GCR has maintained the national scale KShs currency claims paying ability rating of Cannon Assurance Limited (“Cannon”) at BBB+ (triple B plus).
The international solvency margin declined on the back of the more aggressive retention strategy adopted in F10 (and maintained in F11). In this regard, despite sizeable underwriting losses, shareholders interest increased by KShs230m (45%) in F10. Capital accumulation benefited from unrealised gains on land (KShs148m), and equities (KShs56m). The more aggressive approach to risk, however, saw growth in net premiums of 55% outstrip capital growth, resulting in a reduction in international solvency to 97.5%, from 104% previously. Adjusted solvency amounts to 84%. On a statutory basis, net admissible assets exceeded the minimum regulatory requirement.
The investment strategy is considered aggressive, with a significant amount of value tied up in undeveloped land (39.5% of combined invested assets) and equities (26%). Consequently, investment returns are restricted, while both liquidity and investment risk are elevated. Cash and equivalents in the general business represented 24% of total investments in F10. Whilst this translated into comfortable claims cash coverage of 11 months, from 13 months in F09, technical liabilities were only covered 0.3x. This is well below GCR’s comfort level of 1x and is a constraining factor to the rating.
Cannon has evidenced a relatively weak and volatile underwriting trend in the general business over the review period, impacted by comparatively high loss ratios relative to the industry. This was compounded by a significant rise in acquisition costs in F10, on the back of the increased retention strategy. The insurer remains reliant on investment income to support earnings and solvency.
The insurer’s appetite for risk is considered high, given the relative size of its balance sheet. Retention on motor liability and accident amounts to a significant KShs2.25m, which is likely to erode profits during periods of high frequency.
Cannon’s book reflects a high level of concentration to motor (67% of NWP), which increases underwriting risk. The recent upward revision of minimum rates on motor was insufficient to drive a turnaround in fortunes for this class in F10.
Melanie Brown https://globalratings.net/uploads/files/July_2011.pdf
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