Announcements

GCR affirms Cannon Assurance Limited’s rating of BBB+(KE); outlook Stable

Johannesburg, 31 July 2014 — Global Credit Ratings (“GCR”) has today affirmed the national scale claims paying ability rating assigned to Cannon Assurance Limited (“Cannon”) of BBB+(KE); with the outlook accorded as Stable. The rating(s) are vaild until 06/2015.

SUMMARY RATING RATIONALE
Global Credit Ratings has accorded the above credit rating(s) on Cannon Assurance Limited based on the following key criteria:

Cannon was licensed as a Kenyan life assurer in 1974, and underwrites the full spectrum of short term lines and also participates in the life assurance arena. In February 2014, the insurer successfully concluded a corporate transaction with South Africa based MMI Holdings (“MMI”), which saw MMI acquire a majority stake in the business. Considering the calibre of this entity (US$3.8bn market capitalisation on the Johannesburg Stock Exchange as at 4 July 2014) and its broad pr esence in a number of other Southern African territories, this transaction may serve to enhance the insurer’s corporate profile and provide impetus to strengthen its position in the domestic market. However, progress in this regard remains subject to the operationalisation of strategic objectives and the bedding down of group structures.

The rating takes cognisance of the insurer’s standing as an established 2nd tier player in the domestic insurance arena, albeit its competitive position has been constrained of late by a muted growth trajectory. A high degree of profit retention continues to underpin sound capital accumulation, which in turn is supportive of healthy, a bove industry average key solvency metrics. In anticipation of well-paced premium growth, solvency is forecast to remain robust in F14. This notwithstanding, a high degree of capital risk prevails amidst a very aggressive investment stance adopted, with illiquid property investments and unlisted equities representing a sizeable 89% of non-life shareholders interest at FYE13. Resultantly, key liquidity metrics continue to track somewhat below prudential levels. Over the medium term, the insurer intends to gradually de-risk the investment portfolio (by means of select investment property disposals).

Note is taken of the poor underwriting track record displayed, with non-life underwriting losses posted in 4 of the last 5 years under review. As such, earnings remain significantly underpinned by unrealised investment gains. Positively, life operations continue to contribute positively to overall earnings, although F13 saw excess income over outgo recede to a nominal level. Further, risk to revenue remains elevated in light of a persistent high reliance on motor (at 64% of NWP in F13), which was loss making on an underwriting line in F13.

An upward adjustment remains subject to a) an improved market penetration (aided by profitable premium growth and the bedding down of operational structures following the recently concluded corporate transaction); b) the attainment of sustained underwriting profits and c) a de-risking of the investment portfolio towards a more balanced approach (thus supporting enhanced liquidity metrics and reducing capital risk). Conversely, downward rating pressure could develop on the back of a notable deterioration in the quality of invested assets, resulting in increased solvency and liquidity strain and/or a further escalation in underwriting losses rela tive to historic norms.

For a detailed glossary of terms utilised in this announcement please click here.

NATIONAL SCALE RATINGS HISTORY
Initial rating (July/2009)
Claims paying ability: BBB+(KE)
Outlook: Positive

Last rating (July/2013)
Claims paying ability: BBB+(KE)
Outlook: Stable

ANALYTICAL CONTACTS
Primary Analyst
Benjamin Schmidt
Senior Credit Analyst
+27 11 784 1771 schmidt@globalratings.net

Committee Chairperson
Marc Chadwick
Sector Head: Insurance
+27 11 784 1771 chadwick@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Insurance Companies (July 2013).
Cannon Assurance Limited rating reports 2009-2013.

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/RATING-SCALES-DEFINITIONS. 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.

Cannon Assurance 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/s has been disclosed to Cannon Assurance Limited with no contestation of the rating.

The information received from Cannon Assurance Limited and other reliable third parties to accord the credit rating included the audited annual financial statements for F13 (plus four years of comparative numbers), latest internal and/or external report to management, full year F14 detailed budgeted financial statements, reinsurance cover notes for 2014, the actuarial valuation statement for 2013 and most recent year-to-date management accounts to 31 March 2014. In addition, information specific to the rated entity and/or industry was also received.

The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.

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