Announcements

GCR affirms East Africa Reinsurance Company Limited’s rating of A+(KE); Outlook Stable

Johannesburg, 31 July 2014— Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to East Africa Reinsurance Company Limited (“EA Re”) of A+(KE); with the outlook accorded as Stable. Furthermore, Global Credit Ratings has affirmed the international scale rating assigned to East Africa Reinsurance Company Limited of BB-; with the outlook accorded as Stable. The rating(s) are valid until 06/2015.

SUMMARY RATING RATIONALE

Global Credit Ratings has accorded the above credit rating(s) on East Africa Reinsurance Company Limited based on the following key criteria:

EA Re commenced operations in October 1994. The company generates around 50% of its business in Kenya, although its international portfolio continues to grow. The reinsurer is privately held ,with the largest shareholders being First Chartered Securities Limited (25%), ICEA Lion Life Assurance Company Limited (25%), Kenindia Assurance Company Limited (16%) and GIC of India (14.75%), collectively representing 80.75%.

Underpinned by a high level of profit retention, EA Re continues to exhibit an adequate level of relative capitalisation. As such, risk based capitalisation equated to a healthy 2x cover in F13, which continues to plot notably above management’s internal minimum benchmark of 1.5x. For F14, risk adjusted solvency coverage is forecast at 1.75x, a level which is viewed to support relative capital strength. International solvency tracks at a level commensurate with the current rating, albeit a gradual decline in recent years is noted. The life fund covered actuarial liabilities by a solid 3x at FYE13 (as per independent actuarial assessment). Nevertheless, in absolute terms EA Re’s capital base remains relatively subdued. Coupled with mandatory cessions enjoyed by some of its major competitors in the domestic non-life market, this sees the reinsurer assume follow positions on most arrangements.

In the absence of meaningful commission receipts (amidst high levels of risk retention), relative acquisition costs remain elevated by regional standards. Consequently and despite relative claims stability, underwriting margins have trended at thin levels over the review period and are expected to remain curtailed over the medium term. As such, earnings continue to be notably underpinned by investment income.

The conservative investment stance applied is supportive of a strong level of liquidity, whilst no undue banking counterparty concentration is evidenced. Whilst key liquidity metrics are forecast to remain sound, the impending purchase of a sizeable investment property (to be funded exclusively from internal reserves) may give rise to some liquidity easing below robust historic norms.

Cognisance is taken of on-going efforts to diversify the premium base (foreign market premiums: 50% of GWP in F13). Nonetheless, a heightened degree of business procurement risk prevails, given that a high 57% of non-life GWP in F13 was sourced by the reinsurer’s three largest brokers (albeit this is somewhat mitigated by longstanding relationships with most underlying cedants). Net retentions per risk and event are contained at acceptable levels relative to capital, whilst most retrocession counterparties reflect adequate intermediate credit ratings. Given that the bulk of EA Re’s assets are vested locally, the international scale rating is constrained by Kenya’s relatively low sovereign rating of B+ (S&P).

An upward adjustment of the rating remains subject to an improved market acceptance (underpinning greater scale efficiencies), a sustained strengthening in underwriting profitability, as well as an adherence to prudent solvency management protocols. Downward rating pressure could develop on the back of the adoption of a notably more aggressive investment stance and/or a sustained weak operating performance, driving increased pressure on key solvency and liquidity metrics.

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

NATIONAL SCALE RATINGS HISTORY INTERNATIONAL SCALE RATINGS HISTORY
Initial rating (Aug/2007) Initial rating (Aug/2007)
Claims paying ability: A+(KE) Claims paying ability: BB-
Outlook: Stable Outlook: Stable
Last rating (June/2013) Last rating (June/2013)
Claims paying ability: A+(KE) Claims paying ability: BB-
Outlook: Stable 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).
East Africa Reinsurance Company Limited rating reports 2007- 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.

East Africa Reinsurance Company 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 East Africa Reinsurance Company Limited with no contestation of the rating.

The information received from Regent Insurance Botswana (Pty) 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,
the actuarial valuation statement for 2013, retrocession cover notes for 2014, 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.

GCR affirms East Africa Reinsurance Company Limited’s rating of A+(KE); Outlook Stable

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