|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 is supported by a strong financial profile, which offsets 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 48% of gross premiums, technical support as well as operational and brand alignment.
Risk adjusted capitalisation has strengthened over the past three years, supported by strong internal capital generation and very limited exposures to market and insurance risks, together with well contained dividend distributions. As such, the GCR capital adequacy ratio (“CAR”) has registered well above 3x over the last three years, with the regulatory CAR registering at 3x at FY19 (FY18: 2.7x). Risk adjusted capitalisation is expected to be maintained at strong levels, despite a potential moderation in earnings, with management targeting a regulatory CAR of 2x.
Liquidity has been maintained within a very strong range, supported by conservative asset allocation and cash preservation strategies. Accordingly, liquidity coverage of net technical liabilities was maintained at 3.9x at FY19, while operational cash coverage registered at a lower 52.3 months (FY18: 78.5 months). Liquidity is expected to be maintained within a similar range, given a consistent asset allocation strategy.
AIG Kenya has registered sound earnings over the past three years following a change in the reinsurance structure, resulting in high net commission recoveries. As such, the three-year average underwriting margin equated to 16% (FY19: -0.2%; FY18: 30%; FY17: 18%), with the review year underwriting loss stemming from increased expense loadings from the group, as well as non-recurring severance packages following changes in key management. Earnings are supported by sound investment income, with realised investment income amounting to KES421m (FY18: KES327m), resulting in a return on revenue of 23% in FY19 (FY18: 47%). Earnings are expected to be maintained within a similar range, albeit noting potential for volatility due to an elevated cost base, which is viewed to compound uncertainties from the COVID-19 pandemic. In this respect, the insurer’s ability to manage earnings risk while implementing more stringent risk selection is a key rating consideration.
The insurer’s limited business profile impacts the rating negatively. AIG Kenya has maintained a market share and relative market share of 3% and 1x respectively over the review period. The business mix is viewed to be somewhat diversified with three lines of business contributing materially to revenue, partially offset by concentration to the primary market. The insurer’s market share is expected to moderate slightly to below 3%, due to a portfolio cleaning exercise, albeit with similar premium reductions expected among peers over the medium term, given market wide efforts to address portfolio quality.
GCR expects capitalisation and liquidity buffers to be sufficient to absorb potential earnings moderation stemming from reduced premium scale and the impact of the COVID-19 pandemic. In this regard, we expect both GCR CAR and coverage of net technical provisions to be sustained above 3x, while building in a base case stress on earnings over the outlook horizon. The business profile is expected to remain comparatively limited over the short to medium term, with some dilution in market share expected during the portfolio cleaning phase, while the business mix is not expected to change materially.
The national scale financial strength rating is at its ceiling. Conversely, downward rating action would result from failure to execute the portfolio management strategy, which could lead to a weakened earnings assessment.
|Primary analyst||Godfrey Chingono||Deputy Sector Head: Insurance|
|Johannesburg, ZA||GodfreyC@GCRratings.com||+27 11 784 1771|
|Secondary Analyst||Linda Matavire||Insurance Associate|
|Johannesburg, ZA||LindaM@GCRratings.com||+27 11 784 17701|
|Committee chair||Susan Hawthorne||Senior Analyst: Insurance|
|Johannesburg, ZA||SusanH@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, May 2020|
|GCR Insurance Sector Risk Scores, June 2020|
AIG Kenya Insurance Company Limited
|Rating class||Review||Rating scale||Rating class||Outlook/Watch||Date|
|Claims paying ability||Initial||National||A(KE)||Stable Outlook||June 2009|
|Financial Strength||Last||National||AAA(KE)||Stable Outlook||September 2019|
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.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|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.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Senior||A security that has a higher repayment priority than junior securities.|
|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 was based solely on the merits of rated entity, security or financial instrument being rated; and c.) such rating was 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 above 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 face-to-face 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 rated entity and other reliable third parties to accord the credit rating included:
- Audited financial results as at 31 December 2019;
- Four years of comparative audited financial statements to 31 December
- Full year budgeted financial statements for 2020;
- Unaudited interim results to 31 March 2020;
- Reinsurance cover notes for 2020; and
- Other relevant documents.