Announcements Insurance Rating Alerts

GCR affirms Kenya Reinsurance Corporation Limited’s national scale financial strength rating of AA+(KE)

Rating action

Johannesburg, 07 July 2020 – GCR Ratings (“GCR”) has affirmed Kenya Reinsurance Corporation Limited’s
(“Kenya Re”) national scale financial strength rating of AA+(KE), with a Stable Outlook. Furthermore, Kenya Re’s international scale financial strength rating has been downgraded to B, from B+ on country risks revisions, with a Stable Outlook.

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

Rating rationale

The national scale financial strength rating of Kenya Re reflects consistently very strong risk adjusted capitalisation and healthy liquidity, although compressed by earnings weakness. Accordingly, the entity demonstrated a strong financial profile, while business profile remained at intermediate levels, with small and risky presence in foreign markets diluting entrenched domestic market position. Furthermore, the international scale financial strength rating was lowered to reflect higher operating risk in jurisdictions where gross premiums are derived, notably Kenya and India which together accounted for 75% of gross premiums (FY18: 70%). For more details on country risk scores, please visit: https://gcrratings.com/announcements/gcr-lowers-16-country-risk-scores-as-global-challenges-mount/.

Capitalisation was assessed within a very strong range, albeit with unrealised property revaluation gains supporting strong capital growth of 13% to USD315m in FY19 (FY18: USD275m). As such, the GCR capital adequacy ratio (“CAR”) was maintained around 3.0x, reflecting a sizeable capital base relative to the growing quantum of insurance, market and credit risks. Over the rating horizon, risk adjusted capitalisation is expected to remain within a similar band, considering higher capitalisation requirements across jurisdictions of presence, compared to achieved business growth.

Liquidity also represented a credit strength, stimulated by receivable collections following implementations of cash and carry regulations in different markets. Therefore, cash and equivalents grew by 20% to KES7.4bn at FY19 (FY18: KES6.2bn), while majority of investment portfolio was placed in low risk and liquid assets (FY19: 55%; FY18: 53% of portfolio). Consequently, cash and stressed financial assets coverage of net technical liabilities and operational cash coverage registered at healthy levels of 2.1x and 16 months respectively (FY18: 1.9x and 16months). However, operating cash requirements parallelly grew by 18%, driven by claims pressures which could further restrain liquidity metrics and assessment over the medium term, amidst economic challenges hindering cash collections.

Offsetting the above strengths, earnings moderated to intermediate levels, driven by worsening claims experience in the short-term business, with its net incurred loss ratio registering a review period peak of 77% in FY19 (FY18: 66%; five-year average: 62%). Therefore, the group’s underwriting margin deepened to -15% (FY18: -7%), constraining relatively strong and stable investment income at KES3.7bn in FY19 (FY18: KES3.4bn; five-year average: KES3.3bn). Note was taken of net profits strongly increasing to KES3.9bn (FY18: KES1.8bn), on the back of unrealised investment income from properties’ revaluation, which we consider to be a less stable source of revenue. Given the persistence of claims pressures despite prudent underwriting policies, and likely pressure on investment income, the reinsurer’s earning potential will represent a key rating consideration over the medium term.

The business profile of the reinsurer was unchanged within intermediate levels, characterised by a strong presence in Kenya diluted by limited competitiveness in foreign markets. In this respect, the reinsurer maintained a stable 18% (FY18: 17%) share of total cessions in Kenya in FY19, representing 47% of a well-diversified portfolio (FY18: 49%) across four lines of business. Meanwhile outside Kenya, the entity was limited to small participations in multiple markets, with higher earning risks endorsed along business growth in select markets further moderating component assessment. Nevertheless, GCR recognises small presences in other jurisdictions as potential sources of diversification, given traction gained in some markets and management endeavours to expand business in Africa.

Outlook statement

The Stable Outlook is premised on expectations of very strong risk adjusted capitalisation offsetting mounting earning risks, while the entity will demonstrate relatively similar strength in its liquidity and business profile. We expect a reduction in gross premiums, investment income, property revaluation gains and in other income driven by current economic challenges amidst COVID-19, which would escalate earnings pressures given high claims experience.

Rating triggers

A rating upgrade is unlikely over the medium term, but sustainable containment of earnings risks could be viewed positively, while strengths and stability in risk adjusted capitalisation and liquidity are maintained. Conversely, negative rating action may follow earnings weakening beyond expectations and/or a material reduction in liquidity.

Analytical contacts

Primary analyst Fleur Ngassa Analyst
Johannesburg, ZA MarlaineN@GCRratings.com +27 11 784 1771
Secondary analyst Eleanor Kigen Analyst
Johannesburg, ZA Eleanork@GCRratings.com +27 11 784 1771
Committee chair Matthew Pirnie Group Head of Ratings
Johannesburg, ZA Matthewp@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

Kenya Reinsurance Corporation Limited

Rating class Review Rating scale Rating class Outlook Date
Claims paying ability Initial National AA(KE) Stable September 2009
International BB+ Stable September 2009
Financial strength Last National AA+(KE) Stable November 2019
International B+ Stable November 2019

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 2.25
Earnings (0.25)
Capitalisation 2.00
Liquidity 0.50
Comparative profile 0.00
Group support 0.00
Government support 0.00
Peer analysis 0.00
Total Score 11.25

Glossary

Premium The price of insurance protection for a specified risk for a specified period of time.
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.
Revaluation Formal upward or downward adjustment to assets such as property or plant and equipment.
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 Current; ordinarily less than one year.
Technical Liabilities The sum of Net UPR and Net OCR IBNR.
Underwriting Margin Measures efficiency of underwriting and expense management processes.
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 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 rating included:

  • Draft 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 March 2020;
  • Reinsurance cover for 2020; and
  • Other relevant documents.
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