Johannesburg, 19 June 2018 — Global Credit Ratings has today upgraded the national scale claims paying ability rating assigned to AIG Kenya Insurance Company Limited to AA+ (KE) from AA-(KE), with the outlook accorded as Stable. The rating is valid until June 2019.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to AIG Kenya Insurance Company Limited (“AIG Kenya”) based on the following criteria:
The rating was upgraded based on a strengthening in AIG Kenya’s standalone credit profile and enhanced implied support from American International Group Inc. (“the group”), following the changes to the insurer’s reinsurance programme. In GCR’s view, the insurer’s standalone credit profile is expected to be sustained at strengthened levels over the rating horizon, with AIG Kenya remaining strategically important to the group.
AIG Kenya’s risk adjusted capitalisation improved substantially at FY17, supported by the material reduction in insurance risk (given changes in the reinsurance programme), together with well contained market and credit exposure. Accordingly, the adjusted international solvency margin equated to a review period high of 207% in FY17 (FY16: 85%; review period average: 102%). In GCR’s view, risk adjusted capitalisation is likely to remain at exceptional levels, supported by strong internal capital generation and ongoing reinsurance support through group structures.
Earnings capacity improved substantially in FY17, supported by enhanced underwriting profitability and sound investment returns. Improved underwriting performance was largely a function of significant commission recoveries, which GCR views to be sustainable, together with an improved net incurred loss ratio. In particular, the reinsurance programme was amended to reduce the insurer’s retention, as well as introduce a stop loss treaty (which would effectively limit AIG Kenya’s net incurred loss ratio in a highly adverse scenario). Accordingly, the underwriting margin equated to 18% in FY17 (FY16: 7%; review period average: 8%), while the investment yield registered at 10% in FY17 (FY16: 8%; review period average: 11%). In GCR’s view, earnings capacity is likely to continue to register within a very strong range, supported by high levels of commission recoveries and a relatively stable net loss ratio.
AIG Kenya’s liquidity profile is viewed to be very strong, with liquidity measures (inclusive of all government securities) registering within a very strong range. In this respect, coverage of monthly claims equated to a higher 44 months at FY17 (FY16: 26 months), while net technical provision coverage registered at an extremely strong 3x at FY17 (FY16: 1.7x). Furthermore, the insurer’s counterparty strength for such placements is viewed to be strong, with the majority of funds placed in government instruments and the rest of the funds in well rated entities. Liquidity metrics are likely to remain within a similar range over the outlook horizon, supported by sound cashflow generation and conservative asset allocation.
The business profile is viewed to be strong, supported by a fairly well diversified earnings stream, which is partially offset by moderately strong competitive positioning. In this respect, the insurer accounted for an estimated 3% of total short term industry gross premiums in FY17 (FY16: 3%), with three lines materially contributing to revenue. While there is potential for the insurer to strengthen competitive positioning, GCR expects growth to register within a moderately strong range, given AIG Kenya’s selective underwriting disciplines.
The insurer’s stand-alone credit profile derives upliftment from support from the group, to which it is considered to be strategically important. This view is supported by the high levels of strategic, branding and operational alignment, success in supporting group objectives, and alignment of capital and risk management frameworks. Furthermore, the insurer formulates its reinsurance strategy in conjunction with its parent company, with a high degree of reinsurance support underpinning underwriting capacity. The majority of cessions are placed within the group, with the balance spread across fairly well rated local reinsurers.
An upgrade is considered unlikely over the rating horizon, given that the insurer’s rating pierced the national scale ceiling applicable to entities operating within the Kenyan insurance industry. Conversely, downward rating pressure may arise from a deterioration in balance sheet strength below expectations. Furthermore, a change in the strategic importance of AIG Kenya within the group may lead to negative rating action.
NATIONAL SCALE RATINGS HISTORY
|Initial rating (June 2009)|
|Claims paying ability: A(KE)|
|Last rating (July 2017)|
|Claims paying ability: AA-(KE)|
|Primary Analyst||Secondary Analyst|
|Yvonne Mujuru||Linda Matavire|
|Sector Head: Insurance Ratings||Junior Credit Analyst|
|(011) 784 – 1771||(011) 784 – 1771|
|Senior Credit Analyst|
|(011) 784 – 1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated May 2018
AIG Kenya rating announcements, 2009-2017
Kenya Short Term Insurance Industry Bulletins, 2014-2017
RATING LIMITATIONS AND DISCLAIM4RS
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/RATING-SCALES-DEFINITIONS. 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.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY
|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.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Cession||Amount of the insurance ceded to a reinsurer by the original insuring company (cedant) in a reinsurance transaction.|
|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.|
|Coverage||The scope of the protection provided under a contract of insurance.|
|Dividend||The portion of a company’s after-tax earnings that is distributed to shareholders.|
|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.|
|Incurred Loss||The total amount of paid claims and loss reserves associated with a particular time period, usually a policy year.|
|International Scale Rating LC||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.|
|International Solvency Margin||Measures the ability to cover current year’s written premiums using shareholder’s funds.|
|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.|
|Loss||The happening of the event for which insurance pays.|
|Net Incurred Loss||The total amount of paid claims and loss reserves associated with a particular time period, less the reinsurance portion.|
|Net Loss||The amount of loss sustained by an insurer after giving effect to all applicable reinsurance, salvage, and subrogation recoveries.|
|Parent Company||The senior company in a group or fleet of insurers.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|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.|
|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.|
|Securities||Various instruments used in the capital market to raise funds.|
|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.|
|Stop Loss||Any provision in a policy designed to cut off an insurer’s losses at a given point. In effect, a stop loss agreement guarantees the loss ratio of the insurer.|
|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.|
|Upgrade||The assignment of a higher credit rating to an insurer by a credit rating agency. Opposite of downgrade.|
|Yield||Percentage return on an investment or security, usually calculated at an annual rate.|
For a more detailed glossary of term, please click here
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.
AIG Kenya Insurance 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 AIG Kenya Insurance Company Limited with no contestation of the rating.
The information received from AIG Kenya Insurance Company Limited and other reliable third parties to accord the credit rating included:
- The 2017 audited annual financial statements Four years of comparative audited numbers
- Unaudited interim results to 31 March 2018
- Budgeted financial statements for 2018
- 2018 reinsurance cover notes
- Financial Condition Report for 2017
- Actuarial evaluation report for 2017
- Other related documents.
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.
GCR upgrades AIG Kenya Insurance Company Limited’s rating to AA+(KE); Outlook Stable.