Johannesburg, 1 December 2015 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to L’Africaine des Assurances Limited of A(BJ), with the outlook accorded as Stable. The rating is valid until November 2016.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to L’Africaine des Assurances Limited (“AA Benin”) based on the following key criteria:
AA Benin reflects very strong risk adjusted capitalisation, underpinned by a sizeable capital base catering for the quantum of underwriting and market risk exposure. Sound internal capital generation is likely to maintain risk adjusted capitalisation within a strong range over the rating horizon.
Liquidity metrics remained strong over the review period. In this regard, claims cash coverage amounted to a strong 29 months (FY13: 32 months), while cash cover of net technical liabilities equated to an unchanged 0.8x for the third consecutive year. Inclusive of interest bearing securities, coverage of net technical liabilities strengthens to 1.2x. Going forward, GCR expects liquidity metrics to remain at strong levels, underpinned by the insurer’s asset allocation strategy.
The Conférence Interafricaine des Marchés d’Assurances (“CIMA”) code imposes investment restrictions limiting the investment asset classes and diversification available in the region. This notwithstanding, AA Benin’s asset quality measured at moderately strong levels with liquid assets representing 54% of total invested assets. The investment portfolio is complemented by interest bearing securities (17%), investments in subsidiaries (13%) and listed shares (12%). Asset quality is expected to be maintained at current levels, barring any changes in CIMA regulations.
AA Benin’s business profile is strong, supported by an entrenched market position and well diversified business mix. In this regard, the insurer is the leading domestic short term player in the Benin market, supported by a strong brand and diversified distribution network. Furthermore, the insurer’s portfolio is fairly well spread across four lines of business, each contributing materially to the premium base (each in excess of USD1.5m). Going forward, management expects to defend its top tier position, albeit with pressures on gross premium growth, stemming from other players in the industry gaining traction.
AA Benin’s earnings capacity is a function of its sizeable investment portfolio (FYE14: XOF20bn), which generates a moderately high level of investment income in absolute terms. In this respect, the insurer has registered underwriting losses over the bulk of the review period, largely due to an elevated cost base. Nevertheless, sound investment returns translated into stable returns on revenue over the bulk of the review period. This trend is expected to persist over the rating horizon.
The reinsurance programme structure introduces a moderate degree of counterparty concentration and credit risk. Cognisance is, however, taken of the moderate credit quality of the underlying reinsurers in the Globus Re reinsurance programme and the fact that the former retains no risk for its own account.
The rating may be upgraded if the insurer registers sustained underwriting profitability, in conjunction with the maintenance of strong risk adjusted capitalisation and liquidity metrics. Conversely, the rating may be downgraded if risk adjusted capital adequacy and/or liquidity metrics fall below expectations. Furthermore, a material weakening in business profile (by way of market share and/or earnings diversification) could result in negative rating movement.
|NATIONAL SCALE RATINGS HISTORY|
|Initial/last rating (November 2014)|
|Claims paying ability: A(BJ)|
|Primary Analyst||Secondary Analyst|
|Yvonne Masiku||Catherine Zimba|
|Senior Credit Analyst||Junior Credit Analyst|
|(011) 784-1771||(011) 784-1771|
|Sector Head: Insurance Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2015.
AA Benin rating report, 2014
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.
L’Africaine des Assurances 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 L’Africaine des Assurances Limited with no contestation of the rating.
The information received from L’Africaine des Assurances Limited and other reliable third parties to accord the credit rating(s) included:
- The latest available audited annual financial statements up to 31 December 2014
- Four years of comparative audited numbers
- Full year detailed budgeted financial statements for 2015
- Most recent year to date management accounts up to 30 September 2015
- The current year reinsurance cover notes, and
- 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.
|Accounting||A process of recording, summarising, and allocating all items of income and expense of the company and analysing, verifying and reporting the results.|
|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.|
|Capital Base||The issued capital of a company, plus reserves and retained profits.|
|Claim||A request for payment of a loss, which may come under the terms of an insurance 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.|
|Credit Rating Agency||An entity that provides credit rating services.|
|Creditworthiness||An assessment of a debtor’s ability to meet debt obligations.|
|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.|
|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.|
|Interest||Money paid for the use of money.|
|Liquidity||The speed at which assets can be converted to cash.|
|Liquidity Risk||The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.|
|Market Risk||Volatility in the value of a security/asset due to movements in share prices, interest rates, currencies, commodities or wider economic factors.|
|National Scale Rating (“NSR”)||The national scale rating provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.|
|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.|
|Portfolio||(1) All of the insurer’s in-force policies and outstanding losses, with respect to described segments of its business. (2) The collection of financial assets constituting an entity’s investment portfolio.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Rating Horizon||The rating outlook period|
|Rating Outlook||A rating outlook indicates the potential direction of a rated entity’s rating over the medium term, typically one to two years. An outlook may be defined as: ‘Stable’ (nothing to suggest that the rating will change), ‘Positive’ (the rating symbol may be raised), ‘Negative’ (the rating symbol may be lowered) or ‘Evolving’ (the rating symbol may be raised or lowered).|
|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.|
|Securities||Various instruments used in the capital market to raise funds.|
|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 more detailed glossary of terms/acronyms, please click here
GCR affirms L’Africaine des Assurances Limited’s rating of A(BJ); Outlook Stable.