Nairobi, 23 June 2021 – GCR Ratings (“GCR”) downgrades CIC General Insurance Limited’s (“CIC General”) national scale financial strength rating of BBB+(KE) to BBB(KE), Negative Outlook.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|CIC General Insurance Limited||Financial strength||National||BBB(KE)||Negative Outlook|
CIC General’s rating reflects the strengths and weaknesses of CIC Insurance Group PLC (“the group”), being the core operating entity of the group. The rating downgrade follows the group’s continued elevated exposure to investment property (mainly land banks) on the backdrop of a significant shareholder loan, which is on commercial terms. The Negative Outlook reflects high susceptibility of investment property to market risk amid the Covid-19 pandemic, which could moderate the group’s capital assessment over the medium term. This is on the backdrop of earnings pressures arising from the balance sheet structure through significant finance charges and unfavourable yields mismatch with investment property, further compounded by underwriting pressures at CIC General. The business profile remains relatively competitive, supported by strong market share in Kenya and a well-diversified product mix.
The group’s risk adjusted capitalisation is viewed to be intermediate, albeit at risk due to high investment property concentration to capital. Notwithstanding the KES296.8m net loss incurred, no dividend extraction was expected in FY20, thereby sustaining the GCR at 1.4x. Nevertheless, property exposure remains high, accounting for about 97% of the capital base, with about half of it collateralised against an outstanding credit facility. Statutory solvency for the core operating entity improved to 136% (1H FY20 93%), measuring above minimum requirement of 100%. Risk exposure to aged receivables remain a concern. Looking ahead, the group’s risk adjusted capitalisation is likely to remain sensitive to concentration risks and earnings development over the medium term.
Earnings registered a reduction in performance mainly ensued from a KES 274.3m cumulative loss in monetary position of CIC Africa (South Sudan) limited, since its inception, to conform with IAS 29 following the change in its functional currency. This was further impacted by KES 227.2m fair value losses on listed equity. In this respect, the group and CIC General registered reductions in the three-year return on revenue to 1.8% (FY19: 4.3%) and 2.5% (FY19: 3.5%) respectively. Of particular note, CIC General registered an underwriting loss of 5.2% (FY19: 5.0%), despite positive outturns in the medical line due to economic lockdowns, negatively impacting our view of the insurer’s underwriting earnings recovery trend. Notwithstanding the foregoing pressures, there is potential for investment income to improve. Additionally, we believe the long-term business will continue generating positive earnings, thereby sustaining a positive consolidated three-year return on revenue in the near-term.
Liquidity was sustained at similar levels, balancing an increase in stressed liquid assets with similar increases in DA liabilities and technical reserves. As such liquidity ratio and operational cash coverage remained at 1.0x and 13 months, respectively. Liquidity metrics are expected to be sustained at similar levels in the near-term whilst the medium term demonstrates liquidity risks factoring in a bullet loan repayment of a credit facility, which in essence relies on sale of land held at the group level, barring other capital raising initiatives that we current view as having high execution risks.
The rating is strengthened by the group’s business profile, bolstered by the core operating entity’s competitive advantage and strong market position. As such CIC General is ranked among the top three players commanding a market share and relative market share of 7.8%(FY19:8.1%) and 2.9x(3.0x) respectively, while the life business accounts for a market share of 8.6% (FY19: 8.9%). Geographic diversification is viewed to be intermediate, sourcing about 11% of its premiums outside Kenya. GCR expects the competitive position and premium diversification to be sustained at similar levels in the near-term, underpinned by the existing market relationships.
The Negative Outlook reflects rating sensitivities on risk adjusted capitalisation, mainly prompted by execution risks on the disposal of investment property to de-risk the balance sheet, and earnings pressure at the core operating entity level. This is coupled with the credit profile’s sensitivity to medium term liquidity risk from the substantial shareholder loan.
The ratings could be downgraded if existing concerns on 1) persistent earnings pressure, leading to vulnerable coverage of finance costs and reduction in capitalisation, and 2) increased liquidity risks from the repayment of the medium-term loan relative to expected scenarios, are not satisfactorily resolved. Positive rating action is unlikely over the medium term in the absence of significant improvement in asset quality. However, the outlook could revert to Stable if 1) investment property exposure is reduced to rating adequate level and medium-term liquidity risks relating to the loan are controlled in line with expectations, or 2) developing earnings risk is managed.
|Primary analyst||David Mungai||Analyst: Insurance Ratings|
|Nairobi, KE||DavidM@GCRratings.com||+254 73 218 8669|
|Committee chair||Matthew Pirnie||Group Head of Ratings|
|Johannesburg, ZA||MatthewP@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, June 2021|
|GCR Insurance Sector Risk Scores, April 2021|
CIC General Insurance Limited
|Rating class||Review||Rating scale||Rating class||Outlook||Date|
|Claims paying ability||Initial||National||A(KE)||Stable Outlook||May 2013|
|Financial strength||Last||National||BBB+(KE)||Negative Outlook||July 2020|
Risk score summary
|Rating Components and Factors||Risk score|
|Country risk score||3.75|
|Sector risk score||4.00|
|Management and governance||0.00|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Property||Movable or immovable asset.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|Real Estate||Property that consists of land and / or buildings.|
|Receivables||Any outstanding debts, current or not, due to be paid to a company in cash.|
|Recovery||The action or process of regaining possession or control of something lost. To recoup losses.|
|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.|
|Repayment||Payment made to honour obligations in regards to a credit agreement in the following credited order: 3.) Satisfy the due or unpaid interest charges; 4.) Satisfy the due or unpaid fees or charges; and 5.) To reduce the amount of the principal debt.|
|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.|
|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.|
|Technical Liabilities||The sum of Net UPR and Net OCR IBNR.|
|Transaction||A transaction that enables an Issuer to issue debt securities in the capital markets. A debt issuance programme that allows an Issuer the continued and flexible issuance of several types of securities in accordance with the programme terms and conditions.|
|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.|
|Valuation||An assessment of the property value, with the value being compared to similar properties in the area.|
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 was based solely on the merits of 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 credit rating has been disclosed to the rated entity. The rating above 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 rated entity and other reliable third parties to accord the credit rating included:
- Audited financial results as at 31 December 2020;
- Four years of comparative audited financial statements to 31 December.
- Full year budgeted financial statements for 2021.
- Unaudited interim results to 30 May 2021.
- Reinsurance cover notes for 2021; and
- Other relevant documents.