Johannesburg, 23 July 2014 — 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(s) are valid until 06/2015.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating(s) to East African Underwriters Limited (“EAU”) based on the following key criteria:
The rating reflects EAU’s high level of capitalisation, with the international solvency margin forecast to amount to 179% in F14 (F13: 243%). Solvency levels have been buoyed over recent years via a combination of high net profitability and premium reductions. The latter has, however, given rise to solvency volatility, and in GCR’s opinion this is likely to persist going forward. In conjunction with the absence of a strong capital management framework, this limits GCR’s view of cross-cycle capital strength.
EAU’s earnings capacity has strengthened, with the insurer displaying an improved 3-year underwriting performance, notably contrasting the prior negative underwriting trend. The turnaround has been achieved largely through the clean-up of the poorly performing medical portfolio. Earnings have been bolstered by strong investment inflows, albeit remaining highly exposed to foreign exchange risk. The company’s liquidity is viewed to be very strong, with cash coverage of net technical provisions measuring above 2x over the past two years.
Note is taken of EAU’s limited market position. In this regard, the insurer is viewed by GCR to require a more clearly defined sustainable growth strategy in order to stabilise revenue streams and enhance market presence. Furthermore, the reduced premium base has notably weakened cost absorption capabilities. The feed-through of this factor to profitability limits the sustainable capital build-up required to increase underwriting capacity. Revenue stream exposures in terms of business procurement also remain elevated, representing a rating weakness.
Upward movement of the rating could develop on the back of demonstrated control over potential top line volatility, with a more balanced approach to business procurement. This should contribute towards a strengthened market position, whilst augmenting earnings diversification. Further, a stable and profitable underwriting track record would be positively considered, with a sustainable realisation of improved cost efficiencies feeding through. Conversely, downward rating pressure may emanate from a marked weakening in underwriting profitability over a sustained period and/or a sharp decline in key credit metrics below forecast levels.
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NATIONAL SCALE RATINGS HISTORY
Initial rating (Apr/2012)
Claims paying ability: A-(UG)
Last rating (Jun/2013)
Claims paying ability: A-(UG)
Sector Head: Insurance
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Insurance Companies (July 2013)
East African Underwriters Limited rating reports 2012-2013
RATING LIMITATIONS AND DISCLAIMERS
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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(s) included the latest available audited annual financial statements for 2013 (plus four years of comparative numbers), full year detailed budgeted financial statements for 2014, year to date management accounts to March 2014, the 2014 reinsurance cover notes, 2013 statutory regulatory return and other non-public statistical information on the entity and/or industry.
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.
GCR affirms East African Underwriters Limited’s rating of A-(UG); Outlook Stable.