Announcements Insurance Rating Alerts

GCR affirms First Assurance Company Limited’s national scale financial strength rating of BBB+(KE); Outlook Negative

Rating action

Nairobi, 23 September 2020 – GCR Ratings (“GCR”) has affirmed First Assurance Company Limited’s (“First Assurance”) national scale financial strength rating of BBB+(KE), with the Outlook accorded as Negative

Rated Entity / Issue Rating class Rating scale Rating Outlook/Watch
First Assurance Company Limited Financial strength National BBB+(KE) Negative Outlook

Rating rationale

First Assurance’s national scale financial strength rating balances moderately strong risk adjusted capitalisation, with intermediate earnings and liquidity and a limited business profile.

Risk adjusted capitalisation stabilised within a moderately strong range, supported by the recent turnaround in both underwriting and net profitability. As such, the GCR capital adequacy ratio (“CAR”) for First Assurance was sustained at 1.4x at FY19, while the statutory CAR registered an improvement to 127% (FY18: 111%) following the transfer of the life business to a peer subsidiary within the group. Going forward, risk adjusted capitalisation could be assessed at similar levels, should the recent turnaround in profitability be sustained and contribute to capital growth, considering potential risks emanating from the COVID-19 pandemic.

First Assurance registered a turnaround in earnings in FY19, underpinned by an improvement in claims experience and a lower operating cost base. In this respect, the net claims ratio lowered to 58% (FY18: 74%), largely driven by a reduction in motor claims. Lower operating expenses were reduced by transferring the life business to Absa life Assurance Limited during the review year. Accordingly, the underwriting deficit significantly narrowed to KES16m in FY19 (FY18: KES527m deficit), while healthy investment income boosted the net result to close the year at a profit after tax of KES142m (FY18: KES218m loss). While note is taken of the recent improvement in earnings, which continued into FY20 based the latest management accounts, the underwriter’s ability to sustain the current earnings trend may be positively viewed.

Liquidity was maintained at an intermediate level, supported by conservative asset allocation. In this respect, cash and stressed financial assets coverage of net technical obligations stabilised at 1.3x at FY19, while coverage of operational cost requirements was sustained at 9 months. Liquidity metrics are expected to measure at similar levels going forward.

The rating is negatively impacted by the insurer’s limited business profile. In this regard, First Assurance has maintained an intermediate competitive position with the market share registering at around 2% for the general business. The premium base is somewhat diversified, with two lines of business contributing materially to the gross premium base. In addition, the underwriter’s revenue source is geographically concentrated, given that all premiums are derived from the primary market. Looking ahead, competitive position is expected to be maintained within the same range, supported by entrenched market relationships with intermediaries and policyholders.

Kenya Insurance Public Credit Rating

Outlook statement

The Negative Outlook reflects the rating’s sensitivity to sustained earnings pressure, potentially impacting on risk adjusted capitalisation. While potential exist for the current earnings trend to be sustained over rating outlook, GCR expects the underwriting margin to range between 1% to -5% at the close of F20. At net level, GCR expects net profitability to be impacted by a contraction in investment income due to low yields from government securities, with the return on revenue projected to measure around 5%. Risk adjusted capitalisation is anticipated to remain within the moderately strong range, despite prospects of an improvement in the GCR CAR to around 1,6x at F20.

Rating triggers

Reversion to a Stable Outlook may follow a sustained improvement in both earnings and risk adjusted capitalisation. Conversely, the rating could be downgraded should earnings measure below expectations. Furthermore, the rating could be revised downwards should the GCR CAR continue to measure below 1.9x within the next 6 months.

Analytical contacts

Primary analyst David Mburu Analyst: Insurance Ratings
Nairobi, KE DavidM@GCRatings.com +254 20 367 3618
Secondary analyst Tichaona Nyakudya Senior Analyst: Insurance Ratings
Johannesburg, ZA TichaonaN@GCRratings.com +27 11 784 1771
Committee chair Matthew Pirnie Group Head of Ratings
Johannesburg, ZA MatthewP@GCRrratings.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, July 2020

Ratings history

First Assurance Company Limited
Rating class Review Rating scale Rating class Outlook Date
Claims paying ability Initial National BBB+(KE) Stable September 2010
Financial strength Last National BBB+(KE) Negative October 2019

Kenya Insurance | Public Credit Rating

Risk score summary

Rating Components & Factors Risk score
Operating environment 8.25
Country risk score 4.00
Sector risk score 4.25
Business profile (1.25)
Competitive position (0.50)
Premium diversification (0.75)
Management and governance 0.00
Financial profile 0.50
Earnings (0.50)
Capitalisation 1.50
Liquidity (0.50)
Comparative profile 0.00
Group support 0.00
Government support 0.00
Peer analysis 0.00
Total score 7.50
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.
The practice whereby one party, called the Reinsurer, in consideration of a premium paid to him agrees to indemnify
Reinsurance 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.

Kenya Insurance |Public Credit Rating

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 entity. 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 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 entities and other reliable third parties to accord the credit rating included:

  • Audited financial statements as at 31 December 2019;
  • Four years of comparative audited financial statements to 31 December
  • Full year budgeted financial statements for 2020.
  • Unaudited interim results to 31 July 2020.
  • Reinsurance cover for 2020; and
  • Other relevant documents.
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