Johannesburg, 28 June 2018 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to The Jubilee Insurance Company of 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 Jubilee Insurance Company of Kenya Limited (“Jubilee Kenya”) based on the following key criteria:
Jubilee Kenya’s rating benefits from a solid competitive position, reflecting a consolidated revenue market share of 12% in FY17 (FY16: 11%). This was on account of relatively strong long term business revenue growth offsetting a reduction in the short term business market share to 9.2% in FY17 (FY16: 11.4%). Nonetheless, the short term business retained a leading market position despite a drastic industry-wide reduction in the medical portfolio (which underpins the insurer’s competitive strength) and the strategic decision to shed non-performing portfolios. In this regard, the insurer’s defensive business model is viewed to offer latitude for risk selection and absorbing shocks without materially impinging competitive strength.
On the back of stringent risk selection, earnings capacity was maintained within a healthy range, supported by corrective action in the short term business. In this regard, the underwriting margin increased to 12% in FY17 (FY16: 2%; review period average: 8%), offsetting compression in the long term business operating margin to 8% (FY16: 13%), due to profit strain on annuity products. Going forward, prudent underwriting disciplines on new products, active portfolio re-pricing as well as stronger fixed income support is expected to bear positively on earnings capacity. Moreover, higher reinsurance commission rates are expected to drive earnings higher in FY18, while loss protection from reinsurance remains sound at a conservative maximum deductible per risk and event relative to net premiums and capital.
Risk adjusted capitalisation improved from a moderately strong to a strong level. This was supported by capital growth of 29% at FY17 (5-year CAGR: 19%), being a function of an elevation in capital generated from short term operations. Furthermore, the insurer’s risk profile reduced significantly as premiums lowered and high risk assets were diluted by government securities, offsetting the impact of higher risk premium charges on the long term business. Given healthy internal capital generation and conservative revenue growth, risk adjusted capitalisation may remain strong over the rating horizon, albeit tempered by capital management risks in the absence of a formal framework.
Liquidity is viewed to be sound, supported by portfolio rebalancing into government securities. Management has attributed the investment stance to the need to improve the match between the present value of assets and liabilities, while closing the negative investment return gap. Accordingly, cash coverage of policyholder liabilities on the short term business recovered to 0.9x at FY17 (FY16: 0.6x), with further uplift received from high metrics of 2.9x (FY16: 3.4x) on the long term business. Notably, 80% of long term liabilities were covered by government securities, supporting liquidity and asset liability management metrics somewhat. Nonetheless, GCR regards elevated single banking counterparty concentration (in conjunction with asset risk to the same counterparty) as an ongoing source of rating risk.
Jubilee Kenya evidences a well-diversified earnings profile. Revenue traction in the long term business has served to diversify risk, with long term revenue weighting a higher 34% of consolidated gross premiums in FY17 (FY16: 24%). Further diversification benefits are expected from the gradual restructuring of the medical portfolio towards retail risks, thus mitigating exposure to predominant corporate portfolios, while cautious underwriting on annuities could moderate aggregate product risk over the rating horizon.
The rating currently matches the national scale ceiling applicable to entities operating within the Kenyan insurance industry. In this regard, positive rating action may follow an assessment of country and industry risk factors. Negative rating action could follow earnings pressure, a lowering in risk adjusted capitalisation and/or a reduction in diversification benefits.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (May 2007)|
|Claims paying ability: AA-(KE)|
|Last rating (July 2017)|
|Claims paying ability: AA-(KE)|
|Primary Analyst||Committee Chairperson|
|Godfrey Chingono||Yvonne Mujuru|
|Credit Analyst||Sector Head: Insurance Ratings|
|(011) 784 – 1771||(011) 784 – 1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated May 2018
Criteria for Rating Long Term Insurance Companies, updated May 2018
The Jubilee Insurance Company of Kenya Limited’s rating reports, 2007-2017
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; and c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The Jubilee Insurance Company of 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 Jubilee Insurance Company of Kenya Limited with no contestation of the rating.
The information received from The Jubilee Insurance Company of Kenya Limited and other reliable third parties to accord the credit rating included:
- The 2017 audited annual financial statements Four years of comparative audited numbers
- Unaudited interim results to 31 March 2018
- Budgeted financial statements for 2018
- 2018 reinsurance cover notes
- Actuarial valuation statements for 2017
- Financial Condition Reports for 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 terms, please click here
GCR affirms The Jubilee Insurance Company of Kenya Limited’s rating at AA-(KE); Outlook Stable.