Announcements Insurance Rating Alerts

GCR affirms ICEA LION General Insurance Company’s Kenyan financial strength rating of AA-(KE); Outlook Stable

Rating action

Johannesburg, 09 June 2020 – GCR Ratings (“GCR”) has affirmed ICEA LION General Insurance Company Limited’s (“ICEA LION General”) national scale financial strength rating of AA-(KE); Outlook Stable.

Rated Entity / Issue

Rating class

Rating scale

Rating

Outlook/Watch

ICEA LION General Insurance Company Limited

Financial strength

National

AA-(KE)

Stable Outlook

Rating rationale

The rating of ICEA LION General balances the insurer’s strengths and weaknesses at group level, encompassing ICEA LION General and its 53% owned subsidiary, ICEA LION General Insurance Company of Tanzania (together “the group”). The rating benefits from sound risk adjusted capitalisation and liquidity, as well as intermediate earnings, outbalancing weaknesses in the business profile.

The insurer’s risk adjusted capitalisation has been maintained at strong levels over the review period, supported by a large capital base built over time through healthy profit generation and retention. On a risk adjusted basis, the group evidenced strong capitalisation, with the GCR capital adequacy ratio equating to 1.9x at FY19. Nevertheless, the group’s risk adjusted capitalisation evidences some sensitivity to capital concentration to property investments. GCR has however observed a dilution in capital concentration to real estate property from the most recent peak of 71% in FY16 to 54% in FY19. Accordingly, the rating factors a sustained reduction in capital concentration to property investments over the medium term.

The group’s liquidity profile remains sound, supported by a sizeable investment portfolio and conservative asset allocation. Accordingly, cash and stressed financial assets covered net technical obligations by 1.7x at FY19, while coverage of operational cash requirements equated to 24 months. Liquidity metrics are expected to tolerate short term pressures, with downside risks to operating cash flows likely to be followed by moderation in concomitant liabilities.

Despite exhibiting vulnerable underwriting margins and variable investment income, the group’s bottom-line earnings remained adequate. Earning volatility is attributable to historical swings in operating expenses and more recently in the claims experience, coupled with the group’s exposure to listed equity investments. In this respect, the underwriting margin closed at 1.9% (FY18: -3.5%; FY17: 0.9%), whereas the return on revenue fluctuated between 13% and 29% over the past three years. GCR anticipates increased risk to earnings amid COVID-19 related challenges, representing a key rating input over the outlook horizon.

The rating further takes into account the group’s comparatively weaker business profile. In this regard, the group’s share of covered markets’ gross premiums is approximated at 4% at the close of FY19, with the core entity controlling a market share of 4.5% in the domestic market. GCR noted the recent premium progression registered by the Tanzanian subsidiary, with the rapid scale recovery (following a market-wide redirection of government business to the state insurer in FY18) likely to have a positive impact on the group’s competitiveness over the medium term. The premium base evidenced a good spread at both gross and net levels, with at least three product lines contributing materially to overall GWP and the net risk base.

Outlook statement

The Stable Outlook reflects expectations of sustained capitalisation and liquidity strength, while factoring potential for intermediate earnings and the associated volatility to persist over the outlook horizon. That said, the GCR CAR is likely to float between 1.7x and 2.1x in the next 12 months, while capital concentration to investment property is anticipated to continue moderating over the corresponding period. Furthermore, no material changes are expected from the current business position over the rating horizon.

Rating triggers

An upward rating is not expected over the short term although a sustainable turnaround in underwriting profitability while all other credit protection metrics remain within strong to very strong ranges may be considered positively over the medium term. Conversely, downward rating action may follow should capital concentration to property investments remain elevated relative to expectations, impacting negatively on risk-adjusted capitalisation. Furthermore, the rating is sensitive to increased earnings pressure amid COVID-19 related challenges.

Analytical contacts

Primary analyst

Tichaona Nyakudya

Senior Analyst: Insurance

Johannesburg, ZA

TichaonaN@GCRratings.com

+27 11 784 1771

     

Committee chair

Godfrey Chingono

Deputy Sector Head: Insurance

Johannesburg, ZA

GodfreyC@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, May 2020

GCR Insurance Sector Risk Scores, June 2020

Ratings history

ICEA LION General Insurance Company Limited

Rating class

Review

Rating scale

Rating class

Outlook/Watch

Date

Claims paying ability

Initial

National

A+(KE)

Stable

October 2000

Financial strength

Last

National

AA-(KE)

Stable

October 2019

Risk score summary

Rating Components and Factors

Risk score

 

 

Operating environment

8.25

Country risk score

4.00

Sector risk score

4.25

   

Business profile

(0.50)

Competitive position

(0.25)

Premium diversification

(0.25)

Management and governance

0.00

 

 

Financial profile

2.00

Earnings

0.00

Capitalisation

1.50

Liquidity

0.50

   

Comparative profile

0.00

Group support

0.00

Government support

0.00

Peer analysis

0.00

   

Total Score

9.75

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.

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.

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.

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 party. 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 face-to-face 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 results 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 March 2020;
  • Reinsurance cover for 2020; and
  • Other relevant documents.
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