacity, coupled with the maintenance of strong liquidity and risk adjusted capitalisation. Furthermore, an improvement in business profile (supported by increased risk retention) may lead to positive rating movement. Conversely, negative rating action could result from a protracted reduction in risk adjusted capitalisation (due to profit retention shocks), coupled with a deterioration in earnings capacity and/or business profile.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (April 2015)|
|Claims paying ability: BBB+(MZ)|
|Last rating (May 2017)|
|Claims paying ability: BBB+(MZ)|
|Sector Head: Insurance Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2017
Criteria for Rating Newly Established and Start-up Insurance Companies, updated July 2017
ICE rating reports, 2015-2017
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; and c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
International Commercial & Engineering Seguros 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 International Commercial & Engineering Seguros with no contestation of the rating.
The information received from International Commercial & Engineering Seguros and other reliable third parties to accord the credit rating included:
- The audited financial statements to 31 December 2017
- Two years of comparative audited financial statements to 31 December
- Full year budgeted financial statements to 31 December 2018
- Unaudited interim results to 28 February 2018
- Other relevant 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.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY
|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 please click here
GCR upgrades International Commercial & Engineering (ICE) Seguros’s rating to A-(MZ); Outlook Stable.