Johannesburg, 20 August 2020 – GCR Ratings (“GCR”) has affirmed Occidental Insurance Company Limited’s (“OIC Kenya”) national scale financial strength rating of A-(KE). Furthermore, the Outlook has been maintained on Negative.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|Occidental Insurance Company Limited||Financial strength||National||A-(KE)||Negative Outlook|
OIC Kenya’s rating is anchored by strong risk adjusted capitalisation balancing intermediate earnings and liquidity. Furthermore, the business profile is credit negative, having been maintained at a modest level. The Negative Outlook reflects potential for liquidity metrics to remain below rating adequate levels in the absence of sufficient traction in earnings and balance sheet de-risking measures.
Risk adjusted capitalisation is assessed within a strong band, underpinned by consistent internal capital generation. This was further bolstered by reduced aggregate risk exposures, given a significant reduction in credit risk attributable to enhanced premium collection, coupled with contained levels of market risk in light of the review year divestiture of investment property, albeit noting a partially offsetting increase in listed equity holdings. Accordingly, the GCR capital adequacy ratio (“CAR”) strengthened to 1.9x (FY18: 1.8x), while the statutory CAR equated to a higher 158% (FY18: 108%). Looking ahead, prospects of persistent internal capital build along with conservative asset allocation are likely to underpin strong risk adjusted capitalisation.
The underwriter’s liquidity profile remained within an intermediate range supported by conservative asset allocation and enhanced premium collection. Accordingly, cash and stressed financial assets coverage of net technical obligations measured at 1.2x at FY19 (FY18: 1.0x), while coverage of operational cost requirements equated to 11 months (FY18: 10 months). Through support from proceeds of investment property disposal amounting to KES170m, which were invested in short term deposits, liquidity strength persisted into 1H F20, with the liquidity ratio and operational cost coverage measuring at 1.3x and 11 months, respectively. Looking ahead, management’s ability to sustain a conservative investment strategy and enhanced premium collection trends, in spite of COVID-19 pandemic headwinds, represents a key rating consideration over the rating horizon.
OIC Kenya’s earnings remained intermediate, with sound investment income offsetting persistent underwriting deficits. In this respect, investment income amounted to KES379m in FY19, offsetting an underwriting deficit of KES73m (-2% underwriting margin over the review period). Positively, enhanced focus on improving operating cash flows and investment portfolio rebalancing to low risk fixed income securities is likely to elevate investment income flows, with potential to strengthen return on revenue from the current review period average of 11% (FY19: 12%) over the medium term, as rates pressure in core lines of business is likely to persist. Nevertheless, recent interest rate cuts and prospects for further rate reductions, given the ongoing economic slowdown occasioned by the COVID 19 pandemic, could moderate OIC Kenya’s short-term earnings performance given sensitivity to changes in investment income.
The insurer’s business profile continued to be a rating restraint, characterised by a modest market position and intermediate level of premium diversification. Accordingly, OIC Kenya’s share of local short-term industry premiums stood at 2.1% at FY19 (FY18: 2.0%), while relative market share closed at 0.8x (FY18: 0.7x). The insurer derives significant premiums from three product lines at gross level, while policyholder granularity is considered to be very high. The assessment of premium diversification is nevertheless constrained by geographic concentration to a single market given that all premiums are sourced from Kenya. In view of the competitive nature of the local market, which may be stiffened further by potential industry premium contraction in the wake of COVID 19 pandemic risks, GCR expects no material changes to the business profile over the medium term.
The Negative Outlook reflects potential for liquidity metrics to remain below rating adequate levels in the absence of sufficient traction in earnings and balance sheet de-risking measures. The Outlook further captures the possibility of sustained earnings pressure in view of the uncertainty presented by the COVID 19 pandemic risks.
The Outlook could revert to Stable should the insurer demonstrates capacity to sustain liquidity within a rating adequate range. Conversely, the rating may be downgraded should earnings and liquidity be sustained below expected levels.
|Primary analyst||Tichaona Nyakudya||Senior Analyst: Insurance Ratings|
|Johannesburg, ZA||TichaonaN@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, May 2020|
|GCR Insurance Sector Risk Scores, July 2020|
Occidental Insurance Company Limited
|Rating class||Review||Rating scale||Rating class||Outlook/Watch||Date|
|Claims paying ability||Initial||National||A-(KE)||Stable Outlook||March 2017|
|Financial strength||Last||National||A-(KE)||Negative Outlook||September 2019|
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 entity and other reliable third parties to accord the credit rating included:
- Audited financial results as at 31 December 2019;
- Four years of comparative audited financial statements to 31 December
- Full year budgeted financial statement to 31 December 2020;
- Unaudited interim results to 30 June 2020;
- Reinsurance cover notes for 2020; and
- Other relevant documents.