GCR affirms Infiniti Insurance Limited’s rating of A-(ZA); Outlook Stable

04 November 2016 GCR

Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Infiniti Insurance Limited of A-(ZA), with the outlook accorded as Stable.

Summary rating rationale

Global Credit Ratings (“GCR”) has accorded the above credit rating to Infiniti Insurance Limited (“Infiniti”) based on the following key criteria:

Infiniti reflects moderately strong risk adjusted capitalisation, underpinned by sound internal capital generation supporting relatively elevated market risk exposures. The insurer’s interim statutory CAR cover equated to a lower 1.6x at FYE16 (FYE15: 2.1x), while the international solvency margin equated to 46% (FYE15: 68%). This was largely a function of the substantial growth achieved during the year. Management expects SCR coverage to range between 1.4x and 1.6x under expected Solvency Assessment and Management parameters. As such, GCR expects capitalisation to support the rating, in light of the modest growth targets, and the capital management strategy in place.

Earnings capacity is a function of the insurer’s sizeable investment portfolio (FYE16: R929m; FYE15: R806m), which generates a large quantum of investment income in absolute terms. In this respect, sound investment returns have translated into healthy returns on revenue (four year average: 7%), offsetting thin (albeit fairly consistent) underwriting margins over the bulk of the review period. This trend is expected to continue over the rating horizon.

The sizeable investment portfolio, consisting largely of tradable securities, coupled with the investment mandate, allows for cash draw down from the portfolio. This is viewed to offer Infiniti a high level of liquidity support. Liquidity metrics on a pure cash basis remained relatively constrained, with cash coverage of net technical liabilities averaging 0.5x and the average claims cash cover ratio equating to 6 months, given the insurer’s long term investment philosophy.

The investment portfolio is substantially exposed to domestic and foreign equities, representing a combined 114% of capital at FYE16 (FYE15: 129%). Inclusive of the ALSI short future position, this exposure would moderate to 85% of capital at FYE16 (FYE15: 119%), albeit representing an elevated level of capital risk in the event of capital market shocks. In partial mitigation of this risk, the non-cash investment portfolio is actively managed by Foord Asset Management in line with a specific mandate targeting capital preservation, with the tactical asset allocation strategy taking into account prevailing market conditions and volatility. Moderately strong risk adjusted capitalisation also contributes to GCR’s view that the insurer is positioned to absorb a degree of potential exogenous shocks emanating from capital markets.

GCR views the business profile to have strengthened over the review period. In this respect, Infiniti’s share of short term industry gross premiums increased to 1.2% in FY16 (FY15: 0.8%) from 0.6% in FY11, while the earnings profile strengthened, with contributions from other key partners increasing materially since the start of the rating exercise. The business model centres on supporting established and diversified specialised underwriting management agencies, books of business from independent brokers and branches in specialized areas. The strategy is expected to continue to enhance market share over the medium term.

The reinsurance programmes are led by reinsurance counterparties with strong credit profiles, while maximum net deductibles are limited to levels considered to be conservative relative to the capital base.

The rating may be upgraded if the insurer’s risk adjusted capitalisation and/or liquidity metrics strengthen materially. Furthermore, sustainable enhancement of earnings capacity stemming from improved underwriting profitability may lead to positive rating movement. Conversely, downward rating movement may arise if the insurer’s solvency metrics deteriorated below expectations, operating performance weakens on a sustained basis or pronounced equity market losses impact on capital, in the absence of additional capital injections.

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