Fitch Assigns Mutual & Federal Insurance Company Limited's IFS at 'A-'; Affirms National IFS
KEY RATING DRIVERS
Fitch considers M&F as "Core" to the Old Mutual group under Fitch's insurance group rating methodology, based on its importance to Old Mutual's strategy and integration of management into the Old Mutual group. As a result M&F's ratings are aligned with those of the Old Mutual group.
The implied international IFS rating for the group's South African operations is one notch higher than the South African local currency sovereign rating (BBB+/Negative), owing to Old Mutual's geographical diversification: a sizeable proportion of earnings are generated in the UK and Europe. The Negative Outlook reflects that a one-notch downgrade of the South African sovereign rating would trigger a downgrade of M&F's ratings.
From a standalone perspective, M&F's rating benefits from well-established business positions in its chosen market segments and strong capitalisation. Fitch also views favourably M&F's progress on its turnaround strategy, which has begun to deliver tangible benefits in a highly competitive local market.
The M&F group, comprising M&F, M&F RF and a 52.5% stake in Credit Guarantee Insurance Corporation (CGIC), has a leading market position as the second-largest general insurer in South Africa by gross written premium, with a strong domestic franchise. On 6 August 2015, M&F announced the acquisition of Santam Limited's (AA+(zaf)/Stable) 33.6% share in CGIC for ZAR600m. The transaction's negative liquidity impact on M&F will be offset by improved diversification, CGIC's strong market position and the absence of significant integration risk. CGIC is the leading trade credit insurer in South Africa.
Fitch believes that M&F remains adequately capitalised based on the agency's own risk-adjusted assessment and the minimum statutory requirement. At end-2014, M&F's solvency ratio (equity to premiums) remained broadly steady at 51% (end-2013: 59%). Fitch expects solvency to remain strong in 2015.
M&F reported a net profit of ZAR433m in 2014, having posted a net loss of ZAR96m in 2013. The underwriting result improved as a result of pricing and claims management interventions having been put in place and the absence of natural catastrophe events. Fitch expects M&F's management interventions to lead to further improvements in underwriting profits.
Given Fitch's view that M&F RF is "Core" to M&F and in turn M&F is "Core" tothe Old Mutual group under Fitch's insurance group rating methodology, any upgrade or downgrade of Old Mutual's ratings would be mirrored by M&F's ratings.
A downgrade of M&F RF's ratings could also be triggered by a change in M&F RF's "Core" status within M&F.
A downgrade of South Africa's Long-term foreign or local currency Issuer Default Ratings would trigger a downgrade of M&F's IFS rating. A downgrade of the sovereign ratings is not expected to affect the National IFS rating, as the relativity of these ratings to that of the best credits in South Africa is expected to remain unaffected.
A downgrade could also be triggered by deterioration in the standalone profile to an extent that Fitch no longer considered M&F as "Core" to Old Mutual. This could result from sustained weak operating performance, lower levels of capitalisation and/or severe weakening in M&F's market share.