Kenya Reinsurance has consistently very strong risk adjusted capitalisation and healthy liquidity, although compressed by earnings weakness, notes GCR Ratings (GCR).
The African rating agency has affirmed Kenya Reinsurance's national scale financial strength rating of AA+(KE), with a Stable Outlook. Furthermore, Kenya Re’s international scale financial strength rating has been downgraded to B, from B+ on country risks revisions, with a Stable Outlook.
GCR's report says that Kenya Re demonstrated a strong financial profile, while business profile remained at intermediate levels, with small and risky presence in foreign markets diluting entrenched domestic market position. Furthermore, the international scale financial strength rating was lowered to reflect higher operating risk in jurisdictions where gross premiums are derived, notably Kenya and India which together accounted for 75% of gross premiums (FY18: 70%).
Capitalisation was assessed within a very strong range, albeit with unrealised property revaluation gains supporting strong capital growth of 13% to $315m in FY19 (FY18: $275m). As such, the GCR capital adequacy ratio was maintained around 3.0x, reflecting a sizeable capital base relative to the growing quantum of insurance, market and credit risks. Over the rating horizon, risk adjusted capitalisation is expected to remain within a similar band, considering higher capitalisation requirements across jurisdictions of presence, compared to achieved business growth.
Liquidity also represented a credit strength, stimulated by receivable collections following implementations of cash and carry regulations in different markets. Therefore, cash and equivalents grew by 20% to KES7.4bn ($69m) at FY19 (FY18: KES6.2bn), while the majority of investment portfolio was placed in low risk and liquid assets (FY19: 55%; FY18: 53% of portfolio).
Consequently, cash and stressed financial assets coverage of net technical liabilities and operational cash coverage registered at healthy levels of 2.1x and 16 months respectively (FY18: 1.9x and 16months). However, operating cash requirements parallelly grew by 18%, driven by claims pressures which could further restrain liquidity metrics and assessment over the medium term, amidst economic challenges hindering cash collections.
Offsetting the above strengths, earnings moderated to intermediate levels, driven by worsening claims experience in the short-term business, with its net incurred loss ratio registering a review period peak of 77% in FY19 (FY18: 66%; five-year average: 62%). Therefore, the group’s underwriting margin deepened to -15% (FY18: -7%), constraining relatively strong and stable investment income at KES3.7bn in FY19 (FY18: KES3.4bn; five-year average: KES3.3bn). Note was taken of net profits strongly increasing to KES3.9bn (FY18: KES1.8bn), on the back of unrealised investment income from properties’ revaluation, which GCR considers to be a less stable source of revenue.
Given the persistence of claims pressures despite prudent underwriting policies, and likely pressure on investment income, the reinsurer’s earning potential will represent a key rating consideration over the medium term.
The business profile of the reinsurer was unchanged within intermediate levels, characterised by a strong presence in Kenya diluted by limited competitiveness in foreign markets. In this respect, the reinsurer maintained a stable 18% (FY18: 17%) share of total cessions in Kenya in FY19, representing 47% of a well-diversified portfolio (FY18: 49%) across four lines of business.
Meanwhile outside Kenya, the entity was limited to small participations in multiple markets, with higher earning risks endorsed along business growth in select markets further moderating component assessment. Nevertheless, GCR recognises small presences in other jurisdictions as potential sources of diversification, given traction gained in some markets and management endeavours to expand business in Africa.
The Stable Outlook is premised on expectations of very strong risk adjusted capitalisation offsetting mounting earning risks, while the entity will demonstrate relatively similar strength in its liquidity and business profile. GCR expects a reduction in gross premiums, investment income, property revaluation gains and in other income driven by current economic challenges amidst COVID-19, which would escalate earnings pressures given high claims experience.