Johannesburg, 04 July 2018 — 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 B+, with the outlook accorded as Stable. The ratings are valid until June 2019.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to East Africa Reinsurance Company Limited (“EA Re” or “the reinsurer”) based on the following key criteria:
EA Re’s risk adjusted capitalisation is viewed to be very strong, supported by a sizeable capital base catering for the quantum of insurance and market risk exposure. The international solvency margin for the short term business is projected to register around 101% at FY18 (FY17: 98%; FY16: 82%), supported by strong internal capital generation. GCR expects the reinsurer to remain well capitalised under the incoming risk based capital regime, supported by sound internal capital generation and internal capital targets, with the reinsurer expecting to maintain capital adequacy requirement (“CAR”) coverage above the minimum requirement of 2.0x (FY17: 2.6x).
Liquidity is assessed at strong levels, supported by a conservative asset allocation mix. As such, liquid assets (including government securities) coverage of net technical liabilities equated to 1.5x in FY17 (FY16: 1.6x), while liquid assets (including government securities) covered average monthly claims by 11 months (FY16: 13 months). Liquidity metrics are likely to measure at a similar level over the rating horizon.
The recent improvement in underwriting profitability coupled with a large quantum of investment income underpinned the assessment of earnings capacity within a moderately strong range. In this respect, the underwriting margin equated to 3% in FY17 (FY16: 1%), buoyed by the reduction in the loss ratio to 57% (FY16: 63%), offsetting the increase in business acquisition costs. Furthermore, investment income cumulatively amounted to a higher KES486m in FY17 (FY16: 455m). Going forward, earnings capacity is likely to remain within a moderately strong range, underpinned by healthy investment income and modest improvements in underwriting profitability. Retrocession counterparties demonstrate a sound level of aggregated credit strength, whilst maximum deductibles are viewed to be limited to conservative levels, registering at less than 2% of FY17 capital.
EA Re’s competitive position remained relatively modest compared to other regional and international players operating within the region. Nevertheless, its market share in the domestic short term reinsurance business equated to a higher 18.7% in FY17 (FY16:16.5%) subsequent to a 30% increase in premium volume. This is positively viewed given that other top reinsures competing for similar risks in the local market have mandatory cessions which are not available to EA Re.
The international scale rating is impacted by Kenya’s sovereign rating, with the bulk of the reinsurer’s assets domiciled locally.
Upward rating movement could arise over the medium term if EA Re evidenced enhanced credit protection metrics, strengthened underwriting performance and/or business profile. Conversely, risk-adjusted capitalisation falling below a level considered supportive of the current rating, or an unfavourable earnings trend, could put negative pressure on the rating. Furthermore, a significant weakening in liquidity would also be viewed unfavourably. The international scale rating is sensitive to changes in the Kenyan sovereign rating going forward.
|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 2017)||Last rating (June 2017)|
|Claims paying ability: A+(KE)||Claims paying ability: B+|
|Outlook: Stable||Outlook: Negative|
|Primary Analyst||Committee Chairperson|
|Tichaona Nyakudya||Yvonne Mujuru|
|Credit Analyst||Sector Head: Insurance Ratings|
|(011) 784 – 1771||(011) 784 – 1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated May 2018
Criteria for Rating Long Term Insurance Companies, updated May 2018
East Africa Reinsurance Company Limited rating reports, 2007-2017
Kenya Short Term Insurance Industry Bulletins, 2014-2017
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 process was 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:
- The 2017 audited annual financial statements
- 4 years of comparative audited numbers
- Unaudited interim results to 31 March 2018
- Budgeted financial statements for 2018
- Financial condition report for 2017
- Current year retrocession cover notes
- Other related documents.
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.
|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.|
|Credit Rating||An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.|
|Distribution Channel||The method utilised by the insurance company to sell its products to policyholders.|
|Enterprise Risk Management||ERM refers to an integrated or holistic approach to managing risk across an organisation, using clearly articulated frameworks and processes controlled from board level.|
|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 (“ISR”)||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.|
|Intermediary||A third party in the sale and administration of insurance products.|
|Interest||Money paid for the use of money.|
|Investment Portfolio||A collection of investments held by an individual investor or financial institution.|
|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.|
|National Scale Rating (“NSR”)||National Scale credit ratings express risk in relative rank order, which is to say they are ordinal measures of credit risk and are not predictive of a specific frequency of default or loss.|
|Policyholder||The person in actual possession of an insurance policy.|
|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|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Risk Management||Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.|
|Short Term||Current; ordinarily less than one year.|
|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.|
|Statutory||Required by or having to do with law or statute.|
|Subordinated Debt||Debt that in the event of a default is repaid only after senior obligations have been repaid. It is higher risk than senior debt.|
|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.|
For a more detailed glossary of terms, please click here.
GCR affirms East Africa Reinsurance Company Limited’s rating of A+(KE); Outlook Stable.