GCR Ratings has affirmed Kenya Reinsurance Corporation’s financial strength rating of AA+(KE), with a stable outlook.
According to the rating agency’s, the national scale financial strength rating of Kenya Re reflects consistently very strong risk adjusted capitalisation and healthy liquidity and business profile.
“Accordingly, the entity demonstrated a strong financial profile, while business profile remained at intermediate levels, with small and risky presences in foreign markets diluting entrenched strong domestic market position”, the statement says in part.
Capitalisation was assessed within the very strong range, albeit with unrealised property revaluation gains supporting a strong capital growth of 13 per cent to $315m in FY19 from $275million in FY2018.
As such, GCR CAR 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 similar band, considering higher capitalisation requirements across jurisdictions of presence, compared to achieved business growth.
The firms liquidity also represented a credit strength, stimulated by receivable collections following implementations of cash and carry regulations in different markets.
Operating cash requirements grew by 18 per cent, 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 per cent in FY19.
The group underwriting margin deepened to negative 15 per cent in FY19 from -7 per cent in FY18, constraining relatively strong and stable investment income at Sh3.7billion in FY19.
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.
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 endeavors to expand business in Africa” GCR noted.
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.
“We expect 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” the report concludes.