Announcements Insurance Rating Alerts

GCR affirms Activa Ghana’s national scale financial strength rating of A(GH); Outlook Positive

Rating action

Nairobi, 24 June 2021 – GCR Ratings (“GCR”) has affirmed Activa International Insurance Company Limited’s (“Activa Ghana”) national scale financial strength rating of A(GH), with the Outlook maintained as Positive.

Rated Entity / Issue Rating class Rating scale Rating Outlook/Watch
Activa International Insurance Company Limited Financial strength National A(GH) Positive Outlook

Rating rationale

Activa Ghana’s national scale financial strength rating reflects a very strong financial profile, counterbalanced by a modest competitive position and low levels of premium diversification. The insurer’s rating is however restricted by the credit worthiness of its parent, Activa Finances, which is viewed to be of relatively weaker credit strength, limiting Activa Ghana’s national scale financial strength rating.

Activa Ghana has registered sound cross cycle earnings, supported by underwriting profits through most of the review period, as well as fairly high investment returns. The five-year average underwriting margin equated to 10.7% in FY20 and the corresponding net margin registered at 26.0%, although both metrics have shown fairly high volatility. Going forward, we expect earnings to register within a moderately strong to strong range, with potential for improved stability on the back of expected growth.

Activa Ghana’s risk adjusted capitalisation remained very strong, with the GCR capital adequacy ratio (“GCR CAR”) stabilising at 3.8x at FY20. Risk adjusted capitalisation strength has been sustained by retained earnings. The company is however yet to achieve the new regulatory minimum capital requirement of GHS50m with the deadline for the fulfilment of this obligation being January 2022. We nevertheless noted various options that are being considered to address the shortfall in the coming months.

The liquidity profile is a positive rating factor for Activa Ghana, supported by cash flow generation and a conservative portfolio allocation (c. 86.1% of the portfolio is invested in liquid assets). In this respect, the liquidity coverage ratio equated to 4.8x as at the end of FY20, while operational cash coverage remained unchanged at 40 months. Liquidity is expected to moderate going forward due to the planned property development, although is expected to be sustained within a strong range.

Activa Ghana’s business profile is viewed as limited, underpinned by an intermediate market share and limited premium and geographic diversification. In this respect, the insurer’s market and relative market share equated to approximately 4.2% and 1.14x respectively as at end of FY20. In addition to all the premiums being sourced locally, net premium levels are limited in absolute terms and there is exposure to comparatively high broker and policyholder concentration.

Outlook statement

The Positive Outlook reflects the potential for positive rating action if earnings are maintained at strengthened levels over the outlook horizon, supporting internal capital generation and liquidity. We expect risk adjusted capitalisation and liquidity coverage to remain above 3x. The business profile is not expected to change materially over the short to medium term.

Rating triggers

Positive rating action could stem from improved strength and stability in earnings that supports maintenance of high levels of capitalisation and liquidity as well as an improvement in the creditworthiness of the group. Conversely, downward rating pressure may arise if the insurer fails to recapitalise as we believe that this increases regulatory risk. A deterioration in the group credit profile could limit the rating further.

Analytical contacts

Primary analyst Eleanor Kigen Senior Analyst
Nairobi, KE EleanorK@GCRratings.com +254 703 041618
Committee chair Susan Hawthorne Senior Analyst: Insurance Ratings
Johannesburg, ZA SusanH@GCRratings.com +27 11 784 1771

Related criteria and research

Criteria for the GCR Ratings Framework, May 2019
Criteria for Rating Insurance Companies, May 2019
GCR Ratings Scales, Symbols & Definitions, May 2019
GCR Country Risk Scores, June 2021
GCR Insurance Sector Risk Scores, April 2021

Ratings history

Activa International Insurance Company Limited

Rating class Review Rating scale Rating Outlook/Watch Date
Claims paying ability

Financial strength

Initial National A-(GH) Stable Outlook August 2014
Last National A(GH) Positive Outlook June 2020

Risk score summary

Rating factors and components Risk scores
Operating environment 7.75
Country risk score 3.50
Sector risk score 4.25
Business profile (2.00)
Competitive position (0.75)
Premium diversification (1.25)
Management and governance 0.00
Financial profile 4.00
Earnings 0.50
Capitalisation 2.00
Liquidity 1.50
Comparative profile (1.25)
Group cap (1.25)
Government support 0.00
Peer analysis 0.00
Total score 8.50

Glossary

Accident An unplanned event, unexpected and undesigned, which occurs suddenly and at a definite place.
Accounting A process of recording, summarising, and allocating all items of income and expense of the company and analysing, verifying and reporting the results.
Agency An insurance sales office which is directed by an agent, manager, independent agent, or company manager.
Assets A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.
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.
Catastrophe An event, which causes a loss of extraordinary magnitude.
Claim A request for payment of a loss, which may come under the terms of an insurance contract.
Commission A certain percentage of premiums produced that is received or paid out as compensation by an insurer.
Contract An agreement by which an insurer agrees, for a consideration, to provide benefits, reimburse losses or provide services for an insured. A ‘policy’ is the written statement of the terms of the 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.
Debt An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.
Diversification Spreading risk by constructing a portfolio that contains different investments, whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.
Dividend The portion of a company’s after-tax earnings that is distributed to shareholders.
Equity Equity is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.
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.
Facultative Facultative reinsurance means reinsurance of individual risks by offer and acceptance wherein the reinsurer retains the “faculty” to accept or reject each risk offered.
Financial Flexibility The company’s ability to access additional sources of capital funding.
Financial Statements Presentation of financial data including balance sheets, income statements and statements of cash flow, or any supporting statement that is intended to communicate an entity’s financial position at a point in time.
Income Statement A summary of all the expenditure and income of a company over a set period.
International Scale Rating LC 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.
Interest Money paid for the use of money.
Interest Rate The charge or the return on an asset or debt expressed as a percentage of the price or size of the asset or debt. It is usually expressed on an annual basis.
Investment Income The income generated by a company’s portfolio of investments.
Investment Portfolio A collection of investments held by an individual investor or financial institution.
Liabilities All financial claims, debts or potential losses incurred by an individual or an organisation.
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.
Loss The happening of the event for which insurance pays.
Market Risk Volatility in the value of a security/asset due to movements in share prices, interest rates, currencies, commodities or wider economic factors.
Net Profit Trading/operating profits after deducting the expenses detailed in the profit and loss account such as interest, tax, depreciation, auditors’ fees and directors’ fees.
Net Retention The amount of insurance that a ceding company keeps for its own account and does not reinsure.
Operational Risk The risk of loss resulting from inadequate or failed internal processes, people or systems or from external events. This includes legal risk, but excludes strategic risk and reputational risk.
Personal Lines Types of insurance, such as auto or home insurance, for individuals or families rather than for businesses or organisations.
Policy The legal document issued by the company to the policyholder, which outlines the conditions and terms of the insurance.
Policyholder The person in actual possession of an insurance policy.
Pool An organisation of insurers or reinsurers through which particular types of risk are underwritten and premiums, losses and expenses are shared in agreed-upon amounts.
Premium The price of insurance protection for a specified risk for a specified period of time.
Rating Horizon The rating outlook period
Reinstatement The resumption of coverage under a policy, which has lapsed.
Reinsurance The practice whereby one party, called the Reinsurer, in consideration of a premium paid to him agrees to indemnify another party, called the Reinsured, for part or all of the liability assumed by the latter party under a policy or policies of insurance, which it has issued. The reinsured may be referred to as the Original or Primary Insurer, or Direct Writing Company, or the Ceding Company.

For a detailed glossary of terms utilized in this announcement please click here

SALIENT POINTS OF ACCORDED RATINGS

GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of rated entities, 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.

The credit rating has been disclosed to the rated entity. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating. The rated entity participated in the rating process via virtual management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.

The information received from the entities and other reliable third parties to accord the credit rating included:

  • Audited financial results as at 31 December 2020;
  • Four years of comparative audited financial statements to 31 December
  • Full year budgeted financial statements for 2021;
  • Unaudited interim results to 31 March 2021;
  • Reinsurance cover notes for 2021; and
  • Other relevant documents.
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