Johannesburg, 31st October 2019 – GCR Ratings (“GCR”) has affirmed General Alliance Insurance Limited’s (“GA Malawi”) national scale financial strength (formerly claims paying ability) rating of AA-(MW), with the Outlook accorded as Stable.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|General Alliance Insurance Limited||Financial strength||National||AA-(MW)||Stable Outlook|
GCR announced that it had released new criteria for rating insurance companies in May 2019. Consequently, the rating for GA Malawi was placed ‘Under Criteria Observation’. GCR finalised the review for GA Malawi under the released Criteria for Rating Insurance Companies, May 2019. As a result, the rating for GA Malawi has been reviewed in line with the new methodology and subsequently removed from ‘Under Criteria Observation’.
The rating affirmation reflects the insurer’s sound financial profile, anchored by strong earnings capacity, which supported sound risk adjusted capitalisation and moderate liquidity strength over the review period. Offsetting these strengths is limited premium scale and diversification.
Strong earnings capacity is largely driven by the insurer’s well contained loss ratio, which averaged 38% (FY18: 37%) over the past three years. This is attributable to a diligent claims handling process that effectively deals with the impact of fraud on claims, and selective underwriting. While the competitive loss metrics historically combined with a low operating expense ratio of below 30% to generate robust underwriting margins of above 20%, the step up in the metric during the recent two year cycle (40% on average) drastically compressed margins to 12% in FY18 (FY17: 7%). The elevation in cost metrics was partly due to limited scale efficiencies in subsidiaries. Notwithstanding lower exhibited margins, earnings capacity could stabilise within the current range should the subsidiary turnaround realised in FY18 become sustained and reduce dilution of primary market earnings.
Risk adjusted capitalisation reduced to a moderately strong range, from the previously strong range, during the review year due to pressures from lower available capital and increased market risk. The insurer’s exposure to low premium collection markets of Malawi and Zambia eroded risk absorbing capital strength in recent years, with the impact in risk adjusted capitalisation exacerbated by an increase in market risk through a 39% (FY17: 28%) exposure to high risk assets. The weakening trend in premium collections may continue over the medium term given policy enforcement issues in affected markets, albeit noting offsetting improvements in Tanzania. In this regard, management’s ability to reduce the impact of aged premium receivables on capital represents a key rating consideration over the medium term.
Liquidity is viewed to be strong, although susceptible to volatile working capital trends and high exposure to listed equities. Liquidity metrics show sensitivity to the variable cash impact of premium receivables (FY18: MWK925m; FY17: MWK232m release), reflecting changes in the enforcement of existing regulations on premium payments in the primary market. Nonetheless, review year liquidity coverage of 2x (FY17: 1.9x) was cushioned from the adverse working capital movement by a favourable claiming year, which saw net technical liabilities reduce to MWK2.7bn (FY17: MWK3.1bn). In this regard, the reversion to a normal claims experience and likely moderate cash absorption from operations is expected to maintain liquidity within the historical range over the rating horizon.
Competitive positioning is supported by the insurer’s moderately high market share in Malawi, with relatively limited gross premium scale offsetting the factor’s assessment to an intermediate level. The insurer has auxiliary markets in Zambia and Tanzania, which promise medium term growth opportunities, although affected by premium collection challenges and private market participation displacement by a national insurer, respectively. The Malawi business registered a market share of 11% in FY18, corresponding to a relative market share of 1.2x, while market shares of subsidiaries remained limited. Market share is driven by strong market relationships, fostered by an optimised branch network (supporting healthy direct sales) and good broker relationships. Furthermore, the insurer managed to carve out competencies in engineering business which ensured a relatively steady business pipeline, offsetting possible premium contraction in loss making lines. Growth in other markets is expected to be restrained by challenges in respective operating environments, contributing to GCR’s view of a stable competitive position over the medium term.
Premium diversification is limited considering product concentration to motor (reflecting primary market norms), while scale in other lines and benefits from regional operations are still to reach material levels. Motor comprised the insurer’s only significant line at 43% of gross premiums in FY18, increasing from a relatively lower 41% share in the previous year, compared to 45% and 43% respectively on the Malawi operation. In this regard, there is scope for increased earnings diversification from regional operations to further moderate product concentration, while product risk remains fairly low.
The stable outlook reflects possible positive movements in earnings capacity and premium diversification, which are unlikely to breach the current range, as well as GCR’s view that potential reduction in liquidity may not carry the scale and persistence required to change the current assessment.
An improvement in premium diversification or business scale could result in the rating being upgraded. Conversely, the rating could be downgraded on liquidity weakness or a sustained deterioration in earnings capacity.
|Primary analyst||Godfrey Chingono||Deputy Sector Head: Insurance Ratings|
|Johannesburg, ZA||GodfreyC@GCRratings.com||+27 11 784 1771|
|Committee chair||Yvonne Mujuru||Sector Head: Insurance Ratings|
|Johannesburg, ZA||YMujuru@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 2019|
|GCR Insurance Sector Risk Scores, July 2019|
General Alliance Insurance Limited
|Rating class||Review||Rating scale||Rating class||Outlook/Watch||Date|
|Claims paying ability||Initial||National||A+(MW)||Stable||May 2008|
Risk Score Summary
|Risk score||General Alliance Insurance Limited|
|Country risk score||1.75|
|Sector risk score||2.75|
|Management and governance||0.00|
|Accident||An unplanned event, unexpected and un-designed, which occurs suddenly and at a definite place.|
|Agency||An insurance sales office which is directed by an agent, manager, independent agent, or company manager.|
|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.|
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|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.|
|Commission||A certain percentage of premiums produced that is received or paid out as compensation by an insurer.|
|Contract||An agreement by which an insurer agrees, for a consideration, to provide benefits, reimburse losses or provide services for an insured. A ‘policy’ is the written statement of the terms of the contract.|
|Credit Rating||An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.|
|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.|
|Equity||Equity is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.|
|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.|
|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.|
|Facultative||Facultative reinsurance means reinsurance of individual risks by offer and acceptance wherein the reinsurer retains the “faculty” to accept or reject each risk offered.|
|Financial Flexibility||The company’s ability to access additional sources of capital funding.|
|Financial Statements||Presentation of financial data including balance sheets, income statements and statements of cash flow, or any supporting statement that is intended to communicate an entity’s financial position at a point in time.|
|Income Statement||A summary of all the expenditure and income of a company over a set period.|
|Interest||Money paid for the use of money.|
|Interest Rate||The charge or the return on an asset or debt expressed as a percentage of the price or size of the asset or debt. It is usually expressed on an annual basis.|
|Investment Income||The income generated by a company’s portfolio of investments.|
|Investment Portfolio||A collection of investments held by an individual investor or financial institution.|
|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.|
|Net Retention||The amount of insurance that a ceding company keeps for its own account and does not reinsure.|
|Operational Risk||The risk of loss resulting from inadequate or failed internal processes, people or systems or from external events. This includes legal risk, but excludes strategic risk and reputational risk.|
|Personal Lines||Types of insurance, such as auto or home insurance, for individuals or families rather than for businesses or organisations.|
|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.|
|Pool||An organisation of insurers or reinsurers through which particular types of risk are underwritten and premiums, losses and expenses are shared in agreed-upon amounts.|
|Preference Share||Preference or preferred shares entitle a holder to a first claim on any dividend paid by the company before payment is made on ordinary shares. Such dividends are normally linked to an interest rate and not determined by company profits. Preference shares are normally repayable at par value in the event of liquidation. They do not usually carry voting or pre-emptive rights. Preference shares can be redeemable or perpetual.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Rating Horizon||The rating outlook period|
|Reinstatement||The resumption of coverage under a policy, which has lapsed.|
|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.|
Salient Points of Accorded Rating
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.
The credit rating has been disclosed to General Alliance Insurance Limited. 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.
General Alliance Insurance Limited participated in the rating process via face-to-face 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 General Alliance Insurance Limited and other reliable third parties to accord the credit rating included:
- Audited financial statements as at 31 December 2018;
- Four years of comparative audited financial statements to 31 December
- Full year budgeted financial statements for 2019;
- Reinsurance cover notes for 2019;
- Other relevant documents.