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, 20 August 2020 – 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’s national scale financial strength rating reflects the strengths and weaknesses of Liberty Kenya Holdings Plc (“the group”). Heritage Kenya is the core operating entity of the group accounting for 73% and 33% of the group’s total gross written premiums and total assets respectively in FY19.

The group’s risk adjusted capitalisation has been maintained at strong levels over the review period, supported by healthy capital growth providing for the low level of insurance risk and somewhat elevated market and counterparty risk exposures. In this regard, the GCR capital adequacy ratio for the group equated to 2.0x at FY19. Furthermore, the group’s core subsidiaries have largely maintained high regulatory solvency metrics of above 2x under the Risk Based Solvency framework. GCR expects capital growth to be limited in the short term, given the current economic environment, albeit likely to be balanced by a concurrent moderation in insurance and market risk exposures. As such, capital strength is expected to be maintained within a rating adequate range over the medium term.

The group’s through-the-cycle earnings are viewed to be sound, supported by healthy investment income. In this regard, the five year operating margin equated to 7% (FY19: 12%). Note is taken of the improvement in underwriting profitability of the core operating entity in FY19, offsetting a developing negative earnings trend in the life business. Accordingly, Heritage Kenya’s five year underwriting margin registered at 8.6% (FY19: -0.3%), compared to observed operating margin compression in the life business (review period average: 14%; FY19: 8%). GCR expects group earnings to moderate slightly, given the likely negative impact on investment returns associated with the weakening economic environment, noting potential for offsetting gains on significant holdings of longer dated paper.

Liquidity measured at an intermediate level, supported by a sizeable investment portfolio and conservative asset allocation. In addition, the life subsidiary’s asset-liability matching 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 FY19, 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 FY19, while the core entity’s market share registered at 4.3% 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 risk and capital management frameworks.

Outlook statement

The Stable Outlook reflects expectations of an unchanged financial profile over the medium term, although a short term moderation is possible due to the weakening economic environment. Lower interest rates and lower than expected premium growth will likely affect earnings in the short term. As such, the GCR CAR could measure slightly below 2.0x while the liquidity ratio could be sustained around 1.5x. Furthermore, no material changes on the business profile are expected over the rating horizon.

Rating triggers

Upward rating movement may follow a sustained improvement in earnings and liquidity. Conversely, negative rating pressure may stem from a material reduction in earnings, liquidity and risk adjusted capitalisation below expected levels.

Analytical contacts

Primary analyst Sylvia Mhlanga Senior Analyst: Insurance Ratings
Johannesburg, ZA SylviaM@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

Ratings history

The Heritage Insurance Company Kenya Limited

Rating class Review Rating scale Rating class Outlook/Watch Date
Claims paying ability Initial National A+(KE) Stable October 2000
Financial strength Last National AA(KE) Stable November 2019

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 0.75
Capitalisation 1.50
Liquidity 0.25
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 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 entities and other reliable third parties to accord the credit rating included:

  • Audited company and group financial results as at 31 December 2019;
  • Four years of comparative audited company and group financial statements to 31 December
  • Full year company budgeted financial statements for 2020;
  • Unaudited company interim results to 31 March 2020;
  • Reinsurance cover notes for 2020; and
  • Other relevant documents.
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