Johannesburg, 10th June 2021 – GCR Ratings (“GCR”) has affirmed ICEA LION General Insurance Company Limited’s (“ICEA LION General”) national scale financial strength rating of AA-(KE); with the Outlook revised to Positive, from Stable.
|Rated entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|ICEA LION General Insurance Company Limited||Financial strength||National||AA-(KE)||Positive Outlook|
The rating reflects the strengths and weaknesses of the sub-group, encompassing ICEA LION General and its 53% owned subsidiary, ICEA LION General Insurance Company of Tanzania. ICEA LION General is the core entity within this combined establishment, contributing 91% and 93% to the sub-group’s gross premiums and total assets in FY20, respectively. The rating anchors on a strong financial profile, outbalancing a comparatively weaker business position. Underpinning the Positive Outlook is the underwriter’s potential to benefit from more explicit support, including integration and synergies, post consolidation into the recently established ICEA LION Insurance Holdings Limited (“ICEA LION Holdings” or “the group”).
The sub-group’s capital base grew 10% to KES5.6bn at FY20 on the back of sound earnings generation and retention. This, together with continued maintenance of aggregate risk exposures within acceptable ranges, supported an assessment of risk adjusted capitalisation at strengthened levels. In this regard, the GCR capital adequacy ratio (“CAR”) for the sub-group improved to 2.3x (FY19: 1.9x), while the statutory CAR for the core entity equated to 262% at 1Q F21 (FY20: 284%; FY19: 240%), exceeding the prescribed capital requirement coverage ratio of 200%. Looking ahead, the sub-group is expected to continue exhibiting very strong risk adjusted capitalisation metrics. The GCR CAR is likely to be sustained above 2.2x over the rating outlook, while capital concentration to investment property is projected to reduce further (to c. 44% at FY21; FY20: 48%; FY19: 54%), given the observed rate of capital growth along with the absence of material real estate investments over the near term.
The sub-group’s liquidity profile continues to strengthen, supported by a large asset portfolio and moderately conservative allocation stance. This is further buttressed by a sustained reduction in net technical obligations over the review period. Accordingly, cash and stressed financial assets covered net technical liabilities by 1.9x (FY19: 1.7x; FY16: 1.4x), while coverage of operational cost requirements stabilised at 24 months. Liquidity metrics are expected to remain within a strong range over the rating horizon, with the liquidity ratio likely to crossover the 2.0x mark should the observed growth in invested assets continue to surpass that in net technical obligations.
Earnings are assessed within an intermediate range, with prospects of an improvement over the medium term. In this respect, the sub-group managed to sustain positive underwriting profitability on the back of enhanced operational cost efficiencies and a favourable loss experience, with the operating expense ratio improving to 41% (FY19: 50%), while the loss ratio equated to 46% (FY19: 43%; industry average: 64%). Accordingly, the sub-group’s underwriting margin closed higher at 7% (FY19: 2%: five-year average: -1%), and is projected to measure within the 3 -7% range in FY21. Net profitability was nevertheless impacted by volatility in investment income. Against this backdrop, investment income decreased by 29% to KES736m in FY20 due to Covid 19 induced fair-value losses on listed equities with after-tax profit closing the year at KES683m (FY19: KES886m). While there is scope for consolidation of underwriting profitability within the projected range, bottom-line performance may remain exposed to volatility in investment income over the medium term.
The rating takes into account the sub-group’s comparatively weaker business profile. Accordingly, the sub-group reflects an intermediate market position, with stable weighted market and relative market shares of c. 4.4% and 1.6x in FY20, respectively. In view of considerable premium development evidenced by the Tanzanian subsidiary over the past two years, along with the resilience exhibited by the core entity, GCR expects a gradual improvement in the sub-group’s competitiveness over the medium to long term, should the observed uptrend be sustained. Gross written premiums remain well distributed across multiple product lines of significant scale, albeit reflecting increased concentration to motor risks at net level. Cross jurisdictional presence though the Tanzanian subsidiary (accounting for 9% of the sub-group’s GWP) is positively considered.
The rating is cognisant of the pending consolidation of the sub-group at ICEA LION Holdings level, which will also include ICEA LION Life Assurance Limited and its subsidiaries. Pursuant to the creation of ICEA LION Holdings, in which Leapfrog Strategic Africa Investments Limited acquired a 24% stake during FY21, the majority shareholding in ICEA LION General (80%), previously held by First Chartered Securities was transferred to ICEA LION Holdings. In this respect, the rating has potential to benefit from more explicit support, including integration and synergies post consolidation into ICEA LION Holdings, underpinning the Positive Outlook. Furthermore, the outlook captures prospects of sustained financial profile strength, with the sub-group’s underwriting margin likely to measure within the 3 – 7% in FY21, supporting bottom-line profitability and potentially improving the factor’s assessment. The GCR CAR is likely to trend within 2.2x – 2.5x range over the next 12 months, while capital concentration to investment property is anticipated to continue moderating over the corresponding period.
An upward rating movement may follow a successful bedding down of the consolidation of ICEA LION Holdings that supports a positive reassessment of group support. Furthermore, a sustained improvement in underwriting profitability and liquidity while capitalisation is maintained within strong ranges may also trigger upward rating migration. Materialisation of unforeseen risks post the consolidation phase may prompt reversion to a Stable Outlook.
|Primary analyst||Tichaona Nyakudya||Senior Analyst: Insurance Ratings|
|Johannesburg, ZA||TichaonaN@GCRratings.com||+27 11 784 1771|
|Committee chair||Godfrey Chingono||Deputy Sector Head: Insurance Ratings|
|Johannesburg, ZA||GodfreyC@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, March 2021|
|GCR Insurance Sector Risk Scores, April 2021|
ICEA LION General Insurance Company Limited
|Rating class||Review||Rating scale||Rating||Outlook/Watch||Date|
|Claims paying ability||Initial||National||A+(KE)||Stable Outlook||October 2000|
|Financial strength||Last||National||AA-(KE)||Stable Outlook||June 2020|
Risk score summary
|Rating components and factors||Risk score|
|Country risk score||4.00|
|Sector risk score||4.25|
|Management and governance||0.00|
|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 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 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 for 2021;
- Unaudited interim results to 31 March 2021;
- Reinsurance cover for 2021; and
- Other relevant documents.