Announcements

GCR affirms Occidental Insurance Company Limited’s rating of A-(KE); Outlook Stable.

Johannesburg, 19 December 2017 – Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Occidental Insurance Company Limited of A-(KE), with the outlook accorded as Stable. The rating is valid until December 2018.

SUMMARY RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit rating to Occidental Insurance Company Limited (“OIC Kenya”) based on the following key criteria:

The insurer reflects strong risk adjusted capitalisation, supported by limited market risk exposures and well contained insurance risk. Accordingly, the international solvency margin equated to a high 76% at FY16 (FY15: 78%). GCR expects capitalisation to remain strong, underpinned by sound internal capital generation and a conservative dividend policy. The insurer’s reinsurance panel reflects a sound aggregated level of credit strength, with maximum net deductibles viewed to be moderately high relative to capital.

Liquidity metrics are strong, as evidenced by high claims cash cover of 15 months and moderately strong net technical provision coverage of 0.8x at FY16 (FY15: 20 months and 0.9x). GCR expects the company’s liquidity metrics to continue to measure within a strong range over the rating horizon, supported by healthy operating cash flow generation and conservative asset allocation (with the bulk of investments held in liquid assets).

Earnings capacity registered within a sound range, albeit measuring below the strong levels registered historically. Reduced earnings strength stems largely from a recent compression in underwriting profitability. In this respect, the underwriting margin equated to -2% at 9M FY17 (FY16: -2%), compared to the prior four year cycle average of 5%. Underwriting contractions have been partially offset by sound investment income, with the insurer’s return on revenue equating to a still-healthy 9% in FY16. While management expects underwriting margins to recover to moderately strong levels in FY18 (4%), GCR notes the potential for sustained underwriting compression over the outlook horizon due to elevated claims and lower scale efficiencies envisaged.

The insurer’s business profile is viewed to be sound, supported by a well-balanced and consistent earnings stream. However, this is partially offset by intermediate competitive positioning. In this respect, the insurer’s share of short term industry gross premiums equated to 2% in FY16. Competitive positioning may improve over the medium term, given the increased focus on growth. This is expected to be supported by the enhanced focus on the retail segment, and increasing brand visibility and regional presence.

Earnings capacity registering within a strong range through the expansionary phase, coupled with the successful attainment of key targets under the revised strategy (resulting in a strengthening in business profile), could support upward rating movement. This would need to be supported by risk adjusted capital adequacy and liquidity remaining at strong levels. Conversely, a downgrade could result from a persistent deterioration in the underwriting result beyond expectations, coupled with material reduction in risk adjusted capitalisation and/or liquidity metrics.

NATIONAL SCALE RATINGS HISTORY

   
Initial/last rating (March 2017)    
Claims paying ability: A-(KE)    
Outlook: Stable

   

ANALYTICAL CONTACTS

Primary Analyst     Secondary Analyst
Yvonne Mujuru     Nyasha Chikwengo
Sector Head: Insurance Ratings     Credit Analyst
(011) 784-1771     (011) 784-1771
ymujuru@globalratings.net     nyashac@globalratings.net

Committee Chairperson

     
Susan Hawthorne      
Senior Credit Analyst      
(011) 784-1771      
susanh@globalratings.net      

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Short Term Insurance Companies, updated July 2017

Kenya Short Term Insurance Industry Bulletins, 2014-2016

OIC Kenya rating report, 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 RATING

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.

Occidental Insurance Company 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 Occidental Insurance Company Limited with no contestation of the rating.

The information received from Occidental Insurance Company Limited and other reliable third parties to accord the credit rating included:

  • Audited financial results as at 31 December 2016
  • Four years of comparative audited financial statements
  • Unaudited interim results as at 30 September 2017
  • Budgeted financial statements for 2017 and 2018
  • The current year reinsurance cover notes
  • Statutory returns to 31 December 2016
  • Financial Condition Report 2016, and
  • Other related documents.

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

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.
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 Occidental Insurance Company Limited’s rating of A-(KE); Outlook Stable.

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