Announcements Insurance Rating Alerts

GCR downgrades Occidental Insurance Company Limited’s national scale financial strength rating to BBB(KE), from A-(KE) on weakened financial profile; Outlook Stable

Rating action

Johannesburg, 31 August 2021 – GCR Ratings (“GCR”) has downgraded Occidental Insurance Company Limited’s (“OIC Kenya”) national scale financial strength rating to BBB(KE), from A-(KE). The Outlook has been revised from Negative to Stable.

Rated entity / Issue Rating class Rating scale Rating Outlook/Watch
Occidental Insurance Company Limited Financial strength National BBB(KE) Stable Outlook

Rating rationale

The rating downgrade follows a deterioration in earnings which consequently triggered a moderation in risk adjusted capitalisation. The business profile remains credit negative, characterised by a modest market position and intermediate level of premium diversification.

Cross cycle earnings deteriorated on the back of a review year spike in motor claims against the backdrop of a muted premium base. In this respect, net claims incurred rose 18% to KES1.6bn in FY20 largely driven by motor provisions, with the loss ratio peaking at 76% (FY19: 63%; review period average: 68%). Despite maintaining a competitive operating expense ratio (32% vs industry average of 64%), the insurer’s operating cost base crept up over the review period, constricting underwriting profitability headroom. Accordingly, the underwriting deficit widened to KES397m in FY20 from KES63m previously, with the five-year rolling underwriting margin weakening to -7% (prior five-year rolling average: -1.5%). Earnings strain at underwriting level seeped through to bottom-line performance, exacerbated by a notable moderation in net investment income to KES240m (FY19: KES369m) due to stable real estate valuations and transitory loss of interest income following reclassification of the bond portfolio. Accordingly, the insurer reported a net loss position of KES81m (FY19: KES248m profit), with the five-year moving average return on revenue lowering to -7% at FY20 (FY19: -2%). Although premium and investment income growth resumed in 1H FY21, the loss ratio remains elevated at around 74%, with our base case scenario pointing to a weakened earnings profile relative to historical levels.

The underwriter’s capital base closed 12% lower (KES1.4bn) relative to the prior year balance, weighed down by losses registered during the year. This together with the associated growth in inadmissible assets against the backdrop of relatively unchanged risk exposures saw risk adjusted capitalisation moderating to an intermediate level. The entity’s statutory capital adequacy ratio (“CAR”) reflected the same sensitivities, deteriorating to 149% at FY20 (FY19: 158%). The assessment factors in expectations of limited internal capital generation over the outlook period, with the entity’s risk adjusted capitalisation still susceptible to further earnings weakness.

OIC Kenya’s liquidity profile remained within an intermediate range, supported by conservative asset allocation and enhanced premium collection. Accordingly, cash and stressed financial assets coverage of net technical obligations and operational cost requirements stabilised at 1.2x and 10 months at FY20, respectively. Liquidity metrics are likely to be sustained at a similar level going forward, given that no material changes are expected in the current asset allocation mix.

The business profile continued to be a rating restraint, characterised by a modest market position and an intermediate level of premium diversification. In line with the local short-term industry performance, OIC Kenya posted no growth in FY20 with the underwriter’s absolute and relative market share stabilising around 2.1% and 0.8x, respectively. The product mix is considered fairly diversified with material premium contributions from motor, property and accident risks. In view of low product risk and associated high retention in the motor line, concentration in the net risk base is much more pronounced, with the core portfolio constituting a stable 74% of NWP. Despite being geographically exposed to Kenya, with all premiums written from the local market, the policyholder mix is considered well diversified, with the largest and top 20 policyholders constituting 3% and 23% of GWP in FY20, respectively. Given the intensity of competitive pressure playing out in the local market, we expect no material changes to the business profile over the medium term.

Outlook statement

The Stable Outlook captures prospects of gradual earnings recovery towards levels observed at the start of the review period. The underwriting margin is expected to measure in excess of -5%, while return on revenue is projected around 6% over the rating outlook. We expect internal capital generation to be sufficient to support risk adjusted capitalisation at around 1.6x over the corresponding period. No major changes are expected in the business profile and liquidity.

Rating triggers

Positive rating movement could follow a sustained improvement in earnings and risk adjusted capitalisation over the medium to longer term. Conversely, the rating may be downgraded should earnings and risk adjusted capitalisation measure below expectations.

Analytical contacts

Primary analyst Tichaona Nyakudya Senior Analyst: Insurance Ratings
Johannesburg, ZA TichaonaN@GCRratings.com +27 11 784 1771
Committee chair Susan Hawthorne Senior Analyst: Insurance Ratings
Johannesburg, ZA SusanH@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, August 2021
GCR Insurance Sector Risk Scores, April 2021

Ratings history

Occidental Insurance Company Limited

Rating class Review Rating scale Rating Outlook/Watch Date
Claims paying ability Initial National A-(KE) Stable Outlook March 2017
Financial strength Last National A-(KE) Negative Outlook August 2020

Risk score summary

Rating components and factors Risk score
Operating environment 8.25
Country risk score 4.00
Sector risk score 4.25
Business profile (1.25)
Competitive position (0.50)
Premium diversification (0.75)
Management and governance 0.00
Financial profile 0.50
Earnings (0.25)
Capitalisation 1.25
Liquidity (0.50)
Comparative profile 0.00
Group support 0.00
Government support 0.00
Peer analysis 0.00
Total score 7.50

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 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 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
  • Full year budgeted financial statements to 31 December 2021;
  • Unaudited interim results to 30 June 2021;
  • Financial Condition Report for 2020;
  • Actuarial Valuation Report for 2020;
  • Reinsurance cover notes for 2021; and
  • Other relevant documents.
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