Johannesburg, 12 July 2018 — Global Credit Ratings has today affirmed the national scale financial strength rating assigned to Liberty Life Assurance Kenya Limited of AA-(KE), with the outlook accorded as Stable. The rating is valid until June 2019.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to Liberty Life Assurance Kenya Limited (“Liberty Life Kenya”) based on the following key criteria:
Liberty Life Kenya’s rating is supported by strong risk adjusted capitalisation. This is largely a function of robust internal capital models that support capital growth and a low risk content operating structure. In this regard, growth in capital and statutory reserves averaged 18% over the past five years, while underwriting, market and credit risk exposures have been well contained. Risk adjusted capitalisation is expected to be maintained at strong levels over the outlook horizon, with a statutory capital adequacy requirement ratio of 228% (FY16: 161%) evidencing sufficient headroom to withstand market shocks at rating adequate levels.
Strong asset liability management is a key rating strength, reflecting the deployment of group models. Accordingly, the nature and term of liabilities is closely matched by assets, resulting in a portfolio heavily skewed towards fixed income securities (73% of the investment portfolio). Consequently, short term liabilities were more than adequately covered by cash and equivalents, with a higher funded status of 1.2x (FY16: 1.1x), supporting flexibility in meeting longer term liabilities. In this regard, sound policies governing liquidity and asset liability management are viewed to embed disciplines consistent with a very strong factor assessment over the rating horizon. Liberty Life Kenya’s earnings capacity has been supported at a sound level, with the five year average operating margin exceeding that of peers at 12% (vs. 9%), albeit exhibiting a certain degree of volatility. Comparative earnings strength is derived from a well contained benefits experience (underpinned by lower than expected mortality losses) and ongoing cost reduction measures. Furthermore, the insurer’s sizable investment portfolio and deposit administration (“DA”) business provide a healthy cushion to otherwise highly variable earnings, through a steady flow of realised investment and fee income, with an unrealised gain on equities elevating ROE to 25% in FY17 (FY16: 10%). Given somewhat diverse sources of income; efforts to curb the reduction of in-force business; and increased emphasis on profitable growth, earnings capacity may stabilise at current levels over the rating horizon.
Despite efforts to redress earnings through selective growth, Liberty Life’s competitive position remained within a strong range. The insurer’s market share registered at 5.4% in FY17, compared to 5.9% in the previous year, on the back of protracted contraction in individual life and DA products. In this regard, management restructured the product portfolio to enhance the attractiveness of the DA book, while expecting to recoup further volumes from new endowment and unit linked products. These initiatives would be complemented by greater bancassurance presence; a more viable agency model and product management competencies, while brand franchise is expected to contribute positively to market confidence.
The insurer’s earnings spread, while evidencing moderate diversification, benefits from the high weighting towards low to intermediate risk product offerings. The establishment of new distribution channels to boost group life business could gradually see increased diversification over the medium term. The quality of the insurer’s reinsurance counterparties is considered sound, with net deductibles set at conservative levels relative to capital.
GCR views Liberty Life Kenya’s stand-alone credit profile as deriving upliftment from implied shareholder support, following the rebranding exercise undertaken. In this respect, Liberty Life Kenya is a 100% owned subsidiary of Liberty Kenya Holdings Plc, which is majority-owned by South African based Liberty Holdings Limited (“the group”). This view is further supported by Liberty Life Kenya’s moderate success in contributing to overall group growth and profit objectives, with systems integration, technical expertise and operational support available from the group.
The rating currently matches the national scale ceiling applicable to entities operating within the Kenyan insurance industry. In this regard, positive rating action may follow an assessment of country and industry risk factors. The rating exhibits negative sensitivity to weakening profitability and/or a sustained weakening in market position.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (May 2013)|
|Financial Strength: AA(KE)|
|Last rating (July 2017)|
|Financial Strength: AA-(KE)|
|Primary Analyst||Committee Chairperson|
|Godfrey Chingono||Yvonne Mujuru|
|Senior Credit Analyst||Sector Head: Insurance Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Long Term Insurance Companies, updated May 2018
CfC Life Assurance Limited, 2013-2015
Liberty Life Assurance Kenya Limited report, 2016-2017
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. 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 rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
Liberty Life Assurance Kenya Limited 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 rating has been disclosed to Liberty Life Assurance Kenya Limited with no contestation of the rating.
The information received from Liberty Life Assurance Kenya Limited and other reliable third parties to accord the credit rating included:
- Audited financial results as at 31 December 2017
- Four years prior audited financial statements
- Unaudited interim results to 31 March 2018
- Budgeted financial statements for 2018
- Actuarial valuation statement for 2017
- Financial condition report for 2017
- The current year reinsurance cover notes
- Other non-public statistical information
The rating above was solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the rating.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY
|Balance Sheet||Also known as a 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.|
|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.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Claim||A request for payment of a loss, which may come under the terms of an insurance contract.|
|Deductible||The portion of an insured loss to be borne by the insured before he is entitled to recovery from the insurer.|
|Diversification||Spreading risk by constructing a portfolio that contains different investments, 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.|
|Dividend||The portion of a company’s after-tax earnings that is distributed to shareholders.|
|Experience||A term used to describe the relationship, usually expressed as a percent or ratio, of premiums to claims for a plan, coverage, or benefits for a stated time period.|
|Financial Flexibility||The company’s ability to access additional sources of capital funding.|
|International Scale Rating LC||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.|
|Investment Income||The income generated by a company’s portfolio of investments.|
|Liabilities||All financial claims, debts or potential losses incurred by an individual or an organisation.|
|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.|
|Loss||The happening of the event for which insurance pays.|
|Market Risk||Volatility in the value of a security/asset due to movements in share prices, interest rates, currencies, commodities or wider economic factors.|
|Net Profit||Trading/operating profits after deducting the expenses detailed in the profit and loss account such as interest, tax, depreciation, auditors’ fees and directors’ fees.|
|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|
|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.|
|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.|
|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.|
|Stop Loss||Any provision in a policy designed to cut off an insurer’s losses at a given point. In effect, a stop loss agreement guarantees the loss ratio of the insurer.|
|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.|
For a detailed glossary of terms please click here
GCR affirms Liberty Life Assurance Kenya Limited’s rating at AA-(KE); Outlook Stable.