Announcements Insurance Rating Alerts

First Assurance Company Limited’s national scale financial strength rating of BBB+(KE) placed on negative ratings watch as credit profile pressures continue from balance sheet risks.

Rating action

Nairobi, 11 August 2021 – GCR Ratings (“GCR”) has affirmed First Assurance Company Limited’s (“First Assurance”) national scale financial strength rating of BBB+(KE) with the rating placed on Negative Ratings Watch

 

Rated Entity / Issue

Rating class

Rating scale

Rating

Outlook/Watch

 

First Assurance Company Limited

Financial strength

National

BBB+(KE),

Ratings watch negative

Rating rationale

First Assurance’s negative rating watch is premised on the execution risks related to disposal of property that may lead to continued elevated exposure to investment property which has been limiting the entity’s solvency and liquidity improvements over the review period. This would be expected to translate to the GCR CAR registering between 1.4x-1.7x, the cash and stressed assets coverage on net technical liabilities registering between 1.0x-1.4x, while all other credit protection metrics are sustained at similar levels.

Liquidity metrics’ moderated, mainly caused by a change in asset allocation from high liquid assets to longer term government securities. This was further impacted by an increase in unearned premium reserves, mainly relating to the medical and motor book portfolio. In this respect, cash and stressed assets coverage on net technical liabilities lowered to 1.1x at FY20 (FY19:1.3x), while the operational cash coverage registered at 8 months (FY19:9 months). Going forward, the liquidity ratio is expected to be sustained above 1.0x, driven by improved receivable collection mechanisms and yields from the government securities.

The insurer’s GCR CAR continued measuring below 1.6x. During the year FY20, underwriting risk exposures increased subduing the increase in capital base. Similarly, the statutory solvency was maintained at similar levels (FY20;125.9%, FY19: 125.2%), meeting the current minimum capital requirements though measuring below the prescribed capital requirements. The entity remains highly exposed to investment property, mainly freehold land, that accounts for about 86% (FY19:87%) of capital. GCR expects solvency metrics to improve in the near-term, underpinned by sale of investment property and further supported in the medium term by sustained earnings.

Earnings registered improvements in underwriting profitability. This mainly emanated from a 76% reduction in group and intergroup recharges, resulting to a 16% reduction in the operating expenses and ultimately, an improvement in the operating expense ratio to 35% in FY20. ( FY19:38%). Furthermore, in the midst of the COVID 19 pandemic, the insurer incurred a favourable claims experience, particularly in the motor book. As such, three-year underwriting margin improved to -8% (FY19: -12%, FY18: -18.3%). Nevertheless, performance at net level was limited by a write off investment in its former subsidiary, First Assurance Company Limited Tanzania (‘‘FAT’’). As part of an exit agreement, the entity re-invested KES 104m in FAT and wrote off without receiving any consideration consequently resulting to the return on revenue moderating to 1.2%(FY19:5.4%). Looking ahead, GCR expects earnings to be sustained within similar bands, mainly supported by investment income.

First Assurance’s business profile is viewed to be intermediate. As such, the insurer commanded a market share of 3.2%(FY19:2.8%) and relative market share of 1.2x(FY19:1.0x). Product diversification remained concentrated on the medical and motor business while about 90% of the business being sourced through brokers and independent agents, in line with industry norms. Policyholder granularity remained high. In the near-term, the entity’s business profile is expected to be sustained at similar levels, reinforced by the existing intermediary relationships.

The rating further derives upliftment from implied parental support from its ultimate parent, Absa Group Limited given evidence of system integration and cost management measures pertaining to group related expenses.

Outlook statement

The negative ratings watch balances the current limited entity’s solvency and liquidity with the executions plans in place to improve the two metrics over two to three months. GCR anticipates that disposal of the investment property will improve the GCR CAR and liquidity ratio to about 1.7x-1.9x and 1.3x respectively. Failure to execute the plans being implemented could lead to solvency and liquidity registering at current levels, ultimately leading to a downgrade.

Rating triggers

The rating may be downgraded in three months should the current execution plans fail to materialize. Negative rating action may also ensue from a material reduction in earnings which resulting from underwriting pressures. An upgrade is unlikely over the near-term. Nevertheless, improvements in risk adjusted capitalization and liquidity will be viewed positively as the other metrics are sustained at similar levels.

Analytical contacts

Primary analyst

David Mungai

Analyst: Insurance Ratings

Nairobi, KE

DavidM@GCRratings.com

+254 73 218 8669

Committee chair

Matthew Pirnie

Group Head of Ratings

Johannesburg, ZA

MatthewP@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, July 2021

GCR Insurance Sector Risk Scores, April 2021

Ratings history

First Assurance Company limited

Rating class

Review

Rating scale

Rating

Outlook/Watch

Date

Claims paying ability

Financial strength

Initial

National

BBB+(KE)

Stable Outlook

September 2010

Last

National

BBB+(KE)

Negative Outlook

September 2020

Risk Score Summary

Rating Components and Factors

Risk score

 

Operating environment

8.25

Country risk score

4.00

Sector risk score

4.25

   

Business profile

(1.25)

Competitive position

(0.50)

Premium diversification

(0.75)

Management and governance

0.00

 

Financial profile

0.25

Earnings

(0.50)

Capitalisation

1.25

Liquidity

(0.50)

   

Comparative profile

0.50

Group support

0.50

Government support

0.00

Peer analysis

0.00

   

Total Score

7.75

Glossary

Premium

The price of insurance protection for a specified risk for a specified period of time.

Primary Market

The part of the capital markets that deals with the issuance of new securities.

Rating Outlook

See GCR Rating Scales, Symbols and Definitions.

Risk

The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.

Technical Liabilities

The sum of Net UPR and Net OCR IBNR.

Underwriting Margin

Measures efficiency of underwriting and expense management processes.

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 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 entities and other reliable third parties to accord the credit rating included:

  • Audited financial statements as at 31 December 2020;
  • Four years of comparative audited financial statements to 31 December;
  • Full year budgeted financial statements for 2021;
  • Unaudited interim results to 30 May 2021; and
  • Other relevant documents.
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