Announcements Insurance Rating Alerts

GCR affirms East Africa Reinsurance Company Limited’s international and national scale financial strength ratings of B and AA-(KE); Outlooks Stable

Rating action

Johannesburg, 24 June 2020 – GCR Ratings (“GCR”) has affirmed East Africa Reinsurance Company Limited’s (“EA Re”) national scale financial strength of AA-(KE), Outlook Stable. Furthermore, EA Re’s international scale financial strength rating has been affirmed at B, Outlook Stable.

Rated Entity / Issue Rating class Rating scale Rating Outlook/Watch
East Africa Reinsurance Company Limited Financial strength National AA-(KE) Stable Outlook
International B Stable Outlook

Rating rationale

The ratings of EA Re are largely supported by a very strong and stable financial profile, more than offsetting an intermediate business profile.

The reinsurer’s capital base sustained an upward growth trend, expanding by 11% to KES5.1bn at FY19, underpinned by sound profit generation and retention. This, coupled with moderately limited exposure to insurance and market risks, supported the assessment of risk-adjusted capitalisation within a very strong range. Accordingly, the GCR capital adequacy ratio “CAR”) remained robust at 4.1x at FY19 and is anticipated to measure at strengthened levels going forward.

With the support from a conservatively invested asset portfolio, which grew 8% to KES7.2bn at FY19, the reinsurer’s liquidity profile remained solid in spite of an increase in net technical obligations. In this regard, the liquidity ratio equated to 2.0x (FY18: 1.9x), while cash and stressed financial assets covered operational cost requirements by 19 months. While note is taken of the recent progression in reinsurance receivables, which is in tandem with gross premium growth, GCR will continue to monitor the effectiveness of the reinsurer’s credit collection policies in suppressing potential liquidity strain that may arise from these exposures.

Earnings are viewed to be sound, supported by healthy investment income and underwriting margins, with the latter exhibiting above average stability. In this respect, the underwriting margin equated to 5% in FY19 (FY18: 4%), tracking the review period average of 4%. Supporting underwriting profitability is the reinsurer’s investment portfolio, which continued to post healthy yields. Nevertheless, the portfolio yielded 9.2% in FY19, translating to 1.3% lower than the prior year return, due to fair value losses on investment property. This, together with the growth in the earned risk base, saw the net return on revenue moderating to 15% in FY19 (FY18: 18%).

Competitive position remained intermediate, with a stable share of total primary market industry cessions of 6.1% in FY19. This is positively viewed given that other top reinsurers competing for similar risks in the local market have mandatory cessions, which are not available to EA Re. Despite EA Re participation in multiple jurisdictions, the significance of premiums written from these markets in the context of the overall size of covered markets is considered to be modest. The product mix reflects a fair level of spread, with material premiums derived from at least three lines of business at both gross and net levels. Cedant concentration for the combined establishment is assessed at moderate levels, with the largest and top five cedants accounting for 10% and 35% in FY19, respectively.

Outlook statement

The Stable Outlook reflects prospects of sustained financial profile strength, coupled with the absence of material changes in the business profile. Consequently, very strong risk adjusted capitalisation will continue to anchor company specific assessment factors, with further support from liquidity and earnings. GCR CAR is anticipated to continue trending above 3x, while liquidity metrics may be sustained at current levels. Earnings are forecast to remain reliant on both underwriting profitability and investment income, although potential exist for the latter to moderate given the uncertain investment environment due to the Covid-19 pandemic.

Rating triggers

Upward ratings progression may follow a sustainable improvement in business profile, coupled with the maintenance of other credit protection metrics within strong ranges. Conversely, negative rating action may follow a material reduction in risk adjusted capitalisation and liquidity, while an unfavourable earnings trend may also warrant negative ratings movement.

Analytical contacts

Primary analyst Tichaona Nyakudya Senior Analyst: Insurance
Johannesburg, ZA TichaonaN@GCRratings.com +27 11 784 1771
Committee chair Matthew Pirnie Group Head of Ratings
Johannesburg, ZA MatthewP@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

East Africa Reinsurance Company Limited

Rating class Review Rating scale Rating class Outlook Date
Claims paying ability Initial National A+(KE) Stable August 2007
International BB- Stable August 2007
Financial strength Last National AA-(KE) Stable November 2019
International B Stable November 2019

Risk score summary

Rating Components & Factors Risk scores
Operating environment 7.50
Country risk score 4.00
Sector risk score 3.50
Business profile (0.75)
Competitive position (0.50)
Premium diversification (0.25)
Management and governance 0.00
Financial profile 3.25
Earnings 0.50
Capitalisation 2.00
Liquidity 0.75
Comparative profile 0.00
Group support 0.00
Government support 0.00
Peer analysis 0.00
Total Score 10.00

Glossary

Premium The price of insurance protection for a specified risk for a specified period of time.
Provision The amount set aside or deducted from operating income to cover expected or identified loan losses.
Rating Horizon The rating outlook period
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.
Retention The net amount of risk the ceding company keeps for its own account.
Risk The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.
Securities Various instruments used in the capital market to raise funds.
Security One of various instruments used in the capital market to raise funds.
Senior A security that has a higher repayment priority than junior securities.
Short Term Current; ordinarily less than one year.
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 is based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such rating is 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 party. The rating 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 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;
  • Unaudited interim results to March 2020;
  • Full year budgeted financial statements for 2020;
  • Valuation Reports for 2019;
  • Financial Condition Report for 2019;
  • Reinsurance cover notes for 2020; and
  • Other relevant documents.
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