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|
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.
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.
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.
|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|
Kenya Reinsurance Corporation Limited
|Rating class||Review||Rating scale||Rating class||Outlook||Date|
|Claims paying ability||Initial||International||BB+||Stable||September 2009|
|Financial strength||Last||International||B||Stable||July 2020|
Risk score summary
|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.