Johannesburg, 28 July 2017 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Kenya Reinsurance Corporation of AA(KE), with the outlook accorded as Stable. Furthermore, Global Credit Ratings has affirmed the international scale claims paying ability rating assigned to Kenya Reinsurance Corporation at BB, with the outlook accorded as Negative. The ratings are valid until July 2018.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Kenya Reinsurance Corporation (“Kenya Re”) based on the following key criteria:
Kenya Re’s risk adjusted capitalisation has been maintained at a very strong level that is expected to be sustained over the medium term. Strong risk adjusted capitalisation was largely supported by the reinsurer’s sizeable capital base catering for the high quantum of insurance and market risk exposures. Accordingly, the international solvency margin equated to a very high 192% at FY16 (FY15: 167%; review period average: 180%). Robust internal capital generation, coupled with sound capital management practices, are likely to sustain very strong capitalization over the outlook horizon.
Liquidity metrics remained very strong, reflecting increased net investment of operating cash flows into liquid assets. Accordingly, growth in cash and equivalents was aligned with liability accumulation, with cash coverage of net technical liabilities (including long term policyholder liabilities) remaining strong at 1.3x at FY16 (FY15: 1.3x). Going forward, a consistent stream of investment income, is expected to cater for possible cash absorption from subsidiaries, with liquidity largely expected to remain within a very strong range.
Robust earnings capacity is largely a function of strong investment income supporting thin underwriting profitability. In this respect, Kenya Re’s operating margin equated to a strong 29%, well supported by a robust long term business operating margin of 63% over the review period. The short term business’ underwriting profitability remained limited, underpinned by an elevated operating expense ratio relative to peers (review period average: 15%; peer average: 6%). In GCR’s view, the reinsurer’s underwriting profitability is likely to remain susceptible to large event-driven fire losses and attritional losses from the accident and health account. As such, the reinsurer’s ability to increase operational efficiencies is likely to provide flexibility to achieve positive underwriting results over the medium term.
The reinsurer’s business profile is strong, supported by favourable strategic position and well diversified earnings. In this regard, Kenya Re’s domestic market position is underpinned by compulsory cessions, and the affiliation with the Kenyan government (60% shareholding), while earnings are fairly well spread across different geographic locations and lines of business. The reinsurer’s status as an established player across East Africa was further cemented by the establishment of subsidiaries in strategic locations (in recent years), with the expectation of entrenching business relationships in Southern and West Africa. As such, the reinsurer’s business profile is expected to remain strong, supported by Kenya Re’s strong brand recognition, elevated capacity relative to local players, and technical expertise.
Kenya Re reflects adequate reserving, with long term policyholder obligations viewed to be very well funded. In this regard, the life fund evidences a large risk margin above the actuarially determined value of future benefits. Accordingly, the reinsurer’s sizeable statutory reserve equated to a robust 161% of technical liabilities at FY16 (FY15: 137%). Furthermore, short term reserves were certified to be sufficient by an independent actuarial assessment.
The international scale rating remains adversely impacted by Kenya’s sovereign rating, given the fact that the reinsurer’s assets are almost entirely domiciled locally, while the majority of revenues are sourced domestically.
Upward rating movement is constrained by country and industry risk factors. Conversely, the ratings may be downgraded if the reinsurer’s risk adjusted capitalisation and/or liquidity metrics deteriorate materially. Furthermore, sustained underwriting losses, and/or a substantial weakening in the business profile or further negative action on the sovereign rating may result in negative rating actions.
|NATIONAL SCALE RATINGS HISTORY||INTERNATIONAL SCALE RATINGS HISTORY|
|Initial rating (September 2009)||Initial rating (September 2009)|
|Claims paying ability: AA(KE)||Claims paying ability: BB+|
|Outlook: Stable||Outlook: Stable|
|Last rating (August 2016)||Last rating (August 2016)|
|Claims paying ability: AA(KE)||Claims paying ability: BB|
|Outlook: Stable||Outlook: Negative|
|(011) 784 – 1771|
|Sector Head: Insurance Ratings|
|(011) 784 – 1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2016
Criterial for Rating Long Term Insurance Companies, updated July 2016
East Africa Insurance Statistics Bulletin, 2009-2016
Kenya Reinsurance Corporation rating reports, 2009-2016
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/RATING-SCALES-DEFINITIONS. 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 ratings were influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
Kenya Reinsurance Corporation 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 ratings have been disclosed to Kenya Reinsurance Corporation with no contestation of the ratings.
The information received from Kenya Reinsurance Corporation and other reliable third parties to accord the credit ratings included:
- The 2016 audited annual financial statements 4 years of comparative audited numbers
- Unaudited interim results to 31 March 2017
- Budgeted financial statements for 2017
- Annual statutory returns to 31 December 2016
- Current year retrocession cover notes
- The Financial Condition Report to 31 December 2016
- Other related documents.
The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.
|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.|
|Claim||A request for payment of a loss, which may come under the terms of an insurance contract.|
|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.|
|Distribution Channel||The method utilised by the insurance company to sell its products to policyholders.|
|Enterprise Risk Management||ERM refers to an integrated or holistic approach to managing risk across an organisation, using clearly articulated frameworks and processes controlled from board level.|
|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 an insurer, its exposure may also relate to the risk related to policies issued.|
|International Scale Rating (“ISR”)||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.|
|Intermediary||A third party in the sale and administration of insurance products.|
|Interest||Money paid for the use of money.|
|Investment Portfolio||A collection of investments held by an individual investor or financial institution.|
|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.|
|Market Risk||Volatility in the value of a security/asset due to movements in share prices, interest rates, currencies, commodities or wider economic factors.|
|National Scale Rating (“NSR”)||National Scale credit ratings express risk in relative rank order, which is to say they are ordinal measures of credit risk and are not predictive of a specific frequency of default or loss.|
|Policyholder||The person in actual possession of an insurance policy.|
|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|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Risk Management||Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.|
|Short Term||Current; ordinarily less than one year.|
|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.|
|Statutory||Required by or having to do with law or statute.|
|Subordinated Debt||Debt that in the event of a default is repaid only after senior obligations have been repaid. It is higher risk than senior debt.|
|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.|
|Underwriting Margin||Measures efficiency of underwriting and expense management processes.|
For a more detailed glossary of terms, please click here
GCR affirms Kenya Reinsurance Corporation’s rating of AA(KE); Outlook Stable.