Johannesburg, 07 August 2017 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Activa Assurances Limited of A+(CM), with the outlook accorded as Stable. The rating is valid until July 2018.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to Activa Assurances Limited (“Activa Cameroon”) based on the following key criteria:
Activa Cameroon’s rating receives significant support from very strong earnings capacity. Robust earnings capacity has been well supported by a very competitive loss ratio at both the gross (three year average: 47%) and the net level (three year average: 33%). This anchored very high underwriting margins (FY16: 27%; FY15: 17%), with the elevation in FY16 stemming from improved cost control, which could be sustained over the rating horizon. Going forward, earnings capacity is expected to persist within a very strong range, further supported by a conservative maximum deductible per risk and event (equivalent to 0.6% of FY16 net earned premiums) on the reinsurance program.
The insurer reflects very strong risk adjusted capitalisation, underpinned by a sizeable capital base catering for the high quantum of asset and underwriting risks. Accordingly, the international solvency margin measured at a high 152% at FY16 (FY15: 171%), with underwriting risk remaining relatively stable. This has been further supported by a reduction in credit risk, resulting in a moderation in aggregate risks relative to capital. In this respect, risk adjusted capitalisation is expected to remain within a very strong range over the rating horizon.
Activa Cameroon is the third largest player in the domestic short term insurance industry, recording an average market share of 13% over the past two years. Notably, the insurer continues to strengthen its brand equity through continued participation of reputable shareholders at strategy level, facilitating stronger corporate relationships and an edge in development focused insurance solutions. Going forward, the insurer expects to defend its market share through increased penetration of the retail market.
Earnings diversification was positively impacted by favourable regulation on premium retention in the Conference Interafricaine des Marches (“CIMA”) zone. Accordingly, an increase in retention on the fire and engineering portfolio (FY16: 29%; FY15: 0.2%), coupled with a recovery in transport net premiums, improved the risk base spread to a sound level in FY16. This has been accommodated by low product risk in the dominating accident and motor portfolios, with the expected sustenance of sound premium composition likely to support earnings stability over the rating horizon.
Liquidity management has been adversely affected by payments on large claims on behalf of reinsurers (as part of a strategy to cement competitiveness in claims settlement), coupled with fluctuations in short term borrowings. In this respect, cash cover of net technical liabilities equated to 0.6x at FY16 (FY15: 0.2x; FY14: 1x), which is a deviation from management’s internal target of 1x. In this respect, stability in liquidity metrics will be a key rating consideration over the rating horizon.
Exposure to high risk assets is viewed to have been maintained at a moderately high level, compared to the very high levels at the beginning of the review period. While the insurer has managed to contain credit risk, exposure to related party transactions has remained elevated, representing another key risk to the rating.
The reinsurance programme introduces a moderate degree of counterparty concentration and credit risk. This is reflective of the moderate credit quality of the underlying reinsurers and the very conservative maximum retention per risk and event (0.4% of FY16 capital).
The rating could be upgraded on the back of a medium term enhancement in the insurer’s business profile (by way of increased market share and improved earnings profile), and/or further sustainable improvements in liquidity and asset quality. Conversely, negative rating action could follow a sustained deterioration in liquidity metrics and/or asset quality, coupled with an increase in underwriting risk that may reduce solvency.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (September 2009)|
|Claims paying ability: A-(CM)|
|Last rating (July 2016)|
|Claims paying ability: A+(CM)|
|Primary Analyst||Committee Chairperson|
|Godfrey Chingono||Yvonne Mujuru|
|Credit Analyst||Sector Head: Insurance Ratings|
|(011) 784 – 1771||(011) 784 – 1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2016
Activa Assurances Limited’s rating reports, 2009-2016
RATING LIMITATIONS AND DISCLAIMERS
ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO/RATING-SCALES-DEFINITIONS. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
Activa Assurances Limited participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit rating has been disclosed to Activa Assurances Limited with no contestation of the rating.
The information received from Activa Assurances Limited and other reliable third parties to accord the credit rating included:
- The 2016 audited annual financial statements
- 4 years of comparative audited numbers
- Unaudited interim results to 30 June 2017
- Budgeted financial statements for 2017
- Statutory Annual Returns for 2016
- 2017 reinsurance summary
- Other related documents.
The rating above was solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the rating.
|Capacity||The largest amount of insurance available from a company. In a broader sense, it can refer to the largest amount of insurance available in the marketplace.|
|Capital||The sum of money that is invested to generate proceeds.|
|Capitalisation||The provision of capital for a company, or the conversion of income or assets into capital.|
|Capital Adequacy||A measure of the adequacy of an entity’s capital resources in relation to its risks.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Claim||A request for payment of a loss, which may come under the terms of an insurance contract.|
|Credit Rating||An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.|
|Distribution Channel||The method utilised by the insurance company to sell its products to policyholders.|
|Enterprise Risk Management||ERM refers to an integrated or holistic approach to managing risk across an organisation, using clearly articulated frameworks and processes controlled from board level.|
|Exposure||Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For an insurer, its exposure may also relate to the risk related to policies issued.|
|International Scale Rating (“ISR”)||International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.|
|Intermediary||A third party in the sale and administration of insurance products.|
|Interest||Money paid for the use of money.|
|Investment Portfolio||A collection of investments held by an individual investor or financial institution.|
|Liquidity||The speed at which assets can be converted to cash. The ability of an insurer to convert its assets into cash to pay claims if necessary. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.|
|Market Risk||Volatility in the value of a security/asset due to movements in share prices, interest rates, currencies, commodities or wider economic factors.|
|National Scale Rating (“NSR”)||National Scale credit ratings express risk in relative rank order, which is to say they are ordinal measures of credit risk and are not predictive of a specific frequency of default or loss.|
|Policyholder||The person in actual possession of an insurance policy.|
|Portfolio||All of the insurer’s in-force policies and outstanding losses, with respect to described segments of its business.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Rating Horizon||The rating outlook period|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Risk Management||Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.|
|Short Term||Current; ordinarily less than one year.|
|Solvency||With regard to insurers, having sufficient assets (capital, surplus, reserves) and being able to satisfy financial requirements (investments, annual reports, examinations) to be eligible to transact insurance business and meet liabilities.|
|Statutory||Required by or having to do with law or statute.|
|Subordinated Debt||Debt that in the event of a default is repaid only after senior obligations have been repaid. It is higher risk than senior debt.|
|Underwriting||The process of selecting risks and classifying them according to their degrees of insurability so that the appropriate rates may be assigned. The process also includes rejection of those risks that do not qualify.|
|Underwriting Margin||Measures efficiency of underwriting and expense management processes.|
For a more detailed glossary of terms, please click here
GCR affirms Activa Assurances Limited’s rating at A+(CM); Outlook Stable.