Johannesburg, 25th June 2021 – GCR Ratings (“GCR”) has affirmed Forte Insurance (Cambodia) Plc’s (“Forte Insurance”) international scale financial strength rating of B. At the same time, GCR affirmed Forte insurance’s national scale financial strength rating of AA(KH). Both ratings are on Stable Outlook.
|Rated entity / Issue||Rating class||Rating scale||Rating||Outlook / Watch|
|Forte Insurance (Cambodia) Plc||Financial strength||International||B||Stable Outlook|
The ratings reflect the strengths and weaknesses of Forte Investment Holdings Co, Ltd (“Forte Holdings” or “the group”), the parent company of Forte Insurance. The latter is the core operating entity within the group, accounting for approximately 86% and 81% of GWP and total assets, respectively, at FY20. The ratings are supported by a very strong competitive position and sound financial profile. Nevertheless, premium diversification is a credit negative given concentration to the primary market.
The group’s competitive position is assessed at very strong levels, reflecting the long-standing market leading position of Forte Insurance in the local short term insurance market. In this respect, the underwriter continued to post double-digit growth over the past 3 years, commanding very strong market and relative market shares of c. 44.8% and 6.7x (FY19: 43.4% and 5.6x) respectively. Nevertheless, the corresponding weighted market share metrics of the group are approximated at 39.0% and 5.9x (FY19: 38.4% and 5.0x) respectively, indicative of the dilution effect of fringe market positions assumed by other insurance subsidiaries within the group. Going forward, the core entity is expected to sustain its strong foothold in the local general insurance space, while the moderation in group competitiveness from satellite businesses could reduce over the medium term.
Risk adjusted capitalisation is assessed at moderately strong levels, anchoring on a large capital base and constricted exposure to market and insurance risk. With the bulk of after-tax earnings generated over the past two years distributed as dividends (64%), the group’s capital base stagnated at USD34m at FY20, while exposure to market sensitivities remained limited given a conservative asset allocation. Nevertheless, the group’s capitalisation assessment is moderated by material exposure to loans and receivables from related parties, totalling USD6m at FY20. Accordingly, the adjusted GCR capital adequacy ratio (“GCR CAR”) for the group measured at 1.7x at FY20 (FY19: 2.0x). Going forward, risk adjusted capitalisation is projected to remain moderately strong, supported by expectations of relative stability in the capital base and aggregate risk exposures.
The group’s liquidity profile is viewed to be strong, underpinned by a large and growing asset portfolio which is conservatively invested. With support from strong operating cash generation, the investment portfolio grew 11% to USD43m. Accordingly, low-risk assets stabilised at a 73% allocation, supporting strong liquidity metrics. Accordingly, the group’s cash and stressed financial assets covered net technical obligations by a stable 1.9x at FY20, while coverage of operational cost requirements was sustained above 12 months. Liquidity metrics are likely to support factor assessment stability over the rating horizon.
Earnings are assessed within a sound range, supported by strong profitability, mostly generated from the core entity. Notwithstanding a spike in net business acquisition costs to USD2.1m (FY19: USD1.0m) and the associated increase in net commission expense ratio to 7.6% (FY19: 4.1%) following healthy premium growth, the group’s underwriting margin remained relatively stable, equating to 10% in FY20 (FY19: 9%), counterbalanced by enhanced scale efficiencies along with a well contained loss ratio. However, the aforesaid profitability metrics evidence a dilution relative to the core operating entity’s underwriting performance, attributable to underwriting deficits posted by other insurance subsidiaries within the group. The same subsidiaries are also loss-making at net level, further moderating the group’s return on revenue to 8% in FY20, compared to a 12% return posted by Forte Insurance. In GCR’s view, the group’s earnings are likely to remain susceptible to potential dilution from loss making subsidiaries over the short to medium term. This is due to the likely protracted nature of group endeavours to align and integrate the acquired subsidiary (FORTE-TOKO Lao Assurance Co., Ltd) in line with strategic objectives, while current challenges besetting the performance of the other subsidiary, Forte Life Assurance (Cambodia) Plc, are being addressed.
The business mix of the consolidated entity reflects good product diversification, with three (four) lines of business contributing materially to GWP (NWP) in FY20. Premiums are predominantly sourced from the primary market, Cambodia, accounting for a lower 92% of GWP (FY19: 94%), with the balance coming from Lao PDR. Growing exposure to an external market through the Lao PDR based subsidiary is positively considered.
The Stable Outlook reflects prospects of an unchanged business position and a relatively stable financial profile. In this respect, market share and liquidity metrics are likely to be sustained at current levels, while the adjusted GCR CAR is likely to be sustained around 1.7x over the next 12 months.
Positive rating action may follow a sustained improvement in risk adjusted capitalisation and liquidity. Furthermore, a sustained turnaround in the performance of other subsidiaries, along with an improvement in asset quality could lead to a positive rating movement. Conversely, downward ratings pressure could arise from material earnings dilution from possible subsidiary losses or loan impairments, impacting credit protection metrics beyond expectations.
|Primary analyst||Tichaona Nyakudya||Senior Analyst: Insurance Ratings|
|Johannesburg, ZA||TichaonaN@GCRratings.com||+27 11 784 1771|
|Committee chair||Godfrey Chingono||Deputy Sector Head: Insurance Ratings|
|Johannesburg, ZA||GodfreyC@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, June 2021|
|GCR Insurance Sector Risk Scores, April 2021|
|Rating class||Review||Rating scale||Rating||Outlook / Watch||Date|
|Financial strength||Initial / Last||International||B||Stable Outlook||May 2020|
|National||AA(KH)||Stable Outlook||May 2020|
Risk score summary
|Rating factors and components||Risk score|
|Country risk score||4.50|
|Sector risk score||3.00|
|Management and governance||0.00|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Primary Market||The part of the capital markets that deals with the issuance of new securities.|
|Quota Share||The basic form of participating treaty whereby the reinsurer accepts a stated percentage of each and every risk within a defined category of business on a pro rata basis. Participation in each risk is fixed and certain.|
|Rating Horizon||The rating outlook period|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|Receivables||Any outstanding debts, current or not, due to be paid to a company in cash.|
|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.|
|Release||An agreement between the creditor and debtor, in terms of which the creditor release the debtor from its obligations.|
|Reserve||(1) An amount representing actual or potential liabilities kept by an insurer to cover debts to policyholders. (2) An amount allocated for a special purpose. Note that a reserve is usually a liability and not an extra fund. On occasion a reserve may be an asset, such as a reserve for taxes not yet due.|
|Reserves||A portion of funds allocated for an eventuality.|
|Retrocession||The transaction whereby a reinsurer cedes to another reinsurer all or part of the reinsurance it has previously assumed.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Senior||A security that has a higher repayment priority than junior securities.|
|Short Term||Current; ordinarily less than one year.|
|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.|
|Spread||The interest rate that is paid in addition to the reference rate for debt securities.|
|Technical Liabilities||The sum of Net UPR and Net OCR IBNR.|
|Underwriting Margin||Measures efficiency of underwriting and expense management processes.|
|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.|
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 ratings are based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings are an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit ratings have been disclosed to the rated entity. The ratings were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings. The rated entity participated in the rating process via virtual 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 rated entity and other reliable third parties to accord credit ratings included:
- Company audited financial statements to 31 December 2020;
- Group draft financial statements to 31 December 2020;
- Four years of company comparative audited financial statements to 31 December;
- Company management accounts to May 2021;
- Full year company budgeted financial statements to December 2021;
- Reinsurance cover notes for 2021; and
- Other relevant documents.