Announcements

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

Johannesburg, 12 July 2016 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to East Africa Reinsurance Company Limited of A+(KE), with the outlook accorded as Stable. Furthermore, Global Credit Ratings has affirmed the international scale claims paying ability rating assigned to East Africa Reinsurance Company Limited of BB-, with the outlook accorded as Negative. The ratings are valid until June 2017.

SUMMARY RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit ratings to East Africa Reinsurance Company Limited (“EA Re”) based on the following key criteria:

EA Re reflects moderately strong risk adjusted capitalisation, supported by a sizeable capital base catering for the quantum of insurance and market risk exposures. The reinsurer’s international solvency margin equated to a higher 82% at FYE15 (FYE14: 70%). Going forward, risk adjusted capital adequacy is likely to remain within a moderately strong range, supported by sound capital growth.

The reinsurer’s liquidity remained strong, underpinned by sound operating cash flows. In this regard, cash coverage of net technical liabilities equated to 1.2x, while claims cash cover was recorded at a strong 19 months at FYE15. Liquidity metrics are likely to continue to remain at a strong level over the rating horizon, supported by the reinsurer’s asset allocation strategy.

Sound earnings capacity is largely a function of strong investment income supporting thin underwriting profitability. In this respect, the five year aggregate underwriting margin equates to 1% (FY15: -1%; FY14: 3%). Going forward, earnings capacity is expected to be supported by the large quantum of investment returns (which is a function of the sizeable investment portfolio).

The reinsurer reflects a moderately high level of diversification across geographies, and lines of business. In this respect, the local market represented 50% of total gross premiums in FY15, with the balance spread across other international markets (Africa: 33%, Asia: 16%). Property and medical risks contributed a combined 64% of NWP in FY15. Going forward, EA Re expects to continue to focus on growth and diversification.

EA Re’s competitive position remained relatively modest compared to other regional and international players operating within the region. Nonetheless, GCR considers the reinsurer’s regional franchise and reputation as good and well-established. EA Re’s retrocession counterparties demonstrate sound credit strength, whilst maximum deductibles are viewed to be limited to conservative levels, registering at less than 2% of FYE15 capital. The international scale rating is impacted by the negative outlook on Kenya’s sovereign rating, with the bulk of the reinsurer’s assets domiciled locally.

Upward rating movement could arise over the longer term if EA Re is able to maintain strong risk-adjusted capitalisation and strengthen underwriting performance while growing its business profile. Risk-adjusted capitalisation falling below a level considered supportive of its current ratings or an unfavourable earnings trend, could put negative pressure on the ratings. Further, a significant weakening in liquidity would also be viewed unfavourably.

NATIONAL SCALE RATINGS HISTORY   INTERNATIONAL SCALE RATINGS HISTORY
     
Initial rating (August 2007)   Initial rating (August 2007)
Claims paying ability: A+(KE)   Claims paying ability: BB-
Outlook: Stable   Outlook: Stable
     
Last rating (June 2015)   Last rating (June 2015)
Claims paying ability: A+(KE)   Claims paying ability: BB-
Outlook: Stable   Outlook: Stable
     

ANALYTICAL CONTACTS

Primary Analyst   Committee Chairperson
Rodwell Chevure   Marc Chadwick
Credit Analyst   Sector Head: Insurance Ratings
(011) 784-1771   (011) 784-1771
rodwellc@globalratings.net   chadwick@globalratings.net
     

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Insurance Companies, updated July 2015

EA Re rating reports, 2007-2015

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. 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 ratings were influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; c.) such ratings were 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 ratings have been disclosed to East Africa Reinsurance Company Limited with no contestation of the ratings.

The information received from East Africa Reinsurance Company Limited and other reliable third parties to accord the credit ratings included;

  • Audited financial results as per 31 December 2015
  • 4 years of comparative numbers
  • Unaudited interim results as per 31 March 2016
  • Budgeted financial statements for 2016
  • Actuarial valuation statement for 2015
  • Financial Condition Report 2015
  • The current year reinsurance/retrocession cover notes
  • Other non-public statistical information

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.

GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY

Assets A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.
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.
Capital Base The issued capital of a company, plus reserves and retained profits.
Cash Funds that can be readily spent or used to meet current obligations.
Cash Flow The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.
Claim A request for payment of a loss, which may come under the terms of an insurance contract.
Coverage The scope of the protection provided under a contract of insurance.
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.
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.
International Solvency Margin Measures the ability to cover current year’s written premiums using shareholder’s funds.
Intermediary A third party in the sale and administration of insurance products.
Investment Income The income generated by a company’s portfolio of investments.
Investment Portfolio A collection of investments held by an individual investor or financial institution.
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.
Market Risk Volatility in the value of a security/asset due to movements in share prices, interest rates, currencies, commodities or wider economic factors.
Portfolio All of the insurer’s in-force policies and outstanding losses, with respect to described segments of its business.
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.
Retrocession The transaction whereby a reinsurer cedes to another reinsurer all or part of the reinsurance it has previously assumed.
Risk The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.
Solvency With regard to insurers, having sufficient assets (capital, surplus, reserves) and being able to satisfy financial requirements (investments, annual reports, examinations) to be eligible to transact insurance business and meet liabilities.
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.
Underwriting Margin Measures efficiency of underwriting and expense management processes.
Claim A request for payment of a loss, which may come under the terms of an insurance contract.
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.

For a detailed glossary please click here

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

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