Announcements Insurance Rating Alerts

GCR affirms Kenya Reinsurance Corporation Limited’s International and national scale financial strength rating of B and AA+(KE), respectively, Outlooks Stable.

Rating action

Nairobi, 8th July 2021 – GCR Ratings (“GCR”) has affirmed Kenya Reinsurance Corporation Limited’s
(“Kenya Re”) international scale financial strength rating of B. Concurrently, GCR affirmed Kenya Re’s national scale financial strength rating of AA+(KE). Both ratings are on Stable Outlook.

Rated entity / Issue Rating class Rating scale Rating Outlook/Watch
Kenya Reinsurance Corporation Limited Financial strength International B Stable Outlook
National AA+(KE) Stable Outlook

Rating rationale

Kenya Re’s ratings balance a very strong financial profile and moderately sound business position. Financial profile strength is anchored by strong risk adjusted capitalisation and liquidity, partially offset by comparatively weak earnings.

Risk adjusted capitalisation represents a key rating strength, reflected by a strong capital base built on consistent internal capital generation and adequate dividend distribution. In this respect, the capital base grew to KES34bn at FY20 compared to KES22bn reported at the beginning of the review period. Accordingly, both the GCR capital adequacy ratio (“CAR”) and the statutory CAR was sustained above 2.5x. The entity’s ability to maintain capital buffers and absorb aggregate risk exposures is expected to be sustained over the outlook horizon.

Liquidity is viewed to be credit positive, with a slight improvement driven by increased investment in liquid assets whilst net technical reserves remained at similar levels, notwithstanding the change in valuation methodology. Resultantly, cash and stressed financial assets coverage of net technical liabilities registered at 1.9x at FY20 (FY19: 1.7x), while coverage of operational cost requirements remained relatively unchanged at 16 months (FY19:17months). Looking ahead, liquidity and operational cash coverage ratios are expected to remain above 1.5x and 12 months respectively, underpinned by fairly prudent asset allocation and aggressive collection of receivables.

Earnings at underwriting level remains a key weakness, mainly triggered by an elevated claims experience (resulting from a substantial increase in claims reserves across major lines of business) from the core operating entity’s general and life business amid the Covid 19 pandemic, coupled with an increase in commission expenses. In this respect, the general business sustained a 5-year underwriting margin of -6%, while the equivalent period operating margin for the life business equated to 35%. While cognisance is taken of an improvement in profitability metrics in FY20, this mainly emanated from a significant release of unearned premium reserves following the change in the valuation methodology. The change was prompted by efforts to comply with the new regulation on reserving requirements and is not expected to recur. Bottomline earnings are supported by investment income (FY20: KES3.8bn), with the return on revenue averaging 21% over the review period. Going forward, underwriting performance pressure from the general business is expected to persist over the rating horizon.

The business profile is viewed to be moderately sound, supported by a strong market position in Kenya and a wider geographic presence relative to local peers. The entity’s products are well diversified, with 5 lines of business considered material contributors to the premium base. The reinsurer’s share of domestic market cessions slightly contracted to about 16.7% (FY19:17.4%), mainly due to stiff competition from other reinsurers and increased retention capacity amongst primary insurers. Over the medium term, competitive position and premium diversification are expected to be sustained within similar levels, supported by the mandatory cessions in the domestic market and entrenched relationships both in the domestic and international markets.

Outlook statement

The Stable Outlook reflects our expectations that financial profile will remain very strong, underpinned by strong risk adjusted capitalisation and liquidity, while earnings pressure at underwriting level may continue to be balanced by investment income. No significant change in the business profile is expected.

Rating triggers

Positive rating movement is unlikely over the medium term. Nevertheless, sustained demonstration of well contained claims experience from both the general and life businesses impacting favourably on underwriting profitability, while other credit protection metrics are sustained at similar levels, will be viewed positively. Consequently, negative rating action may ensue if earnings deteriorate beyond expected levels. Furthermore, a significant and negative change in asset allocation, prompting a moderation in liquidity ratio to below 1.5x may also trigger downward ratings movement.

Analytical contacts

Primary analyst David Mungai Analyst: Insurance Ratings
Nairobi, KE DavidM@GCRratings.com +254 73 218 8669
Committee chair Tichaona Nyakudya Senior Analyst: Insurance Ratings
Johannesburg, ZA TichaonaN@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, June 2021
GCR Insurance Sector Risk Scores, April 2021

Ratings history

Kenya Reinsurance Corporation Limited

Rating class Review Rating scale Rating class Outlook Date
Claims paying ability Initial International BB+ Stable September 2009
National AA(KE) Stable September 2009
Financial strength Last International B Stable July 2020
National AA+(KE) Stable July 2020

Risk score summary

Rating components and factors Risk scores
Operating environment 8.75
Country risk score 4.75
Sector risk score 4.00
Business profile 0.25
Competitive position 0.00
Premium diversification 0.25
Management and governance 0.00
Financial profile 2.00
Earnings (0.50)
Capitalisation 2.00
Liquidity 0.50
Comparative profile 0.00
Group support 0.00
Government support 0.00
Peer analysis 0.00
Total Score 11.00

Glossary

Balance Sheet Also known as 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.
Capital The sum of money that is invested to generate proceeds.
Cash Funds that can be readily spent or used to meet current obligations.
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.
Debt An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.
Diversification Spreading risk by constructing a portfolio that contains different exposures 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 a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding. In insurance, it refers to an individual or company’s vulnerability to various risks
Income Money received, especially on a regular basis, for work or through investments.
Interest Scheduled payments made to a creditor in return for the use of borrowed money. The size of the payments will be determined by the interest rate, the amount borrowed or principal and the duration of the loan.
Issuer The party indebted or the person making repayments for its borrowings.
Leverage With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.
Liquidity The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. 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.
Long Term Rating See GCR Rating Scales, Symbols and Definitions.
Margin A term whose meaning depends on the context. In the widest sense, it means the difference between two values.
Market An assessment of the property value, with the value being compared to similar properties in the area.
Maturity The length of time between the issue of a bond or other security and the date on which it becomes payable in full.
Rating Outlook See GCR Rating Scales, Symbols and Definitions.
Risk The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.
Short Term Rating See GCR Rating Scales, Symbols and Definitions.
Short Term Current; ordinarily less than one year.

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 ratings are based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings are an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit ratings have been disclosed to the rated entity. The ratings were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings. 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 entity and other reliable third parties to accord the credit ratings included:

  • Draft financial statements as at 31 December 2020;
  • Four years of comparative audited financial statements to 31 December.
  • Full year budgeted financial statements for 2021.
  • Unaudited interim results to 31 May 2021.
  • Retrocession cover notes for 2021; and
  • Other relevant documents.
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