Announcements Insurance Rating Alerts

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

Rating action

Johannesburg, 17th June 2021 – GCR Ratings (“GCR”) has affirmed East Africa Reinsurance Company Limited’s (“EA Re”) international scale financial strength rating of B, Outlook Stable. At the same time, GCR affirmed EA Re’s national scale financial strength of AA-(KE), Outlook Stable.

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

Rating rationale

EA Re’s ratings balance a very strong and stable financial profile, moderate exposure to relatively weaker operating environments, and an intermediate business position.

Over the review period, EA Re’s capital base continued to advance, underpinned by sound earnings generation and retention. In this respect, the reinsurer posted after tax profits totalling KES2.7bn over the corresponding period, retaining c. 83% in the business, which in turn promoted capital growth to KES5.4bn at the close of FY20 (beginning of FY16: KES3.0bn). This, coupled with moderately limited exposure to insurance and market sensitivities sustained the assessment of the reinsurer’s risk adjusted capitalisation within a very strong range. Resultantly, the GCR capital adequacy ratio (“CAR”) strengthened to 4.5x at FY20 (FY19: 4.1x). Furthermore, statutory CAR for both the short-term and long-term business units measured above the prescribed capital adequacy ratio of 200%, equating to 387% and 207% at FY20 (FY19: 294% and 175%), respectively. Risk adjusted capital strength is expected to be sustained over the rating horizon, with the GCR CAR likely to continue measuring above 4x.

EA Re’s liquidity profile continued to strengthen, underpinned by a growing and conservatively invested asset portfolio. Accordingly, low risk assets (mostly government securities and term deposits) constituted 89% of invested assets at FY20 (FY19: 88%). This facilitated an improvement in the liquidity ratio to 2.3x at FY20 (FY19: 2.0x) while operational cash coverage closed the year at 20 months (FY19: 19 months). Maintenance of a conservative asset allocation stance is expected to continue supporting liquidity metrics within a sound range going forward.

The underwriter’s cross cycle earnings remain healthy, although review year performance evidenced some degree of sensitivity to premium scale reduction attributable to Covid -19 related disruptions. In this regard, the reinsurer’s five-year rolling average underwriting margin equated to 3.0% in FY20 (prior five rolling average: 3.7%). Despite review year net incurred claims and total expenses remained relatively unchanged (FY20: KES3.9bn; FY19: KES3.8bn), the reduction in premium scale narrowed the reinsurer’s scope for underwriting profitability, with the underwriting margin dipping to -0.6%. Nevertheless, investment income remained healthy, averaging KES641m over the past five years (FY20: KES631m), supporting net profitability. Accordingly, the reinsurer’s rolling five-year return on revenue stabilised at 15% in FY20, and is expected to be sustained around the same level over the rating horizon. While a partial recovery in premium scale is anticipated for the current year, the underlying conditions that triggered the recent contraction may still be present, with the underwriting margin projected to close the year within the -/+2% band.

Competitive position is assessed within an intermediate range, with review year primary market and relative market shares of 5.7% and 0.8x (FY19: 6.1%; 0.9x), respectively. The slight moderation in primary market share metrics followed a 14% contraction in the gross premiums base, largely attributable to the combined influences of the Covid -19 pandemic and associated risks, including weak macro-economic performance in covered markets. 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. Furthermore, cedant concentration for the combined establishment is assessed at moderate levels, with the largest and top five cedants accounting for 12% and 35% of premiums in FY20, respectively. Premium diversification across multiple jurisdictions is evident, with c. 35% of FY20 GWP (FY19: 37%) sourced from outside Kenya.

Outlook statement

The Stable Outlook reflects the likelihood 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. The GCR CAR is anticipated to continue trending above 4x, while liquidity metrics are expected to be sustained at strengthened levels. Earnings are forecast to be supported by investment income, with underwriting performance largely dependent upon economic performance of covered countries, and the reinsurer’s ability to penetrate more profitable markets and business segments.

Rating triggers

Upward ratings progression may follow a sustainable improvement in the business profile, coupled with the maintenance of other credit protection metrics within strong ranges. Conversely, an unfavourable earnings trend relative to expectations along with a material reduction in liquidity may warrant negative ratings movement.

Analytical contacts

Primary analyst Tichaona Nyakudya Senior Analyst: Insurance
Johannesburg, ZA TichaonaN@GCRratings.com +27 11 784 1771
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, June 2021
GCR Insurance Sector Risk Scores, April 2021

Ratings history

East Africa Reinsurance Company Limited

Rating class Review Rating scale Rating Outlook Date
Claims paying ability Initial International BB- Stable August 2007
National A+(KE) Stable August 2007
Financial strength Last International B Stable June 2020
National AA-(KE) Stable June 2020

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 3.50
Earnings 0.50
Capitalisation 2.00
Liquidity 1.00
Comparative profile 0.00
Group support 0.00
Government support 0.00
Peer analysis 0.00
Total score 10.25

Glossary

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.
Rating Horizon The rating outlook period
Rating Outlook See GCR Rating Scales, Symbols and Definitions.
Recovery The action or process of regaining possession or control of something lost. To recoup losses.
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.
Release An agreement between the creditor and debtor, in terms of which the creditor release the debtor from its obligations.
Reserve (1) An amount representing actual or potential liabilities kept by an insurer to cover debts to policyholders. (2) An amount allocated for a special purpose. Note that a reserve is usually a liability and not an extra fund. On occasion a reserve may be an asset, such as a reserve for taxes not yet due.
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.
Short Term Current; ordinarily less than one year.
Spread The interest rate that is paid in addition to the reference rate for debt securities.
Statutory Required by or having to do with law or statute.
Term Deposit A savings account held for a fixed term. Also called a time deposit. Generally, there are penalties for early withdrawal.
Underwriter In a general sense, an underwriter is a person or company that assumes financial risk. In corporate analysis an underwriter refers to a financial institution closely involved in the pricing and distribution of a new issue of a security and who accepts the obligation to purchase all securities not sold to outside investors. In insurance, and underwriter evaluates risk and exposures of potential clients
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.
Unearned Premium Reserve The amount shown in the insurance company’s balance sheet which represents the approximate total of the premiums which have not yet been earned as of a specific point in time. Also known as insurance funds.
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.
Rating Horizon The rating outlook period
Rating Outlook See GCR Rating Scales, Symbols and Definitions.
Recovery The action or process of regaining possession or control of something lost. To recoup losses.
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.
Release An agreement between the creditor and debtor, in terms of which the creditor release the debtor from its obligations.
Reserve (1) An amount representing actual or potential liabilities kept by an insurer to cover debts to policyholders. (2) An amount allocated for a special purpose. Note that a reserve is usually a liability and not an extra fund. On occasion a reserve may be an asset, such as a reserve for taxes not yet due.
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.
Short Term Current; ordinarily less than one year.
Spread The interest rate that is paid in addition to the reference rate for debt securities.
Statutory Required by or having to do with law or statute.
Term Deposit A savings account held for a fixed term. Also called a time deposit. Generally, there are penalties for early withdrawal.
Underwriter In a general sense, an underwriter is a person or company that assumes financial risk. In corporate analysis an underwriter refers to a financial institution closely involved in the pricing and distribution of a new issue of a security and who accepts the obligation to purchase all securities not sold to outside investors. In insurance, and underwriter evaluates risk and exposures of potential clients
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.
Unearned Premium Reserve The amount shown in the insurance company’s balance sheet which represents the approximate total of the premiums which have not yet been earned as of a specific point in time. Also known as insurance funds.

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

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 ratings are based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings are an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit ratings have been disclosed to the rated entity. The ratings were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings. The rated entity participated in the rating process via virtual 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 credit ratings included:

  • Audited financial results as at 31 December 2020;
  • Four years of comparative audited financial statements to 31 December;
  • Unaudited interim results to March 2021;
  • Full year budgeted financial statements for 2021;
  • Valuation Reports for 2020;
  • Financial Condition Report for 2020;
  • Retrocession cover notes for 2021; and
  • Other relevant documents.
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