Johannesburg, 03 July 2017 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to AIG Kenya Insurance Company Limited of AA-(KE), with the outlook accorded as Stable. The rating is valid until July 2018.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to AIG Kenya Insurance Company Limited (“AIG Kenya”) based on the following key criteria:
AIG Kenya reflects strong risk adjusted capitalisation, supported by limited market risk exposures and well contained insurance risks. The international solvency margin equated to a high 85% at FY16 (FY15: 77%), and is expected to remain at high levels over the rating horizon. GCR expects the insurer to remain well capitalised under the incoming risk based capital regime, underpinned by robust internal capital generation and supported by the capital management strategy in place, with the insurer expecting to maintain capital adequacy requirement (“CAR”) coverage above the minimum requirement of 2.0x (FY16: 2.9x; FY15: 2.7x).
Key liquidity measures remained robust, as evidenced by cash coverage of net technical liabilities at a very strong 1.7x (FY15: 1.4x), and a claims cash cover ratio of 25 months (FY15: 20 months). Healthy operational cash flow generation and conservative asset allocation have facilitated this key rating strength, which GCR expects to continue over the rating horizon. Furthermore, asset quality may strengthen further, with the insurer expecting to dispose its investment property over the short term (with funds to be placed in liquid assets). As such, the investment portfolio would comprise 100% liquid assets (including government securities).
Earnings capacity is viewed to be moderately strong, supported by healthy underwriting margins. In this respect, the five year underwriting margin equated to 7% (FY16: 7%; FY15: 2%). This varies from the insurer’s strong underwriting margins (12%) registered at the start of the review period. The reduction in underwriting profitability over the last few years was mainly a function of unfavourable claims experience (particularly in the motor portfolio), with the insurer subsequently implementing corrective measures to address this. Consequently, management expects underwriting profitability to register well above recent historical levels, further supported by changes in the reinsurance programme (facilitating a high level of commission recoveries) and a relatively stable net loss ratio.
The insurer formulates its reinsurance strategy in conjunction with its parent company, with a high degree of reinsurance support underpinning underwriting capacity. The majority of cessions are placed within the group, with the balance spread across fairly well rated local reinsurers. The reinsurance programme was amended to reduce the insurer’s retention, as well as introduce a stop loss treaty (which would effectively limit AIG Kenya’s net incurred loss ratio in a highly adverse scenario).
AIG Kenya’s business profile is viewed to be strong, supported by well diversified earnings, and a moderately strong competitive position. The insurer’s market share equated to a lower 3% in FY16, from the relatively stable 4% registered over the bulk of the review period. This was largely as a function of stricter underwriting disciplines resulting in premium contractions for two consecutive years. GCR expects the insurer to regain market share over the medium term, supported by the insurer’s medium term growth strategy, and underpinned by AIG Kenya’s strong brand recognition, technical expertise and enhanced capacity.
The insurer’s rating derives upliftment from support from American International Group Inc. (“the group”), to which it is considered to be strategically important. This view is supported by the high levels of strategic, branding and operational alignment, moderate success in supporting group objectives, and comparability of capital and risk management frameworks.
The rating currently matches the national scale ceiling applicable to entities operating within the Kenyan insurance industry. As a result, upward movement of the rating may follow an assessment of country and industry risk factors. Conversely, the rating may be downgraded if the insurer’s risk adjusted capital adequacy deteriorates below expectations, and/or in the event of a sustained weakening in underwriting or operating performance. Material downward pressure on the ratings of the ultimate parent may also warrant rating action.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (June 2009)|
|Claims paying ability: A(KE)|
|Last rating (August 2016)|
|Claims paying ability: AA-(KE)|
|Sector Head: Insurance Ratings|
|Sector Head: Insurance Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2016
Kenya Short Term Insurance Industry Bulletins, 2014-2016
RATING LIMITATIONS AND DISCLAIMERS
ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
AIG Kenya Insurance Company Limited participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit rating has been disclosed to AIG Kenya Insurance Company Limited with no contestation of the rating.
The information received from AIG Kenya Insurance Company Limited and other reliable third parties to accord the credit rating included:
- Audited financial results to 31 December 2016
- Unaudited year to date results to 30 April 2017
- Budgeted financial results to December 2017
- Reinsurance cover notes 2017
- Actuarial valuation report for 2016
- Financial Condition Report for 2016
- Statutory Returns 2016, and
- Other relevant documents.
The rating above was solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the rating.
|Capacity||The largest amount of insurance available from a company. In a broader sense, it can refer to the largest amount of insurance available in the marketplace.|
|Capital||The sum of money that is invested to generate proceeds.|
|Capitalisation||The provision of capital for a company, or the conversion of income or assets into capital.|
|Capital Adequacy||A measure of the adequacy of an entity’s capital resources in relation to its risks.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Claim||A request for payment of a loss, which may come under the terms of an insurance contract.|
|Credit Rating||An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.|
|Distribution Channel||The method utilised by the insurance company to sell its products to policyholders.|
|Enterprise Risk Management||ERM refers to an integrated or holistic approach to managing risk across an organisation, using clearly articulated frameworks and processes controlled from board level.|
|Exposure||Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For an insurer, its exposure may also relate to the risk related to policies issued.|
|International Scale Rating (“ISR”)||International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.|
|Intermediary||A third party in the sale and administration of insurance products.|
|Interest||Money paid for the use of money.|
|Investment Portfolio||A collection of investments held by an individual investor or financial institution.|
|Liquidity||The speed at which assets can be converted to cash. The ability of an insurer to convert its assets into cash to pay claims if necessary. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.|
|Market Risk||Volatility in the value of a security/asset due to movements in share prices, interest rates, currencies, commodities or wider economic factors.|
|National Scale Rating (“NSR”)||National Scale credit ratings express risk in relative rank order, which is to say they are ordinal measures of credit risk and are not predictive of a specific frequency of default or loss.|
|Policyholder||The person in actual possession of an insurance policy.|
|Portfolio||All of the insurer’s in-force policies and outstanding losses, with respect to described segments of its business.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Rating Horizon||The rating outlook period|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Risk Management||Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.|
|Short Term||Current; ordinarily less than one year.|
|Solvency||With regard to insurers, having sufficient assets (capital, surplus, reserves) and being able to satisfy financial requirements (investments, annual reports, examinations) to be eligible to transact insurance business and meet liabilities.|
|Statutory||Required by or having to do with law or statute.|
|Subordinated Debt||Debt that in the event of a default is repaid only after senior obligations have been repaid. It is higher risk than senior debt.|
|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.|
|Underwriting Margin||Measures efficiency of underwriting and expense management processes.|
For a more detailed glossary of terms/acronyms used as per GCR insurance glossary, please click here
GCR affirms AIG Kenya Insurance Company Limited’s rating of AA-(KE); Outlook Stable.