Announcements Insurance Rating Alerts

GCR affirms L’Africaine des Assurances Limited’s national scale rating of A(BJ); Outlook revised to Stable.

Rating Action

Johannesburg, 17 December 2019 – GCR Ratings (“GCR”) has affirmed L’Africaine des Assurances Limited’s (“AA Benin”) national scale financial strength (formerly claims paying ability) rating of A(BJ), with the Outlook revised to Stable from Negative.

Rated Entity / Issue Rating class Rating scale Rating Outlook/Watch
L’Africaine des Assurances Limited Financial strength National A(BJ) Stable Outlook

GCR announced that it had released new criteria for rating insurance companies in May 2019. Consequently, the rating for AA Benin was placed ‘Under Criteria Observation’. GCR finalised the review for AA Benin under the released Criteria for Rating Insurance Companies, May 2019. As a result, the rating for AA Benin has been reviewed in line with the new methodology and subsequently removed from ‘Under Criteria Observation’.

Rating Rationale

AA Benin’s national scale financial strength rating reflects the strengths and weakness of the wider group, which consolidates four subsidiaries in Benin (L’Africaine Vie Benin), Equatorial Guinea, Cote D’Ivoire and a start-up venture in the Democratic Republic of Congo. Overall, the group reflects a neutral business profile and competitive financial profile, while exhibiting a somewhat stable trend that underpins the rating affirmation and the Outlook.

The insurer is the market leader in Benin, with a market share of 34% and a relative market share of 3x in the short term industry, during the review year. However, its strong primary market position in Benin is partially offset by relatively lower market positions in Equatorial Guinea and Cote d’Ivoire. Nonetheless, gross premium growth in secondary markets supported the group’s 6% growth on the backdrop of stagnant premiums at company level, due to price pressure and increased competition in the market. Going forward, the insurer is expected to defend its market share, supported by its strong brand in the primary market and scalable presence in secondary markets.

Premium diversification is intermediate, reflecting a healthy geographic and product spread of gross premiums. The insurer’s portfolio was spread over four significant lines, with three markets making notable contributions to gross premiums. Furthermore, the risk portfolio evidenced a skew towards granular risks, supporting a low product risk assessment. Going forward, GCR expects an unchanged factor assessment, albeit with sustained competitiveness in secondary markets being a key consideration over the medium term.

Earnings measured within an intermediate range, with the turnaround in underwriting profitability at company level viewed positively. The group’s operating margin averaged 5%, while the net return on revenue measured at 9% (prior year average: 15%). Notably, in FY18, AA Benin registered an underwriting profit margin of 3% for the first time in eight years, due to cost control measures and a reduction in the net incurred loss ratio to 49%, measuring well below the five-year average of 55%. This followed prudent underwriting policies in motor and accident, which historically drove high loss ratios. However, negation from a XOF3.0bn impairment on equity investments resulted in a net loss of XOF2.1bn, suppressing the average net return from previously high levels. In this regard, the insurer’s ability to secure profit drivers at competitive levels and reduce earnings risk could improve earnings capacity over the medium term.

Risk adjusted capitalisation moderated due to a lower capital base, albeit remaining within an intermediate range. The review year net loss and continued dividend extraction lowered capital to XOF12.9bn at FY18 (FY17: XOF15.2bn), reducing coverage of predominant market risks (in spite of the impairment), due to the insurer’s aggressive investment strategy. Shareholders injected XOF3.5bn in FY19, with the impact on risk adjusted capitalisation dependent on overall management of market and counterparty risks.

Liquidity has trended within a moderately strong range, with cash and stressed assets covering net technical liabilities and operational cash requirements by 1.5x and 21 months, respectively, at FY18. GCR expects liquidity to improve over the rating horizon underpinned by the capital injection.

Outlook Statement

The Stable Outlook reflects positive management actions in counteracting developing risks through a capital injection and efforts to improve underwriting performance.

Rating triggers

The rating could be upgraded on the back of a sustained improvement in the financial profile. Conversely, a reduction in risk adjusted capitalisation and/or a weakening in earnings below expected levels could result in downward rating action.

Analytical Contacts

Primary analyst
Godfrey Chingono
GodfreyC@GCRratings.com +27 11 784 1771

Yvonne Mujuru

Deputy Sector Head: Insurance Ratings
Johannesburg, ZA GodfreyC@GCRratings.com +27 11 784 1771
Secondary analyst Fleur Ngassa Associate Analyst
Johannesburg, ZA MarlaineN@GCRratings.com +27 11 784 1771
Committee chair Susan Hawthorne Senior Credit Analyst
Johannesburg, ZA SusanH@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, December 2019

Ratings History

AA Benin

Rating class Review Rating scale Rating Outlook Date
Claims paying ability Initial National A(BJ) Stable November 2014
Last A(BJ) Negative November 2018

Risk Score Summary

Risk scores AA Benin
Operating environment 6.50
Country risk score 3.75
Sector risk score 2.75
Business profile 0.00
Competitive position 0.50
Premium diversification (0.50)
Management and governance 0.00
Financial profile 1.25
Earnings 0.75
Capitalisation 0.00
Liquidity 0.50
Comparative profile 0.00
Group support 0.00
Government support 0.00
Peer analysis 0.00
Total Score 7.75

Glossary

Accident An unplanned event, unexpected and undesigned, which occurs suddenly and at a definite place.
Assets A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.
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.
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.
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.
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.

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 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 L’Africaine des Assurances Limited. The ratings above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.

L’Africaine des Assurances 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 L’Africaine des Assurances 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; and
  • Other relevant documents.
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