Johannesburg, 23 December 2019 – GCR Ratings (“GCR”) has upgraded Activa International Insurance Company Limited’s (“Activa Ghana”) national scale financial strength (formally claims ability) rating to A(GH) from A-(GH), with the outlook accorded as Stable.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|Activa International Insurance Company Limited||Financial strength||National||A(GH)||Stable Outlook|
GCR announced that it had released new criteria for rating insurance companies in May 2019. Consequently, the rating for Activa Ghana was placed ‘Under Criteria Observation’. GCR finalised the review for Activa Ghana under the released Criteria for Rating Insurance Companies, May 2019. As a result, the rating for Activa Ghana has been reviewed in line with the new methodology and subsequently removed from ‘Under Criteria Observation’.
Activa Ghana’s national scale financial strength rating upgrade reflects sustained improvement in earnings together with maintenance and strong risk adjusted capitalisation and liquidity. These credit strengths are, however, partially offset by a limited business profile.
Earnings registered within an improved range over the last two years, supported by stronger underwriting profitability and healthy investment income. In this respect, the two year underwriting margin equated to a higher 19% (FY18: 24%), compared to the prior three year cycle underwriting margin of -4%. The return on revenue registered at 32% in FY18 (FY17: 24%). Earnings are likely to be maintained in this range supported by commission recoveries and scale efficiencies as well as healthy investment returns, although GCR notes potential for volatility in underwriting profitability.
Risk adjusted capitalisation registered at very strong levels, underpinned by a capital base that comfortably caters for the quantum of insurance and market risk exposures. Growth in the capital base has been largely supported by high profit retention. Going forward, risk adjusted capitalisation is expected to remain at very strong levels over the rating horizon, supported by low insurance risk and limited exposure to market volatility.
Activa Ghana has a strong liquidity profile, as evidenced by stressed financial asset coverage of net technical liabilities measuring at 6.2x (FY17: 5.4x), while operational cash coverage registered at 45 months at FY18 (FY17: 34 months). GCR expects liquidity metrics to remain within a similar range over the outlook horizon, supported by a conservative asset allocation.
The rating further takes into account the entity’s limited business profile, which is a function of intermediate market share and geographic diversification, while also noting low premium retention. Activa Ghana’s market share and relative market share equated to approximately 4.5% and 1.25x respectively at FY18. Note is, however taken of significant growth in the premium base over the last two years. Competitive positioning may strengthen over the medium term, supported by strong growth targets envisaged and increasing brand recognition.
The stable outlook reflects expectations of capital, earnings and liquidity strength to persist, while factoring potential for the business profile to remain limited over the outlook horizon.
Positive rating action could stem from material improvement in competitive positioning and earnings while other credit protection metrics are maintained at strengthen levels. Conversely, downward rating pressure may arise from a material deterioration in earnings and/or risk adjusted capitalisation below expectations.
|Primary analyst||Sylvia Mhlanga||Insurance Analyst|
|Johannesburg, ZA||Sylviam@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|
Activa International Insurance Company Limited
|Rating class||Review||Rating scale||Rating class||Outlook/Watch||Date|
|Claims paying ability||Initial||National||A-(GH)||Stable||August 2014|
Risk Score Summary
|Country risk score||3.75|
|Sector risk score||4.25|
|Management and governance||0.00|
|Accident||An unplanned event, unexpected and undesigned, which occurs suddenly and at a definite place.|
|Accounting||A process of recording, summarising, and allocating all items of income and expense of the company and analysing, verifying and reporting the results.|
|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.|
|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.|
|Catastrophe||An event, which causes a loss of extraordinary magnitude.|
|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.|
|Debt||An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.|
|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.|
|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.|
|International Scale Rating LC||International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.|
|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 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 rated entities, 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 Activa International Insurance Company 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.
Activa International Insurance Company 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 the entities and other reliable third parties to accord the credit rating included:
- Audited financial results as at 31 December 2018;
- Four years of comparative audited financial statements to 31 December
- Full year budgeted financial statements for 2019;
- Unaudited interim results to 30 June 2019;
- Reinsurance cover for 2019; and
- Other relevant documents.