Johannesburg, 25 September 2018 — Global Credit Ratings has today affirmed the national scale financial strength rating assigned to ICEA LION Life Assurance Company Limited of AA-(KE), with the outlook accorded as Stable. The rating is valid until September 2019.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to ICEA LION Life Assurance Company Limited (“ICEA LION Life”) based on the following key factors:
ICEA LION Life’s risk adjusted capitalisation continued to measure at very strong levels, representing a key rating strength. High capital accumulation sustained a large capital base, which amounted to KES10.2bn at FY17 (FY16: KES9.5bn; FY15: KES7.0bn). Notwithstanding the recent dilution in statutory solvency to 352% in FY17 (FY16: 441%), attributable to an increase in actuarial liabilities due to the growth in business volumes, risk adjusted capitalisation is expected to measure at a very strong level over the rating horizon. Furthermore, reinsurance counterparties display a sound credit profile, while deductibles are set at conservative levels relative to FY17 capital.
Liquidity is viewed to be strong, which is expected to be sustained going forward. Liquidity strength is underpinned by the large asset base relative to net liabilities, with the total investment coverage of policyholder liabilities registering at 1.2x at FY17 (FY16: 1.3x), while liquid assets (including government securities) coverage of policyholders’ obligations remained unchanged at 0.9x.
Earnings capacity has evidenced a high level of volatility, owing to significant fluctuations in reserving, stemming from regulatory changes and atypical premium expansion in FY17. In this respect, the operating margin slid into negative territory, equating to -9% in FY17 (FY16: 71%; FY15: 8%) following a substantial increase in actuarial liabilities (KES6.3bn) allied to the recent growth in the annuity business, along with the increase in the regulatory risk margin, which adversely impacted on the insurer’s total benefit ratio. Furthermore, the ROaE reflected similar sensitivities, reducing to 9% in FY17 (FY16: 37%; FY15: 7%). The absence of a further upward revision in regulatory risk margins in FY18, coupled with prospects of normalised growth in the annuity business is expected to see a rebound in earnings capacity (although potentially susceptible to some degree of volatility over the medium term).
The business profile is viewed to be sound, supported by a strong competitive position, albeit exposed to increased revenue concentration to the individual life business, in particular, the annuity business. Nevertheless, GCR considers the granularity and diversity of the underlying policyholders as concentration risk mitigants. Looking ahead, the business profile is likely to remain solid, underpinned by an established brand and strong corporate relations.
The rating currently matches the national scale ceiling applicable to insurers operating within the Kenyan insurance industry. As a result, upward movement of the rating may follow an assessment of country and industry risk factors. Conversely, downward pressure on the rating could develop from a protracted weakening in capital adequacy and/or deterioration in liquidity.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (October 2000)|
|Financial strength: AA(KE)|
|Last rating (September 2017)|
|Financial strength: AA-(KE)|
|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 Long Term Insurance companies, updated May 2018
ICEA LION Life rating reports, 2012-2017
Insurance Company of East Africa Limited (“ICEA”) rating reports, 2000-2011
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 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; and c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
ICEA LION Life Assurance 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 has been disclosed to ICEA LION Life Assurance Company Limited.
The information received from ICEA LION Life Assurance Company Limited and other reliable third parties to accord the credit rating included:
- Audited financial results as at 31 December 2017
- Four years of comparative financial statements
- Unaudited year to date results to 31 July 2018
- Budgeted financial statements for 2018
- Financial Condition Report 2017
- The current year reinsurance cover notes
- Actuarial valuation 2017
- Other related documents
The rating above was solicited by, or on behalf of the rated entity, and therefore, GCR has been compensated for the provision of the rating.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY
|Balance Sheet||Also known as a Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.|
|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.|
|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.|
|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.|
|Dividend||The portion of a company’s after-tax earnings that is distributed to shareholders.|
|Experience||A term used to describe the relationship, usually expressed as a percent or ratio, of premiums to claims for a plan, coverage, or benefits for a stated time period.|
|Financial Flexibility||The company’s ability to access additional sources of capital funding.|
|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.|
|Investment Income||The income generated by a company’s portfolio of investments.|
|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.|
|Loss||The happening of the event for which insurance pays.|
|Market Risk||Volatility in the value of a security/asset due to movements in share prices, interest rates, currencies, commodities or wider economic factors.|
|Net Profit||Trading/operating profits after deducting the expenses detailed in the profit and loss account such as interest, tax, depreciation, auditors’ fees and directors’ fees.|
|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.|
|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.|
|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.|
|Stop Loss||Any provision in a policy designed to cut off an insurer’s losses at a given point. In effect, a stop loss agreement guarantees the loss ratio of the insurer.|
|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.|
For a detailed glossary of terms please click here.
GCR affirms ICEA LION Life Assurance Company Limited’s rating of AA-(KE); Outlook Stable.