Johannesburg, 23 September 2021 – GCR Ratings (“GCR”) has affirmed Liberty Life Assurance Kenya Limited’s (“Liberty Life Kenya”) national scale financial strength rating of AA(KE), with a Stable Outlook.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|Liberty Life Assurance Kenya Limited||Financial strength||National||AA(KE)||Stable Outlook|
Liberty Life Kenya’s national scale financial strength rating balances strong risk adjusted capitalisation and healthy earnings with intermediate assessments of liquidity and the business profile.
Risk adjusted capitalisation maintained its strength over the review period, supported by a steadily growing capital base that comfortably catered for insurance and market risk exposures. Note is taken of the successful sale of part of the investment property in FY21, which on the backdrop of lower insurance liabilities further diluted aggregate risk exposures at FY20. In this regard, the GCR capital adequacy ratio (“CAR”) equated to 2.1x at FY20 (FY19: 1.7x), while statutory solvency registered at 215% (FY19: 212%). GCR expects capital strength to be maintained within the same range over the rating horizon.
Liberty Life Kenya’s earnings remained within a moderately strong range, albeit under pressure due to a downward trend over the review period as a result of subdued total income. As such, the five-year average operating margin registered at 8% (FY20: 3%), while the return on revenue over the same period equated to 20% (FY20: 7%). We expect earnings pressure to persist going forward, given reducing profitability on in-force business and the expense strain on new business. Positively, we note corrective underwriting measures on select products and potential for increased investment income over the medium term, albeit with a level of earnings volatility expected over the short term due to Covid-19 related claims. In this respect, the insurer’s ability to improve revenue persistence and remedy non-performing accounts represents a key rating input over the medium term.
Liquidity measured at an intermediate level, supported by a sizeable investment portfolio and conservative asset allocation. Liberty Life Kenya’s asset-liability matching is considered to be fairly sound, with maturities of assets and policyholders’ obligations largely matched within the constraints of the operating environment. Accordingly, cash and stressed financial assets coverage of net technical obligations registered above 1.5x at FY20, while coverage of operational cash requirements was above 12 months. Given the recent investment portfolio restructuring, improvements in both asset liability matching and/or liquidity coverage could be positive to the rating over the medium term.
The business profile is considered to be intermediate, underpinned by an intermediate competitive position and comparatively limited premium diversification. The insurer’s share of total industry premiums (excluding investment contributions) measured at 5.3% in FY20. These metrics reflect gross premium stagnation due to limited new business uptake. Competitive positioning is likely to be maintained within a similar range going forward, balancing competitive pressures on insurance risks and increased emphasis on investment products. Liberty Life’s product offering comprises both insurance and investment products, resulting in a diversified income stream. However, geographic diversification is viewed to be limited, given premiums are entirely derived from Kenya.
The Stable Outlook reflects expectations of persistent financial profile strength over the medium term, noting the likelihood of the negative earnings impact of COVID -19 related claims to be short term. GCR expects a recovery in earnings over the medium term should the insurer’s gross premiums track the business acquisition trajectory, while reducing the associated expense strain, and improving profitability on in-force business. As such, the GCR CAR is expected to measure at around 2.0x in FY21, while the liquidity ratio could be sustained around 1.5x. Furthermore, no material changes are expected on the current business profile over the rating horizon.
Upward rating movement may follow a sustained improvement in the business profile and/or earnings. We expect the aforesaid improvements to have a positive impact on the combined assessment on risk adjusted capitalisation and liquidity for the rating migration to be realised. Conversely, negative rating pressure may stem from a material reduction in earnings and continued loss of premiums below expected levels.
|Primary analyst||Sylvia Mhlanga||Senior Analyst: Insurance Ratings|
|Johannesburg, ZA||SylviaM@GCRratings.com||+27 11 784 1771|
|Committee chair||Godfrey Chingono||Deputy Sector Head: Insurance Ratings|
|Johannesburg, ZA||GodfreyC@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, August 2021|
|GCR Insurance Sector Risk Scores, April 2021|
Liberty Life Assurance Kenya Limited
|Rating class||Review||Rating scale||Rating class||Outlook/Watch||Date|
|Claims paying ability||Initial||National||AA(KE)||Stable Outlook||May 2013|
|Financial strength||Last||National||AA(KE)||Stable Outlook||August 2020|
Risk score summary
|Rating components and factors||Risk score|
|Country risk score||4.00|
|Sector risk score||4.25|
|Management and governance||0.00|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|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.|
|Retention||The net amount of risk the ceding company keeps for its own account.|
|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.|
|Security||One of various instruments used in the capital market to raise funds.|
|Senior||A security that has a higher repayment priority than junior securities.|
|Short Term||Current; ordinarily less than one year.|
|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 entity. 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 entities and other reliable third parties to accord the credit rating included:
- Audited financial results 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 August 2021;
- Reinsurance cover notes for 2021; and
- Other relevant documents.