Johannesburg, 07 August 2018 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Enterprise Insurance Company Limited of A+(GH), with the outlook accorded as Stable. The rating is valid until August 2019.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to Enterprise Insurance Company Limited (“EIC”) based on the following key criteria:
EIC’s liquidity metrics measured at very strong levels, as evidenced by very high claims cash cover and net technical provision coverage metrics of 24 months and 2x respectively at FY17 (FY16: 23 months and 2x). This key rating strength has been underpinned by fairly steady operational cash flow generation, coupled with the insurer’s very conservative asset allocation strategy (with all investments placed in cash and equivalents). GCR expects the company’s liquidity metrics to continue to measure within a very strong range. Furthermore, banking counterparty concentration is viewed to be low, with funds spread across several financial institutions including international banks.
The international solvency margin equated to a higher 65% at FY17 (FY16: 59%), supporting sound risk adjusted capitalisation. The increase in the solvency margin was largely due to full profit retention, with the insurer not distributing dividends in FY17. Cognisance is taken however, of the change in IBNR calculation in FY17, mandated by the insurance regulator, which resulted in EIC’s solvency dipping below the minimum regulatory requirement of 150%, further compounded by an increase in disallowed assets. According to management, the shareholders have injected capital to ensure that the insurer meets the regulatory requirement. As such, risk adjusted capital adequacy may register within a strong range, supported by well contained underwriting risk and low market exposure, albeit remaining sensitive to high dividend payouts. Furthermore, maximum net exposures are viewed to be high relative to capital, while the reinsurance panel reflects an intermediate level of aggregated credit strength.
Earnings capacity is viewed to be moderately strong, supported by healthy investment returns (given the sizeable quantum of investment assets), partially offsetting volatile underwriting profitability. In this respect, the ROaE equated to a strong 20% in FY17 (FY16: 35%), while the underwriting margin equated to -4% (FY16: 14%; review period average 5%). Underwriting performance in FY17 was impacted by both increased claims (which was largely a function of the change in IBNR calculation) and cost base effects. In GCR’s view, earnings capacity is likely to remain within a moderately strong range, supported by healthy investment returns, and a normalisation in underwriting performance.
The business profile is moderately strong, supported by healthy competitive positioning and fairly well diversified earnings. In this respect, the insurer is among the top tier players in the market, with a share of total industry premiums of 14% in FY17 (FY16: 13%), while four lines of business contribute in excess of USD2m to gross premiums (albeit with a skew towards motor, in line with industry norms). Competitive positioning has largely been supported by the insurer’s strong brand recognition, wide distribution networks and well entrenched client relations. Accordingly, GCR expects the insurer’s business profile to remain within a moderately strong range over the rating horizon, supported by solid growth attainment.
Positive rating action may stem from a sustained strengthening in earnings capacity and/or solvency. Conversely, downward rating pressure may follow a marked reduction in capital strength stemming from continued high dividend payouts and/or weakened earnings capacity.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (September 2007)|
|Claims paying ability: AA-(GH)|
|Last rating (September 2017)|
|Claims paying ability: A+(GH)|
|Primary Analyst||Committee Chairperson|
|Sylvia Mhlanga||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
Enterprise Insurance Company Limited Rating Reports, 2007 – 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. 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.
Enterprise 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 Enterprise Insurance Company Limited with no contestation of the rating.
The information received from Enterprise Insurance Company Limited and other reliable third parties to accord the credit rating included:
- The audited annual financial statements to December 2017
- Unaudited year to date results to 31 March 2018
- Budgeted financial statements to December 2018
- Financial condition report 2017
- 2018 reinsurance cover notes
- Other related documents.
The rating above was solicited by, or on behalf of, the rated client, 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
|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.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|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.|
|Experience||A term used to describe the relationship, usually expressed as a percent or ratio, of premiums to claims for a plan, coverage, or benefits for a stated time period.|
|Financial Flexibility||The company’s ability to access additional sources of capital funding.|
|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.|
|Investment Income||The income generated by a company’s portfolio of investments.|
|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.|
|Portfolio||All of the insurer’s in-force policies and outstanding losses, with respect to described segments of its business.|
|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.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Securities||Various instruments used in the capital market to raise funds.|
|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.|
|Stop Loss||Any provision in a policy designed to cut off an insurer’s losses at a given point. In effect, a stop loss agreement guarantees the loss ratio of the insurer.|
|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 please click here
GCR affirms Enterprise Insurance Company Limited’s rating of A+(GH); Outlook Stable.