Johannesburg, 31 Aug 2015 — 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 August 2016.
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 exposure and well contained insurance risks. GCR expects risk adjusted capital adequacy to remain within a strong range, underpinned by a solid risk based capital management strategy in place, as well as robust capital generation.
Liquidity metrics have been measured at very strong levels, with cash coverage of net technical liabilities averaging 1.8x over the review period. Similarly the claims cash coverage ratio equated to a strong 26 months in FY14 (FY13: 33 months). Going forward, liquidity metrics are expected to remain at strong levels, supported by the conservative investment approach. AIG Kenya’s asset quality is viewed to be high, with the majority (82%) of invested assets held in cash instruments. GCR expects asset quality to remain at high levels, given management’s asset liability matching philosophy. In this regard, the insurer expects to dispose of investment property and equity holdings over the medium term.
The insurer has registered sound underwriting profitability over the review period, albeit with thinner margins recorded over the last two years. This has largely been a function of unfavourable claims experience (particularly in motor) over the last two years, with the 2-year average net incurred loss ratio equating to a higher 52%, compared to the prior 2-year average of 44%. Management expects the net incurred loss ratio to improve over the medium term, underpinned by strict underwriting disciplines and claims management, while cost curtailment is expected to reduce operational inefficiencies. In GCR’s view, the ability of the insurer to return to strong underwriting margins represents a key rating consideration.
AIG Kenya’s business profile is viewed to be strong, supported by enhanced earnings diversification (with five lines of business each contributing more than 10% of gross premiums) and a stable competitive position (recording an average 4% of industry gross premiums over the review period). Going forward, GCR expects the insurer to maintain its competitive positioning, underpinned by strong brand recognition, technical expertise and enhanced capacity. Furthermore, earnings diversification could continue to improve, supported by the insurer’s strategic focus on retail business (of which the insurer accounts for a relatively high 10% of industry retail business, representing 51% of the insurer’s gross premiums).
The insurer’s rating derives upliftment from support from American International Group (“AIG”) Inc. (“the Group”), as it is considered to be strategically important. This view is supported by the high levels of strategic, branding and operational alignment, success in supporting Group objectives, and comparability of capital and risk management frameworks. Reinsurance arrangements are formulated with the Group, with the high degree of reinsurance support underpinning underwriting capacity. Furthermore, the insurer benefits from business from key multinational clients sourced through the Group.
The rating may be upgraded if AIG Kenya’s underwriting profitability returns to very strong levels. This would need to be supported by risk adjusted capitalisation and liquidity metrics remaining at, or exceeding, current levels, and the insurer maintaining its competitive positioning. 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 2014)|
|Claims paying ability: AA-(KE)|
|Primary Analyst||Secondary Analyst|
|Yvonne Masiku||Rodwell Chevure|
|Credit Analyst||Junior Credit Analyst|
|(011) 784-1771||(011) 784-1771|
|Sector Head: Insurance Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2015
East Africa Insurance Statistics Bulletin 2009-2014
RATING LIMITATIONS AND DISCLAIMERS
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GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY
|Accounting||A process of recording, summarising, and allocating all items of income and expense of the company and analysing, verifying and reporting the results.|
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|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.|
|Capital Base||The issued capital of a company, plus reserves and retained profits.|
|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.|
|Credit Rating Agency||An entity that provides credit rating services.|
|Creditworthiness||An assessment of a debtor’s ability to meet debt obligations.|
|Diversification||Spreading risk by constructing a portfolio that contains different investments, whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.|
|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.|
|Interest||Money paid for the use of money.|
|Liquidity||The speed at which assets can be converted to cash.|
|Liquidity Risk||The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.|
|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”)||The national scale provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.|
|Policy||The legal document issued by the company to the policyholder, which outlines the conditions and terms of the insurance.|
|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|
|Rating Outlook||A rating outlook indicates the potential direction of a rated entity’s rating over the medium term, typically one to two years. An outlook may be defined as: ‘Stable’ (nothing to suggest that the rating will change), ‘Positive’ (the rating symbol may be raised), ‘Negative’ (the rating symbol may be lowered) or ‘Evolving’ (the rating symbol may be raised or lowered).|
|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.|
|Securities||Various instruments used in the capital market to raise funds.|
|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.|
For a more detailed glossary of terms/acronyms used as per GCR insurance glossary, please click here
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 2014
- Unaudited year to date results to 30 June 2015
- Budgeted financial results to December 2015
- Reinsurance cover notes 2015
- Actuarial valuation report for 2014
- Financial Condition Report for 2014
- Statutory Returns 2014, 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.