Announcements Insurance Rating Alerts

GCR downgrades CIC Life’s Kenyan financial strength rating to BBB+(KE) on deterioration in the group’s credit profile; Outlook Negative

Rating action

Johannesburg, 29th July 2020 – GCR Ratings (“GCR”) has downgraded CIC Life Assurance Limited’s (“CIC Life”) national scale financial strength rating to BBB+(KE) from A(KE), with the Outlook accorded as Negative.

Rated Entity / Issue Rating class Rating scale Rating Outlook/Watch
CIC Life Assurance Limited Financial strength National BBB+(KE) Negative Outlook

Rating rationale

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 and equalised to CIC Insurance Group PLC’s risk score despite having a stronger credit profile relative to its parent company.

The underwriter’s capacity to build capital remained constrained given moderately weak earnings performance along with high dividend distributions, which are required to repay high leverage at the holding company level. In this regard, the insurer’s capital base increased marginally by a compound annual growth rate of 1% over the review period, (equating to KES2bn at FY19) while the dividend pay-out ratio averaged 64% over the corresponding period. At the same time, aggregate risk exposures grew year on year, outpacing the progression in available capital, with the GCR’s capital adequacy ratio (“CAR”) trending downwards over the review period (FY19: 1.6x; FY15: 2.6x). Looking ahead, the absence of healthy internal capital retention in the face of growing aggregate risk exposures may result in risk adjusted capitalisation moderating further over the rating outlook.

Earnings partially recovered from a slump that was triggered by a significant spike in claims together with an upsurge in actuarial reserves attributable to a twin increase in annuity business and valuation interest rate margins in FY18. Although an increase in claims to KES2.0bn in FY19 (FY18: KES1.8bn) was noted, review year reduction in exposure to the annuity business followed by a downward revision in valuation interest rate margins from 20% to 10% saw a decline in actuarial reserve transfers to KES846m (FY18: KES1.1bn). With further support from investment income, which grew 80% to KES573m, coupled with observed stability in operating costs, the underwriter posted operating profit amounting to KES163m, translating to an operating margin of 3.3% (FY18: -0.4%). That said, CIC Life’s future earnings performance will largely be dependent on investment income, which may moderate given the uncertainty occasioned by the Covid-19 pandemic. Accordingly, the underwriter’s ability to continue generating adequate investment income to counter rising claims pressure and sustain operating profitability represents a key input in factor assessment over the outlook horizon.

The insurer’s liquidity profile 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 1.2x at FY19 (FY18: 1x) while the operational cost coverage closed at14 months (FY18: 11 months). Liquidity metrics are likely to be sustained within an intermediate range given the hedging potential provided by investments in government instruments against adverse movements in interest rates.

The business profile remains credit neutral, with sound competitive strength offset by moderate levels of premium diversification. In this regard, CIC Life continues to operate in the top tier market of the Kenyan long-term insurance industry, occupying the third position in terms of risk premiums (excluding investment contracts contributions) in FY19. In this respect, the underwriter controlled a market share of 9% (FY18: 10%), while relative market share was maintained above 2x. Although the premium base reflected an elevated skew towards group credit risks (accounting for 62% of GWP in FY19; FY18: 49%) following the repeal of a previously imposed interest rate cap, the materiality of premium contributions from ordinary life (at 23% GWP) and other business lines including fee income from the pension business serves to dilute the exposure to group credit risks.

Outlook statement

The Negative Outlook captures potential ratings pressure should the pending land sale at group level fail to materialise within expected timelines and terms, resulting in persistent solvency and liquidity challenges. The Outlook further reflects GCR’s expectations of sustained earnings pressure which may be compounded by the impact of the COVID-19 pandemic risks. Nevertheless, the assessment of business profile is likely to be maintained at current levels.

Rating triggers

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.

Analytical contacts

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, May 2020
GCR Insurance Sector Risk Scores, July 2020

CIC Life Assurance Limited

Rating class Review Rating scale Rating class Outlook/Watch Date
Claims paying ability Initial National A+(KE) Stable May 2013
Financial strength Last National A(KE) Stable November 2019

Risk score summary

Rating components & factors Risk scores
Operating environment 8.25
Country risk score 4.00
Sector risk score 4.25
Business profile 0.00
Competitive position 0.50
Premium diversification (0.50)
Management and governance 0.00
Financial profile 0.75
Earnings (0.25)
Capitalisation 1.00
Liquidity 0.00
Comparative profile (1.25)
Group cap (1.25)
Government support 0.00
Peer analysis 0.00
Total score 7.75

Glossary

Premium The price of insurance protection for a specified risk for a specified period of time.
Provision The amount set aside or deducted from operating income to cover expected or identified loan losses.
Rating Horizon The rating outlook period
Rating Outlook See GCR Rating Scales, Symbols and Definitions.
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.
Retention The net amount of risk the ceding company keeps for its own account.
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.
Short Term Current; ordinarily less than one year.
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.

SALIENT POINTS OF ACCORDED RATINGS

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 2019;
  • Four years of comparative audited financial statements to 31 December;
  • Unaudited interim results to March 2020;
  • Full year budgeted financial statements for 2020;
  • Reinsurance cover for 2020; and
  • Other relevant documents.
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