Fitch Affirms RMB Structured Insurance at 'BBB'/'A (zaf)'
Fitch has also affirmed RMBSI's National IFS rating at 'A+(zaf)'. The Outlook is Stable.
KEY RATING DRIVERS
The ratings reflect the companies' strong capital positions, prudent investment policy and RMBSI's conservative use of reinsurance in its underwriting management agencies (UMA) insurance business.
Offsetting these positive rating drivers is the group's small size (particularly in relation to other insurers in the market) and concentration risk, stemming from its focus on the South African market and a limited number of clients.
Financial performance has deteriorated in the six months to end-December 2014 (1H15), with the RMBSI group reporting a net profit of ZAR18m (1H14: ZAR24m). Fitch expects full year profit to be weaker than 2014, mainly due to the base effect of strong investment income on structured business in 2014.
The group's combined fee and underwriting income remains strong, but diversification is limited. Fitch expects this revenue base to remain broadly stable in FY15 (FY14: ZAR76m).
As underwriting authority is delegated to UMAs, there could be a potential mis-alignment of interests between UMAs and RMBSI. However, Fitch believes RMBSI manages and controls this potential risk well, by careful selection of UMAs and by requiring them to agree to various conditions relating to their operation and performance.
RMBSI PCC's and RMBFS's ratings reflect the companies' strong links to the RMBSI group. Fitch views RMBSI PCC and RMBFS as "Core" to the RMBSI group, as defined in the agency's insurance rating methodology, and has therefore aligned their IFS ratings with RMBSI.
The Negative Outlook on the international scale ratings reflects RMBSI's exposure to the deteriorating operating environment in South Africa, which is also reflected in the Negative Outlook on South Africa's sovereign ratings (see "Fitch Affirms South Africa at 'BBB'; Outlook Negative", dated 5 June 2015, at www.fitchratings.com). The operating environment is characterised by slow economic growth and pressure on consumers' disposable incomes. Fitch expects these factors to affect the demand for insurance.
The Outlook on RMBSI's National IFS rating remains Stable because this rating reflects the company's creditworthiness relative to other domestic insurers, all of which face similar difficulties from the worsening operating environment.
The RMBSI group remains well-capitalised, with a capital adequacy requirement coverage ratio of 2.3x on a regulatory (interim measures) basis at 31 March 2015. The group's Prism factor-based model (Prism FBM) score was 'Extremely Strong' as at the end of the financial year ending on 30 June 2014 (FYE14). Together with strong reported regulatory solvency ratios, this supports Fitch's view that the RMBSI group has a strong capital position.
RATING SENSITIVITIES
Continued weakness in the economic outlook or a downgrade of the sovereign ratings would trigger a downgrade of the group's international scale ratings.
A downgrade of both the national and international scale ratings could result from evidence of the group's business model being unsustainable, reflected by a sharp decline in revenue or earnings. A substantial, sustained deterioration in the regulatory solvency ratio could also lead to a downgrade as could a sustained fall by RMBSI in Fitch's Prism FBM capital assessment to "Strong" or weaker.
RMBSI group's South African national scale ratings could be upgraded if there is sustained profitable growth that improves the overall scale of the company, provided the strong capital position is maintained.
Given the strong links between RMBFS, RMBSI PCC and the wider RMBSI group, any movements in the ratings of RMBFS and RMBSI PCC are likely to be closely related to changes in the credit profile of the group as a whole.
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