Fidelity Shield downgraded to negative outlook

Fidelity Shield Insurance’s future outlook has been downgraded from stable to negative over weak liquidity and recently “subdued” cash flow.

South African rating agency GCR assigned the negative grade to the insurer but retained BBB+ rate on its ability to settle claims.

The underwriter is associated with billionaire Naushad Merali and lately Mwalimu National Sacco.

“The rating outlook has been revised to Negative, owing to a notable weakening in key liquidity metrics for the YTD FY15. This follows cash outlays pertaining to the purchase of illiquid assets in the investment portfolio, together with subdued cash flow generation of late,” reads the rating report.

“Overall, Fidelity Shield displays a high risk investment appetite, with financial assets exposed to market risk representing 129 per cent of YTD15 capital (FY14: 87 per cent).”

GCR identifies the Fidelity Shield’s investment in property as a key barrier to liquidity.

The insurer last year bought the Equatorial Fidelity Centre from sister company Equatorial Commercial Bank, until last year majority-owned by Mr Merali. The transaction was estimated at Sh415 million.

Mwalimu National Sacco owns 23.8 per cent of Fidelity Shield Insurance following its acquisition of shares in Equatorial Commercial Group.

GCR, however, noted that higher rental income related to the recent property purchase will positively contribute to its bottom-line.

The insurer’s earnings are said to be mainly driven by investment income and not its core business of underwriting. Data from the Insurance Regulatory Authority shows the insurer recorded Sh68 million underwriting loss in the six months to June.

“The company’s limited competitive position currently serves as a rating weakness,” said GCR but noted Fidelity Shield had launched aggressive marketing strategy to grow its market share.

READ: Mwalimu Sacco gets green light to buy Merali bank

As at June this year Fidelity Shield controlled 1.68 per cent of the country’s general insurance market up from 1.47 per cent at the end of last year. The general insurer collected Sh985 million in premiums for the six months to June and incurred claims of Sh431 million.

Motor insurance is its main business, contributing more than 70 per cent of its covers.

“The successful scaling up of operations through proactive measurers recently implemented is likely to positively contribute to the company’s market profile over the medium term,” reads the rating report.

It widened its capital base by Sh150 million last year, underlining its ambitions. The underwriter could turn to members of Mwalimu Sacco to drive new business.

Last year the insurer recorded a 31.5 per cent growth in profits to Sh150 million, allowing it to pay a dividend of Sh10 per share.

The Kenyan insurance sector is generally expected to take a hit from unrealised losses from government securities and listed shares whose prices have slumped since the beginning of the year.

Share prices have dropped by 19 per cent from the beginning of the year while interest rates for Treasury bills and bonds have risen, lowering their prices, given the inverse relationship between interest rates and security prices.