Johannesburg, 21 September 2021 – GCR Ratings (“GCR”) has upgraded Standard Insurance Co., INC’s (“Standard Insurance”) national scale financial strength rating to A+(PH) from A(PH), with the Outlook revised to Stable. At the same time, GCR has affirmed Standard Insurance’s international scale financial strength rating 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)||Stable Outlook|
The ratings on Standard Insurance balance the strengths and weaknesses of Echauz Holdings Corporation (“EHC” or “the 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 national scale financial strength rating upgrade follows an improvement in the group’s liquidity profile which is expected to be sustained above historical levels.
The group’s liquidity profile strengthened on the back of an increase in operational cash generation, with a notable contribution attributable to enhanced credit collection. This was further bolstered by a reduction in net technical provisions given review year low claims experience and unearned premium reserve release. Consequently, the group’s liquidity and operational cost coverage ratios substantially increased to close the year at 2.4x and 25 months (FY19: 1.5x and 14 months), respectively. Considering the observed and projected current year top-line growth, potential exists for a build-up in net technical provisions, while premium receivables may increase in line with business growth, prompting a moderation in liquidity metrics. Nevertheless, the group’s liquidity ratio is still projected to measure between 1.7x – 2.0x over the next 12 months, while cash and stressed financial assets coverage of operational cost requirements is expected to continue to register above 12 months over the corresponding period.
Despite review year reduction in both premium scale and investment income, EHC’s earnings strengthened underpinned by a reduction in claims experience and net business acquisition costs due to Covid 19 related restrictions on economic activity. In this regard, net claims incurred declined 26% to PHP494m in FY20, with the associated loss ratio improving to 30% (FY19: 37%; review period average: 36%). Correspondingly, the net commission expense ratio reduced to 5% (FY19: 9%) upon premium scale moderation, with the combined impact underpinning a much firmer underwriting margin of 23% in FY20 (FY19: 12%). This supported an increase in the group’s after-tax profit which peaked at PHP340m in FY20, translating to a higher return on revenue of 21% (FY19: 12%; review period average: 13%), despite a contraction in investment income. While premium income is expected to recover in FY21, as borne out by a strong performance in 1H F21, claims experience suggests a reversion towards historical norms. Accordingly, profitability metrics are likely to register around the FY19 levels, somewhat reversing the improvement registered in FY20. In this respect, management’s ability to sustain key profitability metrics within the lower double-digit region over the rating outlook may be positively considered.
Risk adjusted capitalisation is assessed within a very strong range, supported by healthy profit generation and retention along with well contained levels of aggregate risk exposures. In this regard, EHC’s capital base expanded 7% to PHP3.0bn at FY20, while the scale of combined risk exposures remained limited relative to the capital base, reflecting the group’s overriding participation in low-risk products and conservative asset allocation. Accordingly, the GCR capital adequacy ratio (“GCR CAR”) for the group has remained firmly above 3x over the past five years, improving to 3.9x at FY20 (FY19: 3.6x; FY16: 3.1x). Similarly, statutory solvency for the core entity was very strong at 587% at FY20 (FY19: 566%). Looking ahead, capital strength is expected to be sustained over the rating outlook, underpinned by continued internal capital growth and limited sensitivity to insurance and market risk.
Despite a slight moderation in market share due to weaker than industry performance, the group’s competitive profile is assessed within a moderately strong range, a function of Standard Insurance’s mid-tier market position in the local short-term insurance industry. In this respect, Standard Insurance controlled a lower 3.6% share of total short-term industry GWP (FY19: 3.9%), while its relative strength reduced to 2.0x (FY19: 2.2x) the size of an average player in the market. Nevertheless, Standard Insurance maintained its leadership position in underwriting motor business, the second largest line of business in the local general insurance market. Furthermore, there is potential recovery in market share given the rebound in premium growth in 1H F21, with the GWP base expanding by 14% year-on-year. Note is however taken of heavy reliance on motor risks, reflecting 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. Serving as a partial mitigant to the abovesaid concentrations, the policyholder profile exhibits notable granularity, with the top five policyholders collectively contributing less than 1% to GWP.
The Stable Outlook reflects our expectations of earnings and liquidity normalisation over the next 12 months. In this respect, the underwriting margin and return on revenue are projected to register slightly above 10%, while the liquidity ratio is forecast to float within the 1.7x – 2.0x band. Capital strength is likely to be sustained over the rating outlook, with the GCR CAR expected to measure above 3.5x. No major changes are expected in the business profile.
Upward rating movement may follow a sustained improvement in earnings and/or liquidity. Conversely, downward rating pressure may be prompted by a material reduction in competitive position, or a sustained weakening in earnings.
|Primary analyst||Tichaona Nyakudya||Senior Analyst: Insurance Ratings|
|Johannesburg, ZA||TichaonaN@GCRratings.com||+27 11 784 1771|
|Committee chair||Eyal Shevel||Sector Head: Corporate Ratings|
|Johannesburg, ZA||Shevel@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, August 2021|
|GCR Insurance Sector Risk Scores, April 2021|
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)||Positive Outlook||September 2020|
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 2020;
- Four years of comparative group and company audited financial statements to 31 December
- Full year budgeted company financial statement to 31 December 2021;
- Unaudited company interim results to 30 June 2021;
- Reinsurance cover notes for 2021; and
- Other relevant documents.