Johannesburg, 12 June 2018 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to The Heritage Insurance Company Kenya Limited of AA-(KE), with the outlook accorded as Stable. The rating is valid until June 2019.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to The Heritage Insurance Company Kenya Limited (“Heritage Kenya”) based on the following key criteria:
Heritage Kenya’s risk adjusted capitalisation remained within a robust range, supported by strong capital growth catering for the quantum of insurance risk and market exposure. This was further supported by increased profit retention, with limited dividend distributions over the last two years. Accordingly, the adjusted international solvency margin equated to a high 86% at FY17 (FY16: 65%). Risk adjusted capital adequacy may remain within a very strong range over the outlook horizon, supported by strong internal capital generation. This would need to be supported by stringent debtor management practices, while observing balanced asset allocations. The maximum deductible per risk equated to 6% at FY17, while the reinsurance panel reflected a strong aggregated credit profile.
The insurer’s liquidity profile is strong, supported by robust liquidity metrics and moderately strong aggregated banking counterparty strength. Liquid assets, including government securities, covered net technical liabilities and average monthly claims by a robust 1.5x (FY16: 1.3x) and 35 months (FY16: 31 months) at FY17 respectively. Going forward, liquidity is expected to remain within a strong range, supported by sound operating cashflow generation and balanced asset allocation.
Heritage Kenya’s earnings capacity is viewed to be strong, supported by healthy underwriting profitability and sound investment returns. In this respect, the five year underwriting margin equated to 8% (FY17: 5%; FY16: 7%), while the investment yield registered at 13% (FY16: 12%). Management expects strong growth targets to support increased scale efficiencies, with an underwriting margin of 9% budgeted for FY18. In GCR’s view underwriting profitability is likely to register within a moderately strong range (4% to 7%), given higher net incurred loss ratios and comparatively lower growth projections (in light of increased competitive dynamics).
The insurer displays a healthy business profile, underpinned by moderate competitive positioning and fairly well diversified earnings. Heritage Kenya’s market share has been maintained at approximately 4% of short term industry gross premiums over the last four years, largely supported by competitiveness in the medical portfolio. Accordingly, medical, motor and fire represent the core portfolio (with the latter largely ceded). In this respect, aggregated product risk is viewed to be moderately limited. Expanded retail exposure may gradually enhance earnings diversification over the medium term.
The rating currently matches the national scale ceiling applicable to entities operating within the Kenyan insurance industry. As a result, upward movement of the rating may follow an assessment of country and industry risk factors. Conversely, the rating could be downgraded on the back of a reduction in earnings capacity and/or a weakening in capital management relative to expectations.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (October 2000)|
|Claims paying ability: A+(KE)|
|Last rating (June 2017)|
|Claims paying ability: AA-(KE)|
|Primary Analyst||Committee Chairperson|
|Yvonne Mujuru||Godfrey Chingono|
|Sector Head: Insurance Ratings||Senior Credit Analyst|
|(011) 784 – 1771||(011) 784 – 1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated May 2018
Kenya Short Term Insurance Industry bulletins, 2014-2017
Heritage Kenya rating reports, 2000-2017
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/RATING-SCALES-DEFINITIONS. 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.
The Heritage Insurance 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 The Heritage Insurance Company Kenya Limited with no contestation of the rating.
The information received from The Heritage Insurance Company Kenya Limited and other reliable third parties to accord the credit rating included:
- The audited annual financial statements to 31 December 2017
- Four years of comparative audited numbers
- Unaudited interim results to 30 April 2018
- Budgeted financial statements to December 2018
- Reinsurance cover notes to 31 December 2018
- Financial Conditions Report at 31 December 2017
- 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.
|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.|
|National Scale Rating (“NSR”)||National Scale credit ratings express risk in relative rank order, which is to say they are ordinal measures of credit risk and are not predictive of a specific frequency of default or loss.|
|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 term, please click here
GCR affirms The Heritage Insurance Company Kenya Limited’s rating of AA-(KE); Outlook Stable.