Johannesburg, 28th May 2021 – GCR Ratings (“GCR”) has upgraded Enterprise Insurance Company Limited’s (“EIC”) national scale financial strength rating to AA+(GH) from AA(GH), with the Outlook accorded as Stable.
|Rated entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|Enterprise Insurance Company Limited||Financial strength||National||AA+(GH)||Stable Outlook|
The rating upgrade is premised on an improvement in earnings, which in turn, facilitated subsequent consolidation of the underwriter’s risk adjusted capitalisation within a healthy range. The business profile, nevertheless, remains credit neutral, with a strong market position counterbalanced by moderate levels of premium diversification.
Over the past two years, EIC’s underwriting performance strengthened on the back of an improvement in claims experience and operational cost efficiencies attributable to strong premium growth. In this respect, the underwriter’s net incurred loss ratio averaged 51% over the past two years (prior two-year aggregate: 56%), while the operating expense ratio for the corresponding period closed comparatively lower (36%) relative to a prior equivalent period cycle (39%), supporting positive underwriting profitability. Accordingly, the entity’s underwriting margin averaged 4% over the past two years (prior two years: -4%), and is projected to measure within the 3 – 7% band over the rating horizon. Building on positive underwriting performance, a healthy flow of investment income (considering an extremely conservative asset allocation) supported solid bottom-line profitability. Against this backdrop, investment income grew by 19% to GHS25m, with the underwriter posting an after-tax profit of GHS22m (FY19: GHS21m). Earnings prospects over the medium term will likely continue to anchor on solid investment income, supported by progressively improving contributions from the underwriting account.
On the strength of healthy earnings generation, coupled with a full profit retention strategy, EIC’s risk adjusted capitalisation is assessed within a healthy range. In this respect, the underwriter’s capital base grew 20% to GHS126m at FY20, while aggregate risk exposures increased concomitantly with business growth, with the GCR capital adequacy ratio (“CAR”) consolidating above the 1.7x mark. From a statutory solvency perspective, EIC’s statutory CAR improved to 408% at FY20 (FY19: 305%) on the back of sound internal capital generation. Furthermore, regulatory compliance with the new minimum capital requirement was achieved through capitalisation of retained earnings, advancing issued and paid-up capital to GHS50m in Q1 FY21. The foregoing feat effectively ended a four-year dividend freeze instituted in FY17, with a conservative dividend distribution of c.14% of after after-tax profits budgeted for the current year. Looking ahead, sound earnings generation and retention could continue underpinning internal capital build, with the GCR CAR expected to measure above 1.7x over the next 12 months.
EIC’s liquidity profile remains very strong, supported by a sizeable asset portfolio which is prudently invested. In this respect, the investment portfolio, which is entirely exposed to liquid instruments advanced 25% to GHS216m at FY20, buttressed by enhanced operational cash flow generation, coupled with reinvestment of interest income. Nevertheless, growth in net technical obligations (mainly net UPR given high premium growth) outpaced the aforesaid progression in the investment portfolio, with the liquidity ratio receding to 2.1x (FY19: 2.3x), while operational cash coverage remained unchanged at 19 months.
The business profile is viewed to be credit neutral, with a strong market position counterbalanced by moderate levels of premium diversification. Anchoring on the aforesaid growth, EIC managed to retain its top spot in the Ghanaian short-term insurance space, commanding respective market and relative market share of c. 11.5% and 3.3x in FY20. Competitive strength stems from a strong brand, extensive distribution networks and entrenched client relations given the insurer’s long-established history in the market. Nevertheless, the premium base reflects increased concentration towards motor risks (a market-wide phenomenon), accounting for a higher 51% and 80% of GWP and NWP in FY20 (FY19: 45% and 77%), respectively. Further limiting premium diversification is the underwriter’s total exposure to the domestic market.
The rating derives support from Enterprise Group Plc, a majority shareholder in EIC given full brand alignment along with evidence of strategic and operational integration.
The Stable Outlook balances expectations of sustained strength in earnings and risk adjusted capitalisation, while factoring in potential downside risks to liquidity given lower interest rates. In this respect, the GCR’s CAR is anticipated to continue measuring above 1.7x, while the liquidity ratio may moderate to around 2x over the next 12 months. Over the rating outlook, GCR anticipates no material changes in the assessment of the entity’s business profile.
Positive rating action may stem from a sustained strengthening in underwriting profitability while liquidity and capitalisation are maintained within strong ranges. Conversely, downward rating pressure may arise should liquidity metrics materially deteriorate below rating sufficient levels.
|Primary analyst||Tichaona Nyakudya||Senior Analyst: Insurance|
|Johannesburg, ZA||TichaonaN@GCRratings.com||+27 11 784 1771|
|Committee chair||Godfrey Chingono||Deputy Sector Head: Insurance|
|Johannesburg, ZA||GodfreyC@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, March 2021|
|GCR Insurance Sector Risk Scores, April 2021|
Enterprise Insurance Company Limited
|Rating class||Review||Rating scale||Rating||Outlook/Watch||Date|
|Claims paying ability||Initial||National||AA-(GH)||Stable||September 2007|
|Financial strength||Last||National||AA(GH)||Stable||June 2020|
Risk score summary
|Rating components & factors||Risk scores|
|Country risk score||3.50|
|Sector risk score||4.25|
|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 rating is based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such rating is an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit rating has been disclosed to the rated entity. The rating was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating. The rated entity 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 2020;
- Four years of comparative audited financial statements to 31 December;
- Unaudited interim results to March 2021;
- Full year budgeted financial statements for 2021;
- Actuarial Valuation Report for 2020;
- Reinsurance cover for 2021; and
- Other relevant documents.