Johannesburg, 04 July 2017 — 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 2018.
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 consolidated risk adjusted capitalisation reduced from a strong to a moderately strong level. The reduction was caused by suppressed capital generation from operations, with the short term business’ international solvency margin lowering to an intermediate 41% at FY16 (compared to a strong 73% and 75% in FY16 and FY15 respectively). This was partially offset by long term business solvency being maintained within a strong range, with shareholder funds coverage of policyholder liabilities measuring at 6% at FY16 (FY15: 9%). Going forward, management has budgeted for solvency to improve substantially, with the short term business’ international solvency margin forecast at 57%. The rating factors in the budgeted strengthening in solvency, with management’s ability to meet solvency targets, and display disciplined capital management policies, representing a primary rating consideration.
Jubilee Kenya reflects a moderately strong aggregated earnings profile. The insurer posted a consolidated profit of KES902m in FY16, translating into a net margin of 5%. The long term business has registered improved operating margins over the past two years (FY16: 13%; FY15: 11%), which were supported by consistent business-wide investment income flows, offsetting the negative impact of short term underwriting margin compression (FY16: 2%; FY15: 8%; FY14: 11%). Going forward, loss ratio moderation in the medical business (BGT17: 76%; FY16: 80%), and a possible recovery in operating efficiency, is budgeted to underpin an increase in the underwriting margin to 8% in FY17. As such, improved earnings control in the short term business, coupled with the sustenance of sound long term business operating performance, has been factored into GCR’s forward looking view of a strengthening earnings capacity, with GCR noting the potential for rating sensitivity to arise out of sustained margin compression in short term business profitability.
Liquidity is viewed to be sound, albeit that liquidity strength in the long term business was partially offset by liquidity pressures in the short term business. Long term liquidity metrics registered at sound levels, reflecting increased investment in government securities. This has also served to facilitate sound asset liability matching, with the maturity profile and yields of investment assets more closely matching underlying liabilities. Accordingly, cash coverage of policyholder liabilities on the long term business improved to 3.3x at FY16 (FY15: 2.7x), compared to a corresponding decline to 0.6x (FY15: 0.8x) in the short term business. While liquidity metrics are budgeted to remain stable over the rating horizon, the rating is likely to be sensitive to the insurer’s liquidity management capabilities, in light of working capital requirements of the short term business’ strategic thrust.
Jubilee Kenya derives significant rating support from its market leadership position, evidencing market shares of 12% and 15% in the short term and long term insurance markets respectively. This stems from an expansive product distribution infrastructure, high franchise value and strong product support networks. Furthermore, comparative performance has exhibited consistent relative strengths, with the insurer’s substantial scale continuing to underpin competitive operating metrics relative to peers.
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 24% of consolidated gross premiums in FY16 (FY15: 21%). Further diversification benefits are expected from the gradual restructuring of the medical portfolio towards retail risks; thus, mitigating exposure to high frequency claims on predominant corporate portfolios. Earning diversification is, therefore, expected to remain sound over 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. Conversely, negative rating action could follow continued suppression in earnings capacity or risk adjusted capitalisation, and/or a weakening in liquidity to levels below expectations.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (May 2007)|
|Claims paying ability: AA-(KE)|
|Last rating (June 2016)|
|Claims paying ability: AA-(KE)|
|Primary Analyst||Committee Chairperson|
|Godfrey Chingono||Marc Chadwick|
|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 July 2016
Criteria for Rating Long Term Insurance Companies, updated July 2016
The Jubilee Insurance Company of Kenya Limited’s rating reports, 2007-2016
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 2016 audited annual financial statements 4 years of comparative audited numbers
- Unaudited interim results to 31 March 2017
- Budgeted financial statements for 2017
- Statutory Annual Returns for 2016
- 2017 reinsurance cover notes
- Actuarial valuation statements for 2016
- Financial Condition Reports for 2016
- 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.