Nairobi, 25 May 2021 – GCR Ratings (“GCR”) has affirmed AIG Kenya Insurance Company Limited’s (“AIG Kenya”) national scale financial strength rating of AAA(KE), with the outlook accorded as Stable.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|AIG Kenya Insurance Company Limited||Financial strength||National||AAA(KE),||Stable Outlook|
AIG Kenya’s national scale financial strength rating reflects a strong financial profile bolstered by very strong risk adjusted capitalisation and liquidity, as well as sound earnings on the gross book, offsetting its limited business profile. Furthermore, the rating derives uplift from implied parental support from AIG MEA Limited Group (“the group”), reflected by strong integration with the group, mainly through the cession of about 65% of gross premiums, technical support as well as operational and brand alignment.
Risk adjusted capitalisation represents a key rating strength. The entity exhibited improvements in capital adequacy over the review period driven by a healthy internal capital generation. The FY20 GCR Capital Adequacy Ratio (“CAR”) was further bolstered by a reduction in counterparty risk and underwriting risk exposures amid the COVID 19 pandemic, resulting in an improvement to 3.3x. The statutory CAR also registered improvements to 333% (FY19: 310%). Going forward, risk adjusted capitalisation is expected to remain above 3x, with potential for ongoing support from better earnings management and limited counterparty risk.
Liquidity is a significant credit positive, underpinned by a very conservative asset allocation. As such, cash and stressed assets coverage on technical liabilities registered at 2.7x (FY19 3.7x), with the moderation caused by working capital absorption from the settlement of reinsurance balances. This resulted in the liquidation of short-term government securities worth KES 1.1 billion. However, a less material reduction was registered in the operational cash coverage, which stood at 46 months (FY19: 50 months). Liquidity metrics are expected to be sustained at similar levels, given management’s decision to maintain the current asset allocation and contained net technical provisions.
Earnings remain moderately strong over the review period, underpinned by high commission income mainly arising from group reinsurance arrangements, following the change in reinsurance strategy during FY17. In this respect, the entity recorded a 3-year underwriting margin of 10.0% (FY19: 15.9%). Although FY20 underwriting margin performance was slightly past break-even performance (FY19: -1.6%) due to an elevated operating expense ratio, somewhat moderating the earnings assessment, GCR notes the high quality of the book with gross underwriting margins having been maintained around 30% over the review period (FY20: 29.8%, FY19: 33.0%). The return on revenue remained within similar levels (FY20: 34.6%; FY19: 37.4%) balancing a reduction in investment income, on account of liquidation of financial assets, and unrealised gains on government securities. GCR expects earnings performance to be supported by the high-quality gross book over the medium term, potentially underpinning an improvement in net underwriting margins.
The insurer’s business profile is limited. With the entity’s gross premiums significantly impacted by an ongoing portfolio cleaning exercise and different sector sensitivities to the Covid-19 pandemic , market share and relative market share reduced to 2.3% (FY19: 2.8%) and 0.9x (FY19: 1.0x) respectively. Product diversification was sustained at similar levels, with three lines of business contributing significantly at gross level. We expect the business profile to withstand pressures on market share over the medium term, given premium growth and business retention initiatives.
The Stable Outlook reflects expectations that the credit profile of AIG Kenya will be maintained, with a GCR CAR registering above 3x in the near-term. Cash and stressed assets coverage on technical liabilities is likely to continue measuring between 2.5x-2.9x, while asset allocation remains weighted towards short-term assets and government bonds. Underwriting profitability at net level is expected to improve drawing strength from the quality gross book (mainly dependant on current reinsurance strategy) and is unlikely to have a negative impact on liquidity and capitalisation over the short term. While market share is under pressure, we expect relative market share to be sustained at 0.9x while market share could range between 2.1% – 2.5%. In this respect, no material changes to the business profile are expected over the outlook horizon.
The national scale financial strength rating is at its ceiling. Negative rating action may ensue if earnings reduce below expected levels or the entity displays weaker competitive position, registering a relative market share of below 0.8x.
|Primary analyst||David Mungai||Analyst: Insurance Ratings|
|Nairobi, KE||DavidM@GCRratings.com||+254 73 218 8669|
|Committee chair||Godfrey Chingono||Deputy Sector Head: Insurance Ratings|
|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
AIG Kenya Insurance Company Limited
|Rating class||Review||Rating scale||Rating||Outlook/Watch||Date|
|Financial Strength||Initial||National||A(KE)||Stable||June 2009|
Risk Score Summary
|Rating Components and Factors||Risk score|
|Country risk score||4.00|
|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.|
|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 March 2021; and
- Other relevant documents.