Fitch affirms Suez Canal insurance company’s IFS rating at ‘B+’; outlook stable
Fitch Ratings has affirmed Egypt’s Suez Canal Insurance Company (SCI) Insurer Financial Strength (IFS) Rating at ‘B+’ and National IFS Rating at ‘AA-(egy)’. The Outlooks are Stable.
The IFS Rating of SCI reflects its high exposure to sovereign debt, weak capitalisation, ‘Favourable’ company profile in Egypt and good financial performance.
The National IFS Rating of ‘AA-‘(egy) reflects the insurer’s conservative investment strategy versus domestic peers’. It also reflects its weak, albeit commensurate with the rating category, capitalisation, together with good financial performance and an established position in the Egyptian insurance market.
KEY RATING DRIVERS
Exposure to Sovereign Risks: Fitch assesses SCI’s exposure to investment and asset risk as high, reflected in a risky assets-to-capital ratio of 260% at end-June 2021 (end-June 2020: 264%). This is driven by high exposure to sovereign-related investments and concentration in low-rated instruments.
Fitch, however, views the company’s investment strategy as prudent versus domestic peers’. SCI’s investment portfolio is predominantly focused on cash and bank deposits and sovereign-related fixed-income instruments. Investments in equities and real estate accounted for only 8% and 3% of its invested assets, respectively, at end-June 2021.
Weak Capitalisation: SCI’s capitalisation, as measured by Fitch’s Prism Factor-Based Model (FBM) score, remained below ‘Somewhat Weak’ at end-June 2021, in line with end-June 2020 results. The main driver of target capital in Prism is asset risk, reflecting high asset charges for investments. SCI’s regulatory solvency ratio, calculated under a Solvency-I-like formula, improved to 144% at end-June 2021 from 113% at end-June 2020 on increased net assets due to improved premium collection.
GoodFinancial Performance: SCI has a record of good financial performance, reflected in a five-year average return on equity (ROE) of 14%. However, when adjusted for inflation, this indicator fell to 1.6% in 2017-2021. Its financial performance is mainly supported by strong investment income, a key contributor to net profitability. We expect financial performance to remain supportive of its ratings.
SCI’s underwriting result is subject to volatility, with the Fitch-calculated combined ratio deteriorating to 111%% in 2021 from 104% in 2020. The main driver was a worsened loss ratio in the compulsory motor insurance line. SCI’s underwriting profitability is also negatively affected by a high expense ratio, driven by both high acquisition and administration costs.
Favourable Business Profile: Fitch’s assessment of the company’s profile reflects a ‘Favourable’ business profile compared with other Egyptian insurers’. This is mainly due to its favourable competitive positioning, moderate business-risk profile and favourable diversification. The company is the fourth largest non-life insurer in Egypt with a market share of 4.6% at end-2020. However, SCI’s operating scale metric remains moderate, with EGP1.1 billion (EUR59 million) of gross written premiums in 2021.
SCI’s business mix is well-diversified, with a focus on motor lines and engineering. The latter is to a larger extent ceded to reinsurers, which explains the predominance of motor lines in the insurance portfolio on a net basis.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade of the IFS Rating:
–Downgrade of Egypt’s sovereign rating
–SCI’s regulatory solvency ratio falling below 100% and not being restored within a reasonable timeframe
Factors that could, individually or collectively, lead to positive rating action/upgrade of the IFS Rating:
–An upgrade of Egypt’s sovereign rating while maintaining current levels of capitalisation
Factors that could, individually or collectively, lead to negative rating action/downgrade on the National IFS Rating:
–SCI’s regulatory solvency ratio falling below 100% and not being restored within a reasonable timeframe
Factors that could, individually or collectively, lead to positive rating action/upgrade on the National IFS Rating:
–Stronger capital as measured by the regulatory solvency ratio, coupled with a stronger business profile. However, we view this as unlikely in the medium term
