Johannesburg, 03 June 2016 — Global Credit Ratings has today affirmed Saham Assurance Company Kenya Limited’s national scale claims paying ability rating at A-(KE), with the outlook accorded as Negative. The rating is valid until May 2017.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to Saham Assurance Company Kenya Limited (“Saham Kenya”) based on the following key criteria:
The negative outlook reflects the potential for earnings capacity to remain under pressure over the rating horizon. In this respect, Saham Kenya’s earnings capacity has remained challenged over the past three years, largely underpinned by limited scale efficiencies to absorb cost base effects. As such, the insurer recorded a third consecutive underwriting loss in FY15, with losses cumulatively amounting to KES154m (corresponding to a third of current capitalisation). Management has set very high short term growth targets in retained lines, as a means of increasing net earned premiums to absorb costs. Nevertheless, GCR expects the insurer’s underwriting trend to remain under pressure, given the execution risk associated with attaining sufficient net premium scale to dilute the total expense ratio to a level facilitating margin headroom. Positively, in terms of the latter, note is taken of the insurer’s comparatively lower average loss ratio (three year average: 51%), with management implementing corrective measures aimed at reducing loss ratio volatility going forward.
As a result of limited earnings capacity, constrained internal capital generation has caused risk adjusted capitalisation to trend downwards over the corresponding period. In this regard, the international solvency margin decreased to 85% at FYE15 (FYE14: 115%; FYE13: 144%), and is projected to reduce to a range between 53% and 61% by FYE16. In GCR’s view, the sustained reduction in solvency represents a weakening in credit strength. A degree of comfort is derived from the written commitment by the majority shareholder (Saham Finance) to inject capital into the insurer in order to comply with any shortfalls relative to minimum regulatory capital requirements.
Liquidity metrics remained at strong levels, underpinned by the insurer’s relatively conservative investment philosophy. In this regard, cash holdings covered net technical liabilities by 1.8x at FYE15 (FYE14: 2.4x), while the claims cash cover ratio equated to a strong 31 months (FY14: 49 months). The metrics are expected to remain within a moderately strong range over the medium term (albeit reflecting scope for a continued downward trend).
Saham Kenya reflects improving earnings diversification, with concerted efforts to reduce the significant concentration to one line of business. Nevertheless, the competitive position remains limited, with the insurer accounting for about 1% of short term industry gross premiums in FY15. While potential growth in life business presents a source of earnings generation, no significant changes in market share are expected over the rating horizon.
The reinsurance panel, which is led by Trust Re (50%), reflects a moderately high aggregate level of credit strength. Furthermore, the maximum net deductibles per risk and event are limited to levels which are viewed to be moderately conservative relative to capital (FYE15: 1.6%).
A downward rating action could arise from continued earnings and solvency pressures. Conversely, the rating may be maintained or upgraded if the insurer demonstrates sustainable strengthening in earnings capacity, while supporting a consolidation in nominal and risk adjusted capitalisation. This would need to be supported by liquidity metrics remaining at strong levels.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (June 2005)|
|Claims paying ability: A-(KE)|
|Last rating (May 2015)|
|Claims paying ability: A-(KE)|
|Primary Analyst||Secondary Analyst|
|Marc Chadwick||Godfrey Chingono|
|Sector Head: Insurance Ratings||Credit Analyst|
|(011) 784-1771||(011) 784-1771|
|Senior Credit Analyst|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2015
Criteria for Rating Long Term Insurance Companies, updated July 2015
Saham rating report rating reports, 2014-2015
Mercantile Insurance Company Limited rating reports, 2005-2013
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.
Saham Assurance Company 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 Saham Assurance Company Kenya Limited with no contestation of the rating.
The information received from Saham Assurance Company Kenya Limited and other reliable third parties to accord the credit rating included:
- Audited financial results as per 31 December 2015
- 4 years of comparative audited numbers
- Unaudited interim results as per 31 March 2016
- Budgeted financial statements for 2016
- Financial Condition Report for 2015
- 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
|Assets||The items on the balance sheet of the insurer which show the book value of property owned. Under regulations, not all property or other resources may be admitted in the statement of the insurer. This gives rise to the term ‘non-admitted assets.’|
|Balance Sheet||An accounting term which refers to a listing of the assets, liabilities, and surplus of a company or individual as of a specific date.|
|Capacity||The largest amount of insurance or reinsurance available from a company. In a broader sense, it can refer to the largest amount of insurance or reinsurance available in the marketplace.|
|Claim||A request for payment of a loss, which may come under the terms of an insurance contract.|
|Commission||A certain percentage of premiums produced that is received or paid out as compensation by an insurer to agents and brokers.|
|Insurer||The party to the insurance contract whom promises to pay losses or benefits. Also, any corporation engaged primarily in the business of furnishing insurance to the public.|
|Interest||Money paid for the use of money.|
|Liquidity||The ability of an insurer to convert its assets into cash to pay claims if necessary.|
|Loss Ratio||The ratio of claims to premiums. It may be calculated in several different ways, using paid premiums or earned premiums, and using paid claims with or without changes in claim reserves and with or without changes in active life reserves.|
|Policy||The legal document issued by the company to the policyholder, which outlines the conditions and terms of the insurance also called the policy contract or the contract.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|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.|
|Reserve||An amount representing actual or potential liabilities kept by an insurer to cover debts to policyholders.|
|Retention||The net amount of risk the ceding company keeps for its own account|
|Risk||Uncertainty as to the outcome of an event when two or more possibilities exist.|
|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.|
|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 Saham Assurance Company Kenya Limited’s rating at A-(KE); Negative Outlook.