Johannesburg, 10th June 2020 – 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 upgrade of EIC’s rating follows a sustained strengthening in risk adjusted capitalisation and liquidity, which are viewed to absorb stressed case scenario risks arising from the COVID-19 pandemic. The business profile is, however, considered to be credit neutral, with the insurer’s strong market position counterbalanced by moderate levels of premium diversification.
Risk adjusted capitalisation strengthened on the back of sustained growth in retained earnings. This, combined with relatively contained levels of underwriting and counterparty risk exposures, resulted in the GCR’s capital adequacy ratio (“CAR”) trending above 1.5x over the last two years. From a statutory solvency standpoint, EIC’s CAR significantly improved to 207% at FY19 (FY18: 164%) underpinned by sound internal capital generation. Looking ahead, the insurer’s ability to maintain risk adjusted capitalisation within a strengthened range over the medium term could be credit positive.
On the strength of a sizeable investment portfolio, which is prudently invested, EIC’s liquidity position was sustained within a very strong band over the last two years. In this respect, the investment portfolio, which is entirely exposed to liquid instruments grew 14% to GHS172m at FY19, largely propped up by reinvestment of interest income. Consequently, the liquid asset pool covered net technical obligations by 2.3x at FY19 (FY18: 2.2x), while coverage of operational cash requirements equated to 19 months (FY18: 17 months). That said, GCR’s liquidity assessment takes cognisance of downside risks from the moderation in interest rates to combat the COVID-19 pandemic effected recently, which may repress liquidity metrics below current levels, albeit likely to remain rating adequate, given cash preservation strategies by shareholders.
Over the review period, EIC’s earnings registered within an intermediate range, reflecting sound bottom-line earnings and somewhat market-aligned, though volatile performance at underwriting level. Bottom-line earnings historically support on strong investment income, with a significant improvement in interest income increasing the return on revenue to 19% in FY19 (FY18: 13%; review period average: 16%). In spite of the recent recovery in underwriting performance (five year underwriting margin: 2%; prior five year average: 1,4%), supported by a moderation in the operating expense ratio, current year premium growth targets are likely to be adversely impacted by the COVID-19 pandemic, with the underwriting margin forecast to trend within very tight ranges over the next 12 months.
The business profile is viewed to be credit neutral, with a strong market position counterbalanced by moderate levels of premium diversification. In this respect, the underwriter was ranked the second largest player in the local short-term insurance space in FY19, commanding a market share of approximately 11%. Nevertheless, the premium base, while reflecting a good spread at gross level, remained concentrated around motor risks on a net basis (a market-wide phenomenon), constituting 77% of NWP in FY19 (FY18: 76%). Further limiting premium diversification is the underwriter’s total exposure to the domestic market given that all premiums are sourced locally.
The rating further derives support from Enterprise Group Limited (“EGL”), a majority shareholder in EIC given full brand alignment along with evidence of strategic and operational integration.
The Stable Outlook reflects expectations of sustained strength in risk adjusted capitalisation, while factoring in potential earnings pressure and downside risks to liquidity which may be occasioned by lower interest rates and less than expected premium volumes due to the adverse impact of the COVID-19 pandemic. In this respect, the GCR’s CAR is anticipated to continue floating above 1.5x, while the liquidity and operational cash coverage ratios may be maintained above 2x and 12 months respectively, over the next 12 months. Competitive strength and intermediate premium diversification qualities are likely to be preserved going forward.
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 earnings volatility in the underwriting result persist.
|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, May 2020|
|GCR Insurance Sector Risk Scores, June 2020|
Enterprise Insurance Company Limited
|Rating class||Review||Rating scale||Rating class||Outlook/Watch||Date|
|Claims paying ability||Initial||National||AA-(GH)||Stable||September 2007|
|Financial strength||Last||National||AA-(GH)||Stable||September 2019|
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 party. 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 2019;
- Four years of comparative audited financial statements to 31 December;
- Unaudited interim results to March 2020;
- Full year budgeted financial statements for 2020;
- Financial Condition Report for 2019;
- Reinsurance cover for 2020; and
- Other relevant documents.