Johannesburg, 15 July 2015 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to East African Underwriters Limited of A-(UG); with the outlook accorded as Stable. The rating is valid until August 2015.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to East African Underwriters Limited (“EAU”) based on the following key criteria:
EAU’s risk-based capital adequacy is considered strong and provides support to the rating. The international solvency margin registered at 281% in FY14 and is forecast at 170% in FY14 (FY13: 243%). It is noted that solvency levels have been buoyed over recent years via a combination of high net profitability and low net retained business volumes. GCR anticipates that the insurer’s capitalisation levels will remain sufficiently strong and resilient to absorb the ambitious growth plans going forward.
The insurer’s earnings capacity has strengthened over the past four-years, albeit exhibiting high levels of volatility. Overall, the insurer reflected a lower combined ratio of 82% in FY14 (FY13: 86%), comparing favourably to the review period average of 92%. This has been supported by a competitive loss ratio offsetting a cumbersome cost base. Sound investment income further enhances the insurer’s net profitability. While GCR expects EAU to reflect sustained sound earnings capacity going forward, the lack of a stable track record in operating performance against targets results in an inherently high level of execution risk within the business plan.
The conservative investment strategy employed has seen strong liquidity metrics sustained throughout the review period. The investment mix is envisioned to be stable going forward. Overall, the insurer’s asset risk exposure is considered moderate.
EAU’s market position remains constrained by its subdued revenue growth, which follows premium losses over the prior three years. The company has formulated ambitious plans to penetrate the SME market in an effort to enhance its market profile, albeit this has been slow to launch to date. As such, the successful execution of the refocused growth strategy presents a key rating consideration going forward in terms of delivering consistent claims experience and a lower expense ratio.
An offsetting rating factor is the significant concentration risk displayed in EAU’s distribution strategy, with the single largest broker representing a material contributor to premiums, at 47% of GWP.
Positive rating movement could develop if EAU demonstrates profitable and stable growth of revenues and earnings, as it expands within the SME segment of the market. This should be coupled with the maintenance of strong risk-adjusted capitalisation. A marked weakening in earnings capacity over a sustained period or material deterioration in risk-based capitalisation could result in negative rating pressure.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (April 2012)|
|Claims paying ability: A-(UG)|
|Last rating (June 2014)|
|Claims paying ability: A-(UG)|
|Sector Head: Insurance Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Insurance Companies, updated July 2014
EAU rating reports (2012-2014)
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. 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; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
East African Underwriters 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/s has been disclosed to East African Underwriters Limited with no contestation of the rating.
The information received from East African Underwriters Limited and other reliable third parties to accord the credit rating included;
- The 2014 audited financial statements
- 4 years of comparative audited numbers
- Unaudited interim results as per 30 April 2015
- Budgeted financial statements for 2015
- 2015 reinsurance cover notes
- Other related documents.
The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY
|Assets||The items on the balance sheet of the insurer which show the book value of property owned. Under regulations, not all property or other resources may be admitted in the statement of the insurer. This gives rise to the term ‘non-admitted assets.’|
|Balance Sheet||An accounting term which refers to a listing of the assets, liabilities, and surplus of a company or individual as of a specific date.|
|Capacity||The largest amount of insurance or reinsurance available from a company. In a broader sense, it can refer to the largest amount of insurance or reinsurance available in the marketplace.|
|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 to agents and brokers.|
|Insurer||The party to the insurance contract whom promises to pay losses or benefits. Also, any corporation engaged primarily in the business of furnishing insurance to the public.|
|Interest||Money paid for the use of money.|
|Liquidity||The ability of an insurer to convert its assets into cash to pay claims if necessary.|
|Loss Ratio||The ratio of claims to premiums. It may be calculated in several different ways, using paid premiums or earned premiums, and using paid claims with or without changes in claim reserves and with or without changes in active life reserves.|
|Policy||The legal document issued by the company to the policyholder, which outlines the conditions and terms of the insurance also called the policy contract or the contract.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|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.|
|Retention||The net amount of risk the ceding company keeps for its own account|
|Risk||Uncertainty as to the outcome of an event when two or more possibilities exist.|
|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.|
|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.|
For a detailed glossary of terms utilised in this announcement please click here