Announcements Insurance Rating Alerts

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

Rating Action

Johannesburg, 24 June 2020 – GCR Ratings (“GCR”) has affirmed Activa International Insurance Company Limited’s (“Activa Ghana”) national scale financial strength rating of A(GH), with the outlook accorded 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 robust risk adjusted capitalisation and very strong liquidity. These credit strengths are, however, partially offset by a limited business profile given the insurer’s modest competitive position. Furthermore, earnings have strengthened over the review period with the possibility of a sustained trend underpinning the Positive outlook.

Activa Ghana continued to exhibit sound capital generation over the review period, underpinned by high profit retention. As such, risk adjusted capitalisation was maintained at very strong levels, supported by a capital base that comfortably caters for insurance and market risk exposures. In this regard, GCR CAR coverage consistently measured above 3x over the review period while statutory CAR registered above the minimum regulatory requirement, although the assessment considered the limited capital scale in absolute terms. Going forward, risk adjusted capitalisation is expected to remain at very strong levels over the rating horizon, supported by low insurance and market risks.

The insurer’s liquidity profile is viewed to be strong, supported by strong cash flow generation coupled with conservative asset allocation. As such, stressed financial asset coverage of net technical liabilities measured at 8.2x (FY18: 6.2x), while operational cash coverage registered at 40 months at FY19 (FY18: 45 months). GCR expects liquidity metrics to remain within a similar range over the outlook horizon.

Earnings registered within a moderately strong range over the review period underpinned by healthy investment income and the underwriting profits posted over the past three years. GCR expects the insurer to remain profitable at the underwriting level, although notes the reliance on commission recoveries to offset the impact of limited net premium scale, as well as certain non-recurring expenses in FY19. Accordingly, a stabilisation in cross cycle underwriting performance could support a more favourable assessment of earnings over the outlook horizon.

Activa Ghana’s business profile is viewed to be limited, underpinned by intermediate market share and limited geographic diversification, while also noting low premium retention. Activa Ghana’s market share and relative market share equated to approximately 4.2% and 1.14x respectively at FY19. Competitive positioning may strengthen over the medium term, supported by strong growth targets envisaged and increasing brand recognition.

The insurer’s rating is restricted by the rating of its parent, Activa Finances, which is viewed to be of relatively weaker credit strength, limiting Activa Ghana’s national scale financial strength rating.

Outlook Statement

The positive outlook reflects potential for upward rating movement should the insurer sustain earnings at strengthened levels. GCR notes the potential negative impact of lower interest rates and COVID-19 risks, however Activa Ghana’s earnings are projected to remain resilient. Risk adjusted capitalisation is expected to continue measuring above 3x while coverage of net technical liabilities and operational cash coverage are estimated to measure well above 2.5x and 12 months respectively over the next 12 months.

Rating triggers

Positive rating action could stem from strengthened earnings while other credit protection metrics are maintained at strong levels. Conversely, downward rating pressure may arise from a material deterioration in earnings and/or if risk adjusted capitalisation reduces below expectations.

Analytical Contacts

Primary analyst Sylvia Mhlanga Senior Insurance Analyst
Johannesburg, ZA Sylviam@GCRratings.com +27 11 784 1771
Committee chair Matthew Pirnie Group Head of Ratings
Johannesburg, ZA MatthewP@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, May 2020
GCR Insurance Sector Risk Scores, June 2020

Ratings History

Activa International Insurance Company Limited

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

Financial strength

Initial National A-(GH) Stable August 2014
Last National A(GH) Stable December 2019

Risk Score Summary

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 3.75
Earnings 0.25
Capitalisation 2.00
Liquidity 1.50
Comparative profile (0.75)
Group support (0.75)
Government support 0.00
Peer analysis 0.00
Total Score 8.75

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.
Preference Share Preference or preferred shares entitle a holder to a first claim on any dividend paid by the company before payment is made on ordinary shares. Such dividends are normally linked to an interest rate and not determined by company profits. Preference shares are normally repayable at par value in the event of liquidation. They do not usually carry voting or pre-emptive rights. Preference shares can be redeemable or perpetual.
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.

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 Activa International Insurance Company Limited. 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.

Activa International Insurance Company Limited participated in the rating process via face-to-face 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 2019;
  • Four years of comparative audited financial statements to 31 December
  • Full year budgeted financial statements for 2020;
  • Unaudited interim results to 31 March 2020;
  • Reinsurance cover for 2020; and
  • Other relevant documents.
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