Johannesburg, 22 November 2019 – GCR Ratings (“GCR”) has revised The Heritage Insurance Company Kenya Limited’s (“Heritage Kenya”) national scale financial strength (formerly claims paying ability) rating to AA(KE), from AA-(KE), with a Stable Outlook.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|The Heritage Insurance Company Kenya Limited||Financial strength||National||AA(KE)||Stable Outlook|
GCR announced that it had released new criteria for rating insurance companies in May 2019. Consequently, the rating for Heritage Kenya was placed ‘Under Criteria Observation’. GCR finalised the review for Heritage Kenya under the released Criteria for Rating Insurance Companies, May 2019. As a result, the rating for Heritage Kenya has been reviewed in line with the new methodology and subsequently removed from ‘Under Criteria Observation’.
The national scale financial strength rating of Heritage Kenya reflects the strengths and weaknesses of Liberty Kenya Holdings Plc (“the group”). Heritage Kenya is the core operating entity of the group accounting for 73% of group premiums.
The rating reflects the group’s strong risk adjusted capitalisation, underpinned by prudent capital management practices. Accordingly, the group’s GCR capital adequacy ratio measured within the 1.5x to 2x range, reflecting strong regulatory solvency of key subsidiaries under the Risk Based Solvency framework. This was largely due to well contained insurance risk on the backdrop of strong capital generation from operations, albeit with relatively elevated market and counterparty risk. In this regard, liquidity was constrained within an intermediate level. Cash and stressed assets covered net technical liabilities by 1.4x, with the factor evidencing potential for an improvement should positive cash generation from operations and a more conservative asset allocation.
Group earnings are viewed to be moderately strong, supported by consistent bottom-line performance on both short term and long term businesses. In this regard, the five year operating margin equated to 11% in FY18 (FY17: 13%), with the review year moderation largely caused by reduced underwriting margins, due to loss ratio elevation in the core operating entity. However, GCR expects that remedial action is likely to stabilise group profitability at historical levels over the outlook horizon.
The group maintained an intermediate business profile over the review period, reflecting competitiveness across all business units, a wide product offering and a level of geographic diversification. Consolidated market share measured at 5.6% in FY18, while the relative market share equated to 1.5x. Furthermore, a comprehensive product offering spanning an almost full range of short term and long term products, derived from two markets, underpinned an intermediate premium diversification assessment. Going forward, the insurer’s business profile is likely to be sustained by strong franchise in markets of operation, coupled with strong client retention on traditional books and shared product development platforms within the group.
Furthermore, the rating receives uplift from Liberty Holdings Limited (SA), given operational alignment and a history of performance.
The stable outlook reflects expectations of capital and earnings strength over the outlook horizon, while the business profile is expected to withstand competitive pressures over the short term.
An upward rating action may stem from an improvement in the business profile and/ or liquidity management. Conversely, the rating could be downgraded on sustained weakness in liquidity or a deterioration in earnings and risk adjusted capitalisation below expected levels.
|Primary analyst||Godfrey Chingono||Deputy Sector Head: Insurance Ratings|
|Johannesburg, ZA||Godfreyc@GCRratings.com||+27 11 784 1771|
|Committee chair||Susan Hawthorne||Senior Credit Analyst|
|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, June 2019|
|GCR Insurance Sector Risk Scores, November 2019|
|Rating class||Review||Rating scale||Rating||Outlook||Date|
|Financial Strength||Initial||National||A+(KE)||Stable||October 2000|
Risk Score Summary
|Risk scores||Heritage Kenya|
|Country risk score||4.50|
|Sector risk score||4.50|
|Management and governance||0.00|
|Assets||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|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.|
|Commission||A certain percentage of premiums produced that is received or paid out as compensation by an insurer.|
|Contract||An agreement by which an insurer agrees, for a consideration, to provide benefits, reimburse losses or provide services for an insured. A ‘policy’ is the written statement of the terms of the 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.|
|Debt||An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.|
|Diversification||Spreading risk by constructing a portfolio that contains different investments, whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.|
|Dividend||The portion of a company’s after-tax earnings that is distributed to shareholders.|
|Equity||Equity is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.|
|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.|
|Financial Statements||Presentation of financial data including balance sheets, income statements and statements of cash flow, or any supporting statement that is intended to communicate an entity’s financial position at a point in time.|
|Income Statement||A summary of all the expenditure and income of a company over a set period.|
|Interest||Money paid for the use of money.|
|Interest Rate||The charge or the return on an asset or debt expressed as a percentage of the price or size of the asset or debt. It is usually expressed on an annual basis.|
|Investment Income||The income generated by a company’s portfolio of investments.|
|Investment Portfolio||A collection of investments held by an individual investor or financial institution.|
|Liabilities||All financial claims, debts or potential losses incurred by an individual or an organisation.|
|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.|
|Net Profit||Trading/operating profits after deducting the expenses detailed in the profit and loss account such as interest, tax, depreciation, auditors’ fees and directors’ fees.|
|Net Retention||The amount of insurance that a ceding company keeps for its own account and does not reinsure.|
|Operational Risk||The risk of loss resulting from inadequate or failed internal processes, people or systems or from external events. This includes legal risk, but excludes strategic risk and reputational risk.|
|Personal Lines||Types of insurance, such as auto or home insurance, for individuals or families rather than for businesses or organisations.|
|Policy||The legal document issued by the company to the policyholder, which outlines the conditions and terms of the insurance.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Rating Horizon||The rating outlook period|
|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.|
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 was based solely on the merits of rated entities, 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 Heritage Insurance Company Kenya Limited. 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 Heritage Insurance Company Kenya Limited participated in the rating process via face-to-face 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 Heritage Insurance Company Kenya Limited and other reliable third parties to accord the credit rating included:
- Audited financial results as at 31 December 2018;
- Four years of comparative audited financial statements to 31 December
- Full year budgeted financial statements to December 2019;
- Reinsurance cover notes for 2019; and
- Other relevant documents.