Johannesburg, 29 September 2020 – GCR Ratings (“GCR”) has affirmed Standard Insurance Co., INC’s (“Standard Insurance”) national scale financial strength rating of A(PH), with the Outlook revised to Positive. Furthermore, GCR has also affirmed the international scale financial strength rating on Standard Insurance of BB, with a Stable Outlook.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|Standard Insurance Co., INC||Financial strength||National||A(PH)||Positive Outlook|
The ratings on Standard Insurance balance the strengths and weaknesses of Echauz Holdings Corporation (“EHC”) group, the immediate holding company and consolidating entity. Standard Insurance is the core operating entity within the group, accounting for 100% of total gross premiums and 91% of group assets. The group’s credit profile is underpinned by very strong capitalisation and moderately strong competitive position. GCR noted an improvement in review year earnings and liquidity, attributable to realisation of scale efficiencies and enhanced cashflow generation, reflecting potential rating upside should this be sustained over the rating outlook.
The group’s risk adjusted capitalisation measured within a very strong range, supported by solid profit generation and retention, coupled with well contained levels of aggregate risk exposures. Further buttressing risk adjusted capitalisation is the recent injection of PHP130m made during the review year by the parent company. In this respect, underwriting and market risk exposures remained limited relative to the capital base given significant participation in low risk products as well as conservative asset allocation. Accordingly, GCR’s capital adequacy ratio (“CAR”) for EHC persistently trended above 3x (FY19: 3.8x), while the statutory CAR for core operating entity exhibited similar capital strength, equating to 566% in FY19 (FY18: 540%). Looking ahead, risk adjusted capitalisation is expected to be sustained at strong levels over the rating outlook, underpinned by internal capital growth and limited sensitivity to insurance and market risk.
Earnings strengthened upon realisation of scale efficiencies, which was complemented by continued stability in claims experience. In this respect, the operating expense ratio improved to 42% (prior two-year average: 47%) following growth in premium scale. In addition, the group sustained a well contained loss ratio of 37% (review period average: 37%), underpinned by selective underwriting, advanced risk modelling, and salvage recoveries. Accordingly, the group posted a healthy review year underwriting result of PHP210m (FY18: PHP98m), with the underwriting margin closing higher at 12% (prior four-year average: 8%). With further support from investment income, generated predominantly though interest earnings, bottom-line performance improved, with the return on revenue equating to 12% (FY18: 10%). Management’s ability to sustain the current earnings trend in the face of the vagaries of COVID-19, represents a key rating consideration over the rating horizon.
On the strength of enhanced operational cashflow generation coupled with the recent capital injection, with proceeds thereof placed in term deposits, the group’s liquidity position registered an improvement which is likely to be sustained over the rating outlook. In this respect, cash and stressed financial assets coverage of net technical liabilities equated to a higher 1.6x (FY18: 1.3x), while coverage of operational cost requirements closed at 14 months (FY18: 12 months).
The group’s competitive profile, a function of Standard Insurance’s market position in the local short-term insurance industry, is assessed within a moderately strong range. Competitive strength is underpinned by Standard Insurance’s pole position in underwriting motor risks given its expansive branch network and entrenched relationships with a large pool of car dealerships, aiding healthy premium generation. In this respect, the underwriter sustained its ranking amongst the top ten players in the general insurance space, commanding a market share of 4.3% (FY18: 4.6%) and relative market share of 2.6x (FY18: 2.7x). The premium base is considered somewhat diversified, with two lines of business contributing materially to premiums. Note is taken, however, of the heavy reliance on motor risks, a reflection the underwriter’s strategic focus and competitive advantage in this class. Further limiting premium diversity is jurisdictional market concentration, given that all premiums are sourced in the domestic market. Acting as a partial mitigant to the abovesaid concentrations, the policyholder profile exhibits notable granularity, with top five policyholders collectively contributing less than 1% to GWP.
The Positive Outlook reflects GCR’s expectations of a sustained improvement in both earnings and liquidity over the next 12 months. In this respect, the underwriting margin and return on revenue are forecast to register above 10%, while the liquidity ratio may be sustained above 1.5x. The Outlook further captures our expectations of continued capital strength, with the GCR CAR projected to trend above 3x. Despite showing some sensitivity to the COVID-19 pandemic headwinds, the group’s competitive strength is likely to be sustained within the moderately strong range going forward.
Positive rating action may stem from a sustained improvement in earnings and/or liquidity. Conversely, downward rating pressure may arise from a material reduction in capitalisation, or from a sustained weakening in earnings.
|Primary analyst||Tichaona Nyakudya||Senior Analyst: Insurance Ratings|
|Johannesburg, ZA||TichaonaN@GCRratings.com||+27 11 784 1771|
|Committee chair||Vinay Nagar||Senior Financial Institutions Analyst|
|Johannesburg, ZA||Vinay@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, May 2020|
|GCR Insurance Sector Risk Scores, July 2020|
Standard Insurance Co., INC
|Rating class||Review||Rating scale||Rating||Outlook/Watch||Date|
|Claims paying ability||Initial||National||A(PH)||Stable Outlook||October 2013|
|Financial strength||Last||National||A(PH)||Stable Outlook||December 2019|
Risk score summary
|Rating components and factors||Risk score|
|Country risk score||8.50|
|Sector risk score||6.50|
|Management and governance||0.00|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|Rating Horizon||The rating outlook period|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|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.|
|Retention||The net amount of risk the ceding company keeps for its own account.|
|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.|
|Security||One of various instruments used in the capital market to raise funds.|
|Senior||A security that has a higher repayment priority than junior securities.|
|Short Term||Current; ordinarily less than one year.|
|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 entity and other reliable third parties to accord the credit ratings included:
- Group and company audited financial results as at 31 December 2019;
- Four years of comparative group and company audited financial statements to 31 December
- Full year budgeted company financial statement to 31 December 2020;
- Unaudited company interim results to 30 June 2020;
- Reinsurance cover notes for 2020; and
- Other relevant documents.