Johannesburg, 06 October 2017 — Global Credit Ratings has today downgraded the national scale claims paying ability rating assigned to Phoenix of East Africa Assurance Company Limited to A(KE) from A+(KE), with the outlook accorded as Negative. The rating is valid until August 2018.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to Phoenix of East Africa Assurance Company Limited (“Phoenix Kenya”) based on the following key criteria:
Phoenix Kenya’s rating was downgraded, on the back of a material reduction in key liquidity metrics, from extremely strong levels recorded over the bulk of the review period. As such GCR’s assessment of the insurer’s standalone credit profile no longer factors in upliftment from extremely strong liquidity. The reduction in liquidity metrics was due to cash and equivalents decreasing, coupled with increased reserves and claims. In this regard, cash coverage of net technical liabilities and claims registered at 1.4x and 21 months respectively at FY16 (FY15: 3.4x and 71 months respectively). In GCR’s view liquidity metrics are likely to remain at reduced levels over the rating horizon, given impeded earnings generation and dividend outflows.
The Negative outlook reflects the continued strain on Phoenix Kenya’s credit profile stemming from persistent earnings strain, with profitability, and the consequent capacity to sustain credit strength going forward, representing a key rating factor. In this regard, the insurer registered consistent underwriting losses over the review period, with the five year underwriting margin equating to -64% (FY16: -164%; FY15: -25%). Earnings pressure is likely to persist over the rating horizon, underpinned by a comparatively higher claims ratio, coupled with continued cost strain, limiting earnings potential. As such, strong evidence of the potential to achieve sustainable positive earnings represents a key rating consideration.
Phoenix Kenya’s rating derives significant upliftment from extremely strong capitalisation. In this regard, the international solvency margin equated to 450% at FY16 (FY15: 519%; review period average: 634%). Nonetheless, GCR notes the potential for risk adjusted capital strength to reduce materially from existing levels, underpinned by limited internal capital generation, high targeted premium growth, and in the absence of a formalised dividend policy. The reinsurance panel reflects a sound level of aggregated credit strength, whilst deductibles are viewed to be set at conservative levels relative to FY16 capital.
Competitive positioning is viewed to be limited, stemming from a lack of premium traction in targeted markets. In this respect, the insurer’s share of total short term insurance industry premiums equated to 0.4% in FY16 (FY15: 0.5%). In order to strategically position the company for strong long term growth and profitability targets, management effected several changes, including material staff restructuring (with the company on-boarding several qualified key personnel). In this regard, the insurer expects to strengthen competitive positioning, supported by enhanced client relationships, increased broker engagement and aggressive marketing. In GCR’s view, competitive positioning is, nevertheless, likely to remain relatively constrained over the outlook horizon, given increased competitive dynamics and execution risks associated with strong growth targets.
The rating may be downgraded if the insurer is not able to sustainably turnaround earnings capacity and/or on the back of a reduction in risk adjusted capitalisation. Upward rating movement is considered unlikely over the rating horizon, given the recent rating action. However, the outlook may revert to Stable should the insurer sustainably turnaround earnings capacity. This would need to be supported by risk adjusted capitalisation and liquidity registering within extremely strong and very strong ranges, respectively.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (August 2010)|
|Claims paying ability: A+(KE)|
|Last rating (September 2016)|
|Claims paying ability: A+(KE)|
|Primary Analyst||Secondary Analyst|
|Yvonne Mujuru||Nyasha Chikwengo|
|Sector Head: Insurance Ratings||Credit Analyst|
|(011) 784-1771||(011) 7841771|
|Senior Credit Analyst|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2017
Phoenix Kenya rating reports, 2010-2016
Kenya Short Term Insurance Industry Bulletins, 2014-2016
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. 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; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
Phoenix of East Africa Assurance Company 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, and contested by, Phoenix of East Africa Assurance Company Limited with no change to the rating decision.
The information received from Phoenix of East Africa Assurance Company Limited and other reliable third parties to accord the credit rating included:
- The audited financial results as at 31 December 2016
- Unaudited interim results to 31 July 2017
- Budgeted financial statements for 2017
- Financial Condition Report 2016
- The current year reinsurance cover notes
- Other relevant company specific information
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”)|
|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 downgrades Phoenix of East Africa Assurance Company Limited’s rating to A(KE); Outlook Negative.