Johannesburg, 31 August 2018 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Activa International Insurance Company Limited of A-(GH), with the outlook accorded as Positive. The rating is valid until August 2019.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to Activa International Insurance Company Limited (“Activa Ghana”) based on the following key criteria:
Activa Ghana’s rating is supported by very strong risk adjusted capitalisation and healthy liquidity profile, which is expected to be sustained over the outlook horizon. Management expects to shift the business mix, focusing on increasing growth in retained lines, potentially resulting in improved scale efficiencies, albeit likely to lead to a dilution in commission recoveries. As such, the rating has been placed on Positive Outlook to reflect the potential for sustained improvement in underwriting performance, should the insurer be able to effectively manage the total expense base.
The insurer reflects very strong risk adjusted capitalisation, historically underpinned by capital injections, and more recently, significant profit retention. This was further bolstered by very limited exposure to systematic risks despite the observance of elevated credit risk sensitivities during the review year. Accordingly, the capital adequacy ratio moderated to 185% at FY17 (FY16: 243%). Going forward, risk adjusted capitalisation is expected to remain at very strong levels over the rating horizon, supported by limited exposure to market volatility.
Activa Ghana’s liquidity profile is viewed to be sound, supported by strong operating cash flow generation, along with a conservative asset allocation policy. This was, however, partially offset by moderate banking counterparty strength. Furthermore, key liquidity measures evidenced high volatility emanating from oscillations in technical provisions. As such, liquid assets coverage of average monthly claims equated to a lower 80 months at FY17 (FY16: 96 months), while liquid assets covered net technical liabilities by 5.3x (FY16: 19.0x). Liquidity metrics are likely to remain within a strong range over the outlook horizon, underpinned by the insurer’s conservative asset allocation, despite on-going oscillations in net technical provisions.
Earnings capacity historically registered within an intermediate range, underpinned by volatile and weak underwriting performance, partially offsetting sound investment returns. However, underwriting performance improved in FY17, following the realisation of significant commission recoveries, offsetting relatively high operating expenses. Accordingly, Activa Ghana recorded an underwriting margin of 14% in FY17 (FY16: -0.3%; prior three year average: -4%). In GCR’s view, earnings capacity may stabilize within a moderately strong range, should the insurer successfully balance the trade-off between a reduction in commission recoveries and increased scale efficiencies, in light of projected growth in retained lines.
Activa Ghana’s business profile is viewed to be sound, supported by a well-diversified earnings profile (with relatively low product risk), albeit partially offset by intermediate competitive position. Nevertheless, the insurer’s estimated share of total industry gross premiums equated to a higher 4.7% in FY17 (FY16: 3.8%) following significant premium volume development. Competitive positioning may strengthen over the medium term, supported by strong growth targets envisaged and increasing brand recognition.
The reinsurance structure continues to pose potential counterparty credit risk, with reinsurance cover largely provided by a single reinsurer, Globus-Re S.A. (“Globus Re”). GCR notes, however, the high credit quality associated with the leading retroccessionairies on Globus Re’s retrocession panel and the fact that Globus Re retains minimal risk for its own account.
Positive rating action may stem from a sustained improvement in earnings capacity. This would need to be supported by risk adjusted capital adequacy and liquidity remaining at very strong and strong levels. Conversely, negative rating action pertain to a reduction in risk adjusted capitalisation and other credit protection metrics, coupled with a lowering in the insurer’s earnings capacity.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (August 2014)|
|Claims paying ability: A-(GH)|
|Last rating (September 2017)|
|Claims paying ability: A-(GH)|
|Primary Analyst||Committee Chairperson|
|Tichaona Nyakudya||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 May 2018
Activa International Insurance Company Limited rating reports, 2014-2017
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 process 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 International Insurance Company 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 International Insurance Company Limited.
The information received from Activa International Insurance Company Limited and other reliable third parties to accord the credit rating included:
- The audited annual financial statements to 31 December 2017
- Four years of comparative audited financial statements
- Budgeted financial statements to 31 December 2018
- Financial Condition Report as at 31 December 2017
- Other related documents.
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.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY
|Assets||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|Balance Sheet||Also known as a Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.|
|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.|
|Deductible||The portion of an insured loss to be borne by the insured before he is entitled to recovery from the insurer.|
|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.|
|Execution Risk||The risk that a company’s business plans will not be successful when they are put into action.|
|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 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.|
|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.|
|Operating Margin||Measures the efficiency of profit generation from investments and underwriting.|
|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.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Rating Horizon||The rating outlook period|
|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.|
|Reserve||An amount representing actual or potential liabilities kept by an insurer to cover debts to policyholders.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Yield||Percentage return on an investment or security, usually calculated at an annual rate.|
For a detailed glossary of terms, please click here.
GCR affirms Activa International Insurance Company Limited’s rating of A-(GH); Outlook Positive.