Johannesburg, 22nd June 2021 – GCR Ratings (“GCR”) has downgraded CIC Life Assurance Limited’s (“CIC Life”) national scale financial strength rating to BBB(KE), from BBB+(KE), Outlook Negative.
|Rated entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|CIC Life Assurance Limited||Financial strength||National||BBB(KE)||Negative Outlook|
The rating downgrade follows a deterioration in the credit profile of the group, headed by CIC Insurance Group PLC, the majority shareholder in CIC Life. Consistent with GCR’s group ratings approach, CIC Life’s overall risk score was capped by the group’s creditworthiness despite having a stronger standalone credit profile relative to its parent company. From a standalone viewpoint, CIC Life’s relative credit strength is underpinned by a sound competitive position and intermediate capitalisation, albeit somewhat diluted by moderate levels of earnings and premium diversification.
Over the past five years, the underwriter’s capacity to generate internal capital has been sluggish considering weak earnings performance demonstrated over the same period. This was exacerbated by aggressive dividend distributions (required to repay debt at the highly leveraged holding company) barring FY20, with the capital base marginally growing by 2.2% on a compound annualised basis over the last five years. Exclusive of the review year, dividend distributions accounted for approximately 75% of prior four years after-tax profits, limiting internal capital generation. Simultaneously, aggregate risk exposures grew year on year, outpacing the progression in available capital, with the GCR’s capital adequacy ratio (“CAR”) stabilising around 1.7x at FY20 (FY16: 2.4x). Nevertheless, the insurer’s statutory solvency margin remains adequate (FY20: 159%; FY19: 152%), measuring above the minimum requirement of 100%, albeit still below the prescribed capital requirement of 200%. Looking ahead, risk adjusted capitalisation is likely to stabilise within the 1.6x – 1.7x range, given prospects of very limited upside to internal capital build over the rating horizon.
The business profile remains credit neutral, with sound competitive strength offset by moderate levels of premium diversification. CIC Life’s GWP contracted 1.4% in FY20 relative to growth of around 2.5% posted by the local long-term industry (excluding pension contributions and other investment contracts). Accordingly, the insurer’s market share slightly moderated to 8.6% (FY19: 8.9%), in line with expectations, while relative market share remained above 2x. Nevertheless, CIC Life continues to operate in the top tier market of the Kenyan long term insurance business, being the third largest underwriter by premium scale. Although the premium base reflects an elevated skew towards group credit risks (accounting for 64% of GWP in FY20), the underwriter derives material premium income from other two product lines, ordinary life and group life. Business is written mostly through agencies (independent and tied), constituting 45% of GWP (FY19: 47%), followed by bancassurance arrangements at 32% (FY19: 34%), with the balance procured from brokers and direct selling. Limiting premium diversification assessment is single market concentration, given that all premiums are written locally.
Consistent with expectations, the insurer’s review year earnings regressed, pressured by a spike in Covid-19 related claims in addition to a slight contraction in GWP, counterweighing operating cost savings attributable to the restructuring of commission-based compensation for intermediaries. In this respect, net claims and benefits incurred rose 15% to KES2.2bn in FY20, while the aforementioned restructuring saw operating expenses improving by 21% to KES1.1bn (FY19: KES1.5bn). Nevertheless, investment income remained solid in the face of Covid-19 induced downturn in both equities and property markets, closing higher at KES586m (FY19: KES573m), supported by a conservative asset allocation. Accordingly, review year operating margin weakened to 1.8% (FY19: 3.3%; five-year average: 2.5%). Looking ahead, claims pressure may persist given the continued presence of underlying causes, while further earnings burden emanating mostly from loss-making product offerings may see operating margins trending within the 1 – 4% range at the end of FY21.
Liquidity stabilised within an intermediate range, underpinned by a conservatively invested asset portfolio. Accordingly, cash and stressed financial assets coverage of net technical obligations equated to 1.1x at FY20 (FY19: 1.2x) while coverage of operational cost requirements closed at 16 months (FY19: 14 months). Liquidity metrics are likely to be sustained within an intermediate range given management’s commitment to maintain the current asset allocation mix.
The Negative Outlook captures potential rating pressure should the group’s credit profile continues to deteriorate beyond expectations. The Outlook further reflects the likelihood of sustained earnings pressure at the insurer’s level given the continued presence of underlying drivers. Nevertheless, the assessment of business profile is likely to be maintained at current levels.
Positive rating action may follow a sustained improvement in the credit profile of the group provided that CIC Life’s credit profile is maintained at current and/or enhanced levels. Conversely, downward rating pressure may arise from further deterioration in the parent company’s credit profile, adversely impacting on the rating cap applicable to CIC Life.
|Primary analyst||Tichaona Nyakudya||Senior Analyst: Insurance Ratings|
|Johannesburg, ZA||TichaonaN@GCRratings.com||+27 11 784 1771|
|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 Life Assurance Limited
|Rating class||Review||Rating scale||Rating||Outlook/Watch||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
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Property||Movable or immovable asset.|
|Rating Horizon||The rating outlook period|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Shareholder||An individual, entity or financial institution that holds shares or stock in an organisation or company.|
|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 Solvency Margin||Gives an indication as to whether the minimum regulatory solvency margin is being met, based on the net statutory assets to statutory net premiums ratio.|
|Statutory||Required by or having to do with law or statute.|
|Underwriter||In a general sense, an underwriter is a person or company that assumes financial risk. In corporate analysis an underwriter refers to a financial institution closely involved in the pricing and distribution of a new issue of a security and who accepts the obligation to purchase all securities not sold to outside investors. In insurance, and underwriter evaluates risk and exposures of potential clients|
For a detailed glossary of terms utilized in this announcement please click here
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 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;
- Unaudited interim results to March 2021;
- Full year budgeted financial statements for 2021;
- Reinsurance cover notes for 2021; and
- Other relevant documents.