Announcements Insurance Rating Alerts

GCR affirms The Heritage Insurance Company Kenya Limited’s national scale financial strength rating of AA(KE); Outlook Stable

Rating action

Johannesburg, 23 September 2021 – GCR Ratings (“GCR”) has affirmed The Heritage Insurance Company Kenya Limited’s (“Heritage Kenya”) national scale financial strength rating of AA(KE), with a Stable Outlook.

Rated entity / Issue Rating class Rating scale Rating Outlook/Watch
The Heritage Insurance Company Kenya Limited Financial strength National AA(KE) Stable Outlook

Rating rationale

Heritage Kenya is a wholly owned subsidiary of Liberty Kenya Holdings Plc (“the group”) while Heritage Kenya holds 60% of shares in The Heritage Insurance Company Tanzania Limited. In this regard, Heritage Kenya’s national scale financial strength rating reflects the strengths and weaknesses of the group. The insurer is the core operating entity of the group, accounting for 76% and 35% of the group’s total gross written premiums and total assets in FY20, respectively.

The group’s capital base grew 9% to KES8.7bn at FY20 as a result of sound earnings generation and retention. This coupled with well contained aggregate risk exposures has supported risk adjusted capitalisation at strong levels over the review period. In this regard, the GCR capital adequacy ratio (“GCR CAR”) for the group equated to 2.3x at FY20 (FY19: 2.0x). Furthermore, the group’s core subsidiaries have largely maintained high regulatory solvency metrics of above 2.0x under the Risk Based Capital framework. GCR expects capital to continue growing, albeit at a lower rate given the current economic environment. This, coupled with expectations of a moderation in insurance and market risk exposures could support maintenance of risk adjusted capitalisation within a rating adequate range over the medium term.

Earnings are viewed to be sound, with note taken of profit suppression in the life business as well as the Tanzanian subsidiaries which have been partially offset by the improvement in underwriting profitability of the core operating entity over the past two years. Overall earnings are supported by healthy investment income across the group. In this regard, the group’s five-year operating margin equated to 7% (FY20: 3%). Heritage Kenya’s five-year underwriting margin registered at 6% (FY20:10%; FY19: 8%), compared to observed operating margin compression in the life business (review period average: 9%; FY20: 3%). GCR expects group earnings to be maintained within the current range with little or no improvement in the life business and Tanzanian subsidiaries in the short term, although a recovery could be possible over the medium term.

Liquidity strength was maintained over the review period, supported by a sizeable investment portfolio and conservative asset allocation. In addition, asset-liability matching for the life business is considered to be fairly sound, with maturities on assets and policyholders’ obligations largely matched. Accordingly, cash and stressed financial assets covered net technical obligations by above 1.5x at FY20, while coverage of operational cash requirements exceeded a prudent 12 months.

The rating further takes into account the group’s healthy business profile. In this regard, the group’s competitive position is viewed to be moderately strong, with the consolidated market share approximated at 5.3% in FY20, while the core entity’s market share registered at 4.4% in the domestic short-term industry. Furthermore, the group’s product offering is viewed to be well diversified, with a wide range of short term and long-term products being offered in the respective markets.

The rating derives upliftment from implied parental support from Liberty Holdings Limited given brand alignment, strategic and operational integration as well as integration with the group’s risk and capital management frameworks.

Outlook statement

GCR expects financial profile strength to be maintained over the medium term although earnings are likely to be suppressed in the short term, with potential for recovery over the medium term. However, GCR CAR is expected to be maintained around 2.0x while the liquidity ratio could be sustained around 1.5x. Furthermore, no material changes are expected in the business profile although we expect premium suppression in the life business to be maintained over the short term.

Rating triggers

Upward rating movement may follow a sustained improvement in earnings and liquidity while other factors are maintained at current levels. Conversely, negative rating pressure may stem from a material reduction in earnings, and competitive position below expected levels.

Analytical contacts

Primary analyst Sylvia Mhlanga Senior Analyst: Insurance Ratings
Johannesburg, ZA SylviaM@GCRratings.com +27 11 784 1771
Committee chair Tichaona Nyakudya Senior Analyst: Insurance Ratings
Johannesburg, ZA TichaonaN@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

Ratings history

The Heritage Insurance Company Kenya Limited

Rating class Review Rating scale Rating Outlook/Watch Date
Claims paying ability Initial National A+(KE) Stable October 2000
Financial strength Last National AA(KE) Stable August 2020

Risk score summary

Rating components and factors Risk score
Operating environment 8.00
Country risk score 4.00
Sector risk score 4.00
Business profile (0.25)
Competitive position 0.00
Premium diversification (0.25)
Management and governance 0.00
Financial profile 2.50
Earnings 0.50
Capitalisation 1.50
Liquidity 0.50
Comparative profile 0.50
Group support 0.50
Government support 0.00
Peer analysis 0.00
Total score 10.75

Glossary

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 RATING

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 company and group financial results as at 31 December 2020;
  • Four years of comparative audited company and group financial statements to 31 December
  • Full year company budgeted financial statements for 2021;
  • Unaudited company interim results to 31 August 2021;
  • Reinsurance cover notes for 2021; and
  • Other relevant documents.
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