Johannesburg, 5 June 2017 — Global Credit Ratings has today affirmed the national scale financial strength rating assigned to CIC Life Assurance Limited of A+(KE), with the outlook accorded as Negative. The rating is valid until May 2018.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to CIC Life Assurance Limited (“CIC Life”) based on the following key criteria:
The negative outlook reflects the potential for negative rating action over the rating horizon, should earnings capacity and risk adjusted capitalisation continue to trend within lower ranges. In this regard, CIC Life’s earnings trajectory has weakened over the review period, with the three year average operating margin equating to 6% between FY14 and FY16, compared to in excess of 10% at the start of the review period. Furthermore, GCR views capital adequacy to have moderated in recent years, having been impacted by a reduction in earnings and higher relative dividend distributions. Going forward, risk adjusted capitalisation is expected to continue to trend within a more limited range, in view of anticipated short to medium term growth targets. Accordingly, the ability of the insurer to achieve enhanced cost efficiencies in the lower yielding investment environment, contributing towards strengthened levels of capital accumulation, is expected to be a key rating consideration over the rating horizon.
Growth in investment assets has lagged the increase in reserves in recent years, with investment coverage of policyholder and investment liabilities following a reducing trend, and registering at 1.5x at FY16 (FY15: 1.7x). Cash coverage of policyholder liabilities has nevertheless remained adequate, at around 1x, with liquidity metrics expected to trend within a similar range over the outlook horizon. Note is, however, taken of the balance sheet risk stemming from elevated banking counterparty exposure to a related party.
Despite a softening in market share, the insurer continues to operate within the upper tier of the Kenyan life insurance market, being the sixth largest player in revenue terms. Going forward, GCR expects the insurer to maintain its relative position within the market, underpinned by its established brand and scope for further penetration and cross selling into the cooperative segment.
Notwithstanding the relatively limited diversification from a product perspective (with group credit representing more than 60% of insurance premiums), the rating considers the fairly contained product risk associated with the underlying offerings. Growth into the more profitable individual life space is expected to enhance the overall policyholder benefit profile and diversification levels over the medium to longer term, although note is taken of the degree of execution risk associated with the expansion strategy.
Reinsurance counterparties reflect a strong aggregate level of credit quality, with maximum per risk and event deductibles equating to conservative levels, at less than 1% of capital.
Positive rating action is unlikely in the near term, given the weakening in key credit assessment metrics. Negative rating action is likely to be taken in the absence of a strengthening in earnings capacity that supports enhanced levels of risk adjusted capital adequacy.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (May 2013)|
|Financial strength: A+(KE)|
|Last rating (May 2016)|
|Financial strength: A+(KE)|
|Primary Analyst||Secondary analyst|
|Susan Hawthorne||Godfrey Chingono|
|Senior Credit Analyst||Credit Analyst|
|(011) 784 – 1771||(011) 784 – 1771|
|Sector Head: Insurance Ratings|
|(011) 784 – 1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Long Term Insurance Companies, updated July 2016
CIC Life rating reports, 2013-2016
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/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.
CIC Life 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 has been disclosed to CIC Life Assurance Limited with no contestation of the rating.
The information received from CIC Life Assurance Limited and other reliable third parties to accord the credit rating included:
- The audited annual financial statements to 31 December 2016
- 4 years of comparative financial statements to 31 December
- Unaudited management accounts to 31 March 2017
- Budgeted financial statements to 31 December 2017
- 2017 reinsurance programme summary
- Financial Condition Report at 31 December 2016
- Draft actuarial valuation report as at 31 December 2016
- Other related 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.
|Assets||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|Balance Sheet||Also known as a Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.|
|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.|
|Deductible||The portion of an insured loss to be borne by the insured before he is entitled to recovery from the insurer.|
|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.|
|Dividend||The portion of a company’s after-tax earnings that is distributed to shareholders.|
|Execution Risk||The risk that a company’s business plans will not be successful when they are put into action.|
|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 LC||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.|
|Liabilities||All financial claims, debts or potential losses incurred by an individual or an organisation.|
|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.|
|Operating Margin||Measures the efficiency of profit generation from investments and underwriting.|
|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.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Rating Horizon||The rating outlook period|
|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.|
|Reserve||An amount representing actual or potential liabilities kept by an insurer to cover debts to policyholders.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Yield||Percentage return on an investment or security, usually calculated at an annual rate.|
For a detailed glossary of terms, please click here
GCR affirms CIC Life Assurance Limited’s rating at A+(KE); Outlook Negative.